UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2005~~2006

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-27544

OPEN TEXT CORPORATION

(Exact name of registrant as specified in its charter)

~~ONTARIO~~CANADA

98-0154400

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

275 Frank Tompa Drive, Waterloo, Ontario, Canada N2L 0A1

(Address of principal executive offices)

Registrant’s telephone number, including area code: (519) 888-7111

~~185 Columbia Street West, Waterloo, Ontario, Canada N2L 5Z5~~

(former name former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, ~~(as defined~~or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act). ~~Yes~~

Large accelerated filer ¨ Accelerated filer x NoNon-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

At ~~October 31, 2005~~November 1, 2006 there were ~~48,477,615~~49,104,908 outstanding Common Shares of the registrant.

OPEN TEXT CORPORATION

TABLE OF CONTENTS


			Page No
PART I Financial Information:

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of September 30, ~~2005~~2006 (Unaudited) and June 30, ~~2005~~2006	3

	Condensed Consolidated Statements of ~~Operations~~Income (Unaudited) – Three Months Ended September 30, ~~2005~~2006 and ~~2004~~2005	4

	Condensed Consolidated Statements of Deficit (Unaudited) -– Three Months Ended September 30, ~~2005~~2006 and ~~2004~~2005	5

	Condensed Consolidated Statements of Cash Flows (Unaudited) -– Three Months Ended September 30, ~~2005~~2006 and ~~2004~~2005	6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2427

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4140

Item 4.	Controls and Procedures	4241

PART II Other Information:

Item 1. 1A.	~~Legal Proceedings~~Risk Factors	42

Item 5.	Other Information	4249

Item 6.	Exhibits	4349

Signatures		4450

Index to Exhibits		4551

OPEN TEXT CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(inIn thousands of U.S. ~~dollars,~~Dollars, except share data)

   September 30,
2005
June 30,
2005

ASSETS
Current assets:

Cash and cash equivalents
   $ 66,767 $ 79,898
Accounts receivable - net of allowance for doubtful accounts of $3,346 as of September 30, 2005 and $3,125 as of June 30, 2005
   73,551 81,936
Income taxes recoverable
   11,496 11,350
Prepaid expenses and other current assets
   10,526 8,438
Deferred tax assets (note 5)
   16,302 10,275


Total current assets
   178,642 191,897
Capital assets (note 4)
   39,019 36,070
Goodwill (note 10)
   244,169 243,091
Deferred tax assets (note 5)
   34,998 36,499
Acquired intangible assets (note 11)
   121,108 127,981
Other assets
   3,841 5,398


   $ 621,777 $ 640,936


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:

Accounts payable and accrued liabilities (note 3)
   $ 75,579 $ 80,468
Deferred revenues
   68,345 75,227
Deferred tax liabilities (note 5)
   10,221 10,128


Total current liabilities
   154,145 165,823
Long-term liabilities:

Accrued liabilities (note 3)
   27,149 25,579
Deferred revenues
   10 103
Deferred tax liabilities (note 5)
   26,442 29,245


Total long-term liabilities
   53,601 54,927
Minority interest
   4,245 4,431
Shareholders’ equity: (note 7)

Share capital 48,459,865 and 48,136,932 Common Shares issued and outstanding as of September 30, 2005, and June 30, 2005, respectively
   410,670 406,580
Commitment to issue shares
   —   813
Additional paid-in capital
   23,800 22,341
Accumulated comprehensive income
   20,287 18,124
Accumulated deficit
   (44,971 ) (32,103 )


Total shareholders’ equity
   409,786 415,755


   $ 621,777 $ 640,936

~~Commitments and Contingencies (note 13)~~


	September 30, 2006			June 30, 2006
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	111,224		$	107,354
Accounts receivable trade, net of allowance for doubtful accounts of $2,730 as of September 30, 2006 and $2,736 as of June 30, 2006 (note 9)		76,668			75,016
Income taxes recoverable		12,788			11,924
Prepaid expenses and other current assets		7,752			8,520
Deferred tax assets (note 12)		15,083			28,724

Total current assets		223,515			231,538
Investments in marketable securities (note 3)		21,127			21,025
Capital assets (note 4)		39,746			41,262
Goodwill (note 5)		233,965			235,523
Acquired intangible assets (note 6)		94,753			102,326
Deferred tax assets (note 12)		47,010			37,185
Other assets		5,276			2,234

	$	665,392		$	671,093

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities (note 7)	$	56,352		$	62,535
Current portion of long-term debt (note 8)		408			405
Deferred revenues		71,334			74,687
Deferred tax liabilities (note 12)		12,616			12,183

Total current liabilities		140,710			149,810
Long-term liabilities:
Accrued liabilities (note 7)		19,162			21,121
Long-term debt (note 8)		12,802			12,963
Deferred revenues		3,966			3,534
Deferred tax liabilities (note 12)		16,611			19,490

Total long-term liabilities		52,541			57,108
Minority interest		6,025			5,804
Shareholders’ equity:
Share capital (note 10)
49,027,823 and 48,935,042 Common Shares issued and outstanding at September 30 and June 30, 2006, respectively; Authorized Common Shares: unlimited		415,079			414,475
Additional paid-in capital		29,838			28,367
Accumulated other comprehensive income		41,023			42,654
Accumulated deficit		(19,824	)		(27,125	)

Total shareholders’ equity		466,116			458,371

	$	665,392		$	671,093

Commitments and Contingencies (note 15)
Subsequent Events (note 18)

See accompanying notes to unaudited condensed consolidated financial statements

OPEN TEXT CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~INCOME

(in thousands of U.S. dollars, except per share data)

   Three months ended
September 30,

   2005
2004

Revenues:

License
   $ 24,943 $ 23,904
Customer support
   46,646 40,792
Service
   21,041 20,900


Total revenues
   92,630 85,596
Cost of revenues:

License
   2,388 2,154
Customer support
   7,652 7,494
Service
   18,604 16,654


Total cost of revenues
   28,644 26,302


   63,986 59,294
Operating expenses:

Research and development
   16,550 14,683
Sales and marketing
   26,113 25,497
General and administrative
   10,437 11,858
Depreciation
   2,509 2,399
Amortization of acquired intangible assets
   6,853 5,429
Special charges (note 14)
   18,111 —


Total operating expenses
   80,573 59,866


Loss from operations
   (16,587 ) (572 )
Other expense
   (524 ) (933 )
Interest income, net
   70 302


Loss before income taxes
   (17,041 ) (1,203 )
Recovery of income taxes
   (4,370 ) (325 )


Net loss before minority interest
   (12,671 ) (878 )
Minority interest (note 13)
   197 108


Net loss for the period
   $ (12,868 ) $ (986 )


Net loss per share - basic (note 9)
   $ (0.27 ) $ (0.02 )


Net loss per share - diluted (note 9)
   $ (0.27 ) $ (0.02 )


Weighted average number of Common Shares outstanding – basic and diluted
   48,439 51,106


	Three months ended September 30,
	2006			2005
Revenues:
License	$	28,825		$	24,943
Customer support		48,288			45,324
Service		24,042			22,363

Total revenues		101,155			92,630
Cost of revenues:
License		2,800			2,388
Customer support		6,731			7,029
Service		19,862			19,035
Amortization of acquired technology intangible assets		4,846			4,631

Total cost of revenues		34,239			33,083

		66,916			59,547
Operating expenses:
Research and development		14,179			15,745
Sales and marketing		24,557			24,901
General and administrative		12,267			12,646
Depreciation		2,992			2,509
Amortization of acquired intangible assets		2,382			2,222
Special charges (recoveries) (note 16)		(468	)		18,111

Total operating expenses		55,909			76,134

Income (loss) from operations		11,007			(16,587	)
Other income (expense)		373			(524	)
Interest income, net		392			70

Income (loss) before income taxes		11,772			(17,041	)
Provision for (recovery) of income taxes		4,334			(4,370	)

Net income (loss) before minority interest		7,438			(12,671	)
Minority interest		137			197

Net income (loss) for the period	$	7,301		$	(12,868	)

Net income (loss) per share – basic (note 11)	$	0.15		$	(0.27	)

Net income (loss) per share – diluted (note 11)	$	0.15		$	(0.27	)

Weighted average number of Common Shares outstanding – basic		48,975			48,439
Weighted average number of Common Shares outstanding – diluted		50,219			48,439

See accompanying notes to unaudited condensed consolidated financial statements

OPEN TEXT CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF DEFICIT

(in thousands of U.S. Dollars)


	Three months ended September 30,						Three months ended September 30,
	2005			2004			2006			2005
Deficit, beginning of period		(32,103	)		(18,529	)	$	(27,125	)	$	(32,103	)
Repurchase of Common Shares (note 7)		—			(6,255	)
Net loss		(12,868	)		(986	)
Net income (loss)								7,301			(12,868	)

Deficit, end of period	$	(44,971	)	$	(25,770	)	$	(19,824	)	$	(44,971	)

See accompanying notes to unaudited condensed consolidated financial statements

OPEN TEXT CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. Dollars)

   Three months ended
September 30,

   2005
2004

Cash flows from operating activities:

Net loss for the period
   $ (12,868 ) $ (986 )
Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization
   9,362 7,828
Share-based compensation
   1,413 —
Undistributed earnings related to minority interest
   197 108
Deferred taxes
   (5,358 ) —
Impairment of capital assets
   2,013 —
Changes in operating assets and liabilities:

Accounts receivable
   8,785 18,735
Prepaid expenses and other current assets
   (2,031 ) (1,861 )
Income taxes
   (622 ) (2,446 )
Accounts payable and accrued liabilities
   4,791 (10,213 )
Deferred revenue
   (6,496 ) (6,049 )
Other assets
   1,138 —


Net cash provided by operating activities
   324 5,116


Cash flows used in investing activities:

Acquisitions of capital assets
   (5,937 ) (3,394 )
Purchase of Vista, net of cash acquired
   —   (23,690 )
Purchase of Artesia, net of cash acquired
   —   (5,057 )
Purchase of Gauss Interprise AG, net of cash acquired
   (85 ) —
Purchase of IXOS, net of cash acquired
   (3,107 ) (1,421 )
Additional purchase consideration for prior period acquisitions
   (3,228 ) (1,326 )
Acquisition related costs
   (999 ) (3,763 )


Net cash used in investing activities
   (13,356 ) (38,651 )


Cash flows from financing activities:

Proceeds from issuance of Common Shares
   243 368
Proceeds from exercise of Warrants
   —   725
Repurchase of Common Shares (note 7)
   —   (11,034 )
Repayment of short-term bank loan
   —   (2,189 )
Other
   —   (48 )


Net cash provided by (used in) financing activities
   243 (12,178 )


Foreign exchange gain (loss) on cash held in foreign currencies
   (342 ) 179
Decrease in cash and cash equivalents during the period
   (13,131 ) (45,534 )
Cash and cash equivalents at beginning of period
   79,898 156,987


Cash and cash equivalents at end of period
   $ 66,767 $ 111,453


	Three months ended September 30,
	2006			2005
Cash flows from operating activities:
Net income (loss) for the period	$	7,301		$	(12,868	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		10,220			9,362
Share-based compensation expense		1,267			1,413
Undistributed earnings related to minority interest		137			197
Deferred taxes		1,714			(5,358	)
Impairment of capital assets		—			2,013
Changes in operating assets and liabilities:
Accounts receivable		(1,694	)		8,785
Prepaid expenses and other current assets		617			(2,031	)
Income taxes		(1,159	)		(668	)
Accounts payable and accrued liabilities		(5,523	)		4,791
Deferred revenues		(2,962	)		(6,496	)
Other assets		(281	)		1,138

Net cash provided by operating activities		9,637			278

Cash flows from investing activities:
Acquisitions of capital assets		(2,785	)		(5,937	)
Additional purchase consideration for prior period acquisitions		—			(3,313	)
Purchase of IXOS, net of cash acquired		(333	)		(3,107	)
Investments in marketable securities		(829	)		—
Acquisition related costs		(2,448	)		(999	)

Net cash used in investing activities		(6,395	)		(13,356	)

Cash flows from financing activities:
Excess tax benefits on share-based compensation expense		205			46
Proceeds from issuance of Common Shares		478			243
Repayment of long-term debt		(99	)		—
Debt issuance costs		(21	)		—

Net cash provided by financing activities		563			289

Foreign exchange gain (loss) on cash held in foreign currencies		65			(342	)

Increase (decrease) in cash and cash equivalents during the period		3,870			(13,131	)
Cash and cash equivalents at beginning of period		107,354			79,898

Cash and cash equivalents at end of period	$	111,224		$	66,767

Supplementary cash flow disclosures (note 14)

See accompanying notes to unaudited condensed consolidated financial statements

OPEN TEXT CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended September 30, ~~2005~~2006

(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)

NOTE ~~1 -~~ 1—BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements (“Interim Financial Statements”) include the accounts of Open Text Corporation and its wholly and partially owned subsidiaries, collectively referred to as “Open Text” or the “Company”. All inter-company balances and transactions have been eliminated.

These Interim Financial Statements are expressed in U.S. dollars and are prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). These financial statements are based upon accounting policies and methods of their application are consistent with those used and described in the Company’s annual consolidated financial ~~statements, except as described in Note 2 “New Accounting Policies” below.~~statements. The Interim Financial Statements do not include all of the financial statement disclosures included in the annual financial statements prepared in accordance with ~~United States generally accepted accounting principles (“~~U.S. ~~GAAP”)~~GAAP and therefore should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, ~~2005.~~

2006.

The information furnished reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. The operating results for the three months ended September 30, ~~2005~~2006 are not necessarily indicative of the results expected for any succeeding quarter or the entire fiscal year ending June 30, ~~2006. Certain comparative figures have been adjusted to conform to current period presentation.~~

2007.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions ~~which are evaluated on an ongoing basis,~~ that affect the amounts reported in the financial statements. These estimates, judgments and assumptions are evaluated on an ongoing basis. Management bases its estimates on historical experience and on various other assumptions that it believes are reasonable at that time, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. In particular, significant estimates, judgments and assumptions include those related toto: (i) revenue recognition, (ii) allowance for doubtful accounts, (iii) testing goodwill for impairment, (iv) the valuation of ~~investments, goodwill and~~ acquired intangible assets, (v) long-lived assets, (vi) the recognition of contingencies, (vii) facility and restructuring accruals, (viii) acquisition accruals, ~~income taxes,~~(ix) asset retirement obligations, (x) realization of investment tax credits, and (xi) the valuation allowance relating to the Company’s deferred tax assets.

Reclassifications

Certain prior period comparative figures have been adjusted to conform to current period presentation including the reclassification of amortization of acquired technology intangible assets from Amortization of acquired intangible assets set forth under Operating expenses to Cost of revenue. The reclassification of Amortization of acquired technology intangible assets increased Cost of revenues and decreased Operating expenses by $4.6 million for the three months ended September 30, 2005 from previously reported amounts.

General and administrative expenses increased by $2.2 million with a corresponding decrease of $192,000, $805,000 and $1.2 million in Cost of revenues for service, Research and development expense and Sales and marketing expense, respectively, for the three months ended September 30, 2005 from previously reported amounts. This reclassification related to a change in the method of allocating operating expenses within the Company.

OPEN TEXT CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended September 30, 2006

(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)

Service revenues increased by $1.3 million, offset by a decrease in Customer support revenues of $1.3 million and Cost of service revenues increased by $623,000, offset by a decrease in cost of customer support revenues of $623,000, in each case, for the three months ended September 30, 2005 from previously reported amounts. These changes correspond to an internal reclassification pertaining to the Company’s Enterprise Support Program (“ESP program”). The ESP program is a customized “on-site” support program that provides support services that suit the specific requirements of the Company’s customers.

There was no change to income (loss) from operations or net income (loss) per share in any of the periods presented as a result of these reclassifications.

Comprehensive net income (loss)

Comprehensive net income (loss) is comprised of net ~~loss~~income (loss) and other comprehensive net income (loss), including the effect of foreign currency translation resulting from the consolidation of subsidiaries where the functional currency is a currency other than the U.S. Dollar. The Company’s total comprehensive net income (loss) was as follows:

   Three months Ended
September 30,

   2005
2004

Other comprehensive net income (loss):

Foreign currency translation adjustment
   $ 2,163 $ 1,347
Net loss for the period
   (12,868 ) (986 )


Comprehensive net income (loss) for the period
   $ (10,705 ) $ 361


	Three months Ended September 30,
	2006			2005
Other comprehensive net income (loss):
Foreign currency translation adjustment	$	(1,837	)	$	2,163
Unrealized gain on investments in marketable securities		206			—
Net income (loss) for the period		7,301			(12,868	)

Comprehensive net income (loss) for the period	$	5,670		$	(10,705	)

NOTE ~~2 -~~ 2—NEW ACCOUNTING POLICIES

~~The following new~~Recently issued accounting ~~policies were adopted in the period:~~

~~Share-based payments~~pronouncements

In September 2006, the United States Securities Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108,Considering the Effects of Prior year Misstatements when Quantifying Current year Misstatements,(“SAB 108”).SAB 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB 108 is effective for the Company’s fiscal year 2007 annual financial statements. The Company is currently assessing the potential impact that the adoption of SAB 108 will have on its financial statements.

~~On July 1, 2005,~~In September 2006, the ~~Company adopted the fair value-based method for measurement and cost recognition of employee share-based compensation arrangements under the provisions of~~ Financial Accounting Standards Board (“FASB”) issued Statement

of Financial Accounting Standards ~~No.~~ (“SFAS”) ~~123 (Revised 2004) “Share-Based Payment”~~No. 157, Fair Value Measurements, (“SFAS ~~123R”~~157”), ~~using~~which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the ~~modified prospective application transitional approach. Previously,~~source of the information. This statement is effective for the Company ~~had elected to account for employee share-based compensation using~~beginning July 1, 2008. The Company is currently assessing the intrinsic value method based upon Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. The intrinsic value method generally did not result in any compensation cost being recorded for employee stock options since the exercise price was equal to the market price of the underlying shares on the date of grant.

~~Under the modified prospective application transitional approach, share-based compensation is recognized for awards granted, modified, repurchased or cancelled subsequent to~~potential impact that the adoption of SFAS ~~123R.~~ 157 will have on its financial statements.

OPEN TEXT CORPORATION

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended September 30, 2006

(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)

In ~~addition, share-based compensation is recognized, subsequent to~~July 2006, the ~~adoption~~FASB issued FASB Interpretation No. 48 on Accounting for Uncertain Tax Positions—an interpretation of ~~SFAS 123R,~~FASB Statement No. 109, “Accounting for Income Taxes” (“FIN 48”). Under FIN 48, an entity should presume that a taxing authority will examine a tax position when evaluating the ~~remaining portion~~position for recognition and measurement; therefore, assessment of the ~~vesting period (if any) for outstanding awards granted prior to~~probability of the ~~date~~risk of ~~adoption. Prior periods have~~examination is not ~~been adjusted and~~appropriate. In applying the ~~Company continues to provide pro forma disclosure as if it had accounted for employee share-based payments in all periods presented under the fair value~~ provisions of ~~SFAS No. 123, “Accounting~~FIN 48, there will be distinct recognition and measurement evaluations. The first step is to evaluate the tax position for ~~Stock-based Compensation”,~~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 will be measured as the maximum amount which is ~~presented below.~~

more likely than not, to be realized. The ~~Company measures share-based compensation costs~~tax position should be derecognized when it is no longer more likely than not 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 management’s best estimate, given the information available at the reporting date, even though the outcome of the tax position is not absolute or final. Subsequent recognition, derecognition, and measurement should be based on ~~the grant date,~~new information. A liability for interest or penalties or both will be recognized as deemed to be incurred based on the ~~calculated fair value~~provisions of the award. The Company has 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 the Company’s circumstancestax law, that is, the ~~stated vesting~~ period for which the taxing authority will begin assessing the interest or penalties or both. The amount of ~~the award, provided that total compensation cost~~interest expense recognized ~~at least equals the pro rata value of the award that has vested. Compensation cost is initially~~will be based on the ~~estimated number~~difference between the amount recognized in the financial statements and the benefit recognized in the tax return. On transition, the change in net assets due to applying the provisions of ~~options for which~~ the ~~requisite service is expected~~final interpretation will be considered as a change in accounting principle with the cumulative effect of the change treated as an offsetting adjustment to ~~be rendered. This estimate is adjusted~~the opening balance of retained earnings in the period ~~once actual forfeitures are known.~~

~~Had~~of transition. FIN 48 will be effective as of the beginning of the first annual period beginning after December 15, 2006 and will be adopted by the Company ~~adopted~~for the ~~fair value-based method~~year ended June 30, 2008. The Company is currently assessing the impact of FIN 48 on its financial statements.

NOTE 3—INVESTMENTS IN MARKETABLE SECURITIES

The Company’s investments in marketable securities consist of investments in the equity of Hummingbird Ltd. (“Hummingbird”). The cost of the investment is $21.1 million. Unrealized gains and losses on this investment, net of tax, are included in accumulated other comprehensive income in shareholders’ equity wherein the Company has recorded a gain, net of tax, of $206,000 and a loss, net of tax, of $45,000 for ~~accounting for share-based compensation in all periods presented, the pro-forma impact on net loss and net loss per share would be as follows:~~

   Three months ended
September 30,
2004

Net loss for the period

As reported
   $ (986 )
Stock-based compensation
   (1,350 )

Pro forma
   $ (2,336 )

Net loss per share—basic and diluted

As reported
   $ (0.02 )
Pro forma
   $ (0.05 )
~~Refer to Note 8 “Share-based Payments” in these condensed consolidated financial statements for details of stock options and share-based compensation cost recorded during~~ the three months ended September 30, ~~2005.~~2006 and June 30, 2006, respectively. As of September 30, 2006, the fair value of this investment was approximately $21.1 million and was determined based on the closing price of Hummingbird shares on the Toronto Stock Exchange.
~~Amortization period for leasehold improvements~~
~~In June 2005,~~On October 2, 2006 the Emerging Issues Task Force (“EITF”) issued Abstract No. 05-06, “Determining the Amortization Period for Leasehold Improvements” (“EITF 05-6”). The pronouncement requires that leasehold improvementsCompany acquired ~~in a business combination, or purchased subsequent to the inception~~all of the ~~lease~~remaining issued and ~~not contemplated at or near the beginning~~outstanding shares of ~~the lease term, be amortized over the lesser of the useful life of the asset or the lease term that includes reasonably assured lease renewals as determined on the date of the~~Hummingbird. For details relating to this acquisition of the leasehold improvement. This pronouncement is being applied prospectively for leasehold improvements that are purchased or acquired on or after July 1, 2005. The adoption of EITF 05-6 did not have a material impact on the Company’s consolidated results of operations or financial condition.see Note 17 “Acquisitions” in these Notes to Interim Financial Statements.
~~Recently Issued Accounting Pronouncements~~OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
~~Accounting changes and error corrections~~For the Three Months Ended September 30, 2006
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces Accounting Principles Board Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes(Tabular dollar amounts in ~~Interim Financial Statements”. SFAS 154 provides guidance on the accounting for and reporting~~thousands of changes in accounting principles and error corrections. SFAS 154 requires retrospective application to prior period’s financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. Certain disclosures are also required for restatements due to correction of an error. SFAS 154 is effective for accounting changes and corrections of errors, made in fiscal years beginning after December 15, 2005. The impact that the adoption of SFAS 154 will have on the Company’s results of operations and financial condition will depend on the nature of future accounting changes and the nature of transitional guidance provided in future accounting pronouncements.U.S. Dollars, except per share data)

NOTE ~~3 - -~~ 4—CAPITAL ASSETS
   As of September 30, 2006
   Cost
Accumulated
Depreciation
   Net
Furniture and fixtures
   $ 8,474    $ 6,505    $ 1,969
Office equipment
   8,272    7,048    1,224
Computer hardware
   67,308    56,377    10,931
Computer software
   17,397    12,216    5,181
Leasehold improvements
   12,400    8,196    4,204
Building
   16,652    415    16,237

   $ 130,503    $ 90,757    $ 39,746

   As of June 30, 2006
   Cost    Accumulated
Depreciation    Net
Furniture and fixtures
   $ 8,605    $ 6,360    $ 2,245
Office equipment
   8,281    6,992    1,289
Computer hardware
   66,714    54,995    11,719
Computer software
   17,023    11,737    5,286
Leasehold improvements
   12,374    8,064    4,310
Building
   16,726    313    16,413

   $ 129,723    $ 88,461    $ 41,262

NOTE 5—GOODWILL
Goodwill is recorded when the consideration paid for an acquisition of a business exceeds the fair value of identifiable net tangible and intangible assets. The following table summarizes the changes in goodwill since June 30, 2005:
Balance, June 30, 2005
   $ 243,091
Adjustments relating to prior acquisitions
   (17,470 )
Adjustments on account of foreign exchange
   9,902

Balance, June 30, 2006
   235,523
Adjustments relating to prior acquisitions
   (671 )
Adjustments on account of foreign exchange
   (887 )

Balance, September 30, 2006
   $ 233,965

Adjustments relating to prior acquisitions primarily relate to the reduction of goodwill on account of corresponding reductions in valuation allowances based upon the review and evaluation of the tax attributes of acquisition-related operating loss carry forwards and deductions originally assessed at the various dates of acquisition and offset by increases to goodwill relating to IXOS share purchases and step accounting adjustments.
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three Months Ended September 30, 2006
(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)
NOTE 6—ACQUIRED INTANGIBLE ASSETS

Technology
Assets

Customer
Assets
Total
Net book value, June 30, 2005
   $ 76,108 $ 51,873 $ 127,981
Activity during fiscal 2006:

Amortization expense
   (18,900 ) (9,199 ) (28,099 )
Impairment of intangible assets
   (1,046 ) —   (1,046 )
Foreign exchange impact
   3,000 2,598 5,598
Other
   (3,988 ) 1,880 (2,108 )

Net book value, June 30, 2006
   55,174 47,152 102,326
Activity during fiscal 2007:

Amortization expense
   (4,846 ) (2,382 ) (7,228 )
Foreign exchange impact
   (219 ) (140 ) (359 )
Other
   10 4 14

Net book value, September 30, 2006
   $ 50,119 $ 44,634 $ 94,753

The range of amortization periods for intangible assets is from 4-10 years.
The following table shows the estimated future amortization expense for each of the next five years, assuming no further adjustments to acquired intangible assets are made:

Fiscal years ending
June 30,
2007
   $ 20,732
2008
   27,239
2009
   20,863
2010
   8,718
2011
   6,215

Total
   $ 83,767

NOTE 7—ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Current liabilities
Accounts payable and accrued liabilities are comprised of the ~~following~~:following:

   As of September 30,
2005
   As of June 30,
2005

As of September 30,
2006

As of June 30,
2006
Accounts payable - trade
   $ 14,032    $ 18,509
Accounts payable—trade
   $ 4,269    $ 6,077
Accrued salaries and commissions
   14,100    18,976    13,467    15,020
Accrued liabilities
   28,413    33,736    26,821    26,827
Amounts payable in respect of restructuring (note 14)
   11,602    920
Amounts payable in respect of restructuring (note 16)
   4,054    6,148
Amounts payable in respect of acquisitions and acquisition related accruals
   7,432    8,327    7,741    8,463



   $ 75,579    $ 80,468    $ 56,352    $ 62,535



OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three Months Ended September 30, 2006
(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)

Long-term accrued liabilities

   As of September 30,
2005
   As of June 30,
2005
Pension liabilities
   $ 623    $ 625
Amounts payable in respect of restructuring (note 14)
   2,883    1,125
Amounts payable in respect of acquisitions and acquisition related accruals
   18,692    18,694
Other accrued liabilities
   134    239
Asset retirement obligations
   4,817    4,896


   $ 27,149    $ 25,579



As of September 30,
2006

As of June 30,
2006
Pension liabilities
   $ 582    $ 582
Amounts payable in respect of restructuring (note 16)
   1,419    1,851
Amounts payable in respect of acquisitions and acquisition related accruals
   12,745    14,224
Other accrued liabilities
   568    568
Asset retirement obligations
   3,848    3,896

   $ 19,162    $ 21,121

Pension liabilities
~~IXOS Software AG (“IXOS”), in which the~~The Company acquired a controlling interest in IXOS in March ~~2004,~~2004. IXOS has pension commitments to employees as well as to current and previous members of its ~~Executive Board.~~executive board. The actuarial cost method used in determining the net periodic pension cost, with respect to the IXOS employees, is the projected unit credit method. The liabilities and annual income or expense of the Company’s pension plan are determined using methodologies that involve various actuarial assumptions, the most significant of which are the discount rate and the long-term rate of return on assets. The Company’s policy is to deposit amounts with an insurance company to cover the actuarial present value of the expected retirement benefits. The total held in short-term investments as of September 30, ~~2005~~2006 was ~~$2.2~~$2.6 million, (June 30, ~~2005 – $2.3~~2006 - $2.6 million)~~, while the~~. The fair value of the pension obligation as of September 30, ~~2005~~2006 was ~~$2.8~~$3.0 million, (June 30, ~~2005 – $2.9~~2006 - $3.0 million).
Asset retirement obligations
The Company is required to return certain of its leased facilities to their original state at the conclusion of the lease. The Company has accounted for such obligations in accordance with FASB SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). At September 30, 2006, the present value of this obligation was $3.8 million, (June 30, 2006 - $3.9 million), with an undiscounted value of $4.8 million, (June 30, 2006 - $4.8 million). These leases were primarily assumed in connection with the IXOS acquisition.
Excess facility obligations and accruals relating to acquisitions
The Company has accrued for the cost of excess facilities both in connection with its Fiscal 2004 and Fiscal 2006 restructuring, as well as with a number of its acquisitions. These accruals represent the Company’s best estimate in respect of future sub-lease income and costs incurred to achieve
sub-tenancy. These liabilities have been recorded using present value discounting techniques and will be discharged over the term of the respective leases. The difference between the present value and actual cash paid for the excess facility will be charged to ~~general and administrative expense~~other income over the terms of the leases ranging between several months to 17 years. ~~To the extent that the amount accrued is in excess of the estimated ultimate obligation, goodwill recognized on the acquisition will be reduced.~~
Transaction-related costs include amounts provided for certain pre-acquisition contingencies.
Of
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the ~~$26.1 million~~Three Months Ended September 30, 2006
(Tabular dollar amounts in thousands of ~~acquisition accruals presented below approximately $7.4 million is due within the next 12 months.~~U.S. Dollars, except per share data)

The following table summarizes the activity with respect to the Company’s acquisition accruals during the ~~three month~~ period ended September 30, ~~2005.~~2006.

   Balance
June 30,
2005
   Initial Accruals
   Usage/Foreign
Exchange/Other
Adjustments
Subsequent
Adjustments
to Goodwill
Balance
September 30,
2005
IXOS

Employee termination costs
   $ 338    $ —      $ (133 ) $ (64 ) $ 141
Excess facilities
   17,274    —      478 —   17,752
Transaction-related costs
   2,167    —      (564 ) —   1,603




   19,779    —      (219 ) (64 ) 19,496
Gauss

Excess facilities
   260    —      (73 ) —   187
Transaction-related costs
   298    —      (117 ) 607 788




   558    —      (190 ) 607 975
Eloquent

Transaction-related costs
   487    —      —   (250 ) 237




   487    —      —   (250 ) 237
Centrinity

Excess facilities
   3,928    —      157 (890 ) 3,195
Transaction-related costs
   651    —      35 —   686




   4,579    —      192 (890 ) 3,881
Open Image

Transaction-related costs
   135    —      14 —   149




   135    —      14 —   149
Artesia

Employee termination costs
   50    —      (48 ) —   2
Excess facilities
   821    —      (85 ) 101 837
Transaction-related costs
   79    —      (3 ) 40 116




   950    —      (136 ) 141 955
Vista

Transaction-related costs
   121    —      (6 ) —   115




   121    —      (6 ) —   115
Optura

Excess facilities
   172    —      (48 ) (30 ) 94
Transaction-related costs
   240    —      (18 ) —   222




   412    —      (66 ) (30 ) 316




Totals

Employee termination costs
   388    —      (181 ) (64 ) 143
Excess facilities
   22,455    —      429 (819 ) 22,065
Transaction-related costs
   4,178    —      (659 ) 397 3,916




   $ 27,021    $ —      $ (411 ) $ (486 ) $ 26,124




~~Asset retirement obligations~~

Balance
June 30,
2006

Initial
Accruals

Usage/
Foreign
Exchange/
Other
Adjustments

Subsequent
Adjustments
to Goodwill

Balance
September 30,
2006
IXOS

Employee termination costs
   $ 22    $ —      $ (22 ) $ —   $ —
Excess facilities
   17,401    —      (1,326 ) —   16,075
Transaction-related costs
   616    —      (2 ) —   614

   18,039    —      (1,350 ) —   16,689
Gauss

Transaction-related costs
   34    —      (7 ) —   27

   34    —      (7 ) —   27
Eloquent

Transaction-related costs
   243    —      —   —   243

   243    —      —   —   243
Centrinity

Excess facilities
   3,329    —      (69 ) —   3,260
Transaction-related costs
   221    —      (148 ) (34 ) 39

   3,550    —      (217 ) (34 ) 3,299
Artesia

Excess facilities
   761    —      (227 ) (306 ) 228
Transaction-related costs
   12    —      (12 ) —   —

   773    —      (239 ) (306 ) 228
Vista

Transaction-related costs
   6    —      —   (6 ) —

   6    —      —   (6 ) —
Optura

Excess facilities
   30    —      (30 ) —   —
Transaction-related costs
   12    —      —   (12 ) —

   42    —      (30 ) (12 ) —

Totals

Employee termination costs
   22    —      (22 ) —   —
Excess facilities
   21,521    —      (1,652 ) (306 ) 19,563
Transaction-related costs
   1,144    —      (169 ) (52 ) 923

   $ 22,687    $ —      $ (1,843 ) $ (358 ) $ 20,486

The ~~Company is required~~adjustments to ~~return certain of its leased~~goodwill relate to employee termination costs and excess facilities primarily to ~~their original state at the conclusion of the lease. The Company has~~adjustments accounted for ~~such obligations~~in accordance with Emerging Issues Task Force 95-3, “Recognition of Liabilities in Connection With a Purchase Business Combination”. The adjustments to goodwill relating to transaction costs are accounted for in accordance with SFAS No. ~~143, “Accounting for Asset Retirement Obligations”~~141, “Business Combinations” (“SFAS ~~143”~~141”). At
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three Months Ended September 30, ~~2005, the present value~~2006
(Tabular dollar amounts in thousands of ~~this obligation was $4.8 million with an undiscounted value of $6.0 million. These leases were primarily assumed in connection with the IXOS acquisition.~~U.S. Dollars, except per share data)

NOTE ~~4 - CAPITAL ASSETS~~8—LONG-TERM DEBT AND CREDIT FACILITIES

   As of September 30, 2005
   Cost
   Accumulated
Depreciation
   Net
Furniture and fixtures
   $ 9,779    $ 7,264    $ 2,515
Office equipment
   4,978    3,788    1,190
Computer hardware
   52,770    41,541    11,229
Computer software
   13,616    10,144    3,472
Leasehold improvements
   11,103    5,868    5,235
Building
   15,378    —      15,378



   $ 107,624    $ 68,605    $ 39,019



   As of June 30, 2005
   Cost
   Accumulated
Depreciation
   Net
Furniture and fixtures
   $ 9,635    $ 6,998    $ 2,637
Office equipment
   5,158    3,731    1,427
Computer hardware
   52,054    40,277    11,777
Computer software
   12,842    9,514    3,328
Leasehold improvements
   12,695    5,473    7,222
Building
   9,679    —      9,679



   $ 102,063    $ 65,993    $ 36,070



Long-term debt
Long-term debt consists of a five year mortgage agreement entered into during December 2005 with a Canadian chartered bank. The ~~cost~~principal amount of the mortgage is Canadian Dollars (“CDN”) $15.0 million. The mortgage: (i) has a fixed term of five years, (ii) matures on January 1, 2011, and (iii) is secured by a lien on the Company’s headquarters in Waterloo, Ontario. Interest is to be paid monthly at a fixed rate of 5.25% per annum. Principal and interest are payable in monthly installments of CDN $101,000 with a final lump sum principal payment of CDN $12.6 million due on maturity. The mortgage may not be prepaid in whole or in part at anytime prior to the maturity date.
As of September 30, 2006, the carrying values of the building ~~relates~~and mortgage were $16.2 million and $13.2 million, respectively.
On October 2, 2006, the Company entered into a $465.0 million credit agreement with a Canadian chartered bank. For details relating to this agreement see Note 18 “Subsequent Events” in these Notes to the ~~Company’s construction~~Interim Financial Statements.
Credit facility
On February 2, 2006, the Company secured a demand operating facility of CDN $40.0 million from a ~~building~~Canadian chartered bank (the “credit facility”). Borrowings under this facility bear interest at varying rates depending upon the nature of the borrowings. The Company has pledged certain of its assets as collateral for this credit facility. There are no stand-by fees for this facility. As of September 30, 2006, there were no borrowings outstanding under this facility.
On October 2, 2006, the credit facility was cancelled upon the Company entering into a new credit agreement with a Canadian chartered bank. The Company was not subject to any termination penalties. For details relating to this new credit agreement and termination of the existing credit agreement see Note 18 “Subsequent Events” in ~~Waterloo, Ontario. Additions~~these Notes to the ~~building amounted to $5.7~~Interim Financial Statements.
NOTE 9—ALLOWANCE FOR DOUBTFUL ACCOUNTS AND UNBILLED RECEIVABLES
Balance of allowance for doubtful accounts as of June 30, 2006
   $ 2,736
Bad debt expense for the period
   720
Write-off/adjustments
   (726 )

Balance of allowance for doubtful accounts as of September 30, 2006
   $ 2,730

Included in accounts receivable are unbilled receivables in the amount of $3.4 million ~~during the quarter ended September 30, 2005, of which $1.6~~and $4.3 million ~~is included in accrued liabilities and accounts payable~~ as of September 30, ~~2005. Construction of this building was completed~~2006 and ~~depreciation commenced in October 2005.~~
June 30, 2006, respectively.
NOTE ~~5 - INCOME TAXES~~10—SHARE CAPITAL AND SHARE BASED PAYMENTS
Share Capital
The authorized share capital of the Company includes an unlimited number of Common Shares and an unlimited number of first preference shares. No preference shares have been issued.
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three Months Ended September 30, 2006
(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)

~~The~~On May 19, 2006, the Company ~~operates in various tax jurisdictions,~~commenced a repurchase program (“Repurchase Program”) that provided for the repurchase of up to a maximum of 2,444,104 Common Shares. Purchase and ~~accordingly,~~payment for the Company’s ~~income is subject to varying rates~~Common Shares, under the Repurchase Program, will be determined by the Board of ~~tax. Losses incurred~~Directors of Open Text and will be made in ~~one jurisdiction cannot be used to offset income taxes payable in another. The Company’s ability to use income tax losses~~accordance with rules and future income tax deductions is dependent upon the profitable operations of the Company in the tax jurisdictions in which such losses or deductions arise. As of September 30, 2005 and June 30, 2005, the Company had total net deferred tax assets of $51.3 million and $46.8 million respectively, and total deferred tax liabilities of $36.7 million and $39.4 million, respectively.
The deferred tax assets as of September 30, 2005 arise primarily from available income tax losses and future income tax deductions. The Company provides a valuation allowance if sufficient uncertainty exists regarding the realization of certain deferred tax assets. Based on the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax assets and tax planning strategies, a valuation allowance of $130.8 million and $127.6 million was required as of September 30, 2005 and June 30, 2005, respectively. The majority of the valuation allowance relates to uncertainties regarding the utilization of foreign pre-acquisition losses of Gauss Interprise AG (“Gauss”) and IXOS. The Company continues to evaluate its taxable position quarterly and considers factors by taxing jurisdiction such as estimated taxable income, the history of losses for tax purposes and the growth of the Company, among others. The principal component of the total deferred tax liabilities arises from acquired intangible assets purchased on the Gauss and IXOS transactions.
~~NOTE 6 - SEGMENT INFORMATION~~
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”) establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method of determining what information to report is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance.
The Company’s operations fall into one dominant industry segment, being enterprise content management software. The Company manages its operations, and accordingly determines its operating segments, on a geographic basis. The Company has two reportable segments: North America and Europe. The Company evaluates operating segment performance based on revenues and direct operating expenses of the segment, based on the location of the respective customers. The accounting policies of the ~~operating segments are the same as those of the Company.~~NASDAQ. The Repurchase Program will terminate on May 18, 2007.
Included in the following operating results are allocations of certain operating costs that are incurred in one reporting segment but which relate to all reporting segments. The allocations of these common operating costs are consistent with the manner in which the chief operating decision maker of the Company allocates them for analysis. ForDuring the three months ended September 30, ~~2005, and 2004,~~2006, the ~~“Other” category consists~~Company did not repurchase any of ~~geographic regions other than North America and Europe.~~
Adjusted income from operating segments, which is the measure of operating performance used by the chief operating decision-maker, does not include amortization of acquired intangible assets, special charges, share-based compensation, other expense and provision for income taxes. Goodwill and other acquired intangible assets have been assigned to segment assets based on the relative benefit that the reporting units are expected to receive from the assets, or the location of the acquired business operations to which they relate. These allocations have been made on a consistent basis.
~~Information about reported segments is as follows:~~

   Three months ended September 30,

   2005
2004

Revenue

North America
   $ 46,229 $ 34,933
Europe
   41,432 44,306
Other
   4,969 6,357


Total revenue
   $ 92,630 $ 85,596


Adjusted income

North America
   $ 5,701 $ 1,414
Europe
   3,865 2,829
Other
   97 808


Total adjusted income
   9,663 5,051
Less:

Amortization of acquired intangible assets
   6,853 5,429
Special charges
   18,111 —
Share-based compensation
   1,413 —
Other expense
   524 933
Provision for income taxes
   (4,370 ) (325 )


Net loss
   $ (12,868 ) $ (986 )


   As of September 30,
2005
As of June 30,
2005

Segment assets

North America
   $ 245,134 $ 238,979
Europe
   322,435 343,421
Other
   52,265 53,940


Total segment assets
   $ 619,834 $ 636,340


~~A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements as of September 30, 2005 and June 30, 2005 is as follows:~~

   As of September 30,
2005
   As of June 30,
2005
Segment assets
   $ 619,834    $ 636,340
Cash and cash equivalents (corporate)
   1,943    4,596


Total assets
   $ 621,777    $ 640,936


The following table sets forth the distribution of revenues determined by location of customer and identifiable assets, by geographic area where the revenue for such location is greater than 10% of total revenue, for the three months ended September 30, 2005 and 2004:

   Three months ended September 30,
   2005
   2004
Total revenues:

Canada
   $ 7,240    $ 3,947
United States
   38,989    30,986
United Kingdom
   8,781    9,789
Germany
   15,109    16,943
Rest of Europe
   17,542    17,574
Other
   4,969    6,357


Total revenues
   $ 92,630    $ 85,596


   As of September 30,
2005
   As of June 30,
2005
Segment assets:

Canada
   $ 114,940    $ 78,267
United States
   130,194    160,712
United Kingdom
   55,125    61,995
Germany
   165,460    173,312
Rest of Europe
   101,850    108,114
Other
   52,265    53,940


Total segment assets
   $ 619,834    $ 636,340


~~The Company’s goodwill has been allocated as follows to the Company’s operating segments:~~

   As of September 30,
2005
   As of June 30,
2005
North America
   $ 80,552    $ 80,220
Europe
   129,385    128,838
Other
   34,232    34,033


   $ 244,169    $ 243,091


~~NOTE 7 – SHAREHOLDERS’ EQUITY~~
its Common Shares.
During the three months ended September 30, 2005, the ~~Company did not repurchase any of its Common Shares. The~~ Company issued 46,581 Common Shares to the former shareholders of DOMEA eGovernment (“Domea”) relating to an acquisition agreement commitment, made as part of the acquisition of Domea, to issue Common Shares in connection with the achievement of certain post-acquisition revenue targets. Upon issuance, the value ascribed to the shares of ~~$813~~$813,000 was transferred from Commitment to issue shares to Share capital.
~~During the three months ended September 30, 2004, the~~ The Company ~~purchased, through its stock~~did not repurchase ~~program, 599,600~~any of its Common Shares on the Toronto Stock Exchange and the NASDAQ National Market at an aggregate cost of $11.0 million. $4.7 million of the repurchase was charged to Share capital based on the average carrying value of the Common Shares, with the remaining $6.3 million charged to Accumulated deficit.
during this period.
~~NOTE 8 – SHARE-BASED PAYMENTS~~Share-Based Payments
Summary of Outstanding Stock Options
As of September 30, ~~2005,~~2006, options to purchase an aggregate of ~~5,456,924~~5,662,951 Common Shares ~~were~~are outstanding under all of the Company’s stock option plans. In addition, ~~1,093,550 options~~253,220 Common Shares are available ~~to be granted~~for issuance under the 1998 Stock Option Plan and the 2004 Stock Option ~~Plan, which are the only plans under which the Company may issue further options.~~Plan. The Company’s stock options generally vest over four to five years and expire ten years from the date of the grant. The exercise price of options granted is equivalent to the fair market value of the stock at the date of ~~grant.~~grant except as noted hereinafter in the case of non-employee members of the Board of Directors only.
Options granted to non-employee members of the Board of Directors vest as of the date of the Company’s Annual General Meeting of shareholders immediately following the date of the grant of the options. The exercise price of options granted is usually equivalent to the fair market value of the stock at the date of grant but in no event is the exercise price less than the market price at the date of grant, as defined in the relevant stock option plan.
A summary of option activity under the Company’s stock option plans for the three months ~~ending~~ended September 30, ~~2005~~2006 is as follows:

   Options
Weighted- Average Exercise
Price
   Weighted – Average
Remaining Contractual
Term
   Aggregate Intrinsic Value
($’000s)
   Options
Weighted-
Average Exercise
Price

Weighted-
Average
Remaining
Contractual Term

Aggregate Intrinsic Value
($’000s)
Outstanding at July 1, 2005
   5,530,274 $ 11.93
Outstanding at June 30, 2006
   5,334,016 $ 12.25
Granted
   —   —            450,000 17.01
Exercised
   (20,950 ) 7.62          (70,572 ) 4.24
Forfeited or expired
   (52,400 ) 20.40          (50,493 ) 15.78


Outstanding at September 30, 2005
   5,456,924 $ 11.87    5.09    11,569
Outstanding at September 30, 2006
   5,662,951 $ 12.70    4.67    $ 29,447


Exercisable at September 30, 2005
   3,837,565 $ 9.85    4.27    15,888
Exercisable at September 30, 2006
   3,836,709 $ 10.93    3.80    $ 26,742





OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three Months Ended September 30, 2006
(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)

The Company estimates the fair value of stock options using the Black-Scholes ~~valuation~~option pricing model, consistent with the provisions of SFAS ~~123R~~123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”) and ~~United States Securities and Exchange Commission (“SEC”)~~SEC Staff Accounting Bulletin No. 107. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable, while the options issued by the Company are subject to both vesting and restrictions on transfer. In addition, option-pricing models require input of subjective assumptions including the estimated life of the option and the expected volatility of the underlying stock over the estimated life of the option. The Company uses historical volatility as a basis for projecting the expected volatility of the underlying stock and estimates the expected life of its stock options based upon historical data.
~~The Company does not believe the existing valuation models necessarily provide a reliable single measure of the fair value of the Company’s stock options.~~ The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair value of the Company’s stock option grants. Estimates of fair value are not intended, however, to predict actual future events or the value ultimately realized by employees who receive equity awards.
For the three months ended September 30, 2006, the weighted-average fair value of options granted, as of the grant date, was $7.50, using the following weighted average assumptions: expected volatility of 47%; risk-free interest rate of 4.3%; expected dividend yield of 0%; and expected life of 4.5 years. A forfeiture rate of 5%, based on historical rates, was used to determine the net amount of compensation expense recognized.
For the three months ended September 30, 2005 no stock options were granted by the ~~Company or had their terms modified.~~ Company.
In ~~addition,~~each of the above periods, no cash was used by the Company to settle equity instruments granted under share-based payment arrangements in the period. For the three months ended September 30, 2004, the weighted-average grant date fair value of options granted during the period was $8.27, using the following weighted average assumptions: expected volatility of 60%; risk-free interest rate of 3%; expected dividend yield of 0%; expected life of 3.5 years.
compensation arrangements.
The fair value of awards granted prior to July 1, 2005 is not adjusted to be consistent with the provisions of SFAS 123R from the amounts disclosed previously, on a pro forma basis, in the ~~notes~~Audited Notes to the ~~consolidated financial statements~~Consolidated Financial Statements in the Company’s Form 10-Ks or in the notes to the ~~condensed consolidated financial statements~~Interim Financial Statements in the Company’s Form 10-Qs. As of September 30, ~~2005,~~2006, the total compensation cost related to unvested stock awards not yet recognized in the statement of operations ~~is $10.6~~was $10.9 million, which will be recognized over a weighted average period of approximately 2 years. As of September 30, 2005, the total compensation cost related to unvested stock awards not yet recognized in the statement of operations was $10.6 million, which would have been recognized over a weighted average period of approximately 2 years.
Share-based compensation ~~costs~~cost included in the statement of ~~operations~~income for the three months ended September 30, 2006 was approximately $1.3 million. Deferred tax assets of $171,000 were recorded, as of September 30, 2006 in relation to the tax effect of certain stock options that are eligible for a tax deduction when exercised. Share-based compensation cost included in the statement of income for the three months ended September 30, 2005 was approximately $1.4 million. Deferred tax assets of $169,000 were recorded, as of September 30, 2005 in relation to the tax effect of certain stock options that are eligible for a tax deduction when exercised. The Company has not capitalized any share-based compensation costs as part of the cost of an asset. ~~The impact of adoption of SFAS 123R~~
For the three months ended September 30, 2006, cash in the ~~period~~amount of $299,000 was ~~an increase to net loss~~received as the result of ~~$1,413,000 an increased net loss~~the exercise of options granted under share-based payment arrangements. The tax benefit realized by the Company, during the three months ended September 30, 2006 from the exercise of options eligible for a tax deduction was $205,000, and this amount was recorded as additional paid-in capital.
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three Months Ended September 30, 2006
(Tabular dollar amounts in thousands of U.S. Dollars, except per share ~~of $0.03 per share.~~data)

For the three months ended September 30, 2005, cash in the amount of $160,000 was received as the result of the exercise of options granted under share-based payment arrangements. The tax benefit realized by the Company, during the three months ended September 30, 2005 from the exercise of options eligible for a tax deduction was $46,000, ~~which~~and this amount was recorded as additional paid-in capital.
Employee Share Purchase Plan (“ESPP”)
Prior to July 1, 2005, the Company offered its employees the opportunity to buy its Common Shares, through the ESPP at a purchase price equal to the lesser of 85% of the weighted average trading price of the Common Shares in the period of five trading days immediately preceding the first business day of the purchase period and 85% of the weighted average trading price of the Common Shares in the period of five trading days immediately preceding the last business day of the purchase period. The ESPP, under its original terms, qualified as non-compensatory plan under APB 25 and as such no compensation cost was recorded in relation to the discount offered to employees for purchases made under the ESPP.
The original terms of the ESPP would have resulted in it being treated as a compensatory plan under the fair value-based method. Effective July 1, 2005, the Company amended the terms of its ESPP to set the amount at which Common Shares may be purchased by employees to 95% of the average market price based on the Toronto Stock Exchange (“TSX”) or Nasdaq National Market (“Nasdaq”) on the last day of the purchase period. As a result of the amendments, the ESPP is no longer considered a compensatory plan under the provisions of SFAS 123R, and as a result no compensation cost has been recorded in relation to the ESPP forDuring the three months ended September 30, ~~2005.~~
2006, 22,209 Common Shares were issued under the ESPP for cash collected from employees totaling $305,000. In addition, cash in the amount $179,190 was received from employees that will be used to purchase Common Shares in future periods.
During the three months ended September 30, 2005, 255,402 Common Shares were issued under the ESPP for cash collected from employees ~~in prior periods total~~totaling $3.1 million. ~~In addition, cash total $83,000 was collected from employees for the three months ended September 30, 2005, that will be used to purchase Common Shares in future periods.~~
NOTE ~~9 –~~ 11—NET ~~LOSS~~INCOME (LOSS) PER SHARE
Basic net ~~loss~~income (loss) per share is computed by dividing net ~~loss~~income (loss) by the weighted average number of common shares outstanding during the period. Diluted net ~~loss~~income (loss) per share is computed by dividing net ~~loss~~income (loss) by the ~~number of Common Shares~~shares used in the calculation of basic net ~~loss~~income (loss) per share plus the dilutive effect of common share equivalents, such as stock options, using the treasury stock method. Common share equivalents are excluded from the computation of diluted net ~~loss~~income (loss) per share if their effect is anti-dilutive.

   Three months ended
September 30,

   2005
2004

Basic net loss per share

Net loss
   $ (12,868 ) $ (986 )


Basic net loss per share
   $ (0.27 ) $ (0.02 )


Diluted net loss per share

Net loss
   $ (12,868 ) $ (986 )


Diluted net loss per share *
   $ (0.27 ) $ (0.02 )


Weighted average number of Common Shares outstanding

Basic and diluted
   48,439 51,106



Three months ended
September 30,

   2006    2005
Basic net income (loss) per share

Net income (loss)
   $ 7,301    $ (12,868 )

Basic net income (loss) per share
   $ 0.15    $ (0.27 )

Diluted net income (loss) per share

Net income (loss)
   $ 7,301    $ (12,868 )

Diluted net income (loss) per share
   $ 0.15    $ (0.27 )

Weighted average number of shares outstanding

Basic
   48,975    48,439
Effect of dilutive securities *
   1,244    —

Diluted
   50,219    48,439

Excluded as anti-dilutive **
   2,504    2,626

* Certain options to purchase Common Shares are excluded from the calculation of diluted net income (loss) per share because the exercise price of the stock options was greater than or equal to the average price of the Common Shares, and therefore their inclusion would have been anti-dilutive.

** Due to the net loss for the ~~periods~~three months ended September 30, 2005, ~~and 2004, the~~ diluted net loss per share has been calculated for that period using the basic weighted average number of Common Shares outstanding, as the inclusion of any potentially dilutive securities would be anti-dilutive. ~~Stock options outstanding, which could be potentially dilutive in the future, total 5.5 million as of September 30, 2005.~~
~~NOTE 10 - GOODWILL~~OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
~~Goodwill is recorded when~~For the ~~consideration paid for an acquisition~~Three Months Ended September 30, 2006
(Tabular dollar amounts in thousands of ~~a business exceeds the fair value of identifiable net tangible and intangible assets. The following table summarizes the changes in goodwill since June 30, 2004:~~U.S. Dollars, except per share data)

Balance, June 30, 2004
   $ 223,752
Goodwill recorded during fiscal 2005:

Vista
   8,714
Artesia
   2,136
Optura
   2,352
Adjustments relating to prior acquisitions
   (822 )
Adjustments on account of foreign exchange
   6,959

Balance, June 30, 2005
   243,091
Adjustments relating to prior acquisitions
   1,357
Adjustments on account of foreign exchange
   (279 )

Balance, September 30, 2005
   $ 244,169


NOTE ~~11 - ACQUIRED INTANGIBLE ASSETS~~12—INCOME TAXES
The Company operates in various tax jurisdictions, and accordingly, the Company’s income is subject to varying rates of tax. Losses incurred in one jurisdiction cannot be used to offset income taxes payable in another. The Company’s ability to use income tax losses and future income tax deductions is dependent upon the profitable operations of the Company in the tax jurisdictions in which such losses or deductions arise. As of September 30, 2006 and June 30, 2006, the Company had total net deferred tax assets of $62.1 million and $65.9 million respectively, and total deferred tax liabilities of $29.2 million and $31.7 million, respectively.
Deferred tax assets arise primarily from available income tax losses and future income tax deductions. The Company provides a valuation allowance if sufficient uncertainty exists regarding the realization of certain deferred tax assets. Taking into account the following factors: (i) the reversal of deferred income tax liabilities, (ii) projected future taxable income, (iii) the character of the income tax assets and (iv) tax planning strategies, a valuation allowance of $126.5 million and $127.5 million was required as of September 30, 2006 and June 30, 2006, respectively. The majority of the valuation allowance relates to uncertainties regarding the utilization of foreign pre-acquisition losses of Gauss Interprise AG (“Gauss”) and IXOS. The Company continues to evaluate its taxable position quarterly and considers factors by taxing jurisdiction such as estimated taxable income, the history of losses for tax purposes and the growth of the Company, among others. The principal component of the total deferred tax liabilities arises from acquired intangible assets purchased in the Gauss and IXOS transactions.
NOTE 13—SEGMENT INFORMATION
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” establishes standards for the reporting, by public business enterprises, of information about operating segments, products and services, geographic areas, and major customers. The method of determining what information to report is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance.
The Company’s operations fall into one dominant industry segment, being enterprise content management software. The Company manages its operations, and accordingly determines its operating segments, on a geographic basis. The Company has two reportable segments: North America and Europe. The Company evaluates operating segment performance based on revenues and direct operating expenses of the segment, based on the location of the respective customers. The accounting policies of the operating segments are the same as those described in the summary of accounting policies. No segments have been aggregated.
Included in the following operating results are allocations of certain operating costs that are incurred in one reporting segment but which relate to all reporting segments. The allocations of these common operating costs are consistent with the manner in which they are allocated for the chief operating decision maker (“CODM”) of the Company’s analysis. For the three months ended September 30, 2006 and September 30, 2005, the “Other” category consists of geographic regions other than North America and Europe. Revenues from transactions that both emanate and conclude within operating segments are not considered for the purpose of this disclosure since such transactions are not reviewed by the CODM.
Adjusted operating margin from operating segments does not include: (i) amortization of acquired intangible assets, (ii) provision for (recovery of) restructuring charges, (iii) other income (expense), (iv) share-based compensation and (v) provision for income taxes. Goodwill and other acquired intangible assets have been
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three Months Ended September 30, 2006
(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)

   Technology
Assets
Customer
Assets
Total

Net book value, June 30, 2004
   $ 76,816 $ 39,772 $ 116,588
Assets acquired and activity during fiscal 2005:

Vista
   8,660 11,700 20,360
Artesia
   3,300 1,600 4,900
Optura
   1,300 700 2,000
Amortization expense
   (16,175 ) (8,234 ) (24,409 )
Other, including foreign exchange impact
   2,207 6,335 8,542


Net book value, June 30, 2005
   76,108 51,873 127,981
Activity during fiscal 2006:

Amortization expense
   (4,631 ) (2,222 ) (6,853 )
Other, including foreign exchange impact
   (3,358 ) 3,338 (20 )


Net book value, September 30, 2005
   $ 68,119 $ 52,989 $ 121,108


assigned to segment assets based on the relative benefit that the reporting units are expected to receive from the assets, or the location of the acquired business operations to which they relate. These allocations have been made on a consistent basis.
Information about reportable segments is as follows:


Three months ended
September 30,

   2006 2005
Revenue

North America
   $ 48,732 $ 46,229
Europe
   47,451 41,432
Other
   4,972 4,969

Total revenue
   $ 101,155 $ 92,630

Adjusted income

North America
   $ 10,223 $ 5,701
Europe
   7,908 3,865
Other
   1,158 97

Total adjusted income
   19,289 9,663
Less:

Amortization of acquired intangible assets
   7,228 6,853
Special charges (recoveries)
   (468 ) 18,111
Share-based compensation
   1,267 1,413
Other expense (income)
   (373 ) 524
Provision for (recovery of) income taxes
   4,334 (4,370 )

Net income (loss)
   $ 7,301 $ (12,868 )


As of September 30,
2006

As of June 30,
2006

Segment assets

North America
   $ 316,628 $ 268,231
Europe
   287,429 331,139
Other
   37,829 38,550

Total segment assets
   $ 641,886 $ 637,920

~~The range~~A reconciliation of ~~amortization periods~~the totals reported for ~~intangible assets~~the operating segments to the applicable line items in the Interim Financial Statements as of September 30, 2006 and June 30, 2006 is ~~from 5-10 years.~~as follows:

As of September 30,
2006

As of June 30,
2006
Segment assets
   $ 641,886    $ 637,920
Investments in marketable securities
   21,127    21,025
Cash and cash equivalents (corporate)
   2,379    12,148

Total assets
   $ 665,392    $ 671,093

OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three Months Ended September 30, 2006
(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)

The following table ~~shows~~sets forth the ~~estimated amortization expense~~distribution of revenues determined by location of customer and identifiable assets, by significant geographic area, for ~~each of~~ the ~~next five years, assuming no further additions to acquired intangible assets are made:~~three months ended September 30, 2006 and 2005:

   Years ending June 30,
2006
   $ 27,499
2007
   26,615
2008
   25,983
2009
   20,422
2010
   8,061

Total
   $ 108,580


Three months ended
September 30,
   2006    2005
Total revenues:

Canada
   $ 6,711    $ 7,240
United States
   42,021    38,989
United Kingdom
   10,838    8,781
Germany
   16,243    15,109
Rest of Europe
   20,370    17,542
Other
   4,972    4,969
   ��
Total revenues
   $ 101,155    $ 92,630


As of September 30,
2006

As of June 30,
2006
Segment assets:

Canada
   $ 157,649    $ 97,421
United States
   158,979    170,810
United Kingdom
   39,285    53,501
Germany
   144,131    177,651
Rest of Europe
   104,013    99,987
Other
   37,829    38,550

Total segment assets
   $ 641,886    $ 637,920

~~Certain of the acquired intangible asset allocations for fiscal 2006 represent management’s preliminary estimates of fair value. Changes may occur from these preliminary estimates with respect~~The Company’s goodwill has been allocated as follows to the ~~Optura acquisition and those changes may be material.~~
Company’s operating segments:

As of September 30,
2006

As of June 30,
2006
North America
   $ 88,907    $ 89,499
Europe
   124,001    124,827
Other
   21,057    21,197

   $ 233,965    $ 235,523

NOTE ~~12 -~~ 14—SUPPLEMENTAL CASH FLOW ~~DISCLOSURE~~DISCLOSURES

   Three months Ended
September 30,

Three months ended
September 30,
   2005
   2004
       2006            2005
Supplemental disclosure of cash flow information:

Cash paid during the period for interest
   $ 26    $ 10    $ 229    $ 26
Cash received during the period for interest
   $ 96    $ —      621    96
Cash paid during the period for income taxes
   $ 622    $ 2,330    2,655    622
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three Months Ended September 30, 2006
(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)

NOTE ~~13 –~~ 15—COMMITMENTS AND CONTINGENCIES
The Company has entered into ~~operating leases for premises and vehicles~~the following contractual obligations with minimum annual payments for the indicated fiscal periods as follows:

   Payments due by period
   Payments due by period
   Total
   Less than
1 year
   1–3 years
   3–5 years
   More than
5 years
   Total    2007    2008 to 2009    2010 to 2011    2012 and beyond
Operating lease obligations
   $ 107,395    $ 11,981    $ 37,018    $ 34,800    $ 23,596
Long-term debt obligations
   $ 15,977    $ 813    $ 2,168    $ 12,996    $ —
Operating lease obligations *
   86,794    13,745    34,268    27,012    11,769
Purchase obligations
   4,110    2,627    1,301    156    26    4,235    1,836    1,921    478    —






   $ 111,505    $ 14,608    $ 38,319    $ 34,956    $ 23,622    $ 107,006    $ 16,394    $ 38,357    $ 40,486    $ 11,769






* Net of $7.3 million of non-cancelable sublease income to be received by the Company from properties which the Company has subleased to other parties.
~~The above balance is net~~Rental expense of ~~$9.4~~$2.3 million ~~of non-cancelable sublease income from properties sub-leased by~~and $3.6 million was recorded during the ~~Company.~~
In July 2004, the Company entered into a commitment to construct a building in Waterloo, Ontario with a view of consolidating its existing Waterloo facilities. The construction of the building was completed in October 2005three months ended September 30, 2006 and ~~the Company has since commenced the use of the building. As of~~ September 30, 2005, ~~a total~~respectively.
The long-term debt obligations are comprised of ~~$15.4 million has been capitalized~~interest and principal payments on the 5 year mortgage on the Company’s headquarters in Waterloo, Ontario. For details relating to this ~~project. The Company has financed this investment through its working capital.~~
mortgage see Note 8 in these Interim Financial Statements.
The Company does not enter into off-balance sheet financing arrangements as a matter of practice except for the use of operating leases for office space, computer equipment and vehicles. In accordance with ~~U.S~~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.
Domination agreements
IXOS domination agreements
On December 1, 2004, the Company announced ~~that—through its wholly-owned subsidiary, 2016091 Ontario, Inc. (“Ontario I”)—~~that it had entered into a domination and profit transfer agreement (the ~~“Domination Agreement”~~“IXOS DA”) with IXOS. The ~~Domination Agreement has been~~IXOS DA came into force in August 2005 when it was registered in the commercial register at the local court ~~of Munich~~ in ~~August 2005 and it has therefore come into force.~~Munich. Under the terms of the ~~Domination Agreement, Ontario I has~~IXOS DA, Open Text acquired authority to issue directives to the management of IXOS. Also inwithin the ~~Domination Agreement, Ontario I offers~~terms of the IXOS DA, Open Text offered to purchase the remaining Common Shares of IXOS for a cash purchase price of Euro 9.38 per share (“Purchase Price”) which was the weighted average fair value of the IXOS Common Shares as of December 1, 2004. ~~Pursuant to the Domination Agreement, Ontario I also guarantees~~Additionally, Open Text has guaranteed a payment by IXOS to the minority shareholders of IXOS of an annual compensation of Euro 0.42 per share (“Annual Compensation”). ~~At a meeting of~~
The IXOS DA was registered on August 23, 2005. In the ~~shareholders of IXOS on January 14,~~quarter ended September 30, 2005, the ~~shareholders authorized~~Company commenced accruing the management board of IXOS to apply for the withdrawal of the listing of the IXOS shares at the Frankfurt/Germany stock exchange (“Delisting”). The Delisting was granted by the Frankfurt Stock Exchange on April 12, 2005 and was effective on July 12, 2005.
Certain IXOS shareholders had filed complaints against the approval of the Domination Agreement and also against the authorization to delist. As a result of an out of court settlement the complaints have been withdrawn and or settled. The out of court settlement was ratified by the court on August 9, 2005. As a result of this ratification the Company recorded an amount ~~of $144,000 as~~ payable to minority shareholders of IXOS ~~for the quarter ended September 30, 2005~~ on account of Annual Compensation. This amount has been accounted for as a “guaranteed dividend”, payable to the minority shareholders, and ~~has been~~is recorded as a charge to minority interest in the ~~earnings~~statements of income.
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the ~~period.~~ Three Months Ended September 30, 2006
(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)
Based on the number of minority IXOS shareholders as of September 30, ~~2005~~2006, the estimated amount of Annual Compensation ~~would approximate $580,000~~
~~per year.~~was approximately $130,000 for the three months ended September 30, 2006. Because the Company is unable to predict, with reasonable accuracy, the number of IXOS minority shareholders ~~that will be on record~~ in future periods, the Company is unable to predict the amount of Annual Compensation that will be payable in future years.
Certain IXOS shareholders have filed for a procedure granted under German law at the district court of Munich, Germany, asking the court to review the proposed amount of the Annual Compensation and the Purchase Price (the “IXOS Appraisal Procedures”) for the amounts offered under the IXOS DA. It cannot be predicted at this stage, whether the court will increase the Annual Compensation and/or the Purchase Price in the IXOS Appraisal Procedures. The purchase offer made under the IXOS DA will expire at the end of the IXOS Appraisal Procedures.
These disputes are a normal and probable part of the process of acquiring minority shares in Germany. The costs associated with the above mentioned shareholder objections to the proposed fair value of the Annual Compensation and the Purchase Price are direct incremental costs associated with the ongoing step acquisitions of shares held by the minority shareholders and have been deferred within Goodwill pending the outcome of the objections. The Company is unable to predict the future costs associated with these activities that will be payable in future periods.
Gauss domination agreements
Pursuant to ~~an Agreement of Control~~a domination agreement dated November 4, 2003 (the “Gauss DA”) between ~~the Company—through its wholly owned subsidiary 2016090 Ontario Inc. (“Ontario II”)—~~Open Text and Gauss, ~~Ontario II~~Open Text has offered to purchase the remaining outstanding shares of Gauss at a price of Euro 1.06 per ~~Gauss share. The original acceptance period was two months after the signing of the Agreement of Control.~~share (the “Gauss Purchase Price I”). As a result of certain shareholders having filed for a special court procedure to ~~reassess~~review the proposed amount of the ~~Annual Compensation~~Gauss Purchase Price I that must be payable to minority shareholders as a result of the ~~Agreement of Control,~~Gauss DA, the acceptance period has been extended pursuant to German law until the end of such proceedings. In addition, in April 2004 Gauss announced that effective July 1, 2004 the shares of Gauss would cease to be listed on a stock exchange. In connection with this delisting, on July 2, 2004, a second offer by ~~Ontario II~~Open Text to purchase the remaining outstanding shares of Gauss at a price of Euro 1.06 per ~~Gauss~~ share, commenced. This acceptance period has also been extended pursuant to German law until the end of proceedings to reassess the amount of the consideration offered under German law in the delisting process. The shareholders’ resolution on the ~~Agreement of Control~~Gauss DA and on the delisting was subject to a court procedure in which certain shareholders of Gauss ~~claim~~claimed that athe resolution by which the shareholders of ~~shareholders respecting~~Gauss approved of the ~~Agreement of Control~~entering into the Gauss DA and the authorization to the management board of Gauss to file for a delisting isare null and void. While the Court of First Instance rendered a judgment in favor of the plaintiffs, Gauss, as defendant, had appealed and believed that the Court of Second Instance would overturn the judgment and rule in favor of Gauss. As a result of an out of court settlement, the complaints have been ~~withdrawn. The settlement provides inter alia~~withdrawn and it has been agreed between Open Text and the minority Gauss shareholders that an amount of Euro 0.05 per share per annum will be payable as compensation to ~~the other~~certain shareholders of Gauss under certain ~~circumstances.~~circumstances, but only after registration of the Squeeze Out as defined hereafter.
In Germany, once ownership of 95% of the shares of a company is obtained, an acquirer can go through a “Squeeze-Out” process which is very similar to the Domination Agreement process. The only difference is if the Squeeze Out is registered, the shares of minority shareholders are transferred automatically—by virtue of the law—to the acquirer. On August 25, 2005, at the shareholders meeting of Gauss, upon a motion of ~~Ontario II,~~Open Text, it was decided to transfer the shares of the minority shareholders, which at the time of the ~~shareholders~~shareholders’ meeting held less than 5% of the shares of Gauss, to ~~Ontario II. Also the shareholders meeting decided to change the Domination Agreement between Gauss and Ontario II, it resolved to change the name to “Open~~Open Text ~~AG” and the end of the fiscal year to June 30. The resolutions will become effective when registered in the commercial register at the local court of Hamburg.~~(“Squeeze Out”). Certain shareholders ~~have~~of Gauss had filed suits to oppose all or some of the resolutions of the ~~shareholders~~shareholders’ meeting of August 25, 2005. ~~It is expected that~~
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the ~~court~~Three Months Ended September 30, 2006
(Tabular dollar amounts in thousands of ~~Hamburg will within~~U.S. Dollars, except per share data)
On October 27, 2006, the ~~next few months decide on~~Squeeze Out was registered in the ~~registration~~Commercial Register in the Local Court of ~~the resolutions.~~
Hamburg. See Note 18 “Subsequent Events” in these Interim Financial Statements.
The Company ~~believes that~~has recorded its best estimate of the ~~registration of these resolutions is a reasonable certainty, accordingly, in pursuance of these resolutions the Company recorded an~~ amount ~~of $53,000 as~~ payable to the minority shareholders of ~~Gauss.~~Gauss under the Squeeze Out. In the three months ended September 30, 2006, the Company has accrued $7,500 for such payments, resulting in total accruals of $82,500 as of September 30, 2006. The Company is ~~not able to predict~~currently in the ~~date on which~~process of determining the ~~resolutions will be registered at the local court. In the event that the resolutions are registered at the end of the current fiscal year a further amount of approximately $22,500 will be~~final amounts payable to ~~these shareholders.~~
shareholders of Gauss.
Guarantees and indemnifications
The Company has entered into license agreements with customers that include limited intellectual property indemnification clauses. ~~The~~Generally, the Company ~~generally~~ agrees to indemnify its customers against legal claims that ~~its~~the Company’s software products infringe certain third party intellectual property rights. In the event of such a claim, the Company is generally obligated to defend its customers against the claim and either to settle the claim at the Company’s expense or pay damages that ~~the~~its 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. The Company has not made any ~~significant~~ indemnification payments in relation to these indemnification clauses.
In connection with certain facility leases, the Company has guaranteed payments on behalf of its ~~subsidiaries. This has been done~~subsidiaries either by providing a security deposit with the landlord or through unsecured bank guarantees obtained from local banks. Additionally, the Company’s current end-user license agreement contains a limited software warranty.
The Company has not recorded a liability for guarantees, indemnities or warranties described above in the accompanying consolidated balance sheet since the maximum amount of potential future payments under such guarantees, indemnities and warranties is not ~~determinable, other than as described above.~~determinable.
Litigation
The Company is 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, the Company’s management does not believe that the outcome of any of these legal matters will have a material adverse effect on its consolidated financial position, results of operations orand cash flows.
NOTE 16—SPECIAL CHARGES (RECOVERIES)
~~NOTE 14 – SPECIAL CHARGES~~
In the three months ended September 30, 2005, the Company recorded special charges of $18.1 million. This is comprised of $16.4 million relating to the 2006 restructuring, $2.0 million related to the impairment of capital assets and a recovery of $303,000 related to the 2004 restructuring charge. Details of each component of Special charges are discussed below.
~~Restructuring charges~~
Fiscal 2006 Restructuring
~~During~~In the ~~three months ended September 30, 2005,~~first quarter of Fiscal 2006, the Board approved, and the Company ~~commenced implementing,~~began to implement restructuring activities to streamline its operations and consolidate its excess ~~facilities.~~facilities (“Fiscal 2006 restructuring plan”). These charges relate to work force reductions, abandonment of excess facilities and other miscellaneous direct costs. Total costs to be incurred in conjunction with the Fiscal 2006 restructuring plan are expected to be inapproximately $22.0 million. On a quarterly basis, the ~~range~~Company conducts an evaluation of ~~$20 million to $30 million, of which $16.4 million has been recorded within Special charges in~~these balances and revises its assumptions and estimates, as appropriate. In the three months ended September 30, ~~2005. The charge consisted primarily~~2006, the Company recorded recoveries from special charges of ~~costs associated with workforce reduction, abandonment of excess facilities, and legal costs incurred related to the termination of facilities.~~$468,000. The provision related to workforce reduction is
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three Months Ended September 30, 2006
(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)
expected to be substantially paid by ~~June 30,~~December 31, 2006, and the provisions relating to the abandonment of excess facilities, such as contract settlements and lease costs, isare expected to be paid by January 2014.
A reconciliation of the beginning and ending liability is shown ~~below:~~below.
Restructuring charges
Fiscal 2006 Restructuring

Fiscal 2006 Restructuring Plan
   Work force
reduction
Facility costs
Other
Total

Balance as of June 30, 2005
   $ —   $ —   $ —   $ —
Accruals
   12,644 3,631 125 16,400
Cash payments
   (3,094 ) (222 ) (125 ) (3,441 )
Foreign exchange and other adjustments
   —   16 —   16


Balance as of September 30, 2005
   $ 9,550 $ 3,425 $ —   $ 12,975


Fiscal 2006 Restructuring Plan

Work force
reduction
Facility costs Other Total
Balance as of June 30, 2006
   $ 2,685 $ 4,135 $ 9 $ 6,829
Accruals (recoveries)
   (256 ) (277 ) 65 (468 )
Cash payments
   (1,042 ) (844 ) (74 ) (1,960 )
Foreign exchange and other adjustments
   (15 ) 40 —   25

Balance as of September 30, 2006
   $ 1,372 $ 3,054 $ —   $ 4,426

The following table outlines restructuring charges incurred and recovered under the ~~fiscal~~Fiscal 2006 restructuring plan, by segment, for the ~~three months~~period ended September 30, ~~2005.~~2006.

Fiscal 2006 Restructuring Plan – by Segment
   Work force
reduction
   Facility costs
   Other
   Total
North America
   $ 6,531    $ 2,720    $ 56    $ 9,307
Europe
   5,565    772    66    6,403
Other
   548    139    3    690




Total charge by segment for the quarter ended September 30, 2005
   $ 12,644    $ 3,631    $ 125    $ 16,400




Fiscal 2006 Restructuring Plan – by Segment
   Work force
reduction Facility costs Other Total
North America
   $ (181 ) $ (351 ) $ 19 $ (513 )
Europe
   (67 ) 74 51 58
Other
   (8 ) —   (5 ) (13 )

Total charge (recovery) for period ended September 30, 2006
   $ (256 ) $ (277 ) $ 65 $ (468 )

~~Impairment of capital assets~~
During the three months ended September 30, 2005, an impairment charge of $2.0 million was recorded against capital assets to write down to fair value, various leasehold improvements at vacated premises and redundant office equipment. Fair value was determined based on the Company’s best estimates of disposal proceeds, net of anticipated costs to sell.
Fiscal 2004 Restructuring
In the three months ended March 31, 2004, the Company recorded a restructuring charge of approximately $10 million relating primarily to its North America segment. The charge consisted primarily of costs associated with a workforce reduction, excess facilities associated with the integration of the IXOS acquisition, write downs of capital assets and legal costs related to the termination of facilities. All actions relating to employer workforce reductions were completed, and the related costs expended as of March 31, 2006. On a quarterly basis the Company conducts an evaluation of these balances and revises its ~~assumption~~assumptions and estimates. As part of this evaluation the Company recorded recoveries to this restructuring charge of $303,000 during the three months ended September 30, 2005. These recoveries represented, primarily, reductions in estimated employee termination costs and recoveries in estimates, ~~relating to accruals for abandoned facilities. The actions relating to employer workforce reduction were substantially complete~~ as ~~of June 30, 2005.~~appropriate. The provision ~~relating to~~for facility costs is expected to be ~~expended~~substantially paid by ~~2014.~~2011. The activity of the Company’s provision for the ~~fiscal~~ 2004 restructuring ~~charges~~charge is as follows ~~since the beginning of the current fiscal year:~~

Fiscal 2004 Restructuring Plan
   Work force
reduction
Facility costs
Other
   Total

Balance as of June 30, 2005
   $ 167 $ 1,878 $ —      $ 2,045
Revisions to prior accruals
   (65 ) (238 ) —      (303 )
Cash payments
   —   (197 ) —      (197 )
Foreign exchange and other adjustments
   —   (35 ) —      (35 )



Balance as of September 30, 2005
   $ 102 $ 1,408 $ —      $ 1,510



~~NOTE 15 – ACQUISITIONS~~
~~Fiscal 2005~~
~~Optura~~
On February 11, 2005, Open Text entered into an agreement to acquire all of the issued and outstanding shares of Optura Inc. (“Optura”). In accordance with SFAS No. 141 “Business Combinations” (“SFAS 141”) this acquisition has been accounted for as a business combination. Optura offers products and integration services that optimize business processes so that companies can collaborate across separate organizational functions, dissimilar systems and business partners. Optura products and services enable Open Text customers, who use a SAP-based Enterprise Resource Planning (“ERP”) system, to improve the efficiencies of their document-based ERP processes. The results of operations of Optura have been consolidated with those of Open Text beginning February 12, 2005.
~~Consideration for this acquisition consisted of $3.7 million in cash, of which $2.7 million was paid at closing and $1.0 million was paid into escrow, as provided for in the share purchase agreement.~~
The preliminary purchase price allocation set forth below represents management’s best estimate of the allocation of the purchase price and the fair value of net assets acquired. The valuation of the acquired intangible assets and the assessment of their expected useful lives are preliminary. These estimates may differ from the final purchase price allocation and these differences may be material.
~~The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of the Optura acquisition:~~

Current assets, including cash acquired of $315
   $ 1,536
Long-term assets
   114
Customer assets
   700
Technology assets
   1,300
Goodwill
   2,321

Total assets acquired
   5,971
Total liabilities assumed
   (2,308 )

Net assets acquired
   $ 3,663

The customer assets of $700,000 have been assigned a life of five years. The technology assets of $1.3 million have been assigned a useful life of five years. The useful lives assigned represent management’s preliminary estimates and changes may occur from these preliminary estimates and these changes may be material.
~~The portion of the purchase price allocated to goodwill was assigned to the Company’s North America reportable segment. No amount of the goodwill is expected to be deductible for tax purposes.~~
As part of the purchase price allocation, the Company originally recognized liabilities in connection with this acquisition of $444,000. The liabilities related to severance charges, transaction costs, and costs relating to excess facilities. The purchase price was subsequently adjusted to accrue an additional $53,000 due to the refinement of management’s original estimates. Liabilities related to transaction-related charges are expected to be paid in fiscal 2006. Liabilities related to excess facilities will be paid over the term of the lease which expires in September 2006.
A director of the Company received approximately $47,000, during the year ended June 30, 2005, in consulting fees for assistance with the acquisition of Optura. These fees are included in the purchase price allocation. The director abstained from voting on the transaction.
~~Artesia~~
On August 19, 2004, Open Text entered into an agreement to acquire all of the issued and outstanding shares of Artesia Technologies, Inc. (“Artesia”). In accordance with SFAS 141 this acquisition has been accounted for as a business combination. Artesia designs and distributes Digital Asset Management software. It has a customer base of over 120 companies and provides these customers and their marketing and distribution partners the ability to easily access and collaborate around a centrally managed collection of digital media elements. The results of operations of Artesia have been consolidated with those of Open Text beginning September 1, 2004.
This acquisition expands Open Text’s media integration and management capabilities as part of its Enterprise Content Management (“ECM”) suite, and provides a platform from which Open Text can address the content management needs of media and marketing professionals worldwide.
Consideration for this acquisition consisted of $5.2 million in cash, of which $3.2 million was paid at closing and $2.0 million was paid into escrow, as provided for in the share purchase agreement. At June 30, 2005, there was a holdback in the amount of $581,000 remaining to be paid. In the three months ended September 30, ~~2005 it was determined and agreed that the holdback would not be paid. Accordingly, the purchase price allocation has been adjusted.~~2006:

Fiscal 2004 Restructuring Plan
   Facility costs
Balance as of June 30, 2006
   $ 1,170
Cash payments
   (133 )
Foreign exchange and other adjustments
   10

Balance as of September 30, 2006
   $ 1,047

~~The purchase price allocation set forth below represents management’s best estimate~~
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three Months Ended September 30, 2006
(Tabular dollar amounts in thousands of ~~the allocation of the purchase price and the fair value of net assets acquired.~~
~~The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of the Artesia acquisition:~~

Current assets, including cash acquired of $773
   $ 2,165
Long-term assets
   2,714
Customer assets
   1,700
Technology assets
   3,300
Goodwill
   1,426

Total assets acquired
   11,305
Total liabilities assumed
   (6,053 )

Net assets acquired
   $ 5,252

~~The customer assets of $1.7 million have been assigned a life of five years. The technology assets of $3.3 million have been assigned useful lives of three to five years.~~
~~The portion of the purchase price allocated to goodwill was assigned to the Company’s North America reportable segment. No amount of the goodwill is expected to be deductible for tax purposes.~~
As part of the purchase price allocation, the Company originally recognized liabilities in connection with this acquisition of $1.8 million. The liabilities related to severance charges, transaction costs, and costs relating to facilities. The purchase price was subsequently adjusted to reduce acquisition-related liabilities by $218,000 due to the refinement of management’s estimates. Liabilities related to severance and transaction-related charges are expected to be paid in the current 2006 fiscal year. Liabilities related to excess facilities will be paid over the term of the lease which expires in May 2010.
A director of the Company received $112,000, during the year ended June 30, 2005, in consulting fees for assistance with the acquisition of Artesia. These fees are included in the purchase price allocation. The director abstained from voting on the transaction.U.S. Dollars, except per share data)

~~Vista~~NOTE 17—ACQUISITIONS
On August 31, 2004, Open Text entered into an agreement to acquire the Vista Plus (“Vista”) suite of products and related assets from Quest Software Inc. (“Quest”). In accordance with SFAS 141 this acquisition has been accounted for as a business combination. As part of this transaction certain Quest employees that developed, sold and supported Vista have been employed by Open Text. The revenues and costs related to the Vista product suite have been consolidated with those of Open Text beginning September 16, 2004.
Vista is a technology that captures and stores business critical information from ERP applications. This acquisition expands Open Text’s integration and report management capabilities as part of its ECM suite, and provides a platform from which Open Text can address report content found in ERP applications, and business intelligence software.
Consideration for this acquisition consisted of $23.7 million in cash, of which $21.7 million was paid at closing and $2.0 million is held in escrow until November 30, 2005, as provided for in the purchase agreement.
~~The purchase price allocation set forth below represents management’s best estimate of the allocation of the purchase price and the fair value of net assets acquired.~~
~~The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of the Vista acquisition:~~

Current assets
   $ 264
Long-term assets
   63
Customer assets
   10,900
Technology assets
   8,430
Goodwill
   9,637

Total assets acquired
   29,294
Total liabilities assumed
   (5,603 )

Net assets acquired
   $ 23,691

~~The customer assets of $10.9 million and the technology assets of $8.4 million have been assigned useful lives of five years.~~
~~The portion of the purchase price allocated to goodwill was assigned to the Company’s North America reportable segment. The goodwill is expected to be deductible for tax purposes.~~
As part of the purchase price allocation, the Company recognized transaction costs in connection with this acquisition of $480,000. These costs are expected to be paid within the current 2006 fiscal year.
A director of the Company received $126,000, during the year ended June 30, 2005, in consulting fees for assistance with the acquisition of Vista. These fees are included in the purchase price allocation. The director abstained from voting on the transaction.
~~Fiscal 2004~~
IXOS
As of September 30, 2006, the Company owned 95.66% of the outstanding shares of IXOS. The Company increased its ownership of ~~IXOS to approximately 95% during~~ the ~~three months ended September 30, 2005. This was done~~shares of IXOS by way of open market purchases of IXOS ~~shares. Prior to these purchases, Open Text held, as of June 30, 2005, approximately 94% of the outstanding~~ shares, ~~of IXOS. Total consideration of $3.1 million was paid for the purchase of shares~~by 0.14% during the three months ended September 30, ~~2005. The Company stepped up its share~~2006. Total consideration paid for the purchase of ~~the fair value increments of the assets acquired and the liabilities assumed~~shares of IXOS toduring the ~~extent of the increased ownership of IXOS.~~three months ended September 30, 2006 was approximately $333,000. The minority interest in IXOS has been adjusted to reflect the reduced minority interest ownership in IXOS.
Hummingbird
On July 5, 2006, the Company announced its intention to make an offer to purchase all of the outstanding common shares of Hummingbird. On August 4, 2006, the Company entered into a definitive agreement with Hummingbird under which the Company was to acquire all of Hummingbird’s outstanding common shares, for cash valued at $27.85 per share, or approximately $494.0 million. On October 2, 2006, the Company acquired all of the issued and outstanding shares of Hummingbird. For further details relating to this acquisition see Note 18 “Subsequent Events” in these Notes to the Interim Financial Statements.
NOTE 18—SUBSEQUENT EVENTS
Hummingbird
On August 4, 2006, Open Text entered into a definitive agreement to acquire all of the issued and outstanding shares of Hummingbird. On October 2, 2006, the Company acquired all of the issued and outstanding shares of Hummingbird. Hummingbird is a global provider of enterprise software solutions. Open Text expects the combination of the two companies to strengthen its ability to offer an expanded portfolio of solutions aimed at a wide range of vertical markets. In accordance with SFAS 141, this acquisition will be accounted for as a business combination.
Hummingbird’s software offerings fall into two principal product families: (i) Hummingbird Enterprise, and (ii) Hummingbird Connectivity. The Company’s flagship offering, Hummingbird Enterprise, is an integrated Enterprise Content Management suite enabling users to capture, create, access, manage, share, find, extract, analyze, protect, publish and archive business content across the extended enterprise from anywhere in the world. Hummingbird Connectivity is a host access product suite that includes software applications for accessing mission-critical back office applications and related data from the majority of today’s systems, including mainframe, AS/400, Linux and UNIX platform environments.
The results of operations of Hummingbird will be consolidated with those of Open Text beginning October 2, 2006.
Consideration for this acquisition consisted of approximately $494.0 million in cash which includes $21.1 million associated with the open market purchases of Hummingbird shares.
OPEN TEXT CORPORATION
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For the Three Months Ended September 30, 2006
(Tabular dollar amounts in thousands of U.S. Dollars, except per share data)
Hummingbird Stock Option Plan
On October 2, 2006, the Company established the Hummingbird Stock Option Plan to provide long-term incentives to attract, motivate and retain certain key: (i) employees, (ii) officers and directors, and (iii) consultants of Hummingbird. Approximately 355,675 options were granted by the Company during October 2006 under this plan.
The preliminary allocation of the purchase price to the fair value of net assets acquired had not been concluded as of the date of the filing of this Quarterly Report under Form 10-Q. The Company expects the preliminary allocation to be completed on or before December 15, 2006.
As of September 30, 2006, a director of the Company earned approximately $100,000 in consulting fees for assistance with the acquisition of Hummingbird. These fees will be included in the purchase price allocation. The director abstained from voting on the Hummingbird acquisition transaction.
New Credit Agreement and termination of existing $40 million line of credit
On October 2, 2006, the Company entered into a $465.0 million Credit Agreement with a Canadian chartered bank (the “Bank”), consisting of a $390.0 million term loan facility (the “Term Loan”) and a $75.0 million committed revolving term credit facility (the “Revolver”).
The Term Loan repayments are equal to approximately $4.7 million per year, paid quarterly for a period of 7 years, with the remainder due at the end of the term. The Term Loan contains floating and fixed rate interest options. The Revolver has a 5 year term with no fixed repayment date prior to the end of the term.
On October 2, 2006, the Company terminated its CDN $40.0 million line of credit with the Bank. The Company was required to terminate this line of credit prior to executing the Credit Agreement. As of the date of termination, there were no borrowings outstanding on the CDN $40.0 million line of credit, nor were there any termination penalties.
Exit Plan
On October 5, 2006, the Company committed to a plan to terminate various employees and abandon certain excess facilities (the “exit plan”). The Company expects to incur severance and other employee termination costs as well as contract termination costs. The Company expects to determine the estimates of the amounts expected to be incurred in connection with the exit plan on or before December 31, 2006.
Gauss Squeeze Out
On October 27, 2006, the Squeeze Out was registered in the Commercial Register in the Local Court of Hamburg. For further details relating to the Squeeze Out refer to Note 15 “Commitments and Contingencies” in these Notes to the Interim Financial Statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation
~~Certain statements in~~In addition to historical information, this Quarterly Report on Form 10-Q ~~constitute~~contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of ~~1995. Statements~~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. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “could,” “would,” “might,” “will” and variations of these words or similar expressions are intended to identify forward-looking statements. In addition, any statements that ~~express or involve discussions with respect~~refer to ~~predictions,~~ expectations, beliefs, plans, projections, objectives, ~~assumptions~~performance or other characterizations of future events or performance or the outcome of litigation (often, but not always, using words or phrases such as “believes”, “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate” or “intends” or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken or achieved)circumstances, including any underlying assumptions, are ~~not statements of historical fact and may be “forward-looking statements”. Such~~forward-looking statements. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed herein and in the notes to our financial statements for the three months ended September 30, 2006, certain sections of which are incorporated herein by reference as set forth in Part II Item 1A “Risk Factors” of this report. 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. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements. You should carefully review Part II Item 1A “Risk Factors” and other documents we file from time to time with the Securities and Exchange Commission. A number of factors ~~that~~may materially affect our business, financial condition, operating results and prospects. These factors include but are not limited to those set forth in Part II Item 1A “Risk Factors” and elsewhere in this report. Any one of these factors may cause ~~the~~our actual results ~~performance or achievements of the Company, or developments in the Company’s business or its industry,~~ to differ materially from recent results or from our anticipated future results. You should not rely too heavily on the ~~anticipated results, performance, achievements or developments expressed or implied by such~~ forward-looking ~~statements. Such risks and uncertainties include, the factors set forth in “Cautionary Statements”~~statements contained in this Quarterly Report on Form ~~10-Q. Readers should not place undue reliance on any such~~10-Q, because these forward-looking statements ~~which speak~~are relevant only as atof the date they ~~are~~were made. Forward-looking statements are based on management’s current plans, estimates, opinions and projections, and the Company assumes no obligation to update forward-looking statements if assumptions regarding these plans, estimates, opinions or projections should change. This discussion should be read in conjunction with the condensed consolidated financial statements and related notes for the periods specified. Further reference should be made to the Company’s Annual Report on Form 10-K for the fiscal year ended on June 30, 2005.
O~~VERVIEW~~OVERVIEW
About Open Text
~~Open Text is~~We are one of the market leaders in providing Enterprise Content Management (“ECM”) solutions that bring together people, processes and information. Our software combines collaboration with content management, transforming information into knowledge that provides the foundation for innovation, compliance and accelerated growth.
Purchase of Hummingbird Ltd. (“Hummingbird”)
~~Our legacy~~On October 2, 2006, we successfully closed the purchase of ~~innovation began in 1991 with~~Hummingbird, a Toronto based, global provider of ECM solutions. This transaction was the ~~successful deployment~~culmination of an offer made by us, on July 2006 to purchase all of the ~~world’s first search engine technology for~~outstanding common shares of this company.
The approximate value of this all cash transaction was $494.0 million, inclusive of our earlier purchase, in June 2006, of approximately 4.3% of issued and outstanding shares of Hummingbird.
The transaction was financed by way of a $390.0 million term loan facility from a Canadian chartered bank, Hummingbird’s cash in the ~~Internet. Today, we support almost 20~~amount of approximately $58.0 million ~~seats across 13,000 deployments in 114 countries~~ and ~~12 languages worldwide.~~
~~The Information technology (“IT”) Environment~~
the rest through the use of our available cash.
We ~~are not seeing much change in the IT environment as customers appear to be holding onto their legacy systems longer. Also, the overall purchasing patterns of customers has had a positive impact on~~believe that this acquisition will enhance our ~~results as customers utilize their existing IT budgets to spend on ECM solutions that assist in meeting regulatory~~size and ~~compliance requirements. This purchasing pattern has generally evolved in response to the heightened regulatory~~global reach and ~~compliance requirements in many industries~~will further solidify our position as a ~~result~~leading provider of ~~government policy and legislation such as the Sarbanes-Oxley Act~~ECM solutions. The union of ~~2002. However, lengthening customer sales cycles are characteristic with compliance-based sales.~~
~~Alliances~~
Our mid-term strategy is to work closer with partners, such as SAP and Microsoft, in order to respond more quickly to customers’ dynamic needs. By building close ties with strategic partners, we can leverage core competencies in ECM areas, such as archiving, records management, collaboration, search, workflow, document management and web content management, to embrace and expand on partner offerings.
Open Text isand Hummingbird will now strengthen our ability to reach a ~~Microsoft Gold Certified Partner with~~wider, more diversified audience and as such we believe the acquisition of Hummingbird will create a ~~track record for delivering powerful ECM solutions~~strong strategic fit that ~~extend Microsoft applications. Microsoft’s desktop~~adds to our “solutions focus” and ~~business platforms match well with our solutions, which meet~~will increase the ~~document management, archiving and compliance requirements of large companies and government agencies.~~
On September 19, 2005, we announced enhancements in our relationship with Microsoft. Open Text’s ECM solutions will connect directly with Microsoft’s ECM capabilities and extend the content created in “Office 12” into key business processes for industries such as Government, Pharmaceuticals, Energy, Media and Entertainment.
Our email archiving products are building momentum and we are seeing increased interest from customers in this area. For the three months ended September 30, 2005, we commenced working with Vedder Price, a legal firm specializing in compliance and legal discovery work, and also with TDCI Inc., an enterprise solutions provider, serving mid-market and
large organizations and Trusted Edge Inc., a company that is setting new standards in retention management and compliance software, to penetrate the legal “vertical” market with email archiving solutions.
~~Customers~~
Our customer base is diversified by industry and geography. This is the result of a continued focus on selling to the 2,000 largest global organizations as the primary target market. We continue to see regulatory requirements as a key business driver and the majority of new customer sales in the first quarter of fiscal 2006 were driven by our customers’ compliance-based requirements. Industries such as Government, Pharmaceutical and Life Sciences, Oil and Gas, and Financial Services have greater demand for specific software solutions to solve compliance-based business problems. We have created specific ECM software solutions to address this demand and continue to work closely with customers and their strategic partners to ensure maximization of their software investments.
~~We scored a number of competitive “wins” during the quarter ended September 30, 2005.~~
~~DuPont Inc., a leading manufacturer, purchased Livelink for SAP document management for 5,600 users;~~
~~Bayer Inc., a leading pharmaceutical company, purchased Livelink for email archiving of Lotus notes for 35,000 users; and~~
Palm Harbor Times, a provider of manufactured and modular homes, purchased Livelink for “production imaging” with the intention of supporting over 100 scanning stations and is to be used by approximately 300 users.
~~Special Charges~~
During the quarter ended September 30, 2005, we recorded special charges of $18.1 million. This is made up of $16.4 million of restructuring expenses, $2.0 million of capital asset write-downs and a recovery of $303,000 relating to the 2004 restructuring.
The 2006 restructuring relates primarily to a reduction in our workforce and abandonment of excess facilities. The restructuring has impacted both our North American and European operations. The restructuring is being done primarily with a view to streamline our operations. Overall we expect the total restructuring charge to be in the range of approximately $20 to $30 million. All significant actions in relation to the restructuring are expected to be completed by the end of the fiscal 2006 year.
The asset write-downs relate to capital assets that were written down to fair value, various leasehold improvements at vacated premises and redundant office equipment. Fair value was determined based on our best estimate of disposal proceeds, net of anticipated costs to sell.
~~Further details relating to Special charges are provided in the “Operating Expenses” section of this document.~~
~~Waterloo Building~~
In July 2004, we entered into a commitment to construct a building in Waterloo, Ontario, with the objective of consolidating our existing facilities in Waterloo. The construction of the building was completed in October, 2005. The facility consists of four floors and occupies approximately 112,000 square feet. We have financed this investment through our working capital. As of September 30, 2005, approximately $15.4 million had been capitalized on this project and on October 17, 2005 we commenced usage of the building.
~~CRITICAL ACCOUNTING POLICIES AND ESTIMATES~~
Our interim condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). These accounting principles were applied on a basis consistent with those of the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended June 30, 2005 filed with the United States Securities and Exchange Commission (“SEC”), with the exceptionreach of our adoption of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004) “Share-based payments” (“SFAS 123R”) as described below.
The preparation of consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenues, bad debts, investments, intangible assets, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed at the time to be reasonable under the circumstances. Under different assumptions or conditions, the actual results will differ, potentially materially, from those previously estimated. Many of the conditions impacting these assumptions and estimates are outside of the Company’s control.
The critical accounting policies affecting significant judgments and estimates used in the preparation of our condensed consolidated financial statements have been applied as outlined in our Annual Report on Form 10-K for the fiscal year ended June 30, 2005 filed with the SEC. Under different assumptions or conditions, the actual results will differ, potentially materially, from those previously estimated. Many of the conditions impacting these assumptions and estimates are outside of our control.
~~Adoption of SFAS 123R~~
On July 1, 2005, the Company adopted the fair value-based method for measurement and cost recognition of share-based compensation under the provisions of FASB SFAS 123R, using the modified prospective application transitional approach. Previously, we had been accounting for employee share-based compensation using the intrinsic value method, which generally did not result in any compensation cost being recorded for stock options where the exercise price was equal to the market price of the underlying shares on the date of grant.
Our stock option plans are now accounted for under SFAS 123R. The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option-pricing model. For the three months ended September 30, 2005, no options were granted by Open Text. For the three months ended September 30, 2004, the fair value of each option was estimated using the following weighted –average assumptions: expected volatility of 60%; risk-free interest rate of 3%; expected dividend yield of 0%; expected life of 3.5 years. Expected option lives and volatilities are based on our historical data.
Share-based compensation cost included in the statement of operations for the three months ended September 30, 2005 was approximately $1.4 million. Additionally, deferred tax assets of $169,000 were recorded in relation to the tax effect of certain stock options that are eligible for a tax deduction when exercised. As of September 30, 2005, the total compensation cost related to unvested awards not yet recognized is $10.6 million which will be recognized over a weighted average period of 2 years.
We made no modifications to the terms of our outstanding share options in anticipation of the adoption of SFAS 123R. Also, we made no changes in either the quantity or type of instruments used in our share option plans or the terms of our share option plans.
Additionally, effective July 1, 2005, we amended the terms of our Employee Share Purchase Plan (“ESPP”) to set the amount at which shares may be purchased to 95% of the average market price on the last day of the purchase period. As a result of the amendments, the ESPP is no longer considered a compensatory plan under the provisions of SFAS 123R, and as a result no compensation cost is recorded related to the ESPP.global partner program.
R~~ESULTS~~OF O~~PERATIONS~~Results of Operations
~~Overview~~
The following table presents an overview of ~~the results of~~our selected financial data.

Three months ended
September 30,

(in thousands)
   2006 2005 Change in $ % Change
Total revenue
   $ 101,155 $ 92,630 $ 8,525 9.2 %
Cost of revenue
   34,239 33,083 1,156 3.5 %
Gross profit
   66,916 59,547 7,369 12.4 %
Amortization of acquired intangible assets
   2,382 2,222 160 7.2 %
Special charges (recoveries)
   (468 ) 18,111 (18,579 ) (102.6 %)
Other operating expenses
   53,995 55,801 (1,806 ) (3.2 %)
Income (loss) from operations
   11,007 (16,587 ) 27,594 N/A
Net income (loss)
   7,301 (12,868 ) 20,169 N/A
Gross margin
   66.2 % 64.3 %
Operating margin
   10.9 % (17.9 %)
In Fiscal 2006, we announced that our operational focus was on increasing near-term profitability by streamlining our operations.:

   Three months ended
September 30,

(in thousands)
   2005
2004
Change in $
% Change

Total revenue
   $ 92,630 $ 85,596 $ 7,034 8.2 %
Cost of revenue
   28,644 26,302 2,342 8.9 %
Gross profit
   63,986 59,294 4,692 7.9 %
Operating expenses
   80,573 59,866 20,707 34.6 %
Loss from operations
   (16,587 ) (572 ) (16,015 ) 2799.8 %
Net loss
   (12,868 ) (986 ) (11,882 ) 1205.1 %
Gross margin
   69.1 % 69.3 %
Operating margin
   (17.9 %) (0.7 %)
~~The results for the three months ended September 30, 2005 are within our expectations and are in line with what we had set out to achieve within this period. Historically,~~ In the first quarter of Fiscal 2006, our Board approved and we began to implement restructuring activities to streamline our operations and consolidate our excess facilities, (“Fiscal 2006 restructuring plan”). In this current quarter of Fiscal 2007, we are pleased to see our efforts materializing. Revenue has ~~always been our lowest quarter.~~
~~Our total revenues~~ increased ~~8.2% from $85.6 million~~by 9.2% in the three months ended September 30, ~~2004~~2006 compared to ~~$92.6 million for the three months ended September 30, 2005. Before the impact of Special charges, the operating margin was 1.64% in the quarter ended September 30, 2005 versus a (0.7%) loss in~~ the same period in the prior fiscal ~~year.~~
~~Our results for~~year, while costs of revenue have increased only slightly by 3.5% in the three months ended September 30, 2005 were positively impacted by several large license deals that closed during the quarter. Approximately 29% of revenue this quarter was generated from new customers and 71% was generated from our installed base, which is in line with our performance in2006 compared to the same period in the prior fiscal year. As a result we have seen our gross profit increase by over 12.0% compared to the same quarter in the prior fiscal year. We believe our Fiscal 2006 restructuring initiative has been successful and we expect to continue to see savings in Fiscal 2007. Absent the impact of the restructuring initiative, operating income increased by $9.0 million, in the current quarter compared to the same period in the prior fiscal year, due to a combination of stronger gross margins and a general decrease in operating loss in the aftermath of the restructuring initiative.
Going forward we will continue to strive to provide customers with an independent alternative to manage information in a compliant and transparent way, while ensuring that content is safe, searchable and readily accessible. We have already taken steps to solidify our position with the acquisition of Hummingbird. In addition, we are seeing the ECM market growing by approximately 8% to 12% a year. With ~~respect~~the acquisition of FileNet Inc. by IBM Corporation, in August 2006, we are now positioned as one of the largest independent providers of ECM solutions in the market, and we think that our independence will help us to compete more effectively, primarily because system integrators will appreciate our neutrality and will want to work with us, over vendors who may be seen as competitors.
We will also continue to adapt to market changes in the ECM sector by developing new solutions, leveraging our existing solutions and utilizing our partner programs to reach new customers, ~~we have noted that~~and to serve existing customers more effectively. We also expect to announce the ~~majority~~“formal” release of ~~these customers are purchasing email archiving and content management solutions for their business. This~~Livelink ECM version 10.0, our next major product release, during the second quarter of Fiscal 2007. Livelink 10.0 is a ~~trend~~higher “value-added” application that ~~is expected~~will offer the ability to ~~continue especially as an increasing number~~connect with or interact with various platforms from other vendors.
An analysis of each of the components of our ~~partners are incorporating these products into their business solutions.~~
“Results of Operations” follows:
Revenues
Revenue by Product Type
The following tables set forth ~~the increase in~~our revenues by product and as a percentage of the related product revenue for the periods indicated:

   Three months ended
September 30,

(In thousands)
   2005
   2004
   Change in $
   % Change

License
   $ 24,943    $ 23,904    $ 1,039    4.3 %
Customer support
   46,646    40,792    5,854    14.4 %
Services
   21,041    20,900    141    0.7 %




Total
   $ 92,630    $ 85,596    $ 7,034    8.2 %





   Three months ended
September 30,

(% of total revenue)
   2005
2004

License
   26.9 % 27.9 %
Customer support
   50.4 % 47.7 %
Services
   22.7 % 24.4 %


Total
   100.0 % 100.0 %


   Three months ended
September 30,
(In thousands)
   2006 2005 Change in $    % Change
License
   $ 28,825 $ 24,943 $ 3,882    15.6 %
Customer support
   48,288 45,324 2,964    6.5 %
Services
   24,042 22,363 1,679    7.5 %

Total
   $ 101,155 $ 92,630 $ 8,525    9.2 %

   Three months ended
September 30,
(% of total revenue)
       2006         2005
License
   28.5 % 26.9 %
Customer support
   47.7 % 48.9 %
Services
   23.8 % 24.2 %

Total
   100.0 % 100.0 %

License Revenue
License revenue consists of fees earned from the licensing of software products to customers.
License revenue increased ~~marginally~~ in the three months ended September 30, ~~2005,~~2006 compared to the same period in the prior fiscal year, primarily due to increases in license sales in Europe—which contributed to 90% of this increase along with an 11% increase contributed by ~~4.3% or $1.0 million.~~
~~During the first quarter~~“Other” countries and offset by a slight decrease in North America of ~~fiscal 2006~~1%. Overall, we ~~had 3 transactions that were greater than $1 million versus one such transaction in the first quarter~~generated 35% of fiscal 2005. In addition to this, there were 10 transactions which were greater than $500,000 versus 3 transactions in same quarter last year. Sales cycles are continuing to lengthen around larger deals as customers are electing to increase not just the size but also the “mix” of their ECM deployments. The average deal size during the first quarter of fiscal 2006 was approximately $270,000 compared to $220,000 in the first quarter of fiscal 2005.
license revenue from new customers.
Customer Support Revenue
Customer support revenue consists of revenue from ~~the Company’s software maintenance contracts and~~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 revenue is generated from such support and maintenance agreements relating to current year sales of software products and from the renewal of existing maintenance agreements for software licenses sold in prior periods. As our installed base grows, the renewal rate has a larger influence on customer support revenue than the current software revenue growth. Therefore, changes in customer support revenue do not necessarily correlate directly to the changes in license revenue in a given period. Typically the term of these support and maintenance ~~contracts~~agreements is twelve months, with customer renewal ~~options, and we~~options. We have historically experienced a ~~90%~~ renewal rate over 90% but continue to encounter pricing pressure from our customers during contract negotiation and renewal. New license sales create additional customer support agreements which ~~drives,~~contribute substantially to the increase in our customer support revenue. ~~Additionally, customer~~
Customer support revenue ~~is directly related to software licenses sold in prior periods.~~
~~Customer support revenues~~ increased ~~14.4% from $40.8 million~~ in the three months ended September 30, ~~2004~~2006 compared to ~~$46.6 million~~the same period in the ~~three months ended September 30, 2005~~.~~The increase~~prior fiscal year, primarily because we saw, (and in ~~customer support revenues was attributable to strong retention rates with existing customers~~almost equal amounts), increases in North America and Europe, offset by a marginal decrease in the ~~“downstream” effect of licenses sold in prior quarters.~~other countries.
Service Revenue
Service revenue consists of revenues from consulting contracts and contracts to provide training and integration services.
Service ~~revenues remained relatively stable with a slight increase of 0.7% from $20.9 million~~revenue grew modestly in the three months ended September 30, ~~2004~~2006, compared to ~~$21.0 million~~the same period in the ~~three months ended September 30, 2005.~~
prior fiscal year. We are pleased to see such growth, as historically service revenue is lower in the first quarter of the fiscal year due to both our employees and our customers taking vacation time during this period, resulting in lower billable hours. We continue to see demand in North America for our SAP related ECM services, with revenue from North America growing by approximately 12%. We expect this trend to continue in the future. Our growth in North America was offset by a decrease in revenue from our global services outside of North America.
Revenue and Operating Margin by ~~Segment~~Geography
The following table sets forth information regarding our revenue by ~~geography:~~
geography.
Revenue by Geography

   Three months ended
September 30,

Three months ended
September 30,

(In thousands)
   2005
2004
   2006 2005
North America
   $ 46,229 $ 34,933    $ 48,732 $ 46,229
Europe
   41,432 44,306    47,451 41,432
Other
   4,969 6,357    4,972 4,969



Total
   $ 92,630 $ 85,596    $ 101,155 $ 92,630



   Three months ended
September 30,
   Three months ended
September 30,
% of Total Revenue
   2005
2004
   2006 2005
North America
   49.9 % 40.8 %    48.2 % 49.9 %
Europe
   44.7 % 51.8 %    46.9 % 44.7 %
Other
   5.4 % 7.4 %    4.9 % 5.4 %



Total
   100.0 % 100.0 %    100.0 % 100.0 %



~~The overall increase~~Overall, we have seen increased revenue growth in ~~North America was a direct~~all three segments in which we operate. In the three months ended September 30, 2006, we have increased the number of our deal transactions by 5%, compared to the same period in the prior fiscal year. In addition, 11% of our transactions were the result of ~~the ramping up of~~ our ~~sales force~~global partner program, reinforcing our belief that ~~was done in previous quarters.~~
our program continues to be successful.
~~In the context of license revenues, all regions contributed to the first quarter results, with~~ North America ~~accounting for 58.5%, while Europe and “Other” accounted for 41.5% of license revenues. This compares to 39.5% and 60.5%, respectively in the same quarter last year.~~
The North America geographic segment includes Canada, the United States and Mexico.
Revenues in North America increased in the three months ended September 30, 2006, compared to the same period in the prior fiscal year, primarily as a result of the North American market showing greater interest in our ECM and SAP solutions. Overall, 48% of our revenue was generated from this segment in the three months ended September 30, 2006.
Europe
The Europe geographic segment includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Norway, Spain, Sweden, Switzerland and the United ~~Kingdom, while~~Kingdom.
Revenues in Europe increased strongly in the ~~“Other”~~three months ended September 30, 2006, compared to the same period in the prior fiscal year, primarily as a result of significant growth in license and customer service revenues in Europe. We did particularly well in both the UK and the Nordic regions, however, the rest of Europe also met their targets.
Other
The “other” geographic segment includes Australia, Japan, Malaysia, and the Middle East region.
Revenues from our “other” segments increased only slightly in the three months ended September 30, 2006 compared to the same period in the prior fiscal year.
Adjusted Operating Margin by Significant Segment
The following table provides a summary of ~~our~~the Company’s adjusted operating margins by significant segment.

   Three months ended
September 30,
   Three months ended
September 30,
   2005
2004
       2006         2005
North America
   12.3 % 4.0 %    21.0 % 12.3 %
Europe
   9.3 % 6.4 %    16.7 % 9.3 %
~~The above~~Our adjusted operating margins have increased in all geographies in the first quarter of Fiscal 2007 compared to the same period in Fiscal 2006 on account of our customers being increasingly interested in purchasing a complete ECM platform which generally involves a larger dollar value transaction. This has the effect of lengthening lead times for new and existing opportunities.
Adjusted operating margin is a non-GAAP financial measure. Such non-GAAP financial measures have certain limitations in that they do not have a standardized meaning and thus our definition may be different from similar non-GAAP financial measures used by other companies. We use this financial measure to supplement the information provided in our consolidated financial statements, which are presented in accordance with U.S. GAAP. The presentation of adjusted operating margin is not meant to be a substitute for net income presented in accordance with U.S. GAAP, but rather should be evaluated in conjunction with and as a supplement to such U.S. GAAP measures. Adjusted operating margin is calculated based on net income ~~(loss)~~ before including the impact of amortization ~~interest,~~of acquired intangibles, special charges, other income/expense, share-based compensation ~~other expense, special charges~~expenses and the provision for taxes. These items are excluded based upon the manner in which our management evaluates our business. We believe the provision of this non-GAAP measure allows our investors to evaluate the operational and financial performance of our core business using the same evaluation measures that we use to make decisions. As such we believe this non-GAAP measure is a useful indication of our performance or expected performance of recurring operations and may facilitate period-to-period comparisons of operating performance.
A reconciliation of our adjusted operating margin to net income ~~taxes.~~as reported in accordance with U.S. GAAP is provided below:

Adjusted operating margins in North America increased by 8.3% from 4.0% in the first quarter of fiscal 2005 compared to 12.3% in the first quarter of fiscal 2006 and operating margins in Europe increased by 2.9% from 6.4% in the first quarter of fiscal 2005 compared to 9.3% in the first quarter of fiscal 2006. These variances were primarily the result of better management of expenses as a consequence of the restructuring that we undertook in the three months ended September 30, 2005. Additionally, the ramping up of the North American sales force that was initiated in fiscal 2005 is now beginning to show positive results.

Three months ended
September 30,

   2006 2005
Revenue

North America
   $ 48,732 $ 46,229
Europe
   47,451 41,432
Other
   4,972 4,969

Total revenue
   $ 101,155 $ 92,630

Adjusted income

North America
   $ 10,223 $ 5,701
Europe
   7,908 3,865
Other
   1,158 97

Total adjusted income
   19,289 9,663
Less:

Amortization of acquired intangible assets
   7,228 6,853
Special charges (recoveries)
   (468 ) 18,111
Share-based compensation
   1,267 1,413
Other expense (income)
   (373 ) 524
Provision for (recovery of) income taxes
   4,334 (4,370 )

Net income (loss)
   $ 7,301 $ (12,868 )

Cost of Revenue 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:
Cost of Revenue:

   Three months ended
September 30,

(In thousands)
   2005
   2004
   Change in $
   % Change

License
   $ 2,388    $ 2,154    $ 234    10.9 %
Customer Support
   7,652    7,494    158    2.1 %
Service
   18,604    16,654    1,950    11.7 %




Total
   $ 28,644    $ 26,302    $ 2,342    8.9 %





   Three months ended
September 30,

Gross Margin %
   2005
2004

License
   90.4 % 91.0 %
Customer Support
   83.6 % 81.6 %
Service
   11.6 % 20.3 %


Total
   69.1 % 69.3 %


Overall gross margin was stable at 69.1% in the first quarter of fiscal 2006, versus 69.3% in the first quarter of fiscal of 2005. This margin was impacted by traditionally lower license revenue in our first quarter of fiscal 2006, and lower utilization levels in professional services typically experienced during the summer months, particularly in Europe.

Three months ended
September 30,

(In thousands)
   2006 2005 Change in $ % Change
License
   $ 2,800 $ 2,388 $ 412 17.3 %
Customer Support
   6,731 7,029 (298 ) (4.2 %)
Service
   19,862 19,035 827 4.3 %
Amortization of acquired technology intangible assets
   4,846 4,631 215 4.6 %

Total
   $ 34,239 $ 33,083 $ 1,156 3.5 %

   Three months ended
September 30,
Gross Margin (% of revenue)
       2006         2005
License
   90.3 % 90.4 %
Customer Support
   86.1 % 84.5 %
Service
   17.4 % 14.9 %
Cost of license revenue
Cost of license revenue consists primarily of royalties payable to third parties and product media duplication, instruction manuals and packaging expenses.
Cost of license revenues ~~has~~ increased ~~slightly~~marginally in the three months ended September 30, ~~2005,~~2006, compared to the same quarter in ~~comparison~~the prior fiscal year, primarily due to higher royalty and third party costs, in correlation with the increased license revenue we saw in this quarter compared to the same period ~~last year, mainly due to increased third party costs, production and shipping costs and reseller fees offset by lower sub-contracting costs.~~
in the prior fiscal year.
Cost of customer support revenues
Cost of customer support revenues is comprised primarily of technical support personnel and ~~their~~ related costs.
Cost of customer support revenues ~~increased 2.1% from $7.5 million~~decreased slightly in the three months ended September 30, ~~2004~~2006, compared to ~~$7.7 million~~the same period in the ~~three months ended September 30, 2005. The increase is attributable~~prior fiscal year primarily toas the result of a ~~higher revenue base. Gross margins remained relatively consistent at 83.6%~~decrease in labor and ~~81.6% in the three months ended September 30, 2005 and 2004, respectively.~~
labor related expenses.
Cost of service revenues
Cost of service revenues ~~consist~~consists primarily of the costs of providing integration, customization and training with respect to our various software products. The most significant component of these costs is personnel related expenses. The other components include travel costs and third party subcontracting.
Cost of service revenues increased ~~11.7% from $16.7 million~~ in the three months ended September 30, ~~2004~~2006 compared to ~~$18.6 million~~the same period in the prior fiscal year as a result of increased revenues. The increase in costs was lower than the increase in revenues, which favorably increased services’ gross margins in the current quarter compared to the same period in the prior year. This favorable increase in margins was in part due to a reclassification of revenue and expenses we made between Customer support and Service. For further details regarding this reclassification please see Note 1 “Basis of Presentation” under Part I of this Quarterly report on Form 10-Q.
Amortization of acquired technology intangible assets
Amortization of acquired intangible assets includes the amortization of patents and customer assets. Amortization of acquired technology is included as an element of cost of sales. The slight increase in amortization of acquired technology intangible assets in the three months ended September 30, ~~2005. Gross margins decreased from 20.3%~~2006, compared to the same period in the ~~three months ended September 30, 2004 to 11.6% in the three months ended September 30, 2005. The decrease~~prior fiscal year, is primarily ~~attributable to changes~~the result of additional amortization resulting from the increase in ~~the method~~our ownership of ~~allocation of IXOS costs in the amount of approximately $700,000 and the remainder due to lower utilization levels in Europe.~~IXOS.
Operating Expenses
The following table sets forth total operating expenses by function and as a percentage of total revenue for the periods indicated:

   Three months ended
September 30,
   $ Change
% Change

(In thousands)
   2005
   2004

Research and development
   $ 16,550    $ 14,683    $ 1,867 12.7 %
Sales and marketing
   26,113    25,497    616 2.4 %
General and administrative
   10,437    11,858    (1,421 ) (12.0 )%
Depreciation
   2,509    2,399    110 4.6 %
Amortization of acquired intangible assets
   6,853    5,429    1,424 26.2 %
Special charges
   18,111    —      18,111 N/A




Total
   $ 80,573    $ 59,866    $ 20,707 34.6 %




   Three months ended
September 30,

(in % of total revenue)
   2005
2004

Research and development
   17.9 % 17.2 %
Sales and marketing
   28.1 % 29.8 %
General and administrative
   11.3 % 13.9 %
Depreciation
   2.7 % 2.8 %
Amortization of acquired intangible assets
   7.4 % 6.3 %
Special charges
   19.6 % N/A

Three months ended
September 30,

(In thousands)
   2006 2005 $ Change % Change
Research and development
   $ 14,179 $ 15,745 $ (1,566 ) (9.9 %)
Sales and marketing
   24,557 24,901 (344 ) (1.4 %)
General and administrative
   12,267 12,646 (379 ) (3.0 %)
Depreciation
   2,992 2,509 483 19.3 %
Amortization of acquired intangible assets
   2,382 2,222 160 7.2 %
Special charges (recoveries)
   (468 ) 18,111 (18,579 ) (102.6 %)

Total
   $ 55,909 $ 76,134 $ (20,225 ) (26.6 %)

   Three months ended
September 30,
(in % of total revenue)
       2006         2005
Research and development
   14.0 % 17.0 %
Sales and marketing
   24.3 % 26.9 %
General and administrative
   12.1 % 13.7 %
Depreciation
   3.0 % 2.7 %
Amortization of acquired intangible assets
   2.4 % 2.4 %
Special charges
   (0.5 %) 19.6 %
Research and development expenses
Research and development expenses consist primarily of ~~engineering~~ personnel expenses, contracted research and development expenses, and ~~facilities and equipment~~facility costs.
Research and development expenses ~~increased from $14.7~~decreased by $1.6 million in the three months ended September 30, ~~2004 to $16.6 million in the three months ended September 30, 2005. The absolute dollar increase is attributable to share-based compensation costs of $445,000, and approximately $1.2 million relating~~2006 compared to the ~~cost of coding and development modules that are sold as “license add-ons” and other development costs. As a percentage of total revenues, research and development expenses remained stable at 17.9%~~same period in ~~the first quarter of fiscal 2006 versus 17.2% in the same quarter of~~ the prior fiscal ~~year.~~
year primarily due to a decrease in our labor and labor related expenses, as a result of our Fiscal 2006 restructuring initiative.
Sales and marketing expenses
Sales and marketing expenses consist primarily of ~~compensation costs related to sales~~personnel expenses and ~~marketing personnel, as well as~~ costs associated with advertising and trade shows.
Sales and marketing expenses ~~increased 2.4% from $25.5 million~~declined marginally by $344,000 in the three months ended September 30, ~~2004~~2006 compared to ~~$26.1 million~~the same period in the ~~three months ended September 30, 2005.~~prior fiscal year, primarily due to a decrease of labor and overhead and office expenses. The ~~absolute dollar~~decrease in these expenses was as a result of our Fiscal 2006 restructuring initiative. The decrease was partially offset by an increase in ~~sales~~our commission and ~~marketing~~other related operating expenses, inas the ~~first quarter~~result of ~~2006 relates primarily to share-based compensation expense of $544,000.~~
normal business activity.
General and administrative expenses
General and administrative expenses consist primarily of salaries of administrative personnel, related overhead, facility expenses, audit fees, consulting expenses and public company costs.
General and administrative expenses decreased ~~12.0% from $11.9 million~~slightly by $379,000 in the three months ended September 30, ~~2004~~2006 compared to ~~$10.4 million~~the same period in the prior fiscal year. The decrease was primarily the result of savings from our compliance and regulatory fees, which we achieved as the result of efficiencies gained from operating improvements.
Share-based compensation expense
On July 1, 2005, we adopted the fair value-based method for measurement and cost recognition of employee share-based compensation under the provisions of SFAS 123R, using the modified prospective application transitional approach. Previously, we had been accounting for employee share-based compensation using the intrinsic value method, which generally did not result in any compensation cost being recorded for stock options since the exercise price was equal to the market price of the underlying shares on the date of grant. Under SFAS 123R, we estimate the fair value of each option granted on the date of the grant using the Black-Scholes option-pricing model.
For the three months ended September 30, ~~2005. As a percentage~~2006, the weighted-average fair value of ~~total revenues, general~~options granted, as of the grant date, was $7.50 using the following weighted average assumptions: expected volatility of 47%; risk-free interest rate of 4.3%; expected dividend yield of 0%; and ~~administrative expenses decreased from 13.9% to 11.3%~~expected life of total revenues in the same period. The absolute dollar decrease in general and administrative expenses in the first quarter of 2006 over the same period in 2005 relates primarily to a decrease of $929,000 relating to consulting and an additional decrease of $515,000 of legal expenses.4.5 years.
~~Depreciation expenses~~
~~Depreciation expenses increased slightly by $110,000~~We granted no stock options during the three months ended September 30, ~~2005 compared~~2005.
Share-based compensation cost included in the statement of income for the quarter ended September 30, 2006 was approximately $1.3 million. Additionally, deferred tax assets of $171,000 were recorded as of September 30, 2006 in relation to the tax effect of certain stock options that are eligible for a tax deduction when exercised. As of September 30, 2006, the total compensation cost related to unvested awards not yet recognized is $10.9 million which will be recognized over a weighted average period of approximately 2 years.
Share-based compensation cost included in the statement of income for the three months ended September 30, ~~2004. The increase~~2005 was approximately $1.4 million. Additionally, deferred tax assets of $169,000 were recorded, as of September 30, 2005 in relation to the tax effect of certain stock options that are eligible for a tax deduction when exercised. As of September 30, 2005, the total compensation cost related to unvested awards not yet recognized was $10.6 million which is to be recognized over a ~~direct result~~weighted average period of approximately 2 years.
Depreciation expenses
Depreciation expenses increased marginally in three months ended September 30, 2006 compared to the same period in the prior fiscal year, due to the inclusion of the deprecation of our Waterloo building on which depreciation ~~of capital assets acquired during~~commenced only in the ~~first~~second quarter of ~~fiscal~~Fiscal 2006.
Amortization of acquired intangible assets
Amortization of acquired intangible assets includes the amortization of ~~acquired technology~~patents and customer assets.
Amortization of acquired technology is included as an element of cost of sales. The increase in amortization of acquired intangible assets ~~increased 26.2% from $5.4 million~~ in the three months ended September 30, ~~2004~~2006, compared to ~~$6.9 million~~the same period in the ~~three months ended September 30, 2005. The~~prior fiscal year, is the result of additional amortization resulting from the increase ~~is due to the impact~~in our ownership of ~~the 2005 acquisitions, in particular the acquisition of Vista.~~
IXOS.
Special ~~Charges~~charges (recoveries)
Fiscal 2007 Restructuring
On October 5, 2006, we committed to a plan to terminate various employees and abandon certain real estate facilities as part of our integration with Hummingbird. We are currently in the process of determining the estimates
of the amounts expected to be incurred in connection with this initiative. As part of this integration, we are reducing our worldwide workforce of 3,500 people by approximately 15 percent. The restructuring actions commenced in October 2006 and to date, approximately 60 percent of these reductions have been completed. The remaining staff reductions are expected to be completed by the end of November, 2006. The staff reductions will be focused on redundant positions or areas of the business that are not consistent with the company’s strategic focus. We are also reducing 38 facilities by closing or consolidating offices in certain locations.
Fiscal 2006 Restructuring
In the first quarter ~~ended September 30, 2005, we recorded Special charges~~ of ~~$18.1 million. This is made up of $16.4 million relating to the~~Fiscal 2006, ~~restructuring and $2.0 million relating to the write down of capital assets and a recovery of $303,000 (related to the 2004 restructuring).~~
~~2006 Restructuring~~
~~During the three months ended September 30, 2005, the~~our Board approved, and we ~~commenced implementing,~~began to implement restructuring activities to streamline ~~its~~our operations and consolidate ~~its~~our excess ~~facilities.~~facilities (“Fiscal 2006 restructuring plan”). These charges relate to work force reductions, abandonment of excess facilities and other miscellaneous direct costs. Total costs to be incurred in conjunction with the Fiscal 2006 restructuring plan are expected to be ~~in the range~~approximately $22.0 million. On a quarterly basis, we conduct an evaluation of ~~$20 million to $30 million, of which $16.4 million has been recorded within Special charges in~~these balances and revise our assumptions and estimates, as appropriate. In the three months ended September 30, ~~2005. The charge consisted primarily~~2006, we recorded recoveries from special charges of ~~costs associated with workforce reduction, abandonment of excess facilities, and legal costs incurred related to the termination of facilities.~~$468,000. The provision related to workforce reduction is expected to be substantially paid by ~~June 30,~~December 31, 2006 and the ~~provision~~provisions relating to the abandonment of excess facilities, such as contract settlements and lease costs, isare expected to be paid by January 2014.
A reconciliation of the beginning and ending liability is shown ~~below:~~below.

Fiscal 2006 Restructuring Plan
   Work force
reduction
Facility costs
Other
Total

Balance as of June 30, 2005
   $ —   $ —   $ —   $ —
Accruals
   12,644 3,631 125 16,400
Cash payments
   (3,094 ) (222 ) (125 ) (3,441 )
Foreign exchange and other adjustments
   —   16 —   16


Balance as of September 30, 2005
   $ 9,550 $ 3,425 $ —   $ 12,975


Fiscal 2006 Restructuring Plan

Work force
reduction
Facility costs Other Total
Balance as of June 30, 2006
   $ 2,685 $ 4,135 $ 9 $ 6,829
Accruals (recoveries)
   (256 ) (277 ) 65 (468 )
Cash payments
   (1,042 ) (844 ) (74 ) (1,960 )
Foreign exchange and other adjustments
   (15 ) 40 —   25

Balance as of September 30, 2006
   $ 1,372 $ 3,054 $ —   $ 4,426

The following table outlines the restructuring charges we incurred under the ~~fiscal~~Fiscal 2006 restructuring plan, by segment, for the ~~quarter~~period ended September 30, ~~2005.~~2006.

Fiscal 2006 Restructuring Plan – by Segment
   Work force
reduction
   Facility costs
   Other
   Total
North America
   $ 6,531    $ 2,720    $ 56    $ 9,307
Europe
   5,565    772    66    6,403
Other
   548    139    3    690




Total charge by segment for the quarter ended September 30, 2005
   $ 12,644    $ 3,631    $ 125    $ 16,400




~~Impairment of capital assets~~
During the three months ended September 30, 2005, an impairment charge of $2.0 million was recorded against capital assets to write down to fair value, various leasehold improvements at vacated premises and redundant office equipment. Fair value was determined based on our best estimates of disposal proceeds, net of anticipated costs to sell.
Fiscal 2006 Restructuring Plan – by Segment

Work force
reduction
Facility costs Other Total
North America
   $ (181 ) $ (351 ) $ 19 $ (513 )
Europe
   (67 ) 74 51 58
Other
   (8 ) —   (5 ) (13 )

Total charge (recovery) for the period ended September 30, 2006
   $ (256 ) $ (277 ) $ 65 $ (468 )

Fiscal 2004 Restructuring
In the three months ended March 31, 2004, we recorded a restructuring charge of approximately $10 million relating primarily to ~~its~~our North America segment. The charge consisted primarily of costs associated with a workforce reduction, excess facilities associated with the integration of the IXOS acquisition, write downs of capital assets and legal costs related to the termination of facilities. On a quarterly basis we conduct an evaluation of these balances and we revise our ~~assumption~~assumptions and estimates. As part of this evaluation we recorded recoveries to this restructuring charge of $303,000 during the three months ended September 30, 2005. These recoveries represented, primarily, reductions in estimated employee termination costs and recoveries in estimates, ~~relating to accruals for abandoned facilities. The~~as appropriate. All actions relating to ~~employer workforce~~work force reduction were ~~substantially complete~~completed, and the related costs expended, as of ~~June 30, 2005.~~March 31, 2006. The provision ~~relating to~~for our facility costs is expected to be expended by ~~2014.~~2011. The activity of our provision for the 2004 restructuring ~~charges~~charge is as follows ~~since~~for the ~~beginning of the current fiscal year:~~period presented below:

Fiscal 2004 Restructuring Plan
   Work force
reduction
Facility costs
Other
   Total

Balance as of June 30, 2005
   $ 167 $ 1,878 $ —      $ 2,045
Revisions to prior accruals
   (65 ) (238 ) —      (303 )
Cash payments
   —   (197 ) —      (197 )
Foreign exchange and other adjustments
   —   (35 ) —      (35 )



Balance as of September 30, 2005
   $ 102 $ 1,408 $ —      $ 1,510



~~Other expense~~
Other expense for the quarter ended September 30, 2005, consists primarily of foreign exchange losses of $541,908. The IXOS acquisition contributed $203,357 to this foreign exchange loss in comparison to $2,730 in the first quarter of fiscal 2005.
Fiscal 2004 Restructuring Plan
   Facility costs
Balance as of June 30, 2006
   $ 1,170
Cash payments
   (133 )
Foreign exchange and other adjustments
   10

Balance as of September 30, 2006
   $ 1,047

Income taxes
We ~~operate in various~~recorded a tax ~~jurisdictions, and accordingly, our income is subject to varying rates~~provision of tax. Losses incurred in one jurisdiction cannot be used to offset income taxes payable in another. Our ability to use these income tax losses and future income tax deductions is dependent upon our operations in$4.3 million for the tax jurisdictions in which such losses or deductions arise. As of September 30, 2005 and June 30, 2005, we had total net deferred tax assets of $51.3 million and $46.8 million and total deferred tax liabilities of $36.7 million and $39.4 million, respectively.
The principal component of the total net deferred tax assets are temporary differences associated with net operating loss carry forwards. The deferred tax assets as of September 30, 2005 arise primarily from available income tax losses and future income tax deductions. We provide a valuation allowance if sufficient uncertainty exists regarding the realization of certain deferred tax assets. Based on the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax assets and tax planning strategies, a valuation allowance of $130.8 million and $127.6 million was required as of September 30, 2005 and June 30, 2005, respectively. The majority of the valuation allowance relates to uncertainties regarding the utilization of foreign pre-acquisition losses of Gauss and IXOS. We continue to evaluate our taxable position quarterly and consider factors by taxing jurisdiction such as estimated taxable income, the history of losses for tax purposes and our growth, among others. The principal component of the total deferred tax liabilities arises from acquired intangible assets purchased on the Gauss and IXOS transactions.
~~During the quarter~~three months ended September 30, ~~2005, we recorded~~2006 compared to a ~~tax~~ recovery of $4.4 million ~~compared to a tax recovery of $325,000 during~~for the ~~quarter~~three months ended September 30, ~~2004.~~
2005. This is as a result of positive net income in the current quarter (versus a loss in the same period in the prior fiscal year) and the impact of higher income being earned in jurisdictions with a higher statutory rate.
Liquidity and Capital Resources
~~Cash and Cash Equivalents~~
Cash and cash equivalents decreased $13.1 million from $79.9 million as of June 30, 2005 to $66.8 million as of September 30, 2005. This reduction is attributable primarily to the following payments: acquisition of capital assets of $5.9 million; further purchases of IXOS shares of $3.1 million; and payments relating to the prior period acquisitions of $3.2 million.
The following table summarizes the changes in our cash and cash equivalents and cash flows over the periods indicated:

   Three months ended
September 30,
$ Change
% Change

(in thousands)
   2005
2004

Net cash provided by (used in):

Operating activities
   $ 324 $ 5,116 $ (4,792 ) (93.7 %)
Investing activities
   $ (13,356 ) $ (38,651 ) $ 25,295 (65.4 %)
Financing activities
   $ 243 $ (12,178 ) $ 12,421 (102.0 %)

Three months ended
September 30,

(in thousands)
   2006 2005 $ Change
Net cash provided by (used in):

Operating activities
   $ 9,637 $ 278 $ 9,359
Investing activities
   $ (6,395 ) $ (13,356 ) $ 6,961
Financing activities
   $ 563 $ 289 $ 274
Net Cash Provided by Operating Activities ~~(“Operating Cash Flow”)~~
~~Operating~~Net cash ~~flow decreased~~provided by ~~$4.8 million from $5.1~~operating activities increased by $9.4 million in the ~~first quarter of fiscal 2005~~three months ended September 30, 2006 compared to ~~$324,000~~the same period in the ~~first quarter of~~prior fiscal ~~2006. This reduction was~~year, primarily as a result of ~~cash payments made relating to~~an increase in net income of approximately $20.2 million, an increase in the ~~2006 restructuring~~impact of ~~$3.4~~non-cash charges of $5.7 million offset by changes in operating assets and ~~a result~~liabilities of ~~severance and interest payments of $1.2 million, made on account of the legal settlement related to the fiscal 2001 acquisition of Bluebird Systems.~~
$16.5 million.
Net Cash Used in Investing Activities
Net cash used in investing activities ~~was $13.4~~decreased by approximately $7.0 million induring the three months ended September 30, ~~2005~~2006 compared to ~~$38.7~~the same period in the prior fiscal year. The overall decrease was due to a reduction in capital expenditures of $3.2 million, and reduced spending on prior period acquisitions (including IXOS) of $6.1 million. The decrease was offset by an increase in acquisition related costs of $2.3 million, which includes a payment of $829,000 for the open market purchase of Hummingbird shares in June 2006.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing increased marginally by $274,000 in the three months ended September 30, ~~2004. The reduction in usage of cash related to investing activities and was due to the fact that we did not make any acquisitions during the quarter ended September 30, 2005 as~~2006 compared to ~~the two acquisitions that we made in~~ the same period in the prior fiscal ~~year which amounted~~year. This increase was primarily due to ~~$28.7 million. Net cash used in investing activities~~increased proceeds on issuance of our common shares, offset by payments we made relating to our mortgage financing.
Commitments and Contractual Obligations
We have entered into the following contractual obligations with minimum annual payments for the ~~current quarter amounted to $13.4 million, made up~~indicated fiscal periods as follows:
   Payments due by period
   Total    2007    2008 to 2009    2010 to 2011    2012 and beyond
Long-term debt obligations
   $ 15,977    $ 813    $ 2,168    $ 12,996    $ —
Operating lease obligations *
   86,794    13,745    34,268    27,012    11,769
Purchase obligations
   4,235    1,836    1,921    478    —

   $ 107,006    $ 16,394    $ 38,357    $ 40,486    $ 11,769

* Net of $7.3 million of non-cancelable sublease income to be received from properties which we have subleased to other parties.
We recorded rental expense of $5.9 million on capital asset purchases, which related primarily to the Waterloo building; $3.2 million relating primarily to “earnouts” in connection with the Bluebird Systems and Domea acquisitions of $2.5$2.3 million and ~~$742,000 respectively; $3.1~~$3.6 million ~~relating to the acquisition of 245,373 IXOS shares; and $1.0 million in payments relating to accruals set up in relation to prior period acquisitions.~~
~~Net Cash Used in Financing Activities~~
~~Net cash provided by financing activities was $243,000 in~~during the three months ended September 30, 2006 and September 30, 2005, ~~compared~~respectively.
The long-term debt obligations are comprised of interest and principal payments on our 5 year mortgage on our headquarters in Waterloo, Ontario. For details relating to ~~net cash used~~this mortgage see Note 8 “Long-term debt and credit facilities” in ~~financing activities~~our Unaudited Notes to Condensed Consolidated Financial Statements.
IXOS domination agreements
Based on the number of ~~$12.2 million in~~minority IXOS shareholders as of September 30, 2006, the estimated amount of Annual Compensation payable to IXOS minority shareholder was approximately $130,000 for the three months ended September 30, 2004. The significant reduction of cash outflows on account of financing activities in the first quarter of fiscal 2006 was primarily due to the fact that we did not re-purchase any of our Common Shares. In addition, effective from July 1, 2005, we reduced the discount at which our employees can buy Open Text shares, under the ESPP, from 15% to 5%. This had the effect of significantly reducing the collections under the ESPP. The reduction in the discount was done so as to allow the ESPP to continue to be treated as a non-compensatory plan under SFAS 123R.
We have a CDN $10.0 million (U.S. $8.6 million) line of credit with a Canadian chartered bank, under which no borrowings were outstanding at September 30, 2005 and 2004. The line of credit bears interest at the bank’s prime rate plus 0.5% and is cancelable at any time at the option of the bank. We have pledged certain of our assets including an assignment of accounts receivable as collateral for this line of credit.
~~We are investigating additional financing options in the form of a mortgage on our new Waterloo property. However as of the date of this filing, no specific financing option has been concluded upon.~~
We financed our operations and capital expenditures primarily with cash flows generated from operations. We anticipate that our cash and cash equivalents and available credit facilities will be sufficient to fund our anticipated cash requirements for working capital, contractual commitments and capital expenditures for at least the next 12 months.
~~Commitments and Contingencies~~
~~We have entered into operating leases for premises and vehicles with minimum annual payments as follows:~~

   Payments due by period
   Total
   Less than
1 year
   1–3 years
   3–5 years
   More than
5 years
Operating lease obligations
   $ 107,395    $ 11,981    $ 37,018    $ 34,800    $ 23,596
Purchase obligations
   4,110    2,627    1,301    156    26





   $ 111,505    $ 14,608    $ 38,319    $ 34,956    $ 23,622





~~The above balance is net of $9.4 million of non-cancelable sublease income from properties sub-leased by Open Text.~~
In July 2004, we entered into a commitment to construct a building in Waterloo, Ontario with a view of consolidating our existing Waterloo facilities. The construction of the building was completed in October 2005 and we have since commenced the use of the building. As of September 30, 2005, a total of $15.4 million has been capitalized on this project. We have financed this investment through our working capital.
~~Domination agreements~~
~~IXOS Domination Agreement~~
Certain IXOS shareholders had filed complaints against the approval of the Domination Agreement and also against the authorization to delist. As a result of an out of court settlement, the complaints have been withdrawn and or settled. The out of court settlement was ratified by the court on August 9, 2005. As a result of this ratification, we recorded an amount of $144,000 as payable to minority shareholders of IXOS for the quarter ended September 30, 2005 on account of Annual Compensation. This amount has been accounted for as a “guaranteed dividend”, payable to the minority shareholders, and has been recorded as a charge to the earnings of the period. The estimated amount of Annual Compensation is currently expected to be approximately $580,000.2006. Because we are unable to predict, with reasonable accuracy, the number of IXOS minority shareholders that will be on record in future periods, we are unable to predict the amount of ~~compensation~~Annual Compensation that will be ~~recorded~~payable in future years.
~~Gauss Domination Agreement~~
~~We recorded an~~Certain IXOS shareholders have filed for a procedure granted under German law at the district court of Munich, Germany, asking the court to review the proposed amount of ~~$53,000 as~~the Annual Compensation and the Purchase Price for the amounts offered under the IXOS DA. It cannot be predicted at this stage, whether the court will increase the Annual Compensation and/or the Purchase Price.
The costs associated with the above mentioned procedure are direct incremental costs associated with the ongoing step acquisitions of shares held by the minority shareholders. These disputes are a normal and probable part of the process of acquiring minority shares in Germany. We are unable to predict the future costs associated with these activities that will be payable in future periods.
For further details relating to the IXOS domination agreement refer to Note 15 “Commitments and Contingencies” in our Unaudited Notes to Condensed Consolidated Financial Statements.
Gauss Squeeze Out
The Gauss Squeeze court administered process was successfully concluded in October 2006 and registered with the local court in Hamburg.
We have recorded our best estimate of the amount payable to the minority shareholders of Gauss ~~and a~~under the Squeeze Out. As of September 30, 2006, we had accrued $82,500 for such payments.
For further ~~amount of approximately $22,500 will be payable to these shareholders by the end of the 2006 fiscal year.~~
~~Guarantees and indemnifications~~
We have entered into license agreements with customers that include limited intellectual property indemnification clauses. We generally 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 to settle the claim at our expense or pay damages that the customers are legally required to paydetails relating to the ~~third-party claimant. These intellectual property infringement indemnification clauses generally are subject~~Gauss Squeeze Out refer to ~~limits based upon the amount of the license sale. We have not made any significant indemnification payments~~Note 15 “Commitments and Contingencies” in ~~relation~~our Unaudited Notes to ~~these indemnification clauses.~~
In connection with certain facility leases, we have guaranteed payments on behalf of our subsidiaries. This has been done through unsecured bank guarantees obtained from local banks. Additionally, our current end-user license agreement contains a limited software warranty.
We have not recorded a liability for guarantees, indemnities or warranties described above in the accompanying consolidated balance sheet since the maximum amount of potential future payments under such guarantees, indemnities and warranties is not determinable, other than as described above.
Condensed Consolidated Financial Statements.
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 ~~its~~our consolidated financial position, results of operations or 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. 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 ~~thresholds~~criteria for capitalization.
~~Cautionary Statements~~Recently Issued Accounting Standards
In September 2006, the United States Securities Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements,(“SAB 108”).SAB 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB 108 is effective for our fiscal year 2007 annual financial statements. We are currently assessing the potential impact that the adoption of SAB 108 will have on our financial statements.
~~Certain statements~~In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157,Fair Value Measurements, (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in ~~this Quarterly Report~~generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on ~~Form 10-Q constitute forward-looking statements within~~how to measure fair value by providing a fair value hierarchy used to classify the ~~meaning~~source of the ~~Private Securities Litigation Reform Act~~information. This statement is effective for us beginning July 1, 2008. We are currently assessing the potential impact that the adoption of ~~1995~~SFAS 157 will have on our financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48 on Accounting for Uncertain Tax Positions—an interpretation of FASB Statement No. 109, “Accounting for Income Taxes” (“FIN 48”). Under FIN 48, an entity should presume that a taxing authority will examine a tax position when evaluating the position for recognition and ~~are made pursuant to the safe harbor provisions of Section 27A~~measurement; therefore, assessment of the ~~Securities Act of 1933, as amended, and Section 21E~~probability of the ~~Securities Exchange Act~~risk of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, including those set forth in the following cautionary statements and elsewhere in this Quarterly Report on Form 10-Q, that may cause the actual results, performance or achievements of the Company, or developments in the Company’s industry, to differ materially from the anticipated results, performance, achievements or developments expressed or implied by such forward-looking statements. The following factors, as well as all of the other information set forth herein, should be considered carefully in evaluating Open Text and its business. If any of the following risks were to occur, the Company’s business, financial condition and results of operations would likely suffer.examination is not appropriate. In ~~that event, the trading price of the Company’s Common Shares would likely decline. Such risks are further discussed in the Company’s filings filed from time to time with the SEC.~~
~~If we do not continue to develop new technologically advanced products, future revenues will be negatively affected~~
Our success depends upon on 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 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. We continue to enhance Livelink and many of our optional components to continue to set the standard for ECM capabilities, in response to customer requests. 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 harmed.
~~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, subject to rapid technological change and are evolving rapidly. 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 products that compete with us 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 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.
~~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, 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 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. 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 with domestic and international import and export laws and regulations, costs related to localizing products for foreign markets, and costs related to translating and distributing products in a timely manner. International operations also tend to expose us to a longer sales and collection cycle, as well as potential losses arising from currency fluctuations, and limitations regarding the repatriation of earnings. Significant international sales may also expose 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, other regulatory requirements and tariffs and other trade barriers. In addition, international earnings may be subject to taxation by more than one jurisdiction, which could also materially adversely affect our results of operations. 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, exchange rates can impact revenue adversely.
~~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, and, if 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 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.
~~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 loss 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 licenses 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, 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 other products (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.
~~Our success depends on ours 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.
~~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 precede, or are not subsequently followed by, increased revenues, our business, financial condition, or results of operations could be materially and adversely affected. In addition, in July 2005, we announced an 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, including any delay in effecting these initiatives, could have a material adverse impact on our results of operations.
~~We must continue to manage our growth or our operating results could be adversely affected~~
Over the past several years, we have experienced growth in revenues, operating expenses, and product distribution channels. In addition, 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 and Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes”), which has necessitated a significant use of company resources to comply 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 National 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~~applying the provisions of ~~Sarbanes~~FIN 48, there will be distinct recognition and ~~recent rules enacted~~measurement evaluations. 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 will be measured as the maximum amount which is more likely than not, to be realized. The tax position should be derecognized when it is no longer more likely than not of being sustained. On subsequent recognition and ~~proposed by~~measurement the ~~SEC~~maximum amount which is more likely than not to be recognized at each reporting date will represent management’s best estimate, given the information available at the reporting date, even though the outcome of the tax position is not absolute or final. Subsequent recognition, derecognition, and ~~NASDAQ, have resulted~~measurement should be based on new information. A liability for interest or penalties or both will be recognized as deemed to be incurred based on the provisions of the tax law,
that is, the period for which the taxing authority will begin assessing the interest or penalties or both. The amount of interest expense recognized will be based on the difference between the amount recognized in ~~increased costs~~the financial statements and the benefit recognized in the tax return. On transition, the change in net assets due to usapplying the provisions of the final interpretation will be considered as ~~we respond~~a change in accounting principle with the cumulative effect of the change treated as an offsetting adjustment to the ~~new requirements. In particular, complying with~~opening balance of retained earnings in the ~~internal control over financial reporting requirements~~period of ~~Section 404~~transition. FIN 48 will be effective as of Sarbanes is resulting in increased internal costs and higher fees from our independent accounting firm and external consultants. The new rules also could make it more difficult for us to obtain certain typesthe beginning of ~~insurance, including director and officer liability insurance, and 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. We cannot yet estimate the amount of total additional costs we may incur or the timing of such costs as we implement these new and proposed rules.
~~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~~first annual period beginning after December 15, 2006 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 Corp., Microsoft Inc. 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 the 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 productsadopted by us ~~and our competitors, market acceptance of enhancements or products, delays in~~for 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 productsyear ended June 30, 2008. We 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 ofcurrently assessing 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 placed upon period-to-period comparisons ofFIN 48 on our financial ~~results to forecast future performance. It is likely that our quarterly revenue and operating results will vary~~
~~significantly in the future and if a shortfall in revenue occurs or if operating costs increase significantly, the market price of our Common Shares could materially decline.~~statements.

~~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. Subject to patents and patents pending, we have generally not sought patent protection for our products. While U.S. and Canadian copyright laws, international conventions and international treaties may provide meaningful protection against unauthorized duplication of software, the laws of some foreign jurisdictions may not protect proprietary rights to the same extent as the laws of Canada or the United States. Software piracy has been, and can be expected to be, a persistent problem for the software industry. Enforcement of 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” or obtain and use information that we regard as proprietary.
~~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 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 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.
~~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.
Item 3. Quantitative and Qualitative Disclosures ~~About~~about Market Risk
We are primarily exposed to market risks associated with fluctuations in ~~interest rates and~~ foreign currency exchange rates.
~~Interest rate risk~~
Our exposure to interest rate fluctuations relates primarily to our investment portfolio, since we had no borrowings outstanding under our line of credit at September 30, 2005. We primarily invest our cash in short-term high-quality securities with reputable financial institutions. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. We do not use derivative financial instruments in our investment portfolio. The interest income from our investments is subject to interest rate fluctuations, which we believe would not have a material impact on our financial position.
All highly liquid investments with a maturity of less than three months at the date of purchase are considered to be cash equivalents. We do not have investments with maturities of three months or greater. Some of the investments that we have invested in may be subject to market risk. This means that a change in the prevailing interest rates may cause the principal amount of the investment to fluctuate. The impact on net interest income of a 100 basis point adverse change in interest rates for the quarter ended September 30, 2005 would have been a decrease of approximately $0.6 million.
Foreign currency risk
Businesses generally conduct transactions in their local currency which is also known as their functional currency. Additionally, balances that are denominated in a currency other than the entity’s reporting currency must be adjusted to reflect changes in foreign exchange rates during the reporting period.
As we operate internationally, a substantial portion of our business is also conducted in currencies other than the U.S. dollar. Accordingly, our results are affected, and may be affected in the future, by exchange rate fluctuations of the U.S. dollar relative to the Canadian dollar, to various European currencies, and, to a lesser extent, other foreign currencies. Revenues and expenses generated in foreign currencies are translated at exchange rates during the month in which the transaction occurs. We cannot predict the effect of foreign exchange rate fluctuations in the future; however, if significant foreign exchange losses are experienced, they could have a material adverse effect on our results of operations. Moreover, in any given quarter, exchange rates can impact revenue adversely.
We have net monetary asset and liability balances in foreign currencies other than the U.S. Dollar, including primarily the ~~Canadian Dollar~~Euro (“~~CDN”~~EUR”), the Pound Sterling (“GBP”), the ~~Australian dollar~~Canadian Dollar (“~~AUD”~~CDN”), and the Swiss Franc (“CHF”)~~, the Danish Kroner (“DKK”), the Arabian Dirham (“AED”), and the Euro (“EUR”)~~. ~~Our cash and cash equivalents are primarily held in U.S. Dollars. We~~Currently, we do not ~~currently~~ use financial instruments to hedge operating expenses in foreign currencies. ~~We intend to assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis.~~
The following tables provide a sensitivity analysis on our exposure to changes in foreign exchange rates. For foreign currencies where we engage in material transactions, the following table quantifies the absolute impact that a 10% increase/decrease against the U.S. dollar would have had on our total revenues, operating expenses, and net income for the three months ended September 30, ~~2005.~~2006. This analysis is presented in both functional and transactional currency. Functional currency represents the currency of measurement for each of an entity’s domestic and foreign operations. Transactional currency represents the currency in which the underlying transactions take ~~place in.~~place. The impact of changes in foreign exchange rates for those foreign currencies not presented in these tables is not material.

10% Change in
Functional Currency
(in thousands)

Total
Revenue

Operating
Expenses

Net
Income
Euro
   $ 4,059    $ 3,608    $ 451
British Pound
   1,252    719    533
Canadian Dollar
   675    1,855    1,180
Swiss Franc
   927    521    406

10% Change in
Transactional Currency
(in thousands)

Total
Revenue

Operating
Expenses

Net
Income
Euro
   $ 2,641    $ 2,244    $ 397
British Pound
   1,081    745    336
Canadian Dollar
   673    1,851    1,178
Swiss Franc
   584    346    238

   10% Change in
Functional Currency
(in thousands)
   Total
Revenue
   Operating
Expenses
   Net
Income
Euro
   $ 3,469    $ 4,343    $ 874
British Pound
   1,174    921    253
Canadian Dollar
   655    1,004    349
Swiss Franc
   556    386    170
   10% Change in
Transactional Currency
(in thousands)
   Total
Revenue
   Operating
Expenses
   Net
Income
Euro
   $ 3,440    $ 4,587    $ 1147
British Pound
   1,090    725    365
Canadian Dollar
   613    153    460
Swiss Franc
   523    195    328
Item 4. Controls and Procedures
Evaluation of ~~disclosure controls~~Disclosure Controls and ~~procedures~~Procedures
As of ~~September 30, 2005,~~ the ~~Company’s~~end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of the Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of ~~the Company’s~~our disclosure controls and procedures ~~pursuant to~~as defined in Rule ~~13a~~13a-15 (e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of ~~September 30, 2005,~~ the ~~Company’s~~end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in ~~the Company’s~~our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that material information is accumulated and communicated to our management, ~~of the Company,~~ including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in ~~internal control~~Internal Controls over ~~financial reporting~~Financial Reporting
~~As a result of~~Based on the evaluation completed by our management, in which ~~the Company’s~~our Chief Executive Officer and Chief Financial Officer participated, our management has concluded that there were no changes in ~~the Company’s~~our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended September 30, ~~2005~~2006 that have materially affected, or are reasonably likely to materially affect, ~~the Company~~our internal control over financial reporting.
PART II OTHER INFORMATION

Item 1.1A. ~~Legal Proceedings~~Risk Factors
Risk Factors
In addition to historical information, this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q. 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 acquisition of Hummingbird may adversely affect our operations and finances in the short term
On October 2, 2006 we acquired all of the outstanding common shares of Hummingbird Ltd.(“Hummingbird”) for a price of $27.85 per share, which equaled a total purchase price of approximately $494.0 million. The Hummingbird shares were acquired for cash, which required us to borrow the funds from a syndicate of leading financial institutions to help to pay for the Hummingbird acquisition. The interest costs associated with this 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 ~~course~~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 all of the employees of the newly merged entity.
Our success depends on our relationships with strategic partners
We rely on close cooperation with partners for sales and product development as well as to optimize opportunities which arise in our competitive environment. 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 private intranets as well as on the Internet. Often, we 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 if we are unable to achieve a successful integration with third party software, we may not be successful in developing and marketing our 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, our operating results will materially suffer. In addition, if the
integrated or new products or enhancements do not achieve market acceptance, our operating results will materially suffer. Also, if new industry standards emerge that we do not anticipate or adapt to, our software products could be rendered obsolete and our business, as well as our ability to compete in the marketplace, 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 our proprietary 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. Since we operate in a rapidly evolving industry, the level of acceptance of products and services that have been released recently or that are planned for future release by the marketplace is not certain. If the markets for our products and services fail to develop, develop more slowly than expected or become subject to intense competition, our business will suffer. As a result, we may be unable to: (i) successfully market our current products and services, (ii) develop new software products, services and enhancements to current products and services, (iii) complete customer installations on a timely basis, or (iv) complete products and services currently under development. If our products and services are not accepted by our customers or by other businesses in the marketplace, 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 ~~various~~rapid technological change and other ~~legal matters. While~~pressures created by changes in our industry. We expect competition to increase and intensify in the ~~results~~future as the pace of ~~litigation~~technological change and ~~claims cannot~~adaptation quickens and as additional companies enter each of our markets. Numerous releases of competitive products have occurred in recent history and can be ~~predicted~~expected to continue in the near future. We may not be able to compete effectively with ~~certainty,~~current competitors and potential entrants into our marketplace. If other businesses were to engage in aggressive pricing policies with respect to competing products, or if marketplace dictated the development of significant price competition, we ~~believe that~~would need to lower our prices. This could result in lower revenues or reduced margins, either of which may materially and adversely affect our business and operating results.
We are confronting two inexorable trends in our industry; the ~~final outcome~~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 International Business Machine (“IBM”) Corporation’s acquisition of FileNet Corporation in October 2006 have changed the marketplace for our goods and services. As a result of these acquisitions, two comparable competitors to our company have been replaced by larger and better capitalized companies. In addition, other ~~matters will not~~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 ~~consolidated~~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, 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 as well as our 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 as well as the implementation of our 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 as well as in 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 as well as our own 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, as a result, 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
The decision by a customer to purchase our products often involves a comprehensive implementation process across our customer’s network or networks. As a result, 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 to implement our software, our sales cycle can tend to be longer than generally expected. Over the past fiscal year, we have experienced a lengthening of our sales cycle as customers include more personnel in their decisions 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 selling opportunities to materialize. If a customer’s decision to license our software is delayed or if the installation of our products takes longer than originally anticipated, the date on which we may recognize revenue from these licenses 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 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. In addition, regulatory limitations regarding the repatriation of earnings may adversely affect cash drawls from foreign operations. 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, as a result this delay could materially reduce operating income. 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. Subsequently, in October 2006 we announced our commitment to a separate restructuring initiative in the aftermath of our acquisition of Hummingbird. 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 the decision to terminate services which are not valued by our customers. Any failure to successfully execute these initiatives on a timely basis may have a material adverse impact on our 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 shipments to our customers. If these defects are discovered, we may not be able to successfully correct such errors in a timely manner. In addition, despite the extensive tests we conduct 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 the design defects or software errors which may become apparent only after the products are installed in an end-user’s network. The occurrence of errors and failures in our products could result in the delay or the denial of market acceptance of our products; alleviating such errors and failures may require us to make significant expenditure of our resources. The harm to our reputation resulting from product errors and failures may be materially damaging. Since, we regularly provide a warranty with our products, the financial ~~conditions.~~impact of fulfilling 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. These agreements usually contain terms such as the exclusion of all implied warranties and the limitation of the availability of consequential or incidental damages. However, such provisions may not effectively protect us against claims and the attendant liabilities and costs associated with
such claims. Although we maintain errors and omissions insurance coverage and comprehensive liability insurance coverage, such coverage may not be adequate to cover all such claims. Accordingly, any such claim could negatively affect our financial condition.
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. We rely on a combination of copyright, patent, trademark and trade secret laws, as well as non-disclosure agreements and other contractual provisions to establish and maintain our proprietary rights. Although we hold certain patents and have other patents pending, our general strategy is to not seek patent protection. 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 North America in which we seek to market our products. While U.S. 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 of the United States. Software piracy has been, and is expected to be, a persistent problem for the software industry. 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, including our competitors, 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.
Other companies may claim that we infringe their intellectual property, which could materially increase costs and materially harm our ability to generate future revenue and profits
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 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. 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 or may require us to obtain a license for the intellectual property rights of third-parties. Such licenses may not be available, or they may not be available on reasonable terms. In addition, such litigation could be disruptive to our ability to generate revenue and may result in significantly increased costs as a result of our defense against those claims or our attempt to license the patents or rework our products to ensure they comply with judicial decisions. Any of the foregoing could have a significant impact on our ability to generate future revenue and profits.
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. If such software was not available, we may experience delays or increased costs in the development of licenses for 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 by us of the license to use, or the inability by licensors to support, maintain, and enhance any of such software, could result in increased costs or in delays or reductions in product shipments until equivalent software is developed or licensed and integrated with internally developed software. Such increased costs or delays or reductions in product shipments 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 distributors or develop a sufficient number of future distributors. Distributors may also give higher priority to the sale of products other than ours (which could include competitors’ products) 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 our distributors’ decision to discontinue the sale of our products could materially reduce 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 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 heightened regulations, have placed, and will 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. In addition, our management may not be able to achieve the rapid, effective execution of the product and business initiatives necessary to successfully implement our operational and competitive strategy and 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. Our inability to manage growth or adapt to regulatory changes may also adversely affect our compliance 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 proposed and enacted by the SEC and NASDAQ, have resulted in increased costs to us as we respond to the these changes. In particular, complying with the requirements of Section 404 of Sarbanes has resulted in a higher level of internal costs and fees from our independent accounting firm and as well as from external consultants. These rules could also adversely affect our ability to obtain certain types of insurance, including director and officer liability insurance. 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.
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. In particular, the recruitment of top research developers and experienced salespeople, remains critical to our success. Competition for such people is intense, and we may not be able to attract, integrate or retain highly qualified technical, sales or managerial personnel in the future.
Our products rely on the stability of 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 Corporation, Microsoft Corporation 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 the installation of our products could have a material adverse effect on our operations in any particular quarter. Because of the impact of the timing of product introductions and the rapid evolution of our business as well as of the markets we serve, we cannot predict whether seasonal patterns experienced in the past will continue. For these reasons, reliance should not be placed upon period-to-period comparisons of our financial results to forecast future performance. It is likely that our quarterly revenue and operating results may vary significantly and which could materially reduce the market price of our Common Shares.
The volatility of our stock price could lead to losses by shareholders
The ~~Harold Tilbury~~market price of our Common Shares has been 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 that are relevant to our industry, changes in financial estimates by securities analysts or other events or factors. In addition, financial markets experience significant price and ~~Yolanda Tilbury Family Trust brought an action against~~volume fluctuations that
particularly affect the ~~Company~~market prices of equity securities of many technology companies. These fluctuations have often resulted from the failure of such companies to meet market expectations in ~~July 2002, before~~ a ~~single arbitrator, under~~particular quarter and thus may or may not be related to the ~~Ontario Arbitrations Act alleging damages for breach~~underlying operating performance of such companies. 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. Sometimes, periods of volatility in the market price of a ~~stock purchase agreement relating~~company’s securities, may lead to the ~~Company’s acquisition~~institution of ~~Bluebird Systems Inc. (“Bluebird”). The claim was for $10 million, plus $5 million in punitive damages. Bluebird and Open Text counterclaimed~~securities class action litigation against ~~the Tilburys claiming that not only was no further amount owing for the purchase of their shares, but that they were entitled to~~ a ~~return of the money already paid~~company. Due to the ~~Tilburys,~~volatility of our stock price, we could be the target of such securities litigation in ~~respect~~the future. Such litigation could result in substantial costs to defend our interests and a diversion of management’s attention and resources, each of which would have a material adverse effect on our business and operating results.
We may have exposure to greater than anticipated tax liabilities
We are subject to income taxes as well as other 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 ~~business acquisition. Bluebird also claimed damages against Harold Tilbury~~ultimate outcome with respect to the ~~lease of~~taxes we owe may differ from the ~~Bluebird premises. In April 2005,~~amounts recorded in our financial statements which may materially affect our financial results in the ~~arbitrator ruled that the sum of approximately $1.9 million, plus interest, was payable by the Company to the Tilburys under the terms of the share purchase agreement and~~period or periods for termination of employment related costs, and subsequently ruled that a further $222,000 was payable under the terms of the share purchase agreement as additional purchase consideration. The Company’s counterclaims were dismissed. A decision on reimbursement of costs had been deferred, at that date, and in August 2005 the arbitrator ruled that the sum of approximately $847,000which such determination is payable by the Company to the Tilburys on account of costs. Based on these awards, a total amount of $3.7 million was recorded as being payable to the Tilburys. This consisted of $2.5 million as additional purchase consideration, $240,000 relating to severance related costs, $85,000 relating to improvements for leasehold properties occupied by Bluebird, $754,000 relating to interest and $129,000 relating to legal costs. All amounts relating to this settlement were paid in September 2005.made.

Item 5. Other Information
~~Effective~~On October ~~24, 2003, we entered into an employment agreement with John Kirkham, which provided for an annual base salary and for an annual bonus upon~~2, 2006, the ~~attainment of certain corporate, revenue, profit and other goals~~Company established ~~from time to time. Effective November 4, 2005,~~the Open Text ~~and Mr. Kirkham entered into an amendment~~Corporation Hummingbird Stock Option Plan to provide for the ~~employment agreement~~grant of Mr. Kirkham. The amended agreement provides that, upon termination without “just cause”, we will pay Mr. Kirkham an amount equivalent to: (i) 6 months base salary; and (ii) 6 months variable compensation pay (based on average earnings over the previous 12 months). In addition, Mr. Kirkham will be entitled to receive all other benefits to which he would have been entitled during the 6-month period following termination and statutory redundancy pay. If Mr. Kirkham’s employment is terminated within 6 months following a change of control other than for just cause, disability or death, then Mr. Kirkham will be entitled to the severance entitlements set out above and allOpen Text stock options ~~granted~~ to ~~him will be deemed~~Hummingbird employees. A copy of this stock option plan is attached as an exhibit to ~~vest and shall be exercisable by him for a period of 90 days following the date of the notice of termination.~~
this quarterly report under Form 10-Q.
Item 6. Exhibits
The following exhibits are filed with this ~~Report.~~report:

Exhibit No
Number

Description of Exhibit
10.1    ~~Amended employment agreement, dated November 4, 2005 between John Kirkham and the Company~~Open Text Corporation “Hummingbird Stock Option Plan”.
31.1    Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002 (filed herewith).~~2002.
31.2    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002 (filed herewith).~~2002.
32.1    Certification of the Chief Executive Officer pursuant to 18 ~~U.S.C.~~U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002 (furnished herewith).~~2002.
32.2    Certification of the Chief Financial Officer pursuant to 18 ~~U.S.C.~~U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002 (furnished herewith).~~2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

OPEN TEXT CORPORATION
Date: November 9, ~~2005~~
2006
By:
/s/S/    JOHN SHACKLETON
John Shackleton
President and Chief Executive Officer
/~~s/    ALAN~~S/    PAUL HM~~OVERD~~CFEETERS
~~Alan Hoverd~~Paul McFeeters
Chief Financial Officer
OPEN TEXT CORPORATION
Index to Exhibits

Exhibit No
Number

Description of Exhibit
10.1    ~~Amended employment agreement, dated November 4, 2005 between John Kirkham and the Company~~Open Text Corporation “Hummingbird Stock Option Plan”.
31.1    Certification of the Chief Executive Officer, pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002 (filed herewith).~~2002.
31.2    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002 (filed herewith).~~2002.
32.1    Certification of the Chief Executive Officer pursuant to 18 ~~U.S.C.~~U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002 (furnished herewith).~~2002.
32.2    Certification of the Chief Financial Officer pursuant to 18 ~~U.S.C.~~U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002 (furnished herewith).~~2002.

4551


	September 30, 2005			June 30, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	66,767		$	79,898
Accounts receivable - net of allowance for doubtful accounts of $3,346 as of September 30, 2005 and $3,125 as of June 30, 2005		73,551			81,936
Income taxes recoverable		11,496			11,350
Prepaid expenses and other current assets		10,526			8,438
Deferred tax assets (note 5)		16,302			10,275

Total current assets		178,642			191,897
Capital assets (note 4)		39,019			36,070
Goodwill (note 10)		244,169			243,091
Deferred tax assets (note 5)		34,998			36,499
Acquired intangible assets (note 11)		121,108			127,981
Other assets		3,841			5,398

	$	621,777		$	640,936

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities (note 3)	$	75,579		$	80,468
Deferred revenues		68,345			75,227
Deferred tax liabilities (note 5)		10,221			10,128

Total current liabilities		154,145			165,823
Long-term liabilities:
Accrued liabilities (note 3)		27,149			25,579
Deferred revenues		10			103
Deferred tax liabilities (note 5)		26,442			29,245

Total long-term liabilities		53,601			54,927
Minority interest		4,245			4,431
Shareholders’ equity: (note 7)
Share capital 48,459,865 and 48,136,932 Common Shares issued and outstanding as of September 30, 2005, and June 30, 2005, respectively		410,670			406,580
Commitment to issue shares		—			813
Additional paid-in capital		23,800			22,341
Accumulated comprehensive income		20,287			18,124
Accumulated deficit		(44,971	)		(32,103	)

Total shareholders’ equity		409,786			415,755

	$	621,777		$	640,936


	Three months ended September 30, 2004
Net loss for the period
As reported	$	(986	)
Stock-based compensation		(1,350	)

Pro forma	$	(2,336	)

Net loss per share—basic and diluted
As reported	$	(0.02	)
Pro forma	$	(0.05	)


	As of September 30, 2006
	Cost		Accumulated Depreciation		Net
Furniture and fixtures	$	8,474	$	6,505	$	1,969
Office equipment		8,272		7,048		1,224
Computer hardware		67,308		56,377		10,931
Computer software		17,397		12,216		5,181
Leasehold improvements		12,400		8,196		4,204
Building		16,652		415		16,237

	$	130,503	$	90,757	$	39,746


	As of June 30, 2006
	Cost		Accumulated Depreciation		Net
Furniture and fixtures	$	8,605	$	6,360	$	2,245
Office equipment		8,281		6,992		1,289
Computer hardware		66,714		54,995		11,719
Computer software		17,023		11,737		5,286
Leasehold improvements		12,374		8,064		4,310
Building		16,726		313		16,413

	$	129,723	$	88,461	$	41,262


Balance, June 30, 2005	$	243,091
Adjustments relating to prior acquisitions		(17,470	)
Adjustments on account of foreign exchange		9,902

Balance, June 30, 2006		235,523
Adjustments relating to prior acquisitions		(671	)
Adjustments on account of foreign exchange		(887	)

Balance, September 30, 2006	$	233,965


	Technology Assets			Customer Assets			Total
Net book value, June 30, 2005	$	76,108		$	51,873		$	127,981
Activity during fiscal 2006:
Amortization expense		(18,900	)		(9,199	)		(28,099	)
Impairment of intangible assets		(1,046	)		—			(1,046	)
Foreign exchange impact		3,000			2,598			5,598
Other		(3,988	)		1,880			(2,108	)

Net book value, June 30, 2006		55,174			47,152			102,326
Activity during fiscal 2007:
Amortization expense		(4,846	)		(2,382	)		(7,228	)
Foreign exchange impact		(219	)		(140	)		(359	)
Other		10			4			14

Net book value, September 30, 2006	$	50,119		$	44,634		$	94,753


	Fiscal years ending June 30,
2007	$	20,732
2008		27,239
2009		20,863
2010		8,718
2011		6,215

Total	$	83,767


	As of September 30, 2005		As of June 30, 2005		As of September 30, 2006		As of June 30, 2006
Accounts payable - trade	$	14,032	$	18,509
Accounts payable—trade					$	4,269	$	6,077
Accrued salaries and commissions		14,100		18,976		13,467		15,020
Accrued liabilities		28,413		33,736		26,821		26,827
Amounts payable in respect of restructuring (note 14)		11,602		920
Amounts payable in respect of restructuring (note 16)						4,054		6,148
Amounts payable in respect of acquisitions and acquisition related accruals		7,432		8,327		7,741		8,463

	$	75,579	$	80,468	$	56,352	$	62,535


	As of September 30, 2005		As of June 30, 2005
Pension liabilities	$	623	$	625
Amounts payable in respect of restructuring (note 14)		2,883		1,125
Amounts payable in respect of acquisitions and acquisition related accruals		18,692		18,694
Other accrued liabilities		134		239
Asset retirement obligations		4,817		4,896

	$	27,149	$	25,579


	Balance June 30, 2005		Initial Accruals		Usage/Foreign Exchange/Other Adjustments			Subsequent Adjustments to Goodwill			Balance September 30, 2005
IXOS
Employee termination costs	$	338	$	—	$	(133	)	$	(64	)	$	141
Excess facilities		17,274		—		478			—			17,752
Transaction-related costs		2,167		—		(564	)		—			1,603

		19,779		—		(219	)		(64	)		19,496
Gauss
Excess facilities		260		—		(73	)		—			187
Transaction-related costs		298		—		(117	)		607			788

		558		—		(190	)		607			975
Eloquent
Transaction-related costs		487		—		—			(250	)		237

		487		—		—			(250	)		237
Centrinity
Excess facilities		3,928		—		157			(890	)		3,195
Transaction-related costs		651		—		35			—			686

		4,579		—		192			(890	)		3,881
Open Image
Transaction-related costs		135		—		14			—			149

		135		—		14			—			149
Artesia
Employee termination costs		50		—		(48	)		—			2
Excess facilities		821		—		(85	)		101			837
Transaction-related costs		79		—		(3	)		40			116

		950		—		(136	)		141			955
Vista
Transaction-related costs		121		—		(6	)		—			115

		121		—		(6	)		—			115
Optura
Excess facilities		172		—		(48	)		(30	)		94
Transaction-related costs		240		—		(18	)		—			222

		412		—		(66	)		(30	)		316

Totals
Employee termination costs		388		—		(181	)		(64	)		143
Excess facilities		22,455		—		429			(819	)		22,065
Transaction-related costs		4,178		—		(659	)		397			3,916

	$	27,021	$	—	$	(411	)	$	(486	)	$	26,124


	Balance June 30, 2006		Initial Accruals		Usage/ Foreign Exchange/ Other Adjustments			Subsequent Adjustments to Goodwill			Balance September 30, 2006
IXOS
Employee termination costs	$	22	$	—	$	(22	)	$	—		$	—
Excess facilities		17,401		—		(1,326	)		—			16,075
Transaction-related costs		616		—		(2	)		—			614

		18,039		—		(1,350	)		—			16,689
Gauss
Transaction-related costs		34		—		(7	)		—			27

		34		—		(7	)		—			27
Eloquent
Transaction-related costs		243		—		—			—			243

		243		—		—			—			243
Centrinity
Excess facilities		3,329		—		(69	)		—			3,260
Transaction-related costs		221		—		(148	)		(34	)		39

		3,550		—		(217	)		(34	)		3,299
Artesia
Excess facilities		761		—		(227	)		(306	)		228
Transaction-related costs		12		—		(12	)		—			—

		773		—		(239	)		(306	)		228
Vista
Transaction-related costs		6		—		—			(6	)		—

		6		—		—			(6	)		—
Optura
Excess facilities		30		—		(30	)		—			—
Transaction-related costs		12		—		—			(12	)		—

		42		—		(30	)		(12	)		—

Totals
Employee termination costs		22		—		(22	)		—			—
Excess facilities		21,521		—		(1,652	)		(306	)		19,563
Transaction-related costs		1,144		—		(169	)		(52	)		923

	$	22,687	$	—	$	(1,843	)	$	(358	)	$	20,486


	As of September 30, 2005
	Cost		Accumulated Depreciation		Net
Furniture and fixtures	$	9,779	$	7,264	$	2,515
Office equipment		4,978		3,788		1,190
Computer hardware		52,770		41,541		11,229
Computer software		13,616		10,144		3,472
Leasehold improvements		11,103		5,868		5,235
Building		15,378		—		15,378

	$	107,624	$	68,605	$	39,019


	As of June 30, 2005
	Cost		Accumulated Depreciation		Net
Furniture and fixtures	$	9,635	$	6,998	$	2,637
Office equipment		5,158		3,731		1,427
Computer hardware		52,054		40,277		11,777
Computer software		12,842		9,514		3,328
Leasehold improvements		12,695		5,473		7,222
Building		9,679		—		9,679

	$	102,063	$	65,993	$	36,070


Balance of allowance for doubtful accounts as of June 30, 2006	$	2,736
Bad debt expense for the period		720
Write-off/adjustments		(726	)

Balance of allowance for doubtful accounts as of September 30, 2006	$	2,730


	Three months ended September 30,
	2005			2004
Revenue
North America	$	46,229		$	34,933
Europe		41,432			44,306
Other		4,969			6,357

Total revenue	$	92,630		$	85,596

Adjusted income
North America	$	5,701		$	1,414
Europe		3,865			2,829
Other		97			808

Total adjusted income		9,663			5,051
Less:
Amortization of acquired intangible assets		6,853			5,429
Special charges		18,111			—
Share-based compensation		1,413			—
Other expense		524			933
Provision for income taxes		(4,370	)		(325	)

Net loss	$	(12,868	)	$	(986	)


	As of September 30, 2005			As of June 30, 2005
Segment assets
North America	$	245,134		$	238,979
Europe		322,435			343,421
Other		52,265			53,940

Total segment assets	$	619,834		$	636,340


	Options		Weighted- Average Exercise Price		Weighted – Average Remaining Contractual Term	Aggregate Intrinsic Value ($’000s)	Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value ($’000s)
Outstanding at July 1, 2005	5,530,274		$	11.93
Outstanding at June 30, 2006							5,334,016		$	12.25
Granted	—			—			450,000			17.01
Exercised	(20,950	)		7.62			(70,572	)		4.24
Forfeited or expired	(52,400	)		20.40			(50,493	)		15.78

Outstanding at September 30, 2005	5,456,924		$	11.87	5.09	11,569
Outstanding at September 30, 2006							5,662,951		$	12.70	4.67	$	29,447

Exercisable at September 30, 2005	3,837,565		$	9.85	4.27	15,888
Exercisable at September 30, 2006							3,836,709		$	10.93	3.80	$	26,742


Balance, June 30, 2004	$	223,752
Goodwill recorded during fiscal 2005:
Vista		8,714
Artesia		2,136
Optura		2,352
Adjustments relating to prior acquisitions		(822	)
Adjustments on account of foreign exchange		6,959

Balance, June 30, 2005		243,091
Adjustments relating to prior acquisitions		1,357
Adjustments on account of foreign exchange		(279	)

Balance, September 30, 2005	$	244,169


	Years ending June 30,
2006	$	27,499
2007		26,615
2008		25,983
2009		20,422
2010		8,061

Total	$	108,580


	Payments due by period										Payments due by period
	Total		Less than 1 year		1–3 years		3–5 years		More than 5 years		Total		2007		2008 to 2009		2010 to 2011		2012 and beyond
Operating lease obligations	$	107,395	$	11,981	$	37,018	$	34,800	$	23,596
Long-term debt obligations											$	15,977	$	813	$	2,168	$	12,996	$	—
Operating lease obligations *												86,794		13,745		34,268		27,012		11,769
Purchase obligations		4,110		2,627		1,301		156		26		4,235		1,836		1,921		478		—

	$	111,505	$	14,608	$	38,319	$	34,956	$	23,622	$	107,006	$	16,394	$	38,357	$	40,486	$	11,769


Fiscal 2006 Restructuring Plan	Work force reduction			Facility costs			Other			Total
Balance as of June 30, 2005	$	—		$	—		$	—		$	—
Accruals		12,644			3,631			125			16,400
Cash payments		(3,094	)		(222	)		(125	)		(3,441	)
Foreign exchange and other adjustments		—			16			—			16

Balance as of September 30, 2005	$	9,550		$	3,425		$	—		$	12,975


Fiscal 2006 Restructuring Plan – by Segment	Work force reduction		Facility costs		Other		Total
North America	$	6,531	$	2,720	$	56	$	9,307
Europe		5,565		772		66		6,403
Other		548		139		3		690

Total charge by segment for the quarter ended September 30, 2005	$	12,644	$	3,631	$	125	$	16,400


Fiscal 2004 Restructuring Plan	Work force reduction			Facility costs			Other		Total
Balance as of June 30, 2005	$	167		$	1,878		$	—	$	2,045
Revisions to prior accruals		(65	)		(238	)		—		(303	)
Cash payments		—			(197	)		—		(197	)
Foreign exchange and other adjustments		—			(35	)		—		(35	)

Balance as of September 30, 2005	$	102		$	1,408		$	—	$	1,510


Current assets, including cash acquired of $315	$	1,536
Long-term assets		114
Customer assets		700
Technology assets		1,300
Goodwill		2,321

Total assets acquired		5,971
Total liabilities assumed		(2,308	)

Net assets acquired	$	3,663


Fiscal 2004 Restructuring Plan	Facility costs
Balance as of June 30, 2006	$	1,170
Cash payments		(133	)
Foreign exchange and other adjustments		10

Balance as of September 30, 2006	$	1,047


Current assets, including cash acquired of $773	$	2,165
Long-term assets		2,714
Customer assets		1,700
Technology assets		3,300
Goodwill		1,426

Total assets acquired		11,305
Total liabilities assumed		(6,053	)

Net assets acquired	$	5,252


Current assets	$	264
Long-term assets		63
Customer assets		10,900
Technology assets		8,430
Goodwill		9,637

Total assets acquired		29,294
Total liabilities assumed		(5,603	)

Net assets acquired	$	23,691


	Three months ended September 30,
(in thousands)	2006			2005			Change in $			% Change
Total revenue	$	101,155		$	92,630		$	8,525		9.2	%
Cost of revenue		34,239			33,083			1,156		3.5	%
Gross profit		66,916			59,547			7,369		12.4	%
Amortization of acquired intangible assets		2,382			2,222			160		7.2	%
Special charges (recoveries)		(468	)		18,111			(18,579	)	(102.6	%)
Other operating expenses		53,995			55,801			(1,806	)	(3.2	%)
Income (loss) from operations		11,007			(16,587	)		27,594		N/A
Net income (loss)		7,301			(12,868	)		20,169		N/A
Gross margin		66.2	%		64.3	%
Operating margin		10.9	%		(17.9	%)


	Three months ended September 30,
(% of total revenue)	2005		2004
License	26.9	%	27.9	%
Customer support	50.4	%	47.7	%
Services	22.7	%	24.4	%

Total	100.0	%	100.0	%


	Three months ended September 30,
Gross Margin %	2005		2004
License	90.4	%	91.0	%
Customer Support	83.6	%	81.6	%
Service	11.6	%	20.3	%

Total	69.1	%	69.3	%


	Three months ended September 30,				$ Change			% Change
(In thousands)	2005		2004		$ Change			% Change
Research and development	$	16,550	$	14,683	$	1,867		12.7	%
Sales and marketing		26,113		25,497		616		2.4	%
General and administrative		10,437		11,858		(1,421	)	(12.0	)%
Depreciation		2,509		2,399		110		4.6	%
Amortization of acquired intangible assets		6,853		5,429		1,424		26.2	%
Special charges		18,111		—		18,111		N/A

Total	$	80,573	$	59,866	$	20,707		34.6	%


	Three months ended September 30,
(in % of total revenue)	2005		2004
Research and development	17.9	%	17.2	%
Sales and marketing	28.1	%	29.8	%
General and administrative	11.3	%	13.9	%
Depreciation	2.7	%	2.8	%
Amortization of acquired intangible assets	7.4	%	6.3	%
Special charges	19.6	%	N/A


	10% Change in Functional Currency (in thousands)
	Total Revenue		Operating Expenses		Net Income
Euro	$	4,059	$	3,608	$	451
British Pound		1,252		719		533
Canadian Dollar		675		1,855		1,180
Swiss Franc		927		521		406

	10% Change in Transactional Currency (in thousands)
	Total Revenue		Operating Expenses		Net Income
Euro	$	2,641	$	2,244	$	397
British Pound		1,081		745		336
Canadian Dollar		673		1,851		1,178
Swiss Franc		584		346		238