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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 December 31, 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 of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At February 7, 2003 there were 19,385,686 outstanding Common Shares of the
registrant.
OPEN TEXT CORPORATION
TABLE OF CONTENTS
Page No.
--------
PART I Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 2002 (Unaudited) and June 30, 2002.............. 3
Condensed Consolidated Statements of Operations (Unaudited) -
Three and Six Months Ended December 31, 2002 and 2001........ 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three and Six Months Ended December 31, 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 ......................... 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 30
Item 4. Controls and Procedures......................................... 31
PART II Other Information:
Item 4. Submissions of Matters to a Vote of Security Holders............ 32
Item 6. Exhibits and Reports on Form 8-K................................ 32
Signatures............................................................... 34
Certifications........................................................... 35
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)
December 31, June 30,
2002 2002
------------ --------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................................... $102,341 $109,895
Accounts receivable - net of allowance for doubtful accounts of
$1,633 as of December 31, 2002 and $1,458 as of June 30, 2002 ........ 29,634 33,094
Income taxes recoverable ................................................ 34 1,194
Prepaid expenses and other current assets ............................... 2,799 2,530
Deferred tax asset ...................................................... 1,407 --
-------- --------
Total current assets .................................................... 136,215 146,713
Capital assets ............................................................. 8,380 8,401
Goodwill, net of accumulated amortization of $12,807 at December 31, 2002
and June 30, 2002 ....................................................... 29,599 24,587
Future tax asset ........................................................... 12,413 --
Other assets ............................................................... 13,543 7,146
-------- --------
$200,150 $186,847
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities (note 3) ....................... $ 25,843 $ 18,889
Deferred revenues ....................................................... 27,208 23,927
-------- --------
Total current liabilities ............................................... 53,051 42,816
Long-term liabilities:
Deferred revenues ....................................................... 2,975 --
Accrued Liabilities ..................................................... 4,047 --
-------- --------
Total long-term liabilities ............................................. 7,022 --
Shareholders' equity:
Share capital
19,298,235 and 19,875,872 Common Shares issued and
outstanding at December 31, 2002 and June 30, 2002, respectively .. 199,578 204,815
Accumulated other comprehensive income ............................ (1,564) (780)
Accumulated deficit (note 6) ............................................ (57,937) (60,004)
-------- --------
Total shareholders' equity .............................................. 140,077 144,031
-------- --------
$200,150 $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 Six months ended
December 31, December 31,
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
(unaudited) (unaudited)
Revenues:
License and networking $17,368 $15,875 $32,844 $30,582
Customer support 14,883 12,230 28,545 24,211
Service 10,763 11,553 19,280 20,637
------- ------- ------- -------
Total revenues 43,014 39,658 80,669 75,430
Cost of revenues:
License and networking 1,618 1,585 3,267 2,627
Customer support 2,401 2,190 4,718 4,258
Service 7,447 7,163 13,682 14,197
------- ------- ------- -------
Total cost of revenues 11,466 10,938 21,667 21,082
------- ------- ------- -------
Gross profit 31,548 28,720 59,002 54,348
Operating expenses:
Research and development 6,850 5,330 13,012 12,031
Sales and marketing 13,815 14,049 25,801 25,705
General and administrative 3,545 3,273 6,787 6,409
Depreciation 1,228 1,470 2,444 2,895
Amortization of acquired intangible assets 738 1,658 1,225 3,313
------- ------- ------- -------
Total operating expenses 26,176 25,780 49,269 50,353
------- ------- ------- -------
Income from operations 5,372 2,940 9,733 3,995
Other income 498 55 1,115 236
Interest income 348 498 732 1,192
------- ------- ------- -------
Income before income taxes 6,218 3,493 11,580 5,423
Provision for income taxes (note 4) -- -- -- (289)
------- ------- ------- -------
Net income for the period $ 6,218 $ 3,493 $11,580 $ 5,134
======= ======= ======= =======
Basic net income per share (note 7) $ 0.32 $ 0.18 $ 0.60 $ 0.26
======= ======= ======= =======
Diluted net income per share (note 7) $ 0.31 $ 0.16 $ 0.57 $ 0.24
======= ======= ======= =======
Weighted average number of Common
Shares outstanding - basic 19,282 19,835 19,461 19,873
======= ======= ======= =======
Weighted average number of Common
Shares outstanding - diluted 20,359 21,302 20,437 21,262
======= ======= ======= =======
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 Six months ended
December 31, December 31,
------------------ ------------------
2002 2001 2002 2001
-------- ------- -------- -------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income for the period $ 6,218 $ 3,493 $ 11,580 $ 5,134
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of acquired
intangible assets 1,966 3,128 3,669 6,208
Other -- -- -- (247)
Changes in operating assets and liabilities
net of assets acquired:
Accounts receivable 2,609 (1,650) 6,124 5,557
Prepaid expenses and other current assets 1,072 32 1,336 (448)
Accounts payable - trade and accrued liabilities 532 3,692 (1,076) 286
Income taxes payable -- (1,965) -- (1,825)
Income taxes recoverable (151) (315) (177) (315)
Deferred revenue (364) (173) 396 (3,559)
Unrealized foreign exchange loss (214) (200) (581) (820)
-------- ------- -------- -------
Net cash provided by operating activities 11,668 6,042 21,271 9,971
-------- ------- -------- -------
Cash flows from investing activities:
Acquisitions of capital assets (918) (1,015) (1,448) (1,751)
Purchase of Centrinity Inc., net of cash acquired (11,369) -- (11,369) --
Purchase of patent -- -- (1,246) --
Purchase of investments -- (623) -- (709)
Business acquisition costs -- (212) -- (212)
Other -- -- (132) --
-------- ------- -------- -------
Net cash used in investing activities (12,287) (1,850) (14,195) (2,672)
-------- ------- -------- -------
Cash flows from financing activities:
Payments of obligations under capital leases -- -- -- (14)
Proceeds from issuance of Common Shares 775 2,900 2,486 4,456
Repurchase of Common Shares (1,066) -- (17,302) (8,259)
-------- ------- -------- -------
Net cash provided by (used in) financing activities (291) 2,900 (14,816) (3,817)
-------- ------- -------- -------
Foreign exchange gain (loss) on cash held in foreign currency 238 (45) 186 179
-------- ------- -------- -------
Increase (decrease) in cash and cash equivalents during the period (672) 7,047 (7,554) 3,661
Cash and cash equivalents at beginning of period 103,013 84,140 109,895 87,526
-------- ------- -------- -------
Cash and cash equivalents at end of period $102,341 $91,187 $102,341 $91,187
======== ======= ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 5 $ 4 $ 9 $ 12
Cash paid during the period for taxes -- -- -- 150
See accompanying notes to condensed consolidated financial statements
5
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED BALANCE SHEETS
(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 Quarterly Report on 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 both the three months and six months ended December 31,
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 ("US GAAP"). 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 - Accounting
Policies 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,
judgments and assumptions, which are evaluated on an ongoing basis, that affect
the amounts reported in the financial statements. Management bases its estimates
on historical experience and on various other assumptions that it believes are
reasonable at that time under the circumstances, the results of which form the
basis for making judgments about carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
those estimates. In particular, significant estimates, judgments and assumptions
include those related to revenue recognition, allowance for doubtful accounts,
investments, long-lived assets and litigation.
Comprehensive net income
Comprehensive net income is comprised of net income and other comprehensive
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 BALANCE SHEETS
(unaudited)
(tabular dollar amounts in thousands, except share data)
Three months ended Six months ended
December 31, December 31,
------------------ ----------------
2002 2001 2002 2001
------ ------ ------- ------
Other comprehensive income (loss):
Foreign currency translation adjustment $ (104) $ 79 $ (798) $ 21
Unrealized gain on available for sale securites 59 -- 14 --
------ ------ ------- ------
Other comprehensive income (loss): (45) 79 (784) 21
Net income for the period 6,218 3,493 11,580 5,134
------ ------ ------- ------
Comprehensive net income for the period $6,173 $3,572 $10,796 $5,155
====== ====== ======= ======
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.
7
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(tabular dollar amounts in thousands, except share data)
If VSOE of fair value does not exist for all undelivered elements, all
revenue is deferred until sufficient evidence exists or all elements
have been delivered.
The Company assesses whether payment terms are customary or extended
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
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 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. Adopting the provisions of SFAS
No. 144 did not have a material impact on the Company's financial condition
or results of operations.
Goodwill and Other Intangible Assets
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 has assessed the impact of SFAS 142
on its operating results and financial condition, and has determined that
there currently exists no impairment in its goodwill.
8
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(tabular dollar amounts in thousands, except share data)
Adjusted net income and per share amounts for the three and six months
ended December 31, 2002 and 2001 as if the principles in SFAS 142 had been
applied in both periods would be as follows:
Three months ended Six months ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income for the period $6,218 $3,493 $11,580 $5,134
Add back: goodwill amortization
-- 1,063 -- 2,122
------ ------ ------- ------
Adjusted net income for the period $6,218 $4,556 $11,580 $7,256
====== ====== ======= ======
Adjusted net income per share
Basic $ 0.32 $ 0.23 $ 0.60 $ 0.37
Diluted $ 0.31 $ 0.21 $ 0.57 $ 0.34
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 fiscal 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. The Company will adopt the provisions
of SFAS 146 for exit or disposal activities that are initiated after
December 31, 2002.
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others
In November 2002, FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45), which requires certain
disclosures of obligations under guarantees. The disclosure requirements of
FIN 45 are effective for the Company's interim period ended December 31,
2002. Effective for 2003, FIN 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees entered
into or modified after December 31, 2002, based on the fair value of the
guarantee. The Company has adopted the disclosure requirements, but has not
determined the impact of the measurement requirements of FIN 45.
9
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(tabular dollar amounts in thousands, except share data)
Consolidation of Variable Interest Entities
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). The consolidation provisions of FIN
46 are effective for all newly created entities created after January 31,
2003, and are applicable to existing entities as of the quarter beginning
July 1, 2003. The Company has not determined the impact of the requirements
of FIN 46.
NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities are as follows:
As of As of
December 31, June 30,
2002 2002
------------ --------
(unaudited)
Accounts payable - trade $ 4,631 $ 2,288
Accrued trade liabilities 10,028 8,300
Amounts payable for acquisitions 2,582 871
Accrued salaries and commissions 8,248 7,376
Other liabilities 354 54
------- -------
$25,843 $18,889
======= =======
NOTE 4 - INCOME TAXES
As of December 31, 2002, the Company had total net deferred tax assets of
$20.3 million, the principal component of which is temporary differences
associated with net operating loss carryforwards. 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 provided against the deferred tax
asset with a valuation allowance of $6.5 million because it believes that
sufficient uncertainty exists regarding the realization of certain 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 December 31, 2002, the Company and its subsidiaries had approximately
$46.0 million of losses and deductions available to reduce taxable income in
future years, the benefit of which is reflected in the deferred tax assets.
Deductions of $6.0 million have no expiration date, and the balance of losses
expire between 2004 and 2011.
The net deferred income tax asset as at December 31, 2002, of $13.8 million
arises from available income tax losses and future income tax deductions. The
Company's ability to use these income tax losses and future income tax
deductions is dependent upon the operations of the Company in the tax
jurisdictions in which such losses or deductions arose. Management records a
valuation allowance against deferred income tax assets when management believes
it is more likely than not that some portion or all of the deferred income tax
assets will not be realized. Based on the reversal of deferred income tax
liabilities, projected future taxable income, the character of the income tax
asset and tax planning strategies, management has determined that a valuation
allowance of $6.5 million is required in respect of its deferred income tax
assets as at December 31, 2002. A valuation allowance of $9.3 million was
required for the deferred income tax assets as at June 30, 2002. In order to
fully utilize the net deferred income tax assets of $13.8 million, the Company
will need to generate future taxable income in applicable jurisdictions of
approximately $35 million. Based on the Company's current projection of taxable
income for the periods in which the deferred income tax assets are deductible,
it is more likely than not that the Company will realize the benefit of the net
deferred income tax assets as at December 31, 2002.
NOTE 5 - SEGMENT INFORMATION
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, based on the location of the respective
customers. The accounting policies of the operating segments are the same as
those described in the summary of accounting policies.
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
10
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(tabular dollar amounts in thousands, except share data)
are consistent with the manner in which they are allocated for presentation to,
and analysis by, the chief operating decision maker of the Company. The "Other"
category consists of geographic regions other than North America and Europe.
Contribution margin from operating segments does not include amortization
of intangible assets, acquired in-process research and development, and
restructuring costs. Goodwill and other intangible assets have been included in
segment assets.
Information about reported segments are as follows:
North
America Europe Other Total
------- ------- ------ --------
Three months ended December 31, 2002
Revenue from external customers $26,088 $15,570 $1,356 $ 43,014
Operating costs 24,864 9,762 1,050 35,676
------- ------- ------ --------
Contribution margin $ 1,224 $ 5,808 $ 306 $ 7,338
======= ======= ====== ========
Segment assets as of December 31, 2002 $74,768 $33,058 $1,620 $109,446
======= ======= ====== ========
Three months ended December 31, 2001
Revenue from external customers $23,602 $14,548 $1,508 $ 39,658
Operating costs 21,994 10,421 1,175 33,590
------- ------- ------ --------
Contribution margin $ 1,608 $ 4,127 $ 333 $ 6,068
======= ======= ====== ========
Segment assets as of December 31, 2001 $59,197 $26,854 $1,730 $ 87,781
======= ======= ====== ========
North
America Europe Other Total
------- ------- ------ -------
Six months ended December 31, 2002
Revenue from external customers $48,236 $30,043 $2,390 $80,669
Operating costs 42,425 22,536 2,306 67,267
------- ------- ------ -------
Contribution margin $ 5,811 $ 7,507 $ 84 $13,402
======= ======= ====== =======
Six months ended December 31, 2001
Revenue from external customers $46,683 $26,683 $2,084 $75,430
Operating costs 40,212 22,529 2,486 65,227
------- ------- ------ -------
Contribution margin $ 6,471 $ 4,134 $ (402) $10,203
======= ======= ====== =======
11
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(tabular dollar amounts in thousands, except share data)
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements for the three
months and six months ended December 31, 2002 and 2001 are as follows:
Three months ended December 31,
-------------------------------
2002 2001
------ ------
Total contribution margin from operating
segments above $7,338 $6,068
Amortization and depreciation 1,966 3,128
------ ------
Total operating income 5,372 2,940
Interest, other income, and taxes 846 553
------ ------
Net Income $6,218 $3,493
====== ======
Six months ended December 31,
-----------------------------
2002 2001
------- -------
Total contribution margin from operating
segments above $13,402 $10,203
Amortization and depreciation 3,669 6,208
------- -------
Total operating income 9,733 3,995
Interest, other income, and taxes 1,847 1,139
------- -------
Net income $11,580 $ 5,134
======= =======
December 31, June 30,
2002 2002
------------ --------
Segment assets $109,446 $ 86,240
Term deposits 90,557 100,473
Investments 147 134
-------- --------
Total corporate assets $200,150 $186,847
======== ========
The following table sets forth the distribution of net revenues determined by
location of customer and identifiable assets, by geographic area where the net
revenue for such location is greater than 10% of total revenue, for the three
and six months ended December 31, 2002 and 2001:
12
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(tabular dollar amounts in thousands, except share data)
Three months ended December 31,
-------------------------------
2002 2001
------- -------
Net revenues:
Canada $ 3,728 $ 2,874
United States 22,360 20,728
United Kingdom 5,073 4,268
Rest of Europe 10,497 10,280
Other 1,356 1,508
------- -------
Total revenues $43,014 $39,658
======= =======
Six months ended December 31,
-----------------------------
2002 2001
------- -------
Net revenues:
Canada $ 6,090 $ 5,307
United States 42,146 41,333
United Kingdom 9,419 9,585
Rest of Europe 20,624 17,051
Other 2,390 2,154
------- -------
Total revenues $80,669 $75,430
======= =======
December 31, June 30,
2002 2002
------------ --------
Segment assets:
Canada $ 36,030 $16,472
United States 38,738 36,105
United Kingdom 11,609 9,556
Other 23,069 24,107
-------- -------
Total segment assets $109,446 $86,240
======== =======
NOTE 6 - ACCUMULATED DEFICIT
During the three months ended December 31, 2002, the Company, pursuant to
its stock repurchase program, purchased 43,500 of its common shares on The
Toronto Stock Exchange and the Nasdaq National Market at an aggregate cost of
$1.1 million. $0.5 million of the repurchase was charged to common share capital
based on the average carrying value of the common stock, with the remaining $0.6
million charged to accumulated deficit. During the six months ended December 31,
2002, the Company purchased 755,700 of its common shares pursuant to its stock
repurchase program at an aggregate cost of $17.3 million. $7.8 million of the
repurchase was charged to common share capital based on the average carrying
value of the common stock, with the remaining $9.5 million charged to
accumulated deficit.
The Company did not repurchase any common shares during the three months
ended December 31, 2001. During the six months ended December 31, 2001, the
Company purchased 348,700 of its common shares pursuant to its stock repurchase
program at an aggregate cost of $8.3 million. $3.6 million of the repurchase was
charged to common
13
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(tabular dollar amounts in thousands, except share data)
share capital based on the average carrying value of the common stock, with the
remaining $4.7 million charged to accumulated deficit.
NOTE 7 - NET INCOME PER SHARE
Three Months Ended December 31, Six Months Ended December 31,
------------------------------- -----------------------------
2002 2001 2002 2001
------- ------- ------- -------
Basic net income per share
Net income $ 6,218 $ 3,493 $11,580 $ 5,134
======= ======= ======= =======
Weighted average number
of shares outstanding 19,282 19,835 19,461 19,873
======= ======= ======= =======
Basic income per share $ 0.32 $ 0.18 $ 0.60 $ 0.26
======= ======= ======= =======
Diluted net income per share
Net income $ 6,218 $ 3,493 $11,580 $ 5,134
======= ======= ======= =======
Weighted average number
of shares outstanding 19,282 19,835 19,461 19,873
Dilutive effect of stock options 1,077 1,467 976 1,389
------- ------- ------- -------
Adjusted weighted average number
of shares outstanding 20,359 21,302 20,437 21,262
======= ======= ======= =======
Diluted income per share $ 0.31 $ 0.16 $ 0.57 $ 0.24
======= ======= ======= =======
NOTE 8 - BUSINESS COMBINATIONS
On November 1, 2002, the Company completed the acquisition of all of the
issued and outstanding shares of Centrinity Inc. ("Centrinity") for cash
consideration of $20.3 million. The transaction was completed by way of an
amalgamation of Centrinity with 3801853 Canada Inc., a wholly-owned subsidiary
of Open Text. The results of operations of Centrinity have been consolidated
with those of Open Text beginning November 1, 2002. Toronto-based Centrinity,
which has developed a communications and messaging platform, has over 8 million
users worldwide. Open Text intends on further developing this technology, and
plans for it to be integrated into its flagship product, Livelink.
The following table summarizes the purchase price allocation:
14
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(tabular dollar amounts in thousands, except share data)
Cash and cash equivalents $ 8,931
Accounts receivable 1,682
Prepaid expenses and other current assets 1,138
Capital assets 1,655
Future tax assets 12,413
Customer contracts 1,000
Customer relationships 1,400
Purchased technology 4,000
Goodwill 5,012
--------
Total assets acquired 37,231
Accounts payable and accrued liabilities (5,600)
Deferred revenues (5,522)
Liabilities recognized in connection with the business combination (5,809)
--------
Total liabilities assumed (16,931)
--------
Net assets acquired $ 20,300
========
The total purchase price allocated to goodwill of $5.0 million was assigned
to the Company's reportable geographic segments as follows:
North America $2,757
Europe 2,255
------
$5,012
======
In accordance with SFAS 142, the goodwill will not be amortized but will be
reviewed for impairment on an annual basis.
The customer contracts of $1.0 million was assigned a useful life of 3
years, while the customer relationships of $1.4 million were assigned a useful
life of 7 years. The purchased technology of $4.0 million has been separated
into subcomponents, whose useful lives have been assigned as either 5 or 7
years.
As part of the purchase price allocation, the Company recognized
liabilities in connection with the acquisition of Centrinity totaling $5.8
million. The liabilities recognized include severance and related charges in
connection with a worldwide reduction in the Centrinity workforce, in addition
to transaction costs and costs relating to provisioning for excessive
facilities. Of the total liabilities recognized in connection with the
acquisition totaling $5.8 million, $5.1 million remains accrued at December 31,
2002.
The following pro forma results of operations reflect the combined results
of Open Text and Centrinity for the three and six-month periods ended December
31, 2002 and 2001, as if the business combination occurred as of the beginning
of Open Text's fiscal year. The information used for this pro forma disclosure
was obtained from unaudited reports filed with the Ontario Securities Commission
for the periods ended September 30, 2001, December 31, 2001, and internal
financial reports prepared by Centrinity from June 1, 2002 through the date of
acquisition, November 1, 2002.
15
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(tabular dollar amounts in thousands, except share data)
Pro Forma Results of Operations
---------------------------------------------------------
Three months ended Six months ended
--------------------------- ---------------------------
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenue $46,057 $42,345 $87,074 $82,840
Net Income 4,872 1,363 7,758 (368)
Basic net income per share $ 0.25 $ 0.07 $ 0.40 $ (0.02)
Shares used in computing basic net income per share (in thousands) 19,640 19,910 19,461 19,873
Diluted net income per share $ 0.24 $ 0.07 $ 0.38 $ (0.02)
Shares used in computing diluted net income per share (in thousands) 20,536 19,910 20,437 19,873
16
Item 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 25 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 December 31, 2002, the Company recorded total
revenue of $43.0 million, of which license and networking revenue was $17.4
million, as well as net income of $6.2 million. In addition, the Company's cash
and cash equivalents were $102.3 million, with cash flow from operations
totaling $11.7 million. The Company's days' sales outstanding ("DSO") of 62 days
at December 31, 2002, decreased from 71 days at December 31, 2001. Segment
information relating to the financial statements is presented in Note 5 to the
Company's condensed consolidated financial statements.
On November 1, 2002, the Company completed the acquisition of all of the
issued and outstanding shares of Centrinity Inc., of Toronto, for cash
consideration of $20.3 million. The transaction was completed by way of an
amalgamation of Centrinity with 3801853 Canada Inc., a wholly-owned subsidiary
of Open Text. The 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.
17
On January 9, 2003, Open Text announced that it entered into a definitive
acquisition agreement to acquire all of the issued and outstanding capital stock
of Eloquent Inc. ("Eloquent"), of San Mateo, California. The purchase price will
consist of cash consideration of up to $6.7 million, or approximately $0.34 per
outstanding share of Eloquent Common Stock, of which $1.0 million will be held
in escrow to secure certain representations, warranties and covenants of
Eloquent in the acquisition agreement. The purchase price is subject to a
downward closing adjustment based on Eloquent's net cash at closing as described
in the acquisition agreement. The companies expect the transaction to close
within approximately 90 days of the signing of the definitive agreement subject
to certain closing conditions, including approval by Eloquent's stockholders.
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"). 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, except as described in Note 2 of these condensed
consolidated financial statements. Dollar amounts in this Quarterly 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 and then recognized as
revenue as that element is delivered.
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 worldwide installed base. The Company's multiple element sales
arrangements generally include rights for the customer to renew PCS after the
bundled term ends. These rights are irrevocable to the customer's benefit, are
for specified prices and the customer is not subject to any economic or other
penalty for failure to renew. Further, the renewal PCS options are for services
comparable to the bundled PCS and cover similar terms.
It is the Company's experience that customers generally exercise their
renewal PCS option. In the renewal transaction, PCS is sold on a stand-alone
basis to the licensees one year or more after the original multiple element
sales arrangement. The renewal PCS price is consistent with the renewal price in
the original multiple element sales arrangement although an adjustment to
reflect consumer price changes are not uncommon.
18
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.
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.
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.
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.
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 but 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 against deferred
income tax assets when management believes it is more likely than not that some
portion or all of the deferred income tax assets will not be realized.
Management considers factors such as the reversal of deferred income tax
liabilities, projected future taxable income, the character of the income tax
asset and tax planning strategies. A change to these factors could impact the
estimated valuation allowance and income tax expense.
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 and for Long-Lived Assets to Be Disposed Of." 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, which are calculated by management based on
financial plans and expectations, taking into account current business trends,
economic outlook, business strategies and other relevant information. 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
19
resulted in a gain to the Company, or a loss less than that provided for, such
gain is recognized when received or receivable.
Results of Operations
Three Months Ended December 31, 2002 Compared with Three Months Ended December
31, 2001
Revenues. The Company's total revenues increased 8% from $39.7 million in
the three months ended December 31, 2001 to $43.0 million for the three months
ended December 31, 2002. License and networking revenues increased 9% from $15.9
million in the three months ended December 31, 2001 to $17.4 million in the
three months ended December 31, 2002. Networking revenue increased slightly to
$1.1 million in the three month period ended December 31, 2002 compared to $1.0
million during the three-month period ended December 31, 2001. The increase in
license and networking revenues is a reflection of both the acquisition of
Centrinity during the quarter ended December 31, 2002, as well as modest organic
growth despite a continued challenging economic environment. As has been the
Company's experience over the past several quarters, 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
during the three months ended December 31, 2002 as compared with the three
months ended December 31, 2001 was in part due to 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
the Company has experienced over the past several quarters of closing larger
license transactions than had been experienced throughout most of fiscal 2002.
The Company is uncertain, however, as to whether this trend will continue
throughout the remaining fiscal 2003.
Customer support revenues increased 22% from $12.2 million in the three
months ended December 31, 2001 to $14.9 million for the three months ended
December 31, 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. Also impacting customer
support revenue during the quarter ended December 31, 2002 was customer support
revenue generated by Centrinity.
Service revenues decreased 7% from $11.6 million in the three months ended
December 31, 2001 to $10.8 million in the three months ended December 31, 2002.
The decrease in service revenues relates primarily to the decrease in the number
of billable personnel within the Company's services organization during the
three month period ended December 31, 2002 as compared to the three months ended
December 31, 2001. The revenue generated from the services organization has
decreased relatively proportionately to the decrease in personnel. Also
impacting service revenues during the three months ended December 31, 2002 was
revenue generated as a result of the Company's North American user's conference,
which was down slightly from the amount recognized during the three months ended
December 31, 2001.
No single customer accounted for greater than 10% of the Company's revenue
in the three months ended December 31, 2002 or in the three months ended
December 31, 2001. For the three months ended December 31, 2002, 61% of total
revenues were from customers located in North America, 36% 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 59%, 37% and
4%, respectively, for North America, Europe and Other for the three months ended
December 31, 2001.
Cost of revenues. Cost of license and networking revenues remained
consistent at $1.6 million in both the three months ended December 31, 2001 and
2002. Cost of networking revenues totaled $0.1 million during each of the
quarters ended December 31, 2002 and 2001. Included in cost of license and
networking revenues are costs relating to packaging the Company's products, as
well as royalties relating to licensed software and other third party software
costs. As a percentage of license and networking revenues, cost of license and
networking revenues represented 9% in the three months ended December 31, 2002
compared with 10% in the three months ended December 31, 2001 due to a higher
total revenue base.
20
Cost of customer support revenues increased 10% from $2.2 million in the
three months ended December 31, 2001 to $2.4 million in the three months ended
December 31, 2002. As a percentage of customer support revenues, cost of
customer support revenues decreased from 18% in the three months ended December
31, 2001 to 16% during the three months ended December 31, 2002. The increase in
cost of customer support revenues in absolute dollars is primarily due to an
increase in personnel-related expenses, including those associated with the
Centrinity acquisition.
Cost of service revenues increased 4% from $7.2 million in the three months
ended December 31, 2001 to $7.4 million in the three months ended December 31,
2002. As a percentage of service revenues, cost of service revenues increased
from 62% in the three months ended December 31, 2001 to 69% in the three months
ended December 31, 2002. The increase in cost of service revenues in absolute
dollars was primarily a result of the fact that during the three months ended
December 31, 2001 there were more investment tax credits earned by the Company's
services organization than during three months ended December 31, 2002.
Research and development. Research and development expenses increased 29%
from $5.3 million in the three months ended December 31, 2001 to $6.9 million in
the three months ended December 31, 2002. Research and development expenses
consist primarily of personnel expenses, and their related facilities and
equipment expenses. As a percentage of revenues, research and development
expenses increased from 13% in the three months ended December 31, 2001 to 16%
in the three months ended December 31, 2002. The increase in research and
development expenses primarily resulted from a decrease in the amount of
research and development tax credits earned during the three month period ended
December 31, 2002 as compared with the three month period ended December 31,
2001. Research and development expenses also increased as a result of the
acquisition of the Centrinity development organization during the three weeks
ended December 31, 2002.
Sales and marketing. Sales and marketing expenses decreased 2% from $14.0
million in the three months ended December 31, 2001 to $13.8 million in the
three months ended December 31, 2002. Sales and marketing expenses include the
costs associated with the Company's sales-force 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 35% in the three months ended December 31, 2001 to 32% in the
three months ended December 31, 2002. The decrease in sales and marketing
expenses in absolute dollars during the three months ended December 31, 2002
compared with the three months ended December 31, 2001 is a result of reduced
spending associated with discretionary external marketing initiatives. The
decrease in sales and marketing expenses as a percentage of total revenues for
the three months ended December 31, 2002 resulted from lower absolute dollar
spending and a higher total revenue base.
General and administrative. General and administrative expenses increased
8% from $3.3 million in the three months ended December 31, 2001 to $3.5 million
in the three months ended December 31, 2002. General and administrative expenses
consist primarily of the salaries of administrative personnel and related
overhead and facilities expenses. As a percentage of revenues, general and
administrative expenses remained consistent at 8% in both the three months ended
December 31, 2001 and 2002. The increase in general and administrative expenses
during the three month period ended December 31, 2002 as compared with the three
month period ended December 31, 2001 is primarily a result of additional
personnel assumed as a result of the Centrinity acquisition. Some of these
additional personnel will be terminated in future periods following the
integration of the two organizations. (See Note 8 of the condensed consolidated
financial statements).
Depreciation. Depreciation expense decreased 16% from $1.5 million in the
three months ended December 31, 2001 to $1.2 million in the three months ended
December 31, 2002. As a percentage of revenues, depreciation expense decreased
from 4% in the three months ended December 31, 2001 to 3% during the three
months ended December 31, 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 55% from $1.7 million in the three months ended
December 31, 2001 to $738,000 in the three months ended December 31, 2002. As a
percentage of revenues, amortization of acquired intangible assets decreased
from 4% in the three months ended December 31, 2001 to 2% in the three months
ended December 31, 2002. This decrease is due to the fact that beginning in
fiscal 2002, the Company discontinued its amortization of goodwill consistent
with recent accounting pronouncements requiring a change in accounting policy.
The 2001 period includes $1.1 million of goodwill amortization. This reduction
in amortization
21
of acquired intangible assets was slightly offset by a partial period of
amortization associated with the acquisition of Centrinity.
Other income. Other income increased 805% from $55,000 for the three months
ended December 31, 2001 to $498,000 for the three months ended December 31,
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.
Interest income. Interest income decreased 30% from $498,000 for the three
months ended December 31, 2001 to $348,000 for the three months ended December
31, 2002. The reduction in interest income is a result of the fact that lower
interest rates realized during the three month period ended December 31, 2002
more than offset the fact that the Company had higher cash balances during the
three months ended December 31, 2002.
Income taxes. The net deferred income tax asset as at December 31, 2002, of
$13.8 million arises from available income tax losses and future income tax
deductions. The Company's ability to use these income tax losses and future
income tax deductions is dependent upon the operations of the Company in the tax
jurisdictions in which such losses or deductions arose. Management records a
valuation allowance against deferred income tax assets when management believes
it is more likely than not that some portion or all of the deferred income tax
assets will not be realized. Based on the reversal of deferred income tax
liabilities, projected future taxable income, the character of the income tax
asset and tax planning strategies, management has determined that a valuation
allowance of $6.5 million is required in respect of its deferred income tax
assets as at December 31, 2002. A valuation allowance of $9.3 million was
required for the deferred income tax assets as at June 30, 2002. In order to
fully utilize the net deferred income tax assets of $13.8 million, the Company
will need to generate future taxable income in applicable jurisdictions of
approximately $35 million. Based on the Company's current projection of taxable
income for the periods in which the deferred income tax assets are deductible,
it is more likely than not that the Company will realize the benefit of the net
deferred income tax assets as at December 31, 2002.
Results of Operations
Six Months Ended December 31, 2002 Compared with the Six Months Ended December
31, 2001
Revenues. The Company's total revenues increased by 7% from $75.4 million
for the six months ended December 31, 2001 to $80.7 million for the six months
ended December 31, 2002. License and networking revenue also increased by 7%
from $30.6 million in the six months ended December 31, 2001 to $32.8 million in
the six months ended December 31, 2002, largely as a result of the Company
closing a greater number of larger license transactions during fiscal 2002.
Customer support revenues increased 18% from $24.2 million in the six
months ended December 31, 2001 to $28.5 million for the six months ended
December 31, 2002. The customer support revenue increase primarily resulted from
growth in the Company's user base through new licenses, as well as strong
customer renewal rates for maintenance and the addition of Centrinity's customer
support revenues beginning November 1, 2002.
Service revenues decreased 6% from $20.6 million in the six months ended
December 31, 2001 to $19.3 million in the six months ended December 31, 2002,
due to a decrease in the number of billable resources employed in the Company's
services organization compared with a year ago.
Cost of revenues. Cost of license and networking revenues increased 24%
from $2.6 million in the six months ended December 31, 2001 to $3.3 million in
the six months ended December 31, 2002. As a percent of license and networking
revenues, cost of license and networking revenues increased from 9% in the six
months ended December 31, 2001 to 10% in the six months ended December 31, 2002.
The increase in cost of license and networking revenues was largely the result
of increases in certain expenses that increase proportionately with license
revenue, such as third-party software costs and royalties.
Cost of customer support revenues increased 11% from $4.3 million in the
six months ended December 31, 2001 to $4.7 million in the six months ended
December 31, 2002. As a percent of customer support revenues, cost of revenues
decreased from 18% in the six months ended December 31, 2001 to 17% in the six
months ended
22
December 31, 2002. Customer support costs in absolute dollars increased due to
an increase in personnel in both the support and contract renewal areas to
support the Company's growing installed customer base, increased expenses
related to education and travel, and costs related to its acquisition of
Centrinity.
Cost of service revenues decreased from $14.2 million during the six months
ended December 31, 2001 to $13.7 million in the six months ended December 31,
2002. As a percentage of service revenues, the cost of service revenues
increased from 68% in the six months ended December 31, 2001 to 71% in the six
months ended December 31, 2002. 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, which were partially
offset by lower investment tax credits earned by the Company's services
organization during the six months ended December 31, 2002.
Research and development. Research and development costs increased 8% from
$12.0 million in the six months ending December 31, 2001 to $13.0 million in the
six months ending December 31, 2002. As a percentage of revenues, research and
development costs remained constant at 16% for the six months ended December 31,
2001 to the six months ended December 31, 2002. Research and development costs
consist primarily of personnel expenses, and their related facilities and
equipment expenses. The increase in research and development expense in absolute
dollars resulted primarily from increased compensation expenses resulting from
additional personnel, some of whom were obtained through the Centrinity
acquisition. The increase in research and development expenses was partially due
to the fact that the Company's research and development tax credit claim in the
six month period ended December 31, 2001 was more significant than the tax
credits earned during the six month period ended December 31, 2002.
Sales and marketing. Sales and marketing expenses increased from $25.7
million in the six month period ended December 31, 2001 to $25.8 million in the
six month period ended December 31, 2002. As a percentage of revenues, sales and
marketing expenses decreased from 34% for the six months ending December 31,
2001 to 32% during the six months ended December 31, 2002. Although the total
sales and marketing expenses were relatively consistent between the two periods,
the Company increased personnel expenses and employee incentive programs, while
decreasing external marketing programs over the past year. Sales and marketing
expenses as a percentage of revenues decreased due to a higher total revenue
base.
General and administrative. General and administrative expenses increased
6% from $6.4 million in the six months ended December 31, 2001 to $6.8 million
in the six months ended December 31, 2002. As a percentage of revenues, general
and administrative expense increased from 8% in the six months ended December
31, 2001 to 9% in the six months ended December 31, 2002. The increase in
general and administrative expense since the prior year was a result of
increases in personnel-related costs, including additional personnel assumed in
the Centrinity acquisition.
Depreciation. Depreciation decreased 16% from $2.9 million in the six
months ended December 31, 2001 to $2.4 million in the six months ended December
31, 2002. As a percentage of revenues depreciation expense decreased from 4% in
the six months ended December 31, 2001 to 3% in the six months ended December
31, 2002. This decrease is due to reduced expenditures on capital assets
resulting in an increasingly depreciated capital asset base.
Amortization of acquired intangible assets. Amortization of acquired
intangible assets decreased 63% from $3.3 million in the six months ended
December 31, 2001 to $1.2 in the six months ended December 31, 2002. As a
percentage of revenues, amortization of acquired intangible assets decreased
from 4% in the six months ended December 31, 2001 to 2% in the six months ended
December 31, 2002. This decrease is due to the fact that beginning in fiscal
2002, the Company discontinued its amortization of goodwill consistent with
recent accounting pronouncements requiring a change in accounting policy.
Other income. Other income increased 372% from $236,000 in the six months
ended December 31, 2001 to $1.1 million in the six month period ended December
31, 2002, due to gains in foreign currency exchange.
Interest income. Interest income decreased 39% from $1.2 million in the six
months ended December 31, 2001 to $732,000 in the six months ended December 31,
2002, as a result of lower interest rates, despite the fact that the Company
maintained higher average cash balances during the six month period ended
December 31, 2002 as compared with the six month period ended December 31, 2001.
23
Liquidity and Capital Resources
At December 31, 2002, the Company had current assets of $136.2 million,
current liabilities of $53.1 million and working capital of $83.1 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 as well as the consideration paid for the Centrinity acquisition, both
of which were partially offset by cash generated by the Company's operations
over the six month period ended December 31, 2002. During the three months ended
December 31, 2002, the Company repurchased for cancellation a total of 45,300 of
its Common Shares on the open market for total consideration of $1.1 million. At
December 31, 2002, the Company had cash and cash equivalents totaling $102.3
million, compared to cash and cash equivalents of $109.9 million at June 30,
2002.
Net cash provided by operating activities during the three months ended
December 31, 2002 was $11.7 million, compared to $6.0 million during the three
months ended December 31, 2001. The increase was primarily a result of higher
net income and stronger cash collections related to the Company's accounts
receivables during the three months ended December 31, 2002 as compared to the
three months ended December 31, 2001.
Net cash provided by operating activities during the six months ended
December 31, 2002 was $21.3 million, compared to $10.0 million during the six
months ended December 31, 2001. The increase was primarily a result of higher
net income and stronger cash collections related to the Company's accounts
receivables during the six months ended December 31, 2002 as compared to the six
months ended December 31, 2001.
Net cash used for investing activities was $12.3 million during the three
months ended December 31, 2002 compared to $1.9 million during the three months
ended December 31, 2001. During the three month period ended December 31, 2002,
the Company paid $11.4 million to purchase Centrinity, as well as $918,000 to
the purchase of capital assets. During the three month period ended December 31,
2001, the Company spent approximately $1.0 million on the purchase of capital
assets, along with $623,000 for the purchase of certain investments and $212,000
relating to business acquisition costs.
Net cash used for investing activities was $14.2 million during the six
months ended December 31, 2002 compared to $2.7 million during the six months
ended December 31, 2001. During the six month period ended December 31, 2002,
the Company paid $11.4 million to purchase Centrinity, as well as $1.4 million
relating to the purchase of capital assets and $1.2 million relating to the
purchase of a patent. During the six month period ended December 31, 2001, the
Company spent approximately $1.8 million on the purchase of capital assets,
along with $709,000 for the purchase of certain investments and $212,000
relating to business acquisition costs.
Net cash used in financing activities was $291,000 in the three months
ended December 31, 2002, resulting from the repurchase for cancellation of
45,300 Common Shares on the open market at a cost of $1.1 million, of which $0.5
million has been charged to share capital and $0.6 million has been charged to
accumulated deficit, partially offset by proceeds of $775,000 from the sale of
Common Shares related to the exercise of Company options. Net cash provided by
financing activities was $2.9 million in the three months ended December 31,
2001, which consisted entirely of the proceeds from the sale of Common Shares
related to the exercise of Company stock options.
Net cash used in financing activities was $14.8 million in the six months
ended December 31, 2002, resulting from the repurchase for cancellation of
757,500 Common Shares on the open market at a cost of $17.3 million, partially
offset by proceeds of $2.5 million from the sale of Common Shares related to the
exercise of Company stock options. Net cash used in financing activities was
$3.8 million in the six months ended December 31, 2001, resulting from the
repurchase for cancellation of 348,700 Common Shares on the open market at a
cost of $8.3 million, partially offset by proceeds of $4.5 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 December
31, 2002 and the entire amount of which was available for
24
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.
On January 9, 2003, the Company announced that it had entered into a
definitive acquisition agreement with Eloquent Inc. ("Eloquent") of San Mateo,
California, whereby Open Text will acquire all of the issued and outstanding
capital stock of Eloquent for cash consideration of up to $6.7 million, or
approximately $0.34 per outstanding share of Eloquent Common Stock, of which
$1.0 million will be held in escrow to secure certain representations,
warranties and covenants of Eloquent in the acquisition agreement. The purchase
price is subject to a downward closing adjustment based on Eloquent's net cash
at closing as described in the acquisition agreement. The companies expect the
transaction to close within 90 days of the signing of the agreement, subject to
certain closing conditions, including approval by Eloquent's stockholders.
With the acquisition of Centrinity, the Company has assumed additional
expenses relating to its ongoing operations. The Company does not currently
anticipate any large increases in operating expenses in the foreseeable future,
with the exception of the operating expenses related to the potential
acquisition of Eloquent. Similarly, the Company does not currently anticipate
significant increases in the levels of capital asset investments in the
forseeable future.
The Company is committed to the following minimum lease payments on
operating leases for office premises and equipment for the fiscal years ending
June 30 (in thousands):
2003 $ 4,089
2004 5,189
2005 4,022
2006 3,879
thereafter 15,768
--------
$32,947
========
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
beyond 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.
25
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
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.
26
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.
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 1,113, excluding
contractors, as of December 31, 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
27
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 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.
28
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 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.
29
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 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
The Company is primarily exposed to market risks associated with
fluctuations in interest rates and foreign currency exchange rates.
Interest rate risk
The Company's exposure to interest rate fluctuations relates primarily to
its investment portfolio, since the Company had no borrowings outstanding under
its line of credit at December 31, 2002. The Company primarily invests its cash
in short-term high-quality securities with reputable financial institutions. The
primary objective of the Company's investment activities is to preserve
principal while at the same time maximizing the income the Company receives from
its investments without significantly increasing risk. The Company does not use
derivative financial instruments in its investment portfolio. The interest
income from the Company's investments is subject to interest rate fluctuations,
which the Company believes would not have a material impact on the financial
position of the Company.
All highly liquid investments with a maturity of less than three months at
the date of purchase are considered to be cash equivalents. All investments with
maturities of three months or greater are classified as available-for-sale and
considered to be short-term investments. Some of the securities that the Company
has invested in may be subject to market risk. This means that a change in the
prevailing interest rates may cause the principal amount of the investment to
fluctuate. The impact on net interest income of a 100 basis point adverse change
in interest rates for the quarter ended December 31, 2002 would have been
approximately $0.3 million.
Foreign currency risk
The Company has net monetary asset and liability balances in foreign
currencies other than the US Dollar, including the Canadian Dollar ("CDN"), the
Pound Sterling ("GBP"), the Australian dollar ("AUD"), the Swiss Franc ("CHF"),
the German Mark ("DEM"), the French Franc ("FRF"), the Dutch Guilder ("NLG"),
the Danish Kroner ("DKK"), the Arabian Durham ("AED"), and the Euro ("EUR"). The
Company's cash and cash equivalents are primarily held in US Dollars.
The Company's net income is affected by fluctuations in the value of the US
dollar as compared to foreign currencies as a result of transactions in foreign
markets. Approximately 40%, 41%, and 39% of the Company's total revenues in
fiscal 2002, 2001, and 2000, respectively, were derived from operations outside
of North America. Approximately 45%, 42%, and 44% of the Company's operating
expenses in fiscal 2002, 2001 and 2000, respectively, were incurred from
operations outside of North America. The Company does not currently use
financial instruments to hedge operating expenses in foreign currencies. The
Company intends to assess the need to
30
utilize financial instruments to hedge currency exposures on an ongoing basis.
The following tables provide a sensitivity analysis on the Company's
exposure to changes in foreign exchange rates. For foreign currencies where the
Company engages in material transactions, the following table quantifies the
impact that a 10% decrease against the U.S. dollar would have had on the
Company's total revenues, operating expenses, and net income for the three month
period ended December 31, 2002. This analysis is presented in both functional
and transactional currency. The impact of changes in foreign exchange rates for
those foreign currencies not presented in these tables is not material.
10% Change in Functional Currency
---------------------------------
Total Operating Net
Revenue Expenses Income
------- --------- ------
Euro $758 $653 $105
British Pound 507 441 66
Swiss Franc 196 163 32
10% Change in Functional Currency
---------------------------------
Total Operating Net
Revenue Expenses Income
------- --------- ------
Euro $738 $413 $ 325
British Pound 472 328 144
Canadian Dollar 435 896 (461)
Swiss Franc 94 159 (65)
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.
31
PART II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
1. The following individuals were elected to the Company's Board of Directors,
to hold office until the next Annual Meeting of Shareholders. The number of
votes cast for each individual and the number of votes withheld are listed
below.
Name For Withheld
- ------------------ --------- --------
P. Thomas Jenkins 9,538,408 1,730
Richard C. Black 9,538,341 1,797
Randy Fowlie 9,538,241 1,897
Peter J. Hoult 9,538,191 1,941
Brian J. Jackman 9,538,341 1,797
David Johnston 9,538,341 1,797
Ken Olisa 9,538,391 1,747
Stephen J. Sadler 9,538,391 1,747
John Shackleton 9,538,428 1,730
Michael Slaunwhite 9,538,441 1,697
2. The shareholders approved the appointment of KPMG LLP as the Company's
independent auditors. There were 9,417,451 Common Shares voted in favour of
the motion and there were 99,599 votes withheld. The shareholders
authorized the Board of Directors to fix the auditor's remuneration.
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
Acquisition of Centrinity Inc.
On November 18, 2002, Open Text filed a Form 8-K to announce the
acquisition of on November 1, 2002, of all of the issued and
outstanding share capital of Centrinity for cash consideration of CDN
$1.26 per share ($20.3 million total) by way of an amalgamation with
3801853 Canada Inc., a wholly-owned subsidiary of Open Text.
Acquisition of Centrinity Inc.
On January 17, 2003, Open Text filed a Form 8-K/A to amend the Form
8-K filed on November 18, 2002 relating to its acquisition of
Centrinity Inc. This Form 8-K/A included audited financial statements
for Centrinity for the years ended September 30, 2001 and 2002, as
well as pro forma financial information.
Acquisition of Eloquent Inc.
On January 9, 2003, Open Text issued a press release announcing that
it had entered into an agreement with Eloquent Inc. ("Eloquent") of
San Mateo, California, whereby Open Text will acquire all of the
issued and outstanding shares of Eloquent for cash consideration of up
to $6.7 million, or approximately $0.34 per share, of which $1.0
million will be held in escrow to secure certain representations,
warranties and covenants of Eloquent in the acquisition agreement. The
purchase
32
price is also subject to downward closing adjustment based on
Eloquent's net cash at closing as described in the acquisition
agreement. The companies expect the transaction to close within 90
days of the announcement, subject to certain conditions, including
approval by Eloquent's stockholders.
33
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: February 14, 2003
By: /s/ P. Thomas Jenkins
--------------------------------------------
P. Thomas Jenkins
Chief Executive Officer
/s/ Alan Hoverd
--------------------------------------------
Alan Hoverd
Chief Financial Officer
(Principal Financial and Accounting Officer)
34
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: February 14, 2003
/s/ P. Thomas Jenkins
---------------------------
P. Thomas Jenkins
Chief Executive Officer
35
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: February 14, 2003
/s/ Alan Hoverd
---------------------------
Alan Hoverd
Chief Financial Officer
36