| OPEN TEXT CORP Item 1A Risk Factors Risk Factors In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, and is subject to the safe harbors created by those sections |
| These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed in the following cautionary statements and elsewhere in this Annual Report on Form 10-K The actual results that we achieve may differ materially from any forward-looking statements, which reflect management’s opinions only as of the date hereof |
| You should carefully review the following factors, as well as the other information set forth herein, when evaluating us and our business |
| If any of the following risks were to occur, our business, financial condition and results of operations would likely suffer |
| In that event, the trading price of our Common Shares would likely decline |
| Such risks are further discussed from time to time in our filings filed from time to time with the SEC Our anticipated acquisition of Hummingbird may adversely affect our operations and finances in the short term In August 2006, we entered into a definitive agreement with Hummingbird to acquire all of Hummingbird’s outstanding common shares at a price of dlra27dtta85 per share, or approximately dlra489dtta0 million |
| This transaction is subject to the approval of two-thirds of the votes cast by Hummingbird’s shareholders at a meeting of shareholders, currently expected to be held in mid-September 2006, as well as court approval |
| The transaction is also subject to certain other customary conditions, including the receipt of regulatory approvals |
| The Hummingbird shares will be acquired for cash, and as a result we will need to borrow the funds for the Hummingbird acquisition from a syndicate of leading financial institutions |
| The interest costs associated with the resulting credit facility will materially increase our operating expenses, which may materially and adversely affect our profitability and the price of our Common Shares |
| The Hummingbird acquisition represents a significant opportunity for our business |
| However, the size of the acquisition and the inevitable integration challenges that will result from the acquisition may divert management’s attention from the normal daily operations of our existing businesses, products and services |
| We cannot ensure that we will be successful in retaining key Hummingbird employees and our operations may be disrupted if we fail to adequately retain and motivate the combined employee base |
| Our success depends on our relationships with strategic partners We rely on close cooperation with partners for product development, optimization, and sales |
| If any of our partners should decide for any reason to terminate or scale back their cooperative efforts with us, our business, operating results, and financial condition may be adversely affected |
| If we do not continue to develop new technologically advanced products, future revenues will be negatively affected Our success depends upon our ability to design, develop, test, market, license and support new software products and enhancements of current products on a timely basis in response to both competitive products and evolving demands of the marketplace |
| In addition, new software products and enhancements must remain compatible with standard platforms and file formats |
| We continue to enhance the capability of our Livelink software to enable users to form workgroups and collaborate on intranets and the Internet |
| We increasingly must integrate software licensed or acquired from third parties with our own software to create or improve our products |
| These products are important to the success of our strategy, and we may not be successful in developing and marketing these and other new software products and enhancements |
| If we are unable to successfully integrate the technologies licensed or acquired from third parties, to develop new software products and enhancements to existing products, or to complete products currently under development, or if such 9 ______________________________________________________________________ [31]Table of Contents integrated or new products or enhancements do not achieve market acceptance, our operating results will materially suffer |
| In addition, if new industry standards emerge that we do not anticipate or adapt to, our software products could be rendered obsolete and our business would be materially harmed |
| If our products and services do not gain market acceptance, we may not be able to increase our revenues We intend to pursue our strategy of growing the capabilities of our ECM software offerings through the in-house research and development of new product offerings |
| In response to customer requests, we continue to enhance Livelink and many of our optional components and we continue to set the standard for ECM capabilities |
| The primary market for our software and services is rapidly evolving |
| As is typical in the case of a rapidly evolving industry, demand for and market acceptance of products and services that have been released recently or that are planned for future release are subject to a high level of uncertainty |
| If the markets for our products and services fail to develop, develop more slowly than expected or become saturated with competitors, our business will suffer |
| We may be unable to successfully market our current products and services, develop new software products, services and enhancements to current products and services, complete customer installations on a timely basis, or complete products and services currently under development |
| If our products and services or enhancements do not achieve and sustain market acceptance, our business and operating results will be materially affected |
| Current and future competitors could have a significant impact on our ability to generate future revenue and profits The markets for our products are intensely competitive, and are subject to rapid technological change and competitive pressures |
| We expect competition to increase and intensify in the future as the markets for our products continue to develop and as additional companies enter each of our markets |
| Numerous releases of competitive products are continually occurring and can be expected to continue in the near future |
| We may not be able to compete effectively with current and future competitors |
| If competitors were to engage in aggressive pricing policies with respect to competing products, or if significant price competition was to otherwise develop, we would likely be forced to lower our prices |
| This could result in lower revenues, reduced margins, loss of customers, or loss of market share for us |
| We are confronting two inexorable trends in our industry; the consolidation of our competitors and the commoditization of our products and services The acquisition of Documentum Inc |
| by EMC Corporation (“EMC”) in December 2003 and the proposed acquisition of FileNet by IBM have changed the marketplace for our goods and services |
| If the IBM/FileNet acquisition is successful, then two comparable competitors to our company will have been replaced by larger and better capitalized companies |
| In addition, other large corporations with considerable financial resources either have products that compete with the products we offer, or have the ability to encroach on our competitive position within our marketplace |
| These large, well-capitalized companies have the financial resources to engage in competition with our products and services on the basis of marketing, services or support |
| They also have the ability to introduce items that compete with our maturing products and services |
| For example, Microsoft has launched SharePoint, a product which provides the same benefits that some of our ECM products provide at a lower cost to the customer |
| The threat posed by larger competitors and the goods and services that these companies can produce at a lower cost to our target customers may materially increase our expenses and reduce our revenues |
| Any material adverse effect on our revenue or cost structure may materially reduce the price of our common shares |
| Acquisitions, investments, joint ventures and other business initiatives may negatively affect our operating results We continue to seek out opportunities to acquire or invest in businesses, products and technologies that expand, complement or are otherwise related to our current business |
| We also consider from time to time, 10 ______________________________________________________________________ [32]Table of Contents opportunities to engage in joint ventures or other business collaborations with third parties to address particular market segments |
| These activities create risks such as the need to integrate and manage the businesses and products acquired with our own business and products, additional demands on our management, resources, systems, procedures and controls, disruption of our ongoing business, and diversion of management’s attention from other business concerns |
| Moreover, these transactions could involve substantial investment of funds and/or technology transfers and the acquisition or disposition of product lines or businesses |
| Also, such activities could result in one-time charges and expenses and have the potential to either dilute the interests of existing shareholders or result in the assumption of debt |
| Such acquisitions, investments, joint ventures or other business collaborations may involve significant commitments of financial and other resources of our company |
| Any such activity may not be successful in generating revenue, income or other returns to us, and the financial or other resources committed to such activities will not be available to us for other purposes |
| Our inability to address these risks could negatively affect our operating results |
| Businesses we acquire may have disclosure controls and procedures and internal controls over financial reporting that are weaker than or otherwise not in conformity with ours We have a history of acquiring complementary businesses with varying levels of organizational size and complexity |
| Upon consummating an acquisition, we seek to implement our disclosure controls and procedures and internal controls over financial reporting at the acquired company as promptly as possible |
| Depending upon the size and complexity of the business acquired, the implementation of our disclosure controls and procedures and internal controls over financial reporting at an acquired company may be a lengthy process |
| Typically, we conduct due diligence prior to consummating an acquisition, however, our integration efforts may periodically expose deficiencies in the disclosure controls and procedures and internal controls over financial reporting of an acquired company |
| We expect that the process involved in completing the integration of our own disclosure controls and procedures and internal controls over financial reporting at an acquired business will sufficiently correct any identified deficiencies |
| However, if such deficiencies exist, we may not be in a position to comply with our periodic reporting requirements and our business and financial condition may be materially harmed |
| The length of our sales cycle can fluctuate significantly which could result in significant fluctuations in license revenue being recognized from quarter to quarter Because the decision by a customer to purchase our products often involves relatively large-scale implementation across our customer’s network or networks, licenses of these products may entail a significant commitment of resources by prospective customers, accompanied by the attendant risks and delays frequently associated with significant expenditures and lengthy sales cycle and implementation procedures |
| Given the significant investment and commitment of resources required by an organization in order to implement our software, our sales cycle tends to take considerable time to complete |
| Over the past fiscal year, we have experienced a lengthening of our sales cycle as customers include more personnel in the decision-making process and focus on more enterprise-wide licensing deals |
| In an economic environment of reduced information technology spending, it can take several months, or even several quarters, for sales opportunities to translate into revenue |
| If a customer’s decision to license our software is delayed and the installation of our products in one or more customers takes longer than originally anticipated, the date on which revenue from these licenses could be recognized would be delayed |
| Such delays could cause our revenues to be lower than expected in a particular period |
| Our international operations expose us to business risks that could cause our operating results to suffer We intend to continue to make efforts to increase our international operations and anticipate that international sales will continue to account for a significant portion of our revenue |
| We have increased our presence in the European market, especially since our acquisition of IXOS Software AG (“IXOS”) |
| These international operations are subject to certain risks and costs, including the difficulty and expense of administering business and compliance abroad, compliance with both domestic and foreign laws, compliance 11 ______________________________________________________________________ [33]Table of Contents with domestic and international import and export laws and regulations, costs related to localizing products for foreign markets, and costs related to translating and distributing products in a timely manner |
| International operations also tend to be subject to a longer sales and collection cycle, as well as potential losses arising from currency fluctuations, and regulatory limitations regarding the repatriation of earnings |
| Significant international sales may also expose us to greater risk from political and economic instability, unexpected changes in Canadian, United States or other governmental policies concerning import and export of goods and technology, regulatory requirements, tariffs and other trade barriers |
| In addition, international earnings may be subject to taxation by more than one jurisdiction, which could also materially adversely affect our effective tax rate |
| Also, international expansion may be more difficult, time consuming, and costly |
| As a result, if revenues from international operations do not offset the expenses of establishing and maintaining foreign operations, our operating results will suffer |
| Moreover, in any given quarter, foreign exchange rates can impact revenue adversely |
| Our expenses may not match anticipated revenues We incur operating expenses based upon anticipated revenue trends |
| Since a high percentage of these expenses are relatively fixed, a delay in recognizing revenue from license transactions could cause significant variations in operating results from quarter to quarter and could result in operating losses |
| If these expenses are not subsequently followed by revenues, our business, financial condition, or results of operations could be materially and adversely affected |
| In addition, in July 2005, we announced our 2006 restructuring initiative to restructure our operations with the intention of streamlining our operations |
| We will continue to evaluate our operations, and may propose future restructuring actions as a result of changes in the marketplace, including the exit from less profitable operations or services no longer demanded by our customers |
| Any failure to successfully execute these initiatives on a timely basis may have a material adverse impact on our results of operations |
| Our products may contain defects that could harm our reputation, be costly to correct, delay revenues, and expose us to litigation Our products are highly complex and sophisticated and, from time to time, may contain design defects or software errors that are difficult to detect and correct |
| Errors may be found in new software products or improvements to existing products after commencement of commercial shipments |
| If these defects are discovered, we may not be able to successfully correct such errors in a timely manner, or at all |
| In addition, despite the tests we carry out on all our products, we may not be able to fully simulate the environment in which our products will operate and, as a result, we may be unable to adequately detect design defects or software errors inherent in our products and which only become apparent when the products are installed in an end-user’s network |
| The occurrence of errors and failures in our products could result in loss of, or delay in market acceptance of our products, and alleviating such errors and failures in our products could require us to make significant expenditure of capital and other resources |
| The harm to our reputation resulting from product errors and failures would be damaging |
| We regularly provide a warranty with our products and the financial impact of these warranty obligations may be significant in the future |
| Our agreements with our strategic partners and end-users typically contain provisions designed to limit our exposure to claims, such as exclusions of all implied warranties and limitations on the availability of consequential or incidental damages |
| However, such provisions may not effectively protect us against claims and related liabilities and costs |
| Although we maintain errors and omissions insurance coverage and comprehensive liability insurance coverage, such coverage may not be adequate and all claims may not be covered |
| Accordingly, any such claim could negatively affect our financial condition |
| Other companies may claim that we infringe their intellectual property, which could result in significant costs to defend and if we are not successful it could have a significant impact on our ability to generate future revenue and profits Although we do not believe that our products infringe on the rights of third-parties, third-parties may assert infringement claims against us in the future, and any such assertions may result in costly litigation or require us 12 ______________________________________________________________________ [34]Table of Contents to obtain a license for the intellectual property rights of third-parties |
| Such licenses may not be available on reasonable terms, or at all |
| In particular, as software patents become more prevalent, it is possible that certain parties will claim that our products violate their patents |
| Such claims could be disruptive to our ability to generate revenue and may result in significantly increased costs as we attempt to license the patents or rework our products to ensure that they are not in violation of the claimant’s patents or dispute the claims |
| Any of the foregoing could have a significant impact on our ability to generate future revenue and profits |
| Failure to protect our intellectual property could harm our ability to compete effectively We are highly dependent on our ability to protect our proprietary technology |
| Our efforts to protect our intellectual property rights may not be successful |
| We rely on a combination of copyright, patent, trademark and trade secret laws, non-disclosure agreements and other contractual provisions to establish and maintain our proprietary rights |
| Although we hold certain patents and have other patents pending, we generally have not sought patent protection for our products |
| While US and Canadian copyright laws, international conventions and international treaties may provide meaningful protection against unauthorized duplication of software, the laws of some foreign jurisdictions may not protect proprietary rights to the same extent as the laws of Canada or the United States |
| Software piracy has been, and is expected to be, a persistent problem for the software industry |
| Enforcement of our intellectual property rights may be difficult, particularly in some nations outside of the United States and Canada in which we seek to market our products |
| Despite the precautions we take, it may be possible for unauthorized third parties, including competitors, to copy certain portions of our products or to “reverse engineer” in order to obtain and use information that we regard as proprietary |
| The loss of licenses to use third party software or the lack of support or enhancement of such software could adversely affect our business We currently depend on certain third-party software, the lack of availability of which could result in increased costs of, or delays in, licenses of our products |
| For a limited number of product modules, we rely on certain software that we license from third-parties, including software that is integrated with internally developed software and which is used in our products to perform key functions |
| These third-party software licenses may not continue to be available to us on commercially reasonable terms, and the related software may not continue to be appropriately supported, maintained, or enhanced by the licensors |
| The loss of license to use, or the inability of licensors to support, maintain, and enhance any of such software, could result in increased costs, delays, or reductions in product shipments until equivalent software is developed or licensed, if at all, and integrated with internally developed software, and could adversely affect our business |
| A reduction in the number or sales efforts by distributors could materially impact our revenues A significant portion of our revenue is derived from the license of our products through third parties |
| Our success will depend, in part, upon our ability to maintain access to existing channels of distribution and to gain access to new channels if and when they develop |
| We may not be able to retain a sufficient number of our existing or future distributors |
| Distributors may also give higher priority to the sale of products other than ours (which could include products of competitors) or may not devote sufficient resources to marketing our products |
| The performance of third party distributors is largely outside of our control and we are unable to predict the extent to which these distributors will be successful in marketing and licensing our products |
| A reduction in sales efforts, a decline in the number of distributors, or the discontinuance of sales of our products by our distributors could lead to reduced revenue |
| We must continue to manage our growth or our operating results could be adversely affected Our markets have continued to evolve at a rapid pace |
| Moreover, we have grown significantly through acquisitions in the past and continue to review acquisition opportunities as a means of increasing the size and scope of our business |
| Finally, we have been subject to increased regulation, including various NASDAQ rules 13 ______________________________________________________________________ [35]Table of Contents and Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes”), which has necessitated a significant use of our resources to comply with the increased level of regulation on a timely basis |
| Our growth, coupled with the rapid evolution of our markets and the new heightened regulations, have placed, and are likely to continue to place, significant strains on our administrative and operational resources and increased demands on our internal systems, procedures and controls |
| Our administrative infrastructure, systems, procedures and controls may not adequately support our operations or compliance with such regulations, and our management may not be able to achieve the rapid, effective execution of the product and business initiatives necessary to successfully penetrate the markets for our products and services and to successfully integrate any business acquisitions in the future to comply with all regulatory rules |
| If we are unable to manage growth effectively, or comply with such new regulations, our operating results will likely suffer and we may not be in a position to comply with our periodic reporting requirements or listing standards, which could result in our delisting from the NASDAQ stock market |
| Recently enacted and proposed changes in securities laws and related regulations could result in increased costs to us Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of Sarbanes and recent rules enacted and proposed by the SEC and NASDAQ, have resulted in increased costs to us as we respond to the new requirements |
| In particular, complying with the requirements of Section 404 of Sarbanes have resulted in an overall higher level of internal costs and fees from our independent accounting firm and external consultants |
| These rules could also impact our ability to obtain certain types of insurance, including director and officer liability insurance, and as a result, we may be forced to accept reduced policy limits and coverage and/or incur substantially higher costs to obtain the same or similar coverage |
| The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, on committees of our Board of Directors, or as executive officers |
| Our products rely on the stability of various infrastructure software that, if not stable, could negatively impact the effectiveness of our products, resulting in harm to our reputation and business Our developments of Internet and intranet applications depend and will depend on the stability, functionality and scalability of the infrastructure software of the underlying intranet, such as that of Sun Microsystems Inc, Hewlett Packard Company, Oracle, Microsoft and others |
| If weaknesses in such infrastructure software exist, we may not be able to correct or compensate for such weaknesses |
| If we are unable to address weaknesses resulting from problems in the infrastructure software such that our products do not meet customer needs or expectations, our business and reputation may be significantly harmed |
| Our quarterly revenues and operating results are likely to fluctuate which could materially impact the price of our Common Shares We experience, and we are likely to continue to experience, significant fluctuations in quarterly revenues and operating results caused by many factors, including changes in the demand for our products, the introduction or enhancement of products by us and our competitors, market acceptance of enhancements or products, delays in the introduction of products or enhancements by us or our competitors, customer order deferrals in anticipation of upgrades and new products, lengthening sales cycles, changes in our pricing policies or those of our competitors, delays involved in installing products with customers, the mix of distribution channels through which products are licensed, the mix of products and services sold, the timing of restructuring charges taken in connection with acquisitions completed by us, the mix of international and North American revenues, foreign currency exchange rates, acquisitions and general economic conditions |
| A cancellation or deferral of even a small number of licenses or delays in installations of our products could have a material adverse effect on our results of operations in any particular quarter |
| Because of the impact of the timing of product introductions and the rapid evolution of our business and the markets we serve, we cannot predict whether seasonal patterns experienced in the past will continue |
| For these reasons, reliance should not be 14 ______________________________________________________________________ [36]Table of Contents placed upon period-to-period comparisons of our financial results to forecast future performance |
| It is likely that our quarterly revenue and operating results could always vary significantly and if such variances are significant, the market price of our Common Shares could materially decline |
| There can be no assurance that any patentable elements will be identified or, if identified, that patent protection will be obtained |
| Although we intend to protect our rights vigorously, there can be no assurance that these measures will, in all cases, be successful |
| Enforcement of our intellectual property rights may be difficult, particularly in some nations outside of the United States and Canada in which we seek to market our products |
| Certain of our license arrangements have required us to make a limited confidential disclosure of portions of the source code for our products, or to place such source code into an escrow for the protection of another party |
| Despite the precautions we have taken, unauthorized third parties may be able to copy certain portions of our products or to reverse engineer or obtain and use information that we regard as proprietary |
| Also, our competitors could independently develop technologies that are perceived to be substantially equivalent or superior to our technologies |
| Our competitive position may be affected by our ability to protect our intellectual property |
| Although we do not believe we are infringing on the intellectual property rights of others, claims of infringement are becoming increasingly common as the software industry develops and as related legal protections, including patents, are applied to software products |
| Although most of our technology is proprietary in nature, we do include certain third party software in our products |
| In these cases, this software is licensed from the entity holding our intellectual property rights |
| Although we believe that we have secured proper licenses for all third-party software that has been integrated into our products, third parties may assert infringement claims against us in the future, and any such assertion may result in litigation, which may be costly and require us to obtain a license for the software |
| Such licenses may not be available on reasonable terms or at all |
| If we are not able to attract and retain top employees, our ability to compete may be harmed Our performance is substantially dependent on the performance of our executive officers and key employees |
| The loss of the services of any of our executive officers or other key employees could significantly harm our business |
| We do not maintain “key person” life insurance policies on any of our employees |
| Our success is also highly dependent on our continuing ability to identify, hire, train, retain and motivate highly qualified management, technical, sales and marketing personnel |
| Specifically, the recruitment of top research developers, along with experienced salespeople, remains critical to our success |
| Competition for such personnel is intense, and we may not be able to attract, integrate or retain highly qualified technical and managerial personnel in the future |
| The volatility of our stock price could lead to losses by shareholders The market price of our Common Shares has been volatile and subject to wide fluctuations |
| Such fluctuations in market price may continue in response to quarterly variations in operating results, announcements of technological innovations or new products by us or our competitors, changes in financial estimates by securities analysts or other events or factors |
| In addition, financial markets experience significant price and volume fluctuations that particularly affect the market prices of equity securities of many technology companies and these fluctuations have often been unrelated to the operating performance of such companies or have resulted from the failure of the operating results of such companies to meet market expectations in a particular quarter |
| Broad market fluctuations or any failure of our operating results in a particular quarter to meet market expectations may adversely affect the market price of our Common Shares, resulting in losses to shareholders |
| In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation have often been instituted against such a company |
| Due to the volatility of our stock price, we could be the target of similar securities litigation in the future |
| Such litigation could result in substantial costs and a diversion of management’s attention and resources, which would have a material adverse effect on our business and operating results |
| 15 ______________________________________________________________________ [37]Table of Contents We may have exposure to greater than anticipated tax liabilities We are subject to income taxes and non-income taxes in a variety of jurisdictions and our tax structure is subject to review by both domestic and foreign taxation authorities |
| The determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment |
| Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made |