UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the Quarterly Period Ended February 29, 2008
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For
the Transition Period From to
Commission File Number 000-20562
COREL CORPORATION
(Exact name of registrant as specified in its charter)
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Canada
(State or other jurisdiction of
incorporation or organization)
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98-0407194
(I.R.S. Employer
Identification No.)
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1600 Carling Avenue, Ottawa, Ontario
(Address of principal executive office)
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K1Z 8R7
(Zip Code)
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Registrants telephone number, including area code:
(613) 728-0826
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
þ
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):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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|
(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
þ
The number of shares outstanding of the registrants common stock as of March 20, 2008 was
25,499,275.
COREL CORPORATION
Form 10-Q
For the Quarter Ended February 29, 2008
INDEX
3
PART I. FINANCIAL INFORMATION
Item 1.
Unaudited Consolidated Financial Statements
Corel Corporation
Consolidated Balance Sheets
(In thousands of U.S. dollars or shares)
(Unaudited)
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|
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|
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February 29
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November 30
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Note
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2008
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2007
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|
Assets
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Current assets:
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Cash and cash equivalents
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$
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28,835
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$
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24,615
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Restricted cash
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161
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217
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Accounts receivable
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Trade, net of allowance for doubtful accounts of $1,470 and $1,366, respectively
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29,795
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41,092
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Other
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2,529
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118
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Inventory
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3
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858
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729
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Income taxes recoverable
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922
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1,470
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Prepaids and other current assets
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3,557
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3,276
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Total current assets
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66,657
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71,517
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Capital assets
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8,905
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8,971
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Intangible assets
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85,892
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92,010
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Goodwill
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88,643
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88,643
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Deferred financing and other long-term assets
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5,806
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5,696
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Total assets
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$
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255,903
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$
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266,837
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Liabilities and shareholders deficit
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Current liabilities:
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Accounts payable and accrued liabilities
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$
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62,387
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$
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67,290
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Income taxes payable
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4
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771
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723
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Deferred revenue
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13,980
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15,707
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Current portion of long-term debt
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5
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18,957
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2,249
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Current portion of obligations under capital lease
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799
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767
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|
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Total current liabilities
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96,894
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86,736
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Deferred revenue
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2,248
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|
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2,365
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Deferred income taxes
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4
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|
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19,520
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20,754
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Income taxes payable
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12,911
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11,693
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Accrued pension benefit obligation
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6
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1,120
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1,116
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Obligations under capital lease
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1,948
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2,114
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Long-term debt
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5
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138,960
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156,359
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Total liabilities
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273,601
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281,137
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Commitments and contingencies
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7
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Shareholders deficit
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Share capital:
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Common Shares (par value: none; authorized: unlimited; issued and outstanding: 25,491
and 25,457 shares, respectively)
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40,929
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40,652
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Additional paid-in capital
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6,838
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5,926
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Accumulated other comprehensive loss
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(4,326
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)
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(721
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)
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Deficit
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4
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|
(61,139
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)
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(60,157
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)
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Total shareholders deficit
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(17,698
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)
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(14,300
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)
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Total liabilities and shareholders deficit
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$
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255,903
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$
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266,837
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|
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See Accompanying Notes to the Consolidated Financial Statements
4
Consolidated Statements of Operations
(In thousands of U.S. dollars or shares, except per share data)
(Unaudited)
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Three months ended
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February 29
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February 28
|
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Note
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2008
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2007
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Revenues
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Product
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$
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59,362
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$
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47,304
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Maintenance and services
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6,182
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5,330
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Total revenues
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65,544
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52,634
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Cost of revenues
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|
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|
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Cost of product
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15,227
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8,497
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|
Cost of maintenance and services
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167
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|
198
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Amortization of intangible assets
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|
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|
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|
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6,414
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5,757
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Total cost of revenues
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21,808
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14,452
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Gross margin
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43,736
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38,182
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Operating expenses
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|
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Sales and marketing
|
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19,684
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17,275
|
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Research and development
|
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|
12,091
|
|
|
|
11,596
|
|
General and administration
|
|
|
|
|
|
|
8,811
|
|
|
|
8,662
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|
Acquired in-process research and development
|
|
|
|
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|
|
|
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7,831
|
|
InterVideo integration expense
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|
|
|
|
|
|
|
|
785
|
|
Restructuring
|
|
|
9
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total operating expenses
|
|
|
|
|
|
|
40,764
|
|
|
|
46,149
|
|
|
|
|
|
|
|
|
|
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|
|
Income (loss) from operations
|
|
|
|
|
|
|
2,972
|
|
|
|
(7,967
|
)
|
Other expenses (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
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|
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|
(120
|
)
|
|
|
(364
|
)
|
Interest expense
|
|
|
|
|
|
|
4,408
|
|
|
|
4,285
|
|
Amortization of deferred financing fees
|
|
|
|
|
|
|
270
|
|
|
|
265
|
|
Other non-operating income
|
|
|
|
|
|
|
(1,464
|
)
|
|
|
(632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
(122
|
)
|
|
|
(11,521
|
)
|
Income tax expense (recovery)
|
|
|
4
|
|
|
|
(92
|
)
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
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|
Net loss
|
|
|
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|
$
|
(30
|
)
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|
$
|
(11,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial gain recognized for defined benefit plan
|
|
|
|
|
|
|
22
|
|
|
|
|
|
Loss on interest rate swaps designated as hedges
|
|
|
2
|
|
|
|
(3,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of taxes
|
|
|
|
|
|
$
|
(3,605
|
)
|
|
$
|
(11,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
$
|
(3,635
|
)
|
|
$
|
(11,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
$
|
(0.00
|
)
|
|
$
|
(0.48
|
)
|
Fully diluted
|
|
|
|
|
|
$
|
(0.00
|
)
|
|
$
|
(0.48
|
)
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
25,463
|
|
|
|
24,627
|
|
Fully diluted
|
|
|
11
|
|
|
|
25,463
|
|
|
|
24,627
|
|
See Accompanying Notes to the Consolidated Financial Statements
5
COREL CORPORATION
Consolidated Statement of Cash Flows
(in thousands of U.S. dollars)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
Note
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
$
|
(30
|
)
|
|
$
|
(11,876
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
1,162
|
|
|
|
702
|
|
Amortization of deferred financing fees
|
|
|
|
|
|
|
270
|
|
|
|
265
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
6,414
|
|
|
|
5,757
|
|
Stock-based compensation
|
|
|
8
|
|
|
|
1,138
|
|
|
|
1,008
|
|
Provision for bad debts
|
|
|
|
|
|
|
104
|
|
|
|
16
|
|
Deferred income taxes
|
|
|
|
|
|
|
(1,234
|
)
|
|
|
(1,035
|
)
|
Loss on disposal of fixed assets
|
|
|
|
|
|
|
42
|
|
|
|
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
|
|
|
|
7,831
|
|
Unrealized loss on forward exchange contracts
|
|
|
|
|
|
|
|
|
|
|
35
|
|
Loss (gain) on interest rate swap recorded at fair value
|
|
|
|
|
|
|
755
|
|
|
|
(191
|
)
|
Gain on sale of investment
|
|
|
|
|
|
|
(822
|
)
|
|
|
|
|
Change in operating assets and liabilities
|
|
|
12
|
|
|
|
(1,392
|
)
|
|
|
15,928
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow provided by operating activities
|
|
|
|
|
|
|
6,407
|
|
|
|
18,440
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
56
|
|
|
|
|
|
Proceeds from operating line of credit
|
|
|
|
|
|
|
|
|
|
|
23,000
|
|
Proceeds from long-term debt
|
|
|
|
|
|
|
|
|
|
|
70,000
|
|
Repayments of long-term debt
|
|
|
|
|
|
|
(691
|
)
|
|
|
(681
|
)
|
Repayments of capital lease obligations
|
|
|
|
|
|
|
(134
|
)
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
|
|
|
|
51
|
|
|
|
1,302
|
|
Financing fees incurred
|
|
|
|
|
|
|
|
|
|
|
(1,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow provided by (used in) financing activities
|
|
|
|
|
|
|
(718
|
)
|
|
|
91,949
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of InterVideo Inc, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(120,368
|
)
|
Purchase of long lived assets
|
|
|
|
|
|
|
(1,434
|
)
|
|
|
(110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow used in investing activities
|
|
|
|
|
|
|
(1,434
|
)
|
|
|
(120,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
|
|
|
(35
|
)
|
|
|
(35
|
)
|
Increase (decrease) in cash and cash equivalents
|
|
|
|
|
|
|
4,220
|
|
|
|
(10,124
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
|
|
|
|
24,615
|
|
|
|
51,030
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
|
|
|
|
$
|
28,835
|
|
|
$
|
40,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Disclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net
|
|
|
|
|
|
$
|
3,438
|
|
|
$
|
4,676
|
|
Taxes paid, net
|
|
|
|
|
|
$
|
461
|
|
|
$
|
(162
|
)
|
See Accompanying Notes to the Consolidated Financial Statements
6
Corel Corporation
Notes to the Consolidated Financial Statements
(All amounts in thousands of U.S. dollars, unless otherwise stated)
(Unaudited)
1. Unaudited Interim Financial Information
The interim financial information is unaudited and includes all adjustments (consisting of
normal recurring adjustments) that are, in the opinion of management, necessary for a fair
presentation of our financial position at February 29, 2008 and our results of operations and cash
flows for the three months ended February 29, 2008 and February 28, 2007 in conformity with
accounting principles generally accepted in the United States of America (U.S. GAAP). The
consolidated balance sheet as of November 30, 2007 was derived from the audited consolidated
financial statements at that date, but, in accordance with the rules and regulations of the United
States Securities and Exchange Commission (SEC), does not include all of the information and
notes required by U.S. GAAP for complete financial statements. Operating results for the three
months ended February 29, 2008 are not necessarily indicative of results that may be expected for
the entire fiscal year. The financial statements should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this
Form 10-Q, and in conjunction with Managements Discussion and Analysis and the financial
statements and notes thereto included in the Companys Form 10-K for the period ending November 30,
2007 (File No. 000-20562).
2. Summary of Significant Accounting Policies
Basis of presentation
The consolidated financial statements have been presented in United States (US) dollars. The
Companys accounting polices are consistent with those presented in our annual consolidated
financial statements as at November 30, 2007, except as noted below. Certain prior period balances
relating to operating expenses and cost of product have been re-classified to conform to the
current years presentation.
Estimates and assumptions
The preparation of these financial statements is in conformity with US GAAP, which requires
management to make certain estimates that affect the reported amounts in the consolidated financial
statements, and the disclosures made in the accompanying notes. In addition to the significant
estimates presented in our annual consolidated financial statements as at November 30, 2007, we
also use assumptions to estimate the cash sweep payments required under our term loan agreement in
the next twelve months. Despite the Companys intention to establish accurate estimates and use
reasonable assumptions, actual results may differ from these estimates.
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.
The Company adopted FASB Interpretation 48,
Accounting for Uncertainty in Income Taxes
(FIN
48), as of December 1, 2007. FIN 48 provides guidance for how uncertain tax positions should be
recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the
evaluation of tax positions taken or expected to be taken in the course of preparing tax returns to
determine whether the tax positions have met a more-likely-than-not threshold of being sustained
by the applicable tax authority. Tax benefits related to tax positions not deemed to meet the
more-likely-than-not threshold are not permitted to be recognized in the financial statements.
Upon adoption of FIN 48, the Company has elected an accounting policy that continues to classify
accrued interest and penalties related to liabilities for income taxes in income tax expense.
Fair Value Measurements
In September 2006, FASB released FAS 157,
Fair Value Measurements
(FAS 157) 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 deferred
portion of the pronouncement.
As of December 1, 2007, the Company has adopted FAS 157 for the fair value measurement of
recurring items, in particular its interest rate swaps. There was no impact on the basis for which
the fair value of these items was determined.
The Company measures the fair value of its $134.5 million of interest rate swaps under a
Level 2 input as defined by FAS 157. The Company relies on a mark to market valuation prepared by
a broker based on observable interest rate yield curves. As of February 29, 2008, the accrued
mark to market loss on these swaps is $7.4 million. Of this amount $3.0 million has been recorded
in prior periods, including $1.8 million in other comprehensive income and $1.2 million in interest
expense. The loss recorded in the
7
three month period ended February 29, 2008 is $4.4 million, which represents the change in the
mark to market valuation on the swaps during the period. Of this amount, $755 has been recorded
in interest expense as it relates to swaps that are not designated as effective hedging instruments
under FAS 133, and $3.6 million has been included in other comprehensive income as it relates to
swaps that qualify as effective hedging instruments under FAS 133.
Accelerated Debt Payments
All cash sweep payments are classified on the balance sheet based on the Companys ability and
intent to refinance the obligation on a long-term basis, the existence of financing arrangements to
allow short-term obligations to be refinanced, and the remoteness of the acceleration due date.
The Company is not currently intending to refinance this obligation and intends to make the payment
as required. As such, the estimated cash sweep obligations due over the next 12 months have been
classified as current liabilities.
Recent Accounting Pronouncements
In December 2007, FASB released FAS 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 fiscal 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 FASB released FAS 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 fiscal 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 currently impact the Company as it has full
controlling interest of all of its subsidiaries.
3. Inventory
The components of inventory are as follows:
|
|
|
|
|
|
|
|
|
|
|
February
|
|
|
November
|
|
|
|
29, 2008
|
|
|
30, 2007
|
|
Product components
|
|
$
|
402
|
|
|
$
|
310
|
|
Finished goods
|
|
|
456
|
|
|
|
419
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
858
|
|
|
$
|
729
|
|
|
|
|
|
|
|
|
4. Income Taxes
For the three months ended February 29, 2008, the Company recorded a tax recovery of $92 on a
loss before income taxes of $122. The current tax provision was $1.1 million which relates mostly
to withholding taxes which are not creditable due to loss carryforwards and income taxes in foreign
jurisdictions. The current tax provision was offset by a deferred tax recovery of $1.2 million
which is related to the amortization of the intellectual property acquired with InterVideo which
has a tax basis of $nil.
For the three months ended February 28, 2007, the Company recorded a tax provision of $355 on
a loss before income taxes of $11.5 million. The current tax provision is $1.4 million and the
deferred tax recovery is $1.0 million. The deferred tax recovery is related to the amortization of
the intellectual property acquired with InterVideo which has a tax basis of $nil. Current taxes
consist of foreign withholding taxes plus taxes incurred by Corels foreign subsidiaries.
The Company adopted the provisions of FIN 48 on December 1, 2007. As a result of the adoption
of FIN 48, the Companys cumulative-effect adjustment resulted in an increase in non-current income
tax liabilities of $952 with a corresponding increase to the December 1, 2007 deficit balance of
$952. As of December 1, 2007 the Company had approximately $32.4 million of unrecognized tax
benefits which, if recognized, approximately $12.6 million would impact the effective tax rate.
At December 1, 2007, the Company has accrued approximately $269 for the potential payment of
interest and penalties.
Using the recognition and measurement criteria in FIN 48 during the quarter, the total amount
of unrecognized tax benefits and related interest increased by approximately $267.
It is reasonably possible that the amount of unrecognized tax benefits, inclusive of related
interest, will change in the next twelve months. The increase in amount of unrecognized tax
benefits relating to transfer pricing and various credits for the next 12 months is expected to be
approximately $527 due to the reasonable possibility that audits will be closed or the statute of
limitations will expire in various jurisdictions.
8
The Company or its subsidiaries file income tax returns in Canada, the United States, Taiwan
and various other foreign jurisdictions. These tax returns are subject to examination by local
taxing authorities provided the tax years remain open to audit under the relevant statute of
limitations. The tax years 2000 to 2007 remain open to examination by some of the major taxing
jurisdictions to which the Company is subject. Included below is a summary of the periods open to
examination by major tax jurisdiction.
|
|
|
Country
|
|
Tax Years Open for Examination
|
Canada
|
|
2000 through 2007
|
United States of America
|
|
2004 through 2007
|
Taiwan
|
|
2002 through 2007
|
Other
|
|
2006 through 2007
|
5. Long-Term Debt
On an annual
basis, the Company may be required
to make a cash sweep payment to fund its principal balance, based on excess cash flow as defined in
the senior credit facility agreement. The Company was not required to make a payment during the
first quarter of fiscal 2008. The first cash sweep payment is expected to be required in February
2009 and has been estimated to be approximately $17.0 million.
The future debt payments on long-term debt as of February 29, 2008, including the annual cash
sweep payment of $17.0 million as discussed above, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Interest
|
|
|
Total
|
|
2008, remainder of
|
|
|
1,558
|
|
|
|
10,153
|
|
|
|
11,711
|
|
2009
|
|
|
18,596
|
|
|
|
12,131
|
|
|
|
30,727
|
|
2010
|
|
|
1,596
|
|
|
|
11,232
|
|
|
|
12,828
|
|
2011
|
|
|
1,596
|
|
|
|
10,693
|
|
|
|
12,289
|
|
2012
|
|
|
134,571
|
|
|
|
3,988
|
|
|
|
138,559
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
157,917
|
|
|
$
|
48,197
|
|
|
$
|
206,114
|
|
|
|
|
|
|
|
|
|
|
|
6. Defined Pension Benefit Plan
|
|
|
|
|
Accrued pension benefit obligation as of December 1, 2007
|
|
$
|
1,116
|
|
Activity during three months ended February 29, 2008
|
|
|
|
|
Service cost
|
|
|
11
|
|
Interest cost
|
|
|
15
|
|
Expected return on plan assets
|
|
|
(8
|
)
|
Amortization of prior unrecognized gain
|
|
|
(22
|
)
|
Contributions
|
|
|
(29
|
)
|
Other effect of foreign exchange
|
|
|
37
|
|
|
|
|
|
Accrued pension benefit obligation as of February 29, 2008
|
|
$
|
1,120
|
|
|
|
|
|
7. Commitments and Contingencies
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. In the prior fiscal year,
the Company accrued for what it believed to be an appropriate settlement. This accrual was 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 February 29, 2008, we were a defendant in the patent infringement proceedings described
below:
Simon Systems (Simon) v. Corel Corporation.
Simon filed patent infringement action on
September 24, 2007, against the Company 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.
9
Victor Company of Japan, Ltd (JVC) v. Corel Corporation, InterVideo, Inc., Cyberlink Corp.
et al.
JVC filed a patent infringement action on January 15, 2008, against Corel and others in the
United States District Court for the Western District of Texas (Austin Division), alleging
infringement of U.S. Patents: 6,493,383 issued on December 10, 2002; 6,522,692 issued February 18,
2003; 6,542,543 issued April 1, 2003; 6,570,920 issued May 27, 2003; and 6,141,491 issued October
31, 2000. JVC alleges certain Corel video playback applications infringe the patents. The Company
believes it has meritorious defenses to JVCs claims and intends to defend the litigation
vigorously. The ultimate outcome of the litigation, however, is uncertain.
During the three month period ended February 29, 2008, we resolved the patent infringement
claim 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. 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. The Company filed its answer and counterclaims to Disc Links
complaint on July 13, 2007. In December 2007, a license agreement was reached with Disc Link, which
settled the dispute.
At the beginning of the third quarter of fiscal 2007, the Company 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 regarding this issue, 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 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 recorded income tax expense and may adversely affect 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 its financial condition or results of
operations. As of February 29, 2008, no amounts have been accrued.
8. Shareholders Equity
Stock option plans
The following table shows total stock-based compensation expense included in the consolidated
statement of operations:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Cost of products
|
|
$
|
10
|
|
|
$
|
9
|
|
Cost of maintenance and services
|
|
|
2
|
|
|
|
2
|
|
Sales and marketing
|
|
|
395
|
|
|
|
270
|
|
Research and development
|
|
|
207
|
|
|
|
195
|
|
General and administration
|
|
|
524
|
|
|
|
532
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
1,138
|
|
|
$
|
1,008
|
|
|
|
|
|
|
|
|
There have been no capitalized stock-based compensation costs.
The Company estimates the fair value of its options for financial accounting purposes using
the Black-Scholes Option Pricing model (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 Companys 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 historic 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 will use a blended rate of its own share price volatility and
the US Dow Jones Software and Computer Services Index. Up to the second quarter of fiscal 2007,
the Company did not use its own share price volatility in the blended rate computation, as the
Company was either a private company or had been a public company for less than
10
one year. Once Corel has been a public company for a period equal to the estimated life of
our stock options, the Company will no longer use a blended rate.
The Company determines the fair value of its restricted stock units based on the share price
of its stock on the date the units are granted. The restricted stock units have no characteristics
which would require a revaluation in subsequent periods.
The fair value, estimated using the Black-Scholes model, of all options granted during the
three months ended February 29, 2008 and February 28, 2007, was estimated as of the date of grant
using the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
February 29,
|
|
February 28,
|
|
|
2008
|
|
2007
|
Expected option life (years)
|
|
|
7
|
|
|
|
7
|
|
Volatility
|
|
|
31.33
|
%
|
|
|
34.20
|
%
|
Risk free interest rate
|
|
|
3.56
|
%
|
|
|
4.03
|
%
|
Forfeiture rate
|
|
|
16.50
|
%
|
|
|
16.82
|
%
|
Dividend yield
|
|
Nil
|
|
|
Nil
|
|
As of February 29, 2008, there was $13.6 million of unrecognized compensation cost related to
equity incentive plans, adjusted for estimated forfeitures, related to non-vested stock-based
payments granted to Corel employees. Total unrecognized compensation cost will be adjusted for
future changes in estimated forfeitures.
2006 Equity Incentive Plan
The 2006 Equity Incentive 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 stock-based awards (options) to the Companys
employees, consultants and directors, and employees, consultants and directors of the Companys
subsidiaries and affiliates. Corel has 4,335,223 remaining common shares authorized for issuance
under the 2006 Equity Incentive Plan.
Option activity under the 2006 Equity Incentive Plan for the three month period ended February
29, 2008 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Equity Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Grant Date Fair
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2007
|
|
|
2,714,465
|
|
|
$
|
12.60
|
|
|
$
|
4.66
|
|
Granted
|
|
|
120,141
|
|
|
|
8.96
|
|
|
|
3.05
|
|
Exercised
|
|
|
(1,334
|
)
|
|
|
9.83
|
|
|
|
5.09
|
|
Forfeited
|
|
|
(129,950
|
)
|
|
|
12.72
|
|
|
|
4.09
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 29, 2008
|
|
|
2,703,322
|
|
|
$
|
12.48
|
|
|
$
|
4.54
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at February 29, 2008
|
|
|
552,982
|
|
|
$
|
12.37
|
|
|
$
|
3.68
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining life of the outstanding options
|
|
8.67 Years
|
|
|
|
|
|
|
|
|
Total intrinsic value of exercisable options
|
|
$
|
429
|
|
|
|
|
|
|
|
|
|
Weighted average remaining life of the exercisable options
|
|
6.76 Years
|
|
|
|
|
|
|
|
|
During fiscal 2007 the Company issued 110,000 units of restricted stock to senior officers of
the Company under the 2006 Equity Incentive Plan. There are 30,000, 20,000, and 60,000 units which
will vest fully if the officers remain with the Company until June 1, 2008, April 24, 2011, and
October 15, 2011, respectively. These units began to vest on September 1, 2007 and will vest fully
by October 15, 2011. Restricted stock unit activity under the 2006 equity incentive plan, for the
three month period ended February 29, 2008 is presented below:
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
Grant Date Fair
|
|
|
|
Units
|
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period
|
|
|
102,500
|
|
|
|
$
|
13.26
|
|
Restricted stock units converted to common shares
|
|
Nil
|
|
|
|
|
n/a
|
Restricted stock units forfeited
|
|
Nil
|
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
102,500
|
|
|
|
$
|
13.26
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
7,500
|
|
|
|
$
|
14.06
|
|
|
|
|
|
|
|
|
|
Weighted average remaining life of the outstanding options
|
|
|
9.37
|
|
Years
|
|
|
|
Weighted average remaining life of the exercisable restricted
stock units
|
|
|
8.90
|
|
Years
|
|
|
|
Total intrinsic value of the exercisable restricted stock units
|
|
$
|
74
|
|
|
|
|
|
|
2003 Share Option and Phantom Share Unit Plan
In the three months ended February 29, 2008, no options were granted as this plan is no longer
eligible for grant distribution. Unit activity for the three month period ended February 29, 2008
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2003 Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Weighted
|
|
Grant Date
|
|
|
|
|
|
|
|
|
Average
|
|
Fair
|
|
|
Options
|
|
|
|
|
Exercise Price
|
|
Value
|
Balance, November 30, 2007
|
|
|
813,940
|
|
|
|
|
$
|
2.31
|
|
|
$
|
5.86
|
|
Exercised
|
|
|
(32,758
|
)
|
|
|
|
|
1.17
|
|
|
|
6.70
|
|
Forfeited
|
|
|
(6,749
|
)
|
|
|
|
|
11.71
|
|
|
|
6.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 29, 2008
|
|
|
774,433
|
|
|
|
|
$
|
2.28
|
|
|
$
|
5.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at February 29, 2008
|
|
|
638,732
|
|
|
|
|
$
|
1.85
|
|
|
$
|
5.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining life of the outstanding options
|
|
|
6.80
|
|
Years
|
|
|
|
|
|
|
|
Total intrinsic value of exercisable options
|
|
$
|
5,251
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining life of the exercisable options
|
|
|
6.68
|
|
Years
|
|
|
|
|
|
|
|
9. Restructuring Charges
InterVideo Acquisition Related Restructuring Charges
In conjunction with the acquisition of InterVideo, management initiated a restructuring plan
(InterVideo Plan) and recorded restructuring charges in fiscal 2007 related to this plan. The
InterVideo Plan included the reduction of headcount across all functions, the closure of certain
facilities and the termination of certain redundant operational contracts. The total restructuring
costs were estimated at $3.5 million, including $2.1 million for termination benefits and $1.4
million for closing redundant facilities.
A summary of restructuring activities related to the acquisition of InterVideo that are
accrued as of February 29, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as at
|
|
|
|
|
|
|
Balance as at
|
|
|
|
November 30, 2007
|
|
|
Cash Payments
|
|
|
February 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination benefits
|
|
$
|
19
|
|
|
$
|
19
|
|
|
$
|
|
|
Cost of closing redundant facilities
|
|
|
681
|
|
|
|
54
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
700
|
|
|
$
|
73
|
|
|
$
|
627
|
|
|
|
|
|
|
|
|
|
|
|
12
Any further changes in estimates related to the InterVideo Plan will result in a charge to
earnings.
Digital Media Restructuring
In the fourth quarter of fiscal 2007, management adopted a restructuring plan (Digital Media
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 resulted in the planned closure of the Companys Minneapolis location in fiscal 2008 as
well as the termination of certain individuals. The total costs that will arise from the Digital
Media Plan are estimated to be $1,924. To date the company has expensed $1,625. The remaining
expense of $299 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 February 29 2008, all of the headcount reductions have been identified and the effected
employees have been 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.
A summary of our restructuring activities, that are accrued as of February 29, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
Change in
|
|
|
|
|
|
|
Balance as
|
|
|
|
Balance as at
|
|
|
Charges in Q1
|
|
|
Estimates
|
|
|
Cash Payments
|
|
|
at February
|
|
|
|
November 30, 2007
|
|
|
2008
|
|
|
in Q1 2008
|
|
|
in Q1 2008
|
|
|
29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination benefits
|
|
$
|
1,184
|
|
|
$
|
464
|
|
|
|
($256
|
)
|
|
$
|
632
|
|
|
$
|
760
|
|
Cost of closing redundant facilities
|
|
|
263
|
|
|
Nil
|
|
|
|
(30
|
)
|
|
Nil
|
|
|
|
233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,447
|
|
|
$
|
464
|
|
|
|
($286
|
)
|
|
$
|
632
|
|
|
$
|
993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Interest Rate Swaps
At November 30, 2007, the Company had hedged, through an interest rate swap, the interest rate
risk associated with changes in future interest payments due to changes in the one month LIBOR rate
on the first $50.0 million of its floating rate debt. 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 interest rate swap expires in May 2011, which is concurrent with the payments up to that date
on the senior credit facility. The objective of the swap entered into on December 4, 2007, is to
hedge the interest rate risk associated with changes in future interest payments due to changes in
the one-month LIBOR rate on the next $40.0 milllion of existing floating rate debt. The cash flow
from this additional swap is expected to offset any changes in the future interest payments due to
changes in the one-month LIBOR rate on this next $40.0 million of existing floating rate debt. 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,
Financial Accounting Standards Board (FASB) 133, Accounting for Derivative Instruments and
Hedging Activities. 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 consolidated statement of operations under other comprehensive income.
As of February 29, 2008, the Company has interest rate swaps with notional principal amounts
of $90.0 million designated as hedging instruments and an additional $44.5 million that have not
been designated as hedging instruments, which in total,
convert an aggregate notional principal amount of $134.5 million (or approximately 85.4%) of
its interest-bearing debt from floating rate interest payments under its term loan facility to
fixed interest rate obligations.
11. Loss per Share
The impact of the exercise of Corel options is anti-dilutive for the three months ending
February 29, 2008 and February 28, 2007. Potentially dilutive instruments for the three months
ended February 29, 2008 and February 28, 2007 represent the impact of the weighted average number
of common shares subject to options outstanding of 3,641,659 and 3,354,667, respectively.
13
12. Change in Operating Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
Accounts receivable
|
|
$
|
9,604
|
|
|
$
|
15,658
|
|
Inventory
|
|
|
(129
|
)
|
|
|
740
|
|
Prepaids and other current assets
|
|
|
(661
|
)
|
|
|
290
|
|
Accounts payable and accrued liabilities
|
|
|
(9,212
|
)
|
|
|
(872
|
)
|
Accrued interest
|
|
|
(12
|
)
|
|
|
22
|
|
Due to related parties
|
|
|
|
|
|
|
(167
|
)
|
Taxes payable
|
|
|
862
|
|
|
|
1,601
|
|
Deferred revenue
|
|
|
(1,844
|
)
|
|
|
(1,344
|
)
|
|
|
|
|
|
|
|
Total change in operating assets and liabilities
|
|
$
|
(1,392
|
)
|
|
$
|
15,928
|
|
|
|
|
|
|
|
|
13. Segment Reporting
The Company has determined that it operates in one business operating and reportable segment,
the packaged software segment. The Company does manage revenue based on two product line
categories; Graphics and Productivity, and Digital Media.
As a result of the integration with InterVideo, sales in Japan have become more significant
within Corel. Accordingly, the Company has broken down sales once recorded as Asia Pacific, into
Japan and Other, beginning the first quarter of fiscal 2008. For comparability purposes, the prior
period results have been re-classified to reflect this change.
Revenues by product and region are disclosed in the following table:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
By product category:
|
|
|
|
|
|
|
|
|
Graphics and Productivity
|
|
$
|
36,947
|
|
|
$
|
34,064
|
|
Digital Media
|
|
|
28,597
|
|
|
|
18,570
|
|
|
|
|
|
|
|
|
|
|
$
|
65,544
|
|
|
$
|
52,634
|
|
|
|
|
|
|
|
|
By geographic region:
|
|
|
|
|
|
|
|
|
Americas
|
|
|
|
|
|
|
|
|
Canada
|
|
$
|
1,908
|
|
|
$
|
570
|
|
United States
|
|
|
28,426
|
|
|
|
25,435
|
|
Other
|
|
|
1,358
|
|
|
|
1,188
|
|
Europe, Middle East and Africa
|
|
|
20,219
|
|
|
|
17,658
|
|
Asia Pacific
|
|
|
|
|
|
|
|
|
Japan
|
|
|
10,246
|
|
|
|
4,472
|
|
Other
|
|
|
3,388
|
|
|
|
3,359
|
|
|
|
|
|
|
|
|
|
|
$
|
65,544
|
|
|
$
|
52,634
|
|
|
|
|
|
|
|
|
14. Subsequent Event
On March 28, 2008 the Company received an unsolicited proposal from Corel Holdings, L.P.
(which is controlled by an affiliate of Vector Capital Corporation) (CHLP), the holder of
approximately 69% of the Companys outstanding common shares. CHLP is proposing to make an offer to
acquire all of Companys outstanding common shares not currently held by CHLP at a price of
US$11.00 cash per share. CHLP has indicated that any such offer would be conditional upon, among
other things, satisfactory confirmatory due diligence and the Companys existing credit facility
remaining in place following the consummation of any transaction.
The Board of Directors of the Company has formed a Special Committee of independent members of
the Board to assist it in evaluating and responding to the CHLP proposal and other related
strategic considerations.
At this time, any impact on our equity compensation plans, if any, is unknown.
14
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
Certain statements made in this Managements Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in this filing (including in the section entitled Risk
Factors constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and applicable Canadian securities laws. Forward-looking statements
are based on estimates and assumptions made by Corel in light of its experience of historical
trends, current conditions and expected future developments, as well as other factors that we
believe are appropriate in the circumstances. However, many factors could cause our actual results,
performance or achievements to differ materially from those expressed or implied by such
forward-looking statements, including, without limitation, the following factors:
|
|
we face competition from companies with significant competitive
advantages, such as significantly greater market share and resources;
|
|
|
|
many of our core products have been marketed for many years and the
packaged software market in North America and Europe is relatively
mature and characterized by modest growth, accordingly, we must
develop new products, successfully complete acquisitions, penetrate
new markets or increase penetration of our installed base to achieve
revenue growth;
|
|
|
|
as an increasing number of companies with advertising or
subscriber-fee business models seek to offer competitive software
products over the Internet at little or no cost to consumers, it may
become more challenging for us to maintain our historical pricing
policies and operating margins;
|
|
|
|
we rely on relationships with a small number of strategic partners and
these relationships can be modified or effectively terminated at any
time without our approval;
|
|
|
|
we face potential claims from third parties who may hold patent and
other intellectual property rights which purport to cover various
aspects of our products and from certain of our customers who may be
entitled to indemnification from us in respect of potential claims
they may receive from third parties related to their use or
distribution of our products;
|
|
|
|
our acquisition strategy may fail for various reasons, including our
inability to find suitable acquisition candidates, complete
acquisitions on acceptable terms or effectively integrate acquired
businesses;
|
|
|
|
we have significantly higher levels of indebtedness following the
InterVideo acquisition, including term loan debt of $157.6 million as
of February 29, 2008, which could have important consequences for our
business such as limiting our ability to make further significant
acquisitions;
|
|
|
|
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; and
|
|
|
|
the proliferation of 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.
|
15
These and other important factors are described in greater detail in the section entitled
Risk Factors in our annual report on Form 10-K dated February 8, 2008 filed with the Securities
and Exchange Commission and with Canadian securities regulators. A copy of the 10-K can be obtained
on our website (
http://www.corel.com
), or at
www.sec.gov
The words expect, estimate, project, intend, believe, plan and similar expressions
are intended to identify forward-looking statements. Forward-looking statements speak only as of
the date of the document in which they are made. We disclaim any obligation or undertaking to
provide any updates or revisions to any forward-looking statement to reflect any change in our
expectations or any change in events, conditions or circumstances on which the forward-looking
statement is based.
The following discussion and analysis should be read in conjunction with our unaudited
consolidated financial statements and accompanying notes for the three month period ended February
29, 2008. All amounts are in United States dollars, except as otherwise noted.
BACKGROUND
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 Original Equipment Manufacturers (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,
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. First
developed in 1982 and marketed by Corel since 1986,
WordPerfect Office Suite,
is the leading
Microsoft-alternative productivity software and features Microsoft-compatible word processing,
spreadsheet and presentation applications.
Digital Media
Our Digital Media products are classified as Digital Imaging and Digital Video. Our Digital
Imaging products include
Corel Paint Shop Pro Photo, Corel Media One,
and
PhotoImpact
, and our
Digital Video products include
WinDVD, VideoStudio, DVD Movie Factory,
and
DVD Copy
.
Corel Paint
Shop Pro Photo
is a digital image editing and management application 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.
Photo Impact
combines easy-to-use photo editing,
photo projects and digital art.
WinDVD,
is the worlds leading software for DVD, video and Blu-ray
Disc playback on PCa with over 200 millions units shipped worldwide.
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 image
editing software.
Digital Video products are comprised of the products acquired in the purchase of InterVideo
with the exception of
PhotoImpact,
which is a Digital Imaging product.
16
OVERVIEW OF THE QUARTER
Operating Performance
Revenue was $65.5 million, up 25% year over year. The revenue growth of $12.9 million is
largely as a result of the acquisition of InterVideo. The first quarter of fiscal 2007 was
impacted by our inability to recognize approximately $11.8 million of InterVideo OEM revenue
because of acquisition accounting standards. This revenue increase is mostly related to our
Digital Video products. Within our Digital Media group, our Digital Video products revenue
increased by $10.7 million or 113%, and our Digital Imaging products decreased by $0.7 million or
8%. Within the Digital Imaging portfolio of products we had growth in
Paint Shop Pro,
which was
offset by lower revenue from
Corel Photo Album.
Our Graphics and Productivity revenue increased by
$2.9 million or 8%, led by growth in our
WinZip, iGrafx, CorelDRAW
and
Corel Painter
products.
This revenue growth was offset by lower revenues from our
Word Perfect
business.
Our net loss for the first quarter of fiscal 2008 was $30,000, or $0.00 per share, compared to
a net loss of $11.9 million, or $0.48 per share in the first quarter of 2007. Non-GAAP Adjusted
EBITDA was $13.3 million and cash flow from operations was $6.4 million in the quarter compared to
non-GAAP adjusted EBITDA of $8.7 million and cash flow from operations of $18.4 in the first
quarter of 2007.
RESULTS OF OPERATIONS
Three Months ended February 29, 2008 and February 28, 2007
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
February 29 and 28,
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Product
|
|
$
|
59,362
|
|
|
$
|
47,304
|
|
|
|
25.5
|
%
|
As a percent of revenue
|
|
|
90.6
|
%
|
|
|
89.9
|
%
|
|
|
|
|
Maintenance and services
|
|
|
6,182
|
|
|
|
5,330
|
|
|
|
16.0
|
%
|
As a percent of revenue
|
|
|
9.4
|
%
|
|
|
10.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65,544
|
|
|
$
|
52,634
|
|
|
|
24.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for the three month period ended February 29, 2008 increased by 24.5% to $65.5
million from $52.6 million for the three months ended February 28, 2007. Of this increase, $10.0
million was attributable to our Digital Media products. This increase is largely due to the
inability to record revenue of approximately $11.8 million on acquired Digital Media products in
the first quarter of fiscal 2007, offset by a decline in our
Corel Photo Album
revenues of $1.6
million. Our Graphics and Productivity revenue increased by $2.9 million or 8.5%, led by growth in
our
WinZip, iGrafx, CorelDRAW
and
Painter
products. This revenue growth was offset by a decline
of $0.9 million in our
WordPerfect
business.
Product revenues for the three months ended February 29, 2008 increased by 25.5% to $59.4
million from $47.3 million for the three months ended February 28, 2007. The largest driver of
this increase was the comparable OEM revenue that was not recorded in fiscal 2007. Excluding this
factor, the increase in product revenues was driven by the continued growth of our
Graphics
and
Productivity
products with increases in product revenue from our
CorelDRAW, WinZip, iGrafx,
and
Corel Painter
, partially offset by lower revenues from our
WordPerfect
products. Our Digital Media
product revenue decreased due to lower revenues from
Corel Photo Album
and some of our Digital
Video products. This was partially offset by an increase in
Paint Shop Pro Photo
.
Maintenance and services revenues increased by 16.0% to $6.2 million for the three month
period ended February 29, 2008. This increase is largely attributable to increased sales of
WinZips maintenance program.
17
Total Revenues by Product Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
February 29 and 28,
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Graphics and Productivity
|
|
$
|
36,947
|
|
|
$
|
34,064
|
|
|
|
8.5
|
%
|
As a percent of revenue
|
|
|
56.4
|
%
|
|
|
64.7
|
%
|
|
|
|
|
Digital Media
|
|
|
28,597
|
|
|
|
18,570
|
|
|
|
54.0
|
%
|
As a percent of revenue
|
|
|
43.6
|
%
|
|
|
35.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65,544
|
|
|
$
|
52,634
|
|
|
|
24.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Our products generally have release cycles 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. In
the past we have experienced declines in product revenues during the second half of product release
cycles, with the sharpest declines occurring toward the end of the release cycle. The fiscal
quarter of the most recent and prior 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
|
|
|
9
|
|
|
|
Q1 2008
|
|
|
|
Q4 2006
|
|
VideoStudio
|
|
|
11
|
|
|
|
Q2 2007
|
|
|
|
Q2 2006
|
|
DVD Movie Factory
|
|
|
6
|
|
|
|
Q1 2007
|
|
|
|
Q1 2006
|
|
DVD Copy
|
|
|
6
|
|
|
|
Q1 2008
|
|
|
|
Q3 2006
|
|
PhotoImpact
|
|
|
13
|
|
|
|
Q1 2008
|
|
|
|
Q3 2006
|
|
Graphics and Productivity revenues increased by $2.9 million or 8.5% to $36.9 million in the
first quarter of fiscal 2008 from $34.1 million in the first quarter of fiscal 2007. This was
driven largely by increased revenue from
CorelDRAW, WinZip, iGrafx,
and
Corel Painter
products,
which was partially offset by lower revenues from
WordPerfect
. Revenue growth from
CorelDRAW
is
largely attributable to our EMEA market, where we have increased sales from the launch of
CorelDRAW
Graphics Suite X4
in February 2008. 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 in
iGrafx
revenues is
attributable to additional marketing and promotional initiatives undertaken in the current quarter.
The increase in
Corel Painter
is mostly driven by new OEM arrangements in Japan. The decline in
WordPerfect
revenues is due primarily to the decrease in point of sale royalties from our OEM
partners and a decrease in enterprise license revenue as it nears the end of its current release
cycle.
18
Digital Media revenues increased by $10.0 million or 54.0% to $28.6 million in the first
quarter of fiscal 2008 from $18.6 million in the first quarter of fiscal 2007. The revenue growth
is largely attributable to the $11.8 million of OEM revenue, largely related to our Digital Video
products, which we were unable to recognize in the first quarter of fiscal 2007, due to accounting
requirements associated with the acquisition of InterVideo. Excluding this factor, our Digital
Media revenue declined by $1.8 million or 5.8% due primarily to lower revenue from
Corel Photo
Album
.
Photo Album
revenue declined by $1.6 million or 61.4%, due to changes in an agreement with
a significant OEM partner. The remainder of our Digital Media portfolio sales remained flat with
the prior year. With gains in retail following the launch of
Paint Shop Pro Photo X2, Paint Shop
Pro Photo
revenues were up reversing the trend from prior quarters. These gains were offset by
minor declines across some of our Digital Video products.
Total Revenues by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
Americas
|
|
$
|
31,692
|
|
|
$
|
27,193
|
|
|
|
16.5
|
%
|
As a percent of revenue
|
|
|
48.4
|
%
|
|
|
51.7
|
%
|
|
|
|
|
Europe, Middle East, Africa (EMEA)
|
|
|
20,219
|
|
|
|
17,658
|
|
|
|
14.5
|
%
|
As a percent of revenue
|
|
|
30.8
|
%
|
|
|
33.5
|
%
|
|
|
|
|
Asia Pacific
|
|
|
13,634
|
|
|
|
7,783
|
|
|
|
75.2
|
%
|
As a percent of revenue
|
|
|
20.8
|
%
|
|
|
14.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65,544
|
|
|
$
|
52,634
|
|
|
|
24.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Revenues in the Americas increased by $4.5 million or 16.5% in the first quarter of fiscal
2008 to $31.7 million compared to $27.2 million in the first quarter of fiscal 2007. The increase
was principally driven by the revenue increases in Digital Video products of $6.1 million
associated with the inability to recognize certain OEM revenue in the first quarter of fiscal 2007.
Our remaining products had an overall decline in revenues, due primarily to lower revenues from
Corel Photo Album
and
WordPerfect.
These were offset by gains in
WinZip
and
iGrafx.
Revenues in EMEA increased by $2.6 million or 14.5% to $20.2 million in the first quarter of
fiscal 2008 from $17.7 million in the first quarter of fiscal 2007. The revenue growth in this
region is driven by increased revenue from
CorelDRAW.
In February 2008 we launched
CorelDRAW
Graphics Suite X4,
which along with the upward trend prior to the launch, further drove the
increase in revenue.
Asia Pacific revenues increased by $5.9 million or 75.2% to $13.6 million in the first quarter
of fiscal 2008. The majority of this increase relates to the $5.4 million gain in revenue from
Digital Video products in the period, due to inability to recognize certain OEM revenue in the
first quarter of fiscal 2007. The remaining growth in revenues is mostly from
Corel Painter
and
Paint Shop Pro.
The increases in
Corel Painter
are attributable to a significant OEM deal entered
into in Japan. The increase in revenues from
Paint Shop Pro
is driven by the launch of
X2
in the
fourth quarter of fiscal 2007.
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
|
$
|
15,227
|
|
|
$
|
8,497
|
|
|
|
79.2
|
%
|
As a percent of product revenue
|
|
|
25.7
|
%
|
|
|
18.0
|
%
|
|
|
|
|
Cost of maintenance and services
|
|
|
167
|
|
|
|
198
|
|
|
|
(15.7
|
)%
|
As a percent of maintenance and service revenue
|
|
|
2.7
|
%
|
|
|
3.7
|
%
|
|
|
|
|
Amortization of intangible assets
|
|
|
6,414
|
|
|
|
5,757
|
|
|
|
11.4
|
%
|
As a percent of revenue
|
|
|
9.8
|
%
|
|
|
10.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,808
|
|
|
$
|
14,452
|
|
|
|
50.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
19
Cost of Product Revenues
. Cost of product revenues increased by 79.2% to $15.2 million in the
first quarter of fiscal 2008 from $8.5 million in the first quarter of fiscal 2007. As a percentage
of product revenues, cost of product revenues increased to 25.6% for the three months ended
February 29, 2008 from 18.0% in the three month period ended February 28, 2007. The increase in the
period is largely attributable to the change in our product mix caused by the increased sales of
Digital Video products in this period, as a percentage of total sales, compared to the prior year.
Digital Video carries a larger cost of product, both historically and in this quarter, resulting in
a lower gross margin on Digital Video products compared to Graphics and Productivity products.
Cost of Maintenance and Services Revenues
. Cost of maintenance and services revenues decreased
to 2.7% of related revenues in the first three months of fiscal 2008 from 3.7% in the first three
months of fiscal 2007, and is primarily attributable to WinZips higher maintenance revenues and
the limited incremental costs to provide such revenue.
Amortization of Intangible Assets
. Amortization of intangible assets increased by $0.7 million
to $6.4 million in the three months ended February 29, 2008, from $5.8 million in the three months
ended February 28, 2007. The increase is due to the fact that intangibles acquired in the
purchase of InterVideo in fiscal 2007 have been amortized for the entire three month period ending
February 29, 2008. In fiscal 2007, no amortization was recorded from the stub period of December
1, 2006 through the date of acquisition of December 12, 2006.
Operating Expenses
During the first quarter of fiscal 2008, we have re-classified some of our operating expenses
related to our Information Technology group, so that costs of certain employees were better aligned
with the functions they performed. As a result, for the three months ended February 28, 2007 we
have reduced our general and administrative costs by $433,000, increased our sales marketing costs
by $171,000, increased our research and development costs by $252,000, and increased our cost of
products sold by $10,000.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
19,684
|
|
|
$
|
17,275
|
|
|
|
13.9
|
%
|
As a percent of revenue
|
|
|
30.0
|
%
|
|
|
32.8
|
%
|
|
|
|
|
Research and development
|
|
|
12,091
|
|
|
|
11,596
|
|
|
|
4.3
|
%
|
As a percent of revenue
|
|
|
18.4
|
%
|
|
|
22.0
|
%
|
|
|
|
|
General and administration
|
|
|
8,811
|
|
|
|
8,662
|
|
|
|
1.7
|
%
|
As a percent of revenue
|
|
|
13.4
|
%
|
|
|
16.5
|
%
|
|
|
|
|
Acquired in-process research and development
|
|
|
|
|
|
|
7,831
|
|
|
|
n/a
|
|
As a percent of revenue
|
|
|
0.0
|
%
|
|
|
14.9
|
%
|
|
|
|
|
Restructuring
|
|
|
178
|
|
|
|
|
|
|
|
n/a
|
|
As a percent of revenue
|
|
|
0.3
|
%
|
|
|
0.0
|
%
|
|
|
|
|
InterVideo integration expense
|
|
|
|
|
|
|
785
|
|
|
|
n/a
|
|
As a percent of revenue
|
|
|
0.0
|
%
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,764
|
|
|
$
|
46,149
|
|
|
|
(11.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing
. Sales and marketing expenses increased by 13.9% to $19.7 million in the
first quarter of fiscal 2008. For the first three months of fiscal 2008, sales and marketing
expenses decreased as a percentage of revenue to 30.0%, as compared to 32.8% for the prior period.
The increase in sales and marketing expenses is as a result of additional headcount in our sales
and marketing force. We continue to expand our marketing efforts in non-traditional international
markets as well as in EMEA. The Company has also focused on further marketing of our Digital
Media products.
Research and Development
. Research and development expenses increased by 4.3% to $12.1 million
in the three months ended February 29, 2008. As a percentage of total revenues, research and
development expenses decreased to 18.4% from 22.0%. The increase in expenditures is related to the
impact of our Digital Video research and development personnel being with the Company for the
entire first quarter of fiscal 2008, and increased payroll costs related to our Canadian staff
resulting from the significant strengthening of the Canadian Dollar versus the US Dollar from the
same period last year. We have reduced our global research and development headcount over the
prior period as part of our integration activities undertaken in fiscal 2007.
20
General and Administration
. General and administration expenses increased 1.7% to $8.8 million
in the first quarter of fiscal 2008 from $8.7 million in the first quarter of fiscal 2007, As a
percentage of total revenues, general and administration expenses decreased to 13.4% in the quarter
ended February 29, 2008. The increase in general and administrative expenses is largely driven by
the increased payroll costs for our Canadian based employees, resulting from the strengthening of
the Canadian dollar versus the US dollar.
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.
InterVideo Integration Expense
: Our integration activities related to the InterVideo
acquisition ceased at the end of fiscal 2007, and hence there are no integration costs in the three
months ending February 29, 2008. In the first quarter of fiscal 2007, integration costs relating
to the acquisition of InterVideo totaling $785,000 were recorded. These costs related to the
integration of the InterVideo business into our existing operations, including travel costs,
retention bonuses and other incremental costs for Corel employees who worked on the integration
planning process.
Restructuring Expense:
We recorded $178,000 of restructuring expenses during the three months
ended February 29, 2008, related to a restructuring plan adopted in the fourth quarter of fiscal
2007 to centralize much of the Companys Digital Media operations in Greater China and Fremont,
California. Additionally, further changes were 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 expense recorded in the first quarter
of fiscal 2008 relates to individuals who were terminated sixty days or greater after the November
2007 announcement date of this restructuring plan. We expect to have some cost savings in future
periods as a result of this centralization of staff and facilities.
Non-Operating (Income) Expense
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
4,288
|
|
|
|
3,921
|
|
Amortization of deferred financing fees
|
|
|
270
|
|
|
|
265
|
|
Other non-operating income
|
|
|
(1,464
|
)
|
|
|
(632
|
)
|
|
|
|
|
|
|
|
Total non-operating expenses
|
|
$
|
3,094
|
|
|
$
|
3,554
|
|
|
|
|
|
|
|
|
Interest Expense
,
Net.
Net interest expense increased by $367,000 in the first quarter of
fiscal 2008 from $3.9 million in the first quarter of fiscal 2007. The increase is due to less
interest income related to short-term investments compared to fiscal 2007, and additional interest
expense related to capital lease obligations, which we did not have in the first quarter of fiscal
2007.
Amortization of Deferred Financing Fees
. Amortization of deferred financing fees of $270,000
in the first quarter of fiscal 2008 was consistent with the first quarter of fiscal 2007, as there
have been no new credit facilities during the period.
Other Non-Operating Income:
Non-operating income increased by $832,000 to $1.5 million in the
first quarter of fiscal 2008 from $632,000 in the first quarter of fiscal 2007. The increase is
primarily related to the gain on sale of a long-term income investment. The remaining balance,
which is generally comprised of favorable foreign currency exchange gains relating mostly to the
weakening of the US Dollar versus the Canadian Dollar and the Euro.
Income Tax Expense (Recovery)
For the three months ended February 29, 2008, we recorded a tax recovery of $92,000 on a loss
before income taxes of $122,000. The current tax provision is $1.1 million and the deferred tax
recovery is $1.2 million. The deferred tax recovery is related to the reversal of the deferred tax
liability of $25.8 million in respect of the intellectual property acquired as part of the
InterVideo acquisition as the intellectual property is amortized. The current tax provision relates
mostly to withholding tax which is not creditable due to loss carryforwards and income taxes in
foreign jurisdictions.
For the three months ended February 28, 2007, we recorded a tax provision of $355,000 on a
loss before income taxes of $11.5 million. The current tax provision was $1.4 million and the
deferred tax recovery was $1.0 million. The deferred tax recovery was
21
related to the reversal of the deferred tax liability of $25.8 million in respect of the
intellectual property acquired as part of the InterVideo acquisition. Current taxes consist of
foreign withholding taxes plus taxes incurred by Corels foreign subsidiaries.
FINANCIAL CONDITION
Working Capital
Our working capital deficiency at February 29, 2008 was $30.2 million, an increase of $15.0
million from the November 30, 2007 working capital deficiency of $15.2 million. The increased
working capital deficiency is primarily due to the additional current liability of $17.0 million
related to our estimated cash sweep payment to fund the principal balance under our term loan.
The remaining decrease in our working capital deficiency relates to collection of accounts
receivable offset by payments of year-end accrued liabilities. The Company expects to continue
generating positive cash flows from operations, which we expect will significantly reduce the
working capital deficiency over the next 12 months. In February 2009, the Company is required to
make a cash sweep payment against its term loan payable based on excess cash flow, as defined in
the Companys credit facility agreement, that is estimated to be approximately $17.0 million. We
expect to use the cash flows from operations to meet this obligation and the cash demands of
approximately $1.0 million related to our current restructuring activities.
Liquidity and Capital Resources
As of February 29, 2008, our principal sources of liquidity are cash and cash equivalents of
$28.8 million and trade accounts receivable of $29.8 million. As a part of our senior credit
facility, we also entered into a five-year $75.0 million revolving line of credit facility, of
which $75.0 million is unused as at February 29, 2008.
Cash provided by operations decreased by $12.1 million to $6.4 million for the three months
ended February 28, 2008 compared to $18.4 million for the three months ended February 28, 2007. The
decrease is due to the receipt of cash for royalty revenues in advance of our related obligation in
the first quarter of fiscal 2007.
Cash used in financing activities was $0.7 million for the three months ended February 29,
2008 compared to the cash provided by financing activities of $91.9 million for the three month
period ended February 28, 2007. In the first quarter of fiscal 2008, we made $0.8 million of
payments against our long-term debt and our capital lease obligations. In the first quarter of
fiscal 2007, we obtained a $70.0 million term loan and used $23.0 million of our operating line of
credit to finance our acquisition of InterVideo. We have since repaid the entire balance on the
line of credit.
Cash used in investing activities was $1.4 million in the three months ended February 29,
2008, a significant decrease from the cash used of $120.5 million in the three months ended
February 28, 2007. The cash outlay in the first quarter of fiscal 2008 was for the purchase of
long-lived assets relating mostly to technology licenses, and significant investment in computer
hardware. The cash outlay in the first quarter of 2007 reflects the purchase of InterVideo on
December 12, 2006, and the remaining interest in Ulead on December 28, 2006 for an aggregate of
$120.4 million.
Adjusted EBITDA
Adjusted EBITDA was $13.3 million in the first quarter of fiscal 2008 compared to $8.7 million
in the first quarter of fiscal 2007. The growth of $4.6 million is primarily attributable to our
increase in gross margin of $5.6 million in the first quarter of fiscal 2008.
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. 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 cash flows calculated in accordance with
GAAP. We consider cash flow from operations to be the closest GAAP measure to Adjusted EBITDA. For
the three months ended February 29, 2008 and February 28, 2007, we had cash flow from operations of
$6.4 million and $18.4 million, respectively. The table below reconciles Adjusted EBITDA to cash
flow from operations:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
February 29,
|
|
|
February 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Cash flow provided by operations
|
|
$
|
6,407
|
|
|
$
|
18,440
|
|
Change in operating assets and liabilities
|
|
|
1,392
|
|
|
|
(15,928
|
)
|
Interest expenses, net
|
|
|
4,288
|
|
|
|
3,921
|
|
Income tax provision (recovery)
|
|
|
(92
|
)
|
|
|
355
|
|
Deferred income taxes
|
|
|
1,234
|
|
|
|
1,035
|
|
Provision for bad debts
|
|
|
(104
|
)
|
|
|
(16
|
)
|
Unrealized foreign exchange losses on forward contracts
|
|
|
|
|
|
|
(35
|
)
|
Gain (loss) on interest rate swap
|
|
|
(755
|
)
|
|
|
191
|
|
Loss on disposal of fixed assets
|
|
|
(42
|
)
|
|
|
|
|
Gain on sale of investment
|
|
|
822
|
|
|
|
|
|
InterVideo integration costs
|
|
|
|
|
|
|
785
|
|
Restructuring costs
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
13,328
|
|
|
$
|
8,748
|
|
|
|
|
|
|
|
|
22
Off Balance Sheet Arrangements
In certain agreements with customers and distributors, including OEMs and online services
companies, we provide indemnifications for third-party intellectual property infringement claims,
and many of these indemnification obligations are not subject to monetary limits. We evaluate
estimated losses for such indemnifications under SFAS No. 5,
Accounting for Contingencies
, as
interpreted by Financial Accounting Standards Board (FASB) Interpretation No. 45,
Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others
. We consider factors such as the degree of probability of an unfavorable
outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not
encountered material costs as a result of such obligations and have not accrued any material
liabilities related to such indemnifications in our financial statements.
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,
litigation and cash sweep payments related to our long-term debt. 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.
All critical accounting policies that affect our more significant judgments and estimates used
in the preparation of our consolidated financial statements have been discussed in Item 7 of our
10-K filing as at November 30, 2007, except as noted below:
Accelerated Debt Payments
On an annual basis, we are required to make a cash sweep payment to fund our
principal balance on our term loans, based on excess cash flow as defined in our senior credit
facility agreement. Any cash sweep payments estimated to be payable within the next year are
classified as a current liability on our consolidated balance sheet. All cash sweep payments are
classified on the balance sheet based on the Companys ability and intent to refinance the
obligation on a long-term basis, the existence of financing arrangements to allow short-term
obligations to be refinanced, and the remoteness of the acceleration due date. We are currently
not intending to refinance this obligation and intend to make the payments as required. As such
the estimated cash sweep obligations due over the next 12 months have been classified as current
liabilities.
Our estimate of our cash sweep payment is based on our excess cash flow forecasts for the
period ending November 30, 2008, based on our current revenue, expense, collection and payment
projections. Excess cash flow is computed in accordance with our senior credit facility agreement.
In computing our excess cash flow, we use estimates and judgment based on our experience. These
estimates are based on current historical trends, including new product introductions. Actual
excess cash flow could vary materially from our estimates. An increase or decrease in excess cash
flow could result from changes in consumer demand or other factors. Should this variance occur, our
required cash sweet payment could fluctuate significantly. Variances are considered and adjusted
for on a quarterly basis.
Item 3.
Quantitative and Qualitative Disclosures 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 $117,000 or each 0.5% change in interest rates, based on debt outstanding as of February
29, 2008. In connection with the current debt facility, we use interest rate swaps to limit our
exposure to changing interest rates and related future cash outflows. 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 February 29, 2008, our interest rate swaps convert an aggregate notional principal
amount of $134.5 million (or approximately 85% 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 8.19% to
9.49%. Of our interest rate swaps, $44.5 million are not designated as hedging instruments.
During the first quarter of fiscal 2008, we have recorded a loss of $755,000 as a result of
recording these interest rate swaps at fair value. On our $90.0 million of interest rate swaps
designated as effective hedging instruments under FAS 133, we have recorded a loss of $3.6 million
in other comprehensive income during the first quarter of fiscal 2008.
23
Foreign Currency Risk
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 the Canadian dollar and certain
European and Asian currencies, in particular the Pound Sterling, the Yen, the Taiwanese dollar and
the Euro. Our exposure to these and other currencies is minimized due to certain hedges naturally
occurring in our business as we have decentralized sales, marketing and support operations in which
most costs are local currency based.
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 Febraury 29, 2008 we have no forward exchange
contracts. However, we did settle some U.S Dollar foreign exchange contracts during the period,
and intend to continue using such contracts into the future. As of February 28, 2007 we had three
U.S. dollar foreign exchange contracts totaling $6,000,000, which were settled between March 15,
2007 and May 15, 2007.
Item 4.
Controls and Procedures
Under the supervision and with the participation of our management, including the Chief
Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our
disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the
period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that these disclosure controls and procedures are effective at the
reasonable assurance level. There were no changes in our internal control over financial reporting
during the quarter ended February 29, 2008 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls and procedures or our internal controls will prevent or detect
all error and all fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within Corel have been detected.
PART II. OTHER INFORMATION
Item 1.
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.
24
At February 29, 2008, we were a defendant in an ongoing patent infringement proceeding
described below:
Simon Systems (Simon) v. Corel Corporation.
Simon filed a 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.
Victor Company of Japan, Ltd (JVC) v. Corel Corporation, InterVideo, Inc., Cyberlink Corp.
et al.
JVC filed a patent infringement action on January 15, 2008, against Corel and others in the
United States District Court for the Western District of Texas (Austin Division), alleging
infringement of U.S. Patents: 6,493,383 issued on December 10, 2002; 6,522,692 issued February 18,
2003; 6,542,543 issued April 1, 2003; 6,570,920 issued May 27, 2003; and 6,141,491 issued October
31, 2000. JVC alleges certain Corel video playback applications infringe the patents. Corel
believes it has meritorious defenses to JVCs claims and intends to defend the litigation
vigorously. The ultimate outcome of the litigation, however, is uncertain.
During the three month period ended February 29, 2008, we resolved the patent infringement
claim 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.
Item 1A.
Risk Factors
The risk factors set forth in the section entitled Risk Factors in our Form 10-K for the
period ending November 30, 2007 (File No. 000-20562), which is incorporated by reference into this
quarterly report.
Item 2.
Use of Proceeds
Not applicable
Item 6. Exhibits
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit
|
3.1*
|
|
Certificate and Articles of Continuance
|
|
|
|
3.2*
|
|
Articles of Amendment
|
|
|
|
3.3*
|
|
By-laws
|
|
|
|
31.1
|
|
Certifications of Chief Executive Officer Pursuant to Section 302 Certifications of Chief Executive
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
*
|
|
Incorporated by reference to the exhibit of the same number in the Companys Registration
Statement on Form F-1, as amended (File No. 333-132970)
|
Items 3, 4 and 5 are not applicable to us and have been omitted.
25
SIGNATURE
Pursuant to the requirements 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.
|
|
|
|
|
|
Corel Corporation
|
|
|
By:
|
/s/ Douglas McCollam
|
|
|
|
Douglas McCollam
Chief Financial Officer, Director
(Principal Financial Officer and Chief Accounting Officer)
|
|
|
Date:
April 7, 2008
26
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