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 July 31, 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 August 31, 2001, there were 362,180,428 shares of the Registrant's Common
Stock outstanding.
Part I. Financial Information
Item 1. Financial Statements
NOVELL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
July 31, 2001 October 31, 2000
------------- ----------------
Amounts in thousands, except share and per share data (Unaudited)
ASSETS
Current assets:
Cash and short-term investments $ 686,943 $ 698,193
Receivables, less allowances ($53,032 - July 31, 2001;
$33,469 - October 31, 2000) 230,570 196,672
Inventories 1,067 2,621
Prepaid expenses 40,226 26,120
Deferred and refundable income taxes 22,198 60,109
Other current assets 29,502 23,644
------------ ------------
Total current assets 1,010,506 1,007,359
Property, plant and equipment, net 291,169 290,104
Long-term investments 366,315 383,583
Other assets 279,739 31,300
------------ ------------
Total assets $ 1,947,729 $ 1,712,346
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 79,229 $ 85,050
Accrued compensation 86,610 54,546
Accrued marketing liabilities 12,794 13,632
Restructuring and merger related liabilities 68,510 16,612
Other accrued liabilities 62,549 43,032
Income taxes payable 43,992 39,043
Deferred revenue 220,072 203,163
------------ ------------
Total current liabilities 573,756 455,078
Minority interests 25,162 12,183
Shareholders' equity:
Common stock, par value $.10 per share
Authorized - 600,000,000 shares
Issued - 362,234,446 shares-July 31, 2001
327,618,192 shares-October 31, 2000 36,223 32,762
Additional paid in capital 256,120 --
Retained earnings 1,079,997 1,319,853
Accumulated other comprehensive (loss) (12,480) (84,427)
Other (11,049) (23,103)
------------- -------------
Total shareholders' equity 1,348,811 1,245,085
------------ ------------
Total liabilities and shareholders' equity $ 1,947,729 $ 1,712,346
============ ============
See notes to consolidated unaudited condensed financial statements.
2
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended
------------------------------------------
July 31, 2001 July 31, 2000
------------- -------------
Amounts in thousands, except per share data
Net sales $ 246,697 $ 270,019
Cost of sales 73,789 85,023
----------- -----------
Gross profit 172,908 184,996
Operating expenses:
Sales and marketing 100,013 123,207
Product development 47,976 58,303
General and administrative 28,101 22,369
Restructuring 30,392 --
----------- -----------
Total operating expenses 206,482 203,879
Loss from operations (33,574) (18,883)
Other income (expense)
Investment income 13,636 32,892
Investment impairment (5,000) --
Other, net 1,870 (2,105)
----------- ------------
Other income (expense), net 10,506 30,787
Income (loss) before taxes (23,068) 11,904
Income tax expense (benefit) (3,794) 3,332
------------ -----------
Net income (loss) $ (19,274) $ 8,572
============ ===========
Net income (loss) per share
Basic: $ (0.06) $ 0.03
Diluted: $ (0.06) $ 0.03
Weighted average shares outstanding:
Basic 328,683 325,315
Diluted 328,683 327,259
Pro forma amounts assuming the accounting change is applied retroactively
- -------------------------------------------------------------------------
Net income (loss) $ -- $ 20,020
=========== ===========
Net income (loss) per share (diluted) $ -- $ 0.06
=========== ===========
See notes to consolidated unaudited condensed financial statements.
3
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Nine Months Ended
---------------------------------------
July 31, 2001 July 31, 2000
------------- -------------
Amounts in thousands, except per share data
Net sales $ 732,487 $ 888,411
Cost of sales 205,843 247,492
----------- -----------
Gross profit 526,644 640,919
Operating expenses:
Sales and marketing 339,584 361,827
Product development 148,035 175,206
General and administrative 77,476 68,000
Restructuring 30,392 --
----------- -----------
Total operating expenses 595,487 605,033
Income (loss) from operations (68,843) 35,886
Other income (expense)
Investment income 45,037 87,463
Investment impairment (149,747) --
Other, net 856 (6,090)
----------- -----------
Other income (expense), net (103,854) 81,373
Income (loss) before taxes (172,697) 117,259
Income tax expense (benefit) (5,386) 32,832
----------- -----------
Net income before cumulative effect of change in accounting
principle (167,311) 84,427
Cumulative effect of change in accounting principle (Note K) (11,048) --
----------- -----------
Net income (loss) $ (178,359) $ 84,427
=========== ===========
Net income (loss) per share - Basic:
Before cumulative effect of change in accounting principle $ (0.52) $ 0.26
Cumulative effect of change in accounting principle (Note K) (0.03) --
----------- -----------
$ (0.55) $ 0.26
=========== ===========
Net income (loss) per share - Diluted:
Before cumulative effect of change in accounting principle $ (0.52) $ 0.25
Cumulative effect of change in accounting principle (Note K) (0.03) --
----------- -----------
$ (0.55) $ 0.25
=========== ===========
Weighted average shares outstanding:
Basic 322,913 326,336
Diluted 322,913 336,970
Pro forma amounts assuming the accounting change is applied retroactively
- -------------------------------------------------------------------------
Net income (loss) $ -- $ 106,891
=========== ===========
Net income (loss) per share (diluted) $ -- $ 0.32
=========== ===========
See notes to consolidated unaudited condensed financial statements.
4
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended
-------------------------------------
July 31, 2001 July 31, 2000
------------- -------------
Dollars in thousands
Cash flows from operating activities
Net income (loss) $ (178,359) $ 84,427
Adjustments to reconcile net income (loss) to net cash provided by
operating activities
Depreciation and amortization 66,995 61,982
Stock plans' income tax benefits -- 61,453
Loss on impaired investments and fixed assets 152,806 --
Restructuring charges 19,185 --
Decrease in receivables 43,392 70,507
Decrease in inventories 1,554 538
(Increase) decrease in prepaid expenses (5,085) 17,475
(Increase) decrease in deferred and refundable income taxes (8,339) 31,144
Decrease in other current assets 9,013 7,221
Decrease in current liabilities, net (39,583) (42,878)
---------- ----------
Net cash provided from operating activities 61,579 291,869
Cash flows from financing activities
Issuance of common stock, net 5,528 74,545
Repurchase of common stock (64,954) (301,011)
---------- ----------
Net cash used by financing activities (59,426) (226,466)
Cash flows from investing activities
Expenditures for property, plant and equipment (25,044) (43,359)
Proceeds from the sale of property, plant and equipment -- 33,079
Purchases of short-term investments (642,197) (701,969)
Maturities of short-term investments 546,823 626,277
Sales of short-term investments 103,413 330,666
Expenditures for other long-term investments (36,523) (186,780)
Increase in restricted cash -- (36,881)
Cash acquired from acquisition of Cambridge 72,358 --
Proceeds from Volera minority shareholders 25,975 --
Other (14,006) 851
---------- ----------
Net cash provided by investing activities 30,799 21,884
Total increase in cash and cash equivalents 32,952 87,287
Cash and cash equivalents - beginning of period 289,537 274,269
---------- ----------
Cash and cash equivalents - end of period 322,489 361,556
Short-term investments - end of period 364,454 315,086
---------- ----------
Cash and short-term investments - end of period $ 686,943 $ 676,642
========== ==========
Supplemental disclosures of non-cash financing and investing activities:
Issuance of stock for acquisitions $ 250,564 $ 17,366
See notes to consolidated unaudited condensed financial statements.
5
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. Acquisitions
On July 10, 2001, the shareholders of Cambridge Technology Partners
(Massachusetts), Inc. ("Cambridge") approved the acquisition of Cambridge
by Novell. The Company issued 0.668 shares of its common stock for each
share of Cambridge common stock outstanding on July 10, 2001. The
transaction was valued at approximately $260.6 million, of which $250.6
million related to the number of shares exchanged at a per share value of
$5.907 (an average closing price of a share of Novell common stock for the
seven trading day period beginning three days before the announcement date
of the acquisition), and $10.0 million related to direct transaction costs.
The acquisition was accounted for as a purchase. The value of the
acquisition was preliminarily allocated as follows:
Adjusted net assets acquired $ 79,721
Goodwill 180,842
--------
$260,563
========
In accordance with Statements of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," issued by the Financial
Accounting Standards Board ("FASB") in June 2001, the Company will not
amortize the goodwill associated with this acquisition. The Company will
review the asset periodically for potential impairment issues.
The unaudited pro forma consolidated statement of operations data for the
nine months ended July 31, 2001 and 2000 set forth below gives effect to
the acquisition of Cambridge as if it occurred on November 1, 1999. The
unaudited pro forma results for these periods include an adjustment to
reflect amortization of goodwill recorded in conjunction with the
acquisition. The basic and diluted net loss per share amounts are computed
using the weighted average number of shares of common stock outstanding
after the issuance of the Company's common stock to acquire the outstanding
shares of Cambridge.
Nine months Nine months
ended July 31, 2000 ended July 31, 2000
------------------- -------------------
Amounts in thousands, except per share data
-------------------------------------------
Revenue $ 1,033,372 $ 1,337,328
Net income (loss) before accounting change (264,496) 15,251
Net income (loss) (275,544) 15,251
Earnings (loss) per share - Basic and Diluted $ (0.77) $ 0.04
6
C. 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
July 31, 2001 Gains Losses July 31, 2001
------------- ----- ------ -------------
(Amounts in thousands)
Cash and cash equivalents:
Cash.............................................. $ 128,578 $ -- $ -- $ 128,578
Corporate debt.................................... 34,596 -- -- 34,596
Money market funds................................ 159,315 -- -- 159,315
---------- -------- ---------- ----------
Total cash and cash equivalents........... 322,489 -- -- 322,489
Short-term investments:
State and local government debt................... 169,112 3,430 -- 172,542
Corporate debt.................................... 94,945 1,392 -- 96,337
Money market preferreds........................... 36,003 -- (3) 36,000
Mutual funds...................................... 57,574 -- (13,330) 44,244
Equity securities................................. 23,918 897 (9,484) 15,331
---------- -------- ---------- ----------
Total short-term investments.............. 381,552 5,719 (22,817) 364,454
Total cash and short-term investments..... $ 704,041 $ 5,719 $ (22,817) $ 686,943
========== ======== ========== ==========
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 nine months of fiscal 2001, the Company realized gains of
$10.7 million and realized losses of $0.8 million on the sale of
securities. During the first nine months of fiscal 2000, the Company
realized gains of $52.7
7
million and realized losses of $1.6 million from the sale of securities.
In addition, the Company recorded impairment losses of $5.0 million during
the third quarter, $142.0 million during the second quarter, and $2.7
million during the first quarter of fiscal 2001 related to short and
long-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.
D. Other Assets
The primary components of other assets as of July 31, 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 internal Novell
venture account, 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 and third quarters of fiscal 2001,
the Company wrote off its long-term investment in marchFIRST and other
long-term investments whose change in market value was believed to be other
than temporary. As of July 31, 2001, there were no unrealized losses on
public long-term equity securities.
E. 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 primarily as a result of changes in the
forecasted income before taxes for fiscal 2001. There is no tax benefit for
the investment impairment losses 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 $9.4 million in the first
nine months of fiscal 2001 and $21.3 million during the same period of
fiscal 2000.
F. 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 July 31, 2001, there were standby
letters of credit of $2.6 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 July 31, 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. At July
31, 2001, there was $0.5 million of standby letters of credit outstanding
under this arrangement.
8
G. Restructuring
During the third quarter of fiscal 2001, the Company recorded a
restructuring charge of approximately $30.4 million as a result of the
Company's acquisition of Cambridge Technology Partners and changes in the
Company's business strategy to address continued changes in customer
demands and the overall market. Specific actions taken 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 fixed assets,
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 related to restructuring costs and
activities in the third quarter of fiscal 2001.
Amount Balance at
Charged to Cash Non-Cash July 31,
Restructuring Payments Charges 2001
------------- -------- ------- ----
Amounts in thousands
--------------------
Severance and benefits $ 15,978 $ (10,553) -- $ 5,425
Abandoned technology 856 -- (645) 211
Redundant facilities and fixed assets 10,740 -- (495) 10,245
Exit unprofitable product lines 2,111 (750) (121) 1,240
Other restructuring related costs 707 (237) -- 470
--------- ---------- --------- ---------
$ 30,392 $ (11,540) $ (1,261) $ 17,591
========= ========== ========== =========
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 nine months of fiscal 2001.
Balance at Balance at
October 31, Cash Non-Cash July 31,
2000 Payments Charges 2001
---- -------- ------- ----
Amounts in thousands
--------------------
Severance and benefits $ 6,139 $ (5,528) -- $ 611
Abandoned technology 286 -- -- 286
Redundant facilities and fixed assets 4,726 (734) (1,166) 2,826
Other restructuring related costs 2,616 (392) -- 2,224
--------- --------- --------- ---------
$ 13,767 $ (6,654) $ (1,166) $ 5,947
========= ========= ========= =========
As of July 31, 2001, the remaining portion of the fiscal 2000 and 2001
restructuring charges included in accrued liabilities related mainly to
severance and benefits, abandoned technology, and other restructuring
related costs, which will largely be paid through fiscal 2002. Amounts
related to redundant facilities and other fixed contracts will be paid over
the respective remaining contract terms.
In addition to the restructuring charges incurred in fiscal 2000 and 2001,
the Company has a liability for a restructuring that occurred in fiscal
1997 related to redundant facilities which are continuing to be paid out
over the respective contract terms.
9
H. Commitments and Contingencies
The Board of Directors has established an internal 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.
These investments are intended to promote the Company's business and
strategic objectives. As of July 31, 2001, the Company had investments of
$61.6 million in various venture capital funds and had commitments to
contribute up to an additional $100 million to these funds over the next
one to two 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 July 31,
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 July 31, 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 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 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, on June 8, 2001 the plaintiffs
filed a Notice of Appeal. 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.
I. 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:
. Net Services, which includes Directory-Enabled OS, Management and
Collaboration products, and UNIX royalties
. Net Directory Services, which includes NDS Directory Services and other
directory products
. Net Content Services, which includes Internet Caching services
10
. Consulting, Support Services, and Education which includes Novell customer
service and education, Cambridge IT services, and Celerant management
consulting
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 Nine Months Ended
-------------------------------------------------------------
Amounts in thousands July 31, 2001 July 31, 2000 July 31, 2001 July 31, 2000
-------------------- ------------- ------------- ------------- -------------
Net services $ 170,226 $ 207,661 $ 537,977 $ 706,538
Net directory services 4,854 5,779 20,469 19,185
Net content services 2,225 2,144 5,933 4,401
Consulting, support services and education 69,392 54,435 168,108 158,287
---------- ---------- ---------- ----------
Total net sales $ 246,697 $ 270,019 $ 732,487 $ 888,411
========== ========== ========== ==========
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 were not material individually in any single
international location.
For the first nine months of fiscal 2001 and fiscal 2000, sales to
international customers were approximately $321.5 million and $385.3 million,
respectively. In the first nine months of fiscal 2001 and fiscal 2000, 67%
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 nine months of fiscal 2001 or fiscal 2000.
J. Net Income (Loss) Per Share
Three Months Ended Nine Months Ended
--------------------------------------------------------------
Amounts in thousands, except per share data July 31, 2001 July 31, 2000 July 31, 2001 July 31, 2000
------------------------------------------- ------------- ------------- ------------- -------------
Basic net income per share computation
Net income (loss) $ (19,274) $ 8,572 $ (178,359) $ 84,427
----------- ----------- ----------- ------------
Weighted average shares outstanding 328,683 325,315 322,913 326,336
----------- ----------- ----------- ------------
Basic net income (loss) per share $ (0.06) $ 0.03 $ (0.55) $ 0.26
=========== =========== =========== ============
Diluted net income per share computation
Net income (loss) $ (19,274) $ 8,572 $ (178,359) $ 84,427
----------- ----------- ----------- ------------
Weighted average shares outstanding 328,683 325,315 322,913 326,336
Incremental shares attributable to exercise of
outstanding options (treasury stock method) -- 1,944 -- 10,634
----------- ----------- ----------- ------------
Total 328,683 327,259 322,913 336,970
----------- ----------- ----------- ------------
Diluted net income (loss) per share $ (0.06) $ 0.03 $ (0.55) $ 0.25
=========== =========== =========== ============
11
K. Comprehensive Income (Loss)
The components of comprehensive income (loss), net of tax, for the three
and nine months ended July 31, 2001 and 2000 were as follows:
Three Months Ended Nine Months Ended
----------------------------------------------------------------
Amounts in thousands July 31, 2001 July 31, 2000 July 31, 2001 July 31, 2000
-------------------- ------------- ------------- -------------- -------------
Net income (loss) $ (19,274) $ 8,572 $ (178,359) $ 84,427
Change in net unrealized gain (loss) on
investments (4,630) (32,329) 71,225 (52,110)
Change in cumulative translation adjustment 197 (176) 722 (253)
----------- ----------- ----------- -----------
Comprehensive income (loss) $ (23,707) $ (23,933) $ (106,412) $ 32,064
=========== =========== =========== ===========
The components of accumulated other comprehensive income (loss), net of
related tax, at July 31, 2001 and October 31, 2000, are as follows:
July 31, 2001 Oct. 31, 2000
------------- -------------
Amounts in thousands
--------------------
Net unrealized gain (loss) on investment: $ (9,969) $ (81,194)
Cumulative translation adjustment (2,511) (3,233)
----------- -----------
Accumulated other comprehensive income (loss) $ (12,480) $ (84,427)
=========== ===========
L. 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 decrease in earnings of
approximately $2.5 million or $.01 per share during the third quarter of
fiscal 2001 and $8.4 million or $0.3 per share during the first nine 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.
M. 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.
12
N. Joint Venture
In April 2001, Novell completed the formation of Volera, Inc. a majority
owned joint venture among 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.
O. Recent Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 supersedes
Accounting Principles Board ("APB") Opinion 16 "Business Combinations" and
FASB Statement No. 38 "Accounting for Pre-acquisition Contingencies," and
eliminates the pooling-of-interests method of accounting for business
combinations except for qualifying business combinations that were
initiated prior to July 1, 2001. Statement No. 141 also includes new
criteria to recognize intangible assets separately from goodwill. The
requirements of Statement 141 are effective for any business combination
accounted for by the purchase method that is completed after June 30, 2001
(i.e., the acquisition date is July 1, 2001 or after). The Company applied
the criteria under this statement in regards to its acquisition of
Cambridge in July 2001.
Statement No. 142, supersedes APB Opinion No. 17, "Intangible Assets," and
states that goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually, or more frequently if
impairment indicators arise, for impairment. Separable intangible assets
that are not deemed to have an indefinite life will continue to be
amortized over their useful lives. The discontinuing of amortization
provisions under Statement No. 142 of goodwill and indefinite lived
intangible assets apply assets acquired after June 30, 2001. In addition,
the impairment provisions of Statement 142 apply to assets acquired prior
to July 1, 2001 upon adoption of Statement 142. Companies are required to
adopt Statement 142 in their fiscal year beginning after December 15, 2001.
Early adoption is permitted for companies with fiscal years beginning after
March 15, 2001 provided that their first quarter financial statements have
not been issued. Novell has elected to early adopt this provision beginning
in the first quarter of fiscal 2002.
13
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 not limited to, those set forth below in the section titled
"Risk Factors Affecting Future Results of Operations."
Introduction
Novell, Inc. is a leader in eBusiness solutions and Net services software
designed to secure and power all types of networks--the Internet, intranets, and
extranets; wired to wireless; corporate and public--across leading operating
systems. Novell and its subsidiary, Cambridge Technology Partners, help
organizations solve complex business challenges, simplify their systems and
processes, and capture new opportunities with one Net solutions. Novell provides
worldwide channel, consulting, education, and developer programs to support its
offerings.
Acquisitions
On July 10, 2001, the shareholders of Cambridge Technology Partners
(Massachusetts), Inc. approved the acquisition of Cambridge by Novell. The
Company issued 0.668 shares of its common stock for each share of Cambridge
common stock outstanding on July 10, 2001. The transaction was valued at
approximately $260.6 million, of which $250.6 million related to the number of
shares exchanged at a per share value of $5.907 (an average closing price of a
share of Novell common stock for the seven trading day period beginning three
days before the announcement date of the acquisition), and $10.0 million related
to direct transaction costs. The acquisition was accounted for as a purchase.
The value of the acquisition was preliminarily allocated as follows:
Adjusted net assets acquired $ 79,721
Goodwill 180,842
--------
$260,563
========
In accordance with Statements of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets," issued by the Financial Accounting
Standards Board ("FASB") in June 2001, the Company will not amortize the
goodwill associated with this acquisition. The Company will review the asset
periodically for potential impairment issues.
Results of Operations
Net Sales
Nine months Nine months
Three months ended Three months ended ended ended
July 31, 2001 Change July 31, 2000 July 31, 2001 Change July 31, 2000
-------------------------------------------------------------------------------------
Net sales (thousands) $ 246,697 (8.6)% $ 270,019 $ 732,487 (17.6)% $ 888,411
Novell's products are organized around the following four business units, all
within the directory-enabled networking software services segment.
. Net Services, which includes Directory-Enabled OS, Management and
Collaboration products, and UNIX royalties
. Net Directory Services, which includes NDS Directory Services and other
directory products
. Net Content Services, which includes Internet Caching services
. Consulting, Support Services, and Education which includes Novell customer
service and education, Cambridge IT services, and Celerant management
consulting
14
Revenue from Net Services products decreased $37.4 million or 18% in the third
quarter of fiscal 2001 compared to the third quarter of fiscal 2000 and
decreased $168.6 million or 24% for the nine months ended July 31, 2001 compared
to the same period of fiscal 2000. Sales in the third quarter of fiscal 2001
were lower than the same quarter of the prior year primarily due to lower UNIX
royalties, continued decline in distribution channel sales, and continued weak
sales performance internationally. Sales for the nine months ended July 31, 2001
were also lower than the same period of the prior year due to a $35.4 million
one-time settlement received in the second quarter of fiscal 2000 from Caldera,
Inc., "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 $0.9 million or 16% lower in
the third quarter of fiscal 2001 compared to the same period of the prior year
and $1.3 million or 7% higher for the nine months ended July 31, 2001 compared
to the same period of fiscal 2000. The decrease in fiscal 2001 third quarter
revenue was due primarily to lower Single Sign-on revenue. The increases for the
nine months ended July 31, 2001 were mainly due to increased unit sales of
products introduced during fiscal 2000, such as DirXML and iChain, slightly
offset by a decrease in NDS Directory Services sales.
Revenue from Net Content Services products was flat in the third quarter of
fiscal 2001 compared to the third quarter of fiscal 2000 and $1.5 million or 35%
higher for the nine months ended July 31, 2001 compared to the same period of
fiscal 2000. The increases for the nine months ended July 31, 2001, were mainly
due to growth in the Internet caching market, which resulted in higher unit
sales.
Revenue from Consulting, Support Services and Education was $15.0 million or 28%
higher in the third quarter of fiscal 2001 compared to the third quarter of
fiscal 2000 and $9.8 million or 6% higher for the nine months ended July 31,
2001 compared to the same period of fiscal 2000. The increases during the
quarter and for the nine months ended July 31, 2001 were due primarily to the
addition of Cambridge and Celerant revenue which added $20.3 million to the
third quarter of fiscal 2001 and higher Novell consulting and service revenue,
offset somewhat by lower education revenues.
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 decrease in earnings of approximately $2.5
million or $.01 per share during the third quarter of fiscal 2001 and $8.4
million or $0.3 per share during the first nine 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 43% of total sales in the third quarter of
fiscal 2001 compared to 41% in the third quarter fiscal 2000 and 43% for the
nine months ended July 31, 2001 compared to 45% during the same period of fiscal
2000. During the third quarter of fiscal 2001, international revenue decreased
2% while domestic revenue decreased 13% compared to the same period of fiscal
2000. The decrease in domestic sales during the third quarter and the nine
months ended July 31, 2001 was partially due to the decline in packaged software
and a general slow down in the market. Internationally, the Company experienced
weakened sales in Australia, Japan, and Canada, offset by increases in Western
Europe during the quarter, and weakened sales across all regions for the nine
months ended July 31, 2001 due to weakened economic conditions.
15
The Company has been working to address the decline in sales, particularly the
decrease in channel sales, in an effort to improve results in future periods.
During fiscal 2000 and 2001, 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 also acquired Cambridge Technologies
Partners to enhance its consulting business and more fully implement its
"solutions" approach. The Company anticipates that it will take several quarters
to fully implement these changes and integrate the two companies before it can
realize the benefits from these actions.
Gross Profit
Nine months Nine months
Three months ended Three months ended ended ended
July 31, 2001 Change July 31, 2000 July 31, 2001 Change July 31, 2000
--------------------------------------------------------------------------------------------
Gross profit (thousands) $ 172,908 (6.5)% $ 184,996 $ 526,644 (17.8)% $ 640,919
Percentage of net sales 70.1% 68.5% 71.9% 72.1%
Gross profit as a percentage of sales increased in the third quarter of 2001 and
decreased slightly as a percentage of sales for the nine months ended July 31,
2001 compared to the same periods of fiscal 2000. The increase in third quarter
2001 gross profit as a percentage of sales over the prior year is primarily due
to decreased royalty and other product costs and improved margins in the
consulting and support areas. The decrease for the nine month period ended July
31, 2001 is due primarily to the effects of decreased product sales levels and
higher costs for services related to the Company's consulting business and
acquisition of Cambridge, and the effect of the $35.5 million one-time royalty
received from Caldera, Inc in the second quarter of fiscal 2000. 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
Nine months Nine months
Three months ended Three months ended ended ended
(dollars in thousands) July 31, 2001 Change July 31, 2000 July 31, 2001 Change July 31, 2000
- ---------------------- ------------------------------------------------------------------------------------
Sales and marketing $ 100,013 (18.8)% $ 123,207 $ 339,584 (6.1)% $ 361,827
Percentage of net sales 40.5% 45.6% 46.4% 40.7%
Product development 47,976 (17.7)% 58,303 148,035 (15.5)% 175,206
Percentage of net sales 19.4% 21.6% 20.2% 19.7%
General and administrative 28,101 25.6% 22,369 77,476 13.9% 68,000
Percentage of net sales 11.4% 8.3% 10.6% 7.7%
Restructuring 30,392 -- -- 30,392 -- --
Percentage of net sales 12.3% -- 4.1% --
Total operating expenses $ 206,482 1.3% $ 203,879 $ 595,487 (1.6)% $ 605,033
Percentage of net sales 83.7% 75.5% 81.3% 68.1%
Sales and marketing expenses decreased by $23.2 million in the third quarter of
fiscal 2001 and $22.2 million for the nine months ended July 31, 2001 compared
to the same periods of fiscal 2000. Sales and marketing expenses fluctuate in
any given period due to timing of product promotions, advertising or other
discretionary expenses. During the second half of fiscal 2000 through the first
quarter of fiscal 2001, the Company increased its sales and marketing
expenditures, including costs for advertising and promotion, as well as sales
force training where appropriate, in an effort to focus on improving future
sales growth. These costs were significantly reduced during the second and third
quarters of fiscal 2001 as the Company revised its marketing spend requirements.
Lower sales during fiscal 2001 caused sales and marketing expenses as a
percentage of sales to increase.
Product development expenses decreased $10.3 million in the third quarter of
fiscal 2001 and $27.2 million for the nine months ended July 31, 2001 compared
to the same periods of fiscal 2000. The decreases were due primarily to
decreased headcount as a result of the restructurings that took place in the
third quarter of fiscal 2001 and fourth quarter of fiscal 2000. Product
development expenses increased as a percentage of net sales for the nine months
ended July 31, 2001 due
16
to lower sales levels.
General and administrative expenses increased $5.7 million during the third
quarter of fiscal 2001 and $9.5 million for the nine months ended July 31, 2001
compared to the same periods of fiscal 2000. The increases were primarily due to
the addition of Cambridge general and administrative costs and integration costs
related to the acquisition, offset somewhat by reduced headcount as a result of
the restructurings that took place in the third quarter of fiscal 2001 and the
fourth quarter of fiscal 2000. Costs for the nine months ended July 31, 2001
also increased as a result of costs related to the formation of Volera, Inc. a
majority owned joint venture among Novell, Nortel Networks, Corp. and Accenture
Ltd. 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 third quarter of fiscal 2001, the Company recorded a restructuring
charge of approximately $30.4 million as a result of the Company's acquisition
of Cambridge Technology Partners and changes in the Company's business strategy
to address continued changes in customer demands and the overall market.
Specific actions taken 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
fixed assets, abandoning and writing off technologies that no longer fit within
the Company's new strategy, and discontinuing unprofitable product lines. These
actions are anticipated to save the Company $35 million per year. The following
table summarizes the activity related to restructuring costs and activities in
the third quarter of fiscal 2001.
Amount Balance at
Charged to Cash Non-Cash July 31,
Restructuring Payments Charges 2001
------------- -------- ------- ----
Amounts in thousands
--------------------
Severance and benefits $ 15,978 $ (10,553) -- $ 5,425
Abandoned technology 856 -- (645) 211
Redundant facilities and fixed assets 10,740 -- (495) 10,245
Exit unprofitable product lines 2,111 (750) (121) 1,240
Other restructuring related costs 708 (238) -- 470
--------- --------- --------- ---------
$ 30,393 $ (11,541) $ (1,261) $ 17,591
========= ========= ========= =========
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 nine months of fiscal 2001.
Balance at Balance at
October 31, Cash Non-Cash July 31,
2000 Payments Charges 2001
---- -------- ------- ----
Amounts in thousands
--------------------
Severance and benefits $ 6,139 $ (5,528) -- $ 611
Abandoned technology 286 -- -- 286
Redundant facilities and fixed assets 4,726 (734) (1,166) 2,826
Other restructuring related costs 2,616 (392) -- 2,224
--------- --------- --------- ---------
$ 13,767 $ (6,654) $ (1,166) $ 5,947
========= ========= ========= =========
As of July 31, 2001, the remaining portion of the fiscal 2000 and 2001
restructuring charges included in accrued liabilities related mainly to
severance and benefits, abandoned technology, and other restructuring related
costs, which will largely be paid through fiscal 2002. Amounts related to
redundant facilities and other fixed contracts will be paid over the respective
remaining contract terms.
17
In addition to the restructuring charges incurred in fiscal 2000 and 2001, the
Company has a liability for a restructuring that occurred in fiscal 1997 related
to redundant facilities which are continuing to be paid out over the respective
contract terms. The Company could incur additional restructuring charges in the
future if the integration of Cambridge with Novell results in additional
redundancy in facilities or functions.
Employee Headcount
(dollars in thousands) Three months ended Change Three months ended
---------------------- July 31, 2001 July 31, 2000
-------------------------------------------------------------
Employees at end of period 7,679 39.7% 6,103
Annualized revenue per average employee
$ 158 (20.4)% $ 199
Headcount increased from the third quarter of 2000, primarily due to the
acquisition of Cambridge which added approximately 2,700 employees, offset
somewhat by the restructuring related reductions that occurred during the fourth
quarter of fiscal 2000 and third quarter of fiscal 2001.
Other Income (Expense), Net
(dollars in thousands) Nine months Nine months
Three months ended Three months ended ended ended
July 31, 2001 Change July 31, 2000 July 31, 2001 Change July 31, 2000
-------------------------------------------------------------------------------------
Other income, net $ 10,506 (65.9)% $ 30,787 $(103,854) (247.3)% $ 81,373
Percentage of net sales 4.3% 11.4% (14.2)% 9.2%
Other income, net w/o impairment $ 15,506 (49.6)% $ 30,787 $ 43,193 (46.9)% $ 81,373
Percentage of net sales 6.3% 11.4% 5.9% 9.2%
The primary component of other income (expense) is related to investment income
or losses. During the third quarter of fiscal 2001, investment income of $13.6
million was offset by investment impairment losses of $5.0 million. Investment
income during the third quarter of fiscal 2000 was $32.9 million due primarily
to equity sales. Investment income for the nine months ended July 31, 2001 was
$42.3 million excluding $149.7 million of investment impairment losses compared
to investment income of $87.5 million during the same period of fiscal 2000. The
$149.7 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 along with other equity investments.
During the first nine months of fiscal 2001, the Company realized gains of $10.7
million and realized losses of $0.8 million on the sale of securities, excluding
impairment losses of $149.7 million. During the first nine months of fiscal
2000, the Company realized gains of $52.7 million and realized losses of $1.6
million from the sale of securities.
18
Income Taxes Expense (Benefit)
Nine months Nine months
Three months ended Three months ended ended ended
July 31, 2001 Change July 31, 2000 July 31 2001 Change July 31, 2000
--------------------------------------------------------------------------------------
Income tax expense (benefit) (thousands) $(3,794) (213.9)% $ 3,332 $(5,386) (116.4)% $ 32,832
Percentage of net sales (1.5)% 1.2% (0.7)% 3.7%
Effective tax expense (benefit) rate (16.4)% 28.0% (3.1)% 28.0%
Effective tax expense (benefit) rate on
income before change in accounting
method and asset impairment (21.0)% 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 primarily as a result of changes in the forecasted income
before taxes for fiscal 2001. 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
Nine months Nine months
Three months ended Three months ended ended ended
(dollars in thousands, except per share data) July 31, 2001 Change July 31, 2000 July 31, 2001 Change July 31, 2000
- --------------------------------------------- --------------------------------------------------------------------------------
Income (loss) before accounting change $ (19,274) (324.8)% $ 8,572 $(167,311) (298.2)% $ 84,427
Percentage of net sales (7.8)% 3.2% (22.8)% 9.5%
Net income (loss) $ (19,274) (324.8)% $ 8,572 $(178,359) (311.3)% $ 84,427
Percentage of net sales (7.8)% 3.2% (24.3)% 9.5%
Income (loss) per share, before
accounting change - basic $ (0.06) $ 0.03 $ (0.52) $ 0.26
Net income (loss) per share - basic $ (0.06) $ 0.03 $ (0.55) $ 0.26
Income (loss) per share, before
accounting change - diluted $ (0.06) $ 0.03 $ (0.52) $ 0.25
Net income (loss) per share - basic $ (0.06) $ 0.03 $ (0.55) $ 0.25
Liquidity and Capital Resources
July 31, 2001 Change October 31, 2000
----------------------------------------------
Cash and short-term investments (thousands) $686,943 (1.6)% $698,193
Percentage of total assets 35.3% 40.8%
Cash and short-term investments decreased by $11.3 million to $686.9 million at
July 31, 2001, down from $698.2 million at October 31, 2000. During the first
nine 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, $86.9
million for net purchases of long-term investments and other long-term investing
activities and $25.0 million to purchase property, plant and equipment. These
cash outflows were offset by $61.6 million provided from operating activities,
$72.4 million cash acquired from Cambridge including the sale of Excell, a
subsidiary of Cambridge, $26.0 million received from Volera minority investors,
and $5.5 million from the net issuance of common stock.
The Company's investment portfolio is diversified among security types, industry
groups, and individual issuers. To
19
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 $5.7 million and gross unrealized losses of $22.8 million as
of July 31, 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 July
31, 2001, the Company's principal unused sources of liquidity consisted of cash
and short-term investments and available borrowing capacity of approximately
$7.4 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 nine months of fiscal 2001, the Company continued to generate
cash 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 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 $40 million, but could be reduced if the growth of the Company
is less than presently anticipated. The Company also intends to invest up to an
additional $100 million over the next couple of years in venture capital funds.
During the third 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 June 30, 2001. As of July 31, 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. There were no shares repurchased during the
third quarter of fiscal 2001 due to the pending acquisition of Cambridge.
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; 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:
. competition for qualified employees
. competition from other product and service companies
. delays in the introduction of new products
. success of new products or technologies
. stock market fluctuations unrelated to Company performance
20
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
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:
. timing of orders from customers and shipments to customers
. product mix, a shift from higher margin products, such as licensing, to lower
margin products or services, such as boxed products
. delays or problems with our fulfillment agents
. impact of foreign currency exchange rates on the price of our products in
international locations
. inability to respond to the decline in sales through the distribution
channel
. inability to derive benefits from the restructuring and new corporate
strategy
We Face Intense Competition For Attracting And Retaining 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. 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 And Consulting
Services
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 computer software and
consulting 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.
The Internet professional services market is relatively new and highly
competitive. The competitors of the Company's IT services business include a
wide variety of Internet-focused professional service firms, management
consulting companies, traditional information technology service firms, systems
integration firms and internal information technology departments of prospective
clients. There are relatively low barriers to entry in the Internet professional
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services market. Current or future competitors may develop or offer services
that are comparable or superior to those of the Company at a lower price, which
could significantly decrease the Company's revenues.
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 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.
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 Contractual Rights, 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
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
22
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 nine
months of fiscal 2001, revenues from Net Services software decreased by 24%
resulting in overall declines in net sales by 17.6% in the first nine months of
fiscal 2001 compared to the same period of fiscal 2000.
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:
. costs and difficulties in staffing and managing international operations;
. unexpected changes in regulatory requirements;
. tariffs and other trade barriers;
. difficulties in enforcing contractual and intellectual property rights;
. longer payment cycles;
. local political and economic conditions;
. potentially adverse tax consequences, including restrictions on repatriating
earnings and the threat of "double taxation"; and
. fluctuations in currency exchange rates.
Some Of Our Venture Capital Fund Investments Have Become Impaired. Additional
Venture Capital Fund Investments Could Become Impaired.
Novell's investment portfolio includes investments made for strategic business
purposes. These investments are generally in small capitalization stocks in the
high-technology industry sector and funds managed by venture capitalists. Many
of these investments might become other than temporarily impaired. During its
first three fiscal quarters ended July 31, 2001, Novell recorded an impairment
charge related to some of the investments in its portfolio whose market value
had experienced an other than temporary decline. The charge totaled $149.7
million. As of July 31, 2001, net unrealized losses on Novell's equity
securities totaled approximately $10.0 million.
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' eBusiness 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:
23
. effectively identify and use leading technologies;
. develop strategic and technical expertise;
. influence and respond to emerging industry standards and other technology
changes and to orient management teams to capitalize on these changes;
. recruit and retain qualified project personnel;
. enhance current services;
. develop new services that meet changing customer needs; and
. effectively advertise and market its services.
Our Services Contracts Contain Pricing Risks.
Novell's Cambridge IT services business derives a significant portion of its
revenue 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 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.
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 Scale.
Achieving the benefits of the acquisition will depend in part on the integration
of the two company's 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.
Neither Novell nor Cambridge has experience in integrating operations on the
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
24
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.
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 July 31, 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 $3.9 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 July 31, 2001, unrealized losses, before tax effect,
on short-term public equity securities totaled $17.1 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 $1.5 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 July 31, 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 $13.6 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 large portion 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 European, Japanese yen
and certain other Latin American and Asian 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 $6.2 million.
All of the potential changes noted above are based on sensitivity analyses
performed on the Company's financial position at July 31, 2001. Actual results
may differ materially.
25
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
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
- ------ -----------
2.1 Amendment No. 1 to Agreement and Plan of Reorganization, dated as of
May 24, 2001, by and among Novell, Inc., Ceres Neptune Acquisition
Corp. and Cambridge Technology Partners (Massachusetts), Inc.,
incorporated by reference to Annex A to the Proxy Statement-Prospectus
forming a part of the Registration Statement on Form S-4 (Reg. No. 333-
59326) of Novell, Inc. (the "Registration Statement").
3(i) Novell, Inc.'s Restated Certificate of Incorporation, as amended,
incorporated by reference to Exhibit 3(i) of the Registration
Statement.
10.1 Key Employment Agreement dated as of May 22, 2001 between Novell, Inc.
and Jack L. Messman, incorporated by reference to Exhibit C to Annex A
to the Proxy Statement - Prospectus forming a part of the Registration
Statement.
(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 May 9, 2001
under Item 5.
Notice of Novell's acquisition of Cambridge Technology Partners, Inc.,
effective July 10, 2001, along with required financial statement information
as filed on July 24, 2001 under Items 2 and 7, respectively.
26
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: September 14, 2001 /s/ Ronald Foster
----------------------------------
Ronald Foster
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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