UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 20052006
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
Commission file number: 0-27544
OPEN TEXT CORPORATION
(Exact name of registrant as specified in its charter)
CANADA | 98-0154400 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
275 Frank Tompa Drive, Waterloo, Ontario, Canada N2L 0A1
(Address of principal executive offices)
Registrant’s telephone number, including area code: (519) 888-7111
(former name former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act).
Large accelerated filer¨ Accelerated filer x Non-accelerated filer¨
Large accelerated filer ¨ | Accelerated filer x | Non-accelerated filer ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
At January 30, 200631, 2007 there were 48,734,79649,242,603 outstanding Common Shares of the registrant.
TABLE OF CONTENTS
Page No | ||||
PART I Financial Information: | ||||
3 | ||||
4 | ||||
5 | ||||
6 | ||||
Unaudited Notes to Condensed Consolidated Financial Statements | 7 | |||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 30 | |||
44 | ||||
| ||||
52 | ||||
Item 5. | 53 | |||
54 | ||||
55 | ||||
56 |
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(inIn thousands of U.S. dollars, except share data)
December 31, 2005 | June 30, 2005 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 87,001 | $ | 79,898 | ||||
Accounts receivable—net of allowance for doubtful accounts of $3,355 as of December 31, 2005 and $3,125 as of June 30, 2005 | 78,268 | 81,936 | ||||||
Income taxes recoverable | 10,957 | 11,350 | ||||||
Prepaid expenses and other current assets | 9,595 | 8,438 | ||||||
Deferred tax assets (note 6) | 16,930 | 10,275 | ||||||
Total current assets | 202,751 | 191,897 | ||||||
Capital assets (note 5) | 39,223 | 36,070 | ||||||
Goodwill (note 11) | 238,656 | 243,091 | ||||||
Deferred tax assets (note 6) | 32,417 | 36,499 | ||||||
Acquired intangible assets (note 12) | 112,264 | 127,981 | ||||||
Other assets | 2,976 | 5,398 | ||||||
$ | 628,287 | $ | 640,936 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities (note 3) | $ | 78,967 | $ | 80,468 | ||||
Current portion of long-term debt (note 4) | 346 | — | ||||||
Deferred revenues | 64,492 | 75,227 | ||||||
Deferred tax liabilities (note 6) | 9,897 | 10,128 | ||||||
Total current liabilities | 153,702 | 165,823 | ||||||
Long-term liabilities: | ||||||||
Accrued liabilities (note 3) | 23,019 | 25,579 | ||||||
Long-term debt (note 4) | 12,582 | — | ||||||
Deferred revenues | 4 | 103 | ||||||
Deferred tax liabilities (note 6) | 25,406 | 29,245 | ||||||
Total long-term liabilities | 61,011 | 54,927 | ||||||
Minority interest | 4,495 | 4,431 | ||||||
Shareholders’ equity: (note 8) | ||||||||
Share capital 48,678,407 and 48,136,932 Common Shares issued and outstanding as of December 31, 2005, and June 30, 2005, respectively | 412,104 | 406,580 | ||||||
Commitment to issue shares | — | 813 | ||||||
Additional paid-in capital | 25,737 | 22,341 | ||||||
Accumulated comprehensive income | 13,488 | 18,124 | ||||||
Accumulated deficit | (42,250 | ) | (32,103 | ) | ||||
Total shareholders’ equity | 409,079 | 415,755 | ||||||
$ | 628,287 | $ | 640,936 | |||||
Commitments and contingencies (note 14)
Subsequent event (note 17)
December 31, 2006 | June 30, 2006 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 124,401 | $ | 107,354 | ||||
Accounts receivable trade, net of allowance for doubtful accounts of $1,705 as of December 31, 2006 and $2,736 as of June 30, 2006 (note 10) | 114,090 | 75,016 | ||||||
Income taxes recoverable (note 13) | — | 11,924 | ||||||
Prepaid expenses and other current assets | 12,053 | 8,520 | ||||||
Deferred tax assets (note 13) | 25,536 | 28,724 | ||||||
Total current assets | 276,080 | 231,538 | ||||||
Investments in marketable securities (note 3) | — | 21,025 | ||||||
Capital assets (note 4) | 47,918 | 41,262 | ||||||
Goodwill (note 5) | 525,077 | 235,523 | ||||||
Acquired intangible assets (note 6) | 379,139 | 102,326 | ||||||
Deferred tax assets (note 13) | 46,007 | 37,185 | ||||||
Other assets | 9,750 | 2,234 | ||||||
$ | 1,283,971 | $ | 671,093 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities (note 7) | $ | 105,708 | $ | 62,535 | ||||
Current portion of long-term debt (note 8) | 4,298 | 405 | ||||||
Deferred revenues | 112,518 | 74,687 | ||||||
Income taxes payable (note 13) | 4,119 | — | ||||||
Deferred tax liabilities (note 13) | 12,369 | 12,183 | ||||||
Total current liabilities | 239,012 | 149,810 | ||||||
Long-term liabilities: | ||||||||
Accrued liabilities (note 7) | 17,588 | 21,121 | ||||||
Long-term debt (note 8) | 397,343 | 12,963 | ||||||
Deferred revenues | 5,178 | 3,534 | ||||||
Deferred tax liabilities (note 13) | 135,180 | 19,490 | ||||||
Total long-term liabilities | 555,289 | 57,108 | ||||||
Minority interest | 6,163 | 5,804 | ||||||
Shareholders’ equity: | ||||||||
Share capital (note 11) | ||||||||
49,226,342 and 48,935,042 Common Shares issued and outstanding at December 31 and June 30, 2006, respectively; Authorized Common Shares: unlimited | 416,809 | 414,475 | ||||||
Additional paid-in capital | 31,970 | 28,367 | ||||||
Accumulated other comprehensive income | 52,275 | 42,654 | ||||||
Accumulated deficit | (17,547 | ) | (27,125 | ) | ||||
Total shareholders’ equity | 483,507 | 458,371 | ||||||
$ | 1,283,971 | $ | 671,093 | |||||
Commitments and Contingencies (note 16) |
See accompanying unaudited notes to condensed consolidated financial statements
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSINCOME
(in thousands of U.S. dollars, except per share data)
Three months ended December 31, | Six months ended December 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Revenues: | ||||||||||||||||
License | $ | 37,131 | $ | 42,622 | $ | 62,074 | $ | 66,526 | ||||||||
Customer support | 46,476 | 44,542 | 93,122 | 85,334 | ||||||||||||
Service | 27,164 | 27,528 | 48,205 | 48,428 | ||||||||||||
Total revenues | 110,771 | 114,692 | 203,401 | 200,288 | ||||||||||||
Cost of revenues: | ||||||||||||||||
License (1) | 1,811 | 3,051 | 4,199 | 5,205 | ||||||||||||
Customer support | 7,734 | 8,062 | 15,386 | 15,556 | ||||||||||||
Service | 21,393 | 22,585 | 39,997 | 39,239 | ||||||||||||
Total cost of revenues | 30,938 | 33,698 | 59,582 | 60,000 | ||||||||||||
79,833 | 80,994 | 143,819 | 140,288 | |||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 14,836 | 15,842 | 31,386 | 30,525 | ||||||||||||
Sales and marketing | 28,059 | 30,787 | 54,172 | 56,284 | ||||||||||||
General and administrative | 11,766 | 9,564 | 22,203 | 21,422 | ||||||||||||
Depreciation | 2,831 | 2,589 | 5,340 | 4,988 | ||||||||||||
Amortization of acquired intangible assets | 6,957 | 6,146 | 13,810 | 11,575 | ||||||||||||
Special charges (recoveries) (note 15) | 8,793 | (1,449 | ) | 26,904 | (1,449 | ) | ||||||||||
Total operating expenses | 73,242 | 63,479 | 153,815 | 123,345 | ||||||||||||
Income (loss) from operations | 6,591 | 17,515 | (9,996 | ) | 16,943 | |||||||||||
Other expense | (1,240 | ) | (1,691 | ) | (1,764 | ) | (2,624 | ) | ||||||||
Interest income | 246 | 303 | 316 | 605 | ||||||||||||
Income (loss) before income taxes | 5,597 | 16,127 | (11,444 | ) | 14,924 | |||||||||||
Provision for (recovery of) income taxes | 2,740 | 4,355 | (1,630 | ) | 4,030 | |||||||||||
Income (loss) before minority interest | 2,857 | 11,772 | (9,814 | ) | 10,894 | |||||||||||
Minority interest | 136 | 802 | 333 | 910 | ||||||||||||
Net income (loss) for the period | $ | 2,721 | $ | 10,970 | $ | (10,147 | ) | $ | 9,984 | |||||||
Basic net income (loss) per share (note 10) | $ | 0.06 | $ | 0.22 | $ | (0.21 | ) | $ | 0.20 | |||||||
Diluted income (loss) per share (note 10) | $ | 0.05 | $ | 0.21 | $ | (0.21 | ) | $ | 0.19 | |||||||
Weighted average number of Common Shares outstanding (note 10) | ||||||||||||||||
Basic | 48,569 | 50,310 | 48,506 | 50,708 | ||||||||||||
Diluted | 49,871 | 52,361 | 48,506 | 53,120 | ||||||||||||
(1) Amount excludes amortization of application software technology which is included within Amortization of acquired intangible assets | $ | 3,653 | $ | 2,718 | $ | 7,184 | $ | 6,215 |
Three months ended December 31, | Six months ended December 31, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Revenues: | ||||||||||||||||
License | $ | 51,425 | $ | 37,131 | $ | 80,250 | $ | 62,074 | ||||||||
Customer support | 78,022 | 45,366 | 126,310 | 90,690 | ||||||||||||
Service | 33,814 | 28,274 | 57,856 | 50,637 | ||||||||||||
Total revenues | 163,261 | 110,771 | 264,416 | 203,401 | ||||||||||||
Cost of revenues: | ||||||||||||||||
License | 3,322 | 1,811 | 6,122 | 4,199 | ||||||||||||
Customer support | 12,659 | 7,134 | 19,390 | 14,492 | ||||||||||||
Service | 29,108 | 22,684 | 48,970 | 42,008 | ||||||||||||
Amortization of acquired technology intangible assets | 10,396 | 4,652 | 15,242 | 9,283 | ||||||||||||
Total cost of revenues | 55,485 | 36,281 | 89,724 | 69,982 | ||||||||||||
107,776 | 74,490 | 174,692 | 133,419 | |||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 22,595 | 14,883 | 36,774 | 30,671 | ||||||||||||
Sales and marketing | 43,824 | 28,553 | 68,381 | 53,885 | ||||||||||||
General and administrative | 15,474 | 10,534 | 27,741 | 22,088 | ||||||||||||
Depreciation | 3,907 | 2,831 | 6,899 | 5,340 | ||||||||||||
Amortization of acquired intangible assets | 7,369 | 2,305 | 9,751 | 4,527 | ||||||||||||
Special charges (note 17) | 4,843 | 8,793 | 4,375 | 26,904 | ||||||||||||
Total operating expenses | 98,012 | 67,899 | 153,921 | 143,415 | ||||||||||||
Income (loss) from operations | 9,764 | 6,591 | 20,771 | (9,996 | ) | |||||||||||
Other income (expense) | 329 | (1,240 | ) | 702 | (1,764 | ) | ||||||||||
Interest income (expense), net | (7,512 | ) | 246 | (7,120 | ) | 316 | ||||||||||
Income (loss) before income taxes | 2,581 | 5,597 | 14,353 | (11,444 | ) | |||||||||||
Provision for (recovery of) income taxes | 173 | 2,740 | 4,507 | (1,630 | ) | |||||||||||
Net income (loss) before minority interest | 2,408 | 2,857 | 9,846 | (9,814 | ) | |||||||||||
Minority interest | 131 | 136 | 268 | 333 | ||||||||||||
Net income (loss) for the period | $ | 2,277 | $ | 2,721 | $ | 9,578 | $ | (10,147 | ) | |||||||
Net income (loss) per share—basic (note 12) | $ | 0.05 | $ | 0.06 | $ | 0.20 | $ | (0.21 | ) | |||||||
Net income (loss) per share—diluted (note 12) | $ | 0.04 | $ | 0.05 | $ | 0.19 | $ | (0.21 | ) | |||||||
Weighted average number of Common Shares outstanding | ||||||||||||||||
Basic | 49,152 | 48,569 | 49,063 | 48,506 | ||||||||||||
Diluted | 50,739 | 49,871 | 50,497 | 48,506 | ||||||||||||
See accompanying unaudited notes to condensed consolidated financial statements
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF DEFICIT
(in thousands of U.S. Dollars)dollars)
Three months ended December 31, | Six months ended December 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Deficit, beginning of period | $ | (44,971 | ) | $ | (25,537 | ) | $ | (32,103 | ) | $ | (18,529 | ) | ||||
Repurchase of common shares (note 8) | — | (9,455 | ) | — | (15,477 | ) | ||||||||||
Net income (loss) | 2,721 | 10,970 | (10,147 | ) | 9,984 | |||||||||||
Deficit, end of period | $ | (42,250 | ) | $ | (24,022 | ) | $ | (42,250 | ) | $ | (24,022 | ) | ||||
Three months ended December 31, | Six months ended December 31, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Deficit, beginning of period | $ | (19,824 | ) | $ | (44,971 | ) | $ | (27,125 | ) | $ | (32,103 | ) | ||||
Net income (loss) | 2,277 | 2,721 | 9,578 | (10,147 | ) | |||||||||||
Deficit, end of period | $ | (17,547 | ) | $ | (42,250 | ) | $ | (17,547 | ) | $ | (42,250 | ) | ||||
See accompanying unaudited notes to condensed consolidated financial statements
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. Dollars)dollars)
Three months ended December 31, | Six months ended December 31, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) for the period | $ | 2,721 | $ | 10,970 | $ | (10,147 | ) | $ | 9,984 | |||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 9,788 | 8,735 | 19,150 | 16,563 | ||||||||||||
Share-based compensation | 1,330 | — | 2,743 | — | ||||||||||||
Excess tax benefits on share-based compensation expense | (644 | ) | — | (644 | ) | — | ||||||||||
Undistributed earnings related to minority interest | 136 | 802 | 333 | 910 | ||||||||||||
Deferred taxes | (687 | ) | 290 | (6,045 | ) | 3,226 | ||||||||||
Impairment of capital assets | 1,654 | — | 3,667 | — | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (3,319 | ) | (15,274 | ) | 5,466 | 3,461 | ||||||||||
Prepaid expenses and other current assets | 1,103 | 956 | (928 | ) | (905 | ) | ||||||||||
Income taxes | (447 | ) | (1,309 | ) | (1,069 | ) | (6,691 | ) | ||||||||
Accounts payable and accrued liabilities | 6,556 | 7,722 | 11,347 | (2,491 | ) | |||||||||||
Deferred revenue | (2,708 | ) | (1,182 | ) | (9,204 | ) | (7,231 | ) | ||||||||
Other assets | 865 | — | 2,003 | — | ||||||||||||
Net cash provided by operating activities | 16,348 | 11,710 | 16,672 | 16,826 | ||||||||||||
Cash flows used in investing activities: | ||||||||||||||||
Acquisition of capital assets | (8,160 | ) | (4,277 | ) | (14,097 | ) | (7,671 | ) | ||||||||
Purchase of Vista, net of cash acquired | — | — | — | (23,690 | ) | |||||||||||
Purchase of Artesia, net of cash acquired | — | — | — | (5,057 | ) | |||||||||||
Purchase of Gauss, net of cash acquired | (6 | ) | (57 | ) | (91 | ) | (979 | ) | ||||||||
Purchase of IXOS, net of cash acquired | (1,121 | ) | (3,453 | ) | (4,228 | ) | (4,275 | ) | ||||||||
Additional purchase consideration for prior period acquisitions | (50 | ) | (191 | ) | (3,278 | ) | (1,194 | ) | ||||||||
Acquisition related costs | (845 | ) | (3,411 | ) | (1,844 | ) | (7,174 | ) | ||||||||
Net cash used in investing activities | (10,182 | ) | (11,389 | ) | (23,538 | ) | (50,040 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from issuance of Common Shares | 1,642 | 2,701 | 1,885 | 3,069 | ||||||||||||
Proceeds from exercise of Warrants | — | — | — | 725 | ||||||||||||
Repurchase of Common Shares (note 8) | — | (17,808 | ) | — | (28,842 | ) | ||||||||||
Repayment of short-term bank loan | — | — | — | (2,189 | ) | |||||||||||
Payment obligations under capital leases | — | — | — | (48 | ) | |||||||||||
Excess tax benefits on share-based compensation expense | 644 | — | 644 | — | ||||||||||||
Proceeds from long-term debt | 12,928 | — | 12,928 | — | ||||||||||||
Net cash provided by (used in) financing activities | 15,214 | (15,107 | ) | 15,457 | (27,285 | ) | ||||||||||
Foreign exchange gain (loss) on cash held in foreign currencies | (1,146 | ) | 5,507 | (1,488 | ) | 5,686 | ||||||||||
Increase (decrease) in cash and cash equivalents, during the period | 20,234 | (9,279 | ) | 7,103 | (54,813 | ) | ||||||||||
Cash and cash equivalents, beginning of period | 66,767 | 111,453 | 79,898 | 156,987 | ||||||||||||
Cash and cash equivalents, end of period | $ | 87,001 | $ | 102,174 | $ | 87,001 | $ | 102,174 | ||||||||
Supplementary cash flow disclosure (note 13)
Three months ended December 31, | Six months ended December 31, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) for the period | $ | 2,277 | $ | 2,721 | $ | 9,578 | $ | (10,147 | ) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 21,672 | 9,788 | 31,892 | 19,150 | ||||||||||||
Share-based compensation expense | 1,333 | 1,330 | 2,600 | 2,743 | ||||||||||||
Undistributed earnings related to minority interest | 131 | 136 | 268 | 333 | ||||||||||||
Amortization of debt issuance costs | 257 | — | 257 | — | ||||||||||||
Unrealized loss on financial instruments (note 9) | 212 | — | 212 | — | ||||||||||||
Deferred taxes | (10,638 | ) | (687 | ) | (8,924 | ) | (6,045 | ) | ||||||||
Impairment of capital assets | — | 1,654 | — | 3,667 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | 25,191 | (3,319 | ) | 23,497 | 5,466 | |||||||||||
Prepaid expenses and other current assets | 277 | 1,103 | 894 | (928 | ) | |||||||||||
Income taxes | (3,395 | ) | (1,045 | ) | (4,554 | ) | (1,713 | ) | ||||||||
Accounts payable and accrued liabilities | 610 | 6,556 | (4,913 | ) | 11,347 | |||||||||||
Deferred revenue | (10,475 | ) | (2,708 | ) | (13,437 | ) | (9,204 | ) | ||||||||
Other assets | 3,976 | 865 | 3,695 | 2,003 | ||||||||||||
Net cash provided by operating activities | 31,428 | 16,394 | 41,065 | 16,672 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Acquisition of capital assets | (1,106 | ) | (8,160 | ) | (3,891 | ) | (14,097 | ) | ||||||||
Additional purchase consideration for prior period acquisitions | (856 | ) | (56 | ) | (856 | ) | (3,369 | ) | ||||||||
Purchase of IXOS, net of cash acquired | (534 | ) | (1,121 | ) | (867 | ) | (4,228 | ) | ||||||||
Purchase of Hummingbird, net of cash acquired | (384,761 | ) | — | (384,761 | ) | — | ||||||||||
Investments in marketable securities | — | — | (829 | ) | — | |||||||||||
Acquisition related costs | (17,752 | ) | (845 | ) | (20,200 | ) | (1,844 | ) | ||||||||
Net cash used in investing activities | (405,009 | ) | (10,182 | ) | (411,404 | ) | (23,538 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Excess tax benefits on share-based compensation expense | 536 | 598 | 741 | 644 | ||||||||||||
Proceeds from issuance of Common Shares | 1,986 | 1,642 | 2,464 | 1,885 | ||||||||||||
Repayment of long-term debt | (1,074 | ) | — | (1,173 | ) | — | ||||||||||
Proceeds from long-term debt | 390,000 | 12,928 | 390,000 | 12,928 | ||||||||||||
Debt issuance costs | (7,412 | ) | — | (7,433 | ) | — | ||||||||||
Net cash provided by financing activities | 384,036 | 15,168 | 384,599 | 15,457 | ||||||||||||
Foreign exchange gain (loss) on cash held in foreign currencies | 2,722 | (1,146 | ) | 2,787 | (1,488 | ) | ||||||||||
Increase in cash and cash equivalents, during the period | 13,177 | 20,234 | 17,047 | 7,103 | ||||||||||||
Cash and cash equivalents at beginning of period | 111,224 | 66,767 | 107,354 | 79,898 | ||||||||||||
Cash and cash equivalents at end of period | $ | 124,401 | $ | 87,001 | $ | 124,401 | $ | 87,001 | ||||||||
Supplementary cash flow disclosures (note 15) |
See accompanying unaudited notes to condensed consolidated financial statements
UNAUDITED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended December 31, 20052006
(Tabular dollar amounts in thousands of U.S. Dollars,dollars, except per share data)
NOTE 1—BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements (“Interim Financial Statements”) include the accounts of Open Text Corporation and its wholly and partially owned subsidiaries, collectively referred to as “Open Text” or the “Company”. All inter-company balances and transactions have been eliminated.
These Interim Financial Statements are expressed in U.S. dollars and are prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). These financial statements are based upon accounting policies and methods of their application are consistent with those used and described in the Company’s annual consolidated financial statements, except as described in Note 2 “New Accounting Policies” below.statements. The Interim Financial Statements do not include all of the financial statement disclosures included in the annual financial statements prepared in accordance with U.S. GAAP and therefore should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005.
2006.
The information furnished, as of December 31, 2006 and for the three and six months ended December 31, 2006 and 2005 is unaudited; however it reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented.presented, and includes the financial results of Hummingbird Ltd. (“Hummingbird”), with effect from October 2, 2006. The operating results for the three and six months ended December 31, 20052006 are not necessarily indicative of the results expected for any succeeding quarter or the entire fiscal year ending June 30, 2006. Certain prior period comparative figures have been adjusted to conform to current period presentation.
2007.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions which are evaluated on an ongoing basis, that affect the amounts reported in the financial statements. These estimates, judgments and assumptions are evaluated on an ongoing basis. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable 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 toto: (i) revenue recognition, (ii) allowance for doubtful accounts, (iii) testing goodwill andfor impairment, (iv) the valuation of acquired intangible assets, (v) long-lived assets, (vi) the recognition of contingencies, (vii) facility and restructuring accruals, (viii) acquisition accruals, share-based compensation, income taxes,(ix) asset retirement obligations, (x) realization of investment tax credits, and(xi) the valuation allowance relating to the Company’s deferred tax assets.assets, (xii) the recognition of share-based payment expense and (xiii) the recognition of unrealized gains/losses on financial instruments.
Reclassifications
Certain prior period comparative figures have been adjusted to conform to current period presentation including the reclassification of Amortization of acquired technology intangible assets from Amortization of acquired intangible assets set forth under Operating expenses to Cost of revenue. The reclassification of Amortization of acquired technology intangible assets increased Cost of revenues and decreased Operating expenses by $4.7 million and $9.3 million for the three and six months ended December 31, 2005 from previously reported amounts.
For the three months ended December 31, 2005, General and administrative expenses decreased by approximately $1.2 million with corresponding increases of approximately $494,000, $47,000, $325,000, and $366,000 in Sales and marketing expense, Research and development, Cost of service revenue and Cost of customer support revenue, respectively, from previously reported amounts. These reclassifications related to a change in the method of allocating operating expenses within the Company.
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Six Months Ended December 31, 2006
(Tabular dollar amounts in thousands of U.S. dollars, except per share data)
For the six months ended December 31, 2005 Cost of service revenues and Cost of customer support revenues increased by $422,000 and $695,000, respectively, with corresponding decreases of approximately $115,000, $287,000 and $715,000 in General and administrative expenses, Sales and marketing expense, and Research and development expense, respectively, from previously reported amounts. These reclassifications related to a change in the method of allocating operating expenses within the Company.
Service revenue increased by approximately $1.1 million and $2.4 million for the three and six months ended December 31, 2005, respectively, offset by a decrease in Customer support revenue of approximately $1.1 million and $2.4 million from previously reported amounts. Cost of service revenue increased by approximately $966,000 and $1.6 million for the three and six months ended December 31, 2005, respectively, offset by a decrease in Cost of customer support revenue of approximately $966,000 and $1.6 million, from previously reported amounts. These changes correspond to an internal reclassification pertaining to the Company’s Enterprise Support Program (“ESP program”). The ESP program is a customized “on-site” support program that provides support services that suit the specific requirements of the Company’s customers.
There was no change to income (loss) from operations or net income (loss) per share in any of the periods presented as a result of these reclassifications.
Comprehensive net income (loss)
Comprehensive net income (loss) is comprised of net lossincome (loss) and other comprehensive net income (loss), including the effect of foreign currency translation resulting from the consolidation of subsidiaries where the functional currency is a currency other than the U.S. Dollar. The Company’s total comprehensive net income (loss) was as follows:
Three months ended December 31, | Six months ended December 31, | Three months ended December 31, | Six months ended December 31, | |||||||||||||||||||||||||
2005 | 2004 | 2005 | 2004 | 2006 | 2005 | 2006 | 2005 | |||||||||||||||||||||
Other comprehensive net income (loss): | ||||||||||||||||||||||||||||
Foreign currency translation adjustment | $ | (6,799 | ) | $ | 34,494 | $ | (4,636 | ) | $ | 35,841 | $ | 11,026 | $ | (6,799 | ) | $ | 9,189 | $ | (4,636 | ) | ||||||||
Unrealized gain on investments in marketable securities | 226 | — | 432 | — | ||||||||||||||||||||||||
Net income (loss) for the period | 2,721 | 10,970 | (10,147 | ) | 9,984 | 2,277 | 2,721 | 9,578 | (10,147 | ) | ||||||||||||||||||
Comprehensive net income (loss) for the period | $ | (4,078 | ) | $ | 45,464 | $ | (14,783 | ) | $ | 45,825 | $ | 13,529 | $ | (4,078 | ) | $ | 19,199 | $ | (14,783 | ) | ||||||||
NOTE 2—NEW ACCOUNTING POLICIES
Recently issued accounting pronouncements
In September 2006, the United States Securities Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior year Misstatements when Quantifying Current year Misstatements”, (“SAB 108”). SAB 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB 108 is effective for the Company’s fiscal year 2007 annual financial statements. The Company is currently assessing the potential impact that the adoption of SAB 108 will have on its financial statements.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”, (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands
OPEN TEXT CORPORATION
UNAUDITED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 20052006
(Tabular dollar amounts in thousands of U.S. Dollars,dollars, except per share data)
NOTE 2—NEW ACCOUNTING POLICIES
The followingdisclosures about fair value measurements. SFAS 157 does not require any new accounting policies were adopted infair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the six months ended December 31, 2005:
Share-based payment
Onsource of the information. This statement is effective for the Company beginning July 1, 2005,2008. The Company is currently assessing the Company adopted the fair value-based method for measurement and cost recognition of employee share-based compensation arrangements under the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. (“SFAS”) 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”), using the modified prospective application transitional approach. Previously, the Company had elected to account for employee share-based compensation using the intrinsic value method based upon Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. The intrinsic value method generally did not result in any compensation cost being recorded for employee stock options since the exercise price was equal to the market price of the underlying shares on the date of grant.
Under the modified prospective application transitional approach, share-based compensation is recognized for awards granted, modified, repurchased or cancelled subsequent topotential impact that the adoption of SFAS 123R. 157 will have on its financial statements.
In addition, share-based compensation is recognized, subsequent toJuly 2006, the adoptionFASB issued FASB Interpretation No. 48 on Accounting for Uncertain Tax Positions—an interpretation of SFAS 123R,FASB Statement No. 109, “Accounting for Income Taxes” (“FIN 48”). Under FIN 48, an entity should presume that a taxing authority will examine a tax position when evaluating the remaining portionposition for recognition and measurement; therefore, assessment of the vesting period (if any) for outstanding awards granted prior toprobability of the daterisk of adoption. Prior periods haveexamination is not been adjusted andappropriate. In applying the Company continues to provide pro forma disclosure as if it had accounted for employee share-based payments in all periods presented under the fair value provisions of SFAS No. 123, “AccountingFIN 48, there will be distinct recognition and measurement evaluations. The first step is to evaluate the tax position for Stock-based Compensation”,recognition by determining if the weight of available evidence indicates it is more likely than not, based solely on the technical merits, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the appropriate amount of the benefit to recognize. The amount of benefit to recognize will be measured as the maximum amount which is presented below.
more likely than not, to be realized. The Company measures share-based compensation coststax position should be derecognized when it is no longer more likely than not of being sustained. On subsequent recognition and measurement the maximum amount which is more likely than not to be recognized at each reporting date will represent management’s best estimate, given the information available at the reporting date, even though the outcome of the tax position is not absolute or final. Subsequent recognition, derecognition, and measurement should be based on the grant date,new information. A liability for interest or penalties or both will be recognized as deemed to be incurred based on the calculated fair valueprovisions of the award. The Company has elected to treat awards with graded vesting as a single award when estimating fair value. Compensation cost is recognized on a straight-line basis over the employee requisite service period, which in the Company’s circumstancestax law, that is, the stated vesting period for which the taxing authority will begin assessing the interest or penalties or both. The amount of the award, provided that total compensation costinterest expense recognized at least equals the pro rata value of the award that has vested. Compensation cost is initiallywill be based on the estimated numberdifference between the amount recognized in the financial statements and the benefit recognized in the tax return. On transition, the change in net assets due to applying the provisions of options for which the requisite service is expectedfinal interpretation will be considered as a change in accounting principle with the cumulative effect of the change treated as an offsetting adjustment to be rendered. This estimate is adjustedthe opening balance of retained earnings in the period once actual forfeitures are known.of transition. FIN 48 will be effective as of the beginning of the first annual period beginning after December 15, 2006 and will be adopted by the Company for the year ended June 30, 2008. The Company is currently assessing the impact of FIN 48 on its financial statements.
NOTE 3—INVESTMENTS
On October 2, 2006, the Company acquired all of the remaining issued and outstanding shares of Hummingbird. In view of this, the existing investment in the equity of Hummingbird is included as part of the cost of the acquisition of Hummingbird. For details relating to this acquisition see Note 18 “Acquisitions” to the Interim Financial Statements.
NOTE 4—CAPITAL ASSETS
Had the Company adopted the fair value-based method for accounting for share-based compensation in all prior periods presented, the pro-forma impact on net income and net income per share would be as follows:
Three months ended December 31, 2004 | Six months ended December 31, 2004 | |||||
Net income for the period: | ||||||
As reported | $ | 10,970 | $ | 9,984 | ||
Share-based compensation not recognized in net income | 657 | 2,403 | ||||
Pro forma | $ | 10,313 | $ | 7,581 | ||
Net income per share – basic | ||||||
As reported | $ | 0.22 | $ | 0.20 | ||
Pro forma | $ | 0.20 | $ | 0.15 | ||
Net income per share – diluted | ||||||
As reported | $ | 0.21 | $ | 0.19 | ||
Pro forma | $ | 0.20 | $ | 0.14 |
As of December 31, 2006 | |||||||||
Cost | Accumulated Depreciation | Net | |||||||
Furniture and fixtures | $ | 9,561 | $ | 6,816 | $ | 2,745 | |||
Office equipment | 8,469 | 7,307 | 1,162 | ||||||
Computer hardware | 68,945 | 58,434 | 10,511 | ||||||
Computer software | 18,657 | 12,599 | 6,058 | ||||||
Leasehold improvements | 13,754 | 8,754 | 5,000 | ||||||
Land and Buildings* | 22,976 | 534 | 22,442 | ||||||
$ | 142,362 | $ | 94,444 | $ | 47,918 | ||||
OPEN TEXT CORPORATION
UNAUDITED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 20052006
(Tabular dollar amounts in thousands of U.S. Dollars,dollars, except per share data)
As of June 30, 2006 | |||||||||
Cost | Accumulated Depreciation | Net | |||||||
Furniture and fixtures | $ | 8,605 | $ | 6,360 | $ | 2,245 | |||
Office equipment | 8,281 | 6,992 | 1,289 | ||||||
Computer hardware | 66,714 | 54,995 | 11,719 | ||||||
Computer software | 17,023 | 11,737 | 5,286 | ||||||
Leasehold improvements | 12,374 | 8,064 | 4,310 | ||||||
Building | 16,726 | 313 | 16,413 | ||||||
$ | 129,723 | $ | 88,461 | $ | 41,262 | ||||
* | Included in this balance is an asset held for sale with a carrying value of approximately $6.9 million and nil as of December 31, 2006 and June 30, 2006, respectively. This asset is being held for sale as a consequence of a decision taken by the Company’s management to sell a building acquired as part of the Hummingbird acquisition. The Company expects to sell the building by way of a commercial sale and, at this point, is unable to predict the timing of its disposal. The building is being held for sale within the Company’s North America reporting segment. See Note 14 “Segment Information” to the Interim Financial Statements. |
ReferNOTE 5—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 since June 30, 2005:
Balance, June 30, 2005 | $ | 243,091 | ||
Adjustments relating to prior acquisitions | (17,470 | ) | ||
Adjustments on account of foreign exchange | 9,902 | |||
Balance, June 30, 2006 | 235,523 | |||
Acquisition of Hummingbird | 274,796 | |||
Adjustments relating to prior acquisitions | 8,293 | |||
Adjustments on account of foreign exchange | 6,465 | |||
Balance, December 31, 2006 | $ | 525,077 | ||
Adjustments relating to Note 9 “Share-Based Payments” in these condensed consolidated financial statements for detailsprior acquisitions primarily relate to the adjustments to goodwill based upon the review and evaluation of stock optionsthe tax attributes of acquisition-related operating loss carry forwards and share-based compensation cost recorded duringdeductions originally assessed at the threevarious dates of acquisition and six months endedincreases to goodwill relating to IXOS and Gauss share purchases and step accounting adjustments.
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Six Months Ended December 31, 2005.
2006
Amortization period for leasehold improvements
In June 2005, the Emerging Issues Task Force (“EITF”) issued Abstract No. 05-06, “Determining the Amortization Period for Leasehold Improvements” (“EITF 05-6”). The pronouncement requires that leasehold improvements acquired(Tabular dollar amounts in a business combination, or purchased subsequent to the inceptionthousands of the lease and not contemplated at or near the beginning of the lease term, be amortized over the lesser of the useful life of the asset or the lease term that includes reasonably assured lease renewals as determined on the date of the acquisition of the leasehold improvement. This pronouncement is being applied by the Company prospectively for leasehold improvements purchased or acquired on or after July 1, 2005. The adoption of EITF 05-6 did not have a material impact on the Company’s consolidated results of operations or financial condition.
Accounting changes and error correctionsU.S. dollars, except per share data)
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”. SFAS 154 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 principles 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 correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, and will be adopted for the year ended June 30, 2007. The impact that the adoption of SFAS 154 will have on the Company’s results of operations and financial condition will depend on the nature of future accounting changes and the nature of transitional guidance provided in future accounting pronouncements.
NOTE 3—6—ACQUIRED INTANGIBLE ASSETS
Technology Assets | Customer Assets | Total | ||||||||||
Net book value, June 30, 2005 | $ | 76,108 | $ | 51,873 | $ | 127,981 | ||||||
Activity during fiscal 2006: | ||||||||||||
Amortization expense | (18,900 | ) | (9,199 | ) | (28,099 | ) | ||||||
Impairment of intangible assets | (1,046 | ) | — | (1,046 | ) | |||||||
Foreign exchange impact | 3,000 | 2,598 | 5,598 | |||||||||
Other | (3,988 | ) | 1,880 | (2,108 | ) | |||||||
Net book value, June 30, 2006 | 55,174 | 47,152 | 102,326 | |||||||||
Activity during fiscal 2007: | ||||||||||||
Acquisition of Hummingbird | 159,200 | 139,800 | 299,000 | |||||||||
Amortization expense | (15,242 | ) | (9,751 | ) | (24,993 | ) | ||||||
Foreign exchange impact | 1,337 | 1,173 | 2,510 | |||||||||
Other | 223 | 73 | 296 | |||||||||
Net book value, December 31, 2006 | $ | 200,692 | $ | 178,447 | $ | 379,139 | ||||||
The range of amortization periods for intangible assets is from 4-10 years.
The following table shows the estimated future amortization expense for the six months ended June 30, 2007 and each of the next four years thereafter, assuming no further adjustments to acquired intangible assets are made:
Fiscal years ending June 30, | |||
2007 | $ | 35,552 | |
2008 | 70,754 | ||
2009 | 64,184 | ||
2010 | 51,742 | ||
2011 | 49,196 | ||
Total | $ | 271,428 | |
NOTE 7—ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Current liabilities
Accounts payable and accrued liabilities are comprised of the following:following:
As of December 31, 2005 | As of June 30, 2005 | As of December 31, 2006 | As of June 30, 2006 | |||||||||
Accounts payable—trade | $ | 13,588 | $ | 18,509 | $ | 8,013 | $ | 6,077 | ||||
Accrued salaries and commissions | 15,086 | 18,976 | 28,445 | 15,020 | ||||||||
Accrued liabilities | 26,810 | 33,736 | 38,752 | 26,827 | ||||||||
Amounts payable in respect of restructuring (note 15) | 14,118 | 920 | ||||||||||
Amounts payable in respect of restructuring (note 17) | 5,981 | 6,148 | ||||||||||
Amounts payable in respect of acquisitions and acquisition related accruals | 9,365 | 8,327 | 24,517 | 8,463 | ||||||||
$ | 78,967 | $ | 80,468 | $ | 105,708 | $ | 62,535 | |||||
OPEN TEXT CORPORATION
UNAUDITED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 20052006
(Tabular dollar amounts in thousands of U.S. Dollars,dollars, except per share data)
Long-term accrued liabilities
As of December 31, 2005 | As of June 30, 2005 | |||||
Pension liabilities | $ | 611 | $ | 625 | ||
Amounts payable in respect of restructuring (note 15) | 2,911 | 1,125 | ||||
Amounts payable in respect of acquisitions and acquisition related accruals | 15,053 | 18,694 | ||||
Other accrued liabilities | 260 | 239 | ||||
Asset retirement obligations | 4,184 | 4,896 | ||||
$ | 23,019 | $ | 25,579 | |||
As of December 31, 2006 | As of June 30, 2006 | |||||
Pension liabilities | $ | 582 | $ | 582 | ||
Amounts payable in respect of restructuring (note 17) | 1,347 | 1,851 | ||||
Amounts payable in respect of acquisitions and acquisition related accruals | 11,760 | 14,224 | ||||
Other accrued liabilities | 575 | 568 | ||||
Asset retirement obligations | 3,324 | 3,896 | ||||
$ | 17,588 | $ | 21,121 | |||
Pension liabilities
IXOS Software AG (“IXOS”), in which theThe Company acquired a controlling interest in IXOS Software AG (“IXOS”) in March 2004,2004. IXOS 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, with respect to the IXOS employees, 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 as of December 31, 20052006 was $2.2$2.8 million (June 30, 2005 – $2.32006—$2.6 million), while the. The fair value of the pension obligation as of December 31, 20052006 was $2.8$3.0 million (June 30, 2005 – $2.92006—$3.0 million).
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 FASB SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). At December 31, 2006, the present value of this obligation was $3.3 million, (June 30, 2006—$3.9 million), with an undiscounted value of $4.6 million, (June 30, 2006—$4.8 million). These leases were primarily assumed in connection with the IXOS acquisition.
Excess facility obligations and accruals relating to acquisitions
The Company has accrued for the cost of excess facilities both in connection with its fiscal 2004 and fiscal 2006 restructuring, as well as with a number of its acquisitions.acquisitions, including its Fiscal 2007 Hummingbird acquisition. These accruals represent the Company’s best estimate in respect of future sub-lease 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.
Transaction-relatedAcquisition related costs include amounts provided for certain pre-acquisition contingencies.
OPEN TEXT CORPORATION
UNAUDITED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 20052006
(Tabular dollar amounts in thousands of U.S. Dollars,dollars, except per share data)
The following table summarizes the activity with respect to the Company’s acquisition accruals during the six monthsperiod ended December 31, 2005.2006.
Balance June 30, 2006 | Initial Accruals | Usage/ Foreign Exchange/ Other Adjustments | Subsequent Adjustments to Goodwill | Balance December 31, 2006 | ||||||||||||||||||||||||||||||
Hummingbird | ||||||||||||||||||||||||||||||||||
Employee termination costs | $ | — | $ | 23,619 | $ | (8,576 | ) | $ | — | $ | 15,043 | |||||||||||||||||||||||
Excess facilities | — | 2,408 | (393 | ) | — | 2,015 | ||||||||||||||||||||||||||||
Transaction-related costs | — | 7,429 | (6,429 | ) | — | 1,000 | ||||||||||||||||||||||||||||
Balance June 30, 2005 | Initial Accruals | Usage/ Foreign Exchange/ Other Adjustments | Subsequent Adjustments | Balance December 31, 2005 | — | 33,456 | (15,398 | ) | — | 18,058 | ||||||||||||||||||||||||
IXOS | ||||||||||||||||||||||||||||||||||
Employee termination costs | $ | 338 | $ | — | $ | (194 | ) | $ | (64 | ) | $ | 80 | 22 | — | (22 | ) | — | — | ||||||||||||||||
Excess facilities | 17,274 | — | 533 | (151 | ) | 17,656 | 17,401 | — | (2,403 | ) | (95 | ) | 14,903 | |||||||||||||||||||||
Transaction-related costs | 2,167 | — | (837 | ) | (30 | ) | 1,300 | 616 | — | (495 | ) | — | 121 | |||||||||||||||||||||
19,779 | — | (498 | ) | (245 | ) | 19,036 | 18,039 | — | (2,920 | ) | (95 | ) | 15,024 | |||||||||||||||||||||
Gauss | ||||||||||||||||||||||||||||||||||
Excess facilities | 260 | — | (189 | ) | (71 | ) | — | |||||||||||||||||||||||||||
Transaction-related costs | 298 | — | (394 | ) | 497 | 401 | 34 | — | (6 | ) | (28 | ) | — | |||||||||||||||||||||
558 | — | (583 | ) | 426 | 401 | 34 | — | (6 | ) | (28 | ) | — | ||||||||||||||||||||||
Eloquent | ||||||||||||||||||||||||||||||||||
Transaction-related costs | 487 | — | 10 | (250 | ) | 247 | 243 | — | — | — | 243 | |||||||||||||||||||||||
487 | — | 10 | (250 | ) | 247 | 243 | — | — | — | 243 | ||||||||||||||||||||||||
Centrinity | ||||||||||||||||||||||||||||||||||
Excess facilities | 3,928 | — | 207 | (873 | ) | 3,262 | 3,329 | — | (270 | ) | (358 | ) | 2,701 | |||||||||||||||||||||
Transaction-related costs | 651 | — | 61 | (196 | ) | 516 | 221 | — | (148 | ) | (73 | ) | — | |||||||||||||||||||||
4,579 | — | 268 | (1,069 | ) | 3,778 | 3,550 | — | (418 | ) | (431 | ) | 2,701 | ||||||||||||||||||||||
Open Image | ||||||||||||||||||||||||||||||||||
Transaction-related costs | 135 | — | 3 | (138 | ) | — | ||||||||||||||||||||||||||||
135 | — | 3 | (138 | ) | — | |||||||||||||||||||||||||||||
Artesia | ||||||||||||||||||||||||||||||||||
Employee termination costs | 50 | — | (48 | ) | (2 | ) | — | |||||||||||||||||||||||||||
Excess facilities | 821 | — | (149 | ) | 101 | 773 | 761 | — | (204 | ) | (306 | ) | 251 | |||||||||||||||||||||
Transaction-related costs | 79 | — | (3 | ) | (21 | ) | 55 | 12 | — | (12 | ) | — | — | |||||||||||||||||||||
950 | — | (200 | ) | 78 | 828 | 773 | — | (216 | ) | (306 | ) | 251 | ||||||||||||||||||||||
Vista | ||||||||||||||||||||||||||||||||||
Transaction-related costs | 121 | — | (7 | ) | (102 | ) | 12 | 6 | — | — | (6 | ) | — | |||||||||||||||||||||
121 | — | (7 | ) | (102 | ) | 12 | 6 | — | — | (6 | ) | — | ||||||||||||||||||||||
Optura | ||||||||||||||||||||||||||||||||||
Excess facilities | 172 | — | (78 | ) | (20 | ) | 74 | 30 | — | (30 | ) | — | — | |||||||||||||||||||||
Transaction-related costs | 240 | — | (47 | ) | (151 | ) | 42 | 12 | — | — | (12 | ) | — | |||||||||||||||||||||
412 | — | (125 | ) | (171 | ) | 116 | 42 | — | (30 | ) | (12 | ) | — | |||||||||||||||||||||
Totals | ||||||||||||||||||||||||||||||||||
Employee termination costs | 388 | — | (242 | ) | (66 | ) | 80 | 22 | 23,619 | (8,598 | ) | — | 15,043 | |||||||||||||||||||||
Excess facilities | 22,455 | — | 324 | (1,014 | ) | 21,765 | 21,521 | 2,408 | (3,300 | ) | (759 | ) | 19,870 | |||||||||||||||||||||
Transaction-related costs | 4,178 | — | (1,214 | ) | (391 | ) | 2,573 | 1,144 | 7,429 | (7,090 | ) | (119 | ) | 1,364 | ||||||||||||||||||||
$ | 27,021 | $ | — | $ | (1,132 | ) | $ | (1,471 | ) | $ | 24,418 | $ | 22,687 | $ | 33,456 | $ | (18,988 | ) | $ | (878 | ) | $ | 36,277 | |||||||||||
OPEN TEXT CORPORATION
UNAUDITED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 20052006
(Tabular dollar amounts in thousands of U.S. Dollars,dollars, except per share data)
The adjustments to goodwill relate primarilyrelating to revisions of the estimates of accruedemployee termination costs and contingencies that existed at the acquisition dateexcess facilities are accounted for employee termination, excess facility and direct costs.
Asset retirement obligations
in accordance with Emerging Issues Task Force 95-3, “Recognition of Liabilities in Connection With a Purchase Business Combination”. The Company is requiredadjustments to return certain of its leased facilitiesgoodwill relating to their original state at the conclusion of the lease. At December 31, 2005, the present value of this obligation was $4.2 milliontransaction costs are accounted for in accordance with an undiscounted value of $5.8 million. These leases were primarily assumed in connection with the IXOS acquisition.
SFAS No. 141, “Business Combinations” (“SFAS 141”).
NOTE 4—8—LONG-TERM DEBT AND CREDIT FACILITIES
Term loan and Revolver
On October 2, 2006, the Company entered into a $465.0 million credit agreement with a Canadian chartered bank (the “bank”) consisting of a $390.0 million term loan facility (the “term loan”) and a $75.0 million committed revolving long-term credit facility (the “revolver”). The term loan was used to partially finance the Hummingbird acquisition and the revolver will be used for general business purposes. The credit agreement is guaranteed by the Company and certain of its subsidiaries.
Long-term debtTerm loan
The term loan has a seven year term and expires on October 2, 2013 and bears interest at a floating rate of LIBOR plus 2.50%. The term loan principal repayments are equal to 0.25% ($975,000) of the original principal amount, due each quarter with the remainder due at the end of the term.
Long-term debtAs of December 31, 2006, the carrying value of the term loan was $389.0 million.
In October 2006, the Company entered into an interest-rate collar agreement (the “collar”) that has the economic effect of circumscribing the interest rate obligations associated with $195.0 million of the term loan within an upper limit of 5.34% and a lower limit of 4.79%. For more details relating to the collar see Note 9 “Financial Instruments and Hedging Activities” to the Interim Financial Statements.
Revolver
The revolver has a five year term and expires on October 2, 2011. Borrowings under this facility bear interest at rates specified in the credit agreement. The revolver replaced a CAD $40.0 million line of credit (the “old line of credit”) the Company previously had with the bank. The Company was required to terminate the old line of credit prior to executing its current credit agreement. As of the date of termination, there were no borrowings outstanding on the CAD $40.0 million line of credit, nor were there any termination penalties. There were no borrowings outstanding under the revolver as of December 31, 2006.
Mortgage
The mortgage consists of a 5five year mortgage agreement entered into during December 2005 with a Canadian charteredthe bank. The principal amount of the mortgage is Canadian Dollars (“CDN”)CAD $15.0 million. The mortgagemortgage: (i) has a fixed term of five years, maturing(ii) matures on January 1, 2011, and (iii) is secured by a lien on the Company’s buildingheadquarters in Waterloo, Ontario. Interest is to be paid monthly at a fixed rate of 5.25% per annum. Principal and interest are payable in monthly installments of CDNCAD $101,000 with a final lump sum principal payment of CDNCAD $12.6 million due on maturity. The mortgage may not be prepaid in whole or in part at anytime prior to the maturity date.
As of December 31, 2005,2006, the carrying valuevalues of the building was $15.9and mortgage were $15.6 million and that of the mortgage was $12.9 million.
Credit facilities
The Company had, as of December 31, 2005, a CDN $10.0$12.6 million, line of credit with a Canadian chartered bank under which no borrowings were outstanding at December 31, 2005 and June 30, 2005. On February 2, 2006, this facility was replaced with a new demand operating facility of CDN $40.0 million. Borrowings under the line of credit bear interest at varying rates depending upon the nature of the borrowings. The Company has pledged certain of its assets as collateral for this credit facility. There are no stand-by fees for this facility. See note 17 “Subsequent Event”.respectively.
OPEN TEXT CORPORATION
UNAUDITED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 20052006
(Tabular dollar amounts in thousands of U.S. Dollars,dollars, except per share data)
NOTE 5—CAPITAL ASSETS9—FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
As of December 31, 2005 | |||||||||
Cost | Accumulated Depreciation | Net | |||||||
Furniture and fixtures | $ | 8,287 | $ | 5,903 | $ | 2,384 | |||
Office equipment | 4,094 | 2,962 | 1,132 | ||||||
Computer hardware | 51,100 | 39,532 | 11,568 | ||||||
Computer software | 14,085 | 10,266 | 3,819 | ||||||
Leasehold improvements | 11,021 | 6,630 | 4,391 | ||||||
Building | 16,029 | 100 | 15,929 | ||||||
$ | 104,616 | $ | 65,393 | $ | 39,223 | ||||
As of June 30, 2005 | |||||||||
Cost | Accumulated Depreciation | Net | |||||||
Furniture and fixtures | $ | 9,635 | $ | 6,998 | $ | 2,637 | |||
Office equipment | 5,158 | 3,731 | 1,427 | ||||||
Computer hardware | 52,054 | 40,277 | 11,777 | ||||||
Computer software | 12,842 | 9,514 | 3,328 | ||||||
Leasehold improvements | 12,695 | 5,473 | 7,222 | ||||||
Building | 9,679 | — | 9,679 | ||||||
$ | 102,063 | $ | 65,993 | $ | 36,070 | ||||
The costIn October 2006, Open Text entered into a three year interest-rate collar that had the economic effect of circumscribing the interest rate obligations associated with $195.0 million of the building relatesterm loan within an upper limit of 5.34% and a lower limit of 4.79%. This was pursuant to a requirement in the Company’s constructioncredit agreement that required the Company to maintain, from thirty days following the date on which the term loan was entered into through the third anniversary or such earlier date on which the term loan is paid, interest rate hedging arrangements with counterparties in respect of 50% of the aggregate actual and projected principal amount of the term loan.
SFAS No.133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) requires that changes in a buildingderivative instrument’s fair value be recognized in Waterloo, Ontario. Additionscurrent earnings unless specific hedge accounting criteria are met and that an entity must formally document, designate and assess the effectiveness of transactions that qualify for hedge accounting.
SFAS 133 requires that written options must meet certain criteria in order for hedge accounting to apply. The Company determined that these criteria were not met and hedge accounting could not be applied for the building amountedquarter ended December 31, 2006. The fair market value of the collar, which represents the cash the Company would receive or pay to $651,000settle the collar, was a payable of $212,000 as of December 31, 2006, and $6.4 million duringhas been included within “Accounts payable and accrued liabilities” on the unaudited condensed consolidated balance sheet. An expense of $212,000, representing the change in the fair value of the collar has been included within interest expense within the unaudited condensed consolidated statements of income for the three and six months ended December 31, 2005, respectively. Approximately $299,000 is included2006. The Company records payments or receipts on the collar as adjustments to interest expense. The collar has a remaining term to maturity of 2.75 years.
The Company will continue to monitor changes in accrued liabilitiesinterest rates periodically and will assess whether hedge accounting could potentially be applied in future periods
NOTE 10—ALLOWANCE FOR DOUBTFUL ACCOUNTS AND UNBILLED RECEIVABLES
Balance of allowance for doubtful accounts as of June 30, 2006 | $ | 2,736 | ||
Bad debt expense for the period | 1,123 | |||
Write-offs | (2,154 | ) | ||
Balance of allowance for doubtful accounts as of December 31, 2006 | $ | 1,705 | ||
Included in accounts payablereceivable are unbilled receivables in the amount of $1.7 million and $4.3 million as of December 31, 2005. Construction of this building was completed2006 and depreciation commenced in October 2005.
June 30, 2006, respectively.
NOTE 6—INCOME TAXES11—SHARE CAPITAL AND SHARE BASED PAYMENTS
Share Capital
The Company operates in various tax jurisdictions, and accordingly, the Company’s income is subject to varying rates of tax. Losses incurred in one jurisdiction cannot be used to offset income taxes payable in another. The Company’s ability to use income tax losses and future income tax deductions is dependent upon the profitable operationsauthorized share capital of the Company in the tax jurisdictions in which such losses or deductions arise. Asincludes an unlimited number of December 31, 2005Common Shares and June 30, 2005,an unlimited number of first preference shares. No preference shares have been issued.
On May 19, 2006, the Company had total net deferred tax assetscommenced a repurchase program (“Repurchase Program”) that provided for the repurchase of $49.3 millionup to a maximum of 2,444,104 Common Shares. Purchase and $46.8 million respectively, and total deferred tax liabilities of $35.3 million and $39.4 million, respectively.
Deferred tax assets arise primarily from available income tax losses and future income tax deductions. The Company provides a valuation allowance if sufficient uncertainty exists regardingpayment for the realization of certain deferred tax assets. Based on the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax assets and tax planning strategies, a valuation allowance of $140.6 million and $127.6 million was required as of December 31, 2005 and June 30, 2005, respectively. The majority of the valuation allowance relates to uncertainties regarding the utilization of foreign pre-acquisition losses of Gauss Interprise AG (“Gauss”) and IXOS. The Company continues to evaluate its taxable position quarterly andCompany’s
OPEN TEXT CORPORATION
UNAUDITED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 20052006
(Tabular dollar amounts in thousands of U.S. Dollars,dollars, except per share data)
considers factorsCommon Shares under the Repurchase Program will be determined by taxing jurisdiction such as estimated taxable income, the historyBoard of losses for tax purposesDirectors of Open Text and the growth of the Company, among others. The principal component of the total deferred tax liabilities arises from acquired intangible assets purchasedwill be made in the Gaussaccordance with rules and IXOS transactions.
NOTE 7—SEGMENT INFORMATION
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”) 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, 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 revenues and direct operating expenses of each segment, based on the location of the respective customers. The accounting policies of the operating segments are the same as those of the Company as a whole. No segments have been aggregated.
Included in the following operating results are allocations of certain operating costs that are incurred in one reporting segment but which relate to all reporting segments.NASDAQ. The allocations of these common operating costs are consistent with the manner in which the chief operating decision maker of the Company allocates them for analysis. For the three and six months ended December 31, 2005, and 2004, the “Other” category consists of geographic regions other than North America and Europe.
Adjusted income from operating segments, which is the measure used by the chief operating decision maker to evaluate operating performance, does not include amortization of acquired intangible assets, special charges, share-based compensation, other expense and provision for (recovery of) income taxes. Goodwill and other acquired intangible assets have been assigned to segment assets basedRepurchase Program will terminate 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 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 2005
(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)
Information about reported segments is as follows:
Three months ended December 31, | Six months ended December 31, | ||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||
Revenue | |||||||||||||||
North America | $ | 53,785 | $ | 47,915 | $ | 100,016 | $ | 82,711 | |||||||
Europe | 51,171 | 60,583 | 92,601 | 105,050 | |||||||||||
Other | 5,815 | 6,194 | 10,784 | 12,527 | |||||||||||
Total revenue | $ | 110,771 | $ | 114,692 | $ | 203,401 | $ | 200,288 | |||||||
Adjusted income | |||||||||||||||
North America | $ | 11,890 | $ | 7,600 | $ | 17,591 | $ | 9,014 | |||||||
Europe | 10,226 | 13,896 | 14,091 | 16,725 | |||||||||||
Other | 1,665 | 217 | 1,762 | 1,025 | |||||||||||
Total adjusted income | 23,781 | 21,713 | 33,444 | 26,764 | |||||||||||
Less: | |||||||||||||||
Amortization of acquired intangible assets | 6,957 | 6,146 | 13,810 | 11,575 | |||||||||||
Special charges (recoveries) | 8,793 | (1,449 | ) | 26,904 | (1,449 | ) | |||||||||
Share-based compensation | 1,330 | — | 2,743 | — | |||||||||||
Other expense | 1,240 | 1,691 | 1,764 | 2,624 | |||||||||||
Provision for (recovery of) income taxes | 2,740 | 4,355 | (1,630 | ) | 4,030 | ||||||||||
Net income (loss) | $ | 2,721 | $ | 10,970 | $ | (10,147 | ) | $ | 9,984 | ||||||
As of December 31, 2005 | As of June 30, 2005 | |||||
Segment assets | ||||||
North America | $ | 240,494 | $ | 238,979 | ||
Europe | 322,674 | 343,421 | ||||
Other | 52,694 | 53,940 | ||||
Total segment assets | $ | 615,862 | $ | 636,340 | ||
A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements as of December 31, 2005 and June 30, 2005 is as follows:
As of December 31, 2005 | As of June 30, 2005 | |||||
Segment assets | $ | 615,862 | $ | 636,340 | ||
Cash and cash equivalents (corporate) | 12,425 | 4,596 | ||||
Total assets | $ | 628,287 | $ | 640,936 | ||
OPEN TEXT CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 2005
(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)
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 three and six months ended December 31, 2005 and 2004:
Three months ended December 31, | Six months ended December 31, | |||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||
Total revenues | ||||||||||||
Canada | $ | 8,411 | $ | 6,206 | $ | 15,652 | $ | 10,004 | ||||
United States | 45,374 | 41,709 | 84,364 | 72,707 | ||||||||
United Kingdom | 9,110 | 11,213 | 17,892 | 20,979 | ||||||||
Germany | 20,174 | 24,387 | 35,280 | 40,775 | ||||||||
Rest of Europe | 21,887 | 24,983 | 39,429 | 43,296 | ||||||||
Other | 5,815 | 6,194 | 10,784 | 12,527 | ||||||||
Total revenues | $ | 110,771 | $ | 114,692 | $ | 203,401 | $ | 200,288 | ||||
As of December 31, 2005 | As of June 30, 2005 | |||||
Segment assets: | ||||||
Canada | $ | 106,147 | $ | 78,267 | ||
United States | 134,347 | 160,712 | ||||
United Kingdom | 51,731 | 61,995 | ||||
Germany | 163,507 | 173,312 | ||||
Rest of Europe | 107,436 | 108,114 | ||||
Other | 52,694 | 53,940 | ||||
Total segment assets | $ | 615,862 | $ | 636,340 | ||
The Company’s goodwill has been allocated to the Company’s operating segments as follows:
As of December 31, 2005 | As of June 30, 2005 | |||||
North America | $ | 78,732 | $ | 80,220 | ||
Europe | 126,464 | 128,838 | ||||
Other | 33,460 | 34,033 | ||||
$ | 238,656 | $ | 243,091 | |||
NOTE 8—SHAREHOLDERS’ EQUITY
During the three months ended December 31, 2005, the Company issued Common Shares to employees that exercised their options under the Company’s stock option plans. See Note 9 “Share-Based Payments.”
May 18, 2007.
During the three and six months ended December 31, 2006 and 2005, the Company did not repurchase any of its Common Shares.
Employee Share Purchase Plan (“ESPP”)
During the three months ended December 31, 2004, the Company purchased, by way of its stock repurchase program, 999,100 of its2006, no Common Shares onwere issued under the Toronto Stock Exchange (“TSX”) and the NASDAQ National Market (“NASDAQ”) at an aggregate cost of $17.8 million. $8.3 million of the aggregate repurchase cost was
OPEN TEXT CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 2005
(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)
charged to Share capital based on the average carrying value of the Common Shares, with the remaining $9.5 million charged to Accumulated deficit.ESPP. During the six months ended December 31, 2004, the Company purchased approximately 1.6 million of its2006, 22,209 Common Shares onwere issued under the TSXESPP for cash collected from employees, in prior periods, totaling $305,000. In addition, cash in the amount of approximately $160,000 and $339,000, respectively, was received from employees for the NASDAQ at an aggregate cost of $28.8 million. $13.3 million of the aggregate repurchase cost was chargedthree and six months ended December 31, 2006 that will be used to Share capital based on the average carrying value of thepurchase Common Shares within future periods.
During the remaining $15.5 million chargedthree months ended December 31, 2005, no Common Shares were issued under the ESPP. During the six months ended December 31, 2005, 255,402 Common Shares were issued under the ESPP for cash collected from employees, in prior periods, totaling $3.1 million. In addition, cash in the amount $83,000 and $316,000, respectively, was received from employees for the three and six months ended December 31, 2005 that was used to Accumulated deficit.
purchase Common Shares in future periods.
NOTE 9—SHARE-BASED PAYMENTSShare-Based Payments
Summary of Outstanding Stock Options
As of December 31, 2005,2006 options to purchase an aggregate of 5,370,2875,727,259 Common Shares are outstanding under all of the Company’s stock option plans. In addition, 934,720 Common Shares1,286,970 stock options are available for issuance under the 1998 Stock Option Plan and the 2004 Stock Option Plan, which are the only plans under which the Company may issue further options.Plan. The Company’s stock options generally vest over four to five years and expire ten years from the date of the grant. The exercise price of options granted is equivalent to the fair market value of the stock at the date of grant.
A summary of option activity under the Company’s stock option plans for the six months endingended December 31, 20052006 is as follows:
Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value ($’000s) | ||||||||
Outstanding at July 1, 2005 | 5,530,274 | $ | 11.93 | ||||||||
Granted | 233,000 | 14.94 | |||||||||
Exercised | (239,492 | ) | 6.55 | ||||||||
Forfeited or expired | (153,495 | ) | 19.60 | ||||||||
Outstanding at December 31, 2005 | 5,370,287 | $ | 12.08 | 4.97 | $ | 9,720 | |||||
Exercisable at December 31, 2005 | 3,973,178 | $ | 10.52 | 4.32 | $ | 13,429 | |||||
Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value ($’000s) | ||||||||
Outstanding at July, 1 2006 | 5,334,016 | $ | 12.25 | ||||||||
Granted | 1,002,675 | 18.76 | |||||||||
Exercised | (269,091 | ) | 7.90 | ||||||||
Forfeited or expired | (340,341 | ) | 18.67 | ||||||||
Outstanding at December 31, 2006 | 5,727,259 | $ | 13.21 | 4.64 | $ | 41,566 | |||||
Exercisable at December 31, 2006 | 3,957,315 | $ | 11.45 | 3.84 | $ | 35,342 | |||||
The Company estimates the fair value of stock options using the Black-Scholes option pricing model, consistent with the provisions of SFAS 123R123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”) and United States Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 107. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Six Months Ended December 31, 2006
(Tabular dollar amounts in thousands of U.S. dollars, except per share data)
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 estimated life of the option and the expected volatility of the underlying stock over the estimated life of the option. 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 Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair value of the Company’s stock option grants. Estimates of fair value are not intended, however, to predict actual future events or the value ultimately realized by employees who receive equity awards.
OPEN TEXT CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Endedthree months ended December 31, 20052006, the weighted-average fair value of options granted, as of the grant date, was $5.87, using the following weighted average assumptions: expected volatility of 46%; risk-free interest rate of 4.7%; expected dividend yield of 0%; and expected life of 4.8 years. For the six months ended December 31, 2006, the weighted-average fair value of options granted, as of the grant date, was $6.66, using the following weighted average assumptions: expected volatility of 46%; risk-free interest rate of 4.6%; expected dividend yield of 0%; expected life of 4.7 years; and a forfeiture rate of 5%, based on historical rates, was used to determine the net amount of compensation expense recognized for each of these periods.
(Tabular dollar amountsDuring the three months ended December 31, 2006, the Company issued a net number of 98,578 stock options to the former employees of Hummingbird in thousandsreplacement of U.S. Dollars, except per share data)
their fully vested Hummingbird stock options. These options were valued using the following weighted average assumptions: expected volatility of 47%; risk-free interest rate of 4.3%; expected dividend yield of 0%; and expected life of 4.5 years, resulting in an approximate fair value of $7.30, of which an amount has been allocated to the cost of the Hummingbird acquisition, and the remainder will be amortized to share-based compensation cost over a vesting period of 4 years.
For the three months ended December 31, 2005, the weighted-average fair value of options granted, as of the grant date, was $8.10, using the following weighted average assumptions: expected volatility of 55%; risk-free interest rate of 4.4%; expected dividend yield of 0%; and expected life of 5.5 years. A forfeiture rate of 5%, based on historical rates, was used to determine the net amount of compensation expense recognized for each of these periods. No options were granted during the three months ended September 30, 2005.
For the three and six months ended December 31, 2004, the weighted-average fair value of options granted, as of the grant date, during the periods was $8.20 and $8.18, respectively, using the following weighted-average assumptions: expected volatility of 60%; risk-free interest rate of 3.5%; expected dividend yield of 0%; and expected life of 3.5 years.
In each of the above periods, no cash was used by the Company to settle equity instruments granted under share-based compensation arrangements.
The fair value of awards granted prior to July 1, 2005 is not adjusted to be consistent with the provision of SFAS 123R from the amounts disclosed previously, on a pro forma basis, in the audited notes to the consolidated financial statements in the Company’s Form 10-Ks or in the notes to the unaudited condensed consolidated financial statements in the Company’s Form 10-Qs. As of December 31, 2005,2006, the total compensation cost related to unvested stock awards not yet recognized in the statementunaudited condensed consolidated statements of operationsincome was $10.7$11.6 million, which will be recognized over a weighted average period of approximately 2 years.
Share-based compensation cost included in the statementunaudited condensed consolidated statements of operationsincome for the three and six months ended December 31, 2006 was approximately $1.3 million and $2.6 million, respectively. Deferred tax assets of $213,000 and $384,000, respectively, were recorded for the three and six months ended December 31, 2006, in relation to the tax effect of certain stock options that are eligible for a tax deduction when exercised. Share-based compensation cost included in the unaudited condensed consolidated statements of income for the three and six months ended December 31, 2005 was approximately $1.3 million and $2.7
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Six Months Ended December 31, 2006
(Tabular dollar amounts in thousands of U.S. dollars, except per share data)
$2.7 million respectively. Deferred tax assets of $155,000 and $324,000 respectively were recorded for the three and six months ended December 31, 2005, respectively, in relation to the tax effect of certain stock options that are eligible for a tax deduction when exercised. The Company has not capitalized any share-based compensation costs as part of the cost of an asset. The impact of adoption of SFAS 123R, for
For the three and six months ended December 31, 2005, was a decrease2006, cash in net incomethe amount of $1.2$1.8 million and an increase in net loss of $2.4$2.1 million, respectively, netwas received as the result of relatedthe exercise of options granted under share-based payment arrangements. The tax effects,benefit realized by the Company from the exercise of options eligible for a tax deduction, during the three and a decreased net income per share of $0.02six months ended December 31, 2006, was approximately $536,000 and $ 0.05,$741,000, respectively, on both a basic and diluted share basis.
which was recorded as additional paid-in capital.
For the three and six months ended December 31, 2005, cash in the amount of $1.4 million and $1.6 million, respectively, was received as the result of the exercise of options granted under share-based payment arrangements. The tax benefit realized by the Company from the exercise of options eligible for a tax deduction, during the three and six months ended December 31, 2005 from the exercise of options eligible for a tax deduction was $597,000$598,000 and $643,000,$644,000, respectively, which was recorded as additional paid-in capital.
Employee Share Purchase Plan (“ESPP”)
Prior to July 1, 2005, the Company offered its employees the opportunity to buy its Common Shares, through and employee stock purchase plan (“ESPP”) at a purchase price equal to the lesser of 85% of the weighted-average trading price of the Common Shares based on the Toronto Stock Exchange (“TSX”) or NASDAQ National Market (“NASDAQ”) in the period of five trading days immediately preceding the first business day of the purchase period and 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. The ESPP, under its original terms, qualified as a non-compensatory plan under APB 25 and as such no compensation cost was recorded in relation to the discount offered to employees for purchases made under the ESPP.
The original terms of the ESPP would have resulted in it being treated as a compensatory plan under the fair value-based method. Effective July 1, 2005, the Company amended the terms of its ESPP to set the amount at which Common Shares may be purchased by employees to 95% of the average market price based on the Toronto
OPEN TEXT CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 2005
(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)
Stock Exchange (“TSX”) or NASDAQ National Market (“NASDAQ”) on the last day of the purchase period. The choice of the appropriate market for determining the average market price is based upon the market that had the greatest volume of trading of Common Shares in that period. As a result of the amendments, the ESPP is no longer considered a compensatory plan under the provisions of SFAS 123R, and as a result no compensation cost has been recorded in relation to the ESPP for the three and six months ended December 31, 2005.
During the three months ended December 31, 2005, no Common Shares were issued under the ESPP. During the six months ended December 31, 2005, 255,402 Common Shares were issued under the ESPP for cash collected from employees in prior periods totaling $3.1 million. In addition, cash in the amount of $83,000 and $316,000, respectively, was received from employees for the three and six months ended December 31, 2005, that will be used to purchase Common Shares in future periods.
NOTE 10—12—NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) by the number of Common Sharesshares used in the calculation of basic net income (loss) 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 (loss) per share if their effect is anti-dilutive.
Three months ended December 31, | Six months ended December 31, | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
Basic net income (loss) per share | |||||||||||||
Net income (loss) | $ | 2,721 | $ | 10,970 | $ | (10,147 | ) | $ | 9,984 | ||||
Basic net income (loss) per share | $ | 0.06 | $ | 0.22 | $ | (0.21 | ) | $ | 0.20 | ||||
Diluted net income (loss) per share | |||||||||||||
Net income (loss) | $ | 2,721 | $ | 10,970 | $ | (10,147 | ) | $ | 9,984 | ||||
Diluted net income (loss) per share | $ | 0.05 | $ | 0.21 | $ | (0.21 | ) | $ | 0.19 | ||||
Weighted average number of shares outstanding | |||||||||||||
Basic | 48,569 | 50,310 | 48,506 | 50,708 | |||||||||
Effect of dilutive securities** | 1,302 | 2,051 | — | 2,412 | |||||||||
Diluted | 49,871 | 52,361 | 48,506 | 53,120 | |||||||||
Excluded as anti-dilutive * | 1,934 | 562 | 2,250 | 291 | |||||||||
Three months ended December 31, | Six months ended December 31, | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
Basic net income (loss) per share | |||||||||||||
Net income (loss) | $ | 2,277 | $ | 2,721 | $ | 9,578 | $ | (10,147 | ) | ||||
Basic net income (loss) per share | $ | 0.05 | $ | 0.06 | $ | 0.20 | $ | (0.21 | ) | ||||
Diluted net income (loss) per share | |||||||||||||
Net income (loss) | $ | 2,277 | $ | 2,721 | $ | 9,578 | $ | (10,147 | ) | ||||
Diluted net income (loss) per share | $ | 0.04 | $ | 0.05 | $ | 0.19 | $ | (0.21 | ) | ||||
Weighted average number of shares outstanding | |||||||||||||
Basic | 49,152 | 48,569 | 49,063 | 48,506 | |||||||||
Effect of dilutive securities* | 1,587 | 1,302 | 1,434 | — | |||||||||
Diluted | 50,739 | 49,871 | 50,497 | 48,506 | |||||||||
Excluded as anti-dilutive** | 2,188 | 1,934 | 2,402 | 2,250 | |||||||||
* |
** | Certain options to purchase Common Shares are excluded from the calculation of diluted net income (loss) per share because the exercise price of the stock options was greater than or equal to the average price of the Common Shares, and therefore their inclusion would have been anti-dilutive. |
OPEN TEXT CORPORATION
UNAUDITED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 20052006
(Tabular dollar amounts in thousands of U.S. Dollars,dollars, except per share data)
NOTE 11—GOODWILL13—INCOME TAXES
GoodwillThe Company operates in various tax jurisdictions, and accordingly, the Company’s income is recorded whensubject to varying rates of tax. Losses incurred in one jurisdiction cannot be used to offset income taxes payable in another. The Company’s ability to use income tax losses and future income tax deductions is dependent upon the consideration paid for an acquisitionprofitable operations of a business exceeds the fair valueCompany in the tax jurisdictions in which such losses or deductions arise. As of identifiable net tangibleDecember 31, 2006 and intangible assets. The following table summarizes the changes in goodwill since June 30, 2004:2006, the Company had total net deferred tax assets of $71.5 million and $65.9 million respectively, and total deferred tax liabilities of $147.5 million and $31.7 million, respectively.
Balance, June 30, 2004 | $ | 223,752 | ||
Goodwill recorded during fiscal 2005: | ||||
Vista | 8,714 | |||
Artesia | 2,136 | |||
Optura | 2,352 | |||
Adjustments relating to prior acquisitions | (822 | ) | ||
Adjustments on account of foreign exchange | 6,959 | |||
Balance, June 30, 2005 | 243,091 | |||
Adjustments relating to prior acquisitions | (380 | ) | ||
Adjustments on account of foreign exchange | (4,055 | ) | ||
Balance, December 31, 2005 | $ | 238,656 | ||
Deferred tax assets arise primarily from available income tax losses and future income tax deductions. The Company provides a valuation allowance if sufficient uncertainty exists regarding the realization of certain deferred tax assets. Taking into account the following factors: (i) the reversal of deferred income tax liabilities, (ii) projected future taxable income, (iii) the character of the income tax assets and (iv) tax planning strategies, a valuation allowance of $166.5 million and $127.5 million was required as of December 31, 2006 and June 30, 2006, respectively. The majority of the valuation allowance relates to uncertainties regarding the utilization of foreign pre-acquisition losses of Hummingbird, Gauss Interprise AG (“Gauss”) and IXOS. 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. The principal component of the total deferred tax liabilities arises from acquired intangible assets purchased in the Hummingbird, Gauss and IXOS transactions.
NOTE 12—ACQUIRED INTANGIBLE ASSETS14—SEGMENT INFORMATION
Technology Assets | Customer Assets | Total | ||||||||||
Net book value, June 30, 2004 | $ | 76,816 | $ | 39,772 | $ | 116,588 | ||||||
Assets acquired and activity during fiscal 2005: | ||||||||||||
Vista | 8,660 | 11,700 | 20,360 | |||||||||
Artesia | 3,300 | 1,600 | 4,900 | |||||||||
Optura | 1,300 | 700 | 2,000 | |||||||||
Amortization expense | (16,175 | ) | (8,234 | ) | (24,409 | ) | ||||||
Other, including foreign exchange impact | 2,207 | 6,335 | 8,542 | |||||||||
Net book value, June 30, 2005 | 76,108 | 51,873 | 127,981 | |||||||||
Activity during fiscal 2006: | ||||||||||||
Amortization expense | (9,283 | ) | (4,527 | ) | (13,810 | ) | ||||||
Other, including foreign exchange impact | (3,838 | ) | 1,931 | (1,907 | ) | |||||||
Net book value, December 31, 2005 | $ | 62,987 | $ | 49,277 | $ | 112,264 | ||||||
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related 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 rangeCompany’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 revenues and direct operating expenses of amortization periodsthe 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.
Included in the following operating results are allocations of certain operating costs that 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 the chief operating decision maker (“CODM”) of the Company’s analysis. For the three and six months ended December 31, 2006 and December 31, 2005, the “Other” category consists of geographic regions other than North America and Europe. Revenues from transactions that both emanate and conclude within operating segments are not considered for the purpose of this disclosure since such transactions are not reviewed by the CODM. The reclassification of certain prior period comparative figures, to conform to current period presentation, referred to in Note 1 “Basis of Presentation” to the Interim Financial Statements, did not impact information about the reportable segments, reported hereunder.
Goodwill and other acquired intangible assets ishave been assigned to segment assets based on the relative benefit that the reporting units are expected to receive from 5-10 years.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
UNAUDITED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 20052006
(Tabular dollar amounts in thousands of U.S. Dollars,dollars, except per share data)
During the three months ended December 31, 2006, the Company changed the manner in which it measures segment income (loss) from “adjusted operating margin” to “contribution margin” since it believes that, in the aftermath of its Hummingbird acquisition, contribution margin is more reflective of the operating performance of the reportable segments. There is no impact to the Company’s Interim Financial Statements as a result of this change.
Contribution margin does not include amortization of intangible assets, depreciation, provision for (recovery of) special charges, interest income (expense) and provision for (recovery of) income taxes.
Information about reportable segments is as follows:
North America | Europe | Other | Total | ||||||||||
Three months ended December 31, 2006 | |||||||||||||
Revenue from external customers | $ | 72,852 | $ | 82,933 | $ | 7,476 | $ | 163,261 | |||||
Operating costs | 58,907 | 61,467 | 6,608 | 126,982 | |||||||||
Contribution margin | $ | 13,945 | $ | 21,466 | $ | 868 | $ | 36,279 | |||||
Three months ended December 31, 2005 | |||||||||||||
Revenue from external customers | $ | 53,785 | $ | 51,171 | $ | 5,815 | $ | 110,771 | |||||
Operating costs | 43,215 | 36,784 | 5,600 | 85,599 | |||||||||
Contribution margin | $ | 10,570 | $ | 14,387 | $ | 215 | $ | 25,172 | |||||
Six months ended December 31, 2006 | |||||||||||||
Revenue from external customers | $ | 121,584 | $ | 130,384 | $ | 12,448 | $ | 264,416 | |||||
Operating costs | 98,631 | 96,672 | 12,075 | 207,378 | |||||||||
Contribution margin | $ | 22,953 | $ | 33,712 | $ | 373 | $ | 57,038 | |||||
Six months ended December 31, 2005 | |||||||||||||
Revenue from external customers | $ | 100,016 | $ | 92,601 | $ | 10,784 | $ | 203,401 | |||||
Operating costs | 86,203 | 68,969 | 12,171 | 167,343 | |||||||||
Contribution margin | $ | 13,813 | $ | 23,632 | $ | (1,387 | ) | $ | 36,058 | ||||
A reconciliation of the totals reported for the operating segments to the applicable line items in the Interim Financial Statements for the three and six months ended December 31, 2006 and 2005 is as follows:
Three months ended December 31, | ||||||||
2006 | 2005 | |||||||
Total contribution margin from operating segments above | $ | 36,279 | $ | 25,172 | ||||
Amortization and depreciation | 21,672 | 9,788 | ||||||
Special charges | 4,843 | 8,793 | ||||||
Total operating income | 9,764 | 6,591 | ||||||
Interest, other income (expense), taxes and minority interest | (7,487 | ) | (3,870 | ) | ||||
Net income | $ | 2,277 | $ | 2,721 | ||||
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Six Months Ended December 31, 2006
(Tabular dollar amounts in thousands of U.S. dollars, except per share data)
Six months ended December 31, | ||||||||
2006 | 2005 | |||||||
Total contribution margin from operating segments above | $ | 57,038 | $ | 36,058 | ||||
Amortization and depreciation | 31,892 | 19,150 | ||||||
Special charges | 4,375 | 26,904 | ||||||
Total operating income | 20,771 | (9,996 | ) | |||||
Interest, other income (expense), taxes and minority interest | (11,193 | ) | (151 | ) | ||||
Net income (loss) | $ | 9,578 | $ | (10,147 | ) | |||
As of December 31, 2006 | As of June 30, 2006 | |||||||
Segment assets | ||||||||
North America | $ | 679,162 | $ | 268,231 | ||||
Europe | 523,101 | 331,139 | ||||||
Other | 57,421 | 38,550 | ||||||
Total segment assets | $ | 1,259,684 | $ | 637,920 | ||||
A reconciliation of the totals reported for the operating segments to the applicable line items in the Interim Financial Statements as of December 31, 2006 and June 30, 2006 is as follows:
As of December 31, 2006 | As of June 30, 2006 | |||||
Segment assets | $ | 1,259,684 | $ | 637,920 | ||
Investments in marketable securities | — | 21,025 | ||||
Cash and cash equivalents (corporate) | 24,287 | 12,148 | ||||
Total assets | $ | 1,283,971 | $ | 671,093 | ||
The following table showssets forth the estimated amortization expensedistribution of revenues determined by location of customer and identifiable assets, by significant geographic area, for each of the next five years, assuming no further adjustments to acquired intangible assets are made:three and six months ended December 31, 2006 and 2005:
Years ending June 30, | |||
2006 | $ | 21,191 | |
2007 | 26,223 | ||
2008 | 25,576 | ||
2009 | 20,278 | ||
2010 | 8,574 | ||
Total | $ | 101,842 | |
Three months ended December 31, | Six months ended December 31, | |||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||
Total revenues: | ||||||||||||
Canada | $ | 11,219 | $ | 8,411 | $ | 17,930 | $ | 15,652 | ||||
United States | 61,633 | 45,374 | 103,654 | 84,364 | ||||||||
United Kingdom | 18,429 | 9,110 | 29,267 | 17,892 | ||||||||
Germany | 30,759 | 20,174 | 47,002 | 35,280 | ||||||||
Rest of Europe | 33,745 | 21,887 | 54,115 | 39,429 | ||||||||
Other | 7,476 | 5,815 | 12,448 | 10,784 | ||||||||
Total revenues | $ | 163,261 | $ | 110,771 | $ | 264,416 | $ | 203,401 | ||||
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Six Months Ended December 31, 2006
(Tabular dollar amounts in thousands of U.S. dollars, except per share data)
As of December 31, 2006 | As of June 30, 2006 | |||||
Segment assets: | ||||||
Canada | $ | 145,424 | $ | 97,421 | ||
United States | 533,738 | 170,810 | ||||
United Kingdom | 96,976 | 53,501 | ||||
Germany | 201,375 | 177,651 | ||||
Rest of Europe | 224,750 | 99,987 | ||||
Other | 57,421 | 38,550 | ||||
Total segment assets | $ | 1,259,684 | $ | 637,920 | ||
The Company’s goodwill has been allocated as follows to the Company’s operating segments:
As of December 31, 2006 | As of June 30, 2006 | |||||
North America | $ | 247,930 | $ | 89,499 | ||
Europe | 243,122 | 124,827 | ||||
Other | 34,025 | 21,197 | ||||
$ | 525,077 | $ | 235,523 | |||
NOTE 13—15—SUPPLEMENTAL CASH FLOW DISCLOSUREDISCLOSURES
Three months ended December 31, | Six months ended December 31, | |||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||
Cash paid during the period for interest | $ | 35 | $ | 71 | $ | 61 | $ | 81 | ||||
Cash received during the period for interest | $ | 281 | $ | — | $ | 377 | $ | — | ||||
Cash paid during the period for taxes | $ | 447 | $ | 2,418 | $ | 1,069 | $ | 4,748 |
Three months ended December 31, | Six months ended December 31, | |||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid during the period for interest | $ | 7,755 | $ | 35 | $ | 7,984 | $ | 61 | ||||
Cash received during the period for interest | 967 | 281 | 1,588 | 377 | ||||||||
Cash paid during the period for income taxes | 3,621 | 447 | 6,276 | 1,069 |
NOTE 14—16—COMMITMENTS AND CONTINGENCIES
The Company has entered into the following contractual obligations with minimum annual payments for the indicated fiscal periods as follows:
Payments due by period | |||||||||||||||
Total | Less than 1 year | 1–3 years | 3–5 years | More than 5 years | |||||||||||
Long-term debt obligations | $ | 16,029 | $ | 434 | $ | 2,081 | $ | 2,081 | $ | 11,433 | |||||
Operating lease obligations * | 99,857 | 8,565 | 36,584 | 32,316 | 22,392 | ||||||||||
Purchase obligations | 2,863 | 948 | 1,590 | 299 | 26 | ||||||||||
$ | 118,749 | $ | 9,947 | $ | 40,255 | $ | 34,696 | $ | 33,851 | ||||||
* Net of $7.5 million of non-cancelable sublease income to be received by the Company from properties which the Company has subleased to other parties.
The long-term debt obligations comprise of interest and principal payments on the mortgage. See Note 4 “Long-term Debt”.
In July 2004, the Company entered into a commitment to construct a building in Waterloo, Ontario with a view of consolidating its existing Waterloo facilities. The construction of the building was completed in October 2005 and the Company has since commenced the use of the building. As of December 31, 2005, a total of $16.0 million has been capitalized on this project. The Company does not expect to make any significant additional payments in connection with this facility. The Company has financed this investment through its working capital.
Payments due by period | |||||||||||||||
Total | 2007 | 2008 to 2009 | 2010 to 2011 | 2012 and beyond | |||||||||||
Long-term debt obligations | $ | 604,712 | $ | 17,741 | $ | 70,498 | $ | 79,692 | $ | 436,781 | |||||
Operating lease obligations * | 106,835 | 13,312 | 46,166 | 33,327 | 14,030 | ||||||||||
Purchase obligations | 6,615 | 2,064 | 3,714 | 837 | — | ||||||||||
$ | 718,162 | $ | 33,117 | $ | 120,378 | $ | 113,856 | $ | 450,811 | ||||||
* | Net of $6.7 million of non-cancelable sublease income to be received by the Company from properties which the Company has subleased to other parties. |
OPEN TEXT CORPORATION
UNAUDITED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 20052006
(Tabular dollar amounts in thousands of U.S. Dollars,dollars, except per share data)
Rental expense of $3.8 million and $6.1 million was recorded during the three and six months ended December 31, 2006, respectively.
Rental expense of $3.6 million and $7.3 million was recorded during the three and six months ended December 31, 2005, respectively.
The landlong-term debt obligations are comprised of interest and principal payments on which the building is locatedCompany’s $390.0 million term loan agreement and a five year mortgage on the Company’s headquarters in Waterloo, Ontario. For the purpose of calculating the interest on the $390.0 million term loan, LIBOR has been leased fromassumed at 5.36%, which is the Universitythree-month LIBOR rate as of Waterloo (“U of W”), for a period of 49 years with the option to renew for another 49 years. The option to renew is exercisable with written noticeDecember 29, 2006. For details relating to the U of W on or beforeterm loan and the commencement ofmortgage see Note 8 “Long-term debt and Credit Facilities” to the 40th anniversary of the lease. The Company is not currently able to determine, with reasonable certainty, whether it will renew the lease of the land for the second period of 49 years. Accordingly, estimates of the rent payable for the initial period of 49 years are included under “Operating lease obligations” in the table above.
Interim Financial Statements.
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 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 criteria for capitalization.
Domination agreements
IXOS domination agreements
On December 1, 2004, the Company announced that—through its wholly-owned subsidiary, 2016091 Ontario, Inc. (“Ontario I”)—that it had entered into a domination and profit transfer agreement (the “Domination Agreement”“IXOS DA”) with IXOS. The Domination Agreement has beenIXOS DA came into force in August 2005 when it was registered in the commercial register at the local court of Munich in August 2005 and it has therefore come into force.Munich. Under the terms of the Domination Agreement, Ontario I hasIXOS DA, Open Text acquired authority to issue directives to the management of IXOS. Also inwithin the Domination Agreement, Ontario I offersterms of the IXOS DA, Open Text offered to purchase the remaining Common Shares of IXOS for a cash purchase price of Euro 9.38 per share (“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 also guaranteesAdditionally, Open Text has guaranteed a payment by IXOS to the minority shareholders of IXOS of an annual compensation of Euro 0.42 per share (“Annual Compensation”).
The shareholders of IXOS at the meeting on January 14, 2005 confirmed that IXOS had entered into the Domination Agreement. At the same meeting of the shareholders of IXOS, the shareholders authorized the management board of IXOS to apply for the withdrawal of the listing of the IXOS shares at the Frankfurt/Germany stock exchange (“Delisting”). The Delisting was granted by the Frankfurt Stock Exchange on April 12, 2005 and was effective on July 12, 2005.
Certain IXOS shareholders had filed complaints against the approval of the Domination Agreement and also against the authorization to delist. As a result of an out of court settlement, the complaints have been withdrawn and or settled. The out of court settlement was ratified by the court on August 9, 2005. The Domination AgreementDA was registered on August 23, 2005, and thereby became effective. As a result of the Domination Agreement coming into force, the Company commenced, in2005. In the quarter ended September 30, 2005, the Company commenced accruing the amount payable to minority shareholders of IXOS on account of Annual Compensation. This amount is accrued as and has been accounted for as a “guaranteed dividend”, payable to the minority shareholders, and is recorded as a charge to minority interest in the periods. unaudited condensed consolidated statements of income.
Based on the number of minority IXOS shareholders as of December 31, 20052006, the estimated amount of Annual Compensation would approximate $523,000 per year.was approximately $123,000 for the three months ended December 31, 2006 and $253,000 for the six months ended December 31, 2006. Because the Company is unable to predict, with reasonable accuracy, the number of IXOS minority shareholders that will be on record in future periods, the Company is unable to predict the amount of Annual Compensation that will be payable in future years.
Certain IXOS shareholders have filed for a procedure granted under German law at the district court of Munich, Germany, asking the court to review the proposed amount of the Annual Compensation and the Purchase Price (the “IXOS Appraisal Procedures”) for the amounts offered under the IXOS DA. It cannot be predicted at this stage, whether the court will increase the Annual Compensation and/or the Purchase Price in the IXOS Appraisal Procedures. The purchase offer made under the IXOS DA will expire at the end of the IXOS Appraisal Procedures.
OPEN TEXT CORPORATION
UNAUDITED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 20052006
(Tabular dollar amounts in thousands of U.S. Dollars,dollars, except per share data)
These disputes are a normal and probable part of the process of acquiring minority shares in Germany. The costs associated with the above mentioned shareholder objections to the proposed fair value of the Annual Compensation and the Purchase Price are direct incremental costs associated with the ongoing step acquisitions of shares held by the minority shareholders and have been deferred within Goodwill pending the outcome of the objections. The Company is unable to predict the future costs associated with these activities that will be payable in future periods.
Gauss domination agreements
Pursuant to a Domination Agreement dated November 4, 2003 betweenOn October 27, 2006, the Company—through its wholly owned subsidiary 2016090 Ontario Inc. (“Ontario II”)—and“Squeeze Out” agreement with the Gauss Ontario II has offered to purchaseminority shareholders was registered in the remaining outstanding sharesCommercial Register in the Local Court of Gauss at a price of Euro 1.06 per Gauss share. The original acceptance period was two months after the signing of the Domination Agreement. As a result of certainHamburg. Certain shareholders havinghave filed for a special court procedure in the German courts to reassess the amountvalue of the Annual Compensation that must be payablepurchase price and annual compensation. The procedure is still pending and the Company is not able to minority shareholders as a result ofdetermine the Domination Agreement, the acceptance period has been extended pursuant to German law until the end of such proceedings. In addition, in April 2004 Gauss announced that effective July 1, 2004 the shares of Gauss would 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 Euro 1.06 per Gauss share, commenced. This acceptance period has also been extended pursuant to German law until the end of proceedings to reassess the amount of the consideration offered under German law in the delisting process. The shareholders’ resolution on the Domination Agreement and on the delisting was subject to a court procedure in which certain shareholders of Gauss claimed that the resolutionlikely date by which the shareholders of Gauss approved of the entering into the Domination Agreement and the authorization to the management board of Gauss to file for a delisting are null and void. While the Court of First Instance rendered a judgment in favor of the plaintiffs, 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 withdrawn. The settlement provides inter alia that an amount of Euro 0.05 per share per annumsuch procedure will be payable as compensation to the other shareholders of Gauss under certain circumstances, but only after registration of the Squeeze Out as defined hereafter.completed.
On August 25, 2005, at the shareholders meeting of Gauss, upon a motion of Ontario II, it was decided to transfer the shares of the minority shareholders, which at the time of the shareholders meeting held less than 5% of the shares of Gauss, to Ontario II (“Squeeze Out”). The resolutions will become effective when registered in the commercial register at the local court of Hamburg. Registration of these resolutions is currently pending. Certain shareholders of Gauss have filed suits to oppose all or some of the resolutions of the shareholders meeting of August 25, 2005. It is expected that the court of Hamburg will, within the next few months, decide on the registration of the resolutions.
The Company believes that the registration of these resolutions is a reasonable certainty; accordingly, in pursuance of these resolutions the Company has recorded its best estimate of the amount payable to the minority shareholders of Gauss. As of December 31, 2005,2006, the Company has accrued $60,000 for such paymentsacquired 100% of all issued and expects that a further amountoutstanding common shares of approximately $15,000 will be payableGauss. See Note 18 “Acquisitions” to these shareholders by the end of the current fiscal quarter. The Company is not currently able to determine the final amount payable and is unable to predict the date on which the resolutions will be registered at the local court.
Interim Financial Statements.
Guarantees and indemnifications
The Company has entered into license agreements with customers that include limited intellectual property indemnification clauses. TheGenerally, the Company generally agrees to indemnify its customers against legal claims that itsthe Company’s 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 theits 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.
OPEN TEXT CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 2005
(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)
In connection with certain facility leases, the Company has guaranteed payments on behalf of its subsidiaries. This has been donesubsidiaries either by providing a security deposit with the landlord or 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 unaudited condensed consolidated balance sheetsheets since the maximum amount of potential future payments under such guarantees, indemnities and warranties is not determinable, other than as described above.
determinable.
Legal ProceedingsLitigation
The Company is subject from time to time 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’s 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 orand cash flows.
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Six Months Ended December 31, 2006
(Tabular dollar amounts in thousands of U.S. dollars, except per share data)
NOTE 15—17—SPECIAL CHARGES (RECOVERIES)
Fiscal 2007 Restructuring
InDuring the three months ended December 31, 2005, the Company recorded special charges of $8.8 million. This is primarily comprised of $7.1 million, relating to the fiscal 2006, restructuring, $1.7 million related to the impairment of capital assets and a recovery of $29,000 related to the 2004 restructuring. Details of each component of special charges are discussed below.
In the six months ended December 31, 2005, the Company recorded special charges of $26.9 million. This is primarily comprised of $23.5 million, relating to the fiscal 2006 restructuring, $3.7 million related to the impairment of capital assets and a recovery of $329,000 related to the 2004 restructuring. Details of each component of special charges are discussed below.
Restructuring charges
Fiscal 2006 Restructuring
In the first quarter of the current fiscal year, the Board approved, and the Company commenced implementing, restructuring activities to streamline its operations and consolidate its excess facilities.facilities (“Fiscal 2007 restructuring plan”). Total costs to be incurred in conjunction with the plan are expected to be in the range of $25$18.0 million to $30$20.0 million, of which $16.4 million was recorded within special charges in the three months ended September 30, 2005 and $7.1$5.1 million has been recorded within specialSpecial charges in the threesix months ended December 31, 2005. These charges2006. The charge consisted primarily of costs associated with workforce reduction and is expected to be paid by December 31, 2008, however on a quarterly basis, the Company will conduct an evaluation of these balances and revise its assumptions and estimates, as appropriate.
A reconciliation of the beginning and ending liability is shown below:
Work force reduction | Facility costs | Other | Total | ||||||||||||
Fiscal 2007 Restructuring Plan | |||||||||||||||
Balance as of June 30, 2006 | $ | — | $ | — | $ | — | $ | — | |||||||
Accruals | 4,911 | — | 191 | 5,102 | |||||||||||
Cash payments | (1,531 | ) | — | (191 | ) | (1,722 | ) | ||||||||
Foreign exchange and other adjustments | 9 | — | — | 9 | |||||||||||
Balance as of December 31, 2006 | $ | 3,389 | $ | — | $ | — | $ | 3,389 | |||||||
The following table outlines restructuring charges incurred under the Fiscal 2007 restructuring plan, by segment, for the six months ended December 31, 2006.
Work force reduction | Facility costs | Other | Total | |||||||||
Fiscal 2007 Restructuring Plan—by Segment | ||||||||||||
North America | $ | 1,897 | $ | — | $ | 101 | $ | 1,998 | ||||
Europe | 3,014 | — | 80 | 3,094 | ||||||||
Other | — | — | 10 | 10 | ||||||||
Total charge by segment for the six months ended December 31, 2006 | $ | 4,911 | $ | — | $ | 191 | $ | 5,102 | ||||
Fiscal 2006 Restructuring
In the first quarter of Fiscal 2006, the Board approved, and the Company began to implement restructuring activities to streamline its operations and consolidate its excess facilities (“Fiscal 2006 restructuring plan”). These charges relate to work force reductions, abandonment of excess facilities and legalother miscellaneous direct costs. Total costs to be incurred relatedin conjunction with the Fiscal 2006 restructuring plan are expected to be approximately $22.0 million. On a quarterly basis, the terminationCompany conducts an evaluation of facilities.these balances and revises its assumptions and estimates, as appropriate. In the three and six months ended December 31, 2006, the Company recorded recoveries from special charges of $259,000 and $727,000, respectively. The provision related to workforce reduction is expected to be substantially paid by June 30, 2006March 31, 2007, and the provisions relating to the abandonment of excess facilities, such as contract settlements and lease costs, are expected to be paid by January 2014.
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Six Months Ended December 31, 2006
(Tabular dollar amounts in thousands of U.S. dollars, except per share data)
A reconciliation of the beginning and ending liability is shown below:
Fiscal 2006 Restructuring
Fiscal 2006 Restructuring Plan | Work force reduction | Facility costs | Other | Total | ||||||||||||
Balance as of June 30, 2005 | $ | — | $ | — | $ | — | $ | — | ||||||||
Accruals | 16,976 | 6,113 | 425 | 23,514 | ||||||||||||
Cash payments | (6,820 | ) | (870 | ) | (425 | ) | (8,115 | ) | ||||||||
Foreign exchange and other adjustments | 156 | 25 | — | 181 | ||||||||||||
Balance as of December 31, 2005 | $ | 10,312 | $ | 5,268 | $ | — | $ | 15,580 | ||||||||
Work force reduction | Facility costs | Other | Total | |||||||||||||
Fiscal 2006 Restructuring Plan | ||||||||||||||||
Balance as of June 30, 2006 | $ | 2,685 | $ | 4,135 | $ | 9 | $ | 6,829 | ||||||||
Accruals (recoveries) | (618 | ) | (184 | ) | 75 | (727 | ) | |||||||||
Cash payments | (1,649 | ) | (1,455 | ) | (84 | ) | (3,188 | ) | ||||||||
Foreign exchange and other adjustments | (14 | ) | 120 | — | 106 | |||||||||||
Balance as of December 31, 2006 | $ | 404 | $ | 2,616 | $ | — | $ | 3,020 | ||||||||
The following tables outline restructuring charges incurred and recovered under the Fiscal 2006 restructuring plan, by segment, for the three and six months ended December 31, 2006:
Work force reduction | Facility costs | Other | Total | |||||||||||
Fiscal 2006 Restructuring Plan—by Segment | ||||||||||||||
North America | $ | (8 | ) | $ | 14 | $ | — | $ | 6 | |||||
Europe | (354 | ) | 79 | 10 | (265 | ) | ||||||||
Total charge (recovery) by segment for three months ended | $ | (362 | ) | $ | 93 | $ | 10 | $ | (259 | ) | ||||
Work force reduction | Facility costs | Other | Total | |||||||||||||
Fiscal 2006 Restructuring Plan—by Segment | ||||||||||||||||
North America | $ | (189 | ) | $ | (337 | ) | $ | 19 | $ | (507 | ) | |||||
Europe | (421 | ) | 153 | 61 | (207 | ) | ||||||||||
Other | (8 | ) | — | (5 | ) | (13 | ) | |||||||||
Total charge (recovery) by segment for the six months ended December 31, 2006 | $ | (618 | ) | $ | (184 | ) | $ | 75 | $ | (727 | ) | |||||
OPEN TEXT CORPORATION
UNAUDITED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 20052006
(Tabular dollar amounts in thousands of U.S. Dollars,dollars, except per share data)
The following table outlines restructuring charges incurred under the fiscal 2006 restructuring plan, by segment, for the six months ended December 31, 2005.
Fiscal 2006 Restructuring Plan – by Segment | Work force reduction | Facility costs | Other | Total | ||||||||
North America | $ | 9,006 | $ | 2,849 | $ | 149 | $ | 12,004 | ||||
Europe | 7,317 | 3,075 | 270 | 10,662 | ||||||||
Other | 653 | 189 | 6 | 848 | ||||||||
Total charge for the six months ended December 31, 2005 | $ | 16,976 | $ | 6,113 | $ | 425 | $ | 23,514 | ||||
Fiscal 2004 Restructuring
In the three months ended March 31, 2004, the Company recorded a restructuring charge of approximately $10 million relating primarily 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. All actions relating to employer workforce reductions were completed, and the related costs expended as of March 31, 2006. On a quarterly basis the Company conducts an evaluation of these balances and revises its assumptions and estimates, if and as appropriate. As part of this evaluation, the Company recorded recoveries to this restructuring charge of $303,000 during the three months ended September 30, 2005 and $26,000 during the three months ended December 31, 2005. These recoveries primarily represented reductions in estimated employee termination costs and recoveries in estimates relating to accruals for abandoned facilities. The actions relating to employer workforce reduction were substantially complete as of June 30, 2005. The provision relating tofor facility costs is expected to be expendedsubstantially paid by 2014.2011. The activity of the Company’s provision for the Company’s fiscal year beginning July 1, 2003 and ending June 30, 2004 restructuring charges arecharge is as follows sincefor the beginning of the current fiscal year:
Fiscal 2004 Restructuring Plan | Work force reduction | Facility costs | Other | Total | |||||||||||
Balance as of June 30, 2005 | $ | 167 | $ | 1,878 | $ | — | $ | 2,045 | |||||||
Revisions to prior accruals | (65 | ) | (264 | ) | — | (329 | ) | ||||||||
Cash payments | — | (372 | ) | — | (372 | ) | |||||||||
Foreign exchange and other adjustments | — | 105 | — | 105 | |||||||||||
Balance as of December 31, 2005 | $ | 102 | $ | 1,347 | $ | — | $ | 1,449 | |||||||
Impairment of capital assets
During the three months ended September 30, 2005, an impairment charge of $2.0 million was recorded against capital assets that were written down to fair value, various leasehold improvements at vacated premises and redundant office equipment. During the threesix months ended December 31, 2005,2006:
Facility costs | ||||
Fiscal 2004 Restructuring Plan | ||||
Balance as of June 30, 2006 | $ | 1,170 | ||
Cash payments | (266 | ) | ||
Foreign exchange and other adjustments | 15 | |||
Balance as of December 31, 2006 | $ | 919 | ||
NOTE 18—ACQUISITIONS
Fiscal 2007
Hummingbird
In October 2006, Open Text acquired all of the issued and outstanding shares of Hummingbird. Open Text expects that the combination of the two companies will strengthen its ability to offer an impairment chargeexpanded portfolio of $1.7solutions aimed at a wide range of vertical markets. In accordance with SFAS 141, this acquisition is accounted for as a business combination.
Hummingbird’s software offerings fall into two principal product families: (i) Hummingbird Enterprise, and (ii) Hummingbird Connectivity. The Company’s flagship offering, Hummingbird Enterprise, is an integrated Enterprise Content Management suite enabling users to capture, create, access, manage, share, find, extract, analyze, protect, publish and archive business content across the extended enterprise from anywhere in the world. Hummingbird Connectivity is a host access product suite that includes software applications for accessing mission-critical back office applications and related data from the majority of today’s systems, including mainframe, AS/400, Linux and UNIX platform environments.
The results of operations of Hummingbird have been consolidated with those of Open Text beginning October 2, 2006.
As of December 31, 2006, consideration for this acquisition, net of cash acquired, consisted of $412.5 million in cash including approximately $21.0 million associated with the open market purchases of Hummingbird shares acquired in June 2006 and an additional $6.4 million of direct acquisition related costs.
Preliminary Purchase Price Allocation
Under business combination accounting the total purchase price was recorded against capitalallocated to Hummingbird’s net intangible and identifiable intangible assets, to write down to fair value, various leasehold improvements at vacated premises and redundant office equipment. Fair value was determined based on the Company’s estimatestheir estimated fair values as of disposal proceeds, net of anticipated costs to sell.October 2, 2006, as set
OPEN TEXT CORPORATION
UNAUDITED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 20052006
(Tabular dollar amounts in thousands of U.S. Dollars,dollars, except per share data)
NOTE 16—ACQUISITIONS
Fiscal 2005
Optura
On February 11, 2005, Open Text entered into an agreement to acquire allforth below. The excess of the issued and outstanding shares of Optura Inc. (“Optura”). This acquisition has been account for as a business combination in accordance with SFAS No. 141 “Business Combinations” (“SFAS 141”). 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 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 purchase price allocation set forth below represents management’s best estimate ofover the net tangible and identifiable intangible assets was recorded as goodwill. The allocation of the purchase price and the fair value of net assets acquired. Thewas based on a preliminary valuation, of the acquired intangible assets and the assessment of their expected useful lives are preliminary.
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 | $ | 1,537 | ||
Long-term assets | 114 | |||
Customer assets | 700 | |||
Technology assets | 1,300 | |||
Goodwill | 2,180 | |||
Total assets acquired | 5,831 | |||
Total liabilities assumed | (2,169 | ) | ||
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 portion of the purchase price allocated to goodwill was assigned toconducted by the Company’s North America reportable segment. No amount of the goodwillmanagement, and its estimates and assumptions are subject to change, on finalization, which 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 relatedoccur prior to severance charges, transaction costs, and costs relating to excess facilities. The purchase price was subsequently adjusted to reduce acquisition related liabilities by $88,000 due to the refinement of management’s original estimates. Remaining liabilities related to transaction-related charges are expected to be paid in fiscal 2006. Liabilities related to excess facilities will be paid over the term of the lease which expires in September 2006.
OPEN TEXT CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 2005
(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)
A director of the Company received approximately $47,000, during the year ended June 30, 2005, 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”). This acquisition has been accounted for as a business combination in accordance with SFAS 141. 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 $5.2 million in cash, of which $3.2 million was paid at closing and $2.0 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. In the three months ended September 30, 2005 it was determined and agreed that the holdback would not be paid. Accordingly, the purchase price allocation has been adjusted.
2007.
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.
Current assets, including cash acquired of $88,287 | $ | 61,767 | ||
Long-term assets | 14,011 | |||
Customer assets | 139,800 | |||
Technology assets | 159,200 | |||
Goodwill | 274,796 | |||
Total assets acquired | 649,574 | |||
Liabilities assumed | (237,083 | ) | ||
Net assets acquired | $ | 412,491 | ||
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 | 2,714 | |||
Customer assets | 1,700 | |||
Technology assets | 3,300 | |||
Goodwill | 1,367 | |||
Total assets acquired | 11,246 | |||
Total liabilities assumed | (5,996 | ) | ||
Net assets acquired | $ | 5,250 | ||
The customer assets of $1.7 million have been assigned a life of five years. The technology assets of $3.3 million have been assigned useful lives of threeboth the customer and technology assets have been estimated to five years.
be seven years each.
The portion of the purchase price allocated to goodwill was assigned in the ratio of 56%, 40 % and 4% to the Company’s North America, reporting segment.Europe and Other segments, respectively. No amount of the goodwill is expected to be deductible for tax purposes.
OPEN TEXT CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 2005
(Tabular dollar amounts in thousands of U.S. Dollars, 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.approximately $33.5 million relating primarily to employee termination charges, costs relating to abandonment of excess Hummingbird facilities and accruals for direct acquisition related costs. This was the result of management approved and initiated plans to restructure the operations of Hummingbird, commencing at the time of acquisition, to eliminate duplicative activities and to reduce costs. The Company will continue to evaluate and identify any material duplicative Hummingbird activities and areas where costs may be reduced during the remainder of the purchase price allocation period and include these in the determination of the fair value of this acquisition. The liability relating to abandonment of excess facilities is expected to be paid over the terms of the various leases, the last of which expires in March 2011. The liabilities related to severance charges, transactionemployee termination costs and costs relating to excess facilities. The purchase price was subsequently adjusted to reduce acquisition related liabilities by $241,000 due to the refinement of management’s estimates. Remaining liabilities related to severance and transaction-related charges are expected to be substantially paid in fiscal 2006. Liabilities relatedon or before the quarter ended December 31, 2008. For further details relating to excess facilities will be paid over the termtype and amounts of these liabilities see Note 6 “Accounts payable and accrued liabilities” to the lease which expires in May 2010.
Interim Financial Statements.
A director of the Company received $112,000, during the year ended June 30, 2005,approximately $351,000 in consulting fees for assistance with the acquisition of Artesia.Hummingbird. 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 SFAS 141 thisPre acquisition has been accounted for as a business combination. As part of this transaction certain Quest employees that developed, sold and supported Vista were 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.
contingencies
The Vista technology 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 was held in escrow until it was releasedCompany is currently conducting an assessment to identify any material pre-acquisition contingencies. If material pre-acquisition contingencies are identified during the vendor on November 30, 2005, as provided for in the purchase agreement.
The purchase price allocation set forth below represents management’s best estimate of the allocationremainder of the purchase price andallocation period, the Company will attempt to determine the fair value of net assets acquired.
The following table summarizesthereof and include them within the estimated fair values of the assets acquired and liabilities assumedpurchase price allocation. No amounts are included as of the date of the Vista acquisition:
Current assets | $ | 263 | ||
Long-term assets | 63 | |||
Customer assets | 10,900 | |||
Technology assets | 8,430 | |||
Goodwill | 9,535 | |||
Total assets acquired | 29,191 | |||
Total liabilities assumed | (5,501 | ) | ||
Net assets acquired | $ | 23,690 | ||
The customer assets of $10.9 million and the technology assets of $8.4 million have been assigned useful lives of five years.December 31, 2006.
OPEN TEXT CORPORATION
UNAUDITED NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three and Six Months Ended December 31, 20052006
(Tabular dollar amounts in thousands of U.S. Dollars,dollars, except per share data)
Proforma financial information (unaudited)
The portionunaudited proforma financial information in the table below summarizes the combined results of Open Text and Hummingbird, on a proforma basis, as though the companies had been combined as of July 1, 2006. This information is presented for informational purposes only and is not indicative of the purchase price allocated to goodwill was assignedresults of operations that would have been achieved if the acquisition and borrowings related to the Company’s North America reportable segment. acquisition had taken place at the beginning of each period presented.
The goodwillunaudited proforma financial information for the six months ended December 31, 2006 combines the historical results for Open Text and Hummingbird.
The unaudited proforma financial information for all periods presented below includes the business combination effect on historical Hummingbird financial information for the adjustments relating to amortization of acquired intangible assets, depreciation on capital assets, and interest expense net of related tax effects. The audit of Hummingbird’s financial information for the year ended September 30, 2006 is expectedcurrently in progress, as of the date of filing this quarterly report on Form 10-Q, and therefore these numbers are preliminary and subject to be deductiblechange. The financial impacts of Open Text’s restructuring initiatives included in the unaudited condensed consolidated statements of income under the caption “special charges” have been included in the calculation of net income (loss) below in the amounts of $4.4 million and $ 26.9 million for tax purposes.the six months ended December 31, 2006 and 2005, respectively, and $8.8 million for the three months ended December 31, 2005. The Company believes that these are material, non recurring items.
AsThe pro forma information included hereunder does not include the financial impacts of the restructuring initiatives relating to former Hummingbird activities as these have been capitalized as part of the preliminary purchase price allocation, the Company recognized transaction costs in connection with this acquisition of $480,000. The purchase price was subsequently adjusted to reduce acquisition related liabilities by $102,000 due to the refinement of management’s estimates. Remaining costs are expected to be paid within fiscal 2006.allocation.
A director of the Company received $126,000, during the year ended June 30, 2005, 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.
Fiscal 2004
(in thousands, except per share data) | Six months ended December 31, 2006 | Six months ended December 31, 2005 | Three months ended December 31, 2005 | ||||||||
Total revenues | $ | 330,388 | $ | 331,713 | $ | 172,859 | |||||
Net income (loss) | $ | 2,984 | $ | (24,841 | ) | $ | (4,048 | ) | |||
Basic net income (loss) per share | $ | 0.06 | $ | (0.51 | ) | $ | (0.08 | ) | |||
Diluted net income (loss) per share | $ | 0.06 | $ | (0.51 | ) | $ | (0.08 | ) |
IXOS
As of December 31, 2006, the Company owned 95.83% of the outstanding shares of IXOS. The Company increased its ownership of IXOS to approximately 95% during the six months ended December 31, 2005. This was doneshares of IXOS by way of open market purchases of IXOS shares. As of June 30, 2005, Open Text held approximately 94% ofshares, by 0.31% during the outstanding shares of IXOS.six months ended December 31, 2006. Total consideration paid for the purchase of shares of IXOS during the three and six months ended December 31, 20052006 was $1.1 millionapproximately $534,000 and $4.2 million,$867,000, respectively. The Company increased 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 adjusted to reflect the reduced minority interest ownership in IXOS.
NOTE 17—SUBSEQUENT EVENTGauss
As ofDuring the quarter ended December 31, 2005,2006, Open Text increased it ownership of Gauss from 95% to 100% by way of a judicial settlement reached with the Company had a CDN $10.0 million lineminority shareholders of credit with a Canadian chartered bank under which no borrowings were outstanding at December 31, 2005Gauss. For details relating to this settlement see Note 16 “Commitments and 2004. On February 2, 2006, this facility was replaced with a new demand operating facility of CDN $40.0 million. A copy ofContingencies” to the agreement is attached as an Exhibit under Item 6 of Part II of this document.Interim Financial Statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation |
Certain statements inIn addition to historical information, this Quarterly Report on Form 10-Q constitutecontains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements1995, Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and is subject to the safe harbors created by those sections. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “could,” “would,” “might,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that express or involve discussions with respectrefer to predictions, expectations, beliefs, plans, projections, objectives, assumptionsperformance or other characterizations of future events or performance or the outcome of litigation (often, but not always, using words or phrases such as “believes”, “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate” or “intends” or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken or achieved)circumstances, including any underlying assumptions, are not statements of historical fact and may be “forward-looking statements”. Suchforward-looking statements. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed herein and in the notes to our financial statements for the three and six months ended December 31, 2006, certain sections of which are incorporated herein by reference as set forth in Part II Item 1A “Risk Factors” of this report. The actual results that we achieve may differ materially from any forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements. You should carefully review Part II Item 1A “Risk Factors” and other documents we file from time to time with the Securities and Exchange Commission. A number of factors thatmay materially affect our business, financial condition, operating results and prospects. These factors include but are not limited to those set forth in Part II Item 1A “Risk Factors” and elsewhere in this report. Any one of these factors may cause our actual results performance or achievements or developments in our business or industry, to differ materially from recent results or from our anticipated future results. You should not rely too heavily on the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. Such risks and uncertainties include the factors set forth in “Risk Factors”statements contained in this Quarterly Report on Form 10-Q. Readers should not place undue reliance on any such10-Q, because these forward-looking statements which speakare relevant only as atof the date they arewere made. Forward-looking statements are based on our management’s current plans, estimates, opinions and projections, and we assume no obligation to update forward-looking statements if assumptions regarding these plans, estimates, opinions or projections should change. This discussion should be read in conjunction with the condensed consolidated financial statements and related notes for the periods specified. Further reference should be made to our Annual Report on Form 10-K for the fiscal year ended June 30, 2005.
OVERVIEW
Purchase of Hummingbird Ltd. (“Hummingbird”)
In October 2006, we completed the acquisition of Hummingbird, a Toronto, Ontario, based, global provider of ECM solutions. This transaction was the culmination of an offer made by us, in July 2006 to purchase all of the issued and outstanding common shares of this company.
The approximate value of this all cash transaction was $412.5 million, net of cash acquired from Hummingbird.
We believe that this acquisition will enhance our size and global reach and will further solidify our position as a leading provider of ECM solutions. The union of Open Text and Hummingbird will now strengthen our ability to reach a wider, more diversified audience and as such we believe the acquisition of Hummingbird will create a strong strategic fit that adds to our “solutions focus” and will increase the reach of our global partner program.
Under business combination accounting, the total purchase price for this acquisition was allocated to Hummingbird’s net tangible and intangible assets based upon their estimated fair values as of October 2, 2006. The excess purchase price over the net tangible and intangible assets was recorded as goodwill. The allocation of the purchase price was based on a preliminary valuation and our preliminary estimates are subject to change. See Note 18 “Acquisitions” to the Interim Financial Statements for additional information relating to this acquisition.
About Open TextRestructuring Activities
In October 2006, we announced a restructuring plan that involves, primarily, workforce reductions, real estate optimization and legal entity reorganization. This plan involved and impacted legacy Hummingbird operations and the operations of the combined companies. We see these actions resulting in savings of approximately $50.0 million for the current fiscal year and we project annualized savings from the restructuring to be in the $80.0 million range starting in Fiscal 2008.
Open Text
New Products
In November, we hosted “LiveLinkUp 2006”, our thirteenth annual global user conference. The conference focused on helping customers leverage their Livelink ECM investment by demonstrating how to streamline information to and from their enterprise applications, to enhance operational efficiencies, reduce costs and improve business performance.
The introduction of “Livelink ECM 10”, which is the next major addition to our ECM suite, was one of the market leaders in providing Enterprise Content Management (“ECM”) solutions that bring together people, processes and information. Our software combines collaboration with content management, transforming information into knowledge that provides the foundation for innovation, compliance and accelerated growth.
The Information technology (“IT”) Environment
We are not seeing much changeour significant announcements made in the IT environment as customers appearcurrent quarter. In addition, our records management offerings continue to be holding onto their legacy systems longer. However, in the past several quarters, we are seeingdrive our customers utilize their existing IT budgets to spend on ECM solutions that assist in meeting regulatorystrategic relations and compliance requirements. This purchasing pattern of our customers has generally evolved in response to the heightened regulatory and compliance requirements in many industries as a result of government policy and legislationtight integration with partners, such as the Sarbanes-Oxley Act of 2002. However, we have also witnessed lengthening customer sales cycles that are characteristic of compliance-based sales.
Alliances
We intend to continue to work more closely with partners that heavily influence our customer’s computing architecture and strategy. Namely, those partners include system integrators like Deloitte and Touche LLP, Accenture, and Atos Origin S.A., independent software vendors like Microsoft Corporation (“Microsoft”), Oracle Inc. (“Oracle”) and SAP and storage vendors like Hitachi Limited, EMC Corporation and Hewlett Packard Company.AG (“SAP”).
We have made good progress on developing an integrated product roadmap wherein combined products will integrate the richer “user experience” of Hummingbird products with the “back end functionality” of our Open Text has been certified by Microsoft asproducts. For Hummingbird customers specifically, the new DMX product will provide customers an easy upgrade, saving a Microsoft Gold Partner with a track record for delivering powerful ECM solutions that extend Microsoft applications. Microsoft’s desktopsignificant amount of time and business platforms match well with our solutions, which meeteffort and easy access to the document management, archiving and compliance requirements of large companies and government agencies. In addition, on November 14, 2005, we announced enhancements in our relationship with Microsoft to become a worldwide ECM partner with Microsoft.
We are seeing increased interest from customers in our email archiving products. We continue to work with partners that provide specialized products and expertise that complement our own. Those partners include Microsoft and IBM, as the dominant email vendors, Vedder Price, Kaufman & Kammholz, P.C., a legal firm specializing in records and retention policies, with Technology Concepts and Design Inc. (“TCDI”), a litigation technology software and service specialist, and with Trusted Edge Inc., providing desktop information classification and control software.
other Open Text product suites.
CustomersPartners
We rely on close cooperation with partners for sales and product development as well as for the optimization of opportunities which arise in our competitive environment.
Our customer base is diversified by industry and geography which is the resultAs of a continued focus on the 2,000 largest global organizations as our primary target market. WeDecember 31, 2006, we continue to see regulatory requirements as a key business drivermake significant progress with our global partner program, particularly with SAP, Oracle and the majority of new customer licensesMicrosoft. Our specific revenue from partners more than doubled in the first two quarters of fiscal 2006 were driven by our customers’ compliance-based requirements. Industries such as Government, Pharmaceutical and Life Sciences, Oil and Gas, and Financial Services have greater demand for specific software solutions to solve compliance-based business problems. We have created specific ECM software solutions to address this demand and continue to work closely with customers and their strategic partners to ensure maximization of their software investments.
Notable customer announcements during the second quarter of fiscal 2006 included:
Special Charges
During the three months ended December 31, 2005, we recorded special charges of $8.8 million which consist primarily of $7.1 million relating2006, compared to the same period in the prior fiscal year, and our partner revenue was approximately 30% of total revenue for the current quarter.
Outlook
We expect to see some reductions in revenue that occurs in the aftermath of acquisitions, as a combined company integrates and begins to grow. Overall, we expect a 20% reduction on Hummingbird’s revenue “run rate” going forward.
Results of Operations
The following table presents an overview of our selected financial data for the periods indicated.
Three months ended December 31, | |||||||||||||||
(in thousands) | 2006 | 2005 | Change in $ | % Change | |||||||||||
Total revenue | $ | 163,261 | $ | 110,771 | $ | 52,490 | 47.4 | % | |||||||
Cost of revenue | 55,485 | 36,281 | 19,204 | 52.9 | % | ||||||||||
Gross profit | 107,776 | 74,490 | 33,286 | 44.7 | % | ||||||||||
Amortization of acquired intangible assets | 7,369 | 2,305 | 5,064 | 219.7 | % | ||||||||||
Special charges | 4,843 | 8,793 | (3,950 | ) | (44.9 | )% | |||||||||
Other operating expenses | 85,800 | 56,801 | 28,999 | 51.1 | % | ||||||||||
Income from operations | 9,764 | 6,591 | 3,173 | 48.1 | % | ||||||||||
Net income | 2,277 | 2,721 | (444 | ) | (16.3 | )% | |||||||||
Gross margin | 66.0 | % | 67.2 | % |
Six months ended December 31, (in thousands) Total revenue Cost of revenue Gross profit Amortization of acquired intangible assets Special charges Other operating expenses Income (loss) from operations Net income (loss) Gross margin 2006 2005 Change in $ % Change $ 264,416 $ 203,401 $ 61,015 30.0 % 89,724 69,982 19,742 28.2 % 174,692 133,419 41,273 30.9 % 9,751 4,527 5,224 115.4 % 4,375 26,904 (22,529 ) (83.7 )% 139,795 111,984 27,811 24.8 % 20,771 (9,996 ) 30,767 N/A 9,578 (10,147 ) 19,725 N/A 66.1 % 65.6 %
As a result of our acquisition of Hummingbird, we have included the financial results of Hummingbird in our consolidated financial statements beginning October 2, 2006, restructuringthe date we acquired 100% of the issued and $1.7 million relatingoutstanding shares. The fluctuations in the operating results in the current periods, compared with the same period in the prior fiscal year, are generally due to the write downsynergies generated by this acquisition. An analysis of capital assets.each of the components of our “Results of Operations” follows:
Immediately upon the acquisition of Hummingbird, Open Text restructured both Hummingbird and pre-acquisition Open Text operations into one combined organization. Sales forces were aligned by either a combined vertical or geography. All back office functions such as accounting and information technology was combined to manage the combined operations. Our research and development teams quickly prepared integration code to combine products and features between previous Hummingbird and Open Text products. Most former Hummingbird executive management and many next levels of management personnel were terminated and primarily Open Text management assumed all responsibilities for sales, service, research and development, and general and administrative activities. In view of the shared resources, single line management and combined operations, presentation of the results of operations of Open Text and Hummingbird separately is not meaningful to this analysis.
Revenues
Revenue by Product Type
The following tables set forth our revenues by product and as a percentage of the related product revenue for the periods indicated:
Three months ended December 31, | Six months ended December 31, | |||||||||||||||||||||||
(in thousands) | 2006 | 2005 | Change in $ | % Change | 2006 | 2005 | Change in $ | % Change | ||||||||||||||||
License | $ | 51,425 | $ | 37,131 | $ | 14,294 | 38.5 | % | $ | 80,250 | $ | 62,074 | $ | 18,176 | 29.3 | % | ||||||||
Customer support | 78,022 | 45,366 | 32,656 | 72.0 | % | 126,310 | 90,690 | 35,620 | 39.3 | % | ||||||||||||||
Service | 33,814 | 28,274 | 5,540 | 19.6 | % | 57,856 | 50,637 | 7,219 | 14.3 | % | ||||||||||||||
Total | $ | 163,261 | $ | 110,771 | $ | 52,490 | 47.4 | % | $ | 264,416 | $ | 203,401 | $ | 61,015 | 30.0 | % | ||||||||
During
Three months ended December 31, | Six months ended December 31, | |||||||||||
(% of total revenue) | 2006 | 2005 | 2006 | 2005 | ||||||||
License | 31.5 | % | 33.5 | % | 30.3 | % | 30.5 | % | ||||
Customer support | 47.8 | % | 41.0 | % | 47.8 | % | 44.6 | % | ||||
Service | 20.7 | % | 25.5 | % | 21.9 | % | 24.9 | % | ||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
License Revenue
License revenue consists of fees earned from the licensing of software products to customers.
The increase in License revenue in the three and six months ended December 31, 2005, we recorded special charges2006, respectively, compared to the same periods in the prior fiscal year was primarily due to the incremental impact of $26.9the Hummingbird acquisition.
Overall, thirty-five percent of license revenue was generated on account of new customers, during the three months ended December 31, 2006, while sixty-five percent was from our installed base.
Customer Support Revenue
Customer support revenue consists of revenue from our customer support and maintenance agreements. These agreements allow our customers to receive technical support, enhancements and upgrades to new versions of our software products when and if available. Customer support revenue is generated from such support and maintenance agreements relating to current year sales of software products and from the renewal of existing maintenance agreements for software licenses sold in prior periods. As our installed base grows, the renewal rate has a larger influence on customer support revenue than the current software revenue growth. Therefore, changes in customer support revenue do not necessarily correlate directly to the changes in license revenue in a given period. Typically the term of these support and maintenance agreements is twelve months, with customer renewal options. We have historically experienced a renewal rate over 90% but continue to encounter pricing pressure from our customers during contract negotiation and renewal. New license sales create additional customer support agreements which contribute substantially to the increase in our customer support revenue.
The increase in Customer support revenue in the three and six months ended December 31, 2006, respectively, compared to the same periods in the prior fiscal year was primarily due to the incremental impact of the Hummingbird acquisition.
Service Revenue
Service revenue consists of revenues from consulting contracts and contracts to provide training and integration services.
The increase in Customer service revenue in the three and six months ended December 31, 2006, respectively, compared to the same periods in the prior fiscal year was primarily due to the incremental impact of the Hummingbird acquisition.
Revenue by Geography
The following table sets forth information regarding our revenue by geography.
Three months ended December 31, | Six months ended December 31 | |||||||||||||||
(In thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
North America | $ | 72,852 | $ | 53,785 | $ | 121,584 | $ | 100,016 | ||||||||
Europe | 82,933 | 51,171 | 130,384 | 92,601 | ||||||||||||
Other | 7,476 | 5,815 | 12,448 | 10,784 | ||||||||||||
Total | $ | 163,261 | $ | 110,771 | $ | 264,416 | $ | 203,401 | ||||||||
Three months ended December 31, | Six months ended December 31, | |||||||||||||||
% of Total Revenue | 2006 | 2005 | 2006 | 2005 | ||||||||||||
North America | 44.6 | % | 48.6 | % | 46.0 | % | 49.2 | % | ||||||||
Europe | 50.8 | % | 46.2 | % | 49.3 | % | 45.5 | % | ||||||||
Other | 4.6 | % | 5.2 | % | 4.7 | % | 5.3 | % | ||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
In the three and six months ended, December 31, 2006, our total revenues have increased by approximately $52.5 million whichand $61.0 million, respectively, compared to the same period in the prior fiscal year.
The “other” geographic segment, reflected above, includes Australia, Japan, Malaysia, and the Middle East region.
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:
Three months ended December 31, | Six months ended December 31, | |||||||||||||||||||||||
(in thousands) | 2006 | 2005 | Change in $ | % Change | 2006 | 2005 | Change in $ | % Change | ||||||||||||||||
License | $ | 3,322 | $ | 1,811 | $ | 1,511 | 83.4 | % | $ | 6,122 | $ | 4,199 | $ | 1,923 | 45.8 | % | ||||||||
Customer support | 12,659 | 7,134 | 5,525 | 77.4 | % | 19,390 | 14,492 | 4,898 | 33.8 | % | ||||||||||||||
Service | 29,108 | 22,684 | 6,424 | 28.3 | % | 48,970 | 42,008 | 6,962 | 16.6 | % | ||||||||||||||
Amortization of acquired technology intangible assets | 10,396 | 4,652 | 5,744 | 123.5 | % | 15,242 | 9,283 | 5,959 | 64.2 | % | ||||||||||||||
Total | $ | 55,485 | $ | 36,281 | $ | 19,204 | 52.9 | % | $ | 89,724 | $ | 69,982 | $ | 19,742 | 28.2 | % | ||||||||
Three months ended December 31, | Six months ended December 31, | |||||||||||
Gross margin (% of revenue) | 2006 | 2005 | 2006 | 2005 | ||||||||
License | 93.5 | % | 95.1 | % | 92.4 | % | 93.2 | % | ||||
Customer support | 83.8 | % | 84.3 | % | 84.6 | % | 84.0 | % | ||||
Service | 13.9 | % | 19.8 | % | 15.4 | % | 17.0 | % |
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 in the three and six months ended December 31, 2006, as a direct result of the incremental impact of Hummingbird.
Cost of customer support revenues
Cost of customer support revenues is comprised primarily of technical support personnel and related costs.
Cost of customer support revenues increased in the three and six months ended December 31, 2006, as a direct result of the incremental impact of Hummingbird.
Cost of service revenues
Cost of service revenues consists primarily of the costs of providing integration, customization and training with respect to our various software products. The most significant component of these costs is personnel related expenses. The other components include travel costs and third party subcontracting.
Cost of service revenues increased in the three and six months ended December 31, 2006, as a direct result of the incremental impact of Hummingbird.
Operating Expenses
The following table sets forth total operating expenses by function and as a percentage of total revenue for the periods indicated:
Three months ended December 31, | Six months ended December 31, | |||||||||||||||||||||||||
(in thousands) | 2006 | 2005 | $ Change | % Change | 2006 | 2005 | $ Change | % Change | ||||||||||||||||||
Research and development | $ | 22,595 | $ | 14,883 | $ | 7,712 | 51.8 | % | $ | 36,774 | $ | 30,671 | $ | 6,103 | 19.9 | % | ||||||||||
Sales and marketing | 43,824 | 28,553 | 15,271 | 53.5 | % | 68,381 | 53,885 | 14,496 | 26.9 | % | ||||||||||||||||
General and administrative | 15,474 | 10,534 | 4,940 | 46.9 | % | 27,741 | 22,088 | 5,653 | 25.6 | % | ||||||||||||||||
Depreciation | 3,907 | 2,831 | 1,076 | 38.0 | % | 6,899 | 5,340 | 1,559 | 29.2 | % | ||||||||||||||||
Amortization of acquired intangible assets | 7,369 | 2,305 | 5,064 | 219.7 | % | 9,751 | 4,527 | 5,224 | 115.4 | % | ||||||||||||||||
Special charges | 4,843 | 8,793 | (3,950 | ) | (44.9 | )% | 4,375 | 26,904 | (22,529 | ) | (83.7 | )% | ||||||||||||||
Total | $ | 98,012 | $ | 67,899 | $ | 30,113 | 44.3 | % | $ | 153,921 | $ | 143,415 | $ | 10,506 | 7.3 | % | ||||||||||
Three months ended December 31, | Six months ended December 31, | |||||||||||
(in % of total revenue) | 2006 | 2005 | 2006 | 2005 | ||||||||
Research and development | 13.8 | % | 13.4 | % | 13.9 | % | 15.1 | % | ||||
Sales and marketing | 26.8 | % | 25.8 | % | 25.9 | % | 26.5 | % | ||||
General and administrative | 9.5 | % | 9.5 | % | 10.5 | % | 10.9 | % | ||||
Depreciation | 2.4 | % | 2.6 | % | 2.6 | % | 2.6 | % | ||||
Amortization of acquired intangible assets | 4.5 | % | 2.1 | % | 3.7 | % | 2.2 | % | ||||
Special charges | 3.0 | % | 7.9 | % | 1.7 | % | 13.2 | % |
Research and development expenses
Research and development expenses consist primarily of $23.5 million relatingpersonnel expenses, contracted research and development expenses, and facility costs.
Research and development expenses increased in the three and six months ended December 31, 2006, compared to the same periods in the prior fiscal 2006 restructuring, $3.7 million relatingyear primarily due to the write downimpact of capital assetsincreased labor and office overhead expenses as a recoveryresult of $329,000 relatingincreased business activity.
Sales and marketing expenses
Sales and marketing expenses consist primarily of personnel expenses and costs associated with advertising and trade shows.
Sales and marketing expenses increased in the three and six months ended December 31, 2006, compared to the fiscal 2004 restructuring.
The fiscal 2006 restructuring relates primarily to a reduction in our workforce and abandonment of excess facilities. The restructuring has impacted both our North American and European operations. The restructuring is being done primarily with a view to streamline our operations. Overall we expect the total restructuring charge to besame periods in the range of approximately $25 to $30 million, of which $23.5 million has been taken to date. All significant actions in relationprior fiscal year primarily due to the restructuring are expectedimpact of additional labor and promotional expenses.
General and administrative expenses
General and administrative expenses consist primarily of salaries of administrative personnel, related overhead, facility expenses, audit fees, consulting expenses and public company costs.
General and administrative expenses increased in the three and six months ended December 31, 2006, compared to be completed by the endsame periods in the prior fiscal year primarily due to the impact of the fiscal 2006 year.
The asset write-downs relate to capital assets that were written down to fair value, various leasehold improvements at vacated premises and redundant office equipment. Fair value was determined based onintegration of Hummingbird within our estimate of disposal proceeds, net of anticipated costs to sell.
Further details relating to special charges are provided in the “Operating Expenses” section of this Quarterly Report on Form 10-Q and Note 15 “Special Charges” to the condensed consolidated financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our interim condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). These accounting principles were applied on a basis consistent with those of the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended June 30, 2005 filed with the United States Securities and Exchange Commission (“SEC”), with the exception of our adoption on July 1, 2005 of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004) “Share-Based Payment” (“SFAS 123R”) as described below.
The preparation of consolidated financial statements in accordance with U.S. GAAP requires us 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, we evaluate our estimates, including those related to revenues, bad debts, investments, intangible assets, income taxes, special charges, contingencies and litigation. We base our 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 our control.
The critical accounting policies affecting significant judgments and estimates used in the preparation of our condensed consolidated financial statements have been applied as outlined in our Annual Report on Form 10-K for the fiscal year ended June 30, 2005 filed with the SEC. 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 our control.
existing operations.
Adoption of SFAS 123RShare-based compensation expense
On July 1, 2005, we adopted the fair value-based method for measurement and cost recognition of employee share-based compensation under the provisions of FASB SFAS 123R, using the modified prospective application transitional approach. Previously, we had been accounting for employee share-based compensation using the intrinsic value method, which generally did not result in any compensation cost being recorded for stock options since the exercise price was equal to the market price of the underlying shares on the date of grant.
Our stock options are now accounted for under SFAS 123R. The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option-pricing model.
For the three months ended December 31, 2006, the fair value of each option was estimated using the following weighted–average assumptions: expected volatility of 46%; risk-free interest rate of 4.7%; expected dividend yield of 0%; and expected life of 4.8 years. For the six months ended December 31, 2006, the fair value of each option was estimated using the following weighted–average assumptions: expected volatility of 46%; risk-free interest rate of 4.6%; expected dividend yield of 0%; and expected life of 4.7 years. Expected option lives and volatilities are based on our historical data.
For the three months ended December 31, 2005, the fair value of each option was estimated using the following weighted–average assumptions: expected volatility of 55%; risk-free interest rate of 4.4%; expected dividend yield of 0%; and expected life of 5.5 years. Expected option lives and volatilities are based on our historical data. No options were granted during the three months ended September 30, 2005.
For the three and six months ended December 31, 2004, the fair value of each option was estimated using the following weighted–average assumptions: expected volatility of 60%; risk-free interest rate of 3.5%; expected dividend yield of 0%; and expected life of 3.5 years.
Share-based compensation cost included in the statementunaudited condensed consolidated statements of operationsincome for the three and six months ended December 31, 20052006 was approximately $1.2$1.3 million and an increase in net loss of $2.4$2.6 million, respectively, net of related tax effects. Additionally,This includes deferred tax assets of $155,000$213,000 and $324,000 were recorded,$384,000 for the three and six months ended December 31, 20052006 respectively, in relation to the tax effect of certain stock options that are eligible for a tax deduction when exercised. As of December 31, 2005,2006, the total compensation cost related to unvested awards not yet recognized is $10.7was $11.6 million, which will be recognized over a weighted average period of approximately 2 years.
We made no modifications to the terms of our outstanding share options in anticipation of the adoption of SFAS 123R. Also, we made no changes in either the quantity or type of instruments used in our share option plans or the terms of our share option plans.
Additionally, effective July 1, 2005, we amended the terms of our Employee Share Purchase Plan (“ESPP”) to set the amount at which Common Shares may be purchased by employees to 95% of the average market price on the Toronto Stock Exchange (“TSX”) or the NASDAQ National Market (“NASDAQ”) on the last day of the purchase period. As a result of the amendments, the ESPP is no longer considered a compensatory plan under the provisions of SFAS 123R, and as a result no compensation cost is recorded related to the ESPP.
RESULTS OF OPERATIONSAmortization of acquired intangible assets
Overview
Amortization of acquired intangible assets includes the amortization of customer assets. Amortization of acquired technology is included as an element of cost of sales. The following table presents an overviewincrease in amortization of the results of our operations foracquired intangible assets in the three and six months ended December 31, 2005 and 2004:
Three months ended December 31, | |||||||||||||||
(in thousands) | 2005 | 2004 | Change in $ | % Change | |||||||||||
Total revenues | $ | 110,771 | $ | 114,692 | $ | (3,921 | ) | (3.4 | %) | ||||||
Cost of revenues * | 30,938 | 33,698 | (2,760 | ) | (8.2 | %) | |||||||||
Gross profit | 79,833 | 80,994 | (1,161 | ) | (1.4 | %) | |||||||||
Amortization of acquired intangible assets | 6,957 | 6,146 | 811 | 13.2 | % | ||||||||||
Special charges (recoveries) | 8,793 | (1,449 | ) | 10,242 | (706.8 | %) | |||||||||
Total remaining operating expenses | 57,492 | 58,782 | (1,290 | ) | (2.2 | %) | |||||||||
Income from operations | 6,591 | 17,515 | (10,924 | ) | (62.4 | %) | |||||||||
Net income | $ | 2,721 | $ | 10,970 | $ | (8,249 | ) | (75.2 | %) | ||||||
Gross margin | 72.1 | % | 70.6 | % | |||||||||||
Operating margin | 6.0 | % | 15.3 | % |
Six months ended December 31, | |||||||||||||||
(in thousands) | 2005 | 2004 | Change in $ | % Change | |||||||||||
Total revenues | $ | 203,401 | $ | 200,288 | $ | 3,113 | 1.6 | % | |||||||
Cost of revenues * | 59,582 | 60,000 | (418 | ) | (0.7 | %) | |||||||||
Gross profit | 143,819 | 140,288 | 3,531 | 2.5 | % | ||||||||||
Amortization of acquired intangible assets | 13,810 | 11,575 | 2,235 | 19.31 | % | ||||||||||
Special charges (recoveries) | 26,904 | (1,449 | ) | 28,353 | (1,956.7 | %) | |||||||||
Total remaining operating expenses | 113,101 | 113,219 | (118 | ) | (0.1 | %) | |||||||||
Income (loss) from operations | (9,996 | ) | 16,943 | (26,939 | ) | (159.0 | %) | ||||||||
Net income (loss) | $ | (10,147 | ) | $ | 9,984 | $ | (20,131 | ) | (201.6 | %) | |||||
Gross margin | 70.7 | % | 70.0 | % | |||||||||||
Operating margin | (4.9 | %) | 8.5 | % |
For the three months ended December 31, 2005, our results were impacted by a decrease in revenues by $3.9 million, or 3.4% compared to the same period in the prior fiscal year. This decrease was due to fewer license deals greater than one million dollars in the second quarter of fiscal 2006, relative to the same period in the prior fiscal year, adverse foreign exchange impacts due to weakening European currencies relative to the United States Dollar, and a general weakening of our European results. These items were partially offset by our strong growth in our North American operations.
For the six months ended, December 31, 2005, our results were impacted by an overall increase in total revenues by $3.1 million or 1.6% compared to the same period in the prior fiscal year. This increase was due primarily to growth in our customer support revenues in the first quarter of fiscal 2006 and as a result of the full impact of our fiscal 2004 acquisitions. This was partially offset by foreign exchange impacts and weaker license revenues particularly in Europe.
Revenues
Revenue by Type
The following tables set forth the increase in revenues by product and as a percentage of the related product revenue for the periods indicated:
Three months ended December 31, | Six months ended December 31, | |||||||||||||||||||||||||||
(in thousands) | 2005 | 2004 | Change $ | Change % | 2005 | 2004 | Change $ | Change % | ||||||||||||||||||||
License | $ | 37,131 | $ | 42,622 | $ | (5,491 | ) | (12.9 | %) | $ | 62,074 | $ | 66,526 | $ | (4,452 | ) | (6.7 | %) | ||||||||||
Customer support | 46,476 | 44,542 | 1,934 | 4.3 | % | 93,122 | 85,334 | 7,788 | 9.1 | % | ||||||||||||||||||
Service | 27,164 | 27,528 | (364 | ) | (1.3 | %) | 48,205 | 48,428 | (223 | ) | (0.5 | %) | ||||||||||||||||
Total | $ | 110,771 | $ | 114,692 | $ | (3,921 | ) | (3.4 | %) | $ | 203,401 | $ | 200,288 | $ | 3,113 | 1.6 | % | |||||||||||
Three months ended December 31, | Six months ended December 31, | |||||||||||||||||||||||||||
(% of total revenue) | 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||||||
License | 33.5 | % | 37.2 | % | 30.5 | % | 33.2 | % | ||||||||||||||||||||
Customer support | 42.0 | % | 38.8 | % | 45.8 | % | 42.6 | % | ||||||||||||||||||||
Service | 24.5 | % | 24.0 | % | 23.7 | % | 24.2 | % | ||||||||||||||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||
License Revenue
License revenue consists of fees earned from the licensing of our software products to customers.
For the three months ended December 31, 2005, license revenues decreased 12.9% or $5.5 million compared to the same period in the prior fiscal year. This was because in the second quarter of fiscal 2006 we had only 3 licensing transactions that were greater than $1 million compared to 5 such transactions in the second quarter of fiscal 2005. In addition, we had 5 licensing transactions which were greater than $500,000 in the second quarter of fiscal 2006 compared to 9 such transactions in the same quarter of the prior fiscal year. Excluding the impact of foreign exchange rates, license revenue declined approximately 6% year over year. Although our North American operations are experiencing significant license revenue growth year over year, this has been offset by a slow down in license revenue in Europe and the rest of the world.
For the six months ended December 31, 2005, license revenue decreased 6.7% or $4.5 million compared to the same period in the prior fiscal year. Excluding the impact of foreign exchange, license revenue declined approximately 3% comparable over the period in the prior fiscal year for the same reasons set forth above.
Customer Support Revenue
Customer support revenue consists of revenue from our customer support and maintenance agreements. Typically the term of these maintenance contracts is twelve months with customer renewal options, and we have historically experienced a renewal rate greater than 90%. New license revenue drives additional customer support contracts which accounts for substantially all the increase in our customer support revenue.
For the three months ended December 31, 2005, customer support revenue increased 4.3% or $1.9 million compared to the same period in the prior fiscal year. The increase in customer support revenue was attributable to new licenses and strong retention rates with existing customers. Excluding the impact of foreign exchange, comparable over the period in the prior fiscal year, growth in customer support revenue was approximately 7%.
For the six months ended December 31, 2005, customer support revenues increased by 9.1% or $7.8 million compared to the same period in the prior fiscal year. The increase in customer support revenue was attributable to new licenses and strong retention rates and the full quarter impact of acquisitions made at the end of the first quarter of fiscal 2005.
Service Revenue
Service revenue consists of revenues from consulting contracts and contracts to provide training and integration services.
For the three months ended December 31, 2005, service revenues remained relatively stable with a slight decrease of approximately 1.3% or $364,000 compared to the same period in the prior fiscal year. Excluding the impact of weakening European currencies, service revenue increased approximately 4% with increases in service revenue in North America more than compensating for decreases in Europe.
For the six months ended December 31, 2005, service revenue remained relatively stable, decreasing slightly by 0.5% or $223,000 compared to the same period of the prior fiscal year. However, excluding the impact of foreign exchange rates, service revenue grew by approximately 2%. North American service revenue presented strong revenue growth with an offsetting decrease in Europe.
Revenue and Operating Margin by Segment
The following table sets forth information regarding our revenue by geography:
Revenue by Geography
Three months ended December 31, | Six months ended December 31 | |||||||||||||||
(In thousands) | 2005 | 2004 | 2005 | 2004 | ||||||||||||
North America | $ | 53,785 | $ | 47,915 | $ | 100,016 | $ | 82,711 | ||||||||
Europe | 51,171 | 60,583 | 92,601 | 105,050 | ||||||||||||
Other | 5,815 | 6,194 | 10,784 | 12,527 | ||||||||||||
Total | $ | 110,771 | $ | 114,692 | $ | 203,401 | $ | 200,288 | ||||||||
Three months ended December 31, | Six months ended December 31, | |||||||||||||||
% of Total Revenue | 2005 | 2004 | 2005 | 2004 | ||||||||||||
North America | 48.6 | % | 41.8 | % | 49.2 | % | 41.3 | % | ||||||||
Europe | 46.2 | % | 52.8 | % | 45.5 | % | 52.4 | % | ||||||||
Other | 5.2 | % | 5.4 | % | 5.3 | % | 6.3 | % | ||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
The overall increase in revenue in North America in the second quarter of fiscal 2006 compared to the prior year period represents our strengthened sales management, improved focus on sales force/process management, implementation of effective lead generation processes and a focus on our key partnerships and verticals that represent our greatest opportunities. Declines in European license revenue reflect weakening European currencies and a period of structural re-alignment of our European sales force commensurate with our re-organization activities.
In the context of license and services revenues, North America has had strong revenue growth, while Europe has declined due to the effects of foreign exchange rates and restructuring activities in Europe that we believe were necessary to position us for future continued success.
The North America geographic segment includes Canada, the United States and Mexico. The Europe geographic segment includes Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Spain, Sweden, and the United Kingdom, while the “Other” geographic segment includes Australia, Japan, Malaysia, and the Middle East region.
Adjusted Operating Margin by Significant Segment
The following table provides a summary of our adjusted operating margins by significant segment.
Three months ended December 31, | Six months ended December 31 | |||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||
North America | 22.1 | % | 15.9 | % | 17.6 | % | 10.9 | % | ||||
Europe | 20.0 | % | 22.9 | % | 15.2 | % | 15.9 | % |
The above adjusted operating margins are calculated based on GAAP net income (loss) including where applicable, the impact of amortization, interest, share-based compensation, other expense, special charges and income taxes.
Adjusted operating margins have declined in Europe and are higher in North America for the three months ended December 31, 2005. On a year to date basis, Europe is relatively constant while North America has increased approximately 6.7% year over year.
The changes in operating margin in Europe were primarily due to a reduction of revenues in Europe, weakening of European currencies, and the impact of the 2006 restructuring on Europe. North America margins increased due to realigned sales management efforts in North America.
Cost of Revenue by 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:
Three months ended December 31, | Six months ended December 31, | |||||||||||||||||||||||||||
(in thousands) | 2005 | 2004 | Change $ | Change % | 2005 | 2004 | Change $ | Change % | ||||||||||||||||||||
License | $ | 1,811 | $ | 3,051 | $ | (1,240 | ) | (40.6 | %) | $ | 4,199 | $ | 5,205 | $ | (1,006 | ) | (19.3 | %) | ||||||||||
Customer support | 7,734 | 8,062 | (328 | ) | (4.1 | %) | 15,386 | 15,556 | (170 | ) | (1.1 | %) | ||||||||||||||||
Service | 21,393 | 22,585 | (1,192 | ) | (5.3 | %) | 39,997 | 39,239 | 758 | 1.9 | % | |||||||||||||||||
Total | $ | 30,938 | $ | 33,698 | $ | (2,760 | ) | (8.2 | %) | $ | 59,582 | $ | 60,000 | $ | (418 | ) | (0.7 | %) | ||||||||||
Three months ended December 31, | Six months ended December 31, | |||||||||||||||||||||||||||
Gross margin by type % | 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||||||
License | 95.1 | % | 92.8 | % | 93.2 | % | 92.2 | % | ||||||||||||||||||||
Customer support | 83.4 | % | 81.9 | % | 83.5 | % | 81.8 | % | ||||||||||||||||||||
Service | 21.2 | % | 18.0 | % | 17.1 | % | 17.0 | % | ||||||||||||||||||||
Consolidated gross margin | 72.1 | % | 70.6 | % | 70.7 | % | 70.1 | % |
For the three months ended December 31, 2005, overall gross margin improved to 72.1%, compared to 70.6% in the three months ended December 31, 2004. The margin improvement was due to improved expense management in services and customer support, primarily as a result of our restructuring activities. This was partially offset by a lower proportion of higher profitability license revenue.
For the six months ended, December 31, 2005, overall gross margin was relatively stable compared to the six months ended December 31, 2005.
Cost of license revenue
Cost of license revenue consists primarily of royalties payable to third parties for related software, and royalties we pay on software embedded within our core products.
For the three months ended December 31, 2005, cost of license revenues decreased by 40.6% or $1.2 million compared to same period in the prior fiscal year. This was driven by a product mix which included less third party products, royalties and reseller fees.
For the six months ended December 31, 2005, cost of license revenues decreased by 19.3% or $1.0 million compared to the same period in the prior fiscal year, foris the same reasons set forth above.
Cost of customer support revenues
Cost of customer support revenues is comprised primarily of technical support personnel and their related costs.
For the three months ended, December 31, 2005, cost of customer support revenues decreased by 4.1% or $328,000 compared to the same period in the prior fiscal year. The decrease is primarily attributable to the weakening of European currencies and operating efficiencies as a result of our global restructuring efforts.
Foran additional three month’s amortization resulting from the six months ended, December 31, 2005, costacquisition of customer support revenues remained relatively stable compared to same period in the prior fiscal year.
Cost of service revenues
Cost of service revenues consists primarily of the costs of providing integration, customization and training with respect to our various software products. The most significant component of these costs is personnel related expenses. The other components include travel costs and third party subcontracting.
For the three months ended, December 31, 2005, cost of service revenues decreased by 5.3% or $1.2 million compared to the same period in the prior fiscal year. The weakening of European currencies, an acquisition made in the third quarter of fiscal 2005 and operational efficiencies as a result of our restructuring efforts have allowed for better utilization of our resources, which has resulted in the decrease.
For the six months ended December 31, 2005, cost of service revenue increased slightly by 1.9% or $758,000 compared to the same period in the prior fiscal year. The increase, is primarily attributable to the timing of acquisitions made late in the first and third quarter of fiscal 2005, offset by weakening European currencies and operational efficiencies as a result of our restructuring efforts.
Operating Expenses
The following table sets forth total operating expenses by function and as a percentage of total revenue for the periods indicated:
Three months ended December 31, | Six months ended December 31, | |||||||||||||||||||||||||||
(in thousands) | 2005 | 2004 | Change $ | Change % | 2005 | 2004 | Change $ | Change % | ||||||||||||||||||||
Research and development | $ | 14,836 | $ | 15,842 | $ | (1,006 | ) | (6.4 | %) | $ | 31,386 | $ | 30,525 | $ | 861 | 2.8 | % | |||||||||||
Sales and marketing | 28,059 | 30,787 | (2,728 | ) | (8.9 | %) | 54,172 | 56,284 | (2,112 | ) | (3.8 | %) | ||||||||||||||||
General and administrative | 11,766 | 9,564 | 2,202 | 23.0 | % | 22,203 | 21,422 | 781 | 3.6 | % | ||||||||||||||||||
Depreciation | 2,831 | 2,589 | 242 | 9.3 | % | 5,340 | 4,988 | 352 | 7.1 | % | ||||||||||||||||||
Amortization of acquired intangible assets | 6,957 | 6,146 | 811 | 13.2 | % | 13,810 | 11,575 | 2,235 | 19.3 | % | ||||||||||||||||||
Special charges (recoveries) | 8,793 | (1,449 | ) | 10,242 | (706.8 | %) | 26,904 | (1,449 | ) | 28,353 | (1,956.7 | %) | ||||||||||||||||
Total | $ | 73,242 | $ | 63,479 | $ | 9,763 | 15.4 | % | $ | 153,815 | $ | 123,345 | $ | 30,470 | 24.7 | % | ||||||||||||
% of Total Revenue Three months ended December 31, Six months ended December 31, Research and development Sales and marketing General and administrative Depreciation Amortization of acquired intangible assets Special charges (recoveries) Total 2005 2004 2005 2004 13.3 % 13.8 % 15.4 % 15.2 % 25.2 % 26.8 % 26.6 % 28.1 % 10.6 % 8.3 % 10.9 % 10.7 % 2.5 % 2.3 % 2.6 % 2.5 % 6.3 % 5.4 % 6.8 % 5.8 % 8.0 % (1.3 %) 13.2 % (0.7 %) 65.9 % 55.3 % 75.5 % 61.6 %
Research and development expenses
Research and development (“R&D”) expenses consist primarily of engineering personnel expenses, contracted research and development expenses, and facilities and equipment costs.
For the three months ended December 31, 2005, R&D expenses decreased by 6.4% or $1.0 million compared to the same period in the prior fiscal year. The decrease in R&D costs is attributable to specific targeted reductions in traditional R&D products and staff as a result of our restructuring activities. Partially offsetting these reductions are more focused expenditures in solutions and packaged service offerings, which allows us to quickly develop the products customers most value.
For the six months ended December 31, 2005, R&D expenses increased slightly because of investments in solutions and packaged service offerings. We expect the declines seen in the second quarter of fiscal 2006 to continue going forward.
Sales and marketing expenses
Sales and marketing expenses consist primarily of costs related to sales and marketing personnel, as well as costs associated with trade shows, seminars, and other marketing programs.
For the three months ended December 31, 2005, sales and marketing expenses decreased by 8.9% or $2.7 million compared to the same period in the prior fiscal year. Sales and marketing expenses have decreased as a result of reductions in staff, which is directly related to the restructuring program that included a consolidation of management structures, reduction of administrative staff and a reduction of selling staff in low growth geographies and/or products. These actions are expected to allow redeployment to markets with better opportunities. We have reduced our investments in marketing programs, and the staff who administers these programs, until growth in the ECM market profitably supports those investments. We also continue to make significant investments in sales and marketing, spending more than 25% of our revenues on sales and marketing activities.
For the six months ended December 31, 2005, sales and marketing expenses decreased by 3.8% or $2.1 million compared to the same period in the prior fiscal year. Sales and marketing expenses have decreased as a result of reductions in staff, which is directly related to the restructuring program that included a consolidation of management structures, reduction of administrative staff and a reduction of selling staff in low growth geographies/products. These actions are expected to allow redeployment to markets with better opportunities. We have reduced our investments in marketing programs, and the staff who administers these programs, until growth in the ECM market profitably supports those investments. We also continue to make significant investments in sales and marketing, spending more than 25% of our revenues on sales and marketing activities.
General and administrative expenses
General and administrative expenses consist primarily of salaries of administrative personnel, related overhead, facility expenses, audit fees, consulting expenses and public company costs.
For the three months ended December 31, 2005, general and administrative expenses increased by 23.0% or $2.2 million compared to the same period in the prior fiscal year. As a percentage of total revenues, in the second quarter of fiscal 2006 general and administrative expenses increased to 10.6% from 8.3% or $2.2 million in the same quarter of the prior fiscal year. The majority of the absolute dollar increase is due to a onetime legal recovery made in the second quarter of fiscal 2005, of $785,000. The remainder of the increase is due to the inclusion of share-based compensation expense of $487,000 and ongoing accretion charges,Hummingbird, in the amount of $376,000, related to facilities which were vacated.
Forapproximately $5.0 million. Absent the six months ended December 31, 2005, generalimpact of the Hummingbird acquisition, amortization expense was relatively flat, at approximately $2.4 million and administrative expenses increased 3.6% or $781,000 compared to the same period in the prior fiscal year. As a percentage of total revenues, general and administrative expenses remained constant at just under 11%$4.8 million for the three and six months ended December 31, 2005. The absolute dollar increase is due to increased legal costs, the inclusion of share-based compensation expense and on-going facilities-based accretion charges.
2006.
Depreciation expensesSpecial charges (recoveries)
Fiscal 2007 Restructuring
ForDuring the three months ended December 31, 2005, depreciation expenses increased slightly by $242,000 or 9.3% compared to the same period in the prior fiscal year. For the six months ended December 31, 2005, depreciation expenses increased by $352,000 or 7.1% compared to the same period in the prior fiscal year. These increases are a direct result of the depreciation of capital assets acquired during the second quarter of fiscal 2006, and the commencement of the depreciation on the Waterloo building.
Amortization of acquired intangible assets
Amortization of acquired intangible assets includes the amortization of acquired technology and customer assets.
For the three months ended December 31, 2005, amortization of acquired intangible assets increased $811,000 or 13.2% compared to the same period in the prior fiscal year. For the six months ended December 31, 2005, amortization of acquired intangible assets increased $2.2 million or 19.3% compared to the same period in the prior fiscal year. These increases are due to the impact of our fiscal 2005 acquisitions, in particular the acquisition of Vista.
Special Charges
In the six months ended December 31, 2005, we recorded special charges of $26.9 million. This is primarily comprised of $23.5 million relating to the fiscal 2006 restructuring, $3.7 million related to the impairment of capital assets and a recovery of $329,000 related to the fiscal 2004 restructuring charge. Details of each component of special charges are discussed below.
Restructuring charges
Fiscal 2006 Restructuring
During the three months ended September 30, 2005, our Board approved, and we commenced implementing, restructuring activities to streamline our operations and consolidate our excess facilities.facilities (“Fiscal 2007 restructuring plan”) in the aftermath of the Hummingbird acquisition . Total costs to be incurred in conjunction with the plan are expected to be in the range of $25$18.0 million to $30$20.0 million, of which $16.4 million was recorded within special charges in the three months ended September 30, 2005 and $7.1$5.1 million has been recorded within specialSpecial charges in the threesix months ended December 31, 2005. These charges2006. The charge consisted primarily of costs associated with workforce reduction and is expected to be paid by December 31, 2008, however on a quarterly basis, we will conduct an evaluation of these balances and revise our assumptions and estimates, as appropriate.
A reconciliation of the beginning and ending liability is shown below:
Work force reduction | Facility costs | Other | Total | ||||||||||||
Fiscal 2007 Restructuring Plan | |||||||||||||||
Balance as of June 30, 2006 | $ | — | $ | — | $ | — | $ | — | |||||||
Accruals | 4,911 | — | 191 | 5,102 | |||||||||||
Cash payments | (1,531 | ) | — | (191 | ) | (1,722 | ) | ||||||||
Foreign exchange and other adjustments | 9 | — | — | 9 | |||||||||||
Balance as of December 31, 2006 | $ | 3,389 | $ | — | $ | — | $ | 3,389 | |||||||
The following table outlines restructuring charges incurred under the Fiscal 2007 restructuring plan, by segment, for the six months ended December 31, 2006.
Work force reduction | Facility costs | Other | Total | |||||||||
Fiscal 2007 Restructuring Plan—by Segment | ||||||||||||
North America . | $ | 1,897 | $ | — | $ | 101 | $ | 1,998 | ||||
Europe | 3,014 | — | 80 | 3,094 | ||||||||
Other | — | — | 10 | 10 | ||||||||
Total charge by segment for the six months ended December 31, 2006 | $ | 4,911 | $ | — | $ | 191 | $ | 5,102 | ||||
Fiscal 2006 Restructuring
In the first quarter of Fiscal 2006, our Board approved, and we began to implement restructuring activities to streamline our operations and consolidate our excess facilities (“Fiscal 2006 restructuring plan”). These charges relate to work force reductions, abandonment of excess facilities and legalother miscellaneous direct costs. Total costs to be incurred relatedin conjunction with the Fiscal 2006 restructuring plan are expected to be approximately
$22.0 million. In the terminationthree and six months ended December 31, 2006, we recorded recoveries from special charges of facilities.$259,000 and $727,000, respectively. The provision related to workforce reduction is expected to be substantially paid by June 30, 2006March 31, 2007, and the provisions relating to the abandonment of excess facilities, such as contract settlements and lease costs, are expected to be paid by January 2014.
A reconciliation of the beginning and ending liability is shown below:below.
Fiscal 2006 Restructuring Plan | Work force reduction | Facility costs | Other | Total | ||||||||||||
Balance as of June 30, 2005 | $ | — | $ | — | $ | — | $ | — | ||||||||
Accruals | 16,976 | 6,113 | 425 | 23,514 | ||||||||||||
Cash payments | (6,820 | ) | (870 | ) | (425 | ) | (8,115 | ) | ||||||||
Foreign exchange and other adjustments | 156 | 25 | — | 181 | ||||||||||||
Balance as of December 31, 2005 | $ | 10,312 | $ | 5,268 | $ | — | $ | 15,580 | ||||||||
Work force reduction | Facility costs | Other | Total | |||||||||||||
Fiscal 2006 Restructuring Plan | ||||||||||||||||
Balance as of June 30, 2006 | $ | 2,685 | $ | 4,135 | $ | 9 | $ | 6,829 | ||||||||
Accruals (recoveries) | (618 | ) | (184 | ) | 75 | (727 | ) | |||||||||
Cash payments | (1,649 | ) | (1,455 | ) | (84 | ) | (3,188 | ) | ||||||||
Foreign exchange and other adjustments | (14 | ) | 120 | — | 106 | |||||||||||
Balance as of December 31, 2006 | $ | 404 | $ | 2,616 | $ | — | $ | 3,020 | ||||||||
The following table outlines restructuring charges incurred and recovered under the fiscalFiscal 2006 restructuring plan, by segment, for the six monthsperiod ended December 31, 2005.2006.
Fiscal 2006 Restructuring Plan – by Segment | Work force reduction | Facility costs | Other | Total | ||||||||
North America | $ | 9,006 | $ | 2,849 | $ | 149 | $ | 12,004 | ||||
Europe | 7,317 | 3,075 | 270 | 10,662 | ||||||||
Other | 653 | 189 | 6 | 848 | ||||||||
Total charge for the six months ended December 31, 2005 | $ | 16,976 | $ | 6,113 | $ | 425 | $ | 23,514 | ||||
Work force reduction | Facility costs | Other | Total | |||||||||||||
Fiscal 2006 Restructuring Plan—by Segment | ||||||||||||||||
North America | $ | (189 | ) | $ | (337 | ) | $ | 19 | $ | (507 | ) | |||||
Europe | (421 | ) | 153 | 61 | (207 | ) | ||||||||||
Other | (8 | ) | — | (5 | ) | (13 | ) | |||||||||
Total charge (recovery) by segment for the six months ended | $ | (618 | ) | $ | (184 | ) | $ | 75 | $ | (727 | ) | |||||
Fiscal 2004 Restructuring
In the three months ended March 31, 2004, we recorded a restructuring charge of approximately $10 million relating primarily to our North America segment. The charge consisted primarily of costs associated with a workforce reduction, excess facilities associated with the integration of theour IXOS acquisition, write downs of capital assets and legal costs related to the termination of facilities. On a quarterly basis we conduct an evaluationAll actions relating to employer workforce reductions were completed, and the related costs expended as of these balances and revise our assumptions and estimates, if and as appropriate. As partMarch 31, 2006. The provision for facility costs is expected to be substantially paid by 2011. The activity of this evaluation, we recorded recoveries to thisthe provision for the 2004 restructuring charge is as follows for the six months ended December 31, 2006:
Facility costs | ||||
Fiscal 2004 Restructuring Plan | ||||
Balance as of June 30, 2006 | $ | 1,170 | ||
Cash payments | (266 | ) | ||
Foreign exchange and other adjustments | 15 | |||
Balance as of December 31, 2006 | $ | 919 | ||
Income taxes
We recorded a provision for income taxes of $303,000 during$173,000 for the three months ended September 30, 2005 and $26,000 duringDecember 31, 2006 compared to $2.7 million for the three months ended December 31, 2005. These recoveries primarily represented reductionsThis decrease in estimated employee termination costs and recoveries in estimates relating to accrualsthe provision for abandoned facilities. The actions relating to employer workforce reduction were substantially complete as of June 30, 2005. A reconciliation of the beginning and ending liability is shown below:
Fiscal 2004 Restructuring Plan | Work force reduction | Facility costs | Other | Total | |||||||||||
Balance as of June 30, 2005 | $ | 167 | $ | 1,878 | $ | — | $ | 2,045 | |||||||
Revisions to prior accruals | (65 | ) | (264 | ) | — | (329 | ) | ||||||||
Cash payments | — | (372 | ) | — | (372 | ) | |||||||||
Foreign exchange and other adjustments | — | 105 | — | 105 | |||||||||||
Balance as of December 31, 2005 | $ | 102 | $ | 1,347 | $ | — | $ | 1,449 | |||||||
�� |
Impairment of capital assets
During the three months ended September 30, 2005, an impairment charge of $2.0 million was recorded against capital assets that were written down to fair value, various leasehold improvements at vacated premises and redundant office equipment. During the three months ended December 31, 2005, an impairment charge of $1.7 million was recorded against capital assets to write down to fair value, various leasehold improvements at vacated premises and redundant office equipment. Fair value was determined based on our estimates of disposal proceeds, net of anticipated costs to sell.
Income taxes
We operate in various tax jurisdictions, and accordingly, our income is subject to varying rates of tax. Losses incurred in one jurisdiction cannot be used to offset income taxes payableis related to higher income being earned in another.jurisdictions with a lower statutory rate.
Our deferred tax assets totaling $238.0 million are based upon available income tax losses and future income tax deductions. Our ability to use these income tax losses and future income tax deductions is dependent upon the profitability of our operationsus generating income in
the tax jurisdictions in which such losses or deductions arise. As of December 31, 2005 and June 30, 2005, we had total netarose. The recognized deferred tax assetsliability of $49.3$147.5 million and $46.8is primarily made up of three components. The first component relates to $128.6 million and total deferred tax liabilitiesarising from the amortization of $35.3 million and $39.4 million, respectively.
The principal component of the total net deferred taxtiming differences relating to acquired intangible assets are temporary differences associated with net operating loss carry forwards. The deferred tax assets as of December 31, 2005 arise primarily from available income tax losses and future income tax deductions.inclusions. The second component of $3.0 million relates primarily to deferred credits arising from non capital losses and un-deducted scientific research and development experimental expenditures acquired at a discount on asset acquisitions, which will be included in income as they are utilized. The third component of $15.9 million relates to other timing differences. We providerecord a valuation allowance if sufficient uncertainty exists regardingagainst deferred income tax assets when we believe it is more likely than not that some portion or all of the realization of certain deferred income tax assets.assets will not be realized. Based on the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax assetsasset and tax planning strategies, we have determined that a valuation allowance of $140.6$166.5 million and $127.6is required in respect of our deferred income tax assets as at December 31, 2006. (A valuation allowance of $127.5 million was required for the deferred income tax assets as at June 30, 2006). This valuation allowance is primarily attributable to valuation allowances set up based on losses incurred in the year in certain foreign jurisdictions. In order to fully utilize the recognized deferred income tax assets of $71.5 million, we will need to generate aggregate future taxable income in applicable jurisdictions of approximately $204.3 million. Based on our 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 we will realize the benefit of the recognized deferred income tax assets as of December 31, 2005 and June 30, 2005, respectively. The majority of the valuation allowance relates to uncertainties regarding the utilization of foreign pre-acquisition losses of Gauss and IXOS. We continue to evaluate our taxable position quarterly and consider factors by taxing jurisdiction such as estimated taxable income, the history of losses for tax purposes and our growth, among others. The principal component of the total deferred tax liabilities arises from acquired intangible assets purchased on the Gauss and IXOS transactions.
During the three months ended December 31, 2005, we recorded a tax expense of $2.7 million compared to a tax expense of $4.4 million during the three months ended December 31, 2004. This decrease in tax expense corresponds to the decrease in income between the periods.
2006.
Liquidity and Capital Resources
Cash and Cash Equivalents
As of December 31, 2005 we held $87.0 million in cash and cash equivalents, an increase of $7.1 million from June 30, 2005. The increase in cash was attributable to positive operating cash flows for the six months ended December 31, 2005 of $17.3 million and cash provided by financing activities of $14.8 million, offset by cash used in investing activities of $23.5 million and the impact of foreign exchange rates on non-U.S dollar currencies of $1.5 million.
The following table summarizes the changes in our cash and cash equivalents and cash flows over the periods indicated:
Three months ended December 31, | Six months ended December 31, | ||||||||||||||||||||||
(in thousands) | 2005 | 2004 | Change $ | 2005 | 2004 | Change $ | |||||||||||||||||
Net cash provided by (used in) | |||||||||||||||||||||||
Operating activities | $ | 16,348 | $ | 11,710 | $ | 4,638 | $ | 16,672 | $ | 16,826 | $ | (154 | ) | ||||||||||
Investing activities | $ | (10,182 | ) | $ | (11,389 | ) | $ | 1,207 | $ | (23,538 | ) | $ | (50,040 | ) | $ | 26,502 | |||||||
Financing activities | $ | 15,214 | $ | (15,107 | ) | $ | 30,321 | $ | 15,457 | $ | (27,285 | ) | $ | 42,742 |
Three months ended December 31, | Six months ended December 31, | |||||||||||||||||||||||
(in thousands) | 2006 | 2005 | $ Change | 2006 | 2005 | $ Change | ||||||||||||||||||
Net cash provided by (used in) | ||||||||||||||||||||||||
Operating activities | $ | 31,428 | $ | 16,394 | $ | 15,034 | $ | 41,065 | $ | 16,672 | $ | 24,393 | ||||||||||||
Investing activities | $ | (405,009 | ) | $ | (10,182 | ) | $ | (394,827 | ) | $ | (411,404 | ) | $ | (23,538 | ) | $ | (387,866 | ) | ||||||
Financing activities | $ | 384,036 | $ | 15,168 | $ | 368,868 | $ | 384,599 | $ | 15,457 | $ | 369,142 |
Net Cash Provided by Operating Activities
NetThe increase in operating cash provided by operating activitiesflow during the three months ended December 31, 2006, compared to the same period in the prior fiscal year, was $16.3primarily due to an increase in the impact of non-cash charges of $12.4 million and $16.7changes in operating assets and liabilities of $3.1 million offset by a reduction in net income for the three andperiod.
The increase in operating cash flow during the six months ended December 31, 2005 respectively, compared to $11.7 million and $16.8 million in the corresponding periods in the prior fiscal year. These increases are2006 was primarily due to stronger accounts receivable collections, andan increase in net income of $19.7 million, the impact of non-cash charges of $12.9 million offset by changes in accounts payableoperating assets and accrued liabilities partially offset by reduced net income.
of $8.2 million.
Net Cash Used in Investing Activities
NetThe increase in net cash used in investing activities was $10.2 million and $23.5 million for the three and six months ended December 31, 2005 respectively compared to $11.4 million and $50.0 million in the corresponding periods in the prior fiscal year.
Net cash used in investing activities forduring the three months ended December 31, 2005, related primarily2006 compared to $8.1 million of purchases of capital assets and $2.1 million relating to acquisitions and acquisition related activities and costs. During the correspondingsame period in the prior fiscal year, was primarily due to $384.7 million in cash, that we spent $4.3paid for the Hummingbird acquisition and an increase in acquisition related costs of $16.9 million onoffset by reduction in capital expenditures of approximately $7.0 million.
assets and $7.1 million relating to acquisitions and acquisition related activities and costs. The increased spending on capital assetsincrease in the three months ended December 31, 2005 reflects the impact of the construction of the Waterloo building. The decreased spending on acquisition costs in the current quarter relates to lower levels of purchases of Gauss and IXOS shares and lower usage of acquisition related accruals.
Netnet cash used in investing activities forduring the six months ended December 31, 2005, related primarily2006 compared to $14.1 million relating to purchases of capital assets and $9.4 million relating to acquisitions and acquisition related activities and costs. During the correspondingsame period in the prior fiscal year, was primarily due to $384.7 million in cash, that we spent $7.7 million on capital assetspaid for the Hummingbird acquisition and $42.3 million relating to acquisitions andan increase in acquisition related activities and costs. The decreased spending on acquisition costs of $18.4 million, offset by a reduction in the current period is primarily a resultcapital expenditures of no acquisitions having been done in the six months ended December 31, 2005 compared to two acquisitions having been completed in the corresponding period in the prior fiscal year, fewer purchases of IXOS and Gauss sharesapproximately $10.2 million and lower usagecash outlays on prior period acquisitions of acquisition related accruals.
$5.9 million.
Net Cash Provided by (Used in) Financing Activities
NetThe increase in net cash provided by financing activities was $15.2 million and $15.5 million in the three and six months ended December 31, 2005 compared to net cash used in financing activities of $15.1 million and $27.3 million in the three and six months ended December 31, 2004. The significant increase of cash provided by financing activities in the three months ended December 31, 2005 was primarily due to the fact that we secured a mortgage on our Waterloo property and we did not re-purchase any of our Common Shares in fiscal 2006.
Financing of $15.0 million CDN was provided by way of a mortgage provided by a Canadian chartered bank secured by a lien on the newly constructed building in Waterloo. The mortgage has a fixed term of five years, maturing on January 1, 2011. Interest is to be paid monthly at a fixed rate of 5.25% per annum. Principal and interest are payable in monthly installments of CDN $101,000 with a final lump sum principal payment of CDN $12.6 million due on maturity. The mortgage may not be prepaid in whole or in part at anytime prior to the maturity date.
As of December 31, 2005, the carrying value of the building was $15.9 million and that of the mortgage was $12.9 million.
As of December 31, 2005, we had a CDN $10.0 million demand line of credit with a Canadian chartered bank under which no borrowings were outstanding at December 31, 2005 and 2004. On February 2, 2006 we replaced this line of credit with a new demand operating facility of CDN $40.0 million. Borrowings under this facility bear interest at varying rates depending upon the nature of the borrowing. We have pledged certain assets as collateral for this demand operating facility. There are no stand-by fees for this facility.
We financed our operations and capital expenditures during the three and six months ended December 31, 20052006 compared to the same period in the prior fiscal year was due primarily to the increased bank financing in the amount of $377.0 million offset by debt issuance costs in the amount of $7.4 million and term loan repayments of $1.0 million.
Term loan and Revolver
On October 2, 2006, we entered into a $465.0 million credit agreement with cash flowsa Canadian chartered bank consisting of a $390.0 million term loan facility and a $75.0 million committed revolving long-term credit facility (the “revolver”). The term loan was used to partially finance the Hummingbird acquisition and the revolver will be used for general business purposes. The credit agreement is guaranteed by us and certain of our subsidiaries.
Term loan
The term loan has a seven year term and expires on October 2, 2013 and bears interest at a floating rate of LIBOR plus 2.50%. The term loan principal repayments are equal to 0.25% ($975,000) of the original principal amount, due each quarter with the remainder due at the end of the term.
In October 2006, we also entered into an interest-rate collar agreement that has the economic effect of circumscribing the interest rate obligations associated with $195.0 million of the term loan within an upper limit of 5.34% and a lower limit of 4.79%.
Revolver
The revolver has a five year term and expires on October 2, 2011. Borrowings under this facility bear interest at rates specified in the credit agreement. The revolver replaced a CAD $40.0 million line of credit that we previously had with the same bank. There were no borrowings outstanding under the revolver as of December 31, 2006.
The credit agreement covering the term loan, the revolver and the term loan agreement relating to a mortgage on our Waterloo building also contain covenants that require us to maintain certain financial ratios. As of December 31, 2006 we were in compliance with all such covenants.
We believe funds generated from operations. We anticipate that ourthe expected results of operations, and available cash and cash equivalents and available credit facilities will be sufficient to fundfinance our anticipated cash requirementsstrategic initiatives for the next fiscal year. In addition, our revolving credit facility is available for additional working capital contractual commitments and capital expenditures forneeds or investment opportunities. There can be no assurance, however, that we will continue to generate cash flows, at least the next 12 months.or above, current levels or that we will be able to maintain our ability to borrow under our revolving credit facility.
Commitments and contingenciesContractual Obligations
We have entered into the following contractual obligations with minimum annual payments for the indicated fiscal periods as follows:
Payments due by period | Payments due by period | |||||||||||||||||||||||||||||
Total | Less than 1 year | 1–3 years | 3–5 years | More than 5 years | Total | 2007 | 2008 to 2009 | 2010 to 2011 | 2012 and beyond | |||||||||||||||||||||
Long-term debt obligations | $ | 16,029 | $ | 434 | $ | 2,081 | $ | 2,081 | $ | 11,433 | $ | 604,712 | $ | 17,741 | $ | 70,498 | $ | 79,692 | $ | 436,781 | ||||||||||
Operating lease obligations * | 99,857 | 8,565 | 36,584 | 32,316 | 22,392 | 106,835 | 13,312 | 46,166 | 33,327 | 14,030 | ||||||||||||||||||||
Purchase obligations | 2,863 | 948 | 1,590 | 299 | 26 | 6,615 | 2,064 | 3,714 | 837 | — | ||||||||||||||||||||
$ | 118,749 | $ | 9,947 | $ | 40,255 | $ | 34,696 | $ | 33,851 | $ | 718,162 | $ | 33,117 | $ | 120,378 | $ | 113,856 | $ | 450,811 | |||||||||||
* | Net of $6.7 million of non-cancelable sublease income to be received from properties which we have subleased to other parties. |
We recorded rental expense of $3.8 million and $6.1 million during the three and six months ended December 31, 2006, respectively.
* NetRental expense of $7.5$3.6 million of non-cancelable sublease income to be received by Open Text from properties which we have sub-leased to other parties.and $7.3 million was recorded during the three and six months ended December 31, 2005, respectively.
The long-term debt obligations compriseare comprised of interest and principal payments on the mortgage. See Note 4 “Long-term Debt”.
In July 2004, we entered intonew $390.0 million term loan agreement and a commitment to construct a building5 year mortgage on the Company’s headquarters in Waterloo, Ontario with a view of consolidating our existing Waterloo facilities. The construction of the building was completed in October 2005 and we have since commenced the use of the building. As of December 31, 2005, a total of $16.0 million has been capitalized on this project. We do not expect to make any significant additional payments in connection with this facility. We have financed this investment through our working capital.
Domination agreements
Ontario.
IXOS domination agreementsagreement
On December 1, 2004, we announced that—through our wholly-owned subsidiary, 2016091 Ontario, Inc. (“Ontario I”)—it had entered into a domination and profit transfer agreement (the “Domination Agreement”) with IXOS. The Domination Agreement has been registered in the commercial register at the local court of Munich in August 2005 and it has therefore come into force. Under the terms of the Domination Agreement, Ontario I has acquired authority to issue directives to the management of IXOS. Also in the Domination Agreement, Ontario I offers to purchase the remaining Common Shares of IXOS for a cash purchase price of Euro 9.38 per share (“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 also guaranteesWe have guaranteed a payment by IXOS to the minority shareholders of IXOS of an annual compensation of Euro 0.42 per share (“Annual Compensation”).
The shareholders of IXOS at the meeting on January 14, 2005 confirmed that IXOS had entered into the Domination Agreement. At the same meeting of the shareholders of IXOS, the shareholders authorized the management board of IXOS to apply for the withdrawal of the listing of the IXOS shares at the Frankfurt/Germany stock exchange (“Delisting”). The Delisting was granted by the Frankfurt Stock Exchange on April 12, 2005 and was effective on July 12, 2005.
Certain IXOS shareholders had filed complaints against the approval of the Domination Agreement and also against the authorization to delist. As a result of an out of court settlement, the complaints have been withdrawn and or settled. The out of court settlement was ratified by the court on August 9, 2005. The Domination Agreementdomination agreement was registered on August 23, 2005, and thereby became effective. As a result of the Domination Agreement coming into force, we commenced, in2005. In the quarter ended September 30, 2005, we commenced accruing the amount payable to minority shareholders of IXOS on account of Annual Compensation. This amount is accrued as and has been accounted for as a “guaranteed dividend”, payable to the minority shareholders, and is recorded as a charge to minority interest in the periods. unaudited condensed consolidated statements of income.
Based on the number of minority IXOS shareholders as of December 31, 20052006, the estimated amount of Annual Compensation would approximate $523,000 per year.was approximately $123,000 for the three months ended December 31, 2006 and $253,000 for the six months ended December 31, 2006. Because we are unable to predict, with reasonable accuracy, the number of IXOS minority shareholders that will be on record in future periods, we are unable to predict the amount of Annual Compensation that will be payable in future years.
Gauss domination agreements
Pursuant to a Domination Agreement dated November 4, 2003 between Open Text -through our wholly owned subsidiary 2016090 Ontario Inc. (“Ontario II”)—andOn October 27, 2006, the “Squeeze Out” agreement with the Gauss Ontario II has offered to purchaseminority shareholders was registered in the remaining outstanding sharesCommercial Register in the Local Court of Gauss at a price of Euro 1.06 per Gauss share. The original acceptance period was two months after the signing of the Domination Agreement. As a result of certainHamburg. Certain shareholders havinghave filed for a special court procedure in the German courts to reassess the amountvalue of the Annual Compensation that must be payablepurchase price and annual compensation. The procedure is still pending and we are not able to minority shareholders as a result ofdetermine the Domination Agreement, the acceptance period has been extended pursuant to German law until the end of such proceedings. In addition, in April 2004 Gauss announced that effective July 1, 2004 the shares of Gauss would 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 Euro 1.06 per Gauss share, commenced. This acceptance period has also been extended pursuant to
German law until the end of proceedings to reassess the amount of the consideration offered under German law in the delisting process. The shareholders’ resolution on the Domination Agreement and on the delisting was subject to a court procedure in which certain shareholders of Gauss claimed that the resolutionlikely date by which the shareholders of Gauss approved of the entering into the Domination Agreement and the authorization to the management board of Gauss to file for a delisting are null and void. While the Court of First Instance rendered a judgment in favor of the plaintiffs, 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 withdrawn. The settlement provides inter alia that an amount of Euro 0.05 per share per annumsuch procedure will be payable as compensation to the other shareholders of Gauss under certain circumstances, but only after registration of the Squeeze Out as defined hereafter.completed.
On August 25, 2005, at the shareholders meeting of Gauss, upon a motion of Ontario II, it was decided to transfer the shares of the minority shareholders, which at the time of the shareholders meeting held less than 5% of the shares of Gauss, to Ontario II (“Squeeze Out”). The resolutions will become effective when registered in the commercial register at the local court of Hamburg. Registration of these resolutions is currently pending. Certain shareholders of Gauss have filed suits to oppose all or some of the resolutions of the shareholders meeting of August 25, 2005. It is expected that the court of Hamburg will, within the next few months, decide on the registration of the resolutions.
We believe that the registration of these resolutions is a reasonable certainty; accordingly, in pursuance of these resolutions the Company has recorded its best estimate of the amount payable to the minority shareholders of Gauss. As of December 31, 2005,2006 we have accrued $60,000 for such paymentsacquired 100% of all issued and expect that a further amountoutstanding common shares of approximately $15,000 will be payableGauss. For more details on this transaction, see Note 18 “Acquisitions” to these shareholders by the end of the current fiscal quarter. We are not currently able to determine the final amount payable and we are unable to predict the date on which the resolutions will be registered at the local court.our Interim Financial Statements.
Guarantees and indemnifications
We have entered into license agreements with customers that include limited intellectual property indemnification clauses. We generally agree to indemnify our customers against legal claims that our software products infringe certain third party intellectual property rights. In the event of such a claim, we are generally obligated to defend our customers against the claim and either to settle the claim at our expense or pay damages that our 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. We have not made any significant indemnification payments in relation to these indemnification clauses.
In connection with certain facility leases, we have guaranteed payments on behalf of our subsidiaries. This has been done through unsecured bank guarantees obtained from local banks. Additionally, our current end-user license agreement contains a limited software warranty.
We have not recorded a liability for guarantees, indemnities or warranties described above in the accompanying consolidated balance sheet since the maximum amount of potential future payments under such guarantees, indemnities and warranties is not determinable, other than as described above.
Litigation
We are subject from time to time 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, our management does not believe that the outcome of any of these legal matters will have a material adverse effect on our consolidated financial position, results of operations orand cash flows.
Off-Balance Sheet Arrangements
We do not enter into off-balance sheet financing as a matter of practice except for the use of operating leases for office space, computer equipment, and vehicles. In accordance with 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 thresholdscriteria for capitalization.
Recently Issued Accounting Standards
In September 2006, the United States Securities Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements”,(“SAB 108”).SAB 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB 108 is effective for our fiscal year 2007 annual financial statements. We are currently assessing the potential impact that the adoption of SAB 108 will have on our financial statements.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for us beginning July 1, 2008. We are currently assessing the potential impact that the adoption of SFAS 157 will have on our financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48 on Accounting for Uncertain Tax Positions—an interpretation of FASB Statement No. 109, “Accounting for Income Taxes” (“FIN 48”). Under FIN 48, an entity should presume that a taxing authority will examine a tax position when evaluating the position for recognition and measurement; therefore, assessment of the probability of the risk of examination is not appropriate. In applying the provisions of FIN 48, there will be distinct recognition and measurement evaluations. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, based solely on the technical merits, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the appropriate amount of the benefit to recognize. The amount of benefit to recognize will be measured as the maximum amount which is more likely than not, to be realized. The tax position should be derecognized when it is no longer more likely than not of being sustained. On subsequent recognition and measurement the maximum amount which is more likely than not to be recognized at each reporting date will represent management’s best estimate, given the information available at the reporting date, even though the outcome of the tax position is not absolute or final. Subsequent recognition, derecognition, and measurement should be based on new information. A liability for interest or penalties or both will be recognized as deemed to be incurred based on the provisions of the tax law, that is, the period for which the taxing authority will begin assessing the interest or penalties or both. The amount of interest expense recognized will be based on the difference between the amount recognized in the financial statements and the benefit recognized in the tax return. On transition, the change in net assets due to applying the provisions of the final interpretation will be considered as a change in accounting principle with the cumulative effect of the change treated as an offsetting adjustment to the opening balance of retained earnings in the period of transition. FIN 48 will be effective as of the beginning of the first annual period beginning after December 15, 2006 and will be adopted by us for the year ended June 30, 2008. We are currently assessing the impact of FIN 48 on our financial statements.
Critical Accounting Policies and Estimates
For a discussion of the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our financial statements, please refer to our most recently filed Annual Report on Form 10-K, for the fiscal year 2006.
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
We are primarily exposed to market risks associated with fluctuations in interest rates and foreign currency exchange rates.
Interest rate risk
Our exposure to interest rate fluctuations relates primarily to our investment portfolio andterm loan, as we had no borrowings outstanding under our mortgage. We primarily invest our cash in short-term high-quality securities with reputable financial institutions.line of credit at December 31, 2006. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. We do not use derivative financial instruments in our investment portfolio. The interest income from our investments is subject toterm loan bears a floating interest rate fluctuations, which we believe would not have a material impact on our financial position.
All highly liquid investments with a maturity of less than three months at the dateLIBOR plus 2.5%. As of purchase are considered to be cash equivalents. We do not have investments with maturities of three months or greater. Some of the investments that we have 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 pointDecember 31, 2006, an adverse change in LIBOR of 100 basis points (1.0%) would have the effect of increasing our annual interest ratespayment on the term loan by approximately $3.9 million assuming the loan balance as of December 31, 2006 is outstanding for the quarter ended December 31, 2005 would have beenentire period.
In October 2006, we entered into an interest rate collar to partially hedge the fluctuation in LIBOR. The collar has a decreasenotional value of approximately $75,000.
$195.0 million and has a cap rate of 5.34% and floor rate of 4.79%. This has the effect of circumscribing our maximum floating interest rate risk on 50% of the term loan within the range of 5.34% to 4.79%.
Foreign currency risk
We transact business in various foreign currencies. International revenues accounted for approximately 62% and 61% of total revenues in the three and six months ended December 31, 2006, compared to approximately 59% and 59% of total revenues, respectively, in the same periods for our prior fiscal year.
BusinessesOur international operations expose us to foreign currency fluctuations. Revenues and related expenses generated from our international subsidiaries are generally conduct transactions in their local currency which is also known as their functional currency. Additionally, balances that are denominated in a currency other than the entity’s reporting currency must be adjusted to reflect changes in foreignfunctional currencies of the local countries. Our primary currencies include Euros, Canadian Dollars and British Pounds. The unaudited condensed consolidated statements of income of our international operations are translated into United States Dollars at the average exchange rates duringin each applicable period. To the reporting period.
As we operate internationally, a substantial portion of our business is also conducted in currencies other thanextent the U.S. dollar. Accordingly, our 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 inUnited States dollars strengthens against foreign currencies, are translated at exchange rates during the monthtranslation of these foreign currency denominated transactions results in which the transaction occurs. We cannot predict the effect of foreign exchange rate fluctuations in the future; however, if significant foreign exchange losses are experienced, they could have a material adverse effect on our results of operations. Moreover, in any given quarter, exchange rates can impact revenue adversely.
We have net monetary asset and liability balances in foreign currencies other than the U.S. Dollar, including primarily the Canadian Dollar (“CDN”), the Pound Sterling (“GBP”), the Japanese Yen (“JPY”), the Swiss Franc (“CHF”), the Danish Kroner (“DKK”), and the Euro (“EUR”). Our cash and cash equivalents are primarily held in U.S. Dollars. We do not currently use financial instruments to hedge operating expenses in foreign currencies.
The following tables provide a sensitivity analysis on our exposure to changes in foreign exchange rates. For foreign currencies where we engage in material transactions, the following table quantifies the absolute impact that a 10% increase/decrease against the U.S. dollar would have had on our totalreduced revenues, operating expenses and net income for our international operations. Similarly, our revenues, operating expenses and net income will increase for our international operations, if the United States dollar weakens against foreign currencies. Using the average foreign currency exchange rates in the three months ended December 31, 2005. This analysis2005, our international revenues for the three months ended December 31, 2006 would have been lower than reported by approximately $8.8 million. Using the average foreign currency exchange rates in the six months ended December 31, 2005, our international revenues for the six months ended December 31, 2006 would have been lower than reported by approximately $11.5 million.
We are also exposed to foreign exchange rate fluctuations as we convert the financial statements of our foreign subsidiaries and our investments in equity interests into United States dollars in consolidation. If there is presented in both functional and transactional currency. Functional currency represents the currency of measurement for 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 changesa change in foreign currency exchange rates, for thosethe conversion of the foreign subsidiaries’ financial statements into United States dollars will lead to a translation gain or loss which is recorded as a component of accumulated other comprehensive income which is part of stockholders’ equity. In addition, we have certain assets and liabilities that are denominated in currencies not presented in these tables is not material.other than the relevant entity’s functional currency.
Euro British Pound Canadian Dollar Swiss Franc Euro British Pound Canadian Dollar Swiss Franc 10% Change in
Functional Currency
(in thousands) Total
Revenue Operating
Expenses Net
Income $ 3,358 $ 2,286 $ 1,072 920 626 294 653 1,642 990 696 368 328 10% Change in
Transactional Currency
(in thousands) Total
Revenue Operating
Expenses Net
Income $ 3,368 $ 2,751 $ 617 895 613 282 481 1,617 1,136 618 367 251
Evaluation of disclosure controlsDisclosure Controls and proceduresProcedures
As of December 31, 2005,the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of the Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15 (e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2005,the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that material information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal controlInternal Controls over financial reportingFinancial Reporting
Based on the evaluation completed by our management, in which our Chief Executive Officer and Chief Financial Officer participated, our management has concluded that there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 20052006 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting.
See Note 14 to Condensed Consolidated Financial Statements.
Item 1A. Risk Factors |
Risk Factors
Certain statements inIn addition to historical information, this Quarterly Report on Form 10-Q constitutecontains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and are made pursuant toSection 21E of the safe harbor provisionsSecurities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and Section 21E ofis subject to the Securities Exchange Act of 1934, as amended. Suchsafe harbors created by those sections. These forward-looking statements involve known and unknown risks as well as uncertainties, and other factors, including those set forthdiscussed in the following cautionary statements and elsewhere in this Quarterly Report on Form 10-Q, that may cause the10-Q. The actual results performance or achievements or developments in our industry tothat we achieve may differ materially from any forward-looking statements, which reflect management’s opinions only as of the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. Thedate hereof. You should carefully review the following factors, as well as all of the other information set forth herein, should be considered carefully inwhen evaluating us and our business. If any of the following risks were to occur, our business, financial condition and results of operations would likely suffer. In that event, the trading price of our Common Shares would likely decline. Such risks are further discussed from time to time in our filings filed from time to time with the SEC.
Our acquisition of Hummingbird may adversely affect our operations and finances in the short term
On October 2, 2006 we acquired all of the issued and outstanding common shares of Hummingbird. The Hummingbird shares were acquired for cash, which required us to borrow the necessary funds from a syndicate of leading financial institutions to help to pay for the Hummingbird acquisition. The interest costs associated with this credit facility will materially increase our operating expenses, which may materially and adversely affect our profitability as well as the price of our Common Shares. The Hummingbird acquisition represents a significant and unique opportunity for our business. However, the size of the acquisition and the inevitable integration challenges that will result from the acquisition may divert management’s attention from the normal daily operations of our existing businesses, products and services. We cannot ensure that we will be successful in retaining key Hummingbird employees. In addition, our operations may be disrupted if we fail to adequately retain and motivate all of the employees of the newly merged entity.
Our success depends on our relationships with strategic partners
We rely on close cooperation with partners for sales and product development as well as for the optimization of opportunities which arise in our competitive environment. If any of our partners should decide for any reason to terminate or scale back their cooperative efforts with us, our business, operating results, and financial condition may be adversely affected.
If we do not continue to develop new technologically advanced products, future revenues will be negatively affected
Our success depends upon our 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 productsthreats and evolving demands of the marketplace.marketplace demands. In addition, new software products and enhancements must remain compatible with standard platforms and file formats. We continue to enhance the capability of our Livelink software to enable users to form workgroups and collaborate on private intranets andas well as on the Internet. We increasinglyOften, we must integrate software licensed or acquired from third parties with our ownproprietary software to create or improve our products. These products are important to the success of our strategy, andstrategy. If we are unable to achieve a successful integration with third party software, we may not be successful in developing and marketing these and otherour new software products and enhancements. If we are 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, which we license or acquire from third parties our operating results will materially suffer. In addition, if suchthe integrated or new products or enhancements do not achieve market acceptance by the marketplace, our operating results will materially
suffer. In addition,Also, if new industry standards emerge that we do not anticipate or adapt to, our software products could be rendered obsolete and, as a result, our business, as well as our ability to compete in the marketplace, would be materially harmed.
If our products and services do not gain market acceptance, we may not be able to increase our revenues
We intend to pursue our strategy of growing the capabilities of our ECM software offerings through the in-houseour proprietary research and development of new product offerings. WeIn response to customer requests, we continue to enhance Livelink and many of our optional components toand we continue to set the standard for ECM capabilities, in response to customer requests.capabilities. The primary market for our software and services is rapidly evolving. As is typical inevolving which means that the caselevel 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.by the marketplace is not certain. If the markets for our products and services fail to develop, develop more slowly than expected or become saturated with competitors,subject to intense competition, our business will suffer. WeAs a result, we may be unable toto: (i) successfully market our current products and services, (ii) develop new software products, services and enhancements to current products and services, (iii) complete customer installations on a timely basis, or (iv) complete products and services currently under development. If our products and services are not accepted by our customers or enhancements do not achieve and sustain market acceptance,by other businesses in the marketplace, our business and operating results will be materially harmed.affected.
Current and future competitors could have a significant impact on our ability to generate future revenue and profits
The markets for our products are intensely competitive, and are subject to rapid technological change and are evolving rapidly.other pressures created by changes in our industry. We expect competition to increase and intensify in the future as the markets for our products continue to developpace of technological change and adaptation quickens and as additional companies enter into each of our markets. Numerous releases of competitive products that compete with us are continually occurringhave occurred in recent history and can be expected to continue in the near future. We may not be able to compete effectively with current competitors and future competitors.potential entrants into our marketplace. If competitorsother businesses were to engage in aggressive pricing policies with respect to competing products, or significant price competition was to otherwise develop,if the dynamics in our marketplace resulted in increasing bargaining power by the consumers of our products and services, we would likely be forcedneed to lower our prices. This could result in lower revenues or reduced margins, losseither of which may materially and adversely affect our business and operating results.
We are confronting two inexorable trends in our industry; the consolidation of our competitors and the commoditization of our products and services
The acquisition of Documentum Inc. by EMC Corporation in December 2003 and International Business Machines Corporation’s acquisition of FileNet Corporation in October 2006 have changed the marketplace for our goods and services. As a result of these acquisitions, two comparable competitors to our company have been replaced by larger and better capitalized companies. In addition, other large corporations with considerable financial resources either have products that compete with the products we offer, or have the ability to encroach on our competitive position within our marketplace. These large, well-capitalized companies have the financial resources to engage in competition with our products and services on the basis of marketing, services or support. They also have the ability to introduce items that compete with our maturing products and services. For example, Microsoft has launched SharePoint, a product which provides the same benefits that some of our ECM products provide at a lower cost to the customer. The threat posed by larger competitors and the goods and services that these companies can produce at a lower cost to our target customers may materially increase our expenses and reduce our revenues. Any material adverse effect on our revenue or losscost structure may materially reduce the price of market share for us.
our Common Shares.
Acquisitions, investments, joint ventures and other business initiatives may negatively affect our operating results
We continue to seek out opportunities to acquire or invest in businesses, products and technologies that expand, complement or are otherwise relatedrelate to our current business. We also consider from time to time,
opportunities to engage in joint ventures or other business collaborations with third parties to address particular market segments. These activities create risks such as the need to integrate and manage the businesses and products acquired with our own business and products, additional demands on our management, resources, systems, procedures and controls, disruption of our 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 the interests of 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 our company. Any such activity may not be successful in generating revenue, income or other returns to us, and the financial or other resources committed to such activities will not be available to us for other purposes. For example, the Hummingbird Connectivity family of products maintains a dominant position in its marketplace. As a result, future growth opportunities could be limited for this family of products. Our inability to address theselimited growth opportunities for this family of products, as well our inability to address other risks couldassociated with other acquisitions or investments in businesses, may negatively affect our operating results.
Businesses we acquire may have disclosure controls and procedures and internal controls over financial reporting that are weaker than or otherwise not in conformity with ours
We have a history of acquiring complementary businesses with varying levels of organizational size and complexity. Upon consummating an acquisition, we seek to implement our disclosure controls and procedures andas well as our 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 our disclosure controls and procedures andas well as the implementation of our internal controls over financial reporting at an acquired company may be a lengthy process. Typically, we conduct due diligence prior to consummating an acquisition, however, our integration efforts may periodically expose deficiencies in the disclosure controls and procedures andas well as in internal controls over financial reporting of an acquired company. We expect that the process involved in completing the integration of our own disclosure controls and procedures andas well as our own internal controls over financial reporting at an acquired business will sufficiently correct any identified deficiencies. However, if such deficiencies exist, we may not be in a position to comply with our periodic reporting requirements and, as a result, our business and financial condition may be materially harmed.
The length of our sales cycle can fluctuate significantly which could result in significant fluctuations in license revenue being recognized from quarter to quarter
Because theThe decision by a customer to purchase our products often involves relatively large-scalea comprehensive implementation process across our customer’s network or networks,networks. As a result, 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 our
software, our sales cycle tendsmay be longer compared to take considerable time to complete.companies in other industries. Over the past fiscal year, we have experienced a lengthening of our sales cycle as customers include more personnel in the decision-making processtheir decisions and focus on more enterprise-wide licensing deals. In an economic environment of reduced information technology spending, it canmay take several months, or even several quarters, for salesmarketing opportunities to translate into revenue.materialize. If a customer’s decision to license our software is delayed andor if the installation of our products in one or more customers takes longer than originally anticipated, the date on which we may recognize revenue from these licenses could be recognized would be delayed. Such delays could cause our revenues to be lower than expected in a particular period.
Our international operations expose us to business risks that could cause our operating results to suffer
We intend to continue to make efforts to increase our international operations and anticipate that international sales will continue to account for a significant portion of our revenue. We have increased our
presence in the European market, especially since our acquisition of IXOS.IXOS Software AG (“IXOS”). 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 usbe subject to a longer sales and collection cycle, as well as potential losses arising from currency fluctuations, andcycle. In addition, regulatory limitations regarding the repatriation of earnings.earnings may adversely affect cash drawls from foreign operations. Significant international sales may also expose us to greater risk from political and economic instability, unexpected changes in Canadian, United States or other governmental policies concerning import and export of goods and technology, regulatory requirements, 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 our effective tax rate. 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, our operating results will suffer. Moreover, in any given quarter, foreign exchange rates can impact revenue adversely.
Our expenses may not match anticipated revenues
We incur operating expenses based upon anticipated revenue trends. Since a high percentage of these expenses are relatively fixed, a delay in recognizing revenue from license transactions related to these expenses could cause significant variations in operating results from quarter to quarter and, as a result such a delay could result inmaterially reduce operating losses.income. If these expenses are not subsequently followed by revenues, our business, financial condition, or results of operations could be materially and adversely affected. In addition, in July 2005, we announced anour 2006 restructuring initiative to restructure our operations with the intention of streamlining our operations. Subsequently, in October 2006 we announced our commitment to a separate restructuring initiative in response to the Hummingbird acquisition. We will continue to evaluate our operations, and may propose future restructuring actions as a result of changes in the marketplace, including the exit from less profitable operations or the decision to terminate services no longer demandedwhich are not valued by our customers. Any failure to successfully execute these initiatives including any delay in effecting these initiatives,on a timely basis may have a material adverse impact on our results of operations.
Our products may contain defects that could harm our reputation, be costly to correct, delay revenues, and expose us to litigation
Our 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 and, ifto our customers. If these defects are discovered, we may not be able to successfully correct such errors in a timely manner, or at all.manner. In addition, despite the extensive tests we carry outconduct on all our products, we may not be able to fully simulate the environment in which our products will operate and, as a result, we may be unable to adequately detect the design defects or software errors inherent in our products and which onlymay become apparent whenonly after the products are installed in an end-user’s network. The occurrence of errors and failures in our products could result in lossthe delay or the denial of or delay in market acceptance of our products, and
products; alleviating such errors and failures in our products couldmay require us to make significant expenditure of capital and otherour resources. The harm to our reputation resulting from product errors and failures wouldmay be materially damaging. WeSince, we regularly provide a warranty with our products, and the financial impact of thesefulfilling warranty obligations may be significant in the future. Our agreements with our strategic partners and end-users typically contain provisions designed to limit our exposure to claims,claims. These agreements usually contain terms such as exclusionsthe exclusion of all implied warranties and limitations onthe limitation of the availability of consequential or incidental damages. However, such provisions may not effectively protect us against claims and relatedthe attendant liabilities and costs.costs associated with such claims. Although we maintain errors and omissions insurance coverage and comprehensive liability insurance coverage, such coverage may not be adequate andto cover all claims may not be covered.such claims. Accordingly, any such claim could negatively affect our financial condition.
Failure to protect our intellectual property could harm our ability to compete effectively
We are highly dependent on our ability to protect our proprietary technology. We rely on a combination of copyright, patent, trademark and trade secret laws, as well as non-disclosure agreements and other contractual provisions to establish and maintain our proprietary rights. Although we hold certain patents and have other patents pending, our general strategy is to not seek patent protection. Although we intend to protect our rights vigorously, there can be no assurance that these measures will, in all cases, be successful. Enforcement of our intellectual property rights may be difficult, particularly in some nations outside of North America in which we seek to market our products. While U.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 of the United States. Software piracy has been, and is expected to be, a persistent problem for the software industry. Certain of our license arrangements have required us to make a limited confidential disclosure of portions of the source code for our products, or to place such source code into an escrow for the protection of another party. Despite the precautions we have taken, unauthorized third parties, including our competitors, may be able to copy certain portions of our products or to reverse engineer or obtain and use information that we regard as proprietary. Also, our competitors could independently develop technologies that are perceived to be substantially equivalent or superior to our technologies. Our competitive position may be affected by our ability to protect our intellectual property.
Other companies may claim that we infringe their intellectual property, which could result in significantmaterially increase costs to defend and if we are not successful it could have a significant impact onmaterially harm our ability to generate future revenue and profits
Claims of infringement are becoming increasingly common as the software industry develops and as related legal protections, including patents, are applied to software products. Although we do not believe that our products infringe on the rights of third-parties, third-parties may assert infringement claims against us in the future. Although most of our technology is proprietary in nature, we do include certain third party software in our products. In these cases, this software is licensed from the entity holding our intellectual property rights. Although we believe that we have secured proper licenses for all third-party software that is integrated into our products, third parties may assert infringement claims against us in the future, and any such assertionsassertion may result in costly litigation or may require us to obtain a license for the intellectual property rights of third-parties. Such licenses may not be available, or they may not be available on reasonable terms, or at all.terms. In particular, as software patents become more prevalent, it is possible that certain parties will claim that our products violate their patents. Such claimsaddition, such litigation could be disruptive to our ability to generate revenue and may result in significantly increased costs as wea result of our defense against those claims or our attempt to license the patents or rework our products to ensure that they are not in violation of the claimant’s patents or dispute the claims.comply with judicial decisions. Any of the foregoing could have a significant impact on our 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 our business
We currently depend on certain third-party software. If such software the lack of availability of which could result inwas not available, we may experience delays or increased costs in the development of or delays in, licenses offor our products. For a limited number of product modules, we rely on certain software that we license from third-parties, including software that is integrated with internally developed software and which is used in our products to perform key functions. These third-party software licenses may not continue to be available to us on commercially reasonable terms, and the related software may not continue to be appropriately supported, maintained, or enhanced by the licensors. The loss by us of the license to use, or the inability ofby licensors to support, maintain, and enhance any of such software, could result in increased costs or in delays or reductions in product shipments until equivalent software is developed or licensed if at all, and integrated with internally developed software, andsoftware. Such increased costs or delays or reductions in product shipments could adversely affect our business.
A reduction in the number or sales efforts by distributors could materially impact our revenues
A significant portion of our revenue is derived from the license of our products through third parties. Our success will depend, in part, upon our ability to maintain access to existing channels of distribution and to gain
access to new channels if and when they develop. We may not be able to retain a sufficient number of our existing distributors or develop a sufficient number of future distributors. Distributors may also give higher priority to the sale of products other than ours (which could include products of competitors)competitors’ products) or may not devote sufficient resources to marketing our products. The performance of third party distributors is largely outside of our control and we are unable to predict the extent to which these distributors will be successful in marketing and licensing our products. A reduction in sales efforts, a decline in the number of distributors, or our distributors’ decision to discontinue the discontinuance of salessale of our products by our distributors could lead to reducedmaterially reduce revenue.
Our success depends on our relationships with strategic partners
We rely on close cooperation with partners for product development, optimization, and sales. If any of our partners should decide for any reason to terminate or scale back their cooperative efforts with us, our business, operating results, and financial condition may be adversely affected.
We must continue to manage our growth or our operating results could be adversely affected
Over the past several years, we have experienced growth in revenues, operating expenses, and product distribution channels. In addition, ourOur markets have continued to evolve at a rapid pace. Moreover, we have grown significantly through acquisitions in the past and continue to review acquisition opportunities as a means of increasing the size and scope of our business. Finally, we have 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 our resources to comply with the increased level of regulation on a timely basis. Our growth, coupled with the rapid evolution of our markets and the new heightenedmore stringent regulations, have placed, and are likely towill continue to place, significant strains on our administrative and operational resources and increased demands on our internal systems, procedures and controls. Our administrative infrastructure, systems, procedures and controls may not adequately support our operations or compliance with such regulations, andregulations. In addition, our management may not be able to achieve the rapid, effective execution of the product and business initiatives necessary to successfully penetrate the markets forimplement our productsoperational and servicescompetitive strategy and to successfully integrate any business acquisitions in the future to comply with all regulatory rules. If we are unable to manage growth effectively, or comply with such new regulations, our operating results will likely suffer and wesuffer. Our inability to manage growth or adapt to regulatory changes may not be in a position to complyalso adversely affect our compliance with our periodic reporting requirements or listing standards, which could result in our delisting from the NASDAQ stock market.
market or in our failure to comply with the rules or the regulations of the SEC.
Recently enacted and proposed changes in securities laws and related regulations could result in increased costs to us
Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of Sarbanes and recent rules enactedproposed and proposedenacted by the SEC and NASDAQ, have resulted inmaterially increased costs to usour expenses as we respond to the new requirements.these changes. In particular, complyingcompliance with the internal control over financial reporting requirements of Section 404 of Sarbanes is resultinghas resulted in increaseda higher level of internal costs and higher fees from our independent accounting firm and as well as from external consultants. The newThese rules could also could make it more difficult for usadversely affect our ability to obtain certain types of insurance at a reasonable cost, including director and officer liability insurance, andinsurance. As a result, we may be forced to accept reduced policy limits and coverage and/or incur substantially higher premiums and related costs to obtain the same or similar coverage. The impact of these eventsincreased difficulty to obtain affordable director and officer liability insurance could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, on committees of our Board of Directors, or as executive officers.
Our products rely on the stability of various infrastructure software that, if not stable, could negatively impact the effectiveness of our products, resulting in harm to our reputation and business
Our developments of Internet and Intranet applications depend and will depend on the stability, functionality and scalability of the infrastructure software of the underlying intranet, such as that of Sun Microsystems Inc., Hewlett Packard Company, Oracle Corp., Microsoft Inc. and others. If weaknesses in such infrastructure software exist, we may not be able to correct or compensate for such weaknesses. If we are unable to address weaknesses resulting from problems in the infrastructure software such that our products do not meet customer needs or expectations, our business and reputation may be significantly harmed.
Our quarterly revenues and operating results are likely to fluctuate which could materially impact the price of our Common Shares
We experience, and we are likely to continue to experience, significant fluctuations in quarterly revenues and operating results caused by many factors, including changes in the demand for our products, the introduction or enhancement of products by us and our competitors, market acceptance of enhancements or products, delays in the introduction of products or enhancements by us or our competitors, customer order deferrals in anticipation of upgrades and new products, lengthening sales cycles, changes in our pricing policies or those of our 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 us, the mix of international and North American revenues, foreign currency exchange rates, acquisitions and general economic conditions.
A cancellation or deferral of even a small number of licenses or delays in installations of our products could have a material adverse effect on our results of operations in any particular quarter. Because of the impact of the timing of product introductions and the rapid evolution of our business and the markets we serve, we cannot predict whether seasonal patterns experienced in the past will continue. For these reasons, reliance should not be placed upon period-to-period comparisons of our financial results to forecast future performance. It is likely that our quarterly revenue and operating results could always vary significantly and if such variances are significant, the market price of our Common Shares could materially decline.
Failure to protect our intellectual property could harm our ability to compete effectively
We are highly dependent on our ability to protect our proprietary technology. Our efforts to protect our intellectual property rights may not be successful. We rely on a combination of copyright, patent, trademark and trade secret laws, non-disclosure agreements and other contractual provisions to establish and maintain our proprietary rights. Although we hold certain patents and have other patents pending, we generally have not sought patent protection for our products. While U.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 our intellectual property rights may be difficult, particularly in some nations outside of the United States and Canada in which we seek to market our products. Despite the precautions we take, it may be possible for unauthorized third parties, including competitors, to copy certain portions of our products or to “reverse engineer” or to obtain and use information that we regard as proprietary.
If we are not able to attract and retain top employees, our ability to compete may be harmed
Our performance is substantially dependent on the performance of our executive officers and key employees. The loss of the services of any of our executive officers or other key employees could significantly harm our business. We do not maintain “key person” life insurance policies on any of our employees. Our success is also highly dependent on our continuing ability to identify, hire, train, retain and motivate highly qualified management, technical, sales and marketing personnel. Specifically,In particular, the recruitment of top research developers along withand experienced salespeople remains critical to our success. Competition for such personnelpeople is intense, and we may not be able to attract, integrate or retain highly qualified technical, andsales or managerial personnel in the future.
Our products rely on the stability of infrastructure software that, if not stable, could negatively impact the effectiveness of our products, resulting in harm to our reputation and business
Our developments of Internet and intranet applications depend and will depend on the stability, functionality and scalability of the infrastructure software of the underlying intranet, such as the infrastructure software produced by Sun Microsystems, Inc., Hewlett-Packard Company, Oracle Corporation, Microsoft Corporation and others. If weaknesses in such infrastructure software exist, we may not be able to correct or compensate for such weaknesses. If we are unable to address weaknesses resulting from problems in the infrastructure software such that our products do not meet customer needs or expectations, our reputation, and consequently, our business may be significantly harmed.
Our quarterly revenues and operating results are likely to fluctuate which could materially impact the price of our Common Shares
We experience, and we are likely to continue to experience, significant fluctuations in quarterly revenues and operating results caused by many factors, including:
changes in the demand for our products;
the introduction or enhancement of products by us and our competitors;
market acceptance of enhancements or products;
delays in the introduction of products or enhancements by us or our competitors;
customer order deferrals in anticipation of upgrades and new products;
changes in the lengths of sales cycles;
changes in our pricing policies or those of our competitors;
delays in product installation 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 us;
the mix of international and North American revenues;
foreign currency exchange rates;
Acquisitions; and
general economic conditions
A cancellation or deferral of even a small number of licenses or delays in the installation of our products could have a material adverse effect on our operations in any particular quarter. As a result of the timing of product introductions and the rapid evolution of our business as well as of the markets we serve, we cannot predict whether seasonal patterns experienced in the past will continue. For these reasons, you should not rely upon period-to-period comparisons of our financial results to forecast future performance. Our quarterly revenue and operating results may vary significantly and which could materially reduce the market price of our Common Shares.
The volatility of our stock price could lead to losses by shareholders
The market price of our Common Shares has been 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 us orthat are relevant to our competitors,industry, changes in financial estimates by securities analysts
or other events or factors. In addition, financial markets experience significant price and volume fluctuations that particularly affect the market prices of equity securities of many technology companies and thesecompanies. These fluctuations have often 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.quarter and thus may or may not be related to the underlying operating performance of such companies. Broad market fluctuations or any failure of our operating results in a particular quarter to meet market expectations may adversely affect the market price of our Common Shares, resulting in losses to shareholders. In the past, followingShares. Occasionally, periods of volatility in the market price of a company’s securities, may lead to the institution of securities class action litigation have often been instituted against such a company. Due to the volatility of our stock price, we could be the target of similarsuch securities litigation in the future. Such litigation could result in substantial costs to defend our interests and a diversion of management’s attention and resources, each of which would have a material adverse effect on our business and operating results.
We may have exposure to greater than anticipated tax liabilities
We are subject to income taxes and non-incomeas well as other taxes in a variety of jurisdictions and our tax structure is subject to review by both domestic and foreign taxation authorities. The determination of our worldwide
provision for income taxes and other tax liabilities requires significant judgment. Although we believe our estimates are reasonable, the ultimate tax outcome with respect to the taxes we owe may differ from the amounts recorded in our financial statements andwhich may materially affect our financial results in the period or periods for which such determination is made.
The CompanyWe held itsour annual and special meeting of shareholders on December 15, 2005.7, 2006. The following actions were voted upon at the meeting:
Name
P. Thomas Jenkins
Randy Fowlie
Peter J. Hoult
Brian J. Jackman
Carol Coghlan Gavin
Ken Olisa
Stephen J. Sadler
John Shackleton
Michael Slaunwhite1. The following individuals were elected to our Board of Directors, to hold office until the next annual meeting of shareholders, or until their successors are elected or appointed. The outcome of the vote was carried by a show of hands.
Name |
P. Thomas Jenkins |
John Shackleton |
Randy Fowlie |
Brian J. Jackman |
Ken Olisa |
Stephen J. Sadler |
Michael Slaunwhite |
Gail Hamilton |
3. The shareholders approved a resolution to authorize amendments to our 2004 Stock Option Plan. There were 25,224,633 Common Shares voted in favour of the motion and there were 9,593,419 Common Shares voted against the motion. A copy of the amended 2004 Stock Option Plan is attached to this document as an exhibit.
4. The shareholders approved a resolution to authorize amendments to our 1998 Stock Option Plan, Odesta Supplementary Stock Option Plan, 1995 Directors Stock Option Plan, Hummingbird Stock Option Plan, Centrinity Stock Option Plan, IXOS Stock Option Plan, Gauss Stock Option, 1995 Flexible Stock Incentive Plan, Vista Stock Option Plan and Artesia Stock Option Plan. There were 28,794,539 Common Shares voted in favour of the motion and there were 6,023,513 Common Shares voted against the motion. A copy of the amended 1998 Stock Option Plan is attached to this document as an exhibit.
5. The shareholders approved a resolution to authorize amendments to our 2004 Employee Stock Purchase Plan. There were 34,746,173 Common Shares voted in favour of the motion and there were 71,879 Common Shares voted against the motion.
On December 7, 2006, Gail Hamilton was elected to our Board of Directors. Ms. Hamilton most recently led a team of over 2,000 employees worldwide at Symantec Corporation (“Symantec”) and had “P&L “responsibility for the global services and support business. Previously Ms. Hamilton led all of Symantec’s consumer and enterprise product development, marketing and support. During her five years at Symantec, Ms. Hamilton helped steer the company through an aggressive acquisition strategy. In 2003, Information Security Magazine recognized Ms. Hamilton as one of the “20 Women Luminaries” shaping the security industry. Ms. Hamilton has over 20 years experience growing leading technology and services businesses in the enterprise market.
The following exhibits are filed with this Report.report:
Exhibit Number | Description of Exhibit | |
Open Text Corporation | ||
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 | |
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 | |
32.1 | Certification of the Chief Executive Officer pursuant to 18 | |
32.2 | Certification of the Chief Financial Officer pursuant to 18 |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
OPEN TEXT CORPORATION | ||||
Date: February | By: | / | ||
John Shackleton | ||||
President and Chief Executive Officer | ||||
/s/ PAUL MCFEETERS | ||||
Chief Financial Officer |
Index to Exhibits
Exhibit Number | Description of Exhibit | |
Open Text Corporation | ||
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 | |
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 | |
32.1 | Certification of the Chief Executive Officer pursuant to 18 | |
32.2 | Certification of the Chief Financial Officer pursuant to 18 |
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