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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended April 30, 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 __
Indicate by check mark wither the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act)
YES X NO __
As of May 30, 2003, there were 371,352,787 shares of the registrant's common
stock outstanding.
Part I. Financial Information
Item 1. Financial Statements
NOVELL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
April 30, 2003 October 31, 2002
-------------- ----------------
In thousands, except share and per share data (Unaudited)
Assets Current assets:
Cash and short-term investments $ 626,397 $ 635,858
Receivables (less allowances of $32,677 - April 30,
2003 and $39,676 - October 31, 2002) 183,672 214,827
Prepaid expenses 32,293 24,077
Deferred income taxes 19,420 21,204
Other current assets 25,166 23,572
---------------- ---------------
Total current assets 886,948 919,538
---------------- ---------------
Property, plant and equipment, net 353,183 369,189
Goodwill 180,579 179,534
Intangible assets 30,092 36,351
Long-term investments 55,603 73,452
Deferred income taxes 83,791 74,323
Other assets 12,385 12,678
---------------- ---------------
Total assets $ 1,602,581 $ 1,665,065
================ ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 61,007 $ 57,241
Accrued compensation 78,498 87,778
Other accrued liabilities 124,337 134,850
Income taxes payable 28,764 36,294
Deferred revenue 267,546 275,344
---------------- ---------------
Total current liabilities 560,152 591,507
---------------- ---------------
Minority interests 7,841 8,016
Stockholders' equity:
Common stock, par value $.10 per share:
Authorized - 600,000,000 shares;
Issued -371,295,559 shares-April 30, 2003,
367,537,926 shares-October 31, 2002 37,130 36,753
Preferred stock, par value $.10 per share;
Authorized - 500,000 shares, Issued - 0 shares -- --
Additional paid-in capital 303,760 297,139
Retained earnings 698,164 738,663
Accumulated other comprehensive income 651 57
Other (5,117) (7,070)
----------------- ----------------
Total stockholders' equity 1,034,588 1,065,542
---------------- ---------------
Total liabilities and stockholders' equity $ 1,602,581 $ 1,665,065
================ ===============
See notes to consolidated unaudited condensed financial statements.
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended
April 30, 2003 April 30, 2002
In thousands, except per share data
Net revenue
New software licenses $ 64,465 $ 70,448
Maintenance and services 211,502 203,405
--------------- ---------------
Net revenue 275,967 273,853
--------------- ---------------
Cost of revenue
New software license costs 5,962 6,981
Maintenance and service costs 102,809 105,847
--------------- ---------------
Cost of revenue 108,771 112,828
--------------- ---------------
Gross profit 167,196 161,025
--------------- ---------------
Operating expenses:
Sales and marketing 101,737 82,145
Product development 48,354 42,385
General and administrative 30,939 31,055
Restructuring 8,675 19,100
--------------- ---------------
Total operating expenses 189,705 174,685
--------------- ---------------
Loss from operations (22,509) (13,660)
--------------- ----------------
Other income (expense), net:
Investment income (expense) (10,459) (17,199)
Other, net (2,016) (1,183)
---------------- ----------------
Other income (expense), net (12,475) (18,382)
---------------- ----------------
Loss before taxes and cumulative effect of accounting change (34,984) (32,042)
Income tax benefit (6,372) (2,293)
---------------- ----------------
Loss before cumulative effect of accounting change (28,612) (29,749)
Cumulative effect of accounting change -- (143,702)
--------------- ----------------
Net loss $ (28,612) $ (173,451)
================ ================
Basic and diluted net loss per share:
Before cumulative effect of accounting change $ (0.08) $ (0.08)
Cumulative effect of accounting change -- (0.40)
--------------- ---------------
Basic and diluted net loss per share $ (0.08) $ (0.48)
=============== ===============
Basic and diluted weighted average shares outstanding 368,746 362,754
See notes to consolidated unaudited condensed financial statements.
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Six Months Ended
April 30, 2003 April 30, 2002
In thousands, except per share data
Net revenue
New software licenses $ 125,503 $ 142,086
Maintenance and services 410,435 409,626
--------------- ---------------
Net revenue 535,938 551,712
--------------- ---------------
Cost of revenue
New software license costs 11,185 13,613
Maintenance and service costs 195,150 216,784
--------------- ---------------
Cost of revenue 206,335 230,397
--------------- ---------------
Gross profit 329,603 321,315
--------------- ---------------
Operating expenses:
Sales and marketing 200,042 167,621
Product development 91,276 85,398
General and administrative 58,284 61,380
Restructuring 8,675 19,100
--------------- ---------------
Total operating expenses 358,277 333,499
--------------- ---------------
Loss from operations (28,674) (12,184)
--------------- ----------------
Other income (expense), net:
Investment income (expense) (17,599) (14,591)
Other, net (1,065) 6,663
---------------- ---------------
Other income (expense), net (18,664) (7,928)
---------------- ----------------
Loss before taxes and cumulative effect of accounting change (47,338) (20,112)
Income tax expense (benefit) (6,838) 1,286
---------------- ---------------
Loss before cumulative effect of accounting change (40,500) (21,398)
Cumulative effect of accounting change -- (143,702)
--------------- ----------------
Net loss $ (40,500) $ (165,100)
================ ================
Basic and diluted net loss per share:
Before cumulative effect of accounting change $ (0.11) $ (0.06)
Cumulative effect of accounting change -- (0.40)
--------------- ---------------
Basic and diluted net loss per share $ (0.11) $ (0.46)
=============== ===============
Basic and diluted weighted average shares outstanding 368,411 362,591
See notes to consolidated unaudited condensed financial statements.
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
In thousands April 30, 2003 April 30, 2002
-------------- --------------
Cash flows from operating activities:
Net loss $ (40,500) $ (165,100)
Adjustments to reconcile net loss to net cash used for operating
activities:
Gain on sale of property, plant and equipment (365) (8,762)
Depreciation and amortization 34,984 33,495
Loss on impaired goodwill -- 143,702
Loss on impaired investments 24,523 29,839
Non-cash restructuring charges 8,675 16,426
Decrease in receivables 31,155 53,665
(Increase) decrease in prepaid expenses (8,216) 948
Increase in deferred income taxes (7,685) (64)
(Increase) decrease in other current assets (1,594) 4,686
Increase (decrease) in accounts payable 3,766 (21,594)
Decrease in other current liabilities, net (40,432) (73,803)
Decrease in deferred revenue (7,798) (30,993)
-------------- --------------
Net cash used for operating activities (3,487) (17,555)
-------------- --------------
Cash flows from financing activities:
Issuance of common stock, net 6,998 7,176
------------- -------------
Net cash provided by financing activities 6,998 7,176
------------- -------------
Cash flows from investing activities:
Expenditures for property, plant and equipment (21,777) (13,161)
Proceeds from the sale of property, plant and equipment 785 16,050
Purchases of short-term investments (278,384) (706,780)
Maturities of short-term investments 63,685 471,449
Sales of short-term investments 141,897 223,211
Cash paid for Volera minority interest shares (1,050) --
Expenditures for long-term investments (7,806) (16,583)
Other 9,676 8,128
------------- -------------
Net cash used for investing activities (92,974) (17,686)
-------------- --------------
Total decrease in cash and cash equivalents (89,463) (28,065)
Cash and cash equivalents - beginning of period 463,987 337,927
------------- -------------
Cash and cash equivalents - end of period 374,524 309,862
Short-term investments - end of period 251,873 373,433
------------- -------------
Cash and short-term investments - end of period $ 626,397 $ 683,295
============= =============
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 year's 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. Previously, the functional currency of our
international subsidiaries, except Novell Japan, Novell India, and the
international subsidiaries of Cambridge Technology Partners ("Cambridge")
and SilverStream, 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 in 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, net of tax, after
any applicable tax valuation allowances (see Note M). Fair market values
are based on quoted market prices when 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
In thousands April 30, 2003 Gains Losses April 30, 2003
-------------- ----- ------ --------------
Cash and cash equivalents:
Cash $ 131,579 $ -- $ -- $ 131,579
Government and agency securities 31,511 -- -- 31,511
Corporate obligations 80,069 -- -- 80,069
Money market funds 131,365 -- -- 131,365
----------- ---------- ---------- -----------
Total cash and cash equivalents 374,524 -- -- 374,524
----------- ---------- ---------- -----------
Short-term investments:
Variable rate instruments 54,000 -- -- 54,000
Government and agency securities 46,460 373 (20) 46,813
Corporate obligations 143,865 2,698 (28) 146,535
Equity securities 4,663 235 (373) 4,525
----------- ---------- ---------- ------------
Total short-term investments 248,988 3,306 (421) 251,873
----------- ---------- ----------- ------------
Total cash and short-term $ 623,512 $ 3,306 $ (421) $ 626,397
=========== ========== =========== ============
investments
Gross Gross Fair Market
Cost at Unrealized Unrealized Value at
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 second quarter of fiscal 2003, we realized gains of $0.7 million
and realized losses of $0.2 million from the sale of short-term
investments. During the second quarter of fiscal 2002, we realized gains of
$2.3 million and realized losses of $0.1 million from the sale of
short-term investments. During the first six months of fiscal 2003, we
realized gains of $1.1 million and realized losses of $0.3 million from the
sale of short-term investments. During the first six months of fiscal 2002,
we realized gains of $5.5 million and realized losses of $0.3 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 six
months of fiscal 2003 or fiscal 2002.
D. Long-term Investments
The primary components of long-term investments as of April 30, 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 second quarter and first six months of fiscal
2003, we recognized impairment losses on long-term investments totaling
$13.7 million and $24.5 million, respectively. During the second quarter
and first six months of fiscal 2002, we recognized impairment losses of
$24.4 million and $29.8 million, respectively. As of April 30, 2003 and
2002, there were no unrealized gains or losses on our long-term equity
investments.
E. Goodwill and Intangible Assets
Goodwill includes approximately $129.0 million from the July 2002
acquisition of SilverStream Software, Inc. ("SilverStream"), approximately
$42.5 million from the July 2001 acquisition of Cambridge, and
approximately $9.1 million related to several small technology-related
acquisitions. Beginning November 1, 2002, we reorganized our operations and
began reporting our financial results in four segments; three are based on
geographic area and the fourth is Celerant management consulting. The
geographic segments are Americas, EMEA, and Asia Pacific.
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
Prior to November 1, 2002, we operated and reported financial results based
on three business segments: product, consulting, and Volera, Inc.
The following is a summary of goodwill, which has been reallocated to the
new segments:
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 523 470 52 -- 1,045
--------- --------- --------- --------- ----------
Balance as of April 30, 2003 $ 70,365 $ 60,917 $ 6,797 $ 42,500 $ 180,579
========= ========= -======== ========= ==========
Adjustments relate to additional SilverStream merger-related liabilities
that we incurred for obligations of SilverStream prior to the acquisition.
The following is a summary of intangible assets:
In thousands April 30, 2003 October 31, 2002
-------------- ----------------
Developed technology $ 26,510 $ 32,769
Trade names 3,582 3,582
------------ ------------
Total intangible assets $ 30,092 $ 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 being amortized over three years. Amortization for the second
quarter and first six months of fiscal 2003 was $3.0 million and $6.3
million, respectively. Amortization for the second quarters and first six
months of fiscal 2002 was $0.8 million and $2.2 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 second quarter and first six months of fiscal 2003 was 30%. However,
with impairment losses the actual tax benefit rate for the second quarter
of fiscal 2003 was 18% and the actual tax benefit rate for the first six
months of fiscal 2003 was 14%. The effective tax rate for fiscal 2002 was
12%. The effective tax rate for the first six months of fiscal 2003
differed from the fiscal 2002 effective tax rate primarily because of
differences in the amount of non-deductible items in each period. No tax
benefit for the investment impairment losses was taken in the first and
second quarter of fiscal 2003 because corporations can only use capital
losses to offset capital gains. We could not be assured at the end of the
second quarter that we could 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 $6.7 million in the first six months of fiscal 2003
and $9.0 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 April 30, 2003,
there was $7.0 million outstanding under the line, which we repaid on May
1, 2003, and standby letters of credit of $8.0 million outstanding under
this agreement.
Our subsidiary in China has a $0.8 million short-term revolving loan, which
expires on February 29, 2004. The loan is being used for our China
operations. At April 30, 2003, there was $0.8 million outstanding under
this revolving loan.
H. Restructuring
During the second quarter of fiscal 2003, we determined that the amount we
had originally accrued for facility-related costs in previous
restructurings was too low and accrued an additional $8.7 million. The
original liability was based on estimated sublease rates and timing of
signing subleases, which have been affected by the decline in the real
estate market. This additional amount, which pertains to three separate
restructuring events, is included in the following tables.
Second quarter of fiscal 2002
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. During the second quarter of
fiscal 2003, we determined that the amount we had originally accrued for
facility-related costs was too low and accrued an additional $7.7 million.
The original liability was based on estimated sublease rates and timing of
signing subleases, which have been affected by the decline in the real
estate market.
The following table summarizes the activity during fiscal 2003 related to
the second quarter of fiscal 2002 restructuring.
Balance at Balance at
Original October 31, Cash April 30,
Charge 2002 Payments Adjustments 2003
------ ---------- ---------- ----------- ----------
In thousands
Severance and benefits $ 14,748 $ 4,258 $ (2,551) $ -- $ 1,707
Excess facilities and property and equipment 5,146 4,221 (963) 7,735 10,993
Other restructuring-related costs 492 300 -- -- 300
-------- -------- -------- -------- --------
$ 20,386 $ 8,779 $ (3,514) $ 7,735 $ 13,000
======== ======== ========= ======== ========
As of April 30, 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.
Fourth quarter of fiscal 2001
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. During the second quarter of fiscal 2003, we determined that the
amount we had originally accrued for facility-related costs was too low and
accrued an additional $0.3 million. The original liability was based on
estimated sublease rates and timing of signing subleases, which have been
affected by the decline in the real estate market. The following table
summarizes the costs and activities during fiscal 2003 related to the
fourth quarter of 2001 restructuring.
Balance at Balance at
Original October 31, Cash April 30,
Charge 2002 Payments Adjustments 2003
------ ----------- ---------- ------------ --------
In thousands
Severance and benefits $ 32,793 $ 1,117 $ (801) $ -- $ 316
Excess facilities and property and equipment 10,896 4,651 (1,656) 262 3,257
Other restructuring-related costs 6,973 624 (241) -- 383
-------- -------- ---------- -------- -------
$ 50,662 $ 6,392 $ (2,698) $ 262 $ 3,956
======== ======== ========== ======== ========
As of April 30, 2003, the remaining balance of the fourth quarter fiscal
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.
Third quarter of fiscal 2001
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.
During the second quarter of fiscal 2003, we determined that the amount we
had originally accrued for facility-related costs was too low and accrued
an additional $0.7 million. The original liability was based on estimated
sublease rates and timing of signing subleases, which have been affected by
the decline in the real estate market.
The following table summarizes the activity during fiscal 2003 related to
the third quarter of fiscal 2001 restructuring costs.
Balance at Balance at
Original October 31, Cash April 30,
Charge 2002 Payments Adjustments 2003
------ ----------- ---------- ------------ -----------
In thousands
Severance and benefits $ 15,978 $ -- $ -- $ -- $ --
Excess facilities and property and equipment 10,740 3,889 (1,068) 678 3,499
Other restructuring-related costs 3,675 137 (137) -- --
-------- -------- --------- -------- ---------
$ 30,393 $ 4,026 $ (1,205) $ 678 $ 3,499
======== ======== ========= ======== =========
As of April 30, 2003, the remaining balance of the third quarter of fiscal
2001 restructuring charge included accrued liabilities 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 building we lease in the Czech Republic 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 fiscal 2003, we paid
approximately $0.1 million against this guarantee and have accrued an
additional $0.4 million, which represents our liability exposure if the new
lessee continues in default, excluding legal fees.
As an element of our standard contract terms, we include an indemnification
clause in our agreements with our customers that indemnifies 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 obligations of our subsidiaries.
J. Commitments and Contingencies
In 1997, the Board of Directors established the Novell Venture account
within our investment portfolio for the purpose of promoting our business
and strategic objectives by making investments in privately-held companies,
mainly small capitalization stocks in the high technology industry sector,
and in funds managed by venture capitalists. As of April 30, 2003, we had a
balance of $45.8 million related to investments in various venture capital
funds and had commitments to contribute an additional $64.2 million to
these funds over the next three to four years, upon the request of 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 April 30, 2003, we had an investment balance of $0.2 million in CTC I
and had commitments to contribute up to an additional $0.3 over the next
three to four years. We do not intend to make any new long-term investments
through the Novell Venture account or into venture capital funds.
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
Exchange 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 segments; three are based on
geographic areas and the fourth is 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 and for the Celerant management consulting segment. 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
All geographic segments sell our software, licenses and services offerings
(except Celerant management consulting services). 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
Operating results by segment
Three months April 30, 2003 Three months April 30, 2002
--------------------------- ---------------------------
Operating Operating
Net Revenue Income (Loss) Net Revenue Income (Loss)
----------- ------------- ----------- -------------
In thousands
Americas $ 129,503 $ 47,831 $ 147,431 $ 65,560
EMEA 88,673 30,270 74,324 28,697
Asia Pacific 20,908 2,397 19,919 3,518
Common unallocated operating costs -- (94,464) -- (93,805)
---------- ---------- ---------- ----------
Total geographical segments 239,084 (13,966) 241,674 3,970
Celerant management consulting 36,883 2,249 32,179 2,435
Unallocated integration costs and
restructuring adjustments -- (10,792) -- (20,065)
---------- ----------- ---------- -----------
Total $ 275,967 $ (22,509) $ 273,853 $ (13,660)
========== =========== ========== ===========
Six months ended April 30, 2003 Six months ended April 30, 2002
------------------------------- -------------------------------
Operating Operating
Net Revenue Income (Loss) Net Revenue Income (Loss)
----------- ------------- ----------- -------------
In thousands
Americas $ 261,344 $ 101,702 $ 297,453 $ 131,691
EMEA 170,400 59,345 154,109 60,422
Asia Pacific 38,765 3,315 38,968 5,641
Common unallocated operating costs -- (184,169) -- (190,626)
---------- ---------- ---------- ----------
Total geographical segments 470,509 (19,807) 490,530 7,128
Celerant management consulting 65,429 2,180 61,182 2,444
Unallocated integration costs and
restructuring adjustments -- (11,047) -- (21,756)
---------- ----------- ---------- -----------
Total $ 535,938 $ (28,674) $ 551,712 $ (12,184)
========== =========== ========== ===========
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 to reviewing geographic and Celerant management consulting
segment results, our chief decision makers review net revenue by solution
category. 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. Products in this category are 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. Products in this category are 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. Services in this category are
branded as Ngage.
o Celerant management consulting- operational strategy and implementation
consulting services offered to a wide range of customers across various
sectors, worldwide.
Revenue by solution category
Three months ended April 30, Six months ended April 30,
----------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
In thousands
Identity management and secure web services $ 22,669 $ 16,630 $ 45,814 $ 33,478
Cross platform services 142,014 147,052 277,866 297,057
---------- ---------- ---------- ----------
Total software licenses and maintenance 164,683 163,682 323,680 330,535
Worldwide services 74,401 77,992 146,829 159,994
---------- ---------- ---------- ----------
Total IT software and solutions 239,084 241,674 470,509 490,529
Celerant management consulting 36,883 32,179 65,429 61,183
----------- ----------- ---------- ----------
Total net revenue $ 275,967 $ 273,853 $ 535,938 $ 551,712
========== ========== ========== ==========
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.
For the second quarters of fiscal 2003 and fiscal 2002, sales in the U.S.
were $125.8 million and $143.1 million, respectively, and sales to
international customers were approximately $150.1 million and $130.8
million, respectively. In the second quarters of fiscal 2003 and fiscal
2002, 75% and 71%, respectively, of our international sales were in EMEA.
On a year-to-date basis, sales in the U.S. were $249.6 million in fiscal
2003 and $290.5 million in fiscal 2002, and sales to international
customers were $286.3 million in fiscal 2003 and $261.2 million in fiscal
2002. For the first six months of fiscal 2003 and fiscal 2002,
international sales in EMEA accounted for 75% and 73%, respectively, of our
total international sales.
No single international country accounted for more than 10% of our total
revenue.
L. Net Income (Loss) Per Share
Earnings per share for the second quarters and first six months of fiscal
2003 and 2002 were calculated as follows:
Three months ended April 30, Six months ended April 30,
----------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
In thousands, except per share data
Basic & diluted net loss per share:
Net loss $ (28,612) $(173,451) $ (40,500) $(165,100)
=========== ========== ========== ==========
Weighted average shares outstanding 368,746 362,754 368,411 362,591
Basic net loss per share $ (0.08) $ (0.48) $ (0.11) $ (0.46)
=========== ========== ========== ===========
M. Comprehensive Income (Loss)
The components of comprehensive income (loss), net of tax, for the second
quarters and year-to-date periods of fiscal 2003 and 2002, were as follows:
Three months ended April 30, Six months ended April 30,
----------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
In thousands
Net loss $ (28,612) $ (173,451) $ (40,500) $ (165,100)
Change in net unrealized gain/(loss) on
investments (36) (3,769) 265 (4,015)
Change in cumulative translation adjustment 700 (1,681) 329 (314)
----------- -------------- ----------- ------------
Comprehensive income (loss) $ (27,948) $ (178,901) $ (39,906) $ (169,429)
============ ============== ============ ============
The components of accumulated other comprehensive income (loss), net of
related tax, at April 30, 2003 and October 31, 2002 are as follows:
April 30, 2003 October 31, 2002
In thousands
Net unrealized gain on investment $ 2,469 $ 2,204
Cumulative translation adjustment (1,818) (2,147)
------------ ------------
Accumulated other comprehensive income $ 651 $ 57
=========== ===========
N. Stock Option and Other Equity Plans
At April 30, 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 the Black-Scholes option pricing model, our net loss and net
loss per share would have been the pro forma amounts indicated in the
following table.
Three months ended April 30, Six months ended April 30,
----------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
In thousands, except per share data
Net loss:
As reported $ (28,612) $ (173,451) $ (40,500) $(165,100)
Pro forma * $ (35,658) $ (190,343) $ (55,774) $(196,474)
Net loss per share:
As reported basic and diluted $ (0.08) $ (0.48) $ (0.11) $ (0.46)
Pro forma basic and diluted* $ (0.10) $ (0.52) $ (0.15) $ (0.54)
* 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 second quarters of fiscal 2003 and fiscal 2002: a risk-free interest
rate of approximately 2.8% and 4.6%, 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 0.88 and 0.87, respectively. The weighted average fair
value of options granted in the second quarters of fiscal 2003 and fiscal
2002 were $1.65 and $1.94, respectively.
For the first six months of fiscal 2003 and fiscal 2002 assumptions
included: a risk-free interest rate of approximately 2.9% and 4.4%,
respectively; a dividend yield of 0.0% for both periods; a weighted-average
expected life of five years for both periods; and a volatility factor of
the expected market price of our common stock of 0.88 and 0.87,
respectively. The weighted average fair value of options granted in the
first six months of fiscal 2003 and fiscal 2002 were $2.06 and $2.51,
respectively.
For purposes of the above table, the Company does not recognize
compensation expense related to employee purchase rights under the Purchase
Plan. Pro forma compensation expense is estimated for the fair value of the
employees' purchase right using the Black-Scholes option pricing model with
the following assumptions for the shares issued in the second quarters of
fiscal 2003 and fiscal 2002: risk-free interest rate of approximately 2.3%
and 1.5%, respectively; a dividend yield of 0.0% for both periods; a
weighted-average expected life of 6 months for both periods; and a
volatility factor of the expected market price of our common stock of 0.88
and 0.87, respectively. The weighted average fair value of the purchase
rights issued in the second quarters of fiscal 2003 and fiscal 2002 was
$0.93 and $1.52. There were no purchase rights issued in the first quarters
of fiscal 2003 and fiscal 2002.
Pursuant to an Exchange Offer dated May 14, 2003, which our stockholders
approved at our Annual Meeting held on May 1, 2003 through the approval of
amendments to our employee stock option plans, we offered a stock option
exchange program (the program) to our non-executive employees giving them
the right to exchange outstanding stock options with an exercise price of
$5.03 per share or more for new options to be issued six months and one day
after the close of the tender offer. The options tendered under the program
will be replaced with options to purchase a fewer number of shares than the
original options would have provided, based upon an exchange ratio, which
is based on the exercise price of the tendered option.
The program was structured to comply with current accounting guidelines so
that we will not be subject to variable accounting and thus will not
recognize compensation expense in connection with the grant of the
replacement options. If the current accounting standards or guidelines are
changed prior to the completion of the tender offer, we will have to comply
with the changed accounting treatment.
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 April 30, 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.
P. Subsequent Events
On April 22, 2003, we entered into an agreement to sell our office campus
and the adjacent vacant land located in San Jose, California for a total of
approximately $124 million. After transaction costs, we anticipate netting
approximately $120 million in cash. At April 30, 2003, the net book value
of the campus and land was approximately $97 million. The closing date for
the sale of the vacant land was May 27, 2003 and the expected closing date
for the sale of the office campus is June 30, 2003.
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 experience as a leader in the field of computer networking, we have some of
the best networking engineers in the world. These engineers work with our
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 a leading company in
providing cross platform solutions, secure Web services, and 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 empower 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. During fiscal 2003, we announced
our strategy to support the Linux kernel in addition to the NetWare kernel. This
would give our customers a choice by providing Novell products and services that
run on both Netware and Linux platforms.
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 management consulting segment 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 overstated or understated.
Long-lived Assets. Our long-lived assets include property, plant and equipment,
long-term investments, goodwill and other intangible assets. At April 30, 2003,
our long-lived assets included $353.2 million of net property, plant and
equipment, $55.6 million of long-term investments, $180.6 million of goodwill,
$30.1 million of identifiable intangible assets, and $103.2 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 a decision to sell a facility, or a
continuation of the decline in real estate market conditions, we could be
required to record additional 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 indicate that the investment
has become other-than-temporarily impaired, we will have to record additional
impairment charges not previously recognized. During the first six months of
fiscal 2003, we recognized $24.5 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 further impaired on an
other-than-temporarily basis 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 will be performing our annual impairment review under Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets," in the fourth quarter of fiscal 2003, based on August 1, 2002 balances,
to determine whether there has been any impairment of our goodwill as of that
date. Various assumptions will be made as a part of this analysis that could
affect the resulting outcome. For example, to estimate the fair value of our
reporting units, management will make 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 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 SFAS No. 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. The 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 six months
ended April 30, 2003, we identified an additional $12.0 million of valuation
allowances related to the increase in our net deferred tax assets, primarily
relating to investment impairments, that we may not be able to recognize in
future periods.
Results of operations
Revenue
Three months ended April 30, Six months ended April 30,
2003 2002 Change 2003 2002 Change
---- ---- ------ ---- ---- ------
(Dollars in thousands)
New software licenses $ 64,465 $ 70,448 (9)% $ 125,503 $ 142,086 (12)%
Maintenance and services 211,502 203,405 4% 410,435 409,626 --%
---------- ----------- ---------- -----------
Total net revenue $ 275,967 $ 273,853 1% $ 535,938 $ 551,712 (3)%
========== =========== ========== ===========
New software licenses revenue decreased in the second quarter and first six
months of fiscal 2003 compared to the same periods of fiscal 2002 primarily due
to decreased demand for our solutions in the United States as a result of the
weak economic environment and a continuing decline in the demand for our Netware
products. Maintenance and services revenue, which includes software maintenance,
technical support, education, and consulting services grew in the second quarter
of fiscal 2003 compared to the same period in fiscal 2002. This increase was
largely due to growth in product maintenance revenue, increased Celerant
management consulting revenue, and favorable Euro exchange rates, partially
offset by decreased demand for IT consulting services. Maintenance and services
revenue remained flat during the first six months of fiscal 2003 compared to the
same period in fiscal 2002, largely due to declining IT consulting revenue, and
weak sales in the United States as a result of the poor economy, which offset
growth in product maintenance revenue and favorable foreign exchange rates.
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 is 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 the geographic segments listed above and the
Celerant management consulting segment. Separate financial information is not
evaluated by business segment in regards to asset allocation.
Three months ended April 30, Six months ended April 30,
2003 2002 Change 2003 2002 Change
---- ---- ------ ---- ---- ------
(Dollars in thousands)
Americas $ 129,503 $ 147,431 (12)% $ 261,344 $ 297,453 (12)%
EMEA 88,673 74,324 19% 170,400 154,109 11%
Asia Pacific 20,908 19,919 5% 38,765 38,968 (1)%
Celerant 36,883 32,179 15% 65,429 61,182 7%
---------- ----------- ---------- -----------
Total net revenue $ 275,967 $ 273,853 1% $ 535,938 $ 551,712 (3)%
========== =========== ========== ===========
Revenue in the Americas decreased during the second quarter and first six months
of fiscal 2003 compared to the same periods of fiscal 2002 due to decreased
software and consulting revenue reflecting poor United States market conditions,
declining Netware revenue and lower IT consulting demand and billing rates. In
addition, revenue in the Americas was negatively affected during the first six
months of fiscal 2003 by a temporary distraction to our selling efforts in the
United States while we transferred certain of our customer accounts from our
sales force to our channel partners. Revenue increased in EMEA during the second
quarter and first six months of fiscal 2003 due to favorable foreign exchange
rates and recovering European market conditions, which resulted in greater
demand for our products and services. The increase in revenue in Asia Pacific
during the second quarter of fiscal 2003 was primarily due to strong sales in
Australia. For the first six months of fiscal 2003, Asia Pacific sales decreased
slightly as the weak Japanese economy offset increased sales in Australia.
Celerant worldwide revenue increased in the second quarter and first six months
of fiscal 2003 due primarily to improved revenue growth in Europe resulting in
greater demand for Celerant's consulting services, revenue recognized on a
number of large completed contracts, and favorable foreign exchange rates.
Revenue outside the U.S. represented 54% of total revenue in the second quarter
of fiscal 2003 compared to 48% in the first quarter of fiscal 2002. Revenue
outside the U.S. for the first six months of fiscal 2003 was 53% compared to 47%
in the first six months of fiscal 2002.
In addition to reviewing geographic and Celerant management consulting segment
results, our chief decision makers review net revenue by solution category:
These solutions 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 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 - provides operational strategy and
implementation consulting services, which result in quantifiable value, to
a wide range of customers across various sectors, worldwide.
Three months ended April, 30 Six months ended April 30,
2003 2002 Change 2003 2002 Change
---- ---- ------ ---- ---- ------
(Dollars in thousands)
Identity management and secure
web services $ 22,669 $ 16,630 36% $ 45,814 $ 33,478 37%
Cross platform services 142,014 147,052 (3)% 277,866 297,057 (7)%
Worldwide services 74,401 77,992 (5)% 146,829 159,994 (8)%
Celerant management consulting
36,883 32,179 15% 65,429 61,183 7%
---------- ----------- ---------- -----------
Total net revenue $ 275,967 $ 273,853 (1)% $ 535,938 $ 551,712 (3)%
========== =========== ========== ===========
Identity management and secure web services revenue increased in the second
quarter and first six months of fiscal 2003 compared to the same periods 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 as the secure identity market continues to grow. Cross platform
services declined in the second quarter and first six months of fiscal 2003
compared to the same periods in fiscal 2002 primarily due to the decline in
demand for our NetWare products, offset slightly by increased demand for our
Groupwise and ZEN products. Worldwide services revenue declined in the second
quarter and first six months of fiscal 2003 compared to the same periods in
fiscal 2002 primarily due to the weakened demand for our IT consulting services
in the U.S. and lower billing rates as a result of the weak economic
environment.
At April 30, 2003, we had $267.5 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. and global economies, 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, in the U.S. or globally, within the next
several quarters. We anticipate some continued declines in our NetWare revenue.
However, we have announced that the next version of NetWare will include network
services running on both the NetWare kernel and the Linux kernel. This
announcement may help to slow the declines because our customers now have a
clear vision of our migration path. We believe this will help us gain new
customers and increase revenue in future periods. We also believe that the
identity management and secure web services markets will continue to grow as it
matures, which may improve revenue from our offerings in these areas. As
previously disclosed, we have decided not to provide specific revenue forecast
information for the remainder of fiscal 2003 or future periods.
Gross profit
Three months ended April, 30 Six months ended April 30,
2003 2002 Change 2003 2002 Change
---- ---- ------ ---- ---- ------
(Dollars thousands)
Gross profit $ 167,196 $ 161,025 4% $ 329,603 $ 321,315 3%
Percentage of revenue 61% 59% 62% 58%
Gross profit in total and as a percentage of sales increased in the second
quarter and first six months of fiscal 2003 compared to the same periods of
fiscal 2002 primarily due to improved consulting margins resulting from
headcount reductions in fiscal 2002 and improved performance in our Celerant
management consulting subsidiary. We are continuing to address ways to improve
our gross margin percentage in future periods, such as improving utilization,
increasing IT consulting billing rates, and reducing expenses. However, due to
the uncertainty in the U.S. and global economies, 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. As previously disclosed, we
have decided not to provide specific forecasted earnings information for the
remainder of fiscal 2003 or future periods.
Operating expenses
Three months ended April, 30 Six months ended April 30,
2003 2002 Change 2003 2002 Change
---- ---- ------ ---- ---- ------
(Dollars in thousands)
Sales and marketing $ 101,737 $ 82,145 24% $ 200,042 $ 167,621 19%
Percentage of revenue 37% 30% 37% 30%
Product development $ 48,354 $ 42,385 14% $ 91,276 $ 85,398 7%
Percentage of revenue 18% 16% 17% 16%
General and administrative $ 30,939 $ 31,055 --% $ 58,284 $ 61,380 (5)%
Percentage of revenue 11% 11% 11% 11%
Restructuring $ 8,675 $ 19,100 (55)% $ 8,675 $ 19,100 (55)%
Percentage of revenue 3% 7% 2% 4%
Total operating expenses $ 189,705 $ 174,685 9% $ 358,277 $ 333,499 7%
Percentage of revenue 69% 64% 67% 60%
Operating expenses, in total and as a percentage of revenue, increased in the
second quarter and first six months of fiscal 2003 compared to the same periods
in fiscal 2002 primarily due to additional operating 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 first quarter. These expenses were
offset somewhat by lower salary expenses as a result of lower bonus accruals and
lower headcount due to the restructuring and other headcount reductions in
fiscal 2002.
Sales and marketing expense, in total and as a percentage of revenue, increased
in the second quarter and first six months of fiscal 2003 compared to the same
periods in fiscal 2002 primarily as a result of increased marketing costs
associated with our new advertising campaign and increased sales headcount. We
have spent approximately $10 million per quarter during fiscal 2003 on our new
advertising campaign and anticipate spending approximately the same amount
during the remainder of fiscal 2003 in an effort to attract new customers and
increase revenue. Sales and marketing headcount increased by 164 employees in
the second quarter of fiscal 2003 compared to the second quarter of fiscal 2002,
which increase includes the addition of 119 SilverStream employees. Sales and
marketing expenses can fluctuate as a percentage of revenue in any given period
due to product promotions, advertising, and other discretionary expenses.
Product development expenses, in total and as a percentage of revenue, increased
in the second quarter and first six months of fiscal 2003 compared to the same
periods of fiscal 2002 due primarily to the addition of SilverStream in the
third quarter of fiscal 2002. Product development headcount increased by 240
employees compared to the second quarter of fiscal 2002, which increase includes
the addition of 174 SilverStream employees and additional employees to support
our Linux initiatives. The increase in cost for the additional headcount was
offset slightly by savings related to lower bonus accruals in fiscal 2003 and a
favorable settlement received in the first quarter of fiscal 2003 related to
development obligations dating back to agreements signed in the 1990s. We
anticipate that our product development expenses will remain relatively flat or
decrease slightly in remaining quarters of fiscal 2003 compared to the second
quarter fiscal 2003 amounts as we continue our cost cutting efforts.
General and administrative expenses in the second quarter of fiscal 2003
remained flat compared to the second quarter of fiscal 2002 primarily due to
additional facility-related merger expenses we recorded due to the declining
real estate market, which offset lower operating costs related to decreased
headcount and integration costs. During the first six months of fiscal 2003,
general and administrative costs decreased primarily due to a full year's impact
of the fiscal 2002 restructuring, lower integration costs related to the
Cambridge and SilverStream acquisitions, and lower bad debt charges. General and
administrative headcount decreased by eight employees at the end of the second
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 second quarter and first six months of fiscal 2003 compared to the same
periods in fiscal 2002 partially as a result of lower revenue in fiscal 2003. We
anticipate that our general and administrative expenses will remain relatively
flat or decrease slightly during the remainder of fiscal 2003 as we continue our
cost cutting efforts.
Restructuring
During the second quarter of fiscal 2003, we determined that the amount we had
originally accrued for facility-related costs in previous restructurings was too
low and accrued an additional $8.7 million. The original liability was based on
estimated sublease rates and timing of signing subleases, which have been
affected by the decline in the real estate market. This additional amount, which
pertains to three separate restructuring events, is included in the following
tables.
Second quarter of fiscal 2002
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. During the second quarter of fiscal 2003, we determined that the
amount we had originally accrued for facility-related costs was too low and
accrued an additional $7.7 million. The original liability was based on
estimated sublease rates and timing of signing subleases, which have been
affected by the decline in the real estate market.
The following table summarizes the activity during fiscal 2003 related to the
second quarter of fiscal 2002 restructuring.
Balance at Balance at
Original October 31, Cash April 30,
Charge 2002 Payments Adjustments 2003
------ --------- ---------- ----------- ----------
In thousands
Severance and benefits $ 14,748 $ 4,258 $ (2,551) $ -- $ 1,707
Excess facilities and property and equipment 5,146 4,221 (963) 7,735 10,993
Other restructuring-related costs 492 300 -- -- 300
-------- -------- -------- -------- --------
$ 20,386 $ 8,779 $ (3,514) $ 7,735 $ 13,000
======== ======== ========= ======== ========
As of April 30, 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.
Fourth quarter of fiscal 2001
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. During the second quarter
of fiscal 2003, we determined that the amount we had originally accrued for
facility-related costs was too low and accrued an additional $0.3 million. The
original liability was based on estimated sublease rates and timing of signing
subleases, which have been affected by the decline in the real estate market.
The following table summarizes the costs and activities during fiscal 2003
related to the fourth quarter of 2001 restructuring.
Balance at Balance at
Original October 31, Cash April 30,
Charge 2002 Payments Adjustments 2003
------ ----------- ---------- ------------ --------
In thousands
Severance and benefits $ 32,793 $ 1,117 $ (801) $ -- $ 316
Excess facilities and property and equipment 10,896 4,651 (1,656) 262 3,257
Other restructuring-related costs 6,973 624 (241) -- 383
-------- -------- ---------- -------- -------
$ 50,662 $ 6,392 $ (2,698) $ 262 $ 3,956
======== ======== ========== ======== ========
As of April 30, 2003, the remaining balance of the fourth quarter fiscal 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.
Third quarter of fiscal 2001
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. During the second quarter of fiscal 2003, we
determined that the amount we had originally accrued for facility-related costs
was too low and accrued an additional $0.7 million. The original liability was
based on estimated sublease rates and timing of signing subleases, which have
been affected by the decline in the real estate market.
The following table summarizes the activity during fiscal 2003 related to the
third quarter of fiscal 2001 restructuring costs.
Balance at Balance at
Original October 31, Cash April 30,
Charge 2002 Payments Adjustments 2003
------ ----------- ---------- ------------ ---------
In thousands
Severance and benefits $ 15,978 $ -- $ -- $ -- $ --
Excess facilities and property and equipment 10,740 3,889 (1,068) 678 3,499
Other restructuring-related costs 3,675 137 (137) -- --
-------- -------- --------- -------- ---------
$ 30,393 $ 4,026 $ (1,205) $ 678 $ 3,499
======== ======== ========= ======== =========
As of April 30, 2003, the remaining balance of the third quarter of fiscal 2001
restructuring charge included accrued liabilities 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 by
reducing costs.
Employees
April 30, April 30,
2003 2002 Change
(Dollars in thousands)
Employees at end of quarter (full time equivalents) 6,221 6,041 3%
Revenue per average employee for three months ended $ 177 $ 178
Headcount in the second quarter of fiscal 2003 increased compared to the same
period in fiscal 2002 due primarily to the acquisition of SilverStream in July
2002. These headcount additions were partially offset by restructuring related
headcount reductions, which occurred during fiscal 2002. We continue to monitor
headcount to ensure our resources are aligned with expected business levels and
our business strategy.
Other income (expense), net
Three months ended April 30, Six months ended April 30,
2003 2002 Change 2003 2002 Change
---- ---- ------ ---- ---- ------
(Dollars in thousands)
Other income (expense), net $ (12,475) $ (18,382) 32% $ (18,664) $ (7,928) (135)%
Percentage of revenue (5)% (7)% (4)% (1)%
The primary component of other income (expense), net, was net investment income
(loss), which was a loss of $10.5 million in the second quarter of fiscal 2003
compared to a loss of $17.2 million in the second quarter of fiscal 2002. In the
second quarter of fiscal 2003, the net investment loss included impairment
losses on long-term investments totaling $13.7 million, realized net gains on
the sale of short-term equity securities of $0.5 million, and $2.7 million in
interest income. During the second quarter of fiscal 2002, investment income of
$7.2 million was offset by investment impairment losses of $24.4 million. During
the first six months of fiscal 2003, the net investment loss included impairment
losses on long-term investments totaling $24.5 million, realized net gains on
the sale of short-term equity securities of $0.8 million, and $7.0 million in
interest income. During the first six months of fiscal 2002, investment income
of $15.3 million was offset by investment impairment losses of $29.8 million.
Excluding investment income (loss), other expense, net, decreased $0.8 million
in the second quarter of fiscal 2003 compared to the second quarter of fiscal
2002. During the first six months of fiscal 2003, other expense, net, decreased
$7.7 million compared to 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)
Three months ended April 30, Six months ended April 30,
2003 2002 Change 2003 2002 Change
---- ---- ------ ---- ---- ------
(Dollars in thousands)
Income tax expense (benefit) $ (6,372) $ (2,293) 178% $ (6,838) $ 1,286 (632)%
Percentage of revenue (2)% (1)% (1)% --%
Effective tax (benefit) rate (18)% (7)% (14)% 6%
Our actual effective tax benefit rate for the second quarter of fiscal 2003 was
18% compared to the effective tax benefit rate of 7% for the same period in
2002. Our actual effective tax benefit rate for the first six months of fiscal
2003 was 14% compared to the effective tax rate of 6% for the same period in
2002. The rate differs because of differences in the amount of non-deductible
investment impairments taken in each period.
Net loss and net loss per share
Three months ended April 30, Six months ended April 30,
(Dollars in thousands, 2003 2002 Change 2003 2002 Change
---- ---- ------ ---- ---- ------
except per share)
Net loss $ (28,612) $ (173,451) 84% $ (40,500) $ (165,100) 76%
Percentage of revenue (10)% (63)% (8)% (30)%
Net loss per share:
Basic and diluted $ (0.08) $ (0.48) 84% $ (0.11) $ (0.46) 76%
We incurred a net loss per share of $0.08 in the second quarter of fiscal 2003
compared to net loss per share of $0.48 in the same period of fiscal 2002. The
second quarter and year-to-date fiscal 2002 net loss and net loss per share
includes a $143.7 million cumulative effect of an accounting change, which
resulted from our adoption of SFAS No. 142. Through our initial SFAS No. 142
analysis, we determined that a portion of our goodwill related to the
acquisition of Cambridge Technology Partners in July 2001 had become impaired.
Before the cumulative effect of the accounting change, net loss per share was
$0.08 for the second quarter and $0.06 for the first six months of fiscal 2002.
The net loss per share during the second quarter of fiscal 2003 was primarily
due to a $13.7 million (pre-tax) charge for long-term investment impairments,
higher sales and marketing expenses to roll out our new advertising campaign,
and facility-related restructuring and merger expenses, as discussed previously.
In addition, the net loss per share for the first six months of fiscal 2003
included $10.8 million of additional investment impairment expenses incurred in
the first quarter of fiscal 2003. At this time, we have decided not to provide
specific forecasted earnings information for the remainder of fiscal 2003.
Liquidity and capital resources
April 30, October 31,
2003 2002 Change
(Dollars in thousands)
Cash and short-term investments $ 626,397 $ 635,858 1%
Percentage of total assets 39% 38%
Cash and short-term investments totaled $626.4 million at April 30, 2003
compared to $635.9 million at October 31, 2002. The decrease in cash can be
attributed to cash used for operations of $3.5 million, expenditures for fixed
assets of $21.8 million, cash paid to acquire Volera minority interest shares
from Accenture of $1.1 million, and net cash paid for long-term investments of
$7.8 million. These decreases were offset somewhat by cash proceeds from stock
issuances under employee stock option or equity plans of $7.0 million, cash
proceeds from the sale of a portion of our vacant land in San Jose, California
of $0.8 million, cash from our line of credit of $6.9 million, and the impact of
foreign exchange fluctuations.
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 $3.3 million and gross unrealized losses of $0.4 million as of April
30, 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 have also invested 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 April 30, 2003, we had commitments to contribute an additional
$64.2 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 April 30, 2003, we had cash and other short-term investments of $433.8
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 $15.0
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
$38.5 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 six months of fiscal 2003, we paid approximately $0.1 million against this
guarantee and have accrued a liability for an additional $0.4 million that we
could be required to pay, excluding 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 indemnifies 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.
On April 22, 2003, we entered into an agreement to sell our office campus and
the adjacent vacant land located in San Jose, California for a total of
approximately $124 million. After transaction costs, we anticipate netting
approximately $120 million in cash. At April 30, 2003, the net book value of the
campus and land was approximately $97 million. The closing date for the sale of
the vacant land was May 27, 2003 and the expected closing date for the sale of
the office campus is June 30, 2003.
Our principal source of liquidity continues to be from operations, on-hand cash,
and income from short-term investments. At April 30, 2003, our principal unused
sources of liquidity consisted of cash on hand in the amount of $374.5 million,
short-term investments in the amount of $251.9 million, and available borrowing
capacity of 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 six months of fiscal 2003, we used $3.5 million of cash to fund
operations. We plan to reduce our cost structure over the remainder of fiscal
2003 to help us return to positive net cash flows from operating and investing
activities for fiscal 2003. 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
from the planned sale of our facilities in San Jose, California, 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 $50 million, but could be reduced if
our growth is less than presently anticipated.
During the fourth quarter of fiscal 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 April 30, 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 half of fiscal 2003.
Factors Affecting Future Results of Operations
Our future results of operations involve a number of risks and uncertainties
that could cause actual results to differ materially from expected and historic
results. A number of these risks and uncertainties are discussed in the
following paragraphs.
The Current Economic Climate and Outlook in the Technology Consulting and
Information Technology Services Sector Is 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 continue to 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 responding to revenue declines experienced by our distribution
partners;
o deriving anticipated benefits from our restructurings and our corporate
strategies; and
o delivering 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
solution categories include: 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 IT Services
The key competitive factors faced by us related to IT consulting are attracting
and retaining the highest quality consultants and the depth and breadth of our
skills and expertise. The market for IT consulting services is highly
competitive due to the existence of several large IT 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 IT consulting area,
which could inhibit our ability to grow our IT consulting business.
Additionally, the worldwide marketplace for IT consulting services is highly
fragmented. We often encounter different groups of competitors in different
regions of the world. Many of these local competitors may have niche
consultancies carved out in a local market against whom it may be difficult to
win business.
Celerant Management Consulting
Because of the extremely specialized nature of the implementation consulting
services provided by Celerant, the main competitive factor faced by Celerant is
not so much presented by rival consulting firms, but rather lies with
prospective clients themselves. The primary decision often faced by Celerant's
prospective clients is a weighing of the costs of a Celerant engagement against
the measurable results and financial benefits to be realized during and after
the engagement. Therefore, a key factor lies in convincing clients of Celerant's
ability to deliver those results and benefits. An additional consideration
potential clients factor into their decisions is a judgment as to whether they
can successfully perform the work that they require themselves, or whether they
need the assistance of a third party such as Celerant.
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 its greater 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 Employees Because of the
Intense Competition for Qualified Employees 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 employees. Even in light of the current economic
downturn, competition for employees of the highest caliber is intense in the
software and consulting industries. The loss of a significant group of key
employees would adversely affect our performance. The failure to successfully
attract, hire, retain and promote qualified employees as we need them could have
a material adverse effect on our business.
If We Are Not Successful in Developing a Strong Business with our Nsure and
exteNd Products and Services, Our Long-Term Growth Will Be Negatively
Impacted
The success of our net directory services products that comprise our Nsure and
exteNd secure web services and identity management solutions sets is important
to our strategy. The acquisition of SilverStream helped further our development
of secure Web services products and enhanced our identity management product
offerings. Our ability to achieve success with our Nsure and exteNd products and
services is dependent on a number of factors including, but not limited to, the
following: growth of the Web-based applications industry; acceptance of the
Nsure and exteNd solution sets by clients; further development of key Nsure and
exteNd product solutions and upgrades; and acceptance of those products by large
industry partners and major accounts. If we are unable to grow the Nsure and
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
geographic and 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, particularly NetWare, 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 our business.
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 that Novell's NetWare client software infringes
a patent allegedly co-owned by them 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, we 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 publicly traded
equity securities, long-term equity investments in 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 six months of fiscal 2003, we
recorded an impairment charge of $24.5 million related to some of the
investments in our portfolio in cases where their market value had experienced
an other-than-temporary decline. As of April 30, 2003, we had net unrealized
gains, after taxes, on investments totaling approximately $2.5 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 do not 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 IT 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 IT consulting 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 enhance 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 Incur Additional Costs or Not Realize Anticipated
Revenue
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 we 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 a meaningful portion of our
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 and Celerant 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 in the short term, 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
consultants, causing significant reductions in operating results for a
particular quarter.
Actions Taken By The SCO Group Could Impact the Acceptance of the Linux
Operating System, Negatively Affecting Novell's Linux Initiatives
Novell recently announced some important Linux initiatives. These include an
upcoming NetWare version based on the Linux kernel, as well as collaboration and
resource management solutions for Linux. The SCO Group ("SCO") has recently
written a "Letter to Linux Customers" that states that Linux infringes on SCO's
Unix intellectual property and other rights, and that SCO intends to
aggressively protect and enforce those rights. SCO's actions have the potential
to disrupt business relations that might otherwise form at a critical time
around Linux technologies, and could potentially deprive Novell of important
economic opportunities. It is possible that SCO's actions, if carried forward,
could lead to the loss of sales and jobs, delayed projects, canceled financing,
and a balkanized Linux community, any of which could hurt Novell's Linux
initiatives.
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 April 30, 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 objective 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 $1.3 million
decrease (less than 0.5% of total investments) 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 April 30, 2003, gross unrealized losses, before tax effect, on
the short-term public equity securities totaled $0.1 million. A reduction in
prices of 10% of these short-term equity securities would result in
approximately a $0.5 million decrease (less than 0.1% of total investments) 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 $6 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
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 $3 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 April 30, 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 June 9, 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 periodic 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
The Stockholders of Novell voted on the following proposals at the Annual
Meeting of Stockholders held on May 1, 2003:
1. To elect seven directors.
2. To approve amendments to certain of our stock option plans to permit
implementation of a stock option exchange program.
3. To approve our Stock-Based Deferred Compensation Plan.
4. To approve amendments to our Employee Stock Purchase Plan.
5. To ratify the appointment of Ernst & Young LLP, as independent auditors for
the fiscal year ending October 31, 2003.
The following tables set forth the outcome of the matters voted upon at the
meeting:
Proposal #1
Election of Directors
The nominees for director were elected based upon the following votes:
Nominee Votes For Votes Withheld
------- --------- --------------
Albert Aiello 304,922,691 20,192,625
Fred Corrado 304,764,016 20,351,300
Jack L. Messman 314,403,331 10,711,985
Richard L. Nolan 304,833,336 20,281,980
Thomas G. Plaskett 306,515,891 18,599,425
John W. Poduska Sr. 307,662,498 17,452,818
James D. Robinson, III 314,638,870 10,476,446
Proposal #2
To approve amendments to certain of our stock option plans to permit
implementation of our stock option exchange program. This proposal was
approved based on the following votes:
Votes For Votes Against Votes Abstained Broker Non-votes
--------- ------------- --------------- ----------------
152,116,030 65,715,988 7,077,408 100,205,890
Proposal #3
To approve our Stock-Based Deferred Compensation Plan. This proposal was
approved based on the following votes:
Votes For Votes Against Votes Abstained Broker Non-votes
--------- ------------- --------------- ----------------
310,499,831 13,566,599 1,048,886 --
Proposal #4
To approve amendments to our Employee Stock Purchase Plan. This proposal
was approved based on the following votes:
Votes For Votes Against Votes Abstained Broker Non-votes
--------- ------------- --------------- ----------------
303,823,399 20,187,762 1,104,155 --
Proposal #5
To ratify the appointment of Ernst & Young LLP, as independent auditors for
the fiscal year ending October 31, 2003. The stockholders ratified the
appointment of Ernst & Young, LLP based on the following votes:
Votes For Votes Against Votes Abstained Broker Non-votes
--------- ------------- --------------- ----------------
305,066,408 19,347,837 701,071 --
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
10.1 Severance Agreement dated as of March 25, 2003 between the
Registrant and Chris Stone.
10.2 Severance Agreement dated as of March 25, 2003 between the
Registrant 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 February 3, 2003, 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: June 16, 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 or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: June 16, 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 or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: June 16, 2003
/s/ Joseph S. Tibbetts, Jr.
Joseph S. Tibbetts, Jr.
Senior Vice President and
Chief Financial Officer