Overview

About Open Text

Open Text is one of the market leaders in providing Enterprise Content 
Management (“ECM”) solutions that bring together people, processes and 
information. The Company’s software combines collaboration with content 
management, transforming information into knowledge that provides the 
foundation for innovation, compliance and accelerated growth.

The Company’s legacy of innovation began in 1991 with the successful deployment 
of the world’s first search engine technology for the Internet. Today, Open 
Text supports approximately 20 million seats across 13,000 deployments in 114 
countries and 12 languages worldwide.


Market Trends

Over the past year the Company has witnessed numerous changes to the 
social-political landscape that have had significant impacts on the ECM market. 
Events over the past several years such as the September 11th terrorist 
attacks, the financial collapse of high-profile U.S. corporations such as Enron 
and Worldcom, as well as ensuing changes to the regulatory environment such as 
Sarbanes-Oxley and the Patriot Act have placed a significant onus on the 
private and public sectors alike to adopt compliance driven software solutions.



The volume of unstructured data being generated in organizations today is 
overwhelming and is growing exponentially. This situation creates a significant 
challenge to physically manage the storage of this content, to operationally 
manage the content so that it adds value back to the organization, and to 
legally manage the content to ensure compliance, security, and protection of 
intellectual property. Email archiving and management has emerged as a key 
solution within ECM and is seen as a significant opportunity by most ECM 
vendors.

The content and volume of email in a company is becoming one of the greatest 
business challenges today. IDC, a provider of market intelligence, advisory 
services, and events for the information technology and telecommunications 
industries, predicted that the number of email messages would grow from 9.7 
million a day in 2000 to 35 billion in 2005. This is causing the following 
business challenges:


• Overtaxed email and file servers;


• Increased system downtime;


• Expensive infrastructure overhead and administration;


• Reduced employee productivity; and


• Exposure to corporate compliance risks.



Open Text’s Email Archiving solutions provide the ability to manually or 
automatically offload emails and attachments from Microsoft Exchange or Lotus 
Domino servers without adversely affecting the email experience of employees. 
By migrating email content to more cost-effective media, organizations can 
alleviate growing demand for storage space, improve mail server performance, 
and simplify backup and restore procedures.



Simultaneously, more organizations continue to focus their attention on the 
preservation of their intellectual property and the knowledge residing 
throughout their workforces. With baby-boomers retiring, corporations have only 
recently become sensitive to the fact that a high percentage of the knowledge 
of their workforces may not be documented or archived in any organized fashion 
which future employees can retrieve. ECM software is designed to solve these 
business needs.



According to Gartner, a provider of research and analysis about the global 
information technology industry, the ECM market will exceed $1.8 billion in 
software revenue in 2009, representing a compound annual growth rate of 10%. 
They expect that this growth will be driven by companies’ increasing need to 
manage content at the enterprise level.



Although the Company recognizes the potential of the ECM market, user adoption 
of ECM has yet to reach an inflection point. Various reasons cited include: a) 
constrained IT budgets; b) unanticipated increased spending on Sarbanes-Oxley 
and other regulatory matters to consulting and service organizations; c) 
avoiding larger more strategic ECM purchase decisions due to organizational 
challenges and initial time constraints.



Consistent with experience over the past several years, the Company does not 
expect total information technology spending to increase in the near term. This 
means that the growth in ECM will continue to come at the expense of standalone 
markets that ECM has subsumed and other parts of the IT market. One area within 
information technology spending which companies are not reducing spending, and 
in many cases are increasing spending, is compliance-focused software. 
Companies are not able to defer spending to become or remain compliant with the 
regulatory environments they operate within. The Company is focused on 
capitalizing on this opportunity, particularly given the fact that compliance 
touches all employees in an organization. As a result, compliance opportunities 
can evolve into enterprise-wide deployments.



Consolidation and Acquisitions



The ECM sector has been marked by significant consolidation over the past 
several years. Sophisticated customers are demanding more robust suites of 
technology and are building out a long-term strategy to address all aspects of 
ECM. In previous years customers often purchased individual functionalities 
(“point solutions”) from separate vendors and then attempted to integrate these 
point solutions at the customer site. The largest, most financially stable 
vendors have taken advantage of their financial position by acquiring many of 
their smaller competitors in an attempt to enhance their product line. These 
smaller vendors will continue to be under increased pressure as ECM 
technologies become mission-critical. The Company expects customers will 
continue to show hesitancy to purchase from any vendor whose financial 
viability is in question. In many cases, these smaller vendors have what is 
regarded as leading technology, but they lack the financial resources to 
convince customers that they will remain in business to support and enhance 
their products for years to come. Product breadth, ease of implementation, 
rapid deployment of solutions and financial stability of the vendor are 
critical.



Through internal development and the Company’s acquisition strategy, the 
Company has created a broad product line to offer to new and existing 
customers. In Fiscal 2005, the Company made three acquisitions.



In August 2004, Open Text acquired all of the issued and outstanding shares of 
Artesia Technologies, Inc. (“Artesia”) for cash consideration of $5.8 million. 
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.



In August 2004, Open Text acquired the Vista Plus (“Vista”) suite of products 
and related assets from Quest Software Inc. (“Quest”) for cash consideration of 
$23.7 million. Vista is a technology that captures and stores business-critical 
information from ERP applications. 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.



In February 2005, Open Text acquired all of the issued and outstanding shares 
of Optura Inc. (“Optura”) for cash consideration of $3.7 million. 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 will 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.



Open Text has increased its ownership of IXOS to approximately 94% during the 
year ended June 30, 2005. This was done by way of open market purchases of IXOS 
shares. Prior to these purchases, as of June 30, 2004, the Company held 
approximately 89% of the outstanding shares of IXOS. Total consideration of 
$13.8 million was paid for the purchase of IXOS shares during the year ended 
June 30, 2005. On January 14, 2005, IXOS shareholders voted to delist the 
shares from the German stock exchange. This delisting became effective on July 
12, 2005. Subsequently, the Domination Agreement for IXOS has been officially 
registered with the Company’s intent to purchase the remaining IXOS minority 
shareholder interests.



In October 2003, Open Text acquired all the common shares of SER Solutions 
Software GmbH and SER eGovernment Deutschland GmbH (together “DOMEA 
eGovernment”) for a total consideration of $11.4 million. The purchase price 
included contingent consideration that could have been earned by the former 
shareholders of DOMEA eGovernment based on the achievement of certain revenue 
targets through December 31, 2004. The revenue targets were achieved and 
accordingly an aggregate amount of $1.6 million was recorded in the year ended 
June 30, 2005, as due and payable to the former shareholders of DOMEA 
eGovernment and was paid in cash on July 5, 2005 and in shares on September 1, 
2005.



Open Text continues to seek opportunities to acquire or invest in businesses, 
products and technologies that expand, complement or are otherwise related to 
the Company’s current business. In the near future, the focus of such 
acquisition opportunities is expected to be on smaller organizations with 
specific vertical market expertise that can be strategically leveraged. The 
Company also considers, from time to time, opportunities to engage in joint 
ventures or other business collaborations with third parties to address 
particular market segments.


Sales Strategy



The Company anticipates that it will continue to develop and market ECM related 
solutions to global organizations with an emphasis on addressing specific 
problems and specific industries. Operationally, the Company has solutions and 
sales teams that focus entirely on industry-specific or cross-industry 
line-of-business markets. The Company has key sales teams that focus on the 
following sectors: government, pharmaceutical and life sciences, financial 
services, oil and gas, and the media and entertainment sectors. The Company 
feels that customized Livelink ECM solutions designed specifically for each of 
these sectors address specific mission-critical problems that such 
organizations confront.



Open Text continues to focus on selling to its large user installed base, as it 
is an important source for sales opportunities. Moreover, the Company has 
integrated the technology and domain expertise from recent acquisitions, which 
represents new selling opportunities in the respective customer bases, wherein 
existing relationships can lead to new sales in other areas of the business. 
The Company believes the presence of such deployments will significantly 
enhance its ability to be regarded as the preferred ECM vendor of choice for a 
specific customer, when that customer is ready to make such a strategic move 
and to consolidate some or all of its component systems.



During Fiscal 2005, the Company experienced a change in the purchasing behavior 
of its ECM customers. Where customers had traditionally focused on 
collaborative functionalities when making initial software purchases, they 
began, in 2005, to look at comprehensive solutions for managing all of their 
enterprise content. Additionally, purchase decisions became more heavily 
weighted on archiving and managing records of enterprise content. The Company 
believes this change in purchasing behavior is a direct result of customer 
demand to meet compliance requirements. This type of initial sale is newer, and 
larger, for the Company, in terms of both the purchase amount and number of 
users that will deploy the software. This trend has resulted in longer sales 
cycles that could be 12 months or longer, driven both by the increased size of 
some of these transactions as well as a lengthened approval process by the 
customer. This is in contrast to past years where initial, limited-scope 
deployments with shorter sales cycles evolved into larger deployments. The 
Company will continue to place emphasis on refining its sales strategies to 
manage the changing patterns in customer demand.



In Open Text’s experience, ECM software has generally not faced pricing 
pressures when configured and marketed for specific business solutions. Rather, 
pricing of ECM solutions has remained stable as buyers place added value on 
software that will address their industry specific needs. However, the price 
point of certain ECM technology components is predictably eroding, following 
the natural commoditization of information technology. In view of this, the 
Company will continue to bundle its software components into larger solutions 
providing tangible returns for its customers.



Competitive Advantage



Historically, the Company has actively sold and marketed its products based on 
a superior return on investment and yet at a lower total-cost-of-ownership 
compared to other products offered by competing vendors. The fact that the 
Livelink ECM product line is highly configurable without end-user programming 
means that as soon as it is purchased, an organization can have it deployed 
almost immediately. By contrast, many competitive products and solutions 
require a significant amount of expensive, customized programming and service 
work, adding not only cost, but also time to the deployment cycle.



Open Text’s ECM products also have a competitive advantage of proven 
scalability in organizations of 100,000 or more users. This scalability 
advantage is a direct result of Livelink ECM’s initial design and development 
to operate on the Web. This gives the Company a direct advantage over 
competitive products that began as client-server based architecture which is an 
architecture that is inherently harder to scale.



The competitive landscape has evolved over the past year as new vendors attempt 
to try and penetrate the ECM market. Microsoft®’s SharePoint™ product has 
experienced significant recent adoption. However SharePoint is focused on 
departmental use rather than enterprise-wide deployment, and the product does 
not possess the scalability of Livelink ECM. Although SharePoint competes with 
some historical aspects of the Company’s business around team workspaces, it 
also creates new opportunities for the Company around the long-term lifecycle 
management of that SharePoint content. On August 9, 2005 the Company announced 
a partnership with Microsoft to address these opportunities by offering ECM 
archiving solutions specially designed for SharePoint users.



Open Text also continues to compete with traditional competitors such as EMC’s 
Documentum®, where document-centric requirements dominate, and with FileNet® 
where business process requirements dominate. IBM® continues to broaden its ECM 
capabilities, but is doing so in the context of its WebSphere and DB2 products 
in the hope of driving their vast integration and professional services 
business.



The Company feels that its key strategic advantages over its competition are 
the comprehensive scope of its ECM offering, its rapid deployment capabilities 
which reduce total cost-of-ownership, the integration maturity and scalability 
of its core ECM components, its customer-centric approach, and its financial 
viability.



Customers



Open Text supports approximately 20 million seats across 13,000 deployments in 
114 countries and 12 languages worldwide. The Company’s customer base is 
diversified by industry and geography, the result of a continued focus on 
licensing to the 2,000 largest global organizations as the primary target 
market. In Fiscal 2005, Open Text issued press releases for its significant 
customer related transactions as listed below:



In July 2004, the University of Southern California’s Information Sciences 
Institute (“USC-ISI”) selected the Company’s software as the foundation for its 
Web Content Management strategy. Researchers at the USC-ISI will use Livelink 
Web Content Management Server to share data and study results with fellow 
computer scientists, faculty, students, and other members of the information 
technology community.



In September 2004, SI Corporation (“SI”), a major textiles producer, selected 
the Company’s software solution to replace a manual invoicing system in its 
Accounts Payable department. Part of SI’s corporate drive to raise productivity 
and lower costs, the solution seamlessly integrates into SI’s SAP financial 
system to enable the Company to maximize its SAP investment, strengthen its 
corporate compliance strategy and reduce operating costs.



In September 2004, the British Council completed one of the most complex Web 
strategies in the UK with the help of Open Text’s Web Content Management 
software. The government-backed agency responsible for providing educational 
opportunities and cultural relations in Britain, has worked on a project to 
revamp its online presence. By consolidating its websites onto one content 
management system, the British Council expects to save USD $2.3 million by 
2005.



In October 2004, U.S. Office of Naval Research adopted Livelink software to 
improve collaboration and to better manage documents and data for the 
organization’s research projects. The solution was developed by Open Text and 
partner Formark® Ltd., the leading supplier of guided collaboration 
applications for Livelink.



In October 2004, Suncor Energy Services Inc. chose to extend its Open Text 
solutions, including IXOS Suite for SAP, and add Livelink to support integrated 
collaboration and content management activities throughout the enterprise.



In November 2004, Sandia National Labs announced its plans to implement Open 
Text’s Artesia Digital Asset Management (DAM) solution to manage its digital 
content, including a large store of historical images.



In December 2004, the Company signed a contract with Siemens Business Services 
to provide Livelink licenses to its technology partner, the BBC. With these 
licenses, Siemens will introduce a new information management system to 25,000 
managed desktop users in the BBC providing a foundation for the creation and 
maintenance of a document archive.



In January 2005, Vintage Petroleum, Inc., a growing independent oil and gas 
company with operations in the United States, South America and Yemen, 
announced it is using Livelink as a platform for business process improvements 
to increase productivity, control information, and meet compliance requirements 
associated with the Sarbanes-Oxley Act of 2002.



In February 2005, Livelink revolutionized the UK-based Transport Research 
Laboratory’s (“TRL”) information environment by converting 40 years of paper 
records to electronic files in just four months. TRL adopted an Electronic 
Document Records Management System (“EDRMS”) to rationalize documentation that 
was taking up 30 kilometers of shelf space.



In March 2005, German banking giant Norddeutsche Landesbank (“NORD/LB”) chose 
Livelink to provide a full range of ECM capabilities to support its new staff 
information portal. With the new system, staff at NORD/LB have access to a 
centralized, Web-based and customizable information system that is easy to 
maintain.



In April 2005, Major League Baseball Advanced Media, the interactive media and 
Internet company of Major League Baseball, selected Open Text’s Artesia for 
Digital Asset Management solution to provide a powerful tool for editing and 
managing its valuable and growing collection of professional baseball audio and 
video footage.



In May 2005, LVA Rheinprovinz, one of Germany’s largest insurance and pension 
firms with approximately 7 million customers, announced that it had chosen the 
Company’s new Production Document Management solution to archive and manage a 
huge store of paper documents of approximately 122 million documents in all.



In May 2005, the San Diego Blood Bank announced it would extend its Livelink 
ECM solution to improve information access and blood ordering processes, and to 
help meet regulatory requirements.



Alliances



Relationships with strategic alliance partners enhance the Company’s ability to 
deliver complete solutions on a global basis, and to ensure that the Company’s 
customers have solutions and support that enable the success of their 
businesses. Some of the more significant strategic alliances that the Company 
has secured are: Microsoft®, SAP®, Deloitte, and Accenture.



Open Text has worked with SAP, for two decades, creating integrated solutions 
that enable users to create, access, manage, and securely archive SAP content, 
data and documents. These solutions address stringent requirements for risk 
reduction, operational efficiency, and IT consolidation.



With the acquisition of Documentum by storage vendor EMC Corporation, other 
storage vendors have taken initiatives to partner with independent ECM 
providers. Open Text has strengthened its relationships with key storage 
vendors such as Hitachi Data Systems, StorageTek®, and Hewlett-Packard Company 
and the Company continues to maintain an active relationship with EMC 
Corporation. These relationships allow third party storage vendors to license 
Livelink ECM to both their existing customer base and broaden their product 
offerings when competing with other storage vendors for new customer accounts.



The Company’s objective is to grow revenues from these relationships in the 
future, and the Company will seek to leverage existing relationships as well as 
look for new opportunities. In Fiscal 2005, Open Text formed several new 
relationships as listed below:

In July 2004, Open Text announced a European alliance with Siemens Business 
Services, a fully owned subsidiary of Siemens AG. The relationship is intended 
to provide customers with a comprehensive one-stop solution for consulting and 
system design, systems integration, deployment and ongoing support.

In November 2004, Open Text formed an alliance with Deloitte Canada, a 
professional services firm, to provide ECM solutions and services to North 
American clients. Open Text and Deloitte Canada formed this relationship to 
reduce the complexity of business change, regulatory compliance and deployment, 
and help clients streamline and automate processes, connect with information 
systems, and access and manage all forms of content.

In December 2004, Open Text announced that it had extended its relationship 
with Hitachi Data Systems to provide combined ECM and storage solutions to 
large organizations. The relationship provided solutions that integrate Hitachi 
Data Systems’ advanced storage infrastructure technology with the Company’s 
leading ECM software to meet customers’ complete range of information 
management requirements.

In May 2005, Open Text announced a relationship with PureEdge to deliver new 
solutions that will help large organizations streamline and improve complex 
processes that require electronic forms.

In August, 2005, Open Text unveiled a content archiving solution for Microsoft 
SharePoint products and technologies, giving customers a powerful, long-term 
archive to store documents from SharePoint sites. The solution helps large 
organizations address the demands and rising costs of preserving huge stores of 
electronic documents for court cases and compliance mandates.



Restructuring Charge



In July 2005, Open Text announced a restructuring of its operations relating 
primarily to a reduction of its workforce and abandonment of excess facilities. 
The Company expects to take a charge of approximately $25 million to $30 
million as a result of this restructuring. In addition, the Company expects 
that 60% of this expense will be incurred relating to personnel costs and 40% 
on account of facilities. The majority of the significant actions to be 
initiated under this restructuring will be completed in the first six months of 
the Fiscal 2006 year.



As of the current date, approximately 15% of the Company’s workforce has been 
terminated and the Company expects to eventually close 27 offices worldwide. 
The Company’s near-term focus is about increasing profitability, which it is 
addressing by streamlining its organization with its recent restructuring. The 
long-term focus is about adapting to long-term changes in the ECM marketplace 
and by broadening its integrations and relationships with other vendors.



Executive Transition



In addition to his role as President, John Shackleton assumed the role of CEO 
effective July 1, 2005, replacing P. Thomas Jenkins. In his seven years at Open 
Text as President, John has led the transformation of Open Text from a single 
product technology company to a global solutions organization. During that 
time, John has recruited and developed an experienced management team, and has 
been instrumental in the integration of a variety of acquisitions. In the role 
of CEO, John will continue to oversee all the operations of the business and 
will be the primary communicator for Open Text business activities.



Effective July 1, 2005, P. Thomas (“Tom”) Jenkins assumed the role of Executive 
Chairman and Chief Strategy Officer for Open Text. In this role, Tom will 
remain a full-time employee, concentrating on leading certain strategic 
activities of the organization including potential acquisitions. Tom will serve 
an integral role ensuring that management is acting through its strategies, 
decisions and actions in the long-term interests of all the Company’s 
shareholders. In addition to encouraging a professional environment and 
productive process for the Board of Directors, Tom will also assist in setting 
the Company’s policy for communications with all stakeholders.



Anik Ganguly, took on an expanded role in Fiscal 2005 as Executive Vice 
President Operations, assuming responsibility for Business Segment Management, 
as well as the functions of Information Systems & Technology, Human Resources, 
Real Estate & Facilities Management and Legal.


Expiry of Outstanding Warrants



During Fiscal 2005, 2,376,681 warrants to acquire Common Shares that had been 
issued in connection with the acquisition of IXOS expired unexercised. The 
warrants had a carrying value of $22.3 million and this amount was reclassified 
into additional paid-in capital from warrants issued, within shareholders’ 
equity.



Waterloo Building



In July 2004, the Company entered into a commitment to construct a building in 
Waterloo, Ontario, with the objective of consolidating its existing facilities 
in Waterloo. The facility will consist of four floors and will occupy 
approximately 112,000 square feet. The cost of this project has been estimated 
to be approximately $14 million. The Company has financed this investment 
through its working capital. As of June 30, 2005, approximately $9.7 million 
had been capitalized on this project. The Company expects that its staff will 
commence usage of this facility before the end of the 2005 calendar year.



Significant Accounting Policies and Critical Accounting Estimates



The Company’s discussion and analysis of its financial condition and results of 
operations are based on its Consolidated Financial Statements, which are 
prepared in accordance with U.S. GAAP. The preparation of the Consolidated 
Financial Statements in accordance with U.S. GAAP necessarily requires the 
Company 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, the Company 
re-evaluates its estimates, including those related to revenues, bad debts, 
investments, intangible assets, income taxes, contingencies and litigation. The 
Company bases its 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.



Open Text believes that the accounting policies described below are critical to 
understanding its business, results of operations and financial condition 
because they involve significant judgments and estimates used in the 
preparation of its Consolidated Financial Statements. An accounting policy is 
deemed to be critical if it requires a judgment or accounting estimate to be 
made based on assumptions about matters that are highly uncertain, and if 
different estimates that could have been used, or if changes in the accounting 
estimates that are reasonably likely to occur periodically, could materially 
impact the Company’s Consolidated Financial Statements. Management has 
discussed the development, selection and application of its critical accounting 
policies with the audit committee of its board of directors, and the Company’s 
audit committee has reviewed its disclosure relating to its critical accounting 
policies in the “Management’s Discussion and Analysis of Financial Condition 
and Results of Operations.”



Other significant accounting policies, primarily those with lower levels of 
uncertainty than those discussed below, are also critical to understanding the 
Company’s Consolidated Financial Statements. The notes to the Consolidated 
Financial Statements contain additional information related to the Company’s 
accounting policies and should be read in conjunction with this discussion.



The following critical accounting policies affect the Company’s more 
significant judgments and estimates used in the preparation of its Consolidated 
Financial Statements:



Revenue



Open Text currently derives all of its revenues from licenses of software 
products and related services. The accounting related to revenue recognition is 
complex and affected by interpretations of the rules and an understanding of 
industry practices. As a result, revenue recognition accounting rules require 
the Company to make significant judgments. Revenue is recognized in accordance 
with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended 
by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with 
Respect to Certain Transactions, and to the extent applicable, Securities and 
Exchange Commission Staff Accounting Bulletin 104, “Revenue Recognition.”



Product license revenue is recognized under SOP 97-2 when (i) persuasive 
evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is 
fixed or determinable, and (iv) collectibility is probable and supported and 
the arrangement does not require additional services to be delivered that are 
essential to the functionality of the software.



(i) Persuasive Evidence of an Arrangement Exists—The Company determines that 
persuasive evidence of an arrangement exists with respect to a customer under 
(a) an executed license agreement, which is signed by both the customer and the 
Company, or (b) a purchase order, quote or binding letter-of-intent received 
from and signed by the customer, in which case the customer has either 
previously executed a license agreement with the Company or will receive a 
shrink-wrap license agreement with the software. Open Text does not offer 
product return rights to end-users or resellers.



(ii) Delivery has Occurred—The software may be either physically or 
electronically delivered to the customer. The Company determines that delivery 
has occurred upon shipment of the software pursuant to the billing terms of the 
arrangement or when the software is made available to the customer through 
electronic delivery. Customer acceptance generally occurs at shipment.



(iii) The Fee is Fixed or Determinable—If at the outset of the customer 
arrangement, the Company determines that the arrangement fee is not fixed or 
determinable, revenue is typically recognized when the arrangement fee becomes 
due and payable.



(iv) Collectibility is Probable—The Company determines whether collectibility 
is probable on a case-by-case basis. The Company generates a high percentage of 
license revenue from the current customer base, for which there is a history of 
successful collection. The Company assesses the probability of collection from 
new customers based upon the number of years the customer has been in business 
and a credit review process, which evaluates the customer’s financial position 
and ultimately their ability to pay. If the Company is unable to determine from 
the outset of an arrangement that collectibility is probable based upon the 
review process, revenue is recognized as payments are received.



With regard to software arrangements involving multiple elements, the Company 
allocates revenue to each element in the arrangement using the residual value 
approach. The Company’s determination of fair value of each element in 
multiple-element arrangements is based on vendor-specific objective evidence 
(“VSOE”). The Company limits its assessment of VSOE for each element to the 
price charged when the same element is sold separately. All of the elements 
included in the multiple-element arrangements have been analyzed and it has 
been determined that there is sufficient VSOE to allocate revenue to consulting 
services and to post-contract customer support (“PCS”) components of the 
license arrangements. The Company sells consulting services separately, and it 
has established VSOE for these services on this basis. VSOE for PCS is 
determined based upon the customer’s annual renewal rates for these elements. 
Accordingly, assuming all other revenue recognition criteria are met, revenue 
from perpetual licenses is recognized upon delivery using the residual method 
in accordance with SOP 98-9, and revenue from PCS is recognized ratably over 
the respective term of the maintenance contract, typically one year.



Service revenues consist of revenues from consulting, implementation, training 
and integration services. These services are set forth separately in the 
contractual arrangements such that the total price of the customer arrangement 
is expected to vary as a result of the inclusion or exclusion of these 
services. For those contracts where the services are not essential to the 
functionality of any other element of the transaction, the Company determines 
VSOE of fair value for these services based upon normal pricing and discounting 
practices for these services when sold separately. These consulting and 
implementation services contracts are primarily time and materials based 
contracts that are, on average, less than six months in length. Revenue from 
these services is recognized at the time such services are rendered as the time 
is incurred by the Company.



The Company also occasionally enters into contracts that are primarily fixed 
fee arrangements to render specific consulting services. The percentage of 
completion method is applied to these more complex contracts that involve the 
provision of services relating to the design or building of complex systems, 
because these services are essential to the functionality of other elements in 
the arrangement. Under this method, the percentage of completion is calculated 
based on actual hours incurred compared to the estimated total hours for the 
services under the arrangement. For those fixed fee contracts where the 
services are not essential to the functionality of a software element, the 
proportional performance method is applied to recognize revenue. Revenues from 
training and integration services are recognized in the period in which these 
services are performed.



Customer advances and billed amounts due from customers in excess of revenue 
recognized are recorded as deferred revenue.



Purchase price allocations in business combinations



The Company has a history of acquiring other businesses, and expects that this 
trend will likely continue in the future. As part of the completion of any 
business combination, the Company is required to value, amongst other opening 
balance sheet items, any intangible assets acquired at the date of acquisition. 
Intangible assets include acquired technology and customer relationships.



Acquired technology is initially recorded at fair value based on the present 
value of the estimated net future income-producing capabilities of software 
products acquired on acquisitions. Acquired technology is amortized over its 
estimated useful life on a straight-line basis.



Customer relationships represent relationships that are with certain customers 
on contractual or legal rights and are considered separable. These contractual 
relationships were acquired by Open Text through business combinations and were 
initially recorded at their fair value based on the present value of expected 
future cash flows. Contractual relationships are amortized over their useful 
lives.



The valuation of these assets is inherently subjective, and necessarily 
involves judgments and estimates regarding future cash flows and other 
operational variables of the entity acquired. There can be no assurance that 
the judgments and estimates made at the date of acquisition will reflect future 
performance of the acquired entity. If management makes judgments or estimates 
that differ from actual circumstances, Open Text may be required to write-off 
certain of its intangible assets.



The Company continually evaluates the remaining useful life of its intangible 
assets being amortized to determine whether events and circumstances warrant a 
revision to the remaining period of amortization.



Impairment of long-lived assets and goodwill



The Company accounts for the impairment and disposition of long-lived assets in 
accordance with FASB Statement of Financial Accounting Standards (“SFAS”) No. 
144 “Accounting for Impairment or Disposal of Long–Lived Assets” (“SFAS 144”). 
The Company tests long-lived assets or asset groups, such as capital assets and 
definite lived intangible assets, for recoverability when events or changes in 
circumstances indicate that their carrying amount may not be recoverable. 
Circumstances which could trigger a review include, but are not limited to: 
significant adverse changes in the business climate or legal factors; current 
period cash flow or operating losses combined with a history of losses or a 
forecast of continuing losses associated with the use of the asset; and a 
current expectation that the asset will more likely than not be sold or 
disposed of significantly before the end of its estimated useful life.



Recoverability is assessed based on comparing the carrying amount of the asset 
to the aggregate pre-tax undiscounted cash flows expected to result from the 
use and the eventual disposal of the asset or asset group. An impairment is 
recognized when the carrying amount is not recoverable and exceeds the fair 
value of the asset or asset group. The impairment loss, if any, is measured as 
the amount by which the carrying amount exceeds fair value.



Similarly, in accordance with FASB SFAS No. 142 “Goodwill and Other Intangible 
Assets” (“SFAS 142”), the Company is required to annually test the value of 
goodwill. This testing requires management to make estimates of the market 
value of its various reporting units. Changes in estimates could result in 
different conclusions for the value of goodwill. The Company performs the 
annual impairment testing on goodwill on April 1 of each fiscal year, provided 
that circumstances do not arise during the year that would necessitate an 
earlier evaluation. Over the past two years, the value of the reporting units 
has exceeded their book value. Based on currently available information, 
management does not anticipate that an impairment of goodwill will occur in the 
foreseeable future, although there can be no assurances that at the time a 
future review is completed, a material impairment charge will not be required 
and recorded.



Allowance for doubtful accounts



Open Text maintains an allowance for doubtful accounts for estimated losses 
resulting from the inability of customers to make payments. The Company 
evaluates the credit worthiness of its customers prior to order fulfillment and 
based on these evaluations, adjusts credit limits to the respective customers. 
In addition to these evaluations, the Company conducts on-going credit 
evaluations of the customers’ payment history and current credit worthiness. 
The allowance is maintained for 100% of all accounts deemed to be uncollectible 
and, for those receivables not specifically identified as uncollectible, an 
allowance is maintained for a specific percentage of those receivables based 
upon the aging of accounts, its historical collection experience and current 
economic expectations. To date, the actual losses have been within management 
expectations. No single customer accounted for more than 10% of the accounts 
receivable balance as of June 30, 2005 and 2004. Actual collections could 
differ materially from the Company’s estimates.



Income taxes



Open Text accounts for income taxes in accordance with FASB SFAS No. 109, 
“Accounting for Income Taxes” (“SFAS 109”). Deferred tax assets and liabilities 
arise from temporary differences between the tax bases of assets and 
liabilities and their reported amounts in the consolidated financial statements 
that will result in taxable or deductible amounts in future years. These 
temporary differences are measured using the enacted tax rates. A valuation 
allowance is recorded to reduce deferred tax assets to the extent that 
management considers it is more likely than not, that such a deferred tax asset 
will not be realized. In determining the valuation allowance, management 
considers factors such as the reversal of deferred income tax liabilities, 
projected taxable income, and the character of income tax assets and tax 
planning strategies. A change to these factors could impact the estimated 
valuation allowance and income tax expense.



In addition, the Company is subject to examinations by taxation authorities of 
the jurisdictions in which it operates in the normal course of operations. The 
Company regularly assesses the status of these examinations and the potential 
for adverse outcomes to determine the adequacy of the provision of income and 
other taxes.



Restructuring charges



Open Text records restructuring charges relating to contractual lease 
obligations and other exit costs in accordance with FASB SFAS No. 146, 
“Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 
146”). SFAS 146 requires recognition of costs associated with an exit or 
disposal activity when the liability is incurred and can be measured at fair 
value.


The Company records restructuring charges relating to employee termination 
costs in accordance with FASB SFAS No. 112 “Accounting for Post Employment 
Benefits” (“SFAS 112”). SFAS 112 applies to post-employment benefits provided 
to employees under on-going benefit arrangements. In accordance with SFAS 112, 
the Company records such charges to restructuring, when the termination 
benefits are capable of being determined or estimated in advance from either 
the provisions of Open Text’s policy or from past practices, the benefits are 
attributable to services already rendered and the obligation relates to rights 
that vest or accumulate.



The recognition of restructuring charges requires management to make certain 
judgments regarding the nature, timing and amount associated with the planned 
restructuring activities, including estimating sublease income and the net 
recoverable amount of equipment to be disposed of. At the end of each reporting 
period, the Company evaluates the appropriateness of the remaining accrued 
balances.



Litigation



The Company is a party, from time to time, in legal proceedings. In these 
cases, management assesses the likelihood that a loss will result, as well as 
the amount of such loss and the financial statements provide for the Company’s 
best estimate of such losses. To the extent that any of these legal proceedings 
are resolved and result in the Company being required to pay an amount in 
excess of what has been provided for in the financial statements, the Company 
would be required to record, against earnings, such excess at that time. If the 
resolution resulted in a gain to the Company, or a loss less than that provided 
for, such gain is recognized when received or receivable.



Recently Issued Accounting Pronouncements



Accounting changes and error corrections



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 in 
Interim Financial Statements—An Amendment of APB Opinion No. 28”. SFAS 154 
provides guidance on the accounting for and reporting of changes in accounting 
principles and error corrections. SFAS 154 requires retrospective application 
to the 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 the 
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.



Share-Based compensation



In December 2004, the FASB issued SFAS No. 123R “Share Based Payment” (“SFAS 
123R”). The new Statement is effective for fiscal years beginning on or after 
June 15, 2005. SFAS 123R addresses the accounting for transactions in which an 
enterprise receives services in exchange for (a) equity instruments of the 
enterprise or (b) liabilities that are based on the fair value of the 
enterprise’s equity instruments or that may be settled by the issuance of such 
equity instruments. This Statement eliminates the ability to account for 
share-based compensation transactions using APB 25 and requires that such 
transactions be accounted for using a fair-value based method. As required by 
SFAS 123R, the Company will be required to recognize an expense for 
compensation cost related to share-based payment arrangements including stock 
options and compensatory employee stock purchase plans. The new rules will be 
effective for the Company beginning July 1, 2005. The Company is currently 
evaluating option valuation methodologies and assumptions in light of the 
evolving accounting standards related to share-based payments and also the 
impact of other aspects of SFAS 123R, including transitional adoption 
alternatives.

In March 2005, the Securities and Exchange Commission (“SEC”) released SEC 
Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”). SAB 107 
provides the SEC staff position regarding the application of SFAS 123R. SAB 107 
contains interpretive guidance related to the interaction between SFAS 123R and 
certain SEC rules and regulations, as well as provides the staff’s views 
regarding the valuation of share-based payment arrangements for public 
companies. SAB 107 also highlights the importance of disclosures made related 
to the accounting for share-based payment transactions. The Company is 
currently evaluating SAB 107 and will be incorporating it as part of its 
adoption of SFAS 123R.



Results of Operations



Overview


Revenue



Total revenue increased by $123.8 million or 42.5% in Fiscal 2005 (“2005”) 
compared to Fiscal 2004 (“2004”) due to a combination of the following:


• License revenue growth of $14.9 million;


• Customer support revenue growth of $70.4 million; and


• Service revenue growth of $38.5 million.


During Fiscal 2005 Open Text had 16 transactions that were greater than $1 
million dollars, and average deal size on an annual basis was approximately 
$250,000. No single customer contributed more than 10% of total revenue during 
the year.



The IXOS acquisition (which was included in the results for the last four 
months of 2004 and for the full year in 2005) together with other acquisitions 
made during 2004 and 2005 acquisitions (Artesia, Vista and Optura) 
substantially drove this increase in total revenue as follows:


• IXOS: $86.4 million;


• Other 2004 acquisitions: $4.5 million;


• 2005 acquisitions: $22.2 million; and


• The remaining $10.7 million was caused by organic growth in the Company’s 
business.



Total revenue increased by $113.3 million or 63.8% in 2004 compared to Fiscal 
2003 (“2003”) due to a combination of the following:


• License revenue growth of $45.7 million;


• Customer support revenue growth of $45.7 million; and


• Service revenue growth of $21.9 million.



The increase in 2004 revenue can be attributed in part to the acquisitions of 
IXOS, Gauss and DOMEA eGovernment. These acquisitions accounted for $86.0 
million of additional revenue in 2004 while the remaining $27.3 million of the 
increase was caused by organic growth in the Company’s business.


The Company experienced significant variations in revenues, expenses and gross 
profit from quarter to quarter and such variations are likely to continue. 
Quarterly revenues, expenses and gross profit are affected by a variety of 
factors, including, amongst other things, the timing of large enterprise 
transactions, acquisitions, seasonality of economic activity, and to some 
degree the timing of capital spend by the Company’s customers.



The results for any quarter are not necessarily indicative of future quarterly 
results, and the Company believes that period-to-period comparisons should not 
be relied upon as an indication of future performance.



Outlook for 2006



The Company’s outlook for 2006 is to focus on near-term profitability by 
streamlining its operations in terms of the restructuring announced in July 
2005. Additionally, the Company will continue to adapt to long-term changes in 
the ECM marketplace and increase its focus on marketing its archiving records 
management as the on-ramp to ECM sales and expanding its partner program.



Revenues



Revenue by Product Type



License Revenue



License revenue consists of fees earned from the licensing of software products 
to customers.



License revenue increased in 2005, compared to 2004, by 12.2% or $14.9 million. 
The Company generated approximately $26 million in revenue from acquisitions 
and approximately $6 million related to the positive impact of foreign exchange 
rates. This increase was offset by the discontinuance of unprofitable revenue 
streams obtained through acquisitions. In addition, 2005 revenue was negatively 
impacted by a shift in the Company’s business model that saw customers 
increasingly interested in buying, substantially, a full ECM platform, which 
had the impact of lengthening the sales cycle and close process for new deals 
and deals in the pipeline. Further, sales were impacted due to the Company’s 
need to partially rebuild its North American sales force, during the year, to 
meet the needs of its evolving business model. Finally, the large drop in the 
Euro during the fourth quarter had the effect of delaying purchase decisions 
with respect to several of the Company’s large European customers. For these 
reasons, the Company’s organic growth decreased in 2005.



License revenue increased in 2004, compared to 2003, by 60.1% or $45.7 million. 
Of this increase, $34.0 million of the increase was due to the impact of 
acquisitions made in 2004. These acquisitions accounted for approximately 75% 
of the year-to-year growth. Of the remaining growth, $3.7 million related to a 
full inclusion of 2003 acquisitions. The Company’s organic growth relating to 
license revenue was 14% during 2004 as compared with 2003.



Customer Support Revenue



Customer support revenue consists of revenue from the Company’s software 
maintenance contracts and customer support agreements. Typically the term of 
these maintenance contracts is twelve months with customer renewal options, and 
the Company has historically experienced a 90% renewal rate, thus contributing 
greatly to its customer support revenue. Customer support revenue is directly 
related to software licenses sold in prior periods.


Customer support revenues increased 64.7% from $108.8 million in 2004 to $179.2 
million in 2005. The increase in customer support revenues resulted from 
several factors. Customer support revenues related to the 2004 and 2005 
acquisitions accounted for approximately 47% and 8%, respectively, of the 
revenue growth. The increase in the number of licenses granted in 2004, which 
resulted in an increased number of maintenance contracts, contributed to the 
growth in customer support revenues in 2005. Moreover, the Company continued to 
experience very strong service support contract renewal rates for all of its 
products, which also contributed to the growth in customer support revenue.



Customer support revenues increased 72.5% from $63.1 million in 2003 to $108.8 
million in 2004. Customer support revenues related to the 2004 acquisitions 
accounted for approximately 65% of the revenue growth achieved during 2004 
compared to 2003. Of the remaining 35%, $5.5 million related to companies 
acquired during 2003 which were not included in fiscal results for the entire 
Fiscal 2003. The remainder resulted from increased licenses in 2003 and 
continued high maintenance renewal rates.



Service Revenue



Service revenue consists of revenues from consulting contracts and contracts to 
provide training and integration services.



Service revenues increased 63.6% from $60.6 million in 2004 to $99.1 million in 
2005. Service revenues related to 2005 acquisitions represented 10% of the 
growth while 2004 acquisitions represented approximately 45% of the growth. In 
2005, the Company completed the integration of the 2004 acquisitions (most 
notably IXOS), aligning services with the sales verticals for consistent 
teaming on strategic accounts as well as delivering repeatable services 
solutions (as opposed to trying to deliver unique consulting solutions to each 
customer), which resulted in the growth in these revenues.



Service revenues increased 56.8% from $38.6 million in 2003 to $60.6 million in 
2004. Service revenues related to 2004 acquisitions accounted for all of the 
revenue growth achieved in this period. Without the impact of the 2004 
acquisitions, the Company’s organic service revenues would have declined by 
approximately 5% as a result of the continued challenging market for service 
engagements globally. During this period, many of the customers addressed their 
service needs with in-house personnel as opposed to using third-parties.



Revenue and Operating Margin by Segment



Revenue by Geography


North America



The North America geographic segment includes Canada, the United States and 
Mexico.



Europe



The Europe geographic segment includes Belgium, Denmark, Finland, France, 
Germany, Italy, Netherlands, Norway, Spain, Sweden, Switzerland and the United 
Kingdom.



While revenues in all geographies are a growing reflection of increasing 
maintenance revenues, acquisitions, and currency movement, the mix of revenue 
by geography is shifting toward Europe due to the acquisition of IXOS in March 
2004. IXOS generates approximately 70% of the revenue in Europe. Further, the 
existence of a strong experienced sales force in Europe enhanced sales, 
particularly in the UK and Germany, while the Company rebuilt its North 
American sales group.



Other



The “other” geographic segment includes Australia, Japan, Malaysia, and the 
Middle East region.



The Company’s overall revenue contribution from these markets slightly outpaced 
that of the other geographic segments due to good performance by specific sales 
teams and partners. The Company’s investments in these markets are based on the 
proven performance of those regional teams balanced with other factors such as 
regional, economic and political conditions.



Adjusted Operating Margin by Significant Segment


The above adjusted operating margins are calculated based on net income before 
including the impact of amortization, interest, other income (expense), 
restructuring charges and income taxes. The adjusted operating margins have 
decreased in all geographies in 2005 due to the Company’s changing business 
model, whereby customers are increasingly interested in a complete ECM platform 
which involves a larger dollar value transaction. This has the effect of 
lengthening lead times for new and existing opportunities. The decrease in 
adjusted operating margins in Europe in 2005 versus 2004 is due to the fact 
that 2004 included the results of IXOS from March 1, 2004. This resulted in a 
higher adjusted operating margin from IXOS than would have been realized on an 
annual basis due to the timing/seasonality of revenue and expenses. In 
addition, the rapid devaluation of the Euro in late 2005 triggered deferrals of 
customer purchases late into the year.


A reconciliation of the Company’s adjusted operating margin to net income as 
reported in accordance with U.S. GAAP is provided in Note 15 of the 
accompanying consolidated financial statements.



For 2006, Open Text is focused on increasing profit levels while positioning 
the Company to take advantage of market opportunities. The Company has 
announced it will take a restructuring charge in its first and second quarter 
of Fiscal 2006 to reduce staffing levels by approximately 15% and close, or 
downsize 27 facilities.



Cost of Revenue and Gross Margin by Product Type



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 increased as the Company’s license revenues increased, 
but the gross margin on licenses has remained stable over 2005, 2004 and 2003 
due to the fact that the Company’s overall cost structure has remained 
relatively unchanged.



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 
63.0% from $20.3 million in 2004 to $33.1 million in 2005. The majority of the 
increase is attributable to personnel costs related to 2004 acquisitions. 
Whereas historically the Company’s support personnel have been located 
predominantly in North America, the Company’s European based 2004 acquisitions 
have made Europe as significant as North America with respect to support 
personnel. The increased number of personnel in the Company’s customer support 
organization also drove increases in other expenses including communication, 
travel and office expenses. The gross margins on customer support were 
relatively flat at 81.3% in 2004 and 81.5% in 2005. This management of expenses 
represents the rationalization of the global support model (focusing on three 
major support sites versus multiple sites) and the integration of 2004 and 2005 
acquisitions while managing the higher cost structures of the 2004 
acquisitions.



Cost of customer support revenues increased 95.1% from $10.4 million in 2003 to 
$20.3 million in 2004, primarily as a result of increased personnel costs 
related primarily to the 2004 acquisitions.



Customer support personnel increased from 140 at the end of 2003 to 238 at the 
end of 2004. The increased number of personnel in the Company’s customer 
support organization drove increases in other expenses including communication, 
travel and office expenses. Occupancy costs increased during 2004 commensurate 
with the increase in facilities due to 2004 acquisitions. The gross margins on 
customer support decreased from 83.5% in 2003 to 81.3% in 2004. This decrease 
reflected the fact that the companies acquired during 2003 had higher cost 
structures than the Company’s core operations and in 2004 the Company had not 
yet fully realized the synergies from their integration.


Cost of service revenues



Cost of service revenues consist primarily of the costs of providing 
integration, customization and training with respect to the Company’s 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 72.0% from $47.3 million in 2004 to $81.4 
million in 2005. Cost of service revenues as a percentage of service revenues 
increased from 78.1% in 2004 to 82.1% in 2005. Additional costs assumed as a 
result of the 2004 acquisitions accounted for the entire increase in cost of 
service revenues. The general mix of expenses associated with the cost of 
service revenues for the 2004 acquisitions is generally consistent with that of 
the Company’s core business, with personnel, subcontracting and travel 
representing approximately three quarters of the expense in this area. The 
Company’s European based 2004 acquisitions have made the service cost structure 
higher as a percentage of revenue.



Cost of service revenues increased 67.6% from $28.2 million in 2003 to $47.3 
million in 2004. The primary reasons for the increased cost of service revenue 
were the additional costs assumed from the 2004 acquisitions:


• 60% of the total increase in cost of service revenue was the result of the 
IXOS acquisition. Most of the remaining increase was largely comprised of 
expenses coming from the Gauss and DOMEA eGovernment acquisitions.


• Higher billing utilization rates were experienced during 2004 than in 2003; 
and


• The number of service personnel increased from 229 at the end of 2003 to 475 
employees at the end of 2004. This increase in headcount was driven by the 2004 
acquisitions which occurred primarily in Europe. At the end of 2004 
approximately 70% of the service organization personnel were in Europe, an 
increase of approximately 40% over 2003.



Operating Expenses


Research and development expenses



Research and development expenses consist primarily of engineering personnel 
expenses, contracted research and development expenses, and facilities and 
equipment costs.



Research and development expenses have remained relatively stable as a 
percentage of revenue during 2005, 2004 and 2003.



Research and development expenses increased 49.3% from $43.6 million in 2004 to 
$65.1 million in 2005 and, as a percentage of total revenues, increased 
slightly from 15.0% in 2004 to 15.7% in 2005. The increase in research and 
development expense in 2005 over 2004 relates primarily to an increase of 
approximately $13.6 million in expenses relating to IXOS and 2005 acquisitions, 
and an additional $3.2 million relating to increased personnel costs. The 
balance of the increase relates to the increased spending in the Company’s core 
development organization relating to the integration of IXOS archiving products 
with Open Text’s Livelink records management and collaboration products. In 
2006, the Company expects to increase its spending relating to the extension 
and enhancement of its Microsoft and SAP interfaces.



Research and development expenses increased 48.7% from $29.3 million in 2003 to 
$43.6 million in 2004 and, as a percentage of total revenues, decreased 
slightly from 16.5% in 2003 to 15.0% in 2004. The increase in research and 
development expenses in absolute dollars in 2004 resulted primarily from 
approximately $12.0 million of additional expenses incurred as part of the 
integration of the development organizations from the 2004 acquisitions, 
primarily IXOS. The balance of the increase is attributable to increased 
spending within the Company’s core development organization, which recorded an 
additional $4 million in operating expenses during Fiscal 2004. These expenses 
were partially offset by increased tax credits associated with qualifying 
research and development activities of $2 million. Development personnel 
increased from 305 at the end of 2003 to 546 at the end of 2004.



Sales and marketing expenses



Sales and marketing expenses consist primarily of compensation costs related to 
sales and marketing personnel, as well as costs associated with advertising and 
trade shows.



The Company has increased spending on marketing due to the fact that ECM is 
becoming a more viable, growing segment of the software market. As such, the 
Company placed additional emphasis on marketing initiatives in the past several 
fiscal years in an effort to be globally regarded as the ECM market leader.



Sales and marketing expenses increased 31.1% from $87.4 million in 2004 to 
$114.6 million in 2005. The absolute dollar increase in sales and marketing 
expenses in 2005 relates to an increase of $14.9 million relating to the impact 
of IXOS. Additionally, the Company spent an additional $4.5 million on labor 
costs, $2.1 million on increased marketing expenses and $2.4 million on 
increased commissions to sales staff, related to an increased number of license 
sales. The rest of the increase relates to core operational spending on 
training, travel, recruitment and other miscellaneous costs. Additionally, 
sales and marketing personnel increased from 498 individuals at the end of 2004 
to 514 at the end of 2005.



Sales and marketing expenses increased 60.2% from $54.5 million in 2003 to 
$87.4 million in 2004. Sales and marketing expenses as a percentage of total 
revenues were relatively constant. The majority of the increase in sales and 
marketing expense in absolute dollars was the result of costs added because of 
the 2004 acquisitions. Sales and marketing personnel increased from 322 at the 
end of 2003 to 498 at the end of 2004.



General and administrative expenses



General and administrative expenses consist primarily of salaries of 
administrative personnel, related overhead, facility expenses, audit fees, 
consulting expenses and separate public company costs.


General and administrative expenses increased 102.3% from $22.8 million in 2004 
to $46.1 million in 2005, and increased from 7.8% to 11.1% of total revenues in 
the same period. The absolute dollar increase in general and administrative 
expenses in 2005 over 2004 relates to an increase of $9.1 million relating to 
the impact of the IXOS acquisition. Additionally, in 2005, the Company spent an 
additional $3.4 million on labor costs, $2.7 million on consulting costs, and 
$5.6 million as a result of separate public company costs, including additional 
audit fees, and Sarbanes-Oxley compliance fees. General and administrative 
personnel increased from 348 individuals at the end of 2004 to 389 at the end 
of 2005.



General and administrative expenses increased 68.7% from $13.5 million in 2003 
to $22.8 million in 2004, and increased slightly from 7.6% to 7.8% of total 
revenues in the same period. Over half of the increase in general and 
administrative expenses related to the 2004 acquisitions. Half of the remaining 
increase related to increased personnel that the Company added to maintain the 
size and scope of its needs as it continued to grow. Total general and 
administrative personnel increased from 200 at the end of 2003 to 348 at the 
end of 2004. The remainder of the increase in general and administrative 
expenses was comprised of higher spending in a number of areas, including 
compliance with new legislation including the Sarbanes-Oxley Act, as well as 
consulting and travel resulting from acquisition activities.



Depreciation expenses



Depreciation expenses increased by 55.4% or $3.9 million in 2005 compared to 
2004 as a direct result of the increased value of capital assets acquired and 
additions through business acquisitions.



Depreciation expenses increased by 41.8% or $2.1 million in 2004 compared to 
2003 as a direct result of the increased value of capital assets acquired and 
additions through business acquisitions.



Amortization of acquired intangible assets



Amortization of acquired intangible assets includes the amortization of 
acquired technology and customer assets.



Amortization of acquired intangible assets increased 115.9% from $11.3 million 
in 2004 to $24.4 million in 2005. The increase is due to the impact of the 2005 
acquisitions and a full year’s amortization of the IXOS intangible assets, 
versus four months amortization in the prior year. Because the amortization of 
acquired intangible assets is only included from the date of acquisition, this 
expense continued to increase substantially in 2005 when a full year 
amortization was recorded for the 2004 acquisitions.



The increase in 2004, over 2003, was principally the result of acquisitions 
during 2004, which accounted for 69% of the increase since the size of 
acquisitions completed during 2004 was far greater than those completed in any 
previous fiscal year.



Provision for (recovery of) restructuring charges


In March 2004, the Company recorded a restructuring charge of $10.0 million 
relating to its North America segment. This charge consisted primarily of:


• Costs associated with workforce reduction of $5.7 million;


• Excess facilities associated with the integration of IXOS of $3.3 million; 
and


• Write down of capital assets and miscellaneous costs of $1.0 million.



As of June 30, 2004, $4.1 million of this provision had been expended with the 
outstanding balance of $5.9 million distributed as follows:


• Costs associated with workforce reduction of $3.3 million; and


• Excess facilities associated with the integration of IXOS of $2.6 million.


As of the end of the third quarter of 2005, the Company recorded a recovery of 
$1.7 million consisting of $1.4 million relating to the provision for workforce 
reduction and $301,000 relating to the provision for excess facilities. This 
recovery was made as a result of a number of decisions that were made regarding 
actions still to take place as compared to the original restructuring plan and 
these decisions necessitated an adjustment to the original restructuring plan.


The Company expects that the provision relating to facility costs will be 
expended by 2014 and the provision related to employee severance by 2006.

Other income (expense)

Other income (expense) for the year ended June 30, 2005, includes $754,000 
relating to interest charges and legal costs incurred on the settlement of the 
action brought against the Company by the Harold L. Tilbury and Yolanda O. 
Tilbury, Trustees of the Harold L. Tilbury Jr. and Yolanda O. Tilbury family 
Trust and realized foreign exchange losses of $1.8 million. The IXOS 
acquisition contributed $309,000 to this foreign exchange loss in comparison to 
$273,000 in 2004.

Income taxes

During 2005, the Company recorded a tax provision of $7.0 million compared to 
$7.3 million during 2004.

The Company’s recognized deferred tax asset of $46.8 million arises from 
available income tax losses and future income tax deductions. The Company’s 
ability to use these income tax losses and future income tax deductions is 
dependent upon the Company generating income in the tax jurisdictions in which 
such losses or deductions arose. The recognized deferred tax liability of $39.4 
million is made up of two components. The first component relates to $35.0 
million arising from the amortization of timing differences relating to 
acquired intangible assets and future income inclusions. The second component 
of $4.4 million relates to deferred tax credits arising from non capital losses 
acquired at a discount on asset acquisitions which will be included in income 
as the non capital losses are utilized. The Company records a valuation 
allowance against deferred income tax assets when it believes it is more likely 
than not that some portion or all of the deferred income tax assets will not be 
realized. Based on the reversal of deferred income tax liabilities, projected 
future taxable income, the character of the income tax asset and tax planning 
strategies, the Company has determined that a valuation allowance of $127.6 
million is required in respect of its deferred income tax assets as at June 30, 
2005. A valuation allowance of $126.9 million was required for the deferred 
income tax assets as at June 30, 2004. This valuation allowance is primarily 
attributable to valuation allowances set up based on losses incurred in the 
year in certain foreign jurisdictions. In order to fully utilize the recognized 
deferred income tax assets of $46.8 million, Open Text will need to generate 
aggregate future taxable income in applicable jurisdictions of approximately 
$133.0 million. Based on the Company’s current projection of taxable income for 
the periods in the jurisdictions in which the deferred income tax assets are 
deductible, it is more likely than not that the Company will realize the 
benefit of the recognized deferred income tax assets at June 30, 2005. Deferred 
tax assets associated with the acquisition of IXOS were substantially offset by 
a valuation allowance.


Canadian Supplement

Canadian securities regulations allow issuers that are required to file reports 
with the SEC, upon meeting certain conditions, to satisfy their Canadian 
continuous disclosure obligations by using financial statements prepared in 
accordance with U.S. GAAP. The Company has provided the following supplemental 
information to highlight the significant differences that would have resulted 
in the MD&A had it been prepared using Canadian GAAP information.

The principal continuing reconciling differences that affect consolidated net 
income under Canadian GAAP are the purchase price allocation to research and 
development activities for which there is no alternative future use, 
stock-based compensation and recording of the minimum pension liability.


Liquidity and Capital Resources


Cash and Cash Equivalents

Cash and cash equivalents decreased $77.1 million from $157.0 million as of 
June 30, 2004 to $79.9 million at June 30, 2005. This reduction relates 
primarily to repurchases of Common Shares, payments made for acquisitions, and 
construction of the Waterloo building, offset by positive operating cash flows. 
Each of these factors is discussed in more detail below.


Net Cash Provided by Operating Activities (“Operating Cash Flow”)


The Company’s primary source of operating cash flow is its positive net income. 
Operating cash flow is also impacted by changes in working capital accounts. 
The changes in accounts receivables and deferred revenue in 2005 of $6.5 
million and $7.2 million respectively, had the largest positive working capital 
impact on the Company’s cash flows. The Company was successful in reducing the 
Days Sales Outstanding in 2005 by four days from 71 to 67 days, which has led 
to accounts receivable having a positive impact on operating cash flow. 
Additionally, the Company’s ability to maintain strong maintenance contract 
renewal rates contributed to positive operating cash flow results in respect of 
deferred revenue. The reduction in accounts payable in 2005 of $2.8 million has 
served to reduce the Company’s available cash balances.


Net Cash Used in Investing Activities

Net cash used in investing activities was $77.4 million in 2005 compared to 
$19.6 million in 2004. Capital spending relating to the construction of the 
Waterloo building was the primary component of the amount spent on capital 
assets of $17.9 million. Additionally the Company spent $31.5 million on the 
three acquisitions concluded in 2005 and $13.8 million for additional purchases 
of IXOS shares.


Net Cash Used in Financing Activities


Net cash used in financing activities was $58.9 million in 2005 compared to net 
cash provided by financing activities of $21.9 million in 2004. This use of 
cash was driven primarily by the repurchase of 3,558,700 Common Shares, for an 
aggregate purchase price of $63.8 million, and a $2.2 million repayment of a 
short-term loan, offset partially by $6.4 million of proceeds received from the 
issuance of Common Shares on the exercise of stock options and warrants and 
pursuant to the Company’s Employee Stock Purchase Plan.

The Company has a CDN $10.0 million (U.S. $8.1 million) line of credit with a 
Canadian chartered bank, under which no borrowings were outstanding at June 30, 
2005 and 2004. The line of credit bears interest at the lender’s prime rate 
plus 0.5% and is cancelable at any time at the option of the bank. Open Text 
has pledged certain of its assets including an assignment of accounts 
receivable as collateral for this line of credit.

The Company financed its operations and capital expenditures primarily with 
cash flows generated from operations and with the proceeds from sales of its 
Common Shares. The Company anticipates that its cash and cash equivalents and 
available credit facilities will be sufficient to fund its anticipated cash 
requirements for working capital, contractual commitments and capital 
expenditures for at least the next 12 months. The Company may need to raise 
additional funds however, in order to fund more rapid expansion of its 
business, develop new and enhance existing products and services, or acquire 
complementary products, businesses or technologies. If additional funds are 
raised through the issuance of equity or convertible debt securities, the 
percentage ownership of its shareholders may be reduced, its shareholders may 
experience additional dilution, and such securities may have rights, 
preferences and privileges senior to those of its current shareholders. 
Additional financing may not be available on terms favorable to the Company, or 
at all. If adequate funds are not available or are not available on acceptable 
terms, the Company’s ability to fund its expansion, take advantage of 
unanticipated opportunities or develop or enhance its services or products 
would be significantly limited.



Commitments and Contractual Obligations

Included in the above balance is $9.2 million of rental income from properties 
sub-leased by the Company. Also included in the above balance is an amount of 
approximately $43.6 million relating to payments in connection with facilities 
that have been identified as excess facilities. This amount has been included 
in both acquisition-related and restructuring accruals in the consolidated 
financial statements.

In July 2004, Open Text entered into a commitment to construct a building in 
Waterloo, Ontario with a view of consolidating its existing Waterloo 
facilities. In October 2004, based on a need for additional space beyond the 
original commitment, Open Text agreed, in principle, to a commitment to 
construct an additional floor to the building. Currently the Company does not 
expect to further expand the scope of this project. The cost of this project is 
estimated to be approximately $14 million. The Company has financed this 
investment through its working capital. As of June 30, 2005, approximately $9.7 
million has been spent to date on this project.

In August 2005, the Domination Agreement with IXOS which had been contested by 
certain IXOS shareholders was settled as a result of an out of court settlement 
that was ratified by the court on August 9, 2005. Additionally, in August 2005, 
the contestation regarding the agreement of control relating to the acquisition 
of Gauss was settled in relation to two shareholders’ suits against the 
resolutions of the shareholders’ meetings of December 23, 2003. Amounts of 
$98,307 and $126,047 were incurred, respectively, for the fiscal year ended 
June 30, 2005 for this settlement.

Open Text is subject 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 
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 or cash flows.

The Company typically agrees in its sales contracts to indemnify its customers 
for any expenses or liability resulting from claimed infringements of patents, 
trademarks or copyrights of third parties. The terms of these indemnification 
agreements are generally perpetual after execution of the agreement. The 
maximum amount of potential future indemnification is unlimited.


Off-Balance Sheet Arrangements

The Company does 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 for capitalization.



Risk Factors That May Affect Future Results

Certain statements in this Annual Report on Form 10-K constitute 
forward-looking statements within the meaning of the Private Securities 
Litigation Reform Act of 1995 and are made pursuant to the safe harbor 
provisions of Section 27A of the Securities Act of 1933, as amended and Section 
21E of the Securities Exchange Act of 1934, as amended. Such forward-looking 
statements involve known and unknown risks, uncertainties and other factors, 
including those set forth in the following statements and elsewhere in this 
Annual Report on Form 10-K, 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. In that event, the 
trading price of the Company’s Common Shares would likely decline. Such risks 
are further discussed from time to time in the Company’s filings with the SEC.

If the Company does not continue to develop new technologically advanced 
products, future revenues will be negatively affected

Open Text’s success will depend on its 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. 
Open Text continues to enhance the capability of its Livelink software to 
enable users to form workgroups and collaborate on intranets and the Internet. 
The Company increasingly must integrate software licensed or acquired from 
third parties with its own software to create or improve its products. These 
products are key to the success of the Company’s strategy, and the Company may 
not be successful in developing and marketing these and other new software 
products and enhancements. If the Company is 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, the Company’s operating results 
will materially suffer. In addition, if new industry standards emerge that the 
Company does not anticipate or adapt to, the Company’s software products could 
be rendered obsolete and its business would be materially harmed.
If the Company’s products and services do not gain market acceptance, the 
Company may not be able to increase its revenues

Open Text intends to pursue its strategy of growing the capabilities of its ECM 
software offerings through the in-house research and development of new product 
offerings. The Company continues to enhance Livelink and many of its optional 
components to continue to set the standard for ECM capabilities, in response to 
customer requests. The primary market for Open Text’s 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 the Company’s products and services 
fail to develop, develop more slowly than expected or become saturated with 
competitors, the Company’s business will suffer. The Company may be unable to 
successfully market its 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 the Company’s products and services or 
enhancements do not achieve and sustain market acceptance, the Company’s 
business and operating results will be materially harmed.

Current and future competitors could have a significant impact on the Company’s 
ability to generate future revenue and profits

The markets for the Company’s products are intensely competitive, subject to 
rapid technological change and are evolving rapidly. The Company expects 
competition to increase and intensify in the future as the markets for the 
Company’s products continue to develop and as additional companies enter each 
of its markets. Numerous releases of products that compete with those of the 
Company are continually occurring and can be expected to continue in the near 
future. The Company 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, the Company would likely be forced to lower its 
prices. This could result in lower revenues, reduced margins, loss of 
customers, or loss of market share for the Company.

Acquisitions, investments, joint ventures and other business initiatives may 
negatively affect the Company’s operating results

Open Text continues to seek out opportunities to acquire or invest in 
businesses, products and technologies that expand, complement or are otherwise 
related to the Company’s current business. The Company also considers from time 
to time, opportunities to engage in joint ventures or other business 
collaborations with third parties to address particular market segments. These 
activities, including the current year’s acquisitions, create risks such as the 
need to integrate and manage the businesses and products acquired with the 
business and products of the Company, additional demands on the Company’s 
management, resources, systems, procedures and controls, disruption of the 
Company’s 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 
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 the Company. Any 
such activity may not be successful in generating revenue, income or other 
returns to the Company, and the financial or other resources committed to such 
activities will not be available to the Company for other purposes. The 
Company’s inability to address these risks could negatively affect the 
Company’s operating results.

Businesses acquired by the Company may have disclosure controls and procedures 
and internal controls over financial reporting that are weaker than or 
otherwise not in conformity with those of the Company

The Company has a history of acquiring complementary businesses with varying 
levels of organizational size and complexity. Upon consummating an acquisition, 
the Company seeks to implement its 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 the Company’s disclosure controls and procedures and 
internal controls over financial reporting at an acquired company may be a 
lengthy process. Typically the Company conducts due diligence prior to 
consummating an acquisition, however, the Company’s integration efforts may 
periodically expose deficiencies in the disclosure controls and procedures and 
internal controls over financial reporting of an acquired company. The Company 
expects that the process involved in completing the integration of the 
Company’s 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, the Company may 
not be in a position to comply with its periodic reporting requirements and the 
Company’s business and financial condition may be materially harmed.

The length of the Company’s 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 the Company’s products often 
involves relatively large-scale implementation across the 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 the 
Company’s software, the Company’s sales cycle tends to take considerable time 
to complete. Over the past fiscal year, the Company has experienced a 
lengthening of its 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 the Company’s software is delayed 
and the installation of the Company’s 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 the 
Company’s revenues to be lower than expected in a particular period.

The Company’s international operations expose the Company to business risks 
that could cause the Company’s operating results to suffer

Open Text intends to continue to make efforts to increase its international 
operations and anticipates that international sales will continue to account 
for a significant portion of its revenue. The Company has increased its 
presence in the European market, especially since its 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 the Company 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 the Company 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 the Company’s 
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, the Company’s operating results will suffer. Moreover, in any given 
quarter, exchange rates can impact revenue adversely.

The Company’s products may contain defects that could harm the Company’s 
reputation, be costly to correct, delay revenues, and expose the Company to 
litigation

The Company’s 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, 
or, if discovered, the Company may not be able to successfully correct such 
errors in a timely manner, or at all. In addition, despite tests carried out by 
the Company on all its products, the Company may not be able to fully simulate 
the environment in which its products will operate and, as a result, the 
Company may be unable to adequately detect design defects or software errors 
inherent in its products and which only become apparent when the products are 
installed in an end-user’s network. The occurrence of errors and failures in 
the Company’s products could result in loss of, or delay in market acceptance 
of the Company’s products, and alleviating such errors and failures in the 
Company’s products could require significant expenditure of capital and other 
resources by the Company. The harm to the Company’s reputation resulting from 
product errors and failures would be damaging to the Company. The Company 
regularly provides a warranty with its products and the financial impact of 
these warranty obligations may be significant in the future. The Company’s 
agreements with its strategic partners and end-users typically contain 
provisions designed to limit the Company’s 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 the Company against claims and related liabilities and 
costs. Although the Company maintains 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 the Company’s financial condition.

Other companies may claim that the Company infringes their intellectual 
property, which could result in significant costs to defend and if the Company 
is not successful could have a significant impact on the Company’s ability to 
generate future revenue and profits

Although the Company does not believe that its products infringe on the rights 
of third-parties, third-parties may assert infringement claims against the 
Company in the future, and any such assertions may result in costly litigation 
or require the Company 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 the Company’s products violate their 
patents. Such claims could be disruptive to the Company’s ability to generate 
revenue and may result in significantly increased costs as the Company attempts 
to license the patents or rework its 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 the Company’s 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 the Company’s business

The Company currently depends on certain third-party software, the loss of 
which could result in increased costs of, or delays in, licenses of the 
Company’s products. For a limited number of product modules, the Company relies 
on certain software that it licenses from third-parties, including software 
that is integrated with internally developed software and which is used in its 
products to perform key functions. These third-party software licenses may not 
continue to be available to the Company 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 the Company’s business.

A reduction in the number or sales efforts by distributors could materially 
impact the Company’s revenues

A significant portion of the Company’s revenue is derived from the license of 
its products through third parties. The Company’s success will depend, in part, 
upon its ability to maintain access to existing channels of distribution and to 
gain access to new channels if and when they develop. The Company may not be 
able to retain a sufficient number of its 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 the Company’s products. The performance of third party 
distributors is largely outside the control of the Company and the Company is 
unable to predict the extent to which these distributors will be successful in 
marketing and licensing the Company’s products. A reduction in sales efforts, a 
decline in the number of distributors, or the discontinuance of sales of the 
Company’s products by its distributors could lead to reduced revenue.

The Company’s success depends and will depend on its relationships with 
strategic partners

The Company relies on close cooperation with partners for product development, 
optimization, and sales. If any of the Company’s partners should decide for any 
reason to terminate or scale back their cooperative efforts with the Company, 
the Company’s business, operating results, and financial condition may be 
adversely affected.

The Company’s expenses may not match anticipated revenues

The Company incurs 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, the Company’s business, financial condition, or results 
of operations could be materially and adversely affected. In addition, in 
Fiscal 2006 the Company announced an initiative to restructure its operations 
with the intention of realizing cost savings in the future. The Company will 
continue to evaluate its 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 its customers. Any 
failure to successfully execute these initiatives, including any delay in 
effecting these initiatives, can have a material adverse impact on the 
Company’s results of operations.

The Company must continue to manage its growth or its operating results could 
be adversely affected

Over the past several years, Open Text has experienced growth in revenues, 
operating expenses, and product distribution channels. In addition, Open Text’s 
markets have continued to evolve at a rapid pace. The Company believes that 
continued growth in the breadth of its product lines and services and in the 
number of personnel, will be required in order to establish and maintain the 
Company’s competitive position. Moreover, the Company has grown significantly 
through acquisitions in the past and continues to review acquisition 
opportunities as a means of increasing the size and scope of its business. 
Finally, the Company has 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. Open Text’s growth, coupled with the rapid evolution 
of the Company’s markets and the new heightened regulations, have placed, and 
are likely to continue to place, significant strains on its administrative and 
operational resources and increased demands on its internal systems, procedures 
and controls. The Company’s administrative infrastructure, systems, procedures 
and controls may not adequately support the Company’s operations or compliance 
with such regulations, and the Company’s management may not be able to achieve 
the rapid, effective execution of the product and business initiatives 
necessary to successfully penetrate the markets for the Company’s products and 
services and to successfully integrate any business acquisitions in the future 
to comply with all regulatory rules. If the Company is unable to manage growth 
effectively, or comply with such new regulations, the Company’s operating 
results will likely suffer and it may not be in a position to comply with its 
periodic reporting requirements or listing standards, which could result in the 
delisting of the Company from the NASDAQ.

Recently enacted and proposed changes in securities laws and related 
regulations could result in increased costs to the Company

Recently enacted and proposed changes in the laws and regulations affecting 
public companies, including the provisions of Sarbanes and recent rules enacted 
and proposed by the SEC and NASDAQ, have resulted in increased costs to the 
Company as it responds to the new requirements. In particular, complying with 
the internal control over financial reporting requirements of Section 404 of 
Sarbanes is resulting in increased internal costs and higher fees from the 
Company’s independent accounting firm. The new rules also could make it more 
difficult for the Company to obtain certain types of insurance, including 
director and officer liability insurance, and the Company 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 the Company to attract and retain qualified 
persons to serve on its Board of Directors, on committees of its Board of 
Directors, or as executive officers. The Company cannot yet estimate the amount 
of total additional costs it may incur or the timing of such costs as it 
implements these new and proposed rules.

The Company’s products rely on the stability of various infrastructure software 
that, if not stable, could negatively impact the effectiveness of the Company’s 
products, resulting in harm to the reputation and business of the Company

Developments of Internet and Intranet applications by Open Text depend on the 
stability, functionality and scalability of the infrastructure software of the 
underlying intranet, such as that of Sun, HP, Oracle, Microsoft and others. If 
weaknesses in such infrastructure software exist, the Company may not be able 
to correct or compensate for such weaknesses. If the Company is unable to 
address weaknesses resulting from problems in the infrastructure software such 
that the Company’s products do not meet customer needs or expectations, the 
Company’s business and reputation may be significantly harmed.

The Company’s quarterly revenues and operating results are likely to fluctuate 
which could materially impact the price of the Company’s Common Shares

The Company experiences, and is likely to continue to experience, significant 
fluctuations in quarterly revenues and operating results caused by many 
factors, including changes in the demand for the Company’s products, the 
introduction or enhancement of products by the Company and its competitors, 
market acceptance of enhancements or products, delays in the introduction of 
products or enhancements by the Company or its competitors, customer order 
deferrals in anticipation of upgrades and new products, lengthening sales 
cycles, changes in the Company’s pricing policies or those of its 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 the Company, 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 the Company’s products could have a material adverse effect on 
the Company’s results of operations in any particular quarter. Because of the 
impact of the timing of product introductions and the rapid evolution of the 
Company’s business and the markets it serves, the Company cannot predict 
whether seasonal patterns experienced in the past will continue. For these 
reasons, one should not rely on period-to-period comparisons of the Company’s 
financial results to forecast future performance. It is likely that the 
Company’s 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 its Common Shares could materially decline.

Failure to protect the Company’s intellectual property could harm its ability 
to compete effectively

The Company is highly dependent on its ability to protect its proprietary 
technology. The Company’s efforts to protect its intellectual property rights 
may not be successful. The Company relies on a combination of copyright, 
patent, trademark and trade secret laws, non-disclosure agreements and other 
contractual provisions to establish and maintain its proprietary rights. The 
Company, subject to those patents and patents pending as discussed in Item I of 
Part I, has generally not sought patent protection for its 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 the Company’s intellectual property rights 
may be difficult, particularly in some nations outside of the United States and 
Canada in which the Company seeks to market its products. Despite the 
precautions taken by the Company, it may be possible for unauthorized third 
parties, including competitors, to copy certain portions of the Company’s 
products or to reverse engineer or obtain and use information that the Company 
regards as proprietary.

If the Company is not able to attract and retain top employees, the Company’s 
ability to compete may be harmed

The Company’s performance is substantially dependent on the performance of its 
executive officers and key employees. The loss of the services of any of its 
executive officers or other key employees could significantly harm the 
Company’s business. The Company does not maintain “key person” life insurance 
policies on any of its employees. The Company’s success is also highly 
dependent on its continuing ability to identify, hire, train, retain and 
motivate highly qualified management, technical, sales and marketing personnel, 
including recently hired officers and other employees. Specifically, the 
recruitment of top research developers, along with experienced salespeople, 
remains critical to the Company’s success. Competition for such personnel is 
intense, and the Company may not be able to attract, integrate or retain highly 
qualified technical and managerial personnel in the future.

The volatility of the Company’s stock price could lead to losses by 
shareholders

The market price of the Common Shares has been highly 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 the Company or its competitors, changes in 
financial estimates by securities analysts or other events or factors. In 
addition, the financial markets have experienced significant price and volume 
fluctuations that have particularly affected the market prices of equity 
securities of many technology companies and that often have been unrelated to 
the operating performance of such companies or have resulted from the failure 
of the operating results of such companies to meet market expectations in a 
particular quarter. Broad market fluctuations or any failure of the Company’s 
operating results in a particular quarter to meet market expectations may 
adversely affect the market price of the 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 has often been 
instituted against such a company. Due to the volatility of the Company’s stock 
price, the Company 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 the Company’s business and operating results.

The Company may have exposure to greater than anticipated tax liabilities

The Company is subject to income taxes and non-income taxes in a variety of 
jurisdictions and its tax structure is subject to review by both domestic and 
foreign taxation authorities. The determination of the Company’s worldwide 
provision for income taxes and other tax liabilities requires significant 
judgment. Although the Company believes its estimates are reasonable, the 
ultimate tax outcome may differ from the amounts recorded in its financial 
statements and may materially affect its financial results in the period or 
periods for which such determination is made.


Quantitative and Qualitative Disclosures about Market Risk

The Company is primarily exposed to market risks associated with fluctuations 
in interest rates and foreign currency exchange rates.


Interest rate risks


The Company’s exposure to interest rate fluctuations relates primarily to its 
investment portfolio, since the Company had no borrowings outstanding under its 
line of credit at June 30, 2005. The Company primarily invests its cash in 
short-term, high-quality securities with reputable financial institutions. The 
primary objective of the Company’s investment activities is to preserve 
principal while at the same time maximizing the income the Company receives 
from its investments without significantly increasing risk. The Company does 
not use derivative financial instruments in its investment portfolio. The 
interest income from the Company’s investments is subject to interest rate 
fluctuations, which the Company believes could not have a material impact on 
the financial position of the Company.

All highly liquid investments with a maturity of less than three months at the 
date of purchase are considered to be cash equivalents. All investments with 
maturities of three months or greater are classified as available-for-sale and 
considered to be short-term investments. At June 30, 2005, the Company has no 
short-term investments. Some of the securities that the Company has 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 fiscal year ended June 30, 2005 would have been a 
decrease of approximately $0.7 million.


Foreign currency risk

Businesses generally conduct transactions in their local currency which is also 
generally their functional currency, or currency in which transactions are 
measured in their stand-alone financial statements. 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 the Company operates internationally, a substantial portion of its business 
is also conducted in foreign currencies other than the U.S. dollar. 
Accordingly, the Company’s 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. 
The Company cannot predict the effect of foreign exchange losses in the future; 
however, if significant foreign exchange losses are experienced, they could 
have a material adverse effect on its business, results of operations, and 
financial condition. Moreover, in any given quarter, exchange rates can impact 
revenue adversely.

The Company has net monetary asset and liability balances in foreign currencies 
other than the U.S. Dollar, including the Canadian Dollar (“CDN”), the Pound 
Sterling (“GBP”), the Australian dollar (“AUD”), the Swiss Franc (“CHF”), the 
Danish Kroner (“DKK”), the Arabian Dirham (“AED”), and the Euro (“EUR”). The 
Company’s cash and cash equivalents are primarily held in U.S. Dollars. The 
Company does not currently use financial instruments to hedge operating 
expenses in foreign currencies. The Company intends to assess the need to 
utilize financial instruments to hedge currency exposures on an ongoing basis.