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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission file number: 0-27544
OPEN TEXT CORPORATION
(Exact name of registrant as specified in its charter)
ONTARIO 98-0154400
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
185 Columbia Street West, Waterloo, Ontario, Canada N2L 5Z5
-----------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (519) 888-7111
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
At November 11, 2002, there were 19,288,670 outstanding Common Shares of the
registrant.
OPEN TEXT CORPORATION
TABLE OF CONTENTS
PART I - Financial Information: Page No.
- ------------------------------- --------
Item 1. Financial Statements
--------------------
Condensed Consolidated Balance Sheets as of
September 30, 2002 (Unaudited) and June 30, 2002 .............. 3
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended September 30, 2002 and 2001 ................ 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended September 30, 2002 and 2001 ................ 5
Notes to Condensed Consolidated Financial Statements .............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........ 25
Item 4. Controls and Procedures ........................................... 25
PART II - Other Information:
- ----------------------------
Item 1. Legal Proceedings ................................................. 25
Item 6. Exhibits and Reports on Form 8-K .................................. 25
Signatures .................................................................. 26
Certifications .............................................................. 27
2
Part I: Financial Information
Item 1. Condensed Consolidated Financial Statements
OPEN TEXT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In US Dollars)
(In thousands, except share data)
September 30, June 30,
2002 2002
------------- ----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 103,013 $ 109,895
Accounts receivable - net of allowance for doubtful
accounts of $1,458 as of September 30, 2002 and June 30, 2002 29,573 33,094
Income taxes recoverable 1,265 1,194
Prepaid expenses and other assets 2,667 2,530
--------- ---------
Total current assets 136,518 146,713
Capital assets 7,290 8,401
Goodwill, net of accumulated amortization of $12,807 at September 30,
2002 and June 30, 2002 24,587 24,587
Other assets
8,035 7,146
--------- ---------
$ 176,430 $ 186,847
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities (note 3) $ 17,595 $ 18,889
Deferred revenues 24,704 23,927
--------- ---------
Total current liabilities 42,299 42,816
Shareholders' equity:
Share capital
19,277,795 and 19,875,872 Common Shares issued and
outstanding at September 30, 2002 and June 30, 2002
respectively 199,249 204,815
Accumulated other comprehensive income:
Cumulative translation adjustment (1,519) (780)
Accumulated deficit (note 6) (63,599) (60,004)
--------- ---------
Total shareholders' equity 134,131 144,031
--------- ---------
$ 176,430 $ 186,847
========= =========
See accompanying notes to condensed consolidated financial statements
3
OPEN TEXT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In US Dollars)
(In thousands, except per share data)
Three months ended
September 30,
2002 2001
------- -------
(unaudited)
Revenues:
License and networking $15,476 $14,707
Customer support 13,662 11,981
Service 8,517 9,083
------- -------
Total revenues 37,655 35,771
Cost of revenues:
License and networking 1,649 1,042
Customer support 2,317 2,068
Service 6,235 7,033
------- -------
Total cost of revenues 10,201 10,143
------- -------
Gross profit 27,454 25,628
Operating expenses:
Research and development 6,162 6,701
Sales and marketing 11,986 11,656
General and administrative 3,242 3,136
Depreciation 1,216 1,425
Amortization of acquired intangible assets 487 1,655
------- -------
Total operating expenses 23,093 24,573
------- -------
Income from operations 4,361 1,055
Other income 617 181
Interest income 384 694
------- -------
Income before income taxes 5,362 1,930
Provision for income taxes - 289
------- -------
Net income for the period $ 5,362 $ 1,641
======= =======
Basic net income per share $ 0.27 $ 0.08
======= =======
Diluted net income per share $ 0.26 $ 0.08
======= =======
Weighted average number of Common
Shares outstanding - basic 19,640 19,910
======= =======
Weighted average number of Common
Shares outstanding - diluted 20,536 21,189
======= =======
See accompanying notes to condensed consolidated financial statements
4
OPEN TEXT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of US Dollars)
Three months ended
September 30,
2002 2001
--------- ---------
(unaudited)
Cash flows from operating activities:
Net income for the period $ 5,362 $ 1,641
Non-cash items:
Depreciation and amortization 1,703 3,080
Changes in operating assets and liabilities net of assets acquired:
Accounts receivable 3,515 7,234
Prepaid expenses and other assets 264 (480)
Accounts payable and accrued liabilities (1,608) (3,653)
Income taxes payable -- 140
Income taxes recoverable (26) --
Deferred revenues 760 (3,386)
Unrealized foreign exchange loss (367) (647)
--------- ---------
Net cash provided by operating activities 9,603 3,929
--------- ---------
Cash flows used in investing activities:
Acquisitions of capital assets (530) (736)
Purchase of patent (1,246) --
Purchase of other investments -- (86)
Other (132) --
--------- ---------
Net cash used in investing activities (1,908) (822)
--------- ---------
Cash flow from financing activities:
Payments of obligations under capital leases -- (14)
Proceeds from issuance of Common Shares 1,711 1,556
Repurchase of Common Shares (16,236) (8,259)
--------- ---------
Net cash used in financing activities (14,525) (6,717)
--------- ---------
Foreign exchange gain (loss) on cash held in foreign currency (52) 224
Decrease in cash and cash equivalents during the period (6,882) (3,386)
Cash and cash equivalents at beginning of period 109,895 87,526
--------- ---------
Cash and cash equivalents at end of period $ 103,013 $ 84,140
========= =========
See accompanying notes to condensed consolidated financial statements
5
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended September 30, 2002
(unaudited)
(tabular dollar amounts in thousands, except share data)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Open Text Corporation and its wholly-owned subsidiaries,
collectively referred to as "Open Text" or the "Company". All intercompany
balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements and
related notes have been prepared pursuant to the Securities and Exchange
Commission rules and regulations for Form 10-Q. Accordingly, certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The accompanying unaudited
condensed consolidated financial statements and related notes should be read in
conjunction with the consolidated financial statements and notes in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002.
The information furnished reflects, in the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results for the interim periods presented. The
operating results for the three months ended September 30, 2002 are not
necessarily indicative of the results expected for any succeeding quarter or the
entire fiscal year ending June 30, 2003.
These condensed consolidated financial statements are expressed in US
dollars and are prepared in accordance with US generally accepted accounting
principles. These accounting principles were applied on a basis consistent with
those of the consolidated financial statements contained in the Company's Annual
Report on Form 10-K, except as described in Note 2 of these condensed
consolidated financial statements.
The preparation of financial statements in conformity with accounting
principles generally accepted in the US requires management to make estimates
and assumptions that affect the amounts reported in the financial statements.
Actual results may differ from those estimates.
Comprehensive net income
Comprehensive net income is comprised of net income and other comprehensive
net income (loss), including the effect of foreign currency translation
resulting from the consolidation of subsidiaries where the functional currency
is a foreign currency, and the inclusion of unrealized capital gains and losses
on available for sale marketable securities. The Company's total comprehensive
net income was as follows:
6
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended September 30, 2002
(unaudited)
(tabular dollar amounts in thousands, except share data)
Three months ended
September 30,
2002 2001
------- -------
Other comprehensive net income (loss):
Foreign currency translation adjustment $ (694) $ (58)
Unrealized loss on available for sale securities (net of tax)
(45) --
------- -------
Other comprehensive loss
(739) (58)
Net income for the period 5,362 1,641
------- -------
Comprehensive net income for the period $ 4,623 $ 1,583
======= =======
NOTE 2--ACCOUNTING POLICIES
Revenue Recognition
a) License revenues
The Company recognizes revenue in accordance with Statement of
Position ("SOP") 97-2, "Software Revenue Recognition", issued by the
American Institute of Certified Public Accountants ("AICPA") in
October 1997 and as amended by SOP 98-9 issued in December 1998.
The Company records product revenue from software licenses and
products when persuasive evidence of an arrangement exists, the
software product has been shipped, there are no significant
uncertainties surrounding product acceptance, the fees are fixed and
determinable and collection is considered probable. The Company uses
the residual method to recognize revenue when a license agreement
includes one or more elements to be delivered at a future date if
evidence of the fair value of all undelivered elements exists. If an
undelivered element for the arrangement exists under the license
arrangement, revenue related to the undelivered element is deferred
based on vendor-specific objective evidence ("VSOE") of the fair value
of the undelivered element.
The Company's multiple-element sales arrangements include arrangements
where software licenses and the associated post contract customer
support ("PCS") are sold together. The Company has established VSOE of
the fair value of the undelivered PCS element based on the contracted
price for renewal PCS included in the original multiple element sales
arrangement, as substantiated by contractual terms and the Company's
significant PCS renewal experience, from its large installed base of
over 5 million users worldwide. The Company's multiple element sales
arrangements generally include rights for the customer to renew PCS
after the bundled term ends. These rights are irrevocable to the
customer's benefit, are for specified prices and the customer is not
subject to any economic or other penalty for failure to renew.
Further, the renewal PCS options are for services comparable to the
bundled PCS and cover similar terms.
It is the Company's experience that customers generally exercise their
renewal PCS option. In the renewal transaction, PCS is sold on a
stand-alone basis to the licensees one year or more after the original
multiple element sales arrangement. The renewal PCS price is
consistent with the renewal price in the original multiple element
sales arrangement although an adjustment to reflect consumer price
changes are not uncommon.
If VSOE of fair value does not exist for all undelivered elements, all
revenue is deferred until sufficient evidence exists or all elements
have been delivered.
7
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended September 30, 2002
(unaudited)
(tabular dollar amounts in thousands, except share data)
The Company assesses whether payment terms are customary or extended
payment terms in accordance with normal practice relative to the market in
which the sale is occurring. The Company's sales arrangements generally
include standard payment terms. These terms effectively relate to all
customers, products, and arrangements regardless of customer type, product
mix or arrangement size. The only time exceptions are made to these
standard terms is on certain sales in parts of the world where local
practice differs. In these jurisdictions, the Company's customary payment
terms are in line with local practice.
b) Service revenues
Service revenues consist of revenues from consulting contracts as well as
training and integration services contracts. Contract revenues are derived
from contracts to develop applications and to provide consulting services.
Contract revenues are recognized under the percentage of completion method,
using a methodology that accounts for costs incurred under the contract in
relation to the total estimated costs under the contract, after providing
for any anticipated losses under the contract. Revenues from training and
integration services are recognized in the period in which the services are
performed.
c) Customer support revenues
Customer support revenues consist of revenue derived from contracts to
provide technical support to license holders. These revenues are recognized
ratably over the term of the contract.
d) Network revenues
Network revenues consist of revenues earned from customers under an
application service provider (ASP) model. Under this model, customers pay a
monthly fee that entitles them to use of the Company's software on a
secure, hosted, third-party server. These revenues are recognized as the
services are provided on a monthly basis over the term of the customer's
contract.
Impairment of long-lived assets
The Company evaluates its long-lived assets, including goodwill and certain
identifiable intangibles, in accordance with the provisions of Statement of
Financial Accounting Standard No. 144 ("SFAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets or intangibles may not be
recoverable. The Company considers factors such as significant changes in the
business climate and projected discounted cash flows from the respective asset.
Impairment losses are measured as the amount by which the carrying amount of the
asset exceeds its fair market value. In July 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 142 requires
goodwill to be tested for impairment at least annually, and written off when
impaired, rather than being amortized as previous standards required. The
Company adopted SFAS 142 beginning July 1, 2002. The Company is currently
assessing the impact of SFAS 142 on its operating results and financial
condition.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets". This Statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supercedes SFAS no. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of", and the
accounting and reporting requirements of ABP No 30, "Reporting the Results of
Operations for a Disposal of a Segment of a Business." The Company adopted SFAS
144 beginning July 1, 2002. The Company does not expect the adoption of SFAS 144
to have a material impact on its financial position or results of operations.
8
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended September 30, 2002
(unaudited)
(tabular dollar amounts in thousands, except share data)
Accounting for Asset Retirement Obligations
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in
which it is incurred. The Company adopted SFAS No. 143 on July 1, 2002.
Adopting the provisions of SFAS No. 143 did not have a material impact on
the Company's financial condition or results of operations.
Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and
Technical Corrections
In May 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44,
and 64, Amendment of SFAS No. 13, and Technical Corrections". Among other
things, SFAS 145 rescinds various pronouncements regarding early
extinguishment of debt and allows extraordinary accounting treatment for
early extinguishment only when the provisions of Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transaction", are met. The Company
adopted the provisions of SFAS 145 regarding early extinguishment of debt
during the second quarter of 2002, and does not expect that its provisions
will have a material impact on its financial condition or results of
operations.
Accounting for Costs Associated with Exit or Disposal Activities
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities and
supersedes EITF Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS 146 requires that costs
associated with exit or disposal activities be recognized when they are
incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS 146 also establishes that the liability should initially be
measured and recorded at fair value. We will adopt the provisions of SFAS
146 for exit or disposal activities that are initiated after December 31,
2002.
NOTE 3--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities are as follows:
As of As of
Sept. 30, June 30,
2002 2001
------- -------
Accounts payable - trade $ 2,322 $ 2,288
Accrued trade liabilities 7,854 8,300
Amounts payable for acquisitions 1,141 871
Accrued salaries and commissions 6,243 7,376
Other liabilities 35 54
------- -------
$17,595 $18,889
======= =======
NOTE 4--INCOME TAXES
As of September 30, 2002, the Company had total net deferred tax assets of
$7.2 million, the principal components of which were temporary differences
associated with net operating loss carryforwards and employee stock option
deductions. The Company operates in several tax jurisdictions. The Company's
income is subject to varying rates of tax, and losses incurred in one
jurisdiction cannot be used to offset income taxes payable in another. The
Company has fully provided against the deferred tax asset with a valuation
allowance because it believes that sufficient uncertainty exists regarding the
realization of the deferred tax assets. The Company continues to evaluate its
taxable position quarterly and considers factors by taxing jurisdiction such as
estimated taxable income, the history of losses for tax purposes and the growth
of the Company, among others.
As of September 30, 2002, the Company and its subsidiaries had
approximately $10.1 million of losses and deductions available to reduce taxable
income in future years, the benefit of which has not been reflected in the
financial statements. Deductions of $5.7 million have no expiration date, and
the balance of losses expire between 2004 and 2011.
9
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended September 30, 2002
(unaudited)
(tabular dollar amounts in thousands, except share data)
NOTE 5--SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the reporting by public business
enterprises of information about operating segments, products and services,
geographic areas, and major customers. The method of determining what
information to report is based on the way that management organizes the
operating segments within the Company for the purpose of operational decisions
and assessments of financial performance.
The Company has two reportable segments: North America and Europe. The
Company evaluates operating segment performance based on revenues and direct
operating expenses of the segment. The accounting policies of the operating
segments are the same as those described in the summary of accounting policies.
Included in the following operating results are allocations of certain
operating costs which are incurred in one reporting segment but which relate to
all reporting segments. The allocations of these common operating costs are
consistent with the manner in which they are allocated for presentation to, and
analysis by, the chief operating decision maker of the Company. For the
three-month period ended September 30, 2002 and 2001, the "Other" category
consists of geographic regions other than North America and Europe.
Information about reported segments are as follows:
North
America Europe Other Total
-------- -------- --------- ---------
Three months ended
September 30, 2002
------------------
Revenues from external customers $ 22,148 $ 14,473 $ 1,034 $ 37,655
Operating costs 17,561 12,774 1,256 31,591
-------- --------- --------- --------
Contribution margin $ 4,587 $ 1,699 $ (222) $ 6,064
======== ========= ========= ========
Segment assets as of September 30, 2002 $ 52,636 $ 28,803 $ 1,591 $ 83,030
======== ========= ========= ========
Three months ended
September 30, 2001
------------------
Revenues from external customers $ 23,019 $ 12,105 $ 647 $ 35,771
Operating costs 18,156 12,098 1,382 31,636
-------- --------- --------- --------
Contribution margin $ 4,863 $ 7 $ (735) $ 4,135
======== ========= ========= ========
Segment assets as of September 30, 2001 $ 53,653 $ 26,990 $ 1,125 $ 81,768
======== ========= ========= ========
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements for the three
months ended September 30, 2002 and 2001 is as follows:
10
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended September 30, 2002
(unaudited)
(tabular dollar amounts in thousands, except share data)
Three months ended September 30,
--------------------------------
2002 2001
------- -------
Total contribution margin from operating
segments above 6,064 $ 4,135
Amortization and depreciation (1,703) (3,080)
------- -------
Total operating income
$ 4,361 $ 1,055
Interest, other income and taxes 1,001 586
------- -------
Net income for the period $ 5,362 $ 1,641
======= =======
As of September 30,
2002 2001
-------- --------
Segment assets $ 83,030 $ 81,768
Term deposits 93,311 80,577
Investments 89 1,262
-------- --------
Total corporate assets $176,430 $163,607
======== ========
Contribution margin from operating segments does not include amortization
of intangible assets or restructuring costs. Goodwill and intangibles have been
included in segment assets.
The distribution of revenues determined by location of customer and by
identifiable assets, that represent greater than 10% of the Company's revenues
by geographic area for the quarters ended September 30, 2002 and September 30,
2001 are as follows:
11
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended September 30, 2002
(unaudited)
(tabular dollar amounts in thousands, except share data)
Three months ended September 30,
---------------------------------
2002 2001
--------------- ---------------
Revenues:
Canada $ 2,362 $ 2,340
United States 19,786 20,678
United Kingdom 4,346 5,337
Rest of Europe 10,127 6,769
Other 1,034 647
--------------- ---------------
Total revenues $ 37,655 $ 35,771
=============== ===============
As of September 30,
2002 2001
--------------- ---------------
Segment assets:
Canada $ 13,378 $ 8,391
United States 39,258 45,262
United Kingdom 8,909 9,920
Rest of Europe 19,894 17,070
Other 1,591 1,125
--------------- ---------------
Total segment assets $ 83,030 $ 81,768
=============== ===============
NOTE 6--ACCUMULATED DEFICIT
During the three months ended September 30, 2002, the Company, through its
stock repurchase program, purchased 712,200 of its common shares through the
facilities of The Toronto Stock Exchange and the Nasdaq National Market at an
aggregate cost of $16.2 million. $7.3 million of the repurchase was charged to
common share capital based on the average carrying value of the common stock,
with the remaining $8.9 million charged to accumulated deficit.
12
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended September 30, 2002
(unaudited)
(tabular dollar amounts in thousands, except share data)
NOTE 7--NET INCOME PER SHARE
Three Months Ended September 30,
--------------------------------------
2002 2001
--------------- -----------------
(in thousands, except per share data)
Basic net income per share
Net income $ 5,362 $ 1,641
======= =======
Weighted average number of shares outstanding 19,640 19,910
======= =======
Basic net income per share $ 0.27 $ 0.08
======= =======
Diluted net income per share
Net income $ 5,362 $ 1,641
======= =======
Weighted average number of shares outstanding 19,640 19,910
Dilutive effect of stock options 896 1,279
------- -------
Adjusted weighted average number of shares outstanding 20,536 21,189
======= =======
Diluted net income per share
$ 0.26 $ 0.08
======= =======
* anti-dilutive options of 1,196,478 have been excluded (fiscal 2001 - 479,773)
13
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements that express or involve discussions
with respect to predictions, expectations, beliefs, plans, projections,
objectives, assumptions or future events or performance or the outcome of
litigation (often, but not always, using words or phrases such as "believes",
"expects" or "does not expect", "is expected", "anticipates" or "does not
anticipate" or "intends" or stating that certain actions, events or results
"may", "could", "would", "might" or "will" be taken or achieved) are not
statements of historical fact and may be "forward-looking statements". Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or developments in the Company's business or its industry, to
differ materially from the anticipated results, performance, achievements or
developments expressed or implied by such forward-looking statements. Such risks
and uncertainties include, the factors set forth in "Cautionary Statements"
beginning on page 20 of this Quarterly Report on Form 10-Q. Readers should not
place undue reliance on any such forward-looking statements, which speak only as
at the date they are made. Forward-looking statements are based on management's
current plans, estimates, opinions and projections, and the Company assumes no
obligation to update forward-looking statements if assumptions regarding these
plans, estimates, opinions or projections should change. This discussion should
be read in conjunction with the condensed consolidated financial statements and
related notes for the periods specified. Further reference should be made to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002.
Overview
The Company develops, markets, licenses and supports collaboration and
knowledge management software for use on intranets, extranets and the Internet,
enabling users to find electronically stored information, work together in
creative and collaborative processes, perform group calendaring and scheduling
functions, and distribute or make available to users across networks or the
Internet the resulting work product and other information. The Company's
software enables thousands of organizations to effectively address a diverse
range of business needs including managing information, unifying globally
distributed teams, capturing market opportunities, accelerating product cycles,
improving customer and partner relationships, and altering business strategies.
The Company's principal product line is its Livelink(R) software, a leading
collaboration and knowledge management software for global enterprises. By
effectively managing people, processes and information, Livelink enables
companies to be more efficient and innovative in managing their intellectual
property. Livelink integrates several engines including, but not limited to,
search, collaboration, workflow, group calendaring and scheduling, and document
management. Its tightly integrated functionalities deliver true dynamic
collaboration and knowledge sharing between individuals, teams and
organizations. This collaborative environment enables ad hoc teams to form
quickly across functional and organizational boundaries, which enables
information to be accessed by employees using any standard Web browser. Fully
Web-based and open-architectured, Livelink provides rapid out-of-the-box
deployment, accelerated adoption, and low cost of ownership.
During the three months ended September 30, 2002, the Company recorded
license and networking revenue of $15.5 million and net income of $5.4 million.
In addition, the Company's cash and cash equivalents were $103.0 million, with
cash flow from operations totaling $9.6 million. The Company's days' sales
outstanding ("DSO") of 71 days at September 30, 2002, was consistent with 71
days at September 30, 2001. Segment information relating to the financial
statements is presented in Note 5 to the Company's condensed consolidated
financial statements.
The Company continues to seek opportunities to acquire or invest in
businesses, products and technologies that expand, compliment or are otherwise
related to the Company's current business or products. The Company also
considers, from time to time, opportunities to engage in joint ventures or other
business collaborations with third parties to address particular market
segments. On November 1, 2002, the Company completed an acquisition of
Centrinity Inc., for total proceeds of approximately $20.2 million.
14
Critical Accounting Policies and Estimates
The Company's condensed consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United States
("US GAAP"), except as described in Note 2 of these condensed consolidated
financial statements. These accounting principles were applied on a basis
consistent with those of the consolidated financial statements contained in the
Company's Annual Report on Form 10-K for the year ended June 30, 2002 filed with
the Securities and Exchange Commission. Dollar amounts in this Report on Form
10-Q are presented in United States dollars unless otherwise indicated.
The preparation of the condensed consolidated financial statements in
accordance with US GAAP necessarily requires the Company to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, the Company evaluates its estimates, including those related to
revenues, bad debts, investments, intangible assets, income taxes, contingencies
and litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed at the time to be reasonable under
the circumstances. Under different assumptions or conditions, the actual results
will differ, potentially materially, from those previously estimated. Many of
the conditions impacting these assumptions and estimates are outside of the
Company's control.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
condensed consolidated financial statements.
Revenue Recognition. The Company recognizes revenue in accordance with
Statement of Position ("SOP") 97-2, "Software Revenue Recognition", issued by
the American Institute of Certified Public Accountants ("AICPA") in October 1997
and as amended by SOP 98-9 issued in December 1998.
The Company records product revenue from software licenses and products
when persuasive evidence of an arrangement exists, the software product has been
shipped, there are no significant uncertainties surrounding product acceptance,
the fees are fixed and determinable and collection is considered probable. The
Company uses the residual method to recognize revenue when a license agreement
includes one or more elements to be delivered at a future date if evidence of
the fair value of all undelivered elements exists. If an undelivered element for
the arrangement exists under the license arrangement, revenue related to the
undelivered element is deferred based on vendor-specific objective evidence
("VSOE") of the fair value of the undelivered element.
The Company's multiple-element sales arrangements include arrangements
where software licenses and the associated post-contract customer support
("PCS") are sold together. The Company has established VSOE of the fair value of
the undelivered PCS element based on the contracted price for renewal PCS
included in the original multiple element sales arrangement, as substantiated by
contractual terms and the Company's significant PCS renewal experience, from its
large installed base of over 5 million users worldwide. The Company's multiple
element sales arrangements generally include rights for the customer to renew
PCS after the bundled term ends. These rights are irrevocable to the customer's
benefit, are for specified prices and the customer is not subject to any
economic or other penalty for failure to renew. Further, the renewal PCS options
are for services comparable to the bundled PCS and cover similar terms.
It is the Company's experience that customers generally exercise their
renewal PCS option. In the renewal transaction, PCS is sold on a stand-alone
basis to the licensees one year or more after the original multiple element
sales arrangement. The renewal PCS price is consistent with the renewal price in
the original multiple element sales arrangement although an adjustment to
reflect consumer price changes are not uncommon.
If VSOE of fair value does not exist for all undelivered elements, all
revenue is deferred until sufficient evidence exists or all elements have been
delivered.
Service revenues consist of revenues from consulting contracts, as well as
training and integration services contracts. Contract revenues are derived from
contracts to develop applications and to provide consulting services. Contract
revenues are recognized under the percentage of completion method, using a
methodology that accounts for
15
costs incurred under the contract in relation to the total estimated
costs under the contract, after providing for any anticipated losses under the
contract. Revenues from training and integration services are recognized in the
period in which the services are performed.
Customer support revenues consist of revenue derived from contracts to
provide technical support to license holders. These revenues are recognized
ratably over the term of the contract.
Network revenues consist of revenues earned from customers under an
application service provider ("ASP") model. Under this model, customers pay a
monthly fee that entitles them to use of the Company's software on a secure,
hosted, third-party server. These revenues are recognized as the services are
provided on a monthly basis over the term of the customer's contract. With
respect to these revenues, the Company's customers pay exclusively for the right
to use the software. The Company's customers do not receive the right to take
possession of the Company's software. Further, it is not possible for customers
to either run the software on their own hardware or for them to contract with
another party unrelated to the Company to host the software.
Allowance for Doubtful Accounts. The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. The Company performs ongoing credit
evaluations of its customers' financial condition and if the financial condition
of the Company's customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances would likely be required.
Actual collections could differ materially from our estimates.
Investments. From time to time the Company may hold minority interests in
companies having operations or technology in areas within its strategic focus,
some of which are publicly traded and have highly volatile share prices. The
Company records an investment impairment charge when it believes an investment
has experienced a decline in value that is other than temporary. Future adverse
changes in market conditions or poor operating results of companies in whom the
Company has invested could result in losses or an inability to recover the
carrying value of the investments that may not be reflected in an investment's
current carrying value, thereby possibly requiring an impairment charge in the
future.
Income Taxes. The Company records a valuation allowance to reduce its
deferred tax assets to the amount that is considered to be more likely than not
to be realized. The Company considers estimated future taxable income and
ongoing tax planning strategies in assessing the need for and size of the
valuation allowance. If the Company were to conclude that it was able to realize
its deferred tax assets in the future in an amount that differs from its net
recorded amount, an adjustment to the deferred tax asset would be required with
the change generally recognized in the determination of income for the period.
Long-Lived Assets. The Company accounts for the impairment and disposition
of long-lived assets in accordance with the Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." This statement addresses financial accounting and reporting
for the impairment of long-lived assets and for the disposal of long-lived
assets. The Company evaluates the carrying value of intangible assets for
impairment of value based on undiscounted future cash flows. While the Company
has not experienced the impairment of intangible assets in prior periods, the
Company cannot guarantee that there will not be impairment in the future.
Litigation. The Company is a party, from time to time, in legal
proceedings. In these cases, management assesses the likelihood that a loss will
result, as well as the amount of such loss and the financial statements provide
for the Company's best estimate of such losses. To the extent that any of these
legal proceedings are resolved and result in the Company being required to pay
an amount in excess of what has been provided for in the financial statements,
the Company would be required to record, against earnings, such excess at that
time. If the resolution resulted in a gain to the Company, or a loss less than
that provided for, such gain is recognized when received or receivable.
16
Results of Operations
Three months Ended September 30, 2002 Compared with Three months Ended
September 30, 2001
Revenues. The Company's total revenues increased 5% from $35.8 million in
the three months ended September 30, 2001 to $37.7 million for the three months
ended September 30, 2002. License and networking revenues increased 5% from
$14.7 million in the three months ended September 30, 2001 to $15.5 million in
the three months ended September 30, 2002. Of this amount, during the three
month period ended September 30, 2002 the Company realized networking revenue
totaling $1.1 million, which was the same amount realized during the three month
period ended September 30, 2001. The modest increase in license and networking
revenues is a reflection of the continued challenging economic environment. As
has been the Company's experience over the past several three months,
information technology spending has been severely cut back or limited within
many companies. The additional levels of approval that are now required prior to
licensing software in many companies has also resulted in a lengthening of the
Company's sales cycles. The growth that was experienced in license and
networking revenues in the three months ended September 30, 2002 as compared
with the three months ended September 30, 2001 was largely a result of an
increase in larger transactions concluded during the quarter. The Company
completed several transactions during the quarter that will generate over $1.0
million in revenue, the majority of which represents license revenue. This
continues a trend that Company experienced beginning during the three months
ended June 30, 2002 of closing larger license transactions than had been
experienced throughout most of fiscal 2002. The Company is uncertain whether
this trend will continue through the remaining fiscal 2003.
Customer support revenues increased 14% from $12.0 million in the three
months ended September 30, 2001 to $13.7 million for the three months ended
September 30, 2002. The increase in customer support revenues was attributable
to very strong renewal rates for maintenance contracts from existing customers
experienced over the past 12 months as well as incremental customer support
revenues from new licenses over the past 12 months.
Service revenues decreased 6% from $9.1 million in the three months ended
September 30, 2001 to $8.5 million in the three months ended September 30, 2002.
The decrease in service revenues relates primarily to the decrease in the number
of billable consultants within the Company's services organization as compared
to the three months ended September 30, 2001. The revenue generated from the
services organization has decreased relatively proportionately to the decrease
in personnel, although utilization rates were relatively comparable between
these two three months.
No single customer accounted for greater than 10% of the Company's revenue
in the three months ended September 30, 2002 or in the three months ended
September 30, 2001. For the three months ended September 30, 2002, 59% of total
revenues were from customers located in North America, 38% of total revenues
were from customers in Europe and 3% of revenues were from customers in
countries outside North America and Europe ("Other"), compared with 64%, 34% and
2%, respectively, for North America, Europe and Other for the three months ended
September 30, 2001.
Cost of revenues. Cost of license and networking revenues increased 58%
from $1.0 million in the three months ended September 30, 2001 to $1.6 million
in the three months ended September 30, 2002. Of these amounts, cost of
networking revenues totaled $0.1 million during each of the quarters ended
September 30, 2002 and 2001. As a percentage of license and networking revenues,
cost of license and networking revenues represented 11% in the three months
ended September 30, 2002 compared with 7% in the three months ended September
30, 2001. The increase in cost of license and networking revenues resulted from
higher costs associated with the sale of third-party software during the three
months ended September 30, 2002 as compared with the same three months a year
ago.
Cost of customer support revenues increased 12% from $2.1 million in the
three months ended September 30, 2001 to $2.3 million in the three months ended
September 30, 2002. As a percentage of customer support revenues, cost of
customer support revenues remained consistent at 17% in both the three months
ended September 30, 2001 and 2002. The increase in cost of customer support
revenues in absolute dollars is primarily due to an increase in
personnel-related expenses. Additionally, the Company's customer support
organization also incurred increased expenses related to education and travel
during the three months ended September 30, 2002 as compared with the same
quarter a year ago.
Cost of service revenues decreased from $7.0 million in the three months
ended September 30, 2001 to $6.2 million in the three months ended September 30,
2002. As a percentage of service revenues, cost of service revenues
17
decreased from 77% in the three months ended September 30, 2001 to 73% in the
three months ended September 30, 2002. The decrease in cost of service revenues
in absolute dollars resulted from a decrease in the number of employees within
the Company's services organization compared to a year ago. In addition to
reductions in personnel-related costs, the Company realized savings in a number
of other variable expense areas, including travel, communications, training, and
recruiting.
Research and development. Research and development expenses decreased by 8%
from $6.7 million in the three months ended September 30, 2001 to $6.2 million
in the three months ended September 30, 2002. Research and development expenses
consisted primarily of personnel expenses, and their related facilities and
equipment expenses. As a percentage of revenues, research and development
expenses decreased from 19% in the three months ended September 30, 2001 to 16%
in the three months ended September 30, 2002. The decrease in research and
development expenses primarily resulted from a decrease in the number of
employees involved with the Company's development organization during the three
month period ended September 30, 2002 as compared with the same period a year
ago. Additionally, research and development expenses decreased due to reduced
salaries in the Company's research departments, and reduced expenses related to
consulting associated with the Company's research initiatives.
Sales and marketing. Sales and marketing expenses increased 3% from $11.7
million in the three months ended September 30, 2001 to $12.0 million in the
three months ended September 30, 2002. Sales and marketing expenses include the
costs associated with the Company's salesforce including compensation costs,
travel, and training, as well as the costs of marketing programs and
initiatives. As a percentage of revenues, sales and marketing expenses decreased
slightly from 33% in the three months ended September 30, 2001 to 32% in the
three months ended September 30, 2002. The increase in sales and marketing
expenses in absolute dollars during the three months ended September 30, 2002
compared with the three months ended September 30, 2001 is a result of increases
in amounts spent on tradeshows as well as employee incentive programs. The
decrease in sales and marketing expenses as a percentage of total revenues for
the three months ended September 30, 2002 resulted from a higher total revenues
base.
General and administrative. General and administrative expenses increased
3% from $3.1 million in the three months ended September 30, 2001 to $3.2
million in the three months ended September 30, 2002. General and administrative
expenses consisted primarily of the salaries of administrative personnel and
related overhead and facilities expenses. As a percentage of revenues, general
and administration expenses remained consistent at 9% in both the three months
ended September 30, 2001 and 2002.
Depreciation. Depreciation expense decreased 15% from $1.4 million in the
three months ended September 30, 2001 to $1.2 million in the three months ended
September 30, 2002. As a percentage of revenues, depreciation expense decreased
from 4% in the three months ended September 30, 2001 to 3% during the three
months ended September 30, 2002. The decrease in depreciation expense in
absolute dollars between the two periods is a result of the fact that over the
past year the Company has not made significant capital expenditures, and
therefore its base of capital assets has become increasingly depreciated.
Amortization of acquired intangible assets. Amortization of acquired
intangible assets decreased 71% from $1.7 million in the three months ended
September 30, 2001, to $487,000 in the three months ended September 30, 2002. As
a percentage of revenues, amortization of acquired intangible assets decreased
from 5% in the three months ended September 30, 2001 to 1% in the three months
ended September 30, 2002. During fiscal 2002, amortization of acquired
intangible assets included the amortization of core technology, purchased
software and goodwill acquired pursuant to acquisitions. However, as a result of
the adoption of new accounting rules, the Company has determined that it has not
experienced an impairment in its goodwill, and therefore has not recorded any
amortization during the three month period ended September 30, 2002. During the
three month period ended September 30, 2001, the Company recorded goodwill
amortization totalling $1.0 million. As a result, during the three months ended
September 30, 2002, the Company's amortization of acquired intangible assets
includes only the amortization of core technology and purchased software.
Other income. Other income increased 241% from $181,000 for the three
months ended September 30, 2001 to $617,000 for the three months ended September
30, 2002. Other income consists primarily of foreign exchange gains or losses,
which reflect relative movements in the various foreign currencies in which the
Company conducts business.
18
Interest income. Interest income decreased 45% from $694,000 for the three
months ended September 30, 2001, to $384,000 for the three months ended
September 30, 2002. The reduction in interest income is a result of both lower
cash balances and lower interest rates realized in the three months ended
September 30, 2002, compared to the three months ended September 30, 2001.
Income taxes. As of September 30, 2002, the Company had total net deferred
tax assets of $7.2 million, the principal components of which were temporary
differences associated with net operating loss carryforwards and employee stock
option deductions. The Company operates in several tax jurisdictions. The
Company's income is subject to varying rates of tax, and losses incurred in one
jurisdiction cannot be used to offset income taxes payable in another. The
Company has fully provided against the deferred tax asset with a valuation
allowance because it believes that sufficient uncertainty exists regarding the
realization of the deferred tax assets. The Company continues to evaluate its
taxable position quarterly and considers factors by taxing jurisdiction such as
estimated taxable income, the history of losses for tax purposes and the growth
of the Company, among others.
As of September 30, 2002, the Company and its subsidiaries had
approximately $10.1 million of losses and deductions available to reduce taxable
income in future years, the benefit of which has not been reflected in the
financial statements. Deductions of $5.7 million have no expiration date, and
the balance of losses expire between 2004 and 2011.
Liquidity and Capital Resources
At September 30, 2002, the Company had current assets of $136.5 million,
current liabilities of $42.3 million and working capital of $94.2 million. These
amounts compare to current assets of $146.7 million, current liabilities of
$42.8 million, and working capital of $103.9 million at June 30, 2002. The
decrease in the Company's current assets and working capital balances since the
beginning of the fiscal year are largely a result of the Company's share buyback
program, offset in part by the Company's net income for the three months ended
September 30, 2002. During the three months ended September 30, 2002, the
Company repurchased for cancellation a total of 712,200 of its Common Shares on
the open market for total consideration of $16.2 million.
At September 30, 2002, the Company had cash and cash equivalents totaling
$103.0 million, compared to cash and cash equivalents of $109.9 million at June
30, 2002. The decrease in this balance since the beginning of the fiscal year is
primarily the result of the amounts spent on repurchasing the Company's Common
Shares referred to above, partially offset by the cash generated from the
Company's operations.
Net cash used in financing activities was $14.5 million in the three months
ended September 30, 2002, primarily resulting from the repurchase for
cancellation of 712,200 Common shares on the open market at a cost of $16.2
million, of which $7.3 million has been charged to share capital and $8.9
million has been charged to accumulated deficit, partially offset by proceeds of
$1.7 million from the sale of Common Shares related to the exercise of Company
options. Net cash used in financing activities was $6.7 million in the three
months ended September 30, 2001, primarily resulting from the repurchase for
cancellation of 348,700 Common Shares on the open market at a cost of $8.3
million, of which $3.6 million has been charged to share capital and $4.7
million has been charged to accumulated deficit, partially offset by proceeds of
$1.6 million from the sale of Common Shares related to the exercise of Company
Stock Options.
The Company has a Cdn$10.0 million (USD$6.3 million) line of credit with a
Canadian chartered bank, under which no borrowings were outstanding at September
30, 2002, the entire amount of which was available for use. The line of credit
bears interest at the lender's prime rate plus 0.5% and is secured by all of the
Company's assets, including an assignment of accounts receivable.
Cash provided by operations during the three months ended September 30,
2002 was $9.6 million, compared to $3.9 million during the three months ended
September 30, 2001. The increase was primarily a result of higher net income
during the three months ended September 30, 2002 compared to the three months
ended September 30, 2001.
Net cash used for investing activities was $1.9 million during the three
months ended September 30, 2002 compared to $822,000 during the three months
ended September 30, 2001. The increase during the three months
19
ended September 30, 2002, primarily related to the purchase of a patent
by the Company for $1.2 million, related to intellectual property incorporated
into certain of the Company's existing products. Also included in investing
activities are the purchase of capital assets, which totaled $736,000 during the
three months ended September 30, 2001 as compared with $530,000 during the three
months ended September 30, 2002.
On September 19, 2002, the Company announced that it had entered into an
agreement with Centrinity Inc. ("Centrinity") of Toronto, whereby Open Text
would purchase all of the issued and outstanding shares of Centrinity for cash
consideration of $1.26 Cdn. per share. On November 1, 2002, this acquisition was
formally completed when the shareholders' of Centrinity approved this
transaction. Total cash consideration paid for the total share capital of
Centrinity is expected to be approximately $20.2 million and will be paid during
the three months ending December 31, 2002. The Company is currently assessing
the identifiable assets and liabilities acquired in this transaction.
Over the past several three months, the Company has taken certain actions,
including consolidating facilities and reducing the number of employees across
the organization, in an effort to manage its operating expenses. The Company
does not currently anticipate any large increases in operating expenses in the
foreseeable future, with the exception of the added operating expenses related
to the addition of Centrinity. Similarly, the Company does not currently
anticipate significant increases in the levels of capital asset investments in
the forseeable future.
On a cumulative basis, to date, license and service revenues have been
insufficient to satisfy the Company's total cash requirements, particularly as
the Company has sought to repurchase its Common Shares, acquire businesses and
grow its infrastructure. The Company currently anticipates that its current cash
and cash equivalents and available credit facilities will be sufficient to fund
its anticipated cash requirements for working capital and capital expenditures
for at least the next 12 months. The Company may need to raise additional funds,
however, in order to fund more rapid expansion of our business, develop new and
enhance existing products and services, or acquire complimentary products,
businesses or technologies. If additional funds are raised through the issuance
of equity or convertible securities, the percentage ownership of the Company's
stockholders may be reduced, the Company's stockholders may experience
additional dilution, and such securities may have rights, preferences, or
privileges senior to those of the Company's stockholders. Additional financing
may not be available on terms favorable to the Company, or at all. If adequate
funds are not available or are not available on acceptable terms, the Company's
ability to fund its expansion, take advantage of unanticipated opportunities or
develop or enhance its services or products would be significantly limited.
Cautionary Statements
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
involve risks, and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including without limitation, those set forth in the
following cautionary statements and elsewhere in this Quarterly Report on Form
10-Q. In addition to the other information set forth herein, the following
cautionary statements should be considered carefully in evaluating Open Text and
its business. If any of the following risks and uncertainties were to occur, the
Company's business, financial condition and results of operations would likely
suffer. In that event, the trading price of the Company's Common Shares would
likely decline.
If the Company does not continue to develop new technologically advanced
products, future revenues will be negatively affected
Open Text's success will depend on its ability to design, develop, test,
market, license and support new software products and enhancements of current
products on a timely basis in response to both competitive products and evolving
demands of the marketplace. In addition, new software products and enhancements
must remain compatible with standard platforms and file formats. Presently, Open
Text is continuing to enhance the capability of its Livelink to enable users to
form workgroups and collaborate on intranets and the Internet. The Company
increasingly must integrate software licensed from third parties with its own
software to create or improve intranet and Internet products. These products are
key to the success of the Company's strategy, and the Company may not be
successful in developing and marketing these and other new software products and
enhancements. If the Company is unable to successfully integrate the
technologies licensed from third parties, to develop new software products and
enhancements to existing products, or to complete products currently under
development, or if such integrated or new products or enhancements do not
achieve market acceptance, the Company's operating results will materially
20
suffer. In addition, if new industry standards emerge that the Company does not
anticipate or adapt to, the Company's software products could be rendered
obsolete and its business would be materially harmed.
If the Company's products and services do not gain market acceptance, the
Company may not be able to increase its revenues
Open Text is continually working on the development of, and improvements
to, new versions of Livelink and other products. In November 2001, the Company
released Livelink MeetingZone(TM), and in April 2001, the Company released
Livelink Wireless(TM). In February 2002, Open Text released Livelink 9.1, the
latest release of the Company's flagship product. The primary market for Open
Text's software and services is rapidly evolving. As is typical in the case of a
new and rapidly evolving industry, demand for and market acceptance of products
and services that have been released recently or that are planned for future
release are subject to a high level of uncertainty. If the markets for the
Company's products and services fail to develop, develop more slowly than
expected or become saturated with competitors, the Company's business will
suffer. The Company may be unable to successfully market its current products
and services, develop new software products, services and enhancements to
current products and services, complete customer installations on a timely
basis, or complete products and services currently under development. If the
Company's products and services or enhancements do not achieve and sustain
market acceptance, the Company's business and operating results will be
materially harmed.
The Company's products may contain defects that could harm the Company's
reputation, be costly to correct, delay revenues, and expose the Company to
litigation
The Company's products are highly complex and sophisticated and, from time
to time, may contain design defects or software errors that are difficult to
detect and correct. Errors may be found in new software products or improvements
to existing products after commencement of commercial shipments, or, if
discovered, the Company may not be able to successfully correct such errors in a
timely manner, or at all. In addition, despite tests carried out by the Company
on all its products, the Company may not be able to fully simulate the
environment in which its products will operate and, as a result, the Company may
be unable to adequately detect design defects or software errors inherent in its
products and which only become apparent when the products are installed in an
end-user's network. The occurrence of errors and failures in the Company's
products could result in loss of or delay in market acceptance of the Company's
products, and alleviating such errors and failures in the Company's products
could require significant expenditure of capital and other resources by the
Company. Because the Company's end-user base consists of a limited number of
end-users, the harm to the Company's reputation resulting from product errors
and failures would be damaging to the Company. The Company regularly provides a
warranty with its products and the financial impact of these warranty
obligations may be significant in the future. The Company's agreements with its
strategic partners and end-users typically contain provisions designed to limit
the Company's exposure to claims, such as exclusions of all implied warranties
and limitations on damage remedies and the availability of consequential or
incidental damages. However, such provisions may not effectively protect the
Company against claims and related liabilities and costs. Although the Company
maintains errors and omissions insurance coverage and comprehensive liability
insurance coverage, such coverage may not be adequate and all claims may not be
covered. Accordingly, any such claim could negatively affect the Company's
financial condition.
The Company currently depends on certain third-party software, the loss of which
could result in increased costs of, or delays in, licenses of the Company's
products
The Company relies on certain software that it licenses from third parties,
including software that is integrated with internally developed software and
which is used in its products to perform key functions. These third-party
software licenses may not continue to be available to us on commercially
reasonable terms, and the related software may not continue to be appropriately
supported, maintained, or enhanced by the licensors. The loss of license to use,
or the inability of licensors to support, maintain, and enhance any of such
software, could result in increased costs, delays, or reductions in product
shipments until equivalent software is developed or licensed, if at all, and
integrated.
21
Current and future competitors could have a significant impact on the Company's
ability to generate future revenue and profits
The markets for the Company's products are new, intensely competitive,
subject to rapid technological change and are evolving rapidly. The Company
expects competition to increase and intensify in the future as the markets for
the Company's products continue to develop and as additional companies enter
each of its markets. Numerous releases of products and services that compete
with those of the Company can be expected in the near future. The Company may
not be able to compete effectively with current and future competitors. If
competitors were to engage in aggressive pricing policies with respect to
competing products, or significant price competition were to otherwise develop,
the Company would likely be forced to lower its prices. This could result in
lower revenues, reduced margins, loss of customers, or loss of market share for
the Company.
The length of the Company's sales cycle can fluctuate significantly which could
result in significant fluctuations in license revenue being recognized from
quarter to quarter
Because the decision by a customer to purchase the Company's products often
involves relatively large-scale implementation across the customer's network or
networks, licenses of these products may entail a significant commitment of
resources by prospective customers, accompanied by the attendant risks and
delays frequently associated with significant expenditures and lengthy sales
cycle and implementation procedures. Given the significant investment and
commitment of resources required by an organization in order to implement the
Company's software, the Company's sales cycle tends to take considerable time to
complete. Particularly in the current economic environment of reduced
information technology spending, it can take several months, or even quarters,
for sales opportunities to translate into revenue. If installation of the
Company's products in one or more customers takes longer than originally
anticipated, the date on which revenue from these licenses could be recognized
would be delayed. Such delays could cause the Company's revenues to be lower
than expected in a particular period.
The Company may not achieve its anticipated revenues if it does not expand its
product line
Substantially all of Open Text's revenues are currently derived from its
Livelink and related products and services offered by the Company in the
Internet, intranet and extranet markets. Accordingly, the Company's future
results of operations will depend, in part, on expanding its product-line and
related services. To achieve its revenue goals, the Company must also continue
to enhance these products and services to meet the evolving needs of its
customers. A reduction in demand or increase in competition in the market for
Internet or intranet applications, or a decline in licenses of Livelink and
related services, would significantly harm the Company's business.
The Company must continue to manage its growth or its operating results could be
adversely affected
Over the past several years, Open Text has experienced growth in revenues,
operating expenses, and product distribution channels. In addition, Open Text's
markets have continued to evolve at a rapid pace. The total number of employees
of the Company has grown from 292 as of September 1, 1996 to 980, excluding
contractors, as of June 30, 2002. The Company believes that continued growth in
the breadth of its product lines and services and in the number of personnel
will be required in order to establish and maintain the Company's competitive
position. Moreover, the Company has grown significantly through acquisitions in
the past and continues to review acquisition opportunities as a means of
increasing the size and scope of its business. Open Text's growth, coupled with
the rapid evolution of the Company's markets, has placed, and is likely to
continue to place, significant strains on its administrative and operational
resources and increased demands on its internal systems, procedures and
controls. The Company's administrative infrastructure, systems, procedures and
controls may not adequately support the Company's operations and the Company's
management may not be able to achieve the rapid, effective execution of the
product and business initiatives necessary to successfully penetrate the markets
for the Company's products and services and to successfully integrate any
business acquisitions in the future. If the Company is unable to manage growth
effectively, the Company's operating results will likely suffer.
Future acquisitions, investments, joint ventures and other business initiatives
may negatively affect the Company's operating results
Open Text continues to seek out opportunities to acquire or invest in
businesses, products and technologies that expand, complement or are otherwise
related to the Company's current business or products. The Company also
considers from time to time, opportunities to engage in joint ventures or other
business collaborations with third
22
parties to address particular market segments. These activities create risks
such as the need to integrate and manage the business acquired with the business
of the Company, additional demands on the Company's management, resources,
systems, procedures and controls, disruption of the Company's ongoing business,
and diversion of management's attention from other business concerns. Moreover,
these transactions could involve substantial investment of funds and/or
technology transfers, the acquisition or disposition of product lines or
businesses. Also, such activities could result in one-times charges and expenses
and have the potential to either dilute existing shareholders or result in the
assumption of debt. Such acquisitions, investments, joint ventures or other
business collaborations may involve significant commitments of financial and
other resources of the Company. Any such activity may not be successful in
generating revenue, income or other returns to the Company, and the financial or
other resources committed to such activities will not be available to the
Company for other purposes. The Company's inability to address these risks could
negatively affect the Company's operating results.
The Company's products rely on the stability of various infrastructure software
which, if not stable, could negatively impact the effectiveness of the Company's
products, resulting in harm to the reputation and business of the Company
Developments of internet and intranet applications by Open Text depends on
the stability, functionality and scalability of the infrastructure software of
the underlying intranet, such as that of Netscape, Microsoft and others. If
weaknesses in such infrastructure software exist, the Company may not be able to
correct or compensate for such weaknesses. If the Company is unable to address
weaknesses resulting from problems in the infrastructure software such that the
Company's products do not meet customer needs or expectations, the Company's
business and reputation may be significantly harmed.
The Company's quarterly revenues and operating results are likely to fluctuate
which could impact the price of the Company's Common Shares
The Company has experienced, and is likely to continue to experience,
significant fluctuations in quarterly revenues and operating results caused by
many factors, including changes in the demand for the Company's products, the
introduction or enhancement of products by the Company and its competitors,
market acceptance of enhancements or products, delays in the introduction of
products or enhancements by the Company or its competitors, customer order
deferrals in anticipation of upgrades and new products, changes in the Company's
pricing policies or those of its competitors, delays involved in installing
products with customers, the mix of distribution channels through which products
are licensed, the mix of products and services sold, the mix of international
and North American revenues, foreign currency exchange rates and general
economic conditions.
Like many other software companies, the Company has generally recognized a
substantial portion of its revenues in the last weeks of each quarter.
Accordingly, the cancellation or deferrals of even a small number of licenses or
delays in installations of the Company's products could have a material adverse
effect on the Company's results of operations in any particular quarter. The
Company also has noted historically lower sales in July and August than in other
months, which has resulted in proportionately lower revenues recorded in the
quarter ended September 30 than in other quarters. Because of the impact of the
timing of product introductions and the rapid evolution of the Company's
business and the markets it serves, the Company cannot predict whether seasonal
patterns experienced in the past will continue. For these reasons, no one should
rely on period-to-period comparisons of the Company's financial results to
forecast future performance. It is likely that the Company's quarterly revenue
and operating results will vary significantly in the future and if a shortfall
in revenue occurs or if operating costs increase significantly, the market price
of our Common Shares could decline.
Failure to protect our intellectual property could harm the Company's ability to
compete effectively
The Company is highly dependent on its ability to protect its proprietary
technology. The Company's efforts to protect its intellectual property rights
may not be successful. The Company relies on a combination of copyright,
trademark and trade secret laws, non-disclosure agreements and other contractual
provisions to establish and maintain its proprietary rights. The Company has a
policy of seeking patent protection for its products. While US and Canadian
copyright laws, international conventions and international treaties may provide
meaningful protection against unauthorized duplication of software, the laws of
some foreign jurisdictions may not protect proprietary rights to the same extent
as the laws of Canada or the United States. Software piracy has been, and can be
expected to be, a persistent problem for the software industry. Enforcement of
the Company's intellectual property rights may be difficult, particularly in
some nations outside of the United States and Canada in which the Company
23
seeks to market its products. Despite the precautions taken by the Company, it
may be possible for unauthorized third parties, including competitors, to copy
certain portions of the Company's products or to reverse engineer or obtain and
use information that the Company regards as proprietary. Although the Company
does not believe that its products infringe on the rights of third parties,
third parties may assert infringement claims against the Company in the future,
and any such assertions may result in costly litigation or require the Company
to obtain a license for the intellectual property rights of third parties, such
licenses may not be available on reasonable terms, or at all.
If the Company is not able to attract and retain top employees, the Company's
ability to compete may be harmed
The Company's performance is substantially dependent on the performance of
its executive officers and key employees. The loss of the services of any of its
executive officers or other key employees could significantly harm the Company's
business. The Company does not maintain "key person" life insurance policies on
any of its employees. The Company's success is also highly dependent on its
continuing ability to identify, hire, train, retain and motivate highly
qualified management, technical, sales and marketing personnel, including
recently hired officers and other employees. Specifically, the recruitment of
top research developers, along with experienced salespeople, remains critical to
the Company's success. Competition for such personnel is intense, and the
Company may not be able to attract, integrate or retain highly qualified
technical and managerial personnel in the future.
The volatility of the Company's stock price could lead to losses by shareholders
The market price of the Common Shares has been highly volatile and subject
to wide fluctuations. Such fluctuations in market price may continue in response
to quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, changes in
financial estimates by securities analysts or other events or factors. In
addition, the financial markets have experienced significant price and volume
fluctuations that have particularly affected the market prices of equity
securities of many high technology companies and that often have been unrelated
to the operating performance of such companies or have resulted from the failure
of the operating results of such companies to meet market expectations in a
particular quarter. Broad market fluctuations or any failure of the Company's
operating results in a particular quarter to meet market expectations may
adversely affect the market price of the Common Shares, resulting in losses to
shareholders. In the past, following periods of volatility in the market price
of a company's securities, securities class action litigation has often been
instituted against such a company. Due to the volatility of our stock price, the
Company could be the target of securities litigation in the future. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which would have a material adverse effect on the
Company's business and operating results.
A reduction in the number or sales efforts by distributors could materially
impact the Company's revenues
A portion of the Company's revenue is derived from the license of its
products through third parties. The Company's success will depend, in part, upon
its ability to maintain access to existing channels of distribution and to gain
access to new channels if and when they develop. The Company may not be able to
retain a sufficient number of its existing or future distributors. Distributors
may also give higher priority to the sale of other products (which could include
products of competitors) or may not devote sufficient resources to marketing the
Company's products. The performance of third party distributors is largely
outside the control of the Company and the Company is unable to predict the
extent to which these distributors will be successful in marketing and licensing
the Company's products. A reduction in sales efforts, or a decline in the number
of distributors, or the discontinuance of sales of the Company's products by its
distributors could lead to reduced revenue.
The Company's international operations expose the Company to business risks that
could cause the Company's operating results to suffer
Open Text intends to continue to make efforts to increase its international
operations and anticipates that international sales will continue to account for
a significant portion of its revenue. Revenues derived outside of North America
represented 40%, 41%, and 39% of total revenues for fiscal 2002, fiscal 2001,
and fiscal 2000, respectively. These international operations are subject to
certain risks and costs, including the difficulty and expense of administering
business abroad, compliance with foreign laws, compliance with domestic and
international import and export laws and regulations, costs related to
localizing products for foreign markets, and costs related to translating and
distributing products in a timely manner. International operations also tend to
expose the Company to a longer sales and collection cycle, as well as potential
losses arising from currency fluctuations, and limitations regarding the
repatriation of earnings. Significant international sales may also expose the
Company to greater risk
24
from political and economic instability, unexpected changes in Canadian, US or
other governmental policies concerning import and export of goods and
technology, and other regulatory requirements and tariffs and other trade
barriers. In addition, international earnings may be subject to taxation by more
than one jurisdiction, which could also materially adversely affect the
Company's results of operations. Moreover, international expansion may be more
difficult, time consuming, and costly. As a result, if revenues from
international operations do not offset the expenses of establishing and
maintaining foreign operations, the Company's operating results will suffer.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There has been no material change to the information concerning the
Company's market risk sensitive instruments as set forth in the Company's Annual
Report on Form 10-K for the year ended June 30, 2002.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this Report on Form 10-Q, our Chief
Executive Officer and Chief Financial Officer performed an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in ensuring the reporting of
material information required to be included in our periodic filings with the
Securities and Exchange Commission. There were no significant changes in our
internal controls or in other factors that could significantly effect these
internal controls subsequent to the date of the most recent evaluation.
PART II Other Information
Item 1. Legal Proceedings
The Company has instituted an action under the Ontario Arbitrators Act
against Harold Tilbury and Yolanda Tilbury as Trustees of the Tilbury Family
Trust, and Harold Tilbury personally, claiming reimbursement for parts of the
purchase price of Bluebird Systems ("Bluebird"), a company previously acquired.
The Company is also seeking indemnification for breaches of the representations
and warranties under the stock purchase agreement in the amount of approximately
$6.5 million. This claim also asks for a rescission of a facility lease assumed
on the purchase of Bluebird, or damages of $7 million, together with punitive
damages of $1 million.
In the normal course of business the Company is subject to various other
legal matters. While the results of litigation and claims cannot be predicted
with certainty, the Company believes that the final outcome of these other
matters will not have a materially adverse effect on its consolidated results of
operations or financial conditions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K
The Company filed no Reports on Form 8-K during the three months ended
September 30, 2002.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
OPEN TEXT CORPORATION
(registrant)
Date: November 13, 2002
By: /s/ P. Thomas Jenkins
--------------------------
P. Thomas Jenkins
Chief Executive Officer
/s/ Alan Hoverd
--------------------------
Alan Hoverd
Chief Financial Officer
(Principal Financial and Accounting
Officer)
26
I, P. Thomas Jenkins, Chief Executive Officer of Open Text Corporation certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Open Text
Corporation.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ P. Thomas Jenkins
--------------------------
P. Thomas Jenkins
Chief Executive Officer
27
I, Alan Hoverd Chief Financial Officer of Open Text Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Open Text
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ Alan Hoverd
-------------------------
Alan Hoverd
Chief Financial Officer
28