39
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, 2003
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, 2003, there were 368,352,452 shares of the registrant's
common stock outstanding.
Part I. Financial Information
Item 1. Financial Statements
NOVELL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
January 31, 2003 October 31, 2002
---------------- ----------------
Amounts in thousands, except share and per share data (Unaudited)
Assets
Current assets:
Cash and short-term investments $ 650,755 $ 635,858
Receivables (less allowances of $33,522 - January 31,
2003 and $39,676 - October 31, 2002) 159,710 214,827
Prepaid expenses 30,894 24,077
Deferred income taxes 18,930 21,204
Other current assets 21,320 23,572
---------------- ---------------
Total current assets 881,609 919,538
Property, plant and equipment, net 360,155 369,189
Goodwill 179,210 179,534
Intangible assets 33,107 36,351
Long-term investments 65,238 73,452
Deferred income taxes 77,171 74,323
Other assets 13,371 12,678
---------------- ---------------
Total assets $ 1,609,861 $ 1,665,065
================ ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 53,825 $ 57,241
Accrued compensation 80,034 87,778
Other accrued liabilities 113,433 134,850
Income taxes payable 33,704 36,294
Deferred revenue 265,220 275,344
---------------- ---------------
Total current liabilities 546,216 591,507
---------------- ---------------
Minority interests 7,792 8,016
---------------- ---------------
Stockholders' equity:
Common stock, par value $.10 per share:
authorized - 600,000,000 shares:
Issued -368,290,022 shares-January 31, 2003,
367,537,926 shares-October 31, 2002 36,829 36,753
Preferred stock, par value $.10 per share:
authorized - 500,000 shares, issued - 0 shares -- --
Additional paid-in-capital 298,161 297,139
Retained earnings 726,775 738,663
Accumulated other comprehensive income (loss) (13) 57
Other (5,899) (7,070)
----------------- ----------------
Total stockholders' equity 1,055,853 1,065,542
---------------- ---------------
Total liabilities and stockholders' equity $ 1,609,861 $ 1,665,065
================ ===============
See notes to consolidated unaudited condensed financial statements.
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended
January 31, 2003 January 31, 2002
Dollars in thousands, except per share data
New software licenses $ 61,038 $ 71,638
Maintenance and services 198,933 206,221
--------------- ---------------
Net revenue 259,971 277,859
--------------- ---------------
New software license costs 5,222 6,632
Maintenance and service costs 92,342 110,937
--------------- ---------------
Cost of revenue 97,564 117,569
--------------- ---------------
Gross profit 162,407 160,290
--------------- ---------------
Operating expenses:
Sales and marketing 98,305 85,476
Product development 42,922 43,013
General and administrative 27,345 30,325
--------------- ---------------
Total operating expenses 168,572 158,814
--------------- ---------------
Income (loss) from operations (6,165) 1,476
--------------- ---------------
Other income (expense), net
Investment income (expense) (7,140) 2,608
Other, net 951 7,846
--------------- ---------------
Other income (expense), net (6,189) 10,454
---------------- ---------------
Income (loss) before taxes (12,354) 11,930
Income tax expense (benefit) (466) 3,579
---------------- ---------------
Net income (loss) $ (11,888) $ 8,351
================ ===============
Net income (loss) per share:
Basic $ (0.03) $ 0.02
Diluted $ (0.03) $ 0.02
Weighted average shares outstanding:
Basic 368,075 362,428
Diluted 368,075 362,970
See notes to consolidated unaudited condensed financial statements.
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Three Months Ended
Dollars in thousands January 31, 2003 January 31, 2002
---------------- ----------------
Cash flows from operating activities
Net income (loss) $ (11,888) $ 8,351
Adjustments to reconcile net loss to net cash provided by operating
activities:
Gain on sale of fixed assets (365) (8,762)
Depreciation and amortization 19,861 18,888
Loss on impaired investments and fixed assets 10,800 5,440
Decrease in receivables 55,117 67,958
(Increase) decrease in prepaid expenses (6,817) 2,745
(Increase) decrease in deferred income taxes (684) 65
Decrease in other current assets 2,252 7,005
Decrease in accounts payable (3,416) (20,502)
Decrease in other current liabilities, net (29,252) (44,300)
Decrease in deferred revenue (10,124) (16,222)
-------------- --------------
Net cash provided by operating activities 25,484 20,666
------------- -------------
Cash flows from financing activities
Issuance of common stock, net 1,098 1,712
------------- -------------
Net cash provided by financing activities 1,098 1,712
------------- -------------
Cash flows from investing activities
Expenditures for property, plant and equipment (16,875) (2,517)
Proceeds from the sale of property, plant and equipment 785 16,050
Purchases of short-term investments (204,587) (246,172)
Maturities of short-term investments 11,156 140,877
Sales of short-term investments 26,780 113,363
Cash paid for Volera minority interest shares (1,050) --
Expenditures for long-term investments (3,104) (7,658)
Other 8,148 2,075
------------- -------------
Net cash (used for) provided by investing activities (178,747) 16,018
-------------- -------------
Total (decrease) increase in cash and cash equivalents (152,165) 38,396
Cash and cash equivalents - beginning of period 463,987 337,927
------------- -------------
Cash and cash equivalents - end of period 311,822 376,323
Short-term investments - end of period 338,933 359,196
------------- -------------
Cash and short-term investments - end of period $ 650,755 $ 735,519
============= =============
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 subheading "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 our fiscal
2002 Annual Report on Form 10-K. These financial statements do include all
normal recurring adjustments that we believe are 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 loss, have been made to the
prior years' amounts in order to conform to the current year's
presentation.
B. Foreign Currency Translation
Due to increased activity in non-U.S. dollar currencies, beginning November
1, 2002 we have determined the functional currency of all of our
international subsidiaries, except for our Irish subsidiaries, to be the
local currency. These subsidiaries generate and expend cash primarily in
their respective local currency. Assets and liabilities of these
subsidiaries are translated at current exchange rates prevailing during the
year. Such translation adjustments are recorded in accumulated other
comprehensive income (loss). Previously, the functional currency of our
international subsidiaries, except CTP international subsidiaries,
SilverStream international subsidiaries, Novell Japan, and Novell India,
was the U.S. Dollar.
C. Cash and Short-term Investments
We consider 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 investment
grade securities that either mature within the next 12 months or have other
characteristics of short-term investments. These include:
oVariable rate preferred stock instruments that are publicly traded and
earn dividends periodically at a rate set on an auction. These
instruments have auction dates within 180 days of the prior auction
date.
oFixed income securities, which have contractual maturities ranging from
zero to seven years. These securities are available to be used for
current operations and thus are classified as short-term investments,
even though some maturities may extend beyond one year.
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 accumulated other comprehensive income (loss), net of tax,
after any applicable tax valuation allowances (see Note M). Fair market
values are based on quoted market prices where available; if quoted market
prices are not available, the fair market values are based on quoted market
prices of similar instruments of companies that are comparable in size,
product offerings, and market sector. When securities are sold, their cost
is determined based on the specific identification method.
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
(Amounts in thousands) January 31, 2003 Gains Losses January 31, 2003
---------------- ----- ------ ----------------
Cash and cash equivalents:
Cash $ 150,309 $ -- $ -- $ 150,309
Government and agency securities 8,101 -- -- 8,101
Corporate obligations 23,702 -- -- 23,702
Money market funds 129,710 -- -- 129,710
----------- ---------- ---------- -----------
Total cash and cash equivalents 311,822 -- -- 311,822
----------- ---------- ---------- -----------
Short-term investments:
Variable rate instruments 100,052 -- (3) 100,049
Government and agency securities 83,495 345 (18) 83,822
Corporate obligations 146,117 2,745 (36) 148,826
Equity securities 6,240 597 (601) 6,236
----------- ---------- ----------- ------------
Total short-term investments 335,904 3,687 (658) 338,933
----------- ---------- ----------- ------------
Total cash and short-term investments $ 647,726 $ 3,687 $ (658) $ 650,755
=========== ========== =========== ============
Gross Gross Fair Market
Cost at Unrealized Unrealized Value at
(Amounts in thousands) October 31, 2002 Gains Losses October 31, 2002
---------------- ----- ------ ----------------
Cash and cash equivalents:
Cash $ 179,098 $ -- $ -- $ 179,098
Government and agency securities 60,121 -- -- 60,121
Corporate obligations 23,219 -- -- 23,219
Money market funds 201,549 -- -- 201,549
------------- ----------- ---------- ------------
Total cash and cash equivalents 463,987 -- -- 463,987
------------- ----------- ----------- ------------
Short-term investments:
Variable rate instruments 14,499 1 -- 14,500
Government and agency securities 38,025 379 -- 38,404
Corporate obligations 110,746 2,533 (113) 113,166
Equity securities 5,982 368 (549) 5,801
------------- ----------- ---------- ------------
Total short-term investments 169,252 3,281 (662) 171,871
------------- ----------- ---------- ------------
Total cash and short-term investments $ 633,239 $ 3,281 $ (662) $ 635,858
============= =========== ========== --============
During the first three months of fiscal 2003, we realized gains of $0.4
million and realized losses of $0.1 million from the sale of short-term
investments. During the first quarter of fiscal 2002, we realized gains of
$3 million and realized losses of $0.1 million from the sale of short-term
investments.
We routinely review all of our investments for impairment. We did not
record any impairment losses on short-term investments during the first
quarters of fiscal 2003 or fiscal 2002.
As of January 31, 2003, we had $3 million of cash restricted in support of
outstanding letters of credit.
D. Long-term Investments
The primary components of long-term investments as of January 31, 2003 were
investments made through the Novell Venture account or the Cambridge
Technology Capital Fund I L.P. ("CTC I"), and direct investments we made
for strategic purposes in equity securities of privately-held companies.
Long-term investments are accounted for initially at cost and written down
to fair market value when indicators of impairment are deemed to be other
than temporary.
We routinely review our investments in private securities and venture funds
for impairment. To assess impairment we analyze forecasted financial
performance of the investees, the liquidation preference value of the stock
we hold, and our estimate of the potential for investment recovery based on
all these factors. During the first quarters of fiscal 2003 and fiscal
2002, we recognized impairment losses on long-term investments totaling $11
million and $5 million, respectively. As of January 31, 2003 and 2002,
there were no unrealized losses on our long-term equity investments.
E. Goodwill and Intangible Assets
Goodwill includes approximately $128 million from the July 2002 acquisition
of SilverStream, approximately $43 million from the July 2001 acquisition
of Cambridge, and approximately $9 million related to several small
technology-related acquisitions. Beginning November 1, 2002, we reorganized
our operations and began reporting our financial results in four new
segments, three are based on geographic area and the fourth being Celerant
management consulting. The geographic segments are Americas, EMEA, and Asia
Pacific. The Americas segment includes the United States, Canada, and Latin
America. The EMEA segment includes Eastern and Western Europe, Middle East,
and Africa. The Asia Pacific segment includes China, Japan, Southeast Asia,
Australia, New Zealand, and India. Prior to November 1, 2002, we operated
and reported financial results based on business segments: product,
consulting, and Volera, Inc. The following is a summary of goodwill
reallocated to the new segments:
(Amounts in thousands) Americas EMEA Asia Celerant Total
-------- ---- ----- -------- -----
Pacific
Balance as of November 1, 2002 $ 69,842 $ 60,447 $ 6,745 $ 42,500 $ 179,534
Adjustments (324) -- -- -- (324)
---------- --------- --------- --------- -----------
Balance as of January 31, 2003 $ 69,518 $ 60,447 $ 6,745 $ 42,500 $ 179,210
========= ========= -======== ========= ==========
The following is a summary of intangible assets:
(Amounts in thousands) January 31, 2003 October 31, 2002
---------------- ----------------
Developed technology $ 29,525 $ 32,769
Trade names 3,582 3,582
------------ ------------
Total intangible assets $ 33,107 $ 36,351
============ ============
Developed technology relates primarily to the exteNd product line that we
acquired as a part of our July 2002 acquisition of SilverStream Software,
Inc. and is amortized over three years. Amortization for the first quarters
of fiscal 2003 and fiscal 2002 totaled $3 million and $1 million,
respectively. Trade names relate to the SilverStream individual product
names, which we continue to use. Trade names have an indefinite life and
therefore are not amortized but are reviewed for impairment at least
annually.
F. Income Taxes
Our estimated effective tax rate before investment impairment losses for
the first quarter of fiscal 2003 was 30%. The actual tax benefit rate for
the quarter was 3.8%. The effective tax rate for fiscal 2002 was 12%. The
fiscal 2003 effective tax rate differed from the effective tax rate for
2002 primarily because of differences in the amount of non-deductible items
in each period and the forecasted income before taxes. No tax benefit for
the investment impairment losses was taken in the first quarter of fiscal
2003 because corporations can only use capital losses to offset capital
gains. We cannot be assured at this time that we can generate sufficient
capital gains during the five-year carry-over period to recognize the tax
benefit of the capital losses. Accordingly, a valuation allowance has been
established against the capital loss amounts we may not be able to
recognize.
We paid income taxes of $3 million in the first quarter of fiscal 2003 and
$1 million during the same period of fiscal 2002.
G. Line of Credit
We currently have a $15 million unsecured revolving bank line of credit,
which expires on March 3, 2004. 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 our operations. At January 31, 2003,
there were standby letters of credit of $7 million outstanding under this
agreement.
In addition, at January 31, 2003, we had outstanding letters of credit
totaling $2.5 million, primarily related to lease guarantees, which have
largely been collateralized.
H. Restructuring
During the second quarter of fiscal 2002, we recorded a pre-tax
restructuring charge of approximately $20 million resulting from our
continued migration towards becoming a solutions provider and as a result
of changing business needs. Specific actions taken included reducing our
workforce worldwide by approximately 50 employees (less than 1%),
consolidating facilities, closing offices in unprofitable locations, and
disposing of excess property and equipment. The following table summarizes
the activity during the first quarter of fiscal 2003 related to the second
quarter fiscal 2002 restructuring.
Balance at Balance at
Original October 31, Cash Non-Cash January 31,
Charge 2002 Payments Charges 2003
------ ----------- ------------ ---------- -----------
(Amounts in thousands)
Severance and benefits $ 14,748 $ 4,258 $ 1,648 $ -- $ 2,610
Excess facilities and property and equipment 5,146 4,221 528 -- 3,693
Other restructuring-related costs 492 300 -- -- 300
-------- -------- --------- -------- --------
$ 20,386 $ 8,779 $ 2,176 $ -- $ 6,603
======== ======== ========= ======== ========
As of January 31, 2003, the remaining balance of the second quarter of
fiscal 2002 restructuring charge included accrued liabilities related to
severance and benefits, which will be paid out over the remaining severance
obligation period not to exceed three years, and redundant facilities and
other fixed contracts, which will be paid over the respective remaining
contract terms.
During the fourth quarter of fiscal 2001, we recorded $51 million of
pre-tax restructuring charges resulting from the restructuring of our
operations in light of changes in general market conditions, changing
customer demands, and the evolution of our business strategy. This business
strategy focuses on Net business solutions designed to secure and power the
networked world across leading operating systems. The execution of this
strategy included refining our consulting initiatives, refocusing research
and development efforts, defining sales and marketing efforts to be more
customer and solutions oriented, and adjusting our overall cost structure
given current revenue levels and our direction.
Specific actions included reducing our workforce worldwide by approximately
1,100 employees (approximately 16%), consolidating excess facilities and
disposing of excess property and equipment, terminating a management
consulting contract that no longer fit with our strategic focus, and
abandoning and writing off technologies that no longer fit within our new
strategy. We also realigned our remaining resources to better manage our
business.
The following table summarizes the costs and activities during the first
quarter of fiscal 2003 related to the fourth quarter 2001 restructuring.
Balance at Non-Cash Balance at
Original October 31, Cash Charges/ January 31,
Charge 2002 Payments Adjustments 2003
------ ----------- ------------ ------------ -----------
(Amounts in thousands)
Severance and benefits $ 32,793 $ 1,117 $ 98 $ -- $ 1,019
Excess facilities and property and equipment 10,896 4,651 985 -- 3,666
Other restructuring-related costs 6,973 624 101 -- 523
-------- -------- --------- -------- -------
$ 50,662 $ 6,392 $ 1,184 $ -- $ 5,208
======== ======== ========= ======== ========
As of January 31, 2003, the remaining balance of the fourth quarter 2001
restructuring charge included accrued liabilities largely related to
severance and benefits, which will be paid out during fiscal 2003, and
excess facilities costs, which will be paid over the respective remaining
lease terms.
During the third quarter of fiscal 2001, we recorded a pre-tax
restructuring charge of approximately $30 million as a result of our July
2001 acquisition of Cambridge Technology Partners and changes in our
business to move towards a Net business solutions strategy. Specific
actions included reducing our workforce worldwide by approximately 280
employees across all functional areas (approximately 5% before the addition
of Cambridge), consolidating facilities and disposing of excess property
and equipment, abandoning and writing off technologies that no longer fit
within our new strategy, and discontinuing unprofitable product lines. The
following table summarizes the activity during the first quarter of fiscal
2003 related to the third quarter 2001 restructuring costs.
Balance at Balance at
Original October 31, Cash Non-Cash January 31,
Charge 2002 Payments Charges 2003
------ ----------- ------------ ---------- -----------
(Amounts in thousands)
Excess facilities and property and equipment $ 10,740 $ 3,889 $ 250 $ -- $ 3,639
Severance and benefits 15,978 -- -- -- --
Other restructuring-related costs 3,675 137 -- -- 137
-------- -------- -------- ------- ---------
$ 30,393 $ 4,026 $ 250 $ -- $ 3,776
======== ======== ======== ======= =========
As of January 31, 2003, the remaining balance of the third quarter 2001
restructuring charge included accrued liabilities largely related to excess
facilities costs, which will be paid over the respective remaining lease
terms.
I. Guarantees
During the first quarter of fiscal 2002, we sold our subsidiary in the
Czech Republic. As a part of this transaction, we provided a guarantee to
the landlord of the Czech building whereby we agreed to pay any and all
monies due under the lease including legal fees if the new lessee defaults
on the lease. During the first quarter of fiscal 2003, we paid
approximately $0.1 million against this guarantee and estimate that we
could be liable for an additional $0.4 million plus legal fees, if the new
lessee continues in default.
As an element of our standard contract terms, we include an indemnification
clause in our agreements with our customers that indemnify the licensee
against certain liability and damages arising from intellectual property
infringement claims arising from their use or distribution of our software.
These terms are common in the high technology industry. We do not record a
liability for potential litigation claims related to indemnification
agreements with our customers. We do not believe the likelihood of a
material obligation is probable.
We also have some outstanding intercompany guarantees, which guarantee
payment of certain intercompany obligations to our subsidiaries.
J. Commitments and Contingencies
The Board of Directors established the Novell Venture account within our
investment portfolio for the purpose of making investments in
privately-held companies for the promotion of our business and strategic
objectives, mainly small capitalization stocks in the high technology
industry sector, and in funds managed by venture capitalists. As of January
31, 2003, we had a balance of $51 million related to investments in various
venture capital funds and had commitments to contribute an additional $70
million to these funds over the next three to four years, upon request by
the fund managers. As a result of our acquisition of Cambridge, we also own
both limited and general partnership interests in CTC I of approximately
24%. As of January 31, 2003, we had an investment balance of $0.6 million
in CTC I and had commitments to contribute up to an additional $0.3 over
the next three to four years.
In May 2002, France Telecom SA and U.S. Philips Corporation, alleged
co-owners of a U.S. patent, filed suit in the U.S. District Court, District
of Delaware, against Novell. The plaintiffs allege that Novell's NetWare
client software infringes the patent. In the suit, the plaintiffs seek
unspecified monetary damages and an injunction prohibiting infringement of
the patent. We intend to vigorously defend ourselves in this suit. Although
there can be no assurance as to the ultimate disposition of the suit, we do
not believe that the resolution of this litigation will have a material
adverse effect on our financial position, results of operations, or cash
flows.
SilverStream and several of its former officers and directors, as well as
the underwriters who handled SilverStream's two public offerings, were
named as defendants in several class action complaints that were filed on
behalf of certain former stockholders of SilverStream who purchased shares
of SilverStream common stock between August 16, 1999 and December 6, 2000.
These complaints are closely related to several hundred other complaints
that the same plaintiffs have brought against other issuers and
underwriters. These complaints all allege violations of the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended.
In particular, they allege, among other things, that there was undisclosed
compensation received by the underwriters of the public offerings of all of
these issuers, including SilverStream's. The plaintiffs are seeking
monetary damages, statutory compensation and other relief that may be
deemed appropriate by the court. A Consolidated Amended Complaint with
respect to all of these complaints was filed in the U.S. District Court,
Southern District of New York, on April 19, 2002. All issuers, including
SilverStream, filed a Motion to Dismiss on July 15, 2002. We believe that
SilverStream and its former officers and directors have meritorious
defenses to the claims made in the complaints and intend to contest the
claims against SilverStream and its former directors and officers
vigorously. While there can be no assurance as to the ultimate disposition
of the litigation, we do not believe that its resolution will have a
material adverse effect on our financial position, results of operations,
or cash flows.
In February 1998, a suit was filed in the U.S. District Court, District of
Utah, against us and certain of our officers and directors, alleging
violation of federal securities laws by concealing the true nature of our
financial condition and seeking unspecified damages. The lawsuit was
brought as a purported class action on behalf of purchasers of our common
stock from November 1, 1996 through April 22, 1997. After a first dismissal
of the suit on November 3, 2000 and a subsequent amendment to the complaint
filed on February 20, 2001, the U.S. District Court dismissed the amended
complaint with prejudice for failure to state a claim. The Order of
Dismissal was entered on April 16, 2002 and the plaintiffs have filed a
Notice of Appeal to the Tenth Circuit Court of Appeals. We intend to
vigorously defend the upholding of the U.S. District Court's ruling. While
there can be no assurance as to the ultimate disposition of the lawsuit, we
do not believe that the resolution of this litigation will have a material
adverse effect on our financial position, results of operations, or cash
flows.
We are a party to a number of additional legal claims arising in the
ordinary course of our business. We believe that the ultimate resolution of
these claims will not have a material adverse effect on our financial
position, results of operations, or cash flows.
K. Segment Information
Beginning November 1, 2002, we reorganized our operations and began
reporting our financial results in four new segments, three are based on
geographic area and a fourth being Celerant management consulting. The
geographic segments are Americas, EMEA, and Asia Pacific. Performance is
evaluated by our Chief Executive Officer and Worldwide Management
Committee, our chief decision makers, and is based on reviewing revenue and
segment operating income (loss) information for each of the geographic
segments. These geographic segments include:
o Americas - includes the United States, Canada, and Latin America
o EMEA - includes Eastern and Western Europe, Middle East, and Africa
o Asia Pacific -includes China, Japan, Southeast Asia, Australia, New
Zealand, and India
All geographic segments sell our software, licenses and services offerings.
These offerings are sold in the U.S. via direct, OEM, reseller, and
distributor channels, and internationally are sold directly and through
distributors who sell to dealers and end users
For the first quarters of fiscal 2003 and fiscal 2002, sales in the U.S.
were $124 million and $147 million, respectively. Sales to international
customers were approximately $136 million and $131 million, respectively.
In the first quarter of fiscal 2003 and fiscal 2002, 76% and 75%,
respectively, of our international sales were in Europe. No single
international location accounted for more than 10% of our total revenue.
Operating results by segment
Quarter ended January 31, 2003 Quarter ended January 31, 2002
------------------------------ ------------------------------
Operating Operating
Net Revenue Income (Loss) Net Revenue Income (Loss)
----------- ------------- ----------- -------------
(Amounts in thousands)
Americas $ 131,841 $ 53,870 $ 150,022 $ 66,131
EMEA 81,727 29,075 79,785 31,725
Asia Pacific 17,857 918 19,049 2,123
Common unallocated operating costs -- (89,703) -- (96,821)
---------- ---------- ---------- ----------
Total geographical segments 231,425 (5,840) 248,856 3,158
Celerant management consulting 28,546 (70) 29,003 9
Unallocated integration costs -- (255) -- (1,691)
---------- ----------- ---------- -----------
Operating income (loss) per statement of
operations $ 259,971 $ (6,165) $ 277,859 $ 1,476
========== =========== ========== ==========
Common unallocated operating costs include corporate services common to all
segments such as corporate sales and marketing, product development,
corporate general and administrative costs, and corporate infrastructure
costs. Celerant does not utilize these corporate services.
In addition, the chief decision makers review revenue by solution category,
all of which are included in the geographic segment revenue. These solution
categories are:
o Identity management and secure web services - solutions that help
customers with their identity management and security issues. Products
include Secure-Login/Single Sign-On, DirXML, iChain, exteNd, and
BorderManager. This category is branded as Nsure and exteNd.
o Cross platform services - solutions that offer an effective and open
approach to networking and collaboration services, including file,
print, messaging, scheduling, workspace, etc. while using a
cross-platform approach. Products include NetWare, GroupWise, ZEN, and
Novell iFolder. This category is branded as Nterprise.
o Worldwide services - comprehensive worldwide IT consulting and support
services that apply Net business solutions to our customers' business
situations, providing the business knowledge and technical expertise to
help our customers implement our identity management, secure web
services, and cross platform services. This category is branded as
Ngage.
Revenue by solution category
Quarter ended January 31,
2003 2002
---- ----
(Amounts in millions)
Identity management and secure web services $ 23,145 $ 16,849
Cross platform services 135,852 150,005
---------- ----------
Total software licenses and maintenance 158,997 166,854
Worldwide services 72,428 82,002
---------- ----------
Total IT software and solutions 231,425 248,856
Celerant management consulting 28,546 29,003
----------- ----------
Total net revenue $ 259,971 $ 277,859
========== ==========
Separate financial information is not evaluated by business segment in
regards to asset allocation. Prior to November 1, 2002, we operated and
reported financial results based on three business segments: product,
consulting, and Volera, Inc.
There were no customers accounting for more than 10% of total revenue
during the first quarter of fiscal 2003 or fiscal 2002.
L. Net Income (Loss) Per Share
Earnings per share were calculated as follows:
Quarter Ended
(Amounts in thousands, except per share data) January 31, 2003 January 31, 2002
---------------- ----------------
Basic net income per share computation
Net income (loss) $ (11,888) $ 8,351
============ ===========
Weighted average shares outstanding 368,075 362,428
Basic net income (loss) per share $ (0.03) $ 0.02
=========== ==========
Diluted net income per share computation
Net income (loss) $ (11,888) $ 8,351
============ ===========
Weighted average shares outstanding 368,075 362,428
Incremental shares attributable to exercise of
outstanding options (treasury stock method) -- 542
----------- -----------
Total 368,075 362,970
Diluted net income (loss) per share $ (0.03) $ 0.02
=========== ==========
M. Comprehensive Income (Loss)
The components of comprehensive income (loss), net of tax, for the first
quarters of fiscal 2003 and 2002, were as follows:
Quarter Ended
(Amounts in thousands) January 31, 2003 January 31, 2002
---------------- ----------------
Net income (loss) $ (11,888) $ 8,351
Change in net unrealized gain/loss on investments
301 (246)
Change in cumulative translation adjustment (371) 1,367
------------ -----------
Comprehensive income (loss) $ (11,958) $ 9,472
============ ===========
The components of accumulated other comprehensive income (loss), net of
related tax, at January 31, 2003 and October 31, 2002 are as follows:
January 31, 2003 October 31, 2002
(Amounts in thousands)
Net unrealized gain on investment $ 2,505 $ 2,204
Cumulative translation adjustment (2,518) (2,147)
------------ ------------
Accumulated other comprehensive income (loss) $ (13) $ 57
============ ===========
N. Stock Option and Other Equity Plans
At January 31, 2003, we had authorized stock option and other equity plans
under which options to purchase shares of our common stock could be granted
to employees, consultants and outside directors. We apply the intrinsic
value method in accounting for our stock option and equity plans.
Accordingly, no compensation expense (except compensation expense related
to restricted stock purchase grants, below-market option grants, and grants
to non-employees) has been recognized for our stock option and other equity
plans. If compensation expense for our stock option and other equity plans
had been determined based on the fair value method of accounting for stock
grants, using Black-Sholes, our net income (loss) and net income (loss) per
share would have been the pro forma amounts indicated below.
Quarter Ended
January 31, 2003 January 31, 2002
(Amounts in thousands, except per share data)
Net income (loss):
As reported $ (11,888) $ 8,351
Pro forma * $ (20,116) $ (6,131)
Net income (loss) per share:
As reported basic $ (0.03) $ 0.02
Pro forma basic * $ (0.05) $ (0.02)
As reported diluted $ (0.03) $ 0.02
Pro forma diluted * $ (0.05) $ (0.02)
* Pro forma amounts have been adjusted to reflect the impact of including
compensation expense related to our stock option and other equity plans.
For the purpose of the above table, the fair value of each option grant was
estimated as of the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in
the first quarters of fiscal 2003 and fiscal 2002: a risk-free interest
rate of approximately 2.85% and 4.19%, respectively; a dividend yield of
0.0% for both quarters; a weighted-average expected life of five years for
both quarters; and a volatility factor of the expected market price of our
common stock of 0.89 and 0.86, respectively. The weighted average fair
value of options granted in the first quarters of fiscal 2003 and fiscal
2002 was $2.13 and $3.00, respectively.
We do not recognize compensation expense related to employee purchase
rights under our 1989 Employee Stock Purchase Plan. Pro forma compensation
expense is estimated for the fair value of the employees' purchase rights
using the Black-Scholes model. Due to the timing of the offering, no
expense is included in the first quarter of fiscal 2003.
O. Derivative Instruments
A large portion of our revenue, expense, and capital purchasing activities
are transacted in U.S. dollars. However, we do enter into transactions in
other currencies, primarily the Euro, Japanese yen, and certain other
European, Latin American and Asian currencies. To protect against
reductions in value caused by changes in foreign exchange rates, we have
established balance sheet and intercompany hedging programs. We hedge
currency risks of some assets and liabilities denominated in foreign
currencies through the use of one-month foreign currency forward contracts.
We enter into these one-month hedging contracts two business days before
the end of each month and settle them at the end of the following month.
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,
2003 is insignificant. Gains and losses recognized during the quarter on
these foreign currency contracts are recorded as other income or expense
and would generally be offset by corresponding losses or gains on the
related hedged items, resulting in negligible net exposure to our financial
statements.
We do not currently hedge currency risks related to revenue or expenses
denominated in foreign currencies.
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 within the meaning of the Private Securities Litigation Reform Act of
1995 that involve risks and uncertainties. In some cases, such forward-looking
statements may be identified by the use of words such as "may," "will,"
"expects," "plans," "anticipates," "estimates," "potential," or "continue" or
the negative thereof or other comparable words. 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 management's current expectations
and information available to us on the date hereof, and we assume no obligation
to update any such forward-looking statements. Our actual results may differ
materially from management's expectations and 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. has been a pioneer in the field of computer networking since our
development and release of NetWare in the mid 1980s. As a result of our 20 years
of expertise as a leader in the field of computer networking, we have over a
thousand of the best networking engineers in the world. These engineers work
closely with our highly-qualified consulting force to create world-class IT
solutions. We are extraordinarily proud of our people, the skills that they have
and the dedication that they bring to our company. Leveraging this expertise, we
expect to continue our evolution of our cross platform strategy and become the
leading company in providing cross platform solutions, secure Web services, and
secure identity management. Our solutions leverage our network expertise and the
Web to help to create a world without information boundaries.
Today we provide Net business solutions across a myriad of platforms designed to
secure and power the networked world, helping organizations solve complex
business challenges, simplify their systems and processes, and capture new
opportunities. Net business solutions include software applications and
consulting services that were developed using open Internet standards and our
own eDirectoryTM network infrastructure products, support highly distributed
network solutions and capitalize on the growth of the Internet. With both
software and services offerings, we can determine how Net business solutions can
be used by an organization and the requirements necessary to ensure proper
security and access. This can then be turned into a Net solutions approach that
helps our customer deliver the right information, to the right individual, at
the right time, and on the right device.
In addition, our Net business solutions include essential network management,
messaging, and collaboration capabilities integrated through our directory
services. Networks are inherently a varied mix of business process,
infrastructure, computer systems, applications, and other devices. Our software
provides the framework and applications for managing, maintaining, and accessing
the information and services of these networks.
Our training, service and support, and consulting groups also support our Net
business solutions by providing worldwide consulting, training, developer, and
distribution channel programs that support our product offerings.
Critical Accounting Policies
An accounting policy is deemed to be critical if it requires us to make an
accounting estimate based on assumptions about matters that are highly uncertain
at the time the accounting estimate is made, and if different estimates that
reasonably could have been used, or if changes in the accounting estimate that
are reasonably likely to occur periodically, could materially change the
financial statements. We consider certain accounting policies related to revenue
recognition, impairment of long-lived assets, and valuation of deferred tax
assets to be critical accounting policies due to the estimation processes
involved in each.
Revenue recognition. Revenue from our Celerant consulting business and about
half of the revenue from our IT consulting group within our worldwide services
business is derived 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 using the percentage of
completion method, using time-to-completion to measure the percent complete with
revisions to estimates reflected in the period in which changes become known. If
we do not accurately estimate the resources required or the scope of work to be
performed, or do not manage our projects properly within the planned periods of
time or satisfy our obligations under the contracts, 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 our results of operations.
We record a provision against revenue for estimated sales returns and allowances
on product and service related sales in the same period as the related revenues
are recorded. We also record a provision to operating expense for bad debts
resulting from customers' inability to pay for the products or services they
have received due to such factors as bankruptcy. These estimates are based on
historical sales returns and bad debt data, analysis of credit memo data, and
other known factors. If the historical data we use to calculate these estimates
does not properly reflect future returns or bad debts, revenue or net income
could be over or understated.
Long-lived Assets. Our long-lived assets include fixed assets, long-term
investments, goodwill and other intangible assets. At January 31, 2003, our
long-lived assets included $360 million of net fixed assets, $65 million of
long-term investments, $179 million of goodwill, $33 million of identifiable
intangible assets, and $96 million of current and non-current net deferred tax
assets.
Property, Plant and Equipment. We periodically review our property, plant and
equipment for impairment in accordance with Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." In determining whether an asset is impaired, we must make
assumptions regarding recoverability of costs, estimated future cash flows from
the asset, intended use of the asset, and other related factors. If these
estimates or their underlying assumptions change, we may be required to record
impairment charges for these assets. For example, in the fourth quarter of
fiscal 2002, we determined that our facilities in San Jose, California and a
small building in Provo, Utah had become impaired due to changes in the intended
use of the facilities, as well as changes in the local commercial real estate
market. This resulted in a pre-tax, non-cash impairment charge of $80 million.
Depending upon relevant factors, such as our decision to change our intentions
for our facilities and place them for sale, or the continuing decline in real
estate market conditions, we could be required to record further impairment
charges.
Long-term Investments. The fair value of long-term investments is dependant on
the actual financial performance of the companies and venture funds in which we
have invested, the investee's market value, and the volatility inherent in the
external markets for these investments. In assessing potential impairment for
these privately-held equity investments, we consider these factors as well as
the forecasted financial performance of our investees, liquidation preference
value of the stock we hold, and estimated potential for investment recovery
based on all these factors. If any of these factors indicates that the
investment has become other-than-temporarily impaired, we may have to record
additional impairment charges not previously recognized. During the first
quarter of fiscal 2003, we recognized $11 million of impairment losses related
to our long-term investments. If general market conditions do not improve, or if
any of the companies or venture funds included in long-term investments do not
meet performance goals, our investments could become other-than-temporarily
impaired as their values decline, causing us to record further investment
impairment charges.
Goodwill and Intangible Assets. In assessing the recoverability of our goodwill
and other intangible assets, we must make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the respective
assets. This process is subjective and requires judgment at many points
throughout the analysis. If these estimates or their related assumptions change
in the future, we may be required to record impairment charges for these assets
not previously recorded.
We completed our annual impairment review under Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets," based on August 1, 2002 balances and determined that there was no
impairment as of that date. However, changes in the assumptions used in the
analysis could have changed the resulting outcome. For example, to estimate the
fair value of our reporting units, management made estimates and judgments about
future cash flows based on our fiscal 2003 forecast and current long-range plans
used to manage the business. These long-range estimates could change in the
future depending on internal changes in the Company as well as external factors.
Future changes in estimates could possibly result in a non-cash goodwill
impairment that could have a material adverse impact on our financial condition
and results of operations.
In connection with our acquisition of SilverStream, we acquired developed
technology related to Silverstream's exteNd products that could be combined with
our products and services. The value of this intangible asset was determined
using expected future cash flows for the exteNd products as well as the combined
products, and an estimated discount factor to account for risks associated with
the product business and future versions of the exteNd products. We also
periodically review our identifiable intangible assets for impairment in
accordance with Statement of SFAS 144. In determining whether an intangible
asset is impaired, we must make assumptions regarding estimated future cash
flows from the asset, intended use of the asset and other related factors. If
the estimates or the related assumptions used to determine the value of the
intangible assets change, we may be required to record impairment charges for
these assets. For example, if we were to abandon our products which integrate
the exteNd Web-based technology that we acquired from SilverStream, or if the
sales forecasts for these secure Web services products were to change, we could
be required to record an impairment charge in future periods.
Deferred Tax Assets Carrying value of our net deferred tax assets assumes that
we 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, we may be required to record additional
valuation allowances against our deferred tax assets resulting in additional
income tax expense in our consolidated statement of operations. Management
evaluates the realizability of the deferred tax assets quarterly and assesses
the need for additional valuation allowances quarterly. During the quarter ended
January 31, 2003, we recorded $5 million of valuation allowances related to the
increase in our net deferred tax assets that we are may not be able to recognize
in future periods.
Results of operations
Revenue
Quarter ended January 31,
2003 2002 Change
(Dollars in millions)
New software licenses $ 61 $ 72 (15)%
Maintenance and services 199 206 (4)%
---------- -----------
Total net revenue $ 260 $ 278 (6)%
========== ===========
New software licenses revenue decreased in the first quarter of fiscal 2003
compared to the same period of fiscal 2002 primarily due to a weakened demand
for our solutions in the U.S. as a result of the weak economic environment and
continuing decline in the demand for our Netware products. Maintenance and
services revenue includes software maintenance, technical support, education,
and consulting services. Maintenance and services revenue also declined in the
first quarter of fiscal 2003 compared to the same period in fiscal 2002, largely
due to a weakened demand for our IT consulting services in the U.S. as a result
of the weak economic environment.
Beginning November 1, 2002, we reorganized our operations and began reporting
our financial results in four new segments, three are based on geographic area
and a fourth, Celerant management consulting. The geographic segments include:
o Americas - includes the United States, Canada, and Latin America
o EMEA - includes Eastern and Western Europe, Middle East, and Africa
o Asia Pacific -includes China, Japan, Southeast Asia, Australia,
New Zealand, and India
Company performance is evaluated by our Chief Executive Officer and Worldwide
Management Committee, our chief decision makers, based on reviewing revenue and
segment operating income (loss) for each of the segments above. Separate
financial information is not evaluated by business segment in regards to asset
allocation.
Quarter ended January 31,
2003 2002 Change
(Dollars in millions)
Americas $ 132 $ 150 (12)%
EMEA 82 80 2%
Asia Pacific 18 19 (6)%
Celerant 28 29 (2)%
---------- -----------
Total net revenue $ 260 $ 278 (6)%
========== ===========
Revenue in the Americas decreased during the first quarter of fiscal 2003
compared to the same period of fiscal 2002 due to poor market conditions and a
temporary distraction to our selling efforts in the U.S. while we transferred
certain of our customer accounts from our sales force to our channel partners.
Revenue increases in EMEA during the first quarter of fiscal 2003 were due to
favorable foreign exchange rates and recovering European market conditions,
which resulted in greater demand for our products and services. The decrease in
revenue in Asia Pacific was primarily due to a weak Japanese economy. Celerant
worldwide revenue decreased slightly in the first quarter of fiscal 2003 due to
weak consulting market in the U.S. Revenue outside the U.S. represented 52% of
total revenue in the first quarter of fiscal 2003 compared to 47% in the first
quarter of fiscal 2002.
In addition to reviewing geographic results, our chief decision makers review
revenue by the following solution categories:
o Identity management and secure web services - solutions that help customers
with their identity management and security issues. Products include
Secure-Login/Single Sign-On, DirXML, iChain, exteNd, and BorderManager.
This category is branded as Nsure and exteNd.
o Cross platform services - solutions that offer an effective and open
approach to networking and collaboration services, including file, print,
messaging, scheduling, workspace, etc. while using a cross-platform
approach. Products include NetWare, GroupWise, ZEN, and Novell iFolder.
This category is branded as Nterprise.
o Worldwide services - comprehensive worldwide consulting and support
services that apply Net business solutions to our customers' business
situations, providing the business knowledge and technical expertise to
help our customers implement our identity management, secure web services,
and cross platform services. This category is branded as Ngage.
o Celerant management consulting - operational strategy and implementation
consulting services, which result in quantifiable value, to a wide range of
customers across various sectors, worldwide.
Quarter ended January 31,
2003 2002 Change
(Dollars in millions)
Identity management and secure web
services $ 23 $ 17 37%
Cross platform services 136 150 (9)%
Worldwide services 73 82 (12)%
Celerant management consulting 28 29 (2)%
---------- -----------
Total net revenue $ 260 $ 278 (6)%
========== ===========
Identity management and secure web services revenue increased in the first
quarter of fiscal 2003 compared to the first quarter of fiscal 2002 due to the
addition of the SilverStream secure web services products as well as increased
demand for our Secure Login/Single SignOn and DirXML products. Cross platform
services declined in the first quarter of fiscal 2003 primarily due to the
decline in NetWare products. Worldwide services revenue declined in the first
quarter of fiscal 2003 primarily due to the weakened demand for our IT
consulting services in the U.S. as a result of the weak economic environment.
At January 31, 2003, we had $265 million of deferred revenue, representing
revenue that is expected to be recognized in future periods. The majority of
this deferred revenue relates to maintenance contracts, which are recognized
ratably over the maintenance period. We have either received payment or recorded
a receivable for the deferred revenue, and have determined collectability to be
reasonably certain. Direct costs incurred to fulfill these maintenance
obligations are relatively small and are recognized as work is performed.
Forward-looking revenue trends
Due to the uncertainty in the U.S. economy, heightened political conflicts
throughout the world, and continued volatility in the information technology
marketplace, we do not believe the information technology or consulting markets
will recover within the next several quarters. We anticipate some continued
declines in our NetWare revenue. However, we believe our new identity management
and secure web services offerings will continue to grow as this market matures.
At this time, we have decided not to provide specific revenue forecast
information for the second quarter or remainder of fiscal 2003.
Gross profit
Quarter ended January 31,
2003 2002 Change
(Dollars in millions)
Gross profit $ 162 $ 160 1%
Percentage of revenue 63% 58%
Gross profit in total and as a percentage of sales increased in the first
quarter of fiscal 2003 compared to the same period of fiscal 2002 due to
improved consulting margins resulting from headcount reductions in fiscal 2002,
offset somewhat by lower margins related to lower revenue from new licenses. We
are continuing to address ways to improve our gross margin percentage in future
periods, such as improving utilization and increasing IT consulting billing
rates. However, due to the uncertainty in the U.S. economy, heightened political
conflicts throughout the world, and continued volatility in the information
technology marketplace, we do not believe we will see significant improvements
in our gross margin percentages in the next several quarters. At this time, we
have decided not to provide specific forecasted earnings information for the
second quarter or remainder of fiscal 2003.
Operating expenses
Quarter ended January 31,
2003 2002 Change
(Dollars in millions)
Sales and marketing $ 98 $ 85 15%
Percentage of revenue 38% 31%
Product development $ 43 $ 43 0%
Percentage of revenue 17% 16%
General and administrative $ 27 $ 30 (10)%
Percentage of revenue 11% 11%
Total operating expenses $ 169 $ 159 6%
Percentage of revenue 65% 57%
Operating expenses, in total and as a percentage of revenue, increased in the
first quarter of fiscal 2003 compared to the same period in fiscal 2002
primarily due to additional expenses related to the SilverStream acquisition in
the third quarter of fiscal 2002, increased sales and marketing headcount, and
increased marketing costs for our new advertising campaign that was rolled out
during the quarter. These expenses were offset somewhat by lower salary expenses
as a result of lower bonus accruals for the first quarter of fiscal 2003 and
lower headcount due to the restructuring and other headcount reductions in the
fiscal 2002.
Sales and marketing expense, in total and as a percentage of revenue, increased
in the first quarter of fiscal 2003 compared to fiscal 2002 primarily as a
result of increased marketing costs associated with our new advertising campaign
and increased sales headcount. Sales and marketing headcount increased by 111
employees in the first quarter of fiscal 2003 compared to the first quarter of
fiscal 2002. Sales and marketing expenses can fluctuate as a percentage of
revenue in any given period due to product promotions, advertising, and other
discretionary expenses. We plan to increase the level of advertising and
marketing costs during the remainder of fiscal 2003 over the first quarter of
fiscal 2003 levels in an effort to attract new customers and increase revenue.
Product development expenses, in total and as a percentage of revenue, remained
flat in the first quarter of fiscal 2003 compared to the same period of fiscal
2002. Product development headcount increased by 215 employees compared to the
first quarter of fiscal 2002, which increase includes the addition of 123
SilverStream employees who became Novell product development employees in July
2002. The increase in cost for the additional headcount was offset by savings
related to lower bonus accruals in the first quarter of fiscal 2003 and a
favorable settlement related to development obligations dating back to
agreements signed in the 1990s. Because we received the benefit of a favorable
settlement in the first quarter of fiscal 2003, we anticipate that our product
development expenses will increase slightly in remaining quarters of fiscal
2003.
General and administrative expenses in the first quarter of fiscal 2003
decreased from the first quarter of fiscal 2002 primarily due to a full year's
impact of the fiscal 2002 restructuring and lower integration costs related to
the Cambridge and SilverStream acquisitions. General and administrative
headcount decreased by 100 employees at the end of the first quarter of fiscal
2003 compared to the same period of fiscal 2002. As a percentage of revenue,
general and administrative costs remained relatively flat in the first quarter
of fiscal 2003 compared to the same period in fiscal 2002 due to lower revenue
in fiscal 2003. We anticipate that our general and administrative expenses will
remain relatively flat during the remainder of fiscal 2003.
During the second quarter of fiscal 2002, we recorded a pre-tax restructuring
charge of approximately $20 million resulting from our continued migration
towards becoming a solutions provider and as a result of changing business
needs. Specific actions taken included reducing our workforce worldwide by
approximately 50 employees (less than 1%), consolidating facilities, closing
offices in unprofitable locations, and disposing of excess property and
equipment. The following table summarizes the activity during the first quarter
of fiscal 2003 related to the second quarter fiscal 2002 restructuring.
Balance at Balance at
Original October 31, Cash Non-Cash January 31,
Charge 2002 Payments Charges 2003
------ ----------- ------------ ---------- --------
(Amounts in millions)
Severance and benefits $ 15 $ 4 $ 1 $ -- $ 3
Excess facilities and property and equipment 5 4 1 -- 3
Other restructuring-related costs 1 1 -- -- 1
-------- -------- --------- -------- --------
$ 21 $ 9 $ 2 $ -- $ 7
======== ======== ========= ======== ========
As of January 31, 2003, the remaining balance of the second quarter 2002
restructuring charge included accrued liabilities related to severance and
benefits, which will be paid out over the remaining severance obligation period
not to exceed three years, and excess facilities and other fixed contracts,
which will be paid over the respective remaining contract terms.
During the fourth quarter of fiscal 2001, we recorded $51 million of pre-tax
restructuring charges resulting from the restructuring of our operations in
light of changes in general market conditions, changing customer demands, and
the evolution of our business strategy. This business strategy focuses on Net
business solutions designed to secure and power the networked world across
leading operating systems. The execution of this strategy included refining our
consulting initiatives, refocusing research and development efforts, defining
sales and marketing efforts to be more customer and solutions oriented, and
adjusting our overall cost structure given current revenue levels and our
direction.
Specific actions included reducing our workforce worldwide by approximately
1,100 employees (approximately 16%), consolidating excess facilities and
disposing of excess property and equipment, terminating a third-party management
consulting contract that no longer fit with our strategic focus, and abandoning
and writing off technologies that no longer fit within our new strategy. We also
realigned our remaining resources to better manage our business.
The following table summarizes the costs and activities during the first quarter
of fiscal 2003 related to the fourth quarter 2001 restructuring.
Balance at Non-Cash Balance at
Original October 31, Cash Charges/ January 31,
Charge 2002 Payments Adjustments 2003
------ ----------- ------------ ------------ --------
(Amounts in millions)
Severance and benefits $ 33 $ 1 $ -- $ -- $ 1
Excess facilities and property and equipment 11 5 1 -- 4
Other restructuring-related costs 7 1 1 -- --
-------- -------- -------- -------- --------
$ 51 $ 7 $ 2 $ -- $ 5
======== ======== ======== ======== ========
As of January 31, 2003, the remaining balance of the fourth quarter 2001
restructuring charge included accrued liabilities largely related to severance
and benefits, which will be paid out during fiscal 2003, and excess facilities
costs, which will be paid over the respective remaining lease terms.
During the third quarter of fiscal 2001, we recorded a restructuring charge of
approximately $30 million, pre-tax, as a result of our acquisition of Cambridge
and changes in our business to move towards a Net business solutions strategy.
Specific actions included reducing our 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 our
new strategy, and discontinuing unprofitable product lines.
The following table summarizes the activity during the first quarter of fiscal
2003 related to the third quarter 2001 restructuring costs.
Balance at Balance at
Original October 31, Cash Non-Cash January 31,
Charge 2002 Payments Charges 2003
------ ----------- ------------ -------------------
(Amounts in millions)
Excess facilities and property and equipment $ 11 $ 4 $ -- $ -- $ 4
Sevrance and benefits 16 -- -- -- --
Other 3 -- -- -- --
---------- ---------- -------- ----- -------
$ 30 $ 4 $ -- $ -- $ 4
======== ======== ======== ===== =======
As of January 31, 2003, the remaining balance of the third quarter 2001
restructuring charge included accrued liabilities largely related to excess
facilities costs, which will be paid over the respective remaining lease terms.
As a result of the fiscal 2002 and the two fiscal 2001 restructurings, we
reduced our expenses by approximately $50 million on a quarterly basis, before
any increased strategic expenditures and the impact of the SilverStream
acquisition. We could incur additional restructuring charges in the future as we
continue to develop our Net solutions strategy and react to market conditions.
Employees
January 31, January 31,
2003 2002 Change
----------- ----------- -------
(Dollars in thousands)
Employees (full time equivalents) 6,255 6,300 (1)%
Revenue per average employee $ 166 $ 167
Headcount in the first quarter of fiscal 2003 decreased compared to the same
period in fiscal 2002 due primarily to restructuring and other employee
reduction efforts in fiscal 2002. These headcount reductions were partially
offset by the addition of SilverStream in July 2002 and additional sales
headcount. We continue to monitor headcount to ensure our resources are aligned
with expected business levels and our business strategy, as well as leading
industry benchmarks.
Other income (expense), net
Quarter ended January 31,
2003 2002 Change
(Dollars in millions)
Other income (expense), net $ (6) $ 10 (159)%
Percentage of revenue (2)% 4%
The primary component of other income (expense), net, was net investment income
(loss), which was a loss of $7 million in the first quarter of fiscal 2003
compared to income of $3 million in the first quarter of fiscal 2002. In the
first quarter of fiscal 2003, the net investment loss included impairment losses
on long-term investments totaling $11 million, realized net gains on the sale of
short-term equity securities of $0.3 million, and $3 million in interest income.
In the first quarter of fiscal 2002, net investment income included impairment
losses on long-term investments totaling $5 million, realized net gains on the
sale of short-term equity securities of $3 million, and $5 million in interest
income, and. Excluding investment income, other income (expense), net decreased
$7 million in the first quarter of fiscal 2003 from the same period in fiscal
2002 due primarily to a $9 million gain on the sale of a building in the first
quarter of fiscal 2002.
Income tax expense (benefit)
Quarter ended January 31,
2003 2002 Change
(Dollars in millions)
Income tax expense (benefit) $ (466) $ 3,579 (113)%
Percentage of revenue 0% 1%
Effective tax (benefit) rate (4)% 30%
Our actual effective tax benefit rate for the first quarter of fiscal 2003 was
4% compared to the effective tax rate of 30% for the same period in 2002. The
rate differs because of non-deductible investment impairments taken in the first
quarter of 2003.
Net income (loss) and net income (loss) per share
Quarter ended January 31,
2003 2002 Change
(Dollars in millions, except per share)
Net income (loss) $ (12) $ 8 (242)%
Percentage of revenue (5)% 3%
Net income (loss) per share:
Basic and diluted $ (0.03) $ 0.02 (240)%
We incurred a net loss per share of $0.03 in the first quarter of fiscal 2003
compared to net income per share of $0.02 in the same period of fiscal 2002
primarily due to decreased revenue, an $11 million (pre-tax) charge for
long-term investment impairments and higher sales and marketing expenses to roll
out our new advertising campaign, offset somewhat by lower salary-related costs,
as discussed previously.
Liquidity and capital resources
January 31, October 31,
2003 2002 Change
----------- ----------- -------
(Dollars in millions)
Cash and short-term investments $ 651 $ 636 2%
Percentage of total assets 40% 38%
Cash and short-term investments increased to $651 million at January 31, 2003
compared to $636 million at October 31, 2002. The increase in cash can be
attributed to cash provided by operations of $25 million, cash proceeds from
stock issuances under employee stock option or equity plans of $1 million, cash
proceeds from the sale of a portion of our vacant land in San Jose, California
of $1 million, and the impact of foreign exchange fluctuations. These increases
were offset somewhat by expenditures for fixed assets of $17 million, cash paid
to acquire Volera minority interest shares from Nortel of $1 million, and net
cash paid for long-term investments of $3 million.
Our short-term investment portfolio is diversified among security types,
industry groups, and individual issuers. To achieve potentially higher returns,
a portion of our investment portfolio is invested in equity securities and
mutual funds, which incur market risk. We mark our short-term investments to
market each month. Our short-term investment portfolio includes gross unrealized
gains of $4 million and gross unrealized losses of $1 million as of January 31,
2003. We monitor our investments and record losses when a decline in the
investment's market value is determined to be other than temporary.
We also invest excess cash in long-term investments through the Novell Venture
account, CTC I, and direct investments in equity securities of privately-held
companies. Investments made through the Novell Venture account and CTC I
generally are in privately-held companies, including small capitalization stocks
in the high technology industry sector, and expansion-stage privately-held
companies. Within the Novell Venture account there are also investments in
venture capital funds that are managed largely by external venture capitalists.
CTC I is managed internally. The value of the investments made through the
Novell Venture account and CTC I is dependent on the performance, successful
acquisition, and/or initial public offering of the investees. As of January 31,
2003, we had commitments to contribute an additional $70 million to the
externally managed venture capital funds over the next three to four years, as
requested by the fund managers, and commitments to the CTC I fund to contribute
up to an additional $300,000 over the next three to four years. We intend to
fund these investments with cash from operations and cash income from short-term
investments, and sales of short-term investments on hand.
As of January 31, 2003, we had cash and other short-term investments of $422
million in accounts outside the U.S. Repatriation of any portion of this amount
would be subject to U.S. federal income taxes. We have provided for the tax
liability on these amounts for financial statement purposes except for $15
million of earnings, which is permanently invested outside the U.S.
Repatriation, however, could result in a loss of certain tax attributes of up to
$38 million and result in additional U.S. federal income tax payments of such
amounts in future years.
During the first quarter of fiscal 2002, we sold our subsidiary in the Czech
Republic. As a part of this transaction, we provided a guarantee to the landlord
of our building there whereby we agreed to pay any and all monies due under the
lease including legal fees if the new lessee defaults on the lease. During the
first quarter of fiscal 2003, we paid approximately $0.1 million against this
guarantee and estimate that we could be liable for an additional $0.4 million,
plus legal fees, if the new lessee continues in default.
As an element of our standard contract terms, we include an indemnification
clause in our agreements with our customers that indemnify the licensee against
certain liability and damages arising from intellectual property infringement
claims arising from their use or distribution of our software. These terms are
common in the high technology industry. We do not record a liability for
potential litigation claims related to indemnification agreements with our
customers. We do not believe the likelihood of a material obligation is
probable.
Our principal source of liquidity continues to be from operations and on-hand
cash and income from short-term investments. At January 31, 2003, our principal
unused sources of liquidity consisted of cash on hand in the amount of $312
million, short-term investments in the amount of $339 million, and available
borrowing capacity of approximately $8 million under our lines of credit. Our
liquidity needs are principally for financing of accounts receivable, fixed
assets, strategic investments, product development, and flexibility in a dynamic
and competitive operating environment.
During the first quarter of fiscal 2003, we generated $25 million of cash flow
from operations, and anticipate generating positive cash flows from operations
and investments during the remainder of fiscal 2003 sufficient to fund
operations. We anticipate being able to fund our current operations, any future
acquisitions, any further integration, restructuring or any merger-related
costs, and planned capital expenditures for the foreseeable future with existing
cash on hand and short-term investments together with cash generated from
operations and investment income. We believe that additional borrowings under
our credit facilities or offerings of equity or debt securities are possible if
the need arises, although such offerings may not be available to us on
acceptable terms. 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
2003 are anticipated to be approximately $60 million, but could be reduced if
the growth of the Company is less than presently anticipated.
During the fourth quarter of 2001, the Board of Directors extended our stock
repurchase program through June 30, 2003 and authorized the use of up to $500
million for the repurchase of additional outstanding shares of our common stock.
As of January 31, 2003, $89 million of the authorized amount had been spent to
repurchase 14 million shares under this plan at an average price of $6.23 per
share. No shares were repurchased during the first quarter of fiscal 2003.
Factors Affecting Future Results of Operations
Our future results of operations involve a number of risks and uncertainties. A
number of these risks and uncertainties are discussed in the following
paragraphs.
The Current Economic Climate and Outlook in the Technology and Information
Technology Services Sector Is Very Weak, Causing Our Business to Suffer
The weakened global economic climate, particularly in the technology sector, has
had an adverse effect on our stock price and ability to sell products and
services. Future economic projections for this sector do not anticipate a quick
recovery. A continuation of the weakened global economy could have further
negative effects on our stock price and ability to sell products and services in
the future.
Our Financial and Operating Results May Vary, Negatively Affecting our Ability
to Detect Trends
We often experience a higher volume of revenue at the end of each quarter and
during our fourth quarter. Because of this, fixed costs that are out of line
with revenue 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 revenue through the distribution
channel;
o inability to derive benefits from the restructurings and our corporate
strategy; and
o inability to deliver solutions as expected by our customers and systems
integration partners.
We May Not Be Able to Successfully Compete in a Challenging Market for Computer
Software and Consulting Services
The market for networking applications and solutions as well as IT consulting is
highly competitive and subject to rapid technological change. We expect
competition to continue to increase both from existing competitors and new
market entrants. We believe that competitive factors common to all of our
operating segments include: our ability to sell both products and services as
part of an overall solution; the breadth of our offerings; the pricing of our
products and services; and the timing and market acceptance of new solutions
developed by us and our competitors.
Software licenses and maintenance
In addition to the factors listed above, key competitive factors related to our
software licenses and maintenance include brand and product awareness; the
performance, reliability and security of our products; the ability to preserve
our legacy customer base; the completeness of our suite of product and solutions
offerings; our ability to establish
and maintain key strategic relationships with distributors, resellers and other
partners; and the pricing strategies of our competitors. Our key competitors
related to software licenses and maintenance revenue include Microsoft, IBM, BEA
Systems, Sun Microsystems, Altiris, Netegrity, Computer Associates and Critical
Path.
Worldwide Services
The key competitive factors faced by us related to consulting in the information
technology area are attracting and retaining the highest quality consultants;
the depth of our skills and expertise; the breadth of consulting capabilities;
and having expertise in key functional areas. The market for consulting services
is highly competitive due to the existence of several large consulting firms
specializing in the information systems area such as IBM, Accenture, EDS and
Microsoft. Many of these companies have greater financial, technical and
marketing resources and greater name recognition in the consulting area, which
could inhibit our ability to grow our consulting business. Additionally, the
worldwide marketplace for consulting services is highly fragmented. In different
regions of the world, there may be multiple competitors, many with niche
consultancies.
Celerant Management Consulting
Because of the extremely specialized nature of the consulting services provided
by Celerant, the primary decision often faced by Celerant's prospective clients
is a weighing of the costs of a Celerant engagement against the measurable and
sustainable results and financial benefits to be realized after the engagement.
Therefore, a key competitive factor faced by Celerant is Celerant's reputation
for consistently delivering quality consulting. Additional considerations
potential clients factor into their decisions are judgments as to whether they
can successfully perform the work that they require themselves, or whether they
need the assistance of a third party.
General
We do not have the product breadth and market power of Microsoft. Microsoft's
ability to ship networking products with features and functionality that compete
with ours, together with our 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 our ability to grow our 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. We believe,
and the courts have agreed, that Microsoft exploits its desktop operating
monopoly in anticompetitive ways designed to maintain that monopoly and, in our
view, to extend its market power to quash competitive alternatives to Microsoft
products. For example, in the past, Microsoft has employed tactics that limit or
block effective and efficient interoperability with our products. We will
ensure, to the best of our ability, that our products will interoperate with
those of Microsoft as they enhance new operating systems and applications.
We May Not be Able To Attract and Retain Qualified Personnel Because of the
Intense Competition for Qualified Personnel in the Computer and Consulting
Industries
Our ability to maintain our competitive technological position will depend, in
large part, on our ability to attract and retain highly qualified development,
consulting, and managerial personnel. Even in light of the current economic
downturn, competition for personnel of the highest caliber is intense in the
software and consulting industries. The loss of a significant group of key
personnel would adversely affect our performance. The failure to successfully
promote and hire suitable replacements in a timely manner could have a material
adverse effect on our business.
If We Are Not Successful in Developing a Strong Business with our exteNd
Products and Services, Our Revenues Will Not Grow at the Rates We Have Projected
One key element of our strategy is to be a leading force in the development of
solutions that make the process of developing open-standards, Web-based
applications fast, simple, and cost effective. Our exteNd solution set leverages
the power of standards such as Java and XML to unify relevant information and
services while enabling customers to leverage prior technology investments and
help them rapidly deliver Web-based applications that are scalable, reliable and
secure. The acquisition of SilverStream helped further our development of secure
Web services products and enhanced our Net business solutions product offerings.
Our ability to achieve success with our exteNd products and services is
dependent on a number of factors including, but not limited to, the following:
the growth of the Web-based applications industry; the acceptance of the exteNd
solution set by clients; development of key exteNd product solutions and
upgrades; and the acceptance of those products by large industry partners and
major accounts. If we are unable to grow the exteNd products and services to
become a major component of our business, our long-term growth will be
negatively impacted.
If We Are Unable to Unify Our Diverse Cultures, the Benefits of Our Solutions
Strategy May Not Be Fully Realized
We have a talented, energetic, and exciting group of employees. As a result of
our recent acquisitions, a number of these employees come from diverse corporate
cultural backgrounds. We are in the process of a cultural initiative to bring
our whole company together towards a new common culture that revolves around our
solutions offerings. If we are not successful in forging a new, vibrant culture
with unified goals and a common vision that is solutions-based, employee
energies may be diverted or diluted and we may not achieve the full benefits of
our solutions strategy.
Our Existing Product Revenue May Deteriorate More Rapidly Than Any Increase in
Sales of Our New Products
We have several existing products, which we have been selling and upgrading for
many years. Sales of these existing products are declining at a faster rate than
we are able to increase sales of new products or technologies. If we are
unsuccessful in increasing sales of new products or technologies, particularly
in our exteNd solution set and Net Directory Services product line, our
long-term growth will be negatively impacted.
If We Do Not Generate New Customers, Our Ability to Grow Our Business Will Be
Negatively Impacted
A significant percentage of our revenue is generated from existing customers. In
order to achieve our growth objectives, we must accelerate the rate at which we
generate new business. We have initiated several new sales and marketing
initiatives in order to accomplish this goal. If those initiatives are not
successful, our ability to cultivate new customers may be adversely affected.
We Have Experienced Delays in the Introduction and Acceptance of New Products
Due to Various Factors
As is common in the computer software industry, we have 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. Significant delays in developing, completing, or
shipping new or enhanced products would adversely affect us.
Moreover, we may experience delays in market acceptance of new releases of our
products as we engage in marketing and education of the user base regarding the
advantages of and system requirements for new products and as customers evaluate
the advantages and disadvantages of upgrading. We have encountered these issues
on each major new release of our products, and expect that we will encounter
such issues in the future. Our ability to achieve desired levels of revenue
growth depends at least in part on the successful completion, introduction and
sale of new versions of our products. There can be no assurance that we will be
able to respond effectively to technological changes or new product
announcements by others, or that our research and development efforts will be
successful. Should we experience material delays or revenue shortfalls with
respect to new product releases, our revenue 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. We have in the past received letters or been the subject of
claims suggesting that we are infringing upon the intellectual rights of others.
For example, in May 2002 a suit was filed by France Telecom SA and U.S. Philips
Corporation against us alleging infringement and seeking unspecified damages and
an injunction. In addition, we have faced and expect to continue to face from
time to time disputes over rights and obligations concerning intellectual
property. We expect third-party infringement claims involving Internet
technologies and software products and services to increase because it has
become more common for such agencies to be able to find attorneys who are
willing to represent them or their clients on a contingency basis. While we have
no reason to think we would not have strong defenses to such claims, the cost
and time of defending ourselves can be significant. In addition, we have agreed,
and may agree in the future, to indemnify customers against claims that our
products infringe upon the intellectual property rights of others. We could
incur substantial costs in defending ourselves and our customers against
infringement claims. If an infringement claim is successful, Novell and our
customers may be required to obtain one or more licenses from third parties, and
we may be obligated to pay or reimburse our customers for monetary damages. In
such instances, we or our customers may not be able to obtain necessary licenses
from third parties at a reasonable cost or at all, and may face delays in
product shipment while developing or arranging for alternative technologies.
We May Not Be Able to Protect Our Confidential Information, Which May Adversely
Affect Our Business
We generally enter into contractual relationships with our employees that
protect our confidential information. In the event that our trade secrets or
other proprietary information are misappropriated, our business could be
seriously harmed. In addition, we may not be able to timely detect unauthorized
use of our intellectual property and take appropriate steps to enforce our
rights. In the event we are unable to enforce these contractual obligations and
our intellectual property rights, our business could be adversely affected.
We Face Increased Risks in Conducting a Global Business, Which May Damage
Business Results
We are a multi-national corporation with offices and subsidiaries around the
world and, as such, we face risks in doing business abroad that we do not face
domestically. Certain aspects inherent in transacting business internationally
could negatively impact our operating results, 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 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, which can affect demand and
increase Novell's costs.
Some of Our Short-term, Long-term, and Venture Capital Fund Investments Have
Become Impaired and Additional Investments Could Become Impaired
Our investment portfolio includes short-term investments in public equity
securities, long-term investments in equity of privately-held companies, 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 the first quarter of fiscal 2003, we recorded an
impairment charge of $11 million related to some of the investments in our
portfolio whose market value had experienced an other than temporary decline. As
of January 31, 2003, we had net unrealized gains, net of taxes, on investments
totaling approximately $3 million; however, there can be no assurances that
these gains will be realized and that losses will not occur. If the companies
and funds in which we have invested suffer poor financial performance, or if the
privately-held companies in which we have invested are not successfully acquired
or experience initial public offerings, the value of our investments will
decrease.
Our Existing Relationships With Other Information Technology Services
Organizations May Be Impaired and We Could Lose Business
We maintain relationships with IT services organizations that recommend, design
and implement solutions for their customers' eBusiness that include Novell Net
services products. At the same time, our service offerings compete with those of
these same organizations. Although many companies in high technology industries
co-exist in a similar state of competition, any of these organizations could
decide at any time to not continue to do business with us or to recommend our
products. A change in the willingness of these information technology service
organizations to do business with us could adversely affect our business.
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, our future success will depend in part on our ability to
continue to adapt and meet these challenges. Among the most important challenges
we face is 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 Net business solutions.
Our Consulting Services Contracts Contain Pricing Risks and, If Our Estimates
Prove Inaccurate, We Could Lose Money
Revenue from our Celerant consulting business and about half of the revenue from
our IT consulting group within our worldwide services is derived 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 we do not accurately estimate the
resources required for a project, do not accurately assess the scope of work
associated with a project, do not manage the project properly, or do not satisfy
our obligations in a manner consistent with the contract, then our costs to
complete the project could increase substantially. We have occasionally had to
commit unanticipated additional resources to complete projects, and it may have
to take similar action in the future. We may not be compensated for these
additional costs or the commitment of these additional resources. Additionally,
our Celerant management consulting business derives revenues from projects
priced on a contingency basis. If results are not met, or if a dispute arises,
potentially large revenues may not be realized.
Our IT Consulting Clients Can Cancel or Reduce the Scope of Their Engagements
With Us on Short Notice
If our clients cancel or reduce the scope of an engagement with the IT
Consulting group within our worldwide services business or the Celerant
management consulting business, we may be unable to reassign our professionals
to new engagements without delay. Personnel and related costs constitute a
substantial portion of our operating expenses. Because these expenses are
relatively fixed, and because we establish 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 our professional
services employees, causing significant reductions in operating results for a
particular quarter.
Our Stock Price Will Fluctuate
Our 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 anticipated earnings can be expected to have an
immediate and significant adverse effect on the trading price of our common
stock in any given period. Revenue fluctuations may also contribute to the
volatility of the trading price of our common stock in any given period.
In addition, the market prices for securities of software companies have been,
and continues to be, very volatile. The market price of our 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 our common stock may be subject to significant fluctuations within a
short period of time. These fluctuations may be due to factors specific to us,
to changes in analysts' earnings estimates, or to factors affecting the computer
industry or the securities markets in general.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in interest rates,
foreign currency exchange rates, and the market prices of equity securities. To
mitigate some of these risks, we utilize currency forward contracts and currency
options. We do not use derivative financial instruments for speculative or
trading purposes, and no significant derivative financial instruments were
outstanding at January 31, 2003.
Interest Rate Risk
The primary objective of our short-term investment activities is to preserve
principal while maximizing yields without significantly increasing risk. The
strategy we use to achieve this is to invest in widely diversified short-term
investments, consisting primarily of investment grade securities, substantially
all of which either mature within the next twelve months or have characteristics
of short-term investments. A hypothetical 50 basis point increase in interest
rates would result in an approximately $1 million decrease (less than 0.5%) in
the fair value of our available-for-sale securities.
Market Risk
We also hold available-for-sale equity securities in our short-term investment
portfolio. As of January 31, 2003, gross unrealized losses, before tax effect,
on the short-term public equity securities totaled $0.6 million. A reduction in
prices of 10% of these short-term equity securities would result in
approximately a $0.6 million decrease (less than 0.5%) in the fair value of our
short-term investments.
In addition, we invest in equity securities of privately-held companies, which
are included in our long-term portfolio of investments, primarily for the
promotion of business and strategic objectives. These investments are generally
in small capitalization stocks in the high technology industry sector or venture
capital funds. Because of the nature of these investments, we are exposed to
risks that the value of these equity securities will change. We typically do not
attempt to reduce or eliminate our market exposure on these securities. A 10%
adverse change in equity prices of equity securities of privately-held companies
would result in an approximately $7 million decrease in the fair value of our
available-for-sale long-term securities.
Foreign Currency Risk
We use derivatives to hedge those net assets and liabilities that, when
translated or remeasured according to accounting principles generally accepted
in the U.S., impact our condensed consolidated statement of operations. Currency
forward contracts are utilized in these hedging programs. All forward contracts
that we enter into are components of hedging programs and are entered into for
the sole purpose of hedging an existing or anticipated currency exposure, not
for speculation or trading purposes. Gains and losses on these currency forward
contracts would generally be offset by corresponding losses and gains on the net
foreign currency assets and liabilities that they hedge, resulting in negligible
net gain or loss overall on the hedged exposures. When hedging balance sheet
exposures, all gains and losses on forward contracts are recognized in other
income and expense in the same period as when the gains and losses on
translation or remeasurement of the foreign currency denominated assets and
liabilities occur. All gains and losses related to foreign exchange contracts
are included in cash flows from operating activities in the condensed
consolidated statement of cash flows. Our hedging programs reduce, but do not
always entirely eliminate, the impact of foreign currency exchange rate
movements. If we did not hedge against foreign currency exchange rate movement,
an increase or decrease of 10% in exchange rates would result in an increase or
decrease in income before taxes of approximately $4 million. This number
represents the exposure related to balance sheet remeasurement and intercompany
translation only and assumes that all currencies move in the same direction at
the same time relative to the U.S. dollar.
All of the potential changes noted above are based on sensitivity analyses
performed on our financial position at January 31, 2003. Actual results may
differ materially.
Item 4. Controls and Procedures
An evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of March 11 , 2003 was carried out by the
Company under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer.
Based on that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that the Company's disclosure controls and procedures have
been designed and are functioning effectively to provide reasonable assurance
that the information required to be disclosed by the company in reports filed
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms. A
controls systems, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the controls systems are met, and no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected. Subsequent
to the date of the most recent evaluation of the Company's internal controls,
there were no significant changes in the Company's internal controls, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
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
Note J of our 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
10.1 Key Employment Agreement dated as of July 1, 2002 between
Novell, Inc. and Gerard Van Kemmel.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
Form 8-K dated November 4, 2002 reporting 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 17, 2003 /s/ Joseph S. Tibbetts, Jr.
-----------------------------------
Joseph S. Tibbetts, Jr.
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
CERTIFICATIONS
I, Jack L. Messman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Novell,
Inc;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 17, 2003
/s/ Jack L. Messman
Jack L. Messman
President and Chief Executive Officer
I, Joseph S. Tibbetts, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Novell,
Inc;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 17, 2003
/s/ Joseph S. Tibbetts, Jr.
Joseph S. Tibbetts, Jr.
Senior Vice President and
Chief Financial Officer