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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended May 31, 2006
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to
Commission File Number 000-20562
COREL CORPORATION
(Exact name of registrant as specified in its charter)
Canada | 98-0407194 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1600 Carling Avenue, Ottawa | K1Z 8R7 | |
(Address of principal executive office) | (Zip Code) |
Registrant’s telephone number, including area code:
(613) 728-0826
(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. Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero Accelerated filero Non-accelerated filerþ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
The number of shares outstanding of the registrant’s common stock as of July 10, 2006 was 24,494,361.
COREL CORPORATION
Form 10-Q
For the Quarter Ended May 31, 2006
INDEX
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PART I. FINANCIAL INFORMATION
Item 1.Unaudited Consolidated Financial Statements
Corel Corporation
Consolidated Balance Sheets
(In thousands of U.S. dollars or shares)
(Unaudited)
(Unaudited)
May 31, | November 30, | |||||||||||
Note | 2006 | 2005 | ||||||||||
(combined) | ||||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 33,021 | $ | 20,746 | ||||||||
Restricted cash | 717 | 966 | ||||||||||
Accounts receivable | ||||||||||||
Trade, net | 16,763 | 19,342 | ||||||||||
Due from related parties | — | 667 | ||||||||||
Other | 648 | 311 | ||||||||||
Inventory | 3 | 1,365 | 726 | |||||||||
Deferred tax assets | 5 | 240 | 592 | |||||||||
Prepaid and other current assets | 2,242 | 2,343 | ||||||||||
Total current assets | 54,996 | 45,693 | ||||||||||
Investments | 262 | 334 | ||||||||||
Capital assets | 3,536 | 3,532 | ||||||||||
Intangible assets | 42,813 | 52,397 | ||||||||||
Goodwill | 9,850 | 9,850 | ||||||||||
Deferred tax assets | 5 | — | 284 | |||||||||
Deferred financing and other long-term assets | 4,199 | 8,746 | ||||||||||
Total assets | $ | 115,656 | $ | 120,836 | ||||||||
LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable and accrued liabilities | $ | 26,436 | $ | 30,152 | ||||||||
Due to related parties | 214 | 334 | ||||||||||
Current portion of promissory note | 532 | 1,170 | ||||||||||
Income taxes payable | 13,472 | 10,773 | ||||||||||
Deferred revenue | 10,107 | 11,755 | ||||||||||
Current portion of term loan payable | 6 | 900 | 15,764 | |||||||||
Total current liabilities | 51,661 | 69,948 | ||||||||||
Promissory note | 797 | 1,072 | ||||||||||
Deferred revenue | 2,159 | 2,085 | ||||||||||
Term loan payable | 6 | 89,100 | 132,965 | |||||||||
Total liabilities | 143,717 | 206,070 | ||||||||||
Commitments and contingencies | 7 | |||||||||||
Shareholders’ deficit | ||||||||||||
Share capital: | ||||||||||||
Class A Common Shares (par value: none; authorized: unlimited; issued and outstanding: nil, and 3,740 shares, respectively; convertible to Class B Common Shares) | — | (42,229 | ) | |||||||||
Class B Common Shares (par value: none; authorized: unlimited; issued and outstanding: nil, and 8,321 shares, respectively) | — | (34,184 | ) | |||||||||
Preferred Shares (par value: none; authorized: unlimited; issued and outstanding: nil, and 3,105 shares, respectively) | — | 2,600 | ||||||||||
WinZip Common Shares (par value: none; authorized: unlimited; issued and outstanding: nil and 20 shares, respectively) | — | 20 | ||||||||||
Corel Common Shares (par value: none; authorized: unlimited; issued and outstanding: 24,493 and nil shares, respectively) | 8 | 30,721 | — | |||||||||
Accumulated other comprehensive income | 14 | 85 | ||||||||||
Additional paid-in capital | 3,160 | 7,427 | ||||||||||
Deficit | (61,956 | ) | (18,953 | ) | ||||||||
Total shareholders’ deficit | (28,061 | ) | (85,234 | ) | ||||||||
Total liabilities and shareholders’ deficit | $ | 115,656 | $ | 120,836 | ||||||||
See Accompanying Notes to the Consolidated Financial Statements.
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Corel Corporation
Consolidated Statements of Operations
(In thousands of U.S. dollars or shares, except per share data)
(Unaudited)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||||||
May 31, | May 31, | |||||||||||||||||||
Note | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||
(combined) | (combined) | (combined) | (combined) | |||||||||||||||||
Revenues | ||||||||||||||||||||
Product | $ | 39,151 | $ | 36,428 | $ | 78,649 | $ | 72,510 | ||||||||||||
Maintenance and services | 5,059 | 3,573 | 9,848 | 7,479 | ||||||||||||||||
Total revenues | 44,210 | 40,001 | 88,497 | 79,989 | ||||||||||||||||
Cost of revenues | ||||||||||||||||||||
Products | 5,049 | 4,097 | 10,054 | 8,805 | ||||||||||||||||
Maintenance and services | 276 | 293 | 590 | 641 | ||||||||||||||||
Amortization of intangible assets | 2,648 | 6,636 | 9,275 | 12,835 | ||||||||||||||||
Total cost of revenues | 7,973 | 11,026 | 19,919 | 22,281 | ||||||||||||||||
Gross profit | 36,237 | 28,975 | 68,578 | 57,708 | ||||||||||||||||
Operating expenses | ||||||||||||||||||||
Sales and marketing | 14,023 | 12,164 | 28,527 | 24,988 | ||||||||||||||||
Research and development | 6,640 | 5,982 | 12,821 | 11,653 | ||||||||||||||||
General and administration | 6,193 | 4,654 | 11,588 | 10,313 | ||||||||||||||||
Restructuring | 9 | 251 | 72 | 811 | 612 | |||||||||||||||
Total operating expenses | 27,107 | 22,872 | 53,747 | 47,566 | ||||||||||||||||
Income from operations | 9,130 | 6,103 | 14,831 | 10,142 | ||||||||||||||||
Other expenses (income) | ||||||||||||||||||||
Loss on debt retirement | 6 | 8,275 | 6 | 8,275 | 3,937 | |||||||||||||||
Interest expense, net | 3,207 | 3,407 | 7,070 | 5,377 | ||||||||||||||||
Amortization of deferred financing fees | 357 | 504 | 801 | 804 | ||||||||||||||||
Other non-operating (income) expense | (528 | ) | 193 | (648 | ) | 371 | ||||||||||||||
Income (loss) before income taxes | (2,181 | ) | 1,993 | (667 | ) | (347 | ) | |||||||||||||
Income tax provision | 1,791 | 1,835 | 4,942 | 2,015 | ||||||||||||||||
Net income (loss) | $ | (3,972 | ) | $ | 158 | $ | (5,609 | ) | $ | (2,362 | ) | |||||||||
Other comprehensive income (loss) | ||||||||||||||||||||
Realized gain (loss) on sale of securities | — | (91 | ) | — | 123 | |||||||||||||||
Unrealized loss on securities | (23 | ) | (57 | ) | (71 | ) | (57 | ) | ||||||||||||
Other comprehensive income (loss) | (23 | ) | (148 | ) | (71 | ) | 66 | |||||||||||||
Total comprehensive income (loss) | $ | (3,995 | ) | $ | 10 | $ | (5,680 | ) | $ | (2,296 | ) | |||||||||
Net income (loss) per share: | ||||||||||||||||||||
Basic | 10 | |||||||||||||||||||
Class A | $ | N/A | $ | (0.05 | ) | $ | N/A | $ | (1.69 | ) | ||||||||||
Class B | $ | N/A | $ | (0.05 | ) | $ | N/A | $ | (1.69 | ) | ||||||||||
WinZip Common | $ | N/A | $ | 38.95 | $ | N/A | $ | 29.20 | ||||||||||||
Corel Common | $ | (0.19 | ) | $ | N/A | $ | (0.28 | ) | $ | N/A | ||||||||||
Diluted | 10 | |||||||||||||||||||
Class A | $ | N/A | $ | (0.05 | ) | $ | N/A | $ | (1.69 | ) | ||||||||||
Class B | $ | N/A | $ | (0.05 | ) | $ | N/A | $ | (1.69 | ) | ||||||||||
WinZip Common | $ | N/A | $ | 38.95 | $ | N/A | $ | 29.20 | ||||||||||||
Corel Common | $ | (0.19 | ) | $ | N/A | $ | (0.28 | ) | $ | N/A | ||||||||||
Pro-forma | 4 | |||||||||||||||||||
Basic | $ | (0.19 | ) | $ | 0.01 | $ | (0.28 | ) | $ | (0.16 | ) | |||||||||
Diluted | $ | (0.19 | ) | $ | 0.01 | $ | (0.28 | ) | $ | (0.16 | ) |
See Accompanying Notes to the Consolidated Financial Statements.
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Corel Corporation
Consolidated Statements of Operations
(In thousands of U.S. dollars or shares, except per share data)
(Unaudited)
(In thousands of U.S. dollars or shares, except per share data)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||||||
May 31, | May 31, | |||||||||||||||||||
Note | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||
(combined) | (combined) | (combined) | (combined) | |||||||||||||||||
Income (loss) applicable to shareholders: | 10 | |||||||||||||||||||
Class A | ||||||||||||||||||||
Distributed earnings to class | $ | N/A | $ | — | $ | N/A | $ | 21,006 | ||||||||||||
Loss allocable to class | $ | N/A | $ | (192 | ) | $ | N/A | $ | (27,328 | ) | ||||||||||
Class B | ||||||||||||||||||||
Distributed earnings to class | $ | N/A | $ | — | $ | N/A | $ | 46,785 | ||||||||||||
Loss allocable to class | $ | N/A | $ | (429 | ) | $ | N/A | $ | (60,866 | ) | ||||||||||
WinZip Common | ||||||||||||||||||||
Distributed earnings to class | $ | N/A | $ | — | $ | N/A | $ | — | ||||||||||||
Income (loss) allocable to class | $ | N/A | $ | 779 | $ | N/A | $ | 584 | ||||||||||||
Corel Common | ||||||||||||||||||||
Distributed earnings to class | $ | — | $ | N/A | $ | — | $ | N/A | ||||||||||||
Loss allocable to class | $ | (3,972 | ) | $ | N/A | $ | (5,609 | ) | $ | N/A | ||||||||||
Weighted average number of shares: | ||||||||||||||||||||
Shares used in basic per share amounts | ||||||||||||||||||||
Class A | N/A | 3,736 | N/A | 3,736 | ||||||||||||||||
Class B | N/A | 8,321 | N/A | 8,321 | ||||||||||||||||
WinZip Common | N/A | 20 | N/A | 20 | ||||||||||||||||
Corel Common | 21,086 | N/A | 20,293 | N/A | ||||||||||||||||
Shares used in diluted per share amounts | ||||||||||||||||||||
Class A | N/A | 3,736 | N/A | 3,736 | ||||||||||||||||
Class B | N/A | 8,321 | N/A | 8,321 | ||||||||||||||||
WinZip Common | N/A | 20 | N/A | 20 | ||||||||||||||||
Corel Common | 21,086 | N/A | 20,293 | N/A | ||||||||||||||||
Shares used in pro-forma per share amounts | 4 | |||||||||||||||||||
Basic | 21,086 | 19,485 | 20,293 | 19,485 | ||||||||||||||||
Diluted | 21,086 | 19,485 | 20,293 | 19,485 |
See Accompanying Notes to the Consolidated Financial Statements.
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Corel Corporation
Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
(Unaudited)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
May 31, | May 31, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(combined) | (combined) | (combined) | (combined) | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income (loss) | $ | (3,972 | ) | $ | 158 | $ | (5,609 | ) | $ | (2,362 | ) | |||||
Adjustments to reconcile net income (loss) to cash flows provided by operating activities: | ||||||||||||||||
Depreciation | 378 | 307 | 776 | 769 | ||||||||||||
Amortization of deferred financing fees | 357 | 504 | 801 | 804 | ||||||||||||
Amortization of intangible assets | 2,648 | 6,636 | 9,275 | 12,835 | ||||||||||||
Stock-based compensation | 794 | 123 | 1,646 | 239 | ||||||||||||
Accrued interest | 352 | 166 | (261 | ) | 533 | |||||||||||
Provision for bad debts | 52 | 27 | 174 | 193 | ||||||||||||
Deferred income taxes | 201 | 19 | �� | 636 | 313 | |||||||||||
Unrealized foreign exchange loss on forward exchange contracts | 193 | 87 | 221 | 293 | ||||||||||||
Gain on disposal of fixed assets | — | (28 | ) | — | (14 | ) | ||||||||||
Loss on early retirement of debt | 8,275 | 6 | 8,275 | 3,937 | ||||||||||||
Gain on disposal of investments | — | (71 | ) | — | (71 | ) | ||||||||||
Change in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (775 | ) | 1,111 | 2,520 | 5,588 | |||||||||||
Inventory | (515 | ) | 180 | (639 | ) | 873 | ||||||||||
Prepaids and other current assets | (186 | ) | (60 | ) | (119 | ) | (134 | ) | ||||||||
Accounts payable and accrued liabilities | 1,500 | (1,126 | ) | (3,536 | ) | (5,649 | ) | |||||||||
Taxes payable | 809 | 162 | 3,081 | 35 | ||||||||||||
Deferred revenue | (370 | ) | 202 | (1,574 | ) | (822 | ) | |||||||||
Cash flows provided by operating activities | 9,741 | 8,403 | 15,667 | 17,360 | ||||||||||||
Cash flows from financing activities | ||||||||||||||||
Restricted cash | — | (13 | ) | — | 1,357 | |||||||||||
Proceeds from term loans | 90,000 | — | 90,000 | 130,000 | ||||||||||||
Repayment of term loans | (140,091 | ) | — | (148,729 | ) | (64,305 | ) | |||||||||
Financing fees incurred | (5,875 | ) | (668 | ) | (7,638 | ) | (7,668 | ) | ||||||||
Net proceeds from public offering | 72,538 | — | 72,538 | — | ||||||||||||
Net proceeds from issuance of common shares | 1 | — | 1 | — | ||||||||||||
Paid up capital distribution | — | — | — | (83,113 | ) | |||||||||||
Dividends paid | (7,500 | ) | (4,000 | ) | (7,500 | ) | (6,135 | ) | ||||||||
Other financing activities | (492 | ) | (3,250 | ) | (1,098 | ) | (2,750 | ) | ||||||||
Cash flows provided by (used in) financing activities | 8,581 | (7,931 | ) | (2,426 | ) | (32,614 | ) | |||||||||
Cash flows from investing activities | ||||||||||||||||
Proceeds from redemption of investments | — | 71 | — | 10,058 | ||||||||||||
Acquisition of Jasc | — | (369 | ) | — | (184 | ) | ||||||||||
Purchase of long lived assets, net of proceeds | (425 | ) | (169 | ) | (855 | ) | (468 | ) | ||||||||
Cash flows (used in) provided by investing activities | (425 | ) | (467 | ) | (855 | ) | 9,406 | |||||||||
Effect of exchange rate changes on cash and cash equivalents | (74 | ) | (10 | ) | (111 | ) | (19 | ) | ||||||||
Increase (decrease) in cash and cash equivalents | 17,823 | (5 | ) | 12,275 | (5,867 | ) | ||||||||||
Cash and cash equivalents, beginning of period | 15,198 | 5,695 | 20,746 | 11,557 | ||||||||||||
Cash and cash equivalents, end of period | $ | 33,021 | $ | 5,690 | $ | 33,021 | $ | 5,690 | ||||||||
See Accompanying Notes to the Consolidated Financial Statements.
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Corel Corporation
Consolidated Statements of Changes in Shareholders’ Deficit
(In thousands of U.S. dollars or shares)
(Unaudited)
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||||||
WinZip | Other | Additional | Total | |||||||||||||||||||||||||||||
Common | Corel Common | Comprehensive | Paid-In | Shareholders’ | ||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Income | Capital | Deficit | Deficit | |||||||||||||||||||||||||
Balances at December 1, 2005 (*) | 20 | $ | 20 | 15,167 | $ | (73,813 | ) | $ | 85 | $ | 7,427 | $ | (18,953 | ) | $ | (85,234 | ) | |||||||||||||||
Total comprehensive loss | — | — | — | — | (48 | ) | — | (1,638 | ) | (1,686 | ) | |||||||||||||||||||||
Shares issued for services rendered | — | — | 3 | 52 | — | — | — | 52 | ||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | 852 | — | 852 | ||||||||||||||||||||||||
Balances at February 28, 2006 | 20 | $ | 20 | 15,170 | $ | (73,761 | ) | $ | 37 | $ | 8,279 | $ | (20,591 | ) | $ | (86,016 | ) | |||||||||||||||
Repurchase of options | — | — | — | — | — | (427 | ) | — | (427 | ) | ||||||||||||||||||||||
WinZip dividends paid | — | — | — | — | — | (5,480 | ) | (2,020 | ) | (7,500 | ) | |||||||||||||||||||||
Shares issued on initial public offering | — | — | 5,000 | 69,317 | — | — | — | 69,317 | ||||||||||||||||||||||||
Issuance of shares on WinZip acquisition (Note 4) | (20 | ) | (20 | ) | 4,323 | 35,158 | — | — | — | 35,138 | ||||||||||||||||||||||
Distribution to shareholders (Note 4) | — | — | — | — | — | — | (35,373 | ) | (35,373 | ) | ||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | 794 | — | 794 | ||||||||||||||||||||||||
Options exercised | — | — | 1 | 7 | — | (6 | ) | — | 1 | |||||||||||||||||||||||
Total comprehensive loss | — | — | — | — | (23 | ) | — | (3,972 | ) | (3,995 | ) | |||||||||||||||||||||
Balances at May 31, 2006 | — | — | 24,494 | $ | 30,721 | $ | 14 | $ | 3,160 | $ | (61,956 | ) | $ | (28,061 | ) | |||||||||||||||||
(*) | On December 1, 2005 the Company reorganized its share capital and all of the outstanding Class A Common, Class B Common and Preferred shares were converted to Corel Common shares (note 8). |
See Accompanying Notes to the Consolidated Financial Statements.
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Corel Corporation
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, unless otherwise stated)
(Unaudited)
(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 such dates and our results of operations and cash flows for the periods then ended, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The combined consolidated balance sheet as of November 30, 2005 was derived from the audited combined 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 and six months ended May 31, 2006 are not necessarily indicative of results that may be expected for the entire fiscal year. The financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Form 10-Q, and in conjunction with Management’s Discussion and Analysis and the financial statements and notes thereto included in the Company’s registration statement on Form F-1 (File No. 333-132970).
2. | Summary of Significant Accounting Policies |
Basis of presentation
The combined consolidated financial statements have been presented in United States (US) dollars.
The Company purchased Cayman Ltd. Holdco (“WinZip”) from affiliates of Vector Capital contemporaneously with the completion of its initial public offering on May 2, 2006. WinZip is a provider of compression utility software. Vector Capital is a venture capital company based in California, and is the Company’s largest shareholder. After May 2, 2006, results of WinZip have been consolidated with the Company’s results. Prior to this transaction, the Company and WinZip were under common control. Because of this common control, and the Company agreeing to acquire WinZip in February 2006, the Company combined its financial statements with WinZip’s effective January 18, 2005 (the date Vector Capital purchased WinZip). On January 18, 2005, push-down accounting was applied by WinZip and consequently WinZip revalued its balance sheet to reflect the fair value of its assets and liabilities with a corresponding increase to goodwill.
The consolidated financial statements presented herein reflect the financial position of the Company at May 31, 2006 and the Company and WinZip at November 30, 2005. The consolidated results of operations for the three and six months ended May 31, 2006 include the results of WinZip for the full period, and the combined consolidated results of operations for the three and six months ended May 31, 2005 include the results of WinZip from January 18, 2005.
Certain prior period amounts have been reclassified to conform to the current period presentation, including reclassifications in the segment disclosure note between sales in the Americas, Europe, Middle East, Africa (EMEA), and Asia-Pacific. There was no impact on net income as a result of this reclassification.
Interest rate swaps
The Company uses interest rate swaps to limit its exposure to the changing interest rates on its consolidated results of operations and future cash outflows for interest. Interest rate swaps provide for the Company to pay an amount equal to a specified fixed rate of interest times a notional principal amount and to receive in return an amount equal to a variable rate of interest times the same notional amount. The notional amounts are not exchanged and no other cash payments are made. The Company entered into an interest rate swap with its principal lender, as required under its senior credit facility.
The interest rate swap qualifies as a derivative under Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities”. The interest rate swap does not qualify as a hedging instrument, and therefore, the Company has not applied hedge accounting. As a result, at the end of each period, the interest rate swap is recorded in the consolidated balance sheet at fair value, and any related gains or loses are recognized on the Company’s statement of operations within “interest expense”.
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As of May 31, 2006, the Company’s interest rate swap converts an aggregate notional principal amount of $71.5 million (or approximately 79% of its interest-bearing debt) from floating rate interest payments under its term loan facility to fixed interest rate obligations. The variable rate of interest is based on three-month LIBOR plus 3.25%. The fixed rates range from 8.62% to 8.74%.
The Company does not use derivative instruments for speculative purposes.
3. | Inventory |
The components of inventory for the periods presented are as follows:
May 31, | November 30, | |||||||
2006 | 2005 | |||||||
Product components | $ | 477 | $ | 219 | ||||
Finished goods | 888 | 507 | ||||||
Inventory | $ | 1,365 | $ | 726 | ||||
4. | Acquisition |
WinZip acquisition
On May 2, 2006 (“the acquisition date”), the Company acquired all of the outstanding securities of WinZip, a provider of compression utility software, from Vector Capital, which originally purchased WinZip on January 18, 2005. The Company acquired WinZip to complement its productivity software. The purchase cost for the acquisition was 4,322,587 common shares of the Company.
The terms of the agreement required the Company to repay all of the outstanding bank debt of WinZip as at the acquisition date and grant options to purchase 74,680 common shares under its 2006 Equity Incentive Plan in replacement for outstanding WinZip options. The acquisition agreement also provides for a reciprocal indemnity for breach of covenants, representations and warranties, generally for a one year period. A portion of the purchase price, amounting to 93,929 Corel common shares issued to Vector Capital, may not be transferred by Vector Capital for a period of one year from the date of the acquisition so that they will be available to satisfy Vector Capital’s indemnification obligations to the Company.
Prior to the acquisition, the Company and WinZip were under common control. As a result, in accordance with SFAS 141, the Company presented combined financial statements, which include the results of WinZip from and after January 18, 2005. In addition, on the acquisition date, the transaction was accounted for as a related party transaction. Accordingly, the fair value of the 4,322,587 Corel common shares issued as consideration were recorded as share capital, and the difference between the fair value of the shares issued and the carrying amount of WinZip’s net assets was recorded as a dividend.
The aggregate purchase cost paid by Vector Capital for WinZip was allocated to assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition and is summarized as follows:
Current assets | $ | 2,497 | ||
Capital assets | 183 | |||
Tradename | 21,772 | |||
Acquired technologies | 5,704 | |||
Non-competition agreements | 150 | |||
Customer relationships | 348 | |||
Goodwill on acquisition of Winzip by Vector | 3,993 | |||
Current liabilities | (858 | ) | ||
Net assets acquired -Vector Capital purchase cost | 33,789 | |||
Fair value of Common Shares issued | (69,162 | ) | ||
Net distribution to Vector Capital | 35,373 | |||
Share issuance costs | (235 | ) | ||
Net capital of common shares issued for WinZip acquisition | $ | 35,138 | ||
To determine the fair value of intangible assets, WinZip engaged a valuation firm. The tradename was valued using an income approach, specifically the present value of the operating cash flows generated by the tradename. The acquired technologies were valued using a relief from royalty method. The customer relationships were also valued using an income
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approach, specifically the present value of the operating cash flows generated by customer relationships. Goodwill is not deductible for tax purposes.
The following unaudited pro forma combined financial information gives effect to the acquisition of WinZip by the Company as if the transaction occurred at the beginning of the six month period ended May 31, 2005:
Six months | ||||
ended May 31, | ||||
2005 | ||||
Revenues | $ | 83,249 | ||
Net income (loss) | $ | (3,047 | ) | |
Pro-forma net income (loss) per share: | ||||
Basic | $ | (0.16 | ) | |
Diluted | $ | (0.16 | ) |
The pro forma combined income (loss) per share on the Consolidated Statements of Operations reflects the equity recapitalization, the reverse split of Corel’s common shares on an ‘as converted’ basis, and the issuance of the common shares resulting from the acquisition of WinZip, assuming the common shares issued for WinZip were outstanding for the entire period, as shown below:
Six months | ||||
ended May 31, | ||||
2005 | ||||
Class A Common Shares: | ||||
Weighted average number of Class A common shares converted to Corel common | 3,736 | |||
Weighted average number of Class B common shares converted to Corel common | 8,321 | |||
Weighted average number of Preferred shares converted to Corel common | 3,105 | |||
Weighted average number of Corel common shares issued upon acquisition of WinZip | 4,323 | |||
19,485 | ||||
5. | Income Taxes |
During the three months ended May 31, 2006, the Company recorded a tax provision of $1.8 million on a loss before income taxes of $2.2 million. The provision consists of $202 of deferred taxes and $1.6 million of current taxes. Deferred taxes relates to timing of deductibility of certain expenses. Current taxes consist of foreign withholding taxes plus taxes incurred by Corel’s foreign subsidiaries, including $1.4 million relating to WinZip operations.
During the three months ended May 31, 2005, the Company recorded a tax provision of $1.8 million on income before income taxes of $2.0 million. The provision includes $427 of deferred taxes relating to the tax benefits realized in Canada from the use of tax carry forwards, that existed prior to Corel’s acquisition by Vector Capital, less a deferred tax recovery of $408 related to WinZip operations in the quarter. Current taxes consists of $1.0 million relating to the WinZip operations and the balance is primarily foreign withholding taxes plus taxes incurred by Corel’s foreign subsidiaries.
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6. | Long-term debt |
Senior Credit Facility
On May 2, 2006, the Company entered into a $165.0 million senior credit facility consisting of a $90.0 million term loan with a six-year maturity and a $75.0 million revolving line of credit facility with a five-year term. The term loan and revolving line of credit facility bear interest at floating rates tied to either the Alternate Base Rate (which equal the higher of (i) the federal funds rate plus 50 basis points, and (ii) the prime rate) or the Adjusted LIBOR. The net proceeds from the senior credit facility were used to repay the existing indebtedness of Corel and WinZip in May 2006. As a result, we incurred a loss on debt retirement of $8.3 million. The borrowings under the senior credit facility are collateralized by a pledge of all the Company’s assets, including subsidiary stock. The senior credit facility also contains various financial and restrictive covenants.
In connection with the senior credit facility, the Company obtained interest rate protection by entering into an interest rate swap with its principal lender for $71.5 million. The variable rate of interest is based on three-month LIBOR plus 3.25%. The fixed rates range from 8.62% to 8.74%.
7. | Commitments and Contingencies |
Legal Proceedings
The Company currently, and from time to time, is involved in certain legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business, including assertions that we may be infringing patents or other intellectual property rights of others. The Company believes that the ultimate amount of liability, if any, for any pending claims of any type (either alone or combined) will not materially affect its financial position or results of operations. The Company also believes that, if necessary, it would be able to obtain any required licenses or other rights to disputed intellectual property rights on commercially reasonable terms. However, 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. The Company’s 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.
At May 31, 2006, the Company was a defendant in an ongoing patent infringement proceeding described below:
Electronics For Imaging, Inc., Massachusetts Institute of Technology v. Corel Corporation et al.Plaintiffs filed this patent infringement action on December 28, 2001 against the Company and 213 other defendants in the U.S. District Court for the Eastern District of Texas, alleging infringement of U.S. patent 4,500,919. The patent expired on May 6, 2002. Plaintiffs allege that the defendants infringed the patent through the use of various color management and correction systems in their products. Plaintiffs seek unspecified damages and attorneys fees. Various motions including motions for summary judgment by both the plaintiffs and defendants, including the Company, were filed during the discovery phase of the proceeding. In July 2004, the court dismissed each summary judgment motion upon which the Company and the plaintiffs had joined issue. Following the decision on the summary judgment motions, the plaintiffs dismissed all claims against every remaining defendant except the Company, Microsoft and Roxio. The plaintiffs then stipulated to non-infringement in respect of the Company, Microsoft and Roxio and the action was dismissed in November 2004. In December 2004, the plaintiffs filed an appeal of various interlocutory rulings by the trial court including certain of the summary judgment decisions. The remaining defendants, including the Company, have filed opposition to the appeals. The Company has cross-appealed on the trial court’s dismissal of its request to have the action dismissed on summary judgment. Oral argument on the appeal was held on December 7, 2005. No decision on the appeal has been rendered to date. The Company believes it has meritorious defenses to the plaintiffs’ claims and intends to defend the litigation vigorously. However, the ultimate outcome of the litigation is uncertain.
8. | Shareholders’ Equity |
Corel Common
On December 1, 2005, Corel reorganized its share capital by way of amalgamation with a wholly-owned subsidiary. All of the outstanding Class A common shares, Class B common shares and preferred shares of the Company were converted into common shares in accordance with their respective percentage equity interests in Corel prior to the reorganization. After completion of the equity recapitalization, the authorized share capital of Corel consists of an unlimited number of preferred shares, issuable in series, none of which series have been authorized and an unlimited number of common shares.
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On April 25, 2006, the Company entered into an underwriting agreement under the terms of which the Company agreed to the sale of 5,000,000 Common Shares from treasury and granted the underwriters an option to purchase up to an additional 750,000 Common Shares from the treasury within a 30-day period to cover over-allotments (“Public Offering”). The Public Offering closed on May 2, 2006. As of May 31, 2006, there are 24,493,455 common shares outstanding. In March 2006, the Company paid a cash dividend of $7,500 to its shareholder, Vector Capital.
Stock option plans
The following table shows total stock-based compensation expense included in the consolidated statement of operations:
Three Months | Six Months | |||||||||||||||
Ended | Ended | |||||||||||||||
May 31, | May 31, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Cost of products | $ | 7 | $ | 4 | $ | 15 | $ | 8 | ||||||||
Cost of maintenance and services | 2 | 1 | 4 | 2 | ||||||||||||
Sales and marketing | 121 | 53 | 312 | 102 | ||||||||||||
Research and development | 53 | 36 | 116 | 71 | ||||||||||||
General and administration | 611 | 29 | 1,199 | 56 | ||||||||||||
Total stock-based compensation expense | $ | 794 | $ | 123 | $ | 1,646 | $ | 239 | ||||||||
There were no capitalized stock-based compensation costs at May 31, 2006 and November 30, 2005. Up to the quarter ended May 31, 2006, the Company has recognized cumulative expenses of $1,130 for performance-based awards.
Corel estimates the fair value of its options for financial accounting purposes using the Black-Scholes model, which requires the input of subjective assumptions, including expected life of the option, risk-free interest rate, dividend rate, future volatility of the price of the Company’s common shares and substantive vesting period. Changes in subjective input assumptions can materially affect the fair value estimate. Prior to the Public Offering, there was no active market for the Company’s common shares. Thus, it was not possible to estimate expected volatility of the Company’s share price in estimating fair value of options granted. Accordingly, as a substitute for such volatility, the Company used the historical volatility of the U.S. Dow Jones Software and Computer Services Index, representing the primary industry in which the Company operates.
The fair value, estimated using the Black-Scholes model, of all options granted under the 2003 Plan and options granted under the 2006 Equity Incentive Plan, during the quarter ended May 31, 2006 and 2005, was estimated as of the date of grant using the following weighted average assumptions:
May 31, | May 31, | |||||||
2006 | 2005 | |||||||
Expected option life (years) | 7 | 7 | ||||||
Volatility | 36.31 | % | 39.70 | % | ||||
Risk free interest rate | 4.57 | % | 4.41 | % | ||||
Dividend yield | Nil | Nil |
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2003 Share Option and Phantom Share Unit Plan
In the three months ended May 31, 2006, options were granted with an exercise price equal to the fair value of the Company’s common shares on the date of grant. Unit activity for the three and six month period ended May 31, 2006 is presented below:
The 2003 Plan | ||||||||||||
Weighted Average | ||||||||||||
Weighted Average | Grant Date Fair | |||||||||||
Options | Exercise Price | Value | ||||||||||
Balance, November 30, 2005 | 1,381,350 | $ | 1.34 | $ | 7.11 | |||||||
Options granted | 49,225 | 15.76 | 7.38 | |||||||||
Options exercised | Nil | Nil | Nil | |||||||||
Options forfeited | (21,484 | ) | 1.57 | 5.17 | ||||||||
Balance, February 28, 2006 | 1,409,091 | $ | 1.84 | |||||||||
Options granted | 9,992 | $ | 17.57 | $ | 8.30 | |||||||
Options exercised | (1,028 | ) | 1.17 | 6.03 | ||||||||
Options repurchased | (22,696 | ) | 1.17 | 9.10 | ||||||||
Options forfeited | (11,015 | ) | 1.42 | 7.63 | ||||||||
Outstanding at May 31, 2006 | 1,384,344 | $ | 1.96 | |||||||||
Exercisable at May 31, 2006 | 513,409 | |||||||||||
Weighted average fair value of outstanding options | $ | 7.03 | ||||||||||
Weighted average remaining life of the outstanding options | 2.60 | Years |
2006 Equity Incentive Plan
A new equity incentive plan was adopted by the Board of Directors in February 2006 (“2006 Equity Incentive Plan”). This plan provides for the grant of options to employees and employees of the Company’s subsidiaries, and restricted shares, share appreciation rights, restricted share units, performance share units, deferred share units, phantom shares and other share-based awards to the Company’s employees, consultants and directors, and employees, consultants and directors of the Company’s subsidiaries and affiliates. Corel has 2,850,000 common shares authorized for issuance under the 2006 Equity Incentive Plan.
On May 2, 2006, 73,806 options were granted under the 2006 Equity Incentive Plan in exchange for cancellation of WinZip options in accordance with the terms of the WinZip acquisition. Unit activity of this plan for the three and six month period is presented below:
2006 Equity Incentive Plan | ||||||||||||
Weighted Average | ||||||||||||
Weighted Average | Grant Date Fair | |||||||||||
Options | Exercise Price | Value | ||||||||||
Options granted | 73,806 | 1.20 | 13.90 | |||||||||
Options exercised | Nil | Nil | Nil | |||||||||
Options forfeited | Nil | Nil | Nil | |||||||||
Outstanding at May 31, 2006 | 73,806 | $ | 1.20 | |||||||||
Exercisable at May 31, 2006 | 9,204 | |||||||||||
Weighted average fair value of outstanding options | $ | 13.90 | ||||||||||
Weighted average remaining life of the outstanding options | 3.34 | Years |
9. | Restructuring Charges |
During the quarter ended May 31, 2005, The Company continued to eliminate redundant positions across all functions in both Corel and Jasc, resulting in a $72 charge to operating results for severance and related costs.
During the quarter ended May 31, 2006, additional termination benefit costs associated with the Company’s realignment of its sales and marketing as well as our research and development teams were incurred.
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The following table summarizes the restructuring costs recognized by the Company for the six months ended May 31, 2006:
Termination benefits charged to expense in the quarter ended February 28, 2006 | $ | 560 | ||
Costs paid or otherwise settled | (73 | ) | ||
Closing liability at February 28, 2006 — termination benefits | 487 | |||
Termination benefits incurred in the quarter ended May 31, 2006 | 251 | |||
Costs paid or otherwise settled | (202 | ) | ||
Closing liability at May 31, 2006 — termination benefits | $ | 536 | ||
All of the costs incurred have been included within restructuring expenses on the statement of operations.
10. | Earnings (loss) Per Share |
The impact of the exercise of Corel options is anti-dilutive in the periods presented. Potentially dilutive instruments for the three and six months ended May 31, 2006 represent the weighted average number of common shares subject to options outstanding of 1,425 and 1,426, respectively, and 669 and 665 for the three and six months ended May 31, 2005, respectively. There are no potentially dilutive instruments for WinZip for the three and six months ended May 31, 2005.
11. | Segment Reporting |
Revenues by product and region and details regarding major external customers are disclosed in the following table:
Three Months Ended | Six Months Ended | |||||||||||||||
May 31, | May 31, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
By product category: | ||||||||||||||||
Productivity | $ | 19,173 | $ | 16,897 | $ | 38,963 | $ | 31,900 | ||||||||
Graphics and Digital Imaging | 25,037 | 23,104 | 49,534 | 48,089 | ||||||||||||
$ | 44,210 | $ | 40,001 | $ | 88,497 | $ | 79,989 | |||||||||
By geographic region: | ||||||||||||||||
Americas | ||||||||||||||||
Canada | $ | 2,211 | $ | 1,952 | $ | 3,660 | $ | 3,626 | ||||||||
United States | 23,617 | 20,507 | 46,906 | 42,682 | ||||||||||||
Other | 1,091 | 811 | 2,016 | 1,513 | ||||||||||||
Europe, Middle East, Africa (EMEA) | 13,681 | 13,671 | 29,449 | 27,097 | ||||||||||||
Asia-Pacific | 3,610 | 3,060 | 6,466 | 5,071 | ||||||||||||
$ | 44,210 | $ | 40,001 | $ | 88,497 | $ | 79,989 | |||||||||
By major customer: | ||||||||||||||||
Company A | $ | 5,858 | $ | 6,261 | $ | 10,732 | $ | 12,002 | ||||||||
All others | 38,352 | 33,740 | 77,765 | 67,987 | ||||||||||||
$ | 44,210 | $ | 40,001 | $ | 88,497 | $ | 79,989 | |||||||||
12. | Related-Party Transactions |
In June 2005, Corel granted options in respect of 413,971 common shares to Mr. Dobson, the Company’s Chief Executive Officer, at an exercise price of $1.17 per common share. A portion of these options, representing the right to acquire 79,378 common shares, vested upon the completion of the Company’s public offering, while the remainder continue to vest over a four year period. Pursuant to the terms of Mr. Dobson’s employment agreement, in April 2006, Corel repurchased options representing the right to acquire 11,348 common shares at a price of $18.83 per unit, or $213,676 in the aggregate. This amount was applied against a portion of the loan Mr. Dobson was obligated to repay under his employment agreement.
In April 2006, Corel also agreed to repurchase options from Mr. Dobson representing the right to acquire 11,348 common shares at a price of $18.83 per unit, or $213,676 in the aggregate, which took effect immediately preceding the completion of the public offering. Corel agreed to repurchase the additional units from Mr. Dobson to help him defray additional expenses incurred in connection with his relocation to Canada.
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Item 2.Management’s Discussion and Analysis of Financial Condition and Results Of Operations
Special Note Regarding Forward-Looking Statements
Certain statements made in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this filing 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 Corel believes are appropriate in the circumstances. However, many factors could cause Corel’s 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; | ||
• | 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; | ||
• | 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; | ||
• | 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; | ||
• | 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; | ||
• | our “Alta” strategy may fail to achieve market acceptance with consumers and our strategic partners; | ||
• | 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; and | ||
• | 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. |
These and other important factors are described in greater detail in our Prospectus dated April 25, 2006, filed with the Securities and Exchange Commission pursuant to Rule 424(b) of the rules and regulations under the Securities Act of 1933. A copy of the Prospectus can be obtained on our website, or at www.sec.gov. Such factors are also described in greater detail in our Canadian supplemented PREP prospectus dated April 26, 2006, or at www.sedar.com.
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.
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Overview
The following discussion and analysis should be read in conjunction with our unaudited combined consolidated financial statements and accompanying notes for the three and six month periods ended May 31, 2006. All figures are in United States dollars, except as otherwise noted.
We are a leading global packaged software company with an estimated installed base of over 40 million current users in over 75 countries. We provide high quality, affordable and easy-to-use productivity and graphics and digital imaging software. Our products enjoy a favorable market position among value-conscious consumers and small businesses. The legal and functional departments within large companies and governmental organizations are also attracted to the industry-specific features and technical capabilities of our software. Our products are sold through a scalable distribution platform comprised of OEMs, our e-Store, and our global network of resellers and retail vendors.
Our product portfolio includes well-established, globally recognized brands. Our primary productivity products areWordPerfect Office Suite,first developed in 1982 and marketed by Corel since 1996, andWinZip,a compression utility developed in 1991, that we acquired on May 2, 2006.WordPerfect Office Suiteis the leading Microsoft-alternative productivity software and includes Microsoft compatible word processing, spreadsheet and presentation functionality.WinZipis the most widely used aftermarket compression utility. Our primary graphics and digital imaging products areCorelDRAW Graphics SuiteandPaint Shop Pro. CorelDRAW Graphics Suiteis a leading illustration and image editing software suite used by design professionals and small businesses.Paint Shop Pro digital image editing and management applications are used by novice and professional photographers and photo editors.
Three and six months ended May 31, 2006 and May 31, 2005 (combined from January 18, 2005)
On May 2, 2006, we acquired all of the outstanding securities of WinZip from Vector Capital. The comparative financial information for the three and six months ended May 31, 2006 and the three and six months ended May 31, 2005 is presented on a combined consolidated basis to include the financial information of WinZip from January 18, 2005 onwards, which reflects the period that WinZip and we were under the common control of Vector Capital. Accordingly, because the combined financial information for the first half of fiscal 2005 only include 132 days of WinZip’s financial information, it is not directly comparable to the consolidated financial information presented for the first half of fiscal 2006.
Revenues
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
May 31, | May 31, | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
2006 | 2005 | Change | 2006 | 2005 | Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Product | $ | 39,151 | $ | 36,428 | 7.5 | % | $ | 78,649 | $ | 72,510 | 8.5 | % | ||||||||||||
As a percent of revenue | 88.6 | % | 91.1 | % | 88.9 | % | 90.7 | % | ||||||||||||||||
Maintenance and services | 5,059 | 3,573 | 41.6 | % | 9,848 | 7,479 | 31.7 | % | ||||||||||||||||
As a percent of revenue | 11.4 | % | 8.9 | % | 11.1 | % | 9.3 | % |
Product revenues for the three months ended May 31, 2006 increased by 7.5% to $39.2 million from $36.4 million for the three months ended May 31, 2005, and increased by 8.5% to $78.6 million from $72.5 million over the six month period ending May 31, 2006. This is mainly due to increases in revenues from license sales ofWinZip 10.0 ProandCorelDRAW; both of which were within their first year of release, and due to increased sales ofPaint Shop Pro. These increases were partially offset by a decline in sales ofWordPerfect.
Maintenance and services revenues increased by 41.6% to $5.1 million for the three month period ended May 31, 2006 and by 31.7% to $9.8 million for the six months ended May 31, 2006. This increase is largely attributable to the successful implementation of WinZip’s maintenance program in fiscal 2005.WordPerfectalso contributed to the increase in maintenance revenues.
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Total Revenues by Product Group
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
May 31, | May 31, | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
2006 | 2005 | Change | 2006 | 2005 | Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Productivity | $ | 19,173 | $ | 16,897 | 13.5 | % | $ | 38,963 | $ | 31,900 | 22.1 | % | ||||||||||||
As a percent of revenue | 43.4 | % | 42.2 | % | 44.0 | % | 39.9 | % | ||||||||||||||||
Graphics and digital imaging | 25,037 | 23,104 | 8.4 | % | 49,534 | 48,089 | 3.0 | % | ||||||||||||||||
As a percent of revenue | 56.6 | % | 57.8 | % | 56.0 | % | 60.1 | % |
Our products generally have release cycles of between 12 and 24 months and we typically earn the largest portion of revenues for a particular product during the first half of its release cycle. 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 Release | Prior | |||||
Product | Version | Quarter | Release | |||
Productivity: | ||||||
WordPerfect Office Suite | 13 | Q1 2006 | Q2 2004 | |||
WinZip | 10 | Q4 2005 | Q1 2004 | |||
iGrafx FlowCharter | 11 | Q1 2006 | Q4 2004 | |||
Graphics and Digital Imaging: | ||||||
CorelDRAW Graphics Suite | 13 | Q1 2006 | Q1 2004 | |||
Designer Suite | 12 | Q2 2005 | Q2 2003 | |||
Painter | 9.5 | Q1 2006 | Q4 2004 | |||
Paint Shop Pro | 10 | Q4 2005 | Q4 2004 |
Productivity revenues increased by 13.5% to $19.2 million in the second quarter of fiscal 2006 from $16.9 million in the second quarter of fiscal 2005, and by 22.1% from $31.9 million to $39.0 million over the first half of fiscal 2006. This increase is primarily due to higher WinZip revenues from higher new license sales and upgrades as we focused on converting trial customers to license users through more aggressive in-product messaging. The increase is also attributable to the availability of new WinZip products, includingWinZip 10.0andWinZip 10.0 Pro, and our maintenance program. Although ourWordPerfectproduct experienced some growth through our global internet store and retail channels primarily due to its recent release, there were lower overallWordPerfectrevenues. This is primarily due to lower PC shipments by our key OEM partners, and an overall decrease in our enterprise license revenues from our corporate and government install base, which we believe is attributable to the IT implications of Microsoft’s pending Vista launch. We are working with our OEM partners to refine our OEM productivity strategy. We expect that before the end of fiscal year 2006, the option of having the full version ofWordPerfect preloaded on PCs by Dell and other OEM partners may no longer be offered to end users.
Graphics and digital imaging revenues increased by 8.4% to $25.0 million in the second quarter of fiscal 2006 from $23.1 million in the second quarter of fiscal 2005, and increased 3.0% to $49.5 million for the first half of fiscal 2006. The increase is attributable to the strength ofPaint Shop ProandCorelDRAW Graphics Suite. Higher revenues were derived fromPaint Shop Prothrough our OEM partners and growth in emerging markets.CorelDRAW Graphics Suitegenerated higher revenues in the second quarter of fiscal 2006 because it is within its first year of release, and because the product has received strong market reception. These revenues were offset by lower sales ofPainterandDesigner Suite, which are late in their life cycle. Going forward, we are placing additional emphasis on our OEM and internet channels since they represent our most profitable route to market. Our new modular digital imaging platform, code-named “Alta”, will be our first product to benefit from this new emphasis.
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Total Revenues by Region
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
May 31, | May 31, | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
2006 | 2005 | Change | 2006 | 2005 | Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Americas | $ | 26,919 | $ | 23,270 | 15.7 | % | $ | 52,582 | $ | 47,821 | 10.0 | % | ||||||||||||
As a percent of revenue | 60.9 | % | 58.2 | % | 59.4 | % | 59.8 | % | ||||||||||||||||
EMEA | 13,681 | 13,671 | 0.1 | % | 29,449 | 27,097 | 8.7 | % | ||||||||||||||||
As a percent of revenue | 30.9 | % | 34.2 | % | 33.3 | % | 33.9 | % | ||||||||||||||||
Asia-Pacific | 3,610 | 3,060 | 18.0 | % | 6,466 | 5,071 | 27.5 | % | ||||||||||||||||
As a percent of revenue | 8.2 | % | 7.6 | % | 7.3 | % | 6.3 | % |
Revenues in the Americas increased by 15.7% in the second quarter of fiscal 2006 to $26.9 million compared to $23.3 million in the second quarter of fiscal 2005, and by 10.0% to $52.6 million for the first half of fiscal 2006. The increase was principally driven by the revenues associated with ourCorelDRAWandWinZipproducts.CorelDRAWrevenues increased because the latest release is within its first year and we added more North American OEM partners and bundling initiatives in the quarter. WinZip revenues increased because of higher new license sales and upgrades as we focused on converting trial customers to license users through more aggressive in-product messaging. The revenue increase in the Americas was offset by lowerWordPerfect revenues due to lower PC shipments by our key OEM partners and a decrease in revenues from our corporate and government install base.
Revenues in EMEA did not significantly change in the second quarter of fiscal 2006 compared to the second quarter of fiscal 2005, remaining at $13.7 million. Over the first half of fiscal 2006 compared to the first half of fiscal 2005, EMEA revenues increased 8.7% to $29.4 million. EMEA revenues have increased in this period due primarily to sales ofCorelDRAW and WinZip, its marketing efforts, and the stage of the product’s release cycle. During the current quarter, however, sales increases were offset by lower sales in Germany, Austria and Switzerland due to a weak regional market for graphics and digital imaging software.
Asia Pacific revenues increased by 18.0% to $3.6 million in the second quarter of fiscal 2006, and increased 27.5% to $6.5 million for the six month period ended May 31, 2006. The increase is primarily due to the additional partnerships, bundling agreements and visibility we are receiving in the region, and the additional resources we have allocated to China.
Cost of Revenues
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
May 31, | May 31, | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
2006 | 2005 | Change | 2006 | 2005 | Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Cost of product | $ | 5,049 | $ | 4,097 | 23.2 | % | $ | 10,054 | $ | 8,805 | 14.2 | % | ||||||||||||
As a percent of product revenue | 12.9 | % | 11.3 | % | 12.8 | % | 12.1 | % | ||||||||||||||||
Cost of maintenance and services | 276 | 293 | (5.8 | %) | 590 | 641 | (8.0 | %) | ||||||||||||||||
As a percent of maintenance and service revenue | 5.5 | % | 8.2 | % | 6.0 | % | 8.6 | % | ||||||||||||||||
Amortization of intangible assets | 2,648 | 6,636 | (60.1 | %) | 9,275 | 12,835 | (27.8 | %) | ||||||||||||||||
As a percent of revenue | 6.0 | % | 16.6 | % | 10.5 | % | 16.1 | % |
Cost of Product Revenues.Cost of product revenues increased by 23.2% to $5.0 million in the second quarter of fiscal 2006 from $4.1 million in the second quarter of fiscal 2005. Cost of product revenues increased by 14.2% from $8.8 million to $10.1 million over the six month period ending May 31, 2006. As a percentage of product revenues, cost of product revenues increased to 12.9% in the second quarter of fiscal 2006 from 11.3% in the second quarter of fiscal 2005. The percentage also increased in the six month period ended May 31, 2006 compared to the six month period ended May 31, 2005. The increase as a percentage of product revenue resulted from increased royalties due to a change in sales mix in our OEM channels.
Cost of Maintenance and Services Revenues.Cost of maintenance and services revenues decreased by 5.8% and 8.0% in the second quarter and first half of fiscal 2006, respectively. As a percentage of revenues, cost of maintenance and services revenues decreased to 5.5% of related revenues in the second quarter of fiscal 2006 from 8.2% in the second quarter of fiscal
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2005. Similarly, cost of maintenance and services revenues decreased to 6.0% of related revenues in the first half of fiscal 2006 from 8.6% in the first half of fiscal 2005. This decrease as a percentage of maintenance and services revenues is primarily attributable to WinZip’s higher maintenance revenues and the limited incremental costs to provide such revenue.
Amortization of Intangible Assets.Amortization of intangible assets decreased significantly in the second quarter and first half of fiscal 2006. The decrease of $4.0 million to $2.6 million in the second quarter of fiscal 2006 and the decrease of $3.5 million to $9.3 million in the first half of fiscal 2006 is due primarily to the fact that the intangible assets pushed down to our accounts in connection with our acquisition by Vector Capital are now fully amortized. Going forward, we expect amortization charges to remain similar to the current quarter, subject to any changes which may result from us making acquisitions.
Operating Expenses
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
May 31, | May 31, | |||||||||||||||||||||||
Percentage | Percentage | |||||||||||||||||||||||
2006 | 2005 | Change | 2006 | 2005 | Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Sales and marketing | $ | 14,023 | $ | 12,164 | 15.3 | % | $ | 28,527 | $ | 24,988 | 14.2 | % | ||||||||||||
As a percent of revenue | 31.7 | % | 30.4 | % | 32.2 | % | 31.2 | % | ||||||||||||||||
Research and development | 6,640 | 5,982 | 11.0 | % | 12,821 | 11,653 | 10.0 | % | ||||||||||||||||
As a percent of revenue | 15.0 | % | 15.0 | % | 14.5 | % | 14.6 | % | ||||||||||||||||
General and administrative | 6,193 | 4,654 | 33.1 | % | 11,588 | 10,313 | 12.4 | % | ||||||||||||||||
As a percent of revenue | 14.0 | % | 11.6 | % | 13.1 | % | 12.9 | % | ||||||||||||||||
Restructuring | 251 | 72 | 248.6 | % | 811 | 612 | 32.5 | % | ||||||||||||||||
As a percent of revenue | 0.6 | % | 0.2 | % | 0.9 | % | 0.8 | % |
Sales and Marketing.Sales and marketing expenses increased by 15.3% to $14.0 million in the second quarter of fiscal 2006, and increased by 14.2% to $28.5 million in the first half of fiscal 2006. As a percentage of total revenues, sales and marketing expenses increased to 31.7% in the second quarter of fiscal 2006. For the first half of fiscal 2006, sales and marketing expenses increased to 32.2% of revenues. This increase is primarily related to marketing efforts to support our most recent releases such asWordPerfectandCorelDRAW Graphics Suite.
Research and Development.Research and development expenses increased by 11.0% to $6.6 million in the second quarter of fiscal 2006 and by 10.0% to $12.8 million for the six month period ending May 31, 2006. As a percentage of total revenues, research and development expenses remained consistent at approximately 15.0% in all period. The increase in expenses is a direct result of higher salaries and benefits and localization costs related to our products targeted for emerging markets.
General and Administrative.General and administrative expenses increased by 33.1% to $6.2 million in the second quarter of fiscal 2006 from $4.7 million in the second quarter of fiscal 2005. On a six month basis, general and administrative expenses increased by 12.4% to $11.6 million for the period ended May 31, 2006. As a percentage of total revenues, general and administrative expenses increased to 14.0% and to 13.1% in the three and six month period ended May 31, 2006, respectively. The increase is attributable in part to costs associated with being a public company, and higher stock-based compensation expenses.
Restructuring.Restructuring costs of $251,000 incurred in the second quarter of fiscal 2006 represent the final severance costs related to the realignment of our sales and marketing force in the Americas and our research and development team. In the second quarter of fiscal 2005, restructuring costs of $72,000 represent final employee termination costs related to the acquisition and integration of Jasc.
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Non-Operating (Income) Expense
Three Months Ended | Six Months Ended | |||||||||||||||
May 31, | May 31, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
(unaudited) | ||||||||||||||||
Loss on debt retirement | $ | 8,275 | $ | 6 | $ | 8,275 | $ | 3,937 | ||||||||
Interest expense, net | 3,207 | 3,407 | 7,070 | 5,377 | ||||||||||||
Amortization of deferred financing fees | 357 | 504 | 801 | 804 | ||||||||||||
Other non-operating (income) expenses | (528 | ) | 193 | (648 | ) | 371 | ||||||||||
Total non-operating expenses | $ | 11,311 | $ | 4,110 | $ | 15,498 | $ | 10,489 | ||||||||
Loss on debt retirement.We incurred a loss on debt retirement of $8.3 million in the second quarter and first half of fiscal 2006 as a result of our refinancing $140.0 million of credit facilities prior to maturity.
Interest Expense, Net.Net interest expense decreased to $3.2 million in the second quarter of fiscal 2006 from $3.4 million in the second quarter of fiscal 2005. The decrease is primarily attributable to the refinancing that occurred in the second quarter where we raised $72.5 million in an initial public offering, entered into a $90.0 million senior credit facility and repaid $140.0 million of our existing credit facilities. The net result was $50.0 million less debt at a lower interest rate. For the six month period ended May 31, 2006, interest costs increased to $7.1 million due to the refinancing of our credit facilities and the inclusion of WinZip’s debt in our financial statements for the full two quarters of fiscal 2006.
Amortization of Deferred Financing Fees.Amortization of deferred financing fees decreased to $357,000 in the second quarter of fiscal 2006 from $504,000 in the second quarter of fiscal 2005 as a direct result of the lower financing fees incurred under the senior credit facility.
Other Non-Operating Expense (Income).We had income of $528,000 in the second quarter of fiscal 2006 compared to other non-operating expenses of $193,000 in the same quarter last year. Other non-operating (income) expenses consist primarily of foreign exchange gains and losses and unrealized gains and losses on forward exchange contracts. The gain reported in the second quarter of fiscal 2006 resulted from the strengthening of foreign currencies against the US dollar, including the British Pound and Euro.
Income Tax Expense (Recovery)
For the three months ended May 31, 2006, the Company recorded a tax provision of $1.8 million on a loss before income taxes of $2.2 million. The provision consists of $202 of deferred taxes and $1.6 million of current taxes. Deferred taxes relates to timing of deductibility of certain expenses. Current taxes consist of foreign withholding taxes plus taxes incurred by Corel’s foreign subsidiaries, including $1.4 million relating to WinZip operations.
For the three months ended May 31, 2005, the Company recorded a tax provision of $1.8 million on income before income taxes of $2.0 million. The provision includes $427,000 of deferred taxes relating to the tax benefits realized in Canada from the use of tax carry forwards, that existed prior to Corel’s acquisition by Vector Capital, less a deferred tax recovery of $408,000 related to WinZip operations in the quarter. Current taxes consists of $1.0 million relating to the WinZip operations and the balance is primarily foreign withholding taxes plus taxes incurred by Corel’s foreign subsidiaries.
Adjusted EBITDA
Adjusted EBITDA was $13.7 million in the second quarter of fiscal 2006 compared to $13.0 million in the second quarter of fiscal 2005. The $752,000 increase is due to higher revenue and income from operations in the quarter. Adjusted EBITDA was $28.1 million for the six months ended May 31, 2006 compared to $25.0 million for the six months ended May 31, 2005. The increase of $3.1 million in this period is also due mainly to the increase in income from operations.
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 changes in cash flows calculated in accordance with GAAP. We consider cash flow from operations to be the closest GAAP measure to Adjusted EBITDA. For the three months ended May 31, 2006 and 2005, we had cash flow from operations of $9.7 million and $8.4
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million, respectively, and for the six months ended May 31, 2006 and 2005, we had $15.7 million and $17.4 million of cash flow from operations, respectively. The table below reconciles Adjusted EBITDA to cash flow from operations:
Three Months Ended | Six Months Ended | |||||||||||||||
May 31, | May 31, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(in thousands) | ||||||||||||||||
(unaudited) | ||||||||||||||||
Cash flow provided by operations | $ | 9,741 | $ | 8,403 | $ | 15,667 | $ | 17,360 | ||||||||
Change in operating assets and liabilities | (463 | ) | (469 | ) | 267 | 109 | ||||||||||
Interest expenses, net | 3,207 | 3,407 | 7,070 | 5,377 | ||||||||||||
Income tax expense | 1,791 | 1,835 | 4,942 | 2,015 | ||||||||||||
Accrued interest | (352 | ) | (166 | ) | 261 | (533 | ) | |||||||||
Provision for bad debts | (52 | ) | (27 | ) | (174 | ) | (193 | ) | ||||||||
Unrealized foreign exchange losses on forward contracts | (193 | ) | (87 | ) | (221 | ) | (293 | ) | ||||||||
Deferred income taxes | (201 | ) | (19 | ) | (636 | ) | (313 | ) | ||||||||
Gain on disposal of fixed assets | — | 28 | — | 14 | ||||||||||||
Restructuring | 251 | 72 | 811 | 612 | ||||||||||||
Reorganization costs | — | — | 117 | 883 | ||||||||||||
Adjusted EBITDA | $ | 13,729 | $ | 12,977 | $ | 28,104 | $ | 25,038 | ||||||||
FINANCIAL CONDITION
Working Capital
Net working capital at May 31, 2006 was $3.3 million, an increase of $27.6 million from the November 30, 2005 working capital deficit of $24.3 million. The increase was largely attributable to proceeds generated on our initial public offering, and the refinancing of our credit facilities.
Current assets at May 31, 2006 were $55.0 million, an increase of $9.3 million from the November 30, 2005 year end balance of $45.7 million. The increase was largely attributable to the change in cash and cash equivalents and restricted cash, which went from $21.7 million at the end of the 2005 fiscal year, to $33.7 million at May 31, 2006 as a result of the Company’s initial public offering. Furthermore, trade accounts receivables declined by $2.6 million, from $19.3 million at November 30, 2005 to $16.8 million at May 31, 2006.
Current liabilities at May 31, 2006 were $51.7 million, a decrease of $18.3 million from the November 30, 2005 balance of $70.0 million. This was mainly due to the $14.9 million decrease in the current portion of term loan payable resulting from the Company’s senior credit facility, and the decrease of $4.0 million in accounts payable and accrued liabilities because of the settlement of year end liabilities.
Liquidity and Capital Resources
As of May 31, 2006, our principal sources of liquidity included cash and cash equivalents and restricted cash of $33.7 million, and trade accounts receivable of $16.8 million. As a part of our senior credit facility, we also entered into a five-year $75.0 million revolving line of credit facility, which is currently unused.
Cash provided by operations increased to $9.7 million for the three months ended May 31, 2006 compared to $8.4 million for the three months ended May 31, 2005. The increase is primarily attributable to the increase in operating income, after adjusting for non-cash expenses included therein, and after considering the increase in other non-operating income for the quarter ending May 31, 2006. Cash provided by operations decreased to $15.7 million from $17.4 million over the six-month period ending May 31, 2006 due primarily to additional interest costs associated with the refinancing of our credit facilities and the inclusion of WinZip’s debt in our financial statements for the full two quarters of fiscal 2006.
Cash provided by financing activities was $8.6 million for the three months ended May 31, 2006 compared to the use of cash in financing activities of $7.9 million for the three month period ended May 31, 2005. In the second quarter of fiscal 2006, we generated net proceeds of $72.5 million from our initial public offering. We also entered into a $165.0 million senior credit facility consisting of a $90.0 million term loan and a $75.0 million revolving line of credit facility, and agreed to repay $140.0 million of existing Corel and WinZip term loans. In the second quarter of fiscal 2005, we used cash to repay our existing line of credit facility and to pay a $4.0 million dividend to WinZip shareholders. Over the six month period ending May 31, 2006, cash used in financing activities decreased to $2.4 million from $32.6 million, due mainly to the paid up capital distributions and the offsetting additional term loans obtained in the first half of fiscal 2005.
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Cash used in investing activities was $425,000 in the three months ended May 31, 2006 compared to $467,000 in the three months ended May 31, 2005. We incurred additional costs associated with the acquisition of Jasc in the three months ended May 31, 2005. There were no such costs for the three months ended May 31, 2006. For the first half of fiscal 2006, $855,000 was used to purchase fixed assets, whereas in the first half of fiscal 2005, cash flows of $9.4 million were generated by the redemption of short-term investments.
Based on our current business plan and internal forecasts, we believe that existing cash and cash equivalents, together with funds generated from operations and the unused $75.0 million operating line of credit facility included under our senior credit facility, will be sufficient to meet our working capital and operating resource expenditure requirements for the next twelve months. Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the risks detailed in Part II, Item 1A titled “Risk Factors”.
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.
Interest Rate Risk
In connection with our initial public offering, we entered into a $165.0 million senior credit facility, consisting of a $90.0 million term loan and a $75.0 million revolving line of credit facility, and repaid our existing indebtedness in full. Under the senior credit facility, we are required to use interest rate swaps to limit our exposure to changing interest rates. As a result, we have interest rate swaps for $71.5 million with a major investment bank that provides for the Company to pay an amount equal to a specified fixed rate of interest times a notional principal amount and to receive in return an amount equal to a variable rate of interest times the same notional amount.
Our exposure to interest rate risk relates primarily to our long term debt, as we have minimal interest-bearing investments. Our interest rate exposure is primarily related to increases in the LIBOR or prime lending rate, because our debt has a floating rate of interest. Our annual interest expense could change by $92,500 for each 0.5% change in interest rates, based on the debt outstanding as of May 31, 2006 not covered by our interest rate swaps.
We will continue to review various options available to us in the coming fiscal year to determine if additional interest rate protection under our senior credit facility is advisable to further limit our risk to increases in lending rates.
Foreign Currency Risk
Most of our business is located in Canada. We incur a disproportionate percentage of costs in Canadian dollars as compared to Canadian dollar denominated revenues. We are therefore exposed to loss if the Canadian dollar appreciates against the U.S. dollar. We try to minimize the effect of changes in U.S./ Canadian dollar exchange rates on our business through the purchase of forward exchange contracts. As we also operate internationally, a portion of our business outside North America is conducted in currencies other than the U.S. dollar. Accordingly, the results of our business may also be affected by fluctuations in the U.S. dollar against certain European currencies, in particular the British Pound and 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.
We cannot predict the impact of future foreign exchange variations on our business. However changes between the U.S. dollar and other currencies could generate foreign exchange losses that could have a material effect on our business.
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. There were no changes in our internal control over financial reporting during the quarter ended May 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1.Legal Proceedings
Legal Proceedings
We currently, and from time to time, are involved in certain legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business, including assertions that we may be infringing patents or other intellectual property rights of others. We believe that the ultimate amount of liability, if any, for any pending claims of any type (either alone or combined) will not materially affect the financial position or results of operations. We also believe that, if necessary, we would be able to obtain any required licenses or other rights to disputed intellectual property rights on commercially reasonable terms. However, 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. Our 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.
At May 31, 2006, we were a defendant in an ongoing patent infringement proceeding described below:
Electronics For Imaging, Inc., Massachusetts Institute of Technology v. Corel Corporation et al.Plaintiffs filed this patent infringement action on December 28, 2001 against us and 213 other defendants in the U.S. District Court for the Eastern District of Texas, alleging infringement of U.S. patent 4,500,919. The patent expired on May 6, 2002. Plaintiffs allege that the defendants infringed the patent through the use of various color management and correction systems in their products. Plaintiffs seek unspecified damages and attorneys fees. Various motions including motions for summary judgment by both the plaintiffs and defendants, including the Company, were filed during the discovery phase of the proceeding. In July 2004, the court dismissed each summary judgment motion upon which we and the plaintiffs had joined issue. Following the decision on the summary judgment motions, the plaintiffs dismissed all claims against every remaining defendant except us, Microsoft and Roxio. The plaintiffs then stipulated to non-infringement in respect of the Company, Microsoft and Roxio and the action was dismissed in November 2004. In December 2004, the plaintiffs filed an appeal of various interlocutory rulings by the trial court including certain of the summary judgment decisions. The remaining defendants, including us, have filed opposition to the appeals. We have cross-appealed on the trial court’s dismissal of its request to have the action dismissed on summary judgment. Oral argument on the appeal was held on December 7, 2005. No decision on the appeal has been rendered to date. We believe we have meritorious defenses to the plaintiffs’ claims and intend to defend the litigation vigorously. However, the ultimate outcome of the litigation is uncertain.
Item 1A.Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business, financial condition, results of operations and trading price of our common stock. Please refer also to our Prospectus dated April 25, 2006 for additional information concerning other uncertainties that could negatively impact the Company.
Our “Alta” strategy may fail to achieve market acceptance with consumers and our strategic partners.We recently announced a new modular digital imaging platform code-named “Alta”, which represents our first modular product offering. Through Alta, we intend to offer consumers the functionality they require in incremental modules as they become more sophisticated users, which represents a significant departure from our traditional means of selling full function versions and upgrades of our digital imaging software. New products are inherently speculative. The commercial success of Alta will depend upon many factors beyond our control, such as market acceptance of purchasing modular software and the availability, functionality and pricing of products offered by our competitors. Our success will also largely depend on the acceptance and promotion of our modular digital imaging platform by our key strategic partners. Significant revenues from Alta and other new products and services may not be achieved for a number of years, if at all. Moreover, operating margins for new products such as Alta may not be as high as the margins we have experienced historically.
Item 2.Use of Proceeds
Initial Public Offering
On April 25, 2006, we filed a prospectus with the Securities and Exchange Commission (‘SEC’) as a part of our initial public offering. The offering was for 6,500,000 common shares, consisting of 5,000,000 from treasury (“primary offering”) and 1,500,000 shares from the selling shareholders. We did not receive any proceeds from the shares sold by the selling shareholders.
The common shares sold in the offering were registered on Registration Statement Form F-1 (File No. 333-132970) under the Securities Act of 1933. The offering was declared effective by the SEC on April 26, 2006. The managing underwriters were Morgan Stanley, JP Morgan, Deutsche Bank Securities, Piper Jaffray, CIBC World Markets and Canaccord Adams. All of the shares sold by us and by the selling shareholders were sold at a price of $16.00 per share. The aggregate gross proceeds from the common shares sold by us and the selling shareholders were $104.1 million. We received net proceeds of approximately $69.3 million from the offering, after deducting an aggregate of $5.6 million in underwriting discounts and commissions paid to the underwriters and an estimated $5.2 million in other direct expenses incurred in connection with the offering. None of the proceeds from the primary offering were paid, directly or indirectly, to any of the Company’s officers or directors or any of their associates, or to any persons owning ten percent or more of the Company’s outstanding common shares or to any of the Company’s affiliates.
Concurrent with the public offering, we entered into a $165 million senior credit facility consisting of a $90.0 million term loan and a $75.0 million revolving line of credit facility. We received net proceeds of $86.1 million from the senior credit facility, after paying financing fees of $3.9 million.
Upon consummation of the offering on May 2, 2006, we applied approximately $56.3 million of the net proceeds from the offering to repay a portion of our existing debt. In addition, we applied an estimated $66.1 million of net proceeds from the senior credit facility to repay the remaining balance of our existing debt. We also applied approximately $18.0 million to repay the existing indebtedness of WinZip. We invested the remaining $15.0 million of net proceeds from the offering in our working capital, where the application of such proceeds will be used for general corporate purposes, and may be used to fund future acquisitions.
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Item 6. Exhibits
Exhibit | ||
Number | Exhibit | |
31.1 | 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. |
Items 3, 4 and 5 are not applicable to us and have been omitted.
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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: July 10, 2006 |
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