-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Crz2m8a7mtzMK5LbIg6Glh6hMsrZL7J1t+yOueBRESmZUUKfDE/Jq7bctU/iI99X aGa07a9QyneG9+IQqTZAMQ== 0001012870-98-000588.txt : 19980304 0001012870-98-000588.hdr.sgml : 19980304 ACCESSION NUMBER: 0001012870-98-000588 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971130 FILED AS OF DATE: 19980302 SROS: NASD 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: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20562 FILM NUMBER: 98554887 BUSINESS ADDRESS: STREET 1: 1600 CARLING AVE CITY: OTTAWA ONTARIO CANAD STATE: A6 BUSINESS PHONE: 6137288200 MAIL ADDRESS: STREET 1: 1600 CARLING AVENUE CITY: OTTAWA STATE: A6 10-K405 1 FORM 10-K405 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1997 Commission File Number 0-20562 COREL CORPORATION (Exact name of Registrant as specified in its Charter) CANADA NOT APPLICABLE (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1600 CARLING AVENUE, OTTAWA, ONTARIO, CANADA K1Z 8R7 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (613) 728-8200 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON SHARES WITHOUT NOMINAL OR PAR VALUE (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of Common Shares held by non-affiliates of the registrant, based on the last reported sales price of the Common Shares as reported on the NASDAQ National Market on February 26, 1998 was $126,110,771. As of that date 59,346,217 Common Shares were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1997 Annual Report to Shareholders are incorporated by reference into Parts II and IV. ================================================================================ COREL CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1997 INDEX PART I Item 1. Business......................................................................... 3 Item 2. Properties....................................................................... 11 Item 3. Legal Proceedings................................................................ 11 Item 4. Submission of Matters to a Vote of Security Holders.............................. 12 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........ 13 Item 6. Selected Financial Data.......................................................... 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of....... 15 Operations Item 8. Financial Statements and Supplementary Data...................................... 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial........ 16 Disclosures PART III Item 10. Directors and Executive Officers of the Registrant............................... 17 Item 11. Executive Compensation........................................................... 19 Item 12. Security Ownership of Certain Beneficial Owners and Management................... 23 Item 13. Certain Relationships and Related Transactions................................... 23 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................. 24 Signatures.................................................................................. 25
All financial information contained in this report is expressed in United States dollars, unless otherwise stated. 2 PART I ITEM 1. BUSINESS GENERAL ________________________________________________________________________________ The Company was incorporated as Corel Systems Corporation under the Canada Business Corporations Act by Articles of Incorporation dated May 29, 1985. The name of the Company was changed to Corel Corporation in May 1992. For the purposes of this report, unless the context otherwise requires, "Corel" refers to the consolidated operations of Corel Corporation and its wholly owned subsidiaries, Corel Corporation Limited, Corel Computer Corporation, Corel International Corporation, Corel Inc. and Corel Corporation (U.S.A.), while "the Company" refers to the parent, Corel Corporation. Corel develops, manufactures, licenses, sells and supports a wide range of software products including graphics applications, business and consumer productivity applications, multimedia titles and communications applications. Corel is also engaged in the research and development of advanced technology software such as products for the new Webtop environment, which includes Java, XML and HTML. Corel products are available for users of most PCs, including International Business Machines Corporation ("IBM/(R)/") and IBM-compatible PCs, Apple Computer Inc.'s ("Apple") Macintosh/(R)/ ("Mac"), and UNIX-based systems. During the second quarter, Corel recorded a nonrecurring charge totaling $113.7 million. The charge consisted of write-downs of previously capitalized acquired technologies for the WordPerfect family of software programs and deferred development costs in the form of advance royalties paid to various developers of the Corel CD HOME Collection and Corel Medical Series software. Both multimedia product lines were sold to Hoffman + Associates Inc. of Toronto for cash, a minority interest in the acquiring company and an ongoing royalty stream over a period of time. During the same quarter, Corel announced the formation of a spin-off company, Corel Computer Corporation. This subsidiary develops and sells video and network computer products, and offers turnkey computing and communication solutions for corporate users. On September 30, 1997, Corel sold various consumer product software lines to IMSI (International Microcomputer Software, Inc.). These lines included CorelCAD, Corel Visual CADD, CorelFLOW, Corel Lumiere Suite, Corel Click & Create and Corel Family Tree Suite. Corel sold these lines for cash, marketable securities in the acquiring company and an ongoing royalty stream over a period of time. On January 20, 1998, Corel issued a press release announcing its financial results for the fourth quarter and the restatement of financial information for the first three quarters of fiscal 1997. The restatement related to certain Java technology exchange transactions undertaken by Corel during the first three quarters of the year. In that press release, Corel reported, in part, that the restatement had the effect of eliminating revenues and the amortization of related costs previously reported in connection with those transactions. The press release stated that the accounting treatment of these transactions in the first three quarters was considered appropriate at the time and that the treatment adopted in the restatement resulted from further consideration by Corel's auditors in connection with the year end audit. The release, which was included as an exhibit to a Report on Form 8-K filed by Corel with the Securities and Exchange Commission in January 1998, provided further information concerning the effects of the restatement on previously reported quarterly results and results for the fiscal year. See "Legal Proceedings." Corel's business strategy emphasizes the development of a broad line of PC software application products for business and personal use, marketed through multiple channels of distribution. Corel is divided into three broad areas: the Software Development Group; the Sales and Customer Support Group; and the Operations and Administration Group. The Software Development Group consists of four divisions, each responsible for a particular area of software development. The Graphics Software Division develops graphics software applications and products designed for the business, academic and home markets. The Productivity Applications Division creates business productivity applications and products designed for the business, academic and home markets. The Multimedia Software Division develops the CD-ROM Photo titles and the small computer system interface ("SCSI) software. The Communications Applications Division, operating as Corel Computer Corporation, develops video communication software and hardware. 3 The Sales and Customer Support Group is responsible for building long-term business relationships with customers. This group is organized to serve three customer types: end-users, original equipment manufacturers ("OEMs") and enterprises. The group also focuses directly on large organizations, offering tailored license programs and organization-wide support. The group manages the channels that serve customers by working with distributors, resellers and OEMs. The group supports Corel's products with technical support and customer service for end-users and organizations. The Operations and Administration Group is responsible for managing business operations and overall business planning. This includes the process of manufacturing and delivering finished goods and licenses, and corporate functions such as finance, administration, human resources and legal. PRODUCTS GRAPHICS SOFTWARE APPLICATIONS ________________________________________________________________________________ The Graphics Software Division develops graphics applications software, which provides the PC with instructions for creating and manipulating graphics, text, or numbers. Corel's graphics software applications are designed to meet the needs of general business users, graphics professionals, and home PC users. Primary examples of graphics software applications include illustration, photo editing and painting, 3D rendering, and animation programs. Corel's graphics software applications programs are developed principally for the Microsoft Corporation ("Microsoft/(R)/") Windows/TM/ ("Windows") and Macintosh operating systems. CORELDRAW. CorelDRAW/TM/ is a suite of software programs featuring integration of all of the major graphics functions that share a common "look and feel". CorelDRAW modules feature common commands and extensive use of object linking and embedding ("OLE") cross-application capabilities. CorelDRAW is available in several versions, with certain combinations of modules, supporting utilities, clipart images, fonts, photos and 3D models available for the various operating system platforms. Versions of CorelDRAW include: CorelDRAW 8 and CorelDRAW 7, 32-bit suites designed to run under Windows 95 and Windows NT, CorelDRAW 6 Suite for Power Macintosh and CorelDRAW 5 for Windows 3.x. The CorelDRAW module is an illustration program allowing users to produce color illustrations incorporating both text and objects. The Corel PHOTO-PAINT/TM/ module is a photo-editing and painting module that enables users to apply global photo-retouching and pixel by pixel editing to scanned or photographic images. The Corel DREAM 3D module is a spline-based 3D modeling and rendering application that allows users to create 3D illustrations with predefined models and surface textures, lighting controls and high resolution rendering. Supporting utilities include Corel TEXTURE/TM/, a tool for creating realistic natural textures, Corel OCR-TRACE/TM/, a bitmap-to-vector conversion utility for images and text, Corel DEPTH/TM/, a tool for applying 3D effects to text and graphics, Corel SCAN/TM/, a wizard-based scanning utility with preset processing options, and Corel CAPTURE/TM/, a tool for capturing portions of, or the entire, application window. CorelDRAW has the leading market share in the illustration segment of the Windows graphics software market with an installed base of over 6.3 million units worldwide. COREL PRINT HOUSE/TM/, COREL PRINT & PHOTO HOUSE/TM/ AND COREL PRINT HOUSE/TM/ MAGIC. Corel Print House was developed as a graphics tool for home and small business design projects. Designed to run under Windows 95 and Windows NT, Corel Print House can be used to create greeting cards, banners, invitations, business cards, signs, calendars, menus, fax report covers, certificates and labels. Corel Print & Photo House adds photo-editing and bitmap creation capabilities that allow users to scan in their own photographs and touch them up or add special effects. Corel Print House Magic is a suite of applications which include Corel Print House 3, Corel Photo House 2 and an all-in-one Calendar, Address Book and List Manager. COREL GALLERY/TM/, COREL GALLERY 2/TM/, COREL MEGA GALLERY/TM/ AND COREL GALLERY/TM/ MAGIC. Published on a single CD-ROM, Corel GALLERY is a visual clipart manager containing 10,000 of the clipart images that are included with CorelDRAW separated into over 50 categories. Corel GALLERY 2 contains 15,000 clipart images, 500 royalty-free photos, 500 fonts, 75 sound clips and 10 video clips. Corel MEGA GALLERY contains over 50,000 vector clipart images, 60,000 Internet-ready professional photos, 1,000 fonts, 200 sound clips, and 100 video clips. Corel GALLERY Magic 65,000 contains 25,000 vector clipart images, 40,000 photos, 500 fonts, 100 animated GIFs and 100 Web theme sets. Corel GALLERY Magic 200,000 is a collection of 105,000 4 clipart images, 80,000 photos and hundreds of fonts, animated GIFs, sounds, video clips and Web theme sets. All versions of Corel GALLERY allows users to drag and drop any of these images into any OLE compatible application or export images to several industry standard formats. COREL PHOTO-PAINT. Corel PHOTO-PAINT is a photo-editing and painting program that enables users to apply global photo-retouching and pixel by pixel editing to scanned or photographic images. Corel PHOTO-PAINT is available in various versions: Corel PHOTO-PAINT 8, Corel PHOTO-PAINT 7 Plus and Corel PHOTO-PAINT 6 for Windows 95 and Windows NT; and Corel PHOTO-PAINT 5 Plus for Windows 3.x. COREL GRAPHICS PACK. Corel Graphics Pack includes five, fully integrated graphics programs with a wizard-driven, task oriented user interface which prompts the user to the appropriate program particular to the project selected and guides them step by step through to completion of the task. Designed for Windows 95, Corel Graphics Pack includes Corel Print House; CorelFLOW 3, a business graphics and technical diagraming program; Corel PHOTO-PAINT 6; Corel MOTION 3D 6, an animation tool and internet utilities; and Corel PRESENTS 6, a presentation graphics program. CORELWEB.GRAPHICS SUITE. CorelWEB.GRAPHICS SUITE includes six HTML authoring, animation and graphics programs designed for Windows 3.x, Windows 95 and Windows NT which allow users to create web pages for the Internet or corporate intranet. CorelWEB.GRAPHICS SUITE includes: CorelWEB.DESIGNER, Internet authoring software requiring no HTML programming knowledge and using a familiar word processor- style interface; CorelWEB.Transit, a tool to convert legacy documents into HTML format; CorelWEB.GALLERY, a library of over 7,500 Internet-ready images; CorelWEB.MOVE, software to add animations to Web pages; CorelWEB.WORLD, a tool that enables the user to turn a Web site into an interactive virtual reality; and CorelWEB.DRAW, software to create and edit illustrations using CorelDRAW technology. COREL WEBMASTER SUITE. Corel WebMaster Suite offers a complete solution for creating Intranet and Internet web sites. Corel WebMaster Suite includes: Corel WEB.DESIGNER, Internet authoring software using a familiar word processor-style interface; Corel WEB.SiteManager, a tool that allows the user to manage local and remote Web sites; Corel WEB.WORLD enables the user to turn a Web site into an interactive reality; Corel WEB.MOVE, software that creates animation; design and bitmap editing as well as the ability to do database and Java-based publishing. COREL VENTURA/TM/. Corel VENTURA is a suite of high-end desktop publishing software programs for publishing documents of any size, length or complexity. The latest version of Corel VENTURA, Corel VENTURA 7, allows users to publish Corel VENTURA 7 documents to HTML, portable electronic formats, such as Corel Envoy/TM/ and Adobe Acrobat/(R)/, a CD-ROM, over an internal network, or on the Internet. Corel VENTURA is available in two versions: Corel VENTURA 7 for Windows 95 and Windows NT, and Corel VENTURA 5 for Windows 3.x. COREL XARA/TM/. CorelXARA, designed for Windows 3.x, Windows for Workgroups, Windows 95 and Windows NT, is a vector and bitmap drawing program allowing the user to create photo-realistic images using powerful artistic tools such as anti-aliasing, graduated transparency and stepless graduated fills. Tools for web page graphics publishing are also included. OTHER GRAPHICS SOFTWARE PRODUCTS. On September 30, 1997, Corel sold to IMSI various graphics software titles in exchange for cash, marketable securities in the acquiring company and an ongoing royalty stream over a period of time. The software product lines sold included CorelCAD/TM/, Corel Visual CADD/TM/, CorelFLOW/TM/, Corel Click & Create/TM/, Corel Lumiere/TM/ and Corel Family Tree Suite/TM/. PRODUCTIVITY SOFTWARE APPLICATIONS ________________________________________________________________________________ Corel's productivity applications software are designed for use by a broad class of end-users, regardless of business, industry, or market segment. Primary examples of productivity software applications are word processing, spreadsheet, and presentation graphics programs. Corel's productivity software applications are developed for Windows, Macintosh, DOS and UNIX operating systems. COREL WORDPERFECT SUITE. Corel WordPerfect/(R)/ Suite is a suite of software programs featuring seamless integration 5 of the most commonly used desktop applications. Corel WordPerfect Suite combines document creation with graphics and Internet capabilities. There are several versions of Corel WordPerfect Suite available: Corel WordPerfect Suite for DOS; Corel WordPerfect Suite 7 for Windows 3.x; and Corel WordPerfect Suite 7 and WordPerfect Suite 8 for Windows 95 and Windows NT. In each of the 16-bit versions, certain combinations of the following programs are included: Corel WordPerfect; Corel Quattro/(R)/ Pro; Corel Presentations/TM/; CorelFLOW; Envoy electronic publishing software; Starfish Software's Sidekick personal information manager; Starfish Software's Dashboard integrated application and task-automation launcher; AT&T WorldNet Service software including Netscape Navigator Internet browser; 150 fonts and 10,000 clipart images. Corel WordPerfect Suite 8 and Corel WordPerfect Suite 7 for Windows 95 and Windows NT contain 32-bit versions of Corel WordPerfect, Corel Quattro/(R)/ Pro, Corel Presentations/TM/. Corel also created versions of Corel WordPerfect Suite for three key business sectors - legal, medical and construction. Corel Office Professional 7 - Medical Edition, Corel WordPerfect Suite 7 - Construction Edition and Corel WordPerfect Suite 7 - Legal Edition offer all the features found in the Corel WordPerfect Suite 7 along with industry-specific applications and resources. COREL OFFICE PROFESSIONAL. Corel Office Professional is a suite of software programs which, depending on the version, includes enhanced Internet connectivity, graphics, and database features. Corel Office Professional is available in three versions: Corel Office Professional for Windows 3.x; Corel Office Professional 8 and Corel Office Professional 7 for Windows 95 and Windows NT with certain combinations of products available for the two operating system platforms. Products offered in Corel Office Professional for Windows 3.x and Corel Office Professional 7 versions include all of the components of Corel WordPerfect Suite plus the Corel Paradox/TM/ database management program and the InfoCentral/TM/ database information manager. Corel Office Professional 8 and Corel Office Professional 7 also include the CorelDRAW 6 illustration module, the Corel Time Line/(R)/ project management software, Corel Barista/TM/ technology which allows users to publish to the Java/TM/ language, QuickTasks/TM/ cross-application automation tool, and an additional 850 fonts. Among the features offered in Corel Office Professional 8 are Corel WEB.SiteBuilder 8, a tool which simplifies the process of creating and managing a Web site; CorelCENTRAL/TM/ 8, a personal information manager with fully integrated Netscape Communicator; Grolier Multimedia Encyclopedia Deluxe Edition 1998, a comprehensive online encyclopedia; and Corel Paradox 8. COREL WORDPERFECT. Corel WordPerfect is Corel's principal word processing program providing all the features that users of word processing products expect plus the ability to handle graphics, tables, spreadsheet data, charts, and images imported from other software programs. Corel WordPerfect is available on a stand-alone basis for the Macintosh, DOS and UNIX operating systems, while Windows versions are available only as components of Corel WordPerfect Suite or Corel Office Professional. COREL QUATTRO PRO. Corel Quattro Pro is an integrated spreadsheet with database, business graphics and, in version 7, Internet capabilities. Corel Quattro Pro is available in two versions: Corel Quattro Pro 6.0 for Windows 3.x and Corel Quattro Pro 7 for Windows 95. COREL PARADOX. Corel Paradox, a powerful data management tool, delivers advanced features such as the ability to publish a database to the Web. It is offered in several configurations including a retail version and a Java runtime version. COREL PRESENTATIONS. Corel Presentations is a presentation graphics program for producing slides, overheads, transparencies and prints. Corel Presentations is available in two versions: Corel Presentations 3 for Windows 3.x and Corel Presentations 7 for Windows 95. MULTIMEDIA SOFTWARE PRODUCTS ________________________________________________________________________________ The Multimedia Software Division develops photo CD titles (for both the Internet and retail markets) as well as peripheral interface software for PCs. COREL PROFESSIONAL PHOTO TITLES. Corel Professional Photo titles on CD-ROM provides an easy and inexpensive way for people to use professional photographs in all their visual communications. Corel Professional Photos are available on individual CDs (100 photos per CD), in packages of 10 CDs (100 photos per CD) or in one of three Corel Stock Photo Libraries, each of which consists of 200 Corel Professional Photos CD-ROM titles. Individual 6 Corel Professional Photos can also be downloaded from Corel's World Wide Web home page. COREL CD HOME AND COREL MEDICAL SERIES TITLES. In May, 1997, Corel sold all software titles in the Corel CD HOME and Corel Medical series to Hoffmann + Associates for cash, a minority interest in the acquiring company as well as an ongoing royalty stream over a time period. PERIPHERAL INTERFACE SOFTWARE. CorelSCSI/TM/ is a software package that allows users to link up to seven peripheral devices with a single host adapter card. CorelSCSI supports most major SCSI peripherals, including CD-ROM and other optical drives, hard disk drives, tape drives, printers and scanners. COMMUNICATIONS APPLICATIONS PRODUCTS ________________________________________________________________________________ In the second quarter, Corel announced the formation of a spin-off company, Corel Computer Corporation. This subsidiary develops and sells video and network computer products, and offers turnkey computing and communication solutions for corporate users. Corel's current desktop video communications product, CorelVIDEO/TM/, is a hardware and software solution that provides television quality video and audio, along with extensive communications features such as broadcast, multi-party conferencing, data sharing, and telephony. Within the local environment, CorelVIDEO uses a single pair of existing unused category 5 UTP wires to transport audio and video signals without impacting network traffic. RESEARCH AND DEVELOPMENT ________________________________________________________________________________ The PC software industry is characterized by frequent changes in technology and user preferences, which require constant attention to software technology trends, shifting consumer demand and rapid product innovation. The pace of change has recently increased due to the burgeoning interest in the Internet, networking in general, and new programming languages such as Java. Accordingly, Corel must be able to provide new software products and modify and enhance existing products on a timely and continuing basis to be competitive. Corel employs a strategy of both internally developing software, including overseeing third party development for certain products, and acquiring or licensing technology that will, in most cases, be enhanced by Corel. Corel believes that its ability to maintain technological competitiveness will depend in large part upon its ability to successfully enhance its existing products, develop new products on a timely basis and acquire or license complementary technologies and products in a timely manner. The Company strives to become as informed as possible at an early stage about changing usage patterns and hardware advances that may affect software design. In order to better serve the needs of users outside of Canada and the United States, Corel "localizes" many of its products to reflect local languages and conventions. Various Corel products have been localized into more than 20 languages. Corel's research and development expenses were $27.2 million, $65.9 million and $89.5 million in fiscal 1995, 1996 and 1997 respectively. Those amounts represented approximately 13%, 20%, and 34%, respectively, of sales in each of those years. Software acquired or licensed for incorporation into Corel's product line totaled $11.7 million in fiscal 1995, $171.1 million in fiscal 1996, of which $153.4 million was for the acquisition of the WordPerfect technology on March 1, 1996, and $12.2 million in fiscal 1997. Corel intends to continue significant expenditures for research and development activities. MANUFACTURING ________________________________________________________________________________ The principal materials and components used in Corel's products include computer media (diskettes, CD-ROMs or tapes), documentation, and video hardware in the case of CorelVIDEO. Corel is often able to acquire component parts and materials on a volume discount basis. Corel contracts all of its manufacturing activity to third parties. Manufacturing involves the duplication of computer media and user manuals, assembly of components, spot testing of the product and final packaging, in accordance 7 with Corel's specifications. Corel believes there is an adequate supply of and source for the raw materials used in its products, and that multiple sources are available for media duplication, manual printing and final packaging. Corel's products are generally shipped as orders are received and, accordingly, Corel has historically operated with little backlog. MARKETING, SALES AND DISTRIBUTION ________________________________________________________________________________ Corel's marketing and sales efforts are directed towards several customer types, including end-users, corporate accounts, and OEMs. Corel's marketing and sales staff seeks to build long-term relationships with customers and end-users of Corel products. In addition to the OEM channel, Corel has three major geographic sales and marketing areas: North America, Europe and the rest of the world. End-user marketing activities cover all of Corel's products and target end-users who make individual buying decisions for the PCs they use at work or at home. Marketing activities aimed at end-users include developing and administering reseller relationships, channel marketing and promotions, end-user marketing programs and seminars, events and product training for resellers. The Corporate Licensing unit has responsibility for sales and marketing activities that target groups of users in all organizations and enterprises. The unit works directly with these organizations and enterprises, as well as with channel partners such as distributors, value-added resellers and large account resellers, to provide complete desktop productivity solutions to this customer segment. The unit's sales and marketing activities include providing technical training to channel resellers, supporting and providing seminars, events, and sales training for channel partners. The unit also has responsibility for administering the Corel License Programs worldwide. Key products for the Corporate Licensing unit are graphics and productivity software applications. The OEM customer unit works with original equipment manufacturers that preinstall or bundle Corel software on their PCs or peripheral hardware. FINISHED GOODS CHANNELS ________________________________________________________________________________ DISTRIBUTORS AND RESELLERS. Corel sells its products worldwide to over 160 distributors for resale through software resellers. Distributors include Ingram Micro, Merisel, Tech Data, and Computer 2000. Resellers include MicroWarehouse and Multiple Zones International. Within the United States and Canada, Corel has sales representatives and support personnel who solicit orders from distributors and resellers and provide product training and sales support. In other countries, Corel's marketing personnel provide product training and sales support. LICENSING. Corel has a program designed to make it easier for large or small organizations to acquire and maintain Corel products. The Corel License Program ("CLP") consists of two separate programs. CLP Universal offers flexible software acquisition, licensing and maintenance options specially designed to meet the needs of large multinational organizations. Targeted audiences include technology specialists and influential end-users in large enterprises. Marketing efforts and fulfillment are generally coordinated through Corel's network of large account resellers. CLP Choice offers flexible software acquisition and licensing options specially designed to meet the needs of small and medium sized organizations. Marketing efforts and fulfillment are generally coordinated through Corel's network of distributors and resellers. SOLUTION PARTNERS. Corel's Solution Partners program is a support relationship with independent developers and consultants that provide products, solutions or services around Corel products. The program supports independent software vendors, consultants, value-added resellers ("VARs"), system integrators, custom application developers, and solution developers, as well as technical support and training organizations. Under this business partnership strategy, the Company provides sales and product information, development services, access to beta software, discounts on Corel products, as well as dedicated developer technical support. APPROVED SERVICE BUREAUS. The Corel Approved Service Bureau Program ("CASB") supports organizations that output and render files created with Corel's graphics software applications such as CorelDRAW and Corel VENTURA. Under CASB, the Company provides members with product information, free priority technical 8 support, and referral services through Corel's bulletin board service ("BBS"), CompuServe Forum and Customer Service and Technical Support networks. DIRECT MARKETING. Corel promotes some of its products through direct marketing techniques directed toward existing and potential users of Corel's products. Fulfillment of product to the end-user is either by direct shipment or through resellers. OEM CHANNEL ________________________________________________________________________________ Corel markets certain productivity, graphics, and multimedia software applications under license agreements with OEMs that grant the OEMs the right to distribute copies of Corel's products with their hardware products. Corel has OEM agreements covering one or more of its products with most of the major PC hardware vendors, including Canon, Compaq, Cybermax, Dell, Digital Equipment Corporation, Epson, Gateway 2000, Hewlett-Packard, Packard Bell, Quantex and Vobis. ADVERTISING AND PROMOTION ________________________________________________________________________________ Advertising, direct marketing, and marketing materials are targeted to various end-user groups through a variety of programs: (i) extensive worldwide advertising in broad consumer media (business publications and television) and trade publications; (ii) joint promotions with computer retailers under which qualifying resellers and OEMs are reimbursed for certain advertising expenditures; (iii) trade show and PC user group participation; and (iv) direct corporate marketing efforts. The Company has an in-house creative design group responsible for conceptualizing and producing all of Corel's ad copy, box covers, and promotional material. The Company has an in-house ad agency which places and monitors the effectiveness of Corel's worldwide advertising. The Company maintains a broad advertising campaign emphasizing the Corel brand identity. CUSTOMERS ________________________________________________________________________________ As described above, Corel has three customer types: end-users, organizations or enterprises, and OEMs. Most end-users of Corel products are individuals in business, government agencies, educational institutions, and at home. These end- users obtain Corel products primarily through distributors, resellers, and OEMs, which include certain Corel products with their hardware. Note 7 to Consolidated Financial Statements (see Item 8) identifies customers that represent more than 10% of Corel's revenues. PRODUCT SUPPORT ________________________________________________________________________________ Corel provides product support coverage options to meet the needs of users of Corel products. Support personnel are located in Orem, Utah; Ottawa, Ontario; and Dublin, Ireland. Certain support is also provided by qualified third-party support organizations in accordance with Corel's specifications for quality and timeliness of the support response. Corel generally hires individuals with product expertise and provides them with the productivity tools, continuous product education, training and consistent processes to deliver quality support for Corel products. Coverage options currently range from standard no-charge toll telephone support to fee-based offerings providing unlimited toll-free telephone and technical support for all Corel products 24 hours per day, 7 days per week. Users have access to Corel's Knowledge Base, a database of technical support articles that is updated regularly with useful information regarding Corel products. Corel provides access to Knowledge Base, technical support information and frequently asked question and answers via Corel's worldwide web site on the Internet (http://www.corel.com). Corel maintains a forum on CompuServe and a bulletin board service ("BBS") to provide users with a mechanism to provide feedback as well as receive technical updates and notes. Additionally, users can access Corel's automated "Fax on Demand" system where up-to-date information about common issues and tips and tricks is stored in numbered documents. Corel's Customer Service representatives, including a number of third-party organizations, answer questions about product specifications and pricing, sell Corel products, and issue replacement media and documents. 9 COMPETITION ________________________________________________________________________________ The PC software business is highly competitive and subject to rapid technological change. Many of Corel's current and potential competitors have larger technical staffs, more established and larger marketing and sales organizations and significantly greater financial resources than does Corel. 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. GRAPHICS SOFTWARE. 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, Macromedia Inc., Deneba Systems Inc. and Micrografx, Inc.. In the photo-editing and painting graphics segment, Corel's competitors include Adobe and Micrografx. In the charting and presentation segments, Corel's competitors include Software Publishing Corporation, Microsoft Corporation, Adobe, Micrografx and IBM (Lotus Development Corporation). In the desktop publishing segment, Corel's competitors include Adobe and Quark, Inc. Corel's competitors include many other independent software vendors, such as Autodesk, Inc., Borland International, Inc., Apple Computer Inc. (Claris Corporation) and Computer Associates, as well as a number of personal computer manufacturers which devote significant resources to creating personal computer software, including Apple, Hewlett- Packard Company and IBM. PRODUCTIVITY SOFTWARE. Corel's competitors in the productivity software (primarily office suites) marketplace include Microsoft and IBM (Lotus). 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 pre-installs certain of its software products on various models of its PCs, competing directly with Corel productivity software. MULTIMEDIA SOFTWARE. The Company competes with other participants in the Photo CD market on the basis of price, the categories of photographs available, the quality of the photographs and the nature of the rights attached to the photos included on the Photo CD. The Company's competitors in this market include Westflight, Digital Zone and Aris Entertainment. COMMUNICATIONS APPLICATIONS. The Company's communications applications products (CorelVIDEO) compete against offerings from Intel, PictureTel, C-Phone, and many other companies. The Company believes that the principal competitive factors in the PC software markets include performance, product features, ease of use, reliability, hardware compatibility, brand name recognition, product reputation, pricing, levels of advertising, availability and quality of customer support, and timeliness of product upgrades. 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. The Company also competes with other software companies in its efforts to acquire software technology developed by third parties. The Company believes that, in the future, competition in the industry will intensify as major software companies expand their product lines. PROPRIETARY RIGHTS ________________________________________________________________________________ Corel regards certain features of its internal operations, software and documentation as proprietary and relies on contract, copyright, trademark, and trade secret laws and other measures to protect its proprietary information. The Company holds no patents applicable to its current business, and existing copyright and trade secret laws afford only limited protection. The Company believes that, due to the rapid pace of innovation within its industry, factors such as the technological expertise and creative skills of its personnel are more important to establishing and maintaining technological leadership than are the various legal protections of its technology. Corel provides its products to end users under non-exclusive licenses, which generally are non-transferable and have a perpetual term. Corel makes source code available for certain of Corel's products. The provision of source code may increase the likelihood of misappropriation or other misuse of Corel's intellectual property. Corel licenses its products pursuant to shrink wrap licenses that are not signed by licensees and therefore may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries do not protect Corel's proprietary rights to the same extent as do the laws of Canada and the United States. 10 Except as noted in the "Legal Proceedings" section of this report, Corel is not aware that its products, trademarks or other proprietary rights infringe the proprietary rights of third parties. However, from time to time Corel receives notices from third parties asserting that Corel has infringed their patents or other intellectual property rights. Corel may find it necessary or desirable in the future to obtain licenses from third parties relating to one or more of its products or relating to current or future technologies. There can be no assurance that third parties will not assert infringement claims against Corel in the future with respect to current or future products or that any such assertion will not require Corel to enter into royalty arrangements or result in costly litigation. As the number of software products in the industry increases and the functionality of these products further overlap, Corel believes that software developers may become increasingly subject to infringement claims. Any such claims, with or without merit, can be time consuming and expensive to defend. EMPLOYEES ________________________________________________________________________________ As of November 30, 1997, Corel employed 1,454 people on a full-time basis, including 839 in research and development, 539 in sales, marketing and support, and 76 in finance and administration. Corel's success depends to a significant extent upon the performance of Corel's executive officers and key technical and marketing personnel, particularly the Company's founder and Chairman, President and Chief Executive Officer, Dr. Michael C.J. Cowpland. The loss of Dr. Cowpland could have a material adverse effect on Corel's results of operations. Corel believes that its future success will also depend in large part on its ability to attract and retain highly skilled technical, managerial and sales and marketing personnel. Competition for employees is intense in the software industry. To date, Corel believes it has been successful in its efforts to recruit qualified employees, but there can be no assurance that Corel will continue to be as successful in the future. None of Corel's employees are subject to collective bargaining agreements. Corel believes relations with its employees are good. ITEM 2. PROPERTIES Corel leases 188,000 square feet of office space in a facility located in Ottawa, Ontario under leases that expire in 2015; 20,484 square feet under a lease that expires in 2002 in another facility in Ottawa, Ontario; 106,450 square feet of office space in a facility located in Orem, Utah under a lease that expires in 1999; and 23,520 square feet of office space in a facility located in Dublin, Ireland under leases that expire between 1997 and 1999. ITEM 3. LEGAL PROCEEDINGS On or about July 5, 1995, the Company received notice that a class action lawsuit had been filed against it by named plaintiff Jeffery L. Fishbein, in the Court of Common Pleas of the Seventeenth Judicial District in Snyder County, Pennsylvania. The complaint, as amended, included causes of action for breach of warranty and violations of state consumer protection laws, on behalf of persons who purchased CorelDRAW 4 and 5. The plaintiff's deposition, originally scheduled to continue on September 9 and 10, 1997, was postponed, due to plaintiff counsel's Petition for Leave to Withdraw as Counsel. By order of the Court dated September 5, 1997, all matters were stayed pending disposition of the Plaintiff's Counsels' Petition. On November 3, 1997, the Court ordered Mr. Fishbein to find replacement counsel on or before December 4, 1997, and granted Plaintiff's Counsel's Petition to Withdraw as Counsel. Because new counsel did not enter an appearance by December 4, 1997, the court held a hearing on December 12, 1997, "to address the issues as to why the action should not be discontinued". Pursuant to Pennsylvania Rules of Civil Procedure, a class action (even one that has not yet been certified) cannot be discontinued without notice unless the Court finds that the discontinuance will not prejudice other prospective class members. By Order dated December 12, 1997, this action was dismissed in its entirety, due to the failure of the plaintiff to appear and show cause as to why the action should not be discontinued and dismissed. On or about January 12, 1998, the Company received notice that a complaint had been filed against it by Micrografx, Inc. in the Northern District of Texas, Dallas Division. The complaint alleges that the personal calendar included in Corel Print House Magic is strikingly similar to and in some instances virtually identical to the personal calendar found in the plaintiff's CreataCard Gold and CreataCard Plus software products. The complaint includes causes of action for copyright infringement, false designation of origin and false representations in commerce, unfair competition and unjust enrichment. By motion filed January 20, 1998, the plaintiff seeks a preliminary injunction to stop the Company from distributing or selling the personal calendar (Corel Family & Friends) included in Corel Print House Magic. An attempt to mediate the matters at issue occurred on February 12, 11 1998; however, this initiative was unsuccessful. Depositions of Corel's representatives occurred in Ottawa on February 19 and 20, 1998. Depositions of the plaintiff's representatives are currently scheduled to be held in Texas on March 2 and 3, 1998. Corel believes that the plaintiff's motion for preliminary injunction will likely be heard in mid-to-late April 1998, but there can be no assurance that this will be the case. The Company considers the complaint to be ill-founded and will vigorously defend both the action and motion for preliminary injunction. On January 20, 1998, Corel issued a press release announcing its financial results for the fourth quarter and the restatement of financial information for the first three quarters of fiscal 1997. The restatement related to certain Java technology exchange transactions undertaken by Corel during the first three quarters of the year. In that press release, Corel reported, in part, that the restatement had the effect of eliminating revenues and the amortization of related costs previously reported in connection with those transactions. The press release stated that the accounting treatment of these transactions in the first three quarters was considered appropriate at the time and that the treatment adopted in the restatement resulted from further consideration by Corel's auditors in connection with the year end audit. On or about February 23, 1998, Corel became aware that a class action lawsuit had been filed against it by named Plaintiff Great Neck Capital Appreciation Investment Partnership in the United States District Court for the Eastern District of New York. The complaint also names as co-defendants Dr. Michael C. J. Cowpland, Corel's Chairman, President and Chief Executive Officer, and Mr. Charles Norris, Corel's former Vice President, Finance and Chief Financial Officer. The complaint was filed on behalf of all persons who purchased or otherwise acquired Corel common shares between March 26, 1997 and January 20, 1998 (the "Class Period"). The complaint alleges that the defendants violated various provisions of the federal securities laws, including Section 10(b) and 10(a) of the Securities Exchange Act of 1934, as amended, and Securities and Exchange Commission Rule 10b-5, by misrepresenting or failing to disclose material information about Corel's financial condition. The complaint alleges that the defendants issued false and misleading press releases and financial statements for the first three quarters of fiscal 1997. Plaintiff alleges, in part, that defendants (a) failed to disclose that they were overstating Corel's reported profits by, among other things, inflating reported revenues and earnings through improperly recognizing revenue on Java technology exchange transactions, and (b) overstated revenues and earnings by understating reserves in connection with sales to distributors who had no obligation to keep or pay for the products. The complaint also alleges that Corel insiders, including the individual co-defendants, sold common shares during the Class Period at "artificially inflated prices". The complaint seeks an unspecified amount of money damages. As of February 26, 1998 the complaint had not been served on any defendant. No motions have been filed or discovery yet undertaken. Corel intends to defend the litigation vigorously. However, due to the inherent uncertainties of litigation, Corel cannot accurately predict the ultimate outcome of the litigation. Investigating and defending the complaint may require expenditure of material amounts of funds and may require a significant amount of management's time and resources. An unfavorable outcome in the litigation could have a material adverse effect on Corel's business, financial condition and results of operations. Announcement of material developments in the litigation prior to its resolution could adversely affect the market price of Corel's common shares. The Company is a party to a number of additional claims arising in the ordinary course of business relating to intellectual property and other matters. The Company believes that the ultimate resolution of these claims will not have a material adverse effect on its business, financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal 1997. 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON SHARES The Company's Common Shares are traded on The Toronto Stock Exchange (the"TSE") under the symbol "COS" and in the over-the-counter market on the NASDAQ National Market under the symbol "COSFF". The following table sets forth the range of quarterly high and low closing sale prices of the Common Shares on the TSE and on the NASDAQ National Market within the two most recent fiscal years.
FISCAL 1996 FISCAL 1997 HIGH LOW HIGH LOW ----------- ----------- ----------- ----------- THE TORONTO STOCK EXCHANGE (Canadian dollars) - -------------------------- First Quarter............................. $24.50 $11.75 $11.10 $7.45 Second Quarter............................ 19.05 12.25 9.70 6.90 Third Quarter............................. 17.75 11.25 9.15 7.60 Fourth Quarter............................ 14.75 8.38 8.95 3.13 NASDAQ NATIONAL MARKET (US dollars) - ---------------------- First Quarter............................. $18.00 $ 8.38 $ 8.25 $6.38 Second Quarter............................ 13.88 8.88 7.13 5.00 Third Quarter............................. 13.00 8.25 6.75 5.50 Fourth Quarter............................ 10.75 6.50 6.50 2.23
As of February 26, 1998, there were 693 record holders of Common Shares. A substantial number of Common Shares of the Company are held by depositories, brokerage firms and financial institutions in "street name." Based upon the number of annual reports and proxy statements requested by such nominees, the management of the Company estimates that the number of beneficial holders of Common Shares approximates 36,000 holders. LIMITATIONS AFFECTING SECURITY HOLDERS There is no law or government decree or regulation in Canada that restricts the export or import of capital, or affects the remittances of dividends, insurance or other payments to a non-resident holder of Common Shares, other than the withholding tax requirements described below. TAXATION The following discussion summarizes certain tax considerations relevant to an investment by individuals and corporations who, for income tax purposes, are resident in the United States and not in Canada, hold Common Shares as capital property, and do not use or hold the Common Shares in carrying on business through a permanent establishment or in connection with a fixed base in Canada (collectively, "Unconnected US Shareholders"). The Canadian tax consequences of an investment in the Common Shares by investors who are not Unconnected US Shareholders may be expected to differ substantially from the tax consequences discussed herein. The discussion is based upon the provisions of the Income Tax Act (Canada) (the "Tax Act"), the Convention between Canada and the United States of America with respect to taxes on Income and on Capital (the"Convention") and the published administrative practices of Revenue Canada, Taxation and judicial decisions, all of which are subject to change. The discussion does not take into account the tax laws of the various provinces or territories of Canada. The discussion is intended to be a general description of the Canadian tax considerations and does not take into account the individual circumstances of any particular shareholder. 13 Any cash dividends and stock dividends on the Common Shares payable to Unconnected US Shareholders generally will be subject to Canadian withholding tax. Under the Convention, the rate of withholding tax generally applicable to Unconnected US Shareholders is 15%. In the case of a United States corporate shareholder owning 10% or more of the voting shares of the Company, the applicable withholding tax under the revised Canada US Income Tax Convention is reduced to 5% for 1997. Capital gains realized on the disposition of Common Shares by Unconnected US Shareholders will not be subject to tax under the Tax Act unless such Common Shares are taxable Canadian property within the meaning of the Tax Act. Common Shares will generally not be taxable Canadian property to a holder unless, at any time during the five-year period immediately preceding a disposition, the holder, or persons with whom the holder did not deal at arm's length, or any combination thereof, owned 25% or more of the issued shares of any class or series of the Company. If the Common Shares are considered taxable Canadian property to a holder, the Convention will generally exempt Unconnected US Shareholders from tax under the Tax Act in respect of a disposition of Common Shares provided the value of the shares of the Company is not derived principally from real property situated in Canada. Neither Canada nor any province thereof currently imposes any estate taxes or succession duties. DIVIDEND POLICY The Company has neither declared nor paid cash dividends on its Common Shares since its inception and does not anticipate paying any dividends in the foreseeable future, but intends to retain future earnings for reinvestment to finance the growth of its business. On November 22, 1993, the Board of Directors declared a two for one stock split, effected in the form of a stock dividend, payable December 8, 1993 to shareholders of record on December 1, 1993. On October 8, 1994, the Board of Directors declared a three for two stock split, effected in the form of a stock dividend, payable October 28, 1994 to shareholders of record on October 24, 1994. Any future determination to pay dividends will be at the discretion of the Board of Directors. 14 ITEM 6. SELECTED FINANCIAL DATA The statement of income data set forth below with respect to the years ended November 30, 1995, 1996 and 1997 and the balance sheet data at November 30, 1996 and 1997 are derived from the audited financial statements of Corel included in Item 8 hereof and should be read in conjunction with those financial statements and the notes thereto. The statement of income data set forth below with respect to the fiscal years ended November 30, 1993 and 1994 and the balance sheet data at November 30, 1993, 1994 and 1995 are derived from audited financial statements not included in this Annual Report on Form 10-K. All amounts are in United States dollars.
YEAR ENDED NOVEMBER 30, ------------------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- (In thousands, except per share data) CANADIAN GAAP Sales..................................................... $105,027 $164,313 $196,379 $334,245 $ 260,581 Income (loss) from continuing operations.................. 20,853 32,503 14,484 (2,750) (231,678) Income (loss) from continuing operations per share (fully diluted).............................. 0.45 0.63 0.26 (0.04) (3.84) Cash and short-term investments........................... 57,000 85,618 81,816 30,629 30,629 Working capital........................................... 84,821 129,094 149,353 120,945 20,356 Total assets.............................................. 132,290 191,422 221,346 398,478 163,743 Long-term debt............................................ - - - 33,830 24,044 Shareholders' equity...................................... 111,234 164,953 195,858 290,260 59,809 US GAAP Income (loss) from continuing operations.................. 20,853 32,503 14,484 (2,750) (231,678) Net income (loss) from continuing operations per share (fully diluted)................... 0.49 0.67 . 0.29 (0.05) (3.84)
_________ Note: The summary financial information is prepared on the basis of Canadian GAAP, which is different in some respects from US GAAP. Significant differences between Canadian GAAP and US GAAP are set forth in Note 10 of "Notes to Consolidated Financial Statements" included in Item 8 hereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth on pages 18-31 of the 1997 Annual Report to Shareholders is incorporated herein by reference and is filed herewith as Exhibit 13.1. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements and independent auditors' report set forth on pages 32-45 and the back cover of the 1997 Annual Report to Shareholders is incorporated herein by reference and is filed herewith as Exhibit 13.2. . Independent Auditors Report; . Consolidated Balance Sheets at November 30, 1996 and 1997; . Consolidated Statements of Operations and Retained Earnings (Deficit) for the years ended November 30, 1995, 1996, and 1997; . Consolidated Statements of Changes in Financial Position for the years ended November 30, 1995, 1996, and 1997; and . Notes to Consolidated Financial Statements. 15 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to the executive officers and directors of Corel:
NAME AGE POSITION WITH THE COMPANY Dr. Michael C.J. Cowpland 54 Chairman of the Board; President; Chief Executive Officer Patrick R. Beirne 44 Chief Engineer Kim E. Dixon 36 Vice President, Marketing Eid E. Eid 40 President, Corel Computer Corporation Sandra Gibson 34 Vice President, Human Resources Paul King 39 Vice President, International Sales Paul C. LaBarge 47 Secretary and Director Michael P. O'Reilly 45 Vice President, Finance; Chief Financial Officer; Treasurer Paul Skillen 37 Vice President, Software Development Carey Stanton 30 Vice President, Business Development Don Sylvester 43 Senior Vice President, Sales Kerry D. Williams 35 Vice President, Manufacturing Lyle B. Blair (2) 67 Director Hon. William G. Davis (1) (2) 68 Director Hunter S. Grant (1) (2) 55 Director Jean-Louis Malouin 54 Director
______________ (1) Member of the Compensation Committee. (2) Member of the Audit Committee. DR. MICHAEL C.J. COWPLAND founded the Company and has served as a Director, Chairman of the Board and President of the Company since May 1986. Prior to founding the Company in 1985, Dr. Cowpland held a variety of executive positions with Mitel Corporation, a telecommunications company, most recently as Chairman of the Board. PATRICK R. BEIRNE joined the Company in November 1985 as Chief Engineer. Prior to November 1985, Mr. Beirne held a number of positions with Mitel Corporation, most recently as Senior Staff Engineer. KIM E. DIXON joined the Company in August 1990 as Senior Product Specialist - Central USA and was appointed Corporate Accounts Manager - USA in December 1990 and North American Marketing Manager in November 1991. Ms. Dixon held the positions of Manager of Media and Market Development - United Kingdom, Australia, New Zealand from January 1993 until July 1993, Manager of International Advertising and Product Marketing from August 1993 until August 1995, and Creative Director from September 1995 until January 1997, at which time she was appointed to her current position, Vice President, Marketing. EID E. EID joined the Company in October 1989 as a Software Programmer. He held the positions of Team Leader from January 1993 until September 1993, and Director, Graphics Software from October 1994 until April 1996, at which time he was appointed Vice President, Software Development. In June 1997, he was appointed President, Corel Computer Corporation. SANDRA GIBSON joined the Company in March 1990 as a Human Resource Generalist. She held the positions of Supervisor, Human Resources from January 1993 until March 1995, Manager, Human Resources from March 1995 until February 1996, Director, Human Resources from March 1996 until September 1996, and Director, Corporate Services from September 1996 until January 1997, at which time she was appointed to her current position, Vice President, Human Resources. 17 PAUL KING joined the Company in January 1998. As Vice-President, International Sales, Mr. King has more than 17 years of Canadian and International sales and marketing experience. Prior to joining Corel, he was Vice President of retail systems at NCR Canada Ltd. where he was responsible for direct sales and marketing in that division. PAUL C. LABARGE has been Secretary of the Company since January 1992. He was appointed a Director of the Company in April 1996. Mr. LaBarge is a Partner of LaBarge Weinstein, external counsel to the Company. Prior to establishing LaBarge Weinstein in February 1997, Mr. LaBarge was a partner with Blake Cassels & Graydon since February 1990. Previously, Mr. LaBarge was a partner with the firm of Lang Michener. MICHAEL P. O'REILLY was appointed Vice President, Finance, Chief Financial Officer and Treasurer in December 1997. Prior to joining Corel, Mr. O'Reilly was a senior tax partner in the Ottawa practice of KPMG, the international professional advisory services firm. PAUL SKILLEN joined the Company in September 1992 as a software developer. He moved on to head up many engineering projects within Corel. In 1996 he was transferred to Orem, Utah to oversee the WordPerfect transition from Novell, Inc. to Corel Corporation. Mr. Skillen was subsequently named Vice President of Engineering in 1997. Prior to joining Corel, he was involved in several high-technology start-up companies including his own consulting firm. Mr. Skillen has almost 20 years experience in the Ottawa area high technology industry. CAREY STANTON joined the Company in May 1991 as Sales Leads Coordinator and was appointed Account Executive for CorelSCSI - USA in October 1991 and Product Marketing Manager in December 1991. He held the positions of Manager, OEM Sales for CorelSCSI, RAID and other Network related product lines from August 1992 until August 1993, and Business Manager from September 1993 until January 1997, at which time he was appointed to his current position, Vice President, Business Development. DON SYLVESTER joined the Company in August 1997. As Senior Vice President, Sales, Mr. Sylvester has twenty years of sales and marketing experience, including seven years with Dell Computer Corporation as the Director of Commercial Sales. Mr. Sylvester holds an MBA from the University of Windsor. KERRY D. WILLIAMS joined the Company in November 1989 as Materials Administrator. He held the positions of Manufacturing Manager from February 1990 until January 1994, Director, Operations and Advertising from January 1994 until August 1995, and Director, Operations from September 1995 until January 1997, at which time he was appointed to his most recent position, Vice President, Manufacturing. LYLE B. BLAIR has been a Director since September 1989. Mr. Blair has been Chairman of L.B. Blair Management Ltd. since 1976. L.B. Blair Management Ltd. has owned and operated several companies including, from 1980 to 1992, Storwal International Inc., an office furniture manufacturer, and Thames Valley Beverages, the largest independent Ontario Pepsi bottler, from 1976 to 1988. Prior to 1976, Mr. Blair held senior international positions with Procter & Gamble Inc. and Pepsico Inc. WILLIAM G. DAVIS has been a Director since September 1989. Mr. Davis has been counsel to Tory Tory DesLauriers & Binnington, Barristers and Solicitors, since February 1986. He served as Canada's Special Envoy on Acid Rain from March 1985 to March 1986 and prior to March 1985 was Premier of the Province of Ontario. Mr. Davis is a director of The Seagram Company Ltd., Magna International Inc. and First American Title Insurance Company, all of which are reporting companies under the Securities Exchange Act of 1934. HUNTER S. GRANT has been a Director since September 1989. Mr. Grant has been Co- Publisher, President and General Manager of the Recorder and Times Limited, a newspaper publishing company, since July 1977. JEAN-LOUIS MALOUIN became a Director in November 1996. Since 1992, Dr. Malouin has been the Dean of the Faculty of Administration at the University of Ottawa. From 1989 to 1992, Dr. Malouin was the Dean of Administration at the University of Alberta and is a former dean at the Universite Laval. He is an expert in operations and production management, management information systems design and research methodology. He has served as a management consultant for numerous organizations and institutions including the Canadian International Development Agency (CIDA), the Universite du Quebec and the Organization for Economic and Cooperation Development. 18 Under the Canada Business Corporations Act, a majority of the Board of Directors and a majority of Board Committee members must be resident Canadians. All directors hold office until the next annual meeting of shareholders and until their successors have been elected. The officers of the Company serve at the discretion of the Board of Directors of the Company. There are no family relationships among any of the directors and executive officers of the Company. The Audit Committee reviews the internal accounting procedures of the Company and consults with and reviews the services provided by the Company's independent auditors and is responsible for corporate governance issues relating to the Company. The Compensation Committee reviews the compensation and benefits of all officers of the Company and recommends to the Board of Directors the compensation and benefits of the most senior officers of the Company. It reviews general policy matters relating to employment and wage equity, compensation and benefits of employees of the Company generally. The Compensation Committee administers the granting of stock options to eligible participants in the Corel Corporation Stock Option Plan. ITEM 11. EXECUTIVE COMPENSATION The following table, presented in accordance with the regulations to the Securities Act (Ontario), sets forth all compensation paid in respect of the individuals who were, at November 30, 1997, the Chief Executive Officer and the other four most highly compensated executive officers of the Company (the "named executive officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS -------------------------------------------- ---------------- OTHER ANNUAL SECURITIES UNDER COMPENSATION OPTIONS NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) GRANTED (#) - --------------------------- ---- ------ ----- ------------ ---------------- Michael C.J. Cowpland 1997 $213,236 Nil - Chairman, President and 1996 188,388 Nil 1,175,000 Chief Executive Officer 1995 163,895 Nil 603,000 Eid E. Eid 1997 188,025 Nil - President, Corel Computer Corp. 1996 181,062 Nil 200,000 1995 156,617 Nil 234,400 Charles A. Norris (2) 1997 130,590 Nil - Vice President, Finance and 1996 106,300 Nil 24,400 Chief Financial Officer 1995 82,264 Nil 24,600 Paul Skillen 1997 184,304 Nil - Vice President, Software Development 1996 117,296 Nil 12,000 1995 81,315 Nil 14,000 Kerry D. Williams 1997 130,287 Nil - Vice President, Manufacturing 1996 128,414 Nil 36,800 1995 114,348 Nil 37,300 _____________________________________________________________________________________________________________________________
Notes: (1) Perquisites and other personal benefits do not exceed the lesser of $50,000 and 10% of the total of the annual salary and bonus for any of the named executive officers. (2) Effective December 2, 1997, Mr. Norris resigned his position as Vice President, Finance and CFO and left the Company. Mr. Norris' responsibilities were assumed by Mr. Michael P. O'Reilly. 19 CASH COMPENSATION The aggregate cash compensation paid or payable to executive officers of the Company for the year ended November 30, 1997 was $1,423,821 during which period there were ten executive officers. The Company furnishes other benefits to its officers and other employees. The estimated aggregate cost to the Company to provide such other benefits to the executive officers of the Company as a group for the year ended November 30, 1997 was less than $11,759 and was attributable primarily to health and dental benefits. Directors who are salaried officers of the Company receive no compensation for serving on the Board. The other directors (the "independent directors"), of which there are currently five, receive an annual retainer of CAD$16,000 and a fee of CAD$800 (CAD$1,600 for Committee Chairman) for each Board of Directors and Committee meeting they attend and are reimbursed for traveling costs and other out-of-pocket expenses incurred in attending such meetings. For the year ended November 30, 1997, the independent directors received an aggregate of $122,520 for their services and in reimbursement for their expenses. DIRECTORS' AND OFFICERS' INSURANCE Corel maintains directors' and officers' liability insurance insuring directors and officers of the Company and its subsidiaries against liability for acts or omissions in their capacities as directors or officers, as well as insuring the Company and its subsidiaries for claims relating to securities matters, subject to certain exclusions. Such insurance also insures Corel against all losses which it may incur in indemnifying officers and directors of Corel. The maximum amount payable under the policy is CAD$5,000,000 per occurrence and CAD$5,000,000 per year, subject, in the case of Corel, to a deductible of US$250,000 per occurrence for entity coverage in Canada, and a deductible of US$250,000 per occurrence for any claims against a director, officer or entity in the United States. STOCK OPTION PLAN The Corel Corporation Stock Option Plan (the "Plan") is administered by the Compensation Committee (the "Committee") of the Board of Directors. Under the Plan the Committee may grant options to purchase Common Shares of the Company to all eligible participants including, full-time permanent employees of Corel, directors on the Board of Directors and persons appointed as an officer of the Company by the Board of Directors. The factors which the Committee considers when granting options include outstanding performance and/or contribution to Corel. The exercise price of such options may not be less than the closing price of the Common Shares on the TSE on the trading day immediately preceding the date of the grant. All options granted under the Plan are non-transferable and the exercise price thereof must be paid at the time of exercise. Options are exercisable for a period of four years from the date of grant. Options held by a participant who ceases to hold a board or office position or whose employment is terminated for any reason, including death, are, for options granted prior to November 1, 1993, exercisable to a date which is not later than four years from the date of the grant. Options granted since that date are exercisable for 30 days following termination. In addition, the Chief Executive Officer of the Company may extend such periods for any participant to a date which is not later than four years from the date of the grant. On April 18, 1997, the shareholders passed a resolution that allowed employees or directors of the Company to tender any existing options held by them to the Company for repricing and regranting. The number of options to be regranted was determined by reducing the initial granted amount pro rata by that ratio that the exercise price of the regranted option is to the original exercise price. The exercise price of the regranted option was effected on the basis of the fair market value of the Common Shares of the Company at the close of market on the day prior to the 14/th/ day following all requisite approval, or CAD$7.70 on May 1, 1997. Pursuant to the passing of the resolution, 10,373,000 options at exercise prices ranging from CAD$7.917 to CAD$25.25 were exchanged for 5,773,614 options at an exercise price of CAD$7.70, of which 3,853,033 options at exercise prices ranging from CAD$9.50 to CAD$22.38 were exchanged by the named executive officers for 2,163,253 options at an exercise price of CAD$7.70. Michael C.J. Cowpland exchanged 2,850,949 options at exercise prices ranging from CAD$9.50 to CAD$22.38 for 1,631,683 options at an exercise price of CAD$7.70. Eid E. Eid exchanged 598,098 options at exercise prices ranging from CAD$9.50 to CAD$22.38 for 311,232 options at an exercise price of CAD$7.70. Charles Norris exchanged 112,881 options at exercise prices ranging from CAD$9.50 to CAD$22.38 for 55,746 options at an exercise price of CAD$7.70. Paul Skillen exchanged 137,472 options at exercise prices ranging from CAD$9.50 to CAD$22.38 for 80,494 options at an exercise price of CAD$7.70. Kerry Williams exchanged 153,633 options at exercise prices ranging from CAD$12.67 to CAD$19.67 for 84,098 options at an exercise price of CAD$7.70. 20 During the year ended November 30, 1997, the Company granted options to purchase up to 202,800 Common Shares to 33 participants at an average exercise price of CAD$6.77 per share, of which options for 134,000 Common Shares were granted to one executive officer and five directors of the Company at an average exercise price of CAD $6.62 per share. As of November 30, 1997, there were outstanding under the plan options exercisable for an aggregate of 6,157,519 Common Shares at prices ranging from CAD$4.00 to CAD$22.38 per share and expiring at various dates through November 14, 2001. Of such options, options exercisable for an aggregate total of 1,999,272 Common Shares were held by nine executive officers and five directors of the Company. Other participants as a group as of such date held options exercisable for an aggregate of 4,158,247 Common Shares at prices ranging from CAD$7.05 to CAD$22.38 and expiring at various dates through September 12, 2001. For the fiscal year ended November 30, 1997 there were no stock options granted under the Plan to the above named executive officers; certain options were repriced as discussed above. The following table sets forth each exercise of stock options under the Plan during the fiscal year ended November 30, 1997 to the named executive officers. AGGREGATED OPTION EXERCISES DURING THE FISCAL YEAR ENDED NOVEMBER 30, 1997 AND FISCAL YEAR-END OPTION VALUES
Value of Unexercised Securities Unexercised in-the-Money Acquired Aggregate Value Options at Options at on Exercise Realized Nov. 30, 1997 Nov. 30, 1996 Name (#) (CAD$) (#) (CAD$) ---- ----------- --------------- ------------- ------------- Michael C.J. Cowpland 455,910 $455,910 1,175,773 - Eid E. Eid 37,993 38,443 273,239 - Charles A. Norris 2,900 14,007 55,746 - Paul Skillen 41,339 47,540 39,155 - Kerry D. Williams 83,625 80,062 101,663 -
COMPENSATION COMMITTEE As at November 30, 1997 the members of the Compensation Committee (the "Committee") were Hunter S. Grant (Chairman) and the Honourable William G. Davis. The Committee has a mandate to: (a) monitor compliance with provincial legislation applicable in respect of employment practices of the Company, (b) determine the appropriate allocation of options, (c) determine Chief Executive Officer and senior officer compensation, (d) monitor compliance with statutory requirements for employment matters including remittances and legislation, and (e) review levels of compensation generally for the Company. The Committee met five times in fiscal 1997 and acted by way of resolution on other occasions. The Company has a policy of compensation based on merit and performance and does not discriminate or distinguish with respect to persons performing similar functions. Compensation in the Company, based on industry surveys, is consistent with industry standards at the level necessary to attract and retain qualified personnel. REPORT ON EXECUTIVE COMPENSATION The philosophy of the Company in the determination of senior executive compensation is to encourage performance in order to maintain the position of the Company in a highly competitive environment. As a result, the compensation package is based upon salaries which provide a reasonable level of remuneration and broad 21 distribution of employee stock options. Given the nature of the industry, the performance of the stock is sensitive to the financial performance of Corel and as such provides a compensation regime which encourages active support of the Company's competitive efforts. With the concurrence of the Compensation Committee, the Chief Executive Officer participates directly in the fixing of the compensation for all levels of employees. Base compensation is reviewed annually to verify compatibility with industry norms. The Chief Executive Officer is involved in all aspects of compensation determination and he assesses, with the assistance of the relevant managers on an on-going basis, performance of the individual incumbents. Individual salaries are set in an appropriate salary range and reflect the employee's experience and proven or expected performance. To ensure a linkage of management with the shareholder, stock options are granted at 100% of market value at the time of the stock option grant. Under the terms of the stock option plan, options must be exercised within a period of four years from the date of the grant. All options granted vest immediately on grant and terminate 30 days after termination of employment unless otherwise determined by the Chief Executive Officer. The number of stock options available for grant under the program are determined by shareholder resolution and fixed as at April 18, 1997 at 16,000,000 and are restricted for certain participants to 10% of the issued and outstanding capital of the Company from time to time. No additional benefits or perquisites are provided to members of management that are not available to employees of Corel generally. These currently include health, long-term disability, dental, group life and a fitness membership. PERFORMANCE GRAPH The following chart and graph compares the yearly percentage change over the last five years in the cumulative total shareholder return on the Company's Common Shares with the cumulative total return of the NASDAQ Index and the NASDAQ Computer and Data Processing Services Stock Index: [GRAPH APPEARS HERE} FIVE-YEAR TOTAL RETURN ON $100 INVESTMENT
__________________________________________________________________________________________________________ 1993 1994 1995 1996 1997 __________________________________________________________________________________________________________ Corel 100.00 79.86 97.81 47.11 13.39 Computer and Data Processing Services Stock Index 100.00 119.32 186.16 229.61 269.96 NASDAQ Index 100.00 116.07 164.31 200.25 248.80 __________________________________________________________________________________________________________
22 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of February 26, 1998, certain information with respect to the beneficial ownership of Common Shares by (1) each person known by the Company to be a beneficial owner of more than 5% of its outstanding Common Shares, (2) by each director and executive officer and (3) by all directors and executive officers as a group.
COMMON EXERCISABLE PERCENTAGE NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OPTIONS OWNED (1) - ------------------------------------ ------ ----------- ---------- Dr. Michael C.J. Cowpland 5,450,558 1,175,773 10.9 Novell, Inc 8,950,000 - 15.1 1555 N. Technology Way Orem, Utah 84057 Lyle B. Blair 3,000 27,107 * Hon. William G. Davis 1,500 27,620 * Hunter S. Grant - 30,186 * Paul C. LaBarge 4,000 27,107 * Jean Louis Malouin - 5,000 * Kim E. Dixon - 41,273 * Eid E. Eid - 273,239 * Sandra Gibson - 16,134 * Michael P. O'Reilly (3) - 100,000 * Paul Skillen - 39,155 * Carey Stanton - 35,015 * Don Sylvester - 100,000 * Kerry D. Williams 290 101,663 * Directors and Executive Officers as a group (14 persons) (2) 5,459,348 1,999,272 12.0
* Indicates less than 1%. (1) Percentage ownership is calculated using as a denominator the total number of Common Shares outstanding plus the number of Common Shares to which the beneficial owner indicated has a right to acquire pursuant to options currently exercisable or exercisable within 60 days. (2) The address for each director and executive officer is Corel Corporation, 1600 Carling Avenue, Ottawa, Ontario, Canada K1Z 8R7. (3) Mr. O'Reilly's options were granted on December 3, 1997 but do not vest for a six month period thereafter. Statements contained in the table as to securities beneficially owned by directors, executive officers and beneficial owners of more than 5% of the Company's outstanding Common Shares are, in each instance, based upon information obtained from such directors and executive officers. Statements contained in the table as to securities beneficially owned by beneficial owners of holders of 5% or more of the Company's outstanding Common Shares are based on Schedules 13G or 13D filed by such persons with the U.S. Securities and Exchange Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Inapplicable pursuant to Instruction 3 to Item 404 of Regulation S-K, except for transactions described elsewhere in this Report. 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS AND SCHEDULES The following audited financial statements of Corel (together with the independent auditors report thereon and the notes thereto) are included in this Report: (a) Consolidated Balance Sheets at November 30, 1996 and 1997. (b) Consolidated Statements of Operations and Retained Earnings (Deficit) for the years ended November 30, 1995, 1996 and 1997. (c) Consolidated Statements of Changes in Financial Position for the years ended November 30, 1995, 1996 and 1997. Financial statement schedules have been omitted because the required information is included in the financial statements or notes thereto as set forth under Item 8 of this Report on Form 10-K. (b) REPORTS ON FORM 8-K On January 21, 1998, the Company filed a Report on Form 8-K to report the restatement of the financial results for the first three quarters of fiscal 1997. (c) LISTING OF EXHIBITS
Exhibit Number Description ------- ----------- 3.1 Certificate and Articles of Incorporation (1) 3.2 By-law No. 6 (1) 4.1 Specimen of Common Share Certificate (1) 10.1 Distribution Agreement dated October 2, 1991 between Corel Corporation and Ingram Micro Inc. (1) 10.2 Distribution Agreement dated May 11, 1989 between Corel Corporation and Merisel, Inc. (formerly Softsel Computer Products, Inc.) (1) 10.3 Agreement for Purchase and Sale by and among Novell, Inc., Corel Corporation, Corel Corporation Limited, and Corel Corporation (Delaware) (3) 13.1 Management's Discussion and Analysis of Financial Condition and Results of Operations (Incorporated by Reference to Pages 18-31 of 1997 Annual Report to Shareholders ("1997 Annual Report")) 13.2 Financial Statements (Incorporated by Reference to Pages 32-45 and Back Cover of 1997 Annual Report) 21.1 Subsidiaries of Registrant (Incorporated by Reference to Exhibit 13.2 filed herein) 23.1 Independent Auditor's Consent 99.1 Form of License Agreement, including Limited Warranty(1)
_________________ (1) Incorporated by reference to Registration Statement on Form F-1, file no. 33-50886. (2) Incorporated by reference to Annual Report on Form 10-K for the fiscal year ended November 30, 1994. (3) Incorporated by reference to Exhibit 2.01 to the Company's Report on Form 8-K/A, Amendment No. 2, dated March 1, 1996. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Ottawa, Province of Ontario, Canada, on February 26, 1997. COREL CORPORATION By /s/ Michael P. O'Reilly ----------------------------- Michael P. O'Reilly Vice-President, Finance; Chief Financial Officer; Treasurer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints MICHAEL C.J. COWPLAND and MICHAEL P. O'REILLY, his Attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said Attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated on February 25, 1997.
SIGNATURE TITLE /s/ Michael C.J. Cowpland - ------------------------------ Michael C.J. Cowpland Chairman of the Board of Directors, President and Chief Executive Officer /s/ Lyle B. Blair - ------------------------------ Lyle B. Blair Director /s/ William G. Davis - ------------------------------ William G. Davis Director - ------------------------------ Hunter S. Grant Director - ------------------------------ Paul C. LaBarge Director /s/ Jean-Louis Malouin - ------------------------------ Jean-Louis Malouin Director /s/ Michael P. O'Reilly - ------------------------------ Michael P. O'Reilly Vice-President, Finance; Chief Financial Officer; Treasurer (Principal Financial and Accounting Officer)
25 EXHIBIT INDEX -------------
Exhibit Number Description - -------------- ----------- 13.1 Management's Discussion and Analysis of Financial Condition and Results of Operations 13.2 Financial Statements 21.1 Subsidiaries of Registrant 23.1 Independent Auditor's Consent
26 EX-13.1 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALS EXHIBIT 13.1 27 EXHIBIT 13.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the purposes of this discussion, unless the context otherwise requires, "Corel" refers to the consolidated operations of Corel Corporation and its wholly owned subsidiaries, Corel Corporation Limited, Corel Computer Corp., Corel International Corporation, Corel, Inc., and Corel Corporation (U.S.A.), while "the Company" refers to the parent, Corel Corporation. The following information should be read in conjunction with the audited consolidated financial statements included elsewhere herein. This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve uncertainty and risk, and all assumptions, anticipations, and expectations stated herein are forward-looking statements. The actual results that Corel achieves may differ materially from any forward-looking statements made herein due to such risks and uncertainties. The Company has identified by italics various sentences within this MD&A which contain such forward-looking statements, and words such as "believes", "anticipates", "expects", "intends", and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. In addition, the section labelled "Factors That May Affect Future Operating Results", which is not italicized for improved readability, consists primarily of forward-looking statements. The Company undertakes no obligation to revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report. Readers are urged to carefully review and consider the various disclosures made by the Company in this MD&A and in the Company's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect Corel's business. Historical results and percentage relationships will not necessarily be indicative of the operating results of any future period. All amounts in this report are in US dollars unless otherwise indicated. OVERVIEW Corel develops, manufactures, licenses, sells, and supports a wide range of software products, including graphics applications, business and consumer productivity applications, multimedia titles and communications applications. During the second quarter, Corel determined that recording a nonrecurring charge totaling $113.7 million was appropriate. The charge consisted of write-downs of previously capitalized acquired technologies for the WordPerfect family of software programs and deferred development costs in the form of advance royalties paid to various developers of the Corel CD HOME Collection and Corel Medical Series software. Both multimedia product lines were sold to Hoffman + Associates Inc. of Toronto for cash, a minority interest in the acquiring company and an ongoing royalty stream over a period of time. During the same quarter, Corel announced the formation of a spin-off company, Corel Computer Corp. The company, a wholly owned subsidiary of Corel Corporation comprising Corel's Video and Network Computing groups, is expected to compete in the network computer market. During the fourth quarter, Corel announced the sale of various consumer product software lines to IMSI (International Microcomputer Software Inc.). These lines included CorelCAD, Corel Visual CADD, CorelFLOW, Corel Lumiere Suite, Corel Click & Create and Corel Family Tree Suite. Corel sold these lines for cash, marketable securities in the acquiring company and an ongoing royalty stream over a period of time. These transactions assisted Corel to focus on its core product offerings, namely business and graphics applications. 28 RESULTS OF OPERATIONS
PERIOD TO PERIOD INCREASE(DECREASE) -------------------------- PERCENT OF SALES 1996 1997 ---------------------------------- COMPARED COMPARED 1995 1996 1997 TO 1995 TO 1996 -------- --------- --------- -------- -------- Sales......................... 100 % 100 % 100 % 70.2 % 22.0 % Cost of sales................. 24 % 30 % 32 % 113.5 % (16.8)% -------- --------- --------- Gross profit.................. 76 % 70 % 68 % 56.5 % (24.3)% -------- --------- --------- Expenses Advertising................... 28 % 28 % 31 % 68.2 % (14.2)% Selling, general and administrative............. 21 % 21 % 33 % 76.3 % 19.0 % Gain on sale of Corel CD Creator................. N/A (3)% N/A N/A N/A Research and development.... 13 % 20 % 34 % 142.1 % 35.8 % Depreciation and amortization............... 5 % 5 % 10 % 101.5 % 37.7 % Write-down of purchased software............... N/A N/A 45 % N/A N/A Gain on foreign exchange..... 0 % 0 % 0 % * * -------- --------- --------- 67 % 71 % 153 % 80.1 % 67.2 % -------- --------- --------- Income (loss) from operations. 9 % (1)% (85)% (129.7)% (4340.9)% Interest income............... 3 % 0 % 0 % (72.3)% (183.0)% -------- --------- --------- Income (loss) before income taxes........................ 12 % (1)% (85)% (116.5)% (6088.9)% Income taxes.................. 4 % 0 % 3 % (111.5)% 1145.5 % -------- --------- --------- Net income (loss)............. 8 % (1)% (88)% (119.1)% (8324.7)% ======== ========= =========
* not meaningful SALES Sales are recognized when products are shipped to customers, primarily distributors, and are net of discounts and allowances for returns. Sales to distributors are subject to agreements allowing limited rights of return and price protection. Corel provides reserves for estimated future returns and exchanges on a quarterly basis and for price protection in the quarter when price reductions are announced. In certain instances, Corel's corporate licensing program provides for the licence of the software and for free updates and upgrades to the software, otherwise known as maintenance, as well as free technical support over the life of the contract (generally not exceeding two years). Given this strategy, rateable revenue recognition is required for that portion of the corporate licensing fees attributable to maintenance and technical support. As at November 30, 1997, deferred revenue relating to corporate licensing fees attributable to maintenance and technical support was $11.9 million. Sales increased 70.2% in the fiscal year ended November 30, 1996 and decreased 22.0% compared to the previous fiscal year. In fiscal 1997, the average selling price per unit has decreased, primarily due to market competition and general shifts in the sales mix from retail packaged products to licensing programs. Average revenue per unit from original equipment manufacturer ("OEM") licences and corporate licence programs, such as the Universal Corel Licence Program, are lower than the average revenue per unit from retail versions. 29 PRODUCT GROUPS
YEAR ENDED NOVEMBER 30 --------------------------------------------------- 1995 1996 1997 ------------ ------------ ------------ (in thousands) Graphics software - new licences.............. $114,530 $101,320 $ 85,148 Graphics software - existing user upgrades.... 63,595 40,625 30,673 ------------ ------------ ------------ Total graphics software................... 178,125 141,945 115,821 Productivity software - new licences.......... 0 87,146 104,935 Productivity software - existing user upgrades 0 91,017 36,015 ------------ ------------ ------------ Total productivity software............... 0 178,163 140,950 Multimedia software........................... 18,254 13,571 2,828 Communications applications................... 0 566 982 ------------ ------------ ------------ Total sales................................... $196,379 $334,245 $260,581 ============ ============ ============
Graphics software revenues decreased in fiscal 1996 primarily due to lower sales of CorelDRAW 6, resulting, the Company believes, from the slower than anticipated corporate adoption rate of Windows 95 as corporations determined how and when they would upgrade to 32-bit operating systems. This was partially offset by the introduction of CorelDRAW 7, Corel Print & Photo House and Corel Ventura 7 in November 1996, Corel MEGA GALLERY in the fourth quarter of fiscal 1996, and Corel Graphics Pack in the first quarter of fiscal 1996. The graphics software revenues decrease in fiscal 1997 relates primarily to the decrease in sales of CorelDRAW versions 3, 4 and 5. Sales of new versions of CorelDRAW were comparable to 1996. Sales in the academic, OEM and corporate markets have increased the number of overall units sold; however, due to the sales mix the overall average selling price decreased in fiscal 1997. In the fourth quarter of fiscal 1997, Corel completed the sale of certain consumer- based products, namely CorelCAD, CorelFLOW, Corel Lumiere Suite, Corel Family Tree Suite, Corel Click & Create and Corel Visual CADD. Revenues from these products were lower in 1997. Corel Photo-Paint 8 was not released in 1997, which adversely affected graphics software revenues. Productivity software applications revenue in 1997 included revenues from new releases such as Corel WordPerfect Suite 8, Corel WordPerfect Suite 8 Professional, Corel Paradox 8, Corel WordPerfect Suite 7 for DOS and UNIX, and Corel WordPerfect Suite 7 16-bit version. Corel also launched business applications developed for specialized industries. These releases included Corel WordPerfect Suite 7 - Construction Edition, Corel WordPerfect Suite 7 - Legal Edition, and Corel Office Professional - Medical Edition. Revenue generated from productivity software applications declined in 1997 from 1996. This was due, in part, to lower than expected sales of Corel WordPerfect Suite 7 16-bit version. Multimedia software includes Corel Professional Photos on CD-ROM and small computer system interface ("SCSI") software. Multimedia software revenues decreased in fiscal 1996 due to a decline in Corel CD Creator revenues resulting from the sale of the Corel CD Creator product line to Adaptec, Inc. in June 1996 for $12 million, and a decline in the average selling price for Photo CD titles as the sales mix changed toward single titles from Corel Stock Photo Libraries containing 200 titles each. Multimedia software revenues further decreased in fiscal 1997 due to the sale of the Corel CD HOME series and the Corel Medical series to Hoffman + Associates Inc. in May 1997. Communications applications include CorelVIDEO video communication software, CorelCAM colour cameras and other video communication hardware. Initial commercial installations of CorelVIDEO commenced in the second quarter of fiscal 1996. 30 SALES CHANNELS. Corel distributes its products primarily through distributors (as retail packaged products), OEM licences and corporate licences.
YEAR ENDED NOVEMBER 30 -------------------------------------------------- 1995 1996 1997 ------------ ------------ ------------ (in thousands) Retail packaged products...................... $174,703 $273,089 $161,528 OEM licences.................................. 18,520 26,527 30,441 Corporate licences............................ 3,156 34,629 68,612 ------------ ------------ ------------ Total sales................................... $196,379 $334,245 $260,581 ============ ============ ============
Retail packaged products and corporate licences are sold primarily through distributors. The three largest distributors accounted for $82.8 million (42%), $168.4 million (50%), and $93.8 million (36%) of Corel's sales in fiscal 1995, 1996 and 1997, respectively. Packaged product revenue increased in 1996 primarily because of the acquisition of the WordPerfect family of software products on March 1, 1996, the subsequent release of Corel versions of these products during the second and third quarters of fiscal 1996 and the introduction of CorelDRAW 7 in November 1996. Packaged product revenue decreased in 1997. Corporate licences increased significantly in fiscal 1996 due to the introduction in April 1996 of the Corel Licence Program that, while including all of Corel's products, was targeted primarily toward office suite users. Corel's enhanced focus on the corporate market has resulted in increased revenue in 1997 from corporate licences. OEM channel revenues are licence fees from original equipment manufacturers. The primary source of OEM revenues in fiscal 1995 and 1996 was the licensing of graphics software applications. OEM revenues in 1997 related to the licensing of graphics software applications and productivity software applications. Corel intends to continue expanding its marketing efforts in the OEM channel and the corporate marketplace and anticipates that sales from both of these areas will increase in the future both in absolute dollars and as a percentage of revenues, although there can be no assurances that such increases will occur. SALES BY REGION
YEAR ENDED NOVEMBER 30 -------------------------------------------------- 1995 1996 1997 ------------ ------------ ------------ (in thousands) North America................................. $ 99,387 $233,997 $147,450 Europe........................................ 79,668 75,513 84,732 Other international........................... 17,324 24,735 28,399 ------------ ------------ ------------ Total sales................................... $196,379 $334,245 $260,581 ============ ============ ============
Sales outside North America, principally in Europe, were 49%, 30% and 43% of Corel's sales for fiscal 1995, 1996 and 1997, respectively. Sales outside North America decreased as a percentage of sales in 1996 primarily due to the introduction during the second and third quarters of fiscal 1996 of the English language versions of Corel WordPerfect Suite and Corel Office Professional, and the general economic slowdown in Europe, particularly in Germany which has traditionally been Corel's second-largest geographic source of revenues after the United States. In 1997, sales increased in both our European and International markets, notably in Germany and the United Kingdom. Corel intends to continue expanding its marketing efforts outside North America and anticipates that sales outside North America will increase in the future in absolute dollars. Conducting business outside North America is typically subject to certain additional risks, including longer payment cycles, unexpected changes in regulatory requirements and tariffs, currency conversion risks, difficulties in staffing and managing foreign operations, greater difficulty in accounts receivable collection and potentially adverse tax consequences. Corel's products are sold primarily in US dollars in all countries other than Canada and in US dollars to Canadian distributors. Sales in US dollars as a percentage of total sales were in excess of 95% in each of fiscal 1995, 1996 and 1997. 31 GROSS PROFIT Corel includes in cost of sales all costs associated with the acquisition of components, the assembly of finished products, the amortization of software acquisition costs and shipping. Costs associated with warehousing are included in selling, general and administrative expenses. Acquired software has been capitalized and is currently being amortized over a 36-month period commencing with the month of first shipment of the product incorporating such acquired software, except for the WordPerfect family of software programs and related technology, the cost of which is currently being amortized over a three to five year period. Gross profit as a percentage of sales decreased from 76% in fiscal 1995 to 70% in fiscal 1996 and to 68% in fiscal 1997. The decrease in fiscal 1996 was due to the shift in product mix to lower margin products within the graphics software product line, the delayed market acceptance of CorelDRAW 6, and the amortization of approximately $9 million per quarter over the last three quarters of fiscal 1996 relating to the acquisition costs of the WordPerfect family of software products. These factors were partially offset by a higher proportion of CD-ROM versions (over 95% in fiscal 1996) and manufacturing efficiencies. The decrease in gross profit in fiscal 1997 was due primarily to a write-down for inventory obsolescence in the amount of $12.8 million. The write-down was necessitated by the discontinuance of older versions of CorelDRAW in the North American channel. This write-down was partially offset by a lower amortization amount related to the write-down of the WordPerfect technology in the second quarter of fiscal 1997. ADVERTISING EXPENSES Advertising expenses include all marketing, advertising and trade show expenses. Advertising expenses increased by 68.2% to $92.7 million in fiscal 1996 from $55.1 million in fiscal 1995 and decreased by 14.2% to $79.6 million in fiscal 1997. The increase in fiscal 1996 was due primarily to advertising expenses related to the acquisition of the WordPerfect family of software programs and the subsequent release of Corel versions of these software programs during the second and third quarters of fiscal 1996. The decrease in 1997 was due primarily to the reduction of print advertising and corporate sponsorships and promotions. Advertising expenditures are fixed prospectively based on a percentage of projected sales. Actual advertising expenses as a percentage of sales were 28% in fiscal 1995, 28% in fiscal 1996 and 31% in fiscal 1997. The increase in advertising expenses as a percentage of sales in fiscal 1997 was due primarily to lower than anticipated sales in fiscal 1997. Corel expects that these expenses will decline somewhat as a percentage of sales and in actual dollars during fiscal 1998. The expected level of advertising expenses as a percentage of sales is subject to, among other things, Corel's level of sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses include all selling expenses (except for advertising expenses) and general administrative expenses as well as expenses associated with warehousing. Selling, general and administrative expenses increased by 76.3% to $71.0 million in fiscal 1996 from $40.3 million in fiscal 1995 and by 19% to $84.5 million in fiscal 1997. The increase in fiscal 1996 was primarily due to the costs of providing customer and technical support for the WordPerfect family of software programs commencing on March 1, 1996, higher warehousing expenses resulting from higher inventory levels, and the hiring of additional customer support and management and administrative personnel associated with Corel's increased marketing efforts. The increases in 1996 occurred throughout the year due to the acquisition of the WordPerfect technology midway through the year. In 1997 these increases for customer and technical support, warehousing and increased personnel for marketing efforts throughout 1996 were in effect for the entire year which caused the increase in 1997. Selling, general and administrative expenses as a percentage of sales were 21% in fiscal 1995, 21% in fiscal 1996 and 33% in fiscal 1997. Corel expects that these expenses will remain relatively stable in absolute dollars during fiscal 1998. The expected level of selling, general and administrative expenses as a percentage of sales is subject to, among other things, Corel's level of sales. 32 GAIN ON SALE OF COREL CD CREATOR On June 26, 1996, the Company sold all versions of its Corel CD Creator software program and its PD optical recording technology to Adaptec, Inc. in a $12 million cash transaction. A gain on the sale of $10.4 million was realized in the third quarter of fiscal 1996. RESEARCH AND DEVELOPMENT EXPENSES The Company has expensed all of its internal software development costs as incurred, in accordance with Canadian GAAP. Research and development expenses are reported net of Canadian investment tax credits.
YEAR ENDED NOVEMBER 30 ------------------------------------------------ 1995 1996 1997 ----------- ----------- ----------- (in thousands, except percentage data) Gross research and development expenses $31,286 $70,619 $89,499 Research and development tax credits 4,054 4,692 - ----------- ----------- ----------- Net research and development expenses $27,232 $65,927 $89,499 =========== =========== =========== Gross research and development expenses as a percentage of sales 16 % 21 % 34 %
Net research and development expenses increased by 142.1% to $65.9 million in fiscal 1996 from $27.2 million in fiscal 1995 and by 35.8% to $89.5 million in fiscal 1997. These increases were primarily attributable to increased staffing and costs associated with the continued maintenance and enhancement of Corel's products, the acquisition of the WordPerfect family of software programs on March 1, 1996, and development work on new products such as Internet and Java products in fiscal 1996 and Webtop products in 1997. Net research and development expenses as a percentage of sales were 13%, 20% and 34% in fiscal 1995, 1996 and 1997 respectively. Corel expects that these expenses will remain relatively stable in absolute dollars during fiscal 1998. The expected level of research and development expenses as a percentage of sales is subject to, among other things, Corel's level of sales. DEPRECIATION AND AMORTIZATION EXPENSES Depreciation and amortization expenses, which do not include the amortization of purchased software, increased by 101.5% to $19.0 million in fiscal 1996 from $9.5 million in fiscal 1995 and by 37.7% to $26.3 million in fiscal 1997. These increases were due primarily to purchases of additional office and computer equipment over these periods, and in particular, office and computer equipment acquired with the acquisition of the WordPerfect family of software programs on March 1, 1996, and the subsequent expenditures during the second quarter of fiscal 1996 to upgrade this equipment. WRITE-DOWN OF PURCHASED SOFTWARE AND ROYALTIES During 1997, the Company determined that recording nonrecurring charges totaling $117.5 million was appropriate. These charges consist of write-downs of previously capitalized acquired technologies for WordPerfect and deferred development costs in the form of advance royalties paid to various developers for multimedia titles in the Corel CD HOME Collection. The multimedia titles were sold to Hoffman + Associates Inc. in the second quarter of 1997. LOSS (GAIN) ON FOREIGN EXCHANGE Foreign exchange gains or losses on Canadian dollar transactions are due to fluctuations in the value of the Canadian dollar relative to the value of the US dollar between the time sales are recorded and the collection of the account receivable, and revaluation gains or losses relating to short-term investments held in a currency other than 33 the financial measurement and reporting currency due to fluctuations in the value of those currencies relative to the value of the US dollar. The fiscal 1995 foreign exchange loss of $0.1 million reflected fluctuations in the exchange rate during 1995, partially offset by the strengthening of the Canadian dollar from US$0.73 at the beginning of fiscal 1995 to US$0.74 at the end of fiscal 1995. The fiscal 1996 foreign exchange gain of $0.1 million reflected fluctuations in the exchange rate during 1996 as the Canadian dollar was US$0.74 both at the beginning and end of fiscal 1996. The fiscal 1997 foreign exchange loss of $0.7 million reflected the weakening of the Canadian dollar from US$0.74 at the beginning of fiscal 1997 to US$0.71 at the end of fiscal 1997. Corel expects that foreign exchange fluctuations in future periods will be immaterial as substantially all of Corel's sales, assets and liabilities as well as a significant portion of its manufacturing and operating expenses will be in US dollars. Consequently, Corel does not hedge its exposure to potential fluctuations of other currencies vis-a-vis the US dollar. INTEREST EXPENSES (INCOME) Interest income decreased by $3.6 million to $1.4 million in fiscal 1996 from $5.0 million in fiscal 1995. Interest expense in 1997 was $1.2 million. The decrease in fiscal 1996 was due primarily to the decrease in cash and short-term investments of $74.9 million during fiscal 1996 resulting mainly from the WordPerfect acquisition on March 1, 1996, and the subsequent transition to Corel, of the WordPerfect family of software programs and related technology. The interest income received by Corel resulted from weighted average interest rates of 6% in fiscal 1995, and 5% in fiscal 1996. The interest expense in 1997 is for long-term debt relating to the acquisition of the WordPerfect technology from Novell, Inc. INCOME TAXES Corel's effective tax rates for fiscal 1995, 1996 and 1997 were 33.6%, 23.6% and (4.0%) respectively. These effective tax rates vary from the Company's statutory tax rate of 44.3% primarily due to foreign tax rate differences associated with Corel's international operations and the unrecorded tax benefit of accounting losses in the 1997 fiscal year. The accounting losses include loss carryforwards for income tax purposes. Corel's effective tax rate in fiscal 1996 reflects lower operating income from the Company's Irish subsidiary primarily due to higher advertising, research and development, and operating expenses in fiscal 1996. LIQUIDITY AND CAPITAL RESOURCES As of November 30, 1997, Corel's principal sources of liquidity included cash and short-term investments of $30.6 million, and accounts receivable of $53.3 million. Short-term investments consist of overnight call loans to a major Canadian bank and marketable securities. Long-term debt of $37.5 million consists of the outstanding royalty and product return obligations pursuant to the acquisition of the WordPerfect family of software programs on March 1, 1996. Shareholders' equity at November 30, 1997 was $59.8 million. Corel has used funds generated from operations and from the exercise of employee stock options to fund its operations, to repay a portion of its long-term debt and to acquire capital equipment, products and technology. Corel's operating activities provided cash of $7.9 million in fiscal 1995, used $11.5 million in fiscal 1996 and provided cash of $55.1 million in 1997. Non-cash working capital (current assets net of cash and short-term investments and current liabilities) increased by $46.5 million to $114.0 million at November 30, 1996 from $67.5 million at November 30, 1995 and decreased $124.2 million to ($10.2) million at November 30, 1997. Major components of non-cash working capital include accounts receivable, inventories, prepaid expenses, accounts payable, accrued liabilities, the current portion of long-term debt and deferred revenue. Accounts receivable increased by $74.6 million in fiscal 1996 to $136.7 million at November 30, 1996, from $62.1 million at November 30, 1995 and decreased by $83.4 million in fiscal 1997 to $53.3 million at November 30, 1997. Days sales outstanding ("DSO") increased by 12 days in fiscal 1996 to 98 days at November 30, 1996, from 86 days at November 30, 1995 and increased by eight days in fiscal 1997 to 106 days at November 30, 1997. Extended payment terms, up to 75 days, are granted to many of Corel's distributors upon the introduction of new products or new versions of current products to allow these distributors to effectively market and promote such new 34 products or new versions of current products. Bad debts written off totalled $4.6 million in fiscal 1996 and $0.1 million in fiscal 1997. A bad debt provision of approximately $4.0 million made in fiscal 1995 on account of a German distributor was confirmed and written off in fiscal 1996. Inventories increased by $14.2 million in fiscal 1996 to $30.4 million at November 30, 1996 from $16.2 million at November 30, 1995 and decreased by $19.0 million in fiscal 1997 to $11.4 million at November 30, 1997. The increase in fiscal 1996 reflected the addition of Corel WordPerfect products subsequent to the acquisition of the WordPerfect technology in fiscal 1996, and Corel's decisions to maintain CorelDRAW 3, CorelDRAW 4 and CorelDRAW 5 as separate product lines, expand Corel Professional Photos on CD-ROM from 440 titles at November 30, 1995 to over 600 titles at November 30, 1996, and introduce new products, such as CorelVIDEO and Corel Graphics Pack. The decrease in fiscal 1997 was primarily due to a write-down for obsolescence related to the decision to discontinue CorelDRAW 3, CorelDRAW 4, CorelDRAW 6 and CorelDRAW 7 in the North American market. Prepaid expenses increased by $9.5 million in fiscal 1996 to $18.4 million at November 30, 1996, from $8.9 million at November 30, 1995, and decreased by $15.8 million in fiscal 1997 to $2.6 million at November 30, 1997, primarily due to the write-down of deferred development costs in the form of prepaid royalties to third-party developers of Corel CD HOME titles. The multimedia titles were sold to Hoffman + Associates Inc. in the second quarter of fiscal 1997. Accounts payable and accrued liabilities increased by $29.4 million in fiscal 1996 to $52.4 million at November 30, 1996, from $23 million at November 30, 1995, and decreased by $4.3 million in fiscal 1997 to $48.1 million at November 30, 1997. The current portion of long-term debt of $13.5 million at November 30, 1997 represents the amounts due in fiscal 1998 arising from long-term royalty and product return obligations pursuant to the acquisition of the WordPerfect family of software programs on March 1, 1996. The exercise of employee and other stock options provided cash of approximately $16.4 million in fiscal 1995, $7.3 million in fiscal 1996 and $6.2 million in fiscal 1997. Also, in 1997, the Company repurchased for cancellation, 1,450,000 Common Shares for $5.0 million. Corel's capital expenditures totalled $28.5 million in fiscal 1995, $210.1 million in fiscal 1996 and $23.8 million in fiscal 1997, including expenditures for acquired software ($11.7 million in fiscal 1995, $171.1 million in fiscal 1996, of which $153.4 million was for the acquisition of the WordPerfect technology on March 1, 1996 and $12.2 million in fiscal 1997), and for computer and office equipment. At November 30, 1997, Corel had no material commitments for capital expenditures. Corel anticipates that capital expenditures for computer and office equipment for fiscal 1998 and future fiscal years will remain constant with respect to fiscal 1997 levels as computer systems are upgraded to take advantage of new technologies. Due to the rapidly changing technology in the computer software industry, expenditures for technology acquisitions are inherently difficult to predict for future fiscal periods. Corel believes that the existing sources of liquidity and anticipated funds from operations will satisfy Corel's projected working capital, capital expenditure and long-term debt repayment requirements for the 1998 fiscal year. Corel anticipates that subsequent to that time, its working capital and capital expenditures will be satisfied by existing sources of liquidity, funds from operations and, if necessary, additional financings. Corel initiated a corporate-wide program in 1996 to review, test and prepare Corel's products and internal systems for the Year 2000. Review and preparation for the Year 2000 is expected to be completed on a timely basis. Corel has committed significant resources to this process and does not believe that the Year 2000 problems that may arise will materially affect sales of Corel products or the operations of the Company. The most current information on the Year 2000 status of Corel products may be found on the Company's Web site. 35 FACTORS THAT MAY AFFECT FUTURE RESULTS Corel does not provide forecasts of future financial performance. While Corel's management is confident about Corel's long-term performance prospects, the following factors, among others, should be considered in evaluating its future results of operations. Competition The PC software business is highly competitive and subject to rapid technological change. Many of Corel's current and potential competitors have larger technical staffs, more established and larger marketing and sales organizations, and significantly greater financial resources than does Corel. 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. GRAPHICS SOFTWARE. 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, Macromedia Inc., Deneba Systems Incorporated and Micrografx, Inc. In the photo-editing and painting graphics segments, its competitors include Adobe and Micrografx. In the charting and presentation segments its competitors include Software Publishing Corporation, Microsoft Corporation, Adobe, Micrografx and IBM (Lotus Development Corporation). In the desktop publishing segment, its competitors include Adobe and Quark, Inc. Corel's competitors include many other independent software vendors, such as Autodesk, Inc., Borland International, Inc., Apple Computer Inc. (Claris Corporation) and Computer Associates, as well as a number of personal computer manufacturers which devote significant resources to creating personal computer software, including Apple, Hewlett-Packard Company and IBM. PRODUCTIVITY SOFTWARE. Corel's competitors in the productivity software (primarily office suites) marketplace include Microsoft and IBM (Lotus). 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 pre-installs certain of its software products on various models of its PCs, competing directly with Corel productivity software. MULTIMEDIA SOFTWARE. The Company competes with other participants in the Photo CD market on the basis of price, the categories of photographs available, the quality of the photographs and the nature of the rights attached to the photos included on the Photo CD. The Company's competitors in this market include Westflight, Digital Zone and Aris Entertainment. COMMUNICATIONS APPLICATIONS. The Company's communications applications products (CorelVIDEO) compete against offerings from Intel, PictureTel, C-Phone and many other companies. The Company believes that the principal competitive factors in the PC software markets include performance, product features, ease of use, reliability, hardware compatibility, brand name recognition, product reputation, pricing, levels of advertising, availability and quality of customer support, and timeliness of product upgrades. 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. The Company also competes with other software companies in its efforts to acquire software technology developed by third parties. The Company believes that, in the future, competition in the industry will intensify as major software companies expand their product lines. Pricing In the past year, pricing pressures have intensified in the PC software applications market and the Company believes that price competition, with its attendant reduced profit margins, may become a more significant factor in the future. Corporate licensing, discount pricing for large volume distributors and retailers, product bundling promotions and 36 competitive upgrade programs are forms of price competition that may become more prevalent. In addition, local area network 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. Additionally, should competitive pressures in the industry increase, Corel may have to increase its spending on advertising as a percentage of revenues, resulting in lower profit margins. Technological Change The markets for Corel's products are characterized by rapidly changing technology, frequent new product introductions and uncertainty due to new and emerging technologies. Corel's future success is highly dependent upon the timely completion and introduction of new or enhanced products incorporating such emerging technologies at competitive price/performance levels. The pace of change has recently accelerated due to the Internet, corporate intranets, the introduction of 32-bit operating systems such as Windows 95 and Windows NT 4.0, and new programming languages, such as Java. PC Growth Rates The underlying PC unit growth rate, which may increase at a slower rate in the future, impacts Corel's revenue growth. Dependence on New Products While Corel performs extensive usability and beta testing of new and enhanced products, user acceptance and corporate penetration rates ultimately determine the success of development and marketing efforts. Product Ship Schedules Delays in new product releases impact sales growth rates and can cause operational inefficiencies that impact manufacturing and distribution logistics, distributor, reseller and OEM relationships, and technical support and customer service staffing. Channel Mix Average revenue per unit is lower from OEM licences than from retail versions, reflecting the relatively low direct costs of operations in the OEM channel. Corel's OEM revenues continued to increase during fiscal 1996 and fiscal 1997. Potential Fluctuations in Quarterly Results Corel's quarterly operating results fluctuate as a result of a number of factors, including the timing of new product announcements and introductions by Corel and its competitors, pricing, distributor ordering patterns, the relative proportions of sales attributable to full kits and existing user upgrades, product returns and reserves, advertising and other marketing expenditures, and research and development expenditures. Revenues and earnings may be difficult to predict due to shipment patterns. Products are generally shipped as orders are received, and accordingly, Corel has historically operated with little backlog. As a result, sales in any quarter are dependent on orders booked and shipped in that quarter. As is typical in the computer software industry, a high percentage of Corel's revenues are expected to be earned in the third month of each fiscal quarter and will tend to be concentrated in the latter half of that month. Accordingly, quarterly financial results will be difficult to predict until the end of the quarter and a shortfall in shipments at the end of any particular quarter may cause the results of that quarter to fall significantly short of anticipated levels. 37 Employee Compensation The highly competitive market for qualified personnel, especially software engineers and developers, could adversely affect Corel's ability to engage and retain competent qualified personnel, particularly development professionals. Corel believes that its employment policies in this regard are competitive within the industry. Effective December 1, 1997, Corel introduced an employee bonus incentive plan. Dependence on Distributors The distribution of Corel's products is carried out primarily through distributors, certain of which are material to the competitive position of Corel. 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 Corel's results of operations. International Operations and Geographic Concentration Currently, Corel markets its products in approximately 70 countries. Corel anticipates that sales outside North America will continue to account for a significant portion of total sales. These sales are subject to certain risks including imposition of government controls, export licence requirements, restrictions on the export of technology, political instability, trade restrictions, changes in tariffs, differences in copyright protection and difficulties in managing accounts receivable. More than 40% of Corel's sales for the past three fiscal years were made in the United States. As a result, adverse developments in the United States markets for Corel's products could have a material adverse effect on Corel's results of operations. Dependence on Key Personnel Corel's success depends to a significant extent upon the performance of Corel's executive officers and key technical and marketing personnel, particularly the Company's founder and Chairman, President and Chief Executive Officer, Dr. Michael C.J. Cowpland. Corel has agreements describing compensation arrangements and containing non-disclosure covenants with certain of its key employees. Corel does not have employment agreements with other key employees, including Dr. Cowpland. Corel believes that its future success will also depend in large part on its ability to attract and retain highly skilled technical, managerial, and sales and marketing personnel. 38 CORPORATE GOVERNANCE The Company's Board of Directors and senior management consider good corporate governance to be central to the effective and efficient operation of Corel. The Toronto Stock Exchange ("TSE") Committee on Corporate Governance in Canada has issued a series of proposed guidelines for effective corporate governance. The guidelines address matters such as the constitution and independence of corporate boards, the functions to be performed by boards and their committees, and the effectiveness and education of board members. To implement these guidelines, the TSE has adopted as a listing requirement the disclosure by each listed corporation of its approach to corporate governance with reference to the proposed guidelines.
Does Corel TSE Corporate Governance Committee Guideline Conform? Comments - -------------------------------------------- -------- ------- 1 Board should explicitly assume responsibility for stewardship of the corporation, and specifically for: a) adoption of a strategic planning process. Yes. The Board participates in strategic planning; however, the nature of the business and its rapid evolution precludes long-term planning. The Board generally participates in, and is fully informed of, strategic initiatives as they develop. b) identification of principal risks, Yes. The Board, in its deliberations, considers and implementing risk-managing systems. the principal risks of the Company's business and receives reports of the Company's assessment and management of those risks. c) succession planning and monitoring Yes. The Board has addressed with the CEO the senior management. question of succession planning. The Board does participate in the appointing of senior management. d) communications policy. Yes. The Board has considered and discussed how the Company communicates with its various stakeholders and intends to further review the Company's communications policy. e) integrity of internal control and Yes. The Board directly, and through its management information systems. Audit Committee, assesses the integrity of the Company's internal control and management information systems. 2 Majority of directors should be "unrelated" Yes. The Board is composed of nine members: (free from conflicting interests). four are unrelated, one is an employee of the Company, one is an officer of the Company and three positions are currently vacant. 3 Disclose for each director whether he or she Yes. Apart from Michael Cowpland and Paul C. is related, and how that conclusion was LaBarge, all directors are unrelated to reached. the Company or each other. Michael Cowpland is the Founder, the largest individual shareholder, Chief Executive Officer and President of the Company. Paul C. LaBarge is the Secretary of the Company. ____________________________________________________________________________________________________________________________________
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Does Corel TSE Corporate Governance Committee Guideline Conform? Comments - -------------------------------------------- -------- -------- 4 a) Appoint a Committee responsible for Yes. The Board of Directors has appointed the appointment/assessment of directors the Audit Committee with this mandate. b) Composed exclusively of non-management Yes. directors, the majority of whom are unrelated. 5 Implement a process for assessing the Yes. The Board of Directors has appointed effectiveness of the Board, its the Audit Committee with this mandate. Committees and individual directors. 6 Provide orientation and education Yes. The Company provides appropriate programs for new directors. documentation and presentations as required for new directors. 7 Consider reducing the size of Board, Yes. The Board has considered its size with with a view to improving effectiveness. a view to the impact of size upon its effectiveness and has concluded that the number of directors is in the appropriate range for a corporation of the size and complexity of the Company. The Board as presently constituted brings together a mix of skills, backgrounds and attitudes that the Board considers appropriate to the stewardship of the Company. 8 Review compensation of directors in Yes. The Board, through its Compensation light of risks and responsibilities. Committee, periodically reviews the adequacy and form of compensation of directors. 9 a) Committees should generally be Yes. All the members of the Audit and Compensation composed of non-management directors, Committees are non-management directors. and b) Majority of Committee members Yes. All the members of the Audit and Compensation should be unrelated. Committees are unrelated. 10 Appoint a Committee responsible for Yes. The Board, as a whole, has considered approach to corporate governance corporate governance issues and has appointed issues. the Audit Committee with this mandate. 11 a) Define limits to management's responsibilities by developing mandates for: (i) the Board. No. There is no specific mandate for the Board, since the Board has plenary power. Any responsibility which is not delegated to senior management or a Board Committee remains with the full Board. (ii) the CEO. No. The scope and extent of the CEO's mandate has evolved through interaction with the Board and an ongoing consultative process with the Board.
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Does Corel TSE Corporate Governance Committee Guideline Conform? Comments - -------------------------------------------- -------- -------- b) Board should approve CEO's corporate Yes. The Board annually approves the key results objectives. for which the CEO is responsible and reviews key results and objectives quarterly. 12 Establish procedures to enable the Yes. The Board has functioned, and is of the Board to function independently of opinion that it can continue to function, management. independently as required. 13 a) Establish an Audit Committee with a Yes. The Audit Committee has a specifically specifically defined mandate. defined mandate that includes oversight responsibility for management reporting on internal controls and corporate governance. b) All members should be Yes. The members are non-management directors. non-management directors. 14 Implement a system to enable individual Yes. A system is under consideration but was not directors to engage outside advisers, implemented during the fiscal year. at corporation's expense.
41 EX-13.2 3 FINANCIAL STATEMENTS EXHIBIT 13.2 42 EXHIBIT 13.2 COREL CORPORATION ________________________________________________________________________________ INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Auditors' Report Consolidated Balance Sheets Consolidated Statements of Operations and Retained Earnings (Deficit) Consolidated Statements of Changes in Financial Position Notes to Consolidated Financial Statements 43 COREL CORPORATION ________________________________________________________________________________ AUDITORS' REPORT TO THE SHAREHOLDERS We have audited the consolidated balance sheets of Corel Corporation as at November 30, 1997, and November 30, 1996, and the consolidated statements of operations and retained earnings (deficit) and changes in financial position for the years ended November 30, 1997, 1996 and 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance 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. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at November 30, 1997 and 1996, and the results of operations and the changes in financial position for the years ended November 30, 1997, 1996 and 1995 in accordance with generally accepted accounting principles. Generally accepted accounting principles in Canada differ in some respects from those applicable in the United States (note 10). /s/ KPMG Chartered Accountants Ottawa, Canada January 16, 1998 (except as to Note 12 which is at February 23, 1998) 44 COREL CORPORATION ________________________________________________________________________________ CONSOLIDATED BALANCE SHEETS
As of November 30 ------------------------- 1996 1997 ------- ------- (in thousands of US$) ASSETS Current assets: Cash and short-term investments $ 6,924 $ 30,629 Accounts receivable Trade (note 11) 135,338 50,951 Other 1,341 2,310 Inventory (note 1) 30,390 11,412 Income taxes recoverable 12 - Deferred income taxes 2,940 2,353 Prepaid expenses 18,388 2,591 -------- --------- Total current assets 195,333 100,246 Deferred income taxes 870 - Capital assets (note 2) 202,275 63,497 -------- --------- Total assets $398,478 $ 163,743 ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 17,592 $ 13,840 Accrued liabilities 34,801 34,223 Current portion of long-term debt (note 3) 15,500 13,500 Income taxes payable - 4,203 Deferred revenue 6,495 14,124 -------- --------- Total current liabilities 74,388 79,890 Long-term debt (note 3) 33,830 24,044 SHAREHOLDERS' EQUITY: Share capital (note 4) 202,953 204,235 Contributed surplus 352 730 Retained earnings (deficit) 86,955 (145,156) -------- --------- Total shareholders' equity 290,260 59,809 -------- --------- Total liabilities and shareholders' equity $398,478 $ 163,743 ======== =========
Commitments (note 8) (See accompanying Notes to Consolidated Financial Statements) 45 COREL CORPORATION ________________________________________________________________________________ CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
Year ended November 30 ---------------------------------------------- 1995 1996 1997 -------- -------- -------- (in thousands of US$, except per share data) Sales $196,379 $334,245 $ 260,581 Cost of sales (note 5) 47,352 101,094 84,136 Gross profit 149,027 233,151 176,445 Expenses: Advertising 55,099 92,682 79,561 Selling, general and administrative 40,292 71,019 84,480 Gain on sale of CD Creator technology - (10,426) - Research and development 27,232 65,927 89,499 Depreciation and amortization 9,468 19,081 26,275 Write-down of purchased software and royalties - - 117,512 Loss (gain) on foreign exchange 136 (141) 764 -------- -------- -------- 132,227 238,142 398,091 -------- -------- -------- Income (loss) from operations 16,800 (4,991) (221,646) Interest expense (income) (5,023) (1,391) 1,154 -------- -------- -------- Income (loss) before income taxes 21,823 (3,600) (222,800) Income taxes (recoverable) (note 6): Current 7,174 5,455 7,421 Deferred 165 (6,305) 1,457 -------- -------- -------- 7,339 (850) 8,878 -------- -------- -------- Net income (loss) 14,484 (2,750) (231,678) Retained earnings beginning of year 75,221 89,705 86,955 Premium on shares repurchased for cancellation - - (433) -------- -------- -------- Retained earnings (deficit) end of year $ 89,705 $ 86,955 $(145,156) ======== ======== ========= Earnings (loss) per share (note 4): Net income (loss) Basic $0.30 $(0.05) $(3.84) Weighted average number of Common shares outstanding (000s): Basic 48,412 57,289 60,297
(See accompanying Notes to Consolidated Financial Statements) 46 COREL CORPORATION ________________________________________________________________________________ CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
Year ended November 30 ---------------------------------------- 1995 1996 1997 -------- -------- -------- (in thousands of US$) Cash provided by (used for): Operations: Net income (loss) $ 14,484 $ (2,750) $(231,678) Items which do not involve cash: Depreciation and amortization 17,334 56,553 52,282 Deferred income taxes 165 (6,305) 1,457 Decrease (increase) in accounts receivable (9,269) (74,560) 83,418 Decrease (increase) in inventory (2,807) (14,166) 18,978 Decrease (increase) in prepaid expenses (7,533) (9,507) 5,616 Increase (decrease) in accounts payable 4,409 4,696 (3,752) Increase (decrease) in accrued liabilities (625) 24,704 (578) Increase (decrease) in income taxes payable/recoverable (8,236) 3,294 4,215 Increase in deferred revenue - 6,495 7,629 Write-down of royalties - - 10,181 Write-down of purchased software - - 107,331 -------- --------- --------- 7,922 (11,546) 55,099 -------- --------- --------- Financing: Issue of share capital 16,421 97,152 6,206 Shares repurchased for cancellation - - (4,979) Increase in long-term debt - 55,000 - Repayment of long-term debt - (5,670) (11,786) -------- --------- --------- 16,421 146,482 (10,559) -------- --------- --------- Investments: Purchase of capital assets (28,459) (210,108) (23,829) Proceeds on disposal of assets 314 280 2,994 -------- --------- --------- (28,145) (209,828) (20,835) -------- --------- --------- Net increase (decrease) in cash (3,802) (74,892) 23,705 Cash at beginning of year 85,618 81,816 6,924 -------- --------- --------- Cash at end of year $ 81,816 $ 6,924 $ 30,629
Cash is defined as cash and short-term investments (See accompanying Notes to Consolidated Financial Statements) 47 COREL CORPORATION ________________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada. These principles are also generally accepted in the United States in all material respects except as disclosed in Note 10. (a) BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Corel Corporation Limited, Corel Computer Corp., Corel International Corporation, Corel, Inc. and its wholly-owned subsidiary, Corel Corporation (U.S.A.). All material intercompany transactions and balances have been eliminated. (b) ESTIMATES AND ASSUMPTIONS Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Examples include provisions for returns and bad debts, the length of product cycles and capital assets lives. Actual results may differ from these estimates. (c) SALES RECOGNITION Sales are recognized when the products are shipped to the customer and are net of discounts and allowances for returns. Sales to distributors are subject to agreements allowing limited rights of return and price protection. The Company provides reserves for estimated future returns, exchanges and price protection. Licence revenue is recognized when the licence is shipped to the customer. Associated maintenance revenue is deferred and recognized over the term of the related agreement. (d) RESEARCH AND DEVELOPMENT COSTS Research costs are expensed as incurred. Development costs are expensed as incurred unless they meet the criteria for deferral under generally accepted accounting principles. Acquired software is capitalized and amortized over its expected useful life, generally three to five years. (e) INVENTORY Inventory of raw materials is valued at the lower of cost and replacement cost, and finished goods are valued at the lower of cost and net realizable value. (f) CAPITAL ASSETS Capital assets are recorded at cost. Amortization of licences commences with the market release of each new software product and version. Depreciation and amortization are calculated using the following rates and bases: Furniture and equipment................ 20 - 33.3% declining balance Computer equipment and software........ 50% straight line Research and development equipment..... 20 - 50% declining balance Software licences and purchased software, clipart libraries and Photo CD libraries.................... Shorter of the life of the licence or 20.0 - 33.3% straight line Leasehold improvements................. Straight line over the term of the lease The Company regularly reviews the carrying value of its capital assets. If the carrying value of its capital assets exceeds the amount recoverable, a write- down is charged to the consolidated statement of operations. 48 COREL CORPORATION ________________________________________________________________________________ (g) CASH AND SHORT-TERM INVESTMENTS Short-term investments are stated at the lower of cost and market value. Short-term investments included with cash consisted of overnight bank term deposits of $6,000,000 and $1,000,000 at November 30, 1996 and 1997 respectively. At November 30, 1997, short-term investments also include $5,000,000 of marketable securities. (h) INCOME TAXES The Company follows the tax allocation basis using the deferral method in accounting for income taxes. Deferred income taxes are recorded for timing differences in reporting income and expenses for financial statement and tax purposes. (i) FOREIGN CURRENCY TRANSLATION Monetary assets and liabilities denominated in foreign currencies are translated at the closing year end rates of exchange. Non-monetary items are translated at the rates of exchange in effect when the assets were acquired or obligations incurred. Income and expense items have been translated at the average rates prevailing during the respective years. The resulting gains or losses resulting from the translation of these amounts have been reflected in earnings. 1. INVENTORY
As at November 30 ------------------------ 1996 1997 -------- -------- (in thousands of US$) Raw materials $23,986 $ 7,974 Finished goods 6,404 3,438 ------- ------- $30,390 $11,412 ======= =======
2. CAPITAL ASSETS
As at November 30, 1997 ------------------------------------------------ Accumulated Depreciation Net and November 30 Cost Amortization Net 1996 ------------ -------------- -------- ----------- (in thousands of US$) Funiture and equipment $ 15,603 $ 7,296 $ 8,307 $ 8,963 Computer equipment and software 60,688 51,265 9,423 24,205 Research and development equipment 12,596 5,198 7,398 6,683 Leasehold improvements 3,625 1,951 1,674 1,729 Software licences and puchased software, clipart libraries and Photo CD libraries 94,009 57,314 36,695 160,695 -------- -------- ------- -------- $186,521 $123,024 $63,497 $202,275 ======== ======== ======= ========
At November 30, 1996 the cost amounted to $297,969,000 and accumulated depreciation and amortization amounted to $95,694,000. The carrying amount of licences not being amortized at November 30, 1997 and 1996 amounted to $2,425,000 and $77,000 respectively. Included in the $107,331,000 write-down of purchased 49 COREL CORPORATION ________________________________________________________________________________ software is an amount of $97,383,000 related to a write-down of the WordPerfect family of software programs to net recoverable amount. 3. LONG-TERM DEBT Long-term debt is comprised of the outstanding royalty and product return obligations pursuant to the acquisition of the WordPerfect family of software programs and related technologies from Novell, Inc. and is secured by a pledge of certain accounts receivable.
As at November As at November 30, 1997 30, 1996 ------------------------------------------ -------------- Product Royalty Returns Total Total ----------- ------------ ---------- ---------- (in thousands of US$) Long-term debt $19,182 $18,362 $37,544 $49,330 Less: Current portion 6,500 7,000 13,500 15,500 ------- ------- ------- ------- $12,682 $11,362 $24,044 $33,830 ======= ======= ======= =======
ROYALTY OBLIGATION The following are the future royalty payments (in thousands of US$) under the acquisition agreement based on management's estimates net of interest imputed at 10%. 1998 $ 6,500 1999 7,800 2000 9,360 2001 2,976 ------- Total minimum royalty payments 26,636 Less amounts representing interest at 10% 7,454 ------- Balance of the obligation $19,182 =======
PRODUCT RETURNS The Company is obligated to reimburse Novell Inc. for amounts representing returns of Novell WordPerfect products in the distribution channel. Payments are due in quarterly installments over four years commencing January 1, 1997, with an interest charge of 1% over the US prime rate. The payments (in thousands of US$) required in the next three years are as follows: 1998 $ 7,000 1999 6,125 2000 5,237 ------- $18,362 =======
50 COREL CORPORATION ________________________________________________________________________________ 4. SHARE CAPITAL
As at November 30 ---------------------------------------- 1995 1996 1997 ------- ------- -------- (a) AUTHORIZED AND ISSUED SHARE CAPITAL Authorized Unlimited preferred shares, issuable in series, no par value Unlimited common shares Issued Number of common shares (000s) 49,300 60,041 59,740 Stated capital (in thousands of US$) $105,801 $202,953 $204,235 (b) COMMON SHARES ISSUED DURING THE YEAR Stock option plan Number of shares (000s) 1,471 791 1,149 Cash consideration (in thousands of US$) $ 16,421 $ 7,252 $ 6,206 Technology acquisition Number of shares (000s) - 9,950 - Consideration (in thousands of US$) - $ 89,900 - (c) COMMON SHARES PURCHASED AND CANCELLED DURING THE YEAR Number of shares (000s) - - 1,450 Cash outlay (in thousands of US$) - - $ (4,979) Premium of share repurchase (in thousands of US$) - - $ 433 Discount on share repurchase (in thousands of US$) - - $ (378)
(d) EARNINGS (LOSS) PER COMMON SHARE The calculations of the earnings (loss) per common share are based on the weighted daily average number of shares outstanding during the year. The calculation of fully diluted earnings per common share assumes that all outstanding options have been exercised at the later of the beginning of the fiscal period or the option issuance date. Where the impact of the conversion or exercise of these options is anti-dilutive they are not included in the calculation of fully diluted earnings per share. In 1995, fully diluted earnings per share was $0.26 and the weighted average number of fully diluted shares outstanding was 55,174. For other years presented there is no dilutive effect for potential conversions.
51 COREL CORPORATION ________________________________________________________________________________ (e) STOCK OPTION PLAN The Company's stock option plan is administered by the Compensation Committee which is a subcommittee of the Board of Directors. The Compensation Committee will designate eligible participants to be included under the plan and will designate the number of options and share price pursuant to the new options, subject to applicable securities laws and stock exchange regulations. The options vest when granted. Information with respect to stock option activity for 1996 and 1997 follows:
Price per share (CDN$) -------------------------------- Weighted Number of Shares Range Average ---------------- --------------- ---------- Outstanding at November 30, 1995 7,564,284 $ 4.67 - $ 25.25 $17.52 Granted 5,957,000 9.50 - 15.00 11.55 Exercised (791,720) 4.67 - 19.67 12.24 Cancelled (371,187) 13.50 - 22.38 17.00 ------------ ---------------- ------ Outstanding at November 30, 1996 12,358,377 4.67 - 25.25 14.99 Granted 5,976,414 4.00 - 8.60 7.67 Exercised (1,149,087) 4.67 - 9.50 7.75 Cancelled (11,028,185) 4.67 - 25.25 15.03 ------------ ---------------- ------ Outstanding at November 30, 1997 6,157,519 $ 4.00 - $ 22.38 $ 9.17 ------------ ---------------- ------
For various price ranges (in CDN$), weighted average characteristics of outstanding stock options at November 30, 1997 were as follows:
Outstanding options ------------------------------------ Remaining life Weighted Average Range of exercise price Shares (years) Price ----------------------- ------ -------------- ---------------- $ 4.00 - $ 7.50 178,800 3.8 $ 6.52 7.51 - 13.00 5,089,329 2.1 7.84 13.01 - 18.00 438,001 1.8 14.03 18.01 - 22.38 451,389 1.2 20.42
The outstanding options expire between February 7, 1998 and November 14, 2001. (f) STOCK OPTION REPRICING On April 18, 1997, the shareholders adopted a resolution by the Board of Directors to reprice outstanding options at prices greater than $7.70, to $7.70. The resolution permitted option holders who qualified for grants under the plan to exchange existing options for options with a current market exercise price. The basis of the exchange was to reduce pro rata the number of options received to the change in exercise price. No other changes will be made in respect of options exchanged. 52 COREL CORPORATION ________________________________________________________________________________ 5. COST OF SALES
Year ended November 30 ------------------------------------------- 1995 1996 1997 -------- -------- --------- (in thousands of US$) Cost of goods sold $37,490 $ 42,852 $44,906 License amortization 7,866 37,472 26,007 Royalties 1,996 20,770 13,223 ------- -------- ------- $47,352 $101,094 $84,136 ======= ======== =======
6. INCOME TAXES Income tax expense varies from the amount that would be computed by applying the basic federal and provincial income tax rates to income before income taxes, as shown in the following table:
Year ended November 30 ------------------------------------------- 1995 1996 1997 -------- -------- -------- (in thousands of US$) Basic rate applied to income before income taxes $ 9,676 $ (1,606) $(99,414) Increase (decrease) in taxes resulting from: Provincial research and development deduction (1,072) (823) (677) Amortization of software licences not tax deductible 601 540 507 Amortization of share costs (194) (197) - Losses recognized for accounting purposes but not for income tax purposes - - 23,152 Write-down of items not deductible for income tax purposes - - 1,086 Foreign tax and exchange rate differences (1,570) 400 84,222 Other items (102) 836 2 ------- ------- -------- $ 7,339 $ (850) $ 8,878 ======= ======= ========
(a) LOSS CARRYFORWARD During the year ended November 30, 1997, the Company reported accounting losses of $222,800,000. The tax benefit related to $213,000,000 of these losses has not been recorded in the consolidated financial statements. The accounting losses include loss carryforwards for income tax purposes of $32,600,000 which begin to expire after the 2003 fiscal year. The remaining amount relates to items expensed in the consolidated financial statements which have not yet been claimed for income tax purposes. 53 COREL CORPORATION ________________________________________________________________________________ 7. SEGMENTED INFORMATION In the opinion of management, the Company operates in one industry segment, that being the PC software development business. The Company distributes its products worldwide from three geographic regions.
As at and for the year ended November 30 -------------------------------------------------------- 1995 1996 1997 ------- ------- ------- (in thousands of US$) Sales U.S.A. - $ 235,818 $ 182,523 Canada $ 78,507 57,334 40,105 Ireland 137,306 309,456 242,334 Segment Transfers Canada (19,434) (23,134) (17,706) Ireland - (245,229) (186,675) -------- --------- --------- Net Sales $196,379 $ 334,245 $ 260,581 -------- --------- --------- Net income (loss) U.S.A. - $ 1,853 $ 3,073 Canada $ 9,800 (4,869) (37,273) Ireland 4,684 266 (197,478) -------- --------- --------- $ 14,484 $ (2,750) $(231,678) -------- --------- --------- Identifiable assets U.S.A. - $ 110,397 $ 40,278 Canada $154,866 75,622 55,456 Ireland 66,480 212,459 68,009 -------- --------- --------- $221,346 $ 398,478 $ 163,743 -------- --------- ---------
A summary of sales by region and by major customer from consolidated operations is as follows:
Year ended November 30 ------------------------------------------------- 1995 1996 1997 ------ ------- ------- (in thousands of US$) By region: U.S.A. $ 91,913 $214,481 $129,110 Europe 79,668 75,513 84,732 Canada 7,474 19,516 18,340 Other 17,324 24,735 28,399 -------- -------- -------- $196,379 $334,245 $260,581 -------- -------- -------- By major customer: Ingram Micro Inc. $ 58,173 $109,562 $ 63,119
54 COREL CORPORATION ________________________________________________________________________________ 8. COMMITMENTS The Company rents office premises, sponsors various sporting events and venues, and is obligated to pay minimum product royalties under long- term agreements. Rent expense (in thousands of US$) pursuant to lease obligations aggregated $3,115, $6,746 and $7,006 during the years ended November 30, 1995, 1996 and 1997, respectively. At November 30, 1997, the minimum commitments under long-term agreements (in thousands of US$), are as follows: 1998 $11,677 1999 7,859 2000 7,660 2001 6,730 2002 4,981 2003 and thereafter 58,315 ------- $97,222 -------
9. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES The carrying values of cash and short-term investments (excluding marketable securities), accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the relatively short period to maturity of the instruments. The fair value of marketable securities included in cash and short term investments at November 30, 1997 is $5,493,000 which is based on the quoted market price. The fair value of long-term debt is determined by discounting the future contractual cash flow of the obligations at discount rates which represent borrowing rates presently available to the Company for instruments with similar terms and maturities. The carrying value of the Company's product return obligation approximates its fair value on a discounted cash flow basis as the interest rate on this obligation automatically reprices based on the US prime rate. The carrying value of the Company's royalty obligation cannot be estimated as the Company cannot reliably estimate the prevailing interest rate for a financial instrument having substantially the same terms and characteristics. Accordingly, the carrying value of the royalty obligation is considered to approximate its fair value. 10. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GAAP The Company's financial statements are prepared on the basis of Canadian GAAP, which is different in some respects from US GAAP. Significant differences between Canadian GAAP and US GAAP are set forth below: (a) CALCULATION OF EARNINGS PER SHARE Under Canadian GAAP, the basic earnings per share data are computed using only the weighted daily average number of shares outstanding during the year. Under US GAAP, the weighted average number of shares is computed including dilutive options, and as if the funds obtained from the assumed exercise of the options were used to purchase common shares at the average market price during the period. The calculation of fully diluted earnings per share for US GAAP purposes is not significantly different from the primary calculation for US GAAP and therefore is not presented. 55 COREL CORPORATION ________________________________________________________________________________
Year ended November 30 -------------------------------------------- 1995 1996 1997 ------- ------- ------- (in thousands of US$) US GAAP-Primary Net income (loss) per share (in US$) $ 0.29 $ (0.05) $ (3.84) Weighted average number of common shares outstanding (000s) 50,349 57,340 60,297
(b) ACCOUNTING FOR STOCK-BASED COMPENSATION The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its employee stock option plan. Accordingly, no compensation expense has been recognized for its stock-based compensation plan. Had compensation cost for the Company's employee stock-option plan been determined based on the fair value at the grant date for awards under the plan, consistent with the methodology prescribed under the Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company's net loss would have changed to the pro forma amounts indicated below:
1996 1997 ------- ------- (in thousands of US$) Net loss as reported $ 2,750 $231,678 Estimated stock based compensation costs 14,290 4,538 ------- -------- Pro forma net loss $17,040 $236,216 ======= ======== Pro forma loss per share $ 0.30 $ 3.92 ======= ========
The weighted average fair values of all options granted during 1997 and 1996 was estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
1996 1997 ------- ------- Expected option life (years) 2.0 1.25 Volatility 45 45 Risk free interest rate 5.47% 4.97% Dividend yield nil nil
The weighted average fair values, at the date of grant, for stock options granted during 1997 and 1996 were $2.51 and $0.76 per option, respectively. The Black-Scholes model, used by the Company to calculate option values, as well as other currently accepted option valuation models, was developed to estimate the fair value of freely tradeable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated values. Accordingly, management believes that this model does not necessarily provide a reliable single measure of the fair value of the Company's stock option awards. 56 COREL CORPORATION ________________________________________________________________________________ (c) DEFERRED INCOME TAXES The Company follows the deferral method of accounting for income taxes. Under U.S. GAAP, the asset and liability method is used. In the case of the Company, the application of the asset and liability method does not result in a significant difference in the amount of the deferred tax asset. U.S. GAAP also requires the disclosure of the tax effect of temporary differences that give rise to deferred tax assets and liabilities. This information is provided in the following table.
1996 1997 -------- -------- (in thousands of US$) Operating loss carryforwards - $ 4,855 Depreciation $ 2 14,750 Reserves 475 3,292 Inter-segment transfers 3,050 - Other 283 - ------ -------- 3,810 22,897 Valuation allowance - (20,544) ------ -------- Net non-current deferred tax assets $3,810 $ 2,353 ------ --------
(d) CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION The Company defines cash for purposes of the consolidated statements of changes in financial position as cash and short-term investments. Included in short-term investments are $5,000,000 of marketable equity securities. Under US GAAP, cash at the end of the year and cash provided by operations for 1997 would be reduced by this amount. 11. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION Included in trade accounts receivable are the following reserves and related activity:
Opening Ending Period Ended Description Balance Additions Deductions Balance - -------------- ------------- --------- ----------- ------------ --------- (in thousands of US$) November 30, 1997 Promotional Rebates $14,750 $42,775 $ 46,129 $11,396 Sales reserve 30,000 85,829 61,416 54,413 Allowance for doubtful accounts 3,831 1,743 108 5,466 November 30, 1996 Promotional Rebates 2,970 39,148 27,368 14,750 Sales reserve 9,871 28,392 8,263 30,000 Allowance for doubtful 6,136 2,283 4,588 3,831 November 30, 1995 Promotional Rebates 2,476 8,442 7,948 2,970 Sales reserve 6,418 8,470 5,017 9,871 Allowance for doubtful 2,027 5,112 1,003 6,136
57 COREL CORPORATION ________________________________________________________________________________ 12. SUBSEQUENT EVENT On or about February 23, 1998, Corel became aware that a class action lawsuit had been filed against it by named Plaintiff Great Neck Capital Appreciation Investment Partnership in the United States District Court for the Eastern District of New York. No motions have been filed or discovery yet undertaken. Corel intends to defend the litigation vigorously. However, due to the inherent uncertainties of litigation, Corel cannot accurately predict the ultimate outcome of the litigation. Investigating and defending the complaint may require expenditure of material amounts of funds and may require a significant amount of management's time and resources. An unfavourable outcome in the litigation could have a material adverse effect on Corel's business, financial condition and results of operations. 58 EX-21.1 4 SUBSIDIARIES EXHIBIT 21.1 59 EXHIBIT 21.1 Subsidiary Information Corel Corporation Limited Europa House Harcourt Street Dublin 2, Ireland Corel, Inc. 567 Timpanogos Parkway Orem, Utah U.S.A. 84507 Corel Corporation (U.S.A.) 567 Timpanogos Parkway Orem, Utah U.S.A. 84507 Corel Computer Corporation 150 Isabella Street, Suite 1000 Ottawa, Ontario K1S 1V7 60 EX-23.1 5 INDEPENDENT AUDITOR'S CONSENT EXHIBIT 23.1 61 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Corel Corporation We consent to the incorporation by reference in the registration statements (No. 33-64940 and No. 33-87226) on Form S-8 of our report dated January 16, 1998, except for note 12 which is as at February 23, 1998, relating to the consolidated balance sheets of Corel Corporation and subsidiaries as of November 30, 1997 and 1996, and the related consolidated statements of operations and retained earnings (deficit) and changes in financial position for each of the years in the three-year period ended November 30, 1997 which report appears in the November 30, 1997 annual report on Form 10-K of Corel Corporation. /s/ KPMG Chartered Accountants Ottawa, Canada February 23, 1998 62 -----END PRIVACY-ENHANCED MESSAGE-----