28
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 January 31, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from
-------
to
-----------
Commission File Number: 0-13351
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 February 28, 2002, there were 362,595,128 shares of the Registrant's
Common Stock outstanding.
Part I. Financial Information
Item 1. Financial Statements
NOVELL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
January 31, 2002 October 31, 2001
----------------- ----------------
Amounts in thousands, except share and per share data (Unaudited)
ASSETS
Current assets:
Cash and short-term investments $ 735,519 $ 705,243
Receivables (less allowances of $42,065 - January 31,
2002 and $47,249 - October 31, 2001) 159,086 227,044
Inventories 1,079 947
Prepaid expenses 27,063 29,808
Deferred and refundable income taxes 34,316 34,595
Other current assets 22,592 29,729
---------------- ---------------
Total current assets 979,655 1,027,366
Property, plant and equipment, net 470,148 496,620
Goodwill and intangible assets 195,223 192,016
Long-term investments 112,533 114,971
Other assets 73,700 73,033
---------------- ---------------
Total assets $ 1,831,259 $ 1,904,006
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 57,069 $ 77,571
Accrued compensation 88,805 87,382
Accrued marketing liabilities 13,091 13,672
Restructuring and merger related liabilities 47,082 91,049
Other accrued liabilities 55,329 59,793
Income taxes payable 37,734 38,175
Deferred revenue 227,039 243,261
---------------- ---------------
Total current liabilities 526,149 610,903
Minority interests 21,395 22,436
Shareholders' equity: Common stock, par value $.10 per share
Authorized - 600,000,000 shares
Issued - 362,616,173 shares-January 31, 2002
362,341,403 shares-October 31, 2001 36,262 36,234
Preferred stock, par value $.10 per share
Authorized - 500,000 shares, Issued - 0 shares -- --
Additional paid in capital 257,635 256,332
Retained earnings 993,837 985,486
Accumulated other comprehensive income 3,576 2,455
Other (7,595) (9,840)
----------------- ----------------
Total shareholders' equity 1,283,715 1,270,667
---------------- ---------------
Total liabilities and shareholders' equity $ 1,831,259 $ 1,904,006
================ ===============
See notes to consolidated unaudited condensed financial statements.
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended
----------------------------------------------
January 31, 2002 January 31, 2001
Amounts in thousands, except per share data
Net sales $ 271,063 $ 245,035
Cost of sales 110,773 66,954
--------------- ---------------
Gross profit 160,290 178,081
Operating expenses:
Sales and marketing 87,366 121,419
Product development 41,123 46,846
General and administrative 30,325 23,100
--------------- ---------------
Total operating expenses 158,814 191,365
Income (loss) from operations 1,476 (13,284)
Other income, net
Investment income 2,608 17,287
Other, net 7,846 544
--------------- ---------------
Other income, net 10,454 17,831
Income before taxes 11,930 4,547
Income tax expense 3,579 1,273
--------------- ---------------
Net income before cumulative effect of change in accounting
principle 8,351 3,274
Cumulative effect of change in accounting principle -- (11,048)
--------------- ----------------
Net income (loss) $ 8,351 $ (7,774)
=============== ================
Net income (loss) per share - Basic:
Before cumulative effect of change in accounting principle $ 0.02 $ 0.01
Cumulative effect of change in accounting principle -- (0.03)
-------------- ---------------
$ 0.02 $ (0.02)
============== ===============
Net income (loss) per share - Diluted:
Before cumulative effect of change in accounting principle $ 0.02 $ 0.01
Cumulative effect of change in accounting principle -- (0.03)
-------------- ---------------
$ 0.02 $ (0.02)
============== ===============
Weighted average shares outstanding:
Basic 362,428 322,183
Diluted 362,970 322,183
See notes to consolidated unaudited condensed financial statements.
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended
January 31, 2002 January 31, 2001
Dollars in thousands
Cash flows from operating activities
Net income (loss) $ 8,351 $ (7,774)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities
Gain on sale of fixed assets (8,672) --
Depreciation and amortization 18,888 19,421
Loss on impaired investments 5,440 2,700
Decrease in receivables 67,958 35,577
(Increase) decrease in inventories (132) 723
Decrease in prepaid expenses 2,745 662
Decrease in deferred and refundable income taxes 65 4,439
Decrease (increase) in other current assets 7,137 (1,535)
(Decrease) increase in current liabilities, net (81,024) 13,642
-------------- -------------
Net cash provided from operating activities 20,756 67,855
Cash flows from financing activities
Issuance of common stock, net 1,712 4,314
Repurchase of common stock -- (64,910)
------------- --------------
Net cash provided (used) by financing activities 1,712 (60,596)
Cash flows from investing activities
Expenditures for property, plant and equipment (2,517) (7,252)
Proceeds from the sale of property, plant and equipment 16,050 --
Purchases of short-term investments (246,172) (285,812)
Maturities of short-term investments 140,877 213,259
Sales of short-term investments 113,363 58,336
Expenditures for other long-term investments (7,658) (13,712)
Other 1,985 (18,205)
------------- --------------
Net cash provided (used) by investing activities 15,928 (53,386)
Total increase (decrease) in cash and cash equivalents 38,396 (46,127)
Cash and cash equivalents - beginning of period 337,927 289,537
------------- -------------
Cash and cash equivalents - end of period 376,323 243,410
Short-term investments - end of period 359,196 412,039
------------- -------------
Cash and short-term investments - end of period $ 735,519 $ 655,449
============= =============
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. As discussed under the heading "Critical Accounting
Policies" in Part I, Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," 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 2001 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
other comprehensive income, 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
January 31, 2002 Gains Losses January 31, 2002
---------------- ----- ------ ----------------
(Amounts in thousands) Cash and cash equivalents:
Cash $ 133,650 $ -- $ -- $ 133,650
Corporate debt 45,931 -- -- 45,931
Money market funds 196,742 -- -- 196,742
---------- -------- -------- ----------
Total cash and cash equivalents 376,323 -- -- 376,323
Short-term investments:
State and local government debt 78,574 2,290 (239) 80,625
Corporate debt 246,944 1,758 (77) 248,625
Money market preferreds 17,015 -- (15) 17,000
Equity securities 9,934 3,339 (327) 12,946
---------- -------- ---------- ----------
Total short-term investments 352,467 7,388 (659) 359,196
Total cash and short-term investments $ 728,790 $ 7,388 $ (659) $ 735,519
========== ======== ========== ==========
Gross Gross Fair Market
Cost at Unrealized Unrealized Value at
October 31, 2001 Gains Losses October 31, 2001
---------------- ----- ------ ----------------
(Amounts in thousands) Cash and cash equivalents:
Cash $ 156,088 $ -- $ -- $ 156,088
Corporate debt 3,995 -- -- 3,995
Money market funds 177,844 -- -- 177,844
---------- ------- --------- ----------
Total cash and cash equivalents 337,927 -- -- 337,927
Short-term investments:
State and local government debt 151,459 5,074 -- 156,533
Corporate debt 138,679 2,255 (9) 140,925
Money market preferreds 17,034 -- (34) 17,000
Mutual funds 41,014 -- -- 41,014
Equity securities 12,336 538 (1,030) 11,844
---------- ------- --------- ---------
Total short-term investments 360,522 7,867 (1,073) 367,316
Total cash and short-term investments $ 698,449 $ 7,867 $ (1,073) $ 705,243
========== ======== ========== =========
During the first three months of fiscal 2002, the Company realized gains of
$3.2 million and realized losses of $0.1 million on the sale of securities.
During the first three months of fiscal 2001, the Company realized gains of
$6.4 million and realized losses of $0.1 million from the sale of
securities.
The Company did not record any impairment losses during the first quarter
of fiscal 2002 or 2001 related to short-term investments whose decline in
market value was determined to be other than temporary. The Company reviews
all of its investments for impairment and recognizes impairment losses as
appropriate.
C. Long-term Assets
The primary components of long-term investments are investments made
through the Novell Venture account, Cambridge Technology Capital Fund I
L.P. ("CTC I") and strategic long-term equity investments. Long-term
investments are recorded at cost.
Investments made through the Novell Venture account generally are in
private companies, primarily small capitalization stocks in the
high-technology industry sector, and funds managed by venture capitalists.
Investments made through CTC I generally are in expansion-stage, private
companies providing products and services within the technology industry.
The value of the investments made through the Novell Venture account and
CTC I are dependent on the performance, successful acquisition, and/or
initial public offering of the investees.
The Company routinely reviews its investments in private securities and
venture funds for impairment. During the first quarters of fiscal 2002 and
2001, the Company recognized impairment losses on long-term investments
totaling $5.4 million and $2.7 million, respectively.
D. Goodwill and Intangible Assets
The following is a summary of goodwill and other intangible assets:
January 31, 2002 October 31, 2001
(Amounts in thousands)
Cambridge goodwill $ 180,559 $ 180,460
Other goodwill 9,286 7,335
Intangible assets 5,378 4,221
------------ ------------
Goodwill and other intangible assets $ 195,223 $ 192,016
============ ============
Goodwill not attributed to the Cambridge acquisition and other intangible
assets relate to several small acquisitions. Intangible assets are
amortized over a two to three year period.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 supersedes APB Opinion No. 17,
"Intangible Assets," and states that goodwill and other intangible assets
with indefinite lives are no longer amortized but are reviewed for
impairment annually, or more frequently if impairment indicators arise.
Separable intangible assets that are not deemed to have an indefinite life
will continue to be amortized over their useful lives. The provisions under
SFAS No. 142 relating to the discontinuance of amortization of goodwill and
indefinite lived intangible assets is effective for assets acquired after
June 30, 2001, and upon adoption of the statement to assets acquired prior
to June 30, 2001. In addition, the provisions of SFAS No. 142 relating to
impairment apply to assets acquired prior to July 1, 2001 upon adoption of
SFAS 142. Novell has elected to adopt this statement beginning in the first
quarter of fiscal 2002, and has discontinued amortization of goodwill
acquired prior to July 1, 2001. Goodwill and intangibles will be reviewed
for impairment on a periodic basis. The following table shows what net
income would have been had the provision been applied at the beginning of
fiscal 2001:
Quarter ended Quarter ended
(Amounts in thousands) January 31, 2002 January 31, 2001
---------------- ----------------
Income before extraordinary item
As reported $ 8,351 $ 3,274
Pro forma $ 3,436
Net income (loss)
As reported $ 8,351 $ (7,774)
Pro forma $ (7,612)
Basic earnings (loss) per share
As reported $ 0.02 $ (0.02)
Pro forma $ (0.02)
Diluted earnings (loss) per share
As reported $ 0.02 $ (0.02)
Pro forma $ (0.02)
SFAS No. 142 also requires companies to perform an impairment test within
six months of adopting the statement. Steps required in the impairment test
include: Step 1 - identifying reporting units, assigning assets and
liabilities to the reporting units, assigning goodwill to reporting units,
and determining if the fair value of each reporting unit is less than its
carrying amount. If the fair value is below carrying value, Step 2 -
determining the impairment amount - is performed. The Company will complete
this test during the second quarter of fiscal 2002.
E. Income Taxes
The Company's estimated effective tax rate for the first three months of
fiscal 2002 is 30%, compared to 28%, before the effect of the cumulative
change in accounting principle, for the first three months of fiscal 2001.
The rate for the first quarter of fiscal 2002 differs from the effective
tax rate for the first quarter of fiscal 2001 primarily as a result of
changes in the forecasted income before taxes for fiscal 2002.
The Company paid cash amounts for income taxes of $1.2 million in the first
three months of fiscal 2002 and $1.0 million during the same period of
fiscal 2001.
F. Line of Credit
The Company currently has a $10 million unsecured revolving bank line of
credit. The line of credit expires on March 3, 2003 and can be renewed at
the option of the Company for a one-year period. The line can be used for
either letter of credit or working capital purposes and 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 January 31, 2002, there were standby letters of credit of
$2.9 million outstanding under this agreement. A subsidiary of the Company
also has a Letter Agreement and stand-by letters of credit of $1.5 million
at January 31, 2002 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 has an
additional credit facility with another bank, which is not subject to a
loan agreement. At January 31, 2002, there was a minimal amount of standby
letters of credit outstanding under this arrangement.
G. Restructuring
At the end of the fourth quarter of fiscal 2001, the Company incurred $50.7
million of pre-tax, restructuring charges resulting from general market
conditions, customer demands, and the Company's evolution of its business
strategy. The new business strategy focuses on eBusiness solutions along
with Net services software designed to secure and power the networked world
across leading operating systems. This included refining the Company's
consulting initiatives, refocusing research and development efforts,
defining sales and marketing efforts to be more customer and solutions
oriented, and adjusting the overall cost structure given current revenue
levels and Company direction.
Specific actions included reducing the Company's workforce worldwide by
approximately 1,100 (approximately 16%), consolidating excess facilities
and disposing of excess property and equipment, terminating a management
consulting contract that no longer fits with the Company's strategic focus,
and abandoning and writing off technologies that no longer fit within the
integrated Company's new strategy. The Company also realigned its remaining
resources to better manage and control its business. The following table
summarizes the costs and activities during the first quarter of fiscal
2002, related to the fourth quarter 2001 restructuring.
Balance at Cash Non-Cash Balance at
October 31, 2001 Payments Charges January 31, 2002
---------------- -------- ------- ----------------
(Amounts in thousands)
Severance and benefits $ 32,793 $ (21,253) $ -- $ 11,540
Excess facilities and property and
equipment 10,896 (3,055) (2,030) 5,811
Other restructuring-related costs 911 (226) -- 685
------------ ------------ ----------- ------------
$ 44,600 $ (24,534) $ (2,030) $ 18,036
============ =========== =========== ============
As of January 31, 2002, the remaining portion of the fourth quarter 2001
restructuring charge included accrued liabilities largely related to
severance and benefits, which will be paid out during fiscal 2002, and
redundant facilities costs, which will be paid over the respective
remaining lease terms.
During the third quarter of fiscal 2001, the Company recorded a
restructuring charge of approximately $30.4 million, pre-tax, as a result
of the Company's acquisition of Cambridge Technology Partners, Inc.
("Cambridge") and changes in the Company's business to move towards an
eBusiness strategy.
Specific actions included reducing the Company's workforce worldwide by
approximately 280 employees (approximately 5% before the addition of
Cambridge) across all functional areas, consolidating facilities and
disposing of excess property and equipment, abandoning and writing off
technologies that no longer fit within the Company's new strategy, and
discontinuing unprofitable product lines. The following table summarizes
the activity during the first quarter of 2002, related to the third quarter
2001 restructuring costs.
Balance at Cash Non-Cash Balance at
October 31, 2001 Payments Charges January 31, 2002
---------------- -------- ------- ----------------
(Amounts in thousands)
Severance and benefits $ 3,377 $ (377) $ -- $ 3,000
Abandoned technology 211 (211) -- --
Excess facilities and property and
equipment 9,736 (3,298) -- 6,438
Exit unprofitable product lines 486 (486) -- --
Other restructuring-related costs 527 (162) -- 365
------------ ---------- ---------- ------------
$ 14,337 $ (4,534) $ -- $ 9,803
============ =========== =========== ============
As of January 31, 2002, the remaining portion of the third quarter 2001
restructuring charge included accrued liabilities largely related to
severance and benefits, which will be paid out during fiscal 2002, and
excess facilities costs, which will be paid over the respective remaining
lease terms.
During the fourth quarter of fiscal 2000, the Company recorded a
restructuring charge of approximately $47.9 million, pre-tax, 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. The new business strategy focuses on a Net services business
model and on electronic or e-solutions.
Specific actions taken included reducing the Company's workforce worldwide
by approximately 700 employees (approximately 13%), consolidating
facilities and disposing of excess property and equipment, 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 during
the first quarter of fiscal 2002, related to the fiscal 2000 restructuring.
Balance at Cash Non-Cash Balance at
October 31, 2001 Payments Charges January 31, 2002
---------------- -------- -------- ----------------
(Amounts in thousands)
Severance and benefits $ 71 $ (71) $ -- $ --
Excess facilities and property and
equipment 2,318 (219) -- 2,099
Other restructuring-related costs 1,432 (283) -- 1,149
------------ ------------ ----------- ------------
$ 3,821 $ (573) $ -- $ 3,248
============ =========== =========== ============
As of January 31, 2002, the remaining portion of the fiscal 2000
restructuring charge included accrued liabilities related mainly to
redundant facilities and other fixed contracts, which will be paid over the
respective remaining contract terms.
H. Commitments and Contingencies
On December 21, 2001, the Company formed a venture capital fund, Novell
Technology Capital Fund I, L.P. (the "Fund"), and related entities that
include Novell Technology GPLP I, L.P. ("GPLP"), the general partner of the
Fund. The Fund was established to achieve a superior return on investments
for its partners by locating, analyzing and investing in
high-growth-oriented businesses. The general partner of GPLP is a
wholly-owned corporate subsidiary of Novell. Novell has committed to an
aggregate investment of $15 million in GPLP and the Fund, primarily through
a limited partnership commitment to the Fund. This commitment may increase
as additional limited partners are brought into the Fund, to a cap of $30
million. Additionally, Novell is entitled to 68.25% of the amounts
allocable to GPLP by the Fund, which is generally equal to 20% of the net
gains of the Fund. Mr. Messman, a director and the Company's Chief
Executive Officer and President, committed to an investment of $182,500 in
the Fund as a limited partner. Mr. Linsalata, the Company's Senior Vice
President, Venture Investments, committed to an investment of $100,000 in
the Fund as a limited partner, and to an investment of $82,500 in GPLP as a
limited partner. Additionally, Mr. Linsalata is entitled to 13.75% of the
amounts allocable to GPLP by the Fund, which is generally equal to 20% of
the net gains of the Fund. No amounts have been distributed by the Fund or
GPLP. The financial and operating results of NTC I and related entities
have been consolidated in Novell's financial statements for the first
quarter of fiscal 2002.
The Board of Directors also established the Novell Venture account 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
for the promotion of the Company's business and strategic objectives. As of
January 31, 2002, the Company had invested $76.7 million into these
externally managed venture capital funds and had commitments to contribute
an additional $90.8 million over the next two to three years, as requested
by the fund managers. Novell, through its acquisition of Cambridge, also
owns both limited and general partnership interests in the Cambridge
Technology Capital Fund I ("CTC I") of approximately 24%. As of January 31,
2002, the Company had contributed $5.7 million to CTC I and had commitments
to contribute an additional $300,000 through 2007.
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 and seeking unspecified damages. 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 on November 2, 2000,
however, the plaintiffs filed an amended complaint on November 22, 2000 in
an effort to remedy inadequacies in the original complaint. Novell has
moved the court to dismiss the amended complaint on the same grounds relied
on in the court's dismissal of the original complaint. 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 1995, Lantec, Inc. filed suit against Novell in the U.S.
District Court, the District of Utah, for alleged anti-trust violations
arising from Novell's acquisition of the GroupWise technology. The
plaintiffs were seeking to demonstrate damages of $300 million. On April
19, 2001, the judge ruled in favor of Novell and dismissed the original
complaint; however, on June 8, 2001 the plaintiffs filed a notice of
appeal. Novell intends to vigorously defend against the claims. 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.
The Company is also 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.
I. Segment Information
The Company is organized and operates as three business segments: product,
consulting, and Volera, Inc. The Company's products and services are sold
throughout the world. The Company's offerings within the product segment
are sold domestically via direct, OEM, reseller, and distributor channels,
and internationally through distributors who sell to dealers and end users.
The following is a description of each of the three segments:
o Product - includes Net Management Services products (Directory-Enabled
OS, Management and Collaboration products, and UNIX royalties), NDS
Directory Services and other directory products, and product-related
customer service, support, and education.
o Consulting - includes Novell and Cambridge IT services consulting and
Celerant management consulting o Volera, Inc. - Novell's majority-owned
subsidiary, which provides Content Distribution Network software.
Beginning November 1, 2001, performance of the Company is evaluated by the
Company's chief decision makers, the Chief Executive Officer and Executive
Management Committee, based on evaluation of revenue, gross margin and
operating profit for each business unit. Revenue is also evaluated based on
results by geographic region. Separate financial information is not
available by business unit in regards to asset allocation. Segment
operating results were calculated for the fourth quarter of fiscal 2001 for
comparative purposes. However except for revenue, operating results by
segment are not available for the first quarter of fiscal 2001. Prior to
the acquisition of Cambridge, the Company's systems did not support the
breakout of operating results other than net sales. Operating results,
other than net sales, were available on a total company basis only.
Operating Results by Segment
Quarter ended January 31, 2002 Product Consulting Volera Total Novell
------- ---------- ------ ------------
Amounts in thousands
Net sales $ 199,257 $ 69,671 $ 2,135 $ 271,063
Cost of sales 37,169 72,695 909 110,773
---------- ---------- ---------- ----------
Gross profit 162,088 (3,024) 1,226 160,290
Segment operating expenses 122,725 27,273 7,125 157,123
----------- ---------- ---------- ----------
Segment income (loss) from operations $ 39,363 $ (30,297) $ (5,899) 3,167
========== =========== ===========
Unallocated operating expenses 1,691
----------
Income (loss) from operations $ 1,476
==========
Quarter ended January 31, 2001 Product Consulting Volera Total Novell
------- ---------- ------ ------------
Amounts in thousands
Net sales $ 230,103 $ 13,074 $ 1,858 $ 245,035
Quarter ended October 31, 2001 Product Consulting Volera Total Novell
------- ---------- ------ ------------
Amounts in thousands
Net sales $ 215,004 $ 90,419 $ 2,187 $ 307,610
Cost of sales 39,345 79,206 1,516 120,067
---------- ---------- ---------- ----------
Gross profit 175,659 11,213 671 187,543
Segment operating expenses 141,817 32,539 10,711 185,067
----------- ---------- ---------- ----------
Segment income (loss) from operations $ 33,842 $ (21,326) $ (10,040) 2,476
========== =========== ===========
Unallocated operating expenses 54,446
----------
Income (loss) from operations $ (51,970)
===========
Segment operating expenses include direct segment costs along with
management's allocation of certain common sales, marketing, and general and
administrative costs to each business unit. Unallocated operating expenses
included approximately $1.7 million of integration expense in the first
quarter of fiscal 2002 and approximately $4.7 million of integration costs
and $49.8 of restructuring costs in the fourth quarter of fiscal 2001.
Prior to fiscal 2002, the company operated in one segment. Management and
the Company's decision makers evaluated the company based on total Company
results. Revenue was evaluated based on geographic location and product
category. Separate financial information was not available by product
category and geographic location. The following table shows first quarter
2002 and 2001 revenue under the previous segment categories.
Revenue by product category Three Months Ended
--------------------------- -----------------------------------
Amounts in thousands January 31, 2002 January 31, 2001
-------------------- ---------------- -----------------
Net services $ 153,714 $ 186,860
Net directory services 11,324 7,632
Net content services 2,135 1,858
Consulting, support services and education 103,890 48,685
---------- ----------
Total net sales $ 271,063 $ 245,035
========== ==========
Sales outside the U.S. are comprised of sales to international customers in
Europe, the Middle East, Canada, South America, and Asia Pacific.
International sales in any single international location were not material
to the Company as a whole.
For the first three months of fiscal 2002 and fiscal 2001, sales to
international customers were approximately $127.5 million and $106.4
million, respectively. In the first three months of fiscal 2002 and fiscal
2001, 75% and 66%, 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 three months of fiscal 2002 or fiscal 2001.
J. Net Income (Loss) Per Share
Three Months Ended
------------------------------------
Amounts in thousands, except per share data January 31, 2002 January 31, 2001
------------------------------------------- ---------------- ----------------
Basic net income per share computation
Net income (loss) $ 8,351 $ (7,774)
----------- ------------
Weighted average shares outstanding 362,428 322,183
----------- -----------
Basic net income (loss) per share $ 0.02 $ (0.02)
=========== ===========
Diluted net income per share computation
Net income (loss) $ 8,351 $ (7,774)
----------- ------------
Weighted average shares outstanding 362,428 322,183
Incremental shares attributable to exercise of
outstanding options (treasury stock method) 542 --
----------- -----------
Total 362,970 322,183
----------- -----------
Diluted net income (loss) per share $ 0.02 $ (0.02)
=========== ===========
K. Comprehensive Income (Loss)
The components of comprehensive income (loss), net of tax, for the three
months ended January 31, 2002 and 2001 were as follows:
Three Months Ended
-------------------------------------
Amounts in thousands January 31, 2002 January 31, 2001
-------------------- ---------------- ----------------
Net income (loss) $ 8,351 $ (7,774)
Change in net unrealized loss on investments (246) (18,084)
Change in cumulative translation adjustment 1,367 714
----------- -----------
Comprehensive income (loss) $ 9,472 $ (25,144)
=========== ============
The components of accumulated other comprehensive income, net of related
tax, at January 31, 2002 and October 31, 2001, are as follows:
January 31, 2002 October 31, 2001
Amounts in thousands
Net unrealized gain on investment: $ 4,786 $ 5,032
Cumulative translation adjustment (1,210) (2,577)
------------ ------------
Accumulated other comprehensive income $ 3,576 $ 2,455
=========== ===========
L. Derivative Instruments
The Company hedges currency risks of some assets and liabilities
denominated in foreign currencies through the use of one-month forward
contracts. Due to the short period of time between entering into the
forward contracts and the quarter end, the fair value of the derivatives as
of January 31, 2002 is insignificant and accordingly did not have a
material impact on our financial position or results of operations.
M. Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. The provisions of SFAS 144 will be
effective for fiscal year 2002 and will be applied prospectively. The
Company is currently in the process of evaluating the potential impact that
the adoption of SFAS 144 will have on its consolidated financial position
and results of operations.
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. In some cases, such
forward-looking statements may be identified by the use of terminology such as
"may," "will," "expects," "plans," "anticipates," "estimates," "potential," or
"continue" or the negative thereof or other comparable terminology. Such
forward-looking statements include statements regarding, among other things, our
revenue expectations, future business strategies, market conditions, and
opportunities, and liquidity. 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 not limited to, those set forth below in the section titled "Risk
Factors Affecting Future Results of Operations."
Introduction
Novell, Inc., ("Novell" or the "Company") provides eBusiness solutions and Net
services software designed to secure and power the networked world. Novell and
its services division, Cambridge Technology Partners ("Cambridge"), help
organizations solve complex business challenges, simplify their systems and
processes, and capture new opportunities. Novell provides worldwide channel,
consulting, education and developer programs to support its offerings.
Critical Accounting Policies
The Company considers certain accounting policies related to revenue recognition
and impairment of long-lived assets and valuation of deferred tax assets to be
critical policies due to the estimation processes involved in each.
Revenue recognition. The Company's IT consulting services business derives a
significant portion of its revenue from fixed-price, fixed-time contracts, which
require the accurate estimation of the cost, scope and duration of each
engagement. Revenue and the related costs for these projects are recognized
based on percentage of completion, using time-to-completion to measure the
percent complete with revisions to estimates reflected in the period in which
changes become known. If the Company does not accurately estimate the resources
required or the scope of work to be performed, or does not manage its projects
properly within the planned periods of time or satisfy its obligations under the
contracts, then future consulting margins may be significantly and negatively
affected or losses on existing contracts may need to be recognized. Any such
resulting reductions in margins or contract losses could be material to the
Company's results of operations.
The Company records a provision for estimated sales returns and allowances on
product and service related sales in the same period as the related revenues are
recorded. These estimates are based on historical sales returns, analysis of
credit memo data and other known factors. If the historical data the Company
uses to calculate these estimates does not properly reflect future returns,
revenue could be overstated.
Impairment of long-lived assets and valuation of deferred tax assets. The
Company's long-lived assets include long-term investments, goodwill and other
intangible assets. At January 31, 2002, the Company had $113 million of
long-term investments, $195 million of goodwill and other intangible assets, and
$94 million of net deferred tax assets, current and non-current, accounting for
approximately 22% of the Company's total assets. The fair value of the long-term
investments is dependant on the performance of the companies or venture funds in
which the Company has invested, as well as volatility inherent in the external
markets for these investments. In assessing potential impairment for these
investments, the Company will consider these factors as well as forecasted
financial performance of its investees. If these forecasts are not met, the
Company may have to record additional impairment charges not previously
recognized. During the quarter ended January 31, 2002, the Company recognized $5
million of impairment losses related to its long-term investments.
In assessing the recoverability of the Company's goodwill and other intangibles,
the Company must make assumptions regarding estimated future cash flows and
other factors to determine the fair value of the respective assets. If these
estimates or their related assumptions change in the future, the Company may be
required to record impairment charges for these assets not previously recorded.
On November 1, 2001 the Company adopted Statement of Financial Accounting
Standards No. 142 ("FAS 142"), "Goodwill and Other Intangible Assets," and is,
therefore, required to analyze its goodwill for impairment issues during the
first six months of fiscal 2002, and then on a periodic basis thereafter. The
company's first goodwill impairment analysis under FAS 142 will be complete
during the second quarter of fiscal 2002. During the first quarter of fiscal
2002, the Company did not record any impairment losses related to goodwill and
other intangible assets.
Carrying value of the Company's net deferred tax assets assumes that the Company
will be able to generate sufficient future taxable income in certain tax
jurisdictions, based on estimates and assumptions. If these estimates and
related assumptions change in the future, the Company may be required to record
additional valuation allowances against its deferred tax assets resulting in
additional income tax expense in the Company's consolidated statement of
operations. Management evaluates the realizability of the deferred tax assets
quarterly and assesses the need for additional valuation allowances quarterly.
Results of Operations
Net Sales
Three months ended January 31,
2002 2001 Change
Net sales (thousands) $ 271,063 $ 245,035 10.6%
Beginning in fiscal 2002, Novell's operations are organized by operating segment
- - product, consulting, and Volera, Inc.
o Product - includes Net Management Services products (Directory-Enabled
OS, Management and Collaboration products, and UNIX royalties), NDS
Directory Services and other directory products, and product-related
customer service, support, and education
o Consulting - includes Novell and Cambridge IT services consulting and
Celerant management consulting o Volera, Inc. - Novell's majority-owned
subsidiary, which provides Content Distribution Network software
Product sales decreased to $199.3 million or 13.4% in the first quarter of
fiscal 2002 compared to the same period of fiscal 2001. Within the product
segment, sales from Net Management Services products decreased $37.1 million or
18% in the first quarter of fiscal 2002 compared to the first quarter of fiscal
2001 primarily due to decreased sales of older Netware versions, which have not
been completely offset by sales of Netware version 6, decreased sales of
management and collaboration products, and lower Unix royalties. Sales from Net
Directory Services products increased $3.7 million or 48.4% in the first quarter
of fiscal 2002 compared to the same period of fiscal 2001 primarily due to
increased sales from DirXML. Product related service, education, and support
decreased $1.3 million. The Company believes net product sales over the
remaining three quarters of fiscal 2002 will remain relatively flat compared to
the first quarter of fiscal 2002.
Consulting sales were $69.7 million or 433% higher in the first quarter of
fiscal 2002 compared to the first quarter of fiscal 2001, due to the acquisition
of Cambridge in the third quarter of fiscal 2001. Cambridge and Celerant sales
added $57.8 million to the first quarter of fiscal 2002. Without Cambridge and
Celerant, sales in the first quarter of fiscal 2002, consulting sales would have
been $11.9 million compared to $13.1 million in the first quarter of fiscal
2001. Consulting sales decreased $20.7 million in the first quarter of fiscal
2002 compared to the fourth quarter of fiscal 2001 primarily due to a weakened
services market and decreased demand for the Company's systems integration and
e-business solutions consulting. The Company expects to see slight declines in
consulting sales over the remaining three quarters of fiscal 2002.
Net sales from Volera, Inc. were relatively flat in the first quarter of fiscal
2002 compared to the first quarter of fiscal 2001 and is expected to increase
over the prior year during the next few quarters.
International sales represented 47% of total net sales in the first quarter of
fiscal 2002 compared to 43% in the first quarter of fiscal 2001. During the
first quarter of fiscal 2002, international sales increased 20% while domestic
sales increased 4% compared to the same period of fiscal 2001. The increase in
domestic sales during the first quarter was due to the addition of Cambridge,
offset by a decline in the IT consulting market. Internationally, sales
increased due to the addition of Cambridge and recovering European market
conditions.
Total net sales have decreased 12% in the first quarter of fiscal 2002 compared
to the fourth quarter of fiscal 2001. Product sales were down 7%, consulting
sales were down 23% and Volera sales were down 2% in the first quarter of fiscal
2002 compared to the fourth quarter of fiscal 2001. The Company expects total
net sales for fiscal 2002 to be between $1.06 billion and $1.08 billion. The
Company is working to address the decline in domestic sales, particularly
related to the consulting segment, in an effort to improve results in future
periods. The Company is near completion of its integration of Cambridge and
during the first quarter of fiscal 2002, the Company reorganized its sales force
to focus on direct selling and on solutions offerings. The Company anticipates
that it will take several quarters to fully realize the benefits from these
actions.
Gross Profit
Three months ended January 31,
2002 2001 Change
Gross profit (thousands) $ 160,290 $ 178,081 (10.0)%
Percentage of net sales 59.1% 72.7%
Gross profit as a percentage of net sales decreased in the first quarter of 2002
compared to the same period of fiscal 2001, primarily due to the effects of
decreased sales levels and a higher mix of lower-margin consulting business. The
mix between product sales and consulting sales has shifted due to the
acquisition of Cambridge, causing product sales to become a smaller percentage
of total sales. During the first quarter of fiscal 2002, gross margin for the
consulting segment was a negative $3.0 million. The negative margin is primarily
due to decreased consulting sales and the costs of excess consultants who were
not fully utilized on consulting engagements. The Company does not expect gross
profit margins to reach first quarter fiscal 2001 levels in the future due to
the increase in the consulting business. However, the Company believes the
current gross profit margin of 59.1% is too low and is currently addressing ways
to increase this in future periods.
Operating Expenses
Three months ended January 31,
(dollars in thousands) 2002 2001 Change
---- ---- ------
Sales and marketing $ 87,366 $ 121,419 (28.0)%
Percentage of net sales 32.2% 49.6%
Product development 41,123 46,846 (12.2)%
Percentage of net sales 15.2% 19.1%
General and administrative 30,325 23,100 31.3 %
Percentage of net sales 11.2% 9.4%
Total operating expenses $ 158,814 $ 191,365 (17.0)%
Percentage of net sales 58.6% 78.1%
Sales and marketing expenses decreased by $34.1 million in the first quarter of
fiscal 2002 compared to the same period in fiscal 2001, primarily due to
decreased spending on marketing campaigns and lower headcount due to the
restructurings in the third and fourth quarters of fiscal 2001. Sales and
marketing headcount decreased by 130 heads year-over-year. In addition, sales
and marketing expenses fluctuate in any given period due to timing of product
promotions, advertising or other discretionary expenses.
Product development expenses decreased $5.7 million in the first quarter of
fiscal 2002 compared to the same period in fiscal 2001, due primarily to
decreased headcount as a result of the restructurings that took place in the
third and fourth quarters of fiscal 2001. Product development headcount
decreased by 134 year-over-year. Product development expense as a percentage of
sales decreased due to the addition of Cambridge consulting sales, which does
not have any associated product development costs.
General and administrative expenses increased $7.2 million during the first
quarter of fiscal 2002 compared to the same period of fiscal 2001. The increase
in general and administrative expense dollars and as a percentage of sales was
primarily due to the addition of Cambridge general and administrative costs,
integration costs related to the acquisition, and increased headcount as a
result of the Cambridge acquisition, offset somewhat by the restructurings that
took place in the third and fourth quarters of fiscal 2001.
Restructuring
At the end of the fourth quarter of fiscal 2001, the Company incurred $50.7
million of pre-tax restructuring charges resulting from general market
conditions, customer demands and the Company's evolution of its business
strategy. The new business strategy focuses on eBusiness solutions along with
Net services software designed to secure and power the networked world across
leading operating systems. This included refining the Company's consulting
initiatives, refocusing research and development efforts, defining sales and
marketing efforts to be more customer and solutions oriented, and adjusting the
overall cost structure given current sales levels and Company direction. The
restructuring charge included $32.8 million of severance and employee related
costs for a reduction in workforce of approximately 1,100 personnel
(approximately 16%), $10.9 million for excess facilities and related property
and equipment disposals, $5.0 million for future committed payments related to
termination of a management consulting contract that no longer fits with the
Company's strategic focus, and $2 million for other related charges. The Company
also realigned its remaining resources to better manage and control its
business.
Of the total $50.7 million charge, cash payments of $24.4 million have been paid
out as January 31, 2002. After writing off certain non-cash charges, accruals of
$18.0 million relating to the fourth quarter restructuring remain as of January
31, 2002, primarily related to severance and benefits to be paid out during
fiscal 2002 and excess facility charges, which will be paid over the respective
lease terms.
During the third quarter of fiscal 2001, the Company recorded a restructuring
charge of approximately $30.4 million, pre-tax, as a result of the Company's
acquisition of Cambridge and changes in the Company's business to move towards
the Company's eBusiness strategy. Specific actions and the related charges taken
included $16.0 million to reduce the Company's workforce worldwide by
approximately 280 employees across all functional areas (approximately 5% before
the addition of Cambridge), $10.7 million to consolidate facilities and dispose
of excess property and equipment, $0.9 million to abandon and write off
technologies that no longer fit within the Company's new strategy, $2.1 million
to discontinue unprofitable product lines, and $0.7 million for other related
restructuring costs.
Of the total $30.4 million third quarter 2001 charge, cash payments of $19.3
million have been paid out as January 31, 2002. After writing off certain
non-cash charges, accruals of $9.8 million remain as of January 31, 2002,
primarily related to severance and benefits to be paid out during fiscal 2002
and excess facility charges, which will be paid over the respective lease terms.
As a result of the two fiscal 2001 restructurings, the Company estimates that
its operating expenses will be reduced by approximately $170 million annually
compared to fourth quarter fiscal 2001 levels, before increased strategic
expenditures. As of the end of the first quarter of fiscal 2002, the company had
recognized approximately $38 million in savings due to the restructurings over
the fourth quarter 2001 expense levels.
During the fourth quarter of fiscal 2000, the Company incurred $47.9 million of
pre-tax restructuring charges resulting from 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. The new business strategy focuses
on a Net services business model and on electronic or e-solutions. This included
a reorganization of the Company into new business units, refocusing research and
development efforts, analyzing profitability of products and discontinuing
unprofitable ones, defining sales and marketing efforts to be more
customer-oriented and market driven, and adjusting the Company's overall cost
structure given current sales levels. The charge included $17.0 million of
severance for a reduction in workforce of approximately 700 personnel
(approximately 13%), $5.1 million for redundant facilities, $22.8 million for
abandonment of technologies that no longer fit with the Company's strategic
focus, and $3.0 million for other related charges.
Of the total $47.9 million fiscal 2000 restructuring charge, cash payments of
$21.6 million have been paid out as of January 31, 2002. After writing off
certain non-cash charges, accruals of $3.2 million remain as of January 31,
2002, primarily related to excess facility and long-term contract charges to be
paid out over the contract terms.
The Company could incur additional restructuring charges in the future as it
continues to develop its eBusiness strategy and react to market conditions.
Employee Headcount
(dollars in thousands) January 31, 2002 January 31, 2001 Change
---------------------- ---------------- ---------------- ------
Employees at end of period 6,267 4,794 30.7 %
Annualized sales per average
employee $ 163 $ 202 (19.2)%
Headcount increased from the first quarter of 2001, primarily due to the
acquisition of Cambridge, which added approximately 2,700 employees, offset
somewhat by the restructuring related reductions that occurred during the third
and fourth quarters of fiscal 2001.
Other Income, Net
Three months ended January 31,
(dollars in thousands) 2002 2001 Change
---------------------- ---- ---- ------
Other income, net $ 10,454 $ 17,831 (41.4)%
Percentage of net sales 3.9% 7.3%
The primary component of other income is related to investment income or losses.
During the first quarter of fiscal 2002, investment income of $8.0 million was
offset by investment impairment losses of $5.4 million. Investment income during
the first quarter of fiscal 2001 included income of $17.3 million from equity
sales offset somewhat by $2.7 million of investment impairment losses. The $5.4
million investment impairment relates to certain investments in the Company's
portfolio, whose declines in market values was determined to be other than
temporary. Also included in other income during the first quarter of fiscal 2002
was an $8.8 million gain on the sale of a building.
Income Taxes Expense
Three months ended January 31,
(dollars in thousands) 2002 2001 Change
---------------------- ---- ---- ------
Income tax expense $ 3,579 $ 1,273 181.1%
Percentage of net sales 1.3% 0.5%
Effective tax expense rate 30.0% 28.0%
The Company's effective tax rate for the first quarter of fiscal 2002 and for
fiscal 2002 is estimated to be 30% compared to 28% in the first quarter of
fiscal 2001 and 21% for fiscal 2001, before restructuring charges and investment
impairment. The rate for the first quarter of fiscal 2002 differs from the
effective tax rates for the first quarter of fiscal 2001 and for fiscal 2001
primarily as a result of changes in the forecasted income before taxes for
fiscal 2002.
Net Income (Loss) and Net Income (Loss) Per Share
(dollars in thousands, except Three months ended January 31,
------------------------------
per share data) 2002 2001 Change
---- ---- ------
Income before accounting change $ 8,351 $ 3,274 155.1%
Percentage of net sales 3.1% 1.3 %
Net income (loss) $ 8,351 $(7,774) 207.4%
Percentage of net sales 3.1% (3.2)%
Income per share, before accounting
change - basic $ 0.02 $ 0.01
Net income (loss) per share - basic $ 0.02 $ (0.02)
Income per share, before accounting
change - diluted $ 0.02 $ 0.01
Net income (loss) per share - basic $ 0.02 $ (0.02)
Liquidity and Capital Resources
January 31, 2002 October 31, 2001 Change
---------------- ---------------- ------
Cash and short-term investments (000s) $735,519 $705,243 4.3%
Percentage of total assets 40.2% 37.0%
Cash and short-term investments increased by $30.3 million to $735.5 million at
January 31, 2002, up from $705.2 million at October 31, 2001. During the first
three months of fiscal 2002, cash and short-term investments increased primarily
due to $20.7 million provided from operating activities, $16.1 million cash
received from the sale of a building, and $1.7 million from the net issuance of
common stock. These cash inflows were offset by cash outflows of $5.8 million
for net purchases of long-term investments and other long-term investing
activities and $2.5 million to purchase property, plant and equipment. Included
in the $20.7 million of cash provided from operating activities was
approximately $43.0 million of cash payments made during the quarter related to
fiscal 2001 merger and restructuring actions accrued at October 31, 2001.
The Company's short-term 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 short-term
investment portfolio includes equity securities with gross unrealized gains of
$7.0 million and gross unrealized losses of $0.3 million as of January 31, 2002.
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 also invests excess cash in long-term investments through the Novell
Venture account, Cambridge Technology Capital Fund I L.P. ("CTC I"), Novell
Technology Capital Fund I, L.P. ("NTC I"), and strategic long-term equity
investments. Investments made through the Novell Venture account, CTC I, and NTC
I generally are in expansion-stage private companies, primarily small
capitalization stocks, in the high-technology industry sector. The Novell
Venture account funds are managed largely by external venture capitalists. CTC I
and NTC I are managed internally. The value of the investments made through the
Novell Venture account and CTC I are dependent on the performance, successful
acquisition, and/or initial public offering of the investees. 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 January
31, 2002, the Company's principal unused sources of liquidity consisted of cash
and short-term investments and available borrowing capacity of approximately $7
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 three months of fiscal 2002, the Company continued to generate
a positive cash flow from operations. The Company anticipates being able to fund
its current operations, integration, restructuring and merger-related costs, 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 offerings of
equity or debt securities are available if the need arises, although offerings
may not be available to the Company on acceptable terms, if at all. 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 2002 are anticipated to
be approximately $40 million, but could be reduced if the growth of the Company
is less than presently anticipated. The Company also has commitments to invest
up to an additional $90.8 million in externally managed venture capital funds
and up to $15 million in internally managed venture capital funds over the next
two to three years.
During the fourth quarter of 2001, the Board of Directors extended the Company's
stock repurchase program through June 30, 2003 and authorized the use of up to
$400 million for the repurchase of additional outstanding shares of the
Company's common stock. As of January 31, 2002, $89 million of the authorized
amount had been spent to repurchase 14 million shares under this plan at an
average price of $6.19 per share. There were no shares repurchased during the
first quarter of fiscal 2002.
Recent Pronouncements
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. The provisions of SFAS 144 will be effective for fiscal year
2002 and will be applied prospectively. The Company is currently in the process
of evaluating the potential impact that the adoption of SFAS 144 will have on
its consolidated financial position and results of operations.
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 services 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; further declines in the demand for information technology
consulting services; risk of consulting clients terminating or reducing the
scope of engagements; 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 other product and service companies
o delays in the introduction of new products and services
o success of new products, technologies or services
o stock market fluctuations unrelated to Company performance
o failure to properly estimate costs of fixed fee engagements
o failure to properly manage consulting engagements within fixed-fees
agreed to by customers
o inability to fully utilize consultants on client engagements
The Current Economic Climate and Outlook in the Technology and Information
Technology Services Sector Is Very Weak
The weakened economic climate, particularly in the technology sector, has had an
adverse effect on Novell's stock price and operations. Future economic
projections for this sector do not anticipate 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.
Our Financial Results May Vary
The Company often experiences a higher volume of sales at the end of each
quarter and during the Company's 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, including a shift from higher margin to lower margin
products or services
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 inability to respond to the decline in sales through the distribution
channel
o inability to derive benefits from our restructurings and new corporate
strategy
o inability to deliver solutions as expected by our consulting customers
o differences in estimates versus actual results
We Compete in a Challenging Market for Computer Software and Consulting Services
Novell competes in a highly challenging market for computer software. One
pervasive factor underlying all of the Company's business endeavors is the
presence of Microsoft in all sectors of the software business, and Microsoft's
dominance in many of those sectors.
In a finding upheld by the Circuit Court for the District of Columbia, the
United States District Court found that Microsoft violated Section 2 of the
Sherman Act by unlawfully acting to maintain its monopoly over desktop operating
systems. The Company believes that Microsoft is exploiting its desktop operating
monopoly in a way that is designed to extend its market power into the market
for server operating systems, and to claim control of network and web services
such as authentication, using many of the same anti-competitive practices found
by the United States District Court to be in violation of the nation's
anti-trust laws. The Company is concerned that the Second Revised Proposed Final
Judgment of the litigation between the Department of Justice and Microsoft will
not benefit competition or consumers in a meaningful way and, if approved, could
result in continued harm to the Company.
Additionally, 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 compete with Novell's, 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 Novell's ability to grow its business.
Microsoft has significant financial resources, which could allow it to
aggressively price its products and services for long periods of time to the
potential detriment of competitors. Microsoft in the past has also employed
tactics that limit or block effective and efficient interoperability with
Novell's products. Microsoft frequently bundles software features into its
operating system for free which compete directly with stand-alone products from
Novell. As Microsoft creates new operating systems and applications, there can
be no assurance that Novell will be able to ensure its products will be
compatible with those of Microsoft.
Although these market conditions and the judgments reached in litigation
concerning Microsoft may affect overall Novell performance, the Company believes
its strong product offering and "One Net" business strategy will be competitive
in the marketplace. Additionally, if the more meaningful relief being sought by
the nine litigating states is imposed on Microsoft, there could be a restoration
of competition in the marketplace that would benefit Novell.
The market for consulting services is highly competitive due to such factors as
the existence of several large consulting firms specializing in the information
systems area such as Compaq Computer Corporation, Hewlett-Packard Company, IBM,
Accenture, Cap Gemini and the three remaining consulting arms of the "Big Five"
accounting firms. Many of these companies have greater financial, technical and
marketing resources and greater name recognition in the consulting area, which
could inhibit the Company's ability to grow its consulting business.
Additionally, the Company may face competition from other industry companies,
which could introduce competitive products and/or services. If any of these
competing products or services achieves market acceptance, Novell's business and
results of operations could be materially adversely affected. Novell believes
that additional factors that affect success in the marketplace include technical
innovation to meet dynamic market needs, marketing strength, system performance,
customer service and support, reliability, ease of use, security, and price
compared to performance. Novell seeks to address all of these factors with its
marketing and product development. However, these factors are also addressed by
competitors, including Microsoft, in ways that may cause Novell's chances of
success to be diminished.
We Face Intense Competition for Qualified Personnel in the Computer and
Consulting Industries
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, consulting, and managerial personnel. Competition for
such personnel is intense and there is a risk of departure due to the
competitive environment in the software and consulting industries. The loss of a
significant group of key personnel would adversely affect the Company's
performance. 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 Depend on a Number of Key Executives Who Have Recently Joined Us and Whom We
May Not Be Able to Retain
Most members of our senior management have recently joined us. Many of these
individuals have not previously worked with one another, and it will take time
for the management team to become integrated and work effectively together. It
may also take time for these individuals to effect change within the
organizations that lie within their respective areas of responsibility. Due to
the competitive nature of our industry, we may not be able to retain all of our
senior managers.
Although Our Acquisition of Cambridge Was 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 Complexity and Scale
Achieving the benefits of the Cambridge acquisition will depend in part on the
successful integration of personnel, operations and technology. The integration
of the two companies has been and will be a complex, time consuming and
expensive process and may continue to disrupt Novell's business if not completed
in a timely and efficient manner. The challenges involved in this integration
include the following:
o Obtaining synergies from the companies' professional services
organizations;
o Obtaining synergies from the companies' service and product offerings
effectively and quickly;
o Coordinating sales efforts so that customers can do business easily
with the combined company;
o Integrating technology, back office, human resources, accounting and
financial systems;
o Bringing together marketing efforts so that the market receives useful
information about the combined company;
o Assimilating our employees into a common business culture; and
o Retaining key officers and employees who possess the necessary skills
and experience to quickly and effectively transition and integrate the
businesses.
Neither Novell nor Cambridge has experience in integrating operations on the
complexity and scale presented by the merger. The integration process has been
and will continue to be complicated and has been and will continue to 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
that the anticipated benefits will be realized. Failure to effectively complete
the integration could materially harm the business and operating results of the
combined company. In addition, goodwill related to the acquisition of Cambridge
could become impaired.
We Have Experienced Delays in the Introduction and Acceptance of New Products
and Solutions Due to Various Factors
As is common in the computer software industry, Novell has in the past
experienced delays in the introduction of new products due to a number of
factors, including 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. Novell could, in the future, experience the
same difficulties in introducing new solutions. Significant delays in
developing, completing or shipping new or enhanced products and solutions would
adversely affect the Company.
Moreover, the Company may experience delays in market acceptance of new releases
of its products and solutions as the Company engages in marketing and education
of the user base regarding the advantages and system requirements for new
products and solutions, 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 and sales of its solutions. 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 or solutions releases,
the Company's sales and net income could be adversely affected.
If Third Parties Claim that We Infringed Upon Their Intellectual Property, Our
Ability to Use Some Technologies and Products Could Be Limited and We May Incur
Significant Costs to Resolve these Claims
Litigation regarding intellectual property rights is common in the Internet and
software industries. Novell expects third-party infringement claims involving
Internet technologies and software products and services to increase. If an
infringement claim is filed against Novell, it may be prevented from using some
technologies and may incur significant costs to resolve the claim.
Novell has in the past received letters suggesting that it is infringing upon
the intellectual rights of others, and it may from time to time encounter
disputes over rights and obligations concerning intellectual property. Novell's
products and services may be found to infringe on the intellectual property
rights of third parties.
In addition, Novell has agreed, and may agree in the future, to indemnify
customers against claims that its products infringe upon the intellectual
property rights of others. Novell could incur substantial costs in defending
itself and its customers against infringement claims. In the event of a claim of
infringement, Novell and its customers may be required to obtain one or more
licenses from third parties. In such instances, Novell or its customers may not
be able to obtain necessary licenses from third parties at a reasonable cost or
at all.
We May Not Be Able to Protect Our Confidential Information, Which May Adversely
Affect Our Business
The Company generally enters into contractual relationships with its employees
that protect its confidential information. In the event that the Company's trade
secrets or other proprietary information are misappropriated, the Company's
business could be seriously harmed. In addition, the Company may not be able to
timely detect unauthorized use of its intellectual property and take appropriate
steps to enforce its rights. In the event the Company is unable to enforce these
contractual obligations, its business could be adversely affected.
We May Not Be Successful at Introducing New Technologies
One 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 sales s from Net
Directory Services increased during the first quarter of fiscal 2002, sales s
from Net Management Services decreased by 18%, resulting in overall declines in
net product sales by 13% in the first quarter of fiscal 2002 compared to the
same period of fiscal 2001.
We Face Increased Risks in Conducting a Global Business, Which May Damage
Business Results
Novell is a multi-national corporation with offices and subsidiaries around the
world and, as such, it faces risks in doing business abroad that it does not
face domestically. Certain aspects inherent in transacting business
internationally could negatively impact the operating results of the Company,
including:
o costs and difficulties in staffing and managing international
operations;
o unexpected changes in regulatory requirements;
o tariffs and other trade barriers;
o difficulties in enforcing contractual and intellectual property rights;
o longer payment cycles;
o local political, social and economic conditions;
o potentially adverse tax consequences, including restrictions on
repatriating earnings and the threat of "double taxation"; and
o fluctuations in currency exchange rates.
Some of Our Short-term, Long-term, and Venture Capital Fund Investments Have
Become Impaired. Additional Investments Could Become Impaired
Novell's investment portfolio includes investments in public equity securities,
small capitalization stocks in the high-technology industry sector, and funds
managed by venture capitalists. Many of these investments have lost a
significant portion of their value at least on a short-term basis, and possibly
on a permanent basis. Additional investments may also lose value. During the
first quarter of fiscal 2002, Novell recorded an impairment charge of $5 million
related to some of the long-term investments in its portfolio whose market value
had experienced an other-than-temporary decline. As of January 31, 2001, the
Company had net unrealized gains or approximately $5 million, net of taxes, on
investments. However, there can be no assurances that these gains will be
realized and that losses will not occur.
Our Existing Relationships With Other Information Technology Services
Organizations May Be Impaired
Novell relies on existing relationships with information technology services
organizations that recommend, design and implement solutions for their customers
that include Novell Net services products. A change in the willingness of these
information technology service organizations to do business with Novell could
undercut Novell's efforts to become a solutions-based Net services software
company.
Our Business May Be Negatively Affected if We Do Not Continue to Adapt to Rapid
Technological Change, Evolving Business Practices and Changing Consumer
Requirements
The software industry and Internet professional services market is characterized
by rapidly changing technology, evolving business practices and changing client
needs. Accordingly, Novell's future success will depend in part on its ability
to continue to adapt and meet these challenges. Among the most important
challenges facing the Company are the need to continue to:
o effectively identify and use leading technologies;
o develop strategic and technical expertise;
o influence and respond to emerging industry standards and other
technology changes and to orient management teams to capitalize on
these changes;
o recruit and retain qualified project personnel;
o enhance current services;
o develop new services that meet changing customer needs; and
o effectively advertise and market services.
Our Services Contracts Contain Pricing Risks
Novell's Cambridge IT services business derives a significant portion of its
sales from fixed-price, fixed-time contracts. Because of the complex nature of
the services provided, it is sometimes difficult to accurately estimate the
cost, scope and duration of particular client engagements. If the Company does
not accurately estimate the resources required for a project, does not
accurately assess the scope of work associated with a project, does not manage
the project properly, or does not satisfy its obligations in a manner consistent
with the contract, then the Company's costs to complete the project could
increase substantially. The Company has occasionally had to commit unanticipated
additional resources to complete projects, and it may have to take similar
action in the future. The Company may not be compensated for these additional
costs or the commitment of these additional resources.
Our Cambridge IT Services Clients Can Cancel or Reduce the Scope of Their
Engagements With Us on Short Notice
If the Company's clients cancel or reduce the scope of an engagement with the
Cambridge IT services business, the Company may be unable to reassign its
professionals to new engagements without delay. Personnel and related costs
constitute a substantial portion of the Company's operating expenses. Because
these expenses are relatively fixed, and because the Company establishes the
levels of these expenses well in advance of any particular quarter,
cancellations or reductions in the scope of client engagements could result in
the under-utilization of the Company's professional services employees, causing
significant reductions in operating results for a particular quarter.
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 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. Sales 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 been 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.
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 January 31, 2002.
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 $2.2 million decrease (less than 0.5%) 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 January 31, 2002, unrealized gains, before tax
effect, on short-term public equity securities totaled $3 million. A 10% adverse
change in prices of these short-term equity securities would result in an
approximate $1.3 million decrease in the fair value of the Company's short-term
investments.
In addition, the Company invests in equity securities, included in its long-term
portfolio of investments, for the promotion of business and strategic
objectives. These 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. A 10% adverse change in equity prices of long-term equity
securities would result in an approximately $11 million decrease in the fair
value of the Company's available-for-sale long-term securities.
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 large portion of the Company's sales , expense and capital purchasing
activities are transacted in U.S. dollars. However, the Company does enter into
transactions in other currencies, primarily European, Japanese yen and certain
other Latin American and Asian currencies. To protect against reductions in
value 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 $7.5 million.
All of the potential changes noted above are based on sensitivity analyses
performed on the Company's financial position at January 31, 2002. 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 H 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
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
3.2 By-Laws, as amended and restated February 26, 2002
10.1 Separation agreement between Novell, Inc. and Rich Nortz, dated
July 12, 2001
10.2 Letter agreement between Novell, Inc. and RRE Advisors, LLC, dated
December 15, 1995
(b) Reports on Form 8-K.
Notice of Novell's scheduled report of fourth quarter results and related
conference call to be held on November 29, 2001, as filed on November 6,
2001 under Item 5.
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: March 15, 2002 /s/ Ronald C. Foster
-----------------------
Ronald C. Foster
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)