UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED NOVEMBER 30,
2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
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Commission File Number: 000-20562
COREL CORPORATION
(Exact name of registrant as
specified in its charter)
Canada
(State or other jurisdiction of
incorporation and organization)
98-0407194
(I.R.S. Employer Identification No.)
1600 Carling Avenue
Ottawa, Ontario
Canada K1Z 8R7
(Address of principal executive
offices, including zip code)
(613) 728-0826
(Registrants telephone
number, including area code)
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Securities registered pursuant to
Section 12(b) of the Act:
Common Shares, no par value
(together with associated rights to
purchase additional Common Shares)
(Title of class)
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Name of exchange on which registered:
The Nasdaq Global Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes
o
No
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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
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this Chapter) is not contained herein,
and will not be contained, to the best of Registrants
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. Yes
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No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act (Check one):
Large accelerated
filer
o
Accelerated
filer
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Non-accelerated
filer
o
Smaller
reporting
company
o
(Do
not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the
Exchange Act). Yes
o
No
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The aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the closing price of
the Registrants common shares on May 31, 2007 of
$13.80, as reported on the Nasdaq Global Market, was
approximately $101.6 million. Common shares held as of
May 31, 2007 by each executive officer and director and by
each person who owns 5% or more of the outstanding common shares
have been excluded from this computation, in that such persons
may be deemed to be affiliates of the Registrant. This
determination of affiliate status is not necessarily a
conclusive determination for any other purpose.
As of January 22, 2008 the Registrant had outstanding
25,459,451 common shares, no par value.
TABLE OF
CONTENT
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Page
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BUSINESS
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1
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RISK FACTORS
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13
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UNRESOLVED STAFF COMMENTS
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25
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PROPERTIES
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LEGAL PROCEEDINGS
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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26
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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27
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SELECTED FINANCIAL DATA
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31
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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35
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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65
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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66
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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107
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CONTROLS AND PROCEDURES
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107
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OTHER INFORMATION
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107
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DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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108
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EXECUTIVE COMPENSATION
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113
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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117
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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123
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PRINCIPAL ACCOUNTANT FEES AND SERVICES
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123
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EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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124
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EX-21.1: SUBSIDIARIES
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EX-23.1: CONSENT OF PRICEWATERHOUSECOOPERS LLP
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EX-31.1: CERTIFICATION
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EX-31.2: CERTIFICATION
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EX-32.1: CERTIFICATION
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EX-32.1: CERTIFICATION
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EX-99.1: SCHEDULE II
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i
INFORMATION
REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on
Form 10-K
which are not historical facts are forward-looking statements
within the meaning of Section 21E of the
U.S. Securities Exchange Act of 1934, as amended. A
forward-looking statement may contain words such as
anticipate that, believes,
continue to, estimates, expects
to, hopes, intends,
plans, to be, will be,
will continue to be, or similar words. These
forward-looking statements include the statements in this Report
regarding: future developments in our markets and the markets in
which we expect to compete; our estimated cost reductions; our
future ability to fund our operations; our development of new
products and relationships; our ability to increase our customer
base; the services that we or our customers will introduce and
the benefits that end users will receive from these services;
the impact of entering new markets; our plans to use or not to
use certain types of technologies in the future; our future cost
of revenue, gross margins and net losses; our future
restructuring, research and development, sales and marketing,
general and administrative, stock-based compensation and
depreciation and amortization expenses; our future interest
expenses; the value of our goodwill and other intangible assets;
our future capital expenditures and capital requirements; and
the anticipated impact of changes in applicable accounting rules.
The accuracy of these forward-looking statements may be impacted
by a number of business risks and uncertainties that could cause
actual results to differ materially from those projected or
anticipated. These risks include the risks described in
Item 1A Risk Factors below. We do
not undertake any obligation to update this forward-looking
information, except as required under applicable law.
PART I
We are a leading global packaged software company with an
estimated installed base of over 100 million current users
in over 75 countries. We provide high quality, affordable and
easy-to-use Graphics and Productivity and Digital Media
software. Our products enjoy a favorable market position among
value-conscious consumers and small businesses benefiting from
the widespread, global adoption of personal computers, or PCs,
and digital capture devices. The functional departments within
large companies and governmental organizations are also
attracted to the industry-specific features and technical
capabilities of our software. Our products are sold through a
scalable distribution platform comprised of OEMs, our global
e-Stores,
and our international network of resellers and retail vendors.
We have broad geographic representation with dedicated sales and
marketing teams based in the Americas, EMEA/ANSEAK and Japan.
Our product portfolio includes well-established, globally
recognized brands.
An important element of our business strategy is to grow
revenues through acquisitions of companies or product lines. We
intend to focus our acquisition activities on companies or
product lines with proven and complementary products and
established user bases that we believe can be accretive to our
earnings shortly after completion of the acquisition. While we
review acquisition opportunities on an ongoing basis, we
currently have no binding obligations with respect to any
particular acquisition.
Graphics
and Productivity
Our primary Graphics and Productivity products are
CorelDRAW
Graphics Suite, Corel Painter, Corel DESIGNER, WinZip
,
iGrafx
and
WordPerfect Office Suite. CorelDRAW
Graphics Suite
is a leading vector illustration, page
layout, digital image editing and bitmap conversion software
suite used by design professionals and small businesses.
Corel Painter
is a
Natural-Media
®
painting and illustration software featuring digital brushes,
art materials and textures that mirror the look and feel of
their traditional counter parts.
Corel DESIGNER Technical
Suite
offers users a graphics application for creating or
updating complex technical illustrations.
WinZip
is a
compression utility developed in 1991, and purchased by us in
May 2006 is the most widely used aftermarket compression
utility, with more than 40 million licenses sold to date.
Our
iGrafx
products allow enterprises to analyze,
streamline and optimize their business processes.
WordPerfect
Office Suite
was first developed in 1982 and marketed by
Corel since 1996, is the leading Microsoft-alternative
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productivity software and includes Microsoft-compatible word
processing, spreadsheet and presentation functionality
Digital
Media
Our primary Digital Media products are
Corel Paint Shop
Pro
,
Corel Media One
and various products acquired in
December 2006 as part of the purchase of InterVideo. These
products include
WinDVD, VideoStudio, DVD Movie Factory, DVD
Copy
and
PhotoImpact. Corel Paint Shop Pro
digital
image editing and management applications are used by novice and
professional photographers and photo editors.
Corel Media One
is a multimedia software program for organizing and
enhancing photos and video clips.
WinDVD
is the
worlds leading DVD player software for use on PCs.
VideoStudio
is our video editing and DVD authoring
software for users who want to produce professional-looking
videos, slideshows and DVDs.
DVD Movie Factory
is a
consumer DVD authoring software.
DVD Copy
is an
application that copies and backs up DVDs and CDs in multiple
device formats.
Photo Impact
is an image editing software.
Corporate
History
We were incorporated in Canada under the
Canada Business
Corporations Act
in May 1985. In January 1989, we released
CorelDRAW
, a market-leading full-featured graphics
software product. In November 1989, we completed an initial
public offering of our common shares. In January 1996, we
acquired the
WordPerfect
family of software products. In
August 2003, we were acquired by Vector Capital and were
continued as a private corporation organized under the
Business Corporations Act (Ontario).
Following our
acquisition by Vector Capital, we undertook a significant
restructuring of our business. As part of this restructuring, we
divested our underperforming product lines, discontinued
speculative research and development activity, refocused on our
core product offerings and implemented company-wide expense
reduction measures.
In October 2004, we acquired Jasc, a leading Digital Media
packaged software company, for total consideration of
$36.7 million, consisting of $34.3 million in cash and
379,677 of our common shares. Through the Jasc acquisition, we
added
Corel Paint Shop Pro
and
Corel Photo Album
to our Digital Media offerings.
In December 2005 we were continued as a corporation organized
under the
Canada Business Corporations Act.
In May 2006,
we acquired WinZip and completed an initial public offering of
our common shares on the TSX and the NASDAQ Global Market. As
consideration for the acquisition, we issued to Vector Capital
4,322,587 of our common shares and repaid all of WinZips
outstanding indebtedness. Vector Capital acquired WinZip in
January 2005. Through this acquisition, we added the
WinZip
file compression utility to our Graphics and Productivity
software offerings.
Fiscal
2007 Activity
Acquisition
of InterVideo
On December 12, 2006, we completed the acquisition of
InterVideo, a provider of Digital Media authoring and video
playback software with a focus on high-definition and DVD
technologies. In 2005, InterVideo acquired a majority interest
in Ulead, a leading developer of video imaging and DVD authoring
software for desktop, server, mobile and Internet platforms. On
December 28, 2006 we completed the acquisition of the
remaining interest in Ulead. The acquisitions of InterVideo and
Ulead (InterVideo) were completed in a cash
transactions totaling approximately $220.4 million. We
purchased InterVideo for $13.00 per share of InterVideo common
stock. We financed the acquisitions through a combination of our
cash reserves, InterVideos cash reserves and debt
financing which included an amendment to our existing credit
agreement to increase available term borrowings by
$70.0 million. In addition, outstanding stock options held
by InterVideo employees were converted into options to purchase
our common shares and we assumed pension obligations under
benefit plans for various InterVideo employees.
This acquisition substantially expanded our presence in the
Digital Media software market by creating a broad portfolio of
Digital Media and DVD video products. The main products acquired
from InterVideo
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include:
WinDVD, VideoStudio, DVD Movie Factory, DVD Copy
and
PhotoImpact.
These products contributed
$73.0 million of revenue in fiscal 2007. With the
combination of our Digital Imaging software and
InterVideos Digital Media products, we now deliver an
expanded portfolio of easy-to-use, multi-purpose high-definition
video, imaging, and DVD creation products to consumers and
enterprises worldwide. In addition the acquisition has enabled
us to further extend our presence in emerging markets.
The acquisition combined our key
strengths business model innovation,
understanding of end user requirements and established
distribution in the Americas and Europe with
InterVideos core assets, which include video technology
innovation, established partnerships with the worlds
leading PC OEM partners, such as Hewlett Packard, Toshiba and
Lenovo and strong market presence in the Asia Pacific region. We
now have significant development offices in Fremont, California,
Taipei and Shanghai and a sales and marketing office in
Yokohama, Japan.
Cost synergies arose from this acquisition, which have resulted
in a reduction of our combined sales and marketing, research and
development and general and administrative expenses as compared
to what those expenses would have been if the companies had
continued to operate as stand-alone entities. We have completed
the process of executing our integration and restructuring
actions to achieve these cost reductions in the current and
future fiscal years. This included the integration of financial
systems, information technology and human resource processes.
As a result of the acquisition, for this period and future
periods, we will report on our two product categories:
1) Graphics and Productivity and 2) Digital Media. Our
primary Graphics and Productivity products include:
CorelDRAW
Graphics Suite, Corel Painter, Corel DESIGNER, WinZip
,
iGrafx
and
WordPerfect Office Suite.
Our primary
Digital Media products include the InterVideo products listed
above and also our
Paint Shop Pro,
and
MediaOne
products.
November
2007 Restructuring
In November 2007, we initiated a restructuring plan to
centralize much of our Digital Media operations in Greater China
and Fremont, California. Additionally, further changes have been
made to our staff to align and balance our global teams. This
has resulted in the planned closure of our Minneapolis location
in fiscal 2008 as well as the termination of certain employees.
We incurred restructuring charges of $1.4 million in the
current period as a result of this plan. A further $763,000 of
restructuring charges will be recorded in fiscal 2008 as a
result of this plan.
Our
Industry
Prior to the mid-1990s, the packaged software industry was
characterized by high annual growth rates, rapid technological
innovation and a relatively large number of viable software
providers within each product category. Over the past decade the
industry has matured, growth rates have become more stable and
market share within each major product category has become
highly concentrated, with one or two companies having a dominant
market position. Our largest competitors, Microsoft Corporation
and Adobe Systems Incorporated, currently hold the majority of
the market share in our target markets. Growth rates of packaged
software sales in emerging economies are expected to be higher
than for the global packaged software market as a whole
resulting from more rapidly increasing PC adoption rates in
these markets. Additionally, higher growth rates are expected
within the Digital Media software market thanks to the
proliferation of digital capture devices, the introduction of
high definition formats, and finally the explosion of Digital
Media content creation and sharing through social networking
websites and email.
Our
Strategy
Our objective is to profitably grow our installed base of
customers and increase sales to our existing users. We plan to
achieve this objective through the following strategies:
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Leverage existing platform and brands to maximize value from
acquisitions.
We are actively seeking to acquire
complementary businesses to ours. Our acquisition and
integration strategy is focused on
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acquisitions of companies with proven and complementary products
and established user bases that we believe will be accretive to
earnings shortly after the completion of the acquisition. As
part of this strategy, in October 2004, we acquired Jasc to
extend our reach in graphics and digital imaging software, in
May 2006 we acquired WinZip to enhance our productivity software
offerings, and in December 2006 we acquired InterVideo and
completed the acquisition of Ulead to expand our presence in the
Digital Media software market by creating a broad portfolio of
digital imaging and DVD video products. We analyze acquisition
candidates and effect acquisition transactions to ensure they
meet our strategic and operational objectives. We seek
acquisition candidates that we believe can benefit from our
existing global marketing, sales, distribution and general and
administrative infrastructure.
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Broaden our distribution network to capitalize on the rapid
adoption of low cost technologies.
We view our relationships
with OEMs, other distributors and online services companies as
key growth drivers, and we are focused on forging new
distribution relationships and broadening our existing
relationships. To accomplish this goal, we have implemented a
flexible channel friendly strategy of providing
customized solutions tailored to the specific business needs of
OEMs, other distributors and online services companies. We offer
these parties:
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attractive pricing;
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marketing and sales support and incentives;
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customized versions of our software; and
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private label packaging and customized promotional materials.
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Increase upgrade conversion rates.
Increasing
upgrade conversion rates represents a significant incremental
revenue opportunity for us. We intend to increase upgrade
conversion rates through a number of strategic initiatives,
including:
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increasing our database of registered users through on-line
registration for new products; this allows us to market product
upgrades to these users more effectively;
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embedding upgrade information directly in our software and
employing other types of proactive marketing within our
products, including access to Tips and Tricks, product
tutorials, online communities and special offers from us and our
partners; and
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offering products in tiers of functionality, such as
entry-level, advanced and expert versions, enabling users at
varying levels of product knowledge and sophistication to
purchase the applications they need and then migrate to the more
advanced versions over time.
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Expand presence in emerging markets.
We are
expanding our presence in emerging markets, such as China,
India, Eastern Europe and Latin America, by continuing to
localize our products in additional languages, expanding our
reseller network and direct sales force and developing
additional regionally-focused versions of our
e-Store.
We
believe these markets represent attractive growth opportunities
for us because they are characterized by first time users of low
cost PCs and digital cameras who have not yet developed loyalty
to a particular brand of software. However, expansion of our
operations in these emerging markets will involve a number of
risks, challenges and uncertainties. See
Item 1A Risk Factors
We
are subject to risks associated with international operations
that may harm our business
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Continue to respond to user needs to better serve specific
market sectors and increase loyalty.
We will
continue to work with our current customer base to help us
develop additional product innovations. A particular focus on
improving user-experience will strengthen user loyalty while
allowing our products to better serve the needs of specific
market segments. We have had significant success through our
offering of high quality products for specific markets such as
the legal and education sectors, and, as we continue to expand,
we plan to target additional markets.
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Continue to deliver high operating margins and positive cash
flow.
We are committed to maximizing our operating margins
and positive cash flow by keeping research and development
activities focused
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on market driven, add-on functionality, utility and geographic
reach of our existing product lines rather than pursuing
speculative projects. We employ disciplined cost management
policies and maintain stringent minimum
return-on-investment
criteria for our acquisition strategies. Our existing
administrative, marketing and distribution infrastructure is
highly scalable. We believe it will enable us to grow our
revenues without experiencing a proportionate increase in fixed
costs, and enabling us to continue to deliver high operating
margins.
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Our
Products
We provide high quality, affordable, and easy-to-use Graphics
and Productivity and Digital Media software. The following table
identifies our major software products within our two principal
product categories:
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Year of
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Fiscal
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Initial
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Quarter of
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Current
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Release
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Latest Release
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Version
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Graphics and Productivity:
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CorelDRAW Graphics Suite
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1989
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Q1 2008
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14
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Corel Designer Technical Suite
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1995
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Q2 2005
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12
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Corel Painter
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1991
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Q1 2007
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10
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WinZip
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1991
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Q4 2006
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11
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iGrafx FlowCharter
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1991
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Q2 2007
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12
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WordPerfect Office Suite
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1982
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Q1 2006
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13
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Digital Media
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Paint Shop Pro
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1991
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Q4 2007
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12
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MediaOne
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2007
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Q4 2007
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2
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WinDVD
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1999
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Q4 2006
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8
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VideoStudio
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1999
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Q2 2007
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11
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DVD Movie Factory
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2001
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Q1 2007
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6
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DVD Copy
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2003
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Q3 2006
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5
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PhotoImpact
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1996
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Q3 2006
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12
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Graphics
and Productivity
Our Graphics and Productivity products include
CorelDRAW,
Corel Painter, Corel Designer Technical Suite, WinZip, iGrafx
FlowCharter,
and
WordPerfect Office Suite
.
CorelDRAW Graphics Suite. CorelDRAW Graphics Suite
is an industry-leading vector illustration software
application and has received over 300 industry awards throughout
the 18 years it has been on the market. The software allows
users to create, manipulate and publish drawings and images in a
variety of media including in print and on the web. Examples of
its uses include creating logos, brochures, newsletters,
reports, advertisements, signs, embroidery designs and technical
illustrations.
CorelDraw Graphics Suite
consists of
applications for illustration and page layout.
CorelDRAW Graphics Suite
is easy-to-use and is compatible
with most industry standard file formats, allowing the import
and export of files in the common formats used by our
competitors, including Adobe and its offerings, Adobe Creative
Suite and Adobe Illustrator, and Microsoft.
CorelDRAW
Graphics Suite
is used principally by graphic designers and
sales and marketing personnel and is currently available in
seventeen languages.
Corel Painter. Corel Painter
is a digital
painting application that, when used with a pen tablet,
simulates natural media, such as watercolors, inks, oil paints,
chalks and pastels. Users include commercial artists,
professional photographers, fine artists and professional
digital artists who wish to create new works of art or enhance
existing images. Because it is compatible with Adobe Photoshop,
Corel Painter
provides additional
5
natural media functionality not otherwise available with
Photoshop.
Corel Painter
s main competitor is Alias
Sketchbook.
Corel Painter
is currently available in six
languages.
Corel Painter Essentials
is a simple to use drawing and
painting application that also provides an automated method of
turning digital photographs into paintings. Users are primarily
consumers, hobbyists and school teachers.
Corel DESIGNER Technical Suite. Corel DESIGNER
Technical Suite
offers users a graphics application for
creating or updating complex technical illustrations. The suite
consists of
Corel DESIGNER
for design, illustration and
page layout,
Corel PHOTO-PAINT
for digital image editing
and
Corel TRACE
for the conversion of bitmaps to vector
images. We also offer
Corel DESIGNER Professional
which
includes a filter for importing 3D computer-aided design
diagrams.
Corel DESIGNER Technical Suite
is currently
available in three languages and is primarily used by
engineering departments and technical publishers, who use the
software to create professional-quality graphics that can be
easily used in business documents, presentations and web and
intranet pages. Examples of its uses include creating product
manuals, assembly instructions and product specification
diagrams.
Corel DESIGNER Technical Suite
is also used in
the manufacturing, automotive and aerospace industries from the
conceptualization stage, through the design specification stage,
to the production of technical manuals and marketing material.
Corel DESIGNER Technical Suite
provides an easy-to-use
technical illustration application at an affordable price
compared to its main competitors IsoDRAW, Autodesk AutoCAD LT
and Deneba Canvas.
WinZip.
As one of the most frequently
downloaded software products available on the Internet with over
175 million downloads to date, WinZip has developed a
strong and highly recognizable brand. The
WinZip
product
line includes three primary products:
WinZip
,
WinZip
E-mail
Companion
and
WinZip Self Extractor. WinZip
is a
widely used compression utility for the Windows platform,
allowing users to temporarily reduce the size of their computer
files for more effective transmission and storage.
WinZip
also includes encryption functionality to provide additional
security in protecting sensitive information.
WinZip
is
based on the .zip file format, but also supports a number of
alternative compression formats.
WinZip
E-Mail
Companion
extends
WinZip
s functionality to
Microsofts Outlook and Outlook Express email applications,
automating the compression and encryption of email file
attachments.
WinZip Self Extractor
allows users to create
archives that can be decompressed without the need for
WinZip
or other compatible decompression utility.
WinZip
has a broad user base that includes individual
consumers, small-to medium-sized businesses and large
corporations.
WinZip
is used worldwide, and is currently
available in six languages.
WinZip
s main
competitors include commercial software such as PKZip, Stuffit,
and WinRAR, open-source software such as 7-Zip and the basic
compression functionality integrated into the Windows operating
systems.
WinZip
s reliability, ease-of-use,
functionality and loyal user base has allowed it to compete
effectively with these offerings.
iGrafx Flowcharter (iGrafx).
The
iGrafx
suite of products allows enterprises to analyze, streamline
and optimize their business processes while ensuring compliance
with regulatory and service level requirements. Uses of
iGrafx
include visually depicting the elements of a
business process, such as a supply chain solution and
identifying, simulating, and visually presenting how a business
can improve its business processes.
iGrafxs
main
competitors are IDS-Scheer Aris, and Metastorm.
iGrafx
products are currently offered in seven languages.
WordPerfect Office Suite.
The
Standard
Edition
of
WordPerfect Office Suite
includes the
WordPerfect, Quattro Pro
and
Presentations
applications. Depending on the version of the suite,
WordPerfect MAIL
and
Paradox
are also available.
WordPerfect
is an easy-to-use word processing application
that includes the ability to integrate charts, tables, images
and graphics.
Quattro Pro
is a spreadsheet and database
application with 3D chart functionality.
Presentations
is
an application for producing multimedia presentations, overheads
and transparencies.
WordPerfect MAIL
is an
e-mail,
calendaring and contact management application.
Paradox
is a database application.
WordPerfect Office Suite
is an innovative, full-featured
software suite and is the leading alternative to Microsoft
Office. Our
WordPerfect Office Suite
applications are
compatible with Microsoft Offices
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applications, allowing users to create documents from scratch,
open and save documents in multiple versions of the Microsoft
Word, Excel and PowerPoint file formats.
WordPerfect Office
Suite
is currently available in five languages and is used
principally by governments, legal professionals and corporate
legal departments, academic institutions, small-to medium-sized
businesses and individual consumers.
Digital
Media
Our Digital Media products include
Corel Paint Shop Pro
,
Corel Photo Album, MediaOne
and the Digital Media
products acquired from InterVideo, including
WinDVD,
VideoStudio, DVD Movie Factory, DVD Copy
and
PhotoImpact.
Corel Paint Shop Pro. Corel Paint Shop Pro
allows users to create, manipulate and manage digital images
with photo editing, digital art and precision graphic design
tools. Primary examples of its uses include digitally altering
photos by fixing scratches and blemishes, changing colors,
digitally removing people, objects and red-eye from
photos and combining photographs into collages.
Corel Paint
Shop Pro
provides advanced functionality at an affordable
price to users of digital cameras ranging from novices to
professionals, graphics hobbyists and business users. Adobe
Photoshop, a competing product, sells at a higher price and is
directed at professional graphic designers.
Corel Paint Shop
Pro
is currently available in seven languages.
MediaOne Plus.
MediaOne Plus
is an
all-in-one
entry level multimedia application that combines simple digital
image and video editing tools, slide show, online sharing and
scrapbook tools.
MediaOne Plus
is typically used by
family memory keepers to organize and share their
digital media memories with friends and family.
MediaOne Plus
also provides end users with easy online backup tools to
preserve their data easily.
WinDVD. WinDVD
is the market leading
application for DVD, Blu-ray Disc and HD DVD playback on
Windows-based personal computers, with an installed base
exceeding 175 million copies.
WinDVD
is bundled with
PCs by most of the worlds market leading PC OEMs. In
addition to its long established support for standard definition
DVD playback,
WinDVD
now includes support for
high-definition video, including H.264, VC-1, WMV-HD and AVCHD
as well as high-definition lossless audio options such as Dolby
TrueHD.
VideoStudio.
Video Studio
is a full
featured video editing application that also provides an
extensive set of wizards and templates to enable
ease of use for new users. The base software support DVD and
other standard definition formats, while
Video Studio Plus
adds support for the high-definition Blu-Ray, HD DVD and
AVCHD formats.
Video Studio
provides a full set of tools
for the editing and manipulation of video from multiple sources,
including SD and HD camcorders.
Video Studio Plus
also
provides one-button encode and upload to
YouTube
tm
.
DVD MovieFactory.
DVD Movie Factory
is
a powerful consumer authoring and burning application, and
provides users with the ability to author video in multiple
formats, including DVD, Blu-ray, HD DVD and AVCHD.
DVD Movie
Factory
provides end users with a set of tools and templates
for the development of menus and other interactive features for
their chosen output format.
DVD Copy. DVD Copy
is an application that
copies and backs up DVDs and CDs, converts video files from PC
formats to mobile device formats and vice versa, and convert
standard and high-definition camcorder formats such as AVCHD to
PC and mobile device formats.
DVD Copy
provides
easy-to-use tools for users who wish to take their video data
anywhere, including over the internet, on their
iPhone
tm
or other mobile phones as well as many other portable media
devices.
PhotoImpact. PhotoImpact
combines easy-to-use
photo editing, photo projects tools and digital art to make
digital photography and image creativity fast and easy.
PhotoImpact
is designed for the family memory
keeper and the graphic arts hobbyist with its effective
photo enhancement tools and photo projects. Video enthusiasts
can enhance their projects by exporting DVD menus from
PhotoImpact
directly into
DVD MovieFactory
and
VideoStudio
.
Corel Photo Album. Corel Photo Album
allows
users to store, organize, share and manage their digital
photograph collections. Our software organizes photographs on
users computers by date, folder, keyword or other desired
criteria. Users of
Corel Photo Album
can organize and
publish photo albums, create scrap-books,
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print and share photographs, create slide shows and create CD
and DVD
back-ups
of
digital images. In addition, the software provides basic
photograph enhancement capability which seamlessly integrates
with Paint Shop Pro for more advanced image editing.
Corel
Photo Album
s main competitors are Adobe Photoshop
Elements and Microsoft Digital Image Suite.
Corel Photo
Album
is currently available in seven languages.
LinDVD. LinDVD
is the Linux-based version of
our DVD software player designed for Linux-based PCs and CE
devices. LinDVD is made available to PC OEMs and Linux software
distributors for bundling with their system or operating system
products.
Customer
Support
We provide several customer support options to meet the varied
needs of our customers. Support options range from 24 hour
7 day a week free support via the Internet to fee-based
options through maintenance agreements for enterprise customers
or on a per incident basis for individual consumers. Our
customer service representatives provide technical support,
answer questions about product specifications, sell our products
and provide replacement media and documentation. We maintain a
database of technical support articles on our web site that is
updated regularly with useful information and frequently asked
questions and answers regarding our products. We maintain an
Internet news group to provide users with a mechanism to provide
feedback as well as receive technical updates and notes. We also
provide up-to-date information about common issues and useful
tips on our web site. The majority of our in-house customer
support personnel are located in Ottawa, Canada, Maidenhead,
England and Makati City, Philippines.
Distribution,
Sales and Marketing
Distribution
We have a global, multi-channel distribution network, including
OEMs, the Internet, retailers and resellers, in over 75
countries through which we are able to distribute our software.
OEMs.
We distribute our software under license
agreements with OEMs granting them the right to distribute
copies of our software installed on their hardware products.
With the acquisition of InterVideo and its existing
relationships, we have further broadened our network of
OEMs. We have relationships with over 100 OEMs, including
Hewlett Packard, Toshiba, Lenovo, Fujitsu, NEC, Dell and Sony.
Internet Distribution.
Our global
e-Stores
allow consumers to purchase most of our software products
directly from us and is our fastest growing distribution
channel. In fiscal 2007, our worldwide
e-Store
revenue grew by 23% year-over-year; the growth in our
e-Store
revenue relating to products which existed prior to our
acquisition of InterVideo was 8%. Our eStores are the central
hub for all After Point of Sale and OEM sales.
Retail and Reseller.
Our retail and reseller
channel encompasses our relationships with over 25,000
resellers, including the following:
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retailers including Office Depot, Best Buy, CompUSA, Staples,
Office Max, The Source by Circuit City, Future Shop, Amazon,
Dixon System Group and Media Market, who sell our products to
consumers and small businesses;
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software distributors, including Ingram Micro, Tech Data and
Navarre, who sell our products to their retail customer base and
license programs to their reseller partners;
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large account resellers, including CDW, Insight, Software House
International, SoftChoice, ASAP and Softmart USA, who sell our
software directly to large enterprises and government accounts,
working closely with our direct sales force to help fulfill
orders; and
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value-added resellers, including independent software vendors,
consultants, system integrators and custom application
developers, who generally service small to medium-sized
businesses and provide varying degrees of technical support,
implementation services and customization.
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Direct Sales.
Our direct sales force
facilitates sales through other channels and the establishment
of key relationships with OEMs, retail chains and resellers. The
direct sales force also directly targets government and large
enterprise clients.
Sales
and Marketing
Our global sales and marketing organization, which is comprised
of approximately 290 employees located in 23 countries as
of November 30, 2007, is focused on increasing sales by
establishing and maintaining personal contact with our
distributors and customers.
Our sales team is responsible for:
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communicating our value proposition and the benefits of our
products;
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designing and implementing incentive programs for our
distributors to promote our products;
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identifying, establishing and developing relationships with OEMs
and online services companies;
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ensuring that our distributors are prominently positioning our
products and managing inventory levels effectively; and
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recruiting new resellers, retailers and distributors.
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Our marketing team focuses on:
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joint marketing and promotions with online services companies,
OEMs and other distributors;
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selective, highly targeted advertising;
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direct mail; and
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public relations.
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Internal
Systems
We use various standard applications to provide a flexible and
scalable infrastructure to accommodate growth and information
needs. We use in-house development resources to maintain these
systems and provide custom integration of applications to meet
our reporting and business needs. The primary applications we
use include Oracle for financial controls, reporting and human
resources, Cognos for operational reporting, IBM Websphere for
our
e-Store,
Onyx customer relationship management database for customer and
prospective customer information and RightNow Technology
interactive knowledge base for customer and technical support.
We believe these systems are sufficient to accommodate our
anticipated growth.
Outsourced
Manufacturing
ModusLink manufactures the principal materials and components
used in the physically packaged versions of our products,
including diskettes and CD-ROMs, product manuals and packaging,
pursuant to a fixed price agreement. ModusLink prepares items to
our specifications at manufacturing sites in the U.S.,
Netherlands and Taiwan and engages third-party printers for the
printing of the packaging and the manuals to be included with
our packaged software. We provide ModusLink with all packaging
and manual design templates.
Intellectual
Property
Our intellectual property rights are important to our business.
We rely on a combination of trademark, patent, copyright, trade
secret, and other common law in the U.S., Canada and other
jurisdictions, as well as confidentiality procedures and
contractual provisions to protect our proprietary technology,
processes and other intellectual property. We have obtained
registrations for many different trademarks in more than 60
separate countries, have numerous issued patents in the
U.S. and Canada and own many copyright registrations. Our
patents expire on various dates between 2010 and 2021. As part
of our hiring process, we typically require
9
employees to execute written agreements containing
confidentiality undertakings, intellectual property assignments,
non-solicitation obligations, and in some cases, non-competition
obligations in our favor.
In addition to the foregoing, we believe the technological and
creative skill of our personnel, product developments and
frequent product enhancements are essential to establishing and
maintaining a competitive advantage.
Our products contain content and technology that we license from
third parties. We generally enter into written agreements with
independent contractors, consultants, strategic partners and
third party content and technology providers, and through these
written agreements we seek to obtain and control access to, and
distribution of, the intellectual property rights necessary for
the continued marketing of our products.
Despite our efforts to protect our intellectual property, third
parties may use, copy or otherwise obtain and market or
distribute our intellectual property or technology without our
authorization or otherwise develop products with the same
functionality as our products. Policing unauthorized use of our
products and intellectual property is costly and virtually
impossible on a worldwide basis. As a result, there is a risk
that our efforts to protect our intellectual property will not
be adequate to fully prevent the misappropriation of our
intellectual property, particularly in emerging markets. See
Item 1A Risk Factors
Our
success depends heavily on our ability to adequately protect our
intellectual property
.
Competition
We compete with other software vendors for customers at the
retail level and in corporate accounts, and for access to
distribution channels. Our two primary competitors are Microsoft
and Adobe. We believe that Microsoft Office and Adobe Systems
hold most of the global market for Graphics and Productivity
software and for Digital Media software. We are the next largest
provider of packaged Graphics and Productivity and Digital Media
software in our target markets. We also compete with a number of
smaller companies, such as Sonic Solutions, Nero, and Cyberlink,
that target certain sectors of the packaged software market.
Our Graphics and Productivity products provide features and
technical capabilities that are generally comparable to
higher-priced products offered by Microsoft and Adobe. Our
Digital Media products offer leading edge technologies for DVD
playback, authoring and video editing each supporting HD-DVD,
Blu-Ray and AVCHD formats, which addresses the growing needs of
our most advanced customers as well as our OEM partners. We also
compete for strategic relationships with OEMs, online services
companies and other distributors. We believe we can provide
distributors with attractive pricing, channel specific marketing
and sales support, incentives and customized versions of our
products and packaging. We believe tailored responses to
distributors needs distinguishes us from our competition
and will allow us to broaden our distribution network.
Research
and Development
We have a research and development team of approximately 500
software professionals, the majority of whom are located in our
Taiwan office and our corporate headquarters in Ottawa, Canada.
Following the acquisition of InterVideo and Ulead, we now have a
stronger concentration of development expertise focused on
digital media innovations. While research and development
investments in our Graphics and Productivity product lines will
remain focused on extending these core technologies to reach
users in new customer segments, new vertical markets, and new
geographies, our research and development investments in our
Digital Media portfolio will focus on maintaining our
technological leadership with leading-edge innovations that
differentiate our offerings with our end users and OEM partners.
The different levels of research and development investment for
each of our two main product categories is a reflection of the
relative maturity and growth potential of each sector. In all
cases, our research and development focus will be on increasing
the user enjoyment of our products by concentrating on
usability-bringing the most frequently used features to the
surface in order to make them more readily accessible and
intuitive to users of all skill levels.
Our increased focus on usability is reflected in the
enhancements we have made to many of our acquired products. For
example, the no editing feature in
Ulead DVD
Movie Factory 6
allows users to create standard
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or High Definition (HD-DVD or Blu-ray) disks directly from their
camcorder, VCR or TV Tuner.
Ulead Video Studio 11 Plus
features the ability to upload your edited videos directly
to
YouTube
tm
;
author HD DVDs (at full resolution, with motion menus) using
much less expensive Standard Definition DVD disks. Usability
improvements also allow us to put hard-to-find features directly
at the disposal of our users. For example,
DVD Copy 6 Plus
allows content to be shared on the Web, emailed or
transferred to an
iPhone,
iPod
®
,
PSP
®
,
Zune
tm
,
or
Nintendo
DS
tm
as well as on PDAs and mobile phones.
The integrated development teams are already collaborating well
on key projects and sharing best practices. The in-product
marketing capabilities originally created for
Corel MediaOne
are now incorporated into
WinDVD
and
DVD Copy
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. We expect this will enable us to communicate and market
directly to new users and create new revenue opportunities.
Work on other products has continued well, with no disruption to
product roadmaps as a result of the InterVideo integration
activities. New versions of
CorelDRAW
and
WordPerfect
are both on schedule for release in the first half of fiscal
2008.
Localization and geographic expansion remain core to our product
strategy, providing users in emerging markets with software in
their native language. In fiscal 2007,
Corel MediaOne
shipped in 3 new languages,
WordPerfect
was
introduced in Russian, and
WinZip
launched a Chinese
version.
Paint Shop Pro Photo X2
also shipped with new
language-switching functionality, enabling users in
multinational enterprises to work in the language of their choice
Finally, while our business is largely focused on desktop
applications, we are well aware of the growing importance of the
web to our users. Many of our products leverage a hybrid model,
maximizing the value of both the desktop and on line
environments. By providing users with a bridge between the two,
we believe we can offer them an even better user experience. In
fiscal 2007, we released version 1.0 of
WordPerfect
Lightning
, a new product for quickly viewing, creating or
capturing content, with online backup of the content provided
through a partnership with Joyent.
CorelDRAW Graphics Suite
users can collaborate and share design ideas online through
our partnership with Conceptshare.com. Our partnership with
Smilebox, enables
Corel Media One Plus
users to create
personalized photo and video projects and share them on their
favorite blog, social network or via email. Zazzle enables our
users to take artwork created in
Painter Essentials
and
send it to an online printing service where they can create
canvases, mugs, t-shirts and other keepsakes- all from within
our application. These partnerships along with others such as
KDDI and NetBlender ensure that we provide our users with the
benefits of both the desktop and Web based environments,
providing them with a more rewarding user experience
We plan to expand our product offerings through the acquisition
of proven products and technology and to employ our research and
development efforts to improve the utility of those products and
technology to our customers. Our research and development
expenses for our fiscal years ended November 30, 2005, 2006
and 2007 were $23.5 million, $25.9 million and
$44.7 million, respectively.
Employees
As of November 30, 2007 we had approximately
1,110 full-time employees, of which 290 were engaged in
sales and marketing, 500 were engaged in research and
development and the remaining 320 were engaged in general
administration, finance and customer support. We have employees
in 23 countries, including approximately 510 employees in
our North American operations, 100 employees in Europe, the
Middle East and Africa (EMEA), and
500 employees in Asia Pacific as of November 30, 2007.
We believe that our future success will depend in large part on
our 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, we
believe we have been successful in our efforts to recruit
qualified employees, but there is a risk that we will not
continue to be successful in the future. See
Item 1A Risk Factors
We
rely on our ability to recruit and retain qualified
employees
. None of our employees are subject to
collective bargaining agreements. Management believes relations
with employees are generally good.
11
Financial
Information by Business Segment and Geographic Data
We operate in one business segment, the packaged software
segment. For information regarding our geographic data, please
refer to Note 18
Segment Reporting
of
our Notes to our Consolidated Financial Statements found in
Item 8 of this Annual Report on
Form 10-K.
Available
Information
Our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to reports filed or furnished pursuant to
Sections 13(a) and 15(d) of the Securities Exchange Act of
1934, as amended, are available free of charge on our Investor
Relations Web site at
http://www.corel.com
as soon as reasonably practicable after we file such material
with, or furnish it to, the SEC. The information posted on our
Web site is not incorporated into this Annual Report on
Form 10-K
unless otherwise noted.
12
Risks
Relating to our Business
Our
quarterly operating results may fluctuate depending on the
timing and success of product releases, which may result in
volatility of our stock price.
Our products generally have release cycles of between 12 and
24 months, and we typically earn the largest portion of
revenues for a particular product during the first half of its
release cycle. If new versions of our software do not achieve
widespread market acceptance, our results of operations will be
adversely affected. Because the timing and success of new
product and product upgrade releases have a significant impact
on our revenues and expenses and release dates do not conform to
a fiscal year cycle, it is difficult to discern meaningful
trends in our business by comparing our financial results for
any two fiscal quarters. Due to the impact of releases of new
products and versions, our future operating results and stock
price may be subject to significant volatility, particularly on
a quarterly basis. Any delays or failures in developing
enhancements and marketing our new versions of our products or
product upgrades may have a harmful impact on our results of
operations.
The
long-term trend in our business reflects growth in revenues from
acquisitions and not our existing products.
Although our financial results have improved since our
acquisition by Vector Capital, a significant portion of that
improvement resulted from our implementation of cost reduction
initiatives, including a significant reduction in our workforce,
as well as additional revenue we obtained primarily through the
sale of products acquired through acquisitions. The effects of
these initiatives and whether the improvement in our operating
results is sustainable over the long-term has yet to be
demonstrated. If we are successful in completing further
acquisitions, we may incur substantial additional costs,
including increased amortization expense and restructuring and
acquisition-related charges. As a result of these and other
factors there is a risk we will not be able to reverse the
long-term trend in our revenues or improve our operating results
in the future.
We
have grown, and may continue to grow, through acquisitions that
give rise to risks and challenges that could adversely affect
our future financial results.
We have in the past acquired, and we expect to acquire in the
future, other businesses, business units, and technologies.
Acquisitions involve a number of special risks and challenges,
including:
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Complexity, time, and costs associated with the integration of
acquired business operations, workforce, products, and
technologies into our existing business, sales force, employee
base, product lines, and technology;
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Diversion of management time and attention from our existing
business and other business opportunities;
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Loss or termination of employees, including costs associated
with the termination or replacement of those employees;
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Assumption of debt or other liabilities of the acquired
business, including litigation related to alleged liabilities of
the acquired business;
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The risk that key customers and business relationships of the
acquired company may not be maximized;
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The incurrence of additional acquisition-related debt as well as
increased expenses and working capital requirements;
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Dilution of stock ownership of existing stockholders, or
earnings per share;
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Increased costs and efforts in connection with compliance with
Section 404 of the Sarbanes-Oxley Act (SOX) and the
risk that the acquired company may not be SOX compliant which
may in-turn cause us to be non-compliant; and
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Substantial accounting charges for restructuring and related
expenses, write-off of in-process research and development,
impairment of goodwill, amortization of intangible assets, and
stock-based compensation expense.
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Integrating acquired businesses has been and will continue to be
a complex, time consuming, and expensive process, and can impact
the effectiveness of our internal controls over financial
reporting.
If integration of our acquired businesses is not successful, we
may not realize the potential benefits of an acquisition or
undergo other adverse effects that we currently do not foresee.
To integrate acquired businesses, we must implement our
technology systems in the acquired operations and integrate and
manage the personnel of the acquired operations. We also must
effectively integrate the different cultures of acquired
business organizations into our own in a way that aligns various
interests, and may need to enter new markets in which we have no
or limited experience and where competitors in such markets have
stronger market positions.
Any of the foregoing, and other factors, could harm our ability
to achieve anticipated levels of profitability from acquired
businesses or to realize other anticipated benefits of
acquisitions. In addition, because acquisitions of technology
companies are inherently risky, no assurance can be given that
our previous or future acquisitions will be successful and will
not adversely affect our business, operating results, or
financial condition.
Our
core products compete with products offered by Microsoft and
Adobe, which have dominant market positions and other
significant competitive advantages.
Our
WordPerfect Suite
competes with Microsoft Office
which has the majority of the global market for office suite
software. In addition, our Digital Media products compete with
similar products offered by Adobe, which has in excess of 50% of
the global packaged Digital Media software markets in which we
compete. It is extremely difficult for us to increase our market
share among existing software users because they tend to have
high levels of brand loyalty due to the actual or perceived
cost, time and effort required to transition existing files and
learn how to use new software. The existence of these dominant
brands also makes it more difficult for us to attract first-time
software buyers because Microsoft and Adobe can offer ubiquitous
products that enable file sharing with other users of their
respective products without compatibility concerns.
In addition to having dominant market positions, Microsoft and
Adobe enjoy a number of other competitive advantages that result
from having large scale operations, leading brand identities and
significantly greater financial and other resources than we do.
These advantages include, among others:
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sales and marketing advantages;
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advantages in the recruitment and retention of skilled technical
personnel;
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advantages in the establishment and negotiation of profitable
strategic, distribution and customer relationships;
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advantages in the development and acquisition of innovative
software technology and the acquisition of software companies;
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greater ability to pursue larger scale product development and
distribution initiatives on a global basis; and
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operational advantages.
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Microsoft and Adobe also offer broader product lines than we do,
including software products outside of the Graphics and
Productivity and Digital Media markets that provide them with
greater opportunities to bundle and cross-sell software products
to their large user bases. Because we generally rely on having
lower prices than Microsoft and Adobe to attract customers, to
the extent Microsoft
and/or
Adobe
were to offer products comparable to ours at a similar price,
our revenues would decline and our business would be harmed.
14
Our
recent growth through acquisitions may not be representative of
future growth.
Because our products and markets are relatively mature, and
since our strategy does not include internal development of new
product lines, our prospects for future growth are highly
dependent on our ability to complete acquisitions of
complementary businesses, products or technologies. Recent
increases in our revenues are primarily attributable to the
inclusion of InterVideo and Ulead revenues in our 2007 results,
WinZips revenues in our 2005 results and our acquisition
of Jasc in October 2004. Our growth in our fiscal year ended
November 30, 2007 was largely attributable to our
acquisition of InterVideo. Our reliance on acquisitions as a
primary means of achieving future growth involves a number of
risks and uncertainties, many of which are beyond our control.
For example, the purchase price for acquisitions will depend
significantly on overall market conditions, the degree of
competition from other strategic or financial buyers and the
availability of attractive acquisition candidates with
complementary products or services. In addition, we may need
debt or equity financing to pay for acquisitions, which may not
be available to us on acceptable terms or at all. Our ability to
use our common shares as currency to pay for acquisitions will
depend on the trading price of our common shares, which may be
volatile. If we cannot successfully execute our acquisition
strategy our growth will be constrained and the value of our
common shares will decline.
In the past, we relied on Vector Capital for advice and
consulting services in connection with our acquisitions of Jasc,
WinZip and InterVideo. Although we have entered into an advisory
services agreement with Vector Capital, it is not obligated to
provide these services in the future. If, for any reason, Vector
Capital does not continue to provide such services, we may not
be able to hire consultants with comparable expertise. The loss
of Vector Capitals advisory services would likely increase
the relative burden on our management in identifying, analyzing
and negotiating acquisitions and could make it more difficult
for us to grow our business.
We
rely on relationships with a small number of companies for a
significant percentage of our revenues, and if any of these
companies terminates its relationship with us, our revenues
could decline.
In our fiscal year ended November 30, 2007, we derived a
substantial amount of our revenues from our relationship with PC
OEM manufacturers. To the extent our relationships with these
large PC OEMs are interrupted or terminated for any reason, our
revenues may decline. In addition, our agreements with these
companies only provide a general framework governing our
relationships. These agreements do not contain any exclusivity
provisions, and these companies have no obligation to purchase a
minimum quantity of our products, promote our products or
continue distributing our products. Each of these companies also
distributes the products of our direct competitors. Accordingly,
these companies may stop distributing our products, they may
feature competitive products more prominently or they may fail
to effectively promote the sale of our products to their
customers, which would harm our competitive position and
operating results.
Because
there are a small number of large PC original equipment
manufacturers, we only have a limited number of potential new
large original equipment manufacturer customers, which will
cause revenue to grow at a slower rate.
At present, we distribute a number of our products bundled with
product offerings of original equipment manufacturers such as
Hewlett Packard, Toshiba, Lenovo, Fujitsu, NEC, Dell and Sony.
There are comparatively few large-scale original equipment
manufacturers. Our reliance on this sales channel involves many
risks, including:
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our lack of control over the shipping dates or volume of systems
shipped;
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our OEM partners are generally not subject to minimum sales
requirements or any obligation to market our products to their
customers;
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our OEM partners may terminate or renegotiate their arrangements
with us and new terms may be less favorable due, among other
things, to an increasingly competitive relationship with certain
partners;
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sales through our OEM partners are subject to changes in
strategic direction, competitive risks, and other issues that
could result in reduction of OEM sales;
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the development work that we must generally undertake under our
agreements with our OEM partners may require us to invest
significant resources and incur significant costs with little or
no associated revenues;
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the time and expense required for the sales and marketing
organizations of our OEM partners to become familiar with our
products may make it more difficult to introduce those products
to the market; and
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our OEM partners may develop, market, and distribute their own
products and market and distribute products of our competitors,
which could reduce our sales.
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Slow
growth, or negative growth, in the PC industry could reduce
demand for our product, and reduce gross profit.
Our revenue depends in large part on the demand for our products
by PC OEMs. The PC industry has experienced slow or negative
growth in the recent past due to general economic slowdowns,
market saturation and other factors. If slow growth in the PC
industry continues or negative growth occurs, demand for our
products may decrease. Furthermore, if a reduction in demand for
our products occurs, we may not be able to reduce expenses
commensurately, due in part to the continuing need for research
and development. Accordingly, continued slow growth or negative
growth in the PC industry could reduce our gross profit.
We
face significant competitive threats from companies that may
offer competitive software products at little or no cost to
consumers to increase their market presence and user
base.
Large online services companies are constantly seeking new ways
to drive Internet traffic to their websites and increase their
user bases. Because these companies primarily earn revenues
through the sale of advertising or the collection of
subscription fees, they are often willing to provide free or low
cost products and services to their users to increase usage of
their core services. For example, Google, Yahoo! and AOL now
provide users with free email services, and Google, Shutterfly,
AOL and Snapfish, among others, provide free online digital
photograph management and editing applications. In addition,
Google now provides online office applications. These and other
online services companies have broad access to our target
customer group, and if they begin to provide their users with
software products with similar features and functionality to our
products, we may be unable to maintain our prices and our
operating results could be adversely affected.
The
manner in which packaged software is distributed is changing
rapidly, which presents challenges to established software
companies such as us and presents opportunities for potential
competitors.
Traditionally, most consumer software has been sold as a
separate stand-alone item through retail vendors. Increasingly,
software products are being bundled with hardware or online
services and sold directly by the equipment manufacturers and
online services companies. Although we have relationships to
bundle our software with some hardware and online services
providers. If we are not successful in maintaining these
relationships and with forging distribution arrangements with
digital camera manufacturers or additional participants in all
the markets we serve, our competitors may gain a significant
competitive advantage.
We generally receive lower prices for software that is bundled
with hardware or services than we receive for physically
packaged software. In the case of software bundled with
hardware, we generally bundle lower functionality versions of
our software and provide the opportunity for users to upgrade to
more full-featured versions. Accordingly, even if we are
successful in expanding our relationships with OEMs, our
revenues may decline to the extent purchasers through these
channels do not purchase our software through the retail channel
or elect not to purchase our software upgrades.
The increasing percentage of packaged software distributed by
OEMs and over the Internet presents a number of challenges and
competitive threats. We currently distribute a substantial
portion of our products in retail locations around the world and
view our retail distribution network as a competitive strength.
To the extent that retail software distribution represents a
diminishing percentage of total software sales, the relative
benefits of our retail network will decline. A declining
percentage of our sales have been derived from our
16
retail distribution channel, and we expect this trend to
continue. If in the future we need to reduce the size or scope
of our retail distribution network, we will likely incur
significant restructuring charges which would adversely affect
our results of operations.
In addition, competitors such as Microsoft, increasingly are
incorporating additional functionality into the Windows
operating system at no additional cost which could render some
or all of our products obsolete.
With
the growth in the Internet as a medium to download and purchase
software, we expect to face increasing competition from smaller
software providers.
The increasing popularity of the Internet as a medium to
purchase software is enabling smaller software providers to
distribute products with minimal upfront costs or resources. In
the past, a substantial barrier to entry into the packaged
software market for small-scale providers has been the need to
manufacture, package and distribute software through a retail or
commercial distribution chain. To the extent consumers
increasingly purchase software over the Internet, we expect to
face increased competition from small software development
companies and programmers worldwide. Online software
distribution has certain inherent advantages over physically
packaged software, such as the reduction or elimination of
manufacturing, packaging, shipping and inventory costs. New
entrants that have business models focused on Internet
distribution may have more favorable cost structures than
companies such as ours that employ a multi-channel distribution
network, which could give those competitors cost savings,
pricing and profitability advantages.
Our
business may be constrained by the intellectual property rights
of others, and we have been and are currently subject to claims
of intellectual property infringement, which are costly and
time-consuming to defend.
The software industry is characterized by the existence of a
large number of patents, trademarks and copyrights, and by
frequent litigation based upon allegations of infringement or
other violations of intellectual property rights. We may be
constrained by the intellectual property rights of others. We
are currently a defendant in a lawsuit alleging intellectual
property infringement, and we may again in the future have to
defend against intellectual property lawsuits. See
Item 3
Legal Proceedings
. We
may not prevail in our current or future intellectual property
litigation given the complex technical issues and inherent
uncertainties in litigation. We have in the past and expect that
we will in the future receive correspondence alleging that our
products infringe the intellectual property rights of others.
Any claims, regardless of their merit, could be time-consuming
and distracting to management, result in costly litigation or
settlement, cause product development or release delays or
require us to enter into costly royalty or licensing agreements.
In addition, some of our agreements with customers and
distributors, including OEMs and online services companies,
require us to indemnify these parties for third-party
intellectual property infringement claims, and many of these
indemnification obligations are not subject to monetary limits.
The existence of these indemnification provisions could increase
our cost of litigation and could significantly increase our
exposure to losses from an adverse ruling.
The
packaged software industry is subject to rapid technological
change, and if we fail to respond to dynamic market forces, our
position within the industry will be harmed.
The packaged software industry is characterized by rapid
technological change. If our competitors are able to develop
innovative new features or functionality that we are unable to
replicate or if we experience delays in providing competing
features or functionality, our business may suffer. Moreover, we
devote the majority of our research and development efforts
toward enhancing our existing product lines rather than pursuing
the development of new applications. If our competitors are able
to make significant innovative improvements to their products or
develop new products with substantially enhanced capabilities,
our products may become obsolete or our value proposition may
become less attractive.
17
Changes
to the royalties we pay to third parties, or the requirement to
pay other amounts in respect of third party intellectual
property, could adversely effect our margins and
profitability.
Our products, in particular our Digital Media applications, are
sold subject to significant royalties which we pay to third
parties, including third parties who hold patents and other
intellectual property rights which purport to cover the
technology contained within our products. These third parties
could, from time to time, increase the royalties we are charged
which could adversely effect our margins and profits. In
addition, our products could become subject to the payment of
additional royalties to other third parties which could also
adversely effect our margins and profits. See Our business
may be constrained by the intellectual property rights of
others, and we have been and are currently subject to claims of
intellectual property infringement, which are costly and
time-consuming to defend.
Our
success depends on our ability to offer products that are highly
compatible with products offered by Microsoft and
Adobe.
Software users often share files, making it critical that our
products remain compatible with products that have dominant
market positions. To make our products compatible with products
offered by Microsoft, Adobe and others, we often rely on
technical information provided to us through informal
cooperative arrangements. We have no contractual right to
receive this technical information, and if these competitors are
unwilling to provide it to us, we may be unable to continue to
provide products that are compatible with their products.
Although we have been able to achieve a high level of
compatibility with Microsoft products in the past, it is often
impossible for us to achieve the same level of functionality and
performance as Microsofts products because its products
benefit from technology embedded in the Microsoft Windows
operating system and other Microsoft software applications,
which places us at a competitive disadvantage.
Since it is often technically impossible for us to develop
products that are compatible in all respects with the leading
brands, there is also a risk that any non-compatible features
will be criticized in the market and damage our reputation. If
our products are not sufficiently compatible or are not
perceived to be compatible with the leading brands for any
reason, we would lose a key element of our value proposition and
our revenues and results of operations would be adversely
affected.
Our
products are complex and may contain errors or defects resulting
from such complexity.
The software products we develop and the associated professional
services we offer are complex and must meet stringent technical
requirements of our customers. We must develop our products
quickly to keep pace with the rapidly changing software market.
Our software products and services may contain undetected errors
or defects, especially when first introduced or when new
versions are released. Failure to achieve acceptance could
result in a delay in, or inability to, receive payment. Our
products may not be free from errors or defects after commercial
shipments have begun, which could result in the rejection of our
products and damage to our reputation, as well as lost revenues,
diverted development resources, increased service and warranty
costs and related litigation expenses and potential liability to
third parties, any of which could harm our business.
We
rely on the accuracy of our customers sales reports for
collecting and reporting revenue. If these reports are not
accurate, our reported revenue will be inaccurate.
Because of the nature of the distribution and sales of our
products, we rely on our distributors and resellers
sales reports in order to collect and report our revenue. If any
of our customer reports are inaccurate, the revenue we collect
and report will be inaccurate, and we may be required to make an
adjustment to our revenue for a subsequent period, which could
harm our credibility in the financial community.
If we
fail to manage our growth effectively, our business could be
harmed.
Our ability to effectively manage and control any future growth
may be limited. To manage any growth, our management must
continue to improve our operational, information and financial
systems, procedures and
18
controls and expand, train, retain and manage our employees. If
our systems, procedures and controls are inadequate to support
our operations, any expansion could decrease or stop, and
investors may lose confidence in our operations or financial
results. If we are unable to manage growth effectively, our
business and operating results could be adversely affected, and
any failure to develop and maintain adequate internal controls
over financial reporting could cause the trading price of our
shares to decline substantially.
If we
fail to maintain strong relationships with our resellers and
distributors, our ability to successfully deploy and sell our
products may be harmed.
We primarily market our product offerings through resellers
(such as Office Depot and Best Buy) and distributors (such as
Ingram Micro). We focus our efforts on larger distributors,
which has resulted in our dependence on a relatively small
number of distributors licensing a large amount of our products.
Our distributors also sell our competitors products, and
if they favor our competitors products for any reason,
they may fail to market our products as effectively or to devote
resources necessary to provide effective sales, which would
cause our results to suffer. In addition, the financial health
of these distributors and our continuing relationships with them
are important to our success. Some of these distributors may be
unable to withstand adverse changes in business conditions. Our
business could be seriously harmed if the financial condition of
some of these distributors substantially weakens.
We may
incur losses associated with currency fluctuations and may not
effectively reduce our exposure.
Our operating results are subject to volatility resulting from
fluctuations in foreign currency exchange rates. For example, we
incur a disproportionate percentage of costs in Canadian and
Taiwanese dollars as compared to Canadian and Taiwanese dollar
revenues. As a result, our results will be negatively affected
if the Canadian dollar and Taiwanese dollar rise relative to the
U.S. dollar. Although we attempt to mitigate a portion of
these risks through foreign currency hedging, these activities
may not effectively offset the adverse financial effect
resulting from unfavorable movement in foreign currency exchange
rates.
As a
global business, we have a relatively complex tax structure, and
there is a risk that tax authorities will disagree with our tax
positions.
We have tax losses carried forward available to offset future
taxable income of approximately $233.5 million as of
November 30, 2007. Approximately 90% of our tax losses are
in Canada. Under Canadian tax rules, we can only use losses to
offset future taxable income from the same business or a
business that is similar to the one that incurred the losses.
While our Canadian losses are not subject to any annual
deduction limitations, the losses do expire between the tax
years 2008 through 2027. As of November 30, 2007, we also
had approximately $220.0 million of tax depreciation in
Canada that would be available to offset taxable income in
future years. We have not recorded a financial statement benefit
for these attributes. We have not been subject to a tax audit or
review for the 2006 and 2007 tax years, and while we believe
that our tax assets have been appropriately determined, there is
a risk that, in the event of an audit, the tax authorities would
not agree with our position.
Since we conduct operations worldwide through our foreign
subsidiaries, we are subject to complex transfer pricing
regulations in the countries in which we operate. Transfer
pricing regulations generally require that, for tax purposes,
transactions between us and our foreign affiliates be priced on
a basis that would be comparable to an arms length
transaction and that contemporaneous documentation be maintained
to support the tax allocation. Although uniform transfer pricing
standards are emerging in many of the countries in which we
operate, there is still a relatively high degree of uncertainty
and inherent subjectivity in complying with these rules. To the
extent Canadian or any foreign tax authorities disagree with our
transfer pricing policies, we could become subject to
significant tax liabilities and penalties.
The Companys tax returns are subject to review by taxing
authorities in the of jurisdictions in which we operate.
Although we believe that we have provided for all tax exposures
the ultimate outcome of a tax review could differ materially
from our provisions. During fiscal 2007, the Minister of Revenue
of Ontario issued a
19
material reassessment in respect to our 2000 through 2002
taxation years. See Item 8
Financial
Statements and Supplementary Data Notes to the
Consolidated Financial Statements Note 11:
Income Taxes.
The taxes we owe for our
WinZip
business are based in
part on maintaining substantial business operations in an
overseas jurisdiction, which has favorable tax laws. If tax
authorities determined that we did not maintain business
operations in this jurisdiction sufficient to remain subject to
these tax provisions, our effective tax rate would increase, and
we could become subject to significant tax liabilities,
penalties and interest.
Our
substantial indebtedness could affect our financing options and
liquidity.
As of November 30, 2007, we had approximately
$158.6 million of total debt outstanding and a
$75.0 million revolving credit facility. Our indebtedness
is secured by substantially all of our assets and could have
important consequences to our business or the holders of our
common shares, including:
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limiting our ability to obtain additional financing in the
future for working capital, capital expenditures or acquisitions;
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requiring a significant portion of our cash flow from operations
to be dedicated to the payment of the principal of and interest
on our indebtedness, thereby reducing funds available for other
purposes;
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making us more vulnerable to economic downturns and limiting our
ability to withstand competitive pressures; and
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making it more difficult to pay dividends on our common shares,
if we decide to do so.
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In addition, because all of our debt bears interest at variable
rates, we are subject to interest rate risk in the event
interest rates increase at a faster pace
and/or
to
higher levels than we have experienced in recent periods. See
Item 7A
Quantitive and Qualitative
Disclosures about Market Risk Interest Rate
Risk.
We are
subject to risks associated with international operations that
may harm our business.
In our fiscal year ended November 30, 2007, we derived
approximately 49.7% of our total revenues from sales to
customers outside of the Americas. Our international operations
subject us to a number of risks, challenges and uncertainties,
including the following:
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foreign currency fluctuations;
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increased software piracy and uncertainty with respect to the
enforcement of intellectual property rights;
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international economic and political conditions;
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labor and employment laws, particularly in Europe, which make it
difficult to maintain flexible staffing levels;
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tariffs, quotas and other trade barriers and restrictions;
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difficulties and expenses in localizing our products,
particularly in Asian markets;
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difficulties inherent in staffing and managing foreign
operations; and
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the burdens of complying with a variety of foreign laws.
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In addition, because increasing the scope of our operations in
emerging economies, such as China, India, Eastern Europe and
Latin America, is a key element of our growth strategy, we
expect that our exposure to the risks and uncertainties
described above will increase in the future.
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An
interruption of our supply of certain products of key components
from our sole source supplier, or a price increase in such
products or complements, could hurt our business.
We have chosen to outsource the manufacturing and distribution
of many of our desktop software products to ModusLink, a third
party provider. Although our reliance on a single supplier
provides us with efficiencies and enhanced bargaining power,
poor performance by or lack of effective communication with this
contractor can significantly harm our financial condition and
results of operations. This risk is amplified by the fact that
we carry very little inventory and rely on
just-in-time
manufacturing processes.
Our
prices may decline, which could harm our operating
results.
We believe that a variety of factors in the current market could
contribute to the risk that prices and possibly our gross
margins will decrease in future fiscal quarters. For example, as
our customers continue to assess their business strategies and
their budgets for our or our competitors, product offerings, we
may feel additional pressure to lower our prices.
Open
source software and open standards may make us more vulnerable
to competition because new market entrants and existing
competitors could introduce similar products quickly and
cheaply.
Open source refers to the free sharing of software code used to
build applications in the software development community.
Individual programmers may modify and create derivative works
and distribute them at no cost to the end user. To the extent
that open source software is developed that has the same or
similar functionality as our products, demand for our software
may decline, we may have to reduce the prices we charge for our
products and our results of operations may be negatively
affected.
In addition, there is continuing pressure on the software
industry to adopt standardized file formats. Microsoft recently
released the specifications for one file format which has been
implemented in its next generation office suite. While we
generally support the adoption of open standards, this change
may make it easier for other software companies to produce
productivity software that is compatible with Microsoft Office.
In the past we have been one of a small group of companies that
offer productivity software that directly competes with
Microsoft Office applications and is also compatible with those
applications. If the proposed Microsoft Office open file format,
or any other open file format, becomes the industry accepted
standard, we could lose a key competitive advantage.
We are
subject to restrictive debt covenants that impose operating and
financial restrictions on our operations and could limit our
ability to grow our business.
Covenants contained in our debt facilities impose significant
operating and financial restrictions on us. These restrictions
prohibit or limit, among other things, our incurrence of
additional indebtedness, acquisitions, asset sales and the
creation of certain types of liens. As part of our current term
loan agreement, we are permitted to make acquisitions up to an
aggregate consideration of $300.0 million, excluding the
acquisition of InterVideo, provided that the aggregate
consideration consisting of cash and indebtedness assumed or
incurred in connection with acquisition does not exceed
$200.0 million over the term of the credit facilities. For
amounts exceeding that amount, we are required to seek the
consent of our lenders.
These restrictions could limit our ability to obtain future
financing, withstand downturns in our business or take advantage
of business opportunities. Furthermore, our debt facilities
require us to maintain specified financial ratios and to satisfy
specified financial condition tests, and under certain
circumstances require us to make quarterly mandatory prepayments
with a portion of our available cash. Our ability to comply with
these ratios or tests may be affected by events beyond our
control, including prevailing economic, financial and industry
conditions. As of November 30, 2007 we are in compliance
with all of our debt covenants.
21
Our
success depends on our ability to adequately prevent piracy of
the proprietary content owned by others which is accessed by
customers through the use of our products
Our products allow our customers to use or display proprietary
content owned by third parties, such as our customers use
of our
WinDVD
product to play movies owned by various
movie studios and production companies. Individuals who are
sophisticated in the field of DVD technology and encryption have
made use of our products to bypass security measures implemented
by movie studios, hardware and software manufacturers (the
AACS Security Protocol) and pirate the proprietary
content thereby making it available to others who can then view
the content without paying the required fees to the content
owners or their agents. While we continuously update the
security of our products to prevent such occurrences, we can
provide no assurances that such breaches will not occur in the
future. The use of our products to improperly access proprietary
third party content, and our requirement to update our software
to correct any deficiencies, could harm our reputation with
third party content providers and our customers. In some
circumstances, it could also expose us to litigation
and/or
the
requirement to compensate the owners of the proprietary content
which is pirated. Further, repeated deficiencies of this type in
our products could cause the AACS licensing authority to
terminate our AACS license which allows us to participate in the
AACS Security Protocol, a prerequisite for our products to be
able to play high definition DVD content distributed by some
movie studios and production companies. The loss of our AACS
license would make our
WinDVD
product less attractive to
some of our important OEM customers, upon whom we rely for a
significant amount of our revenue. Accordingly, our failure to
adequately protect proprietary third party content could cause
us to lose customers and potentially expose us to having to pay
compensation to content owners, either of which would harm our
business.
We may
be unable to maintain licenses to third-party technology that is
integrated into our products.
We integrate third-party technology into our software products.
Although we are not currently reliant on any technology license
agreement from a single third party, if we were to lose our
rights to technology licensed to us by several third parties,
our business could be significantly disrupted, particularly if
the technology subject to those agreements was either no longer
available to us or no longer offered on commercially reasonable
terms. In either case, if we are unable to redesign our software
to function without this third-party technology or to obtain or
internally develop similar technology, we might be forced to
limit the features available in our current or future products.
Our
success depends heavily on our ability to adequately protect our
intellectual property.
We depend upon our ability to protect our technology. Our means
of protecting our intellectual property may not be adequate to
prevent others from misappropriating or otherwise obtaining and
using information that we regard as proprietary. Any of our
patents, trademarks or other intellectual property rights may be
challenged by others or invalidated through administrative
process or litigation. We may be unable to obtain effective
patent or trademark protection in the future. Policing
unauthorized use of our software is difficult and costly,
particularly in countries where the laws may not protect our
proprietary rights as fully as in the U.S. and Canada.
Accordingly, despite our efforts, we may be unable to prevent
third parties from infringing upon or misappropriating our
intellectual property.
We have placed source code for our software in escrow, and this
source code may, under certain circumstances, be made available
to certain of our customers, distributors or OEMs. We also work
with translators, localizers and independent software
developers, and these third parties have access to proprietary
information relating to our technology. While we have entered
into confidentiality and non-competition agreements with these
third parties and their employees, these arrangements could
increase the ease or likelihood of potential misappropriation or
other misuse of our intellectual property.
Further, our software products contain open source software code
licensed to us under various open source licenses. We rely in
part on third parties to develop our software and may not be
able to verify whether the components developed by these third
parties contain additional open source code. Open source code
may impose limitations on our ability to sell our products
because, among other reasons, open source license terms
22
may result in unanticipated obligations regarding our products
and the disclosure of underlying derivative source code, and
open source software cannot be protected under trade secret law.
If we
do not provide acceptable customer support, our reputation will
suffer and it will be difficult to retain existing customers or
to acquire new customers.
The effectiveness of our customer service and technical support
operations are critical to customer satisfaction and our
financial success. If we do not respond effectively to service
and technical support requests we will lose customers and miss
revenue opportunities, such as product renewals and new product
sales. We occasionally experience customer service and technical
support problems, including longer than expected waiting times
for customers when our staffing and systems are inadequate to
handle a higher-than-anticipated volume of requests. If we do
not adequately train our support representatives our customers
will not receive an appropriate level of support, we will lose
customers and our financial results will suffer.
Risks
Related to an Investment in our Common Shares
Our
common share price is likely to be volatile.
The market price of our common shares may be volatile in
response to a number of events, including:
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our quarterly operating results;
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sales of our common shares by principal shareholders;
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future announcements concerning our or our competitors
businesses;
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changes in financial forecasts and recommendations by securities
analysts or the termination of coverage by one or more
securities analysts;
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actions of our competitors;
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general market, economic and political conditions;
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natural disasters, terrorist attacks and acts of war; and
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the other risks described in this section.
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Future
sales or the possibility of future sales, of a substantial
amount of common shares may depress the price of the common
shares.
Future sales, or the availability for sale, of substantial
amounts of common shares in the public market could adversely
affect the prevailing market price of our common shares. All of
the common shares sold in our initial public offering are freely
transferable without restriction or further registration under
the Securities Act of 1933. The remaining common shares
outstanding are restricted securities within the meaning of
Rule 144 under the Securities Act, and are eligible for
resale subject to applicable volume, manner of sale, holding
period and other limitations of Rule 144. Holders of
substantially all of our outstanding restricted shares have the
right to require us to register the resale of their shares.
We are authorized to issue up to 5,150,497 common shares or
other securities pursuant to our equity compensation plans. We
have registered on
Form S-8
registration statements the common shares issuable under these
plans.
Vector
Capital has significant control over our business and you may
not have the same corporate governance protections you would
have if we were not a controlled company.
Vector Capital owns approximately 69% of our outstanding common
shares. As a result, Vector Capital has the ability to influence
our business, policies and affairs and has the ability to
control the outcome of all elections of directors and any
shareholder vote regarding a merger, other extraordinary
transaction or any other matters. Messrs. Slusky and Mehta,
who are members of our Board, are principals of Vector Capital.
Vector
23
Capital has no separate contractual rights to nominate any
directors. There is a risk that the interests of Vector Capital
and these directors will not be consistent with the interests of
other holders of common shares.
In addition, for so long as Vector Capital or any other entity
or group owns more than 50% of the total voting power of our
common shares, we will be a controlled company
within the meaning of Nasdaq and applicable Canadian securities
regulations and, as a result, will qualify for exemptions from
certain corporate governance requirements. As a controlled
company, we are exempt from several NASDAQ standards, including
the requirements:
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that a majority of our Board consists of independent directors;
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that our prospective directors be nominated solely by
independent directors; and
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that the compensation of our executive officers be determined
solely by independent directors.
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We intend to rely on these exemptions and as a result, a
majority of our Board will not be independent. In addition,
while we have a nominating and corporate governance committee
and a compensation committee, these committees do not consist
entirely of independent directors. Our audit committee had only
two independent directors for the transition period ending
April 25, 2007, as permitted by applicable NASDAQ and SEC
rules and by the rules and regulations of the Canadian
provincial securities regulatory authorities. However, our audit
committee is now comprised solely of independent directors.
Accordingly, you may not have the same protections afforded to
stockholders of companies that are subject to all of the NASDAQ
corporate governance requirements.
Vector
Capitals ownership of a majority of our common shares,
coupled with provisions contained in our articles of
incorporation and Canadian law, reduce the likelihood that you
will receive a premium upon a change of control.
As our controlling shareholder, Vector Capital has the sole
ability to transfer control of our company to a third party,
making it possible that you will not receive a premium upon a
change of control. In addition, even if and when no single
shareholder controls us, provisions of our articles of
incorporation and Canadian law may delay or impede a change of
control transaction. Our authorized preferred shares are
available for issuance from time to time at the discretion of
our Board, without shareholder approval. Our Board has the
authority, subject to applicable Canadian corporate law, to
determine the special rights and restrictions granted to or
imposed on any wholly unissued series of preferred shares, and
such rights may be superior to those of our common shares.
Limitations on the ability to acquire and hold our common shares
may be imposed by the
Competition Act
(Canada). This
legislation permits the Commissioner of Competition of Canada to
review any acquisition of a significant interest in us and
grants the Commissioner jurisdiction to challenge such an
acquisition before the Canadian Competition Tribunal if the
Commissioner believes that it would, or would be likely to,
result in a substantial lessening or prevention of competition
in any market in Canada. The
Investment Canada Act
subjects an acquisition of control of a company by a
non-Canadian to government review if the value of our assets as
calculated pursuant to the legislation exceeds a threshold
amount. A reviewable acquisition may not proceed unless the
relevant minister is satisfied that the investment is likely to
be a net benefit to Canada. Any of the foregoing could prevent
or delay a change of control and may deprive our shareholders of
the opportunity to sell their common shares.
You
may be unable to enforce actions against us and certain of our
directors under U.S. federal securities laws.
A majority of our directors and officers reside principally in
Canada. Because all or a substantial portion of our assets and
the assets of these persons are located outside the U.S., it may
not be possible for you to effect service of process within the
U.S. upon us or those persons. Furthermore it may not be
possible for you to enforce judgments obtained in
U.S. courts based upon the civil liability provisions of
the U.S. federal securities laws or other laws of the
U.S. against us or those persons. There is doubt as to the
enforceability in original actions in Canadian courts of
liabilities based upon the U.S. federal securities laws,
and as to the enforceability in Canadian courts of judgments of
U.S. courts obtained in actions based upon the civil
liability
24
provisions of the U.S. federal securities laws. Therefore,
it may not be possible to enforce those actions against us,
certain of our directors and officers or our independent public
accounting firm.
U.S.
investors in our company could suffer adverse tax consequences
if we are characterized as a passive foreign investment
company.
If, for any taxable year, our passive income or our assets that
produce passive income exceed levels provided by U.S. law,
we may be characterized as a passive foreign investment company,
or PFIC, for U.S. federal income tax purposes. This
characterization could result in adverse U.S. tax
consequences to our shareholders. If we were classified as a
PFIC, our U.S. shareholders could be subject to increased
U.S. federal income tax liability upon the sale or other
disposition of our common shares or upon the receipt of amounts
treated as excess distributions.
U.S. shareholders should consult with their own
U.S. tax advisors with respect to the U.S. tax
consequences of investing in our common shares as well as the
specific application of the excess distribution and
other rules discussed in this paragraph. See
Item 5
Material United States Federal
and Canadian Income Tax Consequences.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
Our executive office and registered office is located in Ottawa,
Ontario, Canada. The following chart, updated as of
November 30, 2007, outlines significant properties that we
currently lease for operations. In addition to these, we lease
office space in various countries around the world where we
perform sales and marketing functions. Management believes that
these facilities are well maintained, are adequate for our
immediate needs and that additional space is available if needed
to accommodate expansion.
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Area
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Expiration
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Location
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Purpose
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(in square feet)
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Year
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Ottawa, Canada
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Corporate Head Office
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82,224
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2018
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Taipei, Taiwan
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R&D/Sales, Marketing & Administration
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50,525
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2013
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Fremont, California
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Research and Development/Sales and Marketing
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35,069
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2010
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Eden Prairie, Minnesota
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Sales and Development
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24,126
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2008
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Shanghai, China
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Research and Development/Sales and Marketing
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16,252
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2008
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Tualitin, Oregon
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Sales and Development
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10,908
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2012
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Maidenhead, England
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Sales and Administration
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10,549
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2015
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KaoHsuing, Taiwan
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Research and Development
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9,992
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2009
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Mansfield, Connecticut
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Sales, Operations and Administration
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8,890
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2009
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Yokohoma, Japan
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Sales and Marketing
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6,923
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2012
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Munich, Germany
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Sales and Administration
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6,657
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2012
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Munich, Germany
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iGrafx
Sales and Administration
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3,152
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2008
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ITEM 3.
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LEGAL
PROCEEDINGS
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At November 30, 2007, we were a defendant in an ongoing
patent infringement proceedings described below:
Simon Systems v. Corel
Corporation.
Plaintiff filed this patent
infringement action on September 24, 2007, against us in
the United States District Court for the District of Maryland
(Southern Division), alleging infringement of U.S. Patent
5,559,562. The patent issued on September 24, 1996. The
Plaintiff alleges certain of our video editing applications
infringe the patent in the manner in which the alleged products
provide functionality to allow the transitioning from a first
video stream to a second video stream. We believe we have
25
meritorious defenses to the Plaintiffs claims and intends
to defend the litigation vigorously. The ultimate outcome of the
litigation, however, is uncertain.
Disc Link Corporation v. H&R Block Digital Tax
Solutions, Corel Corporation, Corel Inc., et
al.
Plaintiff filed this patent infringement
action on April 10, 2007, against us and Corel Inc. a
wholly owned subsidiary and 26 other defendants in the U.S
District Court for the Eastern District of Texas, alleging
infringement of U.S. Patent 6,314,574. The patent issued
November 6, 2001. The plaintiff alleged that the defendants
infringed the patent through the use of hyperlinks in software
in software applications sold on discs, in particular hyperlinks
which allegedly facilitate the provision of certain types of
technical support. We filed our answer and counterclaims to
Plaintiffs complaint on July 13, 2007. In December
2007, a license agreement for an immaterial amount was reached
with the Plaintiff, which settled the dispute.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
26
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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Our common shares are listed on the Nasdaq Global Market under
the symbol CREL and on the TSX under the symbol
CRE. The following table sets forth the high and low
closing sales prices per share of our common shares as reported
on the Nasdaq Global Market, as applicable, and the TSX for each
of the quarters during our fiscal year ended November 30,
2007. Our common shares commenced trading on the Nasdaq Global
Market and the TSX on April 26, 2006.
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Nasdaq [US$]
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TSX [C$]
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High
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Low
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High
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Low
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Fiscal 2006
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Q2
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$
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16.15
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$
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13.19
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$
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16.15
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$
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13.96
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Q3
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$
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12.90
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$
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9.40
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$
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14.09
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$
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10.62
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Q4
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$
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14.15
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$
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11.10
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$
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15.92
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$
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12.71
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Fiscal 2007
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Q1
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$
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14.32
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$
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12.20
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$
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16.77
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$
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14.29
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Q2
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$
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14.01
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$
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12.37
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$
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15.30
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$
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14.50
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Q3
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$
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14.24
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$
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12.16
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$
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14.97
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$
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12.95
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Q4
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$
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13.38
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$
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11.14
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$
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14.00
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$
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11.31
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On January 22, 2008 the last reported sale price on the
Nasdaq Global Market for our common shares was $8.08 per share.
On January 22, 2008 the last reported sale price on the TSX
for our common shares was C$10.25 per share.
RECORD
HOLDERS
As of January 31, 2008, there were approximately
185 shareholders of record of our common shares, one of
which was Cede & Co., a nominee for Depository
Trust Company, or DTC, and one of which was The Canadian
Depository for Securities Limited, or CDS. All of our common
shares held by brokerage firms, banks and other financial
institutions in the U.S. and Canada as nominees for
beneficial owners are considered to be held of record by
Cede & Co. in respect of brokerage firms, banks and
other financial institutions located in the U.S., and by CDS in
respect of brokerage firms, banks and other financial
institutions located in Canada. Cede & Co. and CDS are
each considered to be one shareholder of record.
DIVIDEND
POLICY
We do not currently anticipate paying dividends on our common
shares. Any determination to pay dividends to holders of our
common shares in the future will be at the discretion of our
Board and will depend on many factors, including our financial
condition, earnings, legal requirements and other factors as the
Board deems relevant. In addition, our indebtedness limits our
ability to pay dividends and we may in the future become subject
to debt instruments or other agreements that further limit our
ability to pay dividends.
In connection with our acquisition by Vector Capital, we
distributed $4.1 million to Vector Capital in 2003 and we
used $69.8 million to fund the repurchase of our common
shares in the going private transaction. In addition, we paid
$41.0 million of distributions to our shareholders in our
fiscal year ended November 30, 2004 and $85.3 million
of distributions to our shareholders during our fiscal year
ended November 30, 2005. WinZip paid a $12.0 million
dividend to Vector Capital in June 2005 and paid a
$7.5 million dividend to Vector Capital in March 2006.
Those payments are not indicative of our future dividend policy
for the foreseeable future. No distributions or dividends have
been paid or declared during the fiscal year ended
November 30, 2007.
27
MATERIAL
UNITED STATES FEDERAL AND CANADIAN INCOME TAX
CONSEQUENCES
General
The following discussion of material U.S. federal income
tax consequences and Canadian federal income tax consequences of
ownership of our common shares is included for general
information purposes only and does not purport to be a complete
description of all potential tax consequences.
Material
U.S. Federal Income Tax Consequences
This section summarizes the material United States federal
income tax consequences to U.S. Holders (as
defined below) of the ownership and disposition of our common
shares, based on the U.S Internal Revenue Code of 1986, as
amended, existing and proposed Treasury regulations thereunder,
published rulings, court decisions and administrative
interpretations, all as currently in effect. This section does
not purport to be a complete analysis of all of the potential
United States federal income tax considerations that may be
relevant to particular holders of our common shares in light of
their particular circumstances, nor does it deal with all United
States federal income tax consequences applicable to holders
subject to special tax rules, including banks, brokers, dealers
in securities or currencies, traders in securities that elect to
use a mark-to-market method of accounting for their securities
holdings, tax-exempt entities, insurance companies, persons
liable for alternative minimum tax, persons that actually or
constructively own 10 percent or more of our common shares,
persons that hold common shares as part of a straddle or a
hedging, constructive sale, synthetic security, conversion or
other integrated transaction, pass-through entities (e.g.,
partnerships), persons whose functional currency is not the
United States dollar, expatriates or former long-term residents
of the United States, individual retirement accounts or other
tax-deferred accounts, real estate investment trusts, or
regulated investment companies.
For purposes of this discussion, you are a
U.S. Holder if you are a beneficial owner of
common shares and you are for United States federal income tax
purposes (i) a citizen or resident of the United States,
(ii) a corporation, or other entity taxable as a
corporation, created or organized under the laws of the United
States or any political subdivision thereof, (iii) an
estate whose income is subject to United States federal income
tax regardless of its source, or (iv) a trust (a) if a
United States court can exercise primary supervision over the
trusts administration and one or more United States
persons are authorized to control all substantial decisions of
the trust or (b) that has a valid election in effect under
applicable Treasury Regulations to be treated as a United States
person.
Taxation
of Dividends
In general, a U.S holder must include in its gross income as
ordinary income the gross amount of any dividend paid by us out
of our current or accumulated earnings and profits (as
determined for United States federal income tax purposes),
including the amount of any Canadian taxes withheld from this
dividend. We do not maintain calculations of our earnings and
profits for United States federal income tax purposes. The
dividend will not be eligible for the dividends-received
deduction generally allowed to United States corporations in
respect of dividends received from other United States
corporations. Distributions in excess of our current and
accumulated earnings and profits (as determined for United
States federal income tax purposes), including the amount of any
Canadian taxes withheld from the distributions, will be treated
as a non-taxable return of capital to the extent of your
adjusted basis in the common shares and as a capital gain to the
extent such portion exceeds your adjusted basis. If you are a
non-corporate U.S. Holder, dividends you receive in taxable
years beginning before January 1, 2011, generally will be
taxable at a rate of 15 percent, provided certain holding
period and other requirements are satisfied.
Any Canadian tax withheld from dividend payments may, subject to
certain limitations, be claimed as a foreign tax credit against
your United States federal income tax liability or may be
claimed as a deduction for United States federal income tax
purposes.
28
Taxation
of Dispositions
The gain or loss you realize on the sale or other disposition of
your common shares will generally be capital gain or loss for
United States federal income tax purposes, and will be long-term
capital gain or loss if you held your common shares for more
than one year. The amount of gain or loss will be equal to the
difference between the United States dollar value of the amount
that you realize and your adjusted tax basis, determined in
United States dollars, in your common shares. The deduction of
losses is subject to limitations for U.S federal income tax
purposes. The gain or loss will generally be gain or loss from
sources within the United States for foreign tax credit
limitation purposes.
Material
Canadian Income Tax Consequences
The following discussion summarizes the principal Canadian
federal income tax considerations generally applicable to a
person, referred to as an Investor, who holds our
common shares, and who at all material times for the purposes of
the Income Tax Act (Canada) (the Act), deals at
arms length with us, is not affiliated with us, holds
common shares as capital property, is a non-resident of Canada,
and does not, and is not deemed to, use or hold any common share
in, or in the course of, carrying on business in Canada.
This summary is based on the current provisions of the Act,
including the regulations under the Act, and the Canada-United
States Income Tax Convention (1980), referred to as the
Treaty, as amended. This summary takes into account
all specific proposals to amend the Act and the regulations
under the Act publicly announced by the government of Canada
prior to the date of this report, and our understanding of the
current published administrative and assessing practices of the
Canada Revenue Agency. It is assumed that all of those
amendments will be enacted substantially as currently proposed,
although no assurances can be given in this respect. Except to
the extent otherwise expressly set out in this summary, this
summary does not take into account any provincial, territorial,
or foreign income tax law. Special rules, which are not
discussed in this summary, may apply to a non-resident holder
that is an insurer carrying on business in Canada and elsewhere,
or a financial institution as defined by section 142.2 of
the Act. If you are in any doubt as to your tax position, you
should consult with your tax advisor.
Taxation
Of Dividends
Any dividend on a common share paid or credited, or deemed under
the Act to be paid or credited, by us to an Investor, will
generally be subject to Canadian withholding tax at the rate of
25% on the gross amount of the dividend, or such lesser rates as
may be available under an applicable income tax treaty. We will
be required to withhold any such tax from the dividend, and
remit the tax directly to the Canada Revenue Agency for the
account of the Investor. Pursuant to the Treaty, the rate of
withholding tax applicable to a dividend paid on a common share
to an Investor who is a resident of the United States for the
purposes of the Treaty will be reduced to 5% if the beneficial
owner of the dividend is a company that owns at least 10% of our
voting stock, and in any other case will be reduced to 15%.
Under the Treaty, dividends paid or credited to an Investor that
is a United States tax exempt organization as described in
Article XXI of the Treaty will not be subject to Canadian
withholding tax. It is the position of the Canada Revenue Agency
that United States limited liability companies
(LLCs) generally do not qualify as residents of the
United States under the Treaty and therefore Treaty reductions
are not available to those Investors. On September 21,
2007, Canada and the United States announced the signing of a
fifth protocol amending the Treaty (the Protocol).
Under the Protocol, an LLC may be entitled benefits under the
Treaty in certain circumstances provided that members of the LLC
are taxed in the United States on any income, profits or gains
earned through the LLC in the same way they would be if they had
earned it directly. The Protocol will enter into force once it
has been ratified by both Canada and the United States and both
countries have notified each other of such ratification in
writing. The relevant provisions of the Protocol will be
effective for amounts paid or credited on or after the first day
of the second month that begins after the date on which the
Protocol enters into force.
29
Taxation
of Gain on Disposition
An Investor generally will not be subject to tax pursuant to the
Act on any capital gain realized by the Investor on a
disposition of a common share unless the common share
constitutes taxable Canadian property to the
Investor for purposes of the Act and the Investor is not
eligible for relief pursuant to an applicable bilateral tax
treaty. A common share that is disposed of by an Investor will
not constitute taxable Canadian property of the Investor
provided that the common share is listed on a designated
stock exchange for the purposes of the Act (the TSX and
NASDAQ are so designated), and that neither the Investor, nor
one or more persons with whom the Investor did not deal at
arms length, alone or together, at any time in the five
years immediately preceding the disposition, owned 25% or more
of the issued shares of any class or series of our capital
stock. Even if a common share is taxable Canadian property to an
Investor, the Treaty will generally exempt an Investor who is a
resident of the United States for the purposes of the Treaty,
and who would otherwise be liable to pay Canadian income tax in
respect of any capital gain realized by the Investor on the
disposition of a common share, from that liability, provided
that the value of the common share is not derived principally
from real property situated in Canada. We are of the view that
the value of our common shares is not currently derived
principally from real property situated in Canada. The Treaty
may not be available to a non-resident Investor that is an LLC,
which is not subject to tax in the United States or, in
accordance with the Protocol (discussed above), is an LLC, the
members of which is not taxed in the United States on any
income, profits or gains earned through the LLC in the same way
they would be if they earned it directly.
THE FOREGOING SUMMARY OF MATERIAL U.S. AND CANADIAN TAX
CONSEQUENCES IS BASED ON THE CONVENTION BETWEEN CANADA AND THE
UNITED STATES OF AMERICA WITH RESPECT TO TAXES ON INCOME AND
CAPITAL GAINS, U.S. LAW, CANADIAN LAW, AND REGULATIONS,
ADMINISTRATIVE RULINGS AND PRACTICES OF THE U.S. AND
CANADA, ALL AS THEY EXIST AS OF THE DATE OF THIS REPORT. THIS
SUMMARY DOES NOT DISCUSS ALL ASPECTS THAT MAY BE RELEVANT TO ANY
PARTICULAR INVESTORS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES.
INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THEIR OWN PARTICULAR CIRCUMSTANCES AND WITH RESPECT
TO THE SPECIFIC TAX CONSEQUENCES OF OWNERSHIP OF COREL
CORPORATION COMMON SHARES, INCLUDING THE APPLICABILITY AND
EFFECT OF STATE, PROVINCIAL, LOCAL AND FOREIGN TAX LAWS, ESTATE
TAX LAWS AND PROPOSED CHANGES IN APPLICABLE LAWS.
RECENT
SALES OF UNREGISTERED SECURITIES
During our fiscal year ended November 30, 2007 there were
no issuances and sales of unregistered securities.
PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
None.
Information regarding our equity compensation plans required by
Item 201(d) of
Regulation S-K
may be found under Item 12
Share
Option and Other Compensation Plans.
DISCLOSURE
PURSUANT TO THE REQUIREMENTS OF NASDAQ
ADDITIONAL
A quorum for our general meetings consists of one person present
and being, or representing by proxy, shareholders holding in the
aggregate not less than 20% of the issued shares entitled to be
voted at the meeting. We were granted an exemption from the
NASDAQ Marketplace Rules requiring each issuer to provide for a
quorum at any meeting of the holders of common stock of no less
than 33.3% of the outstanding shares of the issuers common
voting stock.
In Fiscal 2007, the independent members of our board of
directors did not have regularly scheduled meetings at which
only independent directors were present, other than meetings of
our audit committee.
30
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
SELECTED
CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for our fiscal years
ended November 30, 2005, 2006 and 2007 and as of
November 30, 2006 and 2007 is derived from our audited
consolidated financial statements included in Item 8 of
this Annual Report on
Form 10-K.
The selected consolidated financial data set forth below for the
period from December 1, 2002 through August 28, 2003,
the period from August 29, 2003 through November 30,
2003, and our fiscal years ended November 30, 2004, and as
of November 30, 2004 and 2005 have been derived from our
audited consolidated financial statements.
The selected consolidated financial data presented as at and for
the period ended August 29, 2003 reflect our results of
operations and balance sheet prior to the time we were acquired
by Vector Capital. The selected consolidated financial data
presented as at and for the fiscal years ended November 30,
2004 and 2005 includes the financial results of the Jasc
business from October 26, 2004. The selected consolidated
financial data presented as at and for the fiscal year ended
November 30, 2005 includes the financial data of WinZip
from January 18, 2005 to November 30, 2005, which
reflects the period that WinZip and we were under common control
by Vector Capital. The selected consolidated financial date
presented as at and for the fiscal year ended November 30,
2007 reflects the acquisition of InterVideo on December 12,
2006. As a result, the financial data presented is not directly
comparable between periods.
Historical results do not necessarily indicate results expected
for any future period. The data below is qualified in its
entirety by the detailed information included elsewhere in this
Annual Report on
Form 10-K
and should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Business and the consolidated
financial statements and the accompanying notes included
elsewhere in this Annual Report on
Form 10-K.
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1,
|
|
|
August 29,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 Through
|
|
|
2003 Through
|
|
|
Fiscal Years Ended
|
|
|
|
August 28,
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2003(1)
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
85,386
|
|
|
$
|
23,806
|
|
|
$
|
111,692
|
|
|
$
|
164,044
|
|
|
$
|
177,191
|
|
|
$
|
250,480
|
|
Gross margin
|
|
|
62,102
|
|
|
|
15,852
|
|
|
|
79,845
|
|
|
|
118,290
|
|
|
|
140,344
|
|
|
|
173,790
|
|
Total operating expenses
|
|
|
88,215
|
|
|
|
24,974
|
|
|
|
71,454
|
|
|
|
101,404
|
|
|
|
106,187
|
|
|
|
166,880
|
|
Income (loss) from operations
|
|
|
(26,113
|
)
|
|
|
(9,122
|
)
|
|
|
8,391
|
|
|
|
16,886
|
|
|
|
34,157
|
|
|
|
6,910
|
|
Income tax expenses (recovery)
|
|
|
(3,895
|
)
|
|
|
555
|
|
|
|
7,315
|
|
|
|
6,291
|
|
|
|
4,668
|
|
|
|
3,443
|
|
Net income (loss)
|
|
|
(27,895
|
)
|
|
|
(9,272
|
)
|
|
|
1,207
|
|
|
|
(8,753
|
)
|
|
|
9,251
|
|
|
|
(13,062
|
)
|
Net income (loss) per Corel common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
0.41
|
|
|
$
|
(0.52
|
)
|
Fully diluted
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
0.40
|
|
|
$
|
(0.52
|
)
|
Weighted average number of Corel common shares used in per share
calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
22,410
|
|
|
|
24,951
|
|
Fully diluted
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
23,156
|
|
|
|
24,951
|
|
Net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
$
|
(0.30
|
)
|
|
$
|
(0.87
|
)
|
|
$
|
0.08
|
|
|
$
|
(2.40
|
)
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Class B
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
0.08
|
|
|
$
|
(2.40
|
)
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
WinZip common
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
136.90
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Fully diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
$
|
(0.30
|
)
|
|
$
|
(0.87
|
)
|
|
$
|
0.08
|
|
|
$
|
(2.40
|
)
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Class B
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
0.08
|
|
|
$
|
(2.40
|
)
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
WinZip common
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
136.90
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Weighted average number of shares used in per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
91,853
|
|
|
|
11,677
|
|
|
|
8,218
|
|
|
|
3,737
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Class B
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
3,497
|
|
|
|
8,321
|
|
|
|
N/A
|
|
|
|
N/A
|
|
WinZip common
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
20
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Fully diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
91,853
|
|
|
|
11,677
|
|
|
|
8,218
|
|
|
|
3,737
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Class B
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
3,497
|
|
|
|
8,321
|
|
|
|
N/A
|
|
|
|
N/A
|
|
WinZip common
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
20
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow provided by (used in) operating activities
|
|
$
|
(10,792
|
)
|
|
$
|
8,671
|
|
|
$
|
32,512
|
|
|
$
|
40,459
|
|
|
$
|
36,225
|
|
|
$
|
26,499
|
|
Cash flow provided by (used in) financing activities
|
|
|
(240
|
)
|
|
|
(47,516
|
)
|
|
|
(5,329
|
)
|
|
|
(38,552
|
)
|
|
|
(3,885
|
)
|
|
|
71,808
|
|
Cash flow provided by (used in) investing activities
|
|
|
6,418
|
|
|
|
43,143
|
|
|
|
(34,099
|
)
|
|
|
7,301
|
|
|
|
(1,906
|
)
|
|
|
(124,760
|
)
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(3)
|
|
$
|
(23,151
|
)
|
|
$
|
(3,428
|
)
|
|
$
|
29,183
|
|
|
$
|
39,531
|
|
|
$
|
42,405
|
|
|
$
|
45,136
|
|
Adjusted EBITDA(3)
|
|
|
(14,561
|
)
|
|
|
(2,290
|
)
|
|
|
32,199
|
|
|
|
49,033
|
|
|
$
|
55,214
|
|
|
$
|
57,291
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
24,683
|
|
|
$
|
21,788
|
|
|
$
|
20,746
|
|
|
$
|
51,030
|
|
|
$
|
24,615
|
|
Working capital (deficit)
|
|
|
(3,556
|
)
|
|
|
(19,417
|
)
|
|
|
(13,482
|
)
|
|
|
31,152
|
|
|
|
(15,219
|
)
|
Total assets
|
|
|
101,400
|
|
|
|
108,788
|
|
|
|
120,836
|
|
|
|
130,686
|
|
|
|
266,837
|
|
Deferred revenue
|
|
|
8,026
|
|
|
|
10,020
|
|
|
|
13,840
|
|
|
|
14,734
|
|
|
|
18,072
|
|
Total long-term debt
|
|
|
26,895
|
|
|
|
64,799
|
|
|
|
150,971
|
|
|
|
90,649
|
|
|
|
158,608
|
|
Total shareholders equity (deficit)
|
|
|
38,579
|
|
|
|
1,537
|
|
|
|
(85,234
|
)
|
|
|
(11,807
|
)
|
|
|
(14,300
|
)
|
|
|
|
(1)
|
|
Reflects data prior to us being
acquired by Vector Capital. The predecessor financial data is
not comparable with financial data for periods subsequent to
August 28, 2003 due to the application of push-down
accounting effective August 29, 2003 and the adoption of
SFAS No. 123 R, Share-based payments (revised
2004) (SFAS 123(R)) relating to the
accounting for stock-based compensation effective
December 1, 2003. In predecessor periods, stock-based
compensation was accounted for in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25).
|
|
(2)
|
|
Financial data for our fiscal year
ended November 30, 2005 is not comparable to prior periods
due to the combination of financial data of WinZip from
January 18, 2005 to November 30, 2005, which reflects
the period that WinZip and we were under common control by
Vector Capital.
|
|
(3)
|
|
EBITDA represents net income before
interest, income taxes, depreciation and amortization. Adjusted
EBITDA represents EBITDA, further adjusted to eliminate items
specifically defined in our credit facility agreement. EBITDA
and Adjusted EBITDA are not measures of operating income,
operating performance or liquidity under GAAP. We have included
a presentation of EBITDA because we understand it is used by
some investors to determine a companys historical ability
to service indebtedness, and it is a starting point for
calculating Adjusted EBITDA. We have included a presentation of
Adjusted EBITDA because certain covenants in our credit facility
are tied to Adjusted EBITDA. If our Adjusted EBITDA were to
decline below certain levels, it could result in, among other
things, a default or mandatory prepayment under our current
credit facility. The covenants in our credit facility are
described under Managements Discussion and Analysis
of Financial Condition and Results of Operations
Indebtedness. Additionally, management uses EBITDA and
Adjusted EBITDA as supplementary non-GAAP measures to assist in
its overall evaluation of our liquidity and to determine
appropriate levels of indebtedness. Neither EBITDA nor Adjusted
EBITDA should be considered in isolation or as a substitute for
cash flow from operations (as determined in accordance with
GAAP) as an indicator of our operating performance, or of
operating income (as determined in accordance with GAAP). EBITDA
and Adjusted EBITDA are not necessarily comparable to similarly
titled measures used by other companies.
|
33
We consider EBITDA and Adjusted EBITDA to be measures of
liquidity. Accordingly, they are reconciled to cash flow from
operations in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1,
|
|
|
August 29,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 Through
|
|
|
2003 Through
|
|
|
Fiscal Years Ended
|
|
|
|
|
|
|
August 28,
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
|
|
|
2003
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Cash flow provided by (used in) operating activities
|
|
$
|
(10,792
|
)
|
|
$
|
8,671
|
|
|
$
|
32,512
|
|
|
$
|
40,459
|
|
|
$
|
36,225
|
|
|
$
|
26,499
|
|
Change in operating assets and liabilities
|
|
|
2,030
|
|
|
|
(12,275
|
)
|
|
|
1,683
|
|
|
|
(10,440
|
)
|
|
|
3,736
|
|
|
|
5,238
|
|
Interest expense
|
|
|
|
|
|
|
225
|
|
|
|
2,709
|
|
|
|
12,786
|
|
|
|
12,309
|
|
|
|
16,978
|
|
Interest income
|
|
|
(1,383
|
)
|
|
|
(19
|
)
|
|
|
(1,485
|
)
|
|
|
(178
|
)
|
|
|
(978
|
)
|
|
|
(724
|
)
|
Income tax expense (recovery)
|
|
|
(3,895
|
)
|
|
|
555
|
|
|
|
7,315
|
|
|
|
6,291
|
|
|
|
4,668
|
|
|
|
3,443
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(225
|
)
|
|
|
(1,731
|
)
|
|
|
(3,232
|
)
|
|
|
(5,488
|
)
|
Other non-cash charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,242
|
)
|
|
|
|
|
|
|
|
|
Loss on debt retirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,937
|
)
|
|
|
(8,292
|
)
|
|
|
|
|
Provision for bad debts
|
|
|
(755
|
)
|
|
|
(326
|
)
|
|
|
93
|
|
|
|
(529
|
)
|
|
|
(195
|
)
|
|
|
(252
|
)
|
Unrealized foreign exchange gains (losses) on forward contracts
|
|
|
162
|
|
|
|
(22
|
)
|
|
|
27
|
|
|
|
(263
|
)
|
|
|
(150
|
)
|
|
|
(147
|
)
|
Deferred income taxes
|
|
|
139
|
|
|
|
(237
|
)
|
|
|
(5,178
|
)
|
|
|
(830
|
)
|
|
|
(876
|
)
|
|
|
83
|
|
Loss on interest rate swap recorded at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(810
|
)
|
|
|
(392
|
)
|
Gain (loss) on disposal of fixed assets
|
|
|
(67
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
20
|
|
|
|
|
|
|
|
(102
|
)
|
(Impairment) gain on disposal of investments
|
|
|
(7,448
|
)
|
|
|
|
|
|
|
729
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
Share of loss of equity investments
|
|
|
(1,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor legal settlement and tax refund
|
|
|
|
|
|
|
|
|
|
|
(8,994
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
(23,151
|
)
|
|
$
|
(3,428
|
)
|
|
$
|
29,183
|
|
|
$
|
39,531
|
|
|
$
|
42,405
|
|
|
$
|
45,136
|
|
Restructuring
|
|
|
|
|
|
|
1,138
|
|
|
|
3,520
|
|
|
|
834
|
|
|
|
810
|
|
|
|
1,447
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
225
|
|
|
|
1,731
|
|
|
|
3,232
|
|
|
|
5,488
|
|
Integration costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
358
|
|
|
|
5,220
|
|
Impairment (gain on disposal) of investments
|
|
|
7,448
|
|
|
|
|
|
|
|
(729
|
)
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
Share of loss of equity investments
|
|
|
1,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-cash charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,242
|
|
|
|
|
|
|
|
|
|
Reorganization costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
883
|
|
|
|
117
|
|
|
|
|
|
Loss on debt retirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,937
|
|
|
|
8,292
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(14,561
|
)
|
|
$
|
(2,290
|
)
|
|
$
|
32,199
|
|
|
$
|
49,033
|
|
|
$
|
55,214
|
|
|
$
|
57,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion and analysis should be read together
with our audited consolidated financial statements for the years
ended November 30, 2007, 2006 and 2005 and accompanying
notes set forth elsewhere in this report. All financial
information is presented in U.S. dollars.
Some of the statements set forth in this section are
forward-looking statements relating to our future results of
operations. Our actual results may vary from the results
anticipated by these statements. Please see Information
Regarding Forward-Looking Statements.
OVERVIEW
We are a leading global packaged software company with an
estimated installed base of over 100 million current users
in over 75 countries. We provide high quality, affordable and
easy-to-use Graphics and Productivity and Digital Media
software. Our products enjoy a favorable market position among
value-conscious consumers and small businesses benefiting from
the widespread, global adoption of personal computers, or PCs,
and digital capture devices. The functional departments within
large companies and governmental organizations are also
attracted to the industry-specific features and technical
capabilities of our software. Our products are sold through a
scalable distribution platform comprised of OEMs, our global
e-Stores,
and our international network of resellers and retail vendors.
We have broad geographic representation with dedicated sales and
marketing teams based in the Americas, EMEA/ANSEAK and Japan.
Our product portfolio includes well-established, globally
recognized brands.
An important element of our business strategy is to grow
revenues through acquisitions of companies or product lines. We
intend to focus our acquisition activities on companies or
product lines with proven and complementary products and
established user bases that we believe can be accretive to our
earnings shortly after completion of the acquisition. While we
review acquisition opportunities on an ongoing basis, we
currently have no binding obligations with respect to any
particular acquisition.
Graphics
and Productivity
Our primary Graphics and Productivity products include:
CorelDRAW Graphics Suite, Corel Painter, Corel DESIGNER,
WinZip
,
iGrafx
and
WordPerfect Office Suite.
CorelDRAW Graphics Suite
is a leading vector illustration,
page layout, digital image editing and bitmap conversion
software suite used by design professionals and small
businesses.
Corel Painter
is a
Natural-Media
®
painting and illustration software featuring digital brushes,
art materials and textures that mirror the look and feel of
their traditional counter parts.
Corel DESIGNER Technical
Suite
offers users a graphics application for creating or
updating complex technical illustrations.
WinZip
is a
compression utility developed in 1991, and purchased by us in
May 2006 is the most widely used aftermarket compression
utility, with more than 40 million licenses sold to date.
Our
iGrafx
products allow enterprises to analyze,
streamline and optimize their business processes.
WordPerfect
Office Suite
was first developed in 1982 and marketed by
Corel since 1996, is the leading Microsoft-alternative
productivity software and includes Microsoft-compatible word
processing, spreadsheet and presentation functionality
Digital
Media
Our primary Digital Media products include:
Corel Paint Shop
Pro
,
Corel Media One
and various products acquired in
December 2006 as part of the purchase of InterVideo. These
products include
WinDVD, VideoStudio, DVD Movie Factory, DVD
Copy
and
PhotoImpact. Corel Paint Shop Pro
digital
image editing and management applications are used by novice and
professional photographers and photo editors.
Corel Media One
is a multimedia software program for organizing and
enhancing photos and video clips.
WinDVD,
is the
worlds leading DVD player software for use on PCs.
VideoStudio
is our video editing and DVD authoring
software for users who want to produce professional-looking
videos, slideshows and DVDs.
DVD Movie Factory
is a
consumer DVD authoring software.
DVD Copy
is an
application that copies and backs up DVDs and CDs in multiple
device formats.
Photo Impact
is an image editing software.
35
Corporate
History
Corel was founded in 1985. In January 1989, we released our
flagship product,
CorelDRAW
, a market-leading
full-featured graphics software suite. In November 1989, we
completed an initial public offering of our common shares. In
January 1996, we acquired the
WordPerfect
family of
software products. In August 2003, we were acquired by Vector
Capital and became a private company. We divested certain
underperforming product lines, discontinued speculative research
and development activities and refocused our business on our
core products and customers. At the same time we reviewed all of
our business functions and implemented company-wide cost
reduction measures. Between August 2003 and May 2004, we reduced
our staff from 708 to 480. The staff reduction contributed to
reducing our annual operating expenses from $113.2 million
in the year ended November 30, 2003 to $71.5 million
in our fiscal year ended November 30, 2004.
In October 2004, we acquired Jasc, a leading Digital Media
packaged software company, for total consideration of
$36.7 million, consisting of $34.3 million in cash and
379,677 of our common shares valued at $2.4 million.
Through the Jasc acquisition, we added
Corel Paint Shop Pro
and
Corel Photo Album
to our Digital Media offerings.
As a result of synergies realized through the integration of
Jasc, we eliminated 38 full-time positions and
substantially reduced staffing and distribution costs in our
fiscal year ended November 30, 2005.
In May 2006, concurrent with the completion of our initial
public offering, we purchased WinZip from Vector Capital. As
consideration for the acquisition, we issued to Vector Capital
4,322,587 of our common shares and repaid all of WinZips
outstanding indebtedness. Vector Capital acquired WinZip in
January 2005. Through this acquisition, we added the
WinZip
file compression utility to our Graphics and Productivity
software offerings. On December 12, 2006, we completed the
acquisition of InterVideo and on December 28, 2006 we
completed the acquisition of the remaining interest in Ulead, in
transactions totaling approximately $220.4 million. This
acquisition expanded our position in the fast growing Digital
Media market with the addition of authoring and video playback
software focused on high-definition and DVD technologies.
In November 2007, management initiated a restructuring plan to
centralize much of our Digital Media operations in Greater China
and Fremont, California. Additionally, further changes have been
made to our staff to align and balance our global teams. This
has resulted in the planned closure of our Minneapolis location
in fiscal 2008 as well as the termination of certain
individuals. We incurred restructuring charges of
$1.4 million in the current period as a result of this
plan. Additional charges of $0.8 million are expected to be
incurred in fiscal 2008.
An important element of our business strategy is to grow
revenues through acquisitions of companies or product lines. We
intend to focus our acquisition activities on companies or
product lines with proven and complementary products and
established user bases that we believe can be accretive to our
earnings shortly after completion of the acquisition. While we
review acquisition opportunities on an ongoing basis, we have no
binding obligations with respect to any particular acquisition.
Our functional currency is the U.S. dollar and our
financial statements are prepared in accordance with generally
accepted accounting principles in the United States, and have
been consistently applied for our fiscal years ended
November 30, 2007, 2006 and 2005.
Industry
and Business Trends
Our largest competitors, Microsoft Corporation and Adobe Systems
Incorporated, hold the majority of the markets in both
Productivity and Graphics and in Digital Media. Microsoft
Corporations Microsoft Office and Adobe Systems hold most
of the North American and global market for packaged Graphics
and Productivity software. Adobe Systems holds much of the
Digital Media software market. Growth rates of packaged software
sales in emerging economies are expected to be higher than for
the global packaged software market as a whole resulting from
more rapidly increasing PC adoption rates in these markets.
Additionally, higher growth rates are expected within the
Digital Media software market thanks to the proliferation of
capturing devices, the introduction of high definition formats,
and finally the expansion of Digital Media content
36
creation and sharing through social networking websites and
email. Because the prices we charge for our packaged software
are generally substantially less than those charged by Microsoft
and Adobe for products with similar functionality, we believe we
are well positioned to take advantage of the emerging market for
lower cost software. However, if any of our more established
competitors decide to compete with us based on price in this
market, we may be unable to successfully compete with the more
widely accepted software applications these competitors sell.
Similarly, the markets for low-cost personal computers and
Digital Media software are only newly emerging. If these markets
do not develop as we expect, our business could be adversely
affected.
We believe there is a significant market opportunity for us in
countries where the markets for PCs are newly emerging, both
because our software is more attractively priced than that of
our larger competitors and because we believe first time users
in these markets do not have established brand loyalties.
The packaged software industry continues to change with new
revenue sharing models and types of business relationships. We
will seek to continue to develop relationships with industry
leading companies to establish new sources of revenues for our
existing and future products. If we are unsuccessful in
establishing such relationships, our operating results could be
materially and adversely affected.
Acquisition
of InterVideo
On December 12, 2006, we completed the acquisition of
InterVideo, a provider of Digital Media authoring and video
playback software with a focus on high-definition and DVD
technologies. In 2005, InterVideo acquired a majority interest
in Ulead, a leading developer of video imaging and DVD authoring
software for desktop, server, mobile and Internet platforms. On
December 28, 2006 we completed the acquisition of the
remaining interest in Ulead. The acquisitions of InterVideo and
Ulead (InterVideo) were completed in cash
transactions totaling approximately $220.4 million. We
purchased InterVideo for $13.00 per share of InterVideo common
stock. We financed the acquisitions through a combination of our
cash reserves, InterVideos cash reserves and debt
financing which included an amendment to our existing credit
agreement to increase available term borrowings by
$70.0 million. In addition, outstanding stock options held
by InterVideo employees were converted into options to purchase
our common shares and we assumed pension obligations under
benefit plans for various InterVideo employees.
This acquisition substantially expanded our presence in the
Digital Media software market by creating a broad portfolio of
Digital Media and DVD video products. The main products acquired
from InterVideo are
WinDVD,
the worlds leading DVD
player software for use on PCs,
VideoStudio,
a
video editing and DVD authoring software
DVD Movie Factory,
a consumer DVD authoring software,
Photo Impact,
an
image editing software, and
DVD Copy
, an application that
copies and backs up DVDs and CDs in multiple device
formats.. These products contributed $73.0 million of
revenue in fiscal 2007. With the combination of our Digital
Imaging software and InterVideos Digital Media products,
we now deliver an expanded portfolio of easy-to-use,
multi-purpose high-definition video, imaging, and DVD creation
products to consumers and enterprises worldwide. In addition,
the acquisition has enabled us to further extend our presence in
emerging markets.
The acquisition combined our key strengths business
model innovation, understanding of end user requirements and
established distribution in the Americas and Europe
with InterVideos core assets, which include video
technology innovation, established partnerships with the
worlds leading PC OEM partners, such as Hewlett Packard,
Toshiba and Lenovo and strong market presence in the Asia
Pacific region. We now have significant development offices in
Fremont, California, Taipei and Shanghai and a sales and
marketing office in Yokohama, Japan.
Cost synergies were realized from this acquisition, which have
resulted in a reduction of the combined Companys sales and
marketing, research and development and general and
administrative expenses as compared to what those expenses would
have been if the companies had continued to operate as
stand-alone entities. We have completed the process of executing
our integration and restructuring actions to achieve these cost
reductions in the current and future fiscal years. This included
the integration of financial systems, information technology and
human resource processes.
37
We were unable to recognize certain revenue from many InterVideo
OEM customers due to acquisition accounting. This impacted our
first quarter revenues in that we did not recognize revenue of
approximately $11.0 million on any InterVideo or Ulead
products that were physically sold to OEM partners and
distributed by them prior to December 12, 2006, for which
the related sell through reports were received subsequent to the
date of acquisition. We would normally recognize such revenues
when we receive a sell through report from our partners.
Operating
Performance
Results for the year ended November 30, 2007 include the
results from our acquisition of InterVideo as of
December 12, 2006.
Revenue for fiscal 2007 was $250.5 million, up 41.4% from
fiscal 2006. Excluding
InterVideo
revenue of
$73.0 million during the year, revenue from the Corel
business was $177.5 million, an increase of 0.2% year over
year. Gains from several products in our Corel portfolio
including
Corel Draw, Painter, WinZip,
and
iGrafx,
were offset by a decrease in revenue from our
WordPerfect
and
Digital Imaging products
,
including
Paint Shop Pro Photo
and
Photo Album.
WordPerfect
and the
Digital Imaging
products declined
by $12.0 million and $3.6 million, respectively in
fiscal 2007, and the rest of the Corel portfolio, excluding
InterVideo
products, grew by $16.0 million or by
15.5% year over year
Our net loss for 2007 was $13.1 million, or a loss of $0.52
per basic common share, compared to a net income of
$9.3 million, or $0.41 per basic common share in 2006. Cash
provided by operations was $26.5 million in the year. The
fiscal 2007 results were impacted by a number of items resulting
from the acquisition of InterVideo, primarily related to the
inability to recognize certain revenues, as discussed above, and
acquisition charges, including the write-off of
$7.8 million in acquired in-process research and
development.
OPERATIONS
Revenues
We derive revenues principally from the sale of our software,
and associated maintenance and support services. Maintenance and
services revenues have historically constituted between 8.0% and
11.0% of our total revenues. We distribute our software through
OEMs, the Internet, retailers and resellers around the world.
Our products are focused on two primary software
markets the Graphics and Productivity market and the
Digital Media market. Our primary Graphics and Productivity
products are
CorelDRAW Graphics Suite
,
Corel Painter,
Corel Designer Technical Suite, WinZip, iGrafx Flow Charter
and
WordPerfect Office Suite
. Our primary Digital
Media products consist of
Paint Shop Pro, Media One
and
the
InterVideo
family of products we acquired, including
WinDVD, VideoStudio, DVD Movie Factory, DVD Copy
and
PhotoImpact.
In our fiscal year ended November 30,
2007, approximately 50.3% of our revenues came from the
Americas, 29.1% came from Europe, the Middle East and Africa and
20.6% came from the Asia Pacific region. During fiscal 2007,
there has been a significant increase in our Asia Pacific sales
due to the acquisition of InterVideo, and our positioning in
this market.
38
Our products generally have release cycles of between 12 and
24 months, and we typically earn the largest portion of
revenues for a particular product during the first half of its
release cycle. The fiscal quarter of the most recent release of
each of our major products is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Quarter of
|
|
|
Quarter of
|
|
|
|
|
|
|
|
|
|
Version
|
|
|
Current Release
|
|
|
Prior Release
|
|
|
|
|
|
|
|
|
Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Graphics and Productivity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CorelDRAW Graphics Suite
|
|
|
14
|
|
|
|
Q1 2008
|
|
|
|
Q1 2006
|
|
|
|
|
|
|
|
|
|
Corel Painter
|
|
|
10
|
|
|
|
Q1 2007
|
|
|
|
Q4 2004
|
|
|
|
|
|
|
|
|
|
Corel Designer Technical Suite
|
|
|
12
|
|
|
|
Q2 2005
|
|
|
|
Q3 2003
|
|
|
|
|
|
|
|
|
|
WinZip
|
|
|
11
|
|
|
|
Q4 2006
|
|
|
|
Q4 2005
|
|
|
|
|
|
|
|
|
|
iGrafx FlowCharter
|
|
|
12
|
|
|
|
Q2 2007
|
|
|
|
Q1 2006
|
|
|
|
|
|
|
|
|
|
WordPerfect Office Suite
|
|
|
13
|
|
|
|
Q1 2006
|
|
|
|
Q2 2004
|
|
|
|
|
|
|
|
|
|
Digital Media
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paint Shop Pro
|
|
|
12
|
|
|
|
Q4 2007
|
|
|
|
Q4 2006
|
|
|
|
|
|
|
|
|
|
MediaOne
|
|
|
2
|
|
|
|
Q4 2007
|
|
|
|
Q4 2006
|
|
|
|
|
|
|
|
|
|
WinDVD
|
|
|
8
|
|
|
|
Q4 2006
|
|
|
|
Q2 2005
|
|
|
|
|
|
|
|
|
|
VideoStudio
|
|
|
11
|
|
|
|
Q2 2007
|
|
|
|
Q2 2006
|
|
|
|
|
|
|
|
|
|
DVD Movie Factory
|
|
|
6
|
|
|
|
Q1 2007
|
|
|
|
Q1 2006
|
|
|
|
|
|
|
|
|
|
DVD Copy
|
|
|
5
|
|
|
|
Q3 2006
|
|
|
|
Q1 2006
|
|
|
|
|
|
|
|
|
|
PhotoImpact
|
|
|
12
|
|
|
|
Q3 2006
|
|
|
|
Q4 2005
|
|
|
|
|
|
|
|
|
|
We have typically released new versions of our Digital Media
products on an annual basis during the second half of our fiscal
year in preparation for the December holiday shopping season.
While we expect to do so in our fiscal year ending
November 30, 2008 as well, it should be noted that release
dates are subject to a number of uncertainties and variables,
many of which are beyond our control. See
Item 1A Risk Factors
Our
quarterly operating results may fluctuate depending on the
timing and success of product releases
.
Cost
of Revenues
Cost of product revenues primarily consists of:
|
|
|
|
|
royalties paid and costs of licensing third party intellectual
property;
|
|
|
|
salaries, benefits, stock-based compensation and related costs
of the manufacturing oversight staff;
|
|
|
|
the cost of packaging and distribution of our packaged software
products;
|
|
|
|
the cost of related customer and technical support functions;
|
|
|
|
credit card fees; and
|
|
|
|
allocated facilities, depreciation and amortization and other
related overhead.
|
Our cost of product revenues varies depending on the format in
which our products are delivered. Products delivered in
electronic format, such as through OEMs or our
e-Store,
involve minimal packaging cost, as compared to products
delivered in fully packaged format, such as through retail
outlets, which involve substantially higher packaging and
distribution expense.
Cost of maintenance and services revenues consists of:
|
|
|
|
|
salaries, benefits, stock-based compensation and related costs
of customer and technical support functions; and
|
|
|
|
allocated facilities, depreciation and amortization and other
related overhead.
|
39
Amortization of intangible assets represents the amortization of
intellectual property and other intangible assets arising from
purchases of other companies such as Jasc and InterVideo is
included in the calculation of our gross margin.
Sales
and Marketing
Sales and marketing expenses consist primarily of:
|
|
|
|
|
salaries, commissions, benefits and stock-based compensation
related to sales and marketing personnel;
|
|
|
|
travel and living expenses;
|
|
|
|
marketing, such as co-marketing programs with our resellers and
OEMs, trade shows and advertising; and
|
|
|
|
allocated facilities, depreciation and amortization and other
related overhead.
|
Research
and Development
Research and development expenses consist primarily of:
|
|
|
|
|
salaries, benefits and stock-based compensation related to
research and development personnel;
|
|
|
|
allocated facilities, depreciation and amortization and other
related overhead; and
|
|
|
|
localization and contract development expenses.
|
Our research and development investments are primarily focused
on maintaining competitive functionality of our software
products, responding to customer requirements and expanding the
geographic reach of our products. We limit research and
development spending to areas that we believe will provide an
attractive return on investment and have eliminated spending on
speculative or high risk projects. Our research and development
costs are expensed as incurred since the cost and time between
technical feasibility and release is insignificant.
General
and Administrative
General and administrative expenses consist primarily of:
|
|
|
|
|
salaries, benefits and stock-based compensation related to
general and administrative personnel;
|
|
|
|
accounting, legal and other professional fees;
|
|
|
|
allocated facilities, depreciation and amortization and other
related overhead; and
|
|
|
|
insurance costs.
|
Taxes
We have tax loss carryforwards available to offset future
taxable income of approximately $233.5 million as of
November 30, 2007. As of November 30, 2007 we also had
approximated $220.0 million of tax depreciation that would
be available to offset taxable income in future years. Our tax
loss carryforwards and our pools of various deductions against
taxable income existed prior to our acquisition by Vector
Capital in fiscal 2003. To the extent that we used
pre-acquisition tax carryforwards to reduce taxes otherwise
payable in fiscal 2004 through 2006, the benefit was applied
first to reduce goodwill and then intangible assets recognized
in connection with our acquisition by Vector Capital. As at
November 30, 2006 the related goodwill and intangibles have
been fully written off. Consequently, to the extent we use tax
loss carryforwards subsequent to 2007, we expect to record the
benefit as a reduction in income tax expense.
The remaining tax loss carryforwards expire between the tax
years 2008 and 2027 and have not been fully audited by relevant
authorities. We have not recorded a financial statement benefit
for these attributes as we have limited history of profitability.
40
Due to the international scope of our business, our income tax
expense includes the tax provisions calculated for the various
tax jurisdictions in which we operate and foreign withholding
tax on certain license income. As a result, income tax expense
is affected by the profitability of our operations in all
locations, as well as local tax rates.
RESULTS
OF OPERATIONS
Comparison
of Fiscal Year Ended November 30, 2007 to Fiscal Year Ended
November 30, 2006
Our consolidated financial statements for our fiscal year ended
November 30, 2007 have been prepared in accordance with
U.S. generally accepted accounting principles.
On December 12, 2006, we acquired all of the outstanding
shares of InterVideo. Accordingly, because the financial
information for year ended November 30, 2006 does not
include InterVideo operations, they are not directly comparable
to the consolidated financial information presented for the year
ended November 30, 2007. In the analysis, Corel
products refers to the revenues and expenses related to
the products which were owned by Corel prior to the acquisition
of InterVideo.
The following table sets forth certain consolidated statements
of operations data in dollars and expressed as a percentage of
revenues for the periods indicated, as well as the percentage
change on a year-over-year basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
157,319
|
|
|
$
|
228,274
|
|
|
|
88.8
|
%
|
|
|
91.1
|
%
|
|
|
45.1
|
%
|
Maintenance and services
|
|
|
19,872
|
|
|
|
22,206
|
|
|
|
11.2
|
|
|
|
8.9
|
|
|
|
11.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
177,191
|
|
|
|
250,480
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
41.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product(1)
|
|
|
21,339
|
|
|
|
49,775
|
|
|
|
13.6
|
|
|
|
21.8
|
|
|
|
133.3
|
|
Cost of maintenance and services(1)
|
|
|
1,142
|
|
|
|
796
|
|
|
|
5.7
|
|
|
|
3.6
|
|
|
|
(30.3
|
)
|
Amortization of intangible assets
|
|
|
14,366
|
|
|
|
26,119
|
|
|
|
8.1
|
|
|
|
10.4
|
|
|
|
81.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
36,847
|
|
|
|
76,690
|
|
|
|
20.8
|
|
|
|
30.6
|
|
|
|
108.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
140,344
|
|
|
|
173,790
|
|
|
|
79.2
|
|
|
|
69.4
|
|
|
|
23.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
54,851
|
|
|
|
70,587
|
|
|
|
31.0
|
|
|
|
28.2
|
|
|
|
28.7
|
|
Research and development
|
|
|
25,883
|
|
|
|
44,712
|
|
|
|
14.6
|
|
|
|
17.9
|
|
|
|
72.7
|
|
General and administrative
|
|
|
24,285
|
|
|
|
37,083
|
|
|
|
13.7
|
|
|
|
14.8
|
|
|
|
52.7
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
7,831
|
|
|
|
0.0
|
|
|
|
3.1
|
|
|
|
n/a
|
|
Integration expense
|
|
|
358
|
|
|
|
5,220
|
|
|
|
0.2
|
|
|
|
2.1
|
|
|
|
1358.1
|
|
Restructuring
|
|
|
810
|
|
|
|
1,447
|
|
|
|
0.5
|
|
|
|
0.6
|
|
|
|
78.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
106,187
|
|
|
|
166,880
|
|
|
|
59.9
|
|
|
|
66.6
|
|
|
|
57.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
34,157
|
|
|
|
6,910
|
|
|
|
19.3
|
%
|
|
|
2.8
|
%
|
|
|
(79.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on debt retirement
|
|
|
8,292
|
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
Interest expense, net
|
|
|
11,331
|
|
|
|
16,254
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
Amortization of deferred financing fees
|
|
|
1,180
|
|
|
|
1,074
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
Other non-operating (income) expense
|
|
|
(565
|
)
|
|
|
(799
|
)
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (recovery)
|
|
|
13,919
|
|
|
|
(9,619
|
)
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
Income tax expense
|
|
|
4,668
|
|
|
|
3,443
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,251
|
|
|
$
|
(13,062
|
)
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Percentage reflects percentage of related revenues.
|
|
*
|
|
Not Meaningful
|
41
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2007
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
Product
|
|
$
|
157,319
|
|
|
$
|
228,274
|
|
|
|
45.1
|
%
|
As a percent of revenue
|
|
|
88.8
|
%
|
|
|
91.1
|
%
|
|
|
|
|
Maintenance and services
|
|
|
19,872
|
|
|
|
22,206
|
|
|
|
11.7
|
%
|
As a percent of revenue
|
|
|
11.2
|
%
|
|
|
8.9
|
%
|
|
|
|
|
Total
|
|
|
177,191
|
|
|
|
250,480
|
|
|
|
41.4
|
%
|
Total revenues for the year ended November 30, 2007
increased by 41.4% to $250.5 million from
$177.2 million for the year ended November 30, 2006.
Of this increase, $73.0 million is attributable to
additional revenues generated from InterVideo products. There
was an increase in total revenues from Corel products of
$0.3 million in the current year. This increase was driven
by growth of approximately $16.0 million, in
WinZip,
CorelDraw, iGrafx,
and
Corel Painter.
These increases
were largely offset by a decrease in
WordPerfect
revenues
of $12.1 million and
Digital Imaging
revenues of
$3.6 million from last year.
Product revenues for the year ended November 30, 2007
increased by 45.1% to $228.3 million from
$157.3 million for the year ended November 30, 2006.
Product revenues for Corel products decreased by
$2.0 million or 1.3% to $155.3 million for the year
ended November 30, 2007. This decline primarily reflects
the decline in sales of
WordPerfect
and the decrease in
sales of
Digital Imaging
products
,
which was
partially offset by an increase in the sales of the rest of the
portfolio of products, led by growth in
WinZip, CorelDRAW,
iGrafx
and
Corel Painter
revenues. The decline in
WordPerfect
revenues for the year ended November 30,
2007 is due primarily to a decrease in point of sale royalties
from one of our largest OEM customers, a decrease in enterprise
license revenue and the latter part of the product lifecycle
given the launch of
WordPerfect Office X3
in the first
quarter of the prior year. The decline in
Digital Imaging
revenue for the year ended November 30, 2007 is
primarily attributable to lower POS and APOS (after Point of
Sale) revenue for
Snapfire
at one of our largest OEM
customers, a decrease in the level of upgrades from earlier
versions of
Paint Shop Pro
to
Paint Shop Pro Photo X1
and the repositioning of this brand as our higher end
product relative to our acquired Photo Impact and
Photo
Express
brands. A new version of
Paint Shop Pro
was
released in the fourth quarter of fiscal 2007. Also, we expect
improved performance from the recently announced
MediaOne
product, which is the follow-on product to
Snapfire
.
Revenues from our
WinZip
products have increased due to
new license sales and upgrades resulting from increased
conversion of trial customers to license users through more
aggressive in-product messaging. The increase in
iGrafx
revenues is attributable to significant new customer wins in
the Japanese market, the overall competitiveness of our product
portfolio and additional marketing and promotional initiatives
undertaken in the current year. The increase in
CorelDRAW
revenues during the year ended November 30, 2007 is
attributable to growth in the European market due to significant
enterprise license agreements and additional promotion and
marketing activity.
CorelDRAW
continues to experience
growth in emerging markets such as Latin America. The increase
in
Corel Painter
revenue during fiscal 2007 is due to
continued worldwide growth in OEMs,
e-store
sales, and channel sales.
Maintenance and services revenues increased by 11.7% to
$22.2 million for the year ended November 30, 2007.
This increase is largely attributable to increased sales of
WinZips maintenance program. As a percentage of total
revenue, maintenance and services revenue declined to 8.9% in
fiscal 2007 from 11.2%, as a result of the change in product mix
due to the acquisition of InterVideo. The InterVideo family of
products generates minimal amounts of maintenance and services
revenue.
42
Total
Revenues by Product Group
As a result of our acquisition of InterVideo, we changed our
revenue by product group classification so that it was aligned
with how we now manage our product groups. Revenues by product
for the year ended November 30, 2006 were reclassified to
conform to the current period. There have been no changes to
total revenues for the year ended November 30, 2006 as a
result of this reclassification.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2007
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Graphics and Productivity
|
|
$
|
137,741
|
|
|
$
|
141,692
|
|
|
|
2.9
|
%
|
As a percent of revenue
|
|
|
77.7
|
%
|
|
|
56.6
|
%
|
|
|
|
|
Digital Media
|
|
|
39,450
|
|
|
|
108,788
|
|
|
|
175.8
|
%
|
As a percent of revenue
|
|
|
22.3
|
%
|
|
|
43.4
|
%
|
|
|
|
|
Graphics and Productivity revenues increased by
$4.0 million or 2.9% to $141.7 million in fiscal 2007
from $137.7 million in fiscal 2006. There was a decline of
$12.0 million in the sales of
WordPerfect Office
.
The rest of the Graphics and Productivity portfolio of products
increased by $16.0 million or 15.5% as compared to the year
ending November 30, 2007. This was primarily driven by
growth in
WinZip, CorelDRAW, iGrafx
and
Corel Painter
revenues. Revenues from our
WinZip
products have
grown due to increased new license sales and upgrades resulting
from increased conversion of trial customers to license users
through more aggressive in-product messaging. The increase in
iGrafx
revenues is attributable to additional marketing
and promotional initiatives undertaken in the current quarter,
and new licensing deals in Japan. The increase in
CorelDRAW
is due to new licensing deals reached in EMEA. The increase
in
Corel Painter
is due to continued worldwide growth in
OEMs,
e-store
sales, and channel sales. The decline in
WordPerfect
revenues is due primarily to the decrease in point of sale
royalties from one of our largest OEM customers, the decrease in
enterprise license revenue, and the launch of
WordPerfect
Office X3
in the first quarter of the prior year.
Digital Media revenues increased by 175.8% to
$108.8 million in fiscal 2007 from $39.5 million in
fiscal 2006. The significant increase is due to the inclusion of
$73.0 million of revenue in fiscal 2007 that resulted from
products acquired with our acquisition of InterVideo on
December 12, 2006. Excluding acquired Digital Media
products, Corels
Digital Imaging
products decreased
by 9.2% to $35.9 million in fiscal 2007, as compared to
$39.5 million in fiscal 2006. The decrease in revenues was
the result of lower conversion rates and lower point of sales
and after point of sales (APOS) revenue at our largest OEM
customer. Some of this decline was offset by the introduction of
MediaOne,
which was not sold in fiscal 2006, as we
continued to acquire new OEM partners and started to realize the
benefit of APOS revenue. Also, during the second half of the
year, we continued to reposition
Paint Shop Pro
as the
high end, high value product in a portfolio of Digital Media
products, which now also includes
Photo Impact
and
MediaOne.
Total
Revenues by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
Change
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Americas
|
|
$
|
104,447
|
|
|
$
|
125,979
|
|
|
|
58.9
|
%
|
|
|
50.3
|
%
|
|
|
20.6
|
%
|
Europe, Middle East, and Africa (EMEA)
|
|
|
58,253
|
|
|
|
72,932
|
|
|
|
32.9
|
|
|
|
29.1
|
|
|
|
25.2
|
|
Asia Pacific (APAC)
|
|
|
14,491
|
|
|
|
51,569
|
|
|
|
8.2
|
|
|
|
20.6
|
|
|
|
255.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
177,191
|
|
|
$
|
250,480
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
41.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues in the Americas increased by 20.6% to
$126.0 million in fiscal 2007 compared to
$104.4 million in fiscal 2006. The increase was principally
driven by the revenues associated with our new
InterVideo
products, which generated sales of $28.7 million for
the year ending November 30, 2007. Revenues for Corel
products declined by 6.9% in fiscal 2007, due to lower
WordPerfect
and
digital imaging
revenues.
WordPerfect
decreased due to the decrease in point of
sale royalties from one of our largest OEM customers, the
decrease in enterprise license revenue, and the launch of
WordPerfect Office X3
in the first quarter of the prior
year.
43
The decline in
digital imaging
revenues for fiscal 2007
is primarily attributable to lower POS revenue at one of our
largest OEM customers and the repositioning of the
Digital
Imaging
product as our higher end product relative to our
acquired
Photo Impact
brand and
MediaOne.
A new
version of
Paint Shop Pro
has been released in the fourth
quarter of fiscal 2007.
Revenues in EMEA increased by 25.2% to $72.9 million in
fiscal 2007 from $58.3 million in fiscal 2006. The main
reason for the increase was the revenues generated by our
InterVideo
products which totaled $10.3 million in
fiscal 2007. Revenues from Corel products increased by 7.6%
primarily due to increases in
CorelDRAW Graphics Suite
and
WinZip
product sales, which offset decreases in
sales in
WordPerfect
and
Digital Imaging
product
. CorelDRAW Graphics Suite
revenues increased
in EMEA due to continued advances made in the retail, academic
and enterprise market and the strengthening of the Euro relative
to the US Dollar.
APAC revenues increased by 255.9% to $51.6 million in
fiscal 2007. The increase is due largely to sales from
InterVideo
products of $34.0 million in fiscal 2007.
Revenue growth in Corel products was 21.2% for the year ended
November 30, 2007, due to revenue growth in
WinZip
and
iGrafx. iGrafx
growth was larger in this region
due to licensing deals reached with one of our distribution
partners initiated in the second quarter of fiscal 2007.
Revenues from our
WinZip
products have grown
significantly due to increased new license sales and upgrades
resulting from increased conversion of trial customers to
license users through more aggressive in-product messaging.
Cost
of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2007
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cost of product
|
|
$
|
21,339
|
|
|
$
|
49,775
|
|
|
|
133.3
|
%
|
As a percent of product revenue
|
|
|
13.6
|
%
|
|
|
21.8
|
%
|
|
|
|
|
Cost of maintenance and services
|
|
|
1,142
|
|
|
|
796
|
|
|
|
(30.3
|
)%
|
As a percent of maintenance and service revenue
|
|
|
5.7
|
%
|
|
|
3.6
|
%
|
|
|
|
|
Amortization of intangible assets
|
|
|
14,366
|
|
|
|
26,119
|
|
|
|
81.8
|
%
|
As a percent of revenue
|
|
|
8.1
|
%
|
|
|
10.4
|
%
|
|
|
|
|
Cost of Product Revenues.
Cost of product
revenues increased by 133.3% to $49.8 million in fiscal
2007 from $21.3 million in fiscal 2006. As a percentage of
product revenues, cost of product revenues increased to 21.8%
from 13.6%, for the year ended November 30, 2007. The
increase in the period is largely attributable to the change in
our product mix caused by the acquisition of InterVideo.
InterVideo products generally have higher royalty bearing
content than Corel products.
Cost of Maintenance and Services
Revenues.
Cost of maintenance and services
revenues decreased to 3.6% of related revenues in fiscal 2007
compared to 5.7% in fiscal 2006. The increase in maintenance
revenues is primarily attributable to
WinZips
higher maintenance revenues, for which we have experienced
limited incremental costs to provide.
Amortization of Intangible
Assets.
Amortization of intangible assets
increased by $11.7 million to $26.1 million in the
year ended November 30, 2007, from $14.4 million in
the year ended November 30, 2006. This increase is due to
the $15.5 million of amortization related to the intangible
assets of $86.6 million acquired with InterVideo.
44
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
Percentage
|
|
|
|
2006
|
|
|
2007
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
Sales and marketing
|
|
$
|
54,851
|
|
|
$
|
70,587
|
|
|
|
28.7
|
%
|
As a percent of revenue
|
|
|
31.0
|
%
|
|
|
28.2
|
%
|
|
|
|
|
Research and development
|
|
|
25,883
|
|
|
|
44,712
|
|
|
|
72.7
|
%
|
As a percent of revenue
|
|
|
14.6
|
%
|
|
|
17.9
|
%
|
|
|
|
|
General and administrative
|
|
|
24,285
|
|
|
|
37,083
|
|
|
|
52.7
|
%
|
As a percent of revenue
|
|
|
13.7
|
%
|
|
|
14.8
|
%
|
|
|
|
|
Restructuring
|
|
|
810
|
|
|
|
1,447
|
|
|
|
78.6
|
%
|
As a percent of revenue
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
|
|
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
7,831
|
|
|
|
n/a
|
|
As a percent of revenue
|
|
|
0.0
|
%
|
|
|
3.1
|
%
|
|
|
|
|
InterVideo integration expenses
|
|
|
358
|
|
|
|
5,220
|
|
|
|
1358.1
|
%
|
As a percent of revenue
|
|
|
0.2
|
%
|
|
|
2.1
|
%
|
|
|
|
|
Sales and Marketing.
Sales and marketing
expenses increased by 28.7% to $70.6 million in fiscal 2007
as compared to $54.9 million in fiscal 2006. For the year,
sales and marketing expenses as a percentage of revenue
decreased to 28.2%, as compared to 31.0% for the prior period.
The increase in sales and marketing expenses is as a result of
additional costs associated with assuming InterVideo operations.
The decline in expenses as a percentage of revenue from the
prior year is due to our integration activities which have
created cost synergies in the current period.
Research and Development.
Research and
development expenses increased by 72.7% to $44.7 million
for the year ended November 30, 2007, as compared to
$25.9 million for the year ended November 30, 2006. As
a percentage of total revenues, research and development
expenses increased to 17.9% from 14.6% in fiscal 2007 as
compared to fiscal 2006. The increase in research and
development expenses is as a result of products acquired from
InterVideo which are part of our Digital Media group of
products. Further research and development investment has been,
and is expected to be, made in Digital Media due to relative
maturity and growth potential of this sector.
General and Administrative.
General and administration
expenses increased to $37.1 million in the year ended
November 30, 2007, from $24.3 million for the year
ended November 30, 2006. As a percentage of total revenues,
general and administration expenses increased to 14.8% from
13.8% as compared to fiscal 2006. The increase in general and
administration costs is due largely to the integration of
InterVideo operations and resources as well as additional
expenses incurred to be compliant with the
Sarbanes-Oxley
Act of 2002.
InterVideo Integration Expense:
Integration
costs relating to the acquisition of InterVideo totaling
$5.2 million have been recorded during the year ending
November 30, 2007. These costs relate to the integration of
the InterVideo business into our existing operations, including
travel costs, retention bonuses, incremental employees engaged
solely for integration activities, other incremental costs for
our employees who worked on the integration planning process,
consultants for integrating systems, and other one-time charges
for integrating systems.
Acquired in-process Research and
Development.
Intangible assets acquired with
InterVideo included $7.8 million of in-process research and
development projects that, on the date of the acquisition, the
related technology had not reached technological feasibility and
did not have an alternate future use. As required by purchase
accounting, this in-process research and development was
expensed upon acquisition in the first quarter of fiscal 2007.
45
Restructuring.
In the fourth quarter of fiscal
2007, our management has initiated a restructuring plan to
centralize much of our Digital Media operations in Greater China
and Fremont, California. Additionally, further changes have been
made to staff to align and balance our global teams. This has
resulted in the planned closure of our Minneapolis location in
fiscal 2008 as well as the termination of certain employees. The
fair value of the liabilities arising from this plan are
$2.2 million, of which $1.9 million relates to
termination and related benefits, and $0.3 million relates
to the closure of our Mineapolis facilty. These charges will be
funded by our cash flow from operations. We have expensed
restructuring charges of $1.4 million in fiscal 2007 as a
result of this plan. Further expenses of $0.8 million will
be recorded in fiscal 2008. We expect significant reductions in
employee expenses in future periods as a result of the
restructuring plan, however, some employees have been added in
other locations to replace some of the individuals terminated.
For our fiscal year ended November 30, 2006, restructuring
costs of $810,000 represent severance costs related to the
realignment of our sales and marketing force in the Americas and
reductions in our research and development team.
Non-Operating
(Income) Expense
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Loss on debt retirement
|
|
$
|
8,292
|
|
|
$
|
|
|
Interest expense, net
|
|
|
11.331
|
|
|
|
16,254
|
|
Amortization of deferred financing fees
|
|
|
1,180
|
|
|
|
1,074
|
|
Other non-operating (income) expenses
|
|
|
(565
|
)
|
|
|
(799
|
)
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses
|
|
$
|
20,238
|
|
|
$
|
16,529
|
|
|
|
|
|
|
|
|
|
|
Loss on Debt Retirement.
We incurred a loss on
debt retirement of $8.3 million in fiscal 2006 relating to
the write-off of deferred financing costs as a result of our
refinancing $130.0 million of credit facilities prior to
maturity, as part of our initial public offering on May 2,
2006.
Interest (Income) Expense, Net.
Net interest
expense increased by $4.9 million in fiscal 2007 from
$11.3 million in fiscal 2006. The increase is due to the
additional long-term debt of $70.0 million entered into as
a result of our acquisitions of InterVideo.
Amortization of Deferred Financing Fees.
The
amortization of deferred financing fees decreased to
$1.1 million for our fiscal year ended November 30,
2007 as compared to $1.2 million for our fiscal year ended
November 30, 2006 as a result of the lower financing fees
incurred under the senior credit facility entered into during
our fiscal year ended November 30, 2006, as compared to
those incurred with the Credit Suisse First Boston
(CSFB) facility entered into during our fiscal year
ended November 30, 2005.
Other non-operating income:
Other
non-operating income, which is generally comprised of foreign
exchange gains and losses, increased from $0.6 million to
$0.8 million largely as a result of additional favorable
foreign currency exchange gains in fiscal 2007 relating to the
weakening of the US Dollar versus the Canadian Dollar and
the Euro. Our gains on foreign currency exchange increased by
$0.5 million from $0.4 million to $0.9 million in
fiscal 2007.
Income Tax Expense.
Income tax expense of
$3.4 million for our fiscal year ended November 30,
2007 consisted of current tax expense of $3.5 million and
deferred tax recovery of $83,000 compared to a tax expense of
$4.7 million for our fiscal year ended November 30,
2006 that included current tax expense of $3.4 million and
a deferred tax expense of $1.3 million.
Current taxes for the years ending November 30, 2006 and
2007 include foreign withholding taxes plus taxes incurred by
our foreign subsidiaries. Deferred taxes in fiscal 2007 relates
to an additional $5.0 million valuation allowance against
all deferred tax assets assumed in the InterVideo acquisition.
In the third quarter, we determined that it was no longer more
likely than not that the deferred tax assets would be realized,
and
46
accordingly a valuation allowance was recorded. This was offset
by a reduction in our deferred income tax liability related to
the amortization of intangible assets recorded on the
acquisition of InterVideo. Deferred taxes in fiscal 2006 related
to the tax benefits realized in Canada from the use of tax loss
carryforwards, existing prior to our acquisition by Vector
Capital, in post-acquisition periods, less deferred tax credits
relating to WinZip operations in 2005.
We had current tax expense of $3.4 million on a loss before
tax of $9.8 million due mostly to foreign withholding taxes
which are not creditable due to the Canadian loss carryforwards
and foreign taxes in jurisdictions which are profitable.
Comparison
of Fiscal Year Ended November 30, 2006 to Fiscal Year Ended
November 30, 2005
Our consolidated financial statements for our fiscal year ended
November 30, 2006 have been prepared in accordance with
U.S. generally accepted accounting principles.
47
The following table sets forth certain consolidated statements
of operations data in dollars and expressed as a percentage of
revenues for the periods indicated, as well as the percentage
change on a year-over-year basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
Percentage
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
148,308
|
|
|
$
|
157,319
|
|
|
|
90.4
|
%
|
|
|
88.8
|
%
|
|
|
6.1
|
%
|
Maintenance and services
|
|
|
15,736
|
|
|
|
19,872
|
|
|
|
9.6
|
|
|
|
11.2
|
|
|
|
26.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
164,044
|
|
|
|
177,191
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product(1)
|
|
|
18,461
|
|
|
|
21,339
|
|
|
|
12.4
|
|
|
|
13.6
|
|
|
|
15.6
|
|
Cost of maintenance and services(1)
|
|
|
1,154
|
|
|
|
1,142
|
|
|
|
7.3
|
|
|
|
5.7
|
|
|
|
(1.0
|
)
|
Amortization of intangible assets
|
|
|
26,139
|
|
|
|
14,366
|
|
|
|
15.9
|
|
|
|
8.1
|
|
|
|
(45.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
45,754
|
|
|
|
36,847
|
|
|
|
27.9
|
|
|
|
20.8
|
|
|
|
(19.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
118,290
|
|
|
|
140,344
|
|
|
|
72.1
|
|
|
|
79.2
|
|
|
|
18.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
54,056
|
|
|
|
54,851
|
|
|
|
33.0
|
|
|
|
31.0
|
|
|
|
1.5
|
|
Research and development
|
|
|
23,538
|
|
|
|
25,883
|
|
|
|
14.3
|
|
|
|
14.6
|
|
|
|
10.0
|
|
General and administrative
|
|
|
19,851
|
|
|
|
24,285
|
|
|
|
12.1
|
|
|
|
13.7
|
|
|
|
22.3
|
|
Other operating expense
|
|
|
3,125
|
|
|
|
358
|
|
|
|
1.9
|
|
|
|
0.2
|
|
|
|
(88.5
|
)
|
Restructuring
|
|
|
834
|
|
|
|
810
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
101,404
|
|
|
|
106,187
|
|
|
|
61.8
|
|
|
|
59.9
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
16,886
|
|
|
|
34,157
|
|
|
|
10.3
|
%
|
|
|
19.3
|
%
|
|
|
102.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on debt retirement
|
|
|
3,937
|
|
|
|
8,292
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
Interest expense, net
|
|
|
12,608
|
|
|
|
11,331
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
Gain on disposal of investments
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
Amortization of deferred financing fees
|
|
|
1,756
|
|
|
|
1,180
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
Other non-operating (income) expense
|
|
|
1,172
|
|
|
|
(565
|
)
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense (recovery)
|
|
|
(2,462
|
)
|
|
|
13,919
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
Income tax expense
|
|
|
6,291
|
|
|
|
4,668
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(8,753
|
)
|
|
$
|
9,251
|
|
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Percentage reflects percentage of related revenues.
|
|
*
|
|
Not Meaningful
|
48
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
Percentage
|
|
|
|
2005
|
|
|
2006
|
|
|
Change
|
|
|
Product
|
|
$
|
148,308
|
|
|
$
|
157,319
|
|
|
|
6.1
|
%
|
As a percent of revenue
|
|
|
90.4
|
%
|
|
|
88.8
|
%
|
|
|
|
|
Maintenance and services
|
|
|
15,736
|
|
|
|
19,872
|
|
|
|
26.3
|
%
|
As a percent of revenue
|
|
|
9.6
|
%
|
|
|
11.2
|
%
|
|
|
|
|
Total
|
|
|
164,044
|
|
|
|
177,191
|
|
|
|
8.0
|
%
|
Product revenues increased by 6.1% to $157.3 million in our
fiscal year ended November 30, 2006 from
$148.3 million in our fiscal year ended November 30,
2005. This is mainly due to increases in revenues from license
sales of
WinZip 10.0 Pro
and
CorelDRAW
; both of
which were within the first half of their release cycle, and due
to the continued growth of the
iGrafx
products. These
increases were partially offset by a decline in sales of
WordPerfect
and a slight decrease in revenue from
Corel Paint Shop Pro.
We also benefited from a full year
of revenues from
WinZip
products. In our fiscal year
ended November 30, 2005,
WinZip
revenues from
December 1, 2004 through January 18, 2005, the period
prior to its acquisition by Vector, were not included in our
financial results.
Maintenance and services revenues increased by 26.3% to
$19.9 million in our fiscal year ended November 30,
2006 from $15.7 million in our fiscal year ended
November 30, 2005. This increase is attributable to the
successful implementation of
WinZip
s maintenance
program, commenced in the latter half of our fiscal year ended
November 30, 2005, which provides customers with the right
to unspecified upgrades of software licences on a
when-and-if-available
basis.
Total
Revenues by Product Group
As a result of our acquisition of InterVideo in fiscal 2007, we
changed our revenue by product group classification so that it
was aligned with how we now manage our product groups. For this
period and future periods, we will report on Corels two
product categories: Digital Media and Graphics and Productivity.
Our primary Digital Media products include the InterVideo
products listed above and also our
Paint Shop Pro, Snapfire,
Photo Album,
and
MediaOne
products. Our primary
Graphics and Productivity products include,
CorelDRAW
Graphics Suite
,
WinZip, WordPerfect Office Suite
and
iGrafx.
Revenues by product for the years ended
November 30, 2006 and 2005 were reclassified to conform to
the current period presentation. There was no impact on total
revenues as a result of this re-classification.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
Percentage
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
Graphics and Productivity
|
|
$
|
123,126
|
|
|
$
|
137,741
|
|
|
|
75.1
|
%
|
|
|
77.7
|
%
|
|
|
11.9
|
%
|
Digital Media
|
|
|
40,918
|
|
|
|
39,450
|
|
|
|
24.9
|
|
|
|
22.3
|
|
|
|
(3.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
164,044
|
|
|
$
|
177,191
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
8.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Graphics and Productivity revenues increased by 11.9% to
$137.7 million in our fiscal year ended November 30,
2006 from $123.1 million in our fiscal year ended
November 30, 2005. Revenues from our
WinZip
products
have grown significantly due to increased new license sales and
upgrades resulting from increased conversion of trial customers
to license users through more aggressive in-product messaging.
The increase is also attributable to the availability of new
versions
WinZip
, including
WinZip 10.0
and
WinZip 10.0 Pro
, and the implementation of our
WinZip
maintenance program commenced in the second half of our
fiscal year ended November 30, 2005.
iGrafx
revenues
have increased as a result of the release of a new version in
the first quarter of our fiscal year ended November 30,
2006. Our
CorelDRAW
products had increased revenues for
our fiscal year ended November 30, 2006 as compared to
November 30, 2005. The growth is attributable to the
strength of
CorelDRAW Graphics Suite
which generated
higher revenues as it was within the first half of its release
cycle.
49
These gains were offset by a decrease in
WordPerfect
revenues. Overall
WordPerfect
revenues were lower in
the year as a result of a decline in enterprise license revenues
from our corporate and government install base, and the decrease
in point of sale revenue as a result of the removal of the
preload of the full
WordPerfect
word processor
application and trial applications of
Quattro Pro
and
Presentations
from the Dell Dimension and Inspiron PCs in
the Americas.
WordPerfect
revenues increased in our
global Internet store and retail channel as a result of the
recent release of
WordPerfect X3.
On a quarterly basis,
WordPerfect
is now the fourth largest brand in Corel,
behind
CorelDRAW
,
Paint Shop Pro
, and
WinZip.
There were also lower sales of
Corel Painter
and
Corel Designer Suite
, which are late in their release
cycle.
Digital Media revenues decreased 3.6% to $39.5 million in
our fiscal year ended November 30, 2006 from
$40.9 million in our fiscal year ended November 30,
2005.
Corel PaintShop
which had increased sales during
the fourth quarter of our fiscal year ended November 30,
2006 through OEM partners that were offset by lower sales in the
retail market.
Total
Revenues by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
Percentage
|
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
Americas
|
|
$
|
98,412
|
|
|
$
|
104,447
|
|
|
|
60.0
|
%
|
|
|
58.9
|
%
|
|
|
6.1
|
%
|
EMEA
|
|
|
52,965
|
|
|
|
58,253
|
|
|
|
32.3
|
|
|
|
32.9
|
|
|
|
10.0
|
|
Asia Pacific
|
|
|
12,667
|
|
|
|
14,491
|
|
|
|
7.7
|
|
|
|
8.2
|
|
|
|
14.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
164,044
|
|
|
$
|
177,191
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
8.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In our fiscal year ended November 30, 2006, revenues by
region for our fiscal year ended November 30, 2005 were
reclassified to conform to the current period presentation of
revenues in the Americas, Europe, Middle East, Africa (EMEA),
and Asia Pacific. In our fiscal year ended November 30,
2005 the geographic identification of WinZip Internet sales was
based on the location of the WinZip server rather than the
location of the customer. In the second quarter of our fiscal
year ended November 30, 2006, we reclassified WinZip
internet sales by location of the customer in order to be
consistent with the rest of the organization. As a result there
was a reclassification of reported revenue in the aggregate
amount of $5.6 million from the Americas to EMEA and Asia
Pacific in the aggregate amount of $4.2 million and
$1.4 million, respectively.
Revenues in the Americas increased by 6.1% for our fiscal year
ended November 30, 2006 to $104.4 million compared to
$98.4 million for our fiscal year ended November 30 2005.
The increase was principally driven by the increased revenues
associated with our
WinZip
products which increased
because of higher new license sales and upgrades resulting from
increased conversion of trial customers to license users through
more aggressive in-product messaging.
CorelDRAW
revenues
increased significantly because it is in the first half of its
release cycle; and we added more North American OEM partners and
bundling initiatives. The revenue growth in the Americas was
offset by lower
WordPerfect
revenues due to lower PC
shipments by our key OEM partners, and in particular Dell, and a
decrease in revenues from our corporate and government install
base.
EMEA revenues increased 10.0% to $58.3 million for our
fiscal year ended November 30, 2006, compared to
$53.0 million for our fiscal year ended November 30,
2005. EMEA revenues have increased in this period due to new
licensing agreements and the improved performance of our OEM
partnerships with Markement, as well as the launch of new
language versions and localized
e-stores.
Asia Pacific revenues increased by 14.4% to $14.5 million
for our fiscal year ended November 30, 2006 as compared to
$12.7 million for our fiscal year ended November 30,
2005. The larger percentage growth in this geographic segment,
as compared to the Americas and EMEA, is due primarily to
further investment in our marketing and sales force in Japan,
and the release of
CorelDraw X3
and
WinZip.
50
Cost
of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
Percentage
|
|
|
|
2005
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
Cost of product
|
|
$
|
18,461
|
|
|
$
|
21,339
|
|
|
|
15.6
|
%
|
As a percent of product revenue
|
|
|
12.4
|
%
|
|
|
13.6
|
%
|
|
|
|
|
Cost of maintenance and services
|
|
|
1,154
|
|
|
|
1,142
|
|
|
|
(1.0
|
)%
|
As a percent of maintenance and service revenue
|
|
|
7.3
|
%
|
|
|
5.7
|
%
|
|
|
|
|
Amortization of intangible assets
|
|
|
26,139
|
|
|
|
14,366
|
|
|
|
(45.0
|
)%
|
As a percent of revenue
|
|
|
15.9
|
%
|
|
|
8.1
|
%
|
|
|
|
|
Cost of Product Revenues.
Cost of product
revenues increased 15.6% to $21.3 million in our fiscal
year ended November 30, 2006 from $18.5 million in our
fiscal year ended November 30, 2005. As a percentage of
product revenues, cost of product revenues increased to 13.6% in
our fiscal year ended November 30, 2006 from 12.4% in our
fiscal year ended November 30, 2005. The increase in the
period is largely attributable to a change in our distribution
channel and product mix, as well as increased royalties due to a
change in the revenue mix in our OEM distribution channels.
Cost of Maintenance and Services
Revenues.
Cost of maintenance and services
revenues decreased 1.0% to $1.1 million in our fiscal year
ended November 30, 2006 from $1.2 million in our
fiscal year ended November 30, 2005. As a percentage of
maintenance and services revenues, cost of maintenance and
services revenues decreased to 5.7% in our fiscal year ended
November 30, 2006 from 7.3% in our fiscal year ended
November 30, 2005 as there were limited incremental costs
to provide the additional revenue generated in the current year.
Amortization of Intangible
Assets.
Amortization of intangible assets
decreased 45% to $14.4 million in our fiscal year ended
November 30, 2006 from $26.1 million in our fiscal
year ended November 30, 2005 as the technology valued in
connection with our acquisition by Vector Capital and our
application of push-down accounting, became fully amortized at
the beginning of our fiscal year ended November 30, 2006.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
Percentage
|
|
|
|
2005
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
|
Sales and marketing
|
|
$
|
54,056
|
|
|
$
|
54,851
|
|
|
|
1.5
|
%
|
As a percent of revenue
|
|
|
33.0
|
%
|
|
|
31.0
|
%
|
|
|
|
|
Research and development
|
|
|
23,538
|
|
|
|
25,883
|
|
|
|
10.0
|
%
|
As a percent of revenue
|
|
|
14.3
|
%
|
|
|
14.6
|
%
|
|
|
|
|
General and administrative
|
|
|
19,851
|
|
|
|
24,285
|
|
|
|
22.3
|
%
|
As a percent of revenue
|
|
|
12.1
|
%
|
|
|
13.7
|
%
|
|
|
|
|
Restructuring
|
|
|
834
|
|
|
|
810
|
|
|
|
(2.9
|
)%
|
As a percent of revenue
|
|
|
0.5
|
%
|
|
|
0.5
|
%
|
|
|
|
|
Other operating expenses
|
|
|
3,125
|
|
|
|
358
|
|
|
|
(88.5
|
)%
|
As a percent of revenue
|
|
|
1.9
|
%
|
|
|
0.2
|
%
|
|
|
|
|
Sales and Marketing.
Sales and marketing
expenses increased 1.5% to $54.9 million in our fiscal year
ended November 30, 2006 from $54.0 million in our
fiscal year ended November 30, 2005. As a percentage of
total revenues, sales and marketing expenses decreased to 31.0%
in our fiscal year ended November 30, 2006 from 33.0% in
our fiscal year ended November 30, 2005. The overall
increase for the year is primarily related to marketing efforts
to support our most recent releases of
WordPerfect
and
CorelDRAW Graphics Suite
in the first half of our fiscal
year ended November 30, 2006. In relation to revenues,
sales and marketing has
51
decreased due to a reduction in marketing and development fund
related activities as well as a savings realized from the
termination of a naming rights agreement on a sports and
entertainment venue.
Research and Development.
Research and
development expenses increased 10.0% to $25.9 million in
our fiscal year ended November 30, 2006 from
$23.5 million in our fiscal year ended November 30,
2005. As a percentage of total revenues, research and
development expenses increased to 14.6% in our fiscal year ended
November 30, 2006 from 14.3% in our fiscal year ended
November 30, 2005. The increase in expenses is a direct
result of higher salaries and benefits and localization costs
related to our products targeted for emerging markets.
General and Administrative.
General and
administrative expenses increased 22.3% to $24.3 million in
our fiscal year ended November 30, 2006 from
$19.9 million in our fiscal year ended November 30,
2005. As a percentage of total revenues, general and
administrative expenses increased to 13.7% in our fiscal year
ended November 30, 2006 from 12.1% during our fiscal year
ended November 30, 2005. The increase is attributable
largely to costs associated with becoming a public company, as
well as an increase of $1.2 million in stock based
compensation for general and administrative employees.
Other Operating Expense.
Other operating
expense in our fiscal year ended November 30, 2005 includes
$2.2 million related to the termination of an obligation
for naming rights on a sporting and entertainment venue, and
$883,000 of fees associated with corporate and tax planning for
WinZip. Other operating expenses in our fiscal year ended
November 30, 2006 include business integration costs of
$358,000 relating to the acquisition of InterVideo. This
includes travel costs and other incremental costs for Corel
employees who worked on the acquisition.
Restructuring.
Restructuring expense increased
by 2.9% to $810,000 for our fiscal year ended November 30,
2006 as compared to $834,000 for our fiscal year ended
November 30, 2005. For our fiscal year ended
November 30, 2005, restructuring charges consist of
severance and related expenses for terminated employees. The
majority of the restructuring charges totaling $834,000 in our
fiscal year ended November 30, 2005 relate to the
integration of Jasc. For our fiscal year ended November 30,
2006, restructuring costs of $810,000 represent charges for the
elimination of redundant positions and also the severance costs
related to the realignment of our sales and marketing force in
the Americas and our research and development team. There are no
future service obligations due from any of our terminated
employees, and we do not expect any future restructuring
expenses to occur as a result of these realignments.
Non-Operating
(Income) Expense
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Loss on debt retirement
|
|
$
|
3,937
|
|
|
$
|
8,292
|
|
Interest expense, net
|
|
|
12,608
|
|
|
|
11,331
|
|
Amortization of deferred financing fees
|
|
|
1,756
|
|
|
|
1,180
|
|
Other non-operating (income) expenses
|
|
|
1,172
|
|
|
|
(565
|
)
|
|
|
|
|
|
|
|
|
|
Total non-operating expenses
|
|
$
|
19,473
|
|
|
$
|
20,238
|
|
|
|
|
|
|
|
|
|
|
Loss on Debt Retirement.
We incurred a loss on
debt retirement of $8.3 million relating to the write-off
of deferred financing costs for our fiscal year ended
November 30, 2006 as a result of our refinancing
$130.0 million of credit facilities prior to maturity, as
part of our initial public offering on May 2, 2006. The
$3.9 million loss on retirement of debt in our fiscal year
ended November 30, 2005 consisted of financing fees of
$1.9 million and an early repayment fee of
$2.0 million incurred on the termination of the credit
facility with Wells Fargo Foothill (WFF).
Interest (Income) Expense, Net.
Net interest
expense decreased to $11.3 million in our fiscal year ended
November 30, 2006 from $12.6 million in our fiscal
year ended November 30, 2005. The decrease is primarily
attributable to the refinancing that occurred in May 2006 where
we raised $69.1 million of net proceeds from
52
our initial public offering, entered into a $90.0 million
senior credit facility, and repaid $130.0 million of our
existing credit facilities. The net result was
$50.0 million less debt at a lower interest rate. As a
result, interest expense has decreased significantly since May
2006. For our fiscal year ended November 30, 2006 this was
offset by the higher level of debt facilities until the time of
our initial public offering in May 2006.
Amortization of Deferred Financing Fees.
The
amortization of deferred financing fees decreased to
$1.2 million for our fiscal year ended November 30,
2006 as compared to $1.8 million for our fiscal year ended
November 30, 2005 as a direct result of the lower financing
fees incurred under the senior credit facility entered into
during our fiscal year ended November 30, 2006, as compared
to those incurred with the Credit Suisse First Boston
(CSFB) facility entered into during our fiscal year
ended November 30, 2005. Financing fees incurred in our
fiscal year ended November 30, 2005 have been reduced to
zero as they were expensed and recorded as a loss on debt
retirement in our fiscal year ended November 30, 2006.
Other Non-Operating (Income) Expense.
Other
non-operating (income) expense consists primarily of foreign
exchange gains and losses and unrealized gains and losses on
forward exchange contracts. There was net income of $565,000 in
our fiscal year ended November 30, 2006 compared to a net
expense of $1.2 million in our fiscal year ended
November 30, 2005. We had non-operating income as opposed
to non-operating expenses in the prior year comparable period
due to the significant strengthening of foreign currencies
against the U.S. dollar, in particular the Euro and the
British Pound. This was partially offset by the less significant
strengthening of the Canadian dollar against the
U.S. dollar, which is the currency in which we incur most
of our expenses.
Income Tax Expense.
Income tax expense of
$4.7 million for our fiscal year ended November 30,
2006 consisted of current tax expense of $3.4 million and
deferred tax expense of $1.3 million compared to a tax
expense of $6.3 million for our fiscal year ended
November 30, 2005 that included current tax expense of
$5.5 million and a deferred tax expense of $830,000.
Current taxes in both periods include foreign withholding taxes
plus taxes incurred by our foreign subsidiaries. Deferred tax
expense in both periods related to the tax benefits realized in
Canada from the use of tax loss carryforwards, existing prior to
our acquisition by Vector Capital, in post-acquisition periods,
less deferred tax credits relating to WinZip operations in 2005.
Our effective tax rate for 2006 was 33.5%, which differs from
the statutory rate of 36.1% due mostly to a reduction for
profits which are subjected to lower foreign tax rates. This is
offset by increases resulting from non deductible expenses and
foreign withholding taxes which were not creditable in Canada.
We anticipate an effective tax rate going forward of between 10%
and 20%. The lower rate as compared to the fiscal year ended
November 30, 2006, is due to strategic business plans which
will have profits realized in foreign jurisdictions which have
tax rates significantly lower than Canada.
LIQUIDITY
AND CAPITAL RESOURCES
As of November 30, 2007, our principal sources of liquidity
include cash and cash equivalents of $24.6 million and
trade accounts receivable of $41.1 million. Our cash
equivalents do not consist of any investments in asset backed
commercial paper. We also have a five-year $75.0 million
revolving line of credit facility which was unused at
November 30, 2007.
During fiscal 2007 we received an invoice from a supplier of
InterVideo relating to the period prior to our acquisition of
InterVideo. During fiscal 2008, we expect to have a significant
cash payout related to the settlement of this invoice. We are
currently performing an audit on this invoice as we are
disputing some of the items invoiced. As of November 30,
2007, we have accrued a material amount for what we believe to
be an appropriate settlement. This accrual has been included in
the purchase price allocation. However, it is possible that this
estimate may be materially different from the final settlement
amount. During fiscal 2008, we will also pay approximately
$2.0 million related to our restructuring announced in the
fourth quarter of fiscal 2007. Based on our current business
plan and internal forecasts, we believe that cash generated from
operations and the unused operating line of credit facility
included under our senior credit facility, will be sufficient to
meet our working capital and operating cash requirements for the
next year. Cash from operations
53
could be affected by various risks and uncertainties, including,
but not limited to, the risks detailed in or incorporated by
reference in Item 1A
Risk
Factors
.
Based on our current senior debt facility, a significant balloon
payment will be required in fiscal 2012. We expect that the
Company will maintain its creditworthiness over this time such
that this payment can be refinanced at or prior to that date.
Working
Capital
The net working capital deficit at November 30, 2007 was
$15.2 million, a decrease of $46.4 million from the
November 30, 2006 net working capital surplus of
$31.2 million. The decrease is primarily attributable to
the financing of the acquisition of InterVideo and the working
capital deficiency of approximately $27.0 million which
existed in InterVideo when we completed the purchase on
December 12, 2006. The acquisition of InterVideo used
approximately $69.3 million of working capital, consisting
of $19.1 million of cash, $43.0 million operating line
of credit and $7.2 million of direct transaction and
restructuring costs. We have repaid the entire balance of the
operating line of credit over the year ended November 30,
2007. Our working capital deficiency has improved by
$27.1 million from its position at February 28, 2007,
the end of our first quarter following the acquisition of
InterVideo. In addition, the Company has generated and expects
to continue generating, cash from operations which we expect
will reduce the working capital deficiency over the next
12 months.
Current assets at November 30, 2007 were
$71.5 million, a decrease of $2.4 million from the
November 30, 2006 year end balance of
$73.9 million. The decrease was primarily attributable to a
decrease in cash and cash equivalents of $26.4 million,
which is offset by an increase in trade accounts receivable of
$22.9 million. The decrease in cash is attributable to the
cash used in the acquisition of InterVideo, as well as cash used
to pay down the operating line of credit which was used in the
acquisition. The increase in the trade accounts receivable
balance is primarily attributable to our increased sales over
the prior period resulting from the InterVideo acquisition,
recent product launches and the timing of cash receipts from
some of our largest customers.
Current liabilities at November 30, 2007 were
$86.7 million, an increase of $44.0 million from
November 30, 2006. The increase primarily resulted from the
increase in accounts payable and accrued liabilities of
$39.1 million and a $3.0 million increase in deferred
revenue. The increases in both balances are due to the
increasing size of our operations subsequent to the acquisition
of InterVideo, including an increase of $25.8 million in
accrued royalties.
Cash
Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash provided by operating activities
|
|
$
|
40,459
|
|
|
$
|
36,225
|
|
|
$
|
26,499
|
|
Cash provided by (used in) financing activities
|
|
|
(38,552
|
)
|
|
|
(3,885
|
)
|
|
|
71,808
|
|
Cash provided by (used in) investing activities
|
|
|
7,301
|
|
|
|
(1,906
|
)
|
|
|
(124,760
|
)
|
Year
ended November 30, 2007 compared to year ended
November 30, 2006.
Cash flow from operations of $26.5 million in our fiscal
year ended November 30, 2007 was a decrease of
$9.7 million from our fiscal year ended November 30,
2006. The decrease in operating cash flows in fiscal 2007 is
attributable to reducing the net working capital deficiency
assumed in the acquisition of InterVideo of $27.0 million,
additional integration and restructuring costs, and a
significant increase in our accounts receivable balance as at
November 30, 2007 due to the timing of cash receipts from
OEM Customers. There were no significant non-operating cash
receipts included in net income in our fiscal year ended
November 30, 2007.
54
Cash flow from financing activities was $71.8 million in
our fiscal year ended November 30, 2007, an increase of
$75.7 million compared to cash used in financing activities
of $3.9 million in our fiscal year ended November 30,
2006. Sources of cash in the current period are the additional
term loan of $70.0 million received as part of our service
agreement amendment to fund the acquisition of InterVideo, and
cash generated by exercises of Corel stock options of
$5.4 million. The exercise of options was minimal in fiscal
2006, as we were only a public company for a portion of the year
and there was no trading window for the exercise of our stock
options unless it involved a terminated employee. Financing cash
outflows in fiscal 2007 were $1.7 million in financing fees
and $2.1 million in repayments of long-term debt.
Cash used in investing activities was $124.8 million in our
fiscal year ended November 30, 2007 compared to
$1.9 million in our fiscal year ended November 30,
2006. The additional cash outlay reflects the purchase of
InterVideo on December 12, 2006 and the remaining interest
in Ulead on December 28, 2006 totaling $120.9 million.
There were also purchases of property, plant and equipment of
$3.8 million an increase of $1.9 million from fiscal
2006. During the current fiscal year, we entered into a number
of capital leases for capital assets with a value of
$3.1 million. Payments on these leases will be made until
fiscal 2013.
At the beginning of the third quarter of fiscal 2007, we
received a notice of reassessment from the Ministry of Revenue
of Ontario (the Ministry) for CDN$13.4 million.
The Ministrys reassessment disallows various deductions
claimed on our tax returns for the 2000, 2001 and 2002 taxation
years resulting in a potential disallowance of loss
carryforwards and liabilities for tax and interest. In
September, 2007, we received further notice that the Ministry
had applied tax losses and other attributes which reduced the
assessment from CDN$13.4 million to CDN$6.4 million.
Subsequently, in November 2007, we received another notice of
reassessment which increased the capital tax and interest for
the 2000, 2001 and 2002 tax years The reassessed balance changed
to CDN $7.5 million. We intend to vigorously defend against
the reassessment. While management believes that they have
adequately provided for potential assessments, it is possible
that an adverse outcome may lead to a deficiency in its recorded
income tax expense and may adversely affect its liquidity.
However, we believe that the positions taken in our tax returns
are correct and estimate the potential loss from the
reassessment will not have a material impact on our financial
condition or results of operations.
Indebtedness
On May 2, 2006, we entered into a $165.0 million
senior credit facility consisting of a $90.0 million term
loan with a six-year maturity and a $75.0 million revolving
line of credit with a five-year term. Proceeds from this
refinancing were used to repay our existing debt at that time.
On December 12, 2006, this facility was amended and we
completed our acquisition of InterVideo and Ulead. The
acquisition was partially financed through an amendment to the
credit facility for an additional $70.0 million of term
loan borrowings. In addition there was a $43.0 million draw
on our revolving line of credit and the remainder was financed
from cash of the combined Company. During the year ended
November 30, 2007 we have repaid the $43.0 million
revolving line of credit. There is no balance outstanding on the
line of credit as of November 30, 2007.
The credit facility agreement requires us to make fixed
quarterly principal repayments of 0.25% of the original
principal amount on the term loan, or $225,000 from June 2006 to
December 2006 and $400,000 from January 2007 through to December
2011, with the balance of the loan due in April 2012. The term
loan and revolving line of credit bear interest at floating
rates tied to either the Alternate Base Rate (ABR),
which equals the higher of (i) the federal funds rate plus
50 basis points, and (ii) the prime rate) plus 2.25%
until December 2006 and ABR plus 3.00% thereafter, or Adjusted
LIBOR plus 3.25% until December 2006 and Adjusted LIBOR plus
4.00% thereafter. On an annual basis, beginning the first
quarter of fiscal 2008, we are required to make a cash sweep
payment to fund our principal balance, based on excess cash flow
as defined in the agreement. We currently estimate that no
payment will be required for the fiscal 2007 cash sweep and that
no payments will be required through November 30, 2008. Our
first payment is expected to be made in the first quarter of
fiscal 2009.
In addition to the above loans, the facility also provides us
with a $25.0 million letter of credit and a
$5.0 million Swingline commitment. The applicable interest
rate on any borrowings is based on a leverage
55
ratio pricing grid. As at November 30, 2007, no balance was
outstanding on either the letter of credit or the Swingline
commitment.
In connection with the senior credit facility, we obtained
interest rate protection by entering into an interest rate swap
with its principal lender for $109.5 million. The variable
rate of interest is based on three-month LIBOR plus 4.00%. The
fixed rates range from 8.93% to 9.49%.
The borrowings under the senior credit facility are
collateralized by a pledge of all our assets, including
subsidiary stock. Under the terms of the credit agreement we are
subject to restrictive covenants, such as restrictions on
additional borrowing, distributions and business
acquisitions/divestitures. It also includes the following
financial covenants:
|
|
|
|
|
a maximum total leverage ratio, which is defined as the ratio of
total debt to trailing four quarter consolidated Adjusted
EBITDA, as defined in the credit agreement, to be less than
specified amounts over the term of the facility as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Ratio
|
|
|
|
|
|
|
Through to November 29, 2007
|
|
|
3.50
|
|
|
|
|
|
November 30, 2007 through November 29, 2008
|
|
|
3.25
|
|
|
|
|
|
November 30, 2008 through November 29, 2009
|
|
|
3.00
|
|
|
|
|
|
November 30, 2009 through November 29, 2010
|
|
|
2.75
|
|
|
|
|
|
November 30, 2010 through November 29, 2011
|
|
|
2.50
|
|
|
|
|
|
November 30, 2011, thereafter
|
|
|
2.25
|
|
|
|
|
|
|
a minimum fixed charge coverage ratio, which is defined as the
ratio of trailing four quarter consolidated Adjusted EBITDA to
fixed charges as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Ratio
|
|
|
|
|
|
|
Through to Nov 29, 2010
|
|
|
2.00
|
|
|
|
|
|
November 30, 2010 through November 29, 2011
|
|
|
2.25
|
|
|
|
|
|
November 30, 2011, thereafter
|
|
|
2.50
|
|
The future debt payments on long-term debt as of
November 30, 2007, excluding the annual cash sweep as
discussed above, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Interest
|
|
|
Total
|
|
|
2008
|
|
$
|
2,249
|
|
|
$
|
13,914
|
|
|
$
|
16,163
|
|
2009
|
|
|
1,596
|
|
|
|
13,772
|
|
|
|
15,368
|
|
2010
|
|
|
1,596
|
|
|
|
13,631
|
|
|
|
15,227
|
|
2011
|
|
|
1,596
|
|
|
|
13,489
|
|
|
|
15,085
|
|
2012
|
|
|
151,571
|
|
|
|
4,491
|
|
|
|
156,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
158,608
|
|
|
$
|
59,297
|
|
|
$
|
217,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30, 2007, we were in compliance with all
debt covenants. We have included the following reconciliation
from the cash flow provided by operations to the Adjusted EBITDA
used in the covenant calculations. Adjusted EBITDA is a non-GAAP
measure that we use to assist in evaluation of our liquidity and
is used by our bank lenders to calculate compliance with certain
financial covenants. Adjusted EBITDA was $57.3 million for
our fiscal year ended November 30, 2007 compared to
$55.2 million for our fiscal year ended November 30,
2006.
This measure does not have any standardized meaning prescribed
by GAAP and therefore is unlikely to be comparable to the
calculation of similar measures used by other companies, and
should not be viewed as alternatives to measures of financial
performance or changes in cash flows calculated in accordance
with GAAP. We consider cash flow from operations to be the
closest GAAP measure to Adjusted EBITDA. For our fiscal years
ended November 30, 2007, 2006 and 2005, we had cash flow
from operations of $26.5 million,
56
36.2 million and $40.5 million, respectively. The
table below reconciles Adjusted EBITDA to cash flow from
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-Ended November 30
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flow provided by operations
|
|
$
|
40,459
|
|
|
$
|
36,225
|
|
|
$
|
26,499
|
|
Change in operating assets and liabilities
|
|
|
(10,440
|
)
|
|
|
3,736
|
|
|
|
5,238
|
|
Interest expense, net
|
|
|
12,608
|
|
|
|
11,331
|
|
|
|
16,254
|
|
Income tax expense
|
|
|
6,291
|
|
|
|
4,668
|
|
|
|
3,443
|
|
Provision for bad debts
|
|
|
(529
|
)
|
|
|
(195
|
)
|
|
|
(252
|
)
|
Unrealized foreign exchange losses on forward contracts
|
|
|
(263
|
)
|
|
|
(150
|
)
|
|
|
(147
|
)
|
Deferred income taxes
|
|
|
(830
|
)
|
|
|
(876
|
)
|
|
|
83
|
|
Loss on interest rate swap recorded at fair value
|
|
|
|
|
|
|
(810
|
)
|
|
|
(392
|
)
|
Gain (Loss) on disposal of fixed assets
|
|
|
20
|
|
|
|
|
|
|
|
(102
|
)
|
Restructuring
|
|
|
834
|
|
|
|
810
|
|
|
|
1,447
|
|
Integration costs
|
|
|
|
|
|
|
358
|
|
|
|
5,220
|
|
Reorganization costs
|
|
|
883
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
49,033
|
|
|
$
|
55,214
|
|
|
$
|
57,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
Obligations and Commitments
We have operating leases for office space. In accordance with
GAAP, neither the lease liabilities nor the underlying assets
are carried on the balance sheet as the terms of the leases do
not meet the criteria for capitalization. Payments on these
leases were approximately $6.8 million for our fiscal year
ended November 30, 2007, $5.2 million for our fiscal
year ended November 30, 2006 and $4.4 million for our
fiscal year ended November 30, 2005.
We have debt as discussed in the indebtedness section above.
The following table outlines our contractual commitments over
the next five years and thereafter at November 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
|
|
1 Year
|
|
|
2-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Long-term debt
|
|
$
|
16,163
|
|
|
$
|
30,595
|
|
|
|
171,147
|
|
|
$
|
|
|
|
$
|
217,905
|
|
Capital Leases
|
|
|
966
|
|
|
|
1,785
|
|
|
|
549
|
|
|
|
|
|
|
|
3,300
|
|
Operating leases
|
|
|
4,420
|
|
|
|
7,882
|
|
|
|
6,362
|
|
|
|
8,349
|
|
|
|
27,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,549
|
|
|
$
|
40,262
|
|
|
$
|
178,058
|
|
|
$
|
8,349
|
|
|
$
|
248,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since our fiscal year ended November 30, 2004 we have
funded our operations from cash flow from operations. We believe
that our current resources are adequate to meet our requirements
for working capital and capital expenditures for at least the
next years. At some point in the future we may require
additional funds for either operating or strategic purposes and
may seek to raise the additional funds through public or private
debt or equity financings. If we ever need to seek additional
financing, there is a risk that additional financing will not be
available, or if available, will not be available on reasonable
terms.
Off-Balance
Sheet Arrangements
As of November 30, 2007 and 2006, we had no off balance
sheet arrangements as defined in Item 303(a)(4) of
Regulation S-K.
57
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States
consistently applied throughout all periods. The preparation of
these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to product
returns, bad debts, inventories, intangible assets, income
taxes, contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our consolidated financial statements:
Revenue
Recognition
We recognize revenues in accordance with Statement of Position
(SOP)
97-2,
Software Revenues Recognition,
issued by the
American Institute of Certified Public Accountants,
SOP 98-9,
Modification of
97-2,
Software Recognition with Respect to Certain Transactions
and Staff Accounting Bulletin (SAB) No. 101
Revenues Recognition in Financial Statements,
issued by the SEC.
Our application of
SOP 97-2
requires judgment, including whether a software arrangement
includes multiple elements, and if so, whether vendor-specific
objective evidence (VSOE) of fair value exists for
those elements. VSOE is based on the associated price when the
elements are sold separately. Some customers receive certain
elements of our products over a period of time. In certain
cases, these elements include post-delivery telephone support
and the right to receive unspecified upgrades/enhancements on a
when-and-if-available
basis. When maintenance is sold separately we recognize revenues
ratably over the contractual time period. Changes to the
elements in a software arrangement, the ability to identify VSOE
for those elements and the fair value of the respective elements
could materially affect the amount of earned and unearned
revenues.
We record product revenues from sales of our packaged software
and license fees when legal title transfers, which is generally
when the product ships or, in some cases, when products are
delivered to retailers. We sell some of our products on
consignment to resellers and retailers and recognize revenue for
these consignment transactions only when the end-user sale has
occurred.
We record revenue from our OEM customers based on the evidence
of products sold by our OEM customers to end customers or to the
OEMs sales channel partners. Under certain agreements where post
contract support (PCS) is granted to OEMs for
a period greater than a year, we recognize revenue ratably over
the shorter of the contractual PCS period or the estimated life
of the product. Typically, our OEM customers do not have the
right to claim a credit or refund for returns from an OEMs
sales channel partners or end customers back to the OEM.
At the time of contract signing, we assess whether the fee
associated with the revenues transactions is fixed or
determinable based on the payment terms associated with the
transaction. We consider the fee to be fixed or determinable if
it is due within our normal payment terms, which are generally
30 to 90 days from invoice date.
We assess the probability of collection based on a number of
factors, including past transaction history with the customer
and the credit-worthiness of the customer. If it is determined
that collection of a fee is not reasonably assured, management
defers the fee and recognizes revenues at the time collection
becomes reasonably assured, which is generally upon receipt of
cash.
58
Allowance
for Product Returns and Rebate Programs
We allow returns of our packaged software from certain
distributors and resellers for various reasons such as the
release of new product versions that supersede older versions in
channel inventory. Consequently we establish a return provision
that is netted against revenues. In computing this provision, we
use estimates and judgment based on our experience. These
estimates are based on channel inventory levels, current and
historical return rates, channel sell in and timing of new
version and product introductions, and are in accordance with
Statement of Financial Accounting Standards 48
(FAS 48), Revenue Recognition when Right
of Return Exists. While our past estimates have been
materially accurate, actual return rates could vary materially
from our estimates. An increase in the return rate could result
from changes in consumer demand or other factors. Should this
variance occur, revenues could fluctuate significantly.
Variances between estimated return rates and actual return rates
are adjusted on a quarterly basis.
While we believe our accounting practice for establishing and
monitoring our product return provision is adequate and
appropriate, any adverse activity or unusual circumstances could
result in an increase in reserve levels in the period in which
such determinations are made and have a significant affect on
revenues.
Accounting
for Income Taxes
We have operations in a number of countries worldwide. Our
income tax liability is therefore a consolidation of the tax
liabilities we expect to have in various locations. Our tax rate
is affected by the profitability of our operations in all
locations, tax rates and systems of the countries in which we
operate our tax policies and the impact of certain tax planning
strategies which we have implemented.
To determine our worldwide tax liability we make estimates of
possible tax liabilities. Our tax filings, positions and
strategies are subject to review under local or international
tax audit and the outcomes of such reviews are uncertain. In
addition, these audits generally take place years after the
period in which the tax provision in question was provided and
it may take a substantial amount of time before the final
outcome of any audit is known. In prior years we have had to
make adjustments to taxes to account for the resolution of
certain tax audits. The adjustments have on occasion been
significant and have been accounted for as changes in estimates.
Future final tax outcomes could also differ materially from the
amounts recorded in our financial statements. These differences
could have a material effect on our financial position and our
net income in the period such determination is made.
We record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be
realized. We have had substantial tax losses over the years and
only a limited history of profitability, therefore we have
recorded a valuation allowance against most tax assets. The
deferred tax assets include the tax effect of
$202.0 million of tax loss carryforward in Canada of which
a significant portion are due to expire over the next two
taxation years. Given the large interest expense related to the
acquisition of InterVideo, and declining sales of WordPerfect,
it is unlikely that we will be able to realize the benefit of
these losses. Other deferred tax assets include investment tax
credits in Canada and Taiwan which can only be applied against
taxable income. Given that neither entity has a history of
generating taxable income, it is unlikely that we will be able
to realize the benefit of these investment tax credits.
Therefore, we have recorded a full valuation allowance to reduce
our deferred tax assets to the amount that is more likely than
not to be realized.
We provide for withholding taxes on the undistributed earnings
of our foreign subsidiaries where applicable. The ultimate tax
liability related to the undistributed earnings could differ
materially from the liabilities recorded in our financial
statements. These differences could have a material effect on
our income tax liabilities and our net income.
In April 2005, WinZip sold its intellectual property and
trademarks to a non-US affiliate in a taxable transaction. We
did not recognize any gain on the transfer of the property based
on an analysis of the fair market value of the assets
transferred that was performed at the time of the transfer, and
as a result did not accrue any income tax expense on the
transfer. The assessment of fair market value is based on both
subjective and objective factors and if applicable tax
authorities disagree with the fair market value analysis, we
could be subject to significant tax liabilities, penalties and
interest.
59
Business
Combinations
We account for acquisitions of businesses and technologies in
accordance with Statement of Financial Accounting Standards No
141
Business Combinations
(FAS 141). We
allocate the purchase price to tangible assets, intangible
assets, and liabilities based on fair values, with the excess of
purchase price being allocated to goodwill.
Historically, our acquisitions have resulted in the allocation
of a portion of the purchase price to goodwill, acquired
intangible assets and consequent adjustments to our deferred
taxes. In order to determine the fair value of these intangible
assets, we make estimates and judgments based on assumptions
about the future income producing capabilities of these assets
and related future expected cash flows. We also make estimates
about the useful life of those acquired intangible assets.
Should different conditions prevail, we could record,
write-downs of intangible assets or changes in the estimate of
useful life of those intangible assets, which would result in
changes to amortization expense.
Acquired definite lived intangible assets are initially recorded
at fair value based on the present value of these estimated net
future income-producing capabilities of the software products
acquired. A significant change to the initial value assigned to
the definite lived intangible assets, could result if different
assumptions are used in determining the present value of the
estimated net future income producing capabilities of the asset.
Acquired definite lived intangible assets are amortized over the
future income producing period, which we consider to be the
useful life, on a straight-line basis, with the exception of
customer relationships which are amortized over the pattern in
which we expect to generate economic benefits from the asset.
Impairment
of Goodwill
In accordance with Statement of Financial Accounting Standards
No. 142
Goodwill and Other Intangible Assets
(
FAS 142), goodwill is subject to annual
impairment tests or on a more frequent basis if events or
conditions indicate that goodwill may be impaired. Goodwill is
tested for impairment in the fourth quarter of each fiscal year.
We also test goodwill for impairment more frequently if events
or circumstances warrant. Corel as a whole is considered one
reporting unit. We estimate the value of our reporting unit
based on market capitalization. If we determine that our
carrying value exceeds our fair value, we would conduct the
second step of the goodwill impairment test. The second step
compares the implied fair value of the goodwill (determined as
the excess fair value over the fair value assigned to our other
assets and liabilities) to the carrying amount of goodwill. If
the carrying amount of goodwill were to exceed the implied fair
value of goodwill, an impairment loss would be recognized.
Long-lived
Assets
We amortize our long-lived assets over the estimated useful life
of the asset. We evaluate all of our long-lived assets,
including intangible assets other than goodwill and fixed
assets, periodically for impairment in accordance with Statement
of Financial Accounting Standards No. 144
Accounting for
the Impairment or Disposal of Long-Lived Assets
(FAS 144). FAS 144 requires that
long-lived assets be evaluated for impairment when events or
changes in facts and circumstances indicate that their carrying
value may not be recoverable. Events or changes in facts or
circumstances can include a strategic change in business
direction, decline or discontinuance of a product line, a
reduction in our customer base or a restructuring. If one of
these events or circumstances indicates that the carrying value
of an asset may not be recoverable or that our estimated
amortization period was not appropriate, we would record
impairment in long lived assets. The amount of impairment would
be measured as the difference between the carrying value and the
fair value of the impaired asset as calculated using a net
realizable value methodology. An impairment would be recorded as
an operating expense in the period of the impairment and as a
reduction in the carrying value of that asset.
60
Stock
Option Accounting
In accordance with Statement of Financial Accounting Standards
No. 123(R)
Share BasedPayment
(FAS 123(R)) we estimate the fair value of our
options for financial accounting purposes using the
Black-Scholes model, which requires a number of subjective
assumptions, including the expected life of the option,
risk-free interest rate, dividend rate, forfeiture rate, future
volatility of the price of our common shares and vesting period.
The use of subjective assumptions could materially affect the
fair value estimate. Prior to our initial public offering, there
was no active market for our common shares. Since we have been
public for less than the vesting period of our options, we do
not consider the volatility of our share price to be
representative of the estimated future volatility when computing
the fair value of options granted. Accordingly, until such time
that a representative volatility can be determined based on our
share price, we will use a blended rate of our own share price
volatility and the U.S. Dow Jones Software and Computer
Services Index. We estimate the risk-free interest rate based on
Government of Canada benchmark bonds with an average yield of
five to ten years. We base our estimate of the expected life of
the option based on comparable industry data and the period for
which our options can be exercised. We assess our forfeiture
rate through an analysis of the turnover of our employees since
we commenced issuing options in December 2003. The fair values
of the options issued are being recognized as compensation
expense over the applicable vesting period of four years on a
straight line basis except for performance based options which
we recognize over the expected service period based on
managements best estimate of the expected achievement.
Based on equity awards outstanding as of November 30, 2007,
we had unrecognized stock-based compensation totaling
$14.6 million, and we expect to record approximately
$7.0 million in stock-based compensation in our fiscal year
ending November 30, 2008. To the extent we continue to
grant equity awards in the future, the amounts of stock-based
compensation recorded in future periods may be greater than
these expectations. Stock-based compensation expense is reported
in our Consolidated Statements of Operations, either as a cost
of revenues, or as an operating expense with which the award
recipients are associated.
Prior to our initial public offering, we did not obtain
contemporaneous valuations from an unrelated valuation
specialist. Instead, a retrospective valuation was performed by
management, with input from Vector Capital. Contemporaneous
valuations were not obtained because we were a private company
and units were granted on a frequent basis. Therefore, it was
impractical to obtain a valuation at each grant date. We believe
that management, as a result of their experience and Vector
Capital as a private equity firm, have relevant experience
valuing companies. Where there was more than one class of shares
outstanding, the enterprise value was equally allocated to the
as-converted common shares to arrive at a per share
fair value.
Prior to our initial public offering, determining the fair value
of our common shares required making complex and subjective
judgments. Management used the income approach to estimate the
value of the enterprise. The income approach involves applying
appropriate discount rates to estimated cash flows that are
based on forecasts of revenues and costs. The enterprise value
is then allocated to preferred and common shares using the
probability-weighted expected return method. Under this method,
management considered the specific rights and preferences of
each share class, and the likelihood of future outcomes. Had
management considered a different allocation method, the
allocations between preferred and common shares would have been
different.
In arriving at the fair value of our common shares, we made a
number of estimates including an organic revenue growth rate and
a marketability discount. We used an organic revenue growth rate
that was based upon our financial results available at the
valuation date and the expected industry growth rate. In
addition, we used a marketability discount of 40% to reflect the
fact that our common shares were not trading in a public market.
This rate was based upon U.S. and Canadian case law and
numerous independent pre-IPO lack of marketability
studies.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board
(FASB) released FIN 48,
Accounting for
Uncertainty in Income Taxes An Interpretation of
FASB Statement 109
and is effective for annual periods
beginning on or after December 15, 2006, which is the year
ending November 30, 2008 for the Company. We
61
are currently completing a final assessment of income tax
uncertainties across all jurisdictions. At this time, it is
unknown as to whether any material retroactive adjustments will
be recorded as part of the transition to FIN 48.
In September 2006, the Financial Accounting Standards Board
released FASB 157,
Fair Value Measurements
and is effective for fiscal years beginning after
November 15, 2007, which is the year ending
November 30, 2008 for the Company. FASB 157 defines fair
value, establishes a framework for measuring fair value in GAAP,
and expands disclosures about fair value measurements. In
November 2007, FASB agreed to a one-year deferral of the
effective date for nonfinancial assets and liabilities that are
recognized or disclosed at fair value on a nonrecurring basis.
We are currently assessing the impact the adoption of this
pronouncement will have on the financial statements.
In February 2007, the Financial Accounting Standards Board
released FASB 159,
The Fair Value Option for Financial
Assets and Financial Liabilities
and is effective for
fiscal years beginning after November 15, 2007, which is
the year ending November 30, 2008 for the Company. This
Statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective
is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. We do not
expect to use the fair value option for any financial assets and
financial liabilities that are not currently recorded at fair
value.
In December 2007, the Financial Accounting Standards Board
released FASB 141-R,
Business Combinations.
This
Statement applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after
December 15, 2008, which is business combinations in the
year ending November 30, 2010 for the Company. The
objective of this Statement is to improve the relevance,
representational faithfulness, and comparability of the
information that a reporting entity provides in its financial
reports about a business combination and its effects.
In December 2007, the Financial Accounting Standards Board
released FASB 160,
Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB
No. 51.
This Statement is effective for fiscal years,
and interim periods within those fiscal years, beginning on or
after December 15, 2008, which for the Company is the year
ending November 30, 2010 and the interim periods within
that fiscal year. The objective of this Statement is to improve
the relevance, comparability, and transparency of the financial
information that a reporting entity provides in its consolidated
financial statements. This standard currently does not impact us
as we have full controlling interest of all of our subsidiaries.
62
QUARTERLY
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
2006
|
|
Feb. 28
|
|
|
May. 31
|
|
|
Aug. 30
|
|
|
Nov. 30
|
|
|
Total Year
|
|
|
|
(Dollars in thousands,
|
|
|
|
except number of shares and per share amounts)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
39,498
|
|
|
$
|
39,151
|
|
|
$
|
36,362
|
|
|
$
|
42,308
|
|
|
$
|
157,319
|
|
Maintenance and service
|
|
|
4,789
|
|
|
|
5,059
|
|
|
|
4,892
|
|
|
|
5,132
|
|
|
|
19,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
44,287
|
|
|
|
44,210
|
|
|
|
41,254
|
|
|
|
47,440
|
|
|
|
177,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products
|
|
|
5,005
|
|
|
|
5,049
|
|
|
|
5,338
|
|
|
|
5,947
|
|
|
|
21,339
|
|
Cost of maintenance and services
|
|
|
314
|
|
|
|
276
|
|
|
|
287
|
|
|
|
265
|
|
|
|
1,142
|
|
Amortization of intangible assets
|
|
|
6,627
|
|
|
|
2,648
|
|
|
|
2,712
|
|
|
|
2,379
|
|
|
|
14,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
11,946
|
|
|
|
7,973
|
|
|
|
8,337
|
|
|
|
8,591
|
|
|
|
36,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
32,341
|
|
|
|
36,237
|
|
|
|
32,917
|
|
|
|
38,849
|
|
|
|
140,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
14,504
|
|
|
|
14,023
|
|
|
|
11,810
|
|
|
|
14,514
|
|
|
|
54,851
|
|
Research and development
|
|
|
6,181
|
|
|
|
6,640
|
|
|
|
6,379
|
|
|
|
6,683
|
|
|
|
25,883
|
|
General and administration
|
|
|
5,395
|
|
|
|
6,193
|
|
|
|
5,833
|
|
|
|
6,864
|
|
|
|
24,285
|
|
InterVideo integration costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
358
|
|
|
|
358
|
|
Restructuring
|
|
|
560
|
|
|
|
251
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
26,640
|
|
|
|
27,107
|
|
|
|
24,022
|
|
|
|
28,418
|
|
|
|
106,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5,701
|
|
|
|
9,130
|
|
|
|
8,895
|
|
|
|
10,431
|
|
|
|
34,157
|
|
Other expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on debt retirement
|
|
|
|
|
|
|
8,275
|
|
|
|
17
|
|
|
|
|
|
|
|
8,292
|
|
Interest expense, net
|
|
|
3,863
|
|
|
|
3,207
|
|
|
|
2,334
|
|
|
|
1,927
|
|
|
|
11,331
|
|
Amortization of deferred financing fees
|
|
|
444
|
|
|
|
357
|
|
|
|
188
|
|
|
|
191
|
|
|
|
1,180
|
|
Other non-operating (income) expense
|
|
|
(120
|
)
|
|
|
(528
|
)
|
|
|
377
|
|
|
|
(294
|
)
|
|
|
(565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
1,514
|
|
|
|
(2,181
|
)
|
|
|
5,979
|
|
|
|
8,607
|
|
|
|
13,919
|
|
Income tax expense
|
|
|
3,152
|
|
|
|
1,791
|
|
|
|
485
|
|
|
|
(760
|
)
|
|
|
4,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(1,638
|
)
|
|
$
|
(3,972
|
)
|
|
$
|
5,494
|
|
|
$
|
9,367
|
|
|
$
|
9,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on securities
|
|
|
(48
|
)
|
|
|
(23
|
)
|
|
|
(36
|
)
|
|
|
(24
|
)
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$
|
(1,686
|
)
|
|
$
|
(3,995
|
)
|
|
$
|
5,458
|
|
|
$
|
9,343
|
|
|
$
|
9,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WinZip common
|
|
$
|
105.85
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Corel common
|
|
$
|
(0.25
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
0.22
|
|
|
$
|
0.38
|
|
|
$
|
0.41
|
|
Fully diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WinZip common
|
|
$
|
92.04
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Corel common
|
|
$
|
(0.25
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
0.22
|
|
|
$
|
0.37
|
|
|
$
|
0.40
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
2007
|
|
Feb. 28
|
|
|
May. 31
|
|
|
Aug. 30
|
|
|
Nov. 30
|
|
|
Total Year
|
|
|
|
(Dollars in thousands,
|
|
|
|
except number of shares and per share amounts)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
47,304
|
|
|
$
|
59,553
|
|
|
$
|
55,018
|
|
|
$
|
66,399
|
|
|
$
|
228,274
|
|
Maintenance and service
|
|
|
5,330
|
|
|
|
5,479
|
|
|
|
5,352
|
|
|
|
6,045
|
|
|
|
22,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
52,634
|
|
|
|
65,032
|
|
|
|
60,370
|
|
|
|
72,444
|
|
|
|
250,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products
|
|
|
8,487
|
|
|
|
14,010
|
|
|
|
12,143
|
|
|
|
15,135
|
|
|
|
49,775
|
|
Cost of maintenance and services
|
|
|
198
|
|
|
|
221
|
|
|
|
244
|
|
|
|
133
|
|
|
|
796
|
|
Amortization of intangible assets
|
|
|
5,757
|
|
|
|
6,373
|
|
|
|
6,925
|
|
|
|
7,064
|
|
|
|
26,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
14,442
|
|
|
|
20,604
|
|
|
|
19,312
|
|
|
|
22,332
|
|
|
|
76,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
38,192
|
|
|
|
44,428
|
|
|
|
41,058
|
|
|
|
50,112
|
|
|
|
173,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
17,104
|
|
|
|
17,492
|
|
|
|
17,231
|
|
|
|
18,760
|
|
|
|
70,587
|
|
Research and development
|
|
|
11,344
|
|
|
|
10,697
|
|
|
|
11,282
|
|
|
|
11,389
|
|
|
|
44,712
|
|
General and administration
|
|
|
9,095
|
|
|
|
9,187
|
|
|
|
8,803
|
|
|
|
9,998
|
|
|
|
37,083
|
|
Acquired in-process research and development
|
|
|
7,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,831
|
|
InterVideo integration expense
|
|
|
785
|
|
|
|
860
|
|
|
|
2,220
|
|
|
|
1,355
|
|
|
|
5,220
|
|
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,447
|
|
|
|
1,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
46,159
|
|
|
|
38,236
|
|
|
|
39,536
|
|
|
|
42,949
|
|
|
|
166,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
(7,967
|
)
|
|
|
6,192
|
|
|
|
1,522
|
|
|
|
7,163
|
|
|
|
6,910
|
|
Other expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
3,921
|
|
|
|
3,718
|
|
|
|
4,195
|
|
|
|
4,420
|
|
|
|
16,254
|
|
Amortization of deferred financing fees
|
|
|
265
|
|
|
|
269
|
|
|
|
270
|
|
|
|
270
|
|
|
|
1,074
|
|
Other non-operating (income) expense
|
|
|
(632
|
)
|
|
|
479
|
|
|
|
(497
|
)
|
|
|
(149
|
)
|
|
|
(799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
|
(11,521
|
)
|
|
|
1,726
|
|
|
|
(2,446
|
)
|
|
|
2,622
|
|
|
|
(9,619
|
)
|
Income tax (recovery) provision
|
|
|
355
|
|
|
|
(587
|
)
|
|
|
4,314
|
|
|
|
(639
|
)
|
|
|
3,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(11,876
|
)
|
|
$
|
2,313
|
|
|
$
|
(6,760
|
)
|
|
$
|
3,261
|
|
|
$
|
(13,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
(731
|
)
|
|
|
(675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income
|
|
$
|
(11,876
|
)
|
|
$
|
2,313
|
|
|
$
|
(6,704
|
)
|
|
$
|
2,530
|
|
|
$
|
(13,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.48
|
)
|
|
$
|
0.09
|
|
|
$
|
(0.27
|
)
|
|
$
|
0.13
|
|
|
$
|
(0.52
|
)
|
Fully Diluted
|
|
$
|
(0.48
|
)
|
|
$
|
0.09
|
|
|
$
|
(0.27
|
)
|
|
$
|
0.13
|
|
|
$
|
(0.52
|
)
|
64
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
Qualitative
and Quantitative Disclosure About Market Risk
Market risk is the risk of a loss that could affect our
financial position resulting from adverse changes in the
financial markets. Our primary risks relate to increases in
interest rates and fluctuations in foreign currency exchange
rates. Our market risk sensitive instruments were all entered
into for non-trading purposes.
Interest
Rate Risk
Our exposure to interest rate risk relates primarily to our
long-term debt. We have significantly larger amounts of interest
bearing debt as compared to interest bearing assets. The risk is
associated with increases in the prime lending rate, as a
significant portion of the debt has a floating rate of interest
based on the prime lending rate.
Given the amount of debt that we have, if lending rates were to
rise significantly, the resulting interest cost could materially
affect the business. Our annual interest expense would change by
approximately $492,000 for each 0.5% change in interest rates,
based on debt outstanding as of November 30, 2007. In
connection with the current debt facility, we use interest rate
swaps to limit our exposure to changing interest rates and
future cash outflows for interest. Interest rate swaps provide
for us to pay an amount equal to a specified fixed rate of
interest times a notional principal amount and to receive in
return an amount equal to a variable rate of interest times the
same notional amount.
As of November 30, 2007, our interest rate swaps convert an
aggregate notional principal amount of $109.5 million (or
approximately 69% of our interest-bearing debt) from floating
rate interest payments under our term loan facility to fixed
interest rate obligations. The variable rate of interest is
based on three-month LIBOR plus 4.00%. The fixed rates range
from 8.93% to 9.49%. During our fiscal year ended 2007, we have
recorded a loss of $392,000 as a result of recording a portion
of these interest rate swaps at fair value. As of
November 30, 2007, $50.0 million of these interest
rate swaps have been designated as effective hedging instruments
and any gains or losses on these items are recorded in other
comprehensive income.
As of November 30, 2006, our interest rate swaps converted
an aggregate notional principal amount of $71.5 million (or
approximately 80% of our interest-bearing debt) from floating
rate interest payments under our term loan facility to fixed
interest rate obligations. The variable rate of interest was
based on three-month LIBOR plus 3.25%. The fixed rates ranged
from 8.62% to 8.74%. During our fiscal year ended 2006, we have
recorded a loss of $810,000 as a result of recording this
interest rate swap at fair value.
Foreign
Currency Risk
Most of our operations are located in Canada and Taiwan. We
incur a disproportionate percentage of costs in Canadian and
Taiwanese dollars as compared to Canadian and Taiwanese dollar
denominated revenues. We are therefore exposed to loss if the
Canadian and Taiwanese dollar appreciates against the
U.S. dollar.
We manage our financial exposure to certain foreign exchange
fluctuations with the objective of minimizing the impact of
foreign currency exchange movements on our operations. We try to
minimize the effect of changes in U.S. and Canadian dollar
exchange rates on our business through the purchase of forward
exchange contracts. As of November 30, 2007, we have two
U.S dollar foreign exchange contracts of $1.2 million,
which were settled on December 10, 2007 and
December 21, 2007. A loss of $138,000 was recorded on these
contracts for the year ending November 30, 2007.
As of November 30, 2006 we had one U.S. dollar foreign
exchange contract of $500,000, which was settled on
December 11, 2006.
As we also operate internationally, a portion of our business
outside North America is conducted in currencies other than the
U.S. dollar. Accordingly, the results of our business may
also be affected by fluctuations in the U.S. dollar against
certain European and Asian currencies, in particular the Pound
Sterling, the Yen and the Euro. Our exposure to these and other
currencies is minimized due to certain hedges naturally
65
occurring in our business as we have decentralized sales,
marketing and support operations in which most costs are local
currency based.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Our consolidated financial statements and supplementary data and
the report of independent auditors thereon set forth below.
Quarterly financial information set forth herein under
Item 7
Managements Discussion
and Analysis of Financial Condition and Results of
Operations
is incorporated herein by reference.
66
Independent
Auditors Report
To the Shareholders of Corel Corporation:
We have completed an integrated audit of Corel
Corporations 2007 consolidated financial statements and of
its internal control over financial reporting as of
November 30, 2007, and an audit of its 2006 and 2005
consolidated financial statements. Our opinions, based on our
audits, are presented below.
Consolidated
Financial statements
We have audited the accompanying consolidated balance sheets of
Corel Corporation as at November 30, 2007 and
November 30, 2006, and the related consolidated statements
of operations, cash flows and changes in shareholders
deficit for each of the years in the three year period ended
November 30, 2007. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits of the Companys financial
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. A financial
statement audit also includes assessing the accounting
principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of the Company as at November 30, 2007 and
November 30, 2006, and the results of its operations and
its cash flows for each of the years in the three year period
ended November 30, 2007 in accordance with accounting
principles generally accepted in the United States of America.
Internal
control over financial reporting
We have also audited Corel Corporations internal control
over financial reporting as at November 30, 2007 based on
criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Report on
Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such
other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
at November 30, 2007 based on criteria established in
Internal Control Integrated Framework issued by the
COSO.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants, Licensed Public Accountants
February 8, 2008
Ottawa, Ontario
67
COREL
CORPORATION
CONSOLIDATED
BALANCE SHEETS
(In
thousands, U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November 30,
|
|
|
|
Note
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
$
|
24,615
|
|
|
$
|
51,030
|
|
Restricted cash
|
|
|
2
|
|
|
|
217
|
|
|
|
717
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade, net
|
|
|
3
|
|
|
|
41,092
|
|
|
|
18,150
|
|
Other
|
|
|
|
|
|
|
118
|
|
|
|
808
|
|
Inventory
|
|
|
5
|
|
|
|
729
|
|
|
|
914
|
|
Income taxes recoverable
|
|
|
|
|
|
|
1,470
|
|
|
|
|
|
Prepaids and other current assets
|
|
|
|
|
|
|
3,276
|
|
|
|
2,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
71,517
|
|
|
|
73,919
|
|
Capital assets
|
|
|
7
|
|
|
|
8,971
|
|
|
|
3,651
|
|
Intangible assets
|
|
|
7,8
|
|
|
|
92,010
|
|
|
|
37,831
|
|
Goodwill
|
|
|
8,9
|
|
|
|
88,643
|
|
|
|
9,850
|
|
Deferred financing and other long-term assets
|
|
|
2,6
|
|
|
|
5,696
|
|
|
|
5,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
$
|
266,837
|
|
|
$
|
130,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
10
|
|
|
$
|
67,290
|
|
|
$
|
28,220
|
|
Due to related parties
|
|
|
4
|
|
|
|
|
|
|
|
167
|
|
Income taxes payable
|
|
|
|
|
|
|
723
|
|
|
|
235
|
|
Deferred revenue
|
|
|
|
|
|
|
15,707
|
|
|
|
12,719
|
|
Current portion of long-term debt
|
|
|
12
|
|
|
|
2,249
|
|
|
|
1,426
|
|
Current portion of obligation under capital leases
|
|
|
13
|
|
|
|
767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
86,736
|
|
|
|
42,767
|
|
Deferred revenue
|
|
|
|
|
|
|
2,365
|
|
|
|
2,015
|
|
Income taxes payable
|
|
|
|
|
|
|
11,693
|
|
|
|
8,488
|
|
Deferred income tax liabilities
|
|
|
11
|
|
|
|
20,754
|
|
|
|
|
|
Long-term debt
|
|
|
12
|
|
|
|
156,359
|
|
|
|
89,223
|
|
Accrued pension benefit obligation
|
|
|
15
|
|
|
|
1,116
|
|
|
|
|
|
Obligation under capital leases
|
|
|
13
|
|
|
|
2,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
281,137
|
|
|
|
142,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
13
|
|
|
|
|
|
|
|
|
|
Shareholders (deficit) equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corel Common Shares (par value: none; authorized: unlimited;
issued and outstanding: 25,457 and 24,535 shares,
respectively)
|
|
|
14
|
|
|
|
40,652
|
|
|
|
30,722
|
|
Additional paid-in capital
|
|
|
|
|
|
|
5,926
|
|
|
|
4,612
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
(721
|
)
|
|
|
(46
|
)
|
Deficit
|
|
|
|
|
|
|
(60,157
|
)
|
|
|
(47,095
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders deficit
|
|
|
|
|
|
|
(14,300
|
)
|
|
|
(11,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders deficit
|
|
|
|
|
|
$
|
266,837
|
|
|
$
|
130,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to the Consolidated Financial Statements
68
COREL
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, U.S. dollars, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
|
Note
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
|
|
|
$
|
228,274
|
|
|
$
|
157,319
|
|
|
$
|
148,308
|
|
Maintenance and services
|
|
|
|
|
|
|
22,206
|
|
|
|
19,872
|
|
|
|
15,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
|
|
|
250,480
|
|
|
|
177,191
|
|
|
|
164,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
|
|
|
|
|
49,775
|
|
|
|
21,339
|
|
|
|
18,461
|
|
Cost of maintenance and services
|
|
|
|
|
|
|
796
|
|
|
|
1,142
|
|
|
|
1,154
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
26,119
|
|
|
|
14,366
|
|
|
|
26,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
|
|
|
|
76,690
|
|
|
|
36,847
|
|
|
|
45,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
173,790
|
|
|
|
140,344
|
|
|
|
118,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
|
|
|
|
70,587
|
|
|
|
54,851
|
|
|
|
54,056
|
|
Research and development
|
|
|
|
|
|
|
44,712
|
|
|
|
25,883
|
|
|
|
23,538
|
|
General and administration
|
|
|
|
|
|
|
37,083
|
|
|
|
24,285
|
|
|
|
19,851
|
|
Acquired in-process research and development
|
|
|
8
|
|
|
|
7,831
|
|
|
|
|
|
|
|
|
|
InterVideo integration expense
|
|
|
8
|
|
|
|
5,220
|
|
|
|
358
|
|
|
|
3,125
|
|
Restructuring
|
|
|
16
|
|
|
|
1,447
|
|
|
|
810
|
|
|
|
834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
|
|
|
166,880
|
|
|
|
106,187
|
|
|
|
101,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
6,910
|
|
|
|
34,157
|
|
|
|
16,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on debt retirement
|
|
|
12
|
|
|
|
|
|
|
|
8,292
|
|
|
|
3,937
|
|
Interest income
|
|
|
|
|
|
|
(724
|
)
|
|
|
(978
|
)
|
|
|
(178
|
)
|
Interest expense
|
|
|
|
|
|
|
16,978
|
|
|
|
12,309
|
|
|
|
12,786
|
|
Gain on disposal of investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125
|
)
|
Amortization of deferred financing fees
|
|
|
|
|
|
|
1,074
|
|
|
|
1,180
|
|
|
|
1,756
|
|
Other non-operating expense (income)
|
|
|
|
|
|
|
(799
|
)
|
|
|
(565
|
)
|
|
|
1,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
(9,619
|
)
|
|
|
13,919
|
|
|
|
(2,462
|
)
|
Income tax expense (recovery)
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
3,526
|
|
|
|
3,411
|
|
|
|
5,461
|
|
Deferred
|
|
|
|
|
|
|
(83
|
)
|
|
|
1,257
|
|
|
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
$
|
(13,062
|
)
|
|
$
|
9,251
|
|
|
$
|
(8,753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of taxes of $nil
|
|
|
|
|
|
|
(675
|
)
|
|
|
(131
|
)
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
$
|
(13,737
|
)
|
|
$
|
9,120
|
|
|
$
|
(8,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per Corel common share:
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
$
|
(0.52
|
)
|
|
$
|
0.41
|
|
|
$
|
N/A
|
|
Fully diluted
|
|
|
|
|
|
$
|
(0.52
|
)
|
|
$
|
0.40
|
|
|
$
|
N/A
|
|
Weighted average number of Corel common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
24,951
|
|
|
|
22,410
|
|
|
|
N/A
|
|
Fully diluted
|
|
|
|
|
|
|
24,951
|
|
|
|
23,156
|
|
|
|
N/A
|
|
69
COREL
CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS (Continued)
(In
thousands, U.S. dollars, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
|
Note
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
(2.40
|
)
|
Class B
|
|
|
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
(2.40
|
)
|
WinZip common
|
|
|
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
136.90
|
|
Fully diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
(2.40
|
)
|
Class B
|
|
|
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
(2.40
|
)
|
WinZip common
|
|
|
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
136.90
|
|
Income (loss) applicable to shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings to class
|
|
|
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
21,018
|
|
Loss allocable to class
|
|
|
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
(29,991
|
)
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings to class
|
|
|
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
46,800
|
|
Loss allocable to class
|
|
|
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
(66,781
|
)
|
WinZip common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings to class
|
|
|
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
12,000
|
|
Loss allocable to class
|
|
|
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
(9,262
|
)
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in basic per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
3,737
|
|
Class B
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
8,321
|
|
WinZip common
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
20
|
|
Shares used in diluted per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
3,737
|
|
Class B
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
8,321
|
|
WinZip common
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
20
|
|
See Accompanying Notes to the Consolidated Financial Statements
70
COREL
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands, U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
|
Note
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flow from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
$
|
(13,062
|
)
|
|
$
|
9,251
|
|
|
$
|
(8,753
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
3,477
|
|
|
|
1,609
|
|
|
|
1,490
|
|
Amortization of deferred financing fees
|
|
|
|
|
|
|
1,074
|
|
|
|
1,180
|
|
|
|
1,756
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
26,119
|
|
|
|
14,366
|
|
|
|
26,139
|
|
Stock-based compensation
|
|
|
|
|
|
|
5,488
|
|
|
|
3,232
|
|
|
|
1,731
|
|
Other non-cash charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,242
|
|
Provision for bad debts
|
|
|
|
|
|
|
252
|
|
|
|
195
|
|
|
|
529
|
|
Deferred income taxes
|
|
|
|
|
|
|
(83
|
)
|
|
|
876
|
|
|
|
830
|
|
Unrealized foreign exchange loss on forward exchange contracts
|
|
|
|
|
|
|
147
|
|
|
|
150
|
|
|
|
263
|
|
Acquired in-process research and development
|
|
|
8
|
|
|
|
7,831
|
|
|
|
|
|
|
|
|
|
Loss (gain) on disposal of fixed assets
|
|
|
|
|
|
|
102
|
|
|
|
|
|
|
|
(20
|
)
|
Loss on early retirement of debt
|
|
|
12
|
|
|
|
|
|
|
|
8,292
|
|
|
|
3,937
|
|
Gain on disposal of investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125
|
)
|
Loss on interest rate swap recorded at fair value
|
|
|
|
|
|
|
392
|
|
|
|
810
|
|
|
|
|
|
Change in operating assets and liabilities
|
|
|
19
|
|
|
|
(5,238
|
)
|
|
|
(3,736
|
)
|
|
|
10,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
|
|
|
|
26,499
|
|
|
|
36,225
|
|
|
|
40,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
500
|
|
|
|
249
|
|
|
|
1,257
|
|
Proceeds from operating line of credit
|
|
|
|
|
|
|
48,000
|
|
|
|
|
|
|
|
|
|
Repayments of operating line of credit
|
|
|
|
|
|
|
(48,000
|
)
|
|
|
|
|
|
|
(2,500
|
)
|
Proceeds from long-term debt
|
|
|
12
|
|
|
|
70,000
|
|
|
|
90,000
|
|
|
|
153,000
|
|
Repayments of long-term debt
|
|
|
12
|
|
|
|
(2,149
|
)
|
|
|
(150,323
|
)
|
|
|
(83,575
|
)
|
Repayments of capital lease obligations
|
|
|
|
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
Payments on deferred purchase price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(750
|
)
|
Financing fees incurred
|
|
|
|
|
|
|
(1,685
|
)
|
|
|
(5,259
|
)
|
|
|
(8,708
|
)
|
Proceeds from public offering, net of costs of $5,176
|
|
|
|
|
|
|
|
|
|
|
69,132
|
|
|
|
|
|
Paid up capital distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83,146
|
)
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
5,406
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
(7,500
|
)
|
|
|
(14,135
|
)
|
Other financing activities
|
|
|
|
|
|
|
51
|
|
|
|
(184
|
)
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities
|
|
|
|
|
|
|
71,808
|
|
|
|
(3,885
|
)
|
|
|
(38,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
Proceeds on disposal of investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
Redemption of short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,987
|
|
Acquisition of Jasc
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(898
|
)
|
Purchase of InterVideo, net of cash acquired
|
|
|
8
|
|
|
|
(120,912
|
)
|
|
|
|
|
|
|
|
|
Purchase of long lived assets
|
|
|
|
|
|
|
(3,848
|
)
|
|
|
(1,906
|
)
|
|
|
(1,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
|
|
|
|
|
|
|
(124,760
|
)
|
|
|
(1,906
|
)
|
|
|
7,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
|
|
|
38
|
|
|
|
(150
|
)
|
|
|
(19
|
)
|
Increase (decrease) in cash and cash equivalents
|
|
|
|
|
|
|
(26,415
|
)
|
|
|
30,284
|
|
|
|
9,189
|
|
Cash and cash equivalents, beginning of period
|
|
|
|
|
|
|
51,030
|
|
|
|
20,746
|
|
|
|
11,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
|
|
|
|
$
|
24,615
|
|
|
$
|
51,030
|
|
|
$
|
20,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
|
|
|
|
|
16,488
|
|
|
|
9,613
|
|
|
|
11,808
|
|
Cash paid (recovered) for income taxes
|
|
|
|
|
|
|
3,208
|
|
|
|
5,526
|
|
|
|
1,561
|
|
Share consideration on acquisitions
|
|
|
|
|
|
|
|
|
|
|
35,138
|
|
|
|
|
|
Purchases of capital assets under capital lease
|
|
|
13
|
|
|
|
3,074
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to the Consolidated Financial Statements
71
COREL
CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS (DEFICIT) EQUITY
(In
thousands, U.S. dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Additional
|
|
|
Retained
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Corel Common
|
|
|
Comprehensive
|
|
|
Paid in
|
|
|
Earnings
|
|
|
Shareholders
|
|
|
|
Note
|
|
|
WinZip Stock
|
|
|
Shares
|
|
|
Income
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Deficit
|
|
|
Balances at December 1, 2005
|
|
|
|
|
|
|
20
|
|
|
$
|
20
|
|
|
|
15,167
|
|
|
$
|
(73,813
|
)
|
|
$
|
85
|
|
|
$
|
7,427
|
|
|
$
|
(18,953
|
)
|
|
$
|
(85,234
|
)
|
Net income loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,251
|
|
|
|
9,251
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
(131
|
)
|
Shares issued for services rendered
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
Repurchase of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(427
|
)
|
|
|
|
|
|
|
(427
|
)
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,232
|
|
|
|
|
|
|
|
3,232
|
|
WinZip dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,480
|
)
|
|
|
(2,020
|
)
|
|
|
(7,500
|
)
|
Shares issued on initial public offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
69,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,173
|
|
Shares issued on WinZip acquisition
|
|
|
8
|
|
|
|
(20
|
)
|
|
|
(20
|
)
|
|
|
4,323
|
|
|
|
35,158
|
|
|
|
|
|
|
|
|
|
|
|
(35,373
|
)
|
|
|
(235
|
)
|
Options Exercised, net of issue costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
152
|
|
|
|
|
|
|
|
(140
|
)
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at November 30, 2006
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
24,535
|
|
|
$
|
30,722
|
|
|
$
|
(46
|
)
|
|
$
|
4,612
|
|
|
$
|
(47,095
|
)
|
|
$
|
(11,807
|
)
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,062
|
)
|
|
|
(13,062
|
)
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(675
|
)
|
|
|
|
|
|
|
|
|
|
|
(675
|
)
|
Stock based compensation
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,488
|
|
|
|
|
|
|
|
5,488
|
|
Acquisition of InterVideo options
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
719
|
|
|
|
|
|
|
|
719
|
|
Options exercised, net of issue costs
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
922
|
|
|
|
9,930
|
|
|
|
|
|
|
|
(4,893
|
)
|
|
|
|
|
|
|
5,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at November 30, 2007
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
25,457
|
|
|
$
|
40,652
|
|
|
$
|
(721
|
)
|
|
$
|
5,926
|
|
|
$
|
(60,157
|
)
|
|
$
|
(14,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of total other comprehensive income for the years
ended November 30, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
November 30, 2007
|
|
|
November 30, 2006
|
|
|
Actuarial gain recognized for defined benefit plan (note 15)
|
|
$
|
931
|
|
|
$
|
|
|
Loss on interest rate swaps designated as hedges (note 2)
|
|
|
(1,821
|
)
|
|
|
|
|
Unrealized gains (losses) on securities (note 6)
|
|
|
215
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
$
|
(675
|
)
|
|
$
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to the Consolidated Financial Statements
72
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
(All
amounts in thousands, U.S. dollars, unless otherwise
stated)
Founded in 1985, Corel Corporation (Corel or the
Company) is a global packaged software company with
products for the Graphics and Productivity market and the
Digital Media market. At November 30, 2007, the
Companys significant products include
CorelDRAW
Graphics Suite, Corel Paint Shop Pro, WordPerfect Office Suite,
Corel Painter, WinZip, WinDVD, VideoStudio, DVD Movie Factory,
DVD Copy,
and
Photo Impact.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of presentation
The Company purchased Cayman Ltd.
Holdco
(WinZip) from affiliates of Vector Capital
contemporaneously with the completion of the Companys
public offering on May 2, 2006. Prior to this transaction,
the Company and WinZip were under common control. Because of
this common control, these financial statements include the
results of WinZip from January 18, 2005 (the date Vector
Capital purchased WinZip).
On March 31, 2006, the Company effected a 1.0 for 11.7
reverse split of its share capital. Accordingly, the share, per
share, and share option data appearing in the consolidated
financial statements and notes has been adjusted for all periods
to reflect the impact of the reverse split.
Basis
of consolidation
The consolidated financial statements include the accounts of
Corel and its wholly-owned subsidiaries. All material
intercompany transactions and balances have been eliminated.
Estimates
and assumptions
The preparation of these financial statements is in conformity
with US GAAP and requires management to make certain estimates
and assumptions that affect the reported amounts in the
consolidated financial statements, and the disclosures made in
the accompanying notes. Examples of estimates include the
provisions for sales returns and bad debts, estimates associated
with annual goodwill impairment tests and estimates of deferred
income tax assets and liabilities. We also use estimates in
determining the remaining economic lives and carrying values of
purchased intangible assets, equipment and other long-lived
assets. In addition, we use assumptions when employing the
Black-Scholes valuation model to estimate the fair value of
options. Despite the Companys intention to establish
accurate estimates and use reasonable assumptions, actual
results may differ from these estimates.
Business
combinations
Corel accounts for business acquisitions using the purchase
method of accounting and records definite lived intangible
assets separate from goodwill. Intangible assets are recorded at
their fair value based on estimates as at the date of
acquisition. Goodwill is recorded as the residual amount of the
purchase price less the fair value assigned to the individual
assets acquired and liabilities assumed as at the date of
acquisition.
Software
revenue recognition
The Company recognizes revenue in accordance with Statement of
Position (SOP)
97-2,
Software Revenue Recognition, issued by the American
Institute of Certified Public Accountants (AICPA),
SOP 98-9,
Modification of
97-2,
Software Recognition with Respect to Certain Transactions
and Staff Accounting Bulletin (SAB) No. 101 and
No. 104 Revenue Recognition in Financial
Statements, issued by the Securities and Exchange
Commission (SEC).
73
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company records revenue when persuasive evidence of an
arrangement exists, there are no significant uncertainties
surrounding product acceptance, the fees are fixed or
determinable and collection is considered probable.
The Companys application of
SOP 97-2
requires judgment, including whether a software arrangement
includes multiple elements, and if so, whether vendor-specific
objective evidence (VSOE) of fair value exists for
those elements. The Companys VSOE is based on the
associated price when the elements are sold separately. Some
customers receive certain elements of the Companys
products over a period of time. Changes to the elements in a
software arrangement, the ability to identify VSOE for those
elements and the fair value of the respective elements could
materially affect the amount of earned and unearned revenue.
The Company sells maintenance contracts that include the right
to unspecified upgrades of software licenses on a
when-and-if-available
basis and customer support. Sales of maintenance contracts are
considered post contract support, and the fees are deferred and
recognized as revenue ratably over the term of the maintenance
arrangement, which is generally 12 or 24 months. Deferred
revenue is not contingent upon any specific delivery of product
since upgrades are only provided
when-and-if-available.
The Company recognizes revenues from the sale of its packaged
software when legal title transfers, which is generally when the
product ships or, in the case of certain agreements, when
products are delivered to retailers. The Company sells some of
its products on consignment to resellers and retailers and
recognizes revenue for these consignment transactions only when
the end-user sale has occurred.
Under the Companys revenue recognition policy for OEM
customers, the Company recognizes revenue based on the evidence
of products sold by our OEM customers to end customers or to the
OEMs sales channel partners. Under certain agreements
where post contract support (PCS) is granted to OEM
for a period greater than a year, revenue is recognized ratably
over the shorter of the contractual PCS period or the estimated
life of the product. Typically, the Companys OEM customers
do not have the right to claim a credit or refund for returns
from OEMs sales channel partners or end customers back to
the OEM. However, in the few instances where Corel has granted
its OEM customers with the right to claim a refund or credit to
a certain capped percentage of the contract amount, the Company
defers revenue based on the contractual return cap until it is
able to establish a reasonable returns estimate based on
historical return activity, that is specific to the respective
sales channel, product line or country.
End-user sales are made directly through the Companys
websites without upgrades. Websales revenue is recognized, net
of returns, upon the delivery of the product and the receipt of
payment by credit card.
At the time of contract signing, the Company assesses whether
the fee associated with the revenue transactions is fixed or
determinable based on the payment terms associated with the
transaction and considers the fee to be fixed or determinable if
it is due within the Companys normal payment terms, which
are generally 30 to 90 days from invoice date.
The Company assesses collectibility based on a number of
factors, including past transaction history with the customer
and the credit-worthiness of the customer. If it is determined
that collection of a fee is not reasonably assured, management
defers the fee and recognizes revenue at the time collection
becomes reasonably assured, which is generally upon receipt of
cash.
Allowance
for product returns and rebate programs
In accordance with Financial Accounting Standards Board
(FAS) 48, the Company reduces product revenues from
distributors and retailers for estimated returns based on
historical returns experience and other factors, such as the
volume and price mix of products in the retail channel, return
rates for prior releases of the product, trends in retailer
inventory and economic trends that might impact customer demand
for its products (including the competitive environment and the
timing of new releases of its product). The Company
74
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
also reduces product revenue for the estimated redemption of
rebates on certain current product sales. The Company estimates
provisions for distributor and retailer sales incentive rebates
based on distributors and retailers actual performance against
the terms and conditions of rebate programs. The Company
estimates and provides for end user rebates based on the terms
and conditions of the specific promotional rebate program,
actual sales during the promotion, the amount of redemptions
received and historical redemption trends by product and by type
of promotional program.
Certain customer agreements require payment by the Company of
marketing development funds, co-operative advertising fees,
rebates or similar charges. The Company accounts for such fees
in accordance with Emerging Issues Task Force (EITF)
Issue
No. 01-09
as a reduction in revenue, unless there is an identifiable
benefit and the fair value of the charges can be reasonably
estimated in which case the Company records these transactions
as marketing expense. Commissions paid to third-party sales
representatives are included in sales and marketing expenses.
Allowance
for doubtful accounts
The Company maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of customers to
make required payments. The Company regularly reviews the
accounts receivable and management uses its judgment to assess
the collectibility of specific accounts. As part of the review,
management considers historical bad debts, changes in customer
payments and current economic trends. Based on this assessment,
an allowance is maintained that represents what is believed to
be ultimately uncollectible from such customers. Changes in
these factors result in adjustments to the allowance for
doubtful accounts which are accounted for as changes in
estimates.
Other
comprehensive income (loss)
Other comprehensive income (loss) is the change in equity of a
business enterprise from non-shareholder transactions affecting
shareholders deficit that are not included in net income
(loss) on the consolidated statement of operations and is
reported as a separate component of shareholders deficit.
Other comprehensive income (loss) includes any unrealized gains
or losses on available-for-sale securities, actuarial gains or
losses on our defined pension benefit plans, and marked to
market gains or losses incurred on our interest rate swaps that
are designated as effective cash flow hedges under Statement of
Financial Accounting Standards No 133 Accounting for
Derivative Instruments and Hedging Activities
(FAS 133).
Foreign
currency translation
The functional currency of the Company and its subsidiaries is
the U.S. dollar. Monetary assets and liabilities
denominated in foreign currencies are re-measured to
U.S. dollars using the exchange rates at the balance sheet
date. Non-monetary assets and liabilities denominated in foreign
currencies are re-measured in U.S. dollars using historical
exchange rates. Revenues and expenses are re-measured using the
actual exchange rates prevailing on the date of the
transactions. Gains and losses resulting from re-measurement are
recorded in the Companys Consolidated Statement of
Operations as a component of other non-operating expense
(income). The gains (losses) on foreign exchange were $862,
$413, and ($933) for the years ending November 30, 2007,
2006, and 2005 respectively. These are included in other
non-operating income (expense) on the consolidated statement of
operations.
Cash
equivalents
Cash equivalents are investments that are highly liquid and have
terms to maturity of three months or less at the time of
acquisition. Cash equivalents typically consist of commercial
paper, term deposits and bankers acceptances issued by
North American banks and corporate debt. Cash and cash
equivalents are carried at cost, which approximates their fair
value.
75
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted
cash
As of November 30, 2007 and 2006, $150 is held in-trust at
a law firm to pay legal fees and expenses of the former Board of
Directors, as required by the acquisition agreement reached
between Vector Capital and Corel Corporation dated
August 28, 2003, whereby Vector capital acquired Corel. Any
unused funds will be returned to Corel in 2009. As of
November 30, 2007 and 2006, $67 represented cash deposit
for leased premises. As of November 30, 2006 approximately
$500 was held on deposit with financial institutions as
compensating balances against certain foreign exchange exposures.
Investments
Investments are made up of equity securities classified as
available-for-sale. Available-for-sale securities do not qualify
for accounting under the equity method because Corels
ownership interest in such investees is less than 20% and the
Company does not have the ability to exercise significant
influence on the investees.
All available-for-sale securities are recorded at fair value.
Any unrealized gains and losses are reported as part of other
comprehensive income (loss). Realized gains and losses are
included in other non-operating expense (income).
Concentration
of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, restricted cash, forward exchange contracts and
accounts receivable.
The Companys cash and cash equivalents are denominated
predominantly in U.S. dollars and are primarily on deposit
with North American financial institutions which reduces the
financial risk from non-performance. Cash and cash equivalent
deposits may exceed federally insured limits.
As at November 30, 2007, the Company has one customer with
a balance of greater then 10% of total accounts receivable. This
customer owes $5,634. As at November 30, 2006 there were no
individual customers with balances greater then 10% of the total
accounts receivable.
Interest
rate risk
The Companys exposure to interest rate risk relates
primarily to its long-term debt. The Company has significantly
larger amounts of interest bearing debt as compared to interest
bearing assets. The risk is associated with increases in the
prime lending rate, as a significant portion of the debt has a
floating rate of interest based on prime.
Given the amount of debt that the Company has, if lending rates
were to rise significantly, the resulting interest cost could
materially affect the business. In connection with the current
debt facility (note 12), the Company uses interest rate
swaps to limit its exposure to changing interest rates and
future cash outflows for interest. Interest rate swaps provide
for the Company to pay an amount equal to a specified fixed rate
of interest times a notional principal amount and to receive in
return an amount equal to a variable rate of interest times the
same notional amount.
Fair
value of financial instruments
The carrying amounts for cash and cash equivalents, restricted
cash, accounts receivable, accounts payable and accrued
liabilities approximates fair value due to the short maturity of
these instruments.
The Company determines the fair value of its operating line of
credit and long-term debt based on market information and a
review of prices and terms available at the fiscal year-end for
similar obligations.
76
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The carrying amount of the long-term debt, which is accounted
for based on amortized cost, also approximate fair value because
the Company has interest rate swaps, totaling approximately 70%
of the total long-term debt which are marked to market as at
November 30, 2007. The remaining long-term debt which was
not hedged, approximates fair value as the long-term debt bears
interest at floating rates.
The carrying amount of the capital leases, which is based on
amortized cost, also approximates fair value as the fixed rates
in the agreements range from 6.94% to 7.89% which approximate
the market rates.
Forward
exchange contracts
Corel manages its financial exposure to certain foreign exchange
fluctuations with the objective of minimizing the impact of
foreign currency exchange movements on its operations.
To meet this objective Corel enters into foreign exchange
contracts from time to time for terms of less than one year.
Contracts are with major Canadian chartered banks, and therefore
non-performance by a counter party is considered unlikely. As of
November 30, 2007, Corel has two U.S dollar foreign
exchange contracts of $1,200 each, which were settled on
December 10, 2007 and December 21, 2007. A loss of
$138 was recorded on these contracts for the year ending
November 30, 2007. As of November 30, 2006 Corel had
one U.S dollar foreign exchange contract of $500, which was
settled on December 11, 2006. A loss of $9 was recorded on
this contract for the year ending November 30, 2006.
In accordance with the provisions of FAS 133, Corels
forward exchange contracts qualify as derivative instruments.
These contracts are not designated as hedging instruments under
FAS 133. These contracts are marked-to-market at the end of
each reporting period and resulting gains or losses are recorded
as other non-operating expense (income) in the Companys
consolidated statement of operations. The Company does not use
derivative instruments for trading purposes.
Interest
rate swaps
During fiscal 2006, the Company entered into an interest rate
swap with its principal lender, as required under its senior
credit facility. The Company does not use derivative instruments
for speculative purposes. As of November 30, 2007, the
interest rate swaps have a notional amount of
$59.5 million. This interest rate swap qualifies as a
derivative and was not designated as a hedging instrument at the
initiation of the swap, and therefore, the Company has not
applied hedge accounting. As a result, at the end of each
period, the interest rate swap is recorded in the consolidated
balance sheet as an accrued liability at fair value, and any
related gains or loses are recognized on the Companys
statement of operations within interest expense. The variable
rate of interest is based on three-month LIBOR plus 4.00%. The
fixed rates range from 8.62% to 8.76%. During fiscal 2007 and
fiscal 2006, the Company recorded a loss of $391 and $810,
respectively, to reflect the fair value for those interest rate
swaps that have not been designated as hedges.
During fiscal 2007, the Company entered into an additional
interest rate swap for $50.0 million with its principal
lender to reduce the risk of changes in cash flows associated
with interest payments due to changes in one-month LIBOR. This
interest rate swap expires in January 2012, which is concurrent
with the period to which the senior credit extends. The
objective of the swap is to hedge the risk of changes in cash
flows associated with the first future interest payments on
floating rate debt with a notional amount of $50.0 million
which is subject to changes in the one-month LIBOR rate, and
therefore the cash flow from the derivative is expected to
offset any changes in the first interest payments on floating
rate debt with a notional amount of $50.0 million due to
changes in one-month LIBOR. This is a hedge of specified cash
flows. As a result, this interest rate swap is a derivative and
was designated as a hedging instrument at the initiation of the
swap. The Company has applied cash flow hedge accounting in
accordance with FAS 133. At the end of each period, the
interest rate swap is recorded in the consolidated balance sheet
at fair value, and any related increases or decreases are
recognized on the Companys balance sheet within
accumulated other comprehensive income.
77
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During fiscal 2007, management has assessed the cash flow hedge
to have no ineffectiveness, as determined by the hypothetical
derivate method. Accordingly during fiscal 2007, the Company has
recorded a $1.8 million mark-to-market loss to other
comprehensive income. During the fiscal year ending
November 30, 2008, $447 of this loss is expected to be
re-classified into earnings. If the Company partially or fully
extinguishes the floating rate debt payments being hedged or
were to terminate the interest rate swap contract, a portion or
all of the gains or losses that have accumulated in other
comprehensive income would be recognized in earnings at that
time. Prospective and retrospective assessments of the
ineffectiveness of the hedge have been and will be made at the
end of each fiscal quarter.
As of November 30, 2007, the Companys interest rate
swaps convert an aggregate notional principal amount of
$109.5 million (or approximately 69.3% of its
interest-bearing debt) from floating rate interest payments
under its term loan facility to fixed interest rate obligations.
On December 4, 2007 the Company entered into an additional
interest rate swap for $40.0 million with its principal
lender to reduce the risk of changes in cash flows associated
with interest payments due to changes in one-month LIBOR. This
has been designated to be a hedging instrument at the initiation
of the swap, and therefore, the Company will apply cash flow
hedge accounting in accordance with FAS 133.
Inventory
Inventory of product components is valued at the lower of
average cost and replacement cost. Finished goods are valued at
the lower of average cost and net realizable value.
Long-lived
assets
Long-lived assets are recorded at cost. Amortization of licenses
commences with the market release of the associated software
products and versions. Depreciation and amortization are
calculated using the following rates and bases:
|
|
|
Capital assets
|
|
|
Furniture and fixtures
|
|
20-33.3% per year declining balance
|
Computer equipment general
|
|
Three years straight line
|
Computer equipment under capital lease general
|
|
Three years straight line
|
Computer equipment research and development
|
|
20-50% per year declining balance
|
Leasehold improvements
|
|
Straight line over the term of the lease
|
Intangible assets
|
|
|
Licenses
|
|
Straight line over their useful lives, generally three to seven
years
|
Acquired technologies
|
|
Straight line over the remaining economic life, generally
estimated to be two to seven years
|
Tradenames
|
|
Straight line over estimated life of five to seven years
|
Customer relationships
|
|
The pattern in which the economic benefits are expected to be
realized, over an estimated life of seven years.
|
Non-competition agreement
|
|
Straight line over two years, the term of the agreement
|
78
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The carrying values of long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amounts of such assets may not be recoverable.
The determination of whether any impairments exist includes a
comparison of estimated undiscounted future cash flows
anticipated to be generated using the remaining life of the
asset to the net carrying value of the asset. If the estimated
undiscounted future cash flows associated with the asset are
less than the carrying value, an impairment loss will be
recorded based on the estimated fair value.
Goodwill
Goodwill represents the excess of the purchase price of acquired
companies over the estimated fair value assigned to the
individual assets acquired and liabilities assumed. The Company
does not amortize goodwill, but instead tests goodwill for
impairment at least annually and, if necessary, would record any
impairment in accordance with FAS 142, Goodwill and
Other Intangible Assets.
A two-step test is performed to assess goodwill for impairment.
First, the fair value of each reporting unit is compared to its
carrying value. If the fair value exceeds the carrying value,
goodwill is not impaired and no further testing is performed.
The second step is performed if the carrying value exceeds the
fair value. The implied fair value of the reporting units
goodwill must be determined and compared to the carrying value
of the goodwill. If the carrying value of a reporting
units goodwill exceeds its implied fair value, an
impairment loss equal to the difference is recorded. The Company
has one reporting unit.
Software
development costs
Product development costs are charged to expense as incurred
until technological feasibility is attained. The Companys
internally developed software costs include application and
tools development, testing, translation and localization costs
incurred in production of software to be licensed to customers.
Technological feasibility is attained when the Companys
software has completed system testing and has been determined
viable for its intended use. The time between the attainment of
technological feasibility and completion of software development
is traditionally short, and to date, such costs have not been
material. Accordingly, the Company did not capitalize any
development costs in fiscal 2007, 2006 and 2005.
The Company capitalizes software acquired through business
combinations and technology purchases only if the related
software under development has reached technological feasibility
or if there are alternative future uses for the technology. The
amortization expense is separately classified and disclosed as a
component of cost of revenue.
Deferred
financing charges
Deferred financing charges arise when the Company arranges
long-term debt financing and are amortized over the term of the
associated debt using the effective interest rate method. In
fiscal 2005, 2006 and 2007, the Company entered into new debt
facilities. Additions to deferred financing charges in fiscal
2007, 2006 and 2005 were $1,685 and $5,259, and $8,708
respectively. During fiscal 2007, 2006 and 2005, the related
amortization expense was $1,074, $1,180 and $1,756, respectively.
Income
taxes
The Company accounts for income taxes under the asset and
liability method. Under this method, the Company recognizes
deferred tax assets and liabilities for future tax consequences
attributable to differences between the financial statement
carrying amounts and the tax basis of existing assets and
liabilities. The Company records a valuation allowance to reduce
its deferred tax assets to an amount for which realization is
more likely than not.
79
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investment
tax credits
Investment tax credits, which are earned as a result of
qualifying research and development expenditures, are recognized
and applied to reduce income tax expense in the year in which
the expenditures are made and their realization is reasonably
assured.
Stock-based
compensation
Stock-based compensation cost is measured at the date of grant,
based on the fair value of the award, and is recognized as an
expense on a straight-line basis over the employees
requisite service period with an equal amount recorded as
additional paid in capital until such time as the fair value has
been fully recognized. The Company accounts for forfeitures
using an estimated rate when determining the fair value of the
award.
Advertising
costs
Advertising costs are expensed as incurred but do not include
expenses related to coupon programs, which are applied against
revenues. Advertising costs were $19,233, $18,951, and $20,981
for the years ending November 30, 2007, 2006 and 2005,
respectively.
Shipping
and handling costs
Shipping and handling costs associated with product delivery are
included in cost of revenues for all periods presented.
Defined
employee benefit plans
The Company maintains a defined benefit pension plan in certain
jurisdictions for which current service costs are charged to
operations as they accrue based on services rendered by
employees during the year. Pension benefit obligations are
determined by independent actuaries using managements best
estimate assumptions, with accrued benefits prorated on service.
Obligations are recorded under the corridor method in accordance
with Statement of Financial Accountings Standard No 158,
Employers Accounting for Defined Benefit Pension and Other
Post Retirement Plans 158 (FAS 158).
Leases
Leases are classified as capital or operating depending on the
terms and conditions of the contracts. The costs of assets
acquired under capital leases are amortized on a straight-line
basis over their estimated useful lives. Obligations recorded
under capital leases are reduced by lease payments net of
imputed interest.
Earnings
per share
The Company computes the basic earnings (loss) per share by
using the weighted average number of common shares outstanding
for the period. Diluted earnings (loss) per share is based upon
the weighted average common shares outstanding for the period
plus dilutive potential common shares, including unvested stock
options, calculated under the treasury stock method. Any stock
options which have an exercise price greater than the market
price at the balance sheet date are not considered as dilutive
potential common shares.
For the year ended November 30, 2005 the Company used the
two class method to compute earnings (loss) per
share. Under this method, basic earnings (loss) per share was
computed for each class of common shares by adding the
distributed earnings and the undistributed earnings (loss) for
the period, to the extent the class could share in the earnings
(loss), and then dividing the total by the adjusted weighted
average number of shares in the class to which the earnings were
allocated. Diluted earnings (loss) per share was also computed
for each class of common shares by adding the distributed
earnings and the undistributed earnings
80
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(loss) for the period, to the extent the class could share in
the earnings (loss), and then dividing the total by the adjusted
weighted average number of shares in the class to which the
earnings were allocated. The weighted average number of shares
was adjusted to include potentially dilutive securities
outstanding during the period. Such securities were the
incremental Class A shares issuable upon the exercise of
Units, and the assumed conversion of the preferred shares.
Recent
accounting pronouncements
In July 2006, the Financial Accounting Standards Board released
FIN 48,
Accounting for Uncertainty in Income
Taxes An Interpretation of FASB Statement 109
(FIN 48) and is effective for annual
periods beginning on or after December 15, 2006, which is
the year ending November 30, 2008 for the Company. The
Company is currently completing its final assessment of income
tax uncertainties across all jurisdictions. At this time, it is
unknown as to whether any material retroactive adjustments will
be recorded as part of the transition to FIN 48.
In September 2006, the Financial Accounting Standards Board
released FASB 157,
Fair Value Measurements
and is effective for fiscal years beginning after
November 15, 2007, which is the year ending
November 30, 2008 for the Company. FASB 157 defines fair
value, establishes a framework for measuring fair value in GAAP,
and expands disclosures about fair value measurements. In
November 2007, FASB agreed to a one-year deferral of the
effective date for nonfinancial assets and liabilities that are
recognized or disclosed at fair value on a nonrecurring basis.
The Company is currently assessing the impact the adoption of
this pronouncement will have on the financial statements.
In February 2007, the Financial Accounting Standards Board
released FASB 159,
The Fair Value Option for Financial
Assets and Financial Liabilities
and is effective for
fiscal years beginning after November 15, 2007, which is
the year ending November 30, 2008 for the Company. This
Statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective
is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. The Company
does not expect to use the fair value option for any financial
assets and financial liabilities that are not currently recorded
at fair value.
In December 2007, the Financial Accounting Standards Board
released FASB 141-R,
Business Combinations.
This Statement applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008, which is business combinations in
the year ending November 30, 2010 for the Company. The
objective of this Statement is to improve the relevance,
representational faithfulness, and comparability of the
information that a reporting entity provides in its financial
reports about a business combination and its effects.
In December 2007, the Financial Accounting Standards Board
released FASB 160,
Noncontrolling Interests in
Consolidated Financial Statements an amendment of
ARB No. 51.
This Statement is effective for
fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, which for the
Company is the year ending November 30, 2010 and the
interim periods within that fiscal year. The objective of this
Statement is to improve the relevance, comparability, and
transparency of the financial information that a reporting
entity provides in its consolidated financial statements. This
standard currently does not impact the Company as it has full
controlling interest of all of its subsidiaries.
|
|
3.
|
Accounts
Receivables and Allowance for Doubtful Accounts
|
The Companys trade receivables are recorded in the balance
sheet at the outstanding principal amount adjusted for any
allowances for doubtful accounts and provisions for rebates and
returns.
81
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of trade receivables for the periods presented
are as follows:
|
|
|
|
|
|
|
|
|
|
|
November 30, 2007
|
|
|
November 30, 2006
|
|
|
Gross accounts receivable
|
|
$
|
49,576
|
|
|
$
|
29,979
|
|
Allowance for doubtful accounts
|
|
|
(1,366
|
)
|
|
|
(1,003
|
)
|
Provisions for returns and rebates
|
|
|
(7,118
|
)
|
|
|
(10,826
|
)
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
$
|
41,092
|
|
|
$
|
18,150
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Related
Party Transactions
|
In connection with certain transaction advisory work performed
on the Companys behalf, the Company paid Vector Capital,
the majority shareholder of the Company, transaction fees and
reimbursements for expenses of $172, $115 and $3,275 in fiscal
2007, 2006 and 2005, respectively. As of November 30, 2007
and 2006, there were amounts payable to Vector Capital of $0 and
$167, respectively.
The Company purchased WinZip from Vector Capital in May 2006.
(note 8)
In June 2005, the Company granted options in respect of 413,971
common shares to the Companys Chief Executive Officer at
an exercise price of $1.17 per common share. Options to acquire
79,378 common shares vested upon the completion of the
Companys initial public offering while the remainder
continues to vest over a four-year period. Pursuant to the terms
of the Chief Executive Officers employment agreement, in
April 2006 the Company repurchased options representing the
right to acquire 22,696 common shares at a price of $18.83 per
unit, or $428 in the aggregate.
The components of inventory for the periods presented are as
follows:
|
|
|
|
|
|
|
|
|
|
|
November 30, 2007
|
|
|
November 30, 2006
|
|
|
Product components
|
|
$
|
310
|
|
|
$
|
444
|
|
Finished goods
|
|
|
419
|
|
|
|
470
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
729
|
|
|
$
|
914
|
|
|
|
|
|
|
|
|
|
|
Investments are included as a component of deferred financing
and other long-term assets on the balance sheet.
Any unrealized gains and losses on the available-for-sale
securities are included in accumulated other comprehensive
income on the balance sheet. The following chart summarizes the
Companys gross unrealized gains and losses on the
available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
418
|
|
|
$
|
203
|
|
|
$
|
334
|
|
Gross unrealized gains
|
|
|
418
|
|
|
|
203
|
|
|
|
334
|
|
Unrealized gains (losses) included in comprehensive income
|
|
|
215
|
|
|
|
(131
|
)
|
|
|
99
|
|
Realized gain on sale of securities
|
|
|
|
|
|
|
|
|
|
|
72
|
|
82
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of long-lived assets for the periods presented
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2007
|
|
|
November 30, 2006
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Cost
|
|
|
Amortization
|
|
|
Capital Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
2,321
|
|
|
$
|
1,118
|
|
|
$
|
2,114
|
|
|
$
|
994
|
|
Computer equipment general
|
|
|
8,287
|
|
|
|
4,891
|
|
|
|
4,682
|
|
|
|
3,117
|
|
Computer equipment research and development
|
|
|
1,299
|
|
|
|
797
|
|
|
|
1,448
|
|
|
|
729
|
|
Computer equipment under capital lease general
|
|
|
3,074
|
|
|
|
294
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
|
1,372
|
|
|
|
282
|
|
|
|
474
|
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,353
|
|
|
|
7,382
|
|
|
|
8,718
|
|
|
|
5,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated amortization
|
|
|
7,382
|
|
|
|
|
|
|
|
5,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
8,971
|
|
|
|
|
|
|
$
|
3,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2007
|
|
|
November 30, 2006
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Cost
|
|
|
Amortization
|
|
|
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
4,036
|
|
|
$
|
2,176
|
|
|
$
|
2,428
|
|
|
$
|
1,735
|
|
Acquired technologies
|
|
|
116,378
|
|
|
|
55,324
|
|
|
|
75,104
|
|
|
|
54,115
|
|
Tradenames
|
|
|
32,348
|
|
|
|
10,956
|
|
|
|
21,772
|
|
|
|
5,818
|
|
Customer relationships
|
|
|
10,999
|
|
|
|
3,295
|
|
|
|
348
|
|
|
|
163
|
|
Non-competition agreement
|
|
|
150
|
|
|
|
150
|
|
|
|
150
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,911
|
|
|
|
71,901
|
|
|
|
99,802
|
|
|
|
61,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated amortization
|
|
|
71,901
|
|
|
|
|
|
|
|
61,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
92,010
|
|
|
|
|
|
|
$
|
37,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the Companys estimated
future amortization charges with respect to intangible assets
for the five succeeding fiscal years.
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortization
|
|
|
|
Expense
|
|
|
2008
|
|
$
|
26,220
|
|
2009
|
|
|
24,546
|
|
2010
|
|
|
17,718
|
|
2011
|
|
|
16,680
|
|
2012
|
|
|
5,849
|
|
Thereafter
|
|
|
997
|
|
|
|
|
|
|
Total
|
|
$
|
92,010
|
|
|
|
|
|
|
83
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
InterVideo
Acquisition
On December 12, 2006, Corel completed the acquisition of
100% of the voting equity of InterVideo, a provider of Digital
Media authoring and video playback software with a focus on
high-definition and DVD technologies, for cash of approximately
$198.6 million. In 2005, InterVideo acquired a majority
interest in Ulead, a leading developer of video imaging and DVD
authoring software for desktop, server, mobile and Internet
platforms. As part of the Companys acquisition of
InterVideo, the remaining voting equity interest in Ulead was
acquired by the Company on December 28, 2006 for cash of
approximately $21.7 million.
The acquisition expanded the Companys presence in the
Digital Media software market by increasing its portfolio of
Digital Media and DVD video products. With the addition of
InterVideo, Corel has extended its presence in Asian markets,
such as China, Taiwan and Japan.
The acquisition of InterVideo was accounted for using the
purchase method of accounting in accordance with Statement of
Financial Accounting Standards No. 141
(FAS 141) Business Combinations.
Assets acquired and liabilities assumed were recorded at their
estimated fair values as of December 12, 2006, and the
results of InterVideo have been included in the Companys
consolidated operations from that date.
Purchase
Price
The total purchase price of the acquisition is as follows:
|
|
|
|
|
Cash consideration InterVideo acquisition
|
|
$
|
198,624
|
|
Cash consideration acquisition of remaining interest
in Ulead
|
|
|
21,731
|
|
Fair value of stock options assumed
|
|
|
3,503
|
|
Deferred stock-based compensation
|
|
|
(2,784
|
)
|
Direct transaction costs
|
|
|
3,751
|
|
Restructuring costs
|
|
|
3,490
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
228,315
|
|
|
|
|
|
|
Fair
value of stock options assumed
Under the terms of the acquisition agreement, each InterVideo
stock option that was outstanding and unexercised at the date of
acquisition are, once vested, exercisable for Corel Common
Shares at a ratio of 1 to 0.918 which was determined by the
relative market value of Corel and InterVideo common shares at
the date of closing.
These options have a per share exercise price equal to the
original exercise price of InterVideo options divided by the
Option Exchange Ratio. There were InterVideo stock options
outstanding at December 12, 2006 which, once vested, are
exercisable into 1,700,717 Corel shares. The estimated fair
value of these outstanding options was $3.5 million as
determined using the Black Scholes option pricing model
(Black Scholes model) with the following assumptions:
|
|
|
Expected option life (years)
|
|
3 to 7
|
Volatility
|
|
16.1% to 36.1%
|
Risk free interest rate
|
|
4.77% to 4.80%
|
Forfeiture rate
|
|
36.79% to 45.11%
|
Dividend yield
|
|
Nil
|
84
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The stock price used in the valuation was $10.60, which was the
average of closing prices for Corel common shares for a range of
trading days (August 23, 2006 through August 31,
2006) around the announcement date (August 28,
2006) of the proposed transaction. The risk-free interest
rate used in the valuation was the zero-coupon yield implied
from U.S. Treasury securities with equivalent remaining
terms. The Company does not anticipate paying any cash dividends
in the foreseeable future and therefore an expected dividend
yield of zero was used in the valuation. Corel estimated the
expected term of unvested options by taking the average of the
vesting term remaining and the contractual term of the option.
The volatility used in the model was based on the blended rate
of the Companys own stock price and the US Dow Jones
Software and Computer Services Index.
Deferred
stock-based compensation
Deferred stock-based compensation represents the portion of the
estimated fair value, measured as of December 12, 2006, of
unvested InterVideo stock options. The fair value of unvested
options exchanged was estimated at $2.8 million using the
Black Scholes model. The stock price used in the valuation is
$14.16, which was the closing price of Corel shares on
December 11, 2006, the last trading day before the close of
the acquisition. The risk-free interest rate used in the
valuation was the zero-coupon yield on December 12, 2006
implied from U.S. Treasury securities with equivalent
remaining terms. The Company does not anticipate paying any cash
dividends in the foreseeable future and therefore an expected
dividend yield of zero was used in the valuation. Corel
estimated the expected term of unvested options by taking the
average of the vesting term remaining and the contractual term
of the option. The volatility used in the model was based on the
blended rate of the Companys own stock price and the US
Dow Jones Software and Computer Services Index. The fair value
of stock options assumed has been included in additional paid-in
capital.
The assumptions used to value deferred stock-based compensation
are as follows:
|
|
|
|
|
Expected term (in years)
|
|
|
4 to 7
|
|
Volatility
|
|
|
19.7 to 34.2
|
%
|
Risk free interest rate
|
|
|
4.45 to 4.49
|
%
|
Forfeiture rate
|
|
|
36.79 to 45.11
|
%
|
Dividend yield
|
|
|
Nil
|
|
The deferred stock-based compensation is being amortized to
expenses over the remaining vesting periods of the underlying
options.
Direct
transaction costs
Direct transaction costs of $3.8 million include investment
banking, legal and accounting fees, and other external costs
directly related to the acquisition.
Restructuring
costs
In conjunction with the acquisition, management has initiated a
restructuring plan (InterVideo plan) and has
incurred restructuring charges in fiscal 2007 related to this
plan. The InterVideo plan includes the reduction of headcount
across all functions, the closure of certain facilities and the
termination of certain redundant operational contracts. The
total restructuring costs are $3.5 million.
As of November 30, 2007, all of the headcount reductions
have been planned, identified and completed, and all facility
closures have been planned and identified. Payments will
continue to be made until May 2008 in relation to lease costs
for the portion of our Eden Prairie, Minnesota office which is
no longer occupied.
85
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of restructuring activities related to the acquisition
of InterVideo that have been included as part of the purchase
price allocation follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at
|
|
|
|
Estimate
|
|
|
Cash Payments
|
|
|
November 30, 2007
|
|
|
Termination benefits
|
|
$
|
2,118
|
|
|
$
|
2,099
|
|
|
$
|
19
|
|
Cost of closing redundant facilities
|
|
|
1,372
|
|
|
|
691
|
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,490
|
|
|
$
|
2,790
|
|
|
$
|
700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pursuant to Emerging Issues Task Force Issue
No. 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination, all restructuring charges related to
the InterVideo acquisition are recognized as a part of the
purchase price allocation and have been accrued for as of
November 30, 2007. Cash flows from lease termination
penalties are discounted to their present value. Any further
changes in estimates related to the InterVideo plan will result
in a charge to earnings in fiscal 2008.
Purchase
Price Allocation
Under the purchase method of accounting, the total purchase
price was allocated to InterVideos net tangible and
intangible assets based on their estimated fair values as at
December 12, 2006. The excess of the purchase price over
the value of the net tangible and identifiable intangible assets
was recorded as goodwill. The fair values assigned to tangible
and intangible assets acquired and liabilities assumed are based
on estimates and assumptions made by management. The allocation
of the purchase price is as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Cash, cash equivalents, and short-term investments
|
|
$
|
106,691
|
|
Working capital
|
|
|
(26,966
|
)
|
Capital and other long-term assets
|
|
|
4,056
|
|
Identifiable definite lived intangible assets
|
|
|
86,577
|
|
Deferred tax liability
|
|
|
(20,836
|
)
|
|
|
|
|
|
Net assets acquired
|
|
|
149,522
|
|
Total purchase price
|
|
|
228,315
|
|
|
|
|
|
|
Goodwill from InterVideo acquisition
|
|
|
78,793
|
|
|
|
|
|
|
The purchase price allocation associated with this acquisition
has been completed. There are contingencies related to certain
legal proceedings that InterVideo was involved with in the
normal course of business that have not yet been settled which
could impact the value of certain acquired assets and
liabilities assumed. Any difference in the final amounts related
to the above estimates will result in a charge to earnings in
the period it is realized.
Identifiable
definite lived intangible assets:
Approximately $86.6 million has been allocated to definite
lived intangible assets acquired, including $7.8 million
related to in-process research and development
(IPR&D). IPR&D represents new projects
that, on the date of acquisition, the related technology had not
reached technological feasibility and did not have an
86
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
alternate future use. All IPR&D has been expensed at the
date of acquisition. The values assigned to identifiable
definite lived intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Year
|
|
|
Estimated Weighted Average
|
|
|
|
Assigned Value
|
|
|
Amortization
|
|
|
Life (in years)
|
|
|
Acquired existing technologies
|
|
$
|
57,520
|
|
|
$
|
10,874
|
|
|
|
4.8
|
|
In-process research and development
|
|
|
7,831
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
10,651
|
|
|
|
3,045
|
|
|
|
5.4
|
|
Trade names
|
|
|
10,575
|
|
|
|
2,115
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
86,577
|
|
|
$
|
16,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To determine the fair value of intangible assets, management
used the income approach, specifically the present value of the
operating cash flows generated, to determine the fair value of
existing technologies, customer relationships, and the trade
name.
Deferred
Tax Liability
Approximately $25.8 million was estimated as the deferred
tax liability arising from the difference between the value
assigned to acquired technologies, customer relationships and
trade names and their related tax value. As of the date of
acquisition, the InterVideo deferred tax assets were recorded at
approximately $5.0 million, for which a full valuation
allowance was applied in the year ending November 30, 2007
(refer to note 11).
Goodwill
Approximately $78.8 million has been allocated to goodwill
arising from the acquisition representing the excess of the
purchase price over the fair value of the underlying net
tangible and intangible assets.
InterVideo
Integration Expense
Integration costs relating to the acquisition of InterVideo
totaling $5.2 million and $358 have been recorded for the
years ending November 30, 2007 and November 30, 2006,
respectively. These costs relate to the integration of the
InterVideo business into our existing operations, including
travel costs, retention bonuses, incremental employees engaged
solely for integration activities, other incremental costs for
Corel employees who worked on the integration planning process,
consultants for integrating systems, and other one time charges
for integrating systems
Pro
Forma Results
The unaudited financial information in the table below
summarizes the combined results of operations of Corel and
InterVideo, on a pro forma basis, as though the companies had
been combined December 1, 2005. The pro forma financial
information is presented for informational purposes only and is
not indicative of the results of operations that would have been
achieved if the acquisition had taken place at the beginning of
the period or of results that may occur in the future. The pro
forma financial information includes the following adjustments:
|
|
|
|
|
additional amortization of intangible assets related to the
acquisition of $13.2 million for the year ended
November 30, 2006
|
|
|
|
deferred tax recovery of $4.8 million for the year ended,
related to the amortization of acquired intangible assets
|
87
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
additional interest expense of $9.3 million for the year
ended, on additional debt financing for the acquisition
|
|
|
|
reduced stock based compensation expense of $2.6 million
|
|
|
|
elimination of minority interest loss of $1.0 million
|
|
|
|
amortization of deferred financing fees of $0.3 million,
for the year ended, related to acquisition financing
|
The unaudited pro forma financial information for the year ended
November 30, 2006 combines the historical results for Corel
for the year ended November 30, 2006 and the historical
results for InterVideo for the year ended September 30,
2006.
|
|
|
|
|
|
|
Year
|
|
|
|
Ended
|
|
|
|
November 30,
|
|
|
|
2006
|
|
|
Net revenues
|
|
$
|
293,879
|
|
Net loss
|
|
$
|
(2,461
|
)
|
Basic net loss per share
|
|
$
|
(0.11
|
)
|
Diluted net loss per share
|
|
$
|
(0.11
|
)
|
WinZip
Acquisition
On May 2, 2006 (the WinZip acquisition date),
the Company acquired all of the outstanding securities of
WinZip, a provider of compression utility software, from Vector
Capital, which originally purchased WinZip on January 18,
2005. The Company acquired WinZip to expand its product
offerings of productivity software. The purchase cost for the
acquisition was 4,322,587 common shares of the Company, valued
at $69.2 million.
Under the terms of the agreement, the Company repaid all of the
outstanding bank debt of WinZip as at the WinZip acquisition
date and granted options to purchase 74,680 common shares under
its 2006 Equity Incentive Plan to replace outstanding WinZip
options. The acquisition agreement also provides for a
reciprocal indemnity for breach of covenants, representations
and warranties, generally for a one-year period. A portion of
the purchase price, amounting to 93,929 Corel common shares
issued to Vector Capital, may not be transferred by Vector
Capital for a period of one year from the date of the
acquisition, so that they will be available to satisfy Vector
Capitals indemnification obligations to the Company.
Prior to the acquisition, the Company and WinZip were under
common control. As a result, in accordance with FAS 141,
the Companys financial statements include the results of
WinZip from January 18, 2005. The transaction was accounted
for as a related party transaction. and accordingly, the fair
value of the 4,322,587 Corel common shares issued as
consideration was recorded as share capital, and the difference
between the fair value of the shares issued and the carrying
amount of WinZips net assets was recorded as a dividend.
88
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The aggregate purchase cost paid by Vector Capital for WinZip
was allocated to assets acquired and liabilities assumed based
upon their estimated fair values at the date of acquisition and
is summarized as follows:
|
|
|
|
|
Current assets
|
|
$
|
2,497
|
|
Capital assets
|
|
|
183
|
|
Tradename
|
|
|
21,772
|
|
Acquired technologies
|
|
|
5,704
|
|
Non-competition agreements
|
|
|
150
|
|
Customer relationships
|
|
|
348
|
|
Goodwill on acquisition of Winzip by Vector
|
|
|
3,993
|
|
Current liabilities
|
|
|
(858
|
)
|
|
|
|
|
|
Fair value of net assets acquired by Vector Capital on
January 18, 2005
|
|
|
33,789
|
|
Fair value of shares issued to Vector Capital, recorded as a
dividend
|
|
|
35,373
|
|
Share issuance costs
|
|
|
235
|
|
|
|
|
|
|
Purchase cost of WinZip acquisition
|
|
$
|
69,397
|
|
|
|
|
|
|
The tradename was valued using an income approach, specifically
the present value of the operating cash flows generated by the
tradename. The acquired technologies were valued using a relief
from royalty method. The customer relationships were also valued
using an income approach, specifically the present value of the
operating cash flows generated by customer relationships.
Goodwill is not deductible for tax purposes.
Changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
Balance, November 30, 2004
|
|
$
|
4,960
|
|
Adjustment for channel inventory and Jasc acquisition costs
|
|
|
897
|
|
Addition on WinZip combination (note 8)
|
|
|
3,993
|
|
|
|
|
|
|
Balance, November 30, 2005 and 2006
|
|
$
|
9,850
|
|
Addition on acquisition of InterVideo (note 8)
|
|
|
78,793
|
|
|
|
|
|
|
Balance, November 30, 2007
|
|
$
|
88,643
|
|
|
|
|
|
|
The Company performed impairment tests at each year end
presented, and there have been no indications that an impairment
of goodwill exists. All goodwill identified above is
non-deductible for income tax purposes.
89
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Accounts
Payable and Accrued Liabilities
|
The components of accounts payable and accrued liabilities for
the periods presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Accrued payroll
|
|
$
|
15,773
|
|
|
$
|
16,715
|
|
Accrued interest
|
|
|
130
|
|
|
|
1,565
|
|
Trade accounts payable
|
|
|
7,095
|
|
|
|
2,386
|
|
Accrued royalties
|
|
|
26,816
|
|
|
|
1,043
|
|
Other accrued liabilities
|
|
|
17,476
|
|
|
|
6,511
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
67,290
|
|
|
$
|
28,220
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before income taxes includes
income from foreign operations of $1,798 in fiscal 2007, $10,357
in fiscal 2006, and $2,273 in fiscal 2005.
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian
|
|
$
|
|
|
|
$
|
736
|
|
|
$
|
1,090
|
|
Foreign
|
|
|
3,526
|
|
|
|
2,675
|
|
|
|
4,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,526
|
|
|
|
3,411
|
|
|
|
5,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian
|
|
|
|
|
|
|
381
|
|
|
|
1,706
|
|
Foreign
|
|
|
(83
|
)
|
|
|
876
|
|
|
|
(876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83
|
)
|
|
|
1,257
|
|
|
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
3,443
|
|
|
$
|
4,668
|
|
|
$
|
6,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of income tax at the statutory rate to the
Companys effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Income (loss) before income taxes
|
|
$
|
(9,839
|
)
|
|
$
|
13,919
|
|
|
$
|
(2,462
|
)
|
Expected statutory rate
|
|
|
36.1
|
%
|
|
|
36.1
|
%
|
|
|
36.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected tax expense (recovery)
|
|
|
(3,552
|
)
|
|
|
5,025
|
|
|
|
(886
|
)
|
Losses not previously benefited
|
|
|
(529
|
)
|
|
|
(601
|
)
|
|
|
|
|
Foreign tax rate differences
|
|
|
(9,248
|
)
|
|
|
(3,258
|
)
|
|
|
214
|
|
Change in valuation allowance
|
|
|
8,770
|
|
|
|
876
|
|
|
|
5,052
|
|
Non-deductible expenses and non-taxable income
|
|
|
5,919
|
|
|
|
1,922
|
|
|
|
1,264
|
|
Settlement of prior year audits
|
|
|
|
|
|
|
|
|
|
|
(334
|
)
|
Change in estimates
|
|
|
(1,759
|
)
|
|
|
|
|
|
|
|
|
Withholding tax on foreign income
|
|
|
3,519
|
|
|
|
685
|
|
|
|
930
|
|
Other
|
|
|
323
|
|
|
|
19
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported income tax expense
|
|
$
|
3,443
|
|
|
$
|
4,668
|
|
|
$
|
6,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant deferred tax assets and liabilities were as follows,
as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Net operating losses carried forward
|
|
$
|
75,282
|
|
|
$
|
76,652
|
|
Book and tax differences on assets
|
|
|
53,915
|
|
|
|
57,794
|
|
Other
|
|
|
37,716
|
|
|
|
18,513
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
166,913
|
|
|
|
152,959
|
|
Basis difference in InterVideo intangible assets (note 8)
|
|
|
(20,754
|
)
|
|
|
|
|
Valuation allowance for tax assets
|
|
|
(166,913
|
)
|
|
|
(152,959
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(20,754
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The deferred income tax liability of $20.8 million arises
from the difference between the carrying value of the InterVideo
intangible assets acquired and their tax basis. A balance of
$25.8 million was estimated as the deferred tax liability
arising from the difference between the value assigned to
acquired technologies, customer relationships and trade names
and their related tax value at the date of acquisition which has
decreased to $20.8 million as a result of amortization
recorded against these intangibles in the year.
As of November 30, 2007, the Company has tax loss
carry-forwards of approximately $233.5 million, which
expire during the years 2008 to 2027. Approximately
$17.1 million of these losses are restricted to amounts
that may be claimed each year based on U.S. tax loss
limitations. The Company also has investment tax credits of
approximately $16.7 million which expire during the years
2008 to 2013. We have recorded a full valuation allowance
against our deferred tax assets because a significant portion of
the Canadian loss carry-forwards are due to expire over the next
two taxation years and Corel does not anticipate generating
sufficient taxable income from operations to use these expiring
losses and the other deferred tax assets.
The Ministry of Revenue of Ontario (the Ministry)
audited the Company for the 2000 through 2002 taxation years and
has denied certain deductions related to transactions with a
foreign related party. In addition, during fiscal 2007 the
Ministry has reassessed additional capital tax related to a
financial transaction entered into during the audit period. The
total tax and interest in the reassessments for the 2000 through
2002 taxation years is $7.5 million. The Company has not
provided any amount in income tax payable in respect of these
reassessments. The Company has filed a Notice of Objection for
the denied deductions and is in the process of preparing a
Notice of Objection for the capital tax issue. Although the
Company believes that it will prevail in the appeals process,
the ultimate liability for the tax and interest may differ from
the amount recorded in our financial statements.
The components of long term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2007
|
|
|
November 30, 2006
|
|
|
|
Current
|
|
|
Long Term
|
|
|
Total
|
|
|
Current
|
|
|
Long Term
|
|
|
Total
|
|
|
Term loan
|
|
$
|
1,596
|
|
|
$
|
156,359
|
|
|
$
|
157,955
|
|
|
$
|
900
|
|
|
$
|
88,650
|
|
|
$
|
89,550
|
|
Promissory note
|
|
|
653
|
|
|
|
|
|
|
|
653
|
|
|
|
526
|
|
|
|
573
|
|
|
|
1,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,249
|
|
|
$
|
156,359
|
|
|
$
|
158,608
|
|
|
$
|
1,426
|
|
|
$
|
89,223
|
|
|
$
|
90,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
Outstanding balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available line of credit
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The future debt payments on long-term debt as of
November 30, 2007, excluding the annual cash sweep as
discussed above, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Interest
|
|
|
Total
|
|
|
2008
|
|
|
2,249
|
|
|
|
13,914
|
|
|
|
16,163
|
|
2009
|
|
|
1,596
|
|
|
|
13,772
|
|
|
|
15,368
|
|
2010
|
|
|
1,596
|
|
|
|
13,631
|
|
|
|
15,227
|
|
2011
|
|
|
1,596
|
|
|
|
13,489
|
|
|
|
15,085
|
|
2012
|
|
|
151,571
|
|
|
|
4,491
|
|
|
|
156,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
158,608
|
|
|
$
|
59,297
|
|
|
$
|
217,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term
Loan
On May 2, 2006, the Company entered into a
$165.0 million senior credit facility consisting of a
$90.0 million term loan with a six-year maturity and a
$75.0 million revolving line of credit with a five-year
term as part of its debt restructuring, which included
repayments of $150.3 million on its then existing credit
facilities. Proceeds from this refinancing were used to repay
the Companys existing debt at that time. As a result, the
Company incurred a loss on debt retirement of $8.3 million.
On December 12, 2006, this facility was amended as the
Company completed its acquisition of InterVideo, and Ulead. The
acquisition was partially financed through an amendment to the
credit facility for an additional $70.0 million of term
loan borrowings. In addition there was a $43.0 million draw
on our revolving line of credit and the remainder from cash of
the combined Company. During the year ended November 30,
2007 the Company has repaid $43.0 million of the revolving
line of credit. There is no balance outstanding on the line of
credit as of November 30, 2007.
The credit facility agreement requires the Company to make fixed
quarterly principal repayments of 0.25% of the original
principal amount on the term loan, or $225 from June 2006 to
December 2006 and $400 from January 2007 through to December
2011, with the balance of the loan due in April 2012. The term
loan and revolving line of credit bear interest at floating
rates tied to either the Alternate Base Rate (ABR,
which equal the higher of (i) the federal funds rate plus
50 basis points, and (ii) the prime rate) plus 2.25%
until December 2006 and ABR plus 3.00% thereafter or Adjusted
LIBOR plus 3.25% until December 2006 and Adjusted LIBOR plus
4.00% thereafter. On an annual basis, beginning the first
quarter of fiscal 2008, the Company is required to make a cash
sweep payment to fund its principal balance, based on excess
cash flow as defined in the agreement. The Company is not
required to make a payment for the fiscal 2007 cash sweep and no
payments will be required through November 30, 2008.
In addition to the above loans, the facility also provides the
Company with a $25.0 million ($10.0 million up to
December 2006) letter of credit and a $5.0 million
Swingline commitment. The applicable interest rate on any
borrowings is based on a leverage ratio pricing grid. As at
November 30, 2007, a balance of $6.7 million was
outstanding on the letter of credit for Ontario tax and interest
owing based on a notice of re-assessment received from the
Ministry of Revenue of Ontario. As at November 30, 2007 no
balance was outstanding on the Swingline commitment.
In connection with the senior credit facility, the Company
obtained interest rate protection by entering into interest rate
swaps with its principal lender for $109.5 million. The
variable rate of interest is based on one-month LIBOR plus
4.00%. The fixed rates range from 8.93% to 9.49%.
The borrowings under the senior credit facility are
collateralized by a pledge of all the Companys assets,
including subsidiary stock. Under the terms of the credit
agreement the Company is subject to restrictive
92
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
covenants, such as restrictions on additional borrowing,
distributions and business acquisitions/divestitures. It also
includes the following financial covenants:
|
|
|
|
|
a maximum total leverage ratio, which is defined as the ratio of
total debt to trailing four quarter consolidated Adjusted
EBITDA, as defined in the credit agreement, to be less than
specified amounts over the term of the facility as follows:
|
|
|
|
|
|
Period
|
|
Ratio
|
|
|
Through to November 29, 2007
|
|
|
3.50
|
|
November 30, 2007 through November 29, 2008
|
|
|
3.25
|
|
November 30, 2008 through November 29, 2009
|
|
|
3.00
|
|
November 30, 2009 through November 29, 2010
|
|
|
2.75
|
|
November 30, 2010 through November 29, 2011
|
|
|
2.50
|
|
November 30, 2011, thereafter
|
|
|
2.25
|
|
|
|
|
|
|
a minimum fixed charge coverage ratio, which is defined as the
ratio of trailing four quarter consolidated Adjusted EBITDA to
fixed charges as follows:.
|
|
|
|
|
|
Period
|
|
Ratio
|
|
|
Through to Nov 29, 2010
|
|
|
2.00
|
|
November 30, 2010 through November 29, 2011
|
|
|
2.25
|
|
November 30, 2011, thereafter
|
|
|
2.50
|
|
As of November 30, 2007, Corel was in compliance with all
debt covenants.
Promissory
Note
On November 30, 2005, the Company signed a promissory note
in regards to the release from its naming rights agreement for a
sporting and entertainment venue. Under the terms of the note,
the Company agreed to repay CDN$2,621 to Capital Sports
Properties Inc., which was recorded as other operating expense
in fiscal 2005. A principal payment of CDN$821 was made on
December 1, 2005, and payments of CDN$300 were made on
April 1 and June 30, 2006 and 2007. Additional payments of
CDN$300 are due on January 1 and June 30, 2008. The Company
can prepay the principal balance at any time, without penalties.
|
|
13.
|
Commitments
and Contingencies
|
Operating
leases
The Company rents office space in North America, Europe, and
Asia under various operating leases, which contain different
renewal options. The leases begin to expire in 2008.
On August 9, 2007 management entered into a new lease
agreement for the rental of office space at our corporate head
office in Ottawa. The agreement extends over the period of
January 1, 2008 through December 31, 2017. The
committed amount for basic rent over this period is
CDN$13.1 million. As part of this lease agreement the
company received leasehold improvement incentives of CDN$987.
93
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At November 30, 2007, the minimum unaccrued commitments for
our rental properties under long-term agreements are as follows:
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
|
2008
|
|
$
|
4,256
|
|
2009
|
|
|
3,835
|
|
2010
|
|
|
3,882
|
|
2011
|
|
|
3,596
|
|
2012
|
|
|
2,766
|
|
2013 and thereafter
|
|
|
8,349
|
|
|
|
|
|
|
|
|
$
|
26,684
|
|
|
|
|
|
|
The Company recorded lease expenses of $6,790, $5,225 and $4,400
for fiscal 2007, 2006, and 2005, respectively.
Obligations
under Capital Leases
In 2007, Corel entered into various capital leases totaling
$3,195. The leases expire on various dates between June 2010 and
Julu 2012, at which time the Company has the right, but not the
obligation, to purchase the equipment. Minimum lease payments
for capital leases in aggregate and for the next five years are
as follows:
|
|
|
|
|
|
|
Capital
|
|
|
|
Leases
|
|
|
2008
|
|
|
966
|
|
2009
|
|
|
956
|
|
2010
|
|
|
829
|
|
2011
|
|
|
371
|
|
2012
|
|
|
178
|
|
Thereafter
|
|
|
Nil
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
3,300
|
|
Interest included in minimum payments at rates varying between
6.94% to 7.89%
|
|
|
419
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
2,881
|
|
Less current portion
|
|
|
767
|
|
|
|
|
|
|
Obligation under capital lease long term
|
|
$
|
2,114
|
|
|
|
|
|
|
Customer
Indemnification
The Company has entered into licensing agreements with customers
that include intellectual property indemnification clauses.
These clauses are typical in the software industry and require
the Company to compensate customers for certain liabilities and
damages incurred as a result of third party intellectual
property claims arising from these transactions. The Company has
not made any significant indemnification payment as a result of
these clauses and, in accordance with FASB Interpretations
No. 45,
Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others
(FIN 45), has not
accrued any amounts in relation to these indemnification clauses.
94
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Legal
Proceedings
The Company is currently, and from time to time, involved in
certain legal proceedings, as well as demands, claims and
threatened litigation that arise in the normal course of its
business, including assertions from third parties that it may be
infringing patents or other intellectual property rights of
others and from certain of our customers that they are entitled
to indemnification from us in respect of claims that they are
infringing such third party rights through the use or
distribution of our products. The ultimate outcome of any
litigation is uncertain and, regardless of outcome, litigation
can have an adverse impact on the business because of defense
costs, negative publicity, diversion of management resources and
other factors. Failure to obtain any necessary license or other
rights on commercially reasonable terms, or otherwise, or
litigation arising out of intellectual property claims could
materially adversely affect the business.
In addition, some of our agreements with customers and
distributors, including OEMs and online services companies,
require us to indemnify these parties for third-party
intellectual property infringement claims, and many of these
indemnification obligations are not subject to monetary limits.
The existence of these indemnification provisions could increase
our cost of litigation and could significantly increase our
exposure to losses from an adverse ruling.
During fiscal 2007 the Company received an invoice from a
supplier of InterVideo relating to the period prior to the
acquisition date of December 12, 2006. The Company is
currently performing an audit on this invoice as it is disputing
some of the items invoiced. As of November 30, 2007, the
Company has accrued a material amount for what it believes to be
an appropriate settlement. This accrual has been included in the
purchase price allocation. However, it is possible that this
estimate may be materially different from the final settlement
amount. Any difference between the final settlement and the
amount accrued will be included in earnings.
At November 30, 2007, we were a defendant in the patent
infringement proceedings described below
Disc Link Corporation (Disc Link) v.
H&R Block Digital Tax Solutions, Corel Corporation, Corel
Inc., et al.
Disc Link filed a patent
infringement action on April 10, 2007, against Corel
Corporation and Corel Inc. (collectively Company)
and 26 other defendants in the U.S District Court for the
Eastern District of Texas, alleging infringement of
U.S. Patent 6,314,574, issued November 6, 2001. Disc
Link alleges that the defendants infringed the patent through
the use of hyperlinks in software applications sold on discs, in
particular hyperlinks which allegedly facilitate the provision
of certain types of technical support. Company filed its answer
and counterclaims to Disc Links complaint on July 13,
2007. In December 2007, a license agreement for an immaterial
amount was reached with Disc Link, which settled the dispute.
Simon Systems (Simon) v. Corel
Corporation.
Simon filed this patent infringement
action on September 24, 2007, against Corel in the United
States District Court for the District of Maryland (Southern
Division), alleging infringement of U.S. Patent 5,559,562,
issued on September 24, 1996. Simon alleges certain Corel
video editing applications infringe the patent in the manner in
which the alleged products provide functionality to allow the
transitioning from a first video stream to a second video
stream. Corel believes it has meritorious defenses to
Simons claims and intends to defend the litigation
vigorously. The ultimate outcome of the litigation, however, is
uncertain.
At the beginning of the third quarter of fiscal 2007, Corel
received a notice of reassessment from the Ministry of Revenue
of Ontario (the Ministry) for CDN$13.4 million.
The Ministry reassessment disallows various deductions claimed
on our tax returns for the 2000, 2001 and 2002 taxation years
resulting in a potential disallowance of loss carryforwards and
liabilities for tax and interest. Subsequent to August 31,
2007, Corel received further notice that the Ministry had
applied tax losses and other attributes which reduced the
assessment from CDN$13.4 million to CDN$6.4 million.
Subsequently, in November 2007, the Company received another
notice of assessment which increased the capital tax and
interest owing for the 2000, 2001, and 2002 taxation years. This
reassessment was for CDN$7.5 million. The Company intends
to vigorously
95
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
defend against the reassessment. While the Company believes that
they have adequately provided for potential assessments, it is
possible that an adverse outcome may lead to a deficiency in its
recorded income tax expense and may adversely affect its
liquidity. However, the Company believes that the positions
taken in its tax returns are correct and estimates the potential
loss from the re-reassessment will not have a material impact on
our financial condition or results of operations. As of
November 30, 2007, no amounts have been accrued.
On December 1, 2005, Corel reorganized its share capital by
way of amalgamation with a wholly-owned subsidiary. All of the
outstanding Class A common shares, Class B common
shares and preferred shares of the Company were converted into
common shares in accordance with their respective percentage
equity interests in Corel prior to the reorganization. After the
completion of the equity recapitalization, the authorized share
capital of Corel consists of an unlimited number of Corel
Preferred Shares, issuable in series, none of which series have
been authorized and an unlimited number of Corel Common Shares.
Corel
Common Shares
The holders of the Companys Common Shares are entitled to
one vote for each share held at any meeting of shareholders.
Subject to the prior rights of the holders of the Companys
preferred shares, the holders of the Companys common
shares are entitled to receive dividends as and when declared by
the board of directors. Subject to the prior payment to the
holders of the preferred shares, in the event of the
Companys liquidation, dissolution or
winding-up
or other distribution of assets among shareholders, the holders
of the common shares are entitled to share pro rata in the
distribution of the balance of the Companys assets. There
are no preemptive, redemption, purchase or conversion rights
attaching to the Common Shares.
On April 25, 2006, the Company entered into an underwriting
agreement with a group of underwriters under the terms of which
the Company agreed to the sale of 5,000,000 Common Shares from
treasury (Public Offering). The Public Offering
closed on May 2, 2006.
At November 30, 2007, there was an unlimited number of
voting Corel Common Shares authorized, and
25,456,534 shares outstanding.
Corel
preferred shares
At November 30, 2007 and 2006, there are unlimited amount
of preferred shares authorized. There are nil shares issued and
outstanding. The Companys preferred shares may be issued
in one or more series. The board of directors may amend the
articles of incorporation to fix the authorized number of
preferred shares in, and to determine the designation of the
shares of, each series and to create, define and attach rights
and restrictions to the shares of each series, subject to the
rights and restrictions attached to the preferred shares as a
class.
The preferred shares are entitled to preference over the Corel
Common Shares with respect to the payment of dividends and the
distribution of assets, whether voluntary or involuntary, or in
the event of any other distribution of assets amongst
shareholders for the purpose of
winding-up
the Companys affairs, and each series of preferred shares
may also be given those preferences over the common shares and
other series of preferred shares.
When the Company does not pay cumulative dividends in full with
respect to a series of its preferred shares, the shares of all
series of preferred shares will participate ratably with respect
to the accumulated dividends in accordance with the amounts that
would be payable on those shares if all the accumulated
dividends were paid in full. Where amounts payable are not paid
in full on the Companys
winding-up,
or on the occurrence of any other event as a result of which the
holders of the shares of all series of the preferred
96
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
shares are entitled to a return of capital, the shares of all
series of preferred shares will participate ratably in a return
of capital in respect of the preferred shares as a class in
accordance with the amounts that would be payable on the return
of capital if all amounts so payable were paid in full.
Dividends
and
paid-up
capital reductions
Prior to its acquisition by Corel on May 2, 2006, WinZip
paid a cash dividend of $7,500 to its shareholders.
During fiscal 2005, Corel paid a cash dividend of $2,135 to
certain holders of Class B shares and returned
paid-up
capital of $83,146 to its preferred and common shareholders.
Also during fiscal 2005, WinZip paid a cash dividend of $12,000
to its shareholders.
Share
Option Plans
The following table shows total stock-based compensation expense
included in the consolidated statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cost of products
|
|
$
|
47
|
|
|
$
|
26
|
|
|
$
|
15
|
|
Cost of maintenance and services
|
|
|
9
|
|
|
|
8
|
|
|
|
4
|
|
Sales and marketing
|
|
|
1,465
|
|
|
|
770
|
|
|
|
583
|
|
Research and development
|
|
|
1,168
|
|
|
|
306
|
|
|
|
197
|
|
General and administration
|
|
|
2,799
|
|
|
|
2,122
|
|
|
|
932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
5,488
|
|
|
$
|
3,232
|
|
|
$
|
1,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corel estimates the fair value of its options for financial
accounting purposes using the Black Scholes model, which
requires the input of subjective assumptions including the
expected life of the option, risk-free interest rate, dividend
rate, future volatility of the price of the Companys
common shares, forfeiture rate and vesting period. Changes in
subjective input assumptions can materially affect the fair
value estimate. Prior to the Public Offering in April 2006 there
was no active market for the Companys common shares. Since
the Company has been public for less than the vesting period of
its options, the Company does not consider the volatility of the
Companys share price to be representative of the estimated
future volatility when computing the fair value of options
granted. Accordingly, until such time that a representative
volatility can be determined based on the Companys share
price, the Company is using a blended rate of its own share
price volatility and the US Dow Jones Software and Computer
Services Index.
The fair value of all options granted during fiscal 2007, 2006
and 2005 was estimated as of the date of grant using the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected option life (years)
|
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
Volatility
|
|
|
31.25
|
%
|
|
|
36.13
|
%
|
|
|
39.18
|
%
|
Risk free interest rate
|
|
|
4.60
|
%
|
|
|
4.33
|
%
|
|
|
4.36
|
%
|
Dividend yield
|
|
|
Nil
|
|
|
|
Nil
|
|
|
|
Nil
|
|
Forfeiture rate
|
|
|
16.46
|
%
|
|
|
16.82
|
%
|
|
|
Nil
|
|
As of November 30, 2007, there was $14,628 of unrecognized
compensation cost, related to equity incentive plans, adjusted
for estimated forfeitures, related to non-vested stock-based
payments granted to Corel
97
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
employees. This will be recognized over a weighted average
period of 2.90 years. Total unrecognized compensation cost
will be adjusted for future changes in estimated forfeitures.
Additionally, as of November 30, 2007, there was $1,653 of
unamortized deferred compensation, related to the acquisition of
InterVideo, which will be recognized over a period of
3.03 years.
2006
Equity Incentive Plan
The 2006 Equity Incentive Plan (2006 Plan) was
adopted by the Board of Directors in February 2006. This plan
provides for the grant of options to employees and employees of
the Companys subsidiaries, and restricted shares, share
appreciation rights, restricted share units, performance share
units, deferred share units, phantom shares and other
share-based awards (options) to the Companys
employees, consultants and directors, and employees, consultants
and directors of the Companys subsidiaries and affiliates.
In May 2007, the board of directors authorized an additional
2,000,000 common shares available for issuance under the 2006
plan. Corel has 4,336,557 remaining common shares authorized for
issuance under the 2006 Equity Incentive Plan.
To date the Company has issued 150,000 restricted stock units
under the 2006 Plan. The company has not issued any restricted
shares, share appreciation rights, performance share units,
deferred share units, phantom shares and other share based
awards. With respect to the exercise of the stock options issued
under the 2006 Plan, the Company would deliver to the optionee
common shares. The 2006 Plan allows the holder to receive a
payment equal to the fair market value of a Corel Common Share
at the exercise date, less the exercise price of the option,
under certain conditions. The exercise price is determined at
the date of the grant, and shall be the same for both components
of the option. Options vest equally over four years and
generally expire ten years after the grant date.
If any employees cease to be eligible for the 2006 Plan, they
have 30 days after the date of their resignation or
90 days from their termination date to exercise any options
that were exercisable on their final date of employment,
otherwise options are forfeited. There were no capitalized
stock-based compensation costs at November 30, 2007.
Options granted under the 2006 Plan have an exercise price
ranging from $9.83 to $14.29, with the exception of 73,806
options granted in the WinZip acquisition which have an exercise
price of $1.15. Outstanding options assumed in the acquisition
of InterVideo (note 8) have an exercise price ranging
from
98
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$10.07 to $18.41, with the exception of 8.9% of options which
have an exercise price ranging from $0.50 to $6.03. Option
activity is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2007
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Grant
|
|
|
|
|
|
|
Exercise
|
|
|
Date Fair
|
|
|
|
Options
|
|
|
Price
|
|
|
Value
|
|
|
Outstanding at beginning of period
|
|
|
513,333
|
|
|
$
|
9.56
|
|
|
$
|
6.26
|
|
Options granted
|
|
|
2,060,764
|
|
|
|
13.01
|
|
|
|
4.95
|
|
Options assumed in the acquisition of InterVideo (note 9)
|
|
|
1,700,717
|
|
|
|
12.95
|
|
|
|
2.06
|
|
Options exercised
|
|
|
(504,252
|
)
|
|
|
10.21
|
|
|
|
4.87
|
|
Options forfeited
|
|
|
(1,096,097
|
)
|
|
|
13.78
|
|
|
|
3.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
2,674,465
|
|
|
$
|
12.59
|
|
|
$
|
4.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
546,187
|
|
|
$
|
12.26
|
|
|
$
|
3.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested during the year
|
|
|
497,376
|
|
|
|
|
|
|
$
|
4.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining life of the outstanding options
|
|
|
8.80 Years
|
|
|
|
|
|
|
|
|
|
Weighted average remaining life of the exercisable options
|
|
|
6.87 Years
|
|
|
|
|
|
|
|
|
|
Total intrinsic value of the exercisable options
|
|
$
|
661
|
|
|
|
|
|
|
|
|
|
Total intrinsic value of the outstanding options
|
|
$
|
1,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Weighted average fair value of options granted
|
|
$
|
4.95
|
|
|
$
|
6.26
|
|
Intrinsic value of options exercised
|
|
|
1,460
|
|
|
|
20
|
|
Fair value of shares vested
|
|
|
2,267
|
|
|
|
291
|
|
During fiscal 2007 the Company has issued 150,000 units of
restricted stock to senior officers of the Company under the
2006 Equity Incentive Plan. There are 30,000, 20,000, and
100,000 units which will vest fully if the officers remain
with the Company until June 1, 2008, April 24, 2011,
and October 15, 2007, respectively. Furthermore, if certain
performance conditions are met, 15,000 of these restricted stock
units may
99
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
vest earlier. These units have began to vest on
September 1, 2007 and will vest fully by October 15,
2007. Restricted stock unit activity for fiscal 2007 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
November 30, 2007
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant
|
|
|
|
|
|
|
Date Fair
|
|
|
|
Options
|
|
|
Value
|
|
|
Outstanding at beginning of period
|
|
N/A$
|
|
|
|
$
|
N/A
|
|
Restricted stock units granted
|
|
|
150,000
|
|
|
|
13.23
|
|
Restricted stock units converted to common shares
|
|
|
(7,500
|
)
|
|
|
14.06
|
|
Restricted stock units forfeited
|
|
|
Nil
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
142,500
|
|
|
$
|
13.19
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
Nil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units vested during the year
|
|
|
7,500
|
|
|
$
|
14.06
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining life of the outstanding options
|
|
|
9.69 Years
|
|
|
|
|
|
Weighted average remaining life of the exercisable restricted
stock units
|
|
|
N/A
|
|
|
|
|
|
Total intrinsic value of the exercisable restricted stock units
|
|
|
Nil
|
|
|
|
|
|
Total intrinsic value of the outstanding restricted stock units
|
|
$
|
1,587
|
|
|
|
|
|
Intrinsic value of restricted stock units exercised
|
|
$
|
95
|
|
|
|
|
|
Fair value of options vested
|
|
$
|
105
|
|
|
|
|
|
2003 Share
Option and Phantom Share Unit Plan
On December 1, 2003, the Board of Directors approved the
Stock Option and Phantom Share Unit Plan (2003
Plan). The 2003 Plan is administered by a Committee
(the Committee), appointed by the Board of
Directors. The Committee has sole and absolute discretion to
grant Units, which consist of a stock option
(option) together with a Phantom Share Unit
(PSU), to eligible persons. All employees and
officers of Corel were eligible persons.
Options are no longer granted under this plan. Corel has
1,065,066 Corel Common Shares reserved for issuance under the
2003 Plan as of November 30, 2007.
Upon exercise of the stock option component, the Company would
deliver to the optionee common shares. A PSU allows the holder
to receive a payment equal to the fair market value of a Corel
Common Share at the exercise date, less the exercise price of
the PSU, under certain conditions. Exercise of the PSU can only
occur at the approval of the Committee. Therefore, Corel has
determined that the PSU does not constitute a liability and has
no value. If the option component is exercised, the PSU
component will be terminated and may not be exercised. If the
PSU component is exercised, the option component will be
terminated and may not be exercised. The exercise price is
determined at the date of the grant, and shall be the same for
both components of the Unit. Units vest equally over four years
on the anniversary of the grant date, and generally expire ten
years after the grant date. The stock option components of the
Units cannot be exercised prior to an initial public offering
(IPO), unless authorized by the Committee.
If any employees cease to be eligible for the 2003 Plan as a
result of resignation, they have 30 days after the
termination date to exercise any Units that were exercisable on
the termination date. If any employees cease to be eligible for
the 2003 Plan as a result of termination, they have 90 days
after the termination date to exercise any Units that were
exercisable on the termination date.
100
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In fiscal 2005, performance awards in respect of 149,830 common
shares were issued to senior executives under the 2003 Plan,
which entitles them to receive Units upon attaining identified
performance goals. Vesting conditions are based solely on the
satisfaction of performance conditions. No performance awards
were issued in fiscal 2006 or 2007. These awards are accounted
for as equity grants with reversal of recognized compensation
cost if the award fails to vest. Included in stock-based
compensation expense for these performance awards are $51, $574
and $627 for the years ending November 30, 2007, 2006 and
2005, respectively.
All units granted up to November 2005, which represent 92.1% of
the outstanding units, have an exercise price of $1.17. Units
granted between November 2005 and March 2006, which represent
7.9% of the units outstanding, have an exercise price ranging
from $13.82 to $17.57. Unit activity is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2007
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Grant
|
|
|
|
|
|
|
Exercise
|
|
|
Date Fair
|
|
|
|
Units
|
|
|
Price
|
|
|
Value
|
|
|
Outstanding at beginning of period
|
|
|
1,320,714
|
|
|
$
|
1.98
|
|
|
$
|
7.24
|
|
Units granted
|
|
|
Nil
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Units exercised
|
|
|
(409,658
|
)
|
|
|
1.17
|
|
|
|
6.53
|
|
Units repurchased
|
|
|
Nil
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Units forfeited
|
|
|
(97,116
|
)
|
|
|
2.42
|
|
|
|
7.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
813,940
|
|
|
$
|
2.31
|
|
|
$
|
7.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
627,954
|
|
|
$
|
1.87
|
|
|
$
|
5.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units vested during the year
|
|
|
360,109
|
|
|
|
|
|
|
$
|
6.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining life of the outstanding units
|
|
|
7.07 Years
|
|
|
|
|
|
|
|
|
|
Weighted average remaining life of exercisable units
|
|
|
6.93 Years
|
|
|
|
|
|
|
|
|
|
Total intrinsic value of exercisable units
|
|
$
|
5,954
|
|
|
|
|
|
|
|
|
|
Total intrinsic value of outstanding units
|
|
$
|
7,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted average fair value of units granted
|
|
$
|
N/A
|
|
|
$
|
7.54
|
|
|
$
|
9.13
|
|
Intrinsic value of units exercised
|
|
|
4,760
|
|
|
|
415
|
|
|
|
63
|
|
Fair value of units vested
|
|
|
2,346
|
|
|
|
1,897
|
|
|
|
1,747
|
|
|
|
15.
|
Employee
pension plans
|
Defined
contribution and retirement savings plan
The Company has a retirement savings plan for its Canadian
employees, and also operates various other defined contribution
benefit plans for some non-Canadian employees. While the
specifics of each plan are different in each country, the
Company contributes amounts related to the level of employee
contributions. These contributions are subject to maximum limits
and vesting provisions, and can be discontinued at the
Companys discretion.
The pension costs in fiscal 2007, 2006, and 2005 were $719,
$1,026, and $781, respectively.
101
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Defined
pension benefit plan
Corel sponsors a defined benefit pension plan (the Benefit
Plan) for a group of Taiwanese employees. Corel assumed
the obligations of the Benefit Plan as a result of its
acquisition of InterVideo on December 12, 2006. As of
November 30, 2007 the Plan assets were $1,111 and the
projected benefit obligation was $2,227.
No employees hired subsequent to July 1, 2005 are eligible
for the Benefit Plan as per the regulations of the Taiwan
government. Employees hired prior to July 1, 2005 could
elect to join this defined pension benefit plan under the Taiwan
Labor Standard Law, articles 53, 55, and 56.
Implementation
of FAS 158
FAS 158 requires that the funded status of defined benefit
postretirement plans be recognized on the Companys balance
sheet and changes in the funded status be reflected in
comprehensive income, effective for fiscal years ending after
December 15, 2006, which Corel adopted effective
December 12, 2006. FAS 158 also requires companies to
measure the funded status of the plan as of the date of their
fiscal year-end, effective for fiscal years ending after
December 15, 2008. Corel adopted the measurement provisions
of FAS 158 effective November 30, 2007.
The funded status of the Benefit Plan was as follows for the
fiscal year ended November 30, 2007:
Change
in fair value of plan assets and benefit
obligation
|
|
|
|
|
Fair value on acquisition date of December 12, 2006
|
|
$
|
967
|
|
Actual return on plan assets
|
|
|
26
|
|
Employer contributions
|
|
|
118
|
|
|
|
|
|
|
Fair value of plan assets at November 30, 2007
|
|
$
|
1,111
|
|
|
|
|
|
|
Projected benefit obligation on acquisition date of
December 12, 2006
|
|
$
|
3,015
|
|
Service cost
|
|
|
59
|
|
Interest cost
|
|
|
84
|
|
Actuarial gain
|
|
|
(931
|
)
|
|
|
|
|
|
Benefit obligation at November 30, 2007
|
|
$
|
2,227
|
|
|
|
|
|
|
Funding deficiency at November 30, 2007
|
|
$
|
1,116
|
|
|
|
|
|
|
Both the plan assets and the benefit obligation are classified
as non-current at November 30, 2007.
The weighted average assumptions used to determine befit
obligations cost were as at November 30, 2007 were:
|
|
|
|
|
Average increase in compensation levels
|
|
|
4.50
|
%
|
Discount rate
|
|
|
2.75
|
%
|
The accumulated benefit obligation as at November 30, 2007
is $922.
Other
Comprehensive Income
The Companys Benefit Plan had a pre-tax net experience
gain of $931 in accumulated other comprehensive income for the
year ended and as of November 30, 2007. The experience gain
recognized for the year ending November 30, 2007 is
attributable to the decrease in the average increase in
compensation levels decreasing from 6.00% to 4.50% and a
reduction of the Taiwanese workforce eligible for the Benefit
Plan subsequent to the acquisition. Net experience gains of $30
will be amortized from accumulated other
102
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
comprehensive income and recognized as components of net
periodic benefit cost (credit) during the next fiscal year.
Pension
Benefit Expense
Corels net pension and post-retirement benefit costs were
as follows for the year-ending November 31, 2007:
|
|
|
|
|
Service cost
|
|
$
|
59
|
|
Interest cost
|
|
|
84
|
|
Actual return on plan assets
|
|
|
(
26
|
)
|
Net periodic benefit costs for the year ending
|
|
|
|
|
November 30, 2007
|
|
$
|
117
|
|
|
|
|
|
|
The weighted average assumptions used to calculate net benefit
cost were as follows for the fiscal years ended
November 30, 2007 were:
|
|
|
|
|
Discount rate:
|
|
|
2.75
|
%
|
Average increase in compensation levels
|
|
|
6.00
|
%
|
Expected long-term return on assets
|
|
|
2.75
|
%
|
As required by law, the Companys plan assets are deposited
in Bank of Taiwan in the form of cash, where Bank of Taiwan is
the assigned trustee for statutory retirement benefits. The
expected long-term rate of return on assets for the plan
reflects the expected returns for the bank accounts held with
the government of Taiwan in which the plan invests and its
expected volatility. In fiscal 2008, Corel expects to contribute
approximately $102 to its Benefit Plan. Corel estimates that the
future benefits payable will be $nil for each of the next five
fiscal years, as well as the period from fiscal 2013 through
fiscal 2017.
|
|
16.
|
Restructuring
Charges
|
In the fourth quarter of fiscal 2007, management adopted a
restructuring plan to centralize much of the Companys
Digital Media operations in Greater China and Fremont,
California. Additionally, further changes have been made to
staff to align and balance our global teams. This has resulted
in the planned closure of the Companys Minneapolis
location in fiscal 2008 as well as the termination of certain
individuals. The fair value of the liability arising from the
plan is $2,210. The Company has expensed restructuring charges
of $1,447 in the current period as a result of this plan,
including termination benefits of $1,184 and costs of closing
redundant facilities of $263. The remaining expense of $763 will
be recorded by May 31, 2008, as termination payments are
made to individuals who are retained by the Company through that
date.
As of November 30, 2007, all of the headcount reductions
have been identified and notified. All facility closures have
been identified. Facilities are expected to close by the end of
May 31, 2008. Any changes from our initial estimates will
be recorded against fiscal 2008 earnings. No cash payments were
made on these liabilities as at November 30, 2007.
In fiscal 2006, Corel incurred restructuring charges of $810 as
the Company initiated a realignment of its sales and marketing
teams and its research and development teams after completing an
internal review of its future requirements. The only costs
associated with this realignment were one-time termination
benefits. As of November 30, 2006 the Company had an
accrued liability of $412 for unpaid termination benefits which
has been fully paid by November 30, 2007.
In fiscal 2005, Corel integrated Jascs operations and
eliminated redundant positions across all functions in both
Corel and Jasc, resulting in an $834 charge to operating results
for severance and related costs.
103
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
17.
|
Earnings
(loss) per share
|
The following tables set forth the reconciliation of the
numerator and denominator used in the computation of basic and
diluted net income (loss) per class of common share (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net income (loss)
|
|
$
|
(13,062
|
)
|
|
$
|
9,251
|
|
|
$
|
(8,753
|
)
|
Less: dividends and paid up capital distributions
|
|
|
|
|
|
|
|
|
|
|
(97,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) allocable to shareholders
|
|
|
(13,062
|
)
|
|
|
9,251
|
|
|
$
|
(106,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings to class
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
21,018
|
|
Loss allocable to class
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(29,991
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings (loss) per share
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(8,973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
3,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings to class
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
46,800
|
|
Loss allocable to class
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(66,781
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings (loss) per share
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(19,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
8,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WinZip Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributed earnings to class
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
12,000
|
|
Loss allocable to class
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(9,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
2,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The impact of the assumed conversion of preferred shares and
exercise of options is anti-dilutive for fiscal 2005 and fiscal
2007. Potentially dilutive instruments relate to the number of
common shares subject to options outstanding of 3,496,000
options for the year ended November 30, 2007. Potentially
dilutive instruments for the year ending November 30, 2005,
relate to the number of common shares subject to options
outstanding of 965,000 options, and the assumed conversion of
preferred shares outstanding of 3,105,000.
The Company has assessed its business in accordance with
Statement of Financial Accounting Standards No. 131,
Disclosures About Segments of an Enterprise and Related
Information
(FAS 131). As of
November 30, 2007, the Company has determined that it
operates in one business operating and reportable segment, the
packaged software segment.
104
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Corels packaged software segment derives its revenues from
two product lines, identified by the markets which they serve:
Graphics and Productivity
and
Digital Media.
Segmented revenues for fiscal 2005 and fiscal 2006 have been
re-classified to conform to the new product lines. Prior to
fiscal 2007, revenues were broken down by
Productivity
and by
Digital Media and Graphics
. There was no
impact on net income or total revenues as a result of these
reclassifications.
The Companys Chief Executive Officer is the chief decision
maker who evaluates the performance of the segment based on
product net revenues and aggregate operating expenses of the
packaged software segment.
The Companys operations outside Canada and the United
States include wholly-owned subsidiaries in Europe, the
Asia-Pacific region and Latin America. Operations in Canada and
the United States are responsible for the design and development
of all the products, as well as product distribution. Net
revenues are attributed to each region based on the location of
the customer. The majority of the revenues in North America are
derived from customers in the United States.
The net book value of capital assets held in Canada as at
November 30, 2007 and November 30, 2006 is
$5.9 million and $2.8 million, respectively. For
geographic regions other than Canada, the net book value of
capital assets held as at November 30, 2007 and
November 30, 2006 is $3.1 million and
$0.9 million, respectively
The net book value of intangible assets held in Canada as at
November 30, 2007 and November 30, 2006 is
$12.1 million and $17.5 million, respectively. For
geographic regions other than Canada, the net book value of
intangible assets held as at November 30, 2007 and
November 30, 2006 is $79.9 million and
$20.3 million, respectively
Revenues by product and region and details regarding major
external customers are disclosed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
By product:
|
|
|
|
|
|
|
|
|
|
|
|
|
Graphics and Productivity
|
|
$
|
141,692
|
|
|
$
|
137,741
|
|
|
$
|
123,126
|
|
Digital Media
|
|
|
108,788
|
|
|
|
39,450
|
|
|
|
40,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
250,480
|
|
|
$
|
177,191
|
|
|
$
|
164,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
$
|
10,122
|
|
|
$
|
8,682
|
|
|
$
|
7,745
|
|
United States
|
|
|
111,116
|
|
|
|
91,571
|
|
|
|
87,090
|
|
Other
|
|
|
4,741
|
|
|
|
4,194
|
|
|
|
3,577
|
|
Europe, Middle East, Africa (EMEA)
|
|
|
72,932
|
|
|
|
58,253
|
|
|
|
52,965
|
|
Asia-Pacific
|
|
|
51,569
|
|
|
|
14,491
|
|
|
|
12,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
250,480
|
|
|
$
|
177,191
|
|
|
$
|
164,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
COREL
CORPORATION
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
19.
|
Changes
in operating assets and liabilities
|
The following table outlines the details of the changes in
operating assets and liabilities reflected on the statement of
cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Accounts receivable
|
|
|
(8,532
|
)
|
|
|
500
|
|
|
|
1,130
|
|
Due to/from related parties
|
|
|
(167
|
)
|
|
|
73
|
|
|
|
(289
|
)
|
Inventory
|
|
|
1,534
|
|
|
|
(188
|
)
|
|
|
613
|
|
Prepaids and other current assets
|
|
|
413
|
|
|
|
43
|
|
|
|
(2,405
|
)
|
Accounts payable and accrued liabilities
|
|
|
(2,314
|
)
|
|
|
(3,389
|
)
|
|
|
3,874
|
|
Taxes payable
|
|
|
654
|
|
|
|
(1,669
|
)
|
|
|
3,969
|
|
Deferred revenue
|
|
|
3,174
|
|
|
|
894
|
|
|
|
3,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(5,238
|
)
|
|
$
|
(3,736
|
)
|
|
$
|
10,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
Not applicable.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation of Disclosure Controls and
Procedures.
We maintain disclosure controls
and procedures, as such term is defined in
Rule 13a-15(e)
under the Exchange Act, that are designed to ensure that
information required to be disclosed by us in reports that we
file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC
rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. In designing and
evaluating our disclosure controls and procedures, management
recognized that disclosure controls and procedures, no matter
how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Additionally, in designing
disclosure controls and procedures, our management necessarily
was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions.
Based on their evaluation as of the end of the period covered by
this Annual Report on
Form 10-K,
our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were
effective.
Managements Report on Internal Control over Financial
Reporting.
Our management is responsible for
establishing and maintaining adequate internal control over
financial reporting as defined in
Rule 13a-15(f)
of the Exchange Act. Because of its inherent limitations,
internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
We assessed the effectiveness of our internal control over
financial reporting as of November 30, 2007. In making this
assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in
Internal Control Integrated Framework.
Based
on our assessment using those criteria, we concluded that our
internal control over financial reporting was effective as of
November 30, 2007.
The effectiveness of the Companys internal control over
financial reporting as of November 30, 2007, has been
audited by PricewaterhouseCoopers LLP, our independent auditors,
as stated in their report which appears in Item 8 of this
Annual Report on
Form 10-K.
Changes in Internal Control over Financial
Reporting.
We acquired InterVideo on
December 12, 2006 and contemporaneously with the closing of
the acquisition commenced the integration of the InterVideo
business with ours. This included implementation of a number
internal controls related to InterVideo operations and migrating
InterVideo processes to our processes. More specifically the
following controls were implemented:
|
|
|
|
|
Migration from InterVideo financial reporting system to our
financial reporting system
|
|
|
|
Additional review and sign-offs of subsidiary workbooks
|
|
|
|
Hired additional staff to ensure adequate oversight of financial
functions
|
During the year we also implemented a number of internal
controls around our tax provision preparation processes. This
included the hiring of additional staff to ensure adequate
segregation between preparation and review of our tax provisions.
There were no changes in our internal control over financial
reporting that occurred during the fourth quarter of fiscal year
2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
Not applicable.
107
PART III
|
|
ITEM 10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
The following sets forth information about our executive
officers and directors:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
David Dobson(4)
|
|
|
45
|
|
|
Chief Executive Officer, Director
|
Douglas McCollam
|
|
|
54
|
|
|
Chief Financial Officer
|
Randall Eisenbach
|
|
|
57
|
|
|
Executive Vice-President, Operations
|
Jeffrey Hastings
|
|
|
43
|
|
|
President and General Manager, Digital Media
|
Nicholas Davies
|
|
|
45
|
|
|
Vice President and General Manager, Graphics and Productivity
|
Amanda Bedborough
|
|
|
38
|
|
|
Executive Vice President, EMEA and APAC Operations
|
Kevin Thornton
|
|
|
40
|
|
|
Senior Vice President, Sales and Marketing, Americas
|
Graham Brown
|
|
|
44
|
|
|
Executive Vice President, Software Development
|
Christopher DiFrancesco
|
|
|
44
|
|
|
Senior Vice President, Legal and General Counsel
|
Jonathan Kissane
|
|
|
38
|
|
|
Senior Vice President, Corporate Development
|
Jeremy Liang
|
|
|
51
|
|
|
Senior Vice President, Digital Media Development
|
Shawn Cadeau
|
|
|
36
|
|
|
Vice President, Global Marketing
|
Philip Wilson
|
|
|
52
|
|
|
Vice President, Global Human Resources
|
Steven Cohen(1)(2)(3)
|
|
|
42
|
|
|
Director
|
J. Ian Giffen(1)(2)(4)
|
|
|
50
|
|
|
Director
|
Amish Mehta(3)
|
|
|
34
|
|
|
Director
|
Alexander Slusky(3)(4)
|
|
|
40
|
|
|
Director
|
Daniel T. Ciporin(1)(2)
|
|
|
50
|
|
|
Director
|
|
|
|
(1)
|
|
Independent director
|
|
(2)
|
|
Member of Audit Committee
|
|
(3)
|
|
Member of Compensation Committee
|
|
(4)
|
|
Member of Nominating and Corporate Governance Committee
|
David Dobson
has served as our Chief Executive Officer
since June 2005 and became a member of our Board in February
2006. From February 2004 to June 2005, he served as Corporate
Vice President, Strategy at IBM. He previously served in various
capacities at IBM in operations, finance, sales, marketing,
strategy and general management from 1986 to 2004.
Mr. Dobson joined IBM in Toronto in 1986. He has a Bachelor
of Electrical Engineering and Management from McMaster
University.
Douglas McCollam
has served as our Chief Financial
Officer since January 2004 and became a member of our Board in
October 2004. He did not stand for re-election to the board of
directors in May 2007, and was replaced by Daniel J. Ciporin.
From July 1996 to January 2004 he served as Executive Vice
President and Chief Financial Officer of NORDX/CDT. He
previously served in various capacities at Nortel Networks,
including as Vice President Finance and Administration for
Nortel CALA from 1993 to 1996. He served as Chief Financial
Officer of Motorola Nortel Communications from 1991 to 1993,
Group Controller Switching from 1989 to 1991 and Assistant Vice
President, Corporate Financial Reporting and Analysis from 1987
to 1989. Mr. McCollam is a Certified Management Accountant
and has a Bachelor of Commerce from Concordia University and an
M.B.A. from the University of Chicago.
Randall Eisenbach
has served as our Executive Vice
President, Operations since August 2007. From April to August
2007 he served as our President and General Manager, Digital
Media. From October 2002 to April 2007 he served as our Chief
Operating Officer. From December 2000 to October 2002 he served
as President and Chief Operating Officer of Enseo Corporation.
Prior to joining Enseo he served in various capacities,
108
including Chief Operating Officer and Executive Vice President,
of 3dfx Interactive (formerly known as STB Systems) from 1985 to
2000. He has a Bachelor of Business Administration and an M.B.A.
from Texas Tech University.
Jeffrey Hastings
has served as Corels President and
General Manager, Digital Media since August 2007. Prior to
joining Corel, Mr. Hastings served as general manager at
Pinnacle Systems, the consumer division of Avid. Prior to
joining Pinnacle, Mr. Hastings was COO of M-Audio, another
Avid company. Mr. Hastings previously served as president
of Rio, the company that pioneered the MP3 space by introducing
the industrys first MP3 player. Mr. Hastings holds a
bachelors degree in computer science from Purdue
University and holds eight US patents.
Nicholas Davies
has served as our Vice President and
General Manager, Graphics and Productivity, since July 2007.
Prior to that, he was our General Manager, Graphics from July
2003 to July 2007 and from October 2001 to July 2003 he held the
position of Vice President Strategic Marketing.
Before joining Corel, Mr. Davies was Vice President EMEA
for Ecademy Ltd., Brand and Marketing Manager for Coleman
Europe, Commercial Manager France for Virgin Cola and Marketing
Director for Puma Sports. Mr. Davies holds an MBA from
INSEAD Business School in France, and a BA with honors in
Business Administration from the European Business School in the
United Kingdom.
Amanda Bedborough
has served as our Executive Vice
President, International Operations since January 2004. Prior to
that Ms. Bedborough served as our Executive Vice President,
Europe, the Middle East and Africa from October 2001 to December
2003. From September 1993 to March 2001 she served in a variety
of capacities at 3dfx Interactive, including Vice President,
Europe, the Middle East and Africa.
Kevin Thornton
has served as Corels Senior Vice
President, Sales and Marketing, Americas since September 2007.
Prior to joining Corel, Mr. Thornton served as Sr. Vice
President Sales, Small Business Division (SBD) at Sage Software.
He previously held management positions with
Coca-Cola
Bottling Company and was the Vice President Sales, Americas for
Corel. Mr. Thornton holds a Bachelor of Physical and Health
Education (Honors) degree from the University of Ottawa.
Graham Brown
has served as our Executive Vice President,
Software Development since April 2002. He joined us in 1991, and
previously served in a variety of capacities, including Vice
President of Software Development, Business Applications from
1998 to 2000. He has a Bachelor of Engineering Science in
Geography and Computer Science from the University of Waterloo.
Christopher DiFrancesco
has served as our Vice President,
Legal, General Counsel and Secretary since December 2003, and
was appointed Senior Vice President, Legal, General Counsel and
Secretary in October 2006. He previously served as corporate
counsel for us from September 2000 to November 2003. From 1998
to 2000 he served as Associate Counsel for the National Hockey
League Players Association. From 1991 to 1998 he was with
the law firm of Gowling Lafleur Henderson in Toronto, Canada. He
has a Bachelor of Engineering Science in Mechanical Engineering
and a Bachelor of Laws from the University of Western Ontario.
Jonathan Kissane
has served as our Senior Vice President,
Corporate Development since October 2006. Prior to joining us,
he served as an Associate and Kauffman Fellow at Centennial
Ventures from 2004 to 2006. From 1996 through 2002, he also held
senior executive positions at Viafone and The Boston Consulting
Group. He has a Bachelor of Science in Engineering and a B.A. in
History from Stanford University, a J.D. from Harvard Law School
and received his MBA with Distinction from INSEAD.
Jeremy Liang
has served as Corels Senior Vice
President, Digital Media Development since June 2007. Prior to
joining Corel, Mr. Liang spent 10 years with Trend
Micro where he served as EVP of Engineering, EVP of Information
and Engineering Operations, and most recently EVP of Information
and Chief Security Officer. Liang holds a masters degree in
computer science from New Mexico Tech and a bachelors
degree in computer science from ChiaoTung University, Taiwan.
Shawn Cadeau
has served as our Vice President, Global
Marketing since May 2006. From April 2002 to February 2006,
Mr. Cadeau served as Director, Product Marketing at Adobe
Systems. He previously held
109
executive positions in product marketing and management with
Accelio Corporation (formerly JetForm) and Cebra Inc., an
e-business
subsidiary of The Bank of Montreal. Mr. Cadeau has a B.A.
from Wilfrid Laurier University.
Philip Wilson
has served as Corels Vice President,
Global Human Resources since June 2007. Prior to joining Corel,
Mr. Wilson spent over 12 years with CIBC. Prior to
CIBC, Mr. Wilson held executive positions at Northern
Telecom, Bell Northern Research and CAE Electronics.
Mr. Wilson graduated from McGill University with a major in
industrial relations and a minor in economics
Steven Cohen
became a member of our Board in January 2006 and is
independent from us. He has served in various capacities at
Teknion Corporation since February 2001 and is currently Teknion
Corporations Senior Vice President, Corporate Development.
He is also a Director and Chairman of the compensation committee
of Pele Mountain Resources Inc., a junior exploration company
listed on the TSX Venture Exchange. He has a Bachelor of
Commerce from McGill University and an M.B.A. from Harvard
Business School.
Steven Cohen
became a member of our Board in January 2006
and is independent from us. He has served in various capacities
at Teknion Corporation since February 2001 and is currently
Teknion Corporations Senior Vice President, Corporate
Development. He is also a Director and Chairman of the
compensation committee of Pele Mountain Resources Inc., a junior
exploration company listed on the TSX Venture Exchange. He has a
Bachelor of Commerce from McGill University and an M.B.A. from
Harvard Business School.
J. Ian Giffen
became a member of our Board in
January 2006 and is independent from us. Since 1996,
Mr. Giffen has been an advisor to or director of software
companies and technology investment funds. From 1992 to 1996,
Mr. Giffen was Vice President and Chief Financial Officer
of Alias Research until its acquisition by Silicon Graphics.
Mr. Giffen is currently a director of MKS, Ruggedcom Inc.
and Descartes Systems and a director or advisor to a number of
other private companies. Mr. Giffen has previously served
on the board of directors of a number of public and private
companies including Macromedia, Financial Models, Sierra
Systems, 724 Solutions, DPS, Open Text, Delano Technology,
Algorithmics, DWL, Changepoint and MGI Software. He is a
Chartered Accountant and has a B.A. in Business Administration
from the University of Strathclyde in Glasgow, Scotland.
Amish Mehta
became a member of our board of directors in
January 2006. He served as our interim President and Chief
Executive Officer from November 2003 to June 2005. He has been
at Vector Capital since August 2002. He previously served as
Chief Executive Officer of CommercialWare from September 1999 to
April 2001. Prior to that he worked at General Atlantic Partners
from 1997 to 1999 and at McKinsey & Company from 1995
to 1997. He has a B.S. in Chemical Engineering from the
University of Pennsylvania, a B.S. in Economics from the Wharton
School and an M.B.A. from Harvard Business School.
Alexander Slusky
has been a member of our Board since
August 2003 and has served as managing partner of Vector Capital
since its inception in 1997. Prior to founding Vector Capital,
he led the technology equity practice at Ziff Brothers
Investments. Prior to joining Ziff Brothers Investments, he was
employed at New Enterprise Associates. Mr. Slusky serves as
a director on the boards of several private companies. He has an
A.B. in Economics from Harvard University, and an M.B.A. from
Harvard Business School.
Daniel T. Ciporin
became a member of Corels board
of directors in April 2007 and is independent from us. He
previously served as Chairman and Chief Executive Officer of
Shopping.com from 1999 until its acquisition by eBay in June
2005. Prior to this position, Mr. Ciporin was Senior Vice
President of MasterCard International. Prior to MasterCard
International, Mr. Ciporin was a management consultant for
Mars and Co. and Corporate Value Associates. Mr. Ciporin
currently serves on the board of directors at publicly traded
companies VistaPrint and Primedia, in addition to serving as a
senior advisor and consultant to a variety of high growth
private companies and boards. In March 2007, Mr. Ciporin
joined Canaan Partners. He has an A.B. from Princeton University
and an M.B.A. from the Yale University School of Management.
Executive officers are appointed by the Board to serve, subject
to the discretion of the Board, until their successors are
appointed.
110
Board of
Directors
Our Board currently consists of six members. We expect that the
term of office for each of directors will expire at the time of
our next shareholders meeting. As a controlled
company, we are not required to comply (and we do not
comply) with the requirement of the Nasdaq Global Market to have
a majority of our directors satisfy the independence
requirements of the Nasdaq Global Market.
There are no family relationships among any of our directors or
executive officers.
Committees
of the Board
The standing committees of our Board consist of an audit
committee, a compensation committee and a nominating and
corporate governance committee. As a controlled
company we are not required to maintain a compensation
committee or a nominating and corporate governance committee
under NASDAQ rules nor are we required to maintain those
committees under Canadian securities regulations. Although we
have formed a compensation committee and a nominating and
corporate governance committee, the memberships of these
committees do not comply with the independence requirements of
the Nasdaq Global Market that would be applicable if we were not
a controlled company.
Audit Committee and Audit Committee Financial
Expert.
Our audit committee is comprised of
Messrs. Cohen, Giffen and Ciporin. Our Board has determined
that Messrs. Cohen, Giffen and Ciporin currently meet the
independence requirements of the Nasdaq Global Market, SEC rules
and the rules and regulations of the Canadian provincial
securities regulatory authorities.
The principal duties and responsibilities of our audit
committee, which are included in our audit committee charter,
are to assist our Board in its oversight of:
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the integrity of our financial statements;
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our compliance with legal and regulatory matters;
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our independent auditors qualifications and
independence; and
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the performance of our internal audit function and our
independent auditors.
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Our audit committee is also responsible for:
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compensating, retaining and overseeing the work of our
independent auditors;
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recommending to the board of directors that the audited annual
financial statements be included in our annual report of
Form 10-K
for the last fiscal year;
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establishing procedures for (a) receipt and treatment of
complaints on accounting and other related matters and
(b) submission of confidential employee concerns regarding
questionable accounting or auditing matters;
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pre-approving any non-audit services by our independent
auditors;
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reviewing and discussing the audited financial statements with
management;
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discussing with the independent auditors the matters required by
Auditing Standards No. 61; and
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receiving written disclosures and the letter from the
independent accountants required by ISB No. 1 and
discussing with the independent accountants their independence.
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The audit committee has the power to investigate any matter
brought to its attention within the scope of its duties. It also
has the authority to retain counsel and advisors to fulfill its
responsibilities and duties. The audit committee also acts as a
qualified legal compliance committee.
The Board has determined Ian Giffen is an audit committee
financial expert.
111
Compensation Committee.
Our compensation
committee is comprised of Messrs. Cohen, Mehta and Slusky.
The principal duties and responsibilities of the compensation
committee are as follows:
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to review and approve goals and objectives relating to the
compensation of our chief executive officer and, based upon a
performance evaluation, to determine and approve the
compensation of the chief executive officer;
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to make recommendations to our board of directors on the
compensation of other executive officers and on incentive
compensation and equity-based plans; and
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to produce reports on executive compensation to be included in
our public filings to the extent required by applicable
securities laws or listing requirements.
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Nominating and Corporate Governance
Committee.
Our nominating and corporate
governance committee is comprised of Messrs. Dobson, Giffen
and Slusky. The principal duties and responsibilities of the
nominating and corporate governance committee are as follows:
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to identify individuals qualified for membership on our board of
directors and to select, or recommend for selection, director
nominees;
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to develop and recommend to our board of directors a set of
corporate governance principles; and
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to oversee the evaluation of our board of directors and
management.
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Disclosure
Policy
Our board of directors has adopted and periodically reviews and
updates our written corporate disclosure policy. This policy,
among other things:
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articulates legal obligations with respect to confidential
corporate information;
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identifies spokespersons who are the persons authorized to
communicate with third parties such as analysts, media and
investors;
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provides guidelines on the disclosure of forward-looking
information;
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establishes procedures for reviewing disclosure, prohibiting
selective disclosure of material information and addressing
inadvertent disclosure; and
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establishes periods prior to the disclosure of certain financial
information and material changes during which trading in our
common shares by insiders is prohibited.
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Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 and
the regulations of the SEC thereunder require a
registrants executive officers and directors, and persons
who own more than 10% of a registered class of equity
securities, to file reports of initial ownership and changes in
ownership with the SEC. As we are a foreign private
issuer pursuant to
Rule 3a12-3
of the Securities Exchange Act of 1934, we and the persons
referred to above are exempt from the reporting and liability
provisions of Section 16(a). However, under Canadian
provincial securities laws, the persons referred to above are
required to file reports in electronic format through the System
for Electronic Disclosure by Insiders, or SEDI, disclosing
changes in beneficial ownership of, or control or direction
over, our common shares and other securities. Our shareholders
can access such reports at www.sedi.ca.
Code of
Ethics
We have adopted a written code of ethics that applies to our
Board of Directors and all of our employees, including our Chief
Executive Officer and Chief Financial Officer. A copy of our
code of ethics is available on our website at
http://investor.corel.com/documents.cfm
or by contacting
us directly at 1600 Carling Avenue, Ottawa, Ontario, Canada K1Z
8R7,
(613) 728-0826.
If we make any amendments to this Code of Ethics other
112
then technical, administrative, or other non-substantive
amendments, or grant any waivers, including implicit waivers,
from a provision of this Code of Ethics to our Chief Executive
Officer, Chief Financial Officer or other finance executives, we
will disclose the nature of the amendment or waiver, its
effective date and to whom it applies on our website or in a
report on
Form 8-K
filed with the SEC. There were no waivers of the Code of Ethics
during our fiscal year ended November 30, 2007.
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ITEM 11.
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EXECUTIVE
COMPENSATION
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Pursuant to Item 402 of
Regulation S-K,
we have provided in this Item 11 the information required
by Items 6.B. and 6.E.2 of
Form 20-F
and pursuant to disclosure rules in Canada.
Summary
Compensation Table
The following table provides information about the compensation
earned during the fiscal years ended November 30, 2006 and
2007 by our Chief Executive Officer, our Chief Financial Officer
and our three next most highly compensated executive officers
(the Named Executive Officers). For those
individuals who receive compensation in a currency different
then the United States dollar, salary is converted based on the
average exchange rate during the year, and bonus is converted
based on the exchange rate as at November 30, which best
reflects the rates at which these amounts were paid.
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Long Term Compensation
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Securities
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Units
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Annual Compensation(1)
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Underlying
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Subject to
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Name And Principal
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Other Annual
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Options
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Resale
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LTIP
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All Other
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Position
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Fiscal Year
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Salary
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Bonus
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Compensation
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Granted
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Restrictions
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Payments
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Compensation
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David Dobson(2)(3)
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2007
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$
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385,566
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$
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323,700
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$
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56,051
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200,000
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Chief Executive Officer
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2006
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376,820
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369,284
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$
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679,676
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2005
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140,754
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203,500
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413,971
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Douglas McCollam
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2007
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232,269
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178,800
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30,000
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Chief Financial Officer
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2006
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227,000
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245,160
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2005
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203,500
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183,150
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8,540
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Randall Eisenbach
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2007
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300,000
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169,500
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20,000
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Executive Vice President, Operations
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2006
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260,000
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181,400
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2005
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260,000
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97,500
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61,910
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Amanda Bedborough(4)
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2007
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344,972
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367,826
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40,000
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Executive VP, International Operations
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2006
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305,688
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203,254
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2005
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398,805
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85,937
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44,831
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104,772
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Patrick Morley
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2007
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300,000
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240,000
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50,000
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Former Chief Operating Officer
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2006
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300,000
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175,500
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2005
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52,308
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50,000
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85,394
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(1)
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Excludes perquisites and other benefits because such
compensation did not exceed the lesser of C$50,000 and 10% of
the total annual salary and bonus for any of the Named Executive
Officers.
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(2)
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Mr. Dobson received other annual compensation of $56,051
relating to housing benefits of $35,482, vehicle allowance of
$7,519, and travelling allowances of $13,050 for travel between
his primary residence and our corporate head office during the
year.
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(3)
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Mr. Dobson received other annual compensation of $252,324
relating to loans forgiven in our fiscal year ended
November 30, 2006, and $4,844 for retirement plan payments.
In addition, during fiscal 2006, we repurchased options from
Mr. Dobson that were previously granted to him pursuant to
the terms of his employment agreement, for an aggregate amount
of $427,352, of which half was applied as a repayment against a
loan and half to help defray additional expenses incurred in
connection with his relocation to Canada. See
Item 13
Certain Relationships and
Related Transactions.
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(4)
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Ms. Bedboroughs salary for our fiscal year ended
November 30, 2005 includes $19,532 of retirement plan
payments and $85,240 of insurance premiums
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113
Option
Grants During the Fiscal Year Ended November 30, 2007 to
Named Executive Officers
The following table sets forth information regarding options for
the purchase of shares granted during the fiscal year ended
November 30, 2007 to the Named Executive Officers.
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% of Total
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Market Value
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Number of Shares
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Options Granted
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Exercise Price
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of Securities
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Underlying Options
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to Employees
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Per Share
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Underlying
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Expiration
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Name
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Granted(1)
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in Fiscal Year(2)
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($/Security)
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Options(3)
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Date
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David Dobson
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200,000
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9.0
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13.73
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Nil
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July 17,2017
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Douglas McCollam
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30,000
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1.4
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13.03
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Nil
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April 24,2017
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Randall Eisenbach
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30,000
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1.4
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0.00
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334,200
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Jan 3, 2017
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Amanda Bedborough
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40,000
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1.8
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6.52
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222,800
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April 24,2017
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Patrick Morley
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50,000
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2.3
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13.03
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Nil
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April 24,2017
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(1)
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Some named executive officers received grants of restricted
stock units which are included in the totals above. Randall
Eisenbach and Amanda Bedborough, received restricted stock units
in the amount of 30,000 and 20,000 units respectively. The
options vest as to 25% on the first anniversary of the date of
grant and as to an additional 6.25% at the completion of each
three-month period thereafter.
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(2)
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The total amount of options granted of 2,210,765 units,
includes 150,000 restricted stock units.
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(3)
|
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Based on the difference between the exercise price per share and
the market price per share as at November 30, 2007 of
$11.14.
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Aggregate
Options Exercised During the Fiscal Year Ended November 30,
2007, Most Recently Completed Financial Year and Option Values
at November 30, 2007 for Named Executive Officers
The following table shows the number of options to purchase
common shares exercised by the Named Executive Officers during
our fiscal year ended November 30, 2007. The value of
unexercised in-the-money options of those persons has been based
on the closing price of the common shares on the Nasdaq Global
Market on November 30, 2007.
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Value of Unexercised
|
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Unexercised Options at
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In-the-Money Options as at
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Shares Acquired
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Aggregate Value
|
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November 30, 2007
|
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November 30, 2007(1)
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Name
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on Exercise
|
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Realized
|
|
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Exercisable
|
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Unexercisable
|
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Exercisable
|
|
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Unexercisable
|
|
|
David Dobson
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174,379
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$
|
1,981,262
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|
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|
157,365
|
|
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259,531
|
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|
$
|
1,568,929
|
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$
|
593,534
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|
Douglas McCollam
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Nil
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Nil
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78,684
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39,234
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784,479
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|
|
|
92,063
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|
Randall Eisenbach
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51,503
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610,097
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23,143
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30,073
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|
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230,736
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|
|
|
326,153
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|
Amanda Bedborough
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Nil
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|
Nil
|
|
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|
72,606
|
|
|
|
51,915
|
|
|
|
723,882
|
|
|
|
341,593
|
|
Patrick Morley
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|
|
42,698
|
|
|
|
486,323
|
|
|
|
Nil
|
|
|
|
Nil
|
|
|
|
Nil
|
|
|
|
Nil
|
|
|
|
|
(1)
|
|
Based on the difference between the exercise price per share and
the market price per share as at November 30, 2007 of
$11.14.
|
Compensation
Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the board
of directors or compensation committee of any entity that has
one or more executive officers serving as a member of our board
of directors or compensation committee.
Compensation
of Directors and Executive Officers
For the fiscal year ended November 30, 2007, the
compensation paid to individuals, other than members of our
management, for serving as a director was $25,000 per year. The
chairperson of each Board committee was paid an additional
$15,000 for our fiscal year ended November 30, 2007.
114
Each new non-employee director that joins our Board will receive
options to purchase 25,000 common shares and thereafter shall
receive an additional 15,000 options for each successive year of
service on the Board. The exercise price of all such options
shall be equal to the fair market value of those shares on the
date of the grant. These options vest as to 25% on the first
anniversary of the date of grant and as to an additional 25%
each year thereafter in quarterly installments. Upon the
occurrence of a significant event (such as a change in control),
as defined under the 2006 Equity Incentive Plan, all options or
other equity awards held by members of our Board under the plan
shall immediately vest.
We also reimburse directors and officers, respectively, for
reasonable out-of-pocket expenses incurred in performing their
duties. Directors and officers of our subsidiaries do not
receive any additional remuneration for acting in that capacity
but will be reimbursed for reasonable out-of-pocket expenses
incurred in performing their duties.
Material
Terms and Conditions of Employment Agreements
We have employment agreements with certain of the Named
Executive Officers. The agreements contain, among other things,
confidentiality, non-solicitation and non-competition covenants
that will apply during the term of each officers
employment and for a specific period of time after termination
of their employment.
David Dobson.
In June 2005, we entered into an
employment agreement with David Dobson, our Chief Executive
Officer and a member of our Board. He currently receives an
annual base salary of C$415,000 ($414,710 based on the exchange
rate in effect as of the close of business on November 30,
2007) with an annual target bonus of 100% of the base
salary based on meeting financial targets set by our board or
compensation committee. If we terminate his employment without
cause, we are obligated to continue paying his salary for
18 months, pay to him his annual target bonus of 100% of
his base salary prorated for the portion of the year prior to
the termination date and continue to make contributions in
respect of Mr. Dobson to our executive group benefit plan
for 18 months. In the event there is a change of control,
and we terminate Mr. Dobsons employment for any
reason other than for cause or he resigns for any reason within
six months of the change of control, his share-based awards
become fully exercisable on the earlier of the date of
termination or the six-month anniversary of the change of
control. We have made loans to Mr. Dobson which have been
fully repaid as of November 30, 2007. See
Item 13
Certain Relationships and
Related Party Transactions Other Related Party
Transactions
.
Douglas McCollam.
In December 2003, we entered
into an employment agreement with Douglas McCollam, our
Chief Financial Officer and a former member of our Board. He
currently receives an annual base salary of C$250,000 ($249,825
based on the exchange rate in effect as of the close of business
on November 30, 2007), with an annual target bonus of 100%
of the base salary based on meeting financial targets set by our
Board or compensation committee. If we terminate his employment
without cause, we are obligated to pay to him a lump sum of one
month of his then current base salary per year of service, up to
a maximum of three months.
Randall Eisenbach.
In May 2005, we entered
into an employment agreement with Randall Eisenbach, our EVP,
Operations. He currently receives an annual base salary of
$300,000, with an annual target bonus of $200,000 based on
meeting targets set by our Board or compensation committee each
year. If we terminate his employment without cause or upon his
death or disability while employed by us, we are obligated to
pay to him a lump sum of six months of his then current base
salary, maintain his benefits and pay his accommodation and
travel expenses for six months.
Amanda Bedborough.
In January 2003, we entered
into an employment agreement with Amanda Bedborough, our
Executive Vice President, International Operations. She
currently receives an annual base salary of £169,104, with
an annual target bonus of £101,296 ($344,972 and $206,644,
respectively, based on the exchange rate in effect as of the
close of business on November 30, 2007) based on
meeting targets set by our Board or compensation committee each
year. In addition, she may be eligible for a target bonus at the
sole discretion of our Board. If we terminate her employment
without cause, we are obligated to pay to her up to
18 months of her base salary and maintain her benefits for
up to 18 months. In the event there is a change of control,
and we terminate Ms. Bedboroughs employment during
the period beginning one month before and ending six months
after the change of control, she is
115
entitled to receive 18 months written notice. In lieu of
notice, we may elect to pay her up to 18 months of her base
salary and maintain her benefits for up to 18 months.
Patrick Morley.
Mr. Morley voluntarily
left the Company on December 1, 2007. No termination
benefits were provided on his departure and no further benefits
will be paid subsequent to November 30, 2007.
Composition
of the Compensation Committee
The compensation committee assists the Board in determining and
administering the compensation for the executive officers of
Corel and our subsidiaries. During our fiscal year ended
November 30, 2007, the compensation committee was comprised
of three directors: Steven Cohen, Amish Mehta and Alexander
Slusky (Chair).
Other than Amish Mehta, none of the members of the compensation
committee is an officer, employee or former officer or employee
of us or any of our affiliates. No member of the compensation
committee is eligible to participate in our executive
compensation program.
Report on
Executive Compensation
The compensation committees executive compensation
philosophy is guided by its objective to obtain and retain
executives critical to our success and the enhancement of
shareholder value. The Company entered into employment
agreements with its executive officers prior to the
Companys initial public offering in May 2006, prior to
which the Company did not have a compensation committee.
Concurrent with the Companys initial public offering, the
compensation committee was established to:
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oversee the Companys compensation and benefits policies
generally;
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oversee and set compensation for the Companys executive
officers;
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evaluate executive officer performance and review the
Companys management succession plan; and
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review compensation related disclosure to be filed or submitted
by the Company.
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A copy of our compensation committee charter is available on our
website at
http://investor.corel.com/documents.cfm
or by contacting us directly at 1600 Carling Avenue, Ottawa,
Ontario, Canada, K1Z 8R7,
(613) 728-0826.
Following the Companys initial public offering,
compensation matters relating to our executive officers are
approved by our Board upon the recommendation of the
compensation committee. The compensation committee requested
that our human resources management engage outside consultation
on executive compensation.
The compensation committees executive compensation
philosophy is intended to provide a competitive level of
compensation and to reward individual performance. Our executive
compensation program is composed of base salary as well as
short-term incentives and equity incentive plan rewards (the
incentive plans). The compensation of our executives
is primarily based on the achievement by us of financial targets
and on the achievement by the individual of personal goals and
objectives. Our equity incentive plans are designed to encourage
ownership of our common shares and our long-term growth. The
short-term incentives are designed to achieve growth and
efficiencies required in the short-term.
Each Named Executive Officers performance and related
salary level, annual bonus target and level of participation in
the incentive plan is reviewed and approved annually by the
compensation committee in conjunction with appropriate senior
management.
For the fiscal year ended November 30, 2007, the
compensation committee recommended awards under the short-term
incentives equal to approximately 75% of each Named Executive
Officers base salary. These awards were based on the
achievement of certain revenue and profit targets and personal
goals and objectives. Since the completion of our initial public
offering, we did not make any new grants of options to executive
officers of the Company.
116
The chief executive officers compensation was determined
pursuant to the terms of an employment agreement with him prior
to the Companys initial public offering. At that time, the
Company made a determination as to appropriate compensation of
its chief executive officer, as compared with other comparable
companies. The chief executive officers compensation for
the fiscal year ended November 30, 2007 is primarily based
upon a base salary plus a bonus based upon the achievement of
corporate revenue and earnings targets fully described in the
employment agreement between the Company and him.
No additional benefits or perquisites are provided to members of
management that are not available to employees of Corel
generally. These currently include vision care, health,
long-term disability, dental, group life insurance and a
fitness/technology/wellness benefit.
The compensation committee intends to continually evaluate the
compensation of its executive officers based on the compensation
objectives as fully described in the compensation committee
charter.
Report Presented by:
Steven Cohen
Amish Mehta
Alexander Slusky (Chair)
Performance
Graphs
As of November 30, 2007, the following graphs show the
total cumulative return on a $100 investment on May 2, 2006
in common shares of Corel Corporation with the cumulative total
return of the S&P/TSX Composite Index, the Nasdaq Composite
Index and the Nasdaq 100 Technology Sector Index, for the period
commencing on May 2, 2006 and ending on November 30,
2007, assuming reinvestment of all dividends.
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Candian Dollar
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US Dollar
|
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Indebtedness
of Directors, Officers and Others
Other than as described in Item 13
Certain Relationships and Related Transactions
, our
directors, senior officers, and their associates were not
indebted to us or to any of our subsidiaries at any time during
our fiscal year ended November 30, 2007.
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ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
|
Beneficial
Ownership
The following table sets forth information regarding the
beneficial ownership of our common shares and shows the number
of shares and percentage of outstanding common shares owned by:
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each person who is known by us to own beneficially 5% or more of
our common shares;
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each member of our Board;
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each of the Named Executive Officers; and
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117
|
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all members of our Board and our executive officers as a group.
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Beneficial ownership is determined in accordance with SEC rules,
which generally attribute beneficial ownership of securities to
each person who possesses, either solely or shared with others,
the power to vote or dispose of those securities. These rules
also treat as outstanding all shares that a person would receive
upon exercise of stock options or warrants held by that person
that are immediately exercisable or exercisable within
60 days of the determination date, which in the case of the
following table is January 29, 2008. Shares issuable
pursuant to exercisable stock options are deemed to be
outstanding for computing the percentage ownership of the person
holding such options, but are not deemed outstanding for
computing the percentage ownership of any other person. The
percentage of beneficial ownership for the following table is
based on 25,456,534 common shares outstanding, as of
November 30, 2007. We have only one class of equity
securities outstanding and all holders of such class have the
same rights, preferences and privileges. Our major shareholders
do not have any voting rights that are different from the voting
rights of shareholders generally. To our knowledge, except as
indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all
common shares shown as beneficially owned by them.
Principal
Shareholders Table
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Name and Address of Beneficial Owner(1)
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Number of Common Shares
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Percent of Class
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Five Percent Shareholder
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Vector Capital
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17,657,614(2
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)
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69.36
|
%
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Executive Officers and Directors
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Alexander Slusky(3)
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17,681,898(3
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)
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69.46
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%
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David Dobson
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272,208(4
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)
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1.07
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%
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Douglas McCollam
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84,182(5
|
)
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*
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Randall Eisenbach
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78,512(6
|
)
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*
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Amanda Bedborough
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73,314(7
|
)
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*
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Amish Mehta(9)
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6,405(8
|
)
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*
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Steven Cohen
|
|
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7,205(10
|
)
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*
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J. Ian Giffen
|
|
|
11,405(11
|
)
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*
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Daniel T. Ciporin
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Nil
|
|
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|
*
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All directors and executive officers as a group (18 persons)
|
|
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660,024
|
(12)
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2.59
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%
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*
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Less than 1%.
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(1)
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Except as otherwise indicated, the address for each beneficial
owner is
c/o Corel
Corporation, 1600 Carling Avenue, Ottawa, Ontario, Canada
K1Z 8R7.
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(2)
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All of these shares are held, directly or indirectly by Corel
Holdings, L.P., a Cayman Islands limited partnership. The sole
general partner of Corel Holdings, L.P. is Vector Capital
Partners II International Ltd., which is wholly owned by
VCPII International LLC. The managing member of VCPII
International LLC is Alexander Slusky. The address for Corel
Holdings, L.P. is
c/o Vector
Capital, 456 Montgomery Street, 19th Floor, San Francisco,
California 94104.
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(3)
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Includes 24,284 common shares issuable upon the exercise of
options that are exercisable within 60 days of
November 30, 2007 all of which are vested. With respect to
the remaining 17,657,614 shares, Mr. Slusky, a
principal of Vector Capital, has voting and investment power
over the common shares owned by Vector Capital and therefore
beneficially owns the common shares held by Vector Capital.
Mr. Slusky, however, disclaims beneficial ownership of
these common shares, except to the extent of his pecuniary
interest in them. The address for Mr. Slusky is
c/o Vector
Capital, 456 Montgomery Street, 19th Floor, San Francisco
California 94104.
|
118
|
|
|
(4)
|
|
Consists of 97,829 common shares issuable upon the exercise of
options that are exercisable within 60 days of
November 30, 2007 all of which are vested, and 174,379
common shares held by him subsequent to the exercise of options.
|
|
(5)
|
|
Consists of 84,182 common shares issuable upon the exercise of
options that are exercisable within 60 days of
November 30, 2007 all of which are vested.
|
|
(6)
|
|
Consists of 22,739 common shares issuable upon the exercise of
options that are exercisable within 60 days of
November 30, 2007 all of which are vested and 55,773 common
shares held by him subsequent to the exercise of options.
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|
(7)
|
|
Consists of 73,314 common shares issuable upon the exercise of
options that are exercisable within 60 days of
November 30, 2007 all of which are vested.
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|
(8)
|
|
Consists of 6,405 common shares issuable upon the exercise of
options that are exercisable within 60 days of
November 30, 2007 all of which are vested.
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|
(9)
|
|
Mr. Mehta, a principal of Vector Capital, does not have
voting or investment power over the common shares beneficially
owned by Vector Capital. The address for Mr. Mehta is
c/o Vector
Capital, 456 Montgomery Street, 19th Floor, San Francisco,
California 94104.
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(10)
|
|
Consists of 7,205 common shares issuable upon the exercise of
options that are exercisable within 60 days of
November 30, 2007 all of which are vested.
|
|
(11)
|
|
Consists of 11,405 common shares issuable upon the exercise of
options that are exercisable within 60 days of
November 30, 2007 all of which are vested.
|
|
(12)
|
|
Includes 396,054 common shares issuable upon the exercise of
options that are exercisable within 60 days of
November 30, 2007 all of which are vested, and 263,970
common shares held by the group subsequent to the exercise of
options.
|
Securities
Authorized For Issuance Under Equity Compensation
Plans
The following table sets forth certain information relating to
our option plans as of November 30, 2007:
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
Number of Common
|
|
|
|
|
|
Remaining Available
|
|
|
|
|
|
Shares to be Issued
|
|
|
Weighted-Average
|
|
|
for Future Issuance
|
|
|
|
|
|
upon Exercise of
|
|
|
Exercise Price of
|
|
|
under Equity
|
|
Plan Category
|
|
Name of Plan
|
|
Outstanding Options
|
|
|
Outstanding Options
|
|
|
Compensation Plan
|
|
|
Option Plans approved by our Shareholders
|
|
2003 Share Option and Phantom Share Unit Plan
|
|
|
813,940
|
|
|
$
|
2.31
|
|
|
|
|
|
|
|
2006 Equity Incentive Plan
|
|
|
2,816,965
|
|
|
$
|
11.95
|
|
|
|
1,519,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
3,630,905
|
|
|
$
|
9.79
|
|
|
|
1,519,592
|
|
Share
Option and Other Compensation Plans
Equity
Incentive Plan
Our equity incentive plan was adopted by our Board and approved
by our shareholders in February 2006. Our equity incentive plan
provides for the grant of options to our employees and employees
of our subsidiaries, and restricted shares, share appreciation
rights, restricted share units, performance share units,
deferred share units, phantom shares and other share-based
awards to our employees, consultants and directors, and
employees, consultants and directors of our subsidiaries and
affiliates. Options granted to our U.S. employees may be
incentive stock options or non-qualified options for
U.S. federal income tax purposes. At the inception of the
plan, 2,850,000 common shares were made available for issuance.
In May 2007, the board of directors authorized an additional
2,000,000 common shares available for issuance under the equity
incentive plan.
Share Reserve.
A total of 4,336,557 common
shares are authorized for issuance under the equity incentive
plan as of November 30, 2007. Of these shares, no more than
500,000 may be issued upon exercise
119
of incentive stock options under the plan and no more than
692,500 may be issued as restricted shares. Appropriate
adjustments will be made to the number of authorized shares
under our equity incentive plan and to the shares subject to
outstanding awards in the event of any reorganization,
recapitalization, share split, dividend or other change in our
capital structure in order to account for the changed
circumstances.
Shares subject to awards under the equity incentive plan that
lapse, expire, terminate, or are forfeited or settled in cash,
and shares surrendered to us as payment of exercise price,
withholding tax, or as part of an award exchange program, will
again become available for grants under the equity incentive
plan. Common shares used to satisfy awards under the plan may be
authorized and unissued shares, or shares acquired by us on the
open market.
No more than 500,000 common shares may be subject to the total
awards granted under the equity incentive plan to any individual
participant in a given calendar year.
Administration of Awards.
Our Board or a
committee of directors appointed by our Board, will administer
our equity incentive plan. The Board or committee of directors
will include the appropriate number of outside directors with
the appropriate qualifications in the case of awards intended to
satisfy the independence or other requirements of exceptions
under U.S. Internal Revenue Code Section 162(m) for
performance-based compensation,
Rule 16b-3
under the Securities Exchange Act of 1934, or any applicable
exchange or quotation system rules. The Board or committee has
the power and discretionary authority to determine the terms and
conditions of the awards, including the individuals who will
receive awards, the term of awards, the exercise price, the
number of shares subject to each award, the limitations or
restrictions on vesting and exercisability of awards, the
acceleration of vesting or the waiver of forfeiture or other
restrictions on awards, the form of consideration payable on
exercise, whether awards will be adjusted for dividend
equivalents and the timing of grants. The Board or committee
also has the power to modify, amend or adjust the terms and
conditions of outstanding awards, to implement an award exchange
program, to create other share-based awards for issuance under
the equity incentive plan, to arrange for financing by
broker-dealers (including payment by us of commissions), to
establish award exercise procedures (including cashless
exercise) and to establish procedures for payment of
withholding tax obligations with cash or shares.
Stock options.
The Board or the committee may
grant options that are, in the case of U.S. recipients,
intended to qualify as incentive stock options for
U.S. federal income tax purposes or non-qualified options.
The Board or the committee will determine the exercise price of
options granted under our equity incentive plan, but except as
required by law of a foreign jurisdiction or due to a merger or
other corporate transaction, the exercise price of an option may
not be less than 100% of fair market value of our common shares
on the date the option is granted. For incentive stock options
granted to any participant who owns at least 10% of the voting
power of all classes of our understanding shares, the option
award must not have a term longer than five years and must have
an exercise price that is at least 110% of fair market value of
our common shares on the date of grant. No options may be
granted for a term longer than 10 years. Options may be
exercised as provided in the applicable award agreement.
Generally, when a participant is terminated by us for good
cause, or a participant voluntarily resigns, outstanding
unvested options granted under the equity incentive plan will be
forfeited immediately. For other terminations of employment,
vested options generally remain exercisable for three months
after termination, except they generally remain exercisable for
one year after death. Specific provisions of a written
employment agreement may provide for different treatment.
However, an option granted under our equity incentive plan is
never exercisable after its term expires.
Share Appreciation Rights.
Share appreciation
rights (SARs) may be granted in conjunction with a related
option, as tandem SARs, or separately as free-standing SARs.
SARs generally allow the participant to receive the appreciation
on the fair market value of our common shares between the date
of grant and the exercise date, for the number of shares with
respect to which the SAR is being exercised. Tandem SARs are
generally exercisable based on certain terms and conditions of
the underlying options, although the committee may grant tandem
SARs with a base price that is higher than the underlying option
price. Free-standing SARs are granted with a base price not less
than 100% of the fair market value of our common shares on the
date of grant and are subject to terms and conditions as
determined by the board or the committee. The board or the
committee may provide that SARs be payable in cash, in common
shares, or a combination of both, and
120
subject to any limitations or other conditions as it deems
appropriate. SARs may be payable on a deferred basis only to the
extent provided for in the participants award agreement.
Restricted Shares.
Restricted share awards are
common shares that vest in accordance with restrictions that are
determined by the Board or the committee. The Board or the
committee has the discretion to determine the individuals who
will receive a restricted share award, the number of shares
granted, when the shares will be paid to the participant,
whether the participant will have the right to vote the
restricted shares or receive dividend amounts, whether the
shares will be issued at the beginning or the end of a
restricted period and any other terms and conditions with
respect to vesting, deferral, payment options and other award
characteristics as it deems appropriate. The committee may also
provide that the participant may be granted a cash award that is
payable upon the vesting of the restricted shares. Generally,
unless our Board or the committee decides otherwise, upon a
participants termination of employment for any reason,
restricted shares that have not vested are immediately forfeited
to us. When a participant terminates employment for disability,
death, retirement, early retirement or other special
circumstances, the committee may waive the forfeiture
requirement and other restrictions on the shares. Specific
provisions of a written employment agreement may provide for
different treatment.
Restricted Share Units.
Restricted share unit
awards may consist of grants of rights to receive common shares
or the value of common shares or a combination of both, which
may vest in installments or on a deferred basis.
Performance Share Units.
Performance share
units are awards of restricted share units that will result in
the delivery of common shares or a payment of the value of
common shares to a participant only if performance goals
established by the Board or the committee are achieved or the
awards otherwise vest. The Board or the committee will
establish, in its discretion, performance goals, which will
determine the number of performance share units and the value of
common shares, if any, to be paid out to participants. The Board
or the committee will also set time periods during which the
performance goals must be met. The performance goals may be
based upon the achievement of corporation-wide, divisional or
individual goals, or any other basis as determined by the Board
or the committee. The Board or the committee will determine
whether payment for performance share units will be made in
cash, common shares or a combination of both. The initial value
of performance share units will be established by the Board or
the committee by the date of grant and will be set at an amount
equal to the fair market value of our common shares on the date
of grant. The Board or the committee may modify the performance
goals as necessary to align them with our corporate objectives
only if there has been a material change in our business,
operations or capital or corporate structure.
Deferred Share Units.
Deferred share unit
awards are awards similar to awards of restricted share units
except that such awards may not be redeemed for common shares or
for the value of common shares until the participant has ceased
to hold all offices, employment and directorships with us and
our affiliates.
Other Share-Based Awards.
The Board or the
committee may create other forms of awards in addition to the
specific awards described in our equity incentive plan which may
be granted alone or in tandem with other awards under the plan.
The Board or the committee has complete authority to determine
the persons to whom and the time or times at which such other
share-based awards will be granted, the number of common shares,
if any, to be granted, whether the value of the awards will be
based on shares or cash, and any other terms and conditions.
Effect of a Significant Event.
In the event of
a significant event as defined in our equity incentive plan, and
unless otherwise provided in an award agreement or a written
employment contract between us and a plan participant, our Board
may provide that the successor corporation will assume each
award or replace it with a substitute award, or the awards will
become exercisable or vested in whole or in part upon written
notice, or the awards will be surrendered for a cash payment, or
any combination of the foregoing will occur. Upon a significant
event, all options granted to members of our Board shall
immediately vest. If a participant in the equity incentive plan
is entitled to receive payments that would qualify as excess
parachute payments under Section 280G of the
U.S. Internal Revenue Code, those payments may be reduced
so that the participant is not subject to the excise tax under
Section 4999 of the U.S. Internal Revenue Code if such
a reduction would result in the participants receiving a
greater after-tax payment.
121
Under the plan, and unless otherwise defined in an award
agreement or a written employment agreement between us and a
plan participant which governs (and subject to certain
exceptions described in the plan), a significant event means:
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a person or group of persons (other than Vector Capital and its
affiliates) becomes the beneficial owner of securities
constituting 50% or more of our voting power;
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50% of our current Board (including any successors approved by
50% of our current Board) cease to constitute 50% of the Board;
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a merger, consolidation, amalgamation or arrangement (or a
similar transaction) involving us occurs, unless after the
event, 50% or more of the voting power of the combined company
is beneficially owned by stockholders who owned all of our
common shares immediately before the event; or
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our shareholders approve a plan of complete liquidation or
winding-up
of our company, or the sale or disposition of all or
substantially all our assets (other than a transfer to an
affiliate).
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Transferability.
Awards under our equity
incentive plan generally are not transferable other than by will
or by the laws of descent and distribution or as expressly
permitted by the Board. Except as noted, only the participant
may exercise an award.
Section 162(m) Provisions.
Awards to any
participant whom the committee determines to be a covered
employee under Section 162(m) of the
U.S. Internal Revenue Code may be subject to restrictions,
including the establishment of performance goals, as necessary
for the award to meet the requirements for performance-based
compensation.
Additional Provisions.
Our equity incentive
plan will automatically terminate in 2016 unless we elect to
terminate it sooner. In addition, our Board has the right to
amend, suspend or terminate the plan at any time provided that
such action does not impair any award previously granted under
the plan. We will not be responsible if awards under the equity
incentive plan result in penalties to a participant under
Section 409A of the U.S. Internal Revenue Code.
Amendments to the plan will be submitted for shareholder
approval to the extent required by applicable law.
Prior
Incentive Plans
Effective December 1, 2003, we adopted a share option and
phantom share unit plan (which we refer to as our prior plan).
Our prior plan provided for the grant of units, options and
phantom shares to our employees, officers and consultants.
As of November 30, 2007, there were units with respect to
813,940 common shares outstanding under the prior plan and there
are no separate options or phantom shares outstanding. Each unit
consists of a stock option that enables the holder to acquire a
fixed number of common shares at a stated exercise price and a
phantom share unit in respect of the same number of shares as
the option, with the same stated exercise price. Upon exercise
of the stock option portion of the unit, we will issue common
shares to the holder. Upon exercise of the phantom share unit
portion of the unit, we may pay the holder an amount of cash
equal to the fair market value of the common shares underlying
the phantom share unit, less the exercise price, or we may
deliver common shares with a fair market value equal to such
amount of cash. In addition, in the case of a stock option
exercise or a phantom share unit exercise, we may effect a net
settlement, in which we deliver the number of common shares
equal in value to the fair market value of the common shares
underlying the option, less the exercise price. A holder may not
exercise both the stock option component of the unit and the
phantom share unit component. When a holder exercises either the
stock option component or the phantom share unit component, the
other component is no longer exercisable. No additional units,
options or phantom share units will be granted under our prior
plan, but the outstanding units granted under our prior plan
will remain outstanding in accordance with their terms.
Appropriate adjustments will be made under our prior plan to the
number of shares subject to outstanding awards in the event of
any future reorganization, recapitalization, share split,
dividend or other change in our capital structure in order to
account for the changed circumstances.
122
Units granted under the prior plan generally vest as to 25% on
the first anniversary of the date of grant and as to an
additional 6.25% at the end of the three month period subsequent
to the first anniversary date.
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ITEM 13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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Other than as described below, since December 1, 2006,
there has not been, and there is not currently proposed, any
transactions or similar transactions to which we were or will be
a party in which the amount involved exceeded or will exceed
$120,000 and in which any director, executive officer, holder of
5% or more of any class of our voting stock or any member of
their immediate family had or will have a direct or indirect
material interest.
In connection with certain transaction advisory work performed
on our behalf, we paid Vector Capital transaction fees and
reimbursements for expenses of approximately $172,000 in fiscal
2007. Payments to Vector Capital made in fiscal 2007 were made
pursuant to the Expense Reimbursement Agreement (incorporated by
reference as exhibit 10.16 to this annual report on
Form 10-K),
reimbursement of expenses of Mssrs. Slusky and Mehta and payment
to Vector Capital of directors fees earned by them. While
we do not maintain a written policy with respect to related
party transactions, we actively maintain a list of related
parties and monitor any potential transactions with such
parties, including Vector Capital and affiliates of Vector
Capital.
We have determined that Messrs. Ciporin, Cohen and Giffen
meet the standards of independence under applicable NASDAQ Stock
Market (NASDAQ) listing standards, including that
each member is free of any relationship that would interfere
with his or her individual exercise of independent judgment.
As a controlled company, we are not required to
comply (and we do not comply) with the requirement of the Nasdaq
Global Market to have a majority of our directors satisfy the
independence requirements of the Nasdaq Global Market. See
Item 10 Directors and Executive Officers
of the Registrant - Committees of the Board
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ITEM 14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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PricewaterhouseCoopers LLP has audited our consolidated balance
sheets as at November 30, 2007 and November 30, 2006
and the consolidated statements of operations, changes in
shareholders (deficit) equity and cash flows for the years
ended November 30, 2007 November 30, 2006 and
November 30, 2005 as stated in their report appearing
herein. PricewaterhouseCoopers LLP has been our auditor since
March 1998.
Audit
Fees
PricewaterhouseCoopers LLP billed us $2,011,957 in 2007 and
$1,114,285 in 2006 for professional services rendered for the
audit of our annual financial statements, the filing of our
registration statement on
Form F-1,
and the review of financial statements included in statutory and
regulatory filings.
Tax
Fees
PricewaterhouseCoopers LLP billed us $307,497 in 2007 and
$297,731 in 2006 for professional services rendered for tax
compliance, tax advice, and tax planning. The taxation advisory
services provided related primarily to payroll taxation matters,
taxation of stock options and preparation of corporate tax
returns.
All Other
Fees
PricewaterhouseCoopers LLP billed us $170,814 in 2007 and
$60,000 in 2006 for professional services rendered in connection
with statutory audits and other matters.
The Audit Committee has considered whether the provision of
these services is compatible with maintaining
PricewaterhouseCoopers LLPs independence and is of the
opinion that the provision of these services does not compromise
PricewaterhouseCoopers LLPs independence. The Audit
Committee, in accordance with the Audit Committees policy
for the engagement of our independent auditor to provide
non-audit services, must pre-approve all non-audit services
provided by PricewaterhouseCoopers LLP. The policy restricts the
type of non-audit services that the auditors may provide to our
subsidiaries and us. It includes a mechanism for the
consideration and pre-approval by the Audit Committee of all
services to be provided by the auditors as well as the
associated fees. In our fiscal year ended November 30,
2007, all non-audit services that were performed by the auditors
were pre-approved by the Audit Committee.
123
PART IV
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ITEM 15.
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EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
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(a) The following documents are filed as part of this
Report:
1. Financial Statements.
Incorporated by reference from the financial statements and
notes thereto that are set forth in Item 8 of this Annual
Report on
Form 10-K.
2. Financial Statement Schedules.
Schedule II Valuation and Qualifying Accounts
(b) The exhibits included in this Report or incorporated
herein by reference are as follows:
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Exhibit
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Number
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Exhibit
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2
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.1
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Stock Purchase Agreement dated May 1, 2006 by and among
Vector CC Holdings IV, SRL, WinZip Computing LLC, Cayman Ltd.
Holdco and Corel Corporation, incorporated by reference to
exhibit 2.2 of the Companys
Form 10-Q
filed with the Commission on May 5, 2005
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2
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.2
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Agreement and Plan of Merger, dated as of August 28, 2006,
among Corel Corporation, Iceland Acquisition Corporation and
InterVideo Inc., incorporated by reference to exhibit 2.1
to the Companys
Form 8-K
filed with the Commission on August 31, 2006
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3
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.1
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Certificate and Articles of Continuance, incorporated by
reference to exhibit 3.1 of the Companys Registration
Statement on
Form F-1
filed with the Commission on April 25, 2006
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3
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.2
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Articles of Amendment, incorporated by reference to
exhibit 3.2 of the Companys Registration Statement on
Form F-1
filed with the Commission on April 25, 2006
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3
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.3
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By-laws, incorporated by reference to exhibit 3.2 of the
Companys Registration Statement on
Form F-1
filed with the Commission on April 25, 2006
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4
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.1
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Form of Registration Rights Agreement by and among Corel
Corporation and the stockholders named therein, incorporated by
reference to exhibit 4.1 of the Companys Registration
Statement on
Form F-1
filed with the Commission on April 25, 2006
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4
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.2
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Form of Corel Corporation Share Certificate, incorporated by
reference to exhibit 4.2 of the Companys Registration
Statement on
Form F-1
filed with the Commission on April 25, 2006
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10
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.1
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Form of Credit Agreement by and among Corel Corporation, Corel
US Holdings, LLC, Morgan Stanley Senior Funding Inc.,
J.P. Morgan Securities Inc. and Deutsche Bank Securities
Inc. and a syndicate of financial institutions, incorporated by
reference to exhibit 2.2 of the Companys
Form 10-Q
filed with the Commission on May 5, 2005
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10
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.2
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First Amendment and Waiver to Credit Agreement dated as of
December 12, 2006, incorporated by reference to
exhibit 99.1 of the Companys
Form 8-K
filed with the Commission on December 14, 2006
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10
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.3
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Employment Agreement between Corel Corporation and David Dobson,
incorporated by reference to exhibit 10.2 of the
Companys Registration Statement on
Form F-1
filed with the Commission on April 25, 2006
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10
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.4
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Employment Agreement between Corel Corporation and Douglas
McCollam, incorporated by reference to exhibit 10.3 of the
Companys Registration Statement on
Form F-1
filed with the Commission on April 25, 2006
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10
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.5
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Employment Agreement between Corel Inc. and Randall Eisenbach,
incorporated by reference to exhibit 10.4 of the
Companys Registration Statement on
Form F-1
filed with the Commission on April 25, 2006
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10
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.6
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Employment Agreement between Corel Corporation and Amanda
Bedborough, incorporated by reference to exhibit 10.5 of
the Companys Registration Statement on
Form F-1
filed with the Commission on April 25, 2006
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10
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.7
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Employment Agreement between Corel Inc. and Patrick Morley,
incorporated by reference to exhibit 10.16 of the
registrants Annual Report on
Form 10-K
filed February 23, 2007
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124
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Exhibit
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Number
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Exhibit
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10
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.8
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2003 Share Option and Phantom Unit Plan, incorporated by
reference to exhibit 10.7 of the Companys
Registration Statement on
Form F-1
filed with the Commission on April 25, 2006
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10
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.9
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2006 Equity Incentive Plan, incorporated by reference to
exhibit 10.8 of the Companys Registration Statement
on
Form F-1
filed with the Commission on April 25, 2006
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10
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.10
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Form of Equity Award, incorporated by reference to
exhibit 10.9 of the Companys Registration Statement
on
Form F-1
filed with the Commission on April 25, 2006
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10
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.11
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InterVideo, Inc. 1998 Stock Plan, incorporated by reference to
exhibit 99.1 of the Companys Registration Statement
on
Form S-8
filed with the Commission on December 14, 2006
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10
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.12
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InterVideo, Inc. 2003 Stock Plan, incorporated by reference to
exhibit 99.2 of the Companys Registration Statement
on
Form S-8
filed with the Commission on December 14, 2006
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10
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.13
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Form of Officer and Director Indemnification Agreement,
incorporated by reference to exhibit 10.10 of the
Companys Registration Statement on
Form F-1
filed with the Commission on April 25, 2006
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10
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.14
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Advisory Services Expense Reimbursement Agreement, incorporated
by reference to exhibit 10.12 of the Companys
Registration Statement on
Form F-1
filed with the Commission on April 25, 2006
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21
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.1*
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Subsidiaries of Corel Corporation
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23
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.1*
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Consent of PricewaterhouseCoopers LLP
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24
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.1*
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Powers of Attorney, incorporated by reference to the signature
page to this Annual Report on
Form 10-K
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31
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.1*
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Rule 13a-14(a)/15d-14(a)
Certification of the Chief Executive Officer
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31
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.2*
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Rule 13a-14(a)/15d-14(a)
Certification of the Chief Financial Officer
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32
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.1*
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Section 1350 Certification of the Chief Executive Officer
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32
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.2*
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Section 1350 Certification of the Chief Financial Officer
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99
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.1*
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Schedule II Valuation and Qualifying Accounts
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125
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 on February 8, 2008.
COREL CORPORATION
David Dobson
Chief Executive Officer
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 and on
February 8, 2008.
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SIGNATURE
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TITLES
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/s/
DAVID
DOBSON
David
Dobson
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Chief Executive Officer and Director (principal executive
officer)
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/s/
DOUGLAS
McCOLLAM
Douglas
McCollam
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Chief Financial Officer (principal financial and accounting
officer)
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/s/
DANIEL
J. CIPORIN
Daniel
J. Ciporin
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Director
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/s/
STEVEN
COHEN
Steven
Cohen
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Director
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/s/
J.
IAN GIFFEN
J.
Ian Giffen
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Director
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/s/
AMISH
MEHTA
Amish
Mehta
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Director (authorized representative in the United States)
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/s/
ALEXANDER
SLUSKY
Alexander
Slusky
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Director
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126
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