-----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, OOCZjnHTy/1JVdFb38/YkdC9Ha5O/tMv0hrzzLbaWkv/BSFkuYrFYFlC/vcF/1b1 EBcILnh0VS8qyTSoAW/M2g== 0001012870-00-000995.txt : 20000229 0001012870-00-000995.hdr.sgml : 20000229 ACCESSION NUMBER: 0001012870-00-000995 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991130 FILED AS OF DATE: 20000228 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: 555645 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-K ================================================================================ 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, 1999 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 21, 2000 was $1,037,126,711. As of that date 65,849,315 Common Shares were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1999 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, 1999 INDEX
Part I Item 1. Business...................................................................................... 3 Item 2. Properties.................................................................................... 10 Item 3. Legal and Government Proceedings.............................................................. 10 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..................... 12 Item 6. Selected Financial Data....................................................................... 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 14 Item 8. Financial Statements and Supplementary Data................................................... 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures......... 15 Part III Item 10. Directors and Executive Officers of the Registrant............................................ 15 Item 11. Executive Compensation........................................................................ 18 Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 22 Item 13. Certain Relationships and Related Transactions................................................ 22 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K, S-3 and 425 ................ 22 Signatures .............................................................................................. 24
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. The Company was continued under the Canada Business Corporation Act by articles of Amalgamation dated December 1, 1998. For the purposes of this report, except in the consolidated financial statements, unless the context otherwise requires, "Corel" and "the Company" refer to the consolidated operations of Corel Corporation and its wholly owned subsidiaries, Corel Corporation Limited, Corel International Corp., 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, business productivity, consumer and video applications as well as network computers. 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"), UNIX-based and Linux-based systems. 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 Applications 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 Consumer Products Software Division develops various software applications for retail users and includes the Graphic Corp. division. The Emerging Technologies Division develops new products for all markets. 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, as well as corporate functions such as finance, administration, human resources, legal, business development and information technology. PRODUCTS Graphics Applications - ------------------------------------------------------------------------------- The Graphics Division develops graphics applications software, which provides the PC with instructions for creating and manipulating graphics, text, or numbers. Corel's graphics applications are designed to meet the needs of general business users and graphics professionals. Primary examples of graphics applications include illustration, photo editing and painting, 3D rendering, and animation programs. Corel's graphics applications programs are developed principally for the Microsoft ("Microsoft/(R)/") Windows/(TM)/ ("Windows"), Macintosh and UNIX operating systems. CorelDRAW/(R)/. CorelDRAW 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 and photos available for the various operating system platforms. Versions of CorelDRAW include: CorelDRAW 9 (Graphics Suite, Office 3 Edition, Premium Color Edition) designed to run under Windows 98, Windows NT and Alpha, CorelDraw 8 for the Power Macintosh, CorelDRAW 5 for Windows 3.x and CorelDRAW 3.5 for UNIX. The CorelDRAW module is an illustration program allowing users to produce color illustrations incorporating both text and objects. The Corel PHOTO-PAINT(R) 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. Supporting utilities include: Microsoft(R) Visual Basic(R) for Applications, a supporting application which allows developers to build custom business solutions by automating and integrating off-the-shelf software applications to meet specific customer needs; Canto(R) Cumulus(R) Desktop LE 4.0, a tool that organizes media and graphics files into a catalog which can be indexed so that users can find images, designs, clipart, stock photos and QuickTime(R) movies quickly and easily; Bitstream(TM) Font Navigator(TM) 3.0, a tool that allows users a quick and easy way to find, install and organize fonts into manageable groups and view and print font samples; Corel TEXTURE(TM), a tool for creating realistic natural textures; Corel TRACE(TM), a bitmap-to-vector conversion utility for images and text; Corel CAPTURE(TM), a tool for capturing portions of the, or the entire, application window; Corel SCRIPT Editor(TM), an OLE 2- enabled scripting application ideal for creating add-on utilities for CorelDRAW 9 or Corel PHOTO-PAINT 9; and, Ixla(TM) Digital Camera interface, a plug-and- play interface for acquiring images from over 120 digital camera models. CorelDRAW has the leading market share in the illustration segment of the Windows graphics software market with an installed base of over 12.4 million units worldwide. CorelDRAW(TM) 7 Select Edition. This is a scaled down version of CorelDRAW. It includes the CorelDRAW 7 and Corel PHOTO-PAINT 7 modules along with the following utilities: Kodak Digital Science(TM) Color Management System, Corel OCR-TRACE, Corel SCAN and Corel MULTIMEDIA MANAGER; a utility that allows the user to organize and manage graphics files easily and browse the extensive clipart and photo libraries included in CorelDRAW 7. This version of CorelDRAW is designed to run under Windows 98 or Windows NT. Corel PHOTO-PAINT(R). 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 including Corel PHOTO-PAINT 9 for Windows 98 and Windows NT and Corel PHOTO-PAINT 8 for Power MacIntosh. Corel VENTURA(R). 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 8, allows users to publish Corel VENTURA 8 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 8 for Windows 98 and Windows NT, and Corel VENTURA 5 for Windows 3.x. 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 the Windows, Macintosh, DOS, UNIX and Linux operating systems. Corel(R) WordPerfect(R) Suite. Corel WordPerfect suite is a suite of software programs featuring seamless integration 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 WordPerfect Suite 2000 for Windows 98 and Windows NT. In each of the 16-bit versions, certain combinations of the following programs are included: Corel WordPerfect; Corel(R) Quattro(R) Pro; and Corel(R) Presentations(TM); along with 150 fonts, 10,000 clipart images and 200 photos. 4 WordPerfect Office 2000 for Windows 98 and Windows NT contains 32-bit versions of WordPerfect, Quattro Pro, Corel Presentations and Trellix 2 desktop web publishing. Corel also offers a version of Corel WordPerfect suite for legal professionals, Law Office 2000 - Legal Edition. Law Office 2000 - Legal Edition offers all the features found in the WordPerfect Office 2000 along with industry-specific applications and resources. WordPerfect Office 2000 VOICE- POWERED Edition includes all of the above features in addition to the speech recognition technology of Dragon NaturallySpeaking(TM). Corel WordPerfect Suite Professional. Corel WordPerfect Suite Professional is a software program that includes enhanced Internet connectivity, graphics and database features. WordPerfect Office 2000 Professional includes Paradox 9, Corel Central 9 and Trellix 2, a tool which simplifies the process of creating and managing a Web site. WordPerfect(R). 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. WordPerfect is available on a stand-alone basis for the Macintosh, DOS, UNIX and Linux operating systems, while Windows versions are available only as components of Corel WordPerfect Suite, Corel WordPerfect Suite Professional and WordPerfect Office 2000. Quattro(R) Pro. Quattro Pro is an integrated spreadsheet with database, business graphics and Internet capabilities. Quattro Pro 9 is available for Windows 98/NT. Paradox(R). 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(R) Presentations(TM). Corel Presentations is a presentation graphics program for producing slides, overheads, transparencies and prints. Corel Presentations 9 is available for Windows 98/NT. Consumer Products Applications - -------------------------------------------------------------------------------- The Consumer Products Division develops graphics applications for home PC users and Photo CD titles for both the Internet and retail markets. Corel Print House(TM) Magic, Corel Print House(TM) Magic Deluxe and Corel Print House(TM) 2000 for Macintosh. Designed to run under Windows 98 and Windows NT, Corel Print House Magic can be used to create greeting cards, banners, invitations, business cards, signs, calendars, menus, fax report covers, certificates and labels using Corel Print House(TM) 3. It also includes Corel Photo House(TM) 2, a tool that adds photo-editing and bitmap creation capabilities to enable users to scan in their own photographs, touch them up or add special effects and an all-in-one Calendar, Address Book and List Manager. In addition to these programs, Corel Print House Magic Deluxe also features access to dozens of free electronic greeting cards; in addition to those available from Corel(R) Greetings Online. Corel Print House Magic 2000 for Macintosh includes Corel Photo House(TM) 5 to touch up digital images and add them directly to your projects, over 80,000 graphics and templates from PaperDirect(TM), Avery(R) and Kodak. Corel Print Office(TM) 2000. Corel Print Office 2000 is a powerful, comprehensive publishing suite that is ideal for small- or home-office users and can be used to create business documents. It also includes Corel Photo House 5, Corel(R) WEB.DESIGNER 2, a tool that creates eye-catching documents and publishes them to the Internet with the click of a button and CorelCENTRAL(TM) 9, a tools that synchronizes your Calendar, Address Book and more with the Palm Pilot(TM) personal organizer. Corel MEGA GALLERY(TM), Corel GALLERY(TM) Magic and Corel GALLERY(TM) 1,300,000. Corel MEGA GALLERY(TM) for MacIntosh 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 clipart images, 80,000 photos and hundreds of fonts, animated GIFs, sounds, video clips 5 and Web theme sets. Corel GALLERY 1,300,000 includes 1,130,000 Web images, 120,000 vector clipart images, 50,000 photos, 1,000 fonts, 500 multipurpose soundfiles, 50+ videoclips and a 30-Day Trial Version of Corel Print House Magic 4. 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 Custom Photo. Corel(R)Custom Photo is a photo-editing software that adds more than 30 effects to pictures and personalizes projects with over 10,000 graphics. Includes Corel Photo House(TM)5 and Corel(R)Project Designer. Corel(R) Graphics Pack II. Corel Graphics Pack II includes eight 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 and Windows NT, Corel Graphics Pack II includes Corel Print House; CorelFLOW(TM) 3, a business graphics and technical diagraming program; Corel Presentations 8; Corel PHOTO-PAINT 7; Corel XARA 1.5; Corel MOTION 3D, an animation tool and internet utilities; Corel CAPTURE(TM), a tool that lets you capture the application window or elements of it, and allows you to define rectangular, elliptical or freehand areas for capture and Corel GALLERY Magic 200,000. Corel(R) Stock Photos. Corel Stock Photos on CD-ROM provide an easy and inexpensive way for people to use professional photographs in all their visual communications. Corel Stock Photos are available on individual CDs (100 photos per CD) or in packages of 10 CDs (100 photos per CD). Individual Corel Stock Photos can also be downloaded from Corel's World Wide Web home page. Emerging Technologies - -------------------------------------------------------------------------------- Corel(R) LINUX(R) OS is built specifically for the desktop and is offered in two versions: Corel LINUX - Standard Edition and Corel LINUX - Deluxe Edition. Based on the Debian version of Linux this system delivers an easy-to- use, four- step graphical installer that automatically detects most PCI hardware. Features include a KDE-based, drag- and-drop desktop environment and a browser-style file manager. Corel sold the CorelVIDEO(TM) product line assets to a third party in the fourth quarter of 1999, as discussed in the Overview section of the Management Discussion and Analysis of Financial Condition and Results of Operations in Exhibit 13.1. Corel sold the Netwinder division assets to a third party in the first quarter of fiscal 1999, as discussed in the Overview section of the Management Discussion and Analysis of Financial Condition and Results of Operations in Exhibit 13.1. 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, emerging interest in Linux as an operating system 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 internally developing software, contracting for the development of certain products by third parties; and acquiring or licensing technology that 6 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 $89.5 million, $71.9 million and $40 million in fiscal 1997, 1998 and 1999, respectively. Those amounts represented approximately 34%, 29% and 16% respectively, of sales in each of those years. Software acquired or licensed for incorporation into Corel's product line totaled $171.1 million in fiscal 1996, of which $153.4 million was for the acquisition of the WordPerfect technology on March 1, 1996, $12.2 million in fiscal 1997, $4.7 million in fiscal 1998 and $15.4 million in fiscal 1999. 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) and documentation. 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, all in accordance 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 Original Equipment Manufacturers (OEMs). Corel's marketing and sales staff seek to build long-term relationships with customers and end-users of Corel products. In addition to the OEM channel, Corel has four major geographic sales and marketing areas: North America, Latin America, Europe and Asia-Pacific. 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 pre-install or bundle Corel software on their PCs or peripheral hardware. 7 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 Pinacor. Resellers include ASAP Software and Software House 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 three 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. CLP Freedom is designed to make it easy and affordable for organizations to standardize on a single software solution. This package allows organizations to license Corel's business or graphics software products for a one- or a two-year term. The minimum licensing commitment to qualify is only 100 employees or workstations within an entire organization or a defined portion of an organization. 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 and 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 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. On-line Distribution. Corel offers its products on-line through third party web sites including amazom.com, beyond.com and buy.com as well as through their own sites operated by Shopnow.com which include Corel eStore, ClipartCity.com, and Corel Studio. OEM Channel - -------------------------------------------------------------------------------- Corel markets certain productivity, graphics, and consumer 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 and peripheral hardware vendors, including Agfa, Canon, Compaq, Cybermax, Dell, Epson, Gateway 2000, Hewlett-Packard, Packard Bell, PC Chips, 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 and trade publications; (ii) joint promotions with computer retailers under which qualifying resellers and OEMs are reimbursed for certain 8 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. Note 14 to the 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 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 bulletin board service ("BBS") for European customers and a forum on CompuServe 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. COMPETITION - -------------------------------------------------------------------------------- The information set forth on pages 36-40 of the 1999 Annual Report to Shareholders is incorporated herein by reference and is filed herewith as Exhibit 13.1 under the heading "Factors That May Affect Future Operating Results." PROPRIETARY RIGHTS - -------------------------------------------------------------------------------- Corel regards certain features of its internal operations, software and documentation as proprietary and relies on contract, patent, copyright, trademark, and trade secret laws and other measures to protect its proprietary information. The Company believes, however, 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 have a perpetual term, with the exception of academic licenses, and are transferable provided the transferor erases or destroys its copy of the product. In special circumstances, 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" and/or "click 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 9 foreign countries do not protect Corel's proprietary rights to the same extent as do the laws of Canada and the United States. 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, 1999, Corel employed 1,320 people on a full-time basis, including 610 in research and development, 504 in sales, marketing and support, and 206 in finance and administration. Corel's success depends to a significant extent upon the performance of Corel's executive officers and key technical, sales and marketing personnel. 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 favourable. 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; 26,050 square feet of office space under a lease that expires in 2002 in another facility in Ottawa, Ontario; 57,421 square feet of office space in a facility located in Orem, Utah under a lease that expires in 2001; 30,970 square feet of office space in a facility located in Dublin, Ireland under leases that expire in 2003, 2009 and 2012 and office space in various countries around the world under leases that expire in 2000. Item 3. Legal and Government Proceedings On or about February 23, 1998, the Company became aware that a class action lawsuit had been filed against it by named Plaintiff Great Neck Capital Appreciation Investment Partnership in the United States District Court for the Eastern District of New York. The 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. The Great Neck complaint was consolidated by order dated June 1, 1998 with four other previously filed complaints: Giskan, Meyer, Mangold and Hagler. Also on June 1, 1998, the court approved the plaintiff's motion for the appointment of lead plaintiff and lead counsel. The firm of Wechsler Harwood Halebian & Feffer is counsel of record. Great Neck (as lead plaintiff) filed a consolidated amended complaint on behalf of lead plaintiff and the class on September 9, 1998 (the "Consolidated Complaint"). The Consolidated Complaint references a revised Class Period (it has been filed on behalf of all persons who purchased or otherwise acquired Corel common 10 shares between January 15, 1997 and January 20, 1998); however, plaintiffs' theories from the individual complaints (as summarized above) remain the same. On November 9, 1998, the Company filed a Motion to Dismiss the Consolidated Complaint in its entirety. On December 30, 1998, Plaintiffs filed a related Motion to strike certain documents referred to in the Company's Motion to Dismiss. Both motions were fully briefed by February 12, 1999. On June 18, 1999, the Company filed a second Motion to Dismiss on the grounds of forum non conveniens. On September 1, 1999, the parties entered into a Memorandum of Understanding and agreed in principle to settle this litigation. On January 13, 2000, the parties executed a Settlement Agreement, subject to approval of the Court. On January 14, 2000, the parties requested that the Court (a) preliminarily approve the proposed settlement; (b) schedule a final settlement hearing; and, (c) direct that notice of the proposed settlement be given to the members of the class. Corel's motions to dismiss (as described above) have been denied as moot, pending approval of the proposed settlement. On February 7, 2000, the Court preliminarily approved the proposed settlement and fixed May 12, 2000 as the date for the settlement hearing. On May 25, 1998, Revenue Canada advised the Company of proposed income tax adjustments for fiscal years ended November 30, 1992 to 1995. The Company filed a Response to Revenue Canada's Proposal on October 23, 1998. The Company received a letter of response in December 1999 advising of upcoming reassessment. The provision the Company had previously recorded was reversed and additional tax recovery was recorded in the fourth quarter of fiscal 1999. On or about June 19, 1998 the Company became aware of a complaint filed against it by Dennis Berkla, d.b.a. Digarts Software. The plaintiff claims breach of a Non-Disclosure Agreement (NDA) and claims Copyright Infringement. The complaint was amended April 9, 1999 for damages for Copyright Infringement, Breach of the NDA, Unfair Competition, and Breach of Confidence. Berkla and a Corel representative signed a non-disclosure agreement prior to Berkla sending certain images to Corel for evaluation. Plaintiff contends that the CD contained images he sent to Corel were covered by this agreement, and that Corel breached the agreement through a limited distribution of his images to Corel employees who were involved in graphics creation, and through a limited distribution of his images to certain Corel beta testers. Plaintiff also originally alleged that certain images in Corel products infringed his copyrights. Corel filed its answer to plaintiff's second amended complaint on April 26, 1999. On September 9, 1999, Corel was awarded partial summary judgement dismissing the bulk of plaintiff's copyright infringement claims and limiting plaintiff's state law claims. In September 1999 the plaintiff amended his claim to seek punitive damages as well. On October 26, 1999, the court excluded any award of punitive damages from the plaintiff's potential recovery. A jury trial of the remaining claims commenced October 26, 1999, in the United States District Court, Eastern District of California and the jury awarded minimal damages to the plaintiff resulting in a favourable outcome for Corel. Plaintiff is appealing the judge's decision to strike punitive damages. Parties filed cross-motions to recover their respective attorney's fees and costs. Decision rendered January 20, 2000 awarded neither party their costs of the trial. Both sides are considering an appeal of this decision. Plaintiff's appeal of the order on punitive damages is pending. On December 15, 1999, Corel filed suit against the United States of America in the U.S. District Court for the District of Columbia, in Washington, D.C., for the actions of its agency, the Department of Labor in conducting an unlawful procurement. The Complaint claims that, in its goal to standardize its office automation suite, the Department of Labor violated various statutes, regulations and treaties by "sole-sourcing" its contract to a competing vendor rather than conduct an open and fair procurement in accordance with U.S. law. In dispute is the decision by the Department of Labor to standardize on a competing product despite the fact that, at the time of the award, the Corel WordPerfect family of products was licenced for a majority of the Department's 20,000 work stations. It is believed that the three-year standardization deal with the competing vendor could be valued as high as US $8 million. As a remedy, Corel is seeking an immediate injunction against the further implementation of the "sole source" contract and to have it declared void. Corel is also seeking to have the standardization process and related procurement activities tendered in a fair and open competition in accordance with the applicable statutes, regulations and treaties. The Answer to the Complaint has yet to be filed by the Government. The Government must also file the administrative document record (all related government documents) and produce these to Corel. 11 On October 14, 1999, the Ontario Securities Commission filed charges against Michael Cowpland, the Company's chairman, president and chief executive officer and his holding company, M.C.J.C. Holdings Inc., in the Ontario Court of Justice. The charges include four counts of violating provisions of the Ontario Securities Act related to insider trading. The Company and Michael Cowpland continue to deny all allegations by the Ontario Securities Commission. The trial of these issues is a private matter between the Ontario Securities Commission and Michael Cowpland as an individual. As such, it is not expected to affect the Company's day-to-day activities. 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 fiscal 1999. 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 "COR" and in the over-the-counter market on the NASDAQ National Market under the symbol "CORL". 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 1999 FISCAL 1998 High Low High Low ------------- ------------- ------------- ------------ The Toronto Stock Exchange (Canadian dollars) - ------------------------------------------ First Quarter............................. $ 7.55 $3.76 $4.01 $2.17 Second Quarter............................ 7.00 3.32 4.24 2.75 Third Quarter............................. 9.65 4.15 3.30 1.78 Fourth Quarter............................ 30.40 7.00 4.15 1.75 NASDAQ National Market (US dollars) - ------------------------------------------ First Quarter............................. $ 5.13 $2.50 $2.94 $1.41 Second Quarter............................ 4.63 2.19 3.13 1.94 Third Quarter............................. 6.38 2.81 2.52 1.16 Fourth Quarter............................ 20.88 4.69 3.00 1.06
As of February 21, 2000, there were 849 holders of record 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 110,000 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. 12 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. 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 1998 and 1999. 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. Any future determination to pay dividends will be at the discretion of the Board of Directors. From time to time, the Company repurchases common shares for cancellation. There is no policy with regards to the timing or amount of common share repurchases and cancellation. There are no plans to repurchase and cancel common shares at this time. 13 Item 6. Selected Financial Data The statement of operations data set forth below with respect to the years ended November 30, 1997, 1998 and 1999 the balance sheet data at November 30, 1998 and 1999 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 operations data set forth below with respect to the fiscal years ended November 30, 1995 and 1996 and the balance sheet data at November 30, 1995, 1996 and 1997 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 ----------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (in thousands, except per share data) Canadian GAAP Sales........................................ $ 243,051 $ 246,827 $ 260,581 $ 334,245 $ 196,379 Income (loss) from continuing operations..... 16,716 (30,448) (231,678) (2,750) 14,484 Income (loss) from continuing operations per share (fully diluted)...... 0.26 (0.51) (3.84) (0.05) 0.26 Cash and short-term investments.............. 18,021 24,506 30,629 6,924 81,816 Working capital.............................. 19,781 (108) 20,356 120,945 149,353 Total assets................................. 151,701 140,159 163,743 398,478 221,346 Novell Obligations........................... 18,579 27,885 37,544 49,330 - Shareholders' equity......................... 64,366 28,583 59,809 290,260 195,858 US GAAP Income (loss) from continuing operations..... 16,716 (30,448) (231,678) (2,750) 14,484 Net income (loss) from continuing operations per share (fully diluted)...... 0.27 (0.51) (3.84) (0.05) 0.29
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 16 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 26-43 of the 1999 Annual Report to Shareholders is incorporated herein by reference on pages and is filed herewith as Exhibit 13.1. Item 7A. Financial Instruments - Quantitative And Qualitative Disclosures About Market Risk As described in Note 6 to the 1999 Consolidated Financial Statements (included in exhibit 13.2), the Company's Product Return Obligation includes interest charges of 1% over the US prime rate and is therefore subject to interest rate risk. Assuming principal repayments of $6,594,000 in 2000 as set out in Note 6 to the 1999 Consolidated Financial Statements and a US prime rate of 8.5% (rate at November 30, 1999 according to the US Federal Reserve Bank), a 10% increase in the US prime rate would result in interest charges of $ 414,000 in 2000 using a weighted average principal balance. The interest charges using the above US prime rate and the weighted average principal balances would be $380,000 in 2000. 14 Item 8. Financial Statements and Supplementary Data The following financial statements and independent auditors' report set forth on pages 44-68 and the back cover of the 1999 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, 1999 and 1998; . Consolidated Statements of Operations and Retained Earnings (Deficit) for the years ended November 30, 1999, 1998, and 1997; . Consolidated Statements of Cash Flows for the years ended November 30, 1999, 1998, and 1997; . Notes to Consolidated Financial Statements; and Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On October 30, 1998 the Company filed a report on form 8-K that reported on the change in the Company's Certifying Accountant. There were no "disagreements", as that term is defined in Item 304 of Regulation S-K, with KPMG on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of KPMG would have caused KPMG to make reference to the matter in their report. 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 as at February 21, 2000:
NAME Age Position with the Company Dr. Michael C.J. Cowpland 56 Chairman of the Board; President; Chief Executive Officer Derek Burney 37 Executive Vice President, Engineering Ross Cammalleri 41 Executive Vice President, Marketing Sandra Gibson 36 Executive Vice President, Corporate Services Steve Houck 30 Executive Vice President, Sales Tony O'Dowd 33 Executive Vice President, International Product Development, General Manager, Corel Corporation Limited Eric Smith 33 Vice President, General Counsel and Secretary Carey Stanton 32 Executive Vice President, Business Development and Legal Affairs Kerry D. Williams 37 Executive Vice President, Manufacturing Lyle B. Blair (1) 69 Director Hon. William G. Davis (1) 70 Director Hunter S. Grant (1) 57 Director Jean-Louis Malouin 56 Director Hon. Barbara McDougall (1) 62 Director
_______ (1) Member of the Audit Committee 15 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. Derek Burney joined the Company in April 1994 as the Project Leader for CorelFLOW. Mr. Burney was promoted to Technology Manager in August 1995 and then as the Director of CAD 3D in February 1996. He held this position until October 1997 when he went to work at IMSI (International Microcomputer Software Inc.) in the product group that purchased CorelCAD, Corel Visual CADD, CorelFLOW, Corel Lumiere Suite, Corel Click & Create and Corel Family Tree Suite from the Company. Upon his return to Corel in May 1998, Mr. Burney was appointed Senior Vice President - Engineering until December 1998 at which time he was promoted to his current position, Executive Vice President, Engineering. Ross Cammalleri joined Corel as Vice President of Marketing Communications before being promoted to his current position as Executive Vice President of Marketing. Prior to joining Corel, he spent three years as Group Account Director for Cossette Communication-Marketing in Montreal, Quebec. Prior to Cossette, Mr. Cammalleri held senior VP positions at Allard Communications and at Ogilvy & Mather. He is fluent in four languages--English, French, Italian and Spanish. Mr. Cammalleri holds a Bachelor of Arts as well as an MBA from McGill University 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, Director, Corporate Services from September 1996 until January 1997 and Vice President, Human Resources from February 1997 until December 1998 at which time she was appointed to her current position, Executive Vice President, Corporate Services. Steven Houck joined Corel in 1995 as a consultant for Corel's multimedia division. He then moved on to become manager of Corel's OEM Accounts, securing deals with Gateway, Hewlett-Packard, Compaq and Fountain Technologies. In December of 1999 he moved into his current position as Executive Vice President of Sales and is responsible for overseeing the worldwide sales operations for Corel Corporation. Tony O'Dowd joined the Company in 1995 as a Senior Development Engineering Manager. Before joining Corel, he was a principal development engineer with Lotus Development Corporation and a technology manager with Symantec Corporation. In September 1996, he was appointed Operations Director and General Manager and held this position until May 1998 when he was promoted to General Manger, Corel Corporation Limited. Mr. O'Dowd was promoted to Vice President, International Product Development in July 1998 and again to his current position of Executive Vice President, International Product Development, General Manager, Corel Corporation Limited in December 1998. Mr. O'Dowd holds a Bachelor of Science in Computer Science from Dublin's Trinity College, where he spent three years lecturing on Assembly Language and Micro Processor Design. Eric Smith joined Corel in May 1996 as Corporate Counsel. He received his appointment to Corporate Counsel and Secretary in October 1998 and was appointed Vice President, General and Secretary in February 2000. Mr. Smith was called to the bar in 1996 and holds an LL.B. from the University of Western Ontario. 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, Business Manager from September 1993 until January 1997 and Vice President, Business Development from February 1997 until December 1998; at which time he was appointed to his current position, Executive Vice President, Business Development and Legal Affairs. 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, Director, Operations from September 1995 until January 1997 and Vice President, Manufacturing from February 1997 until December 1998; at which time he was appointed to his most recent position, Executive Vice President, Manufacturing. 16 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. Hon. William G. Davis has been a Director since September 1989. Mr. Davis has been counsel to Torys, 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 Magna International Inc. and First American Title Insurance Company, both of which are reporting companies under the Securities Exchange Act of 1934. Hunter S. Grant has been a Director since September 1989. Mr. Grant was the Co- Publisher, President and General Manager of the Recorder and Times Limited, a newspaper publishing company, from July 1977 until July 1998. He is currently the President of Kingmer Holding Ltd. Jean-Louis Malouin became a Director in November 1997. 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 Ottawa Economic Development Corporation (OCEDCO). Hon. Barbara McDougall became a Director in April 1998. Since February, 1999, Mrs. McDougall has been President and Chief Executive Officer of the Canadian Institute of International Affairs. Prior to that appointment, she was a private consultant on corporate governance and on international business. Mrs. McDougall was also chairperson of the Board of Directors of AT&T Canada. Her current corporate directorships include the Bank of Nova Scotia, Stelco Inc., and the Independent Order of Foresters. Prior to 1993, Mrs. McDougall was a Member of Parliament and Cabinet Minister. 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, 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 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 stock options to eligible participants in the Corel Corporation Stock Option Plan, (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 general policy matters relating to employment and wage equity, compensation and benefits of employees of the Company generally. The Committee met 5 times in fiscal 1999 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, as compared to industry surveys, is consistent with industry standards at the level necessary to attract and retain qualified personnel. 17 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, 1999, the Chief Executive Officer and the other four most highly compensated executive officers of the Company (the "named executive officers"). Also included is one former executive officer who was no longer with the company at November 30, 1999 but who otherwise would have been included in the top four most highly compensated executive officers of the Company. SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term ----------------------------------------- Compensation Awards All Other ------------------ Annual Securities Other Name and Principal Compen- Under Options Compen- Position Year Salary Bonus sation (1) Granted (#) sation (2) - --------------------------------- -------- -------------- ---------- ------------ ------------------------------- Michael C.J. Cowpland 1999 $199,324 Nil $ - 299,800 $ - Chairman, President and 1998 201,384 Nil - 275,000 - Chief Executive Officer 1997 213,236 Nil - - - Michael P. O'Reilly (3) 1999 134,225 Nil - 68,400 - Executive Vice President 1998 130,565 Nil - 131,800 - Finance, CFO and Treasurer 1997 - Nil - - - Carey Stanton 1999 132,883 Nil - 67,900 - Executive Vice President 1998 134,254 Nil - 81,200 - Business Development and 1997 119,962 Nil - - - Legal Affairs Derek Burney (4) 1999 161,070 Nil - 81,000 - Executive Vice President 1998 125,385 21830 - 95,800 - Engineering 1997 125,442 Nil - - Kerry D. Williams 1999 132,883 Nil - 67,900 - Executive Vice President, 1998 134,254 Nil - 31,200 - Manufacturing 1997 130,287 Nil - - - Jim Orban (5) 1999 132,883 Nil - 72,900 - Executive Vice 1998 76,226 Nil 34,009(6) - - President, Sales and 1997 53,379 1941 20,683(6) - - Marketing Don Sylvester (7) 1999 63,077 27822 - - $164,936 former Executive Vice 1998 135,848 Nil 32420(8) 31,800 - President, Sales 1997 48,288 Nil 9221(8) 100,000 - - ----------------------------------------------------------------------------------------------------------------------------
Notes: (1) Perquisites and other personal benefits do not exceed the lesser of $50,000 and 10% of the total of the annual salary and bonus for any of the named executive officers. (2) These include the amounts paid, payable or accrued to any named executive officer pursuant to an arrangement in connection with the resignation of such executive officer's employment with the Company. (3) Mr. O'Reilly left the Company in February 2000; however he will remain as a consultant. (4) Mr. Burney was appointed Executive Vice President, Engineering in December 1998. (5) Mr. Orban left the Company in December 1999. (6) Represents commissions paid to Mr. Orban. (7) This additional disclosure includes an individual for whom disclosure would have been provided as part of the four most highly paid executive officers above but for the fact that the individual was not serving as an executive officer of the Company at the end of fiscal 1999. (8) Represents commissions paid to Mr. Sylvester. 18 The following table sets forth the stock options granted under the Corel Corporation Stock Option Plan during the fiscal year ended November 30, 1999 to the named executive officers. OPTION GRANTS FOR THE YEAR ENDED NOVEMBER 30, 1999 AND POTENTIAL REALIZABLE VALUE OF EACH GRANT OF OPTIONS
Potential Realizable Value at Assumed Annual Rates of Stock Number of % of total Exercise Price Appreciation for Securities Options or base Option Term underlying granted to Price (CAD$) options employees in ($/share) Expiration -------------------------- Name granted (#) fiscal year (CAD$) Date 5% ($) 10 % ($) - ---------------------------------------------------------------------------------------------------------------------------- Michael C.J. Cowpland 299,800 9.90% $ 3.37 March 25, 2003 $ 217,732 $ 468,892 Michael P. O'Reilly 68,400 2.30% $ 3.37 March 25, 2003 49,676 106,978 Carey Stanton 67,900 2.20% $ 3.37 March 25, 2003 49,313 106,196 Derek Burney 81,000 2.70% $ 3.37 March 25, 2003 58,827 126,685 Kerry D. Williams 67,900 2.20% $ 3.37 March 25, 2003 49,313 106,196 Jim Orban 67,900 2.20% $ 3.37 March 25, 2003 49,312 106,196 5,000 0.2% $ 10.20 Sept 20, 2003 10,991 23,669
The following table sets forth each exercise of stock options under the Corel Stock Option Plan during the fiscal year ended November 30, 1999 to the named executive officers. AGGREGATED OPTION EXERCISES DURING THE FISCAL YEAR ENDED NOVEMBER 30, 1999 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, 1999 Nov. 30, 1999 Name (#) (CAD$) (#) (CAD$) - ------------------------------- ----------------- -------------------- ------------------ ------------------ Michael C.J. Cowpland - $ - 1,383,076 $ 28,315,847 Michael P. O'Reilly 175,000 1,423,138 25,200 577,836 Derek Burney 165,649 967,884 22,809 493,527 Kerry D. Williams 99,100 413,057 36,800 531,840 Jim Orban - - 10,000 195,150 Don Sylvester 131,800 574,188 - - Carey Stanton 146,972 865,024 30,264 602,610
All options are exercisable when granted. The only exception is when options are granted during an employee's probationary period, usually six months in length. There are no unexercisable options held by the named executive officers. Compensation of Directors 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. Each member of the Irish Board of Directors that is not a salaried officer of the Company receives an annual retainer of IEP 8,000. 19 Employment Contracts and termination of employment and change-in control arrangements There are no clauses in the employment contracts for executives that are materially different from those of other employees in the Company. Some of the items included in a standard employee contract are health benefits, fitness benefits and company paid on-site parking; as well as non-competition and confidentiality clauses. Board Compensation Committee 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 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. There is also an incentive program for those executives whose department's performance can be directly measured by financial performance. This program includes commissions and/or bonuses that are paid based on the performance targets outlined at the beginning of the year. 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. This is accomplished through the Company's participation in the High Tech Industry Compensation Survey, an online survey run by Personnel Systems and sponsored by the CATA Alliance. This survey encompasses a broad spectrum of software development organizations and ranks the remuneration of Corel employees and executives in comparison with the other organizations included in the survey. As a result of this survey, it was determined that the Company's remuneration practices for executives are competitive with those of the industry in general. 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. The Compensation Committee reviews and approves the compensation for the Chief Executive Officer on an annual basis. The compensation set for the Chief Executive Officer in fiscal 1999 was appropriate under the circumstances. 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 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. 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. 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 exercisable for 30 days following termination; 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 was subsequently reduced to 11,400, 614 pursuant to the provisions of a further shareholder resolution passed on April 18, 1997. They 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 and group life insurance and a fitness membership. The members of the compensation committee as at November 30, 1999 are as follows: Hunter S. Grant (Chairman) The Honourable William G. Davis Jean-Louis Malouin 20 PERFORMANCE GRAPH - ----------------- The following graph compares the yearly percentage change over the last five years in the cumulative total shareholder return on the Corporation's Common Shares with the cumulative total return of the TSE 30 Stock Index and the TSE Software Technology Index. FIVE-YEAR TOTAL RETURN ON $100 INVESTMENT
- ----------------------------------------------------------------------------------------------------------- 1994 1995 1996 1997 1998 1999 - ----------------------------------------------------------------------------------------------------------- Corel 100.00 122.48 59.01 16.79 18.80 131.48 Nasdaq Computer & Data Services Index 100.00 156.00 192.46 248.41 360.97 649.03 S & P 500 Index 100.00 137.18 175.48 225.78 279.70 339.06 - -----------------------------------------------------------------------------------------------------------
Performance Graph 1995-1999 (Fiscal Year Ended November 30) [GRAPH APPEARS HERE] 21 Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of February 21, 2000, 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 Shares Beneficially Exercisable Percentage Name and Address of Beneficial Owner Owned Options Owned (1) - -------------------------------------------- -------------------- --------------------- -------------------- Dr. Michael C.J. Cowpland 5,150,558 1,383,076 9.7 Lyle B. Blair - 20,000 * Hon. William G. Davis 1,500 27,852 * Hunter S. Grant - 27,852 * Jean Louis Malouin - 20,000 * Barbara McDougall - 20,000 * Derek Burney - 22,809 * Sandra Gibson - 7,801 * Tony O'Dowd 500 73,452 * Steve Houck - 10,000 * Eric Smith - 11,911 * Carey Stanton - 30,264 * Ross Cammalleri - 5,000 * Kerry D. Williams 3,790 67,900 * Directors and Executive Officers as a group (14 persons) (2) 5,156,798 1,727,917 10.0 * 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. 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. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K, S-3 and 425 (a) Financial Statements and Schedules The following audited financial statements of Corel (together with the independent auditors reports thereon and the notes thereto) are included in this Report: 22 (a) Consolidated Balance Sheets at November 30, 1999 and 1998. (b) Consolidated Statements of Operations and Retained Earnings (Deficit) for the years ended November 30, 1999, 1998 and 1997. (c) Consolidated Statements of Changes in Financial Position for the years ended November 30, 1999, 1998 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, S-3 and 425 On February 11, 1999, the Company filed a report on form 8-K to report on the declaration by the Board of Directors of the distribution of 1 common share purchase right in respect of each common share outstanding at the Close of Business on February 25, 1999. On July 29, 1999, the Company filed a report on form S-3 to report on the sale of 1,000,000 common shares. On February 7, 2000, the Company filed a report on form 425 to report on the definitive merger agreement that the Company entered into with Inprise/Borland. (c) Listing of Exhibits Exhibit Number Description ------ ----------- 3.1 Certificate and Articles of Incorporation (1) 3.2 By-law No. 6 (1) 3.3 Certificate and Articles of Amalgamation of Corel Corporation and Corel Computer Corp. 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) (2) 13.1 Management's Discussion and Analysis of Financial Condition and Results of Operations (Incorporated by Reference to pages 26-43 of the 1999 Annual Report to Shareholders ("1999 Annual Report")) 13.2 Financial Statements (Incorporated by Reference to pages 44- 68 and Back Cover of the 1999 Annual Report) 21.1 Subsidiaries of Registrant (Incorporated by Reference to Exhibit 13.2 filed herein) 23.1 Auditors' Report - KPMG LLP Chartered Accountants 23.2 Auditor's Report - PricewaterhouseCoopers LLP Chartered Accountants 99.1 Form of License Agreement, including Limited Warranty (1) 99.2 Supplementary Financial Statement Information ____________ (1) Incorporated by reference to Registration Statement on Form F-1 File No. 33-50886. (2) Incorporated by reference to Exhibit 2.01 to the Company's Report on Form 8-K/A, Amendment No. 2, dated March 1, 1996. 23 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 21, 2000. COREL CORPORATION By /s/ Mitch Desrochers ------------------------------------- Mitch Desrochers Vice President Finance and Controller POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael C.J. Cowpland and Mitch Desrochers, his or her Attorneys-in-fact, each with full power of substitution, for him or her 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 or her 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 21, 2000.
Signature Title /s/ Michael C.J. Cowpland Chairman of the Board of Directors, - --------------------------------------- Michael C.J. Cowpland President and Chief Executive Officer /s/ Lyle B. Blair Director - --------------------------------------- Lyle B. Blair /s/ William G. Davis Director - --------------------------------------- William G. Davis /s/ Hunter S. Grant Director - --------------------------------------- Hunter S. Grant /s/ Jean-Louis Malouin Director - --------------------------------------- Jean-Louis Malouin /s/ Barbara McDougall Director - --------------------------------------- Barbara McDougall /s/ Mitch Desrochers Vice President Finance and Controller - --------------------------------------- Mitch Desrochers (principal financial and accounting officer)
24 Exhibit Index - -------------
Exhibit Number Description Page -------------- ----------- ---- 3.3 Certificate and Articles of Amalgamation - Corel Corporation and Corel Computer Corp. ....................... 26 13.1 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 31 13.2 Financial Statements......................................... 43 21.1 Subsidiaries of Registrant................................... 61 23.1 Auditors' Report - KPMG LLP Chartered Accountants............ 63 23.2 Auditor's Report - PricewaterhouseCoopers LLP Chartered Accountants ................................................. 65 99.2 Supplementary Financial Statement Information Schedule....... 67
25 EX-3.3 2 CERTIFICATE AND ARTICLES OF AMALGAMATION EXHIBIT 3.3 Industry Canada Industrie Canada
Certificate of Amalgamation Certificat de fusion Canada Business Corporations Act Loi canadienne sur les societes par actions COREL CORPORATION 355888-6 - ------------------------------------------------------- ----------------------------------------------------- Name of corporation - Denomination de la societe Corporation number - Numero de la societe I hereby certify that the above-named corporation Je certifie que la societe susmentionnee est issue resulted from an amalgamation, under section 185 of d'une fusion, en vertu de l'article 185 de la Loi the Canada Business Corporations Act, of the canadienne sur les societes par actions, des societes corporations set out in the attached articles of dont les denominations apparaissent dans les statuts amalgamation. de fusion ci-joints. /s/ December 1, 1998/le 1 decembre 1998 Director - Directeur Date of Amalgamation - Date de fusion
27
Industry Canada Industrie Canada FORM 9 FORMULE 9 ARTICLES OF STATUTS DE FUSION AMALGAMATION (ARTICLE 185) (SECTION 185) Canada Business Loi regissant les societes par actions Corporations Act de regime federal 1 - Name of amalgamated Corporation Denomination de la societe issue de la fusion Corel Corporation 2 - 2 - The place in Canada where the registered office Lieu au Canada ou doit etre situe le siege social is to be situated Regional Municipality of Ottawa-Carleton 3 - The classes and any maximum number of shares that the corporation is authorized to issue See Schedule "A" attached 4 - Restrictions, if any, on share transfers Restrictions sur le transfert des actions, s'il y a lieu n/a 5 - Number (or minimum and maximum number) of Nombre (ou nombre minimal et maximal) directors d'administrateurs A Minimum of one (1); A Maximum of ten (10) 6 - Restrictions, if any, on business the corporation Limites imposees a l'activite de la societe, s'il y a may carry on lieu n/a 7 - Other provisions, if any Autres dispositions, s'il y a lieu n/a 8 - The amalgamation has been approved pursuant to La fusion a ete approuvee en accord avec l'article that section or subsection of the Act which is ou le paragraphe de la Loi indique ci-apres: indicated as follows: 183 X 184(1) 184(2) 9 -Name of the amalgamating Corporation No. Signature Date Title/Titre corporations No. de la societe Denomination des societes fusionnantes COREL CORPORATION 1926462 /s/ Michael Cowpland Dec 1/98 Director COREL COMPUTER CORP. 3355977 /s/ Michael Cowpland Dec 1/98 Director
FOR DEPARTMENTAL USE ONLY - A L'USAGE Filed - Deposee DU MINISTERE SEULEMENT Corporation No. - No de la societe 355888-6 Dec 2, 1998 28 SCHEDULE "A" A. - An unlimited number of Preferred Shares which, as a class, shall have attached thereto the following rights, privileges, restrictions and conditions: (i) - the directors of the Corporation may, at any time and from time to time, issue the Preferred Shares in one or more series, each series to consist of such number of shares as may before issuance thereof be fixed by the directors; (ii) - the directors of the Corporation may (subject as hereinafter provided) from time to time before issuance determine the destination, rights, privileges, restrictions and conditions to attach to the Preferred Shares of each series including, without limiting the generality of the foregoing, the rate, amount or method of calculation of dividends whether cumulative or non-cumulative or partially cumulative, and whether such rate, amount or method of calculation shall be subject to change or adjustment in the future, the currency or currencies of payment, the date or dates and place or places of payment thereof, the rights of retraction, if any, vested in the holder of Preferred Shares of such series, and the prices and the other terms and conditions of any rights of retraction and whether any additional rights of retraction may be vested in such holders in the future, voting rights (if any) and conversion rights (if any) and any sinking fund, purchase fund or other provisions attaching to the Preferred Shares of such series, the whole subject to the issue by the Director, Corporations Branch, Department of Consumer and Corporate Affairs, of a certificate of amendment in respect of articles of amendment in prescribed form to designate a series of shares; (iii) - when any fixed cumulative dividends of amounts payable on a return of capital are not paid in full, the Preferred Shares of all series shall participate rateably in respect of such dividends including accumulations, if any, in accordance with amounts which would be payable on the Preferred Shares if all such dividends were declared and paid in full, and on any return of capital in accordance with sums which would be payable on such return of capital if all amounts so payable were paid in full; (iv)- the Preferred Shares of each series shall rank on a parity with the Preferred Shares of every other series with respect to priority in payment of dividends and in the distribution of assets in the event of liquidation, dissolution or winding-up of the corporation, whether voluntarily or involuntarily; (v)- in the event of the liquidation, dissolution or winding-up of the corporation or other distribution of the assets of the Corporation among shareholders for the purpose of winding-up its affairs, the holders of the Preferred Shares shall, before any amount shall be paid to or any property or assets of the Corporation shall be distributed among the holders of the Common Shares or any other shares of the Corporation ranking junior to the Preferred Shares, be entitled to receive (a) an amount equal to the amount of the redemption price specified therefor, together with, in the case of cumulative Preferred Shares all unpaid cumulative dividends (which for such purpose shall be calculated as if such cumulative dividends were accruing from day to day for the period from the expiration of the last period for which cumulative dividends have been paid up to and including the date of distribution) and in the case of non-cumulative dividends, all declared and unpaid non- cumulative dividends, and (b) if such liquidation, dissolution, winding-up or distribution shall be voluntary, an additional amount equal to the premium, if any, which would have been payable on the redemption of the said Preferred Shares if they had been payable by the Corporation on the date of liquidation, dissolution, winding-up or distribution and, if said Preferred Shares could not be redeemed on such date, then an additional amount equal to the greatest premium, if any, which would have been payable on the redemption of said Preferred Shares; (vi)- no dividends shall at any time be declared or paid on or set apart for payment on the common Shares or any other shares of the Corporation ranking junior to the Preferred Shares unless all dividends up to an including the dividend payable for the last completed period for which such dividends shall be payable on each series of Preferred Shares then issued and outstanding shall have been declared and paid or set apart for payment at the date of such declaration or payment or setting apart for payment on the Common Shares or such other shares of the corporation ranking junior to the Preferred Shares nor shall the Corporation call for redemption or redeem or purchase for cancellation or 29 reduce or otherwise pay off any of the Preferred Shares (less than the total amount then outstanding) or any common shares or any other shares of the Corporation ranking junior to the Preferred Shares unless all dividends up to and including the dividend payable for the last completed period for which such dividends shall be payable on each series of the Preferred Shares then issued and outstanding shall have been declared and paid or set apart for payment at the date of such call for redemption, purchase, reduction or other payment; (vii)- the Preferred Shares of any series may be purchased for cancellation or made subject to redemption by the Corporation at such times and at such prices and upon such other terms and conditions as may be specified in the rights, privileges, restrictions and conditions attaching to the Preferred Shares of such series as set forth in the resolution of the board of directors of the Corporation and certificate of amendment relating to such series; (viii)- the approval of the holders of the Preferred Shares, given in the manner described in paragraph (ix) below, shall be required for the creation of any new shares ranking prior to or on a parity with the Preferred Shares; and (ix)- the provisions of paragraph (i) to (viii), inclusive and of this paragraph (ix) may be repealed, altered, modified, amended or varied in whole or in party only with the prior approval of the holders of the Preferred Shares given in the manner hereinafter specified in addition to any other approval required by the Canada Business Corporations Act or any other applicable statutory provision or like or similar effect, from time to time in force. The approval of the holders of the Preferred Shares with respect to any and all matters hereinbefore referred to may be given by at least 66-2/3% of the votes cast at a meeting of the holders of the Preferred Shares duly called for that purpose and held upon at least 21 days' notice at which the holders of a majority of the outstanding Preferred Shares are present or represented by proxy. If at any such meeting the holders of a majority of the outstanding Preferred Shares are not present or represented by proxy within one- half an hour after the time appointed for such meeting, then the meeting shall be adjourned to such date being not less than 30 days later and to such time and place as may be appointed by the chairman of the meeting and not less than 21 days' notice shall be given of such adjourned meeting but it shall be necessary in such notice to specify the purpose for which the meeting was originally called. At such adjourned meeting the holders of the Preferred Shares present or represented by proxy may transact the business for which the meeting was originally called and resolution passed thereat by not less than 66-2/3% of the votes cast at such adjourned meeting and the conduct thereof shall be from time to time prescribed by the by-laws of the Corporation with respect to meetings of shareholders. On every poll taken at every such meeting or adjourned meeting every holder of Preferred Shares shall be entitled to one vote in respect of each Preferred Share held by him. B- An unlimited number of Common Shares which, as a class, shall have attached thereto the following rights, privileges, restrictions and conditions: (i) - The holders of the Common Shares are entitled to one(1) vote per share at all meetings of the shareholders except meetings at which only holders of a specified class of shares are entitled to vote, and are entitled to receive the remaining property of the Corporation upon a dissolution. 30 EX-13.1 3 MD & A OF FINANCIAL CONDITIONS EXHIBIT 13.1 Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements The following information should be read in conjunction with the audited consolidated financial statements included elsewhere herein. 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 sections labelled "Financial Instruments," "Factors That May Affect Future Operating Results" and "Year 2000," which are 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 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 International Corp., 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, business productivity and consumer product applications and for the Windows, MacIntosh and the Unix environment. Corel also develops, manufactures, licenses, sells and supports a desktop operating system for Linux. The Company is currently developing applications in the graphics and business productivity markets for this operating system. On December 31, 1998, the Company transferred its Java(TM)-based jBridge(TM) solution, in exchange for an equity interest in GraphOn Corporation of Campbell, California. The assets transferred had a nominal value in the Company's financial statements. On February 17, 1999, the Company transferred all of the assets of Corel Computer supporting the Netwinder family of Linux-based thin client/thin server computers and $1.6 million cash in exchange for a 25% equity stake in Rebel.com Inc. On April 17, 1999 Corel acquired certain assets of GraphicCorp, a leading supplier of clipart images, photographs and web images. The assets were acquired at an aggregate cost of $10.3 million, of which $6.3 million was acquired by issuing 1 million common shares from treasury, and the remaining $4 million was paid in cash. On November 1, 1999 the Company entered in to an agreement to transfer substantially all of its assets related to the CorelVIDEO(TM) product line to Simply.com Inc. These activities have and will continue to allow the Company to reduce operating costs while still developing and marketing award winning software. 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. The setting of reserves is inherently risky due to the factors discussed below in "Factors That May Affect Future Results". During the year ended November 30, 1998, the Company adopted the Statement of Position ("SOP") 97-2 "Software Revenue Recognition," which provides guidance on applying U.S. generally accepted accounting principles in recognizing revenue from software transactions. The adoption conforms with Canadian generally accepted accounting principles. F-32 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. The increase in deferred revenue in 1999 is consistent with the increase in corporate licence sales. Product groups
Year ended November 30 ----------------------------------- 1999 1998 1997 -------- -------- -------- (in thousands) Graphics $ 82,592 $106,228 $ 91,102 Business productivity 132,948 111,990 140,950 Consumer products 24,000 27,613 27,547 Linux operating system 3,206 - - Video and network computer 305 996 982 -------- -------- -------- Total sales $243,051 $246,827 $260,581 ======== ======== ========
Graphics software revenues decreased in 1999 due to the timing of the release of the latest version of CorelDRAW. Version 9 was released in May 1999; therefore, the Company only had approximately half of the year to sell the new version. In 1998, CorelDRAW 8 was available throughout the entire year. Graphics software revenues increased in 1998 due to the concentration of the Company's marketing and sales efforts, which resulted in large increases in the units sold of the current version of CorelDRAW, and contributed to the large unit sales for the new CorelDraw 8 for Power Macintosh and Corel PHOTOPAINT 8 releases. Sales for business productivity applications increased in 1999 due to the release of WordPerfect Office 2000 in May 1999. A 24-month period existed between the release of Corel WordPerfect Suite 8, in May 1997, and WordPerfect Office 2000. This product development cycle allowed the Company to effectively execute sales and marketing plans for this launch. The business productivity revenues increased in 1999 while sales of the Company's graphics products decreased in 1999, even though both product lines experienced major releases. Business productivity products were adversely impacted in the first quarter of fiscal 1998 due to a change in pricing policy. The Company increased the price of WordPerfect Office 2000 with the launch in 1999. The graphics products were adversely impacted in the first quarter of fiscal 1999 as users waited for the release of CorelDRAW 9 in the second quarter of this year. Unit sales for business productivity applications increased in 1998 and were aided through price cuts to all upgrade versions of the Company's business productivity applications. However, the increase in the units sold did not outweigh the effect of the price cuts and therefore, overall productivity software applications revenue in 1998 dropped from 1997. Consumer product applications include such items as the Corel GALLERY, Corel Graphics Pack, Corel Print House and Corel Studio lines that were designed primarily for the retail channel. Sales of consumer product applications have experienced little change from 1997 through 1999. Linux operating systems sales represent new revenue for Corel. Corel is currently developing graphics and business productivity applications to complement the Linux operating system. Video and Network Computer products include CorelVIDEO video communication software, CorelCAM colour cameras and other video communication hardware; in addition to the NetWinder line of network computers. Revenues remained relatively consistent through 1998. The sale of the NetWinder division in the first quarter of 1999 and CorelVIDEO in the fourth quarter of 1999 resulted in reduced sales in this area for fiscal 1999. There will be no sales from these product lines in the future. F-33 Sales channels. Corel distributes its products primarily through distributors (as retail packaged products), OEM licences and corporate licences.
Year ended November 30 ----------------------------------- 1999 1998 1997 -------- -------- ------- (in thousands) Retail packaged products $140,200 $153,623 $161,528 OEM licences 26,972 23,340 30,441 Corporate licences 75,879 69,864 68,612 ------- -------- -------- Total sales $243,051 $246,827 $260,581 ======== ======== ========
Retail packaged products and corporate licences are sold primarily through distributors. The three largest distributors accounted for $72.8 million (30.0%), $77.7 million (31%) and $93.8 million (36%) of Corel's sales in fiscal 1999, 1998 and 1997, respectively. Packaged product revenue decreased in 1999 due to a shift in focus from retail to corporate and Year 2000 pressure. Corel's enhanced focus on the corporate market has resulted in increased revenue in both 1998 and 1999 from corporate licences. OEM channel revenues are licence fees from original equipment manufacturers and these revenues increased in 1999 due to an increase in OEM licence agreements for business application products. OEM revenues declined in 1998 over 1997 due to the declining price of hardware, which led to a decline in OEM per unit revenues. Sales by region
Year ended November 30 ------------------------------------- 1999 1998 1997 -------- -------- -------- (in thousands) North America $155,805 $152,880 $147,450 Europe 64,123 73,089 84,732 Other 23,123 20,858 28,399 -------- -------- -------- Total sales $243,051 $246,827 $260,581 ======== ======== ========
The decrease in sales in Europe in 1999 reflects large declines in revenues from Germany and France. The decline in both countries can be attributed to graphics products. CorelDRAW 8 was the latest version available in the market in 1998 and it sold throughout the year. CorelDRAW 9 Graphics Suite was only available in May of 1999. The decrease in sales outside of North America in 1998 reflects large declines in revenues from the United Kingdom, Belgium and Japan. Sales in US dollars as a percentage of total sales were in excess of 90% in each of fiscal 1999, 1998 and 1997. 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. The decrease in gross profit in 1999 can be attributable to lower sales, increased inventory obsolescence and valuation adjustments due to the release of new versions in 1999. Gross profit increased in 1998, compared to 1997, both as a percentage of sales and in dollars. This was caused by lower amortization with the write down of the WordPerfect technology in the second quarter of 1997 and to the inventory obsolescence provision of $12.8 million in 1997. 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. In 1999, these expenses increased as a result of print advertising and trade shows to promote the latest versions of the Company's products over the fourth fiscal quarter of this year. Advertising expenses decreased in 1998 due to the reduction of print advertising and corporate sponsorships and promotions. F-34 Selling, General and Administrative Expenses All selling expenses (except for advertising expenses) are included in this category along with general and administrative expenses; as well as expenses associated with warehousing. The increase in selling, general and administration (SG&A) expenses in 1999 over 1998 resulted from new product releases in Corel's two flagship products - CorelDRAW 9 Graphics Suite and WordPerfect 2000. Further expenses were incurred to promote Corel LINUX OS, which was also released during the year. The specific factor leading to 1999 increases in SG&A can be attributed to head count increases. There were two major reasons for the decrease in these expenses in 1998 over 1997. First, the restructuring that occurred at the beginning of the third quarter of 1998 contributed to the decrease in SG&A expenses with the drop in salaries for the last two quarters. Second, the Company used fewer contractors in 1998 than in 1997. Research and Development Expenses The Company has expensed all of its product development costs as incurred, since the criteria for deferral are not met. Research and development expenses are reported net of Canadian investment tax credits.
Year ended November 30 ---------------------------------- 1999 1998 1997 -------- -------- -------- (in thousands) Gross research and development expenses $48,904 $71,935 $89,499 Less: Research and development tax credits 8,855 - - ------- ------- ------- Net research and development expenses $40,049 $71,935 $89,499 ======= ======= =======
In 1999 investment tax credits related to 1996 to 1998 taxation years were recognized for accounting purposes as a result of an audit by Revenue Canada being completed during the year. Gross research and development expenses decreased over 1998 levels since employees terminated as part of the restructuring in 1998 were not entirely replaced. The restructuring that took place in the third quarter of 1998 is the main reason for the decrease in research and development expenses in 1998. In September 1998, the Company terminated 460 employees at the Orem, Utah location as part of the transfer of research and development activities from Orem to Ottawa, Ontario and did not replace all of those employees at the Ottawa location. Depreciation and Amortization Expenses Depreciation and amortization expenses, which do not include the amortization of purchased software, decreased in 1999 as a result of an aging asset base. In 1998, a number of assets were written off as a result of the restructuring that took place. Write-down of Purchased Software and Royalties During 1997, the Company determined that recording nonrecurring charges totaling $117.5 million was appropriate. These charges consisted 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. Restructuring Charge As discussed in research and development expenses, the Company incurred a restructuring charge of $15.9 million in the third quarter of 1998. The charge related to the costs associated with moving the research and development activity in Orem, Utah to the Ottawa, Ontario location. As part of the plan, the Company terminated 460 employees. The research and development efforts on WordPerfect were carried out by engineers at the Orem site. The Company consolidated research and development efforts on WordPerfect in Ottawa by increasing the employee head count by 200. The Company was able to successfully develop and launch WordPerfect Office 2000 from Ottawa. Further discussion of the charge and its components may be found in Note 11 of the 1999 Consolidated Financial Statements. F-35 Interest Expenses (Income) The interest expense relates to Novell obligations for the acquisition of the WordPerfect technology from Novell, Inc. and is netted with interest income from term deposits. The net decrease in 1999 is a result of the decrease in the outstanding Novell obligation. Income Taxes Corel's effective tax rates for fiscal 1999, 1998 and 1997 were (29.8%), (14.9%) and (3.9%); 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. In 1999 Corel recorded a tax benefit of accounting losses in the 1996 and 1997 fiscal years. Further discussion of tax rate differences may be found in Note 13 of the 1999 Consolidated Financial Statements. Liquidity and Capital Resources 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 Novell obligations and to acquire capital equipment, products and technology. Non-cash working capital (current assets net of cash, cash equivalents, short-term investments and current liabilities) increased by $26.3 million to $1.7 million from ($24.6) million in 1998. Corel initiated significant cost cutting measures throughout 1998 that allowed it to record a profit from operations in the fourth quarter of 1998. The full benefit of these measures continued throughout 1999 which helped facilitate the Company's movement towards an improved liquidity position in 1999. The Company has acquired 2,167,114 common shares of GraphOn Corporation as a result of selling its jBridge technology. These shares were restricted from trading as at November 30, 1999 but by the end of fiscal 2000, all restrictions will have been removed. As at November 30, 1999 the shares trading value was in excess of $31 million. Days sales outstanding ("DSO") increased in 1999 to 76 days from 58 days in fiscal 1998 (and 106 days in fiscal 1997). The increase in 1999 can be attributed to large balances being maintained by North American distributors at year end. Significant payments since year end have served to reduce the DSO to more normal levels. The decrease in inventories in 1999 reflects the increased obsolescence charges due to the release of new products. The increase in 1998 reflects the increased production of the Company's core products that were in the market; including CorelDRAW 8 and Corel WordPerfect Suite 8. The decrease in prepaid expenses in 1999 reflects the draw-down of 1998 prepaid royalty balances for technologies that were included in the latest versions of the Company's software. The increase in prepaid expenses in 1998 was a result of more prepaid royalties paid as part of agreements to licence technologies from third parties. Accounts payable and accrued liabilities decreased by $7.9 million in fiscal 1999 and increased by $10 million in fiscal 1998 over 1997. The decrease in 1999 can be attributed to the positive resolution of proposed income tax adjustments made by Canada Customs and Revenue Agency as noted in the previous year. The increase in fiscal 1998 relates to increases in accrued liabilities relating to the restructuring charge as well as accruals for income tax proposals as noted in Note 13 of the 1998 consolidated financial statements. The current portion of Novell obligations of $10.6 million at November 30, 1999 represents the amounts due in fiscal 2000 arising from long-term royalty and product return obligations pursuant to the acquisition of the WordPerfect family of software on March 1, 1996. The exercise of employee and other stock options provided cash of approximately $12.8 million in fiscal 1999, $0.2 million in fiscal 1998 and $6.2 million in fiscal 1997. Corel's capital expenditures totaled $19.2 million in fiscal 1999, $10.3 million in fiscal 1998 and $23.8 million in fiscal 1997, including expenditures for acquired software ($7 in fiscal 1999, $4.7 million in fiscal 1998 and $12.2 million in fiscal 1997), and for computer and office equipment. At November 30, 1999, Corel had no material commitments for capital expenditures. Financial Instruments As described in Note 6 to the 1999 Consolidated Financial Statements, the Company's Product Return Obligation includes interest charges of 1% over the US prime rate and is therefore subject to interest rate risk. Assuming principal repayments of $6,594,000 in 2000 as set out in Note 6 to the 1999 Consolidated Financial Statements and a US prime rate of 8.5% (rate at November 30, 1999 according to the US Federal Reserve Bank), a 10% increase in F-36 the US prime rate would result in interest charges of $762,000 in 2000 using a weighted average principal balance. The interest charges using the above US prime rate and the weighted average principal balances would be $350,000 in 2000. Factors That May Affect Future Operating 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 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. 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., Micrografx, Inc., and Microsoft Corporation. In the desktop publishing segment, its competitors include Adobe. Corel's competitors also include many independent software vendors, such as Autodesk, Inc., and Apple Computer Inc. Business Productivity. Corel's competitors in the productivity software (primarily office suites) marketplace include Microsoft, IBM (Lotus Development Corporation), Sun Microsystems, Inc., Redhat, Inc. and Applix Inc. According to industry sources, Microsoft currently has the largest overall market share for office suites. IBM has a large installed base with its spreadsheet program. Also, IBM preinstalls some of its software products on various models of its PCs, competing directly with Corel productivity software. Consumer Products. 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 Eyewire, Inc., Corbis Corporation and Getty Images, Inc. In the photo-editing and painting graphics segments, its competitors include Adobe, Live Picture, Meta Creations and The Learning Company Inc. In the clipart segment, the Company's competitors include Nova Corporation and The Learning Company. The Company competes with Sierra/Cendant, Broderbund, The Learning Company and Microsoft in the SOHO graphics market. In addition to these direct competitors, the Company competes with a number of personal computer manufacturers that devote significant resources to creating personal computer software, including Apple, Hewlett-Packard Company and IBM. 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 and corporate levels. The Company also competes with other software companies in its efforts to acquire software technology developed by third parties. Pricing Pricing pressures continually intensify 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 competitive upgrade programs are forms of price competition that may become more prevalent. In addition, enterprise wide versions of products are generally priced lower per user than individual copies of the same products. Corel also competes with companies that produce standalone graphics and desktop publishing applications that might serve a specific need of a user or class of users at a price below that of Corel's products. 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 F-37 Internet, corporate intranets and the acceptance of new operating systems such as Windows 98 and Linux. 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. 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. Corel currently has approximately 2,500,000 options outstanding as part of the stock option plan that require shareholder and Toronto Stock Exchange (TSE) approval. These options were granted to the employees in excess of the available options previously approved. If the options receive approval from the shareholders and the TSE, U.S. generally accepted accounting principles would require that a stock-based compensation charge be taken. The charge to the statement of operations would be measured with the TSE closing trade price on the day of the approval. This would represent a significant difference between Canadian and U.S. generally accepted accounting principles and would be disclosed in the notes to the Consolidated Financial Statements in the period the approval occurs. 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. 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 more than 60 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 F-38 accounts receivable. More than 54% 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. Corel has agreements describing compensation arrangements and containing non-disclosure covenants with all of its key employees. 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. Saturation Product upgrades, which enable users to upgrade from earlier versions of Corel's products or from competitors' products, have lower prices and margins than new products. The sales mix has shifted from full-kit products to upgrade products as the market for Corel's products become saturated. This sales pattern is likely to continue. Corporate licences Average revenue per unit from corporate licence programs is lower than average revenue per unit from retail versions. Unit sales under licensing programs may continue to increase. Research and development investment cycle Developing and localizing software is expensive and the investment in product development often involves a lengthy payback cycle. The Company plans to continue significant investments in product research and development from which significant revenue is not assured. Contingencies Contingent liabilities that may affect Corel's future operations are outlined in Note 9 of the Consolidated Financial Statements and public documents filed with the Securities Exchange Commission. Year 2000 Many software and hardware products were designed to store dates using a two-digit year (e.g., 98) instead of a four-digit year (e.g., 1998). This was done to save what was, at the time, valuable memory. As we make the transition to the year 2000, some applications could misinterpret 00 as 1900, 1980 or some other date. In addition, 2000 is a leap year. A leap year occurs at the turn of the century every 400 years, and some applications have failed to accommodate this. There are three major risks for the Corel from Year 2000 issues. Year 2000 compliance problems with Corel's products could have a material adverse effect on sales and operations. Significant Year 2000 compliance problems with internal systems could seriously affect Corel's ability to carry out its operations. Corel also depends heavily on third parties for raw materials, transportation, utilities, and other key services. Interruption of supplier operations due to Year 2000 issues could seriously disrupt Corel's operations. In addition, if Corel's current or future customers do not achieve Year 2000 compliance or if they divert expenditures previously reserved for business software to address their Year 2000 compliance problems, Corel's business, results of operations, or financial condition could be materially adversely affected. Addressing potential year 2000 issues is a high priority at Corel. In 1996, Corel initiated a corporate-wide program to review, test and prepare Corel's products and internal systems for the Year 2000 with the full support of the Board of Directors. The Board of Directors is updated as to the status of Corel's Year 2000 effort on a regular basis. On the product side, Corel has established a comprehensive year 2000 Product Evaluation Program. Corel conducts product evaluations using real world scenarios to determine if the applications will operate as designed using various identified year 2000 critical dates where appropriate. Corel tests all new products before they are released, as well as major upgrades of all existing products. Corel has also completed testing on a number of historic products that have a large user-base. Current information on the status of our products is available on our Web site (www.corel.com/2000). All upcoming product releases are being tested for Year 2000 compliance and it is anticipated that all upcoming releases will be Year 2000 compliant. Although Corel's testing process is comprehensive, there can be no assurances that Corel's products do not contain undetected errors or defects F-39 associated with year 2000 date functions. As of January 18, 2000, Corel has not been notified by any of its customers that any Corel product has experienced a significant Year 2000 problem. For internal systems, the Company has established a three phase testing program. The inventory phase includes compiling a list of hardware and software systems and suppliers that are critical to Corel's operations. Assessment includes the evaluation of critical systems for Year 2000 compliance. The renovation phase includes the resolution of all issues identified in the assessment phase. The inventory phase is ongoing as additions to internal systems are made on a regular basis. Corel has completed the assessment phase for all critical internal hardware and software systems. As of December 13, 1999, all critical systems that required intervention were renovated. In addition, as part of ongoing business operations, Corel strives to ensure that all current investments in new technology are Year 2000 compliant. Due to the nature of Corel's normal business practices, Corel is continually upgrading many of its critical back-end systems with new hardware and software. Corel's Year 2000 program also includes a full review of significant third parties' Year 2000 compliance. Corel has been in contact with the majority of these third parties and is currently conducting an in-depth risk analysis. This includes assessing the extent of Year 2000 compliance for third parties as well as reviewing their plans to address any Year 2000 issues through surveys and discussions with company representatives. As of January 18, 2000, Corel did not experience any year 2000 issues with these third parties. Corel has designed a comprehensive contingency planning process to ensure the continuity of business operations in the event of a disruption caused by Year 2000 issues. The four phases of this plan are I - business process definition, II - business process analysis, III - scenario generation and contingency plan determination and IV -validation and testing. Phase IV of the plan was completed in the fourth quarter of 1999. Corel expects to incur total costs of approximately $0.3 million from the end of the fourth quarter 1999 through the second quarter of 2000 to operate Year 2000 programs. This amount includes the direct costs involved in running the Year 2000 department as well as costs associated with third party testing. These amounts will be funded from operating cash flow and will be expensed as incurred. There have also been substantial efforts expended by the Engineering, MIS and Legal departments with regard to Year 2000 issues and by other departments to a lesser degree. These costs are included in the salaries for those departments. There is no assurance that Corel's financial position may not be materially adversely affected if unanticipated problems occur. Corel assembled a Year 2000 Event Management Team that coordinated the efforts of specialists in critical areas, namely, business continuity, facilities maintenance, MIS, IT, web, finance, legal, sales, public relations and technical verification and recovery. These special knowledge teams came together well before January 1, 2000, to developed a comprehensive test plan to ensure that Corel's transition to the year 2000 was a smooth one. On December 31, 1999, the Event Management Team monitored events worldwide to serve as an early warning system for problems that might adversely impact Corel during the rollover. On January 1, 2000, the Event Management Team assembled to execute the test plan. All critical MIS and IT systems, in Ottawa and Dublin, were reviewed to ensure they were functioning as designed and that data integrity was maintained. Event Management Team members were also on-site at the Saturn manufacturing facility in Montreal, Quebec to coordinate testing between the two companies to ensure that the Corel product manufacturing and distribution system would not be affected by the rollover. The testing and verification process proceeded without incident, and the implementation of year 2000 contingency plans was not required. Corel met its goal of conducting business as usual on January 4, 2000. There have been no significant trends or issues concerning Corel products reported, and no significant year 2000 problems identified with our internal systems as of January 18, 2000. Corel will remain vigilant well past February 29, 2000 to insure that no year 2000 related issues will affect its operations. Notwithstanding the efforts made to become Year 2000 compliant, there can be no assurances that this program will ensure that all of Corel's internal systems, products and third party systems will be Year 2000 compliant. Should these systems not be compliant, there could be material adverse consequences to Corel. 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 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 F-40 governance with reference to the guidelines.
TSE Corporate Governance Committee Does Corel Guideline Conform? Comments - --------------------------------------------- ------------ ------------------------------------------------------ 1 Board should explicitly assume responsibility for stewardship of the corporation, and specifically for: a) adoption of a strategic planning Yes. The Board participates in strategic planning; however, process. 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, and Yes. The Board, in its deliberations, considers the principal implementing risk-managing systems. risks of the Corporation's business and receives reports of the Corporation's assessment and management of those risks. c) succession planning and monitoring Yes. The Board has addressed with the CEO the question of senior management. succession planning. The Board does participate in the appointing of senior management. d) communications policy. Yes. The Board has considered and discussed how the Corporation communicates with its various stakeholders. e) integrity of internal control and Yes. The Board directly, and through its Audit Committee, management information systems. assesses the integrity of the Corporation's internal control and management information systems. 2 Majority of directors should be Yes. The Board is composed of six members: five are "unrelated" (free from conflicting unrelated and one is an officer of the Corporation. interests). 3 Disclose for each director whether he Yes. Apart from Michael Cowpland, all directors are or she is related, and how that unrelated to the Company or each other. Michael conclusion was reached. Cowpland is the Founder, the largest individual shareholder, Chief Executive Officer and President of the Corporation. 4 a) Appoint a Committee responsible for Yes. The Board of Directors has appointed the Audit the appointment/assessment of Committee with this mandate. directors b) Composed exclusively of non- Yes. management directors, the majority of whom are unrelated. 5 Implement a process for assessing the Yes. The Board of Directors has appointed the Audit effectiveness of the Board, its Committee with this mandate. Committees and individual directors. 6 Provide orientation and education Yes. The Corporation provides appropriate documentation programs for new directors. and presentations as required for new directors. - -----------------------------------------------------------------------------------------------------------------------
F-41 7 Consider reducing the size of Board, Yes. The Board has considered its size with a view to the with a view to improving impact of size upon its effectiveness and has effectiveness. concluded that the number of directors is in the appropriate range for a corporation of the size and complexity of the Corporation. The Board as presently constituted brings together a mix of skills, backgrounds and attitudes that the Board considers appropriate to the stewardship of the Corporation. 8 Review compensation of directors in Yes. The Board, through its Compensation Committee, light of risks and responsibilities. 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 Committees are non-management directors. directors 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 corporate approach to corporate governance governance issues and has appointed the Audit issues. 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. b) Board should approve the CEO's Yes. The Board annually approves the key results for which corporate objectives. 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 opinion that it Board to function independently of can continue to function independently as required. management. 13 a) Establish an Audit Committee with a Yes. The Audit Committee has a specifically defined specifically defined mandate. mandate that includes oversight responsibility for management reporting on internal controls and corporate governance. b) All members should be non- Yes. The members are non-management directors. management directors. 14 Implement a system to enable Yes. The Corporation does not have a formal system but individual directors to engage outside individual directors have in the past engaged and are advisers, at corporation's expense. encouraged to engage, outside advisors when necessary.
F-42 EX-13.2 4 FINANCIAL STATEMENTS EXHIBIT 13.2 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Auditors' Report 45 ---------------- -- Consolidated Balance Sheets 46 --------------------------- -- Consolidated Statements of -------------------------- Operations and Retained Earnings -------------------------------- (Deficit) 47 --------- -- Consolidated Statements of -------------------------- Cash Flows 48 ---------- -- Notes to Consolidated Financial ------------------------------- Statements 49 ---------- -- 44 Management's Report Management is responsible for the preparation of the Company's consolidated financial statements. Management believes that the consolidated financial statements fairly reflect the form and substance of transactions and that the consolidated financial statements reasonably present the Company's financial condition and results of operations in conformity with generally accepted accounting principles. Management has included in the Company's consolidated financial statements amounts based on estimates and judgements that it believes are reasonable under the circumstances. PricewaterhouseCoopers LLP, the independent auditors of the Company, have audited the Company's consolidated financial statements in accordance with generally accepted auditing standards and they provide an objective, independent review of the fairness of reported operating results and financial position. The Board of Directors of the Company has an Audit Committee which meets with financial management and the independent auditors to review accounting, auditing, internal accounting controls, and financial reporting matters. Dr. Michael C.J. Cowpland Michael P. O'Reilly Chairman, President and CEO Executive Vice-President Finance, CFO and Treasurer Auditors' Report to the Shareholders We have audited the consolidated balance sheet of Corel Corporation as at November 30, 1999 and November 30, 1998 and the consolidated statements of operations and retained earnings (deficit) and statements of cash flows for the year ended November 30, 1999 and November 30, 1998. 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 audit. We conducted our audit in accordance with generally accepted auditing standards in Canada. 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, 1999 and 1998, and the results of its operations and the cash flows for the years ended November 30, 1999 and 1998 in accordance with generally accepted accounting principles in Canada. PricewaterhouseCoopers LLP Chartered Accountants Ottawa, Canada January 18, 2000 45 Consolidated Balance Sheets
- --------------------------------------------------------------------------------------------------------------- As at November 30 - --------------------------------------------------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------------------------------------------------- (in thousands of US$) Assets Current assets: Cash and cash equivalents (note 1) $ 18,021 $ 22,393 Short-term investments - 2,113 Accounts receivable Trade (note 6) 54,770 45,789 Other 3,954 877 Inventory (note 2) 13,567 17,098 Income taxes recoverable 5,135 - Deferred income taxes 1,642 2,495 Prepaid expenses 2,042 4,618 - --------------------------------------------------------------------------------------------------------------- Total current assets 99,131 95,383 Investments (note 3) 2,873 - Capital assets (note 4) 49,697 44,776 - --------------------------------------------------------------------------------------------------------------- Total assets $ 151,701 $ 140,159 - --------------------------------------------------------------------------------------------------------------- Liabilities and shareholders' equity Current liabilities: Accounts payable and accrued liabilities (note 5) $ 50,284 $ 58,209 Current portion of Novell obligations (note 6) 10,594 11,800 Income taxes payable - 7,549 Deferred revenue 18,472 17,933 - --------------------------------------------------------------------------------------------------------------- Total current liabilities 79,350 95,491 Novell obligations (note 6) 7,985 16,085 Shareholders' equity Share capital (note 7) 222,155 203,088 Contributed surplus 1,099 1,099 Deficit (158,888) (175,604) - --------------------------------------------------------------------------------------------------------------- Total shareholders' equity 64,366 28,583 - --------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 151,701 $ 140,159 - ---------------------------------------------------------------------------------------------------------------
Commitments (note 8) Contingencies (note 9) On behalf of the Board Dr. Michael C.J. Cowpland The Honourable William G. Davis, P.C., C.C., Q.C. Director Director (See accompanying Notes to Consolidated Financial Statements) 46 Consolidated Statements of Operations and Retained Earnings (Deficit)
- ------------------------------------------------------------------------------------------------------------------------------ Year ended November 30 - ------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ (in thousands of US$, except per share data) Sales $ 243,051 $ 246,827 $ 260,581 Cost of sales (note 10) 59,516 51,561 84,136 - ------------------------------------------------------------------------------------------------------------------------------ Gross profit 183,535 195,266 176,445 Expenses: Advertising 47,964 41,826 79,561 Selling, general and administrative 82,229 77,736 84,480 Research and development 40,049 71,935 89,499 Depreciation and amortization 6,443 12,368 26,275 Write-down of purchased software and royalties - - 117,512 Restructuring charge (note 11) - 15,880 - Settlement proceeds (note 12) (6,342) - - Loss (gain) on foreign exchange (246) 911 764 - ------------------------------------------------------------------------------------------------------------------------------ 170,097 220,656 398,091 - ------------------------------------------------------------------------------------------------------------------------------ Income (loss) from operations 13,438 (25,390) (221,646) Interest expense 190 1,112 1,154 - ------------------------------------------------------------------------------------------------------------------------------ Income (loss) before the under noted 13,248 (26,502) (222,800) Income taxes expense (recoverable) (note 13): Current (4,799) 4,088 7,421 Deferred 853 (142) 1,457 - ------------------------------------------------------------------------------------------------------------------------------ (3,946) 3,946 8,878 Share of loss in equity investee (note 3(a)) 478 - - - ------------------------------------------------------------------------------------------------------------------------------ Net income (loss) 16,716 (30,448) (231,678) Retained earnings (deficit) beginning of year (175,604) (145,156) 86,955 Premium on shares repurchased for cancellation - - (433) - ------------------------------------------------------------------------------------------------------------------------------ Deficit end of year $ (158,888) $ (175,604) $ (145,156) - ------------------------------------------------------------------------------------------------------------------------------ Earnings per share (note 7): Basic $ 0.27 $ (0.51) $ (3.84) Fully diluted $ 0.26 $ (0.51) $ (3.84) Weighted average number of Common shares outstanding (000s): Basic 62,194 59,433 60,297 Fully Diluted 64,616 59,433 60,297
(See accompanying Notes to Consolidated Financial Statements) 47 Consolidated Statements of Cash Flows
- ---------------------------------------------------------------------------------------------------------------------------- Year ended November 30 - ---------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- (in thousands of US$) Cash and cash equivalents provided by (used for): Operations: Net income (loss) $ 16,716 $ (30,448) $ (231,678) Items which do not involve cash or cash equivalents: Depreciation and amortization 19,117 25,689 52,282 Deferred income taxes 853 (142) 1,457 Gain on sale of short-term investment (809) - - Equity loss in investments (note 3) 478 - - Write-down of royalties - - 10,181 Write-down of purchased software - - 107,331 Write-down of assets included in restructuring charge - 3,086 - Write-down of short-term investment - 1,908 - Increase (decrease) in accounts receivable (note 3) (12,126) 6,595 83,418 Increase (decrease) in inventory (notes 2 and 3) 3,150 (5,686) 18,978 Increase (decrease) in prepaid expenses 2,576 (2,027) 5,616 Increase (decrease) in accounts payable and accrued (7,925) 10,146 (4,330) liabilities (note 5) Increase (decrease) in income taxes payable (7,549) 3,346 4,215 Increase in income taxes recoverable (5,135) - - Increase in deferred revenue 539 3,809 7,629 - ---------------------------------------------------------------------------------------------------------------------------- 9,885 16,276 55,099 - ---------------------------------------------------------------------------------------------------------------------------- Financing: Issue of share capital (notes 4 and 7) 12,767 209 6,206 Shares repurchased for cancellation - (987) (4,979) Reduction of Novell obligations (9,306) (9,659) (11,786) - ---------------------------------------------------------------------------------------------------------------------------- 3,461 (10,437) (10,559) - ---------------------------------------------------------------------------------------------------------------------------- Investments: Proceeds on sale of short-term investment 2,922 1,624 - Increase in short-term investment - - (5,645) Purchase of equity investment (note 3(a)) (1,561) - - Purchase of capital assets (note 4) (19,198) (10,359) (23,829) Proceeds on disposal of assets (note 4) 119 305 2,994 - ---------------------------------------------------------------------------------------------------------------------------- (17,718) (8,430) (26,480) - ---------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (4,372) (2,591) 18,060 Cash and cash equivalents at beginning of year 22,393 24,984 6,924 - ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 18,021 $ 22,393 $ 24,984 - ----------------------------------------------------------------------------------------------------------------------------
(See accompanying Notes to Consolidated Financial Statements) 48 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 16. The consolidated statement of operations and retained earnings (deficit) and statement of cash flows for the year ended November 30, 1997 were audited by another auditing firm who reported without reservation as noted in their report dated January 16, 1998. (a) Basis of consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Corel Corporation Limited, Corel International Corp., Corel Inc. and Corel Corporation (U.S.A.). Corel Computer Corp. was amalgamated with Corel Corporation on December 1, 1998 and is no longer a subsidiary of the parent company. 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, and the disclosure of contingent assets and liabilities. Examples include the provisions for returns and bad debts, the length of product cycles and capital asset 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 various rights of return and price protection. The Company provides reserves for estimated future returns, exchanges and price protection. License 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. During the year ended November 30, 1998, the Company adopted the Statement of Position ("SOP") 97-2 "Software Revenue Recognition" and SOP 98-4 "Deferral of the Effective Date of a Provision of SOP 97-2" which provide guidance on applying US generally accepted accounting principles in recognizing revenue from software transactions. The adoption of SOP 97-2 and SOP 98-4 conforms with Canadian generally accepted accounting principles and did not have a material impact on the Company's results for the year ended November 30, 1999 and 1998. In December 1998, SOP 98-9 "Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions" was released. The Company will adopt SOP 98-9 for fiscal 2000. The Company does not expect SOP 98-9 to have a material impact on the Company's financial results. (d) Research and development costs Research costs are expensed as incurred. Development costs related to software products developed for sale 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) Cash and cash equivalents Cash includes cash equivalents, which are investments that are highly liquid and have terms to maturity of three months or less at the time of acquisition. (f) Short-term investments Short-term investments are available for sale securities to be sold within 365 days and are stated at the lower of cost and market value. 49 (g) Inventory Inventory of product components is valued at the lower of average cost and replacement cost, and finished goods are valued at the lower of average cost and net realizable value. (h) 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 internal use software 33.3% straight line Research and development equipment 20 - 50% declining balance Licences and purchased software, deferred 20 - 33.3% straight line or the life of the royalties, clipart libraries and Photo CD libraries licence 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. (i) 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. (j) Foreign currency Monetary assets and liabilities denominated in foreign currencies are translated at the closing year-end rates of exchange. Non-monetary items and any related amortization of such items are translated at the rates of exchange in effect when the assets were acquired or obligations incurred. All other income and expense items have been translated at the average rates prevailing during the respective years. The gains or losses resulting from the translation of these amounts have been reflected in earnings. Translation of the financial statements of the integrated foreign operations are translated in accordance with the policies noted above. (k) Investment tax credits Investments tax credits ("ITCs"), which are earned as a result of qualifying research and development expenditures, are recognized when the expenditures are made and their realization is reasonably assured, and are applied to reduce research and development expense in the year. 1. Financial Instruments The carrying amounts for cash, marketable securities, accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short maturity of these instruments unless otherwise noted. Cash equivalents consists of a $6 million term deposit issued by a major North American bank and is carried at cost which approximates fair market value. The fair value of the Company's Novell 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. Concentration of credit risk, with respect to accounts receivable, is limited due to the diversity of the Company's channel arrangements. The Company has credit evaluation, approval and monitoring processes intended to mitigate 50 - ------------------------------------------------------------------------------- potential credit risks. Ingram Micro Inc. accounted for $27,143,000 (49.5%) and $21,764,000 (47.5%) of accounts receivable at November 30, 1999 and November 30, 1998, respectively. 2. Inventory - ------------------------------------------------------------------------------- As at November 30 - ------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------- (in thousands of US$) Product components $ 8,582 $ 12,799 Finished goods 4,985 4,299 - ------------------------------------------------------------------------------- $ 13,567 $ 17,098 - ------------------------------------------------------------------------------- 3. Investments (a) Rebel.com On February 17, 1999 the Company purchased a 25% interest in Rebel.com for $3,351,000. The company's share of the net book value of the underlying assets was $1,299,000. The remaining balance of the purchase price of $2,052,000 has been allocated to goodwill and is being amortized on a straight line basis over three years. The fair value of the assets used to purchase the Company's share of Rebel.com was as follows (in thousands of US$): Cash $ 1,561 Capital assets 1,341 Inventory 381 Accounts receivable 68 - ------------------------------------------------------------------------------- Total purchase price $ 3,351 - ------------------------------------------------------------------------------- The Company is accounting for this investment using the equity method. In 1999, $342,000 of goodwill has been amortized and the Company's share of Rebel.com's net loss of $136,000 has been deducted from the value of the investment. (b) GraphOn Corporation On December 31, 1998, the Company sold its jBridge technology to GraphOn Corporation. In consideration of the transfer of technology, GraphOn issued to the Company 3,886,503 shares of common stock of GraphOn and a warrant to purchase up to 388,650 shares of additional common stock. The assets transferred had a nominal value in the Company's financial statements. On July 12, 1999, GraphOn Corporation completed a merger with Unity First Acquisition Corp., a publicly traded acquisition corporation ("Unity"). As part of the merger, Unity changed its name to GraphOn Corporation. Under the terms of the merger agreement, GraphOn Shareholders received a fixed exchange ratio of 0.5576 share of Unity common stock for each share of GraphOn Common Stock. As result of the merger, the Company holds 2,167,114 shares of common stock, representing 19.5% of the merged company and a warrant to purchase up to 216,711 shares of common stock at an exercise price of $1.79 per share. These shares are subject to certain trading restrictions and will become unrestricted within one year. The trading value of the GraphOn common stock at November 30, 1999 was $31,017,902 and the excess of the trading value of the underlying common shares of the warrant over the exercise price of the warrant was $2,713,872. 51 - ------------------------------------------------------------------------------- 4. Capital assets - -------------------------------------------------------------------------------
November 30, 1999 November 30 1998 ----------------------------- -------------------------- Accumulated Accumulated Cost Amortization Cost Amortization - -------------------------------------------------------------------------------------------------------------------- (in thousands of US$) Furniture and equipment $ 14,673 $ 9,580 $ 13,898 $ 8,221 Computer equipment and internal use software 71,954 62,202 64,154 60,656 Research and development equipment 12,664 8,649 12,611 6,681 Leasehold improvements 3,329 2,650 3,304 2,299 Licenses and purchased software, deferred royalties 95,476 75,860 91,024 64,614 Clipart libraries and Photo CD libraries 19,257 8,715 8,167 5,911 -------------------------- -------------------------- $ 217,353 $ 167,656 $ 193,158 $ 148,382 LESS: Accumulated amortization 167,656 148,382 - -------------------------------------------------------------------------------------------------------------------- Net book value $ 49,697 $ 44,776 - --------------------------------------------------------------------------------------------------------------------
Included in the net value of licenses and purchased software is $12,163,000 (1998 - $16,019,000) of WordPerfect licenses. During the year clipart was acquired at an aggregate cost of $10,300,000, of which $6,300,000 was acquired by issuing 1,000,000 common shares from treasury and the remaining $4,000,000 was paid in cash. 5. Accounts payable and accrued liabilities As at November 30 - ------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------- (in thousands of US$) Trade accounts payable $ 30,571 $ 23,845 Accrued payroll 5,073 4,793 Accrued liabilities 14,640 29,571 - ------------------------------------------------------------------------------- $ 50,284 $ 58,209 - ------------------------------------------------------------------------------- F-52 - ------------------------------------------------------------------------------- 6. Novell obligations The Novell obligations are comprised of royalty and product return obligations pursuant to the March 1, 1996 acquisition of the WordPerfect family of software programs and related technologies from Novell, Inc. - ------------------------------------------------------------------------------- As at November 30 - ------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------- (in thousands of US$) Royalty obligation $ 11,985 $ 15,563 Product return obligation 6,594 12,322 - ------------------------------------------------------------------------------- 18,579 27,885 Less: current portion of Novell obligations 10,594 11,800 - ------------------------------------------------------------------------------- Novell obligations $ 7,985 $ 16,085 - ------------------------------------------------------------------------------- Under the royalty obligation, the Company was obligated, at the date of acquisition, to pay royalties at a rate of 2% of its net revenues to Novell, Inc. to a maximum of a then present value of $30,000,000 of such payments imputing a 10% discount rate. The Company is currently amortizing the balance of this commitment and the related deferred royalties in accordance with the forecasted present value royalty payments as follows (in thousands of US$): 2000 $ 4,000 2001 4,000 2002 3,985 -------------------------------------------------- $ 11,985 -------------------------------------------------- Under the product return obligation, the Company was obligated, at the date of acquisition, to reimburse Novell, Inc. to a maximum of $25,000,000 for amounts representing estimated returns of Novell WordPerfect products in the distribution channel at that date. Payments are due in quarterly instalments over four years commencing January 1, 1997, with an interest charge of 1% over the US prime rate. Certain accounts receivable have been pledged as collateral for this obligation. Payments totaling $6,594,000 are required under this obligation during 2000. Interest paid on this obligation was $827,000, $1,230,000, and $1,781,000 in 1999, 1998 and 1997, respectively 7. Share capital
As at November 30 - ------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- (a) Authorized and issued share capital Authorized Unlimited preferred shares, issuable in series, no par Unlimited common shares, no par value Issued Number of common shares (000s) 65,532 59,478 59,740 Stated capital (in thousands of US$) $ 222,155 $203,088 $204,235 (b) Common shares issued during the year Stock option plan
- -------------------------------------------------------------------------------- Number of shares (000s) 5,054 132 1,149 Cash consideration (in thousands of US$) $ 12,767 $ 209 $ 6,206 Technology acquisition Number of shares (000s) 1,000 - - Consideration (in thousands of US$) $ 6,300 $ - $ - (c) Common shares purchased and cancelled during the year Number of shares (000s) - 394 1,450 Cash outlay (in thousands of US$) $ - $ (987) $ (4,979) Premium on share repurchase (in thousands of US$) $ - $ - $ 433 Discount on share repurchase credited to contributed surplus - $ (369) $ (378) (in thousands of US$)
(d) Earnings per common share The calculations of the earnings per common share are based on the weighted daily average number of shares outstanding during the year. The calculation of fully diluted earnings per common share assumes that all outstanding options have been exercised at the later of the beginning of the fiscal period or the option issuance date. As the impact of the exercise of these options is anti-dilutive in 1997 and 1998, they have not been included in the calculation of fully diluted earnings per share. (e) Stock Option Plan The Company's stock option plan is administered by the Compensation Committee which is a subcommittee of the Board of Directors. The Compensation Committee will designate eligible participants to be included under the plan and will designate the number of options and share price pursuant to the new options, subject to applicable securities laws and stock exchange regulations. The options vest when granted. Information with respect to stock option activity for 1997, 1998 and 1999 is as follows.
Price per share (CDN$) ------------------------------------------------------ Number of Shares Range Weighted Average - --------------------------------------------------------------------------------------------------------------------------- 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 Expired (655,085) 4.67 - 22.38 15.62 Cancelled (10,373,100) 9.50 - 25.25 14.96 - --------------------------------------------------------------------------------------------------------------------------- Outstanding at November 30, 1997 6,157,519 4.00 - 22.38 9.17 Granted 3,422,000 2.10 - 4.10 3.03 Exercised (131,600) 3.00 - 3.00 3.00 Expired (1,167,460) 7.70 - 19.67 11.87 - --------------------------------------------------------------------------------------------------------------------------- Outstanding at November 30, 1998 8,280,459 2.10 - 22.38 8.65 Granted 3,021,800 3.37 - 11.70 3.41 Exercised (5,054,268) 2.10 - 13.50 4.03 Expired (3,196,181) 2.10 - 22.38 9.32 - --------------------------------------------------------------------------------------------------------------------------- Outstanding at November 30, 1999 3,051,810 $ 2.10 - 13.50 $ 5.03 - ---------------------------------------------------------------------------------------------------------------------------
F-54 - -------------------------------------------------------------------------------- For various price ranges (in CDN$), weighted average characteristics of outstanding stock options at November 30, 1999 were as follows: Outstanding options ------------------------------------ Range of exercise price Shares Remaining life Weighted (years) Average - ------------------------------------------------------------------------------- $ 2.10 - $ 3.00 633,550 2.6 $ 2.97 3.01 - 7.00 1,288,921 3.3 3.39 7.01 - 13.50 1,129,339 0.7 8.05 The outstanding options expire between March 14, 2000 and September 27, 2003. On April 18, 1997, the shareholders adopted a resolution by the Board of Directors to re-price outstanding options at prices greater than $7.70, to $7.70. The resolution permitted option holders who qualified for grants under the plan to exchange existing options for options with a current market exercise price. The basis of the exchange was to reduce the number of existing options received in proportion to the change in exercise price. Included in the outstanding options are approximately 2,500,000 options that require shareholder and Toronto Stock Exchange approval. These options were granted to the employees in excess of the available options previously approved. These options have been included in the weighted average number of shares for the calculation of fully diluted earnings per share. 8. Commitments The Company rents office premises, sponsors various sporting events and venues, and is obligated to pay minimum product royalties under long-term agreements. Rent expense (in thousands of US$) pursuant to lease obligations aggregated $7,169, $7,155 and $7,006 during the years ended November 30, 1999, 1998 and 1997, respectively. At November 30, 1999, the minimum commitments under long-term agreements (in thousands of US$), are as follows: 2000 $ 7,010 2001 6,111 2002 5,219 2003 3,951 2004 3,979 2005 and thereafter 57,679 -------------------------------------------------------- $ 83,949 -------------------------------------------------------- 9. Contingencies On or about March 5, 1998, the Company was served with a class action lawsuit 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. On November 9, 1998, the Company filed a Motion to Dismiss and is awaiting reply from the Plaintiff. On December 30, 1998, Plaintiffs filed a related Motion to strike certain documents referred to in the Company's Motion to Dismiss. Both motions were fully briefed by February 12, 1999. On June 18, 1999, the Company filed a second Motion to Dismiss the Consolidated Complaint in its entirety on the grounds of forum non conveniens. The plaintiffs have not yet brought their motion to certify the class and the filing. All three pending motions were stayed as a result of a Memorandum of Understanding ("MOU") that was entered into by the parties on September 1, 1999. The MOU must receive both preliminary and final court approval. On January 13, 2000, the parties executed a Settlement agreement, subject to approval of the Court. On January 14, 2000, the parties requested that the court (a) preliminarily approve the proposed settlement; (b) schedule a final settlement F-55 - -------------------------------------------------------------------------------- hearing; and (c) direct that the notice of the proposed settlement be given to the members of the class. The settlement of this litigation is not expected to have a material adverse effect on the Company's operating results. 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. 10. Cost of sales
- ------------------------------------------------------------------------------------- Year ended November 30 - ------------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------- (in thousands of US$) Cost of goods sold $ 35,377 $ 27,119 $ 44,906 License amortization 12,674 13,321 26,007 Royalties 11,465 11,121 13,223 - ------------------------------------------------------------------------------------ $ 59,516 $ 51,561 $ 84,136 ====================================================================================
11. Restructuring Charge The Company proceeded with the implementation of a consolidation plan in the third fiscal quarter of 1998. Under this plan, research and development activity in the Company's Orem, Utah engineering center was transferred to engineering facilities in Ottawa, Ontario. On September 11, 1998, approximately 460 employees were terminated at the Orem, Utah facility. The balance of the workforce at that location remained with the Company until February 1, 1999 and assisted with the transfer of the source code and technical services to the Ottawa facility. As at November 30, 1999, the restructuring accrual included in accounts payable and accrued liabilities is comprised of the following amounts:
- ------------------------------------------------------------------------------------------------------------------------ Asset Severance Facilities write-downs costs closure costs Total - ------------------------------------------------------------------------------------------------------------------------ (in thousands of US$) Restructuring charge during the fiscal year $ 3,086 $ 10,104 $ 2,690 $ 15,880 Payments - (6,395) (1,344) (7,739) Re-allocation - (1,842) 1,842 - Non-cash asset write-downs (3,086) - - (3,086) - ------------------------------------------------------------------------------------------------------------------------ Restructuring accrual at November 30, 1998 $ - $ 1,867 $ 3,188 $ 5,055 ======================================================================================================================== Payments $ - $ (2,100) $ (1,705) $ (3,805) Re-allocation - 233 (233) - - ------------------------------------------------------------------------------------------------------------------------ Restructuring accrual at November 30, 1999 $ - $ - $ 1,250 $ 1,250 ========================================================================================================================
F-56 - -------------------------------------------------------------------------------- 12. Settlement proceeds During the third quarter of fiscal 1999, the Government of Canada and the Company reached an agreement on a final settlement related to the complaints filed by the Company in the summer of 1998 with the Canadian International Trade Tribunal. The complaints concerned a procurement for a standard Year 2000-compliant desktop office suite for Revenue Canada. The negotiated settlement in the amount of $6,342,000 represents full and final settlement covering all claims by the Company arising from this procurement. 13. Income taxes Income tax expense varies from the amount that would be computed by applying the basic federal and provincial income tax rates to income before income taxes, as shown in the following table:
- ---------------------------------------------------------------------------------------------------------- Year ended November 30 - ---------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------- (in thousands of US$) Income (loss) before income taxes and share of loss in equity investee Domestic $ 11,491 $ (26,002) $ (54,616) Foreign 1,757 (500) (168,184) - ---------------------------------------------------------------------------------------------------------- 13,248 (26,502) (222,800) - ---------------------------------------------------------------------------------------------------------- Basic rate applied to income before income taxes $ 5,911 $ (11,825) $ (99,414) Increase (decrease) in taxes resulting from: Provincial research and development deduction (122) (831) (677) Loss carryforwards utilized (6,117) - - Losses (income) recognized for accounting purposes but not for income tax purposes (10,666) 9,089 23,661 Write-down of items not deductible for income tax purposes - - 1,086 Foreign tax and exchange rate differences 7,048 7,513 84,222 - ---------------------------------------------------------------------------------------------------------- $ (3,946) $ 3,946 $ 8,878 ==========================================================================================================
The accumulated accounting losses include loss carryforwards for income tax purposes of $108,700,000 attributable to operations in Ireland which begin to expire after the 2003 fiscal year. The tax benefit related to these losses has not been recorded in the consolidated financial statements. During 1999 a total of $3,133,296 was paid to various tax jurisdictions for income tax purposes. 14. Segmented information The Company has only one global operating segment as detailed in the consolidated financial statements included herein. The Company sells its products worldwide from three geographic regions. A summary of sales by product, channel, region and by major customer from consolidated operations is as follows: F-57 - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------- Year ended November 30 - --------------------------------------------------------------------------------------------- 1999 1998 1997 - --------------------------------------------------------------------------------------------- (In thousands of US$) By product Graphics software $ 82,592 $ 106,228 $ 91,102 Productivity software 132,948 111,990 140,950 Consumer products 24,000 27,613 27,547 Linux operating system 3,206 - - Video communications 305 996 982 - --------------------------------------------------------------------------------------------- $ 243,051 $ 246,827 $ 260,581 ============================================================================================= By sales channel Retail packaged $ 140,200 $ 153,623 $ 161,528 OEM licenses 26,972 23,340 30,441 Corporate licenses 75,879 69,864 68,612 - --------------------------------------------------------------------------------------------- $ 243,051 $ 246,827 $ 260,581 ============================================================================================= By region United States $ 141,972 $ 137,938 $ 129,110 Europe 64,123 73,089 84,732 Canada 13,833 14,942 18,340 Other 23,123 20,858 28,399 - --------------------------------------------------------------------------------------------- $ 243,051 $ 246,827 $ 260,581 ============================================================================================= By major customer Ingram Micro Inc. $ 43,810 $ 57,994 $ 63,119 =============================================================================================
15. Year 2000 The Year 2000 issue arises because many computerized systems use two digits rather than four to identify a year. Date- sensitive systems may recognize the Year 2000 as 1900 or some other date, resulting in errors when information using Year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 issue may be experienced before, on, or after January 1, 2000 and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entity's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 issue affecting the Company, including those related to the efforts of customers, suppliers, or other third parties, will be fully resolved. 16. Significant differences between Canadian and United States GAAP The Company's financial statements are prepared on the basis of Canadian GAAP, which differs in some respects from US GAAP. Significant effects of differences between Canadian GAAP and US GAAP are set forth below: (a) Calculation of earnings per share The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" during the year ended November 30, 1998, and restated earnings per share for all prior periods presented as required by such Statement. The dilutive effect of the weighted average share calculation results from employee stock options. F-58
- ----------------------------------------------------------------------------------------------------------------------------------- Year ended November 30 -------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- U.S. GAAP Net Income (loss) per share - Basic $ 0.27 $ 0.51 $ (3.84) - Diluted $ 0.27 $ 0.51 $ (3.84) Weighted average number of common shares: Basic 62,194 59,433 59,740 Dilutive effect of employee stock options 848 - - - ----------------------------------------------------------------------------------------------------------------------------------- Fully diluted shares 63,042 59,433 59,740 - -----------------------------------------------------------------------------------------------------------------------------------
(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 gain (loss) would have changed to the pro forma amounts indicated below:
- ----------------------------------------------------------------------------------------------------------------------------------- Year ended November 30 - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands of US$ except per share data) Net income (loss) as reported $ 16,716 $ (30,448) $ (231,678) Estimated stock-based compensation costs (1,665) (1,849) (4,538) - ----------------------------------------------------------------------------------------------------------------------------------- Pro forma net income (loss) $ 15,051 $ (32,297) $ (236,216) - ----------------------------------------------------------------------------------------------------------------------------------- Pro forma income (loss) per share $ 0.24 $ (0.54) $ (3.92) - -----------------------------------------------------------------------------------------------------------------------------------
The fair values of all options granted during 1999, 1998 and 1997 were estimated as of the date of grant using the Black- Scholes option pricing model with the following weighted average assumptions:
- -------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- Expected option life (years) 3.34 2.0 1.25 Volatility 86 45 45 Risk free interest rate 4.78% 4.33% 4.97% Dividend yield nil nil nil - --------------------------------------------------------------------------------------------------------------------------------
The fair values, at the date of grant, for stock options granted during 1999, 1998 and 1997 were $1.35, $0.54 and $0.76 per option, respectively. The Black-Scholes model, used by the Company to calculate option values, as well as other currently accepted option valuation models were developed to estimate the fair value of freely tradeable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated values. Accordingly, management believes that these models do not necessarily provide a reliable single measure of the fair value of the Company's stock option awards. F-59 - ------------------------------------------------------------------------------- (c) Deferred income taxes The Company follows the deferral method of accounting for income taxes. Under US GAAP, the asset and liability method is used. In the case of the Company the application of the asset and liability method does not result in a significant difference in the amount of the deferred tax asset. US GAAP also requires the disclosure of the tax effect of temporary differences that give rise to deferred tax assets and liabilities. This information is provided in the following table.
- ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands of US$) Operating loss carryforwards $ 11,200 $ 15,437 Depreciation 9,400 10,246 Reserves 3,100 5,473 Royalties not yet deducted for tax purposes 1,300 1,556 Investment tax credits 2,000 - - ------------------------------------------------------------------------------------------------------------------------------------ 27,000 32,712 Valuation allowance (25,358) (30,217) - ------------------------------------------------------------------------------------------------------------------------------------ Net current deferred tax assets $ 1,642 $ 2,495 - ------------------------------------------------------------------------------------------------------------------------------------
(d) Comprehensive Income The Company has adopted the United States Financial Accounting Standards Board Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income effect December 1, 1998. This statement requires disclosure of Comprehensive Income, which includes reported net earnings adjusted for other comprehensive income. Other comprehensive income includes items that cause changes in shareholders' equity but are not related to share capital or net earnings which, for the Company, comprises only unrealized holding gains for available for sale securities. The company is accounting for this change on a prospective basis.
- -------------------------------------------------------------------------------------------------------------------------------- Year ended November 30, 1999 - -------------------------------------------------------------------------------------------------------------------------------- (in thousands of US$) Net income $ 16,716 Other comprehensive income: Unrealized holding gains on available for sale securities 3,102 Related Income tax (1,038) - -------------------------------------------------------------------------------------------------------------------------------- Comprehensive income $ 18,780 - --------------------------------------------------------------------------------------------------------------------------------
The effect of adding comprehensive income to the financial statements would have increased the reported value of investments by $3,102,000 and decreased income taxes recoverable by $1,038,000 in 1999. (e) New Accounting Pronouncements During the year ended November 30, 1999, the Company adopted SOP 98-1 "Accounting for the Costs of Computer Software Purchased for Internal Use" which provide guidance on applying US generally accepted accounting principles for costs associated with the implementation of computer software for internal use. SOP 98-1 conforms with Canadian generally accepted accounting principles and the adoption of it did not have a material impact on the results for the year ended November 30, 1999. In June 1998 the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities which establishes standards for derivative instruments and hedging activities. It requires that all derivatives be recognized as either assets or liabilities on the Balance Sheet and be measured at fair value. This Statement is effective for fiscal years beginning after June 15, 1999, which is the year beginning December 1, 1999 for the Company. Prior periods should not be restated. The Company has not yet assessed the impact of adopting this pronouncement. F-60 EX-21.1 5 SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1 Subsidiary Information Corel Corporation Limited Europa House 3/rd/ Floor Harcourt Street Dublin 2, Ireland Corel, Inc. 567 Timpanogos Parkway Orem, Utah USA 84507 Corel Corporation (U.S.A.) 567 Timpanogos Parkway Orem, Utah USA 84507 Corel International Corp. c/o Peat Marwick Associates Limited Hastings, Christ Church Barbados F-62 EX-23.1 6 AUDITOR'S REPORT- KPMG LLP EXHIBIT 23.1 We have audited the consolidated statements of operations and retained earnings (deficit) and changes in financial position of Corel Corporation for the year ended November 30, 1997. 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 audit. 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 results of operations and the changes in its financial position for the year ended November 30, 1997 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). Chartered Accountants Ottawa, Canada January 16, 1998 (except as to Note 12 which is at February 23, 1998) F-64 EX-23.2 7 AUDITOR'S REPORT- PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.2 Our report on the consolidated financial statements of Corel Corporation has been incorporated by reference in this Form 10-K from page 45 of the 1999 Annual Report to Shareholders of Corel Corporation. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 23 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. PricewaterhouseCoopers LLP Ottawa, Canada Chartered Accountants January 18, 2000 F-66 EX-99.2 8 SUPPLEMENTARY FINANCIAL STATEMENT - -------------------------------------------------------------------------------- Exhibit 99.2 Supplementary Financial Statement Information Included in trade accounts receivable are the following reserves and related activity:
Period Ended Description Opening Additions Deductions Ending Balance Balance (In thousands of US$) November 30, Promotional $ 6,197 $ 8,208 $ 11,128 $ 3,277 1999 rebates Sales reserve 21,882 55,309 36,262 40,929 Allowance for 6,804 28 112 6,720 doubtful accounts November 30, Promotional 11,396 25,959 31,158 6,197 1998 rebates Sales reserve 54,413 58,367 90,898 21,882 Allowance for 366 6,804 doubtful accounts 5,466 1,704 November 30, Promotional 14,750 42,775 46,129 11,396 1997 rebates Sales reserve 30,000 85,829 61,416 54,413 Allowance for 3,831 1,743 108 5,466 doubtful accounts
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