-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HWMyVz6fx/EHZ2IZ1XNz0jG0hmQQ6tExynBsS+ZQETWIFRxfXWj6NlhW9WM2DQvy IdD0QKjzrzBMskyyp0PELQ== 0000758004-02-000005.txt : 20020614 0000758004-02-000005.hdr.sgml : 20020614 20020614134157 ACCESSION NUMBER: 0000758004-02-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020402 FILED AS OF DATE: 20020614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOVELL INC CENTRAL INDEX KEY: 0000758004 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 870393339 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13351 FILM NUMBER: 02679153 BUSINESS ADDRESS: STREET 1: 1800 SOUTH NOVELL PLACE CITY: PROVO STATE: UT ZIP: 84606 BUSINESS PHONE: 8018617000 MAIL ADDRESS: STREET 1: 1800 SOUTH NOVELL PLACE CITY: PROVO STATE: UT ZIP: 84606 10-Q 1 q210q.txt QUARTERLY REPORT - SECOND QUARTER FISCAL 2002 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, 2002 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ------- to ----------- Commission File Number: 0-13351 NOVELL, INC. (Exact name of registrant as specified in its charter) Delaware 87-0393339 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1800 South Novell Place Provo, Utah 84606 (Address of principal executive offices and zip code) (801) 861-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO As of May 31, 2002, there were 364,272,506 shares of the Registrant's Common Stock outstanding. Part I. Financial Information Item 1. Financial Statements NOVELL, INC. CONSOLIDATED CONDENSED BALANCE SHEETS April 30, 2002 October 31, 2001 -------------- ---------------- Amounts in thousands, except share and per share data (Unaudited) ASSETS Current assets: Cash and short-term investments $ 683,295 $ 705,243 Receivables (less allowances of $42,390 - April 30, 2002 and $47,249 - October 31, 2001) 173,379 227,044 Inventories 416 947 Prepaid expenses 29,391 29,808 Deferred income taxes 24,930 34,595 Other current assets 25,043 29,729 ---------------- --------------- Total current assets 936,454 1,027,366 Property, plant and equipment, net 461,033 496,620 Goodwill 51,539 187,795 Intangible assets 3,714 4,221 Long-term investments 93,198 114,971 Other assets 85,943 73,033 ---------------- --------------- Total assets $ 1,631,881 $ 1,904,006 ================ =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 55,977 $ 77,571 Accrued compensation 80,267 87,382 Accrued marketing liabilities 12,796 13,672 Other accrued liabilities 111,291 150,842 Income taxes payable 26,145 38,175 Deferred revenue 212,268 243,261 ---------------- --------------- Total current liabilities 498,744 610,903 Minority interests 20,438 22,436 Shareholders' equity: Common stock, par value $.10 per share Authorized - 600,000,000 shares Issued - 364,272,506 shares-April 30, 2002 362,341,403 shares-October 31, 2001 36,427 36,234 Preferred stock, par value $.10 per share Authorized - 500,000 shares, Issued - 0 shares -- -- Additional paid in capital 262,877 256,332 Retained earnings 820,386 985,486 Accumulated other comprehensive income (loss) (1,874) 2,455 Other (5,117) (9,840) ----------------- ---------------- Total shareholders' equity 1,112,699 1,270,667 ---------------- --------------- Total liabilities and shareholders' equity $ 1,631,881 $ 1,904,006 ================ ===============
See notes to consolidated unaudited condensed financial statements. NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS Three Months Ended --------------------------------------------- April 30, 2002 April 30, 2001 Amounts in thousands, except per share data Net sales $ 273,853 $ 240,755 Cost of sales 112,828 67,125 --------------- --------------- Gross profit 161,025 173,630 Operating expenses: Sales and marketing 84,169 116,903 Product development 40,361 52,566 General and administrative 31,055 26,146 Restructuring 19,100 -- --------------- --------------- Total operating expenses 174,685 195,615 Loss from operations (13,660) (21,985) Other income (loss), net Investment income (loss) (17,199) (130,633) Other, net (1,183) (1,558) ---------------- ---------------- Other income (loss), net (18,382) (132,191) Loss before taxes (32,042) (154,176) Income tax expense (benefit) (2,293) (2,865) ---------------- ---------------- Net loss before cumulative effect of change in accounting principle (29,749) (151,311) Cumulative effect of change in accounting principle (143,702) -- ---------------- --------------- Net loss $ (173,451) $ (151,311) ================ ================ Net loss per share - basic and diluted: Before cumulative effect of change in accounting principle $ (0.08) $ (0.48) Cumulative effect of change in accounting principle (0.40) -- --------------- --------------- $ (0.48) $ (0.48) =============== =============== Weighted average shares outstanding - basic and diluted: 362,754 317,873
See notes to consolidated unaudited condensed financial statements. NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS Six Months Ended --------------------------------------------- April 30, 2002 April 30, 2001 Amounts in thousands, except per share data Net sales $ 551,712 $ 485,790 Cost of sales 230,397 134,079 --------------- --------------- Gross profit 321,315 351,711 Operating expenses: Sales and marketing 171,535 238,322 Product development 81,484 99,412 General and administrative 61,380 49,246 Restructuring 19,100 -- --------------- --------------- Total operating expenses 333,499 386,980 Loss from operations (12,184) (35,269) Other income (loss), net Investment income (loss) (14,591) (113,346) Other, net 6,663 (1,014) --------------- ---------------- Other income (loss), net (7,928) (114,360) Loss before taxes (20,112) (149,629) Income tax expense (benefit) 1,286 (1,592) --------------- ---------------- Net loss before cumulative effect of change in accounting principle (21,398) (148,037) Cumulative effect of change in accounting principle (143,702) (11,048) ---------------- ---------------- Net loss $ (165,100) $ (159,085) ================ ================ Net loss per share - basic and diluted: Before cumulative effect of change in accounting principle $ (0.06) $ (0.46) Cumulative effect of change in accounting principle (0.40) (0.04) --------------- --------------- $ (0.46) $ (0.50) =============== =============== Weighted average shares outstanding - basic and diluted: 362,591 320,028
See notes to consolidated unaudited condensed financial statements. NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS Six Months Ended April 30, 2002 April 30, 2001 Dollars in thousands Cash flows from operating activities Net loss $ (165,100) $ (159,085) Adjustments to reconcile net loss to net cash provided by operating activities Gain on sale of fixed assets (8,762) -- Depreciation and amortization 33,495 41,869 Loss on impaired goodwill 143,702 -- Loss on impaired investments and fixed assets 29,839 147,806 Non-cash restructuring charges 16,426 -- Decrease in receivables 53,665 57,790 Decrease in inventories 531 1,156 Decrease (increase) in prepaid expenses 417 (1,971) (Increase) decrease in deferred income taxes (64) 6,095 Decrease in other current assets 4,686 4,341 Decrease in current liabilities, net (126,390) (31,686) -------------- -------------- Net cash provided by (used in) operating activities (17,555) 66,315 Cash flows from financing activities Issuance of common stock, net 7,176 8,391 Repurchase of common stock -- (64,954) ------------- -------------- Net cash provided by (used in) financing activities 7,176 (56,563) Cash flows from investing activities Expenditures for property, plant and equipment (13,161) (18,338) Proceeds from the sale of property, plant and equipment 16,050 -- Purchases of short-term investments (706,780) (435,054) Maturities of short-term investments 471,449 415,788 Sales of short-term investments 223,211 67,330 Proceeds from Volera minority shareholders -- 25,975 Expenditures for long-term investments (16,583) (32,849) Other 8,128 (15,752) ------------- -------------- Net cash provided by (used in) investing activities (17,686) 7,100 Total increase (decrease) in cash and cash equivalents (28,065) 16,852 Cash and cash equivalents - beginning of period 337,927 289,537 ------------- ------------- Cash and cash equivalents - end of period 309,862 306,389 Short-term investments - end of period 373,433 332,218 ------------- ------------- Cash and short-term investments - end of period $ 683,295 $ 638,607 ============= =============
See notes to consolidated unaudited condensed financial statements. NOVELL, INC. NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS A. Quarterly Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. As discussed under the heading "Critical Accounting Policies" in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," actual results could differ materially from those estimates. The accompanying consolidated unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q but do not include all of the information and footnotes required by generally accepted accounting principles and should, therefore, be read in conjunction with the Company's fiscal 2001 Annual Report on Form 10-K. These financial statements do include all normal recurring adjustments that the Company believes necessary for a fair presentation of the statements. The interim operating results are not necessarily indicative of the results for a full year. Certain reclassifications, none of which affected net loss, have been made to the prior years' amounts in order to conform to the current year's presentation. B. Cash and Short-term Investments The Company considers all highly liquid debt instruments purchased with a term to maturity of three months or less to be cash equivalents. Short-term investments are widely diversified, consisting primarily of short-term investment grade securities, substantially all of which either mature within the next 12 months or have characteristics of short-term investments. Municipal securities included in short-term investments have contractual maturities ranging from one to seven years. Money market preferreds have contractual maturities of less than 180 days. No other short-term investments have contractual maturities. All marketable debt and equity securities that are included in cash and short-term investments are considered available-for-sale and are carried at fair market value. The unrealized gains and losses related to these securities are included in other comprehensive income (loss), net of tax, after any applicable tax valuation allowances. Fair market values are based on quoted market prices where available; if quoted market prices are not available, then fair market values are based on quoted market prices of comparable instruments. The cost of securities sold is based on the specific identification method. Such securities are anticipated to be used for current operations and are therefore classified as current assets, even though some maturities may extend beyond one year. The following is a summary of cash and short-term investments, all of which are considered available-for-sale. Gross Gross Fair Market Cost at Unrealized Unrealized Value at (Amounts in thousands) April 30, 2002 Gains Losses April 30, 2002 -------------- ----- ------ -------------- Cash and cash equivalents: Cash $ 123,440 $ -- $ -- $ 123,440 U.S. government debt 41,124 -- -- 41,124 Corporate debt 34,916 -- -- 34,916 Money market funds 110,382 -- -- 110,382 ----------- ---------- ---------- ------------ Total cash and cash equivalents 309,862 -- -- 309,862 Short-term investments: U.S. government debt 110,102 3 (144) 109,961 Corporate debt 234,512 1,636 (82) 236,066 Money market preferreds 18,001 -- (1) 18,000 Equity securities 10,040 625 (1,259) 9,406 ----------- ---------- ----------- ------------ Total short-term investments 372,655 2,264 (1,486) 373,433 Total cash and short-term investments $ 682,517 $ 2,264 $ (1,486) $ 683,295 =========== ========== =========== ============
Gross Gross Fair Market Cost at Unrealized Unrealized Value at (Amounts in thousands) October 31, Gains Losses October 31, ------------ ----- ------ ----------- 2001 2001 ---- ---- Cash and cash equivalents: Cash $ 156,088 $ -- $ -- $ 156,088 Corporate debt 3,995 -- -- 3,995 Money market funds 177,844 -- -- 177,844 ---------- ------- --------- ---------- Total cash and cash equivalents 337,927 -- -- 337,927 Short-term investments: State and local government debt 151,459 5,074 -- 156,533 Corporate debt 138,679 2,255 (9) 140,925 Money market preferreds 17,034 -- (34) 17,000 Mutual funds 41,014 -- -- 41,014 Equity securities 12,336 538 (1,030) 11,844 ---------- ------- --------- --------- Total short-term investments 360,522 7,867 (1,073) 367,316 Total cash and short-term investments $ 698,449 $ 7,867 $ (1,073) $ 705,243 - ========== ======== ========== =========
During the first six months of fiscal 2002, the Company realized gains of $6.1 million and realized losses of $0.3 million on the sale of short-term securities. During the first six months of fiscal 2001, the Company realized gains of $6.7 million and realized losses of $0.1 million from the sale of short-term securities. The Company did not record any impairment losses during the first six months of fiscal 2002 or 2001 related to short-term investments whose decline in market value was determined to be other than temporary. The Company reviews all of its investments for impairment and recognizes impairment losses as appropriate. C. Long-term Assets The primary components of long-term investments are investments made through the Novell Venture account, Cambridge Technology Capital Fund I L.P. ("CTC I") and strategic long-term equity investments. Long-term investments are recorded at cost. Investments made through the Novell Venture account generally are in private companies, primarily small capitalization stocks in the high-technology industry sector, and funds managed by venture capitalists. Investments made through CTC I generally are in expansion-stage, private companies providing products and services within the technology industry. The value of the investments made through the Novell Venture account and CTC I are dependent on the performance, successful acquisition, and/or initial public offering of the investees. The Company routinely reviews its investments in private securities and venture funds for impairment. During the first six months of fiscal 2002 and 2001, the Company recognized impairment losses on long-term investments totaling $29.8 million and $144.7 million, respectively. D. Goodwill and Intangible Assets The following is a summary of goodwill and intangible assets: April 30, 2002 October 31, 2001 (Amounts in thousands) IT consulting related goodwill $ -- $ 138,211 Celerant related goodwill 42,500 42,500 Product related goodwill 9,039 7,084 ------------ ------------ Total goodwill $ 51,539 $ 187,795 ============ ============ Total intangible assets $ 3,714 $ 4,221 ============ ============
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 supersedes APB Opinion No. 17, "Intangible Assets," and states that goodwill and other intangible assets with indefinite lives are no longer amortized but are reviewed for impairment annually, or more frequently if impairment indicators arise. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The provisions under SFAS No. 142 relating to the discontinuance of amortization of goodwill and indefinite lived intangible assets is effective for assets acquired after June 30, 2001, and upon adoption of the statement to assets acquired prior to June 30, 2001. In addition, the provisions of SFAS No. 142 relating to impairment apply to assets acquired prior to July 1, 2001 upon adoption of SFAS No. 142. Novell has elected to adopt this statement beginning in the first quarter of fiscal 2002, and has discontinued amortization of goodwill acquired prior to July 1, 2001 and will review goodwill and intangibles for impairment on a periodic basis. The following table shows what net income would have been had the provision been applied at the beginning of fiscal 2001: Quarter ended Quarter ended Year-to-date Year-to-date (Amounts in thousands) April 30, 2002 April 30, 2001 April 30, 2002 April 30, 2001 -------------- -------------- -------------- -------------- Loss before extraordinary item As reported $ (29,749) $ (151,311) $ (21,398) $ (148,037) Pro forma $ (150,755) $ (147,320) Net loss As reported $ (173,451) $ (151,311) $ (165,100) $ (159,085) Pro forma $ (150,755) $ (158,368) Basic and diluted loss per share As reported $ (0.48) $ (0.48) $ (0.46) $ (0.50) Pro forma $ (0.47) $ (0.49)
SFAS No. 142 also requires companies to perform an impairment test within six months of adopting the statement. Steps required in the impairment test include: Step 1 - identifying reporting units, assigning assets and liabilities to the reporting units, assigning goodwill to reporting units, and determining if the fair value of each reporting unit is less than its carrying amount. If the fair value is below carrying value, Step 2 - determining the impairment amount - is performed. The Company completed this test during the second quarter of fiscal 2002. Through Step 1, the Company identified four reporting units; Product, Volera, Inc., Information Technology (IT) Consulting, and Management Consulting. Based on the present value of expected future cash flows and other analysis, the Company determined that the IT Consulting unit had a fair value that was less than its carrying amount. Step 2 was then performed for this unit to determine the impairment amount, resulting in a transitional goodwill impairment loss of $143.7 million as of November 1, 2001, which was recorded as the cumulative effect of an accounting change in the Company's consolidated Statements of Operations. The decline in fair value of the IT consulting unit was primarily due to a softening in the consulting and technology markets as well as the global economy causing a sharp decline in revenue and profitability. The changes in the carrying amount of goodwill for the six months ended April 30, 2002 are as follows: Management (Amounts in thousands) Product Volera IT Consulting Consulting Total ------- ------ ------------- ---------- ----- Balance as of November 1, 2001 $ 7,084 $ -- $ 143,702 $ 42,500 $ 193,286 Acquisitions 1,955 -- -- -- 1,955 Impairment of goodwill -- -- (143,702) -- (143,702) ---------- --------- ----------- ------------ ---------- Balance as of April 30, 2002 $ 9,039 $ -- $ -- $ 42,500 $ 51,539 ========== ========= -========= ============ ===========
Intangible assets relate to several small product-related acquisitions and are amortized over a two to three year period. E. Income Taxes The Company's estimated effective tax rate for the first six months of fiscal 2002 is 30% on income before the investment impairment and the effect of the cumulative change in accounting principle. The rate differs from the effective tax rate for fiscal 2001 primarily as a result of changes in the forecasted income before taxes for fiscal 2002. The second quarter 2001 rate included an adjustment to bring the year-to-date rate to 21%. There is no tax benefit for the investment impairment because corporations can only use capital losses to offset capital gains. The Company cannot be assured at this time that it can generate sufficient capital gains during the five-year carry-over period to recognize the tax benefit of this capital loss. Accordingly, a valuation allowance has been established for the investment impairments taken in the second quarter of fiscal 2002. There is no tax benefit for the change in accounting method since goodwill is not deductible for tax purposes in this situation. The Company paid cash amounts for income taxes of $9.0 million in the first six months of fiscal 2002 and $2.9 million during the same period of fiscal 2001. F. Line of Credit The Company currently has a $10 million unsecured revolving bank line of credit. The line of credit expires on March 3, 2003 and can be renewed at the option of the Company for a one-year period. The line can be used for either letter of credit or working capital purposes and is subject to the terms of a loan agreement containing financial covenants and restrictions, none of which are expected to significantly affect the Company's operations. At April 30, 2002, there were standby letters of credit of $1.7 million outstanding under this agreement. The Company has an additional credit facility with another bank, which is not subject to a loan agreement. At April 30, 2002, there was a minimal amount of standby letters of credit outstanding under this arrangement. G. Restructuring During the second quarter of fiscal 2002, the Company recorded a restructuring charge of approximately $20.4 million, pre-tax. The charge was a result of the Company's continued move towards its new business strategy of becoming a solutions provider, addressing changes in the market due to technology changes, and becoming more customer focused. Specific actions taken included reducing the Company's workforce worldwide by approximately 50 employees (less than 1%), consolidating facilities, closing offices in unprofitable locations, and disposing of excess property and equipment. The following table summarizes the activity during the second quarter of fiscal 2002, related to the fiscal 2002 restructuring. Total Cash Non-Cash Balance at Restructuring Charge Payments Charges April 30, 2002 -------------------- -------- -------- -------------- (Amounts in thousands) Severance and benefits $ 14,748 $ (1,642) $ (1,318) $ 11,788 Excess facilities and property and equipment 5,146 -- -- 5,146 Other restructuring-related costs 492 -- (150) 342 ------------ ----------- ------------ ------------ $ 20,386 $ (1,642) $ (1,468) $ 17,276 ============ =========== ============ ============
As of April 30, 2002, the remaining balance of the second quarter 2002 restructuring charge included accrued liabilities related to severance and benefits, which will be paid out over the next four quarters and redundant facilities and other fixed contracts, which will be paid over the respective remaining contract terms. During the second quarter of fiscal 2002, the Company also rolled out approximately $1.3 million of excess accruals related to a fiscal 2000 restructuring, which is included in the restructuring costs reflected on the statement of operations for the three and six months ended April 30, 2002. These excess accruals relate to employee benefits and legal costs that were not required. At the end of the fourth quarter of fiscal 2001, the Company incurred $50.7 million of pre-tax, restructuring charges resulting from general market conditions, customer demands, and the Company's evolution of its business strategy. This business strategy focuses on eBusiness solutions along with Net services software designed to secure and power the networked world across leading operating systems. The execution of this strategy included refining the Company's consulting initiatives, refocusing research and development efforts, defining sales and marketing efforts to be more customer and solutions oriented, and adjusting the overall cost structure given current revenue levels and Company direction. Specific actions included reducing the Company's workforce worldwide by approximately 1,100 employees (approximately 16%), consolidating excess facilities and disposing of excess property and equipment, terminating a management consulting contract that no longer fits with the Company's strategic focus, and abandoning and writing off technologies that no longer fit within the Company's new strategy. The Company also realigned its remaining resources to better manage and control its business. The following table summarizes the costs and activities during the first six months of fiscal 2002, related to the fourth quarter 2001 restructuring. Non-Cash Balance at Cash Charges / Balance at October 31, 2001 Payments Adjustments April 30, 2002 ---------------- -------- ----------- -------------- (Amounts in thousands) Severance and benefits $ 32,793 $ (26,547) $ (4,000) $ 2,246 Excess facilities and property and equipment 10,896 (5,029) 1,970 7,837 Other restructuring-related costs 911 (226) -- 685 ------------ ------------ ----------- ------------ $ 44,600 $ (31,802) $ (2,030) $ 10,768 ============ =========== =========== ============
As of April 30, 2002, the remaining balance of the fourth quarter 2001 restructuring charge included accrued liabilities largely related to severance and benefits, which will be paid out during fiscal 2002, and redundant facilities costs, which will be paid over the respective remaining lease terms. During the third quarter of fiscal 2001, the Company recorded a restructuring charge of approximately $30.4 million, pre-tax, as a result of the Company's acquisition of Cambridge Technology Partners ("Cambridge") and changes in the Company's business to move towards an eBusiness strategy. Specific actions included reducing the Company's workforce worldwide by approximately 280 employees (approximately 5% before the addition of Cambridge) across all functional areas, consolidating facilities and disposing of excess property and equipment, abandoning and writing off technologies that no longer fit within the integrated Company's new strategy, and discontinuing unprofitable product lines. The following table summarizes the activity during the first half of 2002, related to the third quarter 2001 restructuring costs. Balance at Cash Non-Cash Balance at October 31, 2001 Payments Charges April 30, 2002 ---------------- -------- ------- -------------- (Amounts in thousands) Severance and benefits $ 3,377 $ (754) $ -- $ 2,623 Abandoned technology 211 (211) -- -- Excess facilities and property and equipment 9,736 (4,749) -- 4,987 Exit unprofitable product lines 486 (486) -- -- Other restructuring-related costs 527 (162) -- 365 ------------ ---------- ---------- ------------ $ 14,337 $ (6,362) $ -- $ 7,975 ============ =========== =========== ============
As of April 30, 2002, the remaining balance of the third quarter 2001 restructuring charge included accrued liabilities largely related to severance and benefits, which will be paid out during fiscal 2002, and excess facilities costs, which will be paid over the respective remaining lease terms. H. Commitments and Contingencies On December 21, 2001, the Company formed a venture capital fund, Novell Technology Capital Fund I, L.P. (the "Fund"), and related entities that include Novell Technology GPLP I, L.P. ("GPLP"), the general partner of the Fund. The Fund was established to achieve a superior return on investments for its partners by locating, analyzing and investing in high-growth-oriented businesses. The general partner of GPLP is a wholly-owned corporate subsidiary of Novell. Novell has committed to an aggregate investment of $15 million in GPLP and the Fund, primarily through a limited partnership interest in the Fund. This commitment may increase as additional limited partners are brought into the Fund, to a cap of $30 million. Additionally, Novell is entitled to 68.25% of the amounts allocable to GPLP by the Fund, which is generally equal to 20% of the net gains of the Fund. Mr. Messman, a director and the Company's Chief Executive Officer and President, committed to an investment of $182,500 in the Fund as a limited partner. Mr. Linsalata, the Company's Senior Vice President, Venture Investments, committed to an investment of $100,000 in the Fund as a limited partner, and to an investment of $82,500 in GPLP as a limited partner. Additionally, Mr. Linsalata is entitled to 13.75% of the amounts allocable to GPLP by the Fund, which is generally equal to 20% of the net gains of the Fund. No amounts have been distributed by the Fund or GPLP. The financial and operating results of the Fund, GPLP and other related entities have been consolidated in Novell's financial statements for the second quarter of fiscal 2002. The Board of Directors also established the Novell Venture account within Novell's investment portfolio for the purpose of making investments in private companies, mainly small capitalization stocks in the high-technology industry sector, and investments in funds managed by venture capitalists for the promotion of the Company's business and strategic objectives. As of April 30, 2002, the Company had an investments of $36.6 million in private companies and $53.7 million related to these externally managed venture capital funds, and had commitments to the externally managed venture capital funds to contribute an additional $87.0 million over the next two to three years, as requested by the fund managers. Novell, through its acquisition of Cambridge, also owns both limited and general partnership interests in the Cambridge Technology Capital Fund I ("CTC I") of approximately 24%. As of April 30, 2002, the Company had an investment balance of $1.6 million in CTC I and had commitments to contribute an additional $300,000 through 2007. In February 1998, a suit was filed in the U.S. District Court, District of Utah, against Novell and certain of its officers and directors, alleging violation of federal securities laws by concealing the true nature of Novell's financial condition and seeking unspecified damages. The lawsuit was brought as a purported class action on behalf of purchasers of Novell common stock from November 1, 1996 through April 22, 1997. After a first dismissal and a subsequent amendment to the complaint, the Federal District Judge dismissed the amended complaint with prejudice for failure to state a claim. The plaintiffs have filed a Notice of Appeal to the Tenth Circuit Court of Appeals and Novell intends to vigorously defend to uphold the Federal District Court's ruling. While there can be no assurance as to the ultimate disposition of the lawsuit, Novell does not believe that the resolution of this litigation will have a material adverse effect on its financial position, results of operations, or cash flows. In January 1995, Lantec, Inc. filed suit against Novell in the U.S. District Court, the District of Utah, for alleged anti-trust violations arising from Novell's acquisition of the GroupWise technology. The plaintiffs were seeking to demonstrate damages of $300 million. On April 19, 2001, the judge ruled in favor of Novell and dismissed the entire complaint. The plaintiff filed a Notice of Appeal to the Tenth Circuit Court of Appeals and Novell intends to vigorously defend to uphold the Federal District Court's ruling. While there can be no assurance as to the ultimate disposition of the lawsuit, Novell does not believe that the resolution of this litigation will have a material adverse effect on its financial position, results of operations, or cash flows. The Company is a party to a number of legal claims arising in the ordinary course of business. The Company believes the ultimate resolution of these claims will not have a material adverse effect on its financial position, results of operations, or cash flows. I. Segment Information The Company is organized and operates as three business segments: product, consulting, and Volera, Inc. The Company's products and services are sold throughout the world. The Company's offerings within the product segment are sold domestically via direct, OEM, reseller, and distributor channels, and internationally through distributors who sell to dealers and end users. The following is a description of each of the three segments: o Product - includes Net Management Services products (Directory-Enabled OS, Management and Collaboration products, and UNIX royalties), NDS Directory Services and other directory products, and product-related customer service, support, and education. o Consulting - includes Novell and Cambridge IT services consulting and Celerant management consulting. o Volera, Inc. - Novell's majority-owned subsidiary, which provides Content Distribution Network software. Beginning November 1, 2001, performance of the Company is evaluated by the Company's chief decision makers, the Chief Executive Officer and the Executive Management Committee, based on evaluation of revenue, gross margin and segment income (loss) from operations for each of the segments above. Revenue is also evaluated based on results by geographic region. Separate financial information is not evaluated by business segment in regards to asset allocation. Except for net sales, operating results by segment are not available for the second quarter and year-to-date fiscal 2001. Prior to the acquisition of Cambridge, the Company's systems did not support the breakout of operating results by segment other than net sales. Operating results, other than net sales, were available on a total company basis only. Operating Results by Segment Quarter ended April 30, 2002 Product Consulting Volera Total Novell ------- ---------- ------ ------------ Amounts in thousands Net sales $ 197,109 $ 75,346 $ 1,398 $ 273,853 Cost of sales 38,387 73,561 880 112,828 ---------- ---------- ---------- ---------- Gross profit 158,722 1,785 518 161,025 Segment operating expenses 124,693 23,310 6,617 154,620 ----------- ---------- ---------- ---------- Segment income (loss) from operations $ 34,029 $ (21,525) $ (6,099) 6,405 ========== =========== =========== Unallocated operating expenses 20,065 ---------- Loss from operations $ (13,660) =========== Quarter ended April 30, 2001 Product Consulting Volera Total Novell ------- ---------- ------ ------------ Amounts in thousands Net sales $ 224,214 $ 14,691 $ 1,850 $ 240,755
Year-to-date April 30, 2002 Product Consulting Volera Total Novell ------- ---------- ------ ------------ Amounts in thousands Net sales $ 396,366 $ 151,813 $ 3,533 $ 551,712 Cost of sales 75,556 153,052 1,789 230,397 ---------- ---------- ---------- ---------- Gross profit (loss) 320,810 (1,239) 1,744 321,315 Segment operating expenses 247,418 50,583 13,742 311,743 ----------- ---------- ---------- ---------- Segment income (loss) from operations $ 73,392 $ (51,822) $ (11,998) 9,572 ========== =========== =========== Unallocated operating expenses 21,756 ---------- Loss from operations $ (12,184) =========== Product Consulting Volera Total Novell Year-to-date April 30, 2001 Amounts in thousands Net sales $ 454,317 $ 27,765 $ 3,708 $ 485,790
Segment operating expenses include direct segment costs along with management's allocation of certain common sales, marketing, and general and administrative costs to each business unit. Unallocated operating expenses included restructuring and integration expenses. Prior to fiscal 2002, the Company operated in one segment. Management and the Company's decision makers evaluated the Company based on total Company results. Revenue was evaluated based on geographic location and product category. Other than net sales, separate financial information was not available by product category and geographic location. The following table shows second quarter and year-to-date fiscal 2002 and 2001 revenue under the previous segment categories. Revenue by product category Three Months Ended Six Months Ended --------------------------- ----------------------------------------------------------------------- Amounts in thousands April 30, 2002 April 30, 2001 April 30, 2002 April 30, 2001 -------------------- -------------- -------------- -------------- -------------- Net management services $ 151,835 $180,891 $ 305,551 $ 367,752 Net directory services 10,685 7,983 22,009 15,614 Net content services 1,398 1,850 3,533 3,708 Consulting, support services and education 109,935 50,031 220,619 98,716 ---------- ---------- ----------- ---------- Total net sales $ 273,853 $ 240,755 $ 551,712 $ 485,790 ========== ========== ========== ==========
Sales outside the U.S. are comprised of sales to international customers in Europe, the Middle East, Canada, South America, and the Asian Pacific. International sales in any single international location were not material to the Company as a whole. For the first six months of fiscal 2002 and fiscal 2001, sales to international customers were approximately $261.2 million and $214.3 million, respectively. In the first six months of fiscal 2002 and fiscal 2001, 73% and 66%, respectively, of international sales were to European countries. No one foreign country accounted for 10% or more of total net sales in either period. There were no customers accounting for more than 10% of total revenue during the first six months of fiscal 2002 or fiscal 2001. J. Net Income (Loss) Per Share Three Months Ended Six Months Ended ---------------------------------------------------------------------- Amounts in thousands, except per share data April 30, 2002 April 30, 2001 April 30, 2002 April 30, 2001 ------------------------------------------- -------------- -------------- -------------- -------------- Basic and diluted net income per share computation Net income (loss) $ (173,451) $ (151,311) $ (165,100) $ (159,085) ------------ ------------ ------------ ------------ Weighted average shares outstanding 362,754 317,873 362,591 320,028 ----------- ----------- ----------- ----------- Basic and diluted net income (loss) per share $ (0.48) $ (0.48) $ (0.46) $ (0.50) =========== =========== =========== ===========
K. Comprehensive Income (Loss) The components of comprehensive income (loss), net of tax, for the three month and year-to-date periods ended April 30, 2002 and 2001 were as follows: Three Months Ended Six Months Ended ---------------------------------------------------------------------- Amounts in thousands April 30, 2002 April 30, 2001 April 30, 2002 April 30, 2001 -------------------- -------------- -------------- -------------- -------------- Net loss $ (173,451) $ (151,311) $ (165,100) $ (159,085) Change in net unrealized gain/loss on investments (3,769) 93,939 (4,015) 75,855 Change in cumulative translation adjustment (1,681) (189) (314) 525 ------- --------------- ------------ -------------- Comprehensive loss $ (178,901) $ (57,561) $ (169,429) $ (82,705) ============ =============== ============ ===============
The components of accumulated other comprehensive income, net of related tax, at April 30, 2002 and October 31, 2001, are as follows: April 30, 2002 October 31, 2001 Amounts in thousands Net unrealized gain on investment: $ 1,017 $ 5,032 Cumulative translation adjustment (2,891) (2,577) ------------ ------------ Accumulated other comprehensive income (loss) $ (1,874) $ 2,455 ============ ===========
L. Derivative Instruments The Company hedges currency risks of some assets and liabilities denominated in foreign currencies through the use of one-month forward contracts. Due to the short period of time between entering into the forward contracts and the quarter end, the fair value of the derivatives as of April 30, 2002 is insignificant and accordingly did not have a material impact on our financial position or results of operations. M. Recent Accounting Pronouncements In August 2001, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed. The provisions of SFAS No. 144 will be effective for fiscal year 2002 and will be applied prospectively. Adoption of SFAS No. 144 did not have a material impact on the Company's consolidated financial position and results of operations. At the beginning of the second quarter of fiscal 2002, the Company adopted FASB Emerging Issues Task Force No. 01-14, "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred," ("EITF 01-14"). EITF 01-14 requires companies to account for reimbursements received for out-of-pocket expenses incurred as revenue and the related expenses as cost of sales. EITF 01-14 also requires companies to reclassify prior period financial statements to conform to current year presentation for comparative purposes. Previously they were not included in the statement of operations. The adoption of EITF 01-14 did not have any impact on net earnings in any reported period. N. Subsequent Event On June 10, 2002, the Company announced that it had entered into a definitive agreement to acquire SilverStream Software, Inc. Under terms of the agreement, the Company will commence a cash tender offer to acquire all of the outstanding shares of SilverStream common stock at a price of $9.00 per share, followed by a merger in which the holders of the remaining outstanding shares of SilverStream common stock will receive the same cash price. With acceptance of the tender offer by stockholders representing 90 percent of SilverStream shares, the acquisition would likely close in July 2002. If less than 90 percent of the shares are tendered, a formal stockholder meeting of SilverStream stockholders would need to be called to approve the transaction, and the acquisition would likely close during the Company's fourth quarter 2002. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. In some cases, such forward-looking statements may be identified by the use of terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "potential," or "continue" or the negative thereof or other comparable terminology. Such forward-looking statements include statements regarding, among other things, our revenue expectations, future business strategies, market conditions, and opportunities, and liquidity. All forward-looking statements are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results may differ materially from the results discussed in such forward-looking statements as a result of a number of factors, which include, but are not limited to, those set forth below in the section titled "Risk Factors Affecting Future Results of Operations." Introduction Novell, Inc., ("Novell" or the "Company") provides eBusiness solutions and Net services software designed to secure and power the networked world. Novell and its services division, Cambridge Technology Partners ("Cambridge"), help organizations solve complex business challenges, simplify their systems and processes, and capture new opportunities. Novell provides worldwide channel, consulting, education and developer programs to support its offerings. Critical Accounting Policies The Company considers certain accounting policies related to revenue recognition and impairment of long-lived assets and valuation of deferred tax assets to be critical policies due to the estimation processes involved in each. Revenue recognition. The Company's IT consulting services business derives a portion of its revenue from fixed-price, fixed-time contracts, which require the accurate estimation of the cost, scope and duration of each engagement. Revenue and the related costs for these projects are recognized based on percentage of completion, using time-to-completion to measure the percent complete with revisions to estimates reflected in the period in which changes become known. If the Company does not accurately estimate the resources required or the scope of work to be performed, or does not manage its projects properly within the planned periods of time or satisfy its obligations under the contracts, then future consulting margins may be significantly and negatively affected or losses on existing contracts may need to be recognized. Any such resulting reductions in margins or contract losses could be material to the Company's results of operations. The Company also records a provision for estimated sales returns and allowances on product and service related sales in the same period as the related revenues are recorded. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. If the historical data the Company uses to calculate these estimates does not properly reflect future returns, revenue could be overstated. Impairment of long-lived assets and valuation of deferred tax assets. The Company's long-lived assets include long-term investments, goodwill and other intangible assets. At April 30, 2002, the Company had $93 million of long-term investments, $52 million of goodwill, $4 million of intangible assets, and $96 million of net deferred tax assets, current and non-current, accounting for approximately 15% of the Company's total assets. The fair value of the long-term investments is dependant on the performance of the companies or venture funds in which the Company has invested, as well as volatility inherent in the external markets for these investments. In assessing potential impairment for these investments, the Company will consider these factors as well as forecasted financial performance of its investees. If these forecasts are not met, the Company may have to record additional impairment charges not previously recognized. During the six months ended April 30, 2002, the Company recognized $29.8 million of impairment losses related to its long-term investments. In assessing the recoverability of the Company's goodwill and other intangibles, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded. On November 1, 2001 the Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," and was, therefore, required to analyze its goodwill and other intangibles with indefinite lives for impairment issues during the first six months of fiscal 2002, and then on a periodic basis thereafter. The Company's first goodwill impairment analysis under SFAS 142 was completed during the second quarter of fiscal 2002 and resulted in an impairment charge of $143.7 million related to goodwill in its IT Consulting group. Carrying value of the Company's net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets resulting in additional income tax expense in the Company's consolidated statement of operations. Management evaluates the realizability of the deferred tax assets and assesses the need for additional valuation allowances on a quarterly basis. Results of Operations Net Sales Quarter ended April 30, Year-to-date April 30, ----------------------- ---------------------- 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Net sales (thousands) $ 273,853 $ 240,755 13.7% $ 551,712 $ 485,790 13.6%
Beginning in fiscal 2002, Novell's operations are organized by operating segment - - product, consulting, and Volera, Inc. o Product - includes Net Management Services products (Directory-Enabled OS, Management and Collaboration products, and UNIX royalties), NDS Directory Services and other directory products, and product-related customer service, support, and education. o Consulting - includes Novell and Cambridge IT services consulting and Celerant management consulting. o Volera, Inc. - Novell's majority-owned subsidiary, which provides Content Distribution Network software. Product sales decreased $27.1 million or 12% in the second quarter of fiscal 2002 and $57.9 million or 13% year-to-date 2002 compared to the same periods of fiscal 2001. Within the product segment, sales from Net Management Services products decreased $29.1 million or 16% in the second quarter of fiscal 2002 and $62.2 million or 17% year-to-date 2002 compared to the same periods of fiscal 2001 primarily due to decreased sales of older Netware versions, which have not been completely offset by sales of Netware version 6, decreased sales of management and collaboration products, and lower Unix royalties. Sales from Net Directory Services products increased $2.7 million or 33.8% in the second quarter of fiscal 2002 and $6.4 million or 41% year-to-date 2002 compared to the same periods of fiscal 2001 primarily due to increased sales from DirXML. Product related service, education, and support decreased $0.7 million during the second quarter of fiscal 2002 and $2.1 million year-to-date 2002 compared to the same periods of fiscal 2001. The Company believes net product sales over the second half of fiscal 2002 will remain relatively flat compared to the first two quarters of fiscal 2002. Consulting sales were $60.7 million or 413% higher in the second quarter of fiscal 2002 and $124.0 million or 447% higher year-to-date 2002 compared to the same periods of fiscal 2001, due to the acquisition of Cambridge in the third quarter of fiscal 2001. Consulting sales decreased $1.1 million in the second quarter of fiscal 2002 compared to first quarter of fiscal 2002 primarily due to a weakened services market and decreased demand for the Company's systems integration and e-business solutions consulting. The Company expects to see stabilization in consulting sales over the remaining two quarters of fiscal 2002. At the beginning of the second quarter of fiscal 2002, the Company adopted FASB Emerging Issues Task Force No. 01-14, "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred," ("EITF 01-14"). EITF 01-14 requires companies to account for reimbursements received for out-of-pocket expenses incurred as revenue and the related expenses as cost of sales. Previously they were not included in the statement of operations. Reimbursable expense revenue is now included in consulting revenue in all periods presented. Net sales from Volera, Inc. were relatively flat in the second quarter of fiscal 2002 and year-to-date 2002 compared to the same periods of fiscal 2001 and are expected to remain relatively flat during the next two quarters. International sales represented 48% of total net sales in the second quarter of fiscal 2002 and 47% year-to-date 2002 compared to 45% in the second quarter of fiscal 2001 and 44% for the first six months of fiscal 2001. During the second quarter of fiscal 2002, international sales increased 21% while domestic sales increased 8% compared to the same period of fiscal 2001. Year-to-date, international sales increased 22% and domestic sales increased 7% compared to the same period of fiscal 2001. Internationally, sales increases were due to the addition of Cambridge and recovering European market conditions. The increase in domestic sales during the second quarter and first half of fiscal 2002 was due to the addition of Cambridge. Total net sales decreased 1% in the second quarter of fiscal 2002 compared to the first quarter of fiscal 2002. Product sales were down 1%, consulting sales were down 1.5% and Volera sales were down 34.5% in the second quarter of fiscal 2002 compared to the first quarter of fiscal 2002. The Company expects total net sales for fiscal 2002 to remain relatively flat compared to the first two quarters of fiscal 2002 or slightly above $1.1 billion for the year. The Company is working to address the decline in sales, particularly related to the consulting segment, in an effort to improve results in future periods. The Company has completed its integration of Cambridge during the first half of fiscal 2002 and has reorganized its sales force to focus on direct selling and on solutions offerings. The Company anticipates that it will take several quarters to fully realize the benefits from these actions. Gross Profit Quarter ended April 30, Year-to-date April 30, ----------------------- ---------------------- 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Gross profit (thousands) $ 161,025 $173,630 (7.3)% $ 321,315 $ 351,711 (8.6)% Percentage of net sales 58.8% 72.1% 58.2% 72.4%
Gross profit as a percentage of net sales decreased in the second quarter and year-to-date 2002 compared to the same periods of fiscal 2001, primarily due to the effects of a higher mix of lower-margin consulting business along with decreased product sales levels. The mix between product sales and consulting sales has shifted due to the acquisition of Cambridge, causing product sales to become a smaller percentage of total sales. During the second quarter and year-to-date fiscal 2002, gross margin for the consulting segment was $1.8 million or 2% and a negative $1.2 million or negative 1%, respectively. The low margins are primarily due to decreased consulting sales and costs of excess consultants who were not fully utilized on consulting engagements. The Company does not expect gross profit margins to reach fiscal 2001 levels in the future due to the increase in the consulting business. However, the Company believes the current gross profit margin of 58% can be improved and is currently addressing ways to improve its gross margin in future periods. As described above, the Company adopted EITF 01-14, which requires companies to account for reimbursements received for out-of-pocket expenses incurred as revenue and the related expenses as cost of sales. This change did not have a significant effect on gross margin. Operating Expenses Quarter ended April 30, Year-to-date April 30, (dollars in thousands) 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Sales and marketing $ 84,169 $ 116,903 (28.0)% $ 171,535 $ 238,322 (28.0)% Percentage of net sales 30.7% 48.6% 31.1% 49.1% Product development 40,361 52,566 (23.2)% 81,484 99,412 (18.0)% Percentage of net sales 14.7% 21.8% 14.8% 20.5% General and administrative 31,055 26,146 18.8% 61,380 49,246 24.6% Percentage of net sales 11.3% 10.9% 11.1% 10.1% Restructuring 19,100 -- -- 19,100 -- -- Percentage of net sales 7.0% -- 3.5% -- Total operating expenses $ 174,685 $ 195,615 (10.7)% 333,499 386,980 (13.8)% Percentage of net sales 63.8% 81.3% 60.4% 79.7%
Sales and marketing expenses decreased by $32.7 million and $66.8 million in the second quarter and year-to-date of fiscal 2002, respectively, compared to the same periods of fiscal 2001. These declines are primarily due to decreased spending on marketing campaigns and lower headcount due to the restructurings in the third and fourth quarters of fiscal 2001 and second quarter of fiscal 2002. Sales and marketing headcount decreased by 179 year-over-year. In addition, sales and marketing expenses fluctuate in any given period due to timing of product promotions, advertising or other discretionary expenses. Product development expenses decreased $12.2 million in the second quarter of fiscal 2002 and $17.9 million year-to-date 2002 compared to the same periods in fiscal 2001. These declines are due primarily to decreased headcount as a result of the restructurings that took place in the third and fourth quarters of fiscal 2001 and second quarter of fiscal 2002. Product development headcount decreased by 126 year-over-year. Product development expense as a percentage of sales decreased due to the addition of Cambridge consulting sales, which does not have any associated product development costs. General and administrative expenses increased $4.9 million during the second quarter of fiscal 2002 and $12.1 million year-to-date 2002 compared to the same periods of fiscal 2001. The increase in general and administrative expense dollars and as a percentage of sales was primarily due to the addition of Cambridge general and administrative costs, integration costs related to the acquisition, and increased headcount as a result of the Cambridge acquisition, offset somewhat by headcount reductions resulting from the restructurings that took place in the third and fourth quarters of fiscal 2001. Restructuring During the second quarter of fiscal 2002, the Company recorded a restructuring charge of approximately $20.4 million, pre-tax. The charge was a result of the Company's continued efforts to implement its new business strategy of becoming a solutions provider, addressing changes in the market due to technology changes, and becoming more customer focused. Specific actions taken included reducing the Company's workforce worldwide by approximately 50 employees (less than 1%), consolidating facilities, closing offices in unprofitable locations, and disposing of excess property and equipment. Of the $20.4 million pre-tax charge, cash payments of $1.6 million were paid out as of April 30, 2002. After writing off certain non-cash charges, accruals of $17.3 million remain relating primarily to severance and benefits, which will be paid out over the next four quarters, and redundant facilities and other fixed contracts, which will be paid out over the respective remaining contract terms. During the second quarter of fiscal 2002, the Company also rolled out approximately $1.3 million of excess accruals related to a fiscal 2000 restructuring, which is included in the restructuring costs reflected on the statement of operations for the three and six months ended April 30, 2002. These excess accruals relate to employee benefits and legal costs that were not required. At the end of the fourth quarter of fiscal 2001, the Company incurred $50.7 million of pre-tax, restructuring charges resulting from general market conditions, customer demands, and the Company's evolution of its business strategy. This business strategy focuses on eBusiness solutions along with Net services software designed to secure and power the networked world across leading operating systems. The execution of this strategy included refining the Company's consulting initiatives, refocusing research and development efforts, defining sales and marketing efforts to be more customer and solutions oriented, and adjusting the overall cost structure given current revenue levels and Company direction. Specific actions included reducing the Company's workforce worldwide by approximately 1,100 employees (approximately 16%), consolidating excess facilities and disposing of excess property and equipment, terminating a management consulting contract that no longer fits with the Company's strategic focus, and abandoning and writing off technologies that no longer fit within the integrated Company's new strategy. The Company also realigned its remaining resources to better manage and control its business. Of the total $50.7 million charge, cash payments of $31.8 million have been paid out as of April 30, 2002. After writing off certain non-cash charges, accruals of $10.8 million relating to the fourth quarter restructuring remain as of April 30, 2002, primarily related to severance and benefits, which will be paid out during fiscal 2002, and redundant facilities costs, which will be paid over the respective remaining lease terms. During the third quarter of fiscal 2001, the Company recorded a restructuring charge of approximately $30.4 million, pre-tax, as a result of the Company's acquisition of Cambridge Technology Partners and changes in the Company's business to move towards an eBusiness strategy. Specific actions included reducing the Company's workforce worldwide by approximately 280 employees (approximately 5% before the addition of Cambridge) across all functional areas, consolidating facilities and disposing of excess property and equipment, abandoning and writing off technologies that no longer fit within the Company's new strategy, and discontinuing unprofitable product lines. Of the total $30.4 million third quarter 2001 charge, cash payments of $21.2 million have been paid out as of April 30, 2002. After writing off certain non-cash charges, accruals of $8.0 million remain as of April 30, 2002, primarily related to severance and benefits, which will be paid out during fiscal 2002, and excess facilities costs, which will be paid over the respective remaining lease terms. As a result of the fiscal 2002 and two 2001 restructurings, the Company estimates that its operating expenses will be reduced by approximately $180 million annually compared to fourth quarter fiscal 2001 levels, before increased strategic expenditures. Year-to-date fiscal 2002, the Company had recognized approximately $82 million in savings due to the restructurings over the fourth quarter 2001 expense levels. The Company could incur additional restructuring charges in the future as it continues to develop its eBusiness strategy and react to market conditions. Employee Headcount (dollars in thousands) April 30, 2002 April 30, 2001 Change - ---------------------- -------------- -------------- ------ Employees at end of period 6,041 4,790 26.1% Annualized sales per average employee $ 178 $ 201 (11.4)%
Headcount increased from the second quarter of 2001, primarily due to the acquisition of Cambridge, which added approximately 2,700 employees, offset somewhat by headcount reductions resulting from the restructurings that occurred during the third and fourth quarters of fiscal 2001 and second quarter of fiscal 2002. Other Income (Loss), Net Quarter ended April 30, Year-to-date April 30, ----------------------- ---------------------- (dollars in thousands) 2002 2001 Change 2002 2001 Change - ---------------------- ---- ---- ------ ---- ---- ------ Other income (loss), net $ (18,382) $ (132,191) 86.1% $ (7,928) $ (114,360) 93.1% Percentage of net sales (6.7)% (54.9)% (1.4)% (23.5)%
The primary component of other income is related to investment income or losses. During the second quarter of fiscal 2002, investment income of $7.2 million was offset by investment impairment losses of $24.4 million. Year-to-date investment income of $15.3 million was offset by investment impairment losses of $29.8 million. Investment income during the second quarter and year-to-date fiscal 2001 totaled $11.4 million and $31.4 million, respectively. The second quarter and year-to-date 2001 investment income was offset by investment impairment losses of $142.0 million and $144.7 million, respectively. Investment impairment losses relate to certain investments in the Company's portfolio, whose declines in market values were determined to be other than temporary. Also included in other income during year-to-date fiscal 2002 was an $8.8 million gain on the sale of a building and a $1.6 million loss on the sale of four small foreign subsidiaries. Income Taxes Expense (Benefit) Quarter ended April 30, Year-to-date April 30, ----------------------- ---------------------- 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Income tax expense (benefit) (thousands) $(2,293) $ (2,865) 20.0% $ 1,286 $ (1,592) 180.8% Percentage of net sales (0.8)% (1.2)% 0.2% (0.3)% Effective tax expense (benefit) rate (7.2)% (1.8)% 6.4% (1.1)% Effective tax expense (benefit) rate on income before change in accounting method and asset impairment (30.0)% (23.6)% 30.0% (21.0)%
The Company's effective tax rate, before investment impairment and the accounting change, for the second quarter of fiscal 2002 and for fiscal 2002 is estimated to be 30%, compared to 28% in the second quarter of 2001 and 21% in fiscal 2001. The rate differs from the effective tax rate for the second quarter of fiscal 2001 and for fiscal 2001 primarily as a result of changes in the forecasted income before taxes for fiscal 2002. There is no tax benefit for the investment impairment because corporations can only use capital losses to offset capital gains. The Company cannot be assured at this time that it can generate sufficient capital gains during the five-year carry-over period to recognize the tax benefit of this capital loss. Accordingly, a valuation allowance has been established. There is no tax benefit for the change in accounting method since goodwill is not deductible for tax purposes in this situation. Net Loss and Net Loss Per Share (dollars in thousands, except Quarter ended April 30, Year-to-date April 30, ----------------------- ---------------------- per share data) 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Loss before accounting change $ (29,749) $(151,311) 80.3% $ (21,398) $(148,037) 85.5% Percentage of net sales (10.9)% (62.8)% (3.9)% (30.5)% Net loss $(173,451) $(151,311) (14.6)% $(165,100) $(159,085) (3.8)% Percentage of net sales (63.3)% (62.8)% (29.9)% (32.7)% Loss per share, before accounting change - basic and diluted $ (0.08) $(0.48) $ (0.06) $ (0.46) Net loss per share - basic and diluted $ (0.48) $(0.48) $ (0.46) $ (0.50)
Effective November 1, 2001 the Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." SFAS 142 requires, among other things, the discontinuance of amortization related to goodwill and indefinite lived intangible assets. These assets will then be subject to an impairment test at least annually. In addition, the statement includes provisions requiring companies to identify reporting units, upon adoption, for the purpose of assessing potential future impairments and to perform an initial impairment analysis within the first six months after adoption. The Company completed its goodwill impairment analysis during the second quarter of fiscal 2002 and recognized a transitional goodwill impairment loss of $143.7 million as of November 1, 2001, which was recorded as the cumulative effect of a change in accounting principle in the Company's consolidated Statements of Operations. Any further impairment losses recorded in the future could have a material adverse impact on our financial conditions and results of operations. Subsequent Events On June 10, 2002, the Company announced that it had entered into a definitive agreement to acquire SilverStream Software, Inc. Under terms of the agreement, the Company will commence a cash tender offer to acquire all of the outstanding shares of SilverStream common stock at a price of $9.00 per share, followed by a merger in which the holders of the remaining outstanding shares of SilverStream common stock will receive the same cash price. With acceptance of the tender offer by stockholders representing 90 percent of SilverStream shares, the acquisition would likely close in July 2002. If less than 90 percent of the shares are tendered, a formal stockholder meeting of SilverStream stockholders would need to be called to approve the transaction, and the acquisition would likely close during the Company's fourth quarter 2002. Liquidity and Capital Resources April 30, 2002 October 31, 2001 Change Cash and short-term investments (000s) $683,295 $705,243 (3.1)% Percentage of total assets 41.9% 37.0%
Cash and short-term investments decreased by $21.9 million to $683.3 million at April 30, 2002, down from $705.2 million at October 31, 2001. During the first six months of fiscal 2002, cash and short-term investments decreased primarily due to $18.6 million used for operating activities, $13.2 million for purchases of fixed assets, and $13.4 million in net purchases of long-term investments and other long-term investing activities, offset somewhat by $16.1 million cash received from the sale of a building, and $7.2 million from the net issuance of common stock. Included in the $18.6 million of cash used for operating activities were approximately $60.0 million of cash payments made during the first six months of fiscal 2002 related to fiscal 2001 and 2002 merger and restructuring actions. The Company's short-term investment portfolio is diversified among security types, industry groups, and individual issuers. To achieve potentially higher returns, a portion of the Company's investment portfolio is invested in equity securities and mutual funds, which incur market risk. The Company's short-term investment portfolio includes equity securities with gross unrealized gains of $2.1 million and gross unrealized losses of $1.3 million as of April 30, 2002. The Company monitors its investments and records losses when a decline in the investment's market value is determined to be other than temporary. The Company also invests excess cash in long-term investments through the Novell Venture account, Cambridge Technology Capital Fund I L.P. ("CTC I"), Novell Technology Capital Fund I, L.P. ("NTC I"), and strategic long-term equity investments. Investments made through the Novell Venture account, CTC I, and NTC I generally are in expansion-stage private companies, primarily small capitalization stocks, in the high-technology industry sector. The Novell Venture account funds are managed largely by external venture capitalists. CTC I and NTC I are managed internally. The value of the investments made through the Novell Venture account and CTC I are dependent on the performance, successful acquisition, and/or initial public offering of the investees. The Company monitors its investments and records losses when a decline in the investment's market value is determined to be other than temporary. The Company's principal source of liquidity has been from operations. At April 30, 2002, the Company's principal unused sources of liquidity consisted of cash and short-term investments and available borrowing capacity of approximately $8.3 million under its credit facilities. The Company's liquidity needs are principally for the Company's financing of accounts receivable, capital assets, strategic investments, product development and flexibility in a dynamic and competitive operating environment. During the first six months of fiscal 2002, the Company did not generate a positive cash flow from operations, however it currently anticipates generating positive cash flows from operations in the third and fourth quarters of fiscal 2002. The Company anticipates being able to fund its current operations, future acquisitions, integration, restructuring and merger-related costs, and planned capital expenditures for the foreseeable future with existing cash and short-term investments together with internally generated funds. The Company believes that borrowings under the Company's credit facilities or offerings of equity or debt securities are possible if the need arises, although such offerings may not be available to the Company on acceptable terms, given current market conditions. Investments will continue in product development and in new and existing areas of technology. Cash may also be used to acquire technology through purchases and strategic acquisitions. Capital expenditures in fiscal 2002 are anticipated to be approximately $40 million, but could be reduced if the growth of the Company is less than presently anticipated. The Company has commitments to invest up to an additional $87.0 million in externally managed venture capital funds and up to $15 million in internally managed venture capital funds over the next two to three years. On June 10, 2002, the Company announced that it had entered into a definitive agreement to acquire SilverStream Software, Inc. at a purchase price of $9.00 per share. Assuming a closing of the acquisition in July 2002, with approximately 23.6 million SilverStream shares projected to be outstanding at the time of the closing, which projection includes estimated option exercises prior to the closing date, the total cash acquisition price before acquisition fees and expenses will be approximately $212 million. In the event of a July closing, cash on SilverStream's balance sheet is expected to total approximately $100 million, which would yield a net cash outlay by Novell of approximately $112 million before acquisition fees and expenses. During the fourth quarter of 2001, the Board of Directors extended the Company's stock repurchase program through June 30, 2003 and authorized the use of up to $500 million for the repurchase of additional outstanding shares of the Company's common stock. As of April 30, 2002, $89 million of the authorized amount had been spent to repurchase 14 million shares under this plan at an average price of $6.19 per share. There were no shares repurchased during the first six months of fiscal 2002. Recent Pronouncements In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. The provisions of SFAS 144 will be effective for fiscal year 2002 and will be applied prospectively. Adoption of SFAS 144 did not have a material impact on the Company's consolidated financial position and results of operations. Risk Factors Affecting Future Results of Operations The Company's future results of operations involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially from historical results or from the Company's expectations are the following: business conditions and the general economy; competitive factors, such as rival operating systems, directories and applications; acceptance of new products and services and price pressures; availability of third-party compatible products at below market prices; risk of nonpayment of accounts or notes receivable; risks associated with foreign operations; risk of product line or inventory obsolescence due to shifts in technologies or market demand; timing of software product introductions; further declines in the demand for information technology consulting services; risk of consulting clients terminating or reducing the scope of engagements; market fluctuations of investment securities; and litigation. Other factors may also adversely affect the Company's financial results and stock price, including but not limited to: o competition for qualified employees; o competition from other product and service companies; o delays in the introduction of new products and services; o success of new products, technologies or services; o stock market fluctuations unrelated to Company performance; o failure to properly estimate costs of fixed fee engagements; o failure to properly manage consulting engagements within fixed-fees agreed to by customers; and o inability to fully utilize consultants on client engagements. The Current Economic Climate and Outlook in the Technology and Information Technology Services Sector Is Very Weak The weakened economic climate, particularly in the technology sector, has had an adverse effect on Novell's stock price and operations. Future economic projections for this sector do not anticipate a quick recovery. A continuation of the weakened economy could have further negative effects on the Company's stock price and operations in the future. Our Financial Results May Vary The Company often experiences a higher volume of sales at the end of each quarter and during the Company's fourth quarter. Because of this, fixed costs that are out of line with sales levels may not be detected until late in any given quarter and results of operations could be adversely affected. Operating results have been, and may in the future be affected, by other factors including, but not limited to: o timing of orders from customers and shipments to customers; o product mix, including a shift from higher margin to lower margin products or services; o delays or problems with our fulfillment agents; o impact of foreign currency exchange rates on the price of our products in international locations; o inability to respond to the decline in sales through our distribution channel; o inability to derive benefits from our restructurings and new corporate strategy; o inability to deliver solutions as expected by our consulting customers; and o differences in estimates versus actual results. We Compete in a Challenging Market for Computer Software and Consulting Services Novell competes in a highly challenging market for computer software. One pervasive factor underlying all of the Company's business endeavors is the presence of Microsoft in all sectors of the software business, and Microsoft's dominance in many of those sectors. In a finding upheld by the Circuit Court for the District of Columbia, the United States District Court found that Microsoft violated Section 2 of the Sherman Act by unlawfully acting to maintain its monopoly over desktop operating systems. The Company believes that Microsoft is exploiting its desktop operating monopoly in a way that is designed to extend its market power into the market for server operating systems, and to claim control of network and web services such as authentication, using many of the same anti-competitive practices found by the United States District Court to be in violation of the nation's antitrust laws. The Company is concerned that the Second Revised Proposed Final Judgment of the litigation between the Department of Justice and Microsoft will not benefit competition or consumers in a meaningful way and, if approved, could result in continued harm to the Company. Additionally, the Company does not have the product breadth and market power of Microsoft. Microsoft's ability to ship networking products with features and functionality that compete with Novell's, together with its ability to offer incentives to customers to purchase certain products in order to obtain favorable sales terms or necessary compatibility or information with respect to other products, may significantly inhibit Novell's ability to grow its business. Microsoft has significant financial resources, which could allow it to aggressively price its products and services for long periods of time to the potential detriment of competitors. Microsoft in the past has also employed tactics that limit or block effective and efficient interoperability with Novell's products. Microsoft frequently bundles software features into its operating system for free which compete directly with stand-alone products from Novell. As Microsoft creates new operating systems and applications, there can be no assurance that Novell will be able to ensure its products will be compatible with those of Microsoft. Although these market conditions and the judgments reached in litigation concerning Microsoft may affect overall Novell performance, the Company believes its strong product offering and "One Net" business strategy will be competitive in the marketplace. Additionally, if the more meaningful relief being sought by the nine litigating states is imposed on Microsoft, there could be a restoration of competition in the marketplace that would benefit Novell. The market for consulting services is highly competitive due to such factors as the existence of several large consulting firms specializing in the information systems area such as Hewlett-Packard Company, IBM, Accenture, Cap Gemini and the three remaining consulting arms of the "Big Five" accounting firms. Many of these companies have greater financial, technical and marketing resources and greater name recognition in the consulting area, which could inhibit the Company's ability to grow its consulting business. Additionally, the Company may face competition from other industry companies, which could introduce competitive products and/or services. If any of these competing products or services achieves market acceptance, Novell's business and results of operations could be materially adversely affected. Novell believes that additional factors that affect success in the marketplace include technical innovation to meet dynamic market needs, marketing strength, system performance, customer service and support, reliability, ease of use, security, and price compared to performance. Novell seeks to address all of these factors with its marketing and product development. However, these factors are also addressed by competitors, including Microsoft, in ways that may cause Novell's chances of success to be diminished. We Face Intense Competition for Qualified Personnel in the Computer and Consulting Industries The ability of the Company to maintain its competitive technological position will depend, in large part, on its ability to attract and retain highly qualified development, consulting, and managerial personnel. We compete for such personnel in the software and consulting industries. The loss of a significant group of key personnel would adversely affect the Company's performance. The failure to successfully promote and hire suitable replacements in a timely manner could have a material adverse effect on the Company's business. We Depend on a Number of Key Executives Who Have Recently Joined Us and Whom We May Not Be Able to Retain Most members of our senior management have recently joined us. Many of these individuals have not previously worked with one another, and it will take time for the management team to become integrated and work effectively together. It may also take time for these individuals to effect change within the organizations that lie within their respective areas of responsibility. Due to the competitive nature of our industry, we may not be able to retain all of our senior managers. Novell's Business May be Adversely Impacted by Acquisitions Which May Affect its Ability to Manage and Maintain its Business. Since Novell's inception, it has acquired a number of businesses, including Cambridge Technology Partners. In the future, Novell may undertake additional acquisitions of businesses that complement its existing operations. For example, Novell recently announced that it had entered into a definitive agreement to acquire SilverStream Software, Inc. The transaction is expected to close in July 2002 and is subject to certain customary closing conditions, including the receipt of all necessary government approvals and the tender, without withdrawal prior to the expiration of the tender offer, of at least a majority of SilverStream's outstanding shares of common stock on a fully-diluted basis. Such past or future acquisitions by Novell could involve a number of risks, including: o the possibility that one or more such acquisitions may not close due to closing conditions in the acquisition agreements, the inability to obtain regulatory approval, or the inability to meet conditions imposed for government or court approvals for the transaction; o the diversion of the attention of management and other key personnel; o the inability to effectively integrate an acquired business into Novell's culture, product and service delivery methodology and other standards, controls, procedures and policies; o the inability to retain the management, key personnel and other employees of an acquired business; o the inability to retain the customers of an acquired business; o the possibility that Novell's reputation will be affected by customer satisfaction problems of an acquired business; o potential known or unknown liabilities associated with an acquired business, including but not limited to regulatory, environmental and tax liabilities; o the write down of acquired identifiable intangibles, which may adversely affect Novell's reported results of operations; and o litigation which has or which may arise in the future in connection with such acquisitions. We Have Experienced Delays in the Introduction and Acceptance of New Products and Solutions Due to Various Factors As is common in the computer software industry, Novell has in the past experienced delays in the introduction of new products due to a number of factors, including the complexity of software products, the need for extensive testing of software to ensure compatibility of new releases with a wide variety of application software and hardware devices, and the need to "debug" products prior to extensive distribution. Novell could, in the future, experience the same difficulties in introducing new solutions. Significant delays in developing, completing or shipping new or enhanced products and solutions would adversely affect the Company. Moreover, the Company may experience delays in market acceptance of new releases of its products and solutions as the Company engages in marketing and education of the user base regarding the advantages and system requirements for new products and solutions, and as customers evaluate the advantages and disadvantages of upgrading. The Company has encountered these issues on each major new release of its products, and expects that it will encounter such issues in the future. Novell's ability to achieve desired levels of sales growth depends at least in part on the successful completion, introduction and sale of new versions of its products and sales of its solutions. There can be no assurance that the Company will be able to respond effectively to technological changes or new product announcements by others, or that the Company's research and development efforts will be successful. Should Novell experience material delays or sales shortfalls with respect to new product or solutions releases, the Company's sales and net income could be adversely affected. If Third Parties Claim that We Infringed Upon Their Intellectual Property, Our Ability to Use Some Technologies and Products Could Be Limited and We May Incur Significant Costs to Resolve these Claims Litigation regarding intellectual property rights is common in the Internet and software industries. Novell expects third-party infringement claims involving Internet technologies and software products and services to increase. If an infringement claim is filed against Novell, it may be prevented from using some technologies and may incur significant costs to resolve the claim. Novell has in the past received letters suggesting that it is infringing upon the intellectual rights of others, and it may from time to time encounter disputes over rights and obligations concerning intellectual property. Novell's products and services may be found to infringe on the intellectual property rights of third parties. In addition, Novell has agreed, and may agree in the future, to indemnify customers against claims that its products infringe upon the intellectual property rights of others. Novell could incur substantial costs in defending itself and its customers against infringement claims. In the event of a claim of infringement, Novell and its customers may be required to obtain one or more licenses from third parties. In such instances, Novell or its customers may not be able to obtain necessary licenses from third parties at a reasonable cost or at all. We May Not Be Able to Protect Our Confidential Information, Which May Adversely Affect Our Business The Company generally enters into contractual relationships with its employees that protect its confidential information. In the event that the Company's trade secrets or other proprietary information are misappropriated, the Company's business could be seriously harmed. In addition, the Company may not be able to timely detect unauthorized use of its intellectual property and take appropriate steps to enforce its rights. In the event the Company is unable to enforce these contractual obligations, its business could be adversely affected. We May Not Be Successful at Introducing New Technologies One goal of the Company is to achieve widespread acceptance and adoption of Novell's Net Services and e-solutions products, Directory Services ("NDS"), and the products and applications that take advantage of directory services. The Company's ability to achieve success with its Net Services and NDS solutions is dependent on a number of factors including, but not limited to, the following: development of key Net Services and directory products and upgrades, the acceptance of those products by large industry partners, the marketing of those products through appropriate channels of distribution, and the acceptance of those products in major accounts. The Company has only had limited success in introducing new technologies and there can be no assurance of success with Net Services or NDS solutions. Our Existing Product Sales May Deteriorate More Rapidly Than Sales of Our New Products Increase The Company has several existing products, which it has been selling and upgrading for many years. Technology shifts or competition could occur causing sales of these products to decline at a faster rate than the Company is able to increase sales of new products or technologies. Sales from Net Management Services decreased during the first six months of fiscal 2002 by 16.9%, resulting in overall declines in net product sales by 12.8% in the first six months of fiscal 2002 compared to the same period of fiscal 2001. We Face Increased Risks in Conducting a Global Business, Which May Damage Business Results Novell is a multi-national corporation with offices and subsidiaries around the world and, as such, it faces risks in doing business abroad that it does not face domestically. Certain aspects inherent in transacting business internationally could negatively impact the operating results of the Company, including: o costs and difficulties in staffing and managing international operations; o unexpected changes in regulatory requirements; o tariffs and other trade barriers; o difficulties in enforcing contractual and intellectual property rights; o longer payment cycles; o local political, social and economic conditions; o potentially adverse tax consequences, including restrictions on repatriating earnings and the threat of "double taxation"; and o fluctuations in currency exchange rates. Some of Our Short-term, Long-term, and Venture Capital Fund Investments Have Become Impaired. Additional Investments Could Become Impaired Novell's investment portfolio includes investments in public and private equity securities, small capitalization stocks in the high-technology industry sector, and funds managed by venture capitalists. Many of these investments have lost a significant portion of their value at least on a short-term basis, and possibly on a permanent basis. Additional investments may also lose value. During the first half of fiscal 2002, Novell recorded an impairment charge of $29.8 million related to some of the long-term investments in its portfolio whose market value had experienced an other-than-temporary decline. As of April 30, 2002, the Company had net unrealized gains on investments of approximately $1.0 million, net of taxes. However, there can be no assurances that these gains will be realized and that losses will not occur. Our Existing Relationships With Other Information Technology Services Organizations May Be Impaired Novell relies on existing relationships with information technology services organizations that recommend, design and implement solutions for their customers that include Novell Net services products. A change in the willingness of these information technology service organizations to do business with Novell could undercut Novell's efforts to become a solutions-based Net services software company. Our Business May Be Negatively Affected if We Do Not Continue to Adapt to Rapid Technological Change, Evolving Business Practices and Changing Consumer Requirements The software industry and Internet professional services market is characterized by rapidly changing technology, evolving business practices and changing client needs. Accordingly, Novell's future success will depend in part on its ability to continue to adapt and meet these challenges. Among the most important challenges facing the Company are the need to continue to: o effectively identify and use leading technologies; o develop strategic and technical expertise; o influence and respond to emerging industry standards and other technology changes and to orient management teams to capitalize on these changes; o recruit and retain qualified project personnel; o enhance current services; o develop new services that meet changing customer needs; and o effectively advertise and market services. Our Services Contracts Contain Pricing Risks Novell's Cambridge IT services business derives a significant portion of its sales from fixed-price, fixed-time contracts. Because of the complex nature of the services provided, it is sometimes difficult to accurately estimate the cost, scope and duration of particular client engagements. If the Company does not accurately estimate the resources required for a project, does not accurately assess the scope of work associated with a project, does not manage the project properly, or does not satisfy its obligations in a manner consistent with the contract, then the Company's costs to complete the project could increase substantially. The Company has occasionally had to commit unanticipated additional resources to complete projects, and it may have to take similar action in the future. The Company may not be compensated for these additional costs or the commitment of these additional resources. Our Cambridge IT Services Clients Can Cancel or Reduce the Scope of Their Engagements With Us on Short Notice If the Company's clients cancel or reduce the scope of an engagement with the Cambridge IT services business, the Company may be unable to reassign its professionals to new engagements without delay. Personnel and related costs constitute a substantial portion of the Company's operating expenses. Because these expenses are relatively fixed, and because the Company establishes the levels of these expenses well in advance of any particular quarter, cancellations or reductions in the scope of client engagements could result in the under-utilization of the Company's professional services employees, causing significant reductions in operating results for a particular quarter. Our Stock Price Will Fluctuate The Company's future financial results and stock price could be subject to significant volatility, particularly on a quarterly basis. Due to analysts' expectations of continued growth, any shortfall in earnings can be expected to have an immediate and significant adverse effect on the trading price of Novell's Common Stock in any given period. Sales fluctuations may also contribute to the volatility of the trading price of Novell Common Stock in any given period. In addition, the market prices for securities of software companies have been very volatile both recently and historically. The market price of Novell Common Stock, in particular, has been subject to wide fluctuations in the past. As a result of the foregoing factors and other factors that may arise in the future, the market price of Novell's Common Stock may be subject to significant fluctuations within a short period of time. These fluctuations may be due to factors specific to the Company, to changes in analysts' earnings estimates, or to factors affecting the computer industry or the securities markets in general. Item 3. Qualitative and Quantitative Disclosures About Market Risk The Company is exposed to financial market risks, including changes in interest rates, foreign currency exchange rates and marketable equity security prices. To mitigate some of these risks, the Company utilizes currency forward contracts and currency options. The Company does not use derivative financial instruments for speculative or trading purposes, and no derivative financial instruments were outstanding at April 30, 2002. Interest Rate Risk The primary objective of the Company's investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified short-term investments, consisting primarily of investment grade securities, substantially all of which either mature within the next 12 months or have characteristics of short-term investments. A hypothetical 50 basis point increase in interest rates would result in an approximate $0.7 million decrease (less than 0.5%) in the fair value of the Company's available-for-sale securities. Market Risk The Company also holds available-for-sale equity securities in its short-term investment portfolio. As of April 30, 2002, unrealized losses, before tax effect, on short-term public equity securities totaled $0.6 million. A 10% adverse change in prices of these short-term equity securities would result in an approximate $0.9 million decrease in the fair value of the Company's short-term investments. In addition, the Company invests in equity securities, included in its long-term portfolio of investments, for the promotion of business and strategic objectives. These investments are generally in small capitalization stocks in the high-technology industry sector, both public and private. Because of the nature of these investments, the Company is exposed to equity price risks. The Company typically does not attempt to reduce or eliminate its market exposure on these securities. A 10% adverse change in equity prices of long-term equity securities would result in an approximately $9 million decrease in the fair value of the Company's available-for-sale long-term securities. Foreign Currency Risk The Company uses forward contracts to hedge those net assets and liabilities that, when remeasured according to accounting principles generally accepted in the United States of America, impact the condensed consolidated statement of operations. All forward contracts entered into by the Company 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 foreign currency investments would generally be offset by corresponding losses and gains on the related hedging instruments, resulting in negligible net exposure to the Company. A large portion of the Company's sales, expense and capital purchasing activities are transacted in U.S. dollars. However, the Company does enter into transactions in other currencies, primarily European, Japanese yen and certain other Latin American and Asian currencies. To protect against reductions in value caused by changes in foreign exchange rates, the Company has established balance sheet hedging programs. Currency forward contracts are utilized in these hedging programs. When hedging balance sheet exposure, all gains and losses on forward contracts are recognized in other income and expense in the same period as the gains and losses on 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. The Company's hedging programs reduce, but do not always entirely eliminate, the impact of foreign currency exchange rate movements. If the Company did not hedge against foreign currency exchange rate movement, an adverse change of 10% in exchange rates would result in a decline in income before taxes of approximately $8 million. All of the potential changes noted above are based on sensitivity analyses performed on the Company's financial position at April 30, 2002. Actual results may differ materially. Part II. Other Information Except as listed below, all information required by items in Part II is omitted because the items are inapplicable or the answer is negative. Item 1. Legal Proceedings. The information required by this item is incorporated herein by reference to Footnote H of the Company's financial statements contained in Part I, Item 1 of this Form 10-Q. Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Stockholders on April 17, 2002 for the following purposes: 1. To elect seven directors. 2. To ratify the appointment of Ernst & Young LLP, as independent auditors for Novell, Inc. 3. To consider a Stockholder Proposal to amend the by-laws. The following tables set forth the outcome of the matters voted upon at the meeting: Proposal #1 Election of Directors Votes For Votes Withheld Jack L. Messman 306,304,419 9,716,431 Elaine H Bond 308,765,633 7,255,217 Richard L. Nolan 308,939,868 7,080,982 John W. Puduska, Sr. 310,642,017 5,378,833 James D. Robinson, III 307,316,083 8,704,767 Larry W. Sonsini 307,199,098 8,821,752 Carl J. Yankowski 308,558,250 7,462,600 Proposal #2 To ratify the appointment of Ernst & Young LLP, as independent auditors for Novell, Inc. Votes For Votes Against Votes Abstained Broker Non-votes 308,617,076 5,962,835 1,440,939 --
Proposal #3 To consider a Stockholder Proposal to amend the by-laws. Votes For Votes Against Votes Abstained Broker Non-votes 52,042,753 144,633,932 4,130,836 161,828,422
Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number Description 10.1 Key Employment Agreement dated as of January 30, 2002 between Novell, Inc. and Chris Stone. (b) Reports on Form 8-K. Notice of Novell's scheduled report of fourth quarter results and related conference call to be held on February 28, 2002, as filed February 5, 2002 under Item 5. Notice of the departure of an executive officer of Novell and the appointment of a new executive officer of Novell, as filed February 26, 2002 under Item 5. Agreement and Plan of Merger dated as of June 9, 2002 by and among Novell, Delaware Planet Inc., a Delaware corporation and a wholly-owned subsidiary of Novell and SilverStream Software, Inc., a Delaware corporation, as filed June 10, 2002 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 14, 2002 /s/ Ronald C. Foster -------------------- Ronald C. Foster Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) EX-10 3 ex10-1.txt KEY EMPLOYMENT AGREEMENT EXHIBIT 10.1 Novell, Inc. January 30, 2002 Mr. Chris Stone 12 Old Meadow Lane Harvard, MA 01451 Dear Chris, On behalf of Novell, Inc. ("Novell"), I am pleased to offer you the position of Vice Chairman-Office of the Chief Executive Officer of Novell (the "Vice Chairman"). Your responsibilities as the Vice Chairman are more fully described in the attached Schedule 1. In this role you will report to Jack Messman, Chairman and Chief Executive Officer of Novell. I am eager to see the results of your contribution to Novell as you offer your considerable talents and abilities--and hope that we in turn enrich your career and contribute to the fulfillment of your professional goals. Your gross annual base salary, exclusive of bonuses, commissions and other incentive pay, will be $600,000.00. This amount will be paid in installments in accordance with Novell's standard payroll practices (less applicable withholding). In addition to your base salary, you will be eligible to participate in Novell's bonus program which this year will be paid quarterly. To participate in the quarterly bonus program, you must be employed for the entire quarter for which that bonus applies. Your bonus will be based on company operating profit and individual objectives established between yourself and Jack. Your annualized target bonus will represent 100% of your base salary for the first 12 months, of which 50% will be guaranteed. To demonstrate our desire for you to begin employment by March 1, 2002, Novell will pay you a sign-on bonus of $350,000.00 (less applicable withholding). This amount will be paid within three weeks of your first date of employment. If you voluntarily terminate your employment with Novell within the first 12 months of the day that your employment commences, you agree that you will repay Novell a pro-rated portion of the sign-on bonus. You will also be granted shares of Novell restricted stock and a non-qualified stock option to purchase shares of Novell common stock. These grants are more fully described in the attached Schedule 2. In addition to the foregoing, you will be eligible to participate in the Novell, Inc. Senior Management Severance Plan (the "Plan"). Schedule 3 more fully explains your participation in the Plan. A copy of the Plan is also included in this offer letter for your reference. Novell also offers an outstanding benefit package, which we view as an important part of our compensation program. This full range benefit program includes: four weeks of vacation, life, medical, dental and disability insurance. Details regarding these benefits are provided to you in the attached Novell 2002 Flexware Comparison Chart. Other terms that apply to this offer are set forth in the attached Schedule 4: Your expected start date will be March 1, 2002. Federal employment laws require that you provide verification of your eligibility to work in the United States before you start employment. Please review the I-9 instructions and bring the appropriate identification necessary to complete the form on your first day of employment. If you accept this offer of employment, you acknowledge and agree that the rights and obligations under this offer letter and its attached schedules and exhibit (the "Offer Letter") shall survive the termination of your employment with Novell for any reason and shall be binding upon your heirs, executors, administrators and legal representatives. This Offer Letter, upon its acceptance by you, is binding on Novell's successors and assigns, and all covenants in this Offer Letter shall inure to the benefit of and be enforceable by said successors or assigns. The interpretation, performance and enforcement of this Offer Letter shall be governed by and construed in accordance with, the laws of the Commonwealth of Massachusetts, without reference to conflicts of laws principles. In addition, you agree that any dispute, claim or proceeding arising out of or relating to this Offer Letter shall be commenced and maintained in any state or federal court in the Commonwealth of Massachusetts and you submit to the exclusive venue and jurisdiction of such court. The language of all parts of this Offer Letter shall be construed as a whole according to its fair meaning and shall not be construed strictly either for or against either party. Moreover, the terms "and," and "or" shall both mean "and/or." You acknowledge and agree that your acceptance of the provisions set forth in this Offer Letter are a material inducement to Novell's agreement to grant restricted stock and stock options to purchase Novell's common stock. You agree that the restrictions contained in this Offer Letter are necessary for the protection of the business and goodwill of Novell and you consider them to be reasonable for such purpose. You also acknowledge and agree that upon your acceptance of this offer of employment that any breach or threatened breach of any provision of this Offer Letter will cause Novell substantial and irrevocable damage and monetary damages would be inadequate to compensate Novell and, in addition to any other remedies or rights it may have, Novell shall be entitled to seek an injunction and all other available equitable relief to enforce the terms of this Offer Letter. You further acknowledge and agree that the provisions in this Offer Letter are necessary to protect Novell's interests and are reasonable under the circumstances, given that Novell conducts business worldwide and that a competitive business may be carried out anywhere in the world as a result of advanced communications technology. Each provision herein shall be treated as a separate and independent clause, and the unenforceability of any one clause shall in no way impair the enforceability of any of the other clauses of the Offer Letter. If any provision of this Offer Letter shall for any reason be held to be excessively broad as to length of time, scope, range of activities, geographic area or otherwise so as to be unenforceable at law, such provision(s) shall be reformed and construed by the appropriate judicial body to the fullest extent enforceable, and the remaining provisions of this Offer Letter will not be affected. This Offer Letter will remain valid through March 1, 2002. Please signify acceptance of this offer by signing the "Acceptance and Acknowledgment" attached to this Offer Letter, as well as Novell's Intellectual Property Agreement, Novell's Conflicts Disclosure Form, and the Licensing of Technology Transfer Questionnaire, all of which are enclosed. Return the signed copies of these documents to Novell Human Resources c/o Alan Friedman (at 8 Cambridge Center, Cambridge, MA 02142) in the enclosed pre-addressed envelope, and retain any copies for your files. Please understand that your employment with Novell constitutes at-will employment. Again, we look forward to your joining Novell. If you have questions or wish to discuss this offer, please contact me. Sincerely, Alan J. Friedman Senior Vice President, People ACCEPTANCE AND ACKNOWLEDGMENT I accept the offer of employment from Novell as set forth in the offer letter dated January 30, 2002, together with its attached schedules (the "Offer Letter"). I understand and acknowledge that my employment with Novell is for no particular duration and is at-will, meaning that Novell or I may terminate the employment relationship at any time, with or without cause and with or without prior notice. Additionally, I acknowledge that this offer of employment is contingent upon successful completion of a background check which is currently in progress and, if applicable, upon authorization in the form of an export license from the U.S. Dept. of Commerce, Bureau of Export Administration, Office of Export Licensing or the U.S. Department of State, Office of Defense Trade Controls. I understand and agree that the terms and conditions set forth in the Offer Letter represent the entire agreement between Novell and me superseding all prior negotiations and agreements, whether written or oral. I understand that the terms and conditions described in the Offer Letter are the terms and conditions of my employment. No one other than Novell's Senior Vice President of People or the CEO of Novell is authorized to enter into any employment or other agreement that modifies the terms of the Offer Letter, and any such modification must be in writing and signed by either such executive. In addition, I understand that any promotions, increases in compensation and/or offers regarding other positions must be in writing and signed by my manager and the appropriate individual in the Human Resources Department. I understand that Novell may modify benefits as well as other plans and programs from time to time as it deems necessary. As an employee of Novell I understand and agree that I will be bound to abide by the company's policies and procedures. Signature Chris Stone Date Schedule 1 to Chris Stone offer letter of January 30, 2002 As Vice Chairman-Office of the Chief Executive Officer of Novell, Inc., you will have responsibility for following areas within Novell: 1. Research & Development 2. Marketing (including Product Marketing, Outbound Marketing, and Marcom) 3. Alliances 4. Novell Technical Services (Novell Customer Services and Education) 5. Solutions Development 6. Consulting (Functional Leadership) 7. Industry Analysts 8. Chief Technology Officer At an appropriate time, Novell will separate the Information Technology Department from the financial function and have it report to you. Novell's organizational structure will need to change to accommodate these reporting relationships. Novell will endeavor to make these organizational changes as quickly as possible upon your arrival. Schedule 2 To Chris Stone Offer Letter of January 30, 2002 Grant of Novell Restricted Stock Upon the commencement of your employment with Novell, you will be granted 200,000 shares of Novell restricted stock according to the following vesting schedule: o 10% on the first annual anniversary date of the grant o 10% on the second anniversary date of the grant o 80% on the third anniversary date of the grant Grant of Non-Qualified Novell Stock Option Upon the commencement of your employment with Novell, you will be granted a non-qualified stock option to purchase 600,000 shares of Novell common stock at an exercise price equal to the fair market value (as determined in accordance with the applicable Novell stock plan) of the stock on your first day of employment. Your option will vest according to the following schedule: o 25% on the first annual anniversary date of the grant, and thereafter the remaining 75% in equal monthly installments over the next three years so that this grant will be fully vested on the fourth anniversary of your date of grant Both the grant of restricted stock and the non-qualified stock option are subject to you executing the appropriate documentation that will confirm the action taken by the Compensation Committee of the Novell Board of Directors in connection with these grants. The Shareholder Services Department will provide you with this documentation upon the commencement of your employment. Schedule 3 to Chris Stone Offer Letter of January 30, 2002 You will be able to participate in the Novell, Inc. Senior Management Severance Plan (the "Plan") and you will be eligible for the benefits provided under the Plan subject to the following specific clarifications: 1. With respect to your severance payment, as described under Article IV A.1.of the Plan, it will be 18 months of your base salary. 2. With respect to your non-compete and non-solicit covenant, as described in Article VII A. and B. of the Plan respectively, the time period associated with each is (i) 18 months in the case of an involuntary termination other than for cause and other than following a change in control, and (ii) 24 months in the case of an involuntary termination following a change in control. Schedule 4 to Chris Stone Offer Letter of January 30, 2002 You recognize that it is important to protect the rights to property, trade secrets and confidential information and any related rights belonging to Novell, including its predecessors and successors, and its past and present subsidiaries, business units, divisions and Affiliated Companies ("Novell"). "Affiliated Companies" of Novell will be companies directly or indirectly controlling, controlled by or under common control with Novell, Inc. A Company is controlled by ownership of more than 50% of shares entitled to vote for directors or persons performing a similar function, or by actual control of the Board of Directors. As such, in consideration and as a condition of your initial and continued employment with Novell and the additional benefits associated therewith, you agree as follows: Confidential Information: At all times, whether during or after termination (for any reason) of your employment with Novell, you will keep in strictest confidence and trust Novell's Confidential Information (defined below), including that which you create. Except as may be necessary to perform your duties for Novell or except with prior written permission of the CEO of Novell, you will not, directly or indirectly, disclose to any person or entity, or use or permit to be used, any Confidential Information. Novell Property: You agree that all Novell Property (defined below) shall be and remain the sole and exclusive property of Novell. You agree that during your employment you shall not make, use or permit to be used any Novell Property except for the benefit of Novell. You further agree that after termination of your employment with Novell for any reason, you will not use, or permit others to use, any Novell Property. Upon termination of your employment with Novell for any reason, you will immediately surrender to Novell all Novell Property in your possession, custody or control. Disclosure and Assignment of Inventions: You will fully and promptly disclose to Novell and no one else all Inventions (defined below) generated, authored, conceived, discovered, developed or reduced to practice or learned by you, either alone or jointly with others, while you are employed by Novell. You agree that all Inventions are and will be the sole and absolute property of Novell (and its assigns), as works made for hire or otherwise. To the extent any Inventions are not or are deemed not to be works made for hire, you hereby assign to Novell any and all rights, title and interest (including but not limited to, tangible and intangible rights such as patents, copyrights, trademarks, trade secrets, licensing and publishing rights) that you now have or may acquire in and to all Inventions, benefits and rights relating thereto, domestic or foreign. You hereby waive all claims to moral rights you may have in Inventions. You agree that you will sign all papers, including, without limitation, copyright applications, patent applications, declarations, oaths, formal assignments, assignment of priority rights, and powers of attorney, which Novell may deem necessary or desirable in order to protect its rights and interests in any Invention. You further agree to assist Novell in every reasonable way, both during and after your employment with Novell (at Novell's expense), to obtain, maintain and from time to time enforce patents, copyrights, trademarks, trade secrets, mask work, and other rights and protections relating to Inventions. Prior Inventions: If, before employment with Novell, you created any Inventions that you wish not to be subject to this Schedule 4, then all such Inventions must be identified in the attached Exhibit A. Your failure to attach such Exhibit A to this Schedule 4 and to sign your initials on the next line constitutes your representation that you have made no such Inventions by the time you signed this Schedule 4. Non-Solicitation: While you are employed by Novell and for a two-year period after voluntary termination of your employment for any reason, you will not, without prior written permission from the CEO of Novell, directly or indirectly (whether alone or as a partner, joint venturer, consultant, officer, director, investor, employee, agent, or independent contractor), whether for yourself or on behalf of any other person or entity, actually or attempt to: (a) Solicit (defined below) any Employee (defined below) to become employed or retained by any person or entity other than Novell; retain, employ or hire any Employee; or induce, encourage, persuade or cause any Employee to terminate employment with Novell for any reason. (b) accept employment with a competitor of Novell in which you knowingly interfere with contracts or related follow-on business in effect at the time of your termination between Novell and its customers and/or partners. (c) knowingly permit any person or entity that employs you or that is directly or indirectly controlled by you to engage in any of the conduct prohibited by this Non-Solicitation section. No Conflicting Obligations: You represent that you have no interest or obligation that is inconsistent or in conflict with this Schedule 4, or that may prevent, limit or impair your performance of any part of this Schedule 4. You agree to notify Novell immediately if any such interest or obligation arises. You also represent that you will not bring with you or disclose to Novell, or use in the performance of your responsibilities at Novell, any confidential information not generally available to the public of a former employer or any other party, unless you have obtained written authorization for its possession and use. You also agree that, during your employment by Novell, you shall abide by any confidentiality obligations you may owe to any former employer or other party. You also agree and represent that you are not bound by any valid agreement or obligation of non-competition or non-solicitation to any former employers or other parties. Employee At-Will: Your employment is "at-will" and, as such, Novell or you may terminate your employment for any reason at any time. There are no representations or promises that your employment either will continue for a specific period or be terminated only under particular circumstances. Definitions: The terms used in this Schedule 4 have the following meaning: (a) "Confidential Information" means all information and know-how, whether or not in writing, of a private, secret or confidential nature concerning the Company's business or financial affairs and includes, but is not limited to, the following: any and all versions of Novell's computer software and documentation and all other software, hardware, algorithms, schematics, source documents, engineering, strategic and tactical plans, documentation and information created, developed, produced or distributed by Novell; Novell's business methods and practices and all other data or information concerning Novell's business; the corporate data repository known as "Knowledgeworks" or as it may later be known, and all the information and data contained therein, including without limitation templates, methodologies, handbooks, matrices and client deliverables; names, addresses, business information, contacts, requirements and lists of all Novell actual or potential suppliers, customers and partners, and the nature of Novell's relationships with such persons or entities; sales, strategic, tactical, business, financial or marketing plans, budgets, reports, projections and other information; information regarding compensation, employees' performance and all other personnel-related matters; confidential, proprietary or trade secret information provided to Novell by its potential or actual customers, suppliers, partners, employees, consultants, co-venturers or other third parties; and any other information not generally known to the public (including information about Novell's operations, finances, products or services) that Novell maintains or otherwise considers as confidential. (b) "Novell Property" includes, but is not limited to the following: all originals and copies (in whatever form) of Confidential Information and Inventions, and any and all notes, data, notebooks, memoranda, lists, records, reports, drawings, sketches, specifications, computer programs, designs, graphics, architectures, frameworks, devices and models (or portions of any of them), passwords, codes, personal computers, laptops, fax machines, scanners, copiers, printers, tools, cd-roms, diskettes, intangible information stored on diskettes, pagers, cellular phones, credit cards, telephone charge cards, manuals, building keys and passes, access cards, parking passes, and any documentation or other materials of any nature, whether written, printed, electronic or in digital format or otherwise, relating to any matter concerning Novell's business and any other Novell Property in my possession, custody or control. (c) "Employee" shall mean any employee of Novell, or any person whose employment with Novell terminated (for any reason) within six months of any activity prohibited by subsection (a) of the Non-Solicitation section. (d) "Inventions" includes, but is not limited to, the following: all discoveries, developments, designs, improvements, inventions, formulae, processes, methods, works of authorship, articles, books, manuals, techniques, computer software or hardware programs, strategies, trade secrets, know-how and data, whether or not patentable or registerable, and all work product (by me or anyone else) relating thereto, that (a) relate to research or development activities or the business of Novell or any actual or potential customer, partner or supplier of Novell; or (b) result from tasks assigned to you by Novell; or (c) result from use of premises or personal property (whether tangible or intangible) owned, leased, contracted for or controlled by Novell. (e) "Solicit" includes, without limitation, any and all involvement by you in any communications or contacts with any Employee or Customer/Partner (or any person or entity on his/her/its respective behalf), regardless of whether or not you make the first contact, concerning (i) with respect to subsection (a) of the Non-Solicitation Section: potential employment, terms and conditions of employment or job opportunities with any person or entity other than Novell; and (ii) with respect to subsection (b) of the Non-Solicitation Section, the potential performance of services, conduct of business or forming of relationships with any person or entity other than Novell. In addition, "solicit" for purposes of subsection (a) of the Non-Solicitation Section also includes your involvement in any manner in any interviewing, recruiting or hiring processes that may involve an Employee. The above terms/modifications of this Schedule 4 supersede all prior or contemporaneous agreements, representations or understandings, written or oral, by or between Novell and you concerning the subject matter set forth in this Schedule 4, and shall constitute the only agreement between the parties concerning such subject matter. This Schedule 4 may only be modified by a court of competent jurisdiction or a written agreement signed by you and an executive vice president of Novell. Novell's waiver of any default of you shall not constitute a waiver of its rights under this Schedule 4 with respect to any subsequent default by you. Exhibit A to Schedule 4 Disclosure of Prior Inventions (If applicable, please provide information below) -----END PRIVACY-ENHANCED MESSAGE-----