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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 FORM 10-Q (Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the period ended August 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 0-20562
COREL CORPORATION
(Exact name of Registrant as specified in its Charter)
1600 Carling Avenue
(613) 728-8200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Ottawa, Ontario, Canada KIZ 8R7
(Address of Principal Executive Offices including Zip Code)
(Registrant's Telephone Number, Including Area Code)
(Former name, former address and former fiscal year if changed
since last report)
COREL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial statements
Consolidated Balance Sheets as of August 31, 2000 and November 30, 1999
Consolidated Statements of Cash Flows for the Nine Months Ended August 31, 2000 and 1999
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
PART II. Other Information
Item 1. Legal Proceedings
COREL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of US$)
August 31, |
November 30, | ||||
2000 | 1999 | ||||
ASSETS |
(unaudited) |
(audited) |
|||
Current assets: | |||||
Cash and cash equivalents | $ 11,557 | $ 18,021 | |||
Accounts receivable, net | |||||
Trade | 26,177 | 54,770 | |||
Other | 1,664 | 3,954 | |||
Inventory, net | 8,272 | 13,567 | |||
Income taxes recoverable . . . . . . . . . . . . . . . . . . . . . . | - | 5,135 | |||
Future income tax assets . . . . . . . . . . . . . . . . . . . . . | 1,713 | 1,642 | |||
Prepaid expenses | 2,277 | 2,042 | |||
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . | 51,660 | 99,131 | |||
Investments | 11,772 | 2,873 | |||
Capital assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 40,469 | 49,697 | |||
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $ 103,901 | $ 151,701 | |||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||
Current liabilities: | |||||
Accounts payable and accrued liabilities | $ 34,235 | $ 50,284 | |||
Current portion of Novell obligations | 5,470 | 10,594 | |||
Income taxes payable | 5,187 | - | |||
Deferred revenue | 13,100 | 18,472 | |||
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . | 57,992 | 79,350 | |||
Novell obligations. . . . . . | 6,464 | 7,985 | |||
Shareholders' equity | |||||
Common Shares (000s), no par value, 73,537 and | |||||
65,532 issued at August 31, 2000 and | |||||
November 30, 1999, respectively | |||||
Share capital | 243,998 | 222,155 | |||
Contributed surplus | 1,099 | 1,099 | |||
Deficit | (205,652) | (158,888) | |||
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . .. . | 39,445 | 64,366 | |||
Total liabilities and shareholders' equity . . . . . . . . . . . | $ 103,901 | $ 151,701 |
(See accompanying notes)
COREL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND DEFICIT
(in thousands of US$, except per share data)
(unaudited)
Three Months Ended
August 31, |
|
Nine Months Ended
August 31, |
| |||||
2000 | 1999 | 2000 | 1999 | |||||
Sales | $ 36,357 | $ 71,312 | $ 117,137 | $ 182,119 | ||||
Cost of sales | 7,840 | 15,466 | 34,121 | 41,118 | ||||
Gross profit | 28,517 | 55,846 | 83,016 | 141,001 | ||||
Expenses | ||||||||
Advertising | 6,912 | 11,641 | 29,586 | 32,358 | ||||
Selling, general and administrative | 18,602 | 19,377 | 64,421 | 59,934 | ||||
Research and development | 12,151 | 10,671 | 35,904 | 36,526 | ||||
Depreciation and amortization | 1,832 | 1,895 | 5,398 | 4,568 | ||||
Settlement proceeds . . . . . . . . . . . . . . . . . | - | (6,342) | - | (6,342) | ||||
Loss on foreign exchange | 727 | 319 | 1,196 | 265 | ||||
40,224 | 37,561 | 136,505 | 127,309 | |||||
Income (loss) from operations | (11,707) | 18,285 | (53,489) | 13,692 | ||||
Gain on investment. . . . . . . . . . . . . . . . . . . | 4,503 | - | 14,585 | - | ||||
Interest income (expense) | 191 | 46 | 254 | (283) | ||||
Income (loss) before income taxes | (7,013) | 18,331 | (38,650) | (13,409) | ||||
Income tax expense. . . . . . . . . . . . . . . . . . . | (2,944) | (737) | (5,882) | (1,275) | ||||
Share of loss in equity investee . . . . . . . . . | (788) | - | (2,232) | - | ||||
Net income (loss) | (10,745) | 17,594 | (46,764) | 12,134 | ||||
Deficit beginning of period . . . . . . . . . . . . . | (194,907) | (181,064) | (158,888) | (175,604) | ||||
Deficit end of period . . . . . . . . . . . . . . . . . | $ (205,652) | $ (163,470) | $ (205,652) | $ (163,470) | ||||
Income (loss) per share: | ||||||||
Net income (loss) | ||||||||
Basic | $ (0.15) | $ 0.28 | $ (0.69) | $ 0.20 | ||||
Fully diluted . . . . . . . . . . . . . . . . . . . . | $ (0.15) | $ 0.26 | $ (0.69) | $ 0.18 | ||||
Average number of Common Shares
outstanding (000s) |
||||||||
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . | 71,335 | 62,793 | 68,152 | 61,519 | ||||
Fully diluted . . . . . . . . . . . . . . . . . . . . | 71,335 | 69,062 | 68,152 | 68,720 |
(See accompanying notes)
COREL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of US$)
(unaudited)
Nine Months ended August 31 | |||
2000 | 1999 | ||
Operating activities: | |||
Net loss | $ (46,764) | $ 12,134 | |
Adjustments to reconcile net loss to net cash
provided by operating activities: |
|||
Depreciation and amortization | 15,204 | 14,436 | |
Write down of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 934 | - | |
Loss on disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . | 131 | - | |
Future income tax assets | (71) | 853 | |
Equity loss in investments . . . . . . . . . . . . . . . . . . . . . . . . . . | 2,232 | - | |
Gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | (14,585) | (809) | |
Decrease (increase) in accounts receivable . . . . . . . . . . . . . | 30,883 | (3,255) | |
Decrease (increase) in inventory. . . . . . . . . . . . . . . . . . . . . . | 5,295 | 2,168 | |
Decrease (increase) in prepaid expenses . . . . . . . . . . . . . . . | (235) | 2,405 | |
Decrease in accounts payable and accrued liabilities. . . . . . | (23,049) | (10,721) | |
Increase in income taxes payable . . . . . . . . . . . . . . . . . . . . . | 5,187 | (3,806) | |
Decrease in income taxes recoverable . . . . . . . . . . . . . . . . . | 5,135 | - | |
Increase (decrease) in deferred revenue . . . . . . . . . . . . . . . . | (5,372) | (304) | |
Net cash provided by (used in) operating activities | (25,075) | 13,101 | |
Financing activities: | |||
Issue of common stock | 21,843 | 6,712 | |
Reduction of Novell Obligations | (6,645) | (7,000) | |
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . | 15,198 | (288) | |
Investing activities: | |||
Purchase of investments | (1,663) | (1,561) | |
Purchase of capital assets | (9,781) | (12,871) | |
Proceeds on disposal of investment . . . . . . . . . . . . . . . . . . . . . . | 14,585 | 2,922 | |
Proceeds on disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . | 272 | 96 | |
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . | 3,413 | (11,414) | |
Decrease in cash and cash equivalents | (6,464) | 1,399 | |
Cash and cash equivalents at beginning of period | 18,021 | 22,393 | |
Cash and cash equivalents at end of period | $ 11,557 | $ 23,792 |
(See accompanying notes)
COREL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
(U.S. dollars, tabular amounts in thousands except per share data)
(unaudited)
1. Basis of Presentation
The consolidated financial statements include the accounts of Corel Corporation and its subsidiaries (collectively, the "Company") after elimination of all significant intercompany balances and transactions. Certain amounts for the comparative periods have been reclassified to conform to the current year presentation. The financial statements have been prepared by the Company in accordance with accounting principles for interim financial statements generally accepted in Canada, which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These principles are also generally accepted in the United States except as disclosed in Note 7. While management has based its assumptions and estimates on facts and circumstances currently known, actual amounts may differ from such estimates. The information included in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis and financial statements and notes thereto included in the Company's 1999 Annual Report on Form 10-K.
These financial statements have been prepared using generally accepted accounting principles that are applicable to a going concern, which assumes that the Company will realize its assets and discharge its liabilities in the normal course of business. As such, the financial statements do not reflect adjustments in the carrying values of the assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used, that would be necessary if the going concern assumption were not appropriate, and such adjustments could be material. Based on subsequent events, as described in Note 6, the Company believes the above going concern assumption is appropriate.
Software Revenue Recognition
On December 1, 1999, the Company adopted SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions" ("SOP 98-9"). Revenue from license fees for software products is recognized when the software is delivered, when there is persuasive evidence that an arrangement exists, when the fee is fixed and determinable and collection is probable. If software products transactions include the right to receive future products, a portion of the revenue is deferred and recognized as such products are delivered. Revenue from services is recognized as the services are performed. The adoption of SOP 98-9 has not had a material impact on the Company's financial results.
2. Unaudited Interim Financial Statements
The interim consolidated financial information contained herein is unaudited but, in the opinion of management, includes all adjustments (consisting only of normal recurring entries) necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Results of operations for the periods presented herein are not necessarily indicative of results of operations for the entire year.
3. Inventories
August 31,
2000 |
November 30, 1999 | ||
Product components | $ 4,569 | $ 8,582 | |
Finished goods | 3,703 | 4,985 | |
$ 8,272 | $ 13,567 |
4. 1998 Restructuring Charge
The Company proceeded with the implementation of a consolidation plan introduced in the third fiscal quarter of 1998. During the first nine months of fiscal 2000, approximately $0.5 million was disbursed, principally for facilities closure costs, from the November 30, 1999 balance of accrued restructuring costs. As at August 31, 2000 the restructuring accrual included in accounts payable and accrued liabilities was approximately $0.7 million.
5. Income Taxes
On December 1, 1999, the Company adopted the Canadian Institute of Chartered Accountants' ("CICA") handbook section 3465, "Income Taxes", which is similar in all material respects to United States Financial Accounting Standards Board Statement No.109. Under this new accounting policy, income taxes are provided for using the liability method whereby future tax assets and liabilities are recognized using current tax rates on the difference between the financial statement carrying amounts and the respective tax basis of assets and liabilities.
The tax effects of the significant components of temporary differences giving rise to the Company's future income tax assets are as follows:
August 31,
2000 |
November 30, 1999 | ||
Operating loss carryforward | $ 16,339 | $ 11,200 | |
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 5,915 | 9,400 | |
Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 3,392 | 3,100 | |
Royalties not yet deducted for tax purposes . . . . . . . . . . . . . . . . | 1,151 | 1,300 | |
Investment tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | 2,000 | 2,000 | |
28,797 | 27,000 | ||
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | (27,084) | (25,358) | |
Net current future tax assets | $ 1,713 | $ 1,642 |
The net current future tax assets relate to the operations in the United States of America. These assets are temporary differences which the Company believes will reverse in the near future.
6. Subsequent events
On September 6, 2000, the Company announced that it had identified the components of the previously-targeted $40 million in expenditure cuts, designed to realign the company's costs with its expected achievable revenues. As part of this plan, the Corporation announced the proposed consolidation of its engineering operations, based in Dublin, Ireland, to its corporate headquarters in Ottawa, Canada. A total of 139 positions at the Dublin facility will be eliminated as a result of the move.
On September 19, 2000, the Company announced it had entered into a share purchase agreement with an institutional investor. Subject to the terms and conditions of this agreement, the Corporation may issue and sell to the investor up to 14,690,000 shares in periodic draw down periods over 24 months, if all associated warrants are exercised.
On October 2, 2000, the Company announced it had formed a strategic alliance with Microsoft Corporation that will see the two companies expand their relationship to encompass projects related to Microsoft's new .NET initiative. As part of this expanded relationship, Microsoft has purchased 24 million non-voting participating convertible preferred shares at a purchase price of $5.625 per share or a total purchase price and liquidation value of $135 million convertible on a share for share basis subject to anti-dilution protections, but not in Microsoft's hands. The companies will also work together to support the development, testing and marketing of new products related to the .NET platform. Joint-marketing initiatives will include participation in product launches and trade show events and representation on mutual Web sites. In addition, both companies have agreed to settle certain legal issues between them.
7. Significant Differences Between Canadian and United States GAAP
The Company's financial statements are prepared on the basis of Canadian GAAP, which is different in some respects from US GAAP. Significant differences between Canadian GAAP and US GAAP are set forth below:
(a) Comprehensive Income
On December 1, 1999, the Company adopted the United States Financial Accounting Standards Board ("FASB") Statement No.130, "Reporting Comprehensive Income", ("FAS 130"). FAS 130 requires the presentation of comprehensive income and its components in a full set of general-purpose financial statements. The purpose of reporting comprehensive income is to report changes in equity that result from transactions and other economic events, excluding transactions with owners in their capacity as owners. The Company's comprehensive income consists of net loss and unrealized gain or loss on available-for-sale marketable securities; however, the adoption of FAS 130 had no impact on the financial position or results of operations of the Company. The Company's comprehensive income (loss) for the three and nine months periods ended August 31, 2000 and 1999 was $(10,499,500), $(51,182,998), $16,127,972 and $12,540,217 , respectively.
(b ) Stock-based compensation
At the Company's Annual and Special Meeting of Shareholders held on March 8, 2000, the shareholders approved an amendment to the Corel Corporation Stock Option Plan to increase the number of Common Shares reserved for issuance under the plan by 2,500,000 to accommodate the potential exercise of options currently granted under the plan. In addition, the shareholders also approved the extension of the expiry date of certain options held by senior management which were unable to be exercised, and therefore would expire, due to shares not being available pending the above noted shareholder approval of additional shares being reserved and also due to certain restricted trading periods imposed by the Company on senior management. The compensation cost to the Company for U.S. GAAP purposes is approximately $29.5 million.
(c) New accounting pronouncements
In June 1998, the FASB issued FAS 133, Accounting for Derivative Instruments and Hedging Activities, amended by FAS 137 and 138 which establish standards for derivative instruments and hedging activities. They require that all derivatives be recognized as either assets or liabilities on the Balance Sheet and be measured at fair value. These statements are effective for all fiscal quarters of all fiscal years beginning after June 15, 2000, which is the year beginning December 1, 2000 for the Company. Prior periods should not be restated. The Company has not yet assessed the impact of adopting this pronouncement.
On March 31, 2000, the FASB issued Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation - an interpretation of APB Opinion No. 25 ("FIN 44"), providing new accounting rules for stock-based compensation under APB Opinion No. 25, Accounting for Stock Issued to Employees. FIN 44 does not change FASB Statement No. 123, Accounting for Stock-Based Compensation. The new rules are significant and will result in compensation expense in several situations in which no expense is typically recorded under current practice, including option repricings, purchase business combinations and plans that permit tax withholdings. FIN 44 is generally effective for transactions occurring after July 1, 2000, but applies to repricings and some other transactions after December 15, 1998. The Company does not expect the adoption of FIN 44 to have a material impact on its results of operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements ("SAB 101"), which was amended in March 2000 by SAB 101A. SAB 101 summarizes certain of the SEC staff views in applying generally accepted accounting
principles to revenue recognition in financial statements. SAB 101 is effective beginning the Company's first quarter of fiscal 2001. The Company does not expect the adoption of SAB 101 to have a material impact on its results of operations or financial position.
8. Segmented information
The Company has only one global operating segment as detailed in the consolidated financial statements included herein.
The Company sells its products worldwide from three geographic regions. A summary of sales by product, by sales channel and by region from consolidated operations is as follows:
Three Months
Ended August 31 |
Nine Months
Ended August 31 | ||||||
2000 | 1999 | 2000 | 1999 | ||||
By product | |||||||
Professional & Consumer Graphics software . . . | $ 17,235 | $ 32,403 | $ 53,854 | $ 74,212 | |||
Productivity software . . . . . . . . . . . . . . . . . . . . . | 17,859 | 38,870 | 57,106 | 107,493 | |||
Linux operating system and applications. . . . . . . . . | 1,263 | - | 6,179 | - | |||
Video Communications . . . . . . . . . . . . . . . . . . . . . . | - | 39 | (2) | 414 | |||
Total sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . | $ 36,357 | $ 71,312 | $ 117,137 | $ 182,119 |
By sales channel | |||||||
Retail packaged products | $ 17,133 | $ 42,471 | $ 58,927 | $ 103,560 | |||
OEM licenses | 4,313 | 8,464 | 13,168 | 21,835 | |||
Corporate licenses | 14,911 | 20,377 | 45,042 | 56,724 | |||
Total sales | 36,357 | 71,312 | 117,137 | 182,119 |
By region | |||||||
North America | $ 25,963 | $ 48,191 | $ 72,052 | $ 120,266 | |||
Europe | 5,814 | 14,690 | 28,754 | 45,937 | |||
Other international | 4,580 | 8,431 | 16,331 | 15,916 | |||
Total sales | $ 36,357 | $ 71,312 | $ 117,137 | $ 182,119 |
9. Contingencies
The Company is a party to a number of claims arising in the ordinary course of business relating to employment, intellectual property and other matters. The Company believes that such claims, individually, will not have a material adverse effect on its business, financial position or results of operations but, in the aggregate, may have a material adverse effect on its business, financial position or results of operations. Such possible effect cannot be reasonably estimated at this time.
10. Stock option plan 2000
At the Company's Annual and Special Meeting of Shareholders held on March 8, 2000, the shareholders approved the Corel Corporation Stock Option Plan 2000 (the "Plan") with the maximum number of common shares to be issued under the Plan set at 4,000,000. Pursuant to the Plan, on March 30, 2000, options for an aggregate of 3,413,000 common shares of the Company, exercisable at a price of Cdn. $15.25 per share, were granted to employees of the Company and on April 17, 2000, options for 30,000 common shares of the Company, exercisable at a price of Cdn. $9.65 per share, were granted to an employee of the Company. On July 10, 2000, 63,000 options were granted at a price of Cdn. $5.40 and another 8,000 were granted at a price of $3.63. On August 15, 2000, 10,000 options were granted at a price of Cdn. $5.35.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company develops, manufactures, licenses, sells and supports a wide range of software products, including Linux operating system, graphics, business productivity and consumer product applications. The Company's products are available for users of most PCs, including International Business Machines Corporation and IBM compatible PCs, Apple Computer Inc.'s Macintosh, UNIX-based and Linux-based systems.
On December 22, 1999, the Company acquired a one third ownership stake in LinuxForce Inc., of Philadelphia, with a three-year option to increase the ownership position to two-thirds. LinuxForce is a company organized to deliver a full-range of technical services and support for Linux®. This strategic investment will allow Corel to deliver end-to-end Linux solutions by combining Corel's Linux product lines with a comprehensive technical and professional services portfolio.
On January 12, 2000, the Company entered into an agreement to acquire up to a 30 per cent interest in Newlix Corporation, an Ottawa-based Linux start-up company. Newlix develops Linux-based Omega server software.
On January 18, 2000, the Company entered into an agreement to acquire up to a 30 per cent stake in OE/One.com Corp., a Hull, Quebec based start up company developing an "Information Appliance" platform or thin-client Internet Appliance platform.
On February 7, 2000, the Company entered into a definitive merger agreement with Inprise Corporation ("Inprise") of Scotts Valley, California. On May 15, 2000 Inprise and the Company entered into a Termination Agreement and Release. As a result of the Termination Agreement, the proposed merger between Inprise and the Company was terminated and Inprise and the Company agreed to release each other from all liabilities arising from, relating to or in connection with the Merger Agreement and related option agreements.
On March 24, 2000, the Company entered into an agreement to purchase all of the assets relating to the Painter, Bryce and KPT family of graphic software products of MetaCreations Corporation of Santa Barbara California. The cash purchase price for the assets was $10.0 million of which $2.0 million was paid on each of March 24, 2000 and June 30, 2000 and the balance being payable in $2.0 million instalments on each of September 30, 2000, December 31, 2000 and January 31, 2001.
On June 28, 2000, the Company issued 7,299,270 common shares at Cdn. $4.11 per common share for total gross proceeds of Cdn. $30 million. In addition, warrants, on the basis of one warrant for every two shares purchased, were issued to the purchasers of common shares of the Company that were purchased as part of the offering. In the event that all of the warrants are exercised, the Company will issue an additional 3,649,635 common shares resulting in gross proceeds of Cdn. $16,642,335.60. As at August 31, 2000, 11,659 warrants have been exercised for gross proceeds of Cdn. $53,165.
On July 17, 2000, the Company announced that Hemera Technologies Inc. ("Hemera"), of Hull, Quebec, acquired GraphicCorp, a division of the Company, as well as the Company= s collection of premium and stock digital photographic images. As part of the transaction, the Company has obtained a 23 percent equity interest in Hemera. The companies have also entered into agreements which allow the Company to maintain perpetual licences to use and distribute the image content in its products and online services. The results of operations of GraphicCorp are not considered material to the Company's continuing operations.
On August 15, 2000 Michael Cowpland resigned as President, Chief Executive Officer and Chair of the Board of Directors of the Company. He will continue to serve as a director and as a technology advisor. Derek J. Burney, formerly executive vice-president, engineering and chief technology officer of the Company was appointed interim President and CEO. Mr. James Baillie, counsel to the law firm of Torys and Mr. Larry O'Brien, Chair of CALIAN Technology Ltd., were appointed to the Board of Directors following the Board of Directors' acceptance of the resignation from Mr. William G. Davis for personal reasons. Mr. Baillie has been appointed as Chair of the Board of Directors. On October 2, 2000 Mr. Burney was appointed President and CEO and appointed to the Board of Directors.
Results of Operations
Sales
Sales decreased 49% to $36.4 million in the third quarter of fiscal 2000 from $71.3 million in the third quarter of fiscal 1999. Sales also decreased 37% to $117.1 million in the first nine months of fiscal 2000 from $182.1 million in the first nine months of fiscal 1999. This decrease was due primarily to the Company's flagship products WordPerfect Office 2000 and CorelDRAW 9 nearing the end of their life cycles in fiscal 2000. Financial performance in the third quarter of fiscal 2000 as compared to the same period in the prior year was negatively impacted primarily by the decline in revenues. The Company has been impacted, as has the entire industry in the Company's belief, by the reduction in the amount of product inventory traditionally held within the distribution channel. The Company expects to release, for general availability, CorelDRAW 10 in the fourth quarter of fiscal 2000. The Company generally experiences an increase in revenues upon release of a major upgrade of its flagship products.
The table below shows sales consisting of professional and consumer graphics software, productivity software, Linux products and video communications:
Three Months
Ended August 31 |
Nine Months
Ended August 31 | ||||||
2000 | 1999 | 2000 | 1999 | ||||
Professional & Consumer Graphics software . . . . . . | $ 17,235 | $ 32,403 | $ 53,854 | $ 74,212 | |||
Productivity software . . . . . . . . . . . . . . . . . . . . . . . . | 17,859 | 38,870 | 57,106 | 107,493 | |||
Linux operating system and applications. . . . . . . . . . . . . . |
1,263 |
- | 6,179 | - | |||
Video Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . | - | 39 | (2) | 414 | |||
Total sales | $ 36,357 | $ 71,312 | $ 117,137 | $ 182,119 |
Graphics software revenues decreased by $15.2 million in the third quarter of fiscal 2000, as compared to the third quarter of fiscal 1999. Graphics software revenues also decreased by $20.4 million in the first nine months of fiscal 2000, as compared to the first nine months of fiscal 1999. The reduction in Graphics software revenue is primarily attributable to CorelDRAW 9 being in the early stages of its life cycle in the third quarter of fiscal 1999 and nearing the end of its life cycle in the third quarter of 2000.
Productivity software revenues decreased by $21.0 million in the third quarter of fiscal 2000, as compared to the third quarter of fiscal 1999. Productivity software also decreased by $50.4 million in the first nine months of fiscal 2000, as compared to the first nine months of fiscal 1999. The reduction in productivity sales revenue was due primarily to WordPerfect Office 2000 drawing to the end of its life cycle in the third quarter of fiscal 2000.
The Company distributes its products primarily through distributors (as retail packaged products), OEM licenses and corporate licenses. The table below shows sales through these channels:
Three Months
Ended August 31 |
Nine Months
Ended August 31 | ||||||
2000 | 1999 | 2000 | 1999 | ||||
Retail packaged products | $ 17,133 | $ 42,471 | $ 58,927 | $ 103,560 | |||
OEM licenses | 4,313 | 8,464 | 13,168 | 21,835 | |||
Corporate licenses | 14,911 | 20,377 | 45,042 | 56,724 | |||
Total sales | $36,357 | $71,312 | $117,137 | $182,119 |
Retail packaged products and corporate licences are sold primarily through distributors. The three largest distributors accounted for $7.1 million (20%) and $21.4 million (30 %) of the Company's sales in the third quarter of fiscal 2000 and 1999, respectively, and $16.8 million (14%) and $60.8 million (33%) in the first nine months of fiscal 2000 and 1999, respectively. Retailed packaged product volume decreased by $25.3 million in the third quarter of fiscal 2000 and by $44.6 million in the first nine months of fiscal 2000 as compared to the same time periods in fiscal 1999. The reduction in retail packaged products was due primarily to the Company's flagship products, WordPerfect Office 2000 and CorelDRAW 9, being near the end of their life cycles.
OEM licenses decreased by $4.2 million in the third quarter of fiscal 2000 as compared to the third quarter of fiscal 1999. OEM license revenue also decreased by $8.7 million in the first nine months of fiscal 2000, as compared to the first nine months of fiscal 1999. The decrease in OEM license revenue is due primarily to decreases in sales of CorelDRAW 9, WordPerfect Office and Print House.
Corporate licenses, including maintenance revenues, decreased by $5.5 million in the third quarter of fiscal 2000, as compared to the third quarter of fiscal 1999. Corporate licenses decreased by $11.7 million in the first nine months of fiscal 2000, as compared to the first nine months of fiscal 1999. The decrease in corporate licenses is primarily attributable to WordPerfect Office 2000 being near the end of its life cycle.
The table below shows the Company's sales geographically:
Three Months
Ended August 31 |
Nine Months
Ended August 31 | ||||||
2000 | 1999 | 2000 | 1999 | ||||
North America | $ 25,963 | $ 48,191 | $ 72,052 | $ 120,266 | |||
Europe | 5,814 | 14,690 | 28,754 | 45,937 | |||
Other international | 4,580 | 8,431 | 16,331 | 15,916 | |||
Total sales | $ 36,357 | $ 71,312 | $ 117,137 | $ 182,119 |
Sales outside North America, principally in Europe, were 29% and 32% of the Company's sales for the third quarter of fiscal 2000 and 1999, respectively. In the first nine months of fiscal 2000 and fiscal 1999 sales outside North America, principally in Europe, were 39% and 34%, respectively.
The Company's products are sold primarily in US dollars except to non-distributor customers in Canada. Sales in US dollars as a percentage of total sales were in excess of 90% in the third quarter of both fiscal 2000 and fiscal 1999, as well as the first nine months of both fiscal 2000 and fiscal 1999.
Gross Profit
The Company includes in cost of sales all costs associated with the acquisition of components, the assembly of finished products, product royalties, the amortization of software acquisition costs and shipping. Costs associated with warehousing are included in selling, general and administrative expenses. Acquired software has been capitalized and is currently being amortized over a 36-month period commencing with the month of first shipment of the product incorporating such acquired software, except for the cost of the WordPerfect family of software programs and related technology, which is currently being amortized over a five year period.
Gross profit as a percentage of sales increased marginally in the third quarter of fiscal 2000 as compared to the third quarter of fiscal 1999. In the first nine months of fiscal 2000 gross profit as a percentage of sales decreased as compared to the first nine months of fiscal 1999 due principally to the fixed costs components of cost of sales as described above being applied to an overall decrease in sales.
Advertising Expense
Advertising expenses include all marketing, advertising and trade show expenses. Advertising expenses decreased in both the third quarter of fiscal 2000 compared to the third quarter of fiscal 1999 and the first nine months of fiscal 2000 compared to the first nine months of fiscal 1999. The decrease in advertising expenses can be attributed to the Company's cost reduction plan.
Selling, General and Administrative Expense
Selling, general and administrative expenses include all general administrative expenses as well as expenses associated with warehousing. Selling, general and administrative expenses decreased in the third quarter of fiscal 2000 compared to the third quarter of fiscal 1999 primarily due to a reduced headcount. The increase in selling, general and administrative expenses in the first nine months of fiscal 2000 as compared to the first nine months of fiscal 1999 is primarily due to increased selling efforts for CorelDRAW 9, WordPerfect Office 2000 and Corel's Linux operating system, Corel LINUX OS, an increased headcount in the first two quarters of fiscal 2000 as well as a one time legal settlement of approximately $2.6 million and consulting costs related to the Company's cost reduction plan.
Research and Development Expense
The Company has expensed all of its internal software development costs as incurred, in accordance with Canadian GAAP. Research and development expenses are reported net of Canadian investment tax credits.
Net research and development expenses increased in the third quarter of fiscal 2000 compared to the third quarter of fiscal 1999 due to the upcoming launch of CorelDRAW 10 in the fourth quarter of fiscal 2000. Net research and development decreased marginally in the first nine months of fiscal 2000 as compared to the first nine months of fiscal 1999. Included in research and development expenses are one time employee severance costs associated with the Company's cost reduction plan of approximately $2.5 million.
Depreciation and Amortization Expense
Depreciation and amortization expenses, which do not include the amortization of purchased software, increased in both the third quarter and the first nine months of fiscal 2000 compared to the third quarter and the first nine months of fiscal 1999. The increase in depreciation and amortization expense is due primarily to the purchase of computer assets during the second quarter of fiscal 2000 as well as a one time revaluation of assets to market value.
Foreign Exchange Gains or Losses
Foreign exchange gains or losses on non-US dollar transactions are due to fluctuations in the value of those currencies relative to the value of the US dollar between the time of the transaction and its settlement, and revaluation gains or losses relating to short-term investments held in a currency other than the financial measurement and reporting currency due to fluctuations in the value of those currencies relative to the value of the US dollar.
Interest Expense (Income)
The Company reported a decrease in net interest expense in both the third quarter and the first nine months of fiscal 2000 compared to the third quarter and the first nine months of fiscal 1999. The change was due to the decreased balance of the Novell obligations.
Income Taxes
The Company's effective tax rates were (41%) and 4% for the third quarter of fiscal 2000 and 1999, respectively and (15.1%) and 9.5% for the first nine months of fiscal 2000 and 1999. These rates vary from the Company's statutory tax rate of 44%, primarily due to foreign tax rate differences associated with the Company's international operations and the unrecorded tax benefit of accounting losses in the 1999, 1998 and 1997 fiscal years. The accounting losses include loss carry forwards for income tax purposes.
Cost Reduction Plan
On May 16, 2000, following termination of the merger agreement with Inprise Corporation, the Company announced that it had undertaken a cost reduction plan with the intention of eliminating $40 million in costs to the Company on an annualized basis. The cost reduction plan has been implemented in a series of steps.
Cost reduction actions commenced in late April 2000, when the Company began to curtail discretionary spending, particularly in the area of direct marketing and travel. In early May 2000, the Company proceeded to identify broader areas of spending cuts, namely, in the areas of future hirings, capital purchases and other discretionary purchases. In mid-May 2000, the Company began to consider employee terminations and commenced a formal process of planning for spending cuts that would reduce its quarterly expenses to a level commensurate with expected achievable revenues.
The Company established a targeted spending rate for its second and third fiscal quarters based on its expectations in early May 2000 for achievable revenues in those periods. Consideration was also given to the amount of spending that had occurred in the first quarter and spending estimates for the second quarter, with a normalization factor for what was considered non-recurring. In summary, this called for a quarterly cost structure of $45 million or a $10 million quarterly reduction from normalized spending rates.
On June 8, 2000, the Company announced a reduction in its workforce of approximately 320 positions from a combination of employee terminations, termination of contract positions, elimination of vacant positions, attrition and termination of the services of independent contractors. The costs of severance and other termination payments estimated at $1.6 million, have been recorded in the Company's third fiscal quarter ending August 31, 2000. The estimated annualized cost saving from the workforce reduction, without taking into account one time implementation charges, is expected to be approximately $11 million.
On September 6, 2000, the Company announced that it had identified the remaining components of the previously-targeted $40 million in expenditure cuts, designed to realign the Company's costs with its expected achievable revenues. As part of this plan, the Company announced the proposed consolidation of its engineering operations, based in Dublin, Ireland, to its corporate headquarters in Ottawa, Canada. A total of 139 positions at the Dublin facility will be eliminated as a result of the move with the estimated costs of severance and other termination payment, being approximately $0.85 million recorded in the third quarter of fiscal 2000 and approximately $1.4 million in additional costs to be recorded in a future period.
The Company does not expect to incur significant costs in connection with the implementation of other components of the cost reduction plan other than workforce reduction.
As stated above, the Company's cost reduction plan is intended to match costs with expected achievable revenues for future quarters. In the past the Company has experienced an increase in revenues immediately following and as a result of the release by the Company of new versions of its products, including CorelDRAW and Corel WordPerfect Office. The Company may receive increased revenues from the expected release of a new version of CorelDRAW for Windows in the fourth quarter of fiscal 2000 and from the release of a new version of Corel WordPerfect Office for Windows in the first half of fiscal 2001. In addition, the Company may receive additional revenues from the release of Linux-based application software which is currently under development. However, there can be no assurance that the anticipated releases described above will result in such increases.
The Company is also considering the possible spin-off of non-core activities or activities which can be readily outsourced, as well as the sale of some or all of its minority investments. The Company does not expect that the transfer of such activities or the sale of such investments will result in immediate cost reductions or cash proceeds.
Liquidity and Capital Resources
As of August 31, 2000, the Company's principal sources of liquidity included cash and cash equivalents of approximately $11.6 million, and accounts receivable of $27.8 million. Cash equivalents consist of overnight call loans to a major Canadian bank.
Cash used in operations was $25.1 million for the first nine months of fiscal 2000 compared to cash provided by operations of $13.1 million for the first nine months of fiscal 1999. The decrease of $38.2 million was primarily due to the net loss of $46.8 million in the first nine months of fiscal 2000 as compared to the net income of $12.1 million in the first nine months of fiscal 1999.
Accounts receivable, net of provisions, increased in the third quarter of fiscal 2000 from the second quarter of 2000, primarily as a result of a reduction in the provision for sales returns to reflect the reduced level of products in the distribution channel.
Financing activities provided $15.2 million in the first nine months of fiscal 2000 compared to a net use of $0.3 million in the first nine months of fiscal 1999. The source of cash in 2000 through financing activities was the issuance of stock for $18.8 million and the exercise of employee stock options for $3 million as compared to $6.7 million from the exercise of stock options in the first nine months of fiscal 1999. The use of cash in the first nine months of 2000 and 1999 was the repayment of the Novell obligations.
Investing activities provided $3.4 million in the first nine months of fiscal 2000 compared to a use of
$11.4 million in the first nine months of fiscal 1999, including proceeds from sales of shares of GraphOn Corporation ("GraphOn") of $14.6 million in the first nine months of fiscal 2000 and expenditures for capital assets of $9.8 million in the first nine months of fiscal 2000 compared to $12.9 million for the purchase of capital assets in the first nine months of fiscal 1999.
On September 19, 2000, the Company announced it had entered into a share purchase agreement with an institutional investor. Subject to the terms and conditions of this agreement, the Company may issue and sell to the investor up to 14,690,000 shares in periodic draw down periods over 24 months, if all associated warrants are exercised.
On October 2, 2000, the Company announced it had formed a strategic alliance with Microsoft Corporation that will see the two companies expand their relationship to encompass projects related to Microsoft's new .NET initiative. As part of this expanded relationship, Microsoft has purchased 24 million non-voting participating convertible preferred shares at a purchase price of $5.625 per share or a total purchase price and liquidation value of $135 million convertible on a share for share basis subject to anti-dilution protections, but not in Microsoft's hands. The companies will also work together to support the development, testing and marketing of new products related to the .NET platform. Joint-marketing initiatives will include participation in product launches and trade show events and representation on mutual Web sites. In addition, both companies have agreed to settle certain legal issues between them.
At August 31, 2000, the Company's capital resource commitments consisted primarily of commitments under litigation settlement agreements, prior period asset purchase agreements and lease arrangements for office space. No significant commitments exist for future capital expenditures. The Company believes available balances of cash and cash equivalents combined with the proceeds of the shares issued and issuable as described above are sufficient to meet the Company's working capital requirements for the foreseeable future.
Potential Fluctuations in Quarterly Results
The Company has experienced, and expects to continue to experience, significant fluctuations in its quarterly operating results due to the following factors: market acceptance of new and enhanced products, timing and shipment of significant orders, mix of products sold, exchange rate fluctuations, length of sales cycles and cycles in the markets the Company serves. In addition, the Company's net sales and operating results for a future quarter will depend on generating and shipping orders in the same quarter that the order is received. The failure to receive anticipated orders or delays in shipments near the end of a quarter, due to rescheduling, cancellations or unexpected manufacturing difficulties, may cause net sales in a particular quarter to fall significantly below expectations. This could adversely affect the Company's operating results for such quarter.
Forward-looking Statements
This report and other reports and statements published by the Company from time to time (collectively, "Published Reports") contain, or may contain, certain forward-looking statements and information that are based on the beliefs of, and information currently available to, the Company's management, as well as estimates and assumptions made by the Company's management. When used in Published Reports, words such as "anticipate," "believe," "estimate," "expect," "future," "intend," "plan" and similar expressions, as they relate to the Company or the Company's management, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions relating to the Company's operations and results of operations, competitive factors and pricing pressures, shifts in market demand, the performance and needs of the industries served by the Company, the costs of product development, the successful implementation of the cost reduction plan and other risks and uncertainties, including, in addition to any risks and uncertainties specifically identified in the text surrounding such statements, those risks discussed in Corel Corporation's 1999 Annual Report on Form 10-K under the section titled "Factors That May Affect Future Operating Results," uncertainties with respect to changes or developments in social, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including the Company's stockholders, customers, suppliers, business partners, competitors and legislative, regulatory, judicial and other governmental authorities and officials. Should one or more of these risks or uncertainties materialize, or should the underlying estimates or assumptions prove incorrect, actual results or outcomes may vary significantly from those anticipated, believed, estimated, expected, intended or planned.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On or about February 23, 1998, the Company became aware that a class action lawsuit had been filed against it by named Plaintiff Great Neck Capital Appreciation Investment Partnership in the United States District Court for the Eastern District of New York. The Great Neck complaint was consolidated by order dated June 1, 1998 with four other previously filed complaints: Giskan, Meyer, Mangold and Hagler. Also on June 1, 1998, the court approved the plaintiff's motion for the appointment of lead plaintiff and lead counsel. Great Neck (as lead plaintiff) filed a consolidated amended complaint on behalf of lead plaintiff and the class on September 9, 1998 (the "Consolidated Complaint"). On February 7, 2000, the Court preliminarily approved the proposed settlement and fixed May 12, 2000 as the date for the settlement hearing. By Order and Final Judgment dated May 12, 2000, the Consolidated Complaint was dismissed with prejudice pursuant to an agreed payment by the Company.
On or about June 19, 1998, the Company became aware of a complaint filed against it by Dennis Berkla, d.b.a. Digarts Software. The plaintiff claimed breach of a Non-Disclosure Agreement (NDA) and claimed Copyright Infringement. On January 24, 2000, the District court issued an order denying recovery of attorneys' fees or costs by either party. On February 24, 2000, plaintiff filed a second notice of appeal, appealing the District Court's denial of recovery of plaintiff's attorneys' fees. Corel has cross-appealed the District Court's order denying Corel's attorneys' fees and costs. All appeals are pending. Court-connected mediation regarding the appeal issues was held on June 19, 2000 with no resolution.
On December 15, 1999, Corel filed suit against the United States of America in the U.S. District Court for the District of Columbia, in Washington, D.C., for the actions of its agency, the Department of Labor in conducting an unlawful procurement. The Complaint claims that, in its goal to standardize its office automation suite, the Department of Labor violated various statutes, regulations and treaties by "sole-sourcing" its contract to a competing vendor rather than conduct an open and fair procurement in accordance with U.S. law. In dispute is the decision by the Department of Labor to standardize on a competing product despite the fact that, at the time of the award, the Corel WordPerfect family of products was licenced for a majority of the Department's 20,000 work stations. It is believed that the three-year standardization deal with the competing vendor could be valued as high as US $8 million. As a remedy, Corel is seeking an immediate injunction against the further implementation of the "sole source" contract and to have it declared void. Corel is also seeking to have the standardization process and related procurement activities tendered in a fair and open competition in accordance with the applicable statutes, regulations and treaties. The Answer to the Complaint was filed by the Government on March 21, 2000. The Government has filed a motion to have Corel's action dismissed for lack of jurisdiction and, in the alternative, for summary judgment. Corel filed its motion for preliminary injunction. All motions were argued on August 11, 2000 in conjunction with arguments on the merits of the case. The decision of the court is pending.
On October 14, 1999, the Ontario Securities Commission filed charges against Dr. Michael C.J. Cowpland, the Company's former Chairman, President and Chief Executive Officer and his holding company, M.C.J.C. Holdings Inc., in the Ontario Court of Justice. The charges include four counts of violating provisions of the Ontario Securities Act related to insider trading. The trial of these issues is a private matter between the Ontario Securities Commission and Dr. Cowpland as an individual. As such, it is not expected to affect the Company's day-to-day activities. Dr. Cowpland continues to deny all allegations by the Ontario Securities Commission.
On March 13, 2000, the Company was served with a complaint filed against it and Dr. Michael C.J. Cowpland by plaintiffs Anthony Basilio and Fred Spagnola in the United States District Court for the Eastern District of Pennsylvania. The complaint was filed on behalf of all persons who purchased or otherwise acquired Corel common shares between December 7, 1999 and December 21, 1999 (the "Class Period"). The complaint alleges that the defendants violated various provisions of the federal securities laws, including Section 10(b), Section 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934, as amended, by misrepresenting or failing to disclose material information about Corel's financial condition. The complaint seeks an unspecified amount of money damages. On March 29, 2000, the Company was served with a second complaint filed against the same named defendants by plaintiff Alan Treski in the United States District Court for the Eastern District of Pennsylvania. This second complaint references an identical Class Period as the Basilio complaint referenced above and contains similar allegations. Since service of the Basilio and Treski complaints, the Company has become aware of four additional complaints filed in the same jurisdiction and one complaint filed in the District of Massachusetts that reference an identical Class Period and contain similar allegations. On May 12, 2000, the firm of Savett Frutkin Podell & Ryan, counsel for plaintiffs Basilio, Spagnola and Treski, filed Motions for Appointment of Lead Plaintiffs and Co-Lead Counsel and a related Motion for Consolidation in respect of the six pending Eastern District of Pennsylvania and the one District of Massachusetts actions. A scheduling conference occurred on June 14, 2000. All plaintiffs support consolidation of the pending cases in the Eastern District of Pennsylvania. At the conference on June 14, 2000, the court appointed Fred Spagnola, Michael Perron and David Chavez as Lead Plaintiffs, and the law firms of Weinstein, Kitchenoff Scarlato & Goldman Ltd. and Savett Frutkin Podell& Ryan, P.C. as Co-Lead Counsel. The Court has consolidated all pending cases in the Eastern District of Pennsylvania. An Amended Consolidation Complaint was served on or about August 14, 2000. The Amended Consolidated Complaint references an expanded class period, from December 7, 1999 to March 20, 2000 (inclusive). On October 16, 2000 Corel will file a motion to dismiss the complaint on the grounds of forum non conveniens and for failure to state the claims in accordance with applicable laws. The Company intends to aggressively defend this matter.
On April 24, 2000, Carleton Acquisition Co., a wholly-owned subsidiary of Corel, was served with a lawsuit filed by Management Insights, Inc. in the Court of Chancery of the State of Delaware in New Castle County against Inprise Corporation ("Inprise"), four individually named directors of Inprise, Corel and Carleton Acquisition Co. The president and CEO of the plaintiff corporation is C. Robert Coates, who resigned as director of Inprise allegedly as a result of the proposed merger with Corel. The plaintiff sought an injunction against the consummation of the merger, and in the alternative sought rescissory and other unspecified equitable relief and damages. As against Corel, the plaintiff alleged that the Company induced the merger agreement with misrepresentations of its current and projected financial results. Due to the failure of the Corel / Inprise merger on May 16, 2000, the case became moot. On June 5, 2000, the case was dismissed with prejudice, with the defendant Inprise contributing some funds toward the plaintiff's legal costs. The Company did not contribute funds toward the settlement.
The Company is a party to a number of additional claims arising in the ordinary course of business relating to employment, intellectual property and other matters. The Company believes that such claims, individually, will not have a material adverse effect on its business, financial position or results of operations but, in the aggregate, may have a material adverse effect on its business, financial position or results of operations. Such possible effect cannot be reasonably estimated at this time.
Item 6. Exhibits and Reports on Form 8-K
a) The following exhibits are filed as part of this Quarterly Report on Form 10-Q
3.1 - Amendment to Articles of Incorporation, dated October 2, 2000, to create a first series of 24,000,000 participating convertible preferred shares.
4.1 - Purchase Agreement, dated October 2, 2000, between Corel Corporation and Microsoft Corporation (previously filed as an exhibit to the Company's Current Report on Form 8-K dated October 2, 2000 and incorporated herein by reference)
4.2 - Registration Rights Agreement, dated October 2, 2000, between Corel Corporation and Microsoft Corporation (previously filed as an exhibit to the Company's Current Report on Form 8-K dated October 2, 2000 and incorporated herein by reference)
10.1 - Technology Support and Settlement Agreement, dated October 2, 2000, between Corel Corporation and Microsoft Corporation (previously filed as an exhibit to the Company's Current Report on Form 8-K dated October 2, 2000 and incorporated herein by reference)
27.1 - Financial Data Schedule
b) Reports on Form 8-K
On June 13, 2000, June 16, 2000, June 21, 2000, June 22, 2000, June 26, 2000, June 27, 2000, June 30, 2000, August 17, 2000, September 12, 2000, September 28, 2000 and October 11, 2000 the Company filed Current Reports on Form 8-K which included information under Item 5 (Other Events).
Items 2,3,4 and 5 are not applicable and have been omitted.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
COREL CORPORATION
(Registrant)
Date: October 16, 2000 By: /s/ John Blaine
John Blaine
Chief Financial Officer, Executive Vice QAGQ
(Principal Financial and Accounting Officer)
Exhibit 3.1
Canada Business Corporations Act Loi canadienne sur les sociétés par actions "Robert D. Chapman" Secretary Filed - Déposée SCHEDULE A
The Articles of the Corporation are amended to create a first series of
24,000,000 participating convertible
preferred shares which shall be designated the Series A Participating Convertible Preferred Shares (the "Series A
Shares") and shall have attached thereto, in addition to the rights, privileges, conditions and restrictions attaching
to the Preferred Shares as a class, the following rights, privileges, conditions and restrictions as set forth below: 1. Rank of Shares Within Class. Each Series A Share shall rank equally and be
identical in all
respects. 2. Dividends. The holders of full or fractional Series A Shares shall be entitled to
receive, when and as
declared by the Board of Directors of the Company (the "Board"), but only out of funds or assets of the Company
legally available therefor, dividends on each date (each, a "Payment Date") that any dividend or other distribution
is payable or made (whether in the form of cash, securities, rights, warrants or other property) on or in respect of
the Common Shares (as defined below) other than dividends or other distributions to the extent payable in form of
Common Shares (each, a "Participating Dividend") in an amount per whole Series A Share equal to the aggregate
amount of the Participating Dividends that would be payable on the Payment Date to a holder of the Reference
Package (as defined below) entitled to receive such Participating Dividend. Each such dividend shall be paid to the
holders of record of the Series A Shares on the date, not more than 60 days before the Payment Date, fixed by the
Board before the Payment Date to determine the holders of the Series A Shares entitled to receive such dividend.
Dividends on each full and each fractional Series A Share shall be cumulative from September 29, 2000 (the
"Original Issue Date"). "Common Shares" means the common shares in the capital of the Company constituted as of the
Original
Issue Date and any other shares or securities into which such shares are exchanged, consolidated or reclassified as
a result of any merger, consolidation, reclassification or other transaction. A "holder", with respect to any Preferred Share, means the person or entity in whose name
such Preferred
Share is registered on the Preferred Share register maintained by the Company or its agent. "Reference Package" initially means one fully paid and nonassessable Common Share, but is
subject to
adjustment as provided in Section 6 hereof. 3. Certain Restrictions.
So long as any Series A Share is outstanding, no dividends (except to the
extent they are payable in the form of Common Shares) shall be declared, paid or set aside for payment, and no
other distribution shall be declared, made or set aside for making, on or in respect of any Common Shares or any
Junior Shares (as defined below), nor shall any Common Shares, Junior Shares or Parity Shares (as defined below)
be redeemed, purchased or otherwise acquired for any consideration (or any consideration be paid to or made
available for a sinking fund for the redemption of any such shares), by the Company, directly or indirectly
(including without limitation by any of its subsidiaries), unless, in each case, all of the cumulative dividends on all
of the outstanding Series A Shares payable prior thereto or contemporaneously therewith shall have been, or shall
contemporaneously be, paid in full. "Junior Shares" means any class
or series of shares of the Company (other than the Common Shares)
hereafter authorized over which the Series A Shares have preference or priority in the distribution of assets on any
liquidation, dissolution or winding up of the Company or other distribution of assets of the Company for the
purposes of winding up its affairs. "Parity Shares" means any class
or series of shares of the Company (other than the Series A Shares) that
ranks on a parity with the Series A Shares in the distribution of assets on any liquidation, dissolution or winding up
of the Company or other distribution of assets of the Company for the purposes of winding up its affairs. 4. Liquidation, Dissolution or Winding Up. In the event of any voluntary or
involuntary liquidation,
dissolution or winding up of the affairs of the Company or other distribution of assets of the Company for the
purposes of winding up its affairs (collectively, a "Liquidation"), the holders of full and fractional Series A Shares
shall be entitled, before any distribution or payment is made on any date to the holders of the Common Shares or
any Junior Shares in connection with such Liquidation, to be paid in full out of the assets of the Company available
for distribution to its shareholders an amount per whole Series A Share equal to the greater of (A) US$5.625 and
(B) the aggregate amount that would be distributed on such date in connection with such Liquidation to a holder of
the Reference Package assuming it was outstanding and that the Series A Shares did not exist, together in each
case with all accrued and unpaid dividends to such distribution or payment date, whether or not earned or declared
(the "Liquidation Preference"). If such payment shall have been made in full to all holders of Series A Shares, the
holders of Series A Shares as such shall have no rights or claims to any remaining assets of the Company. In the
event the assets of the Company available for distribution to the holders of Series A Shares in connection with any
Liquidation shall be insufficient to pay in full all amounts to which such holders are entitled pursuant to this
Section 4 and all liquidation preferences to which all Parity Shares are entitled in connection with such
Liquidation, the holders of Series A Shares and such Parity Shares shall be paid pro rata in accordance with their
respective aggregate liquidation preferences. For the purposes of this Section 4, the consolidation or merger of, or
binding share exchange by, the Company with any other entity shall not be deemed to constitute a Liquidation. 5. Voting Power. The holders of Series A Shares shall have no voting rights except as
required by law;
provided, however, that the Company shall not amend its Articles of Incorporation or by-laws in any manner which would alter or change
the powers,
preferences or special rights of the holders of the Series A Shares so as to affect them adversely without the
affirmative vote of the holders of a majority or more of the outstanding Series A Shares, voting separately as a
class on the basis of one vote per share and provided further, however, that with respect to any vote to approve an
amalgamation or an arrangement that would result in an exchange, reclassification or cancellation of the Series A
Shares and the Common Shares on substantially the same basis, which vote is held within six months of the
completion of a "Permitted Bid" or "Competing Permitted Bid", each as defined in the Shareholders Rights Plan
Agreement described in Section 6(a) below, pursuant to which an offeror has offered to purchase all of the
outstanding Series A Shares and all of the outstanding Common Shares at a price for the Series A Shares which is
the greater of (i) the offer price for the Common Shares multiplied by the number of Common Shares as then
constitutes the Reference Package, and (ii) an amount equal to the Liquidation Preference, the holders of the Series
A Shares shall be entitled to vote, on an as converted basis, together with the holders of the Common Shares and of
any other series of Preferred Shares but not separately as a class or series. 6. Conversion Rights. (a) General. Each Series A Share
shall be convertible at the option of the holder thereof, at any time,
into the Reference Package. Notwithstanding anything herein to the contrary, if the holder of a Series A Share is
Microsoft Corporation, a Washington corporation, or any of its Affiliates or Associates (as each such term is
defined in the Shareholder Rights Plan Agreement, dated as of February 11, 1999 and as amended and restated as
of March 31, 1999, between the Company and Montreal Trust Company of Canada, as Rights Agent), such holder
shall have no rights to convert such Series A Share but any transferee holder thereof which is not Microsoft
Corporation or one of its Affiliates or Associates shall have such conversion rights from and after such transfer. (b) Extraordinary Common Stock Event. If the Company shall (i) issue any additional
Common Shares
as all or part of a dividend or other distribution on or in respect of outstanding Common Shares, (ii) subdivide the
outstanding Common Shares into a greater number of Common Shares, or (iii) combine the outstanding Common
Shares into a smaller number of Common Shares, then and in each such case the number of Common Shares in the
Reference Package shall be changed effective immediately upon the consummation of such event into the number
of Common Shares that a holder of the Reference Package immediately prior to such change and consummation
would hold immediately after such event as a result thereof. (c) Changes in the Common Shares. If the Common Shares are exchanged for or
changed into other
stock or securities, cash and/or any other property as a result of any merger, consolidation, reclassification or other
transaction, then and in any such case each Series A Share shall at the same time be similarly exchanged or
changed into an amount per whole Series A Share equal to the aggregate amount per whole Series A Share equal to
the aggregate amount of stock, securities, cash and/or other property (payable in kind), as the case may be, (the
"Substitute Consideration") that a holder of the Reference Package immediately prior to the consummation of such
transaction would have received as a result of such transaction if it was entitled to participate therein; provided,
however, that if the Substitute Consideration consists in whole or in part of securities of the entity surviving or
resulting from such transaction (which may be the Company) entitled to vote generally in the election of directors
of such entity then, at the option of each holder of the Series A Shares, such holder may elect, in lieu of the
exchange or change provided above, either (i) if the Company is the surviving or resulting entity, to have the Series
A Shares remain outstanding and to have the Reference Package changed effective immediately upon the
consummation of such transaction into the Substitute Consideration that a holder of the Reference Package
immediately prior to such consummation and change would have received as a result of such transaction if it was
entitled to participate therein or (ii) if the Company is not the surviving or resulting entity (the "Successor"), to
receive in exchange for its Series A Shares the same number of preferred shares of the Successor with terms
identical to the terms of the Series A Shares except that the references to (A) the Company shall be to the
Successor, (b) the Board shall be to the board of directors of the Successor, (C) the Common Shares shall be to the
voting securities of the Successor issued in such transaction and (B) the Reference Package shall be the Substitute
Consideration that a holder of the Reference Package immediately prior to the consummation of the transaction
would have received as a result of such transaction if it was entitled to participate therein. (d) Exercise of Conversion Privilege and Procedure for Conversion. To exercise its conversion privilege, a holder of Series A Shares shall surrender the certificate or
certificates
representing the shares being converted to the Company at its principal office (which certificate or certificates
shall, if required by the Company, be duly endorsed to the Company or in blank or be accompanied by proper
instruments of transfer to the Company or in blank), accompanied by a written notice to the Company to the effect
that such holder elects so to convert such shares and specifying the name or names (with address or addresses) in
which a certificate or certificates or other appropriate instruments evidencing the shares or other property to which
such holder is entitled upon such conversion. All accrued and unpaid dividends or other distributions payable on
any Series A Shares surrendered for conversion, whether or not earned or declared, shall be paid forthwith upon
such conversion. Any dividend payable on Series A Shares surrendered for conversion during the period from the
close of business on any record date for the payment of such dividend on such shares to the opening of business
on the date of payment of such dividend shall be payable to the holder of record of such shares as of such record
date notwithstanding such conversion. As promptly as practicable after the surrender by a holder of Series A
Shares of certificates evidencing the Series A Shares being converted at the office referred to above and
compliance by such holder with the other conditions specified above, the Company shall issue and shall deliver to
the person or persons entitled thereto (as specified in the applicable written notice of conversion) a certificate or
certificates evidencing the number of whole Common Shares, other securities and/or property to which such
person or persons shall be entitled as provided herein, together (if applicable) with cash in lieu of fractional
Common Shares as provided below. Such conversion shall be deemed to have been made as of the close of
business on the date of such surrender and compliance and at such time such person or persons shall be treated for
all purposes as the record holder or holders (or, in the case of securities or property not in registered form, the
owner or owners) of such Common Shares, other securities and/or property on such date and the rights of the
converting holder as holder of the converted Series A Shares shall cease. (e) Cash in Lieu of Fractional Shares. No fractional Common Shares shall be
issued upon conversion of
Series A Shares. If a number of Series A Shares (evidenced by one or more certificates) shall be surrendered for
conversion at one time by the same holder, the number of whole Common Shares issuable upon conversion thereof
shall be computed on the basis of the aggregate number of Series A Shares being converted at such time by such
holder. Instead of any fractional Common Shares that would otherwise be issuable to a holder upon conversion of
Series A Shares, the Company shall pay to such holder a cash adjustment in respect of such fractional share in an
amount equal to the same fraction of the Closing Price (as defined below) on the day of conversion. "Closing Price" of the Common Shares on any day means the last reported per share sale
price, regular
way, of the Common Shares on such day or, if no sale takes place on such day, the average of the reported closing
per share bid and asked prices, regular way, of the Common Shares on such day, in each case on the Nasdaq
National Market or, if the Common Shares are not quoted on the Nasdaq National Market on such day, on the
principal national securities exchange or quotation system in the United States or Canada on which the Common
Shares are listed or admitted to trading or quoted on such day, or, if the Common Shares are not so listed or
admitted to trading or quoted on such day, the average of the closing per share bid and asked prices of the
Common Shares on such day in the over-the-counter market as reported by a generally acceptable national
quotation service or, if not so available in such manner, as furnished by any member firm of The Toronto Stock
Exchange selected from time to time by the Board for that purpose on such day or, if not so available in such
manner, as otherwise determined as of such day in good faith by the Board (whose good faith determination shall
be conclusive and described in a resolution of the Board). (f) Partial Conversion. In the event some but not all of the Series A Shares
represented by a certificate
or certificates surrendered by a holder are converted, the Company shall execute and deliver to the holder a new certificate representing the number of Series A Shares which were not converted. (g) Reservation of Common Shares. The Company shall at all times reserve and keep
available out of
its authorized but unissued Common Shares, solely for the purpose of effecting the conversion of the Series A Shares, the full number
of its Common
Shares then deliverable upon conversion of all the then outstanding Series A Shares, and if at any time the number
of authorized but unissued Common Shares shall not be sufficient to effect the conversion of all the then
outstanding Series A Shares, the Company shall take such corporate action as may be necessary to increase its authorized but unissued Common Shares to such number of
shares as
shall be sufficient for such purpose. If any Common Shares required to be reserved for issuance upon conversion
of Series A Shares require registration with or approval of any governmental authority before such shares may be
issued or freely transferred upon conversion, the Company will in good faith and as expeditiously as is
commercially reasonable endeavor to cause such shares to be duly registered or approved, as the case may be;
provided, however, that the foregoing shall apply in any jurisdiction only when the Series A Shares shall have
become freely transferable under applicable securities laws of such jurisdiction. If the Common Shares are then
listed or admitted for trading or quoted on any national securities exchange or quotation system, the Company will,
if permitted by the rules of such exchange or quotation system, cause all Common Shares issuable upon conversion
of the Series A Shares to be so listed, admitted for trading or quoted, as the case may be. 7. Issuer Tender or Exchange Offers. If the Company, directly or indirectly
(including without
limitation through any of its subsidiaries), shall consummate a tender or exchange offer (including an issuer bid in
Canada) for all or any portion of the Common Shares, it shall contemporaneously therewith consummate a tender
or exchange offer (or issuer bid in Canada) for the same portion of the outstanding Series A Shares for
consideration per whole Series A Share equal to the product of (A) the consideration paid per Common Share in
such tender or exchange offer for the Common Shares and (B) the Reference Package. 8. Notices. The Company shall distribute to the holders of Series A Shares copies of
all notices,
materials, annual and quarterly reports, proxy statements, information statements and any other documents that it
distributes generally to the holders of Common Shares, at such times and by such method as such documents are
distributed to
such holders of Common Shares. 9. No Reissuance. No shares of Series A Stock acquired by the Company by reason of
purchase,
conversion or otherwise shall be reissued and shall be cancelled. 10. Redemption. The Series A Shares shall not be redeemable.
Industry Canada
Industrie Canada
Date
Signature
Title -- Titre
7530-21-936-1387 (01-93) 46
FOR DEPARTMENTAL USE ONLY - À L'USAGE DU MINISTÈRE SEULEMENT