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EX-32.2 - EXHIBIT 32.2 - OPEN TEXT CORPexhibit322q1-1610xq.htm
EX-31.2 - EXHIBIT 31.2 - OPEN TEXT CORPexhibit312q1-1610xq.htm
EX-31.1 - EXHIBIT 31.1 - OPEN TEXT CORPexhibit311q1-1610xq.htm
EX-32.1 - EXHIBIT 32.1 - OPEN TEXT CORPexhibit321q1-1610xq.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, 2015.
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 26, 2015, there were 121,351,776 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, 2015 (unaudited) and June 30, 2015
Condensed Consolidated Statements of Income - Three Months Ended September 30, 2015 and 2014 (unaudited)
Condensed Consolidated Statements of Comprehensive Income - Three Months Ended September 30, 2015 and 2014 (unaudited)
Condensed Consolidated Statements of Cash Flows - Three Months Ended September 30, 2015 and 2014 (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
PART II Other Information:
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


    2


OPEN TEXT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share data)
 
September 30, 2015
 
June 30, 2015
 
(unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
690,785

 
$
699,999

Short-term investments
18,022

 
11,166

Accounts receivable trade, net of allowance for doubtful accounts of $5,437 as of September 30, 2015 and $5,987 as of June 30, 2015 (note 3)
233,947

 
284,131

Income taxes recoverable (note 14)
20,000

 
21,151

Prepaid expenses and other current assets
47,099

 
53,191

Deferred tax assets (note 14)
31,250

 
30,711

Total current assets
1,041,103

 
1,100,349

Property and equipment (note 4)
163,179

 
160,419

Goodwill (note 5)
2,161,592

 
2,161,592

Acquired intangible assets (note 6)
631,791

 
679,479

Deferred tax assets (note 14)
150,861

 
155,411

Other assets (note 7)
74,570

 
85,576

Deferred charges (note 8)
33,501

 
37,265

Long-term income taxes recoverable (note 14)
8,393

 
8,404

Total assets
$
4,264,990

 
$
4,388,495

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities (note 9)
$
189,329

 
$
241,370

Current portion of long-term debt (note 10)
8,000

 
8,000

Deferred revenues
323,470

 
358,066

Income taxes payable (note 14)
15,996

 
17,001

Deferred tax liabilities (note 14)
71

 
997

Total current liabilities
536,866

 
625,434

Long-term liabilities:
 
 
 
Accrued liabilities (note 9)
29,579

 
34,682

Deferred credits (note 8)
11,796

 
12,943

Pension liability (note 11)
55,737

 
56,737

Long-term debt (note 10)
1,578,000

 
1,580,000

Deferred revenues
27,542

 
28,223

Long-term income taxes payable (note 14)
151,306

 
151,484

Deferred tax liabilities (note 14)
64,066

 
69,185

Total long-term liabilities
1,918,026

 
1,933,254

Shareholders’ equity:
 
 
 
Share capital (note 12)
 
 
 
121,351,776 and 122,293,986 Common Shares issued and outstanding at September 30, 2015 and June 30, 2015, respectively; Authorized Common Shares: unlimited
806,424

 
808,010

Additional paid-in capital
132,733

 
126,417

Accumulated other comprehensive income
51,884

 
51,828

Retained earnings
838,494

 
863,015

Treasury stock, at cost (625,725 shares at September 30, 2015 and 625,725 at June 30, 2015, respectively)
(19,986
)
 
(19,986
)
Total OpenText shareholders' equity
1,809,549

 
1,829,284

Non-controlling interests
549

 
523

Total shareholders’ equity
1,810,098

 
1,829,807

Total liabilities and shareholders’ equity
$
4,264,990

 
$
4,388,495

Guarantees and contingencies (note 13)
Related party transactions (note 21)
Subsequent events (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,
 
 
2015
 
2014
Revenues:
 
 
 
 
License
 
$
51,331

 
$
58,195

Cloud services and subscriptions

147,790

 
154,053

Customer support
 
185,667

 
183,906

Professional service and other
 
49,747

 
57,633

Total revenues
 
434,535

 
453,787

Cost of revenues:
 
 
 
 
License
 
2,681

 
2,997

Cloud services and subscriptions
 
58,916

 
59,577

Customer support
 
20,508

 
22,963

Professional service and other
 
38,064

 
43,197

Amortization of acquired technology-based intangible assets (note 6)
 
19,883

 
18,206

Total cost of revenues
 
140,052

 
146,940

Gross profit
 
294,483

 
306,847

Operating expenses:
 
 
 
 
Research and development
 
46,440

 
44,742

Sales and marketing
 
77,945

 
81,041

General and administrative
 
35,569

 
35,743

Depreciation
 
12,914

 
12,242

Amortization of acquired customer-based intangible assets (note 6)
 
27,805

 
25,884

Special charges (note 17)
 
17,337

 
4,169

Total operating expenses
 
218,010

 
203,821

Income from operations
 
76,473

 
103,026

Other expense, net
 
(4,913
)
 
(9,873
)
Interest and other related expense, net
 
(19,046
)
 
(11,099
)
Income before income taxes
 
52,514

 
82,054

Provision for income taxes (note 14)
 
11,202

 
17,402

Net income for the period
 
$
41,312

 
$
64,652

Net income attributable to non-controlling interests
 
(26
)
 
(26
)
Net income attributable to OpenText
 
$
41,286

 
$
64,626

Earnings per share—basic attributable to OpenText (note 20)
 
$
0.34

 
$
0.53

Earnings per share—diluted attributable to OpenText (note 20)
 
$
0.34

 
$
0.53

Weighted average number of Common Shares outstanding—basic
 
122,160

 
121,918

Weighted average number of Common Shares outstanding—diluted
 
122,640

 
122,861

Dividends declared per Common Share
 
$
0.2000

 
$
0.1725

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,
 
 
2015
 
2014
Net income for the period
 
$
41,312

 
$
64,652

Other comprehensive income—net of tax:
 
 
 
 
Net foreign currency translation adjustments
 
1,723

 
3,105

Unrealized gain (loss) on cash flow hedges:
 
 
 
 
Unrealized loss
 
(3,390
)
 
(2,900
)
Loss reclassified into net income
 
512

 
53

Actuarial gain (loss) relating to defined benefit pension plans:
 
 
 
 
Actuarial gain (loss)
 
1,113

 
(3,118
)
Amortization of actuarial loss into net income
 
83

 
121

Unrealized gain on short-term investments
 
15

 

Unrealized loss on marketable securities (Actuate)
 

 
(494
)
Total other comprehensive income (loss), net, for the period
 
56

 
(3,233
)
Total comprehensive income
 
41,368

 
61,419

Comprehensive income attributable to non-controlling interests
 
(26
)
 
(26
)
Total comprehensive income attributable to OpenText
 
$
41,342

 
$
61,393


See accompanying Notes to Condensed Consolidated Financial Statements


    5


OPEN TEXT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(unaudited)
 
Three Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income for the period
$
41,312

 
$
64,652

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of intangible assets
60,602

 
56,332

Share-based compensation expense
6,533

 
4,449

Excess tax expense (benefits) on share-based compensation expense
216

 
(395
)
Pension expense
1,167

 
1,220

Amortization of debt issuance costs
1,156

 
1,143

Amortization of deferred charges and credits
2,617

 
2,631

Deferred taxes
(4,184
)
 
(1,545
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
52,106

 
55,543

Prepaid expenses and other current assets
5,834

 
(149
)
Income taxes
3,797

 
17,806

Accounts payable and accrued liabilities
(48,322
)
 
(34,139
)
Deferred revenue
(32,393
)
 
(26,755
)
Other assets
2,281

 
(2,262
)
Net cash provided by operating activities
92,722

 
138,531

Cash flows from investing activities:
 
 
 
Additions of property and equipment
(17,197
)
 
(30,235
)
Proceeds from maturity of short-term investments
2,255

 

Purchase of Actuate Corporation, net of cash acquired
(7,701
)
 

Purchase of Informative Graphics Corporation, net of cash acquired
(88
)
 

Purchase of ICCM Professional Services Limited, net of cash acquired
(2,027
)
 

Purchase consideration for prior period acquisitions

 
(222
)
Other investing activities
(926
)
 
(7,374
)
Net cash used in investing activities
(25,684
)
 
(37,831
)
Cash flows from financing activities:
 
 
 
Excess tax (expense) benefits on share-based compensation expense
(216
)
 
395

Proceeds from issuance of Common Shares
5,252

 
7,099

Common Shares repurchased
(50,026
)
 

Repayment of long-term debt
(2,000
)
 
(13,417
)
Debt issuance costs

 
(183
)
Payments of dividends to shareholders
(23,312
)
 
(21,045
)
Net cash used in financing activities
(70,302
)
 
(27,151
)
Foreign exchange loss on cash held in foreign currencies
(5,950
)
 
(8,953
)
Increase (decrease) in cash and cash equivalents during the period
(9,214
)
 
64,596

Cash and cash equivalents at beginning of the period
699,999

 
427,890

Cash and cash equivalents at end of the period
$
690,785

 
$
492,486

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, 2015
(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 subsidiaries, collectively referred to as "OpenText" or the "Company". We wholly own all of our subsidiaries with the exception of Open Text South Africa Proprietary Ltd. (OT South Africa), GXS, Inc. (GXS Korea) and EC1 Pte. Ltd. (GXS Singapore), which as of September 30, 2015, were 90%, 85% and 81% owned, respectively, by OpenText.
Throughout this Quarterly Report on Form 10-Q: (i) the term “Fiscal 2016” means our fiscal year beginning on July 1, 2015 and ending June 30, 2016; (ii) the term “Fiscal 2015” means our fiscal year beginning on July 1, 2014 and ending June 30, 2015; (iii) the term “Fiscal 2014” means our fiscal year beginning on July 1, 2013 and ending June 30, 2014; and (iv) the term “Fiscal 2013” means our fiscal year beginning on July 1, 2012 and ending June 30, 2013.
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.
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 obligations 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 period balances have been reclassified to conform to the current period presentation including the reclassification related to a change in the method of allocating operating expenses within the Company. As a result of such reclassifications, the following expenses have been reclassified for the three months ended September 30, 2014 as follows:
 
 
Three Months Ended September 30,
 
 
2014
Reclassifications within cost of revenue
 
 
Decrease to cost of revenue - Cloud services and subscriptions
 
$
(328
)
Decrease to cost of revenue - Customer support
 
(249
)
Decrease to cost of revenue - Professional services and other
 
(352
)
Reclassifications within operating expenses
 
 
Decrease to operating expense - General and administrative
 
(13
)
Increase to operating expense - Sales and marketing
 
942


Starting in the fourth quarter of Fiscal 2015, we combined revenues from cloud services and revenues from subscriptions into one line item named "Cloud services and subscriptions" revenue. In addition, we reclassified certain license revenue, customer support revenue and professional services revenue to “Cloud services and subscriptions” revenue to better align the nature of revenues that are now depicted under  “Cloud services and subscriptions” revenue. As a result, revenue and cost of revenues previously reflected in "License", "Customer support" and "Professional services and other" were reclassified to

    7


Cloud services and subscriptions”. These revenues and expenses have been reclassified in the Condensed Consolidated Statements of Income for the three months ended September 30, 2014 to conform with the current period presentation as follows:
 
 
Three Months Ended September 30,
 
 
2014
Reclassifications within revenue
 
 
Decrease to License
 
$
(420
)
Decrease to Professional services and other
 
(3,627
)
Increase to Cloud services and subscriptions
 
4,047

Reclassifications within cost of revenue
 
 
Decrease to cost of revenue - License
 
$
(91
)
Decrease to cost of revenue - Customer support
 
(6
)
Decrease to cost of revenue - Professional services and other
 
(1,812
)
Increase to cost of revenue - Cloud services and subscriptions
 
1,909

There was no change to income from operations, net income or net income per share in any of the periods presented as a result of these reclassifications.
NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS
Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments
In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-16 “Simplifying the Accounting for Measurement-Period Adjustments” (ASU 2015-16). This update amended Accounting Standards Codification (ASC) Topic 805 “Business Combinations” to simplify the presentation of adjustments identified during the measurement period of a business combination. ASU 2015-16 requires that the acquirer record, in the reporting period in which the adjustment amounts are determined, the effect on earnings of changes in depreciation, amortization or their income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. An entity must present separately on the face of the income statement, or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 eliminates the requirement to retrospectively account for adjustments made to provisional amounts recognized in a business combination. ASU 2015-16 is effective for our fiscal year ending June 30, 2017. The adoption of ASU 2015-16 is not expected to have a material impact on our Condensed Consolidated Financial Statements.
Presentation of Debt Issuance Costs
In April 2015, the FASB issued ASU No. 2015-03 "Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03). This update amended the ASC Subtopic 835-30, "Interest - Imputation of Interest" to simplify the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. ASU 2015-03 is effective for our fiscal year ending June 30, 2017, with early adoption permitted. The adoption of ASU 2015-03 is not expected to have a material impact on our Condensed Consolidated Financial Statements.
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 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(s), (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract(s) and (v) recognizing

    8


revenue when (or as) the entity satisfies a performance obligation. In August 2015 the FASB voted to defer the effective date of ASU 2014-09 for one year. The new guidance will now be effective for us in the first quarter of our fiscal year ending June 30, 2019. Early adoption, prior to the original effective date, 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 Condensed Consolidated Financial Statements.
NOTE 3—ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance as of June 30, 2015
5,987

Bad debt expense
558

Write-off /adjustments
(1,108
)
Balance as of September 30, 2015
$
5,437

Included in accounts receivable are unbilled receivables in the amount of $23.1 million as of September 30, 2015 (June 30, 2015$26.7 million).
NOTE 4—PROPERTY AND EQUIPMENT
 
As of September 30, 2015
 
Cost
 
Accumulated
Depreciation
 
Net
Furniture and fixtures
$
18,634

 
$
(11,721
)
 
$
6,913

Office equipment
1,559

 
(902
)
 
657

Computer hardware
114,273

 
(76,844
)
 
37,429

Computer software
38,561

 
(19,348
)
 
19,213

Capitalized software development costs
42,747

 
(9,346
)
 
33,401

Leasehold improvements
56,659

 
(31,062
)
 
25,597

Land and buildings
47,510

 
(7,541
)
 
39,969

Total
$
319,943

 
$
(156,764
)
 
$
163,179

 

 
As of June 30, 2015
 
Cost
 
Accumulated
Depreciation
 
Net
Furniture and fixtures
$
17,571

 
$
(11,334
)
 
$
6,237

Office equipment
1,532

 
(879
)
 
653

Computer hardware
110,076

 
(72,479
)
 
37,597

Computer software
37,981

 
(17,525
)
 
20,456

Capitalized software development costs
38,576

 
(7,353
)
 
31,223

Leasehold improvements
53,391

 
(29,458
)
 
23,933

Land and buildings
47,525

 
(7,205
)
 
40,320

Total
$
306,652

 
$
(146,233
)
 
$
160,419

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, 2015:
Balance as of June 30, 2015
$
2,161,592

Adjustments relating to prior acquisitions

Balance as of September 30, 2015
$
2,161,592



    9


NOTE 6—ACQUIRED INTANGIBLE ASSETS
 
As of September 30, 2015
 
Cost
 
Accumulated Amortization
 
Net
Technology Assets
$
385,363

 
$
(187,384
)
 
$
197,979

Customer Assets
699,325

 
(265,513
)
 
433,812

Total
$
1,084,688

 
$
(452,897
)
 
$
631,791

 
 
 
 
 
 
 
As of June 30, 2015
 
Cost
 
Accumulated Amortization
 
Net
Technology Assets
$
428,724

 
$
(210,862
)
 
$
217,862

Customer Assets
716,525

 
(254,908
)
 
461,617

Total
$
1,145,249

 
$
(465,770
)
 
$
679,479

The above balances as of September 30, 2015 have been adjusted to reflect the impact of intangible assets relating to acquisitions where the gross cost has become fully amortized during the three months ended September 30, 2015. The impact of this resulted in a reduction of $43.4 million related to Technology Assets and $17.2 million related to Customer Assets.
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,
2016 (nine months ended June 30)
$
133,765

2017
164,266

2018
151,573

2019
124,404

2020
57,011

2021 and beyond
772

Total
$
631,791

 
NOTE 7—OTHER ASSETS
 
As of September 30, 2015
 
As of June 30, 2015
Debt issuance costs
$
29,474

 
$
30,630

Deposits and restricted cash
11,736

 
12,137

Deferred implementation costs
13,225

 
13,736

Cost basis investments
11,964

 
11,386

Marketable securities

 
9,108

Long-term prepaid expenses and other long-term assets
8,171

 
8,579

Total
$
74,570

 
$
85,576

Debt issuance costs relate primarily to costs incurred for the purpose of obtaining our credit facilities and Senior Notes (as defined in note 10 below), and are being amortized over the respective terms of the Term Loan B, the Revolver, and Senior Notes (see note 10).
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.

    10


Marketable securities are classified as available for sale securities and are recorded on our Condensed Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a separate component of Accumulated Other Comprehensive Income. As of September 30, 2015, all of our marketable securities are recorded as short-term investments.
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, 2015
 
As of June 30, 2015
Accounts payable—trade
$
11,639

 
$
15,558

Accrued salaries and commissions
53,991

 
83,888

Accrued liabilities
93,575

 
107,870

Accrued interest on Senior Notes
9,375

 
20,625

Amounts payable in respect of restructuring and other Special charges (note 17)
18,351

 
12,065

Asset retirement obligations
2,398

 
1,364

Total
$
189,329

 
$
241,370

Long-term accrued liabilities 
 
As of September 30, 2015
 
As of June 30, 2015
Amounts payable in respect of restructuring and other Special charges (note 17)
$
1,769

 
$
2,034

Other accrued liabilities*
20,881

 
24,826

Asset retirement obligations
6,929

 
7,822

Total
$
29,579

 
$
34,682

* 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, 2015, the present value of this obligation was $9.3 million (June 30, 2015$9.2 million), with an undiscounted value of $10.1 million (June 30, 2015$9.8 million).

    11


NOTE 10—LONG-TERM DEBT
Long-term debt
Long-term debt is comprised of the following:
 
As of September 30, 2015
 
As of June 30, 2015
Total debt
 
 
 
Senior Notes
$
800,000

 
$
800,000

Term Loan B
786,000

 
788,000

 
1,586,000

 
1,588,000

Less:
 
 
 
Current portion of long-term debt
 
 
 
Term Loan B
8,000

 
8,000

 


 


Non-current portion of long-term debt
$
1,578,000

 
$
1,580,000

Senior Unsecured Fixed Rate Notes
On January 15, 2015, we issued $800 million in aggregate principal amount of 5.625% Senior Notes due 2023 (Senior Notes) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (Securities Act), and to certain persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes bear interest at a rate of 5.625% per annum, payable semi-annually in arrears on January 15 and July 15, commencing on July 15, 2015. Senior Notes will mature on January 15, 2023, unless earlier redeemed, in accordance with their terms, or repurchased.
For the three months ended September 30, 2015, we recorded interest expense of $11.3 million relating to Senior Notes.
Term Loan B
In connection with the acquisition of GXS Group, Inc. (GXS), on January 16, 2014, we entered into a 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 the Revolver (defined below). 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, 2015, we recorded interest expense of $6.5 million relating to Term Loan B (three months ended September 30, 2014$6.6 million).
Revolver
We currently have a $300 million committed revolving credit facility (the Revolver). Borrowings under the Revolver are secured by a first charge over substantially all of our assets, and on a pari passu basis with Term Loan B. The Revolver will mature on December 22, 2019 with no fixed repayment date prior to the end of the term. As of September 30, 2015, we have not drawn any amounts on the Revolver.


    12


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, 2015 and June 30, 2015:
 
As of September 30, 2015
 
Total benefit
obligation
 
Current portion of
benefit obligation*
 
Non-current portion of
benefit obligation
CDT defined benefit plan
$
25,916

 
$
575

 
$
25,341

GXS Germany defined benefit plan
21,732

 
773

 
20,959

GXS Philippines defined benefit plan
6,828

 
28

 
6,800

Other plans
2,814

 
177

 
2,637

Total
$
57,290

 
$
1,553

 
$
55,737

 
 
As of June 30, 2015
 
Total benefit
obligation
 
Current portion of
benefit obligation*
 
Non-current portion of
benefit obligation
CDT defined benefit plan
$
26,091

 
$
575

 
$
25,516

GXS Germany defined benefit plan
22,420

 
774

 
21,646

GXS Philippines defined benefit plan
7,025

 
26

 
6,999

Other plans
2,751

 
175

 
2,576

Total
$
58,287

 
$
1,550

 
$
56,737

*
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, 2015, 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.
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 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

    13


significant of which are the discount rate and estimated service costs. Aside from an initial contribution which had a fair value of approximately $28.0 thousand as of September 30, 2015, 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.
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, 2015
 
As of June 30, 2015
 
CDT
 
GXS GER
 
GXS PHP
 
Total
 
CDT
 
GXS GER
 
GXS PHP
 
Total
Benefit obligation—beginning of period
$
26,091

 
$
22,420

 
$
7,025

 
$
55,536

 
$
29,344

 
$
24,182

 
$
5,276

 
$
58,802

Service cost
107

 
103

 
427

 
637

 
452

 
360

 
1,518

 
2,330

Interest cost
154

 
128

 
81

 
363

 
735

 
625

 
289

 
1,649

Benefits paid
(118
)
 
(189
)
 
(46
)
 
(353
)
 
(495
)
 
(793
)
 
(78
)
 
(1,366
)
Actuarial (gain) loss
(298
)
 
(723
)
 
(394
)
 
(1,415
)
 
1,676

 
2,701

 
201

 
4,578

Foreign exchange (gain) loss
(20
)
 
(7
)
 
(265
)
 
(292
)
 
(5,621
)
 
(4,655
)
 
(181
)
 
(10,457
)
Benefit obligation—end of period
25,916

 
21,732

 
6,828

 
54,476

 
26,091

 
22,420

 
7,025

 
55,536

Less: Current portion
(575
)
 
(773
)
 
(28
)
 
(1,376
)
 
(575
)
 
(774
)
 
(26
)
 
(1,375
)
Non-current portion of benefit obligation
$
25,341

 
$
20,959

 
$
6,800

 
$
53,100

 
$
25,516

 
$
21,646

 
$
6,999

 
$
54,161



The following are details of net pension expense relating to the following pension plans:
 
 
Three Months Ended September 30,
 
 
2015
 
2014
 
 
CDT
 
GXS GER
 
GXS PHP
 
Total
 
CDT
 
GXS GER
 
GXS PHP
 
Total
Pension expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
 
$
107

 
$
103

 
$
427

 
$
637

 
$
122

 
$
80

 
$
340

 
$
542

Interest cost
 
154

 
128

 
81

 
363

 
199

 
190

 
67

 
456

Amortization of actuarial gains and losses
 
107

 

 

 
107

 
109

 

 

 
109

Net pension expense
 
$
368

 
$
231

 
$
508

 
$
1,107

 
$
430

 
$
270

 
$
407

 
$
1,107



    14


In determining the fair value of the pension plan benefit obligations as of September 30, 2015 and June 30, 2015, respectively, we used the following weighted-average key assumptions:
 
As of September 30, 2015
 
As of June 30, 2015
 
CDT
 
GXS GER
 
GXS PHP
 
CDT
 
GXS GER
 
GXS PHP
Assumptions:
 
 
 
 
 
 
 
 
 
 
 
Salary increases
2.00%
 
2.00%
 
7.00%
 
2.00%
 
2.00%
 
7.00%
Pension increases
1.75%
 
2.00%
 
4.00%
 
1.75%
 
2.00%
 
3.50%
Discount rate
2.42%
 
2.64%
 
4.75%
 
2.36%
 
2.54%
 
4.75%
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
2016 (nine months ended June 30)
$
431


$
518


$
21

2017
615


703


32

2018
661


783


43

2019
733


836


88

2020
803


882


76

2021 to 2025
5,240


4,795


1,182

Total
$
8,483


$
8,517


$
1,442

Other Plans
Other plans include 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
Cash Dividends
For the three months ended September 30, 2015, pursuant to the Company’s dividend policy, we declared total non-cumulative dividends of $0.2000 per Common Share, in the aggregate amount of $23.3 million, which we paid during the same period.
For the three months ended September 30, 2014, pursuant to the Company’s dividend policy, we paid total non-cumulative dividends of $0.1725 per Common Share, in the aggregate amount of $21.0 million.
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

    15


Repurchase
During the three months ended September 30, 2015 and 2014, we did not repurchase any of our Common Shares for potential reissuance under our Long Term Incentive Plans (LTIP) or other plans.
Reissuance
During the three months ended September 30, 2015 and 2014, we did not reissue any Common Shares from treasury stock.
Share Repurchase Plan
On July 28, 2015, our Board of Directors authorized the repurchase of up to $200 million of Common Shares (Share Repurchase Plan). Shares may be repurchased from time to time in the open market, private purchases through forward, derivative, accelerated repurchase or automatic repurchase transactions or otherwise.
During the three months ended September 30, 2015, we repurchased and cancelled approximately 1.1 million OpenText Common Shares for approximately $50.0 million under our Share Repurchase Plan (three months ended September 30, 2014—nil). Of the $50.0 million repurchased, $42.5 million was recorded to retained earnings to reflect the difference between the market price of Common Shares repurchased and its book value.
As of September 30, 2015, approximately $150.0 million remained available for repurchase under the Share Repurchase Plan.
Share-Based Payments
Total share-based compensation expense for the periods indicated below is detailed as follows: 
 
 
Three Months Ended September 30,
 
 
2015
 
2014
Stock options
 
$
3,664

 
$
2,569

Performance Share Units (issued under LTIP)
 
620

 
591

Restricted Share Units (issued under LTIP)
 
1,234

 
743

Restricted Share Units (other)
 
381

 
75

Deferred Share Units (directors)
 
634

 
471

Total share-based compensation expense
 
$
6,533

 
$
4,449

Summary of Outstanding Stock Options
As of September 30, 2015, options to purchase an aggregate of 4,437,690 Common Shares were outstanding and 2,812,143 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. Currently we also have options outstanding that vest over five years, as well as options outstanding that vest based on meeting certain market conditions. The exercise price of all our 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, 2015 is as follows:
 
Options
 
Weighted-
Average Exercise
Price
 
Weighted-
Average
Remaining
Contractual Term
(years)
 
Aggregate Intrinsic  Value
($’000s)
Outstanding at June 30, 2015
4,375,365

 
$
42.26

 
 
 
 
Granted
348,460

 
45.73

 
 
 
 
Exercised
(145,700
)
 
29.27

 
 
 
 
Forfeited or expired
(140,435
)
 
46.59

 
 
 
 
Outstanding at September 30, 2015
4,437,690

 
$
42.82

 
4.99
 
$
27,343

Exercisable at September 30, 2015
1,308,414

 
$
33.81

 
3.71
 
$
16,793



    16


We estimate the fair value of stock options using the Black-Scholes option-pricing model or, where appropriate, the Monte Carlo Valuation Method, 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 techniques 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.
For the periods indicated, the weighted-average fair value of options and weighted-average assumptions were as follows:
 
Three Months Ended September 30,
 
 
2015
 
2014
Weighted–average fair value of options granted
 
$
11.23

 
$
14.30

Weighted-average assumptions used:
 
 
 
 
Expected volatility
 
33
%
 
32
%
Risk–free interest rate
 
1.48
%
 
1.51
%
Expected dividend yield
 
1.63
%
 
1.15
%
Expected life (in years)
 
4.33

 
4.34

Forfeiture rate (based on historical rates)
 
5
%
 
5
%
Average exercise share price
 
$
45.73

 
$
56.33

As of September 30, 2015, 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 2.5 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, 2015, cash in the amount of $4.3 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, 2015 from the exercise of options eligible for a tax deduction was $0.2 million.
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.
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 Restricted Share Units (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.
Fiscal 2015 LTIP
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. Awards under the Fiscal 2015 LTIP will be issued in the second quarter of Fiscal 2016 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 2015 LTIP awards in stock.
Fiscal 2016 LTIP
Grants made in Fiscal 2014 under the LTIP (collectively referred to as Fiscal 2016 LTIP) consisting of PSUs and RSUs, took effect in Fiscal 2014 starting on November 1, 2013. The Performance Conditions for vesting of the PSUs are based solely

    17


upon market conditions. RSUs granted 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.
Fiscal 2017 LTIP
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.
Fiscal 2018 LTIP
Grants made in Fiscal 2016 under the LTIP (collectively referred to as Fiscal 2018 LTIP), consisting of PSUs and RSUs, took effect in Fiscal 2016 starting on August 23, 2015. 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 2018 LTIP. We expect to settle the Fiscal 2018 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.
As of September 30, 2015, the total expected compensation cost related to the unvested LTIP awards not yet recognized was $20.6 million, which is expected to be recognized over a weighted average period of 2.3 years.
Restricted Share Units (RSUs)
During the three months ended September 30, 2015, we did not grant any RSUs to employees in accordance with employment agreements (three months ended September 30, 201412,500). The RSUs will vest equally over three years from the respective date of grants. We expect to settle the awards in stock.
Deferred Stock Units (DSUs)
During the three months ended September 30, 2015, we granted 556 DSUs to certain non-employee directors (three months ended September 30, 2014398). 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, 2015, cash in the amount of approximately $1.0 million, was received from employees that will be used to purchase Common Shares in future periods (three months ended September 30, 2014$0.8 million).
We recently implemented a number of amendments to our ESPP, including increasing the purchase price discount from 5% to 15% and permitting Common Shares to be purchased on the open market by the trustee of a trust, or by an agent or broker designated by an administrator, and transferred to eligible employees under the ESPP, as an alternative to the issuance of Common Shares from treasury (the Amendments). The Amendments were subsequently approved by shareholders at the annual and special meeting held on October 2, 2015, and will apply to purchase periods commencing on or after January 1, 2016 unless otherwise determined by our Board of Directors or the compensation committee of the Board.


    18


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, 2015—
June 30, 2016
 
July 1, 2016—
June 30, 2018
 
July 1, 2018—
June 30, 2020
 
July 1, 2020
and beyond
Long-term debt obligations
$
2,057,210

 
$
47,893

 
$
156,944

 
$
155,957

 
$
1,696,416

Operating lease obligations*
220,777

 
35,822

 
75,841

 
53,108

 
56,006

Purchase obligations
13,108

 
6,952

 
5,834

 
322

 

 
$
2,291,095

 
$
90,667

 
$
238,619

 
$
209,387

 
$
1,752,422

*Net of $3.0 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.
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
As we have previously disclosed, the United States Internal Revenue Services (IRS) is examining certain of our tax returns for our fiscal year ended June 30, 2010 (Fiscal 2010) through our fiscal year ended June 30, 2012 (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. We also previously disclosed that the examinations may lead to proposed adjustments to our taxes that may be material, individually or in the aggregate, and that we have not recorded any material accruals for any such potential adjustments in our Condensed Consolidated Financial Statements.
As part of these examinations, on July 17, 2015 we received from the IRS a Notice of Proposed Adjustment (“NOPA”) in draft form proposing a one-time approximately $280 million increase to our U.S. federal taxes arising from the reorganization in Fiscal 2010 and proposing penalties equal to 20% of the additional taxes, plus interest at the applicable statutory rate (which will continue to accrue until the matter is resolved and may be substantial). A NOPA is an IRS position and does not impose an obligation to pay tax. The draft NOPA may be changed before the final NOPA is issued, including because the IRS reserved the right in the draft NOPA to increase the adjustment. Based on our discussions with the IRS, we expect we will receive an additional NOPA proposing an approximately $80 million increase to our U.S. federal taxes for Fiscal 2012 arising from the integration of Global 360 Holding Corp. into the structure that resulted from the reorganization, accompanied by proposed penalties and interest (although there can be no assurance that this will be the amount reflected in the NOPA when received). Depending upon the outcome of these matters, additional state income taxes plus penalties and interest may be due.
We strongly disagree with the IRS’ position and intend to vigorously contest the proposed adjustments to our taxable

    19


income. We are examining various alternatives available to taxpayers to contest the proposed adjustments. Any such alternatives could involve a lengthy process and result in the incurrence of significant expenses. As of the date of this Quarterly Report on Form 10-Q, we have not recorded any material accruals in respect of these examinations in our Condensed Consolidated Financial Statements. An adverse outcome of these tax examinations could have a material adverse effect on our financial position and results of operations.
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 $1.9 million as of September 30, 2015. We currently have in place a bank guarantee in the amount of $2.9 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 has approximately $4.6 million accrued 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 $1.5 million to cover our anticipated financial exposure in this matter.
Please also see "Risk Factors" included in our Annual Report on Form 10-K for Fiscal 2015.
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.
We recognize interest expense and penalties related to income tax matters in income tax expense.
For the three months ended September 30, 2015, and 2014, we recognized the following amounts as income tax-related interest expense and penalties:
 
Three Months Ended September 30,
 
 
2015
 
2014
Interest expense
 
$
1,777

 
$
2,004

Penalties expense (recoveries)
 
(130
)
 
48

Total
 
$
1,647

 
$
2,052

As of September 30, 2015 and June 30, 2015, the following amounts have been accrued on account of income tax-related interest expense and penalties:
 
As of September 30, 2015
 
As of June 30, 2015
Interest expense accrued *
$
29,959

 
$
28,827

Penalties accrued *
$
4,618

 
$
5,040

*
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, 2015, could decrease tax expense in the next 12 months by $15.6 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.

    20


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. For Canada, the United States, Luxembourg and Germany, the earliest fiscal years open for examination are 2008, 2010, 2011 and 2008, respectively.
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 and the Netherlands. 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. For more information relating to certain tax audits, please refer to note 13.
As at September 30, 2015, we have provided $12.6 million (June 30, 2015—$12.1 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) remained relatively stable at 21.3% for the three months ended September 30, 2015, compared to 21.2% for the three months ended September 30, 2014. Our tax expense however, decreased by $6.2 million primarily as the result of (i) lower net income, having an impact of $5.4 million, and (ii) a decrease in the net expense of unrecognized tax benefits with related interest and penalties in the amount of $2.2 million. These impacts were partially offset by an increase in valuation allowance in the amount of $1.3 million. The remainder of the differences are due to normal course movements and non-material items.
NOTE 15—FAIR VALUE MEASUREMENT
ASC Topic 820 “Fair Value Measurement” (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, 2015 and June 30, 2015:

    21


 
September 30, 2015
 
June 30, 2015
 
 
 
Fair Market Measurements using:
 
 
 
Fair Market Measurements using:
 
September 30, 2015
 
Quoted prices
in active
markets for
identical
assets/
(liabilities)
 
Significant
other
observable
inputs
 
Significant
unobservable
inputs
 
June 30, 2015
 
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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds*
18,022

 
n/a
 
18,022

 
n/a
 
20,274

 
n/a
 
20,274

 
n/a
Derivative financial instrument asset (note 16)
n/a

 
n/a
 
n/a

 
n/a
 
273

 
n/a
 
273

 
n/a
 
$
18,022

 
n/a
 
$
18,022

 
n/a
 
$
20,547

 
n/a
 
$
20,547

 
n/a
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instrument liability (note 16)
$
(3,643
)
 
n/a
 
$
(3,643
)
 
n/a
 
$

 
n/a
 
$

 
n/a
 
$
(3,643
)
 
n/a
 
$
(3,643
)
 
n/a
 
$

 
n/a
 
$

 
n/a
*These assets in the table above are classified as Level 2 as certain specific assets included within may not have quoted prices that are readily accessible in an active market or we may have relied on alternative pricing methods that do not rely exclusively on quoted prices to determine the fair value of the investments.
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 these instruments. Our discounted cash flow techniques use observable market inputs, such as, where applicable, 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.
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, 2015 and 2014, no indications of impairment were identified and therefore no fair value measurements were required.
If applicable, we will recognize transfers between 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, 2015 and 2014, we did not have any transfers between Level 1, Level 2 or Level 3.
Marketable Securities
Marketable Securities are classified as available for sale securities and are recorded on our Condensed Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a separate component of Accumulated Other Comprehensive Income.

    22


A summary of our marketable securities outstanding as of September 30, 2015 and June 30, 2015 is as follows:
 
As of September 30, 2015
 
As of June 30, 2015
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses)
 
Estimated Fair Value
 
Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses)
 
Estimated Fair Value
Corporate bonds
$
18,019

 
$
5

 
$
(2
)
 
$
18,022

 
$
20,286

 
$
2

 
$
(14
)
 
$
20,274

NOTE 16—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Foreign Currency Forward Contracts
We are engaged in hedging programs with relationship 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 foreign currency forward contracts to hedge portions of our payroll exposure with typical maturities of between one and twelve months. We do not use derivatives for speculative purposes.
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, 2015, is recorded within “Accounts payable and accrued liabilities”.
As of September 30, 2015, the notional amount of forward contracts we held to sell U.S. dollars in exchange for Canadian dollars was $65.0 million (June 30, 2015$76.4 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, 2015
 
As of June 30, 2015
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 current assets
(Accounts payable and accrued liabilities)
$
(3,643
)
 
$
273


    23


 Effects of Derivative Instruments on Income and Other Comprehensive Income (OCI)
Three Months Ended September 30, 2015
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
 
$
(4,612
)
 
Operating
expenses
 
 
$
(696
)
 
N/A
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 

NOTE 17—SPECIAL CHARGES (RECOVERIES)
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,
 
 
2015
 
2014
Fiscal 2015 Restructuring Plan
 
$
15,474

 
$

OpenText/GXS Restructuring Plan
 
(152
)
 
2,806

Restructuring Plans prior to OpenText/GXS Restructuring Plan
 

 
87

Acquisition-related costs
 
177

 
436

Other charges (recoveries)
 
1,838

 
840

Total
 
$
17,337

 
$
4,169

Fiscal 2015 Restructuring Plan
In the third quarter of Fiscal 2015 and in the context of the acquisition of Actuate Corporation (Actuate), we began to implement restructuring activities to streamline our operations (OpenText/Actuate Restructuring Plan). We subsequently announced, on May 20, 2015 that we were initiating a restructuring program in conjunction with organizational changes to support our cloud strategy and drive further operational efficiencies. These charges are combined with the OpenText/Actuate Restructuring Plan (collectively referred to as the Fiscal 2015 Restructuring Plan) and are presented below. The Fiscal 2015 Restructuring Plan charges relate to workforce reductions and facility consolidations. These charges require 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.

    24


As of September 30, 2015, we expect total costs to be incurred in conjunction with the Fiscal 2015 Restructuring Plan to be approximately $32.0 to $35.0 million, of which $23.7 million has already been recorded within Special charges to date. We expect the Fiscal 2015 Restructuring Plan to be substantially completed by the end of Fiscal 2016.
A reconciliation of the beginning and ending liability for the three months ended September 30, 2015 is shown below. 
Fiscal 2015 Restructuring Plan
Workforce
reduction
 
Facility costs
 
Total
Balance as of June 30, 2015
$
3,842

 
$
2,126

 
$
5,968

Accruals and adjustments
15,084

 
390

 
15,474

Cash payments
(7,657
)
 
(401
)
 
(8,058
)
Foreign exchange
(470
)
 
597

 
127

Balance as of September 30, 2015
$
10,799

 
$
2,712

 
$
13,511

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, facility consolidations and other miscellaneous direct costs. These charges require 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.
Since the inception of the plan $27.3 million has been recorded within Special charges. We do not expect to incur any further significant charges related to this plan.
A reconciliation of the beginning and ending liability for the three months ended September 30, 2015 are shown below. 
OpenText/GXS Restructuring Plan
Workforce
reduction
 
Facility costs
 
Total
Balance as of June 30, 2015
$
2,846

 
$
4,436

 
$
7,282

Accruals and adjustments
(156
)
 
1

 
(155
)
Cash payments
(328
)
 
(847
)
 
(1,175
)
Foreign exchange
128

 
(23
)
 
105

Balance as of September 30, 2015
$
2,490

 
$
3,567

 
$
6,057

Acquisition-related costs
Included within "Special charges" for the three months ended September 30, 2015 are costs incurred directly in relation to acquisitions in the amount of $0.2 million (September 30, 2014$0.2 million). We incurred no costs relating to financial advisory, legal, valuation and audit services and other miscellaneous costs necessary to integrate acquired companies into our organization during the three months ended September 30, 2015 (September 30, 2014$0.2 million).
Other charges (recoveries)
For the three months ended September 30, 2015, "Other charges (recoveries)" primarily includes (i) a recovery of $0.2 million relating to certain pre-acquisition tax liabilities becoming statute barred and (ii) a recovery of $0.2 million relating to interest released on certain pre-acquisition liabilities. These recoveries were offset by charges of $1.9 million relating to a one-time, ERP implementation project in which the Company is currently involved. The remaining amounts relate to miscellaneous other charges.
Included within "Other charges (recoveries)" 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.

    25


NOTE 18—ACQUISITIONS
Fiscal 2015 Acquisitions
Acquisition of Actuate Corporation
On January 16, 2015, we acquired Actuate Corporation (Actuate), based in San Francisco, California, United States. Actuate was a leader in personalized analytics and insights and we believe the acquisition complements our OpenText EIM Suite. In accordance with Topic 805 "Business Combinations" (Topic 805), this acquisition was accounted for as a business combination.
The results of operations of Actuate were consolidated with those of OpenText beginning January 16, 2015.
The following tables summarize the preliminary consideration paid for Actuate and the amount of the assets acquired and liabilities assumed, as well as the goodwill recorded as of the acquisition date: 
Cash consideration*
$
322,417

Fair value, at date of acquisition, on shares of Actuate already owned through open market purchases
9,539

Preliminary purchase consideration
$
331,956

*Inclusive of $0.5 million accrued for but unpaid as of September 30, 2015.
Preliminary Purchase Price Allocation 
The recognized amounts of identifiable assets acquired and liabilities assumed, based upon their fair values as of January 16, 2015, are set forth below:
Current assets (inclusive of cash acquired of $22,463)
$
78,150

Non-current tangible assets
13,540

Intangible customer assets
62,600

Intangible technology assets
60,000

Liabilities assumed
(79,686
)
Total identifiable net assets
134,604

Goodwill
197,352

Net assets acquired
$
331,956

The finalization of the 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, 2015.
No portion of the goodwill recorded upon the acquisition of Actuate is expected to be deductible for tax purposes.
The fair value of current assets acquired includes accounts receivable with a fair value of $23.4 million. The gross amount receivable was $23.6 million of which $0.2 million of this receivable was expected to be uncollectible.
We recognized a gain of $3.1 million as a result of remeasuring to fair value our investment in Actuate held before the date of acquisition. The gain was included in "Other income" in our Consolidated Financial Statements during the year ended June 30, 2015.
Informative Graphics Corporation
On January 2, 2015, we acquired Informative Graphics Corporation (IGC), based in Scottsdale, Arizona, United States. IGC was a leading developer of viewing, annotation, redaction and publishing commercial software. Total consideration for IGC was $40.0 million ($38.7 million - net of cash acquired), of which $36.5 million was paid in cash, and $3.5 million is currently held back and unpaid in accordance with the purchase agreement. In accordance with Topic 805, this acquisition was accounted for as a business combination. We believe this acquisition enables OpenText to engineer solutions that further increase a user's experience within our OpenText EIM Suite.
The finalization of the 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, 2015.
The results of operations of IGC were consolidated with those of OpenText beginning January 2, 2015.

    26



NOTE 19—SUPPLEMENTAL CASH FLOW DISCLOSURES
 
Three Months Ended September 30,
 
 
 
2015
 
2014
 
Cash paid during the period for interest
 
$
29,294

*
$
10,512

 
Cash received during the period for interest
 
$
283

 
$
649

 
Cash paid during the period for income taxes
 
$
7,405

 
$
(2,548
)
**
*We issued Senior Notes on January 16, 2015. Interest owing on Senior Notes is payable semi-annually, with the first payment of $22.5 million made on July 15, 2015 (see note 10).
**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. 
 
Three Months Ended September 30,
 
 
2015
 
2014
Basic earnings per share
 
 
 
 
Net income attributable to OpenText
 
$
41,286

 
$
64,626

Basic earnings per share attributable to OpenText
 
$
0.34

 
$
0.53

Diluted earnings per share
 
 
 
 
Net income attributable to OpenText
 
$
41,286

 
$
64,626

Diluted earnings per share attributable to OpenText
 
$
0.34

 
$
0.53

Weighted-average number of shares outstanding
 
 
 
 
Basic
 
122,160

 
121,918

Effect of dilutive securities
 
480

 
943

Diluted
 
122,640

 
122,861

Excluded as anti-dilutive*
 
2,547

 
1,636

* 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, 2015, Mr. Stephen Sadler, a director, earned $6.0 thousand (September 30, 2014$4.0 thousand) 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.

    27


NOTE 22—SUBSEQUENT EVENTS
Cash Dividends
As part of our quarterly, non-cumulative cash dividend program, we declared, on October 28, 2015, a dividend of $0.20 per Common Share. The record date for this dividend is November 27, 2015 and the payment date is December 18, 2015. 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.
Daegis Inc.
On October 8, 2015, the Company announced a definitive agreement to acquire all outstanding shares of Daegis Inc. (Daegis), a global information governance, data migration solutions and development company, for $0.82 per share in cash, for a total value of approximately $13.5 million. The transaction is expected to close in the second quarter of Fiscal 2016.

    28


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”, "might", "will" 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, 2015 and ending June 30, 2016 (Fiscal 2016) 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) 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 (including tax examinations in the United States or elsewhere) and other legal proceedings; (viii) potential exposure to greater than anticipated tax liabilities or expenses, including with respect to changes in Canadian, U.S. or international tax regimes; (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

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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, 2015 compared with the three months ended September 30, 2014, 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 operate in the Enterprise Information Management (EIM) market. 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 maximizing the value of enterprise information while minimizing its risks. 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, 2015, employed approximately 8,100 people worldwide.
Quarterly Summary:
During the quarter we saw the following activity:
Total revenue was $434.5 million, down 4.2% over the same period in the prior fiscal year.
Total recurring revenue was $383.2 million, down 3.1% over the same period in the prior fiscal year.
Cloud services and subscription revenue was $147.8 million, down 4.1% over the same period in the prior fiscal year.
License revenue was $51.3 million, down 11.8% over the same period in the prior fiscal year.
GAAP-based EPS, diluted, was $0.34 compared to $0.53 in the same period in the prior fiscal year.
Non-GAAP-based EPS, diluted, was $0.84 compared to 0.97 in the same period in the prior fiscal year.
GAAP-based gross margin was 67.8% compared to 67.6% in the same period in the prior fiscal year.
GAAP-based operating margin was 17.6% compared to 22.7% in the same period in the prior fiscal year.
Non-GAAP-based operating margin was 34.1%, compared to 34.3% in the same period in the prior fiscal year.
Operating cash flow was $92.7 million, down 33.1% from the same period in the prior fiscal year.
Cash and cash equivalents was $690.8 million as of September 30, 2015, compared to 700.0 million as of June 30, 2015.


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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, can 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 2016
We believe we have a strong position in the EIM market. We look to grow our Cloud-based EIM strategy through acquisitions, innovation and with new ways to purchase our solutions, such as our subscription pricing and managed service offerings. While we continue to offer on-premises solutions, we realize the EIM market is broad and we are agnostic to whether a customer prefers an on-premises solution, cloud solution, or combination of both (hybrid). We believe giving the customer choice and flexibility with their payment option will help us to strive to obtain long-term customer value. In addition to reviewing our earnings and cash flows, we measure long-term value by looking at our "recurring revenue", which we define as revenue from Cloud services and subscriptions, Customer support and Professional service and other. In the first quarter of Fiscal 2016, recurring revenue was $383.2 million, down 3.1% compared to the first quarter of Fiscal 2015, and represented 88.2% of our total revenues.
We believe customers are looking for more choice and flexibility on how they consume technology. We are committed to delivering our products and services to customers via multiple delivery models, including a hybrid delivery model.
Additionally, Customer support revenues, which are a recurring source of income for us, make up a significant portion of our revenue mix. Our management reviews our Customer support renewal rates on a quarterly basis and we use these rates as a method of monitoring our customer service performance. For the three months ended September 30, 2015, our Customer support renewal rate was approximately 90%, consistent with the customer support renewal rate during the three months ended September 30, 2014.
We see an opportunity to help our customers become “digital businesses” and with our recent acquisition of Actuate Corporation (Actuate) in Fiscal 2015, we believe we have acquired a strong platform to integrate personalized analytics and insights onto our OpenText EIM suites of products, which we believe will further our vision to enable a “digital first world” and strengthen our position among leaders in EIM.
We also believe 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.


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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 2016, 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, 2015.

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.

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Summary of Results of Operations
 
 
Three Months Ended September 30,
(In thousands)
 
2015
 
Change increase (decrease)
 
2014
Total Revenues by Product Type:
 
 
 
 
 
 
License
 
$
51,331

 
$
(6,864
)
 
$
58,195

Cloud services
 
147,790

 
(6,263
)
 
154,053

Customer support
 
185,667

 
1,761

 
183,906

Professional service and other
 
49,747

 
(7,886
)
 
57,633

Total revenues
 
434,535

 
(19,252
)
 
453,787

Total Cost of Revenues
 
140,052

 
(6,888
)
 
146,940