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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

     (Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended May 31, 2002

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to _________

Commission file number 0-20562

COREL CORPORATION
(Exact name of Registrant as specified in its Charter)

 

Canada	Not Applicable
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

1600 Carling Avenue
Ottawa, Ontario, Canada    KIZ 8R7
(Address of Principal Executive Offices including Zip Code)

(613) 728-8200
(Registrant's Telephone Number, Including Area Code)


(Former name, former address and former fiscal year if changed since last report)

    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 reports), and (2) has been subject to such filing requirements for the past 90 days.   YES [X]    NO [  ]

COREL CORPORATION FORM 10-Q
TABLE OF CONTENTS

PART I. Financial Information

Item 1. Financial statements

Consolidated Balance Sheets as of May 31, 2002 and November 30, 2001

Consolidated Statements of Operations and Deficit for the Three and Six Months Ended May 31, 2002 and 2001

Consolidated Statements of Cash Flows for the Six Months Ended May 31, 2002 and 2001

Notes to Consolidated Financial Statements

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Liquidity and Capital Resources

Item 3. Quantitative and Qualitative Disclosure About Market Risk

PART II. Other Information

Item 1. Legal Proceedings

Item 6: Exhibits and Reports on Form 8-K

Signatures

PART I -- FINANCIAL INFORMATION

Item 1. Financial Statements

COREL CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands of US$)

(unaudited)

(See accompanying notes)

COREL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

AND DEFICIT

(in thousands of US$, except per share data)

(unaudited)

(See accompanying notes)

COREL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of US$)

(unaudited)

(See accompanying notes)

COREL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

May 31, 2002

(unaudited)

1. Summary of significant accounting policies

All dollar amounts included herein are expressed in thousands of US$ unless otherwise noted. Certain per share information is expressed in units of US$ unless otherwise noted.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"). These principles are also generally accepted in the United States ("US GAAP") in all material respects except as disclosed in Note 5. In management's opinion, all adjustments necessary for fair presentation are reflected in the financial statements. All adjustments made are normal and recurring in nature. Corel Corporation has followed the same accounting policies and methods of application as in the most recent audited financial statements except as stated here within.

Goodwill and Other Intangible Assets

The company is accounting for the goodwill associated with the October 30, 2001 acquisition of Micrografx, Inc. and the March 15, 2002 acquisition of Softquad Software Ltd. in accordance with Canadian Institute of Chartered Accountants (CICA) 3062 - "Goodwill and Other Intangible Assets" ("CICA 3062") which requires the value of goodwill and intangible assets that result from business combinations subsequent to June 30, 2001 to be valued on an annual basis. If the amount recorded for goodwill or intangible assets is less than the current value, an impairment of the asset is recorded on November 30, 2002 for the difference. If at any point during the year, certain events result in a material impact, a write-down may be required at that point in time.

2. Earnings per share

The calculation of earnings per share is based on the weighted average number of shares outstanding during the period. The calculation of diluted earnings per share assumes that all outstanding options, warrants and convertible preferred shares have been exercised at the later of the beginning of the fiscal period or the option, warrant, or convertible preferred share issuance date. As the impacts of the exercise of options and conversion of preferred shares are anti-dilutive in the first six months of 2002, 33,000 outstanding options, 535,000 warrants and 24,000,000 preferred shares have been excluded from the calculation of diluted earnings per share.

3. Segmented information

The Company has only one global operating segment. The Company sells its products worldwide from four geographic regions. A summary of sales by product, sales channel, region and major customer from consolidated operations is as follows:

4. Acquisition of Softquad Software Ltd. ("Softquad")

On March 15, 2002, the Company completed the acquisition of all of the issued and outstanding stock of Softquad, a developer of XML-enabling technologies and commerce solutions for e-Business. The Company's consolidated statements of operations reflect the results of operations of Softquad from the date of acquisition.

The aggregate purchase price paid was approximately $18.1 million consisting of 11,071,833 shares of newly issued common shares of Corel at a value of $16.9 million. The components of the aggregate purchase price were as follows (in thousands)

Other costs of acquisition include professional fees and other costs directly related to the acquisition.

The Softquad acquisition has been accounted for in accordance with the purchase method of accounting. The purchase price has been allocated to identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as follows:

The estimates of fair value were determined by the Company's management based on information furnished by the management of Softquad and an independent valuation of developed software and in-process research and development products.

Goodwill will be re-evaluated during on an annual basis for impairment. All losses will be recorded against income in the year impairment is determined. Factors that contributed to goodwill include synergies to be achieved by combining Softquad technologies with the Company's technologies, access to certain distribution channels and customer lists, as well as additional workforce skill sets. If at any point during the year, certain events result in a material impact, a write-down of goodwill may be required at that point in time.

To determine the fair market value of the core technology and the developed software, the Company considered the three traditional approaches of value: the cost approach, the market approach and the income approach.

The independent valuator relied primarily on the income approach, under which fair market value is a function of the future revenues expected to be generated by an asset, net of all allocable expenses. The income approach focuses on the income-producing capability of the developed software and the core technology, and best represents the present value of the future economic benefits expected to be derived.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information gives effect to the acquisition of Softquad made by Corel as if the transactions occurred at the beginning of each of the six month periods ended May 31, 2002 and May 31, 2001

5. Significant differences between Canadian and United States GAAP

The Company's financial statements are prepared on the basis of Canadian GAAP, which differs in some respects from US GAAP. There were no differences in reported cash flows for the periods presented. Significant differences between Canadian GAAP and US GAAP are reflected in the Balance Sheets and Statements of Operations set forth below:

A. In-process research and development

Associated with the allocation of the purchase price of the acquisition of Micrografx is $4.3 million for in-process research and development which, for US GAAP purposes, is to be expensed in the year of acquisition if the related technology has not reached technological feasibility and does not have an alternative future use This adjustment results in a $4.3 million reduction of capital assets and increase in the reported net loss for the quarter ending November 30, 2001. This adjustment reduces the book value of the assets acquired and, in turn, the related tax difference on those assets resulting in a reduction of $1.6 million to the future tax liability and goodwill. Under Canadian GAAP, the company has not yet commenced amortization of the in-process research and development.

B. Available for sale securities

SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") requires available-for-sale securities to be marked to market with unrealized holding gains or losses being accounted for in other comprehensive income. Accordingly, the reported carrying value of investments would not have changed at May 31, 2002 and would have decreased by $0.4 million at November 30, 2001. In addition, income taxes payable would not have changed at May 31, 2002 and decreased by $0.1 million at November 30, 2001.

C. Comprehensive income

Other comprehensive income includes items that cause changes in shareholders' equity but are not related to share capital or net earnings which, for the Company, comprises only unrealized holding gains on available-for-sale securities and any related tax expense.

D. Accounting for stock-based compensation

In accordance with Financial Accounting Standards Board ("FASB") interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", and interpretation of APB No. 25 ("FIN 44"), the repricing of options that occurred on November 16, 2000 to CDN $5.70 or US $3.63 has resulted in variable plan accounting for the re-priced options. The options were repriced to the market value of the underlying common shares at the time of repricing. At May 31, 2002, 1,544,500 options had been tendered for repricing to CDN $5.70 while 186,000 options had been tendered for repricing to US $3.63. The market value of the Company's shares has never gone above the exercise price of the options since the repricing occurred, thus no expense has been recorded. For US GAAP reported results of operations, future periods may reflect compensation charges or credits depending on the fair market price of the underlying shares.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Overview

Corel develops, manufactures, licenses, sells and supports a wide range of software solutions for home and small business users, creative professionals and enterprise customers. Corel's software is available for use on most industry computers, including those produced by International Business Machines Corporation ("IBM"), Apple Computer, Inc., and those using Linux operating systems. The Company plans to leverage its existing and recently acquired technology assets and experience to enhance its relationships with existing customers, as well as to target new customers in emerging markets created by the expansion of the Web and the increasing demand for graphics-rich visual communication. Corel also plans to develop applications for Microsoft Corporation's ("Microsoft") .NET platform as part of its commitment to offer customers flexible services and solutions.

On March 15, 2002, Corel acquired Softquad Software Ltd. ("Softquad"). Softquad is a developer of XML-enabling technologies and commerce solutions for e-Business. The technology acquired will aid in the development of new products that enable customers to create graphic-rich content that can be output easily and simultaneously to multiple channels, including the Web. Upon close, approximately 11.1 million common shares were issued to former Softquad shareholders for a value of $16.9 million representing 100% of the total consideration.

Corel's business strategy emphasizes the development of a broad line of software solutions for business, academic and personal use, marketed through multiple channels of distribution. These software solutions are designed to provide customers with tools to create, publish and deploy content. The Company also plans to leverage and extend its technology base using partnerships and acquisitions to develop and market solutions that maximize customers' ability to exchange information.

The following information contains forward-looking statements, as defined by the United States Private Securities Litigation Reform Act of 1995, involving Corel's expectations about future financial results and other matters. These statements reflect management's current forecast of certain aspects of Corel's future business. Specifically, this release contains forward-looking statements regarding the likely benefits from new product introductions and the need by the marketplace for the products under development; the programs being undertaken by Corel and expectations regarding the ability of the Corel to increase sales and return to profitability and results in future quarters and for the year. The words "plan," "expect," "believe," "intend," "anticipate," "forecast," "target," "estimate" and similar expressions identify forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results of operations to differ materially from historical results or current expectations. In particular, there can be no assurance that the Corel's cost reductions will be adequate or that the Corel will achieve a level of revenue that will allow Corel to return to profitability, or that Corel will be able to successfully implement or complete the short-term and long-term programs being undertaken by the company. Risk factors include shifts in customer demand, product shipment schedules, product mix, competitive products and pricing, technological shifts, Corel's effectiveness at executing its sales, marketing and development plan, the market acceptance of new products and other variables. Readers are referred to Corel's most recent reports filed with the Securities and Exchange Commission for a more complete discussion of the other risks and uncertainties. The factors underlying forecasts are dynamic and subject to change. As a result, forecasts speak only as of the date they are given and do not necessarily reflect Corel's outlook at any other point in time. Corel does not undertake to update or review these forward-looking statements.

Revenue

The 15% decrease in revenues for the quarter ended May 31, 2002 from the quarter ended May 31, 2001 can mainly be attributed to the Company's flagship business application product, Corel WordPerfect 2002, being released in the second quarter of 2001, whereas no new products were released in the second quarter of 2002. Sales have also decreased 10% in the first six months of fiscal 2002 from the first six months of fiscal 2001 as a result of other current products nearing the end of their life cycle.

Revenues have maintained a relatively consistent level as a result of the Company's product offerings remaining consistent with previous quarters. Significant overall revenue growth is not expected before the fourth quarter of fiscal 2002 with the release of CorelDRAW Graphics Suite 11 and Corel Ventura expected late in that quarter. Corel Xmetal and Enterprise Process Management will also contribute to increased fourth quarter revenues.

Revenue by Product Group

Creative Products revenue increased by 14.8% for the quarter ended May 31, 2002 from the quarter ended May 31, 2001. This can be mainly attributed to the restructuring of the Company in October 2001 to focus more on European markets where the demand for CorelDRAW products has increased. For the first six months of 2002, creative products revenues declined 7% from the first six months of 2001. This can be attributed to no new product releases during the first six months of 2002 whereas the Company's flagship product, CorelDRAW 10, was released just prior to the first quarter of 2001.

Revenues from Creative Products is expected to increase during the remainder of the year as a result of the anticipated release of CorelDRAW Graphics Suite 11 in the third quarter of fiscal 2002.

Business Applications revenue declined by 48.7% for the quarter ended May 31, 2002 from the quarter ended May 31, 2001. It also declined 31% for the first six months of 2002 from the first six months of 2001. This can attributed to the release of Corel WordPerfect Office 2002 being released in the second quarter of 2001 whereas no new business application products were released in the first six months of 2002, and the existing products are reaching the end of their life cycle.

Revenues from Business Applications are expected to remain constant in Q3 2002 with the release of Corel WordPerfect Family Pack 4 and increase in Q4 2002 with the release of Corel WordPerfect 11.

Other revenues in the first quarter of 2002 relate primarily to revenues from products obtained from the purchase of Micrografx and Softquad, including Enterprise Process Management ("EPM") products. Revenues from EPM products are expected to increase during the remainder of the year as the Company continues to promote its presence in the EPM market.

Revenue by sales channels

Corel distributes its products primarily through distributors (as retail packaged products), OEM licences and corporate licences.

Sales from retail packaged products decreased by 23% in the quarter ended May 31, 2002 from the quarter ended May 31, 2001, and declined 15.2% in the first six months of 2002 from the first six months of 2001. A large majority of this decline can be attributed to Business Applications, which had Corel WordPerfect Office 2002 released in the second quarter of 2001 whereas no new products were released in 2002. The remainder of the decline can be attributed to Creative Products, which also had no new product releases in 2002, as well as to an industry trend to carry reduced inventory levels

OEM sales decreased 26% for the second quarter of 2002 from the second quarter of 2001, and decreased 40% in the first six months of 2002 compared to the first six months of 2001. This decline is consistent across all product groups and can be attributed to the general decline in royalties that OEM customers are willing to pay for licences included in their products, and to no new products being released in the quarter.

Corporate licenses increased 7.5% in the second quarter of 2002 from the second quarter of 2001. Corporate licences also increased 10% in the first six months of 2002 compared to the first six months of 2001. The increase is directly related to Creative Products revenues in Europe, Middle East and Africa. This is a result of the Company's growth strategy, which focuses more attention on the corporate community, as well as the European markets.

Under this strategy, the Company expects to increase the number of direct sales made to corporate customers in fiscal 2002. Although the Company anticipates growth within the retail channel, new product lines will not be as heavily reliant on the retail channel as previous product lines due to the majority of revenue growth expected in the corporate enterprise market. Consequently, the Company's channel mix is expected to continually shift from retail to corporate/direct sales during the remainder of the year.

Revenue by region

Revenue in North America declined 25% in the second quarter of 2002 from the second quarter of 2001. North American revenue also declined 16% in the first six months of 2002 compared to the first six months of 2001. This can be attributed to no new product releases during the quarter, as well as a trend in the industry to reduce inventory levels in stock.

Revenues in Europe, Middle East and Africa increased by 43% for the quarter ended May 31, 2002 from the quarter ended May 31, 2001. Revenues also increased by 20.5% in Europe, Middle East and Africa for the first six months of 2002 from the first six months of 2001. This can be attributed to the restructuring of the Company which occurred in October, 2001 to focus more attention on the European markets.

Corel's products are sold primarily in US dollars in all regions other than Europe where the Euro is the predominant currency.

Cost of sales and gross profit

Cost of sales declined 17.8% during the quarter ended May 31, 2002 from the quarter ended May 31, 2001. For the first six months of 2002, cost of sales also declined by 12.4% from the first six months of 2001. The decline is primarily due to the increase in corporate licence sales, which require minimal manufacturing costs. This cost savings was partially offset by the amortization of the additional technology which was acquired with Micrografx.

As the Company continues its focus on the corporate community, it is anticipated that the costs associated with assembly and manufacturing will continue to decline as a percentage of revenue, but will be offset by the increased amortization from software purchased on acquisition of both Micrografx and Softquad. The net effect is expected to be a marginal improvement to the gross margin percentage.

Advertising Expenses

Advertising expenses increased marginally by 3% for the second quarter of 2002 from the second quarter of 2001. For the first six months of 2002, advertising expenses declined 9% from the first six months of 2001. This can be directly attributed to no new product releases during the first six months of 2002, whereas Corel WordPerfect 2002 and CorelDRAW 10 were heavily promoted in the first six months of 2001.

With the anticipated release of new products, including CorelDRAW Graphics Suite 11 in the third quarter of 2002, and Corel WordPerfect 11 in the fourth quarter of 2002, advertising expenses are expected to increase for the remainder of fiscal 2002.

Selling, general and administrative expenses

Selling, general and administrative expense increased by 12% during the quarter ended May 31, 2002 compared to the quarter ended May 31, 2001. For the first six months of 2002, selling, general and administrative expenses increased 9.3%. This can be attributed to the additional infrastructure and employees acquired from the acquisition of Micrografx in October, 2001 and Softquad, in March, 2002.

It is anticipated that selling, general, and administrative costs will increase marginally for the remainder of fiscal 2002 as the Company continues to reposition itself as outlined in its corporate strategy.

Research and development expenses

Research and development costs increased 32% for the quarter ended May 31, 2002 from the quarter ended May 31, 2001. Research and development costs also increased 29% in the first six months of 2002 from the first six months of 2001. This increase can be attributed to the developers retained subsequent to the acquisition of Micrografx and Softquad.

The Company anticipates research and development costs for the remainder of fiscal 2002 to remain at current levels.

Depreciation and amortization expenses

Depreciation and amortization increased 35% in the second quarter of 2002 from the second quarter of 2001. These costs also increased 12% for the first six months of 2002 due to the amortization of additional assets acquired on the purchase of Micrografx and Softquad.

No significant changes in depreciation and amortization are expected for the remainder of fiscal 2002.

Interest income

Interest income declined 72% for the quarter ended May 31, 2002 from the quarter ended May 31, 2001. Interest also declined 72% in the first six months of 2002 from the first six months of 2001. These decreases were primarily attributable to decreases in the average effective interest rates in the respective periods. In addition, there was a decline in cash available for investment as a result of costs related to the acquisition of Micrografx and Softquad.

Income taxes

The Company's tax expense is impacted by the relative profitability of its operations in various geographic regions. Income tax expense increased by 373% in the second quarter of 2002 compared to the second quarter of 2001 primarily as a result of an increase in withholding tax expense during the quarter. Income tax expense declined by 20% in the first six months of 2002 compared to the first six months of 2001 primarily as a result of reductions of its future income tax liabilities.

Liquidity and capital resources

As of May 31, 2002, Corel's principal sources of liquidity included cash and cash equivalents and short-term investments of approximately $85.9 million, and trade accounts receivable of $23.8 million. As of May 31, 2002, $19.4 million of cash was restricted in use as it was held as security against certain corporate financial obligations, including $16.3 million held in trust as a requirement for the participation rights issued in the acquisition of Micrografx. The value of the participation rights is to be paid in cash or common shares of Corel on October 30, 2002. In the event Corel's common share price at that time is equal to or less than $2.29, Corel will pay the remaining transaction value in Cash. If Corel's common share price is highr than $2.29, Corel will issue common shares with a then-current value equivalent to the remaining one-half of the transaction value, on a per share basis, 18% of any increase in the value of Corel common shares in the 12 month period following the close.

Cash used in operations was $12.6 million for the first six months of fiscal 2002 compared to cash provided by operations of $14.0 million for the first six months of 2001. The decrease was primarily due to additional spending on research and development, and additional costs associated with the acquisition of Micrografx and Softquad.

Trade accounts receivable, net of provisions increased from $18.7 million at November 30, 2002 to $23.8 million at May 31, 2002. The increase was partly a result of a reduction of the provision for returns.

Accounts payable and accrued liabilities decreased from $27.9 million at November 30, 2001 to $23.2 million at May 31, 2002 mainly due to payment of previously accrued liabilities, including those that were assumed on the acquisition of Micrografx.

Financing activities provided $0.1 million in the first six months of 2002 compared to cash used in financing activities of $9.9 million in the first six months of 2001. The source of cash in the first quarter of fiscal 2002 through financing activities was the issuance of shares. The use of cash in the first six months of fiscal 2001 can be attributed to repayment of the Novell obligations of $10 million.

Cash provided from investing activities was $33.8 million in the first six months of 2002 compared to cash used in investing activities of $25.8 million in the first six months of 2001. The primary source of cash was the redemption of short-term investments, which provided $38.4 million for the first six months of 2002. The main use of cash for investing activities during the quarter were costs associated with the acquisition of Softquad of $2.6 million, additional costs associated with the acquisition of Micrografx of $0.5 million, as well as for expenditures for capital assets of $1.4 million.

On September 19, 2000, the Company announced it had entered into a share purchase agreement with an institutional investor. Subject to the terms and conditions of this agreement, the Company may issue and sell to the investor up to 14,690,000 shares in periodic draw-down periods over 24 months, if all warrants are exercised. The Company had not issued any shares under this agreement as of May 31, 2002.

The Company currently has $46.2 million of cash and cash equivalents and $39.7 million of short-term investments which are highly liquid. The Company believes this, along with future cash flow from operations will provide sufficient liquidity for the near term. Cash provided from operations is expected to decrease and perhaps continue to be negative over the next two to three quarters as the Company continues to develop new product lines from technology acquired from Micrografx and SoftQuad. The Company believes available balances of cash and cash equivalents and short-term investments are sufficient to meet its working capital requirements for the foreseeable future.

Future Payments

Commitments under lease and sponsorship contract obligations as of May 31, 2002 were as follows:

Potential Fluctuations in Quarterly Results

The Company has experienced, and expects to continue to experience, significant fluctuations in its quarterly operating results due to the following factors: market acceptance of new and enhanced products, timing and shipment of significant orders, mix of products sold, exchange rate fluctuations, length of revenue cycles and cycles in the markets the Company serves. In addition, the Company's net revenue and operating results for a future quarter will depend on generating and shipping orders in the same quarter that the order is received. The failure to receive anticipated orders or delays in shipments near the end of a quarter, due to rescheduling, cancellations or unexpected manufacturing difficulties, may cause net revenue in a particular quarter to fall significantly below expectations. This could adversely affect the Company's operating results for such quarter.

Being first to market with new products is critical to revenue growth. As the Company and its competitors develop new products, demand for the Company's current and future products will fluctuate. If demand for the Company's products were to decline significantly, revenue would decline and cost of sales would increase as a result of obsolete inventory and accelerated amortization of capitalized licences.

Critical Accounting Policies and Estimates

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in Canada. The preparation of these financial statements requires Corel to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, Corel evaluates its estimates including those related to product returns, bad debts, inventories, intangible assets, income taxes, contingencies and litigation. Corel bases its 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 judgements 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.

Corel believes the following critical accounting policies affect its more significant judgements and estimates used in the preparation of its consolidated financial statements:

Revenue recognition

The Company recognizes revenue in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition," issued by the American Institute of Certified Public Accountants ("AICPA"), SOP 98-9, "Modification of 97-2, Software Recognition with Respect to Certain Transactions" and Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial Statements", issued by the Securities and Exchange Commission ("SEC").

The Company records product revenue from packaged software and license fees when persuasive evidence of an arrangement exists, the software product has been shipped, there are no significant uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is considered probable.

Revenue is net of a provision for product returns. In computing this provision, management uses estimates and professional judgement. These estimates are based on information on channel inventory and current run rates. Consequently, actual return rates could vary materially from management's estimates. An increase in the return rate could result from changes in consumer demand. Should this variance occur, revenues could fluctuate significantly. Variances from estimated return rates and actual return rates are adjusted for monthly.

At the time of contract signing, the Company assesses whether the fee associated with the revenue transactions is fixed and determinable based on the payment terms associated with the transaction. The Company considers the fee to be fixed and determinable if it is due within the Company's normal payment terms, which are generally 30 to 90 days from invoice date.

The Company assesses collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company does not request collateral from its customers. If it is determined that collection of a fee is not reasonably assured, the Company defers the fee and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash.

The Company uses binding purchase orders and signed license agreements as evidence of an arrangement. The Company's arrangements do not include acceptance clauses.

The Company reviews its accounts receivable and evaluates the adequacy of its allowance for doubtful accounts. Specific items that are analyzed include historical bad debts, changes in customer payments, and current economic trends.

Income taxes

The Company has a net future tax asset, the principal components of which are book and tax differences on assets and net operating loss carryforwards. The Company believes sufficient uncertainty exists regarding the realizability of these net future tax assets such that a valuation allowance has been taken on the entire amount. Assumptions regarding the realizability of these net future tax assets are revisited at each balance sheet date. Any changes in the Company's overall operating environment and financial performance could result in adjustments to the valuation allowance.

Goodwill

The Company assesses the impairment of identifiable intangible assets, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Future adverse changes in the market conditions or poor operating results of the underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment's carrying value, thereby, possibly requiring an impairment charge in the future.

New Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, which is the fiscal year beginning December 1, 2002 for the Company. The Company has not assessed the impact that the adoption of this standard will have on its results of operations or financial position.

In December 2001, the CICA issued AcG 13 - "Hedging Relationships" ("AcG 13"). The guideline presents the views of the Canadian Accounting Standards Board on the identification, designation, documentation and effectiveness of hedging relationships, for the purpose of applying hedge accounting. The guideline is effective for all fiscal years beginning on or after January 1, 2002, which is the fiscal year beginning December 1, 2002 for the Company. The Company has not assessed the impact that the adoption of this standard will have on its results of operations or financial position.

In January 2002, the CICA amended CICA 1650 - "Foreign Currency Translation" ("CICA 1650"). The amended standard eliminates the requirement to defer and amortize exchange gains and losses related to foreign currency denominated monetary items with a fixed or ascertainable life extending beyond the end of the following fiscal year, and requires new disclosure surrounding foreign exchange gains and losses. The standard is effective for all fiscal years beginning on or after January 1, 2002, which is the fiscal year beginning December 1, 2002 for the Company. The Company has not assessed the impact that the adoption of this standard will have on its results of operations or financial position.

In January 2002, the CICA issued CICA 3870 - "Stock-Based Compensation and Other Stock-Based Payments" ("CICA 3870"). This section establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services. This section sets out a fair value-based method of accounting and is required for certain, but not all, stock-based transactions. The recommendations of this section should be adopted for fiscal years beginning on or after January 1, 2002, which is the fiscal year beginning December 1, 2002 for the Company, and applied to awards granted on or after the date of adoption. The Company has not assessed the impact that the adoption of this standard will have on its results of operations or financial position.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest rate risk

Corel's exposure to market risk for changes in interest rates relates primarily to its investment portfolio of cash equivalents and short-term investments. The primary objective of the Company with respect to investments is security of principal. Investment criteria include selecting securities having an acceptable credit rating and diversifying both issuers and terms to maturity, which in no case exceed one year. Short-term investments include only those securities with active secondary or resale markets to ensure portfolio liquidity. Sustained low general interest rates, particularly in the United States, could significantly reduce Corel's interest income. Corel does not use derivative financial instruments in its investment portfolio.

At May 31, 2002, interest rates on the Company's investments ranged from 1.75% to 2.37% per annum (average rate approximately 1.94% per annum) with all investments maturing by the end of January 2003. The Company's cash, cash equivalents and short-term investments are denominated predominantly in US dollars.

The table below presents principal amounts and related weighted average interest related by date of maturity for Corel's interest bearing investment portfolio. Weighted average interest rates include the after-tax yield on a debt security of a major Canadian corporation

		Weighted average	Fair value at
	Maturity balance	after-tax yield	May 31, 2002
Cash equivalents	$ 3,000	0.92%	$ 3,045
Commercial Paper	75,520	1.41%	75,708
Total investment portfolio	$ 78,520	1.39%	$ 78,753

Foreign currency risk

Corel conducts business worldwide. Revenues and expenses are generated primarily in US dollars, but the Company does operate in foreign currencies, primarily in Canada and Europe and, to a lesser extent, in Australia, Latin America, Japan and other Asian countries. As the Company's business expands, its exposure to foreign currency risk will increase. Corel continues to monitor its foreign currency exposure to minimize the impact on its business operations. Corel has mitigated, and expects to continue to mitigate, a portion of its currency exposure through decentralized sales, marketing and support operations in which most costs are local currency based. As of May 31, 2002, Corel had no foreign currency hedges outstanding.

PART II. OTHER INFORMATION

Item 1. Legal and Government Proceedings

On March 13, 2000, the Company was served with a complaint filed against it and Dr. Michael C.J. Cowpland by plaintiffs Anthony Basilio and Fred Spagnola in the United States District Court for the Eastern District of Pennsylvania. The Complaint was filed on behalf of all persons who purchased or otherwise acquired Corel common shares between December 7, 1999 and December 21, 1999 (the "Class Period"). The Complaint alleges that the defendants violated various provisions of U.S. federal securities laws, including Section 10(b), Section 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934, as amended, by misrepresenting or failing to disclose material information about the Company's financial condition. The Complaint seeks an unspecified amount of money damages. Numerous other complaints were filed thereafter, each making similar allegations and referencing the same Class Period as the initial claims. The Court appointed Fred Spagnola, Michael Perron and David Chavez as Lead Plaintiffs, and the law firms of Weinstein, Kitchenoff Scarlato & Goldman Ltd., and Savett Frutkin Podell & Ryan, P.C. as Co-Lead Counsel. The Court has consolidated all pending cases in the Eastern District of Pennsylvania. An Amended Consolidated Complaint was served on or about August 14, 2000, which claims an expanded Class Period, from December 7, 1999 to March 20, 2000 (inclusive), and contains several new allegations. On or about July 6, 2001, the Company and co-defendant Cowpland filed their answers to the amended Complaint, denying all liability to Plaintiffs and asserting various affirmative defenses. By order dated February 1, 2002, the Court granted Plaintiffs' motion for class certification and on May 3, 2002 approved the expanded Class Period as claimed in the Amended Consolidated Complaint. The parties are continuing their discovery processes. The trial date for this action has not yet been set.

The Company is a party to a number of additional claims arising in the ordinary course of business relating to employment, intellectual property and other matters. Based on its review of the individual matters, the Company believes that such claims, individually, will not have a material adverse effect on its business, financial position or results of operations but, in the aggregate, may have a material adverse effect on its business, financial position or results of operations. Such possible effect cannot be reasonably estimated at this time.

Item 4. Submission of matters to a vote of security holders

a) The Annual and Special Meeting of Shareholders was held on March 28, 2002

b) Six matters submitted to vote:

1) Fixing the numbers of directors at nine.

2) Election of Board of Directors

Each of the persons named in the Proxy statement as a nominee for director was elected. Following are the voting results on each of the nominees for director.

3) The appointment of PricewaterhouseCoopers LLP as auditors.

For	Shares Withheld
49,055,600	152,829

4) The approval of Special Resolution No. 1 - amendments to the Articles of the Corporation to provide, as part of the other provisions set out in paragraph 2 of the articles, that the registered office of the Corporation be in the Province of Ontario;

to provide, as part of the other provisions set out in paragraph 7 of the articles, that the actual number of directors within the minimum and maximum be determined from time to time by resolution of he directors and that any vacancy among the directors may be filled by resolution of the directors; and

5) The approval of Resolution No. 1 - amendment to Corel Corporation Stock Option Plan 2000 ("Plan 2000") to fix the number of common shares reserved for issuance under the 2000 Plan ant 10,400,000 common shares.

6) The approval of Resolution No. 2 - confirming By-Law No. 7 of the Corporation relating generally to the transaction of the business and the affairs of Corel Corporation.

Item 6. Exhibits and Reports on Form 8-K

a) The following exhibits are filed as part of this Quarterly Report on Form 10Q

3.2 By-Law No.7 (1)

3.4 Amendment to Articles of Incorporation (1)

4.1 Amended Corel Corporation Stock Option Plan 2000 as amended February 12, 2002 (1)

b) Reports on Form 8-K

During the three-month period ended May 31, 2002, the Company filed one Current Report on Form 8-K including information requested under Item 5 & Item 7 as follows:

On March 15, 2002, the Company reported the completion of the acquisition of Softquad Software Ltd.

(1) Previously filed as an exhibit to the Company's 10Q quarterly report filing on April 15, 2002 and incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

COREL CORPORATION

(Registrant)

Date: July 15, 2002 By: /s/ John Blaine

John Blaine

Chief Financial Officer, Executive Vice President Finance and Treasurer

(Principal Financial and Accounting Officer)