27
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 April 30, 2001
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: 0-13351
NOVELL, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0393339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 South Novell Place
Provo, Utah 84606
(Address of principal executive offices and zip code)
(801) 861-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
As of May 31, 2001, there were 319,214,379 shares of the Registrant's Common
Stock outstanding.
Part I. Financial Information
Item 1. Financial Statements
NOVELL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
April 30, 2001 October 31, 2000
- -------------- ----------------
Amounts in thousands, except share and per share data (Unaudited)
ASSETS
Current assets:
Cash and short-term investments $ 638,607 $ 698,193
Receivables, less allowances ($37,177 - April; $33,469 -
October) 138,882 196,672
Inventories 1,465 2,621
Prepaid expenses 28,091 26,120
Deferred and refundable income taxes 55,473 60,109
Other current assets 19,303 23,644
------------ ------------
Total current assets 881,821 1,007,359
Property, plant and equipment, net 276,291 290,104
Long-term investments 362,695 383,583
Other assets 48,216 31,300
------------ ------------
Total assets $ 1,569,023 $ 1,712,346
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 75,837 $ 85,050
Accrued compensation 63,374 54,546
Accrued marketing liabilities 12,876 13,632
Other accrued liabilities 55,887 59,644
Income taxes payable 15,136 39,043
Deferred revenue 200,282 203,163
------------ ------------
Total current liabilities 423,392 455,078
Minority interests 27,982 12,183
Shareholders' equity:
Common stock, par value $.10 per share
Authorized - 600,000,000 shares
Issued - 319,281,283 shares-April
327,618,192 shares-October 38,403 32,762
Retained earnings 1,099,271 1,319,853
Accumulated other comprehensive (loss) (8,047) (84,427)
Other (11,978) (23,103)
------------- -------------
Total shareholders' equity 1,117,649 1,245,085
------------ ------------
Total liabilities and shareholders' equity $ 1,569,023 $ 1,712,346
============ ============
See notes to consolidated unaudited condensed financial statements.
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended
-------------------------------------------
April 30, 2001 April 30, 2000
Amounts in thousands, except per share data
Net sales $ 240,755 $ 302,349
Cost of sales 66,192 83,742
----------- -----------
Gross profit 174,563 218,607
Operating expenses:
Sales and marketing 118,206 125,392
Product development 54,563 60,248
General and administrative 23,779 24,728
----------- -----------
Total operating expenses 196,548 210,368
Income (loss) from operations (21,985) 8,239
Other income (expense)
Investment income 11,414 37,020
Investment impairment (142,047) --
Other, net (1,558) (2,175)
------------ ------------
Other income (expense), net (132,191) 34,845
Income (loss) before taxes (154,176) 43,084
Income tax expense (benefit) (2,865) 12,064
------------ -----------
Net income (loss) $ (151,311) $ 31,020
============ ===========
Net income (loss) per share
Basic: $ (0.48) $ 0.09
Diluted: $ (0.48) $ 0.09
Weighted average shares outstanding:
Basic 317,873 326,788
Diluted 317,873 341,546
Pro forma amounts assuming the accounting change is applied retroactively
Net income (loss) $ -- $ 49,452
=========== ==========
Net income (loss) per share (diluted) $ -- $ 0.14
=========== ==========
See notes to consolidated unaudited condensed financial statements.
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Six Months Ended
-------------------------------------------
April 30, 2001 April 30, 2000
Amounts in thousands, except per share data
Net sales $ 485,790 $ 618,392
Cost of sales 132,054 162,469
----------- -----------
Gross profit 353,736 455,923
Operating expenses:
Sales and marketing 239,953 239,048
Product development 104,051 118,185
General and administrative 45,001 43,921
----------- -----------
Total operating expenses 389,005 401,154
Income (loss) from operations (35,269) 54,769
Other income (expense)
Investment income 28,701 54,571
Investment impairment (142,047) --
Other, net (1,014) (3,985)
------------ ------------
Other income (expense), net (114,360) 50,586
Income (loss) before taxes (149,629) 105,355
Income tax expense (benefit) (1,592) 29,500
------------ -----------
Net income before cumulative effect of change in accounting
principle (148,037) 75,855
Cumulative effect of change in accounting principle (Note K) (11,048) --
------------ -----------
Net income (loss) $ (159,085) $ 75,855
============ ==========
Net income (loss) per share - Basic:
Before cumulative effect of change in accounting principle $ (0.46) $ 0.23
Cumulative effect of change in accounting principle (Note K) (0.04) --
----------- ----------
$ (0.50) $ 0.23
=========== ==========
Net income (loss) per share - Diluted:
Before cumulative effect of change in accounting principle $ (0.46) $ 0.22
Cumulative effect of change in accounting principle (Note K) (0.04) --
----------- ----------
$ (0.50) $ 0.22
=========== ==========
Weighted average shares outstanding:
Basic 320,028 326,847
Diluted 320,028 341,826
Pro forma amounts assuming the accounting change is applied retroactively
Net income (loss) $ -- $ 86,871
=========== ==========
Net income (loss) per share (diluted) $ -- $ 0.25
=========== ==========
See notes to consolidated unaudited condensed financial statements.
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
April 30, 2001 April 30, 2000
Dollars in thousands
Cash flows from operating activities
Net income (loss) $ (159,085) $ 75,855
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 41,869 39,961
Stock plans' income tax benefits -- 56,398
Loss on impaired investments and fixed assets 147,806 --
Decrease in receivables 57,790 45,308
Decrease in inventories 1,156 162
(Increase) decrease in prepaid expenses (1,971) 8,986
Decrease in deferred and refundable income taxes 6,095 29,457
Decrease in other current assets 4,341 6,763
Decrease in current liabilities, net (31,686) (73,251)
----------- -----------
Net cash provided from operating activities 66,315 189,639
Cash flows from financing activities
Issuance of common stock, net 8,391 70,608
Repurchase of common stock (64,954) (301,011)
----------- -----------
Net cash used by financing activities (56,563) (230,403)
Cash flows from investing activities
Expenditures for property, plant and equipment (18,338) (28,140)
Purchases of short-term investments (435,054) (484,530)
Maturities of short-term investments 415,788 507,785
Sales of short-term investments 67,330 287,585
Expenditures for other long-term investments (32,849) (150,349)
Increase in restricted cash -- (27,217)
Proceeds from Volera minority shareholders 25,975 --
Other (15,752) 444
----------- ----------
Net cash provided by investing activities 7,100 105,578
Total increase in cash and cash equivalents 16,852 64,814
Cash and cash equivalents - beginning of period 289,537 274,269
---------- ----------
Cash and cash equivalents - end of period 306,389 339,083
Short-term investments - end of period 332,218 307,626
---------- ----------
Cash and short-term investments - end of period $ 638,607 $ 646,709
============ ==========
Supplemental disclosures of non-cash financing and investing activities:
Issuance of restricted stock for acquisitions $ -- $ 17,366
See notes to consolidated unaudited condensed financial statements.
NOVELL, INC.
NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS
A. Quarterly Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ materially from those
estimates. The accompanying consolidated unaudited condensed financial
statements have been prepared in accordance with the instructions to Form
10-Q but do not include all of the information and footnotes required by
generally accepted accounting principles and should, therefore, be read in
conjunction with the Company's fiscal 2000 Annual Report on Form 10-K.
These financial statements do include all normal recurring adjustments that
the Company believes necessary for a fair presentation of the statements.
The interim operating results are not necessarily indicative of the results
for a full year. Certain reclassifications, none of which affected net
income (loss), have been made to the prior years' amounts in order to
conform to the current year's presentation.
B. Cash and Short-term Investments
The Company considers all highly liquid debt instruments purchased with a
term to maturity of three months or less to be cash equivalents. Short-term
investments are widely diversified, consisting primarily of short-term
investment grade securities, substantially all of which either mature
within the next 12 months or have characteristics of short-term
investments. Municipal securities included in short-term investments have
contractual maturities ranging from one to seven years. Money market
preferreds have contractual maturities of less than 180 days. No other
short-term investments have contractual maturities. All marketable debt and
equity securities that are included in cash and short-term investments are
considered available-for-sale and are carried at fair market value. The
unrealized gains and losses related to these securities are included in
shareholders' equity, net of tax and after applicable tax valuation
allowances. Fair market values are based on quoted market prices where
available; if quoted market prices are not available, then fair market
values are based on quoted market prices of comparable instruments. The
cost of securities sold is based on the specific identification method.
Such securities are anticipated to be used for current operations and are
therefore classified as current assets, even though some maturities may
extend beyond one year.
The following is a summary of cash and short-term investments, all of which
are considered available-for-sale.
Gross Gross Fair Market
Cost at Unrealized Unrealized Value at
Apr. 31, 2001 Gains Losses Apr. 31, 2001
------------- ----- ------ -------------
(Amounts in thousands) Cash and cash equivalents:
Cash.............................................. $ 92,157 $ -- $ -- $ 92,157
Corporate debt.................................... 64,162 -- -- 64,162
Money market funds................................ 150,070 -- -- 150,070
---------- -------- --------- ----------
Total cash and cash equivalents........... 306,389 -- -- 306,389
Short-term investments:
State and local government debt................... 155,202 1,907 -- 157,109
Corporate debt.................................... 64,619 990 -- 65,609
Money market preferreds........................... 48,800 -- -- 48,800
Mutual funds...................................... 56,825 -- (11,658) 45,167
Equity securities................................. 16,086 1,926 (2,479) 15,533
---------- -------- ---------- ----------
Total short-term investments.............. 341,532 4,823 (14,137) 332,218
Total cash and short-term investments..... $ 647,921 $ 4,823 $ (14,137) $ 638,607
========== ======== ========== ==========
Gross Gross Fair Market
Cost at Unrealized Unrealized Value at
Oct. 31, 2000 Gains Losses Oct. 31, 2000
------------- ----- ------ -------------
(Amounts in thousands) Cash and cash equivalents:
Cash..............................................$ 137,968 $ -- $ -- $ 137,968
Corporate debt.................................... 54,514 1 -- 54,515
Money market funds................................ 97,054 -- -- 97,054
---------- --------- ---------- ----------
Total cash and cash equivalents........... 289,536 1 -- 289,537
Short-term investments:
State and local government debt................... 221,565 -- (1,274) 220,291
Corporate debt.................................... 48,257 238 -- 48,495
Money market preferreds........................... 57,000 -- -- 57,000
Mutual funds...................................... 54,082 -- (8,543) 45,539
Equity securities................................. 25,221 20,267 (8,157) 37,331
---------- --------- ---------- ----------
Total short-term investments.............. 406,125 20,505 (17,974) 408,656
Total cash and short-term investments.....$ 695,661 $ 20,506 $ (17,974) $ 698,193
========== ========= ========== ==========
During the first six months of fiscal 2001, the Company realized gains of
$5.3 million and realized losses of $0.1 million on the sale of securities.
During the first six months of fiscal 2000, the Company realized gains of
$33.2 million and realized losses of $1.6 million from the sale of
securities.
In addition, the Company recorded impairment losses of $142.0 million
during the second quarter of fiscal 2001 and $144.7 million year-to-date
fiscal 2001 for short and long-term investments whose decline in market
value was determined to be other than temporarily. The Company reviews all
of its short-term investments for impairment and recognizes impairment
losses as appropriate.
C. Other Assets
The primary components of other assets as of April 30, 2001 and October 31,
2000 were long-term investments related to restricted cash for the
Company's off-balance-sheet financing of its buildings in San Jose,
California and Provo, Utah, investments made through the Novell Venture
Fund, and strategic long-term equity investments.
The Company marks its public equity securities to market each month and
records the related unrealized gain or loss as a component of comprehensive
income. The Company also reviews its long-term investments in public and
private equity securities and venture funds for impairment and recognizes
losses as appropriate. During the second fiscal quarter of 2001, the
Company wrote off its long-term investment in marchFIRST due to the change
in its market value, which is believed to be other than temporary. As of
April 30, 2001, there were no unrealized losses on public long-term equity
securities.
D. Income Taxes
The Company's effective tax rate for fiscal 2001, before cumulative effect
of change in accounting principle and investment impairment, is estimated
to be 21%, compared to 28% in fiscal 2000. The rate differs from the
effective tax rate for fiscal 2000 and the first quarter of fiscal 2001
primarily as a result of changes in the forecasted income before taxes for
fiscal 2001. The second quarter tax provision includes an adjustment to
bring the year-to-date effective rate to 21%. There is no tax benefit for
the investment impairment because corporations can only use capital losses
to offset capital gains. The Company cannot be assured at this time that it
can generate sufficient capital gains during the five-year carry-over
period to recognize the tax benefit of this capital loss. Accordingly, a
valuation allowance has been established.
The Company paid cash amounts for income taxes of $2.9 million in the first
six months of fiscal 2001 and $19.6 million during the same period of
fiscal 2000.
E. Line of Credit
The Company currently has a $10 million unsecured revolving bank line of
credit, with interest at the prime rate. The line of credit expires on
February 28, 2002 and can be renewed at the option of the Company. The line
can be used for either letter of credit or working capital purposes. The
line is subject to the terms of a loan agreement containing financial
covenants and restrictions, none of which are expected to significantly
affect the Company's operations. At April 30, 2001, there were standby
letters of credit of $2.7 million outstanding under this agreement. A
subsidiary of the Company has a Letter Agreement and stand-by letters of
credit valued at $1.2 million at April 30, 2001 with the same bank. The
Letter Agreement is subject to financial covenants and restrictions, none
of which are expected to significantly affect the Company's operations. The
Company also has an additional credit facility with another bank, which is
not subject to a loan agreement. At April 30, 2001, there was $0.5 million
of standby letters of credit outstanding under this arrangement.
F. Restructuring
During the fourth quarter of fiscal 2000, the Company recorded a
restructuring charge of approximately $48.0 million as a result of the
Company's plan to change its business strategy to address changes in the
market due to technology changes, customer demands, and methods of
distribution. Specific actions taken included reducing the Company's
workforce worldwide by approximately 700 employees (approximately 13%),
consolidating facilities and disposing of excess fixed assets, abandoning
and writing off technologies that no longer fit within the Company's new
strategy, discontinuing unprofitable products and closing offices in
unprofitable locations. The following table summarizes the activity related
to restructuring costs and activities in the six months of fiscal 2001.
Balance at Balance at
October 31, Cash Non-Cash April 30,
2000 Payments Charges 2001
---- -------- ------- ----
(Amounts in thousands)
Severance and benefits $ 6,139 $ (5,342) -- $ 797
Abandoned technology 286 -- -- 286
Redundant facilities and fixed assets 4,726 (233) (699) 3,794
Other restructuring related costs 2,616 (321) -- 2,295
--------- ---------- --------- ---------
$ 13,767 $ (5,896) $ (699) $ 7,172
========= ========== ========== =========
As of April 30, 2001, the remaining portion of the restructuring charge
included in accrued liabilities related to severance and benefits,
abandoned technology, and other restructuring related costs, which will
largely be paid during fiscal 2001. Amounts related to redundant facilities
and other fixed contracts will be paid over the respective remaining
contract terms.
G. Commitments and Contingencies
The Board of Directors has established the Novell Venture Fund within
Novell's investment portfolio for the purpose of making investments in
private companies, mainly small capitalization stocks in the
high-technology industry sector, and funds managed by venture capitalists.
These investments are intended to promote the Company's business and
strategic objectives. As of April 30, 2001, the Company had investments of
$55.1 million in various venture capital funds and had commitments to
contribute an additional $105.2 million to these funds over the next two to
three years, as requested by the fund managers.
In fiscal 1997, the Company entered into agreements to lease buildings
being constructed on land owned by the Company in San Jose, California and
in Provo, Utah. The lessor has funded $223 million for construction of the
buildings. The leases are for a period of seven years and can be renewed
for two additional five-year periods, by either the lender or the Company,
subject to the approval of the other party. Rent obligations commenced
during the second quarter of fiscal 1999 for the San Jose buildings and
during the second quarter of fiscal 2000 for the Provo buildings. Annual
rent under each agreement is determined by taking the funded amount
multiplied by the secured interest rate. If the Company does not purchase
the buildings, or arrange for the sale of the buildings, at the end of the
lease, the Company will guarantee the lessor no more than 85% of the
residual value of the buildings. The guaranteed residual value at April 30,
2001, was approximately $190 million. In addition, the agreement calls for
the Company to maintain a specific level of restricted cash to serve as
collateral for the leases and maintain compliance with certain financial
covenants. The value of restricted cash held as collateral at April 30,
2001 was approximately $223 million, and is included in long-term
investments.
In February 1998, a suit was filed in the U.S. District Court, District of
Utah, against Novell and certain of its officers and directors, alleging
violation of federal securities laws by concealing the true nature of
Novell's financial condition. The lawsuit was brought as a purported class
action on behalf of purchasers of Novell common stock from November 1,
1996, through April 22, 1997. The Federal District Court dismissed the
original complaint November 2, 2000; however, the plaintiffs filed an
amended complaint November 22, 2000 in an effort to remedy inadequacies in
the original complaint. Novell intends to seek dismissal of the amended
complaint and believes that the case is without merit. If the case
continues, Novell intends to vigorously defend against the allegations.
While there can be no assurance as to the ultimate disposition of the
lawsuit, Novell does not believe that the resolution of this litigation
will have a material adverse effect on its financial position, results of
operations, or cash flows.
In January 2001, Novell began a jury trial in a suit filed against Novell
by Lantec, Inc. in the U.S. District Court, District of Utah, for alleged
anti-trust violations arising from Novell's acquisition of the GroupWise
technology. On April 19, 2001, the judge ruled in favor of Novell and
dismissed the original complaint; however, the plaintiffs have the
opportunity to appeal the decision. Novell does not believe that the
resolution of this litigation will have a material adverse effect on its
financial position, results of operations, or cash flows.
The Company is a party to a number of legal claims arising in the ordinary
course of business. The Company believes the ultimate resolution of the
claims will not have a material adverse effect on its financial position,
results of operations, or cash flows.
H. Segment Information
The Company operates in one business segment, directory-enabled networking
software and services. Company's products are sold throughout the world; in
the U.S. via direct, OEM, reseller, and distributor channels, and
internationally through distributors who sell to dealers and end users. The
Company is organized into four business units, based on product or service
type. Novell's business units are as follows:
o Net Management Services, which includes Directory-Enabled OS, management
and collaboration products, and UNIX royalties o Net Directory Services,
which includes NDS Directory Services and other directory products o Net
Content Services, which includes Internet Caching services o Novell
Customer Services, which includes education, consulting and technical
services
Performance of the Company is evaluated by the Company's chief decision
makers, the Chief Executive Officer and Executive Council, based on
evaluation of revenue results by business unit and geographic region, and
expense results on a total company level. Separate financial information is
not available by business unit in regards to asset allocation, expense
allocation, or profitability.
Revenue by product category
Three Months Ended Six Months Ended
-----------------------------------------------------------
Amounts in thousands Apr. 30, 2001 Apr. 30, 2000 Apr. 30, 2001 Apr. 30, 2000
-------------------- ------------- ------------- ------------- -------------
Net Management Services $ 180,891 $ 239,350 $ 367,751 $ 498,878
Net Directory Services 7,983 7,307 15,615 13,406
Net Content Services 1,850 992 3,708 2,257
Novell Customer Services 50,031 54,700 98,716 103,851
---------- ---------- ---------- ----------
Total net sales $ 240,755 $ 302,349 $ 485,790 $ 618,392
========== ========== ========== ==========
Sales outside the U.S. are comprised of sales to international customers in
Europe, the Middle East, Canada, South America, and Asia Pacific. Other
than sales in Ireland, international sales were not material individually
in any other international location.
For the first six months of fiscal 2001 and fiscal 2000, sales to
international customers were approximately $214.3 million and $275.5
million, respectively. In the first six months of fiscal 2001 and fiscal
2000, 66% and 67%, respectively, of international sales were to European
countries. No one foreign country accounted for 10% or more of total net
sales in either period.
There were no customers accounting for more than 10% of total revenue
during the first six months of fiscal 2001 or fiscal 2000.
I. Net Income (Loss) Per Share
Three Months Ended Six Months Ended
------------------------------------------------------------
Amounts in thousands, except per share data Apr. 30, 2001 Apr. 30, 2000 Apr. 30, 2001 Apr. 30, 2000
------------------------------------------- ------------- ------------- ------------- -------------
Basic net income per share computation
Net income (loss) $ (151,311) $ 31,020 $ (159,085) $ 75,855
------------ ----------- ------------ ------------
Weighted average shares outstanding 317,873 326,788 320,028 326,847
----------- ----------- ----------- -----------
Basic net income (loss) per share $ (0.48) $ 0.09 $ (0.50) $ 0.23
============ =========== ============ ===========
Diluted net income per share computation
Net income (loss) $ (151,311) $ 31,020 $ (159,085) $ 75,855
------------ ----------- ------------ ------------
Weighted average shares outstanding 317,873 326,788 320,028 326,847
Incremental shares attributable to exercise of
outstanding options (treasury stock method) -- 14,758 -- 14,979
----------- ----------- ----------- -----------
Total 317,873 341,546 320,028 341,826
----------- ----------- ----------- -----------
Diluted net income (loss) per share $ (0.48) $ 0.09 $ (0.50) $ 0.22
============ =========== ============ ===========
J. Comprehensive Income (Loss)
The components of comprehensive income (loss), net of tax, for the three
and six months ended April 30, 2001 and 2000 were as follows:
Three Months Ended Six Months Ended
-----------------------------------------------------------
Amounts in thousands Apr. 30, 2001 Apr. 30, 2000 Apr. 30, 2001 Apr. 30, 2000
-------------------- ------------- ------------- ------------- -------------
Net income (loss) $ (151,311) $ 31,020 $ (159,085) $ 75,855
Change in net unrealized gain (loss) on
investments 93,939 (94,427) 75,855 (19,781)
Change in cumulative translation adjustment (189) 473 525 (77)
------------ ----------- ----------- ------------
Comprehensive income (loss) $ (57,561) $ (62,934) $ (82,705) $ 55,997
============ ============ ============ ===========
The components of accumulated other comprehensive income (loss), net of
related tax, at April 30, 2001 and October 31, 2000, are as follows:
Apr. 30, 2001 Oct. 31, 2000
------------- -------------
Dollars in thousands
Net unrealized gain (loss) on investment: $ (5,339) $ (81,194)
Cumulative translation adjustment (2,708) (3,233)
------------ ------------
Accumulated other comprehensive income (loss) $ (8,047) $ (84,427)
============ ============
K. Change In Accounting Principle - Revenue Recognition
The Company previously recognized revenue related to product sales to
distribution channel partners upon shipment to the partner and provided a
reserve for contractual return obligations and other estimated product
returns. Effective November 1, 2000, the Company changed its method of
accounting for revenue related to these product sales to recognize such
revenues upon the sell-through of the respective product from the
distribution channel partner to the reseller or end user. The Company
believes the change in accounting principle is preferable based on guidance
provided in SEC Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements. The $11.0 million ($0.03 per share) cumulative effect
of the change (after reduction for income taxes of $6.1 million) was
included in income in the first quarter of fiscal 2001. Also, during the
three months ended January 31, 2001, the Company recognized $6.8 million in
revenue that was included in the cumulative effect adjustment at November
1, 2000. The effect of that revenue on the first quarter was to increase
net income by $4.9 million ($0.01 per share).
Had the Company reported under its previous method of accounting for
revenue recognition, the effect on earnings without consideration of the
cumulative effect of the change would be a increase in earnings of
approximately $5.6 million or $.02 per share during the second quarter of
fiscal 2001 and $3.8 million or $0.1 per share during the first six months
of fiscal 2001. The pro forma amounts presented in the unaudited
consolidated statements of income were calculated assuming the accounting
change was made retroactively to prior periods.
L. Derivative Instruments
During the first quarter of fiscal 2001, the Company adopted Statements of
Financial Accounting Standards No. 133 and 138, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133 and SFAS 138). SFAS 133
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities requiring all companies to recognize derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. SFAS 138 is an amendment to SFAS
133, which amended or modified certain issues discussed in SFAS 133.
Implementation of SFAS 133 and SFAS 138 did not have a material impact on
the Company's statement of financial position, results of operations or
cash flows.
M. Joint Venture
In April 2001, Novell completed the formation of Volera, Inc. a
majority owned joint venture between Novell, Inc., Nortel Networks Corp.,
and Accenture Ltd. The Company contributed cash, fixed assets and products
and technologies in exchange for a 89.8% ownership in Volera. Nortel and
Accenture contributed $26.0 million in cash for the remaining 10.1%
ownership.
N. Acquisitions
On March 12, 2001, the Company announced that it had entered into a
definitive agreement to acquire Cambridge Technology Partners, Inc., a
global information technology services and eSolutions provider. Upon
closing, the Company will exchange 0.668 shares of its common stock for
every outstanding share of Cambridge. The transaction is valued at
approximately $251 million, based on the an average closing price for the
seven day period beginning three days before the announcement date, of
$5.907 per share. The acquisition will be accounted for as a purchase and
is expected to close July 11, 2001.
Upon closing, Novell Board member Jack Messman, who is also the president
and Chief Executive Officer of Cambridge, will assume the role of Chief
Executive Officer at Novell. Eric Schmidt will continue as Chairman of the
Board of Directors of Novell and will assume the role of Chief Strategist
of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") and other parts of this Form 10-Q contain forward-looking
statements that involve risks and uncertainties. All forward-looking statements
are based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements. The
Company's actual results may differ materially from the results discussed in
such forward-looking statements as a result of a number of factors, which
include, but are certainly not limited to, those set forth below in the section
titled "Risk Factors Affecting Future Results of Operations."
Introduction
Novell, Inc., is a provider of Net services software that delivers services to
secure and power all types of networks--the Internet, intranets, and extranets;
wired to wireless; corporate and public--across leading operating systems.
Novell's Net services software provides the foundation for one Net--a single
global network that supports new applications and forms of business. Worldwide
channel, consulting, education and technical support programs, along with
strategic alliances, help to combine Novell Net services software with
third-party products and services to form complete Net solutions.
Results of Operations
Net Sales
Q2 2001 Change Q2 2000 Ytd 2001 Change Ytd 2000
------------ ----------- ------------ ------------ ------------ ------------
Net sales (thousands) $ 240,755 (20.4)% $ 302,349 $ 485,790 (21.4)% $ 618,392
Novell's products are organized around the following four business units, all
within the directory-enabled networking software services segment.
o Net Management Services, which includes Directory-Enabled OS, management
and collaboration products, and UNIX royalties o Net Directory Services,
which includes NDS Directory Services and other directory products o Net
Content Services, which includes Internet Caching services o Novell
Customer Services, which includes education, consulting, and technical
services
Revenue from Net Management Services products decreased $58.5 million or 24% in
the second quarter of fiscal 2001 compared to the second quarter of fiscal 2000
and decreased $131.1 million or 26% year-to-date fiscal 2001 compared to the
same period of fiscal 2000. Sales in the second quarter of fiscal 2001 were
lower than the second quarter of fiscal 2000 primarily due to a one time $35.5
million royalty from Caldera, Inc. received during the second quarter of fiscal
2000, lower UNIX royalties, and continued weak sales performance
internationally. Year-to-date fiscal 2001 sales were also lower than the same
period of the prior year due to "Year 2000" related sales that occurred in the
first quarter of the prior year as companies purchased additional software to
become Year 2000 compliant, and the continued decline in the Company's packaged
software business.
Revenue from Net Directory Services products was $0.7 million or 9% higher in
the second quarter of fiscal 2001 compared to the second quarter of fiscal 2000
and $2.2 million or 16% higher year-to-date fiscal 2001 compared to the same
period of fiscal 2000. The increases were mainly due to increased unit sales of
products introduced during fiscal 2000, such as Single Sign-on, DirXML, and
iChain, slightly offset by a decrease in NDS Directory Services sales.
Revenue from Net Content Services products was $0.9 million or 86% higher in the
second quarter of fiscal 2001 compared to the second quarter of fiscal 2000 and
$1.5 million or 64% higher year-to-date fiscal 2001 compared to the same period
of fiscal 2000. The increases were mainly due to growth in the Internet caching
market, which resulted in higher unit sales.
Revenue from Novell Customer Services was $4.7 million or 8% lower in the second
quarter of fiscal 2001 compared to the second quarter of fiscal 2000 and $5.1
million or 5% lower year-to-date fiscal 2001 compared to the same period of
fiscal 2000. The decreases were a result of lower education revenues, offset
somewhat by higher consulting and service revenue.
The Company previously recognized revenue related to product sales to
distribution channel partners upon shipment to the partner and provided a
reserve for contractual return obligations and other estimated product returns.
Effective November 1, 2000, the Company changed its method of accounting for
revenue related to these product sales to recognize such revenues upon the
sell-through of the respective product from the distribution channel partner to
the reseller or end user. The Company believes the change in accounting
principle is preferable based on guidance provided in SEC Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements. The $11.0 million
($0.03 per share) cumulative effect of the change (after reduction for income
taxes of $6.1 million) was included in income in the first quarter of fiscal
2001. Also, during the three months ended January 31, 2001, the Company
recognized $6.8 million in revenue that was included in the cumulative effect
adjustment at November 1, 2000. The effect of that revenue on the first quarter
was to increase net income by $4.9 million ($0.01 per share).
Had the Company reported under its previous method of accounting for revenue
recognition, the effect on earnings without consideration of the cumulative
effect of the change would be a increase in earnings of approximately $5.6
million or $.02 per share during the second quarter of fiscal 2001 and $3.8
million or $0.1 per share during the first six months of fiscal 2001. The pro
forma amounts presented in the unaudited consolidated statements of income were
calculated assuming the accounting change was made retroactively to prior
periods.
International sales represented 45% of total sales in the second quarter of
fiscal 2001 compared to 41% in the second quarter fiscal 2000 and 44%
year-to-date fiscal 2001 compared to 45% during the same period of fiscal 2000.
During the second quarter of fiscal 2001, international revenue decreased 14%
while domestic revenue decreased 25% compared to the same period of fiscal 2000.
The decrease in domestic sales was partially due to the one-time time $35.5
million royalty from Caldera, Inc. received during the second quarter of fiscal
2000. Internationally, the Company has experienced weakened sales in Europe,
Japan, Latin America and Canada in fiscal 2001.
The Company is currently addressing the decline in sales, particularly the
decrease in channel sales, in an effort to improve results in future periods.
During fiscal 2000, the Company reorganized its sales force and product groups
to better service its customers and to focus its resources on taking advantage
of new opportunities. The Company has continued these efforts in fiscal 2001,
and anticipates that it will take a couple of quarters to fully implement these
changes and realize the benefits from them.
Gross Profit
Q2 2001 Change Q2 2000 Ytd 2001 Change Ytd 2000
------------ ----------- ------------ ------------ ------------ ------------
Gross profit (thousands) $ 174,563 (20.1)% $ 218,607 $ 353,736 (22.4)% $ 455,923
Percentage of net sales 72.5% 72.3% 72.8% 73.7%
Gross profit as a percentage of sales increased slightly in the second quarter
of 2001 and decreased as a percentage of sales year-to-date compared to the same
periods of fiscal 2000. The year-to-date decrease is due primarily to the
effects of decreased product sales levels and higher costs for services related
to the Company's consulting business and the effect of the $35.5 million
one-time royalty from Caldera, Inc.. The mix between software sales and
services, education and consulting revenue continues to shift with software
sales becoming a smaller percentage of total sales.
Operating Expenses
(dollars in thousands) Q2 2001 Change Q2 2000 Ytd 2001 Change Ytd 2000
- ----------------------
------------ ----------- ------------ ------------ ------------ ------------
Sales and marketing $ 118,206 (5.7)% $ 125,392 $ 239,953 0.4% $ 239,048
Percentage of net sales 49.1% 41.5% 49.4% 38.7%
Product development $ 54,563 (9.4)% $ 60,248 $ 104,051 (12.0)% $ 118,185
Percentage of net sales 22.7% 19.9% 21.4% 19.1%
General and administrative $ 23,779 (3.8)% $ 24,728 $ 45,001 2.5% $ 43,921
Percentage of net sales 9.9% 8.2% 9.3% 7.1%
Total operating expenses $ 196,548 (6.6)% $ 210,368 $ 389,005 (3.0)% $ 401,154
Percentage of net sales 81.6% 69.6% 80.1% 64.9%
Sales and marketing expenses decreased by $7.2 million in the second quarter of
fiscal 2001 compared to the same period of fiscal 2000 and remained relatively
flat year-to-date 2001 compared to the same period of fiscal 2000. Sales and
marketing expenses fluctuate in any given period due to timing of product
promotions, advertising or other discretionary expenses. Also, beginning in the
second half of fiscal 2000 and continuing through the first quarter of fiscal
2001, the Company increased its sales and marketing expenditures, where
appropriate, in an effort to focus on improving future sales growth. These
expenditures included costs for advertising and promotion, as well as sales
force training. Increased expenditures and lower sales during fiscal 2001 caused
sales and marketing expenses as a percentage of sales to increase.
Product development expenses decreased $5.7 million in the second quarter of
fiscal 2001 and decreased $14.1 million year-to-date fiscal 2001 compared to the
same periods of fiscal 2000 due primarily to decreased headcount as a result of
the restructuring in the fourth quarter of fiscal 2000. Product development
expenses increased as a percentage of net sales due to lower sales levels.
General and administrative expenses decreased $1.0 million during the second
quarter of fiscal 2001 and increased $1.1 million year-to-date 2001 compared to
the same periods of fiscal 2000. The decrease in second quarter 2001 expenses
was primarily due to reduced headcount as a result of the restructuring in the
fourth quarter of fiscal 2000, and lower consulting and bad debt expense, offset
by costs related to the formation of Volera, Inc. a majority owned joint venture
between Novell, Nortel Networks, Corp. and Accenture Ltd.. The increase
year-to-date was primarily due to costs incurred for the formation of Volera,
the Company's new internet content subsidiary, offset somewhat by lower
operating costs from decreased headcount as a result of the restructuring in the
fourth quarter of fiscal 2000. Decreased sales levels in fiscal 2001 caused
general and administrative expenses as a percentage of sales to increase in
fiscal 2001 compared to the same periods of fiscal 2000.
Restructuring
During the fourth quarter of fiscal 2000, the Company recorded a restructuring
charge of approximately $48.0 million as a result of the Company's plan to
change its business strategy to address changes in the market due to technology
changes, customer demands, and methods of distribution. Specific actions taken
included reducing the Company's workforce worldwide by approximately 700
employees (approximately 13%), consolidating facilities and disposing of excess
fixed assets, abandoning and writing off technologies that no longer fit within
the Company's new strategy, discontinuing unprofitable products and closing
offices in unprofitable locations. The following table summarizes the activity
related to restructuring costs and activities in the first quarter of fiscal
2001.
Balance at Balance at
October 31, Cash Non-Cash April 30,
2000 Payments Charges 2001
---- -------- ------- ----
(Amounts in thousands)
Severance and benefits $ 6,139 $ (5,342) -- $ 797
Abandoned technology 286 -- -- 286
Redundant facilities and fixed assets 4,726 (233) (699) 3,794
Other restructuring related costs 2,616 (321) -- 2,295
--------- ---------- --------- ---------
$ 13,767 $ (5,896) $ (699) $ 7,172
========= ========== ========== =========
As of April 30, 2001, the remaining portion of the restructuring charge included
in accrued liabilities related to severance and benefits, abandoned technology,
and other restructuring related costs will largely be paid during fiscal 2001.
Amounts related to redundant facilities and other fixed contracts will be paid
over the respective remaining contract terms.
Employee Headcount
(dollars in thousands) Q2 2001 Change Q2 2000
- ----------------------
-------------------- ------------------- -------------------
Employees at end of period 4,790 (10.9)% 5,373
Annualized revenue per average employee
$ 201 (11.0)% $ 226
Headcount decreased from the second quarter of 2000, primarily due to the
reduction in force that occurred during the fourth quarter of fiscal 2000 as a
part of the restructuring.
Other Income (Expense), Net
(dollars in thousands) Q2 2001 Change Q2 2000 Ytd2001 Change Ytd 2000
------------ ----------- ------------- ------------ ----------- ------------
Other income, net $(132,191) (479.4)% $ 34,845 $(114,360) (326.1)% $ 50,586
Percentage of net sales (54.9)% 11.5% (23.5)% 8.2%
Other income, net w/o impairment $ 9,856 (71.7)% $ 34,845 $ 27,687 (45.3)% $ 50,586
Percentage of net sales 4.1% 11.5% 5.7% 8.2%
The primary component of other income (expense) is related to investment income
or losses. During the second quarter of fiscal 2001, investment income of $11.4
million was offset by investment impairment losses of $142.0 million. Investment
income during the second quarter of fiscal 2000 was $37.0 million. Year-to-date
2001, investment income was $28.7 million excluding $144.7 million of investment
impairment losses compared to investment income of $54.6 million during the same
period of fiscal 2000. The $144.7 million investment impairment relates to
certain investments in the Company's portfolio, whose declines in market values
was determined to be other than temporary. Included in the impairment loss was
the Company's investment in marchFIRST.
During the first six months of fiscal 2001, the Company realized gains of $5.3
million and realized losses of $0.1 million on the sale of securities, excluding
impairment losses of $147.3 million. During the first six months of fiscal 2000,
the Company realized gains of $33.2 million and realized losses of $1.6 million
from the sale of securities.
Income Taxes Expense (Benefit)
Q2 2001 Change Q2 2000 Ytd2001 Change Ytd 2000
------------ ----------- ------------- ------------ ----------- ------------
Income tax expense (benefit) (thousands) $(2,865) (123.7)% $ 12,064 $(1,592) (105.4)% $ 29,500
Percentage of net sales (1.2)% 4.0% (0.3)% 4.8%
Effective tax expense (benefit) rate (1.8)% 28.0% (1.1)% 28.0%
Effective tax expense (benefit) rate on
income before change in accounting
method and asset impairment (23.6)% 28.0% (21.0)% 28.0%
The Company's effective tax rate for fiscal 2001, before cumulative effect of
change in accounting principle and investment impairment, is estimated to be
21%, compared to 28% in fiscal 2000. The rate differs from the effective tax
rate for fiscal 2000 and the first quarter of fiscal 2001 primarily as a result
of changes in the forecasted income before taxes for fiscal 2001. The second
quarter tax provision includes an adjustment to bring the year-to-date effective
rate to 21%. There is no tax benefit for the investment impairment because
corporations can only use capital losses to offset capital gains. The Company
cannot be assured at this time that it can generate sufficient capital gains
during the five-year carry-over period to recognize the tax benefit of this
capital loss. Accordingly, a valuation allowance has been established.
Net Income (Loss) and Net Income (Loss) Per Share
(dollars in thousands, except
per share data) Q2 2001 Change Q2 2000 Ytd2001 Change Ytd 2000
------------- ----------- ------------ ------------ ----------- ----------
Income (loss) before accounting change $(151,311) (587.8)% $31,020 $(148,037) (295.2)% $ 75,855
Percentage of net sales (62.8)% 10.3% (30.5)% 12.3%
Net income (loss) $(151,311) (587.8)% $ 31,020 $(159,085) (309.7)% $ 75,855
Percentage of net sales (62.8)% 10.3% (32.8)% 12.3%
Income (loss) without impairment charge $ (9,264) (129.9)% $ 31,020 $ (5,990) (107.9)% $ 75,855
Percentage of net sales (3.8)% 10.3% (1.2)% 12.3%
Income (loss) per share, before accounting
change - basic $ (0.48) $ 0.09 $ (0.46) $ 0.23
Net income (loss) per share - basic $ (0.48) $ 0.09 $ (0.50) $ 0.23
Income (loss) per share, before accounting
change - diluted $ (0.48) $ 0.09 $ (0.46) $ 0.22
Net income (loss) per share - basic $ (0.48) $ 0.09 $ (0.50) $ 0.22
Net income (loss) per share without
impairment charge - basic and diluted $ (0.03) $ 0.09 $ (0.02) $ 0.22
Liquidity and Capital Resources
Q2 2001 Change Q4 2000
---------------- ---------------- ----------------
Cash and short-term investments (thousands) $638,607 (8.5)% $698,193
Percentage of total assets 40.7% 40.8%
Cash and short-term investments decreased by $59.6 million to $638.6 million at
April 30, 2001, down from $698.2 million at October 31, 2000. During the first
six months of fiscal 2001, cash and short-term investments decreased primarily
due to cash outflows of $64.9 million for the repurchase of common stock, $74.6
million for net purchases of long-term investments and other long-term investing
activities and $18.3 million to purchase property, plant and equipment. These
cash outflows were offset by $63.8 million provided from operating activities,
$26.0 million received from Volera minority investors, and $8.4 million from the
issuance of common stock.
The Company's investment portfolio is diversified among security types, industry
groups, and individual issuers. To achieve potentially higher returns, a portion
of the Company's investment portfolio is invested in equity securities and
mutual funds, which incur market risk. The Company's investment portfolio
includes equity securities with gross unrealized gains of $4.8 million and gross
unrealized losses of $14.1 million as of April 30, 2001. The majority of the
unrealized losses pertained to the Company's investments managed externally. The
Company monitors its investments and records losses when a decline in the
investment's market value is determined to be other than temporary.
The Company's principal source of liquidity has been from operations. At April
30, 2001, the Company's principal unused sources of liquidity consisted of cash
and short-term investments and available borrowing capacity of approximately
$7.3 million under its credit facilities. The Company's liquidity needs are
principally for the Company's financing of accounts receivable, capital assets,
strategic investments, product development and flexibility in a dynamic and
competitive operating environment.
During the first six months of fiscal 2001, the Company continued to generate
cash from operations. The Company anticipates being able to fund its current
operations and planned capital expenditures for the foreseeable future with
existing cash and short-term investments together with internally generated
funds. The Company believes that borrowings under the Company's credit
facilities or public offerings of equity or debt securities are available if the
need arises. Investments will continue in product development and in new and
existing areas of technology. Cash may also be used to acquire technology
through purchases and strategic acquisitions. Capital expenditures in fiscal
2001 are anticipated to be approximately $50 million, but could be reduced if
the growth of the Company is less than presently anticipated. The Company also
intends to fund an additional $105 million over the next couple of years to
venture capital funds.
During the fourth quarter of fiscal 2000, the Board of Directors authorized the
use of up to $500 million for the repurchase of additional outstanding shares of
the Company's common stock through October 31, 2001. As of April 30, 2001, $82.4
million had been spent to repurchase 12.4 million shares under this plan at an
average price of $6.67 per share.
Acquisitions
On March 12, 2001, the Company announced that it had entered into a definitive
agreement to acquire Cambridge Technology Partners, Inc., a global information
technology services and eSolutions provider. Upon closing, the Company will
exchange 0.668 shares of its common stock for every outstanding share of
Cambridge. The transaction is valued at approximately $251 million, based on the
an average closing price for the seven day period beginning three days before
the announcement date, of $5.907 per share. The acquisition will be accounted
for as a purchase and is expected to close July 11, 2001.
Risk Factors Affecting Future Results of Operations
The Company's future results of operations involve a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially from historical results are the following: business conditions and
the general economy; competitive factors, such as rival operating systems,
directories and applications; acceptance of new products and price pressures;
availability of third-party compatible products at below market prices; risk of
nonpayment of accounts or notes receivable; risks associated with foreign
operations; risk of product line or inventory obsolescence due to shifts in
technologies or market demand; timing of software product introductions; market
fluctuations of investment securities; and litigation.
Other factors may also adversely affect the Company's earnings and stock price,
including but not limited to: o competition for qualified employees o
competition from competitors o delays in the introduction of new products o
success of new products or technologies o stock market fluctuations unrelated to
Company performance
Our Financial Results May Vary
The Company often experiences a higher volume of sales at the end of the quarter
and during the fourth quarter. Because of this, fixed costs that are out of line
with sales levels may not be detected until late in any given quarter and
results of operations could be adversely affected.
Operating results have been and may also be affected by other factors including,
but not limited to: o timing of orders from customers and shipments to customers
o product mix, a shift from higher margin products, such as licensing, to lower
margin products or services, such as boxed products o delays or problems with
our fulfillment agents o impact of foreign currency exchange rates on the price
of our products in international locations o our inability to respond to the
decline in sales through the distribution channel o our inability to derive
benefits from the restructuring and new corporate strategy
The Current Economic Climate and Outlook in the Technology Sector is Very Weak
The weakened economic climate, particularly in the technology sector, has had an
effect on Novell's stock price and operations. Future economic projections for
this sector do not aticipate a quick recovery. A continuation of the weakened
economy could have further negative effects on the Company's stock price and
operations in the future.
We Face Intense Competition for Attracting and Retaining Qualified Personnel in
the Computer Industry
The ability of the Company to maintain its competitive technological position
will depend, in large part, on its ability to attract and retain highly
qualified development and managerial personnel. Competition for such personnel
is intense and there is a risk of departure due to the competitive environment
in the software industry. The loss of a significant group of key personnel would
adversely affect the Company's performance. Over the past year, the Company has
lost several of its vice presidents. The failure to successfully promote and
hire suitable replacements in a timely manner could have a material adverse
effect on the Company's business.
We Compete in the Highly Competitive Market for Computer Software
Novell believes that the principal competitive factors are technical innovation
to meet dynamic market needs, marketing strength, system/performance, customer
service and support, reliability, ease of use, security, and price/performance.
The market for computer software remains competitive due to such factors as
Microsoft's presence in all sectors of the software business. The Company does
not have the product breadth and market power of Microsoft. Microsoft's ability
to ship networking products with features and functionality that are competitive
with Novell, together with its ability to offer incentives to customers to
purchase certain products in order to obtain favorable sales terms or necessary
compatibility or information with respect to other products, may significantly
inhibit the Company's ability to grow its business. In addition, as Microsoft
creates new operating systems and applications, there can be no assurance that
Novell will be able to ensure that its products will be compatible with those of
Microsoft.
Additionally, the Company may face competition from other industry companies,
which could introduce competitive products. If any of these competing products
achieves market acceptance, Novell's business and results of operations could be
materially adversely affected.
We Have Experienced Delays in the Introduction of New Products Due to Various
Factors
As is common in the computer software industry, Novell has experienced delays in
the introduction of new products due to: the complexity of software products,
the need for extensive testing of software to ensure compatibility of new
releases with a wide variety of application software and hardware devices, and
the need to "debug" products prior to extensive distribution. Significant delays
in developing, completing or shipping new or enhanced products would adversely
affect the Company.
Moreover, the Company may experience delays in market acceptance of new releases
of its products as the Company engages in marketing and education of the user
base regarding the advantages and system requirements for the new products and
as customers evaluate the advantages and disadvantages of upgrading. The Company
has encountered these issues on each major new release of its products, and
expects that it will encounter such issues in the future. Novell's ability to
achieve desired levels of sales growth depends at least in part on the
successful completion, introduction and sale of new versions of its products.
There can be no assurance that the Company will be able to respond effectively
to technological changes or new product announcements by others, or that the
Company's research and development efforts will be successful. Should Novell
experience material delays or sales shortfalls with respect to new product
releases, the Company's sales and net income could be adversely affected.
We May Not Be Successful at Introducing New Technologies
Another goal of the Company is to achieve widespread acceptance and adoption of
Novell's Net Services and e-solutions products, Directory Services (NDS), and
the products and applications that take advantage of directory services. The
Company's ability to achieve success with its Net Services and NDS solutions is
dependent on a number of factors including but not limited to the following:
development of key Net Services and directory products and upgrades, the
acceptance of those products by large industry partners, the marketing of those
products through appropriate channels of distribution, and the acceptance of
those products in major accounts. The Company has only had limited success in
introducing new technologies and there can be no assurance of success with Net
Services or NDS solutions.
Our Existing Product Sales May Deteriorate More Rapidly than Sales of Our New
Products Increase
The Company has several existing products, which it has been selling and
upgrading for many years. Technology shifts or competition could occur causing
sales of these products to decline at a faster rate than the Company is able to
increase sales of new products or technologies. Although revenues from Net
Directory Services and Net Content Services increased during the first half of
fiscal 2001, revenues from Net Management Services decreased by 26% resulting in
overall declines in net sales by 21.4% in the first half of fiscal 2001 compared
to the same period of fiscal 2000.
We Face Productivity and Financial Risks Due To The Power Crisis In California
The Company conducts operations in San Jose, California, which is currently
experiencing an energy crisis. If the state of California is not able to remedy
this problem, the Company could suffer work stoppages, loss of data, and/or
higher operating costs due to significantly higher utility costs.
We Face Risks from Our International Operations
The Company has sales offices in countries worldwide. It also has significant
operations in Ireland and Japan, and conducts product development in India.
International operations are subject to inherent risks including, but not
limited to: fluctuating currency exchange rates, longer payment cycles,
difficulties in managing multiple offshore operations, increased tariffs and
duties, price controls, restrictions on foreign currencies, trade barriers, and
political unrest. These factors could have a material impact on our financial
condition in the future.
Our Long-term and Venture Capital Fund Investments Could Become Impaired
Included in the Company's investment portfolio are investments made for
strategic business purposes, and investments through the Novell Venture Fund.
Novell Venture Fund investments are in private companies, generally small
capitalization stocks in the high-technology industry sector, and funds managed
by venture capitalists. The value of these investments is dependent on the
performance, successful acquisition, and/or initial public offering of the
investees. Some or all of these investments could become other than temporarily
impaired in the future requiring the Company to record investment losses. During
the first six months of fiscal 2001, the Company had investment impairment
losses of $144.7 million, due primarily to the Company's investment in
marchFIRST.
Our Stock Price Will Fluctuate
The Company's future earnings and stock price could be subject to significant
volatility, particularly on a quarterly basis. Due to analysts' expectations of
continued growth, any such shortfall in earnings can be expected to have an
immediate and significant adverse effect on the trading price of Novell's Common
Stock in any given period. Revenue fluctuations may also contribute to the
volatility of the trading price of Novell Common Stock in any given period.
In addition, the market prices for securities of software companies have been
very volatile recently and historically they have also shown to be volatile as
well. The market price of Novell Common Stock, in particular, has been subject
to wide fluctuations in the past. As a result of the foregoing factors and other
factors that may arise in the future, the market price of Novell's Common Stock
may be subject to significant fluctuations within a short period of time. These
fluctuations may be due to factors specific to the Company, to changes in
analysts' earnings estimates, or to factors affecting the computer industry or
the securities markets in general.
Risk Factors Associated with the Acquisition of Cambridge Technologies Partners
If the conditions to the merger between Novell and Cambridge Technologies
Partners ("merger") are not met, the merger will not occur.
Several conditions must be satisfied or waived to complete the merger. These
conditions are described in the Merger Agreement (see Exhibit 2.1). Novell
cannot be assured that each of the conditions will be satisfied. If the
conditions are not satisfied or waived, the merger will not occur or will be
delayed, and Novell may lose some of all of the intended benefits of the merger.
If the merger is not completed, Novell's stock price and future business and
operations could be harmed.
If the merger is not completed, Novell may be subject to the following material
risks: o the price of Novell common stock may decline o Novell will incur
significant costs related to the merger, such as legal,
accounting and other financial advisor fees. These costs must be paid even
if the merger is not complete, which would affect its operating results
The merger will result in substantial costs whether or not completed.
The merger will result in significant costs including costs associated with
combining the operations of the two companies, severance benefits and other
costs associated with discontinuing redundant business activities, direct
transaction costs, etc. The aggregate amount of these costs may be greater than
currently anticipated and a substantial portion will be incurred whether or not
the merger is completed.
Although the merger is intended to result in benefits to the combined company,
those benefits may not be realized. Additionally, neither Novell nor Cambridge
is experienced in organizing an integration of businesses of this scale.
Achieving the benefits of the merger will depend in part on the integration of
the two company's personnel, operations and technology. The integration of the
two companies will be a complex, time consuming and expensive process and may
disrupt Novell's business if not completed in a timely and efficient manner.
Neither Novell nor Cambridge has experience in integrating operations on the
scale presented by the merger. The integration process will be complicated and
will involve a number of special risks and challenges, including the possibility
that management may be distracted from regular business operations. It is not
certain that Novell and Cambridge can be successfully integrated in a timely
manner or at all or that any of the anticipated benefits will be realized.
Failure to effectively complete the integration could materially harm the
business and operating results of the combined company.
Client and employee uncertainty related to the merger could harm the Company.
Novell's customers may, in response to the announcement of the merger, delay,
defer or cancel purchasing decisions or terminate their relationship with the
Company. Delays, deferrals or cancellations of purchasing decisions or any
termination of their relationship with Novell by its customers could seriously
harm the business of the Company. Similarly, Novell employees may experience
uncertainty about their future role with the combined company. This may
adversely affect the Company's ability to attract and retain key management,
sales, marketing, technical, services and administrative personnel.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
The Company is exposed to financial market risks, including changes in interest
rates, foreign currency exchange rates and marketable equity security prices. To
mitigate some of these risks, the Company utilizes currency forward contracts
and currency options. The Company does not use derivative financial instruments
for speculative or trading purposes, and no derivative financial instruments
were outstanding at April 30, 2001.
Interest Rate Risk
The primary objective of the Company's investment activities is to preserve
principal while maximizing yields without significantly increasing risk. This is
accomplished by investing in widely diversified short-term investments,
consisting primarily of investment grade securities, substantially all of which
either mature within the next 12 months or have characteristics of short-term
investments. A hypothetical 50 basis point increase in interest rates would
result in an approximate $6.0 million decrease (approximately 1%) in the fair
value of the Company's available-for-sale securities.
Market Risk
The Company also holds available-for-sale equity securities in its short-term
investment portfolio. As of April 30, 2001, unrealized losses on short-term
public equity securities totaled $0.3 million, which pertained primarily to the
Company's external portfolio. A 10% adverse change in prices of these short-term
equity securities would result in an approximate $1.6 million decrease in the
fair value of the Company's short-term investments.
In addition, the Company invests in long-term equity securities and venture
capital funds for the promotion of business and strategic objectives. The
investments are generally in small capitalization stocks in the high-technology
industry sector, both public and private. Because of the nature of these
investments, the Company is exposed to equity price risks. The Company typically
does not attempt to reduce or eliminate its market exposure on these securities.
As of April 30, 2001, there were no unrealized losses on long-term public equity
securities as the Company had written off its long-term investment in marchFIRST
due to a change in its market value believed to be other than temporary. A 10%
adverse change in equity prices of long-term equity securities, including those
held in the venture capital funds, would result in an approximate $13.7 million
decrease in the fair value of the Company's long-term equity security and
venture capital investments.
Foreign Currency Risk
The Company hedges currency risks of investments denominated in foreign
currencies with currency forward contracts. Gains and losses on these foreign
currency investments would generally be offset by corresponding losses and gains
on the related hedging instruments, resulting in negligible net exposure to the
Company. A substantial majority of the Company's revenue, expense and capital
purchasing activities are transacted in U.S. dollars. However, the Company does
enter into transactions in other currencies, primarily Japanese yen and certain
other Asian and European currencies. To protect against reductions in value and
the volatility of future cash flows caused by changes in foreign exchange rates,
the Company has established balance sheet hedging programs. Currency forward
contracts and currency options are utilized in these hedging programs. The
Company's hedging programs reduce, but do not always entirely eliminate, the
impact of foreign currency exchange rate movements. If the Company did not hedge
against foreign currency exchange rate movement, an adverse change of 10% in
exchange rates would result in a decline in income before taxes of approximately
$6.1 million.
All of the potential changes noted above are based on sensitivity analyses
performed on the Company's financial position at April 30, 2001. Actual results
may differ materially.
Part II. Other Information
Except as listed below, all information required by items in Part II is omitted
because the items are inapplicable or the answer is negative.
Item 1. Legal Proceedings.
The information required by this item is incorporated herein by reference to
Footnote G of the Company's financial statements contained in Part I, Item 1 of
this Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on April 17, 2001 for the
following purposes:
1. To elect eight directors.
2. To approve a proposal to amend the 1989 Employee Stock Purchase Plan to
increase the reserve by 6 million shares.
3. To ratify the appointment of Ernst & Young LLP, as independent auditors for
Novell, Inc.
4. To consider a Shareholder Proposal to amend the by-laws.
The following tables set forth the outcome of the matters voted upon at the
meeting:
Proposal #1
Election of Directors
Votes For otes Withheld
Eric. E. Schmidt 264,468,562 3,843,340
John A. Young 264,404,299 3,907,603
Elaine R. Bond 264,379,895 3,932,007
Reed E. Hundt 264,470,652 3,841,250
William N. Joy 255,940,816 12,371,086
Jack L. Messman 264,490,812 3,821,090
Richard L. Nolan 264,507,257 3,804,645
Larry W. Sonsini 254,680,131 13,631,771
Proposal #2
To approve an amendment to the 1989 Employee Stock Purchase Plan
Votes For Votes Against Votes Abstained Broker Non-votes
240,406,381 26,259,446 1,643,675 2,400
Proposal #3
To ratify the appointment of Ernst & Young LLP, as independent auditors for
Novell, Inc.
Votes For Votes Against Votes Abstained Broker Non-votes
258,213,956 8,790,174 1,307,772 --
Proposal #4
To consider a Shareholder Proposal to amend the by-laws
Votes For Votes Against Votes Abstained Broker Non-votes
42,443,578 104,543,724 5,047,414 116,277,186
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
2.1 Agreement and Plan of Reorganization dated as of March 12, 2001, by and
among Novell, Inc., a Delaware corporation, Ceres Neptune Acquisition
Corp., a Delaware corporation and a wholly owned subsidiary of Novell,
Inc., and Cambridge Technology Partners (Massachusetts), Inc., a Delaware
corporation, incorporated by reference to Exhibit 2.1, filed as an exhibit
in the Registrant's Report on Form 8-K, filed March 16, 2001.
(b) Reports on Form 8-K.
Notice of Novell's scheduled report of second quarter results and related
conference call to be held on February 15, 2001, as filed on February 6,
2001 under Item 5.
Agreement and Plan of Reorganization (Merger Agreement) dated as of March
12, 2001, by and among Novell, Inc., a Delaware corporation, Ceres Neptune
Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of Novell, Inc., and Cambridge Technology Partners
(Massachusetts), Inc., a Delaware corporation, as filed on March 16,
2001 under Items 5 and 7.
SIGNATURES
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.
Novell, Inc.
(Registrant)
Date: June 14, 2001 /s/ Dennis R. Raney
--------------------
Dennis R. Raney
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)