2003 (9
months)
|
$ 2,995 |
$ 877 |
$
3,872 |
| 2004 |
3,333 |
903 |
SIZE="-2">4,236 |
| 2005 |
1,852 |
930 |
SIZE="-2">2,782 |
| 2006 |
987 |
958 |
SIZE="-2">1,945 |
2007
|
392 |
987 |
SIZE="-2">1,379 |
2008 and
thereafter |
6,101 |
11,656 |
SIZE="-2">17,757 |
|
$
15,660 |
$
16,311 |
$
31,971 |
FACE="Frutiger 45 Light" SIZE="-2">Potential Fluctuations in Quarterly
Results
We experience significant fluctuations in our
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 we serve. In addition, our 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 our operating results for such quarter.
Being first to market with new products is critical
to revenue growth. As we and our competitors develop new products, demand for our
current and future products will fluctuate. If demand for our 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
Our discussion and analysis of financial condition
and results of operations are based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in Canada. The
preparation of these financial statements
requires us to make estimates and judgements that affect the reported amounts of assets, liabilities,
revenue and expenses and related
disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates including
those related to product returns,
bad debts, inventories, intangible assets, income taxes, contingencies and litigation. We base our
estimates on historical experience and
on various other assumptions that are believed to be reasonable under the circumstances, the results of
which form the basis for making
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.
We believe the following critical accounting
policies affect our more significant judgements and estimates used in the preparation of our
consolidated financial statements:
FACE="Frutiger 45 Light" SIZE="-2">Revenue recognition
We recognize 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").
We record 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, we use estimates and professional judgement. These
estimates are based on information on channel inventory and current return rates. Consequently, actual
return rates could vary materially
from our estimates. An increase in the return rate could result from changes in consumer demand.
Should this variance occur, revenue
could fluctuate significantly. Variances from estimated return rates and actual return rates are adjusted
for monthly.
At the time of contract signing, we assess whether
the fee associated with the revenue transactions is fixed and determinable based on
the payment terms associated with the transaction. We consider the fee to be fixed and determinable if
it is due within our normal
payment terms, which are generally 30 to 90 days from invoice date.
We assess collection based on a number of
factors, including past transaction history with the customer and the credit-worthiness of the
customer and do not request collateral from our customers. If it is determined that collection of a fee is
not reasonably assured, we defer
the fee and recognize revenue at the time collection becomes reasonably assured, which is generally
upon receipt of cash.
We use binding purchase orders and signed
license agreements as evidence of an arrangement. Our arrangements do not include
acceptance clauses.
We review our accounts receivable and evaluate
the adequacy of our allowance for doubtful accounts. Specific items that are analyzed
include historical bad debts, changes in customer payments, and current economic
trends.
Income taxes
We have a net future tax asset the principal
components of which are book and tax differences on assets and net operating loss
carryforwards. We believe 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 our overall operating environment and financial performance
could result in adjustments to the
valuation allowance.
FACE="Frutiger 45 Light" SIZE="-2">New Accounting
Pronouncements
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
July 1 2003, which is the fiscal
year beginning December 1, 2003 for Corel. Corel does not believe that the adoption of this guideline
will have a material impact on its
results of operations or financial position.
In December 2002, the CICA issued CICA
3475 - "Disposal of long-lived assets and discontinued operations" ("CICA 3475"). This section
establishes standards for the recognition, measurement, presentation and disclosure of the disposal of
long-lived assets. It also establishes
standards for the presentation and disclosure of discontinued operations, whether or not they include
long-lived assets. The
recommendations in this section should be applied to disposal activities initiated by an enterprise's
commitment to a plan on or after May
1, 2003, with early adoption encouraged. Corel does not believe that the adoption of this guideline will
have a material impact on its
results of operations or financial position.
In December 2002, the CICA issued CICA
3063 - "Impairment of long-lived assets" ("CICA 3063"). This section establishes standards for
the recognition, measurement and disclosure of the impairment of long-lived assets. The
Recommendations in this Section should be
applied prospectively for years beginning on or after April 1, 2003, which is the fiscal year beginning
December 1, 2003 for Corel, with
earlier application encouraged. Corel does not believe that the adoption of this guideline will have a
material impact on its results of
operations or financial position.
FACE="Frutiger 45 Light" SIZE="-2">Item 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest rate
risk
Our exposure to market risk for changes in
interest rates relates primarily to our investment portfolio of cash equivalents and short-term
investments. Our primary objective 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 our interest income. We do not
use derivative financial
instruments in our investment portfolio.
At February 28, 2003, interest rates on our
investments ranged from 1.21% to 2.86% per annum (average rate approximately 1.35%
per annum) with all investments maturing by the end of July 2003. Our cash, cash equivalents and
short-term investments are
denominated predominantly in US dollars. As at February 28, 2003, maturity values approximate fair
values.
Foreign currency
risk
Corel conducts business worldwide. Revenue and
expenses are generated primarily in US dollars, but we do operate in foreign currencies,
primarily in Canada and Europe and, to a lesser extent, in Australia, Latin America, Japan and other
Asian countries. As our business expands,
our exposure to foreign currency risk increases. We continue to monitor our foreign currency exposure
to minimize the impact on our business
operations. We have mitigated, and expect to continue to mitigate, a portion of our currency exposure
through decentralized sales, marketing
and support operations in which most costs are local currency based. As at February 28, 2003 we had
forward exchange contracts to
purchase Canadian dollars with maturity dates ranging from March 7, 2003 to October 31, 2003 to
purchase a total of CDN $8.0 million.
Item 4. CONTROLS AND
PROCEDURES
(a) Evaluation of disclosure controls and
procedures. Corel's chief executive officer and chief financial officer have evaluated the effectiveness
of Corel's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934
Rules 13a-14(c) and 15d-14(c)) as of April
8, 2003, (the "Evaluation Date"). Based on such review, they have concluded that, as of the Evaluation
Date, Corel's disclosure controls and
procedures were effective to ensure that material information relating to Corel and its consolidated
subsidiaries would be made known to
them by others within those entities.
(b) Changes in internal controls. There were no
significant changes in Corel's internal controls or to the knowledge of Corel's chief executive
officer and chief financial officer, in other factors that could significantly affect Corel's internal controls
subsequent to the Evaluation Date.
(c) Limitations on the Effectiveness of Controls.
Corel's management including the chief executive officer and chief financial officer, does not
expect that our disclosure controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system are met.
PART II. OTHER
INFORMATION
Item 1. Legal and Government
Proceedings
On March 13, 2000, Corel was served with a
complaint filed against it and Dr. Michael C.J. Cowpland by Plaintiffs Anthony Basilio and Fred
Spagnola in the U.S. 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, by misrepresenting or failing to disclose material information about
Corel's financial condition. The Complaint
seeks an unspecified amount of money damages. Further complaints were filed thereafter, each making
similar allegations and referencing
the same Class Period as the initial claims. 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, Corel and
co-defendant Cowpland filed their answers
to the amended Complaint, denying all liability to Plaintiffs and asserting various affirmative defences.
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. Corel strongly disagrees with the claims made against it in the Complaint and
intends to continue its vigorous defence
of this action. This case is currently in the discovery phase. The trial date for this action has not yet been
set.
In January 2002, Corel was notified of a claim
filed December 28, 2001, which also names Micrografx (acquired by Corel in 2001) and 92
other defendants, by The Massachusetts Institute of Technology ("MIT") and Electronics for Imaging,
Inc. ("EMI") in the U.S. District Court,
Eastern District of Texas, for alleged patent infringement of U.S. Patent No. 4,500,919 relating to a
system and method of color management.
The subject patent expired in May 2002. Plaintiffs filed an amended complaint on April 25, 2002 (the
"Complaint"), increasing the number
of defendants to 214. The defendants include numerous large corporations, including Microsoft, IBM,
Dell, and Nikon. The Complaint seeks
injunctive relief and an unspecified amount of money damages. Both Corel and Micrografx have
licensed from Eastman Kodak ("Kodak")
a color management system included in the products identified in the Complaint, and as such, Corel has
claimed indemnity from Kodak for
losses arising from the Complaint, including for those claims of co-defendants who are claiming
indemnity from Corel. This case is continuing
in its discovery process. Corel strongly disagrees with the Plaintiffs' claims and intends to vigorously
defend this matter.
In February 2002, Corel was served with a claim
filed November 2, 2001 by Heidelberger Druckmaschinen AG, in the U.S. District Court,
Southern District of New York, for alleged infringement of U.S. Patent No. 4,393,399 relating to a
process for electronic color retouching.
The subject patent expired July 12, 2000. The Complaint sought an unspecified amount of money
damages. Corel vigorously defended the
litigation which proceeded to the discovery phase. Shortly after a court ordered mediation which took
place on March 11, 2003 the case
was settled. The terms of settlement were not material.
Corel 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, Corel 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 2. Changes in Securities and
Use of Proceeds
None.
Item 3. Defaults Upon Senior
Securities
None.
Item 4. Submission of matters to a
vote of security holders
None.
Item 6. Exhibits and Reports on
Form 8-K
a) The following exhibits are included with the
Company's 10-Q as filed with the SEC on April 14, 2003.
Exhibit 99. Certification Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
b) Reports on Form 8-K
None.
FACE="Frutiger 45 Light" SIZE="-2"> 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)
April 14, 2003
By: /s/ W. Martin Catto
W. Martin Catto
Executive Vice President, Finance
and Interim Chief Financial Officer
(Principal Financial and Accounting
Officer)
Form of Certification on Form
10-Q
I, Derek Burney, certify that:
1.I have reviewed this quarterly report on Form
10-Q of Corel Corporation ("the Registrant");
2. Based on my knowledge, this quarterly report
does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial
statements, and other financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and
for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I
are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
a) designed such disclosure controls and
procedures to ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the
Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I
have disclosed, based on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have identified for the Registrant's auditors
any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that
involves management or other employees who have a significant role in the Registrant's
internal controls;
6. The Registrant's other certifying officer and I
have indicated in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and material
weaknesses.
April 14, 2003
/s/ Derek
Burney |
Derek
Burney
President and Chief
Executive Officer
Form of Certification on Form
10-Q
I, W. Martin Catto, certify that:
1.I have reviewed this quarterly report on Form
10-Q of Corel Corporation ("the Registrant");
2. Based on my knowledge, this quarterly report
does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial
statements, and other financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and
for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I
are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
a) designed such disclosure controls and
procedures to ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the
Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I
have disclosed, based on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have identified for the Registrant's auditors
any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that
involves management or other employees who have a significant role in the Registrant's
internal controls;
6. The Registrant's other certifying officer and I
have indicated in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and material
weaknesses.
April 14, 2003
/s/ W. Martin
Catto |
W. Martin
Catto
Executive Vice President,
Finance and Interim Chief Financial Officer