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EX-31.2 - EXHIBIT - OPEN TEXT CORPexhibit312q1-15.htm
EX-32.1 - EXHIBIT - OPEN TEXT CORPexhibit321q1-15.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________
FORM 10-Q
______________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014.
OR
¨
TRANSITION 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)  
______________________
 
 
 
CANADA
 
98-0154400
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)

275 Frank Tompa Drive, Waterloo, Ontario, Canada N2L 0A1
(Address of principal executive offices)
(519) 888-7111
(Registrant’s telephone number, including area code)
______________________
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý    Accelerated filer  ¨    Non-accelerated filer  ¨ (Do not check if smaller reporting company) Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
At October 21, 2014, there were 122,037,521 outstanding Common Shares of the registrant.

    1


OPEN TEXT CORPORATION
TABLE OF CONTENTS
 
Page No
PART I Financial Information:
 
Item 1. Financial Statements
 
Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and June 30, 2014
Condensed Consolidated Statements of Income - Three Months Ended September 30, 2014 and 2013 (unaudited)
Condensed Consolidated Statements of Comprehensive Income - Three Months Ended September 30, 2014 and 2013 (unaudited)
Condensed Consolidated Statements of Cash Flows - Three Months Ended September 30, 2014 and 2013 (unaudited)
PART II Other Information:
 





    2



OPEN TEXT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share data)
 
September 30, 2014
 
June 30, 2014
 
(unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
492,486

 
$
427,890

Accounts receivable trade, net of allowance for doubtful accounts of $4,535 as of September 30, 2014 and $4,499 as of June 30, 2014 (note 3)
239,762

 
292,929

Income taxes recoverable (note 14)
12,372

 
24,648

Prepaid expenses and other current assets
47,498

 
42,053

Deferred tax assets (note 14)
30,336

 
28,215

Total current assets
822,454

 
815,735

Property and equipment (note 4)
151,573

 
142,261

Goodwill (note 5)
1,940,082

 
1,963,557

Acquired intangible assets (note 6)
681,229

 
725,318

Deferred tax assets (note 14)
159,424

 
156,712

Other assets (note 7)
54,819

 
52,041

Deferred charges (note 8)
48,598

 
52,376

Long-term income taxes recoverable (note 14)
10,701

 
10,638

Total assets
$
3,868,880

 
$
3,918,638

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities (note 9)
$
193,720

 
$
231,954

Current portion of long-term debt (note 10)
62,105

 
62,582

Deferred revenues
301,341

 
332,664

Income taxes payable (note 14)
15,341

 
31,630

Deferred tax liabilities (note 14)
944

 
1,053

Total current liabilities
573,451

 
659,883

Long-term liabilities:
 
 
 
Accrued liabilities (note 9)
39,126

 
41,999

Deferred credits (note 8)
16,382

 
17,529

Pension liability (note 11)
61,682

 
60,300

Long-term debt (note 10)
1,243,500

 
1,256,750

Deferred revenues
18,646

 
17,248

Long-term income taxes payable (note 14)
163,749

 
162,131

Deferred tax liabilities (note 14)
57,371

 
60,631

Total long-term liabilities
1,600,456

 
1,616,588

Shareholders’ equity:
 
 
 
Share capital (note 12)
 
 
 
122,034,461 and 121,758,432 Common Shares issued and outstanding at September 30, 2014 and June 30, 2014, respectively; Authorized Common Shares: unlimited
800,422

 
792,834

Additional paid-in capital
117,242

 
112,398

Accumulated other comprehensive income
36,216

 
39,449

Retained earnings
759,898

 
716,317

Treasury stock, at cost (763,278 shares at September 30, 2014 and June 30, 2014, respectively)
(19,132
)
 
(19,132
)
Total OpenText shareholders' equity
1,694,646

 
1,641,866

Non-controlling interests
327

 
301

Total shareholders’ equity
1,694,973

 
1,642,167

Total liabilities and shareholders’ equity
$
3,868,880

 
$
3,918,638

Guarantees and contingencies (note 13)
Related party transactions (note 21)
Subsequent event (note 22)

See accompanying Notes to Condensed Consolidated Financial Statements

    3



OPEN TEXT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands of U.S. dollars, except share and per share data)
(unaudited)

 
 
Three Months Ended
September 30,
 
 
2014
 
2013
Revenues:
 
 
 
 
License
 
$
58,615

 
$
55,306

Cloud services

150,006

 
41,647

Customer support
 
183,906

 
168,440

Professional service and other
 
61,260

 
59,067

Total revenues
 
453,787

 
324,460

Cost of revenues:
 
 
 
 
License
 
3,088

 
3,036

Cloud services
 
57,996

 
14,265

Customer support
 
23,218

 
22,170

Professional service and other
 
45,361

 
45,435

Amortization of acquired technology-based intangible assets (note 6)
 
18,206

 
21,530

Total cost of revenues
 
147,869

 
106,436

Gross profit
 
305,918

 
218,024

Operating expenses:
 
 
 
 
Research and development
 
44,742

 
40,216

Sales and marketing
 
80,099

 
69,413

General and administrative
 
35,756

 
28,886

Depreciation
 
12,242

 
6,458

Amortization of acquired customer-based intangible assets (note 6)
 
25,884

 
17,277

Special charges (note 17)
 
4,169

 
3,731

Total operating expenses
 
202,892

 
165,981

Income from operations
 
103,026

 
52,043

Other income (expense), net
 
(9,873
)
 
1,926

Interest and other related expense, net
 
(11,099
)
 
(4,385
)
Income before income taxes
 
82,054

 
49,584

Provision for income taxes (note 14)
 
17,402

 
18,954

Net income for the period
 
$
64,652

 
$
30,630

Net (income) loss attributable to non-controlling interests
 
(26
)
 

Net income attributable to OpenText
 
$
64,626

 
$
30,630

Earnings per share—basic attributable to OpenText (note 20)
 
$
0.53

 
$
0.26

Earnings per share—diluted attributable to OpenText (note 20)
 
$
0.53

 
$
0.26

Weighted average number of Common Shares outstanding—basic
 
121,918

 
118,126

Weighted average number of Common Shares outstanding—diluted
 
122,861

 
118,756

Dividends declared per Common Share
 
$
0.1725

 
$
0.15

As a result of the two-for-one stock-split, effected February 18, 2014 by way of a stock dividend, all historical per share data and number of Common Shares outstanding in these Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements are presented on a post stock-split basis.
See accompanying Notes to Condensed Consolidated Financial Statements

    4



OPEN TEXT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of U.S. dollars)
(unaudited)
 




 
 
Three Months Ended
September 30,
 
 
2014
 
2013
Net income for the period
 
$
64,652

 
$
30,630

Other comprehensive income—net of tax:
 
 
 
 
Net foreign currency translation adjustments
 
3,105

 
241

Unrealized gain (loss) on cash flow hedges:
 
 
 
 
Unrealized gain (loss)
 
(2,900
)
 
1,520

Loss reclassified into net income
 
53

 
584

Actuarial gain (loss) relating to defined benefit pension plans:
 
 
 
 
Actuarial gain (loss)
 
(3,118
)
 
83

Amortization of actuarial loss into net income
 
121

 
73

Unrealized loss on marketable securities
 
(494
)
 

Total other comprehensive income (loss), net, for the period
 
(3,233
)
 
2,501

Total comprehensive income
 
61,419

 
33,131

Comprehensive income attributable to non-controlling interests
 
(26
)
 

Total comprehensive income attributable to OpenText
 
$
61,393

 
$
33,131



    5



OPEN TEXT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(unaudited)
 
Three Months Ended
September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income for the period
$
64,652

 
$
30,630

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of intangible assets
56,332

 
45,265

Share-based compensation expense
4,449

 
4,612

Excess tax benefits on share-based compensation expense
(395
)
 
(73
)
Pension expense
1,220

 
353

Amortization of debt issuance costs
1,143

 
525

Amortization of deferred charges and credits
2,631

 
2,967

Loss on sale and write down of property and equipment

 
21

Deferred taxes
(1,545
)
 
(1,869
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
55,543

 
28,778

Prepaid expenses and other current assets
(149
)
 
(3,432
)
Income taxes
17,806

 
7,502

Deferred charges and credits

 
2,700

Accounts payable and accrued liabilities
(34,139
)
 
(18,093
)
Deferred revenue
(26,755
)
 
(18,560
)
Other assets
(2,262
)
 
(1,402
)
Net cash provided by operating activities
138,531

 
79,924

Cash flows from investing activities:
 
 
 
Additions of property and equipment
(30,235
)
 
(8,315
)
Purchase of Cordys Holding B.V., net of cash acquired

 
(30,588
)
Purchase consideration for prior period acquisitions
(222
)
 
(222
)
Other investing activities
(7,374
)
 
(1,500
)
Net cash used in investing activities
(37,831
)
 
(40,625
)
Cash flows from financing activities:
 
 
 
Excess tax benefits on share-based compensation expense
395

 
73

Proceeds from issuance of Common Shares
7,099

 
1,823

Repayment of long-term debt
(13,417
)
 
(7,668
)
Debt issuance costs
(183
)
 

Payments of dividends to shareholders
(21,045
)
 
(17,721
)
Net cash used in financing activities
(27,151
)
 
(23,493
)
Foreign exchange gain (loss) on cash held in foreign currencies
(8,953
)
 
4,896

Increase in cash and cash equivalents during the period
64,596

 
20,702

Cash and cash equivalents at beginning of the period
427,890

 
470,445

Cash and cash equivalents at end of the period
$
492,486

 
$
491,147

Supplementary cash flow disclosures (note 19)
See accompanying Notes to Condensed Consolidated Financial Statements

    6



OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended September 30, 2014
(Tabular amounts in thousands, except share and per share data)
NOTE 1—BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements include the accounts of Open Text Corporation and our wholly-owned and majority-owned subsidiaries, collectively referred to as "OpenText" or the "Company". Our majority owned subsidiaries include Open Text South Africa Proprietary Ltd. (OT South Africa), GXS, Inc. (GXS Korea) and EC1 Pte. Ltd. (GXS Singapore), which as of September 30, 2014, were 90%, 85% and 81% owned, respectively, by OpenText.
Throughout this Quarterly Report on Form 10-Q: (i) the term “Fiscal 2015” means our fiscal year beginning on July 1, 2014 and ending June 30, 2015; (ii) the term “Fiscal 2014” means our fiscal year beginning on July 1, 2013 and ending June 30, 2014; (iii) the term “Fiscal 2013” means our fiscal year beginning on July 1, 2012 and ending June 30, 2013; and (iv) the term “Fiscal 2012” means our fiscal year beginning on July 1, 2011 and ending June 30, 2012.
These Condensed Consolidated Financial Statements are expressed in U.S. dollars and are prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). The information furnished reflects all adjustments necessary for a fair presentation of the results for the periods presented.
Additionally, as a result of a two-for-one stock-split effected February 18, 2014 by way of a stock dividend, all historical per share data, number of Common Shares outstanding, and share-based compensation awards presented in the unaudited Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements have been presented on a post stock-split basis.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates, judgments and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements. These estimates, judgments and assumptions are evaluated on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable at that time, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. In particular, significant estimates, judgments and assumptions include those related to: (i) revenue recognition, (ii) allowance for doubtful accounts, (iii) testing of goodwill for impairment, (iv) the valuation of acquired intangible assets, (v) the valuation of long-lived assets, (vi) the recognition of contingencies, (vii) restructuring accruals, (viii) acquisition accruals and pre-acquisition contingencies, (ix) asset retirement obligations, (x) the realization of investment tax credits, (xi) the valuation of stock options granted and liabilities related to share-based payments, including the valuation of our long-term incentive plan, (xii) the valuation of financial instruments, (xiii) the valuation of pension assets and obligations, and (xiv) accounting for income taxes.
Reclassifications
Certain prior year balances have been reclassified to conform to the current year's presentation. Such reclassifications were not considered material and did not affect our consolidated total revenues, consolidated income from operations or consolidated net income.
NOTE 2—ACCOUNTING POLICIES UPDATE AND RECENT ACCOUNTING PRONOUNCEMENTS
Recent Accounting Pronouncements
Disclosure of Going Concern Uncertainties:
In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15 "Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern" (ASU 2014-15). ASU 2014-15 provides guidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company's ability to continue as a going concern within one year from the date the financial statements are issued. ASU 2014-15 is effective for our fiscal year ending June 30, 2017, with early adoption permitted. We do not believe the pending adoption of ASU 2014-15 will have a material impact on our consolidated financial statements.

    7



Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606” (ASU 2014-09). This update supersedes the revenue recognition requirements in Accounting Standard Codification (ASC) Topic 605, “Revenue Recognition” and nearly all other existing revenue recognition guidance under U.S. GAAP. The core principal of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 identifies five steps to be followed to achieve this core principal, which includes i) identifying contract(s) with customers, ii) identifying performance obligations in the contract, iii) determining the transaction price, iv) allocating the transaction price to the performance obligations in the contract(s) and v) recognizing revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 is effective for us in the first quarter of our fiscal year ending June 30, 2018. Early adoption is not permitted. When applying ASU 2014-09 we can either apply the amendments: i) retrospectively to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09 or ii) retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined within ASU 2014-09. We are currently evaluating the impact of the pending adoption of ASU 2014-09 on our consolidated financial statements.
NOTE 3—ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance as of June 30, 2014
$
4,499

Bad debt expense
1,561

Write-off /adjustments
(1,525
)
Balance as of September 30, 2014
$
4,535

Included in accounts receivable are unbilled receivables in the amount of $24.4 million as of September 30, 2014 (June 30, 2014$41.7 million).
NOTE 4—PROPERTY AND EQUIPMENT
 
As of September 30, 2014
 
Cost
 
Accumulated
Depreciation
 
Net
Furniture and fixtures
$
16,613

 
$
(9,498
)
 
$
7,115

Office equipment
1,616

 
(851
)
 
765

Computer hardware
98,867

 
(59,613
)
 
39,254

Computer software
29,825

 
(12,827
)
 
16,998

Capitalized software development costs
26,139

 
(2,477
)
 
23,662

Leasehold improvements
48,282

 
(25,630
)
 
22,652

Land and buildings
47,326

 
(6,199
)
 
41,127

Total
$
268,668

 
$
(117,095
)
 
$
151,573

 
 
As of June 30, 2014
 
Cost
 
Accumulated
Depreciation
 
Net
Furniture and fixtures
$
16,089

 
$
(8,856
)
 
$
7,233

Office equipment
1,573

 
(869
)
 
704

Computer hardware
90,469

 
(55,433
)
 
35,036

Computer software
28,556

 
(10,656
)
 
17,900

Capitalized software development costs
19,965

 
(1,542
)
 
18,423

Leasehold improvements
45,934

 
(24,251
)
 
21,683

Land and buildings
47,149

 
(5,867
)
 
41,282

Total
$
249,735

 
$
(107,474
)
 
$
142,261


    8



NOTE 5—GOODWILL
Goodwill is recorded when the consideration paid for an acquisition of a business exceeds the fair value of identifiable net tangible and intangible assets. The following table summarizes the changes in goodwill since June 30, 2014:
Balance as of June 30, 2014
$
1,963,557

Acquisition of GXS Group, Inc. (note 18)
(23,475
)
Balance as of September 30, 2014
$
1,940,082


NOTE 6—ACQUIRED INTANGIBLE ASSETS
 
As of September 30, 2014
 
Cost
 
Accumulated Amortization
 
Net
Technology Assets
$
699,206

 
$
(491,248
)
 
$
207,958

Customer Assets
874,257

 
(400,986
)
 
473,271

Total
$
1,573,463

 
$
(892,234
)
 
$
681,229

 
 
 
 
 
 
 
As of June 30, 2014
 
Cost
 
Accumulated Amortization
 
Net
Technology Assets
$
699,206

 
$
(473,043
)
 
$
226,163

Customer Assets
874,257

 
(375,102
)
 
499,155

Total
$
1,573,463

 
$
(848,145
)
 
$
725,318


The weighted average amortization periods for acquired technology and customer intangible assets are approximately five years and six years, respectively.
The following table shows the estimated future amortization expense for the fiscal years indicated below. This calculation assumes no future adjustments to acquired intangible assets:
 
 
Fiscal years ending
June 30,
2015 (nine months ended June 30)
$
130,260

2016
149,415

2017
132,222

2018
119,535

2019 and beyond
149,797

Total
$
681,229

 
NOTE 7—OTHER ASSETS
 
As of September 30, 2014
 
As of June 30, 2014
Debt issuance costs
$
18,874

 
$
19,834

Deposits and restricted cash
13,380

 
14,251

Deferred implementation costs
7,028

 
5,409

Cost basis investments
8,224

 
7,276

Long-term prepaid expenses and other long-term assets
7,313

 
5,271

Total
$
54,819

 
$
52,041

Debt issuance costs relate primarily to costs incurred for the purpose of obtaining our term loans and are being amortized over the term of the loans (see note 10). 

    9



Deposits and restricted cash relate to security deposits provided to landlords in accordance with facility lease agreements and cash restricted per the terms of contractual-based agreements.
Deferred implementation costs relate to deferred direct and relevant costs on implementation of long-term contracts, to the extent such costs can be recovered through guaranteed contract revenues.
Cost basis investments relate to investments for which the Company holds less than a 20% interest, is a limited partner and does not exert significant influence over operational or investment decisions.
Long-term prepaid expenses and other long-term assets primarily relate to advance payments on long-term licenses that are being amortized over the applicable terms of the licenses.
NOTE 8—DEFERRED CHARGES AND CREDITS
Deferred charges and credits relate to cash taxes payable and the elimination of deferred tax balances relating to legal entity consolidations completed as part of internal reorganizations of our international subsidiaries. Deferred charges and credits are amortized to income tax expense over a period of 6 to 15 years.
NOTE 9—ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Current liabilities
Accounts payable and accrued liabilities are comprised of the following:
 
 
As of September 30, 2014
 
As of June 30, 2014
Accounts payable—trade
$
14,785

 
$
16,025

Accrued salaries and commissions
55,664

 
80,991

Accrued liabilities
110,711

 
121,558

Amounts payable in respect of restructuring and other Special charges (note 17)
11,273

 
11,694

Asset retirement obligations
1,287

 
1,686

Total
$
193,720

 
$
231,954

Long-term accrued liabilities 
 
As of September 30, 2014
 
As of June 30, 2014
Amounts payable in respect of restructuring and other Special charges (note 17)
$
3,587

 
$
4,531

Other accrued liabilities*
27,643

 
29,331

Asset retirement obligations
7,896

 
8,137

Total
$
39,126

 
$
41,999

* Other accrued liabilities consist primarily of tenant allowances, deferred rent and lease fair value adjustments relating to certain facilities acquired through business acquisitions.
Asset retirement obligations
We are required to return certain of our leased facilities to their original state at the conclusion of our lease. We have accounted for such obligations in accordance with ASC Topic 410 “Asset Retirement and Environmental Obligations” (Topic 410). As of September 30, 2014, the present value of this obligation was $9.2 million (June 30, 2014$9.8 million), with an undiscounted value of $9.7 million (June 30, 2014$10.4 million).
NOTE 10—LONG-TERM DEBT
Long-term debt
Long-term debt is comprised of the following:

    10



 
As of September 30, 2014
 
As of June 30, 2014
Total debt
 
 
 
Term Loan A
$
502,500

 
$
513,750

Term Loan B
794,000

 
796,000

Mortgage
9,105

 
9,582

 
1,305,605

 
1,319,332

Less:
 
 
 
Current portion of long-term debt
 
 
 
Term Loan A
45,000

 
45,000

Term Loan B
8,000

 
8,000

Mortgage
9,105

 
9,582

 
62,105

 
62,582

Non-current portion of long-term debt
$
1,243,500

 
$
1,256,750

Term Loan A and Revolver
As of September 30, 2014, one of our credit facilities consists of a $600 million term loan facility (Term Loan A) and a $100 million committed revolving credit facility (the Revolver). Borrowings under Term Loan A are secured by a first charge over substantially all of our assets, and as of January 16, 2014, on a pari passu basis with Term Loan B (as defined below). We entered into this credit facility and borrowed the full amount under Term Loan A on November 9, 2011.
Term Loan A has a five year term and repayments made under Term Loan A are equal to 1.25% of the original principal amount at each quarter for the first 2 years, approximately 1.88% for years 3 and 4 and 2.5% for year 5. Term Loan A bears interest at a floating rate of LIBOR plus a fixed amount, depending on our consolidated leverage ratio. As of September 30, 2014, this fixed amount was 2.5%.
For the three months ended September 30, 2014, we recorded interest expense of $3.7 million relating to Term Loan A (three months ended September 30, 2013$3.5 million).
The Revolver has a five year term with no fixed repayment date prior to the end of the term. As of September 30, 2014, we have not drawn any amounts on the Revolver.
Term Loan B
In connection with the acquisition of GXS Group, Inc. (GXS), on January 16, 2014, we entered into a second credit facility, which provides for a $800 million term loan facility (Term Loan B).
Borrowings under Term Loan B are secured by a first charge over substantially all of our assets on a pari passu basis with Term Loan A. We entered into Term Loan B and borrowed the full amount on January 16, 2014.
Term Loan B has a seven year term and repayments made under Term Loan B are equal to 0.25% of the original principal amount in equal quarterly installments for the life of Term Loan B, with the remainder due at maturity. Borrowings under Term Loan B currently bear a floating rate of interest at a rate per annum equal to 2.5% plus the higher of LIBOR or 0.75%.
For the three months ended September 30, 2014, we recorded interest expense of $6.6 million relating to Term Loan B.
Mortgage
We currently have an "open" mortgage with a Canadian bank where we can pay all or a portion of the mortgage on or before August 1, 2015. The original principal amount of the mortgage was Canadian $15.0 million and interest accrues monthly at a variable rate of Canadian prime plus 0.50%. Principal and interest are payable in monthly installments of Canadian $0.1 million with a final lump sum principal payment due on maturity. The mortgage is secured by a lien on our headquarters in Waterloo, Ontario, Canada. We first entered into this mortgage in December 2005.
As of September 30, 2014, the carrying value of the mortgage was approximately $9.1 million (June 30, 2014$9.6 million).
As of September 30, 2014, the carrying value of the Waterloo building that secures the mortgage was $15.6 million (June 30, 2014$15.6 million).
For the three months ended September 30, 2014, we recorded interest expense of $0.1 million, relating to the mortgage (three months ended September 30, 2013$0.1 million).

    11



NOTE 11—PENSION PLANS AND OTHER POST RETIREMENT BENEFITS
The following table provides details of our defined benefit pension plans and long-term employee benefit obligations for Open Text Document Technologies GmbH (CDT), GXS GmbH (GXS GER) and GXS Philippines, Inc. (GXS PHP) as of September 30, 2014 and June 30, 2014:
 
As of September 30, 2014
 
Total benefit
obligation
 
Current portion of
benefit obligation*
 
Non-current portion of
benefit obligation
CDT defined benefit plan
$
30,174

 
$
595

 
$
29,579

GXS Germany defined benefit plan
24,632

 
860

 
23,772

GXS Philippines defined benefit plan
5,411

 

 
5,411

Other plans
2,992

 
72

 
2,920

Total
$
63,209

 
$
1,527

 
$
61,682

 
 
As of June 30, 2014
 
Total benefit
obligation
 
Current portion of
benefit obligation*
 
Non-current portion of
benefit obligation
CDT defined benefit plan
$
29,344

 
$
634

 
$
28,710

GXS Germany defined benefit plan
24,182

 
917

 
23,265

GXS Philippines defined benefit plan
5,276

 

 
5,276

Other plans
3,148

 
99

 
3,049

Total
$
61,950

 
$
1,650

 
$
60,300

 
*
The current portion of the benefit obligation has been included within "Accounts payable and accrued liabilities" in the Condensed Consolidated Balance Sheets.
Defined Benefit Plans
CDT Plan
CDT sponsors an unfunded defined benefit pension plan covering substantially all CDT employees (CDT pension plan) which provides for old age, disability and survivors’ benefits. Benefits under the CDT pension plan are generally based on age at retirement, years of service and the employee’s annual earnings. The net periodic cost of this pension plan is determined using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate and estimated service costs. No contributions have been made since the inception of the plan. Actuarial gains or losses in excess of 10% of the projected benefit obligation are being amortized and recognized as a component of net periodic benefit costs over the average remaining service period of the plan's active employees. As of September 30, 2014, there is approximately $0.3 million in accumulated other comprehensive income related to the CDT pension plan that is expected to be recognized as a component of net periodic benefit costs over the next fiscal year.
GXS Germany Plan
As part of our acquisition of GXS, we acquired an unfunded defined benefit pension plan covering certain German employees which provides for old age, disability and survivors' benefits. The GXS GER plan has been closed to new participants since 2006. Benefits under the GXS GER plan are generally based on a participant’s remuneration, date of hire, years of eligible service and age at retirement. The net periodic cost of this pension plan is determined using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate and estimated service costs. No contributions have been made since the inception of the plan. If actuarial gains or losses are in excess of 10% of the projected benefit obligation, such gains or losses will be amortized and recognized as a component of net periodic benefit costs over the average remaining service period of the plan’s active employees. All information presented below for the GXS GER plan is presented for the period indicated, starting on January 16, 2014, when such plan was assumed by us with the acquisition of GXS.
GXS Philippines Plan
As part of our acquisition of GXS, we acquired a primarily unfunded defined benefit pension plan covering substantially all of the GXS Philippines employees which provides for retirement, disability and survivors' benefits. Benefits under the GXS

    12



PHP plan are generally based on a participant’s remuneration, years of eligible service and age at retirement. The net periodic cost of this pension plan is determined using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate and estimated service costs. Aside from an initial contribution which had a fair value of approximately $36.0 thousand as of September 30, 2014, no additional contributions have been made since the inception of the plan. If actuarial gains or losses are in excess of 10% of the projected benefit obligation, such gains or losses will be amortized and recognized as a component of net periodic benefit costs over the average remaining service period of the plan’s active employees. All information presented below for the GXS PHP plan is presented for the period indicated, starting on January 16, 2014, when such plan was assumed by us with the acquisition of GXS.
The following are the details of the change in the benefit obligation for each of the above mentioned pension plans for the periods indicated: 
 
As of September 30, 2014
 
As of June 30, 2014
 
CDT
 
GXS GER
 
GXS PHP
 
Total
 
CDT
 
GXS GER
 
GXS PHP
 
Total
Benefit obligation—beginning of period
$
29,344

 
$
24,182

 
$
5,276

 
$
58,802

 
$
23,871

 
$
23,637

*
$
5,182

*
$
52,690

Service cost
122

 
80

 
340

 
542

 
458

 
173

 
724

 
1,355

Interest cost
199

 
190

 
67

 
456

 
877

 
408

 
125

 
1,410

Benefits paid
(126
)
 
(215
)
 
(23
)
 
(364
)
 
(522
)
 
(461
)
 
(66
)
 
(1,049
)
Actuarial (gain) loss
2,481

 
1,917

 
(137
)
 
4,261

 
3,595

 
452

 
(818
)
 
3,229

Foreign exchange (gain) loss
(1,846
)
 
(1,522
)
 
(112
)
 
(3,480
)
 
1,065

 
(27
)
 
129

 
1,167

Benefit obligation—end of period
30,174

 
24,632

 
5,411

 
60,217

 
29,344

 
24,182

 
5,276

 
58,802

Less: Current portion
(595
)
 
(860
)
 

 
(1,455
)
 
(634
)
 
(917
)
 

 
(1,551
)
Non-current portion of benefit obligation
$
29,579

 
$
23,772

 
$
5,411

 
$
58,762

 
$
28,710

 
$
23,265

 
$
5,276

 
$
57,251

* Beginning benefit obligation as of January 16, 2014.

The following are details of net pension expense relating to the following pension plans:
 
 
Three Months Ended September 30,
 
 
2014
 
2013
 
 
CDT
 
GXS GER
 
GXS PHP
 
Total
 
CDT
 
GXS GER
 
GXS PHP
 
Total
Pension expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
 
$
122

 
$
80

 
$
340

 
$
542

 
$
113

 
$

 
$

 
$
113

Interest cost
 
199

 
190

 
67

 
456

 
217

 

 

 
217

Amortization of actuarial gains and losses
 
109

 

 

 
109

 
69

 

 

 
69

Net pension expense
 
$
430

 
$
270

 
$
407

 
$
1,107

 
$
399

 
$

 
$

 
$
399



    13



In determining the fair value of the pension plan benefit obligations as of September 30, 2014 and June 30, 2014, respectively, we used the following weighted-average key assumptions:
 
As of September 30, 2014
 
As of June 30, 2014
 
CDT
 
GXS GER
 
GXS PHP
 
CDT
 
GXS GER
 
GXS PHP
Assumptions:
 
 
 
 
 
 
 
 
 
 
 
Salary increases
2.50%
 
2.00%
 
7.00%
 
2.50%
 
2.00%
 
7.00%
Pension increases
2.00%
 
2.00%
 
6.00%
 
2.00%
 
2.00%
 
6.00%
Discount rate
2.40%
 
2.50%
 
5.00%
 
2.90%
 
3.00%
 
5.15%
Normal retirement age
N/A
 
65-67
 
60
 
N/A
 
65-67
 
60
Employee fluctuation rate:
 
 
 
 
 
 
 
 
 
 
 
to age 30
1.00%
 
N/A
 
N/A
 
1.00%
 
N/A
 
N/A
to age 35
0.50%
 
N/A
 
N/A
 
0.50%
 
N/A
 
N/A
to age 40
—%
 
N/A
 
N/A
 
—%
 
N/A
 
N/A
to age 45
0.50%
 
N/A
 
N/A
 
0.50%
 
N/A
 
N/A
to age 50
0.50%
 
N/A
 
N/A
 
0.50%
 
N/A
 
N/A
from age 51
1.00%
 
N/A
 
N/A
 
1.00%
 
N/A
 
N/A
Anticipated pension payments under the pension plans for the fiscal years indicated below are as follows:

Fiscal years ending June 30,

CDT

GXS GER

GXS PHP
2015 (nine months ended June 30)
$
446


$
657


$
9

2016
657


913


24

2017
729


984


35

2018
779


1,063


46

2019
871


1,108


94

2020 to 2024
5,869


6,038


1,107

Total
$
9,351


$
10,763


$
1,315

Other Plans
Other plans include certain defined benefit pension plans that are offered by certain of our foreign subsidiaries. Many of these plans were assumed through our acquisitions or are required by local regulatory requirements. These other plans are primarily unfunded, with the aggregate projected benefit obligation included in our pension liability. The net periodic cost of these plans are determined using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate and estimated service costs.
NOTE 12—SHARE CAPITAL, OPTION PLANS AND SHARE-BASED PAYMENTS
Dividends
Stock Dividend
On January 23, 2014, we announced that our Board of Directors approved a two-for-one stock-split of our outstanding Common Shares. The two-for-one stock-split was implemented by way of a stock dividend whereby shareholders received one Common Share for each Common Share held. The record date for the stock dividend was February 7, 2014 and the payment date was February 18, 2014.
As a result of the two-for-one stock-split, all historical per share data, number of Common Shares outstanding and share-based compensation awards are presented on a post stock-split basis.
Cash Dividends
For the three months ended September 30, 2014, pursuant to the Company’s dividend policy, we declared total non-cumulative dividends of $0.1725 per Common Share, in the amount of $21.0 million, which we paid during the same period.

    14



For the three months ended September 30, 2013, pursuant to the Company’s dividend policy, we declared total non-cumulative dividends of $0.15 per Common Share, in the amount of $17.7 million, which we paid during the same period.
Share Capital
Our authorized share capital includes an unlimited number of Common Shares and an unlimited number of Preference Shares. No Preference Shares have been issued.
Treasury Stock
During the three months ended September 30, 2014 and 2013, we did not repurchase any of our Common Shares for potential reissuance under our Long Term Incentive Plans (LTIP) or otherwise.
During the three months ended September 30, 2014 and 2013, we did not reissue any Common Shares from treasury stock.
Share-Based Payments
Total share-based compensation expense for the periods indicated below is detailed as follows: 
 
 
Three Months Ended September 30,
 
 
2014
 
2013
Stock options
 
$
2,569

 
$
1,357

Performance Share Units (issued under LTIP)
 
591

 
2,168

Restricted Share Units (issued under LTIP)
 
743

 
604

Restricted Share Units (other)
 
75

 
216

Deferred Share Units (directors)
 
471

 
267

Total share-based compensation expense
 
$
4,449

 
$
4,612

Summary of Outstanding Stock Options
As of September 30, 2014, options to purchase an aggregate of 4,187,409 Common Shares were outstanding and 3,437,482 Common Shares were available for issuance under our stock option plans. Our stock options generally vest over four years and expire between seven and ten years from the date of the grant. The exercise price of the options is set at an amount that is not less than the closing price of our Common Shares on the NASDAQ on the trading day immediately preceding the applicable grant date.
A summary of activity under our stock option plans for three months ended September 30, 2014 is as follows:
 
Options
 
Weighted-
Average Exercise
Price
 
Weighted-
Average
Remaining
Contractual Term
(years)
 
Aggregate Intrinsic  Value
($’000s)
Outstanding at June 30, 2014
4,273,226

 
$
36.35

 
 
 
 
Granted
397,100

 
56.33

 
 
 
 
Exercised
(246,745
)
 
25.35

 
 
 
 
Forfeited or expired
(236,172
)
 
37.04

 
 
 
 
Outstanding at September 30, 2014
4,187,409

 
$
38.85

 
5.33
 
$
69,752

Exercisable at September 30, 2014
768,459

 
$
23.38

 
3.21
 
$
24,625


We estimate the fair value of stock options using the Black-Scholes option-pricing model, consistent with the provisions of ASC Topic 718, “Compensation—Stock Compensation” (Topic 718) and SEC Staff Accounting Bulletin No. 107. The option-pricing models require input of subjective assumptions, including the estimated life of the option and the expected volatility of the underlying stock over the estimated life of the option. We use historical volatility as a basis for projecting the expected volatility of the underlying stock and estimate the expected life of our stock options based upon historical data.
We believe that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair value of our stock option grants. Estimates of fair value are not intended, however, to predict actual future events or the value ultimately realized by employees who receive equity awards.

    15



For the periods indicated, the weighted-average fair value of options and weighted-average assumptions were as follows:
 
 
Three Months Ended September 30,
 
 
2014
 
2013
Weighted–average fair value of options granted
 
$
14.30

 
$
7.75

Weighted-average assumptions used:
 
 
 
 
Expected volatility
 
32
%
 
32
%
Risk–free interest rate
 
1.51
%
 
1.19
%
Expected dividend yield
 
1.15
%
 
1.80
%
Expected life (in years)
 
4.34

 
4.36

Forfeiture rate (based on historical rates)
 
5
%
 
5
%
Average exercise share price
 
$
56.33

 
$
33.17

As of September 30, 2014, the total compensation cost related to the unvested stock option awards not yet recognized was approximately $33.2 million, which will be recognized over a weighted-average period of approximately 3 years.
No cash was used by us to settle equity instruments granted under share-based compensation arrangements.
We have not capitalized any share-based compensation costs as part of the cost of an asset in any of the periods presented.
For the three months ended September 30, 2014, cash in the amount of $6.3 million was received as the result of the exercise of options granted under share-based payment arrangements. The tax benefit realized by us during the three months ended September 30, 2014 from the exercise of options eligible for a tax deduction was $0.5 million.
For the three months ended September 30, 2013, cash in the amount of $1.2 million was received as the result of the exercise of options granted under share-based payment arrangements. The tax benefit realized by us during the three months ended September 30, 2013 from the exercise of options eligible for a tax deduction was $0.1 million.
Long-Term Incentive Plans
We incentivize our executive officers, in part, with long term compensation pursuant to our LTIP. The LTIP is a rolling three year program that grants eligible employees a certain number of target Performance Share Units (PSUs) and/or RSUs. Target PSUs become vested upon the satisfaction of certain financial and/or operational performance criteria (the Performance Conditions) that are determined at the time of the grant. Target RSUs become vested when an eligible employee remains employed throughout the vesting period. LTIP grants that have recently vested, or have yet to vest, are described below. LTIP grants will be referred to in this Quarterly Report on Form 10-Q based upon the year in which the grants are expected to vest and be settled.
Grants made in Fiscal 2012 under the LTIP (collectively referred to as Fiscal 2014 LTIP) took effect in Fiscal 2012 starting on February 3, 2012. Awards made under the Fiscal 2014 LTIP will be issued in the second quarter of Fiscal 2015 in accordance with our insider trading policy, which states, in part, that stock awards may not be issued while a "trading window" is closed. We expect to settle the Fiscal 2014 LTIP awards in stock.
Grants made in Fiscal 2013 under the LTIP (collectively referred to as Fiscal 2015 LTIP) took effect in Fiscal 2013 starting on November 2, 2012 for the RSUs and December 3, 2012 for the PSUs. The Performance Conditions for vesting of the PSUs are based solely upon market conditions. RSUs granted are employee service-based awards and vest over the life of the Fiscal 2015 LTIP. We expect to settle the Fiscal 2015 LTIP awards in stock.
Grants made in Fiscal 2014 under the LTIP (collectively referred to as Fiscal 2016 LTIP) took effect in Fiscal 2014 starting on November 1, 2013. The Performance Conditions for vesting of the PSUs are based solely upon market conditions. RSUs granted on November 1, 2013 are employee service-based awards and vest over the life of the Fiscal 2016 LTIP. We expect to settle the Fiscal 2016 LTIP awards in stock.
Grants made in Fiscal 2015 under the LTIP (collectively referred to as Fiscal 2017 LTIP), consisting of PSUs and RSUs, took effect in Fiscal 2015 starting on September 4, 2014. The Performance Conditions for vesting of the PSUs are based solely upon market conditions. The RSUs are employee service-based awards and vest over the life of the Fiscal 2017 LTIP. We expect to settle the Fiscal 2017 LTIP awards in stock.
PSUs and RSUs granted under the LTIPs have been measured at fair value as of the effective date, consistent with Topic 718, and will be charged to share-based compensation expense over the remaining life of the plan. Stock options granted under the LTIPs have been measured using the Black-Scholes option-pricing model, consistent with Topic 718. We estimate the fair value of PSUs using the Monte Carlo pricing model and RSUs have been valued based upon their grant date fair value.

    16



Expected and actual stock compensation expense for each of the above mentioned LTIP plans is as follows:
 
 
 
 
 
 
 
Three Months Ended September 30,
Grants Made
Under LTIP
Equity Instrument
Grant Date
End Date
 
Expected Total LTIP Expense
 
2014
 
2013
Fiscal 2013 LTIP
PSU
10/29/2010
9/15/2013
 
6,489

 

 
215

Fiscal 2014 LTIP
PSU
2/3/2012
9/15/2014
 
7,838

 
420

 
1,370

Fiscal 2015 LTIP
PSU
12/3/2012
9/15/2015
 
2,313

 
(1
)
 
583

Fiscal 2015 LTIP
RSU
11/2/2012
9/15/2015
 
3,804

 
211

 
604

Fiscal 2016 LTIP
PSU
11/1/2013
9/15/2016
 
1,638

 
85

 

Fiscal 2016 LTIP
RSU
11/1/2013
9/15/2016
 
4,162

 
329

 

Fiscal 2017 LTIP
PSU
9/4/2014
9/15/2017
 
3,701

 
87

 

Fiscal 2017 LTIP
RSU
9/4/2014
9/15/2017
 
8,645

 
203

 

 
 
 
 
 
$
38,590

 
$
1,334

 
$
2,772

Of the total expected LTIP expense of $38.6 million noted in the table above, $20.7 million has been recognized to date and the remaining expected total compensation cost of $17.9 million is expected to be recognized over a weighted average period of 2.3 years.
Restricted Share Units (RSUs)
On September 8, 2014, we granted 12,500 RSUs to our Chief Financial Officer, in accordance with his employment agreement. The RSUs will vest equally over three years. We expect to settle the awards in stock.
Deferred Stock Units (DSUs)
During the three months ended September 30, 2014, we granted 398 DSUs to certain non-employee directors (three months ended September 30, 2013486 on a post stock-split basis). The DSUs were issued under our Deferred Share Unit Plan. DSUs granted as compensation for directors fees vest immediately, whereas all other DSUs granted vest at our next annual general meeting following the granting of the DSUs. No DSUs are payable by us until the director ceases to be a member of the Board.
Employee Share Purchase Plan (ESPP)
During the three months ended September 30, 2014, cash in the amount of approximately $0.8 million was received from employees that will be used to purchase Common Shares in future periods (three months ended September 30, 2013$0.7 million)
NOTE 13—GUARANTEES AND CONTINGENCIES
We have entered into the following contractual obligations with minimum payments for the indicated fiscal periods as follows: 
 
Payments due between
 
Total
 
October 1, 2014—
June 30, 2015
 
July 1, 2015—
June 30, 2017
 
July 1, 2017—
June 30, 2019
 
July 1, 2019
and beyond
Long-term debt obligations
$
1,492,579

 
$
70,162

 
$
561,703

 
$
66,417

 
$
794,297

Operating lease obligations*
202,686

 
37,429

 
69,962

 
47,213

 
48,082

Purchase obligations
23,265

 
8,585

 
14,187

 
493

 

 
$
1,718,530

 
$
116,176

 
$
645,852

 
$
114,123

 
$
842,379

*Net of $3.7 million of sublease income to be received from properties which we have subleased to third parties.
Guarantees and Indemnifications
We have entered into customer agreements which may include provisions to indemnify our customers against third party claims that our software products or services infringe certain third party intellectual property rights and for liabilities related to a breach of our confidentiality obligations. We have not made any material payments in relation to such indemnification provisions and have not accrued any liabilities related to these indemnification provisions in our Condensed Consolidated Financial Statements.

    17



Litigation
We are currently involved in various claims and legal proceedings.
Quarterly, we review the status of each significant legal matter and evaluate such matters to determine how they should be treated for accounting and disclosure purposes in accordance with the requirements of ASC Topic 450-20 "Loss Contingencies" (Topic 450-20). Specifically, this evaluation process includes the centralized tracking and itemization of the status of all our disputes and litigation items, discussing the nature of any litigation and claim, including any dispute or claim that is reasonably likely to result in litigation, with relevant internal and external counsel, and assessing the progress of each matter in light of its merits and our experience with similar proceedings under similar circumstances.
If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss in accordance with Topic 450-20. As of the date of this Quarterly Report on Form 10-Q, such aggregated losses were not material to our consolidated financial position or result of operations and we do not believe as of the date of this filing that it is reasonably possible that a loss exceeding the amounts already recognized will be incurred that would be material to our consolidated financial position or results of operations.
Contingencies
EasyLink Services International Corporation (EasyLink) and its United States subsidaries are currently being assessed by the New York State Department of Taxation and Finance (the Department) for the potential applicability of telecommunications excise and franchise taxes to its New York State revenues for certain pre-acquisition EasyLink revenue. The potential exposure under this assessment, based upon the notice issued by the Department, is approximately $10.5 million and has been accrued for by us. OpenText intends to vigorously defend against this assessment.
As part of our acquisition of GXS, we have inherited a tax dispute in Brazil between the Company’s subsidiary, GXS Tecnologia da Informação (Brasil) Ltda. (GXS Brazil), and the municipality of São Paulo, in connection with GXS Brazil’s judicial appeal of a tax claim in the amount of $2.7 million as of September 30, 2014. We currently have in place a bank guarantee in the amount of $3.7 million in recognition of this dispute. However, we believe that the position of the São Paulo tax authorities is not consistent with the relevant facts and based on information available on the case and other similar matters provided by local counsel, we believe that we can defend our position and that no tax is owed. Although we believe that the facts support our position, the ultimate outcome of this matter could result in a loss of up to the claim amount discussed above, plus future interest or penalties that may accrue.
Historically, prior to our acquisition of GXS, GXS would charge certain costs to its subsidiaries, including GXS Brazil, primarily based on historical transfer pricing studies that were intended to reflect the costs incurred by subsidiaries in relation to services provided by the parent company to the subject subsidiary. GXS recorded taxes on amounts billed, that were considered to be due based on the intercompany charges. GXS subsequently re-evaluated its intercompany charges to GXS Brazil and related taxes and, upon taking into consideration the current environment and judicial proceedings in Brazil, concluded that it was probable that certain indirect taxes would be assessable and payable based upon the accrual of such intercompany charges and accrued approximately $10.2 million for the probable amount of a settlement related to the indirect taxes, interest and penalties.
Our Indian subsidiary, GXS India Technology Centre Private Limited (GXS India), is subject to potential assessments by Indian tax authorities in the city of Bangalore. GXS India has received assessment orders from the Indian tax authorities alleging that the transfer price applied to intercompany transactions was not appropriate. Based on advice from our tax advisors, we believe that the facts that the Indian tax authorities are using to support their assessment are incorrect. We have filed appeals and anticipate an eventual settlement with the Indian tax authorities. We have accrued $1.4 million to cover our anticipated financial exposure in this matter.
The United States Internal Revenue Service (IRS) is examining certain of our tax returns for Fiscal 2010 through Fiscal 2012, and in connection with those examinations is reviewing our internal reorganization in Fiscal 2010 to consolidate certain intellectual property ownership in Luxembourg and Canada and our integration of certain acquisitions into the resulting structure. These examinations may lead to proposed adjustments to our taxes, which may be material, individually or in the aggregate. As of the date of this Quarterly Report on Form 10-Q, no adjustments have been proposed by the IRS, and we have not recorded any material accruals for any such potential adjustments in our Condensed Consolidated Financial Statements.
Please also see "Risk Factors" in our Annual Report on Form 10-K to our fiscal year ended June 30, 2014.
NOTE 14—INCOME TAXES
Our effective tax rate represents the net effect of the mix of income earned in various tax jurisdictions that are subject to a wide range of income tax rates.

    18



We recognize interest expense and penalties related to income tax matters in income tax expense.
For the three months ended September 30, 2014 and 2013, we recognized the following amounts as income tax-related interest expense and penalties:
 
 
Three Months Ended September 30,
 
 
2014
 
2013
Interest expense
 
$
2,004

 
$
2,328

Penalties expense
 
48

 
238

Total
 
$
2,052

 
$
2,566

As of September 30, 2014 and June 30, 2014, the following amounts have been accrued on account of income tax-related interest expense and penalties:
 
As of September 30, 2014
 
As of June 30, 2014
Interest expense accrued *
$
28,014

 
$
26,235

Penalties accrued *
$
7,649

 
$
7,858

*
These balances have been included within "Long-term income taxes payable" within the Condensed Consolidated Balance Sheets.
We believe that it is reasonably possible that the gross unrecognized tax benefits, as of September 30, 2014, could decrease tax expense in the next 12 months by $18.9 million, relating primarily to the expiration of competent authority relief and tax years becoming statute barred for purposes of future tax examinations by local taxing jurisdictions.
Our four most significant tax jurisdictions are Canada, the United States, Luxembourg and Germany. Our tax filings remain subject to audits by applicable tax authorities for a certain length of time following the tax year to which those filings relate. Tax years that remain open to tax audits by local taxing authorities vary by jurisdiction up to ten years.
We are subject to tax audits in all major taxing jurisdictions in which we operate and currently have tax audits open in Canada, the United States, France, Spain, Germany, India, the Netherlands and Italy. On a quarterly basis we assess the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provision for income and other taxes. Statements regarding the United States audits are included in note 13.
The timing of the resolution of income tax audits is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities or possibly reach resolution of income tax audits in one or more jurisdictions. These assessments or settlements may or may not result in changes to our contingencies related to positions on tax filings. The actual amount of any change could vary significantly depending on the ultimate timing and nature of any settlements. We cannot currently provide an estimate of the range of possible outcomes.
As at September 30, 2014, we have provided $8.2 million (June 30, 2014—$7.6 million) in respect of both additional foreign withholding taxes or deferred income tax liabilities for temporary differences related to the undistributed earnings of certain non-United States subsidiaries, and planned periodic repatriations from certain United States and Luxembourg subsidiaries, that will be subject to withholding taxes upon distribution. We have not provided for additional foreign withholding taxes or deferred income tax liabilities related to undistributed earnings of all other non-Canadian subsidiaries, since such earnings are considered permanently invested in those subsidiaries, or are not subject to withholding taxes. It is not practicable to reasonably estimate the amount of additional deferred income tax liabilities or foreign withholding taxes that may be payable should these earnings be distributed in the future.
The effective GAAP tax rate (which is the provision for taxes expressed as a percentage of net income before taxes) decreased to 21.2% for the three months ended September 30, 2014, from 38.2% for the three months ended September 30, 2013, primarily due to a decrease in the net change in valuation allowance in the amount of $2.0 million and a decrease in the net expense of unrecognized tax benefits with related interest and penalties in the amount of $1.2 million. The remainder of the differences are due to normal course movements and non-material items.

    19



NOTE 15—FAIR VALUE MEASUREMENTS
ASC Topic 820 “Fair Value Measurements and Disclosures” (Topic 820) defines fair value, establishes a framework for measuring fair value, and addresses disclosure requirements for fair value measurements. Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value, in this context, should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including our own credit risk.
In addition to defining fair value and addressing disclosure requirements, Topic 820 establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are: 
Level 1—inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
Level 2—inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis:
Our financial assets and liabilities measured at fair value on a recurring basis consisted of the following types of instruments as of September 30, 2014 and June 30, 2014:
 
September 30, 2014
 
June 30, 2014
 
 
 
Fair Market Measurements using:
 
 
 
Fair Market Measurements using:
 
September 30, 2014
 
Quoted prices
in active
markets for
identical
assets/
(liabilities)
 
Significant
other
observable
inputs
 
Significant
unobservable
inputs
 
June 30, 2014
 
Quoted prices
in active
markets for
identical
assets/
(liabilities)
 
Significant
other
observable
inputs
 
Significant
unobservable
inputs
(Level 1)
 
(Level 2)
 
(Level 3)
 
(Level 1)
 
(Level 2)
 
(Level 3)
Financial Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities
$
5,637

 
$
5,637

 
n/a

 
n/a
 
$

 
$

 
n/a

 
n/a
 
$
5,637

 
$
5,637

 
n/a

 
n/a
 
$

 
$

 
n/a

 
n/a
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instrument asset (liability) (note 16)
$
(3,118
)
 
n/a

 
$
(3,118
)
 
n/a
 
$
756

 
n/a

 
$
756

 
n/a
 
$
(3,118
)
 
n/a

 
$
(3,118
)
 
n/a
 
$
756

 
n/a

 
$
756

 
n/a
Our valuation technique used to measure the fair values of our marketable securities were derived from quoted market prices as an active market for these securities exist. Our valuation techniques used to measure the fair values of the derivative instruments, the counterparty to which has high credit ratings, were derived from pricing models including discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data, as no quoted market prices exist for the derivative instruments. Our discounted cash flow techniques use observable market inputs, such as foreign currency spot and forward rates.
Our cash and cash equivalents, along with our accounts receivable and accounts payable and accrued liabilities balances, are measured and recognized in our Condensed Consolidated Financial Statements at an amount that approximates their fair value (a Level 2 measurement) due to their short maturities.

    20



Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure certain assets at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the three months ended September 30, 2014 and 2013, no indications of impairment were identified and therefore no fair value measurements were required.
If applicable, we will recognize transfers into and out of levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurs. During the three months ended September 30, 2014 and 2013, we did not have any significant transfers in or out of Level 2 or Level 3.
NOTE 16—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Foreign Currency Forward Contracts
We are engaged in hedging programs with Canadian chartered banks to limit the potential foreign exchange fluctuations incurred on future cash flows relating to a portion of our Canadian dollar payroll expenses. We operate internationally and are therefore exposed to foreign currency exchange rate fluctuations in the normal course of our business, in particular to changes in the Canadian dollar on account of large costs that are incurred from our centralized Canadian operations, which are denominated in Canadian dollars. As part of our risk management strategy, we use derivative instruments to hedge portions of our payroll exposure. We do not use these forward contracts for trading or speculative purposes. These forward contracts typically mature between one and twelve months.
We have designated these transactions as cash flow hedges of forecasted transactions under ASC Topic 815 “Derivatives and Hedging” (Topic 815). As the critical terms of the hedging instrument, and of the entire hedged forecasted transaction, are the same, in accordance with Topic 815 we have been able to conclude that changes in fair value or cash flows attributable to the risk being hedged are expected to completely offset at inception and on an ongoing basis. Accordingly, quarterly unrealized gains or losses on the effective portion of these forward contracts have been included within other comprehensive income. The fair value of the contracts, as of September 30, 2014, is recorded within “Accounts payable and accrued liabilities”.
As of September 30, 2014, the notional amount of forward contracts we held to sell U.S. dollars in exchange for Canadian dollars was $74.7 million (June 30, 2014$99.6 million).
Fair Value of Derivative Instruments and Effect of Derivative Instruments on Financial Performance
The effect of these derivative instruments on our Condensed Consolidated Financial Statements for the periods indicated below were as follows (amounts presented do not include any income tax effects).
Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets (see note 15)
 
 
As of September 30, 2014
 
As of June 30, 2014
Derivatives
Balance Sheet Location
Fair Value
Asset (Liability)
 
Fair Value
Asset (Liability)
Foreign currency forward contracts designated as cash flow hedges
Prepaid expenses and other assets (Accounts payable and accrued liabilities)
$
(3,118
)
 
$
756


    21



 Effects of Derivative Instruments on Income and Other Comprehensive Income (OCI)
 
Three Months Ended September 30, 2014
Derivatives in Cash Flow
Hedging Relationship
Amount of Gain or (Loss)
Recognized in OCI on
Derivatives 
(Effective
Portion)
 
Location of
Gain or (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
 
Amount of Gain or
(Loss) Reclassified from
Accumulated OCI into
Income (Effective
Portion)
 
Location of
Gain or
(Loss)
Recognized
in Income on
Derivatives
(Ineffective
Portion and
Amount
Excluded
from
Effectiveness
Testing)
 
Amount of Gain or
(Loss) Recognized in
Income on Derivatives
(Ineffective Portion
and Amount Excluded
from Effectiveness
Testing)
Foreign currency forward contracts
$
(3,946
)
 
Operating
expenses
 
$
(72
)
 
N/A
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2013
Derivatives in Cash Flow
Hedging Relationship
Amount of Gain or (Loss)
Recognized in OCI on
Derivatives 
(Effective
Portion)
 
Location of
Gain or (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
 
Amount of Gain or
(Loss) Reclassified from
Accumulated OCI into
Income (Effective
Portion)
 
Location of
Gain or
(Loss)
Recognized
in Income on
Derivatives
(Ineffective
Portion and
Amount
Excluded
from
Effectiveness
Testing)
 
Amount of Gain or
(Loss) Recognized in
Income on Derivatives
(Ineffective Portion
and Amount Excluded
from Effectiveness
Testing)
Foreign currency forward contracts
$
2,068

 
Operating
expenses
 
$
(794
)
 
N/A
 

NOTE 17—SPECIAL CHARGES
Special charges include costs that relate to certain restructuring initiatives that we have undertaken from time to time under our various restructuring plans, as well as acquisition-related costs and other similar charges. 
 
 
Three Months Ended September 30,
 
 
2014
 
2013
OpenText/GXS Restructuring Plan
 
$
2,806

 
$

Restructuring Plans prior to OpenText/GXS Restructuring Plan
 
87

 
4,796

Acquisition-related costs
 
436

 
1,304

Other charges
 
840

 
(2,369
)
Total
 
$
4,169


$
3,731

OpenText/GXS Restructuring Plan
In the third quarter of Fiscal 2014 and in the context of the acquisition of GXS, we began to implement restructuring activities to streamline our operations (OpenText/GXS Restructuring Plan). These charges relate to workforce reductions and facility consolidations. These charges requires management to make certain judgments and estimates regarding the amount and timing of restructuring charges or recoveries. Our estimated liability could change subsequent to its recognition, requiring adjustments to the expense and the liability recorded. On a quarterly basis, we conduct an evaluation of the related liabilities and expenses and revise our assumptions and estimates as appropriate.
As of September 30, 2014, we expect total costs to be incurred in conjunction with the OpenText/GXS Restructuring Plan to be approximately $30.0 million, of which $22.1 million has already been recorded within Special charges to date. We expect the OpenText/GXS Restructuring Plan to be substantially completed by the end of our current fiscal year.

    22



A reconciliation of the beginning and ending liability for the three months ended September 30, 2014 is shown below. 
OpenText/GXS Restructuring Plan
Workforce
reduction
 
Facility costs
 
Total
Balance as of June 30, 2014
$
5,051

 
$
6,028

 
$
11,079

Accruals and adjustments
2,426

 
380

 
2,806

Cash payments
(2,343
)
 
(904
)
 
(3,247
)
Foreign exchange
(268
)
 
86

 
(182
)
Balance as of September 30, 2014
$
4,866

 
$
5,590

 
$
10,456

Acquisition-related costs
Included within Special charges for the three months ended September 30, 2014 are costs incurred directly in relation to acquisitions in the amount of $0.2 million (three months ended September 30, 2013$0.9 million). Additionally, we incurred costs relating to financial advisory, legal, valuation and audit services and other miscellaneous costs necessary to integrate acquired companies into our organization for the three months ended September 30, 2014 in the amount of $0.2 million (three months ended September 30, 2013$0.4 million).
Other charges
Included within "Other charges" for the three months ended September 30, 2014 is a charge of $0.8 million relating to certain pre-acquisition tax liabilities, the associated interest accrual, and miscellaneous integration costs.
Included within "Other charges" for the three months ended September 30, 2013 is a net recovery of $3.8 million relating to a reduction of certain pre-acquisition tax liabilities, inclusive of an offsetting associated interest accrual. This recovery was offset by a charge of $1.4 million relating to a settlement agreement reached in connection with the acquisition of IXOS Software AG in February 2004.
NOTE 18—ACQUISITIONS
GXS Group, Inc.
On January 16, 2014, we acquired GXS Group, Inc. (GXS), a Delaware corporation and leader in cloud-based, business-to-business (B2B) integration. The acquisition combines OpenText's Information Exchange portfolio with GXS' portfolio of B2B integration services and managed services. Total consideration for GXS was $1.2 billion, inclusive of the issuance of 2,595,042 OpenText Common Shares on a post stock-split basis. In accordance with Topic 805 "Business Combinations" (Topic 805), this acquisition was accounted for as a business combination.
The results of operations of GXS have been consolidated with those of OpenText beginning January 16, 2014.
The following tables summarize the preliminary consideration paid for GXS and the amount of the assets acquired and liabilities assumed, as well as the preliminary goodwill recorded as of the acquisition date: 
Cash consideration paid
$
1,101,874

Equity consideration paid
116,777

Preliminary purchase consideration
$
1,218,651

Acquisition-related costs (included in Special charges in the Condensed Consolidated Statements of Income) for the three months ended September 30, 2014
$
141

As set forth in the purchase agreement, $60.0 million of the total cash consideration paid is currently being held by an escrow agent for indemnification purposes and, subject to certain conditions being met, the payout thereof will be released between nine and twelve months from the date of the acquisition.
Preliminary Purchase Price Allocation
The preliminary purchase price of GXS has been allocated to GXS' tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated fair values as of the acquisition date. For certain assets and liabilities, the book values as of the balance sheet date have been determined to reflect fair values. The excess of the purchase price over the net tangible and identifiable intangible assets has been recorded as goodwill. The preliminary allocation of the purchase price was based upon a preliminary valuation and our estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date).

    23



Our preliminary purchase price allocation for GXS is as follows:
Current assets (inclusive of cash acquired of $24,382)
$
127,406

Non-current tangible assets
36,139

Intangible customer assets
364,600

Intangible technology assets
123,200

Liabilities and non-controlling interest assumed
(105,459
)
Total identifiable net assets
545,886

Goodwill
672,765

Net assets acquired
$
1,218,651

The finalization of the above purchase price allocation is pending the determination of the finalization of the fair value for taxation-related balances and for potential unrecorded liabilities. We expect to finalize this determination on or before December 31, 2014.
Adjustments made to goodwill in the first quarter of Fiscal 2015 primarily include reductions of certain tax related liabilities based upon the determination of additional tax attributes available on acquisition.
No portion of the goodwill recorded upon the acquisition of GXS is expected to be deductible for tax purposes.
The fair value of current assets acquired includes accounts receivable with a fair value of $94.3 million. The gross amount receivable was $108.2 million of which $13.9 million of this receivable was expected to be uncollectible.
NOTE 19—SUPPLEMENTAL CASH FLOW DISCLOSURES
 
 
Three Months Ended September 30,
 
 
2014
 
2013
Cash paid during the period for interest
 
$
10,512

*
$
3,736

Cash received during the period for interest
 
$
649

 
$
522

Cash paid (received) during the period for income taxes
 
$
(2,548
)
**
$
4,553

*We entered into Term Loan B on January 16, 2014 (see note 10). This amount includes $6.6 million of interest related to this new Credit Facility.
**Income tax installments paid in prior periods were higher than the actual taxes eventually determined as being owed, resulting in a net refund during the period.
NOTE 20—EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income, attributable to OpenText, by the weighted average number of Common Shares outstanding during the period. Diluted earnings per share are computed by dividing net income, attributable to OpenText, by the shares used in the calculation of basic earnings per share plus the dilutive effect of Common Share equivalents, such as stock options, using the treasury stock method. Common Share equivalents are excluded from the computation of diluted earnings per share if their effect is anti-dilutive. 

    24



 
 
Three Months Ended September 30,
 
 
2014
 
2013
Basic earnings per share
 
 
 
 
Net income attributable to OpenText
 
$
64,626

 
$
30,630

Basic earnings per share attributable to OpenText
 
$
0.53

 
$
0.26

Diluted earnings per share
 
 
 
 
Net income attributable to OpenText
 
$
64,626

 
$
30,630

Diluted earnings per share attributable to OpenText
 
$
0.53

 
$
0.26

Weighted-average number of shares outstanding
 
 
 
 
Basic
 
121,918

 
118,126

Effect of dilutive securities
 
943

 
630

Diluted
 
122,861

 
118,756

Excluded as anti-dilutive*
 
1,636

 
1,370

* Represents options to purchase Common Shares excluded from the calculation of diluted earnings per share because the exercise price of the stock options was greater than or equal to the average price of the Common Shares during the period.
NOTE 21—RELATED PARTY TRANSACTIONS
Our procedure regarding the approval of any related party transaction requires that the material facts of such transaction be reviewed by the independent members of our Board and the transaction be approved by a majority of the independent members of the Board. The Board reviews all transactions in which we are, or will be, a participant and any related party has or will have a direct or indirect interest. In determining whether to approve a related party transaction, the Board generally takes into account, among other facts it deems appropriate, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances; the extent and nature of the related person’s interest in the transaction; the benefits to the Company of the proposed transaction; if applicable, the effects on a director’s independence; and if applicable, the availability of other sources of comparable services or products.
During the three months ended September 30, 2014, Mr. Stephen Sadler, a director, earned $4.0 thousand (three months ended September 30, 2013$0.2 million) in consulting fees from OpenText for assistance with acquisition-related business activities. Mr. Sadler abstained from voting on all transactions from which he would potentially derive consulting fees.
NOTE 22—SUBSEQUENT EVENT
Cash Dividends
As part of our quarterly, non-cumulative cash dividend program, we declared, on October 22, 2014, a dividend of $0.1725 per Common Share. The record date for this dividend is November 21, 2014 and the payment date is December 12, 2014. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination and discretion of our Board of Directors.

    25




Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of the U.S. Securities Act of 1933, as amended (the Securities Act), and is subject to the safe harbours created by those sections. All statements other than statements of historical facts are statements that could be deemed forward-looking statements.
When used in this report, the words “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “may”, “could”, “would”, and other similar language, as they relate to Open Text Corporation (“OpenText” or the “Company”), are intended to identify forward-looking statements under applicable securities laws. Specific forward-looking statements in this report include, but are not limited to: (i) statements about our focus in the fiscal year beginning July 1, 2014 and ending June 30, 2015 (Fiscal 2015) on growth in earnings and cash flows; (ii) creating value through investments in broader Enterprise Information Management (EIM) capabilities; (iii) our future business plans and business planning process; (iv) statements relating to business trends; (v) statements relating to distribution; (vi) the Company’s presence in the cloud and in growth markets; (vii) product and solution developments, enhancements and releases and the timing thereof; (viii) the Company’s financial conditions, results of operations and earnings; (ix) the basis for any future growth and for our financial performance; (x) declaration of quarterly dividends; (xi) the changing regulatory environment and its impact on our business; (xii) potential loss of recurring revenues; (xiii) research and development and related expenditures; (xiv) our building, development and consolidation of our network infrastructure; (xv) competition and changes in the competitive landscape; (xvi) our management and protection of intellectual property and other proprietary rights; (xvii) foreign sales and exchange rate fluctuations; (xviii) cyclical or seasonal aspects of our business; (xix) capital expenditures; (xx) potential legal and/or regulatory proceedings; and (xxi) other matters.
In addition, any statements or information that refer to expectations, beliefs, plans, projections, objectives, performance or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking, and based on our current expectations, forecasts and projections about the operating environment, economies and markets in which we operate. Forward-looking statements reflect our current estimates, beliefs and assumptions, which are based on management’s perception of historic trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. The forward-looking statements contained in this report are based on certain assumptions including the following: (i) countries continuing to implement and enforce existing and additional customs and security regulations relating to the provision of electronic information for imports and exports; (ii) our continued operation of a secure and reliable business network; (iii) the stability of general economic and market conditions, currency exchange rates, and interest rates; (iv) equity and debt markets continuing to provide us with access to capital; (v) our continued ability to identify and source attractive and executable business combination opportunities; and (vi) our continued compliance with third party intellectual property rights. Management’s estimates, beliefs and assumptions are inherently subject to significant business, economic, competitive and other uncertainties and contingencies regarding future events and, as such, are subject to change. We can give no assurance that such estimates, beliefs and assumptions will prove to be correct.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to differ materially from the anticipated results, performance or achievements expressed or implied by such forward-looking statements. The risks and uncertainties that may affect forward-looking statements include, but are not limited to: (i) integration of acquisitions and related restructuring efforts, including the quantum of restructuring charges and the timing thereof; (ii) the possibility that the Company may be unable to meet its future reporting requirements under the Exchange Act, and the rules promulgated thereunder; (iii) the risks associated with bringing new products and services to market; (iv) fluctuations in currency exchange rates; (v) delays in the purchasing decisions of the Company’s customers; (vi) the competition the Company faces in its industry and/or marketplace; (vii) the final determination of litigation, tax audits and other legal proceedings; (viii) potential exposure to greater than anticipated tax liabilities or expenses; (ix) the possibility of technical, logistical or planning issues in connection with the deployment of the Company’s products or services; (x) the continuous commitment of the Company’s customers; (xi) demand for the Company’s products and services; (xii) increase in exposure to international business risks as we continue to increase our international operations; (xiii) inability to raise capital at all or on not unfavorable terms in the future; and (xiv) downward pressure on our share price and dilutive effect of future sales or issuances of equity securities. Other factors that may affect forward-looking statements include, but are not limited to: (i) the future performance, financial and otherwise, of the Company; (ii) the ability of the Company to bring new products and services to market and to increase sales; (iii) the strength of the Company’s product development pipeline; (iv) failure to secure and protect patents, trademarks and other proprietary rights; (v) infringement of third-party proprietary rights triggering indemnification obligations and resulting in significant expenses or restrictions on our ability to provide our products or services; (vi) failure to comply with privacy laws and regulations that are extensive, open to various interpretations and complex to implement; (vii) the Company’s growth and profitability prospects; (viii) the estimated size and growth prospects of the EIM market; (ix) the Company’s competitive position in the EIM market and its ability to take advantage of future opportunities in this market; (x) the benefits of the Company’s products and services to be realized by customers; (xi) the demand for the Company’s products and services and

    26



the extent of deployment of the Company’s products and services in the EIM marketplace; (xii) the Company’s financial condition and capital requirements; (xiii) system or network failures or information security breaches in connection with our services and products; and (xiv) failure to attract and retain key personnel to develop and effectively manage our business.
For additional information with respect to risks and other factors which could occur, see the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q including Part I, Item 1A “Risk Factors” therein and in this Quarterly Report on Form 10-Q and other securities filings with the Securities and Exchange Commission (SEC) and other securities regulators. Readers are cautioned not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Unless otherwise required by applicable securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The following MD&A is intended to help readers understand our results of operations and financial condition, and is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying Notes to our Condensed Consolidated Financial Statements under Part I, Item 1 of this Quarterly Report on Form 10-Q.
All dollar and percentage comparisons made herein generally refer to the three months ended September 30, 2014 compared with the three months ended September 30, 2013, unless otherwise noted.
Where we say “we”, “us”, “our”, “OpenText” or “the Company”, we mean Open Text Corporation or Open Text Corporation and its subsidiaries, as applicable.
EXECUTIVE OVERVIEW
We are an independent company providing a comprehensive suite of software products and services that assist organizations in finding, utilizing, and sharing business information from any device in ways which are intuitive, efficient and productive. Our technologies and business solutions address one of the biggest problems encountered by enterprises today: the explosive growth of information volume and formats. Our software and services allow organizations to manage the information that flows into, out of, and throughout the enterprise as part of daily operations. Our solutions help to increase customer satisfaction, improve collaboration with partners, address the legal and business requirements associated with information governance, and aim to ensure that information remains secure and private, as demanded in today's highly regulated climate.
Our products and services provide the benefits of organizing and managing business content, while leveraging it to operate more efficiently and effectively. Our solutions incorporate social and mobile technologies and are delivered for on-premises deployment as well as through cloud and managed hosted services models to provide the flexibility and cost efficiencies demanded by the market. In addition, we provide solutions that facilitate the exchange of transactions that occur between supply chain participants, such as manufacturers, retailers, distributors and financial institutions, and are central to a company’s ability to effectively collaborate with its partners.
Our initial public offering was on the NASDAQ in 1996 and we were subsequently listed on the Toronto Stock Exchange in 1998. We are a multinational company and as of September 30, 2014, employed approximately 8,000 people worldwide.
We operate in a market known as Enterprise Information Management (EIM). This is a comprehensive market category that includes a rich set of capabilities that allow organizations to manage content by optimizing the value of business information while reducing the costs associated with capturing, storing, and managing information. At its core, EIM is about helping organizations get the most out of information. Our EIM offerings include Enterprise Content Management (ECM), Business Process Management (BPM), Customer Experience Management (CEM), Information Exchange (iX), and Discovery.
Quarterly Summary:
During the quarter we saw the following activity:
Total revenue was $453.8 million, up 39.9% over the same period in the prior fiscal year.
License revenue was $58.6 million, up 6.0% over the same period in the prior fiscal year.
GAAP-based EPS, diluted, was $0.53 compared to $0.26 in the same period of the prior fiscal year.
Non-GAAP-based EPS, diluted, was $0.97 compared to $0.69 in the same period of the prior fiscal year.
GAAP-based operating margin was 22.7% compared to 16.0% in the same period of the prior fiscal year.
Non-GAAP-based operating margin was 34.3% compared to 30.6% in the same period of the prior fiscal year.
Operating cash flow was $138.5 million, up 73.3% from the same period in the prior fiscal year.
Cash and cash equivalents was $492.5 million as of September 30, 2014, compared to $427.9 million as of June 30, 2014.

    27



See "Use of Non-GAAP Financial Measures" below for a reconciliation of non-GAAP-based measures to GAAP-based measures.
See "Acquisitions" below for the impact of acquisitions on the period-to-period comparability of results.
Acquisitions
Our competitive position in the marketplace requires us to maintain a complex and evolving array of technologies, products, services and capabilities. In light of the continually evolving marketplace in which we operate, we regularly evaluate various acquisition opportunities within the EIM market.
We believe our acquisitions support our long-term strategic direction, strengthen our competitive position, expand our customer base, provide greater scale to accelerate innovation, grow our earnings and increase shareholder value. We expect to continue to strategically acquire companies, products, services and technologies to augment our existing business. Our acquisitions, particularly significant ones such as GXS Group, Inc. (GXS), acquired in January 2014, affect the period-to-period comparability of our results. See note 18 “Acquisitions” to our Condensed Consolidated Financial Statements for more details.
Outlook for Fiscal 2015
We believe we have a strong position in the EIM market. Our goal is to strengthen our position in EIM by building on our leadership in ECM, BPM, CEM, and iX and expanding our position in Discovery. Customer support revenues are generally a recurring source of income for us and makes up a significant portion of our revenue mix. With the acquisition of GXS, our cloud services revenue has grown and we expect cloud services revenue to continue to be a recurring and growing stream of revenue in the future. We also believe that our diversified geographic profile helps strengthen our position and helps to reduce the impact of a downturn in the economy that may occur in any one specific region.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates, judgments and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements. These estimates, judgments and assumptions are evaluated on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable at that time, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from those estimates. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
(i)
Revenue recognition,
(ii)
Capitalized software,
(iii)
Goodwill,
(iv)
Acquired intangibles,
(v)
Restructuring charges,
(vi)
Business combinations,
(vii)
Foreign currency, and
(viii)
Income taxes.     
During the first quarter of Fiscal 2015, there were no significant changes to our critical accounting policies and estimates. For a detailed discussion of our critical accounting policies and estimates, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended June 30, 2014.
RESULTS OF OPERATIONS
The following tables provide a detailed analysis of our results of operations and financial condition. For each of the periods indicated below, we present our revenues by product, revenues by major geography, cost of revenues by product, total gross margin, total operating margin, gross margin by product, and their corresponding percentage of total revenue. In addition, we provide Non-GAAP measures for the periods discussed in order to provide additional information to investors that we believe will be useful as this presentation is in line with how our management assesses our Company's performance. See "Use of Non-GAAP Financial Measures" below for a reconciliation of Non-GAAP-based measures to GAAP-based measures.

    28



Summary of Results of Operations
 
 
Three Months Ended September 30,
(In thousands)
 
2014
 
Change increase (decrease)
 
2013
Total Revenues by Product Type:
 
 
 
 
 
 
License
 
$
58,615

 
$
3,309

 
$
55,306

Cloud services
 
150,006

 
108,359

 
41,647

Customer support
 
183,906

 
15,466

 
168,440

Professional service and other
 
61,260

 
2,193

 
59,067

Total revenues
 
453,787

 
129,327

 
324,460

Total Cost of Revenues
 
147,869

 
41,433

 
106,436

Total GAAP-based Gross Profit
 
305,918

 
87,894

 
218,024

Total GAAP-based Gross Margin %
 
67.4
%
 
 
 
67.2
%
Total GAAP-based Operating Expenses
 
202,892

 
36,911

 
165,981

Total GAAP-based Income from Operations
 
$
103,026

 
$
50,983

 
$
52,043

 
 
 
 
 
 
 
% Revenues by Product Type:
 
 
 
 
 
 
License
 
12.9
%
 
 
 
17.1
%
Cloud services
 
33.1
%
 
 
 
12.8
%
Customer support
 
40.5
%
 
 
 
51.9
%
Professional service and other
 
13.5
%
 
 
 
18.2
%
 
 
 
 
 
 
 
Total Cost of Revenues by Product Type:
 
 
 
 
License
 
$
3,088

 
$
52

 
3,036

Cloud services
 
57,996

 
43,731

 
14,265

Customer support
 
23,218

 
1,048

 
22,170

Professional service and other
 
45,361

 
(74
)
 
45,435

Amortization of acquired technology-based intangible assets
 
18,206

 
(3,324
)