0000930661-01-501833.txt : 20011009
0000930661-01-501833.hdr.sgml : 20011009
ACCESSION NUMBER: 0000930661-01-501833
CONFORMED SUBMISSION TYPE: S-4/A
PUBLIC DOCUMENT COUNT: 6
FILED AS OF DATE: 20010926
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: COREL CORP
CENTRAL INDEX KEY: 0000890640
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372]
IRS NUMBER: 101151819
STATE OF INCORPORATION: A6
FISCAL YEAR END: 1130
FILING VALUES:
FORM TYPE: S-4/A
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-67310
FILM NUMBER: 1744864
BUSINESS ADDRESS:
STREET 1: 1600 CARLING AVE
STREET 2: OTTAWA ONTARIO K1Z 8R7
CITY: CANADA
STATE: A6
ZIP: 00000
BUSINESS PHONE: 6137288200
MAIL ADDRESS:
STREET 1: 1600 CARLING AVENUE
STREET 2: OTTAWA ONTARIO K1Z 8R7
CITY: CANADA
STATE: A6
ZIP: 00000
S-4/A
1
ds4a.txt
AMENDMENT NO. 3 TO FORM S-4
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 2001
Registration Statement No. 333-67310
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
COREL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
--------------
Canada 7372 Not applicable
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction Industrial Identification No.)
of Incorporation or Classification Code
Organization) Number)
1600 Carling Avenue
Ottawa, Ontario K1Z 8R7
(613) 728-8200
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
--------------
John Blaine
Chief Financial Officer
Corel Corporation
1600 Carling Avenue
Ottawa, Ontario K1Z 8R7
(613) 728-8200
(Name, Address, Including Zip Code and Telephone Number, Including Area Code,
of Agent for Service)
Copies of all communications to:
Robert D. Chapman, Esq. Mark Weissler, Esq. John B. McKnight, Esq.
McCarthy Tetrault LLP Milbank, Tweed, Hadley& Locke Liddell & Sapp
40 Elgin Street, Suite McCloy LLP LLP
1400 One Chase Manhattan 2200 Ross Avenue, Suite
Ottawa, Ontario K1P 5K6 Plaza 2200
New York, New York 10005 Dallas, Texas 75201
--------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective
and all other conditions to completion of the merger contemplated by the merger
agreement, dated as of July 16, 2001, described in the enclosed
prospectus/proxy statement, have been satisfied or waived.
--------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, as amended, check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
--------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
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[LOGO OF MICROGRAFX] September 25, 2001
Dear Micrografx Shareholder:
You are cordially invited to attend a special meeting of common shareholders
of Micrografx, Inc. to be held on Monday, October 29, 2001, at 10:00 a.m.,
local time, at the Doubletree Hotel, 8250 North Central Expressway, Dallas,
Texas. At the special meeting, we are seeking your approval of a merger
agreement providing for the merger of Micrografx and a subsidiary of Corel
Corporation, with the surviving company becoming a subsidiary of Corel. The
merger agreement has been unanimously approved by the boards of directors of
Micrografx and Corel.
The consideration you would receive in the merger for each share of
Micrografx common stock and Micrografx preferred stock, on an as-converted
basis, will depend on the price of Corel common stock immediately before the
time of the merger and other factors described in this prospectus/proxy
statement. If as at present the price of Corel common stock at that time is
below $2.90, the consideration will be either approximately $1.99 in cash, or
Corel common stock having a value of approximately $1.02 plus a Corel
participation right, as determined by Corel in its discretion. The
participation right will convert a year after closing into $1.02 in cash or, if
the price of Corel common stock at that time is higher than the price at
closing, an amount of Corel common stock having a value of $1.02 plus 18% of
the appreciation of Corel common stock during the period between closing and
the first anniversary of closing. If the price of Corel common stock at the
time of closing is $2.90 or above, Corel may not pay cash at closing and must
issue shares of Corel common stock and Corel participation rights as described
above.
If the closing was to occur today, the average sales price would be less
than $2.90 and, as a result, Corel could elect to pay cash for the outstanding
Micrografx common stock and preferred stock. However, there can be no assurance
that the average sales price of Corel common stock will remain below $2.90. If
the average sales price of Corel common stock increases to $2.90 or greater
prior to the closing, Micrografx shareholders would receive Corel common stock
and Corel participation rights. Corel common stock is listed on the Nasdaq
National Market and The Toronto Stock Exchange under the symbols "CORL" and
"COR," respectively. You are urged to obtain current market quotations for
Corel common stock. The Micrografx common stock is traded on the over-the-
counter bulletin board of the National Association of Securities Dealers, Inc.
under the symbol "MGXI."
The other Micrografx directors and I urge you to vote FOR the proposal to
approve the merger agreement, which we have unanimously approved after careful
consideration. Your vote is extremely important and your early response will be
greatly appreciated. If Micrografx shareholders approve the merger agreement at
the Micrografx special meeting and the other closing conditions are satisfied,
Micrografx and Corel expect to complete the merger within the several days
following the Micrografx special meeting and, in any event, as soon as
reasonably practicable following the Micrografx special meeting. You are
encouraged to read this prospectus/proxy statement in its entirety.
Sincerely,
James L. Hopkins
Chairman, President and Chief
September 25, 2001 Executive Officer
Dallas, Texas
For a discussion of significant matters that should be considered before
voting at the Micrografx special meeting, see "Risk Factors" beginning on page
16.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved this prospectus/proxy statement or the
securities to be issued in the merger or determined if this document is
accurate or adequate. Any representation to the contrary is a criminal offense.
Further, no securities commission or similar regulatory authority in Canada has
in any way passed on the merits of the Corel common stock or Corel
participation rights offered under this prospectus/proxy statement or the
disclosure contained in this prospectus/proxy statement. Any representation to
the contrary is a criminal offense.
This prospectus/proxy statement is dated September 25, 2001 and is first
being mailed to the holders of Micrografx common stock on or about September
28, 2001.
MICROGRAFX, INC.
8144 Walnut Hill Lane, Suite 1050
Dallas, Texas 75231
----------------
NOTICE OF SPECIAL MEETING OF COMMON SHAREHOLDERS
TO BE HELD ON OCTOBER 29, 2001
----------------
TO THE COMMON SHAREHOLDERS OF MICROGRAFX, INC.:
NOTICE IS HEREBY GIVEN that a special meeting of holders of common stock,
par value $.01 per share, of Micrografx, Inc., a Texas corporation, will be
held on October 29, 2001, at 10:00 a.m., local time, at the Doubletree Hotel
located at 8250 North Central Expressway, Dallas, Texas for the following
purposes:
1. To consider and vote on a proposal to approve the merger agreement dated
as of July 16, 2001, among Micrografx, Inc., Corel Corporation and Calgary I
Acquisition Corp. and the merger of Micrografx with Calgary I Acquisition Corp.
A copy of the merger agreement is attached as Annex A to the accompanying
prospectus/proxy statement.
2. To transact any other business as may properly come before the Micrografx
special meeting, including any motion to postpone or adjourn to a later time to
permit further solicitation of proxies if necessary to establish a quorum or to
obtain additional votes in favor of the proposal, or before any postponements
or adjournments thereof.
The merger agreement, the proposed merger and other related matters are more
fully described in the accompanying prospectus/proxy statement. The Micrografx
board of directors unanimously recommends that you vote "FOR" the proposal
listed above.
The Micrografx board of directors has fixed the close of business on
September 10, 2001 as the record date for the determination of shareholders
entitled to notice of and to vote at this special meeting and at any
adjournments or postponements thereof.
By Order of the Board of Directors
/s/ James L. Hopkins
James L. Hopkins
Chairman, President and Chief
Executive Officer
Dallas, Texas
September 25, 2001
To ensure that your shares are represented at the Micrografx special
meeting, please complete, date and sign the enclosed proxy and mail it
promptly in the postage-paid envelope provided or, if eligible, vote over
the Internet, as described in the prospectus/proxy statement and in
accordance with the instructions that may accompany your proxy card,
whether or not you plan to attend the Micrografx special meeting. You can
revoke your proxy at any time before it is voted by following the
procedures described in the accompanying prospectus/proxy statement.
TABLE OF CONTENTS
Page
----
QUESTIONS AND ANSWERS ABOUT THE MERGER................................... 1
FORWARD-LOOKING STATEMENTS............................................... 2
SUMMARY.................................................................. 3
RISK FACTORS............................................................. 16
Risk Factors Relating to the Merger...................................... 16
Risk Factors Relating to Corel........................................... 21
Risk Factors Relating to Micrografx...................................... 26
MICROGRAFX, INC. SELECTED HISTORICAL FINANCIAL INFORMATION............... 30
COREL CORPORATION SELECTED HISTORICAL FINANCIAL INFORMATION.............. 31
COMPARATIVE PER SHARE DATA............................................... 32
MARKET PRICE AND DIVIDEND INFORMATION.................................... 33
THE MICROGRAFX SPECIAL MEETING........................................... 35
When and Where the Special Meeting Will be Held.......................... 35
What Will be Voted On.................................................... 35
Which Shareholders May Vote at the Special Meeting....................... 35
How Do Micrografx Shareholders Vote...................................... 35
How to Change Your Vote.................................................. 35
Vote Required to Approve the Merger...................................... 36
Quorum; Abstentions; Broker Non-Votes.................................... 36
Solicitation of Proxies and Expenses of Solicitation..................... 36
Approval of Preferred Shareholders....................................... 37
Proposals of Shareholders................................................ 37
APPROVAL OF THE MERGER................................................... 38
Background of the Merger................................................. 38
Micrografx's Reasons for the Merger and Recommendation of the Micrografx
Board of Directors...................................................... 41
Opinion of Micrografx's Financial Advisor................................ 43
Interests of Some Micrografx Officers and Directors in the Merger........ 47
THE MERGER AGREEMENT AND PARTICIPATION RIGHTS AGREEMENT.................. 49
General.................................................................. 49
Effective Time of the Merger............................................. 49
Merger Consideration..................................................... 49
Treatment of Micrografx Stock Options and Employee Stock Purchase Plan
Options................................................................. 53
Treatment of Warrants, Convertible Notes and Subordinated Convertible De-
benture................................................................. 53
Procedures for Exchange of Stock Certificates............................ 54
The Merger Agreement..................................................... 55
Participation Rights Agreement........................................... 59
Voting Agreements and Proxies............................................ 61
Bridge Loan Extended by Corel to Micrografx.............................. 62
Page
----
Regulatory Approvals..................................................... 63
Listing of Corel Common Stock............................................ 64
Anticipated Accounting Treatment......................................... 64
Material United States Federal Income Tax Consequences................... 64
Material Canadian Federal Income Tax Consequences........................ 74
Dissenters' Rights....................................................... 75
MICROGRAFX BUSINESS...................................................... 78
MICROGRAFX MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................... 87
MICROGRAFX MANAGEMENT.................................................... 104
MICROGRAFX EXECUTIVE COMPENSATION AND OTHER MATTERS...................... 105
MICROGRAFX SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS... 108
COMPARATIVE RIGHTS OF HOLDERS OF MICROGRAFX COMMON STOCK AND COREL COMMON
STOCK AND PARTICIPATION RIGHTS.......................................... 109
LEGAL MATTERS............................................................ 119
EXPERTS.................................................................. 119
WHERE YOU CAN FIND MORE INFORMATION...................................... 120
TRADEMARKS............................................................... 121
INDEX TO MICROGRAFX, INC. CONSOLIDATED FINANCIAL STATEMENTS.............. F-1
ANNEX A--Merger Agreement................................................ A-1
ANNEX B--Form of Participation Rights Agreement.......................... B-1
ANNEX C--Form of Proxy and Voting Agreement.............................. C-1
ANNEX D--Opinion of Micrografx's Financial Advisor....................... D-1
ANNEX E--Articles 5.11, 5.12 and 5.13 of the Texas Business Corporation
Act..................................................................... E-1
ADDITIONAL INFORMATION
The prospectus/proxy statement incorporates important business and
financial information about Corel that is not included in or delivered
with the prospectus/proxy statement. This information is available without
charge to Micrografx shareholders on written or oral request. Shareholders
should contact Corel Corporation, 1600 Carling Avenue, Ottawa, Ontario K1Z
8R7, Attention: Chief Financial Officer, telephone number (613) 728-8200.
To obtain timely delivery of requested documents before the Micrografx
special meeting, you must request them no later than October 22, 2001,
which is five business days before the date of the Micrografx special
meeting.
Please also see "Where You Can Find More Information" in this
prospectus/proxy statement to obtain further information and learn about
other ways that you can get this information.
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: When will the merger be completed?
A: Corel and Micrografx are working to complete the merger as quickly as
possible. Subject to regulatory and Micrografx shareholder approval, we hope
to complete the merger during Corel's fourth fiscal quarter ending November
30, 2001.
Q: If I receive shares of Corel common stock in the merger, where will they be
listed?
A: The shares of Corel common stock issuable pursuant to the merger agreement
will be listed on both the Nasdaq National Market and The Toronto Stock
Exchange.
Q: Will Micrografx common stock continue to be traded on the over-the-counter
bulletin board after the merger?
A: No. On completion of the merger, Micrografx will merge with a subsidiary of
Corel, with the surviving company being a wholly owned subsidiary of Corel.
The Micrografx common stock will not thereafter be listed on any exchange
or otherwise be publicly traded.
Q: Do I, as a Micrografx shareholder, have the right to vote on the merger?
A: Yes. Holders of Micrografx common stock and Micrografx preferred stock are
entitled to vote on the merger. Holders of Micrografx common stock will
vote on a proposal to approve the merger agreement and the merger at the
Micrografx special meeting to be held on October 29, 2001, and holders of
Micrografx preferred stock are expected to vote separately as a class on
the same proposal by written consent.
Q: What Micrografx shareholder vote is necessary to approve the merger
agreement and the merger?
A: The merger cannot be completed unless Micrografx shareholders that on the
record date own a majority of the outstanding shares of Micrografx common
stock, and a majority of the outstanding shares of Micrografx preferred
stock, voting separately as a class, vote to approve the merger agreement
and the merger. Under executed voting agreements and related irrevocable
proxies, approximately 3,254,406 shares of Micrografx common stock, or
26.0% of the outstanding shares of Micrografx common stock, owned by one
significant Micrografx shareholder and all of the directors and executive
officers of Micrografx at the Micrografx record date and 420,000 shares of
Micrografx preferred stock, or 37.5% of the outstanding shares of
Micrografx preferred stock, owned by one significant Micrografx shareholder
at the Micrografx record date will be voted for the approval of the merger
agreement and the merger.
Q: Are Micrografx shareholders entitled to dissenters' rights?
A: Yes. Under Texas law, Micrografx shareholders are entitled to dissenters'
rights if they follow the requirements specified by Texas law and do not
vote to approve the merger agreement and merger.
Q: What do I need to do now?
A: You should carefully read and consider the information contained in this
prospectus/proxy statement. You should then complete, sign and date your
proxy card and return it in the enclosed return envelope, or if eligible,
vote over the Internet as soon as possible so that your shares of
Micrografx common stock may be represented at the Micrografx special
meeting.
Q: Should I send in my stock certificates now?
A: No. After the merger is completed, you will receive a letter of transmittal
and written instructions for exchanging your stock certificates.
Q: Can I change my vote after I have voted by proxy?
A: Yes. You can change your vote at any time before your proxy is voted at the
Micrografx special meeting. You can do this in a number of ways. First, you
may send in a later-dated, signed proxy card to the corporate secretary of
Micrografx so that it arrives before the Micrografx special meeting.
Second, you can send a written notice to the corporate secretary of
Micrografx stating that you would like to revoke your proxy. Third, you may
attend the Micrografx special meeting and vote in person.
1
Q: Can I submit my proxy over the Internet?
A: Only beneficial holders who hold shares in street name may submit their
proxies over the Internet. If you are a beneficial holder, you should refer
to the proxy card included with your proxy materials for instructions about
how to vote. If you vote over the Internet, you do not need to complete and
mail your proxy card.
Q: If my shares of Micrografx common stock are held in street name by my
broker, will my broker vote my shares for me?
A: A broker will vote the shares held by you only if you provide instructions
to your broker on how to vote. Without instructions, those shares will not
be voted. Micrografx shareholders should instruct their brokers to vote
their shares by following the directions provided by their brokers. Please
check the voting form used by your broker to see if it offers Internet
voting. If you do not instruct your broker to vote your shares, this will
have the effect of a vote against the proposal relating to the merger
agreement and merger.
Q: Is Corel shareholder approval required?
A: No. It is not necessary to obtain the approval by Corel shareholders of the
merger agreement and the merger. The Corel board of directors has
unanimously approved the merger agreement.
Q. Who can help answer my questions?
A: Micrografx shareholders who would like additional copies, without charge,
of this prospectus/proxy statement or have additional questions about the
transaction, including the procedures for voting Micrografx shares, should
contact:
Micrografx, Inc.
Attn: Greg DeWitt, Chief Financial Officer
8144 Walnut Hill Lane, Suite 1050
Dallas, Texas 75231
Telephone: (469) 232-1062
FORWARD-LOOKING STATEMENTS
Some statements made in this document are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-
looking statements include statements as to:
. the amount, timing and form of consideration to be received by
Micrografx shareholders in the merger;
. the anticipated closing date of the merger;
. the anticipated tax treatment of the merger;
. the benefits expected to result from the merger; and
. the performance and financial condition of Corel following the merger.
Any statements contained herein, including, without limitation, statements
to the effect that Corel or Micrografx or their respective management
"believes," "expects," "anticipates," "plans," "may," "will," "projects,"
"continues," "estimates" or statements concerning "potential," "opportunity" or
other variations thereof or comparable terminology or the negative thereof,
that are not statements of historical fact should be considered forward-looking
statements. Actual results could differ materially and adversely from those
anticipated in the forward-looking statements as a result of several factors,
including those set forth in "Risk Factors" beginning on page 16, which you
should review carefully.
2
SUMMARY
This summary highlights selected information contained in this
prospectus/proxy statement. It may not contain all of the information that is
important to you and it is qualified in its entirety by the more detailed
information appearing elsewhere in this document or that is incorporated by
reference or attached as Annexes to this document. Page references are included
in parentheses to direct you to a more complete description of the items
presented in this summary. In addition, Corel is incorporating by reference
important business and financial information into this prospectus/proxy
statement. You may obtain the information incorporated by reference into this
prospectus/proxy statement without charge by following the instructions in the
section entitled "Where You Can Find More Information." Corel has supplied all
information contained or incorporated by reference in this prospectus/proxy
statement relating to Corel and Calgary I Acquisition Corp. and Micrografx has
supplied all information contained in this prospectus/proxy statement relating
to Micrografx. Neither Corel nor Calgary I Acquisition Corp., on the one hand,
or Micrografx on the other hand, is responsible for the information supplied by
the other.
All dollar amounts indicated by "$" are in United States dollars and all
dollar amounts indicated by "Cdn$" are in Canadian dollars.
The Companies (Page 78)
COREL CORPORATION MICROGRAFX, INC.
CALGARY I ACQUISITION CORP. 8144 Walnut Hill Lane, Suite 1050
1600 Carling Avenue Dallas, Texas 75231
Ottawa, Ontario (469) 232-1000
K1Z 8R7
(613) 728-8200
Corel and Calgary I Acquisition Corp.
Corel develops, manufactures, licenses, sells and supports two main types of
software products--creative products and business applications products.
Corel's flagship products are CorelDRAW10 Graphics Suite and WordPerfect Office
2002. Corel's products are available for users of most personal computers, or
PCs, including International Business Machines Corporation and IBM-compatible
PCs, Apple Computer Inc.'s Macintosh(R), UNIX(R)-based and Linux(R)-based
systems. Corel is continuing to expand its support of the web, delivering the
Internet's versatility to customers through web-based applications, content and
services. Corel also is developing applications of its products for use on
Microsoft Corporation's .NET platform as part of its commitment to provide
customers with a full range of applications and services on multiple platforms.
Calgary I Acquisition Corp. is a newly formed Delaware corporation formed
solely to effect the merger and has no business or assets.
Micrografx
Micrografx is a recognized global leader in providing enterprise process
management and graphics software, solutions and services. Micrografx enterprise
process management solutions allow senior and mid-level executives to identify
and value key performance improvement initiatives. These initiatives range from
improving e-business processes to quality initiatives like ISO 9000, Six
Sigma(TM) and key line-of-business application initiatives such as supply chain
management. Micrografx graphics software division supplies businesses and
individuals with graphics solutions for technical illustration, business
diagramming and digital image processing.
3
The Merger (Page 49)
On July 16, 2001, Corel, its wholly owned subsidiary Calgary I Acquisition
Corp., and Micrografx entered into the merger agreement pursuant to which
Micrografx will merge with Calgary I Acquisition Corp., with the surviving
corporation becoming a wholly owned subsidiary of Corel. Under the terms of the
merger agreement, if Corel is entitled to and elects to pay cash at the closing
for the outstanding shares of Micrografx capital stock, Micrografx will be the
surviving corporation in the merger and become a wholly owned subsidiary of
Corel. If Micrografx shareholders receive at closing a combination of shares of
Corel common stock and Corel participation rights for their shares of
Micrografx capital stock, Calgary I Acquisition Corp. will be the surviving
corporation in the merger. The merger is subject to various conditions and
rights of termination described in this document and the merger agreement. For
a detailed description of the terms of the merger agreement, see "The Merger
Agreement and Participation Rights Agreement." In addition, copies of the
merger agreement and the participation rights agreement are attached and
included as Annex A and Annex B, respectively, to this prospectus/proxy
statement. We encourage you to read the entire merger agreement and the entire
participation rights agreement.
Reasons for the Merger (Page 41)
The Micrografx board of directors has unanimously determined that the merger
is fair to and in the best interests of Micrografx and its shareholders and has
unanimously approved the merger agreement and the merger based on a number of
factors, including, without limitation, the following:
. the total amount of consideration, the timing of receipt of
consideration and the various forms of consideration that may be
received by Micrografx shareholders under the terms of the merger
agreement and the participation rights agreement and, in particular, the
minimum aggregate value that Micrografx shareholders would receive at
closing and on the first anniversary of the date of closing, as well as
the potential opportunity for Micrografx shareholders to participate in
any appreciation in value of Corel common stock during the year
following the closing of the merger;
. the financial presentation of Alliant Partners to the Micrografx board
of directors, including Alliant Partners' written opinion dated July 16,
2001, to the effect that, as of the date of the opinion and based on and
subject to the matters stated in the opinion, the total consideration to
be received by Micrografx shareholders is fair, from a financial point
of view;
. Micrografx's weakened financial position, which resulted in lost product
sales because Micrografx's corporate customers frequently make their
purchasing decisions on the basis of the financial strength of the
software vendor; this financial condition also restricted Micrografx's
ability to make significant expenditures for advertising and promotions
necessary to the marketing of its graphics division products through
distributors and resellers; and
. in light of the difficulties Micrografx experienced in attempting to
raise capital in the current depressed capital markets, the terms under
which external financing could have been procured, if at all, would have
been on terms that would have diluted Micrografx shareholders to the
point to where even successful results by Micrografx over the coming
quarters might not have produced as attractive a result to Micrografx
shareholders as the merger with Corel.
What Micrografx Shareholders Will Receive in the Merger (Page 49)
Under the terms of the merger agreement, and subject to a number of
assumptions summarized below and set forth in greater detail under "The Merger
Agreement and Participation Rights Agreement--Merger Consideration," the
holders of Micrografx common stock and Micrografx preferred stock, on an as-
converted basis, will be entitled to receive either cash, or a combination of
shares of Corel common stock and Corel
4
participation rights, depending on whether the volume weighted average sales
price of Corel's common stock during a specified period prior to the closing of
the merger is greater than, less than or equal to $2.90 per share, as follows:
. for each Micrografx common share or each Micrografx preferred share on
an as-converted basis, approximately $1.99 in cash, or an aggregate
approximate amount of $32.1 million if:
. the volume weighted average sales price of Corel's common stock
during the ten consecutive trading day period ending on the second
business day prior to the effective time of the merger is less than
$2.90 per share; and
. Corel elects under the merger agreement to deliver cash to the
Micrografx shareholders, which is referred to in this document as the
cash alternative; or
. for each Micrografx common share or each Micrografx preferred share on
an as-converted basis, approximately $1.02 in aggregate value of Corel
common stock and one Corel participation right if the volume weighted
average sales price of Corel common stock during the pre-closing
calculation period is $2.90 per share or greater or if Corel does not
elect the cash alternative.
Each Corel participation right will entitle the holder to receive on the
first anniversary of the closing:
. approximately $1.02 in cash, if the volume weighted average sales
price of Corel common stock during the 20 consecutive trading day
period immediately prior to the first anniversary is equal to or less
than the average sales price of the Corel common stock during the
pre-closing calculation period; or
. Corel common stock having a value equal to approximately $1.02 plus
18% of the appreciation in value of a share Corel common stock
between the closing and the first anniversary, based on the volume
weighted average sales price of Corel common stock during the first
anniversary calculation period, if the volume weighted average sales
price of the Corel common stock for the first anniversary calculation
period is greater than the average sales price of the Corel common
stock for the pre-closing calculation period.
If the foregoing combination of securities is received by Micrografx
shareholders at closing and cash is received for the Corel participation
rights on the first anniversary of closing, then Micrografx shareholders
will have received for each of their shares a combined value of
approximately $2.04 in shares of Corel common stock and cash, or an
aggregate total value of $33.0 million.
5
The following table sets forth the type and amount of consideration that
Micrografx shareholders would be entitled to receive at the closing of the
merger for each share of Micrografx common stock or share of Micrografx
preferred stock on an as-converted basis, and in the event that Corel
participation rights are issued at the first anniversary of the closing, based
on various Corel common stock prices during both the specified period prior to
the closing and the specified period prior to the first anniversary of the
closing.
Actual Actual Actual
Consideration Value Corel Price Consideration Actual Value
Corel Price Received at Received at First Received at First Received at First
at Closing Closing at Closing Anniversary Anniversary Anniversary
----------- ------------- ---------- ----------- ----------------- -----------------
Corel Elects to Pay Cash at Closing
$2.00 $1.99 cash $1.99 N/A N/A N/A
$2.50 $1.99 cash $1.99 N/A N/A N/A
$2.75 $1.99 cash $1.99 N/A N/A N/A
$2.89 $1.99 cash $1.99 N/A N/A N/A
Corel Does Not Elect or is Not Entitled to Pay Cash at Closing
$2.00 .512 Corel share $1.02 $1.50 $1.02 cash $1.02
$2.00 $1.02 cash $1.02
$2.50 .445 Corel share $1.11
$3.00 .401 Corel share $1.20
$2.50 .409 Corel share $1.02 $2.00 $1.02 cash $1.02
$2.50 $1.02 cash $1.02
$3.00 .371 Corel share $1.11
$3.50 .344 Corel share $1.20
$2.90 .353 Corel share $1.02 $2.50 $1.02 cash $1.02
$2.90 $1.02 cash $1.02
$3.50 .323 Corel share $1.13
$4.00 .305 Corel share $1.22
$3.50 .293 Corel share $1.02 $3.00 $1.02 cash $1.02
$3.50 $1.02 cash $1.02
$4.00 .278 Corel share $1.11
$4.50 .267 Corel share $1.20
In addition to the impact that the sales price of Corel common stock has on
the amount and form of consideration that Micrografx shareholders will receive,
the consideration receivable for each share of Micrografx common stock and
Micrografx preferred stock is determined by a conversion ratio which is
affected by:
. the calculation of the adjusted Micrografx annual revenues for the year
ended June 30, 2001, where the amount of actual revenues is subject to
being increased to the extent of 50% of the reduction in the principal
amount of the indebtedness owing by it under its debenture issued to
Intergraph Corporation and the reduction in the principal amount of its
trade payables that were outstanding on the date of the merger
agreement, as well as by any proceeds received by Micrografx from the
exercise of options or warrants prior to the closing of the merger,
provided that in no event will the adjusted amount exceed $34.0 million;
and
. the number of shares of Micrografx common stock and Micrografx preferred
stock, on an as-converted basis, outstanding at the closing of the
merger, which will be affected by any exercise of
6
Micrografx options or warrants prior to the closing, including whether
or not the exercises are effected on a cashless basis.
The approximate amounts of the per share and aggregate consideration
provided above and elsewhere in this prospectus/proxy statement are based on
assumptions that Corel and Micrografx believe to be reasonable, and which are
more particularly described under "The Merger Agreement and Participation
Rights Agreement--Merger Consideration." However, if Micrografx is unable to
timely repay the Intergraph debenture and obtain the associated reduction in
indebtedness and if actual Micrografx annual revenues are adjusted only to
reflect proceeds received from the full exercise of outstanding vested options
and warrants with an exercise price less than $1.65 per share, which would also
result in a corresponding increase in the number of outstanding shares of
Micrografx common stock at closing, then Micrografx shareholders would receive
only $1.93 per share in cash at closing under the cash alternative
(approximately $31.1 million in cash in the aggregate) or, if shares of Corel
common stock and Corel participation rights are issued at closing, $0.99 per
share in value of Corel common stock at closing and the same amount in cash on
the first anniversary of the closing (approximately $32.0 million in value in
the aggregate), assuming the Corel stock price for the first anniversary
calculation period is equal to or less than the price for the closing
calculation period. As described elsewhere in this prospectus/proxy statement,
the exact total amount, the precise timing and the specific form of
consideration that Micrografx shareholders will receive in the merger are
subject to a number of variables, and no assurances can be given in this
regard.
Treatment of Micrografx Stock Options and Warrants (Page 53)
Options
All outstanding vested options, including options that will vest as a result
of the merger, must be exercised prior to the closing or they will be
cancelled, and Micrografx will give written notice of this procedure to the
optionholders under the terms of the merger agreement. The merger agreement
provides that the notice must specifically permit cashless exercises of
options. All unvested options having an exercise price of less than $1.65 per
share will be cashed out by Micrografx immediately prior to the closing at a
price per option share equal to the amount by which $1.65 exceeds the exercise
price. To the extent that the outstanding options are not exercised, they will
terminate and become null and void at the effective time of the merger.
Micrografx must provide written notice to all of the participants in the
Micrografx Employee Stock Purchase Plan that outstanding options under that
plan, to the extent exercisable (based on each participant's payroll deduction
contributions through the date of exercise), may be exercised for a specified
period of not less than 30 days from the date of the notice. At the end of the
period, all outstanding options under the Employee Stock Purchase Plan will
terminate.
Warrants
If Corel is entitled to and elects the cash alternative, then all
outstanding warrants to purchase shares of Micrografx capital stock will
terminate. Otherwise, at the effective time of the merger, Corel will assume
all of Micrografx's obligations under all of its outstanding warrants and the
holders will be entitled to receive on exercise the same amount of cash or
number of shares of Corel common stock and Corel participation rights as the
holders would have received if they had exercised the warrants prior to the
effective time of the merger. The exercise prices following the merger for the
warrants will be adjusted consistent with the conversion ratios used to
determine the merger consideration.
Treatment of Micrografx Convertible Debt (Page 53)
Immediately prior to the effective time of the merger, all outstanding
convertible promissory notes issued by Micrografx (convertible into
973,180 shares of Micrografx common stock) will be converted into shares of
7
Micrografx common stock in accordance with their terms and the holders will be
entitled to receive the same consideration to be received by other Micrografx
shareholders in the merger. Pursuant to a subordinated convertible debenture
issued by Micrografx to Intergraph Corporation, Micrografx owes Intergraph
approximately $5.8 million plus accrued interest. Intergraph and Micrografx
have agreed that in the event that the Intergraph debenture is redeemed prior
to October 31, 2001, Intergraph will accept $3.8 million, plus accrued
interest, in full satisfaction of Micrografx's obligations to Intergraph under
the debenture.
Recommendation of Micrografx Board of Directors to Micrografx Shareholders
(Page 41)
The Micrografx board of directors has unanimously determined that the merger
is fair to and in the best interests of Micrografx and its shareholders and has
unanimously approved the merger agreement and the merger. Accordingly, the
Micrografx board of directors unanimously recommends that its shareholders vote
"FOR" the approval of the merger agreement and the merger.
Opinion of Micrografx's Financial Advisor (Page 43)
In deciding to approve the merger agreement and the merger, the Micrografx
board of directors considered a number of factors, including the opinion of its
financial advisor, Alliant Partners. On July 16, 2001, Alliant Partners
delivered to the Micrografx board of directors its opinion that, as of that
date, the total consideration to be received by Micrografx shareholders
pursuant to the merger agreement was fair, from a financial point of view, to
Micrografx shareholders.
The full text of Alliant Partners' opinion, dated July 16, 2001, is attached
to this prospectus/proxy statement as Annex D. Shareholders of Micrografx are
urged to read this opinion carefully for a description of the assumptions made,
matters considered and limitations on the review undertaken. Alliant Partners'
opinion is directed to the Micrografx board of directors and does not
constitute a recommendation to any Micrografx shareholder with respect to any
matter relating to the proposed merger. Alliant Partners' opinion speaks only
as of its date and Alliant Partners is under no obligation to confirm its
opinion as of a later date.
Voting Agreements and Proxies (Page 61)
One significant holder of Micrografx common stock and Micrografx preferred
stock and all of Micrografx's directors and executive officers holding
Micrografx common stock have entered into voting agreements with Corel in which
they have agreed to vote their shares of Micrografx common stock and Micrografx
preferred stock in favor of approval of the merger agreement and the merger.
They also granted irrevocable proxies to an officer of Corel to vote their
shares of Micrografx common stock and Micrografx preferred stock in favor of
approval of the merger agreement and the merger. Under the executed voting
agreements and related irrevocable proxies, approximately 3,254,406 shares of
Micrografx common stock, or 26.0% of the outstanding shares of Micrografx
common stock, owned by one significant Micrografx shareholder and all of the
directors and executive officers of Micrografx at the Micrografx record date
and 420,000 shares of Micrografx preferred stock, or 37.5% of the outstanding
shares of Micrografx preferred stock, owned by one significant Micrografx
shareholder at the Micrografx record date will be voted for the approval of the
merger agreement and the merger.
Micrografx Special Meeting (Page 35)
The Micrografx special meeting will be held at the Doubletree Hotel located
at 8250 North Central Expressway, Dallas, Texas on October 29, 2001, at 10:00
a.m., local time.
At the Micrografx special meeting, Micrografx common shareholders will be
asked to vote to approve the merger agreement and the merger. Approval of the
merger agreement and the merger requires the affirmative
8
vote of a majority of the outstanding shares of Micrografx common stock and a
majority of the outstanding shares of Micrografx preferred stock on the record
date, each voting separately as a class.
Micrografx shareholders are entitled to vote at the special meeting if they
owned shares of Micrografx common stock at the close of business on September
10, 2001, the record date. On that date, there were 12,525,038 shares of
Micrografx common stock outstanding and entitled to vote at the Micrografx
special meeting. Holders of Micrografx preferred stock are entitled to vote,
separately as a class, with respect to approval of the merger agreement and the
merger. On September 10, 2001, there were 1,120,000 shares of preferred stock
outstanding and entitled to vote on the merger. It is expected that holders of
Micrografx preferred stock will vote by written consent.
If you abstain or do not vote your shares of Micrografx common stock, the
effect will be the same as a vote against the approval of the merger agreement
and the merger.
Interests of Micrografx Officers and Directors in the Merger (Page 47)
In considering the Micrografx board of directors' recommendation that you
vote to approve the merger agreement and the merger, you should be aware that
some of the Micrografx officers and directors have interests in the merger that
are different from, or in addition to, the interests of Micrografx shareholders
generally.
Micrografx is a party to an employment agreement with its chairman,
president and chief executive officer, James L. Hopkins. The agreement is for a
term of one year, commencing October 16, 2000, and may be automatically renewed
annually for an additional term of one year. The agreement contains customary
non-disclosure and non-compete provisions. If Mr. Hopkins' employment is
terminated without cause following the merger, he will receive:
. severance benefits equal to his current base salary and bonus; and
. payment of all accrued and unpaid vacation pay.
In addition, on consummation of the merger, Mr. Hopkins will receive:
. forgiveness of debt relating to his relocation expenses; and
. immediate vesting of his unvested Micrografx restricted shares.
Mr. Hopkins holds unvested stock options for 250,000 shares of Micrografx
common stock and 400,000 unvested restricted shares of Micrografx common stock.
Mr. Hopkins waived his right under the employment agreement to be granted an
additional stock option for 250,000 shares of Micrografx common stock.
The employment agreement between Micrografx and Kenneth A. Carraher,
president of the enterprise process management business unit, is for a term of
three years commencing March 1, 2000. If Mr. Carraher's employment is
terminated without cause following the merger, he will receive:
. severance benefits equal to two times the sum of his current base salary
and a fixed bonus amount; and
. payment of all accrued and unpaid vacation pay.
In addition, if all of the payments and benefits triggered by a change of
control result in the imposition of a 20% excise tax on Mr. Carraher, the
agreement provides that Micrografx will reimburse him for 150% of the taxes.
9
Employment agreements with Gary J. Klembara, executive vice president,
sales, and Greg DeWitt, chief financial officer of Micrografx, provide that if
their employment is terminated without cause following the merger, severance
pay is owed up to one year's salary and bonus, plus limited continuation of
benefits.
Corel has covenanted that its board of directors will at the effective time
of the merger include a person nominated by Micrografx and mutually acceptable
to Corel and Micrografx. Corel also has agreed to recommend and support the
election to the Corel board of directors at Corel's 2002 annual shareholders'
meeting of this director or another individual acceptable to Corel and
nominated by the holders of a majority of the shares of Micrografx common stock
held by holders owning 5% or more of the Micrografx common stock on the record
date for the Micrografx special meeting. It is expected that James L. Hopkins,
Micrografx's chairman, president and chief executive officer, will be
Micrografx's nominee.
Some executive officers and directors of Micrografx may own stock options
with vesting schedules that accelerate on consummation of the merger. In
addition, Corel has agreed to fulfill the obligations of Micrografx under its
charter documents and bylaws concerning indemnification of present and former
officers and directors of Micrografx for a six-year period from the closing
date of the merger and to use all commercially reasonable efforts to maintain
in effect, if available, at a premium of up to 200% of the premium presently
paid by Micrografx, directors' and officers' liability insurance covering the
individuals presently covered under Micrografx's existing insurance.
Conditions to the Merger (Page 56)
The merger will not be completed unless a number of contractual or legal
conditions are either satisfied or waived by Micrografx or Corel. Examples of
those conditions include the accuracy of the representations and warranties and
the performance of the covenants and agreements of the parties under the merger
agreement, the receipt of Micrografx shareholder approval and applicable
regulatory and third party approvals and the absence of governmental or legal
action to block the merger. In addition to these standard conditions, Corel and
Micrografx will complete the merger only if the following conditions are
satisfied or waived:
. the shares of Corel common stock issuable at closing and at the first
anniversary are approved for unconditional listing on The Toronto Stock
Exchange and the Nasdaq National Market (if Corel has not elected the
cash alternative);
. the absence of the presently effective exercise on the close of business
on the day following the Micrografx special meeting by more than 10% of
the outstanding Micrografx common stock of dissenters' rights in
connection with the merger;
. neither Corel nor Micrografx has suffered any material adverse change
other than general economic or industry conditions; and
. the delivery of specified ancillary documents, legal opinions and
(unless the cash alternative is elected by Corel) tax opinions that the
merger will qualify as a reorganization within the meaning of United
States federal income tax laws.
Limitation on Negotiations (Page 57)
Until the merger is completed, the merger agreement provides that Micrografx
may not solicit or encourage any inquiries with respect to any acquisition
proposal and must immediately notify Corel of any inquiry relating to an
acquisition proposal. The merger agreement provides that Micrografx may conduct
discussions and negotiations with respect to an acquisition proposal if its
board of directors determines after consultation with its legal and financial
advisors that an action is required for the Micrografx board of directors to
comply with its fiduciary duties to its shareholders and that the proposal is
reasonably likely to result in a superior proposal from a financial point of
view than that set forth in the merger agreement.
10
Corel Bridge Loan to Micrografx (Page 62)
On August 28, 2001, Corel extended to Micrografx a bridge loan in the
aggregate amount of $2.5 million for use by Micrografx to reduce its
indebtedness and provide operating capital. To secure Micrografx's payment
obligations under the bridge loan, Micrografx granted to Corel a security
interest in all of the assets and the stock of its subsidiary, Image2Web, Inc.
At the same time, Micrografx also granted to Corel an option to purchase 80% of
the stock of Image2Web for a purchase price equal to the amount of the loan
owing from time to time and a right of first refusal for the balance of the
outstanding Image2Web stock. The option is exercisable only under the following
circumstances:
. default of Micrografx in the repayment of the bridge loan;
. failure of Micrografx's shareholders to approve the merger agreement and
the merger; or
. termination of the merger by either Micrografx or Corel in accordance
with the terms of the merger agreement.
If Corel elects to exercise the option, then the termination fee to which
Corel would otherwise have been entitled also will not be payable.
Termination of the Merger Agreement (Page 57)
The merger agreement may be terminated prior to the merger:
. by mutual written consent of Micrografx and Corel;
. by Corel or Micrografx if the merger has not become effective on or
before December 31, 2001;
. by Corel or Micrografx if any court or governmental authority has taken
any action seeking to make illegal or restrict, prevent, enjoin or
prohibit consummation of the merger;
. by Corel or Micrografx if the required approval of the Micrografx
shareholders is not obtained following a vote at a shareholders'
meeting;
. by Micrografx on informing Corel of its desire not to proceed with the
transactions set forth in the merger agreement so that it can pursue a
superior proposal and Corel has not made an equivalent proposal;
. by Corel if the Micrografx board of directors has withdrawn or adversely
modified or failed to reconfirm its approval or recommendation of the
merger agreement or merger; or
. by Corel or Micrografx on a material breach of any representation,
warranty or covenant of the other party that is not cured within 30 days
following receipt by the breaching party of notice.
Termination Fees and Expenses (Page 58)
Micrografx must immediately pay to Corel a termination fee equal to 3.5% of
the adjusted Micrografx annual revenues for the year ended June 30, 2001
(approximately $1.2 million based on the assumptions outlined under "The Merger
Agreement and Participation Rights Agreement--Merger Consideration") if:
. Micrografx terminates the merger agreement because its board of
directors determines that termination is necessary for it to comply with
its fiduciary obligations in response to a superior proposal;
. Corel terminates the merger agreement because the Micrografx board of
directors withdrew or adversely modified or failed to reconfirm its
recommendation of the merger agreement or the merger; or
11
. an alternative proposal is received and:
. the merger agreement has been terminated by either party by reason of
the failure of Micrografx to obtain shareholder approval of the
merger agreement and the merger;
. Corel has terminated the merger agreement by reason of Micrografx's
breach under the merger agreement or the existence of a nonappealable
law or order making illegal or otherwise preventing the consummation
of the merger (provided that Micrografx has participated in the issue
of the order in respect of which the right of termination has been
exercised); or
. the merger agreement has been terminated by either party by reason of
the failure of the parties to consummate the merger by December 31,
2001.
However, no termination fee will be payable unless a definitive
agreement with respect to the alternative proposal or any other
alternative proposal is entered into within 12 months of the date of
termination with the person who made the original alternative proposal
or its affiliate or within nine months of the date of termination with
any other person.
On the occurrence of any of the termination events described above, except
for the termination by Micrografx as a result of the existence of an
alternative proposal and its board of directors' determination that the
termination was necessary for it to comply with its fiduciary obligations to
its shareholders, or if the required approval of the Micrografx shareholders is
not obtained, Micrografx also will pay all of Corel's accounting, legal,
investment and other out-of-pocket expenses with respect to the transactions
contemplated by the merger agreement. Notwithstanding the foregoing, if Corel
exercises its option to acquire 80% of the outstanding capital stock of
Image2Web for a purchase price equal to the amount outstanding under the bridge
loan extended by Corel to Micrografx, then Micrografx will not be required to
pay the termination fee to Corel. In that circumstance, however, Micrografx
will remain obligated to pay Corel's out-of-pocket expenses.
Participation Rights Agreement (Page 59)
The terms and conditions applicable to the Corel participation rights will
be set forth in the participation rights agreement to be entered into between
Corel and Bank of New York, as trustee, substantially the form of which is
attached to this prospectus/proxy statement as Annex B. The trustee will
administer the participation rights agreement and will also act as paying agent
on behalf of Corel.
Unless the cash alternative is elected by Corel, at the time of the closing
of the merger Corel is required to deposit with the trustee cash in an amount
equal to 50% of the adjusted Micrografx annual revenues, which is calculated as
described under "The Merger Agreement and Participation Rights Agreement--
Merger Consideration--Summary and Assumptions," and after applying the 1.03
multiple is currently estimated to be approximately $16.5 million, less any
cash retained by Corel to address the claims of dissenting Micrografx
shareholders. The cash fund would be held in trust for the benefit of the
holders of the Corel participation rights on the terms and subject to the
conditions contained in the participation rights agreement. If under the terms
of the participation rights agreement, shares of Corel common stock are to be
issued and delivered to holders of Corel participation rights at the first
anniversary of the closing of the merger, then once this determination is made
Corel is required to promptly issue and deliver to the trustee certificates
evidencing the appropriate number of whole shares of Corel common stock for
delivery to the holders.
A holder of Corel participation rights will not have any rights as a Corel
common shareholder and will not in his capacity as a holder of Corel
participation rights be entitled to receive any dividends in respect of Corel
common stock or to vote or otherwise receive notice of any meeting of Corel
shareholders. If, in accordance with the terms of the participation rights
agreement, a holder is entitled to receive shares of Corel common stock, then
he will acquire the rights of a Corel common shareholder only after he has
surrendered his certificates representing Corel participation rights. Corel
participation rights may not be sold and are not
12
otherwise transferable (except by devise or descent) and will not be listed or
eligible for trading on any exchange or market. Until the surrender of his
certificates, the registered owner of Corel participation rights will be
treated as the owner of the rights for all purposes.
Under the terms of the participation rights agreement, in the event of a
"disposition" of Corel, as defined in the participation rights agreement,
holders of Corel participation rights will be entitled to receive cash or
securities depending on the per share value receivable in connection with the
disposition by the holders of Corel common stock at the time of the
disposition, as compared with the average stock price of Corel common stock at
the closing of the merger. If the per share value receivable in connection with
the disposition is less than or equal to the Corel common stock price at
closing, then the holders of Corel participation rights will be entitled to
receive the same amount in cash that they otherwise would have received on the
first anniversary of the closing of the merger. If, however, the per share
value receivable in connection with the disposition by the holders of Corel
common stock is greater than the Corel common stock price at closing, then the
holders of Corel participation rights will be entitled to receive the
consideration in the disposition to which they would have been entitled to
receive had the Corel participation rights been settled for shares of Corel
common stock immediately prior to consummation of the disposition.
Stock Exchange Listing (Page 64)
The completion of the merger is conditioned on Corel receiving approval for
the conditional listing on The Toronto Stock Exchange and the Nasdaq National
Market of the shares of Corel common stock to be issued to the Micrografx
shareholders in the merger or pursuant to the Corel participation rights.
Following the completion of the merger, the Micrografx common stock will cease
to be publicly traded.
Material United States Federal Income Tax Consequences (Page 64)
This summary applies only to United States Micrografx shareholders and
optionholders and is subject to the assumptions and limitations set out in "The
Merger Agreement and Participation Rights Agreement --Material United States
Federal Income Tax Consequences," which should be read for a more detailed
discussion.
If Corel is entitled, and elects, to pay cash for all shares of Micrografx
capital stock at closing, Calgary I Acquisition Corp. will be merged with and
into Micrografx, resulting in Micrografx being the surviving entity. For United
States federal income tax purposes, this will be treated as a taxable stock
sale by the United States Micrografx shareholders on which capital gain or loss
will be recognized by each shareholder in an amount equal to the difference
between the amount of cash received and the shareholder's adjusted tax basis in
the Micrografx stock disposed of.
If Corel is not entitled, or does not elect, to pay cash for all shares of
Micrografx capital stock at closing, Micrografx will be merged with and into
Calgary I Acquisition Corp., resulting in Calgary I Acquisition Corp. being the
surviving entity. In this event, the Micrografx shareholders will receive a
combination of shares of Corel common stock and Corel participation rights in
exchange for their Micrografx capital stock. In this case, the merger will be
structured to qualify as a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended, or Internal Revenue Code.
Even if the merger qualifies as a reorganization, the tax consequences to the
United States Micrografx shareholders are uncertain. There are no federal
income tax laws addressing the tax treatment of the receipt of deferred rights
that are similar to the Corel participation rights in a reorganization within
the meaning of Section 368 of the Internal Revenue Code. United States
Micrografx shareholders who receive participation rights may be able to report
the transaction using the open transaction method. Under the open transaction
method, a United States Micrografx shareholder who receives cash on the first
anniversary of the closing of the merger may be able to delay reporting gain,
if any, until the shareholder actually receives cash pursuant to the
participation rights. When payments of cash are
13
received, each United States Micrografx shareholder would recognize capital
gain to the extent of the cash received, other than to the extent a portion of
the cash received (determined using the applicable federal rate) is treated as
interest and taxable as ordinary income. If a United States Micrografx
shareholder receives Corel common stock on the first anniversary of the closing
of the merger, the shareholder will recognize no income or gain, other than to
the extent that a portion of the shares received (determined using the
applicable federal rate) is treated as interest and taxable as ordinary income.
However, the applicability of the open transaction method is generally limited
to rare and extraordinary situations in which the value of the contingent
obligation cannot reasonably be ascertained. Therefore, if a United States
Micrografx shareholder does not report the transaction pursuant to the open
transaction method or if the shareholder does report the transaction pursuant
to the open transaction method but the Internal Revenue Service, or IRS, is
successful in challenging the shareholder's reporting, the United States
Micrografx shareholder would be required to recognize capital gain, if any, on
receipt of the Corel common stock and Corel participation rights at closing to
the extent of the fair market value at the closing of the shareholder's right
to subsequently receive cash pursuant to the Corel participation rights. Any
amount of cash distributed on the first anniversary of the closing of the
merger in excess of the value placed on this right at closing would be taxable
to the United States Micrografx shareholder in the year received. A portion of
the excess amounts (determined using the applicable federal rate) would be
treated as interest and taxable as ordinary income, with the balance taxed as
capital gain. If the aggregate distributions of cash to a United States
Micrografx shareholder were less than the value placed on the right at closing,
the shareholder would be treated as incurring a capital loss in the year of
final distribution.
If Corel is not entitled, or does not elect, to pay cash for all shares of
Micrografx capital stock at closing, the merger is conditioned on the receipt
of opinions of counsel to Micrografx and counsel to Corel that the merger will
be treated for federal income tax purposes as a reorganization. However,
opinions of counsel are subject to qualifications, assumptions and
representations and are not binding on the IRS or the courts. Therefore, if the
merger did not qualify as a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code, the merger would be fully taxable to the United
States Micrografx shareholders.
United States shareholders will generally recognize ordinary income on the
receipt of cash dividends paid by Corel (including the amount of any Canadian
taxes withheld thereon) with respect to Corel common stock to the extent of
Corel's current and accumulated earnings and profits. Unless Corel becomes a
passive foreign investment company, United States shareholders will generally
recognize capital gain or loss on the sale or other disposition of shares of
Corel common stock held by the them.
The United States federal income tax consequences to United States
Micrografx optionholders will depend on the particular Micrografx stock plan
under which the options were issued and whether the holder exercises the option
or is cashed out.
Tax matters are very complicated. The tax consequences of the merger to each
Micrografx shareholder and optionholder will depend on the facts of its own
situation. Micrografx shareholders and optionholders are urged to consult their
tax advisors as to the specific tax consequences of the merger, including the
applicable federal, state, local and foreign tax laws.
Material Canadian Federal Income Tax Consequences (Page 74)
This summary applies only to holders of Micrografx shares who are non-
residents of Canada and is subject to the assumptions and limitations set out
in "The Merger Agreement and Participation Rights Agreement--Material Canadian
Federal Income Tax Consequences," which should be read for a more detailed
discussion.
A holder of Micrografx shares will not be subject to tax in Canada on any
capital gain realized on the disposition of the shares. Payments to a non-
resident holder pursuant to the Corel participation rights, whether
14
in cash or Corel common stock, should not be subject to tax in Canada. Canadian
withholding tax at a rate of 15% will be payable by a non-resident holder who
is a resident of the United States on dividends paid or credited, or deemed to
be paid or credited, on Corel common stock. A non-resident holder will not be
subject to tax in Canada on any capital gain realized on the disposition of
Corel common stock, provided the shares do not constitute "taxable Canadian
property."
A non-resident holder who dissents from the merger and receives from the
surviving entity in the merger the fair value of the Micrografx shares held by
the holder will not be subject to tax in Canada on the amounts received.
Anticipated Accounting Treatment (Page 64)
Corel will account for the merger using the purchase method of accounting.
Regulatory Approvals (Page 63)
In Canada, a trust indenture or similar instrument, such as the
participation rights agreement must comply with Part VIII of the Canada
Business Corporations Act, or CBCA, because Corel as a debt issuer is
incorporated under the CBCA. The director appointed under the CBCA may exempt a
trust indenture if the debt obligations issued and the security interest
effected by the trust indenture are subject to a substantially equivalent law
to Part VIII of the CBCA. Corel has filed an exemption application with the
CBCA director.
Dissenters' Rights (Page 75)
Under Articles 5.11, 5.12 and 5.13 of the Texas Business Corporation Act, or
TBCA, Micrografx shareholders may dissent from the merger and demand the fair
value of their shares in cash. To exercise this right, Micrografx shareholders
must not vote their shares in favor of the merger agreement and the merger and
must take other actions that Texas law requires.
Comparison of Rights of Securityholders (Page 109)
When the merger is completed, Micrografx shareholders may become holders of
shares of Corel common stock and Corel participation rights. After that time,
their rights will be governed by the CBCA and other Canadian federal and
provincial laws, Corel's certificate and articles of amalgamation, Corel's
bylaws, the Corel rights plan and the participation rights agreement. See
"Comparative Rights of Holders of Micrografx Common Stock and Corel Common
Stock and Participation Rights" for a summary of the material differences
between the rights of Micrografx shareholders and their rights as Corel
securityholders.
15
RISK FACTORS
The following factors should be considered together with the other
information included in this prospectus/proxy statement, including the Annexes.
Any of the following risks could materially adversely affect the business,
operating results and financial condition of Micrografx and Corel. You should
consider these factors in conjunction with the other information contained in
this prospectus/proxy statement and the Annexes.
Risk Factors Relating to the Merger
Neither Corel nor Micrografx can tell you the exact total amount, the precise
timing or the specific form of consideration that you will receive in the
merger because this will be based on the price of Corel's common stock at
various points in time and several other factors.
If the average sales price of Corel common stock during a specified period
preceding the closing is less than $2.90 per share, then Corel may elect to pay
cash to Micrografx shareholders. The calculation of the exact amount of the
consideration payable to Micrografx shareholders in this circumstance is
subject to a number of variables, some of which will not be known until
closing. On the other hand, if Corel does not elect to pay cash at closing or
if the average per share sales price of Corel common stock during a specified
period prior to closing is equal to or greater than $2.90, then Micrografx
shareholders will receive a combination of shares of Corel common stock and
Corel participation rights. The exact value of any shares of Corel common stock
to be received at closing will not be known until closing and the exact value
of the consideration to be received at maturity of the Corel participation
rights will not be known until the first anniversary of the closing. On the
first anniversary of the closing, you will be entitled to receive for each
participation right either cash or additional shares of Corel common stock,
depending on the average sales price of Corel common stock during a specified
period prior to the first anniversary. The Corel participation rights are not
transferable, and may not therefore be sold at any time. The market price of
Corel common stock, which has been extremely volatile in recent periods, will
strongly influence the amount, timing and form of consideration that you will
receive in the merger, so there can be no assurances in this regard.
Availability of additional shares of Corel common stock on the consummation of
the merger could depress the price of Corel common stock.
Unless Corel is entitled, and elects, to pay cash for all Micrografx shares
at closing, immediately following the closing of the merger a significant
amount of additional Corel common stock will be available for trading in the
public market. In addition, if the average sales price of Corel common stock
during a specified period prior to the first anniversary of the closing is
greater than the average sales price of Corel common stock at closing, then
shares of Corel common stock will be issued to Micrografx shareholders. The
additional shares in the market may cause the price of Corel common stock to
decline. Also, if Corel's shareholders sell substantial numbers of Corel common
stock in the public market following consummation of the merger, including
shares issued on the exercise of outstanding options and warrants, the market
price of Corel common stock could fall. These sales might also make it more
difficult for Corel to sell equity or equity related securities at a time and
price that Corel would deem appropriate. All of the shares of Corel common
stock issued to Micrografx shareholders in the merger will be freely tradable
without restrictions or further registration under the Securities Act of 1933,
as amended, unless the shares are held by an "affiliate" of Corel or Micrografx
prior to the merger, as that term is defined under the Securities Act of 1933,
as amended.
Even though Corel is required to deposit cash at closing with the trustee to
provide funds in the event cash is payable to the holders of Corel
participation rights under the terms of the participation rights agreement,
there can be no assurance that these funds will be adequate or available to
fund cash payments to Micrografx shareholders on the first anniversary of the
closing.
Unless Corel elects the cash alternative at closing, it is required at that
time to deposit with the trustee under the participation rights agreement the
cash amount necessary to fund the amount that would be payable
16
to holders of Corel participation rights at the first anniversary of the
closing of the merger, less any cash retained by Corel to address the claims of
dissenting Micrografx shareholders. Even though the cash fund would be held in
trust by the trustee for the benefit of the holders of Corel participation
rights, there can be no assurance that the cash fund would be protected from
any claims by Corel or from claims by Corel's creditors or a trustee in
bankruptcy should Corel encounter financial difficulty. In addition, the cash
deposited into the cash fund at closing may not ultimately prove adequate to
make all required cash payments to holders of Corel participation rights, as
Corel may retain funds to address the claims of dissenting Micrografx
shareholders, the cash fund may experience poor investment results, Micrografx
warrantholders may, after the merger, exercise their warrants (which would
entitle them to shares of Corel common stock and Corel participation rights and
could translate into additional cash payments being due), if an event of a
default was to occur under the participation rights agreement any amounts
payable to holders of Corel participation rights would thereafter bear interest
at a default interest rate and other possible reasons. To the extent that the
amounts held in the cash fund are not adequate to make payment of any and all
cash amounts due to the holders of Corel participation rights, then under the
terms of the participation rights agreement Corel is required to promptly
deposit with the trustee additional cash amounts as are necessary to make the
payments. There can be no assurance that Corel will have adequate funds to meet
any additional obligations.
Neither Corel nor Micrografx can tell you at this time whether the merger
consideration that you receive will be subject to United States taxation and
the tax consequences with respect to the Corel participation rights, if any,
received by you are uncertain.
The United States tax consequences to the United States Micrografx
shareholders in the merger will depend on the type of consideration received by
them. Pursuant to the merger agreement, the Micrografx shareholders will
receive, in exchange for their shares of Micrografx capital stock, either all
cash at closing or a combination of Corel common stock and participation rights
at closing. The nontransferable Corel participation rights entitle Micrografx
shareholders to either Corel common stock or cash on the first anniversary of
the closing. The determination as to which consideration will be paid both at
closing and at the first anniversary will depend on the per share sales price
of Corel common stock during a specified period prior to the closing and the
first anniversary, respectively. See "The Merger Agreement and Participation
Rights Agreement--Material United States Federal Income Tax Consequences" for a
description of the material United States federal income tax consequences
resulting from each of these alternatives.
If the Micrografx shareholders receive participation rights in the merger,
the United States federal income tax consequences to the United States
Micrografx shareholders are uncertain, as there are no United States federal
income tax laws addressing the United States tax treatment of the receipt of
deferred rights that are similar to receipt of the Corel participation rights.
If it is determined that Micrografx shareholders are obligated to pay income
tax in respect to their receipt of the Corel participation rights, Micrografx
shareholders will be unable to transfer or sell their Corel participation
rights to obtain cash to meet their tax obligations. A discussion of the
material United States federal income tax consequences to the United States
Micrografx shareholders with respect to their potential receipt of Corel common
stock and Corel participation rights is provided in "The Merger Agreement and
Participation Rights Agreement--Material United States Federal Income Tax
Consequences."
If the Micrografx shareholders receive participation rights in the merger,
Corel does not intend to withhold any amounts with respect to payments made to
the shareholders pursuant to the Corel participation rights. However, if the
Canadian tax laws or the interpretation thereof changes, Corel may be required
to withhold 25% (unless reduced under an applicable bilateral tax treaty) of
all or a portion of any payments made to the shareholders pursuant to the Corel
participation rights. A discussion of the potential Canadian tax consequences
to taxpayers who are non-Canadian residents is provided in "The Merger
Agreement and Participation Rights Agreement--Material Canadian Federal Income
Tax Consequences."
17
Holders of the Corel participation rights will not be able to transfer or sell
the Corel participation rights, nor will they have any rights as Corel common
shareholders.
Corel participation rights may not be sold and are not otherwise
transferable (except by devise or descent) and will not be listed or eligible
for trading on any exchange or market. A holder of Corel participation rights
will not have any rights as a Corel common shareholder and will not in his
capacity as a holder of Corel participation rights be entitled to receive any
dividends in respect of Corel common stock or to vote or otherwise receive
notice of any meeting of Corel shareholders. If, in accordance with the terms
of the participation rights agreement, a holder of Corel participation rights
is entitled to receive shares of Corel common stock, then he will acquire the
rights of a Corel common shareholder only after he has surrendered his
certificates representing Corel participation rights.
The terms of Corel's bridge loan to Micrografx may adversely affect Micrografx.
In connection with the merger, Corel has extended a $2.5 million secured
bridge loan to Micrografx. This loan is scheduled to become due on January 31,
2002 and can become due earlier if, for example, the merger agreement is
terminated by either party or if Micrografx in Corel's view suffers a material
adverse change. Micrografx does not currently have enough cash to repay this
loan. Failure to repay the loan when due could result in exercise of creditors'
remedies against Micrografx. In addition, Micrografx has granted to Corel an
option, exercisable following default under the loan, to acquire 80% of the
outstanding stock of a Micrografx subsidiary in exchange for forgiveness of the
then current outstanding balance of the loan and a right of first refusal on
the remaining 20%. Corel's exercise of this option could impair Micrografx's
ability to pursue its business strategy if the merger does not occur.
Due to the uncertainties raised by the merger, some customers of Corel and
Micrografx could delay purchasing decisions or cease doing business with Corel
and Micrografx altogether, which could adversely affect the business of the
combined company.
Uncertainty in the marketplace or customer concern regarding the impact of
the merger could result in customers or potential customers of Corel or
Micrografx deferring purchasing decisions until the closing of the merger or
after, or ceasing to do business with Corel and Micrografx altogether.
Customers may defer purchasing decisions as they have the opportunity to learn
more about the business plan of the combined company. If a substantial number
of customers defer purchases, these deferrals could harm the business, results
of operations and financial condition of the combined company. In addition, as
a result of the deferral of purchases, the near-term quarterly results of Corel
and Micrografx could fail to meet the expectations of investors and analysts.
As a result of the merger, Corel or Micrografx may become a competitor of some
their respective customers, which may adversely affect the combined company's
business relationship with an affected customer or result in the termination of
that business relationship.
On the consummation of the merger, the businesses of Corel and Micrografx
will be integrated. The combined company after the merger may compete with
existing customers of Corel or Micrografx. If this occurs, the combined
company's relationship with an affected customer may be adversely impacted or
terminated by the customer, either of which could adversely affect the
business, results of operations and financial condition of the combined
company.
Corel faces different market risks from those faced by Micrografx and these
risks may cause the value of the shares of Corel common stock issued to you to
decline.
In the merger you may receive shares of Corel common stock. The business,
strategy and financial condition of Corel is different from that of Micrografx.
Corel's results of operations, as well as the price of Corel common stock, may
be affected by various factors different from those affecting Micrografx's
results of operations and its common stock price. Future events that may not
have affected the price of Micrografx's common stock may cause the price of
Corel common stock to fall.
18
The merger may stimulate competition and the companies may not be able to
compete successfully.
The merger may cause Micrografx's and Corel's competitors to enter business
combinations, accelerate product development or aggressively reduce prices.
These and other competitive practices could create more powerful or aggressive
competitors. There is a risk that Corel will not be able to compete
successfully as future markets evolve. Increased competitive pressure could
lead to lower sales and prices of Corel's products, and this could harm Corel's
business, results of operations and financial condition.
The integration of the Corel, Micrografx and SoftQuad Software, Ltd. businesses
may be costly and the failure of Corel to successfully effect the integration
may adversely affect Corel's business, results of operations and financial
condition.
Corel's ability to realize some of the anticipated benefits of the merger
with Micrografx and the merger with SoftQuad Software, Ltd. will depend in part
on Corel's ability to integrate Micrografx's operations and SoftQuad's
operations into Corel's current operations in a timely and efficient manner.
The integration process will require significant efforts from each of Corel,
Micrografx and SoftQuad. The integration process may distract Corel
management's attention from the day-to-day business of the combined company. If
Corel is unable to successfully integrate the operations of the three companies
or if this integration process is delayed or costs more than expected, Corel's
business, operating results and financial condition may be negatively impacted.
Officers and directors of Micrografx may have interests that are different
from, or in addition to, those of Micrografx shareholders generally.
You should be aware of potential conflicts of interest and the benefits
available to officers and directors of Micrografx when considering the
Micrografx board of directors' recommendation of the merger. The officers and
directors of Micrografx have interests in the merger that are in addition to,
or different from, their interests as Micrografx shareholders. These interests
include the right of some of Micrografx's officers and directors to:
. accelerated vesting of their stock options on consummation of the
merger;
. receipt of severance benefits under employee retention agreements in the
event they are terminated by Corel after the merger; and
. indemnification and insurance coverage with respect to acts and
omissions in their capacities as officers and directors of Micrografx.
In addition, under the terms of the merger agreement, an individual mutually
acceptable to Corel and Micrografx will be nominated to serve on the Corel
board of directors immediately following consummation of the merger. For a more
detailed discussion of potential conflicts of interests of Micrografx's
management, see "Approval of the Merger--Interests of Some Micrografx Officers
and Directors in the Merger."
The rights of Micrografx shareholders will differ from their rights as Corel
securityholders which could provide less protection to the Micrografx
shareholders following the merger.
On the consummation of the merger, Micrografx shareholders may become
holders of Corel common stock and Corel participation rights. Material
differences exist between the rights of Micrografx shareholders under
Micrografx's charter documents, bylaws and the TBCA and the rights of Corel
common shareholders and holders of participation rights under Corel's charter
documents, bylaws, the participation rights agreement and the CBCA, which could
provide less protection to Micrografx shareholders and give more discretion to
the officers and directors of Corel. These differences include, among others,
the fact that Corel has adopted a shareholder rights plan that may discourage
some types of transactions involving an actual or threatened change of control
of Corel. Micrografx does not have a shareholder rights plan. The rights of
holders of Corel participation rights will be substantially different than any
rights currently accorded Micrografx shareholders.
19
If the merger is consummated, Micrografx shareholders will cease to own a
direct interest in Micrografx and will be unable to directly benefit from any
future growth of Micrografx.
If the merger is consummated, Micrografx shareholders will cease to own a
direct interest in Micrografx. In fiscal 1999, Micrografx implemented a new
business strategy to focus its business on the corporate market and de-
emphasize its focus on the consumer market. If Micrografx successfully
implements this new business strategy, its business, results of operation and
financial condition may improve. However, if the merger is consummated,
Micrografx shareholders will not directly benefit from Micrografx's improved
financial position.
Failure to complete the merger could adversely affect the business, results of
operations and financial condition of Corel and Micrografx.
The completion of the merger is subject to numerous conditions. Even if a
majority in interest of holders of Micrografx common stock and Micrografx
preferred stock vote to approve the merger, Micrografx cannot guarantee that
the merger will be completed. If the merger is not completed for any reason,
Corel and Micrografx may be subject to a number of material risks, including
the following:
. potential customers may defer purchases of Corel's or Micrografx's
services and products;
. potential partners may refrain from entering into agreements with Corel
or Micrografx;
. Micrografx may under some circumstances be required to pay Corel's
expenses related to the merger and pay to Corel a substantial
termination fee or Corel may exercise its right to acquire 80% of the
stock of Image2Web with a value that may exceed the aggregate amount
owed by Micrografx to Corel under the bridge loan extended by Corel;
. employee turnover may increase; and
. Micrografx would likely require additional capital, which may not be
available on terms attractive to Micrografx or at all.
The occurrence of any of these factors could result in serious harm to the
business, results of operation and financial condition of Corel or Micrografx
or both.
If the merger agreement is terminated under any of a number of circumstances,
Micrografx would incur substantial costs and may lose a valuable asset.
In the event the merger agreement is terminated by Micrografx or by Corel
under any of a number of specified circumstances, Micrografx would be obligated
to pay Corel a termination fee in an amount equal to 3.5% of the adjusted
Micrografx annual revenues for the year ended June 30, 2001, which adjustments
are calculated based on a formula described elsewhere in this document. In
addition, Micrografx also would be required to pay to Corel all of Corel's
accounting, legal, investment and other out-of-pocket expenses incurred by
Corel with respect to the merger. Further, in the event of termination of the
merger agreement, Micrografx would be obligated to repay a $2.5 million bridge
loan extended to Micrografx by Corel, although Corel also has an option to
purchase 80% of the shares of stock of Image2Web in satisfaction of the
indebtedness outstanding under the bridge loan. In any event, given
Micrografx's current poor financial condition, the obligation to pay the
foregoing significant amounts could prove difficult for Micrografx and it may
not have adequate capital resources to effect payment. If Micrografx was to
fail to repay the bridge loan then Corel could exercise creditor remedies,
including the right to foreclose on the assets pledged to secure the loan and
the right to pursue any deficiency against Micrografx. Alternatively, as 80% of
the value of Image2Web may exceed any amounts likely to be outstanding under
the bridge loan, the exercise by Corel of the option to purchase the shares of
stock of Image2Web may also have a negative impact on Micrografx.
The substantial expenses associated with the merger could adversely affect the
financial results of Micrografx.
Micrografx will incur substantial costs in connection with the merger. These
costs will primarily relate to the costs associated with the fees of attorneys,
accountants and Micrografx's financial advisor. If the merger is not completed,
Micrografx will have incurred significant costs for which it will have received
little or no benefit.
20
Risk Factors Relating to Corel
Corel experienced losses in the past and may have losses in future periods.
Corel has a history of losses. It incurred net losses of $30.4 million in
1998, net income of $16.7 million in 1999 and net losses of $55.4 million in
2000. Although Corel reported net income for the quarters ended February 28,
2001 and May 31, 2001, its revenues have declined from prior recent quarters.
The demand for Corel's products is affected by various factors, many of which
are beyond its control. For example, overall general economic conditions have
recently deteriorated and this may affect the overall rate of capital spending
by Corel's corporate customers. If general economic conditions continue to
deteriorate, Corel may suffer further reductions in its revenues which may
result in operating and net losses over the balance of 2001. Even if Corel does
achieve profitability in future periods, it may not sustain or increase
profitability on a quarterly or annual basis in the future.
Corel's competitors may introduce products with which its current and new
products may not compete successfully.
The markets for Corel's products experience and will continue to experience
rapidly changing technologies, evolving industry standards, frequent new
product introductions by its competitors and short product life cycles. These
market characteristics and the activities of Corel's competitors, including
their introduction of new products and product upgrades, could render Corel's
technology obsolete. In the past Corel has introduced new versions of its
flagship CorelDRAW and WordPerfect Office products approximately annually. Its
most recent versions, CorelDRAW 10 Graphics Suite and WordPerfect Office 2002
were introduced approximately 20 months and 25 months, respectively, after the
introduction of the previous versions. Corel will have to successfully manage
the transition from older products in order to minimize disruption in customer
ordering patterns, avoid excess inventory and ensure adequate supplies of new
products. Corel may not successfully develop, introduce or manage the
transition of new products or do so on a timely basis in response to changing
technologies and standards and new products and product upgrades introduced by
its competitors. Failed market acceptance of new products or problems
associated with new product transitions could harm Corel's business, results of
operations and financial condition.
If new versions of Corel's current products or new products fail to generate
sales due to a lack of customer acceptance, Corel may be unable to expand its
market share. Corel may also lose customers who have purchased its products in
the past, which would result in a decline in market share for current products.
Corel's share of the markets for each of graphics products and business
applications products has declined in the past three fiscal years and may
continue to decline, even with the introduction of new versions of its
products. Users of Corel's graphics products and business applications products
may elect not to upgrade to newer versions of those products. In addition, the
introduction of new graphics application products planned by Corel may fail to
achieve a market share for such products that will permit it to record profits
from such products.
Corel has experienced quarterly fluctuations in operating results that have
affected and may adversely affect its share price and cause it to be volatile.
Corel has experienced, and expects to continue to experience, significant
fluctuations in its quarterly operating results due to reduced demand for older
versions of its flagship products and lower than planned market acceptance of
new versions of these products. This has in the past adversely affected and in
the future could adversely affect Corel's revenues as reported on a quarterly
basis, as well as its share price, and as a consequence increase the volatility
of the market prices of its common stock.
21
Holders of Corel's common stock will have their percentage ownership diluted by
approximately 45% on the conversion of Corel's outstanding Series A preferred
shares into Corel common stock and, if implemented, by its equity line stock
purchase agreement and on the issuance of Corel's common stock to holders of
Micrografx capital stock and to holders of SoftQuad Software, Ltd. stock, and
as a result the price of its common stock may decline.
A significant number of shares of Corel's common stock will be available for
trading in the public market which will result in substantial dilution to
existing shareholders. Up to 24,000,000 additional shares of Corel common stock
will be available for trading as a result of the resale and resulting
conversion of the outstanding Corel Series A preferred stock, for which Corel
has filed a registration statement under the Securities Act of 1933, as
amended. In addition, over the course of the two-year term of Corel's September
18, 2000 equity line stock purchase agreement with Albans Investments Limited,
an institutional investor, Corel may elect to issue up to 14,464,000 shares of
Corel common stock (assuming the exercise of all related warrants) which would
be available for trading. If shares of Corel common stock and Corel
participation rights are issued at the time of the closing of the merger with
Micrografx and if additional shares of Corel common stock are issued at the
first anniversary of the closing pursuant to the Corel participation rights, up
to an aggregate of approximately 11.4 million shares of Corel common stock may
be issued. Corel also entered into a merger agreement on August 7, 2001, with
its wholly owned subsidiary, Calgary II Acquisition Corp., and SoftQuad
Software, Ltd., pursuant to which SoftQuad will merge with Calgary II
Acquisition Corp. Up to approximately 11.2 million shares of Corel common stock
may be issued to the holders of SoftQuad securities on the closing of the
merger with SoftQuad Software, Ltd. Together, the Corel common stock issuable
on conversion of the Corel Series A preferred shares, the common stock which
may be issued pursuant to the September 18, 2000 equity line stock purchase
agreement and the exercise of related warrants, the issue of the common stock
to Micrografx shareholders and the issue of common stock to SoftQuad
shareholders constitute approximately 45% of Corel's issued and outstanding
common stock as of September 10, 2001 after giving effect to the conversion of
the Series A preferred shares, the exercise of the warrants issued and issuable
pursuant to the stock purchase agreement and the issue of shares pursuant to
the Corel participation rights. In addition, Corel has issued and there are
outstanding employee stock options for a total of 4,046,691 shares of Corel
common stock ranging from Cdn$3.00 to Cdn$15.25. The additional shares in the
market will dilute the percentage interest of Corel's other shareholders and
may have a material adverse effect on the market price of Corel's common stock.
Any such decline in the market price of its common stock could impede Corel's
efforts to obtain additional financing through the sale of additional equity or
equity-related securities or could make such financing more costly.
Any inability of Corel to protect its intellectual property may limit its
ability to compete and result in a loss of a competitive advantage and
decreased revenue.
Corel relies principally on copyright, trademark, patent, trade secret and
contract laws to protect its proprietary technology. Corel cannot be certain
that it has taken adequate steps to prevent misappropriation of its technology
or that its competitors will not independently develop technologies that are
substantially equivalent or superior to Corel's technology.
Corel may be subject to intellectual property infringement claims that are
costly to defend and could limit its ability to use some technologies in the
future.
Although Corel believes that none of the software or the trademarks it uses
or any of the other elements of its business infringe on the proprietary rights
of any third parties, third parties have asserted and may assert claims against
Corel for infringement of their proprietary rights and these claims may be
successful. Corel could incur substantial costs and diversion of management
resources in the defense of any claims relating to proprietary rights, which
could materially adversely affect its business, results of operations or
financial condition. These types of claims are common in the software industry.
Parties making these claims could secure a judgment awarding substantial
damages as well as injunctive or other equitable relief that could effectively
block Corel's ability to license its products in the United States, Canada or
elsewhere. Such a
22
judgment could have a material adverse effect on Corel's ability to sell its
products or on its costs of doing business. If a third party asserts a claim
relating to proprietary technology or information against Corel, it may seek
licenses to the intellectual property from the third party. However, Corel
cannot be certain that third parties will extend licenses to it on commercially
reasonable terms, or at all. Corel's failure to obtain the necessary licenses
or other rights or to obtain those rights at a reasonable cost could materially
adversely affect its ability to sell its products or its costs of doing
business.
Corel's common stock price has been and may in the future be affected by
recently experienced extreme price and volume fluctuation in the market for
technology stocks and for manufacturers of certain types of software.
Nasdaq, where many publicly-held software companies are traded, has recently
experienced extreme price and volume fluctuations. These fluctuations often
have been unrelated or disproportionate to the operating performance of these
companies. Until recently, the trading prices of many of these companies'
stocks have been at or near historic highs and these trading prices and
multiples were substantially above historical levels. In addition, in the
recent past, the valuations of companies engaged in the business of developing
and selling software utilizing the Linux open source code have increased
substantially in expectation of future revenues and profitability, and have
subsequently declined substantially. These broad market and industry factors
may materially adversely affect the market price of Corel's common stock,
regardless of its actual operating performance. In the past, following periods
of volatility in the market price of an individual company's securities,
securities class action litigation often has been instituted against that
company. Corel has already been the subject of several lawsuits alleging that
it has violated various provisions of federal securities laws. This litigation,
and other claims, if made, could result in substantial costs and a diversion of
the attention and resources of Corel's management.
The ability of Corel's shareholders to effect changes in control of Corel is
limited.
Corel's certificate and articles of amalgamation, bylaws and the Investment
Canada Act contain provisions that could delay or impede the removal of
incumbent directors and could make more difficult a merger, tender offer or
proxy contest involving Corel. This could discourage a third party from
attempting to acquire control of Corel, even if these events would be
beneficial to the interests of the shareholders. In particular, Corel has a
shareholder rights plan which enables the board of directors to delay a change
in control of Corel. In addition, Corel's certificate and articles of
amalgamation authorize its board of directors to provide for the issuance of
preferred shares, in one or more series, which its board of directors could
issue without further shareholder approval and with terms and conditions and
rights, privileges and preferences as it determines.
In addition, since Corel is a Canadian corporation, investments in Corel may
be subject to the provisions of the Investment Canada Act. In general, this act
provides a system for the notification to the Investment Canada agency of
acquisitions of Canadian businesses by non-Canadian investors and for the
review by the Investment Canada agency of acquisitions that meet thresholds
specified in the act. To the extent that a non-Canadian person or company
attempted to acquire 33% or more of Corel's outstanding common stock, the
threshold for a presumption of control, the transaction could be reviewable by
the Investment Canada agency. These factors could have the effect of delaying,
deferring or preventing a change of control of Corel.
If Corel is unable to hire and retain key personnel, it may be unable to
develop products or achieve sales of products.
Corel's success depends to a significant extent on the performance of its
executive officers and key technical and marketing personnel. The loss of one
or more of Corel's key employees could have a material adverse effect on its
ability to develop products or to sell products. Corel believes that its future
success will depend in large part on its ability to attract and retain highly
skilled technical, managerial and sales and marketing personnel. There can be
no assurance that Corel will be successful in attracting and retaining these
personnel. The implementation by Corel of its cost reduction plan has resulted
and may continue to result in the voluntary retirement of employees whom Corel
wishes to retain.
23
Competition within distribution channels may adversely prevent Corel from
achieving levels of sales which would make it profitable.
Corel competes with other software vendors for access to distribution
channels, retail shelf space and the attention of customers at the retail level
and in corporate accounts. Other competitors with greater market share and
significantly greater financial resources may command the attention of the
retail accounts, the corporate market and original equipment manufacturers, or
OEMs. In order to compete for distribution channel space Corel must offer
compelling reasons to distribute its products. Corel attempts to achieve this
through offering a superior product at a reasonable price that offers
compatibility with competitive products. Corel must also use innovative
marketing ideas in order to compel the distributor to carry Corel products.
Inability to maintain distribution channel space could have a material adverse
effect on Corel's revenues and profitability.
Corel's marketplace is intensely competitive and rapidly changing and it may
not be able to compete successfully in the future.
Corel's industry is highly competitive and subject to rapid technological
change. Many of its current and potential competitors have larger technical
staffs, more established and larger marketing and sales organizations and
significantly greater financial resources. The rapid pace of technological
change constantly creates new opportunities for existing and new competitors
and can quickly render existing technologies less valuable. As the market for
Corel's products continues to develop, additional competitors may enter the
market and competition may intensify. Inability to compete in the following
factors could have a material adverse effect on Corel's business product
performance, product features, ease of use, reliability, hardware and
competitor compatibility, brand name recognition, product reputation, pricing,
levels of advertising, availability and quality of customer support and
timeliness of product upgrades. Corel competes in the following areas with a
variety of companies, including:
. Graphics. Corel's graphics software products face substantial
competition from a wide variety of companies. In the illustration
graphics segment, Corel's competitors include Adobe Systems
Incorporated, JASC Software, Inc., Macromedia Inc. and Microsoft
Corporation. In the desktop publishing segment, its competitors include
Adobe Systems Incorporated. Corel's competitors also include many
independent software vendors, such as Autodesk, Inc. and Apple Computer
Inc.
. Business Productivity. Corel's competitors in the productivity software
(primarily office suites) marketplace include Microsoft, IBM (Lotus
Development Corporation), Sun Microsystems, Inc., Redhat, Inc. and
Applix Inc. According to industry sources, Microsoft currently has the
largest overall market share for office suites. IBM has a large
installed base with its spreadsheet program. Also, IBM preinstalls some
of its software products on various models of its PCs, competing
directly with Corel's productivity software.
Changes in distribution channels may prevent Corel from achieving levels of
sales which would make it profitable.
Corel's products are distributed primarily through distributors, certain of
which are material to its competitive position. The distribution channels
through which software products for desktop computers are sold have been
characterized by rapid change, including consolidations and financial
difficulties of certain distributors and resellers, the emergence of new
retailers such as general mass merchandisers and superstores and the desire of
large customers such as retail chains and corporate users to purchase directly
from software developers. The loss of, or a significant reduction in sales
volume attributable to, any of Corel's principal distributors or the insolvency
or business failure of any such distributor could have a material adverse
effect on its revenues and profitability.
Prices of Corel's products could decrease, which would reduce its profits.
Pricing pressures continually intensify in the PC software applications
market and Corel believes that price competition, with its attendant reduced
profit margins, may become a more significant factor in the future.
24
Corporate licensing, discount pricing for large volume distributors and
retailers, product bundling promotions and competitive upgrade programs are
forms of price competition that may become more prevalent. In addition,
enterprise-wide versions of products are generally priced lower per user than
individual copies of the same products. Corel also competes with companies that
produce standalone graphics and desktop publishing applications that might
serve a specific need of a user or class of users at a price below that of
Corel's products. Reductions in the prices of Corel's products could reduce its
profits.
Corel faces regulatory risks in doing business in foreign countries that could
adversely affect its revenues and profitability and it relies to a large degree
on sales in the United States.
Currently, Corel markets its products in more than 60 countries. Corel
anticipates that sales outside of North America will continue to account for a
significant portion of total sales. These sales are subject to risks including
imposition of government controls, export license requirements, restrictions on
the export of technology, political instability, trade restrictions, changes in
tariffs, differences in copyright protection and difficulties in managing
accounts receivables. More than 50% of Corel's sales for the past two fiscal
years were made in the United States. As a result, adverse developments in the
foreign markets or in the United States market for Corel's products could have
a material adverse effect on revenues and profitability.
Because Corel's revenues are earned in different currencies, its revenues are
subject to exchange rate fluctuations.
A substantial portion of Corel's revenues are earned in Europe and collected
in euros. As a result, Corel is at risk from exchange rate fluctuations between
the euro and the United States dollar. The fluctuation of the euro against the
United States dollar since 1999 has had, and may continue to have, a negative
effect on Corel's revenues as reported in its financial statements, and may
significantly affect the comparability of its results between financial
periods. Corel does not conduct any foreign exchange hedging activities to
protect against exchange rate fluctuations. Given the volatility in currency
exchange rates, there is a risk that Corel will not be able to effectively
manage its currency translation risks or that exchange rate volatility will
have a material adverse effect on its profits.
Corel's research and development costs are significant and may not result in
increased sales or revenue.
Developing software is expensive. Corel plans to continue significant
investments in product research in the near future. Corel cannot assure that
significant sales or revenue from the products it is developing will be
achieved.
Corel's products are currently used principally on PCs and any slowing of
growth of PC unit sales may adversely affect its revenue growth.
The growth rate of sales of PCs may decrease in the future and have a
negative effect on the growth of Corel's revenues.
It is possible that Corel may become a passive foreign investment company, or
PFIC, for United States federal income tax purposes, which could result in
negative tax consequences to you.
Corel would become a PFIC, for United States federal income tax purposes if
75% or more of its gross income in any year is considered passive income
(defined for this purpose as including interest, dividends and rents and
royalties, as well as gains from the sale of assets that produce these types of
income) or on average for any year, 50% or more of its assets produce passive
income or are held to produce passive income.
Cash and cash equivalents, among other types of assets, are considered to
produce, or to be held for the production of, passive income for purposes of
applying the second of the two tests set forth above. As of May 31, 2001, Corel
had $127.2 million of cash and cash equivalents on hand. These balances may
25
either increase or decrease from the amount on hand as of May 31, 2001.
Accordingly, Corel may be or may subsequently become a PFIC if the average
quarterly value of all its assets that produce, or are held for the production
of, passive income (including cash) equals or exceeds 50% of its gross assets.
Because the PFIC determination is made annually on the basis of facts and
circumstances that may be beyond Corel's control (including fluctuations in the
market value of its stock), and because this registration is being made prior
to the close of Corel's taxable year in which you may acquire its stock on the
merger, Corel cannot assure you that it will not be a PFIC for this year or
future years.
If Corel becomes a PFIC, United States holders of its shares will be subject
to United States federal income tax rules that will have negative consequences
for those holders. Under the PFIC rules, unless a qualified electing fund or
mark-to-market election is made, a United States holder would, on receipt of
distributions, or on disposition of Corel's shares at a gain, be liable to pay
tax at the then highest rates on ordinary income plus an interest charge. The
interest charge would generally be calculated as if the distribution or gain
had been recognized ratably over the United States holder's holding period (for
PFIC purposes) for the shares. A United States holder also would be required to
make an annual return on IRS Form 8621 that describes any distributions
received with respect to its shares and any gain realized on the sale or other
disposition of its shares. There is a risk that Corel will not complete the
actions necessary for United States holders to make a qualifying electing fund
election if it was to be considered a PFIC for any taxable year.
Risk Factors Relating to Micrografx
Micrografx has experienced significant competition for its products which has
reduced its sales and adversely affected its business, results of operations
and financial condition.
The PC graphics software market is highly competitive. Micrografx's
competitors include many independent applications software vendors, such as
Adobe, Macromedia, Inc. and Microsoft. Most of Micrografx's existing
competitors, as well as a number of potential competitors, have larger
technical staffs, more established and larger marketing and sales organizations
and significantly greater financial resources than Micrografx does. Micrografx
cannot provide assurances that its competitors will not develop products that
are superior to Micrografx's applications software products. If Micrografx's
competitors are able to develop such products, then they may be able to gain
greater market acceptance than Micrografx's products, which will likely result
in reduced sales of Micrografx's software products and will adversely effect
Micrografx's business, results of operations and financial condition.
If Micrografx is unable to successfully implement its new business strategy,
its business, results of operations and financial condition will be adversely
affected.
During fiscal 1999 and in prior years, Micrografx generated a significant
portion of its business from the personal creativity software market and the
licensing of personal creativity technology to third parties. Due to aggressive
competition and Micrografx's belief that its products are well suited to
various high-growth business markets, Micrografx has chosen to pursue business
customers. Micrografx's future financial performance will depend on the
successful transition of internal resources away from its past strength in the
retail market while moving toward solving problems currently experienced by
businesses. In order to accomplish its objective, Micrografx has hired
employees with skills required for Micrografx's new direction, is training
existing employees on how to make this change and revising its marketing and
sales programs and adapting its distribution channels to serve business
customers. However, there is no assurance that Micrografx's efforts will be
successful.
In order to succeed, Micrografx will have to convince businesses that its
products are able to solve their problems, identify and develop features which
business customers desire and ensure that it has a sales force and customer
support system sufficient in size and expertise to service business customers.
In light of the difficulties associated with the transition of its business
focus, Micrografx may confront unanticipated risks and uncertainties.
Therefore, there can be no assurance that Micrografx's business strategy will
be successful and it
26
is possible that Micrografx's business, results of operations and financial
condition will be adversely affected if it is unable to effectively implement
its new business focus.
If Micrografx's management is unable to reduce Micrografx's expenses and
increase revenues in the near future, then Micrografx may need to obtain
financing from third parties, which may not be available or may be available
only on terms not acceptable to Micrografx.
During fiscal 2001, Micrografx's cash outlays for operations, software
development and capital expenditures was approximately $3.6 million. The rate
of cash usage over the past three years to implement Micrografx's new business
strategy was greater than expected. Management has developed plans to attempt
to reduce the rate of cash usage while transitioning its business model. Should
these plans and steps be insufficient to meet the goal of reducing cash outlays
and allowing Micrografx to meet its obligations from existing resources and if
management's plans to increase revenue growth are unsuccessful, Micrografx
would then be left with inadequate resources to operate its business. There can
be no assurance that Micrografx's management will be successful in its efforts
to preserve Micrografx's existing sources of liquidity. In connection with the
merger with Corel, Micrografx obtained a bridge loan in the principal amount of
$2.5 million from Corel to be used to reduce Micrografx's indebtedness and
provide operating capital. Micrografx may need to obtain additional financing
from third parties. There is no assurance that Micrografx can identify any
further sources of external financing and, even if the financing is available,
it may not be extended on terms acceptable to Micrografx. If Micrografx is
unable to obtain additional financing when it is needed, Micrografx's business,
results of operations and financial condition may be adversely affected.
New product introductions may adversely affect Micrografx's ability to sell its
older products profitably.
Micrografx's future financial performance will depend in significant part on
the successful development and introduction of new and enhanced versions of its
products and customer acceptance of these products. Micrografx cannot provide
assurance that it will be able to successfully develop and introduce new
products. In addition, the timing of new product introductions which are
updates of previously released products can have a significant impact on the
profitability of the older version of the product. To the extent that the
distributors were unable to sell the older version at the rate they anticipated
when they purchased the product, additional marketing expenditures are
generally required to promote the older version in order to reduce stocking
levels in anticipation of the release of the new version of the product, which
adversely affects Micrografx's profitability.
Micrografx's success depends on its ability to adapt to technological change in
a timely manner.
The PC industry is subject to rapid technological change and continuing
development of new and enhanced operating environments. The success of
Micrografx's products will depend to a large extent on its ability to continue
to develop and introduce innovative and competitive products in a cost-
effective and timely manner. Micrografx's management cannot provide assurances
that Micrografx will be able to do so. If Micrografx is unable to develop and
introduce innovative and competitive products on a cost-effective and timely
manner, its business, results of operations and financial condition will be
adversely effected.
Micrografx's international operations are subject to a number of risks.
Micrografx anticipates that its international net revenues will continue to
account for a significant portion of its total net revenues. As a result, a
significant portion of Micrografx's net revenues are subject to the risks
inherent in international operations. These risks include:
. unexpected changes in, or impositions of, legislative or regulatory
requirements;
. delays resulting from difficulty in obtaining export licenses for some
technology, tariffs, quotas and other trade barriers and restrictions;
. longer payment cycles;
27
. exchange rate fluctuations;
. imposition of additional taxes and penalties;
. difficulties in staffing and managing foreign subsidiary operations;
. the burdens of complying with a variety of foreign laws;
. potentially adverse tax consequences; and
. other factors beyond Micrografx's control.
Micrografx is also subject to general political risks in connection with its
international trade relationships. In addition, the laws of some foreign
countries in which Micrografx's products are or may be manufactured or sold,
including various countries in Asia, may not protect its products or
intellectual property rights to the same extent as do the laws of the United
States. This makes the possibility of piracy of Micrografx's technology and
products more likely. Currently, most of Micrografx's arrangements with third-
party manufacturers provide for pricing and payment in United States dollars
and Micrografx does not currently engage in any currency hedging activities,
although Micrografx may do so in the future.
Micrografx's quarterly operating results may fluctuate due to seasonality in
demand for its products.
Historically, Micrografx's results of operations are subject to significant
quarterly variations. The causes of these variations include:
. seasonality of the retail software market;
. delays in the introduction of new or enhanced versions of Micrografx
products;
. timing and cost of new product upgrades and introductions;
. reduced distribution channel sales preceding the introduction of updated
products; and
. large distribution channel sales following the introduction of new or
updated products.
Some level of seasonality is expected to continue with a higher level of
revenues occurring in the fourth calendar quarter in connection with the
purchasing habits of most businesses as they close out their fiscal year. A
lower level of revenues is expected to occur in the third calendar quarter
principally due to the extended holiday periods in Europe during the July and
August time frame resulting in a lower level of business purchasing.
Micrografx will continue to expend resources to upgrade some of its products
even though the sales of upgrades generate lower profit margins.
Micrografx will continue to expend resources to upgrade some of its
products. Product upgrades, which enable users to upgrade from earlier versions
of Micrografx products, or from competitor's products, typically have lower
prices than new products, resulting in lower gross profit margins. Micrografx
plans to continue upgrading successful products in the future.
The Internet market is subject to rapid change and uncertainty.
Micrografx provides products for use in the Internet market. The Internet
market is rapidly evolving and is characterized by an increasing number of
market entrants. As is typical in the case of a new and evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. Critical issues concerning the
commercial use of the Internet, including security, reliability, cost, ease of
use and access and quality of service remain unresolved and may affect the
growth of Internet use, together with the software standards and electronic
media employed in those markets.
28
Micrografx has a history of losses, expects future losses and may not achieve
or sustain annual profitability.
Micrografx expects to incur operating losses in the future. Sales of
Micrografx products may not generate sufficient revenues to fund its continuing
operations. Micrografx may not generate positive cash flow or attain
profitability. Even if Micrografx achieves profitability, it may not be able to
sustain it. To date, Micrografx has incurred significant losses. As of June 30,
2001, Micrografx's accumulated deficit was approximately $30.6 million. These
losses have resulted primarily from significant costs associated with the
development of Micrografx's products and the costs associated with the
marketing of those products.
Micrografx may not be able to generate sufficient working capital or obtain
additional capital to fund its operations when needed.
A lack of additional funding could force Micrografx to substantially curtail
or cease its operations, which would have a material adverse effect on its
business, results of operations and financial condition. Micrografx anticipates
that its future cash requirements may be supplemented by improved product
sales, third party financing and/or the sale or licensing of some of its
technologies. However, there can be no assurance that any future funds required
will be generated from operations or from other potential sources. Further, any
required funds may only be available on unattractive terms.
29
MICROGRAFX, INC.
SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected historical financial data for each of the fiscal
years ended June 30, 1997 through 2001 has been derived from Micrografx's
audited consolidated financial statements. You should not expect the results
for the prior periods to be an indication of the results to be achieved for
future periods. This information is only a summary and you should read it
together with Micrografx's historical financial statements and related notes
contained in this prospectus/proxy statement. Please read the selected
financial data set forth below in conjunction with "Micrografx Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this prospectus/proxy statement.
Year Ended June 30,
--------------------------------------------
2001 2000 1999 1998 1997
------- -------- ------- ------- -------
(in thousands, except per share data)
Statements of Operations Data:
Net revenues.................... $30,171 $ 36,273 $56,962 $71,792 $64,862
Cost of revenues................ 5,955 8,074 10,210 21,466 19,784
------- -------- ------- ------- -------
Gross profit.................. 24,216 28,199 46,752 50,326 45,078
Total operating expenses........ 24,268 49,215 50,171 49,953 53,483
------- -------- ------- ------- -------
(Loss) income from operations... (52) (21,016) (3,419) 373 (8,405)
Total non operating expense
(income)....................... 1,259 699 (659) (561) (308)
------- -------- ------- ------- -------
(Loss) income before income
taxes.......................... (1,311) (21,715) (2,760) 934 (8,097)
Income tax provision (benefit).. 323 454 3,092 327 (1,910)
------- -------- ------- ------- -------
Net (loss) income............... $(1,634) $(22,169) $(5,852) $ 607 $(6,187)
Preferred stock dividends....... (83) -- -- -- --
------- -------- ------- ------- -------
Net income (loss) applicable to
common shareholders............ $(1,717) $(22,169) $(5,852) $ 607 $(6,187)
======= ======== ======= ======= =======
(Loss) earnings per share:
Basic......................... $ (0.15) $ (1.95) $ (0.53) $ 0.06 $ (0.60)
======= ======== ======= ======= =======
Diluted....................... $ (0.15) $ (1.95) $ (0.53) $ 0.05 $ (0.60)
======= ======== ======= ======= =======
Shares used in computing
earnings loss per share:
Basic......................... 11,651 11,390 11,119 10,613 10,342
Diluted....................... 11,651 11,390 11,119 11,055 10,342
Balance Sheet Data:
Cash and short-term
investments.................... $ 1,690 $ 2,843 $11,220 $28,067 $14,765
Working capital (deficit)....... (7,556) (3,220) 5,605 18,112 12,937
Total assets.................... 18,927 19,479 42,383 55,141 39,112
Total long-term liabilities..... 203 6,234 5,808 410 1,414
Shareholders' equity............ 1,665 1,779 22,432 28,570 23,528
30
COREL CORPORATION
SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected historical financial data for each of the fiscal
years ended November 30, 1996 through 2000 has been derived from Corel's
audited consolidated financial statements. You should not expect the results
for the prior periods to be an indication of the results to be achieved for
future periods. This information is only a summary and you should read it
together with Corel's historical financial statements and related notes
contained in the annual reports and other information that Corel has filed with
the Securities and Exchange Commission and incorporated by reference in this
prospectus/proxy statement. See "Where You Can Find More Information."
The selected historical financial data for the six months ended May 31, 2000
and 2001 has been derived from Corel's unaudited interim consolidated financial
statements which, in the opinion of Corel's management, include all
adjustments, consisting only of normal, recurring adjustments, necessary for a
fair presentation of the information set forth in the consolidated financial
statements. The results of operations for the six months ended May 31, 2001 are
not necessarily indicative of the results for the full fiscal year.
The selected financial information is prepared on the basis of Canadian
generally accepted accounting principles, which are different in some respects
from United States generally accepted accounting principles. For a description
of significant differences between Canadian generally accepted accounting
principles and United States generally accepted accounting principles, see
Corel's Form 10-K/A for the fiscal year ended November 30, 2000 which is
incorporated by reference in this prospectus/proxy statement. See "Where You
Can Find More Information."
Please read the selected financial data set forth below in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Corel's financial statements, Corel's Form 10-K/A for
the fiscal year ended November 30, 2000 and Corel's Form 10-Qs for the three
months ended February 28, 2001 and the six months ended May 31, 2001 and
incorporated by reference into this prospectus/proxy statement.
Six Months Ended
May 31, Year Ended November 30,
----------------- -----------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
-------- -------- -------- -------- -------- --------- --------
(in thousands, except per share data)
Canadian GAAP Sales..... $ 68,550 $ 80,780 $157,487 $243,051 $246,827 $ 260,581 $334,245
Income (loss) from
continuing operations.. $ 2,860 $(36,019) $(55,348) $ 16,716 $(30,448) $(231,678) $ (2,750)
Income (loss) from
continuing operations
Per share (fully dilut-
ed).................... $ 0.03 $ (0.55) $ (0.80) $ 0.27 $ (0.51) $ (3.84) $ (0.05)
US GAAP income (loss)
from continuing
operations............. $ 2,860 $(36,019) $(55,348) $ 16,716 $(30,448) $(231,678) $ (2,750)
Net income (loss) from
continuing operations
per share (fully dilut-
ed).................... $ 0.03 $ (0.55) $ (0.80) $ 0.27 $ (0.51) $ (3.84) $ (0.05)
Balance Sheet Data:
Cash and cash
equivalents............ $105,784 $ 9,894 $127,430 $ 18,021 $ 24,506 $ 30,629 $ 6,924
Working capital......... 116,758 (20,670) 106,662 23,781 4,692 27,356 129,945
Total assets............ 199,349 106,217 218,587 139,716 124,596 144,561 374,088
Novell obligations...... -- 14,674 10,000 6,594 12,322 18,362 24,940
Shareholders' equity.... 165,638 31,260 162,644 64,366 28,583 59,809 290,260
31
COMPARATIVE PER SHARE DATA
The following tables set forth the historical and pro forma per share data
of Corel and Micrografx.
You should read the information below along with Corel's and Micrografx's
consolidated financial statements included elsewhere in this prospectus/proxy
statement or incorporated by reference into this prospectus/proxy statement.
Six Months Ended Year Ended
May 31, 2001 November 30, 2000
---------------- -----------------
Historical--Corel:
Basic income (loss) per share.............. $0.04 $(0.80)
Diluted income (loss) per share............ $0.03 $(0.80)
Book value per share....................... $2.25 $ 2.21
Year Ended
June 30, 2001
----------------
Historical--Micrografx:
Basic and diluted loss per share........... $(0.15)
Book value per share....................... $ 0.13
Six Months Ended Year Ended
May 31, 2000 November 30, 2000
---------------- -----------------
Pro Forma Combined:
Basic income (loss) per share.............. $0.03 $(0.89)
Diluted income (loss) per share............ $0.03 $(0.89)
Book value per share....................... $2.33 $ 2.30
The historical book value per share is computed by dividing shareholders'
equity by the number of shares of common stock outstanding at the end of each
period presented.
The unaudited pro forma basic and diluted loss per share for the year ended
November 30, 2000 is computed by dividing the sum of Corel's net loss for the
year ended November 30, 2000 ($55,348,000) and Micrografx's net loss for the 12
months ended December 31, 2000 ($16,450,000) by the sum of the weighted average
number of shares of Corel common stock outstanding for the year ended November
30, 2000 (69,498,000) and 11,379,000, the number of shares of Corel common
stock that would be issued based on a transaction value of approximately $33.0
million and a Corel share price of $2.90. The unaudited pro forma basic and
diluted income per share for the six months ended May 31, 2001 is computed by
dividing the sum of Corel's net income for the six months ended May 31, 2001
($2,860,000) and Micrografx's net loss for the six months ended June 30, 2001
($69,000) by the sum of the weighted average number of shares of Corel common
stock outstanding for the six months ended May 31, 2001 (73,688,000 basic and
97,769,000 diluted) and 11,379,000, the number of shares of Corel common stock
that would be issued based on a transaction value of approximately $33.0
million and a Corel share price of $2.90.
The unaudited pro forma book value per share at November 30, 2000 is
computed by dividing the sum of Corel's shareholders' equity at November 30,
2000 ($162,644,000) and the estimated transaction value of approximately $33.0
million by the sum of the number of shares of Corel common stock outstanding at
November 30, 2000 (73,641,000) and 11,379,000, the number of shares of Corel
common stock that would be issued based on a transaction value of approximately
$33.0 million and a Corel share price of $2.90. The unaudited pro forma book
value per share at May 31, 2001 is computed by dividing the sum of Corel's
shareholders' equity at May 31, 2001 ($165,638,000) and the estimated
transaction value of approximately $33.0 million by the sum of the number of
shares of Corel common stock outstanding at May 31, 2001 (73,761,000) and
11,379,000, the number of shares of Corel common stock that would be issued
based on a transaction value of approximately $33.0 million and a Corel share
price of $2.90.
32
MARKET PRICE AND DIVIDEND INFORMATION
Corel
Corel common stock is listed and traded on the Nasdaq National Market and
The Toronto Stock Exchange. The following table sets forth the high and low
closing per share sales prices of Corel common stock as reported on the Nasdaq
National Market and The Toronto Stock Exchange for the quarterly fiscal periods
presented below:
The Toronto
Stock
Nasdaq Exchange
------------- -------------
High Low
High Low (Cdn$) (Cdn$)
------ ------ ------ ------
Fiscal Year Ended November 30, 1999
First quarter ended February 28, 1999............. $ 5.13 $ 2.50 $ 7.55 $ 3.76
Second quarter ended May 31, 1999................. $ 4.63 $ 2.19 $ 7.00 $ 3.32
Third quarter ended August 31, 1999............... $ 6.38 $ 2.81 $ 9.65 $ 4.15
Fourth quarter ended November 30, 1999............ $20.88 $ 4.69 $30.40 $ 7.00
Fiscal Year Ended November 30, 2000
First quarter ended February 29, 2000............. $30.25 $13.18 $57.95 $19.70
Second quarter ended May 31, 2000................. $15.88 $ 3.03 $22.95 $ 3.80
Third quarter ended August 31, 2000............... $ 5.25 $ 2.91 $ 7.70 $ 4.30
Fourth quarter ended November 30, 2000............ $ 6.06 $ 2.59 $ 9.05 $ 4.01
Fiscal Year Ended November 30, 2001
First quarter ended February 28, 2001............. $ 3.88 $ 1.38 $ 5.90 $ 2.32
Second quarter ended May 31, 2001................. $ 2.65 $ 2.00 $ 4.02 $ 3.07
Third quarter ended August 31, 2001............... $ 3.83 $ 2.33 $ 5.98 $ 3.50
Fourth quarter through September 24, 2001......... $ 3.20 $ 2.03 $ 5.01 $ 3.12
On July 13, 2001, the last full trading day before the announcement of the
execution of the merger agreement, the closing per share sales price for the
Corel common stock was $2.92 on the Nasdaq National Market and Cdn$4.45 on The
Toronto Stock Exchange. On September 24, 2001, the most recent practicable
date, the closing per share sales price for the Corel common stock was $2.14 on
the Nasdaq National Market and Cdn$3.40 on The Toronto Stock Exchange. We urge
you to obtain current market quotations before making any decisions with
respect to the merger. As of September 24, 2001, there were approximately 1,150
holders of record of Corel common stock.
33
Micrografx
The Micrografx common stock is traded on the over-the-counter bulletin board
under the symbol "MGXI" effective as of April 30, 2001. Prior to that time, the
Micrografx common stock was traded on the Nasdaq National Market under the
symbol "MGXI." The following table sets forth for the periods from July 1, 1999
through April 29, 2001, the high and low per share sales price for the
Micrografx common stock as reported on the Nasdaq National Market and, for the
period from April 30, 2001 through September 24, 2001, the range of high and
low bid prices for the Micrografx common stock as reported on the over-the-
counter bulletin board. The quotations from the over-the-counter bulletin board
reflect interdealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions.
Nasdaq
-----------------
High Low
-------- --------
Fiscal Year Ended June 30, 2000
First quarter ended September 31, 1999..................... $ 6.13 $ 3.88
Second quarter ended December 31, 1999..................... $ 5.69 $ 3.25
Third quarter ended March 31, 2000......................... $ 7.88 $ 4.00
Fourth quarter ended June 30, 2000......................... $ 7.50 $ 2.31
Fiscal Year Ended June 30, 2001
First quarter ended September 31, 2000..................... $ 2.69 $ .88
Second quarter ended December 31, 2000..................... $ 1.91 $ .12
Third quarter ended March 31, 2001......................... $ 1.41 $ .38
Fourth quarter through April 29, 2001...................... $ 1.00 $ .65
Over-the-Counter
Bulletin Board
-----------------
High Low
-------- --------
Fourth quarter from April 30, 2001 to June 30, 2001........ $ 1.33 $ .55
Fiscal Year Ended June 30, 2002
First quarter through September 24, 2001................... $ 1.78 $ 1.30
On July 13, 2001, the last full trading day before the announcement of the
execution of the merger agreement, the closing per share bid price of
Micrografx common stock was $1.70 on the over-the-counter bulletin board. On
September 24, 2001, the most recent practicable date, the closing per share bid
price of Micrografx common stock was $1.50 on the over-the-counter bulletin
board. We urge you to obtain current market quotations before making any
decisions with respect to the merger. As of September 24, 2001, there were
approximately 193 holders of record of Micrografx common stock.
Dividend Information
Corel has never declared or paid cash dividends on its shares of common
stock. Corel anticipates that any earnings will be retained for development and
expansion of its business and does not anticipate paying any cash dividends in
the near future. Corel's board of directors has sole discretion to pay cash
dividends based on its financial condition, results of operation, capital
requirements, contractual obligations and other relevant factors. Micrografx
has not paid any cash dividends on its common stock in the two most recent
fiscal years and has no intention of paying cash dividends in the foreseeable
future.
34
THE MICROGRAFX SPECIAL MEETING
When and Where the Special Meeting Will Be Held
This prospectus/proxy statement is furnished to the holders of Micrografx
common stock as part of the solicitation of proxies by the Micrografx board of
directors for use at the Micrografx special meeting on October 29, 2001, at
10:00 a.m., local time, at the Doubletree Hotel, 8250 North Central Expressway,
Dallas, Texas. The meeting may be adjourned or postponed to another date and/or
place for proper purposes.
This prospectus/proxy statement, and the accompanying proxy card, are first
being mailed to holders of Micrografx common stock on or about September 28,
2001.
What Will Be Voted On
The purpose of the Micrografx special meeting is to consider and vote on a
proposal to approve the merger agreement and the merger. See "The Merger
Agreement and Participation Rights Agreement."
Which Shareholders May Vote at the Special Meeting
Only holders of record of Micrografx common stock at the close of business
on September 10, 2001, the Micrografx record date, are entitled to notice of
and to vote at the Micrografx special meeting. At the close of business on the
Micrografx record date, there were 12,525,038 shares of Micrografx common stock
outstanding and entitled to vote, held of record by approximately 193
shareholders. A majority, or 6,262,520, of these shares, present in person or
represented by proxy, will constitute a quorum for the transaction of business.
Each Micrografx shareholder is entitled to one vote for each share of
Micrografx common stock held as of the Micrografx record date.
How Do Micrografx Shareholders Vote
The Micrografx proxy card accompanying this document is solicited on behalf
of the Micrografx board of directors for use at the Micrografx special meeting.
Shareholders are requested to complete, date and sign the accompanying proxy
and promptly return it in the accompanying envelope or, if eligible, vote over
the Internet. All proxies that are properly executed and returned, and that are
not revoked, will be voted at the Micrografx special meeting in accordance with
the instructions indicated thereon. Executed but unmarked proxies will be voted
for approval of the merger agreement and the merger. The Micrografx board of
directors does not presently intend to bring any other business before the
Micrografx special meeting other than the specific proposal referred to in this
document and specified in the notice of the Micrografx special meeting.
The Micrografx board of directors knows of no other matters that are to be
brought before the Micrografx special meeting. If any other business properly
comes before the Micrografx special meeting, including the consideration of a
motion to adjourn the Micrografx special meeting (including for purposes of
soliciting additional votes for approval of the merger agreement and the
merger), it is intended that proxies will be voted in accordance with the
judgment of the persons voting the proxies.
How to Change Your Vote
A Micrografx shareholder who has given a proxy may revoke it at any time
before it is exercised at the Micrografx special meeting by doing one of the
following:
. filing a written notice of revocation with Corporate Secretary,
Micrografx, Inc., at 8144 Walnut Hill Lane, Suite 1050, Dallas, Texas
75231;
. granting a subsequently dated proxy; or
. attending the Micrografx special meeting and voting in person.
35
Attending the Micrografx special meeting will not, by itself, revoke a
proxy. You must also vote at the meeting.
Vote Required to Approve the Merger
Under the TBCA, and the Micrografx articles of incorporation and bylaws,
approval of the merger agreement and the merger requires the affirmative vote
of the holders of at least a majority of the issued and outstanding shares of
Micrografx common stock entitled to vote at the Micrografx meeting. The
required vote of the Micrografx common shareholders is based on the number of
outstanding shares of Micrografx common stock and not on the shares actually
voted. Therefore, the failure of a holder of shares of Micrografx common stock
to submit a proxy or to vote in person at the Micrografx meeting, including
abstentions and "broker non-votes," will have the same effect as a vote against
approval of the merger agreement and the merger.
In addition to the approval of the holders of at least a majority of the
issued and outstanding shares of Micrografx common stock, full shareholder
approval of the merger agreement and the merger also requires the affirmative
vote of holders of at least a majority of the issued and outstanding shares of
Micrografx's preferred stock, voting separately as a class. It is expected that
holders of Micrografx preferred stock will vote with respect to approval of the
merger agreement and the merger by written consent.
The matters to be considered at the Micrografx special meeting are of great
importance to Micrografx shareholders. Accordingly, common shareholders are
urged to read and carefully consider the information presented in this
prospectus/proxy statement and to complete, date, sign and promptly return the
enclosed proxy in the enclosed postage-paid envelope.
Under executed voting agreements and related irrevocable proxies,
approximately 3,254,406 shares of Micrografx common stock owned by one
significant Micrografx shareholder and all of the directors and executive
officers of Micrografx at the Micrografx record date will be voted for approval
of the merger agreement and the merger. The shares owned by these persons
represent approximately 26.0% of the total number of shares of Micrografx
common stock outstanding at the Micrografx record date. As of the Micrografx
record date, Corel owned no shares of Micrografx common stock.
Quorum; Abstentions; Broker Non-Votes
The presence, in person or by properly executed proxy, of the holders of at
least a majority of the outstanding shares of Micrografx common stock entitled
to vote at the Micrografx special meeting constitutes a quorum. If an executed
Micrografx proxy is returned and the shareholder has specifically abstained
from voting on any matter, the shares represented by that proxy will be
considered present at the Micrografx special meeting for purposes of
determining a quorum. If an executed proxy is returned by a broker holding
shares in street name which indicates that the broker does not have
discretionary authority as to some shares to vote on one or more matters, the
shares represented by the broker's proxy will be considered present at the
meeting for purposes of determining a quorum. Since the required vote of the
Micrografx common shareholders is based on the number of outstanding shares of
Micrografx common stock, abstentions and broker non-votes will have the same
effect as a vote against approval of the merger agreement and the merger.
Solicitation of Proxies and Expenses of Solicitation
Micrografx will bear the cost of the solicitation of proxies in the enclosed
form from its common shareholders. In addition to solicitation by mail, the
directors, officers and employees of Micrografx may solicit proxies from
shareholders by telephone, telegram, letter, facsimile or in person. Following
the original mailing of the proxies and other soliciting materials, Micrografx
may request that brokers, custodians, nominees and other record holders forward
copies of the proxy and other soliciting materials to persons for whom they
hold shares of Micrografx common stock and request authority for the exercise
of proxies. In those cases, Micrografx, on the request of the record holders,
will reimburse the record holders for their reasonable expenses. Micrografx has
retained Georgeson & Company to assist in the solicitation of proxies at a cost
of approximately $5,500 plus reasonable expenses.
36
Approval of Preferred Shareholders
In addition to the approval of the holders of at least a majority of the
issued and outstanding shares of Micrografx common stock, the approval of the
merger agreement and the merger requires the affirmative vote of the holders of
at least a majority of the issued and outstanding shares of the Micrografx
preferred stock, which is the only series of Micrografx preferred stock that is
authorized or outstanding. At the close of business on the Micrografx record
date, there were 1,120,000 shares of Micrografx preferred stock outstanding and
entitled to vote, held of record by seven shareholders. It is expected that
holders of Micrografx preferred stock will vote, as a separate class, with
respect to approval of the merger agreement and the merger by written consent.
Under executed voting agreements and related irrevocable proxies, 420,000
shares of Micrografx preferred stock owned by one significant shareholder at
the Micrografx record date will be voted for approval of the merger agreement
and the merger. The shares owned by this shareholder represent approximately
37.5% of the total number of shares of Micrografx preferred stock outstanding
at the Micrografx record date.
Proposals of Shareholders
All proposals of shareholders intended to be presented at the 2001 annual
meeting of shareholders of Micrografx must be received by Micrografx at its
principal executive offices on or before October 1, 2001, for inclusion in
Micrografx's proxy statement relating to that meeting. If a shareholder does
not seek to have a proposal included in the proxy statement relating to the
2001 annual meeting of shareholders of Micrografx, but nevertheless wishes to
present a proposal or nomination at the annual meeting, written notice of the
proposal or nomination must be received by the corporate secretary of
Micrografx at its principal executive offices not later than the close of
business on October 26, 2001.
37
APPROVAL OF THE MERGER
The following information relating to the merger is not intended to be a
complete description of all the information relating to the merger but is
intended to include the material terms of the merger. More detailed information
is contained elsewhere in this prospectus/proxy statement, including the
annexes. A copy of the merger agreement is set forth in Annex A to this
prospectus/proxy statement. You are urged to read the merger agreement
carefully for a complete description of the terms of the merger.
Background of the Merger
In 1997, Micrografx began an effort to refocus and rebrand its product line
to provide PC and server software for use by businesses. This software is used
by business professionals in the area of process management, technical
illustration and image editing. Prior to 1997, Micrografx had products that
were sold to consumers. The management of Micrografx determined that Micrografx
should cease focusing on the consumer market and instead focus exclusively on
the sale of software to businesses. Micrografx divested itself of its consumer
product lines in 1998 and launched the iGrafx brand targeted at businesses. In
April 1999, Micrografx purchased the InterCAP subsidiary of Intergraph
Corporation to strengthen its position in the technical illustration market,
paying a total of $12.2 million, which included a $5.8 million subordinated
convertible debenture having a maturity date in March 2002.
Micrografx experienced a sudden decline in revenue as a result of its
decision to divest its consumer brands, which was not offset by a corresponding
rapid increase in revenue from new business. As a consequence, Micrografx's
total revenues declined and significant losses were generated, depleting
Micrografx's working capital. In June 2000, Micrografx was forced to reduce its
workforce significantly. In October 2000, the Micrografx board of directors was
restructured and James L. Hopkins joined Micrografx to serve as its chairman,
president and chief executive officer with the directive of halting any further
decline and returning Micrografx to profitability. Over the time period from
October 2000 through February 2001, the new Micrografx management team focused
on stabilizing Micrografx's revenues, controlling costs and raising outside
capital to strengthen Micrografx. During that time period, Micrografx's
management made presentations to several potential investors and joint venture
partners, both strategic and financial. One potential joint venture partner
expressed interest in purchasing Micrografx's InterCAP subsidiary. After
exploring a possible acquisition, the party decided instead to develop its
relationship with Micrografx by establishing a reseller relationship.
In March 2001, Mr. Hopkins was contacted by Derek Burney, the president and
chief executive officer of Corel, to explore the possibility of Corel and
Micrografx pursuing a strategic relationship in the markets that both companies
were targeting. The two executives discussed the similarities in the two
companies' markets and product lines and noted that both companies were doing
similar things to refocus and return to profitability. As a result of the
executives' initial conversation, a meeting was set between senior executives
of the two companies at the CeBIT trade show in Hanover, Germany, to be held in
late March 2001.
On March 22, 2001, Mr. Hopkins and another executive of Micrografx met an
executive of Corel at the CeBIT trade show. During the meeting, the executives
discussed strategies they were employing and shared other information that was
of a public nature. On his return, Mr. Hopkins had informal discussions with
each member of the Micrografx board of directors to advise him of Corel's
initial interest.
On May 2, 2001, Mr. Burney contacted Mr. Hopkins to further discuss Corel's
strategy and to discuss Micrografx's strategy. Mr. Burney also proposed the
merits of a business combination between the two companies. Mr. Hopkins
indicated that the potential of a business combination for Micrografx was part
of its longer term strategy, but that at this particular time, given the
progress to date of their turnaround efforts, a combination might not be
advantageous to Micrografx shareholders. In addition, Micrografx had recently
been delisted from the Nasdaq National Market and Mr. Hopkins felt that this,
in part, contributed to the depression of Micrografx's current market
valuation. Therefore, any potential business combination would be
38
contemplated only if it valued Micrografx based on its current and expected
revenues. Mr. Hopkins indicated that, coincidental with this discussion,
Micrografx had a scheduled board meeting that day and that Mr. Hopkins would
discuss with the Micrografx board and significant Micrografx shareholders the
merits of a business combination with Corel.
On May 3, 2001, Mr. Hopkins contacted Mr. Burney and indicated that the
board of Micrografx was interested in pursuing further the merits of a business
combination with Corel and that the key investors had indicated their approval
of further discussions. Mr. Hopkins invited Mr. Burney to meet with himself,
representatives of Micrografx's board and significant Micrografx investors as
soon as possible.
On May 10, 2001, Micrografx reported its results of operations for its
quarter ended March 31, 2001. Micrografx reported its first quarterly operating
profit since March 31, 1999.
On May 13, 2001, Mr. Burney met Mr. Hopkins and representatives of
Micrografx's board and significant Micrografx investors in London, England. Mr.
Burney presented his vision for Corel and the merits of a business combination
between the two companies. On May 14, 2001, Mr. Burney met Mr. Hopkins and
other representatives of Micrografx's board and significant Micrografx's
investors in Amsterdam, Netherlands. Again, Mr. Burney presented his vision for
Corel and the merits of a business combination between the two companies.
Following that meeting Messrs. Burney and Hopkins began to further discuss
potential valuations for Micrografx based on a multiple of Micrografx's
revenues. On May 15, 2001, Mr. Burney met Mr. Hopkins and additional
representatives of Micrografx's board and significant Micrografx's investors in
New York. Mr. Burney presented his vision for Corel and the merits of a
business combination between the two companies. Following that meeting, Messrs.
Burney and Hopkins further discussed valuations.
On May 16, 2001, Mr. Hopkins contacted Mr. Burney to discuss a valuation and
pricing methodology that would be a compromise on their respective positions.
Mr. Hopkins proposed an initial valuation based on one times Micrografx revenue
plus an additional component related to Corel's future market valuation.
Messrs. Hopkins and Burney agreed to continue these discussions towards a
mutually satisfactory conclusion.
On May 25, 2001, Corel and Micrografx entered into a mutual confidentiality
agreement.
On May 30, 2001, Messrs. Burney and Hopkins visited Micrografx's Annapolis,
Maryland office to receive a briefing on Micrografx's technical illustration
products and technology under development. On May 31, 2001, the two executives
visited Micrografx's Dallas, Texas office to receive a briefing on Micrografx's
imaging products and technology under development. On June 1, 2001, the two
executives visited Micrografx's Portland, Oregon office to receive a briefing
on Micrografx's enterprise process management products and technology under
development.
During the period June 4 to June 8, 2001, Micrografx supplied information
about its business activities to Corel. On June 6, 2001, Mr. Hopkins and other
representatives of Micrografx met in Ottawa, Ontario with Mr. Burney and other
representatives of Corel to receive detailed presentations on Corel's current
and planned product offerings. Following these presentations, Mr. Hopkins, Mr.
Burney, Mr. Kenneth Carraher, Micrografx's president of enterprise process
management group, Mr. John Blaine, Corel's chief financial officer, and
Mr. Greg DeWitt, Micrografx's chief financial officer, as well as Corel's legal
counsel, met to negotiate valuation and business combination considerations.
On June 19, 2001, Messrs. Burney and Blaine met Messrs. Hopkins and Carraher
in Dallas, Texas to negotiate a pricing framework for final negotiations.
On June 22, 2001, Corel supplied Micrografx with an initial term sheet, a
copy of which was provided to Micrografx's board of directors for their
consideration. In addition, the board of directors suggested that Mr. Hopkins
retain an investment banker to perform an analysis to determine whether the
contemplated price Corel was willing to offer would be fair to Micrografx
shareholders and whether the banker could issue an opinion to that effect.
After soliciting bids from investment bankers, Alliant Partners was selected on
June 28, 2001.
39
During the period July 1 to July 15, 2001, Corel and its legal counsel,
McCarthy Tetrault LLP, conducted business, financial and legal due diligence
with respect to Micrografx, and during the same period Micrografx and its legal
counsel, Locke Liddell & Sapp LLP, conducted business, financial and legal due
diligence with respect to Corel. As more particularly described below, during
the same period the parties engaged in detailed discussions and negotiations
with respect to all aspects of the contemplated business combination.
On July 4, 2001, Corel delivered to Micrografx an initial draft of the
proposed form of merger agreement. Micrografx management and its legal counsel
proceeded with its review of the draft, while Corel and its legal counsel
continued the preparation of related documentation.
On July 6, 2001, the Micrografx board of directors held a special meeting to
discuss the status of the proposed merger. Mr. Hopkins reviewed with the board
of directors the status of the transaction and the principal terms under
discussion. Another meeting of the Micrografx board of directors was held later
in the day on July 6, 2001 at which Mr. Hopkins reviewed with the board of
directors concerns expressed with respect to the continuing rapid rise in the
market price of Micrografx common stock. The board of directors discussed these
concerns and agreed to meet on July 9, 2001 to assess the continuing interest
of both parties in proceeding with the proposed merger.
The Micrografx board of directors met again on July 9, 2001 to discuss the
outstanding issues relating to the proposed merger. The Micrografx board of
directors met again on each of July 10, July 11 and July 12, 2001. At each
meeting, Mr. Hopkins reviewed with the board of directors the status of
negotiations, focusing on the economic terms of the proposed transaction, as
well as other primary issues under discussion. At the special meeting of the
Micrografx board of directors on July 12, 2001, Alliant Partners, Micrografx's
financial advisor, met with the board of directors to discuss its analysis of
the fairness of the transaction to Micrografx shareholders.
On the morning of July 16, 2001, the Micrografx board of directors held a
meeting at which Mr. Hopkins reported that an understanding had been reached
with Corel with respect to the key terms of the definitive agreement relating
to the proposed merger. The Micrografx board of directors discussed the
structure and terms of the proposed merger with its legal counsel, Locke
Liddell & Sapp, and its financial advisor, Alliant Partners. The presentations
and discussions at the meeting were wide ranging and detailed and included,
among other things:
. a presentation by Mr. Hopkins of the events of the previous days and the
key terms of the proposed merger;
. a presentation by Alliant Partners regarding the fairness of the
proposed merger, from a financial point of view, to the Micrografx
shareholders;
. a detailed description by Locke Liddell & Sapp of the material terms of
the merger agreement and the participation rights agreement, including
the representations, warranties and covenants of the parties, the
conditions to closing the merger, the termination rights and
circumstances under which a termination fee would be payable to Corel or
the option relating to the stock of Image2Web would be exercisable by
Corel; and
. a presentation by Locke Liddell & Sapp regarding the fiduciary duties of
the directors and related issues.
Mr. Hopkins, together with Micrografx's legal and financial advisors,
responded to questions from various members of the Micrografx board of
directors with regard to the foregoing matters and the structure and terms of
the proposed merger. Following this discussion, Alliant Partners delivered its
oral opinion, subsequently confirmed in writing, that, as of the same date, the
total consideration to be received by Micrografx shareholders pursuant to the
merger agreement was fair, from a financial point of view, to Micrografx
shareholders. After discussing the information presented and after due
consideration of the factors described under "--Micrografx's Reasons for the
Merger and Recommendation of the Micrografx Board of Directors,"
40
the Micrografx board of directors unanimously approved the merger agreement and
the merger and recommended that the merger agreement and the merger be approved
by the Micrografx shareholders.
Subsequent to its consideration of the merger agreement and the merger, the
Micrografx board of directors then considered proposals to approve the bridge
loan of $2.5 million by Corel to Micrografx contemplated in the merger
agreement, the grant of the option to Corel to purchase 80% of the stock of
Image2Web for a purchase price equal to the amount outstanding under the bridge
loan, the amendment of the statement of resolutions establishing the
designations, preferences, limitations and relative rights of the Micrografx
preferred stock to set a fixed conversion ratio of 1.5 shares of Micrografx
common stock for each share of Micrografx preferred stock and to provide for a
waiver of the rights of redemption of the holders of the shares that would be
triggered by the merger and to amend the terms of the convertible promissory
notes issued by Micrografx to provide that they will convert into shares of
Micrografx common stock in the event of the closing of the merger. The
Micrografx board of directors unanimously approved each of these proposals.
Following completion of the foregoing meeting of the Micrografx board of
directors, on the morning of July 16, 2001 the parties executed the merger
agreement and released a public announcement of the proposed merger.
Micrografx's Reasons for the Merger and Recommendation of the Micrografx Board
of Directors
The Micrografx board of directors has unanimously determined that the merger
is fair to and in the best interests of Micrografx and its shareholders and has
unanimously approved the merger agreement and the merger. Accordingly, the
Micrografx board of directors unanimously recommends that its shareholders vote
"FOR" the approval of the merger agreement and the merger.
In reaching its determination, the Micrografx board of directors considered
a number of factors, including, without limitation, the following:
. the total amount of consideration, the timing of receipt of
consideration and the various forms of consideration that may be
received by Micrografx shareholders under the terms of the merger
agreement and the participation rights agreement and, in particular, the
minimum aggregate value that Micrografx shareholders would receive at
closing and on the first anniversary of the date of closing, as well as
the potential opportunity for Micrografx shareholders to participate in
any appreciation in value of Corel common stock during the year
following the closing of the merger;
. the financial presentation of Alliant Partners to the Micrografx board
of directors, including Alliant Partners' written opinion dated July 16,
2001, to the effect that, as of the date of the opinion and based on and
subject to the matters stated in the opinion, the total consideration to
be received by Micrografx shareholders is fair, from a financial point
of view;
. the expected tax consequences of the merger to Micrografx shareholders
under United States and Canadian federal tax laws;
. Micrografx's weakened financial position and its difficulty in meeting
its financial obligations, which has had the following effects:
. Micrografx's ability to make sales to large business customers,
which account for a significant percentage of Micrografx's revenue
has been impaired;
. the past-due financial obligations of Micrografx have prevented
Micrografx from establishing new relationships with alternative
suppliers who may have provided lower costs or superior services to
allow Micrografx to remain competitive and resulted in increased
administrative time and expense in dealing with unhappy vendors; and
. current Micrografx operating results, although improved, might not
be sufficient to allow Micrografx to pay off the $5.8 million
Intergraph debenture that is payable in full in March 2002;
41
. the board of directors' familiarity with and review, based in part on
the advice of Micrografx management, of Corel's business operations,
financial condition operating results;
. the board of directors' familiarity with and review, based in part on
the advice of Micrografx management, of Corel's future prospects and the
future prospects of the combined company;
. the anticipated benefits in product marketing and distribution resulting
from the merger, including:
. the sale of products through distributors and resellers, as
Micrografx's graphics products division are sold, requires
significant expenditures for advertising and promotions to be
successful. In this sales channel, Micrografx competes with larger,
better funded competitors such as Microsoft and Adobe, all of whom
have the financial wherewithal to promote their products more
intensively than Micrografx; and
. the similarities in the product lines and markets addressed by both
Corel and Micrografx suggest synergies and cost savings for the
combined company, and the associated belief that Micrografx's
products would generate greater sales with the backing of a larger,
better financed company such as Corel;
. the difficulty of raising additional capital, including:
. the current lack of interest in small technology companies from
public and private investors, plus the recent poor results posted by
Micrografx, have made it difficult for Micrografx to raise capital
in the financial markets under terms that would be considered
reasonable, taking into account the dilutive effects of the
investment, thereby preventing Micrografx from solving the liquidity
problems that continue to hamper its operations;
. in light of the difficulties Micrografx experienced in attempting to
raise capital in the current depressed capital markets, the terms
under which external financing could have been procured, if at all,
would have been on terms that would have diluted Micrografx
shareholders to the point to where even successful results by
Micrografx over the coming quarters might not have produced as
attractive a result to Micrografx shareholders as the merger with
Corel; and
. the delisting of the Micrografx common stock from the Nasdaq
National Market created concern among customers and investors about
Micrografx's future ability to raise capital and concern about the
liquidity of any investment in Micrografx shares. These concerns
translated into greater difficulty selling products to customers and
greater difficulty in interesting investors in Micrografx;
. the slowing economy has resulted in business customers postponing
capital purchases, which has affected the Micrografx corporate sales
effort. Due to Micrografx's reduced cash position, a prolonged downturn
in the economy would produce a significantly larger risk for Micrografx
than for a more liquid company such as Corel;
. the terms and conditions of the merger agreement and the participation
rights agreement, which provide for reciprocal representations and
warranties, conditions to closing and rights to termination, which the
Micrografx board of directors believed to be reasonable, as well as
provisions contained in the merger agreement that permit the Micrografx
board of directors, in exercise of its fiduciary duties, to continue to
receive unsolicited inquiries and proposals regarding other potential
transactions, to engage in discussions or negotiations with and give
information to third parties that make proposals regarding other
potential transactions and to terminate the merger agreement, subject to
some limitations, including the obligation to pay under some
circumstances Corel's expenses relating to the merger and a termination
fee or, in the alternative, triggering Corel's ability to exercise its
option to acquire 80% of the capital stock of Image2Web; and
. the likelihood that the merger will be consummated.
42
The Micrografx board of directors also considered a number of potentially
negative factors in its deliberations concerning the proposed merger. The
potentially negative factors considered by the Micrografx board of directors
included:
. the possibility that Micrografx, as an independent company, could
substantially improve its results of operations and financial condition,
and hence the value of its stock, in the near term;
. the risks that Corel faces in the market may make it difficult for Corel
to be successful. Although Corel is much larger than Micrografx, Corel
still faces competition from Microsoft and Adobe, both of which are much
larger and have significantly greater resources than does Corel;
. the risk that the combined company would perform significantly below
expectations;
. the risk that the merger might not be concluded in a timely manner or at
all. If the merger agreement is terminated, Micrografx may have to pay
to Corel a termination fee, potential partners may refrain from entering
into agreements with Micrografx, Micrografx would likely be required to
obtain additional capital and Micrografx employee turnover may increase;
. the fact that Micrografx could lose other transaction opportunities
during the period that it is precluded under the terms of the merger
agreement from soliciting other transaction proposals;
. the fact that if Micrografx defaults in the repayment of the bridge loan
extended by Corel, the shareholders of Micrografx do not approve the
merger agreement and the merger or the merger agreement is terminated by
Micrografx or Corel for any reason, Corel would be entitled to acquire
all or a part of the assets and stock of Image2Web, a valuable
Micrografx asset;
. the uncertainty with respect to the amount, timing and form of the
consideration to be delivered in the merger;
. the potential negative reaction of the financial community after
announcement of the proposed merger; and
. the other risks and uncertainties described above under "Risk Factors."
The Micrografx board of directors did not believe that the negative factors
were sufficient, individually or in the aggregate, to outweigh the potential
advantages of the merger. The foregoing discussion of the information and the
factors considered by the Micrografx board of directors is not meant to be
exhaustive, but includes the material factors considered by the Micrografx
board of directors. The board of directors of Micrografx did not quantify or
attach any particular weight to the various factors that they considered in
reaching their determination that the merger agreement and the merger are fair
to and in the best interests of Micrografx and its shareholders. Rather, the
Micrografx board of directors viewed its recommendation as being based on its
business judgment in light of Micrografx's business and financial position and
the totality of the information presented and considered.
There can be no assurance that the benefits of the merger will be realized
by Micrografx's shareholders. See "Risk Factors."
Opinion of Micrografx's Financial Advisor
Micrografx retained Alliant Partners to render an opinion regarding the
fairness of a possible acquisition of Micrografx by Corel, from a financial
point of view, to the holders of Micrografx common stock.
On the morning of July 16, 2001, the Micrografx board of directors met and
approved the merger of Micrografx with Calgary I Acquisition Corp. By
teleconference, Alliant Partners delivered to the Micrografx board of directors
its opinion that as of July 16, 2001, and based on the matters described in the
opinion, the total consideration to be received by Micrografx shareholders was
fair, from a financial point of view. No limitations were imposed by Micrografx
on the scope of Alliant Partners' investigations or the procedures to be
43
followed by Alliant Partners in rendering its fairness opinion. In furnishing
the opinion, Alliant Partners was not engaged as an agent or fiduciary of
Micrografx's shareholders or any other third party.
The full text of the fairness opinion, which sets forth, among other things,
assumptions made, matters considered and limitations on the review undertaken
is attached to this prospectus/proxy statement as Annex D. Shareholders of
Micrografx are urged to read Alliant Partners' fairness opinion in its
entirety. The fairness opinion was prepared for the benefit and use of the
Micrografx board of directors in its consideration of the merger and does not
constitute a recommendation to shareholders of Micrografx as to how they should
vote at the Micrografx special meeting in connection with the merger. The
fairness opinion does not address the relative merits of the merger and any
other transactions or business strategies discussed by the Micrografx board of
directors as alternatives to the merger agreement or the underlying business
decision of the Micrografx board of directors to proceed with or effect the
merger, except with respect to the fairness of the total consideration to be
received by Micrografx, from a financial point of view, to the holders of
Micrografx common stock. The summary of Alliant Partners' fairness opinion set
forth in this prospectus/proxy statement is qualified in its entirety by
reference to the full text of Alliant Partners' fairness opinion.
In connection with the preparation of Alliant Partners' fairness opinion,
Alliant Partners, among other things:
. reviewed the terms of the merger agreement dated as of June 16, 2001;
. reviewed some internal financial statements and other financial and
operating data prepared by the management of Micrografx;
. reviewed public financial statements and other information concerning
Micrografx and Corel;
. compared some aspects of the financial performance of Micrografx with
comparable public companies and the prices paid for securities in those
publicly traded companies;
. analyzed available information, both public and private, concerning
other mergers and acquisitions comparable in whole or in part to the
merger;
. performed a discounted cash flow analysis of Micrografx based on
financial guidance provided by Micrografx management;
. assessed Micrografx's relative contribution to the combined entity based
on current financial performance;
. participated in discussions with Micrografx management concerning the
operations, business strategy, financial performance and prospects for
Micrografx and Corel as a consolidated entity and its strategic
rationale for the merger;
. reviewed the recent reported closing prices and trading activity for
Micrografx common stock;
. reviewed the Micrografx Annual Report on Form 10-K for the fiscal year
ended June 30, 2000, and the Micrografx Quarterly Report on Form 10-Q
for the quarterly period ended March, 31, 2001;
. participated in discussions with Corel management concerning the
operations, business strategy, financial performance and prospects for
Micrografx and Corel as a combined entity;
. reviewed recent equity analyst reports covering Corel;
. considered the effect of the merger on the future financial performance
of the consolidated entity;
. participated in discussions related to the merger among Micrografx,
Corel and their financial and legal advisors; and
. conducted other financial studies, analyses and investigations as
Alliant Partners deemed appropriate for the purposes of its opinion.
44
In conducting its review and arriving at its fairness opinion, Alliant
Partners relied on and assumed the accuracy and completeness of the financial
statements and other information provided by Micrografx or otherwise made
available to Alliant Partners and did not assume responsibility independently
to verify the information. Alliant Partners further relied on the assurances of
Micrografx's management that the information provided was prepared on a
reasonable basis in accordance with industry practice and, with respect to
financial planning data, reflected the best currently available estimates and
good faith judgments of Micrografx's management as to the expected future
financial performance of Micrografx and that Micrografx management was not
aware of any information or facts that would make the information provided to
Alliant Partners incomplete or misleading. Without limiting the generality of
the foregoing, for the purpose of the fairness opinion, Alliant Partners
assumed that neither Micrografx nor Corel was a party to any pending
transaction, including external financing, recapitalization, acquisitions or
merger discussions, other than the merger or in the ordinary course of
business.
In arriving at the fairness opinion, Alliant Partners did not perform any
appraisals or valuations of specific assets or liabilities of Micrografx and
was not furnished with any appraisals or valuations.
Without limiting the generality of the foregoing, Alliant Partners did not
undertake any independent analysis of any pending or threatened litigation,
possible unasserted claims or other contingent liabilities to which Micrografx,
Corel or any of their respective affiliates was a party or may be subject and,
at Micrografx's direction and with its consent, Alliant Partners' made no
assumption concerning, and therefore did not consider, the possible assertion
of claims, outcomes or damages arising out of those matters. Although
developments following the date of Alliant Partners' fairness opinion may
affect the opinion, Alliant Partners assumed no obligation to update, revise or
reaffirm the opinion.
Following is a summary explanation of the various sources of information and
valuation methodologies employed by Alliant Partners in conjunction with
rendering its opinion to the Micrografx board of directors.
Comparable Company Analysis. Alliant Partners compared some financial
information and valuation ratios relating to Micrografx to corresponding
publicly available data and ratios from a group of selected publicly traded
companies deemed comparable to Micrografx. The comparable companies selected
included ten publicly traded companies in the business of providing graphics or
design related software and/or business productivity or process management
software. Financial information reviewed by Alliant Partners included each
company's: enterprise value, calculated as the market capitalization of the
selected company, plus the company's long term debt, less the company's excess
cash; trailing 12 months, or TTM, revenue; gross margin; and earnings before
interest and taxes, or EBIT, as reported as of the date of Alliant Partners'
fairness opinion; prior calendar year and projected current calendar year
revenue estimates; and most recently available headcount figures. Comparable
companies included: Adobe; Applied Microsystems; Autodesk; Bitstream; Corel;
Document Sciences; International Microcomputer; Macromedia; ON Technology and
Scansoft.
The comparable companies had enterprise value / TTM revenues ratios with a
weighted narrow average (narrow average excludes the highest and lowest
estimates) of 1.3x; enterprise value / calendar year 2000 revenues ratios with
a weighted narrow average of 1.3x; and enterprise value / calendar year 2001
revenues ratios with a weighted narrow average of 2.0x. Some adjustments for
differences in performance, size and liquidity and application of an
acquisition control premium were made to the multiples before reaching an
implied average enterprise value of $26.0 million for Micrografx through this
methodology.
Comparable Transaction Analysis. Alliant Partners reviewed seven comparable
merger and acquisition transactions from January 2000 through July 16, 2001
which involved sellers that share some characteristics with Micrografx,
including graphics software and visual process management solutions. These
comparable transactions of companies included:
. Macromedia's acquisition of Allaire Corp.;
. Dassault Systemes SA's acquisition of Spatial Technology;
45
. Unigraphics Solutions' acquisition of Engineering Animation;
. Metastream (subsidiary of MetaCreations Corp.) acquisition of Viewpoint
Digital (subsidiary of Computer Associates);
. Nemetschek AG's acquisition of Diehl Graphsoft;
. Corel's acquisition of three MetaCreations product lines; and
. Microsoft's acquisition of Visio Corp.
Estimated multiples paid in the comparable transactions were based on
information obtained from public filings, public company disclosures, press
releases, industry and popular press reports, databases and other sources. The
price / revenue multiples of the seven transactions range had a weighted narrow
average of 2.3x. Some adjustments for differences in performance and liquidity
were made to the multiples before reaching an implied average enterprise value
of $20.1 million for Micrografx through this methodology.
No company, transaction or business utilized as a comparison in the
comparable company analysis or the comparable transaction analysis is identical
to Micrografx, Corel or the merger. In evaluating the comparable companies,
Alliant Partners made judgments and assumptions with regard to industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Micrografx or Corel.
Accordingly, an analysis of the results of the foregoing is not entirely
mathematical; rather it involves complex considerations and judgments
concerning differences in financial and operating characteristics and other
factors that could affect the acquisition, public trading and other values of
the comparable companies, comparable transactions or the business segment,
company or transactions to which they are being compared.
Discounted Cash Flow Analysis. Alliant estimated the present value of the
projected future cash flows of Micrografx on a stand-alone basis using
financial guidance provided by Micrografx management for the years ending June
31, 2002 through June 30, 2004 and a discount rate of 33%. Alliant Partners
obtained a terminal valuation based on application of an adjusted projected
revenue multiple to terminal year projected revenues. Based on this
methodology, Micrografx has an implied enterprise value of $24.0 million.
Relative Contribution. Alliant Partners analyzed Micrografx's relative
contribution to the combined entity based on Micrografx's relative contribution
to the combined TTM revenues and gross margins as well as the most recent
balance sheet figures. Weighting contributions to the combined income statement
and balance sheet equally, this analysis resulted in a weighted average
contribution for Corel of 90% and a weighted average contribution for
Micrografx of 10%. Based on this methodology, Micrografx has an implied
enterprise value of $25.0 million.
To reach a value range for the enterprise value of Micrografx, Alliant
Partners utilized a weighted average of the value indications implied by the
four methodologies. The comparable company analyses, comparable transaction
analysis and the relative contribution methodologies were each weighted
equally. The discounted cash flow method received a lower weighting, as
traditional forecasts were not provided by Micrografx management. The implied
weighted average enterprise value for Micrografx is $23.7 million, with a
valuation range of $21.4 million to $26.1 million (valuation range is +/- 10%).
In analyzing the merger, Alliant assumed that the price of Corel common
stock during the measurement period before closing would be at least $2.90 per
share and that the price of Corel common stock during the measurement period
preceding the first anniversary of closing would be less than the price during
the measurement period preceding closing. Alliant made this assumption because
this is the case in which the value of the consideration received by Micrografx
shareholders would be the least, discounting the payment to be made on
settlement of the participation right because it would not be received until a
year after closing. Alliant did not otherwise attempt to value Corel or its
securities.
46
Conclusion. While the foregoing summary describes some analyses and factors
that Alliant Partners deemed material in its presentation to the Micrografx
board of directors, it is not a comprehensive description of all analyses and
factors considered by Alliant Partners. The preparation of a fairness opinion
is a complex process that involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to summary description. Alliant Partners believes
that its analyses must be considered as a whole and that selecting portions of
its analyses and of the factors considered by it, without considering all
analyses and factors, would create an incomplete view of the evaluation process
underlying Alliant Partners' fairness opinion. Several analytical methodologies
were employed and no one method of analysis should be regarded as critical to
the overall conclusion reached by Alliant Partners. Each analytical technique
has inherent strengths and weaknesses and the nature of the available
information may further affect the value of particular techniques. The
conclusions reached by Alliant are based on all analyses and factors taken as a
whole and also on application of Alliant Partners' own experience and judgment.
Those conclusions may involve significant elements of subjective judgment and
qualitative analysis. Alliant Partners therefore gives no opinion as to the
value or merit standing alone of any one or more parts of the analysis it
performed. In performing its analyses, Alliant Partner considered general
economic, market and financial conditions and other matters, many of which are
beyond the control of Micrografx and Corel. The analyses performed by Alliant
are not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than those suggested by the analyses.
Accordingly, analyses relating to the value of a business do not purport to be
appraisals or to reflect the prices at which the business actually may be
purchased. Furthermore, no opinion is being expressed as to the prices at which
shares of Corel common stock may trade at any future time.
Pursuant to its letter agreement with Micrografx, Alliant Partners is to
receive a fee for the fairness opinion rendered to the Micrografx board of
directors. Micrografx has also agreed to reimburse Alliant Partners for its
out-of-pocket expenses and to indemnify and hold harmless Alliant Partners and
its affiliates and any person, director, employee or agent acting on behalf of
Alliant Partners or any of its affiliates, or any person controlling Alliant
Partners or its affiliates, for losses, claims, damages, expenses and
liabilities relating to or arising out of services provided by Alliant Partners
as financial advisor to Micrografx. The terms of the fee arrangement with
Alliant Partners, which Micrografx and Alliant Partners believe are customary
in transactions of this nature, were negotiated at arm's-length between
Micrografx and Alliant Partners and the Micrografx board of directors was aware
of any fee arrangements.
Alliant Partners was retained based on Alliant Partner's experience as a
financial advisor. As part of its investment banking business, Alliant Partners
is frequently engaged in the valuation of technology businesses and their
securities in connection with mergers and acquisitions, sales and divestitures,
joint ventures and strategic partnerships, private financings and other
specialized studies.
Interests of Some Micrografx Officers and Directors in the Merger
In considering the recommendation of the Micrografx board of directors with
respect to the merger agreement, shareholders should be aware that some of the
officers and directors of Micrografx may have interests in the merger that are
in addition to, or different from, their interests as shareholders generally.
The Micrografx board of directors was aware of these interests and considered
them along with other matters in recommending that you support the merger
agreement.
Micrografx is a party to an employment agreement with its chairman,
president and chief executive officer, James L. Hopkins. The agreement is for a
term of one year, commencing October 16, 2000, and is automatically renewed
annually for an additional term of one year. The agreement contains customary
non-disclosure and non-compete provisions. If Mr. Hopkins' employment is
terminated without cause following the merger, he will receive:
. severance benefits equal to his current base salary and bonus; and
47
. payment of all accrued and unpaid vacation pay.
In addition, on the consummation of the merger, Mr. Hopkins will receive:
. forgiveness of debt relating to his relocation expenses; and
. immediate vesting of his unvested Micrografx restricted shares.
Mr. Hopkins holds unvested stock options for 250,000 shares of Micrografx
common stock and 400,000 unvested restricted shares of Micrografx common stock
Mr. Hopkins waived his right under the employment agreement to be granted an
additional stock option for 250,000 shares of Micrografx common stock.
The employment agreement between Micrografx and Kenneth A. Carraher,
president of the enterprise process management business unit, is for a term of
three years commencing March 1, 2000. If Mr. Carraher's employment is
terminated without cause following the merger, he will receive:
. severance benefits equal to two times the sum of his current base salary
and a fixed bonus amount; and
. payment of all accrued and unpaid vacation pay.
In addition, if all of the payments and benefits triggered by a change of
control result in the imposition of a 20% excise tax on Mr. Carraher, the
agreement provides that Micrografx will reimburse him for 150% of the taxes.
Employment agreements with Gary J. Klembara, executive vice president of
sales, and Greg DeWitt, chief financial officer of Micrografx, provide that if
their employment is terminated without cause following the merger, severance
pay is owed up to one year's salary and bonus, plus limited continuation of
benefits;
Corel has covenanted that its board of directors will at the effective time
of the merger include a person nominated by Micrografx and mutually acceptable
to Corel and Micrografx. Corel also has agreed to recommend and support the
election to the Corel board of directors at Corel's 2002 annual shareholders'
meeting of this director or another individual acceptable to Corel and
nominated by the holders of a majority of the shares of Micrografx common stock
held by holders owning 5% or more of the Micrografx common stock on the record
date for the Micrografx special meeting. It is expected that James L. Hopkins,
Micrografx's chairman, president and chief executive officer, will be
Micrografx's nominee.
Some executive officers and directors of Micrografx may own stock options
with vesting schedules that accelerate on consummation of the merger. In
addition, Corel has agreed to fulfill the obligations of Micrografx under its
charter documents and bylaws concerning indemnification of present and former
officers and directors of Micrografx for a six-year period from the closing
date of the merger and to use all commercially reasonable efforts to maintain
in effect, if available, at a premium of up to more than 200% of the premium
presently paid by Micrografx, directors' and officers' liability insurance
covering the individuals presently covered under Micrografx's existing
insurance.
48
THE MERGER AGREEMENT AND PARTICIPATION RIGHTS AGREEMENT
General
On July 16, 2001, Corel, Calgary I Acquisition Corp. and Micrografx entered
into the merger agreement, which provides for the merger of Micrografx with
Calgary I Acquisition Corp. As described below, if Corel elects at closing to
pay cash for all of Micrografx's capital stock, Micrografx will be the
surviving corporation in the merger and become a wholly owned subsidiary of
Corel, but if at closing Micrografx's shareholders receive a combination of
shares of Corel common stock and Corel participation rights for their shares of
Micrografx capital stock, then Calgary I Acquisition Corp. will be the
surviving corporation in the merger. In either event, after the merger the
charter of the surviving corporation will be substantially the certificate of
incorporation of Calgary I Acquisition Corp. and the bylaws of the surviving
corporation will be those of Calgary I Acquisition Corp. Attached to this
prospectus/proxy statement as Annex A is the merger agreement.
If the merger is completed, shareholders of Micrografx will no longer hold
any interest in Micrografx. They will become securityholders of Corel unless
Corel elects to pay cash for Micrografx's capital stock and their rights will
be governed by Corel's certificate and articles of amalgamation, bylaws, the
participation rights agreement and the laws of Canada. See "Comparative Rights
of Holders of Micrografx Common Stock and Corel Common Stock and Participation
Rights" for information about the relative rights of Micrografx and Corel
securityholders.
Effective Time of the Merger
The merger will become effective on the filing of the executed certificate
of merger with the Delaware Secretary of State and the executed articles of
merger with the Texas Secretary of State. The merger agreement provides that
the parties will proceed as promptly as practicable to obtain all consents and
approvals and to make all filings with and give all notices to governmental
authorities and other third parties to consummate the merger.
There is no assurance that the conditions to the merger will be satisfied.
Moreover, as described below, the merger agreement may be terminated by either
Corel or Micrografx under various conditions specified in the merger agreement.
Therefore, there is no assurance as to whether or when the merger will become
effective.
Merger Consideration
Summary and Assumptions
On the closing of the merger, and based on the assumptions set forth below,
the holders of Micrografx common stock and holders of Micrografx preferred
stock, on an as-converted basis, will be entitled to receive:
. approximately $1.99 in cash if:
. the volume weighted average sales price of Corel's common stock
during the ten consecutive trading day period ending on the second
business day prior to the effective time of the merger is less than
$2.90; and
. Corel exercises its right under the merger agreement to pay cash
consideration to the Micrografx shareholders as a result of the
average price being less than $2.90 per share, which is referred to
in this document as the cash alternative; or
. approximately $2.04 in aggregate value of Corel common stock and one
Corel participation right if:
. the volume weighted average sales price of Corel common stock during
the pre-closing calculation period is $2.90 or greater; or
. Corel does not elect the cash alternative.
49
Each Corel participation right will entitle the holder to receive on
the first anniversary of the closing:
. approximately $1.02 in cash, if the volume weighted average sales
price of Corel common stock during the 20 consecutive trading day
period immediately prior to the first anniversary is equal to or
less than the average sales price of the Corel common stock during
the pre-closing calculation period; or
. Corel common stock having a value equal to approximately $1.02 plus
18% of the appreciation in value of a share of Corel common stock
between the closing and the first anniversary, based on the average
sales price of Corel common stock during the first anniversary
calculation period, if the average sales price of the Corel common
stock for the first anniversary calculation period is greater than
the average sales price of the Corel common stock for the pre-
closing calculation period.
The cash and value per share amounts summarized above are based on the
assumptions set forth below, and in the event the assumptions are not met and
actual results vary materially from the assumptions, whether individually or in
the aggregate, Micrografx shareholders will receive a different amount of cash
or value in shares of Corel common stock and Corel participation rights,
whichever the case may be, than set forth above, which difference may be
material. Please make reference to the defined terms and formulae set forth in
the following pages for an understanding of the application of these
assumptions.
. Intergraph and Micrografx have agreed that in the event that the
Intergraph debenture is redeemed prior to October 31, 2001, Intergraph
will accept $3.8 million, plus accrued interest, in full satisfaction of
Micrografx's obligations to Intergraph in connection with the debenture.
The agreement reflects a reduction in the principal amount owing to
Intergraph of $2.0 million, which reduction is a component of the
calculation of adjusted Micrografx annual revenues as described below.
. The principal amount of Micrografx's trade payable indebtedness
outstanding at July 16, 2001, the date of the merger agreement, is
reduced by $348,000 (this amount is the total reduction in trade payable
indebtedness achieved by Micrografx as of September 14, 2001; Micrografx
does not expect to obtain substantial further reductions in trade
payable indebtedness prior to closing), which reduction is a component
of the calculation of adjusted Micrografx annual revenues as described
below.
. Micrografx's vested warrants and vested options granted under the
Micrografx 1995 Incentive and Non-Statutory Stock Option Plan and the
Micrografx 1995 Director Stock Option Plan with an exercise price of
less than $1.65, and all outstanding options under the Micrografx
Employee Stock Purchase Plan, are exercised in full with the aggregate
exercise price paid of approximately $751,949 in cash to Micrografx,
which results in an adjustment to Micrografx annual revenues as
described below and also results in an additional 939,276 shares of
Micrografx common stock being issued and outstanding and impacts the
number of outstanding shares component of the Micrografx per share stock
value as described below.
Although Corel and Micrografx believe that the foregoing assumptions are
reasonable, if no reduction in the principal amount of the Intergraph debenture
were obtained and all vested options and warrants with an exercise price of
less than $1.65 per share were fully exercised for cash, then Micrografx
shareholders would receive $1.93 per share in cash at closing under the cash
alternative (approximately $31.1 million in cash in the aggregate) or $0.99 in
value of Corel common stock at closing and the same amount in cash on the first
anniversary of the closing (approximately $32.0 million in value in the
aggregate), assuming the Corel stock price at the first anniversary is equal to
or less than the price at closing, if a combination of shares of Corel common
stock and Corel participation rights are issued at closing. As described
elsewhere in this prospectus/proxy statement, the exact total amount, the
precise timing and the specific form of consideration that Micrografx
shareholders will receive in the merger is subject to a number of variables and
no assurances can be given in this regard.
50
Closing Consideration
Cash Alternative
If during the ten consecutive trading day period ending on the second
business day before the effective time of the merger the volume weighted
average sales price of Corel common stock on the Nasdaq National Market is less
than $2.90 per share, Corel has the right to cause each share of Micrografx
common stock and Micrografx preferred stock, on an as-converted basis, to be
converted solely into the right to receive cash based on the following formula:
Per share cash amount = Adjusted Micrografx annual revenues
-----------------------------------
Outstanding shares of Micrografx common stock
and Micrografx preferred stock, on an as-
converted basis
Adjusted Micrografx
annual revenues for
calculation of the cash
alternative =
1.00 x annual audited revenues of Micrografx
for the 12 months ended June 30, 2001 (the
product equalling $30.2 million), plus (x) 50%
of the reduction without payment or other
consideration to the holder thereof in the
principal amount of the indebtedness
represented by the subordinated convertible
debenture dated April 16, 1999 issued by
Micrografx to Intergraph Corporation, (y) 50%
of any reductions after the date of the merger
agreement in the principal amount of trade
payable indebtedness owed by Micrografx that is
outstanding on the date of the merger
agreement, which reductions are effected
through the negotiation of discounts, without
other consideration to the creditor, to the
principal balance of the trade payables that
are otherwise outstanding and (z) the proceeds
received by Micrografx after the date of the
merger agreement and prior to the effective
time of the merger from the exercise of any
options or warrants to purchase shares of its
capital stock; provided, that in no event will
the amount of adjusted Micrografx annual
revenues exceed $34.0 million.
If Corel elects the cash alternative described above, Calgary I Acquisition
Corp. will merge into Micrografx, Micrografx will be the surviving corporation
in the merger and the transaction will be fully taxable to United States
shareholders of Micrografx.
Issuance of Corel Common Stock
If the average Corel common stock closing price calculated in the manner
described above is equal to or greater than $2.90 per share, or if the average
Corel common stock closing price is less than $2.90 per share but Corel does
not exercise its right to elect the cash alternative, each issued and
outstanding share of Micrografx common stock and Micrografx preferred stock, on
an as-converted basis, will be converted into the right to receive a per share
stock value of Corel common stock and one Corel participation right, with the
per share Corel common stock value to be based on the average Corel common
stock closing price and expressed as a conversion ratio as follows:
Corel common stock
conversion ratio =
Micrografx per share stock value
--------------------------------
Average Corel common stock closing price
51
Micrografx per
share stock value =
.50 x Adjusted Micrografx annual revenues
(applying the 1.03 multiple)
------------------------------------------------
Outstanding shares of Micrografx common stock
and Micrografx preferred stock, on an as-
converted basis
Adjusted Micrografx
annual revenues for
calculation of
Corel common stock value
=
1.03 x annual audited revenues of Micrografx
for the 12 months ended June 30, 2001 (the
product equalling $31.1 million), plus
adjustments and limitations described above for
the cash alternative.
Receipt of Cash or Shares of Corel Common Stock Pursuant to Corel
Participation Rights
If Corel delivers shares of Corel common stock at the closing of the merger,
Micrografx shareholders also will be entitled to receive one Corel
participation right for each share of Micrografx common stock and Micrografx
preferred stock held by them, on an as-converted basis. The terms and
conditions applicable to the Corel participation rights will be set forth in
the participation rights agreement to be entered into between Corel and Bank of
New York, as trustee, substantially the form of which is attached to this
prospectus/proxy statement as Annex B. See "--Participation Rights Agreement"
below for further information about the Corel participation rights and the
participation rights agreement. The holders of Corel participation rights are
entitled to receive on the first anniversary of the closing of the merger
either cash or shares of Corel common stock as follows:
If the price of the Corel common stock on the first anniversary, determined
by reference to the volume weighted average sales price of Corel common stock
during the 20 consecutive trading day period ending on the first anniversary is
equal to or less than the average Corel common stock closing price determined
as set forth above, each Corel participation right is entitled to receive a per
share cash value as follows:
First anniversary per
share cash value =
.50 x Adjusted Micrografx annual revenues
(applying the 1.03 multiple)
------------------------------------------------
Number of outstanding shares of Micrografx
common stock and Micrografx preferred stock, on
an as-converted basis, at closing
If the average price of Corel common stock on the first anniversary
determined in the manner described above is greater than the average Corel
common stock price at the closing determined as set forth above, each Corel
participation right is entitled to receive Corel common stock equal in value to
the first anniversary per share cash value described immediately above, based
on the average price of Corel common stock at the first anniversary, plus 18%
of the appreciation in per share value of Corel common stock between the
closing of the merger and the first anniversary of the closing, which is
described as follows:
First anniversary per
share stock value =
.50 x Adjusted Micrografx annual revenues
(applying the 1.03 multiple)
------------------------------------------------
Number of outstanding shares of Micrografx
common stock and Micrografx preferred stock, on
an as-converted basis, at closing
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First anniversary Corel
common stockconversion ratio =
First anniversary per share stock value + (.18
x (Corel common stock first anniversary stock
price--Corel common stock closing stock price))
------------------------------------------------
Corel first anniversary stock price
Treatment of Micrografx Stock Options and Employee Stock Purchase Plan Options
Micrografx Options
At least ten days prior to the effective time of the merger, holders of
outstanding options to acquire shares of Micrografx common stock under the
Micrografx 1995 Incentive and Non-Statutory Stock Option Plan and the
Micrografx 1995 Director Stock Option Plan will be given written notice by
Micrografx that all outstanding options must be exercised, to the extent vested
(including those that would vest as a result of the merger), not later than two
business days before the effective time of the merger. Micrografx's notice will
specify that the options may be exercised by payment of the exercise price in
cash, or at the discretion of the optionholder, on a cashless basis. If the
optionholder elects to exercise the options on a cashless basis, Micrografx
will reduce the number of shares of Micrografx common stock delivered on
exercise of the option by that number of shares having a value (based on the
closing price of Micrografx common stock on the over-the-counter bulletin board
on the exercise date, or $1.65, if greater) equal to the total exercise price
of the options. To the extent that the outstanding options are not exercised,
they will terminate and become null and void at the effective time of the
merger.
For example purposes only, if the closing price of Micrografx common stock
on the exercise date was $2.00 per share and the optionholder has vested
options for 1,000 shares of Micrografx common stock, exercisable at a price of
$0.44 per share, then the holder could elect to exercise the options by paying
the exercise price ($440) in cash or on a cashless basis. In a cashless
exercise, the number of Micrografx shares issued would be reduced by 220 shares
(the number of shares having a value equal to the total option exercise price
of $440) and the holder would receive a "net" number of Micrografx shares equal
to 780 shares.
Each holder of unvested options with an exercise price of less than $1.65
per share will be paid cash by Micrografx immediately prior to the effective
time of the merger in an amount equal to the product of the difference between
$1.65 per share and the exercise price and the total number of shares issuable
under the unvested options. Each unvested option with an exercise price of more
than $1.65 per share will terminate and become null and void at the effective
time of the merger.
Micrografx Employee Stock Purchase Plan Options
At least 30 days before the second business day prior to the effective time
of the merger, Micrografx must provide written notice to all of the
participants in the Micrografx Employee Stock Purchase Plan that all
outstanding options under the Employee Stock Purchase Plan, to the extent
exercisable (based on each participant's payroll deduction contributions
through the date of exercise), may be exercised for a specified period of not
less than 30 days from the date of the notice. At the end of the period, all
outstanding options under the Employee Stock Purchase Plan will terminate.
Treatment of Warrants, Convertible Notes and Subordinated Convertible Debenture
Warrants
If Corel is entitled to, and Corel elects to, pay cash for all shares of
Micrografx capital stock at closing, then all outstanding warrants to purchase
shares of Micrografx capital stock will terminate. Otherwise, at the effective
time of the merger, Corel will assume all of Micrografx's obligations under all
of its outstanding
53
warrants and the holders will be entitled to receive upon exercise the same
amount of cash or number of shares of Corel common stock and Corel
participation rights as the holders would have received if they had exercised
the warrants prior to the effective time of the merger. The exercise prices
following the merger for the warrants will be adjusted consistent with the
conversion ratios described above.
Convertible Promissory Notes
Immediately prior to the effective time of the merger, all of the
outstanding convertible promissory notes of Micrografx (convertible into
approximately 973,180 shares of Micrografx common stock) will be converted into
shares of Micrografx common stock in accordance with their terms and will
thereafter receive the same consideration to be received by other Micrografx
shareholders in the merger.
Subordinated Convertible Debenture
Following the effective time of the merger, Corel will redeem the
subordinated convertible debenture dated as of April 16, 1999 issued by
Micrografx to Intergraph Corporation in the original principal amount of $5.8
million. Intergraph and Micrografx have agreed that in the event that the
Intergraph debenture is redeemed prior to October 31, 2001, Intergraph will
accept $3.8 million, plus accrued interest, in full satisfaction of
Micrografx's obligations to Intergraph under with the debenture.
Procedures for Exchange of Stock Certificates
Corel will enter into an agreement with a bank or trust company to act as
exchange agent, under which Corel must deposit with the exchange agent as of
the effective time of the merger, for the benefit of the holders of Micrografx
common stock and Micrografx preferred stock, the cash to be delivered to the
holders if the cash alternative is elected by Corel or, otherwise, certificates
representing the number of duly authorized whole shares of Corel common stock
and the number of duly authorized Corel participation rights issuable in
connection with the merger, in each event to be held for the benefit of the
Micrografx shareholders.
As soon as reasonably practicable after the effective time of the merger and
not more than ten business days after the effective time, Corel will cause the
exchange agent to mail to each holder of record of Micrografx common stock and
Micrografx preferred stock a letter of transmittal with instructions to be used
by the holder in surrendering certificates which, until the merger, represented
shares of Micrografx common stock or Micrografx preferred stock in exchange for
cash or for certificates representing shares of Corel common stock and Corel
participation rights. Any delivery of cash or shares of Corel common stock and
Corel participation rights may be reduced by the amount of any withholding
taxes required under applicable law.
On the surrender of Micrografx stock certificates to the exchange agent with
a duly executed letter of transmittal, the holder of the certificates will
receive:
. cash if Corel has elected the cash alternative; or
. a certificate representing whole shares of Corel common stock
(appropriately rounded up or down) and a certificate representing Corel
participation rights.
In no event will Micrografx shareholders receive fractional shares or interest
on any funds to be received in the merger.
In the event of a transfer of ownership of Micrografx common stock or
Micrografx preferred stock that is not registered in the stock transfer records
of Micrografx, the consideration payable for the shares may be issued to a
transferee if the certificate representing the shares of Micrografx capital
stock is presented to the exchange agent together with all documents required
to evidence and effect the transfer, and the person requesting the issuance
pays or provides evidence to the reasonable satisfaction of Corel that all
applicable stock transfer taxes have been paid or are not applicable.
54
Until a certificate representing shares of Micrografx common stock or
Micrografx preferred stock has been surrendered to the exchange agent, each
certificate will after the effective time of the merger be deemed to represent
only the right to receive cash or a combination of Corel common stock and Corel
participation right as described above.
Until the certificates are surrendered and assuming they are entitled to
Corel common stock, Micrografx shareholders will not be entitled to vote on
matters submitted to Corel shareholders, transfer or dispose of the Corel
common stock or receive dividends, if any, declared by Corel. Certificates
representing shares of Micrografx common stock or Micrografx preferred stock
surrendered for exchange by affiliates of Micrografx must be accompanied by
executed affiliate agreements.
Any portion of the amounts deposited with the exchange agent that remain
unclaimed by the former shareholders of Micrografx 12 months after the
effective time of the merger will be delivered on demand to Corel, and the
former shareholders of Micrografx who have not complied with the exchange
procedures set forth in the merger agreement must look only to Corel (subject
to abandoned property, escheat and other similar laws) as general creditors for
payment of the cash or Corel common stock and Corel participation rights into
which their shares of Micrografx common stock and Micrografx preferred stock
have been converted.
The Merger Agreement
Representations, Warranties and Covenants
Under the merger agreement, Corel and Micrografx each made a number of
representations and warranties to the other party, including representations
and warranties relating to:
. organization and qualification and similar corporate matters;
. capital structure;
. authorization, execution, delivery, performance and enforceability of
the merger agreement and related matters;
. the absence of conflicts under charter documents or bylaws, the
existence of required consents or approvals and the absence of
violations of any instruments or relevant law;
. documents filed or to be filed with the Securities and Exchange
Commission and the accuracy of the financial statements and other
information contained therein;
. absence of specified material adverse changes, other than those relating
to general economic or industry conditions material litigation or
material undisclosed liabilities;
. compliance with applicable laws and orders; and
. the accuracy of the information supplied in connection with the
preparation of the prospectus/proxy statement and related registration
statement.
Micrografx also made representations and warranties to Corel relating to:
. intellectual property matters;
. compliance with agreements;
. title to properties;
. tax, labor, insurance and employee benefit matters; and
. compliance with environmental laws.
55
Micrografx has covenanted that until the consummation of the merger or the
termination of the merger agreement, it will, among other things, maintain and
conduct its business in the ordinary course consistent with past practice and
will not amend its charter documents, incur any material obligations, make any
capital expenditures or enter into any agreements or issue any shares of its
capital stock, in each event other than in the ordinary course of its business
consistent with past practice.
Corel has agreed to fulfill the obligations of Micrografx under its charter
documents and bylaws concerning indemnification of present and former officers
and directors of Micrografx for a six-year period from the closing date of the
merger and to use all commercially reasonable efforts to maintain in effect, if
available at a premium of up to 200% of the premium presently paid by
Micrografx, directors' and officers' liability insurance covering the
individuals presently covered under Micrografx's existing insurance.
Payment of Intergraph Debenture
Corel has agreed to redeem following the effective time of the merger
Micrografx's subordinated convertible debenture held by Intergraph Corporation
dated as of April 16, 1999 in the original principal amount of $5.8 million.
Intergraph has agreed that it will accept $3.8 million, plus accrued interest,
in full payment of the debenture if the redemption payment is made on or before
October 31, 2001. See "--Treatment of Warrants, Convertible Notes and
Subordinated Convertible Debenture."
Appointment of Micrografx Designee as Corel Director
Corel has covenanted that its board of directors will at the effective time
of the merger include a person nominated by Micrografx and mutually acceptable
to Corel and Micrografx. Corel also has agreed to recommend and support the
election to the Corel board of directors at Corel's 2002 annual shareholders'
meeting of this director or another individual acceptable to Corel and
nominated by the holders of a majority of the shares of Micrografx common stock
held by holders owning 5% or more of the Micrografx common stock on the record
date for the Micrografx special meeting. It is expected that James L. Hopkins,
Micrografx's chairman, president and chief executive officer, will be
Micrografx's nominee.
Conditions to the Completion of the Merger
The obligations of Corel and Micrografx to consummate the merger are subject
to the satisfaction or waiver of each of the following conditions:
. the accuracy in all material respects of the representations and
warranties made by the other party, except for representations and
warranties qualified by materiality which must be accurate as written;
. the performance in all material respects by the other party of its
covenants and agreements;
. the taking by each party of all necessary corporate actions;
. the absence of any legal restraint or prohibition issued or pending by
any court or governmental authority or any law or order that would
prohibit or render illegal the merger or the other transactions set
forth in the merger agreement;
. the existence of all required consents, approvals, actions or filings
with governmental authorities or other public or private third parties
and the expiration or termination of any waiting period imposed by any
governmental entity necessary for the consummation of the merger;
. if Corel has not elected the cash alternative, the approval for listing
on The Toronto Stock Exchange and the Nasdaq National Market of the
shares of Corel common stock issuable at the effective time of the
merger and at the first anniversary thereof;
. the absence of the presently effective exercise on the close of business
on the day following the Micrografx special meeting by more than 10% of
the outstanding Micrografx common stock of dissenters' rights in
connection with the merger; and
56
. the delivery of specified ancillary documents and legal and (unless the
cash alternative is elected by Corel) tax opinions.
Limitation on Negotiations
The merger agreement provides that Micrografx will not, directly or
indirectly, solicit or encourage any inquiries or the making of any proposal or
offer that constitutes or may reasonably be expected to lead to an alternative
proposal from any person or engage in any discussions or negotiations or
provide any confidential information to any person or group with respect to any
proposal or otherwise knowingly facilitate any effort to attempt to make or
implement an alternative proposal except as described below. The merger
agreement also requires Micrografx to immediately notify Corel of any offer or
proposal to enter into negotiations relating to an alternative proposal and to
immediately terminate any existing activities, discussions or negotiations with
respect to any of the foregoing. For purposes of the merger agreement, "an
alternative proposal" means an inquiry, proposal or offer regarding any merger,
consolidation or business combination involving Micrografx or any of its
subsidiaries or any acquisition or similar transaction (including a tender or
exchange offer) involving the purchase of:
. all or any significant portion of the assets of Micrografx and its
subsidiaries taken as a whole;
. 20% or more of Micrografx's outstanding common stock; or
. 20% or more of the outstanding shares of any subsidiary of Micrografx.
The Micrografx board of directors may consider and engage in discussions or
negotiations with, and furnish confidential information to, a third party who
makes a bona fide, unsolicited alternative proposal if, before approval by
Micrografx's shareholders of the merger agreement:
. based on the advice of its outside counsel, the board of directors
determines in good faith and in its reasonable judgment that the action
is likely required for the Micrografx board of directors to comply with
its fiduciary duties to its shareholders under applicable law;
. based on the advice of Micrografx's financial advisor, the board of
directors determines in good faith that the alternative proposal is
reasonably likely to result in a "superior proposal"; and
. Micrografx provides Corel with written notice of the alternative
proposal with a description of its principal financial terms and
conditions three business days before furnishing the information to or
commencing the discussions with a third party.
As defined in the merger agreement, a "superior proposal" means an
alternative proposal (except that the applicable threshold percentage will be
50% rather than 20%) received by Micrografx with respect to which its board of
directors has determined, based on the advice of Micrografx's financial
advisor, that the consideration to be received by the Micrografx shareholders
is superior from a financial point of view to that to be received by them in
the merger, that the alternative proposal is superior and reasonably likely to
be consummated, that the person or group making the alternative proposal will
have adequate sources of financing to complete the alternative proposal and
that the alternative proposal is more favorable and provides greater value to
Micrografx's shareholders than the merger.
Termination and Termination Fees
Termination. The merger agreement may be terminated at any time prior to the
effective time of the merger as follows:
. by mutual written consent of Micrografx and Corel;
. by Corel or Micrografx on written notice to the other if:
. at any time after December 31, 2001, the merger has not been
consummated and the failure to consummate the merger is not caused
by a breach of the merger agreement by the terminating party;
57
. the required approval of the Micrografx shareholders is not obtained
following a vote held at a meeting of the shareholders (including at
not more than two adjournments or postponements thereof);
. there has been a material breach of any representation, warranty,
covenant or agreement on the part of the non-terminating party that
is not curable or is curable but has not been cured within the 30
days following receipt of written notice of the breach from the
terminating party; or
. any court or governmental authority has enacted, entered or enforced
any law or order that has the effect of making illegal or otherwise
restricting, preventing, enjoining or prohibiting consummation of
the merger and has become final and nonappealable;
. by Micrografx if the Micrografx board of directors determines in good
faith and on the advice of outside counsel that termination of the
merger agreement is required for the Micrografx board of directors to
comply with its fiduciary obligations to shareholders by reason of an
unsolicited bona fide alternative proposal that Micrografx's board of
directors has determined is a superior proposal and after Corel has been
given a reasonable opportunity to make an equivalent proposal to proceed
with the merger; or
. by Corel if the Micrografx board of directors or any committee thereof
has withdrawn or modified in a manner adverse to Corel or failed to
reconfirm its approval or recommendation of the merger agreement or the
merger. An announcement by Micrografx that an alternative proposal is
under consideration will be deemed a withdrawal or modification unless
Micrografx's board of directors publicly reaffirms its original
recommendation within ten business days after the announcement.
If the merger agreement is validly terminated, the agreement will be null
and void and the termination will be without liability of any party, except for
liability for breach of the merger agreement and except for any provisions
relating to solicitation and termination fees, confidentiality, fees and
expenses and termination, which will survive.
Termination Fee. Micrografx is required to make immediate payment to Corel
of a termination fee equal to 3.5% of adjusted Micrografx annual revenues for
the year ended June 30, 2001 (approximately $1.2 million based on the
assumptions outlined under "--Merger Consideration"):
. if Micrografx terminates the merger agreement as a result of its board
of directors' good faith determination that termination of the merger
agreement is necessary for the board of directors to comply with its
fiduciary obligations in response to its receipt of a superior proposal;
. if Corel terminates the merger agreement as a result of the Micrografx
board of directors' withdrawal of or modification in an adverse manner
or fails to reconfirm its recommendation of the merger agreement or the
merger;
. if an alternative proposal is made and the merger agreement is
terminated by either party by reason of the failure of Micrografx to
obtain the approval by its shareholders of the merger agreement and the
merger and a definitive agreement with respect to the alternative
proposal or any other alternative proposal is entered into within 12
months of the date of termination with the person or affiliate who made
the original alternative proposal or within nine months of the date of
termination with any other person;
. if an alternative proposal is made and Corel terminates the merger
agreement by reason of Micrografx's breach under the merger agreement or
the existence of a nonappealable law or order making illegal or
otherwise preventing the consummation of the merger (and provided that
Micrografx has participated in the issue in respect of which the right
of termination has been exercised) and a definitive agreement with
respect to the alternative proposal or any other alternative proposal is
entered into within 12 months of the date of termination with the person
or affiliate who made the original alternative proposal or within nine
months of the date of termination with any other person; or
58
. if an alternative proposal is made and the merger agreement is
terminated by either party by reason of the failure of the parties to
consummate the merger by December 31, 2001 and a definitive agreement
with respect to the alternative proposal or any other alternative
proposal is entered into within 12 months of the date of termination
with the person or affiliate who made the original alternative proposal
or within nine months of the date of termination with any other person.
In addition, on the occurrence of any of the termination events described
above, except for the termination by Micrografx as a result of the existence of
an alternative proposal and its board of directors' determination that the
termination was necessary for it to comply with its fiduciary obligations to
its shareholders, or if the required approval of Micrografx shareholders is not
obtained, Micrografx will pay to Corel all of Corel's accounting, legal,
investment and other out-of-pocket expenses incurred by Corel with respect to
the transactions contemplated by the merger agreement. Notwithstanding the
foregoing, if Corel exercises its option to acquire 80% of the outstanding
capital stock of Image2Web for a purchase price equal to the amount outstanding
under the bridge loan extended by Corel to Micrografx, then Micrografx will not
be required to pay the termination fee to Corel. See "Approval of the Merger--
Bridge Loan Extended by Corel to Micrografx." In that circumstance, however,
Micrografx will remain obligated to pay Corel's expenses.
Waiver and Amendment
At any time before the effective time of the merger, either Corel or
Micrografx may:
. extend the time for the performance of any of the obligations or other
acts of the other party under the merger agreement;
. waive any inaccuracies in the representations and warranties of the
other party contained in the merger agreement; or
. waive compliance by the other party with any of the covenants,
agreements or conditions contained in the merger agreement.
Fees and Expenses
Corel and Micrografx will each pay its own fees and expenses in connection
with the merger agreement and the merger, whether or not the merger is
completed, except that the filing fee in connection with any filings under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
Competition Act (Canada) and the expenses (other than professional fees) and
filing fees incurred in connection with preparing, printing and mailing this
prospectus/proxy statement will be shared equally by Corel and Micrografx.
Participation Rights Agreement
General
The terms and conditions applicable to the Corel participation rights will
be set forth in the participation rights agreement to be entered into between
Corel and Bank of New York, as trustee, substantially the form of which is
attached hereto as Annex B. The trustee will administer the participation
rights agreement and also will act as paying agent thereunder on behalf of
Corel. Corel is obligated under the terms of the participation rights agreement
to pay all fees and expenses of the trustee and to otherwise pay all costs
associated with the administration of the participation rights agreement.
Assets Held for the Benefit of Holders of Corel Participation Rights
Unless the cash alternative is elected by Corel, at the time of the closing
of the merger Corel is required to deposit with the trustee cash in an amount
equal to 50% of the adjusted Micrografx annual revenues, which is based on the
assumptions enumerated above under "--Merger Consideration--Summary and
Assumptions," and after applying the 1.03 multiple would be approximately $16.5
million, less any cash retained by Corel to
59
address the claims of dissenting Micrografx shareholders. The cash fund would
be held in trust for the benefit of the holders of the Corel participation
rights on the terms and subject to the conditions contained in the
participation rights agreement. Pending application of the cash fund, the
trustee is authorized to invest and reinvest the cash fund in specified
permitted investments. To the extent that the cash fund is not adequate to
make payment of any and all cash amounts due to the holders of the Corel
participation rights, then under the terms of the participation rights
agreement Corel is required to promptly deposit with the trustee additional
cash amounts as necessary to make the payments. To the extent that the amounts
held in the cash fund at any time exceed the maximum amount of cash that would
be payable to all holders of Corel participation rights on the first
anniversary of the closing of the merger (whether due to interest earned on
the cash fund or otherwise), then, in the absence of any default under the
participation rights agreement, Corel is entitled to withdraw any excess
amount for its own account.
If under the terms of the participation rights agreement, shares of Corel
common stock are to be issued and delivered to holders of Corel participation
rights at the first anniversary of the closing of the merger, then once this
determination is made Corel is required to promptly issue and deliver to the
trustee certificates evidencing the appropriate number of whole shares of
Corel common stock for delivery to the holders.
Rights and Obligations of Holders of Corel Participation Rights
A holder of Corel participation rights will not have any rights as a Corel
common shareholder and will not in his capacity as a holder of Corel
participation rights be entitled to receive any dividends in respect of Corel
common stock or to vote or otherwise receive notice of any meeting of Corel
shareholders. If, in accordance with the terms of the participation rights
agreement, a holder of Corel participation rights is entitled to receive
shares of Corel common stock, then he will acquire the rights of a Corel
common shareholder only after he has surrendered his certificates representing
Corel participation rights. Corel participation rights may not be sold and are
not otherwise transferable (except by devise or descent) and will not be
listed or eligible for trading on any exchange or market. Until the surrender
of his certificates, the registered owner of Corel participation rights will
be treated as the owner of the rights for all purposes.
As more particularly described under "--Merger Consideration--Closing
Consideration," the holders of Corel participation rights are entitled to
receive on the first anniversary of the closing of the merger either cash or
shares of Corel common stock.
Under the terms of the participation rights agreement, on the third
business day following the first anniversary of the closing of the merger, on
presentation of certificates representing Corel participation rights to the
trustee at its office in New York City, Corel will pay to the registered
holder the shares of Corel common stock or cash to which the holder is
entitled.
Any cash or shares of Corel common stock deposited with the trustee and
remaining unclaimed for one year after the date on which the payment of cash
or issuance of shares to holders is to be made under the participation rights
agreement, must, at the request of Corel, be paid or delivered to Corel and
discharged from the trust established under the participation rights
agreement. The holder of a Corel participation right will thereafter, as an
unsecured general creditor, look only to Corel for payment or delivery of the
appropriate amount of cash or shares of Corel common stock.
Dispositions and Defaults
Under the terms of the participation rights agreement, in the event of any
of the following "dispositions":
. a business combination involving Corel as a result of which 50% or more
of the shares of Corel common stock are disposed of;
. a disposition, in one or a series of transactions, of all or
substantially all of the assets of Corel; or
. a reclassification of Corel common stock as any other capital stock of
Corel or any other person;
then holders of Corel participation rights will be entitled to receive cash or
securities depending on the per share value receivable in connection with the
disposition by the holders of Corel common stock at the time of
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the disposition, as compared with the average stock price of Corel common stock
at the closing of the merger. If the per share value receivable in connection
with the disposition is less than or equal to the Corel common stock price at
closing, then the holders of Corel participation rights will be entitled to
receive the same amount in cash that they otherwise would have received on the
first anniversary of the closing of the merger. If, however, the per share
value receivable in connection with the disposition by the holders of Corel
common stock is greater than the Corel common stock price at closing, then the
holders of Corel participation rights will be entitled to receive the
consideration in the disposition to which they would have been entitled to
receive had the Corel participation rights been settled for shares of Corel
common stock immediately prior to consummation of the disposition. Any
determinations or judgments as to what holders of Corel participation rights
are entitled to receive in connection with a disposition must be made by Corel
and an independent financial expert and, absent manifest error, will be final
and binding on Corel and the holders of Corel participation rights. Under the
terms of the participation rights agreement, as soon as practicable after
consummation of a disposition, Corel must give each holder of Corel
participation rights notice of the disposition and payment of the cash or other
consideration to which the holders are entitled.
If an event of default occurs under the participation rights agreement, then
either the trustee or the holders of at least 25% of the outstanding Corel
participation rights may declare the Corel participation rights due and payable
immediately, and on that declaration, Corel must promptly pay to the holders
thereof an amount in cash equal to that which would otherwise be payable on the
first anniversary of the closing of the merger, plus interest at the rate of
10% per annum measured from the default payment date through the date payment
is made or duly provided for. An event of default is defined under the
participation rights agreement to be a default in the payment of all or any
part of the cash amount payable in respect of the Corel participation rights,
Corel's commencement of a voluntary case under any bankruptcy, insolvency or
similar law, the appointment or taking possession by a receiver, liquidator or
similar official or the entry of a decree or order for relief in respect of
Corel that remains unstayed and in effect for 60 days in any involuntary case
under any applicable bankruptcy, insolvency or similar law. In the event of any
default in the issuance and delivery of listed shares of Corel common stock to
holders of Corel participation rights, then Corel must pay to the holders a
cash amount equal to the value of the shares of Corel common stock based on the
then current market value plus interest at the rate of 10% per annum. Holders
of the Corel participation rights may be required to indemnify the trustee
before it is willing to take actions taken by the trustee on request of the
holders.
Amendments, Authorizations and Waivers Under the Participation Rights
Agreement
The participation rights agreement may be amended in some limited respects
by Corel and the trustee acting alone and without the consent of any holders of
Corel participation rights. The consent of the holders of not less than a
majority of the outstanding Corel participation rights, together with the
consent of Corel and the trustee, is required for other amendments, including
those that would have the effect of modifying in any manner the rights of the
holders under the participation rights agreement. However, some terms
fundamental to the timing and calculation of the amount of monies or securities
to which the holders are entitled cannot be amended without the consent of all
affected holders. The consent of the holders of a majority of the outstanding
Corel participation rights would be necessary to direct the time, method and
place of conducting any proceeding for any remedy available to the trustee
under the participation rights agreement or exercising any trust or power
conferred on the trustee with respect to the Corel participation rights under
the participation rights agreement or to waive any event of default.
Voting Agreements and Proxies
One significant holder of Micrografx common stock and Micrografx preferred
stock and all of Micrografx's directors and executive officers holding
Micrografx common stock have entered into voting agreements with Corel in which
they have agreed to vote their shares of Micrografx common stock and Micrografx
preferred stock in favor of approval of the merger agreement and the merger.
They also granted irrevocable proxies to an officer of Corel to vote their
shares of Micrografx common stock and Micrografx preferred stock in favor of
approval of the merger agreement and the merger. Approximately 3,254,406 shares
of Micrografx common stock, or approximately 26.0% of the outstanding shares of
Micrografx
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common stock on September 10, 2001, and 420,000 shares of Micrografx preferred
stock, or approximately 37.5% of the outstanding shares of Micrografx preferred
stock on September 10, 2001, are subject to the voting agreements and
irrevocable proxies.
The voting agreements and proxies provide, among other things, the
following:
. agreements on the part of the Micrografx shareholders to vote all shares
of Micrografx's capital stock held by them at the Micrografx special
meeting and at any other shareholders' meeting and in every written
consent solicited in favor of approval of the merger agreement and the
merger and to not take any action inconsistent with their obligations
under the voting agreements and proxies;
. that the shareholders will not transfer any shares of Micrografx's
capital stock, including shares obtained after the date of the related
voting agreement and proxy;
. the grant to an officer of Corel by the shareholders of an irrevocable
proxy to vote the shares of Micrografx's capital stock in favor of the
merger agreement and the merger and against alternative proposals;
. various representations by the shareholders relating to ownership of
their shares and authority to execute the voting agreements and to
deliver the proxies; and
. the provision of any additional consents or waivers required to complete
the merger.
The voting agreements and proxies terminate on the earlier to occur of the
effective date of the merger or the date the merger agreement is terminated.
Bridge Loan Extended by Corel to Micrografx
On August 28, 2001, Corel extended to Micrografx a $2.5 million bridge loan
for operating capital and reduction of indebtedness. The bridge loan is non-
amortizing and matures on January 31, 2002. Interest on the loan is due and
payable on a quarterly basis following termination of the merger agreement and
at maturity and accrues at a rate of 8.0% per annum. The default rate, whether
at maturity or upon acceleration or otherwise, is 10.0% per annum.
The loan is guaranteed by Image2Web and is secured by all of the assets of
Image2Web and by a pledge of all of the outstanding stock of Image2Web by
Micrografx.
The covenants of the loan are more restrictive than the covenants in the
merger agreement. The loan prohibits other borrowings and limits future liens,
business combinations and asset sales, investments and transactions with
affiliates.
Events of default under the terms of the bridge loan include, without
limitation:
. payment defaults;
. covenant defaults;
. cross defaults under other borrowings;
. the assessment of judgments against Micrografx;
. a change of control of Micrografx;
. the termination of the merger agreement;
. the failure of the security interests granted pursuant to the terms of
the loan to be perfected and a first priority; and
. the occurrence of any event would reasonably be expected to result in a
material adverse effect on the business, assets, operations, prospects
or condition, financial or otherwise, of Micrografx and its subsidiaries
taken as a whole.
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Following an event of default, Corel may accelerate the loan and, in the
event of Micrografx's failure to timely repay the loan, exercise creditor
rights against Micrografx.
Micrografx has granted to Corel an option to purchase 80% of the Image2Web
stock for a purchase price equal to the amount of the loan owing from time to
time. The option will be exercisable only on the:
. default of Micrografx in the repayment of the bridge loan;
. failure of Micrografx's shareholders to approve the merger agreement and
the merger; or
. termination of the merger by either Micrografx or Corel in accordance
with the terms of the merger agreement.
The option will expire on June 30, 2002.
If Corel elects to exercise the option and acquire the Image2Web stock, then
the termination fee set forth in the merger agreement will not be payable. See
"The Merger Agreement and Participation Rights Agreement--The Merger
Agreement--Termination and Termination Fees."
In addition, Micrografx has granted to Corel a right of first refusal with
respect to sales of the remaining 20% of the outstanding Image2Web stock. This
right remains in effect for five years from the effective date of the loan,
subject to the earlier expiration of the option.
Regulatory Approvals
CBCA Application. In Canada, a trust indenture or similar instrument, such
as the participation rights agreement, which is established between an issuer
of a debt, where the issuer is incorporated under the CBCA, and a trustee for
that debt must comply with Part VIII--Trust Indentures of the CBCA. Part VIII
of the CBCA describes the obligations and requirements of an issuer on the
entering into of a trust indenture if the debt obligations are part of a
distribution to the public. The purpose of Part VIII is to ensure that the
terms and conditions of the trust indenture provide adequate protection for the
securityholders. Subsection 82(3) of the CBCA provides that the director
appointed under the CBCA may exempt a trust indenture from the requirements of
Part VIII of the CBCA if the debt obligations issued and the security interest
effected by the trust indenture are subject to a law of a province of Canada or
of a foreign country that is substantially equivalent to Part VIII of the CBCA.
A trust indenture governed by the United States Trust Indenture Act of 1939, as
amended by the Trust Indenture Reform Act of 1990, is considered to have
provisions that are substantially equivalent to Part VIII of the CBCA. Corel
has filed an exemption application with the director appointed under the CBCA.
The CBCA director has 30 days from receipt of the application to grant or
refuse the application. See "The Merger Agreement and Participation Rights
Agreement--Participation Rights Agreement."
Other Laws. Micrografx and Corel conduct operations in a number of
jurisdictions where other regulatory filings or approvals may be required or
advisable in connection with the completion of the merger. Micrografx and Corel
are currently in the process of reviewing whether other filings or approvals
may be required or desirable in these other jurisdictions. Some of these
filings may not be completed prior to closing and some of these approvals,
which are not as a matter of practice required to be obtained prior to
effectiveness of a merger transaction, may not be obtained prior to closing.
No filings are required to be made and no approvals are required to be
obtained pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, or the Competition Act (Canada). However, any time before or after
the consummation of the merger, the Department of Justice, the Federal Trade
Commission, state attorneys general, the antitrust regulatory agencies of
various foreign countries or a private person or entity could challenge the
merger under antitrust laws and seek, among other things, to enjoin the merger
or to cause Corel to divest itself, in whole or in part, of Micrografx or other
businesses conducted by Corel. Based on the information available to them,
Corel and Micrografx believe that the merger will not violate the United States
federal, state or Canadian or other foreign antitrust laws.
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Listing of Corel Common Stock
The completion of the merger is conditioned on Corel receiving approval for
the conditional listing on The Toronto Stock Exchange and the Nasdaq National
Market of the shares of Corel common stock to be issued to the Micrografx
shareholders in the merger. The Corel participation rights will not be listed
on any exchange nor will they transferable or tradeable by Micrografx
shareholders.
Anticipated Accounting Treatment
In June 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, effective
for all business combinations initiated after June 30, 2001, which requires
that the purchase method of accounting be used for all business combinations
initiated after that date. Corel will apply SFAS 141 to the merger.
In June 2001 the Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001, but also to be applied immediately to any business
combinations consummated after June 30, 2001. SFAS 142 requires that goodwill
and intangible assets deemed to have indefinite lives will no longer be
amortized, including goodwill recorded in past business combinations, but will
be subject to annual impairment tests in accordance with the new guidelines.
Other intangible assets will continue to be amortized over their useful lives.
Corel will apply SFAS 142 to the merger.
The total purchase price will be allocated to the assets acquired and
liabilities assumed based on their respective fair values. To the extent that
this purchase price exceeds the fair value of the net tangible assets acquired
at the effective time of the merger, Corel will allocate the excess purchase
price, based on independent expert valuation, to intangible assets which will
include purchased in-process research and development and acquired technology,
with the remainder to other intangibles and/or goodwill.
Material United States Federal Income Tax Consequences
In General
In the opinion of Locke Liddell & Sapp LLP, counsel to Micrografx, and
Milbank, Tweed, Hadley & McCloy LLP, counsel to Corel, the following are the
material United States federal income tax consequences to United States
Micrografx shareholders and United States holders of Micrografx options as a
result of the merger.
Subject to the terms and conditions set forth below, and as described in
more complete detail thereafter, the following summarizes some of the principal
United States federal income tax consequences of the merger:
. If the Micrografx shareholders receive solely cash in the merger:
. the merger will be treated as a taxable stock sale by the United
States Micrografx shareholders; and
. each United States Micrografx shareholder will recognize capital
gain or loss in an amount equal to the difference between the amount
of cash received and the shareholder's adjusted tax basis in the
shares of Micrografx stock disposed of.
. If the Micrografx shareholders receive Corel common stock and Corel
participation rights in the merger:
. the merger of Micrografx and Calgary I Acquisition Corp. should
qualify as a reorganization under Section 368(a) of the Internal
Revenue Code;
. none of Corel, Calgary I Acquisition Corp., or Micrografx will
recognize any gain or loss;
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. the tax consequences to the United States Micrografx shareholders
are uncertain due to the receipt of the Corel participation rights
and whether or not the open transaction method of reporting is
available to the United States Micrografx shareholders.
The tax consequences to Micrografx shareholders or optionholders who are not
United States persons (as described below) involve tax considerations that are
beyond the scope of this discussion. Each Micrografx shareholder and
optionholder who is not a United States person is advised to consult its tax
advisor to determine the United States federal, state, local and foreign tax
consequences of the merger and ownership of Corel common stock applicable to
the Micrografx shareholder or optionholder.
Generally, a United States person is:
. an individual that is a citizen or resident of the United States;
. a corporation, partnership or other entity, other than a trust or
estate, created or organized in or under the laws of the United States
or any political subdivision thereof;
. an estate the income of which is subject to United States federal income
taxation regardless of its source; or
. a trust if, in general, a United States court is able to exercise
primary supervision over the administration of the trust and one or more
United States persons have the authority to control all substantial
decisions of the trust.
The discussion does not intend to be exhaustive of all possible tax
considerations; for example, the discussion does not contain a description of
any state, local or foreign tax considerations (except where otherwise
specifically noted in this prospectus/proxy statement). In addition, the
summary discussion is intended to address only those United States federal
income tax considerations that are generally applicable to a United States
Micrografx shareholder or optionholder who holds Micrografx stock or a
Micrografx option, respectively, as a capital asset, and it does not discuss
all aspects of United States federal income taxation that might be relevant to
a specific United States Micrografx shareholder or optionholder in light of
particular investment or tax circumstances.
In particular, the discussion does not purport to deal with all aspects of
taxation that may be relevant to United States Micrografx shareholders or
optionholders subject to special treatment under the United States federal
income tax laws, including, without limitation: individual retirement and other
tax-deferred accounts; banks and other financial institutions; insurance
companies; tax-exempt organizations; dealers, brokers or traders in securities
or currencies; persons subject to the alternative minimum tax; persons who hold
their common stock as part of a straddle, hedging, synthetic security,
conversion transaction or other integrated investment consisting of Micrografx
or Corel common stock and one or more other investments; persons whose
functional currency is other than the United States dollar; persons who
received their common stock as compensation in connection with the performance
of services or on exercise of options received as compensation in connection
with the performance of services; persons eligible for tax treaty benefits; and
foreign corporations, foreign partnerships, other foreign entities and
individuals who are not citizens or residents of the United States. In
addition, the following discussion, including the legal opinions discussed
below, does not address the United States federal income tax consequences to
any United States Micrografx shareholder or optionholder who will own 5% or
more of either the total voting power or the total value of the outstanding
Corel common stock after the merger, determined after taking into account
ownership under the applicable attribution rules of the Internal Revenue Code
and Treasury regulations.
The information in the discussion is based on the federal income tax laws as
of the date of this document, which include:
. the Internal Revenue Code;
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. current, temporary and proposed Treasury regulations promulgated under
the Internal Revenue Code;
. the legislative history of the Internal Revenue Code;
. current administrative interpretations and practices of the Internal
Revenue Service, or IRS, (including its practices and policies as
expressed in private letter rulings, which are not binding on the IRS
except with respect to a taxpayer that receives such a ruling); and
. court decisions.
There is a risk that future legislation, Treasury regulations,
administrative interpretations and court decisions will significantly change
the current law or adversely affect existing interpretations of the federal
income tax laws. Any change could apply retroactively to transactions
preceding the date of the change and neither Corel nor Micrografx undertakes
to inform the United States Micrografx shareholders or optionholders of any
change. There is a risk that the statements set forth in the following summary
discussion (which do not bind the IRS or the courts) will be challenged by the
IRS and will not be sustained by a court if so challenged.
The discussion is not intended to be, and should not be construed by the
United States Micrografx shareholders or optionholders as, tax advice.
Therefore, each United States Micrografx shareholder and optionholder is urged
to consult with its tax advisor to determine the United States federal, state,
local and foreign tax consequences of the merger and the ownership of Corel
common stock, including the particular facts and circumstances that may be
unique to the shareholder or optionholder.
United States Federal Income Tax Consequences to United States Micrografx
Shareholders
Consequences if Micrografx Shareholders Receive Solely Cash in the Merger
If Corel is entitled to, and elects to, pay cash for all shares of
Micrografx capital stock at closing, Calgary I Acquisition Corp., a subsidiary
of Corel, will be merged with and into Micrografx and the Micrografx
shareholders will receive solely cash in exchange for their Micrografx stock.
For United States federal income tax purposes, this will be treated as a
taxable stock sale by the United States Micrografx shareholders on which
capital gain or loss will be recognized by each shareholder in an amount equal
to the difference between the amount of cash received by the shareholder in
the merger and the shareholder's adjusted tax basis in the shares of
Micrografx stock disposed of.
Consequences if Micrografx Shareholders Receive Corel Common Stock and
Corel Participation Rights in the Merger
Consequences if the Merger Qualifies as a Reorganization for United
States Federal Income Tax Purposes
If Corel is not entitled to, or does not elect to, pay cash for all
shares of Micrografx capital stock at closing, then Micrografx will be
merged with and into Calgary I Acquisition Corp. and the Micrografx
shareholders will receive shares of Corel common stock and Corel
participation rights in exchange for their Micrografx stock. It is a
closing condition that Milbank, Tweed, Hadley & McCloy provide an opinion
to Corel, and Locke Liddell & Sapp provide an opinion to Micrografx, to the
effect that if Corel is not entitled, or does not elect, to pay cash for
all shares of Micrografx capital stock at closing, the merger will be
treated for United States federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code. These
tax opinions will be subject to assumptions and qualifications and assume
the truth and accuracy as of closing of some representations of Corel,
Calgary I Acquisition Corp. and Micrografx, including representations in
some certificates delivered to counsel by the respective managements of
Corel, Calgary I Acquisition Corp. and Micrografx.
Assuming the merger is treated as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, and subject to the limitations
and qualifications referred to herein, the merger
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described in the preceding paragraph should result in the following United
States federal income tax consequences:
. Recognition of Gain or Loss by Corel, Calgary I Acquisition Corp.
and Micrografx:
None of Corel, Calgary I Acquisition Corp. or Micrografx will
recognize any gain or loss as a result of the merger.
. Recognition of Gain or Loss by United States Micrografx
Shareholders:
The tax consequences to the United States Micrografx shareholders
are uncertain. There are no federal income tax laws addressing the tax
treatment of the receipt of deferred rights that are similar to the
Corel participation rights in a reorganization within the meaning of
Section 368 of the Internal Revenue Code.
. Recognition of Gain if Open Transaction Method Applies:
United States Micrografx shareholders who receive participation
rights may be able to report the transaction using the open
transaction method. Under this method, a United States Micrografx
shareholder who receives cash on the first anniversary following the
closing may be able to delay reporting gain, if any, until the
shareholder actually receives cash pursuant to the participation
rights. When payments of cash are received, each United States
Micrografx shareholder would recognize any capital gain in an amount
equal to the lesser of the amount of cash received, other than to
the extent a portion of the cash received (determined using the
applicable federal rate) is treated as interest and taxable as
ordinary income, and the amount, if any, by which the sum of the
fair market value of the Corel common stock received at closing and
the amount of cash received at the first anniversary of the closing
of the merger (other than the amount of cash treated as interest and
taxable as ordinary income) exceeds the shareholder's adjusted tax
basis in the Micrografx capital stock disposed of in the merger. If
a United States Micrografx shareholder receives Corel stock on the
first anniversary of the closing of the merger, the shareholder will
recognize no income or gain, other than to the extent that a portion
of the shares received (determined using the applicable federal
rate) is treated as interest and taxable as ordinary income. The
open transaction method has been upheld by courts where taxpayers
receive deferred payment obligations if the obligations have no
ascertainable fair market value. Regulations promulgated by the
Treasury Department also recognize the validity of the open
transaction method, but limit its applicability to rare and
extraordinary situations in which the value of the contingent
obligation cannot reasonably be ascertained. United States
Micrografx shareholders may determine that the fair market value at
the closing of the Corel participation rights cannot reasonably be
ascertained due to the substantial contingencies imposed under the
participation rights agreement. This determination may be supported
by the fact that:
. cash payments with respect to the Corel participation
rights will be made to the holders of the Corel
participation rights only if the Corel stock price at the
first anniversary of the closing of the merger is equal to
or less than the Corel stock price at the closing; and
. no cash will be provided if the Corel stock price at the
first anniversary of the closing of the merger is greater
than the Corel stock price at the closing.
. Recognition of Gain if Open Transaction Method Does Not
Apply:
If a United States Micrografx shareholder does not report the
transaction pursuant to the open transaction method or if a United
States Micrografx shareholder does report the transaction pursuant
to the open transaction method and the IRS is successful in
asserting that the shareholder is not entitled to report the
transaction using the open transaction method, the United States
Micrografx shareholder would be required to recognize capital gain,
if any, on receipt of the Corel common stock and Corel participation
rights at closing. The amount of the
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capital gain that would be recognized by the shareholder, however,
is uncertain. One possibility is that the shareholder would
recognize capital gain equal to the lesser of:
. the fair market value at the closing of the shareholder's
right to subsequently receive cash under the Corel
participation rights; and
. the amount by which the sum of the fair market value at
the closing of the Corel common stock and the Corel
participation rights received at the closing exceeds the
shareholder's adjusted tax basis in the Micrografx capital
stock disposed of in the merger.
Any determination of fair market value would be required to take
into account the contingent nature of the participation rights. Any
amount of cash distributed on the first anniversary date in excess
of the value placed on these rights at closing would be taxable to
the United States Micrografx shareholder in the year received. A
portion of the excess amount (determined using the applicable
federal rate) received would be treated as interest and taxable as
ordinary income, with the balance taxed as capital gain. If the
aggregate distributions of cash to a United States Micrografx
shareholder were less than the value placed on the participation
rights at closing, the shareholder would be treated as incurring a
capital loss in the year of final distribution.
Because of the lack of legal authority with respect to the
applicability of the open transaction method, each United States
Micrografx shareholder is urged to consult its tax advisor
concerning the recognition of gain, if any, resulting from the
transaction.
. Recognition of Loss by United States Micrografx Shareholders
and Applicability of Installment Method:
A United States Micrografx shareholder will not be entitled to
recognize loss, if any, on receipt of shares of Corel common stock
and Corel participation rights at closing in exchange for the
Micrografx capital stock disposed in the merger.
The installment method is not available to transferors of stock
or securities traded on an established securities market. Micrografx
common stock is currently traded on the over-the-counter bulletin
board. Because Treasury regulations define established securities
market as including any over-the-counter market, the installment
method will not be available to United States Micrografx common
shareholders to report gain from the receipt of cash pursuant to the
Corel participation rights.
. United States Micrografx Shareholders' Tax Bases in Corel Common
Stock:
. Tax Bases if Open Transactions Method Applies:
Assuming the open transaction method applies, if a United States
Micrografx shareholder receives additional shares of Corel common
stock pursuant to its Corel participation rights, the aggregate tax
basis of the shareholder's Corel common stock received in the merger
(including Corel common stock subsequently received pursuant to the
Corel participation rights other than Corel common stock that is
treated as interest and taxable as ordinary income) will be equal to
the aggregate tax basis of the Micrografx capital stock disposed of
in the merger. The aggregate tax basis of each United States
Micrografx shareholder's Corel common stock received pursuant to the
Corel participation rights that is treated as interest and taxable
as ordinary income will be equal to the fair market value of the
stock at the time of receipt. If the open transaction method applies
but each United States Micrografx shareholder subsequently receives
cash pursuant to its Corel participation rights, the aggregate tax
basis of the shareholder's Corel common stock received in the merger
will be equal to the aggregate tax basis of the Micrografx stock
surrendered in the merger, increased by the amount of gain
recognized by the shareholder and
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decreased by the amount of cash paid to the shareholder pursuant to
the Corel participation rights (other than cash received pursuant to
the Corel participation rights that is treated as interest and
taxable as ordinary income).
. Tax Bases if Open Transaction Method Does Not Apply:
If the open transaction method does not apply, the method by
which a United States Micrografx shareholder would determine the tax
basis in its Corel common stock is uncertain. One possible method is
as follows. If a United States Micrografx shareholder subsequently
receives additional shares of Corel common stock pursuant to its
Corel participation rights, the aggregate tax basis of the
shareholder's Corel common stock received in the merger (including
Corel common stock subsequently received pursuant to the Corel
participation rights other than Corel common stock that is treated
as interest and taxable as ordinary income) will be equal to the
aggregate tax basis of the Micrografx capital stock disposed of in
the merger, increased by the amount of gain recognized on the
closing and decreased by the fair market value at the time of
receipt of the participation rights of the contingent right to
receive cash pursuant to the Corel participation rights. The
aggregate tax basis of each shareholder's Corel common stock
received pursuant to the Corel participation rights that is treated
as interest and taxable as ordinary income will be equal to the fair
market value of the stock at the time of receipt. If, however, a
United States Micrografx shareholder subsequently receives cash
pursuant to its Corel participation rights, the aggregate tax basis
of the shareholder's Corel common stock received at the closing will
be equal to the aggregate tax basis of Micrografx stock disposed of
in the merger, increased by the amount of gain recognized by the
shareholder on the closing and decreased by the fair market value at
the time of receipt of the contingent right to receive cash pursuant
to the Corel participation rights.
If the open transaction method does not apply, each United States
Micrografx shareholder should consult with its tax advisor regarding
the computation of the tax basis in its Corel common stock.
. United States Micrografx Shareholders' Holding Periods of Corel
Common Stock:
The holding period of Corel common stock received by each United
States Micrografx shareholder in the merger (other than Corel common
stock received pursuant to the Corel participation rights that is
treated as interest and taxable as ordinary income) will include the
period for which the Micrografx stock surrendered in exchange therefor
was held for tax purposes, provided that the Corel stock is held as a
capital asset at the time of the merger. Any United States Micrografx
shareholder receiving Corel common stock pursuant to the Corel
participation rights that is treated as interest and taxable as
ordinary income will have a new holding period with respect to the
stock beginning at the time it is received.
. Recognition of Gain or Loss by Dissenting United States
Micrografx Shareholders:
United States Micrografx shareholders who perfect their dissenters'
rights under law and receive payment for their Micrografx capital stock
in cash and who do not own any shares of Corel common stock (either
actually or constructively within the meaning of Section 318 of the
Internal Revenue Code) following the receipt of the cash will generally
recognize capital gain or loss measured by the difference between the
amount of cash received and the shareholder's adjusted tax basis in the
Micrografx capital stock disposed of.
. Information Returns
United States Micrografx shareholders will be required to attach a
statement to their tax returns for the year of the merger that contains
the information listed in Treasury Regulations Section 1.368-3(b). The
statement must include the shareholder's adjusted tax basis in the
shareholder's Micrografx stock and the number of shares and the value
of the Corel common stock received.
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Consequences if the Merger Does Not Qualify as a Reorganization for United
States Federal Income Tax Purposes
Although it is a condition to closing, unless Corel elects the cash
alternative, that Milbank, Tweed, Hadley & McCloy provide an opinion to Corel,
and Locke Liddell & Sapp provide an opinion to Micrografx, to the effect that
the merger will be treated for United States federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, these opinions are subject to qualifications, assumptions and
representations and are not binding on the IRS or the courts. If the IRS were
to successfully assert that the merger does not constitute a reorganization
within the meaning of Section 368 of the Internal Revenue Code and assuming
the open transaction method applies, each United States Micrografx shareholder
would be required to recognize capital gain, if any, in the year of the
closing to the extent that the fair market value of the Corel common stock
received by the shareholder in the merger exceeds the shareholder's adjusted
tax basis in the Micrografx capital stock disposed and no United States
Micrografx shareholder would be entitled to recognize loss in the year of the
closing. Cash or additional Corel common stock subsequently received pursuant
to the Corel participation rights on the first anniversary of the closing
would be taxed as capital gain in the year of the first anniversary of the
closing, but only to the extent that the fair market value of the additional
stock or the amount of cash (other than additional Corel common stock or cash
that is treated as interest and taxable as ordinary income) when added to the
fair market value of the stock received at the closing exceeds the sum of the
adjusted tax basis in the Micrografx stock disposed of and the gain previously
recognized in the year of the closing. A United States Micrografx shareholder
would be entitled to recognize capital loss in the year of the first
anniversary of the closing to the extent that the shareholder's adjusted tax
basis in the Micrografx capital stock disposed of at closing exceeds the sum
of (i) the fair market value of the additional Corel common stock or the
amount of cash received at the first anniversary of the closing of the merger
(other than cash or Corel common stock that is treated as interest and taxable
as ordinary income) and (ii) the fair market value of the Corel common stock
received at the closing. Each United States Micrografx shareholder's aggregate
basis in any Corel common stock received in accordance with this paragraph
(including any additional Corel common stock subsequently received pursuant to
the Corel participation rights as interest) would equal the fair market value
of the stock at the time of receipt, and the holding period for the stock
would begin the day after it is received.
If the IRS were to successfully assert that the merger does not constitute
a reorganization within the meaning of Section 368 of the Internal Revenue
Code and the open transaction method did not apply, each United States
Micrografx shareholder would be required to recognize capital gain or loss in
the year of the closing based on the difference between the sum of the fair
market value of the Corel common stock and the fair market value of the Corel
participation rights received by the shareholder, and the shareholder's
adjusted tax basis in the Micrografx capital stock disposed of. When cash or
additional Corel common stock is subsequently distributed to a Micrografx
shareholder pursuant to the Corel participation rights, and if the amount of
the cash or the fair market value of the additional Corel common stock is
greater or less than the value of the Corel participation rights at closing,
the shareholder would recognize a capital gain or loss in the year the cash or
additional Corel common stock was distributed in an amount equal to the
difference (other than to the extent the cash or additional Corel common stock
is treated as interest and taxable as ordinary income). Each United States
Micrografx shareholder's aggregate basis in any Corel common stock received in
accordance with this paragraph (including any additional Corel common stock
subsequently received pursuant to the Corel participation rights as interest)
would equal the fair market value of the stock at the time of receipt and the
holding period for the stock would begin the day after it is received.
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Consequences of Holding Corel Common Stock
In General
Cash dividends (including the amount of any Canadian taxes withheld thereon)
paid with respect to Corel common stock generally will be includible as
ordinary income in the gross income of a United States shareholder when the
dividends are actually or constructively received to the extent of Corel's
current and accumulated earnings and profits as determined for United States
federal income tax purposes. Dividends paid in Canadian dollars will be
includible in a United States dollar amount based on the exchange rate in
effect on the day of receipt by the shareholder (or the shareholder's agent).
Any gain or loss recognized upon a subsequent sale or conversion of the
Canadian dollars for a different amount will be United States source ordinary
income or loss. Dividends generally will be foreign source income. Any Canadian
withholding tax paid by or for the account of any United States shareholder
with respect to the dividends will be eligible, subject to generally applicable
limitations and conditions, for credit against the United States shareholder's
United States federal income tax liability, but generally will be passive
income or financial services income which is treated separately from other
types of income for foreign tax credit limitation purposes. Dividends on Corel
common stock will not be eligible for the dividends-received deduction allowed
to corporations with respect to dividends paid by United States corporations.
If distributions made by Corel were to exceed Corel's current and
accumulated earnings and profits as determined for United States federal income
tax purposes, the excess would be treated as a non-taxable return of capital to
the extent of the United States shareholder's adjusted basis in the common
shares, and thereafter as capital gain.
Subject to the passive foreign investment company rules discussed below,
United States shareholders will recognize capital gain or loss on the sale or
other disposition of shares of Corel common stock held by the United States
shareholder. Generally, this capital gain or loss will be long-term capital
gain or loss if the United States shareholder's holding period for such common
shares exceeds one year. Long-term capital gain of a non-corporate United
States shareholder is generally subject to a maximum tax rate of 20%.
Consequences if Corel is Determined to be a Passive Foreign Investment
Company
In general, a foreign corporation is a passive foreign investment company,
or a PFIC, for any taxable year in which a United States holder owns stock in
the corporation and:
. 75% or more of its gross income consists of passive income (such as
dividends, interest, rents and royalties); or
. 50% or more of the average quarterly value of its assets consists of
assets that produce, or are held for the production of, passive income.
Cash and cash equivalents, among other types of assets, are considered to
produce, or to be held for the production of, passive income for purposes of
applying the second test set forth above. As of May 31, 2001, Corel had $127.2
million of cash, cash equivalents, restricted cash and marketable securities on
hand. These balances may either increase or decrease from the amount on hand as
of May 31, 2001. Accordingly, Corel may be or may subsequently become a PFIC if
in any tax year the average quarterly value of all Corel's assets that produce,
or are held for the production of, passive income (including cash) equals or
exceeds 50% of Corel's gross assets. Because the PFIC determination is made
annually on the basis of facts and circumstances that may be beyond Corel's
control (including fluctuations in the market value of Corel's stock), and
because this discussion is being provided prior to the close of Corel's taxable
year in which a Micrografx shareholder may acquire Corel stock, it cannot be
assured that Corel will not be a PFIC for this year or future years.
If Corel were a PFIC for any taxable year, a United States shareholder that
held Corel common stock in that taxable year would be required to file an IRS
form 8621 and would thereafter generally be subject to
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special rules with respect to some distributions made by Corel on the common
stock and with respect to gains from dispositions of common stock. In general,
a United States shareholder would be required to allocate excess distributions
(i.e., any distributions to the extent they exceed 125% of the average of the
distributions actually received in the three preceding tax years) or any gains,
as the case may be, ratably over its holding period for the common stock. That
portion of any excess distributions or gains allocated to a prior taxable year,
other than a year prior to the first year in which Corel was a PFIC, would
effectively be taxed at the highest United States federal income tax rate in
effect for that year with respect to ordinary income. In addition, the United
States shareholder would be subject to an interest charge on the resulting tax
liability determined as if that tax liability had been due with respect to the
particular taxable year. The portion, if any, of excess distributions or gains
not so allocated to a prior taxable year of the United States shareholder in
which Corel was a PFIC would be included in the United States holder's income
for the taxable year of the particular distribution or disposition and taxed as
ordinary income.
The foregoing rules with respect to excess distributions and dispositions
may be avoided if a United States shareholder is eligible for and timely makes
either a valid "qualifying electing fund" election, in which case the United
States shareholder generally would be required to include in income on a
current basis its pro rata share of Corel's ordinary income and net capital
gains, or a valid "mark-to-market" election. Corel can provide no assurances
that it will complete the actions necessary for United States shareholders to
make a qualifying electing fund election in the event that Corel is to be
considered a PFIC for any taxable year. If a mark-to-market election is made,
the United States shareholder will include in ordinary income each year the
excess, if any, of the fair market value over the adjusted tax basis of its
common stock. The United States shareholder also will be allowed an ordinary
loss each year of the excess, if any, of the adjusted tax basis over the fair
market value of its common stock, but only to the extent of the net amount of
previously included income as a result of the mark-to-market election. The
United States holder's tax basis in the common stock will be adjusted to
reflect any such income or loss amounts. Assuming the common stock is treated
as marketable stock for purposes of the PFIC rules, the mark-to-market election
would be available with respect to the common stock.
Due to the possibility that Corel could be determined to constitute a
passive foreign investment company, United States Micrografx shareholders are
urged to consult their tax advisors regarding the consequences of owning an
investment in a passive foreign investment company.
Backup Withholding
Under the Internal Revenue Code, a United States Micrografx shareholder may
be subject, under some circumstances, to backup withholding with respect to the
amount of cash, if any, received in the merger, any dividends paid on the Corel
common stock received in the merger and the proceeds from the sale, exchange or
redemption of the Corel common stock received in the merger, unless the
shareholder provides proof of an applicable exemption or a correct taxpayer
identification number to Corel and otherwise complies with applicable
requirements of the backup withholding rules. Any amounts withheld under the
backup withholding rules are not an additional tax and may be refunded or
credited against the shareholder's United States federal income tax liability,
provided the required information is furnished to the IRS.
United States Federal Income Tax Consequences to United States Micrografx
Optionholders
The United States federal income tax consequences to United States
Micrografx optionholders will depend on the particular Micrografx stock plan
under which the options were issued and whether the holder exercises the option
or is cashed out. The following summary is not comprehensive and therefore
holders of options should consult their tax advisors regarding the tax
consequences of the options.
Micrografx 1995 Director Stock Option Plan. Outstanding options under the
Micrografx 1995 Director Stock Option Plan are nonstatutory stock options. In
general, if the holder exercises the options prior to the closing, the holder
will recognize ordinary income when the option is exercised in an amount equal
to the
72
excess of the fair market value of the Micrografx stock received over the
option price paid. The tax basis of the Micrografx stock received will be its
fair market value when received. The Micrografx stock received on the exercise
of these options will convert into either cash or shares of Corel common stock
and Corel participation rights in the merger on the same terms as all other
outstanding shares of Micrografx capital stock. See tax consequences above for
the tax consequences to United States Micrografx shareholders on receiving
either cash or Corel common stock and Corel participation rights in exchange
for their Micrografx stock. If, on the other hand, the holder of one of these
options instead receives a cash payment from Micrografx in exchange for the
option, the holder will recognize ordinary income in the amount of the cash
received at the time it is received.
Micrografx 1995 Incentive and Non-Statutory Stock Option Plan. Outstanding
options under the Micrografx 1995 Incentive and Non-Statutory Stock Option Plan
include both nonstatutory stock options and incentive stock options, or ISOs.
The holders of nonstatutory stock options under this plan will have the same
tax consequences as the holders of options under the Micrografx 1995 Director
Stock Option Plan discussed above. The tax consequences to holders of ISOs who
elect to exercise their options prior to the closing, and to holders who elect
to be cashed out, are described below.
(1) ISOs Exercised Prior to the Closing. If the holders of ISOs exercise
their options prior to the closing, the following tax consequences apply.
Although there is no regular United States federal income tax triggered on the
exercise of an ISO, an amount equal to the excess of the fair market value of
the Micrografx stock received over the option price paid is includable in the
holder's alternative minimum taxable income. If the holder of shares acquired
on exercise of an ISO makes a disposition of the ISO shares within two years
from the date the ISO was granted or one year from the date the ISO was
exercised, the holder will recognize ordinary income at the time of the early
disposition.
(a) Consequences if Corel Is Not Entitled to, or Does Not Elect to, Pay
Cash for All Shares of Micrografx Capital Stock at Closing. If the holder
exercises ISOs prior to the closing, and the resulting shares of Micrografx
capital stock convert into the right to receive shares of Corel common
stock and Corel participation rights in the merger, this would not be
considered a disposition. The holder's shares of Corel common stock
received in the merger would be subject to the rules applicable to ISO
shares, triggering the recognition of ordinary income if the Corel shares
were disposed of within two years from the date the ISO was granted or one
year from the date the ISO was exercised. See "--United States Federal
Income Tax Consequences to United States Micrografx Shareholders" above for
the tax effect on receiving Corel common stock and Corel participation
rights in exchange for Micrografx capital stock.
(b) Consequences if Corel Is Entitled to, and Elects to, Pay Cash for
All Shares of Micrografx Capital Stock at Closing. If the holder exercises
ISOs prior to closing, and in the merger Corel elects to pay cash in
exchange for the resulting Micrografx shares, this would be an early
disposition of the ISO shares. In an early disposition, the holder will
recognize ordinary income equal to the excess, if any, of the lesser of the
amount realized on the early disposition or the fair market value of the
shares on the date of exercise, over the option price. The excess, if any,
of the amount realized on the early disposition of the shares over the fair
market value of the shares on the date of exercise will be short-term
capital gain, provided the holder holds the shares as a capital asset at
the time of early disposition. If a holder disposes of the shares for less
than his or her basis in the shares, the difference between the amount
realized and his or her basis will be a short-term capital loss, provided
the holder holds the shares as a capital asset at the time of disposition.
(2) Incentive Stock Options Not Exercised Prior to the Closing. If, on the
other hand, the holder of an ISO elects to receive a cash payment from
Micrografx at closing, the holder will recognize ordinary income in the amount
of the cash received at the time the cash is received.
The foregoing summary discussion does not purport to be a complete analysis
or discussion of all potential United States federal income tax effects
relevant to the merger. The discussion is included for general information
purposes only and may not apply to a particular Micrografx shareholder or
optionholder in light of the shareholder's or optionholder's particular
circumstances. Micrografx
73
shareholders and optionholders should consult their tax advisors as to the
particular tax consequences to them of the merger, including tax return
reporting requirements, applicability and effect of United States federal,
state, local and foreign tax laws and possible future changes and
interpretations thereof, which can have retroactive effects.
Material Canadian Federal Income Tax Consequences
The following is a discussion of the material Canadian federal income tax
consequences to some Micrografx shareholders who acquire Corel common stock and
Corel participation rights or cash as a result of the merger and Micrografx
optionholders who receive cash from Corel.
This summary is applicable to a Micrografx shareholder or optionholder who,
for purposes of the Income Tax Act (Canada) and at all relevant times:
. is neither a resident nor deemed to be a resident of Canada;
. deals at arm's-length with and is not affiliated with Micrografx and
Corel;
. holds any Micrografx shares, and will hold any Corel common stock and
Corel participation rights, as capital property;
. does not use or hold and is not deemed to use or hold Micrografx shares,
and will not use or hold and will not be deemed to use or hold any Corel
common stock and Corel participation rights, in connection with carrying
on a business in Canada; and
. to whom any Corel common stock and Corel participation rights will not
otherwise constitute "taxable Canadian property."
Micrografx shares, Corel common stock and Corel participation rights will
generally be considered to be capital property to a non-resident holder for
purposes of the Income Tax Act (Canada) unless the non-resident holder holds
Corel common stock or Corel participation rights in the course of carrying on a
business of trading or dealing in securities or otherwise as part of a business
of buying and selling securities or the holder acquired the shares or Corel
participation rights as part of a transaction considered to be an adventure or
concern in the nature of trade.
Corel common stock and Corel participation rights will generally not be
taxable Canadian property to a non-resident holder at the time of a disposition
or deemed disposition of Corel common stock or Corel participation rights
unless, at that time, the Corel common stock is not listed on a prescribed
stock exchange, which includes the Nasdaq National Market and The Toronto Stock
Exchange, or, at any time during the 60-month period immediately preceding that
time, the non-resident holder, persons with whom the non-resident holder did
not deal at arm's--length or the non-resident holder together with those
persons, owned or had an interest in or a right to acquire (including the Corel
participation rights) 25% or more of the issued shares of any class or series
of shares of the capital stock of Corel or the Corel common stock or Corel
participation rights were deemed to be taxable Canadian property.
This summary is not applicable to a non-resident holder which is an
organization exempt from tax in the United States and described in Article XXI
of the Canada-United States Income Tax Convention or a non-resident holder
which is a non-resident insurer carrying on an insurance business in Canada and
elsewhere.
This discussion is based on the current provisions of the Income Tax Act
(Canada) and the regulations thereunder in force as of the date hereof, all
specific proposals to amend the Income Tax Act (Canada) and the regulations
publicly announced by the Minister of Finance (Canada) prior to the date hereof
and counsel's understanding of the current published administrative and
assessing practices of the Canada Customs and Revenue Agency. This discussion
is not exhaustive of all possible Canadian federal income tax consequences and,
except for the publicly announced proposals, does not take into account or
anticipate any changes in law, whether by legislative, governmental or judicial
decision or action nor does it take into account provincial, territorial or
foreign tax consequences which may differ significantly from those discussed
herein.
74
Non-resident holders of Micrografx shares should consult with their tax
advisors for advice relating to the tax consequences to them having regard to
their own particular circumstances.
Disposition of Micrografx Shares. A non-resident holder will not be subject
to tax in Canada on any capital gain realized on the disposition of Micrografx
shares as a result of the merger.
Corel Participation Rights. Payments to a non-resident holder pursuant to
the Corel participation rights, whether in cash or Corel common stock, should
not be subject to tax in Canada. Although Corel's Canadian counsel has advised
Corel that such payments should not be subject to Canadian withholding tax
under current law, Corel will be required to withhold 25% (unless reduced under
an applicable bilateral tax treaty) of all or a portion of any payments made
pursuant to the Corel participation rights if required by applicable law at the
time of such payments. There can be no assurance that the Canadian tax laws or
the interpretation thereof will not change, whether by legislative,
governmental or judicial actions from the laws and the interpretations thereof
on which Corel's Canadian counsel has based its advice.
Dividends on Corel Common Stock. Subject to the provisions of an applicable
bilateral tax treaty, Canadian withholding tax at a rate of 25% will be payable
on dividends paid or credited, or deemed to be paid or credited, by Corel to a
non-resident holder on Corel common stock. In the case of a non-resident holder
that is the beneficial owner of the dividends and a resident of the United
States for purposes of the Canada-United States Income Tax Convention, the rate
of withholding tax will generally be reduced to 15% of the gross amount of the
dividends. The 15% rate will be reduced to 5% where a non-resident holder is a
company and is the beneficial owner of at least 10% of the voting stock of
Corel.
Disposition of Corel Common Stock. A non-resident holder will not be subject
to tax in Canada on any capital gain realized on the disposition of Corel
common stock.
Dissenting Micrografx Shareholders. A non-resident holder who dissents from
the merger and receives from the surviving entity of the merger the fair value
of the holder's Micrografx shares held by the holder will not be subject to tax
in Canada on the amounts received.
Dissenters' Rights
Any Micrografx shareholder of record may exercise dissenters' rights in
connection with the merger by properly complying with the requirements of
Articles 5.11, 5.12 and 5.13 of the TBCA. The information that follows is a
general summary of dissenters' rights and as a summary is qualified by and not
a substitute for the provisions of Articles 5.11, 5.12 and 5.13 of the TBCA.
The full text of these Articles is set forth in Annex E. The required procedure
set forth in Articles 5.11, 5.12 and 5.13 of the TBCA must be followed exactly
or you may lose your right to dissent from the merger.
Any shareholder who desires to dissent from the merger must file a written
objection to the merger with the Corporate Secretary of Micrografx, 8144 Walnut
Hill Lane, Suite 1050, Dallas, Texas, 75231, prior to the meeting. The written
notice must state that the shareholder will exercise his right to dissent if
the merger is consummated and give the shareholder's address to which notice of
effectiveness of the merger should be sent. A vote against the merger is not
sufficient to perfect a shareholder's statutory right to dissent from the
merger. If the merger is consummated, each shareholder who sent notice to
Micrografx as described above and who did not vote in favor of the merger will
be deemed to have dissented from the merger. Failure to vote against the merger
will not constitute a waiver of the dissenters' rights; on the other hand, a
vote in favor of the merger will constitute a waiver. Corel, or its subsidiary
that survives the merger, will be liable for any payments to dissenting
shareholders.
If the merger is approved by Micrografx's shareholders and subsequently
becomes effective, Micrografx must notify the dissenting shareholders within
ten days in writing that the merger has occurred. Each dissenting shareholder
so notified must, within ten days of the delivery or mailing of the notice,
make a written demand
75
on Micrografx for payment of the fair value of the dissenting shareholder's
shares as estimated by the dissenting shareholder. Failure to follow this
procedure will constitute a waiver of his dissenter's rights by the dissenting
shareholder. The demand must state the number and class of the shares owned by
the dissenting shareholder and the fair value of the shares as estimated by the
dissenting shareholder. The fair value of the shares will be the value of the
shares as of the date immediately preceding the meeting, excluding any
appreciation or depreciation in anticipation of the merger. Dissenting
shareholders who fail to make a written demand within the ten-day period will
be bound by the merger and lose their rights to dissent. Within 20 days after
making a demand, the dissenting shareholder must submit his or her certificates
to Micrografx for notation thereon that the demand has been made. Dissenting
shareholders who have made a demand for payment of their shares will not be
entitled to vote or exercise any other rights of a shareholder except the right
to receive payment for their shares pursuant to the provisions of the TBCA and
the right to maintain an appropriate action to obtain relief on the basis of
fraud.
Within 20 days after receipt of a dissenting shareholder's demand letter as
described above, Micrografx must deliver or mail to the dissenting shareholder
written notice:
. stating that Micrografx accepts the amount claimed in the demand letter
and agrees to pay that amount within 90 days after the effective date of
the merger on surrender of the certificates duly endorsed by the
dissenting shareholder; or
. containing Micrografx's written estimate of the fair value of the shares
of Micrografx stock together with an offer to pay the amount within 90
days after the effective date of the merger if Micrografx receives
notice, within 60 days after the effective date of the merger, stating
that the dissenting shareholder agrees to accept that amount and on
surrender of the certificates duly endorsed by the dissenting
shareholder.
In either case, the dissenting shareholder will cease to have any ownership
interest in Micrografx following consummation of the merger.
If the dissenting shareholder and Micrografx agree on the fair value of the
shares within 60 days after the effective date of the merger, Micrografx will
pay the fair value to the dissenting shareholder within 90 days of the
effective date of the merger or immediately on surrender of the certificates
duly endorsed. On payment of the agreed value, the shareholder will cease to
have any interest in the shares or in Micrografx.
If the dissenting shareholder and Micrografx cannot agree on the fair value
of the shares within 60 days after the effective date of the merger, the
dissenting shareholder may, within 60 days of the expiration of the initial 60-
day period, file a petition in any court of competent jurisdiction in Dallas
County, Texas requesting a finding and determination of the fair value of the
dissenting shareholder's shares. Each dissenting shareholder is not required to
file a separate petition. If one dissenting shareholder files a petition,
Micrografx must file, with the clerk of the court in which the petition was
filed, a list containing the names and addresses of the dissenting shareholders
with whom agreements as to the value of their shares have not been reached. The
court will give notice of the time and place of the hearing on the petition to
the dissenting shareholders included on the list. Dissenting shareholders so
notified by the court will be bound by the final judgment of the court
regarding the fair value of the shares. If no petition is filed within the
appropriate time period, then all dissenting shareholders who have not reached
an agreement with Micrografx on the value of their shares will be bound by the
merger and lose their rights to dissent.
After a hearing concerning the petition, the court will determine which
dissenting shareholders have complied with the provisions of the TBCA and have
become entitled to the valuation of, and payment for, their shares and will
appoint one or more qualified appraisers to determine the value of the shares
of Micrografx stock in question. The appraiser will determine the value and
file a report with the court. The court will then in its judgment determine the
fair value of the shares of Micrografx. The judgment of the court will be
binding on Micrografx and on all dissenting shareholders receiving notice of
the hearing. This value may be more than, less than or equal to what is
received by non-dissenting shareholders. The court will direct Micrografx to
pay
76
the amount, together with interest thereon beginning 91 days after the
effective date of the merger to the date of judgment, to the dissenting
shareholders entitled to the payment. The judgment will be payable on the
surrender to Micrografx of the certificates fully endorsed by the dissenting
shareholder. On payment of the judgment, the dissenting shareholder will cease
to have any interest in the certificates. All court costs will be allotted
between the dissenting shareholders and Micrografx in the manner the court
determines to be fair and equitable.
Any dissenting shareholder who has made a written demand on Micrografx for
payment of the fair value of his Micrografx stock may withdraw the demand at
any time before payment for his shares has been made or before a petition has
been filed with an appropriate court for determination of the fair value of the
shares. If a dissenting shareholder withdraws his demand, or if he is otherwise
unsuccessful in asserting his dissenters' rights, the dissenting shareholder
will be bound by the merger and his status as a former shareholder will be
restored without prejudice to any corporate proceedings, dividends or
distributions which may have occurred in the interim. In the absence of fraud
in the transaction, a dissenting shareholder's statutory right to appraisal is
the exclusive remedy for the recovery of the value of his shares or money
damages to the shareholder with respect to the merger.
77
MICROGRAFX BUSINESS
Overview
Micrografx develops and markets graphics software for business use in the
areas of process management, technical illustration, business diagramming and
digital image processing. Additionally, Micrografx supports the business use of
its technology through consulting, training and development services.
Historically, Micrografx has developed a variety of graphics oriented
software products. The technologies used in these products included:
. image editing;
. three dimensional, or 3D, object rendering;
. basic drawing tools for both the consumer and corporate markets;
. greeting card software for the personal creativity market;
. flowcharting;
. process simulation; and
. technical drawing.
In fiscal year 1997, Micrografx's management and board of directors
concluded that Micrografx did not have the critical mass to continue to support
the number of technologies it was pursuing. Micrografx determined that the
greatest future value was in pursuing solutions for the business market and de-
emphasizing the consumer market. While pursuing this change in direction, the
challenge has been to achieve profitability in the face of phasing out
technologies that did not fit into the long-term strategy of Micrografx and
changing the internal infrastructure and employee skill sets to line up with
Micrografx's long-term strategy.
The first significant steps in the strategic change process were:
. The licensing of Micrografx consumer technologies of drawing, greeting
card and consumer image editing to Cendant Software Corporation,
effective June 30, 1998 and
. The assignment of Micrografx's distribution rights for American
Greetings(R), CreataCard(R) Gold(TM) and CreataCard(R) Plus(TM) to The
Learning Company in August of 1998.
These agreements ended Micrografx's development and distribution of these
products and mostly completed Micrografx's de-emphasis of the consumer market
in order to focus on the enterprise process management and business graphics
markets. The combined value of these licensing and assignment agreements was
approximately $21.0 million. The $21.0 million was recognized as technology
licensing revenue in varying amounts from the fourth quarter of 1998 through
the fourth quarter of 1999.
Micrografx is currently concentrating on two areas of business software:
enterprise process management and graphic products.
. The principal enterprise process management products are iGrafx
Professional(TM), iGrafx Process(TM), Micrografx FlowCharter(R) and
Optima(R).
. The principal graphics products are iGrafx Designer(TM), ActiveCGM(TM),
Micrografx Graphics Suite(R), Picture Publisher(R), Simply3D(R),
Webtricity(TM) and OnSwitch(TM), the solution produced by Image2Web.
The underlying technologies provide the opportunity to develop significant
solutions for businesses in addition to licensing the basic technologies to
businesses for general use.
Micrografx was initially organized as a partnership in June 1982 and was
subsequently incorporated in the State of Texas in March 1984. Micrografx's
principal executive offices are located at 8144 Walnut Hill Lane,
78
Suite 1050, Dallas, Texas 75231, and its telephone number is (469) 232-1000.
Micrografx's United States operations are based in Dallas, Texas, with
business units located in Dallas, Texas, Portland, Oregon and Annapolis,
Maryland. International subsidiaries are located in the United Kingdom,
France, Germany, Italy, the Netherlands, Switzerland, Australia and Japan.
Micrografx's Business Strategy and Products
Micrografx develops and markets software tools and solutions that are
targeted toward business needs for enterprise process management and graphics
products. While some of the graphics products applications are written for the
UNIX(R) environment, Micrografx's products are generally designed for PCs and
servers utilizing the Microsoft Windows(R) operating environments, which
include Windows 95, Windows 98, Windows 2000 and Windows NT.
Due to the rapid change in technology related to PCs and competitive market
conditions, Micrografx is continually updating and refining its products. To
keep pace with the market, Micrografx seeks to release new versions of its
products every 18 to 24 months with minor upgrade releases more often.
Significant versions and the release date for English versions of Micrografx's
products are discussed below with the product to which it relates.
Enterprise Process Management Applications
Every business has key processes that can be broken down into smaller
processes, each eventually describing specific activities across the
organization. Enterprise process management tools help management supervise
this key sequence of events and assist the organization to perform at optimal
levels. Micrografx believes that the benefits of enterprise process
management, or EPM, for businesses may include faster time to market with
products, improved cost effectiveness and increased product quality. Today,
most businesses address these issues using a single department or project.
Micrografx believes that while this by-department or by-project methodology
can yield short-term success, it is a self-limiting approach. EPM delves
deeper by providing a disciplined, systematic approach with the potential to
yield greater long-term benefits across departments and functional areas of
the organization.
Micrografx believes that graphical visualization software tools provide the
best way to document and communicate process information, allowing people to
comprehend more information and mentally process more complexity than was
possible before. Sophisticated process management tools--when used to their
fullest potential--can add significant value, extending far beyond electronic
processes. These tools can be used to assess all of the critical factors (such
as cycle times, costs, etc.) tied to each step in any kind of process, and can
reveal ways to make the system faster, more cost-effective, more efficient or
quality oriented, or any combination of these.
Process management is a cycle that occurs in three stages: documentation,
improvement and management.
. Documentation stage of process management. The documentation stage
creates a snapshot of how the business operates today. This stage can
be the most labor-intensive, often requiring a great deal of
information gathering and data entry. The best tools for this stage
make input intuitive and fast. Documentation can be made far more
efficient by drawing the process rather than manually writing out the
process. Also, when the process must be communicated to others,
Micrografx believes that it is far easier for the human mind to
digest and understand the flow of a process when it is presented
visually.
. Improvement stage of process management. The improvement stage
addresses issues such as lowering costs, reducing time-to-market and
improving quality. In some cases, just the act of documentation
identifies obvious inefficiencies that can be easily remedied. Aside
from the obvious process flaws that reveal themselves, however,
process simulation is the cornerstone of process improvement
initiatives. Process simulation tools allow users to enter key
variables and
79
constraints into a process flow, run the simulation, then see where
inefficiencies lie. Simulation also allows for "what-if" analysis to
determine the optimal solution in a process.
. Management stage of process management. Management of all of an
organization's process information is the highest level of
sophistication in process management. Management provides efficient
storage, access and distribution systems across an organization. At
this point, the question is no longer "What is the best process?" but
rather "How can I apply this best process so that it is utilized
across my organization consistently?"
Micrografx provides tools for each stage of the cycle:
. iGrafx(TM) Professional(TM). iGrafx(TM) Professional(TM) provides a
leading-edge technology base for Micrografx's ongoing process
management tool development initiatives. Below the surface, iGrafx
Professional(TM) incorporates one of the industry's most advanced
graphics engines, with superior display and printing technologies
designed specifically for the needs of process management. iGrafx
Professional(TM) creates powerful, interactive diagrams of business
processes, workflow, computer networks, web sites and databases.
iGrafx Professional(TM) is fully extensible via Microsoft's Visual
Basic for Applications, or VBA, for powerful custom solutions and
incorporates iGrafx iShapes(TM) technology. iGrafx Professional(TM)
is the next generation of Micrografx's FlowCharter(R) product. iGrafx
Professional(TM) was released in March 1999 and iGrafx FlowCharter(R)
2000 Professional was released in November 2000.
. iGrafx(TM) Process(TM). iGrafx(TM) Process(TM), an extension of the
iGrafx Professional(TM) technology, is a process management tool that
wraps an easy-to-use interface around a high-end process simulation
engine. iGrafx Process(TM) provides robust modeling and simulation
capabilities for companies striving to improve internal processes. It
is designed to model business processes and perform "what-if"
simulations on most business scenarios, allowing the management team
to analyze and experiment with company processes without directly
impacting the business. Customers are using iGrafx Process(TM) to
communicate about processes, reduce cycle times, eliminate
bottlenecks, understand capacity constraints, re-deploy limited
resources and more. iGrafx Process(TM) is fully extensible via VBA
for powerful custom solutions and incorporates iShapes(TM)
technology. iGrafx Process(TM) is the next generation of Micrografx's
Optima(R) product, which is no longer actively marketed. iGrafx
Process(TM) was released in March 1999 and iGrafx Process(TM) 2000
was released in October 2000.
. iGrafxProcess(TM) Central. iGrafx(TM) Process(TM) Central is a
central repository that integrates with iGrafx Professional(TM) and
iGrafx Process(TM) to give stakeholders "real-time", quick access to
all enterprise process data and saves users time developing
enterprise models by linking and reusing models whenever possible. It
also provides comprehensive repository capabilities such as access
and security control, concurrency control, versioning and
configuration management. iGrafx Process(TM) Central Viewer is
available only with iGrafx Process Central. The freely deployed
iGrafx Process(TM) Central Viewer gives read-only and query access to
iGrafx Process(TM) Central repositories. iGrafx Process(TM) Central
was released in January 2001.
Graphics Products Applications
The graphics products group consists of technical illustration products,
heritage products and digital image processing solutions.
Technical Illustration Products
Businesses are looking for help to increase productivity and profitability
by using the web and related technologies. Micrografx offers standards-based
products and services that enable businesses to leverage valuable investments
in technical graphics like engineering drawings, technical illustrations,
schematics and
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diagrams, and to optimize them for use in innovative web-based applications.
These web-based applications include parts catalogs, technical documentation,
shop-floor viewing and real-time monitoring and control systems. The
transferability and reusability of technical graphics, particularly for
production-oriented businesses, enable the development of web-based product
information systems that span the organization--from the main office to
engineering and from design to the shop floor. This information system is
particularly valuable when businesses use Micrografx's technology to hotspot
graphics and hyperlink to related data, creating "intelligent graphics."
Micrografx has developed the following technical graphics applications:
. Intelligent Graphics Server. Intelligent Graphics Server, or iGS, is a
high performance server specifically designed for creating graphics on
demand or quickly and easily changing existing graphics in high volume
Internet-enabled enterprise applications. iGS is able to merge drawings
with other drawings and with data from external sources such as database
tables or flat files. Some of the intended uses for iGS include:
. illustrated parts catalogs;
. interactive electronic technical manuals, computer-based training;
. real-time monitoring and control systems; and
. geographical information system applications.
iGS was released in May 2000.
. iGrafx Designer(TM). iGrafx Designer(TM) is the technical graphics
solution that bridges the gap between computer aided design, or CAD, and
camera-ready. It provides a rich graphical tool set that supports an
incredibly diverse range of file types, including many UNIX(R)-based
CAD/CAM systems. Engineering departments and technical publishers alike
can take advantage of iGrafx Designer's(TM) powerful, flexible
functionality to create rich, presentation-quality graphics that can be
easily utilized in Microsoft Office documents, presentations, web and
intranet pages and much more. With leading edge, full-featured tools for
image editing and three dimension, iGrafx Designer(TM) is a complete
graphics solution designed for the exacting needs of today's designers
and technical graphics users. iGrafx Designer(TM) is the next generation
of Micrografx's Designer(R) product, which is no longer actively
marketed. iGrafx Designer(TM) was released in June 1999.
. ActiveCGM(TM)Publishing Suite. ActiveCGM(TM) Publishing Suite lets users
create, view and add hyperlinks and animation to technical graphics.
ActiveCGM(TM) allows attribute information to be linked to graphics
components. Using ActiveCGM(TM) and HTML, the text markup language for
the web, authors can easily create high-quality, interactive graphics-
driven documents that are compact and efficient for Internet
distribution. The suite is comprised of ActiveCGM(TM) Author,
ActiveCGM(TM) Runtime, ActiveCGM(TM) Browser and VP-Active and is based
on a native implementation of CGM. It is the first standards-based
software suite designed to support the creation and delivery of
intelligent graphics on the web. ActiveCGM(TM) was obtained from
Intergraph Corporation with the purchase of InterCAP in April 1999 and
ActiveCGM(TM) version 7 was released in March 2000.
. Illustrator2 and Mondello. Illustrator2 and Mondello are for
professional technical illustrators working in manufacturing, aerospace,
defense, electronics and heavy equipment industries. They provide the
missing link in computer-aided publishing by replacing the drawing board
and automating the graphics segment of the publishing process. These
products help professional illustrators create, edit and manage high-
quality artwork containing raster images, continuous-tone images and
vector line art. Illustrator2 is for a UNIX based platform while
Mondello is for Windows NT and both were obtained from Intergraph with
the purchase of InterCAP in April 1999.
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Heritage Products
Micrografx also has the following graphics tools:
. Graphics Suite(R). Graphics Suite(R) is a suite of four software
applications: Picture Publisher(R), Simply3D(R), Designer(R) and
FlowCharter(R). Graphics Suite(R) 2 Enterprise was released in December
1997.
. Picture Publisher(R). Picture Publisher(R), the long-time leader in
easy-to-use, yet powerful, full-featured image editing, also provides
full functionality for creating compelling web pages. Picture
Publisher(R) contains 10,000 stock photos and clip art images, 500
seamless Internet textures, 250 TrueType(TM) fonts, as well as effects,
filters, creative macros, templates, interactive wizards and on-line
tutorials. Picture Publisher(R) 8 was released in February 1998.
. Simply3D(R). Simply3D(R), an innovative, intuitive tool, takes 3D
technical power from simple logos to complex, micron-accurate technical
illustrations, with rendering and animation easy enough for the
occasional user. Simply3D(R) allows the user to create professional-
quality 3D text, web graphics and animations for all kinds of projects,
including web sites, print, video, multimedia and even interactive 3D
scenes for Microsoft PowerPoint(R) presentations. Simply3D(R) contains
1,000 3D drag-and-drop objects and 800 professional-quality textures as
well as many lighting setups, animations and deformations. Simply3D(R) 3
was released in February 1998.
. Webtricity(TM). Webtricity(TM) is a suite of three powerful,
professional-level applications that give users the ability to make
compelling graphics and animation for the web. The suite includes
Picture Publisher(R), Simply3D(R), Draw 6 and Media Manager(R).
Webtricity(TM) 2 was released in May 1998.
Digital Image Processing
Micrografx believes that currently, the delivery of product content for e-
commerce is inefficient and labor intensive. Product images and their related
meta-data are being transformed with minimal automation. The data that relates
to the image is often disconnected or misplaced so that even the most basic
information such as product description, list price, sale price, model number
of stock keeping unit, or SKU, may not be available in a timely, efficient
manner or may not match up with the delivery of the product image to the web
site. Micrografx believes that the cost and complexity in managing this e-
commerce product data prevents sites from offering their visitors the minimum
necessary experience to fully portray their wares and effectively engage in e-
commerce.
OnSwitch(TM), the initial solution of Micrografx's wholly owned Image2Web
subsidiary, automates the lengthy and complex processes required to prepare,
maintain and personalize product information for e-commerce. OnSwitch(TM)
focuses on all the product information that is needed for e-commerce with a
special focus on product imagery. Through OnSwitch(TM), customers' sites are
supported by an open connectivity platform that can automatically acquire,
aggregate, analyze, transform and publish all image and related product data
required to successfully present a product offering on the web, while
drastically reducing the time and overhead costs involved.
Solutions Consulting
In order to address specific customer needs, Micrografx has solutions
consulting groups to assist the enterprise process management and graphics
products business units. During the selling process, if it is determined that a
customer needs functionality beyond that of the current applications, the
solutions consulting groups will provide a means to meet the customer's
requirements. In the enterprise process management area, the solution generally
involves VBA coding in the iGrafx Development application, which was created
specifically for this purpose. In the graphics products area, modifications are
generally made to the existing product to satisfy the customer need. These
groups are comprised of highly specialized engineers, software developers and
technical graphics artists . These consultative teams deliver innovative
process, web and
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e-commerce-based solutions to businesses who want to use the Internet and
related technologies for competitive advantage. Micrografx packages standards-
based technology with industry best practices through customization of its
applications often with other custom or off-the-shelf software tools. Whether
acting as the project lead or as part of a multi-vendor partnership, Micrografx
believes that its flexibility, adaptability and proven methodology empowers
organizations to maximize their solutions investments.
Micrografx's Localization
Micrografx localizes its business products for distribution in foreign
countries by translating user interfaces, packaging and marketing materials and
product documentation. Most of Micrografx's products have been localized into
various languages, including German, French, Japanese, Italian and Spanish.
Micrografx's Marketing and Distribution
Micrografx has sales organizations in most of the major markets of the
world, including the United States, Germany, France, the United Kingdom, Italy,
Switzerland, Australia and Japan. In addition, Micrografx has agents in the
Netherlands, Denmark, Switzerland, Spain and Poland. In 2001, approximately 53%
of Micrografx's revenues were generated outside the United States, with
approximately 45% from Europe and approximately 8% from Asia Pacific.
Micrografx typically operates with very little backlog of unshipped orders
because it can ship products within a few days of receipt of a purchase order.
Micrografx distributes its products through the following channels: corporate
sales force, distributors and resellers, direct to end users and through OEMs.
Corporate sales force. Micrografx has corporate sales representatives
located in its offices in the United States as well as in Germany, France, the
United Kingdom, Italy, the Netherlands, Australia, Japan, Denmark, Switzerland,
Spain and Poland. The direct sales organization consists of regionally based
sales representatives. Sales made by the corporate sales force are often
fulfilled through the distributor and reseller channels.
Distributors and resellers. Micrografx also markets its products through
independent, non-exclusive distributors and resellers located in approximately
35 countries around the world. Distributors include Computer 2000, Ingram Micro
and Tech Data Corporation. Resellers include Corporate Software, Inc., Gruber
Consultrade, MicroCenter, Inc., Snapp LLC and Softmart, Inc. In fiscal 2001,
Micrografx's sales to Ingram Micro accounted for 13% of its net revenues, while
no other customer accounted for more than 10% of its net revenues. In fiscal
2000, Micrografx's sales to Ingram Micro accounted for 15% of its net revenues,
while no other customer accounted for more than 10% of its net revenues.
Micrografx offers sales incentives, training, technical support and promotional
aids to some resellers. Micrografx has distributorship agreements with all
distributors and resellers. These agreements are cancelable by either party
with specified prior written notice, and none of these agreements contain
minimum or required purchase commitments by the distributor or reseller.
Direct sales to end-users. Micrografx promotes its products through direct
marketing techniques designed to reach existing and potential customers. These
techniques include "one-on-many" seminars and trade show events. Micrografx
uses third-party fulfillment companies located in the United States, Europe and
Japan to get products to the end users.
OEMs. Micrografx licenses some of its products to OEMs under agreements that
give the OEMs the right to distribute copies of Micrografx's products with the
OEM's equipment or software, typically PCs, printers, scanners and other
corporate software solutions. During fiscal 2001, Micrografx had OEM agreements
with companies including Gerber Garmet Technology, Inc., Honeywell, Inc.,
Matrox Graphics and Siemens Building Technologies, Inc.
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Promotion and Advertising
Micrografx's marketing organization is responsible for worldwide product
marketing, planning, positioning, market strategy and communicating marketing
plans to Micrografx's sales offices. Local personnel in each sales territory
develop the marketing mix by coordinating media placement, direct mail, public
relations and channel sales management. Micrografx uses outside agencies to
develop the following:
. marketing literature;
. advertisements;
. brochures;
. demonstration diskettes; and
. packaging.
Micrografx also uses outside public relations agencies.
Micrografx routinely conducts promotions with resellers, distributors, OEMs
and major customers in an effort to increase sales of its products. On a
limited basis, Micrografx advertises in the PC industry trade press and other
business publications. To build awareness, Micrografx offers trial and preview
versions with some of its software products and participates in industry trade
events.
Product Support
Micrografx offers technical support to its customers through the telephone
or the Internet. Technical support is provided for a fee on either a pay-per-
incident plan paid by credit card charge or through a pre-purchased annual
support plan. Technical support business hours are from 8:00 a.m. to 6:00 p.m.
Dallas, Texas time, Monday through Friday in the United States. Internet
support is provided 24 hours a day, 7 days per week via support databases, user
forums or downloadable files. Micrografx has product support internally for
North American customers and generally outsources these activities to
independent, third party service providers in Europe, Japan and Australia.
Product Development
Micrografx has a continuing program of product development directed toward
the enhancement of existing products based on current and anticipated customer
needs. Micrografx's research and product development effort also emphasizes
introduction of new products to broaden Micrografx's product line and to reach
larger segments of the market.
Competition
The PC graphics software market is highly competitive. Micrografx's
competitors include many independent applications software vendors, such as
Microsoft, Adobe and Macromedia, Inc. The primary competitor for Micrografx's
enterprise process management products is Microsoft's Visio product; and the
primary competitors for the Micrografx's technical graphics products are
Autotrol, Macromedia, Inc., Enigma, Inc., Adobe and ITEDO Software.
Most of the Micrografx's competitors, as well as a number of potential
competitors, have larger technical staffs, more established and larger
marketing and sales organizations and significantly greater financial resources
than Micrografx. Micrografx's competitors could develop products that are
superior to Micrografx's applications software products or that will achieve
greater market acceptance. This could result in reduced sales of Micrografx's
applications software products.
Micrografx believes that the principal competitive factors in Micrografx's
market include:
. customer demand;
84
. product capabilities;
. ability to extend product to meet specific customer needs;
. ease of understanding and operating the software;
. product reliability;
. price/performance characteristics;
. name recognition; and
. availability and quality of support services.
Micrografx believes that its products currently compete favorably with
respect to these factors.
Product Protection
Micrografx attempts to protect its ownership rights in its software products
with patents, trademarks, copyrights, trade secret laws and nondisclosure
safeguards, as well as contractual restrictions on copying, disclosure and
transferability that are incorporated into its software license agreements.
Despite these restrictions, it may be possible for competitors or users to copy
aspects of Micrografx's products to obtain information that Micrografx regards
as proprietary. Existing laws protecting intellectual property are helpful but
imperfect aids in preventing unauthorized copying and use of Micrografx's
products. Monitoring and identifying unauthorized copying and use of software
can be difficult, and software piracy is a persistent problem for the software
industry.
Micrografx believes that because of the rapid technological change in the
computer software industry, trade secret and copyright protection are less
significant than other competitive factors such as the knowledge, ability and
experience of Micrografx's personnel, name recognition and ongoing product
innovation.
Trademarks
Micrografx, the Micrografx logo, Image2Web, Picture Publisher(R),
PhotoMagic, Optima(R), Micrografx FlowCharter(R), NetworkCharter(TM),
Micrografx Graphics Suite(R), Micrografx Designer(R), Simply 3D(R) and Instant
3D are registered trademarks of Micrografx. iGrafx, iGrids, Webtricity(TM),
Small Business Graphics and Print Studio, Micrografx Media Manager(R) and ABC
ToolKit are trademarks of Micrografx. American Greetings(R), CreataCard(R)
Gold(TM) and CreataCard(R) Plus(TM) are either registered trademarks or
trademarks of American Greetings Corporation. Microsoft, Windows and Windows
Draw(R) are either registered trademarks or trademarks of Microsoft Corporation
in the United States and/or other countries. All other products are trademarks
or registered trademarks of their respective holders.
Manufacturing
Micrografx assembles its products in the United States and the Netherlands.
The principal materials and components used in its products include disks,
books, other printed material and packaging. Micrografx outsources a major
portion of its manufacturing activity to third parties, including disk
duplication and product assembly. Micrografx has multiple sources of raw
materials, supplies and components and it does not currently anticipate
difficulty in securing the raw materials required for its operations.
Micrografx's Employees
As of June 30, 2001, Micrografx has 189 employees, of which 37 persons are
in product development, 103 persons are in sales, marketing and customer
support and 49 persons are in finance, operations and administration.
Micrografx's continued success is dependent in part on its ability to attract
and retain qualified employees. Competition for employees in the software
industry is intense. Micrografx believes that it has been
85
successful in its efforts to recruit and retain highly qualified employees. No
employee of Micrografx is covered by a collective bargaining agreement.
Micrografx believes that its relations with its employees are good.
Micrografx Properties
Micrografx's headquarters are located in Dallas, Texas. The leased space is
used for sales and marketing, operations and administration. Micrografx
outsources its United States production to a Dallas, Texas based company.
Micrografx currently leases office space for development and sales offices in
Portland, Oregon and Annapolis, Maryland; and international sales offices in
Woking, the United Kingdom; Paris, France; Munich, Germany; Chatswood,
Australia; and Tokyo, Japan; and has a production control office in Venlo, the
Netherlands. Micrografx believes that all of its properties, together with the
related machinery and equipment located at each property, are well maintained,
in good operating condition and are suitable and adequate for its present and
foreseeable future needs.
Legal Proceedings
Micrografx is party to various legal proceedings arising from the normal
course of business activities, none of which, in the opinion of Micrografx's
management, is expected to have a material adverse impact on Micrografx's
business, results of operations or its financial position.
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MICROGRAFX MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Micrografx's consolidated financial statements and the related notes appearing
elsewhere in this prospectus/proxy statement.
Overview
Micrografx develops and markets graphics software for business use in the
areas of process management, technical illustration, business diagramming and
digital image processing. Additionally, Micrografx supports the business use of
its technology through consulting, training and development services.
Historically, Micrografx has developed a variety of graphics oriented
software products. These products included various technologies such as image
editing, three dimensional object rendering, basic drawing tools for both the
consumer and corporate markets, greeting card software for the personal
creativity market, flowcharting, process simulation and technical drawing. In
fiscal year 1997, management and the board of directors of Micrografx concluded
that Micrografx did not have the critical mass to continue to support the
number of technologies it was pursuing. As a result, several changes were made
in the management team and structure of Micrografx. In 1997, the new management
team began the process of determining which technologies Micrografx should
pursue as part of its long-term strategy. It was determined that the greatest
potential value was in pursuing solutions for the corporate market and to de-
emphasize the consumer market. While pursuing this change in direction, the
challenge has been to achieve profitability in the face of phasing out
technologies that did not fit into the long-term strategy of Micrografx and
changing the internal infrastructure and employee skill sets to line up with
Micrografx's long-term strategy.
The first significant steps in the strategic change process were the
licensing of Micrografx consumer technologies: drawing, greeting card and
consumer image editing were licensed to Cendant Software Corporation effective
June 30, 1998 and distribution rights for American Greetings(R), CreataCard(R)
Gold(TM) and CreataCard(R) Plus(TM) were assigned to The Learning Company in
August of 1998. These agreements ended Micrografx's development and
distribution of these products and mostly completed its de-emphasis of the
consumer market in order to focus on the enterprise process management and
technical graphics markets. The combined value of these licensing and
assignment agreements was approximately $21.0 million. The $21.0 million was
recognized as technology licensing revenue in varying amounts from the fourth
quarter of 1998 through the fourth quarter of 1999.
The management of Micrografx is currently concentrating on two areas of
corporate software: enterprise process management and graphics products. The
principal enterprise process management products are iGrafx Professional(TM),
iGrafx Process(TM), Micrografx FlowCharter(R) and Optima(R). The principal
graphics products are iGrafx Designer(TM), ActiveCGM(TM), Micrografx Graphics
Suite(R), Picture Publisher(R), Simply3D(R), Webtricity(TM) and OnSwitch(TM),
the solution produced by Image2Web. The underlying technologies provide the
opportunity to develop significant solutions for corporations in addition to
licensing the basic technologies to corporations for general use.
Micrografx was initially organized as a partnership in June 1982 and was
subsequently incorporated in the State of Texas in March 1984. The principal
executive offices of Micrografx are located at 8144 Walnut Hill Lane, Suite
1050, Dallas, Texas, 75231 and its telephone number is (469) 232-1000.
Micrografx's United States operations are based in Dallas, Texas, with business
units located in Dallas, Texas, Portland, Oregon and Annapolis, Maryland.
International subsidiaries are located in the United Kingdom, France, Germany,
Italy, the Netherlands, Switzerland, Australia and Japan.
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Delisting of Micrografx Common Stock
On April 27, 2001, Micrografx received notification from the Nasdaq Listing
Qualifications Panel that the Micrografx common stock would not continue to be
listed on the Nasdaq National Market due to Micrografx's failure to meet all of
the requirements for listing on the Nasdaq National Market. Micrografx was
first contacted with a Nasdaq Staff Determination letter, dated October 17,
2000, stating that Micrografx was not in compliance with the minimum $4.0
million net tangible assets requirement. Micrografx appealed the Nasdaq Staff
Determination and was granted an exception by Nasdaq whereby Micrografx had to
demonstrate a closing bid price of at least $1.00 per share for a minimum of
ten consecutive trading days and meet the minimum net tangible asset
requirement by May 15, 2001. On April 27, 2001, Micrografx received a Nasdaq
Staff Determination letter stating that Micrografx was unable to satisfy the
requirements of the exception and, as a result, effective April 30, 2001, the
Micrografx common stock commenced trading on the over-the-counter bulletin
board. Micrografx appealed the decision to the Nasdaq Listing and Hearing
Review Council. On July 25, 2001, the Review Council informed Micrografx that
it was reversing the earlier decision to delist Micrografx from the Nasdaq
National Market. The decision, which is subject to review by the NASD Board of
Governors, allows Micrografx until October 23, 2001 to demonstrate a minimum of
$4.0 million in net tangible assets or $10.0 million in shareholder's equity.
In addition, Micrografx must comply with all requirements for continued listing
on the Nasdaq National Market and successfully complete an application and
review process. Upon compliance with these requirements, Micrografx will be
relisted on the Nasdaq National Market
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship to net revenues of some items in the consolidated statements of
operations of Micrografx. The table excludes technology revenues recognized in
fiscal year 1999 relating to the licensing of Micrografx consumer technology to
Cendant Software Corporation and to The Learning Company. Technology revenues
were excluded from this table as the management of Micrografx believes that
including these revenues would not be indicative of Micrografx's ongoing
operations. Historical results and percentage relationships are not necessarily
indicative of operating results for any future period.
Years Ended
June 30,
----------------
2001 2000 1999
---- ----- -----
Net revenues................................................... 100% 100% 100%
Cost of revenues............................................... 20% 25% 28%
Gross profit................................................... 80% 75% 72%
Operating expenses:
Sales and marketing.......................................... 52% 65% 84%
General and administrative................................... 15% 20% 17%
Research and development..................................... 14% 21% 21%
In-process research and development charge................... -- -- 5%
Write down of long-lived assets.............................. -- 22% --
Restructuring charges........................................ (1)% 5% --
Total operating expenses....................................... 80% 133% 127%
Loss from operations........................................... 0% (58)% (55)%
Non operating (income) expense................................. 4% 2% (2)%
Loss before income taxes....................................... (4)% (60)% (53)%
Income taxes................................................... 1% 1% 8%
Net loss....................................................... (5)% (61)% (61)%
Fiscal 2001 Compared to Fiscal 2000
Net Revenues
Micrografx previously had viewed revenues in three principal categories:
enterprise process management, technical graphics and heritage products. During
the third quarter of fiscal 2001, Micrografx began to further
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refine its business model to bring more focus to core businesses. To that end,
the technical graphics and heritage product groups were combined into a single
organization known as the graphics products group.
The following table sets forth, for the periods indicated, net revenues (in
thousands) by product category and the percentage relationship to total net
revenues. The enterprise process management category includes iGrafx
Professional(TM), iGrafx Process(TM), Micrografx FlowCharter(R), Optima(R) and
related products. The graphics products group category includes Micrografx
Designer(R), iGrafx Designer(TM), the ActiveCGM(TM) products and related
products, as well as what was previously the heritage products and other
category which includes Micrografx Graphics Suite(R), iGrafx Business(TM),
NetworkCharter(TM), Picture Publisher(R), Simply3D(R), Webtricity(TM) and
OnSwitch(TM), the solution produced by Image2Web.
Years Ended June 30,
------------------------
2001 % 2000 %
------- --- ------- ---
Enterprise Process Management...................... $15,363 51% $15,363 42%
Graphics Products Group............................ 14,808 49% 20,910 58%
------- --- ------- ---
Total net revenues................................. $30,171 100% $36,273 100%
======= === ======= ===
Enterprise Process Management Revenues
Enterprise process management, or EPM, revenues were unchanged in fiscal
year 2001 from fiscal 2000 because revenues from the increase in sales of
iGrafx Professional(TM) and iGrafx Process(TM) offset the decline in sales of
FlowCharter(R). Management believes that its EPM related revenue base may
continue to grow in the future as more companies adopt business process and
quality related programs such as Six Sigma(TM) (Six Sigma(TM) is a trademark of
Motorola, Inc.). Management also believes that it may be able to expand the
scope of process related activities addressed by its software products (e.g.,
ISO compliance, Activity Based Costing, etc.) and is evaluating marketing
opportunities such as co-marketing arrangements, joint ventures, partnerships,
joint development agreements and OEM arrangements with other companies.
Management believes that recent agreements with Six Sigma Academy and other
premier "Six Sigma" consulting firms evidence the market opportunities and the
value-added nature of Micrografx products. Companies such as Ford Motor
Company, Dupont, Toshiba and Ernst & Young have adopted Micrografx's products
for use in Six Sigma(TM) applications.
Upgraded versions of iGrafx Professional(TM) (re-named iGrafx FlowCharter(R)
2000 Professional to capitalize on the historically strong brand identity of
the FlowCharter(R) name) and iGrafx Process (re-named iGrafx Process(TM) 2000)
were released at the end of the second quarter of fiscal 2001. Additionally,
two new products, iGrafx Process(TM) for Six Sigma(TM) and iGrafx Process(TM)
Central, also were released at the end of the second quarter of fiscal 2001.
Management expects all of these products to contribute to revenue growth in the
near term.
Graphics Products Group Revenues
The graphics products group consists of technical illustration products,
heritage products and digital image processing solutions.
Revenues from the technical illustration sub-category of graphics products
were lower in fiscal 2001 than in fiscal 2000 primarily because sales of iGrafx
Designer(TM) and Micrografx's Active CGM(TM) products have declined. The
version of iGrafx Designer(TM) that was sold during most of fiscal 2001 was
released in the fourth quarter of fiscal 1999, with localized versions released
in the following quarter. As is typical in the software industry, sales of
iGrafx Designer(TM) increased significantly on the new release, peaked in the
second quarter of fiscal 2000 and have declined slowly since. Micrografx
released a new version of the Designer(TM) product in the fourth quarter of
fiscal 2001. Management expects the current version of the Designer(TM) product
to follow a trend similar to the prior version. Sales of ActiveCGM(TM) products
have declined due to a reallocation of sales resources from these products to
the Designer(R) products.
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Revenues declined in the heritage product sub-category of graphics products
because of the change in strategic direction from the consumer market to the
enterprise market. The largest decline has been in the Graphics Suite(R)
product line. As in the case of iGrafx Designer(TM), no new version of this
product has been released in several years. Micrografx plans a new release of
Graphics Suite(R) during the first half of the next fiscal year. Micrografx
also experienced revenue declines from products such as Windows Draw(R) which
were subject to OEM agreements in place prior to the Cendant Software
Corporation and The Learning Company agreements, which ended Micrografx's
development and distribution of these products. Most of the OEM arrangements
expired during fiscal years 1999 and 2000. Lastly, revenues from retail
products such as Picture Publisher(R), Webtricity(TM) and Simply3D(R) have
declined as Micrografx's investment in the retail channel has been reduced.
Micrografx plans to release a new version of Picture Publisher(R) during the
first quarter of fiscal 2002 to capitalize on the interest in digital
photography.
Revenues from OnSwitch, Image2Web solution in the digital image processing
sub-category of graphics products, were not material in either fiscal year 2001
or fiscal year 2000.
The following table sets forth, for the periods indicated, net revenues (in
thousands) by geographic region and as a percentage of total revenues:
Years Ended June 30,
------------------------
2001 % 2000 %
------- --- ------- ---
Americas........................................... $14,339 47% $14,143 39%
Europe............................................. 13,547 45% 18,847 52%
Asia Pacific....................................... 2,285 8% 3,283 9%
------- --- ------- ---
Total net revenues................................. $30,171 100% $36,273 100%
======= === ======= ===
Americas revenue is comparatively unchanged as the increase in enterprise
process management sales offset the decline in graphics products. The decline
in European revenues was primarily the result of a decline in Graphics Suite(R)
revenues and declines in other product versions significantly past the height
of the product revenue cycle. European revenues also were negatively impacted
by foreign currency exchanges rates. If exchange rates had not changed from
their fiscal 2000 levels, European revenues would have been approximately 10%
higher for fiscal year 2001. The Asia Pacific decline resulted as sales of
iGrafx Designer(TM), Graphics Suite(R) and other graphics products have
declined. Management believes international revenues may improve as Micrografx
places more emphasis on its products with strong brand identity, leveraging the
FlowCharter(R), Designer and Picture Publisher(R) names.
Cost of Revenues and Gross Profit
Cost of revenues for fiscal year 2001 were approximately $6.0 million, or
20% of net revenues, compared to $9.2 million, or 25% of net revenues, for
fiscal year 2000. Cost of revenues includes the direct cost of the products
manufactured (typically CD-ROMs, manuals and boxes), external royalties and the
amortization of capitalized software and acquired product rights. Micrografx
made the determination in fiscal 2001 that certain consulting and training
costs should be categorized as cost of revenues. These costs were previously
reported as sales and marketing operating costs. All periods presented have
been restated to conform to the current year presentation. The decline in cost
of revenues percentage is reflective of a rising average sales price and, to a
lesser extent, a lower cost of revenues resulting from the transition to
selling to corporate customers. Corporations generally purchase multi-user
licenses that require the delivery of only a few CDs and manuals rather than a
complete boxed software product including CDs and manuals for each user.
Sales and Marketing Expense
Sales and marketing expenses declined to approximately $16.0 million, or 53%
of net revenues in fiscal year 2001, compared to $23.5 million, or 65% of net
revenues in fiscal year 2000. The reduction in selling
90
costs resulted primarily from a reduced direct sales force in the United
States, curtailed spending for variable marketing costs, particularly in
Europe, and generally tighter spending controls throughout Micrografx's
worldwide sales organization. Micrografx believes that a continued greater
focus on core businesses by the sales and marketing organization and the
resulting efficiencies in reaching the customer will continue to result in a
decline in this expense category as a percentage of revenues through the middle
of its next fiscal year.
General and Administrative Expense
General and administrative expenses for fiscal year 2001 were approximately
$4.4 million, or 15% of net revenues, compared to $7.3 million, or 20% of net
revenues, for fiscal year 2000. The decrease in general and administrative
costs is primarily due to the corporate restructuring and reduction in
workforce that occurred on June 30, 2000, whereby Micrografx reduced its United
States workforce by approximately 40%. The reduction is partially offset by
$650,000 in legal and other professional fees accrued in connection with the
merger. Micrografx expects general and administrative costs to decline as a
percentage of sales for the near term.
Research and Development Expense
Research and development expenses include compensation, benefits and
incentives paid to developers. In accordance with Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," Micrografx capitalizes some software development
costs incurred after technological feasibility is achieved. These costs are
amortized over the estimated economic life of the products. Historically,
Micrografx estimated the economic life of the products to be from 12 to 18
months, which is consistent with a consumer software model. With the change in
strategy to a corporate software provider, Micrografx now estimates the
economic life of the corporate software to be approximately 48 months. The
longer economic life was implemented with the release of iGrafx
Professional(TM), iGrafx Process(TM) and iGrafx Designer(TM). No adjustments
were made to the amortization rate of any previously released software, which
had lives ranging from 12 to 18 months. Amortization of capitalized software
development costs is included in cost of revenues.
Net research and development expenses for fiscal year 2001 were
approximately $4.2 million, or 14% of net revenues, compared to $7.4 million,
or 21% of net revenues, for fiscal year 2000. Gross research and development
expenses, before capitalization, for fiscal year 2001, were $6.2 million, or
20% of net revenues, compared to $10.2 million, or 28% of net revenues, for
fiscal year 2000. Gross research and development spending has declined as a
result of the corporate restructuring and reduction in workforce that occurred
on June 30, 2000 and Micrografx's development of fewer products, all focused on
corporate customers. Micrografx expects research and development costs to rise
as a percentage of sales as sales, marketing and general and administrative
costs decline as a percentage of sales. During fiscal year 2001, Micrografx
capitalized approximately $2.0 million in software development costs and
amortized approximately $1.8 million in software development costs. This
compares to capitalization of $2.8 million and amortization of approximately
$2.4 million in fiscal year 2000.
Effect of Exchange Rates
Micrografx's operating results are affected by changes in foreign currency
exchange rates. These variations result from the change in exchange rates of
European currencies and the Japanese yen versus the United States dollar.
Exchange rates during fiscal 2001 have had an unfavorable impact on net
revenues reported by Micrografx. If exchange rates had not changed from their
fiscal 2000 levels, Micrografx would have reported approximately $1.5 million
more in net revenues for fiscal year 2001. Additionally, the loss from
operations would have been decreased by $623,000 for fiscal year 2001. Because
European manufacturing costs and European and Japanese operating expenses also
are incurred in those local currencies, the impact of exchange rates on net
loss is less than on revenues.
91
Micrografx has historically entered into foreign exchange contracts to hedge
against some exposure to changes in foreign currency exchange rates. This
exposure results from foreign operations of Micrografx in countries including
Germany, France, the United Kingdom, the Netherlands and Japan that are
denominated in currencies other than the United States dollar. As of June 30,
2001, Micrografx has no foreign exchange contracts outstanding.
Non-operating (Income) Expense
Non-operating (income) expense includes interest income, interest expense
and other (income) expense. Other (income) expense, net includes the gain or
loss resulting from revaluation of receivables and payables denominated in
foreign currency and gains or losses when receivables and payables denominated
in foreign currency are settled.
For fiscal year 2001, interest income was relatively unchanged compared with
the fiscal year 2000. Interest expense of approximately $863,000 resulted
primarily from the convertible debenture to Intergraph and Micrografx's
receivable facility. Changes in exchange rates resulted in a loss of
approximately $467,000 for fiscal year 2001 compared to a loss of approximately
$106,000 for fiscal year 2000. The exchange rate loss is primarily a result of
the Japanese yen and the European currencies weakening to the United States
dollar.
Income Taxes
Pursuant to the requirements of SFAS 109, a valuation allowance must be
provided when it is more likely than not that deferred tax assets will not be
realized. Based on the fact that Micrografx has a cumulative net operating loss
for the prior three years and there are no prior tax payments that could be
refunded, it is Micrografx's belief that the realization of the deferred tax
assets in the near term is remote. As a result of the previous operating
losses, Micrografx did not recognize a tax benefit on the net loss for fiscal
year 2000 or fiscal year 2001. Micrografx did record a tax provision resulting
from taxes due in international subsidiaries.
Fiscal 2000 Compared to Fiscal 1999
Net Revenues
As previously stated, in fiscal 2001 Micrografx refined its business model.
To that end, the fiscal 2000 and 1999 net revenue information has been restated
to reflect Micrografx's two primary revenue categories. The following table
sets forth, for the periods indicated, net revenues (in thousands) by product
category and the percentage relationship to total net revenues. The enterprise
process management category includes iGrafx Professional(TM), iGrafx
Process(TM), Micrografx FlowCharter(R), Optima(R) and related products. The
graphics products group category includes Micrografx Designer(R), iGrafx
Designer(TM), the ActiveCGM(TM) products and related products, as well as what
was previously the heritage products and other category which included
Micrografx Graphics Suite(R) American Greetings(R) CreataCard(R) Plus(TM),
American Greetings(R) CreataCard(R) Gold(TM), iGrafx Business(TM),
NetworkCharter(TM), Picture Publisher(R), Simply3D(R), Webtricity(TM), Windows
Draw(R), Simply3D(R)(TM), Picture Publisher(R) and OnSwitch(TM), the solution
produced by Image2Web.
The technology category results from Micrografx's use of its library of
graphics software in selective licensing. For fiscal 1999, this category
consisted of the licensing of some personal creativity software source code to
Cendant Software Corporation and The Learning Company.
Years Ended June 30,
------------------------
2000 % 1999 %
------- ---- ------- ---
Enterprise Process Management...................... $15,363 42% $15,182 27%
Graphics Products Group............................ 20,910 58% 23,805 42%
Technology......................................... -- -- 17,975 31%
------- ---- ------- ---
Total revenues..................................... $36,273 100% $56,962 100%
======= ==== ======= ===
92
Enterprise Process Management Revenues
Enterprise process management, or EPM, revenues were up slightly as the
increase in sales of iGrafx Professional(TM) and iGrafx Process(TM) more than
offset the declining revenues from FlowCharter(R). Revenues from past versions
of FlowCharter(R) represent approximately one-half of total EPM revenues,
demonstrating the strong brand identity that FlowCharter(R) has developed.
Graphics Product Group Revenues
The decline in the graphics products group revenues was the result of
Micrografx's change in strategic direction. The largest decline resulted from
the decreased emphasis on general desktop diagramming and drawing tools such as
Graphics Suite(R) and iGrafx Business(TM). Micrografx also experienced
significant revenue declines from products such as CreataCard(R) and Windows
Draw(R) as OEM agreements in place prior to the Cendant Software Corporation
and The Learning Company agreements expired during fiscal years 1999 and 2000.
Lastly, revenues from retail products such as Picture Publisher(R),
Webtricity(TM) and Simply3D(R) have declined as Micrografx's importance in
retail channels has declined.
These declines were partially offset by a substantial increase in revenue
for new technical illustration product offerings. The largest increase resulted
from the release of iGrafx Designer(TM) in international markets. iGrafx
Designer(TM) is the upgrade to Micrografx Designer(R) version 7 and was
released in English markets in the fourth quarter of fiscal 1999. The localized
versions (German, French and Japanese in particular) were released in early
fiscal 2000. iGrafx Designer(TM) has a loyal installed base and there had been
a longer than usual amount of time between versions, resulting in a high level
of demand for the upgraded product, particularly in international markets.
Also, Micrografx had an increase in revenue from its InterCAP products.
Micrografx acquired InterCAP in mid-April 1999, resulting in less than a full
quarter's worth of revenue in fiscal 1999. Micrografx did grow InterCAP
revenues from the fiscal 1999 run rates, but the majority of the InterCAP
growth resulted from having a complete year of operations included in
Micrografx results.
Revenues from OnSwitch(TM), Image2Web solution in the digital image
processing sub-category of graphics products, were not material in fiscal year
2000 and the solution was not available in 1999.
Technology Revenues
The technology category also contains revenue recognized related to the
previously discussed Cendant Software Corporation and The Learning Company
relationships. As of June 30, 1999, all revenue related to these transactions
has been recognized. Micrografx continues to seek other licensing relationships
in order to leverage its portfolio of technologies, however, there can be no
assurance that it will be able to enter into licensing relationships in the
future.
The following table sets forth, for the periods indicated, net revenues (in
thousands) by geographic region and as a percentage of total revenues:
Years Ended June 30,
------------------------
2000 % 1999 %
------- --- ------- ---
Americas........................................... $14,143 39% $34,695 61%
Europe............................................. 18,847 52% 19,153 34%
Asia Pacific....................................... 3,283 9% 3,114 5%
------- --- ------- ---
Total net revenues................................. $36,273 100% $56,962 100%
======= === ======= ===
93
The following table sets forth, for the periods indicated, net revenues (in
thousands) by geographic region and as a percentage of revenues, excluding the
technology and heritage revenues:
Years Ended June 30,
------------------------
2000 % 1999 %
------- --- ------- ---
Americas........................................... $10,457 41% $ 8,109 46%
Europe............................................. 12,427 49% 8,147 46%
Asia Pacific....................................... 2,424 10% 1,463 8%
------- --- ------- ---
Total net revenues................................. $25,308 100% $17,719 100%
======= === ======= ===
Revenues increased from fiscal 1999 to fiscal 2000 in all regions when
technology and heritage revenues are excluded. The increase in Americas
revenues resulted from the acquisition of InterCAP, as the majority of
InterCAP's customers are in the United States. The increases in Europe and
Japan were driven mostly by the upgrades to the new version of iGrafx
Designer(TM).
Cost of Revenues and Gross Profit
Cost of revenues includes the cost of documentation, diskettes or compact
disks, or CDs, packaging and production overhead; amortization of capitalized
software development costs and acquired product rights and technology
royalties. Excluding technology licensing revenues, cost of revenues declined
from 28% of revenue in fiscal 1999 to 25% of revenue in fiscal 2000. This
percentage is reflective of a rising average sales price and, to a lesser
extent, a lower cost of revenues resulting from the transition to selling to
corporate customers. Corporations generally purchase multi-user licenses that
require the delivery of only a few CDs and manuals rather than a complete boxed
software product including CDs and manuals for each user.
Sales and Marketing Expense
Sales and marketing expenses include the cost of advertising, promotions,
cooperative and incentive programs with distributors, trade shows, marketing,
technical support and Micrografx's sales force. Sales and marketing expenses
declined due to the change in business structure and lower costs associated
with enterprise sales versus retail sales that were targeted in prior years.
General and Administrative Expense
General and administrative expenses include principally the costs of
executive, information systems, human resources, finance, legal and
administrative functions. The increase in general and administrative expenses
from fiscal 1999 to fiscal 2000 is primarily due to the favorable outcome in
1999 of legal actions, either filed or expected. As a result of the licensing
of technology to Cendant Software Corporation in June 1998, Micrografx expected
American Greetings to pursue legal action against it. Micrografx accrued a
charge based on management's assessment of likely outcomes. In August 1998,
Micrografx licensed its technology to The Learning Company, American Greetings'
new partner in the greeting card software market, and American Greetings agreed
to drop the impending legal action. As a result, Micrografx was able to reverse
in fiscal 1999 the charge that was taken in fiscal 1998. Excluding the impact
of this and other settlements, general and administrative costs declined from
fiscal 1999 to fiscal 2000.
Research and Development Expense
Research and development expenses include compensation, benefits and
incentives paid to developers. In accordance with Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," Micrografx capitalizes some software development
costs incurred after technological feasibility is achieved. These costs are
amortized over the estimated economic life of the products. Historically,
Micrografx estimated the economic life of the products to be from 12 to 18
months, which is consistent with a consumer software model. With the change in
strategy to a corporate software provider, Micrografx now estimates the
economic life of the corporate software to be approximately 48 months.
94
The longer economic life was implemented with the release of iGrafx
Professional(TM), iGrafx Process(TM) and iGrafx Designer(TM). No adjustments
were made to the amortization rate of any previously released software, which
had lives ranging from 12 to 18 months. Amortization of capitalized software
development costs is included in cost of revenues.
Research and development expenses (net of amounts capitalized) in fiscal
2000 were $7.4 million, or 21% of net revenues, compared to $8.2 million, or
21% of net revenues excluding technology revenues, in fiscal 1999. Gross
research and development expenses, before capitalization, for fiscal 2000 were
$10.2 million, or 28% of net revenues, compared to $13.9 million, or 36% of
revenues excluding technology revenues, for fiscal 1999. The decrease in gross
research and development expenses resulted from the reduction in the number of
graphics technologies and engines, which occurred in the fourth quarter of
fiscal 1999.
During fiscal 2000, Micrografx capitalized approximately $2.8 million in
software development costs and amortized $2.4 million in software development
costs. This compares to capitalization of $5.6 million and amortization of $3.0
million for fiscal 1999.
Restructuring Charge
Subject to a restructuring plan submitted to and approved by its board of
directors in June 2000, Micrografx took the following actions in June 2000:
. eliminated 74 employee positions, primarily at its Allen, Texas
headquarters;
. decided to move from the existing corporate headquarters to a smaller
facility;
. decided to abandon development and marketing of some products; and
. re-evaluated growth expectations and market strategies.
Related solely to its restructuring and reorganization, Micrografx has
accrued some anticipated costs as follows (in thousands):
. benefits cost for terminated employees: $67
. relocation of the Allen workforce: $1,595
The following table shows, in thousands, the results for the periods leading
up to the restructuring:
Q3'00 Q2'00 Q1'00 FY'99
------- ------- ------- --------
Net Loss............................... $(1,969) $(2,675) $(4,609) $ (5,852)
Net Cash (Usage) Provided.............. 934 (2,532) (5,529) (17,664)
Ending Cash Balance.................... 4,093 3,159 5,691 11,220
During June of fiscal year 2000, the management of Micrografx concluded that
it was necessary to significantly modify the operating structure of Micrografx
in order for it to sustain viability and put itself in a position to return to
profitability. Management and the board of directors of Micrografx determined
that to reach profitability in an acceptable period of time, some significant
actions were necessary in the structure and size of the organization.
Accordingly, at the June 2000 board of directors meeting, the decision to
operationally divide Micrografx into three major business units to decentralize
operations and to reduce the size and scope of the organization was made
pursuant to a plan submitted by the management of Micrografx.
On June 30, 2000, the restructuring plan was implemented and approximately
74 employee positions were eliminated, the affected employees were notified of
their termination and their termination benefits were communicated to them. On
July 3, 2000, an announcement of the actions taken and their potential effects
on Micrografx was distributed to the public by press release and subsequently
filed in a Form 8-K with the Securities and Exchange Commission. As of June 30,
2000, the expected date of completion of the restructuring plan was on or
around August 31, 2000 and all actions were substantially completed as of
September 1, 2000 when Micrografx moved into their new corporate headquarters
in Dallas, Texas.
95
At June 30, 2001, there is no remaining restructuring accrual, as compared
to the June 30, 2000 balance of approximately $653,000. The reduction in the
restructuring accrual in fiscal 2001 resulted from cash payments for
restructuring related items, the reversal of charges totaling $330,000 due to
the re-evaluation of expected costs associated with certain leased assets and
costs associated with stock warrants issued in terminating the Allen building
lease.
Benefits cost for terminated employees. Micrografx eliminated 74 positions
and terminated approximately that number of employees on June 30, 2000.
Micrografx provided these employees two months of health benefits, which began
on June 30, 2000 and ended August 31, 2000. Micrografx accrued approximately
$67,000 for these termination benefits based on the current cost of providing
these benefits.
Relocate the Allen workforce. Micrografx began the planning and preparation
for the move into a new facility in 1998. At the time the planning began,
Micrografx had more than 300 employees and expected to grow. At that time,
Micrografx was renting a 60,000 square foot office space in Richardson, Texas.
The facility that Micrografx designed to move into was approximately 90,000
square feet.
As a result of the licensing of the personal creativity business and the
slower-than-expected ramp of enterprise-related sales, management of Micrografx
subsequently determined that some actions were necessary to reduce the ongoing
operating expenses. In June 1999, Micrografx terminated approximately 38
positions and in September 1999, Micrografx terminated approximately ten more
positions. Also, in the fourth quarter of fiscal 1999, Micrografx began
curtailing its marketing efforts in order to lower operating costs.
During the third quarter of fiscal 2000, management of Micrografx decided to
begin acting on the excess capacity in the Allen, Texas facility (150 employees
occupied a space designed for more than 300). Management discussed various
alternatives such as concentrating the remaining employees in some parts of the
building and subleasing the remaining parts. In the fourth quarter of fiscal
2000, management had specific discussions with local Dallas firms related to
subleasing part of the facility. Due to the open design of the building and the
common areas, Micrografx could not come to terms with any potential sublessees.
While formulating the restructuring plan in June 2000, management of
Micrografx decided that it was not feasible to continue leasing the Allen,
Texas facility. In June, management met with Micrografx's real estate broker to
discuss their options related to finding and moving into a smaller facility and
the approach Micrografx should take in its discussions and negotiations with
the landlord. In July 2000, management met with the landlord to discuss
Micrografx's situation and restructuring plan and Micrografx signed a letter of
intent to surrender the property under the lease of 90,000 square feet and
execute a new lease for approximately 14,000 square feet with the same lessor.
In conjunction with the lease agreement, Micrografx issued to Prentiss
Properties warrants to purchase 100,000 shares of Micrografx common stock at
$1.03 per share. On September 1, 2000, Micrografx moved into the Dallas, Texas
facility.
Due to the move, there were costs associated with some fixed assets to be
disposed of, and costs related to the relocation of, corporate facilities.
These costs were not incurred to generate revenues after the commitment date
and were incremental costs that were incurred as a direct result of the
restructuring plan. These costs were absent from Micrografx's operational costs
prior to the commitment date. Accordingly, Micrografx accrued approximately
$1.6 million for these relocation costs as follows (in thousands):
Abandonment of leasehold improvements............................... $ 615
Write-down of building specific assets to disposal value............ 395
Liability for the early lease termination and subsequent asset
disposal........................................................... 300
Other move-related costs............................................ 285
------
Total............................................................... $1,595
======
96
Write Down of Long-Lived Assets. In addition, some other factors discussed
below have resulted in an impairment of some long-lived assets as of June 30,
2000. The impaired assets and the amount of the estimated impairment is
specified below (in thousands):
. InterCAP acquisition-related long-term assets and intangibles
$7,119
. Capitalized software development costs and acquired product rights
$1,087
In April 1999, Micrografx completed the acquisition of InterCAP Graphics
Systems, Inc. Micrografx engaged KPMG Peat Marwick to assist it in determining
the allocation of purchase price among the tangible and intangible assets of
the acquired company. The final allocation was as follows (in thousands).
Net Assets......................................................... $ (344)
Workforce.......................................................... 418
Customer List...................................................... 240
Non-compete Agreement.............................................. 281
Current Technologies............................................... 898
In-process R&D Expense............................................. 1,928
Deferred Tax Liability............................................. (616)
Goodwill........................................................... 9,559
-------
Total.............................................................. $12,364
=======
During the fourth fiscal quarter, management of Micrografx identified some
conditions including the lack of available growth capital and increased
competition in the graphics software market as indicators of asset impairment.
Accordingly, management prepared its evaluation of those assets and concluded
that in some cases there was in fact an impairment of value. Based on an
evaluation of these indicators, Micrografx determined that assets with a
carrying value of $9.8 million were impaired and wrote them down by $7.1
million to their fair value. Fair value was based on estimated future cash
flows to be generated by the InterCAP operations discounted at a market rate of
interest. A description of the events resulting in the impairment follows.
Lack of Available Capital. At the time of the InterCAP acquisition,
Micrografx had total cash and liquid investments of approximately $20.0 million
and expected to invest approximately $13.3 million on the InterCAP operations
during fiscal 2000. Micrografx expected that with the addition of the InterCAP
operations and through the growth of its other businesses it could continue
investing for the long term pursuant to a plan it had initiated as early as
1996. However, due to the cash flow difficulties described below and in the
"Liquidity and Capital Resources" section below, Micrografx was only able to
spend approximately $4.1 million on the InterCAP operations during fiscal 2000.
Micrografx engaged an investment banking firm in November 1999 and began
preparing a private placement offering memorandum for Image2Web and had general
discussions regarding additional funding for Micrografx. However, two factors
complicated and delayed the release of the memorandum and related funding. The
first delay resulted from a basic change in the business model for Image2Web
(from a licensed base software company to an application service provider, or
ASP, consulting and services model). The second resulted from the stock market
correction in mid April 2000. Since the correction primarily related to re-
valuation of Internet and other technology companies, Image2Web's financing
prospects were negatively impacted.
The ultimate completion of this financing was significant to Micrografx for
three reasons: it would remove the continuing investment obligation in
Image2Web from Micrografx; Micrografx believed that a part of its historical
investment in either pre-existing software, or its prior investment in the
operation of Image2Web, would be returned to it as either a license agreement
or repayment of charges (between $1.5 million and $5.0 million); and it would
provide needed growth capital for its InterCAP products. To date, no funding
for Image2Web has occurred and there can be no assurances they will ever occur.
This lack of available growth capital was determined by Micrografx to be one of
its indicators of impairment.
97
Additionally, the Intelligent Graphics Server, or iGS, which is a
significant product component for Micrografx's technical graphics strategy, was
originally scheduled for delivery in January 2000. However, due to delays
partially caused by the less-than-expected investment, the product release was
delayed.
Increased Competition and Lower Customer Demand. Management of Micrografx
believed at the time of the InterCAP acquisition that there were a limited
number of companies with competitive ability in the technical graphics arena.
Micrografx believed the market to be a sizeable niche with small competitors
such as Itedo in Germany and Auto-Trol in the United States. With the recent
focus on e-marketplaces and tools to support them, the market has expanded, as
have the number and ability of competitors, some of which have significantly
more resources and momentum than Micrografx in this market. Management of
Micrografx believes that some competitor's products do not provide as much
functionality as iGS. Because of the above-mentioned factors (lack of
investment ability, delay in the release of iGS and increasing competition),
Micrografx believes the market share and revenues it will be able to gain will
be significantly less than expected. As a result, management has revised growth
and operating expectations of the graphics products group and specifically the
products and technologies acquired through InterCAP.
Impairment of Capitalized Software Development Costs and Acquired Product
Rights. Micrografx's restructuring plan includes dividing itself into three
major business units. These business units have clearly defined business plans
that encompass several key products. Micrografx has decided to abandon the
development and marketing of several other products that do not fit into its
new business unit structure. These products include iGrafx Business(TM), iGrafx
Share, iGrafx Image and Shared Technologies. The following grid shows the
products actively developed and marketed as enterprise products during fiscal
year 2000 and the business unit to which they relate as of June 30, 2000:
Product Business Unit
------- -------------
OnSwitch(TM) Image2Web
iGrafx Development Enterprise Process Management (EPM)
iGrafx Professional(TM) EPM
iGrafx Process(TM) EPM
FlowCharter(R) EPM
Optima(R) EPM
iGrafx IDEF0 EPM
ActiveCGM(TM) Technical Graphics (TG)
iGrafx Designer(TM) TG
Graphics Suite(R) Discontinued
iGrafx Image Discontinued
iGrafx Business(TM) Discontinued
iGrafx Share Discontinued
Picture Publisher(R) Discontinued
Simply3D(R) Discontinued
Webtricity(TM) Discontinued
Shared Technologies* Discontinued
* Shared Technologies contained various tools, such as filters, originally
planned for use in the iGrafx Business(TM) and Share platforms. These tools
were intended for general purpose desktop diagramming, a market which
Micrografx is no longer actively pursuing.
Micrografx recorded a loss of approximately $1.1 million in the fourth
quarter of fiscal 2000 for the abandonment of these products.
In-Process Research and Development Charge
On April 16, 1999, Micrografx acquired InterCAP for approximately $12.4
million. The purchase price consisted of $3.9 million in cash at closing,
issuance of a promissory note to Intergraph for $2.5 million
98
payable with interest on August 31, 1999, issuance of a convertible
subordinated debenture to Intergraph for $5.8 million due March 31, 2002 and
approximately $213,000 in costs directly related to the transaction.
In connection with the acquisition of InterCAP, Micrografx recorded a charge
of $1.9 million for purchased in-process research and development, based on the
appraised value of the related developmental projects. The in-process research
and development had no alternative future use and did not otherwise qualify for
capitalization. The income approach, which included an analysis of the markets,
cash flows and risks associated with achieving the cash flows, was the primary
technique utilized in valuing each purchased in-process research and
development project.
InterCAP's research and development relates to WebCGM software products.
These software products allow customers in the aerospace, defense and
manufacturing industries to publish technical graphics on the Internet.
Micrografx's goal in this acquisition was to acquire technology that
complemented its iGrafx Designer technical graphics product. iGrafx Designer,
in conjunction with the acquired technologies, allows Micrografx to create a
solution for intelligent technical illustration and web-based technical
publishing. These complementary products provide a tiered illustration solution
supported by the industry standards and leading edge web publishing solutions.
Significant assumptions used in determining the value of purchased in-
process research and development for InterCAP included projected operating cash
flows and the discount rate. Projected operating cash flows were expected to
begin in early fiscal 2000. The discount rate selected for InterCAP's in-
process technologies was 15%.
At the time of the acquisition, InterCAP management estimated the remaining
cost and time to complete the purchased in-process research and development
projects was approximately $355,000 and 44 engineer-months. The term engineer-
month refers to the average amount of research work expected to be performed by
an engineer in a month. The projects were completed during fiscal 2001.
The relative stage of completion and projected operating cash flows of the
underlying in-process projects acquired were the most significant and uncertain
assumptions utilized in the valuation analysis of the in-process research and
development. Uncertainties regarding projected operating cash flows could give
rise to unforeseen budget over-runs and/or revenue shortfalls in the event that
Micrografx is unable to successfully commercialize the projects. Micrografx
management is primarily responsible for estimating the value of the purchased
in-process research and development in all acquisitions accounted for under the
purchase method.
Effect of Exchange Rates
Exchange rates during fiscal 2000 had an unfavorable impact on net revenues
reported by Micrografx. If exchange rates had not changed from their 1999
rates, Micrografx would have reported approximately $1.3 million more in net
revenues and approximately $340,000, or $0.03 per diluted share, in net income
in fiscal 2000. This increase resulted from the change in exchange rates of
European currencies versus the United States dollar. Since European
manufacturing costs and operating expenses are incurred in those local
currencies, the relative translation impact of exchange rates on net income
(loss) is less than on revenues.
Micrografx has historically entered into foreign exchange contracts to hedge
against some exposure to changes in foreign currency exchange rates. This
exposure results from foreign operations of Micrografx in countries including
Germany, France, the United Kingdom, the Netherlands and Japan that are
denominated in currencies other than the United States dollar. As of June 30,
2001, Micrografx had no foreign exchange contracts outstanding.
Non-operating (Income) Expense
Non-operating (income) expense includes interest income, interest expense
and other (income) expense. Other (income) expense, net includes the gain or
loss resulting from revaluation of receivables and payables denominated in
foreign currency and gains or losses when receivables and payables denominated
in foreign currency are settled.
99
Interest income decreased from $1.0 million in fiscal 1999 to $65,000 in
fiscal 2000 due to the decrease in cash on hand during fiscal 2000. Interest
expense increased in fiscal 2000 as a result of the debt incurred in
conjunction with the purchase of InterCAP and the receivable-backed financing
agreement entered into on March 31, 2000.
Income taxes
Micrografx recognized a tax provision of approximately $454,000 in fiscal
2000 compared to approximately $3.1 million in fiscal 1999.
Market Risk
The risk inherent in Micrografx's market risk sensitive instruments and
positions is the potential loss arising from adverse changes in foreign
currency exchange rates and interest rates. The United States dollar is the
functional currency for financial reporting. In this regard, Micrografx had
previously used foreign forward exchange contracts to minimize the adverse
earnings impact from the effect of exchange rate fluctuations on Micrografx's
non-United States dollar net balance sheet exposures. Micrografx had none of
those contracts as of June 30, 2001. Micrografx's earnings are also affected by
changes in interest rates due to the impact those changes have on its variable-
rate debt instruments. Micrografx has a variable-rate debt instrument based on
the prime rate representing approximately 8.7% of its total debt at June 30,
2001. If the prime interest rate increased by 10%, it would result in an
immaterial annual change to Micrografx's pre-tax earnings and cash flows.
Liquidity and Capital Resources
At June 30, 2001, Micrografx's principal sources of liquidity consisted of
cash and cash equivalents of approximately $1.7 million. For the fiscal year
ended June 30, 2001, cash used in operating, investing and financing activities
resulted in a net decrease in cash and cash equivalents of approximately $1.2
million, compared to cash usage of approximately $6.0 million for the fiscal
year ended June 30, 2000. Cash used in operating activities improved 52% from
$2.6 million for the fiscal year ended June 30, 2000 to $1.2 million for the
fiscal year ended June 30, 2001. The net change in cash for the fiscal year
ended June 30, 2001 also includes approximately $2.2 million of cash used in
product development activities and approximately $2.4 million in proceeds from
the issuance of notes payable and preferred stock.
During fiscal year 2001, the primary negative factors in the operational
cash usage were Micrografx's net loss of approximately $1.6 million and the
increase in accounts receivable of approximately $2.6 million. A portion of the
accounts receivable increase occurred in the fourth quarter of fiscal year 2001
because of a slow down in collections due to the impact of the current economic
environment where customers are stretching out their accounts payable.
Additionally, accounts receivable increased at the end of fiscal 2001 because
of the continued shift in revenue to business customers from retail
distribution. Business revenues have a lower return risk than retail
distribution revenues and therefore require a lower returns reserve resulting
in higher net accounts receivable.
As a result of Micrografx's reduced liquidity, it has generally been unable
to pay invoices received from vendors according to the agreed on terms. As of
June 30, 2001, approximately $2.0 million in accounts payable were more than 90
days past due. Micrografx vendors have been cooperative in an effort to
establish payment plans that will allow Micrografx to continue to operate in
the short-term and pay off the outstanding balances as cash flow improves, but
there are no assurances that vendors will remain cooperative.
Micrografx has been successful in the following areas of its plan to reduce
the rate of cash usage:
. Quarterly cash operating expenses (operating costs before consideration
of capitalized software development and amortization) have declined from
approximately $9.2 million for the three months ended June 30, 2000 to
approximately $6.3 million for the three months ended June 30, 2001. The
100
33% decline resulted primarily from lower personnel costs due to the
June 30, 2000 restructuring and from lower rent and related operating
expenses due to the move of the corporate headquarters to smaller leased
space.
. Management had expected revenues to decline during the first fiscal
quarter of 2001 and to stabilize for the remainder of the year. These
expectations were met and management believes that revenues will remain
at or near the current level for the near term.
. Capital spending has been restricted in fiscal year 2001 to requirements
for replacement only. Capital expenditures for fiscal 2001 were
approximately $187,000, compared to approximately $1.4 million for
fiscal 2000. Management does not expect a material change in the current
level of capital spending for the near term.
On March 31, 2000, Micrografx received a receivable financing line of
credit whereby it can receive advances on a significant portion of its
domestic receivables. Micrografx is able to receive advances for up to $3.0
million in value of invoices. This facility was renewed in May 2001 and will
mature on March 2, 2002. Micrografx had approximately $643,000 and $767,000
outstanding under this facility at June 30, 2001 and June 30, 2000,
respectively.
On September 5, 2000, Micrografx issued approximately $1.7 million in
Micrografx preferred stock to some institutional investors and other
unaffiliated parties. This preferred stock is convertible into Micrografx
common stock or, at the holders' option, up to one-half of the preferred stock
may be converted into Image2Web common stock. In September 2001, Micrografx
and the Series A preferred shareholders amended the terms of the Series A
preferred stock whereby the preferred shareholders relinquished their rights
to convert their preferred shares into Image2Web common stock. Micrografx and
its preferred shareholders have agreed that immediately prior to the closing
of the merger each share of preferred stock will be converted into 1.5 shares
of Micrografx common stock. In the event that the merger does not close, the
preferred stock reverts to its original terms.
In January 2001, Micrografx received approximately $800,000 from the
issuance of short-term convertible notes payable. The notes bear interest at
8% per annum with an original maturity date of April 30, 2001. On April 30,
2001, these notes were amended to extend the maturity date to May 31, 2001,
and on May 31, 2001, the maturity date was extended until June 30, 2001. On
June 27, 2001, Micrografx received an additional $139,850 from the issuance of
an additional convertible note payable. Subsequent to year-end, Micrografx
entered into an exchange agreement with the note holders, whereby immediately
prior to the closing of the merger the notes will be converted into Micrografx
common stock at a conversion rate of $1.00 per share for the principal balance
plus accrued and unpaid interest.
In connection with the April 16, 1999 acquisition of InterCAP, Micrografx
issued a subordinated convertible debenture in the amount of $5.8 million to
Intergraph Corporation. The debenture may be initially converted into 579,700
shares of Micrografx common stock. In July 1999, Micrografx registered 579,700
shares of Micrografx common stock to cover the agreement should either
Intergraph or Micrografx elect to convert all or any part of the debenture
into shares of Micrografx common stock. The actual number of shares and the
timing of the conversion are both subject to terms and conditions as outlined
in the convertible debenture agreement. The applicable interest rate for the
convertible debenture is a 7% fixed rate to begin January 5, 2000 and
increasing to 8% on January 4, 2001. Since Micrografx did not reset the
conversion price on the reset date, November 30, 1999, the interest rates were
raised by 200 basis points to 9% and 10%, respectively. The debenture matures
on March 31, 2002. Interest expense is being provided for at an effective
interest rate of 8%. The convertible debenture is secured by the capital stock
of InterCAP. On May 31, 2001, Micrografx exercised their option to reset the
conversion price. The conversion price was reset to $0.90 from $10.00.
Corel has agreed to redeem the debenture held by Intergraph Corporation
following the merger. In connection with the merger, Micrografx negotiated
with Intergraph to reduce the principal amount of the debenture from $5.8
million to $3.8 million if the $3.8 million plus accrued interest is paid by
October 31, 2001. Micrografx anticipates that the merger will close by October
31, 2001 and that Corel will fund the $3.8 million principal payment plus
accrued interest. If the merger does not close, Micrografx could exercise its
101
option to convert the debenture into Micrografx common stock. The maximum
amount of the debenture that can be converted into Micrografx common stock
within a 60-day period is $1.0 million. The reset conversion price of $0.90
equates to the issuance of 1,111,111 shares of Micrografx common stock for each
$1.0 million of principal. Conversion of the entire principal amount of the
$5.8 million debenture would result in the issuance of 6,441,111 shares of
Micrografx common stock. However, because of the 60-day limitation, the maximum
number of shares of Micrografx common stock that could be issued by the March
31, 2002 maturity date of the debenture is 3,333,333 if the conversion was
started by October 31, 2001. The remaining principal amount after the issuance
of 3,333,333 shares of Micrografx common stock would be $2.8 million, which
would be due on March 31, 2002.
Management of Micrografx is examining various financing methods to provide
Micrografx with capital resources sufficient to meet its operating
requirements. In light of Micrografx's capital resource constraints, which are
anticipated to continue for some time, among other factors, the merger was
determined to be the most prudent course of action for the benefit of
Micrografx shareholders. On August 28, 2001, Corel extended to Micrografx a
$2.5 million bridge loan that is secured by all of the assets and the stock of
Image2Web. Micrografx also granted to Corel an option to purchase 80% of the
stock of Image2Web for a purchase price equal to the amount of the loan owing
from time to time and a right of first refusal to acquire the 20% balance of
the outstanding Image2Web stock. In addition, in the event that Micrografx
fails to timely repay the loan, Corel may exercise creditor rights against
Micrografx. The loan matures on January 31, 2002 and bears interest at 8.0% per
annum. The proceeds of the loan will be used to pay off the accounts receivable
line of credit with Silicon Valley Bank of approximately $643,000 at June 30,
2001, to pay a portion of the approximately $2.0 million in past due accounts
payable and to provide operating cash. Micrografx is currently negotiating with
vendors to reduce the amount owed in exchange for paying them currently rather
than the vendors waiting for Micrografx's cash flow position to improve.
In the event that the merger fails to close, Micrografx will continue to
pursue the potential sale of equity. Management also is evaluating other
sources of capital, including the issuance of debt securities in one or more
private transactions, the sale or spin-off of certain assets to third parties,
and/or traditional bank lines secured by international accounts receivable. The
failure of Micrografx to acquire additional external financing or the failure
to close the Corel transaction could result in severe operational difficulties
and shareholder dilution resulting from the conversion of the Intergraph
debenture into Micrografx common stock. Such difficulties could result in a
further reduction in workforce, a further reduction in the scope of operations,
or ultimately in a forced reorganization or bankruptcy. Micrografx believes it
may be successful in obtaining the necessary revenue levels and/or additional
funding necessary to operate Micrografx in the near term, however, there can be
no assurance that under its current conditions, external funds will be
available or, if available, will not potentially dilute shareholders' interests
or returns.
Capital Commitments
As of June 30, 2001, Micrografx had no significant commitments for capital
expenditures.
Other Matters
The assets and liabilities of non-United States operations are translated
into United States dollars at exchange rates in effect as of the respective
balance sheet dates and revenue and expense accounts of these operations are
translated at average exchange rates during the month the transactions
occurred. Unrealized translation gains and losses are included as an adjustment
to shareholders' equity. Micrografx has mitigated a portion of its currency
exposure through decentralized sales, marketing and administrative operations.
When necessary, Micrografx may also hedge to prevent material exposure.
Euro Conversion
Micrografx is addressing issues regarding the European Economic Monetary
Union's single euro currency and is currently able to transact business using
this currency. Micrografx intends to convert the appropriate European ledgers
to the Euro after fiscal year ended June 30, 2001 and anticipates no material
costs associated with this conversion.
102
Recent Accounting Pronouncements
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Assets and Extinguishments of Liabilities," or SFAS 140. This
statement replaces FASB Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," or SFAS 125.
It revises the standards for accounting for securitizations and other transfers
of financial assets and collateral and requires some disclosures, but it
carries over most of SFAS 125's provisions without reconsideration. SFAS 140 is
effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. Micrografx does not expect the
adoption of SFAS 140 will have a material impact on its results of operations
or financial position.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, effective
for all business combinations initiated after June 30, 2001, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the statements. Other intangible
assets will continue to be amortized over their useful lives. Micrografx is
currently reviewing the impact of SFAS Nos. 141 and 142 and will be performing
a fair value analysis at a later date in connection with the adoption of SFAS
No. 142 on July 1, 2002.
Quarterly Results of Operations
The following table presents selected financial results for each of the last
eight quarters through June 30, 2001 (in thousands, except per share data).
These financial results are unaudited. In the opinion of Micrografx management,
however, they have been prepared on the same basis as the audited financial
information and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods presented when read in conjunction with the consolidated financial
statements and related notes appearing elsewhere in this prospectus/proxy
statement. The gross profit amounts for the quarters ended September 30, 1999
and December 31, 1999 have been adjusted from amounts disclosed in previously
filed Form 10-Q's to conform to current year presentation for a change in
classification of some expenses between cost of revenues and sales and
marketing expenses. The reclassified amounts are not significant in either
period.
Quarters Ended
------------------------------------
9/30/00 12/31/00 3/31/01 6/30/01
------- -------- ------- --------
Net revenues............................ $ 6,839 $ 7,377 $ 8,392 $ 7,563
Gross profit............................ 5,136 5,902 7,030 6,148
Income (loss) from operations........... (1,133) 95 843 143
Net income (loss)....................... (1,400) (165) 118 (187)
Basic and diluted income (loss) per
share.................................. $ (0.12) $ (0.02) $ 0.01 $ (0.02)
Shares used in computing income (loss)
per share:
Basic................................. 11,498 11,564 11,761 11,847
Diluted............................... 11,498 11,564 11,794 11,847
Quarters Ended
------------------------------------
9/30/99 12/31/99 3/31/00 6/30/00
------- -------- ------- --------
Net revenues............................ $ 8,522 $ 9,656 $ 9,932 $ 8,163
Gross profit............................ 6,276 7,124 7,691 5,978
Loss from operations.................... (4,508) (2,396) (1,523) (12,589)
Net loss................................ (4,609) (2,675) (1,969) (12,916)
Basic and diluted loss per share........ $ (0.41) $ (0.24) $ (0.17) $ (1.13)
Shares used in computing loss per share:
Basic and diluted..................... 11,324 11,358 11,436 11,476
103
MICROGRAFX MANAGEMENT
The directors and officers of Micrografx who will serve as directors or
executive officers of Corel following the merger are as follows:
Held
Position
Name and Address Age Since Present Office Held in Micrografx
---------------- --- -------- ---------------------------------
James L. Hopkins 55 2000 President, chief executive officer and
8144 Walnut Hill Lane, Suite 1050 chairman of the board of directors
Dallas, TX 75231
Gary J. Klembara 49 2000 Executive vice president, sales
8144 Walnut Hill Lane, Suite 1050
Dallas, TX 75231
Kenneth A. Carraher 41 1997 Division president--enterprise process
7585 SW Mohawk management group
Tualatin, OR 97062
James L. Hopkins has served as the president, chief executive officer and
chairman of the board of directors since October 2000. From 1999 through 2000,
Mr. Hopkins served as the managing director of the Austin office of Hoak,
Breedlove, Wesneski & Co., a boutique technology investment banking company.
From 1991 through May 1999, Mr. Hopkins held a variety of positions with STB
Systems, Inc., leading to the position of vice president of strategic marketing
and chief financial officer. STB was a developer of graphic subsystems for
personal computers. When STB was acquired by 3dfx Interactive, Inc. in May
1999, Mr. Hopkins assumed the position of vice president of finance and
strategic planning for 3dfx for a short transition period before joining Hoak,
Breedlove. Mr. Hopkins remains on the board of directors for 3dfx, as well as
two early-stage privately-held software companies.
Gary J. Klembara has served as the executive vice president, sales of
Micrografx since January 2001. From 2000 through 2001, Mr. Klembara was the
executive vice president, worldwide sales for Image2Web. From 1984 through
2000, Mr. Klembara worked at Compaq Computer Corporation where he held numerous
sales and sales management positions, including national director of the sales,
consultants and systems integrators division.
Kenneth A. Carraher has served as the division president--enterprise process
management group since July 1997. From 1991 through 1997, he served as the
founder and president of AdvanEdge Technologies which was acquired by
Micrografx in 1997.
104
MICROGRAFX EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table shows the compensation earned for the past three years
by the executive officers of Micrografx who will serve as a director or
executive officer of Corel following the merger and whose salary and bonus for
fiscal 2001 exceeded $100,000.
Summary Compensation Table
Annual Long-Term Compensation
Compensation (#)
--------------- ----------------------
Awards Payouts
-------------- -------
Securities All Other
Name and Principal Fiscal Salary Bonus Restricted Underlying LTIP Compensation
Position Year ($)(1) ($) Stock (#) Options (#)(2) Payouts ($)(3)
------------------ ------ ------- ------- ---------- -------------- ------- ------------
James L. Hopkins........ 2001 149,423 40,055 500,000 250,000 -- 2,625
chairman, president 2000 -- -- -- -- -- --
and chief executive 1999 -- -- -- -- -- --
officer(4)
Kenneth A. Carraher..... 2001 200,000 69,900 65,000 -- -- 3,072
division president-- 2000 205,539 20,813 -- 85,000 -- 5,434
enterprise process 1999 129,231 49,244 -- 8,000 -- 4,025
management group
Gary J. Klembara........ 2001 198,462 120,765 50,000 50,000 -- 2,625
executive vice 2000 -- -- -- -- -- --
president--sales 1999 -- -- -- -- -- --
--------
(1) Includes amounts of base salary deferred at the election of the executive
pursuant to Micrografx's 401(k) Savings Plan, a defined contribution plan.
(2) The Micrografx stock option plan authorizes the issuance of stock
appreciation rights but none have been issued by Micrografx as of June 30,
2001.
(3) Includes Micrografx contributions in fiscal 2001 in the following amounts
to match amounts deferred pursuant to Micrografx's 401(k) Savings Plan:
Mr. Hopkins: $2,625; Mr. Carraher: $3,072; and Mr. Klembara: $2,625.
(4) Mr. Hopkins has served as Micrografx's chairman, president and chief
executive officer since October 2000. Mr. Hopkins compensation reflected
above is for the time period between October 16, 2000 and fiscal year end
June 30, 2001.
Options Granted in Last Fiscal Year
The following table sets forth information concerning stock options granted
during fiscal year 2001 by Micrografx to the named executive officers of
Micrografx. The grants relate to options to purchase shares of Micrografx
common stock. Micrografx did not grant any stock appreciation rights to any of
these individuals during fiscal year 2001.
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options/SARs Price Appreciation
Underlying Granted to Exercise for Option Term (2)
Options/SARs Employees in Price Expiration ---------------------
Name Granted (#)(1) Fiscal Year ($/Share) Date 5% ($) 10% ($)
---- -------------- ------------ --------- ---------- ---------- ----------
James L. Hopkins(3)..... 250,000 16.00% 0.84 3/23/11 132,665 336,200
Kenneth A. Carraher..... -- -- -- -- -- --
Gary J. Klembara........ 50,000 3.23% 0.84 3/23/11 26,533 67,240
105
All of the options granted to executives were granted under Micrografx's 1995
Incentive and Non-Statutory Stock Option Plan.
(1) Options vest generally in annual 25% increments. The options have a term
of ten years, unless they are exercised or expire upon the circumstances
set forth in the Micrografx stock option plan, including retirement,
termination in the event of a change in control, death or disability.
(2) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent upon the future
performance of Micrografx common stock, overall market conditions and the
executive's continued employment with Micrografx. The amounts represented
in this table may not necessarily be achieved.
(3) Mr. Hopkins was granted an option to purchase 500,000 shares of Micrografx
common stock but has waived his right under his employment agreement to
receive stock options for 250,000 of these shares.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth information concerning stock options
exercised during fiscal year 2000 by the named executive officers and the
number and value of unexercised in-the-money options for Micrografx's common
stock at June 30, 2001. The actual amount, if any, realized on exercise of
stock options will depend on the amount by which the market price of Micrografx
common stock on the date of exercise exceeds the exercise price. The actual
value realized on the exercise of unexercised in-the-money stock options
(whether exercisable or unexercisable) may be higher or lower than the values
reflected in this table.
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options/ SARs at The-Money Options/SARs at
Shares Fiscal Year End Fiscal Year-End ($)(1)
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
James L. Hopkins........ -- -- -- 250,000 -- 39,050
Kenneth A. Carraher..... -- -- 83,719 77,750 -- --
Gary J. Klembara........ -- -- -- 50,000 -- 7,810
--------
(1) Values are stated based upon the closing price of $1.25 per share of
Micrografx common stock on the over-the-counter bulletin board on June 29,
2001, the last trading day of fiscal 2001.
Certain Transactions
There are no transactions that are required to be disclosed.
Employment Agreements
Micrografx is a party to an employment agreement with its chairman,
president and chief executive officer, James L. Hopkins. The agreement is for a
term of one year, commencing October 16, 2000 and may be automatically renewed
annually for an additional term of one year. Under the terms of the agreement,
Mr. Hopkins is paid an annual salary of $210,000. Mr. Hopkins also is eligible
to earn a performance bonus in the amount of 4% of Micrografx's annual pre-tax,
pre-bonus income up to a maximum of $240,000 per year. Under the terms of the
agreement, Mr. Hopkins was also entitled to receive a hiring bonus of $340,000
payable in cash, less customary employment taxes on January 10, 2001. As a
condition to entry into the employment agreement, Micrografx also entered into
a stock purchase agreement with Mr. Hopkins providing for the purchase of
500,000 shares of restricted Micrografx common stock at a price of $0.44 per
share, the closing price on January 10, 2001. The stock will become
unrestricted ratably over a four-year period provided that
106
Mr. Hopkins remains employed by Micrografx. At June 30, 2001, neither the
hiring bonus had been paid nor the shares of stock paid for, although
Micrografx had as of that date expensed or recorded as deferred compensation
the hiring bonus, and recorded a receivable for the stock in the amount of
$220,000 as an offset to the hiring bonus. The employment agreement contains
customary non-disclosure and non-compete provisions. If Mr. Hopkins' employment
is terminated without cause following a change of control or corporate
transaction, each as defined in the employment agreement, he will receive:
. severance benefits equal to his current base salary and bonus;
. immediate vesting of all outstanding stock options; and
. payment of all accrued and unpaid vacation pay.
In addition, on consummation of the merger, Mr. Hopkins will receive:
. forgiveness of debt relating to his relocation expenses; and
. immediate vesting of his unvested Micrografx restricted shares.
Mr. Hopkins currently holds unvested stock options for 250,000 shares of
Micrografx common stock and 400,000 unvested restricted shares of Micrografx
common stock. Mr. Hopkins waived his right under his employment agreement to be
granted an additional stock option for 250,000 shares of Micrografx common
stock.
The employment agreement between Micrografx and Kenneth A. Carraher,
president of the enterprise process management business unit, is for a term of
three years commencing November 1, 2000. Under the terms of the agreement, Mr.
Carraher is paid an annual salary of $200,000. Mr. Carraher also is eligible to
earn an annual bonus as approved by the board of directors. The agreement
contains customary non-disclosure and non-compete provisions. If Mr. Carraher's
employment is terminated without cause following a change of control or
corporate transaction, each as defined in the employment agreement, he will
receive:
. severance benefits equal to two times the sum of his current base salary
and bonus;
. immediate vesting of all outstanding stock options; and
. payment of all accrued and unpaid vacation pay.
In addition, if these payments and benefits triggered by a change of control
result in the imposition of a 20% excise tax on Mr. Carraher, the agreement
provides that Micrografx will reimburse him for 150% of the taxes.
Micrografx has entered into an employment agreement with Mr. Klembara that
provides for Mr. Klembara's employment as executive vice president of sales.
Under the terms of the agreement, Mr. Klembara is paid an annual salary of
$200,000. Mr. Klembara is also eligible to earn an annual bonus calculated
under a formula set forth in his employment agreement. The agreement contains
customary non-disclosure and non-compete provisions. If Mr. Klembara's
employment is terminated without cause, or is terminated by Mr. Klembara on a
change of control, Mr. Klembara will be entitled to receive as a severance
payment an amount totaling his annual base salary.
107
MICROGRAFX SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
The following table sets forth as of September 24, 2001 information
regarding the beneficial ownership of Micrografx's common stock and preferred
stock by:
. each person known by Micrografx to own beneficially more than 5% of each
class of the outstanding Micrografx voting securities;
. each director, the chief executive officer and the four other most
highly compensated executive officers whose salary and bonus for fiscal
2000 exceeded $100,000; and
. all directors and executive officers of Micrografx as a group.
The following calculations of the percentage of outstanding shares are based
on 12,525,038 shares of Micrografx's common stock and 420,000 shares of
preferred stock outstanding as of September 24, 2001, respectively.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities, subject to community property laws, where
applicable. Information for each 5% shareholder of Micrografx common stock is
derived solely from filings with the Securities and Exchange Commission on or
before September 24, 2001.
Shares of Micrografx common stock subject to options that are presently
exercisable or exercisable within 60 days of September 24, 2001 are deemed
outstanding and beneficially owned by the person holding the options for the
purpose of computing the percentage of ownership of that person but are not
treated as outstanding for the purpose of computing the ownership percentage of
any other person. These options are separately set forth below in the column
titled "Options."
Preferred
Stock
Common Stock Beneficially
Beneficially Owned Owned
--------------------------- ------------
Common Preferred
Name and Address (1) Stock Options Total % Stock %
-------------------- --------- ------- --------- --- --------- -------
The Lake Fund(2)........ 2,334,000 20,000 2,354,000 -- 420,000 37.5
Roemer Visscherplein
2106 AG Heemstede
The Netherlands
James L. Hopkins........ 500,000 -- 500,000 -- -- --
Russell Hogg............ -- 58,750 58,750 * -- --
George W. Macintyre..... -- -- -- -- -- --
P. Michael Sullivan..... -- -- -- -- -- --
John M. Carradine....... -- -- -- -- -- --
Kenneth A. Carraher..... 168,525 93,719 262,244 -- -- --
Gary J. Klembara........ 50,000 -- 50,000 * -- --
Chris Hughes............ 50,796 48,350 97,146 * -- --
David Wright............ 32,000 18,750 50,750 * -- --
Douglas Richard (3)..... 39,000 105,400 144,400 -- -- --
All directors and execu-
tive officers as a
group
(11 people)............ 920,406 251,485 1,171,891 -- -- --
--------
* Less than 1%.
(1) The address for each director and executive officer is Micrografx, Inc.,
8144 Walnut Hill Lane, Suite 1050, Dallas, Texas 75231.
(2) Information with respect to The Lake Fund was obtained from a Schedule 13D
filed with the Securities and Exchange Commission.
(3) Mr. Richard resigned as chief executive officer of Micrografx in August
2000. He is currently retained as a consultant.
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COMPARATIVE RIGHTS OF HOLDERS OF MICROGRAFX COMMON STOCK AND
COREL COMMON STOCK AND PARTICIPATION RIGHTS
The internal affairs of Micrografx are currently governed by the corporate
laws of Texas, particularly the Texas Business Corporation Act, or TBCA, the
articles of incorporation of Micrografx as amended to date and the Micrografx
amended and restated bylaws. On consummation of the merger, unless Corel is
entitled to and elects the cash alternative, Micrografx shareholders will
become securityholders of Corel, a Canadian corporation governed by the Canada
Business Corporations Act, or CBCA. After that time, their rights will be as
provided under the CBCA, other applicable Canadian law, the Corel certificate
and articles of amalgamation, the Corel bylaws, Corel's rights plan and the
participation rights agreement. The following is a summary comparison of some
differences between the rights of holders of shares of Corel common stock under
the CBCA, the Corel certificate and articles of amalgamation and the Corel
bylaws and the rights of Micrografx shareholders under the TBCA, the Micrografx
articles of incorporation and the Micrografx amended and restated bylaws. This
summary does not purport to be a complete discussion of, and is qualified in
its entirety by reference to, the TBCA, the CBCA, the respective common laws of
Texas and Canada, the full texts of the governing corporate instruments of
Micrografx and Corel and the participation rights agreement, to all of which
all of Micrografx shareholders are referred.
Unless Corel is entitled to, and elects to pay cash at the closing of the
merger for all outstanding shares of Micrografx capital stock, then Micrografx
shareholders will receive a combination of shares of Corel common stock and
Corel participation rights. Micrografx shareholders do not currently have any
rights similar to those that they would enjoy as holders of Corel participation
rights. Reference is hereby made to "The Merger Agreement and Participation
Rights Agreement--Participation Rights Agreement" for a summary of the terms of
the Corel participation rights and the participation rights agreement, as well
as to the full text of the participation rights agreement, substantially the
form of which is attached to this prospectus/proxy statement as Annex B.
The Micrografx preferred stock has the following rights and features:
. the right to receive cumulative dividends,
. liquidation preferences,
. the right to elect two directors to the board of directors,
. redemption rights and
. conversion rights allowing the preferred stock to convert into common
stock.
On consummation of the merger, the holders of the Micrografx preferred
stock, on an as-converted basis, will receive the same type of consideration as
the holders of Micrografx common stock. Therefore, unless Corel is entitled to
and elects the cash alternative, the holders of Micrografx preferred stock will
become securityholders of Corel common stock and Corel participation rights.
The shares of Corel common stock have the following rights and features:
. the right to vote at all meetings of shareholders, including for the
election of directors,
. the right to receive discretionary dividends and
. the right to receive the remaining property of Corel on dissolution.
Each series of Corel preferred shares has the following rights and features:
. such dividend, voting, redemption, conversion and other rights as may
be fixed by the board of directors for each series,
. the right to rank equally with each other series with respect to
priority in payment of dividends and on liquidation and
. liquidation preferences.
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The Corel Series A preferred shares have the following rights and features:
. the right to receive discretionary dividends equally with the Corel
common stock,
. a liquidation preference and
. conversion rights allowing the Series A preferred shares to convert
into Corel common stock.
Vote on Extraordinary Corporate Transactions
Micrografx. Texas law generally requires the affirmative vote of the holders
of at least two-thirds of the shares entitled to vote to authorize any merger,
consolidation, dissolution or sale of all or substantially all of the assets of
a corporation; however, the Micrografx articles of incorporation, in accordance
with Texas law, reduce the affirmative vote required to authorize any action,
including a merger, to a majority of the outstanding shares entitled to vote.
The holders of Micrografx common stock and Micrografx preferred stock will each
vote separately as a class on the merger agreement and the merger.
Unless required by a corporation's articles of incorporation, no authorizing
shareholder vote is required of a corporation surviving a merger if:
. the corporation is the sole surviving corporation in the merger,
. there is no amendment to the corporation's articles of incorporation,
. each shareholder holds the same number of shares after the merger as
before, with identical designations, preferences, limitations and
relative rights,
. the voting power of the shares outstanding after the merger plus the
voting power of the shares issuable as a result of the merger (taking
into account convertible securities and warrants, options or other
rights to purchase securities issued pursuant to the merger) does not
exceed the voting power of the shares outstanding prior to the merger
by more than 20%,
. the number of participating shares (that is, shares whose holders are
entitled to participate without limitation on dividends or other
distributions) outstanding after the merger plus the participating
shares issuable as a result of the merger (taking into account
convertible securities and warrants, options or other rights to
purchase securities issued pursuant to the merger) does not exceed the
number of participating shares outstanding prior to the merger by more
than 20% and
. the board of directors of the corporation adopts a resolution
approving the plan of merger.
Corel. Under the CBCA, some extraordinary corporate actions, such as
amalgamations (other than an amalgamation between a parent corporation and one
or more of its wholly owned subsidiaries or between two or more of the
subsidiaries), continuances, sales, leases or exchanges of all or substantially
all the assets of a corporation other than in the ordinary course of business
and other extraordinary corporate actions such as liquidations, dissolutions or
other arrangements, if ordered by a court, are required to be approved by a
resolution passed by not less than two-thirds of the votes cast by the
shareholders entitled to vote in person or by proxy at the annual or special
meeting called for that purpose, whether or not the shares held by them are
designated as voting shares in the corporation's articles of incorporation and,
in some cases, the action also is required to be approved by a resolution
passed by not less than two-thirds of the votes cast by shareholders entitled
to vote in person or by proxy at the annual or special meeting called for that
purpose separately by each affected class or series, including by a class or
series that does not otherwise carry the right to vote. The foregoing
provisions apply to Corel.
Dividends and Distributions
Micrografx. Subject to restrictions contained in a corporation's articles of
incorporation, Texas law allows the board of directors of a corporation to make
distributions. However, Texas law prohibits a distribution from being made if:
. after giving effect to the distribution, the corporation would be
insolvent or
. the distribution exceeds the surplus of the corporation.
110
Despite these limitations, if the net assets of a corporation equal or
exceed the amount of the proposed distribution, then a corporation may make a
distribution involving a purchase or redemption of any of its own shares if the
purchase or redemption is made to:
. eliminate fractional shares,
. collect or compromise indebtedness owed by or to the corporation,
. pay dissenting shareholders entitled to payment for their shares under
Texas law or
. redeem or purchase redeemable shares in accordance with Texas law.
The Micrografx articles of incorporation do not alter these statutory rules;
however, they do provide that the holders of the Micrografx preferred stock
will be entitled to receive out of funds legally available for payment of
dividends, cumulative dividends in cash, when, as and if declared by the
Micrografx board of directors, at the annual rate of $0.09 per share, payable
on a conversion or redemption of the preferred stock or the liquidation or
dissolution of Micrografx, but specifically excluding a consolidation, merger
or sale of all or substantially all of Micrografx's assets.
Corel. Under the CBCA, a corporation may not declare or pay a dividend if
there are reasonable grounds for believing that:
. the corporation is, or would after the payment of the dividend be,
unable to pay its liabilities as they become due or
. the realisable value of the corporation's assets would thereby be less
than the aggregate of its liabilities and its stated capital of all
classes.
Other than the preferential rights of the holders of Corel preferred stock
with respect to dividends and liquidations, the Corel certificate and articles
of amalgamation contain no additional restrictions on the declaration or
payment of dividends. Corel has not paid any dividends on its common stock or
its preferred stock.
Amendment to Charter
Micrografx. Texas law prohibits any amendment to the articles of
incorporation without the approval of the holders of at least two-thirds of the
shares entitled to vote. If any class or series of shares were entitled to vote
separately on an amendment to the articles of incorporation, Texas law would
prohibit the amendment without the approval of the holders of at least two-
thirds of the shares within the class or series entitled to vote. Each class or
series of shares is entitled to vote on any amendment to the articles of
incorporation that would affect the rights of such class or series. The
Micrografx articles of incorporation, in accordance with Texas law, reduce the
affirmative vote required to authorize any action, including an amendment to
the articles of incorporation, to a majority of the outstanding shares entitled
to vote. Under Texas law, if the amendment is of a nature that would affect a
particular class or series of shares in a particular manner, that class or
series is entitled to vote as a class or series on the amendment, whether or
not entitled to vote in the corporation's articles of incorporation.
Corel. Under the CBCA, amendments to the articles of incorporation of a
corporation generally require approval by a resolution passed by not less than
two-thirds of the votes cast by shareholders entitled to vote in person or by
proxy at the annual or special meeting called for that purpose. If the
amendment is of a nature affecting a particular class or series in a manner
requiring a separate class or series vote, that class or series is entitled to
vote on the amendment whether or not it otherwise carries the right to vote.
The foregoing provisions apply to Corel.
Amendment to Bylaws
Micrografx. Texas law states that the board of directors may amend the
bylaws without shareholder approval unless the articles of incorporation or the
bylaws reserves the power exclusively to the shareholders in
111
whole or in part. The Micrografx articles of incorporation and bylaws do not
reserve the power to amend the bylaws to the shareholders.
Corel. The CBCA provides that unless the articles of incorporation or bylaws
of a corporation provide otherwise, the directors may, by resolution, make,
amend or repeal any bylaws that regulate the business or affairs of the
corporation. Where the directors make, amend or repeal a bylaw, they are
required under Canadian corporation law to submit the bylaw or amendment or
repeal of a bylaw to the shareholders for confirmation at the next annual or
special meeting of shareholders. The shareholders entitled to vote at
shareholder meetings may confirm, reject or amend any bylaw or amendment or
repeal of a bylaw by a resolution passed by a majority of the votes cast by
shareholders entitled to vote at the annual or special meeting of shareholders
represented in person or by proxy. The foregoing provisions apply to Corel.
Interested Shareholder Transactions
Micrografx. Micrografx is subject to Article Thirteen of the TBCA, known as
the Texas business combination law. In general, the Texas business combination
law prohibits an "issuing public corporation," directly or indirectly, from
entering into or engaging in a "business combination" with an "affiliated
shareholder" (or its affiliates or associates) during the three-year period
immediately following the date on which the affiliated shareholder first became
an affiliated shareholder, unless:
. before the date the person became an affiliated shareholder, the board
of directors of the issuing public corporation approved the business
combination or the acquisition of shares that caused the affiliated
shareholder to become an affiliated shareholder or
. not less than six months after the date the person became an
affiliated shareholder, the business combination was approved by the
affirmative vote of the holders of at least two-thirds of the issuing
public corporation's outstanding voting shares not beneficially owned
by the affiliated shareholder or its affiliates.
An "affiliated shareholder" is generally defined as a person that is or was
within the proceeding three-year period the beneficial owner of 20% or more of
a corporation's outstanding voting shares. A "business combination" is defined
generally to include:
. mergers, share exchanges or conversions involving an affiliated
shareholder,
. dispositions of assets involving a value equal to 10% or more of the
market value of the assets or of the outstanding common stock or
representing 10% or more of the earning power or net income of the
corporation,
. in some cases, the issuance or transfer of securities by the
corporation to an affiliated shareholder, other than as a result of
the exercise of warrants or rights to purchase shares of the
corporation offered, or a share dividend paid to all shareholders of
the corporation, on a pro rata basis,
. some types of plans or agreements relating to a liquidation or
dissolution of the corporation involving an affiliated shareholder,
. some types of reclassifications, recapitalizations, distributions or
other transactions that would have the effect of increasing an
affiliated shareholder's percentage ownership of the corporation or
. the receipt of tax, guarantee, loan or other financial benefits by an
affiliated shareholder other than proportionately as a shareholder of
the corporation.
An "issuing public corporation" is generally defined as a Texas corporation
that has 100 or more shareholders, a class of its voting shares registered
under the Securities Exchange Act of 1934, as amended, or a class of its voting
shares qualified for trading in a national market system.
112
Corel. The CBCA does not contain a comparable provision with respect to
business combinations. However, policies of some Canadian securities regulatory
authorities, including Rule 61-501 of the Ontario Securities Commission, which
contain requirements in connection with related party transactions. A related
party transaction means, generally, any transaction by which an issuer,
directly or indirectly, acquires or transfers an asset or acquires or issues
treasury securities or assumes or transfers a liability from or to, as the case
may be, a related party by any means in any one or any combination of
transactions. "Related party" is defined in Rule 61-501 and includes directors,
senior officers and holders of at least 10% of the voting securities of the
issuer. Rule 61-501 requires more detailed disclosure in any proxy material
required to be sent to security holders in connection with a related party
transaction and, subject to some exceptions, the preparation of a formal
valuation of the subject matter of the related party transaction and any non-
cash consideration offered therefor and the inclusion of a summary of the
valuation in the proxy material. Rule 61-501 also requires in some
circumstances, and subject to some exceptions, that the minority shareholders
of the issuer separately approve the transaction by a simple majority or two-
thirds of the votes cast, depending on the circumstances. The foregoing
provisions apply to Corel.
Dissenters' Rights
Micrografx. Under Texas law, a shareholder generally has the right to
dissent from any merger to which the corporation is a party, from any sale of
all or substantially all assets of the corporation or from any plan of
exchange, in each case only if shareholder approval is required. However,
dissenters' rights are not available with respect to a plan of merger in which
there is a single surviving corporation or with respect to any plan of
exchange, if:
. the shares held by the shareholder are part of a class or series of
shares that is:
. listed on a national securities exchange or Nasdaq,
. designated as a national market security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or
. held of record by not less than 2,000 holders.
. the shareholder is not required by the terms of the plan of merger or
plan of exchange to accept for the shareholder's shares any
consideration that is different from the consideration, other than cash
in lieu of fractional shares, to be provided to any other holder of
shares of the same class or series held by the shareholder and
. the shareholder is not required by the terms of the plan of merger or
plan of exchange to accept for his shares any consideration other than:
. shares of a corporation that, immediately after the merger or
exchange, will be part of a class or series of shares that are
listed, or authorized for listing on official notice of issuance, on
a national securities exchange, approved for quotation as a national
market security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by not
less than 2,000 holders or
. cash in lieu of fractional shares otherwise entitled to be received.
Under Texas law, shareholders who possess the right to dissent from a
transaction may demand payment of the fair value of their shares calculated as
of the day before the vote authorizing the transaction was taken, but excluding
any appreciation or depreciation that occurred in anticipation of the
transaction.
Corel. Shareholders of a CBCA corporation are entitled to exercise dissent
rights and to be paid the fair value of their shares in connection with:
. an amendment to the corporation's articles of incorporation to add,
change or remove any provisions restricting or constraining the issue,
transfer or ownership of shares of the class held by holders by the
class so affected,
113
. an amendment to the corporation's articles of incorporation to add,
change or remove any restriction on the business or businesses that the
corporation may carry on,
. some other amendments to the corporation's articles of incorporation of
a nature requiring a separate class or series vote,
. an amalgamation (other than an amalgamation between a parent corporation
and one or more of its wholly owned subsidiaries or between two or more
of the subsidiaries),
. a continuance under the laws of another jurisdiction,
. a sale, lease or exchange of all or substantially all the property of
the corporation, other than in the ordinary course of business or
. a court order permitting a shareholder to dissent in connection with an
application to the court for an order approving an arrangement proposed
by the corporation; provided that a shareholder is not entitled to
dissent if an amendment to the articles of incorporation is effected by
a court order approving a reorganization or a court order rectifying a
matter that is oppressive or unfairly prejudicial to or that unfairly
disregards the interests of any security holder, creditor, director or
officer.
Holders of Corel common stock are not entitled to dissenters' rights in
connection with the merger. In addition, under the CBCA there is no right of
partial dissent and, accordingly, a dissenting shareholder may only dissent
with respect to all shares held by him on behalf of any one beneficial owner
and which are registered in the name of the dissenting shareholder.
Derivative Action
Micrografx. Texas law provides that a shareholder must state in the
complaint that he was a shareholder of the corporation at the time of the
transaction of which he complains. A shareholder may not sue derivatively
unless he first files a written demand with the corporation that it take
suitable action and 90 days has expired from the date the demand was issued or
unless irreparable injury to the corporation is occurring or would result by
waiting for the expiration of the 90-day period. Additionally, a court must
dismiss a derivative proceeding if one of the following groups determines in
good faith, after reasonable inquiry and based on appropriate factors under the
circumstances, as determined by the group, that the continuation of the
derivative proceeding is not in the best interests of the corporation. The
groups eligible to make the determination whether to proceed with the
derivative action include:
. a majority vote of independent and disinterested directors constituting
a quorum of the board of directors outside of the presence of any
interested directors,
. a majority vote of a committee of two or more independent and
disinterested directors appointed by a majority vote of one or more
independent and disinterested directors at a meeting of the board of
directors or
. a panel of one or more disinterested and qualified persons appointed by
the court.
The approval of the court is required to discontinue or settle a derivative
proceeding.
Corel. Under the CBCA, a complainant may apply to the court for leave to
bring an action in the name of and on behalf of a corporation or any of its
subsidiaries, or to intervene in an existing action to which the corporation or
any subsidiary is a party, for the purpose of prosecuting, defending or
discontinuing the action on behalf of the corporation. Under the CBCA, no
action may be brought and no intervention in an action may be made unless the
complainant has given reasonable notice to the directors of the corporation or
its subsidiary of the complainant's intention to apply to the court and the
court is satisfied that:
. the directors of the corporation or its subsidiary will not bring,
diligently prosecute or defend or discontinue the action,
114
. the complainant is acting in good faith and
. it appears to be in the interest of the corporation or its subsidiary
that the action be brought, prosecuted, defended or discontinued.
Under the CBCA, the court in a derivative action may make any order it
thinks fit including, without limitation:
. an order authorizing the complainant or any other person to control the
conduct of the action,
. an order giving directions for the conduct of the action,
. an order directing that any amount adjudged payable by a defendant in
the action shall be paid, in whole or in part, directly to former and
present security holders of the corporation or its subsidiary instead of
to the corporation or its subsidiary and
. an order requiring the corporation or its subsidiary to pay reasonable
legal fees reasonably incurred by the complainant in connection with the
action. Additionally, under Canadian corporation law, a court may order
a corporation or its subsidiary to pay the complainant's interim costs,
including legal fees and disbursements. Although the complainant may be
held accountable for the interim costs on final disposition of the
complaint, it is not required to give security for costs in a derivative
action.
Director Qualifications
Micrografx. Texas law does not have any residency or other director
qualification requirements.
Corel. A majority of the directors of a Canadian corporation generally must
be resident Canadians. The CBCA also requires that a corporation whose
securities are publicly traded have not fewer than three directors, at least
two of whom are not officers or employees to the corporation or any of its
affiliates. The foregoing provisions apply to Corel.
Election of Directors
Micrografx. Under Texas law, directors are elected at each annual
shareholder meeting unless their terms are staggered. Vacancies on the board of
directors may be filled by the shareholders or directors, unless the articles
of incorporation or the bylaws provide otherwise. The articles of incorporation
may authorize the election of some directors by one or more classes or series
of shares, and the articles of incorporation, or an bylaw adopted by a vote of
the shareholders may provide for staggered terms for the directors. The
Micrografx articles of incorporation provide that the holders of the Micrografx
preferred stock voting as a single class have the right to elect two directors
to the board of directors. There is no cumulative voting or staggered terms.
Corel. The Corel certificate and articles of amalgamation and the Corel
bylaws do not provide for a classified board of directors or for cumulative
voting in the election of directors.
Removal of Directors
Micrografx. The Micrografx articles of incorporation provide that any
director, or the entire board of directors, may be removed, with or without
cause, by the affirmative vote of the holders of at least a majority of all
shares then entitled to vote at an election of directors, voting together as a
single class. The Micrografx board of directors has the right to remove a
director for cause.
Corel. The shareholders of a CBCA corporation such as Corel may, by
resolution passed by a majority of the votes cast thereon at a meeting of
shareholders called for that purpose, remove any director , with or without
cause, before the expiration of that director's term of office and may elect
any qualified person in that director's stead for the remainder of the
director's term.
115
Vacancy on the Board of Directors
Micrografx. Under the Micrografx bylaws, any vacancy on the board, occurring
for any reason except for the removal of a director without cause, may be
filled by a majority of the directors then in office, although less than a
quorum. Vacancies occurring because a director is removed without cause are
filled by a vote of the shareholders. New directors will hold office until the
annual meeting of the shareholders of Micrografx at which the term of the class
to which they have been elected expires.
Corel. Generally, under the CBCA, if a vacancy should occur in the board of
directors, the remaining directors, if constituting a quorum, may appoint a
qualified person to fill the vacancy for the remainder of the vacating
director's term. In the absence of a quorum, the remaining directors shall call
a meeting of shareholders to fill the vacancy. In addition, if the articles of
a corporation so provide, the directors may increase the number of directors
within the range provided in the articles and may fill the vacancies thereby
created for a term expiring not later than the next annual meeting of
shareholders provided that the total number of directors so appointed does not
exceed one-third of the number of directors elected at the previous annual
meeting of shareholders. The Corel certificate and articles of amalgamation do
not provide for the filling of vacancies caused by an increase in the number of
directors.
Director and Officer Indemnification
Micrografx. Under Texas law, current and former directors and officers of a
corporation, and persons who served at the request of the corporation as a
directors or officers of a subsidiary of a corporation, may be indemnified by
the corporation for liabilities or expenses reasonably incurred in connection
with claims, actions, suits or proceedings arising from their being or having
been a director or officer. This indemnification may include reasonable
settlements of these types of claims, actions, suits or proceedings. However,
Texas law also provides that a corporation may only indemnify directors or
officers if it is determined that they:
. acted in good faith,
. reasonably believed that their conduct was in the corporation's best
interests or, in some cases, that their conduct was at least not opposed
to the corporation's best interests and
. in the case of any criminal proceeding, had no reasonable cause to
believe that their conduct was unlawful.
Texas law requires a corporation to indemnify a director against reasonable
expenses incurred in connection with a proceeding in which the director is a
named a defendant because he is or was a director if the director is wholly
successful in the defense of the proceeding.
The Micrografx articles of incorporation provide that the board of
directors, in its sole discretion, may indemnify any person for whom
indemnification is permitted to the fullest extent permitted by law.
Texas law allows a Texas corporation to obtain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation
for any liability asserted against him, whether or not the corporation has the
power to indemnify him, under Texas law. Neither the Micrografx articles of
incorporation nor the Micrografx bylaws limit Texas law.
Corel. The CBCA also generally provides that a corporation may indemnify its
present and former directors or officers or a person who acts or acted at the
corporation's request as a director or officer of a body corporate of which the
corporation is or was a shareholder or creditor, and his heirs and legal
representatives against all costs, charges and expenses, including an amount
paid to settle an action or satisfy a judgment reasonably incurred by him in
respect of any civil, criminal or administrative action or proceeding to which
he is made a party by reason of being or having been a director or officer of
the corporation. However, the indemnity is limited to circumstances in which
the director or officer acted honestly and in good faith with a view to the
best interests of the corporation, and in the case of a criminal or
administrative action or proceeding
116
that is enforced by a monetary penalty, the director or officer must have had
reasonable grounds for believing that his conduct was lawful. Subject to the
above mentioned limitations, a corporation may, with the approval of a court,
also indemnify its present and former directors or officers or a person who
acts or acted at the corporation's request as a director or officer of a body
corporate of which the corporation is or was a shareholder or creditor, and his
heirs and legal representatives in respect of an action by or on behalf of the
corporation or body corporate to procure a judgment in its favor, to which that
person is made a party by reason of being of having been a director or an
officer of the corporation or body corporate. The Corel bylaws require
indemnification to the full extent authorized by the CBCA. Where an officer or
director is substantially successful on the merits in his defense of the action
or proceeding, the officer or director is entitled to indemnification from the
corporation for the costs, charges and expenses which were reasonably incurred.
The CBCA does not expressly contemplate the advance payment of an indemnitee's
expenses prior to the final disposition of an action.
Director Exculpation
Micrografx. Under Texas law, a corporation is permitted to include a
provision in its articles of incorporation which eliminates the liability of
directors to the corporation or its shareholders for monetary damages for
breach of fiduciary duty as a director, provided the liability does not arise
from some proscribed conduct, including intentional misconduct, deriving an
improper personal benefit from a transaction and breach of the duty of loyalty.
The Micrografx articles of incorporation contain such a provision limiting the
liability of its directors.
Corel. The CBCA has no comparable provision.
Fiduciary Duties
Micrografx. Under Texas law, the duty of care requires that the directors
act in an informed and deliberative manner and inform themselves, prior to
making a business decision, of all material information reasonably available to
them. The duty of care also requires that directors exercise care in overseeing
and investigating the conduct of corporate employees. The duty of loyalty may
be summarized as the duty to act in good faith, not out of self-interest, and
in a manner that the directors' reasonably believe to be in the best interests
of the shareholders.
Corel. The CBCA requires directors of a Canadian corporation to act honestly
and in good faith with a view to the best interests of the corporation, and the
duty of care requires that the directors exercise the care, diligence and skill
that a reasonably prudent person would exercise in comparable circumstance.
Corel's bylaws contain a similar provision.
Special Meeting of Shareholders
Micrografx. Under Texas law, special meetings of the shareholders may be
called by the board of directors, the president of a corporation or the holders
of at least 10% of the shares entitled to vote at the special meeting, unless
the corporation's articles of incorporation provide for a number of shares
greater than 10%. The Micrografx amended and restated bylaws leaves 10% as the
percentage of shares required to call a special meeting. The Micrografx amended
and restated bylaws require that written or printed notice stating the place,
day and hour of each meeting of shareholders, and in case of a special meeting
the purpose for which the meeting is called, be delivered not less than 10 nor
more than 30 days before the meeting, either personally or by mail, to each
shareholder of record entitled to vote at the meeting.
Corel. Under the CBCA, a special meeting of shareholders may be called by
the directors of a corporation. Under the Corel bylaws, in addition to the
Corel board of directors, the chairman of the board of Corel or the president
of Corel has the power to call a special meeting of shareholders. The holder of
not less than 5% of the issued shares of a corporation that carry the right to
vote may request that directors call a
117
meeting of shareholders. If the meeting is not called within 21 days after
receiving such a request, any shareholder that signed the request may call the
meeting.
Shareholder Proposals
Micrografx. Under Texas law, a corporation's articles of incorporation or
bylaws may contain procedural requirements for submitting shareholder
proposals. Generally, under United States securities laws, a shareholder may
submit a proposal to be included in a company's proxy statement if the
shareholder:
. owns at least 1% or $2,000 in market value of the securities
entitled to be voted on the proposal,
. has owned the securities for at least one year prior to the date of
the proposal and
. continues to own the securities through the date of the meeting.
A shareholder must also comply with procedural requirements described in the
Securities Exchange Act of 1934.
Corel. Under the CBCA, a shareholder entitled to vote at an annual meeting
of shareholders may submit to the corporation a proposal with matters that the
shareholder proposes to raise at the next annual meeting. On receipt of a
proposal, a corporation that solicits proxies will include the proposal in the
management proxy circular and, if requested by the shareholder, include in the
management proxy circular a statement by the shareholder of not more than 200
words in support of the proposal and the name and address of the shareholder.
A corporation may, within 10 days after receiving a shareholder proposal,
notify the shareholder of its intention to omit the proposal from the
management proxy circular if:
. the proposal is not submitted at least 90 days before the
anniversary date of the previous annual meeting,
. it appears that the proposal is submitted by the shareholder for the
purpose of securing publicity or enforcing a personal claim or
grievance, or primarily for the purpose of promoting general
economic, political, racial, religious, social or similar causes,
. the corporation, in the previous two years, included a substantially
similar proposal at the request of the shareholder and the
shareholder failed to present the proposal at the annual meeting or
. a substantially similar proposal was submitted to shareholders
within the past two years and the proposal was defeated.
Consent in Lieu of Meeting
Micrografx. Under Texas law, unless otherwise provided in the articles of
incorporation, any action required to be taken or which may be taken at an
annual or special meeting of shareholders may be taken without a meeting,
without prior notice and without a vote, if a consent in writing is signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize the action at a meeting.
Micrografx's articles of incorporation expressly approves shareholder actions
by written consent.
Corel. The CBCA provides shareholder action may be taken without a meeting
only by a written resolution signed by all shareholders who would be entitled
to vote on that action at a meeting.
Quorum Requirements
Micrografx. Under Texas law, a quorum of shareholders is a majority of the
outstanding shares entitled to vote, present in person or represented by proxy,
unless otherwise specified in the articles of incorporation or in the bylaws,
but in no event can the quorum be less than one-third of the outstanding shares
entitled to vote.
118
The Micrografx bylaws state that a quorum shall be the holders, present in
person or by proxy, of a majority of the shares of the capital stock of the
corporation issued and outstanding and entitled to vote at the meeting.
Corel. Under the CBCA, a quorum of shareholders is a majority of the
outstanding shares entitled to vote at a meeting of shareholders unless
otherwise specified in the bylaws. The Corel bylaws generally state that a
quorum shall be five persons present in person and representing in their own
right, or by proxy, or as the duly authorized representative of any shareholder
that is a body corporate or association, not less than 10% in number of the
outstanding shares of the corporation carrying voting rights at the meeting of
shareholders.
Inspection of Books and Records
Micrografx. Under Texas law, any shareholder of a corporation who has been a
shareholder for at least six months or owns at least 5% of all of the
outstanding shares of a corporation, its agents or legal representatives may
make a written demand to examine the records of that corporation. Such a demand
to examine the corporation's records must have a "proper purpose."
Corel. The CBCA provides that shareholders, creditors, their agents and
legal representatives may examine some of the records of a corporation such as
Corel during usual business hours and take extracts therefrom, free of charge.
Shareholder Rights Plan
Micrografx. Micrografx does not have a comparable plan.
Corel. Under Corel's shareholders rights plan, as amended and restated as of
March 31, 1999, the holders of Corel's common stock have rights which become
exercisable if any person or group acquires Corel common stock and/or
securities convertible into or exchangeable for Corel's common stock or other
voting shares that represent, or on conversion or exchange would represent,
more than 20% of Corel's outstanding voting shares, in which case each holder
of Corel common stock other than such person or group would be entitled to
purchase additional Corel common stock at a discount to their current market
price.
LEGAL MATTERS
McCarthy Tetrault LLP of Ottawa, Canada will provide an opinion as to the
validity of the Corel common stock to be issued in connection with the merger
and Canadian tax consequences. The United States federal income tax
consequences in connection with the merger will be passed on for Corel by
Milbank, Tweed, Hadley & McCloy LLP. The United States federal income tax
consequences in connection with the merger will be passed on for Micrografx by
Locke Liddell & Sapp LLP.
EXPERTS
The audited financial statements incorporated by reference in this
prospectus/proxy statement of Corel for the years ended November 30, 2000 and
1999 and for each of the three years in the period ended November 30, 2000 have
been included in reliance on the report of PricewaterhouseCoopers LLP,
independent auditors, given on their authority as experts in accounting and
auditing.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of Micrografx as of June 30, 2001 and 2000 and for each of
the three years in the period ended June 30, 2001, as set forth in their report
(which contains an explanatory paragraph describing conditions that raise
substantial
119
doubt about Micrografx's ability to continue as a going concern as described in
Note 2 to the consolidated financial statements). The consolidated financial
statements are included in the prospectus/proxy statement and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Corel has filed a Registration Statement on Form S-4 to register with the
Securities and Exchange Commission the Corel common stock and Corel
participation rights that may be issued to Micrografx shareholders in the
merger. This document is a part of that registration statement and constitutes
a prospectus of Corel and a proxy statement of Micrografx. As allowed by the
rules of the Securities and Exchange Commission, this prospectus/proxy
statement does not, however, contain all the information you can find in the
registration statement or the exhibits to the registration statement.
Micrografx and Corel file annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any reports, statements or other information filed by
Micrografx or Corel at the Securities and Exchange Commission's public
reference rooms at the following locations:
Public Reference Room New York Regional Office Citicorp Center
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661-2511
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the public reference rooms. You may also obtain copies
of documents filed with the Securities and Exchange Commission from commercial
document retrieval services (some of which also provide on-line delivery) and
at the world wide web site maintained by the Securities and Exchange Commission
at www.sec.gov.
Corel common stock is traded on the Nasdaq National Market and Corel is
required to file reports, proxy statements and other information with Nasdaq.
Reports, proxy statements and other information concerning Corel may be
inspected at the offices of the Nasdaq Stock Market, Inc. which is located at
1735 K Street, N.W., Washington, D.C. 20006. Corel common stock is also traded
on The Toronto Stock Exchange and Corel is required to file reports, proxy
statements and other information with the exchange. Reports, proxy statements
and other information concerning Corel can be inspected at the offices of The
Toronto Stock Exchange at 2 First Canadian Place, Toronto, Ontario, Canada M5X
1J2.
Corel also files annual, quarterly and special reports, proxy statements and
other information with the Canadian securities regulatory authorities in the
provinces where the filings are required to be made. Copies of the filings are
available to the public over the Internet at www.sedar.com, the web site
maintained on behalf of the Canadian securities administrators for accessing
filings made through SEDAR (System for Electronic Document Analysis and
Retrieval). SEDAR is the system used for electronically filing most securities
related information with the Canadian securities regulatory authorities.
Micrografx common stock is traded on the over-the-counter bulletin board.
The Securities and Exchange Commission allows Corel to "incorporate by
reference" information into this prospectus/proxy statement. This means that
Corel can disclose important information to you by referring you to another
document filed separately with the Securities and Exchange Commission. The
information incorporated by reference is deemed to be part of this
prospectus/proxy statement, except for any information superseded by
information contained in this prospectus/proxy statement.
120
This prospectus/proxy statement incorporates by reference the documents set
forth below that have previously been filed by Corel with the Securities and
Exchange Commission. These documents contain important information about Corel
and its financial condition.
1. Corel's annual report on Form 10-K/A for the fiscal year ended
November 30, 2000;
2. Corel's quarterly report on Form 10-Q for the fiscal quarter ended
February 28, 2001;
3. Corel's quarterly report on Form 10-Q for the fiscal quarter ended
May 31, 2001;
4. Corel's current report on Form 8-K filed on August 17, 2001;
5. Corel's Form 8-A filed on March 25, 1999, including the amendment
filed on July 20, 2000; and
6. Corel's Form 20-F filed on August 25, 1992.
Corel is also incorporating by reference additional documents that it files
with the Securities and Exchange Commission under Sections 13(a), 13(c), 14
and 15(d) of the Securities Exchange Act of 1934, as amended, between the date
of this prospectus/proxy statement and the date of Micrografx special meeting.
In addition, any document of the type referred to above, and any material
change reports (excluding confidential reports), interim financial statements
and information circulars, all as filed by Corel with the various securities
commissions or any similar authorities in the provinces of Canada between the
date of this document and the date of the meetings, will be deemed to be
incorporated by reference in this prospectus/proxy statement. Any statement
contained in a document incorporated or deemed to be incorporated by reference
will be deemed to be modified or superseded for the purposes of this document
to the extent that a statement contained in this document, or in any other
subsequently filed document that is also incorporated or deemed to be
incorporated by reference, modifies or supersedes the statement.
You can obtain any of the incorporated documents by contacting Corel or the
Securities and Exchange Commission. Documents filed by Corel with the various
securities commissions or any similar authorities in the provinces of Canada
can be requested from Micromedia, 20 Victoria Street, Toronto, Canada MSC 2NC.
Please request these documents by October 22, in order to receive them before
the Micrografx special meeting. Corel will send you the documents incorporated
by reference, without charge, excluding all exhibits, unless Corel has
specifically incorporated by reference the exhibit in this prospectus/proxy
statement.
You may obtain documents incorporated by reference in this prospectus/proxy
statement by requesting them in writing or by telephone at the following
addresses:
Corel Corporation
Attention: Investor Relations
1600 Carling Avenue
Ottawa, Ontario K1Z 8R7
Telephone: (613) 728-0826
If you would like to request documents, please do so by October 22, 2001 to
receive them before the Micrografx special meeting.
You can also get more information by visiting Micrografx's web site at
www.micrografx.com and Corel's web site at www.corel.com. Web site materials
are not a part of this prospectus/proxy statement.
TRADEMARKS
Each of Corel and Micrografx owns trademarks rights with respect to various
trademarks and service marks contained in this prospectus/proxy statement.
This document also includes trademarks, service marks or tradenames of
companies other than Corel and Micrografx, which are the property of their
respective owners.
121
INDEX TO MICROGRAFX, INC. CONSOLIDATED FINANCIAL STATEMENTS
1. Consolidated Financial Statements. The following consolidated financial
statements of Micrografx, Inc., are filed as part of this Form S-4 on the
pages indicated:
Report of Independent Auditors........................................ F-2
Consolidated Balance Sheets at June 30, 2001, and 2000................ F-3
Consolidated Statements of Operations for the Years Ended June 30,
2001, 2000, and 1999................................................. F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
June 30, 2001, 2000, and 1999........................................ F-5
Consolidated Statements of Cash Flows for the Years Ended June 30,
2001, 2000, and 1999................................................. F-6
Notes to Consolidated Financial Statements............................ F-7
2. Consolidated Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts........................ F-23
Schedules other than the one listed above are omitted as the required
information is inapplicable or the information is presented in the
consolidated financial statements or related notes.
F-1
Report of Independent Auditors
The Shareholders of Micrografx, Inc.
We have audited the accompanying consolidated balance sheets of Micrografx,
Inc. and subsidiaries (the Company) as of June 30, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended June 30, 2001. Our audits
also included the financial statement schedule, listed in the Index. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Micrografx,
Inc. and subsidiaries at June 30, 2001 and 2000, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended June 30, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that Micrografx, Inc. will continue as a going concern. As more fully
described in Note 2, the Company has incurred significant operating losses and
has a working capital deficiency. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
Dallas, Texas
August 9, 2001, except for the first paragraph of Note 2 and the first
paragraph of Note 10 as to which the date is August 28, 2001
F-2
Micrografx, Inc.
Consolidated Balance Sheets
(In thousands, except per share data)
June 30, June 30,
2001 2000
-------- --------
Assets
Current assets:
Cash and cash equivalents................................ $ 1,690 $ 2,843
Accounts receivable, less allowances of $869 and $2,788.. 6,549 3,926
Inventories.............................................. 430 458
Other current assets..................................... 834 1,019
-------- --------
Total current assets................................... 9,503 8,246
Property and equipment, net................................ 879 1,570
Capitalized software development costs, net................ 5,637 5,530
Acquired product rights, net............................... 954 1,612
Goodwill, net.............................................. 1,378 1,749
Other assets............................................... 576 772
-------- --------
Total assets........................................... $ 18,927 $ 19,479
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable......................................... $ 3,327 $ 3,606
Accrued compensation and benefits........................ 1,388 1,597
Other accrued expenses................................... 2,557 3,503
Deferred revenue......................................... 2,227 1,584
Subordinated convertible debenture....................... 5,797 --
Notes payable............................................ 940 138
Receivable facility...................................... 643 767
Income taxes payable..................................... 180 271
-------- --------
Total current liabilities.............................. 17,059 11,466
Long-term debt............................................. -- 5,797
Other non-current liabilities.............................. 203 437
Shareholders' equity:
Preferred stock, $.01 par value, 10,000 shares
authorized; 1,120 and no shares issued.................. 1,449 --
Common stock, $.01 par value, 20,000 shares authorized;
13,302 and 12,263 shares issued......................... 133 123
Additional capital....................................... 38,254 38,029
Accumulated deficit...................................... (30,632) (28,915)
Accumulated other comprehensive loss..................... (1,740) (1,659)
Less--treasury stock (766 shares), at cost............... (5,799) (5,799)
-------- --------
Total shareholders' equity............................. 1,665 1,779
-------- --------
Total liabilities and shareholders' equity............. $ 18,927 $ 19,479
======== ========
See accompanying notes.
F-3
Micrografx, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Years Ended June 30,
--------------------------
2001 2000 1999
------- -------- -------
Net revenues....................................... $30,171 $ 36,273 $56,962
Cost of revenues................................... 5,955 9,204 10,869
------- -------- -------
Gross profit................................... 24,216 27,069 46,093
Operating expenses:
Sales and marketing.............................. 15,998 23,462 32,702
General and administrative....................... 4,408 7,310 6,637
Research and development......................... 4,192 7,445 8,245
Write down of long-lived assets.................. -- 8,206 --
Restructuring charges............................ (330) 1,662 --
In-process research and development charge....... -- -- 1,928
------- -------- -------
Total operating expenses....................... 24,268 48,085 49,512
------- -------- -------
Loss from operations............................... (52) (21,016) (3,419)
Interest income.................................... (55) (65) (1,004)
Interest expense................................... 863 621 260
Other expense...................................... 451 143 85
------- -------- -------
Total non operating expense (income)........... 1,259 699 (659)
------- -------- -------
Loss before income taxes........................... (1,311) (21,715) (2,760)
Income tax provision............................... 323 454 3,092
------- -------- -------
Net loss........................................... (1,634) (22,169) (5,852)
Preferred stock dividends.......................... (83) -- --
------- -------- -------
Net loss applicable to common shareholders......... $(1,717) $(22,169) $(5,852)
======= ======== =======
Loss per share:
Basic............................................ $ (0.15) $ (1.95) $ (0.53)
======= ======== =======
Diluted.......................................... $ (0.15) $ (1.95) $ (0.53)
======= ======== =======
See accompanying notes.
F-4
Micrografx, Inc.
Consolidated Statements of Shareholders' Equity
(In thousands)
Preferred Accumulated
Stock Common Stock Other
------------- ------------- Additional Retained Comprehensive Treasury
Shares Amount Shares Amount Capital Earnings Loss Stock Total
------ ------ ------ ------ ---------- -------- ------------- -------- --------
Balance, June 30, 1998.. -- -- 11,474 $115 $33,770 $ (894) $(1,537) $(2,884) $ 28,570
Common stock issued
under stock option
plan................... -- -- 509 5 3,082 -- -- -- 3,087
Common stock issued
under stock purchase
plan................... -- -- 145 2 792 -- -- -- 794
Treasury stock
purchased.............. -- -- -- -- -- -- -- (4,066) (4,066)
Restricted stock
activity............... -- -- 3 -- (28) -- -- -- (28)
Translation of foreign
currency financial
statements............. -- -- -- -- -- -- (73) -- (73)
Net loss................ -- -- -- -- -- (5,852) -- -- (5,852)
--------
Total comprehensive
loss................... -- -- -- -- -- -- -- -- (5,925)
----- ------ ------ ---- ------- -------- ------- ------- --------
Balance, June 30, 1999.. -- -- 12,131 122 37,616 (6,746) (1,610) (6,950) 22,432
Common stock issued
under stock option
plan................... -- -- 20 -- 106 -- -- -- 106
Common stock issued
under stock purchase
plan................... -- -- 112 1 446 -- -- -- 447
Treasury stock issued
related to purchase of
AdvanEdge.............. -- -- -- -- (307) -- -- 1,207 900
Restricted stock plan
activity............... -- -- -- -- 6 -- -- (56) (50)
Options issued for
services............... -- -- -- -- 162 -- -- -- 162
Translation of foreign
currency financial
statements............. -- -- -- -- -- -- (49) -- (49)
Net loss................ -- -- -- -- -- (22,169) -- -- (22,169)
--------
Total comprehensive
loss................... -- -- -- -- -- -- -- -- (22,218)
----- ------ ------ ---- ------- -------- ------- ------- --------
Balance, June 30, 2000.. -- -- 12,263 123 38,029 (28,915) (1,659) (5,799) 1,779
Issuance of Preferred
Stock, net of offering
costs.................. 1,120 1,449 -- -- -- -- -- -- 1,449
Common stock issued
under stock purchase
plan................... -- -- 249 2 150 -- -- -- 152
Restricted stock plan
activity............... -- -- 790 8 (72) -- -- -- (64)
Accrued dividends-
Preferred.............. -- -- -- -- -- (83) -- -- (83)
Options issued for
services............... -- -- -- -- 147 -- -- -- 147
Translation of foreign
currency financial
statements............. -- -- -- -- -- -- (81) -- (81)
Net loss................ -- -- -- -- -- (1,634) -- -- (1,634)
--------
Total comprehensive
loss................... -- -- -- -- -- -- -- -- (1,715)
----- ------ ------ ---- ------- -------- ------- ------- --------
Balance, June 30, 2001.. 1,120 $1,449 13,302 $133 $38,254 $(30,632) $(1,740) $(5,799) $ 1,665
===== ====== ====== ==== ======= ======== ======= ======= ========
See accompanying notes.
F-5
Micrografx, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Years Ended June 30,
---------------------------
2001 2000 1999
------- -------- --------
Cash flows from operating activities:
Net loss.......................................... $(1,634) $(22,169) $ (5,852)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Asset impairment charge......................... -- 8,206 --
Restructuring charge............................ (704) 1,662 --
Depreciation and amortization................... 4,034 7,152 7,121
In-process research and development charge...... -- -- 1,928
Deferred income taxes and other................. (59) 118 2,383
Deferred compensation........................... (295) 6 (28)
Changes in operating assets and liabilities, net
of effects of purchase of InterCAP:
Deferred revenue.............................. 643 (67) (11,297)
Accounts receivable........................... (2,623) 2,553 6,989
Inventories................................... 28 113 410
Other current assets.......................... (74) 417 (28)
Payables and accruals......................... (710) (411) (4,762)
Income taxes payable.......................... 168 (133) 64
------- -------- --------
Total adjustments........................... 408 19,616 2,780
------- -------- --------
Net cash used in operating activities....... (1,226) (2,553) (3,072)
------- -------- --------
Cash flows from investing activities:
Proceeds from maturities of short-term
investments.................................... -- 3,440 6,283
Purchases of short-term investments............. -- (1,039) (7,100)
Payment for purchase of acquisitions, net of
cash acquired.................................. -- -- (3,720)
Capitalization of software development costs and
purchases of acquired product rights........... (2,168) (3,214) (7,998)
Payments for purchases of property and
equipment, net................................. (187) (1,406) (1,674)
------- -------- --------
Net cash used in investing activities....... (2,355) (2,219) (14,209)
------- -------- --------
Cash flows from financing activities:
Proceeds from employee stock programs........... 382 678 3,881
Proceeds from preferred stock issue, net of
offering costs................................. 1,449 -- --
Treasury stock acquired......................... -- -- (4,066)
Issuance of notes payable....................... 940 -- --
Payments of notes payable....................... (138) (2,600) (125)
(Payments) proceeds from receivable facility,
net............................................ (124) 767 --
------- -------- --------
Net cash provided by (used in) financing
activities................................. 2,509 (1,155) (310)
------- -------- --------
Effect of exchange rates on cash and cash
equivalents...................................... (81) (49) (73)
Net decrease in cash and cash equivalents......... (1,153) (5,976) (17,664)
Cash and cash equivalents, beginning of year...... 2,843 8,819 26,483
------- -------- --------
Cash and cash equivalents, end of year............ $ 1,690 $ 2,843 $ 8,819
======= ======== ========
Supplemental Cash Flow Information
Cash paid for --
Interest...................................... $ 543 $ 621 $ 133
Income taxes.................................. $ 424 $ 760 $ 388
See accompanying notes.
F-6
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
1. Summary of Significant Accounting Policies
The Company
Micrografx, Inc. ("Micrografx" or the "Company") was founded in 1982 and
incorporated in 1984 in the state of Texas. Micrografx develops and markets
graphics software for business use in two target categories: enterprise process
management, and graphics products.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Inventories
Inventories are stated at the lower of cost or market using a weighted-
average method. Finished goods inventories include costs of material, labor and
overhead. Major classes of inventory include the following (in thousands):
June 30,
---------
2001 2000
---- ----
Raw materials.................................................... $334 $362
Finished goods................................................... 96 96
---- ----
$430 $458
==== ====
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided for using the straight-line method over
the following estimated useful lives:
Computers and equipment 2-5 Years
Software 2-5 Years
Furniture and fixtures 5-7 Years
Leasehold improvements Shorter of Lease Term or Asset Life
Capitalized Software Development Costs and Acquired Product Rights
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," the Company capitalizes certain software development costs
incurred after technological feasibility is achieved and also capitalizes costs
of acquiring certain product rights in connection with the development of its
computer software products.
F-7
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Capitalized costs are reported at the lower of unamortized cost or net
realizable value. Capitalized software development costs and acquired product
rights are amortized on a straight-line basis. With the change in strategy to a
business software provider, the Company now estimates the economic life of the
business software to be approximately 48 months. The longer economic life was
implemented with the release of iGrafx Professional, iGrafx Process, and iGrafx
Designer. No adjustments were made to the amortization rate of any previously
released software, which had lives ranging from 12 to 18 months. Amortization
of capitalized software development costs is included in cost of revenues. The
Company begins amortization when the products are available for general release
to customers. All other research and development expenditures are charged to
research and development expense in the period incurred.
Foreign Currency
For the majority of the Company's foreign subsidiaries, the functional
currency is the local currency of the country. Accordingly, assets and
liabilities of the foreign subsidiaries are translated to U.S. dollars at year
end exchange rates. Income and expense items are translated at the average
rates of exchange prevailing during the year. The adjustments resulting from
translating the financial statements of foreign subsidiaries are reflected as
cumulative translation adjustments, a reduction of shareholders' equity.
In fiscal year 2001, the net foreign currency exchange loss was
approximately $417,000, compared to an exchange loss of $117,000 in fiscal year
2000 and an exchange gain of $19,000 in fiscal year 1999.
Foreign Forward Exchange Contracts
The Company has historically entered into forward foreign exchange contracts
to hedge existing or projected exposure to changing foreign exchange rates.
This exposure results from the Company's foreign operations in countries
including Germany, France, the United Kingdom, the Netherlands, and Japan that
are denominated in currencies other than the U.S. dollar. These forward
contracts are not held for trading purposes.
These contracts generally have maturities of 180 days or less and contain an
element of risk that the counterparty may be unable to meet the terms of the
contracts. However, the Company minimizes such risk by limiting the
counterparty to major financial institutions. Management believes the risk of
incurring such losses is remote, and any losses therefrom would be immaterial.
Gains and losses associated with these forward contracts are recognized in
other (income) expense. During fiscal 2001, the Company recognized no gain or
loss associated with forward contracts. During fiscal 2000, the Company
recognized approximately $11,000 in gains associated with forward contracts.
During fiscal 1999, the Company recognized approximately $58,000 in losses
associated with forward contracts. At June 30, 2001, the Company had no forward
contracts outstanding.
Revenue Recognition
The Company analyzes revenue sales to customers based upon the following:
. Business products sold to distributors and resellers are recognized when
product is shipped because the end-user is identified and the likelihood
of the product being returned is unlikely. These products are usually in
the form of licenses versus packaged products.
. Packaged product sales to distributors and resellers are recognized when
related products are sold through to the end user; however, adjustments
are made for expected returns based on historical product returns.
F-8
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. Maintenance and subscription revenue is recognized ratably over the
contract period. Revenue from products licensed to original equipment
manufacturers ("OEMs") is recorded when OEMs ship licensed products
while revenue from multi-user licenses is recorded when the software has
been delivered.
In connection with the sale of certain products, the Company provides free
telephone support service to customers. The Company does not defer the
recognition of any revenue associated with the sale of these products, since
the cost of providing this free support is insignificant, the support is
provided within one year after the associated revenue is recognized (the vast
majority of the support actually occurs within three months) and enhancements
are minimal and infrequent. The estimated cost of providing this free support
is accrued upon product shipment. Provisions are recorded for returns and bad
debts based on historical experience.
The Company periodically offers rebates to distributors, the amounts of
which are primarily based on sales volume and are accrued as reductions in
revenue and in a contra-receivable account. The Company provided for rebates of
approximately $263,000, $940,000, and $1,180,000, in fiscal 2001, 2000, and
1999, respectively. The Company also offers distributors and resellers co-op
advertising funds, generally 2-10 percent of amounts invoiced, that are used to
promote the Company's products. These funds are generally in the form of
credits against outstanding invoices and are included in sales and marketing
expense during the period in which the related revenue is recognized. The
Company did not provide a material amount for co-op funds in fiscal 2001 but
provided for co-op funds of $155,000, and $1,251,000, in fiscal 2000, and 1999,
respectively.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
$709,000, $1,624,000, and $4,929,000, in fiscal 2001, 2000, and 1999,
respectively.
Stock-Based Compensation
The Company grants stock options through employee stock option plans and a
restricted stock plan. Options are granted for a fixed number of shares to
employees and directors with an exercise price equal to the fair value of the
shares at the date of grant for all plans, excluding the restricted stock plan.
The Company accounts for stock option grants in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees," because the alternative fair
value accounting method provided for under FASB Statement No. 123, "Accounting
for Stock-based Compensation," requires the use of valuation models that were
not developed for use in valuing employee stock options. Accordingly, the
Company does not recognize compensation expense for these stock option grants,
as the exercise price is equal to the fair value of the Company's common stock
on the date of grant. Restricted stock shares under the restricted stock option
plan are granted at $0.01 par value and compensation expense, equal to the
intrinsic value on the date of grant, is recognized over the vesting period.
F-9
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loss Per Share
Loss per share for all periods presented is based on the weighted average
basic and dilutive equivalent shares outstanding using the treasury stock
method. Amounts are shown in thousands except for per share data.
Years Ended June 30,
--------------------------
2001 2000 1999
------- -------- -------
Numerator:
Net loss applicable to common shareholders...... $(1,717) $(22,169) $(5,852)
Denominator:
Denominator for basic earnings per share--
weighted average shares...................... 11,651 11,390 11,119
Effect of dilutive employee stock options..... -- -- --
------- -------- -------
Denominator for diluted earnings per share--
adjusted weighted average shares and assumed
conversions.................................. 11,651 11,390 11,119
======= ======== =======
Basic loss per share.......................... $ (0.15) $ (1.95) $ (0.53)
======= ======== =======
Diluted loss per share........................ $ (0.15) $ (1.95) $ (0.53)
======= ======== =======
Options to purchase 3,600,259, 3,042,262 and 2,746,898 shares of Common
Stock were excluded from the diluted loss per share calculation because they
were anti-dilutive for fiscal years ended 2001, 2000 and 1999, respectively.
These options included all options outstanding for each fiscal year presented
as well as 579,700 shares related to the subordinated convertible debentures
issued in connection with InterCAP acquisition.
Reclassifications
Certain previously reported amounts have been reclassified to conform with
current year presentation.
2. Corel Acquisition, Liquidity and Capital Resources
On July 16, 2001, the Company signed a definitive agreement with Corel
Corporation ("Corel") whereby Corel will acquire Micrografx. The transaction
will be accounted for as a purchase and is subject to regulatory approval, as
well as approval by the Company's shareholders. The purchase price will be
equivalent to one times the Company's 2001 annual revenues, subject to certain
adjustments, or approximately $32.0 million. The transaction is expected to
close in October 2001, assuming shareholder approval and regulatory approval.
On August 28, 2001, Corel extended to Micrografx a $2.5 million bridge loan
that is secured by the stock and assets of Image2Web, Inc. ("Image2Web").
Image2Web is a wholly-owned subsidiary of Micrografx. Micrografx also granted
to Corel an option to purchase 80% of the stock of Image2Web for a purchase
price equal to the amount of the loan owing from time to time, and a right of
first refusal to acquire the 20% balance of the outstanding Image2Web stock.
The bridge loan is non-amortizing and matures on January 31, 2002. Interest on
the loan accrues at a rate of 8.0% per annum and is payable quarterly, in
arrears, in the event the merger agreement is terminated and at maturity. The
proceeds of the loan will be used to pay off the accounts receivable line of
credit with Silicon Valley Bank of approximately $643,000 at June 30, 2001, to
pay a portion of the approximately $2.0 million in past due accounts payable at
June 30, 2001 and to provide operating cash.
Management is examining various financing methods that would ensure that the
capital resources of Micrografx are sufficient to meet its requirements. In
light of Micrografx's capital resource constraints, which are anticipated to
continue for some time, and other factors, the sale of Micrografx to Corel was
determined to be the most prudent course of action for the benefit of the
shareholders.
In the event that the transaction with Corel fails to close, Micrografx will
continue to pursue the potential sale of equity. Management is also evaluating
other sources of capital including the issuance of debt securities
F-10
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in one or more private transactions, the sale or spin-off of certain assets to
third parties, and/or traditional bank lines secured by international accounts
receivable. The failure to close the Corel transaction or the failure of
Micrografx to acquire additional external financing could result in severe
operational difficulties and shareholder dilution resulting from the conversion
of the Intergraph debenture (see below) to common stock. Such difficulties
could result in a further reduction in workforce, a further reduction in the
scope of operations, or ultimately in a forced reorganization or bankruptcy.
Micrografx believes it should be successful in obtaining the necessary revenue
levels and/or additional funding necessary to operate Micrografx in the near
term, however, there can be no assurance that under its current conditions,
external funds will be available or, if available, will not potentially dilute
shareholders' interests or returns.
At June 30, 2001, Micrografx's principal sources of liquidity consisted of
cash and cash equivalents of approximately $1.7 million. For the fiscal year
ended June 30, 2001, cash used in operating, investing and financing activities
resulted in a net decrease in cash and cash equivalents of approximately $1.2
million, compared to cash usage of approximately $6.0 million for the fiscal
year ended June 30, 2000. Cash used in operating activities improved 52% from
$2.6 million for the fiscal year ended June 30, 2000 to $1.2 million for the
fiscal year ended June 30, 2001. The net change in cash for the fiscal year
ended June 30, 2001 also includes approximately $2.2 million of cash used in
product development activities and approximately $2.4 million in proceeds from
the issuance of notes payable and Series A Preferred Stock.
During fiscal year 2001, the principal negative factors in the operational
cash usage were Micrografx's net loss of approximately $1.6 million and the
increase in accounts receivable of approximately $2.6 million. A portion of the
accounts receivable increase occurred in the fourth quarter of fiscal year 2001
because of a slow down in collections due to the impact of the current economic
environment where customers are stretching out their accounts payable.
Additionally, accounts receivable increased at the end of fiscal 2001 because
of the continued shift in revenue to business customers from retail
distribution. Business revenues have a lower return risk than retail
distribution revenues and therefore require a lower returns reserve resulting
in a higher net accounts receivable.
As a result of Micrografx's reduced liquidity, the Company has generally
been unable to pay invoices received from vendors according to the agreed upon
terms. As of June 30, 2001, approximately $2.0 million in accounts payable were
more than 90 days past due. Micrografx vendors have been cooperative in an
effort to establish payment plans that will allow Micrografx to continue to
operate in the short-term and pay off the outstanding balances as cash flow
improves, but there are no assurances that vendors will remain cooperative.
Micrografx has been successful in the following areas of its plan to reduce
the rate of cash usage:
. Quarterly cash operating expenses (operating costs before consideration
of capitalized software development and amortization) have declined from
approximately $9.2 million for the three months ended June 30, 2000 to
approximately $6.3 million for the three months ended June 30, 2001. The
33% decline resulted primarily from lower personnel costs due to the
June 30, 2000 restructuring and from lower rent and related operating
expenses due to the move of the corporate headquarters to smaller leased
space.
. Management had expected revenues to decline during the first fiscal
quarter of 2001 and to stabilize for the remainder of the year. These
expectations were met and management believes that revenues will remain
at or near the current level for the near term.
. Capital spending has been restricted in fiscal year 2001 to requirements
for replacement only. Capital expenditures for fiscal 2001 were
approximately $187,000, compared to approximately $1.4 million for
fiscal 2000. Management does not expect a material change in the current
level of capital spending for the near term.
F-11
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On March 31, 2000, Micrografx received a receivable financing line of credit
whereby it can receive advances on a significant portion of its domestic
receivables. Micrografx is able to receive advances for up to $3 million in
value of invoices. This facility was renewed in May 2001 and will mature on
March 2, 2002. Micrografx had approximately $643,000 and $767,000 outstanding
under this facility at June 30, 2001 and June 30, 2000, respectively.
On September 5, 2000, Micrografx issued approximately $1.7 million in
Micrografx Series A preferred stock to certain institutional investors and
other unaffiliated parties receiving approximately $1.4 million after offering
costs. This preferred stock is convertible into Micrografx common stock. or, at
the holders' option, up to one-half of the preferred stock may be converted
into Image2Web common stock. In September 2001, Micrografx and the Series A
preferred shareholders amended the terms of the Series A preferred stock
whereby the preferred shareholders relinquished their rights to convert their
preferred shares into Image2Web common stock. Image2Web, Inc. ("Image2Web") is
a wholly-owned subsidiary of Micrografx. In connection with the Corel
transaction, the Series A Preferred Stock will convert into common stock of the
Company (see Note 10).
In January 2001, Micrografx received approximately $800,000 from the
issuance of short-term convertible notes payable. The notes bear interest at 8%
per annum, with an original maturity date of April 30, 2001 (see Note 8). On
April 30, 2001, these notes were amended to extend the maturity date to May 31,
2001, and on May 31, 2001, the maturity date was extended until June 30, 2001.
On June 27, 2001, Micrografx received an additional $139,850 from the issuance
of an additional convertible note payable. Subsequent to year-end, Micrografx
entered into an exchange agreement with the note holders, whereby immediately
prior to the closing of the Corel transaction the notes will be converted into
Micrografx common stock at a conversion rate of $1.00 per share for the
principal balance plus accrued and unpaid interest. If the Corel transaction
does not close, the notes will revert to their original rights (see Note 8).
In connection with the April 16, 1999 acquisition of InterCAP, Micrografx
issued a subordinated convertible debenture in the amount of $5.8 million to
Intergraph Corporation. The debenture was initially convertible into 579,700
shares of Micrografx common stock. In July 1999, the Company registered
579,700 shares to cover the agreement should either Intergraph or the Company
elect to convert all or any part of the debenture into shares of common stock
of the Company. The actual number of shares and the timing of the conversion
are both subject to terms and conditions as outlined in the convertible
debenture agreement. As described in the debenture, the applicable interest
rate for the convertible debenture is a 7 percent fixed rate to begin January
5, 2000 and increasing to 8 percent on January 4, 2001. Since the Company did
not reset the conversion price on the reset date, November 30, 1999, the
interest rates were raised by 200 basis points to 9 and 10 percent
respectively. The debenture matures on March 31, 2002. Interest expense is
being provided for at an effective interest rate of 8 percent. The convertible
debenture is secured by the capital stock of InterCAP. On May 31, 2001,
Micrografx exercised their option to reset the conversion price. The conversion
price was reset to $0.90 from $10.00.
In connection with the proposed acquisition of Micrografx by Corel,
Micrografx negotiated with Intergraph to reduce the principal amount of the
debenture from $5.8 million to $3.8 million if the $3.8 million plus accrued
interest are paid by September 30, 2001 (See Note 8). Micrografx anticipates
that the Corel transaction will close by September 30, 2001 and that Corel will
fund the $3.8 million principal payment plus accrued interest. If the
acquisition of Micrografx by Corel does not close, Micrografx could exercise
its option to convert the debenture into common stock. The maximum amount of
the debenture that can be converted into common stock within a 60-day period is
$1.0 million. The reset conversion price of $0.90 equates to the issuance of
1,111,111 shares of common stock for each $1.0 million of principle. Conversion
of all of the $5.8 million debenture would result in the issuance of 6,441,111
shares of common stock. However, because of the 60-day limitation, the maximum
number of shares that could be issued by the March 31, 2002 maturity date
F-12
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the debenture is 3,333,333 if the conversion was started by October 31,
2001. The remaining principal amount after the issuance of the 3,333,333 shares
of common stock would be $2.8 million, which would be due on March 31, 2002.
Micrografx is currently negotiating with vendors to reduce the amount owed
in exchange for paying them currently rather than the vendors waiting until
Micrografx's cash flow position improves.
3. Restructuring and Impairment Charge
In the fourth quarter of fiscal 2000, the Company recorded charges for
restructuring and asset writedowns of approximately $9.9 million. The
restructuring initiatives involved the Company's elimination of 74 employee
positions, the relocation of the Allen, Texas workforce from the existing
corporate headquarters to a smaller facility, the decision to abandon the
development and marketing of certain products and the writedown of certain
long-lived assets, including goodwill. At June 30, 2001, there is no remaining
restructuring accrual, as compared to the June 30, 2000 balance of
approximately $653,000. The reduction in the restructuring accrual during
fiscal 2001 resulted from cash payments for restructuring related items, the
reversal of charges totaling $330,000 due to the re-evaluation of expected
costs associated with certain leased assets and costs associated with stock
warrants issued in terminating the Allen building lease.
4. Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid securities with original maturities
of three months or less to be cash equivalents. All short-term investments
historically have had maturities within one year of the balance sheet date. The
Company had no short term investments at fiscal year end 2000 or 2001. Cash and
cash equivalents consist of the following (in thousands):
June 30,
2001 2000
------ ------
Cash and cash equivalents:
Cash......................................................... $1,257 $2,463
Money market funds........................................... 433 380
------ ------
Total cash and cash equivalents................................ $1,690 $2,843
====== ======
The appropriate classification of securities is determined at the time of
purchase and reevaluated as of each balance sheet date. The Company has
classified its cash equivalents and short-term investments as available-for-
sale. The available-for-sale securities are carried at cost that approximates
fair value. Gross realized and unrealized gains and losses for these securities
were not material at June 30, 2001, or 2000. The fair value of securities is
based on quoted market prices, where available, or quotes from external pricing
sources such as brokers for those or similar investments and issues. Gross
sales proceeds from available-for-sale securities were $13,639,000,
$34,256,000, and $228,957,000, in fiscal 2001, 2000, and 1999, respectively.
The cost of available-for-sale securities sold is based on the specific
identification method.
5. Accounts Receivable
Accounts receivable consists of the following (in thousands):
June 30,
2001 2000
------ -------
Trade Receivables............................................ $7,418 $ 6,714
Allowances................................................... (869) (2,788)
------ -------
Accounts receivable, net..................................... $6,549 $ 3,926
====== =======
F-13
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Allowances consist of reserves for returns, reserves for bad debt and
accruals for co-op and incentive programs. At June 30, 2001 and 2000,
approximately 47 percent and 53 percent, respectively, of trade receivables
represented amounts due from 10 customers. At June 30, 2001, the Company had
one customer with a receivable balance of 17 percent of trade receivables. At
June 30, 2000, the Company had one customer with a receivable balance of 23
percent of trade receivables. The credit risk in the Company's trade accounts
receivable is substantially mitigated by the Company's credit evaluation
process, credit insurance policies, reasonably short collection terms and the
geographical diversification of revenues. The Company does not require
collateral from its customers.
The Company distributes its products domestically through independent, non-
exclusive distributors, authorized resellers, and its corporate sales
representatives located throughout the United States. The Company distributes
its products internationally through independent, non-exclusive distributors
located primarily in Western Europe and Japan. In fiscal 2001 and fiscal 2000,
one customer's sales accounted for 13 and 15 percent of net revenues,
respectively. In fiscal 1999, the Company had one customer whose sales
accounted for 12 percent of net revenues.
6. Property and Equipment
Property and equipment consists of the following (in thousands):
June 30,
2001 2000
-------- --------
Computers and equipment................................... $ 12,395 $ 12,630
Furniture and fixtures.................................... 387 387
Leasehold improvements.................................... 607 615
-------- --------
13,389 13,632
Less--accumulated depreciation and amortization........... (12,510) (12,062)
-------- --------
Property and equipment, net............................... $ 879 $ 1,570
======== ========
7. Capitalized Software Development Costs and Acquired Product Rights
Capitalized software development costs and acquired product rights consist
of the following (in thousands):
June 30,
2001 2000
------- -------
Capitalized software development costs...................... $ 8,814 $ 6,847
Less--accumulated amortization.............................. (3,177) (1,317)
------- -------
Capitalized software development costs, net................. $ 5,637 $ 5,530
======= =======
Acquired product rights..................................... $ 2,019 $ 3,661
Less--accumulated amortization.............................. (1,065) (2,049)
------- -------
Acquired product rights, net................................ $ 954 $ 1,612
======= =======
During the fiscal years ended June 30, 2001, 2000, and 1999, the Company
capitalized approximately $2.2 million, $3.2 million, and $8.0 million
respectively, of software development costs and acquired product rights.
Amounts amortized and charged to cost of revenues for capitalized software
development costs and acquired product rights during the fiscal years ended
June 30, 2001, 2000, and 1999, were approximately
F-14
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$2.7 million, $4.6 million, and $5.0 million, respectively. Additionally, the
Company wrote down capitalized software development costs and acquired product
rights to net realizable value by approximately $32,000, $1.2 million, and
$444,000, in fiscal 2001, 2000, and 1999, respectively.
8. Debt
The Company's debt consists of the following (in thousands):
2001 2000
------ ------
Long-term debt consists of:
Subordinated convertible debenture issued in connection
with acquisition of InterCAP.............................. $ -- 5,797
Short-term debt consists of:
Subordinated convertible debenture issued in connection
with acquisition of InterCAP 5,797 --
Notes payable issued to institutional investors............ 940 --
Note payable issued for lease obligations.................. -- 138
Receivable facility, net of discount of $93 in fiscal
2000...................................................... 643 767
------ ------
Total debt................................................. $7,380 $6,702
====== ======
In January and June 2001, the Company received approximately $800,000 and
$140,000, respectively, from the issuance of short-term convertible notes
payable. The notes, which bear interest at 8% per annum, are classified as
current liabilities. The notes issued in January had an original maturity date
of April 30, 2001 but the notes were amended to extend the maturity date to
June 30, 2001. The note issued in June has a maturity date of August 31, 2001.
Since the $800,000 of notes payable were due on June 30, 2001, and remained
outstanding, the Company is currently in default with those notes; however, the
Company and the note holders have agreed that immediately prior to the closing
of the Corel acquisition, the notes will be converted into Micrografx common
stock at a conversion rate of $1.00 per share for the principal balance plus
accrued and unpaid interest. Additionally, on the conversion the noteholders
will receive warrants to purchase 80,000 shares of common stock with an
exercise price of $0.50 per share. If the Corel transaction does not close, the
notes revert to their original rights.
The subordinated convertible debenture issued for the InterCAP acquisition
may be initially converted into 579,700 shares of Micrografx common stock. In
July 1999, the Company registered 579,700 shares to cover the agreement should
either Intergraph or the Company elect to convert all or any part of the
debenture into shares of common stock of the Company. The actual number of
shares and the timing of the conversion are both subject to terms and
conditions as outlined in the convertible debenture agreement. As described in
the Subordinated Convertible Debenture dated April 16, 1999 between Micrografx,
Inc. and Intergraph Corporation, the applicable interest rate for the
convertible debenture is a 7% fixed rate to begin January 5, 2000 and
increasing to 8% on January 4, 2001. Since the Company did not reset the
conversion price on the reset date, November 30, 1999, the interest rates were
raised by 200 basis points to 9% and 10% respectively. On May 31, 2001, the
Company exercised its option to reset the conversion price. The conversion
price was reset to $0.90 from $10.00. The debenture matures on March 31, 2002.
Interest expense is being provided for at an effective interest rate of 8%. The
note payable and the convertible debenture are both secured by the capital
stock of InterCAP. As previously discussed in Note 2, if the Corel transaction
can be closed before September 30, 2001, Intergraph has agreed to accept $3.8
million plus accrued interest in settlement for the entire amount due.
The Company entered into a $3.0 million receivable-backed financing
agreement with Silicon Valley Bank ("SVB") on March 31, 2000. SVB will advance
to the Company 80% of the value of non-distributor domestic invoices and 40% of
distributor invoices and the facility bears interest at prime plus 3.0% of the
gross value of
F-15
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the invoices financed. SVB also charges a fee of 0.375% of the gross value of
the invoices. The Company agreed to issue to SVB warrants to purchase 25,000
shares of the Company's Common Stock at $7.00 per share. These warrants have a
7-year life. The fair value of the warrants of approximately $125,000 was
recognized as additional interest expense in fiscal years 2000 and 2001. This
facility was renewed in May 2001 and matures on March 20, 2002. The Company
intends to pay off this facility with the proceeds from the Corel bridge loan.
(See Note 2)
9. Income Taxes
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of existing differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Current and noncurrent deferred income tax assets and
liabilities are classified on the balance sheet based on the classification of
the assets and liabilities giving rise to these differences. Deferred tax
assets and liabilities that are not related to an asset or liability for
financial reporting are classified according to the expected reversal of the
temporary difference.
Components of the provision for income taxes are as follows (in thousands):
Years Ended June 30,
----------------------
2001 2000 1999
----- ------- ------
Current:
Federal......................................... $ -- $ -- $ (51)
Foreign......................................... 323 454 366
----- ------- ------
Total current provision........................... 323 454 315
Deferred provision................................ -- -- 2,777
----- ------- ------
Total income tax provision........................ $ 323 $ 454 $3,092
===== ======= ======
The provision for income taxes is reconciled with the federal statutory rate
as follows (in thousands):
Years Ended June 30,
----------------------
2001 2000 1999
----- ------- ------
Benefit computed at federal statutory rate........ $(446) $(7,383) $ (945)
Nondeductible expenses............................ 466 2,951 73
In-process research and development............... -- -- 656
Unbenefited foreign losses........................ -- -- 1,439
Foreign taxes not benefited....................... 316 454 883
Change in valuation allowance..................... (13) 4,432 1,037
Other............................................. -- -- (51)
----- ------- ------
Tax provision..................................... $ 323 $ 454 $3,092
===== ======= ======
F-16
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Components of the net deferred income tax assets (liabilities) are as
follows (in thousands):
June 30,
----------------
2001 2000
------- -------
Deferred Tax Assets
Tax credit carryforwards............................. $ 2,602 $ 2,602
Net operating loss carryforwards..................... 7,824 6,967
Depreciation......................................... -- 260
Reserves and other accrued expenses not currently
deductible for tax purposes......................... 1,196 1,943
Undistributed earnings in foreign subsidiaries....... -- --
Other................................................ 23 43
------- -------
Total deferred tax assets.......................... 11,645 11,815
Deferred Tax Liabilities
Depreciation......................................... (104) --
Capitalized software development costs currently
deductible for tax purposes......................... (1,966) (2,227)
Undistributed earnings in foreign subsidiaries....... (641) (641)
Other................................................ (201) (201)
------- -------
Total deferred tax liabilities..................... (2,912) (3,069)
Total net deferred tax assets.......................... 8,733 8,746
Valuation allowance.................................... (8,733) (8,746)
------- -------
Deferred tax assets, net of valuation allowance........ $ -- $ --
======= =======
At June 30, 2001, the Company has research and development tax credit
carryforwards of $1.9 million for federal tax purposes, which expire between
2004 and 2014, and the Company has foreign tax credit carryforwards of
$400,000, which expire between 2003 and 2004. In addition, the Company has
alternative minimum tax credit carryforwards of $300,000 that may be carried
forward indefinitely as a credit against the Company's current tax liability.
The Company also has net operating loss carryforwards of $23.0 million for
federal tax purposes that expire between 2009 and 2012. The annual utilization
of these carryforwards will be limited.
Pursuant to the requirements of SFAS 109, a valuation allowance must be
provided when it is more likely than not that deferred tax assets will not be
realized. Based on the fact that the Company has a cumulative net operating
loss for the prior three years and there are no prior tax payments that could
be refunded, it is management's belief that the realization of the net deferred
tax assets in the near term is remote. The impact on the current year provision
is a charge for foreign taxes not benefited of $316,000.
10. Shareholders' Equity
Preferred Stock
At June 30, 2001, 1,120,000 shares of the Company's 10,000,000 authorized
shares of Preferred Stock are outstanding. The rights and preferences of
preferred stock are established by the Company's Board of Directors upon
issuance. At August 30, 2000, the Company designated 4,000,000 shares as Series
A Convertible
F-17
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Preferred Stock ("Series A Preferred Stock"), with a par value of $0.01 per
share. The Series A Preferred Stock is convertible into Micrografx Common Stock
at a price that is initially equal to the purchase price. Any Series A
Preferred Shareholders may elect to convert up to 50% of its shares of Series A
Preferred Stock into shares of Image2Web Common Stock owned by the Company. The
preferred stock is redeemable upon a change of control, as defined, if approved
by the Company's Board of Directors. Dividends accrue at 9% per year. On
September 5, 2000, the Company received approximately $1.4 million from the
issuance of 1,120,000 shares of Series A Preferred Stock, net of $231,000 in
offering costs. The purchasers of the Series A Preferred Stock consisted of
certain institutional investors and other unaffiliated parties. The holders of
the Series A Preferred Stock have the right to appoint two members to the
Company's Board of Directors. Two of the five current members of the Board of
Directors are appointees of the Series A Preferred holders. In August 2001, the
Company and the holders of the preferred stock amended the terms of Preferred
Stock whereby each outstanding share of preferred stock will be converted into
1.5 shares of common stock. In the event that the Corel transaction does not
close, the preferred stock reverts to its original terms noted above.
In September, 2001 the Company and the Series A Preferred Shareholders
amended the terms of the Series A Preferred Stock whereby the Preferred
Shareholders relinquished their rights to convert up to 50% of its shares of
Series A Preferred Stock into shares of Image2Web common stock.
Restricted Stock
The Company has a restricted stock plan, described below under the heading
"Stock Options". During 2001 the Company's Executive Compensation and Stock
Option Committee of the Board of Directors approved the grant of restricted
stock outside of the restricted stock plan to certain key executives of the
Company. A total of 290,000 shares were granted, 240,000 in February 2001 and
an additional 50,000 in May 2001. The shares vest at a rate of 25% per year on
the anniversary date of the grant.
In January 2001, the Company entered into a Stock Purchase Agreement with
its CEO, as a condition of his employment. The Agreement allows for the
purchase of 500,000 shares of the Company's common stock at a price of $0.44
per share, the closing price on January 10, 2001. The stock is restricted and
shall become unrestricted at a rate of 100,000 shares per year, with the first
100,000 becoming unrestricted at the purchase date in January 2001, and then
100,000 annually on the anniversary date thereafter. At June 30, 2001, the
stock had not been paid for and a receivable in the amount of $220,000 is
recorded as an offset to the accrual for the CEO's hiring bonus described in
the following paragraph.
Additionally, the CEO was to receive a hiring bonus in the amount of
$340,000 payable in cash, less customary employment taxes on January 10, 2001.
The bonus is earned ratably over a four year period beginning on that date. At
June 30, 2001, the hiring bonus had not been paid, however, approximately
$40,000 has been expensed and the balance of approximately $300,000 is recorded
as deferred compensation and is included in the equity section of the balance
sheet.
Stock Options
The Company has reserved 7,500,000 shares of its Common Stock for issuance
in connection with its stock option plans for employees and non-employees,
which are administered by the Company's Stock Option Committee.
Up to 100,000 of the 7,500,000 shares available may be granted as restricted
stock awards. The stock is restricted because recipients receive the stock only
upon completing a specified objective or period of employment, generally one to
five years. Restricted stock shares are granted at $0.01 par value and
compensation expense is deferred until earned. The shares are considered issued
when awarded, but the recipient does not own and cannot sell the shares during
the restriction period.
F-18
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of June 30, 2001, approximately 1,682,982 shares remained available for
grant, of which approximately 76,920 shares may be granted as restricted
shares.
Each option issued under the plans, excluding the restricted stock plan,
terminates at the time designated by the Board of Directors, not to exceed 10
years. The exercise price and vesting schedule for each option is determined by
the Company's Stock Option Committee, based on the fair market value of the
Company's common stock at the grant date, and is payable when the option is
exercised. Options that terminate under the provisions of these plans
subsequently become available for reissuance.
A summary of the Company's stock option activity, and related information
for the years ended June 30, 2001, 2000, and 1999, follows:
2001 2000 1999
-------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- -------- ----------- -------- ---------- --------
Outstanding at
Beginning of year...... 2,462,562 $3.62 2,167,198 $8.06 2,397,294 $7.30
Granted................ 1,545,948 0.90 1,520,353 4.22 925,019 9.08
Exercised.............. (500) 1.03 (29,567) 3.63 (514,846) 5.95
Cancelled.............. (987,451) 5.70 (1,195,422) 7.19 (640,269) 8.40
---------- ----------- ----------
Outstanding at end of
year................... 3,020,559 2,462,562 2,167,198
========== =========== ==========
Exercisable at end of
year................... 1,074,773 $4.62 739,210 $7.27 589,672 $7.21
========== =========== ==========
Weighted-average fair
value of options
granted during the
year................... $ 0.68 $ 2.61 $ 5.05
========== =========== ==========
Weighted-average fair
value of purchase
rights granted during
the year............... $ 1.31 $ 2.44 $ 3.12
========== =========== ==========
The following is additional information relating to options outstanding as
of June 30, 2001:
Options Outstanding Options Exercisable
--------------------------------------------------------------- --------------------------
Weighted Average Weighted Weighted
Exercise Remaining Average Number Average
Price Range Number Outstanding Contractual Life Exercise Price Exercisable Exercise Price
----------- ------------------ ---------------- -------------- ----------- --------------
$0.44--$ 0.84 814,031 9.73 $0.78 -- $ --
$0.88--$ 3.94 1,020,617 8.79 $2.21 495,425 $1.64
$4.06--$ 8.75 872,905 5.83 $5.88 418,914 $6.31
$8.88--$11.25 313,006 2.65 $9.31 160,434 $9.43
F-19
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation," (SFAS 123) requires the disclosure of pro forma net income
and earnings per share information computed as if the Company had accounted for
its employee stock options granted subsequent to June 30, 1995, under the fair
value method set forth in SFAS 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
Year ended June 30,
---------------------------------
2001 2000 1999
--------- ---------- ----------
Expected term:
Stock options............................... 3.5 years 3.6 years 3.5 years
Employee stock purchase plan................ 1.0 years 0.52 years 1.45 years
Interest rate................................ 4.35% 6.53% 5.83%
Volatility................................... 107.42% 78.74% 70.19%
Dividends.................................... 0.00% 0.00% 0.00%
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Because
options vest over several years and additional option grants are expected, the
effects of these hypothetical calculations are not likely to be representative
of similar future calculations. The Company's pro forma information follows (in
thousands):
Years ended June 30,
--------------------------
2001 2000 1999
------- -------- -------
Pro forma net loss................................. $(2,490) $(23,717) $(8,344)
======= ======== =======
Pro forma basic and diluted loss per share......... $ (0.21) $ (2.08) $ (0.75)
======= ======== =======
Summary of Reserved Shares
At June 30, 2001, the following common shares were reserved for issuance
under option plans, warrants, conversion of notes payable and conversion of
preferred stock.
Shares
----------
Options......................................................... 4,703,541
Warrants........................................................ 230,000
Notes payable................................................... 939,850
Preferred stock................................................. 1,680,000
Subordinated Convertible Debenture.............................. 3,333,333
----------
10,886,724
==========
Currently, Micrografx has 20,000,000 common shares authorized and
12,536,000 shares outstanding resulting in 7,464,000 shares available for
issuance. Therefore, the Company has insufficient authorized common shares to
satisfy the total number of reserved shares. However, due to the conversion
terms associated with the various convertible securities, the Company has
sufficient time to increase the total authorized common shares prior to a
conversion that would exceed the current total authorized common shares.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan allows eligible employees to
authorize the Company to withhold from 1 percent to 10 percent of gross
earnings. Shares are purchased by participants at the lower of
F-20
MICROGRAFX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
85 percent of the fair market value per share at the beginning or ending of
each offering period. As of June 30, 2001, 2,000,000 shares were authorized for
the plan, approximately 1,375,000 shares were issued, and approximately $34,000
had been withheld for the purchase of shares for the November 2001 offering
period.
11. Employee Benefit Plan
The Micrografx, Inc. 401(k) Savings Plan (Plan) allows eligible employees to
elect to reduce their current compensation by up to 15 percent, subject to
certain maximum dollar limitations prescribed by the Internal Revenue Code
($10,500 in 2001), and have the amount contributed to the Plan as salary
deferral contributions. The Company may make employer contributions to the Plan
at the discretion of the Board of Directors. During fiscal 2001, 2000, and
1999, the Company contributed approximately $188,000, $331,000, and $301,000,
to the Plan, respectively. At June 30, 2001, there were approximately 82
participants in the Plan.
12. Commitments and Contingencies
Leases
The Company leases its office and warehouse space and certain equipment
under non-cancelable operating lease agreements. Rent expense of approximately
$1.5 million, $2.0 million, and $1.4 million, was recorded during fiscal 2001,
2000, and 1999, respectively. Future minimum lease payments for operating
leases are as follows (in thousands):
Years Ending June 30,
---------------------
2002............................................................... $1,247
2003............................................................... 1,107
2004............................................................... 738
2005............................................................... 266
Thereafter......................................................... 99
------
$3,457
======
Litigation
The Company is party to various legal proceedings arising from the normal
course of business activities, none of which, in management's opinion, is
expected to have a material adverse impact on the Company's results of
operations or its financial position.
13. Segment Information
As of June 30, 2001, the Company operated in a single industry segment: the
development, marketing and support of personal computer applications and
systems software products. The Company's Chief Operating Decision Maker
("CODM") assesses performance and allocates resources on an enterprise-wide
basis. Therefore, no separately reportable operating segments exist.
The CODM monitors revenues based on product category and geographic area.
Virtually all products sold in Europe are manufactured in the Netherlands.
Substantially all other products are manufactured in Dallas, Texas. Net
revenues for each segment include only sales to unaffiliated customers; there
were no intra-segment revenues for the periods presented.
F-21
The following product category data includes net revenues (in thousands):
Years Ended June 30,
-----------------------
2001 2000 1999
------- ------- -------
Net revenues
Enterprise Process Management..................... $15,363 $15,363 $15,182
Graphics Product Group............................ 14,808 20,910 23,805
Technology........................................ -- -- 17,975
------- ------- -------
Total net revenues................................ $30,171 $36,273 $56,962
======= ======= =======
The following geographic area data includes net revenues, based on product
shipment destination, and property, plant and equipment, based on physical
location (in thousands):
Years Ended June 30,
-----------------------
2001 2000 1999
------- ------- -------
Net revenues
United States..................................... $14,178 $14,935 $34,695
Germany........................................... 6,000 8,197 6,925
Japan............................................. 1,545 2,072 1,270
Rest of World..................................... 8,448 11,069 14,072
------- ------- -------
Total............................................. $30,171 $36,273 $56,962
======= ======= =======
Property, Plant & Equipment, net
United States..................................... $ 576 $ 1,148 $ 1,570
Germany........................................... 109 112 122
Japan............................................. 9 15 41
Rest of World..................................... 185 295 410
------- ------- -------
Total............................................. $ 879 $ 1,570 $ 2,143
======= ======= =======
F-22
SCHEDULE II
MICROGRAFX, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance At Charged Charged Balance
Beginning To Costs To Other at End
Description of Period and Expenses Accounts(b) Deductions(a) of Period
----------- ---------- ------------ ----------- ------------- ---------
Years Ended June 30,
1999
Allowance for doubtful
accounts:............. $ 343 $ 306 $ -- $ 44 $ 605
Allowance for sales
returns:.............. $1,364 $ -- $ 503 $ -- $1,867
Deferred tax valuation
allowance:............ $2,560 $2,486 $ -- $ -- $5,046
2000
Allowance for doubtful
accounts:............. $ 605 $ (152) $ -- $ (12) $ 465
Allowance for sales
returns:.............. $1,867 $ -- $ 121 $ -- $1,988
Deferred tax valuation
allowance:............ $5,046 $3,700 $ -- $ -- $8,746
2001
Allowance for doubtful
accounts:............. $ 465 $ (337) $ -- $ (55) $ 183
Allowance for sales
returns:.............. $1,988 $ -- $(1,464) $ -- $ 524
Deferred tax valuation
allowance:............ $8,746 $ (13) $ -- $ -- $8,733
--------
(a) Represents amounts written-off during the year, net of recoveries.
(b) The allowance for sales returns is recorded as a reduction of revenues.
F-23
ANNEX A
MERGER AGREEMENT
dated as of July 16, 2001
as amended and restated
by and among
COREL CORPORATION
CALGARY I ACQUISITION CORP.
-and-
MICROGRAFX, INC.
GLOSSARY OF DEFINED TERMS
The following terms, when used in this Agreement, have the meanings ascribed
to them in the corresponding Sections of this Agreement listed below:
"affiliate" -- Section 9.18(a)
"Affiliate Agreement" -- Section 6.04
"Aggregate Redemption Fund" -- Section 2.01(c)(i)
"this Agreement" -- Preamble
"Alternative Proposal" -- Section 5.02
"Antitrust Division" -- Section 6.07
"beneficially" -- Section 9.18(b)
"business day" -- Section 9.18(c)
"Canadian GAAP" -- Section 4.05
"Cash Alternative" -- Section 2.01(c)(ii)
"Cash Fund" -- Section 7.03(g)
"CERCLA" -- Section 3.15(b)
"Certificate of Merger" -- Section 1.03
"Certificates" -- Section 2.02(b)
"Closing" -- Section 1.02
"Closing Date" -- Section 1.02
"Code" -- Preamble
"Confidentiality Agreement" -- Section 6.01
"Confidential Information" -- Section 6.01
"Constituent Corporations" -- Section 1.01
"Contracts" -- Section 3.04(a)
"control," controlling," "controlled by" and -- Section 9.18(a)
"under common control with"
"Conversion Number" -- Section 2.01(c)(i)
"Corel" -- Preamble
"Corel Closing Share Price" -- Section 2.01(c)(ii)
"Corel Common Stock" -- Section 4.02(a)
"Corel's Counsel" -- Section 7.02(c)
"Corel Disclosure Letter" -- Section 4.01
"Corel Financial Statements" -- Section 4.05
"Corel Permits" -- Section 4.10
"Corel PR" -- Section 2.01(c)(i)
"Corel Reports" -- Section 4.05
"Corel Rights Agreement" -- Section 4.02(a)
"Corel Stock Option Plan" -- Section 4.02(a)
"Corel Stock Option Plan 2000" -- Section 4.02(a)
"Developers" -- Section 3.16(b)
"Dissenting Shareholder" -- Section 2.01(j)
"DL" -- Section 1.01
"Effective Time" -- Section 1.03
"Environmental Law" -- Section 3.15(e)(i)
"Environmental Permits" -- Section 3.15(a)
"ERISA" -- Section 3.13(b)(i)
"Exchange Act" -- Section 3.04(b)
"Exchange Agent" -- Section 2.02(a)
"FTC" -- Section 6.07
"Governmental or Regulatory Authority" -- Section 3.04(a)
"group" -- Section 9.18(f)
"Hazardous Material" -- Section 3.15(e)(ii)
"HSR Act" -- Section 3.04(b)
"Indemnified Liabilities" -- Section 6.10(a)
"Indemnified Parties" -- Section 6.10(a)
"Indemnifying Party" -- Section 6.10(a)
"Intellectual Property Rights" -- Section 3.16
"laws" -- Section 3.04(a)
"Lien" -- Section 3.02(b)
"material adverse effect" -- Section 9.18(e)
"Merger" -- Preamble
"Micrografx" -- Preamble
"Micrografx Affiliates" -- Section 6.04
"Micrografx Annual Revenues" -- Section 2.01(c)(i)
"Micrografx Common Stock" -- Section 2.01(b)
"Micrografx's Counsel" -- Section 7.03(d)
"Micrografx Director" -- Section 6.11
"Micrografx Disclosure Letter" -- Section 3.01
"Micrografx Employee Benefit Plan" -- Section 3.13(b)(i)
"Micrografx ESOP" -- Section 2.01(e)
"Micrografx ESPP" -- Section 2.01(f)
"Micrografx Financial Statements" -- Section 3.05
"Micrografx Leases" -- Section 3.17
"Micrografx Leased Properties" -- Section 3.17
"Micrografx License Agreements" -- Section 3.16(b)
"Micrografx Permits" -- Section 3.10
"Micrografx Preferred Stock -- Section 2.01(b)
"Micrografx Reports" -- Section 3.05
"Micrografx Series A Stock" -- Section 2.01(d)
"Micrografx Shareholders' Approval" -- Section 6.03(b)
"Micrografx Shareholders' Meeting" -- Section 6.03(a)
"Nasdaq" -- Section 2.02(e)
"Options" -- Section 3.02(a)
"orders" -- Section 3.04(a)
"Participation Rights Agreement" -- Section 2.01(c)(i)
"person" -- Section 9.18(f)
"Plan" -- Section 3.13(b)(ii)
"Principal Party" -- Section 5.05
"Proxy Statement" -- Section 3.09
"Registration Statement" -- Section 4.09
"Representatives" -- Section 9.18(g)
"Restraint" -- Section 7.01(e)
"SEC" -- Section 3.04(b)
"Secretary of State" -- Section 1.03
"Securities Act" -- Section 3.04(b)
"Significant Subsidiary" -- Section 9.18(h)
"Software" -- Section 3.16(b)
"Specified Amount" -- Section 8.02(b)
"Sub" -- Preamble
"Sub Common Stock" -- Section 2.01(a)
"Subsidiary" -- Section 9.18(i)
"Superior Proposal" -- Section 8.01(c)
"Surviving Corporation" -- Section 1.01
"Surviving Corporation Common Stock" -- Section 2.01(a)
"Takeover Laws" -- Section 3.23
"taxes" -- Section 3.12(c)
"Texas Secretary of State" -- Section 1.03
"TL" -- Section 1.01
"Trustee" -- Section 7.03(g)
"TSE" -- Section 2.01(e)
"U.S. GAAP" -- Section 3.05
"Voting and Proxy Agreement" -- Preamble
TABLE OF CONTENTS
ARTICLE I--THE MERGER
1.01 The Merger...................................................... A-1
1.02 Closing......................................................... A-1
1.03 Effective Time.................................................. A-2
1.04 Certificate of Incorporation and Bylaws of the Surviving
Corporation..................................................... A-2
1.05 Directors and Officers of the Surviving Corporation............. A-2
1.06 Effects of the Merger........................................... A-2
1.07 Further Assurances.............................................. A-2
ARTICLE II--CONVERSION OF SHARES
2.01 Conversion of Capital Stock..................................... A-2
2.02 Exchange of Certificates........................................ A-5
ARTICLE III--REPRESENTATIONS AND WARRANTIES OF MICROGRAFX
3.01 Organization and Qualification.................................. A-7
3.02 Capital Stock................................................... A-8
3.03 Authority Relative to this Agreement............................ A-9
3.04 Non-Contravention; Approvals and Consents....................... A-9
3.05 Reports and Financial Statements................................ A-10
3.06 Absence of Certain Changes or Events............................ A-11
3.07 Absence of Undisclosed Liabilities.............................. A-11
3.08 Legal Proceedings............................................... A-11
3.09 Information Supplied............................................ A-11
3.10 Compliance with Laws and Orders................................. A-11
3.11 Compliance with Agreements; Certain Agreements.................. A-12
3.12 Taxes........................................................... A-12
3.13 Employee Benefit Plans; ERISA................................... A-13
3.14 Labor Matters................................................... A-14
3.15 Environmental Matters........................................... A-14
3.16 Intellectual Property Rights.................................... A-15
3.17 Micrografx Owned and Leased Properties.......................... A-17
3.18 Title to Properties............................................. A-17
3.19 Insurance....................................................... A-17
3.20 Vote Required................................................... A-17
3.21 Opinion of Financial Advisor.................................... A-17
3.22 Ownership of Corel Common Stock................................. A-17
3.23 Takeover Laws................................................... A-18
ARTICLE IV--REPRESENTATIONS AND WARRANTIES OF COREL AND SUB
4.01 Organization and Qualification.................................. A-18
4.02 Capital Stock................................................... A-18
4.03 Authority Relative to this Agreement............................ A-19
4.04 Non-Contravention; Approvals and Consents....................... A-19
4.05 Reports and Financial Statements................................ A-21
4.06 Absence of Certain Changes or Events............................ A-21
4.07 Absence of Undisclosed Liabilities.............................. A-21
4.08 Legal Proceedings............................................... A-22
4.09 Information Supplied............................................ A-22
4.10 Compliance with Laws and Orders................................. A-22
4.11 Sub............................................................. A-23
i
4.12 Ownership of Micrografx Common Stock............................ A-23
4.13 Reporting Issuer................................................ A-23
4.14 Issuance of Capital Stock....................................... A-23
4.15 Taxes........................................................... A-23
ARTICLE V--COVENANTS
5.01 Covenants of Micrografx......................................... A-23
5.02 No Solicitations................................................ A-25
5.03 Covenants of Corel.............................................. A-26
5.04 Third Party Standstill Agreements............................... A-26
5.05 Purchases of Capital Stock of the Other Party................... A-27
5.06 Advice of Changes............................................... A-27
5.07 Notice and Cure................................................. A-27
5.08 Fulfillment of Conditions....................................... A-27
ARTICLE VI--ADDITIONAL AGREEMENTS
6.01 Access to Information; Confidentiality.......................... A-27
6.02 Preparation of Registration Statement and Proxy Statement....... A-28
6.03 Approval of Shareholders of Micrografx.......................... A-28
6.04 Micrografx Affiliates........................................... A-29
6.05 Stock Exchange Listing.......................................... A-29
6.06 Certain Tax Matters............................................. A-29
6.07 Regulatory and Other Approvals.................................. A-29
6.08 Micrografx Director............................................. A-29
6.09 Expenses........................................................ A-29
6.10 Brokers or Finders.............................................. A-30
6.11 Takeover Statutes............................................... A-30
6.12 Conveyance Taxes................................................ A-30
6.13 Micrografx 401(k) Plan.......................................... A-30
6.14 Consents........................................................ A-30
6.15 Indemnification and Insurance................................... A-30
6.16 Intergraph Debenture............................................ A-31
6.17 Bridge Loan..................................................... A-31
ARTICLE VII--CONDITIONS
7.01 Conditions to Each Party's Obligation to Effect the Merger...... A-31
7.02 Conditions to Obligation of Corel and Sub to Effect the Merger.. A-32
7.03 Conditions to Obligation of Micrografx to Effect the Merger..... A-33
ARTICLE VIII--TERMINATION, AMENDMENT AND WAIVER
8.01 Termination..................................................... A-34
8.02 Effect of Termination........................................... A-35
8.03 Amendment....................................................... A-36
8.04 Waiver.......................................................... A-36
ARTICLE IX--GENERAL PROVISIONS
9.01 Non-Survival of Representations, Warranties, Covenants and
Agreements...................................................... A-36
9.02 Notices......................................................... A-36
9.03 Entire Agreement; Incorporation of Exhibits..................... A-37
9.04 Public Announcements............................................ A-37
9.05 No Third Party Beneficiaries.................................... A-38
ii
9.06 No Assignment; Binding Effect..................................... A-38
9.07 Headings.......................................................... A-38
9.08 Interpretation.................................................... A-38
9.09 Invalid Provisions................................................ A-38
9.10 Governing Law..................................................... A-39
9.11 Enforcement of Agreement.......................................... A-39
9.12 Jurisdiction...................................................... A-39
9.13 Service of Process................................................ A-39
9.14 Waiver of Trial by Jury........................................... A-39
9.15 Remedies Cumulative............................................... A-40
9.16 Obligation of Corel and Micrografx................................ A-40
9.17 Limitations on Warranties......................................... A-40
9.18 Certain Definitions............................................... A-40
9.19 Counterparts...................................................... A-41
9.20 Disclosure Letters................................................ A-41
9.21 Execution......................................................... A-41
9.22 Personal Liability................................................ A-41
9.23 Currency.......................................................... A-41
9.24 Date for Any Action............................................... A-41
EXHIBITS
A Voting and Proxy Agreement
B Participation Rights Agreement
C Affiliate Agreement
iii
This MERGER AGREEMENT dated as of July 16, 2001 (the "Agreement") is made
and entered into by and among Corel Corporation, a corporation continued under
the laws of Canada ("Corel"), Calgary I Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of Corel ("Sub"), and Micrografx,
Inc., a Texas corporation ("Micrografx").
WHEREAS, the Boards of Directors of Corel, Sub and Micrografx have each
previously determined that it is advisable and in the best interests of their
respective shareholders to consummate, and have approved, the merger
transaction provided for herein in which Micrografx would merge with Sub (the
"Merger");
WHEREAS, the respective Boards of Directors of Corel and Micrografx have
determined that the Merger is in furtherance of and consistent with their
respective long-term business strategies and is advisable, fair to and in the
best interests of their respective shareholders, and this Agreement and the
Merger have been approved and adopted by the sole shareholder of Sub;
WHEREAS, unless the Cash Alternative is elected by Corel, the parties intend
that for U.S. federal income tax purposes, the Merger shall qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code") and that this Agreement shall constitute
a "plan of reorganization" for the purposes of Section 368 of the Code;
WHEREAS certain holders of shares of Micrografx Common Stock and shares of
Micrografx Preferred Stock have entered into Voting and Proxy Agreements in the
form of Exhibit A hereto ("Voting and Proxy Agreement"); and
WHEREAS, Corel, Sub and Micrografx desire to make certain representations,
warranties and agreements in connection with the Merger and also to prescribe
various conditions to the Merger;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound hereby, agree as follows:
ARTICLE I
The Merger
1.01 The Merger. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time (as defined in Section 1.03), Micrografx shall
be merged with and into Sub in accordance with the General Corporation Law of
the State of Delaware, as amended (the "DL") and the Business Corporations Act
of the State of Texas, as amended (the "TL"). At the Effective Time, subject to
Section 2.01(c)(ii), the separate existence of Micrografx shall cease and Sub
shall continue as the surviving corporation in the Merger (the "Surviving
Corporation"). Sub and Micrografx are sometimes referred to herein as the
"Constituent Corporations". As a result of the Merger, the outstanding shares
of capital stock of the Constituent Corporations shall be converted or
cancelled in the manner provided in Article II.
1.02 Closing. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to Section
8.01, and subject to the satisfaction or waiver (where applicable) of the
conditions set forth in Article VII, the closing of the Merger (the "Closing")
will take place at the offices of McCarthy Tetrault located at The Chambers, 40
Elgin Street, Suite 1400, Ottawa, Ontario, K1P 5K6, at 10:00 a.m., local time,
on the second business day following satisfaction of the condition set forth in
Section 7.0l(a) unless another date, time or place is agreed to in writing by
the parties hereto (the "Closing Date"). At the Closing there shall be
delivered to Corel, Sub and Micrografx the certificates and other documents and
instruments required to be delivered under Article VII.
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1.03 Effective Time. At the Closing, a certificate of merger (the
"Certificate of Merger") shall be duly prepared and executed by the Surviving
Corporation and thereafter delivered to the Secretary of State of Delaware (the
"Secretary of State") for filing, as provided in Section 251 of the DL, and
articles of merger ("Articles of Merger") shall be duly prepared and executed
by the Surviving Corporation and thereafter delivered to the Secretary of State
of Texas ("Texas Secretary of State") for filing, as provided in Article 5.04
of the TL, as soon as practicable on the Closing Date. The Merger shall become
effective at the time of the filing of the Certificate of Merger with the
Secretary of State and the issuance of the Certificate of Merger by the Texas
Secretary of State (the date and time of such filing and issuance being
referred to herein as the "Effective Time").
1.04 Certificate of Incorporation and Bylaws of the Surviving
Corporation. At the Effective Time, (i) the Certificate of Incorporation of the
Surviving Corporation shall be amended to read in its entirety (except for the
corporate name) as set forth in the Certificate of Incorporation of Sub as in
effect immediately prior to the Effective Time until thereafter amended as
provided by law and such Certificate of Incorporation, and (ii) the Bylaws of
Sub as in effect immediately prior to the Effective Time shall be the Bylaws of
the Surviving Corporation until thereafter amended as provided by law, the
Certificate of Incorporation of the Surviving Corporation and such Bylaws.
1.05 Directors and Officers of the Surviving Corporation.
(a) The directors of Sub immediately prior to the Effective Time shall,
from and after the Effective Time, be the directors of the Surviving
Corporation until their successors shall have been duly elected or
appointed and qualified or until their earlier death, resignation or
removal in accordance with the Surviving Corporation's Certificate of
Incorporation and Bylaws.
(b) The officers of Sub immediately prior to the Effective Time shall,
from and after the Effective Time, be the officers of the Surviving
Corporation until their successors shall have been duly elected or
appointed and qualified or until their earlier death, resignation or
removal in accordance with the Surviving Corporation's Certificate of
Incorporation and Bylaws.
1.06 Effects of the Merger. Subject to the foregoing, the effects of the
Merger shall be as provided in the applicable provisions of the DL and TL
including, without limitation, Section 259 and Article 5.06, respectively,
thereof.
1.07 Further Assurances. Each party hereto will, either before or after the
Effective Time, execute such further documents, instruments, deeds, bills of
sale, assignments and assurances and take such further actions as may
reasonably be requested by one or more of the others to consummate the Merger,
to vest the Surviving Corporation with full title to all assets, properties,
privileges, rights, approvals, immunities and franchises of either of the
Constituent Corporations or to effect the other purposes of this Agreement.
ARTICLE II
Conversion of Shares
2.01 Conversion of Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of the
capital stock of either Micrografx or Sub, each of the following shall occur:
(a) Capital Stock of Sub. Each issued and outstanding share of the
common stock, par value $.01 per share, of Sub ("Sub Common Stock") shall
be converted into and become one fully paid and nonassessable share of
common stock, par value $.01 per share, of the Surviving Corporation
("Surviving Corporation Common Stock"). Each certificate representing
outstanding shares of Sub Common Stock shall at the Effective Time
represent an equal number of outstanding shares of Surviving Corporation
Common Stock.
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(b) Cancellation of Treasury Stock and Stock Owned by Corel and
Subsidiaries. All shares of common stock, par value $.01 per share, of
Micrografx ("Micrografx Common Stock") and preferred stock, par value $.01
per share, of Micrografx ("Micrografx Preferred Stock"), that are owned by
Micrografx as treasury stock or owned by Corel, Sub or any other Subsidiary
(as defined in Section 9.18) of Corel (other than shares of Surviving
Corporation Common Stock) shall be cancelled and retired and shall cease to
exist and no stock of Corel or other consideration shall be delivered in
exchange therefor.
(c) Exchange Ratio for Micrografx Common Stock.
(i) Subject to Section 2.01(c)(ii), each issued and outstanding
share of Micrografx Common Stock (other than shares to be cancelled in
accordance with Section 2.01(b) and other than Micrografx Common Stock
held by Persons who exercise their dissent rights in accordance with
Articles 5.11 and 5.12 of TL) shall be converted into the right to
receive (i) a fraction of a validly issued, fully paid and
nonassessable common share of Corel ("Corel Common Stock") resulting
from the multiplication of one share of Corel Common Stock by the
Conversion Ratio (as defined below) and (ii) one Corel participation
right ("Corel PR") in the form set forth in Sections 3.02 and 3.03 of
the Participation Rights Agreement, substantially in the form of which
is annexed as Exhibit B hereto.
"Conversion Ratio" shall be determined immediately prior to the
Effective Time and shall be the Micrografx Times Revenue Share Price
(as defined below) divided by the volume weighted average trading price
of Corel Common Stock on Nasdaq (or if the Corel Common Stock is not
then traded on Nasdaq any other principal exchange on which the shares
of Corel Common Stock are then listed) during the ten consecutive
trading day period that ends on the second business day prior to the
Effective Time (the "Corel Closing Share Price").
(A) the "Micrografx Times Revenue Share Price" means the price
per share resulting upon dividing (x) 50% of the Micrografx Annual
Revenues by (y) the sum of the number of shares of issued and
outstanding Micrografx Common Stock and the number of shares of
Micrografx Common Stock into which the issued and outstanding
Micrografx Series A Stock is convertible immediately prior to the
Effective Time; and
(B) "Micrografx Annual Revenues" means 103% of the annual audited
revenues of Micrografx for the 12 months ended June 30, 2001, plus
(x) 50% of the reduction without payment or other consideration to
the holder thereof in the principal amount of the indebtedness
represented by the Subordinated Convertible Debentures dated April
16, 1999 issued by the Corporation to Intergraph Corporation (the
"Intergraph Debentures"), (y) 50% of any reductions after the date
hereof in the principal amount of trade payable indebtedness owed by
Micrografx that is outstanding on the date of this Agreement, which
reductions are effected through the negotiation of discounts,
without other consideration to the creditor, to the principal
balance of such trade payables that are otherwise outstanding, and
(z) the proceeds received by Micrografx after the date hereof and
prior to the Effective Time from the exercise of any options or
warrants to purchase shares of its capital stock; provided, that in
no event shall the amount of Micrografx Annual Revenues exceed $34
million.
(ii) If the Corel Closing Share Price is less than $2.90 unless due
to a stock dividend, split or other share reclassification event, Corel
shall have the right (the "Cash Alternative"), in lieu of the exchange
provided for in Sections 2.01(c)(i) and 2.01(d), to require that each
issued and outstanding share of Micrografx Common Stock and each issued
and outstanding share of Micrografx Series A Stock (to the same extent
as if the Micrografx Series A Stock had first been converted into
shares of Micrografx Common Stock), as described in Section 2.01(c)(i)
shall be converted into the right to receive solely cash equal to 200%
of the Micrografx Times Revenue Share Price provided, that for the
purposes of this Section 2.01(c)(ii), the Micrografx Times Revenue
Share Price shall be calculated by substituting in the definition of
"Micrografx Annual Revenue" "100%" in place of "103%" where the same
appears. In the event Corel elects to exercise such right, and
notwithstanding any
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other provision hereof, the parties agree that Sub shall merge with and
into Micrografx and the Surviving Corporation shall be Micrografx (and
the provisions of Sections 1.01, 1.03 and 1.04 shall be read
accordingly), and the parties further agree that the Merger will be
treated as a taxable stock transfer for United States tax purposes.
(iii) All shares of Micrografx Common Stock converted in accordance
with paragraph (i) or (ii) of this Section 2.01(c) shall no longer be
outstanding and shall automatically be cancelled and retired and shall
cease to exist, and each holder of a certificate representing any such
shares shall cease to have any rights with respect thereto, except the
right to receive the shares of Corel Common Stock and the Corel PRs, or
cash, to be issued in consideration therefor (determined in accordance
with Section 2.02(c)(i)), upon the surrender of such certificate in
accordance with Section 2.02, without interest.
(d) Conversion of Micrografx Preferred Stock. Each issued and
outstanding share of Micrografx's Series A Convertible Preferred Stock
("Micrografx Series A Stock") shall be converted into the right to receive
such number of validly issued, fully paid and nonassessable shares of Corel
Common Stock and Corel PRs to the same extent as if the Micrografx Series A
Stock had first been converted into Micrografx Common Stock.
(e) Stock Option Plans.
(i) Not less than ten days prior to the Effective Time, each
participant holding stock options under the Micrografx 1995 Incentive
and Non-Statutory Stock Option Plan and the Micrografx 1995 Director
Stock Option Plan (together, the "Micrografx ESOP") shall be given
written notice by Micrografx that all outstanding stock options under
the Micrografx ESOP must be exercised, and may, at the discretion of
the holder, be exercised on a cashless basis such that the number of
shares of Micrografx Common Stock that may be issued shall be that
number of shares of Micrografx Common Stock that is net of that number
of shares which is equal to the quotient obtained by dividing (A) the
product of the total number of shares issuable and the respective
exercise prices by (B) the greater of $1.65 and the closing price of
Micrografx Common Stock on the Over-the-Counter Bulletin Board on the
date of exercise, to the extent vested (including those which would
vest upon the Effective Time), no later than two business days prior to
the Effective Time. To the extent that such options are not exercised,
all outstanding but unexercised options under the Micrografx ESOP will
terminate at the Effective Time, and become null and void.
(ii) Each participant holding unvested options, including unvested
options which would not vest upon the Effective Time, with an exercise
price less than $1.65 per share shall be paid by Corel, at the
Effective Time, cash equal to the difference between $1.65 per share
and such exercise price (the "Option Cash").
(f) Stock Purchase Plans. Micrografx shall provide written notice not
later than 30 days prior to the second business day prior to the Effective
Time to all participants in the Micrografx Employee Stock Purchase Plan
(the "Micrografx ESPP") that all outstanding options under the Micrografx
ESPP to the extent exercisable (including those which would be exercisable
upon the Effective Time), may be exercised for a period of not less than
thirty (30) days from the date of such notice. At the end of such 30-day
period, all outstanding options under the Micrografx ESPP will terminate.
Furthermore, no further Offering Periods shall be implemented absent the
prior approval of Corel until after this Agreement has been terminated in
accordance with Section 8.01.
(g) Warrants. At the Effective Time, Corel shall assume all of
Micrografx's obligations under all outstanding warrants. Holders of
outstanding warrants shall be entitled to receive, upon exercise of such
warrants, the same number of shares of Corel Common Stock and Corel PRs as
such holders would have received in shares of Micrografx Common Stock had
they exercised the warrants prior to the Effective Time. The exercise
prices for such warrants shall be adjusted consistent with the appropriate
conversion ratios.
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(h) Convertible Promissory Notes. Immediately prior to the Effective
Date, all outstanding convertible promissory notes issued by Micrografx
shall be converted into Micrografx Common Stock pursuant to the terms and
conditions of such convertible promissory notes.
(i) Consideration for Corel Common Stock and Corel PRs. Effective as of
the Effective Time, the Surviving Corporation shall in consideration for
Corel's issuance of Corel Common Stock and Corel PRs in accordance with
Section 2.01(d), issue such shares of the Surviving Corporation to Corel as
Corel and Sub may agree.
(j) Shares of Dissenting Shareholders. Notwithstanding anything in this
Agreement to the contrary but only to the extent required by the TL, shares
of Micrografx Common Stock that are issued and outstanding immediately
prior to the Effective Time and held by a person (a "Dissenting
Shareholder") who shall not have voted to approve and adopt this Agreement
or consented thereto in writing and who shall have complied with all of the
provisions of the TL to dissent from the Merger and to demand appraisal for
such shares in accordance with Article 5.12 of the TL (the "Dissenting
Shares") shall not be converted as described in Section 2.01(c), unless
such holder fails to perfect or withdraws or otherwise loses his right to
appraisal, but shall instead become the right to receive such consideration
as may be determined to be due such Dissenting Shareholder pursuant to the
TL. If, after the Effective Time, such Dissenting Shareholder fails to
perfect or withdraws or otherwise loses his right to appraisal, such
Dissenting Shareholder's shares of Micrografx Common Stock shall no longer
be considered Dissenting Shares for purposes of this Agreement and shall
thereupon be deemed to have been converted into and to have become
exchangeable for, at the Effective Time, Shares of Corel Common Stock and
Corel PRs. Micrografx shall give Corel prompt notice of any demands
received by Micrografx for appraisal of shares of Micrografx Common Stock,
and Corel shall have the right to participate in all negotiations and
proceedings with respect to such demands. Micrografx shall not, except with
prior written consent of Corel, make any payment with respect to, or settle
or offer to settle, any such demands.
2.02 Exchange of Certificates.
(a) Exchange Agent. As of the Effective Time, Corel shall enter into an
agreement (the terms of which shall be reasonably satisfactory to
Micrografx) with such bank or trust company as may be designated by Corel
(the "Exchange Agent"), which shall provide that Corel shall deposit with
the Exchange Agent as of the Effective Time, for the benefit of the holders
of shares of Micrografx Common Stock and Micrografx Preferred Stock, for
exchange in accordance with this Article II, through the Exchange Agent,
either (A) if the Cash Alternative is elected by Corel, the full cash
amount provided in Section 2.01(c)(ii), or (B) if the Cash Alternative is
not elected, (i) certificates representing the number of duly authorized
whole shares of Corel Common Stock issuable in connection with the Merger,
and (ii) certificates representing the number of duly authorized Corel PRs
issuable in connection with the Merger, to be held for the benefit of and
distributed to such holders in accordance with this Section (such shares of
Corel Common Stock and such Corel PRs, being referred to herein as the
"Exchange Fund").
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time and in any event within ten business days after the
Effective Time, Corel shall cause the Exchange Agent to mail to each holder
of record of the Certificate(s) (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as
the Surviving Corporation may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for cash or
for certificates representing whole shares of Corel Common Stock or whole
Corel PRs. Upon surrender of a Certificate for cancellation to the Exchange
Agent, together with such letter of transmittal duly executed and completed
in accordance with its terms, the holder of such Certificate shall be
entitled to receive in exchange therefor, if the Cash Alternative is
elected then cash, and otherwise a certificate representing that number of
whole shares of Corel Common Stock and such number of Corel PRs, which such
holder has the right to receive pursuant to the provisions of this
Article II, and the Certificate so surrendered shall forthwith be
cancelled. In no event shall the holder of
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any Certificate be entitled to receive any fractional shares or interest on
any funds to be received in the Merger. In the event of a transfer of
ownership of Micrografx Common Stock or Micrografx Preferred Stock which is
not registered in the transfer records of Micrografx, if the Cash
Alternative is elected then cash, and otherwise a certificate representing
that number of whole shares of Corel Common and a certificate representing
that number of Corel PRs may be issued to a transferee if the Certificate
representing such Micrografx Common Stock or Micrografx Preferred Stock is
presented to the Exchange Agent accompanied by all documents required to
evidence and effect such transfer and the person requesting such issuance
shall pay any transfer or other taxes required by reason of the issuance or
delivery of shares of Corel Common Stock or Corel PRs to a person other
than the registered holder of such Certificate or establish to the
reasonable satisfaction of Corel that such tax has been paid or is not
applicable. Until surrendered as contemplated by this Section 2.02(b),
except as limited by paragraph (c) below, each Certificate shall be deemed
at any time after the Effective Time to represent, if the Cash Alternative
is elected then cash, and otherwise ownership of the number of shares of
Corel Common Stock (and any rights derivative thereof) and Corel PRs into
which the number of shares of Micrografx Common Stock or Micrografx
Preferred Stock shown thereon have been converted as contemplated by this
Article II. Notwithstanding the foregoing, Certificates representing
Micrografx Common Stock or Micrografx Preferred Stock surrendered for
exchange by any person constituting an "affiliate" of Micrografx for
purposes of Section 6.04 shall not be exchanged until Corel has received an
Affiliate Agreement (as defined in Section 6.04) executed by such person as
provided in Section 6.04.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect
to Corel Common Stock with a record date on or after the Effective Time
shall be paid to the holder of any unsurrendered Certificate with respect
to the shares of Micrografx Common Stock or Micrografx Preferred Stock
represented thereby until the holder of record of such Certificate shall
surrender such Certificate in accordance with this Section. Subject to the
effect of applicable laws, following surrender of any such Certificate,
there shall be paid to the record holder of the certificates representing
whole shares of Corel Common Stock or Corel PRs issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount
of dividends or other distributions, if any, with a record date on or after
the Effective Time which theretofore became payable, but which were not
paid by reason of the immediately preceding sentence, with respect to such
whole shares of Corel Common Stock, and (ii) at the appropriate payment
date, the amount of dividends or other distributions with a record date on
or after the Effective Time but prior to surrender and a payment date
subsequent to surrender payable with respect to such whole shares of Corel
Common Stock or Corel PRs.
(d) No Further Ownership Rights in Micrografx Common Stock or Micrografx
Preferred Stock. All cash paid or, as the case may be, shares of Corel
Common Stock and all Corel PRs issued upon the surrender for exchange of
Certificates in accordance with the terms hereof (including any cash paid
pursuant to Section 2.02(e)) shall be deemed to have been issued at the
Effective Time in full satisfaction of all rights pertaining to the shares
of Micrografx Common Stock or Micrografx Preferred Stock represented
thereby, as applicable. From and after the Effective Time, the stock
transfer books of Micrografx shall be closed and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Micrografx Common Stock or Micrografx
Preferred Stock which were outstanding immediately prior to the Effective
Time. If, after the Effective Time, Certificates are presented to the
Surviving Corporation for any reason, they shall be cancelled and exchanged
as provided in this Section.
(e) No Fractional Shares. No certificate or scrip representing
fractional shares of Corel Common Stock will be issued in the Merger upon
the surrender for exchange of Certificates, and such fractional share
interests will not entitle the owner thereof to vote or to any rights of a
shareholder of Corel. In lieu of any such fractional shares, each holder of
Certificates who would otherwise have been entitled to a fraction equal to
one-half or more of a share of Corel Common Stock shall receive a full
share of Corel Common Stock.
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(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains unclaimed by the former shareholders of Micrografx for 12 months
after the Effective Time shall be delivered to Corel, upon demand, and any
shareholders of Micrografx who have not theretofore complied with this
Article II shall thereafter look only to Corel (subject to abandoned
property, escheat and other similar laws) as general creditors for payment
of their claim for cash, on the one hand, or Corel Common Stock or Corel
PRs and any dividends or distributions with respect to Corel Common Stock
or Corel PRs on the other hand. Neither Corel nor the Surviving Corporation
shall be liable to any holder of shares of Micrografx Common Stock or
Micrografx Preferred Stock for cash or shares of Corel Common Stock or
Corel PRs (or dividends or distributions with respect thereto) delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
(g) Withholding Rights. Corel shall be entitled to deduct and withhold
from the consideration otherwise payable pursuant to this Agreement to any
holder of shares of Micrografx Common Stock or Micrografx Preferred Stock
such amounts as Corel is required to deduct and withhold or remit pursuant
to the applicable rules under any provision of federal, provincial, local
or foreign tax law, and Corel may sell the shares of Corel Common Stock or
the Corel PRs to which such holder is entitled for the purposes of
obtaining cash necessary to remit any such amount to the applicable
authority. To the extent that amounts are so withheld by Corel, such
withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of the shares of Micrografx Common Stock or
Micrografx Preferred Stock in respect of which such deduction and
withholding was made by Corel.
(h) Lost, Stolen or Destroyed Certificates. In the event any
Certificates shall have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming such Certificate(s) to be
lost, stolen or destroyed and, if required by Corel, the posting by such
person of a bond in such sum as Corel may reasonably direct as indemnity
against any claim that may be made against it or the Surviving Corporation
with respect to such Certificate(s), the Exchange Agent will pay the cash
or issue the shares of Corel Common Stock and the Corel PRs pursuant to
Section 2.02(b) deliverable in respect of the shares of Micrografx Common
Stock or Micrografx Preferred Stock represented by such lost, stolen or
destroyed Certificates.
ARTICLE III
Representations and Warranties of Micrografx
Micrografx represents and warrants to Corel and Sub as follows:
3.01 Organization and Qualification. Each of Micrografx and its Subsidiaries
(as defined in Section 9.18) is a corporation duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has full corporate power and authority to conduct its
business as and to the extent now conducted and to own, use and lease its
assets and properties, except for such failures to be so existing and in good
standing or to have such power and authority which, individually or in the
aggregate, are not having and would not reasonably be expected to have a
material adverse effect (as defined in Section 9.18) on Micrografx and its
Subsidiaries taken as a whole. Each of Micrografx and its Subsidiaries is duly
qualified, licensed or admitted to do business and is in good standing in each
jurisdiction in which the ownership, use or leasing of its assets and
properties, or the conduct or nature of its business, makes such qualification,
licensing or admission necessary, except for such failures to be so qualified,
licensed or admitted and in good standing which, individually or in the
aggregate, are not having and would not be reasonably expected to have a
material adverse effect on Micrografx and its Subsidiaries taken as a whole.
Section 3.01 of the letter dated the date hereof and delivered to Corel by
Micrografx concurrently with the original execution and delivery of this
Agreement (the "Micrografx Disclosure Letter") sets forth: (i) the name and
jurisdiction of incorporation of each Subsidiary of Micrografx, (ii) its
authorized capital stock, (iii) the number of issued and outstanding shares of
its capital stock and (iv) the record owners of such shares. Except for
interests in the Subsidiaries of Micrografx and as disclosed in Section 3.01 of
the Micrografx Disclosure Letter, Micrografx does not directly
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or indirectly own any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for, any equity or similar
interest in, any corporation, partnership, limited liability company, joint
venture or other business association or entity (other than (i) non-controlling
investments in the ordinary course of business and corporate partnering,
development, cooperative marketing and similar undertakings and arrangements
entered into in the ordinary course of business and (ii) other investments of
less than $100,000 in aggregate). Except as disclosed in Section 3.01 of the
Micrografx Disclosure Letter, Micrografx has previously made available to Corel
correct and complete copies of the certificate or articles of incorporation and
bylaws (or other comparable charter documents) of Micrografx and its
Subsidiaries.
3.02 Capital Stock.
(a) As of the date of this Agreement, the authorized capital stock of
Micrografx consists solely of (A) 20,000,000 shares of Micrografx Common
Stock, and (B) 10,000,000 shares of Micrografx Preferred Stock, of which
4,000,000 shares have been designated as Micrografx Series A Stock. As of
the date of this Agreement, 12,549,542 shares of Micrografx Common Stock
are issued and outstanding, 475,509 shares of Micrografx Common Stock are
held in the treasury of Micrografx and 1,120,000 shares of Micrografx
Series A Stock are issued and outstanding. As of the date hereof, (i)
5,300,000 shares of Micrografx Common Stock are reserved for issuance upon
the exercise of options under the Micrografx ESOP of which options for
3,049,449 shares of Micrografx Common Stock have been granted and are
outstanding, (ii) 100,000 shares of Micrografx Common Stock are reserved
for issuance under the Micrografx 1993 Restricted Stock Plan, (iii)
2,000,000 shares of Micrografx Common Stock are reserved for issuance under
the Micrografx ESPP, (iv) 579,700 shares of Micrografx Common Stock are
reserved for issuance upon the conversion of the principal balance of an
outstanding debenture, (v) 939,850 shares of Micrografx Common Stock are
reserved for issuance upon conversion of the principal balance outstanding
under certain promissory notes (additional shares of Micrografx Common
Stock are reserved with respect to accrued interest, which at Closing shall
constitute approximately 35,000 shares) and (vi) 240,000 shares of
Micrografx Common Stock are reserved for issuance upon exercise of
outstanding warrants. All of the issued and outstanding shares of
Micrografx Common Stock are, and all shares reserved for issuance will be,
upon issuance in accordance with the terms specified in the instruments or
agreements pursuant to which they are issuable, duly authorized, validly
issued, fully paid and nonassessable. Except for shares of Micrografx
Common Stock issuable upon conversion of the Micrografx Series A Stock and
except pursuant to this Agreement, and except as set forth in Section 3.02
of the Micrografx Disclosure Letter or as described above in this Section
3.02, there are no outstanding subscriptions, options, warrants, rights
(including "phantom" stock rights), preemptive rights or other contracts,
commitments, understandings or arrangements, including any right of
conversion or exchange under any outstanding security, instrument or
agreement (together, "Options"), obligating Micrografx or any of its
Subsidiaries to issue or sell any shares of capital stock of Micrografx or
to grant, extend or enter into any Option with respect thereto.
(b) Except as disclosed in Section 3.02 of the Micrografx Disclosure
Letter or as described above in this Section 3.02, all of the outstanding
shares of capital stock of each Subsidiary of Micrografx are duly
authorized, validly issued, fully paid and nonassessable and are owned,
beneficially and of record, by Micrografx or a Subsidiary wholly owned,
directly or indirectly, by Micrografx, free and clear of any liens, claims,
mortgages, encumbrances, pledges, security interests, equities and charges
of any kind other than standard state and federal securities law private
offering legends and restrictions (each a "Lien"). Except as disclosed in
Section 3.02 of the Micrografx Disclosure Letter, there are no (i)
outstanding Options obligating Micrografx or any of its Subsidiaries to
issue or sell any shares of capital stock of any Subsidiary of Micrografx
or to grant, extend or enter into any such Option; (ii) outstanding bonds,
debentures or other evidences of indebtedness of Micrografx having the
right to vote (or that are convertible for or exercisable into securities
having the right to vote) with the holders of Micrografx Common Stock on
any matter; or (iii) voting trusts, proxies or other commitments,
understandings, restrictions or arrangements in favor of any person other
than Micrografx or a Subsidiary wholly owned, directly or indirectly, by
Micrografx with respect to the voting of or the right to participate in
dividends or
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other earnings on any capital stock of any Subsidiary of Micrografx, other
than Voting and Proxy Agreements.
(c) Except as disclosed in Section 3.02 of the Micrografx Disclosure
Letter or as described above in this Section 3.02, there are no outstanding
contractual obligations of Micrografx or any Subsidiary of Micrografx to
repurchase, redeem or otherwise acquire any shares of Micrografx Common
Stock or Micrografx Preferred Stock or any capital stock of any Subsidiary
of Micrografx or to provide funds to, or make any investment (in the form
of a loan, capital contribution or otherwise) in, any Subsidiary of
Micrografx or any other person.
3.03 Authority Relative to This Agreement. Micrografx has full corporate
power and authority to enter into this Agreement and, subject to obtaining the
Micrografx Shareholders' Approval (as defined in Section 6.03(a)), to perform
its obligations hereunder and to consummate the transactions contemplated
hereby. On or prior to the date hereof, the execution, delivery and performance
of this Agreement by Micrografx and the consummation by Micrografx of the
transactions contemplated hereby have been duly and validly approved by the
Board of Directors of Micrografx, the Board of Directors of Micrografx has
recommended adoption of this Agreement by the shareholders of Micrografx and
directed that this Agreement be submitted to the shareholders of Micrografx for
their consideration, and no other corporate proceedings on the part of
Micrografx or its shareholders are necessary to authorize the execution,
delivery and performance of this Agreement by Micrografx and the consummation
by Micrografx of the transactions contemplated hereby, other than obtaining the
Micrografx Shareholders' Approval. This Agreement has been duly and validly
executed and delivered by Micrografx and, assuming due and valid authorization,
execution and delivery hereof by the other parties hereto, constitutes a legal,
valid and binding agreement of Micrografx enforceable against Micrografx in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditors' rights generally and by general
equitable principles (regardless of whether such enforceability is considered
in a proceeding in equity or at law).
3.04 Non-Contravention; Approvals and Consents.
(a) The execution and delivery of this Agreement by Micrografx do not,
and the performance by Micrografx of its obligations hereunder and the
consummation of the transactions contemplated hereby will not, conflict
with, result in a violation or breach of, constitute (with or without
notice or lapse of time or both) a default under, result in or give rise to
any right of payment or reimbursement, termination, cancellation,
modification or acceleration of, or result in the creation or imposition of
any Lien upon any of the assets or properties of Micrografx or any of its
Subsidiaries under, any of the terms, conditions or provisions of (i) the
certificates or articles of incorporation or bylaws (or other comparable
charter documents) of Micrografx or any of its Subsidiaries, or (ii)
subject to the obtaining of Micrografx Shareholders' Approval and the
taking of the actions described in paragraph (b) of this Section 3.04,
(x) any statute, law, rule, regulation or ordinance (together, "laws"), or
any judgment, decree, order, writ, permit or license (together, "orders"),
of any court, tribunal, arbitrator, authority, agency, commission, official
or other instrumentality of the United States, any foreign country or any
domestic or foreign state, province, county, city or other political
subdivision (a "Governmental or Regulatory Authority") applicable to
Micrografx or any of its Subsidiaries or any of their respective assets or
properties, or (y) to the knowledge of Micrografx, except as disclosed in
Section 3.04 of the Micrografx Disclosure Letter, any note, bond, mortgage,
security agreement, indenture, license, franchise, permit, concession,
contract, lease or other instrument, obligation or agreement of any kind
(together, "Contracts") to which Micrografx or any of its Subsidiaries is a
party or by which Micrografx or any of its Subsidiaries or any of their
respective assets or properties is bound, excluding from the foregoing
clauses (x) and (y) conflicts, violations, breaches, defaults, payment or
reimbursement obligations, terminations, cancellations, modifications,
accelerations and creations and impositions of Liens which, individually or
in the aggregate, would not reasonably be expected to have a material
adverse effect on Micrografx and its Subsidiaries taken as a whole or on
the ability of Micrografx to consummate the transactions contemplated by
this Agreement.
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(b) Except (i) for the filing of a premerger notification report by
Micrografx under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations thereunder (the "HSR Act"), (ii)
for the filing of the Proxy Statement (as defined in Section 3.09) and the
Registration Statement (as defined in Section 4.09) with the Securities and
Exchange Commission (the "SEC") pursuant to the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder (the "Exchange
Act"), and the Securities Act of 1933, as amended, and the rules and
regulations thereunder (the "Securities Act"), the declaration of the
effectiveness of the Registration Statement by the SEC and filings with
various Canadian provincial and state securities authorities that are
required in connection with the transactions contemplated by this
Agreement, (iii) for the filing of the Certificate of Merger and other
appropriate merger documents required by the DL with the Secretary of State
and the filing of the Articles of Merger with the Texas Secretary of States
under the TL and appropriate documents with the relevant authorities of
other states in which the Constituent Corporations are qualified to do
business, (iv) the filing(s) as may be required by the Investment Canada
Act (Canada) and/or the Competition Act (Canada), (v) such filings and
applications as are required to be made under Canadian securities law and
under the Canada Business Corporations Act, (vi) such filings as are
required to be made with Nasdaq and the TSE, and (vii) as disclosed in
Section 3.04 of the Micrografx Disclosure Letter, no consent, approval or
action of, filing with or notice to any Governmental or Regulatory
Authority or other public or private third party is necessary or required
under any of the terms, conditions or provisions of any law or order of any
Governmental or Regulatory Authority or, to the knowledge of Micrografx,
any Contract to which Micrografx or any of its Subsidiaries is a party or
by which Micrografx or any of its Subsidiaries or any of their respective
assets or properties is bound for the execution and delivery of this
Agreement by Micrografx, the performance by Micrografx of its obligations
hereunder or the consummation by Micrografx of the transactions
contemplated hereby, other than such consents, approvals, actions, filings
and notices which the failure to make or obtain, as the case may be,
individually or in the aggregate, would not reasonably be expected to have
a material adverse effect on Micrografx and its Subsidiaries taken as a
whole or on the ability of Micrografx to consummate the transactions
contemplated by this Agreement.
3.05 Reports and Financial Statements. Micrografx has made available to
Corel prior to the execution of this Agreement a true and complete copy of each
form, report, schedule, registration statement, definitive proxy statement and
other document (together with all amendments thereof and supplements thereto)
filed by Micrografx or any of its Subsidiaries with the SEC since January 1,
1997 (as such documents have since the time of their filing been amended or
supplemented, the "Micrografx Reports"), which are all the documents (other
than preliminary material) that Micrografx and its Subsidiaries were required
to file with the SEC since such date. Except as disclosed in Section 3.05 of
the Micrografx Disclosure Letter, as of their respective dates, the Micrografx
Reports (i) complied as to form in all material respects with the requirements
of the Securities Act or the Exchange Act, as the case may be, and (ii) did not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited consolidated financial statements and unaudited interim
consolidated financial statements (including, in each case, the notes, if any,
thereto) included in the Micrografx Reports (the "Micrografx Financial
Statements") complied as to form in all material respects with the published
rules and regulations of the SEC with respect thereto, were prepared in
accordance with generally accepted accounting principles in the United States
("U.S. GAAP") applied on a consistent basis during the periods involved (except
as may be indicated therein or in the notes thereto and except with respect to
unaudited statements as permitted by Form 10-Q of the SEC) and fairly present
(subject, in the case of the unaudited interim financial statements, to the
absence of certain footnotes and to normal, recurring year-end audit
adjustments (which would not reasonably be expected to, individually or in the
aggregate, materially adverse to Micrografx and its Subsidiaries taken as a
whole)) the consolidated financial position of Micrografx and its consolidated
subsidiaries as at the respective dates thereof and the consolidated results of
their operations and cash flows for the respective periods then ended. Except
as set forth in Section 3.05 of the Micrografx Disclosure Letter, each
Subsidiary of Micrografx is treated as a consolidated subsidiary of Micrografx
in the Micrografx Financial Statements for all periods covered thereby.
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3.06 Absence of Certain Changes or Events. Except as disclosed in the
Micrografx Reports filed prior to the date of this Agreement or in Section 3.06
of the Micrografx Disclosure Letter:
(a) since March 31, 2001, there has not been any change, event or
development having, or that would reasonably be expected to have,
individually or in the aggregate, a material adverse effect on Micrografx
and its Subsidiaries taken as a whole, and
(b) between such date and the date hereof (i) Micrografx and its
Subsidiaries have conducted their respective businesses only in the
ordinary course substantially consistent with past practice and (ii)
neither Micrografx nor any of its Subsidiaries has taken any action which,
if taken after the date hereof, would constitute a breach of any provision
of clause (ii) of Section 5.01(b).
3.07 Absence of Undisclosed Liabilities. Except as disclosed in the
Micrografx Reports filed prior to the date of this Agreement, or for matters
reflected or reserved against in the consolidated balance sheet of Micrografx
and its consolidated subsidiaries, dated March 31, 2001, included in the
Micrografx Financial Statements or as disclosed in Section 3.07 of the
Micrografx Disclosure Letter, neither Micrografx nor any of its Subsidiaries
had at such date, or has incurred since that date, any liabilities or
obligations (whether absolute, accrued, contingent, fixed or otherwise, or
whether due or to become due) of any nature that would be required by U.S. GAAP
to be reflected on a consolidated balance sheet of Micrografx and its
consolidated subsidiaries (including the notes thereto), except liabilities or
obligations (i) which were incurred in the ordinary course of business
consistent with past practice or (ii) which have not been, and would not
reasonably be expected to be, individually or in the aggregate, materially
adverse to Micrografx and its Subsidiaries taken as a whole.
3.08 Legal Proceedings. Except as disclosed in the Micrografx Reports filed
prior to the date of this Agreement or in Section 3.08 of the Micrografx
Disclosure Letter, (i) there are no actions, suits, arbitrations or proceedings
pending or, to the knowledge of Micrografx, threatened against, relating to or
affecting, nor to the knowledge of Micrografx are there any Governmental or
Regulatory Authority investigations or audits pending or threatened against,
relating to or affecting, Micrografx or any of its Subsidiaries or affiliates
or any of their respective assets and properties which, individually or in the
aggregate, would reasonably be expected to have a material adverse effect on
Micrografx and its Subsidiaries taken as a whole or on the ability of
Micrografx to consummate the transactions contemplated by this Agreement, and
(ii) neither Micrografx nor any of its Subsidiaries nor any of its affiliates
is subject to any order of any Governmental or Regulatory Authority which,
individually or in the aggregate, is having or would reasonably be expected to
have a material adverse effect on Micrografx and its Subsidiaries taken as a
whole or on the ability of Micrografx to consummate the transactions
contemplated by this Agreement.
3.09 Information Supplied. The joint proxy statement relating to the
Micrografx Shareholders' Meeting (as defined in Section 6.03 (b)), as amended
or supplemented from time to time (as so amended and supplemented, the "Proxy
Statement"), and any other documents to be filed by Micrografx with the SEC,
the Ontario Securities Commission, the TSE or any other Governmental or
Regulatory Authority in connection with the Merger and the other transactions
contemplated hereby will (in the case of the Proxy Statement and any such other
documents filed with the SEC under the Exchange Act or the Securities Act)
comply as to form in all material respects with the requirements of the
Exchange Act and the Securities Act, respectively, and will not, on the date of
its filing or, in the case of the Proxy Statement, at the date it is mailed to
shareholders of Micrografx and at the times of the Micrografx Shareholders'
Meeting, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading, except that no representation is made by Micrografx with
respect to information supplied in writing by or on behalf of Corel or Sub
expressly for inclusion therein and information incorporated by reference
therein from documents filed by Corel or any of its Subsidiaries with the SEC.
3.10 Compliance with Laws and Orders. Micrografx and its Subsidiaries hold
all permits, licenses, variances, exemptions, orders and approvals of all
Governmental and Regulatory Authorities necessary for the lawful conduct of
their respective businesses as presently conducted (the "Micrografx Permits"),
except for
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failures to hold such permits, licenses, variances, exemptions, orders and
approvals which, individually or in the aggregate, are not having and would not
reasonably be expected to have a material adverse effect on Micrografx and its
Subsidiaries taken as a whole. Micrografx and its Subsidiaries are in
compliance with the terms of the Micrografx Permits, except failures so to
comply which, individually or in the aggregate, are not having and would not
reasonably be expected to have a material adverse effect on Micrografx and its
Subsidiaries taken as a whole. Except as disclosed in the Micrografx Reports
filed prior to the date of this Agreement, Micrografx and its Subsidiaries are
not in violation of or default under any law or order of any Governmental or
Regulatory Authority, except for such violations or defaults which,
individually or in the aggregate, are not having and would not be reasonably
expected to have a material adverse effect on Micrografx and its Subsidiaries
taken as a whole.
3.11 Compliance with Agreements; Certain Agreements.
(a) Except as disclosed in the Micrografx Reports filed prior to the
date of this Agreement, neither Micrografx nor any of its Subsidiaries nor,
to the knowledge of Micrografx, any other party is in breach or violation
of, or in default in the performance or observance of any term or provision
of, and no event has occurred which, with notice or lapse of time or both,
could be reasonably expected to result in a default under, (i) the
certificates or articles of incorporation or bylaws (or other comparable
charter documents) of Micrografx or any of its Subsidiaries or (ii) any
Contract to which Micrografx or any of its Subsidiaries is a party or by
which Micrografx or any of its Subsidiaries or any of their respective
assets or properties is bound, except in the case of clause (ii) for
breaches, violations and defaults which, individually or in the aggregate,
are not having and would not reasonably be expected to have a material
adverse effect on Micrografx and its Subsidiaries taken as a whole. Except
for this Agreement and those agreements and other documents filed as
exhibits to the Micrografx Reports or set forth in Section 3.11 of the
Micrografx Disclosure Letter, as of the date of this Agreement, neither
Micrografx nor any of its Subsidiaries is a party to or bound by any non-
competition agreement or other agreement or arrangement that materially
restricts it or any of its Subsidiaries from competing in any line of
business which is material to Micrografx and its Subsidiaries.
(b) Except as disclosed in Section 3.11 of the Micrografx Disclosure
Letter or in the Micrografx Reports filed prior to the date of this
Agreement or as provided for in this Agreement, as of the date hereof, to
the knowledge of Micrografx, neither Micrografx nor any of its Subsidiaries
is a party to any oral or written (i) consulting agreement not terminable
on 60 days' or less notice involving the payment of more than U.S.$100,000
per annum in the aggregate for all such agreements, (ii) union or
collective bargaining agreement which covers any employees, (iii) agreement
with any executive officer or other employee of Micrografx or any of its
Subsidiaries, the benefits of which in the aggregate for all such executive
officers and employees exceed U.S.$100,000, and which are contingent or
vest, or the terms of which are materially altered, upon the occurrence of
a transaction involving Micrografx or any of its Subsidiaries of the nature
contemplated by this Agreement, excluding accelerated vesting of options as
contemplated in Section 2.01(e), (iv) agreement with respect to any
executive officer or other employee of Micrografx or any of its
Subsidiaries providing any term of employment or compensation guarantee or
(v) agreement or plan, including any stock option, stock appreciation
right, restricted stock or stock purchase plan, any of the benefits of
which will be increased, or the vesting of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by
this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement.
3.12 Taxes.
(a) Each of Micrografx and its Subsidiaries has filed all material tax
returns and reports required to be filed by it, or requests for extensions
to file such returns or reports have been timely filed or granted and have
not expired, and all such tax returns and reports are complete and accurate
in all material respects, except to the extent that such failures to file,
have extensions granted that remain in effect or be complete and accurate
in all respects, as applicable, individually or in the aggregate, would not
reasonably
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be expected to have a material adverse effect on Micrografx and its
Subsidiaries taken as a whole. Micrografx and each of its Subsidiaries has
paid (or Micrografx has paid on its behalf) all taxes shown as due on such
tax returns and reports. The most recent financial statements contained in
the Micrografx Reports reflect a reserve for all taxes payable by
Micrografx and its Subsidiaries which is adequate in accordance with U.S.
GAAP for all taxable periods and portions thereof accrued through the date
of such financial statements, and no deficiencies for any taxes have been
proposed, asserted or assessed against Micrografx or any of its
Subsidiaries that are not adequately reserved for, except for inadequately
reserved taxes and inadequately reserved deficiencies that would not
reasonably be expected to, individually or in the aggregate, have a
material adverse effect on Micrografx and its Subsidiaries taken as a
whole. No requests for waivers of the time to assess any taxes against
Micrografx or any of its Subsidiaries have been granted or are pending,
except requests with respect to such taxes that have been adequately
reserved for in the most recent Micrografx Reports, or, to the extent not
adequately reserved, the assessment of which would not, individually or in
the aggregate, have a material adverse effect on Micrografx and its
Subsidiaries taken as a whole.
(b) To the knowledge of Micrografx, there are no liens for material
amounts of taxes on the assets of Micrografx or any of its Subsidiaries
except for statutory liens for current taxes not yet due and payable.
(c) Micrografx has not taken and, unless the Cash Alternative is elected
by Corel, will not take any action to prevent, nor has it any knowledge of
any fact or circumstance reasonably likely to prevent, the Merger from
qualifying as a tax free reorganization within the meaning of Section 368
of the Code, other than the possible election of the Cash Alternative by
Corel.
(d) As used in this Section 3.12, "taxes" shall include all federal,
provincial, state, local and foreign income, capital, franchise, property,
sales, use, goods and services, excise, land transfer, ad valorem, workers
compensation, employment insurance, workers health and other taxes,
including obligations for taxes and other amounts required to be withheld
from payments due or made to any other person (including employees and non-
resident persons) and any interest, penalties or additions to tax.
3.13 Employee Benefit Plans; ERISA.
(a) Except as described in the Micrografx Reports filed prior to the
date of this Agreement or in Section 3.13 of the Micrografx Disclosure
Letter or as would not reasonably be expected to have a material adverse
effect on Micrografx and its Subsidiaries taken as a whole, (i) all
Micrografx Employee Benefit Plans (as defined below) are in compliance in
all material respects with all applicable requirements of law, including
ERISA and the Code, and (ii) neither Micrografx nor any of its Subsidiaries
has any liabilities or obligations with respect to any such Micrografx
Employee Benefit Plans, whether accrued, contingent or otherwise, nor to
the knowledge of Micrografx are any such liabilities or obligations
expected to be incurred. Except as described in the Micrografx Reports
filed prior to the date of this Agreement or in Section 3.13 of the
Micrografx Disclosure Letter, the execution of, and performance of the
transactions contemplated in, this Agreement will not (either alone or upon
the occurrence of any additional or subsequent events) constitute an event
under any Micrografx Employee Benefit Plan that will or may result in any
payment (whether of severance pay or otherwise), acceleration, forgiveness
of indebtedness, vesting, distribution, increase in benefits or obligation
to fund benefits with respect to any employee. The only severance
agreements or severance policies applicable to Micrografx or any of its
Subsidiaries are the agreements and policies specifically referred to in
Section 3.13 of the Micrografx Disclosure Letter and items 12 to 16 of
Section 3.11 of the Micrografx Disclosure Letter. The last date on which
stock options were granted to any director of Micrografx was April 1, 2001.
The last date on which stock options were granted to any employee of
Micrografx was July 12, 2001.
(b) As used herein:
(i) "Micrografx Employee Benefit Plan" means any Plan entered into,
established, maintained, sponsored, contributed to or required to be
contributed to by Micrografx or any of its Subsidiaries for the benefit
of the current or former employees or directors of Micrografx or any of
its Subsidiaries
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and existing on the date of this Agreement or at any time subsequent
thereto and on or prior to the Effective Time and, in the case of a
Plan which is subject to Part 3 of Title I of the Employee Retirement
Income Security Act of 1974, as amended, and the rules and regulations
thereunder ("ERISA"), Section 412 of the Code or Title IV of ERISA, at
any time during the five-year period preceding the date of this
Agreement; and
(ii) "Plan" means any employment, bonus, incentive compensation,
deferred compensation, pension, profit sharing, retirement, stock
purchase, stock option, stock ownership, stock appreciation rights,
phantom stock, leave of absence, layoff, vacation, day or dependent
care, legal services, cafeteria, life, health, medical, accident,
disability, workmen's compensation or other insurance, severance,
separation, termination, change of control or other benefit plan,
agreement, practice, policy, program or arrangement of any kind,
whether written or oral, including, but not limited to any "employee
benefit plan" within the meaning of Section 3(3) of ERISA.
3.14 Labor Matters. Except as disclosed in the Micrografx Reports filed
prior to the date of this Agreement, there are no material controversies
pending or, to the knowledge of Micrografx, threatened between Micrografx or
any of its Subsidiaries and any representatives of its employees, except as
would not reasonably be expected to, individually or in the aggregate, have a
material adverse effect on Micrografx and its Subsidiaries taken as a whole,
and, to the knowledge of Micrografx, there are no material organizational
efforts presently being made involving any of the now unorganized employees of
Micrografx or any of its Subsidiaries. Since June 30, 2000, there has been no
work stoppage, strike or other concerted action by employees of Micrografx or
any of its Subsidiaries except as would not reasonably be expected to,
individually or in the aggregate, have a material adverse effect on Micrografx
and its Subsidiaries taken as a whole.
3.15 Environmental Matters.
(a) Except as disclosed in the Micrografx Reports filed prior to date of
this Agreement, each of Micrografx and its Subsidiaries has obtained all
licenses, permits, authorizations, approvals, registrations, franchises and
consents from Governmental or Regulatory Authorities which are required
under or pursuant to any applicable Environmental Law (as defined below) in
respect of its business or operations ("Environmental Permits"), except for
such failures to have Environmental Permits which, individually or in the
aggregate, would not reasonably be expected to have a material adverse
effect on Micrografx and its Subsidiaries taken as a whole. Each of such
Environmental Permits is in full force and effect and each of Micrografx
and its Subsidiaries is in compliance with the terms and conditions of all
such Environmental Permits and with any applicable Environmental Law,
except for such failures to be in compliance which, individually or in the
aggregate, would not reasonably be expected to have a material adverse
effect on Micrografx and its Subsidiaries taken as a whole.
(b) To the knowledge of Micrografx, no site or facility now or
previously owned, operated or leased by Micrografx or any of its
Subsidiaries is listed or proposed for listing on the National Priorities
List promulgated pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, and the rules and
regulations thereunder ("CERCLA"), or on any similar state or local list of
sites requiring investigation or clean-up.
(c) To the knowledge of Micrografx, no Liens have arisen under or
pursuant to any Environmental Law on any site or facility owned, operated
or leased by Micrografx or any of its Subsidiaries, other than any such
real property not individually or in the aggregate material to Micrografx
and its Subsidiaries taken as a whole, and no action of any Governmental or
Regulatory Authority has been taken or, to the knowledge of Micrografx, is
in process which could subject any of such properties to such Liens.
(d) There have been no environmental investigations, studies, audits,
tests, reviews or other analyses conducted by, or which are in the
possession of, Micrografx or any of its Subsidiaries in relation to any
site or facility now or previously owned, operated or leased by Micrografx
or any of its Subsidiaries which have not been delivered to Corel prior to
the execution of this Agreement.
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(e) As used herein in this Section 3.15:
(i) "Environmental Law" means any law or order of any Governmental
or Regulatory Authority relating to the regulation or protection of
human health, safety or the environment or to emissions, discharges,
releases or threatened releases of pollutants, contaminants, chemicals
or industrial, toxic or hazardous substances or wastes into the
environment (including, without limitation, ambient air, soil, surface
water, ground water, wetlands, land or subsurface strata), or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of pollutants, contaminants,
chemicals or industrial, toxic or hazardous substances or wastes; and
(ii) "Hazardous Material" means (A) any petroleum or petroleum
products, flammable explosives, radioactive materials, asbestos in any
form that is or could become friable, urea formaldehyde foam insulation
and transformers or other equipment that contain dielectric fluid
containing levels of polychlorinated biphenyls (PCBs); (B) any
chemicals or other materials or substances which are now or hereafter
become defined as or included in the definition of "hazardous
substances," "hazardous wastes," "hazardous materials," "extremely
hazardous wastes," "restricted hazardous wastes," "toxic substances,"
"toxic pollutants" or words of similar import under any Environmental
Law; and (C) any other chemical or other material or substance,
exposure to which is now or hereafter prohibited, limited or regulated
by any Governmental or Regulatory Authority under any Environmental
Law.
3.16 Intellectual Property Rights. Except as disclosed in the Micrografx
Reports filed prior to the date of this Agreement or as set forth in Section
3.16 of the Micrografx Disclosure Letter:
(a) Micrografx and its Subsidiaries have all right, title and interest
in, or a valid and binding license to use, all Micrografx Intellectual
Property Rights (the term "Intellectual Property Rights" is defined below)
individually or in the aggregate material to the conduct of the businesses
of Micrografx and its Subsidiaries. Neither Micrografx nor any Subsidiary
of Micrografx is in default (or with the giving of notice or lapse of time
or both, would be in default) under any license to use such Micrografx
Intellectual Property Rights, to the knowledge of Micrografx, (i) such
Micrografx Intellectual Property Rights are not being infringed by any
third party, and (ii) neither Micrografx nor any Subsidiary of Micrografx
is infringing any Intellectual Property Rights of any third party, which
default or infringement is or would be reasonably likely, individually or
in the aggregate, to have a material adverse effect on Micrografx and its
Subsidiaries taken as a whole. For purposes of this Agreement,
"Intellectual Property Rights" means intellectual property of whatever
nature and kind including all domestic and foreign trade-marks, business
names, trade names, domain names, trading styles, patents and patent
rights, trade secrets, service marks and service mark rights, service names
and service name rights, industrial designs and copyrights, whether
registered or unregistered, and all applications for registration thereof,
and inventions, formulae, product formulations, processes and processing
methods, technology, techniques, know how and manuals and other proprietary
intellectual property rights and all pending applications for and
registrations of any of the foregoing.
(b) Section 3.16 of the Micrografx Disclosure Letter contains an
accurate and complete list of all the software products of Micrografx and
its Subsidiaries currently being shipped (the "Software"). All individuals
who have written the Software, other than minor components of the Software
which in the aggregate do not comprise more than 5% of the source code for
the current versions of the Software, have assigned, in writing or by
operation of applicable law, to Micrografx all their right, title and
interest (including all intellectual property rights and moral rights) in
and to the Software.
(c) Section 3.16 of the Micrografx Disclosure Letter contains (or will
be supplemented to prior to Closing to contain) an accurate and complete
list as of the date of this Agreement of all licenses, sublicenses,
assignments and other agreements under which Micrografx and its
Subsidiaries are licensed to use third party Intellectual Property Rights
which are material to the business of Micrografx as currently conducted
(the "Micrografx License Agreements").
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(d) Except as set forth in Section 3.16 of the Micrografx Disclosure
Letter (including as it may be supplemented prior to Closing), Micrografx
and its Subsidiaries are not required to pay any royalties, fees or other
amounts to any Person in connection with the Micrografx License Agreements
or the development, manufacture or commercial exploitation of any products
of Micrografx or its Subsidiaries in each such case in excess of $100,000
in aggregate per annum.
(e) Section 3.16 of the Micrografx Disclosure Letter contains an
accurate and complete list as of the date of this Agreement of all
registered patents, registered and unregistered trademarks, registered and
unregistered trade names, registered and unregistered service marks and
registered and unregistered copyrights (in each case that are currently in
use) except for those that in the aggregate are not material to the conduct
of the business of Micrografx and its Subsidiaries, as well as all
applications, registrations, renewals, modifications, extensions,
divisionals and continuations thereto for any and all of the foregoing,
included in the Micrografx Intellectual Property Rights (excluding third
party Intellectual Property Rights), including the jurisdiction in which
each such Micrografx Intellectual Property Rights has been issued or
registered or in which any such application for such issuance, approval or
registration has been filed. All patents, trademarks, trade names, service
marks and copyrights owned by Micrografx or any of its Subsidiaries and
which are material to the conduct of their business as currently conducted
are valid and enforceable, except for those the invalidity or
unenforceability of which would not be reasonably likely, individually or
in the aggregate, to have a material adverse effect on Micrografx and its
Subsidiaries taken as a whole.
(f) Section 3.16 of Micrografx Disclosure Letter contains an accurate
and complete list as of the date of this Agreement of all material licenses
and sublicenses under which Micrografx or any of its Subsidiaries has
granted the right to manufacture, reproduce, market or exploit any products
of Micrografx or any Subsidiaries or any adaptation, derivative or
reformulation based on any such product or any portion thereof.
(g) Neither Micrografx nor any of its Subsidiaries is or will be as a
result of the execution and delivery of this Agreement or the performance
of its obligations under this Agreement, in breach of any Micrografx
License Agreements. Neither the execution or delivery of this Agreement nor
the consummation of the transactions contemplated hereby will cause or will
result in a material change to the terms of any material license,
sublicense or other similar agreement.
(h) Except as set forth in Section 3.16 of the Micrografx Disclosure
Letter, the source code for the Micrografx Software except for those that
in the aggregate are not material to the conduct of the business of
Micrografx and its Subsidiaries has not been delivered or made available to
any person and Micrografx or its Subsidiaries have not agreed or undertaken
to or in any way promised to provide such source code to any person.
(i) There are no known problems or defects in the Micrografx Software
except for those that in the aggregate are not material to the conduct of
the business of Micrografx and its Subsidiaries including bugs, logic
errors or failures of the Micrografx Software to operate in all material
respects as described in the related documentation.
(j) Except as set forth in Section 3.16 of the Micrografx Disclosure
Letter, neither Micrografx nor its Subsidiaries (i) has been named as a
party in any suit, action or proceeding which involves a claim of
infringement or violation of any Intellectual Property Right except for
those that in the aggregate are not material to the conduct of the business
of Micrografx and its Subsidiaries of any third party or (ii) has received
any written claim or allegation that the manufacturing, importation,
marketing, licensing, sale, offer for sale, or use of any of its products
infringes Intellectual Property Rights of any third party.
(k) Micrografx and its Subsidiaries have taken all reasonable steps to
protect and preserve the confidential information, trade secrets and know-
how of Micrografx and its Subsidiaries except for those that in the
aggregate are not material to the conduct of the business of Micrografx and
its Subsidiaries, including appropriate non-disclosure agreements with all
employees and third persons having access to any confidential information,
trade secrets or know-how of Micrografx and its Subsidiaries.
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(l) Neither Micrografx nor any of its Subsidiaries has made any written
claim or allegation that any third person is or has infringed,
misappropriated, breached or violated the rights of Micrografx or its
Subsidiaries in any of the Micrografx Intellectual Property Rights which
are material to the business of Micrografx as currently conducted.
3.17 Micrografx Owned and Leased Properties. Micrografx and its Subsidiaries
do not own, and are not parties to any agreement or option to own any real
property. Except as set out in the Micrografx Reports or as disclosed in
Section 3.17 of the Micrografx Disclosure Letter, Micrografx and its
Subsidiaries are not party to, or under any agreement to become a party to, any
lease with respect to real property ("Micrografx Leases"). Each Micrografx
Lease is in good standing, creates a good and valid leasehold estate in the
leased properties thereby demised and is in full force and effect without
amendment ("Micrografx Leased Properties"). With respect to each Micrografx
Lease: (i) all rents and additional rents due have been paid, (ii) no waiver,
indulgence or postponement of Micrografx or its Subsidiaries' obligations has
been granted by the other party thereto, (iii) as described in Section 3.17 of
the Micrografx Disclosure Letter, there exists no event of default or event,
occurrence, condition or act of or relating to Micrografx or its Subsidiaries
which, with the giving of notice, the lapse of time or the happening of any
other event or condition, would become a default or require a consent from a
third party under a Micrografx Lease, and (iv) to the knowledge of Micrografx,
all of the covenants to be performed by any party (other than Micrografx and
its Subsidiaries) under each Micrografx Lease have been performed in all
material respects. Each Micrografx Leased Property is adequate and suitable in
all material respects for the purposes for which it is presently being used and
Micrografx and its Subsidiaries have adequate rights of ingress and egress into
each of Micrografx Leased Property for the operation of its business in the
ordinary course.
3.18 Title to Properties. Micrografx and each of its Subsidiaries have a
good and valid title to, or valid and subsisting leasehold interest in and to,
or a valid and enforceable license to use, all material assets, properties and
rights owned, used or held for use by them in the conduct of their business, in
each case free and clear of any leases, claims, mortgages, pledges and security
interest except those (i) arising in the ordinary course, (ii) that do not
materially impair the continued use of such properties, (iii) for current Taxes
and assessments not yet due and payable, or (iv) that are not reasonably
expected to have a material adverse effect on Micrografx.
3.19 Insurance. Micrografx and its Subsidiaries have policies of insurance
and bonds of the type and in amounts customarily carried by persons conducted
businesses and owning assets similar to those of Micrografx and its
Subsidiaries. There is no material claim pending under any of such policies or
bonds as to which coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds. All premiums due and payable under all
such policies and bonds have been paid and Micrografx and its Subsidiaries are
otherwise in compliance in all material respects with the terms of such
policies and bonds. Micrografx has no knowledge of any threatened termination
of, or material premium increase with respect to, any of such policies.
3.20 Vote Required. Assuming the accuracy of the representation and warranty
contained in Section 4.12, the affirmative vote of the holders of record of at
least a majority of each of the outstanding shares of Micrografx Common Stock
and the outstanding shares of Micrografx Series A Stock with respect to the
adoption of this Agreement are the only votes of the holders of any class or
series of the capital stock of Micrografx required to adopt this Agreement and
to approve the Merger and the other transactions contemplated hereby.
3.21 Opinion of Financial Advisor. Micrografx has received the opinion of
Alliant Partners, dated the date hereof, to the effect that, as of the date
hereof, the consideration to be received in the Merger by the shareholders of
Micrografx is fair from a financial point of view to the shareholders of
Micrografx, and a true and complete copy of such opinion has been delivered to
Corel.
3.22 Ownership of Corel Common Stock. Neither Micrografx nor any of its
Subsidiaries beneficially owns any shares of Corel Common Stock.
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3.23 Takeover Laws. Micrografx has taken all necessary actions so that
neither the provisions of Micrografx's articles of incorporation nor the
provisions of Article 13 of TL will, before the termination of this Agreement,
apply to this Agreement, the Merger or the other transactions contemplated
hereby. To the knowledge of Micrografx except for Article 13 of TL (which has
been rendered inapplicable), no "moratorium", "control share", "fair price" or
other antitakeover laws and regulation of any state (collectively, "Takeover
Laws") are applicable to the Merger or other transactions contemplated by this
Agreement.
ARTICLE IV
Representations and Warranties of Corel and Sub
Corel and Sub, jointly and severally, represent and warrant to Micrografx as
follows:
4.01 Organization and Qualification. Each of Corel and its Subsidiaries
(including Sub) is a corporation duly incorporated, validly existing and in
good standing under the laws of its jurisdiction of incorporation and has full
corporate power and authority to conduct its business as and to the extent now
conducted and to own, use and lease its assets and properties, except for such
failures to be so existing and in good standing or to have such power and
authority which, individually or in the aggregate, are not having and would not
reasonably be expected to have a material adverse effect on Corel and its
Subsidiaries taken as a whole. Sub was formed solely for the purpose of
engaging in the transactions contemplated by this Agreement, has engaged in no
other business activities and has conducted its operations only as contemplated
hereby. Each of Corel and its Subsidiaries is duly qualified, licensed or
admitted to do business and is in good standing in each jurisdiction in which
the ownership, use or leasing of its assets and properties, or the conduct or
nature of its business, makes such qualification, licensing or admission
necessary, except for such failures to be so qualified, licensed or admitted
and in good standing which, individually or in the aggregate, are not having
and would not reasonably be expected to have a material adverse effect on Corel
and its Subsidiaries taken as a whole. Section 4.01 of the letter dated the
date hereof and delivered by Corel and Sub to Micrografx concurrently with the
original execution and delivery of this Agreement (the "Corel Disclosure
Letter") sets forth (i) the name and jurisdiction of incorporation of each
Subsidiary of Corel, (ii) its authorized capital stock, (iii) the number of
issued and outstanding shares of its capital stock and (iv) the record owners
of such shares. Except for interests in the Subsidiaries of Corel and as
disclosed in Section 4.01 of the Corel Disclosure Letter, Corel does not
directly or indirectly own any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for, any equity or similar
interest in, any corporation, partnership, limited liability company, joint
venture or other business association or entity (other than (i) non-controlling
investments in the ordinary course of business and corporate partnering,
development, cooperative marketing and similar undertakings and arrangements
entered into in the ordinary course of business and (ii) other investments of
less than $1,000,000). Corel has previously made available to Micrografx
correct and complete copies of the Certificate and Articles of Amalgamation and
bylaws (or other comparable charter documents) of Corel.
4.02 Capital Stock.
(a) As of the date of this Agreement, the authorized capital stock of
Corel consists solely of an unlimited number of common shares of Corel
("Corel Common Stock"), an unlimited number of preferred shares, issuable
in series, and a first series of 24,000,000 Series A Participating
Convertible Preferred Shares ("Series A Preferred Stock"). As of the date
of this Agreement, 73,761,044 shares of Corel Common Stock and 24,000,000
Series A Preferred Shares are issued and outstanding, options for 713,174
shares of Corel Common Stock are granted and outstanding under the Corel
Stock Option Plan as last amended as of January 18, 2000 (the "Corel Stock
Option Plan") and options for 2,130,174 shares of Corel Common Stock are
granted and outstanding under the Corel Stock Option Plan 2000 as amended
and restated as of February 13, 2001 (the "Corel Stock Option Plan 2000")
and warrants for 169,500 shares of Corel Common Stock are issued and
outstanding to an investor and warrants for 113,000 shares
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of Corel Common Stock are issued and outstanding to advisors to Corel. All
of the issued and outstanding shares of Corel Common Stock are, and all
shares reserved for issuance will be, upon issuance in accordance with the
terms specified in the instruments or agreements pursuant to which they are
issuable, duly authorized, validly issued, fully paid and nonassessable.
Except pursuant to this Agreement and the rights agreement dated February
11, 1999, amended and restated as of March 31, 1999 between Corel and
Computershare Trust Company of Canada (predecessor to Montreal Trust
Company of Canada), as Rights Agent ("Corel Rights Agreement") and except
as set forth in Section 4.02 of the Corel Disclosure Letter, there are no
outstanding Options obligating Corel or any of its Subsidiaries to issue or
sell any shares of capital stock of Corel or to grant, extend or enter into
any Option with respect thereto.
(b) Except as disclosed in Section 4.02 of the Corel Disclosure Letter
or as described above in this Section 4.02, all of the outstanding shares
of capital stock of each Subsidiary of Corel are duly authorized, validly
issued, fully paid and nonassessable and are owned, beneficially and of
record, by Corel or a Subsidiary wholly owned, directly or indirectly, by
Corel, free and clear of any Liens. Except pursuant to the Corel Rights
Agreement or as disclosed in Section 4.02 of the Corel Disclosure Letter,
there are no (i) outstanding Options obligating Corel or any of its
Subsidiaries to issue or sell any shares of capital stock of any Subsidiary
of Corel or to grant, extend or enter into any such Option; (ii)
outstanding bonds, debentures or other evidences of indebtedness of Corel
having the right to vote (or that are convertible for or exercisable into
securities having the right to vote) with the holders of Corel Common Stock
on any matter; or (iii) voting trusts, proxies or other commitments,
understandings, restrictions or arrangements in favor of any person other
than Corel or a Subsidiary wholly owned, directly or indirectly, by Corel
with respect to the voting of or the right to participate in dividends or
other earnings on any capital stock of any Subsidiary of Corel.
(c) Except as disclosed in Section 4.02 of the Corel Disclosure Letter,
there are no outstanding contractual obligations of Corel or any Subsidiary
of Corel to repurchase, redeem or otherwise acquire any shares of Corel
Common Stock or any capital stock of any Subsidiary of Corel or to provide
funds to, or make any investment (in the form of a loan, capital
contribution or otherwise) in, any Subsidiary of Corel or any other person.
4.03 Authority Relative to This Agreement. Each of Corel and Sub has full
corporate power and authority to enter into this Agreement and, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
On or prior to the date hereof, the execution, delivery and performance of this
Agreement by each of Corel and Sub and the consummation by each of Corel and
Sub of the transactions contemplated hereby have been duly and validly approved
by its Board of Directors and by the sole shareholder of Sub, and no other
corporate proceedings on the part of either of Corel or Sub or their
shareholders are necessary to authorize the execution, delivery and performance
of this Agreement by Corel and Sub and the consummation by Corel and Sub of the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by each of Corel and Sub and, assuming due and valid
authorization, execution and delivery hereof by the other parties hereto,
constitutes a legal, valid and binding agreement of each of Corel and Sub
enforceable against each of Corel and Sub in accordance with its terms, except
as enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
4.04 Non-Contravention; Approvals and Consents.
(a) The execution and delivery of this Agreement by each of Corel and
Sub do not, and the performance by each of Corel and Sub of its obligations
hereunder and the consummation of the transactions contemplated hereby will
not, conflict with, result in a violation or breach of, constitute (with or
without notice or lapse of time or both) a default under, result in or give
rise to any right of payment or reimbursement, termination, cancellation,
modification or acceleration of, or result in the creation or imposition of
any Lien upon any of the assets or properties of Corel or any of its
Subsidiaries under, any of the terms, conditions or provisions of (i) the
certificates or articles of amalgamation or bylaws (or other
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comparable charter documents) of Corel or any of its Subsidiaries, or (ii)
subject to the taking of the actions described in paragraph (b) of this
Section, (x) any laws or orders of any Governmental or Regulatory Authority
applicable to Corel or any of its Subsidiaries or any of their respective
assets or properties or (y) to the knowledge of Corel any Contracts to
which Corel or any of its Subsidiaries is a party or by which Corel or any
of its Subsidiaries or any of their respective assets or properties is
bound, excluding from the foregoing clauses (x) and (y) conflicts,
violations, breaches, defaults, payment or reimbursement obligations,
terminations, cancellations, modifications, accelerations and creations and
impositions of Liens which, individually or in the aggregate, would not
reasonably be expected to have a material adverse effect on Corel and its
Subsidiaries taken as a whole or on the ability of Corel and Sub to
consummate the transactions contemplated by this Agreement.
(b) Except (i) for the filing of a premerger notification report by
Corel under the HSR Act, (ii) for the filing of the Registration Statement
with the SEC pursuant to the Exchange Act and the Securities Act, the
declaration of the effectiveness of the Registration Statement by the SEC
and filings with various Canadian provincial and state securities
authorities that are required in connection with the transactions
contemplated by this Agreement, (iii) for the filing of the Certificate of
Merger and other appropriate merger documents required by the DL with the
Secretary of State and the filing of the Articles of Merger with the Texas
Secretary of State under the TL and appropriate documents with the relevant
authorities of other states in which the Constituent Corporations are
qualified to do business, (iv) as may be required under applicable
requirements of the Competition Act (Canada) and the Investment Canada Act
(Canada), (v) as may be required by the by-laws, rules, regulations or
policies of the TSE in respect of the Corel Common Stock to be issued in
the Merger and upon the exercise of the Micrografx Options to be assumed by
Corel by reason of the Merger and the listing of such Corel Common Stock on
such stock exchanges, (vi) such filings as are required to be made under
the Canada Business Corporations Act or under Canadian securities laws, and
(vii) as disclosed in Section 4.04 of the Corel Disclosure Letter, no
consent, approval or action of, filing with or notice to any Governmental
or Regulatory Authority, to the knowledge of Corel, or other public or
private third party is necessary or required under any of the terms,
conditions or provisions of any law or order of any Governmental or
Regulatory Authority or any Contract to which Corel or any of its
Subsidiaries is a party or by which Corel or any of its Subsidiaries or any
of their respective assets or properties is bound for the execution and
delivery of this Agreement by each of Corel and Sub, the performance by
each of Corel and Sub of its obligations hereunder or the consummation by
Corel of the transactions contemplated hereby, other than such consents,
approvals, actions, filings and notices which the failure to make or
obtain, as the case may be, individually or in the aggregate, would not
reasonably be expected to have a material adverse effect on Corel and its
Subsidiaries taken as a whole or on the ability of Corel and Sub to
consummate the transactions contemplated by this Agreement.
(c) (i) The issuance of the Corel Common Stock and the Corel PRs will be
exempt from the prospectus and registration requirements of the securities
laws of the Province of Ontario and no other documents will be required to
be filed, proceedings taken or approvals, permits, consents or
authorizations or regulatory authorities obtained under the securities laws
of the Province of Ontario in respect of the issuance and delivery by Corel
of the Corel Common Stock or the Corel PRs.
(ii) The issuance of the Corel Common Stock upon exercise of the
Corel PRs will be exempt from the prospectus and registration
requirements of the securities laws of the Province of Ontario and no
other documents will be required to be filed, proceedings taken or
approvals, permits, consents or authorizations or regulatory
authorities obtained under the securities laws of the Province of
Ontario in respect of the issuance and delivery by Corel of the Corel
Common Stock provided that no commission or other remuneration is paid
or given to others for the trade except for ministerial or professional
services as for services performed by a registered dealer.
(iii) No other documents will be required to be filed, proceedings
taken or approvals, permits, consents, orders or authorizations of
regulatory authorities required to be obtained under the securities
laws of the Province of Ontario in connection with the first trade of
the Corel Common Stock issued at the Effective Time or the Corel Common
Stock issued upon the exercise of the Corel PRs made
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through a registrant registered under the securities laws of the
Province of Ontario who has complied with such applicable laws, provided
that:
(A) Corel is a reporting issuer as defined in the Securities Act
(Ontario);
(B) the vendor of such securities is not in a "special
relationship" with Corel or, if so, the vendor has reasonable
grounds for believing the Corporation is not in default of the
Securities Act (Ontario) or the Regulation thereunder;
(C) disclosure to the Ontario Securities Commission has been made
of the exempt trade;
(D) no unusual effort is made to prepare the market or to create
a demand for the securities subject to such trade and no
extraordinary commission or consideration is paid in respect of such
trade; and
(E) such trade is not a "control person distribution" (as defined
in Ontario Securities Commission Rule 14-501).
4.05 Reports and Financial Statements. Corel has made available to
Micrografx prior to the execution of this Agreement a true and complete copy
of each form, report, schedule, registration statement, definitive proxy
statement and other document (together with all amendments thereof and
supplements thereto) filed by Corel or any of its Subsidiaries with Canadian
securities regulatory authorities and the SEC, the TSE and Nasdaq since
January 1, 1997 (as such documents have since the time of their filing been
amended or supplemented, the "Corel Reports"), which are all the documents
(other than preliminary material) that Corel and its Subsidiaries were
required to file with the SEC, Canadian securities regulatory authorities and
the TSE since such date. As of their respective dates, the Corel Reports (i)
complied as to form in all material respects with the requirements of the
Securities Act or the Exchange Act or Canadian securities laws and the TSE,
and (ii) did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading. The audited consolidated financial statements and
unaudited interim consolidated financial statements (including, in each case,
the notes, if any, thereto) included in the Corel Reports (the "Corel
Financial Statements") complied as to form in all material respects with the
published rules and regulations of the Canadian securities regulatory
authorities with respect thereto, were prepared in accordance with generally
accepted accounting principles in Canada ("Canadian GAAP") applied on a
consistent basis during the periods involved (except as may be indicated
therein or in the notes thereto and except with respect to unaudited
statements as permitted by Canadian securities laws) and fairly present
(subject, in the case of the unaudited interim financial statements, to the
absence of certain footnotes and to normal, recurring year-end audit
adjustments and to the absence of complete notes (which would not reasonably
be expected to, individually or in the aggregate, be materially adverse to
Corel and its Subsidiaries taken as a whole)) the consolidated financial
position of Corel and its consolidated subsidiaries as at the respective dates
thereof and the consolidated results of their operations and cash flows for
the respective periods then ended. Except as set forth in Section 4.05 of the
Corel Disclosure Letter, each Subsidiary of Corel is treated as a consolidated
subsidiary of Corel in the Corel Financial Statements for all periods covered
thereby.
4.06 Absence of Certain Changes or Events. Except as disclosed in the Corel
Reports filed prior to the date of this Agreement or in Section 4.06 of the
Corel Disclosure Letter:
(a) since May 31, 2001, there has not been any change, event or
development having, or that would reasonably be expected to have,
individually or in the aggregate, a material adverse effect on Corel and
its Subsidiaries taken as a whole, and
(b) between such date and the date hereof Corel and its Subsidiaries
have conducted their respective businesses only in the ordinary course
substantially consistent with past practice.
4.07 Absence of Undisclosed Liabilities. Except as disclosed in the Corel
Reports filed prior to this Agreement, or for matters reflected or reserved
against in the consolidated balance sheet of Corel and its
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consolidated subsidiaries dated May 31, 2001 included in the Corel Financial
Statements or as disclosed in Section 4.07 of the Corel Disclosure Letter,
neither Corel nor any of its Subsidiaries had at such date, or has incurred
since that date, any liabilities or obligations (whether absolute, accrued,
contingent, fixed or otherwise, or whether due or to become due) of any nature
that would be required by Canadian GAAP to be reflected on a consolidated
balance sheet of Corel and its consolidated subsidiaries (including the notes
thereto), except liabilities or obligations (i) which were incurred in the
ordinary course of business consistent with past practice or (ii) which have
not been, and would not reasonably be expected to be, individually or in the
aggregate, materially adverse to Corel and its Subsidiaries taken as a whole.
4.08 Legal Proceedings. Except as disclosed in the Corel Reports filed prior
to the date of this Agreement or in Section 4.08 of the Corel Disclosure
Letter, (i) there are no actions, suits, arbitrations or proceedings pending
or, to the knowledge of Corel, threatened against, relating to or affecting,
nor to the knowledge of Corel are there any Governmental or Regulatory
Authority investigations or audits pending or threatened against, relating to
or affecting, Corel or any of its Subsidiaries or affiliates or any of their
respective assets and properties which, individually or in the aggregate, would
reasonably be expected to have a material adverse effect on Corel and its
Subsidiaries taken as a whole or on the ability of Corel and Sub to consummate
the transactions contemplated by this Agreement, and (ii) neither Corel nor any
of its Subsidiaries nor affiliates is subject to any order of any Governmental
or Regulatory Authority which, individually or in the aggregate, is having or
would reasonably be expected to have a material adverse effect on Corel and its
Subsidiaries taken as a whole or on the ability of Corel and Sub to consummate
the transactions contemplated by this Agreement.
4.09 Information Supplied. The registration statement on Form S-4 to be
filed with the SEC by Corel in connection with the issuance of shares of Corel
Common Stock and Corel PRs in the Merger, as amended or supplemented from time
to time (as so amended and supplemented, the "Registration Statement"), and any
other documents to be filed by Corel with the SEC, Canadian securities
regulatory authorities, the TSE or any other Governmental or Regulatory
Authority in connection with the Merger and the other transactions contemplated
hereby will (in the case of the Registration Statement and any such other
documents filed with the SEC under the Securities Act or the Exchange Act, with
Canadian securities regulatory authorities under Canadian securities laws or
with the TSE) comply as to form in all material respects with the requirements
of the Exchange Act, the Securities Act or comparable Canadian laws,
respectively, and will not, on the date of its filing or, in the case of the
Registration Statement, at the time it becomes effective under the Securities
Act, at the date the Proxy Statement is mailed to shareholders of Micrografx
and at the times of the Micrografx Shareholders' Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they are made, not misleading, except that no
representation is made by Corel or Sub with respect to information supplied in
writing by or on behalf of Micrografx expressly for inclusion therein and
information incorporated by reference therein from documents filed by
Micrografx or any of its Subsidiaries with the SEC, Canadian securities
regulatory authorities or the TSE.
4.10 Compliance with Laws and Orders. Corel and its Subsidiaries hold all
permits, licenses, variances, exemptions, orders and approvals of all
Governmental and Regulatory Authorities necessary for the lawful conduct of
their respective businesses as presently conducted (the "Corel Permits"),
except for failures to hold such permits, licenses, variances, exemptions,
orders and approvals which, individually or in the aggregate, are not having
and would not reasonably be expected to have a material adverse effect on Corel
and its Subsidiaries taken as a whole. Corel and its Subsidiaries are in
compliance with the terms of the Corel Permits, except failures so to comply
which, individually or in the aggregate, are not having and would not
reasonably be expected to have a material adverse effect on Corel and its
Subsidiaries taken as a whole. Except as disclosed in the Corel Reports filed
prior to the date of this Agreement, Corel and its Subsidiaries are not in
violation of or default under any law or order of any Governmental or
Regulatory Authority, except for such violations or defaults which,
individually or in the aggregate, are not having and would not reasonably be
expected to have a material adverse effect on Corel and its Subsidiaries taken
as a whole.
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4.11 Sub. Sub is a newly-formed wholly-owned subsidiary of Corel that has
not engaged in any operations through the Closing Date.
4.12 Ownership of Micrografx Common Stock. Neither Corel nor any of its
Subsidiaries beneficially owns any shares of Micrografx Common Stock.
4.13 Reporting Issuer. Corel is a reporting issuer for purposes of the
Securities Act (Ontario) and is not on the list of defaulting reporting issuers
maintained pursuant to Section 72(8) of the Securities Act (Ontario).
4.14 Issuance of Capital Stock. All issued and outstanding shares of Corel
capital stock are duly authorized, validly issued, fully paid and
nonassessable, and all shares of Corel Common Stock reserved for issuance
pursuant to the Corel PRs will be, upon issuance in accordance with the terms
specified in this Agreement, duly authorized, validly issued, fully paid and
nonassessable.
4.15 Taxes.
(a) Corel will have been engaged in an active trade or business outside
of the United States, within the meaning of Treasury Regulation Section
1.367(a)-2T(b)(2) and (3), for the entire 36-month period immediately
before the Effective Time. Corel does not have any intention, and will not
have an intention at the Effective Time, to substantially dispose of or
discontinue such trade or business. As of the date hereof but not as of any
other date, Corel represents that it satisfies the substantiality test
contained in Treasury Regulation Section 1.367(a)-3(c)(3).
(b) Corel has not taken and, unless the Cash Alternative is elected by
Corel, will not take any action to prevent, nor has it any knowledge of any
fact or circumstance reasonably likely to prevent, the Merger from
qualifying as a tax free reorganization within the meaning of Section 368
of the Code, other than the possible election of the Cash Alternative by
Corel.
ARTICLE V
Covenants
5.01 Covenants of Micrografx. Except (i) as otherwise expressly contemplated
by this Agreement or (ii) as set forth in Micrografx's Disclosure Letter, at
all times from and after the date hereof until the Effective Time, Micrografx
covenants and agrees as to itself and its Subsidiaries that (except as
expressly contemplated or permitted by this Agreement or to the extent that
Corel shall otherwise previously consent in writing):
(a) Micrografx and each of its Subsidiaries shall conduct their
respective businesses only in, and Micrografx and each of its Subsidiaries
shall refrain from taking any action except in, the ordinary course
consistent in all material respects with past practice.
(b) Without limiting the generality of paragraph (a) of this Section,
(i) Micrografx and its Subsidiaries shall use all commercially
reasonable efforts to preserve substantially intact in all material
respects their present business organization, to maintain its existence
in good standing, to keep available the services of its key officers
and employees, to maintain its assets and properties in good working
order and condition, ordinary wear and tear and obsolescence excepted,
to maintain insurance on its tangible assets and businesses in such
amounts and against such risks and losses as are currently in effect,
to preserve its relationships with customers and suppliers and others
having significant business dealings with it and to comply in all
material respects with all laws and orders of all Governmental or
Regulatory Authorities applicable to it.
(ii) Micrografx shall not and shall not permit any of its
Subsidiaries to:
(A) amend its certificate or articles of incorporation or bylaws
(or other comparable corporate charter documents);
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(B) (i) declare, set aside or pay any dividends on or make other
distributions in respect of any of its capital stock, except for the
declaration and payment of dividends by a wholly-owned Subsidiary
solely to its parent corporation, (ii) split, combine, reclassify or
take similar action with respect to any of its capital stock or
issue or authorize or propose the issuance of any other securities
in respect of, in lieu of or in substitution for shares of its
capital stock, (iii) adopt a plan of complete or partial liquidation
or resolutions providing for or authorizing such liquidation or a
dissolution, merger, consolidation, restructuring, recapitalization
or other reorganization or (iv) directly or indirectly redeem,
repurchase or otherwise acquire any shares of its capital stock or
any Option with respect thereto;
(C) issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock or any Option
with respect thereto other than (i) the issuance of Micrografx
Common Stock pursuant to options granted under the Micrografx ESOP,
in each case outstanding on the date of this Agreement and in
accordance with their present terms, (ii) the issuance of options
pursuant to the Micrografx ESOP in accordance with their present
terms and only after consent of Corel and the issuance of shares of
Micrografx Common Stock upon exercise of such options, (iii) the
issuance by a wholly-owned Subsidiary of its capital stock to its
parent corporation or modify rights of shares or options, and (iv)
the issuance of Micrografx Common Stock pursuant to outstanding
warrants;
(D) except as otherwise contemplated by this Agreement acquire
(by merging or consolidating with, or by purchasing an equity
interest in or a portion of the assets of, or by any other manner)
any business or any corporation, partnership, association or other
business organization or division thereof or otherwise acquire or
agree to acquire any assets other than in the ordinary course of its
business consistent with past practice;
(E) other than in the ordinary course of its business consistent
with past practice, sell, lease, grant any security interest in or
otherwise dispose of or encumber any of its assets or properties;
(F) except to the extent required by applicable law,
(i) permit any material change in (A) any pricing, marketing,
purchasing, investment, accounting (except as required by
applicable law or due to changes in the accounting standards
applicable to Micrografx), financial reporting, inventory,
credit, allowance or tax practice or policy or (B) any method of
calculating any bad debt, contingency or other reserve for
accounting, financial reporting or tax purposes or (ii) make any
material tax election or settle or compromise any material
income tax liability with any Governmental or Regulatory
Authority;
(G) (i) incur (which shall not be deemed to include entering into
credit agreements, lines of credit or similar arrangements until
borrowings are made under such arrangements) any indebtedness or
borrowed money or guarantee any such indebtedness other than trade
payables and loans to wholly-owned subsidiaries and loans in the
ordinary course of its business substantially consistent with past
practice or (ii) voluntarily purchase, cancel, prepay or otherwise
provide for a complete or partial discharge in advance of a
scheduled repayment date with respect to, or waive any right under,
any indebtedness for borrowed money other than in the ordinary
course of its business substantially consistent with past practice;
(H) except as contemplated in Section 2.01(e), enter into, adopt,
amend in any material respect (except as may be required by
applicable law) or terminate any Micrografx Employee Benefit Plan or
other agreement, arrangement, plan or policy between Micrografx or
one of its Subsidiaries and one or more of its directors, officers
or employees, or, except for normal increases in the ordinary course
of business substantially consistent with past practice that, in the
aggregate, do not result in a material increase in benefits or
compensation expense to Micrografx
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and its Subsidiaries taken as a whole, increase in any manner the
compensation or fringe benefits of any director, officer or employee
or pay any benefit not required by any plan or arrangement in effect
as of the date hereof;
(I) enter into any Contract or amend or modify any existing
Contract, or engage in any new transaction, in each case outside the
ordinary course of business substantially consistent with past
practice or not on an arm's length basis, with any affiliate of
Micrografx or any of its Subsidiaries;
(J) make any capital expenditures or commitments for additions to
plant, property or equipment constituting capital assets except in
the ordinary course of business substantially consistent with past
practice;
(K) make any change in the lines of business in which it
participates or is engaged;
(L) pay, discharge, satisfy, waive, settle or release any
material claim, liability or obligation (absolute, accrued, asserted
or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction, in the ordinary course of business
substantially consistent with past practice;
(M) settle or compromise any claim brought by any present, former
or purported holder of any of its securities in connection with the
transactions contemplated by this Agreement prior to the Effective
Time without the prior written consent of Corel; or
(N) enter into any Contract, commitment or arrangement to do or
engage in any of the foregoing.
Notwithstanding the other terms of this Section 5.01, nothing contained
herein shall limit the ability of Micrografx or of any of its Subsidiaries to
(i) negotiate, settle, discharge, obtain discounts to and pay trade payables,
(ii) negotiate, settle, pay, discharge or amend and obtain a discount with
respect to the Intergraph Debentures as contemplated in Section 2.01(c)(i),
(iii) negotiate, pay, settle, discharge or issue shares of Micrografx Common
Stock in exchange for all indebtedness evidenced by those certain convertible
notes issued by Micrografx in the aggregate principal amount of $939,000, (iv)
issue, in the manner contemplated in Section 2.01(e) and (g), Micrografx Common
Stock pursuant to the exercise of warrants or options to purchase shares of
Micrografx Common Stock outstanding as of the date of this Agreement, (v)
borrow up to $2.5 million, the proceeds of which will be used to reduce
Micrografx's indebtedness and otherwise provide operating capital to
Micrografx, and (vi) amend the rights of holders of Micrografx Series A Stock;
provided that, except as expressly permitted herein as such actions shall be on
terms and conditions acceptable to Corel, acting reasonably.
5.02 No Solicitations. At all times from and after the date hereof until the
Effective Time, Micrografx covenants and agrees as to itself and its
Subsidiaries (a) that neither it nor any of its Subsidiaries shall, directly or
indirectly, and it shall use its best efforts to cause its Representatives (as
defined in Section 9.18) not to, knowingly initiate, solicit or encourage,
directly or indirectly, any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
shareholders) with respect to a merger, consolidation or other business
combination including Micrografx or any of its Subsidiaries or any acquisition
or similar transaction (including, without limitation, a tender or exchange
offer) involving the purchase of (i) all or any significant portion of the
assets of Micrografx and its Subsidiaries taken as a whole, (ii) 20% or more of
the outstanding shares of Micrografx's Common Stock or (iii) 20% of the
outstanding shares of the capital stock of any Subsidiary of Micrografx (any
such proposal or offer being hereinafter referred to as an "Alternative
Proposal"), or engage in any negotiations concerning, or provide any
confidential information or data to, or have any discussions with, any person
or group relating to an Alternative Proposal (excluding the transactions
contemplated by this Agreement), or otherwise knowingly facilitate any effort
or attempt to make or implement an Alternative Proposal; (b) that it will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties with respect to any of the
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foregoing, and it will take the necessary steps to inform such parties of its
obligations under this Section; and (c) that it will notify Corel immediately
if any such inquiries, proposals or offers, written or oral, are received by,
any such information is requested from, or any such negotiations or discussions
are sought to be initiated or continued with, it or any of such persons;
provided, however, that nothing contained in this Section 5.02 shall prohibit
the Board of Directors of Micrografx or its Representatives from (i) furnishing
information to (but only pursuant to a confidentiality agreement in customary
form and having terms and conditions no less favorable to Micrografx than the
Confidentiality Agreement, a copy of which shall be provided promptly to Corel)
or entering into discussions or negotiations with any person or group that
makes an unsolicited bona fide Alternative Proposal, if, and only to the extent
that, prior to receipt of the Micrografx Shareholders' Approval, (i) based upon
the advice of outside counsel, determines in good faith and in its reasonable
judgment that such action is likely required for the Board of Directors to
comply with its fiduciary duties to shareholders imposed by applicable law, and
(ii) based on the advice of Micrografx's financial advisor, determines in good
faith and in its reasonable judgment that such Alternative Proposal is
reasonably likely to result in a Superior Proposal (as defined herein), (B)
three business days prior to furnishing such information to, or entering into
discussions or negotiations with, such person or group and proposed terms of
the transaction, Micrografx provides written notice to Corel to the effect that
it is furnishing information to, or entering into discussions or negotiations
with, such person or group, which notice shall identify such person or group
and proposed terms of the transaction in reasonable detail, and (C) Micrografx
keeps Corel informed of the status and all material information with respect to
any such discussions or negotiations and information furnished to the other
party; (ii) to the extent required, complying with Rules 14d-9 and 14e-2(a)
promulgated under the Exchange Act with regard to an Alternative Proposal.
Nothing in this Section 5.02 shall (x) permit Micrografx to terminate this
Agreement (except as specifically provided in Article VIII), (y) permit any
party to enter into any agreement with respect to an Alternative Proposal for
so long as this Agreement remains in effect (it being agreed that for so long
as this Agreement remains in effect, Micrografx shall not enter into any
agreement with any person or group that provides for, or in any way
facilitates, an Alternative Proposal (other than a confidentiality agreement
under the circumstances described above)), or (z) affect any other obligation
of any party under this Agreement.
5.03 Covenants of Corel. Except (i) as otherwise contemplated by this
Agreement, (ii) as required by applicable law or rule of any stock exchange or
over-the-counter market, or (iii) as set forth in Corel's Disclosure Letter, at
all times from and after the date hereof until the Effective Time, Corel
covenants and agrees as to itself and its Subsidiaries that (except as
expressly contemplated or permitted by this Agreement, or to the extent that
Micrografx shall otherwise previously consent in writing):
(a) Corel shall cause Sub to (i) perform its obligations under this
Agreement in accordance with its terms, (ii) not incur directly or
indirectly any liabilities or obligations other than those incurred in
connection with the Merger, and (iii) not engage directly or indirectly in
any business or activities of any type or kind and not enter into any
agreements or arrangements with any person, or be subject to or bound by
any obligation or undertaking, which is not contemplated by this Agreement.
(b) Corel and its Subsidiaries shall use all commercially reasonable
efforts to preserve substantially intact in all material respects their
present business organization and reputation, to maintain its existence in
good standing, to keep available the services of its key officers and
employees, to maintain its assets and properties in good working order and
condition, ordinary wear and tear excepted, to maintain insurance on its
tangible assets and businesses in such amounts and against such risks and
losses as are currently in effect, to preserve its relationships with
customers and suppliers and others having significant business dealings
with it and to comply in all material respects with all laws and orders of
all Governmental or Regulatory Authorities applicable to it.
5.04 Third Party Standstill Agreements. Micrografx agrees that, during the
period from the date of this Agreement through the Effective Time, neither it
nor any of its Subsidiaries shall terminate, amend, modify or waive any
provision of any confidentiality or standstill agreement to which it is a
party. During such period, Micrografx shall enforce, to the extent necessary to
prevent a breach and to the fullest extent permitted under
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applicable law, the provisions of any such agreement, including, but not
limited to, by obtaining injunctions and to enforce specifically the terms and
provisions thereof in any court having jurisdiction.
5.05 Purchases of Capital Stock of the Other Party. Each of Micrografx and
Corel (each, a "Principal Party") agrees that, during the period from the date
hereof through the Effective Time, neither it nor any of its Subsidiaries or
other affiliates will purchase any shares of capital stock of the other
Principal Party.
5.06 Advice of Changes. Each Principal Party shall confer on a regular and
frequent basis with the other with respect to its business and operations and
other matters relevant to the Merger, and shall promptly advise the other,
orally and in writing, of any change or event, including, without limitation,
any complaint, investigation or hearing by any Governmental or Regulatory
Authority (or communication indicating the same may be contemplated) or the
institution or threat of litigation, having, or which, insofar as can be
reasonably foreseen, could have, a material adverse effect on such Principal
Party and its Subsidiaries taken as a whole or on the ability of such Principal
Party to consummate the transactions contemplated hereby; provided that no
party shall be required to make any disclosure to the extent such disclosure
would constitute a violation of any applicable law.
5.07 Notice and Cure. Each Principal Party will notify the other of, and
will use all commercially reasonable efforts to cure before the Closing, any
event, transaction or circumstance, as soon as practical after it becomes known
to such Principal Party, that causes or will cause any covenant or agreement of
such Principal Party under this Agreement to be breached or that renders or
will render untrue any representation or warranty of such Principal Party
contained in this Agreement. Each Principal Party also will notify the other in
writing of, and will use all commercially reasonable efforts to cure, before
the Closing, any violation or breach, as soon as practical after it becomes
known to such party, of any representation, warranty, covenant or agreement
made by such Principal Party. No notice given pursuant to this paragraph shall
have any effect on the representations, warranties, covenants or agreements
contained in this Agreement for purposes of determining satisfaction of any
condition contained herein.
5.08 Fulfillment of Conditions. Subject to the terms and conditions of this
Agreement, each Principal Party will take or cause to be taken all commercially
reasonable steps necessary or desirable and proceed diligently and in good
faith to satisfy each condition to the other's obligations contained in this
Agreement and to consummate and make effective the transactions contemplated by
this Agreement, and neither Principal Party will, nor will it permit any of its
Subsidiaries, officers, directors, employee or agents to, take or fail to take
any action that could be reasonably expected to result in the nonfulfillment of
any such condition.
ARTICLE VI
Additional Agreements
6.01 Access to Information; Confidentiality. Each Principal Party shall, and
shall cause each of its Subsidiaries to, throughout the period from the date
hereof to the Effective Time, (i) provide the other Principal Party and its
Representatives with full access, upon reasonable prior notice and during
normal business hours, to all officers, employees, agents and accountants of
such Principal Party and its Subsidiaries and their respective assets,
properties, books and records, but only to the extent that such access does not
unreasonably interfere with the business and operations of such Principal Party
and its Subsidiaries, and (ii) furnish promptly to such persons (x) a copy of
each report, statement, schedule and other document filed or received by such
Principal Party or any of its Subsidiaries pursuant to the requirements of
federal or state securities laws and each material report, statement, schedule
and other document filed with any other Governmental or Regulatory Authority,
and (y) all other information and data (including, without limitation, copies
of Contracts, Micrografx Employee Benefit Plans, and other books and records)
concerning the business and operations of such Principal Party and its
Subsidiaries as the other party or any of such other persons reasonably may
request. Notwithstanding anything herein to the contrary, nothing herein shall
require any Principal Party or any of its
A-27
Subsidiaries to disclose any information to the other Principal Party or any of
its Representatives if such disclosure would be in violation of (i) any
applicable law or regulation of any Governmental or Regulatory Authority, or
(ii) any agreement to which such Principal Party is a party on the date hereof.
No investigation pursuant to this paragraph or otherwise shall affect any
representation or warranty contained in this Agreement or any condition to the
obligations of the parties hereto. Any such information or material obtained
pursuant to this Section 6.01 that constitutes "Confidential Information" (as
such term is defined in the letter agreement dated as of May 25, 2001 between
Micrografx and Corel (the "Confidentiality Agreement") shall be governed by the
terms of the Confidentiality Agreement.
6.02 Preparation of Registration Statement and Proxy Statement. Micrografx
and Corel shall prepare and file with the SEC, applicable Canadian securities
regulatory authorities and the TSE as soon as reasonably practicable after the
date hereof, the Proxy Statement. Corel shall prepare and file with the SEC, as
soon as reasonably practicable after the date hereof, the Registration
Statement, in which the Proxy Statement will be included. Corel and Micrografx
shall use their best efforts to have the Registration Statement declared
effective by the SEC as promptly as practicable after such filing. Corel shall
also take any action (other than qualifying as a foreign corporation or taking
any action which would subject it to taxation or service of process in any
jurisdiction where Corel is not now so qualified or subject) required to be
taken under applicable state blue sky or provincial or federal securities laws
in connection with the issuance and resale of Corel Common Stock and the
issuance of the Corel PRs in connection with the Merger. If at any time prior
to the Effective Time any event shall occur that should be set forth in an
amendment of or a supplement to the Registration Statement, Corel shall prepare
and file with the SEC such amendment or supplement as soon thereafter as is
reasonably practicable. Corel, Sub and Micrografx shall cooperate with each
other in the preparation of the Registration Statement and the Proxy Statement
and any amendment or supplement thereto, and each shall notify the other of the
receipt of any comments of the SEC with respect to the Registration Statement
or the Proxy Statement and of any requests by the SEC for any amendment or
supplement thereto or for additional information, and shall provide to the
other promptly copies of all correspondence between Corel or Micrografx, as the
case may be, or any of its Representatives and the SEC with respect to the
Registration Statement or the Proxy Statement. Corel shall give Micrografx and
its counsel the opportunity to review the Registration Statement and all
responses to requests for additional information by and replies to comments of
the SEC before their being filed with, or sent to, the SEC. Each of Micrografx,
Corel and Sub agrees to use its best efforts, after consultation with the other
parties hereto, to respond promptly to all such comments of and requests by the
SEC and to cause (i) the Registration Statement to be declared effective by the
SEC at the earliest practicable time and to be kept effective as long as is
necessary to consummate the Merger, and (ii) the Proxy Statement to be mailed
to the holders of Micrografx Common Stock entitled to vote at the meeting of
the shareholders of Micrografx at the earliest practicable time.
6.03 Approval of Shareholders of Micrografx.
(a) Micrografx shall, through its Board of Directors duly call, give
notice of, convene and hold a meeting of the holders of Micrografx Common
Stock and hold a meeting or obtain consent from its holders of Micrografx
Series A Stock (the "Micrografx Shareholders' Meeting") for the purpose of
voting on the approval of the Merger and this Agreement (the "Micrografx
Shareholders' Approval"). Micrografx shall, through its Board of Directors,
include in the Proxy Statement the recommendation of the Board of Directors
of Micrografx that the shareholders of Micrografx approve the Merger and
this Agreement, and shall use its reasonable best efforts to solicit
proxies in order to obtain such adoption. At such meeting, Corel shall, and
shall cause its Subsidiaries to, cause all shares of Micrografx Common
Stock then owned by Corel or any such Subsidiary to be voted in favor of
the approval of the Merger and of this Agreement. If Shareholders' Approval
is not obtained at the initial Micrografx Shareholders' Meeting, the
shareholders' meeting shall be adjourned a minimum of two times for the
purposes of seeking approval of the Merger and this Agreement.
(b) Corel and Micrografx shall coordinate and cooperate with respect to
the timing of the Micrografx Shareholders' Meeting and Micrografx shall use
its reasonable best efforts to cause the Micrografx Shareholders' Meeting
to be held as soon as practicable after the date hereof.
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6.04 Micrografx Affiliates. At least 30 days prior to the Closing Date,
Micrografx shall deliver a letter to Corel identifying all persons who, at the
time of the Micrografx Shareholders' Meeting, may, in Micrografx's reasonable
judgment, be deemed to be "affiliates" (as such term is used in Rule 145 under
the Securities Act) of Micrografx ("Micrografx Affiliates"). Micrografx shall
use its reasonable best efforts to cause each Micrografx Affiliate to deliver
to Corel on or prior to the Closing Date a written agreement substantially in
the form and to the effect of Exhibit C hereto (an "Affiliate Agreement").
6.05 Stock Exchange Listing. Corel shall use its reasonable best efforts to
cause the shares of Corel Common Stock issuable at the Effective Time and upon
exercise of the Corel PRs to be approved for listing on the TSE and on Nasdaq,
subject to official notice of issuance, prior to the Effective Time.
6.06 Certain Tax Matters. Unless the Cash Alternative is elected by Corel,
Corel and Micrografx shall not take or fail to take any action which action or
failure would cause the Merger not to qualify as a reorganization under the
provisions of Section 368(a) of the Code or cause the failure to obtain the
opinion of counsel referred to in Section 7.02(e) or 7.03(e), other than any
action contemplated by this Agreement; provided, that neither Corel nor
Micrografx shall be required to agree to an alteration of the amount or
character of the consideration offered pursuant to Section 2.01. Nothing in
this section precludes either Corel or Micrografx from taking any action that
may cause gain to be recognized by any stockholder obligated to sign a gain
recognition agreement under Section 367 of the Code. Notwithstanding the
foregoing sentence, unless the Cash Alternative is elected by Corel, Corel and
Micrografx shall comply with the "reporting requirements" of Treasury
Regulation Section 1.367(a)-3(c)(6).
6.07 Regulatory and Other Approvals. Subject to the terms and conditions of
this Agreement and without limiting the provisions of Sections 6.02 and 6.03,
each Principal Party will proceed diligently and in good faith to, as promptly
as practicable, (a) obtain all consents, approvals or actions of, make all
filings with and give all notices to Governmental or Regulatory Authorities or
any other public or private third parties required of Principal Party or any of
their Subsidiaries to consummate the Merger and the other matters contemplated
hereby, and (b) provide such other information and communications to such
Governmental or Regulatory Authorities or other public or private third parties
as the other Principal Party or such Governmental or Regulatory Authorities or
other public or private third parties may reasonably request in connection
therewith. In addition to and not in limitation of the foregoing, each
Principal Party will (i) take promptly all actions necessary to make the
filings required of either of the Principal Party or their affiliates under the
HSR Act and the Competition Act (Canada), (ii) comply at the earliest
practicable date with any request for additional information received by such
party or its affiliates from (A) the Federal Trade Commission (the "FTC") or
the Antitrust Division of the Department of Justice (the "Antitrust Division")
pursuant to the HSR Act and (B) any Canadian Governmental or Regulatory
Authority pursuant to the Competition Act (Canada), (iii) cooperate with the
other Principal Party in connection with such Principal Party's filings under
the HSR Act and the Competition Act (Canada) and in connection with resolving
any investigation or other inquiry concerning the Merger or the other matters
contemplated by this Agreement commenced by any Governmental or Regulatory
Authority of competent jurisdiction, and (iv) proceed diligently and in good
faith to obtain early termination of any waiting period applicable to the
Merger under the HSR Act and Competition Act (Canada).
6.08 Micrografx Director. Corel's Board of Directors shall take action to
cause the Board of Directors of Corel at the Effective Time to include one
person nominated by Micrografx prior to the Effective Time, who shall be
mutually agreed to by Micrografx and Corel (the "Micrografx Director"). Corel
shall also recommend and support the election of the Micrografx Director or
another individual nominated by the holders of a majority of the shares of
Micrografx Common Stock held by holders each owning beneficially 5% of more of
Micrografx Common Stock on the record date for the Micrografx Shareholders'
Meeting, who shall be acceptable to Corel, to the Corel Board of Directors at
Corel's 2002 annual meeting of shareholders.
6.09 Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such cost or expense,
except that the filing fee in connection with the filings required under the
HSR Act and
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the Competition Act (Canada) and the expenses incurred in connection with
preparing, printing and mailing the Registration Statement and the Proxy
Statement (other than professional fees), as well as any filing fees relating
thereto, shall be shared equally by Corel and Micrografx.
6.10 Brokers or Finders. Each of Micrografx and Corel represents, as to
itself and its affiliates, that no agent, broker, investment banker, financial
advisor or other firm or person is or will be entitled to any broker's or
finder's fee or any other commission or similar fee in connection with any of
the transactions contemplated by this Agreement, and each of Micrografx and
Corel shall indemnify and hold the other harmless from and against any and all
claims, liabilities or obligations with respect to any other such fee or
commission or expenses related thereto asserted by any person on the basis of
any act or statement alleged to have been made by such party or its affiliate.
6.11 Takeover Statutes. If any "fair price", "moratorium", "control share
acquisition" or other form of anti-takeover statute or regulation shall become
applicable to the transactions contemplated hereby, each party hereto and the
members of the Board of Directors of such Principal Party shall grant such
approvals and take such actions as are reasonably necessary so that the
transactions contemplated hereby may be consummated as promptly as practicable
on the terms contemplated hereby and thereby and otherwise act to eliminate or
minimize the effects of such statute or regulation on the transactions
contemplated hereby and thereby.
6.12 Conveyance Taxes. Micrografx and Corel shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp taxes, any transfer, recording,
registration and other fees, and any similar taxes which become payable in
connection with the transactions contemplated by this Agreement that are
required or permitted to be filed on or before the Effective Time.
6.13 Micrografx 401(k) Plan. Micrografx shall amend the Micrografx 401(k)
Plan to provide that, at the Effective Time, all participant accounts in the
Micrografx 401(k) Plan will become 100% vested. Corel will, and will also cause
the Surviving Corporation to, maintain the existence of the Micrografx 401(k)
Plan and the current level of matching employer contribution to such Plan to a
maximum of $5,000 per employee, for a period of no less than one year following
the Effective Time.
6.14 Consents. Corel, Sub and Micrografx, for itself, shall each use
commercially reasonable best efforts to obtain the consent and approval of, or
effect the notification of or filing with, each person or authority whose
consent or approval is required of any of Corel, Sub or Micrografx,
respectively, in order to permit the consummation of the Merger and the
transactions contemplated by this Agreement and to enable the Surviving
Corporation to conduct and operate the business of Micrografx and its
subsidiaries substantially as presently conducted and as contemplated to be
conducted.
6.15 Indemnification and Insurance.
(a) From and after the Effective Time, Corel will, and will also cause
the Surviving Corporation to, fulfill and honor in all respects the
obligations of Micrografx pursuant to any indemnification provisions under
Micrografx's Articles of Incorporation or Bylaws as in effect on the date
hereof for the benefit of its present and former directors and officers in
effect on the date hereof (the "Indemnified Parties"). The Certificate of
Incorporation and Bylaws of the Surviving Corporation will contain
provisions with respect to exculpation and indemnification that are at
least as favorable to the Indemnified Parties as those contained in the
Articles of Incorporation and Bylaws of Micrografx as in effect on the date
hereof, which provisions will not be amended, repealed or otherwise
modified for a period of six years from the Effective Time in any manner
that would adversely affect the rights thereunder of individuals who,
immediately prior to the Effective Time, were directors, officers,
employees or agents of Micrografx, unless such modification is required by
law.
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(b) For a period of six years after the Effective Time, Corel will, or
will cause the Surviving Corporation to, use all commercially reasonable
efforts to maintain in effect, if available at a premium which is not more
than twice the premium currently paid by Micrografx, directors' and
officers' liability insurance covering those persons who are currently
covered by Micrografx's directors' and officers' liability insurance policy
on terms substantially similar to those applicable to the current directors
and officers of Micrografx, and if such premium during the six year period
equals or exceeds twice the premium currently paid by Micrografx, Corel
will, or will cause the Surviving Corporation to maintain such insurance as
is available for such maximum premium as Corel is obligated to pay
hereunder.
(c) The provisions of this Section 6.15 are intended to be in addition
to the rights otherwise available to the Indemnified Parties by law,
charter, statute, bylaw, resolution of the Board of Directors of
Micrografx, and shall operate for the benefit of, and shall be enforceable
by, each of the Indemnified Parties, their heirs and their representatives.
6.16 Intergraph Debenture. Corel will repay the Subordinated Convertible
Debenture dated April 16, 1999 issued by Micrografx to Intergraph Corporation
in the original principal amount of $5,797,000 shortly following the Effective
Date.
6.17 Bridge Loan. As soon as reasonably practicable following the date
hereof Corel shall provide to Micrografx a bridge loan in the aggregate amount
of $2.5 million for use by Micrografx to reduce its indebtedness and provide
operating capital. Such loan shall be extended to Micrografx by Corel on terms
and conditions satisfactory to Corel, including security over all of the assets
and stock of Image2Web, Inc., and Micrografx shall grant to Corel an option to
purchase 80% of the stock for a purchase price equal to the amount of the loan
owing from time to time, exercisable by Corel (A) upon default in repayment of
the loan or (B) in the event that (i) the shareholders of Micrografx do not
approve the Merger or (ii) the Merger is terminated by Micrografx or Corel in
accordance with its terms.
ARTICLE VII
Conditions
7.01 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
fulfillment or waiver, at or prior to the Closing, of each of the following
conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have been
approved by the requisite vote of the stockholders of Micrografx under the
TL and Micrografx's Articles of Incorporation.
(b) Registration Statement; State Securities Laws. The Registration
Statement shall have become effective in accordance with the provisions of
the Securities Act, and no stop order suspending such effectiveness shall
have been issued by any Governmental or Regulatory Authority of competent
jurisdiction and remain in effect and no proceeding seeking such an order
shall be pending or threatened. Corel shall have received all state
securities or "Blue Sky" permits and other authorizations, and all
approvals, rulings and exceptions from applicable Canadian securities
regulatory authorities, necessary to issue the Corel Common Stock and the
Corel PRs, as well as the Corel Common Stock issuable upon conversion of
the Corel PRs.
(c) Exchange Listing. The shares of Corel Common Stock issuable at the
Effective Time and upon exercise of the Corel PRs in accordance with this
Agreement shall have been conditionally approved for listing on the TSE
subject to the customary requirements of such exchange and on Nasdaq on
official notice of issuance.
(d) HSR Act and Competition Act (Canada). Any waiting period (and any
extension thereof) applicable to the consummation of the Merger under the
HSR Act and the Competition Act (Canada) shall have expired or shall have
been terminated.
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(e) No Injunctions or Restraints. No competent Governmental or
Regulatory Authority shall have enacted, issued, promulgated, enforced or
entered any law or order (whether temporary, preliminary or permanent
(collectively, "Restraints") which is then in effect and has the effect of
making illegal or otherwise restricting, preventing, enjoining or
prohibiting consummation of the Merger or the other transactions
contemplated by this Agreement.
(f) Governmental and Regulatory and Other Consents and Approvals. Other
than the filing provided for by Section 1.03 and filings pursuant to the
HSR Act and the Competition Act (Canada) which are addressed in Section
7.01(d), all consents, approvals and actions of, filings with and notices
to any Governmental or Regulatory Authority of competent jurisdiction or
any other public or private third parties, all as listed in Schedule
7.01(f) of the Micrografx Disclosure Letter and the Corel Disclosure Letter
required of Corel, Micrografx or any of their Subsidiaries to consummate
the Merger and the other matters contemplated hereby, in form reasonably
satisfactory to Corel.
7.02 Conditions to Obligation of Corel and Sub to Effect the Merger. The
obligation of Corel and Sub to effect the Merger is further subject to the
fulfillment, at or prior to the Closing, of each of the following additional
conditions (all or any of which may be waived in whole or in part by Corel and
Sub in their sole discretion):
(a) Representations and Warranties. The representations and warranties
made by Micrografx in this Agreement shall be true and correct, in all
material respects (except that representations that have materiality in
them shall be true as written) as of the Closing Date as though made on and
as of the Closing Date or, in the case of representations and warranties
made as of a specified date earlier than the Closing Date, on and as of
such earlier date and Micrografx shall have delivered to Corel a
certificate, dated the Closing Date and executed in the name and on behalf
of Micrografx by its Chairman of the Board and Chief Executive Officer or
Chief Financial Officer, to such effect.
(b) Performance of Obligations. Micrografx shall have performed and
complied with, in all material respects, each agreement, covenant and
obligation required by this Agreement to be so performed or complied with
by Micrografx at or prior to the Closing, and Micrografx shall have
delivered to Corel a certificate, dated the Closing Date and executed in
the name and on behalf of Micrografx by its Chairman of the Board and Chief
Executive Officer or its Chief Financial Officer, to such effect.
(c) All Actions. The Board of Directors and shareholders of Micrografx
shall have adopted all necessary resolutions, and all other necessary
corporate action shall have been taken by Micrografx and its Subsidiaries
to permit the Merger.
(d) Dissenting Stockholders. The holders of Micrografx Common Stock
representing in excess of 10% of the outstanding Micrografx Common Stock
shall not have exercised (and if exercised, have not withdrawn such
exercise to the satisfaction of Corel by the close of business on the day
after the day of the Micrografx Shareholders' Meeting), dissent or similar
rights in connection with the merger.
(e) U.S. Federal Tax Opinion. Unless the Cash Alternative is elected by
Corel, Corel shall have received an opinion from Milbank, Tweed, Hadley &
McCloy LLP, counsel to Corel ("Corel's Counsel"), in form and substance
reasonably satisfactory to Corel, dated the Effective Time, substantially
to the effect that, on the basis of facts, representations and assumptions
set forth in such opinion which are consistent with the state of facts
existing at the Effective Time, the Merger will be treated as a
reorganization within the meaning of Section 368(a) of the Code. In
rendering its opinion, Corel's Counsel may require and rely upon
representations and covenants, including those contained in certificates of
officers of Micrografx, Corel, Sub and others, reasonably satisfactory in
form and substance to it.
(f) Micrografx Counsel's Opinion. Corel shall have received an opinion
from Locke Liddell & Sapp LLP ("Micrografx's Counsel"), in form and
substance reasonably satisfactory to Corel, dated the Effective Time.
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7.03 Conditions to Obligation of Micrografx to Effect the Merger. The
obligation of Micrografx to effect the Merger is further subject to the
fulfillment, at or prior to the Closing, of each of the following additional
conditions (all or any of which may be waived in whole or in part by Micrografx
in its sole discretion):
(a) Representations and Warranties. The representations and warranties
made by Corel and Sub in this Agreement shall be true and correct in all
material respects (except that representations that have materiality in
them shall be true as written), as of the Closing Date as though made on
and as of the Closing Date or, in the case of representations and
warranties made as of a specified date earlier than the Closing Date, on
and as of such earlier date and Corel and Sub shall each have delivered to
Micrografx a certificate, dated the Closing Date and executed in the name
and on behalf of Corel by its President or Chief Financial Officer and in
the name and on behalf of Sub by its President or any Vice President, to
such effect.
(b) Performance of Obligations. Corel and Sub shall have performed and
complied with, each in all material respects, each agreement, covenant and
obligation required by this Agreement to be so performed or complied with
by Corel or Sub at or prior to the Closing, and Corel and Sub shall each
have delivered to Micrografx a certificate, dated the Closing Date and
executed in the name and on behalf of Corel by its President or its Chief
Financial Officer and in the name and on behalf of Sub by its President or
any Vice President, to such effect.
(c) All Actions. Corel and Sub shall have adopted all necessary
resolutions, and all necessary corporate actions shall have been taken by
Corel and Sub to permit the Merger.
(d) Appointment of Directors. Corel shall have duly appointed the
Micrografx Director, subject to consummation of the Merger and acceptance
of such appointment.
(e) U.S. Federal Tax Opinion. Unless the Cash Alternative is elected by
Corel, Micrografx shall have received an opinion from Micrografx's Counsel,
in form and substance reasonably satisfactory to Micrografx, dated the
Effective Time, substantially to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion which are
consistent with the state of facts existing at the Effective Time, the
Merger will be treated as a reorganization within the meaning of Section
368(a) of the Code. In rendering its opinion, Micrografx's Counsel may
require and rely upon representations and covenants, including those
contained in certificates of officers of Micrografx, Corel, Sub and others,
reasonably satisfactory in form and substance to it.
(f) Corel Counsel's Opinion. Micrografx shall have received an opinion
from Corel's Counsel, in form and substance reasonably satisfactory to
Micrografx, dated the Effective Time.
(g) Participation Rights Agreement. Unless the Cash Alternative is
elected by Corel, prior to the Effective Time Corel shall have entered into
the Participation Rights Agreement with a trustee acceptable to Corel and
Micrografx (the "Trustee"), and at the Effective Time Corel shall have
delivered to the Trustee by wire transfer of immediately available funds an
amount equal to the product of (i) the Micrografx Times Revenue Share Price
multiplied by (ii) the number of shares of issued and outstanding
Micrografx Common Stock and the number of shares of Micrografx Common Stock
into which the issued and outstanding Micrografx Preferred Stock is
convertible immediately prior to the Effective Time less the number of
shares of Micrografx Common Stock held by Dissenting Shareholders (the
"Cash Fund") to be held by the Trustee pursuant to and in accordance with
the terms of the Participation Rights Agreement.
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ARTICLE VIII
Termination, Amendment and Waiver
8.01 Termination. This Agreement may be terminated, and the transactions
contemplated hereby may be abandoned, at any time prior to the Effective Time,
whether prior to or after Micrografx Shareholders' Approval:
(a) By mutual written agreement of the parties hereto duly authorized by
action taken by or on behalf of their respective Boards of Directors;
(b) By either Principal Party upon notification to the non-terminating
Principal Party by the terminating Principal Party:
(i) at any time after December 31, 2001, if the Merger shall not
have been consummated on or prior to such date and such failure to
consummate the Merger is not caused by a breach of this Agreement by
the terminating Principal Party;
(ii) if the Micrografx Shareholders' Approval shall not be obtained
by reason of the failure to obtain the requisite vote upon a vote held
at a meeting of such shareholders (including at not more than two
adjournments or postponements thereof, called therefor);
(iii) if there has been a material breach of any representation,
warranty, covenant or agreement on the part of the non-terminating
Principal Party set forth in this Agreement, which breach is not
curable or, if curable, has not been cured within 30 days following
receipt by the non-terminating Principal Party of written notice of
such breach from the terminating Principal Party; or
(iv) if any Restraint having the effects set forth in Section
7.01(e) shall be in effect and shall have become final and
nonappealable; or
(c) (i) By Micrografx prior to Micrografx Shareholders' Approval, if the
Board of Directors of Micrografx determines in good faith, based upon the
advice of outside counsel that termination of the Agreement is required for
the Board of Directors to comply with its fiduciary duties to shareholders
imposed by applicable law by reason of an unsolicited bona fide Alternative
Proposal which the Board of Directors of Micrografx has determined is a
Superior Proposal (as hereinafter defined), provided that Micrografx shall
have complied with the provisions of Section 5.02 and shall notify Corel in
writing promptly of its intention to terminate this Agreement or enter into
a definitive agreement with respect to such Alternative Proposal, but in no
event shall such notice be given less than three business days prior to the
public announcement of Micrografx's termination of this Agreement, and
Micrografx must provide Corel with a reasonable opportunity to make an
equivalent proposal to enable Micrografx to proceed with the Merger; or
(ii) by Corel if the Board of Directors of Micrografx or any committee
shall have withdrawn or modified in a manner adverse to Corel its approval
or recommendation or failed to reconfirm its recommendation of this
Agreement or the Merger (it being understood that an announcement by
Micrografx that states that an Alternative Proposal is under consideration
by such Board of Directors shall be deemed such a withdrawal or
modification, unless the Board of Directors publicly reaffirms its original
recommendation within ten business days after such announcement); and
provided further that Micrografx's ability to terminate this Agreement
pursuant to clause (i) of this paragraph (c) is conditioned upon the prior
payment by Micrografx of any amounts owed by it pursuant to Section 8.02
(b). For purposes of this Agreement, a "Superior Proposal" is an
Alternative Proposal (provided that for the purposes of this Section only,
the percentages in the definition of Alternative Proposal shall be deemed
to be 50%) received by Micrografx with respect to which the Board of
Directors of Micrografx has determined, based upon the advice of
Micrografx's financial advisor and taking into account all relevant
factors, that the consideration to be received by the shareholders of
Micrografx is superior from a financial point of view to the consideration
to be received by them in the Merger and the Board of Directors has
concluded in good faith and in its reasonable judgment, that such
Alternative Proposal is superior and is reasonably likely to be consummated
and the Board of Directors has reasonably concluded in good faith
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that the person or group making such Alternative Proposal will have
adequate sources of financing to consummate such Alternative Proposal and
that such Acquisition Proposal is more favorable and provides greater value
to Micrografx's shareholders than the Merger.
8.02 Effect of Termination.
(a) If this Agreement is validly terminated by either Micrografx or
Corel pursuant to Section 8.01, written notice thereof shall forthwith be
given to the other party or parties specifying the provision hereof
pursuant to which such termination is made, and this Agreement will
forthwith become null and void and there will be no liability or obligation
under this Agreement on the part of either Micrografx or Corel (or any of
their respective Representatives or affiliates), except (i) that the
provisions of the Confidentiality Agreement and Sections 6.11 and 6.12 and
this Section 8.02 will continue to apply following any such termination,
(ii) that nothing contained herein shall relieve any party hereto from
liability for willful breach of its representations, warranties, covenants
or agreements contained in this Agreement, and (iii) as provided in
paragraph (b) below.
(b) In the event that any person or group shall have made an Alternative
Proposal with respect to Micrografx and thereafter this Agreement is
terminated by Micrografx pursuant to Section 8.01(c)(i), then Micrografx
shall pay the Specified Amount (as defined below) to Corel. In the event
that Corel shall terminate this Agreement pursuant to 8.01(c)(ii), then
Micrografx shall pay the Specified Amount and Corel's Expenses (as defined
below) to Corel. In the event that any person or group shall have made an
Alternative Proposal with respect to Micrografx and the Micrografx
Shareholders' Approval shall not be obtained, and thereafter either
Principal Party shall terminate this Agreement pursuant to Section 8.01
(b)(ii) and a definitive agreement with respect to such Alternative
Proposal or any other Alternative Proposal is entered into by Micrografx
within twelve months of the date of such termination with any person that
made the original Alternative Proposal or within nine months of the date of
such termination with any other person, then Micrografx shall pay to Corel
the Specified Amount and all accounting, legal, investment and other out-
of-pocket expenses incurred by Corel with respect to the transaction
contemplated by this Agreement ("Corel's Expenses"). In the event that any
person or group shall have made an Alternative Proposal with respect to
Micrografx, and thereafter Corel shall terminate this Agreement pursuant to
8.01(b)(iii) or 8.01(b)(iv) (and provided Micrografx has directly or
indirectly participated in the issue of the Restraint in respect of which
the right of termination has been exercised pursuant to Section
8.01(b)(iv)) and a definitive agreement with respect to such Alternative
Proposal or any other Alternative Proposal is entered into by Micrografx
within twelve months of the date of such termination with any person that
made the original Alternative Proposal or within nine months of the date of
such termination with any other person, then Micrografx shall pay the
Specified Amount and Corel's Expenses to Corel. If any person or group
shall have made an Alternative Proposal with respect to Micrografx and
thereafter this Agreement is terminated pursuant to Sections 8.01(b)(i) and
a definitive agreement with respect to such Alternative Proposal or any
other Alternative Proposal is executed by Micrografx within twelve months
after such termination with any person that made the original Alternative
Proposal or within nine months of the date of such termination with any
other person, then Micrografx shall pay to Corel the Specified Amount and
Corel's Expenses. The Specified Amount shall be paid by wire transfer of
same day funds, either on the date contemplated in Section 8.01 (c) if
applicable, or otherwise within two business days after such amount becomes
due. "Specified Amount" means a termination fee equal to 3.5% of Micrografx
Annual Revenues. If Micrografx Shareholders' Approval is not received and
no Specified Amount is payable, Micrografx will pay to Corel, Corel's
Expenses. In the event that Corel exercises its option to acquire and
acquires, 80% of the stock of the Image2Web, Inc. as described in Section
6.17, Micrografx shall not be required to pay the Specified Amount in any
of the circumstances described in this Section 8.02(b).
(c) Micrografx acknowledges that the agreements contained in Section
8.02(b) are an integral part of the transactions contemplated by this
Agreement and that, without these agreements Corel would not enter into
this Agreement; accordingly, if Micrografx fails promptly to pay the amount
due pursuant to such
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paragraph, and in order to obtain such payment, Corel commences a suit
which results in a judgment against Micrografx for such amount, Micrografx
shall pay to Corel, all costs and expenses (including attorneys' fees and
expenses) incurred by Corel or any of its Subsidiaries in connection with
such suit, together with interest on the amount of the fee at a rate equal
to the prime rate publicly announced from time to time by Citibank, N.A.
and in effect on the date such payment was required to be made.
8.03 Amendment. This Agreement may be amended, supplemented or modified by
action taken by or on behalf of the respective Boards of Directors of the
parties hereto at any time prior to the Effective Time, whether prior to or
after the Micrografx Shareholders' Approval shall have been obtained, but after
such adoption and approval only to the extent permitted by applicable law. No
such amendment, supplement or modification shall be effective unless set forth
in a written instrument duly executed by or on behalf of each party hereto.
8.04 Waiver. At any time prior to the Effective Time any party hereto, by
action taken by or on behalf of its Board of Directors, may to the extent
permitted by applicable law (i) extend the time for the performance of any of
the obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties or compliance with the
covenants and agreements of the other parties hereto contained herein or in any
document delivered pursuant hereto or (iii) waive compliance with any of the
covenants, agreements or conditions of the other parties hereto contained
herein. No such extension or waiver shall be effective unless set forth in a
written instrument duly executed by or on behalf of the party extending the
time of performance or waiving any such inaccuracy or non-compliance. No waiver
by any party of any term or condition of this Agreement, in any one or more
instances, shall be deemed to be or construed as a waiver of the same or any
other term or condition of this Agreement on any future occasion.
ARTICLE IX
General Provisions
9.01 Non-Survival of Representations, Warranties, Covenants and
Agreements. The representations, warranties, covenants and agreements contained
in this Agreement or in any instrument delivered pursuant to this Agreement
shall not survive the Merger but shall terminate at the Effective Time, except
for the agreements contained in Article I and Article II, in Sections 6.06,
6.08, 6.09, 6.10, 6.11 and 6.12 and this Article IX and the agreements of the
"affiliates" of Micrografx delivered pursuant to Section 6.04, which shall
survive the Effective Time.
9.02 Notices. All notices, requests and other communications hereunder must
be in writing and will be deemed to have been duly given (a) on the date of
delivery if delivered personally, including by courier service, (b) upon
receipt if delivered by registered or certified mail, return receipt requested,
postage prepaid, or (c) upon receipt if sent by facsimile transmission,
provided that any notice received by telecopy or otherwise at the addressee's
location on any business day after 5:00 p.m. (addressee's local time) shall be
deemed to have been received at 9:00 a.m. (addressee's local time) on the next
business day. Any party to this Agreement may notify any other party of any
changes to the address or any of the other details specified in this paragraph,
provided that such notification shall only be effective on the date specified
in such notice or five (5) business days after the notice is given, whichever
is later. Rejection or other refusal to accept or the inability to deliver
because of changed address of which no notice was given shall be deemed to be
receipt of the notice as of the date of such rejection, refusal or inability to
deliver. All notices hereunder shall be delivered or faxed, as the case may be,
to the addresses and/or facsimile numbers set forth below, or pursuant to such
other instructions as may be designated in writing by the party to receive such
notice:
If to Corel or Sub, to:
Corel Corporation
1600 Carling Avenue
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Ottawa, Ontario
K1Z 8R7
Facsimile No.: 613-728-9790
Attn: Chief Executive Officer
with a copy to:
McCarthy Tetrault LLP
The Chambers
Suite 1400, 40 Elgin Street
Ottawa, Ontario
K1P 5K6
Facsimile No.: (613) 563-9386
Attn: Robert D. Chapman
If to Micrografx, to:
Micrografx, Inc.
8144 Walnut Hill Lane
Suite 1050
Dallas, Texas 75231
Facsimile No.: 469-232-1197
Attn: Chief Executive Officer
with a copy to:
Locke Liddell & Sapp LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201
Facsimile No.: 214-740-8800
Attention: John B. McKnight
9.03 Entire Agreement; Incorporation of Exhibits.
(a) This Agreement supersedes all prior discussions, representations,
warranties and agreements, both written and oral, among the parties hereto
with respect to the subject matter hereof, other than the Confidentiality
Agreement, which shall survive the execution and delivery of this Agreement
in accordance with its terms, and contains, together with the
Confidentiality Agreement, the sole and entire agreement among the parties
hereto with respect to the subject matter hereof. No prior drafts of this
Agreement and no words or phrases from any such prior drafts shall be
admissible into evidence in any action, suit or other proceeding involving
this Agreement.
(b) The Micrografx Disclosure Letter, the Corel Disclosure Letter and
any Schedule or Exhibit attached to this Agreement and referred to herein
are hereby incorporated herein and made a part hereof for all purposes as
if fully set forth herein.
9.04 Public Announcements. Except as otherwise required by law or the rules
of any applicable securities exchange or national market system, so long as
this Agreement is in effect, Corel and Micrografx will not, and will not permit
any of their respective Subsidiaries or Representatives to, issue or cause the
publication of any press release or make any other public announcement with
respect to the transactions contemplated by this Agreement without the consent
of the other party, which consent shall not be unreasonably withheld, delayed
or conditioned. Corel and Micrografx will cooperate with each other in the
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development and distribution of all press releases and other public
announcements with respect to this Agreement and the transactions contemplated
hereby, and will furnish the other with drafts of any such releases and
announcements as far in advance as practicable.
9.05 No Third Party Beneficiaries. Except as provided in Section 6.08, the
terms and provisions of this Agreement are intended solely for the benefit of
each party hereto and their respective successors or permitted assigns, and
except as otherwise expressly provided for herein, it is not the intention of
the parties to confer third-party beneficiary rights upon any other person.
9.06 No Assignment; Binding Effect. Neither this Agreement nor any right,
interest or obligation hereunder may be assigned by any party hereto, in whole
or in part (whether by operation of law or otherwise), without the prior
written consent of the other parties hereto and any attempt to do so will be
void, except that Sub may assign any or all of its rights, interests and
obligations hereunder to another direct or indirect wholly-owned Subsidiary of
Corel, provided that any such Subsidiary agrees in writing to be bound by and
liable for all of the terms, conditions and provisions contained herein that
would otherwise be applicable to Sub. Subject to the preceding sentence, this
Agreement is binding upon, inures to the benefit of and is enforceable by the
parties hereto and their respective successors and personal or legal
representatives, executors, administrators, heirs, distributees, devisees,
legatees and permitted assigns.
9.07 Headings. The table of contents, glossary of defined terms and the
descriptive headings used in this Agreement have been inserted for convenience
of reference only and do not define, modify or limit the provisions hereof or
in any way affect the meaning or interpretation of this Agreement.
9.08 Interpretation. When a reference is made in this Agreement to Sections,
Exhibits or Schedules, such reference shall be to a Section of or Exhibit or
Schedule to this Agreement unless otherwise indicated. Whenever the words
"include," "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation." The words "hereof,"
"herein" and "herewith" and words of similar import shall, unless otherwise
stated, be construed to refer to this Agreement as a whole and not to any
particular provision of this Agreement. All terms defined in this Agreement
shall have the defined meaning contained herein when used in any certificate or
other document made or delivered pursuant hereto unless otherwise defined
therein. The definitions contained in this Agreement are applicable to the
singular as well as the plural forms of such terms and to the masculine as well
as to the feminine and neuter genders of such term. Any agreement or instrument
defined or referred to herein or in any agreement or instrument that is
referred to herein means such agreement or instrument as from time to time
amended, modified or supplemented and attachments thereto and instruments
incorporated therein. References to a person are also to its permitted
successors and assigns. The parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties and no presumption or burden of proof
shall arise favoring or disfavoring any party by virtue of the authorship of
any of the provisions of this Agreement. Any reference to any federal, state,
local or foreign statute or law shall be deemed to also to refer to any
amendments thereto and all rules and regulations promulgated thereunder, unless
the context requires otherwise.
9.09 Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future law, public
policy or order, and if the rights or obligations of any party hereto under
this Agreement, and the economic or legal substance of the transactions
contemplated hereby, will not be materially and adversely affected thereby, (i)
such provision will be fully severable, (ii) this Agreement will be construed
and enforced as if such illegal, invalid or unenforceable provision had never
comprised a part hereof, and (iii) the remaining provisions of this Agreement
will remain in full force and effect and will not be affected by the illegal,
invalid or unenforceable provision or by its severance herefrom. Upon such
determination that any term or other provision is invalid, illegal or incapable
of being enforced, the parties hereto shall negotiate in good faith to modify
this Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner in order that the transactions contemplated
hereby are consummated as originally contemplated to the greatest extent
possible.
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9.10 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to a contract
executed and fully performed in such jurisdiction, without giving effect to the
conflicts of laws principles thereof.
9.11 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
was not performed in accordance with its specified terms or was otherwise
breached and that money damages would not be an adequate remedy for any breach
of this Agreement. It is accordingly agreed that in any proceeding seeking
specific performance each of the parties will waive the defense of adequacy of
a remedy at law. Each of the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of competent jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
9.12 Jurisdiction. Each of the parties hereto irrevocably agrees that any
action, suit, claim or other legal proceeding with respect to this Agreement or
in respect of the transactions contemplated hereby or for recognition and
enforcement of any judgment in respect hereof brought by any other party hereto
or its successors or assigns shall be brought and determined in any federal
court located in the County of New Castle in the State of Delaware or the
courts of the State of Delaware located in the County of New Castle (or any
appeals courts thereof). The foregoing Delaware courts are hereinafter referred
to as the "Delaware Courts". Each of the parties hereto irrevocably submits
with regard to any such proceeding for itself and in respect to its property,
generally and unconditionally, to the exclusive jurisdiction of the aforesaid
courts. Each of the parties hereto irrevocably waives, and agrees not to
assert, by way of motion, as a defense, counterclaim or otherwise, in any
action or proceeding with respect to this Agreement, (a) any claim that it is
not personally subject to the jurisdiction of the above-named courts for any
reason other than the failure to serve process in accordance with Section 9.13
hereof, (b) that it or its property is exempt or immune from jurisdiction of
any such court or from any legal process commenced in such courts (whether
through service of notice, attachment before judgment, attachment in aid of
execution of judgment, execution of judgment or otherwise) and (c) to the
fullest extent permitted by applicable law, that (i) the proceeding in any such
court is brought in an inconvenient forum, (ii) the venue of such proceeding is
improper or (iii) this Agreement, or the subject matter hereof, may not be
enforced in or by such court. Notwithstanding the foregoing, each of the
parties hereto agrees that each of the other parties shall have the right to
bring any action or proceeding for enforcement of a judgment entered by the
Delaware Courts in any other court or jurisdiction.
9.13. Service of Process.
(a) The parties agree that the delivery of process or other papers in
connection with any such action or proceeding in the manner provided in
Section 9.02, or in such other manner as may be permitted by law, shall be
valid and sufficient service thereof.
(b) Each of Micrografx, Corel and Sub hereby designates the Wilmington,
Delaware offices of CT Corporation as its respective agent for service of
process in the State of Delaware, respectively, solely with respect to any
dispute or controversy arising out of this Agreement or any of the
transactions contemplated hereby and service upon Corel or Sub for such
purposes shall be deemed to be effective upon service of CT Corporation, as
aforesaid or of its successor designated in accordance with the following
sentence. A party may designate another corporate agent or law firm
reasonably acceptable to each of the other parties and located in the
County of New Castle in the State of Delaware, as successor agent for
service of process upon 30 days' prior written notice to each other party.
9.14 Waiver of Trial by Jury. Each of the parties hereto acknowledges and
agrees that any controversy which may arise under this Agreement is likely to
involve complicated and difficult issues, and therefore each such party hereby
irrevocably and unconditionally waives, to the fullest extent permitted by
applicable law, any right such party may have to a trial by jury in respect of
any action, suit, claim or other proceeding directly or indirectly arising out
of or relating to this Agreement or the transactions contemplated by this
Agreement. Each party certifies and acknowledges that (i) no representative of
such party has been authorized by such party to
A-39
represent or, to the knowledge or such party, has represented, expressly or
otherwise, that such other party would not, in the event of litigation, seek to
enforce the foregoing waiver, (ii) each such party understands and has
considered the implications of this waiver, (iii) each such party makes this
waiver voluntarily and (iv) each such party has been induced to enter into this
Agreement by, among other things, the mutual waivers and certifications in this
Section 9.14.
9.15 Remedies Cumulative. Except as otherwise herein provided, the rights
and remedies herein provided shall be cumulative and not exclusive of any
rights or remedies provided by applicable law, either at law or in equity.
9.16 Obligation of Corel and Micrografx. Whenever this Agreement requires
Sub or another Subsidiary of Corel to take any action, such requirement shall
be deemed to include an undertaking on the part of Corel to cause Sub or such
Subsidiary to take such action and a guarantee of the performance thereof.
Whenever this Agreement requires a Subsidiary of Micrografx to take any action,
such requirement shall be deemed to include an undertaking on the part of
Micrografx to cause such Subsidiary to take such action and a guarantee of the
performance thereof.
9.17 Limitations on Warranties.
(a) Except for the representations and warranties contained in Article
III of this Agreement, Micrografx makes no other express or implied
representation or warranty to Corel or Sub. Each of Corel and Sub
acknowledge that, in entering into this Agreement, it has not relied on any
representations or warranties of Micrografx or any other Person other than
the representations and warranties of Micrografx set forth in Article III
of this Agreement.
(b) Except for the representations and warranties contained in Article
IV of this Agreement, Corel and Sub make no other express or implied
representation or warranty to Micrografx. Micrografx acknowledges that, in
entering into this Agreement, it has not relied on any representations or
warranties of Corel and Sub or any other Person other than the
representations and warranties of Corel and Sub set forth in Article IV of
this Agreement.
9.18 Certain Definitions. As used in this Agreement:
(a) except as provided in Section 6.04, the term "affiliate," as applied
to any person, shall mean any other person directly or indirectly
controlling, controlled by, or under common control with, that person; for
purposes of this definition, "control" (including, with correlative
meanings, the terms "controlling", "controlled by", "under common control
with"), as applied to any person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of that person, whether through the ownership of voting
securities, by contract or otherwise;
(b) a person will be deemed to "beneficially" own securities if such
person would be the beneficial owner of such securities under Rule 13d-3
under the Exchange Act, including securities which such person has the
right to acquire (whether such right is exercisable immediately or only
after the passage of time);
(c) the term "business day" means any day on which commercial banks are
open for business in New York, New York and Toronto, Ontario other than a
Saturday, a Sunday or a day observed as a holiday in Toronto, Ontario under
the laws of the Province of Ontario or the federal laws of Canada or in New
York, New York under the laws of the State of New York or the federal laws
of the United States of America.
(d) the term "knowledge" or any similar formulation of "knowledge" shall
mean, with respect to Micrografx, the actual knowledge of Micrografx's
executive officers, and with respect to Corel, the actual knowledge of
Corel's executive officers;
(e) any reference to any event, change or effect being "material" or
"materially adverse" or having a "material adverse effect" on or with
respect to an entity (together with its subsidiaries taken as a whole)
A-40
means such event, change or effect is material or materially adverse, as
the case may be, to the business, financial condition or results of
operations, properties, liabilities, prospects of such entity (together
with its subsidiaries taken as a whole) or the ability of the parties
hereto to consummate the Merger and excluding any changes or effects caused
by changes in general economic conditions or changes generally affecting
the industry in which Micrografx operates;
(f) the term "person" shall include individuals, corporations,
partnerships, trusts, limited liability companies, associations,
unincorporated organizations, joint ventures, other entities, groups (which
term shall include a "group" as such term is defined in Section 13(d)(3) of
the Exchange Act), labor unions or Regulatory or Governmental Authorities;
(g) the "Representatives" of any entity means such entity's directors,
officers, employees, legal, investment banking and financial advisors,
accountants and any other agents and representatives;
(h) the term "Significant Subsidiary" shall have the meaning ascribed
thereto by Rule 1-02(w) of Regulation S-X of the Securities Act of 1933;
and
(i) the term "Subsidiary" means, with respect to any party, any
corporation or other organization, whether incorporated or unincorporated,
(i) of which such party or any other Subsidiary of such party is a general
partner, (ii) securities or other interests of which having by their terms
ordinary voting power to elect a majority of the Board of Directors or
others performing similar functions with respect to such corporation or
other organization, or the means to otherwise control such corporation,
organization or other person are directly or indirectly owned or controlled
by such party or by any one or more of its Subsidiaries, or by such party
and one or more of its Subsidiaries or (iii) of which more than 50% of the
equity interests in such corporation or other organization is, directly or
indirectly through Subsidiaries or otherwise, beneficially owned by such
party.
9.19 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument, and shall become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties.
9.20 Disclosure Letters. Each of the Micrografx Disclosure Letter and the
Corel Disclosure Letter shall be construed with and as an integral part of this
Agreement to the same extent as if the same had been set forth verbatim herein.
No disclosure in either the Micrografx Disclosure Letter or the Corel
Disclosure Letter shall be deemed to be an admission or representation as to
the materiality of the item so disclosed.
9.21 Execution. This Agreement may be executed by facsimile signatures by
any party and such signature shall be deemed binding for all purposes hereof,
without delivery of an original signature being thereafter required.
9.22 Personal Liability. Neither this Agreement nor any other document
delivered in connection with this Agreement (other than an Affiliate Agreement
or Proxy and Voting Agreement dated as of the date hereof, delivered by any
officer or director of Micrografx) shall create or be deemed to create or
permit any personal liability or obligation on the part of any officer or
director of any party hereto.
9.23 Currency. Unless otherwise specified, all references in this Agreement
to "dollars" or "$" shall mean United States dollars.
9.24 Date for Any Action. In the event that any date on which any action is
required to be taken hereunder by any of the parties hereto is not a business
day, such action shall be required to be taken on the next succeeding day which
is a business day.
A-41
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be signed
by its officers thereunto duly authorized and its corporate seal to be affixed
as of the date first above written.
Corel Corporation
/s/ Derek J. Burney
By: _________________________________
Name: Derek J. Burney
Title: President and Chief
Executive Officer
/s/ John Blaine
By: _________________________________
Name: John Blaine
Title: Executive Vice President,
Finance and Chief Financial
Officer
Calgary I Acquisition Corp.
/s/ Derek J. Burney
By: _________________________________
Name: Derek J. Burney
Title: President and Chief
Executive Officer
/s/ John Blaine
By: _________________________________
Name: John Blaine
Title: Chief Financial Officer
Micrografx, Inc.
/s/ James Hopkins
By: _________________________________
Name: James Hopkins
Title: Chairman and Chief
Executive Officer
A-42
EXHIBIT C
FORM OF AFFILIATE AGREEMENT
[Date]
Ladies and Gentlemen:
I have been advised that as of the date hereof I may be deemed to be an
"affiliate" of Micrografx, Inc., a Texas corporation ("Micrografx"), as that
term is defined for purposes of paragraphs (c) and (d) of Rule 145 of the rules
and regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act"). Neither my entering into this agreement, nor anything contained herein,
shall be deemed an admission on my part that I am such an "affiliate".
Pursuant to the terms of the Agreement and Plan of Merger dated as of July
12, 2001 (the "Merger Agreement"), among Corel Corporation, a Canadian
corporation ("Corel"), Calgary I Acquisition Corp., a Delaware corporation
wholly owned by Corel ("Sub"), and Micrografx; Sub will be merged with and into
Micrografx (the "Merger"), and as a result of the Merger, I will be entitled to
receive shares of Corel's Common Stock and Contingent Value Rights exercisable
for shares of Corel's Common Stock (together, the "Corel Securities"), in
exchange for the shares of common stock, par value $.01 per share, and shares
of preferred stock, par value $.01 per share, of Micrografx owned by me at the
Effective Time (as defined in the Merger Agreement) of the Merger.
I represent, warrant and covenant to Corel that in such event:
A. I shall not make any sale, transfer or other disposition of the Corel
Securities in violation of the Act or the Rules and Regulations.
B. I have carefully read this letter and the Merger Agreement and
discussed its requirements and other applicable limitations upon my ability
to sell, transfer or otherwise dispose of Corel Securities, to the extent I
felt necessary, with my counsel or counsel for Micrografx.
C. I have been advised that the issuance of Corel Securities to me
pursuant to the Merger has been registered with the Commission under the
Act on a Registration Statement on Form S-4. However, I have also been
advised that, since at the time the Merger was submitted for a vote of the
stockholders of Micrografx I may have been deemed to have been an affiliate
of Micrografx and a distribution by me of Corel Securities has not been
registered under the Act, the Corel Securities must be held by me
indefinitely unless (i) a distribution of Corel Securities by me has been
registered under the Act, (ii) a sale of Corel Securities by me is made in
conformity with the volume and other limitations of Rule 145 promulgated by
the Commission under the Act,(iii) in the opinion of counsel reasonably
acceptable to Corel, some other exemption from registration is available
with respect to a proposed sale, transfer or other disposition of the Corel
Securities by me, or (iv) pursuant to a "no-action" or interpretive letter
from the Staff of the Commission, registration is not required with respect
to a proposed sale, transfer or other disposition of Corel Securities.
D. I understand that Corel is under no obligation to register the sale,
transfer or other disposition of Corel Securities by me or on my behalf or
to take any other action necessary in order to make compliance with an
exemption from registration available.
E. I also understand that stop transfer instructions will be given to
Corel's transfer agents with respect to the Corel Securities and that there
will be placed on the certificates for the Corel Securities, or any
substitutions therefor, a legend stating in substance:
"The shares represented by this certificate were issued in a
transaction to which Rule 145 promulgated under the Securities Act of
1933, as amended, applies. The shares represented by this
C-1
certificate may only be transferred in accordance with the terms of an
agreement dated , , between the registered holder hereof and Corel
(the "Corporation"), a copy of which agreement is on file at the
principal offices of the Corporation."
F. I also understand that unless the transfer by me of my Corel
Securities has been registered under the Act or is a sale made in
conformity with the provisions of this Agreement, Corel reserves the right
to put the following legend on the certificates issued to my transferee:
"The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended, and were acquired from a person who
received such shares in a transaction to which Rule 145 promulgated under
such Act applies. The shares have been acquired by the holder not with a
view to, or for resale in connection with, any distribution thereof within
the meaning of such Act and may not be sold, pledged or otherwise
transferred except in accordance with an exemption from the registration
requirements of such Act."
It is understood and agreed that the legends set forth in paragraphs E and F
above shall be removed by delivery of substitute certificates without such
legend if such legend is not required for purposes of the Act or this
Agreement. It is understood and agreed that such legends and the stop orders
referred to above will be removed if (i) one year shall have elapsed from the
date that the undersigned acquired Corel Securities received in the Merger and
the provisions of Rule 145(d)(2) are then available to the undersigned, (ii)
two years shall have elapsed from the date the undersigned acquired the Corel
Securities received in the Merger and the provisions of Rule 145(d)(3) are then
applicable to the undersigned, (iii) Corel shall have received either an
opinion of counsel, which opinion and counsel shall be reasonably satisfactory
to Corel, or a "no action" or "interpretive" letter obtained from the Staff of
the Commission, to the effect that the Corel Securities subject thereto may be
transferred free of the restrictions imposed by Rule 144 or 145 under the Act
or (iv) in the event of a sale of Corel Securities received by the undersigned
in the Merger which has been registered under the Act.
By its acceptance hereof, Corel agrees, for up to two years to the extent
necessary to permit the undersigned to sell the Corel Securities pursuant to
Rule 145 and, to the extent applicable, Rule 144 under the Act, that it will
(i) file on a timely basis all reports required to be filed by it pursuant to
Section 13 of the Securities Exchange Act of 1934, as amended (the "1934 Act"),
and (ii) furnish to the undersigned, upon request, a written statement as to
whether Corel has complied with such reporting requirements during the twelve
(12) months preceding any proposed sale of Corel Securities by the undersigned
under Rule 145 and Rule 144.
Very truly yours,
Accepted this day of
, , by:
By: _________________________________
Name:
Title:
C-2
ANNEX B
COREL CORPORATION
TO
BANK OF NEW YORK,
Trustee
FORM OF PARTICIPATION RIGHTS AGREEMENT
Dated as of , 2001
TABLE OF CONTENTS
ARTICLE I--DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 101. Definitions............................................... B-1
Section 102. Compliance Certificates and Opinions...................... B-4
Section 103. Form of Documents Delivered to Trustee.................... B-5
Section 104. Acts of Holders........................................... B-5
Section 105. Notices, etc., to Trustee and Company..................... B-6
Section 106. Notice to Holders; Waiver................................. B-6
Section 107. Conflict with Trust Indenture Act......................... B-6
Section 108. Effect of Headings and Table of Contents.................. B-6
Section 109. Successors and Assigns.................................... B-7
Section 110. Benefits of Agreement..................................... B-7
Section 111. Governing Law............................................. B-7
Section 112. Legal Holidays............................................ B-7
Section 113. Severability Clause....................................... B-7
Section 114. No Recourse Against Others................................ B-7
ARTICLE II--PR FORMS
Section 201. Forms Generally........................................... B-7
Section 202. Form of Face of PR........................................ B-8
Section 203. Form of Reverse of PR..................................... B-9
Section 204. Form of Trustee's Certificate of Authentication........... B-11
ARTICLE III--THE PRs
Section 301. Title and Terms........................................... B-11
Section 302. Registrable Form.......................................... B-11
Section 303. Execution, Authentication, Delivery and Dating............ B-12
Section 304. Withholding Rights........................................ B-12
Section 305. Registration.............................................. B-12
Section 306. Mutilated, Destroyed, Lost and Stolen PRs................. B-12
Section 307. Presentation of PR Certificate............................ B-13
Section 308. Persons Deemed Owners..................................... B-13
Section 309. Cancellation.............................................. B-13
Section 310. No Rights as Shareholder.................................. B-13
ARTICLE IV--THE TRUSTEE
Section 401. Certain Duties and Responsibilities....................... B-14
Section 402. Certain Rights of Trustee................................. B-15
Section 403. Not Responsible for Recitals or Issuance of PRs........... B-16
Section 404. May Hold PRs.............................................. B-16
Section 405. Money Held in Trust....................................... B-16
Compensation, Reimbursement and Indemnification of the
Section 406. Trustee................................................... B-16
Section 407. Disqualification; Conflicting Interests................... B-17
Section 408. Corporate Trustee Required; Eligibility................... B-17
Section 409. Resignation and Removal; Appointment of Successor......... B-17
Section 410. Acceptance of Appointment by Successor.................... B-18
Merger, Conversion, Consolidation or Succession to
Section 411. Business.................................................. B-18
i
ARTICLE V--HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Company to Furnish Trustee Names and Addresses of
Section 501. Holders................................................... B-19
Section 502. Preservation of Information; Communications to Holders.... B-19
Section 503. Reports by Trustee........................................ B-20
Section 504. Reports by Company........................................ B-20
ARTICLE VI--AMENDMENTS
Section 601. Amendments Without Consent of Holders..................... B-20
Section 602. Amendments with Consent of Holders........................ B-21
Section 603. Execution of Amendments................................... B-21
Section 604. Effect of Amendments...................................... B-22
Section 605. Conformity with Trust Indenture Act....................... B-22
Section 606. Reference in PRs to Amendments............................ B-22
ARTICLE VII--COVENANTS
Section 701. Payment of Amounts, if Any, to Holders.................... B-22
Section 702. Maintenance of Office or Agency........................... B-22
Section 703. Money for PR Payments to Be Held in Trust................. B-23
Section 704. Fund; Investment of Moneys by Trustee..................... B-23
ARTICLE VIII--REMEDIES OF THE TRUSTEE AND HOLDERS ON EVENT OF DEFAULT
Event of Default Defined; Acceleration of Maturity; Waiver
Section 801. of Default................................................ B-24
Collection of Indebtedness by Trustee; Trustee May Prove
Section 802. Debt...................................................... B-25
Section 803. Application of Proceeds................................... B-27
Section 804. Suits for Enforcement..................................... B-27
Section 805. Restoration of Rights on Abandonment of Proceedings....... B-27
Section 806. Limitations on Suits by Holders........................... B-27
Unconditional Right of Holders to Institute Certain
Section 807. Suits..................................................... B-28
Powers and Remedies Cumulative; Delay or Omission Not
Section 808. Waiver of Default......................................... B-28
Section 809. Control by Holders........................................ B-28
Section 810. Waiver of Past Defaults................................... B-29
Trustee to Give Notice of Default, but May Withhold in
Section 811. Certain Circumstances..................................... B-29
Right of Court to Require Filing of Undertaking to Pay
Section 812. Costs..................................................... B-29
ARTICLE VIIII--CONSOLIDATION, MERGER, SALE OR CONVEYANCE
Section 901. Company May Consolidate, Etc.............................. B-29
Section 902. Successor Substituted..................................... B-30
Section 903. Opinion of Counsel to Trustee............................. B-30
ii
AGREEMENT, dated as of , 2001, between COREL CORPORATION, a
corporation continued under the laws of Canada (hereinafter called the
"Company"), and Bank of New York, trustee (hereinafter called the "Trustee").
RECITALS OF THE COMPANY
WHEREAS, the Company has duly authorized the creation of an issue of
Participation Rights (hereinafter called the "PRs"), of substantially the tenor
and amount hereinafter set forth, and to provide therefor the Company has duly
authorized the execution and delivery of this Agreement;
WHEREAS, pursuant to the Merger Agreement dated as of July 16, 2001 (the
"Merger Agreement"), among the Company, Calgary I Acquisition Corp. (the
"Merger Subsidiary") and Micrografx, Inc., a Texas corporation ("Micrografx"),
the Company has agreed to issue and deliver to stockholders of Micrografx,
among other securities, a PR for each issued and outstanding share of common
stock, par value $.01 per share, of Micrografx ("Micrografx Common Stock") and
a PR for each share of common stock of Micrografx into which each issued and
outstanding share of Series A Preferred Stock of Micrografx is convertible
immediately prior to the effective time (the "Effective Time") of the merger of
Micrografx with the Merger Subsidiary (other than shares of Micrografx Common
Stock to be cancelled pursuant to the Merger Agreement and other than any
shares of Micrografx Common Stock held by Dissenting Shareholders (as defined
in the Merger Agreement)); and
WHEREAS, all things necessary have been done to make the PRs, when executed
by the Company and authenticated and delivered hereunder, the valid obligations
of the Company and to make this Agreement a valid agreement of the Company, in
accordance with their and its terms.
NOW, THEREFORE, for and in consideration of the premises and the
consummation of the transactions referred to above, it is mutually covenanted
and agreed, for the equal and proportionate benefit of all Holders of the PRs,
as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 101 Definitions.
For all purposes of this Agreement, except as otherwise expressly provided
or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to them
in this Article, and include the plural as well as the singular;
(b) all accounting terms used herein and not expressly defined shall
have the meanings assigned to such terms in accordance with generally
accepted accounting principles, and the term "generally accepted accounting
principles" means such accounting principles as are generally accepted at
the time of any computation;
(c) all other terms used herein which are defined in the Trust Indenture
Act, either directly or by reference therein, have the meanings assigned to
them therein; and
(d) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision.
Certain terms, used principally in Article Four, are defined in that
Article.
"Act," when used with respect to any Holder, has the meaning specified in
Section 104.
B-1
"Affiliate" means a person that, directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with,
the first mentioned person.
"Agreement" means this instrument as originally executed and as it may from
time to time be supplemented or amended pursuant to the applicable provisions
hereof.
"Board of Directors" means either the board of directors of the Company or
any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the Board
of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Breakpoint Amount" means $ [insert the Corel Closing Share Price as
determined under the Merger Agreement], as adjusted from time to time pursuant
to Section 3.01(e).
"Business Day" means any day (other than a Saturday or a Sunday) on which
banking institutions in The City of New York, New York or in the State of the
principal office of the Trustee are not authorized or obligated by law or
executive order to close.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution of this instrument such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
"Common Stock" means the common shares of the Company.
"Company" means the Person named as the "Company" in the first paragraph of
this instrument, until a successor Person shall have become such pursuant to
the applicable provisions of this Agreement, and thereafter "Company" shall
mean such successor Person. To the extent necessary to comply with the
requirements of the provisions of Trust Indenture Act Sections 310 through 317
as they are applicable to the Company, the term "Company" shall include any
other obligor with respect to the PRs for the purposes of complying with such
provisions.
"Company Request" or "Company Order" means a written request or order signed
in the name of the Company by the chairman of the Board of Directors, the
president, chief financial officer, any vice president, the controller, the
treasurer, the secretary or any assistant secretary, and delivered to the
Trustee.
"Control" (including the terms "controlled," "controlled by" and "under
common control with") means the possession, directly or indirectly or as
trustee or executor, of the power to direct or cause the direction of the
management or policies of a person, whether through the ownership of stock or
as trustee or executor, by contract or otherwise.
"Corporate Trust Office" means the office of the Trustee at which at any
particular time its corporate trust business shall be principally administered,
which office at the date of execution of this Agreement is located at
.
"Current Market Value" has the meaning set forth in Section 203.
"Default Amount" means an amount in cash equal to the First Anniversary
Payment; provided, that if an Event of Default occurs due to the failure to
timely issue and deliver the First Anniversary Stock (as provided in Section
801(d), then the "Default Amount" shall be equal to a cash amount in United
States dollars equal to the value of the First Anniversary Stock based on the
then Current Market Value thereof).
"Default Interest Rate" means 10% per annum.
B-2
"Default Payment Date" means the date upon which the PRs become due and
payable pursuant to Section 801.
"Disposition" means (i) a merger, consolidation, amalgamation, arrangement,
or other business combination involving the Company as a result of which at
least 50% of the shares of Common Stock shall be converted, exchanged or
otherwise disposed of, (ii) a sale, transfer or other disposition, in one or a
series of transactions, of all or substantially all of the assets of the
Company or (iii) a reclassification of Common Stock as any other capital stock
of the Company or any other Person; provided, however, that a "Disposition"
shall not mean, or occur upon, a merger of the Company and any wholly owned
subsidiary of the Company.
"Disposition Payment Date" has the meaning set forth in Section 203.
"Effective Time" has the meaning set forth in the Preamble.
"Event of Default" has been the meaning set forth in Section 601.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"First Anniversary Date" means , 2002 [insert the first
anniversary of the Effective Time as determined under the Merger Agreement].
"First Anniversary Payment" has the meaning set forth in Section 203.
"First Anniversary Payment Date" has the meaning set forth in Section 203.
"First Anniversary Stock" has the meaning set forth in Section 203.
"Fund" has the meaning set forth in Section 704.
"Holder" means a Person in whose name a PR is registered in the Security
Register.
"Merger Agreement" has the meaning set forth in the preamble.
"Independent Financial Expert" means an independent nationally recognized
investment firm.
"Officer's Certificate" means a certificate signed by the chairman of the
Board of Directors, the president, any vice president, the controller, the
treasurer, the secretary or any assistant secretary of the Company in his or
her capacity as such an officer, and delivered to the Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may be general
counsel for the Company, and who shall be reasonably acceptable to the Trustee.
"Outstanding," when used with respect to PRs means, as of the date of
determination, all PRs theretofore authenticated and delivered under this
Agreement, except:
(a) PRs theretofore cancelled by the Trustee or delivered to the Trustee
for cancellation;
(b) From and after the earlier of the First Anniversary Payment Date,
the Disposition Payment Date, or the Default Payment Date, PRs, or portions
thereof, for whose payment cash or securities of the Company has been
theretofore deposited with the Trustee or any Paying Agent (other than the
Company) in trust or set aside and segregated in trust by the Company (if
the Company shall act as its own Paying Agent) for the Holders of such PRs;
and
(c) PRs in exchange for or in lieu of which other PRs have been
authenticated and delivered pursuant to this Agreement, other than any such
PRs in respect of which there shall have been presented to the Trustee
proof satisfactory to it that such PRs are held by a bona fide purchaser in
whose hands the PRs are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
Outstanding PRs have given any request, demand, direction, consent or waiver
hereunder, PRs owned by the Company or any other obligor
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upon the PRs or any affiliate of the Company or such other obligor shall be
disregarded and deemed not to be Outstanding, except that, in determining
whether the Trustee shall be protected in relying upon any such request,
demand, direction, consent or waiver, only PRs which the Trustee knows to be so
owned shall be so disregarded.
"Paying Agent" means any Person other than the Company authorized by the
Company to pay the amount determined pursuant to Section 301, if any, on any
PRs on behalf of the Company, which shall initially be Bank of New York.
"Permitted Investments" has the meaning set forth in Section 704.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"PR Certificate" means a certificate representing any of the PRs.
"Responsible Officer," when used with respect to the Trustee, means any duly
appointed officer assigned to the Corporate Trust Office and also means, with
respect to any particular corporate trust matter, any other duly appointed
officer of the Trustee to whom such matter is referred because of his knowledge
of and familiarity with the particular subject.
"Security Register" has the meaning specified in Section 305.
"Surviving Person" has the meaning set forth in Section 901.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
the date as of which this Agreement was executed, except as provided in Section
605.
"Trustee" means the Person named as the "Trustee" in the first paragraph of
this Agreement, until a successor Trustee shall have become such pursuant to
the applicable provisions of this Agreement, and thereafter "Trustee" shall
mean such successor Trustee.
"vice president" when used with respect to the Company or the Trustee, means
any vice president, whether or not designated by a number or a word or words
added before or after the title of "vice president".
Section 102. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take any
action under any provision of this Agreement, the Company shall furnish to the
Trustee an Officer's Certificate stating that all conditions precedent, if any,
provided for in this Agreement (including any covenants, compliance with which
constitutes a condition precedent) relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with, except
that, in the case of any such application or request as to which the furnishing
of such documents is specifically required by any provision of this Agreement
relating to such particular application or request, no additional certificate
or opinion need be furnished.
Every certificate or opinion with respect to compliance with a condition or
covenant provided for in this Agreement shall include:
(a) a statement that each individual signing such certificate or opinion
has read such covenant or condition and the definitions herein relating
thereto;
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
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(c) a statement that, in the opinion of each such individual, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or condition
has been complied with; and
(d) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
Section 103. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care
should know, that the certificate or opinion or representations with respect to
such matters are erroneous.
Any certificate, statement or opinion of an officer of the Company or of
counsel may be based, insofar as it relates to accounting matters, upon a
certificate or opinion of or representations by an accountant or firm of
accountants in the employ of the Company, unless such officer or counsel, as
the case may be, knows that the certificate or opinion or representations with
respect to the accounting matters upon which his certificate, statement or
opinion may be based as aforesaid are erroneous, or in the exercise of
reasonable care should know that the same are erroneous. Any certificate or
opinion of any independent firm of public accountants filed with the Trustee
shall contain a statement that such firm is independent.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Agreement, they may, but need not, be consolidated and
form one instrument.
Section 104. Acts of Holders.
(a) Any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Agreement to be given or taken by one or more
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company
pursuant to Section 105. Such instrument or instruments (and the action
embodied therein and evidenced thereby) are herein sometimes referred to as the
"Act" of the Holders signing such instrument or instruments. Proof of execution
of any such instrument or of a writing appointing any such agent shall be
sufficient for any purpose of this Agreement and (subject to Section 401)
conclusive in favor of the Trustee and the Company, if made in the manner
provided in this Section.
(b) The fact and date of the execution by any Person of any such instrument
or writing may be proved in any reasonable manner which the Trustee deems
sufficient.
(c) The ownership of PRs shall be proved by the Security Register.
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(d) At any time prior to (but not after) the evidencing to the Trustee, as
provided in this Section 104, of the taking of any action by the Holders of the
PRs specified in this Agreement in connection with such action, any Holder of a
PR the serial number of which is shown by the evidence to be included among the
serial numbers of the PRs the Holders of which have consented to such action
may, by filing written notice at the Corporate Trust Office and upon proof of
holding as provided in this Section 104, revoke such action so far as concerns
such PR. Any request, demand, authorization, direction, notice, consent, waiver
or other action by the Holder of any PR shall bind every future Holder of the
same PR or the Holder of every PR issued upon the registration of transfer
thereof or in exchange therefor or in lieu thereof, in respect of anything
done, suffered or omitted to be done by the Trustee, any Paying Agent or the
Company in reliance thereon, whether or not notation of such action is made
upon such PR.
Section 105. Notices, etc., to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver or
Act of Holders or other document provided or permitted by this Agreement to be
made upon, given or furnished to, or filed with:
(a) The Trustee by any Holder or by the Company shall be sufficient for
every purpose hereunder if made, given, furnished or filed, in writing and
either delivered by facsimile or mailed, first-class prepaid, to or with
the Trustee at its Corporate Trust Office, Attention: Chief Financial
Officer; or
(b) the Company by the Trustee or by any Holder shall be sufficient for
every purpose hereunder if in writing and mailed, first-class postage
prepaid, to the Company addressed to it at 1600 Carling Avenue, Ottawa,
Ontario, K1Z 8R7, Attention: , or at any other
address previously furnished in writing to the Trustee by the Company.
Section 106. Notice to Holders; Waiver.
Where this Agreement provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if in writing and mailed, first-class postage prepaid, to each Holder affected
by such event, at his address as it appears in the Security Register, not later
than the latest date, and not earlier than the earliest date, prescribed for
the giving of such notice. In any case where notice to Holders is given by
mail, neither the failure to mail such notice, nor any defect in any notice so
mailed, to any particular Holder shall affect the sufficiency of such notice
with respect to other Holders. Where this Agreement provides for notice in any
manner, such notice may be waived in writing by the Person entitled to receive
such notice, either before or after the event, and such waiver shall be the
equivalent of such notice. Waivers of notice by Holders shall be filed with the
Trustee, but such filing shall not be a condition precedent to the validity of
any action taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service or by reason of
any other cause, it shall be impracticable to mail notice of any event as
required by any provision of this Agreement, then any method of giving such
notice as shall be satisfactory to the Trustee shall be deemed to be a
sufficient giving of such notice.
Section 107. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with another
provision hereof which is required to be included in this Agreement by any of
the provisions of the Trust Indenture Act, such required provision shall
control.
Section 108. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
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Section 109. Successors and Assigns.
All covenants and agreements in this Agreement by the Company shall bind its
successors and assigns, whether so expressed or not.
Section 110. Benefits of Agreement.
Nothing in this Agreement or in the PRs, express or implied, shall give to
any Person (other than the parties hereto and their successors hereunder, any
Paying Agent and the Holders) any benefit or any legal or equitable right,
remedy or claim under this Agreement or under any covenant or provision herein
contained, all such covenants and provisions being for the sole benefit of the
parties hereto and their successors and of the Holders.
Section 111. Governing Law.
This Agreement and the PRs shall be governed by and construed in accordance
with the laws of the State of New York.
Section 112. Legal Holidays.
In the event that the First Anniversary Payment Date, the Disposition
Payment Date or the Default Payment Date, as the case may be, shall not be a
Business Day, then (notwithstanding any provision of this Agreement or the PRs
to the contrary) payment on the PRs need not be made on such date, but may be
made on the next succeeding Business Day with the same force and effect as if
made on the required date.
Section 113. Severability Clause.
In case any provision in this Agreement or in the PRs shall be invalid,
illegal or unenforceable under applicable laws, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
Section 114. No Recourse Against Others.
A director, officer, employee or stockholder, as such, of the Company shall
not have any liability for any obligations of the Company under the PRs or this
Agreement or for any claim based on, in respect of or by reason of such
obligations or their creation. Each Holder by accepting a PR waives and
releases all such liability. The waiver and release are part of the
consideration for the issue of the PRs.
ARTICLE TWO
PR FORMS
Section 201. Forms Generally.
The PRs and the Trustee's certificate of authentication shall be in
substantially the forms set forth in this Article, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Agreement and may have such letters, numbers or other marks
of identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange or as may be
required by law or any rule or regulation pursuant thereto, all as may be
determined by officers executing such PRs, as evidenced by their execution of
the PRs. Any portion of the text of any PR may be set forth on the reverse
thereof, with an appropriate reference thereto on the face of the PR.
The definitive PRs shall be printed, lithographed or engraved on steel
engraved borders or produced by any combination of these methods or may be
produced in any other manner, all as determined by the officers executing such
PRs, as evidenced by their execution of such PRs.
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Section 202. Form of Face of PR.
COREL CORPORATION
No. Certificate for Participation Rights
This certifies that (the "Holder"), is the registered
holder of the number of Participation Rights ("PRs") set forth above. Each PR
entitles the Holder, subject to the provisions contained herein and in the
Agreement referred to on the reverse hereof, to a payment from Corel
Corporation, a corporation continued under the laws of Canada (the "Company"),
in an amount and in the form determined pursuant to the provisions set forth on
the reverse hereof and as more fully described in the Agreement. Such payment
or issuance shall be made on the third Business Day following the First
Anniversary Date (the "First Anniversary Payment Date") or on the Disposition
Payment Date or the Default Payment Date, as the case may be, each as defined
in the Agreement referred to on the reverse hereof.
This PR Certificate represents the right to receive the payment or issuance
of the amounts described in this Certificate and as more fully set forth in the
Agreement. Such payment shall be made in the Borough of Manhattan, The City of
New York, or at any other office or agency maintained by the Company for such
purpose either (i) in currency of the United States of America as at the time
is legal tender for the payment of public and private debts; (provided,
however, the Company may pay such amounts by its check payable in such money),
or (ii) by delivering Common Stock (as defined in the Agreement referred to on
the reverse hereof), in accordance with the provisions set forth on the reverse
hereof. [Institution that is Trustee] has been appointed as Paying Agent in the
Borough of Manhattan, The City of New York.
Reference is hereby made to the further provisions of this PR Certificate
set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed by
the Trustee referred to on the reverse hereof by manual signature, this PR
Certificate shall not be entitled to any benefit under the Agreement, or be
valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated:
Corel Corporation
By___________________________________
Attest:
[SEAL]
-----------------------------
Authorized Signature
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Section 203. Form of Reverse of PR.
This PR Certificate is issued under and in accordance with the Participation
Rights Agreement, dated as of , 2001 (the "Agreement"), between the
Company and Bank of New York, trustee (the "Trustee," which term includes any
successor Trustee under the Agreement), and is subject to the terms and
provisions contained in the Agreement, to all of which terms and provisions the
Holder of this PR Certificate consents by acceptance hereof. The Agreement is
hereby incorporated herein by reference and made a part hereof. Reference is
hereby made to the Agreement for a full statement of the respective rights,
limitations of rights, duties, obligations and immunities thereunder of the
Company, the Trustee and the holders of the PRs. Copies of the Agreement can be
obtained by contacting the Trustee.
The Company shall pay to the Holder hereof on the third Business Day next
following , 2002 (the "First Anniversary Date"), a Disposition Payment
Date or a Default Payment Date, as applicable, for each PR represented hereby
(i) if the Current Market Value on the First Anniversary Date is the Breakpoint
Amount or less, US $. [insert Micrografx Times Revenue Share Price, as defined
in the Merger Agreement] in cash (the "First Anniversary Payment"), and (ii) if
the then Current Market Value is more than the Breakpoint Amount, such number
of whole shares of Common Stock (the "First Anniversary Stock ") as shall
result upon the multiplication of the number of PRs represented by this PR
Certificate by a fraction of which (A) the numerator is the sum of (x) US
$ [Micrografx Times Revenue Share Price] and (y) 18% of the positive
difference obtained by subtracting from the then Current Market Value the
Breakpoint Amount and (B) the denominator is the then Current Market Value. The
determination of these amounts by the Company absent manifest error shall be
final and binding on the Company and the Holder.
The Company will not issue fractional shares of Common Stock. Instead the
fraction will be rounded up or down to the nearest whole share.
The Company shall reserve out of its authorized but unissued Common Stock
enough shares of Common Stock to permit issuance and delivery of the First
Anniversary Stock. All shares of Common Stock which may be issued upon payment
of the First Anniversary Stock shall be duly authorized, fully paid and non-
assessable. The Company will use to its reasonable best efforts to comply in
all materials respect with all securities laws regulating the offer and
delivery of shares of Common Stock upon issuance and delivery of the First
Anniversary Stock, and will list such shares on each securities exchange or
market on which the Common Stock is listed prior to the First Anniversary Date.
Upon the consummation of a Disposition, as defined below, the Company shall
pay to the Holder hereof for each PR represented hereby cash or other
consideration amount as if such Disposition Date were the First Anniversary
Date. Consistent with the formulae applicable to determining what the Holder
would be entitled to receive on the First Anniversary, the "Current Market
Value" shall be based upon the per share value receivable in connection with
the disposition by the holders of Common Stock at the time of the Disposition
(as determined in good faith by the Company and an Independent Financial
Expert) and, in applying such formulation of the "Current Market Value" (A) if
the Current Market Value is less than or equal to the Breakpoint Amount, then
for each PR represented hereby the Holder shall be entitled to received the
First Anniversary Payment in cash, and (B) if the Current Market Value is
higher than the Breakpoint Amount, then the Holder of each PR shall be entitled
to receive for each PR the consideration in the Disposition to which he would
have been entitled to receive had the PRs been settled for First Anniversary
Stock immediately prior to consummation of the Disposition. Any determinations
or judgments as to what the Holders are entitled to receive in a Disposition
shall be final and binding absent manifest error. Such determinations by the
Company and such Independent Financial Expert absent manifest error shall be
final and binding on the Company and the Holder. Such payment shall be made on
the date (the "Disposition Payment Date") established by the Company, which in
no event shall be more than 30 days after the date on which the Disposition was
consummated. As soon as practicable after the Disposition, the Company shall
give the Holder hereof and the Trustee notice of such Disposition, the cash or
other consideration to be received and the Disposition Payment Date.
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If an Event of Default occurs and is continuing, either the Trustee or the
Holders holding an aggregate of at least 25% of the Outstanding PRs, by notice
to the Company (and to the Trustee if given by the Holders), may declare the
PRs due and payable, and upon such declaration, the Company shall promptly pay
to the Holders for each PR held by the Holders the Default Amount with cash
interest at the Default Interest Rate from the Default Payment Date through the
date payment is made or duly provided for.
Notwithstanding any provision of the Agreement or of this PR Certificate to
the contrary, other than in the case of interest on the Default Amount, no
interest shall accrue on any amounts payable on the PRs to the Holder.
"Current Market Value" means with respect to the First Anniversary Date, the
Disposition Date or the Default Payment Date, the volume weighted average price
on the Nasdaq (or the principal exchange on which shares of Common Stock are
then listed) of shares of Common Stock during the 20 consecutive trading day
period that ends on such date.
"Disposition" means (i) a merger, amalgamation, arrangement, consolidation,
or other business combination involving the Company as a result of which 50% or
more of the shares of Common Stock shall be converted, exchanged, or otherwise
disposed of, (ii) a sale, transfer or other disposition, in one or a series of
transactions, of all or substantially all of the assets of the Company or (iii)
a reclassification of Common Stock as any other capital stock of the Company or
any other Person; provided, however, that "Disposition" shall not mean a merger
or amalgamation of the Company and any wholly owned subsidiary of the Company.
The Agreement permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the holders of PRs under the Agreement at any time by
the Company and the Trustee with the consent of the holders of a majority of
the PRs at the time outstanding.
No reference herein to the Agreement and no provision of this PR Certificate
or of the Agreement shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay or deliver any amounts determined
pursuant to the terms hereof and of the Agreement at the times, place, and
amount, and in the cash or securities of the Company, herein prescribed.
The PRs represented by this PR Certificate shall not be transferable or
exchangeable, except by devise or descent.
The Company, the Trustee and any agent of the Company or the Trustee may
treat the Person in whose name this PR Certificate is registered as the owner
hereof for all purposes, and neither the Company, the Trustee nor any agent
shall be affected by notice to the contrary.
All capitalized terms used in this PR Certificate without definition shall
have the meanings assigned to them in the Agreement.
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Section 204. Form of Trustee's Certificate of Authentication.
TRUSTEE'S CERTIFICATE OF AUTHENTICATION.
This is one of the PR Certificates referred to in the within-mentioned
Agreement.
_____________________________________
Trustee
By___________________________________
Authorized Officer
ARTICLE THREE
THE PRs
Section 301. Title and Terms.
(a) The aggregate number of PR Certificates which may be authenticated and
delivered under this Agreement is limited to the number equal to the number of
shares of Micrografx Common Stock and Preferred Stock issued and outstanding
immediately prior to the Effective Time (other than shares of Common Stock in
the treasury of Micrografx and shares of Micrografx Common Stock owned by the
Company or any direct or indirect wholly owned subsidiary of the Company or of
Micrografx), plus PRs required to be issued after the Effective Time on
exercise of warrants of Micrografx assumed by the Company at the Effective Time
so outstanding, except for PRs authenticated and delivered upon registration of
transfer of, or in exchange for, or in lieu of, other PRs pursuant to Sections
304, 306 or 606.
(b) The PRs shall be known and designated as the "Participation Rights" of
the Company.
(c) The Company shall pay to each Holder the payments required under the PRs
at the times and in the amounts and forms therein provided. The determinations
of such amounts and forms by the Company absent manifest error shall be final
and binding on the Company and the Holders.
(d) Notwithstanding any provision of this Agreement or the PR Certificates
to the contrary, other than in the case of interest on the Default Amount, no
interest shall accrue on any amounts payable on the PRs to any Holder.
(e) In the event the Company shall in any manner subdivide (by stock split,
stock dividend or otherwise) or combine (by reverse stock split or otherwise)
the number of outstanding shares of Common Stock, the Company shall
appropriately adjust the Breakpoint Amount and the calculation of the First
Anniversary Stock. Whenever an adjustment is made as provided in this Section
301(e), the Company shall (i) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(ii) promptly file with the Trustee a copy of such certificate and (iii) mail a
brief summary thereof to each Holder. The Trustee shall be fully protected in
relying on any such certificate and on any adjustment therein contained. Such
adjustments absent manifest error shall be final and binding on the Company and
the Holders.
Section 302. Registrable Form.
The PRs shall be issuable only in registered form.
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Section 303. Execution, Authentication, Delivery and Dating.
The PRs shall be executed on behalf of the Company by its chairman of the
Board of Directors or its president or any vice president or its treasurer,
under its corporate seal which may, but need not, be attested. The signature of
any of these officers on the PRs may be manual or facsimile.
PRs bearing the manual or facsimile signatures of individuals who were at
any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such PRs or did not hold
such offices at the date of such PRs.
At any time and from time to time after the execution and delivery of this
Agreement, the Company may deliver PRs executed by the Company to the Trustee
for authentication, together with a Company Order for the authentication and
delivery of such PRs; and the Trustee in accordance with such Company Order
shall authenticate and deliver such PRs as provided in this Agreement and not
otherwise.
Each PR shall be dated the date of its authentication.
No PR shall be entitled to any benefit under this Agreement or be valid or
obligatory for any purpose unless there appears on such PR a certificate of
authentication substantially in the form provided for herein duly executed by
the Trustee by manual signature of an authorized officer, and such certificate
upon any PR shall be conclusive evidence, and the only evidence, that such PR
has been duly authenticated and delivered hereunder and that the Holder is
entitled to the benefits of this Agreement.
Section 304. Withholding Rights.
The Company shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any Holder such amounts as the
Company is required to deduct and withhold or remit pursuant to the applicable
rules under any provision of federal, provincial, local or foreign tax law, and
the Company may sell the shares of First Anniversary Stock to which such Holder
is entitled for the purposes of obtaining cash necessary to remit any such
amount to the applicable authority. To the extent that amounts are so withheld
by the Company, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the Holder in respect of which such deduction
and withholding was made by the Company.
Section 305. Registration.
The Company shall cause to be kept at the Corporate Trust Office of the
Trustee a register (the register maintained in such office and in any other
office or agency designated pursuant to Section 702 being herein sometimes
referred to as the "Security Register") in which, subject to such reasonable
regulations as it may prescribe, the Company shall provide for the registration
of PRs. The PRs shall not be exchangeable or transferable, except by devise or
descent.
Section 306. Mutilated, Destroyed, Lost and Stolen PRs.
If any mutilated PR is surrendered to the Trustee, or (b) the Company and
the Trustee receive evidence to their satisfaction of the destruction, loss or
theft of any PR, and there is delivered to the Company and the Trustee such
security or indemnity as may be required by them to save each of them harmless,
then, in the absence of notice to the Company or the Trustee that such PR has
been acquired by a bona fide purchaser, the Company shall execute and upon its
written request the Trustee shall authenticate and deliver, in exchange for any
such mutilated PR or in lieu of any such destroyed, lost or stolen PR, a new PR
Certificate of like tenor and amount of PRs, bearing a number not
contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen PR has become or is to
become due and payable within 15 days, the Company in its discretion may,
instead of issuing a new PR Certificate, pay such PR on the due date.
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Upon the issuance of any new PRs under this Section, the Company may require
the payment of a sum sufficient to cover any tax or other governmental charge
that may be imposed in relation thereto and any other expenses (including the
fees and expenses of the Trustee) connected therewith.
Every new PR issued pursuant to this Section in lieu of any destroyed, lost
or stolen PR shall constitute an original additional contractual obligation of
the Company, whether or not the destroyed, lost or stolen PR shall be at any
time enforceable by anyone, and shall be entitled to all benefits of this
Agreement equally and proportionately with any and all other PRs duly issued
hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen PRs.
Section 307. Presentation of PR Certificate.
Payment of any amounts on the PRs (including issuance of any shares) shall
be made only upon presentation by the Holder thereof at the office or agency of
the Company maintained for that purpose in the Borough of Manhattan, The City
of New York, or the Corporate Trust Office and at any other office or agency
maintained by the Company for such purpose.
Section 308. Persons Deemed Owners.
The Company, the Trustee and any agent of the Company or the Trustee may
treat the Person in whose name any PR is registered as the owner of such PR for
the purpose of receiving payment on such PR and for all other purposes
whatsoever, whether or not such PR be overdue, and neither the Company, the
Trustee nor any agent of the Company or the Trustee shall be affected by notice
to the contrary.
Section 309. Cancellation.
All PRs surrendered for payment shall, if surrendered to any Person other
than the Trustee, be delivered to the Trustee and shall be promptly cancelled
by it. The Company may at any time deliver to the Trustee for cancellation any
PRs previously authenticated and delivered hereunder which the Company may have
acquired in any manner whatsoever, and all PRs so delivered shall be promptly
cancelled by the Trustee. No PRs shall be authenticated in lieu of or in
exchange for any PRs cancelled as provided in this Section, except as expressly
permitted by this Agreement. All cancelled PRs held by the Trustee shall be
disposed of as directed by a Company Order.
Section 310. No Rights as Shareholder.
The Holders, as such, shall not be entitled (i) to receive any dividends in
respect of the Common Stock issuance to such Holder upon surrender of his PR
Certificate or (ii) to vote or to receive notice of any meeting of the
Company's shareholders or otherwise exercise any rights of or to receive any
notice delivered to, holders of Common Stock until such Holder surrenders his
PR Certificate. Upon the surrender of a PR Certificate in accordance with the
provisions of the Agreement and the issuance of shares of Common Stock to which
such Holder of such PR Certificate is entitled, each Holder shall be entitled
to receive payment of all dividends per share of Common Stock payable to
holders of Common Stock of the Company as of or after the date of such
surrender.
ARTICLE FOUR
THE TRUSTEE
The Company hereby appoints Bank of New York as Trustee of the Company in
respect with the PRs and the PR Certificates upon the terms and subject to the
conditions set forth herein and tin the PR Certificates, and Bank of New York
hereby accepts such appointment.
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At the Effective Time, the Company shall (i) deposit with the Trustee the
Fund for the benefit of the Holders pursuant to Section 704 and (ii) provide
the Trustee with a list of Holders pursuant to Section 501. The Trustee shall
hold such Fund, and if the Current Market Value is less than or equal to the
Breakpoint Amount on any applicable date shall distribute such Fund based on
the list of Holders as set forth in Sections 704 and 501. If the Current Market
Value is greater than the Breakpoint Amount on any applicable date, then the
Company shall deliver to the Trustee on such date certificate(s) evidencing
such number of shares of Common Stock to be issued to Holders pursuant Section
501.
Section 401. Certain Duties and Responsibilities.
(a) with respect to the Holders of PRs issued hereunder, the Trustee, prior
to the occurrence of an Event of Default with respect to the PRs and after the
curing or waiving of all Events of Default which may have occurred, undertakes
to perform such duties and only such duties as are specifically set forth in
this Agreement. In case an Event of Default with respect to the PRs has
occurred (which has not been cured or waived), the Trustee shall exercise such
of the rights and powers vested in it by this Agreement, and use the same
degree of care and skill in their exercise, as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
(b) In the absence of bad faith on its part, prior to the occurrence of an
Event of Default and after the curing or waiving of all such Events of Default
which may have occurred, the Trustee may conclusively rely, as to the truth of
the statements and the correctness of the opinions expressed therein, upon
certificates or opinions furnished to the Trustee and conforming to the
requirements of this Agreement; but in the case of any such certificates or
opinions which by any provision hereof are specifically required to be
furnished to the Trustee, the Trustee shall be under a duty to examine the same
to determine whether or not they conform to the requirements of this Agreement.
(c) No provision of this Agreement shall be construed to relieve the Trustee
from liability for its own negligent action, its own negligent failure to act,
or its own willful misconduct, except that
(1) this Subsection (c) shall not be construed to limit the effect of
Subsections (a) and (b) of this Section;
(2) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer, unless it shall be proved that the
Trustee was negligent in ascertaining the pertinent facts;
(3) no provision of this Agreement shall require the Trustee to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of
its rights or powers, if it shall have reasonable grounds for believing
that repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it; and
(4) the Trustee shall not be liable with respect to any action taken or
omitted to be taken by it in good faith in accordance with the direction of
the Holders pursuant to Section 809 relating to the time, method and place
of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this
Agreement.
(d) Whether or not therein expressly so provided, every provision of this
Agreement relating to the conduct or affecting the liability of or affording
protection to the Trustee shall be subject to the provisions of this Section.
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Section 402. Certain Rights of Trustee.
The Trustee undertakes to perform such duties and only such duties as are
specifically set forth in this Agreement, and no implied covenants or
obligations shall be read into this Agreement against the Trustee. Subject to
the provisions of Trust Indenture Act Sections 315(a) through 315(d) and
Section 401 hereof:
(a) the Trustee may rely and shall be protected in acting or refraining
from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document
believed by it to be genuine and to have been signed or presented by the
proper party or parties;
(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors may be sufficiently evidenced by a
Board Resolution;
(c) whenever in the administration of this Agreement the Trustee shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other
evidence be herein specifically prescribed) may, in the absence of bad
faith on its part, rely upon an Officer's Certificate;
(d) the Trustee may consult with counsel and the written advice of such
counsel or any Opinion of Counsel shall be full and complete authorization
and protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Agreement at the request or direction
of any of the Holders pursuant to this Agreement, unless such Holders shall
have offered to the Trustee reasonable security or indemnity against the
costs, expenses and liabilities which might be incurred by it in compliance
with such request or direction;
(f) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, approval,
appraisal, bond, debenture, note, coupon, security, or other paper or
document unless requested in writing to do so by the Holders of not less
than a majority in aggregate number of the PRs then Outstanding; provided
that, if the payment within a reasonable time to the Trustee of the
reasonable costs, expenses or liabilities likely to be incurred by it in
the making of such investigation is, in the opinion of the Trustee, not
reasonably assured to the Trustee by the security afforded to it by the
terms of this Agreement, the Trustee may require reasonable indemnity
against such expenses or liabilities as a condition to proceeding; the
reasonable expenses of every such investigation shall be paid by the
Company or, if paid by the Trustee or any predecessor Trustee, shall be
repaid by the Company upon demand;
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by
it hereunder;
(h) the permissive rights of the Trustee to do things enumerated in this
Agreement shall not be construed as a duty and the Trustee shall be liable
for its negligence, bad faith or willful misconduct;
(i) the Trustee shall not be required to give any note or surety in
respect of the execution of the said trusts and powers or otherwise in
respect of the premises; and
(j) except for (i) a default under Section 801(a) or (d) and (ii) any
other event of which the Trustee has "actual knowledge," which event, with
the giving of notice or the passage of time or both, would constitute an
Event of Default, the Trustee shall not be deemed to have notice of any
default or event unless specifically notified in writing of such event by
the Company or the Holders of not less than 25% in aggregate number of PRs
Outstanding; as used herein, the term "actual knowledge" means the actual
fact or statement of knowing, without any duty to make any investigation
without regard thereto.
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No provision of this Agreement shall require the Trustee to expend or risk
its own funds or otherwise incur any financial liability in the performance of
any of its duties hereunder, or in the exercise of any of its rights or powers,
if it shall have reasonable grounds for believing that repayment of such funds
or adequate indemnity against such risk or liability is not reasonably assured
to it. Notwithstanding anything contained herein, the Trustee may not satisfy
any expenses incurred, fees owed or other amount due it from the Fund, but will
look solely to the Company for such amounts.
Section 403. Not Responsible for Recitals or Issuance of PRs.
The recitals contained herein and in the PRs, except the Trustee's
certificates of authentication, shall be taken as the statements of the
Company, and the Trustee assumes no responsibility for their correctness. The
Trustee makes no representations as to the validity or sufficiency of this
Agreement or of the PRs. The Trustee shall not be accountable for the use or
application by the Company of PRs or the proceeds thereof.
Section 404. May Hold PRs.
The Trustee, any Paying Agent, or any other agent of the Company, in its
individual or any other capacity, may become the owner or pledgee of PRs, and,
subject to Sections 407 and 412, may otherwise deal with the Company with the
same rights it would have if it were not Trustee, Paying Agent, or such other
agent.
Section 405. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated from
other funds except to the extent required by law. The Trustee shall be under no
liability for interest on any money received by it hereunder. The Company and
the Trustee agree that the Fund shall be structured in such a fashion as to
maximize the protection of funds contained therein against claims from and of
the Company's creditors.
Section 406. Compensation, Reimbursement and Indemnification of the Trustee.
The Company agrees
(a) to pay to the Trustee from time to time reasonable compensation for
all services rendered by it hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee
of an express trust);
(b) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision
of this Agreement (including the reasonable compensation and the expenses
and disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to its negligence or bad
faith; and
(c) to indemnify the Trustee for, and to hold it harmless against, any
loss, liability or expense incurred without negligence or bad faith on its
part, arising out of or in connection with the acceptance or administration
of this trust, including the costs and expenses of defending itself against
any claim or liability in connection with the exercise or performance of
any of its powers or duties hereunder, including the enforcement of this
Section 406. The Trustee shall notify the Company promptly of any claim for
which it may seek indemnity. The Company shall defend the claim and the
Trustee shall cooperate in the defense. The Company need not pay for any
settlement made without its consent.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 801(b) or 801(c) occurs, the reasonable expenses
and the compensation for services (including the reasonable fees and expenses
of its agents and counsel) are intended to constitute expenses of
administration under any bankruptcy law.
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Section 407. Disqualification; Conflicting Interests.
The Trustee shall be subject to the provisions of Section 310(b) of the
Trust Indenture Act during the period of time provided for therein. Nothing
herein shall prevent the Trustee from filing with the Commission the
application referred to in the penultimate paragraph of Section 310(b) of the
Trust Indenture Act.
Section 408. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be a corporation
organized and doing business under the laws of the United States of America or
of any State, authorized under such laws to exercise corporate trust powers,
having a combined capital and surplus of at least $50,000,000, subject to
supervision or examination by Federal or State authority and, to the extent
there is such an institution eligible and willing to serve, having an office or
agency in The City of New York. If such corporation publishes reports of
condition at least annually, pursuant to law or to the requirements of the
aforesaid supervising or examining authority, then for the purposes of this
Section, the combined capital and surplus of such corporation shall be deemed
to be its combined capital and surplus as set forth in its most recent report
of condition so published. If at any time the Trustee shall cease to be
eligible in accordance with the provisions of this Section, it shall resign
immediately in the manner and with the effect hereinafter specified in this
Article.
Section 409. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 410.
(b) The Trustee, or any trustee or trustees hereafter appointed, may
resign at any time by giving written notice thereof to the Company. If an
instrument of acceptance by a successor Trustee shall not have been
delivered to the Trustee within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time by (i) the Company, by a
Board Resolution or (ii) an Act of the Holders of a majority of the
Outstanding PRs, delivered to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with Section 407 after written
request therefor by the Company or by any Holder who is an original
Holder of PRs or who has been a bona fide Holder of a PR for at least
six months, or
(2) the Trustee shall cease to be eligible under Section 408 and
shall fail to resign after written request therefor by the Company or
by any such Holder, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent, or a receiver of the Trustee or of
its property shall be appointed, or any public officer shall take
charge or control of the Trustee or of its property or affairs for the
purpose of rehabilitation, conservation or liquidation,
then, in any case, (i) the Company by a Board Resolution may remove the
Trustee, or (ii) who is an original Holder of PRs or the Holder of any PR
who has been a bona fide Holder of a PR for at least six months may, on
behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the removal of the Trustee and the appointment
of a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause,
the Company, by a Board Resolution, shall promptly appoint a successor
Trustee. If, within six months after such resignation, removal or
incapability, or the occurrence of such vacancy, a successor Trustee shall
be appointed by Act of the Holders of a majority of the
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Outstanding PRs delivered to the Company and the retiring Trustee, the
successor Trustee so appointed shall, forthwith upon its acceptance of such
appointment in accordance with Section 410, become the successor Trustee
and supersede the successor Trustee appointed by the Company. If no
successor Trustee shall have been so appointed by the Company or the
Holders of the PRs and so accepted appointment, the Holder of any PR who
has been a bona fide Holder for at least six months may on behalf of
himself and all others similarly situated, petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each removal
of the Trustee and each appointment of a successor Trustee by mailing
written notice of such event by first-class mail, postage prepaid, to the
Holders of PRs as their names and addresses appear in the Security
Register. Each notice shall include the name of the successor Trustee and
the address of its Corporate Trust Office. If the Company fails to send
such notice within ten days after acceptance of appointment by a successor
Trustee, the successor Trustee shall cause the notice to be mailed at the
expense of the Company.
Section 410. Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute, acknowledge and
deliver to the Company and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act,
deed or conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee; but, on request of the Company or the successor
Trustee, such retiring Trustee shall, upon payment of its charges, execute and
deliver an instrument transferring to such successor Trustee all the rights,
powers and trusts of the retiring Trustee, and shall duly assign, transfer and
deliver to such successor Trustee all property and money and copies of books
and records held by such retiring Trustee hereunder. Upon request of any such
successor Trustee, the Company shall execute any and all instruments for more
fully and certainly vesting in and confirming to such successor Trustee all
such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at the time of such
acceptance such successor Trustee shall be qualified and eligible under this
Article.
Section 411. Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto. In case any PRs shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the PRs so authenticated with the same effect
as if such successor Trustee had itself authenticated such PRs; and such
certificate shall have the full force which it is anywhere in the PRs or in
this Agreement provided that the certificate of the Trustee shall have;
provided that the right to adopt the certificate of authentication of any
predecessor Trustee shall apply only to its successor or successors by merger,
conversion or consolidation.
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ARTICLE FIVE
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
Section 501. Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee (a)
semiannually, not later than [SIX MONTHS AFTER DATE OF PR] and [TWELVE MONTHS
AFTER DATE OF PR], a list, in such form as the Trustee may reasonably require,
of the names and addresses of the Holders as of [FIVE MONTHS 15 DAYS AFTER DATE
OF PR] and [ELEVEN MONTHS 15 DAYS AFTER DATE OF PR], respectively, and (b) at
such times as the Trustee may request in writing, within 30 days after receipt
by the Company of any such request, a list, in such form as the Trustee may
reasonably require, of the names and the addresses of the Holders as of a date
not more than 15 days prior to the time such list is furnished; provided,
however, that, if and so long as the Trustee shall be the security registrar,
no such list need be furnished.
Section 502. Preservation of Information; Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 501 and the names and
addresses of Holders received by the Trustee in its capacity as security
registrar. The Trustee may destroy any list furnished to it as provided in
Section 501 upon receipt of a new list so furnished.
(b) If three or more Holders (hereinafter referred to as "applicants") apply
in writing to the Trustee, and furnish to the Trustee reasonable proof that
each such applicant has owned a PR for a period of at least six months
preceding the date of such application, and such application states that the
applicants desire to communicate with other Holders with respect to their
rights under this Agreement or under the PRs and is accompanied by a copy of
the form of proxy or other communication which such applicants propose to
transmit, then the Trustee shall, within five Business Days after the receipt
of such application at its election, either
(1) afford such applicants access to the information preserved at the
time by the Trustee in accordance with Section 502(a), or
(2) inform such applicants as to the approximate number of Holders whose
names and addresses appear in the information preserved at the time by the
Trustee in accordance with Section 502(a), and as to the approximate cost
of mailing to such Holders the form of proxy or other communication, if
any, specified in such application.
If the Trustee shall elect not to afford such applicants access to such
information, the Trustee shall, upon the written request of such applicants,
mail to each Holder whose name and address appear in the information preserved
at the time by the Trustee in accordance with Section 502(a), a copy of the
form of proxy or other communication which is specified in such request, with
reasonable promptness after a tender to the Trustee of the material to be
mailed and of payment, or provision for the payment, of the reasonable expenses
of mailing, unless within five days after such tender, the Trustee shall mail
to such applicants and file with the Commission, together with a copy of the
material to be mailed, a written statement to the effect that, in the opinion
of the Trustee, such mailing would be contrary to the best interests of the
Holders or would be in violation of applicable law. Such written statement
shall specify the basis of such opinion. If the Commission, after opportunity
for a hearing upon the objections specified in the written statement so filed,
shall enter an order refusing to sustain any of such objections or if, after
the entry of an order sustaining one or more of such objections, the Commission
shall find, after notice and opportunity for hearing, that all the objections
so sustained have been met and shall enter an order so declaring, the Trustee
shall mail copies of such material to all such Holders with reasonable
promptness after the entry of such order and the renewal of such tender
otherwise the Trustee shall be relieved of any obligation or duty to such
applicants respecting their application.
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(c) Every Holder of PRs, by receiving and holding the same, agrees with the
Company and the Trustee that neither the Company nor the Trustee shall be held
accountable by reason of the disclosure of any such information as to the names
and addresses of the Holders in accordance with Section 502(b), regardless of
the source from which such information was derived, and that the Trustee shall
not be held accountable by reason of mailing any material pursuant to a request
made under Section 502(b).
Section 503. Reports by Trustee.
Within 60 days after [date selected by Trustee] of each year commencing with
the [date selected by Trustee] occurring after the initial issuance of PRs
hereunder, the Trustee shall transmit by mail to the Holders of PRs, in the
manner and to the extent provided in Section 313(c) of the Trust Indenture Act,
and to the Company a brief report dated as of such July 16 which satisfies the
requirements of Section 313(a) of the Trust Indenture Act.
Section 504. Reports by Company.
The Company shall:
(a) file with the Trustee, within 15 days after the Company is required
to file the same with the Commission, copies of the annual reports and of
the information, documents and other reports (or copies of such portions of
any of the foregoing as the Commission may from time to time by rules and
regulations prescribe) which the Company may be required to file with the
Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or,
if the Company is not required to file information, documents or reports
pursuant to either of said Sections, then it shall file with the Trustee
and the Commission, in accordance with rules and regulations prescribed
from time to time by the Commission, such of the supplementary and periodic
information, documents and reports which may be required pursuant to
Section 13 of the Exchange Act in respect of a security listed and
registered on a national securities exchange as may be prescribed from time
to time in such rules and regulations; and
(b) file with the Trustee and the Commission, in accordance with rules
and regulations prescribed from time to time by the Commission, such
additional information, documents and reports with respect to compliance by
the Company with the conditions and covenants of this Agreement as may be
required from time to time by such rules and regulations.
The Trustee shall transmit by mail to all Holders, as their names and
addresses appear in the Security Register, within 30 days after the filing
thereof with the Trustee, such summaries of any information, documents and
reports required to be filed by the Company pursuant to Subsections (a) and (b)
of this Section as may be required by rules and regulations prescribed from
time to time by the Commission.
ARTICLE SIX
AMENDMENTS
Section 601. Amendments Without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a Board
Resolution, and the Trustee, at any time and from time to time, may enter into
one or more amendments hereto, in form satisfactory to the Trustee, for any of
the following purposes:
(a) to convey, transfer, assign, mortgage or pledge to the Trustee as
security for the PRs any property or assets in addition to the Fund; or
(b) to evidence the succession of another Person to the Company, and the
assumption by any such successor of the covenants of the Company herein and
in the PRs; or
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(c) to add to the covenants of the Company such further covenants,
restrictions, conditions or provisions as its Board of Directors and the
Trustee shall consider to be for the protection of the Holders of PRs, and
to make the occurrence, or the occurrence and continuance, of a default in
any such additional covenants, restrictions, conditions or provisions an
Event of Default permitting the enforcement of all or any of the several
remedies provided in this Agreement as herein set forth; provided that in
respect of any such additional covenant, restriction, condition or
provision such amendment may provide for a particular period of grace after
default (which period may be shorter or longer than that allowed in the
case of other defaults) or may provide for an immediate enforcement upon
such an Event of Default or may limit the remedies available to the Trustee
upon such an Event of Default; or
(d) to cure any ambiguity, to correct or supplement any provision herein
which may be defective or inconsistent with any other provision herein, or
to make any other provisions with respect to matters or questions arising
under this Agreement; provided that in each case, such provisions shall not
materially adversely affect the interests of the Holders.
Section 602. Amendments with Consent of Holders.
With the consent of the Holders of not less than a majority of the
Outstanding PRs, by Act of said Holders delivered to the Company and the
Trustee, the Company, when authorized by a Board Resolution, and the Trustee
may enter into one or more amendments hereto for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Agreement or of modifying in any manner the rights of the Holders under
this Agreement; provided, however, that no such amendment shall, without the
consent of the Holder of each Outstanding PR affected thereby:
(a) modify the definition of First Anniversary Payment Date, First
Anniversary Payment, First Anniversary Stock, Breakpoint Amount,
Disposition Payment Date, Default Payment Date, Current Market Value or
Default Interest Rate or modify Sections 203 or 301(e) or reduce the
amounts payable in respect of the PRs;
(b) reduce the amount of the Outstanding PRs, the consent of whose
Holders is required for any such amendment; or
(c) modify any of the provisions of this Section, except to increase any
such percentage or to provide that certain other provisions of this
Agreement cannot be modified or waived without the consent of the Holder of
each PR affected thereby.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed amendment, but it shall be
sufficient if such act shall approve the substance thereof.
Promptly after the execution by the Company and the Trustee of any amendment
pursuant to the provisions of this Section, the Company shall mail a notice
thereof by first class mail to the Holders of PRs at their addresses as they
shall appear on the Security Register, setting forth in general terms the
substance of such amendment. Any failure of the Company to mail such notice, or
any defect therein, shall not, however, in any way impair or affect the
validity of any such amendment.
Section 603. Execution of Amendments.
In executing any amendment permitted by this Article, the Trustee shall be
entitled to receive, and (subject to Section 401) shall be fully protected in
relying upon, an Opinion of Counsel stating that the execution of such
amendment is authorized or permitted by this Agreement. The Trustee may, but
shall not be obligated to, enter into any such amendment which affects the
Trustee's own rights, duties or immunities under this Agreement or otherwise.
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Section 604. Effect of Amendments.
Upon the execution of any amendment under this Article, this Agreement shall
be modified in accordance therewith, and such amendment shall form a part of
this Agreement for all purposes; and every Holder of PRs theretofore or
thereafter authenticated and delivered hereunder shall be bound thereby.
Section 605. Conformity with Trust Indenture Act.
Every amendment executed pursuant to this Article shall conform to the
requirements of the Trust Indenture Act as then in effect.
Section 606. Reference in PRs to Amendments.
PRs authenticated and delivered after the execution of any amendment
pursuant to this Article may, and shall if required by the Trustee, bear a
notation in form approved by the Trustee as to any matter provided for in such
amendment. If the Company shall so determine, new PRs so modified as to
conform, in the opinion of the Trustee and the Board of Directors, to any such
amendment may be prepared and executed by the Company and authenticated and
delivered by the Trustee in exchange for Outstanding PRs.
ARTICLE SEVEN
COVENANTS
Section 701. Payment of Amounts, if Any, to Holders.
The Company will duly and punctually pay the cash amounts, or deliver shares
of Common Stock, if any, in the manner provided for in Section 307 on the PRs
in accordance with the terms of the PR Certificates and this Agreement, the
payment of such cash amounts or issuance of such shares constituting debt
obligations of the Company owing to the Holders.
Section 702. Maintenance of Office or Agency.
As long as any of the PRs remain Outstanding, the Company will maintain in
the Borough of Manhattan, The City of New York, an office or agency where PRs
may be presented or surrendered for payment. The Company also will maintain in
the Borough of Manhattan, The City of New York, an office or agency where
notices and demands to or upon the Company in respect of the PRs and this
Agreement may be served. The Company hereby initially designates the office of
at as the office or agency of the
Company where PRs may be presented for payment, and the Corporate Trust Office
as the office or agency where such notices or demands may be served, in each
case, unless the Company shall designate and maintain some other office or
agency for one or more of such purposes. The Company will give prompt written
notice to the Trustee of any change in the location of any such office or
agency. If at any time the Company shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at
the Corporate Trust Office of the Trustee, and the Company hereby appoints the
Trustee as its agent to receive all such presentations, surrenders, notices and
demands.
The Company may from time to time designate one or more other offices or
agencies (in or outside of The City of New York) where the PRs may be presented
or surrendered for any or all such purposes, and may from time to time rescind
such designation; provided, however, that no such designation or rescission
shall in any manner relieve the Company of its obligations as set forth in the
preceding paragraph. The Company will give prompt written notice to the Trustee
of any such designation or rescission and any change in the location of any
such office or agency.
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Section 703. Money for PR Payments to Be Held in Trust.
Whenever the Company shall have one or more Paying Agents for the PRs, it
will, on or before the First Anniversary Payment Date, the Disposition Payment
Date or the Default Payment Date, as the case may be, deposit with a Paying
Agent to the extent not available in the Fund a sum in same day funds
sufficient to pay the amount, if any, so becoming due, or the shares of Common
Stock then issuable, such sum or shares to be held in trust by the Trustee for
the benefit of the Persons entitled to such amount, and (unless such Paying
Agent is the Trustee) the Company will promptly notify the Trustee of such
action or any failure so to act.
The Company will cause each Paying Agent other than the Trustee to execute
and deliver to the Trustee an instrument in which such Paying Agent shall agree
with the Trustee, subject to the provisions of this Section, that (A) such
Paying Agent will hold all sums held by it for the payment of any amount
payable on PRs in trust for the benefit of the Persons entitled thereto until
such sums shall be paid to such Persons or otherwise disposed of as herein
provided and (B) that it will give the Trustee notice of any failure by the
Company (or by any other obligor on the PRs) to make any payment on the PRs
when the same shall be due and payable.
Any money (or securities) deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment on any PR and remaining
unclaimed for one year after the First Anniversary Payment Date, the
Disposition Payment Date or the Default Payment Date, as the case may be, shall
be paid or delivered to the Company on Company Request, or (if then held by the
Company) shall be discharged from such trust; and the Holder of such PR shall
thereafter, as an unsecured general creditor, look only to the Company for
payment or delivery thereof and all liability of the Trustee or such Paying
Agent with respect to such trust money (or securities of the Company) shall
thereupon cease, but the Company will remain obligated (subject to applicable
escheat laws) to pay the required amount or deliver the required Common Stock
as the case may be if PRs are thereafter presented to it.
Section 704. Fund; Investment of Moneys by Trustee.
To secure payments due on the PRs, the Company has deposited with the
Trustee $ [insert amount of Cash Fund as determined under the
Merger Agreement] (the "Fund"). These amounts shall be held by the Trustee for
the benefit of the Holders in trust and applied by the Trustee to the making of
all cash payments due on the PRs. The Company and the Trustee agree that the
deposit of the Fund with the Trustee constitutes a transfer of the Fund from
the Company to the Trustee to be held in trust for the benefit of the Holders.
Further, the Company hereby agrees that, subject only to the immediately
following sentence, upon the execution of this Agreement by the Trustee, the
Trustee will, without any further act of the Company, become the owner of and
be indefeasibly and irrevocably vested with the Fund in trust for the benefit
of the Holders on the terms and subject to the conditions of this Agreement.
Pending application of the monies as described above, such monies held by
the Trustee as part of the Fund shall, upon Company Request and as stated
therein, be invested or reinvested by the Trustee until required to be paid out
by the Trustee as provided in this Agreement, in any one or more of the
following (herein called "Permitted Investments"):
(1) obligations of or guaranteed by the United States of America or any
agency thereof for which the full faith and credit of the obligor shall be
pledged and which shall mature (except in the case of obligations
guaranteed by REA) not more than one year after the purchase thereof;
(2) obligations of any state or municipality, or subdivision or agency
of either thereof, which shall mature not more than one year after the
purchase thereof and are rated AA (or equivalent) or better by at least two
nationally recognized statistical rating organizations or having a
comparable rating in the event of any future change in the rating system of
such agencies;
(3) certificates of deposit issued by, or time deposits of, any bank or
trust company (including the Trustee) organized under the laws of the
United States of America or any State thereof having capital and
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surplus of not less than $500,000,000 (determined from its most recent
report of condition, if it publishes such reports at least annually
pursuant to law or the requirements of Federal or State examining or
supervisory authority) and maturing not more than one year after the
purchase thereof, or repurchase obligations entered into with any such
institution;
(4) commercial paper of bank holding companies or of other issuers
(excluding the Company) generally rated in the highest category by at least
two nationally recognized statistical rating organizations and maturing not
more than one year after the purchase thereof; and
(5) money market funds at least 95% of the assets of which are
investments of the type described in clauses (1)-(4) above.
Unless an Event of Default shall have occurred and be continuing, any interest
received by the Trustee on any such investments which shall exceed the amount
of accrued interest, if any, paid by the Trustee on the purchase thereof, and
any such profit which may be realized from any sale, redemption or maturity of
each investments, shall be paid to the Company. In case the net proceeds
realized upon any sale, redemption or maturity shall amount to less than the
purchase price paid by the Trustee in the purchase of the investments so sold,
the Trustee shall notify the Company in writing thereof, and the Company shall
pay to the Trustee the amount of the difference between such purchase price and
the amount so realized within three Business Days, and the amount so paid shall
be held by the Trustee in like manner and subject to the same conditions as the
proceeds realized upon such sale. Such investments shall be held by the Trustee
as a part of the Fund, but upon the Company Request the Trustee shall sell all
or any designated part of the same, and the proceeds of such sale shall be held
by the Trustee subject to the same provisions hereof as the cash used by it to
purchase the investments so sold. The Company will reimburse the Trustee for
any brokerage commissions or other expenses incurred by the Trustee in
connection with the purchase or sale of such investments. The Trustee may
aggregate such costs and expenses of and such receipts from such investments on
a monthly basis (or such other periodic basis as the Company and the Trustee
may agree in writing from time to time) so as to net each against the other
during such period and pay to the Company amounts due to it or notify the
Company of amounts due from it on a net basis for such period. Upon payment of
all Outstanding PRs out of the Fund or through issuance of Common Stock, or as
otherwise provided herein, any amounts remaining therein will be paid to the
Company.
The Company may at any time deliver a statement signed by a Company officer
showing in good faith that the amounts held in the Fund exceed the maximum
First Anniversary Payment, in which event and in the absence of any Event of
Default the Company may withdraw cash or investments so held in the amount of
the excess.
ARTICLE EIGHT
REMEDIES OF THE TRUSTEE AND HOLDERS
ON EVENT OF DEFAULT
Section 801. Event of Default Defined; Acceleration of Maturity; Waiver of
Default.
"Event of Default," with respect to PRs, means each one of the following
events which shall have occurred and be continuing (whatever the reason for
such Event of Default and whether it shall be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree or order of
any court or any order, rule or regulation of any administrative or
governmental body):
(a) default in the payment of all or any part of the cash amounts
payable in respect of any of the PRs as and when the same shall become due
and payable;
(b) a court having jurisdiction in the premises shall enter a decree or
order for relief in respect of the Company in an involuntary case under any
applicable bankruptcy, insolvency or other similar law now or
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hereafter in effect, or appointing a receiver, liquidator, assignee,
custodian, trustee or sequestrator (or similar official) of the Company or
for substantially all of its property or ordering the winding up or
liquidation of its affairs, and such decree or order shall remain unstayed
and in effect for a period of 60 consecutive days;
(c) the Company shall commence a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
consent to the entry of an order for relief in an involuntary case under
any such law, or consent to the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee or sequestrator (or
similar official) of the Company or for substantially all of its property,
or make any general assignment for the benefit of creditors; or.
(d) default in the issuance and delivery to the Holders of all or part
of the First Anniversary Stock (which must be listed on each securities
exchange or market on which the Common Stock is listed prior to the
issuance and delivery thereof) as and when the same shall become issuable
and deliverable.
If an Event of Default described above occurs and is continuing, then, and in
each and every such case, unless all of the PRs shall have already become due
and payable, either the Trustee or the Holders of not less than 25% of the PRs
then Outstanding hereunder by notice in writing to the Company (and to the
Trustee if given by the Holders) may declare the PRs to be due and payable
immediately, and upon any such declaration the Default Amount shall become
immediately due and payable from the Fund and, to the extent that sufficient
cash is not available in the Fund to make payment of the full Default Amount
(plus the Default Interest Rate) to all Holders, then the Trustee shall notify
the Company under Section 703, obtain such shortfall amount, and distribute the
full Default Amount (plus such additional amounts as arise out of application
of the Default Interest Rate) to the Holders (provided, that to the extent that
the Company does not immediately fulfill its obligations under Section 703,
then the Trustee shall pay and distribute on a pro rata basis to the Holders
all cash in the Fund, with the balance to be paid and distributed as soon as
possible thereafter). The Default Amount shall thereafter bear interest at the
Default Interest Rate until payment is made or duly provided for the benefit of
the Holders.
The foregoing provisions, however, are subject to the condition that if, at
any time after the PRs shall have been so declared due and payable, and before
any judgment or decree for the payment of the moneys due shall have been
obtained or entered as hereinafter provided, the Company shall pay or shall
deposit with the Trustee a sum sufficient to pay all amounts which shall have
become due otherwise than by acceleration (with interest upon such overdue
amount at the Default Interest Rate to the date of such payment or deposit) and
such amount as shall be sufficient to cover reasonable compensation to the
Trustee, its agents, attorneys and counsel, and all other expenses and
liabilities incurred and all advances made, by the Trustee except as a result
of negligence or bad faith, and if any and all Events of Default under this
Agreement, other than the nonpayment of the amounts which shall have become due
by acceleration, shall have been cured, waived or otherwise remedied as
provided herein, then and in every such case the Holders of a majority of all
the PRs then Outstanding, by written notice to the Company and to the Trustee,
may waive all defaults with respect to the PRs and rescind and annul such
declaration and its consequences, but no such waiver or rescission and
annulment shall extend to or shall affect any subsequent default or shall
impair any right consequent thereof.
Section 802. Collection of Indebtedness by Trustee; Trustee May Prove Debt.
The Company covenants that in case default shall be made in the payment of
all or any part of the PRs when the same shall have become due and payable,
whether at the First Anniversary Date, the Disposition Payment Date, the
Default Payment Date or otherwise, then upon demand of the Trustee, the Company
will pay to the Trustee for the benefit of the Holders of the PRs the whole
amount that then shall have become due and payable on all PRs (with interest
from the date due and payable to the date of such payment upon the overdue
amount at the Default Interest Rate); and, in addition thereto, such further
amount as shall be sufficient to cover the costs and expenses of collection,
including reasonable compensation to the Trustee and each predecessor Trustee,
their respective agents, attorneys and counsel, and any expenses and
liabilities incurred, and all advances made, by the Trustee and each
predecessor Trustee except as a result of its negligence or bad faith.
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In case the Company shall fail forthwith to pay such amounts upon such
demand, the Trustee, in its own name and as trustee of an express trust, shall
be entitled and empowered to institute any action or proceedings at law or in
equity for the collection of the sums so due and unpaid, and may prosecute any
such action or proceedings to judgment or final decree, and may enforce any
such judgment or final decree against the Company or other obligor upon such
PRs and collect in the manner provided by law out of the property of the
Company or other obligor upon such PRs, wherever situated, the moneys adjudged
or decreed to be payable.
In case there shall be pending proceedings relative to the Company or any
other obligor upon the PRs under Title 11 of the United States Code or any
other applicable Federal or State bankruptcy, insolvency or other similar law
of Canada or any province thereof or of any other applicable jurisdiction, or
in case a receiver, assignee or trustee in bankruptcy or reorganization,
liquidator, sequestrator or similar official shall have been appointed for or
taken possession of the Company or its property or such other obligor, or in
case of any other judicial proceedings relative to the Company or other obligor
upon the PRs, or to the creditors or property of the Company or such other
obligor, the Trustee, irrespective of whether the cash payment on any PRs shall
then be due and payable as therein expressed or otherwise and irrespective of
whether the Trustee shall have made any demand pursuant to the provisions of
this Section, shall be entitled and empowered, by intervention in such
proceedings or otherwise:
(a) to file and prove a claim or claims for the whole amount owing and
unpaid in respect of the PRs, and to file such other papers or documents as
may be necessary or advisable in order to have the claims of the Trustee
(including any claim for reasonable compensation to the Trustee and each
predecessor Trustee, and their respective agents, attorneys and counsel,
and for reimbursement of all expenses and liabilities incurred, and all
advances made, by the Trustee and each predecessor Trustee, except as a
result of negligence or bad faith) and of the Holders allowed in any
judicial proceedings relative to the Company or other obligor upon the PRs,
or to the creditors or property of the Company or such other obligor;
(b) unless prohibited by applicable law and regulations, to vote on
behalf of the Holders in any election of a trustee or a standby trustee in
arrangement, reorganization, liquidation or other bankruptcy or insolvency
proceedings or person performing similar functions in comparable
proceedings; and
(c) to collect and receive any moneys or other property payable or
deliverable on any such claims, and to promptly distribute the Fund and all
amounts receivable with respect to the claims of the Holders and of the
Trustee on their behalf and any trustee, receiver, or liquidator, custodian
or other similar official is hereby authorized by each of the Holders to
make payments to the Trustee, and, in the event that the Trustee shall
consent to the making of payments directly to the Holders, to pay to the
Trustee such amounts as shall be sufficient to cover reasonable
compensation to the Trustee, each predecessor Trustee and their respective
agents, attorneys and counsel, and all other expenses and liabilities
incurred, and all advances made, by the Trustee and each predecessor
Trustee except as a result of negligence or bad faith and all other amounts
due to the Trustee or any predecessor Trustee pursuant to Section 406.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or vote for or accept or adopt on behalf of any Holder
any plan of reorganization, arrangement, adjustment or composition affecting
the PRs or the rights of any Holder thereof, or to authorize the Trustee to
vote in respect of the claim of any Holder in any such proceeding except, as
aforesaid, to vote for the election of a trustee in bankruptcy or similar
person.
All rights of action and of asserting claims under this Agreement, or under
any of the PRs, may be enforced by the Trustee without the possession of any of
the PRs or the production thereof on any trial or other proceedings relative
thereto, and any such action or proceedings instituted by the Trustee shall be
brought in its own name as trustee of an express trust, and any recovery of
judgment, subject to the payment of the expenses, disbursements and
compensation of the Trustee, each predecessor Trustee and their respective
agents and attorneys, shall be for the ratable benefit of the Holders.
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In any proceedings brought by the Trustee (and also any proceedings
involving the interpretation of any provision of this Agreement to which the
Trustee shall be a party) the Trustee shall be held to represent all the
Holders, and it shall not be necessary to make any Holders of such PRs parties
to any such proceedings.
Section 803. Application of Proceeds.
Any monies (including PRs of the Company) collected by the Trustee pursuant
to this Article in respect of any PRs shall be applied in the following order
at the date or dates fixed by the Trustee upon presentation of the several PRs
in respect of which monies (including PRs of the Company) have been collected
and stamping (or otherwise noting) thereon the payment in exchange for the
presented PRs if only partially paid or upon surrender thereof if fully paid:
FIRST: To the payment of costs and expenses in respect of which monies
have been collected, including reasonable compensation to the Trustee and
each predecessor Trustee and their respective agents and attorneys and of
all expenses and liabilities incurred, and all advances made, by the
Trustee and each predecessor Trustee except as a result of negligence or
bad faith, and all other amounts due to the Trustee or any predecessor
Trustee pursuant to Section 406;
SECOND: To the payment of the whole amount then owing and unpaid upon
all the PRs, with interest at the Default Interest Rate on all such
amounts, and in case such moneys shall be insufficient to pay in full the
whole amount so due and unpaid upon the PRs, then to the payment of such
amounts without preference or priority of any PR over any other PR, ratably
to the aggregate of such amounts due and payable; and
THIRD: To the payment of the remainder, if any, to the Company or any
other person lawfully entitled thereto.
Section 804. Suits for Enforcement.
In case an Event of Default has occurred, has not been waived and is
continuing, the Trustee may in its discretion proceed to protect and enforce
the rights vested in it by this Agreement by such appropriate judicial
proceedings as the Trustee shall deem most effectual to protect and enforce any
of such rights, either at law or in equity or in bankruptcy or otherwise,
whether for the specific enforcement of any covenant or agreement contained in
this Agreement or in aid of the exercise of any power granted in this Agreement
or to enforce any other legal or equitable right vested in the Trustee by this
Agreement or by law.
Section 805. Restoration of Rights on Abandonment of Proceedings.
In case the Trustee shall have proceeded to enforce any right under this
Agreement and such proceedings shall have been discontinued or abandoned for
any reason, or shall have been determined adversely to the Trustee, then and in
every such case the Company and the Trustee shall be restored respectively to
their former positions and rights hereunder, and all rights, remedies and
powers of the Company, the Trustee and the Holders shall continue as though no
such proceedings had been taken.
Section 806. Limitations on Suits by Holders.
No Holder of any PR shall have any right by virtue or by availing itself of
any provision of this Agreement to institute any action or proceeding at law or
in equity or in bankruptcy or otherwise upon or under or with respect to this
Agreement, or for the appointment of a trustee, receiver, liquidator, custodian
or other similar official or for any other remedy hereunder, unless such Holder
previously shall have given to the Trustee written notice of default and of the
continuance thereof as hereinbefore provided, and unless also the Holders of
not less than 25% of the PRs then Outstanding shall have made written request
upon the Trustee to institute such action or proceedings in its own name as
trustee hereunder and shall have offered to the Trustee such reasonable
indemnity as it may require against the costs, expenses and liabilities to be
incurred therein or
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thereby and the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity shall have failed to institute any such action or
proceeding and no direction inconsistent with such written request shall have
been given to the Trustee pursuant to Section 809; it being understood and
intended, and being expressly covenanted by the taker and Holder of every PR
with every other taker and Holder and the Trustee, that no one or more Holders
of PRs shall have any right in any manner whatever by virtue or by availing
itself or themselves of any provision of this Agreement to effect, disturb or
prejudice the rights of any other such Holder of PRs, or to obtain or seek to
obtain priority over or preference to any other such Holder or to enforce any
right under this Agreement, except in the manner herein provided and for the
equal, ratable and common benefit of all Holders of PRs. For the protection and
enforcement of the provisions of this Section, each and every Holder and the
Trustee shall be entitled to such relief as can be given either at law or in
equity.
Section 807. Unconditional Right of Holders to Institute Certain Suits.
Notwithstanding any other provision in this Agreement and any provision of
any PR, the right of any Holder of any PR to receive payment of the amounts
payable or shares issuable in respect of such PR on or after the respective due
dates expressed in such PR, or to institute suit for the enforcement of any
such payment on or after such respective dates, shall not be impaired or
affected without the consent of such Holder.
Section 808. Powers and Remedies Cumulative; Delay or Omission Not Waiver of
Default.
Except as provided in Section 806, no right or remedy herein conferred upon
or reserved to the Trustee or to the Holders is intended to be exclusive of any
other right or remedy, and every right and remedy shall, to the extent
permitted by law, be cumulative and in addition to every other right and remedy
given hereunder or now or hereafter existing at law or in equity or otherwise.
The assertion or employment of any right or remedy hereunder, or otherwise,
shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
No delay or omission of the Trustee or of any Holder to exercise any right
or power accruing upon any Event of Default occurring and continuing as
aforesaid shall impair any such right or power or shall be construed to be a
waiver of any such Event of Default or an acquiescence therein; and, subject to
Section 806, every power and remedy given by this Agreement or by law to the
Trustee or to the Holders may be exercised from time to time, and as often as
shall be deemed expedient, by the Trustee or by the Holders.
Section 809. Control by Holders.
The Holders of a majority of the PRs at the time Outstanding shall have the
right to direct the time, method, and place of conducting any proceeding for
any remedy available to the Trustee, or exercising any trust or power conferred
on the Trustee with respect to the PRs by this Agreement; provided that such
direction shall not be otherwise than in accordance with law and the provisions
of this Agreement; and provided further that (subject to the provisions of
Section 401) the Trustee shall have the right to decline to follow any such
direction if the Trustee, being advised by counsel, shall determine that the
action or proceeding so directed may not lawfully be taken or if the Trustee in
good faith by its board of directors, the executive committee, or a trust
committee of directors or Responsible Officers of the Trustee shall determine
that the action or proceedings so directed would involve the Trustee in
personal liability or if the Trustee in good faith shall so determine that the
actions or forbearances specified in or pursuant to such direction would be
unduly prejudicial to the interests of Holders of the PRs not joining in the
giving of said direction, it being understood that (subject to Section 401) the
Trustee shall have no duty to ascertain whether or not such actions or
forbearances are unduly prejudicial to such Holders.
Nothing in this Agreement shall impair the right of the Trustee in its
discretion to take any action deemed proper by the Trustee and which is not
inconsistent with such direction or directions by Holders.
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Section 810. Waiver of Past Defaults.
In the case of a default or an Event of Default specified in clause (b) or
(c) of Section 801, the Holders of PRs of a majority of all the PRs then
Outstanding may waive any such default or Event of Default, and its
consequences, except a default in respect of a covenant or provisions hereof
which cannot be modified or amended without the consent of the Holder of each
PR affected. In the case of any such waiver, the Company, the Trustee and the
Holders of the PRs shall be restored to their former positions and rights
hereunder, respectively; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
Upon any such waiver, such default shall cease to exist and be deemed to
have been cured and not to have occurred, and any Event of Default arising
therefrom shall be deemed to have been cured, and not to have occurred for
every purpose of this Agreement; but no such waiver shall extend to any
subsequent or other default or Event of Default or impair any right consequent
thereon.
Section 811. Trustee to Give Notice of Default, but May Withhold in Certain
Circumstances.
The Trustee shall transmit to the Holders, as the names and addresses of
such Holders appear on the Security Register, notice by mail of all defaults
which have occurred, such notice to be transmitted within 90 days after the
occurrence thereof unless such defaults shall have been cured before the giving
of such notice (the term "default" or "defaults" for the purposes of this
Section being hereby defined to mean any event or condition which is, or with
notice or lapse of time or both would become, an Event of Default); provided
that, except in the case of default in the payment of the amounts payable in
respect of any of the PRs, the Trustee shall be protected in withholding such
notice if and so long as the board of directors, the executive committee, or a
trust committee of directors or trustees and/or Responsible Officers of the
Trustee in reasonable good faith determines that the withholding of such notice
is in the interests of the Holders.
Section 812. Right of Court to Require Filing of Undertaking to Pay Costs.
All parties to this Agreement agree, and each Holder of any PR by his
acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy
under this Agreement or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, the filing by any party litigant in such
suit of an undertaking to pay the reasonable costs of such suit, and that such
court may in its discretion assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in such suit, having due regard to
the merits and good faith or the claims or defenses made by such party
litigant; but the provisions of this Section shall not apply to any suit
instituted by the Trustee, to any suit instituted by any Holder or group of
Holders holding in the aggregate more than 10% of the PRs Outstanding or to any
suit instituted by any Holder for the enforcement of the payment of any PR on
or after the due date expressed in such PR.
ARTICLE NINE
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
Section 901. Company May Consolidate, Etc.
Without limiting the effect of provisions in the PRs relating to
Dispositions, the Company shall not consolidate with or amalgamate with or
enter into an arrangement with or merge into any other Person or convey,
transfer or lease its properties and assets substantially as an entirety to any
Person, unless:
(1) in case the Company shall consolidate with, amalgamate with or enter
into an arrangement with or merge into any other Person or convey, transfer
or lease its properties and assets substantially as an entirety to any
person, the Person formed by such consolidation or into which the Company
is merged or
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the Person which acquires by conveyance or transfer, or which leases, the
properties and assets of the Company substantially as an entirety (the
"Surviving Person") shall be a corporation, partnership or trust organized
and existing under the laws of Canada or of the United States of America,
any state or province thereof or the District of Columbia and shall
expressly assume payment of amounts on all the PRs and the performance of
every covenant of this Agreement on the part of the Company to be performed
or observed;
(2) immediately after giving effect to such transaction and treating any
indebtedness which becomes an obligation of the Surviving Person, the
Company or any Subsidiary as a result of such transaction as having been
incurred by the Surviving Person, the Company or such Subsidiary at the
time of such transaction, no Event of Default shall have happened and be
continuing; and
(3) the Company has delivered to the Trustee an Officer's Certificate,
stating that such consolidation, merger, conveyance, transfer or lease
complies with this Article and that all conditions precedent herein
provided for relating to such transaction have been complied with.
Section 902. Successor Substituted.
Upon any consolidation of or merger by the Company with or into any other
Person, or any conveyance, transfer or lease of the properties and assets
substantially as an entirety to any Person in accordance with Section 901, the
Surviving Person shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under this Agreement with the same effect
as if the Surviving Person had been named as the Company herein, and
thereafter, except in the case of a lease, the predecessor corporation shall be
relieved of all obligations and covenants under this Agreement and the PRs.
Section 903. Opinion of Counsel to Trustee.
The Trustee, subject to the provisions of Sections 401 and 402, may receive
an Opinion of Counsel, prepared in accordance with Sections 103 and 104, as
conclusive evidence that any such consolidation, merger, sale, lease or
conveyance, and any such assumption, and any such liquidation or dissolution,
complies with the applicable provisions of this Agreement.
* * * * * * *
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This Agreement may be signed in any number of counterparts with the same
effect as if the signatures to each counterpart were upon a single instrument,
and all such counterparts together shall be deemed an original of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed, and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
Corel Corporation
By: _________________________________
Title:
Attest: ________________________________
Title:
Bank Of New York
By: _________________________________
Title:
Attest: ________________________________
Title:
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ANNEX C
FORM OF PROXY AND VOTING AGREEMENT
PROXY AND VOTING AGREEMENT, dated as of July , 2001 (this "Agreement"),
among Corel Corporation, a Canadian corporation ("Corel"), Calgary I
Acquisition Corp., a Delaware corporation ("Sub"), Micrografx, Inc., a Texas
corporation ("Micrografx"), and the individual shareholders of Micrografx
listed on Schedule A hereto (collectively, the "Principals"). As used in this
Agreement, the term "Principal" means, with respect to each person listed on
Schedule A hereto, such person.
Corel, Sub and Micrografx are parties to a Merger Agreement dated July ,
2001 (the "Merger Agreement"; capitalized terms not defined herein shall have
the meanings ascribed to them in the Merger Agreement), pursuant to which
Micrografx would be merged with and into Sub.
WHEREAS, each Principal is the record holder and/or beneficial owner (as
defined in rule 13d-3 under the Securities and Exchange Act of 1934, as amended
(the "Exchange Act")) of such number of shares of Micrografx's outstanding
Common Stock or Micrografx's outstanding Series A Preferred Stock ("Micrografx
Stock") and securities convertible into Micrografx Stock as indicated on
Schedule A, which Schedule A sets forth the nature of such ownership.
WHEREAS, Micrografx and Sub are entering into the Merger Agreement in
reliance upon the execution and delivery of this Agreement by the Principals;
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
Section 1. Representations and Warranties. Each Principal represents and
warrants to Corel and Sub that:
(a) Each Principal owns, beneficially and/or of record, as of the date
hereof, the number of shares of Micrografx Stock or securities convertible
into Micrografx Stock set forth next to his name in Schedule A hereto
(collectively, the "Shares"), subject to no rights of others and free and
clear of all security interests, liens, claims, pledges, options, rights of
first refusal, agreements, limitations on the Principal's voting rights,
charges and other encumbrances of any nature whatsoever other than those
imposed by federal and state securities laws. On the date hereof, the
Shares constitute all of the shares of Micrografx Stock or securities
convertible into Micrografx Stock owned, beneficially and/or of record, by
each such Principal, other than shares of Micrografx Stock of which
Principal currently disclaims beneficial ownership in accordance with
applicable law. Principal's right to vote or dispose of the Shares owned,
beneficially and/or of record, by such Principal is not subject to any
voting trust, voting agreement, voting arrangement or proxy and such
Principal has not entered into any contract, option or other arrangement or
undertaking with respect thereto.
(b) Each Principal has the legal capacity to execute, deliver and
perform this Agreement and the Proxy (as defined in Section 2(c) below).
This Agreement constitutes a valid and binding obligation of each Principal
enforceable against such Principal in accordance with its terms. If such
Principal is an individual married and the Shares constitute community
property under applicable law, this Agreement has been duly authorized,
executed and delivered by, and constitutes the valid and binding agreement
of, the Principal's spouse enforceable against such spouse in accordance
with its terms. If such Principal is a person other than an individual,
such Principal has full power and authority to make, enter into and carry
out the terms of this Agreement and Proxy.
(c) The execution, delivery and performance by each Principal of this
Agreement and the consummation of the transactions contemplated hereby do
not and will not (i) result in any breach or violation of or be in conflict
with or constitute a default under the terms of any law, order, regulation
or
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agreement or arrangement to which he is a party or by which he is bound,
(ii) require any filing with or authorization by any governmental entity,
or (iii) require any consent or other action by any person under,
constitute a default under, or give rise to any right of termination,
cancellation or acceleration or to a loss of any benefit to which he is
entitled under any provision of any agreement or other instrument binding
on him.
(d) Each Principal does not beneficially own any Shares of Corel Common
Stock.
Section 2. Voting Agreement. (a) Until the Expiration Date (as defined in
Section 2(c) below), no Principal will assign, sell, pledge, hypothecate or
otherwise transfer or dispose of any of the shares of Micrografx Stock owned of
record and/or beneficially owned by such Principal, or any other securities of
Micrografx with respect to which he otherwise has the right to vote, or any
interest therein, deposit any of such shares or securities into a voting trust
or enter into a voting agreement or arrangement or grant any proxy with respect
thereto (except as contemplated by this Agreement and the Proxy) or enter into
any contract, option or other arrangement or undertaking with respect to the
direct or indirect transfer or disposition of any of the shares of Micrografx
Stock. In the case of any transfer by operation of law, this Agreement shall be
binding upon the transferee.
(b) Each Principal will, with respect to those shares of Micrografx
Stock or other securities of Micrografx that such Principal either owns for
voting at the Micrografx Shareholders Meeting to be held for the purpose of
voting on the adoption of the Merger Agreement or for granting any written
consent in connection with the solicitation of written consents in lieu of
such a meeting or with respect to which such Principal otherwise controls
the vote, vote or cause to be voted such shares (or execute written
consents with respect to such shares) (i) to approve the Merger Agreement
and the transactions contemplated thereby, (ii) against any Alternative
Proposal and (iii) in favor of any other matter necessary for the
consummation of the transactions contemplated by the Merger Agreement.
(c) Each Principal acknowledges that concurrently with the execution of
this Agreement, such Principal has executed and delivered to Corel an
Irrevocable Proxy, pursuant to Section 2.29 of the Texas Business
Corporation Act, coupled with an interest, the form of which is attached
hereto as Exhibit A (the "Proxy"), so as to vote such shares set forth
therein in accordance with this Section 2 and each Principal hereby grants
to Corel such irrevocable proxy. The terms of this proxy shall expire upon
approval by the requisite vote of Micrografx's Shareholders at the
Micrografx Shareholders Meeting or at any adjournment thereof of the
adoption of the Merger Agreement or upon the earlier termination of the
Merger Agreement in accordance with the provisions thereof (the "Expiration
Date").
(d) The Principals, Corel and Micrografx shall use commercially
reasonable efforts to cause the agreements in this Section 2 to be
appropriately disclosed in filings with the SEC, including the Registration
Statement referred to in the Merger Agreement.
(e) Principal agrees that any shares of Micrografx Stock that Principal
purchases or with respect to which Principal otherwise acquires beneficial
ownership (as such term is defined in Rule 13d-3 under the Exchange Act)
after the execution of this Agreement and prior to the Expiration Date
shall be subject to the terms and conditions of this Agreement to the same
extent as if they constituted Micrografx Stock.
Section 3. No Solicitation. Prior to the Closing Date, no Principal shall,
and each Principal shall use best efforts to cause such Principal's affiliates
and Representatives not to, (i) initiate, solicit or encourage, directly or
indirectly, any inquiries or the making or implementation of any Alternative
Proposal, or engage in any negotiations concerning, or provide any confidential
information or otherwise facilitate any effort or attempt to make or implement,
any Alternative Proposal or (ii) become a member of a "group" (as such term is
used in Section 13(d) of the Exchange Act) with respect to any voting
securities of Micrografx with respect to an Alternative Proposal. The
Principals will promptly notify Corel and Micrografx if any such inquiries,
proposals or offers are received by, any such information is requested from, or
any such negotiations are sought to be initiated or continued with, such
Principal or any of such Persons.
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Section 4. Binding Effect. All covenants, representations, warranties and
other stipulations in this Agreement and other documents referred to herein,
given by or on behalf of any of the parties hereto, shall bind and inure to the
benefit of the respective successors, heirs, personal representatives and
assigns of the parties hereto.
Section 5. Entire Agreement. This Agreement contains the entire agreement
among the parties with respect to the subject matter hereof and supersedes all
prior arrangements or understandings with respect hereto.
Section 6. Notices. All notices, requests, consents and other communications
hereunder to any party shall be deemed to be sufficient if contained in a
written instrument and shall be deemed to have been duly given when delivered
in person, by telecopy, by nationally-recognized overnight courier, or by first
class registered or certified mail, postage prepaid, addressed to such party at
the address set forth below or such other address as may hereafter be
designated in writing by the addressee to the addressor at the address and
telecopier numbers set forth in the Merger Agreement, with respect to Corel,
Sub and Micrografx, and at the addresses and telecopier numbers set forth in
Schedule A for the Principals. All such notices, requests, consents and other
communications shall be deemed to have been delivered when received.
Section 7. Modifications; Amendments; Waivers. The terms and provisions of
this Agreement may not be modified or amended, nor any provision hereof waived,
except pursuant to a writing signed by the parties hereto (including their
assigns). No waiver by any party of any term of this Agreement in any one or
more instances shall be deemed or construed as a waiver of such term on any
future occasion.
Section 8. Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to be an
original instrument, but all such counterparts together shall constitute but
one agreement.
Section 9. Headings. The headings of the various sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed to
be a part of this Agreement.
Section 10. Severability. It is the desire and intent of the parties that
the provisions of this Agreement be enforced to the fullest extent permissible
under the law and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any provision of this Agreement would be
held in any jurisdiction to be invalid, prohibited or unenforceable for any
reason, such provision, as to such jurisdiction, shall be ineffective, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of such provision in any other jurisdiction.
Notwithstanding the foregoing, if such provision could be more narrowly drawn
so as not to be invalid, prohibited or unenforceable in such jurisdiction, it
shall, as to such jurisdiction, be so narrowly drawn, without invalidating the
remaining provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction.
Section 11. Governing Law. This Agreement shall be governed by and construed
in accordance with the law of the State of Delaware, without giving effect to
principles governing conflicts of laws.
Section 12. Specific Performance: Remedies. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or equity. Except as otherwise expressly provided for herein, no
remedy conferred by any of the specific provisions of this Agreement is
intended to be exclusive of any other remedy, and each and every remedy shall
be cumulative and shall be in addition to every other remedy given hereunder or
now or hereafter existing at law or in equity or by statute or otherwise. The
election of any one or more remedies by any party hereto shall not constitute a
waiver by any such party of the right to pursue any other available remedies,
including specific performance and injunctive relief.
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Section 13. Consent to Jurisdiction; Service of Process. Each of the parties
hereto hereby irrevocably submits to the exclusive jurisdiction of the courts
of the State of Delaware and to the jurisdiction of the United States District
Court for the District of Delaware or any court of the State of Delaware
located in the County of New Castle, for the purpose of any action or
proceeding arising out of or relating to this Agreement and each of the parties
hereto hereby irrevocably agrees that all claims in respect to such action or
proceeding shall be heard and determined exclusively in any Delaware state or
federal court. Each of the parties hereto agrees that a final judgment in any
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Each of the parties hereto irrevocably consents to the service of the summons
and complaint and any other process in any other action or proceeding relating
to the transactions contemplated by this Agreement, on behalf of itself or its
property, by personal delivery of copies of such process to such party. Nothing
in this Section 13 shall affect the right of any party to serve legal process
in any other manner permitted by law.
Section 14. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF THE PARTIES HERETO IN THE
NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT THEREOF.
Section 15. Further Assurances. Each party covenants and agrees to execute
and deliver any additional documents or take such further actions as may
reasonably be requested by another party to effect the purposes of this
Agreement.
Section 16. Termination. This Agreement and the Proxy delivered in
connection herewith shall terminate and have no further force or effect as of
the Expiration Date.
[Signature Page Immediately Follows]
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IN WITNESS WHEREOF, the parties hereto have executed this Proxy and Voting
Agreement on the date first written above.
Corel Corporation
By:__________________________________
Name
Title
Calgary I Acquisition Corp.
By:__________________________________
Name:
Title:
Micrografx, Inc.
By:__________________________________
Name:
Title:
Principal:
By:__________________________________
Name:
Title:
By:__________________________________
Name:
Title:
By:__________________________________
Name:
Title:
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Schedule A
Number of
Number of Micrografx Amount of
Micrografx Series A Micrografx
Name of Record Common Preferred Convertible Options/
Owner Stock Stock notes Warrants
-------------- ---------- ---------- ----------- --------
C-6
ANNEX C
IRREVOCABLE PROXY
Each of the undersigned shareholders of Micrografx, Inc., a Texas
corporation ("Micrografx"), hereby irrevocably (to the fullest extent provided
by law, but subject to automatic termination and revocation as provided below)
appoints Corel Corporation, a Canadian corporation ("Corel"), or any designee
of Corel, the attorney and proxy of the undersigned, with full power of
substitution and resubstitution, to the full extent of each of the
undersigned's rights with respect to the shares of capital stock of Micrografx
owned beneficially or of record by the undersigned, which shares are listed in
Schedule A to the Proxy and Voting Agreement dated as of July , 2001, among
Corel, Calgary I Acquisition Corp., Micrografx and the individual stockholders
listed on Schedule A thereto, as the same may be amended from time to time (the
"Proxy and Voting Agreement", capitalized terms not otherwise defined herein
being used herein as therein defined), and any and all other shares or
securities of Micrografx issued or issuable with respect thereof or otherwise
acquired by the undersigned shareholders on or after the date hereof, until the
termination date specified in the Proxy and Voting Agreement (the "Shares").
Upon the execution hereof, all prior proxies given by the undersigned with
respect to the Shares are hereby revoked and no subsequent proxies will be
given as to the matters covered hereby prior to the earlier of the date of
termination of the Proxy and Voting Agreement pursuant to Section 16 thereof
(the "Termination Date") and the Closing Date of the Merger Agreement (such
earlier date being hereinafter referred to as the "Proxy Termination Date").
This proxy is irrevocable (to the fullest extent provided by law, but subject
to automatic termination and revocation as provided below), coupled with an
interest, and is granted in connection with the Proxy and Voting Agreement, and
is granted in consideration of the undersigned shareholders entering into the
Merger Agreement referred to therein.
The attorney and proxy named above will be empowered at any time prior to
the Proxy Termination Date to exercise all voting and other rights with respect
to the Shares (including, without limitation, the power to execute and deliver
written consents with respect to the Shares) of the undersigned at every
annual, special or adjourned meeting of shareholders of Micrografx held prior
to the Proxy Termination Date and in connection with every solicitation of
written consents in lieu of such a meeting prior to the Proxy Termination Date,
or otherwise, to the extent that any of the following matters is considered and
voted on at any such meeting or in connection with any such consent
solicitation: (i) approval of the Merger Agreement, the execution and delivery
by Micrografx of the Merger Agreement and the approval of the terms thereof and
each of the further actions contemplated by the Merger Agreement, and any
actions required in furtherance thereof; (ii) against any action, any failure
to act, or agreement that would result in a breach in any respect of any
covenant, representation or warranty or any other obligation or agreement of
Micrografx or the undersigned under the Merger Agreement or the Proxy and
Voting Agreement (before giving effect to any materiality or similar
qualifications contained therein); (iii) against any Alternative Proposal and
(iv) in favor of any other matter necessary for the consummation of the
transactions contemplated by the Merger Agreement.
The attorney and proxy named above may only exercise this proxy to vote the
Shares subject hereto in accordance with the preceding paragraph, and may not
exercise this proxy in respect of any other matter. The undersigned may vote
the Shares (or grant one or more proxies to vote the Shares) on all other
matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned shareholders.
This proxy is irrevocable and coupled with an interest, but shall
automatically terminate and be revoked and be of no further force and effect on
and after the Proxy Termination Date.
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This proxy is governed by and construed in accordance with the laws of the
State of Delaware.
Dated: July , 2001
By:
Name:
Title:
Number of Series A Preferred Stock: _
Number of Common Shares: ____________
Record Holder(s): ___________________
_____________________________________
By:
Name:
Title:
Number of Series A Preferred Stock: _
Number of Common Shares: ____________
Record Holder(s): ___________________
_____________________________________
By:
Name:
Title:
Number of Series A Preferred Stock: _
Number of Common Shares: ____________
Record Holder(s): ___________________
_____________________________________
C-8
ANNEX D
[Alliant Partners Letterhead]
July 16, 2001
Board of Directors
Micrografx, Inc.
8144 Walnut Hill Lane, Suite 1050
Dallas, TX 75231
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of Micrografx, Inc. ("Micrografx" or the "Company")
of the consideration to be received in the acquisition (the "Acquisition") of
Micrografx by Corel Corporation ("Corel"). As contemplated in the Merger
Agreement (the "Agreement") dated July 16, 2001, Micrografx shareholders will
be provided a total consideration of no less than approximately $31.1 million.
The form of the consideration provided will be determined by comparing the
average Corel share price for the ten trading days prior to closing the
transaction (the "Closing Share Price") with a stipulated Corel share price of
$2.90 (the "Signing Share Price"). Should the Closing Share Price be less than
the Signing Share Price, Corel, at its' sole discretion may pay approximately
$31.1 million in cash in exchange for all of the outstanding common stock and
preferred stock of Micrografx. Should Corel not exercise this option, or should
the Closing Share Price be higher than the Signing Share Price, the purchase
price will be increased by at least 3% to $32.03 million, payable as follows:
(1) 50% of the consideration, approximately $16.02 million, will be
payable in freely tradeable Corel common shares at Closing, or
approximately $1.01 per Micrografx share. Additionally, one
Participation Right (a "PR") would be issued at closing for each
Micrografx share.
(2) The nontransferable PR's would entitle the holders one year following
closing to receive additional consideration, with the exchange ratio
calculation and form of consideration dependent on the Corel share
price at that time.
a. If the Corel share price one year after closing (based on a 20
day trading average) is less than or equal to the Corel Closing
Share Price, Micrografx shareholders will receive approximately
$16.02 million cash consideration, or approximately $1.01 per
each.
b. If the Corel share price one year after Closing (based on a 20
trading day average) is greater than the Corel Closing Share
Price, Micrografx shareholders will receive consideration in
freely tradeable Corel common shares equal to approximately
$16.02 million (or $1.01 per share) plus 18% of the appreciation
in Corel's share price over the Closing Share Price.
To account for the one year delay on 50% of the minimum consideration, a
liquidity discount of 6.56% (current federal funds rate) has been applied to
50% of the minimum consideration, yielding a total consideration to be received
by Micrografx shareholders valued at no less than $31.05 million as of today's
date.
For purposes of the opinion set forth herein, we have:
(a) Reviewed certain internal financial statements and other financial and
operating data prepared by the management of Micrografx;
(b) Reviewed public financial statements and other information concerning
Micrografx and Corel;
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Board of Directors Page 2
Micrografx, Inc. July 16, 2001
(c) Discussed the past and current operations and financial condition of
Micrografx with senior executives of Micrografx;
(d) Discussed with the senior management of Micrografx the strategic
objectives of the Acquisition and the strategic alternatives available
to Micrografx;
(e) Discussed with the senior management of Corel the strategic objectives
of the Acquisition;
(f) Compared the financial performance of Micrografx with that of certain
other comparable publicly-traded companies and the prices paid for
securities in those publicly-traded companies;
(g) Reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(h) Performed a discounted cash flow analysis of Micrografx based on
financial guidance provided by Micrografx management;
(i) Assessed Micrografx's relative contribution to the combined entity
based on current financial performance;
(j) Reviewed the Agreement and certain related documents and discussed the
proposed terms of the transaction with managements of both Micrografx
and Corel; and
(k) Performed such other analyses and considered such other factors as we
have deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. The Micrografx financial and other information reviewed by
Alliant Partners in connection with the rendering of this opinion was limited
to publicly available information, information provided by Micrografx's senior
management regarding Micrografx's financial condition and future prospects, the
strategic objectives of the Acquisition as well as the strategic alternatives
available to Micrografx. In addition, we have assumed that the Acquisition will
be consummated in accordance with the terms set forth in the Agreement. We have
not made any independent valuation or appraisal of the assets or liabilities of
Micrografx, nor have we been furnished with any such appraisals. Our opinion is
necessarily based on economic, market and other conditions as in effect on, and
the information made available to us as of, the date hereof.
Our opinion addresses only the fairness of the transaction, from a financial
point of view, to the stockholders of Micrografx, and we do not express any
views on any other terms of the Agreement or the business and strategic bases
underlying the Agreement.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the total consideration to be received by the Micrografx
stockholders pursuant to the Agreement is fair, from a financial point of view,
to the Micrografx stockholders.
Very truly yours,
/s/
Alliant Partners
D-2
ANNEX E
ARTICLES 5.11, 5.12 AND 5.13 OF THE TEXAS BUSINESS CORPORATION ACT
Art. 5.11. Rights of Dissenting Shareholders in the Event of Certain Corporate
Actions
A. Any shareholder of a domestic corporation shall have the right to dissent
from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if shareholder
approval is required by Article 5.03 or 5.16 of this Act and the shareholder
holds shares of a class or series that was entitled to vote thereon as a class
or otherwise;
(2) Any sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise provided in
the articles of incorporation) of all, or substantially all, the property and
assets, with or without good will, of a corporation if special authorization of
the shareholders is required by this Act and the shareholders hold shares of a
class or series that was entitled to vote thereon as a class or otherwise;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in which the
shares of the corporation of the class or series held by the shareholder are to
be acquired.
B. Notwithstanding the provisions of Section A of this Article, a shareholder
shall not have the right to dissent from any plan of merger in which there is a
single surviving or new domestic or foreign corporation, or from any plan of
exchange, if:
(1) the shares held by the shareholder are part of a class or series, shares
of which are on the record date fixed to determine the shareholders entitled to
vote on the plan of merger or plan of exchange:
(a) listed on a national securities exchange;
(b) listed on the Nasdaq Stock Market (or successor quotation system) or
designated as a national market security on an interdealer quotation system
by the National Association of Securities Dealers, Inc., or successor
entity; or
(c) held of record by not less than 2,000 holders;
(2) the shareholder is not required by the terms of the plan of merger or
plan of exchange to accept for the shareholder's shares any consideration that
is different than the consideration (other than cash in lieu of fractional
shares that the shareholder would otherwise be entitled to receive) to be
provided to any other holder of shares of the same class or series of shares
held by such shareholder and
(3) the shareholder is not required by the terms of the plan of merger or
the plan of exchange to accept for the shareholder's shares any consideration
other than:
(a) shares of a domestic or foreign corporation that, immediately after
the effective time of the merger or exchange, will be part of a class or
series, shares of which are:
(i) listed, or authorized for listing on official notice of
issuance, on a national securities exchange;
(ii) approved for quotation as a national market security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc., or successor entity; or
(iii) held of record by not less than 2,000 holders;
(b) cash in lieu of fractional shares otherwise entitled to be received;
or
E-1
(c) any combination of the securities and cash described in Subdivisions
(a) and (b) of this subsection.
Art. 5.12. Procedure for Dissent by Shareholders as to Said Corporate Actions
A. Any shareholder of any domestic corporation who has the right to dissent
from any of the corporate actions referred to in Article 5.11 of this Act may
exercise that right to dissent only by complying with the following procedures:
(1) (a) With respect to proposed corporate action that is submitted to a
vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action, setting
out that the shareholder's right to dissent will be exercised if the action is
effective and giving the shareholder's address, to which notice thereof shall
be delivered or mailed in that event. If the action is effected and the
shareholder shall not have voted in favor of the action, the corporation, in
the case of action other than a merger, or the surviving or new corporation
(foreign or domestic) or other entity that is liable to discharge the
shareholder's right of dissent, in the case of a merger, shall, within ten (10)
days after the action is effected, deliver or mail to the shareholder written
notice that the action has been effected, and the shareholder may, within ten
(10) days from the delivery or mailing of the notice, make written demand on
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, for payment of the fair value of the shareholder's
shares. The fair value of the shares shall be the value thereof as of the day
immediately preceding the meeting, excluding any appreciation or depreciation
in anticipation of the proposed action. The demand shall state the number and
class of the shares owned by the shareholder and the fair value of the shares
as estimated by the shareholder. Any shareholder failing to make demand within
the ten (10) day period shall be bound by the action.
(b) With respect to proposed corporate action that is approved pursuant to
Section A of Article 9.10 of this Act, the corporation, in the case of action
other than a merger, and the surviving or new corporation (foreign or domestic)
or other entity that is liable to discharge the shareholder's right of dissent,
in the case of a merger, shall, within ten (10) days after the date the action
is effected, mail to each shareholder of record as of the effective date of the
action notice of the fact and date of the action and that the shareholder may
exercise the shareholder's right to dissent from the action. The notice shall
be accompanied by a copy of this Article and any articles or documents filed by
the corporation with the Secretary of State to effect the action. If the
shareholder shall not have consented to the taking of the action, the
shareholder may, within twenty (20) days after the mailing of the notice, make
written demand on the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, for payment of the fair value of
the shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was delivered
to the corporation pursuant to Section A of Article 9.10 of this Act, excluding
any appreciation or depreciation in anticipation of the action. The demand
shall state the number and class of shares owned by the dissenting shareholder
and the fair value of the shares as estimated by the shareholder. Any
shareholder failing to make demand within the twenty (20) day period shall be
bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of a
demand for payment made by a dissenting shareholder in accordance with
Subsection (1) of this Section, the corporation (foreign or domestic) or other
entity shall deliver or mail to the shareholder a written notice that shall
either set out that the corporation (foreign or domestic) or other entity
accepts the amount claimed in the demand and agrees to pay that amount within
ninety (90) days after the date on which the action was effected, and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed, or shall contain an estimate by the corporation
(foreign or domestic) or other entity of the fair value of the shares, together
with an offer to pay the amount of that estimate within ninety (90) days after
the date on which the action was effected, upon receipt of notice within sixty
(60) days after that date from the shareholder that the shareholder agrees to
accept that amount and, in the case of shares represented by certificates, on
the surrender of the certificates duly endorsed.
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(3) If, within sixty (60) days after the date on which the corporate action
was effected, the value of the shares is agreed upon between the shareholder
and the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, payment for the shares shall be made within ninety
(90) days after the date on which the action was effected and, in the case of
shares represented by certificates, upon surrender of the certificates duly
endorsed. Upon payment of the agreed value, the shareholder shall cease to have
any interest in the shares or in the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the
county in which the principal office of the domestic corporation is located,
asking for a finding and determination of the fair value of the shareholder's
shares. Upon the filing of any such petition by the shareholder, service of a
copy thereof shall be made on the corporation (foreign or domestic) or other
entity, which shall, within ten (10) days after service, file in the office of
the clerk of the court in which the petition was filed a list containing the
names and addresses of all shareholders of the domestic corporation who have
demanded payment for their shares and with whom agreements as to the value of
their shares have not been reached by the corporation (foreign or domestic) or
other entity. If the petition shall be filed by the corporation (foreign or
domestic) or other entity, the petition shall be accompanied by such a list.
The clerk of the court shall give notice of the time and place fixed for the
hearing of the petition by registered mail to the corporation (foreign or
domestic) or other entity and to the shareholders named on the list at the
addresses therein stated. The forms of the notices by mail shall be approved by
the court. All shareholders thus notified and the corporation (foreign or
domestic) or other entity shall thereafter be bound by the final judgment of
the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The
appraisers shall have power to examine any of the books and records of the
corporation the shares of which they are charged with the duty of valuing, and
they shall make a determination of the fair value of the shares on such
investigation as to them may seem proper. The appraisers shall also afford a
reasonable opportunity to the parties interested to submit to them pertinent
evidence as to the value of the shares. The appraisers shall also have such
power and authority as may be conferred on Masters in Chancery by the Rules of
Civil Procedure or by the order of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, pursuant to the payment of
the agreed value of the shares or pursuant to payment of the
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