[August 15, 2011] OPEN TEXT CORP - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operation Tweet (Edgar Glimpses Via Acquire Media NewsEdge) This Annual Report on Form 10-K, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors within the meaning of the Private Securities Litigation Reform Act of 1995, and created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. Certain statements in this report may contain words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "could," "would" and other similar language and are considered forward-looking statements or information under applicable securities laws. In addition, any information or statements 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, estimates, forecasts and projections about the operating environment, economies and markets in which we operate. Such forward-looking information or statements are subject to important assumptions, risks and uncertainties that are difficult to predict, and the actual outcome may be materially different. Our assumptions, although considered reasonable by us at the date of this report, may prove to be inaccurate and consequently our actual results could differ materially from the expectations set out herein. 26-------------------------------------------------------------------------------- Table of Contents You should not rely too heavily on the forward-looking statements contained in this Annual Report on Form 10-K, because these forward-looking statements are relevant only as of the date they were made. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking information or statements. You should carefully review Part I, Item 1A "Risk Factors" and other documents we file from time to time with the Securities and Exchange Commission and other applicable securities regulators. A number of factors may materially affect our business, financial condition, operating results and prospects. These factors include but are not limited to those set forth in Part I, Item 1A "Risk Factors" and elsewhere in this report. Any one of these factors, and other factors that we are unaware of, or currently deem immaterial, may cause our actual results to differ materially from recent results or from our anticipated future results. 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 consolidated financial statements and the accompanying Notes to Consolidated Financial Statements (the Notes) under Part II, Item 8 of this Form 10-K. All percentage comparisons made herein under the section titled "Fiscal 2011 Compared to Fiscal 2010" refer to the twelve months ended June 30, 2011 (Fiscal 2011) compared with the twelve months ended June 30, 2010 (Fiscal 2010). All percentage comparisons made herein under the section titled "Fiscal 2010 Compared to Fiscal 2009" refer to Fiscal 2010 compared with the twelve months ended June 30, 2009 (Fiscal 2009). Where we say "we", "us", "our", "OpenText" or "the Company", we mean Open Text Corporation or Open Text Corporation and its subsidiaries, as applicable. BUSINESS OVERVIEW OpenText We are an independent company providing Enterprise Content management (ECM) software solutions. ECM is the set of technologies used to capture, manage, store, preserve, find and retrieve structured and unstructured content. We focus solely on ECM software solutions with a view to being recognized as "The Content Experts" in the software industry. We endeavor to be at the leading edge of content management technology by regularly upgrading and improving on our product offerings. We have endeavored to achieve this objective internally and through acquisitions of companies that own technologies we feel will benefit our clients. 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 currently employ approximately 4,400 people worldwide. Fiscal 2011 Highlights: Fiscal 2011 was overall a successful year for us. In terms of our operating results: • Total revenues increased by 13.3% on a year over year basis to $1.033 billion. • License revenues increased to $269.2 million, a 13.1% increase over Fiscal 2010. • Customer support revenues increased to $560.5 million, a 10.4% increase over Fiscal 2010. • Operating cash flows increased to $223.2 million, a 23.9% increase over Fiscal 2010. Other Fiscal 2011 highlights and features were as follows: • In June 2011, OpenText was named a top-ten finalist in the third annual "Forrester Voice of the Customer (VoC) award" for our commitment to customer centricity. The award recognizes how we collect, interpret and react to customer feedback. Customer centricity is one of our corporate values and we have built a comprehensive, enterprise-wide "culture of the customer" initiative. 27 -------------------------------------------------------------------------------- Table of Contents • In June 2011, OpenText's acquired Metastorm business was recognized as a leader in the "IDC MarketScape: Business Process (BP) Platforms Report". The report, released annually by industry analysts at International Data Corporation (IDC), a market intelligence and advisory firm, evaluates the relative capabilities of vendor solutions to support people-centric process applications based on the complexity, abilities and strategy of the solutions. OpenText Metastorm was rated above average and received top scores across IDC's product, customer and business assessments. • In May 2011, OpenText was awarded two 2011 SAP® Pinnacle Awards for "Global Software Solution Partner of the Year" and "Global Enterprise Support Partner of the Year". SAP Pinnacle awards are presented annually to leading SAP partners that have excelled in developing and growing their partnership with SAP. Winners were selected from over 150 nominations in 18 categories from SAP partners and SAP employees. • In March 2011, we acquired weComm Limited (weComm), a London-based software company. See "Acquisitions" below for more details. • In February 2011, we acquired Metastorm Inc. (Metastorm), a software company that provides Business Process Management (BPM), Business Process Analysis (BPA) and Enterprise Architecture (EA). See "Acquisitions" below for more details. • In January 2011, we celebrated our 15th anniversary of being listed on the NASDAQ. • In December 2010, our secure social networking software was used at the G-20 summit in Seoul, South Korea. The software was first used at the G-20 summit in Toronto in June 2010. • In November 2010, "OpenText Content World 2010" was held at the Gaylord National Resort and Conference Center in Washington D.C. offering more than 110 sessions, from customer case studies to business and technical breakouts, panel discussions, and best practices through leadership sessions. With the launch of the new ECM Suite 2010, "OpenText Everywhere", as well as new developments in our solution portfolios for Microsoft SharePoint and SAP, OpenText Content World 2010 was a showcase of the possibilities in the world of ECM. • In November 2010, we showcased a new release of "OpenText Everywhere" with client applications for Apple iPhone and iPad. OpenText Everywhere lets users natively and securely access a full set of OpenText ECM suite 2010 capabilities from "RIM Blackberry", "Apple iPhone" and "Apple iPad" devices. It provides secure end-to-end communication between the ECM Suite and mobile devices, and pushes the permission model and audit capabilities of the ECM Suite right to the device. The new applications were revealed for the first time at our annual OpenText Content World user conference where attendees were able to experience "OpenText Everywhere" on iPads and iPhones. • In October 2010, we acquired StreamServe Inc. (StreamServe), a leading provider of business communication solutions. See "Acquisitions" below for more details. On July 13, 2011, we acquired Global 360 Holding Corp. (Global360), a provider of "process and case management" solutions headquartered in Dallas, Texas. See "Acquisitions" below for more details. 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 ECM marketplace and elsewhere in the high technology industry. We believe our acquisitions support our long-term strategic direction, and are intended to strengthen our competitive position, expand our customer base, provide greater scale to accelerate innovation, and increase shareholder value. We expect to continue to strategically acquire companies, products, services and technologies to augment our existing business. 28 -------------------------------------------------------------------------------- Table of Contents During Fiscal 2011 we have continued our acquisition activity with the following acquisitions: weComm Limited (weComm) On March 15, 2011, we acquired weComm, a software company based in London, United Kingdom for $20.5 million in cash (inclusive of cash acquired). weComm's software platform offers deployment of media rich applications for mobile devices, including smartphones and tablets. The acquisition facilitates our delivery of a platform to customers whereby we can help customers provide rich, immersive mobile applications cost-effectively across a multitude of mobile operating systems and devices. Metastorm Inc. (Metastorm) On February 18, 2011, we acquired Metastorm, a software company based in Baltimore, Maryland for $182.0 million in cash (inclusive of cash acquired). Metastorm provides BPM, BPA, and EA software that helps enterprises align their strategies with execution. The acquisition adds complementary technology and expertise that can be used to enhance our ECM solutions portfolio. StreamServe Inc. (StreamServe) On October 27, 2010, we acquired StreamServe, a software company based in Burlington, Massachusetts for $70.5 million in cash (inclusive of cash acquired). StreamServe offers enterprise business communication solutions that help organizations process and deliver highly personalized documents in paper or electronic format. The acquisition adds complementary document output and customer communication management software to our ECM Suite, while enhancing our SAP partnership and extending our reach in the Nordic market. In accordance with Accounting Standards Codification Topic 805 "Business Combinations" (ASC Topic 805), these acquisitions were accounted for as business combinations. For more details relating to these acquisitions, see note 17 "Acquisitions" to our consolidated financial statements. On July 13, 2011, we acquired Global 360 Holding Corp. (Global360), a provider of "process and case management" solutions headquartered in Dallas, Texas. The acquisition continues our expansion into the business process management (BPM) market, and adds to our technology, talent, services, partner and geographical strengths, as well as giving us new capabilities in the field of "dynamic case management". The purchase consideration for this acquisition is approximately $260 million, subject to customary purchase price and holdback adjustments. See note 24 "Subsequent Events" to our consolidated financial statements. Partners Partnerships are fundamental to the OpenText business. We have developed strong and mutually beneficial relationships with key technology partners, including major software vendors, systems integrators, and storage vendors, which we believe gives us leverage to deliver customer-focused solutions. Key partnership alliances of OpenText include, but are not limited to, Oracle©, Microsoft©, and SAP©. We rely on close cooperation with partners for sales and product development, as well as for the optimization of opportunities which arise in our competitive environment. We aim to strengthen our global partner program, with emphasis on developing strategic relations and achieving close integration with partners. Our partners continue to generate business in key areas such as archiving, records management and compliance. Outlook for Fiscal 2012 We believe that we have a strong position in the ECM market and that the market for content solutions remains generally stable. We think that our diversified geographic profile helps strengthen our position, in that approximately half of our revenues comes from outside of North America and thus helps cushions us from a "downturn" in any one specific region. Additionally, we believe that our focus on compliance based products 29 -------------------------------------------------------------------------------- Table of Contents also helps to partially insulate us from any "downturns" in the macroeconomic environment. We also believe we have a strong position in the ECM market as over 50% of our revenues are from customer support revenues, which are generally a recurring source of income, and we expect this trend will continue. We expect our revenue "mix" for Fiscal 2012 to be in the following ranges: (% of total revenues) License 25% to 30% Customer support 52% to 57% Services and other 18% to 23% FISCAL 2011 COMPARED TO FISCAL 2010 Revenues Revenues by Product Type and Geography: The following tables set forth our revenues by product and as a percentage of total revenues as well as revenues by major geography and as a percentage of total revenues for each of the periods indicated: Revenues by product type Change/ increase (In thousands) 2011 2010 (decrease) License $ 269,202 $ 238,074 $ 31,128 Customer support 560,541 507,452 53,089 Services and Other 203,560 166,497 37,063 Total $ 1,033,303 $ 912,023 $ 121,280 (% of total revenues) 2011 2010 License 26.1 % 26.1 % Customer support 54.2 % 55.6 % Services and Other 19.7 % 18.3 % Total 100.0 % 100.0 % Revenues by Geography Change/ increase (In thousands) 2011 2010 (decrease) North America $ 530,646 $ 472,157 $ 58,489 Europe 413,976 372,819 41,157 Other* 88,681 67,047 21,634 Total $ 1,033,303 $ 912,023 $ 121,280 % of total revenues 2011 2010 North America 51.4 % 51.8 % Europe 40.1 % 40.9 % Other* 8.5 % 7.3 % Total 100.0 % 100.0 % 30 -------------------------------------------------------------------------------- Table of Contents * Other primarily consists of the following countries: Australia, Brazil, Japan, Singapore and United Arab Emirates. License Revenues consists of fees earned from the licensing of software products to customers. Our license revenues are impacted by the strength of general economic and industry conditions, the competitive strength of our software products, and our acquisitions. License revenues increased by $31.1 million in Fiscal 2011 as compared to Fiscal 2010. The increase in license revenues is geographically attributable to an increase in North America license sales of $18.0 million, an increase in Europe license sales of $4.6 million and an increase in license sales in other geographies of $8.5 million. License revenues increased on account of an increase in the quantity of deals in excess of $1 million achieved in Fiscal 2011 compared to Fiscal 2010 (23 large deals in Fiscal 2011 compared to 19 large deals in Fiscal 2010). Customer Support Revenues consist of revenues from our customer support and maintenance agreements. These agreements allow our customers to receive technical support, enhancements and upgrades to new versions of our software products when and if available. Customer support revenues are generated from support and maintenance relating to current year sales of software products and from the renewal of existing maintenance agreements for software licenses sold in prior periods. Therefore, changes in customer support revenues do not always correlate directly to the changes in license revenues from period to period. The terms of support and maintenance agreements are typically twelve months, with customer renewal options. Customer support revenues increased by $53.1 million in Fiscal 2011 as compared to Fiscal 2010. The increase in customer support revenues was attributable to an increase in North America customer support sales of $21.1 million, an increase in Europe customer support sales of $22.7 million and the remainder $9.3 million of the change due to sales generated in other geographies. Service and Other Revenuesconsist of revenues from consulting contracts and contracts to provide implementation, training and integration services (Professional Services). "Other" revenues consist of hardware revenues. These revenues are grouped within the "Service and Other" category because they are relatively immaterial. Professional Services, if purchased, are typically performed after the purchase of new software licenses. Service and other revenues increased by $37.1 million in Fiscal 2011 as compared to Fiscal 2010. Geographically, the increase is due to an increase in revenues in North America of $19.4 million, an increase in revenues from Europe of $13.9 million and the remainder $3.8 million of the change due to increased revenues generated in other geographies. Cost of Revenues and Gross Margin by Product Type The following tables set forth the changes in cost of revenues and gross margin by product type for the periods indicated: Change/ increase (In thousands) 2011 2010 (decrease) License $ 18,284 $ 16,922 $ 1,362 Customer Support 86,834 83,741 3,093 Service and Other 167,854 135,396 32,458 Amortization of acquired technology-based intangible assets 68,048 60,472 7,576 Total $ 341,020 $ 296,531 $ 44,489 31 -------------------------------------------------------------------------------- Table of Contents Gross Margin 2011 2010 License 93.2 % 92.9 % Customer Support 84.5 % 83.5 % Service and Other 17.5 % 18.7 % Cost of license revenues consists primarily of royalties payable to third parties and product media duplication, instruction manuals and packaging expenses. Cost of license revenues increased by $1.4 million during Fiscal 2011 as compared to Fiscal 2010. The increase in costs is primarily due to an increase in direct costs associated with the corresponding increase in license revenues. Overall gross margin on cost of license revenues has remained stable at approximately 93%. Cost of customer support revenues is comprised primarily of technical support personnel and related costs, as well as third party royalty costs. Cost of customer support revenues increased by $3.1 million during Fiscal 2011 as compared to Fiscal 2010. The increase in costs is primarily due to an increase in direct costs associated with the corresponding increase in customer support revenues. Overall gross margin on customer support revenues has remained relatively stable at approximately 84%. Cost of service and other revenues consists primarily of the costs of providing integration, configuration and training with respect to our various software products. The most significant components of these costs are personnel-related expenses, travel costs and third party subcontracting. Cost of services and other revenues increased by $32.5 million during Fiscal 2011, primarily as a result of an increase in direct labour costs and other labour related costs associated with an increase in service and other revenues. Overall gross margin on cost of services and other revenues has decreased compared to the prior fiscal year primarily on account of an increase in direct labour and labour-related costs. Amortization of acquired technology-based intangible assets increased by $7.6 million due to the increase in intangible assets on account of acquisitions during Fiscal 2011. Operating Expenses The following table sets forth total operating expenses by function and as a percentage of total revenues for the periods indicated: Change/ increase (In thousands) 2011 2010 (decrease) Research and development $ 145,992 $ 129,378 $ 16,614 Sales and marketing 232,332 198,208 34,124 General and administrative 86,696 83,295 3,401 Depreciation 22,116 17,425 4,691 Amortization of acquired customer-based intangible assets 38,966 35,940 3,026 Special charges 15,576 42,008 (26,432 ) Total $ 541,678 $ 506,254 $ 35,424 32 -------------------------------------------------------------------------------- Table of Contents (in % of total revenues) 2011 2010 Research and development 14.1 % 14.2 % Sales and marketing 22.5 % 21.7 % General and administrative 8.4 % 9.1 % Depreciation 2.1 % 1.9 % Amortization of acquired customer-based intangible assets 3.8 % 3.9 % Special charges 1.5 % 4.6 % Research and development expenses consist primarily of personnel expenses, contracted research and development expenses, and facility costs. Research and development enables organic growth and as such we dedicate extensive efforts to update and upgrade our product offering. The primary driver is typically budgeted software upgrades and software development. Research and development expenses increased by $16.6 million primarily due to an increase in direct labour and labour-related benefits and expenses of $15.9 million. Overall, our research and development expenses, as a percentage of total revenues, have remained stable at 14%. Headcount at June 30, 2011 related to research and development activities increased by 210 employees compared to June 30, 2010. Our expectation for Fiscal 2012 is that research and development expenses will be in the range of 14% - 16% of total revenues. Sales and marketing expenses consist primarily of personnel expenses and costs associated with advertising and trade shows. Sales and marketing expenses increased by $34.1 million primarily due to an increase in direct labour and labour-related benefits and expenses of $28.1 million. The remainder of the difference is principally due to sales events and changes in other miscellaneous sales and marketing-related expenses. Overall, our sales and marketing expenses, as a percentage of total revenues, have remained relatively stable at approximately 22%. Headcount at June 30, 2011 related to sales and marketing activities increased by 180 employees compared to June 30, 2010. Our expectation for Fiscal 2012 is that sales and marketing expenses will be in the range of 21% -23% of total revenues. General and administrative expensesconsist primarily of personnel expenses, related overhead, audit fees, other professional fees, consulting expenses and public company costs. General and administrative expenses increased by $3.4 million primarily due to an increase in occupancy and occupancy related costs of $2.8 million, patent costs of $1.2 million and travel related costs of $0.4 million, partially offset by a decrease in consulting costs of $1.0 million. Overall, our general and administrative expenses, as a percentage of total revenues, decreased to 8.4% as a result of operational efficiencies achieved. Headcount at June 30, 2011 related to general and administrative activities increased by 47 employees compared to June 30, 2010. 33-------------------------------------------------------------------------------- Table of Contents Our expectation for Fiscal 2012 is that general and administrative expenses will be in the range of 8% -10% of total revenues. Depreciation expenses increased by $4.7 million in Fiscal 2011 as a result of capital asset additions made by us in Fiscal 2011. Amortization of acquired customer-based intangible assets increased by $3.0 million due to an increase in intangible assets resulting from acquisitions in Fiscal 2011. Special charges typically relate to amounts that we expect to pay in connection with restructuring plans relating to employee workforce reduction and abandonment of excess facilities, impairment of long-lived assets, acquisition related costs (with effect from July 1, 2009 and onwards) and other similar charges. Generally, we implement such plans in the context of integrating existing OpenText operations with that of acquired entities. Actions related to such restructuring plans are, more often than not, completed within a period of one year. In certain limited situations, if the planned activity does not need to be implemented, or an expense lower than anticipated is paid out, we record a recovery of the originally recorded expense to special charges. Special charges decreased by $26.4 million during Fiscal 2011 as compared to Fiscal 2010 primarily due to the substantial completion of our Fiscal 2010 restructuring plan implemented in the first quarter of Fiscal 2010. For more details on Special charges, see note 16 to our consolidated financial statements. Other expense relates to certain non-operational charges consisting primarily of transactional foreign exchange gains (losses) and tax-related penalties. For Fiscal 2011, net other expense decreased by $2.2 million, as compared to the prior fiscal year. The decrease is primarily due to lower foreign exchange losses incurred in Fiscal 2011. Net interest expense primarily consists of cash interest paid on our debt facilities offset by interest income earned on our cash and cash equivalents. Interest expense relates primarily to interest paid on our long-term debt obtained for the purpose of partially financing our Hummingbird acquisition (the term loan). The term loan bears floating-rate interest at LIBOR plus a fixed rate which is currently set at 2.25% per annum. The carrying value of the term loan, as of June 30, 2011, is approximately $285.0 million. Net interest expense increased by $1.4 million as compared to the prior fiscal year, primarily due to an increase in income tax interest expenses of $1.8 million resulting mainly from the expiration of competent authority benefits while the related exposure has not yet reversed. This was partially offset by a $0.4 million decrease resulting from lower interest expenses in Fiscal 2011 on our term loan and mortgage, as well as the absence of interest expense incurred from the 3-year interest rate collar hedging arrangement that expired in the second quarter of Fiscal 2010. For more details on interest expenses see note 11 to our consolidated financial statements, and also the discussion under "Long-term Debt and Credit Facilities" under the "Liquidity and Capital Resources" section of this MD&A. Provision for (recovery of) income taxes: The net increase from $1.3 million in Fiscal 2010 to $9.5 million in Fiscal 2011 was primarily due to "one-time" tax benefits relating to the internal reorganization of our international subsidiaries during the latter part of Fiscal 2010 and the beginning of Fiscal 2011 together with an increase in income taxes due to an increase in "net income before income taxes" over the comparative periods. 34-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources The following table sets forth changes in cash flow from operating, investing and financing activities for the periods indicated: Fiscal Fiscal increase (In thousands) 2011 2010 (decrease) Cash provided by operating activities $ 223,221 $ 180,191 $ 43,030 Cash used in investing activities 287,268 109,821 177,447 Cash used in financing activities 2,703 7,395 (4,692 ) Cash flows provided by operating activities Cash flows from operating activities increased by $43.0 million in Fiscal 2011 on account of an increase in net income before the impact of non cash adjustments of $62.5 million offset by a decrease in operating assets and liabilities of $19.5 million. The decrease in operating assets and liabilities was primarily due to decreases of (i) $24.3 million relating to a higher accounts receivable balance, (ii) $16.2 million relating to the net impact of changes in income taxes payable balance partially offset by changes relating to tax related deferred charges and credits, and (iii) $9.9 million relating to the change in accounts payable balance. These decreases were partially offset by increases of (i) $7.7 million relating to a higher deferred revenue balance, (ii) $20.6 million relating to the change in other assets balance, and (iii) $2.6 million due to a lower prepaid and other assets balance. Cash used in investing activities Our cash used in investing activities are primarily on account of business acquisitions. In Fiscal 2011, cash flows used in investing activities increased by $177.5 million. This was primarily due to an increase in acquisition related spending of approximately $115.0 million, particularly as a result of the Metastorm acquisition which alone accounted for $168.7 million of cash spending in Fiscal 2011. There was also a short term investment of $45.5 million that matured during Fiscal 2010 but the same offsetting impact was not repeated in the current year. The remainder of the change was due to capital assets additions of $17.3 million and other miscellaneous activities. Cash flows from financing activities Our cash flows from financing activities consist of long-term debt financing and amounts received from shares exercised by our employees. These inflows are typically offset by scheduled and non-scheduled repayments of our long-term debt financing and, when applicable, the repurchases of our Common Shares. During Fiscal 2011, cash flows used in financing activities decreased by $4.7 million primarily due to (i) an increase in the proceeds from common shares exercised by our employees in the amount of $1.5 million, (ii) an increase in excess tax benefits on share-based compensation expense in the amount of $0.7 million, and (iii) a decrease in spending on the repurchase of our Common Shares in the amount of $1.5 million. The remainder of the increase was due to other financing related activities. We did not enter into any new or additional long-term debt arrangements during the fiscal year. Long-term Debt and Credit Facilities On October 2, 2006, we entered into a $465.0 million credit agreement (the credit agreement) with a Canadian chartered bank (the bank) consisting of a term loan facility in the amount of $390.0 million and a $75.0 million committed revolving long-term credit facility (the revolver). The term loan was used to partially finance the Hummingbird acquisition and the revolver will be used for general business purposes, if necessary. As of 35-------------------------------------------------------------------------------- Table of Contents June 30, 2011, no amount has been drawn under the revolver. However, on July 7, 2011, we borrowed $73.5 million on the revolver For further details, see note 24 "Subsequent Events" to our consolidated financial statements). The credit agreement is guaranteed by the Company and certain of our subsidiaries. For details relating to this and our other credit facilities, see note 11 "Long Term Debt" to our consolidated financial statements. The material financial covenants under our term loan agreement are that: • We must maintain a "consolidated leverage" ratio of no more than 3:1 at the end of each financial quarter. Consolidated leverage ratio is defined for this purpose as the proportion of our total debt, including guarantees and letters of credit, over our "trailing twelve months" net income before interest, taxes, depreciation and amortization (EBITDA); and • We must maintain a "consolidated interest coverage" ratio of 3:1 or more at the end of each financial quarter. Consolidated interest coverage ratio is defined for this purpose as our consolidated EBITDA over our consolidated interest expense. As of June 30, 2011, the carrying value of the term loan was $285.0 million and we were in compliance with all loan covenants relating to this credit facility. As of June 30, 2011 there were no borrowings outstanding under our revolver. We intend at the appropriate time to amend and restate our existing credit facility for the purposes of increasing our liquidity and access to capital for general corporate purposes, which may include future growth opportunities, and extending the maturity dates of our existing loans. In December 2005, we entered into a five-year mortgage agreement with the bank. The principal amount of the mortgage was for Canadian $15.0 million and was originally scheduled to mature on January 1, 2011. During Fiscal 2011, the mortgage was extended for a total of twelve months, now maturing on January 1, 2012. Please refer to note 11 "Long-term debt" to our consolidated financial statements. We anticipate that our cash and cash equivalents, as well as available credit facilities and committed loan facilities will be sufficient to fund our anticipated cash requirements for working capital, contractual commitments, and capital expenditures for the foreseeable future. Any material acquisition related activities may require additional sources of financing. Pensions As part of the acquisition of Captaris, we acquired an unfunded pension plan and certain long-term employee benefit plans. As of June 30, 2011, our total unfunded pension plan obligation was $19.0 million, of which $0.5 million is payable within the next 12 months. We expect to be able to make the long term and short term payments related to this obligation, in the normal course. For a detailed discussion see note 10 "Pension Plans and Other Post Retirement Benefits" to our consolidated financial statements. Commitments and Contractual Obligations We have entered into the following contractual obligations with minimum annual payments for the indicated fiscal periods as follows: Payments due by Period ending June 30, July 1, 2012 - July 1, 2014 - July 1, Total 2012 June 30, 2014 June 30, 2016 2016 and beyond Long-term debt obligations $ 313,587 $ 22,862 $ 290,725 $ - $ - Operating lease obligations * 149,373 26,211 42,702 31,370 49,090 Purchase obligations 2,601 1,826 773 2 - $ 465,561 $ 50,899 $ 334,200 $ 31,372 $ 49,090 36 -------------------------------------------------------------------------------- Table of Contents * Net of $3.8 million of non-cancelable sublease income to be received from properties which we have subleased to other parties. The long-term debt obligations are comprised of interest and principal payments on our term loan agreement and a mortgage on our headquarters in Waterloo, Ontario, Canada. See note 11 to our consolidated financial statements. Guarantees and indemnifications We have entered into license agreements with customers that include limited intellectual property indemnification clauses. Generally, we agree to indemnify our customers against legal claims that our software products infringe certain third party intellectual property rights. In the event of such a claim, we are generally obligated to defend our customers against the claim and either settle the claim at our expense or pay damages that our customers are legally required to pay to the third-party claimant. These intellectual property infringement indemnification clauses generally are subject to limits based upon the amount of the license sale. We have not made any indemnification payments in relation to these indemnification clauses. In connection with certain facility leases, we have guaranteed payments on behalf of our subsidiaries either by providing a security deposit with the landlord or through unsecured bank guarantees obtained from local banks. We have not accrued a liability for guarantees, indemnities or warranties described above in the accompanying consolidated balance sheets since no material payments are expected to be made. The maximum amount of potential future payments under such guarantees, indemnities and warranties is not determinable. Litigation We are subject from time to time to legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, our management does not believe that the outcome of any of these legal matters will have a material adverse effect on our consolidated financial position, results of operations and cash flows. Off-Balance Sheet Arrangements We do not enter into off-balance sheet financing as a matter of practice except for the use of operating leases for office space, computer equipment, and vehicles. None of the operating leases described in the previous sentence has, or potentially may have, a material current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources. In accordance with U.S. GAAP, neither the lease liability nor the underlying asset is carried on the balance sheet, as the terms of the leases do not meet the criteria for capitalization. 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 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. In particular, significant estimates, judgments and assumptions include those related to: (i) revenue recognition, (ii) allowance for doubtful accounts, (iii) testing goodwill for impairment, (iv) the valuation of acquired intangible assets, (v) the 37 -------------------------------------------------------------------------------- Table of Contents 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) realization of investment tax credits, (xi) the valuation of stock options granted and liabilities related to share-based payments, including the valuation of our long-term incentive plan, (xii) the valuation of financial instruments, (xiii) the valuation of pension assets and obligations, and (xiv) accounting for income taxes. Revenue recognition a) License revenues We recognize revenues in accordance with ASC Topic 985-605, "Software Revenue Recognition" (ASC Topic 985-605). We record product revenues from software licenses and products when persuasive evidence of an arrangement exists, the software product has been shipped, there are no significant uncertainties surrounding product acceptance by the customer, the fees are fixed and determinable, and collection is considered probable. We use the residual method to recognize revenues on delivered elements when a license agreement includes one or more elements to be delivered at a future date if evidence of the fair value of all undelivered elements exists. If an undelivered element for the arrangement exists under the license arrangement, revenues related to the undelivered element is deferred based on vendor-specific objective evidence (VSOE) of the fair value of the undelivered element. Our multiple-element sales arrangements include arrangements where software licenses and the associated post contract customer support (PCS) are sold together. We have established VSOE of the fair value of the undelivered PCS element based on the contracted price for renewal PCS included in the original multiple element sales arrangement, as substantiated by contractual terms and our significant PCS renewal experience, from our existing worldwide base. Our multiple element sales arrangements generally include irrevocable rights for the customer to renew PCS after the bundled term ends. The customer is not subject to any economic or other penalty for failure to renew. Further, the renewal PCS options are for services comparable to the bundled PCS and cover similar terms. It is our experience that customers generally exercise their renewal PCS option. In the renewal transaction, PCS is sold on a stand-alone basis to the licensees one year or more after the original multiple element sales arrangement. The exercised renewal PCS price is consistent with the renewal price in the original multiple element sales arrangement, although an adjustment to reflect consumer price changes is not uncommon. If VSOE of fair value does not exist for all undelivered elements, all revenues are deferred until sufficient evidence exists or all elements have been delivered. We assess whether payment terms are customary or extended in accordance with normal practice relative to the market in which the sale is occurring. Our sales arrangements generally include standard payment terms. These terms effectively relate to all customers, products, and arrangements regardless of customer type, product mix or arrangement size. Exceptions are only made to these standard terms for certain sales in parts of the world where local practice differs. In these jurisdictions, our customary payment terms are in line with local practice. b) Service revenues Service revenues consist of revenues from consulting, implementation, training and integration services. These services are set forth separately in the contractual arrangements such that the total price of the customer arrangement is expected to vary as a result of the inclusion or exclusion of these services. For those contracts where the services are not essential to the functionality of any other element of the transaction, we determine VSOE of fair value for these services based upon normal pricing and discounting practices for these services when sold separately. These consulting and implementation services contracts 38 -------------------------------------------------------------------------------- Table of Contents are primarily time and materials based contracts that are, on average, less than six months in length. Revenues from these services is recognized at the time such services are rendered as the time is incurred by us. We also enter into contracts that are primarily fixed fee arrangements wherein the services are not essential to the functionality of a software element. In such cases, the proportional performance method is applied to recognize revenues. Revenues from training and integration services are recognized in the period in which these services are performed. c) Customer support revenues Customer support revenues consist of revenues derived from contracts to provide PCS to license holders. These revenues are recognized ratably over the term of the contract. Advance billings of PCS are not recorded to the extent that the term of the PCS has not commenced and payment has not been received. Deferred revenues Deferred revenues primarily relates to support agreements which have been paid for by customers prior to the performance of those services. Generally, the services will be provided in the twelve months after the signing of the agreement. Long-term sales contracts We entered into certain long-term sales contracts involving the sale of integrated solutions that include the modification and customization of software and the provision of services that are essential to the functionality of the other elements in this arrangement. As prescribed by ASC Topic 985-605,, we recognize revenues from such arrangements in accordance with the contract accounting guidelines in ASC Topic 605-35, "Construction-Type and Production-Type Contracts" (ASC Topic 605-35), after evaluating for separation of any non-ASC Topic 605-35 elements in accordance with the provisions of ASC Topic 605-25, "Multiple-Element Arrangements" (ASC Topic 605-25). When circumstances exist that allow us to make reasonably dependable estimates of contract revenues, contract costs and the progress of the contract to completion, we account for sales under such long-term contracts using the percentage-of-completion (POC) method of accounting. Under the POC method, progress towards completion of the contract is measured based upon either input measures or output measures. We measure progress towards completion based upon an input measure and calculate this as the proportion of the actual hours incurred compared to the total estimated hours. For training and integration services rendered under such contracts, revenues are recognized as the services are rendered. We will review, on a quarterly basis, the total estimated remaining costs to completion for each of these contracts and apply the impact of any changes on the POC prospectively. If at any time we anticipate that the estimated remaining costs to completion will exceed the value of the contract, the loss will be recognized immediately. When circumstances exist that prevent us from making reasonably dependable estimates of contract revenues, we account for sales under such long-term contracts using the completed contract method. Sales to resellers and channel partners We execute certain sales contracts through resellers and distributors (collectively, resellers) and also large, well-capitalized partners such as SAP AG and Accenture Inc. (collectively, channel partners). We recognize revenues relating to sales through resellers when all the recognition criteria have been met-in other words, persuasive evidence of an arrangement exists, delivery has occurred in the reporting period, the fee is fixed and determinable, and collectability is probable. Typically, we recognize revenues to 39 -------------------------------------------------------------------------------- Table of Contents resellers only after the reseller communicates the occurrence of end-user sales to us, since we do not have privity of contract with the end-user. In addition we assess the creditworthiness of each reseller and if the reseller is newly formed, undercapitalized or in financial difficulty any revenues expected to emanate from such resellers are deferred and recognized only when cash is received and all other revenue recognition criteria are met. We recognize revenues relating to sales through channel partners in the reporting period in which we receive evidence, from the channel partner, of end user sales (collectively, the documentation) and all other revenue recognition criteria have been met. As a result, if the documentation is not received within a given reporting period we recognize the revenues in a period subsequent to the period in which the channel partner completes the sale to the end user. Business combinations In Fiscal 2010, we adopted ASC Topic 805 which revised the accounting guidance that we were required to apply for our acquisitions in comparison to prior fiscal years. The underlying principles are similar to the previous guidance and require that we recognize separately from goodwill the identifiable assets acquired and the liabilities assumed, generally at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill to the extent that we identify adjustments to the preliminary purchase price allocation. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our Consolidated Statements of Income. As a result of adopting the revised accounting guidance in accordance with ASC Topic 805 as of the beginning of Fiscal 2010, certain of our policies differ when accounting for acquisitions in Fiscal 2010 and future periods in comparison to the accounting for acquisitions in Fiscal 2010 and prior periods, including: • The direct transaction costs associated with the business combination are expensed as incurred (prior to Fiscal 2010, direct transaction costs were included as a part of the purchase price); • The costs to exit or restructure certain activities of an acquired company are accounted for separately from the business combination (prior to Fiscal 2010, these restructuring and exit costs were included as a part of the assumed obligations in deriving the purchase price allocation); and • Changes in estimates associated with income tax valuation allowances or uncertain tax positions after the measurement period are generally recognized as income tax expense with application of this policy also applied prospectively to all of our business combinations regardless of the acquisition date (prior to Fiscal 2010, any such changes were generally included as a part of the purchase price allocation indefinitely). Costs to exit or restructure certain activities of an acquired company or our internal operations are accounted for as one-time termination and exit costs pursuant to ASC Topic 420, "Exit or Disposal Cost Obligations" (ASC Topic 420), and, as noted above, are accounted for separately from the business combination. For a given acquisition, we generally identify certain pre-acquisition contingencies as of the acquisition date and may extend our review and evaluation of these pre-acquisition contingencies throughout the measurement period in order to obtain sufficient information to assess whether we include these contingencies as a part of the purchase price allocation and, if so, to determine the estimated amounts. 40-------------------------------------------------------------------------------- Table of Contents If we determine that a pre-acquisition contingency (non-income tax related) is probable in nature and estimable as of the acquisition date, we record our best estimate for such a contingency as a part of the preliminary purchase price allocation. We often continue to gather information for and evaluate our pre-acquisition contingencies throughout the measurement period and if we make changes to the amounts recorded or if we identify additional pre-acquisition contingencies during the measurement period, such amounts will be included in the purchase price allocation during the measurement period and, subsequently, in our results of operations. Uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date and we reevaluate these items quarterly with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period and we continue to collect information relating to facts and circumstances that existed at acquisition date. Changes to these uncertain tax positions and tax related valuation allowances made subsequent to the measurement period or if they relate to facts and circumstances that do not exist at acquisition date, are recorded in our provision for income taxes in our consolidated statement of income. Acquired intangibles Acquired intangibles consist of acquired technology and customer relationships associated with various acquisitions. Acquired technology is initially recorded at fair value based on the present value of the estimated net future income-producing capabilities of software products acquired on acquisitions. We amortize acquired technology over its estimated useful life on a straight-line basis. Customer relationships represent relationships that we have with customers of the acquired companies and are either based upon contractual or legal rights or are considered separable; that is, capable of being separated from the acquired entity and being sold, transferred, licensed, rented or exchanged. These customer relationships are initially recorded at their fair value based on the present value of expected future cash flows. We amortize customer relationships on a straight-line basis over their estimated useful lives. We continually evaluate the remaining estimated useful life of our intangible assets being amortized to determine whether events and circumstances warrant a revision to the remaining period of amortization. Goodwill Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. The carrying amounts of goodwill and other intangible assets are periodically reviewed for impairment (at least annually for goodwill and indefinite lived intangible assets) and whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. Our operations are analyzed by management and our chief operating decision maker (CODM) as being part of a single industry segment: the design, development, marketing and sales of enterprise content management software and solutions. For Fiscal 2010 and earlier years, we allocated goodwill to reporting units on a geographical basis comprising of three reporting units: North America, Europe and "Other"; "Other" primarily consists of Australia, Brazil, Japan, Singapore and the United Arab Emirates. During Fiscal 2011, pursuant to an internal reorganization of subsidiaries to consolidate our intellectual property we moved to a single reporting unit for the purposes of allocation of goodwill. The primary valuation method selected was the market approach. Our annual impairment analysis of goodwill was performed as of April 1, 2011. This analysis indicated that the fair value of our reporting unit was in excess of its carrying value and therefore there was no impairment of goodwill required to be recorded for Fiscal 2011 (no impairments were recorded for Fiscal 2010 and Fiscal 2009). 41 -------------------------------------------------------------------------------- Table of Contents Impairment of long-lived assets We account for the impairment and disposition of long-lived assets in accordance with ASC Topic 360, "Property, Plant, and Equipment" (ASC Topic 360). We test long-lived assets or asset groups, such as capital assets and definite lived intangible assets, for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant adverse changes in the business climate or legal factors; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and a current expectation that the asset will more likely than not be sold or disposed of before the end of its estimated useful life. Recoverability is assessed based on comparing the carrying amount of the asset to the aggregate pre-tax undiscounted cash flows expected to result from the use and eventual disposal of the asset or asset group. Impairment is recognized when the carrying amount is not recoverable and exceeds the fair value of the asset or asset group. The impairment loss, if any, is measured as the amount by which the carrying amount exceeds fair value, which for this purpose is based upon the discounted projected future cash flows of the asset or asset group. We have not recorded any impairment charges for long-lived assets during Fiscal 2011 and Fiscal 2009, and during Fiscal 2010 we recorded an impairment charge to intangible assets of $0.3 million. See note 16 to our consolidated financial statements for further details. Derivative Financial Instruments During Fiscal 2011, we used derivative financial instruments to manage foreign currency rate risk. We account for these instruments in accordance with ASC Topic 815, "Derivatives and Hedging" (ASC Topic 815), which requires that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value as of the reporting date. ASC Topic 815 also requires that changes in our derivative financial instruments' fair values be recognized in earnings; unless specific hedge accounting and documentation criteria are met (i.e. the instruments are accounted for as hedges). We recorded the effective portions of the gain or loss on derivative financial instruments that were designated as cash flow hedges in accumulated other comprehensive income in our accompanying consolidated balance sheets. Any ineffective or excluded portion of a designated cash flow hedge, if applicable,was recognized in our consolidated statement of income. Allowance for doubtful accounts We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payments. We evaluate the creditworthiness of our customers prior to order fulfillment and based on these evaluations, we adjust our credit limit to the respective customer. In addition to these evaluations, we conduct on-going credit evaluations of our customers' payment history and current creditworthiness. The allowance is maintained for 100% of all accounts deemed to be uncollectible and, for those receivables not specifically identified as uncollectible, an allowance is maintained for a specific percentage of those receivables based upon the aging of accounts, our historical collection experience and current economic expectations. To date, the actual losses have been within our expectations. No single customer accounted for more than 10% of the accounts receivable balance as of June 30, 2011 and 2010. Income taxes We account for income taxes in accordance with ASC Topic 740, "Income Taxes" (ASC Topic 740). Deferred tax assets and liabilities arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. These temporary differences are measured using enacted tax rates. A valuation allowance is recorded to reduce deferred tax assets to the extent that we consider it is more likely than not that a 42-------------------------------------------------------------------------------- Table of Contents deferred tax asset will not be realized. In determining the valuation allowance, we consider factors such as the reversal of deferred income tax liabilities, projected taxable income, and the character of income tax assets and tax planning strategies. A change to these factors could impact the estimated valuation allowance and income tax expense. We account for our uncertain tax provisions by using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, based solely on the technical merits, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the appropriate amount of the benefit to recognize. The amount of benefit to recognize is measured as the maximum amount which is more likely than not to be realized. The tax position is derecognized when it is no longer more likely than not capable of being sustained. On subsequent recognition and measurement the maximum amount which is more likely than not to be recognized at each reporting date will represent the Company's best estimate, given the information available at the reporting date, although the outcome of the tax position is not absolute or final. Upon adopting the revisions in ASC Topic 740, we elected to follow an accounting policy to classify accrued interest related to liabilities for income taxes within the "Interest expense" line and penalties related to liabilities for income taxes within the "Other expense" line of our consolidated statements of income. See note 13 to our consolidated financial statements for more details. Fair value of financial instruments Carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable and accounts payable (trade and accrued liabilities) approximate their fair value due to the relatively short period of time between origination of the instruments and their expected realization. The fair value of our total long-term debt approximates its carrying value. We apply the provisions of ASC 820, "Fair Value Measurements and Disclosures", to our derivative financial instruments that we are required to carry at fair value pursuant to other accounting standards (see note 14 to our consolidated financial statements for more details). Foreign currency translation Our consolidated financial statements are presented in U.S. dollars. In general, the functional currency of our subsidiaries is the local currency. For such subsidiary, assets and liabilities denominated in foreign currencies are translated into U.S dollars at the exchange rates in effect at balance sheet dates and revenues and expenses are translated at the average exchange rates prevailing during the month of the transaction. The effect of foreign currency translation adjustments not affecting net income are included in Shareholders' equity under the "Cumulative translation adjustment" account as a component of "Accumulated other comprehensive income (loss)". Transactional foreign currency gains (losses) are included in the Consolidated Statements of Income under the line item "Other income (expense)" (For details see note 21 to our consolidated financial statements). Restructuring charges We record restructuring charges relating to contractual lease obligations and other exit costs in accordance with ASC Topic 420, "Exit or Disposal Cost Obligations" (ASC Topic 420). ASC Topic 420 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at its fair value in the period in which the liability is incurred. In order to incur a liability pursuant to ASC Topic 420, our management must have established and approved a plan of restructuring in sufficient detail. A liability for a cost associated with involuntary termination benefits is recorded when benefits have been communicated and a liability for a cost to terminate an operating lease or other contract is incurred when the contract has been terminated in accordance with the contract terms or we have ceased using the right conveyed by the contract, such as vacating a leased facility. 43-------------------------------------------------------------------------------- Table of Contents The recognition of restructuring charges requires us to make certain judgments regarding the nature, timing and amount associated with the planned restructuring activities, including estimating sub-lease income and the net recoverable amount of equipment to be disposed of. At the end of each reporting period, we evaluate the appropriateness of the remaining accrued balances. For details, see note 16 to our consolidated financial statements. Litigation We are currently involved in various claims and legal proceedings. Quarterly, we review the status of each significant matter and assess our potential financial exposure. 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 ASC Topic 450, "Contingencies". Share-based payment We measure share-based compensation costs, in accordance with ASC Topic 718, "Compensation - Stock Compensation" (ASC Topic 718) on the grant date, based on the calculated fair value of the award. We have elected to treat awards with graded vesting as a single award when estimating fair value. Compensation cost is recognized on a straight-line basis over the employee requisite service period, which in our circumstances is the stated vesting period of the award, provided that total compensation cost recognized at least equals the pro rata value of the award that has vested. Compensation cost is initially based on the estimated number of options for which the requisite service is expected to be rendered. This estimate is adjusted in the period once actual forfeitures are known. For details, see note 12 to our consolidated financial statements. Accounting for Pensions, post-retirement and post-employment benefits Pension expense is accounted for in accordance with ASC Topic 715, "Compensation-Retirement Benefits" (ASC Topic 715). Pension expense consists of: actuarially computed costs of pension benefits in respect of the current year of service, imputed returns on plan assets (for funded plans) and imputed interest on pension obligations. The expected costs of post retirement benefits, other than pensions, are accrued in the financial statements based upon actuarial methods and assumptions. The over-funded or under-funded status of defined benefit pension and other post retirement plans are recognized as an asset or a liability (with the offset to "Accumulated Other Comprehensive Income" within "Shareholders' equity"), respectively, on the balance sheet. See note 10 to our consolidated financial statements for details relating to our pension plans. 44 -------------------------------------------------------------------------------- Table of Contents FISCAL 2010 COMPARED TO FISCAL 2009 Revenues Revenues by Product Type and Geography: The following tables set forth our revenues by product, and as a percentage of total revenues as well as revenues by major geography and as a percentage of total revenues for each of the periods indicated: Revenues by product type Change/ increase (In thousands) 2010 2009 (decrease) License $ 238,074 $ 229,818 $ 8,256 Customer support 507,452 405,310 102,142 Services and Other 166,497 150,537 15,960 Total $ 912,023 $ 785,665 $ 126,358 (% of total revenues) 2010 2009 License 26.1 % 29.3 % Customer support 55.6 % 51.6 % Services and Other 18.3 % 19.1 % Total 100.0 % 100.0 % Revenues by Geography Change/ increase (In thousands) 2010 2009 (decrease) North America $ 472,157 $ 391,855 $ 80,302 Europe 372,819 351,384 21,435 Other 67,047 42,426 24,621 Total $ 912,023 $ 785,665 $ 126,358 % of total revenues 2010 2009 North America 51.8 % 49.9 % Europe 40.9 % 44.7 % Other 7.3 % 5.4 % Total 100.0 % 100.0 % License Revenues consists of fees earned from the licensing of software products to customers. Our license revenues are impacted by the strength of general economic and industry conditions, the competitive strength of our software products, and our acquisitions. License revenues increased by $8.3 million in Fiscal 2010 as compared to Fiscal 2009. The increase in license revenues is geographically attributable to an increase in North America license sales of $5.8 million and an increase in license sales in other geographies of $5.5 million. These increases were partially offset by a decrease in Europe of $3.0 million. 45-------------------------------------------------------------------------------- Table of Contents Overall our increase in license revenues is primarily due to the impact of our Fiscal 2010 acquisitions and the result of a larger quantity of deals in excess of $1 million achieved in Fiscal 2010 compared to Fiscal 2009. (19 large deals achieved in Fiscal 2010 compared to 15 large deals achieved in Fiscal 2009). Customer Support Revenues consist of revenues from our customer support and maintenance agreements. These agreements allow our customers to receive technical support, enhancements and upgrades to new versions of our software products when and if available. Customer support revenues are generated from support and maintenance relating to current year sales of software products and from the renewal of existing maintenance agreements for software licenses sold in prior periods. Therefore, changes in customer support revenues do not always correlate directly to the changes in license revenues from period to period. The terms of support and maintenance agreements are typically twelve months, with customer renewal options. Customer support revenues increased by approximately $102.1 million in Fiscal 2010 as compared to Fiscal 2009. This was partially due to the impact of our Fiscal 2010 acquisitions and growth of our North America operations. The increase in customer support revenues was attributable to an increase in North America customer support sales of $58.8 million, an increase in Europe customer support sales of $27.3 million and the remainder of the change due to sales generated in other geographies. Service and Other Revenues-Service revenues consist of revenues from consulting contracts and contracts to provide implementation, training and integration services (Professional Services). "Other" revenues consist of hardware revenues. These revenues are grouped within the "Service and Other" category because they are relatively immaterial. Professional Services, if purchased, are typically performed after the purchase of new software licenses. Service and other revenues increased by approximately $16.0 million in Fiscal 2010 as compared to Fiscal 2009. The increase in service and other revenues is partially due to the impact of our Fiscal 2010 acquisitions. Geographically, the increase is due to an increase in North America of $15.7 million, partially offset by a decrease in revenues from Europe of $2.9 million. The remainder of the difference was due to increased revenues generated in other geographies. Cost of Revenues and Gross Margin by Product Type The following tables set forth the changes in cost of revenues and gross margin by product type for the periods indicated: Change/ increase (In thousands) 2010 2009 (decrease) License $ 16,922 $ 16,204 $ 718 Customer Support 83,741 68,902 14,839 Service and Other 135,396 118,998 16,398 Amortization of acquired technology-based intangible assets 60,472 47,733 12,739 Total $ 296,531 $ 251,837 $ 44,694 Gross Margin 2010 2009 License 92.9 % 92.9 % Customer Support 83.5 % 83.0 % Service and Other 18.7 % 21.0 % Cost of license revenues consists primarily of royalties payable to third parties and product media duplication, instruction manuals and packaging expenses. 46 -------------------------------------------------------------------------------- Table of Contents Cost of license revenues increased marginally by $0.7 million during Fiscal 2010 as compared to Fiscal 2009 and overall gross margin on cost of license revenues has remained stable at approximately 93%. Cost of customer support revenues is comprised primarily of technical support personnel and related costs, as well as third party royalty costs. Cost of customer support revenues increased by $14.8 million during Fiscal 2010 as compared to Fiscal 2009. The increase in costs was primarily due to an increase in direct costs associated with the corresponding increase in customer support revenues. Overall gross margin on customer support revenues has remained relatively stable at approximately 83%. Cost of service and other revenues consists primarily of the costs of providing integration, customization and training with respect to our various software products. The most significant components of these costs are personnel-related expenses, travel costs and third party subcontracting. Cost of services and other revenues increased by $16.4 million during Fiscal 2010, primarily as a result of higher training and support costs associated with an increase in service and other revenues. Of this increase approximately $0.7 million, was the result of our Hardware costs (and sales) commencing in the second quarter of Fiscal 2009. Overall gross margin on cost of services and other revenues has decreased compared to the prior fiscal year primarily on account of an increase in direct labour and labour-related costs. Amortization of acquired technology-based intangible assets increased by $12.7 million due to the increase in intangible assets on account of acquisitions during Fiscal 2010. Operating Expenses The following table sets forth total operating expenses by function and as a percentage of total revenues for the periods indicated: Change/ increase (In thousands) 2010 2009 (decrease) Research and development $ 129,378 $ 116,164 $ 13,214 Sales and marketing 198,208 186,533 11,675 General and administrative 83,295 73,842 9,453 Depreciation 17,425 12,012 5,413 Amortization of acquired customer-based intangible assets 35,940 33,259 2,681 Special charges 42,008 14,434 27,574 Total $ 506,254 $ 436,244 $ 70,010 (in % of total revenues) 2010 2009 Research and development 14.2 % 14.8 % Sales and marketing 21.7 % 23.7 % General and administrative 9.1 % 9.4 % Depreciation 1.9 % 1.5 % Amortization of acquired customer-based intangible assets 3.9 % 4.2 % Special charges 4.6 % 1.8 % Research and development expenses consist primarily of personnel expenses, contracted research and development expenses, and facility costs. Research and development enables organic growth and as such we dedicate extensive efforts to update and upgrade our product offering. The primary driver is typically budgeted software upgrades and software development. 47-------------------------------------------------------------------------------- Table of Contents Research and development expenses increased by $13.2 million primarily due to an increase in direct labour and labour-related benefits and expenses of $15.9 million, partially offset by a reduction in consulting-related expenses. Overall, our research and development expenses, as a percentage of total revenues, remained relatively stable at roughly 14%. Headcount at June 30, 2010 related to research and development activities, increased by 211 employees compared to June 30, 2009. Sales and marketing expenses consist primarily of personnel expenses and costs associated with advertising and trade shows. Sales and marketing expenses increased by $11.7 million primarily due to an increase in direct labour and labour-related benefits and expenses of $10.8 million. The remainder of the difference is principally due to changes in other miscellaneous sales and marketing-related expenses. Overall, our sales and marketing expenses, as a percentage of total revenues, have decreased as a result of efficiencies achieved. Headcount at June 30, 2010 related to sales and marketing activities increased by 9 employees compared to June 30, 2009. General and administrative expenses consist primarily of personnel expenses, related overhead, audit fees, other professional fees, consulting expenses and public company costs. General and administrative expenses increased by $9.5 million primarily due to an increase in direct labour and labour-related benefits and expenses of $9.3 million. The remainder of the difference can be attributed to changes in other miscellaneous items. Overall, our general and administrative expenses, as a percentage of total revenues, remained relatively stable at roughly 9%. Headcount at June 30, 2010 related to general and administrative activities increased by 7 employees compared to June 30, 2009. Depreciation expenses increased by $5.4 million in Fiscal 2010, as a result of capital asset acquisitions made by us in Fiscal 2010. Amortization of acquired customer-based intangible assets increased by $2.7 million due to an increase in intangible assets resulting from acquisitions made by us in Fiscal 2010. Special charges typically relate to amounts that we expect to pay in connection with restructuring plans relating to employee workforce reduction and abandonment of excess facilities, impairment of long-lived assets, acquisition related costs (with effect from July 1, 2009 and onwards) and other similar charges. Generally, we implement such plans in the context of streamlining existing OpenText operations with that of acquired entities. Actions related to such restructuring plans are, more often than not, completed within a period of one year. In certain limited situations, if the planned activity does not need to be implemented, or an expense lower than anticipated is paid out, we record a recovery of the originally recorded expense to special charges. In accordance with the new business combination accounting rules which are applicable to us with effect from July 1, 2009, acquisition-related expenses are required to be included in the determination of income and 48-------------------------------------------------------------------------------- Table of Contents may not, as was permitted earlier, be capitalized as part of the cost of the acquisition. As a result, we recorded an additional expense (within Special charges) of $3.2 million during Fiscal 2010 on account of expenses related to these acquisitions. Other income (expense) relates to certain non-operational charges consisting primarily of foreign exchange gains (losses), changes in the market value of financial assets/hedges, and tax-related penalties. For Fiscal 2010, net other expense increased by $5.1 million, as compared to the prior fiscal year primarily due to the impact of transactional foreign currency adjustments, offset by a gain of $4.4 million resulting from re-measuring to fair value our investment in Vignette common shares held before the date of acquisition. Net interest expense is primarily made up of cash interest paid on our debt facilities offset by interest income earned on our cash and cash equivalents. Interest expense relates primarily to interest paid on our long-term debt obtained for the purpose of partially financing our Hummingbird acquisition (the term loan). The term loan bears floating-rate interest at LIBOR plus a fixed rate which is currently set at 2.25% per annum. The carrying value of the term loan, as of June 30, 2010, is approximately $288.0 million. Net interest expense decreased by $3.3 million primarily due to a decrease in the interest paid on the term loan on account of lower interest rates in Fiscal 2010. Income taxes: The reduction in tax expense in Fiscal 2010 compared to Fiscal 2009 was primarily due to the impacts of an internal reorganization of our international subsidiaries initiated to consolidate our intellectual property within certain jurisdictions and to effect an operational reduction of our global subsidiaries with a view to, eventually, having a single operating legal entity in each jurisdiction. Liquidity and Capital Resources The following table sets forth changes in cash flow from operating, investing and financing activities for the periods indicated: increase (In thousands) Fiscal 2010 Fiscal 2009 (decrease) Cash provided by operating activities $ 180,191 $ 176,170 $ 4,021 Cash provided by (used in) investing activities (109,821 ) (160,829 ) 51,008 Cash provided by (used in) financing activities (7,395 ) 24,798 (32,193 ) Cash flows provided by operating activities Cash flows from operating activities increased by a $4.0 million in Fiscal 2010 on account of an increase in net income before the impact of non cash adjustments of $45.2 million offset by a decrease in operating assets and liabilities of $41.2 million. The decrease in operating assets and liabilities was primarily due to, (i) a decrease in cash flows of $19.2 million relating to a higher accounts receivable balance, (ii) a decrease in cash flows of $20.6 million as a result of a net increase in other assets, and (iii) a decrease in cash flows of $18.2 million related to a lower net income taxes payable balance. These decreases were offset by (i) an increase in cash flows of $9.9 million relating to a higher deferred revenues balance, (ii) an increase in cash flows of $4.7 million relating to a higher accounts payable balance, and (iii) an increase in cash flows of $2.3 million due to a lower prepaid and other assets balance. The remaining change in operating assets and liabilities relates to miscellaneous items. 49-------------------------------------------------------------------------------- Table of Contents Overall, the year over year growth in operating cash flows was adversely impacted by increased restructuring costs in Fiscal 2010. Additionally, starting in Fiscal 2010 acquisition-related costs are required to be recorded as a reduction of operating cash flow, whereas in Fiscal 2009 these could be capitalized as part of the acquisition and hence included under investing costs. Absent the incremental impact of such costs and the internal reorganization costs incurred in Fiscal 2010, operating cash flow for Fiscal 2010 was approximately $206 million. Cash flows used in investing activities Our cash flows used in investing activities are primarily on account of business acquisitions. In Fiscal 2010, cash flows used in investing activities decreased by approximately $51.0 million. This was primarily due to the maturity of short-term investments we held, of $45.5 million which occurred in Fiscal 2010 and an overall reduction in acquisition related spending of approximately $3.7 million. The remainder of the decrease was due to changes in miscellaneous items. Cash flows from financing activities Our cash flows from financing activities consist of long-term debt financing and monies received from shares exercised by our employees. These inflows are typically offset by scheduled and non-scheduled repayments of our long-term debt financing and, when applicable, the repurchases of our shares. During Fiscal 2010, cash flow from financing activities decreased by $32.2 million primarily due to (i) a decrease in the proceeds from common shares exercised by our employees in the amount of $9.6 million, (ii) a decrease in excess tax benefits on share-based compensation expense in the amount of $7.5 million, and (iii) a repurchase of our shares in the amount of $14.0 million (compared to nil in Fiscal 2009), to fund an executive long-term incentive compensation plan. The remainder of the decrease was due to other financing related activities. We did not enter into any new or additional long-term debt arrangements during the year. [ Back To TMCnet.com's Homepage ]