and providing long-term storage, and carries inherent risks that can undermine regulatory compliance, disaster recovery, and business continuity. To minimize expenses, enable business users to extract the maximum value from business documents, and in due course strengthen customer relationships and corporate reputation, organizations need a robust production imaging solution.
| • | Report and Output |
Traditionally, organizations have relied on paper-based processes to support these requirements—processes that were adequate when operations were nominal, but that impair the accessibility and usability of critical corporate information as enterprises reach a global scale.Livelink for Enterprise Report Management™ enables organizations to reduce operating costs, and ensure that appropriate business users can extract the maximum value from report content.
| • |
Product Development
Open Text intendsexpects to continue to pursue its strategy of growing the capabilities of its ECM software offerings through the in-house research and development of new product offerings as well as the addition of technologies and expertise through the acquisition of othercomplementary companies, technologies, and products.
During fiscal 2004,Fiscal 2005 was a significant year for the Company, enhancedin terms of product development efforts. The Company successfully integrated theLivelink portfolio IXOS archiving products with the Open Text LiveLink records management and several of its optional componentscollaboration products and Open Text now has solutions on the market to continuearchive and provide records management for content from SAP, Lotus Notes, SharePoint, and Outlook. In addition, the Company integrated the IXOS Web Content Management products with the Open Text Web Content Management products and is continuing to set the standardsuccessfully sell their business solutions for ECM capabilities and in response to customer requests. Examples include the addition of secure Instant Messaging capabilitypharmaceutical, financial services, federal government and the abilityenergy sector.
During Fiscal 2005, the Company made significant improvements advancing its Service-Oriented Architecture to distribute rich-media presentations including video, voiceeven better integrate and textassemble ECM components into specific business solutions rapidly and without programming skills. During Fiscal 2005, the foundational integration required to a wide audience overbring together the web.product lines of Open Text and IXOS was completed. The modular architecture ofLivelink allows for the release of newCompany invested in research and improved product components independently of the baseline platform. The modular architecture also supports the Company’s acquisition strategy, allowingdevelopment to provide new product componentssolutions to help companies address the enormous volumes of content that must be managed in today’s environment. The Company continually focuses on customer requests and technologiessuggestions, particularly from customers believed to be quickly assimilated intoLivelink. New offerings based on technologies acquired“thought leaders” within their sectors, in fiscal 2004 from IXOSits product research and Gauss Interprise AG (“Gauss”) were developed and are evidence of the continued success of this architectural approach.development activities.
The strategic intent of the Company’s product developments is to offerdevelopment efforts are aimed at providing customers in the world’s largest and most complex organizations, a scalable infrastructure for managing all their enterprise content. LargeThe Company expects large organizations are expected towill continue to invest in infrastructure and solutions for ECM for several years as they look for better ways to manage risk and comply with regulations; find ways to extend their investment in enterprise applications
like ERP; and provide tools to make their innovating and problem-solving processes more efficient. The company’sCompany’s product development willis expected to continue to focus on offering customers infrastructure products that provide high value and low total cost of ownership, as well as innovative solutions for important business problems.
In July 2004, Open Text formed a European alliance with Siemens Business Services. The product development organization,alliance combines Siemens’ broad range of IT services—consulting, systems integration and IT systems management— with Open Text’s Livelink ECM solutions. Through the alliance, the companies leverage complementary expertise and provide combined solutions to major European customers.
In August 2004, Open Text acquired theVista Plus® suite of products and related assets from Quest Software Inc. Vista Plus captures and stores business-critical information from packaged applications like Oracle E-Business Suite, PeopleSoft and mySAP as well as custom and mainframe legacy environments. Vista provides a strong platform from which to address report content found in coordinationERP applications, and business intelligence (BI) software from Cognos, Business Objects, Crystal Reports and others. Vista Plus’ integration with SAP R/3, PeopleSoft and Oracle Applications provides value for automating and tracking the delivery of reports and documents to physical destinations like printers and fax servers, as well and electronic delivery to end users. The acquisition expands Open Text’s integration and report management capabilities as part of its Professional Services function, partners, and identified lighthouse customers, continues to advance theLivelink platform and technology to support rapid development of knowledge-based applications.comprehensive ECM suite.
AsIn August 2004, Open Text’sLivelink ECM—Email Archiving for Microsoft®Exchange software was the first to complete the Microsoft Certified for Windows Server 2003 program. This stringent third-party testing by VeriTest of June 30, 2004,Open Text’s archiving solution for Microsoft Exchange ensures ultimate compatibility with Microsoft Windows Server 2003 standards, and guarantees both higher reliability and lower total cost of ownership than non-certified applications. After intensive testing, VeriTest found that the Company’s researchsolution complies with all Microsoft standards, and development team consisted of 546 employees. During fiscal 2004, throughwill easily accommodate upgrades, offering the acquisitions of IXOS, Gauss,highest quality and DOMEA eGovernment, the Company acquired new technologies that are being integrated with itsLivelink technology with the goal of producing a more diverse product offering. Amounts spent on research and development during fiscal 2004, fiscal 2003, and fiscal 2002 were $43.6 million, $29.3 million, and $24.1 million, respectively.longevity to customers.
Customer SupportIn August 2004, Open Text’s FirstClass Division releasedFirstClass®8.0, a major evolution of the Company’s suite of collaboration and Global Servicescommunications software for academic organizations.FirstClass 8.0 provides a wealth of new features created in response to changing customer requirements, including advances in system security and manageability, in performance and scalability, and in collaboration and customization capabilities. In addition, the release continues FirstClass’ industry-leading support for a wide range of computing platforms to provide customers with flexibility and choice as they deploy FirstClass in diverse computing environments.
In August 2004, Open Text acquired Artesia Technologies, Inc. of Rockville, MD, an important step towards helping customers better integrate and manage all types of digital media for improved enterprise content management. The acquisition expands Open Text’s rich media integration and management capabilities as part of its comprehensive ECM suite, and provides a strong platform from which to address the growing content management needs of media and marketing professionals worldwide.
In September 2004, Open Text introduced a new Livelink ECM solution which integrates with PeopleSoft Enterprise Financial Management 8.8 to improve invoice handling and reduce processing costs for customers. The Open Text solution, calledLivelink ECM—Accounts Payable for PeopleSoft Enterprise, applies Livelink ECM’s flexible workflow and document management tools to facilitate the processing and tracking of invoice documentation. Accounts Payable for PeopleSoft Enterprise offers a complete solution that includes flexible workflow to manage invoice routing, document management capabilities and flexible data capture technology.
In October 2004, Open Text’sLivelink ECM—Records Management software was approved by the UK Government’s National Archives electronic records management systems (ERMS) program. The UK government’s ERMS program, which incorporates the management of classified records, involves a rigorous testing process to ensure that organizations using records management software can adequately control and
manage those records. Open Text was also the first to receive Chapter 4 Classified Records certification under the U.S. Department of Defense’s 5015.2 certification program, an important qualification for records management solutions used by the Department of Defense and other U.S. Federal agencies.
In October 2004, Open Text introduced a solution for online “communities of practice”, which bring together people in an organization with similar responsibilities or interests. The solution allows marketing professionals or purchasing managers to connect in new ways, providing a forum where they can share information and best practices, and improve processes. CalledLivelink ECM—Communities of Practice, the solution provides a central workspace in Livelink ECM where members can publish relevant news, share documents, participate in member Weblogs, arrange online meetings and hold Webcasts. The solution also tracks the contributions of participants to help members identify experts in the community on specific subjects.
In October 2004, Open Text introduced a major extension of itsLivelink ECM—Suite for SAP®Solutions, which allows customers to store, manage, retrieve and archive documents from mySAP™ ERP Financials, and mySAP ERP Human Capital Management. The new version of the product, Version 6.0, includes integration with SAP NetWeaver, which lets customers standardize on a single ERP software platform. By integrating with SAP NetWeaver, Open Text provides a complementary standard platform for managing documents and other content—a central repository that links with other systems to provide more cost-effective information management and easier access to documents.
In November 2004, Open Text introduced a revolutionary new collaboration platform calledLivelink ECM— Touchpoint™, the first solution to unify Web conferencing, blogs, team workspaces, instant messaging, and the ability to see the online presence of others into a single, seamless interface. Touchpoint is designed to better match the dynamics of human interaction, while eliminating the need for users to switch between applications to use different collaboration tools. For example, a user can see the presence of a co-worker online, instant message that person, then, with one click and within the same interface, quickly escalate that interaction into a Web meeting where the two can share documents or “white board” ideas. If necessary, the two can involve others and create a team workspace for an ongoing project.
In December 2004, Open Text releasedArtesia for Digital Asset Management (DAM), Version 6.0, a solution for managing digital content in large organizations.Artesia for DAM 6.0 lets customers easily administer a highly scalable, flexible, and sophisticated security model across an entire company, not just within a few departments. The solution also delivers new digital asset management services in a J2EE-based Service-Oriented Architecture. The new features were added in response to the overwhelming adoption of digital asset management solutions among customers and the need to deploy them broadly in an organization.
In March 2005, Open Text joined the Compliance and Management of Electronic Information (CMEI) Working Group. Led by the Internet Law & Policy Forum, the CMEI Working Group develops and publishes best practices, checklists and summaries of legal and regulatory requirements to provide compliance guidance. Additionally, the group holds forums where technology vendors, regulated entities, government leaders and policy experts can discuss the impact of law on end users and develop recommendations and guidelines that will facilitate compliance while allowing companies to continue effective business operations. Open Text joined Hitachi Data Systems, Hewlett Packard, Network Appliance, Oracle, Plasmon, Sun Microsystems, and Symantec Corporation to provide guidance on best practices for compliance with information retention and maintenance regulations.
In April 2005, Open Text became the first to integrate email archiving, records management and search capabilities, when it completed its rollout of the industry’s most advanced suite of email management solutions. Designed to work with Lotus Notes and Microsoft Exchange, the solutions offer the ability to address specific legal, policy and compliance requirements. The solutions include:Livelink ECM—Email Archiving, which is designed for organizations requiring lower storage costs and improved system performance, providing a basic
email archiving infrastructure;Livelink ECM—Email Management, which lets customers set specific retention and disposition policies to emails and manage them as corporate records; andLivelink ECM—Email Monitoring, which adds support for legal discovery processes and structured retention management of all emails.
In April 2005, Open Text introduced itsLivelink ECM Platform, a secure, integrated framework that combines a shared content repository with user, content, and process services in an SOA. With the introduction of the Livelink ECM Platform, Open Text marked the completion of its integration ofLivelink ECM—Enterprise Server (formerly “Livelink”) with the content archive (Livelink ECM—Archive Server) from IXOS Software. The Livelink ECM Platform allows Open Text to offer a shared platform for multiple solutions, universal access to enterprise content, a common user experience, and simplified maintenance and administration. With the platform as a foundation, customers can more quickly and easily deploy a comprehensive range of Livelink ECM solutions as their needs evolve.
In May 2005, Open Text introduced a production document management solution that dramatically improves the way companies manage and store the millions of documents used in large-scale processes such as invoicing, ordering, or claims processing. The solution reduces costs, increases productivity, and helps companies gain greater value from content by providing a single access point to information and the ability to link documents to other core business applications. TheLivelink ECM—Production Document Management solution works with Open Text’s new BPM offering,Livelink ECM—BPM Server, giving customers an end-to-end solution—process management, document management and a single document repository—to improve business-critical functions such as customer account statements for banks, policy statements for insurance companies, or outgoing invoices for utilities. The Production Document Management solution includes sophisticated imaging and archiving technology to import and consolidate huge volumes of paper documents into an electronic form. The system maintains every incoming document and makes it available on demand to multiple users simultaneously.
In May 2005, Open Text unveiled a new BPM solution calledLivelink ECM—BPM Server, that improves customers’ business-critical processes, reduces costs and tightly integrates processes with the important documents and other content vital to users. The new BPM Server solution allows customers to automate and optimize high-volume processes comprising millions of transactions, thousands of users and multiple applications. With its comprehensive capabilities, the solution eliminates inefficiencies in processes to, for example, optimize cash flow in accounts receivable, improve response times for faster customer service, or reduce costs in procurement. The BPM Server solution integrates with a wide range of business applications, so that more required contributors can be easily incorporated into a process to improve efficiency. Its standards-based, open architecture allows it to work easily with ERP, supply chain, CRM, and office applications such as Microsoft Outlook.
The Company offers its customers a broad range of support, consulting,employed approximately 500 people in research and learning services aimed at providing the highest level of customer satisfaction. These services include:
Customer Support
The Company’s worldwide Customer Support organization has the technical expertisedevelopment and experience needed to get the most out of a customer’s investment in our technology. The Company’s staff of Product Specialists, Team Leaders,spent $138.1 million on research and Customer Service Representatives provide technical assistance to customers who are enrolled in Support Programs. Support teams handle questions on the use, configuration, and functionality of products. In addition, these teams can help to identify software issues, develop creative solutions, and document enhancement requests for consideration in future product releases. By allowing each customer to select a level of service that corresponds with specific requirements, the Company is able to deliver highly appropriate and effective service to maximize customers’ investment in their implementation.
Global Services
Open Text offers both training and consulting services, as well as integration services for the purpose of configuring and adapting the Company’s software to specific customer needs. Consultants orchestrate the strategic planning, implementation and governance of our solutions, and deliver rapid implementation and upgrade services to accelerate customer return on investment. The Company’s consulting group can help build
solutions that enable customers to leverage their investment in our technology, as well as in existing enterprise systems. As consulting engagements, service packages include tasks and deliverables as defined on a per-engagement basis. The implementation of these service packages can range from simple modifications to meet specific departmental needs to enterprise applications that integrate with multiple existing systems. Open Text’s Global Services Implementation Framework provides the proven methods, procedures, and guidelines to successfully roll out ECM solutions.
The Company’s Learning Services area provides the educational programs for its products. The Company provides a variety of educational offerings from educational planning and custom curriculums to e-learning, certification programs, courses and workshops.
Competition
The Company positions itself within the market category of ECM. This market category represents an aggregation of capabilities from what were previously distinct markets that are consolidating due to pressure from buyers wanting an increasingly higher level of integration and interoperability. Therefore, the Company’s products and services compete in several market segments that are at various stages of maturity and each market has both distinct and overlapping competitors. These markets include business process management, collaboration and team support software, compliance management, conferencing software, document management, document archiving and retrieval, e-mail management, knowledge management, eLearning, learning management, project management, portals, records management, and web content management, each of which is intensely competitive and subject to rapid technological change. Despite growing adoption of the term ECM, other terms exist to describe all or sub-sets of these markets including Knowledge Management (KM), Smart Enterprise Suites (by Gartner Group), and the Knowledge Worker Infrastructure (by Meta). It isdevelopment in the integration of functionality in these otherwise distinct market segments that the Company believes it differentiates itself.
The Company competes with repository-based collaboration software solutions such as IBM’s Lotus Notes/Domino, Microsoft’s Sharepoint, and EMC’s Documentum eRoom, collaboration service providers such as WebEx Communications Inc. and Centra Software Inc., and with e-mail-based collaboration solutions from Microsoft Corp, International Business Machines Corporation, and Groove Networks Inc. In the document management market, the Company competes with vendors such as EMC’s Documentum Division, FileNet Corp, and Hummingbird Ltd. Companies like FileNet Corp and TIBCO Software Inc. also offer integrated document and business process management solutions similar to the archiving, forms, workflow, and BPM capabilities provided by the Company. As the Company envisioned over five years ago with its acquisition of PS Software, nearly all remaining pure-play records management vendors have now been acquired over the past twolast three fiscal years. Those acquiring vendors include EMC’s Documentum Division, IBM Corporation, and Vignette Corporation. Web content management vendors such as EMC’s Documentum Division, Interwoven Inc., Vignette Corporation, and Stellent Inc. compete aggressively with the Company to manage content for purpose-built web sites. In the e-learning market for regulatory compliance training and accreditations, the Company competes with learning management solutions from vendors such as SumTotal Systems Inc., Saba Software Inc., and Centra Software Inc. In the email management market, the Company competes against vendors such as KVS Inc., which was recently acquired, and EMC’s Legato Division. In the portal marketplace, the Company competes with Plumtree Software Inc. and portal solutions from major infrastructure providers. In all the above cases, the Company will also compete against vendors having a particular regional strength (such as Easy Software AG in Germany) or systems integrators purpose-built composite applications based on web development techniques rather than a commercial off-the-shelf (“COTS”) product like those provided by some of the vendors above.
The Company expects competition to increase in the future as the markets for its products develop and as additional players enter these markets. The Company believes that the principal competitive factors in these markets include:
The Company’s competitors can be expected to enhance their existing products or to develop new products that will further integrate collaboration, content, and process features.
The Company’s markets are the subject of intense industry interest, and the Company is aware of numerous other major software vendors as well as smaller entrepreneurial companies focusing significant resources on developing and marketing software products and services that may compete with the Company’s products and services. Numerous releases of products and services that compete with those of the Company can be expected in the near future. Moreover, certain of the Company’s current and potential competitors may bundle their products with other software in a manner that may discourage users from licensing products offered by the Company.
Many of the Company’s current and potential competitors in each of its markets have longer operating histories and significantly greater financial, technical and marketing resources, name recognition and installed product base than the Company. There can be no assurance that the Company will be able to compete effectively with current and future competitors. Increased competition from existing or potential competitors could result in the reduction of prices and revenues, reduced margins, and loss of customers and market share, any one of which would negatively impact the Company’s operating results.
Sales and Marketing
Open Text employs multiple distribution channels, including direct sales, distributors, systems integrators, independent software vendors (“ISVs”)ISVs and VARs to market and license its products and sell its products and services throughout the world. Given the significant investment and commitment of resources required by an organization in order to implement the Company’s software, the Company’s sales cycle tends to take considerable time to complete. Particularly in the current economic environment of reduced information technology spending, it can take several months, or even quarters, for sales opportunities to translate into revenue. It was the Company’s experience throughout most ofthe last fiscal 2003 and 2004year that customers committing to larger purchases, particularly those that were compliance driven, were less predictable in terms of timing and likelihood of purchase as more people within their organizations became involved in the procurement decision. This also added to the lengthening of the sales cycle for such customers. Additionally, some customers remained hesitant to commit to large, enterprise-wide deployments of the
Company’s software and as a result, thein Fiscal 2005. The Company, in Fiscal 2005, has also experienced a lengthening ofmore variability in its sales cycles since customers didn’t commit to a license or took longer to commit to a deal.
In Fiscal 2005, the Company made substantial investments around a small number of alliances with leading system integrators, leading storage vendors, Microsoft and increased demandsSAP, by adding experienced personnel dedicated to cultivating business with those vendors. In all cases, the Company’s product portfolio and sales strategies are aligned with each of these vendors for return on investment analysis.mutual benefit.
Direct Sales.Sales.The Company employs a direct sales force as the primary method to market and license its products and sell its products and services. As of June 30, 2004,2005, Open Text’s worldwide sales and marketing organization consisted of 417514 employees located in approximately 150 cities. Historically, a significant percentage of the Company’s revenues have been generated through its direct sales force. For fiscal 2004, the Company’s license revenues were significantly generated through its direct sales force.
Distributors.Distributors. Open Text has distribution agreements in Japangeographies where it does not have an adequate direct sales presence. Distribution arrangements exist with Canon Sales Inc. and Infocom Corporation,such distributors, pursuant to which each of them markets, licenses and sells Open Text products and services within the country of Japan.a particular geography.
ISVs.ISVs.Open Text markets and licenses its products to select independent software vendors, in order to have its products embedded in high-value application products marketed by manufacturers with specific industry or application domain expertise. Such partners generally sell an entire product portfolio into the target market, thereby having more cost effective access to that market than Open Text.
Alliance Partners.Partners. The Company’s Livelink Alliance Partner program includes VARs, solution providers, technology partners, ASPs,Application System Providers (“ASPs”), and systems integrators.Allianceintegrators. Alliance Partners license, customize, configure and install the Company’s software products with complementary hardware, software and services. In combining these products and services, Alliance Partners are able to deliver complete solutions to address specific customer needs.
Competition
The market for the Company’s products is highly competitive and competition will continue to intensify as the ECM and BPM markets consolidate. The Company competes with a large number of enterprise content management, web content management, business process management, workflow, document imaging and electronic document management companies. IBM is the largest company that competes directly with Open Text in the enterprise content and business process management markets. Documentum, a competitor in the content management market, was acquired by EMC Corporation, a large storage technology company, during 2003. EMC is now a competitor offering both content management and storage management capabilities. Additionally the Company competes with FileNet®, which is an entity that develops, markets, sells and supports a software platform and application development framework for ECM and BPM. Numerous smaller software vendors also compete in each product area. The Company also experiences competition from systems integrators who configure hardware and software into customized systems.
Large infrastructure vendors such as Oracle Corporation and Microsoft Corporation have developed products, or plan to offer products in the content management market. Software vendors such as Tibco Software, Inc., Savvion Inc. and Pegasystems, Inc., each with a different core product foundation, have approached the business process management market from their individual market segments and may compete more intensely with the Company in the future. It is also possible that new competitors or alliances among existing competitors may emerge and rapidly acquire significant market share. The Company also expects that competition will increase as a result of ongoing software industry consolidation.
The Company believes that the principal competitive factors affecting the market for its software products and services include vendor and product reputation; product quality, performance and price; the availability of software products on multiple platforms; product scalability; product integration with other enterprise
applications; software functionality and features; software ease of use; and the quality of professional services, customer support services and training. The Company believes relative importance of each of these factors depends upon the specific customer involved.
No one single customer has accounted for more than 10% of the Company’s revenue in any of the past three fiscal years. See Note 15 to the Fiscal 2005 Consolidated Financial Statements included in Item 8 to this Annual Report on Form 10-K for information on the results of operation of the Company’s operating and geographic segments for each of the years in the three year period ended June 30, 2005.
Employees
As of June 30, 2004,2005, the Company employed a total of 2,1052,241 individuals. The composition of this employee base is approximately as follows: 498514 employees in sales and marketing, 546549 employees in product development, 475519 employees in professional services, 238270 employees in customer support, and 348389 employees in general and administrative roles. The Company’s employees are not subject to a labor union or collective bargaining agreement. The Company is of the opinionbelieves that relations with its employees are strong.
In July 2005, the Company announced a restructuring of its operations which resulted in a reduction of approximately 15% of its workforce. The details of this restructuring are covered in Management’s Discussion and Analysis, attached to this Annual Report on Form 10-K under Item 7 of Part II.
Intellectual Property Rights
The Company’s success and ability to compete are dependentdepend on ourits ability to develop and maintain ourits intellectual property and proprietary technology and to operate without infringing on the proprietary rights of others. Open Text’s software products are generally licensed to customers on a nonexclusivenon-exclusive basis for internal use in a customer’s organization. The Company also grants rights in its intellectual property to third parties that allow them to market certain of the Company’s products on a nonexclusivenon-exclusive or limited-scope exclusive basis for a particular application of the product(s) or to a particular geographic area.
Open Text relies on a combination of copyright, patent, trademark and trade secret laws, non-disclosure agreements and other contractual provisions to establish and maintain its proprietary rights. The Company has obtained or applied for trademark registration for most strategic product names in allmost major markets. During fiscal 2003 the Company indirectly acquired a patent relating to collaborative technology. The Company is currently exploring opportunities to exploit this patent and these opportunities may include licensing it. The Company now owns mainly as a result of its acquisition program, four USU.S. patents and has anfour additional four patent applications filed with the USU.S. Patent and Trademark Office. Some of these patents and patent applications have been filed in other jurisdictions. Recently theThe Company has embarked on a program to identify and seek patent protection for the intellectual property that results from its internal research and development efforts. There can be no assurance that any patentable elements will be identified or, if identified, that patent protection will be obtained. Although the Company intends to protect its rights vigorously, there can be no assurance that these measures will, in all cases, be successful. Enforcement of the Company’s intellectual property rights may be difficult, particularly in some nations outside of the United States and Canada in which the Company seeks to market its products. Certain of the Company’s license arrangements have required the Company to make a limited confidential disclosure of portions of the source code for its products, or to place such source code into an escrow for the protection of another party. Despite the precautions taken by the Company, it may be possible for unauthorized third parties to copy certain portions of the Company’s products or to reverse engineer or obtain and use information that the Company regards as proprietary. Also, the Company’s competitors could independently develop technologies that are perceived to be substantially equivalent or superior to the Company’s technologies. The Company’s competitive position may be affected by its ability to protect its intellectual property. Although the Company does not believe it is infringing on the intellectual property rights of others, claims of infringement are becoming increasingly common as the software industry develops and related legal protections, including patents, are applied to software products.
Although most of the Company’s technology is proprietary in nature, the Company does include certain third party software in its products. In these cases, this software is licensed from the entity holding its intellectual
property rights. Although the Company believes that it has secured proper licenses for all third-party software that has been integrated into its products, third parties may assert infringement claims against the Company in the future, and any such assertion may result in litigation, which may be costly and require the Company to obtain a license for the software. Such licenses may not be available on reasonable terms or at all.
| Item 2. | Properties |
Item 2. PropertiesAs of June 30, 2005, the Company leases approximately:
The Company leases approximately 451,571
The Company also leases USU.S. field offices in Dublin, Ohio; Philadelphia, Pennsylvania; San Mateo, California; Carlsbad, California; Irvine, California; Los Angeles, California; Livonia, Michigan; Boston, Massachusetts; and Albany, New York; Boulder, Colorado; Atlanta, Georgia; Houston, Texas; Rockville, Maryland and Scottsdale, Arizona; Canadian field offices in Ottawa, Ontario and international field offices, the most important of which are located in Hamburg, Germany; Paris, France; Amsterdam, The Netherlands; Prague, Czech Republic; St. Gallen, Switzerland; Melbourne, Australia and Beaconsfield, UK. After executing
The Company continues to review its restructuring plans, this space is considered adequate forfacilities portfolio in an effort to ensure that the Company’s needs.operational needs are being met. The current annualized head-lease rent paid byCompany is in the process of constructing a facility for its own use in Waterloo, Ontario, Canada. The square footage of this facility is approximately 112,000.
In July 2005, the Company including operating costs, is approximately US $22.7 million.announced a restructuring of its operations which will result in the closure of 27 offices worldwide. The current annualized sub-lease rent collected by the Company, including operating costs, is approximately US $7.42 million.details of this restructuring are covered in Management’s Discussion and Analysis, attached to this Annual Report on Form 10-K under Item 7 of Part II.
| Item 3. | Legal Proceedings |
The Harold Tilbury and Yolanda Tilbury Family Trust have brought an action against the Company in July 2002, before a single arbitrator, under the Ontario Arbitrations Act. The complaint alleges failure to pay amounts owing underAct alleging damages for breach of a stock purchase agreement relating to the Company’s acquisition of Bluebird Systems IncInc. (“Bluebird”). The claim iswas for $10 USD million, plus $5 USD million in punitive damages. The Company was not a party to the stock purchase agreement, but has been held to be the principal behind the transaction by the arbitrator so that if Open Text’s subsidiary Bluebird is liable, Open Text would also be liable. Bluebird and Open Text have counterclaimed against the Tilburys claiming that not only iswas no further amount owing for the purchase of their shares, but that they arewere entitled to a return of the money already paid to the Tilburys, based on misrepresentations at the time of sale. Bluebird has also asked for rescissionin respect of the lease assumed onbusiness acquisition. Bluebird also claimed damages against Harold Tilbury with respect to the purchaselease of the shares locatedBluebird premises. In April 2005, the arbitrator ruled that the sum of approximately $1.9 million, plus interest, was payable by the Company to the Tilburys under the terms of the share purchase agreement and for termination of employment related costs, and subsequently ruled that a further $222,000 was payable under the terms of the share purchase agreement as additional purchase consideration. The Company’s counterclaims were dismissed. A decision on reimbursement of costs had been deferred, at that date, and in Carlsbad, CaliforniaAugust 2005 the arbitrator ruled that the sum of approximately $847,000 is payable by the Company to the Tilburys on account of costs. Based on these awards, a total amount of $3.7 million was recorded as being payable to the Tilburys. This consisted of $2.5 million as additional
purchase consideration, $240,000 relating to severance related costs, $85,000 relating to improvements for leasehold properties occupied by Bluebird, $754,000 relating to interest and $129,000 relating to legal costs.
An employee of the Company commenced an action against the Company in September 1999 claiming specific performance of an alleged agreement made between him and the Company on July 11, 1996, concerning certain share options granted to the employee in 1996. The employee claimed that all options granted vested and were exercisable as of October 16, 1998. He also claimed the rights to exercise 112,500 options or alternatively, payment of $2.2 million as of August 30, 1999, as damages for the loss of $7 USD million together withopportunity for a return on any monies assessed to be owing to him, payment of bonuses in the total amount of $179,283, payment of vacation pay of $17,250, payment of consulting fees of $20,700 and interest. He was also seeking aggravated, exemplary and punitive damages of $1 USD million. It is not expected this$500,000 and costs on a solicitor and client basis. This matter will be completed until the fall of 2004. The Company believes the claim made against it is without merit, and intends to defend the action vigorously. The arbitration process is inherently uncertain and unpredictable and accordingly there can be no assurances as to the ultimate outcome of the arbitration.
Beginningwas settled in July 2001, Eloquent Inc, (“Eloquent”, a company acquired during fiscal 2003) and certain of its officers and directors were named as defendants in several class action shareholder complaints filed in the United States District Court for the Southern District of New York. These actions include (1) Pond Equities v. Eloquent, Inc., et al., Case No. 01-CV-6775; (2) Zitto Investments, Inc. v. Eloquent, Inc., et al., Case No. 01-CV-7591; (3) Bartula v. Eloquent, Inc., et al., Case No. 01-CV-7607; and (4) Holleran v. Eloquent, Inc., et al., Case No. 01-CV-7698. Similar complaints were filed in the same Court against hundreds of other public companies that conducted initial public offerings (“IPOs”) of their common stock in the late 1990s (the “IPO Lawsuits”). In each of these complaints, the plaintiffs allege that Eloquent, certain of its officers and directors and its IPO underwriters violated the federal securities laws because Eloquent’s IPO registration statement and prospectus contained untrue statements of material fact or omitted material facts regarding the compensation to be received by, and the stock allocation practices of, the IPO underwriters. The plaintiffs sought unspecified monetary damages and other relief.
On August 8, 2001, the IPO Lawsuits were consolidated for pretrial purposes before United States Judge Shira Scheindlin of the Southern District of New York. In late 2002 and early 2003 the various plaintiffs and issuer defendants entered into settlement discussions. In June, 2003, the Company’s Board of Directors agreed in principle to a settlement proposal as described in a Memorandum of UnderstandingJanuary 2005 with the plaintiffs andemployee receiving a Issuer-Insurer Agreement with the Company’s insurers. In May, 2004, the plaintiffs and counselcertain number of shares which had been previously reserved for various defendants, including the Company, reached agreement on a proposed form of settlement agreement (the “Settlement Agreement”). Under the proposed Settlement Agreement, the issuers (includinghim under his stock option agreement. There was no financial impact to the Company as successor to Eloquent) are to be dismissed as parties froma result of this settlement.
In the litigation and will be released from all claims by the plaintiffs without admissionnormal course of wrongdoing on behalf of the Company. Under the proposed Settlement Agreement, if the plaintiffs fail to obtain a minimum settlement or judgment against certain underwriter defendants in related cases, each of the settling issuer defendants will pay their proportionate share of the difference. Under the Issuer-Insurer Agreement, however,business, the Company and the other settling issuers have agreed with their insurers that in the event that the issuer defendants ultimately owe any payment to the plaintiffs under the settlement, the issuers’ insurers will be responsible for making any such payment to the plaintiffsis subject to the applicable deductible ($250,000, in the case of the Company) and up to the coverage amount of each Issuers’ insurance policy. The Company believes that its coverage is sufficient to cover its obligations, if any, under the proposed Settlement Agreement. Implementation of the Settlement Proposal requires execution and delivery of the proposed Settlement Agreement and Issuer-Insurer Agreement by the Company andvarious other parties, and approval by the court, which is expected to occur in late 2004 or early 2005. The Company believes that these lawsuits are without merit and, if the proposed Settlement Agreement is not implemented, intends to defend against them vigorously.
The settlement was finalized and executed in mid-June 2004. Following submission to the court of the executed settlement agreement, the plaintiffs filed a motion on June 25 for the court’s preliminary approval of the settlement. Thereafter, on July 14, 2004, the Underwriters filed an opposition to the plantiffs’ motion for preliminary approval. Judge Scheindlin has not, at this time scheduled a preliminary-approval.
The Company is also subject to legal proceedings and claims that arise in the ordinary course of business.matters. While the outcomeresults of these proceedingslitigation and claims cannot be predicted with certainty, management does not believethe Company believes that the final outcome of any of these legalother matters will not have a materialmaterially adverse effect on its consolidated results of operations or financial results.conditions.
Item 4. Submission of Matters to a Vote of Security Holders
| Item 4. | Submission of Matters to a Vote of Security Holders |
None.
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The Common Shares have traded on the NASDAQ National Market since January 23, 1996 under the symbol “OTEX”. The Common Shares have traded on the Toronto Stock Exchange (“TSX”) since June 26, 1998 under the symbol “OTC”. The following table sets forth the high and low sales prices for the Common Shares, as reported by the TSX, and the high and low bid prices, as reported by NASDAQ, for the periods indicated below.
On June 30, 2004,2005, the closing price of the Company’s Common Shares on NASDAQ National Market was $31.90$14.16 USD per share. On June 30, 2004,2005, the closing price of the Company’s Common Shares on the TSX was $42.70$17.33 CDN per share.
| Nasdaq | TSX | NASDAQ | TSX | |||||||||||||||||||||
| High | Low | High | Low | High | Low | High | Low | |||||||||||||||||
| (in U.S. dollars) | (in Canadian dollars) | (in U.S. dollars) | (in Canadian dollars) | |||||||||||||||||||||
Year Ending June 30, 2004: | ||||||||||||||||||||||||
Fiscal Year Ending June 30, 2005: | ||||||||||||||||||||||||
Fourth Quarter | $ | 32.96 | $ | 23.00 | $ | 43.13 | $ | 31.94 | $ | 19.00 | $ | 14.00 | $ | 23.00 | $ | 17.30 | ||||||||
Third Quarter | 32.80 | 19.02 | 43.29 | 24.68 | 21.22 | 16.84 | 26.35 | 20.52 | ||||||||||||||||
Second Quarter | 23.74 | 17.06 | 31.52 | 23.00 | 20.26 | 14.82 | 25.50 | 18.37 | ||||||||||||||||
First Quarter | 19.27 | 12.40 | 26.38 | 17.38 | 32.06 | 16.44 | 41.45 | 21.48 | ||||||||||||||||
Year Ending June 30, 2003: | ||||||||||||||||||||||||
Fiscal Year Ending June 30, 2004: | ||||||||||||||||||||||||
Fourth Quarter | $ | 17.38 | $ | 13.46 | $ | 25.12 | $ | 19.05 | $ | 32.96 | $ | 23.00 | $ | 43.13 | $ | 31.94 | ||||||||
Third Quarter | 15.02 | 11.55 | 22.41 | 18.19 | 32.80 | 19.02 | 43.29 | 24.68 | ||||||||||||||||
Second Quarter | 14.00 | 8.49 | 21.85 | 13.55 | 23.74 | 17.06 | 31.52 | 23.00 | ||||||||||||||||
First Quarter | 12.97 | 7.74 | 20.40 | 12.25 | 19.27 | 12.40 | 26.38 | 17.38 | ||||||||||||||||
On September 1, 2004,2005, the closing price of the Company’s Common Shares on NASDAQ National Market was $16.72$11.93 USD per share.
On September 1, 2005, the closing price of the Company’s Common Shares on the TSX was $14.16 CDN per share.
As at September 1, 2004,2005, there were approximately 18,38510,776 shareholders of record of the Company’s Common Shares. As at September 1, 2004,2005, there were approximately 5,8344,141 U.S. shareholdersShareholders of record holding Common Shares.
All of the share information presented above and throughout this reportAnnual Report on Form 10-K has been adjusted for the two-for-one stock split that took place in fiscal 2004 as described below.Fiscal 2004.
There have been no recent sales of unregistered securities and no repurchases of securities by the Company or its affiliates.during the past three fiscal years.
Dividend Policy
The Company has never paid cash dividends on its capital stock. The Company currently intends to retain earnings, if any, for use in its business and does not anticipate paying any cash dividends in the foreseeable future. In fiscalFiscal 2004, as a one time event, the Company declared a two-for-one split of the Company’s Common Shares effected by means of a dividend.
Exchange Controls and Other Limitations Affecting Holders of Common Shares
Investment Canada Act
Canada has no system of exchange controls. There is no law, government decree or regulation in Canada restricting the export or import of capital or affecting the remittance of dividends, interest or other payments to a non-resident holder of Common Shares, other than withholding tax requirements.
There is no limitation imposed by Canadian law or by the articles or other charter documents of the Company on the right of a non-resident to hold or vote Common Shares or Preferred Shares of the Company with
voting rights (collectively, “Voting Shares”), other than as provided in the Investment Canada Act (the “Investment Act”), as amended by the World Trade Organization Agreement Implementation Act (the “WTOA Act”). The Investment Act generally prohibits implementation of a reviewable investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture that is not a “Canadian,” as defined in the Investment Act (a “non-Canadian”), unless, after review, the minister responsibleSecurities Authorized for the Investment Act is satisfied that the investment is likely to be a net benefit to Canada. An investment in Voting Shares of the Company by a non-Canadian (other than a “WTO Investor,” as defined below) would be reviewableIssuance under the Investment Act if it were an investment to acquire direct control of the Company, and the value of the assets of the Company were $5.0 million or more. Except for certain economic sectors with respect to which the lower threshold would apply, an investment in Voting Shares of the Company by a WTO Investor would be reviewable under the Investment Act if it were an investment to acquire direct control of the Company, and the value of the assets of the Company equaled or exceeded $237 million CDN. A non-Canadian, whether a WTO Investor or otherwise, would acquire control of the Company for purposes of the Investment Act if he or she acquired a majority of the Voting Shares of the Company. The acquisition of less than a majority, but at least one-third of the Voting Shares of the Company, would be presumed to be an acquisition of control of the Company, unless it could be established that the Company was not controlled in fact by the acquirer through the ownership of Voting Shares. In general, an individual is a WTO Investor if he or she is a “national” of a country (other than Canada) that is a member of the World Trade Organization (“WTO Member”) or has a right of permanent residence in a WTO Member. A corporation or other entity will be a WTO investor if it is a “WTO Investor-controlled entity” pursuant to detailed rules set out in the Investment Act. The United States is a WTO Member.
Certain transactions involving Voting Shares of the Company would be exempt from the Investment Act, including: (a) an acquisition of Voting Shares of the Company if the acquisition were made in connection with the person’s business as a trader or dealer in securities; (b) an acquisition of control of the Company in connection with the realization of a security interest granted for a loan or other financial assistance and not for any purpose related to the provisions of the Investment Act; and (c) an acquisition of control of the Company by reason of an amalgamation, merger, consolidation or corporate reorganization, following which the ultimate direct or indirect control of the Company, through the ownership of voting interests, remains unchanged.
Canadian Federal Income Tax Considerations
The following summary is based upon the current provisions of theIncome Tax Act (Canada) (the “ITA”) and the regulations thereunder, all proposed amendments to the ITA and the regulations thereunder are publicly announced by the Department of Finance, Canada prior to the date hereof, the administrative policies and assessing practices of the Canada Revenue Agency (“CRA”), made publicly available prior to the date hereof and the Canada-United States Income Tax Convention (1980), as amended by the 1983, 1984, 1995 and 1997 Protocols thereto (the “Convention”). Except for the foregoing, this summary does not take into account or anticipate changes in the law or the administrative policies or assessing practices of the CRA whether by legislative, governmental or judicial action and does not take into account or anticipate provincial, territorial or foreign tax considerations.
This summary relates to the principal Canadian federal income tax considerations under the ITA and the regulations thereunder generally applicable to purchasers of Common Shares hereunder who: (i) for purposes of the ITA, are not, have not been and will not be or be deemed to be resident in Canada at any time while they held or hold Common Shares (or other property for which Common Shares were substituted on a tax deferred exchange), deal at arm’s length and are not affiliated with the Company, will hold their Common Shares as capital property, and do not use or hold, and will not and will not be deemed to use or hold their Common Shares in, or in the course of carrying on a business in Canada through a permanent establishment or in connection with a fixed base in Canada, and (ii) for purposes of the Convention, are residents of the United States and not residents of Canada.
Amounts in respect of Common Shares paid or credited or deemed to be paid or credited as, on account or in lieu of payment of, or in satisfaction of, dividends to a non-resident holder will generally be subject to Canadian
non-resident withholding tax. Such withholding tax is levied at a basic rate of 25%, which may be reduced pursuant to the terms of an applicable tax treaty between Canada and the country of residence of the non-resident holder. Currently, under the Convention, the rate of Canadian non-resident withholding tax on the gross amount of dividends beneficially owned by a person who is a resident of the United States for the purpose of the Convention and who does not have a “permanent establishment” or “fixed base” in Canada to which the holding of Common Shares is effectively connected is 15% except where such beneficial owner is a company which owns at least 10% of the voting stock of the Company (in which case the rate of such withholding tax is 5%).
A purchase of Common Shares by the Company (other than a purchase of Common Shares by the Company on the open market in the manner in which shares would be purchased by any member of the public in the open market) will give rise to a deemed dividend under the ITA equal to the difference between the amount paid by the Company on the purchase and the paid-up capital of such shares determined in accordance with the ITA. The paid-up capital of such shares may be less than the non-resident holder’s cost of such shares. Any such dividend deemed to have been received by a non-resident holder would be subject to a non-resident withholding tax as described above. The amount of any such deemed dividend will reduce the proceeds of disposition of the Common Shares to the non-resident holder for purposes of computing the amount of the non-resident holder’s capital gain or loss under the ITA.
A holder who is not resident in Canada for purposes of the ITA will generally not be subject to tax under the ITA in respect of any capital gain or entitled to deduct any capital loss realized on a disposition of Common Shares unless at the time of such disposition such Common Shares constitute “taxable Canadian property” of the holder for purposes of the ITA and the holder is not entitled to relief under the Convention. If the Common Shares are listed on a prescribed stock exchange (which includes the NASDAQ National Market) at the time they are disposed of, they will generally not constitute “taxable Canadian property” of the non-resident holder at the time of a disposition of such shares unless such holder uses or holds or is deemed to use or hold such shares in or in the course of carrying on business in Canada or, at any time during the 60 month period immediately preceding the disposition of the Common Shares, 25% or more of the issued shares of any class or series of the Company were owned by the non-resident holder, by persons with whom the non-resident holder did not deal at arm’s length or by the non-resident holder and persons with whom the non-resident holder did not deal at arm’s length. In any event, under the Convention, gains derived by a resident of the US from the disposition of Common Shares will generally not be taxable in Canada unless such Common Shares form part of the business property of a permanent establishment which such US resident has or had (within the twelve-month period preceding the date of disposition) or pertain to a fixed base which is or was available (within the twelve-month period preceding the date of disposition) to such US resident in Canada or unless the value of the Common Shares is derived principally from real property situated in Canada.
When a non-resident holder dies holding Common Shares, such holder will be deemed to have disposed of such Common Shares for proceeds equal to the fair market value thereof immediately before such holder’s death and will be subject to the tax treatment with respect to dispositions described above. Any person who acquires such Common Shares as a consequence of the death of such holder will be deemed to have acquired such shares at a cost equal to their fair market value at that time.
United States Federal Income TaxationEquity Compensation Plans
The following discussion summarizes certain US federal income tax considerations relevanttable sets forth summary information relating to an investment inthe Company’s various stock option plans as of June 30, 2005:
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants, and rights | Weighted average exercise price of outstanding options, warrants, and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column a) | ||||
| (a) | (b) | (c) | |||||
Equity compensation plans approved by security holders | 5,530,274 | $ | 11.93 | 1,054,900 | |||
Equity compensation plans not approved by security holders | — | — | — | ||||
Total | 5,530,274 | $ | 11.93 | 1,054,900 | |||
Stock Repurchases
The following table provides details of Common Shares repurchased by the Company during the three months ended June 30, 2005:
PURCHASES OF EQUITY SECURITIES OF THE COMPANY FOR THE THREE
MONTHS ENDED JUNE 30, 2005
Period | (a) Total Number of Shares (or Units) Purchased | (b) Average Price Paid per Share (or Unit) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | |||||
04/1/05 to 04/30/05 | — | $ | — | — | 2,388,233 | ||||
05/1/05 to 05/31/05 | 675,500 | 15.77 | 675,500 | 1,712,733 | |||||
06/1/05 to 06/30/05 | 322,400 | 15.74 | 997,900 | 1,390,333 | |||||
Total | 997,900 | $ | 15.76 | 997,900 | 1,390,333 | ||||
On May 10, 2005, the Company commenced a repurchase program (the “Repurchase Program”) that provided for the repurchase of up to a maximum of 2,388,233 Common Shares. Purchase and payment for the Common Shares, under the Repurchase Program, were determined by individuals, corporations, estatesthe Board of Directors of Open Text and trusts who, for income tax purposes, are residentwere made in accordance with rules and policies of the US and not in Canada, holdTSX. No purchases of Common Shares as capital assets, do not use or holdwere made other than by means of open market transactions through the facilities of the TSX without the approval of the TSX. The price paid for the Common Shares in carrying on a business through a permanent establishment or in connection with a fixed base in Canada and, inwas at the case of individual investors, are also US citizens (collectively, “Unconnected US Shareholders”). The tax consequences of an investment in the Common Shares by investors who are not Unconnected US Shareholders may be expected to differ substantially from the tax consequences discussed herein. Further, this summary is not a comprehensive description of all of the tax considerations that may be relevant to an
Unconnected US Shareholder based on such Shareholder’s particular circumstances. In particular, this discussion does not address the potential application of the alternative minimum tax. In addition, this discussion does not address the US federal income tax consequences to Unconnected US Shareholders that are subject to special treatment under US federal income tax laws, including, but not limited to:
This discussion does not address any aspect of US federal gift or estate tax, or of state, local or non-U.S. tax laws and does not address aspects of US federal income taxation applicable to Unconnected US Shareholders holding options, warrants or other rights to acquire Common Shares.
The discussion is based upon the provisions of the US Internal Revenue Code of 1986, as amended (the “Code”), the existing and proposed Treasury regulations promulgated thereunder, the Convention, the administrative practices published by the US Internal Revenue Service (“IRS”) and US judicial decisions, all of which are subject to change. This discussion does not consider the potential effects, both adverse and beneficial, of any recently proposed legislation which, if enacted, could be applied, possibly on a retroactive basis, at any time.
Unconnected US Shareholders generally will treat the gross amount of dividends paid by the Company equal to the US dollar value of such dividends on the date the dividends are received or treated as received (based on the exchange rate on such date), without reduction for the Canadian withholding tax, as dividend income for US federal income tax purposes to the extent of the Company’s current and accumulated earnings and profits. However, the amount of Canadian tax withheld (calculated in accordance with U.S. federal income tax principles) generally will give rise to a foreign tax credit or deduction for US federal income tax purposes. Investors should be aware that dividends paid by the Company generally will constitute “passive income” for purposes of the foreign tax credit, which could reduce the amount of the foreign tax credit available to a US shareholder. The Code applies various limitations on the amount of foreign tax credit that may be available to a US taxpayer. Investors should consult their own tax advisors with respect to the potential consequences of those limitations. Dividends paid on the Common Shares will not generally be eligible for the “dividends received” deduction. An investor that is a corporation may, under certain circumstances, be entitled to a 70% deduction of the US-source portion of dividends received from the Company if such investor owns shares representing at least 10% of the voting power and value of the Company. To the extent that distributions exceed current and accumulated earnings and profits of the Company, they will be treated first as a return of capital, up to the investor’s adjusted basis in Common Shares and thereafter as gain from the sale or exchange of the Common Shares.
In the case of foreign currency received as a dividend that is not converted by the recipient into US dollars on the date of receipt, an Unconnected US Shareholder will have a tax basis in the foreign currency equal to its US dollar value on the date the dividends are received or treated as received. Any gain or loss recognized upon a subsequent sale or other disposition of the foreign currency, including an exchange for US dollars, will be US source ordinary income or loss.
Subject to the discussion below under “Passive Foreign Investment Company”, the sale of Common Shares generally will result in the recognition of gain or loss to the holder in an amount equal to the difference between the amount realized and the holder’s adjusted basis in the Common Shares. The tax basis will initially equal its cost to the Unconnected US Shareholder, as reduced by any distributions on the shares treated as return of capital. The Unconnected US Shareholder that is an individual will be taxed on the net amount of his or her capital gain at a maximum rate of 15% provided the Common Shares were held for more than 12 monthsprevailing market price at the time of sale or disposition. Special rules (and generally lower maximum rates) may apply to individuals in lower tax brackets.
Corporate taxpayers may deduct capital losses to the extent of capital gains. Non-corporate taxpayers may deduct excess capital losses, whether short-term or long-term, up to an additional US$3,000 a year (US$1,500 in the case of a married individual filing separately). Non-corporate taxpayers may carry forward unused capital losses indefinitely. Unused capital losses of a corporation (other than an S corporation) may be carried back three years and carried forward five years.
In general, dividends paidpurchase. The Repurchase Program terminated on Common Shares and payments of the proceeds of a sale of Common Shares, paid within the US or through certain US-related financial intermediaries, are subject to information reporting and may be subject to backup withholding at a 28% rate unless (i) the payor is entitled to, and does in fact, presume that the Unconnected US Shareholder of common shares is a corporation or other exempt recipient or (ii) the Unconnected US Shareholder provides a taxpayer identification number on a properly completed Form W-9 and certifies that no loss of exemption from backup withholding has occurred. The amount of any backup withholding will be allowed as a credit against an Unconnected US Shareholder’s US federal income tax liability and may entitle such holder to a refund, provided that the required information is furnished to the IRS. Unconnected US Shareholders should consult their tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining such an exemption if applicable.
Passive Foreign Investment Company
A non-US corporation will be classified as a passive foreign investment company (a “PFIC”) for US federal income tax purposes if it satisfies either of the following two tests: (i) 75% or more of its gross income for the taxable year is “passive income” (generally, interest, dividends, royalties, rent and similar income, and gains on disposition of assets that generate such income) or (ii) 50% or more of its assets produce or are held for the production of passive income on average for the taxable year (by value or, if the Company so elects, by adjusted basis). If the corporation owns, directly or indirectly, at least 25% by value of the stock of another corporation, it will be treated as if it holds directly its proportionate share of assets, and receives directly its proportionate share of income of such other corporation. Accordingly, the classification of the Company as a PFIC in any taxable year will depend on the character of the income and the assets of the Company and its subsidiaries.
The Company does not believe that it is currently a PFIC. If the Company were to be a PFIC for any taxable year, US investors would be required to (i) at disposition or when such investor receives an “excess distribution”, pay a penalty tax equivalent to US federal income tax at ordinary income rates, calculated as if any gain on that sale were realized (or the excess distribution were made) ratably over that holding period, plus an interest charge on taxes that are deemed due during the period that the investor owned that stock, (ii) if a Qualified Electing Fund election is made, include currently in their taxable income certain undistributed amounts of the Company’s income, or (iii) if a mark-to-market election is made, include currently an amount of ordinary income or loss (which loss is subject to limitations) each year in an amount equal to the difference between the fair market value of such investor’s shares in the Company and such investor’s adjusted tax basis therein.
Controlled Foreign Corporation
If more than 50% of the voting power of all classes of stock or the total value of the stock of the Company is owned, directly or indirectly, by US persons including citizens or residents of the US, US domestic partnerships and corporations or estates or trusts other than foreign estates or trusts, each of whom owns 10% or more of the total combined voting power of all classes of stock of the Company (“10% US Shareholders”), the Company would be treated as a “controlled foreign corporation” under Subpart F of the Code. This classification would have many complex results, including the required inclusion by such 10% US Shareholders in income of their pro rata shares of “Subpart F income” (as specifically defined by the Code) of the Company. The Company does not believe that it is currently a controlled foreign corporation.September 6, 2005.
Item 6—Selected Consolidated Financial Data
The following table sets forth selected consolidated financial data of the Company for the periods indicated. The selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Consolidated Financial Statements and related notes of the Company appearing elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of income data set forth below for the fiscal years ended June 30, 2005, 2004 2003 and 2002 2003
and the selected consolidated balance sheet data as of June 30, 20042005 and 20032004 are derived from ourthe Company’s audited consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of income data set forth below for the fiscal years ended June 30, 2002 and 2001 and 2000 and the selected consolidated balance sheet data as of June 30, 2003, 2002 2001 and 20002001 are derived from audited consolidated financial statements, previously issued but that are not included in this Annual Report on Form 10-K.
| Fiscal Year Ended June 30, | |||||||||||||||||
| 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||
| (in thousands, except per share data) | |||||||||||||||||
Statement of Income Data: | |||||||||||||||||
Revenues: | |||||||||||||||||
License | $ | 136,522 | $ | 121,642 | $ | 75,991 | $ | 65,984 | $ | 73,752 | |||||||
Customer support | 179,178 | 108,812 | 63,091 | 48,707 | 40,316 | ||||||||||||
Service | 99,128 | 60,604 | 38,643 | 39,681 | 35,709 | ||||||||||||
Total revenues | 414,828 | 291,058 | 177,725 | 154,372 | 149,777 | ||||||||||||
Cost of revenues: | |||||||||||||||||
License | 11,540 | 10,784 | 6,550 | 5,341 | 5,878 | ||||||||||||
Customer support | 33,086 | 20,299 | 10,406 | 8,364 | 7,632 | ||||||||||||
Service | 81,367 | 47,319 | 28,241 | 27,411 | 27,043 | ||||||||||||
Total cost of revenues | 125,993 | 78,402 | 45,197 | 41,116 | 40,553 | ||||||||||||
Gross profit | 288,835 | 212,656 | 132,528 | 113,256 | 109,224 | ||||||||||||
Operating expenses: | |||||||||||||||||
Research and development | 65,139 | 43,616 | 29,324 | 24,071 | 24,311 | ||||||||||||
Sales and marketing | 114,553 | 87,362 | 54,532 | 51,084 | 51,317 | ||||||||||||
General and administrative | 46,110 | 22,795 | 13,509 | 12,498 | 13,191 | ||||||||||||
Depreciation | 11,040 | 7,103 | 5,009 | 5,587 | 5,178 | ||||||||||||
Amortization of acquired intangible assets | 24,409 | 11,306 | 3,236 | 6,506 | 5,460 | ||||||||||||
Provision for (recovery of) restructuring charge | (1,724 | ) | 10,005 | — | — | — | |||||||||||
Total operating expenses | 259,527 | 182,187 | 105,610 | 99,746 | 99,457 | ||||||||||||
Income from operations | 29,308 | 30,469 | 26,918 | 13,510 | 9,767 | ||||||||||||
Other income (expense) | (3,116 | ) | 217 | 2,788 | 1,613 | (2,417 | ) | ||||||||||
Interest income, net | 1,377 | 1,210 | 1,228 | 1,837 | 4,675 | ||||||||||||
Income before income taxes | 27,569 | 31,896 | 30,934 | 16,960 | 12,025 | ||||||||||||
Provision for income taxes | 6,958 | 7,270 | 3,177 | 289 | 1,229 | ||||||||||||
Net income before minority interest | 20,611 | 24,626 | 27,757 | 16,671 | 10,796 | ||||||||||||
Minority interest | 252 | 1,328 | — | — | — | ||||||||||||
Net income for the year | $ | 20,359 | $ | 23,298 | $ | 27,757 | $ | 16,671 | $ | 10,796 | |||||||
Net income per share, basic | $ | 0.41 | $ | 0.53 | $ | 0.71 | $ | 0.42 | $ | 0.27 | |||||||
Net income per share, diluted | $ | 0.39 | $ | 0.49 | $ | 0.67 | $ | 0.39 | $ | 0.25 | |||||||
Weighted average number of Common Shares outstanding, basic | 49,919 | 43,744 | 39,051 | 39,957 | 40,064 | ||||||||||||
Weighted average number of Common Shares outstanding, diluted | 52,092 | 47,272 | 41,393 | 42,478 | 42,932 | ||||||||||||
Statement of Income Data: Revenues: License Customer support Service Total revenues Cost of revenues: License Customer support Service Total cost of revenues Gross profit Operating expenses: Research and development Sales and marketing General and administrative Depreciation Amortization of acquired intangible assets Restructuring charge Total operating expenses Income (loss) from operations Other income (expense) Interest income Interest expense Income before income taxes Provision for income taxes Net income before minority interest Minority interest Net income for the year Net income per share, basic Net income per share, diluted Weighted average Common Shares outstanding, basic Weighted average Common Shares outstanding, diluted Balance Sheet Data: Cash and cash equivalents Working capital Total assets Long-term liabilities Balance Sheet Data: Cash and cash equivalents Working capital Total assets Long-term liabilities Fiscal Year Ended June 30, 2004 2003 2002 2001 2000 (in thousands, except per share data) $ 121,642 $ 75,991 $ 65,984 $ 73,752 $ 57,574 108,812 63,091 48,707 40,316 26,641 60,604 38,643 39,681 35,709 30,180 291,058 177,725 154,372 149,777 114,395 10,784 6,550 5,341 5,878 2,685 20,299 10,406 8,364 7,632 5,731 47,319 28,241 27,411 27,043 25,670 78,402 45,197 41,116 40,553 34,086 212,656 132,528 113,256 109,224 80,309 43,616 29,324 24,071 24,311 17,743 87,362 54,532 51,084 51,317 42,928 22,795 13,509 12,498 13,191 19,832 7,103 5,009 5,587 5,178 4,586 11,306 3,236 6,506 5,460 2,962 10,005 — — — 1,774 182,187 105,610 99,746 99,457 89,825 30,469 26,918 13,510 9,767 (9,516 ) 217 2,788 1,613 (2,417 ) 48,965 1,355 1,283 1,853 4,736 6,161 (145 ) (55 ) (16 ) (61 ) (109 ) 31,896 30,934 16,960 12,025 45,501 7,270 3,177 289 1,229 20,422 24,626 27,757 16,671 10,796 25,079 1,328 — — — — $ 23,298 $ 27,757 $ 16,671 $ 10,796 $ 25,079 $ 0.53 $ 0.71 $ 0.42 $ 0.27 $ 0.56 $ 0.49 $ 0.67 $ 0.39 $ 0.25 $ 0.51 43,744 39,051 39,957 40,064 44,698 47,272 41,393 42,478 42,932 48,842 June 30, 2004 2003 2002 2001 2000 (in thousands) $ 156,987 $ 116,554 $ 109,895 $ 87,526 $ 113,918 104,722 94,440 103,897 82,030 98,008 670,755 238,687 186,847 175,002 183,250 60,071 6,608 — — — As of June 30, 2005 2004 2003 2002 2001 $ 79,898 $ 156,987 $ 116,554 $ 109,895 $ 87,526 26,074 104,722 94,440 103,897 82,030 640,936 668,655 238,687 186,847 175,002 54,927 57,971 6,608 — —
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation |
The following discussion and analysis should be read together with the Company’s Consolidated Financial Statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K, including the following discussion, contains trend analyses and other forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are made pursuant to the safe haborharbor provisions of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Any statements in this Annual Report on Form 10-K that are not statements of historical fact are forward-looking statements. These forward-looking statements are based on a number of assumptions and involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or developments in the Company’s business or its industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. These risks, uncertainties, and factors include, but are not limited to, those set forth under “Risk Factors That May Affect Future Results” and elsewhere in this Annual Report on Form 10-K. Forward-looking statements are based on management’s current plans, estimates, opinions and projections, and the Company assumes no obligation to update forward-looking statements if assumptions or these plans, estimates, opinions or projections should change.
Overview
The Company’s Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and are presented in United States dollars unless otherwise indicated. All references in this Annual Report on Form 10-K to financial information concerning the Company refer to such information in accordance with U.S. GAAP and all dollar amounts in this Annual Report on Form 10-K are in United States dollars unless otherwise indicated.About Open Text
Open Text is one of the market leaderleaders in providing Enterprise Content Management (“ECM”) solutions that bring together people, processes and information. The Company’s principal product line is Livelink®, a leadingsoftware combines collaboration andwith content management, software producttransforming information into knowledge that provides the foundation for global enterprises. innovation, compliance and accelerated growth.
The software enables usersCompany’s legacy of innovation began in 1991 with the successful deployment of the world’s first search engine technology for the Internet. Today, Open Text supports approximately 20 million seats across 13,000 deployments in 114 countries and 12 languages worldwide.
Market Trends
Over the past year the Company has witnessed numerous changes to capturethe social-political landscape that have had significant impacts on the ECM market. Events over the past several years such as the September 11thterrorist attacks, the financial collapse of high-profile U.S. corporations such as Enron and Worldcom, as well as find electronically storedensuing changes to the regulatory environment such as Sarbanes-Oxley and the Patriot Act have placed a significant onus on the private and public sectors alike to adopt compliance driven software solutions.
The volume of unstructured data being generated in organizations today is overwhelming and is growing exponentially. This situation creates a significant challenge to physically manage the storage of this content, to operationally manage the content so that it adds value back to the organization, and to legally manage the content to ensure compliance, security, and protection of intellectual property. Email archiving and management has emerged as a key solution within ECM and is seen as a significant opportunity by most ECM vendors.
The content and volume of email in a company is becoming one of the greatest business challenges today. IDC, a provider of market intelligence, advisory services, and events for the information work togethertechnology and telecommunications industries, predicted that the number of email messages would grow from 9.7 million a day in both creative2000 to 35 billion in 2005. This is causing the following business challenges:
Open Text’s Email Archiving solutions provide the ability to manually or automatically offload emails and attachments from Microsoft Exchange or Lotus Domino servers without adversely affecting the email experience of employees. By migrating email content to more structured processes, perform group calendaringcost-effective media, organizations can alleviate growing demand for storage space, improve mail server performance, and scheduling,simplify backup and distributerestore procedures.
Simultaneously, more organizations continue to focus their attention on the preservation of their intellectual property and the knowledge residing throughout their workforces. With baby-boomers retiring, corporations have only recently become sensitive to the fact that a high percentage of the knowledge of their workforces may not be documented or make availablearchived in any organized fashion which future employees can retrieve. ECM software is designed to users across networks orsolve these business needs.
According to Gartner, a provider of research and analysis about the Internetglobal information technology industry, the resulting work productECM market will exceed $1.8 billion in software revenue in 2009, representing a compound annual growth rate of 10%. They expect that this growth will be driven by companies’ increasing need to manage content at the enterprise level.
Although the Company recognizes the potential of the ECM market, user adoption of ECM has yet to reach an inflection point. Various reasons cited include: a) constrained IT budgets; b) unanticipated increased spending on Sarbanes-Oxley and other information. This collaborative environment enables ad hoc teamsregulatory matters to form quickly across functionalconsulting and service organizations; c) avoiding larger more strategic ECM purchase decisions due to organizational boundaries, which enables information to be accessed by employees using any standard Web browser. Fully Web-basedchallenges and initial time constraints.
Consistent with open architecture, Livelink provides comprehensive configurations, rapid deployment, accelerated adoption, and low cost of ownership. Open Text provides integrated solutions that enable people to use information and technology more effectively at departmental levels and across enterprises. The Company offers its solutions both as end-user stand-alone products and as fully integrated modules, which together provide a complete solution that is easily incorporated into existing enterprise business systems. Although most ofexperience over the Company’s technology is proprietary in nature,past several years, the Company does not expect total information technology spending to increase in the near term. This means that the growth in ECM will continue to come at the expense of standalone markets that ECM has subsumed and other parts of the IT market. One area within information technology spending which companies are not reducing spending, and in many cases are increasing spending, is compliance-focused software. Companies are not able to defer spending to become or remain compliant with the regulatory environments they operate within. The Company is focused on occasion include certain third party softwarecapitalizing on this opportunity, particularly given the fact that compliance touches all employees in its products.an organization. As a result, compliance opportunities can evolve into enterprise-wide deployments.
Consolidation and Acquisitions
The ECM sector has been marked by significant consolidation over the past several years. Sophisticated customers are demanding more robust suites of technology and are building out a long-term strategy to address all aspects of ECM. In previous years customers often purchased individual functionalities (“point solutions”) from separate vendors and then attempted to integrate these point solutions at the customer site. The largest, most financially stable vendors have taken advantage of their financial position by acquiring many of their smaller competitors in an attempt to enhance their product line. These smaller vendors will continue to be under increased pressure as ECM technologies become mission-critical. The Company expects customers will continue
to show hesitancy to purchase from any vendor whose financial viability is in question. In many cases, these smaller vendors have what is regarded as leading technology, but they lack the financial resources to convince customers that they will remain in business to support and enhance their products for years to come. Product breadth, ease of implementation, rapid deployment of solutions and financial stability of the vendor are critical.
Through internal development and the Company’s acquisition strategy, the Company has created a broad product line to offer to new and existing customers. In Fiscal 2005, the Company made three acquisitions.
In fiscalAugust 2004, Open Text acquired all of the Company recorded total revenuesissued and outstanding shares of $291.1 million,Artesia Technologies, Inc. (“Artesia”) for cash consideration of $5.8 million. Artesia designs and distributes Digital Asset Management software. It has a record for a Company fiscal year, due to a numbercustomer base of factors including an increase in new customers, additional license transactions completed with existingover 120 companies and provides these customers and their marketing and distribution partners the acquisitionsability to easily access and collaborate around a centrally managed collection of digital media elements. The results of operations of Artesia have been consolidated with those of Open Text beginning September 1, 2004.
In August 2004, Open Text acquired the Vista Plus (“Vista”) suite of products and related assets from Quest Software Inc. (“Quest”) for cash consideration of $23.7 million. Vista is a technology that captures and stores business-critical information from ERP applications. As part of this transaction certain Quest employees that developed, sold and supported Vista have been employed by Open Text. The revenues and costs related to the Vista product suite have been consolidated with those of Open Text beginning September 16, 2004.
In February 2005, Open Text acquired all of the issued and outstanding shares of Optura Inc. (“Optura”) for cash consideration of $3.7 million. Optura offers products and integration services that optimize business processes so that companies can collaborate across separate organizational functions, dissimilar systems and business partners. Optura products and services will enable Open Text customers, who use a SAP-based Enterprise Resource Planning (“ERP”) system, to improve the efficiencies of their document-based ERP processes. The results of operations of Optura have been consolidated with those of Open Text beginning February 12, 2005.
Open Text has increased its ownership of IXOS Gauss, and DOMEA eGovernment. The Company achieved overall profitability in fiscal 2004 forto approximately 94% during the sixth straight year while it achieved profitability from operations for the fourth straight year. In addition, cash and cash equivalents increasedended June 30, 2005. This was done by way of open market purchases of IXOS shares. Prior to $157.0 millionthese purchases, as of June 30, 2004, while cash flow from operations totaled $37.5 million for fiscal 2004.
During fiscal 2004, the Company did not repurchase any Common Shares in the open market, whereas during fiscal 2003, 1,512,000 Common Shares were repurchased in the open market for a total purchase price of $17.3 million. The Company’s days sales outstanding (DSO) increased from 61 days at June 30, 2003 to 71 days at June 30, 2004. The main reason for this increase is due to IXOS, which has a higher DSO than the Company.
The Company expects that over time, the Company DSO will trend towards historical levels. Geographic segment information regarding the Company is presented in Note 16 to the Company’s Consolidated Financial Statements.
On February 19, 2004, Open Text Corporation acquired a total of 19,157,428 IXOS shares orheld approximately 88%89% of the ordinary share capital and voting rights of IXOS through its wholly owned subsidiary 2016091 Ontario Inc. (“Ontario”). Of these IXOSoutstanding shares 17,792,529 shares (approximately 93% of the tendered shares) were tendered for the Alternative Consideration (as described below), with the balance, including shares purchased on the open market, acquired for approximately $15.3 million in cash. The Alternative Consideration for each IXOS share consisted of 0.5220 of an Open Text Common Share and 0.1484 of a warrant. Each whole warrant is exercisable to purchase one Open Text Common Share and may be exercised at any time prior to February 19, 2005, at a strike price of $20.75 per share. Between the closing date of the tender offer and June 30, 2004, Open Text acquired an additional 203,647 Common Shares of IXOS for $2.3 million in cash. As a result of the additional purchase, Ontario obtained a total of 19,361,075 IXOS shares or approximately 89% ownership of IXOS. It is the Company’s intention to acquire 100% of IXOS, as discussed further on page 86. At this time, it is not determinable when this process will be completed. The results of IXOS’ operations have been included in the consolidated financial statements of Open Text since March 1, 2004.
On October 16, 2003, Open Text acquired approximately 75% of the shares of Gauss Interprise AG (“Gauss”) for total cashTotal consideration of $9.8$13.8 million pursuant to several sale and purchase agreements with major shareholders. The results of Gauss’ operations have been included in the consolidated financial statements of Open Text since that date. As of June 30, 2004, Open Text had acquired approximately 92% of the common shares of Gauss as a result of these agreements, as well as throughwas paid for the purchase of commonIXOS shares during the year ended June 30, 2005. On January 14, 2005, IXOS shareholders voted to delist the shares from the German stock exchange. This delisting became effective on July 12, 2005. Subsequently, the open market and through a public tender offer. It isDomination Agreement for IXOS has been officially registered with the Company’s intentionintent to acquire 100% of Gauss, as discussed further on page 88. At this time, it is not determinable how long this process will take.purchase the remaining IXOS minority shareholder interests.
OnIn October 23, 2003, Open Text acquired all the common shares of SER Solutions Software GmbH and SER eGovernment Deutschland GmbH (together “DOMEA eGovernment”) for a total consideration of up to $11.4 million, subject to meeting certain revenue performance and certain adjustments based on the Company’s assets and liabilities. The results of DOMEA eGovernment’s operations have been included in the consolidated financial statements of Open Text since that date.million. The purchase price of $11.4 million includesincluded contingent consideration of $3.8 million that may becould have been earned by the former shareholders of DOMEA eGovernment based on the achievement of certain revenue targets through December 31, 2004. Amounts earnedThe revenue targets were achieved and accordingly an aggregate amount of $1.6 million was recorded in the year ended June 30, 2005, as due and payable to the former shareholders of DOMEA eGovernment and was paid in cash on July 5, 2005 and in shares on September 1, 2005.
Open Text continues to seek opportunities to acquire or invest in businesses, products and technologies that expand, complement or are otherwise related to the Company’s current business. In the near future, the focus of such acquisition opportunities is expected to be on smaller organizations with specific vertical market expertise that can be strategically leveraged. The Company also considers, from time to time, opportunities to engage in joint ventures or other business collaborations with third parties to address particular market segments.
Sales Strategy
The Company anticipates that it will continue to develop and market ECM related solutions to global organizations with an emphasis on addressing specific problems and specific industries. Operationally, the Company has solutions and sales teams that focus entirely on industry-specific or cross-industry line-of-business markets. The Company has key sales teams that focus on the following sectors: government, pharmaceutical and life sciences, financial services, oil and gas, and the media and entertainment sectors. The Company feels that customized Livelink ECM solutions designed specifically for each of these sectors address specific mission-critical problems that such organizations confront.
Open Text continues to focus on selling to its large user installed base, as it is an important source for sales opportunities. Moreover, the Company has integrated the technology and domain expertise from recent acquisitions, which represents new selling opportunities in the respective customer bases, wherein existing relationships can lead to new sales in other areas of the business. The Company believes the presence of such deployments will significantly enhance its ability to be regarded as the preferred ECM vendor of choice for a specific customer, when that customer is ready to make such a strategic move and to consolidate some or all of its component systems.
During Fiscal 2005, the Company experienced a change in the purchasing behavior of its ECM customers. Where customers had traditionally focused on collaborative functionalities when making initial software purchases, they began, in 2005, to look at comprehensive solutions for managing all of their enterprise content. Additionally, purchase decisions became more heavily weighted on archiving and managing records of enterprise content. The Company believes this change in purchasing behavior is a direct result of customer demand to meet compliance requirements. This type of initial sale is newer, and larger, for the Company, in terms of both the purchase amount and number of users that will deploy the software. This trend has resulted in longer sales cycles that could be 12 months or longer, driven both by the increased size of some of these transactions as well as a lengthened approval process by the customer. This is in contrast to past years where initial, limited-scope deployments with shorter sales cycles evolved into larger deployments. The Company will continue to place emphasis on refining its sales strategies to manage the changing patterns in customer demand.
In Open Text’s experience, ECM software has generally not faced pricing pressures when configured and marketed for specific business solutions. Rather, pricing of ECM solutions has remained stable as buyers place added value on software that will address their industry specific needs. However, the price point of certain ECM technology components is predictably eroding, following the natural commoditization of information technology. In view of this, the Company will continue to bundle its software components into larger solutions providing tangible returns for its customers.
Competitive Advantage
Historically, the Company has actively sold and marketed its products based on a superior return on investment and yet at a lower total-cost-of-ownership compared to other products offered by competing vendors. The fact that the Livelink ECM product line is highly configurable without end-user programming means that as soon as it is purchased, an organization can have it deployed almost immediately. By contrast, many competitive products and solutions require a significant amount of expensive, customized programming and service work, adding not only cost, but also time to the deployment cycle.
Open Text’s ECM products also have a competitive advantage of proven scalability in organizations of 100,000 or more users. This scalability advantage is a direct result of Livelink ECM’s initial design and development to operate on the Web. This gives the Company a direct advantage over competitive products that began as client-server based architecture which is an architecture that is inherently harder to scale.
The competitive landscape has evolved over the past year as new vendors attempt to try and penetrate the ECM market. Microsoft®’s SharePoint™ product has experienced significant recent adoption. However
SharePoint is focused on departmental use rather than enterprise-wide deployment, and the product does not possess the scalability of Livelink ECM. Although SharePoint competes with some historical aspects of the Company’s business around team workspaces, it also creates new opportunities for the Company around the long-term lifecycle management of that SharePoint content. On August 9, 2005 the Company announced a partnership with Microsoft to address these opportunities by offering ECM archiving solutions specially designed for SharePoint users.
Open Text also continues to compete with traditional competitors such as EMC’s Documentum®, where document-centric requirements dominate, and with FileNet® where business process requirements dominate. IBM® continues to broaden its ECM capabilities, but is doing so in the context of its WebSphere and DB2 products in the hope of driving their vast integration and professional services business.
The Company feels that its key strategic advantages over its competition are the comprehensive scope of its ECM offering, its rapid deployment capabilities which reduce total cost-of-ownership, the integration maturity and scalability of its core ECM components, its customer-centric approach, and its financial viability.
Customers
Open Text supports approximately 20 million seats across 13,000 deployments in 114 countries and 12 languages worldwide. The Company’s customer base is diversified by industry and geography, the result of a continued focus on licensing to the 2,000 largest global organizations as the primary target market. In Fiscal 2005, Open Text issued press releases for its significant customer related transactions as listed below:
In July 2004, the University of Southern California’s Information Sciences Institute (“USC-ISI”) selected the Company’s software as the foundation for its Web Content Management strategy. Researchers at the USC-ISI will use Livelink Web Content Management Server to share data and study results with fellow computer scientists, faculty, students, and other members of the information technology community.
In September 2004, SI Corporation (“SI”), a major textiles producer, selected the Company’s software solution to replace a manual invoicing system in its Accounts Payable department. Part of SI’s corporate drive to raise productivity and lower costs, the solution seamlessly integrates into SI’s SAP financial system to enable the Company to maximize its SAP investment, strengthen its corporate compliance strategy and reduce operating costs.
In September 2004, the British Council completed one of the most complex Web strategies in the UK with the help of Open Text’s Web Content Management software. The government-backed agency responsible for providing educational opportunities and cultural relations in Britain, has worked on a project to revamp its online presence. By consolidating its websites onto one content management system, the British Council expects to save USD $2.3 million by 2005.
In October 2004, U.S. Office of Naval Research adopted Livelink software to improve collaboration and to better manage documents and data for the organization’s research projects. The solution was developed by Open Text and partner Formark® Ltd., the leading supplier of guided collaboration applications for Livelink.
In October 2004, Suncor Energy Services Inc. chose to extend its Open Text solutions, including IXOS Suite for SAP, and add Livelink to support integrated collaboration and content management activities throughout the enterprise.
In November 2004, Sandia National Labs announced its plans to implement Open Text’s Artesia Digital Asset Management (DAM) solution to manage its digital content, including a large store of historical images.
In December 2004, the Company signed a contract with Siemens Business Services to provide Livelink licenses to its technology partner, the BBC. With these licenses, Siemens will introduce a new information
management system to 25,000 managed desktop users in the BBC providing a foundation for the creation and maintenance of a document archive.
In January 2005, Vintage Petroleum, Inc., a growing independent oil and gas company with operations in the United States, South America and Yemen, announced it is using Livelink as a platform for business process improvements to increase productivity, control information, and meet compliance requirements associated with the Sarbanes-Oxley Act of 2002.
In February 2005, Livelink revolutionized the UK-based Transport Research Laboratory’s (“TRL”) information environment by converting 40 years of paper records to electronic files in just four months. TRL adopted an Electronic Document Records Management System (“EDRMS”) to rationalize documentation that was taking up 30 kilometers of shelf space.
In March 2005, German banking giant Norddeutsche Landesbank (“NORD/LB”) chose Livelink to provide a full range of ECM capabilities to support its new staff information portal. With the new system, staff at NORD/LB have access to a centralized, Web-based and customizable information system that is easy to maintain.
In April 2005, Major League Baseball Advanced Media, the interactive media and Internet company of Major League Baseball, selected Open Text’s Artesia for Digital Asset Management solution to provide a powerful tool for editing and managing its valuable and growing collection of professional baseball audio and video footage.
In May 2005, LVA Rheinprovinz, one of Germany’s largest insurance and pension firms with approximately 7 million customers, announced that it had chosen the Company’s new Production Document Management solution to archive and manage a huge store of paper documents of approximately 122 million documents in all.
In May 2005, the San Diego Blood Bank announced it would extend its Livelink ECM solution to improve information access and blood ordering processes, and to help meet regulatory requirements.
Alliances
Relationships with strategic alliance partners enhance the Company’s ability to deliver complete solutions on a global basis, and to ensure that the Company’s customers have solutions and support that enable the success of their businesses. Some of the more significant strategic alliances that the Company has secured are: Microsoft®, SAP®, Deloitte, and Accenture.
Open Text has worked with SAP, for two decades, creating integrated solutions that enable users to create, access, manage, and securely archive SAP content, data and documents. These solutions address stringent requirements for risk reduction, operational efficiency, and IT consolidation.
With the acquisition of Documentum by storage vendor EMC Corporation, other storage vendors have taken initiatives to partner with independent ECM providers. Open Text has strengthened its relationships with key storage vendors such as Hitachi Data Systems, StorageTek®, and Hewlett-Packard Company and the Company continues to maintain an active relationship with EMC Corporation. These relationships allow third party storage vendors to license Livelink ECM to both their existing customer base and broaden their product offerings when competing with other storage vendors for new customer accounts.
The Company’s objective is to grow revenues from these relationships in the future, and the Company will seek to leverage existing relationships as well as look for new opportunities. In Fiscal 2005, Open Text formed several new relationships as listed below:
In July 2004, Open Text announced a European alliance with Siemens Business Services, a fully owned subsidiary of Siemens AG. The relationship is intended to provide customers with a comprehensive one-stop solution for consulting and system design, systems integration, deployment and ongoing support.
In November 2004, Open Text formed an alliance with Deloitte Canada, a professional services firm, to provide ECM solutions and services to North American clients. Open Text and Deloitte Canada formed this relationship to reduce the complexity of business change, regulatory compliance and deployment, and help clients streamline and automate processes, connect with information systems, and access and manage all forms of content.
In December 2004, Open Text announced that it had extended its relationship with Hitachi Data Systems to provide combined ECM and storage solutions to large organizations. The relationship provided solutions that integrate Hitachi Data Systems’ advanced storage infrastructure technology with the Company’s leading ECM software to meet customers’ complete range of information management requirements.
In May 2005, Open Text announced a relationship with PureEdge to deliver new solutions that will help large organizations streamline and improve complex processes that require electronic forms.
In August, 2005, Open Text unveiled a content archiving solution for Microsoft SharePoint products and technologies, giving customers a powerful, long-term archive to store documents from SharePoint sites. The solution helps large organizations address the demands and rising costs of preserving huge stores of electronic documents for court cases and compliance mandates.
Restructuring Charge
In July 2005, Open Text announced a restructuring of its operations relating primarily to a reduction of its workforce and abandonment of excess facilities. The Company expects to take a charge of approximately $25 million to $30 million as a result of this restructuring. In addition, the Company expects that 60% of this expense will be incurred relating to personnel costs and 40% on account of facilities. The majority of the significant actions to be initiated under this arrangementrestructuring will be paidcompleted in the formfirst six months of 50% cashthe Fiscal 2006 year.
As of the current date, approximately 15% of the Company’s workforce has been terminated and 50%the Company expects to eventually close 27 offices worldwide. The Company’s near-term focus is about increasing profitability, which it is addressing by streamlining its organization with its recent restructuring. The long-term focus is about adapting to long-term changes in the ECM marketplace and by broadening its integrations and relationships with other vendors.
Executive Transition
In addition to his role as President, John Shackleton assumed the role of CEO effective July 1, 2005, replacing P. Thomas Jenkins. In his seven years at Open Text as President, John has led the transformation of Open Text from a single product technology company to a global solutions organization. During that time, John has recruited and developed an experienced management team, and has been instrumental in the integration of a variety of acquisitions. In the role of CEO, John will continue to oversee all the operations of the business and will be the primary communicator for Open Text business activities.
Effective July 1, 2005, P. Thomas (“Tom”) Jenkins assumed the role of Executive Chairman and Chief Strategy Officer for Open Text. In this role, Tom will remain a full-time employee, concentrating on leading certain strategic activities of the organization including potential acquisitions. Tom will serve an integral role ensuring that management is acting through its strategies, decisions and actions in the long-term interests of all the Company’s shareholders. In addition to encouraging a professional environment and productive process for the Board of Directors, Tom will also assist in setting the Company’s policy for communications with all stakeholders.
Anik Ganguly, took on an expanded role in Fiscal 2005 as Executive Vice President Operations, assuming responsibility for Business Segment Management, as well as the functions of Information Systems & Technology, Human Resources, Real Estate & Facilities Management and Legal.
Expiry of Outstanding Warrants
During Fiscal 2005, 2,376,681 warrants to acquire Common Shares.Shares that had been issued in connection with the acquisition of IXOS expired unexercised. The warrants had a carrying value of $22.3 million and this amount was reclassified into additional paid-in capital from warrants issued, within shareholders’ equity.
Waterloo Building
In July 2004, the Company entered into a commitment to construct a building in Waterloo, Ontario, with the objective of consolidating its existing facilities in Waterloo. The facility will consist of four floors and will occupy approximately 112,000 square feet. The cost of this project has been estimated to be approximately $14 million. The Company has financed this investment through its working capital. As of June 30, 2004,2005, approximately $0.6$9.7 million had been capitalized on this project. The Company expects that its staff will commence usage of this facility before the end of the purchase price is being held to secure certain warranties, representations and covenants in the acquisition agreement. As this amount is also being held as security for certain pre-acquisition contingencies, the resolution of which is uncertain, the Company is unable to estimate when this amount will be paid. When paid, these amounts will be recorded as additional goodwill.
On March 20, 2003, Open Text completed an acquisition of all of the issued and outstanding shares of Eloquent for cash consideration of $6.7 million, of which $1.0 million is being held in escrow to secure certain representations, warranties and covenants of Eloquent in the acquisition agreement. The results of operations of Eloquent have been consolidated with those of Open Text beginning March 20, 2003.
On February 25, 2003, Open Text Inc. (“OTI”), a wholly-owned subsidiary of the Company, acquired all of the issued and outstanding shares of Corechange through the merger of a wholly-owned subsidiary of OTI, with and into Corechange, with Corechange as the surviving corporation. Consideration for this acquisition was comprised of (1) cash consideration of $3.6 million paid on closing; (2) additional cash consideration of $650,000 held in escrow in order to satisfy potential breaches of representations and warranties as provided for in the share purchase agreement; and (3) additional cash consideration to be earned over the one-year period following closing, contingent on Corechange meeting certain revenue targets. This acquisition was also subject to an adjustment of the purchase price based on the level of net assets in existence at closing. As of June 30, 2004, the Company is of the opinion that the level of net assets present at the closing date was sufficiently low such
that no further amounts are due in respect of this purchase price. The results of operations of Corechange have been consolidated with those of Open Text beginning February 25, 2003.
On November 1, 2002, the Company completed the acquisition of all of the issued and outstanding shares of Centrinity Inc. for cash consideration of $20.3 million. The transaction was completed by way of an amalgamation of Centrinity with 3801853 Canada Inc., a wholly-owned subsidiary of Open Text. The results of operations of Centrinity have been consolidated with those of Open Text beginning November 1, 2002.
With respect to the Company’s strategy relating to acquisitions, Open Text has established the practice of integrating acquired technology into Livelink shortly following the completion of the respective acquisition. Consequently over time, the operational performance of the Company’s acquired entities on a stand-alone basis may not be tracked.2005 calendar year.
Significant Accounting Policies and Critical Accounting Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based on its Consolidated Financial Statements, which are prepared in accordance with U.S. GAAP. The preparation of the Consolidated Financial Statements in accordance with U.S. GAAP necessarily requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluatesre-evaluates its estimates, including those related to revenues, bad debts, investments, intangible assets, income taxes, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed at the time to be reasonable under the circumstances. Under different assumptions or conditions, the actual results will differ, potentially materially, from those previously estimated. Many of the conditions impacting these assumptions and estimates are outside of the Company’s control.
Open Text believes that the accounting policies described below are critical to understanding its business, results of operations and financial condition because they involve significant judgments and estimates used in the preparation of its Consolidated Financial Statements. An accounting policy is deemed to be critical if it requires a judgment or accounting estimate to be made based on assumptions about matters that are highly uncertain, and if different estimates that could have been used, or if changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the Company’s Consolidated Financial Statements. Management has discussed the development, selection and application of its critical accounting policies with the audit committee of its board of directors, and the Company’s audit committee has reviewed its disclosure relating to its critical accounting policies in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed below, are also critical to understanding the Company’s Consolidated Financial Statements. The Company believesnotes to the Consolidated Financial Statements contain additional information related to the Company’s accounting policies and should be read in conjunction with this discussion.
The following critical accounting policies affect itsthe Company’s more significant judgments and estimates used in the preparation of its Consolidated Financial Statements.Statements:
Revenue:RevenueThe Company
Open Text currently derives all of its revenues from licenses of software products and related services. The accounting related to revenue recognition is complex and affected by interpretations of the rules and an understanding of industry practices. As a result, revenue recognition accounting rules require the Company to
make significant judgments. Revenue is recognized in accordance with Statement of Position (SOP) 97-2,Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2,Software Revenue Recognition with Respect to Certain Transactions, and to the extent applicable, Securities and Exchange Commission Staff Accounting Bulletin 104, “Revenue Recognition.”
Product license revenue is recognized under SOP 97-2 when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectibility is probable and supported and the arrangement does not require additional services to be delivered that are essential to the functionality of the software.
(i) Persuasive Evidence of an Arrangement Exists—The Company determines that persuasive evidence of an arrangement exists with respect to a customer under (a) an executed license agreement, which is signed by both the customer and the Company, or (b) a purchase order, quote or binding letter-of-intent received from and signed by the customer, in which case the customer has either previously executed a license agreement with the Company or will receive a shrink-wrap license agreement with the software. The CompanyOpen Text does not offer product return rights to end-users or resellers.
(ii) Delivery has Occurred—The Company’s software may be either physically or electronically delivered to the customer. The Company determines that delivery has occurred upon shipment of the software pursuant to the billing terms of the arrangement or when the software is made available to the customer through electronic delivery. Customer acceptance generally occurs at shipment.
(iii) The Fee is Fixed or Determinable—If at the outset of the customer arrangement, the Company determines that the arrangement fee is not fixed or determinable, revenue is typically recognized when the arrangement fee becomes due and payable.
(iv) Collectibility is Probable and Supported—Probable—The Company determines whether collectibility is probable and supported on a case-by-case basis. The Company may generategenerates a high percentage of its license revenue from itsthe current customer base, for whomwhich there is a history of successful collection. The Company assesses the probability of collection from new customers based upon the number of years the customer has been in business and a credit review process, which evaluates the customer’s financial position and ultimately their ability to pay. If the Company is unable to determine from the outset of an arrangement that collectibility is probable based upon itsthe review process, revenue is recognized as payments are received.
With regard to software arrangements involving multiple elements, the Company allocates revenue to each element in the arrangement other than licenses based onusing the relative fairresidual value of each element.approach. The Company’s determination of fair value of each element in multiple-element arrangements is based on vendor-specific objective evidence (“VSOE”). The Company limits its assessment of VSOE for each element to the price charged when the same element is sold separately. The Company has analyzed allAll of the elements included in itsthe multiple-element arrangements have been analyzed and it has been determined that it hasthere is sufficient VSOE to allocate revenue to consulting services and to post-contract customer support (“PCS”) components of itsthe license arrangements. The Company sells its consulting services separately, and it has established VSOE for these services on this basis. VSOE for PCS is determined based upon the customer’s annual renewal rates for these elements. Accordingly, assuming all other revenue recognition criteria are met, revenue from perpetual licenses is recognized upon delivery using the residual method in accordance with SOP 98-9, and revenue from PCS is recognized ratably over the respective term of the maintenance contract, typically one year.
Services revenue consistsService revenues consist of feesrevenues from consulting, implementation, training and integration services. These services and PCS. Consulting services include needs assessment, software integration, security analysis, application development and training. The Company generally bills consulting services fees onare set forth separately in the contractual arrangements such that the total price of the customer arrangement is expected to vary as a time and materials basis. The Company’s consultingresult of the inclusion or exclusion of these services. For those contracts where the services are not essential to the functionality of its software. The Company’s software products are fully functionalany other element of the transaction, the Company determines VSOE of fair value for these services based upon deliverynormal pricing and discounting practices for these
services when sold separately. These consulting and implementation services contracts are primarily time and generally do not require any significant modificationmaterials based contracts that are, on average, less than six months in length. Revenue from these services is recognized at the time such services are rendered as the time is incurred by the Company.
The Company also occasionally enters into contracts that are primarily fixed fee arrangements to render specific consulting services. The percentage of completion method is applied to these more complex contracts that involve the provision of services relating to the design or alteration for customer use. Customers purchase consultingbuilding of complex systems, because these services are essential to facilitate the adoptionfunctionality of the Company’s technology and may dedicate personnel to participateother elements in the arrangement. Under this method, the percentage of completion is calculated based on actual hours incurred compared to the estimated total hours for the services being performed, but they may also decide to use their own resources or appoint other professional service organizations to provide these services. Software products are billed separately from professional services. The Company recognizes revenue from consulting services asunder the arrangement. For those fixed fee contracts where the services are performed. The Company’s customers typically purchase PCS annually,not essential to the functionality of a software element, the proportional performance method is applied to recognize revenue. Revenues from training and integration services are recognized in the Company prices PCS based on a percentage of the product license fee. Customers purchasing PCS receive product upgrades, Web-based technical support and telephone hot-line support.period in which these services are performed.
Customer advances and billed amounts due from customers in excess of revenue recognized are recorded as deferred revenue.
Purchase price allocations in business combinations
The Company has a history of acquiring other businesses, and expects that this trend will likely continue in the future. As part of the completion of any business combination, the Company is required to value, amongst other opening balance sheet items, any intangible assets acquired at the date of acquisition. Intangible assets include acquired technology and customer relationships.
Acquired technology is initially recorded at fair value based on the present value of the estimated net future income-producing capabilities of software products acquired on acquisitions. Acquired technology is amortized over its estimated useful life on a straight-line basis.
Customer relationships represent relationships that are with certain customers on contractual or legal rights and are considered separable. These contractual relationships were acquired by Open Text through business combinations and were initially recorded at their fair value based on the present value of expected future cash flows. Contractual relationships are amortized over their useful lives.
The valuation of these assets is inherently subjective, and necessarily involves judgments and estimates regarding future cash flows and other operational variables of the entity acquired. There can be no assurance that the judgments and estimates made at the date of acquisition will reflect future performance of the acquired entity. If management makes judgments or estimates that differ from actual circumstances, Open Text may be required to write-off certain of its intangible assets.
The Company continually evaluates the remaining useful life of its intangible assets being amortized to determine whether events and circumstances warrant a revision to the remaining period of amortization.
Impairment of long-lived assets and goodwill
The Company accounts for the impairment and disposition of long-lived assets in accordance with FASB Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for Impairment or Disposal of Long–Lived Assets” (“SFAS 144”). The Company tests long-lived assets or asset groups, such as capital assets and definite lived intangible assets, for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant adverse changes in the business climate or legal factors; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and a current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.
Recoverability is assessed based on comparing the carrying amount of the asset to the aggregate pre-tax undiscounted cash flows expected to result from the use and the eventual disposal of the asset or asset group. An impairment is recognized when the carrying amount is not recoverable and exceeds the fair value of the asset or asset group. The impairment loss, if any, is measured as the amount by which the carrying amount exceeds fair value.
Similarly, in accordance with FASB SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company is required to annually test the value of goodwill. This testing requires management to make estimates of the market value of its various reporting units. Changes in estimates could result in different conclusions for the value of goodwill. The Company performs the annual impairment testing on goodwill on April 1 of each fiscal year, provided that circumstances do not arise during the year that would necessitate an earlier evaluation. Over the past two years, the value of the reporting units has exceeded their book value. Based on currently available information, management does not anticipate that an impairment of goodwill will occur in the foreseeable future, although there can be no assurances that at the time a future review is completed, a material impairment charge will not be required and recorded.
Allowance for Doubtful Accounts.doubtful accounts The Company
Open Text maintains allowancesan allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company performs ongoingevaluates the credit worthiness of its customers prior to order fulfillment and based on these evaluations, adjusts credit limits to the respective customers. In addition to these evaluations, the Company conducts on-going credit evaluations of the customers’ payment history and current credit worthiness. The allowance is maintained for 100% of all accounts deemed to be uncollectible and, for those receivables not specifically identified as uncollectible, an allowance is maintained for a specific percentage of those receivables based upon the aging of accounts, its customer’s financial conditionhistorical collection experience and ifcurrent economic expectations. To date, the financial conditionactual losses have been within management expectations. No single customer accounted for more than 10% of the Company’s customers were to deteriorate, resulting in an impairmentaccounts receivable balance as of their ability to make payments, additional allowances would likely be required.June 30, 2005 and 2004. Actual collections could differ materially from ourthe Company’s estimates.
Income taxes
Open Text accounts for income taxes in accordance with FASB SFAS No. 109, “Accounting for Income Taxes. The Company records aTaxes” (“SFAS 109”). Deferred tax assets and liabilities arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. These temporary differences are measured using the enacted tax rates. A valuation allowance againstis recorded to reduce deferred income tax assets whento the extent that management believesconsiders it is more likely than not, that some portion or all of thesuch a deferred income tax assetsasset will not be realized. ManagementIn determining the valuation allowance, management considers factors such as the reversal of deferred income tax liabilities, projected taxable income, and the character of the income tax assetassets and tax planning strategies. A change to these factors could impact the estimated valuation allowance and income tax expense. See page 43 for management’s discussion
In addition, the Company is subject to examinations by taxation authorities of the factors necessaryjurisdictions in which it operates in the normal course of operations. The Company regularly assesses the status of these examinations and the potential for adverse outcomes to determine the Company to realize its deferred tax assets.adequacy of the provision of income and other taxes.
Restructuring charges
Open Text records restructuring charges relating to contractual lease obligations and other exit costs in accordance with FASB SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 requires recognition of costs associated with an exit or disposal activity when the liability is incurred and can be measured at fair value.
The Company records restructuring charges relating to employee termination costs in accordance with FASB SFAS No. 112 “Accounting for Post Employment Benefits” (“SFAS 112”). SFAS 112 applies to post-employment benefits provided to employees under on-going benefit arrangements. In accordance with SFAS 112, the Company records such charges to restructuring, when the termination benefits are capable of being determined or estimated in advance from either the provisions of Open Text’s policy or from past practices, the benefits are attributable to services already rendered and the obligation relates to rights that vest or accumulate.
The recognition of restructuring charges requires management to make certain judgments regarding the nature, timing and amount associated with the planned restructuring activities, including estimating sublease income and the net recoverable amount of equipment to be disposed of. At the end of each reporting period, the Company evaluates the appropriateness of the remaining accrued balances.
Litigation.Litigation
The Company is a party, from time to time, in legal proceedings. In these cases, management assesses the likelihood that a loss will result, as well as the amount of such loss and the financial statements provide for the Company’s best estimate of such losses. To the extent that any of these legal proceedings are resolved and result in the Company being required to pay an amount in excess of what has been provided for in
the financial statements, the Company would be required to record, against earnings, such excess at that time. If the resolution resulted in a gain to the Company, or a loss less than that provided for, such gain is recognized when received or receivable.
ValuationRecently Issued Accounting Pronouncements
Accounting changes and error corrections
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, (“SFAS 154”), which replaces Accounting Principles Board Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements—An Amendment of Intangible Assets.APB Opinion No. 28”. SFAS 154 provides guidance on the accounting for and reporting of changes in accounting principles and error corrections. SFAS 154 requires retrospective application to the prior period’s financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. Certain disclosures are also required for restatements due to the correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company has a historyimpact that the adoption of acquiring other businesses,SFAS 154 will have on the Company’s results of operations and expects that this trendfinancial condition will likely continuedepend on the nature of future accounting changes and the nature of transitional guidance provided in future accounting pronouncements.
Share-Based compensation
In December 2004, the future. As partFASB issued SFAS No. 123R “Share Based Payment” (“SFAS 123R”). The new Statement is effective for fiscal years beginning on or after June 15, 2005. SFAS 123R addresses the accounting for transactions in which an enterprise receives services in exchange for (a) equity instruments of the completionenterprise or (b) liabilities that are based on the fair value of any business combination,the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. This Statement eliminates the ability to account for share-based compensation transactions using APB 25 and requires that such transactions be accounted for using a fair-value based method. As required by SFAS 123R, the Company is required to value any intangible assets acquired at the date of acquisition. This valuation is inherently subjective, and necessarily involves judgments and estimates regarding future cash flows and other operational variables of the entity acquired. However, there can be no assurance that the judgments and estimates made at the date of acquisition will reflect future performance of the acquired entity. To assist management with the valuation process, the Company has adopted the practice of using independent valuation experts in the valuation process for intangible assets acquired through material acquisitions. However, if either management or the independent experts make judgments or estimates that differ from actual circumstances, the Company may be required to write-off certain of its intangible assets. Similarly, in accordance with SFAS No. 142Goodwillrecognize an expense for compensation cost related to share-based payment arrangements including stock options and Other Intangible Assets,compensatory employee stock purchase plans. The new rules will be effective for the Company beginning July 1, 2005. The Company is requiredcurrently evaluating option valuation methodologies and assumptions in light of the evolving accounting standards related to annually testshare-based payments and also the valueimpact of its goodwillother aspects of SFAS 123R, including transitional adoption alternatives.
In March 2005, the Securities and Exchange Commission (“SEC”) released SEC Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”). SAB 107 provides the SEC staff position regarding the application of SFAS 123R. SAB 107 contains interpretive guidance related to the interaction between SFAS 123R and certain SEC rules and regulations, as well as its acquired intangible assets. This testing requires managementprovides the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also highlights the importance of disclosures made related to make estimates of the market valueaccounting for share-based payment transactions. The Company is currently evaluating SAB 107 and will be incorporating it as part of its various operating segments. Changes in estimates could result in different conclusions for the valueadoption of goodwill. The Company performs its annual impairment testing on its goodwill at June 30th each fiscal year, provided that circumstances don’t arise during the year that would necessitate an earlier evaluation. Over the past two years, the value of the Company’s reporting units have exceeded their book value by a substantial margin. Based on currently available information, management does not anticipate that an impairment of its goodwill will occur in the foreseeable future, although there can be no assurances that at the time a future review is completed, a material impairment charge will not be required and recorded.SFAS 123R.
Results of Operations
Overview
The following table presents for the periods indicated, certain componentsan overview of the selected financial data of the CompanyCompany.
| Fiscal Year | % Change from Fiscal Year | |||||||||||||||||
(in thousands) | 2005 | 2004 | 2003 | 2004 to 2005 | 2003 to 2004 | |||||||||||||
Total revenue | $ | 414,828 | $ | 291,058 | $ | 177,725 | 42.5 | % | 63.8 | % | ||||||||
Cost of revenue | 125,993 | 78,402 | 45,197 | 60.7 | % | 73.5 | % | |||||||||||
Gross profit | 288,835 | 212,656 | 132,528 | 35.8 | % | 60.5 | % | |||||||||||
Operating expenses | 259,527 | 182,187 | 105,610 | 42.5 | % | 72.5 | % | |||||||||||
Income from operations | 29,308 | 30,469 | 26,918 | (3.8 | )% | 13.2 | % | |||||||||||
Gross margin | 69.6 | % | 73.1 | % | 74.6 | % | ||||||||||||
Operating margin | 7.1 | % | 10.5 | % | 15.1 | % | ||||||||||||
Net income | $ | 20,359 | $ | 23,298 | $ | 27,757 | (12.6 | )% | (16.1 | )% | ||||||||
 |  |
Revenue
Total revenue increased by $123.8 million or 42.5% in Fiscal 2005 (“2005”) compared to Fiscal 2004 (“2004”) due to a combination of the following:
During Fiscal 2005 Open Text had 16 transactions that were greater than $1 million dollars, and average deal size on an annual basis was approximately $250,000. No single customer contributed more than 10% of total revenue during the year.
The IXOS acquisition (which was included in the results for the last four months of 2004 and for the full year in 2005) together with other acquisitions made during 2004 and 2005 acquisitions (Artesia, Vista and Optura) substantially drove this increase in total revenue as follows:
Total revenue increased by $113.3 million or 63.8% in 2004 compared to Fiscal 2003 (“2003”) due to a combination of the following:
The increase in 2004 revenue can be attributed in part to the acquisitions of IXOS, Gauss and DOMEA eGovernment. These acquisitions accounted for $86.0 million of additional revenue in 2004 while the remaining $27.3 million of the increase was caused by organic growth in the Company’s business.
Gross Margin
Gross margin declined from 74.6% in 2003, to 73.1% in 2004, to 69.6% in 2005.
Overall, the decline in gross margin was due to the change in the Company’s revenue-product mix:
A full discussion of each of the above metrics follows after the quarterly overview.
Quarterly Overview
The historicalfollowing table summarizes selected un-audited quarterly financial data for the past eight fiscal quarters:
| Fiscal 2005 | |||||||||||||
| Fourth Quarter | Third Quarter | Second Quarter | First Quarter | ||||||||||
| (in thousands) | |||||||||||||
Total revenues | $ | 109,373 | $ | 105,167 | $ | 114,692 | $ | 85,596 | |||||
Gross profit | 76,142 | 72,405 | 80,994 | 59,294 | |||||||||
Net income (loss) | $ | 5,033 | $ | 5,342 | $ | 10,970 | $ | (986 | ) | ||||
Earnings (loss) per share: | |||||||||||||
Basic | $ | 0.10 | $ | 0.11 | $ | 0.22 | $ | (0.02 | ) | ||||
Diluted | $ | 0.10 | $ | 0.10 | $ | 0.21 | $ | (0.02 | ) | ||||
Total revenues Gross profit Net income Earnings per share: Basic Diluted Fiscal 2004 Fourth
Quarter Third
Quarter Second
Quarter First
Quarter (in thousands) $ 104,984 $ 80,215 $ 61,674 $ 44,185 74,197 60,005 45,944 32,510 $ 8,973 $ 3,279 $ 7,692 $ 3,354 $ 0.19 $ 0.07 $ 0.19 $ 0.08 $ 0.16 $ 0.07 $ 0.18 $ 0.08
The Company experienced significant variations in revenues, expenses and gross profit from quarter to quarter and such variations are likely to continue. Quarterly revenues, expenses and gross profit are affected by a variety of factors, including, amongst other things, the timing of large enterprise transactions, acquisitions, seasonality of economic activity, and to some degree the timing of capital spend by the Company’s customers.
The results for any quarter are not necessarily indicative of future quarterly results, toand the Company believes that period-to-period comparisons should not be expected for anyrelied upon as an indication of future period.performance.
| Year Ended June 30, | |||||||||
| 2004 | 2003 | 2002 | |||||||
Revenues: | |||||||||
License | 41.8 | % | 42.8 | % | 43.3 | % | |||
Customer support | 37.4 | 35.5 | 31.9 | ||||||
Service | 20.8 | 21.7 | 24.8 | ||||||
Total revenues | 100.0 | 100.0 | 100.0 | ||||||
Cost of revenues: | |||||||||
License | 3.7 | 3.7 | 3.5 | ||||||
Customer support | 7.0 | 5.9 | 5.5 | ||||||
Service | 16.3 | 15.9 | 16.7 | ||||||
Total cost of revenues | 27.0 | 25.5 | 25.7 | ||||||
Gross profit | 73.0 | 74.5 | 74.3 | ||||||
Operating expenses: | |||||||||
Research and development | 15.0 | 16.5 | 15.8 | ||||||
Sales and marketing | 30.0 | 30.7 | 33.5 | ||||||
General and administrative | 7.8 | 7.6 | 8.2 | ||||||
Depreciation | 2.4 | 2.8 | 3.7 | ||||||
Amortization of acquired intangible assets | 3.9 | 1.8 | 4.3 | ||||||
Restructuring charge | 3.4 | — | — | ||||||
Total operating expenses | 62.5 | 59.4 | 65.5 | ||||||
Income from operations | 10.5 | 15.1 | 8.8 | ||||||
Other income | 0.1 | 1.6 | 1.1 | ||||||
Interest income | 0.5 | 0.7 | 1.2 | ||||||
Interest expense | (0.1 | ) | — | — | |||||
Income before income taxes | 11.0 | 17.4 | 11.1 | ||||||
Provision for income taxes | 2.5 | 1.8 | 0.2 | ||||||
Net income before minority interest | 8.5 | 15.6 | 10.9 | ||||||
Minority interest | 0.5 | — | — | ||||||
Net income for the year | 8.0 | % | 15.6 | % | 10.9 | % | |||
The ECM MarketOutlook for 2006
AccordingThe Company’s outlook for 2006 is to focus on near-term profitability by streamlining its operations in terms of the Meta group, the enterprise content management (ECM) market will reach $2.3 billionrestructuring announced in software and $7 billion in services by 2007, representing a compound annual growth rate of 15%. They expect that many vendors will adopt the mantle of “enterprise content management” during the next 12 months, which they have stated has already begun. Over that same period and consistent with experience over the past several years,July 2005. Additionally, the Company does not expect total information technology spendingwill continue to increase. This means that the growthadapt to long-term changes in ECM is coming at the expense of other parts of the IT market. The vast majority of information contained in an organization is unstructured data—exactly the type of data that the ECM market is focusedmarketplace and increase its focus on managing. Whereas companies have spentmarketing its archiving records management as the better part of the last decade focusing on managing the structured data that ERP systems center around, their focus has now shiftedon-ramp to the larger opportunity of managing the unstructured data.ECM sales and expanding its partner program.
Over the past year the Company has witnessed numerous changes to the social-political landscape that have had significant impacts on the ECM market, which the Company sees as now being at an inflection point. Events over the past several years such as the September 11Revenues
th terrorist attacks, the financial collapse of high-profile US corporations such as Enron and Worldcom, as well as ensuing changes to the regulatory environment such as Sarbanes-Oxley and the Patriot Act have placed a significant onus on the private and public sectors alike to adopt compliance driven software solutions. Simultaneously, more organizations continue to focus their attention on the preservation of their intellectual property and the knowledge residing throughout their workforces. With baby-boomers retiring, corporations have only recently become sensitive to the fact that a high percentage of the knowledge of their workforces may not be documented or archived in any organized fashion which future employees can retrieve.Revenue by Product Type
The ECM sector has been markedfollowing tables set forth the increase in revenues by significant consolidation over the past several years. Sophisticated customers are demanding more robust suites of technology which address all aspects of ECM as compared with past practice of purchasing point solutions from separate vendors to address specific needs. The largest, most financially stable vendors have taken advantage of their financial position by acquiring many of their smaller competitors in an attempt to round out their product line. These smaller vendors had found that as the ECM market matured and as ECM technologies became mission critical within organizations, customers became increasingly hesitanta percentage of the related product revenue for the periods indicated:
(In thousands) | 2005 | 2004-2005 Change in % | 2004 | 2003-2004 Change in % | 2003 | ||||||||||
License | $ | 136,522 | 12.2 | % | $ | 121,642 | 60.1 | % | $ | 75,991 | |||||
Customer support | 179,178 | 64.7 | % | 108,812 | 72.5 | % | 63,091 | ||||||||
Services | 99,128 | 63.6 | % | 60,604 | 56.8 | % | 38,643 | ||||||||
Total | $ | 414,828 | 42.5 | % | $ | 291,058 | 63.8 | % | $ | 177,725 | |||||
(% of total revenue) | 2005 | 2004 | 2003 | ||||||
License | 32.9 | % | 41.8 | % | 42.8 | % | |||
Customer support | 43.2 | % | 37.4 | % | 35.5 | % | |||
Services | 23.9 | % | 20.8 | % | 21.7 | % | |||
Total | 100.0 | % | 100.0 | % | 100.0 | % | |||
License Revenue
License revenue consists of fees earned from the licensing of software products to purchase their product ifcustomers.
License revenue increased in 2005, compared to 2004, by 12.2% or $14.9 million. The Company generated approximately $26 million in revenue from acquisitions and approximately $6 million related to the vendor’s financial viabilitypositive impact of foreign exchange rates. This increase was at all a question. In many cases, these smaller companies have what is regarded as leading technology, but they lack the financial resources to convince customers that they will remain in business to support and enhance their products for years to come. Within the growing ECM sector, the Company has established itselfoffset by the enddiscontinuance of fiscal 2004 as both the largest and fastest growing software vendor in this sector.
The Company has seen its competitive landscape evolve over the past year. Given the growth of the ECM market, new vendors continue to try and penetrate the market. Microsoft has recently entered the ECM market withunprofitable revenue streams obtained through acquisitions. In addition, 2005 revenue was negatively impacted by a competitive product which is focused on departmental use rather than enterprise-wide deployment as the product does not possess the scalability of Livelink. With the content management offerings coming from the IXOS acquisition, the Company believes that it has the most comprehensive collaboration and content management softwareshift in the industry. AsCompany’s business model that saw customers increasingly interested in buying, substantially, a result,full ECM platform, which had the Company is increasingly competing against more traditional content management vendors such as Filenet. The Company feels that oneimpact of lengthening the sales cycle and close process for new deals and deals in the pipeline. Further, sales were impacted due to the Company’s need to partially rebuild its North American sales force, during the year, to meet the needs of its key strategic advantages over its competition isevolving business model. Finally, the fact that its core technology has beenlarge drop in place forthe Euro during the fourth quarter had the effect of delaying purchase decisions with respect to several years. This has allowed Open Text to spend the past couple of years focused on designing and delivering solutions to specific market participants. By contrast, many of the Company’s competitors are stilllarge European customers. For these reasons, the Company’s organic growth decreased in the process of acquiring and integrating the requisite technology to provide a complete product offering.2005.
Market Trends
During fiscal 2004, many of the Company’s customers were dealing with internal mandates to significantly reduce information technology spending. Given these tighter budgets, customers have increasingly focused on
purchasing software solutions which help organizations save money. Software that is quickly and easily deployable is currently viewed as being more attractive than software that takes a long time to implement, such as ERP systems. One area within information technology spending which companies are not reducing spending, andLicense revenue increased in many cases are increasing spending, is compliance-focused software. Companies are not able to defer spending to become or remain compliant with the regulatory environments they operate within. The Company is focused on exploiting this opportunity, particularly given the fact that compliance touches all employees in an organization. As a result, compliance opportunities can evolve into enterprise-wide deployments.
During fiscal 2004, the Company continued to experience a trend witnessed over the past several years of initial, limited-scope deployments quickly evolving into larger deploys. Initial deployments typically last for approximately nine months, subsequent to which the customer will frequently purchase additional licenses for further internal deployment, followed often by an enterprise-wide deployment. This strategy has been a focus of the Company’s sales efforts since post-September 11th, when it became extremely difficult to close sales opportunities with new customers. In addition, over the past several years, as many customers imposed rigid spending freezes on purchases of new information technology solutions and initiatives, the Company has been able to continue to grow its revenue by further developing relationships and opportunities within its installed-base.
Historically, the Company has been able to generate revenue growth by selling and marketing its products on the proposition that they produced an extremely high return on investment and can actually save companies money. The fact that the Livelink product line is highly configurable without programming means that as soon as it is purchased, an organization can have it deployed almost immediately and can begin saving money. By contrast, many competitive products and solutions require a significant amount of customized programming and service work adding not only cost but also lead-time to the deployment cycle. Both of these factors adversely impact such product’s return on investment. Although today the high return on investment of the Company’s products remains a selling feature, during fiscal 2004 the Company experienced an increase in customers purchasing products to address key business problems that they cannot delay addressing.
Another recent operational trend has been the Company’s strong focus on vertical markets and designing products to address specific needs of those markets. The Company currently has four vertical sales groups focused on selling solutions to the government, pharmaceutical, financial services, and oil and gas sectors. The Company feels that customized Livelink solutions designed specifically for each of these verticals address specific mission critical problems that these industries confront. Pharmaceutical companies, for instance, are focused more than ever on bringing products to market faster and more cost-effectively than ever before while remaining fully-compliant with Food and Drug Administration regulations. Nearly all regulations require an organization to train and test all employees involved in processes associated with the regulation. The need for US government agencies to communicate, collaborate, and share knowledge has never been as important as it is today, and the Company is increasingly active in this sector.
Open Text continues to remain focused on selling to its large user installed base as an important source of sales opportunities. The Company has found that customers that initially purchase Livelink to address a specific need often expand the deployment of Livelink to address multiple other issues within the first year. The Company also feels that the acquisitions it completed over the past several years represent significant cross-selling opportunities, and that these cross-selling opportunities will represent a further source of future growth. Open Text anticipates that it will continue to develop and market ECM related solutions focused on addressing specific problems and specific industries.
Open Text has not engaged in overly aggressive discounting practices relative to many of its competitors. Over the past several years, the Company has maintained an average deal size of between $250,000 and $300,000. By contrast, IXOS content management products had been under significant pricing pressure, driving the average deal size to approximately $100,000 over the same period.
Fiscal 2004 Overview
The most significant corporate transaction during fiscal 2004 was the acquisition of IXOS. The strength of IXOS’ product-line is its strong offering in the area of content management—a key aspect of ECM. Traditionally, the strength of Open Text’s product offering has been its collaboration functionality. Taken together, the Company believes that the unprecedented one-stop shopping combination of collaboration and content functionality achieved through this acquisition provides the Company with the most complete ECM suite in the industry. As of June 30, 2004, the two organizations are now organized as one global organization, and perhaps most importantly, the Company’s integrated product roadmap is now complete and published. General availability of the Company’s first integrated product—Livelink WCM Server occurred in the fourth quarter of fiscal 2004 with additional integrated products scheduled in the latter half of calendar 2004. The majority of the IXOS restructuring efforts were completed by June 30, 2004, although some aspects of the Company’s plans will get executed in early fiscal 2005. As a results, the Company believes that the synergies between the two companies are only now just starting to be realized, and the Company is optimistic that these will continue and broaden into fiscal 2005. The Company strives to prudently manage expenses. Expense management played a key role in the profitability achieved in fiscal 2004. From a products perspective, the continued growth in the Company’s core Livelink business reinforced the fact that the Company’s value proposition for the ECM market is being well received.
Fiscal 2004 Compared with Fiscal 2003
Revenues. Total revenues included license revenues, customer support revenues, and service revenues. Total revenues increased 64% from $177.7 million in fiscal 2003 to $291.1 million in fiscal 2004. License revenues increased 60% from $76.0 million in fiscal 2003 to $121.6 million in fiscal 2004. The overall increase in revenue was significantly impacted by several acquisitions that the Company completed in fiscal 2004. During fiscal 2004, the Company acquired Gauss, DOMEA eGovernment, and IXOS. On a combined basis, revenues stemming from these acquisitions accounted for approximately 76% of the revenue growth achieved during fiscal 2004, compared to fiscal 2003. The remaining $27.32003, by 60.1% or $45.7 million. Of this increase, $34.0 million or 15% represents organic revenue growth achieved during fiscal 2004. Additionally, $10.3 millionof the increase was contributed from companies acquired during fiscal 2003 which were not included in fiscal 2003 results for the entire fiscal year. The impact that both fiscal 2004 and fiscal 2003 acquisitions had on the Company’s revenue growth was reasonably consistent across license, service and support revenues. As these results indicate, although acquisitions represented the largest component of growth during fiscal 2004, the Company’s core operations still achieved strong organic growth. This organic growth reflects the continued demand in the marketplace for the Company’s software solutions. The Company defines organic growth as being the period-to-period growth achieved whendue to the impact of the current period’s acquisitions are removed. Consequently, organic growthmade in fiscal 2004 represents the fiscal 2004 revenue growth compared to fiscal 2003 once the impact of IXOS, Gauss and DOMEA eGovernment are removed. On this basis, the Company’s organic revenue growth during fiscal 2004 was 15%.
An important factor responsible for the increase in license revenues from $76.0 million to $121.6 million during fiscal 2004 was the impact of the fiscal 2004 acquisitions.2004. These transactionsacquisitions accounted for approximately $34.0 million of license revenue growth from fiscal 2003 or approximately 75% of the year-to-year growth. Of the remaining growth, $3.7 million related to a full inclusion of fiscal 2003 acquisitions. The Company’s organic growth relating to license revenue was 14% during fiscal 2004 as compared with fiscal 2003. This strong organic growth was driven by the fact that customers who purchase
Customer Support Revenue
Customer support revenue consists of revenue from the Company’s products to address a specific problem in their business very quickly find alternative uses for Livelinksoftware maintenance contracts and within a year often have Livelink managing multiple processes. The organic growth also reflectscustomer support agreements. Typically the fact thatterm of these maintenance contracts is twelve months with customer renewal options, and the Company remains focused on specific industry verticalshas historically experienced a 90% renewal rate, thus contributing greatly to its customer support revenue. Customer support revenue is directly related to software licenses sold in prior periods.
Customer support revenues increased 64.7% from $108.8 million in 2004 to $179.2 million in 2005. The increase in customer support revenues resulted from several factors. Customer support revenues related to the 2004 and 2005 acquisitions accounted for its solution offerings.approximately 47% and 8%, respectively, of the revenue growth. The Company operates sales verticals for the pharmaceutical, financial services, government, and oil and gas industries. During fiscal 2004, the continued development and strong performanceincrease in the Company’s government vertical had a particularly significant impact onnumber of licenses granted in 2004, which resulted in an increased number of maintenance contracts, contributed to the Company’s fiscal 2004 license revenue growth although the Company’s pharmaceutical and financial services verticals also performed well. Additionally, the continued adoption of the Company’s newly introduced modules
was a further contributor to growth. Most of these new products are small components of code licensed as point solutions designed to accelerate deployment by addressing very specific and recurring issues faced by customers. Revenue in this category totaled approximately $1.0 million during fiscal 2003, and increased to approximately $5.8 million during fiscal 2004. During fiscal 2004,customer support revenues in 2005. Moreover, the Company did notcontinued to experience a significant variation from fiscal 2003very strong service support contract renewal rates for all of its products, which also contributed to the growth in the amount of revenue realized from large license transactions.customer support revenue.
Customer support revenues increased 72%72.5% from $63.1 million in fiscal 2003 to $108.8 million in fiscal 2004. SupportCustomer support revenues stemming from fiscalrelated to the 2004 acquisitions accounted for approximately 65% of the revenue growth achieved during fiscal 2004 compared to fiscal 2003. Of the remaining 35% or approximately $17.5 million of growth achieved during fiscal 2004,, $5.5 million was contributed fromrelated to companies acquired during fiscal 2003 which were not included in fiscal 2003 results for the entire fiscal year. The Company’s organic growth relating to license revenue was 28% during fiscal 2004 as compared with fiscalFiscal 2003. The increase in customer support revenuesremainder resulted from several factors including the increaseincreased licenses in the number2003 and continued high maintenance renewal rates.
Service Revenue
Service revenue consists of licenses granted in fiscal 2004, as well as strong renewal rates for maintenancerevenues from consulting contracts for existing customers. The Company continuedand contracts to experience very strong service contract renewal rates for all of its products, most notably its core Livelink products. Over the past year, the Company effectively implemented price increases in all regions for its customer supportprovide training and integration services. The increases contributed to the revenue growth achieved in fiscal 2004. Furthermore, growth in support revenue stemming from the Company’s core Livelink products was 24% as compared with fiscal 2003. The Company believes that this fact demonstrates that the Company’s customers are very satisfied and dedicated to the Company’s core product offering. The Company believes that during fiscal 2005 the integration of IXOS’ customer support organization will create further operational synergies.
Service revenues increased 57%63.6% from $38.6 million in fiscal 2003 to $60.6 million in fiscal 2004.2004 to $99.1 million in 2005. Service revenues stemming from fiscalrelated to 2005 acquisitions represented 10% of the growth while 2004 acquisitions accounted for the entire revenue growth achieved during fiscal 2004 compared to fiscal 2003. If the impactrepresented approximately 45% of the fiscalgrowth. In 2005, the Company completed the integration of the 2004 acquisitions were removed,(most notably IXOS), aligning services with the Company’s organic services revenue growth was a decrease of approximately 5%. This decrease in core service revenues was primarily attributable to the continued challenging marketsales verticals for services engagements globally. The Company is witnessing many of its customers addressing its services needs with in-house personnelconsistent teaming on strategic accounts as opposed to using third-parties. Given the difficult service environment, the Company is currently focusing onwell as delivering repeatable services solutions which have been effective for other customers as(as opposed to trying to deliver unique consulting solutions to each customer. In responsecustomer), which resulted in the growth in these revenues.
Service revenues increased 56.8% from $38.6 million in 2003 to $60.6 million in 2004. Service revenues related to 2004 acquisitions accounted for all of the revenue growth achieved in this challenging services environment,period. Without the Company will be taking active steps in fiscal 2005 to maximize service revenue opportunities when it will align its services resources by vertical industry. This mirrors a similar change thatimpact of the 2004 acquisitions, the Company’s sales organization undertookorganic service revenues would have declined by approximately 2 years ago and which has demonstrated considerable success. The Company expects that5% as a result of the continued challenging market for service engagements globally. During this will result inperiod, many of the Company’s sales and services organization working more closely together,customers addressed their service needs with similar areas of expertise, and that these changes will help create more revenue opportunities.in-house personnel as opposed to using third-parties.
Revenue and Operating Margin by Segment
The following table sets forth information regarding the Company’s revenue by geography
Revenue by Geography
(In thousands) | 2005 | 2004 | 2003 | |||||||||
North America | $ | 173,767 | $ | 136,346 | $ | 102,221 | ||||||
Europe | 215,401 | 138,192 | 70,805 | |||||||||
Other | 25,660 | 16,520 | 4,699 | |||||||||
Total | $ | 414,828 | $ | 291,058 | $ | 177,725 | ||||||
% of Total Revenue | 2005 | 2004 | 2003 | |||||||||
North America | 41.9 | % | 46.8 | % | 57.5 | % | ||||||
Europe | 51.9 | % | 47.5 | % | 39.8 | % | ||||||
Other | 6.2 | % | 5.7 | % | 2.7 | % | ||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
CostNorth America
The North America geographic segment includes Canada, the United States and Mexico.
Europe
The Europe geographic segment includes Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom.
While revenues in all geographies are a growing reflection of revenues. Costincreasing maintenance revenues, acquisitions, and currency movement, the mix of license revenues consisted primarilyrevenue by geography is shifting toward Europe due to the acquisition of IXOS in March 2004. IXOS generates approximately 70% of the costs associatedrevenue in Europe. Further, the existence of a strong experienced sales force in Europe enhanced sales, particularly in the UK and Germany, while the Company rebuilt its North American sales group.
Other
The “other” geographic segment includes Australia, Japan, Malaysia, and the Middle East region.
The Company’s overall revenue contribution from these markets slightly outpaced that of the other geographic segments due to good performance by specific sales teams and partners. The Company’s investments in these markets are based on the proven performance of those regional teams balanced with the royalties payable to third parties whose software is bundled withother factors such as regional, economic and political conditions.
Adjusted Operating Margin by Significant Segment
The following table provides a summary of the Company’s products, as well as product media, duplication, manuals, packaging expenses,adjusted operating margins by significant segment.
| 2005 | 2004 | 2003 | |||||||
North America | 13.6 | % | 16.0 | % | 18.6 | % | |||
Europe | 12.4 | % | 19.9 | % | 17.0 | % |
The above adjusted operating margins are calculated based on net income before including the impact of amortization, interest, other income (expense), restructuring charges and finder’s fees. Costincome taxes. The adjusted operating margins have decreased in all geographies in 2005 due to the Company’s changing business model, whereby customers are increasingly interested in a complete ECM platform which involves a larger dollar value transaction. This has the effect of license revenues increased 65% from $6.6 millionlengthening lead times for new and existing opportunities. The decrease in fiscal 2003 to $10.8 millionadjusted operating margins in fiscal 2004. As a percentage of license revenues, the cost of license revenues remained consistent at 9% during fiscal 2004. The increaseEurope in cost of license revenues in absolute dollars is a reflection of the increase in license revenues. The consistency in the cost of license revenues as a percentage of license revenues2005 versus 2004 is due to the fact that 2004 included the results of IXOS from March 1, 2004. This resulted in a higher adjusted operating margin from IXOS than would have been realized on an annual basis due to the timing/seasonality of revenue and expenses. In addition, the rapid devaluation of the Euro in late 2005 triggered deferrals of customer purchases late into the year.
A reconciliation of the Company’s adjusted operating margin to net income as reported in accordance with U.S. GAAP is provided in Note 15 of the accompanying consolidated financial statements.
For 2006, Open Text is focused on increasing profit levels while positioning the Company to take advantage of market opportunities. The Company has announced it will take a restructuring charge in its first and second quarter of Fiscal 2006 to reduce staffing levels by approximately 15% and close, or downsize 27 facilities.
Cost of Revenue and Gross Margin by Product Type
The following tables set forth the changes in cost of revenues and gross margin by product type for the periods indicated:
Cost of Revenue:
(In thousands) | 2005 | 2004-2005 Change in % | 2004 | 2003-2004 Change in % | 2003 | ||||||||||
License | $ | 11,540 | 7.0 | % | $ | 10,784 | 64.6 | % | $ | 6,550 | |||||
Customer Support | 33,086 | 63.0 | % | 20,299 | 95.1 | % | 10,406 | ||||||||
Service | 81,367 | 72.0 | % | 47,319 | 67.6 | % | 28,241 | ||||||||
Total | $ | 125,993 | 60.7 | % | $ | 78,402 | 73.5 | % | $ | 45,197 | |||||
Gross Margin % | 2005 | 2004 | 2003 | ||||||
License | �� | 91.5 | % | 91.1 | % | 91.4 | % | ||
Customer Support | 81.5 | % | 81.3 | % | 83.5 | % | |||
Service | 17.9 | % | 21.9 | % | 26.9 | % | |||
Total | 69.6 | % | 73.1 | % | 74.6 | % | |||
Cost of license revenue
Cost of license revenue consists primarily of royalties payable to third parties and product media duplication, instruction manuals and packaging expenses.
Cost of license revenues increased as the Company’s license revenues increased, but the gross margin on licenses has remained stable over 2005, 2004 and 2003 due to the fact that the Company’s overall cost structure has remained relatively unchanged. In each
Cost of fiscal 2003 and fiscal 2004, costs related to third-party product costs, as well as royalties, represented the vast majority of the cost of license revenue. Also, the companies acquired in fiscal 2004 maintained a similar cost structure.customer support revenues
Cost of customer support revenues is comprised primarily of technical support personnel and their related costs. Cost of customer support revenues increased 95%63.0% from $10.4 million in fiscal 2003 to $20.3 million in fiscal 2004 primarily as a result of increased personnel coststo $33.1 million in fiscal 2004 as compared with fiscal 2003. Over half of the increase in the cost of customer support revenues is attributable to personnel costs.2005. The majority of the increase in personnel costs is attributable to personnel costs related to fiscal 2004 acquisitions, although the
Company also experienced an increase in personnel costs for its core operations due to the inclusion of a full year’s impact of fiscal 2003 acquisition personnel costs. Support personnel increased from 140 at the end of fiscal 2003 to 238 at the end of fiscal 2004.acquisitions. Whereas historically the Company’s support personnel has residedhave been located predominantly in North America, the Company’s European based 2004 acquisitions have made Europe almost as significant as North America with respect to support personnel. The increased number of personnel in the Company’s customer support organization also drove increases in variable expense categoriesother expenses including communication, travel and office expenses. The gross margins on customer support were relatively flat at 81.3% in 2004 and 81.5% in 2005. This management of expenses represents the rationalization of the global support model (focusing on three major support sites versus multiple sites) and the integration of 2004 and 2005 acquisitions while managing the higher cost structures of the 2004 acquisitions.
Cost of customer support revenues increased 95.1% from $10.4 million in 2003 to $20.3 million in 2004, primarily as a result of increased personnel costs related primarily to the 2004 acquisitions.
Customer support personnel increased from 140 at the end of 2003 to 238 at the end of 2004. The increased number of personnel in the Company’s customer support organization drove increases in other expenses including communication, travel and office expenses. Occupancy costs increased during fiscal 2004 commensurate with the increase in facilities due to fiscal 2004 acquisitions. As a percentage ofThe gross margins on customer support revenues, customer support costs increaseddecreased from 16%83.5% in fiscal 2003 to 19%81.3% in fiscal 2004. This increase in percentage terms reflectsdecrease reflected the fact that the companies acquired during fiscal 2004 have2003 had higher cost structures compared tothan the Company’s core operations and in 2004 the Company hashad not yet fully realized fullthe synergies from their integration.
Cost of service revenues
Cost of service revenues consistedconsist primarily of the costs of providing integration, customization and training with respect to the Company’s various software products. The most significant component of cost of service revenuethese costs is personnel related expenses, whileexpenses. The other components include travel costs associated with travel, occupancy, and third-partythird party subcontracting.
Cost of service revenues increased 68%72.0% from $28.2 million in fiscal 2003 to $47.3 million in fiscal 2004.2004 to $81.4 million in 2005. Cost of service revenues as a percentage of service revenues increased from 73%78.1% in fiscal 20032004 to 78%82.1% in fiscal 2004.2005. Additional costs assumed as a result of the fiscal 2004 acquisitions effectively accounted for the entire increase in cost of service revenues; approximately 60% of this increase is the result of the added IXOS related expenses, while the balance is largely comprised of other expenses coming from Gauss and DOMEA eGovernment.revenues. The general mix of expenses associated with the cost of service revenues for the fiscal 2004 acquisitions is generally consistent with that of the Company’s core business, with personnel, subcontracting and travel representing approximately three quarters of the entire expense base in this area. The Company experiencedCompany’s European based 2004 acquisitions have made the service cost structure higher as a percentage of revenue.
Cost of service revenues increased 67.6% from $28.2 million in 2003 to $47.3 million in 2004. The primary reasons for the increased cost of service revenue were the additional costs assumed from the 2004 acquisitions:
Operating Expenses
The following table sets forth total operating expenses by function and as a percentage of total revenue for the periods indicated:
(In thousands) | 2005 | 2005-2004 Change in % | 2004 | 2004-2003 Change in % | 2003 | |||||||||||
Research and development | $ | 65,139 | 49.3 | % | $ | 43,616 | 48.7 | % | $ | 29,324 | ||||||
Sales and marketing | 114,553 | 31.1 | % | 87,362 | 60.2 | % | 54,532 | |||||||||
General and administrative | 46,110 | 102.3 | % | 22,795 | 68.7 | % | 13,509 | |||||||||
Depreciation | 11,040 | 55.4 | % | 7,103 | 41.8 | % | 5,009 | |||||||||
Amortization of acquired intangible assets | 24,409 | 115.9 | % | 11,306 | 249.4 | % | 3,236 | |||||||||
Provision for (recovery of) restructuring charge | (1,724 | ) | N/A | 10,005 | N/A | — | ||||||||||
Total | $ | 259,527 | 42.5 | % | $ | 182,187 | 72.5 | % | $ | 105,610 | ||||||
(in % of total revenue) | 2005 | 2004 | 2003 | ||||||
Research and development | 15.7 | % | 15.0 | % | 16.5 | % | |||
Sales and marketing | 27.6 | % | 30.0 | % | 30.7 | % | |||
General and administrative | 11.1 | % | 7.8 | % | 7.6 | % | |||
Depreciation | 2.7 | % | 2.4 | % | 2.8 | % | |||
Amortization of acquired intangible assets | 5.9 | % | 3.9 | % | 1.8 | % | |||
Provision for (recovery of) restructuring charge | (0.4 | )% | 3.4 | % | 0 | % |
Research and development expenses.expenses
Research and development expenses consistedconsist primarily of engineering personnel expenses, contracted research and development expenses, and facilities and equipment costs. To date the Company has expensed all research
Research and development costsexpenses have remained relatively stable as incurred. a percentage of revenue during 2005, 2004 and 2003.
Research and development expenses increased 49%49.3% from $43.6 million in 2004 to $65.1 million in 2005 and, as a percentage of total revenues, increased slightly from 15.0% in 2004 to 15.7% in 2005. The increase in research and development expense in 2005 over 2004 relates primarily to an increase of approximately $13.6 million in expenses relating to IXOS and 2005 acquisitions, and an additional $3.2 million relating to increased personnel costs. The balance of the increase relates to the increased spending in the Company’s core development organization relating to the integration of IXOS archiving products with Open Text’s Livelink records management and collaboration products. In 2006, the Company expects to increase its spending relating to the extension and enhancement of its Microsoft and SAP interfaces.
Research and development expenses increased 48.7% from $29.3 million in fiscal 2003 to $43.6 million in fiscal 2004 and, as a percentage of total revenues, decreased slightly from 16%16.5% in fiscal 2003 to 15%15.0% in fiscal 2004. The increase in research and developmentsdevelopment expenses in absolute dollars in fiscal 2004 resulted primarily from approximately $12.0 million of additional expenses addedincurred as part of the integration of the development organizations offrom the fiscal 2004 acquisitions, primarily attributable to IXOS. The balance of the increase is attributable to increased spending within the Company’s core development organization, which recorded an additional $4 million in operating expenses during fiscal 2004 and wasFiscal 2004. These expenses were partially offset by increased tax credits associated with qualifying research and development activities of $2 million. Development personnel increased from 305 at the end of fiscal 2003 to 546 at the end of fiscal 2004. The vast majority of growth in the Company’s development organization was centered in Europe. Whereas the Company had effectively no European development presence at the end of fiscal 2003, at the end of fiscal 2004 over 40% of the Company’s development headcount was in Europe.
Sales and marketing expenses.expenses
Sales and marketing expenses consistedconsist primarily of compensation ofcosts related to sales and marketing personnel, as well as expensescosts associated with advertising and trade shows, facilities and other expenses relatedshows.
The Company has increased spending on marketing due to the sales and marketingfact that ECM is becoming a more viable, growing segment of the Company’s products and services. software market. As such, the Company placed additional emphasis on marketing initiatives in the past several fiscal years in an effort to be globally regarded as the ECM market leader.
Sales and marketing expenses increased 60%31.1% from $87.4 million in 2004 to $114.6 million in 2005. The absolute dollar increase in sales and marketing expenses in 2005 relates to an increase of $14.9 million relating to the impact of IXOS. Additionally, the Company spent an additional $4.5 million on labor costs, $2.1 million on increased marketing expenses and $2.4 million on increased commissions to sales staff, related to an increased number of license sales. The rest of the increase relates to core operational spending on training, travel, recruitment and other miscellaneous costs. Additionally, sales and marketing personnel increased from 498 individuals at the end of 2004 to 514 at the end of 2005.
Sales and marketing expenses increased 60.2% from $54.5 million in fiscal 2003 to $87.4 million in fiscal 2004. Sales and marketing expenses decreased slightly as a percentage of total revenues from 31% in fiscal 2003 to 30% in fiscal 2004.were relatively constant. The vast majority of the increase in sales and marketing expense in absolute dollars was the result of costs added because of the fiscal 2004 acquisitions, as only approximately 10% of the increase in sales and marketing expenses relates to the Company’s core operations. Furthermore, the increased spending within the Company’s
core operations was almost exclusively focused on marketing as the Company’s core spending on sales was consistent with the prior year. With ECM becoming a viable, growing segment of the software market, the Company is placing additional emphasis on marketing initiatives in an effort to be globally regarded as the ECM market leader.acquisitions. Sales and marketing personnel increased from 322 at the end of fiscal 2003 to 498 at the end of fiscal 2004. Similar to the other functional groups, this increase in headcount was focused in Europe due to the fiscal 2004 acquisitions. As of June 30, 2004, approximately 50% of the Company’s sales and marketing personnel were located in Europe as compared to 30% in the prior year.
General and administrative expenses.expenses
General and administrative expenses consistedconsist primarily of the salaries of administrative personnel, related overhead, facilitiesfacility expenses, audit fees, consulting expenses and corporateseparate public company costs.
General and administrative expenses increased 69%102.3% from $22.8 million in 2004 to $46.1 million in 2005, and increased from 7.8% to 11.1% of total revenues in the same period. The absolute dollar increase in general and administrative expenses in 2005 over 2004 relates to an increase of $9.1 million relating to the impact of the IXOS acquisition. Additionally, in 2005, the Company spent an additional $3.4 million on labor costs, $2.7 million on consulting costs, and $5.6 million as a result of separate public company costs, including additional audit fees, and Sarbanes-Oxley compliance fees. General and administrative personnel increased from 348 individuals at the end of 2004 to 389 at the end of 2005.
General and administrative expenses increased 68.7% from $13.5 million in fiscal 2003 to $22.8 million in fiscal 2004, but remained consistent as a percentageand increased slightly from 7.6% to 7.8% of total revenues at 8% in both fiscal 2004 and 2003.the same period. Over half of the increase in general and administrative expenses relaterelated to expenses added as part of the 2004 acquisitions. Approximately 50%Half of the remaining increase in general and administrative expenses relatesrelated to increased personnel that the Company added throughout fiscal 2004. Asto maintain the size and scope of the Company’s business continuesits needs as it continued to grow, Open Text requires a more sophisticated infrastructure to support the changing needs of the business. All areas within general and administrative expenses, including finance, information technology, and human resources, added headcount during the year.grow. Total general and administrative personnel increased from 200 asat the end of June 30, 2003 to 348 asat the end of June 30, 2004. Whereas approximately 75% of the Company’s general and administrative personnel were located in North America as of June 30, 2003, this percentage has been reduced to a little over 50% as of June 30, 2004 as a result of the fiscal 2004 acquisitions. The remainder of the increase in general and administrative expenses iswas comprised of higher spending in a number of non-personnel areas, including compliance with new legislation including the Sarbanes-Oxley Act, as well as increased spending with respect to consulting and travel resulting from significant acquisition integration activities.
Depreciation expenses
Depreciation expenses. Depreciation expense increased 42% from $5.0by 55.4% or $3.9 million in fiscal 20032005 compared to $7.1 million in fiscal 2004. Almost all2004 as a direct result of the increase in depreciation expense is a resultincreased value of increased depreciation expenses recorded during the year relating to capital assets acquired and additions through business acquisitions.
Depreciation expenses increased by 41.8% or $2.1 million in 2004 compared to 2003 as parta direct result of the fiscal 2004increased value of capital assets acquired and additions through business acquisitions. Before the impact of the fiscal 2004 acquisition depreciation is considered, the Company’s depreciation expense remained consistent with the depreciation expense the Company recorded during fiscal 2003. During the year, the impact of the full depreciation of older assets was not offset by depreciation on newer capital assets.
Amortization of acquired intangible assets.assets
Amortization of acquired intangible assets includes the amortization of both acquired technology and customer assets.
Amortization of acquired intangible assets increased 249%115.9% from $3.2 million for fiscal 2003 to $11.3 million in 2004 to $24.4 million in 2005. The increase is due to the impact of the 2005 acquisitions and a full year’s amortization of the IXOS intangible assets, versus four months amortization in the prior year. Because the amortization of acquired intangible assets is only included from the date of acquisition, this expense continued to increase substantially in 2005 when a full year amortization was recorded for fiscal 2004. Thisthe 2004 acquisitions.
The increase in 2004, over 2003, was principally the result of acquisitions during fiscal 2004, which accounted for 69% of the increase assince the size of acquisitions completed during fiscal 2004 was far greater than those completed in any previous fiscal year.
Provision for (recovery of) restructuring charges
In March 2004, the Company recorded a restructuring charge of $10.0 million relating to its North America segment. This charge consisted primarily of:
As of June 30, 2004, $4.1 million of this provision had been expended with the outstanding balance of $5.9 million distributed as follows:
As of the end of the third quarter of 2005, the Company recorded a recovery of $1.7 million consisting of $1.4 million relating to the provision for workforce reduction and $301,000 relating to the provision for excess facilities. This recovery was made as a result the amount allocated as part of the various purchase price allocations,a number of decisions that were made regarding actions still to intangible assets, was also greater than in any previous fiscal year. Because the amortization of acquired intangible assets has only been included from the date of acquisition, this expense will continue to increase substantially in fiscal 2005 when a full year amortization is recorded for the fiscal 2004 acquisitions. The remaining 31% increase was due to amortization of acquired intangibles from acquisitions in fiscal 2003 being included for a full fiscal yeartake place as compared to the 3 months of amortization expense recorded onoriginal restructuring plan and these decisions necessitated an adjustment to the 2003 acquisitions during fiscal 2003.original restructuring plan.
The Company expects that the provision relating to facility costs will be expended by 2014 and the provision related to employee severance by 2006.
Other income (expense)
Other income. Other income decreased 92% from $2.8 million(expense) for fiscal 2003, comparedthe year ended June 30, 2005, includes $754,000 relating to $0.2 million for fiscal 2004. Other income consists primarilyinterest charges and legal costs incurred on the settlement of the action brought against the Company by the Harold L. Tilbury and Yolanda O. Tilbury, Trustees of the Harold L. Tilbury Jr. and Yolanda O. Tilbury family Trust and realized foreign exchange gains or losses which reflect relative movementsof $1.8 million. The IXOS acquisition contributed $309,000 to this foreign exchange loss in the various foreign currenciescomparison to $273,000 in which the Company conducts business.2004.
Income taxes
Interest.Interest income, net remained unchanged at $1.2 million in fiscal 2003 and fiscal 2004.
Income taxes.During fiscal 2004,2005, the Company recorded a tax provision of $7.3$7.0 million compared to $3.2$7.3 million during fiscal 2003. The increase in the Company’s tax provision is due to the fact that during fiscal 2004, the Company became taxable or began using acquired losses in certain taxing jurisdictions where it was previously able to use internally generated tax loss carry forwards. When the Company uses losses acquired in business combinations, the benefit of those losses impacts the purchase equation and not the income statement as occurs with internally generated loss carryforwards.2004.
The Company’s recognized deferred tax asset of $46.4$46.8 million arises from available income tax losses and future income tax deductions. The Company’s ability to use these income tax losses and future income tax deductions is dependent upon the operations of the Company generating income in the tax jurisdictions in which such losses or deductions arose. The recognized deferred tax liability arisesof $39.4 million is made up of two components. The first component relates to $35.0 million arising from the amortization of timing differences relating to acquired intangible assets non-capitaland future income inclusions. The second component of $4.4 million relates to deferred tax credits arising from non capital losses acquired at a discount inon asset acquisitions and futurewhich will be included in income inclusions. Managementas the non capital losses are utilized. The Company records a valuation allowance against deferred income tax assets when managementit believes it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Based on the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax asset and tax planning strategies, managementthe Company has determined that a valuation allowance of $126.9$127.6 million is required in respect of its deferred income tax assets as at June 30, 2004.2005. A valuation allowance of $5.7$126.9 million was required for the deferred income tax assets as at June 30, 2003.2004. This increasevaluation allowance is primarily attributable to valuation allowances against acquired loss carryforwardsset up based on losses incurred in the year.year in certain foreign jurisdictions. In order to fully utilize the recognized deferred income tax assets of $46.4$46.8 million, the CompanyOpen Text will need to generate aggregate future taxable income in applicable jurisdictions of approximately $133$133.0 million. Based on the Company’s current projection of taxable income for the periods in the jurisdictions in which the deferred income tax assets are deductible, it is more likely than not that the Company will realize the benefit of the recognized deferred income tax assets at June 30, 2004.
During fiscal 2004, the Company recorded deferred tax assets of $11.9 million and deferred tax liabilities of $2.3 million in connection with its acquisition of IXOS.2005. Deferred tax assets associated with the acquisition of GaussIXOS were fullysubstantially offset by a valuation allowance.
Fiscal 2003 Compared with Fiscal 2002Canadian Supplement
Revenues. Total revenues included license revenues, customer support revenues, and service revenues. Total revenues increased 15% from $154.4 millionCanadian securities regulations allow issuers that are required to file reports with the SEC, upon meeting certain conditions, to satisfy their Canadian continuous disclosure obligations by using financial statements prepared in fiscal 2002accordance with U.S. GAAP. The Company has provided the following supplemental information to $177.7 million in fiscal 2003. Revenues from license increased 15% from $66.0 million in fiscal 2002 to $76.0 million fiscal 2003. The increase in license revenues was a result of several factors, includinghighlight the Company’s focus on certain industry verticals for its solution offerings. In particular, the emergence of strong performancesignificant differences that would have resulted in the pharmaceutical, government, and financial services sectors contributed to the Company’s fiscal 2003 license revenue growth. Also contributing to license revenue growth were the acquisitions completed during fiscal 2003. Specifically, approximately $5.6 million of license revenue was recorded during the fiscal year relating to the fiscal 2003 acquisitions. Additionally, the introduction of new modules designed to accelerate deployment and address very specific issues faced by customers further contributed to the Company’s growth in license revenues. Revenue of these products totaled approximately $1.0 million during fiscal 2003. During fiscal 2003, the Company also saw the continued return of large license transactions, a trend that began during the fourth quarter of fiscal 2002.MD&A had it been prepared using Canadian GAAP information.
Customer support revenues increased 30% from $48.7 million in fiscal 2002 to $63.1 million in fiscal 2003. The increase in customer support revenues resulted from several factors includingprincipal continuing reconciling differences that affect consolidated net income under Canadian GAAP are the increase in the number of licenses granted in fiscal 2003, as well as strong renewal rates for maintenance contracts for existing customers. During fiscal 2003, the Company effectively implementedpurchase price increases in all regions for its customer support services and those increases contributed to the revenue growth achieved in fiscal 2003. Additionally, in fiscal 2003 the Company’s customer support organization began to offer to customers a number of value added support programs. The acquisitions in fiscal 2003 also contributed to the growth in customer support revenues. Approximately 11% of the growth in customer support revenues relates to the fiscal 2003 acquisitions, while the remaining 19% growth relates to the Company’s organic business. The Company’s renewal rate of maintenance contracts for the Company’s products was in excess of 90%.
Service revenues decreased 3% from $39.7 million in fiscal 2002 to $38.6 million in fiscal 2003. The decrease in service revenues was primarily attributable to the continued challenging market for services engagements globally. Although in aggregate the Company’s service revenue decreased slightly from fiscal 2002 to fiscal 2003, the Company experienced an increase in Livelink-related service engagements. The Company also generated consulting and integration revenues relating to customers of companies acquired during fiscal 2003 totaling approximately $600,000 during fiscal 2003. These increases were more than offset by a decrease in services revenue relating to certain of the Company’s older products.
Cost of revenues. Cost of license revenues consisted primarily of the costs associated with the royalties payable to third-parties whose software is bundled with the Company’s products, as well as product media, duplication, manuals, packaging expenses, and finder’s fees. Cost of license revenues increased 23% from $5.3 million in fiscal 2002 to $6.6 million in fiscal 2003. As a percentage of license revenues, the cost of license revenues increased slightly from 8% during fiscal 2002 to 9% during fiscal 2003. The increase in cost of license revenues in absolute dollars was a reflection of the increase in license revenues. The increase in cost of license as a percentage of license revenues was due to higher third-party product costs included in licenses granted during fiscal 2003 associated largely with acquired companies’ products.
Cost of customer support revenues is comprised primarily of technical support personnel and their related costs. Cost of customer support revenues increased 24% from $8.4 million in fiscal 2002 to $10.4 million in fiscal 2003, primarily as a result of increased personnel costs in fiscal 2003 as compared with fiscal 2002. Increased personnel costs relating to the Company’s core operations increased approximately $1.1 million, while the impact of the Company’s fiscal 2003 acquisitions totaled approximately $900,000, the most significant component of which were personnel costs. As a percentage of customer support revenues, customer support costs decreased slightly from 17% in fiscal 2002 to 16% in fiscal 2003, reflective of the fact that the Company effectively restructured the acquired companies’ cost structures and that the Company realized some economies of scale as its support organization continued to grow.
Cost of service revenues consisted primarily of the costs of providing integration, customization and training. Cost of service revenues increased 3% from $27.4 million in fiscal 2002 to $28.2 million in fiscal 2003. Cost of service revenues as a percentage of service revenues increased from 69% in fiscal 2002 to 73% in fiscal, 2003. Additional costs assumed as a result of the fiscal 2003 acquisitions accounted for approximately $500,000 of the increase in absolute dollars in costs of service revenues compared with fiscal 2002. Also impacting costs of service revenues is the fact that in fiscal 2003 the Company recorded approximately $700,000 less of investment tax credits through its services organization, due to the fact that the amount of investment tax credits recorded during fiscal 2002 was atypically high. Investment tax credits are recorded as a credit to cost of service revenues. Consequently, once the impact of the 2003 acquisitions and investment tax credits are removed, the Company’s core services organization actually realized a decrease in costs in fiscal 2003 as compared with fiscal 2002. This decrease in core cost of services was a result of both a slight decrease in personnel costs related to lower personnel in the Company’s services organization during fiscal 2003, as well as lower expenses incurred with respect to the Company’s 2003 user’s conferences as compared with fiscal 2002.
Research and development expenses.Research and development expenses consisted primarily of engineering personnel expenses, contracted research and development expenses, and facilities and equipment costs. The Company expensed all research and development costs as incurred during the year. Research and development expenses increased 22% from $24.1 million in fiscal 2002 to $29.3 million in fiscal 2003 and, as a percentage of total revenues, remained relatively consistent at 16% in both fiscal 2002 and 2003. The increase in research and development expenses in absolute dollars in fiscal 2003 resulted primarily from approximately $4.0 million of additional expenses added as part of the integration of the development organizations of the companies acquired in fiscal 2003. The increase in research and development expense in fiscal 2003 as compared with fiscal 2002 also resulted from the fact that in fiscal 2003 the Company recorded approximately $750,000 less in investment tax credits, which were recorded as a reductionallocation to research and development expenses. The investment tax credits recorded during fiscal 2002 were atypically high,activities for which there is no alternative future use, stock-based compensation and were not considered to be indicativerecording of claims expected to be made in subsequent years.the minimum pension liability.
Sales and marketing expenses. Sales and marketing expenses consisted primarily of compensation of sales and marketing personnel, as well as expenses associated with advertising, trade shows, facilities and other expenses related to the sales and marketingSee note 19 of the Company’s products and services. Sales and marketing expenses increasedaccompanying consolidated financial statements for a reconciliation from $51.1 million fiscal 2002U.S. GAAP to $54.5 million in fiscal 2003. Sales and marketing expenses decreased asCanadian GAAP, including a percentage of total revenues from 33% in fiscal 2002 to 31% in fiscal 2003. Of the increase in sales and marketing expense in absolute dollars, $1.0 million related to additional marketing initiatives, approximately half of which related to the companies acquired in fiscal 2003. Additionally, sales costs assumed as partdescription of the Company’s 2003 acquisitions accounted for an additional $5.4 million of sales and marketing expenses during fiscal 2003. Consequently, sales expenses decreased by approximately $1.4 million withinmaterial differences affecting the Company’s core business operations during fiscal 2003,consolidated statements of income and consolidated balance sheets. There were no significant differences affecting the majorityconsolidated statements of which relates to approximately $900,000 less of severance costs during fiscal 2003 compared to fiscal 2002, when the Company underwent an internal resizing program aimed at reducing costs throughout the organization.cash flows.
General and administrative expenses.General and administrative expenses consisted primarily of the salaries of administrative personnel and related overhead and facilities expenses. General and administrative expenses increased 8% from $12.5 million in fiscal 2002 to $13.5 million in fiscal 2003 but remained consistent as a percentage of total revenues at 8% in both fiscal 2002 and 2003. Of the $1.0 million increase in general and administrative expenses, approximately half related to the 2003 acquisitions, most notably Centrinity. The balance of the increase in general and administrative expenses related to increases in a number of administrative areas, the majority of which were driven by a higher volume of business activity in fiscal 2003 as compared with fiscal 2002.
Depreciation expenses. Depreciation expense decreased 10% from $5.6 million in fiscal 2002 to $5.0 million in fiscal 2003. The decrease in depreciation expense was a result of the fact the Company did not make significant capital expenditures in fiscal 2003. Depreciation relating to the capital assets added as part of the fiscal 2003 acquisitions was only recorded for a partial year, and as a result this additional depreciation did not offset the reduction realized from the Company’s core base of capital assets during the year.
Amortization of acquired intangible assets.Amortization of acquired intangible assets includes amortization of both acquired technology and customer assets. Additionally, during fiscal 2002 amortization of acquired intangible assets included amortization of goodwill on acquisitions. At the beginning of fiscal 2003, the Company discontinued its amortization of goodwill consistent with new accounting pronouncements. As a result, amortization of acquired intangible assets decreased 50% from $6.5 million for fiscal 2002 to $3.2 million for fiscal 2003. This decrease was principally the result of the discontinued amortization of goodwill, which was partially offset by additional amortization on the intangible assets recorded as part of the fiscal 2003 acquisitions.
Other income (loss). Other income increased 73% from $1.6 million for fiscal 2002, compared to $2.8 million for fiscal 2003. During fiscal 2002, the gain of $1.6 million related primarily to the Company’s attempted acquisition of Accelio Corporation, a software company located in Ottawa, Ontario. The gain that the Company realized on this attempted acquisition arose from the sale of shares of Accelio common stock owned by the Company and in connection with certain lock-up agreements in connection with the attempted acquisition, partially offset by the costs incurred. The $2.8 million gain in fiscal 2003 was primarily comprised of foreign exchange gains realized during the year, the most significant cause of which was the appreciation of the Euro against the U.S. dollar.
Interest.Interest income decreased 33% from $1.9 million in fiscal 2002, compared to $1.2 million in fiscal 2003. The decrease was due to lower interest rates realized during fiscal 2003 as compared with fiscal 2002.
Income taxes.During fiscal 2003, the Company recorded a tax provision of $3.2 million compared to $289,000 during fiscal 2002. The increase in the Company’s tax provision was due to the fact that during fiscal 2003, the Company became taxable in certain taxing jurisdictions where it was previously able to use loss carryforwards.
Quarterly Results
The following table summarizes selected unaudited quarterly financial data for the past eight quarters:
| Fiscal 2004 | ||||||||||||
| Fourth Quarter | Third Quarter | Second Quarter | First Quarter | |||||||||
| (in thousands, except per share data) | ||||||||||||
Total revenues | $ | 104,984 | $ | 80,215 | $ | 61,674 | $ | 44,185 | ||||
Gross profit | 74,197 | 60,005 | 45,944 | 32,510 | ||||||||
Net income | $ | 8,973 | $ | 3,279 | $ | 7,692 | $ | 3,354 | ||||
Net income per share | ||||||||||||
Basic | $ | 0.18 | $ | 0.07 | $ | 0.19 | $ | 0.08 | ||||
Diluted | $ | 0.16 | $ | 0.07 | $ | 0.18 | $ | 0.08 | ||||
| Fiscal 2003 | ||||||||||||
| Fourth Quarter | Third Quarter | Second Quarter | First Quarter | |||||||||
| (in thousands, except per share data) | ||||||||||||
Total revenues | $ | 53,097 | $ | 43,959 | $ | 43,014 | $ | 37,655 | ||||
Gross profit | 40,509 | 33,018 | 31,548 | 27,454 | ||||||||
Net income | $ | 9,385 | $ | 6,792 | $ | 6,218 | $ | 5,362 | ||||
Net income per share | ||||||||||||
Basic | $ | 0.24 | $ | 0.17 | $ | 0.16 | $ | 0.14 | ||||
Diluted | $ | 0.22 | $ | 0.16 | $ | 0.15 | $ | 0.13 | ||||
The Company has experienced, and is likely to continue to experience, significant fluctuations in quarterly results caused by many factors, including changes in demand for the Company’s products, the introduction or enhancement of products by the Company and its competitors or delays thereof, market acceptance of products or enhancements, customer order deferrals in anticipation of upgrades and new products, changes in the Company’s pricing policies or those of its competitors, delays involved in installing products with customers, the mix of distribution channels through which products are licensed or sold, the mix of products and services sold, the mix of international and North American revenues, foreign currency exchange rates and general economic conditions. As a result, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance. In addition, like many other software companies, the Company has generally recognized a substantial portion of its revenues in the last weeks of each quarter. The Company’s revenues for the quarter ended September 30 of each fiscal year generally have been lower than revenues for other quarters. The acquisition of IXOS, which generates a very high proportion of its revenues in Europe, will make this trend more pronounced going forward. However, it is uncertain whether this trend will continue in current or future periods. Due to all of the foregoing factors, the Company’s operating results in a particular quarter may fail to meet market expectations, which could result in a decrease in the price of Common Shares and a loss to shareholders.
Liquidity and Capital Resources
Other thanThe following table summarizes the cash generated through its operations, the Company has traditionally financed its cash needs primarily through the issuance ofchanges in the Company’s Common Sharescash and Warrants. Atcash equivalents and cash flows over the periods indicated:
(in thousands) | June 30, 2005 | June 30, 2004 | Change in % | ||||||||
Cash and cash equivalents | $ | 79,898 | $ | 156,987 | (49.1 | )% | |||||
Net cash provided by (used in): | |||||||||||
Operating activities | 57,264 | 37,519 | 52.6 | % | |||||||
Investing activities | (77,383 | ) | (19,613 | ) | 294.5 | % | |||||
Financing activities | (58,920 | ) | 21,936 | (368.6 | )% | ||||||
Cash and Cash Equivalents
Cash and cash equivalents decreased $77.1 million from $157.0 million as of June 30, 2004 the Company had working capital of $104.7 million compared to working capital of $94.4$79.9 million at June 30, 2003.2005. This increasereduction relates primarily to repurchases of Common Shares, payments made for acquisitions, and construction of the Waterloo building, offset by positive operating cash flows. Each of these factors is discussed in more detail below.
Net Cash Provided by Operating Activities (“Operating Cash Flow”)
The Company’s primary source of operating cash flow is its positive net income. Operating cash flow is also impacted by changes in working capital primarily relates to increasedaccounts. The changes in accounts receivables and deferred revenue in 2005 of $6.5 million and $7.2 million respectively, had the largest positive working capital assumed as partimpact on the Company’s cash flows. The Company was successful in reducing the Days Sales Outstanding in 2005 by four days from 71 to 67 days, which has led to accounts receivable having a positive impact on operating cash flow. Additionally, the Company’s ability to maintain strong maintenance contract renewal rates contributed to positive operating cash flow results in respect of deferred revenue. The reduction in accounts payable in 2005 of $2.8 million has served to reduce the Company’s available cash balances.
Net Cash Used in Investing Activities
Net cash used in investing activities was $77.4 million in 2005 compared to $19.6 million in 2004. Capital spending relating to the construction of the Waterloo building was the primary component of the amount spent on capital assets of $17.9 million. Additionally the Company spent $31.5 million on the three acquisitions concluded in 2005 and $13.8 million for additional purchases of IXOS acquisition, along withshares.
Net Cash Used in Financing Activities
Net cash used in financing activities was $58.9 million in 2005 compared to net cash provided by financing activities of $21.9 million in 2004. This use of cash was driven primarily by the repurchase of 3,558,700 Common Shares, for an aggregate purchase price of $63.8 million, and a $2.2 million repayment of a short-term loan, offset partially by $6.4 million of proceeds received from the issuance of Common Shares on the exercise of stock options and warrants and pursuant to the Company’s fiscal 2004 profitability. Cash and cash equivalents increased from $116.6 million at June 30, 2003 to $157.0 million at June 30, 2004, primarily for the same reasons including changes in the components of working capital.Employee Stock Purchase Plan.
The Company has a CDN $10.0 million (USD $7.4(U.S. $8.1 million) line of credit with a Canadian chartered bank, under which no borrowings were outstanding at June 30, 2004, the entire amount of which was available for use.2005 and 2004. The line of credit bears interest at the lender’s prime rate plus 0.5%. The Company and is cancelable at any time at the option of the bank. Open Text has pledged certain of its assets including an assignment of accounts receivable as collateral for outstanding amounts under this line of credit.
On October 16, 2003, the Company acquired approximately 75% of the shares of Gauss for total cash consideration of $9.8 million. The results of Gauss’ operations have been included in the consolidated financial statements of Open Text since that date. As of June 30, 2004, Open Text had acquired approximately 92% of the common shares of Gauss as a result of additional shares purchased under a delisting offer, an agreement of control, as well as through the purchase of common shares on the open market and through a public tender offer. The Company intends to achieve 100% ownership and has offered to purchase the remaining outstanding shares of Gauss at a price of Euro 1.06 per Gauss-Share. As of June 27, 2004 there were 662,241 Gauss shares not owned by Open Text. Therefore, the maximum cost for these shares is Euro 701,975. The original acceptance period had been two months. After certain shareholders filed for a special court procedure to reassess the amount of the offered consideration (Spruchverfahren), the acceptance period was extended pursuant to mandatory German law until the end of these proceedings.
On October 23, 2003, Open Text acquired all the common shares of DOMEA eGovernment for total consideration of up to $11.4 million, subject to meeting certain revenue performance and certain adjustments based on the Company’s assets and liabilities. The results of DOMEA eGovernment’s operations have been included in the consolidated financial statements of Open Text since that date. As June 30, 2004, potential purchase price payment obligations in the amount of $2.5 million in cash and $1.8 million in shares remains outstanding.
On February 19, 2004, the Company acquired approximately 88% of the ordinary share capital and voting rights of IXOS, including shares acquired in the open market for cash consideration of $15.3 million plus issuance of 9.3 million in common shares and 2.6 million in warrants. Between the closing date and June 30, 2004, Open Text acquired an additional 1% of the Common Shares of IXOS for $2.3 million in cash. The results of operations of IXOS have been consolidated with those of Open Text beginning March 1, 2004. The Company anticipates that it will acquire all of the outstanding shares of IXOS. The total cash consideration to acquire the remaining outstanding shares of IXOS is estimated to be approximately 9 EURO per share, for a total cost of approximately $30 million. The timeline for achieving 100% ownership is uncertain and could take several more quarters. During fiscal 2004, proceeds received from exercised purchase warrants were $4.7 million. These purchase warrants expire in February 2005. Assuming 100% of the outstanding warrants are exercised prior to expiration, the Company can expect to receive further cash proceeds of approximately $50 million.
Cash provided by operations during fiscal 2004 was $37.5 million, compared to $40.0 million for fiscal 2003. This decrease is primarily due to the fact that the Company undertook a restructuring during its third quarter of fiscal 2004 and $3.4 million was paid out relating to this undertaking by June 30, 2004.
Net cash used in investment activities during fiscal 2004 was $19.6 million of which $9.8 million relates to the acquisition of Gauss, $3.4 million relates to the acquisition of DOMEA eGovernment, and cash provided through the acquisition of IXOS of $19.4 million. The IXOS acquisition represented a source of cash given the fact that the acquisition was financed primarily through shares and IXOS had significant cash reserves on its
balance sheet at the date of acquisition. Other significant investment activities during fiscal 2004 include the purchase of capital assets totaling $6.1 million, other acquisitions of $4.0 million, and business acquisition costs of $15.7 million. Net cash used in investment activities in fiscal 2003 was $23.9 million of which $18.2 million related to the acquisitions of Centrinity, Corechange and Eloquent. The other significant investment activity during fiscal 2003 was the purchase of capital assets, which totaled $3.6 million.
Net cash provided by financing activities during fiscal 2004 was $21.9 million This amount was comprised of proceeds of $18.3 million received by the Company related to the exercise of stock options and purchases made under the Company’s employee stock purchase plan and proceeds of $4.7 million related to the issuance of warrants arising from the IXOS acquisition. These proceeds were offset by deferred financing costs related to the IXOS acquisition of $0.7 million, and payments of capital lease obligations of $0.4 million. Net cash used in financing activities was $10.1 million during fiscal 2003. This amount was comprised of proceeds of $7.0 million received by the Company related to the exercise of stock options and purchases made under the Company’s employee stock purchase plan, offset by $17.3 million spent on repurchasing 1,512,000 Common Shares of which $7.7 million was charged to share capital and $9.6 million was charged to accumulated deficit.
The Company earns interest on its cash and cash equivalents, which consist of highly liquid investments with an original maturity of three months or less at the date of acquisition. Interest earned from these investments totaled $1.4 million during fiscal 2004 and $1.3 million during fiscal 2003, due to higher cash balances maintained in fiscal 2004 as compared to fiscal 2003.
The Company’s capital asset balance increased from $10.0 million as at June 30, 2003 to $24.7 million as at June 30, 2004. This increase is primarily due to the addition of capital assets net of depreciation acquired through the Company’s three acquisitions completed during fiscal 2004 that totaled over $14.2 million and regular capital asset acquisitions totaling $0.4 million as well the impact of foreign exchange revaluations.
The increase in the Company’s goodwill from $32.3 million as at June 30, 2003 to $223.8 million as at June 30, 2004 is due to additional goodwill recorded in connection with the fiscal 2004 acquisitions.
The Company’s acquired intangible assets totaled $20.5 million as at June 30, 2003 as compared to $116.6 million as at June 30, 2004. During fiscal 2004, the Company added $107.4 million of intangible assets as a result of acquisitions. These assets, along with the Company’s other specifically identifiable intangible assets, are being amortized over varying periods generally ranging from four to seven years.
The Company’s other assets totaled $3.1 million as at June 30, 2003 as compared to $5.7 million as at June 30, 2004. Other assets are primarily comprised of deposits, loan receivable, and pension plan assets.
Subsequent to June 30, 2004, the Company entered into separate commitments to purchase Artesia Technologies Inc., as well as the business assets of the Vista Plus suite of products. Total consideration for these transactions will be approximately $30.0 million cash, and it is expected that this amount will be principally paid during the Company’s quarter ending September 30, 2004.
In July 2004, the Company entered into a commitment to construct a building in Waterloo, Ontario in an effort to consolidate its existing facilities in Waterloo. Construction of this facility will commence in the Company’s first quarter ending September 30, 2004, and is expected to be completed by August 2005 which is the approximate date when the Company’s current leases for space in Waterloo will expire. The size of this facility is approximately the same as the Company’s current space under lease in Waterloo, with a provision for modest growth. The facility is to be constructed on a land which has been leased from the University of Waterloo in its High-Technology Park for a period of 99 years. The total cost of this project is approximately $8 million and at this point the Company intends to finance this investment through its working capital. Once constructed, this facility will become the Company’s lowest cost facility on a per square footage basis.
The Company currently anticipates thatfinanced its operating expenses foroperations and capital expenditures primarily with cash flows generated from operations and with the year ending June 30, 2005 will be relatively consistent, as a percentageproceeds from sales of revenue, with those incurred in fiscal 2004. In absolute dollars, operating expenses will increase substantially, along with revenues, given that a full year’s operating results for IXOS will be recorded. Similarly, the Company currently anticipates that amounts expended on capital assets for the year ending June 30, 2005 will be generally consistent with those incurred during fiscal 2004. These expectations, however, are subject to change based on a number of factors, including the possibility of completing acquisitions and other strategic transactions.
its Common Shares. The Company anticipates that its cash and cash equivalents and available credit facilities will be sufficient to fund its anticipated cash requirements for working capital, contractual commitments and capital expenditures for at least the next 12 months. The Company may need to raise additional funds however, in order to fund more rapid expansion of its business, develop new and enhance existing products and services, or acquire complementary products, businesses or technologies. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of the Company’sits shareholders may be reduced, the Company’sits shareholders may experience additional dilution, and such securities may have rights, preferences and privileges senior to those of the Company’sits current shareholders. Additional financing may not be available on terms favorable to the Company, or at all. If adequate funds are not available or are not available on acceptable terms, the Company’s ability to fund its expansion, take advantage of unanticipated opportunities or develop or enhance the Company’sits services or products would be significantly limited.
Commitments and Contractual Obligations
The Company has entered into operating leases for premises, computer equipment and vehicles with minimum annual payments as follows:
| Payments due by period | |||||||||||||||
| Total | Less than 1 year | 1–3 years | 3–5 years | More than 5 years | |||||||||||
Operating lease obligations | $ | 111,256 | $ | 17,223 | $ | 38,243 | $ | 35,777 | $ | 20,013 | |||||
Purchase obligations | 7,224 | 6,019 | 1,042 | 137 | 26 | ||||||||||
| $ | 118,480 | $ | 23,242 | $ | 39,285 | $ | 35,914 | $ | 20,039 | ||||||
Included in the above balance is $9.2 million of rental income from properties sub-leased by the Company. Also included in the above balance is an amount of approximately $43.6 million relating to payments in connection with facilities that have been identified as excess facilities. This amount has been included in both acquisition-related and restructuring accruals in the consolidated financial statements.
In July 2004, Open Text entered into a commitment to construct a building in Waterloo, Ontario with a view of consolidating its existing Waterloo facilities. In October 2004, based on a need for additional space beyond the original commitment, Open Text agreed, in principle, to a commitment to construct an additional floor to the building. Currently the Company does not expect to further expand the scope of this project. The cost of this project is estimated to be approximately $14 million. The Company has financed this investment through its working capital. As of June 30, 2004,2005, approximately $9.7 million has been spent to date on this project.
In August 2005, the Domination Agreement with IXOS which had been contested by certain IXOS shareholders was settled as a result of an out of court settlement that was ratified by the court on August 9, 2005. Additionally, in August 2005, the contestation regarding the agreement of control relating to the acquisition of Gauss was settled in relation to two shareholders’ suits against the resolutions of the shareholders’ meetings of December 23, 2003. Amounts of $98,307 and $126,047 were incurred, respectively, for the fiscal year ended June 30, 2005 for this settlement.
Open Text is subject to legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, the Company had future commitments and contractual obligations as summarized indoes not believe that the following table (in millions). These commitments are principally comprisedoutcome of operating leases for the Company’s leased premises.any of these legal matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows.
| Payment due by period | ||||||||||
| Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | ||||||
Operating lease obligations | 111.4 | 17.1 | 31.3 | 28.2 | 34.8 | |||||
Purchase obligations | 2.2 | 0.7 | 1.5 | — | — | |||||
| 113.6 | 17.8 | 32.8 | 28.2 | 34.8 | ||||||
The Company typically agrees in its sales contracts to indemnify its customers for any expenses or liability resulting from claimed infringements of patents, trademarks or copyrights of third parties. The terms of these indemnification agreements are generally perpetual after execution of the agreement. The maximum amount of potential future indemnification is unlimited.
Off-Balance Sheet Arrangements
The Company does not enter into off-balance sheet financing as a matter of practice except for the use of operating leases for office space, computer equipment, and vehicles. In accordance with U.S. GAAP, neither the lease liability nor the underlying asset is carried on the balance sheet, as the terms of the leases do not meet the thresholds for capitalization. Commitments related to the operating leases over the next five years and thereafter are disclosed above.
The Company typically agrees in its sales contracts to indemnify its customers for any expenses or liability resulting from claimed infringements of patents, trademarks or copyrights of third parties. The terms of these indemnification agreements are generally perpetual any time after execution of the agreement. The maximum amount of potential future indemnification is typically limited to the value of the fees paid for the corresponding license or service, but the company does agree in limited circumstances to expand this limitation or to make the indemnification obligation unlimited. To date the Company has not paid any amounts to settle claims or defend lawsuits.
Pursuant to the Agreement of Control between 2016090 Ontario Inc. (“Ontario”), a wholly owned subsidiary of Open Text, and Gauss, Ontario has offered to purchase the remaining outstanding shares of Gauss at a price of Euro 1.06 per Gauss-Share. As of June 27, 2004 there were 662,241 Gauss shares not owned by
Open Text. The costs for these shares will be Euro 701,975, if the remaining shareholders agree to sell at this price. The original acceptance period had been two months. As a result of certain shareholders having now filed for a special court procedure to reassess the amount of the offered consideration (Spruchverfahren), the acceptance period has been extended pursuant to mandatory German law until the end of such proceedings. In addition, in April 2004 Gauss announced that effective July 1, 2004 the shares of Gauss will cease to be listed on a stock exchange. In connection with this delisting, on July 2, 2004, a second offer by Ontario to purchase the remaining outstanding shares of Gauss at a price of Euro 1.06 per Gauss share has commenced. Again, the acceptance period has been extended pursuant to mandatory German law until the end of the proceedings to reassess the amount of the offered consideration (Spruchverfahren). The Agreement of Control is currently subject to a court procedure in which certain shareholders of Gauss claim, that the resolution of shareholders of Dec 23, 2003 respecting the Agreement of Control is null and void. A first instance judgment (in favor of the validity of the Agreement of Control) is expected by November 2004 at the earliest.
Risk Factors That May Affect Future Results
Certain statements in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, including those set forth in the following statements and elsewhere in this Annual Report on Form 10-K, that may cause the actual results, performance or achievements of the Company, or developments in the Company’s industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. The following factors, as well as all of the other information set forth herein, should be considered carefully in evaluating Open Text and its business. If any of the following risks were to occur, the Company’s business, financial condition and results of operations would likely suffer. In that event, the trading price of the Company’s Common Shares would likely decline. Such risks are further discussed from time to time in the Company’s filings with the SEC.
If the Company does not continue to develop new technologically advanced products, future revenues will be negatively affected
Open Text’s success will depend on its ability to design, develop, test, market, license and support new software products and enhancements of current products on a timely basis in response to both competitive products and evolving demands of the marketplace. In addition, new software products and enhancements must remain compatible with standard platforms and file formats. Presently, Open Text is continuingcontinues to enhance the capability of its Livelink software to enable users to form workgroups and collaborate on intranets and the Internet. The Company increasingly must integrate software licensed or acquired from third parties with its own software to create or improve intranet and Internetits products. These products are key to the success of the Company’s strategy, and the Company may not be successful in developing and marketing these and other new software products and enhancements.
If the Company is unable to successfully integrate the technologies licensed or acquired from third parties, to develop new software products and enhancements to existing products, or to complete products currently under development, or if such integrated or new products or enhancements do not achieve market acceptance, the Company’s operating results will materially suffer. In addition, if new industry standards emerge that the Company does not anticipate or adapt to, the Company’s software products could be rendered obsolete and its business would be materially harmed.
If the Company’s products and services do not gain market acceptance, the Company may not be able to increase its revenues
Open Text intends to pursue its strategy of growing the capabilities of its ECM software offerings through the in-house research and development of new product offerings. During fiscal 2004, theThe Company enhancedcontinues to enhance Livelink and severalmany of its optional components to continue to set the standard for Enterprise Content ManagementECM capabilities, and in response to customer requests. Examples include the addition of secure Instant Messaging capability and the ability to distribute rich-media presentations including video, voice and text
components to a wide audience over the web. The primary market for Open Text’s software and services is rapidly evolving. As is typical in the case of a rapidly evolving industry, demand for and market acceptance of products and services that have been released recently or that are planned for future release are subject to a high level of uncertainty. If the markets for the Company’s products and services fail to develop, develop more slowly than expected or become saturated with competitors, the Company’s business will suffer. The Company may be unable to successfully market its current products and services, develop new software products, services and enhancements to current products and services, complete customer installations on a timely basis, or complete products and services
currently under development. If the Company’s products and services or enhancements do not achieve and sustain market acceptance, the Company’s business and operating results will be materially harmed.
Current and future competitors could have a significant impact on the Company’s ability to generate future revenue and profits
The markets for the Company’s products are new, intensely competitive, subject to rapid technological change and are evolving rapidly. The Company expects competition to increase and intensify in the future as the markets for the Company’s products continue to develop and as additional companies enter each of its markets. Numerous releases of products that compete with those of the Company are continually occurring and can be expected to continue in the near future. The Company may not be able to compete effectively with current and future competitors. If competitors were to engage in aggressive pricing policies with respect to competing products, or significant price competition werewas to otherwise develop, the Company would likely be forced to lower its prices. This could result in lower revenues, reduced margins, loss of customers, or loss of market share for the Company.
Acquisitions, investments, joint ventures and other business initiatives may negatively affect the Company’s operating results
Open Text acquired a number of companies in each of fiscal 2003 and 2004 and continues to seek out opportunities to acquire or invest in businesses, products and technologies that expand, complement or are otherwise related to the Company’s current business or products.business. The Company also considers from time to time, opportunities to engage in joint ventures or other business collaborations with third parties to address particular market segments. These activities, andincluding the current year’s acquisitions, create risks includingsuch as the need to integrate and manage the businesses and products acquired with the business and products of the Company, additional demands on the Company’s management, resources, systems, procedures and controls, disruption of the Company’s ongoing business, and diversion of management’s attention from other business concerns. Moreover, these transactions could involve substantial investment of funds and/or technology transfers and the acquisition or disposition of product lines or businesses. Also, such activities could result in one-time charges and expenses and have the potential to either dilute existing shareholders or result in the assumption of debt. Such acquisitions, investments, joint ventures or other business collaborations may involve significant commitments of financial and other resources of the Company. Any such activity may not be successful in generating revenue, income or other returns to the Company, and the financial or other resources committed to such activities will not be available to the Company for other purposes. In addition, if Open Text acquires companies with weak internal controls, it will take time to get the acquired company up to the same level of operating effectiveness as Open Text. The Company’s inability to address these risks could negatively affect the Company’s operating results.
The tender offer for all shares of IXOS by Open Text began on December 2, 2003. On February 19, 2004, Open Text Corporation closed the tender offer, pursuant to which, 2016091 Ontario, a wholly owned subsidiary of Open Text Corporation, acquired a total of 19,157,428 IXOS shares or approximately 88% of the ordinary share capital and voting rights of IXOS, including shares acquired in the open market. Between the closing date of the tender offer and June 30, 2004, Open Text acquired an additional 203,647 Common Shares of IXOS. As a result of the additional purchase, 2016091 Ontario obtained a total of 19,361,075 IXOS shares or approximately 89% ownership in IXOS. The issuance of Common Shares and Common Share purchase warrants by Open Text under the offer and the subsequent resale of these securities may result in a material adverse affect on the market value of our Common Shares. After completion of the offer, Open Text must successfully integrate, among other
things, certain product offerings, product development, sales and marketing, administrative and customer service functions, and management information systems of the Company and IXOS. This integration may cause disruptions, including potential loss of customers, suppliers, and other business partners, in the business of Open Text or that of IXOS, which could have material adverse effects on each company’s or the combined companys’ business and operations. In addition, Open Text may not be able to retain the management and key employees of IXOS. It is possible that these integration efforts will not be completed as efficiently as planned or will distract management from the operations of the combined company. Expected cost savings from the business combination may not be fully realized or realized within the Company’s expected time frames.
Businesses acquired by the Company may have disclosure controls and procedures and internal controls over financial reporting that are weaker than or otherwise not in conformity with those of the Company
The Company has a history of acquiring complementary businesses with varying levels of organizational size and complexity. Upon consummating an acquisition, the Company seeks to implement its disclosure controls and procedures and internal controls over financial reporting at the acquired company as promptly as possible. Depending upon the size and complexity of the business acquired, the implementation of the Company’s disclosure controls and procedures and internal controls over financial reporting at an acquired company may be a lengthy process. Typically the Company conducts due diligence prior to consummating an acquisition, however, the Company’s integration efforts may periodically expose deficiencies in the disclosure controls and procedures and internal controls over financial reporting of an acquired company. The Company believesexpects that the process involved in completing the integration of the Company’s own disclosure controls and procedures and internal controls over financial reporting at an acquired business will sufficiently correct any identified deficiencies. However, if such deficiencies exist, the Company may not be in a position to comply with its periodic reporting requirements and the Company’s business and financial condition may be materially harmed.
A reduction in the number or sales efforts by distributors could materially impactThe length of the Company’s revenuessales cycle can fluctuate significantly which could result in significant fluctuations in license revenue being recognized from quarter to quarter
A material portion ofBecause the decision by a customer to purchase the Company’s revenue is derived fromproducts often involves relatively large-scale implementation across the licensecustomer’s network or networks, licenses of these products may entail a significant commitment of resources by prospective customers, accompanied by the attendant risks and delays frequently associated with significant expenditures and lengthy sales cycle and implementation procedures. Given the significant investment and commitment of resources required by an organization in order to implement the Company’s software, the Company’s sales cycle tends to take considerable time to complete. Over the past fiscal year, the Company has experienced a lengthening of its products through third-parties. The Company’s success will depend,sales cycle as customers include more personnel in part, upon its abilitythe decision-making process and focus on more enterprise-wide licensing deals. In an economic environment of reduced information technology spending, it can take several months, or even quarters, for sales opportunities to maintain accesstranslate into revenue. If a customer’s decision to existing channels of distribution and to gain access to new channels if and when they develop. The Company may not be able to retain a sufficient number of its existing or future distributors. Distributors may also give higher priority to the sale of other products (which could include products of competitors) or may not devote sufficient resources to marketinglicense the Company’s products. The performance of third party distributorssoftware is largely outside the control of the Companydelayed and the Company is unable to predict the extent to which these distributors will be successful in marketing and licensing the Company’s products. A reduction in sales efforts, a decline in the number of distributors, or the discontinuance of salesinstallation of the Company’s products by its distributorsin one or more customers takes longer than originally anticipated, the date on which revenue from these licenses could leadbe recognized would be delayed. Such delays could cause the Company’s revenues to reduced revenue.be lower than expected in a particular period.
The Company’s international operations expose the Company to business risks that could cause the Company’s operating results to suffer
Open Text intends to continue to make efforts to increase its international operations and anticipates that international sales will continue to account for a significant portion of its revenue. The Company is increasinghas increased its presence in the European market, especially since its acquisition of IXOS. Revenues derived outside of North America represented 53%, 42%, and 40% of total revenues for fiscal 2004, 2003, and 2002, respectively. These international operations are subject to certain risks and costs, including the difficulty and expense of administering business and compliance abroad, compliance with both domestic and foreign laws, compliance with domestic and international import and export laws and regulations, costs related to localizing products for foreign markets, and costs related to translating and distributing products in a timely manner. International operations also tend to expose the Company to a longer sales and collection cycle, as well as potential losses arising from currency fluctuations, and limitations regarding the repatriation of earnings. Significant international sales may also expose the Company to greater risk from political and economic instability, unexpected changes in Canadian, USUnited States or other governmental policies concerning import and export of goods and technology, other regulatory requirements and tariffs and other trade barriers. In addition, international earnings may be subject to taxation by more than one jurisdiction, which could also materially adversely affect the Company’s results of operations. Moreover,Also, international
expansion may be more difficult, time consuming, and costly. As a result, if revenues from international operations do not offset the expenses of establishing and maintaining foreign operations, the Company’s operating results will suffer. Moreover, in any given quarter, exchange rates can impact revenue adversely.
The Company’s products may contain defects that could harm the Company’s reputation, be costly to correct, delay revenues, and expose the Company to litigation
The Company’s products are highly complex and sophisticated and, from time to time, may contain design defects or software errors that are difficult to detect and correct. Errors may be found in new software products or improvements to existing products after commencement of commercial shipments, or, if discovered, the Company may not be able to successfully correct such errors in a timely manner, or at all. In addition, despite tests carried out by the Company on all its products, the Company may not be able to fully simulate the environment in which its products will operate and, as a result, the Company may be unable to adequately detect design defects or software errors inherent in its products and which only become apparent when the products are installed in an end-user’s network. The occurrence of errors and failures in the Company’s products could result in loss of, or delay in market acceptance of the Company’s products, and alleviating such errors and failures in the Company’s products could require significant expenditure of capital and other resources by the Company. The harm to the Company’s reputation resulting from product errors and failures would be damaging to the Company. The Company regularly provides a warranty with its products and the financial impact of these warranty obligations may be significant in the future. The Company’s agreements with its strategic partners and
end-users typically contain provisions designed to limit the Company’s exposure to claims, such as exclusions of all implied warranties and limitations on the availability of consequential or incidental damages. However, such provisions may not effectively protect the Company against claims and related liabilities and costs. Although the Company maintains errors and omissions insurance coverage and comprehensive liability insurance coverage, such coverage may not be adequate and all claims may not be covered. Accordingly, any such claim could negatively affect the Company’s financial condition.
Other companies may claim that the Company infringes their intellectual property, which could result in significant costs to defend and if the Company is not successful could have a significant impact on the Company’s ability to generate future revenue and profits
Although the Company does not believe that its products infringe on the rights of third-parties, third-parties may assert infringement claims against the Company in the future, and any such assertions may result in costly litigation or require the Company to obtain a license for the intellectual property rights of third-parties, suchthird-parties. Such licenses may not be available on reasonable terms, or at all. In particular, as software patents become more prevalent, it is possible that certain parties will claim that the Company’s products violate their patents. Such claims could be disruptive to the Company’s ability to generate revenue and may result in significantly increased costs as the Company attempts to license the patents or rework its products to ensure that they are not in violation of the claimant’s patents or dispute the claims. Any of the foregoing could have a significant impact on the Company’s ability to generate future revenue and profits.
The loss of licenses to use third party software or the lack of support or enhancement of such software could adversely affect the Company’s business
The Company currently depends on certain third-party software, the loss of which could result in increased costs of, or delays in, licenses of the Company’s products. For a limited number of product modules, the Company relies on certain software that it licenses from third-parties, including software that is integrated with internally developed software and which is used in its products to perform key functions. These third-party software licenses may not continue to be available to the Company on commercially reasonable terms, and the related software may not continue to be appropriately supported, maintained, or enhanced by the licensors. The loss of license to use, or the inability of licensors to support, maintain, and enhance any of such software, could result in increased costs, delays, or reductions in product shipments until equivalent software is developed or licensed, if at all, and integrated, and could adversely affect the Company’s business.
A reduction in the number or sales efforts by distributors could materially impact the Company’s revenues
A significant portion of the Company’s revenue is derived from the license of its products through third parties. The Company’s success will depend, in part, upon its ability to maintain access to existing channels of distribution and to gain access to new channels if and when they develop. The Company may not be able to retain a sufficient number of its existing or future distributors. Distributors may also give higher priority to the sale of other products (which could include products of competitors) or may not devote sufficient resources to marketing the Company’s products. The performance of third party distributors is largely outside the control of the Company and the Company is unable to predict the extent to which these distributors will be successful in marketing and licensing the Company’s products. A reduction in sales efforts, a decline in the number of distributors, or the discontinuance of sales of the Company’s products by its distributors could lead to reduced revenue.
The Company’s success depends and will depend on ourits relationships with strategic partners
The companyCompany relies on close cooperation with leading partners for product development, optimization, and sales. If any of ourthe Company’s partners should decide for any reason to terminate or scale back their cooperative efforts with the Company, ourthe Company’s business, operating results, and financial condition may be adversely affected.
The length of the Company’s sales cycle can fluctuate significantly which could result in significant fluctuations in license revenue being recognized from quarter to quarter
Because the decision by a customer to purchase the Company’s products often involves relatively large-scale implementation across the customer’s network or networks, licenses of these products may entail a significant commitment of resources by prospective customers, accompanied by the attendant risks and delays frequently associated with significant expenditures and lengthy sales cycle and implementation procedures. Given the significant investment and commitment of resources required by an organization in order to implement the Company’s software, the Company’s sales cycle tends to take considerable time to complete. Particularly in the current economic environment of reduced information technology spending, it can take several months, or even quarters, for sales opportunities to translate into revenue. If installation of the Company’s products in one or more customers takes longer than originally anticipated, the date on which revenue from these licenses could be recognized would be delayed. Such delays could cause the Company’s revenues to be lower than expected in a particular period.
Our expenses may not match anticipated revenues
We base ourThe Company incurs operating expenses onbased upon anticipated revenue trends. Since a high percentage of these expenses are relatively fixed, a delay in recognizing revenue from license transactions could cause significant variations in operating results from quarter to quarter and could result in operating losses. If these expenses precede, or are not subsequently followed by, increased revenues, ourthe Company’s business, financial condition, or results of operations could be materially and adversely affected. In addition, in Fiscal 2006 the Company announced an initiative to restructure its operations with the intention of realizing cost savings in the future. The Company will continue to evaluate its operations, and may propose future restructuring actions as a result of changes in the marketplace, including the exit from less profitable operations or services no longer demanded by its customers. Any failure to successfully execute these initiatives, including any delay in effecting these initiatives, can have a material adverse impact on the Company’s results of operations.
The Company must continue to manage its growth or its operating results could be adversely affected
Over the past several years, Open Text has experienced growth in revenues, operating expenses, and product distribution channels. In addition, Open Text’s markets have continued to evolve at a rapid pace. The total number of employees of the Company has grown to approximately 2105 as of June 30, 2004. The Company believes that continued growth in the breadth of its product lines and services and in the number of personnel, will be required in order to establish and maintain the Company’s competitive position. Moreover, the Company has grown significantly through acquisitions in the past and continues to review acquisition opportunities as a means of increasing the size and scope of its business. Finally, the Company has been subject to increased regulation, including various NASDAQ rules and Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes”), which has necessitated a significant use of company resources to comply on a timely basis. Open Text’s growth, coupled with the rapid evolution of the Company’s markets hasand the new heightened regulations, have placed, and isare likely to continue to place, significant strains on its administrative and operational resources and increased demands on its internal systems, procedures and controls. The Company’s administrative infrastructure, systems, procedures and controls may not adequately support the Company’s operations or compliance with such regulations, and the Company’s management may not be able to achieve the rapid, effective execution of the product and business initiatives necessary to successfully penetrate the markets for the Company’s products and services and to successfully integrate any business acquisitions in the future.future to comply with all regulatory rules. If the Company is unable to manage growth effectively, or comply with such new regulations, the Company’s operating results will likely suffer.suffer and it may not be in a position to comply with its periodic reporting requirements or listing standards, which could result in the delisting of the Company from the NASDAQ.
Recently enacted and proposed changes in securities laws and related regulations could result in increased costs to the Company
Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of Sarbanes and recent rules enacted and proposed by the SEC and NASDAQ, have resulted in increased costs to the Company as it responds to the new requirements. In particular, complying with the internal control over financial reporting requirements of Section 404 of Sarbanes is resulting in increased internal costs and higher fees from the Company’s independent accounting firm. The new rules also could make it more difficult for the Company to obtain certain types of insurance, including director and officer liability insurance, and the Company may be forced to accept reduced policy limits and coverage and/or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for the Company to attract and retain qualified persons to serve on its Board of Directors, on committees of its Board of Directors, or as executive officers. The Company cannot yet estimate the amount of total additional costs it may incur or the timing of such costs as it implements these new and proposed rules.
The Company’s products rely on the stability of various infrastructure software that, if not stable, could negatively impact the effectiveness of the Company’s products, resulting in harm to the reputation and business of the Company
Developments of internetInternet and intranetIntranet applications by Open Text dependsdepend on the stability, functionality and scalability of the infrastructure software of the underlying intranet, such as that of Sun, HP, Oracle, Microsoft
and others. If weaknesses in such infrastructure software exist, the Company may not be able to correct or compensate for such weaknesses. If the Company is unable to address weaknesses resulting from problems in the infrastructure software such that the Company’s products do not meet customer needs or expectations, the Company’s business and reputation may be significantly harmed.
The Company’s quarterly revenues and operating results are likely to fluctuate which could materially impact the price of the Company’s Common Shares
The Company has experienced,experiences, and is likely to continue to experience, significant fluctuations in quarterly revenues and operating results caused by many factors, including changes in the demand for the Company’s products, the introduction or enhancement of products by the Company and its competitors, market acceptance of enhancements or products, delays in the introduction of products or enhancements by the Company or its competitors, customer order deferrals in anticipation of upgrades and new products, lengthening sales cycles, changes in the Company’s pricing policies or those of its competitors, delays involved in installing products with customers, the mix of distribution channels through which products are licensed, the mix of products and services sold, the timing of restructuring charges taken in connection with acquisitions completed by the Company, the mix of international and North American revenues, foreign currency exchange rates, acquisitions and general economic conditions.
Like many other software companies, the Company has generally recognized a substantial portion of its revenues in the last weeks of each quarter. Accordingly, theA cancellation or deferralsdeferral of even a small number of licenses or delays in installations of the Company’s products could have a material adverse effect on the Company’s results of operations in any particular quarter. Because of the impact of the timing of product introductions and the rapid evolution of the Company’s business and the markets it serves, the Company cannot predict whether seasonal patterns experienced in the past will continue. For these reasons, no one should not rely on period-to-period comparisons of the Company’s financial results to forecast future performance. It is likely that the Company’s quarterly revenue and operating results will vary significantly in the future and if a shortfall in revenue occurs or if operating costs increase significantly, the market price of ourits Common Shares could materially decline.
Failure to protect the Company’s intellectual property could harm ourits ability to compete effectively
The Company is highly dependent on its ability to protect its proprietary technology. The Company’s efforts to protect its intellectual property rights may not be successful. The Company relies on a combination of copyright, patent, trademark and trade secret laws, non-disclosure agreements and other contractual provisions to establish and maintain its proprietary rights. The Company, subject to those patents and patents pending as discussed on page 22,in Item I of Part I, has generally not sought patent protection for its products. While USU.S. and Canadian copyright laws, international conventions and international treaties may provide meaningful protection against unauthorized duplication of software, the laws of some foreign jurisdictions may not protect proprietary rights to the same extent as the laws of Canada or the United States. Software piracy has been, and can be expected to be, a persistent problem for the software industry. Enforcement of the Company’s intellectual property rights may be difficult, particularly in some nations outside of the United States and Canada in which the Company seeks to market its products. Despite the precautions taken by the Company, it may be possible for unauthorized third parties, including competitors, to copy certain portions of the Company’s products or to reverse engineer or obtain and use information that the Company regards as proprietary.
If the Company is not able to attract and retain top employees, the Company’s ability to compete may be harmed
The Company’s performance is substantially dependent on the performance of its executive officers and key employees. The loss of the services of any of its executive officers or other key employees could significantly harm the Company’s business. The Company does not maintain “key person” life insurance policies on any of its employees. The Company’s success is also highly dependent on its continuing ability to identify, hire, train,
retain and motivate highly qualified management, technical, sales and marketing personnel, including recently hired officers and other employees. Specifically, the recruitment of top research developers, along with experienced salespeople, remains critical to the Company’s success. Competition for such personnel is intense, and the Company may not be able to attract, integrate or retain highly qualified technical and managerial personnel in the future.
The volatility of the Company’s stock price could lead to losses by shareholders
The market price of the Common Shares has been highly volatile and subject to wide fluctuations. Such fluctuations in market price may continue in response to quarterly variations in operating results, announcements of technological innovations or new products by the Company or its competitors, changes in financial estimates by securities analysts or 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 technology companies and that often have been unrelated to the operating performance of such companies or have resulted from the failure of the operating results of such companies to meet market expectations in a particular quarter. Broad market fluctuations or any failure of the Company’s operating results in a particular quarter to meet market expectations may adversely affect the market price of the Common Shares, resulting in losses to shareholders. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against such a company. Due to the volatility of ourthe Company’s stock price, the Company could be the target of securities litigation in the future. Such litigation could result in substantial costs and a diversion of management’s attention and resources, which would have a material adverse effect on the Company’s business and operating results.
WeThe Company may have exposure to greater than anticipated tax liabilities
We areThe Company is subject to income taxes and non-income taxes in a variety of jurisdictions and ourits tax structure is subject to review by both domestic and foreign taxation authorities. The determination of ourthe Company’s worldwide provision for income taxes and other tax liabilities requires significant judgment. Although we believe ourthe Company believes its estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in ourits financial statements and may materially affect ourits financial results in the period or periods for which such determination is made.
New accounting pronouncements may require us to change the way in which we account for our operational or business activities
The Financial Accounting Standards Board and other bodies that have jurisdiction over the form and content of our accounts are constantly discussing proposals designed to ensure that companies best display relevant and transparent information relating to their respective businesses. The effect of the pronouncements of FASB and other bodies may have the effect of requiring us to account for revenues and/or expenses in a different manner than at present. In particular, if the FASB or any other standard-setting or regulatory body requires us to expense the fair value of stock options, we would likely report increased expenses in our income statement and a reduction of our net income and earnings per share. The impact of applying a fair value method of accounting for stock options is disclosed in the Note 2 to the Consolidated Financial Statements.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
The Company is primarily exposed to market risks associated with fluctuations in interest rates and foreign currency exchange rates.
Interest rate risks
The Company’s exposure to interest rate fluctuations relates primarily to its investment portfolio, since the Company had no borrowings outstanding under its line of credit at June 30, 2004.2005. The Company primarily
invests its cash in short-term, high-quality securities with reputable financial institutions. The primary objective of the Company’s investment activities is to preserve principal while at the same time maximizing the income the Company receives from its investments without significantly increasing risk. The Company does not use derivative financial instruments in its investment portfolio. The interest income from the Company’s investments is subject to interest rate fluctuations, which the Company believes wouldcould not have a material impact on the financial position of the Company.
All highly liquid investments with a maturity of less than three months at the date of purchase are considered to be cash equivalents. All investments with maturities of three months or greater are classified as available-for-sale and considered to be short-term investments. At June 30, 2005, the Company has no short-term investments. Some of the securities that the Company has invested in may be subject to market risk. This means that a change in the prevailing interest rates may cause the principal amount of the investment to fluctuate. The impact on net interest income of a 100 basis point adverse change in interest rates for the fiscal year ended June 30, 20042005 would have been a decrease of approximately $1.3$0.7 million.
Foreign currency risk
Businesses generally conduct transactions in their local currency which is also generally their functional currency, or currency in which transactions are measured in their stand-alone financial statements. Additionally, balances that are denominated in a currency other than the entity’s reporting currency must be adjusted to reflect changes in foreign exchange rates during the reporting period.
As the Company operates internationally, a substantial portion of its business is also conducted in foreign currencies other than the U.S. dollar. Accordingly, the Company’s results are affected, and may be affected in the future, by exchange rate fluctuations of the U.S. dollar relative to the Canadian dollar, to various European currencies, and, to a lesser extent, other foreign currencies. Revenues and expenses generated in foreign currencies are translated at exchange rates during the month in which the transaction occurs. The Company cannot predict the effect of foreign exchange losses in the future; however, if significant foreign exchange losses are experienced, they could have a material adverse effect on its business, results of operations, and financial condition. Moreover, in any given quarter, exchange rates can impact revenue adversely.
The Company has net monetary asset and liability balances in foreign currencies other than the U.S. Dollar, including the Canadian Dollar (“CDN”), the British Pound Sterling (“GBP”), the Australian dollar (“AUD”), the Swiss Franc (“CHF”), the Danish Kroner (“DKK”), the Arabian Dirham (“AED”), and the Euro.Euro (“EUR”). The Company’s cash and cash equivalents are primarily held in U.S. Dollars.
The Company’s net income is affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies as a result of transactions in foreign markets. Approximately 53%, 42%, and 40% of the Company’s total revenues in fiscal 2004, 2003, and 2002, respectively, were derived from operations outside of North America. Approximately 61%, 46%, and 45% of the Company’s operating expenses in fiscal 2004, 2003 and 2002, respectively, were incurred from operations outside of North America. The Company does not currently use financial instruments to hedge operating expenses in foreign currencies, as it feels that its diverse international base of revenues and expenses provides a natural hedge to its foreign currency exposure.currencies. The Company intends to assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis.
The following tables provide a sensitivity analysis on the Company’s exposure to changes in foreign exchange rates. For foreign currencies where the Company engages in material transactions, the following table quantifies the absolute impact that a 10% changeincrease/decrease against the U.S. dollar would have had on the Company’s total revenues, operating expenses, and net income for the year ended June 30, 2004 assuming no other impact.2005. This analysis is presented in both functional and transactional currency. Functional currency represents the currency of measurement forof each of an entity’s domestic and foreign operations. Transactional currency represents the currency in which the underlying transactions take place in. The impact of changes in foreign exchange rates for those foreign currencies not presented in these tables is not material.
| 10% Change in Functional Currency | |||||||||||||||||||
| 10% Change in Functional Currency | Total Revenue | Operating Expenses | Net Income | ||||||||||||||||
| Total Revenue | Operating Expenses | Net Income | (in thousands) | ||||||||||||||||
Euro | $ | 8,052 | $ | 7,001 | 1,051 | $ | 12,430 | $ | 11,740 | $ | 690 | ||||||||
British Pound | 3,540 | 2,172 | 1,368 | 5,004 | 2,869 | 2,135 | |||||||||||||
Canadian Dollar | 1,750 | 5,166 | (3,416 | ) | 2,259 | 6,566 | 4,307 | ||||||||||||
Swiss Franc | 1,441 | 1,615 | (174 | ) | 2,694 | 1,639 | 1,055 | ||||||||||||
| 10% Change in Transactional Currency | 10% Change in Transactional Currency | ||||||||||||||||||
| Total Revenue | Operating Expenses | Net Income | Total Revenue | Operating Expenses | Net Income | ||||||||||||||
Euro | $ | 7,873 | $ | 6,985 | $ | 888 | $ | 12,628 | $ | 11,747 | $ | 881 | |||||||
British Pound | 3,413 | 2,143 | 1,270 | 4,861 | 2,843 | 2,018 | |||||||||||||
Canadian Dollar | 1,355 | 4,448 | (3,093 | ) | 1,957 | 4,931 | 3,466 | ||||||||||||
Swiss Franc | 1,133 | 1,669 | (536 | ) | 2,402 | 1,879 | 523 | ||||||||||||
Item 8. Financial Statements and Supplementary Data
| Item 8. | Financial Statements and Supplementary Data |
Management’s Report of Independent Registered Public Accounting Firm
Management is responsible for all the information and representations contained in the consolidated financial statements and other sections of this Form 10-K. Management believes that the consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and appropriate in the circumstances to reflect in all material respects the substance of events and transactions that should be included, and that the other information in this Form 10-K is consistent with those statements. In preparing the consolidated financial statements, management makes informed judgments and estimates of the expected effects of events and transactions that are currently being accounted for.
In meeting its responsibility for the reliability of the consolidated financial statements, management depends on the Company’s system of internal controls. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management’s authorization, and are recorded properly to permit the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. In designing control procedures, management recognizes that errors or irregularities may nevertheless occur. Also, estimates and judgments are required to assess and balance the relative cost and expected benefits of the controls. Management believes that the Company’s accounting controls provide reasonable assurance that errors or irregularities that could be material to the consolidated financial statements are prevented or would be detected within a timely period by employees in the normal course of performing their assigned functions.
The Board of Directors pursues its oversight role for these consolidated financial statements through the Audit Committee, which is comprised solely of Directors who are not officers or employees of the Company. The Audit Committee meets with management periodically to review their work and to monitor the discharge of each of their responsibilities. The Audit Committee also meets periodically with KPMG LLP, the independent auditors, who have free access to the Audit Committee of the Board of Directors, without management present, to discuss internal controls, auditing, and financial reporting matters.Shareholders
KPMG LLP is engaged to express an opinion on our consolidated financial statements. Their opinion is based on procedures believed by them to be sufficient to provide reasonable assurance that the consolidated financial statements are in conformity with accounting principles generally accepted in the United States of America.
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August 31, 2004
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of Open Text Corporation
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Open Text Corporation maintained effective internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Open Text Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Open Text Corporation maintained effective internal control over financial reporting as of June 30, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Open Text Corporation maintained, in all material respects, effective internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Open Text Corporation as of June 30, 20042005 and 20032004, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended June 30, 2004.2005, and our report dated September 23, 2005 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Toronto, Canada
September 23, 2005
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Open Text Corporation
We have audited the accompanying consolidated balance sheets of Open Text Corporation as of June 30, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended June 30, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform anthe audit to obtain reasonable assurance about 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. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the CompanyOpen Text Corporation as of June 30, 20042005 and 20032004, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2004,2005, in conformity with U.S. generally accepted accounting principles.
As discussedWe also have audited, in Note 2 toaccordance with the consolidatedstandards of the Public Company Accounting Oversight Board (United States), the effectiveness of Open Text Corporation’s internal control over financial statements, effective July 1, 2001, the Company adopted the provisionsreporting as of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and certain provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” as required for goodwill and intangible assets resulting from business combinations consummated after June 30, 2001.2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 23, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
August 31, 2004September 23, 2005
CONSOLIDATED BALANCE SHEETS
(In thousands of USU.S. Dollars, except share data)
| June 30, | June 30, | |||||||||||||||
| 2004 | 2003 | 2005 | 2004 | |||||||||||||
| ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 156,987 | $ | 116,554 | $ | 79,898 | $ | 156,987 | ||||||||
Accounts receivable trade, net of allowance for doubtful accounts of $3,628 as at June 30, 2004 and $1,933 as at June 30, 2003 | 82,996 | 35,855 | ||||||||||||||
Accounts receivable trade, net of allowance for doubtful accounts of $3,125 as of June 30, 2005 and $3,628 as at June 30, 2004 (note 7) | 81,936 | 82,996 | ||||||||||||||
Income taxes recoverable | 7,041 | 484 | 11,350 | 7,041 | ||||||||||||
Prepaid expenses and other current assets | 6,550 | 3,541 | 8,438 | 6,550 | ||||||||||||
Deferred tax asset (note 15) | 18,776 | 7,688 | ||||||||||||||
Deferred tax assets (note 14) | 10,275 | 18,776 | ||||||||||||||
Total current assets | 272,350 | 164,122 | 191,897 | 272,350 | ||||||||||||
Capital assets (note 3) | 24,678 | 10,011 | 36,070 | 24,678 | ||||||||||||
Goodwill, net of accumulated amortization of $12,807 at June 30, 2004 and 2003 (note 4) | 223,752 | 32,301 | ||||||||||||||
Deferred tax asset (note 15) | 27,668 | 8,674 | ||||||||||||||
Goodwill (note 4) | 243,091 | 223,752 | ||||||||||||||
Deferred tax assets (note 14) | 36,499 | 27,668 | ||||||||||||||
Acquired intangible assets (note 5) | 116,588 | 20,517 | 127,981 | 116,588 | ||||||||||||
Other assets (note 6) | 5,719 | 3,062 | 5,398 | 3,619 | ||||||||||||
Total assets | $ | 670,755 | $ | 238,687 | ||||||||||||
| $ | 640,936 | $ | 668,655 | |||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable—trade and accrued liabilities (note 9) | $ | 94,075 | $ | 31,596 | ||||||||||||
Accounts payable and accrued liabilities (note 9) | $ | 80,468 | $ | 94,075 | ||||||||||||
Deferred revenues | 62,661 | 38,086 | 75,227 | 62,661 | ||||||||||||
Deferred tax liabilities | 10,892 | — | ||||||||||||||
Deferred tax liabilities (note 14) | 10,128 | 10,892 | ||||||||||||||
Total current liabilities | 167,628 | 69,682 | 165,823 | 167,628 | ||||||||||||
Long-term liabilities: | ||||||||||||||||
Accrued liabilities (note 9) | 25,579 | 21,520 | ||||||||||||||
Deferred revenues | 915 | 1,696 | 103 | 915 | ||||||||||||
Deferred tax liabilities | 35,536 | — | ||||||||||||||
Accrued liabilities (note 10) | 23,620 | 4,912 | ||||||||||||||
Deferred tax liabilities (note 14) | 29,245 | 35,536 | ||||||||||||||
Total long-term liabilities | 60,071 | 6,608 | 54,927 | 57,971 | ||||||||||||
Minority interest | 10,051 | — | 4,431 | 10,051 | ||||||||||||
Shareholders’ equity: | ||||||||||||||||
Share capital (note 11) | ||||||||||||||||
51,054,786 and 39,136,518 Common Shares issued and outstanding at June 30, 2004 and June 30, 2003 respectively | 427,015 | 204,343 | ||||||||||||||
Warrants issued (note 18) | 22,705 | — | ||||||||||||||
Accumulated other comprehensive income: | ||||||||||||||||
Cumulative translation adjustment | 1,814 | (119 | ) | |||||||||||||
Share capital (note 10) | ||||||||||||||||
48,136,932 and 51,054,786 Common Shares issued and outstanding at June 30, 2005 and June 30, 2004, respectively | 406,580 | 427,015 | ||||||||||||||
Commitment to issue shares (note 17) | 813 | — | ||||||||||||||
Warrants issued (note 10) | — | 22,705 | ||||||||||||||
Additional paid-in capital | 22,341 | — | ||||||||||||||
Accumulated comprehensive income | 18,124 | 1,814 | ||||||||||||||
Accumulated deficit | (18,529 | ) | (41,827 | ) | (32,103 | ) | (18,529 | ) | ||||||||
Total shareholders’ equity | 433,005 | 162,397 | 415,755 | 433,005 | ||||||||||||
Commitments and contingencies (note 13) | ||||||||||||||||
Total liabilities and shareholders’ equity | $ | 670,755 | $ | 238,687 | ||||||||||||
| $ | 640,936 | $ | 668,655 | |||||||||||||
Subsequent event (note 23) | ||||||||||||||||
Commitments and Contingencies (note 12) | ||||||||||||||||
Subsequent Events (note 22) | ||||||||||||||||
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of USU.S. Dollars, except share and per share data)
| Year ended June 30, | Year ended June 30, | |||||||||||||||||||||
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | |||||||||||||||||
Revenues: | ||||||||||||||||||||||
License | $ | 121,642 | $ | 75,991 | $ | 65,984 | $ | 136,522 | $ | 121,642 | $ | 75,991 | ||||||||||
Customer support | 108,812 | 63,091 | 48,707 | 179,178 | 108,812 | 63,091 | ||||||||||||||||
Service | 60,604 | 38,643 | 39,681 | 99,128 | 60,604 | 38,643 | ||||||||||||||||
Total revenues | 291,058 | 177,725 | 154,372 | 414,828 | 291,058 | 177,725 | ||||||||||||||||
Cost of revenues: | ||||||||||||||||||||||
License | 10,784 | 6,550 | 5,341 | 11,540 | 10,784 | 6,550 | ||||||||||||||||
Customer support | 20,299 | 10,406 | 8,364 | 33,086 | 20,299 | 10,406 | ||||||||||||||||
Service | 47,319 | 28,241 | 27,411 | 81,367 | 47,319 | 28,241 | ||||||||||||||||
Total cost of revenues | 78,402 | 45,197 | 41,116 | 125,993 | 78,402 | 45,197 | ||||||||||||||||
| 212,656 | 132,528 | 113,256 | 288,835 | 212,656 | 132,528 | |||||||||||||||||
Operating expenses: | ||||||||||||||||||||||
Research and development | 43,616 | 29,324 | 24,071 | 65,139 | 43,616 | 29,324 | ||||||||||||||||
Sales and marketing | 87,362 | 54,532 | 51,084 | 114,553 | 87,362 | 54,532 | ||||||||||||||||
General and administrative | 22,795 | 13,509 | 12,498 | 46,110 | 22,795 | 13,509 | ||||||||||||||||
Depreciation | 7,103 | 5,009 | 5,587 | 11,040 | 7,103 | 5,009 | ||||||||||||||||
Amortization of acquired intangible assets | 11,306 | 3,236 | 6,506 | 24,409 | 11,306 | 3,236 | ||||||||||||||||
Restructuring charge | 10,005 | — | — | |||||||||||||||||||
Provision for (recovery of) restructuring charge (note 20) | (1,724 | ) | 10,005 | — | ||||||||||||||||||
Total operating expenses | 182,187 | 105,610 | 99,746 | 259,527 | 182,187 | 105,610 | ||||||||||||||||
Income from operations | 30,469 | 26,918 | 13,510 | 29,308 | 30,469 | 26,918 | ||||||||||||||||
Other income (note 14) | 217 | 2,788 | 1,613 | |||||||||||||||||||
Interest income | 1,355 | 1,283 | 1,853 | |||||||||||||||||||
Interest expense | (145 | ) | (55 | ) | (16 | ) | ||||||||||||||||
Other income (expense) (note 13) | (3,116 | ) | 217 | 2,788 | ||||||||||||||||||
Interest income, net | 1,377 | 1,210 | 1,228 | |||||||||||||||||||
Income before income taxes | 31,896 | 30,934 | 16,960 | 27,569 | 31,896 | 30,934 | ||||||||||||||||
Provision for income taxes (note 15) | 7,270 | 3,177 | 289 | |||||||||||||||||||
Provision for income taxes (note 14) | 6,958 | 7,270 | 3,177 | |||||||||||||||||||
Net income before minority interest | 24,626 | 27,757 | 16,671 | 20,611 | 24,626 | 27,757 | ||||||||||||||||
Minority interest | 1,328 | — | — | 252 | 1,328 | — | ||||||||||||||||
Net income for the year | $ | 23,298 | $ | 27,757 | $ | 16,671 | $ | 20,359 | $ | 23,298 | $ | 27,757 | ||||||||||
Net income per share—basic (note 19) | $ | 0.53 | $ | 0.71 | $ | 0.42 | ||||||||||||||||
Net income per share—basic (note 18) | $ | 0.41 | $ | 0.53 | $ | 0.71 | ||||||||||||||||
Net income per share—diluted (note 19) | $ | 0.49 | $ | 0.67 | $ | 0.39 | ||||||||||||||||
Net income per share—diluted (note 18) | $ | 0.39 | $ | 0.49 | $ | 0.67 | ||||||||||||||||
Weighted average number of Common Shares outstanding—basic | 43,743,508 | 39,050,556 | 39,957,438 | 49,918,541 | 43,743,508 | 39,050,556 | ||||||||||||||||
Weighted average number of Common Shares outstanding—diluted | 47,272,113 | 41,393,108 | 42,477,930 | 52,091,860 | 47,272,113 | 41,393,108 | ||||||||||||||||
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
| Common Shares | Warrants | Accumulated Deficit | Accumulated Comprehensive Income | Total | Common Shares | Warrants | Commitment to Issue Shares | Additional Paid in Capital | Accumulated Deficit | Accumulated Comprehensive Income | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Number | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2001 | 39,876 | $ | 203,636 | $ | — | $ | — | $ | (69,213 | ) | $ | (1,396 | ) | $ | 133,027 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of Common Shares | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Under employee stock option plans | 838 | 4,917 | — | — | — | — | 4,917 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Under employee stock purchase plans | 278 | 2,600 | — | — | — | — | 2,600 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase and cancellation of shares | (1,240 | ) | (6,338 | ) | — | — | (7,462 | ) | — | (13,800 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | 616 | 616 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income for the year | — | — | — | — | 16,671 | — | 16,671 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | 17,287 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Number | Amount | Commitment to Issue Shares | Additional Paid in Capital | Accumulated Deficit | Accumulated Comprehensive Income | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2002 | 39,752 | 204,815 | — | — | (60,004 | ) | (780 | ) | 144,031 | 39,752 | $ | 204,815 | — | $ | — | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of Common Shares | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Under employee stock option plans | 582 | 4,445 | — | — | — | — | 4,445 | 582 | 4,445 | — | — | — | — | — | — | 4,445 | |||||||||||||||||||||||||||||||||||||||||||
Under employee stock purchase plans | 314 | 2,562 | — | — | — | — | 2,562 | 314 | 2,562 | — | — | — | — | — | — | 2,562 | |||||||||||||||||||||||||||||||||||||||||||
Repurchase and cancellation of shares | (1,512 | ) | (7,722 | ) | — | — | (9,580 | ) | — | (17,302 | ) | (1,512 | ) | (7,722 | ) | — | — | — | — | (9,580 | ) | — | (17,302 | ) | |||||||||||||||||||||||||||||||||||
Income tax effect related to stock options | — | 243 | — | — | — | — | 243 | — | 243 | — | — | — | — | — | — | 243 | |||||||||||||||||||||||||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | 661 | 661 | — | — | — | — | — | — | — | 661 | 661 | |||||||||||||||||||||||||||||||||||||||||||
Net income for the year | — | — | — | — | 27,757 | — | 27,757 | — | — | — | — | — | — | 27,757 | — | 27,757 | |||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | 28,418 | 28,418 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2003 | 39,136 | 204,343 | — | — | (41,827 | ) | (119 | ) | 162,397 | 39,136 | 204,343 | — | — | — | — | (41,827 | ) | (119 | ) | 162,397 | |||||||||||||||||||||||||||||||||||||||
Issuance of Common Shares | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Under employee stock option plans | 1,986 | 14,943 | — | — | — | — | 14,943 | 1,986 | 14,943 | — | — | — | — | — | — | 14,943 | |||||||||||||||||||||||||||||||||||||||||||
Under employee stock purchase plans | 305 | 3,387 | — | — | — | — | 3,387 | 305 | 3,387 | — | — | — | — | — | — | 3,387 | |||||||||||||||||||||||||||||||||||||||||||
Acquisition of DOMEA eGovernment | 117 | 2,411 | — | — | — | — | 2,411 | 117 | 2,411 | — | — | — | — | — | — | 2,411 | |||||||||||||||||||||||||||||||||||||||||||
Acquisition of IXOS | 9,286 | 190,907 | 2,640 | 24,820 | — | — | 215,727 | 9,286 | 190,907 | 2,640 | 24,820 | — | — | — | — | 215,727 | |||||||||||||||||||||||||||||||||||||||||||
Under IXOS warrants exercised | 225 | 6,775 | (225 | ) | (2,115 | ) | — | — | 4,660 | 225 | 6,775 | (225 | ) | (2,115 | ) | — | — | — | — | 4,660 | |||||||||||||||||||||||||||||||||||||||
Income tax effect related to stock options | — | 4,249 | — | — | — | — | 4,249 | — | 4,249 | — | — | — | — | — | — | 4,249 | |||||||||||||||||||||||||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | 1,933 | 1,933 | — | — | — | — | — | — | — | 1,933 | 1,933 | |||||||||||||||||||||||||||||||||||||||||||
Net income for the year | — | — | — | — | 23,298 | — | 23,298 | — | — | — | — | — | — | 23,298 | — | 23,298 | |||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | — | — | — | — | — | — | 25,231 | 25,231 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2004 | 51,055 | $ | 427,015 | 2,415 | $ | 22,705 | $ | (18,529 | ) | $ | 1,814 | $ | 433,005 | 51,055 | 427,015 | 2,415 | 22,705 | — | — | (18,529 | ) | 1,814 | 433,005 | ||||||||||||||||||||||||||||||||||||
Issuance of Common Shares | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Under employee stock option plans | 343 | 2,049 | — | — | — | — | — | — | 2,049 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Under employee stock purchase plans | 260 | 4,350 | — | — | — | — | — | — | 4,350 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Under IXOS warrant exercised | 38 | 1,137 | (38 | ) | (364 | ) | — | — | — | — | 773 | ||||||||||||||||||||||||||||||||||||||||||||||||
Reclass warrants to additional paid in capital on expiration | — | — | (2,377 | ) | (22,341 | ) | — | 22,341 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Domea eGovernment earn out | — | — | — | — | 813 | — | — | — | 813 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchase and cancellation of shares | (3,559 | ) | (29,902 | ) | — | — | — | — | (33,933 | ) | — | (63,835 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Income tax benefit related to stock options exercised | — | 1,931 | — | — | — | — | — | — | 1,931 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | — | — | 16,845 | 16,845 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Minimum pension liability, net of tax | — | — | — | —�� | — | — | — | (535 | ) | (535 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income for the year | — | — | — | — | — | — | 20,359 | — | 20,359 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | 36,669 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of June 30, 2005 | 48,137 | $ | 406,580 | — | $ | — | $ | 813 | $ | 22,341 | $ | (32,103 | ) | $ | 18,124 | $ | 415,755 | ||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of USU.S. Dollars)
| Year ended June 30, | Year ended June 30, | |||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | |||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||
Net income for the year | $ | 23,298 | $ | 27,757 | $ | 16,671 | $ | 20,359 | $ | 23,298 | $ | 27,757 | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||||
Depreciation and amortization | 18,409 | 8,245 | 12,093 | 35,449 | 18,409 | 8,245 | ||||||||||||||||||
Non-cash restructuring charge | 684 | — | — | (1,724 | ) | 684 | — | |||||||||||||||||
Undistributed earnings related to minority interest | 1,328 | — | — | 252 | 1,328 | — | ||||||||||||||||||
Deferred taxes | (2,244 | ) | — | — | (1,168 | ) | (2,244 | ) | — | |||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||||||||||
Accounts receivable | (2,461 | ) | 1,259 | 4,610 | 6,452 | (2,461 | ) | 1,259 | ||||||||||||||||
Prepaid expenses and other current assets | 5,058 | 354 | (396 | ) | (1,327 | ) | 5,058 | 354 | ||||||||||||||||
Income taxes | 188 | (231 | ) | (2,878 | ) | (3,902 | ) | 188 | (231 | ) | ||||||||||||||
Accounts payable and deferred revenues | (6,845 | ) | 2,670 | (590 | ) | |||||||||||||||||||
Other | 104 | (35 | ) | (1,012 | ) | |||||||||||||||||||
Accounts payable and accrued liabilities | (2,765 | ) | (10,561 | ) | (8,017 | ) | ||||||||||||||||||
Deferred revenue | 7,224 | 1,616 | 10,687 | |||||||||||||||||||||
Other assets | (1,586 | ) | 2,204 | (35 | ) | |||||||||||||||||||
Net cash provided by operating activities | 37,519 | 40,019 | 28,498 | 57,264 | 37,519 | 40,019 | ||||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||
Acquisition of capital assets | (6,112 | ) | (3,615 | ) | (2,248 | ) | (17,909 | ) | (6,112 | ) | (3,615 | ) | ||||||||||||
Purchase of Optura, net of cash acquired | (3,347 | ) | — | — | ||||||||||||||||||||
Purchase of Vista, net of cash acquired | (23,690 | ) | — | — | ||||||||||||||||||||
Purchase of Artesia, net of cash acquired | (4,475 | ) | — | — | ||||||||||||||||||||
Additional purchase consideration for prior period acquisitions | (1,182 | ) | — | — | ||||||||||||||||||||
Purchase of Gauss, net of cash acquired | (9,764 | ) | — | — | (487 | ) | (9,764 | ) | — | |||||||||||||||
Purchase of DOMEA eGovernment, net of cash acquired | (3,403 | ) | — | — | — | (3,403 | ) | — | ||||||||||||||||
Purchase of IXOS, net of cash acquired | 19,367 | — | — | (13,779 | ) | 19,367 | — | |||||||||||||||||
Business acquisition costs | (15,736 | ) | — | — | ||||||||||||||||||||
Purchase of Centrinity Inc., net of cash acquired | — | (11,369 | ) | — | — | — | (11,369 | ) | ||||||||||||||||
Purchase of Corechange Inc., net of cash acquired | — | (2,695 | ) | — | — | — | (2,695 | ) | ||||||||||||||||
Purchase of Eloquent Inc., net of cash acquired | — | (2,674 | ) | — | — | — | (2,674 | ) | ||||||||||||||||
Purchase of patent | — | (1,246 | ) | — | — | — | (1,246 | ) | ||||||||||||||||
Purchase of other investments | — | — | (709 | ) | ||||||||||||||||||||
Proceeds from sale of other investments | — | — | 2,702 | |||||||||||||||||||||
Payments against acquisition accruals | — | (1,455 | ) | (212 | ) | — | — | (1,455 | ) | |||||||||||||||
Proceeds from available for sale securities | — | 287 | — | — | — | 287 | ||||||||||||||||||
Other | (3,965 | ) | (1,171 | ) | — | |||||||||||||||||||
Other acquisitions | — | (3,163 | ) | (603 | ) | |||||||||||||||||||
Acquisition related costs | (12,514 | ) | (16,538 | ) | (568 | ) | ||||||||||||||||||
Net cash used in investment activities | (19,613 | ) | (23,938 | ) | (467 | ) | (77,383 | ) | (19,613 | ) | (23,938 | ) | ||||||||||||
Cash flow from financing activities: | ||||||||||||||||||||||||
Payment of obligations under capital leases | (386 | ) | — | (12 | ) | (68 | ) | (386 | ) | — | ||||||||||||||
Proceeds from issuance of Common Shares | 18,330 | 7,007 | 7,517 | 6,399 | 18,330 | 7,007 | ||||||||||||||||||
Proceeds from exercise of warrants | 4,660 | — | — | 773 | 4,660 | — | ||||||||||||||||||
Repurchase of Common Shares | — | (17,302 | ) | (13,800 | ) | (63,835 | ) | — | (17,302 | ) | ||||||||||||||
Repayment of short-term bank loan | (2,189 | ) | — | — | ||||||||||||||||||||
Other | (668 | ) | 243 | — | — | (668 | ) | 243 | ||||||||||||||||
Net cash provided by (used in) financing activities | 21,936 | (10,052 | ) | (6,295 | ) | (58,920 | ) | 21,936 | (10,052 | ) | ||||||||||||||
Foreign exchange gain on cash held in foreign currency | 591 | 630 | 633 | 1,950 | 591 | 630 | ||||||||||||||||||
Increase in cash and cash equivalents during the year | 40,433 | 6,659 | 22,369 | |||||||||||||||||||||
Increase (decrease) in cash and cash equivalents during the year | (77,089 | ) | 40,433 | 6,659 | ||||||||||||||||||||
Cash and cash equivalents at beginning of the year | 116,554 | 109,895 | 87,526 | 156,987 | 116,554 | 109,895 | ||||||||||||||||||
Cash and cash equivalents at end of the year | $ | 156,987 | $ | 116,554 | $ | 109,895 | $ | 79,898 | $ | 156,987 | $ | 116,554 | ||||||||||||
Supplementary cash flow information (note 17) | ||||||||||||||||||||||||
Supplementary cash flow disclosures (note 16) | ||||||||||||||||||||||||
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements
(Tabular amounts in thousands, except per share datadata)
NOTE 1—NATURE OF OPERATIONS
Open Text is the market leader in providingCorporation (the “Company” or “Open Text”) develops, markets, sells and supports Enterprise Content Management (ECM) solutions that brings together people, processes and information.(“ECM”) solutions. The Company’s principal product line is called Livelink®, a leading collaboration and content management software product for global enterprises. The software enables users to capture as well as find electronically stored information, work together in both creative and collaborative processes as well as more structured processes, perform group calendaring and scheduling, and distribute or make available to users across networks or the Internet the resulting work product and other information. This collaborative environment enables ad hoc teams to form quickly across functional and organizational boundaries, which enables information to be accessed by employees using any standard Web browser. Fully Web-based with open architecture, Livelink provides comprehensive configuration, rapid deployment, accelerated adoption, and low cost of ownership. Open Text provides integrated solutions that enable people to use information and technology more effectively at departmental levels and across enterprises.. The Company offers its solutions both as end-user stand-alonestand alone products and as fully integrated modules, which together provide a complete solution that is easily incorporated into existing enterprise business systems.modules. Although most of the Company’sOpen Text’s technology is proprietary in nature,developed within the Company, does include certain third party software is included, if required, in its products. The Company’s
Open Text’s shares trade publicly on the NASDAQ Stock Market—National marketMarket (“NASDAQ”), under the symbol OTEX and on the Toronto Stock Exchange (“TSX”) under the symbol OTC.
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
These consolidated financial statements are expressed in USU.S. dollars and are prepared in accordance with accounting principles generally accepted in the United States of America (“USU.S. GAAP”). Certain prior year amounts have been reclassified to conform to current year presentation.
Basis of consolidation
The consolidated financial statements include the accounts of Open Text Corporation and its subsidiaries, all of which are wholly-owned with the exception of IXOS Software AG (“IXOS”) and Gauss Interprise AG, (“Gauss”) which as of June 30, 2005, were 94% and 95% owned, respectively, and as of June 30, 2004, were 89% and 92% owned, respectively. All material intercompanyinter-company balances and transactions have been eliminated. The Company has recorded a minority interest on its balance sheet in respect of IXOS to reflect the 11% of non-controlling interest in IXOS. Since Gauss was acquired withhad a net liability position,deficit in shareholders’ equity on acquisition, no minority interest has been recorded. A minority interest will not be recorded in Gauss until such time as it moves into a net asset position.(see Note 17—Acquisitions).
Use of estimates
The Company’s Consolidated Financial Statements are prepared in accordance with U.S. GAAP. The preparation of the Consolidated Financial Statementsfinancial statements in accordanceconformity with U.S. GAAP necessarily requires the Companymanagement to make estimates, judgments and judgmentsassumptions, which are evaluated on an ongoing basis, that affect the amounts reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis,in the Company evaluates its estimates, including those related to revenues, bad debts, investments, goodwill and other intangible assets, income taxes, contingencies and litigation. The Companyfinancial statements. Management bases its estimates on historical experience and on various other assumptions that it believes are believedreasonable at that time, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. In particular, significant estimates, judgments and assumptions include those related to revenue recognition, allowance for doubtful accounts, testing goodwill for impairment, the valuation of acquired intangible assets, long-lived assets, the recognition of contingencies, facility and restructuring accruals, acquisition accruals, asset retirement obligations, realization of investment tax credits, and the valuation allowance relating to the Company’s deferred tax assets.
Cash and cash equivalents
Cash and cash equivalents include investments that have terms to maturity of three months or less at the time to be reasonable under the circumstances. Under different assumptionsof acquisition. Cash equivalents are recorded at cost and typically consist of term deposits, commercial paper, U.S. dollar denominated Canadian federal government securities or conditions, the actual results will differ, potentially materially, from those previously estimated. Manyshort-term interest bearing investment-grade securities and demand accounts of the conditions impacting these assumptions and estimates are outside of the Company’s control.a major Canadian chartered bank.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
Cash and cash equivalents
All highly liquid short-term investments which are readily convertible into known amounts of cash and which are so near their maturity that they present insignificant risk of changes in value because of changes in interest rates are classified as cash equivalents.
Capital assets
Capital assets are stated at cost and are depreciated on a straight-line basis over the estimated useful lives of the related assets. Gains and losses uponon asset disposals are taken into income in the year of disposition. The following represents the estimated useful lives of capital assets:
Furniture and fixtures | 5 to 10 years | |
Office equipment | 5 years | |
Computer hardware | 3 to 7 years | |
Computer software | 3 years | |
Leasehold improvements | Over the term of the lease | |
Building |
Impairment of long-lived capital and intangible assetsBusiness combinations
The Company accounts for the impairment on disposalacquisitions of long-lived assets using thecompanies in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS 141”). The Company allocates the purchase price to tangible assets, intangible assets and liabilities based on estimated fair values at the date of acquisition with the excess of purchase price, if any, being allocated to goodwill.
Impairment of long-lived assets
The Company accounts for the impairment and disposition of long-lived assets in accordance with FASB SFAS No. 144, (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company considers factorstests long-lived assets or asset groups, such as capital assets and definite lived intangible assets, for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant adverse changes in the business climate or legal factors; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and projected discounteda current expectation that the asset will more likely than not be sold or disposed of before the end of its estimated useful life.
Recoverability is assessed based on comparing the carrying amount of the asset to the aggregate pre-tax undiscounted cash flows expected to result from the respective asset. Impairment losses areuse and eventual disposal of the asset or asset group. An impairment is recognized when the carrying amount is not recoverable and exceeds the fair value of the asset or asset group. The impairment loss, if any, is measured as the amount by which the carrying amount of the asset exceeds its fair market value.
The Company accounts forAcquired intangibles
This category consists of acquired technology and contractual relationships associated with various acquisitions, as well as trademarks and patents.
Acquired technology is initially recorded at fair value based on the impairmentpresent value of intangible assets using the FASB Statementestimated net future income-producing capabilities of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets.” SFAS 142 requires goodwill to be tested for impairment at least annually, and written off when impaired, rather than beingsoftware products acquired on acquisitions. Acquired technology is amortized as previous standards required. The Company adopted SFAS 142 beginning July 1, 2002. Theover its estimated useful life on a straight-line basis.
Contractual relationships represent relationships that the Company has tested its goodwill for impairment forwith certain customers on contractual or legal rights and are considered separable. These contractual relationships were acquired by the quarter ended June 30, 2004, and has determined that there currently exists no impairment in its goodwill.Company
Adjusted net income and per share amounts presented as if the principles in SFAS 142 had been applied in all periods would be as follows:
| Year ended June 30, | |||||||||
| 2004 | 2003 | 2002 | |||||||
Net income for the period | $ | 23,298 | $ | 27,757 | $ | 16,671 | |||
Add back: goodwill amortization | — | — | 4,711 | ||||||
Adjusted net income for the period | $ | 23,298 | $ | 27,757 | $ | 21,382 | |||
Adjusted net income per share | |||||||||
Basic | $ | 0.53 | $ | 0.71 | $ | 0.54 | |||
Diluted | $ | 0.49 | $ | 0.67 | $ | 0.50 | |||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
through business combinations and were initially recorded at their fair value based on the present value of expected future cash flows. Contractual relationships are amortized on a straight-line basis over their useful lives.
The Company continually evaluates the remaining useful life of its intangible assets being amortized to determine whether events and circumstances warrant a revision to the remaining period of amortization.
Goodwill
FASB SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), requires that goodwill and other intangible assets with indefinite useful lives be tested for impairment annually or earlier if events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.
In accordance with SFAS 142, the Company does not amortize goodwill. The Company performed, in accordance with SFAS 142, its annual impairment analysis of goodwill as of April 1, 2005. Historically, the Company performed its annual goodwill impairment test coincident with its year end of June 30. In Fiscal 2005, the date of the test was moved to the first day of the fourth quarter, in order to provide the Company with more adequate time to complete the analysis given the acceleration of public company reporting requirements. The Company believes that the accounting change described above is an alternative accounting principle that is preferable under the circumstances and that the change was not intended to delay, accelerate or avoid an impairment charge. The analysis in all years indicated that there was no impairment of goodwill in any of the reporting units. If estimates change, a materially different impairment conclusion could result.
Allowance for doubtful accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payments. The Company evaluates the credit worthiness of its customers prior to order fulfillment and based on these evaluations, adjusts credit limits to the respective customers. In addition to these evaluations, the Company conducts on-going credit evaluations of its customers’ payment history and current credit worthiness. The allowance is maintained for 100% of all accounts deemed to be uncollectible and, for those receivables not specifically identified as uncollectible, an allowance is maintained for a specific percentage of those receivables based upon the aging of accounts, the Company’s historical collection experience and current economic expectations. To date, the actual losses have been within management expectations. No single customer accounted for more than 10% of the accounts receivable balance as of June 30, 2005 and 2004.
Asset retirement obligations
The Company accounts for asset retirement obligations in accordance with FASB SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”), which applies to certain obligations associated with the retirement of tangible long-lived assets. SFAS 143 requires that a liability be initially recognized for the estimated fair value of the obligation when it is incurred. The associated asset retirement cost is capitalized as part of the carrying amount of the long-lived asset and depreciated over the remaining life of the underlying asset and the associated liability is accreted to the estimated fair value of the obligation at the settlement date through periodic accretion charges recorded within general and administrative expenses. When the obligation is settled, any difference between the final cost and the recorded amount is recognized as income or loss on settlement.
Revenue recognition
Revenue recognition
a)License revenues
The Company recognizes revenue in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”, issued by the American Institute of Certified Public Accountants (“AICPA”) in October 1997 as amended by SOP 98-9 issued in December 1998.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
The Company records product revenue from software licenses and products when persuasive evidence of an arrangement exists, the software product has been shipped, there are no significant uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is considered probable. The Company uses the residual method to recognize revenue on delivered elements when a license agreement includes one or more elements to be delivered at a future date if evidence of the fair value of all undelivered elements exists. If an undelivered element for the arrangement exists under the license arrangement, revenue related to the undelivered element is deferred based on vendor-specific objective evidence (“VSOE”) of the fair value of the undelivered element.
The Company’s multiple-element sales arrangements include arrangements where software licenses and the associated post contract customer support (“PCS”) are sold together. The Company has established VSOE of the fair value of the undelivered PCS element based on the contracted price for renewal PCS included in the original multiple element sales arrangement, as substantiated by contractual terms and the Company’s significant PCS renewal experience, from its large installed base of over 17 million users worldwide.existing worldwide base. The Company’s multiple element sales arrangements generally include rights for the customer to renew PCS after the bundled term ends. These rights are irrevocable to the customer’s benefit, are for specified prices and the customer is not subject to any economic or other penalty for failure to renew. Further, the renewal PCS options are for services comparable to the bundled PCS and cover similar terms.
It is the Company’s experience that customers generally exercise their renewal PCS option. In the renewal transaction, PCS is sold on a stand-alone basis to the licensees one year or more after the original multiple element sales arrangement. The renewal PCS price is consistent with the renewal price in the original multiple element sales arrangement although an adjustment to reflect consumer price changes is not uncommon.
If VSOE of fair value does not exist for all undelivered elements, all revenue is deferred until sufficient evidence exists or all elements have been delivered.
The Company assesses whether payment terms are customary or extended in accordance with normal practice relative to the market in which the sale is occurring. The Company’s sales arrangements generally include standard payment terms. These terms effectively relate to all customers, products, and arrangements regardless of customer type, product mix or arrangement size. The only time exceptions are made to these standard terms is on certain sales in parts of the world where local practice differs. In these jurisdictions, the Company’s customary payment terms are in line with local practice.
b)Service revenues
Service revenues consist of revenues from consulting, contracts, customer support agreements, andimplementation, training and integration services. These services contracts. Contract revenues are derivedset forth separately in the contractual arrangements such that the total price of the customer arrangement is expected to vary as a result of the inclusion or exclusion of these services. For those contracts where the services are not essential to the functionality of any other element of the transaction, the Company determines VSOE of fair value for these services based upon normal pricing and discounting practices for these services when sold separately. These consulting and implementation services contracts are primarily time and materials based contracts that are, on average, less than six months in length. Revenue from these services is recognized at the time such services are rendered as the time is incurred by the Company.
The Company also enters into contracts that are primarily fixed fee arrangements to develop applications and to providerender specific consulting services. Contract revenues are recognized under theThe percentage of completion method using a methodologyis applied to these more complex contracts that accounts for costs incurred underinvolve the contract in relationprovision of services relating to the total estimated costs under the contract, after providing for any anticipated losses under the contract. Revenues from training and integrationdesign or building of complex systems, because these services are recognizedessential to the functionality of other elements in the period in whicharrangement. Under this method, the services are performed.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
percentage of completion is calculated based on actual hours incurred compared to the estimated total hours for the services under the arrangement. For those fixed fee contracts where the services are not essential to the functionality of a software element, the proportional performance method is applied to recognize revenue. Revenues from training and integration services are recognized in the period in which these services are performed.
c) Customer support revenues
Customer support revenues consist of revenue derived from contracts to provide post contract supportPCS to license holders. These revenues are recognized ratably over the term of the contract. Advance billings of PCS are not recorded to the extent that the term of the PCS has not commenced or payment has not been received.
Deferred revenue
Deferred revenue primarily relates to support agreements which have been paid for by customers prior to the performance of those services. Generally, the services will be provided in the next twelve months.
Research and development costs
Research and development costs internally incurred in creating computer software to be sold, licensed or otherwise marketed, are expensed as incurred unless they meet the criteria for deferral and amortization, described in FASB SFAS No. 86 “Accounting for the Costs of Corporate Software to be Sold, Released, or Otherwise Marketed” (“SFAS 86”). In accordance with SFAS 86, costs related to research, design and development of products are charged to researchexpenses as incurred and development expense as incurred. Software development costs are capitalized beginning atbetween the time when a product’s technological feasibility has been established, and ending when adates that the product is availableconsidered to be technologically feasible and is considered to be ready for general release to customers. To date, completing a working model of
In the Company’s products,historical experience, the dates relating to the achievement of technological feasibility and general release of such productsthe product have substantially coincided. In addition, no significant costs are incurred subsequent to the establishment of technological feasibility. As a result to date the Company hasdoes not capitalizedcapitalize any softwareresearch and development costs since such costs have not been significant.relating to internally developed software to be sold, licensed or otherwise marketed.
Income taxes
The Company accounts for income taxes under the asset and liability method that requires the recognition of deferredin accordance with FASB SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). Deferred tax assets and liabilities for the expected future tax consequences ofarise from temporary differences between the carrying amounts and tax basisbases of assets and liabilities. Effects of changes in tax rates are recognizedliabilities and their reported amounts in the periodconsolidated financial statements that includes the enactment date. The Company provides awill result in taxable or deductible amounts in future years. These temporary differences are measured using enacted tax rates. A valuation allowance on netis recorded to reduce deferred tax assets whento the extent that management considers it is not more likely than not that such assetsa deferred tax asset will not be realized. In determining the valuation allowance, management considers factors such as the reversal of deferred income tax liabilities, projected taxable income, and the character of income tax assets and tax planning strategies. A change to these factors could impact the estimated valuation allowance and income tax expense.
In addition, the Company is subject to examinations by taxation authorities of the jurisdictions in which the Company operates in the normal course of operations. The Company regularly assesses the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provision for income and other taxes.
OPEN TEXT CORPORATION
Concentrations of credit riskNotes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
The Company maintains the majority of its cash and cash equivalents in U.S. dollar denominated Canadian federal government securities, commercial paper, or short-term, interest-bearing, investment-grade securities and demand accounts of a major Canadian chartered bank.
The Company performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral. The Company maintains allowances for potential losses, and to date, such actual losses have been within management’s expectations. No single customer accounted for more than 10% of the accounts receivable balance at June 30, 2004 and June 30, 2003.
Fair value of financial instruments
Carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable-tradepayable—trade and accrued liabilities, and income taxes payable approximate their fair value due to theirthe relatively short maturities. Available-for-sale securities are valued at fair market valueperiod of time between origination of the securities on the balance sheet date.instruments and their expected realization.
Foreign currency translation
The functional currency of the majority of the Company’s subsidiaries is the local currency. For such subsidiaries, monetary assets and liabilities denominated in foreign currencies are translated into local currencies at the year-end rate of exchange. Non-monetary assets and liabilities denominated in foreign currencies are
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
Tabular amounts in thousands, except per share data
translated at historic rates, and revenue and expenses are translated at average exchange rates prevailing during the month of the transaction. Exchange gains or losses are reflected in the consolidated statements of income.
The accounts of the Company’s self-sustaining foreign operations for which the functional currency is other than the U.S. dollar are translated into U.S. dollars using the current rate method. Assets and liabilities are translated at the year-end exchange rate, and revenue and expenses are translated at average exchange rates prevailing during the month of the transaction. GainsUnrealized gains and losses arising from the translation of the financial statements of these foreign operations are deferredaccumulated in the “foreign currency“Cumulative translation adjustment” account, included as a separate component of shareholders’ equity.
Employee stock option and share purchase plans
The Company has elected to continue to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and to present the pro forma information that is required by FASB SFAS No. 123—”Accounting123, “Accounting for Stock-Based Compensation” (“SFAS 123”). APB 25 requires compensation cost for stock-based employee compensation plans to be recognized over the vesting period of the options based on the difference, if any, on the grant date between the quoted market price of the Company’s stock and the option exercise price. NoDuring the periods presented, no stock options were issued to employees at an exercise price less than the market price of the underlying stock on the date of grant. Accordingly, no compensation costs werecost was included in net income as reported for fiscalthe years ended June 30, 2005, 2004 2003 and 2002.2003.
As of June 30, 2005 the Company offered its employees the opportunity to buy its Common Shares, through its Employee Share Purchase Plan (“ESPP”), at a purchase price that is computed as the lesser of:
| 1. | 85% of the weighted average trading price of the Common Shares in the period of five trading days immediately preceding the first business day of the purchase period; and |
| 2. | 85% of the weighted average trading price of the Common Shares in the period of five trading days immediately preceding the last business day of the purchase period. |
As of June 30, 2005, the ESPP qualified as a non-compensatory plan under APB 25 and as such no compensation cost was recognized in relation to the discount offered to employees for purchases made under the ESPP. The terms of the ESPP resulted in it being treated as a compensatory plan under SFAS 123 and as such, compensation expense was recognized under the fair value method.
In May 2005, the Board of Directors approved an amendment to the ESPP to adjust the features of the plan such that it will no longer be considered a compensatory plan under the fair value method. This amendment came into effect on July 1, 2005 (see Note 22—Subsequent Events).
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
Had compensation costexpense for the Company’s stock-based compensation plans and the employee stock purchase planits ESPP been determined using the fair value approach set forth in SFAS No. 123, the Company’s net income for the year and net income per share would have been in accordance with the pro forma amounts indicated below:
| Year ended June 30, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| (in thousands, except per share amounts) | ||||||||||||
Net income for the year | ||||||||||||
As reported | $ | 23,298 | $ | 27,757 | $ | 16,671 | ||||||
Fair value compensation cost* | (2,151 | ) | (7,087 | ) | (8,104 | ) | ||||||
Pro forma | $ | 21,147 | $ | 20,670 | $ | 8,567 | ||||||
Net income per share—basic | ||||||||||||
As reported | $ | 0.53 | $ | 0.71 | $ | 0.42 | ||||||
Pro forma | $ | 0.48 | $ | 0.53 | $ | 0.21 | ||||||
Net income per share—diluted | ||||||||||||
As reported | $ | 0.49 | $ | 0.67 | $ | 0.39 | ||||||
Pro forma | $ | 0.45 | $ | 0.50 | $ | 0.20 | ||||||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
Tabular amounts in thousands, except per share data
| Year ended June 30, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Net income for the year | ||||||||||||
As reported | $ | 20,359 | $ | 23,298 | $ | 27,757 | ||||||
Stock-based compensation | (6,035 | ) | (3,410 | ) | (7,087 | ) | ||||||
Pro forma | $ | 14,324 | $ | 19,888 | $ | 20,670 | ||||||
Earnings per share—basic | ||||||||||||
As reported | $ | 0.41 | $ | 0.53 | $ | 0.71 | ||||||
Pro forma | $ | 0.29 | $ | 0.45 | $ | 0.53 | ||||||
Earnings per share—diluted | ||||||||||||
As reported | $ | 0.39 | $ | 0.49 | $ | 0.67 | ||||||
Pro forma | $ | 0.27 | $ | 0.42 | $ | 0.50 | ||||||
The fair value of stock-based compensation calculated above is net of the tax benefit available to the Company for the exercise of options and sale of its shares by its U.S. employees.
For purposes of computing pro forma net income, the Company estimates the fair value of each stock option grant and the participant’s rights under the ESPP on the date of grant using the Black-Scholes option-pricing model. Compensation cost is recorded over the vesting period of the option and term of the ESPP. Forfeitures of stock-based compensation are accounted for in the period that the forfeiture occurs.
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, while the options issued by the Company are subject to both vesting and restrictions on transfer. In addition, option-pricing models require input of subjective assumptions including the expected stock price volatility. As a result, the Company doesn’t believe the existing models necessarily provide a reliable single measure of the fair value of the Company’s stock options. The Company uses historical volatility as a basis for projecting the expected volatility of the underlying stock and estimates the expected life of its stock options based upon historical data. The fair value of stock options granted in the periods presented was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions for the stock-based compensation plans:
| Year ended June 30, | Year ended June 30, | |||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | |||||||||||||||||||
Volatility | 60 | % | 80 | % | 80 | % | 61 | % | 60 | % | 80 | % | ||||||||||||
Risk-free interest rate | 3 | % | 6 | % | 6 | % | 3.2 | % | 3.0 | % | 6.0 | % | ||||||||||||
Expected life (in years) | 4.3 | 3.5 | 5.5 | |||||||||||||||||||||
Dividend yield | — | — | — | 0 | % | 0 | % | 0 | % | |||||||||||||||
Expected lives (in years) | 3.5 | 5.5 | 5.5 | |||||||||||||||||||||
Weighted average fair value (in dollars) | $ | 10.33 | $ | 6.34 | $ | 9.60 | $ | 8.35 | $ | 10.33 | $ | 6.34 | ||||||||||||
Restructuring charges
The Company records restructuring charges relating to contractual lease obligations and other exit costs in accordance with FASB SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 requires recognition of costs associated with an exit or disposal activity when the liability is incurred and can be measured at fair value.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
The Company records restructuring charges relating to employee termination costs in accordance with FASB SFAS No. 112, “Accounting for Post Employment Benefits” (“SFAS 112”). SFAS 112 applies to post-employment benefits provided to employees under on going benefit arrangements. In accordance with SFAS 112, the Company records such charges when the termination benefits are capable of being determined or estimated in advance, from either the provisions of the Company’s policy or from past practices, the benefits are attributable to services already rendered and the obligation relates to rights that vest or accumulate.
The recognition of restructuring charges requires management to make certain judgments regarding the nature, timing and amount associated with the planned restructuring activities, including estimating sublease income and the net recoverable amount of equipment to be disposed of. At the end of each reporting period, the Company evaluates the appropriateness of the remaining accrued balances.
Litigation
The Company is a party, from time to time, in legal proceedings. In these cases, management assesses the likelihood that a loss will result, as well as the amount of such loss and the financial statements provide for the Company’s best estimate of such losses. To the extent that any of these legal proceedings are resolved and result in the Company being required to pay an amount in excess of what has been provided for in the financial statements, the Company would be required to record, against earnings, such excess at that time. If the resolution resulted in a gain to the Company, or a loss less than that provided for, such gain is recognized when received or receivable.
Net income per share
Basic net income per share is computed using the weighted average number of common shares outstanding including contingently issuable shares where the contingency has been resolved. Diluted net income per share is computed using the weighted average number of common shares and stock equivalents (usingoutstanding using the treasury stock method) outstandingmethod during the year.year (see Note 18—Net Income Per Share).
Recently Issued Accounting Pronouncementsissued accounting pronouncements
Consolidation of Variable Interest Entities
In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 requires all companies with variable interests in entities created after January 31, 2003 to apply its provisions to those entities immediately. In December 2003, the FASB issued a revised Interpretation “FIN 46R”. Under the revised Interpretation, an entity deemed to be a business, based on certain specified criteria, need not be evaluated to determine if it is a Variable Interest Entity. The Company must apply the provisions to variable interests held in all variable interest entities during the year ended on June 30, 2004. Adoption of FIN 46changes and FIN 46R during fiscal 2004 did not have an impact on the Company’s financial condition or results of operations.
Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equityerror corrections
In May 2003,2005, the FASB issued Statement ofSFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces Accounting Principles Board Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Accounting Standards 150 (“SFAS 150”) “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”Statements”. SFAS 150 established154 provides guidance on the accounting for and reporting of changes in accounting principles and error corrections. SFAS 154 requires retrospective application to prior period’s financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. Certain disclosures are also required for classifyingrestatements due to correction of an error. SFAS 154 is effective for accounting changes and measuring as liabilities certaincorrections of errors, made in fiscal years beginning after December 15, 2005. The impact that the adoption of SFAS 154 will have on the Company’s results of operations and financial instruments that have characteristicscondition will depend on the nature of liabilitiesfuture accounting changes and equity.the nature of transitional guidance provided in future accounting pronouncements.
Share-Based compensation
In December 2004, the FASB issued SFAS No. 123R, “Share Based Payment” (“SFAS 123R”). The new statement is effective for Open Text for its fiscal yearyears beginning July 1, 2003. Adoption ofon or after June 15, 2005. SFAS 150 did not have a material impact on123R addresses the Company’s financial condition or results of operations.
Accounting for Revenue Arrangements and Multiple Deliverables
The Emerging Issues Task Force released Issue No. 00-21 “Accounting for Revenue Arrangements and Multiple Deliverables” in May 2003. Issue No. 00-21 addresses how to account for arrangements that may involve delivery or performance of multiple products, services and or rights to use assets. Issue No. 00-21 is effective for Open Text for its fiscal year beginning July 1, 2003. Adoption of Issue No. 00-21 did not have a material impact on the Company’s financial condition or results of operations.accounting
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
Restructuring Liabilities
The Company followsfor transactions in which an enterprise receives services in exchange for (a) equity instruments of the guidance of SFAS No. 146, “Accounting for Costs Associated with Exitenterprise or Disposal Activities”, which addresses accounting for restructuring and similar costs. SFAS No. 146 requires(b) liabilities that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. In addition, under SFAS No. 146 the restructuring liability is measured and recorded at fair value. This statement was effective for exit and disposal activities initiated after December 31, 2002. The Company’s restructuring efforts in fiscal 2004 were accounted for in accordance with SFAS No. 146.
Accounting for Asset Retirement Obligations
In August 2001, the FASB issued SFAS No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations.” SFAS 143 requires entities to recordare based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. This Statement eliminates the ability to account for share-based compensation transactions using APB 25 and requires that such transactions be accounted for using a liabilityfair-value based method. As required by SFAS 123R, the Company will be required to recognize an expense for an asset retirement obligation incompensation cost related to share-based payment arrangements including stock options and compensatory employee stock purchase plans. The new rules will be effective for the period in which it is incurred.Company for reporting periods beginning July 1, 2005. The Company adopted SFAS No. 143 on July 1, 2002. Adoptingis currently evaluating option valuation methodologies and assumptions in light of the provisionsevolving accounting standards related to share-based payments, and also the impact of other aspects of SFAS 143 did not have a material impact on123R, including transitional adoption alternatives.
In March 2005, the Company’s financial condition or resultsSecurities and Exchange Commission (“SEC”) released SEC Staff Accounting Bulletin No. 107, “Share-Based Payments” (“SAB 107”). SAB 107 provides the SEC staff position regarding the application of SFAS 123R. SAB 107 contains interpretive guidance related to the interaction between SFAS 123R and certain SEC rules and regulations, as well as provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also highlights the importance of disclosures made related to the accounting for share-based payment transactions. The Company is currently evaluating SAB 107 and will be incorporating it as part of its operations.adoption of SFAS 123R.
The impact of applying one of the fair-value based methods of accounting for stock options, the Black Scholes method, over the periods presented is disclosed earlier in this note.
NOTE 3—CAPITAL ASSETS
| June 30, 2004 | As of June 30, 2005 | |||||||||||||||||
| Cost | Accumulated Depreciation | Net | Cost | Accumulated Depreciation | Net | |||||||||||||
Furniture and fixtures | $ | 8,615 | $ | 5,639 | $ | 2,976 | $ | 9,635 | $ | 6,998 | $ | 2,637 | ||||||
Office equipment | 3,259 | 1,550 | 1,709 | 5,158 | 3,731 | 1,427 | ||||||||||||
Computer hardware | 39,249 | 31,267 | 7,982 | 52,054 | 40,277 | 11,777 | ||||||||||||
Computer software | 11,551 | 6,908 | 4,643 | 12,842 | 9,514 | 3,328 | ||||||||||||
Leasehold improvements | 9,748 | 2,565 | 7,183 | 12,695 | 5,473 | 7,222 | ||||||||||||
Building under construction | 185 | — | 185 | |||||||||||||||
Building | 9,679 | — | 9,679 | |||||||||||||||
| $ | 72,607 | $ | 47,929 | $ | 24,678 | $ | 102,063 | $ | 65,993 | $ | 36,070 | |||||||
| June 30, 2003 | As of June 30, 2004 | |||||||||||||||||
| Cost | Accumulated Depreciation | Net | Cost | Accumulated Depreciation | Net | |||||||||||||
Furniture and fixtures | $ | 5,821 | $ | 4,638 | $ | 1,183 | $ | 8,615 | $ | 5,639 | $ | 2,976 | ||||||
Office equipment | 1,650 | 1,000 | 650 | 5,330 | 3,610 | 1,720 | ||||||||||||
Computer hardware | 31,143 | 25,579 | 5,564 | 41,888 | 33,896 | 7,992 | ||||||||||||
Computer software | 6,556 | 5,071 | 1,485 | 12,230 | 7,591 | 4,639 | ||||||||||||
Leasehold improvements | 2,970 | 1,841 | 1,129 | 11,733 | 4,567 | 7,166 | ||||||||||||
Building | 185 | — | 185 | |||||||||||||||
| $ | 48,140 | $ | 38,129 | $ | 10,011 | $ | 79,981 | $ | 55,303 | $ | 24,678 | |||||||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
The cost of the building relates to the Company’s construction of a building in Waterloo, Ontario. Additions to the building amounted to $9.5 million during Fiscal 2005, of which $1.5 million and $1.7 million are included in accounts payable and accrued liabilities, respectively, at June 30, 2005. Construction of the building is currently in progress and therefore depreciation has not yet commenced. Use of this facility, as well as depreciation, is expected to commence in the second quarter of the next fiscal period.
NOTE 4—GOODWILL
Goodwill is recorded when the consideration paid for an acquisition of a business exceeds the fair value of identifiable net tangible and intangible assets. The following table summarizes the changes in goodwill over the past two fiscal years:since June 30, 2003:
Balance, July 1, 2002 | $ | 24,587 | |
Goodwill recorded during fiscal 2003: | |||
Corechange | 1,901 | ||
Eloquent | 342 | ||
Centrinity | 4,551 | ||
Adjustments to purchase price allocations for prior acquisitions and foreign exchange impact | 920 | ||
Balance, June 30, 2003 | 32,301 | ||
Goodwill recorded during fiscal 2004: | |||
IXOS | 167,713 | ||
Gauss | 16,965 | ||
Domea | 5,058 | ||
Other acquisitions | 990 | ||
Adjustments to purchase price allocations for prior acquisitions and foreign exchange impact | 725 | ||
Balance, June 30, 2004 | $ | 223,752 | |
Balance as of June 30, 2003 | $ | 32,301 | |
Goodwill recorded during Fiscal 2004: | |||
IXOS | 167,713 | ||
Gauss | 16,965 | ||
Domea | 5,058 | ||
Pallas | 990 | ||
Adjustments to purchase price allocation for prior acquisitions and foreign exchange impact | 725 | ||
Balance as of June 30, 2004 | 223,752 | ||
Goodwill recorded during Fiscal 2005: | |||
Vista | 8,714 | ||
Artesia | 2,136 | ||
Optura | 2,352 | ||
Adjustments to purchase price allocation for prior acquisitions and foreign exchange impact | 6,137 | ||
Balance as of June 30, 2005 | $ | 243,091 | |
NOTE 5—ACQUIRED INTANGIBLE ASSETS
| Technology Assets | Customer Assets | Total | ||||||||||
Net Book Value, July 1, 2002 | $ | 5,380 | $ | — | $ | 5,380 | ||||||
Assets acquired during fiscal 2003: | ||||||||||||
Corechange | 4,600 | 2,000 | 6,600 | |||||||||
Centrinity | 4,000 | 2,400 | 6,400 | |||||||||
Eloquent | 2,300 | 800 | 3,100 | |||||||||
Patent | 1,246 | — | 1,246 | |||||||||
Other | 759 | 268 | 1,027 | |||||||||
Amortization expense | (2,722 | ) | (514 | ) | (3,236 | ) | ||||||
Net Book Value, June 30, 2003 | 15,563 | 4,954 | 20,517 | |||||||||
Assets acquired during fiscal 2004: | ||||||||||||
IXOS | 60,758 | 32,913 | 93,671 | |||||||||
Gauss | 5,500 | 4,200 | 9,700 | |||||||||
Domea | 1,700 | 1,800 | 3,500 | |||||||||
Other | 506 | — | 506 | |||||||||
Amortization expense | (7,211 | ) | (4,095 | ) | (11,306 | ) | ||||||
Net Book Value, June 30, 2004 | $ | 76,816 | $ | 39,772 | $ | 116,588 | ||||||
Technology Assets | Customer Assets | Total | ||||||||||
Net book value as of June 30, 2003 | $ | 15,563 | $ | 4,954 | $ | 20,517 | ||||||
Assets acquired during Fiscal 2004: | ||||||||||||
IXOS | 60,758 | 32,913 | 93,671 | |||||||||
Gauss | 5,500 | 4,200 | 9,700 | |||||||||
Domea | 1,700 | 1,800 | 3,500 | |||||||||
Other, including foreign exchange impact | 506 | — | 506 | |||||||||
Amortization expense | (7,211 | ) | (4,095 | ) | (11,306 | ) | ||||||
Net book value as of June 30, 2004 | 76,816 | 39,772 | 116,588 | |||||||||
Assets acquired during Fiscal 2005: | ||||||||||||
Vista | 8,660 | 11,700 | 20,360 | |||||||||
Artesia | 3,300 | 1,600 | 4,900 | |||||||||
Optura | 1,300 | 700 | 2,000 | |||||||||
Other, including foreign exchange impact | 2,207 | 6,335 | 8,542 | |||||||||
Amortization expense | (16,175 | ) | (8,234 | ) | (24,409 | ) | ||||||
Net book value as of June 30, 2005 | $ | 76,108 | $ | 51,873 | $ | 127,981 | ||||||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
The weighted averagerange of amortization periodperiods for intangible assets is 75 to 10 years.
Certain of the acquired intangible asset allocations for fiscal 2004 represent management’s preliminary estimates. The Company has retained the services of an independent valuation expert to assist in this allocation, and expects that this valuation will be finalized early in fiscal 2005. Changes may occur from these preliminary estimates and those changes may be material.
The following table shows the estimated amortization expense for each of the next 5five years, assuming no further additions to acquired intangible assets are made:
| Year ending June 30, | Years ending June 30, | |||||
2005 | $ | 20,043 | ||||
2006 | 19,107 | $ | 26,497 | |||
2007 | 19,008 | 26,426 | ||||
2008 | 17,188 | 25,645 | ||||
2009 | 16,038 | 19,871 | ||||
2010 | 8,496 | |||||
Total | $ | 91,384 | $ | 106,935 | ||
Certain of the intangible assets acquired during Fiscal 2005 have been recorded based on management’s preliminary estimates of fair value. Changes may occur from these preliminary estimates and those changes may be material.
NOTE 6—OTHER ASSETS
| June 30, | As of June 30, | |||||||||||
| 2004 | 2003 | 2005 | 2004 | |||||||||
Deposits (note 10) | $ | 5,287 | $ | 2,090 | ||||||||
Restricted cash | $ | 2,442 | $ | 700 | ||||||||
Deposits | 2,246 | 2,487 | ||||||||||
Loan receivable | 404 | 972 | 266 | 404 | ||||||||
Long-term prepaid expenses | 379 | — | ||||||||||
Other | 28 | — | 65 | 28 | ||||||||
| $ | 5,719 | $ | 3,062 | $ | 5,398 | $ | 3,619 | |||||
The restricted cash relates to cash on hand that has been restricted in accordance with facility lease agreements or acquisition related escrow agreements.
NOTE 7—ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance of allowance for doubtful accounts as at June 30, 2001 | $ | 1,458 | ||||||
Balance of allowance for doubtful accounts as of June 30, 2002 | $ | 1,458 | ||||||
Bad debt expense for the year | 1,655 | 537 | ||||||
Write-off/adjustments | (1,655 | ) | (62 | ) | ||||
Balance of allowance for doubtful accounts as at June 30, 2002 | 1,458 | |||||||
Balance of allowance for doubtful accounts as of June 30, 2003 | 1,933 | |||||||
Bad debt expense for the year | 537 | (940 | ) | |||||
Write-off/adjustments | (62 | ) | 2,635 | |||||
Balance of allowance for doubtful accounts as at June 30, 2003 | 1,933 | |||||||
Balance of allowance for doubtful accounts as of June 30, 2004 | 3,628 | |||||||
Bad debt expense for the year | (940 | ) | 496 | |||||
Write-off/adjustments | 2,635 | (999 | ) | |||||
Balance of allowance for doubtful accounts as at June 30, 2004 | $ | 3,628 | ||||||
Balance of allowance for doubtful accounts as of June 30, 2005 | $ | 3,125 | ||||||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
NOTE 8—BANK INDEBTEDNESS
The Company has a CDN $10.0 million (USD $7.4(U.S. $8.1 million) line of credit with a Canadian chartered bank, under which no borrowings were outstanding at June 30, 20042005 and 2003.2004. The line of credit bears interest at the lender’s prime rate plus 0.5%. and is cancelable at any time at the option of the bank. The Company has provided allpledged certain of its assets including an assignment of accounts receivable as collateral for this line of credit. During 2004, 2003, and 2002 borrowings and interest cost on bank indebtedness were insignificant.
NOTE 9—ACCOUNTS PAYABLE—TRADE AND ACCRUED LIABILITIES
| June 30, | ||||||
| 2004 | 2003 | |||||
Accounts payable | $ | 18,050 | $ | 4,035 | ||
Short-term loan | 2,189 | — | ||||
Accrued liabilities | 36,905 | 12,693 | ||||
Amounts payable for acquisitions | 6,734 | 3,443 | ||||
Accrued salaries and commissions | 28,583 | 10,403 | ||||
Other liabilities | 1,614 | 1,022 | ||||
| $ | 94,075 | $ | 31,596 | |||
Current liabilities
Accounts payable and accrued liabilities are comprised of the followingShort-term loan:
IXOS’ subsidiary in Japan has a short-term loan totaling approximately $2.2 million as of June 30, 2004. The weighted average interest rate on these short-term borrowings was 1.21% as of June 30, 2004. The loan is renewed monthly. There are no significant bank covenants associated with these borrowings.
| As of June 30, 2005 | As of June 30, 2004 | |||||
Accounts payable—trade | $ | 18,509 | $ | 18,050 | ||
Accrued salaries and commissions | 18,976 | 25,666 | ||||
Accrued liabilities | 33,736 | 19,603 | ||||
Amounts payable in respect of restructuring | 920 | 5,918 | ||||
Amounts payable in respect of acquisitions and acquisition-related accruals | 8,327 | 22,649 | ||||
Short-term loan | — | 2,189 | ||||
| $ | 80,468 | $ | 94,075 | |||
NOTE 10—LONG-TERM ACCRUED LIABILITIESLong-term liabilities
| June 30, | ||||||
| 2004 | 2003 | |||||
Pension liability | $ | 3,552 | $ | — | ||
Excess facility obligations | 16,159 | 4,912 | ||||
Asset retirement obligations | 3,909 | — | ||||
| $ | 23,620 | $ | 4,912 | |||
| As of June 30, 2005 | As of June 30, 2004 | |||||
Pension liabilities | $ | 625 | $ | 1,452 | ||
Amounts payable in respect of restructuring | 1,125 | — | ||||
Amounts payable in respect of acquisitions and acquisition-related accruals | 18,694 | 16,159 | ||||
Other accrued liabilities | 239 | — | ||||
Asset retirement obligations | 4,896 | 3,909 | ||||
| $ | 25,579 | $ | 21,520 | |||
Pension liabilityliabilities
IXOS, in which the Company acquired a controlling interest in March 2004, has pension commitments to employees as well as to current and previous members of its Executive Board. The actuarial cost method used in determining the net periodic pension cost is the projected unit credit method. The liabilities and annual income or expense of the Company’s pension plan are determined using methodologies that involve various actuarial assumptions, the most significant of which are the discount rate and the long-term rate of return on assets. The Company’s policy is to deposit amounts with an insurance company to cover the actuarial present value of the expected retirement benefits. The total held in short-term investments atas of June 30, 2005 was $2.3 million (June 30, 2004 was– $2.1 million. These amounts are included in “other assets”. The amounts are independent ofmillion), while the defined benefit plan and do not constitute assets of the plan. The fair value of the pension obligation atas of June 30, 2005 was $2.9 million (June 30, 2004 was– $3.6 million.million).
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
Excess facility obligations and accruals relating to acquisitions
The Company has accrued for the cost of excess facilities both in connection with its fiscalFiscal 2004 restructuring, as well as severalwith a number of its acquisitions. These accruals give effect torepresent the Company’s best estimate in respect of future sub-lease income.income and costs incurred to achieve sub-tenancy. These liabilities have been recorded using present value discounting techniques and will be discharged over the term of the respective leases. The difference between the present value and actual cash paid for the excess facility will be charged to other income over the terms of the leases ranging between several months to 17 years. To the extent that the amount accrued is in excess of the estimated ultimate obligation, goodwill recognized on the acquisition will be reduced.
The Company has also accrued for costs relating to employee terminations which include a reduction of IXOS’s workforce. The actions related to these terminations were substantively complete as of June 30, 2005.
Transaction-related costs include amounts provided for certain pre-acquisition contingencies.
Of the $27.0 million of acquisition accruals presented below approximately $8.3 million is due within the next 12 months.
FISCAL 2005
The following table summarizes the activity with respect to the Company’s acquisition accruals during the year ended June 30, 2005.
| Balance June 30, 2004 | Additions | Usage/Foreign Exchange Adjustments | Adjustments to Goodwill | Balance June 30, 2005 | |||||||||||||
IXOS | |||||||||||||||||
Employee termination costs | $ | 7,438 | $ | — | $ | (6,850 | ) | $ | (250 | ) | $ | 338 | |||||
Excess facilities | 19,930 | — | (655 | ) | (2,001 | ) | 17,274 | ||||||||||
Transaction-related costs | 3,438 | — | (1,586 | ) | 315 | 2,167 | |||||||||||
| 30,806 | — | (9,091 | ) | (1,936 | ) | 19,779 | |||||||||||
Gauss | |||||||||||||||||
Employee termination costs | 214 | — | (135 | ) | (79 | ) | — | ||||||||||
Excess facilities | 498 | — | 74 | (312 | ) | 260 | |||||||||||
Transaction-related costs | — | 500 | (202 | ) | — | 298 | |||||||||||
| 712 | 500 | (263 | ) | (391 | ) | 558 | |||||||||||
Domea | |||||||||||||||||
Transaction-related costs | 15 | 25 | (40 | ) | — | — | |||||||||||
| 15 | 25 | (40 | ) | — | — | ||||||||||||
Corechange | |||||||||||||||||
Excess facilities | 551 | — | (285 | ) | (266 | ) | — | ||||||||||
Transaction-related costs | 125 | — | (31 | ) | (94 | ) | — | ||||||||||
| 676 | — | (316 | ) | (360 | ) | — | |||||||||||
Eloquent | |||||||||||||||||
Transaction-related costs | 500 | — | (13 | ) | — | 487 | |||||||||||
| 500 | — | (13 | ) | — | 487 | ||||||||||||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
| Balance June 30, 2004 | Additions | Usage/Foreign Exchange Adjustments | Adjustments to Goodwill | Balance June 30, 2005 | |||||||||||||
Centrinity | |||||||||||||||||
Excess facilities | 5,483 | — | (1,555 | ) | — | 3,928 | |||||||||||
Transaction-related costs | 500 | — | 99 | 52 | 651 | ||||||||||||
| 5,983 | — | (1,456 | ) | 52 | 4,579 | ||||||||||||
Open Image | |||||||||||||||||
Transaction-related costs | 116 | — | 19 | — | 135 | ||||||||||||
| 116 | — | 19 | — | 135 | |||||||||||||
Artesia | |||||||||||||||||
Employee termination costs | — | 270 | — | (220 | ) | 50 | |||||||||||
Excess facilities | — | 1,098 | (178 | ) | (99 | ) | 821 | ||||||||||
Transaction-related costs | — | 380 | (301 | ) | — | 79 | |||||||||||
| — | 1,748 | (479 | ) | (319 | ) | 950 | |||||||||||
Vista | |||||||||||||||||
Transaction-related costs | — | 480 | (359 | ) | — | 121 | |||||||||||
| — | 480 | (359 | ) | — | 121 | ||||||||||||
Optura | |||||||||||||||||
Employee termination costs | — | 100 | — | (100 | ) | — | |||||||||||
Excess facilities | — | 138 | — | 34 | 172 | ||||||||||||
Transaction-related costs | — | 206 | (115 | ) | 149 | 240 | |||||||||||
| — | 444 | (115 | ) | 83 | 412 | ||||||||||||
Totals | |||||||||||||||||
Employee termination costs | 7,652 | 370 | (6,985 | ) | (649 | ) | 388 | ||||||||||
Excess facilities | 26,462 | 1,236 | (2,599 | ) | (2,644 | ) | 22,455 | ||||||||||
Transaction-related costs | 4,694 | 1,591 | (2,529 | ) | 422 | 4,178 | |||||||||||
| $ | 38,808 | $ | 3,197 | $ | (12,113 | ) | $ | (2,871 | ) | $ | 27,021 | ||||||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
FISCAL 2004
| Balance June 30, 2003 | Additions | Usage/Foreign Exchange Adjustments | Adjustments to Goodwill | Balance June 30, 2004 | |||||||||||||
IXOS | |||||||||||||||||
Employee termination costs | $ | — | $ | 12,413 | $ | (4,975 | ) | $ | — | $ | 7,438 | ||||||
Excess facilities | — | 19,981 | (51 | ) | — | 19,930 | |||||||||||
Transaction-related costs | — | 11,911 | (8,473 | ) | — | 3,438 | |||||||||||
| — | 44,305 | (13,499 | ) | — | 30,806 | ||||||||||||
Gauss | |||||||||||||||||
Employee termination costs | — | 1,117 | (903 | ) | — | 214 | |||||||||||
Excess facilities | — | 1,127 | (629 | ) | — | 498 | |||||||||||
Transaction-related costs | — | 1,996 | (1,996 | ) | — | — | |||||||||||
| — | 4,240 | (3,528 | ) | — | 712 | ||||||||||||
Domea | |||||||||||||||||
Transaction-related costs | — | 350 | (335 | ) | — | 15 | |||||||||||
| — | 350 | (335 | ) | — | 15 | ||||||||||||
Corechange | |||||||||||||||||
Employee termination costs | 256 | — | (256 | ) | — | — | |||||||||||
Excess facilities | 1,377 | — | (826 | ) | — | 551 | |||||||||||
Transaction-related costs | 496 | — | (71 | ) | (300 | ) | 125 | ||||||||||
| 2,129 | — | (1,153 | ) | (300 | ) | 676 | |||||||||||
Eloquent | |||||||||||||||||
Employee termination costs | 41 | — | (41 | ) | — | — | |||||||||||
Transaction-related costs | 646 | — | (146 | ) | — | 500 | |||||||||||
| 687 | — | (187 | ) | — | 500 | ||||||||||||
Centrinity | |||||||||||||||||
Employee termination costs | 718 | — | (718 | ) | — | — | |||||||||||
Excess facilities | 6,563 | — | (1,080 | ) | — | 5,483 | |||||||||||
Transaction-related costs | 970 | — | (191 | ) | (279 | ) | 500 | ||||||||||
| 8,251 | — | (1,989 | ) | (279 | ) | 5,983 | |||||||||||
Open Image | |||||||||||||||||
Transaction-related costs | 116 | — | — | — | 116 | ||||||||||||
| 116 | — | — | — | 116 | |||||||||||||
Totals | |||||||||||||||||
Employee termination costs | 1,015 | 13,530 | (6,893 | ) | — | 7,652 | |||||||||||
Excess facilities | 7,940 | 21,108 | (2,586 | ) | — | 26,462 | |||||||||||
Transaction-related costs | 2,228 | 14,257 | (11,212 | ) | (579 | ) | 4,694 | ||||||||||
| $ | 11,183 | $ | 48,895 | $ | (20,691 | ) | $ | (579 | ) | $ | 38,808 | ||||||
Certain 2004 and 2003 amounts in the table above have been reclassified to conform to the presentation adopted in 2005. In particular, $2.3 million of acquisition related accruals that were included primarily in the original purchase price allocation for Centrinity in the Company’s Annual Report in Form 10-K for the fiscal year ended June 30, 2004, were not included the acquisition accruals note disclosure for the year ended June 30,
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
2004. This disclosure was amended in 2005. No adjustment to goodwill or accrued liabilities was required as the amendment only impacted note disclosure.
Asset retirement obligations
The Company is required to return certain of its leased facilities to their original state at the conclusion of the lease. The Company has accounted for such obligations in accordance with SFAS 143. At June 30, 2004,2005, the present value of this obligation was $3.9$4.9 million with an undiscounted value of $6.8 million. These leases were primarily assumed in connection with the IXOS acquisition and consequently thisacquisition. In 2004, the liability was recorded as partrelated to the IXOS asset retirement obligation, in the amount of the purchase price equation, when a liability of $3.8$3.9 million, was recorded. The changeincluded in the liability since the date of acquisition relates to the accretion of interest againsttable above. To conform with current year presentation, asset retirement obligation amounts have been excluded from this liability subsequent to the acquisition.table and are included separately under long-term liabilities in this note.
NOTE 11—10—SHARE CAPITAL
The authorized share capital of the Company includes an unlimited number of Common Shares and an unlimited number of first preference shares. No preference shares arehave been issued.
During fiscalFiscal 2005, the Company repurchased for cancellation 3,558,700 Common Shares at a cost of $63.8 million, of which $29.9 million has been charged to share capital and $33.9 million has been charged to accumulated deficit.
During Fiscal 2004, the Company did not repurchase any common sharesCommon Shares for cancellation. On October 8, 2003, the Company declared a two-for-one split of the Company’s Common Shares effected by means of a stock dividend. The stock split doubled the number of the Company’s outstanding Common Shares. Share certificates representing the stock dividend were mailed on or after October 28, 2003 to shareholders of record as of the close of business on October 22, 2003. All of the share and per share information presented in these Annual Financial Statementsthe consolidated financial statements reflects the stock dividend.dividend on a retroactive basis.
During fiscalFiscal 2003, the Company repurchased for cancellation 1,511,400 common sharesCommon Shares at a cost of $17.3 million, of which $7.7 million has been charged to share capital and $9.6 million has been charged to accumulated deficit.
During fiscal 2002,The unexercised warrants issued by the Company repurchased for cancellation 1,240,400 common shares atin connection with the acquisition of IXOS expired on March 11, 2005, and the rights of the holders to acquire Common Shares thereunder ceased and terminated. As a costresult, the carrying value assigned to the 2,376,681 unexercised expired warrants in the amount of $13.8 million, of which $6.3$22.3 million has been charged to sharereclassified as additional paid-in capital and $7.5 million has been charged to accumulated deficit.within shareholders’ equity.
NOTE 12—11—OPTION PLANS
A summary of the Company’s various Stock Option Plans is set forth below. All numbers shown in the chart below have been adjusted to account for the 2:1two-for-one stock split that occurred on October 22, 2003.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
1995 | 1995 | 1995 | 1995 | 1998 | Centrinity | IXOS | Gauss | 1995 “Restated” Flexible Stock Incentive Plan | 1995 Replacement Stock Option Plan | 1995 Supplementary Stock Option Plan | 1995 Directors Stock Option Plan | 1998 Stock Option Plan | Centrinity Stock Option Plan | Gauss Stock Option Plan | IXOS Stock Option Plan | 2004 Stock Option Plan | Vista Stock Option Plan | Artesia Stock Option Plan | ||||||||||||||||||||
Date of Inception | Jun-95 | Oct-95 | Oct-95 | Oct-95 | Jun-98 | Jan-03 | Mar-04 | Jan-04 | ||||||||||||||||||||||||||||||
Date of inception | Jun-95 | Oct-95 | Oct-95 | Oct-95 | Jun-98 | Jan-03 | Jan-04 | Mar-04 | Oct-04 | Sep-04 | Sep-04 | |||||||||||||||||||||||||||
Eligibility | Employees, officers, directors, and consultants | Employees, officers, directors, and consultants of Odesta | Former employees and directors of Odesta | Eligible non-employee directors (1) | Eligible employees and directors, as determined by the Board of Directors | Eligible employees, consultants and directors, as determined by the Board of Directors | Eligible employees as determined by the Board of Directors | Eligible employees as determined by the Board of Directors | Employees, officers, directors, and consultants | Employees, officers, directors, and consultants of Odesta | Former employees and directors of Odesta | Eligible non- employee directors (1) | Eligible employees and directors, as determined by the Board of Directors | Eligible employees, consultants and directors, as determined by the Board of Directors | Eligible employees as determined by the Board of Directors | Eligible employees as determined by the Board of Directors | Eligible employees, as determined by the Board of Directors | Former employees, and consultants of Quest Software Inc. | Eligible employees, and consultants of Artesia Technologies Inc. | |||||||||||||||||||
Options granted to date | 12,778,750 | 1,096,498 | 715,000 | 1,048,000 | 7,494,290 | 414,968 | 210,000 | 51,000 | 12,778,750 | 1,096,498 | 715,000 | 1,048,000 | 7,686,290 | 414,968 | 51,000 | 210,000 | 710,000 | 43,500 | 20,000 | |||||||||||||||||||
Options cancelled to date | (3,829,198) | (2,418) | (177,750) | (286,000) | (2,147,940) | (8,000) | 0 | 0 | (3,895,367) | (2,418) | (177,750) | (286,000) | (2,237,690) | (8,000) | (3,000) | (67,500) | (13,500) | (1,000) | — | |||||||||||||||||||
Options exercised to date | (8,105,864) | (1,094,080) | (476,550) | (508,500) | (1,989,474) | (33,751) | 0 | 0 | (8,296,803) | (1,094,080) | (476,900) | (508,500) | (2,136,124) | (39,100) | — | — | — | — | — | |||||||||||||||||||
Options outstanding | 843,688 | — | 60,700 | 253,500 | 3,356,876 | 373,217 | 210,000 | 51,000 | 586,580 | — | 60,350 | 253,500 | 3,312,476 | 367,868 | 48,000 | 142,500 | 696,500 | 42,500 | 20,000 | |||||||||||||||||||
Termination grace periods | Immediately “for cause”; 90 days for any other reason | Immediately “for cause”; 90 days for any other reason | 1 year due to death; 90 days for any other reason | Immediately “for cause”; 3 months for any other reason | Immediately “for cause”; 90 days for any other reason | Immediately “for cause”; 90 days for any other reason; 180 days due to death | Immediately “for cause”; 90 days for any other reason; 180 days due to death | Immediately “for cause”; 90 days for any other reason; 180 days due to death | Immediately “for cause”; 90 days for any other reason | Immediately “for cause”; 90 days for any other reason | 1 year due to death; 90 days for any other reason | Immediately “for cause”; 3 months for any other reason | Immediately “for cause”; 90 days for any other reason | Immediately “for cause”; 90 days for any other reason; 180 days due to death | Immediately “for cause”; 90 days for any other reason; 180 days due to death | Immediately “for cause”; 90 days for any other reason; 180 days due to death | Immediately “for cause”; 90 days for any other reason; 180 days due to death | Immediately “for cause”; 90 days for any other reason; 180 days due to death | Immediately “for cause”; 90 days for any other reason; 180 days due to death | |||||||||||||||||||
Vesting schedule | Over a 4 or 5 year period; options exercisable up to 7 years from grant date | Vest over a 3 year period; options exercisable up to 10 years from grant date | Vest over a 2 year period; options exercisable up to 10 years from grant date | Determined by Plan Administrator (2) | Determined by Plan Administrator (2) | Over a 4 year period, unless otherwise specified | Over a 4 year period, unless otherwise specified | Over a 4 year period, unless otherwise specified | Over a 4 or 5 year period; options exercisable up to 10 years from grant date | Vest over a 3 year period; options exercisable up to 10 years from grant date | Vest over a 2 year period; options exercisable up to 10 years from grant date | Determined by Plan Administrator (2) | Determined by Plan Administrator (2) | Over a 4 year period, unless otherwise specified | Over a 4 year period, unless otherwise specified | Over a 4 year period, unless otherwise specified | Determined by the Company. If not specified it is 25% per year | Determined by the Company. If not specified it is 25% per year | Determined by the Company. If not specified it is 25% per year | |||||||||||||||||||
Exercise price range (average) | $2.13 - $6.10 ($3.69) | N/A | $2.13 - $2.13 ($2.13) | $6.45 - $7.41 ($7.07) | $6.09 - $26.24 ($11.59) | $12.09 - $13.50 ($12.36) | $26.24 - $26.24 ($26.24) | $26.24 - $26.24 ($26.24) | $2.13 – $5.94 | n/a | $2.13 – $2.13 ($2.13) | $6.45 – $7.41 ($7.07) | $6.09 – $26.24 ($11.94) | $12.09 – $13.50 ($12.35) | $26.24 – $26.24 ($26.24) | $26.24 – $26.24 ($26.24) | $14.61 – $20.71 ($16.35) | $17.99 – $17.99 ($17.99) | $17.99 – $17.99 ($17.99) | |||||||||||||||||||
Expiration dates | 10/12/2005 to 1/27/2008 | N/A | 9/17/2006 | 9/17/2007 to 3/5/2008 | 8/14/2008 to 5/10/2014 | 11/1/2012 to 1/28/2013 | 1/27/2014 | 1/27/2014 | 10/12/2005 to 1/27/2008 | n/a | 9/17/2006 | 9/17/2007 to 3/5/2008 | 8/14/2008 to 11/3/2014 | 11/1/2012 to 1/28/2013 | 1/27/2014 | 1/27/2014 | 12/9/2011 to 5/9/2012 | 9/3/2010 to 9/3/2013 | 9/3/2010 to 9/3/2013 | |||||||||||||||||||
| (1) | The Plan Administrator determined the non-employee directors of the Company to whom options are granted, the number of Common Shares subject to each option, the exercise price and vesting schedule of each option. |
| (2) | Representing the Board of Directors of the Company or, if established and duly authorized to act, the Executive Committee of the Board of Directors of the Company. |
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
Option Exchange Program
On September 10, 1996, the Board of Directors authorized an option exchange program (the “Program”) whereby employees who have been granted options to acquire Common Shares of the Company under the 1995 Flexible Stock Incentive Plan (the “Flexible Plan”) and the 1995 Supplementary Stock Option Plan (the “Supplementary Plan”) were permitted to exchange those options on a one-for-one basis, for an option to acquire Common Shares of the Company with an exercise price of $4.25 (the “Exchange Options”). This was subsequently approved by the shareholders. The Exchange Options vest and become exercisable, as to 10% of the Common Shares subject to option, the later of six months after the date of grant or the date the original option was scheduled to first vest (the “initial vesting date”), as to the next 10% of the Common Shares subject to option, six months after the initial vesting date, and as to the remainder of the Common Shares subject to option, 5% at the end of each quarter following one year after the initial vesting date.
A total of 510,452 options to acquire Common Shares of the Company from the Flexible and Supplementary plans were eligible for exchange under the Program with an average exercise price of $12.89. A total of 140,830 options under the Flexible Plan with a weighted average exercise price of $10.90 were exchanged for 140,830 Exchange Options and 335,000 options under the Supplementary Plan with an exercise price of $14.00 were exchanged for 335,000 Exchange Options.
Summary of Outstanding Stock Optionsoutstanding stock options
As of June 30, 2004,2005, options to purchase an aggregate of 5,148,9815,530,274 Common Shares were outstanding under all of the Company’s stock option plans. In addition there were 1,054,900 options available to be issued under the 1998 Stock Option Plan and the 2004 Stock Option Plan, which are the only plans outunder which the Company may issue further options. There were exercisable options outstanding to purchase 3,697,790 shares at an average price of an allowable pool of options totaling 20,875,848. There$9.60. At June 30, 2004, there were exercisable options outstanding to purchase 3,450,755 shares at an average price of $8.11. At June 30, 2003, there were exercisable options outstanding to purchase 4,602,456 shares at an average price of $7.26.
A summary of option activity since June 30, 20012002 is set forth below:
| Options Outstanding | ||||||
| Number | Weighted Average Exercise | |||||
Options outstanding at June 30, 2001 | 5,762,228 | $ | 6.77 | |||
Granted during fiscal 2002 | 2,039,500 | 11.62 | ||||
Cancelled | (616,822 | ) | 10.69 | |||
Exercised | (838,096 | ) | 5.87 | |||
Options outstanding at June 30, 2002 | 6,346,810 | $ | 8.08 | |||
Granted during fiscal 2003 | 856,690 | 11.87 | ||||
Cancelled | (167,350 | ) | 11.25 | |||
Exercised | (582,354 | ) | 7.63 | |||
Options outstanding at June 30, 2003 | 6,453,796 | $ | 8.54 | |||
Granted during fiscal 2004 | 809,000 | 20.89 | ||||
Cancelled | (127,330 | ) | 12.07 | |||
Exercised | (1,986,485 | ) | 7.54 | |||
Options outstanding at June 30, 2004 | 5,148,981 | $ | 10.77 | |||
| Options Outstanding | ||||||
| Number | Weighted Average Exercise Price | |||||
Options outstanding as of June 30, 2002 | 6,346,810 | $ | 8.08 | |||
Granted during Fiscal 2003 | 856,690 | 11.87 | ||||
Cancelled | (167,350 | ) | 11.25 | |||
Exercised | (582,354 | ) | 7.63 | |||
Options outstanding as of June 30, 2003 | 6,453,796 | 8.54 | ||||
Granted during Fiscal 2004 | 809,000 | 20.89 | ||||
Cancelled | (127,330 | ) | 12.07 | |||
Exercised | (1,986,485 | ) | 7.54 | |||
Options outstanding as of June 30, 2004 | 5,148,981 | 10.77 | ||||
Granted during Fiscal 2005 | 965,500 | 16.67 | ||||
Cancelled | (240,919 | ) | 14.81 | |||
Exercised | (343,288 | ) | 5.71 | |||
Options outstanding as of June 30, 2005 | 5,530,274 | $ | 11.93 | |||
The following table summarizes information regarding post-split stock options outstanding at June 30, 2005:
| Options Outstanding | Options Exercisable | |||||||||||
| Range of Exercise Prices | Number Outstanding as of June 30, 2005 | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | Number Outstanding as of June 30, 2005 | Weighted Average Exercise Price | |||||||
| $ 2.13 – $ 6.72 | 939,404 | 2.22 | $ | 4.80 | 939,404 | $ | 4.80 | |||||
| 6.88 – 9.53 | 917,162 | 3.45 | 7.24 | 917,162 | 7.24 | |||||||
| 9.72 – 11.09 | 942,450 | 5.53 | 10.66 | 822,450 | 10.68 | |||||||
| 11.31 – 14.56 | 890,118 | 6.72 | 13.02 | 583,634 | 13.16 | |||||||
| 14.61 – 17.34 | 1,260,140 | 6.62 | 16.35 | 277,140 | 16.00 | |||||||
| 17.41 – 26.24 | 581,000 | 8.32 | 21.67 | 158,000 | 21.79 | |||||||
| $ 2.13 – $26.24 | 5,530,274 | 5.36 | $ | 11.93 | 3,697,790 | $ | 9.60 | |||||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
The following table summarizes information regarding post-split stock options outstanding at June 30, 2004:
| Options Outstanding | Options Exercisable | |||||||||||
Range of Exercise Prices | Number Outstanding at June 30, 2004 | Weighted Average Remaining Contractual Life (years) | Weighted Average Exercise Price | Number Outstanding at June 30, 2004 | Weighted Average Exercise Price | |||||||
| $ 2.13 -$ 4.98 | 853,286 | 2.61 | $ | 3.48 | 853,286 | $ | 3.48 | |||||
| 5.63 - 6.88 | 1,035,938 | 4.22 | 6.74 | 1,035,938 | 6.74 | |||||||
| 7.22 - 10.75 | 1,022,750 | 6.17 | 9.74 | 709,500 | 9.46 | |||||||
| 10.76 - 13.10 | 765,150 | 7.25 | 11.76 | 425,900 | 11.64 | |||||||
| 13.15 - 16.25 | 657,357 | 6.89 | 14.46 | 407,131 | 14.78 | |||||||
| 17.04 - 26.24 | 814,500 | 9.28 | 20.90 | 19,000 | 18.38 | |||||||
| $ 2.13 -$ 26.24 | 5,148,981 | 5.93 | $ | 10.77 | 3,450,755 | $ | 8.11 | |||||
Employee Stock Purchase Plan
On March 5, 1998, the shareholders of the Company approved an Employee Stock Purchase Plan (“ESPP”) whereby employees of the Company can subscribe to purchase Common Shares through payroll withholdings from the treasury of the Company at 85% of the lessor of: (1) the average of the last five days of the last ESPP period or (2) the average price of the last five days of the current ESPP period. An aggregate 1,000,000 Common Shares havehas been reserved for purchase under the ESPP, subject to adjustments in the event of stock dividends, stock splits, combinations of shares, or other similar changes in capitalization of the Company. During fiscal 2004,Fiscal 2005, a total of 305,380260,421 Common Shares were issued under the ESPP. During fiscal(2004 – 305,380; 2003 a total of 314,000 Common Shares were issued under the ESPP, and during fiscal 2002, a total of 278,112 Common Shares– 314,000) were issued under the ESPP.
On May 3, 2005, the Board of Directors of the Company approved an amendment to the ESPP to reduce the discount at which shares may be purchased to 95% of the average market price on the last day of the purchase period. The ESPP amendment was subject to the approval of the Toronto Stock Exchange (“TSX”) and was to become effective on the first day of the purchase period during which SFAS 123R becomes effective. The TSX approved this amendment on June 21, 2005. SFAS 123R is effective in the first interim or annual reporting period beginning after June 15, 2005 and as a result the ESPP amendment came into effect on July 1, 2005 (see Note 22—Subsequent Events).
NOTE 13—12—COMMITMENTS AND CONTINGENCIES
The Company has entered into operating leases for premises and vehicles with minimum annual payments as follows:
2005 | $ | 17,769 | |
2006 | 16,808 | ||
2007 | 15,998 | ||
2008 | 14,299 | ||
2009 | 13,938 | ||
Thereafter | 34,812 | ||
| $ | 113,624 | ||
| Payments due by period | |||||||||||||||
| Total | Less than 1 year | 1–3 years | 3–5 years | More than 5 years | |||||||||||
Operating lease obligations | $ | 111,256 | $ | 17,223 | $ | 38,243 | $ | 35,777 | $ | 20,013 | |||||
Purchase obligations | 7,224 | 6,019 | 1,042 | 137 | 26 | ||||||||||
| $ | 118,480 | $ | 23,242 | $ | 39,285 | $ | 35,914 | $ | 20,039 | ||||||
The above balance is net of $9.2 million of non-cancelable sublease income from properties sub-leased by the Company.
The Company does not enter into off-balance sheet financing arrangements as a matter of practice except for the use of operating leases for office space, computer equipment, and vehicles. In accordance with GAAP, neither the lease liability nor the underlying asset is carried on the balance sheet, as the terms of the leases do not meet the criteria for capitalization.
Rent expense amounted towas $15.5 million, $14.3 million in 2004,and $7.2 million for the years ended June 30, 2005, 2004 and 2003, respectively.
In July 2004, the Company entered into a commitment to construct a building in 2003, and $5.9Waterloo, Ontario with a view to consolidating its existing Waterloo facilities. In October 2004, based on a need for additional space beyond the original commitment, the Company agreed, in principle, to a commitment to construct an additional floor. The Company currently does not expect to further expand the scope of this project. The cost of this project is estimated to be approximately $14 million. The Company has financed this investment through its working capital. As of June 30, 2005, approximately $9.7 million has been capitalized to date on this project.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in 2002.thousands, except per share data)
The Company is subject to legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows.
OPEN TEXT CORPORATIONDomination agreements
NotesOn December 1, 2004, the Company announced that—through its wholly-owned subsidiary, 2016091 Ontario, Inc. (“Ontario I”)—it had entered into a domination and profit transfer agreement (the “Domination Agreement”) with IXOS. Under the terms of the Domination Agreement, Ontario I will acquire authority to Consolidated Financial Statements—(Continued)
Tabular amountsissue directives to the management of IXOS. Also in thousands, exceptthe Domination Agreement, Ontario I offers to purchase the remaining common shares of IXOS for a cash purchase price of Euro 9.38 per share data
(“Purchase Price”) which was the weighted average fair value of the IXOS common shares as of December 1, 2004. Pursuant to the Domination Agreement, Ontario I will also guarantee a payment by IXOS to the other shareholders of IXOS of annual compensation of Euro 0.42 per share (“Annual Compensation”). At a meeting of the shareholders of IXOS on January 14, 2005, the shareholders of IXOS approved the Domination Agreement. IXOS commenced the process of registering the Domination Agreement under German laws and applied for a delisting to the Frankfurt Stock Exchange. The delisting of the shares was granted by the Frankfurt Stock Exchange on April 12, 2005 and was effective on July 12, 2005. Certain IXOS shareholders have filed complaints against the approval of the Domination Agreement and also against the authorization to delist. A first hearing of the court took place in May 2005. As a result of an out of court settlement the complaints have been settled; the Company expects the Domination Agreement to be registered shortly. A special procedure was also commenced to attempt to increase the Annual Compensation and the Purchase Price payable (see Note 22—Subsequent Events).
Pursuant to an Agreement of Control dated November 4, 2003 between the Company—through its wholly owned subsidiary 2016090 Ontario Inc. (“Ontario”Ontario II”), a wholly owned subsidiary of Open Text, —and Gauss, Ontario II has offered to purchase the remaining outstanding shares of Gauss at a price of EUROEuro 1.06 per Gauss-Share. As of June 30, 2004 there were 662,241 Gauss shares not owned by Open Text. The costs for these shares will be EURO 701,975, if the remaining shareholders agree to sell at this price.share. The original acceptance period had beenwas two months.months after the signing of the Agreement of Control. As a result of certain shareholders having now filed for a special court procedure to reassess the amount of the offered consideration (Spruchverfahren),Annual Compensation that must be payable to minority shareholders as a result of the Agreement of Control, the acceptance period has been extended pursuant to mandatory German law until the end of such proceedings. In addition, in April 2004 Gauss announced that effective July 1, 2004 the shares of Gauss willwould cease to be listed on a stock exchange. In connection with this delisting, on July 2, 2004, a second offer by Ontario II to purchase the remaining outstanding shares of Gauss at a price of EUROEuro 1.06 per Gauss share has commenced. Again, theThis acceptance period has also been extended pursuant to mandatory German law until the end of the proceedings to reassess the amount of the consideration offered consideration (Spruchverfahren).under German law in the delisting process. The shareholders’ resolution on the Agreement of Control is currentlyand on the delisting was subject to a court procedure in which certain shareholders of Gauss claim that thea resolution of shareholders of Dec 23, 2003 respecting the Agreement of Control and the delisting is null and void. A first instanceWhile the Court of First Instance rendered a judgment (inin favor of the validityplaintiffs, Gauss, as defendant, had appealed and believed that the Court of Second Instance would overturn the judgment and rule in favor of Gauss. As a result of an out of court settlement, the complaints have been settled. The settlement provides inter alia that an amount of Euro 0.05 per shares and per annum will be payable as compensation to the other shareholders of Gauss under certain circumstances. A special court procedure was also commenced to reassess the amount of the Agreement of Control) is expected by November 2004 at the earliest.
NOTE 14—OTHER INCOME
| Year ended June 30, | ||||||||||
| 2004 | 2003 | 2002 | ||||||||
Gain (loss) on sale of investments, net of disposal costs | $ | (74 | ) | $ | 152 | $ | 1,012 | |||
Balance of other income | 291 | 2,636 | 601 | |||||||
Other income | $ | 217 | $ | 2,788 | $ | 1,613 | ||||
During fiscal 2002, the Company realized a gain of $1.0 million related to the Company’s attempted acquisition of Accelio Corporation (“Accelio”), a software company located in Ottawa, Ontario. The gain the Company realized on this attempted acquisition arose from the sale of shares of Accelio common stock owned by the Company, and gains realized in connection with certain lock-up agreements in connection with the attempted acquisition, partially offset by the costs incurred.
During fiscal 2003, the Company realized a gain of $152,000 relating to a small equity investment it disposed of during the year. The majority of the balance of other income during fiscal 2003 relates to realized foreign exchange gains recorded during the year. The strong appreciation of the Euro as compared to the U.S. dollar accounted for the majority of this amount.
During fiscal 2004, the Company incurred a loss on the disposition of a small equity investment. The majority of the balance of other income during fiscal 2004 relates to foreign exchange gains and losses incurred during the year.Annual Compensation (see Note 22—Subsequent Events).
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
Litigation
The Harold Tilbury and Yolanda Tilbury Family Trust brought an action against the Company in July 2002, before a single arbitrator, under the Ontario Arbitrations Act alleging damages for breach of a stock purchase agreement relating to the Company’s acquisition of Bluebird Systems Inc. (“Bluebird”). The claim was for $10 million, plus $5 million in punitive damages. Bluebird and Open Text counterclaimed against the Tilburys claiming that not only was no further amount owing for the purchase of their shares, but that they were entitled to a return of the money already paid to the Tilburys, in respect of the business acquisition. Bluebird also claimed damages against Harold Tilbury with respect to the lease of the Bluebird premises. In April 2005, the arbitrator ruled that the sum of approximately $1.9 million, plus interest, was payable by the Company to the Tilburys under the terms of the share purchase agreement and for termination of employment related costs, and subsequently ruled that a further $222,000 was payable under the terms of the share purchase agreement as additional purchase consideration. The Company’s counterclaims were dismissed. A decision on reimbursement of costs had been deferred, at that date, and in August 2005 the arbitrator ruled that the sum of approximately $847,000 is payable by the Company to the Tilburys on account of costs. Based on these awards, a total amount of $3.7 million was recorded as being payable to the Tilburys. This consisted of $2.5 million as additional purchase consideration, $240,000 relating to severance related costs, $85,000 relating to improvements for leasehold properties occupied by Bluebird, $754,000 relating to interest and $129,000 relating to legal costs.
Guarantees and indemnifications
The Company has entered into license agreements with customers that include limited intellectual property indemnification clauses. The Company generally agrees to indemnify its customers against legal claims that its software products infringe certain third party intellectual property rights. In the event of such a claim, the Company is generally obligated to defend its customers against the claim and either to settle the claim at the Company’s expense or pay damages that the customers are legally required to pay to the third-party claimant. These intellectual property infringement indemnification clauses generally are subject to limits based upon the amount of the license sale. The Company has not made any significant indemnification payments in relation to these indemnification clauses.
In connection with certain facility leases, the Company has guaranteed payments on behalf of its subsidiaries. This has been done through unsecured bank guarantees obtained from local banks. Additionally, the Company’s current end-user license agreement contains a limited software warranty.
The Company has not recorded a liability for guarantees, indemnities or warranties described above in the accompanying consolidated balance sheet and the maximum amount of potential future payments under such guarantees, indemnities and warranties is not determinable, other than as described above.
NOTE 15—13—OTHER INCOME (EXPENSE)
Included in other income (expense) for the year ended June 30, 2005 are primarily foreign exchange losses of $1.8 million and an amount of $754,000 relating to interest charges and legal costs incurred on the settlement of the action brought against the Company by the Harold L. Tilbury and Yolanda O. Tilbury, Trustees of the Harold L. Tilbury Jr. and Yolanda O. Tilbury Family Trust (see Note 22 “Subsequent Events”).
Included in other income (expense) for the year ended June 30, 2004 is a loss on the disposition of a small equity investment in the amount of $74,000 and foreign exchange gains of $291,000.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
Included in other income (expense) for the year ended June 30, 2003 is a gain of $152,000 relating to a small equity investment the Company disposed of during the year and realized foreign exchange gains of $2.7 million.
NOTE 14—INCOME TAXES
The Company operates in several tax jurisdictions. Its income is subject to varying rates of tax and losses incurred in one jurisdiction cannot be used to offset income taxes payable in another.
The income before income taxes consisted of the following:
| Year Ended June 30, | Year Ended June 30, | |||||||||||||||||
| 2004 | 2003 | 2002 | 2005 | 2004 | 2003 | |||||||||||||
Domestic income | $ | 15,457 | $ | 7,549 | $ | 3,931 | $ | 20,255 | $ | 15,457 | $ | 7,549 | ||||||
Foreign income | 16,439 | 23,385 | 13,029 | 7,314 | 16,439 | 23,385 | ||||||||||||
Income before income taxes | $ | 31,896 | $ | 30,934 | $ | 16,960 | $ | 27,569 | $ | 31,896 | $ | 30,934 | ||||||
A reconciliation of the combined Canadian federal and provincial income tax rate with the Company’s effective income tax rate is as follows:
| Year Ended June 30, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
Expected statutory rate | 36.4 | % | 37.6 | % | 40.0 | % | ||||||
Expected provision for income taxes | $ | 11,610 | $ | 11,631 | $ | 6,784 | ||||||
Effect of permanent differences | (151 | ) | 1,316 | 2,694 | ||||||||
Effect of foreign tax rate differences | (491 | ) | (234 | ) | (453 | ) | ||||||
Effect of change in tax rates | (855 | ) | — | — | ||||||||
Non-taxable portion of capital gain | — | — | (202 | ) | ||||||||
Tax incentive for research and development | (506 | ) | (1,854 | ) | (368 | ) | ||||||
Benefit of losses* | (2,004 | ) | (3,633 | ) | — | |||||||
Change in valuation allowance | 236 | (3,548 | ) | (7,850 | ) | |||||||
Other items | (569 | ) | (501 | ) | (316 | ) | ||||||
| $ | 7,270 | $ | 3,177 | $ | 289 | |||||||
| Year Ended June 30, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Expected statutory rate | 36.1 | % | 36.4 | % | 37.6 | % | ||||||
Expected provision for income taxes | $ | 9,952 | $ | 11,610 | $ | 11,631 | ||||||
Effect of permanent differences | 534 | (151 | ) | 1,316 | ||||||||
Effect of foreign tax rate differences | (3,456 | ) | (491 | ) | (234 | ) | ||||||
Effect of change in tax rates | — | (855 | ) | — | ||||||||
Tax incentive for research and development | — | (506 | ) | (1,854 | ) | |||||||
Benefit of losses | (3,977 | ) | (2,004 | ) | (3,633 | ) | ||||||
Change in valuation allowance | 5,132 | 236 | (3,548 | ) | ||||||||
Other items | (1,227 | ) | (569 | ) | (501 | ) | ||||||
| $ | 6,958 | $ | 7,270 | $ | 3,177 | |||||||
The provision (recovery)subsequent recognition of a benefit related to the realization of tax loss carry forwards or deductible temporary differences acquired in a business combination where a valuation allowance had been established for income taxes consistedthese assets at the date of acquisition are applied to reduce goodwill and are not included in income. During Fiscal 2005, the recognition of $3.5 million (Fiscal 2004—$4.8 million) in pre-acquisition tax benefits of acquired companies was recorded as an adjustment (reduction) to goodwill in the respective periods.
As at June 30, 2005, a valuation allowance of $113.6 million has been recorded on acquired deferred tax assets in business combinations where the Company had concluded that it is more likely than not that all or a portion of the following:acquired tax benefits would not be realized in the future. Subsequent recognition of these tax benefits will be applied as a reduction in goodwill.
| Year Ended June 30, | |||||||||||
| 2004 | 2003 | 2002 | |||||||||
Domestic: | |||||||||||
Current income taxes | $ | — | $ | 460 | $ | — | |||||
Deferred income taxes | 1,265 | (272 | ) | — | |||||||
| 1,265 | 188 | — | |||||||||
Foreign: | |||||||||||
Current income taxes | 9,514 | 3,493 | 289 | ||||||||
Deferred income taxes | (3,509 | ) | (504 | ) | — | ||||||
| 6,005 | 2,989 | 289 | |||||||||
Provision for income taxes | $ | 7,270 | $ | 3,177 | $ | 289 | |||||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
The provision for income taxes consisted of the following:
| Year Ended June 30, | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
Domestic: | ||||||||||||
Current income taxes | $ | — | $ | — | $ | 460 | ||||||
Deferred income taxes | 2,173 | 1,265 | (272 | ) | ||||||||
| 2,173 | 1,265 | 188 | ||||||||||
Foreign: | ||||||||||||
Current income taxes | 8,126 | 9,514 | 3,493 | |||||||||
Deferred income taxes | (3,341 | ) | (3,509 | ) | (504 | ) | ||||||
| 4,785 | 6,005 | 2,989 | ||||||||||
Provision for income taxes | $ | 6,958 | $ | 7,270 | $ | 3,177 | ||||||
The Company has approximately $49.9$48.4 million of domestic non-capital loss carryforwards which expire between 2006 and 2010 and $2.2$1.5 million of domestic capital loss carryforwards that have no expiry date. In addition, the Company has $326.7$367.9 million of foreign non-capital loss carry forwards of which $226.1 million have no expiry date. $8.2$30.8 million of these foreign losses are restricted and can only be used against the profits of a previously acquired company in accordance with a statutory formula. The remainder of the foreign losses expire between 20052006 and 2024.2025. The Company also has $1.8$0.7 million of foreign capital loss carryforwards that have no expiry date. In addition, Investment Tax Credits of $2.7 million will expire between 2014 and 2015.
The primary temporary differences which gave rise to net deferred tax assets at June 30, 20042005 and 20032004 are:
| Year Ended June 30, | Year Ended June 30, | |||||||||||||||
| 2004 | 2003 | 2005 | 2004 | |||||||||||||
Deferred tax assets | ||||||||||||||||
Non-capital loss carryforwards | $ | 148,990 | $ | 19,668 | $ | 143,445 | $ | 148,990 | ||||||||
Capital loss carryforwards | 1,331 | 710 | 2,203 | 1,331 | ||||||||||||
Employee stock options | 2,875 | — | 436 | 2,875 | ||||||||||||
Undeducted scientific research and development expenses | 2,770 | — | 4,956 | 2,770 | ||||||||||||
Scientific research and development tax credits | 684 | 684 | — | 684 | ||||||||||||
Depreciation and amortization | 5,349 | 1,062 | 5,818 | 5,349 | ||||||||||||
Share issue costs | — | 167 | ||||||||||||||
Financing fees | 558 | — | 133 | 558 | ||||||||||||
Restructuring costs | 7,895 | — | 11,540 | 7,895 | ||||||||||||
Other | 2,927 | — | 5,877 | 2,926 | ||||||||||||
Total deferred tax asset | 173,379 | 22,291 | 174,408 | 173,378 | ||||||||||||
Less, valuation allowance | (126,934 | ) | (5,669 | ) | ||||||||||||
Valuation allowance | (127,634 | ) | (126,934 | ) | ||||||||||||
| 46,445 | 16,622 | 46,774 | 46,444 | |||||||||||||
Deferred tax liabilities | ||||||||||||||||
Scientific research and development tax credits | 294 | 260 | ||||||||||||||
Deferred credits | 8,160 | — | ||||||||||||||
Acquired intangibles | 35,372 | — | ||||||||||||||
Other | 2,603 | — | ||||||||||||||
Net deferred tax asset | $ | 16 | $ | 16,362 | ||||||||||||
Comprised of: | ||||||||||||||||
Current asset | $ | 18,776 | $ | 7,688 | ||||||||||||
Long-term asset | 27,668 | 8,674 | ||||||||||||||
Current liability | (10,892 | ) | — | |||||||||||||
Long-term liability | (35,536 | ) | 0 | |||||||||||||
| $ | 16 | $ | 16,362 | |||||||||||||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
| Year Ended June 30, | ||||||||
| 2005 | 2004 | |||||||
Deferred tax liabilities | ||||||||
Scientific research and development tax credits | 579 | 294 | ||||||
Deferred credits | 4,356 | 8,160 | ||||||
Acquired intangibles | 31,636 | 35,372 | ||||||
Other | 2,802 | 2,602 | ||||||
Net deferred tax asset | $ | 7,401 | $ | 16 | ||||
Comprised of: | ||||||||
Current assets | $ | 10,275 | $ | 18,776 | ||||
Long-term assets | 36,499 | 27,668 | ||||||
Current liabilities | (10,128 | ) | (10,892 | ) | ||||
Long-term liabilities | (29,245 | ) | (35,536 | ) | ||||
| $ | 7,401 | $ | 16 | |||||
The Company believes that sufficient uncertainty exists regarding the realization of certain deferred tax assets that a valuation allowance is required. The Company continues to evaluate its taxable position quarterly and considers factors by taxing jurisdiction, such as estimated taxable income, the history of losses for tax purposes and the growth of the Company, among others.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
Tabular amounts in thousands, except per share data
NOTE 16—15—SEGMENT INFORMATION
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”Information” establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method of determining what information to report is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance.
The Company’s operations fall into one dominant industry segment, being enterprise content management software. The Company manages its operations, and accordingly determines its operating segments, on a geographic basis. The Company has two reportable segments: North America and Europe. The Company evaluates operating segment performance based on total revenues and direct operating costsexpenses of the segment.segment, based on the location of the respective customers. The accounting policies of the operating segments are the same as those described in the summary of accounting policies. No segments have been aggregated.
Information about reported segments is as follows:
| North America | Europe | Other | Total | ||||||||||
2004 | |||||||||||||
Total revenues | $ | 136,346 | $ | 138,192 | $ | 16,520 | $ | 291,058 | |||||
Operating costs | 89,884 | 123,384 | 18,907 | 232,175 | |||||||||
Contribution margin | $ | 46,462 | $ | 14,808 | $ | (2,387 | ) | $ | 58,883 | ||||
Segment assets | $ | 249,515 | $ | 275,815 | $ | 52,011 | $ | 577,341 | |||||
2003 | |||||||||||||
Total revenues | $ | 102,221 | $ | 70,805 | $ | 4,699 | $ | 177,725 | |||||
Operating costs | 77,595 | 60,403 | 4,564 | 142,562 | |||||||||
Contribution margin | $ | 24,626 | $ | 10,402 | $ | 135 | $ | 35,163 | |||||
Segment assets | $ | 98,769 | $ | 38,618 | $ | 2,106 | $ | 139,493 | |||||
2002 | |||||||||||||
Total revenues | $ | 92,410 | $ | 56,467 | $ | 5,495 | $ | 154,372 | |||||
Operating costs | 70,454 | 52,880 | 5,435 | 128,769 | |||||||||
Contribution margin | $ | 21,956 | $ | 3,587 | $ | 60 | $ | 25,603 | |||||
Segment assets | $ | 52,577 | $ | 31,428 | $ | 2,235 | $ | 86,240 | |||||
Included in the abovefollowing operating results are allocations of certain operating costs whichthat are incurred in one reporting segment but which relate to all reporting segments. The allocations of these common operating costs are consistent with the manner in which they are allocated for presentation to, and analysis by, the chief operating decision maker of the Company.Company allocates them for analysis. For the yearyears ended June 30, 2005, 2004 2003 and 2002,2003, the “Other” category consists of geographic regions other than North America and Europe.
Adjusted income from operating segments does not include amortization of acquired intangible assets, provision for (recovery of) restructuring charges, other income (expense) and provision for income taxes. Goodwill and other acquired intangible assets have been assigned to segment assets based on the relative benefit that the reporting units are expected to receive from the assets, or the location of the acquired business operations to which they relate. These allocations have been made on a consistent basis.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
Information about reported segments is as follows:
Year ended June 30, 2005 | Year ended June 30, 2004 | Year ended June 30, 2003 | ||||||||||
Revenue | ||||||||||||
North America | $ | 173,767 | $ | 136,346 | $ | 102,221 | ||||||
Europe | 215,401 | 138,192 | 70,805 | |||||||||
Other | 25,660 | 16,520 | 4,699 | |||||||||
Total revenue | $ | 414,828 | $ | 291,058 | $ | 177,725 | ||||||
Adjusted income | ||||||||||||
North America | $ | 23,686 | $ | 21,768 | $ | 19,051 | ||||||
Europe | 26,646 | 27,511 | 12,063 | |||||||||
Other | 2,786 | 2,383 | 268 | |||||||||
Total adjusted income | 53,118 | 51,662 | 31,382 | |||||||||
Less: | ||||||||||||
Amortization of acquired intangible assets | 24,409 | 11,306 | 3,236 | |||||||||
Provision for (recovery of) restructuring charge | (1,724 | ) | 10,005 | — | ||||||||
Other income (expense) | 3,116 | (217 | ) | (2,788 | ) | |||||||
Provision for income taxes | 6,958 | 7,270 | 3,177 | |||||||||
Net income | $ | 20,359 | $ | 23,298 | $ | 27,757 | ||||||
Segment assets | ||||||||||||
North America | $ | 238,979 | $ | 155,492 | ||||||||
Europe | 343,421 | 361,055 | ||||||||||
Other | 53,940 | 58,694 | ||||||||||
Total segment assets | $ | 636,340 | $ | 575,241 | ||||||||
A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements for the years ended June 30, 2005, 2004, 2003, and 20022003 is as follows:
| Year Ended June 30, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
Total contribution margin from operating segments above | $ | 58,883 | $ | 35,163 | $ | 25,603 | ||||||
Amortization and depreciation | (18,409 | ) | (8,245 | ) | (12,093 | ) | ||||||
Restructuring charge | (10,005 | ) | — | — | ||||||||
Income from operations | 30,469 | 26,918 | 13,510 | |||||||||
Interest, other income (expense), income taxes and minority interest | (7,171 | ) | 839 | 3,161 | ||||||||
Net income for the year | $ | 23,298 | $ | 27,757 | $ | 16,671 | ||||||
| As of June 30, | ||||||
| 2004 | 2003 | |||||
Segment assets | $ | 577,341 | $ | 139,493 | ||
Investments | — | — | ||||
Cash and cash equivalents (corporate) | 93,414 | 99,194 | ||||
Total assets | $ | 670,755 | $ | 238,687 | ||
Contribution margin from operating segments does not include amortization of intangible assets, acquired in-process research and development and restructuring costs. Goodwill and intangibles have been assigned to segment assets based on the location of the acquired business operations to which they relate. These allocations have been made on a consistent basis.
The distribution of net revenues determined by location of customer, and identifiable assets greater than 10%, by geographic areas for the years ended June 30, 2004, 2003 and 2002 are as follows:
| Year Ended June 30, | |||||||||
| 2004 | 2003 | 2002 | |||||||
Total revenues: | |||||||||
Canada | $ | 16,662 | $ | 13,500 | $ | 12,190 | |||
United States | 119,684 | 88,721 | 80,220 | ||||||
United Kingdom | 35,547 | 22,042 | 20,320 | ||||||
Germany | 43,447 | 12,472 | 7,352 | ||||||
Rest of Europe | 59,198 | 35,529 | 30,594 | ||||||
Other | 16,520 | 5,461 | 3,696 | ||||||
Total revenues | $ | 291,058 | $ | 177,725 | $ | 154,372 | |||
| As of June 30, | ||||||
| 2005 | 2004 | |||||
Segment assets | $ | 636,340 | $ | 575,241 | ||
Cash and cash equivalents (corporate) | 4,596 | 93,414 | ||||
Total assets | $ | 640,936 | $ | 668,655 | ||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
| As of June 30, | ||||||
| 2004 | 2003 | |||||
Segment assets: | ||||||
Canada | $ | 183,290 | $ | 43,725 | ||
United States | 66,225 | 55,044 | ||||
United Kingdom | 20,682 | 13,733 | ||||
Germany | 119,566 | 4,831 | ||||
Rest of Europe | 135,567 | 20,053 | ||||
Other | 52,011 | 2,107 | ||||
Total segment assets | $ | 577,341 | $ | 139,493 | ||
The following table sets forth the distribution of revenues determined by location of customer and identifiable assets, by geographic area where the revenue for such location is greater than 10% of total revenue, for the years ended June 30, 2005, 2004 and 2003:
| Year Ended June 30, | |||||||||
| 2005 | 2004 | 2003 | |||||||
Total revenues: | |||||||||
Canada | $ | 20,279 | $ | 16,662 | $ | 13,500 | |||
United States | 153,488 | 119,684 | 88,721 | ||||||
United Kingdom | 50,103 | 35,547 | 22,804 | ||||||
Germany | 79,086 | 43,447 | 12,472 | ||||||
Rest of Europe | 86,212 | 59,198 | 35,529 | ||||||
Other | 25,660 | 16,520 | 4,699 | ||||||
Total revenues | $ | 414,828 | $ | 291,058 | $ | 177,725 | |||
| As of June 30, | ||||||
| 2005 | 2004 | |||||
Segment assets: | ||||||
Canada | $ | 78,267 | $ | 14,711 | ||
United States | 160,712 | 140,781 | ||||
United Kingdom | 61,995 | 55,533 | ||||
Germany | 173,312 | 202,957 | ||||
Rest of Europe | 108,114 | 102,565 | ||||
Other | 53,940 | 58,694 | ||||
Total segment assets | $ | 636,340 | $ | 575,241 | ||
The Company’s goodwill has been allocated as follows to the Company’s operating segments:
| As of June 30, | As of June 30, | |||||||||||
| 2004 | 2003 | 2005 | 2004 | |||||||||
North America | $ | 66,452 | $ | 21,922 | $ | 80,220 | $ | 64,534 | ||||
Europe | 124,530 | 9,612 | 128,838 | 125,580 | ||||||||
Other | 32,770 | 767 | 34,033 | 33,638 | ||||||||
| $ | 223,752 | $ | 32,301 | $ | 243,091 | $ | 223,752 | |||||
NOTE 17—16—SUPPLEMENTAL CASH FLOW DISCLOSURES
| Year Ended June 30, | |||||||||
| 2004 | 2003 | 2002 | |||||||
Supplemental disclosure of cash flow information: | |||||||||
Cash paid during the period for interest | $ | 46 | $ | 55 | $ | 19 | |||
Cash paid during the period for taxes | 6,277 | 590 | 495 | ||||||
| Year Ended June 30, | |||||||||
| 2005 | 2004 | 2003 | |||||||
Supplemental disclosure of cash flow information: | |||||||||
Cash paid during the year for interest | $ | 248 | $ | 46 | $ | 55 | |||
Cash received during the year for interest | 1,625 | 1,256 | 1,283 | ||||||
Cash paid during the year for income taxes | 6,658 | 6,277 | 590 | ||||||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
NOTE 18—17—ACQUISITIONS
Fiscal 2005
Optura
On February 11, 2005, Open Text entered into an agreement to acquire all of the issued and outstanding shares of Optura Inc. (“Optura”). In accordance with FASB SFAS No. 141 “Business Combinations” (“SFAS 141”) this acquisition has been accounted for as a business combination. Optura offers products and integration services that optimize business processes so that companies can collaborate across separate organizational functions, dissimilar systems and business partners. Optura products and services will enable Open Text customers, who use a SAP-based Enterprise Resource Planning (“ERP”) system, to improve the efficiencies of their document-based ERP processes. The results of operations of Optura have been consolidated with those of Open Text beginning February 12, 2005.
Consideration for this acquisition consisted of $3.7 million in cash, of which $2.7 million was paid at closing and $1.0 million was paid into escrow, as provided for in the share purchase agreement.
The preliminary purchase price allocation set forth below represents management’s best estimate of the allocation of the purchase price and the fair value of net assets acquired. The valuation of the acquired intangible assets and the assessment of their expected useful lives are preliminary. These estimates may differ from the final purchase price allocation and these differences may be material.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of the Optura acquisition:
Current assets, including cash acquired of $315 | $ | 1,536 | ||
Long-term assets | 114 | |||
Customer assets | 700 | |||
Technology assets | 1,300 | |||
Goodwill | 2,352 | |||
Total assets acquired | 6,002 | |||
Total liabilities assumed | (2,340 | ) | ||
Net assets acquired | $ | 3,662 | ||
The customer assets of $700,000 have been assigned a life of five years. The technology assets of $1.3 million have been assigned a useful life of five years. The useful lives assigned represent management’s preliminary estimates and changes may occur from these preliminary estimates and these changes may be material.
The portion of the purchase price allocated to goodwill was assigned to the Company’s North America reportable segment. No amount of the goodwill is expected to be deductible for tax purposes.
As part of the purchase price allocation, the Company originally recognized liabilities in connection with this acquisition of $444,000. The liabilities related to severance charges, transaction costs, and costs relating to excess facilities. The purchase price was subsequently adjusted to accrue an additional $83,000 due to the refinement of management’s original estimates. Liabilities related to transaction-related charges are expected to be paid within the upcoming fiscal year. Liabilities related to excess facilities will be paid over the term of the lease which expires in September 2006.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
A director of the Company received approximately $47,000 in consulting fees for assistance with the acquisition of Optura. These fees are included in the purchase price allocation. The director abstained from voting on the transaction.
Artesia
On August 19, 2004, Open Text entered into an agreement to acquire all of the issued and outstanding shares of Artesia Technologies, Inc. (“Artesia”). In accordance with FASB SFAS No. 141 “Business Combinations” (“SFAS 141”) this acquisition has been accounted for as a business combination. Artesia designs and distributes Digital Asset Management software. It has a customer base of over 120 companies and provides these customers and their marketing and distribution partners the ability to easily access and collaborate around a centrally managed collection of digital media elements. The results of operations of Artesia have been consolidated with those of Open Text beginning September 1, 2004.
This acquisition expands Open Text’s media integration and management capabilities as part of its Enterprise Content Management (“ECM”) suite, and provides a platform from which Open Text can address the content management needs of media and marketing professionals worldwide.
Consideration for this acquisition consisted of $5.8 million in cash, of which $3.2 million was paid at closing and $2.6 million was paid into escrow, as provided for in the share purchase agreement. At June 30, 2005, there was a holdback in the amount of $581,000 remaining to be paid.
The preliminary purchase price allocation set forth below represents management’s best estimate of the allocation of the purchase price and the fair value of net assets acquired. The valuation of the acquired intangible assets and the assessment of their expected useful lives are preliminary. These estimates may differ from the final purchase price allocation and these differences may be material.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of the Artesia acquisition:
Current assets, including cash acquired of $773 | $ | 2,165 | ||
Long-term assets | 2,732 | |||
Customer assets | 1,600 | |||
Technology assets | 3,300 | |||
Goodwill | 2,136 | |||
Total assets acquired | 11,933 | |||
Total liabilities assumed | (6,104 | ) | ||
Net assets acquired | $ | 5,829 | ||
The customer assets of $1.6 million have been assigned a life of five years. The technology assets of $3.3 million have been assigned useful lives of three to five years. The useful lives assigned represent management’s preliminary estimates and changes may occur from these preliminary estimates and these changes may be material.
The portion of the purchase price allocated to goodwill was assigned to the Company’s North America reportable segment. No amount of the goodwill is expected to be deductible for tax purposes.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
As part of the purchase price allocation, the Company originally recognized liabilities in connection with this acquisition of $1.8 million. The liabilities related to severance charges, transaction costs, and costs relating to facilities. The purchase price was subsequently adjusted to reduce acquisition-related liabilities by $319,000 due to the refinement of management’s estimates. Liabilities related to severance and transaction-related charges are expected to be paid in the upcoming fiscal year. Liabilities related to excess facilities will be paid over the term of the lease which expires in May 2010.
A director of the Company received $112,000 in consulting fees for assistance with the acquisition of Artesia. These fees are included in the purchase price allocation. The director abstained from voting on the transaction.
Vista
On August 31, 2004, Open Text entered into an agreement to acquire the Vista Plus (“Vista”) suite of products and related assets from Quest Software Inc. (“Quest”). In accordance with FASB SFAS No. 141 “Business Combinations” (“SFAS 141”) this acquisition has been accounted for as a business combination. As part of this transaction certain Quest employees that developed, sold and supported Vista have been employed by Open Text. The revenues and costs related to the Vista product suite have been consolidated with those of Open Text beginning September 16, 2004.
Vista is a technology that captures and stores business critical information from ERP applications. This acquisition expands Open Text’s integration and report management capabilities as part of its ECM suite, and provides a platform from which Open Text can address report content found in ERP applications, and business intelligence software.
Consideration for this acquisition consisted of $23.7 million in cash, of which $21.7 million was paid at closing and $2.0 million is held in escrow until November 30, 2005, as provided for in the purchase agreement.
The preliminary purchase price allocation set forth below represents management’s best estimate of the allocation of the purchase price and the fair value of net assets acquired. The valuation of the acquired intangible assets and the assessment of their expected useful lives are preliminary. These estimates may differ from the final purchase price allocation and these differences may be material.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of the Vista acquisition:
Current assets | $ | 264 | ||
Long-term assets | 63 | |||
Customer assets | 11,700 | |||
Technology assets | 8,660 | |||
Goodwill | 8,714 | |||
Total assets acquired | 29,401 | |||
Total liabilities assumed | (5,711 | ) | ||
Net assets acquired | $ | 23,690 | ||
The customer assets of $11.7 million and the technology assets of $8.7 million have been assigned useful lives of five years. The useful lives assigned represent management’s preliminary estimates and changes may occur from these preliminary estimates and changes may be material.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
The portion of the purchase price allocated to goodwill was assigned to the Company’s North America reportable segment. The goodwill is expected to be deductible for tax purposes.
As part of the purchase price allocation, the Company recognized transaction costs in connection with this acquisition of $480,000. These costs are expected to be paid within the upcoming fiscal year.
A director of the Company received $126,000 in consulting fees for assistance with the acquisition of Vista. These fees are included in the purchase price allocation. The director abstained from voting on the transaction.
Pro forma results
The following pro forma results of operations reflect the combined results of Open Text, Optura (acquired on February 12, 2005), Vista (acquired September 16, 2004) and Artesia (acquired September 1, 2004) for the twelve months ended June 30, 2005 and 2004 as if the business combinations occurred at the beginning of Open Text’s fiscal year. The information used for this pro forma disclosure was obtained from unaudited internal financial reports of each of these acquisitions.
| Twelve months ended June 30 | ||||||
| 2005 | 2004 | |||||
Revenue | $ | 423,492 | $ | 320,921 | ||
Net Income | $ | 21,830 | $ | 27,996 | ||
Basic EPS | $ | 0.44 | $ | 0.64 | ||
Diluted EPS | $ | 0.42 | $ | 0.59 | ||
Shares used in Basic EPS Calculation | 49,919 | 43,744 | ||||
Shares used in Diluted EPS Calculation | 52,092 | 47,272 | ||||
The pro forma results are not necessarily indicative of what would have occurred if the acquisitions had actually been completed as of the assumed dates and for the periods presented.
Fiscal 2004
IXOS
On October 21, 2003, Open Text announced that it had entered into a business combination agreement with IXOS Software AG (“IXOS”). The transaction was consummated via a tender offer to purchase all of the issued and outstanding shares of common stock of IXOS for either cash or a combination of Common Shares and Common Share purchase warrants (the “Alternative Consideration”) of Open Text.
On February 19, 2004, Open Text Corporation closed the tender offer, pursuant to which, a wholly owned subsidiary, 2016091 Ontario, acquired a total of 19,157,428 IXOS shares or approximately 88% of the ordinary share capital and voting rights of IXOS, including shares acquired in the open market. Of these IXOS shares, 17,792,529 shares (approximately 93% of the tendered shares) were tendered for the Alternative Consideration (as described below), with the balance, including shares purchased on the open market, acquired for approximately $15.3 million in cash. The Alternative Consideration for each IXOS share consisted of 0.5220 of an Open Text Common Share and 0.1484 of a warrant. Each whole warrant iswas exercisable to purchase one Open Text Common Share and maycould be exercised at any time prior to February 19, 2005 at a strike price of $20.75 per
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
Tabular amounts in thousands, except per share data
share. Between the closing date of the tender offer and June 30, 2004, Open Text acquired an additional 203,647 Common Shares of IXOS for $2.3 million in cash. As a result of the additional purchase, 2016091 Ontario obtained a total of 19,361,075 IXOS shares or approximately 89% ownership of IXOS.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
Approximately 9.3 million Open Text shares were issued in conjunction with the tender offer for IXOS. These shares were valued using the average share price two days before and two days after the acquisition was agreed to and announced. Accordingly, the fair value of these shares was approximately $191 million.
Approximately 2.6 million warrants were issued in conjunction with the Alternative Consideration. The fair value of each warrant was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:
Volatility | |||
Risk-free interest rate | |||
Dividend yield | — | ||
Expected life | 1 year |
Based on this methodology, the warrants were valued at $9.40 each, resulting in a total value of approximately $25 million. As at June 30, 2004, 224,572 warrants have beenwere exercised. In the third quarter of Fiscal 2005, all of the outstanding warrants expired unexercised. The carrying value of the unexercised warrants of $22.3 million was reclassified as additional paid in capital at the time of expiry.
The results of operations of IXOS have been included in Open Text’s consolidated results from March 1, 2004.
IXOS is a leading vendor of solutions for Enterprise Content Management (“ECM”). IXOS enterprise solutions help businesses achieve efficient management and display of web information, optimization of business processes, and secure, long-term archiving of all business documents in a highly-scaleable document repository.
The Company has retained the services of an independent valuator to assist in the purchase price allocation. The work of the independent valuator is not yet finalized. The allocation presented infollowing table summarizes the preliminary purchase price allocation, represents management’s best estimatethe impact of the allocation ofstep acquisitions and adjustments to the purchase price atand the current time. These items may differ from the final purchase price allocation and these differences may be material.
The following table summarizes the estimated fair values of theamount assigned to assets acquired and liabilities assumed as of the date of the IXOS acquisition:at June 30, 2005.
| As of June 30, 2004 | Step Acquisitions and Purchase Price Adjustments(a)(b) | As of June 30, 2005 | ||||||||||||||
Current assets | $ | 85,649 | $ | 85,649 | $ | 1,849 | $ | 87,498 | ||||||||
Long-term assets | 28,612 | 28,612 | 9,277 | 37,889 | ||||||||||||
Customer assets | 32,913 | 32,913 | 4,587 | 37,500 | ||||||||||||
Technology | 60,758 | |||||||||||||||
Technology assets | 60,758 | 1,169 | 61,927 | |||||||||||||
Goodwill | 167,713 | 167,713 | (2,235 | ) | 165,478 | |||||||||||
Total assets acquired | 375,645 | 375,645 | 390,292 | |||||||||||||
Current liabilities | (49,188 | ) | (49,188 | ) | (6,733 | ) | (55,921 | ) | ||||||||
Long-term liabilities | (34,718 | ) | (34,718 | ) | 593 | (34,125 | ) | |||||||||
Liabilities recognized in connection with the business combination | (46,440 | ) | (46,440 | ) | (433 | ) | (46,873 | ) | ||||||||
Total liabilities assumed | (130,346 | ) | (130,346 | ) | (136,919 | ) | ||||||||||
Minority Interest | (8,505 | ) | ||||||||||||||
Minority interest | (8,505 | ) | 5,872 | (2,633 | ) | |||||||||||
Net assets acquired | $ | 236,794 | $ | 236,794 | $ | 250,740 | ||||||||||
| (a) | Adjustments made to the IXOS purchase price equation relate primarily to incremental shares purchased within Fiscal 2005 and certain purchase price adjustments made within the allocation period as defined by SFAS 141. |
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
Other adjustments to the purchase price equation in the current fiscal year relate to:
| (b) | The Company increased its ownership of IXOS to approximately 94% during the year ended June 30, 2005. This was done by way of open market purchases of IXOS shares. Prior to these purchases, Open Text held, as of June 30, 2004, approximately 89% of the outstanding shares of IXOS. Total consideration of $13.8 million was paid for the purchase of IXOS shares during the year ended June 30, 2005. The Company stepped up its share of the fair value increments of the assets acquired and the liabilities assumed of IXOS to the extent of the increased ownership of IXOS. The minority interest in IXOS has been reduced to reflect the appropriate lower minority interest ownership in IXOS. The impact of these step purchases has been reflected in the purchase allocation table above. |
The portion of the purchase price allocated to goodwill of $167.7$165,478 million was assigned to the Company’s reportable geographic segments as follows:
| As of June 30, 2005 | ||||||
North America | $ | 31,857 | $ | 31,432 | ||
Europe | 104,000 | 102,614 | ||||
Other | 31,856 | 31,432 | ||||
| $ | 167,713 | $ | 165,478 | |||
The customerCustomer assets of $32.9$37.5 million have an estimatedwere assigned a useful life of 10 years. Theyears, while the technology assets of $60.8$61.9 million, havehad an estimated useful life of between 5five years and 7seven years.
As part of the purchase price allocation, the Company recognized liabilities in connection with the acquisition of IXOS totaling approximately $46.4$46.9 million. The liabilities recognized include severance and related charges in connection with a worldwide reduction in the IXOS workforce, in addition to transaction costs and costs relating to provisioning for excessive facilities. Of the approximately $46.4$46.9 million in total liabilities recognized in connection with the acquisition, approximately $34.7$19.8 million remains accrued at June 30, 2004. Amounts accrued relating2005. This amount is primarily attributable to severance will be paid during fiscal 2005, and amounts relating to excessiveexcess facilities which will be paid over the term of the respective leases.
IXOS had approximately $132$123.5 million (Fiscal 2004—$132.0 million) of net operating loss carry forwards and other future deductions at June 30, 2004.2005. As of June 30, 2004, the Company had recorded $4.8 million of deferred tax assets in the preliminary purchase price allocation related to these operating loss carryforwards and other future deductions since it is currentlywas considered unlikely that the Company willwould be able to utilize most of the loss carry forwards. Theforwards and other future deductions. As of June 30, 2005, the gross deferred tax asset related to these loss carry forwards is approximately $36and other future deductions was $36.5 million and iswas offset by a valuation allowance and deferred tax liabilities totaling $31.2$32.4 million. During Fiscal 2005, the Company utilized $7.2 million of these acquired tax losses resulting in a reduction of goodwill of $1.6 million. The Company will continue to review and evaluate these net operating loss carry forwards.forwards and other future deductions. If the Company determines that it will realize the tax attributes related to IXOS in the future, the related decrease in the valuation allowance will reduce goodwill instead of the provision for taxes.
OPEN TEXT CORPORATION
Open Text intendsNotes to acquire 100% of the shares of IXOS. The total cash consideration to acquire the remaining outstanding shares of IXOS is estimated to be approximately $30 million.Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
A Director of the Company received $220,000 in consulting fees for assistance with the acquisition of IXOS. These fees are included in the acquisition costs. The Director abstained from voting on this transaction.
IXOS Restructuring
On March 16, 2004, as a result of the business combination with Open Text and in response to the Company’s plan to exit certain activities of IXOS, IXOS announced plans to improve profitability and position the company for future growth. IXOS recorded a charge of approximately $13 million (10.5 million Euro) in the third quarter of fiscal 2004 relating to this restructuring activity which includes a reduction of IXOS’ workforce. In the fourth quarter of fiscal 2004, IXOS recorded further restructuring charges of $10.1 million. These restructuring charges taken by IXOS did not impact the operating results of Open Text as the restructuring charges were recorded as part of the liabilities assumed as of the date IXOS was acquired (see the table at the end of this note for further details). Furthermore, as the Company continues to finalize the restructuring plan, additional liabilities associated with the Open Text restructuring efforts may be incurred. Additionally, the amounts that Open Text has recorded as liabilities assumed as part of the business combination which have not yet been recognized by IXOS will be recognized by IXOS as expenses in their stand-alone financial statements as the respective liabilities are incurred. It is Open Text’s expectations that the majority of these liabilities will be incurred by the end of fiscal 2005.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
Tabular amounts in thousands, except per share data
Gauss
On October 16, 2003, 2016090 Ontario Inc. (“Ontario”), a wholly owned subsidiary of Open Text, acquired approximately 75% of the shares of Gauss Interprise AG (“Gauss”) pursuant to several sale and purchase agreements with major shareholders. The results of Gauss’ operations have been included in the consolidated financial statements of Open Text since that date. As of June 30, 2004,2005, Open Text had acquired approximately 92%95% of the common shares of Gauss as a result of these agreements, as well as through the purchase of common shares on the open market and through a public tender offer. Total cash consideration paid for the Company’s interest in Gauss is $9.8$10.3 million.
On December 23, 2003, at an Extraordinary Shareholder Meeting of Gauss, the Gauss shareholders voted to approve an Agreement of Control between Ontario and Gauss. The Agreement of Control is not effective until it is registered with the German Courts. Under German law registration occurs on the earlier of a) 30 days following shareholder approval or b) if any actions contesting the registration are filed, when such actions have been resolved. Pursuant to the German Stock Corporation Act, the Agreement entitles Ontario, as the majority shareholder of Gauss, to issue instructions to the management board of Gauss.
In May 2004, Gauss announced that the Agreement of Control between the majority shareholder Ontario and Gauss was registered in the commercial register at the lower court of Hamburg and became effective on May 6, 2004. The registrar at the commercial register granted the registration in spite of the fact that two complaints of shareholders against the validity of the resolutions are currently pending at the district court of Hamburg.
On May 12, 2004, the purchase offer of the major shareholder, Ontario, to the minority shareholders of Gauss commenced. Under the purchase offer Ontario offered to purchase the remaining outstanding shares of Gauss at a price of Euro 1.06 per Gauss-Share. This amount represented the 3-month trailing weighted average stock price for Gauss as determined by the German takeover authority. The original acceptance period had been two months. After certain shareholders filed for a special court procedure to reassess the amount of the offered consideration, the acceptance period was extended pursuant to mandatory German law until the end of these proceedings.
In addition, in April 2004 Gauss announced that effective July 1, 2004 the shares of Gauss will cease to be listed on a stock exchange. In connection with this delisting on July 2, 2004, a second offer by Ontario to purchase the remaining outstanding shares of Gauss at a price of Euro 1.06 per Gauss share has commenced. This acceptance period has been extended pursuant to mandatory German law until the end of the proceedings to reassess the amount of the offered consideration.
Gauss is a developer of Web content management software. It also provides Integrated Document and Output Management (IDOM) software for ERP systems. These products automate processes such as invoicing, ordering and insurance claims, allowing customers to convert large volumes of paper into electronic documents via imaging technology and processing them through highly structured workflows.
The Company has retained the services of an independent valuator to assist in the purchase price allocation. The work of the independent valuator is not yet finalized. The allocation presented in the preliminary purchase price allocation represents management’s best estimate of the allocation of the purchase price at the current time. These items may differ from the final purchase price allocation and these differences may be material.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
Tabular amounts in thousands, except per share data
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of the Gauss acquisition.
Current assets | $ | 3,712 | $ | 3,712 | ||||
Long-term assets | 1,737 | 1,737 | ||||||
Customer assets | 4,200 | 4,508 | ||||||
Technology | 5,500 | |||||||
Technology assets | 5,244 | |||||||
Goodwill | 16,965 | 16,913 | ||||||
Total assets acquired | 32,114 | 32,114 | ||||||
Current liabilities | (13,071 | ) | (13,071 | ) | ||||
Long-term liabilities | (5,039 | ) | (5,039 | ) | ||||
Liabilities recognized in connection with the business combination | (4,240 | ) | (4,240 | ) | ||||
Total liabilities assumed | (22,350 | ) | (22,350 | ) | ||||
Net assets acquired | $ | 9,764 | $ | 9,764 | ||||
The portion of the purchase price allocated to goodwill of $17.0 million was assigned to the Company’s reportable geographic segments as follows:
As of June 30, 2005 | ||||||
North America | $ | 11,536 | $ | 11,501 | ||
Europe | 5,429 | 5,412 | ||||
| $ | 16,965 | $ | 16,913 | |||
No minority interest was recorded as part of the purchase price as the net book value of Gauss’ assets and liabilities was in a negativedeficit position. To the extent Gauss incurs losses subsequent to the acquisition date; the Company will recognize the full amount of those losses. If Gauss generates income subsequent to the acquisition date, the Company will account for that income as follows:
| i) | Credit the full amount into income to the extent of post-acquisition losses charged against income; |
| ii) | Credit the minority’s share in the income against goodwill or additional-paid-in capital to the extent that those amounts adjust the basis of the acquired minority interest to zero; and |
| iii) | Credit any excess of the minority interests’ share in the income of the acquired enterprise to the minority interests. |
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
The customer assets of $4.2$4.5 million and the technology assets of $5.5$5.2 million have estimated useful lives of 5five years.
As part of the purchase price allocation, the Company recognized liabilities in connection with the acquisition of Gauss totaling $4.2 million. The liabilities recognized include severance and related charges in connection with a worldwide reduction in the Gauss workforce, in addition to transaction costs and costs relating to provisioning for excessiveexcess facilities. Of the total liabilities recognized in connection with the acquisition totaling $4.2 million, $0.7 million$558,000 remains accrued at June 30, 2004. As2005. Liabilities related to transaction-related charges are expected to be paid in the majority of this amount relatesupcoming fiscal year. Liabilities related to vacated facilities these amounts will be paid out over the termsterm of the various underlying leases.
Gauss had approximately $218 million of net operating loss carry forwards at December 31, 2003. Currently, no net deferred tax assets have been recorded in the preliminary purchase price allocation related to these operating loss carry forwards since at the current time it is unlikely that the Company will be able to utilize any of these net operating loss carry forwards. The gross deferred tax asset related to these loss carry forwards is approximately $91 million and is fully offset by a valuation allowance.lease.
Open Text intends to acquire 100% of the shares of Gauss. The total cash consideration for 100% of Gauss is estimated to be approximately $11.0 million.
A Director of the Company received $170,000 in consulting fees for assistance with the acquisition of Gauss. These fees are included in the acquisition costs. The Director abstained from voting on this transaction.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)Domea eGovernment
Tabular amounts in thousands, except per share data
On October 23, 2003, Open Text acquired all the common shares of SER Solutions Software GmbH and SER eGovernment Deutschland GmbH (together “DOMEA eGovernment”) for total consideration of up to $11.4 million, subject to meeting certain revenue performance and certain adjustments based on the Company’s assets and liabilities. The results of DOMEA eGovernment’s operations have been included in the consolidated financial statements of Open Text since that date. DOMEA eGovernment develops and markets the DOMEA eGovernment® software solution. The purchase price includesincluded contingent consideration of up to $3.8 million that maycould be earned by the former shareholders of DOMEA eGovernment based on the achievement of certain revenue targets through December 31, 2004. Amounts earned under this arrangement will be paid in the form of 50% cash and 50% in Open Text Common Shares. In addition, approximately $0.5 millionThe revenue targets have been achieved and accordingly $813,000 has been recorded in the year ended June 30, 2005, as due and payable to the former shareholders of Domea eGovernment, and $813,000 has been recorded within shareholders’ equity representing the fair value of the Company’s commitment to issue Common Shares. Based on the share purchase price is being held to secure certain warranties, representationsagreement, $813,000 of cash was paid on July 5, 2005 and covenants in the acquisition agreement. Given that this amount will only become payable when certain pre-acquisition contingencies have become resolved, the Company is unable to estimate when or if this amount will be paid.shares were issued on September 1, 2005.
The Company has retained the services of an independent valuator to assist in the purchase price allocation. The work of the independent valuator is not yet finalized. The allocation presented in the preliminary purchase price allocation represents management’s best estimate of the allocation of the purchase price at the current time. These items may differ from the final purchase price allocation and these differences may be material.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of the DOMEA eGovernment acquisition.purchase price allocation.
Current assets | $ | 2,537 | $ | 2,537 | ||||
Long-term assets | 249 | 249 | ||||||
Customer assets | 1,800 | 2,091 | ||||||
Technology | 1,700 | |||||||
Technology assets | 2,829 | |||||||
Goodwill | 5,058 | 3,638 | ||||||
Total assets acquired | 11,344 | 11,344 | ||||||
Current liabilities | (2,080 | ) | (2,080 | ) | ||||
Long-term liabilities | (1,336 | ) | (1,336 | ) | ||||
Liabilities recognized in connection with the business combination | (350 | ) | (350 | ) | ||||
Total liabilities assumed | (3,766 | ) | (3,766 | ) | ||||
Net assets acquired | $ | 7,578 | $ | 7,578 | ||||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
The portion of the purchase price allocated to goodwill of $5.1$3.6 million was assigned entirely to the Company’s European operating segment.
Customer assets of $1.8$2.1 million and technology assets of $1.7$2.8 million were assigned a useful life of 5five years.
As part of the purchase price allocation, the Company recognized liabilities in connection with the acquisition of DOMEA eGovernment totaling $0.4 million. The liabilities recognized relate to transaction costs related to this acquisition. Of the total liabilities recognized in connection with the acquisition totaling $0.4 million, $15 thousand remains accrued atThis liability has been fully paid as of June 30, 2004.2005.
A Director of the Company received $90,000 in consulting fees for assistance with the acquisition of DOMEA eGovernment. These fees are included in the acquisition costs. The Director abstained from voting on this transaction.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
Tabular amounts in thousands, except per share data
Pro forma results
The following pro forma results of operations reflect the combined results of Open Text, Gauss (acquired on October 16, 2003), DOMEA eGovernment (acquired on October 23, 2003) and IXOS, for the twelve months ended June 30, 2004 and 2003 as if the business combinations occurred at the beginning of Open Text’s fiscal year. The information used for this pro forma disclosure was obtained from unaudited reports filed with the Ontario Securities Commission and the Deutsche Borse for the quarterly and annual (as applicable) periods ended June 30, 2003, September 30, 2003 and December 31, 2003 and from internal financial reports prepared by Gauss for the period from July 1, 2003 to October 15, 2003, from the internal financial reports prepared by DOMEA eGovernment for the periods ended September 30, 2002, December 31, 2002, March 31, 2003, June 30, 2003, September 30, 2003 and for the period from October 1, 2003 to October 22, 2003 and from the unaudited financial statements filed with the Deutsche Borse for the periods ended March 31, 2003 and December 31, 2003 and from the internal reports prepared by IXOS for the period from January 1, 2004 to February 29, 2004.
Twelve months ended June 30 | |||||||
| 2004 | 2003 | ||||||
Revenue | $ | 395,600 | $ | 342,866 | |||
Net Income (loss) | $ | 1,356 | $ | (1,358 | ) | ||
Basic EPS | $ | 0.03 | $ | (0.03 | ) | ||
Shares used in Basic EPS Calculation | 50,048 | 48,453 | |||||
The pro forma results are not necessarily indicative of what would have occurred if the acquisitions had actually been completed as of the assumed dates and for the periods presented. The pro forma results represent Open Text’s preliminary assessment of the intangible assets and are subject to change and, therefore, the final values may differ substantially from these amounts.
Asset Acquisitions
During the year,Fiscal 2004, the Company acquired the assets of two companies through share purchases for total consideration of $2.2 million. The principal assets acquired for these acquisitions were both technology and tax assets. The tax assets had estimated fair values of $6.8 million $3.4and $3.7 million respectively. As the benefit of the tax losses exceeded the purchase price after allocating estimated fair values to the assets acquired and liabilities assumed, the Company recorded a deferred tax asset of $12.0 million and a deferred tax credit of $10.1 million in respect of these acquisitions. As the losses are utilized the deferred tax asset and deferred credit will decrease concurrentlyproportionately and the Company will recognize the net benefit of the losses in its income tax expense for the period.
Fiscal 2003
Corechange Inc.
On February 25, 2003, Open Text Inc. (“OTI”) a wholly-owned subsidiary of the Company, acquired all of the issued and outstanding shares of Corechange Inc. (“Corechange”). Consideration for this acquisition was comprised of (1) cash consideration of $3.6 million paid on closing; (2) additional cash consideration of $650,000 to be held in escrow in order to satisfy potential breaches of representations and warranties as provided for in the share purchase agreement; and (3) additional cash consideration to be payable over the one-year period following closing, calculated as a fixed percentage of certain revenues of Corechange. The results of operations of Corechange have been consolidated with those of Open Text beginning February 25, 2003. Boston-based Corechange delivers infrastructure software to develop, deploy and manage enterprise portals on a global scale.
The following table summarizes the purchase price allocation:
Current assets | $ | 2,968 | ||
Capital assets | 753 | |||
Deferred tax assets | 596 | |||
Technology assets | 4,600 | |||
Customer assets | 2,000 | |||
Goodwill | 1,989 | |||
Total assets acquired | 12,906 | |||
Current liabilities | (8,656 | ) | ||
Net assets acquired | $ | 4,250 | ||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
The following table summarizes the purchase price allocation:
Current assets | $ | 2,968 | ||
Capital assets | 753 | |||
Deferred tax assets | 596 | |||
Technology assets | 4,600 | |||
Customer assets | 2,000 | |||
Goodwill | 1,989 | |||
Total assets acquired | 12,906 | |||
Current liabilities | (8,656 | ) | ||
Net assets acquired | $ | 4,250 | ||
The total purchase price allocated to goodwill of $2.0 million was assigned entirely to the Company’s North American geographic segment.
The customer assets of $2.0 million were assigned a useful life of 7seven years. The technology assets of $4.6 million have also been assigned a useful life of 7seven years.
As part of the purchase price allocation, the Company recognized liabilities in connection with the acquisition of Corechange totaling $4.1 million. The liabilities recognized include severance and related charges in connection with a worldwide reduction in the Corechange workforce, in addition to transaction costs, costs relating to provisioning for excessive facilities, and certain pre-acquisition contingencies. Of the total liabilities recognized in connection with the acquisition, $0.6 million remains accrued atAt June 30, 2004 in respect of a pre-acquisition contingency,2005, the resolution of which may take in excess of one year.liabilities had been fully paid.
Eloquent, Inc.
On March 20, 2003, Open Text completed an acquisition of all of the issued and outstanding shares of Eloquent Inc. (“Eloquent”) for cash consideration of $6.7 million, of which $1.0 million is being held in escrow to secure certain representations, warranties and covenants of Eloquent in the acquisition agreement. The results of operations of Eloquent have been consolidated with those of Open Text beginning March 20, 2003. San Mateo-based Eloquent’s closed-loop “sales readiness” solution, LaunchForce(TM)LaunchForce™, is built on a scaleable technology platform designed to deploy corporate knowledge to front-line employees and partners.
The following table summarizes the purchase price allocation:
Current assets | $ | 4,229 | ||
Other assets | 132 | |||
Deferred tax assets | 1,020 | |||
Technology assets | 2,300 | |||
Customer assets | 800 | |||
Goodwill | 582 | |||
Total assets acquired | 9,063 | |||
Current liabilities | (2,350 | ) | ||
Net assets acquired | $ | 6,713 | ||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
Tabular amounts in thousands, except per share data
The total purchase price allocated to goodwill of $0.6 million was assigned entirely to the Company’s North American geographic segment.
The customer assets of $0.8 million were assigned a useful life of 7seven years. The technology assets of $2.3 million have also been assigned a useful life of 7seven years.
As part of the purchase price allocation, the Company recognized liabilities in connection with the acquisition of Eloquent totaling $1.2 million. The liabilities recognized include severance and related charges in connection with a reduction in the Eloquent workforce, in addition to transaction costs and pre-acquisition contingencies. Of the total liabilities recognized in connection with the acquisition, $0.5 million remains accrued at June 30, 20042005 in respect of a pre-acquisition contingency, the resolution of which the Company expects to occur within fiscal 2005.Fiscal 2006.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
Centrinity, Inc.
On November 1, 2002, the Company completed the acquisition of all of the issued and outstanding shares of Centrinity Inc. (“Centrinity”) for cash consideration of $20.3 million. The results of operations of Centrinity have been consolidated with those of Open Text beginning November 1, 2002. Toronto-based Centrinity, which has developed a communications and messaging platform, had over 8 million users worldwide.
The following table summarizes the purchase price allocation:
Net working capital items | $ | 552 | ||
Capital assets | 1,655 | |||
Deferred tax assets | 12,413 | |||
Customer assets | 2,400 | |||
Technology assets | 4,000 | |||
Goodwill | 5,311 | |||
Liabilities recognized in connection with the business combination | (6,031 | ) | ||
Net assets acquired | $ | 20,300 | ||
The total purchase price allocated to goodwill of $5.3 million was assigned to the Company’s reportable geographic segments as follows:
North America | $ | 2,921 | |
Europe | 2,390 | ||
| $ | 5,311 | ||
Customer contracts of $1.0 million were assigned a useful life of 3three years, while the customer relationships of $1.4 million were assigned a useful life of 7seven years. The technology assets of $4.0 million hashave been separated into subcomponents, whose useful lives have been assigned as either 5five or 7seven years.
As part of the purchase price allocation, the Company recognized liabilities in connection with the acquisition of Centrinity totaling $6.0 million. The liabilities recognized include severance and related charges in connection with a worldwide reduction in the Centrinity workforce, in addition to transaction costs, costs relating to provisioning for excessive facilities, and pre-acquisition contingencies. Of the total liabilities recognized in
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
Tabular amounts in thousands, except per share data
connection with the acquisition, $3.9$4.6 million remains accrued at June 30, 2004.2005. The remaining accrual relates to provisioning for excessive facilities and pre-acquisition contingencies. The component of the accrual relating to excessive facilities will be paid out over the term of the respective leases. The Company is unable to estimate when the component relating to pre-acquisition contingencies will be paid, as the resolution of the underlying contingency is not estimable.
Fiscal 2002
There were no acquisitions in fiscal 2002.
The following tables summarize the activity that the Company has incurred with respect to its acquisition accruals over the past 2 fiscal years:
| Balance, June 30, 2002 | Additions | Usage | Adjustments to goodwill | Balance, June 30, 2003 | ||||||||||||
Corechange | ||||||||||||||||
Employee termination costs | $ | — | $ | 1,148 | $ | (892 | ) | $ | — | $ | 256 | |||||
Excess facilities | — | 1,557 | (180 | ) | — | 1,377 | ||||||||||
Transaction-related costs | — | 1,136 | (640 | ) | — | 496 | ||||||||||
| — | 3,841 | (1,712 | ) | — | 2,129 | |||||||||||
Eloquent | ||||||||||||||||
Employee termination costs | — | 117 | (76 | ) | — | 41 | ||||||||||
Excess facilities | — | — | — | — | — | |||||||||||
Transaction-related costs | — | 1,097 | (451 | ) | — | 646 | ||||||||||
| — | 1,214 | (527 | ) | — | 687 | |||||||||||
Centrinity | ||||||||||||||||
Employee termination costs | — | 824 | (324 | ) | — | 500 | ||||||||||
Excess facilities | — | 5,131 | (685 | ) | — | 4,446 | ||||||||||
Transaction-related costs | — | 2,155 | (775 | ) | — | 1,380 | ||||||||||
| — | 8,110 | (1,784 | ) | — | 6,326 | |||||||||||
Totals | ||||||||||||||||
Employee termination costs | — | 2,089 | (1,292 | ) | — | 797 | ||||||||||
Excess facilities | — | 6,688 | (865 | ) | — | 5,823 | ||||||||||
Transaction-related costs | — | 4,388 | (1,866 | ) | — | 2,522 | ||||||||||
| $ | — | $ | 13,165 | $ | (4,023 | ) | $ | — | $ | 9,142 | ||||||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data
| Balance, June 30, 2003 | Additions | Usage | Adjustments to goodwill | Balance, June 30, 2004 | |||||||||||||
IXOS | |||||||||||||||||
Employee termination costs | $ | — | $ | 12,413 | $ | (4,975 | ) | $ | — | $ | 7,438 | ||||||
Excess facilities | — | 23,890 | (51 | ) | 23,839 | ||||||||||||
Transaction-related costs | — | 11,911 | (8,473 | ) | 3,438 | ||||||||||||
| — | 48,214 | (13,499 | ) | — | 34,715 | ||||||||||||
Gauss | |||||||||||||||||
Employee termination costs | — | 1,117 | (903 | ) | — | 214 | |||||||||||
Excess facilities | — | 1,127 | (629 | ) | 498 | ||||||||||||
Transaction-related costs | — | 1,996 | (1,996 | ) | — | ||||||||||||
| — | 4,240 | (3,528 | ) | — | 712 | ||||||||||||
Domea | |||||||||||||||||
Employee termination costs | — | — | — | — | — | ||||||||||||
Excess facilities | — | — | — | — | — | ||||||||||||
Transaction-related costs | — | 350 | (335 | ) | — | 15 | |||||||||||
| — | 350 | (335 | ) | — | 15 | ||||||||||||
Corechange | |||||||||||||||||
Employee termination costs | 256 | — | (256 | ) | — | — | |||||||||||
Excess facilities | 1,377 | — | (826 | ) | — | 551 | |||||||||||
Transaction-related costs | 496 | — | (71 | ) | (400 | ) | 25 | ||||||||||
| 2,129 | — | (1,153 | ) | (400 | ) | 576 | |||||||||||
Eloquent | |||||||||||||||||
Employee termination costs | 41 | — | (41 | ) | — | — | |||||||||||
Excess facilities | — | — | — | — | — | ||||||||||||
Transaction-related costs | 646 | — | (146 | ) | 500 | ||||||||||||
| 687 | — | (187 | ) | — | 500 | ||||||||||||
Centrinity | |||||||||||||||||
Employee termination costs | 500 | — | — | 500 | |||||||||||||
Excess facilities | 4,446 | — | (1,080 | ) | — | 3,366 | |||||||||||
Transaction-related costs | 1,380 | — | (648 | ) | (732 | ) | — | ||||||||||
| 6,326 | — | (1,728 | ) | (732 | ) | 3,866 | |||||||||||
Totals | |||||||||||||||||
Employee termination costs | 797 | 13,530 | (6,175 | ) | — | 8,152 | |||||||||||
Excess facilities | 5,823 | 25,017 | (2,586 | ) | — | 28,254 | |||||||||||
Transaction-related costs | 2,522 | 14,257 | (11,669 | ) | (1,132 | ) | 3,978 | ||||||||||
| $ | 9,142 | $ | 52,804 | $ | (20,430 | ) | $ | (1,132 | ) | $ | 40,384 | ||||||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
Tabular amounts in thousands, except per share datadata)
NOTE 19—18—NET INCOME PER SHARE
| Year Ended June 30, | |||||||||
| 2004 | 2003 | 2002 | |||||||
Basic income per share | |||||||||
Net income | $ | 23,298 | $ | 27,757 | $ | 16,671 | |||
Weighted average number of shares outstanding | 43,744 | 39,050 | 39,958 | ||||||
Basic income per share | $ | 0.53 | $ | 0.71 | $ | 0.42 | |||
Diluted income per share | |||||||||
Net income | $ | 23,298 | $ | 27,757 | $ | 16,671 | |||
Weighted average number of shares outstanding | 43,744 | 39,050 | 39,958 | ||||||
Dilutive effect of stock options * | 3,528 | 2,344 | 2,520 | ||||||
Adjusted weighted average number of shares outstanding | 47,272 | 41,394 | 42,478 | ||||||
Diluted income per share | $ | 0.49 | $ | 0.67 | $ | 0.39 | |||
Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income by the shares used in the calculation of basic net income per share plus the dilutive effect of common share equivalents, such as stock options, using the treasury stock method. Common share equivalents are excluded from the computation of diluted net income per share if their effect is anti-dilutive.
| Year Ended June 30, | |||||||||
| 2005 | 2004 | 2003 | |||||||
Basic earnings per share | |||||||||
Net income | $ | 20,359 | $ | 23,298 | $ | 27,757 | |||
Basic earnings per share | $ | 0.41 | $ | 0.53 | $ | 0.71 | |||
Diluted earnings per share | |||||||||
Net income | $ | 20,359 | $ | 23,298 | $ | 27,757 | |||
Diluted earnings per share | $ | 0.39 | $ | 0.49 | $ | 0.67 | |||
Weighted average number of shares outstanding | |||||||||
Basic | 49,919 | 43,744 | 39,050 | ||||||
Effect of dilutive securities: Stock options | 2,173 | 3,528 | 2,343 | ||||||
Diluted | 52,092 | 47,272 | 41,393 | ||||||
For the years ended June 30, 2005, 2004 and 2003 respectively, 621,691, 127,442 and 907,808 options have been excluded from the calculation of diluted earnings per share because the exercise price of the stock options was greater than or equal to the average price of the Common Shares and consequently their inclusion would have been anti-dilutive.
NOTE 19—SUMMARY OF MATERIAL DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (“GAAP”) IN THE UNITED STATES AND CANADA
The consolidated financial statements of the Company have been prepared in accordance with U.S. GAAP which conform in all material respects with Canadian GAAP except as set forth below.
Condensed Consolidated Income StatementsBalance Sheets
| June 30, | ||||||
| 2005 | 2004 | |||||
Total assets in accordance with U.S. GAAP | $ | 640,936 | $ | 668,655 | ||
Goodwill(a) | 9,092 | 9,092 | ||||
Total assets in accordance with Canadian GAAP | $ | 650,028 | $ | 677,747 | ||
Total shareholders’ equity in accordance with U.S. GAAP | $ | 415,755 | $ | 433,005 | ||
Goodwill(a) | 9,092 | 9,092 | ||||
Minimum pension liability(d) | 535 | — | ||||
Total shareholders’ equity in accordance with Canadian GAAP | $ | 425,382 | $ | 442,097 | ||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
Condensed Consolidated Statement of Operations
| June 30, 2005 | ||||
Net income in accordance with U.S. GAAP | $ | 20,359 | ||
ESPP compensation (b) | (2,079 | ) | ||
Stock option compensation (c) | (2,978 | ) | ||
Net Income in accordance with Canadian GAAP | $ | 15,302 | ||
There were no material differences in the consolidated statement of income statements between U.S. and Canadian GAAP for the years ended on June 30, 2004 and 2003.
Condensed Consolidated Balance Sheets
| June 30, | ||||||
| 2004 | 2003 | |||||
Total assets in accordance with U.S. GAAP | $ | 670,755 | $ | 238,687 | ||
Goodwill (a) | 9,092 | 9,092 | ||||
Total assets in accordance with Canadian GAAP | $ | 679,847 | $ | 247,779 | ||
Total shareholders’ equity in accordance with U.S. GAAP | $ | 433,005 | $ | 162,397 | ||
Goodwill (a) | 9,092 | 9,092 | ||||
Total shareholders’ equity in accordance with Canadian GAAP | $ | 442,097 | $ | 171,489 | ||
(a) Goodwill
Under U.S. GAAP, any portion of the purchase price for acquisitions made by the Company allocated to research and development activities for which there is no alternative future use must be expensed on the acquisition date. Under Canadian GAAP, Handbook Section 1581, such amounts were included in the amount recognized as goodwill as they cannot be expensed and did not meet the criterion to be separately classified as acquired intangible assets.
(b) ESPP
As of June 30, 2005, the Company offered its employees the opportunity to buy its Common Shares at a purchase price that was computed as the lesser of:
As of June 30, 2005, the ESPP qualified as non-compensatory plans under APB 25 and as such no compensation cost was recognized in relation to the discount offered to employees for purchases made under the ESPP.
In January 2002, the Canadian Accounting Standards Board (“AcSB”) issued CICA Section 3870 “Stock-Based Compensation and Other Stock-Based Payments” (“Section 3870”). Section 3870 came into effect for fiscal years beginning on or after January 1, 2002. In March 2003, the AcSB amended Section 3870 to require that all enterprises expense stock-based compensation. For public companies this rule was effective for fiscal years beginning on or after January 1, 2004.
The terms of the ESPP result in it being treated as a compensatory plan under Section 3870 and as such compensation expense is recognized under the fair value method.
In May 2005, the Board of Directors approved an amendment to the ESPP to reduce the discount at which shares may be repurchased. This amendment came into affect on July 1, 2005 (see Note 22—Subsequent Events).
During the year ended June 30, 2005, the Company recorded compensation expense of $2.1 million in relation to the ESPP under Canadian GAAP.
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share datadata)
(c) Stock option compensation
In accordance with the amendments to Section 3870, the Company, for Canadian GAAP purposes only, has adopted the policy retroactively without restatement of prior periods and has commenced expensing the fair value of options granted to employees on or after July 1, 2002. The Company has calculated and recorded a charge to opening accumulated deficit in the amount of $2.9 million, representing the expense for the 2003 and 2004 fiscal years with a corresponding increase in contributed surplus.
During the year ended June 30, 2005, the Company recorded compensation expense of $3.0 million for stock options granted to employees on or after July 1, 2002.
(d) Minimum pension liability
Under U.S. GAAP, the Company is required to record an additional minimum pension liability for its pension plan in IXOS (see Note 9—Accounts Payable—Trade And Accrued Liabilities). Accumulated comprehensive income has been charged with $535,000, net of tax on account of this plan. No such adjustment is required under Canadian GAAP.
NOTE 20—PROVISION FOR (RECOVERY OF) RESTRUCTURING CHARGE
In the three months ended March 31, 2004, the Company recorded a restructuring charge of approximately $10 million relating to its North America segment. The charge consisted primarily of costs associated with a workforce reduction, excess facilities associated with the integration of the IXOS acquisition, write downs of capital assets and legal costs related to the termination of facilities. On a quarterly basis the Company conducts an evaluation of these balances and revises its assumption and estimates. As part of this evaluation a number of decisions were made regarding actions still to take place as contemplated under the original plan and these decisions necessitated an adjustment to the Company’s original restructuring accrual. Based on the above analyses, the Company recorded recoveries to this restructuring charge of $1.7 million during the year ended June 30, 2005. These recoveries represented, primarily, reductions in estimated employee termination costs. The actions relating to employer workforce reduction were substantially complete as of June 30, 2005. The provision relating to facility costs is expected to be expended by 2014.
The activity of the Company’s provision for restructuring charges is as follows since the beginning of the current fiscal year:
| As of June 30, 2004 | Provision | Usage | Recoveries | As of June 30, 2005 | |||||||||||||
Employee severance | $ | 3,290 | $ | — | $ | (1,700 | ) | $ | (1,423 | ) | $ | 167 | |||||
Facility costs | 2,538 | — | (359 | ) | (301 | ) | 1,878 | ||||||||||
Legal and other outside service costs | 90 | — | (90 | ) | — | — | |||||||||||
| $ | 5,918 | $ | — | $ | (2,149 | ) | $ | (1,724 | ) | $ | 2,045 | ||||||
| June 30, 2003 | Provision | Usage | Recoveries | As of June 30, 2004 | |||||||||||||
Employee severance | $ | — | $ | 5,656 | $ | (2,366 | ) | $ | — | $ | 3,290 | ||||||
Facility costs | — | 3,317 | (779 | ) | — | 2,538 | |||||||||||
Capital assets | — | 684 | (684 | ) | — | — | |||||||||||
Legal and other outside service costs | — | 348 | (258 | ) | — | 90 | |||||||||||
| $ | — | $ | 10,005 | $ | (4,087 | ) | $ | — | $ | 5,918 | |||||||
OPEN TEXT CORPORATION
Notes to Consolidated Financial Statements—(Continued)
(Tabular amounts in thousands, except per share data)
NOTE 21—RESTRUCTURING COSTS
During fiscal 2004, in connection with the integration of its recent acquisitions, the Company approved a plan to streamline its operations. The initiative totaled approximately $10.0 million and consists primarily of workforce reduction and excess facilities associated with the integration. Charges for employee severance costs represent the reduction of Open Text’s work force from our core businesses by approximately 140 people. The components of the restructuring charges are as follows:
| July 1, 2003 Balance | June 30, 2004 Balance | ||||||||||||
| Provision | Usage | ||||||||||||
Employee termination benefits | $ | — | $ | 5,656 | $ | (2,366 | ) | $ | 3,290 | ||||
Facility costs | — | 3,317 | (779 | ) | 2,538 | ||||||||
Capital assets | — | 684 | (684 | ) | — | ||||||||
Legal and other outside service costs | — | 348 | (258 | ) | 90 | ||||||||
| $ | — | $ | 10,005 | $ | (4,087 | ) | $ | 5,918 | |||||
NOTE 22 —RELATEDRELATED PARTY TRANSACTIONS
During fiscal 2004,Fiscal 2005, a Director of the Company received $480,000 (fiscal$315,970 (Fiscal 2004—$480,000, Fiscal 2003—$237,000) in consulting fees for assistance with acquisition activities.
NOTE 23—22—SUBSEQUENT EVENTEVENTS
The Harold Tilbury and Yolanda Tilbury Family Trust brought an action against the Company in July, 2002, before a single arbitrator, under the Ontario Arbitrations Act alleging damages for breach of a stock purchase agreement relating to the Company’s acquisition of Bluebird. The claim was for $10 million, plus $5 million in punitive damages. Bluebird and Open Text counterclaimed against the Tilburys claiming that not only was no further amount owing for the purchase of their shares, but that they were entitled to a return of the money already paid to the Tilburys, in respect of the business acquisition. Bluebird also claimed damages against Harold Tilbury with respect to the lease of the Bluebird premises. In April 2005, the arbitrator ruled that the sum of approximately $1.9 million, plus interest, was payable by the Company to the Tilburys under the terms of the share purchase agreement and for termination of employment related costs, and subsequently ruled that a further $222,000 was payable under the terms of the share purchase agreement as additional purchase consideration. The Company’s counterclaims were dismissed. A decision on reimbursement of costs had been deferred, at that date, and in August 2005 the arbitrator ruled that the sum of approximately $847,000 is payable by the Company to the Tilburys on account of costs. Based on these awards, a total amount of $3.7 million was recorded as being payable to the Tilburys. This consisted of $2.5 million as additional purchase consideration, $240,000 relating to severance related costs, $85,000 relating to improvements for leasehold properties occupied by Bluebird, $754,000 relating to interest and $129,000 relating to legal costs.
In August 2005, the Domination Agreement with IXOS (see Note 12) which had been contested by certain IXOS shareholders was settled, as a result of an out of court settlement that was ratified by the court on August 9, 2005. Additionally, in August 2005, the contestation of the agreement of control relating to acquisition of Gauss, (see Note 12), was also settled in relation to two shareholders’ suits against the resolutions of the shareholders’ meetings of December 23, 2003. Amounts of $98,307 and $126,047 were accrued at June 30, 2005 in respect of these settlements.
In July 2004,2005, the Company entered intoannounced that management had committed itself to a commitmentrestructuring plan relating primarily to construct a building in Waterloo, Ontario in an effortexcess facilities and severance costs. The restructuring charge is expected to consolidate its existing facilities in Waterloo. Construction of this facility will commence in the Company’s first quarter ending September 30, 2004,range between approximately $25 million and $30 million and is expected to be completed by August 2005 which istaken during the approximate date when the Company’s current leases for space in Waterloo will expire. The size of this facility is approximately the same as the Company’s current space under lease in Waterloo, with a provision for modest growth. The facility is to be constructed on a land which has been leased from the University of Waterloo in its High-Technology Park for a period of 99 years. The total cost of this project is approximately $8 million and at this point the Company intends to finance this investment through its working capital.
On August 3, 2004, the Company announced that it will acquire Artesia Technologies, Inc. of Rockville, Md., a privately owned company best known for its pioneering solutions in Digital Asset Management (DAM). The cash consideration paid for this acquisition will be approximately $6 million. The Company will begin consolidating Artesia’s results during its first fiscal quarter of 2005.
On August 31, 2004, the Company announced that it had signed a definitive agreement to acquire the Vista Plus® suite of products, business assets, and the related employees from Quest Software Inc. Vista Plus captures and stores business-critical information from packaged applications like Oracle E-Business Suite, PeopleSoft and mySAP as well as custom and mainframe legacy environments. The acquisition expands Open Text’s integration and report management capabilities as part of its comprehensive ECM suite. Vista provides a strong platform from which to address report content found in ERP applications, and business intelligence (BI) software from Cognos, Business Objects, Crystal Reports and others. The transaction is expected to close in September 2004, and the cash consideration will be approximately $24 million. The Company will begin to consolidate the results of Vista Plus beginning in its first quarter ending September 30, 2004.2005.
On May 3, 2005 the Board of Directors of the Company approved an amendment to the ESPP to reduce the discount at which shares may be purchased to 95% of the average market price on the last day of the purchase period. The ESPP amendment was subject to the approval of the TSX and was to become effective on the first day of the purchase period during which SFAS 123R becomes effective. The TSX approved this amendment on June 21, 2005. SFAS 123R is effective in the first interim or annual reporting period beginning after June 15, 2005 and as a result the ESPP amendment came into effect on July 1, 2005.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None
| Item 9A. | Controls and Procedures |
Item 9A.(A) Evaluation of Disclosure Controls and Procedures
As of June 30, 2004, ourthe end of the period covered by this Annual Report on Form 10-K, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, performed an evaluation ofevaluated the effectiveness of the design and operation of ourCompany’s disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, ourthe Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2004, ourthe end of the period covered by this Annual Report on Form 10-K, the Company’s disclosure controls and procedures arewere effective in ensuringto provide reasonable assurance that material information required to be disclosed in our reports filed or submitted under the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified inby the SecuritiesSEC and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to ourthe Company’s management, including ourthe Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There
(B) Management’s Annual Report On Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f), to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with the authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
The Company’s management assessed the Company’s internal control over financial reporting as of June 30, 2005, the end of the Company’s fiscal year. In making its assessment, the Company’s management used the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that the Company’s internal control over financial reporting was effective as of June 30, 2005. In reliance on the guidance set forth in Question 3 of a “Frequently Asked Questions” interpretive release issued by the staff of the Securities and Exchange Commission’s Office of the Chief Accountant and the Division of Corporation Finance in June 2004 (and revised on October 6, 2004), the Company’s management determined that it would exclude Optura Inc. and Artesia Technologies Inc., which the Company acquired on February 11, 2005 and August 19, 2004 respectively, from the scope of its assessment of internal control over financial reporting as of June 30, 2005. These acquisitions represented 3.1% of the Company’s Fiscal 2005 revenue, 5.7% of the Company’s Fiscal 2005 net income and 1.5% of the Company’s Fiscal 2005 assets (see Note 17—Acquisitions).
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, do not expect the Company’s Disclosure Controls or the Company’s internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2005 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which appears under Item 8 of this Annual Report on Form 10-K. KPMG LLP has issued an attestation report concurring with management’s assessment, which is included at the beginning of Part II, Item 8 of this Form 10-K.
(C) Attestation Report of the Independent Registered Public Accounting Firm
See Report at the beginning of Part II, Item 8 of this Form 10-K.
(D) Changes in Internal Controls over Financial Reporting
As a result of the evaluation completed by management, in which the Company’s Chief Executive Officer and Chief Financial Officer participated, management has concluded that there were no changes in ourthe Company’s internal control over financial reporting during the Company’s fourth fiscal quarter ended on June 30, 20042005 that havehas materially affected, or areis reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.
| Item 9B. | Other Information |
Effective September 23, 2005, the Company and P. Thomas Jenkins entered into an amendment to the employment agreement of Mr. Jenkins. The amended agreement provides for an annual base salary and for an annual performance bonus based upon goals approved by the Board of Directors upon recommendation of the Compensation Committee from time to time. The amended agreement provides that, upon termination without “just cause”, the Company will pay Mr. Jenkins an amount equivalent to: (i) 15 months base salary; (ii) any performance bonus which has been earned on a pro rata basis to the date of termination; and (iii) 1.25 times Mr. Jenkins’ target annual compensation payment for the then current fiscal year. In addition, Mr. Jenkins will be entitled to receive all other benefits to which he would have been entitled during the 15-month period following termination. If Mr. Jenkins’ employment is terminated within 6 months following a change of control other than for just cause, disability or death, then Mr. Jenkins will be entitled to the severance entitlements set out above and all stock options granted to him will be deemed to vest and shall be exercisable by him for a period of 90 days following the date of the notice of termination.
Effective September 23, 2005, the Company and John Shackleton entered into an amendment to the employment agreement of Mr. Shackleton. The amended agreement provides for an annual base salary and for an annual performance bonus based upon goals approved by the Board of Directors upon recommendation of the Compensation Committee from time to time. The amended agreement provides that, upon termination without “just cause”, the Company will pay Mr. Shackleton an amount equivalent to: (i) 15 months base salary; (ii) any performance bonus which has been earned on a pro rata basis to the date of termination; and (iii) 1.25 times Mr. Shackleton’s target annual compensation payment for the then current fiscal year. In addition, Mr. Shackleton will be entitled to receive all other benefits to which he would have been entitled during the 15-month
period following termination. If Mr. Shackleton’s employment is terminated within 6 months following a change of control other than for just cause, disability or death, then Mr. Shackleton will be entitled to the severance entitlements set out above and all stock options granted to him will be deemed to vest and shall be exercisable by him for a period of 90 days following the date of the notice of termination.
Effective September 23, 2005, the Company entered into an employment agreement with Alan Hoverd. The employment agreement provides for an annual base salary and for an annual performance bonus based upon goals approved by the Board of Directors upon recommendation of the Compensation Committee from time to time. The employment agreement provides that, upon termination without “just cause”, the Company will pay Mr. Hoverd an amount equivalent to: (i) 12 months base salary; (ii) any performance bonus which has been earned on a pro rata basis to the date of termination; and (iii) Mr. Hoverd’s target annual compensation payment for the then current fiscal year. In addition, Mr. Hoverd will be entitled to receive all other benefits to which he would have been entitled during the 12-month period following termination. If Mr. Hoverd’s employment is terminated within 6 months following a change of control other than for just cause, disability or death, then Mr. Hoverd will be entitled to the severance entitlements set out above and all stock options granted to him will be deemed to vest and shall be exercisable by him for a period of 90 days following the date of the notice of termination.
Item 9B. Other InformationPART III
None.
Item 10. Directors and Executive Officers of the Registrant
| Item 10. | Directors and Executive Officers of the Registrant |
The following table sets forth certain information as to the directors and executive officers of the Company as of June 30, 2004.September 1, 2005.
Name | Age | Position with Company | Principal Occupation | |||
P. Thomas Jenkins
| Director, Executive Chairman and Chief Strategy Officer | Executive Chairman and Chief Strategy Officer | ||||
John Shackleton Illinois, USA | 58 | Director, President and Chief Executive Officer | ||||
| ||||||
Randy Fowlie(2)(3)
| Director | |||||
Carol Coghlan Gavin(1)(3) Illinois, USA | 49 | Director | President, Winston Advisors Ltd. | |||
Peter Hoult(1)(2)(3)(4)
| Director | Strategic Business Consultant, | ||||
Brian Jackman
| ||||||
| Director | President, | ||||
Ken Olisa(2)(4) London, UK | ||||||
| 53 | Director | Chairman and Chief Executive Officer, | |||
| Director | Chairman and Chief Executive Officer, | ||||
Michael Slaunwhite(1)(2) Ontario, Canada | 44 | Director | Chairman and Chief Executive Officer, Halogen Software Inc. | |||
Alan Hoverd
| Chief Financial Officer | Chief Financial Officer | ||||
Anik Ganguly
| Executive Vice President, | Executive Vice President, | ||||
Bill Forquer
| Executive Vice President, Marketing | Executive Vice President, Marketing | ||||
| Executive Vice President, Worldwide Sales | Executive Vice President, Worldwide Sales | ||||
Kirk Roberts Ontario, Canada | 44 | Executive Vice President, Services | Executive Vice President, Services |
| (1) | Member of the Compensation Committee. |
| (2) | Member of the Audit Committee. |
| (3) | Member of the Corporate Governance and Nominating Committee. |
| (4) | Member of the Advisory Committee. |
P. Thomas Jenkins has served as a director of the Company since December 1994 and as Executive Chairman of the Company since June 30, 2005. Mr. Jenkins was appointed Chief Strategy Officer of the Company in August 2005. From 1997 until July 2005, Mr. Jenkins served as Chief Executive Officer of the Company from July 1997.Company. Mr. Jenkins is currently a member of the board of BMC Software, Inc. From December 1994 to July 1997, Mr. Jenkins held progressive executive positions within the Company. From December 1989 until June 1994, he held several executive positions with DALSA Inc., an electronic imaging manufacturer. Mr. Jenkins received an M.B.A. in technology management from York University, a M.A. Sc. in electrical engineering from the University of Toronto and a B. Eng. Mgt. in technology and commerce from McMaster University.
John Shackletonhas served as director of the Company since January 1999 and as the President and Chief Executive Officer of the Company since July 2005. From November 1998.1998 to July 2005, Mr. Shackleton served as President of the Company. From July 1996 to 1998.1998 Mr. Shackleton served as President of the Platinum Solution division for Platinum Technology Inc. Prior to that he served as Vice President of Professional Services for the Central U.S. and South America at Sybase, Inc., as Vice President of Worldwide Consulting at ViewStar Corp., a document management imaging company, and he directed several consulting practices for Oracle Systems Corp. Mr. Shackleton is also currently a director of OmniViz, Inc.
Randy Fowlie has served as a director of the Company since March 1998. From June 1999 toJanuary 2005 until present, Mr. Fowlie has held the position of Vice President and General Manager, Digital Media of Leitch Technology Corporation, a public software and hardware company, which acquired Inscriber Technology Corporation in January 2005. From June 1999 to January 2005, Mr. Fowlie held the position of Chief Operating Officer and Chief Financial Officer of Inscriber Technology Corporation, a computer software company, that develops products for the global broadcast, video and digital signage marketplaces, and from February 1998 to June 1999, Mr. Fowlie was the Chief Financial Officer thereof. Prior thereto, Mr. Fowlie worked with KPMG Chartered Accountants from 1984 and was a partner with KPMG Chartered Accountants.from 1995 to 1998. Mr. Fowlie is currently a member of the board of Inscriber Technology Corporation and the advisory board of CTT Communitech Technology Association. Mr. Fowlie received a B.B.A. (Honours) from Wilfrid Laurier University and he is a Chartered Accountant.
Carol Coghlan Gavin has served as a director of the Company since December 2004. Ms. Gavin is the President of Winston Advisors Ltd., a private consulting firm she founded in 2005. Ms. Gavin serves as a director of Tellabs Foundation and is also a member of the board of visitors for the University of Illinois College of Law. From 1988 until June 2001, Ms. Gavin held various positions with Tellabs, Inc., a U.S. based manufacturer of telecommunications equipment, most recently as Senior Vice President, General Counsel and Secretary. Ms. Gavin received a bachelor’s degree from the University of Illinois and graduated from the University of Illinois College of Law. Ms. Gavin was admitted to the Illinois State Bar in 1980.
Peter Hoult has served as a director of the Company since December 2002. Mr. Hoult is a strategic business consultant with Peter Hoult Management Consultants, a private consulting firm he founded in 1993. HeMr. Hoult acts as a director of various public and private companies.Halogen Software Inc. From 1996 to 2000, Mr. Hoult was a Visiting Professor of Strategic Marketing at Babcock (Wake Forest University) and Fuqua (Duke University) Post-Graduate Business Schools. From 1972 to 1990, Mr. Hoult held various senior executive management positions with RJ Reynolds Industries. Mr. Hoult received a B.A. (Honours) in psychology from the University of Reading and he pursued graduate research at the London School of Economics.
Brian J. Jackman has served as a director of the Company since December 2002 and currently2002. Mr. Jackman is the President of the Jackman Group, Inc., a private consulting firm he founded in 2005. Mr. Jackman also serves as a director of several public companies.PCTEL, Inc. From 1982 until his retirement in September 2001, Mr. Jackman held various positions with Tellabs, Inc., a U.S. based manufacturer of telecommunications equipment, most recently as Executive Vice-President, President, Global Systems and Technologies and as a member of the board of directors of the company.
David Johnston has served as Mr. Jackman received a director of the Company since December 2002. Mr. Johnston has been the PresidentB.A. from Gannon University and Vice-Chancellor and Professor, University of Waterloo since 1999. Prior thereto, Mr. Johnston was a Professor at the Faculty of Law at McGill Universityan M.B.A. from 1994 to 1999 and Principal and Vice-Chancellor and Professor of Law at McGill University from 1979 to 1994. Mr. Johnston acts as a director to various public and private companies.Penn State University.
Ken Olisa has served as a director of the Company since January 1998. Since 1992, Mr. Olisa has beenis the Chairman & CEO of Interregnum Plc.aPlc., a publicly traded UK technology merchant bank, quoted on London’s AIM exchange. Fromwhich he founded in 1992. After working for IBM from 1974 to 1981, to 1992, Mr. Olisa held various positions with Wang Laboratories Inc., between 1981 and 1992, lastly that of Senior Vice President and General Manager, Europe, Africa and Middle East. Prior to his term at Wang, Mr. Olisa was an executive at IBM (UK) Ltd. Currently Mr Olisa is a director of Reuters Group plcPlc and of several privately heldother private information technology companies in the UK. Mr. Olisa is a Liveryman of the Worshipful Company of Information Technologists; a Freeman of the City of London; a Director of the Reuters Foundation; Chairman of Thames Reach Bondway, a charity working to shelter and resettle the homeless in London; and a Governor of the Peabody Trust. Mr. Olisa holds an MA from Cambridge University in Natural, Social, Political and Management Science.
Stephen J. Sadler has served as a director of the Company since September 1997. From April 2000 to present, Mr. Sadler has served as the Chairman and CEO of Enghouse Systems Limited, a software engineering
company that develops GIS (Geographic Information Systems)geographic information systems as well as IVR (Interactive Voice Response Systems).interactive voice response systems. Mr. Sadler was previously the Executive Vice President and Chief Financial Officer of GEAC from 1987 to 1990, was President and Chief Executive Officer of GEAC from 1990 to 1996, was Vice Chairman of GEACthereof from 1996 to 1998, and was a Senior Advisor to GEAC on acquisitions until May 1999. Prior to Mr. Sadler’s involvement with GEAC, he held executive positions with Phillips Electronics Limited and Loblaws Companies Limited. Mr. Sadler is Chairman of Helix Investments (Canada) Inc., a position he has held since early 1998. Mr. Sadler is also currently a director of Enghouse Systems Limited, and Belzberg Technologies Ltd. Mr. Sadler holds a B.A. Sc. (Honours) in industrial engineering and an M.B.A. (Dean’s List) and he is a Chartered Accountant.
Michael Slaunwhite has served as a director of the Company since March 1998. Mr. Slaunwhite has served as CEO and Chairman of Halogen Software Inc., a leading provider of employee performance management software, from 2000 to present, and as President and Chairman from 1995 to 2000. From 1994 to 1995, Mr. Slaunwhite was an independent consultant to a number of companies assisting them with strategic and financing plans. Mr. Slaunwhite was Chief Financial Officer of Corel Corporation from 1988 to 1993. Mr. Slaunwhite holds a B.A. Commerce (Honours) from Carleton University.
Alan Hoverdwas appointed Chief Financial Officer of Open Text Corporation in April 2000. He joined the Company as the Vice President of Finance in July 1999. Mr. Hoverd has over twenty-seven years of high tech experience, including five years as Vice President of Finance, Chief Financial Officer and a Director of Digital Equipment of Canada. He was also Manager of Business Planning for ten years at Digital Equipment of Canada. Mr. Hoverd has held several financial positions with IBM Canada, including Manager of Finance for the Storage and Peripherals division, and five years as Controller of Gulf Minerals of Canada.
Anik Gangulyhas been with Open Text since 1997 and is the Executive Vice President, Operations since October 2004. Mr. Ganguly was appointed the Company’s Executive Vice President, Products in September 1999. He has been with Open Text since December of 1997, when the Company acquired Campbell Services Inc. where Mr. Ganguly was President and CEO. From 1991 to 1997, he has been involved in Enterprise Software development and, in particular, the application of Internet standards to facilitate collaboration and communication across corporate boundaries. Mr. Ganguly has chaired an Internet Engineering Task Force working group and continues to be a strong proponent of open standards. Mr. Ganguly has a Bachelor of Engineering degree in Mechanical Engineering and received his MBAMBS from the University of Wisconsin, Madison.
Bill Forquerwas appointed Executive Vice President, Marketing in 2003. From 2001 to 2003, he served as Senior Vice President, Business Development of the Company. Mr. Forquer has been involved with knowledge management systems his entire career. He has been with Open Text since June 1998, when the Company acquired Information Dimensions, Inc. (IDI) where Mr. Forquer was President. Prior to being named President of IDI in 1996, Mr. Forquer held other executive management positions at IDI. Mr. Forquer began his career in 1981 at Battelle Laboratories developing the software that subsequently was spun-off into IDI. Mr. Forquer has a B.S. in Mathematics Education and a M.S. in Computer and Information Science, both from The Ohio State University.
Michael FarrellJohn Kirkham has been with Open Text since 1992 and was appointed Executive Vice President, Worldwide Sales in 2003.February 2005. He joined the Company in November 2003 as SVP Global Services, Europe, and assumed responsibilities for global sales in Europe as well. In October 2004 he was appointed SVP, International Sales, before moving to his current position. Mr. Kirkham has over 30 years of high tech management experience in worldwide operations. He was Executive Officer of Applied Learning/National Education Training Group, a subsidiary of NEC. He was also VP, International Operations and UK Managing Director for Wave Technologies for seven years. From 20002001 to 2003, before joining Open Text, he held several management positions with Thomson Learning, including VP Global Integration and VP, International, Thomson Enterprise Solutions. Mr. Kirkham has a Bachelor of Science (Econ) Honors Degree from the London School of Economics, and a diploma in Business Studies from the Manchester University Business School.
Kirk Robertswas appointed Executive Vice President, Services in the calendar year of 2003. Mr. Roberts has been in the online services and software industry for over 15 years. Prior to joining the Company in 1996 as Vice President of Network Services, Mr. Roberts founded NirvCentre, one of Canada’s first online service providers, where he served as Executive VP, Worldwide Sales. Previously, he served as Executive Vice President,the senior executive for ten years. In 1996, through a strategic acquisition, Mr. Roberts joined Open Text, and designed and launched the Livelink Online Service—a global Livelink application hosting service for large corporations. Today, in his current role, Mr. Roberts leads two business units, Global Business Development, based in the San Francisco, California office, since October of 1994. After a number of years in software consulting, marketingCustomer Support and sales, he founded Interleaf’s Canadian-based operation in 1985, using Canadian venture capital funding. As President of Interleaf Canada, Mr. Farrell expanded the operation to four offices and fifty-five employees. Before that he spent time with enterprise database vendors in sales and marketing management positions. Mr. Farrell studied in the Honours Degree program in Computer Science in 1976.Global Services.
The Board of Directors has determined that Randy Fowlie qualifies as an “audit committee financial expert” under the rules of the Securities and Exchange Commission. Mr. Fowlie is also financially sophisticated as required by NASD Marketplace Rules, and is independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act, and within the meaning of the Company’s director independence standards and those of any exchange, quotation system or market upon which the Company’s securities are traded. The Company has a standing audit committee of the Board of Directors composed of Messrs, Fowlie, Jackman, Olisa, Slaunwhite and Hoult. There are no family relationships among any of the executive officers or directors of the Company. All directors serve one year terms and are elected annually at each Annual General Meeting (“AGM”). All executive officers are appointed annually as well.
Code of Business Conduct and Ethics
The Company has adopted a “codeCode of ethics” as defined by regulations promulgated under the Securities Act of 1933, as amended,Business Conduct and the Securities Exchange Act of 1934 and a “code of conduct” as defined by qualitative listing requirements promulgated by NasdaqEthics that applyapplies to all of the Company’s directors, officers and employees, including the principal executive officer, principal financial officer, principal accounting officer orand controller, or persons performing similar functions. The codeCode of ethicsBusiness Conduct and code of conduct are collectively referred to asEthics incorporates the Company’s “Business Conduct Policy.” A copyguidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with all applicable laws and regulations. The Code also incorporates the Company’s expectations of its employees that enable the Company to provide accurate and timely disclosure in its filings with the Securities and Exchange Commission and other public commissions.
The full text of the Company’s Code of Business Conduct Policyand Ethics is attached as exhibit 14.1 in this Annual Reportpublished on Form 10-K, and may also be obtained by any person, without charge, upon request directed toits web site atwww.opentext.comunder the Company at: 185 Columbia Street West, Waterloo, Ontario N2L 5Z5, CANADA, Attn: Sue Proulx.
Company/Investors section. The Company will promptlyintends to disclose to investors, in compliance with applicable rules and regulations,future amendments to thecertain provisions of its Code as well asof Business Conduct and Ethics, or waivers of the Code,such provisions that apply or are granted to specified individuals, including directors and executive officers, on this web site within four business days following the date of such amendment or certain other senior financial officers or persons performing similar functions, in each such case to the extent required by such rules and regulations.waiver.
Item 11. Executive Compensation
| Item 11. | Executive Compensation |
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth summary information concerning the compensation earned in the Company’s last three fiscal years by the Chief Executive Officer of the Company and the four most highly compensated executive officers of the Company (collectively, the “Named Executive Officers”):
| Annual Compensation | Long Term Compensation(2) |
| |||||||||||||||
|
|
|
| ||||||||||||||
Name and Principal Position | Awards | ||||||||||||||||
| Fiscal Year | Salary ($) | Bonus ($) | Other Annual Compensation(1) ($) | Securities (#) | |||||||||||||
P. Thomas Jenkins Executive Chairman and | 2005 2004 2003 | 387,918 328,735 287,570 | 143,765 214,624 232,220 | 15,494 11,033 8,871 | 100,000 — 200,000 | ||||||||||||
John Shackleton President and Chief | 2005 2004 2003 | 368,740 | 106,800 231,133 228,189 | 31,480 20,763 12,174 | 75,000 80,000 — | ||||||||||||
Bill Forquer Executive Vice President, | 2005 2004 2003 | 272,500 265,000 260,000 | 53,000 77,235 48,050 | 15,855 8,913 6,270 | — | ||||||||||||
| |||||||||||||||||
Anik Ganguly Executive Vice President, | 2005 2004 2003 | 290,000 242,500 195,000 | 45,000 86,005 95,450 | 2,515 1,625 215 | 20,000 20,000 — | ||||||||||||
John Kirkham Executive Vice President, | 2005 2003 | 193,296 — | 211,100 45,425 — | 16,789 10,148 — | 180,000 20,000 — | ||||||||||||
Notes:
| (1) | The amounts in “Other Annual Compensation” include |
| (2) | The Company has not granted restricted shares or stock appreciation rights to Named Executive Officers and has no long-term incentive plan. |
| (3) | Options/SARs |
| (4) | P. Thomas Jenkins served as Chief Executive Officer of the Company until June 30, 2005. |
Stock Option Information
Option Grants in Last Fiscal Year
The following table sets forth the options granted to the Named Executive Officers in the fiscal year ended June 30, 2004.2005. The exercise price per share of each option was equal to the fair market value of the Common Shares on the grant date as determined by the Board of Directors of the Company, and the options becomeeach option becomes exercisable at the rate of 25% of the total option grant at the end of each of 4four annual periods from the date the options begin to vest. The Company did not grant any stock appreciation rights during fiscal 2004.Fiscal 2005. The
percentage of total options granted to Open Text employees in Fiscal 2005 is based on options granted during that period to purchase an aggregate of 965,500 shares. The potential
realizable value represents amounts that may be realized upon exercise of the options immediately prior to the expiration of their term assuming the specified compounded rates of appreciation on the Common Shares over the term of the options. These numbers are calculated based on the requirements of the Securities and Exchange Commission and do not reflect the Company’s estimate of future stock price growth. Actual gains, if any, on stock option exercises will depend on the future performance of the Common Shares and the date on which the options are exercised. There can be no assurance that the rates of appreciation assumed in the table can be achieved or that the amounts reflected will be received by the Named Executive Officers.
Individual Grants | Individual Grants | Potential realizable value at assumed annual rates of stock price appreciation for option term | Individual Grants | Potential realizable value at assumed annual rates of stock price appreciation for option term | ||||||||||||||||||||||
Name | Number of securities underlying options/SARs granted (#) | Percent of total options/SARs granted to employees in fiscal year | Exercise ($/sh) | Expiration Date | 5% ($) | 10% ($) | Number of securities underlying options/SARs granted (#) | Percent of total options/SARs granted to employees in fiscal year | Exercise or base price ($/sh) | Expiration Date | 5% ($) | 10% ($) | ||||||||||||||
P. Thomas Jenkins | — | — | — | — | — | — | 100,000 | 10.36 | % | 16.920 | 12/9/2011 | 1,064,090 | 2,696,612 | |||||||||||||
John Shackleton | 80,000 | 9.89 | % | 17.015 | 8/19/2013 | 856,051 | 2,169,402 | 75,000 | 7.77 | % | 16.920 | 12/9/2011 | 798,067 | 2,022,459 | ||||||||||||
Bill Forquer | 20,000 | 2.47 | % | 17.015 | 8/19/2013 | 214,013 | 542,351 | 10,000 | 1.04 | % | 16.920 | 12/9/2011 | 106,409 | 269,661 | ||||||||||||
Michael Farrell | 30,000 | 3.71 | % | 17.015 | 8/19/2013 | 321,019 | 813,526 | |||||||||||||||||||
Anik Ganguly | 20,000 | 2.47 | % | 17.015 | 8/19/2013 | 214,013 | 542,351 | 20,000 | 2.07 | % | 16.920 | 12/9/2011 | 212,818 | 539,322 | ||||||||||||
John Kirkham | 2,000 | 0.21 | % | 16.920 | 12/9/2011 | 21,282 | 53,932 | |||||||||||||||||||
John Kirkham | 150,000 | 15.54 | % | 14.610 | 05/9/2012 | 1,378,223 | 3,492,687 | |||||||||||||||||||
John Kirkham | 28,000 | 2.90 | % | 17.990 | 09/3/2014 | 267,985 | 725,091 | |||||||||||||||||||
Aggregate Options ExercisedAggregated Option Exercises in the Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth options exercised and the values of outstanding options for Common Shares held by each of the Named Executive Officers:
Name | Shares (#) | Aggregate value ($) | Number of Common Shares underlying outstanding Options at June 30, 2004 | Value of unexercised in-the- ($) | Shares acquired on exercise (#) | Value Realized ($) | Number of Common Shares underlying unexercised Options at June 30, 2005 | Value of unexercised in-the- money options at June 30, 2005(1) ($) | ||||||||||||||||
| Exercisable | Unexercisable | Exercisable | Unexercisable | |||||||||||||||||||||
Name | Shares acquired on exercise (#) | Value Realized ($) | Exercisable | Unexercisable | Exercisable | Unexercisable | ||||||||||||||||||
| — | — | 324,000 | 300,000 | 7,121,100 | 9,570,000 | 449,000 | 275,000 | 6,357,840 | 2,478,000 | |||||||||||||||
John Shackleton | — | — | 677,862 | 80,000 | 16,963,497 | 1,189,200 | — | — | 632,862 | 135,000 | 8,678,126 | — | ||||||||||||
Bill Forquer | — | — | 40,000 | 25,000 | 981,463 | 414,613 | — | — | 50,000 | 25,000 | 637,200 | — | ||||||||||||
Michael Farrell | — | — | — | 30,000 | — | 445,950 | ||||||||||||||||||
Anik Ganguly | — | — | 80,000 | 30,000 | 1,890,835 | 505,450 | — | — | 90,000 | 40,000 | 920,400 | 70,800 | ||||||||||||
John Kirkham | — | — | 5,000 | 195,000 | — | — | ||||||||||||||||||
Note:
| Based on the closing price of the Company’s Common Shares on the NASDAQ National Market on June 30, |
Executive Officer Employment Agreements
The following is a brief description of the employment agreements entered into between the Company or its subsidiaries and each of the Named Executive Officers.
Effective July 1, 2002, the Company entered into an employment agreement with P. Thomas Jenkins. The agreement provides for an annual base salary and for an annual performance bonus based upon goals established by the Compensation Committee from time to time. The employment agreement provides that, upon termination without “just cause”, the Company will pay Mr. Jenkins a lump-sum payment equivalent to 18 months base salary and Mr. Jenkins will be entitled to receive all other benefits to which he would have been entitled for the following 18 months. If Mr. Jenkins is terminated as a result of a change in control of the Company, the Company will pay Mr. Jenkins a lump-sum amount of CDN $250,000.
Effective January 1, 2003, the Company entered into an employment agreement with John Shackleton. The agreement provides for an annual base salary and for an annual performance bonus based upon goals established by the Compensation Committee from time to time. The employment agreement provides that, upon termination without “just cause”, the Company will pay Mr. Shackleton a lump-sum payment equivalent to 12 months base salary and Mr. Shackleton will be entitled to receive all other benefits to which he would have been entitled for the following 12 months. If Mr. Shackleton is terminated as a result of a change in control of the Company, the Company will pay Mr. Shackleton a lump-sum amount of US $250,000.
Effective March 7, 2000, the Company entered into an employment agreement with Mike Farrell, which provides for an annual base salary and for an annual bonus upon the attainment of certain corporate, revenue, profit and other goals established from time to time. The employment agreement does not require the Company to pay a penalty for terminating the agreement without “just cause”.
Effective May 2001, the Company entered into an employment agreement with Bill Forquer, which provides for an annual base salary and for an annual bonus upon the attainment of certain corporate, revenue, profit and other goals established from time to time.
Effective December 1997, the Company entered into an employment agreement with Anik Ganguly, which provides for an annual base salary and for an annual bonus upon the attainment of certain corporate, revenue, profit and other goals established from time to time. The employment agreement provides that upon termination without “just cause,” the Company will make semi-annual payments equivalent to 6 months base salary to Mr. Ganguly.
The Company also entered into separate Employee Confidentiality and Non-Solicitation Agreements with each of the Named Executive Officers. Under these agreements, each of the Named Executive Officers has agreed to keep in confidence all proprietary information of the Company during his employment with the Company and for a period of three years following the termination of his or her employment with the Company.
Compensation Committee Interlocks and Insider Participation
During fiscal 2004, the Compensation Committee was comprised of Messrs. Jackman, Johnston, and Slaunwhite. None of the current members of the Compensation Committee have been or are an officer or employee of the Company.
Director Compensation
Directors who are salaried officers or employees of the Company receive no compensation for serving as directors. Non-employee directors of the Company receive an annual retainer fee of $15,000 and an additional $1,250 fee for each meeting attended, including committee meetings, except for Audit Committee members who receive $1,875 for each Audit Committee meeting attended. Each committee chairman receives an annual retainer of $5,000, except for the Audit Committee Chairman who receives a $7,500 annual retainer. Non-employeeIn Fiscal
2005, non-employee directors of the Company are also entitled to a yearly grant ofcompany received 12,000 options to acquire Common Shares of the Company. The independent Lead Director in addition to fees received as described above, receives an annual retainer of $5,000. The Company reimburses all directors for all reasonable expenses incurred by them in their capacity as directors. During fiscal 2004,Fiscal 2005, Stephen J. Sadler received $480,000 (fiscal 2003—$315,970 (Fiscal 2004—$237,000)480,000) in consulting fees for assistance with acquisition activities. Mr. Sadler abstained from voting on all transactions from which he would potentially derive consulting fees.
Item 12. Security OwnershipExecutive Officer Employment Agreements
Effective September 23, 2005, the Company and P. Thomas Jenkins entered into an amendment to the employment agreement of Certain Beneficial OwnersMr. Jenkins. The amended agreement provides for an annual base salary and for an annual performance bonus based upon goals approved by the Board of Directors upon recommendation of the RegistrantCompensation Committee from time to time. The amended agreement provides that, upon termination without “just cause”, the Company will pay Mr. Jenkins an amount equivalent to: (i) 15 months base salary; (ii) any performance bonus which has been earned on a pro rata basis to the date of termination; and (iii) 1.25 times Mr. Jenkins’ target annual compensation payment for the then current fiscal year. In addition, Mr. Jenkins will be entitled to receive all other benefits to which he would have been entitled during the 15-month period following termination. If Mr. Jenkins’ employment is terminated within 6 months following a change of control other than for just cause, disability or death, then Mr. Jenkins will be entitled to the severance entitlements set out above and all stock options granted to him will be deemed to vest and shall be exercisable by him for a period of 90 days following the date of the notice of termination.
Effective September 23, 2005, the Company and John Shackleton entered into an amendment to the employment agreement of Mr. Shackleton. The amended agreement provides for an annual base salary and for an annual performance bonus based upon goals approved by the Board of Directors upon recommendation of the Compensation Committee from time to time. The amended agreement provides that, upon termination without “just cause”, the Company will pay Mr. Shackleton an amount equivalent to: (i) 15 months base salary; (ii) any performance bonus which has been earned on a pro rata basis to the date of termination; and (iii) 1.25 times Mr. Shackleton’s target annual compensation payment for the then current fiscal year. In addition, Mr. Shackleton will be entitled to receive all other benefits to which he would have been entitled during the 15-month period following termination. If Mr. Shackleton’s employment is terminated within 6 months following a change of control other than for just cause, disability or death, then Mr. Shackleton will be entitled to the severance entitlements set out above and all stock options granted to him will be deemed to vest and shall be exercisable by him for a period of 90 days following the date of the notice of termination.
Effective May 9, 2001, the Company entered into an employment agreement with Bill Forquer, which provides for an annual base salary and for an annual bonus upon the attainment of certain corporate, revenue, profit and other goals established from time to time.
Effective November 30, 1997, the Company entered into an employment agreement with Anik Ganguly, which provides for an annual base salary and for an annual bonus upon the attainment of certain corporate, revenue, profit and other goals established from time to time. The employment agreement provides that upon termination without “just cause,” the Company will make semi-annual payments equivalent to 6 months base salary to Mr. Ganguly.
Effective October 24, 2003, the Company entered into an employment agreement with John Kirkham, which provided for an annual base salary and for an annual bonus upon the attainment of certain corporate, revenue, profit and other goals established from time to time.
The Company also entered into separate Employee Confidentiality and Non-Solicitation Agreements with each of the Named Executive Officers. Under these agreements, each of the Named Executive Officers has agreed to keep in confidence all proprietary information of the Company during his employment with the Company and for a period of three years following the termination of his or her employment with the Company.
Compensation Committee Interlocks and Insider Participation
From July 1, 2004 until December 9, 2004, the Compensation Committee was comprised of Messrs. Brian Jackman, Michael Slaunwhite and David Johnston. From December 9, 2004 through June 30, 2005, the Compensation Committee was comprised of Messrs. Peter Hoult and Michael Slaunwhite and Ms. Carol Gavin. None of the members of the Compensation Committee have been or are an officer or employee of the Company, or any of its subsidiaries, or had any relationship requiring disclosure herein. No executive officer of the Company served as a member of the compensation committee of another entity (or other committee of the board of directors performing equivalent functions, or in the absence of any such committee, the entire board), one of whose executive officers served as a director of the Company.
Audit Committee Changes
On September 13, 2005, Peter Hoult was appointed as an additional member to the Company’s Audit Committee.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management |
The following table sets forth certain information as of June 30, 20042005 regarding Common Shares beneficially owned directly or indirectly, or over which control or direction is exercised by the following persons or companies: (i) each person or company known by the Company to be the beneficial owner of or to exercise control or direction over, more than 5% of the outstanding Common Shares, (ii) each director and proposed director of the Company, (iii) each Named Executive Officer, and (iv) all directors and executive officers as a group. Except as otherwise indicated, the Company believes that the beneficial owners of the Common Shares
listed below based on the information furnished by such owners, have sole investment and voting power with respect to such Common Shares, subject to community property laws where applicable.
The number and percentage of shares beneficially owned is determined in accordance with the rules of the SEC, and is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which a person has sole or shared voting on investment power and also any shares of Common Shares underlying options or warrants that are exercisable by that person within 60 days of June 30, 2005. However, these shares underlying options and warrants are not treated as outstanding for the purposes of computing the percentage ownership of any other person or entity. As of June 30, 2004,2005, there were 51,054,78648,136,932 Common Shares outstanding. Unless otherwise indicated, the address of each person or entity named in the table is care of Open Text Corporation, 185 Columbia Street West, Waterloo Ontario, Canada, N2L-5Z5.
Name and Address of Beneficial Owner | Number of Shares Beneficially Owned, | Percent of Total Beneficially Owned, Controlled or Directed | |||
General Atlantic Service Corporation 3 Pickwick Plaza, Greenwich Connecticut, US 06830 | 3,846,084 | 7.53 | % | ||
FMR Corp. 82 Devonshire Street, Boston, Massachusetts, US 02109 | 3,396,220 | 6.65 | % | ||
Massachusetts Financial Services Company 500 Boylston Street, Boston Massachusetts, US 02116 | 2,613,140 | 5.12 | % | ||
RBC Asset Management Inc. Royal Trust Tower 77 King Street West, Suite 3800 Toronto, Ontario CA M5K 1H1 | 2,550,800 | 5.00 | % | ||
P. Thomas Jenkins (1) | 1,395,100 | 2.73 | % | ||
John Shackleton (2) | �� | 704,090 | 1.38 | % | |
Stephen J. Sadler (3) | 634,600 | 1.24 | % | ||
Michael Farrell (4) | 578,500 | 1.13 | % | ||
Michael Slaunwhite (5) | 124,000 | * | |||
Randy Fowlie (6) | 102,000 | * | |||
Anik Ganguly (7) | 94,232 | * | |||
Bill Forquer (8) | 51,792 | * | |||
Ken Olisa (9) | 42,000 | * | |||
Peter Hoult (10) | 14,000 | * | |||
David Johnston (11) | 12,400 | * | |||
Brian Jackman (12) | 12,000 | * | |||
All executive officers and directors as a group (12 Persons) (13) | 3,764,214 | 7.37 | % |
Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Common Shares Outstanding | |||
General Atlantic Service Corporation 3 Pickwick Plaza, Greenwich Connecticut, US 06830(1)(a) | 3,846,084 | 7.99 | % | ||
RBC Asset Management Inc. Royal Trust Tower 77 King Street West, Suite 3800 Toronto, Ontario CA M5K 1H1(1)(b) | 3,077,850 | 6.39 | % | ||
TAL Global Asset Management 1000 de la Gaucheterie West, Suite 3100 Montreal Quebec CA H3B 4W5(1)(c) | 2,876,225 | 5.98 | % | ||
Royal Trust Co. Royal Trust Tower, PO Box 7500 Station A 77 King Street West, 6th Floor Toronto, Ontario CA M5P 1P9(1)(d) | 2,698,200 | 5.61 | % | ||
Caisse de depot et placement du Quebec 1000 place Jean-Paul-Riopelle Montreal Quebec CA H2Z 2B3(1)(e) | 2,667,260 | 5.54 | % | ||
P. Thomas Jenkins(2) | 1,520,100 | 3.16 | % | ||
John Shackleton(3) | 679,430 | 1.41 | % | ||
Stephen J. Sadler(4) | 646,600 | 1.34 | % | ||
Alan Hoverd(5) | 210,000 | * | |||
Michael Slaunwhite(6) | 136,000 | * | |||
Randy Fowlie(7) | 114,000 | * | |||
Anik Ganguly(8) | 104,232 | * | |||
Bill Forquer(9) | 61,894 | * | |||
Peter Hoult(10) | 24,000 | * | |||
Brian Jackman(11) | 24,000 | * | |||
Ken Olisa(12) | 12,000 | * | |||
Carol Coghlan Gavin(13) | 3,000 | * | |||
John Kirkham(14) | 12,000 | * | |||
Kirk Roberts(15) | 81,058 | * | |||
All executive officers and directors as a group (14 Persons)(16) | 3,628,314 | 7.54 | % | ||
| * | Less than 1% |
| (1) | Based on information filed in Schedule 13G with the SEC. |
| (a) | Shared voting power for 3,846,084 Common Shares. |
| (b) | Shared voting power and shared dispositive power for 3,077,850 Common Shares. |
| (c) | Sole voting power for 2,836,500 Common Shares and sole dispositive power for 2,876,225 Common Shares. |
| (d) | Shared voting power and shared dispositive power for 2,698,200 Common Shares. |
| (e) | Sole voting power and sole dispositive power for 2,667,260 Common Shares. |
| (2) | Includes 1,021,100 Common Shares owned and options for |
| Includes |
| Includes 182,600 Common Shares owned and options for |
| (5) | Includes |
| Includes |
| (7) | Includes 500 Common Shares owned and options for 113,500 Common Shares which are vested. |
| (8) | Includes 9,232 Common Shares owned and options for 90,000 Common Shares which are vested and options for 5,000 Common Shares which will vest within 60 days of June 30, |
| (9) | Includes |
| (10) | Includes options for 24,000 Common Shares which are vested. |
| (11) | Includes |
| (12) | Includes options for 12,000 Common |
| (13) | Includes 3,000 Common Shares owned. |
| (14) | Includes options for 5,000 Common Shares which are vested and options for 7,000 Common Shares which will vest within 60 days of June 30, 2005. |
| (15) | Includes 4,498 Common Shares owned and options for 63,100 Common Shares which are vested and options for 5,000 Common Shares which will vest within 60 days of June 30, 2005. |
| (16) | See notes |
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth summary information relating to the Company’s various stock options plans as of June 30, 2003:
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants, and rights | Weighted average exercise price of outstanding options, warrants, and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | ||||
| (a) | (b) | (c) | |||||
Equity compensation plans approved by security holders | 7,562,799 | $ | 13.95 | 293,650 | |||
Equity compensation plans not approved by security holders | — | — | — | ||||
Total | 7,562,799 | $ | 13.95 | 293,650 | |||
Item 13. Certain Relationships and Related Transactions
| Item 13. | Certain Relationships and Related Transactions |
During fiscal 2004,Fiscal 2005, Stephen J. Sadler received $480,000 (fiscal 2003—$315,970 (Fiscal 2004—$237,000)480,000) in consulting fees for assistance with acquisition activities.Mr.activities. Mr. Sadler, a director with the Company, abstained from voting on all transactions from which he would potentially derive consulting fees.
The Company has adopted a policy that all transactions between the Company and its officers, directors and affiliates will be approved by a majority of the “independent” members of the Board of Directors of the Company, as defined in NASDAQ Rule 4200.
Item 14. Principal Accountant Fees and Services
| Item 14. | Principal Accountant Fees and Services |
Aggregate fees for professional services rendered to the Company by KPMG LLP for fiscal 2004Fiscal 2005 and fiscal 2003:Fiscal 2004:
Audit Fees
Audit fees were approximately $3,298,477 for Fiscal 2005 and $1,102,748 for fiscal 2004 and $484,176 for fiscal 2003.Fiscal 2004. Such fees were for professional services rendered for (a) the annual audits of the Company’s consolidated financial statements, including statutory audits of foreign subsidiaries and the accompanying attestation report regarding the Company’s internal control over financial reporting contained in the Company’s Annual Report on Form 10-K, (b) the review of quarterly financial information included in the Company’s quarterly reportsQuarterly Reports on Form 10-Q and (c) fees related to filings with the Securities and Exchange Commission and accounting consultations.
Audit-Related Fees
Audit-related fees that were not reported as audit fees were approximately $165,691 for Fiscal 2005 and $154,364 for fiscal 2004 and $85,008 for fiscal 2003.Fiscal 2004. Such fees were for accounting consultations concerning financial accounting and reporting standards.
Tax Fees
The total fees for tax services were approximately $206,376 for Fiscal 2005 and $424,538 for fiscal 2004 and $74,237 for fiscal 2003.Fiscal 2004. The fees were for services related to: tax compliance, including the preparation of tax returns, tax planning and tax advice, advice related to mergers and acquisitions, and requests for rulings or technical advice from tax authorities.
All Other Fees
There were no fees for other services for fiscalFiscal years 20042005 and 2003.2004.
The Audit Committee of the Board of Directors has determined that the provision of the services as set out above is compatible with maintaining KPMG LLP’s independence.
Pre-Approval Policy
The Audit Committee has established a policy of reviewing, in advance, and either approving or disapproving, anyall audit, audit-related, ortax and other non-audit service proposed to be provided to the Company by any indepenendentindependent public or certified public accountant who is providing audit services to the Company.accountant. This policy requires that all services received from the Company’s independent accountants be approved in advance by either the Audit Committee or a delegate of the Audit Committee. The Audit Committee has delegated pre-approval responsibility to the Chairperson of the Audit Committee. All of the audit, audit-related, tax and all other services provided by KPMG to the Company in fiscal 2004Fiscal 2005 were pre-approved. All non-audit services provided in 2004Fiscal 2005 were reviewed with the Audit Committee, which concluded that the provision of such services by KPMG was compatible with the maintenance of the firm’s independence in the conduct of its auditing functions.
The Audit Committee of the Board of Directors has adopted an Audit Committee Charter which is attached hereto asAppendix A.
Item 15. Exhibits and Financial Statement Schedules
| Item 15. | Exhibits and Financial Statement Schedules |
a) The following documents are filed as a part of this report:
1) Consolidated Financial Statements and ReportReports of Independent Accountants and the related notes thereto are included under Item 8, in Part II.
2) See Note 7 in the Consolidated Financial Statements included under Item 8, Part II.
3) Exhibits: The following exhibits are filed as part of this Annual Report on Form 10-K.
| Exhibit Number | Description of Exhibit | |
| 3.1 | Articles of Incorporation of the Company.(1) | |
| 3.2 | Articles of Amalgamation of the Company.(1) | |
| 3.3 | Articles of Amendment of the Company.(1) | |
| 3.4 | By-law No. 1 of the Company.(1) | |
| 3.5 | Articles of Amendment of the Company.(1) | |
| 3.6 | By-law No. 2 of the Company.(1) | |
| 3.7 | By-law No. 3 of the Company.(1) | |
| 3.8 | Articles of Amalgamation of the Company.(1) | |
| 3.9 | Articles of Amalgamation of the Company, dated July 1, | |
| 3.10 | Articles of Amalgamation of the Company, dated July 1, | |
| 3.11 | Articles of Amalgamation of the Company, dated July 1, | |
| 3.12 | Articles of Amalgamation of the Company, dated July 1, 2004.(7) | |
| 3.13 | Articles of Amalgamation of the Company, dated July 1, 2005. | |
| 4.1 | Form of Common Share Certificate.(1) | |
| 10.1 | Restated 1995 Flexible Stock Incentive Plan.(3) | |
| 10.2 | 1995 Replacement Stock Option Plan.(1) | |
| 10.3 | 1995 Supplementary Stock Option Plan.(1) | |
| 10.4 | 1995 Directors Stock Option Plan.(1) | |
| 10.5 | Amendment to Agreement, dated June 27, 1997 between INSO Corporation and the Company.(2) | |
| 10.6 | ||
| 10.7 | ||
| Indemnity Agreement with Robert Hoog dated April 30, 2004.(7) | ||
| Indemnity Agreement with Hartmut Schaper dated April 30, 2004.(7) | ||
| 10.10 | Indemnity Agreement with Peter Lipps dated August 19, 2005. | |
| 10.11 | 2004 Employee Stock Option Plan. | |
| 10.12 | Artesia Stock Option Plan. | |
| 10.13 | Vista Stock Option Plan. | |
| 10.14 | Employment Agreement, dated September 23, 2005 between P. Thomas Jenkins and the Company. | |
| 10.15 | Employment Agreement, dated September 23, 2005 between John Shackleton and the Company. | |
| 10.16 | Employment Agreement, dated September 23, 2005 between Alan Hoverd and the Company. | |
| 10.17 | Employment Agreement, dated November 30, 1997 between Anik Ganguly and the Company. | |
| Exhibit Number | Description of Exhibit | |
| 10.18 | Employment Agreement, dated October 23, 2003 between John Kirkham and the Company. | |
| 21.1 | List of the Company’s | |
| 23.1 | Consent of Independent Registered Public Accounting Firm. | |
| 24.1 | Power of Attorney (contained on Signature Page). | |
| 31.1 | Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| (1) | Filed as an Exhibit to the Company’s Registration Statement on Form F-1 (Registration Number 33-98858) as filed with the Securities and Exchange Commission (the “SEC”) on November 1, 1995 or Amendments 1, 2 or 3 thereto (filed on December 28, 1995, January 22, 1996 and January 23, 1996 respectively), and incorporated herein by reference. |
| (2) | Filed as an Exhibit to the Company’s Report on Form 8-K, as filed with the SEC on June 16, 1998 and incorporated herein by reference. |
| (3) | Filed as an Exhibit to the Company’s Annual Report on Form 10-K, as filed with the SEC on August 20, 1999 and incorporated herein by reference. |
| (4) | Filed as an Exhibit to the Company’s Annual Report on Form 10-K, as filed with the SEC on September 28, 2001 and incorporated herein by reference. |
| (5) | Filed as an Exhibit to the Company’s Annual Report on Form 10-K, as filed with the SEC on September 28, 2002 and incorporated herein by reference. |
| (6) | Filed as an Exhibit to the Company’s Annual Report on Form 10-K, as filed with the SEC on September 29, 2003 and incorporated herein by reference. |
| (7) | Filed as an Exhibit to the Company’s Annual Report on form 10-K, as filed with the SEC on September 13, 2004 and incorporated herein by reference. |
3)4) Appendix: The following appendix is filed as part of this Annual Report on Form 10-K.
| Appendix | Description of Appendix | |
| A | Audit | |
b) Exhibits
The Company hereby files as part of this Annual Report on Form 10-K the exhibits listed in 14(a)15(a)(3) above. Exhibits which are incorporated by reference can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street NW, Room 1024, Washington D.C. and at the Commission’s regional offices at 219 South Dearborn Street, Room 1204, Chicago Illinois; 76 Federal Plaza, Room 1102, New York, New York, and 5757 Wilshire Boulevard, Suite 1710, Los Angeles, California. Copies of such materials can also be obtained from the Public Reference Section of the Commission, 450 Fifth Street NW, Washington, D.C. 20549 at prescribed rates.
c) Financial Statement Schedules
The Company hereby files as part of this Annual Report on Form 10-K the consolidated financial statement schedules listed in 14(a)(2) above.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: September | OPEN TEXT CORPORATION | |||
| /s/ ALAN HOVERD | ||||
| Alan Hoverd | ||||
| Chief Financial Officer | ||||
POWER OF ATTORNEY AND SIGNATURES
The undersigned officers and directors of Open Text Corporation hereby constitute and appoint P. Thomas JenkinsJohn Shackleton and Alan Hoverd, and each of them singly, with full power of substitution, our true and lawful attorney’s-in-fact and agents to sign for us in our names in the capacities indicated below any and all amendments to this Annual Report on Form 10-K and to file same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission.Commission, hereby ratifying and confirming all that each of the said attorneys-in-fact, or his substitute(s), may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature | Title | Date | ||
/s/ J
|
| September | ||
/ Alan Hoverd | Chief Financial Officer | September | ||
/s/ P. T
|
| September | ||
/ Randy Fowlie | Director | September | ||
/s/ C Carol Coghlan Gavin | Director | September 27, 2005 | ||
/s/ PETER HOULT Peter Hoult | Director | September 27, 2005 | ||
/s/ BRIAN JACKMAN Brian Jackman | Director | September 27, 2005 | ||
/s/ KEN OLISA Ken Olisa | Director | September | ||
/ Stephen J. Sadler | Director | September | ||
/ Michael Slaunwhite | Director | September | ||
|
| |||
|
| |||
|
| |||
OPEN TEXT CORPORATION
INDEX TO EXHIBITS
| Exhibit Number | Description of Exhibit | |
| 3.1 | Articles of Incorporation of the Company. (1) | |
| 3.2 | Articles of Amalgamation of the Company. (1) | |
| 3.3 | Articles of Amendment of the Company. (1) | |
| 3.4 | By-law No. 1 of the Company. (1) | |
| 3.5 | Articles of Amendment of the Company. (1) | |
| 3.6 | By-law No. 2 of the Company. (1) | |
| 3.7 | By-law No. 3 of the Company. (1) | |
| 3.8 | Articles of Amalgamation of the Company. (1) | |
| 3.9 | Articles of Amalgamation of the Company, dated July 1, 2001 (4) | |
| 3.10 | Articles of Amalgamation of the Company, dated July 1, 2002 (5) | |
| 3.11 | Articles of Amalgamation of the Company, dated July 1, 2003 (6) | |
| 3.12 | Articles of Amalgamation of the Company, dated July 1, 2004. (7) | |
| 3.13 | Articles of Amalgamation of the Company, dated July 1, 2005. | |
| 4.1 | Form of Common Share Certificate. (1) | |
| 10.1 | Restated 1995 Flexible Stock Incentive Plan. (3) | |
| 10.2 | 1995 Replacement Stock Option Plan. (1) | |
| 10.3 | 1995 Supplementary Stock Option Plan. (1) | |
| 10.4 | 1995 Directors Stock Option Plan. (1) | |
| 10.5 | Amendment to Agreement, dated June 27, 1997 between INSO Corporation and the Company. (2) | |
| 10.6 | ||
| 1998 Stock Option Plan. (3) | ||
| Indemnity Agreement with Robert Hoog dated April 30, 2004. (7) | ||
| Indemnity Agreement with Hartmut Schaper dated April 30, 2004. (7) | ||
| 10.10 | Indemnity Agreement with Peter Lipps dated August 19, 2005. | |
| 10.11 | 2004 Employee Stock Option Plan. | |
| 10.12 | Artesia Stock Option Plan. | |
| 10.13 | Vista Stock Option Plan. | |
| 10.14 | Employment Agreement, dated September 23, 2005 between P. Thomas Jenkins and the Company. | |
| 10.15 | Employment Agreement, dated September 23, 2005 between John Shackleton and the Company. | |
| 10.16 | Employment Agreement, dated September 23, 2005 between Alan Hoverd and the Company. | |
| 10.17 | Employment Agreement, dated November 30, 1997 between Anik Ganguly and the Company. | |
| 10.18 | Employment Agreement, dated October 23, 2003 between John Kirkham and the Company. | |
| Exhibit Number | Description of Exhibit | |
| 21.1 | List of the Company’s | |
| 23.1 | Consent of Independent Registered Public Accounting Firm. | |
| 24.1 | Power of Attorney (contained on Signature Page) | |
| 31.1 | Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of the Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| (1) | Filed as an Exhibit to the Company’s Registration Statement on Form F-1 (Registration Number 33-98858) as filed with the Securities and Exchange Commission (the “SEC”) on November 1, 1995 or Amendments 1, 2 or 3 thereto (filed on December 28, 1995, January 22, 1996 and January 23, 1996 respectively), and incorporated herein by reference. |
i
| (2) | Filed as an Exhibit to the Company’s Report on Form 8-K, as filed with the SEC on June 16, 1998 and incorporated herein by reference. |
| (3) | Filed as an Exhibit to the Company’s Annual Report on Form 10-K, as filed with the SEC on August 20, 1999 and incorporated herein by reference. |
| (4) | Filed as an Exhibit to the Company’s Annual Report on Form 10-K, as filed with the SEC on September 28, 2001 and incorporated herein by reference. |
| (5) | Filed as an Exhibit to the Company’s Annual Report on Form 10-K, as filed with the SEC on September 28, 2002 and incorporated herein by reference. |
| (6) | Filed as an Exhibit to the Company’s Annual Report on Form 10-K, as filed with the SEC on September 29, 2003 and incorporated herein by reference. |
ii
| (7) | Filed as an Exhibit to the Company’s Annual Report on form 10-K, as filed with the SEC on September 13, 2004 and incorporated herein by reference. |
Appendix A
Open Text Corporation (the “Company”)
Audit Committee Charter
AdoptedAs amended by the Board of Directors
on May 31, 2000, as amended on April 21, 2003.July 27, 2005.
A. PURPOSE AND SCOPE
The primary function of the Audit Committee (the “Committee”) is to (a) assist the Board of Directors in fulfilling its responsibilities by reviewing: (i) the financial reports provided by the Corporation to the Securities and Exchange Commission (“SEC”), other Regulatory Bodies (as defined below), the Corporation’s stockholders or to the general public, and (ii) the Corporation’s internal financial and accounting controls; (b) oversee the engagement of, and work performed by, any independent public accountants, (c) oversee the accounting and financial reporting process of the Corporation and the audits of the financial statements of the Corporation; and (d) recommend, establish and monitor procedures including without limitation relating to Risk Management designed to improve the quality and reliability of the disclosure of the Corporation’s financial condition and results of operations.to:
| a) | assist the Board of Directors in fulfilling its responsibilities by reviewing: |
| i) | the financial reports provided by the Company to the Securities and Exchange Commission (“SEC”), other Regulatory Bodies (as defined below), the Company’s stockholders and to the general public, and |
| ii) | the Company’s internal financial and accounting controls; |
| b) | appoint, compensate and retain the Company’s independent public accountants, |
| c) | oversee the work performed by any independent public accountants, including their conduct of the annual audit and engagement for any other services, |
| d) | oversee the accounting and financial reporting processes of the Company as established by the Company’s management and the audits of the financial statements of the Company conducted by the Company’s independent public accountants, |
| e) | recommend, establish and monitor procedures, including without limitation those relating to risk management and those designed to improve the quality and reliability of the disclosure of the Company’s financial condition and results of operations, |
| f) | establish procedures designed to facilitate: |
| i) | the receipt, retention and treatment of complaints relating to accounting, internal accounting controls or auditing matters and |
| ii) | the receipt of confidential or anonymous submissions by employees of concerns regarding questionable accounting or auditing matters, |
| g) | engage advisors as necessary, and |
| h) | distribute relevant funding provided by the Company regarding the payment of outside auditors and advisors engaged by the Committee. |
B. COMPOSITION AND MEETINGS
The Committee shall be comprised of a minimum of three directors as appointed by the Board of Directors, each of whom shallwho shall:
a) meet the independence and audit committee composition requirements promulgated by the SEC, the National Association of Securities Dealers, any exchange upon which securities of the CorporationCompany are traded, orand any governmental or regulatory body exercising authority over the CorporationCompany (each a “Regulatory Body” and collectively, the “Regulatory Bodies”), as in effect from time to time, and each member
b) not have participated in the preparation of the Committee shallfinancial statements of the Company at any time during the past three years, and
c) be free from any relationship that, in the opinion of the Board of Directors, would interfere with the exercise of his or her independent judgment as a member of the Committee.
A majority of the members of the Committee shall constitute a quorum at any meeting of the Committee, but in no case shall a quorum be comprised of less than three (3) members of the Committee.
All members of the Committee shall be able“financially literate”, which is defined as having a basic understanding of finance and accounting and having the ability to read and understand fundamental financial statements, including a balance sheet, cash flow statement and income statement. At least one member of the Committee shall have employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. Further, no later than the earliest time required by any Regulatory Body, at least one member of the Committee shall qualify as a “financialan “audit committee financial expert” (as such term will beis defined by the SEC).
The Committee shall ensure that all necessary and proper disclosures shall be made in all applicable filings with the SEC rulemaking).and other Regulatory Bodies as to composition of the Committee. Committee members may enhance their familiarity with finance and accounting by participating in education programs conducted by the Company or an outside consultant at the Company’s expense. Independence and financial literacy are to be determined by the Board of Directors in accordance with applicable laws, rules and regulations.
The members of the Committee shall be electedappointed by the Board of Directors at the meeting of the Board of Directors following each annual meeting of stockholders and shall serve until their successors shall be duly elected and qualified or until their earlier death, resignation or removal. Unless a Chair is elected by the full Board of Directors, the members of the Committee may designate a Chair by majority vote of the full Committee membership. In the absence of the Chairman at a duly convened meeting, the Committee shall select a temporary substitute from among its members.
The Committee shall meet on a regularly-scheduled basis at least four times per year or more frequently as circumstances dictate. The Committee shall meet at least quarterly with the independent auditor in separate executive sessions or provide the opportunity for full and frank discussion without members of senior management present.
Ordinarily, meetings of the Committee should be convened with no less than seven (7) days notice having been given. In exceptional circumstances the requirement for notice can be waived subject to the formal consent of no less than the number of Committee members that constitutes a quorum of the Committee or instruction by a resolution of the Company’s Board of Directors.
The Committee shall report its actions to the members of the Board and the Secretary of the Company and keep written minutes of its meetings which shall be recorded and filed with the books and records of the Company. Minutes of each meeting will be made available to the members of the Board and the Secretary of the Company.
C. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties the Committee shall:
Document Review
1. Review and assess the adequacy of this Charter periodically as conditions dictate, but at least annually (and update this Charter if and when appropriate).
2. Review with representatives of management and representatives of the Corporation’sCompany’s independent accounting firm the Corporation’sCompany’s audited annual financial statements prior to their filing as part of the Annual Report on Form 10-K. After such review and discussion, the Committee shall recommend to the Board of
Directors whether such audited financial statements should be included in the Corporation’sCompany’s Annual Report on
Form 10-K. The Committee shall also review the Corporation’sCompany’s quarterly financial statements and shall recommend to the Board of Directors whether such financial statements should be included in the Company’s quarterly SEC filings on Form 10-Q and such10-Q. The Committee shall also review any other financial reports and filings as may be required by any other Regulatory Body.Body and shall recommend to the Board of Directors whether such other financial reports or filings should be included in any external filing.
3. Take steps designed to insureensure that the independent accounting firm reviews the Corporation’sCompany’s interim financial statements prior to their inclusion in the Corporation’sCompany’s quarterly reports on Form 10-Q and such other financial reports and filings as may be required by any other Regulatory Body.
4. Review and assess the performance of the Chief Financial Officer and award monetary bonus, if applicable, in accordance with the Incentive Program established by the Compensation Committee.
Independent Accounting Firm
5. The Committee shall4. Have sole authority and be directly responsible for the appointment, compensation, retention (including the authority not to retain or to terminate) and oversight of any registeredindependent public accounting firmfirms engaged (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Corporation,Company, and each such registeredindependent public accounting firm must report directly to the Committee. The authority of the Committee shall have the following specific committee responsibilitiesinclude ultimate authority to approve all audit engagement fees and authorities: (i) the pre-approval ofterms.
5. Approve in advance any and all audit services and permissible non-audit services as set forth inSarbanes–Oxley Act, 2002 (the “Act”); (ii)to be performed by the sole authority to appoint, determine fundingindependent accounting firm and adopt and implement policies for and oversee the outside auditors as set forth in the Act.such pre-approval.
6. Determine funding necessary for compensation of any independent accounting firms and notify the Company of anticipated funding needs of the Committee.
7. Resolve any disagreements between management and the independent accounting firm as to financial reporting matters.
7.8. Instruct the independent accounting firm that it should report directly to the Committee on matters pertaining to the work performed during its engagement and on matters required by the rules and regulations of any applicable Regulatory Body.
8.9. On an annual basis, receive from the independent accounting firm a formal written statement identifying all relationships between the independent accounting firm and the CorporationCompany consistent with Independence Standards Board (“ISB”) Standard 1.1, as it may be modified or supplemented. The Committee shall actively engage in a dialogue with the independent accounting firm as to any disclosed relationships or services that may impact its independence. The Committee shall take appropriate action to oversee the independence of the independent accounting firm.
9.10. On an annual basis, discuss with representatives of the independent accounting firm the matters required to be discussed by Statement on Auditing Standards (“SAS”) 61, as it may be modified or supplemented.
10. Meet with the independent accounting firm prior to the audit to review the planning and staffing of the audit and consider whether or not to approve the auditing services proposed to be provided.
11. Evaluate the performance of the independent accounting firm and consider the discharge of the independent accounting firm when circumstances warrant.
12. Consider in advance whether or not to approve any non-audit services to be performed by the independent accounting firm which are required to be approved by the Committee pursuant to the rules and regulations of any applicable Regulatory Body.
Financial Reporting Processes
13.12. In consultation with the Company’s management and the independent accounting firm, and management, review annually the adequacy of the Corporation’sCompany’s internal control over financial and accounting controls.
14.13. Require the Corporation’s chief executive officerCompany’s Chief Executive Officer and chief financial officerChief Financial Officer to submit a report to the Committee prior to the filing of the Annual Report on Form 10-K or a Form 10-Q, a report dated no earlier than 10 days prior to the datewhich is based on their evaluation of filing of the Form 10-K or Form 10-Q to the Committee which evaluates the design and operation of the Corporation’s internal control over financial and accounting controls,reporting, and which discloses (a)discloses:
a) any and all significant deficiencies discoveredand material weaknesses in the design and operation of the internal controlscontrol over financial reporting which couldare reasonably likely to adversely affect the Corporation’sCompany’s ability to record, process, summarize, and report financial data; and (b)
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Corporation’sCompany’s internal controls. control over financial reporting.
The Committee shall direct the actions to be taken and/or make recommendations to the Board of Directors of actions to be taken, to the extent such report indicates the finding of any significant deficiencies in internal controlscontrol over financial reporting or fraud.
15.14. Regularly review the Corporation’sCompany’s critical accounting policies and accounting estimates resulting from the application of these policies and inquire at least annually of both the Corporation’s internal auditorsCompany’s management, accounting group and the independent accounting firm as to whether either has any concerns relative to the quality or aggressiveness of management’s accounting policies.
Compliance
16. To the extent deemed necessary by the Committee, it shall have the authority to engage outside counsel and determine funding for such counsel, independent accounting consultants and/or other experts, in each case at the Corporation’s expense, to review any matter under its responsibility.
17.15. Establish procedures in compliance with the Act for (a)applicable law for:
a) the receipt, retention, and treatment of complaints received by the CorporationCompany regarding accounting, internal accounting controls, or auditing matters; and (b)
b) the confidential, anonymous submission by employees of the CorporationCompany of concerns regarding questionable accounting or auditing matters.
18. Investigate any allegations that any officer or director of the Corporation,Company, or any other person acting under the direction of any such person, took any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of an audit of the financial statements of the CorporationCompany for the purpose of rendering such financial statements materially misleading and, if such allegations prove to be correct, take or recommend to the Board of Directors appropriate disciplinary action.
Reporting
19.16. Prepare, in accordance with the rules of any Regulatory Body, a written report of the audit committeeAudit Committee to be included in the Corporation’sCompany’s annual proxy statement for each annual meeting of stockholders.
20.17. Instruct the Corporation’sCompany’s management to disclose in its Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q’s10-Q, the approval by the Committee of any non-audit services performed by the independent accounting firm, and review the substance of any such disclosure.disclosure and the considerations relating to the compatibility of such services with maintaining the independence of the accounting firm.
Conflicts of Interest
21.18. Review and approve all payments to be made pursuant to any related party transactions involving executive officers and members of the Board, and, as required by any Regulatory Body, consider approvalBody.
Independent Advice
19. The Committee may conduct or authorize investigations into or studies of matters within the Committee’s scope of responsibilities and duties as described above, and may seek, retain and terminate accounting, legal, consulting or other expert advice from a source independent of management, at the expense of the Company, with notice to either the Lead Director, the Executive Chairman or the Chief Executive Officer of the Company, as deemed appropriate by the Committee. In furtherance of the foregoing, the Committee shall have the sole authority to retain and terminate any such consultant or advisor to be used to assist in the evaluation of such transactions.matters and shall have the sole authority to approve the consultant or advisor’s fees and other retention terms.
While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee to plan or conduct audits, to establish the Company’s accounting and financial reporting systems, or to determine that the Corporation’sCompany’s financial statements are complete and accurate and are in accordance with generally accepted accounting principles.
3This Charter is intended as a component of the flexible governance framework within which the Board of Directors, assisted by its committees, directs the affairs of the Company. While it should be interpreted in the context of all applicable laws, regulations and listing requirements, as well as in the context of the Company’s Articles and By-Laws, it is not intended to establish any legally binding obligations.
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