Current assets: Cash and cash equivalents Accounts receivable trade, net of allowance for doubtful accounts of $3,699 as of September 30, 2008 and $3,974 as of June 30, 2008 (note 8) Income taxes recoverable (note 13) Prepaid expenses and other current assets Deferred tax assets (note 13) Total current assets Investments in marketable securities (note 3) Capital assets (note 4) Goodwill (note 5) Acquired intangible assets (note 6) Deferred tax assets (note 13) Other assets (note 7) Long-term income taxes recoverable (note 13) Current liabilities: Accounts payable and accrued liabilities (note 9) Current portion of long-term debt (note 10) Deferred revenues Income taxes payable (note 13) Deferred tax liabilities (note 13) Total current liabilities Long-term liabilities: Accrued liabilities (note 9) Long-term debt (note 10) Deferred revenues Long-term income taxes payable (note 13) Deferred tax liabilities (note 13) Total long-term liabilities Minority interest Shareholders’ equity: Share capital (note 11) 51,862,214 and 51,151,666 Common Shares issued and outstanding at September 30, 2008 and June 30, 2008, respectively; Authorized Common Shares: unlimited Additional paid-in capital Accumulated other comprehensive income Retained earnings Total shareholders’ equity Commitments and contingencies (note 16) Subsequent events (note 19) Revenues: License Customer support Service Total revenues Cost of revenues: License Customer support Service Amortization of acquired technology-based intangible assets Total cost of revenues Gross profit Operating expenses: Research and development Sales and marketing General and administrative Depreciation Amortization of acquired customer-based intangible assets Special charges (recoveries) (note 17) Total operating expenses Income from operations Other income (expense), net Interest income (expense), net Income before income taxes Provision for income taxes (note 13) Net income before minority interest Minority interest Net income for the period Net income per share—basic (note 12) Net income per share—diluted (note 12) Weighted average number of Common Shares outstanding—basic Weighted average number of Common Shares outstanding—diluted Retained earnings (deficit), beginning of period Net income Retained earnings, end of period Cash flows from operating activities: Net income for the period Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization In-process research and development Share-based compensation expense Employee long-term incentive plan Excess tax benefits from share-based compensation Undistributed earnings related to minority interest Amortization of debt issuance costs Unrealized (gain) loss on financial instruments Deferred taxes Changes in operating assets and liabilities: Accounts receivable Prepaid expenses and other current assets Income taxes Accounts payable and accrued liabilities Deferred revenue Other assets Net cash provided by operating activities Cash flows from investing activities: Acquisition of capital assets Purchase of a division of Spicer Corporation Purchase of eMotion LLC, net of cash acquired Additional purchase consideration for prior period acquisitions Purchase of an asset group constituting a business Investments in marketable securities Acquisition related costs Net cash used in investment activities Cash flow from financing activities: Excess tax benefits on share-based compensation expense Proceeds from issuance of Common Shares Repayment of long-term debt Debt issuance costs Net cash provided by (used in) financing activities Foreign exchange gain (loss) on cash held in foreign currencies Increase (decrease) in cash and cash equivalents during the period Cash and cash equivalents at beginning of the period Cash and cash equivalents at end of the period Supplementary cash flow disclosures (note 15) taxes, and (xv) valuation of inventory. Other comprehensive income (loss): Foreign currency translation adjustment Unrealized loss on investments in marketable securities Net income for the period Comprehensive income (loss) for the period AND ACCOUNTING POLICY UPDATES date and in the principal or most advantageous market for that asset or liability. The fair value, in this context, should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including our own credit risk. ($ in millions) Assets: Marketable Securities Total financial assets Liabilities: Derivative financial instrument Total financial liabilities using Level 2 valuation methodology, was nil. measurements were required. Furniture and fixtures Office equipment Computer hardware Computer software Leasehold improvements Land and buildings * Furniture and fixtures Office equipment Computer hardware Computer software Leasehold improvements Land and buildings * Balance, June 30, 2007 Purchase of an asset group constituting a business (note 18) Adjustments relating to prior acquisitions Adjustments relating to the adoption of FIN 48 Adjustments on account of foreign exchange Balance, June 30, 2008 Acquisition of a division of Spicer Corporation (note 18) Acquisition of eMotion LLC (note 18) Amount allocated to intangible customer assets (note 6) Adjustments relating to prior acquisitions Adjustments on account of foreign exchange Balance, September 30, 2008 Net book value, June 30, 2007 Activity during Fiscal 2008: Acquisition of Momentum (note 18) Amortization expense Foreign exchange and other impacts Net book value, June 30, 2008 Activity during Fiscal 2009: Acquisition of a division of Spicer Corporation (note 18) Purchase of an asset group constituting a business (note 18) Amortization expense Foreign exchange and other impacts Net book value, September 30, 2008 2009 2010 2011 2012 2013 Total Debt issuance costs Deposits Long-term prepaid expenses Pension assets Miscellaneous other amounts Balance of allowance for doubtful accounts (AfDA) as of June 30, 2007 Bad debt expense for the year Write-off /adjustments Balance of allowance for doubtful accounts as of June 30, 2008 Bad debt expense for the period Write-off /adjustments Balance of allowance for doubtful accounts as of September 30, 2008 Included in accounts receivable are unbilled receivables in the amount of Accounts payable—trade Accrued salaries and commissions Accrued liabilities Amounts payable in respect of restructuring (note 17) Amounts payable in respect of acquisitions and acquisition related accruals Long-term accrued liabilities Pension liabilities Amounts payable in respect of restructuring (note 17) Amounts payable in respect of acquisitions and acquisition related accruals Other accrued liabilities Asset retirement obligations be paid by February 2015. Division of Spicer Corporation (See note 18) Employee termination costs Excess facilities Transaction-related costs Hummingbird Employee termination costs Excess facilities Transaction-related costs IXOS Employee termination costs Excess facilities Transaction-related costs Eloquent Employee termination costs Excess facilities Transaction-related costs Centrinity Employee termination costs Excess facilities Transaction-related costs Artesia Employee termination costs Excess facilities Transaction-related costs Totals Employee termination costs Excess facilities Transaction-related costs Long-term debt Term loan Mortgage Less: Current portion of long-term debt Term loan Mortgage Long-term portion of long-term debt outstanding under the revolver as of . 1.0 year from December 31, 2008. the aggregate was nil. Outstanding at June 30, 2008 Granted Exercised Forfeited or expired Outstanding at September 30, 2008 Exercisable at September 30, 2008 recognized. $1.1 million and $2.5 million, respectively. $655,000 and $1.7 million, respectively. During the three months ended Basic earnings per share Net income Basic earnings per share Diluted earnings per share Net income Diluted earnings per share Weighted average number of shares outstanding Basic Effect of dilutive securities Diluted Excluded as anti-dilutive * outcomes or settlements. Revenues: Canada United States United Kingdom Germany Rest of Europe All other countries Total revenues Long-lived assets: Canada United States United Kingdom Germany Rest of Europe All other countries Total Supplemental disclosure of cash flow information: Cash paid during the period for interest Cash received during the period for interest Cash paid during the year for income taxes Long-term debt obligations Operating lease obligations * Purchase obligations 12. Fiscal 2006 Restructuring Plan Balance as of June 30, 2008 Accruals (recoveries) Cash payments Foreign exchange and other adjustments Balance as of September 30, 2008 Fiscal 2004 Restructuring Plan Balance as of June 30, 2008 Accruals (recoveries) Cash payments Foreign exchange and other adjustments Balance as of September 30, 2008 Current assets (net of cash acquired of $608) Long-term assets Goodwill Total assets acquired Liabilities assumed Net assets acquired seven years, respectively. Current assets (net of cash acquired of nil) Long-term assets Customer assets Technology assets Goodwill Total assets acquired Liabilities assumed Net assets acquired Current assets (net of cash acquired of $619) Long-term assets Customer assets Goodwill Total assets acquired Liabilities assumed Net assets acquired Current assets (net of cash acquired of $88,287) Long-term assets Customer assets Technology assets Goodwill Total assets acquired Liabilities assumed Net assets acquired In November 2008, we hosted our annual global conference event “Open Text Content World” in Orlando, Florida. The event featured “content experts” from across the industry, and was our largest conference ever, with over 1,600 attendees. Total consideration for this acquisition was acquired. Total consideration for this acquisition was million. (in thousands) Total revenues Total cost of revenues Gross profit Operating expenses Income from operations Other expense, net, interest expense net, income taxes and minority interest Net income Gross margin Special charges) follows: (In thousands) License Customer support Services Total (% of total revenue) License Customer support Services Total (In thousands) North America Europe Other Total % of total revenue North America Europe Other Total contributed to the remainder of the growth. (In thousands) License Customer Support Service Amortization of acquired technology intangible assets Total Gross Margin License Customer Support Service six months ended December 31, 2008. the higher margins related to hardware sales. (In thousands) Research and development Sales and marketing General and administrative Depreciation Amortization of acquired customer intangible assets Special charges (recoveries) Total (in % of total revenue) Research and development Sales and marketing General and administrative Depreciation Amortization of acquired customer intangible assets Special charges (recoveries) Amortization of acquired customer-based intangible Net interest expense decreased by investible cash and declining interest rates. s sale, for $4.5 million. The collar expires on December 31, 2009. million which was cancelled in December, 2008. detailed discussion see Note 11. Long-term debt obligations Operating lease obligations * Purchase obligations 12. hands. x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 September 30,December 31, 2008.¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 CANADA 98-0154400 CANADA98-0154400October 31, 2008January 26, 2009, there were 51,865,26851,900,406 outstanding Common Shares of the registrant.Page No PART I Financial Information: Page NoPART I Financial Information: Item 1.Financial Statements 3 4 5 6 7 32 43 44 Item 1A. 45Item 5. 46Item 6.4748 September 30,
2008 June 30,
2008 (unaudited) ASSETS $ 250,133 $ 254,916 108,301 134,396 10,207 16,763 12,810 10,544 14,042 13,455 395,493 430,074 3,349 — 43,352 43,582 544,701 564,648 267,915 281,824 50,379 59,881 9,982 10,491 42,159 44,176 $ 1,357,330 $ 1,434,676 LIABILITIES AND SHAREHOLDERS’ EQUITY $ 77,983 $ 99,035 3,476 3,486 158,614 176,967 5,208 13,499 3,696 4,876 248,977 297,863 17,880 20,513 302,989 304,301 2,597 2,573 53,070 54,681 100,153 109,912 476,689 491,980 8,707 8,672 444,130 438,471 47,320 39,330 69,305 110,819 62,202 47,541 622,957 636,161 $ 1,357,330 $ 1,434,676 December 31, June 30, 2008 2008 ASSETS (unaudited) Current assets: Cash and cash equivalents $ 172,870 $ 254,916 126,757 134,396 Inventory (note 4) 2,227 - Income taxes recoverable (note 15) 6,655 16,763 Prepaid expenses and other current assets 12,029 10,544 Deferred tax assets (note 15) 16,604 13,455 Total current assets 337,142 430,074 Investments in marketable securities (note 3) 2,789 - Capital assets (note 5) 40,163 43,582 Goodwill (note 6) 577,244 564,648 Acquired intangible assets (note 7) 383,325 281,824 Deferred tax assets (note 15) 62,305 59,881 Other assets (note 8) 9,656 10,491 Long-term income taxes recoverable (note 15) 40,776 44,176 Total assets $ 1,453,400 $ 1,434,676 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued liabilities (note 10) $ 123,715 $ 99,035 Current portion of long-term debt (note 12) 3,412 3,486 Deferred revenues 169,858 176,967 Income taxes payable (note 15) 140 13,499 Deferred tax liabilities (note 15) 3,366 4,876 Total current liabilities 300,491 297,863 Long-term liabilities: Accrued liabilities (note 10) 21,718 20,513 Pension liability (note 11) 16,243 - Long-term debt (note 12) 300,307 304,301 Deferred revenues 6,957 2,573 Long-term income taxes payable (note 15) 51,240 54,681 Deferred tax liabilities (note 15) 144,701 109,912 Total long-term liabilities 541,166 491,980 Minority interest (note 20) - 8,672 Shareholders’ equity: Share capital (note 13) 51,887,209 and 51,151,666 Common Shares issued and outstanding at December 31, 2008 and June 30, 2008, respectively; Authorized Common Shares: unlimited 444,512 438,471 Additional paid-in capital 48,441 39,330 Accumulated other comprehensive income 55,827 110,819 Retained earnings 62,963 47,541 Total shareholders’ equity 611,743 636,161 Total liabilities and shareholders’ equity $ 1,453,400 $ 1,434,676 Commitments and contingencies (note 18) share and per share data) Three months ended
September 30, 2008 2007 $ 50,074 $ 44,260 98,429 86,304 34,120 33,403 182,623 163,967 2,893 3,554 15,567 12,598 27,729 27,504 10,747 10,152 56,936 53,808 125,687 110,159 28,578 23,983 44,832 37,859 18,387 17,010 2,698 2,984 8,215 7,415 — (61 ) 102,710 89,190 22,977 20,969 729 (1,827 ) (2,994 ) (7,872 ) 20,712 11,270 5,932 3,343 14,780 7,927 119 127 $ 14,661 $ 7,800 $ 0.29 $ 0.16 $ 0.28 $ 0.15 51,298 50,285 52,990 51,618 2008 2007 2008 2007 Revenues: License $ 64,852 $ 55,158 $ 114,926 $ 99,418 Customer support 100,438 90,614 198,867 176,918 Service and other 42,361 36,762 76,481 70,165 Total revenues 207,651 182,534 390,274 346,501 Cost of revenues: License 5,281 4,649 8,174 8,203 Customer support 17,356 14,191 32,923 26,789 Service and other 31,881 30,192 59,610 57,696 Amortization of acquired technology-based intangible assets 11,799 10,308 22,546 20,460 Total cost of revenues 66,317 59,340 123,253 113,148 Gross profit 141,334 123,194 267,021 233,353 Operating expenses: Research and development 29,948 26,147 58,526 50,130 Sales and marketing 49,347 42,300 94,179 80,159 General and administrative 18,280 16,955 36,667 33,965 Depreciation 2,920 3,752 5,618 6,736 Amortization of acquired customer-based intangible assets 10,138 7,514 18,353 14,929 Special charges (recoveries) (note 19) 11,446 (47 ) 11,446 (108 ) Total operating expenses 122,079 96,621 224,789 185,811 Income from operations 19,255 26,573 42,232 47,542 Other income (expense), net (12,532) (3,683 ) (11,803) (5,510 ) Interest income (expense), net (5,347 ) (7,567 ) (8,341 ) (15,439 ) Income before income taxes 1,376 15,323 22,088 26,593 Provision for income taxes (note 15) 683 4,511 6,615 7,854 Net income before minority interest 693 10,812 15,473 18,739 Minority interest (note 18) (68) 127 51 254 Net income for the period $ 761 $ 10,685 $ 15,422 $ 18,485 Net income per share—basic (note 14) $ 0.01 $ 0.21 $ 0.30 $ 0.37 Net income per share—diluted (note 14) $ 0.01 $ 0.20 $ 0.29 $ 0.35 Weighted average number of Common Shares outstanding—basic 51,873 50,736 51,586 50,511 53,242 52,689 52,955 52,224 Three months ended
September 30, 2008 2007 $ 47,541 $ (5,465 ) 14,661 7,800 $ 62,202 $ 2,335 2008 2007 2008 2007 Retained earnings (deficit), beginning of period $ 62,202 $ 2,335 $ 47,541 $ (5,465 ) Net income 761 10,685 15,422 18,485 Retained earnings, end of period $ 62,963 $ 13,020 $ 62,963 $ 13,020 Three months ended
September 30, 2008 2007 $ 14,661 $ 7,800 21,660 20,551 — 500 1,423 1,063 1,059 185 (6,629 ) (397 ) 119 127 224 290 (722 ) 1,407 (256 ) (705 ) 27,946 10,502 (1,926 ) (499 ) 4,731 484 (18,369 ) (5,495 ) (19,430 ) (3,773 ) 322 174 24,813 32,214 (3,887 ) (1,216 ) (10,836 ) — (3,635 ) — (35 ) (176 ) — (2,209 ) (3,608 ) — (3,258 ) (8,029 ) (25,259 ) (11,630 ) 6,629 397 5,542 5,719 (867 ) (30,933 ) — (349 ) 11,304 (25,166 ) (15,641 ) 4,909 (4,783 ) 327 254,916 149,979 $ 250,133 $ 150,306 2008 2007 Cash flows from operating activities: Net income for the period $ 15,422 $ 18,485 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 46,517 42,125 In-process research and development 121 500 Share-based compensation expense 2,533 1,718 Employee long-term incentive plan 2,805 757 Excess tax benefits from share-based compensation (6,653 ) (766 ) Undistributed earnings related to minority interest 51 254 Pension expense 906 — Amortization of debt issuance costs 550 711 Unrealized (gain) loss on financial instruments 807 2,851 Loss on sale and write down of capital assets 269 — Deferred taxes 3,915 (4,113 ) Changes in operating assets and liabilities: Accounts receivable 32,790 7,579 Inventory (609) — Prepaid expenses and other current assets (861 ) (197 ) Income taxes 6,469 8,554 Accounts payable and accrued liabilities (16,097 ) 1,472 Deferred revenue (25,613 ) (8,883 ) Other assets 1,334 510 Net cash provided by operating activities 64,656 71,557 Cash flows from investing activities: Additions of capital assets - net (2,094 ) (3,386 ) Purchase of a division of Spicer Corporation (10,836 ) — Purchase of eMotion LLC, net of cash acquired (3,635 ) — Purchase of Captaris Inc., net of cash acquired (101,499 ) — Additional purchase consideration for prior period acquisitions (4,612 ) (439 ) Purchase of an asset group constituting a business — (2,209 ) Investments in marketable securities (3,608 ) — Acquisition related costs (7,288 ) (11,842 ) Net cash used in investment activities (133,572 ) (17,876 ) Cash flows from financing activities: Excess tax benefits on share-based compensation expense 6,653 766 Proceeds from issuance of Common Shares 6,039 9,217 Repayment of long-term debt (1,721 ) (61,877 ) Debt issuance costs — (349 ) Net cash provided by (used in) financing activities 10,971 (52,243 ) Foreign exchange gain (loss) on cash held in foreign currencies (24,101 ) 8,292 Increase (decrease) in cash and cash equivalents during the period (82,046 ) 9,730 Cash and cash equivalents at beginning of the period 254,916 149,979 Cash and cash equivalents at end of the period $ 172,870 $ 159,709 Supplementary cash flow disclosures (note 17) September 30,December 31, 2008“Company”“Company��. All inter-company balances and transactions have been eliminated.presented.presented and includes the financial results of Captaris Inc. (Captaris), with effect from November 1, 2008 (see Note 20). The operating results for the three and six months ended September 30,December 31, 2008 are not necessarily indicative of the results expected for any succeeding quarter. Additionally,During the quarter ended December 31, 2008 we established and adopted certain additional critical accounting policies as a consequence of our acquisition of Captaris (see Note 2). Other than the establishment and adoption of these additional critical accounting policies there have been no significant changes in new accounting pronouncements or in our critical accounting policies from those that were disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008.(xiii)obligations, (xiv) accounting for income taxes.OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)wasis as follows: Three months ended
September 30, 2008 2007 $ (41,255 ) $ 20,869 (259 ) — 14,661 7,800 $ (26,853 ) $ 28,669 2008 2007 2008 2007 Other comprehensive income (loss): by approximately $251,000 with a corresponding decrease to Sales and marketing expenses by approximately $223,000 and $474,000, respectively, for the three and six months ended September 30,December 31, 2007, from previously reported amounts.AprilNovember 2008, the Financial Accounting Standards Board (FASB) ratified Emerging Issues Task Force (EITF) Issue No. 08-06, Equity Method Investment Accounting Considerations (EITF 08-06). EITF 08-06 is effective for us beginning July 1, 2009, with early adoption prohibited. We do not currently have any investments that are accounted for under the equity method and therefore the pending adoption of EITF 08-06 is not expected to have any impact on our consolidated financial statements., (SFAS 161), which enhances the disclosure requirements under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities(SFAS 133). SFAS 161 requires additional disclosures about the objectives of an entity’sentity's derivative instruments and hedging activities, the method of accounting for such instruments under SFAS 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on a company’s financial position, financial performance, and cash flows. SFAS 161 is effective for us beginning January 1,during the quarter ended March 31, 2009 and early adoption is encouraged. We are currently assessing the impact that the adoption ofdisclosures required by SFAS 161 will have on the disclosures withinbe included in our future consolidated financial statements.OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)141.141 Business Combinations (SFAS 141). The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS 141R is effective for us beginning July 1, 2009 and will apply prospectively to business combinations completed on or after that date.In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115 (SFAS 159). SFAS 159 permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in SFAS 159 are elective; however, the amendment to FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. SFAS 159 was effective for us beginning July 1, 2008. The adoption of SFAS 159 did not have a material impact on our consolidated financial statements.157(157 (FSP FAS 157-2),which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). On July 1, 2008, we adopted SFAS 157 except for those items that have been deferred under FSP FAS 157-2 and such adoption did not have a material impact on our consolidated financial statements (see Note 3). We are currently assessing the potential impact that the full adoption of SFAS 157 will have on our consolidated financial statements.OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)Level 1—inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.Level 2—inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.Level 3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.· Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. · Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. · Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. September 30,December 31, 2008: September 30,
2008 Fair Market Measurements using: Quoted prices in
active markets
for identical
assets
(Level 1) Significant
other
observable
inputs
(Level 2) Significant
unobservable
inputs
(Level 3) $ 3.3 $ 3.3 n/a n/a $ 3.3 $ 3.3 n/a n/a $ 2.1 n/a $ 2.1 n/a $ 2.1 n/a $ 2.1 n/a Fair Market Measurements using: Quoted prices in active markets for identical assets Significant other observable inputs Significant unobservable inputs OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For In addition, on December 30, 2008, we entered into certain foreign currency forward contracts the Three Months Ended September 30,fair value of which, on December 31, 2008,(Tabular amounts in thousands, except per share data) including our cost and equity method investments, at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the three and six months ended September 30,December 31, 2008, we did not record any other-than-temporary impairments on those assets required to be measured atno indications of impairment were identified and therefore no fair value on a nonrecurring basis. As of September 30, 2008 Cost Accumulated
Depreciation Net $ 10,693 $ 8,756 $ 1,937 9,442 8,251 1,191 77,092 69,542 7,550 25,787 20,092 5,695 14,148 10,612 3,536 24,964 1,521 23,443 $ 162,126 $ 118,774 $ 43,352 As of June 30, 2008 Cost Accumulated
Depreciation Net $ 10,490 $ 8,877 $ 1,613 10,251 8,948 1,303 80,499 72,654 7,845 28,015 21,819 6,196 15,160 11,295 3,865 24,261 1,501 22,760 $ 168,676 $ 125,094 $ 43,582 * Included in this balance isA building that was recorded as an asset“asset held for sale with a fair value of approximatelysale” was sold in December 2008 for Canadian dollars $5.9 million as$5.8 million. Inclusive of September 30, 2008 (June 30, 2008—selling costs a loss of Canadian dollars $5.9 million). This asset is being held for sale as a result of a decision we took to sell a building we acquired as part of our Hummingbird acquisition. We expect to sell$302,000 was recorded upon the building by way of a commercial sale and, at this point, we are unable to predict the timing of this disposal.sale.OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)5—6—GOODWILL $ 528,312 2,199 5,930 (6,480 ) 34,687 564,648 4,640 3,678 (2,081 ) (3,319 ) (22,865 ) $ 544,701 to the evaluation of the tax attributes of acquisition-related operating loss carry forwards and deductions, including reductions in previously recognized valuation allowances, originally assessed at the various dates of acquisition.6—7—ACQUIRED INTANGIBLE ASSETS Technology
Assets Customer
Assets Total $ 179,216 $ 164,108 $ 343,324 — 1,900 1,900 (41,515 ) (30,759 ) (72,274 ) 4,002 4,872 8,874 141,703 140,121 281,824 5,529 1,777 7,306 — 2,081 2,081 (10,747 ) (8,215 ) (18,962 ) (1,633 ) (2,701 ) (4,334 ) $ 134,852 $ 133,063 $ 267,915 Total Acquisition of Captaris Inc. (note 20) Acquisition of eMotion LLC (note 20) 4-103-10 years.OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)The amount of $2.1 million allocated to customer assets, in the table above, relates to the valuation of customer assets acquired through the purchase of an asset group constituting a business, which was consummated in September 2007 (see Note 18). The amount was included within goodwill for the year ended June 30, 2008 and was reclassified to customer assets in the finalization of the purchase price allocation.nine months ended June 30, 2009 and for each of the next four years, assumingfiscal periods indicated below. This calculation assumes no furtherfuture adjustments to acquired intangible assets: Fiscal years ending
June 30, $ 48,988 54,392 51,656 48,933 48,618 $ 252,587 s 7—8—OTHER ASSETS As of September 30,
2008 As of June 30,
2008 $ 5,608 $ 5,834 1,781 1,848 1,963 2,116 543 598 87 95 $ 9,982 $ 10,491 Deposits relate to security deposits provided to landlords in accordance with facility lease agreements. Pension assets relate to a pension asset recognized under SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—Plans – an Amendment of FASB Statements 87, 88, 106 and 132(R)” (SFAS 158) relating to a pension plan for legacy IXOS employees (see Note 9 for details relating to pension liabilities)11).8—9—ALLOWANCE FOR DOUBTFUL ACCOUNTS $ 2,089 2,855 (970 ) 3,974 925 (1,200 ) $ 3,699 OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)$4.5$4.7 million and $4.2 million as of September 30,December 31, 2008 and June 30, 2008, respectively.9—10—ACCOUNTS PAYABLE AND ACCRUED LIABILITIES As of September 30,
2008 As of June 30,
2008 $ 8,041 $ 3,728 23,291 34,292 38,354 49,014 407 1,150 7,890 10,851 $ 77,983 $ 99,035 As of September 30,
2008 As of June 30,
2008 $ 140 $ 154 256 299 7,674 10,256 3,662 2,697 6,148 7,107 $ 17,880 $ 20,513 Pension liabilitiesPension liabilities relate to a pension plan recognized under SFAS 158, relating to certain former members of the IXOS board of directors. See also Note 7 for details relating to pension assets recognized under SFAS 158. 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 our 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 fair value of our total plan assets as of September 30, 2008 is $3.3 million (June 30, 2008—$3.7 million). The fair value of our total pension obligation as of September 30, 2008 is $2.5 million, (June 30, 2008—$3.1 million). No. 143,No.143, “Accounting for Asset Retirement Obligations” (SFAS 143). At September 30,As of December 31, 2008 the present value of this obligation was $ 6.1$6.9 million, (June 30, 2008—$7.1 million), with an undiscounted value of $6.9$8.9 million, (June 30, 2008—$7.8 million). These leases were primarily assumed in connection with our IXOS and Hummingbird acquisitions.OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)Excess facility obligations and accrualsWeexcessthe subject acquisition and in the case of abandoned facilities, in connection with a number of our acquisitions, including our Fiscal 2007 Hummingbird acquisition. These accruals includehave been recorded at present value less our best estimate in respect offor future sub-lease income and costs incurred to achieve sub-tenancy. These liabilities have been recorded using present value discounting techniquesThe accrual for workforce reductions is extinguished against the payments made to the employees and in the case of excess facilities, will be discharged over the term of the respective leases. Any excess of the difference between the present value and actual cash paid for the excess facility will be charged to income and any deficits will be reversed to goodwill. The terms of the leases range from one yearprovisions for abandoned facilities are expected to three years.threesix months ended September 30,December 31, 2008. Balance
June 30,
2008 Initial
Accruals Usage/
Foreign
Exchange/
Other
Adjustments Subsequent
Adjustments
to Goodwill Balance
September 30,
2008 $ — $ — $ — $ — $ — — — — — — — 262 (61 ) — 201 — 262 (61 ) — 201 310 — (28 ) (13 ) 269 4,249 — (720 ) (795 ) 2,734 815 — (120 ) (695 ) — 5,374 — (868 ) (1,503 ) 3,003 — — — — — 15,255 — (3,335 ) — 11,920 — — (45 ) 45 — 15,255 — (3,380 ) 45 11,920 — — — — — — — — — — 243 — — — 243 243 — — — 243 — — — — — 211 — (37 ) — 174 — — — — — 211 — (37 ) — 174 — — — — — 24 — (1 ) — 23 — — — — — 24 — (1 ) — 23 310 — (28 ) (13 ) 269 19,739 — (4,093 ) (795 ) 14,851 1,058 262 (226 ) (650 ) 444 $ 21,107 $ 262 $ (4,347 ) $ (1,458 ) $ 15,564 OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data) $ — $ 9,276 $ (1,649 ) $ — $ 7,627 — 3,347 (149 ) — 3,198 — 797 (466 ) — 331 — 13,420 (2,264 ) — 11,156 — — — — — — — — — — — 262 (240 ) (22 ) — — 262 (240 ) (22 ) — 310 — (41 ) (13 ) 256 4,249 — (1,475 ) (795 ) 1,979 815 — (120 ) (695 ) — 5,374 — (1,636 ) (1,503 ) 2,235 — — — — — 15,255 — (4,901 ) — 10,354 — — (45 ) 45 — 15,255 — (4,946 ) 45 10,354 — — — — — — — — — — 243 — — — 243 243 — — — 243 — — — — — 211 — (77 ) — 134 — — — — — 211 — (77 ) — 134 — — — — — 24 — (6 ) — 18 — — — — — 24 — (6 ) — 18 310 9,276 (1,690 ) (13 ) 7,883 19,739 3,347 (6,608 ) (795 ) 15,683 1,058 1,059 (871 ) (672 ) 574 $ 21,107 $ 13,682 $ (9,169 ) $ (1,480 ) $ 24,140 10—11— PENSION PLANS AND OTHER POST RETIREMENT BENEFITS Total benefit obligation Current portion of benefit obligation* Non current portion of benefit obligation $
In determining the fair value of the CDT pension plan as of December 31, 2008, we used the following weighted average key assumptions:Assumptions: Assumptions : Former IXOS directors’ defined benefit pension plan Assumptions : Former IXOS employees’ defined benefit pension plan As of September 30,
2008 As of June 30,
2008 $ 293,257 $ 294,006 13,208 13,781 306,465 307,787 2,993 2,993 483 493 3,476 3,486 $ 302,989 $ 304,301 The credit agreement is guaranteed by us and certain of our subsidiaries.September 30,December 31, 2008 we have made total non-scheduled prepayments of $90.0 million oftowards the principal on the term loan. These non-scheduled prepayments have reduced our total outstanding term loan to $292.5 million and our quarterly scheduled principal payment to approximately $748,000.September 30,December 31, 2008, we recorded interest expense of $3.5$3.7 million and $7.2 million, respectively, (three and six months ended September 30,December 31, 2007-$7.1 million) on account of interest expense6.1 million and $13.2 million, respectively), relating to the term loan.OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)September 30,December 31, 2008. During Fiscal 2008, we obtained a demand guarantee, under the revolver, in the amount of Euro 11.1 million.million which was cancelled on December 22, 2008 (See Note 16 for details)18).September 30,December 31, 2008, we recorded interest expense of $57,000,$55,000 and $112,000 respectively, (three and six months ended September 30,December 31, 2007—$72,000)73,000 and $145,000, respectively), on account of stand-by fees relating to the revolver.iswas Canadian $15.0 million. The mortgage: (i) has a fixed term of five years, (ii) matures on January 1, 2011, and (iii) is secured by a lien on our headquarters in Waterloo, Ontario. Interest is to be paidaccrues monthly at a fixed rate of 5.25% per annum. Principal and interest are payable in monthly installments of Canadian $101,000 with a final lump sum principal payment of Canadian $12.6 million due on maturity.September 30,December 31, 2008, the carrying value of the building was $16.4$14.0 million. (June 30, 2008—$17.1 million)September 30,December 31, 2008, we recorded interest expense of $175,000,$144,000 and $320,000 (three and six months ended September 30,December 31, 2007—$177,000)188,000 and $365,000, respectively), on account of interest expense relating to the mortgage.September 30,December 31, 2008, in accordance with the contractual terms and conditions of the term loan agreement, the hedged portion of the loan was $150.0$100.0 million (June 30, 2008—$150.0 $150.0 million).which represents the cash we would receive or pay to settle the collar, was a payable of approximately $2.1$3.6 million as of September 30,December 31, 2008 (June 30, 2008—$2.8 million), and has been included within “Accounts payable and accrued liabilities”. The collar has a remaining term to maturity of 1.25 years.September 30,December 31, 2008, we recorded a recovery tonet interest expense of $722,000,$1.5 million and $807,000 respectively, (for the three and six months ended September 30, 2007—anDecember 31, 2007-an increase to interest expense of $1.4 million)million and $2.8 million, respectively), representing the change in the fair value of the collar during the quarter ended September 30,December 31, 2008. Additionally, we record payments or receipts on the collar as adjustments to interest expense. We recorded interest expense in the amount of $763,000 ,$394,000 and $1.2 million, respectively, on account of monies payable under the collar for the three and six months ended September 30,December 31, 2008 (three and six months ended September 30, 2007,December 31, 2007- a reduction to interest expense of $10,000)nil and $10,000, respectively).OPEN TEXT CORPORATIONUnaudited NotesCondensed Consolidated Financial Statements—(Continued)Forlimit the Three Months Ended September 30, 2008(Tabularexchange fluctuations on certain intercompany revenue streams that are expected to occur, on a monthly basis, over the next twelve months, in the amounts in thousands, exceptof $5.5 million per share data)We will continue to monitor changes in interest rates periodicallymonth, for a total amount of $66.0 million. These contracts have been designated as, and will assess whether hedge accounting could potentially be appliedaccounted for as, cash flow hedges of forecasted transactions. We do not use forward contracts for trading purposes. As of December 31, 2008 the fair value of these forward contracts individually and in future periods.11—13—SHARE CAPITAL, OPTION PLANS AND SHARE BASED PAYMENTSSeptember 30,December 31, 2008 and 2007.September 30,December 31, 2008, options to purchase an aggregate of 3,529,1783,743,948 Common Shares are outstanding under all of our stock option plans, and 604,3751,364,525 Common Shares are available for issuance under the 1998 Stock Option Plan and the 2004 Stock Option Plan.our stock option plans. Our stock options generally vest over four years and expire between seven and ten years from the date of the grant. The exercise price of the options we grant is set at an amount that is not less than the closing price of our Common Shares on the trading day for the NASDAQ immediately preceding the applicable grant date.threesix months September 30,December 31, 2008 is as follows: Options Weighted-
Average Exercise
Price Weighted-
Average
Remaining
Contractual Term
(years) Aggregate Intrinsic Value
($’000s) 3,763,665 $ 15.22 465,000 34.56 (697,264 ) 7.54 (2,223 ) 18.62 3,529,178 $ 19.29 4.55 $ 54,117 2,110,958 $ 15.65 3.85 $ 39,966 Options OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)September 30,December 31, 2008, the weighted-average fair value of options granted, as of the grant date, was $13.69,$10.13, using the following weighted average assumptions: expected volatility of 42%41%; risk-free interest rate of 3.8%1.28%; expected dividend yield of 0%; and expected life of 4.4 years. A forfeiture rate of 5%, based on historical rates, was used to determine the net amount of compensation expense recognized.September 30,December 31, 2007, there were no options granted by us. A forfeiture rate of 5%, based on historical rates, was used to determine the net amount of compensation expense recognized during this period. recognized for each of these periods.September 30,December 31, 2008, the total compensation cost related to the unvested stock awards not yet recognized was $12.0$12.5 million, which will be recognized over a weighted average period of approximately 3 years.September 30,December 31, 2007, the total compensation cost related to the unvested stock awards not yet recognized was $10.3$9.0 million, which will be recognized over a weighted average period of approximately 2 years.September 30,December 31, 2008 was approximately $1.4 million. Deferred tax assets of $250,000 were recorded for the three months ended September 30, 2008 in relation to the tax effect of certain stock options that are eligible for a tax deduction when exercised.September 30,December 31, 2007 was approximately $1.1 million. Deferred tax assets of $138,000 were recorded for the three months ended September 30, 2007 in relation to the tax effect of certain stock options that are eligible for a tax deduction when exercised.September 30,December 31, 2008, cash in the amount of $5.3$382,000 and $5.6 million, respectively, was received as the result of the exercise of options granted under share-based payment arrangements. The tax benefit realized by us during the three and six months ended September 30,December 31, 2008 from the exercise of options eligible for a tax deduction was $24,000 and $6.6 million, respectively, which was recorded as additional paid-in capital.September 30,December 31, 2007, cash in the amount of $5.5$3.4 million and $8.9 million, respectively, was received as the result of the exercise of options granted under share-based payment arrangements. The tax benefit realized by usthe Company, during the three and six months ended September 30,December 31, 2007 from the exercise of options eligible for a tax deduction was $397,000,$369,000 and $766,000, respectively, which was recorded as additional paid-in capital.OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)for ourin Fiscal 2008, starting on July 1, 2007. The LTIP is a rolling three year program whereby we will make a series of annual grants, each of which covers a three year performance period, to certain of our employees, upon the employee meeting pre-determined performance targets. Awards may be equal to either 100% or 150% of target, for each criterion independently, based on the employee’s accomplishments over the three year period. The maximum amount that an employee may receive with regard to any single performance criterion is 1.5 times the target award for that criterion. We will payexpect to settle the LTIP awards in cash.Absolute share price—if our Common Shares appreciate to a predetermined price per share and that price is maintained for a minimum of 22 consecutive NASDAQ trading days, the absolute share price target will have been achieved;Relative total shareholder return—if, over a three year period, our Common Shares appreciate at a rate which exceeds the rate of appreciation disclosed by the Standard & Poor’s Mid Cap 400—Software and Services Index by a prearranged percentage, the relative total shareholder return target will have been achieved; and· Average adjusted earnings per share—if the average of our adjusted earnings per share over the latter two years of a three year period reaches a preset amount, the average adjusted earnings per share target will have been met (adjusted earnings per share means adjusted net income divided by our total number of Common Shares outstanding on a diluted basis).· · Absolute share price = 37.5%;Relative total shareholder return = 37.5%; and· Absolute share price = 37.5%; Average adjusted earnings per share = 25.0%.· Relative total shareholder return = 37.5%; and · Average adjusted earnings per share = 25%. September 30,December 31, 2008 and charged the expense relating to such liability to compensation cost in the amount of $1.1 million$1.7million for the three months ended September 30,December 31, 2008 (three months ended September 30,December 31, 2007—$185,000)572,000) and $2.8 million for the six months ended December 31, 2008 (six months ended December 31, 2007—$757,000). The outstanding liability under the LTIP is re-measured based upon the change in the fair value of the liability. As of the end of every reporting period, a cumulative adjustment to compensation cost for the change in fair value is recognized. The cumulative compensation expense recognized upon completion of the LTIP will be equal to the payouts made.September 30,December 31, 2008, 13,284no Common Shares were issued under the ESPP. During the six months ended December 31, 2008, 13,316 Common Shares were issued under the ESPP for cash collected from employees totaling $404,000. In addition, cash in the amount of $287,000$115,000 and $402,000, respectively, was received from employees for the three and six months ended December 31, 2008 that will be used to purchase Common Shares in future periods.OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)September 30,December 31, 2007, no Common Shares were issued under the ESPP. During the six months ended December 31, 2007, 16,894 Common Shares were issued under the ESPP for cash collected from employees, totaling $350,000. In addition, cash in the amount of $181,000approximately $151,000 and $332,000, respectively, was received from employees for the three and six months ended December 31, 2007 that will be used to purchase Common Shares in future periods.12—14—NET INCOME PER SHARE Three months ended
September 30, 2008 2007 $ 14,661 $ 7,800 $ 0.29 $ 0.16 $ 14,661 $ 7,800 $ 0.28 $ 0.15 51,298 50,285 1,692 1,333 52,990 51,618 64 698 *Represents options to purchase Common Shares excluded from the calculation of diluted net income per share because the exercise price of the stock options was greater than or equal to the average price of the Common Shares during the period. Basic earnings per share 2008 2007 2008 2007 13—15—INCOME TAXESSeptember 30,December 31, 2008 was $44.1$45.8 million of which $11.8$12.9 million of unrecognized tax benefits would affect our effective tax rate, if realized, and the remaining $32.3$32.9 million would reduce goodwill recognized in connection with the Hummingbird acquisition. In addition, consistent with the provisions of FIN 48, certain reclassifications were made to the balance sheet upon adoption of FIN 48 at July 1, 2007, including an increase of $1.8 million to long-term deferred tax assets, an increase of $26.5 million to long-term current income tax recoverable, a decrease of $18.1 million to current income tax payable, an increase of $39.9 million to long-term income tax payable and a decrease of $6.5 million to goodwill. These unrecognized tax benefits relate primarily to the deductibility of inter companyintercompany charges as they relate to transfer pricing.OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)accrued interest related to liabilities for income tax expensetax-related receivables/payables under “Interest income (expense), net” and penalties related to liabilities for income tax expense under “Other income (expense)”, on our consolidated financial statements. The gross amount of tax –related interest and penalties accrued as of September 30,December 31, 2008 was $0.5 millionapproximately $300,000 and nil, respectively.September 30,December 31, 2008 could increase in the next 12 months by $1.8$1.9 million, relating primarily to tax years becoming statute barred for purposes of future tax examinations by local taxing jurisdictions.10ten years.there can be no assurances as towe cannot predict with any level of certainty the exact nature of the possible future outcomes.14—16—SEGMENT INFORMATIONNo. 131,No.131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS 131) establishes standards for reporting, by public business enterprises, information about operating segments, products and services, geographic areas, and major customers. The method of determining what information, under SFAS 131, to report is based on the way that we organize our operating segments for making operational decisions and how our management and chief operating decision maker (CODM) assessesassess our financial performance. Our operations are analyzed as being part of a single industry segment: the design, development, marketing and sales of enterprise content management software and solutions. Three months ended
September 30, 2008 2007 $ 14,115 $ 11,087 70,177 68,063 19,637 20,996 31,023 22,329 38,762 33,430 8,909 8,062 $ 182,623 $ 163,967 OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data) 2008 2007 2008 2007 long livedlong-lived assets, representing capital assets and intangible assets- net, by significant geographic area, as of the periods indicated below. As of September
30, 2008 As of June
30, 2008 $ 60,623 $ 53,970 133,276 140,525 31,264 33,080 32,443 41,143 48,517 50,823 5,144 5,865 $ 311,267 $ 325,406 Long-lived assets: 15—17—SUPPLEMENTAL CASH FLOW DISCLOSURES Three months ended
September 30, 2008 2007 $ 4,504 $ 7,327 $ 1,767 $ 1,171 $ 3,452 $ 499 During the three months ended September 30, 2008, we acquired capital assets in the amount of $1.4 million which were accrued for but not paid as of September 30, 2008, (September 30, 2007 – $757,000). Supplemental disclosure of cash flow information: 16—18—COMMITMENTS AND CONTINGENCIES Payments due by period ending June 30, Total 2009 2010 to 2011 2012 to 2013 2014 and beyond $ 408,618 $ 18,601 $ 60,766 $ 46,049 $ 283,202 80,518 18,522 38,206 9,186 14,604 4,576 1,946 2,246 384 — $ 493,712 $ 39,069 $ 101,218 $ 55,619 $ 297,806 Payments due by period ending June 30, Total 2009 2010 to 2011 2012 to 2013 2014 and beyond * Net of $5.6$4.7 million of non-cancelable sublease income to be received from properties which we have subleased to other parties.OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)$4.2$4.4 million and $8.6 million was recorded during the three and six months ended September 30, 2008. (ThreeDecember 31, 2008, respectively (three and six months ended September 30,December 31, 2007- $4.0 million)$4.2 million and $8.2 million, respectively).10.Domination agreementOn1, 2004,2008, we announced that we had entered into a domination and profit transfer agreement (the IXOS DA) with IXOS. The IXOS DA came into force in August 2005 when it was registered in the commercial register at the local court in Munich. Under the terms of the IXOS DA, Open Text acquired the authority to issue directives to the management of IXOS. Also within the terms of the IXOS DA, Open Text offered to purchase the remaining Common Shares ofminority interest in IXOS for approximately $12.4 million and successfully concluded the “Squeeze Out” (SO) process. As a cash purchase price of Euro 9.38 per share (“the Purchase Price”) which was the weighted average fair value of the IXOS Common Shares as of December 1, 2004. Additionally, Open Text hasresult, a guaranteed a payment by IXOS to the minority shareholders of IXOS of an annual compensation of Euro 0.42 per share (“the Annual Compensation”). The purchase price of 9.38 Euro has been disputed and is under review by a competent authority appointed by the German courts. At this time we cannot predict what the final purchase price will be or whether the annual compensation will be increased.The IXOS DA was registered on August 23, 2005. In the quarter ended September 30, 2005, we commenced accruingnot payable for Fiscal 2009. Annual Compensation in the amount payableof Euro 335,000 relating to minority shareholders of IXOS on account of Annual Compensation. This amount has been accounted for as a “guaranteed dividend”, payable to the minority shareholders, and is recorded as a charge to minority interest in the Consolidated Statements of Income. Based on the number of minority IXOS shareholders as of September 30,Fiscal 2008 the estimated amount of Annual Compensation for Fiscal 2009 is $478,000, of which $119,000 has been accrued for and is expected to be paid during the three months ended September 30, 2008.As of September 30, 2008 we continue to actively pursue the acquisition of the remainder of the IXOS minority interest through a “Squeeze Out” (SO) process. quarter ending March 31, 2009.onin December 11, 2007, a demand guarantee from a Canadian chartered bank in the amount of Euro 11.1 million for the purpose of guaranteeing the payment of the remaining IXOS purchase consideration. TheAs we now own 100% of IXOS, this guarantee is valid for a period of one year ending onwas cancelled in December 10, 2008 and is renewable for an additional period of one year. A meeting, in relation to the SO, was held in January, 2008. In early May 2008, the relevant court granted our request to “fast track” the registration of the SO; this decision has been appealed and it is not known, at this stage, when the appeal will be heard.Disputes such as these 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. We are unable to predict the future costs associated with these activities that will be payable in future periods.OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)business.business, and accrue for these items where appropriate. 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 and cash flows. Currently, we are not involved in any significant litigation that we reasonably believe could materially impact our financial position or results of operations and cash flows.17—19—SPECIAL CHARGES (RECOVERIES) Fiscal 2009 Restructuring Plan Workforce reduction Facility costs Total Balance as of June 30, 2008 $ - $ - $ - Accruals 9,973 11,307 Cash payments (1,544 ) (1,547 ) Foreign exchange and other adjustments 266 258 Balance as of December 31, 2008 $ 8,695 $ 1,323 $ 10,018 threesix months ended September 30,December 31, 2008 is shown below. Facility costs $ 906 — (182 ) (61 ) $ 663 OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)Fiscal 2004 Restructuring PlanIn the three months ended March 31, 2004, we recorded a restructuring Special charges also includes an impairment charge of $139,000 against certain capital assets that were written down in connection with various leasehold improvements and redundant office equipment at abandoned facilities.$10.0$467,000 of direct acquisition related costs. a charge associated withemployee termination charges, costs relating to abandonment of excess Captaris facilities and accruals for unpaid direct acquisition related costs. This was the result of our management approved and initiated plans to restructure the operations of Captaris by way of workforce reduction and abandonment of excess legacy facilities. The liability relating to abandonment of excess facilities associatedis expected to be paid over the terms of the various leases, the last of which expires in February 2015. The liabilities related to employee termination costs are expected to be paid on or before the one-year anniversary of the closing date of this acquisition. (See Note 10).integrationacquisition of Captaris. These fees are included in the purchase price allocation. The director abstained from voting on the transaction. IXOSresults of operations that would have been achieved if the acquisition write downshad taken place at the beginning of capital assets and legal costs relatedeach period presented.terminationallocation of facilities (Fiscal 2004 restructuring plan). All actions relatingvalues to employer workforce reductions were completed,acquired intangible assets (see Note 7). Total revenues $ 219,283 $ 210,619 $ 436,402 $ 397,851 related costs expended, as of March 31, 2006. As of June 30, 2008 payments relating to excess facilities related to our Fiscal 2004 restructuring plan were paid. A reconciliationacceleration of the beginning and ending liability for the three months ended September 30, 2008 is shown below: Facility costs $ 543 — (543 ) — $ — NOTE 18—ACQUISITIONSvesting of (Captaris) employee stock options. Fiscal 2009$190,000$198,000 in costs directly related to this acquisition. An amount of $500,000 has been held back, as provided for in the purchase agreement, to provide for any adjustments to the purchase price in the one year period following the closing date of the acquisition. This additional amount, if payable, shall be paid subject to any adjustments, on July 3, 2009 and will increase the cost of the acquisition.OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data) $ 648 238 3,678 4,564 (739 ) $ 3,825 portionuseful lives of the purchase price allocatedcustomer and technology assets have been estimated to goodwill has been assigned to our North America reporting unitbe five and is deductible for tax purposes.receivedearned approximately $35,000 in consulting fees for assistance with the acquisition of eMotion. These fees are included in the purchase price allocation. The director abstained from voting on the transaction.$11.6$11.7 million which consisted of $10.8 million in cash, approximately $262,000$239,000 in costs directly related to this acquisition and approximately $494,000 (Canadian dollars $500,000)$594,000 related to amounts held back under the purchase agreement. This amount held back is expected to beagreement, which have been paid within the next six months.in January 2009. In addition, a further amount of $494,000 (Canadian dollars $500,000)$224,000 has been held back from the purchase price and will be recorded as part of the purchase only upon the resolution of certain contingencies.OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data) $ 932 23 1,777 5,529 4,640 12,901 (1,310 ) $ 11,591 receivedearned approximately $54,000 in consulting fees for assistance with the acquisition of Spicer. These fees are included in the purchase price allocation. The director abstained from voting on the transaction.Fiscal 2007MomentumIn March 2007, we acquired all issued and outstanding shares of Momentum, a privately held company that specializes in providing ECM solutions to U.S. government agencies. The acquisition of Momentum has enhanced our ability to provide services to the U.S. government. In accordance with SFAS 141, this acquisition is accounted for as a business combination.Established in 1993 and based in Arlington, Virginia, Momentum has been serving the government sector for more than 12 years by providing technical expertise to automate business processes. Momentum has experience using our Livelink ECM software to develop integrated systems for its clients.The results of operations of Momentum have been consolidated with those of Open Text beginning March 2, 2007.OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)Consideration for this acquisition consisted of $4.7 million in cash. We additionally incurred approximately $877,000 in costs directly related to this acquisition.Purchase Price AllocationUnder business combination accounting the total purchase price was allocated to Momentum’s net assets, based on their estimated fair values as of March 2, 2007, as set forth below. The excess of the purchase price over the net assets was recorded as goodwill.The purchase price allocation set forth below represents our best estimate of the allocation of the purchase price and the fair value of net assets acquired. $ 1,454 157 1,900 1,948 5,459 (501 ) $ 4,958 The useful life of the customer assets has been estimated to be four years.The portion of the purchase price allocated to goodwill has been assigned to our North America reporting unit and is deductible for tax purposes.A director of the Company received approximately $84,000 in consulting fees for assistance with the acquisition of Momentum. These fees are included in the purchase price allocation. The director abstained from voting on the transaction.HummingbirdIn October 2006, we acquired all of the issued and outstanding shares of Hummingbird, an enterprise software solutions company that specializes in the development of decision enabling web-based environments. The acquisition of Hummingbird has strengthened our ability to offer an expanded portfolio of solutions aimed at a wide range of 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. Hummingbird Enterprise is an integrated ECM suite comprised of solutions for a) document and content management, b) records management, c) knowledge management, d) collaboration, e) data integration, and f) business intelligence. Hummingbird Connectivity includes software applications for accessing “mission critical” back office applications and legacy data.The results of operations of Hummingbird have been consolidated with those of Open Text beginning October 2, 2006.OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)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 $7.2 million of direct acquisition related costs.Purchase Price AllocationUnder business combination accounting the total purchase price was allocated to Hummingbird’s net tangible and identifiable intangible assets, based on their estimated fair values as of October 2, 2006, as set forth below. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill.The purchase price allocation set forth below represents our best estimate of the allocation of the purchase price and the fair value of net assets acquired. $ 69,067 13,063 139,800 159,200 270,772 651,902 (239,411 ) $ 412,491 The useful lives of both the customer and technology assets have been estimated to be seven years each.The portion of the purchase price allocated to goodwill was assigned in the ratio of 96%, 2% and 2% to our North America, Europe and Other reporting units, respectively. No amount of the goodwill is expected to be deductible for tax purposes.As part of the purchase price allocation, we recognized liabilities in connection with this acquisition of approximately $43.0 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 our 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 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 June 2011. The liabilities related to employee termination costs have been substantially paid as of June 30, 2008, with the remaining balance expected to be paid on or before the fiscal year ended June 30, 2009. For further details relating to the type and amounts of these liabilities see Note 9.A director of the Company received approximately $330,000 in consulting fees for assistance with the acquisition of Hummingbird. These fees are included in the purchase price allocation. The director abstained from voting on the transaction.FIN 48Upon the adoption of FIN 48, goodwill relating to the Hummingbird acquisition was reduced by an amount of $6.5 million (see Note 13).OPEN TEXT CORPORATIONUnaudited Notes to Condensed Consolidated Financial Statements—(Continued)For the Three Months Ended September 30, 2008(Tabular amounts in thousands, except per share data)IXOSAs of September 30, 2008, we owned 96.34% (June 30, 2008—96.33%) of the outstanding shares of IXOS. We increased our ownership of the shares of IXOS by way of open market purchases during the three months ended September 30, 2008. Total consideration paid for the purchase of shares of IXOS during the three months ended September 30, 2008 was approximately $35,000. The minority interest in IXOS has been adjusted to reflect the proportionate reduction in minority interest ownership in IXOS as a result of such open market purchases.NOTE 19—SUBSEQUENT EVENTSAcquisition of CaptarisOn October 31, 2008 we announced the acquisition of Captaris, Inc. (Captaris) a provider of software products that automate “document-centric” processes. As a result of this acquisition Open Text acquired all of Captaris’s outstanding shares for a total amount of approximately US $131 million in cash. Captaris is based in Seattle, Washington. Shares of Captaris’s common stock, which prior to the acquisition traded on the Nasdaq Global Market under the symbol “CAPA,” are in the process of being delisted from trading.The Fiscal 2009 Restructuring Plan and the Captaris Restructuring PlanOn November 3, 2008 we announced the implementation of a plan to restructure our operations and consolidate our excess facilities (Fiscal 2009 restructuring plan). Total costs in connection with this plan are expected to be approximately $20 million and significant actions expected to take place, are as follows:Employee reductions of approximately 10 percent of our workforce.Closure of office facilities.Other costs.These are preliminary estimates and may change upon the finalization of the complete details of the Fiscal 2009 restructuring plan; we expect to finalize these details during November 2008. In accordance with SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities expenditures relating to the Fiscal 2009 restructuring plan will be charged to income from continuing operations and recorded under “Special Charges” within the Consolidated Statements of Income. We expect to complete, substantially, all significant actions related to the Fiscal 2009 restructuring plan by December 31, 2009.In addition, we also expect to make certain reductions in the legacy employee head count and office facilities of Captaris (Captaris restructuring plan) and are, at the moment, in the process of finalizing the significant actions and costs relating to this initiative. In accordance with EITF 95-3 the expenditures relating to the Captaris restructuring plan will be included as part of the cost of the acquisition of Captaris.Normal Course Issuer BidOn November 3, 2008, we announced our intention to make a Normal Course Issuer Bid (NCIB) to repurchase, from time to time, until November 6, 2009, if considered advisable, up to an aggregate of 2,593,263 of our common shares. All common shares purchased by Open Text pursuant to the NCIB will be cancelled. The NCIB will expire on November 6, 2009.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation September 30,December 31, 2008, (the Notes), certain sections of which are incorporated herein by reference. 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 may 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 to differ materially from recent results or from our anticipated future results. You should not rely too heavily on the forward-looking statements contained in this Quarterly Report on Form 10-Q, because these forward-looking statements are relevant only as of the date they were made.September 30,December 31, 2008 (first quarter of Fiscal 2009) compared with the three and six months ended September 30,December 31, 2007, (first quarter of Fiscal 2008), unless otherwise noted. All references to “Notes” made herein are references to the Notes to our consolidated financial statements.3,0003,400 people worldwide.Milestones:The second quarter of Fiscal 2009 was overall a successful quarter for us. We generated $64.9 million in license revenue, equivalent to a 17.6% increase over the second quarter of Fiscal 2008, and total revenue increased by $25.1 million, to $207.7 million, equivalent to a 13.8% increase. Of the total license revenue generated, approximately 25% came from new customers and 75% came from our existing customer base.Significant milestonesSeptember 30,December 31, 2008 (and up to the date of the filing of this report) were as follows:Total revenue increased by 11.4% on a quarter over quarter basis to $182.6 million.License revenue increased to $50.1 million, equivalent to a 13.1% increase over the same period in the prior fiscal year.· •· In December 2008, we announced a major expansion to our “eDiscovery” capabilities, with an early case assessment solution designed to assist organizations in reducing the costs associated with eDiscovery activities. This solution allows organizations to assess the legal merits of a case and manage legal holds and collection for discovery, regulatory and compliance requests. · · In October 2008, we unveiled a new release of our “Web Solutions”, aimed at delivering a complete set of “Web 2.0” tools to help meet the demands of new digital strategies. We believe our new tools will give customers greater security and control over social media than what was previously offered. · In October 2008, we announced the release of our version 2.0 “Open Text Employee Information Management solution” (EIM). The new version includes improved user navigation, closer integration with SAP ERP Human Capital management solution, as well as a new feature that allows guest users to temporarily access content in personnel folders, subject to security policies. · In October 2008, we will be unveilingintroduced an expansion of our “Content Lifecycle Management” services for Microsoft Office SharePoint 2007, extending the solution to our eDOCS customers. This solution is intended to provide eDOCS customers with integrated records management and archiving capabilities for Microsoft Corporation’s (Microsoft) new “cloud-based” operating system, Windows AzureTM throughto improve compliance initiatives to meet regulatory demands and risk management concerns.· SBB AG, a Swiss travel and transport company, who purchased our Enterprise Library Services offering, early next year.Lifecycle Management solution;On October 31, 2008 we announced that we acquired Captaris Inc. (discussed in more detail later in this document).· The City of London Corporation, who purchased a comprehensive corporate records management and archiving solution; and · Getty Images, a creator and distributor of digital content, who purchased our Digital Media solutions. Since the beginning of$3.8 million, which consisted of $3.6 million, in cash, net of cash acquired, and approximately $190,000 in costs directly related to this acquisition. An amount of $500,000 has been held back, as provided for in the purchase agreement, to provide for any adjustments to the purchase price in the one-year period following the closing date of the acquisition. This additional amount, if payable, shall be paid subject to any adjustments, on July 3, 2009 and will increase the cost of the acquisition.$11.6 million, which consisted of $10.8 million in cash, approximately $262,000 in costs directly related to this acquisition and approximately $494,000 (Canadian dollars $500,000) related to amounts held back under the purchase agreement. This amount held back is expected to be paid within the next six months. In addition, a further amount of $494,000 (Canadian dollars $500,000) has been held back from the purchase price and will be recorded as part of the cost of the acquisition only upon the resolution of certain contingencies.CaptarisOn October 31, 2008 we announced the acquisition of Captaris, Inc. (Captaris) a provider of software products that automate “document-centric” processes. As a result of this acquisition Open Text has acquired allof Captaris’s outstanding shares for a total amount of approximately $131 million in cash. We believe that this acquisition strengthens our position as the ECM market’s independent leader and broadens the suite of solutions we offer that integrate with SAP, Microsoft and Oracle solutions. Shares of Captaris’s common stock, which prior to the acquisition traded on the Nasdaq Global Market under the symbol “CAPA,” are in the process of being delisted from trading.Partners37%38% of our license revenues in the three months ended September 30,December 31, 2008 compared to approximately 34% during the three months ended September 30,December 31, 2007.slow-down.“slow-down”. We have a diversified “footprint”, in that more thanapproximately 50% of our revenues are from outside of North America, which helps to insulate us from the “slowdown”slowdown currently being experienced in the U.S. economy. Also, slightly overapproximately 50% of our revenues are from maintenance revenues, which are a recurring source of income and as such, we expect this trend to continue, as historically our renewal rate for maintenance services is in excess of 90%. Additionally, we believe our focus on compliance-based products, also helps(with approximately 70% of our license revenue emanating from compliance-based products), along with our strong partnerships, will help insulate us from “downturns” being experienced in the current macro-economic environment.(% of total revenue) License 25%25 %continue to grow license revenue;· continue to grow license revenue; continue to focus on partner-influenced sales; and· continue to focus on partner-influenced sales; and continue to manage our costs effectively and reduce costs as appropriate.· continue to manage our costs effectively and reduce costs as appropriate. The following table presents an overviewoperations: Three months ended
September 30, Change/
increase
(decrease) 2008 2007 $ 182,623 $ 163,967 $ 18,656 56,936 53,808 3,128 125,687 110,159 15,528 102,710 89,190 13,520 22,977 20,969 2,008 (8,316 ) (13,169 ) 4,853 $ 14,661 $ 7,800 $ 6,861 68.8 % 67.2 % N/A Three months ended
September 30, Change/
increase
(decrease) 2008 2007 $ 50,074 $ 44,260 $ 5,814 98,429 86,304 12,125 34,120 33,403 717 $ 182,623 $ 163,967 $ 18,656 Three months ended
September 30, 2008 2007 27.4 % 27.0 % 53.9 % 52.6 % 18.7 % 20.4 % 100.0 % 100.0 % 2008 2007 2008 2007 Three months ended
September 30, Change/
increase
(decrease) 2008 2007 $ 84,292 $ 79,150 $ 5,142 89,422 76,755 12,667 8,909 8,062 847 $ 182,623 $ 163,967 $ 18,656 Three months ended
September 30, 2008 2007 46.2 % 48.3 % 49.0 % 46.8 % 4.8 % 4.9 % 100.0 % 100.0 % 2008 2007 Change - Increase/ (decrease) 2008 2007 Change - Increase/ (decrease) 2008 2007 2008 2007 $5.8$9.7 million in the three months ended December 31, 2008, primarily as the result of increased revenues from our North America operations and the impact of increased partner influenced sales. Of the total growth achieved, North America accounted for 68% of the increase, while Europe contributed to the rest. The “Other” geographic area remained relatively flat. Partner influenced sales comprised of 38% of our license revenues in the second quarter of Fiscal 2009 compared to 34% in the second quarter of Fiscal 2008.$5.6 million66% of the increase, while North America and the “Other” geographic area contributed equally toaccounted for the remainder of the increase. Approximately 37% of our license revenue came from partner-related transactions in the first quarter of Fiscal 2009 versus approximately 34% in the first quarter of Fiscal 2008.Overall, our average license transaction size (for license transactions in excess of $75,000) went up, from $220,000 in the first quarter of Fiscal 2008 to $310,000 in the first quarter of Fiscal 2009.In addition, we had 6 individual license transactions of $1.0 million or greater in the first quarter of Fiscal 2009, compared to 3 such transactions in the first quarter of Fiscal 2008.continueit is not atypical 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.$12.1$9.8 million in the three months ended December 31, 2008, primarily as the result of growth from our operations in North America. Of the total growth achieved, North America accounted for over 90% of the increase, while Europe and the Other geographic area remained relatively flat on a quarter over quarter basis.$5.8 million70% of the increase, while Europe contributed $5.6 million25% of the increase and the Other geographic area contributed to the remainder.and contracts to provide training and integration services. “Other” revenue consists of hardware sales. It may be noted that “Other” revenue is a new revenue stream, and starting in the second quarter of Fiscal 2009, these revenues are being “grouped” (on account of their relative immateriality), within this category. remained relatively flat, increasing only slightlyincreased by approximately $700,000 primarily as$5.6 million in the resultthree months ended December 31, 2008, of which $3.7 million related to sale of hardware. Of the total growth from ourNorth America contributed 79%, while the Other geographic area contributed 18%, and Europe operations. Three months ended
September 30, Change/
increase
(decrease) 2008 2007 $ 2,893 $ 3,554 $ (661 ) 15,567 12,598 2,969 27,729 27,504 225 10,747 10,152 595 $ 56,936 $ 53,808 $ 3,128 Three months ended
September 30, 2008 2007 94.2 % 92.0 % 84.2 % 85.4 % 18.7 % 17.7 % 2008 2007 Change- Increase/ (decrease) 2008 2007 Change- Increase/ (decrease) 2008 2007 2008 2007 The slight decrease in the costwas primarily due to lower production costsas a percentage of license revenue (and gross margin) remained stable during the three and this contributed to the increase in overall gross margin.$3.0$3.2 million in the three months ended December 31, 2008, and $6.1 million in the six months ended December 31, 2008, primarily due to an increase in direct costs associated with increased customer service revenues and an increase in headcount of 49 employees.revenue. Overall gross margin on customer support revenue has remained relatively stable at approximately 84%within a range of 83% to 85%.componentcomponents of these costs isare personnel related expenses. The other components includeexpenses, travel costs and third party subcontracting. Also, starting in the second quarter of Fiscal 2009, the costs of selling hardware has been grouped within this category. As noted earlier, this is a new revenue stream and these are the direct costs of sale related to the sale of hardware.The slightservice revenues was primarily due to increased training costs.services of $200,000. Overall gross margin on service revenue hasand other revenues have improved as a result of improved execution of billable utilization and longer term assignments.$595,000$1.5 million in the three months ended December 31, 2008 and $2.1 million in the six months ended December 31, 2008, primarily due to the overall impact of increased levels of intangible assets in the first quarter ofrelating to our Fiscal 2009 compared to the first quarter of Fiscal 2008.acquisitions. Three months ended
September 30, Change/
increase
(decrease) 2008 2007 $ 28,578 $ 23,983 $ 4,595 44,832 37,859 6,973 18,387 17,010 1,377 2,698 2,984 (286 ) 8,215 7,415 800 — (61 ) 61 $ 102,710 $ 89,190 $ 13,520 Three months ended
September 30, 2008 2007 15.6 % 14.6 % 24.5 % 23.1 % 10.1 % 10.4 % 1.5 % 1.8 % 4.5 % 4.5 % 0.0 % 0.0 % (in thousands) 2008 2007 Change - Increase (decrease) 2008 2007 Change - Increase (decrease) 2008 2007 2008 2007 $4.6$3.8 million in the three months ended December 31, 2008, primarily due to an increase in direct labour and labour-related benefits and expenses of $3.9 million and the$1.8 million. The remaining increase in expenses is the result of miscellaneous other expenses.$4.1$4.5 million. The increase in labour costs is attributable to an increase in headcount of 120 employees. The remaining increase is the result of an increase in travelmiscellaneous expenses of approximately $483,000$1.4 million and a net increase in travel, office and overhead expenses of approximately $1.1 million.costs.obligations. $1.4$1.3 million in the three months ended December 31, 2008 and $2.7 million in the six months ended December 31, 2008, primarily due to an increase in direct labour and labour-related benefits and expenses of $2.3 million, offsetexpenses. a net decrease in office, overhead and miscellaneous expenses. The increase in labour costs is attributable to an increase in headcount of 3995 employees.Depreciation expensesremained relatively stable.customer assets has remained stable at 4.5% of revenue. The slight increase of $800,000 is increased by $2.6 million in the three months ended December 31, 2008, and $3.4 million in the six months ended December 31, 2008, primarily due to the overall impact of increased levels of intangible assets relating to our Fiscal 2009 acquisitions. firstsecond quarter of Fiscal 2009 compared to restructure our workforce and to rationalize and consolidate our facilities (the Fiscal 2009 Restructuring Plan). The charge to earnings in the firstsecond quarter of Fiscal 2008.2009 was $11.4 million consisting primarily of $10.0 million relating to workforce reduction and $1.3 million relating to abandonment of excess facilities. We expect that the Fiscal 2009 Restructuring Plan will result in future cost savings and operational efficiencies of approximately $40.0 million.Interest expense relates primarily to interest paid on our $390.0 million long-term debt obtained in October 2006, (term loan), for the purpose of partially financing our Hummingbird acquisition. The term loan bears floating-rate interest at LIBOR plus a fixed rate which is currently set at 2.25% per annum. In addition, as required by the lenders of the term loan, we also entered into an interest rate collar (collar) which enclosed the floating portion of our interest rate obligations associated with a portion of the term loan, within an upper limit of 5.34% and a lower limit of 4.79%. We account for the collar as a derivative instrument that is marked to market, with the changes in fair value being charged to interest expense in the period to which such changes relate. This change in value is the “theoretical” or unrealized (gain)/loss on the interest rate collar and reflects the change in the fair value of the collar between reporting periods.To date, since entering into the agreement, we have made net payments of $1.5 million on the collar. We expect to make a payment of approximately $394,000 on the collar in the second quarter of Fiscal 2009. Although we are not able to predict future changes in the fair value of the collar with certainty, or the amount that we expect to pay or receive in future quarters, we expect to see its fair value approach nil as the collar approaches its contractual maturity (December, 2009).$4.9$2.2 million in the three months ended December 31, 2008, of which $4.3$2.1 million was the result of lower interest expenses and $596,000,$100,000, the result of higherlower interest income earned.The This decrease in interest expense is primarily due to (i) a decrease of $2.4 million in the interest paid on the term loan, offset by an increase in the amount paid on the collar of $3.6$400,000. The remainder of the change in interest expense is due to miscellaneous items. (ii)approximately $700,000, the result of lower interest income earned. This decrease in interest expense is primarily due to a decrease of $5.9 million in the interest paid on the term loan and a decrease in the unrealized loss on the fair value of the collar of $2.1 million$2.0 million. The decreases were offset by (iii) an increase in the amount paid on the collar of $772,000,$1.2 million, and (iv) an increase in tax-related interest expense of $732,000.$500,000. The remainder of the change in interest expense is due to miscellaneous items.The increaseon account of larger interest earnings relateddue to a largerlower pool of investable cash.1012 and also the discussion under “Long-term Debt and Credit Facilities” under the “Liquidity and Capital Resources” section of this MD&A.September 30,December 31, 2008, our cash and cash equivalents werewas made up of cash and bank-issued term deposits with maturities of 30 days or less. We are able to access our cash easily, for regular operational use, sinceand we have no exposure to illiquid investments or distressed securities.activitiesactivitie$7.4$6.9 million in the six months ended December 31, 2008, due to a decrease in non-cash adjustments of $6.2 million and a decrease in operating assets and liabilities of $8.1$11.6 million and a decrease in net income of $3.1 million, both offset by an increase in net incomenon-cash adjustments of $6.9$7.8 million.incremental impactvaluation of significantly largerour employee long term incentive plan of $2.0 million, and (iv) pension accruals in the amount of $900,000. These increases were offset by a decrease on our excess tax benefitsbenefit on the exerciseshare based compensation expenses of stock options by our US employees of $6.2$5.9 million, (which is required to be presented asand an outflow of operating cash flow) and a decrease in the unrealized loss on the fair value of our collar by $2.1 million as a result$2.0 million. The remainder of increasing interest rates, offset by a slight increase in depreciation and amortization of $1.1 million, an increase in the accrual for our employee long-term incentive plan of approximately $874,000 (partially due to a full quarter impact of this accrual), and the remainder relatingchange relates to miscellaneous items.The decrease in operating assets and liabilities of $8.1 million is primarily due to lower deferred revenue balances in the amount of $15.7 million, lower accounts payable and accrued liabilities in the amount of $12.9 million, offset by an increase in taxes payable of $4.2 million and a reduction in accounts receivable of $17.4 million. The remaining movement in operating assets and liabilities is due to miscellaneous changes in prepaid expenses, other current assets and other assets. during the quarter being offset by payments of higher levels of accrued liabilities and deferred revenue relating to Fiscal 2008 year end accruals.Hummingbird,Captaris, we typically implement exit plans for reduction of legacy workforces and legacy real estate facilities of the acquired company.companies. These plans are recognized in accordance with the accounting rules governing acquisition-related accruals. Payments against these accruals are recorded as a use of cash in investing activities. In addition we also spend recurring amounts on purchases of miscellaneous capital assets.first quarter of Fiscal 2009,six months ended December 31, 2008, cash flows used in investing activities were higher by $13.6 million compared to the first quarter of Fiscal 2008.$115.7 million. This increase in spending was due to (i) an additional $2.7increase of $118.0 million having been spentrelating to acquisitions, (inclusive of $101.5 million for Captaris), and (ii) an increase in investments of $3.6 million. These increases were offset by (i) a reduction of payments related to acquisition accruals of $4.6 million and (ii) a reduction of spending on capital assets an incremental $12.3of $1.3 million relating to new acquisitions, and investments of $3.6 million in marketable securities, offset by a decrease of $4.8 million in acquisition costs, due to the trailing off of payments which are at the endimpact of the contractual periodsale of a building held as an asset held for certain acquired leased facilities, and the remainder due to decreased purchases of the IXOS minority interest.In addition, as indicated earlier in this document, we expended approximately $131 million in cash to acquire Captaris on October 31, 2008.first quarter of Fiscal 2009,six months ended December 31, 2008, cash flow from financing activities was higherincreased by $36.5$63.2 million compared to the first quarter of Fiscal 2008same period in the prior fiscal year, primarily due to the fact that we did not make any non-scheduled prepayments on our long-term debt financing, whereas during the first quartersix months ended December 31, 2007, we made total non-scheduled prepayments of Fiscal 2009 compared to a non-scheduled prepayment of $30.0 million in the first quarter of Fiscal 2008 and also due to additional cash received of $6.2 million relating to$60.0 million. In addition there was an increase in cash flow from the excess tax benefits on share-based compensation of $5.9 million. These increases were offset by a reduction in the exerciseproceeds from the issuance of stock options by our US employees. TheCommon Shares in the amount of $3.2 million, with the remaining increasechange in cash flows from financing activities is due to miscellaneous items. We did not enter in enter into any new or additional long-term debt arrangements duringin the first or second quarter of Fiscal 2009.acquiredentered into a $465.0 million credit agreement (credit agreement) with a Canadian chartered bank consisting of thea term loan facility in the amount of $390.0 million and a $75.0 million committed revolving long-term credit facility (revolver). The term loan was used to partially finance the Hummingbird acquisition and the revolver will be used for general business purposes, if necessary. The credit agreement is guaranteed by us and certain of our subsidiaries. (See Note 10 for details relating to an additional, non significant, mortgage financing arrangement).current date)December 31, 2008) we have made total prepayments of $90.0 million of the principal on the term loan. These payments have reduced the current quarterly principal payment to approximately $748,000. There were no prepayments made during the threesix months ended, September 30,December 31, 2008.September 30,December 31, 2008, the carrying value of the term loan was $293.3$292.5 million and we are in compliance with all loan covenants relating to this facility.As discussed earlier in the “Net Interest Expense” section above, welimited our exposure to the floating rate portion of the interest rate on the term loan, by enteringentered into a three-year interest-rate collar that has the economic effect of circumscribing the floating portion of our 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%. As of September 30,December 31, 2008, the hedged portion of the loan is $150.0$100.0 million (June 30, 2008—$150.02008 - $150.0 million).million. See Note 16 for details.September 30,December 31, 2008, and through to the date hereof, we have not borrowed any amounts under the revolver.Building held for saleWe currently own a building in Toronto, Canada (acquired asAs part of the acquisition of Hummingbird), whichCaptaris, we have classified asacquired an “asset held for sale”. Although we cannot determineunfunded pension plan and certain long-term employee benefit plans. As of December 31, 2008, our total unfunded pension plan obligation was $15.0 million and the eventual selling price or the timing of the sale, we are actively marketing the property andtotal unfunded long-term employee benefit obligation was $1.7 million. We expect to sell the building during Fiscal 2009. As of September 30, 2008, the fair value of the building was estimated to be and recorded at, Canadian Dollars $5.9 million.Normal Course Issuer BidOn November 3, 2008, we announced our intentionable to make the payments related to these obligations, in the normal course. For a Normal Course Issuer Bid (NCIB) to repurchase, from time to time, until November 6, 2009, if considered advisable, up to an aggregate of 2,593,263 of our common shares. All common shares purchased by Open Text pursuant to the NCIB will be cancelled. The NCIB will expire on November 6, 2009. Payments due by period ending June 30, Total 2009 2010 to 2011 2012 to 2013 2014 and beyond $ 408,618 $ 18,601 $ 60,766 $ 46,049 $ 283,202 80,518 18,522 38,206 9,186 14,604 4,576 1,946 2,246 384 — $ 493,712 $ 39,069 $ 101,218 $ 55,619 $ 297,806 Payments due by period ending June 30, Total 2009 2010 to 2011 2012 to 2013 2014 and beyond * Net of $5.6$4.7 million of non-cancelable sublease income to be received from properties which we have subleased to other parties.$4.2$4.4 million and $8.6 million was recorded during the three and six months ended September 30, 2008. (ThreeDecember 31, 2008, respectively (three and six months ended September 30,December 31, 2007- $4.0 million)$4.2 million and $8.2 million, respectively).$390.0 million term loan agreement and a five-yearfive year mortgage on our headquarters in Waterloo, Ontario. SeeFor details relating to the term loan and the mortgage, see Note 10.U.S. GAAP.U.S.GAAP. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amount of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent that there are material differences between these estimates, judgments and assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:Revenue recognitionBusiness combinationsGoodwill and intangible assets –Impairment AssessmentsAccounting for income taxesLegal and Other ContingenciesThe valuation of stock options granted and liabilities related to share-based payments, including the long-term incentive planAllowances for doubtful accountsFacility and restructuring accrualsFinancial instruments· Revenue recognition · Business combinations · Goodwill and intangible assets – Impairment Assessments · Accounting for income taxes · Legal and other contingencies · The valuation of stock options granted and liabilities related to share-based payments, including the long-term incentive plan · Allowance for doubtful accounts · Facility and restructuring accruals · Financial instruments · The valuation of pension assets and obligations Item 3. Quantitative and Qualitative Disclosures about Market RiskItem 3. Quantitative and Qualitative Disclosures about Market Risk September 30,December 31, 2008. As of September 30,December 31, 2008, we had an outstanding balance of $293.3$292.5 million on this loan. The term loan bears a floating interest rate of LIBOR plus a fixed rate of 2.25%. As of September 30,December 31, 2008, an adverse change in LIBOR of 300 basis points (3.0%) would have the effect of increasing our annual interest payment on the term loan by approximately $8.8 million, absent the impact of our interest rate collar referred to below and assuming that the loan balance as of September 30,December 31, 2008 is outstanding for the entire period.$150.0$100.0 million of the above mentioned term loan, with an interest rate collar that partially hedges the fluctuation in LIBOR. The collar has a notional value of $150.0$100.0 million, a cap rate of 5.34% and a floor rate of 4.79%. This has the effect of circumscribing our maximum floating interest rate risk within the range of 5.34% to 4.79%. The collar expires in December 2009. As of September 30,December 31, 2008, the fair value of the collar was a payable in the amount of $2.1$3.6 million.September 30,December 31, 2008, this balance represented approximately 63%62% of our total cash and cash equivalents. A 10% adverse change in foreign exchange rates versus the U.S. dollar would have decreased our reported cash and cash equivalents by approximately 6%.13a-15 (e)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 the end of the period covered by this Quarterly Report on Form 10-Q,December 31, 2008, 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.September 30,December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.Risk Factors1A.,1A, “Risk Factors” in our Annual Report on Form 10-K for our fiscal year ended June 30, 2008. These are not the only risks and uncertainties facing us. Our business is also subject to general risks and uncertainties that affect many other companies.AppointmentNew Director.On August 26,Captaris Inc., we assumed certain unfunded pension liabilities. We have no assurance that we will generate sufficient cash flow to satisfy these obligationsannouncedacquired Captaris Inc. and, as a part of the appointmenttransaction, assumed its unfunded pension plan liabilities. We will be required to fund these obligations through current and future cash flows. Going forward, our net pension liability and cost may be materially affected by the discount rate used to measure these pension obligations and the longevity and actuarial profile of H. Garfield Emerson, Q.C.the relevant workforce. A change in the discount rate would result in a significant increase or decrease in the valuation of these pension obligations, affecting the net periodic pension cost in the year the change is made and following years. We have no assurance that we will generate cash flow sufficient to satisfy these obligations. This could have a material adverse effect on our business and results of operations.Directors. Mr. Emerson is a lawyer with extensive experience in corporate governance and mergers and acquisitions and is currently PrincipalDirectors, to hold office until the next annual meeting of Emerson Advisory, an independent business and financial advisory firm. He is a certified directorshareholders, or until their successors are elected or appointed. The outcome of the Institutevote was carried by a show of Corporate Directorshands.a memberapproved the authorization of the Directors in Residence faculty of The Directors College, sponsored by the DeGroote School of Business (McMaster University) and the Conference Board of Canada. Mr. Emerson is the past National Chair of Fasken Martineau DuMoulin LLP, a national Canadian law firm, and is the former President and CEO of NM Rothschild & Sons, Canada Limited, an investment banking firm affiliated with NM Rothschild & Sons Limited, London, England, where he provided investment banking and financial advisory services in the areas of mergers and acquisitions, corporate finance, restructurings, and privatizations. Prior to this, Mr. Emerson was a senior partner of the law firm, Davies, Ward & Beck, where he was engaged in securities and corporate law and mergers and acquisitions.In addition to his directorship of Open Text, Mr Emerson is the Chairman of theour Board of Directors to fix the auditors’ remuneration. The outcome of First Calgary Petroleums Ltd, andthe vote was carried by a directorshow of CAE Inc., Canadian Tire Corporation, Limited, Sentry Select Capital Corp., Wittington Investments, Limited and Pelmorex Investments Inc.Fiscal 2009 Restructuringshareholders approved a resolution to amend the Company’s 2004 Stock Option Plan to (a) further restrict the grant of options that may be made under the 2004 Stock Option Plan and the Captaris Restructuring PlanOn November 3, 2008 we announced the implementation of a plan to restructure our operations and consolidate our excess facilities (Fiscal 2009 restructuring plan). Total costs in connection with this plan are expected to be approximately $20 million and significant actions expected to take place, are as follows:Employee reductions of approximately 10 percent of our workforce.Closure of office facilities.Other costs.These are preliminary estimates and may change upon the finalizationother share compensation arrangements of the complete detailsCompany that may be entered into with non-executive directors of the Fiscal 2009 restructuring plan; we expect to finalize these details during November 2008. In accordance with SFAS No. 146,AccountingCompany; (b) reserve for Costs Associated with Exit or Disposal Activities expenditures relatingissuance an additional 1,000,000 Common Shares under the 2004 Stock Option Plan; and (c) specify that amendments to the Fiscal 2009 restructuring plan will be charged to income from continuing operations and recorded under “Special Charges” within the Consolidated Statements of Income. We expect to complete, substantially, all significant actions related to the Fiscal 2009 restructuring plan by December 31, 2009.In addition, we also expect to make certain reductions in the legacy employee head count and office facilities of Captaris (Captaris restructuring plan) and are, at the moment, in the process of finalizing the significant actions and costs relating to this initiative. In accordance with EITF 95-3 the expenditures relating to the Captaris restructuring plan will be included as partprovisions governing amendment of the cost2004 Stock Option Plan must be approved by the holders of Common shares. There were 27,856,056 Common Shares voted in favour of the acquisition of Captaris.Normal Course Issuer BidOn November 3, 2008, we announced our intention to make a Normal Course Issuer Bid (NCIB) to repurchase, from time to time, until November 6, 2009, if considered advisable, up to an aggregate of 2,593,263 of our common shares. All common shares purchased by Open Text pursuant tomotion and there were 11,567,403 voted against the NCIB will be cancelled. The NCIB will expire on November 6, 2009. 2.1Agreement and plan of merger between Open Text Corporation, Open Text Inc., Oasis Merger Corporation and Captaris Inc., dated September 3, 2008(1)31.1 Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)Filed as an Exhibit to the Company’s Current Report on Form 8-K, as filed with the SEC on September 5, 2008 and incorporated herein by reference. OPEN TEXT CORPORATION Date: November 5, 2008February 4, 2009 By: JOHN SHACKLETON JOHN SHACKLETON PAUL MCFEETERS PAUL MCFEETERS 48