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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, 1998
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 24, 1999 was $218,140,133. As
of that date 51,327,090 Common Shares were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 Annual Report to Shareholders are incorporated by
reference into Parts II and IV.
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COREL CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1998
INDEX
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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.................... 13
Item 6. Selected Financial Data...................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 15
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........................................... 16
Item 11. Executive Compensation....................................................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 23
Item 13. Certain Relationships and Related Transactions............................................... 23
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 24
Signatures ............................................................................................. 25
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All financial information contained in this report is expressed in United States
dollars, unless otherwise stated.
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PART I
ITEM 1. BUSINESS
GENERAL
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The Company was incorporated as Corel Systems Corporation under the Canada
Business Corporations Act by Articles of Incorporation dated May 29, 1985. The
name of the Company was changed to Corel Corporation in May 1992. For the
purposes of this report, 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 Computer Corp., Corel International
Corporation, Corel Inc. and Corel Corporation (U.S.A.), while "the Company"
refers to the parent, Corel Corporation.
Corel develops, manufactures, licenses, sells and supports a wide range of
software products including graphics, 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. The Video and Network Computer
Division develops video communications software and Linux-based network
computing solutions.
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
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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 Corporation ("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, photos and 3D models available for the various operating
system platforms. Versions of CorelDRAW include: CorelDRAW 8, a 32-bit suite
designed to run under Windows 95, Windows NT and Alpha, CorelDRAW 8 for the
Power Macintosh,
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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.
The Corel DREAM 3D module is a spline-based 3D modeling and rendering
application that allows users to create 3D illustrations with predefined models
and surface textures, lighting controls and high resolution rendering.
Supporting utilities include Corel TEXTURE(TM), a tool for creating realistic
natural textures, Corel OCR-TRACE(TM), a bitmap-to-vector conversion utility for
images and text, Corel SCAN(TM), a wizard-based scanning utility with preset
processing options, and 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 8 or
Corel PHOTO-PAINT 8, Corel(R) Versions(R), a tool that provides an overview of
all archived files in a history list and allows you to retrieve any archived
file when a previous version is required and Kodak Digital Science(TM) Color
Management System, a tool that ensures accurate color representation during
scanning, display and printing using ColorSync(R) 2.0-compatible device
profiles.
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 95 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 8 for Windows 95 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 95 and Windows NT, and Corel VENTURA 5 for Windows 3.x.
CORELXARA(TM). CorelXARA, designed for Windows 95 and Windows NT, is an
outstanding Web graphics design tool that delivers exceptional animation
capabilities and advanced color-handling tools for polished and professional Web
graphic design.
PRODUCTIVITY SOFTWARE APPLICATIONS
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Corel's productivity applications software are designed for use by a broad class
of end-users, regardless of business, industry, or market segment. Primary
examples of productivity software applications are word processing, spreadsheet,
and presentation graphics programs. Corel's productivity software applications
are developed for Windows, Macintosh, DOS, 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 8 for Windows 95 and Windows NT. In each of
the 16-bit versions, certain combinations of the following programs are
included: Corel WordPerfect; Corel(R) Quattro(R) Pro; and Corel(R)
Presentations(TM); along with 150 fonts, 10,000 clipart images and 200 photos.
Corel WordPerfect Suite 8 for Windows 95 and Windows NT contains 32-bit versions
of Corel WordPerfect,
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Corel Quattro Pro and Corel Presentations. Corel also offers versions of Corel
WordPerfect suite for three key business sectors - legal, medical and
construction. Corel WordPerfect Suite Professional 8 - Medical Edition, Corel
WordPerfect Suites 7 and 8 - Construction Edition and Corel WordPerfect Suites 7
and 8 - Legal Edition offer all the features found in the Corel WordPerfect
Suites 7 and 8 along with industry-specific applications and resources. Corel
WordPerfect Suite 8 with Dragon NaturallySpeaking(TM) 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. Corel WordPerfect Suite Professional is available in two
versions: Corel Office Professional for Windows 3.x and Corel WordPerfect Suite
8 Professional for Windows 95 and Windows NT. Products offered in Corel Office
Professional for Windows 3.x include all of the components of Corel WordPerfect
Suite plus the Corel(R) Paradox(R) database management program. Corel
WordPerfect Suite 8 Professional includes Corel Paradox 8, the Corel(R) Time
Line(R) project management software and Corel(R) WEB.SiteBuilder 8, a tool
which simplifies the process of creating and managing a Web site.
COREL(R) WORDPERFECT(R). Corel WordPerfect is Corel's principal word processing
program, providing all the features that users of word processing products
expect plus the ability to handle graphics, tables, spreadsheet data, charts,
and images imported from other software programs. Corel WordPerfect is available
on a stand-alone basis for the Macintosh, DOS, UNIX and Linux operating systems,
while Windows versions are available only as components of Corel WordPerfect
Suite or Corel WordPerfect Suite Professional.
COREL(R) QUATTRO(R) PRO. Corel Quattro Pro is an integrated spreadsheet with
database, business graphics and, in version 7, Internet capabilities. Corel
Quattro Pro is available in two versions: Corel Quattro Pro 6.0 for Windows 3.x
and Corel Quattro Pro 8 for Windows 95.
COREL(R) PARADOX(R). Corel Paradox, a powerful data management tool, delivers
advanced features such as the ability to publish a database to the Web. It is
offered in several configurations including a retail version and a Java runtime
version.
COREL(R) PRESENTATIONS(TM). Corel Presentations is a presentation graphics
program for producing slides, overheads, transparencies and prints. Corel
Presentations is available in two versions: Corel Presentations 3 for Windows
3.x and Corel Presentations 8 for Windows 95.
CONSUMER PRODUCTS APPLICATIONS
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The Consumer Products Division develops graphics applications for home PC users,
Photo CD titles for both the Internet and retail markets and peripheral
interface software for PCs.
COREL PRINT HOUSE(TM) MAGIC AND COREL PRINT HOUSE(TM) MAGIC DELUXE. Designed to
run under Windows 95 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 OFFICE(TM). Corel Print Office 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 and an all-in-
one Calendar, Address Book and List Manager.
COREL MEGA GALLERY(TM), COREL GALLERY(TM) MAGIC AND COREL GALLERY(TM) 1,000,000.
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 and Web theme sets.
Corel GALLERY 1,000,000 includes 815,000 Web images, 140,000 vector
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clipart images, 60,000 photos, 1,000 fonts, 530 sounds and 125 videos. 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(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) WEBMASTER SUITE. Corel WebMaster Suite offers a complete solution for
creating Intranet and Internet web sites. Corel WebMaster Suite includes: Corel
WEB.DESIGNER, Internet authoring software using a familiar word processor-style
interface; Corel WEB.SiteManager, a tool that allows the user to manage local
and remote Web sites; Corel WEB.WORLD to enable the user to turn a Web site into
an interactive reality; Corel WEB.MOVE software that creates animation; design
and bitmap editing as well as the ability to do database and Java-based
publishing.
COREL(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), in packages of 10 CDs (100 photos per CD) or in one of four Corel Stock
Photo Libraries, each of which consists of 200 Corel Stock Photos CD-ROM titles.
Individual Corel Stock Photos can also be downloaded from Corel's World Wide Web
home page.
PERIPHERAL INTERFACE SOFTWARE. CorelSCSI(TM) is a software package that allows
users to link up to seven peripheral devices with a single host adapter card.
CorelSCSI supports most major SCSI peripherals, including CD-ROM and other
optical drives, hard disk drives, tape drives, printers and scanners.
VIDEO AND NETWORK COMPUTERS
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As of December 1, 1998, Corel Computer Corporation was amalgamated with Corel
Corporation as a division. This division develops and sells video and network
computer products and offers turnkey computing and communication solutions for
corporate users. NetWinder(TM) network computers were developed from the
powerful, scalable, open source Linux operating system, and provide an
alternative to traditional systems at a fraction of the cost and upkeep; without
losing any of the power, speed or reliability that users need. Corel sold the
NetWinder Division to a third party in the first quarter of fiscal 1999, as
discussed in the Overview section of Management's Discussion and Analysis of
Financial Condition and Results of Operations in Exhibit 13.1.
The Company's current desktop video communications product, CorelVIDEO(TM), is a
hardware and software solution that provides television quality video and audio,
along with extensive communications features such as broadcasts, multi-party
calls, data collaboration, telecommuting and privacy control. By running on a
parallel wire to the data network, CorelVIDEO does not affect the data network
bandwidth. Corel intends to sell the Video division as soon as it is reasonably
possible and therefore expects sales to decrease in this area for fiscal 1999.
RESEARCH AND DEVELOPMENT
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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
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timely and continuing basis to be competitive. Corel employs a strategy of both
internally developing software, including overseeing third party development for
certain products and acquiring or licensing technology that will in most
cases, be enhanced by Corel. Corel believes that its ability to maintain
technological competitiveness will depend in large part upon its ability to
successfully enhance its existing products, develop new products on a timely
basis and acquire or license complementary technologies and products in a timely
manner. The Company strives to become as informed as possible at an early stage
about changing usage patterns and hardware advances that may affect software
design.
In order to better serve the needs of users outside of Canada and the United
States, Corel "localizes" many of its products to reflect local languages and
conventions. Various Corel products have been localized into more than 20
languages.
Corel's research and development expenses were $65.9 million, $89.5 million and
$71.9 million in fiscal 1996, 1997 and 1998 respectively. Those amounts
represented approximately 20%, 34% and 29% 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 and $4.7 million in fiscal 1998. Corel intends to
continue significant expenditures for research and development activities.
MANUFACTURING
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The principal materials and components used in Corel's products include computer
media (diskettes, CD-ROMs or tapes), documentation, network computer hardware
for the NetWinder series and video hardware in the case of CorelVIDEO. Corel is
often able to acquire component parts and materials on a volume discount basis.
Corel contracts all of its manufacturing activity to third parties.
Manufacturing involves the duplication of computer media and user manuals,
assembly of components, spot testing of the product and final packaging, in
accordance 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
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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 three major geographic sales and marketing areas: North America,
Europe and the rest of the world.
End-user marketing activities cover all of Corel's products and target end-users
who make individual buying decisions for the PCs they use at work or at home.
Marketing activities aimed at end-users include developing and administering
reseller relationships, channel marketing and promotions, end-user marketing
programs and seminars and 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.
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FINISHED GOODS CHANNELS
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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 MicroWarehouse and
Multiple Zones International. Within the United States and Canada, Corel has
sales representatives and support personnel who solicit orders from distributors
and resellers and provide product training and sales support. In other
countries, Corel's marketing personnel provide product training and sales
support.
LICENSING. Corel has a program designed to make it easier for large or small
organizations to acquire and maintain Corel products. The Corel License Program
("CLP") consists of 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 Freeedom 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.
OEM CHANNEL
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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, Quantex and Vobis.
ADVERTISING AND PROMOTION
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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 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
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monitors the effectiveness of Corel's worldwide advertising. The Company
maintains a broad advertising campaign emphasizing the Corel brand identity.
CUSTOMERS
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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
that include certain Corel products with their hardware. Note 9 to the
Consolidated Financial Statements (see Item 8) identifies customers that
represent more than 10% of Corel's revenues.
PRODUCT SUPPORT
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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
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The information set forth on pages 28-30 of the 1998 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 Results."
PROPRIETARY RIGHTS
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Corel regards certain features of its internal operations, software and
documentation as proprietary and relies on contract, copyright, trademark, and
trade secret laws and other measures to protect its proprietary information. The
Company 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 licences, 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 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
9
<PAGE>
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, 1998, Corel employed 1,265 people on a full-time basis,
including 561 in research and development, 547 in sales, marketing and support,
and 157 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; 106,450
square feet of office space in a facility located in Orem, Utah under a lease
that expires in 2001; 23,520 square feet of office space in a facility located
in Dublin, Ireland under leases that expire in 2004 and office space in various
countries around the world under leases that expire between 1999 and 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 shares between January 15, 1997 and January 20,
1998); however, plaintiffs' theories from the individual complaints (as
summarized above) remain the same.
10
<PAGE>
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. The
plaintiffs have not yet brought their motion to certify the class and the
filing.
The Company intends to defend this class action litigation vigorously. However,
due to the inherent uncertainties of litigation, the Company cannot accurately
predict the ultimate outcome of the litigation. Investigating and defending the
Consolidated Complaint may require expenditure of material amounts of funds and
may require a significant amount of management's time and resources. An
unfavorable outcome in the litigation could have a material adverse effect on
the Company's business, financial condition and results of operations.
Announcement of material developments in the litigation prior to its resolution
could adversely affect the market price of Corel's common shares.
On March 12, 1998, the Company received notice that a complaint had been filed
against it by Hedy Lamarr in the 9th Judicial Circuit for Orange County Florida.
The complaint was subsequently moved to the United States District Court for the
Middle District of Florida, Orlando Division. The complaint alleged that the
plantiff has suffered damages arising from Corel's use of her image in
connection with CorelDRAW 8 and related product packaging. The plaintiff
demanded payment of a reasonable royalty for Corel's use of her name and
likeness and sought injunctive relief enjoining further use. The plaintiff made
no efforts to obtain injunctive relief until she filed a motion on September 28,
1998 for Partial Summary Judgment and for Preliminary Injunction.
On December 1, 1998, Corel Corporation and Hedy Lamarr announced a settlement of
the lawsuit initiated by Ms. Lamarr in March 1998. In addition, Ms. Lamarr
granted Corel a five-year exclusive licence to use the lifelike vector
illustration of Hedy Lamarr on Corel's graphic software packaging.
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 and is awaiting
reply. The Company has recorded a provision of $2,468,000, inclusive of
interest and penalties, for certain adjustments. However, it is not possible to
accurately estimate the amount, if any, of additional income taxes that may
result from the remaining adjustments identified and therefore, no further
provision has been made.
On or about October 2, 1998, the Company became aware that a class action
lawsuit had been filed against it by plaintiff Karla A. Lyon in the Superior
Court of California, County of San Diego. The complaint also names as co-
defendants Corel Corporation (USA), Corel, Inc., Fry's Electronics, and David
Bicknell, a manager of one of Fry's Electronics' stores. The complaint was
filed on behalf of all persons whose photograph or likeness was, without that
person's consent, knowingly used by any of the defendants within the State of
California.
The complaint alleges that the defendants violated section 3344 of the
California Civil Code, respecting commercial use of identifiable individuals'
photographs, and section 3294 of the California Civil Code, respecting
oppression, fraud, and malice. The complaint alleges that the defendants entered
into a common plan to obtain photographs of the class members and use, without
consent, such photographs for commercial purposes including incorporating the
photographs into products, merchandise, and on-line sales through the Internet.
The complaint alleges that the defendants evaded just debts and royalties
payable to the class members together with monetary damages for unauthorized use
of those photographs. The complaint further alleges that, to the extent
pecuniary compensation would not afford adequate relief, all class members are
entitled to an injunction preventing the defendants from further use of
identified photographs. The Company cannot identify which of its products
contain identified photographs until the class is certified, which certification
the Company contests. The complaint seeks an unspecified amount of monetary
damages together with injunctive relief.
The plaintiff has propounded her first set of documentary and interrogatory
discovery on the Company and the Company has responded. The plaintiff has not
yet brought her motion to certify the class and the filing.
The Company intends to aggressively defend this class action litigation.
However, due to the inherent uncertainties of litigation, the Company cannot
accurately predict the ultimate outcome of the litigation. Investigating and
defending the class action may require expenditure of material amounts of funds
and may require a significant amount of management's time and resources. An
unfavorable outcome in this litigation could have a material adverse effect on
the Company's business, financial condition and results of operations.
Announcement
11
<PAGE>
of material developments in the litigation prior to its resolution could
adversely affect the market price of Corel's common shares.
The Company is a party to a number of additional claims arising in the ordinary
course of business relating to intellectual property and other matters. The
Company believes that the ultimate resolution of these claims will not have a
material adverse effect on its business, financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1998.
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON SHARES
The Company's Common Shares are traded on The Toronto Stock Exchange (the"TSE")
under the symbol "COS" and in the over-the-counter market on the NASDAQ National
Market under the symbol "COSFF". The following table sets forth the range of
quarterly high and low closing sale prices of the Common Shares on the TSE and
on the NASDAQ National Market within the two most recent fiscal years.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
HIGH LOW HIGH LOW
---- --- ---- ---
THE TORONTO STOCK EXCHANGE (Canadian dollars)
- -----------------------------------
<S> <C> <C> <C> <C>
First Quarter.................... $4.01 $2.17 $11.10 $7.45
Second Quarter................... 4.24 2.75 9.70 6.90
Third Quarter.................... 3.30 1.78 9.15 7.60
Fourth Quarter................... 4.15 1.75 8.95 3.13
NASDAQ NATIONAL MARKET........... (US dollars)
- -----------------------------------
First Quarter.................... $2.94 $1.41 $ 8.25 $6.38
Second Quarter................... 3.13 1.94 7.13 5.00
Third Quarter.................... 2.52 1.16 6.75 5.50
Fourth Quarter................... 3.00 1.06 6.50 2.23
</TABLE>
As of February 16, 1999, there were 765 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 35,000 holders.
LIMITATIONS AFFECTING SECURITY HOLDERS
There is no law or government decree or regulation in Canada that restricts the
export or import of capital, or affects the remittances of dividends, insurance
or other payments to a non-resident holder of Common Shares, other than the
withholding tax requirements described below.
TAXATION
The following discussion summarizes certain tax considerations relevant to an
investment by individuals and corporations who, for income tax purposes, are
resident in the United States and not in Canada, hold Common Shares as capital
property, and do not use or hold the Common Shares in carrying on business
through a permanent establishment or in connection with a fixed base in Canada
(collectively, "Unconnected US Shareholders"). The Canadian tax consequences of
an investment in the Common Shares by investors who are not Unconnected US
Shareholders may be expected to differ substantially from the tax consequences
discussed herein. The discussion is based upon the provisions of the Income Tax
Act (Canada) (the "Tax Act"), the Convention between Canada and the United
States of America with respect to taxes on Income and on Capital
(the"Convention") and the published administrative practices of Revenue Canada,
Taxation and judicial decisions; all of which are subject to change. The
discussion does not take into account the tax laws of the various provinces or
territories of Canada.
The discussion is intended to be a general description of the Canadian tax
considerations and does not take into account the individual circumstances of
any particular shareholder.
Any cash dividends and stock dividends on the Common Shares payable to
Unconnected US Shareholders
13
<PAGE>
generally will be subject to Canadian withholding tax. Under the Convention, the
rate of withholding tax generally applicable to Unconnected US Shareholders is
15%. In the case of a United States corporate shareholder owning 10% or more of
the voting shares of the Company, the applicable withholding tax under the
revised Canada US Income Tax Convention is reduced to 5% for 1997 and 1998.
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.
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data set forth below with respect to the years ended
November 30, 1996, 1997 and 1998 and the balance sheet data at November 30, 1997
and 1998 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, 1994 and 1995 and the balance
sheet data at November 30, 1994, 1995 and 1996 are derived from audited
financial statements not included in this Annual Report on Form 10-K. All
amounts are in United States dollars.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
CANADIAN GAAP
Sales ...................................... $246,827 $ 260,581 $334,245 $196,379 $164,313
Income (loss) from continuing operations (30,448) (231,678) (2,750) 14,484 32,503
Income (loss) from continuing
operations per share (fully diluted)..... (0.51) (3.84) (0.05) 0.26 0.63
Cash and short-term investments............. 24,506 30,629 6,924 81,816 85,618
Working capital............................. (108) 20,356 120,945 149,353 129,094
Total assets................................ 140,159 163,743 398,478 221,346 191,422
Novell Obligations.......................... 27,885 37,544 49,330 - -
Shareholders' equity........................ 28,583 59,809 290,260 195,858 164,953
US GAAP
Income (loss) from continuing operations (30,448) (231,678) (2,750) 14,484 32,503
Net income (loss) from continuing
operations per share (fully diluted)..... (0.51) (3.84) (0.05) 0.29 0.67
</TABLE>
14
<PAGE>
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 12
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 20-35 of the 1998 Annual Report to
Shareholders is incorporated herein by reference on pages 27-40 and is filed
herewith as Exhibit 13.1.
ITEM 7A. FINANCIAL INSTRUMENTS - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
As described in Note 4 to the 1998 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 $7,000,000 in 1999 and $5,322,000 in
2000 as set out in Note 4 to the 1998 Consolidated Financial Statements and a US
prime rate of 7.75% (rate at November 30, 1998 according to the US Federal
Reserve Bank), a 10% increase in the US prime rate would result in interest
charges of $586,835 in 1999 and $253,460 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 $539,088 in 1999 and $232,838 in
2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and independent auditors' report set forth on
pages 36-55 and the back cover of the 1998 Annual Report to Shareholders is
incorporated herein by reference on pages 41-59 and is filed herewith as Exhibit
13.2.
. Independent Auditors' Report;
. Consolidated Balance Sheets at November 30, 1998 and 1997;
. Consolidated Statements of Operations and Retained Earnings (Deficit) for
the years ended November 30, 1998, 1997, and 1996;
. Consolidated Statements of Changes in Financial Position for the years
ended November 30, 1998, 1997, and 1996; and
. Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
15
<PAGE>
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:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
Dr. Michael C.J. Cowpland 55 Chairman of the Board; President; Chief Executive Officer
Derek Burney 36 Executive Vice President, Engineering
Kim E. Dixon 37 Executive Vice President, Corporate Communications
Sandra Gibson 35 Executive Vice President, Corporate Services
Tony O'Dowd 32 Executive Vice President, International Product
Development, General Manager, Corel Corporation
Limited
Jim Orban 30 Executive Vice President, Marketing
Michael P. O'Reilly 46 Executive Vice President Finance; Chief Financial
Officer; Treasurer
Eric Smith 32 Corporate Counsel and Secretary
Carey Stanton 31 Executive Vice President, Business Development and
Legal Affairs
Don Sylvester 44 Executive Vice President, Sales
Kerry D. Williams 36 Executive Vice President, Manufacturing
Lyle B. Blair (1) 68 Director
Hon. William G. Davis (1) 69 Director
Hunter S. Grant (1) 56 Director
Jean-Louis Malouin 55 Director
Hon. Barbara McDougall 61 Director
</TABLE>
________
(1) Member of the Audit Committee
DR. MICHAEL C.J. COWPLAND founded the Company and has served as a Director,
Chairman of the Board and President of the Company since May 1986. Prior to
founding the Company in 1985, Dr. Cowpland held a variety of executive positions
with Mitel Corporation, a telecommunications company; most recently as Chairman
of the Board.
DEREK BURNEY joined the Company in April 1994 as the Project Leader for Corel
Flow. 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.
KIM E. DIXON joined the Company in August 1990 as Senior Product Specialist -
Central USA and was appointed Corporate Accounts Manager - USA in December 1990
and North American Marketing Manager in November 1991. Ms. Dixon held the
positions of Manager of Media and Market Development - United Kingdom,
Australia, New Zealand from January 1993 until July 1993, Manager of
International Advertising and Product Marketing from August 1993 until August
1995, Creative Director from September 1995 until January 1997 and Vice
President, Marketing from February 1997 until December 1998 at which time she
was appointed to her current position, Executive Vice President, Corporate
Communications.
16
<PAGE>
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.
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.
JIM ORBAN joined the Company in October 1995 as a Senior Account Manager. He
held this position until November 1997 when he was promoted to Vice President of
North American Channel Sales. Mr. Orban moved into the Marketing department of
the Company in September 1998 and was appointed Senior Vice President of
Marketing. In December 1998 he was appointed to his current position, Executive
Vice President, Marketing.
MICHAEL P. O'REILLY was appointed Executive Vice President, Finance, Chief
Financial Officer and Treasurer in December, 1997. Prior to joining Corel, Mr.
O'Reilly was a senior tax partner in the Ottawa practice of KPMG, the
international professional advisory services firm. Mr. O'Reilly is a Chartered
Accountant. He holds a B.A. from the University of Western Ontario and an Hons.
B.Comm from the University of Windsor.
ERIC SMITH joined Corel in May 1996 as Corporate Counsel and continues to hold
this position. He received his appointment to Corporate Counsel and Secretary in
October 1998. 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.
DON SYLVESTER joined Corel in August 1997. As Executive Vice President, Sales,
Mr. Sylvester has twenty years of sales and marketing experience, including
seven years with Dell Computer Corporation as the Director of Commercial Sales.
Mr. Sylvester holds an MBA from the University of Windsor.
KERRY D. WILLIAMS joined the Company in November 1989 as Materials
Administrator. He held the positions of Manufacturing Manager from February 1990
until January 1994, Director, Operations and Advertising from January 1994 until
August 1995, 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.
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 Tory Tory DesLauriers & Binnington, Barristers and Solicitors,
since February 1986. He served as Canada's Special Envoy on Acid Rain from March
1985 to March 1986 and prior to March 1985 was Premier of the Province of
Ontario. Mr. Davis is a director of The Seagram Company Ltd., Magna
International Inc. and First American Title Insurance Company, all of which are
reporting companies under the Securities Exchange Act of 1934.
17
<PAGE>
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. As a Member of
Parliament, Mrs. McDougall was appointed to a number of Cabinet posts,
including Employment and Immigration and Secretary of State for Internal
Affairs. Mrs. McDougall has held a number of positions in the business
community since her retirement from politics in 1993. Currently, Mrs.
McDougall serves as the Chairperson of Morguard Real Estate Investment Trust
and the Japan Society; Director of AT&T Canada, the Independent Order of
Foresters, the Canadian Opera Company and the Council for Canadian Unity and
Governor of York University. She was appointed President and CEO of the
Canadian Institute of International Affairs in February 1999.
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 1998 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.
18
<PAGE>
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, 1998, the Chief Executive Officer and the
other four most highly compensated executive officers of the Company (the "named
executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------
OTHER AWARDS ALL
--------------
ANNUAL SECURITIES OTHER
NAME AND PRINCIPAL COMPEN- UNDER OPTIONS COMPEN-
POSITION YEAR SALARY BONUS SATION (1) GRANTED (#) SATION (2)
- ------------------------- ------ -------- ----- ----------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael C.J. Cowpland 1998 $201,384 Nil $ - 275,000
Chairman, President and 1997 213,236 Nil - -
Chief Executive Officer 1996 188,388 Nil - 1,175,000
Michael P. O'Reilly 1998 130,565 Nil - 131,800
Executive Vice President 1997 - Nil - -
Finance, CFO and Treasurer 1996 - Nil - -
Carey Stanton 1998 134,254 Nil - 81,200
Executive Vice President, 1997 119,962 Nil - -
Business Development and 1996 97,916 Nil - 38,800
Legal Affairs
Don Sylvester 1998 135,848 Nil 32,420(4) 31,800
Executive Vice President 1997 48,288 Nil 9,221(4) 100,000
Sales 1996 - Nil - -
Kerry D. Williams 1998 134,254 Nil - 31,200
Executive Vice President, 1997 130,287 Nil - -
Manufacturing 1996 128,414 Nil - 36,800
Paul Skillen (3) 1998 154,000 Nil - 100,000 $110,000
former Vice President, 1997 184,304 Nil - -
Software Development 1996 117,296 Nil - 80,000
- ----------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Perquisites and other personal benefits do not exceed the lesser of $50,000
and 10% of the total of the annual salary and bonus for any of the named
executive officers.
(2) These include the amounts paid, payable or accrued to any named executive
officer pursuant to an arrangement in connection with the resignation of
such executive officer's employment with the Company.
(3) This additional disclosure includes an individual for whom disclosure would
have been provided as part of the four most highly paid executive officers
above but for the fact that the individual was not serving as an executive
officer of the Company at the end of fiscal 1998.
(4) Represents commissions paid to Mr. Sylvester.
19
<PAGE>
The following table sets forth the stock options granted under the Plan during
the fiscal year ended November 30, 1998 to the named executive officers.
OPTION GRANTS FOR THE YEAR ENDED NOVEMBER 30, 1998
AND POTENTIAL REALIZABLE VALUE OF EACH GRANT OF OPTIONS
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Number of % of total Exercise Appreciation for
Securities Options or base Option Term
underlying granted to Price (CAD$)
options employees in ($/share) Expiration ---------------------
Name granted (#) fiscal year (CAD$) Date 5% ($) 10% ($)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael C.J. Cowpland 275,000 8% $3.00 June 23, 2002 $177,793 $382,883
Michael P. O'Reilly 100,000 3% $3.15 Dec 9, 2001 67,884 146,192
31,800 1% $3.00 June 23, 2002 20,559 44,275
Carey Stanton 50,000 1% $3.73 May 4, 2002 40,192 85,555
31,200 1% $3.00 June 23, 2002 20,171 43,440
Don Sylvester 31,800 1% $3.00 June 23, 2002 20,559 44,275
Kerry D. Williams 31,200 1% $3.00 June 23, 2002 20,171 43,440
Paul Skillen (1) 100,000 3% $2.60 March 1, 2000 24,375 49,833
</TABLE>
(1) All dollar amounts applicable to Paul Skillen's options are in US Dollars.
The following table sets forth each exercise of stock options under the Plan
during the fiscal year ended November 30, 1998 to the named executive officers.
AGGREGATED OPTION EXERCISES DURING THE FISCAL YEAR ENDED
NOVEMBER 30, 1998 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of
Unexercised
Securities Unexercised in-the-Money
Acquired Aggregate Value Options at Options at
on Exercise Realized Nov. 30, 1998 Nov. 30, 1998
Name (#) (CAD$) (#) (CAD$)
- ----------------------- ----------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Michael C.J. Cowpland - $ - 1,450,773 $261,250
Michael P. O'Reilly - - 131,800 110,210
Carey Stanton - - 116,215 40,640
Don Sylvester - - 131,800 30,210
Kerry D. Williams - - 132,863 29,640
Paul Skillen - - 39,155 -
</TABLE>
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.
20
<PAGE>
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 for which financial performance is directly related to the
department(s) they are responsible for. 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 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 1998 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,
for options granted prior to November 1, 1993, exercisable to a date which is
not later than four years from the date of the grant. Options granted since that
date are exercisable for 30 days following termination, 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. 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, 1998 are as
follows:
Hunter S. Grant (Chairman)
The Honourable William G. Davis
21
<PAGE>
PERFORMANCE GRAPH
The following chart and graph compares the yearly percentage change over the
last five years in the cumulative total shareholder return on the Company's
Common Shares with the cumulative total return of the S&P 500 Index and the
NASDAQ Computer and Data Processing Services Stock Index:
FIVE-YEAR TOTAL RETURN ON $100 INVESTMENT
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Corel 100.00 122.48 59.01 16.79 18.80
Computer and Data Processing Services Stock Index 100.00 156.00 192.46 248.41 361.81
S&P 500 Index 100.00 97.92 111.51 143.93 155.80
- -------------------------------------------------------------------------------------------
</TABLE>
[PERFORMANCE GRAPH APPEARS HERE]
22
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 24, 1999, 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.
<TABLE>
<CAPTION>
COMMON SHARES
BENEFICIALLY EXERCISABLE PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OPTIONS OWNED (1)
- ------------------------------------- ------------- ----------- ----------
<S> <C> <C> <C>
Dr. Michael C.J. Cowpland 5,450,558 1,450,773 11.0
Novell, Inc 4,296,000 - 7.0
1555 N. Technology Way
Orem, Utah 84057
Lyle B. Blair 3,000 37,107 *
Hon. William G. Davis 1,500 37,620 *
Hunter S. Grant - 40,186 *
Jean Louis Malouin - 15,000 *
Barbara McDougall - 15,000 *
Derek Burney 300 12,623 *
Kim E. Dixon - 41,273 *
Sandra Gibson - 11,343 *
Tony O'Dowd 1,000 39,463 *
Jim Orban - 22,853 *
Michael P. O'Reilly - 131,800 *
Eric Smith - 811 *
Carey Stanton - 85,015 *
Don Sylvester 33,800 131,800 *
Kerry D. Williams 290 101,663 *
Directors and Executive Officers as a 5,498,148 2,112,098 12.0
group (15 persons) (2)
</TABLE>
* 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.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND SCHEDULES
The following audited financial statements of Corel (together with the
independent auditors reports thereon and the notes thereto) are included
in this Report:
(a) Consolidated Balance Sheets at November 30, 1998 and 1997.
(b) Consolidated Statements of Operations and Retained Earnings
(Deficit) for the years ended November 30, 1998, 1997 and 1996.
(c) Consolidated Statements of Changes in Financial Position for the
years ended November 30, 1998, 1997 and 1996.
Financial statement schedules have been omitted because the required
information is included in the financial statements or notes thereto as
set forth under Item 8 of this Report on Form 10-K.
(B) REPORTS ON FORM 8-K
On October 23, 1998, the Company filed a report on form 8-K to report on
the resignation of KPMG LLP Chartered Accountants as its independent
auditor and certifying accountant and the appointment of
PricewaterhouseCoopers LLP as the Company's independent auditor and
certifying accountant.
(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 - 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) (3)
13.1 Management's Discussion and Analysis of Financial Condition
and Results of Operations (Incorporated by Reference to
pages 20-35 of the 1998 Annual Report to Shareholders ("1998
Annual Report"))
13.2 Financial Statements (Incorporated by Reference to pages 36-
55 and Cover Back of the 1998 Annual Report)
21.1 Subsidiaries of Registrant (Incorporated by Reference to
Exhibit 13.2 filed herein)
23.1 Auditors' Report - KPMG LLP Chartered Accountants
99.1 Form of License Agreement, including Limited Warranty (1)
________________
24
<PAGE>
(1) Incorporated by reference to Registration Statement on Form F-1 File
No. 33-50886.
(2) Incorporated by reference to Annual Report on Form 10-K for the
fiscal year ended November 30, 1994.
(3) Incorporated by reference to Exhibit 2.01 to the Company's Report on
Form 8-K/A, Amendment No. 2, dated March 1, 1996.
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 22, 1999.
COREL CORPORATION
By /s/ Michael P. O'Reilly
------------------------------------------
Michael P. O'Reilly
Executive Vice President Finance; Chief Financial Officer; Treasurer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints MICHAEL C.J. COWPLAND and MICHAEL P. O'REILLY,
his 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 22, 1999.
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/ Michael P. O'Reilly Executive Vice President Finance;
-----------------------------
Michael P. O'Reilly Chief Financial Officer and Treasurer
(principal financial and accounting officer)
25
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
3.3 Certificate and Articles of Amalgamation
13.1 Management's Discussion and Analysis of Financial
Condition and Results of Operations
13.2 Financial Statements
21.1 Subsidiaries of Registrant
23.1 Auditors' Report - KPMG LLP Chartered Acountants
</TABLE>
<PAGE>
Exhibit 3.3
Industry Canada Industrie Canada
<TABLE>
<CAPTION>
Certificate of Amalgamation Certificat de fusion
Canada Business Corporations Act Loi canadienne sur les societes par actions
COREL CORPORATION 355888-6
- ------------------------------------------------ ------------------------------------------------
<S> <C>
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 d'une fusion, en vertu de l'article 185 de la Loi
of 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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
<S> <C> <C>
1 - Name of amalgamated Corporation Denomination de la societe issue de la fusion
Corel Corporation
2 - 2 - The place in Canada where Lieu au Canada ou doit etre situe le siege social
the registered office 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 may Limites imposees a l'activite de la societe, s'il y a
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 ou
that section or subsection of the Act which is 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
</TABLE>
<PAGE>
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 ot 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 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;
<PAGE>
(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 fo 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.
<PAGE>
EXHIBIT 13.1
<PAGE>
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. This Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking
statements involve uncertainty and risk, and all assumptions, anticipations, and
expectations stated herein are forward-looking statements. The actual results
that Corel achieves may differ materially from any forward-looking statements
made herein due to such risks and uncertainties. The Company has identified by
italics various sentences within this MD&A which contain such forward-looking
statements, and words such as "believes", "anticipates", "expects", "intends",
and similar expressions are intended to identify forward-looking statements, but
are not the exclusive means of identifying such statements. In addition, the
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 Computer Corp.,
Corel International Corporation, Corel, Inc., and Corel Corporation (U.S.A.),
while "the Company" refers to the parent, Corel Corporation. Corel Computer
Corp. was amalgamated with Corel Corporation on December 1, 1998 and is no
longer a subsidiary of the parent company.
Corel develops, manufactures, licenses, sells, and supports a wide range of
software products, including graphics, business productivity and consumer
product applications and video and network computer products.
In the third quarter of 1998, the Company initiated a consolidation plan to
transfer the research and development activity in the Orem, Utah engineering
center to the engineering facilities in Ottawa, Ontario. As a result of this
plan, a restructuring charge of $15,880,000 was incurred in the third quarter of
1998 for severance costs associated with the termination of approximately 550
employees at the Orem, Utah location, facilities closure costs and non-cash
asset write-downs.
On December 31, 1998, the Company transferred its Java(TM)-based jBridge(TM)
solution, in exchange for a 25% equity stake in GraphOn Corporation of Campbell,
California. On January 20, 1999, the Company announced the signing of an
agreement to transfer the Corel Computer NetWinder(TM) division to Hardware
Canada Computing (HCC) of Ottawa, Canada, in exchange for a significant
ownership position. Under the terms of the agreement, HCC acquired all of
the assets of Corel Computer supporting the NetWinder family of Linux(R)-based
thin client/thin server computers and other consideration, in exchange for a 25%
equity stake in HCC.
These activities have and will continue to allow the Company to reduce operating
costs while still developing and marketing award winning software.
<PAGE>
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 various rights of return and
price protection. Corel provides reserves for estimated future returns and
exchanges and for price protection on a quarterly basis. The setting of reserves
is inherently risky due to the factors discussed below in "Factors That May
Affect Future Results." 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 1998 is consistent with
the increase in corporate licence sales.
In fiscal 1998, the average selling price per unit decreased due to a decision
made in the second quarter of the year to decrease prices for upgrades of
Business Productivity applications. Average revenue per unit from original
equipment manufacturer ("OEM") licences and corporate licence programs, such as
the Universal Corel Licence Program, are lower than the average revenue per unit
from retail versions.
PRODUCT GROUPS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
------------------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(in thousands)
<S> <C> <C> <C>
Graphics - new licences................................. $ 68,720 $ 52,562 $ 64,255
Graphics - existing user upgrades....................... 37,508 38,540 40,674
-------------- -------------- --------------
Total graphics..................................... 106,228 91,102 104,929
-------------- -------------- --------------
Business productivity - new licences.................... 83,801 104,935 87,146
Business productivity - existing user upgrades.......... 28,189 36,015 91,017
-------------- -------------- --------------
Total business productivity........................ 111,990 140,950 178,163
-------------- -------------- --------------
Consumer products....................................... 27,613 27,547 50,587
-------------- -------------- --------------
Video and network computer.............................. 996 982 566
-------------- -------------- --------------
Total sales............................................. $246,827 $260,581 $334,245
============== ============== ==============
</TABLE>
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 the Power Macintosh and Corel Photo Paint 8
releases.
The graphics applications revenues decrease in fiscal 1997 relates primarily to
the decrease in sales of CorelDRAW versions 3, 4 and 5. Sales of new versions of
CorelDRAW were comparable to 1996. Sales in the academic, OEM and corporate
markets have increased the number of overall units sold. However, due to the
sales mix the overall average selling price decreased in fiscal 1997. Corel
Photo-Paint 8 was not released in 1997 which adversely affected graphics
software revenues.
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 declined from 1997.
Business productivity applications revenue in 1997 included revenues from new
releases such as Corel WordPerfect Suite 8, Corel WordPerfect Suite 8
Professional, Corel Paradox 8, Corel WordPerfect Suite 7 for DOS and UNIX, and
Corel WordPerfect Suite 7 16-bit version. Corel also launched business
applications developed for specialized
<PAGE>
industries. These releases included Corel WordPerfect Suite 7 - Construction
Edition, Corel WordPerfect Suite 7 - Legal Edition, and Corel Office
Professional - Medical Edition. Revenue generated from productivity software
applications declined in 1997 from 1996. This was due, in part, to lower than
expected sales of Corel WordPerfect Suite 7 16-bit version.
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 market. Sales of consumer product applications
experienced little change between 1997 and 1998. The decline from 1996 revenues
can be attributed to revenues generated in that year from the CD Creator and CD
Home lines which were subsequently sold in 1997. The sales of the Graphics Pack
and Print House products in 1996 were relatively higher than in 1997 and 1998
due to that year being the initial launch year for those products.
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. Initial commercial
installations of CorelVIDEO commenced in the second quarter of fiscal 1996.
Revenues remained relatively consistent through 1998. It is expected that
the completed sale of the NetWinder division in the first quarter of 1999 and
the intended sale of the video division when reasonably possible in 1999 will
result in reduced sales in this area for fiscal 1999.
SALES CHANNELS. Corel distributes its products primarily through distributors
(as retail packaged products), OEM licences and corporate licences.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
-----------------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(in thousands)
<S> <C> <C> <C>
Retail packaged products................................ $153,623 $161,528 $273,089
OEM licences............................................ 23,340 30,441 26,527
Corporate licences...................................... 69,864 68,612 34,629
-------------- -------------- --------------
Total sales............................................. $246,827 $260,581 $334,245
============== ============== ==============
</TABLE>
Retail packaged products and corporate licences are sold primarily through
distributors. The three largest distributors accounted for $77.7 million (31%),
$93.8 million (36%) and $168.4 million (50%) of Corel's sales in fiscal 1998,
1997 and 1996, respectively. Packaged product revenue decreased in 1997 and
1998 due to a shift in focus from retail to corporate sales. Corel's enhanced
focus on the corporate market has resulted in increased revenue in both 1997 and
1998 from corporate licences. OEM channel revenues are licence fees from
original equipment manufacturers. These revenues decreased in 1998 due to the
declining price of hardware which has led to a decline in OEM per unit revenues.
The primary source of OEM revenues in fiscal 1996 was the licensing of graphics
software applications. OEM revenues in 1997 and 1998 related to the licensing of
graphics software applications and productivity software applications.
SALES BY REGION
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
-----------------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
(in thousands)
<S> <C> <C> <C>
North America........................................... $152,880 $147,450 $233,997
Europe.................................................. 73,089 84,732 75,513
Other................................................... 20,858 28,399 24,735
-------------- -------------- --------------
Total................................................... $246,827 $260,581 $334,245
============== ============== ==============
</TABLE>
In 1997, sales increased in both the European and International markets; notably
in Germany and the United Kingdom. North American sales increased again in 1998;
although not to 1996 levels. The decrease in sales outside
<PAGE>
of North America in 1998 reflected large declines in revenues from the United
Kingdom, Belgium and Japan. Corel's products are sold primarily in US dollars in
all countries. Sales in US dollars as a percentage of total sales were in excess
of 90% in each of fiscal 1998, 1997 and 1996.
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 fiscal 1997 was due primarily to a write-down
for inventory obsolescence in the amount of $12.8 million. The write-down was
necessitated by the discontinuance of older versions of CorelDRAW in the North
American channel. This write-down was partially offset by a lower amortization
amount related to the write-down of the WordPerfect technology in the second
quarter of fiscal 1997. Gross profit increased in 1998 both as a percentage of
sales and in dollars. This was due to lower amortization with the write down of
the WordPerfect technology in the second quarter of 1997 and to the inventory
obsolescence provision required in 1997.
ADVERTISING EXPENSES
Advertising expenses include all marketing, advertising and trade show expenses.
Advertising expenses decreased in both 1997 and 1998. The decrease in 1997 was
due primarily to the reduction of print advertising and corporate sponsorships
and promotions. In 1998, these expenses decreased even further due to a
significant reduction in television advertising. In addition, print
advertisements have also decreased as part of the Company's efforts to control
costs and use advertising dollars more effectively.
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. There were two major reasons for the decrease in
these expenses over 1997. Firstly, the restructuring that occurred in the third
quarter of 1998 contributed to the decrease in SG&A expenses with the decline in
salaries for the last two quarters. Secondly, the Company's customer support
expenses decreased in 1998, which reflects the fact that customers required less
product support in 1998 and is consistent with the Company's latest product
versions moving towards the end of their life cycle. In 1996, the purchase of
the WordPerfect technology resulted in increases in expenses for customer and
technical support, warehousing and increased personnel for marketing efforts.
These increases remained in effect for the entire 1997 fiscal year.
GAIN ON SALE OF COREL CD CREATOR
On June 26, 1996, the Company sold all versions of its Corel CD Creator software
program and its PD optical recording technology to Adaptec, Inc. in a $12
million cash transaction. A gain on the sale of $10.4 million was realized in
the third quarter of fiscal 1996.
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
The Company has expensed all of its internal software development costs as
incurred, in accordance with Canadian GAAP. Research and development expenses
are reported net of Canadian investment tax credits.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
-------------------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
(in thousands)
<S> <C> <C> <C>
Gross research and development expenses................. $71,935 $89,499 $70,619
Less: Research and development tax credits............. - - 4,692
--------------- -------------- --------------
Net research and development expenses................... $71,935 $89,499 $65,927
=============== ============== ==============
</TABLE>
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. The increase in 1997 research and development expenses was primarily
attributable to increased staffing and costs associated with the continued
maintenance and enhancement of Corel's products (including a full year of R&D
expenses associated with WordPerfect in 1997 as compared to a partial year in
1996) as well as new R&D on Webtop products.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses, which do not include the amortization of
purchased software, decreased in 1998 due to the decrease in assets purchased in
1998 as compared to 1997 and the write-down of assets as part of the
restructuring. The increase in 1997 was attributable to the full year of
depreciation and amortization incurred on relatively higher 1996 purchases for
the research and development and technical support staff in Orem, Utah as well
as the depreciation and amortization on additional 1997 purchases.
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 the Overview and Research and Development Expenses sections
above, the Company incurred a restructuring charge of $15.9 million in the third
quarter of 1998. The charge relates to the costs associated with moving the
research and development activity in Orem, Utah to the Ottawa, Ontario and
Dublin, Ireland locations. Further discussion of the charge and its components
may be found in Note 7 of the 1998 Consolidated Financial Statements included in
Exhibit 13.2.
INTEREST EXPENSES (INCOME)
The interest expense in fiscal 1997 and 1998 relates to Novell Obligations for
the acquisition of the WordPerfect technology from Novell, Inc. The interest
expense in 1996 for these obligations was more than offset by the interest
earned on the cash and short term investments held by the Company in the first
part of the year.
<PAGE>
INCOME TAXES
Corel's effective tax rates for fiscal 1998, 1997 and 1996 were (15%), 23.6% and
(4.0%) respectively. These effective tax rates vary from the Company's statutory
tax rate of 44.3% primarily due to foreign tax rate differences associated with
Corel's international operations and the unrecorded tax benefit of losses in the
1998 and 1997 fiscal years. The accounting losses include loss carryforwards for
income tax purposes.
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 long-term debt
and to acquire capital equipment, products and technology. Corel initiated
significant cost reduction measures throughout 1998 that allowed it to record a
profit from operations in the fourth quarter of 1998. The efforts undertaken
throughout 1998 will facilitate the Company's movement towards an improved
liquidity position in 1999.
Days sales outstanding ("DSO") decreased in fiscal 1998 to 58 days at November
30, 1998 from 106 days at November 30, 1997,and 98 days at November 30, 1996.
The decrease in inventories in fiscal 1997 was primarily due to a write-down for
obsolescence related to the decision to discontinue CorelDRAW 3, CorelDRAW 4,
CorelDRAW 6 and CorelDRAW 7 in the North American market. The increase in 1998
reflects the increased production of the Company's core products that are
currently in the market; including CorelDRAW 8 and Corel WordPerfect Suite 8.
The increase in prepaid expenses in 1998 was a result of more prepaid royalties
paid as part of agreements to use third party technologies. Prepaid expenses
decreased by $15.8 million in fiscal 1997 to $2.6 million at November 30, 1997.
This was primarily due to the write-down of deferred development costs in the
form of prepaid royalties to third-party developers of Corel CD HOME titles. The
multimedia titles were sold to Hoffman + Associates Inc. in the second quarter
of fiscal 1997.
Accounts payable and accrued liabilities increased by $10.0 million in fiscal
1998 and decreased by $4.3 million in fiscal 1997. 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 the Legal and
Government Proceedings section above and in Note 14 of the 1998 Consolidated
Financial Statements in Exhibit 13.2.
The current portion of Novell Obligations of $11.8 million at November 30, 1998
represents the amounts due in fiscal 1999 arising from long-term royalty and
product return obligations pursuant to the acquisition of the WordPerfect family
of software programs on March 1, 1996.
The exercise of employee and other stock options provided cash of approximately
$0.2 million in fiscal 1998, $6.2 million in fiscal 1997 and $7.3 million in
fiscal 1996. This was countered by repurchases of common shares by the Company
for cancellation. The repurchases included 394,000 common shares for $1.0
million in 1998 and 1,450,000 common shares for $5.0 million in 1997.
Corel's capital expenditures totalled $10.4 million in fiscal 1998, $23.8
million in fiscal 1997 and $210.1 million in fiscal 1996, including expenditures
for acquired software of $4.7 million in fiscal 1998, $12.2 million in fiscal
1997 and $171.1 million in fiscal 1996, of which $153.4 million was for the
acquisition of the WordPerfect technology on March 1, 1996, and for computer and
office equipment. At November 30, 1998, Corel had no material commitments for
capital expenditures.
Corel believes that the existing sources of liquidity and anticipated funds from
operations will satisfy Corel's projected working capital, capital expenditure
and Novell Obligations repayment requirements for the 1999 fiscal year. Corel
anticipates that subsequent to that time, its working capital and capital
expenditures will be satisfied by
<PAGE>
existing sources of liquidity, funds from operations and, if necessary,
additional financing
<PAGE>
signed to sell the Network Computer division and the intention to sell the Video
division , it is expected that the above mentioned organizations will not remain
competitors of Corel.
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.
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 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.
Corel's OEM revenues fell slightly in 1998 from the increases experienced in
1996 and 1997.
<PAGE>
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.
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 accounts receivable. More than 45% 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.
<PAGE>
Corporate licenses
Average revenue per unit from corporate license 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.
YEAR 2000
Many computer and related systems use the last two digits in a year as a
reference point and may not properly distinguish between 1900 and 2000 when
"00" is used. If not corrected, these systems may provide incorrect data or may
not function (at all).
There are three major risks for the Company 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 the Company'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 the Company'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.
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.
Corel has established a Year 2000 Product Evaluation Program. For those Corel
products currently being sold and for historical Corel products, the Company has
provided detailed Year 2000 information on a product by product basis on their
website at http://www.corel.com/2000.htm. The status of each product is
discussed and updated regularly; including whether a product will be tested, the
stage of testing reached on the product and the conclusion on its Year 2000
compliance once testing is complete. The Company expects to complete testing of
these products by the end of the third quarter of 1999. 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 the Company's products
do not contain undetected errors or defects associated with year 2000 date
functions.
The three phases of the Company's internal systems testing program are
inventory, assessment and renovation. 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 expects to complete the
assessment phase for all critical internal hardware and software systems by the
third quarter of 1999. The Company is also in the process of implementing
solutions to ensure Year 2000 compliance. It is expected that renovations, if
required, will be complete by the third quarter of 1999 for critical systems.
Non-critical systems will be tested and solutions implemented over the balance
of 1999. In addition, as part of ongoing business operations, the Company
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. These practices are intended to help ensure that Corel does not
experience any significant disruptions due to Year 2000 issues.
<PAGE>
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. The Company fully expects to have
suitable solutions in place before 2000. There can be no guarantees, however,
that these third parties will be fully Year 2000 compliant.
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. The Company is currently in phase
I of the plan; which includes identifying the business processes and the
resources and technologies required for each process. Phase II provides
quantitative analysis for each process using various criteria such as business
impact and likelihood of failure. Both Phase I and II are expected to be
complete during the second quarter of 1999. Phase III is expected to be
complete in the third quarter of 1999 and Phase IV completion is expected in the
fourth quarter of 1999.
Corel expects to incur total costs of approximately $1.7 million from the first
quarter of 1999 through the second quarter of 2000 to become Year 2000
compliant. 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 both the
Engineering and Legal departments in regards 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 the Company's financial position
may not be materially adversely affected if unanticipated problems occur.
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 before 2000, there could be material adverse
consequences to the Company.
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 governance with reference to the
guidelines.
<TABLE>
<CAPTION>
TSE Corporate Governance Committee Does Corel
Guideline Conform? Comments
- ------------------------------------------------- -------- ---------------------------------------------------
<S> <C> <C> <C>
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;
process. however, the nature of the business and its rapid
evolution precludes long-term planning. The Board
generally participates in, and is fully informed of,
strategic initiatives as they develop.
b) identification of principal risks, and Yes. The Board, in its deliberations, considers the
implementing risk-managing systems. principal risks of the Company's business and
receives reports of the Company's assessment and
management of those risks.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
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
Company communicates with its various stakeholders
and intends to further review the Company's
communications policy.
e) integrity of internal control and Yes. The Board directly, and through its Audit Committee,
management information systems. assesses the integrity of the Company's internal
control and management information systems.
2 Majority of directors should be Yes. The Board is composed of seven members: six are
"unrelated" (free from conflicting unrelated, one is an officer of the Company and one
interests). seat on the Board remains vacant.
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 Company.
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 Company provides appropriate documentation
programs for new directors. and presentations as required for new directors.
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 Company. The Board as presently
constituted brings together a mix of skills,
backgrounds and attitudes that the Board considers
appropriate to the stewardship of the Company.
8 Review compensation of directors in Yes. The Board, through its Compensation 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, and
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
b) Majority of Committee members should Yes. All the members of the Audit and Compensation
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
corporate objectives. which the CEO is responsible and reviews key
results and objectives quarterly.
12 Establish procedures to enable the Yes. The Board has functioned, and is of the opinion
Board to function independently of that it can continue to function independently as
management. required.
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-management Yes. The members are non-management directors.
directors.
14 Implement a system to enable Yes.
individual directors to engage
outside advisers, at corporation's
expense.
</TABLE>
<PAGE>
EXHIBIT 13.2
<PAGE>
COREL CORPORATION
- --------------------------------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of
Operations and Retained Earnings (Deficit)
Consolidated Statements of
Changes in Financial Position
Notes to Consolidated Financial Statements
<PAGE>
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.
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, 1998 and the consolidated statements of operations and retained
earnings (deficit) and changes in financial position for the year ended 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,
1998, and the results of its operations and the changes in its financial
position for the year ended November 30, 1998 in accordance with generally
accepted accounting principles in Canada.
/s/ KPMG LLP
Chartered Accountants
Ottawa, Canada
January 8, 1999
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
As at November 30
- --------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Assets
Current assets:
Cash and short-term investments $ 24,506 $ 30,629
Accounts receivable
Trade (note 4 and note 13) 45,789 50,951
Other 877 2,310
Inventory (note 1) 17,098 11,412
Deferred income taxes 2,495 2,353
Prepaid expenses 4,618 2,591
- --------------------------------------------------------------------------------------------------
Total current assets 95,383 100,246
Capital assets (note 2) 44,776 63,497
- --------------------------------------------------------------------------------------------------
Total assets $ 140,159 $ 163,743
==================================================================================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued liabilities (note 3) $ 58,209 $ 48,063
Current portion of Novell obligations (note 4) 11,800 13,500
Income taxes payable 7,549 4,203
Deferred revenue 17,933 14,124
- --------------------------------------------------------------------------------------------------
Total current liabilities 95,491 79,890
Novell obligations (note 4) 16,085 24,044
Shareholders' equity
Share capital (note 5) 203,088 204,235
Contributed surplus 1,099 730
Deficit (175,604) (145,156)
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 28,583 59,809
- --------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 140,159 $ 163,743
==================================================================================================
</TABLE>
Commitments (note 10)
Contingencies (note 14)
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)
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Year ended November 30
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Sales $ 246,827 $ 260,581 $ 334,245
Cost of sales (note 6) 51,561 84,136 101,094
- ------------------------------------------------------------------------------------------------------------------------
Gross profit 195,266 176,445 233,151
Expenses:
Advertising 41,826 79,561 92,682
Selling, general and administrative 77,736 84,480 71,019
Gain on sale of CD Creator technology - - (10,426)
Research and development 71,935 89,499 65,927
Depreciation and amortization 12,368 26,275 19,081
Write-down of purchased software and royalties - 117,512 -
Restructuring charge (note 7) 15,880 - -
Loss (gain) on foreign exchange 911 764 (141)
- ------------------------------------------------------------------------------------------------------------------------
220,656 398,091 238,142
- ------------------------------------------------------------------------------------------------------------------------
Loss from operations (25,390) (221,646) (4,991)
Interest expense (income) 1,112 1,154 (1,391)
- ------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (26,502) (222,800) (3,600)
Income taxes (recoverable) (note 8):
Current 4,088 7,421 5,455
Deferred (142) 1,457 (6,305)
- ------------------------------------------------------------------------------------------------------------------------
3,946 8,878 (850)
- ------------------------------------------------------------------------------------------------------------------------
Net loss (30,448) (231,678) (2,750)
Retained earnings (deficit) beginning of year (145,156) 86,955 89,705
Premium on shares repurchased for cancellation - (433) -
- ------------------------------------------------------------------------------------------------------------------------
Retained earnings (deficit) end of year $ (175,604) $ (145,156) $ 86,955
- ------------------------------------------------------------------------------------------------------------------------
Basic and fully diluted loss per share (note 5): $ (0.51) $ (3.84) $ (0.05)
Weighted average number of 59,433 60,297 57,289
Common shares outstanding (000s):
</TABLE>
(See accompanying Notes to Consolidated Financial Statements)
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Year ended November 30
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash provided by (used for):
Operations:
Net loss $ (30,448) $ (231,678) $ (2,750)
Items which do not involve cash:
Depreciation and amortization 25,689 52,282 56,553
Deferred income taxes (142) 1,457 (6,305)
Write-down of royalties - 10,181 -
Write-down of purchased software - 107,331 -
Write-down of assets included in restructuring charge 3,086 - -
Decrease (increase) in accounts receivable 6,595 83,418 (74,560)
Decrease (increase) in inventory (5,686) 18,978 (14,166)
Decrease (increase) in prepaid expenses (2,027) 5,616 (9,507)
Increase (decrease) in accounts payable and accrued liabilities 10,146 (4,330) 29,400
Increase in income taxes payable / recoverable 3,346 4,215 3,294
Increase in deferred revenue 3,809 7,629 6,495
- ----------------------------------------------------------------------------------------------------------------------------
14,368 55,099 (11,546)
- ----------------------------------------------------------------------------------------------------------------------------
Financing:
Issue of share capital 209 6,206 97,152
Shares repurchased for cancellation (987) (4,979) -
Increase in Novell obligations - - 55,000
Reduction of Novell obligations (9,659) (11,786) (5,670)
- ----------------------------------------------------------------------------------------------------------------------------
(10,437) (10,559) 146,482
- ----------------------------------------------------------------------------------------------------------------------------
Investments:
Purchase of capital assets (10,359) (23,829) (210,108)
Proceeds on disposal of assets 305 2,994 280
- ----------------------------------------------------------------------------------------------------------------------------
(10,054) (20,835) (209,828)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (6,123) 23,705 (74,892)
Cash at beginning of year 30,629 6,924 81,816
- ----------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 24,506 $ 30,629 $ 6,924
- ----------------------------------------------------------------------------------------------------------------------------
Cash is defined as cash and short-term investments
</TABLE>
(See accompanying Notes to Consolidated Financial Statements)
<PAGE>
COREL CORPORATION
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada. These principles are also
generally accepted in the United States in all material respects except as
disclosed in Note 12.
(a) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Corel Corporation Limited, Corel
Computer Corp., Corel International Corporation, Corel Inc. and Corel
Corporation (U.S.A.). All material intercompany transactions and balances
have been eliminated.
(b) ESTIMATES AND ASSUMPTIONS
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenue and expenses, 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. Licence revenue is recognized when the
licence is shipped to the customer. Associated maintenance revenue is
deferred and recognized over the term of the related agreement.
(d) RESEARCH AND DEVELOPMENT COSTS
Research costs are expensed as incurred. Development costs 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) 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.
(f) CAPITAL ASSETS
Capital assets are recorded at cost. Amortization of licences commences
with the market release of each new software product and version.
Depreciation and amortization are calculated using the following rates and
bases:
<TABLE>
<CAPTION>
<S> <C>
Furniture and equipment 20 - 33.3% declining balance
Computer equipment and software 50% straight line
Research and development equipment 20 - 50% declining balance
Licences and purchased software, deferred royalties, 20 - 33.3% straight line or the life of the
clipart libraries and Photo CD libraries licence
Leasehold improvements Straight line over the term of the lease
</TABLE>
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.
(g) SHORT-TERM INVESTMENTS
Short-term investments are stated at the lower of cost and market value.
<PAGE>
(h) INCOME TAXES
The Company follows the tax allocation basis using the deferral method in
accounting for income taxes. Deferred income taxes are recorded for timing
differences in reporting income and expenses for financial statement and
tax purposes.
(i) FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities denominated in foreign currencies are
translated at the closing year-end rates of exchange. Non-monetary items
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 resulting gains or losses
resulting from the translation of these amounts have been reflected in
earnings.
(j) 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. INVENTORY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
As at November 30
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
Product components $12,799 $ 7,974
Finished goods 4,299 3,438
- --------------------------------------------------------------------------------
$17,098 $11,412
- --------------------------------------------------------------------------------
</TABLE>
2. CAPITAL ASSETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
November 30
As at November 30, 1998 1997
---------------------------------------------------------------------------
Accumulated
Depreciation
and
Cost Amortization Net Net
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Furniture and equipment $ 13,898 $ 8,221 $ 5,677 $ 8,307
Computer equipment and software 64,154 60,656 3,498 9,423
Research and development equipment 12,611 6,681 5,930 7,398
Leasehold improvements 3,304 2,299 1,005 1,674
Licenses and purchased software,
deferred royalties, clipart libraries and
Photo CD libraries 99,191 70,525 28,666 36,695
- ---------------------------------------------------------------------------------------------------------------------------
$193,158 $148,382 $44,776 $63,497
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
At November 30, 1997 the cost amounted to $186,521,000 and accumulated
depreciation and amortization amounted to $123,024,000. The carrying amount
of licences not being amortized at November 30, 1998 and 1997 amounted to
$201,000 and $2,425,000 respectively.
<PAGE>
3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
As at November 30
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Trade accounts payable $23,845 $28,297
Accrued payroll 4,793 5,190
Accrued liabilities 29,571 14,576
- --------------------------------------------------------------------------------
$58,209 $48,063
- --------------------------------------------------------------------------------
</TABLE>
4. 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.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
As at November 30
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Royalty obligation $15,563 $19,182
Product return obligation 12,322 18,362
- --------------------------------------------------------------------------------
27,885 37,544
Less: current portion of Novell obligations 11,800 13,500
- --------------------------------------------------------------------------------
Novell obligations $16,085 $24,044
- --------------------------------------------------------------------------------
</TABLE>
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):
<TABLE>
<S> <C>
1999 $ 4,800
2000 4,800
2001 4,800
2002 1,163
--------------------------------------------
$15,563
--------------------------------------------
</TABLE>
<PAGE>
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. The payments required under this
obligation in the next two years are as follows (in thousands):
1999 $ 7,000
2000 5,322
------------------------------------
$ 12,322
------------------------------------
Interest paid on this obligation was $1,230,000, $1,781,000 and $595,000 in
1998, 1997 and 1996, respectively.
5. SHARE CAPITAL
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
As at November 30
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(a) AUTHORIZED AND ISSUED SHARE CAPITAL
Authorized
Unlimited preferred shares, issuable in series, no par value
Unlimited common shares, no par value
Issued
Number of common shares (000s) 59,478 59,740 60,041
Stated capital (in thousands) $ 203,088 $ 204,235 $ 202,953
(b) COMMON SHARES ISSUED DURING THE YEAR
Stock option plan
Number of shares (000s) 132 1,149 791
Cash consideration (in thousands) $ 209 $ 6,206 $ 7,252
Technology acquisition
Number of shares (000s) - - 9,950
Consideration (in thousands) $ - $ - $ 89,900
(c) COMMON SHARES PURCHASED AND CANCELLED DURING THE YEAR
Number of shares (000s) 394 1,450 -
Cash outlay (in thousands) $ (987) $ (4,979) $ -
Premium on share repurchase (in thousands) $ - $ 433 $ -
Discount on share repurchase credited to contributed surplus
(in thousands) $ (369) $ (378) $ -
</TABLE>
(Cont'd)
<PAGE>
(d) LOSS PER COMMON SHARE
The calculations of the loss per common share are based on the weighted
daily average number of shares outstanding during the year. The calculation
of fully diluted earnings per common share assumes that all outstanding
options have been exercised at the later of the beginning of the fiscal
period or the option issuance date. As the impact of the exercise of these
options is anti-dilutive, 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 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
Price per share (CDN$)
-------------------------------------------
Number of Shares Range Weighted Average
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at November 30, 1995 7,564,284 $14.67 - $ 25.25 $17.52
Granted 5,957,000 9.50 - 15.00 11.55
Exercised (791,720) 4.67 - 19.67 12.24
Cancelled (371,187) 13.50 - 22.38 17.00
- -----------------------------------------------------------------------------------------------------------
Outstanding at November 30, 1996 12,358,377 4.67 - 25.25 14.99
Granted 5,976,414 4.00 - 8.60 7.67
Exercised (1,149,087) 4.67 - 9.50 7.75
Cancelled (11,028,185) 4.67 - 25.25 15.03
- -----------------------------------------------------------------------------------------------------------
Outstanding at November 30, 1997 6,157,519 4.00 - 22.38 9.17
Granted 3,422,000 2.10 - 4.10 3.03
Exercised (131,600) 3.00 - 3.00 3.00
Cancelled (1,167,460) 7.70 - 19.67 11.87
- -----------------------------------------------------------------------------------------------------------
Outstanding at November 30, 1998 8,280,459 $ 2.10 - $ 22.38 $ 8.65
===========================================================================================================
</TABLE>
For various price ranges (in CDN$), weighted average characteristics of
outstanding stock options at November 30, 1998 were as follows:
<TABLE>
<CAPTION>
Outstanding options
------------------------------------------------
Range of exercise price Shares Remaining life (years) Weighted Average
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 2.10 - $ 4.00 3,315,400 3.6 $ 3.04
4.01 - 7.50 1,222,302 1.9 5.95
7.51 - 13.00 3,207,407 1.4 7.94
13.01 - 18.00 229,950 1.3 13.50
18.01 - 22.38 305,400 0.7 20.93
</TABLE>
The outstanding options expire between April 11, 1999 and September 24,
2002.
(CONT'D)
<PAGE>
(f) STOCK OPTION REPRICING
On April 18, 1997, the shareholders adopted a resolution by the Board of
Directors to reprice outstanding options at prices greater than $7.70, to
$7.70. The resolution permitted option holders who qualified for grants
under the plan to exchange existing options for options with a current
market exercise price. The basis of the exchange was to reduce the number
of existing options received in proportion to the change in exercise price.
6. COST OF SALES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year ended November 30
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cost of goods sold $27,119 $44,906 $ 42,852
License amortization 13,321 26,007 37,472
Royalties 11,121 13,223 20,770
- --------------------------------------------------------------------------------
$51,561 $84,136 $101,094
================================================================================
</TABLE>
7. RESTRUCTURING CHARGE
The Company proceeded with the implementation of a consolidation plan in
the third fiscal quarter. 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 will
remain with the Company until February 1, 1999 and will assist with the
transfer of the source code and technical services to the Ottawa facility.
As at November 30, 1998, the restructuring accrual included in accounts
payable and accrued liabilities is comprised of the following amounts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Asset write- Severance Facilities
downs costs closure costs Total
- --------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Restructuring charge $ 3,086 $10,104 $ 2,690 $15,880
Payments - (6,395) (1,344) (7,739)
Reallocation - (1,842) 1,842 -
Non-cash asset write-downs (3,086) - - (3,086)
- --------------------------------------------------------------------------------------------
Restructuring accrual $ - $ 1,867 $ 3,188 $ 5,055
============================================================================================
</TABLE>
<PAGE>
8. 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:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Year ended November 30
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Basic rate applied to income before income taxes $(11,825) $(99,414) $(1,606)
Increase (decrease) in taxes resulting from:
Provincial research and development deduction (831) (677) (823)
Amortization of software licenses not tax deductible 107 507 540
Amortization of share issue costs - - (197)
Losses recognized for accounting purposes but not for income tax purposes 8,853 23,152 -
Write-down of items not deductible for income tax purposes - 1,086 -
Foreign tax and exchange rate differences 7,513 84,222 400
Other items 129 2 836
- -----------------------------------------------------------------------------------------------------------------------------
$3,946 $ 8,878 $ (850)
=============================================================================================================================
</TABLE>
The accumulated accounting losses include loss carryforwards for income tax
purposes of $117,100,000 which begin to expire after the 2003 fiscal year.
Of these loss carryforwards for income tax purposes, $105,800,000 originate
from the operations in Ireland and have a statutory rate of 10%. The
remaining losses of $11,300,000 are attributed to the operations in
Canada and have a statutory rate of 44.62%. The tax benefit related to
these losses has not been recorded in the Consolidated Financial
Statements.
<PAGE>
COREL CORPORATION
- --------------------------------------------------------------------------------
9. SEGMENTED INFORMATION
In the opinion of management, the Company operates in the software
industry. The Company sells its products worldwide from three geographic
regions.
<TABLE>
<CAPTION>
As at and for the year ended November 30
- -----------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Sales
U.S.A. $ 103,253 $ 182,523 $ 235,818
Canada 31,274 40,105 57,334
Ireland 184,112 242,334 309,456
Segment transfers
Canada (10,960) (17,706) (23,134)
Ireland (60,852) (186,675) (245,229)
- -----------------------------------------------------------------------------------
Net sales $ 246,827 $ 260,581 $ 334,245
- -----------------------------------------------------------------------------------
Net income (loss)
U.S.A. $ 2,063 $ 3,073 $ 1,853
Canada (20,348) (37,273) (4,869)
Ireland (12,163) (197,478) 266
- -----------------------------------------------------------------------------------
Net loss $ (30,448) $ (231,678) $ (2,750)
- -----------------------------------------------------------------------------------
Identifiable assets
U.S.A. $ 30,501 $ 40,278 $ 110,397
Canada 43,863 55,456 75,622
Ireland 65,795 68,009 212,459
- -----------------------------------------------------------------------------------
Identifiable assets $ 140,159 $ 163,743 $ 398,478
- -----------------------------------------------------------------------------------
</TABLE>
A summary of sales by region and by major customer from consolidated
operations is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Year ended November 30
- -----------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
By region
U.S.A. $ 137,938 $ 129,110 $ 214,481
Europe 73,089 84,732 75,513
Canada 14,942 18,340 19,516
Other 20,858 28,399 24,735
- -----------------------------------------------------------------------------------
$ 246,827 $ 260,581 $ 334,245
- -----------------------------------------------------------------------------------
By major customer
Ingram Micro Inc. $ 57,994 $ 63,119 $ 109,562
</TABLE>
<PAGE>
10. 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) pursuant to lease obligations
aggregated $7,155, $7,006 and $6,746 during the years ended November 30,
1998, 1997 and 1996, respectively. At November 30, 1998, the minimum
commitments under long-term agreements (in thousands), are as follows:
1999 $ 7,312
2000 5,337
2001 5,323
2002 4,462
2003 928
2004 and thereafter 50,201
---------
$ 73,563
---------
11. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The carrying values of financial assets and liabilities approximate their
fair value unless otherwise noted.
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.
12. 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) REVENUE RECOGNITION
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. SOP 97-2 conforms with
Canadian generally accepted accounting principles and the adoption of it
did not have a material impact on the Company's results for the year ended
November 30, 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 its fiscal year ending
November 30, 1999, and does not expect any material impact on its revenue
recognition policies.
(b) 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. Basic and diluted earnings per share (US GAAP) are the same
as basic and fully diluted earnings per share (Canadian GAAP) for all
periods presented.
<PAGE>
(c) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting
for its employee stock option plan. Accordingly, no compensation expense
has been recognized for its stock-based compensation plan. Had compensation
cost for the Company's employee stock option plan been determined based on
the fair value at the grant date for awards under the plan, consistent with
the methodology prescribed under the Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, the Company's
net loss would have changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Year ended November 30
--------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------
(in thousands except per share data)
<S> <C> <C> <C>
Net loss as reported $ 30,448 $ 231,678 $ 2,750
Estimated stock-based compensation costs 1,849 4,538 14,290
--------------------------------------------------------------------------------
Pro forma net loss $ 32,297 $ 236,216 $ 17,040
--------------------------------------------------------------------------------
Pro forma loss per share $ 0.54 $ 3.92 $ 0.30
--------------------------------------------------------------------------------
</TABLE>
The fair values of all options granted during 1998, 1997 and 1996 were
estimated as of the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected option life (years) 2.0 1.25 2.0
Volatility 45 45 45
Risk free interest rate 4.33% 4.97% 5.47%
Dividend yield nil nil nil
--------------------------------------------------------------------------------
</TABLE>
The fair values, at the date of grant, for stock options granted during
1998, 1997 and 1996 were $0.54, $0.76 and $2.51 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.
(Cont'd)
<PAGE>
(d) 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 .
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Operating loss carryforwards $ 15,437 $ 4,855
Depreciation 10,246 14,750
Reserves 5,473 3,292
Royalties not yet deducted for tax purposes 1,556 -
- -------------------------------------------------------------------------------
32,712 22,897
Valuation allowance (30,217) (20,544)
- -------------------------------------------------------------------------------
Net current deferred tax assets $ 2,495 $ 2,353
===============================================================================
</TABLE>
The net current deferred tax assets relate to the operations in the United
States. These assets relate to temporary differences which the Company
believes will reverse in the near future.
(e) CONSOLIDATED STATEMENTS OF CASH FLOWS
The Company defines cash for purposes of the consolidated statements of
changes in financial position as cash and short-term investments. As at
November 30, 1998, cash included short-term investments of $2,100,000
(1997 -$5,600,000) which, under US GAAP, would not qualify as cash
equivalents. As a result, cash from operating activities under US GAAP
would increase by $1,900,000 and cash from investing activities under US
GAAP would increase by $1,600,000 in 1998. In addition, cash at the end of
1997 and cash provided by operations during 1997 would have been reduced by
$5,600,000.
(f) NEW PRONOUNCEMENTS
In 1997, SFAS 130, "Reporting Comprehensive Income" and SFAS 131,
"Disclosures About Segments of an Enterprise and Related Information" were
issued and are effective for fiscal years commencing after December 15,
1997. The Company is required to adopt the provisions of SFAS 130 and 131
in fiscal 1999 and expects the adoption will not impact results of
operations or financial position, but may require additional disclosures.
<PAGE>
13. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
Included in trade accounts receivable are the following reserves and
related activity:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Opening Ending
Period Ended Description Balance Additions Deductions Balance
- -------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
November 30, 1998 Promotional rebates $11,396 $25,959 $31,158 $ 6,197
Sales reserve 54,413 58,367 90,898 21,882
Allowance for doubtful accounts 5,466 1,704 366 6,804
November 30, 1997 Promotional rebates 14,750 42,775 46,129 11,396
Sales reserve 30,000 85,829 61,416 54,413
Allowance for doubtful accounts 3,831 1,743 108 5,466
November 30, 1996 Promotional rebates 2,970 39,148 27,368 14,750
Sales reserve 9,871 28,392 8,263 30,000
Allowance for doubtful accounts 6,136 2,283 4,588 3,831
=============================================================================================================
</TABLE>
14. CONTINGENCIES
Revenue Canada has identified and advised the Company of proposed income
tax adjustments for fiscal years ended November 30, 1992 to 1995. In the
opinion of management, the proposed adjustments are substantially in excess
of amounts which may become payable on assessment. The Company has recorded
a provision of $2,468,000, inclusive of interest and penalties, for certain
adjustments. It is not possible to accurately estimate the amount, if any,
of additional income taxes that may result from the remaining adjustments
identified and accordingly, no provision has been made at this time.
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 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 will be fully briefed by
February 12, 1999. The Plaintiffs have not yet brought their Motion to
certify the class and the filing.
On or about October 2, 1998, the Company became aware that a class action
lawsuit had been filed against it by plaintiff Karla A. Lyon in the
Superior Court of California, County of San Diego. The complaint also names
as co-defendants Corel Corporation (USA), Corel, Inc., Fry's Electronics,
and David Bicknell, a manager of one of Fry's Electronics' stores. The
complaint was filed on behalf of all persons whose photograph or likeness
was, without that person's consent, knowingly used by any of the defendants
within the State of California.
The Company intends to aggressively defend these two aforementioned class
action litigations. However, due to the inherent uncertainties of
litigation, the Company cannot accurately predict the ultimate outcome of
these litigations. Investigating and defending the class actions may
require expenditure of material amounts of funds and may require a
significant amount of management's time and resources. An unfavorable
outcome in either litigation could have a material adverse effect on the
Company's business, financial condition and results of operations.
Announcement of material developments in these litigations prior to their
resolution could adversely affect the market price of Corel's common
shares.
<PAGE>
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.
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. ACQUISITION OF ASSETS
On March 1, 1996, the Company acquired the WordPerfect family of software
programs and related technologies from Novell, Inc. The consolidated
statements of operations and retained earnings (deficit) includes results
of operations associated with the WordPerfect family of products from the
date of acquisition.
The purchase price was allocated amongst the following assets:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Amount
- --------------------------------------------------------------------------------
(in thousands)
<S> <C>
Furniture and equipment $ 2,703
Computer equipment 1,538
Software licences and purchased software 153,409
- --------------------------------------------------------------------------------
$157,650
================================================================================
</TABLE>
Consideration given, at fair market value, follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Amount
- --------------------------------------------------------------------------------
(in thousands)
<S> <C>
Cash $ 12,750
9,500,000 shares of common stock 89,900
Novell obligations 55,000
- --------------------------------------------------------------------------------
$157,650
================================================================================
</TABLE>
17. COMPARATIVE FIGURES
The comparative balance sheet as at November 30, 1997 and the consolidated
statements of operations and retained earnings (deficit) and statements of
changes in financial position for the years ended November 30, 1997 and
1996 were audited by another auditing firm.
<PAGE>
EXHIBIT 21.1
<PAGE>
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 Corporation
Peat Marwick Associates Limited
Hastings, Christ Church
Barbados
<PAGE>
Exhibit 23.1
Auditors' Report
We have audited the consolidated balance sheet of Corel Corporation as at
November 30, 1997 and the consolidated statements of operations and retained
earnings (deficit) and changes in financial position for the years ended
November 30, 1997 and 1996. 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 financial position of the Company as at November 30,
1997, the results of operations and the changes in its financial position for
the years ended November 30, 1997 and 1996 in accordance with generally accepted
accounting principles.
Generally accepted accounting principles in Canada differ in some respects from
those applicable in the United States. (note 10).
/s/ KPMG LLP
Chartered Accountants
Ottawa, Canada
January 16, 1998
(except as to Note 12 which
is at February 23, 1998)
