<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the period ended August 31, 1997
----------------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from __________________to __________________________
COMMISSION FILE NUMBER 0-20562
-------
COREL CORPORATION
-----------------
(Exact name of Registrant as specified in its Charter)
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)
(613) 728-8200
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether 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
------- -------
As of September 30, 1997, the registrant had 61,095,717 Common Shares
outstanding.
===============================================================================
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CORPORATION
TABLE OF CONTENTS
Page No.
--------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as at November 30, 1996
and August 31, 1997............................................ 3
Consolidated Statements of Income and Retained Earnings
(Deficit) for the three months and for the nine months
ended August 31, 1996 and August 31, 1997....................... 4
Consolidated Statements of Changes in Financial Position
for the nine months ended August 31, 1996 and August 31, 1997... 5
Notes to Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 23
Item 6. Exhibits and Reports on Form 8-K............................. 23
SIGNATURES.............................................................. 24
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COREL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S.$)
<TABLE>
<CAPTION>
November 30, August 31,
1996 1997
------------- ----------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and short-term investments.... $ 6,924 $ 22,481
Accounts receivable (note 2)
Trade.......................... 135,338 77,901
Other.......................... 1,341 4,755
Inventory (note 3)................. 30,390 25,684
Income taxes recoverable........... 12 8,345
Deferred income taxes.............. 2,940 3,885
Prepaid expenses................... 18,388 3,011
------------- ---------
195,333 146,062
Deferred income taxes................... 870 405
Capital assets (note 4)................. 202,275 101,220
------------- ---------
$398,478 $247,687
============== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................... $ 17,592 $ 7,760
Accrued liabilities................ 34,801 32,967
Current portion of long-term debt.. 15,500 14,400
Deferred revenue................... 6,495 8,359
------------- ---------
74,388 63,486
Long-term debt (note 5)................. 33,830 24,900
Shareholders' equity
Share capital (note 6)............. 202,953 208,456
Contributed surplus................ 352 352
Retained earnings (Deficit)........ 86,955 (49,507)
------------- ---------
290,260 159,301
------------- ---------
$398,478 $247,687
============= =========
</TABLE>
(See accompanying Notes to Consolidated Financial Statements)
3
<PAGE>
COREL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS
(in thousands of U.S.$, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
August 31, August 31,
---------------------- ---------------------
1996 1997 1996 1997
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
Sales.......................................... $ 84,942 $ 55,803 $208,839 $ 249,934
Cost of sales (note 7)......................... 33,040 15,721 64,234 60,377
---------- --------- --------- ---------
Gross profit................................ 51,902 40,082 144,605 189,557
---------- --------- -------- ----------
Expenses:
Advertising................................. 22,921 20,523 60,992 60,925
Selling, general and administrative......... 19,359 22,462 50,848 64,173
Gain on sale of CD Creator.................. (10,426) - (10,426) -
Research and development.................... 19,611 22,433 44,415 63,554
Depreciation and amortization............... 5,483 7,419 14,036 21,595
Write-down of purchased software
and royalties (note 8)................... - - - 113,674
Loss on foreign exchange.................... (509) 402 (100) 1,419
---------- --------- -------- ----------
56,439 73,239 159,765 325,340
---------- --------- -------- ----------
Income (loss) from operations.................. (4,537) (33,157) (15,160) (135,783)
Interest expense (income)...................... (441) 152 (1,687) 990
---------- --------- -------- ----------
Income (loss) before income taxes.............. (4,096) (33,309) (13,473) (136,773)
Income taxes:
Current.................................... (205) (374) (2,705) (200)
Deferred (reduction)....................... (690) (1,523) (1,474) (480)
---------- --------- -------- ----------
(895) (1,897) (4,179) (680)
Net income (loss).............................. (3,201) (31,412) (9,294) (136,093)
Retained earnings at beginning of period....... 83,612 (17,995) 89,705 86,955
Premium on cancellation of shares.............. - (100) - (369)
Retained earnings (deficit) at end of period... $ 80,411 ($49,507) $ 80,411 ($49,507)
========== ========= ======== ==========
Earnings (loss) per share: (note 9)
Net income (loss)
Basic................................... ($0.05) ($0.52) ($0.16) ($2.26)
Fully diluted........................... ($0.05) ($0.47) $0.14 ($1.94)
Average number of Common Shares
outstanding:
Basic................................... 59,859 60,565 56,418 60,239
Fully diluted........................... 69,754 67,270 65,368 70,155
</TABLE>
(See accompanying Notes to Consolidated Financial Statements)
4
<PAGE>
COREL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES
IN FINANCIAL POSITION
(in thousands of U.S.$)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
-------------------------
August 31, August 31,
1996 1997
------------ ----------
<S> <C> <C>
Cash provided by (used for):
Operations:
Net income (loss).................................... ($9,294) ($136,093)
Items which do not involve cash:
Depreciation and amortization................... 36,736 47,748
Loss (gain) on disposal of assets............... 1,720 (118)
Deferred income taxes........................... (1,474) (480)
Write-down of purchased software and royalties.. - 113,674
Write-down of investments....................... - 1,633
Decrease (increase) in accounts receivable........... (36,207) 54,023
Decrease (increase) in inventory..................... (15,554) 4,706
Decrease (increase) in prepaid expenses.............. (14,500) 6,561
Decrease in accounts payable......................... (2,956) (9,832)
Increase (decrease) in other accrued liabilities..... 15,249 (1,834)
Increase in deferred revenue......................... 2,675 1,864
Increase in income taxes payable/recoverable......... (3,339) (8,333)
----------- ----------
Cash provided by (used for) operations............... (26,944) 73,519
------------ ----------
Financing:
Issue of share capital............................... 96,086 6,036
Shares purchased for cancellation.................... - (902)
Increase in long-term debt........................... 55,000 -
Repayment of long-term debt.......................... (2,059) (10,030)
------------ ----------
149,027 (4,896)
------------ ----------
Investments:
Purchase of investment............................... - (1,633)
Purchase of capital assets........................... (201,938) (51,581)
Proceeds on disposal of assets....................... 252 148
------------ ----------
(201,686) (53,066)
------------ ----------
Net increase (decrease) in cash........................... (79,603) 15,557
Cash at beginning of period............................... 81,816 6,924
Cash at end of period..................................... $ 2,213 $ 22,481
============ ==========
</TABLE>
Cash is defined as cash and short-term investments
(See accompanying Notes to Consolidated Financial Statements)
5
<PAGE>
COREL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars, tabular amounts in thousands except per share data)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of Corel
Corporation (the "Company") have been prepared by the Company in accordance with
accounting principles generally accepted in Canada (Canadian GAAP). The
consolidated financial statements include the Company's wholly-owned
subsidiaries, Corel Corporation Limited, Corel, Inc., Corel Corporation USA,
Corel Computer Corporation, and Corel International Corp. These principles also
conform in all material respects with accounting principles generally accepted
in the United States (US GAAP) (See Note 9).
In the opinion of Management, these unaudited interim consolidated financial
statements reflect all adjustments, which are of a normal and recurring nature,
necessary to state fairly the results for the periods presented.
These financial statements should be read in conjunction with the Company's
audited financial statements as of November 30, 1995 and 1996 and for each of
the three years in the period ended November 30, 1996 including notes thereto,
included in the Company's Annual Report on Form 10-K for the year ended November
30, 1996. The consolidated results of operations for the third fiscal quarter
and the three fiscal quarters ended August 31, 1997 are not necessarily
indicative of the results to be expected for any future period.
2. ACCOUNTS RECEIVABLE
Included in trade accounts receivable are the following reserves:
<TABLE>
<CAPTION>
November 30, August 31,
1996 1997
-------------- ----------
<S> <C> <C>
Promotional rebates.............. $14,750 $24,555
Sales reserve.................... 30,000 37,059
Allowance for doubtful accounts.. 3,831 6,102
</TABLE>
3. INVENTORIES
<TABLE>
<CAPTION>
November 30, August 31,
1996 1997
-------------- ----------
<S> <C> <C>
Raw Materials..................... $23,986 $19,560
Finished goods.................... 6,404 6,124
--------------- ---------
$30,390 $25,684
=============== =========
</TABLE>
6
<PAGE>
COREL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars, tabular amounts in thousands except per share data)
(Unaudited)
4. CAPITAL ASSETS
<TABLE>
<CAPTION>
AUGUST 31, 1997
------------------------------------------------
ACCUMULATED
DEPRECIATION NET
AND NOVEMBER 30,
COST AMORTIZATION NET 1996
---------- ------------ -------- -------------
<S> <C> <C> <C> <C>
Furniture and equipment..................... $ 15,596 $ 6,694 $ 8,902 $ 8,963
Computer equipment and software............. 58,759 47,797 10,962 24,205
Research and development equipment.......... 12,275 4,811 7,464 6,683
Leasehold improvements...................... 3,612 1,856 1,756 1,729
Software licenses and purchased software,
clipart libraries and photo CD libraries.. 133,983 61,847 72,136 160,695
--------- ------------ -------- ------------
$224,225 $123,005 $101,220 $202,275
========= ============ ======== ============
</TABLE>
At November 30, 1996, the cost amounted to $297,969,000 and accumulated
depreciation amounted to $95,694,000. The carrying amount of licenses not being
amortized at August 31, 1997 and November 30, 1996 amounted to $908,000 and
$77,000 respectively.
5. LONG-TERM DEBT
Long-term debt consists of the outstanding royalty and product return
obligations pursuant to the WordPerfect acquisition on March 1, 1996.
<TABLE>
<CAPTION>
As at November 30, 1996 As at August 31, 1997
---------------------------- ------------------------------
Product Product
Royalty Returns Total Royalty Returns Total
---------------------------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C>
(in thousands of US$)
Long-term debt $24,390 $24,940 $49,330 $19,460 $19,840 $39,300
Less: Current portion 9,000 6,500 15,500 7,000 7,400 14,400
------------------------------ ---------- ------- -------
$15,390 $18,440 $33,830 $12,460 $12,440 $24,900
============================== ========== ======= =======
</TABLE>
7
<PAGE>
COREL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars, tabular amounts in thousands except per share data)
(Unaudited)
6. SHARE CAPITAL
During the nine-month periods ended August 31, 1996 and August 31, 1997, the
Company issued 622,238 and 1,140,212 common shares, respectively, pursuant to
its Stock Option Plan, for proceeds of $6,186,000 and $6,036,000, respectively.
In addition, during the nine period ended August 31, 1997, the Company, pursuant
to its normal course issuer bid which commenced on March 5, 1997, purchased for
cancellation 157,300 common shares at a cost of $902,000.
During the nine-month periods ended August 31, 1996 and August 31, 1997, the
Company issued 3,049,700 and 5,810,614 stock options, respectively, and canceled
204,211 and 10,923,984 stock options, respectively, pursuant to its Stock Option
Plan. Included in the above amounts for the nine-month period ended August 31,
1997 is the cancellation of 10,373,100 stock options and the issuance of
5,773,614 stock options on May 1, 1997, following the fourteen day option
exchange period, pursuant to Resolution No. 2 approved by shareholders on April
18, 1997.
7. COST OF SALES
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED THREE FISCAL QUARTERS
AUGUST 31, ENDED AUGUST 31,
-------------------- -----------------------
1996 1997 1996 1997
---------- --------- ------- ---------------
<S> <C> <C> <C> <C>
Cost of goods sold.... $13,885 $ 4,550 $29,951 $23,419
Licence amortization.. 12,286 7,755 22,701 26,152
Royalties............. 6,869 3,416 11,582 10,806
$33,040 $15,721 $64,234 $60,377
========== ========== ========= =============
</TABLE>
8. WRITE-DOWN OF PURCHASED SOFTWARE AND ROYALTIES
During the three-month period ending May 31, 1997, the Company determined that a
non-recurring charge totaling $113.7 million was appropriate. This charge
consists of the write-down of previously capitalized acquired technologies of
$104.9 million and the write-down of $8.8 million of deferred development costs
in the form of advance royalties paid to various developers of the Corel CD HOME
COLLECTION and Corel Medical Series software.
9. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GAAP
These unaudited interim consolidated financial statements have been prepared on
the basis of Canadian GAAP, which is different in some respects from US GAAP.
Net income (loss) in accordance with US GAAP is equal to net income (loss) in
accordance with Canadian GAAP for the nine months ended August 31, 1996 and
August 31, 1997.
8
<PAGE>
Earnings per share calculations are set forth below:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED THREE FISCAL QUARTERS
AUGUST 31, ENDED AUGUST 31,
---------------------- ------------------------
1996 1997 1996 1997
---------- ---------- ------- --------------
<S> <C> <C> <C> <C>
CANADIAN GAAP - BASIC
Net income (loss) per share.. ($0.05) ($0.52) ($0.16) ($2.26)
Weighted average number of
Common Shares outstanding.. 59,859 60,565 56,418 60,239
US GAAP - PRIMARY
Net income (loss) per share.. ($0.05) ($0.51) ($0.16) ($2.24)
Weighted average number of
Common Shares outstanding.. 59,972 61,013 56,542 60,854
</TABLE>
The calculation of fully diluted earnings per share for US GAAP purposes is not
significantly different from the primary calculation for US GAAP and therefore
is not presented.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following information must be read in conjunction with the unaudited
Consolidated Financial Statements and Notes thereto included in Item 1 of this
Quarterly Report and the audited Consolidated Financial Statements and Notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the Company's Annual Report on Form 10-K for
the year ended November 30, 1996 (the "1996 Form 10-K"). This Form 10-Q 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 the
Company 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 Form 10-Q which contain such forward-
looking statements, and words such as "believes", "anticipates", "expects",
"intends" and similar expressions are intended to identify forward-looking
statements, but are not the exclusive means of identifying such statements. In
addition, the section labeled "Factors That May Affect Future Operating
Results", which is not italicized for improved readability, consists primarily
of forward-looking statements. The Company undertakes no obligation to revise
any forward-looking statements in order 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 report 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 the Company's business. Therefore, historical results and percentage
relationships will not necessarily be indicative of the operating results of any
future period.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain statement of
income data expressed as a percentage of sales for the periods indicated, and
the percentage change of such items as compared to the indicated prior period.
10
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<TABLE>
<CAPTION>
PERIOD TO PERIOD
INCREASE (DECREASE)
-----------------------------
3RD QTR NINE MONTHS
PERCENT OF SALES 1997 ENDED
-----------------------------------
THREE MONTHS NINE MONTHS VS MAY 31 '97
ENDED AUGUST 31, ENDED AUGUST 31, 3RD QTR VS
-----------------------------------
1996 1997 1996 1997 1996 MAY 31 '96
--------- ------- ------- ------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales.................................. 100% 100% 100% 100% (34.3)% 19.7%
Cost of sales.......................... 39 28 31 24 (52.4) (11.3)
-------- ------ ------ ------
Gross profit......................... 61 72 69 76 (22.8) 31.1
-------- ------ ------ ------
Expenses
Advertising.......................... 27 37 29 24 (10.5) (0.1)
Selling, general and administrative.. 23 40 24 26 16.0 26.2
Gain on sale of CD Creator........... (13) N/A (5) N/A N/A N/A
Research and development............. 23 40 21 25 14.4 43.1
Depreciation and amortization........ 6 13 7 9 35.3 53.9
Write-down of purchased software
and royalties...................... N/A N/A N/A 46 N/A N/A
Loss on foreign exchange............. 0 1 0 1 179.0 107.0
-------- ------- ------- -------
66 131 76 131 29.8 103.6
-------- ------- ------- -------
Income (loss) from operations.......... (5) (59) (7) (55) (630.8) (795.7)
Interest expense (income).............. 0 0 1 0 (134.5) (158.7)
-------- ------- ------- ------
Income (loss) before income taxes...... (5) (59) (6) (55) (813.2) (915.2)
Income taxes........................... (1) (3) (2) 0 (112.0) 83.7
-------- ------ ------- ------
Net income (loss)...................... (8)% (56)% (4)% (55)% (881.3) (1,364.3)%
======== ====== ======= =====
</TABLE>
SALES
Sales decreased 34.3% to $55.8 million in the third quarter of fiscal 1997 from
$84.9 million in the third quarter of fiscal 1996 primarily due to decreased
aggregate unit sales of Corel's products. Sales increased 19.7% to $249.9
million in the first nine months of fiscal 1997 from $208.8 million in the first
nine months of fiscal 1996 in the third quarter of fiscal 1997 primarily due to
the introduction in the second quarter of fiscal 1996 of Corel's productivity
software applications. Corel expects that the rate of growth in sales for the
three months ended November 30, 1997 compared to the three months ended August
31, 1997 will be approximately 25% to 30%, due primarily to the expected
introduction in the fourth quarter of fiscal 1997 of CorelDRAW 8, Corel Print
House 3, and several foreign language versions of Corel WordPerfect Suite 8.
Risks that could cause actual sales to differ from expected sales are detailed
in the remainder of this section, and under the section titled "Factors That May
Affect Future Operating Results".
PRODUCT GROUPS. The table below shows sales for the third fiscal quarters ended
August 31, 1996 and 1997, and for the nine-month periods ended August 31, 1996
and 1997, consisting of graphics software new licenses (full kits and
competitive upgrades) and existing user upgrades, productivity software new
licenses (full kits and competitive upgrades) and existing user upgrades,
multimedia software (including sales from the Company's Professional Photo CD
titles, Corel CD Home series and CorelSCSI), and communication applications
(including CorelVIDEO):
11
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS ENDED
ENDED
AUGUST 31, AUGUST 31,
------------------- -------------------
1996 1997 1996 1997
--------- -------- ---------- --------
<S> <C> <C> <C>
Graphics software - new licenses................ $17,299 $13,657 $ 60,520 $ 62,594
Graphics software - existing user upgrades...... 3,480 (1,668) 5,125 14,626
--------- -------
Total graphics software..................... 20,779 11,989 65,645 77,220
--------- -------- ---------- --------
Productivity software - new licenses............ 31,922 37,519 64,446 126,008
Productivity software - existing user upgrades.. 30,974 5,732 69,217 43,215
--------- -------
Total productivity software................. 62,896 43,251 133,663 169,223
--------- -------- ---------- --------
Multimedia software............................. 1,088 297 9,291 2,504
--------- -------- ---------- --------
Communications applications..................... 179 266 240 987
--------- -------
Total sales..................................... $84,942 $55,803 $208,839 $249,934
========= ======== ========== ========
</TABLE>
Graphics software revenues decreased in the third quarter of fiscal 1997, as
compared to the third quarter of fiscal 1996, primarily due to reduced unit
volumes of retail versions of CorelDRAW 6 and CorelDRAW 7, partially offset by
increased unit volumes for original equipment manufacturers ("OEM") versions of
Corel's graphics software products, and a decline in average selling prices
("ASPs") for certain of Corel's graphics software products due to the greater
proportion of sales to OEMs under various OEM agreements. Graphics software
revenues increased in the first nine months of fiscal 1997, as compared to the
first nine months of fiscal 1996, primarily due to the introduction of CorelDRAW
7 in the fourth quarter of fiscal 1996 and several foreign language versions of
CorelDRAW 7 during the first nine months of fiscal 1997. This was partially
offset by a decrease in unit volume sales of CorelDRAW 6, CorelDRAW 3, Corel
Graphics Pack and Corel Print House, and ASPs for certain of Corel's graphics
software products due to the greater proportion of sales to OEMs under various
OEM agreements.
Productivity software revenues decreased in the third quarter of fiscal 1997, as
compared to the third quarter of fiscal 1996, primarily due to reduced unit
volumes of retail versions of Corel WordPerfect Suite 8 and Corel WordPerfect
Suite 7, partially offset by the introduction of Corel WordPerfect Suite 8
Professional and Corel WordPerfect Suite 7 for Windows 3.x in the third quarter
of fiscal 1997 and increasing corporate licensing revenues. Productivity
software revenues increased in the first nine months of fiscal 1997, as compared
to the first nine months of fiscal 1996, primarily because such revenues
commenced during the second quarter of fiscal 1996 with the introduction of
Corel versions of the WordPerfect products acquired from Novell on March 1,
1996.
Multimedia sales were lower in the third quarter of fiscal 1997, as compared to
the third quarter of fiscal 1996, and in the first nine months of fiscal 1997,
as compared to the first nine months of fiscal 1996, primarily due to a decline
in the unit sales of the Corel Stock Photo Libraries, a decline in Corel CD
Creator revenues resulting from the sale of the CD Creator product line to
Adaptec, Inc. in June 1996, and a decline in Corel CD HOME revenues resulting
from the sale of the Corel CD HOME COLLECTION and Corel Medical Series to
Hoffman + Associates Inc. in April 1997.
SALES CHANNELS. Corel distributes its products primarily through distributors
(as retail packaged products), OEM licences and corporate licences. The table
below shows sales through these channels
12
<PAGE>
for the third fiscal quarters ended August 31, 1996 and 1997, and for the nine-
month periods ended August 31, 1996 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------ ---------------------
1996 1997 1996 1997
------------------- --------- ----------
<S> <C> <C> <C> C>
Retail packaged products.. $64,426 $32,642 $173,569 $177,060
OEM licences.............. 6,302 6,111 17,593 22,310
Corporate licences........ 14,214 17,050 17,677 50,564
Total sales............... $84,942 $55,803 $208,839 $249,934
=================== ========= ==========
</TABLE>
Retail packaged products and corporate licences are sold primarily through
distributors. The three largest distributors accounted for $45.3 million (53%)
and $12.6 million (23%) of Corel's sales in the third quarter of fiscal 1996 and
1997, respectively, and $108.2 million (52%) and $80.6 million (32%) of Corel's
sales in the first nine months of fiscal 1996 and 1997, respectively. Packaged
product volume decreased in the third quarter of fiscal 1997 primarily because
of a decrease in unit volume sales of Corel WordPerfect Suite for Windows 3.1,
Corel Office Professional 7, CorelDRAW 6 and CorelDRAW 5. This was partially
offset by the introduction of Corel WordPerfect Suite 8 in the second quarter of
fiscal 1997, and Corel WordPerfect Suite 8 Professional and Corel WordPerfect
Suite 7 for Windows 3.x in the third quarter of fiscal 1997. Packaged product
volume increased in the first nine months of fiscal 1997, as compared to the
first nine months of fiscal 1996, primarily due to the introduction during the
second quarter of fiscal 1996 of Corel versions of the WordPerfect products
acquired from Novell on March 1, 1996.
Corporate licences, including maintenance revenues, increased significantly in
the third quarter of fiscal 1997, as compared to the third quarter of fiscal
1996, and in the first nine months of fiscal 1997, as compared to the first nine
months of fiscal 1996, due to the introduction in April 1996 of the Corel
Corporate Licence Program.
OEM channel revenues decreased in the third quarter of fiscal 1997, as compared
to the third quarter of fiscal 1996, primarily due to declining ASPs for
CorelDRAW 5 OEM revenues and a decline in unit volume for OEM versions of Corel
WordPerfect Suite for Windows 3.x. OEM channel revenues increased in the first
nine months of fiscal 1997, as compared to the first nine months of fiscal 1996,
primarily because of the acquisition of the WordPerfect products on March 1,
1996, and the subsequent licensing of Corel versions of these products to
various OEMs.
Corel intends to continue expanding its marketing efforts in the OEM channel and
the corporate marketplace and anticipates that sales from both of these areas
will increase in the future both in absolute dollars and as a percentage of
revenues, although there can be no assurances that such increases will occur.
The table below shows Corel's sales geographically for the third fiscal quarters
ended August 31, 1996 and 1997, and for the nine-month periods ended August 31,
1996 and 1997:
13
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
------------------ -----------------------
1996 1997 1996 1997
--------- -------- --------- ------------
<S> <C> <C> <C> <C>
North America........ $64,314 $36,230 $150,509 $164,531
Europe............... 13,311 12,582 42,758 62,130
Other international.. 7,317 6,991 15,572 23,273
Total sales.......... $84,942 $55,803 $208,839 $249,934
========= ======== ========= ============
</TABLE>
Sales outside North America, principally in Europe, were 24% and 35% of Corel's
sales for the third quarter of fiscal 1996 and 1997, respectively, and 28% and
34% of Corel's sales for the first nine months of fiscal 1996 and 1997,
respectively. The increase in the respective three month and nine month periods
was primarily due to a decrease in unit volume sales of Corel's graphics
software products and productivity software products in North America. Corel
intends to continue expanding its marketing efforts outside North America and
anticipates that sales outside North America will increase in the future both in
absolute dollars and as a percentage of revenues. Conducting business outside
North America is typically subject to certain additional risks, including longer
payment cycles, unexpected changes in regulatory requirements and tariffs,
currency conversion risks, difficulties in staffing and managing foreign
operations, greater difficulty in accounts receivable collection and potentially
adverse tax consequences.
Because Corel ships a large portion of its products during the last two weeks of
each quarter, Corel's distributors and dealers typically hold significant
inventories of Corel's software products at the end of each quarter. Corel has
set its reserves for returns in accordance with historical experience. Setting
reserves involves making judgments about future competitive conditions and
product life cycles. Those judgments involve evaluating information that often
is unclear and in conflict. Based upon returns experience, Corel's estimates
have been materially accurate. However, there can be no assurance that
historical experience will be an accurate guide for the future because the rate
of returns is primarily a function of the competitive state of the market in the
future and thus, in large part, is a function of the actions of Corel's
competitors, which Corel cannot anticipate.
Corel's products are sold primarily in US dollars in all countries other than
Canada and in US dollars to Canadian distributors. Sales in US dollars as a
percentage of total sales were in excess of 95% in the third quarter of both
fiscal 1996 and fiscal 1997 and in the first nine months of both fiscal 1996 and
fiscal 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. Acquired software has been
capitalized and is currently being amortized over a 36-month period commencing
with the month of first shipment of the product incorporating such acquired
software, except for the remaining cost, after the write-down in the second
quarter of fiscal 1997, of the WordPerfect family
14
<PAGE>
of software programs and related technology, which is currently being amortized
over a five year period. See "Write-down of Purchased Software and Royalties".
Gross profit as a percentage of sales was 72% of sales in the third quarter of
fiscal 1997 as compared to 61% in the third quarter of fiscal 1996 and 76% of
sales in the first nine months of fiscal 1997 as compared to 69% in the first
nine months of fiscal 1996. Gross profit as a percentage of sales increased in
both the respective three- and nine-month periods primarily due to the reduction
in quarterly amortization charges of approximately $9 million pursuant to the
technology write-down of $113.7 million in the second quarter of fiscal 1997.
Corel expects that its gross margin, as a percentage of sales, will be somewhat
higher during the three months ending November 30, 1997 from the level
experienced in the three months ended August 31, 1997 as the sales mix for the
three months ending November 30, 1997 is expected to shift toward higher margin
products with the anticipated launch of CorelDRAW 8 in the fourth quarter of
fiscal 1997, and higher anticipated sales in the fourth quarter of fiscal 1997
provide better absorption of fixed amortization charges. However, gross margin
levels are subject to a number of risks, including product mix and Corel's
ability to realize expected sales levels.
ADVERTISING EXPENSE
Advertising expenses include all marketing, advertising and trade show expenses.
Advertising expenses decreased by 10% to $20.5 million in the third quarter of
fiscal 1997 from $22.9 million in the third quarter of fiscal 1996 and were
$60.9 million in the first nine months of fiscal 1997 compared to $61.0 million
in the first nine months of fiscal 1996. Advertising expenses increased as a
percentage of sales from 27% in the third quarter of fiscal 1996 to 37% in the
third quarter of fiscal 1997 primarily due to the reduced level of sales in the
third quarter of fiscal 1997 as compared to the third quarter of fiscal 1996.
Advertising expenses decreased as a percentage of sales from 29% in the first
nine months of fiscal 1996 to 24% in the first nine months of fiscal 1997
primarily due to the higher level of sales in the first nine months of fiscal
1997 as compared to the first nine months of fiscal 1996. The decrease in
advertising expenses in the third quarter of fiscal 1997 and in the first nine
months of fiscal 1997 was due to more targeted marketing efforts and the
implementation of various cost control measures. Corel expects that these
expenses will increase somewhat in absolute dollars and decrease somewhat as a
percentage of sales during the fourth quarter of fiscal 1997 as compared to the
third quarter of fiscal 1997. The expected level of advertising expenses as a
percentage of sales is subject to, among other things, Corel's level of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses include all general administrative
expenses as well as expenses associated with warehousing. Selling, general and
administrative expenses increased by 16% to $22.5 million in the third quarter
of fiscal 1997 from $19.4 million in the third quarter of fiscal 1996 and by 26%
to $64.2 million in the first nine months of fiscal 1997 from $50.8 million in
the first nine months of fiscal 1996. Selling, general and administrative
expenses increased as a percentage of sales from 23% in the third quarter of
fiscal 1996 to 40% in the third quarter of fiscal 1997 and from 24% in the first
nine months of fiscal 1996 to 26% in the first nine months of fiscal 1997. The
increase in the amount of such expenses was primarily due to the costs of
providing
15
<PAGE>
customer and technical support for the WordPerfect family of software programs
commencing on March 1, 1996, higher warehousing expenses resulting from higher
inventory levels, and the hiring of additional customer support and management
and administrative personnel associated with Corel's increased marketing
efforts. Corel expects that these expenses will remain approximately the same in
absolute dollars and decrease as a percentage of sales during the third quarter
of fiscal 1997 as compared to the third quarter of fiscal 1997. The expected
level of selling, general and administrative expenses as a percentage of sales
is subject to, among other things, Corel's level of sales.
GAIN ON SALE OF CD CREATOR
On June 26, 1996, the Company sold all versions of its Corel CD Creator software
program and its PD optical recording technology to Adaptec, Inc. in a $12
million cash transaction. A gain on the sale of $10.4 million was realized in
the third quarter of fiscal 1996.
RESEARCH AND DEVELOPMENT EXPENSE
The Company has expensed all of its internal software development costs as
incurred, in accordance with Canadian GAAP. Research and development expenses
are reported net of Canadian investment tax credits. The table below shows gross
research and development expenses, related tax credits, net research and
development expenses, and gross research and development expenses as a
percentage of sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
-------------------- ----------------------
1996 1997 1996 1997
--------- -------- --------- ----------
<S> <C> <C> <C> <C>
Gross research and development expenses.. $20,836 $21,774 $47,894 $67,437
Research and development tax credits..... 1,225 (659) 3,479 3,883
--------- ------- --------- ----------
Net research and development expenses.... $19,611 $22,433 $44,415 $63,554
========= ======== ========= ==========
Gross research and development expenses
as a percentage of sales.............. 25% 39% 23% 27%
</TABLE>
Net research and development expenses increased by 14% to $22.4 million in the
third quarter of fiscal 1997 from $19.6 million in the third quarter of fiscal
1996 and by 43% to $63.6 million in the first nine months of fiscal 1997 from
$44.4 million in the first nine months of fiscal 1996. Net research and
development expenses as a percentage of sales increased from 23% in the third
quarter of fiscal 1996 to 40% in the third quarter of fiscal 1997, and from 21%
in the first nine months of fiscal 1996 to 25% in the first nine months of
fiscal 1997. The increase in net research and development expenses was primarily
attributable to increased staffing and costs associated with the acquisition of
the WordPerfect family of software programs on March 1, 1996, the continued
maintenance and enhancement of Corel's current products as well as the
development of new products scheduled for introduction during fiscal 1997 and
fiscal 1998. Corel expects that these expenses will increase somewhat in
absolute dollars and decrease somewhat as a percentage of sales during the
fourth quarter of fiscal 1997 as compared to the third quarter of fiscal 1997.
The
16
<PAGE>
expected level of research and development expenses as a percentage of sales is
subject to, among other things, Corel's level of sales.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses, which do not include the amortization of
purchased software, increased by 35% to $7.4 million in the third quarter of
fiscal 1997 from $5.5 million in the third quarter of fiscal 1996 and by 54% to
$21.6 million in the first nine months of fiscal 1997 from $14.0 million in the
first nine months of fiscal 1996. This increase was due primarily to purchases
of additional office and computer equipment during the eighteen months ended
August 31, 1997, in particular, office and computer equipment acquired with the
acquisition of the WordPerfect family of software programs on March 1, 1996 and
the subsequent expenditures during the second quarter of fiscal 1996 to upgrade
this equipment.
WRITE-DOWN OF PURCHASED SOFTWARE AND ROYALTIES
During the three-month period ending May 31, 1997, the Company determined that
due to the increased functionality of Corel WordPerfect Suite 8 initiated since
the acquisition of the software on March 1, 1996 and the increased research and
development effort directed at Java oriented applications, a non-recurring
charge totaling $113.7 million was appropriate to more adequately reflect the
appropriate residual value of certain acquired technologies. This charge
consists of the write-down of previously capitalized acquired technologies of
$104.9 million, primarily the WordPerfect family of software applications, and
the write-down of $8.8 million of deferred development costs in the form of
advance royalties paid to various developers of the Corel CD HOME COLLECTION and
Corel Medical Series software.
LOSS (GAIN) ON FOREIGN EXCHANGE
Foreign exchange gains or losses on non-US dollar transactions are due to
fluctuations in the value of those currencies relative to the value of the US
dollar between the time sales are recorded and the collection of the account
receivable, and revaluation gains or losses relating to short-term investments
held in a currency other than the financial measurement and reporting currency
due to fluctuations in the value of those currencies relative to the value of
the US dollar.
INTEREST EXPENSE (INCOME)
Interest expense (income) decreased by $0.6 million to an expense of $0.2
million in the third quarter of fiscal 1997 from income of $0.4 million in the
third quarter of fiscal 1996 and by $2.7 million to an expense of $1.0 million
in the first nine months of fiscal 1997 from income of $1.7 million in the first
nine months of fiscal 1996. The decrease was primarily due to the lower level of
cash and short-term investments, and the long-term interest bearing obligations
resulting from the acquisition of the WordPerfect family of software programs on
March 1, 1996. Interest expense (income) paid (received) by Corel resulted from
weighted average interest rates of 3.2% in the third quarter of fiscal 1997 as
compared to 3.6% in the third quarter of fiscal 1996 and 4.5% in the first nine
months of fiscal 1997 as compared to 4.1% in the first nine months of fiscal
1996.
17
<PAGE>
INCOME TAXES
Corel's effective tax recovery rates were 6% and 22% for the third quarter of
fiscal 1997 and 1996, respectively, and, on loss from operations excluding the
write-down of purchased software and royalties, 3% and 31% for the first nine
months of fiscal 1997 and 1996, respectively. These rates vary from the
Company's statutory tax rate of 44%, primarily due to foreign tax rate
differences associated with Corel's international operations and the application
of research and development tax credits. The decreases in the three and nine
months of fiscal 1997 compared to 1996 were due primarily to foreign tax rate
differences associated with Corel's operations in Ireland. The Company expects
that, under current tax laws, it will continue to generate additional tax
credits directly related to the Company's ongoing research and development
efforts. Corel's effective tax rate will be affected by product mix and sales,
operating expense, advertising expense, and research and development expense
levels, which may vary.
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 1997, Corel's principal sources of liquidity included cash and
short-term investments of approximately $22.5 million, accounts receivable of
$82.7 million and an undrawn bank credit facility in the amount of $25.0
million. Short-term investments consist of overnight call loans to a major
Canadian bank.
Long-term debt of $39.3 million consists of the outstanding royalty and product
return obligations pursuant to the acquisition of the WordPerfect family of
software programs on March 1, 1996.
Cash provided by operations was $73.5 million for the first nine months of
fiscal 1997 compared to cash used of $26.9 million for the first nine months of
fiscal 1996. The increase of $100.4 million was primarily due to a decrease in
accounts receivable of $54.0 million in the first nine months of fiscal 1997
compared to an increase of $36.2 million in the first nine months of fiscal
1996, a decrease in prepaid expenses of $6.6 million in the first nine months of
fiscal 1997 compared to an increase of $14.5 million in the first nine months of
fiscal 1996, a decrease in inventory of $4.7 million in the first nine months of
fiscal 1997 compared to an increase of $15.6 million in the first nine months of
fiscal 1996, an increase in depreciation and amortization expense of $11.0
million from $36.7 million for the first nine months of fiscal 1996 to $47.7
million for the first nine months of fiscal 1997. This was offset by a decrease
in accounts payable and accrued liabilities of $11.7 million in the first nine
months of fiscal 1997 compared to an increase of $12.3 million in the first nine
months of fiscal 1996, and net loss from operations, excluding the write-down of
purchased software and royalties, of $22.4 million for the first nine months of
fiscal 1997 compared to a net loss of $9.3 million for the first nine months of
fiscal 1996.
Accounts receivable decreased in the first nine months of fiscal 1997 primarily
due to reduced sales levels in the second and third quarters of fiscal 1997.
Prepaid expenses increased in the first nine months of fiscal 1996 primarily due
to the payment of advance royalties to third-party developers of Corel CD Home
titles.
Financing activities used cash of $4.9 million in the first nine months of
fiscal 1997 compared to providing cash of $149.0 million in the first nine
months of fiscal 1996. This change was due to a
18
<PAGE>
reduction in the issuance of share capital of $90.1 million from $96.1 million
in the first nine months of fiscal 1996 to $6.0 million in the first nine months
of fiscal 1997, primarily due to the issuance of $89.9 million of share capital
to Novell on March 1, 1996 relating to the acquisition of the WordPerfect family
of software applications, the assumption of long-term debt relating to the
acquisition of the WordPerfect family of software applications of $55.0 million
in the first nine months of fiscal 1996, an increase in the repayment of long-
term debt of $7.9 million from $2.1 million in the first nine months of fiscal
1996 to $10.0 million in the first nine months of fiscal 1997, and the purchase
of Corel shares for cancellation of $0.9 million pursuant to its normal course
issuer bid which commenced on March 5, 1997.
Investing activities, primarily the acquisition of capital assets, used $53.1
million in the first nine months of fiscal 1997 compared to $201.7 million in
the first nine months of fiscal 1996, including expenditures for acquired
software of $42.4 million in the first nine months of fiscal 1997 compared to
$166.7 million, including $153.4 million relating to the acquisition of the
WordPerfect family of software applications, in the first nine months of fiscal
1996. At August 31, 1997, Corel had no material commitments for capital
expenditures. Corel anticipates that capital expenditures for computer and
office equipment for fiscal 1997 and future fiscal years will continue to grow
from fiscal 1996 levels as computer systems are upgraded to take advantage of
new technologies. Due to the rapidly changing technology in the computer
software industry, expenditures for technology acquisitions cannot be predicted
for future fiscal periods and, as such, Corel has no firm plans as to how much
of its cash reserves it is planning to spend on technology acquisitions in
future fiscal periods.
The Company believes that the existing sources of liquidity and anticipated
funds from operations will satisfy Corel's projected working capital, capital
expenditure and long-term debt repayment requirements for at least the next 12
months. The Company anticipates that subsequent to that time, its working
capital, capital expenditures and long-term debt repayments will be satisfied by
existing sources of liquidity, funds from operations and, if necessary,
additional financings.
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 does Corel.
The rapid pace of technological change constantly creates new opportunities for
existing and new competitors and can quickly render existing technologies less
valuable. As the market for Corel's products continues to develop, additional
competitors may enter the market and competition may intensify.
19
<PAGE>
GRAPHICS SOFTWARE. Corel's graphics software products face substantial
competition from a wide variety of companies. In the illustration graphics
segment Corel's competitors include Adobe, Macromedia, Deneba Systems and
Micrografx. In the photo editing and painting graphics segment its competitors
include Adobe and Micrografx. In the charting and presentation segments its
competitors include Software Publishing Corporation, Microsoft, Adobe,
Micrografx and IBM (Lotus). In the desktop publishing segment its competitors
include Adobe and Quark. Corel's competitors include many other independent
software vendors, such as Autodesk, Borland, Apple (Claris) and Computer
Associates, as well as a number of personal computer manufacturers which devote
significant resources to creating personal computer software, including Apple,
Hewlett-Packard and IBM.
PRODUCTIVITY SOFTWARE. Corel's competitors in the productivity software
(primarily office suites) marketplace include Microsoft and IBM (Lotus).
According to industry sources, Microsoft currently has the largest overall
market share for office suites. IBM has a large installed base with its
spreadsheet program and has recently adopted aggressive pricing strategies.
Also, IBM preinstalls certain of its software products on various models of its
PCs, competing directly with Corel productivity software.
MULTIMEDIA SOFTWARE. The Company competes with other participants in the Photo
CD market on the basis of price, the categories of photographs available, the
quality of the photographs and the nature of the rights attached to the photos
included on the Photo CD. The Company's competitors in this market include
Westflight, Digital Zone and Aris Entertainment.
COMMUNICATIONS APPLICATIONS. The Company's communications applications products
(CorelVIDEO) compete against offerings from Intel, PictureTel, C-Phone, and many
other companies.
The Company believes that the principal competitive factors in the PC software
markets include performance, product features, ease of use, reliability,
hardware compatibility, brand name recognition, product reputation, pricing,
levels of advertising, availability and quality of customer support, and
timeliness of product upgrades. Corel competes with other software vendors for
access to distribution channels, retail shelf space and the attention of
customers at the retail level and in corporate accounts. The Company also
competes with other software companies in its efforts to acquire software
technology developed by third parties. The Company believes that, in the future,
competition in the industry will intensify as major software companies expand
their product lines.
Pricing
In the past year, pricing pressures have intensified in the PC software
applications market and the Company believes that price competition, with its
attendant reduced profit margins, may become a more significant factor in the
future. Corporate licensing, discount pricing for large volume distributors and
retailers, product bundling promotions and competitive upgrade programs are
forms of price competition that may become more prevalent. In addition, local
area network versions of products are generally priced lower per user than
individual copies of the same products. Corel also competes with companies that
produce standalone graphics and desktop publishing applications that might serve
a specific need of a user or class of users at a price below that of Corel's
products.
20
<PAGE>
Additionally, should competitive pressures in the industry increase, Corel may
have to increase its spending on advertising as a percentage of revenues,
resulting in lower profit margins.
Technological Change
The markets for Corel's products are characterized by rapidly changing
technology, frequent new product introductions and uncertainty due to new and
emerging technologies. Corel's future success is highly dependent upon the
timely completion and introduction of new or enhanced products incorporating
such emerging technologies at competitive price/performance levels. The pace of
change has recently accelerated due to the Internet, corporate intranets, the
introduction of 32-bit operating systems, such as Windows 95 and Windows NT 4.0,
and new programming languages, such as Java.
Corporate Adoption Rate of 32-bit Operating Systems
Primarily all of the Company's office suite and graphics software products
introduced in fiscal 1995, fiscal 1996 (with the exception of Corel WordPerfect
Suite and Corel Office Professional which run under Windows 3.1), and the first
nine months of fiscal 1997 (with the exception of Corel WordPerfect Suite 7 for
Windows 3.x), and planned for introduction in the balance of fiscal 1997, run
under Windows 95 and Windows NT. While existing product will continue to be
sold, revenues from product upgrades to new versions and revenues from new
office suite and graphics software products now in development may be delayed if
the adoption rate of 32-bit operating systems at the corporate level is slower
than anticipated.
PC Growth Rates
The underlying PC unit growth rate, which may increase at a slower rate in the
future, impacts Corel's revenue growth.
Dependence on New Products
While Corel performs extensive usability and beta testing of new and enhanced
products, user acceptance and corporate penetration rates ultimately determine
the success of development and marketing efforts.
Product Ship Schedules
Delays in new-product releases impact sales growth rates and can cause
operational inefficiencies that impact manufacturing and distribution logistics,
distributor, reseller and OEM relationships, and technical support and customer
service staffing.
Channel Mix
Average revenue per unit is lower from OEM licences than from retail versions,
reflecting the relatively low direct costs of operations in the OEM channel.
Corel expects that OEM revenues will increase during future periods.
Potential Fluctuations in Quarterly Results
21
<PAGE>
Corel's quarterly operating results fluctuate as a result of a number of
factors, including the timing of new product announcements and introductions by
Corel and its competitors, pricing, distributor ordering patterns, the relative
proportions of sales attributable to full kits and existing user upgrades,
product returns and reserves, advertising and other marketing expenditures, and
research and development expenditures. Revenues and earnings may be difficult to
predict due to shipment patterns. Products are generally shipped as orders are
received, and accordingly, Corel has historically operated with little backlog.
As a result, sales in any quarter are dependent on orders booked and shipped in
that quarter. As is typical in the computer software industry, a high percentage
of Corel's revenues are expected to be earned in the third month of each fiscal
quarter and will tend to be concentrated in the latter half of that month.
Accordingly, quarterly financial results will be difficult to predict until the
end of the quarter and a shortfall in shipments at the end of any particular
quarter may cause the results of that quarter to fall significantly short of
anticipated levels.
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 with
the industry norm. New government regulations, low stock prices or other factors
could reduce the value of Corel's equity incentives and force Corel into more of
a cash compensation model.
Dependence on Distributors
The distribution of Corel's products is carried out primarily through
distributors, certain of which are material to the competitive position of
Corel. The distribution channels through which software products for desktop
computers are sold have been characterized by rapid change, including
consolidations and financial difficulties of certain distributors and resellers,
the emergence of new retailers such as general mass merchandisers and
superstores, and the desire of large customers such as retail chains and
corporate users to purchase directly from software developers. The loss of, or a
significant reduction in sales volume attributable to, any of Corel's principal
distributors or the insolvency or business failure of any such distributor could
have a material adverse effect on Corel's results of operations.
International Operations and Geographic Concentration
Currently, Corel markets its products in approximately 70 countries. Corel
anticipates that sales outside North America will continue to account for a
significant portion of total sales. These sales are subject to certain risks
including imposition of government controls, export licence requirements,
restrictions on the export of technology, political instability, trade
restrictions, changes in tariffs, differences in copyright protection and
difficulties in managing accounts receivable. More than 40% of Corel's sales for
the past three fiscal years were made in the United States. As a result, adverse
developments in the United States markets for Corel's products could have a
material adverse effect on Corel's results of operations.
Dependence on Key Personnel
22
<PAGE>
Corel's success depends to a significant extent upon the performance of Corel's
executive officers and key technical and marketing personnel, particularly the
Company's founder and Chairman, President and Chief Executive Officer, Dr.
Michael C.J. Cowpland. Corel has agreements describing compensation arrangements
and containing non-disclosure covenants with certain of its key employees. Corel
does not have employment agreements with other key employees, including Dr.
Cowpland, and does not have non-competition agreements with any of its
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.
23
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In connection with the class action lawsuit filed against the Company by named
plaintiff Jeffery L. Fishbein, the plaintiffs filed a motion for class
certification on June 27, 1997. The Company is in the process of conducting
discovery and intends to oppose the plaintiffs' motion. On September 2, 1997,
the plaintiff's counsel filed a Petition for leave to withdraw as Counsel,
citing "irreconcilable differences relating to the litigation which preclude
plaintiff's counsel from continuing to serve his best interests". Plaintiff's
counsel have requested that he obtain substitute counsel. All matters presently
before the court are stayed pending the outcome of the Petition. See the
discussions in "Legal Proceedings" in the Company's previously filed annual and
quarterly reports.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
None
b) Reports on Form 8-K
The Company filed no reports on Form 8-K for the fiscal quarter ended
August 31, 1997.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
COREL CORPORATION
(Registrant)
Date: October 6, 1997 By: /s/ Michael C.J. Cowpland
-------------------------
MICHAEL C. J. COWPLAND
Chairman, President, Chief
Executive Officer and Director
Date: October 6, 1997 By: /s/ Charles A. Norris
------------------------------
CHARLES A. NORRIS
Vice-President, Finance and
Chief Financial Officer
25
