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(Registrant’s telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
Title of Each Class
Name of Each Exchange on Which
Registered
Common Stock, par value $.10 per share
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
The aggregate market value of the registrant’s common stock
held by non-affiliates as of April 30, 2007 (based on the
last reported sales price of the common stock on the NASDAQ
Global Select Market on such date) was $1,773,283,464. For
purposes of this disclosure, shares of common stock held by
persons who hold more than 5% of the outstanding common stock
and common stock held by executive officers and directors of the
registrant have been excluded because such persons are deemed to
be “affiliates” as that term is defined under the
rules and regulations promulgated under the Securities Act of
1933. This determination is not necessarily conclusive for other
purposes.
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or non-accelerated
filer. See definition of accelerated filer and large accelerated
filer in
Rule 12b-2
of the Exchange Act)
Large Accelerated
Filer þ Accelerated
Filer o Non-Accelerated
Filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act) Yes o No þ
Portions of Proxy Statement for the fiscal 2008 Annual Meeting
of Shareholders are incorporated by reference into Part III
of this report to the extent described herein.
This Annual Report on
Form 10-K
contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements, other than statements of historical
fact, regarding our strategy, future operations, financial
position, estimated revenue, projected costs, projected savings,
prospects, plans, opportunities and objectives constitute
“forward-looking statements.” The words
“may,”“will,”“expect,”“plan,”“anticipate,”“believe,”“estimate,”“potential,” or
“continue” and similar types of expressions identify
forward-looking statements, although not all such statements
contain these identifying words. These forward-looking
statements are based upon information that is currently
available to us
and/or
management’s current expectations, speak only as of the
date hereof, and are subject to risks and uncertainties. We
expressly disclaim any obligation, except as required by law, or
undertaking to update or revise any forward-looking statements
contained or incorporated by reference herein to reflect any
change or expectations with regard thereto or to reflect any
change in events, conditions, or circumstances on which any such
forward-looking statement is based, in whole or in part. Our
actual results may differ materially from the results discussed
in or implied by such forward-looking statements. We are subject
to a number of risks, some of which may be similar to those of
other companies of similar size in our industry, including
pre-tax losses, rapid technological changes, competition,
limited number of suppliers, customer concentration, failure to
successfully integrate acquisitions, adverse government
regulations, failure to manage international activities, and
loss of key individuals. Risks that may affect our operating
results include, but are not limited to, those discussed in
Part I Item 1A, titled “Risk Factors.”
Readers should carefully review the risk factors described in
this document and in other documents that we file from time to
time with the Securities and Exchange Commission.
PART I
Item 1.
Business
The
Company
We are a global infrastructure software and services company. We
develop, implement, and support proprietary, mixed source and
open source software for use in business solutions by providing
our customers with enterprise infrastructure software and a full
range of training and support services. We help customers lower
costs, manage complexity and mitigate risk, allowing them to
focus on business innovation and growth. Our products enable
customers to solve business challenges by maximizing the
effectiveness of their information technology (“IT”)
environments.
We were incorporated in the State of Delaware on
January 25, 1983 and have established a reputation for
innovation and industry leadership. We currently have
approximately 4,100 employees in over 70 offices worldwide.
Our singular focus is providing global leadership in
enterprise-wide, desktop to data center operating systems based
on Linux and open source, and the software required to secure
and manage mixed IT environments. We enable customers to build
their own ‘Open Enterprises by adding the strength,
flexibility and economy of open source software to their
existing IT infrastructures. We offer an open source platform
along with fully integrated identity, security, and systems
management solutions. Our specific offerings include identity
and access management products, a portfolio of systems
management products led by our
ZENworks®
suite of offerings, and workgroup products, including
SUSE®
Linux Enterprise Server (“SLES”), Open Enterprise
Server,
NetWare®,
and collaboration products on several operating systems,
including Linux, NetWare, Windows, and UNIX. These technologies
allow us to help our customers manage both our open source
platform and the other heterogeneous components of their IT
infrastructures. By delivering these solutions to our customers,
either directly or through our global network of partners, we
are able to help customers achieve increased performance from
their IT infrastructure at a reduced cost.
To best align our business with our strategy, in the first
quarter of fiscal 2007 we re-organized our company into four
product-related business units and a business consulting unit.
This is a change from our prior practice of reporting along
geographic segments. Our business unit segments are Open
Platform Solutions, Identity and Security Management, Systems
and Resource Management, and Workgroup. They are described below
in more detail. All of the groups within our business consulting
segment, which included our Swiss-based consulting unit, our
U.K.-based Salmon Ltd. (“Salmon”) business consulting
unit, and our Japan consulting group, have been divested or are
in the process of being divested as of the end of fiscal 2007
since they were not part of our core business.
Open Platform Solutions. We deliver Linux
solutions for the enterprise, and the SUSE Linux Enterprise
platform underpins all of these products. SUSE Linux Enterprise
is a leading distribution that focuses considerable effort on
interoperability and virtualization within both open source and
proprietary systems and provides ease in usability and
management. Our primary open platform solutions offerings are:
Linux platform products:
•
SUSE Linux Enterprise Server is an enterprise-class, open source
server operating system for professional deployment in
heterogeneous IT environments of all sizes and sectors. This
operating system integrates all server services relevant in
Linux, including integrated virtualization, and constitutes a
stable and secure platform for the cost-efficient operation of
IT environments.
•
SUSE Linux Enterprise Desktop is a business desktop product that
brings together the Linux operating environment with a complete
set of office applications. Included among the more significant
business applications are OpenOffice (an office productivity
suite), Mozilla’s Firefox browser, and Novell
Evolutiontm,
a collaboration client for Linux.
Other open platform products:
•
openSUSE®
is a reliable and secure home computing product, which includes
an easy-to-install Linux operating system that lets users browse
the Web, send
e-mail, chat
with friends, organize digital photos, play movies and songs,
and create documents and spreadsheets. It also allows users to
host a Web site or blog, create a home network and develop their
own applications.
•
SUSE Engineering is product development work we perform for
customers.
Identity and Security Management. Our
security, identity, and access management solutions help
customers integrate, secure and manage information assets as
well as reduce complexity and ensure compliance. Adding
intelligence to every part of a customer’s IT environment
makes their systems more agile and secure. Our solutions
leverage automated, centrally managed policies to support the
enterprise. Our partners’ expertise, experience and
technology provide some of the most comprehensive information
security solutions in the industry today. Our primary identity
and security management offerings are:
Identity and access management products:
•
Identity Manager is a powerful data-sharing and synchronization
solution, often referred to as a meta-directory solution,
which automatically distributes new and updated information
across every designated application and directory on a network.
This ensures that trusted customers, partners, and suppliers are
accessing consistent information, regardless of the applications
and directories to which they have access.
•
Access
Manager®
helps customers maximize access without limiting security or
control. It simplifies and safeguards online asset-sharing,
allowing customers to control access to Web-based and
traditional business applications. Trusted users gain secure
authentication and access to portals, Web-based content and
enterprise applications while IT administrators gain centralized
policy-based management of authentication and access privileges
for Web-based environments and enterprise applications. Access
Manager supports a broad range of platforms and directory
services.
SecureLogin is a directory-integrated authentication solution
that delivers reliable, single sign-on access across
multi-platform networks, simplifying password management by
eliminating the need for users to remember more than one
password.
•
Sentineltm
automates the monitoring of IT for effectiveness allowing users
to detect and resolve threats in real-time. Sentinel also
provides documented evidence needed by some users to comply with
regulatory and industry compliance requirements.
Other identity and security management products:
•
Novell® eDirectorytm
is a full-service, platform-independent directory that
significantly simplifies the complexities of managing users and
resources in a mixed Linux, NetWare, UNIX, and Windows
environment. It is a secure, scalable, directory service that
allows organizations to centrally store and manage information
across all networks and operating systems and leverage existing
IT investments.
Systems and Resource Management. With our
resource management solution, customers can define business and
IT policies to automate the management of multiple IT resources,
including the emerging challenge of managing virtual
environments. As a result, customers reduce IT effort, control
IT costs, and reduce IT skill requirements to fully manage and
leverage their IT investment. Our primary systems and resource
management offerings are ZENworks management products.
ZENworks management products protect the integrity of networks
by centralizing, automating, and simplifying every aspect of
network management, from distributing vital information across
the enterprise to maintaining consistent policies on desktops,
servers, and devices on Linux, NetWare, and Windows
environments. ZENworks management products include:
•
ZENworks Suite
•
ZENworks Patch Management
•
ZENworks Asset Management
•
ZENworks Linux Management
•
ZENworks Configuration Management
•
ZENworks Orchestrator
•
ZENworks Security Management
Workgroup. We provide comprehensive and
adaptable workgroup solutions that provide all the
infrastructure, services and tools customers require to
effectively and securely collaborate across a myriad of devices.
We offer the security, reliability, and manageability our
customers’ employees need to efficiently get their jobs
done at lower cost. Our primary workgroup products are:
•
Open Enterprise Server (“OES”) is a secure, highly
available suite of services that provides proven networking,
communication, collaboration and application services in an
open, easy-to-deploy environment. OES provides customers the
choice of deploying on either NetWare or SUSE Linux Enterprise
Server and provides common management tools, identity-based
services and support backed by Novell.
•
NetWare and other NetWare-related products:
•
NetWare is our proprietary operating system platform that offers
secure continuous access to core network resources such as
files, printers, directories,
e-mail and
databases seamlessly across all types of networks, storage
platforms and client desktops.
•
Novell Cluster
Servicestm
is a scalable, highly available Storage Area Network resource
management tool that reduces administrative costs and complexity
of delivering uninterrupted access to information and resources.
GroupWise®
collaboration products offer both traditional and mobile users
solutions for communication over intranets, extranets and the
Internet.
•
Teaming + Conferencing allows for social networking within an
enterprise where subject matter experts are easily identified
and where new team workspaces can be easily formed.
•
Other workgroup products:
•
BorderManager®
is a suite of network services used to connect a network
securely to the Internet or any other network, allowing outside
access to intranets and user access to the Internet.
•
Novell Open Workgroup Suite provides organizations of all sizes
with a secure, flexible and cost-effective IT infrastructure and
a proven set of workgroup services. Unlike a proprietary,
Windows-centric solution, the Novell Open Workgroup Suite is
comprised of a package of open, standards-based software from
all business segments. This suite offers a low-cost, open
alternative to Microsoft and includes a complete infrastructure
and productivity solution from the desktop to the server and
includes the following components:
•
Open Enterprise Server
•
GroupWise
•
ZENworks Suite
•
SUSE Linux Enterprise Desktop — open source desktop
•
OpenOffice.org for Linux and Windows — open source
productivity suite
In addition to our technology offerings, within each of our
product business units, we offer a worldwide network of
consultants, trainers, and technical support personnel to help
our customers and partners best utilize our software. We also
have partnerships with application providers, hardware and
software vendors, and consultants and systems integrators. In
this way we can offer a full solution to our customers.
•
Professional services: We provide technical expertise to
deliver world-class infrastructure solutions, based on an
innovative approach focused on solving our customers’
business problems. We deliver services ranging from discovery
workshops to strategy projects to solution implementations, all
using a consistent, well-defined methodology. Our professional
services approach is based on a strong commitment to open
standards, interoperability, and the right blend of technology
from Novell and other leading vendors.
•
Technical support: We provide phone-based, web-based, and
onsite technical support for our proprietary and open source
products through our Premium Service program. Premium Service
provides customers with the flexibility to select the
appropriate level of technical support services, which may
include stated response times, around-the-clock support, service
account management, and dedicated resources, such as
Novell’s most experienced engineers. The Dedicated Support
Engineer, Primary Support Engineer, Advantage Support Engineer,
and Account Management programs allow customers to build an
ongoing support relationship with Novell at an appropriate level
for their needs. We have committed a significant amount of
technical support resources to the Linux open source platform.
We also offer a full array of remote monitoring services and
managed services. These services help customers increase system
uptime, leveraging our experts to monitor and maintain the
technologies our customers have employed.
•
Training services: We accelerate the adoption and enable
the effective use of our products and solutions through the
delivery of timely and relevant instructor-led and
technology-based training courses, assessments and performance
consulting services. Programs are delivered directly to
customers and through our global channel of authorized Novell
training partners. Our courses provide customers with a thorough
understanding of the implementation, configuration, and
administration of our products and solutions. Additionally, we
offer performance consulting services that provide clients and
partners with an evaluation
of their proficiencies and their knowledge gaps. We also deliver
Advanced Technical
Trainingtm
at an engineer level to customers and partners on a global basis.
Strategy
We offer customers enterprise infrastructure software in a
flexible combination of open source, mixed source and
proprietary technologies. We also offer a full range of
high-quality services to ensure customer success in their
deployments of our solutions. Our strategy is to offer customers
a compelling open source computing platform, along with
integrated systems, security, and identity solutions, and
workgroup products. By offering these technologies and services,
and showing customers how they can easily manage both our
platform and the other heterogeneous components of their IT
infrastructures, we will help them drive increased IT
effectiveness while lowering cost, complexity and risk. Deployed
either directly or through our global network of partners,
Novell solutions enable customers to spend more of their time,
energy, and resources focused on driving their own businesses
forward.
Our strategy is to create products that enable our customers to
secure, manage, simplify, and integrate their heterogeneous IT
environments at low cost, while ensuring the products are easy
to implement, deploy and maintain. A key component of our
strategy is to ensure that critical Novell product functions
work on the Linux platform. We pursue our strategy through five
key areas as follows:
Product
Strategy
Our overall products and services strategy is two-fold. First,
we offer products and services that will help to broaden and
accelerate enterprise adoption of Linux in general, and SUSE
Linux Enterprise in particular. We plan to leverage this
broadening base of Linux implementations as a foundation upon
which we will sell our enterprise infrastructure software
offerings, which is the second part of our strategy.
A key enabling element of this strategy is for us to continue to
deliver innovative, open source and open standards-based
products that are easy to deploy, simple to operate, and highly
reliable and scalable. By doing so, we will empower IT
executives to create more robust computing environments at a
lower cost of operation.
With regard to Linux adoption, we plan to continue our strong
support of the open source development community, and of the
many open source organizations and projects to which we
presently contribute. We also plan to continue to use our
significant engineering and support resources to encourage
customers to adopt Linux. One way we can accomplish this is to
develop and sell key product functions that operate on the Linux
platform.
To support the second part of our two-fold strategy —
driving sales of enterprise infrastructure software —
our plan is to continue developing and delivering role-based,
policy-driven identity management solutions, systems and
resource management solutions, and workgroup solutions. Our
design approach involves creation of sets of open
standards-based, discrete software products that are easy for
customers to implement and that quickly deliver
value — without further dependence on proprietary
software. We use our enterprise infrastructure software as a
basis for establishing and maintaining long-term strategic
relationships with key customers.
Where appropriate, we also intend to augment our offerings and
delivery capabilities through acquisitions. Taken together, we
believe the success of these key strategies will provide lasting
benefits to our customers and stockholders alike.
Professional
Services Strategy
Our professional services strategy is to focus our IT consulting
and training expertise on identity-driven solutions and open
source software adoption, and to provide a full range of support
services for all our proprietary, mixed source and open source
products.
Alliances
and Partnership Strategy
We partner with industry leaders in the software, hardware,
consulting, and system integration industries to bring to market
our solution offerings. We believe that a well-managed and
supported partnership portfolio is
critical to our success in today’s competitive solutions
market and helps increase our revenue and customer reach. Our
business partner strategy is based on having a single partner
program with a goal of providing consistent interactions with
Novell focused on technology enablement, certification, joint
marketing, and sales initiatives.
To ensure partner efficiency, we have developed a partner
ecosystem that combines our knowledge, services and solutions
with that of our partners’ to provide customers the ability
to adapt to, and profit from, the opportunities that open source
and identity bring to businesses. We become the foundation for
the ecosystem, providing technology, programs, resources, and
skills to create solutions and ensure that customers get the
functionality and business value required to improve the bottom
line results of their businesses.
During fiscal 2007, we entered into a partnership with
Microsoft. The overarching purpose of this partnership is to
increase the utility, desirability and penetration of Linux by
enabling its interoperation with Windows to a mixed environment
that is easier to maintain. We believe that this partnership
will help us deliver differentiated value to customers by giving
them greater flexibility and effectiveness in their IT
environments. The partnership consists of four related
agreements:
•
Development of technologies to optimize SLES and Windows, each
running as guests in a virtualized setting on the other
operating system;
•
Development of management tools for managing heterogeneous
virtualization environments, to enable each party’s
management tools to command, control and configure the other
party’s operating system in a virtual machine environment;
•
Development of translators to improve interoperability between
Microsoft Office and OpenOffice document formats; and
•
Collaboration on improving directory and identity
interoperability and identity management between Microsoft
Active Directory software and Novell eDirectory software.
Additionally, during fiscal 2007, Novell and Microsoft announced
a collaboration to deliver
Moonlighttm,
a Silverlight-compatible framework-based technology for hosting
Silverlight interactive applications on Linux. Silverlight is a
cross-browser, cross-platform plug-in for delivering richer user
experiences on the Web.
We believe that this partnership 1) addresses pressing,
industry-wide issues, 2) puts customers’ needs first, and
3) creates financial and strategic benefits for us.
In addition to Microsoft, our alliance partners include: IBM,
HP, Dell, Inc., Lenovo, Intel Corporation, Oracle Corporation,
SAP AG, Advanced Micro Devices, Inc., Veritas, Computer
Associates International, Inc., EMC, Adobe Systems, Inc.,
Capgemini, EDS and Accenture. These partners are all members of
the Novell
PartnerNet®Program and gain value through participating in different
partner tracks. Solution providers gain access to various
marketing programs that help drive sales volumes. Technology
partners receive solution developer toolkits and services that
ensure successful enablement of their technology with our
technology. Our training partners have opportunities to increase
their skill levels and provide training services to our
customers.
Multi-channel
Sales Strategy
We deliver solutions through direct channels, serving large
organizations directly, with systems integration partners, or
through telemarketing or websales. We also deliver solutions
through indirect channels, serving small- and medium-sized
organizations through our channel partners. We have reengaged
and renewed our business partner and channel relationships, with
an emphasis on specialization, giving us a greater presence in
the marketplace while lowering our distribution costs. To
maximize our reach while ensuring the highest quality of service
to our customers, we provide our channel partners complete
access to all of our tools, training and methodologies.
Personnel
Development Strategy
Our employees are our most significant asset. We work
continuously to update their skill sets by providing education
and training to improve our productivity. We regularly assess
our development progress and focus on key areas as appropriate.
We typically acquire companies or technology when we determine
that the related products or technology are strategic or
complementary to our current or future product offerings, as the
opportunities arise. For example, during fiscal 2007, we
acquired 100% of the outstanding stock of Senforce Technologies,
Inc., a provider of endpoint security management and RedMojo,
Inc., which specialized in cross-platform virtualization
management software tools.
As we determine that parts of our business are no longer
strategic to the company as a whole, we will look for
alternatives such as divestitures or other capital structures.
For example, during fiscal 2007, we signed an agreement to sell
our shares in Cambridge Technology Partners (Switzerland) SA
(“CTP Switzerland”) and we sold our shares in Salmon
Ltd to Okam Limited, a U.K. Limited Holding Company since they
provide general business consulting and we concluded that those
operations are no longer strategic to our business.
Segment
and Geographic Information
We sell our products, services, and solutions primarily to
corporations, government entities, educational institutions,
resellers and distributors both domestically and internationally.
In the first quarter of fiscal 2007, we began operating and
reporting our financial results based on four new
product-related business unit segments based on information
solution categories and a new business consulting segment. As
noted above, during fiscal 2007, we sold Salmon and signed an
agreement to sell CTP Switzerland, which were the last two
components of our business consulting segment, therefore
eliminating the business consulting segment. Business consulting
in fiscal 2006 and 2005 was also comprised of our Japan
consulting group, which was sold in fiscal 2006. The remaining
segments are:
•
Open platform solutions
•
Identity and security management
•
Systems and resource management
•
Workgroup
Our performance is evaluated by our Chief Executive Officer and
our other chief decision makers (executive leadership team)
based on reviewing revenue, including revenue growth rates, and
segment operating income (loss) information for each segment. We
changed our operating and reporting structure to increase
integration and teamwork internally, to build stronger
business-focused units and to be better equipped to address
customer needs.
Prior to fiscal 2007, we operated and reported our financial
results in three segments based on geographic area:
•
Americas — included the United States, Canada and
Latin America
•
EMEA — included Eastern and Western Europe, Middle
East, and Africa
•
Asia Pacific — included China, Southeast Asia,
Australia, New Zealand, Japan, and India
The four product-related operating segments sell our software
and services. These offerings are sold both directly to
customers and through original equipment manufacturers
(“OEM”), resellers, and distributors who sell to
dealers and end users.
Segment disclosures and geographical information for fiscal
years 2007, 2006, and 2005 are presented in Part II,
Item 8, Note AA of the notes to the consolidated
financial statements of this report, which is incorporated by
reference into this Part I, Item 1.
As our strategy continues to evolve, the way in which management
views financial information to best evaluate performance and
operating results may also change.
We conduct product development activities throughout the world
in order to meet the needs of our worldwide customer base. Our
commitment to deliver world-class products that manage,
simplify, secure, and accelerate business solutions means
continued investment in product development. Our major product
development sites include Provo, Utah; Cambridge, Massachusetts;
Nuremberg, Germany; Dublin, Ireland; Bangalore, India; and
Prague, Czech Republic.
In addition to technology developed in-house, our products also
include technology developed by the open source community. Some
of our product development engineers work as a part of open
source development teams across the world. This involvement
ensures our role in leading technical advances, developing new
features and having input over timing of releases, as well as
other information related to the development of the Linux kernel
and other open source projects.
Product development expenses for the fiscal years 2007, 2006,
and 2005 are discussed in Part II, Item 7 of this
report, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” which is
incorporated by reference into this Part I, Item 1.
Sales and
Marketing
Our sales and marketing strategy targets customers who are
looking for solutions in the following five technology areas:
data center, security and identity management, systems and
resource management, desktop and workgroup. We sell our business
solutions via a multi-channel, specialized sales and marketing
model. Our partner ecosystem includes value added partners such
as demand agents, vertical markets resellers, systems integrator
distributors, and OEMs who meet our criteria. We also sell
directly to enterprise customers. In addition, we conduct sales
and marketing activities and provide technical support,
training, and field service to our customers from our 14
U.S. and 56 international sales offices.
Distributors. We have established a network of
independent distributors who sell our products to resellers,
dealers, VARs (value added resellers), and computer retail
outlets. As of October 31, 2007, there were
7 U.S. distributors and 129 international distributors.
VARs and Systems Integrators. We also sell
directly to VARs and systems integrators who provide solutions
across multiple vertical market segments and whose volume of
purchases warrants buying directly from us.
OEMs/Independent Hardware Vendors
(“IHVs”)/Independent Software Vendors
(“ISVs”). We license subsets of
products to domestic and international OEMs/IHVs/ISVs for
integration with their products
and/or
solutions. As of October 31, 2007, we had agreements with
2,032 IHVs and ISVs.
End-User Customers. We have assembled
worldwide field resources to work directly with enterprise
end-users. Additionally, product upgrades and software
maintenance are sold directly to end-users. Customers can also
purchase products and services under license agreements through
partners or resellers in or near their geographic locations.
Marketing Strategy. Our marketing strategy is
to clearly articulate Novell’s value proposition in the
markets we choose to serve and in doing so attract and retain
satisfied customers. To do this, we employ multiple channels of
communications to raise awareness, generate demand and provide
tools for our multi-channel field sales and services
organizations. We examine and select market opportunities that
best fit our current product portfolio and solutions strengths.
This includes researching geographic and industry markets,
determining product lifecycle maturity, and assessing
competitive strategies. Our marketing strategy is driven by a
key set of metrics that include the measurement of awareness
across geographies, specific lead generation metrics and
deliverables to support the sales process. Our marketing
strategy will be successful if we increase the market’s
adoption of our products based on clear market differentiation,
improve the win ratio of our sales force by providing quality
training and tools, and shorten the sales cycle by providing
convincing evidence of our capabilities to prospective
customers. Our target marketing audience is the CIO and other
senior IT executives responsible for key IT functions across the
enterprise.
Marketing Initiatives. Our marketing
activities are varied but tightly focused. To more closely align
our offerings with customer needs, we have developed a series of
strategic campaigns that address these customer needs and align
them with our capabilities. Specifically, our campaigns are
focused on promoting our enterprise-wide “desktop to data
center” Linux platform, our Security and Systems Management
offerings used to manage mixed IT environments, and our advanced
workgroup capabilities for file, print, directory, and advanced
collaboration. Our marketing campaigns are based on our
positioning of “Software for the Open
Enterprisetm”.
We believe this positioning best serves us in increasing our
relevance to our customers.
International Revenue. In fiscal years 2007,
2006, and 2005, approximately 50%, 49%, and 52%, respectively,
of our revenue was generated from customers outside the
U.S. No foreign countries accounted for more than 10% of
revenue in fiscal year 2007, 2006, or 2005. For information
regarding risk related to foreign operations, see Part I,
Item 1A, “Risk Factors,” which information is
incorporated by reference into this Part I, Item 1.
Major
Customers
No single customer accounted for more than 10% of our revenue in
fiscal 2007, 2006, or 2005. During fiscal 2007, we received
$355.6 million from Microsoft related to the Microsoft
agreements discussed above, which is being recognized over
future periods.
Manufacturing
Suppliers
Our physical products, which consist primarily of discs and
manuals, are duplicated by outside vendors. Multiple high-volume
manufacturers are available. We do not rely on a single provider
for our raw materials, nor have we encountered problems with our
existing manufacturing suppliers.
Backlog
Lead times for our products are relatively short. Consequently,
we do not believe that backlog is a reliable indicator of future
revenue or earnings. Our practice is to ship products promptly
upon the receipt of purchase orders from our customers and,
therefore, backlog is not significant.
Although we have a significant amount of deferred revenue
recorded on our consolidated balance sheet, included in this
report, the majority of this amount relates to maintenance and
subscription contracts and the Microsoft agreement, which is
recognized ratably over the related service periods, typically
one to three years, and do not pertain to unshipped product.
Competition
The market for identity-driven computing solutions, systems and
resource management solutions, and Linux and platform services
solutions is highly competitive and subject to rapid
technological change. We expect competition to continue to
increase both from existing competitors and new market entrants.
We believe that competitive factors common to all of our
segments include the following:
•
our ability to preserve our traditional customer base;
•
our ability to sell overall solutions comprised of products and
services provided by us and our partners;
•
the timing and market acceptance of new solutions developed by
us and our competitors;
•
brand and product awareness;
•
the ability of Linux and open source solutions to provide a
lower total cost of ownership;
•
the completeness of our suite of product and solutions offerings
to solve customer problems;
•
our ability to establish and maintain key strategic
relationships with distributors, resellers, independent software
vendors, and other partners; and
•
the pricing of our products and services and the pricing
strategies of our competitors.
Primary competitors of our identity, security and systems
management computing solutions include Microsoft, IBM, Sun
Microsystems, Oracle Corporation, HP, Symantec (Altiris, Inc.),
Avocent (LANDesk, Inc.), and Computer Associates. Primary
competitors for our Linux and platform services solutions
include Microsoft and Red Hat.
One pervasive factor facing us and all companies doing business
in our industry is the dominance of Microsoft. However, in
November 2006 Novell and Microsoft entered into a set of broad
business and technical collaboration agreements to build, market
and support a series of new solutions designed to make Novell
and Microsoft products work better together. The two companies
also agreed to provide each other’s customers with patent
coverage for their respective products. We will continue to be
competitors of Microsoft, but it is our goal that through this
set of agreements, Microsoft will serve as an important indirect
source of channel sales for Novell’s Linux sales.
Copyright,
Licenses, Patents, and Trademarks
We rely on copyright, patent, trade secret, and trademark law,
as well as provisions in our license, distribution, and other
agreements to protect our intellectual property rights. Our
portfolio of patents, copyrights, and trademarks as a whole is
material to our business but no individual piece of intellectual
property is critical to our business. We have been issued what
we consider to be valuable patents and have numerous other
patents pending. No assurance can be given that the pending
patents will be issued or, if issued, will provide protection
for our competitive position. Notwithstanding our efforts to
protect our intellectual property through contractual measures,
unauthorized parties may still attempt to violate our
intellectual property rights.
Our business includes a mix of proprietary offerings and
offerings based on open source technologies. With respect to
proprietary offerings, we perform the majority of our
development efforts internally, but we also acquire and license
technologies from third parties. No one license is critical to
our business. Our open source offerings are primarily comprised
of open source components developed by independent third parties
over whom we exercise no control. The collective licenses to
those open source technologies are critical to our business. If
we are unable to maintain licenses to these third party open
source materials, our distribution of relevant offerings may be
delayed until we are able to develop, license, or acquire
replacement technologies. Such a delay could have a material
adverse impact on our business.
In November 2005, Open Invention Network, LLC (“OIN”)
was established by us, IBM, Philips, Red Hat and Sony. OIN is a
privately held company that has and will acquire patents to
promote Linux and open source by offering its patents on a
royalty-free basis to any company, institution or individual
that agrees not to assert its patents against the Linux
operating system or certain Linux-related applications. In
addition, OIN, in its discretion, will enforce its patents to
the extent it believes such action will serve to further protect
and promote Linux and open source. In fiscal 2007, NEC became an
investor in OIN, with the same rights, privileges and
obligations as the original investors.
The software industry is characterized by frequent litigation
regarding patent, copyright and other intellectual property
rights and trends suggest that this may increase. From time to
time, we have had infringement claims asserted by third parties
against us and our products. While there are no known pending or
threatened claims against us for which we expect to have an
unsatisfactory resolution that would have a material adverse
effect on our results of operations and financial condition,
there can be no assurance that such claims will not be asserted,
or, if asserted, will be resolved in a satisfactory manner. In
addition, there can be no assurance that third-parties will not
assert other claims against us with respect to any third-party
technology. In the event of litigation to determine the validity
of any third-party claims, such litigation could result in
significant expense to us and divert the efforts of our
technical and management personnel, whether or not such
litigation is determined in our favor.
In the event of an adverse result in any such litigation, we
could be required to expend significant resources to develop
non-infringing technology or to obtain licenses to the
technology that was the subject of the litigation. There can be
no assurance that we would be successful in such development or
that any such licenses would be available.
In addition, the laws of certain countries in which our products
are or may be developed, manufactured, or sold may not protect
our products and intellectual property rights to the same extent
as the laws of the U.S.
All segments of our business often experience a higher volume of
revenue at the end of each quarter and during the fourth quarter
of our fiscal year due to the spending cycles of our customers
and the negotiation patterns typical in the software industry.
Corporate
Information
Novell was incorporated in Delaware on January 25, 1983.
Our headquarters and principal executive offices are located at
404 Wyman Street, Suite 500, Waltham, MA02451. Our
telephone number at that address is
(781) 464-8000.
We also have offices located in Provo, Utah, telephone number
(801) 861-7000.
Our website is www.novell.com. We conduct primary product
development activities in Provo, Utah; Waltham, Massachusetts;
Cambridge, Massachusetts; Dublin, Ireland; Nuremberg, Germany;
Bangalore, India, and Prague, Czech Republic. We also contract
out some product development activities to third-party
developers.
Our Annual Report, Securities and Exchange Commission
(“SEC”) filings, earnings announcements, and other
financial information are available on our Investor Relations
website URL at
http://www.novell.com/ir.
We make our annual, quarterly, and current reports, including
any amendments to those reports, freely available on our website
as soon as reasonably practicable after they are filed with or
furnished to the SEC. This and other information that we file
with or furnish to the SEC is also freely available on the
SEC’s website at www.sec.gov. Mailed copies of these
reports can be obtained free of charge through our automated
telephone access system at
(800) 317-3195
or by emailing Novell’s investor relations department at
irmail@novell.com. The information on our website listed above
is not and should not be considered part of this Annual Report
on
Form 10-K
and is intended to be an inactive textual reference only.
Employees
As of November 30, 2007, we had approximately 4,100
employees. None of our employees are represented by a labor
union, and we consider our employee relations to be good.
Competition for personnel of the highest caliber is intense in
the software and consulting industries. To make a long-term
relationship with us rewarding, we endeavor to give our
employees challenging work, educational opportunities,
competitive wages, sales commission plans, bonuses, and
opportunities to participate financially in the success of
Novell through stock option and stock purchase plans.
Set forth below are the names, ages, and titles of the persons
currently serving as our executive officers.
Name
Age
Position
Ronald W. Hovsepian
46
President and Chief Executive Officer
Dr. Jeffrey Jaffe
53
Executive Vice President and Chief Technology Officer
Tom Francese
57
Executive Vice President, Worldwide Sales
Alan J. Friedman
59
Senior Vice President, People
Joseph A. LaSala, Jr.
53
Senior Vice President, General Counsel and Secretary
Colleen O’Keefe
51
Senior Vice President of Services
John Dragoon
47
Senior Vice President and Chief Marketing Officer
Dana C. Russell
46
Senior Vice President and Chief Financial Officer
Ronald W.
Hovsepian
Ronald W. Hovsepian has served as one of our directors and as
our President and Chief Executive Officer since June 2006.
Mr. Hovsepian served as our President and Chief Operating
Officer from October 2005 to June 2006. From May 2005 to
November 2005, Mr. Hovsepian served as Executive Vice
President and President, Worldwide Field Operations.
Mr. Hovsepian joined us in June 2003 as President, Novell
North America. Before coming to
Novell, Mr. Hovsepian was a Managing Director with Bear
Stearns Asset Management, a technology venture capital fund,
from February 2002 to December 2002. From March 2000 to February
2002, Mr. Hovsepian served as Managing Director for
Internet Capital Group, a venture capital firm. Prior to that,
Mr. Hovsepian served in a number of executive positions
with IBM over an approximate
17-year
period. Mr. Hovsepian is also chairman of the board of
directors of Ann Taylor Corporation.
Dr. Jeffrey
Jaffe
Dr. Jeffrey Jaffe, Novell’s Executive Vice President
and Chief Technology Officer, joined Novell in November 2005.
From October 2001 to October 2005, Dr. Jaffe served as
President of Bell Labs Research and Advanced Technologies. Prior
to that, Dr. Jaffe held a variety of technical and
management positions with IBM, most recently serving as general
manager of IBM’s SecureWay business unit, where he was
responsible for IBM’s security, directory, and networking
software business.
Tom
Francese
Tom Francese has served as Novell’s Executive Vice
President, Worldwide Sales since October 2006 and as President,
Novell EMEA since joining Novell in October 2005. Prior to
joining Novell, Mr. Francese held numerous executive sales
positions with IBM over a
30-year
period, except for February 2000 to June 2000 during which he
served as a Managing Director of Deutsche Bank with
responsibilities in information technology.
Alan J.
Friedman
Alan J. Friedman became Senior Vice President, People in July
2001 in connection with Novell’s acquisition of Cambridge
Technology Partners (“Cambridge”). Mr. Friedman
served as Cambridge’s Senior Vice President of Human
Resources, Enterprises Learning and Knowledge Management from
January 2000 to July 2001, and had joined Cambridge in December
1999 as Vice President of Learning and Knowledge Management.
Prior to joining Cambridge, Mr. Friedman was Senior Vice
President of Human Resources for Arthur D. Little, Inc., a
consulting firm, from June 1993 to December 1999.
Joseph A.
LaSala, Jr.
Joseph A. LaSala, Jr. became Senior Vice President, General
Counsel and Secretary of Novell in July 2001 in connection with
Novell’s acquisition of Cambridge. From March 2000 to July
2001, Mr. LaSala served as Senior Vice President, General
Counsel and Secretary of Cambridge. Prior to joining Cambridge,
Mr. LaSala served as Vice President, General Counsel and
Secretary of UPR from January 1996 to March 2000.
Mr. LaSala is a member of the board of directors of
Mainline Management LLC, the general partner of Buckeye GP
Holdings, L.P.
Colleen
O’Keefe
Colleen O’Keefe joined Novell in December 2006 as
Novell’s Senior Vice President of Services to oversee
Novell’s global technical support group, which provides
onsite and remote support services, technical training services,
and professional services to customers. Prior to joining Novell,
from September 2002 to November 2006, Ms. O’Keefe held
several key leadership positions at NCR Corporation in the
Payment Solutions and Worldwide Services divisions. From
September 1999 to March 2002, she served as senior vice
president, Customer Services, at Global Crossing. In addition,
Ms. O’Keefe served in a number of positions in the
telecommunications industry, including 18 years at Southern
New England Telephone and two years at AT&T.
John
Dragoon
John Dragoon has served as Novell’s Senior Vice President
and Chief Marketing Officer since March 2006. Mr. Dragoon
joined Novell in October 2003 as Vice President, Worldwide Field
Marketing. Prior to joining Novell, from April 2002 to September
2003 Mr. Dragoon was the senior vice president of marketing
and product management at Art Technology Group, a provider of
Internet commerce, service, and marketing solutions and from
April 2001 to March 2003 served as vice president, operations,
of Internet Capital Group, a venture capital
firm. Prior to his tenure at Internet Capital Group,
Mr. Dragoon served in a number of sales and marketing
positions at IBM from 1984 to 2000.
Dana C.
Russell
Dana C. Russell has served as Novell’s Senior Vice
President and Chief Financial Officer since February 2007. Prior
to that, Mr. Russell served as Novell’s Vice President
and Interim Chief Financial Officer from June 2006 to February
2007, and as Vice President of Finance from March 2000 to June
2006. Mr. Russell served as the Corporate Controller from
June 2003 to June 2006, and was also the Treasurer from December
2005 to June 2006. Mr. Russell joined Novell in 1994. Prior
to joining Novell, Mr. Russell worked at Price Waterhouse
in Salt Lake City. Mr. Russell is a CPA licensed in the
State of Utah.
Item 1A.
Risk
Factors
Matters
related to or arising out of our historical stock-based
compensation practices, including government actions, litigation
matters, and downgrades in our credit ratings, could have a
material adverse effect on the Company.
Our historical stock-based compensation practices have exposed
us to risks associated with the judgments we made historically
as well as those made as a result of our review of those
practices. Based on the findings of the review of our historical
stock-based compensation practices by the Audit Committee, we
concluded that we had utilized incorrect measurement dates for
some of the stock-based compensation awards granted during the
review period, November 1, 1996 through October 31,2006. As a result, we recorded in our consolidated financial
statements for the fiscal year ended October 31, 2006 a
cumulative $19.2 million adjustment for previously
unrecorded stock-based compensation expense, and related income
tax effects, as a decrease to retained earnings as of
November 1, 2005, the beginning of our 2006 fiscal year, in
accordance with the guidance applicable to the initial
compliance with Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements” and $0.1 million of non-cash expense in
the 2006 fiscal year. We determined that the amounts of
stock-based compensation expense that should have been
recognized in each of the applicable historical periods were not
material to those periods on either a quantitative or
qualitative basis. Therefore, we did not restate our
consolidated financial statements for prior periods. While we
believe that we have made appropriate judgments regarding
materiality and in determining the correct measurement dates for
our stock-based compensation awards, the IRS may disagree with
our judgments. If the IRS disagrees with our judgments, we may
incur additional expenses as a result of different tax
decisions, or take other actions not currently contemplated.
As discussed in Part I, Item 3, “Legal
Proceedings,” derivative actions were filed against us and
our current and former officers and directors after we disclosed
the commencement of our Audit Committee’s review of our
historical stock-based compensation practices. No assurance can
be given regarding the outcomes of litigation or government
actions relating to our historical stock-based compensation
practices. The resolution of any such matters may be time
consuming and expensive, and may distract management from the
conduct of our business. Furthermore, if we are subject to
adverse findings in litigation or government actions, we could
be required to pay damages or penalties or have other remedies
imposed, which could harm our business, financial condition,
results of operations and cash flows.
Furthermore, any resulting adverse effects on the Company as
described above could cause our credit ratings to be downgraded.
A significant downgrade in ratings may increase our cost of
borrowing or limit our access to capital.
We may
experience difficulties, delays or unexpected costs in
completing our cost reduction and sales growth strategic
initiatives and may not achieve the anticipated benefits of
these initiatives.
We previously announced three strategic initiatives as part of
our plan to increase profitability through revenue growth and
cost reduction. These initiatives include a major shift in our
sales strategy from direct to indirect sales; an investment in
overlapping offshore research and development teams to
eventually assume functions once handled in more expensive
environments; a move to a shared services model for our
financial and administrative
functional support in order to reduce costs; and aligning our
services business with each business unit to drive product
revenue. We may not realize, in full or in part, the anticipated
benefits from one or more of these initiatives, and other events
and circumstances, such as difficulties, delays or unexpected
costs, may occur which could result in our not realizing all or
any of the anticipated benefits. If we are unable to realize
these benefits, our ability to continue to fund our planned
business activities may be adversely affected. In addition, our
plans to invest in these initiatives ahead of future growth
means that such costs will be incurred whether or not we realize
these benefits. We are also subject to the risk of business
disruption in connection with our strategic initiatives, which
could have a material adverse effect on our business, financial
condition and operating results.
Our shift
to a sales strategy more focused on indirect sales may result in
decreased or fluctuating revenue.
We have historically relied heavily on our direct sales force in
selling our products. Our ability to achieve significant revenue
growth in the future will depend in large part on our success in
establishing relationships with distributors and OEM partners.
We are currently investing, and plan to continue to invest,
significant resources to develop distribution relationships. Our
distributors also sell, or may potentially sell, products
offered by our competitors. There can be no assurance that we
will be able to retain or attract a sufficient number of
existing or future third party distribution partners or that
such partners will recommend, or continue to recommend, our
products. The inability to establish or maintain successful
relationships with distributors and OEM partners could cause our
sales to decline.
In addition, indirect channel sales involve a number of special
risks. We lack control over the delivery of our products to
end-users. Resellers and distributors may have the ability to
terminate their relationships with us on short notice. Our
indirect channel partners may not market or support our products
effectively or be able to release their products embedded with
our products in a timely manner. We may not be able to
effectively manage conflicts between our various indirect
channel and direct customers, and economic conditions or
industry demand may adversely affect indirect channel partners,
or indirect channel partners may devote greater resources to
marketing and supporting the products of other companies. As a
result, revenues derived from indirect channel partners may
fluctuate significantly in subsequent periods, which may
adversely affect our business, operating results, and financial
condition.
Increasing
our foreign research and development operations exposes us to
risks that are beyond our control and could affect our ability
to operate successfully.
In order to enhance the cost-effectiveness of our operations, we
plan to increasingly shift portions of our research and
development operations to jurisdictions outside of the United
States. The transition of even a portion of our research and
development operations to a foreign country involves a number of
logistical and technical challenges that could result in product
development delays and operational interruptions, which could
reduce our revenues and adversely affect our business. We may
encounter complications associated with the
set-up,
migration and operation of business systems and equipment in
expanded or new facilities. This could result in delays in our
research and development efforts and otherwise disrupt our
operations. If such delays or disruptions occur, they could
damage our reputation and otherwise adversely affect our
business and results of operations.
We cannot be certain that any shifts in our operations to
offshore jurisdictions will ultimately produce the expected cost
savings. We cannot predict the extent of government support,
availability of qualified workers, future labor rates, or
monetary and economic conditions in any offshore location where
we may operate.
The relocation of labor resources may have a negative impact on
our existing employees, which could negatively impact our
operations. In addition, we will likely be faced with
competition in these offshore markets for qualified personnel,
including skilled design and technical personnel, and we expect
this competition to increase as other companies expand their
operations offshore. If the supply of qualified personnel
becomes limited due to increased competition or otherwise, it
could increase our costs and employee turnover rates.
Sales of our NetWare product have been declining for many years
and such decline could offset or out pace the growth in our
other products. Our strategy is to offset these declines with
sales of our next generation of NetWare enterprise-ready
operating system and services, OES. OES allows customers the
opportunity to choose between a NetWare operating system and a
Linux operating system, thereby providing NetWare customers with
a means to migrate to Linux and open source solutions. However,
NetWare and OES combined license and maintenance revenue of our
business declined by $28.5 million, or 12%, in fiscal 2007.
If our strategy is unsuccessful, our combined NetWare and OES
revenue stream will decline more rapidly than the growth of
revenue streams from our other products.
If our
identity-driven computing solutions, systems and resource
managements solutions, and Linux and platform services solutions
do not grow at the rate we anticipate, our growth will be
negatively impacted.
Our product strategy focuses on three specific areas:
identity-driven computing solutions, systems and resource
management solutions, and Linux and platform services solutions
with a specific emphasis on open source platforms. We have
focused on these offerings because we believe that
identity-driven solutions and open source platforms are two of
the fastest growing segments in our industry, and we believe
that they represent the best opportunity for us to profitably
grow our revenue. Our ability to achieve success with this
strategy is dependent on a number of factors including, but not
limited to, the following:
•
the growth of these markets;
•
our development of key product solutions and upgrades;
•
the acceptance of our solutions particularly by enterprise
companies, large industry partners and major accounts;
•
the decisions by customers to upgrade from older versions of our
products to newer versions; and
•
the successful sale of technical support and other Novell
solutions along with our products.
We may
not be able to successfully compete in a challenging market for
infrastructure software services.
The industries we compete in are highly competitive. We expect
competition to continue to increase both from existing
competitors and new market entrants. Competitors of our
identity-driven computing solutions and Linux and platform
services solutions include Microsoft, IBM, Sun, HP, Altiris,
Oracle, LANDesk, and Computer Associates. Our primary competitor
in the North America Linux market is Red Hat. Competitors of our
global services and support group include IBM, Accenture, HP,
CSC and Capgemini. Many of our competitors have greater
financial, technical and marketing resources than we have. We
believe that competitive factors common to all of our segments
include:
•
the pricing of our products and services and the pricing
strategies of our competitors;
•
the timing and market acceptance of new solutions developed by
us and our competitors;
•
brand and product awareness;
•
the performance, reliability and security of our products;
•
the ability to preserve our legacy customer base;
•
our ability to establish and maintain key strategic
relationships with distributors, resellers and other
partners; and
•
our ability to attract and retain highly qualified development,
consulting and managerial personnel.
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 software industry. We have from time to time received
letters or been the subject of claims suggesting that we are
infringing upon the intellectual property rights of others. In
addition, we have faced and expect to continue to face from time
to time disputes over rights and obligations concerning
intellectual property. The cost and time of defending ourselves
can be significant. If an infringement claim is successful, we
and our customers may be required to obtain one or more licenses
from third parties, and we may be obligated to pay or reimburse
our customers for monetary damages. In such instances, we or our
customers may not be able to obtain necessary licenses from
third parties at a reasonable cost or at all, and may face
delays in product shipment while developing or arranging for
alternative technologies, which could adversely affect our
operating results.
In the
event claims for indemnification are brought for intellectual
property infringement, we could incur significant expenses,
thereby adversely affecting our results of operations.
We indemnify customers against certain claims that our products
infringe upon the intellectual property rights of others.
Additionally, under our Novell Linux Indemnification Program, we
offer indemnification for copyright infringement claims made by
third parties against registered Novell customers who obtain
SUSE Linux Enterprise Server 8, SUSE Linux Enterprise Server 9,
SUSE Linux Enterprise Server 10, SUSE Linux Enterprise Desktop
10, SUSE Linux Retail Solution, Novell Point of Service, Novell
Linux Desktop, and SUSE Linux Enterprise Desktop, and who, after
January 12, 2004, obtained upgrade protection and a
qualifying technical support contract from us or a participating
channel partner. Although indemnification programs for
proprietary software are common in our industry, indemnification
programs that cover open source software are less so. In the
event that we are required to indemnify our customers against
claims for intellectual property infringement, we could incur
significant expense reimbursing customers for their legal costs
and, in the event those claims are successful, for damages.
Legal
actions taken by claimants alleging intellectual property
infringement could adversely affect our revenue and business
plan if these legal actions cause a reduction in demand for our
SUSE Linux and
Ximian®
products.
In January 2004, The SCO Group, Inc. filed suit against us in
the Third Judicial District Court of Salt Lake County, State of
Utah. We removed the claim to the U.S. District Court,
District of Utah. SCO’s complaint alleged that our public
statements and filings regarding the ownership of the copyrights
in UNIX and UnixWare have harmed SCO’s business reputation
and affected its efforts to protect its ownership interest in
UNIX and UnixWare. SCO is also seeking to require us to assign
all copyrights that we have registered in UNIX and UnixWare to
SCO and to pay actual, special and punitive damages. In August
2007, the U.S. District Court granted us summary judgment
against SCO, concluding that we retained ownership of the UNIX
and UnixWare copyrights, and dismissed SCO’s claims against
us. Although SCO has recently filed a Chapter 11 bankruptcy
petition, SCO has indicated its intent to appeal the District
Court’s ruling. If SCO is able to successfully appeal the
District Court’s decision, and then succeed on its claims
before a jury, our future revenue and business plans could be
adversely affected.
We have
experienced delays in the introduction of new products due to
various factors, resulting in lost revenue.
We have in the past experienced delays in the introduction of
new products due to a number of factors, including the
complexity of software products, the need for extensive testing
of software to ensure compatibility of new releases with a wide
variety of application software and hardware devices, the need
to “debug” products prior to extensive distribution,
and with regard to our open-source products, our increasing
reliance on the work of third parties not employed by Novell.
Our open source offerings depend to a large extent on the
efforts of developers not employed by us for the creation and
update of open source technologies. For example, Linus Torvalds,
the original developer of the Linux kernel, and a small group of
engineers, many of whom are not employed by us, are primarily
responsible for the development and evolution of the Linux
kernel that is a key component of our Open Enterprise Server and
SUSE Linux Enterprise offerings. The timing and nature of new
releases of the Linux kernel are
controlled by these third parties. Delays in developing,
completing, or shipping new or enhanced products could result in
delayed or reduced revenue for those products and could
adversely impact customer acceptance of those offerings.
We
benefit from the open source contributions of third-party
programmers and corporations, and if they cease to make these
contributions, our product strategy could be adversely
affected.
Our open source offerings depend to a large extent on the
efforts of developers not employed by us for the creation and
update of open source technologies. Also, we and many other
corporations contribute software into the open source movement.
If key members, or a significant percentage, of this group of
developers or corporations decides to cease development of the
Linux kernel or other open source applications, we would have to
either rely on another party (or parties) to develop these
technologies, develop them ourselves or adapt our product
strategy accordingly. This could increase our development
expenses, delay our product releases and upgrades and adversely
impact customer acceptance of open source offerings.
We may
not be able to attract and retain qualified personnel because of
the intense competition for qualified personnel in the software
industry.
Our ability to maintain our competitive technological position
depends, in large part, on our ability to attract and retain
highly qualified development, consulting, and managerial
personnel. Competition for personnel of the highest caliber is
intense in the software industry. The loss of certain key
individuals, or a significant group of key personnel, would
adversely affect our performance. The failure to successfully
hire suitable replacements in a timely manner could have a
material adverse effect on our business.
If our
relationships with other IT services organizations become
impaired, we could lose business.
We maintain relationships with IT services organizations that
recommend, design and implement solutions that include our
products for their customers’ businesses. Any of these
organizations could decide, at any time, to cease doing business
with us or recommending our products. A change in the
willingness of these IT service organizations to do business
with us or recommend our products could result in lower revenue.
The
success of our acquisitions is dependent on our ability to
integrate personnel, operations and technology, and if we are
not successful, our revenue will not grow at the rate we
anticipate.
Achieving the benefits of acquisitions depends in part on the
successful integration of personnel, operations and technology.
The integration of acquisitions is subject to risks and requires
significant expenditure of time and resources. The challenges
involved in integrating acquisitions include the following:
•
obtaining synergies from the companies’ organizations;
•
obtaining synergies from the companies’ service and product
offerings effectively and quickly;
•
bringing together marketing efforts so that the market receives
useful information about the combined companies and their
products;
•
coordinating sales efforts so that customers can do business
easily with the combined companies;
•
integrating product offerings, technology, back office, human
resources, accounting and financial systems;
•
assimilating employees who come from diverse corporate cultural
backgrounds into a common business culture revolving around our
solutions offerings; and
•
retaining key officers and employees who possess the necessary
skills and experience to quickly and effectively transition and
integrate the businesses.
Failure to effectively and timely complete the integration of
acquisitions could materially harm the business and operating
results of the combined companies. In addition, goodwill related
to any acquisitions could become
impaired. Furthermore, we may assume significant liabilities in
connection with acquisitions we make or become responsible for
liabilities of the acquired businesses.
Our
financial and operating results vary and may fall below
estimates, which may cause the price of our
common stock to decline.
Our operating results may fluctuate from quarter to quarter due
to a variety of factors including, but not limited to the:
•
timing of orders from customers and shipments to customers;
•
impact of foreign currency exchange rates on the price of our
products in international locations;
•
inability to respond to the decline in revenue through the
distribution channel; and
•
inability to deliver solutions as expected by our customers and
systems integration partners.
In addition, we often experience a higher volume of revenue at
the end of each quarter and during the fourth quarter of our
fiscal year. Because of this, fixed costs that are out of line
with revenue levels may not be detected until late in any given
quarter and results of operations could be adversely affected.
Due to these factors or other unanticipated events,
quarter-to-quarter comparisons of our operating results may not
be reliable indicators of our future performance. In addition,
from time to time our quarterly financial results may fall below
our expectations or the expected results published by the
securities and industry analysts who follow our company. This
could cause the market price of our securities to decline,
perhaps significantly.
We face
increased risks in conducting a global business.
We are a global corporation with subsidiaries, offices and
employees around the world and, as such, we face certain risks
in doing business abroad that we do not face domestically. Risks
inherent in transacting business internationally could
negatively impact our operating results, including:
•
costs and difficulties in staffing and managing international
operations;
•
unexpected changes in regulatory requirements;
•
tariffs and other trade barriers;
•
difficulties in enforcing contractual and intellectual property
rights;
•
longer payment cycles;
•
local political and economic conditions;
•
potentially adverse tax consequences, including restrictions on
repatriating earnings and the threat of “double
taxation”; and
•
fluctuations in currency exchange rates, which can affect demand
and increase our costs.
We may
not be able to protect our confidential information, and this
could adversely affect our business.
We generally enter into contractual relationships with our
employees to protect our confidential information. The
misappropriation of our trade secrets or other proprietary
information could seriously harm our business. In addition, we
may not be able to timely detect unauthorized use of our
intellectual property and take appropriate steps to enforce our
rights. In the event we are unable to enforce these contractual
obligations and our intellectual property rights, our business
could be adversely affected.
Our
professional services contracts contain pricing risks and, if
our estimates prove inaccurate, we could lose money.
A portion of our professional services revenue is from
fixed-price, fixed-time contracts. Because of the complex nature
of the services provided, it is sometimes difficult to
accurately estimate the cost, scope and duration of particular
client engagements. If we do not accurately estimate the
resources required for a project, do not accurately assess the
scope of work associated with a project, do not manage the
project properly, or do not satisfy our obligations in a manner
consistent with the contract, then our costs to complete the
project could increase substantially. We have occasionally had
to commit unanticipated additional resources to complete
projects, and may have to take similar action in the future. We
may not be compensated for these additional costs or the
commitment of these additional resources.
Our
professional services clients may cancel or reduce the scope of
their engagements with us on short notice.
If our clients cancel or reduce the scope of a professional
services engagement, we may be unable to reassign our
professionals to new engagements without delay. Personnel and
related costs constitute a substantial portion of our operating
expenses. Because these expenses are relatively fixed, and
because we establish the levels of these expenses well in
advance of any particular quarter, cancellations or reductions
in the scope of client engagements could result in the
under-utilization of our professional services employees,
causing significant reductions in operating results for a
particular quarter.
Conversion
of our debentures into shares of our common stock will dilute
the ownership interests of existing stockholders.
The conversion of some or all of our $600 million aggregate
principal amount of senior convertible debentures due 2024 into
shares of common stock will dilute the ownership interest of
existing common stockholders. Any large volume sales in the
public market of the common stock issued upon such conversion
could adversely affect prevailing market prices of our common
stock. In addition, the existence of the debentures may
encourage short selling by market participants because the
conversion of the debentures could depress the price of our
common stock.
Item 1B.
Unresolved
Staff Comments
None.
Item 2.
Properties
In the U.S., we own approximately 887,000 (and occupy
approximately 778,000) square feet of office space on
46 acres in Provo, Utah. We use that space for
administrative offices and a product development center. Novell
is consolidating its occupancy on the Provo campus and is
currently marketing 189,000 square feet of space for sale.
We also occupy 85,000 square feet of warehouse space in and
around Provo for operational support. We lease
71,000 square feet of office space in Waltham,
Massachusetts as our corporate headquarters and principal
executive offices. This facility is also used for product
development. We lease a 177,000 square-foot office building
in Cambridge, Massachusetts, of which we occupy approximately
22,000 square feet for product development activities and
sublease the remainder. We lease a 64,000 square-foot
facility in Lebanon, New Hampshire, of which 11,000 square
feet is used for product development and the remainder is
subleased. In addition, we lease offices that host sales,
support
and/or
product development activity in Arkansas, California, Florida,
Georgia, Illinois, Michigan, Minnesota, Missouri, New York,
Oregon, Texas, Utah, Virginia, and Washington.
Internationally, we own office buildings in the United Kingdom,
the Netherlands, South Africa, and India. We use these office
buildings, which vary in size from 18,000 to 85,000 square
feet, for sales, support and administrative offices.
We lease and occupy a shared service center in Dublin, Ireland
of 31,000 square feet, and product development centers in
Nuremberg, Germany; Prague, Czech Republic; and Bangalore, India
of 64,000 square feet, 19,000 square feet and
80,000 square feet, respectively. Novell has recently
entered into an agreement to expand
its total occupancy in Bangalore, India to 158,000 square
feet. In addition, each of our subsidiaries in Argentina,
Australia, Austria, Belgium, Brazil, Canada, China, Colombia,
Denmark, Finland, France, Germany, India, Israel, Italy, Japan,
Malaysia, Mexico, Netherlands, New Zealand, Norway, Portugal,
Scotland, Singapore, South Africa, Spain, Sweden, Switzerland,
Taiwan, and Venezuela, leases a small facility used as sales and
support offices. We have leased facilities in Luxembourg,
Netherlands, United Kingdom and Thailand which we no longer
occupy.
The terms of the above leases vary from month-to-month to up to
17 years. We believe that our existing facilities are
adequate to meet our current requirements and we anticipate that
suitable additional or substitute space will be available, as
necessary, upon reasonable terms.
Item 3.
Legal
Proceedings
Between September and November of 2006, seven separate
derivative complaints were filed in Massachusetts state and
federal courts against us and many of our current and former
officers and directors asserting various claims related to
alleged options backdating. We are also named as a nominal
defendant in these complaints, although the actions are
derivative in nature and purportedly asserted on our behalf.
These actions arose out of our announcement of a voluntary
review of our historical stock-based compensation practices. The
complaints essentially allege that since 1999, we have
materially understated our compensation expenses and, as a
result, overstated actual income. The five actions filed in
federal court have been consolidated, and the parties to that
action have stipulated that the defendants’ answer or
motion to dismiss will be due 45 days after the filing of
an amended complaint. The two actions filed in state court have
also been consolidated and transferred to the Business
Litigation Session of Massachusetts Suffolk County Superior
Court, and the parties to that action have stipulated that the
defendants’ answer or motion to dismiss will be due
30 days after the filing of an amended complaint. While we
are still in the process of evaluating these claims, based on
the results of our own internal audit and rulings in similar
cases, we believe we have strong defenses to the claims asserted
in both consolidated cases. While there can be no assurance as
to the ultimate disposition of the litigation, we do not believe
that its resolution will have a material adverse effect on our
financial position, results of operations or cash flows.
On November 12, 2004, we filed suit against Microsoft in
the U.S. District Court, District of Utah. We are seeking
treble and other damages under the Clayton Act, based on claims
that Microsoft eliminated competition in the office productivity
software market during the time that we owned the WordPerfect
word-processing application and the Quattro Pro spreadsheet
application. Among other claims, we allege that Microsoft
withheld certain critical technical information about Windows
from us, thereby impairing our ability to develop new versions
of WordPerfect and other office productivity applications, and
that Microsoft integrated certain technologies into Windows
designed to exclude WordPerfect and other Novell applications
from relevant markets. In addition, we allege that Microsoft
used its monopoly power to prevent original equipment
manufacturers from offering WordPerfect and other applications
to customers. On June 10, 2005, Microsoft’s motion to
dismiss the complaint was granted in part and denied in part. On
September 2, 2005, Microsoft sought appellate review of the
District Court’s denial of its motion. On October 15,2007, the U.S. Fourth Circuit Court of Appeals affirmed the
District Court’s ruling, thereby allowing Novell to proceed
with the remaining claims against Microsoft. While there can be
no assurance as to the ultimate disposition of the litigation,
we do not believe that its resolution will have a material
adverse effect on our financial position, results of operations
or cash flows.
On January 20, 2004, the SCO Group, Inc. filed suit against
us in the Third Judicial District Court of Salt Lake County,
State of Utah. Upon our motion the action was removed to the
U.S. District Court, District of Utah. SCO’s original
complaint alleged that our public statements and filings
regarding the ownership of the copyrights in UNIX and UnixWare
harmed SCO’s business reputation and affected its efforts
to protect its ownership interest in UNIX and UnixWare. Our
answer set forth numerous affirmative defenses and counterclaims
alleging slander of title and breach of contract, and seeking
declaratory actions and actual, special and punitive damages in
an amount to be proven at trial. On February 3, 2006, SCO
filed a Second Amended Complaint alleging that we had violated
supposed non-competition provisions of the agreement under which
we sold certain UNIX-related assets to SCO, that we infringe
SCO’s copyrights, and that we are engaging in unfair
competition by attempting to deprive SCO of the value of the
UNIX technology. SCO sought to require us to assign all
copyrights that we have registered in UNIX and UnixWare to SCO,
to prevent us from representing that we have any ownership
interest in the UNIX and
UnixWare copyrights, to require us to withdraw all
representations we have made regarding our ownership of the UNIX
and UnixWare copyrights, and to cause us to pay actual, special
and punitive damages in an amount to be proven at trial. As a
result of SCO’s Second Amended Complaint, SUSE filed a
demand for arbitration before the International Court of
Arbitration in Zurich, Switzerland, pursuant to a
“UnitedLinux Agreement” in which SCO and SUSE were
parties. On August 10, 2007, the U.S. District Court
Judge issued a Memorandum Decision and Order that granted Novell
summary judgment against SCO on significant issues in the
litigation. The District Court determined that we own the UNIX
copyrights and dismissed certain of SCO’s claims against
us. In addition, the Court ruled that we were entitled to a
share of certain royalties SCO had received from Sun
Microsystems, Inc. and Microsoft through their licenses with
SCO. Prior to the commencement of the trial before the
U.S. District Court, SCO filed a petition for relief under
Chapter 11 of the U.S. Bankruptcy Code. Novell has
since obtained an order from the bankruptcy court allowing us to
proceed with the trial for the purpose of determining how much
is owed to Novell from the license royalties and to determine
whether SCO had authority to enter into the Sun and Microsoft
agreements. No trial date has been set. Hearings before the
International Court Tribunal in connection with the SUSE
Arbitration matter have been stayed by the Court in the SCO
bankruptcy case. Although there can be no assurance as to the
ultimate disposition of the suit, we do not believe that the
resolution of this litigation will have a material effect on our
financial position, results of operations or cash flows.
On July 12, 2002, Amer Jneid and other related plaintiffs
filed a complaint in the Superior Court of California, Orange
County, alleging claims for breach of contract, fraud in the
inducement, misrepresentation, infliction of emotional distress,
rescission, slander and other claims against us in connection
with our purchase of so-called “DeFrame” technology
from the plaintiffs and two affiliated corporations (TriPole
Corporation and Novetrix), and employment agreements Novell
entered into with the plaintiffs in connection with the
purchase. The complaint sought unspecified damages, including
“punitive damages.” The dispute (resulting in these
claims) arises out of the plaintiffs’ assertion that we
failed to properly account for license distributions which the
plaintiffs claim would have entitled them to certain bonus
payouts under the purchase and employment agreements. After a
lengthy jury trial in January 2007, the jury returned a verdict
in favor of the various plaintiffs on certain contract claims
and in favor of us on various remaining claims. As a result of
the verdict, a judgment was entered against us on
August 27, 2007 in the amount of $19.0 million plus an
additional $4.5 million in prejudgment interest. In addition,
the Court has awarded plaintiffs attorneys fees and costs
related to the litigation. We have filed and intend to file
Notices of Appeal of the judgment and the related orders to the
California Court of Appeals. We believe we have strong legal
arguments that will likely result in reversal of the judgment
and the lower court’s orders. Although Novell believes that
settlement is also a possibility, Novell has accrued $27 million
for this matter. While there can be no assurance as to the
ultimate disposition of the litigation, we do not believe that
its resolution will have a material adverse effect on our
financial position or results of operations.
SilverStream, which we acquired in July 2002, and several of its
former officers and directors, as well as the underwriters who
handled SilverStream’s two public offerings, were named as
defendants in several class action complaints that were filed on
behalf of certain former stockholders of SilverStream who
purchased shares of SilverStream common stock between
August 16, 1999 and December 6, 2000. These complaints
are closely related to several hundred other complaints that the
same plaintiffs have brought against other issuers and
underwriters. These complaints all allege violations of the
Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended. In particular, they allege, among other
things, that there was undisclosed compensation received by the
underwriters of the public offerings of all of the issuers,
including SilverStream. A Consolidated Amended Complaint with
respect to all of these companies was filed in the
U.S. District Court, Southern District of New York, on
April 19, 2002. The plaintiffs are seeking monetary
damages, statutory compensation and other relief that may be
deemed appropriate by the Court. While we believe that
SilverStream and its former officers and directors have
meritorious defenses to the claims, a tentative settlement has
been reached between many of the defendants and the plaintiffs,
which contemplates a settlement of the claims, including the
ones against SilverStream and its former directors and officers.
Any settlement agreement must receive final approval from the
Court and efforts to pursue the same are ongoing. While there
can be no assurance as to the ultimate disposition of the
litigation, we do not believe that its resolution will have a
material adverse effect on our financial position, results of
operations or cash flows.
We account for legal reserves under Statement of Financial
Accounting Standards, (“SFAS”) No. 5, which
requires us to accrue for losses that we believe are probable
and can be reasonably estimated. We evaluate the adequacy of our
legal reserves based on our assessment of many factors,
including our interpretations of the law and our assumptions
about the future outcome of each case based on current
information. It is reasonably possible that our legal reserves
could be increased or decreased in the near term based on our
assessment of these factors. We are currently party to various
legal proceedings and claims involving former employees, either
asserted or unasserted, which arise in the ordinary course of
business. While the outcome of these matters cannot be predicted
with certainty, we do not believe that the outcome of any of
these claims or any of the above mentioned legal matters will
have a material adverse effect, individually or in the
aggregate, on our consolidated financial position, results of
operations or cash flows.
Item 4.
Submission
of Matters to a Vote of Security Holders
2007
Annual Meeting of Stockholders
Our 2007 Annual Meeting was held at 404 Wyman Street, Waltham,
Massachusetts, on August 30, 2007. Out of the
349,339,284 shares of common stock that were outstanding
and entitled to vote at the meeting as of July 13, 2007
(record date), a total of 296,223,463 shares were present
in person or by proxy at the meeting, representing 84.8% of the
outstanding shares. The following are the voting results for the
items considered by the stockholders:
I. Election
of Directors
Each of the eleven nominees for Director was elected, by the
votes set forth below, to hold office until the next annual
meeting of stockholders and until his or her successor is
elected and qualified, except in the event of his or her earlier
death, resignation, or removal.
Nominee
Votes For
Votes Against
Votes Abstaining
Albert Aiello
288,894,766
5,048,680
2,280,017
Fred Corrado
287,977,744
5,855,285
2,390,434
Richard L. Crandall
288,132,402
5,620,548
2,470,513
Ronald W. Hovsepian
289,980,759
3,872,639
2,370,065
Patrick S. Jones
289,292,286
4,513,171
2,418,006
Claudine B. Malone
288,220,382
5,552,341
2,450,740
Richard L. Nolan
280,025,023
13,797,033
2,401,407
Thomas G. Plaskett
287,703,509
5,786,802
2,733,152
John W. Poduska, Sr.
287,971,862
6,000,680
2,250,957
James D. Robinson, III
276,536,755
17,369,912
2,316,796
Kathy Brittain White
288,845,369
4,997,120
2,380,974
II.
Ratification
of Independent Public Accounting Firm
Ratification of the appointment of PricewaterhouseCoopers LLP as
Novell’s independent registered public accounting firm for
the fiscal year ending October 31, 2007 passed by the
following vote:
Market
for Registrant’s Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities
Novell’s common stock trades on the Nasdaq Global Select
Market under the symbol “NOVL.” The following chart
sets forth the high and low sales prices of our common stock
during each quarter of the last two fiscal years:
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
Fiscal 2007
High
$
7.35
$
7.63
$
8.26
$
8.10
Low
$
5.70
$
6.18
$
6.68
$
5.76
Fiscal 2006
High
$
9.81
$
9.83
$
8.56
$
6.98
Low
$
7.17
$
7.00
$
5.73
$
5.75
No dividends have been declared on our common stock. We have no
current plans to pay dividends on our common stock, and intend
to retain our earnings for use in our business. We had 7,143
stockholders of record at November 30, 2007.
Issuances
of Unregistered Common Stock
Not Applicable
Issuer
Purchases of Equity Securities
The following table presents information regarding purchases of
shares of Novell common stock made by Novell pursuant to its
share repurchase program during the three months ended
October 31, 2007.
The total number of shares purchased includes shares surrendered
to Novell to satisfy tax withholding obligations in connection
with the vesting of restricted stock units, restricted stock
rights, and stock issued under a stock-based compensation plan
totaling 31,365 shares in the months of August, September
and October of fiscal 2007.
The following graph compares the total return on a cumulative
basis, assuming the reinvestment of dividends, of $100 invested
on October 31, 2002 in our common stock, the
Standard & Poor’s 500 Composite Stock Price
Index, the NASDAQ Computer & Data Processing Index,
and the Dow Jones U.S. Software Index. The comparisons in the
graph below are based upon historical data and are not
indicative of, nor intended to forecast, future performance of
our common stock.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN
Base
Indexed/Cumulative Returns
Period
Fiscal Year Ended October 31,
Company/Index Name
2002
2003
2004
2005
2006
2007
Novell, Inc.
$
100
241.56
295.88
313.58
246.91
311.11
S&P 500 Index
$
100
120.80
132.18
143.71
167.19
191.54
Nasdaq Computer & Data Processing Index
$
100
119.39
130.58
144.23
164.99
209.38
Dow Jones U.S. Software
$
100
115.49
122.46
129.61
148.37
183.06
Item 6.
Selected
Financial Data
The following selected historical consolidated financial data
should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and our audited consolidated financial
statements and related notes to those statements included in
this report. The selected historical consolidated financial data
for the periods presented have been derived from our audited
consolidated financial statements.
Income (loss) from continuing operations before taxes
8,415
27,180
457,423
57,398
(61,619
)
Income tax expense
34,691
22,642
86,612
11,335
102,882
Income (loss) from continuing operations
(26,276
)
4,538
370,811
46,063
(164,501
)
Income (loss) from discontinued operations, net of taxes
(18,184
)
15,015
5,911
11,125
2,597
Net income (loss) before accounting change
(44,460
)
19,553
376,722
57,188
(161,904
)
Cumulative effect of accounting change, net of tax (d)
—
(897
)
—
—
—
Net income (loss)
(44,460
)
18,656
376,722
57,188
(161,904
)
Net income (loss) from continuing operations, diluted
$
(26,276
)
$
4,332
$
372,708
$
19,789
$
(164,501
)
Net income (loss) available to common stockholders, diluted
$
(44,460
)
$
18,220
$
378,159
$
30,818
$
(161,904
)
Net income (loss) from continuing operations per common share,
diluted
$
(0.08
)
$
0.01
$
0.85
$
0.05
$
(0.44
)
Net income (loss) per common share, diluted
$
(0.13
)
$
0.05
$
0.86
$
0.08
$
(0.44
)
Balance sheet
Cash, cash equivalents and short-term investments
$
1,857,637
$
1,466,287
$
1,654,904
$
1,211,467
$
751,852
Working capital
1,332,218
1,075,580
1,284,901
843,930
406,014
Total assets
2,854,394
2,449,723
2,761,858
2,293,358
1,569,572
Senior convertible debentures
600,000
600,000
600,000
600,000
—
Series B Preferred Stock
—
9,350
9,350
25,000
—
Total stockholders’ equity (e)
$
1,158,326
$
1,104,650
$
1,386,486
$
963,364
$
934,470
(a)
In the first quarter of fiscal 2006, we adopted FASB Statement
No. 123(R), which required us to record compensation
expenses related to stock awards. For fiscal 2007 and 2006,
compensation expense totaled $34.3 million and
$35.3 million, respectively. Prior years were not restated
to include such expense.
(b)
In the first quarter of fiscal 2005, we recognized a gain of
$447.6 million on a litigation settlement with Microsoft to
settle potential anti-trust litigation.
(c)
Income (loss) from operations for all periods presented excludes
the results of Celerant, Salmon, and CTP Switzerland, which have
been classified as discontinued operations.
(d)
In May 2006, we adopted Financial Interpretation No. 47,
“Accounting for Conditional Asset Retirement
Obligations” (“FIN 47”), which required us
to recognize the cumulative effect of initially applying
FIN 47 as a change in accounting principle. In fiscal 2002,
we adopted Statement of Financial Accounting Standards
No. 142, “Goodwill and Other Intangible Assets,”
resulting in a transitional goodwill impairment loss.
(e)
As discussed in Note C to the consolidated financial statements
contained in this report, in accordance with the provisions of
SAB 108, we decreased beginning retained earnings at November 1,2005 by approximately $19.2 million, from $984.1 million to
$964.9 million with the offset to additional paid-in capital to
record a cumulative after-tax stock-based compensation expense
that should have been recognized in the consolidated financial
statements during the period 1997 through 2005. Had the
stock-based compensation expense been
recognized during that period, net income would have been
reduced by the following amounts: $2.9 million in fiscal 2003,
$0.7 million in fiscal 2004, and $0.2 million in fiscal 2005.
Item 7.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Overview
We deliver infrastructure software for the Open Enterprise. We
are a leader in desktop to data center operating systems based
on Linux and the software required to secure and manage mixed
information technology (“IT”) environments. We help
customers around the world minimize cost, complexity, and risk,
allowing them to focus on innovation and growth.
To best align our business with our strategy, we are organized
into four business segments. Our business segments are open
platform solutions, identity and security management, systems
and resource management, and workgroup. During fiscal 2007, we
divested our business consulting segment through the sale of
Salmon, our UK-based consulting unit, in the second quarter of
fiscal 2007 and as a result of an agreement to sell our CTP
Switzerland consulting unit that we entered into in the fourth
quarter of fiscal 2007.
Below is an update on each of our business units:
•
Within our open platform solutions business unit segment, Linux
and open source products remain an important growth business.
During the year we established and expanded relationships with
several strategic partners to increase the reach of both our
server and desktop products. Revenue from our Linux platform
products increased 69% year-over-year in fiscal 2007. The
strength of our revenue growth was due in part to our agreement
with Microsoft which was signed in November 2006.
•
We continue to expand our position in the identity and security
management market by offering products that deliver a complete,
integrated solution in the areas of security, compliance, and
governance issues. Our unique role-based, policy-driven approach
has received positive industry reviews. Revenue from our
identity and access management products increased 7% in fiscal
2007 as compared to the same period a year ago.
•
Systems and resource management products continue to be an
important part of our product offering. Our strategy is to
provide a complete “desktop to data center” offering,
with leadership in virtualization for both Linux and
mixed-source environments. Earlier this year, we announced the
general availability of two major products, ZENworks
Configuration Management and ZENworks Orchestrator. We believe
these products will become a new source of growth in the future.
Revenue was relatively flat in fiscal 2007 as the market was
anticipating a refreshed product offering.
•
Our workgroup revenue base is an important source of cash flow
and provides us with a potential opportunity to sell additional
products and services. We continued efforts to stabilize the
decline of revenue from our legacy products, such as Open
Enterprise Server, NetWare and NetWare-related products. At the
end of fiscal 2007, we announced the general availability of
Open Enterprise Server 2, which completes the transition of
delivering NetWare services on Linux. We also introduced Novell
Teaming + Conferencing, which extends the value of our
collaboration offering. Our Workgroup business declined 9% in
fiscal 2007, excluding the impact of the Microsoft agreement, as
compared to the same period a year ago.
At the beginning of the fiscal year, we identified several key
initiatives including; improving our sales model and sales staff
specialization; integrating our product development approach and
balancing between on and offshore development locations; and
improving administrative and support functions with the primary
goal to simplify and refocus our business and increase
sustainable profitability. We have substantially completed these
initiatives according to plan. In conjunction with these
initiatives, we incurred restructuring charges of
$43.1 million in fiscal 2007.
In continuation of our two-year strategic plan, we will refine
the improvements we made in our sales, research and development,
and back office initiatives in fiscal 2008. In addition, we will
realign our services business to improve its efficiency and
focus. In conjunction with these initiatives, we expect to incur
restructuring charges of
$15 million to $25 million in fiscal 2008. While our
initiatives and their implementation involve opportunities,
risks, and challenges, we believe they will result in long-term,
sustainable profitability.
Critical
Accounting Policies
An accounting policy is deemed to be critical if it requires us
to make an accounting estimate based on assumptions about
matters that are uncertain at the time an accounting estimate is
made, and if different estimates that reasonably could have been
used or changes in the accounting estimate that are reasonably
likely to occur periodically could materially change the
financial statements. We consider accounting policies related to
revenue recognition and related reserves, impairment of
long-lived assets, valuation of deferred tax assets, loss
contingency accruals and share-based payments to be critical
accounting policies due to the judgments and estimation
processes involved in each.
Revenue Recognition and Related Reserves. Our
revenue is derived primarily from the sale of software licenses,
software maintenance, upgrade protection, subscriptions of SUSE
Linux Enterprise Server (“SLES”), technical support,
training, and professional services. Our customers include:
distributors, who sell our products to resellers, dealers, and
VARs; OEMs, who integrate our products with their products or
solutions; VARs, who provide solutions across multiple vertical
market segments which usually includes services; and end users,
who may purchase our products and services directly from Novell
or from other partners or resellers. Except for our SUSE Linux
product, distributors do not order to stock and only order
products when they have an end customer order, which they
present to us. With respect to our SUSE Linux product,
distributors place orders and the product is then sold through
to end customers principally through the retail channel. OEMs
report the number of copies duplicated and sold via an activity
or royalty report. Software maintenance, upgrade protection,
technical support, and subscriptions of SLES typically involve
one to three-year contract terms. Our standard practice is to
provide customers with a
30-day
general right of return. Such return provision allows for a
refund
and/or
credit of any amount paid by our customers.
Revenue is recognized in accordance with Statement of Position
(“SOP”)
97-2,
“Software Revenue Recognition,” and Staff Accounting
Bulletin No. 104, “Revenue Recognition,” and
related interpretations. When an arrangement does not require
significant production, modification, or customization of
software or does not contain services considered to be essential
to the functionality of the software, revenue is recognized when
the following four criteria are met:
•
Persuasive evidence of an arrangement exists — We
require evidence of an agreement with a customer specifying the
terms and conditions of the products or services to be delivered
typically in the form of a signed contract or statement of work
accompanied by a purchase order.
•
Delivery has occurred — For software licenses,
delivery takes place when the customer is given access to the
software programs via access to a website or shipped medium. For
services, delivery takes place as the services are provided.
•
The fee is fixed or determinable — Fees are fixed or
determinable if they are not subject to cancellation or other
payment terms that exceed our standard payment terms. Typical
payment terms are net 30 days.
•
Collection is probable — We perform a credit review of
all customers with significant transactions to determine whether
a customer is creditworthy and collection is probable. Prior
Novell-established credit history, credit reports, financial
statements, and bank references are used to assess
creditworthiness.
In general, revenue for transactions that do not involve
software customization or services considered essential to the
functionality of the software is recognized as follows:
•
Software license fees for our SUSE Linux product are recognized
when the product is sold through to an end customer;
•
Software license fees for sales through OEMs are recognized upon
receipt of license activity or royalty reports;
•
All other software license fees are recognized upon delivery of
the software;
Software maintenance, upgrade protection, technical support, and
subscriptions of SLES are recognized ratably over the contract
term; and
•
Professional services, training and other similar services are
recognized as the services are performed.
If the fee due from the customer is not fixed or determinable,
revenue is recognized as payments become due from the customer.
If collection is not considered probable, revenue is recognized
when the fee is collected. We record provisions against revenue
for estimated sales returns and allowances on product and
service-related sales in the same period as the related revenue
is recorded. We also record a provision to operating expenses
for bad debts resulting from customers’ inability to pay
for the products or services they have received. These estimates
are based on historical sales returns and bad debt expense,
analyses of credit memo data, and other known factors, such as
bankruptcy. If the historical data we use to calculate these
estimates does not accurately reflect future returns or bad
debts, adjustments to these reserves may be required that would
increase or decrease revenue or net income.
Many of our software arrangements include multiple elements.
Such elements typically include any or all of the following:
software licenses, rights to additional software products,
software maintenance, upgrade protection, technical support,
training and professional services. For multiple-element
arrangements that do not involve significant modification or
customization of the software and do not involve services that
are considered essential to the functionality of the software,
we allocate value to each element based on its relative fair
value, if sufficient Novell-specific objective evidence of fair
value exists for each element of the arrangement.
Novell-specific objective evidence of fair value is determined
based on the price charged when each element is sold separately.
If sufficient Novell-specific objective evidence of fair value
exists for all undelivered elements, but does not exist for the
delivered element, typically the software, then the residual
method is used to allocate value to each element. Under the
residual method, each undelivered element is allocated value
based on Novell-specific objective evidence of fair value for
that element, as described above, and the remainder of the total
arrangement fee is allocated to the delivered element, typically
the software. If sufficient Novell-specific objective evidence
of fair value does not exist for all undelivered elements and
the arrangement involves rights to unspecified additional
software products, all revenue is recognized ratably over the
term of the arrangement. If the arrangement does not involve
rights to unspecified additional software products, all revenue
is initially deferred until typically the only remaining
undelivered element is software maintenance or technical
support, at which time the entire fee is recognized ratably over
the remaining maintenance or support term.
In the case of multiple-element arrangements that involve
significant modification or customization of the software or
involve services that are considered essential to the
functionality of the software, contract accounting is applied.
When Novell-specific objective evidence of fair value exists for
software maintenance or technical support in arrangements
requiring contract accounting, the professional services and
license fees are combined and revenue is recognized on the
percentage of completion basis. The percentage of completion is
generally calculated using estimated hours incurred to date
relative to the total expected hours for the entire project. The
cumulative impact of any revision in estimates to complete or
recognition of losses on contracts is reflected in the period in
which the changes or losses become known. The maintenance or
support fee is unbundled from the other elements and revenue is
recognized ratably over the maintenance or support term.
When Novell-specific objective evidence of fair value does not
exist for software maintenance or support, then all revenue is
deferred until completion of the professional services, at which
time the entire fee is recognized ratably over the remaining
maintenance or support period.
For consolidated statements of operations classification
purposes only, we allocate the revenue first to those elements
for which we have Novell-specific objective evidence of fair
value, and any remaining recognized revenue is then allocated to
those items for which we lack Novell-specific objective evidence
of fair value.
Professional services contracts are either
time-and-materials
or fixed-price contracts. Revenue from
time-and-materials
contracts is recognized as the services are performed. Revenue
from fixed-price contracts is recognized based on the
proportional performance method, generally using estimated time
to complete to measure the completed effort. The cumulative
impact of any revision in estimates to complete or recognition
of losses on contracts is reflected in the period in which the
changes or losses become known. Professional services revenue
includes reimbursable expenses charged to our clients.
On November 2, 2006, we entered into a Business
Collaboration Agreement, a Technical Collaboration Agreement,
and a Patent Cooperation Agreement with Microsoft Corporation
that collectively are designed to build, market and support a
series of new solutions to make Novell and Microsoft products
work better together for customers. Each of the agreements is
scheduled to expire on January 1, 2012.
Under the Business Collaboration Agreement, we are marketing a
combined offering with Microsoft. The combined offering consists
of SUSE Linux Enterprise Server and a subscription for SLES
support along with Microsoft Windows Server, Microsoft Virtual
Server and Microsoft Viridian, and is offered to customers
desiring to deploy Linux and Windows in a virtualized setting.
Microsoft made an upfront payment to us of $240 million for
SLES subscription “certificates,” which Microsoft may
use, resell or otherwise distribute over the term of the
agreement, allowing the certificate holder to redeem single or
multi-year subscriptions for SLES support from us (entitling the
certificate holder to upgrades, updates and technical support).
Microsoft agreed to spend $60 million over the term of the
agreement for marketing Linux and Windows virtualization
scenarios and also agreed to spend $34 million over the
term of the agreement for a Microsoft sales force devoted
primarily to marketing the combined offering. Microsoft agreed
that for three years following the initial date of the agreement
it will not enter into an agreement with any other Linux
distributor to encourage adoption of non-Novell Linux/Windows
Server virtualization through a program substantially similar to
the SLES subscription “certificate” distribution
program.
The Technical Collaboration Agreement focuses primarily on four
areas:
•
Development of technologies to optimize SLES and Windows, each
running as guests in a virtualized setting on the other
operating system;
•
Development of management tools for managing heterogeneous
virtualization environments, to enable each party’s
management tools to command, control and configure the other
party’s operating system in a virtual machine environment;
•
Development of translators to improve interoperability between
Microsoft Office and OpenOffice document formats; and
•
Collaboration on improving directory and identity
interoperability and identity management between Microsoft
Active Directory software and Novell eDirectory software.
Under the Technical Collaboration Agreement, Microsoft agreed to
provide funding to help accomplish these broad objectives,
subject to certain limitations.
Under the Patent Cooperation Agreement, Microsoft agreed to
covenant with our customers not to assert its patents against
our customers for their use of our products and services for
which we receive revenue directly or indirectly, with certain
exceptions, while we agreed to covenant with Microsoft’s
customers not to assert our patents against Microsoft’s
customers for their use of Microsoft products and services for
which Microsoft receives revenue directly or indirectly, with
certain exceptions. In addition, we and Microsoft each
irrevocably released the other party, and its customers, from
any liability for patent infringement arising prior to
November 2, 2006, with certain exceptions. Both we and
Microsoft have payment obligations under the Patent Cooperation
Agreement. Microsoft made an upfront net balancing payment to us
of $108 million, and we will make ongoing payments to
Microsoft totaling a minimum of $40 million over the
five-year term of the agreement based on a percentage of our
Open Platform Solutions and Open Enterprise Server revenues.
As the three agreements are interrelated and were negotiated and
executed simultaneously, for accounting purposes we considered
all of the agreements to constitute one arrangement containing
multiple elements. The SLES subscription purchases of
$240 million were within the scope of Statement of Position
(“SOP”)
97-2,
“Software Revenue Recognition,” and are being
accounted for based on vendor specific objective evidence of
fair value. We will recognize the revenue ratably over the
respective subscription terms beginning upon customer
activation, or for subscriptions which expire un-activated, if
any, we will recognize revenue upon subscription expiration.
Objective evidence of the fair value of elements within the
Patent Cooperation Agreement and Technical Collaboration
Agreement did not exist. As such, we combined the
$108 million for the Patent Cooperation
Agreement payment and amounts we will receive for the Technical
Collaboration Agreement and are recognizing this revenue ratably
over the contractual term of the agreements of 5 years. Our
periodic payments to Microsoft will be recorded as a reduction
of revenue. The contractual expenditures by Microsoft, including
the dedicated sales force of $34 million and the marketing
funds of $60 million, do not obligate us to perform, and,
therefore, do not have an accounting consequence to us.
Long-lived Assets. Our long-lived assets
include net fixed assets, long-term investments, goodwill, and
other intangible assets. At October 31, 2007, our
long-lived assets included $180.5 million of net fixed
assets, $37.3 million of long-term investments,
$404.6 million of goodwill, and $33.6 million of
identifiable intangible assets.
We periodically review our property, plant, and equipment and
finite-lived intangible assets for impairment in accordance with
Statement of Financial Accounting Standards (“SFAS”)
No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Factors that could indicate an impairment include
significant underperformance of the asset as compared to
historical or projected future operating results, significant
changes in the actual or intended use of the asset, or
significant negative industry or economic trends. When we
determine that the carrying value of an asset may not be
recoverable, the related estimated future undiscounted cash
flows expected to result from the use and eventual disposition
of the asset are compared to the carrying value of the asset. If
the sum of the estimated future cash flows is less than the
carrying amount, we record an impairment charge based on the
difference between the carrying value of the asset and its fair
value, which we estimate based on discounted expected future
cash flows. In determining whether an asset is impaired, we must
make assumptions regarding recoverability of costs, estimated
future cash flows from the asset, intended use of the asset and
other related factors. If these estimates or their related
assumptions change, we may be required to record impairment
charges for these assets.
We evaluate the recoverability of goodwill and indefinite-lived
intangible assets annually as of August 1, or more
frequently if events or changes in circumstances warrant, such
as a material adverse change in the business. Goodwill is
considered to be impaired when the carrying value of a reporting
unit exceeds its estimated fair value. Indefinite-lived
intangible assets are considered impaired if their carrying
value exceeds their estimated fair value. Fair values are
estimated using a discounted cash flow methodology. In assessing
the recoverability of our goodwill and indefinite-lived
intangible assets, we must make assumptions regarding estimated
future cash flows and other factors to determine the fair value
of the respective assets. This process requires subjective
judgment at many points throughout the analysis. Changes in
reporting units and changes to the estimates used in the
analyses, including estimated future cash flows, could cause one
or more of the reporting units or indefinite-lived intangibles
to be valued differently in future periods. Future analysis
could potentially result in a non-cash goodwill impairment
charge of up to $404.6 million, the full amount of our
goodwill, depending on the estimated value of the reporting
units and the value of the net assets attributable to those
reporting units at that time.
During the fourth quarters of fiscal 2007, 2006, and 2005, we
completed our annual goodwill impairment reviews and determined
that there was no goodwill impairment. These assessments are
made at the reporting unit level, and therefore we could be
subject to an impairment charge to goodwill if any one of our
reporting units does not perform in line with forecasts in the
future. In addition, changes in the assumptions used in the
analyses could have changed the resulting outcomes. For example,
to estimate the fair value of our reporting units at
August 1, 2007, we made estimates and judgments about
future cash flows based on our fiscal 2008 forecast and current
long-range plans used to manage the business. These long-range
estimates could change in the future depending on internal
changes in our company as well as external factors. Future
changes in estimates could possibly result in a non-cash
impairment charge that could have a material adverse impact on
our results of operations.
Developed technology is amortized over three years as a cost of
revenue. Customer/contractual relationships are amortized over
one to three years as a sales expense. Most of our
trademarks/trade names have indefinite lives and therefore are
not amortized but are reviewed for impairment at least annually.
During fiscal 2007, we recorded a $3.9 million impairment
charge for certain intangible assets we acquired as a part of
the
e-Security
acquisition. During fiscal 2006, we recorded a $1.2 million
impairment charge for certain intangible assets we acquired as a
part of the Ximian acquisition. During fiscal 2005, we recorded
a $1.5 million impairment charge for certain intangible
assets we acquired as a part of the SilverStream and SUSE
acquisitions.
Deferred Tax Assets. In accordance with
applicable accounting standards, we regularly assess our ability
to realize our deferred tax assets. Assessments of the
realization of deferred tax assets require that management
consider all available evidence, both positive and negative, and
make significant judgments about many factors, including the
amount and likelihood of future taxable income. Based on all the
available evidence, we continue to believe that it is more
likely than not that our remaining U.S. net deferred tax
assets, and certain foreign deferred tax assets, are not
currently realizable. As a result, we continue to provide a full
valuation reserve on our U.S. net deferred tax assets and
certain foreign deferred tax assets.
Loss Contingency Accruals and
Restructurings. We are required to make accruals
for certain loss contingencies related to litigation and taxes.
We accrue these items in accordance with SFAS No. 5,
“Accounting for Contingencies,” which requires us to
accrue for losses we believe are probable and can be reasonably
estimated, however, the estimation of the amount to accrue
requires significant judgment. Litigation accruals require us to
make assumptions about the future outcome of each case based on
current information. Tax accruals require us to make assumptions
based on the results of tax audits, past experience and
interpretations of tax law. When our restructurings include
leased facilities, in accordance with SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal
Activities,” we are required to make assumptions about
future sublease income, which would offset our costs and
decrease our accrual. From time to time, we are subjected to tax
audits and must make assumptions about the outcome of the audit.
If any of the estimates or their related assumptions change in
the future, or if actual outcomes are different than our
estimates, we may be required to record additional charges or
reduce our accruals. During fiscal 2006, we recorded a
$24.0 million adjustment to increase accruals related to
loss contingencies due to changes in facts and circumstances.
During fiscal 2005, we recorded a $1.2 million adjustment
to reduce previous restructuring accruals and a
$5.3 million adjustment to increase merger liabilities
primarily due to changes in estimates we originally made
regarding future subleases.
Share-based Payments. On November 1,2005, we adopted Statement of Financial Accounting Standards
(“SFAS”) No. 123(R), “Share-Based
Payment,” which requires us to account for share-based
payment transactions using a fair value-based method and
recognize the related expense in the results of operations.
Prior to our adoption of SFAS No. 123(R), as permitted
by SFAS No. 123, we accounted for share-based payments
to employees using the Accounting Principles Board Opinion
No. 25 (“APB 25”), “Accounting for Stock
Issued to Employees,” intrinsic value method and,
therefore, we generally recognized compensation expense for
restricted stock awards and did not recognize compensation cost
for employee stock options. SFAS No. 123(R) allows
companies to choose one of two transition methods: the modified
prospective transition method or the modified retrospective
transition method. We chose to use the modified prospective
transition methodology, and accordingly, we have not restated
the results of prior periods.
Under the fair value recognition provisions of
SFAS No. 123(R), share-based compensation cost is
estimated at the grant date based on the fair value of the award
and is recognized as expense over the requisite service period
of the award. The fair value of restricted stock awards is
determined by reference to the fair market value of our common
stock on the date of grant. Consistent with the valuation method
we used for disclosure-only purposes under the provisions of
SFAS No. 123, we use the Black-Scholes model to value
both service condition and performance condition option awards
under SFAS No. 123(R). For awards with market
conditions granted subsequent to our adoption of
SFAS No. 123(R), we use a lattice valuation model to
estimate fair value. For awards with only service conditions and
graded-vesting features, we recognize compensation cost on a
straight-line basis over the requisite service period. For
awards with performance or market conditions granted subsequent
to our adoption of SFAS No. 123(R), we recognize
compensation cost based on the graded-vesting method.
Determining the appropriate fair value model and related
assumptions requires judgment, including estimating stock price
volatility, forfeiture rates, and expected terms. The expected
volatility rates are estimated based on historical and implied
volatilities of our common stock. The expected term represents
the average time that options that vest are expected to be
outstanding based on the vesting provisions and our historical
exercise, cancellation and expiration patterns. We estimate
pre-vesting forfeitures when recognizing compensation expense
based on
historical rates and forward-looking factors. We update these
assumptions at least on an annual basis and on an interim basis
if significant changes to the assumptions are warranted.
We issue performance-based equity awards, typically to senior
executives, which vest upon the achievement of certain financial
performance goals, including revenue and income targets.
Determining the appropriate amount to expense based on the
anticipated achievement of the stated goals requires judgment,
including forecasting future financial results. The estimate of
expense is revised periodically based on the probability of
achieving the required performance targets and adjustments are
made as appropriate. The cumulative impact of any revision is
reflected in the period of change. If the financial performance
goals are not met, the award does not vest, so no compensation
cost is recognized and any previously recognized compensation
cost is reversed.
In the past, we have issued market condition equity awards,
typically granted to senior executives, the vesting of which is
accelerated or contingent upon the price of Novell common stock
meeting specified pre-established stock price targets. For
awards granted prior to our adoption of
SFAS No. 123(R), the fair value of each market
condition award was estimated as of the grant date using the
same option valuation model used for time-based options without
regard to the market condition criteria. As a result of our
adoption of SFAS No. 123(R), compensation cost is
recognized over the estimated requisite service period and is
not reversed if the market condition target is not met. If the
pre-established stock price targets are achieved, any remaining
expense on the date the target is achieved is recognized either
immediately or, in situations where there is a remaining minimum
time vesting period, ratably over that period.
SAB 108
In September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108, “Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements”
(“SAB 108”). SAB 108 was issued in order to
eliminate the diversity of practice surrounding how public
companies quantify financial statement misstatements.
SAB 108 was effective for fiscal years ending after
November 15, 2006, but we adopted it early in fiscal 2006.
Traditionally, there were two widely-recognized methods for
quantifying the effects of financial statement misstatements:
the “roll-over” method and the “iron
curtain” method. The roll-over method focuses primarily on
the impact of a misstatement on the income statement, including
the reversing effect of prior year misstatements, but its use
can lead to the accumulation of misstatements on the balance
sheet. The iron-curtain method, on the other hand, focuses
primarily on the effect of correcting the period-end balance
sheet with less emphasis on the reversing effects of prior year
errors on the income statement. Prior to our application of the
guidance in SAB 108, we consistently applied the roll-over
method when quantifying financial statement misstatements.
In SAB 108, the SEC staff established an approach that
requires quantification of financial statement misstatements
based on the effects of misstatements on each of the financial
statements and the related financial statement disclosures. This
model is commonly referred to as a “dual approach”
because it requires quantification of errors under both the iron
curtain and the roll-over methods.
SAB 108 permitted us to initially apply its provisions to
errors that are material under the dual method but were not
previously material under our previously used method of
assessing materiality either by (i) restating prior
financial statements as if the dual approach had always been
applied or (ii) recording the cumulative effect of
initially applying the dual approach as adjustments to the
carrying values of the applicable balance sheet accounts as of
November 1, 2005 with an offsetting adjustment recorded to
the opening balance of retained earnings. We elected to record
the effects of applying SAB 108 using the cumulative effect
transition method and adjusted beginning retained earnings for
fiscal 2006 in the accompanying consolidated financial
statements for misstatements associated with our historical
stock-based compensation expense and related income tax effects.
We do not consider any of the misstatements to have a material
impact on our consolidated financial statements in any of the
prior years affected under our previous method for quantifying
misstatements, the roll-over method.
On May 23, 2007, we announced that we had completed our
self-initiated, voluntary review of our historical stock-based
compensation practices and determined the related accounting
impact.
The review was conducted under the direction of the Audit
Committee of our Board of Directors, who engaged the law firm of
Cahill Gordon & Reindel LLP, with whom we had no
previous relationship, as independent outside legal counsel to
assist in conducting the review. The scope of the review covered
approximately 400 grant actions (on approximately 170 grant
dates) from November 1, 1996 through September 12,2006. Within these pools of grants are more than 58,000
individual grants. In total, the review encompassed awards
relating to more than 230 million shares of common stock
granted over the ten-year period.
The Audit Committee, together with its independent outside legal
counsel, did not find any evidence of intentional wrongdoing by
any former or current Novell employees, officers or directors.
We have determined, however, that we utilized incorrect
measurement dates for some of the stock-based compensation
awards granted during the review period. The incorrect
measurement dates can be attributed primarily to the following
reasons:
Administrative Corrections — In the period of
fiscal 1997 to 2005, we corrected administrative errors
identified subsequent to the original authorization by awarding
stock options that we dated with the original authorization
date. The administrative errors included incorrect lists of
optionees, generally new hires who were inadvertently omitted
from the lists of optionees because of the delayed updating of
our personnel list, and miscalculations of the number of options
to be granted to particular employees on approved lists.
Number of Shares Approved Not Specified —
Documented authorization for certain grants, primarily in the
period from fiscal 1997 through 2000, lacked specificity for
some portion or all of the grant.
Authorization Incomplete or Received Late — For
certain grants, primarily in the period from fiscal 1997 through
2004, there is incomplete documentation to determine with
certainty when the grants were actually authorized or the
authorization was received after the stated grant date.
In light of the above findings, we and our advisors performed an
exhaustive process to uncover all information that could be used
in making a judgment as to appropriate measurement dates. We
used all available information to form conclusions as to the
most likely option granting actions that occurred and to form
conclusions as to the appropriate measurement dates.
Under APB No. 25, “Accounting for Stock Issued to
Employees,” because the exercise prices of the stock
options on the new measurement dates were, in some instances,
lower than the fair market value of the underlying stock on such
dates, we are required to record compensation expense for these
differences. As a result, stock-based compensation expense in a
cumulative after-tax amount of approximately $19.2 million
should have been reported in the consolidated financial
statements for the fiscal years ended October 31, 1997
through October 31, 2005. After considering the materiality
of the amounts of stock-based compensation and related income
tax effects that should have been recognized in each of the
applicable historic periods, including the interim periods of
fiscal 2005 and 2006, we determined that the errors were not
material to any prior period, on either a quantitative or
qualitative basis, under our previous method for quantifying
misstatements, the roll-over method. Therefore, we have not
restated our consolidated financial statements for prior
periods. In accordance with the provisions of SAB 108, we
decreased beginning retained earnings at November 1, 2005
by approximately $19.2 million, from $984.1 million to
$964.9 million, or a reduction of two percent, with the
offset to additional paid-in capital in the consolidated balance
sheet.
The following table summarizes the effects, net of income taxes,
(on a cumulative basis prior to fiscal 2005 and in fiscal
2005) resulting from changes in measurement dates and the
related application of the guidance applicable to the initial
compliance with SAB 108:
Pursuant to an Agreement and Plan of Merger, dated
August 1, 2007, we acquired 100% of the outstanding stock
of Senforce Technologies, Inc., a provider of endpoint security
management, for $20.0 million in cash plus transaction
costs of $0.2 million. Endpoint security management focuses
on technology that provides data security for workstations,
laptops or mobile devices in order to ensure that data cannot be
accessed when they are lost or stolen. Senforce’s products
have been integrated into our identity and security management
products. Senforce’s results of operations were included in
our consolidated financial statements beginning on the
acquisition date.
RedMojo
On November 17, 2006, we acquired 100% of the outstanding
stock of RedMojo Inc, a privately-held company that specialized
in cross-platform virtualization management software tools.
RedMojo’s products have been integrated into our systems
and resource management products. The purchase price was
approximately $9.7 million in cash plus merger and
transaction costs of approximately $0.2 million.
RedMojo’s results of operations were included in our
consolidated financial statements beginning on the acquisition
date.
e-Security
On April 19, 2006, we acquired 100% of the outstanding
stock of
e-Security,
Inc., a privately-held company headquartered in Vienna,
Virginia.
e-Security
provides security information, event management and compliance
software.
e-Security’s
products are now part of our identity and access management
sub-category. The purchase price was approximately
$71.7 million in cash, plus transaction costs of
$1.1 million.
e-Security’s
results of operations were included in our consolidated
financial statements beginning on the acquisition date.
Open
Invention Network, LLC
On November 8, 2005, Open Invention Network, LLC
(“OIN”) was established by us, IBM, Philips, Red Hat
and Sony. OIN is a privately-held company that has acquired and
intends to continue acquiring patents to promote Linux and open
source by offering its patents on a royalty-free basis to any
company, institution or individual that agrees not to assert its
patents against the Linux operating system or certain
Linux-related applications. In addition, OIN, in its discretion,
will enforce its patents to the extent it believes such action
will serve to further protect and promote Linux and open source.
Each party contributed capital with a fair value of
$20.0 million to OIN. We account for our ownership interest
using the equity method of accounting. Our $20.0 million
contribution consisted of patents with a fair value of
$15.8 million, including $0.3 million of prepaid
acquisition costs, and cash of $4.2 million. At the time of
the contribution, the patents had a book value of
$14.4 million, including $0.3 million of prepaid
acquisition costs. The $1.4 million difference between the
fair value and book value of the patents will be amortized to
our investment in OIN account and equity income over the
remaining estimated useful life of the patents, which is
approximately nine years. Our investment in OIN, as of
October 31, 2007 of $19.2 million is classified as
other assets in the consolidated balance sheet. In fiscal 2007,
our ownership interest in OIN decreased to approximately 17% due
to the addition of NEC, a new investor in the company.
In December 2005, we acquired the remaining 50% ownership of our
sales and marketing joint venture in India from our joint
venture partner for approximately $7.5 million in cash and
other consideration. At the time of the acquisition, the net
book value of the minority interest was $5.3 million. The
$2.0 million difference between the net book value of the
minority interest and the amount we paid for the remaining 50%
ownership was recorded as goodwill.
Tally
Systems Corp.
On April 1, 2005, we acquired 100% of the outstanding stock
of Tally Systems Corp., a privately-held company headquartered
in Lebanon, New Hampshire. Tally provides automated PC hardware
and software recognition products and services used by customers
to manage hardware and software assets. These products and
services are now part of our ZENworks product line. The purchase
price was approximately $17.3 million in cash, plus
transaction costs of $0.4 million and excess facility costs
of $4.5 million recorded as an acquisition liability.
Tally’s results of operations were included in our
consolidated financial statements beginning on the acquisition
date.
Immunix,
Inc.
On April 27, 2005, we acquired 100% of the outstanding
stock of Immunix, Inc., a privately-held company headquartered
in Portland, Oregon, which provides enterprise class, host
intrusion prevention solutions for the Linux platform. This
acquisition enables us to expand security offerings on the Linux
platform. The purchase price was approximately
$17.3 million in cash, plus transaction costs of
$0.4 million. Immunix’s results of operations were
included in our consolidated financial statements beginning on
the acquisition date.
Divestitures
CTP
Switzerland
On October 31, 2007, we signed a share purchase agreement,
(“Agreement”) to sell our wholly-owned CTP Switzerland
subsidiary to a management-led buyout group for
$0.5 million at close plus an additional contingent payment
of up to approximately $0.3 million over the next year
based on an earn-out model that is tied to CTP
Switzerland’s management bonuses. Final closing of the sale
will occur on January 31, 2008. The $0.5 million was
placed into an escrow account as of October 31, 2007 and
will be held until the close on January 31, 2008. Once the
sale is complete, there will be no further shareholder or
operational relationship between us and CTP Switzerland going
forward.
Due to the signing of the Agreement prior to the end of fiscal
2007, CTP Switzerland was classified as a discontinued operation
in our consolidated statements of operations for fiscal 2007,
2006 and 2005. In addition, the Agreement triggered the need to
test the $3.9 million of goodwill related to CTP
Switzerland for impairment. Using an estimate of proceeds to be
received upon sale as an indicator of CTP Switzerland’s
fair value, we determined that the entire amount of CTP
Switzerland’s goodwill had become impaired, and was,
therefore, written off. In addition, we recorded an impairment
charge of $5.0 million to write CTP Switzerland’s
remaining assets down to their fair value based on the estimated
proceeds to be received upon the sale. Both of these were
recorded as components of discontinued operations in the
consolidated statement of operations. After the impairment
noted, CTP Switzerland’s assets of approximately
$4.3 million and liabilities of approximately
$4.1 million are considered “held for sale,”
however, due to their immateriality, we did not classify these
separately on our consolidated balance sheet.
Salmon
On March 12, 2007, we sold our shares in Salmon to Okam
Limited, a U.K. Limited Holding Company for $4.9 million,
plus an additional contingent payment of approximately
$3.9 million to be received if Salmon meets certain revenue
targets. There will be no further shareholder or operational
relationship between us and Salmon going forward. Salmon was a
component of our business consulting segment and Salmon’s
sale will not have an
impact on our professional services business and has been
recorded as a component of the discontinued operations in the
consolidated statement of operations.
During the first quarter of fiscal 2007, we determined that it
was more likely than not that Salmon would be sold. This
determination triggered the need to test the $11.9 million
of goodwill related to Salmon for impairment. Using an estimate
of proceeds to be received upon sale as an indicator of
Salmon’s fair value, we determined that $10.2 million
of Salmon’s goodwill had become impaired, and was,
therefore, written off during the quarter as a component of the
discontinued operations in the consolidated statement of
operations. In addition, we also determined that
$0.5 million of customer/contractual relationship
intangible assets and $0.1 million of non-compete agreement
intangible assets had become impaired and, therefore, were also
written off in the first quarter of fiscal 2007.
In the second quarter of fiscal 2007, we recognized a gain on
the consummation of the sale of approximately $0.6 million.
Salmon’s results of operations are classified as a
discontinued operation in our consolidated statements of
operations.
Celerant
On May 24, 2006, we sold our shares in Celerant consulting
to a group comprised of Celerant management and Caledonia
Investments plc for $77.0 million in cash. Celerant
consulting was acquired by Novell in 2001 as part of the
Cambridge Technology Partners acquisition. There are no ongoing
shareholder or operational relationships between us and Celerant
consulting. The sale of Celerant consulting does not impact our
professional services business. Celerant’s results of
operations are classified as a discontinued operation in our
consolidated statements of operations.
The results of discontinued operations (CTP Switzerland, Salmon
and Celerant) for fiscal 2007, 2006, and 2005 are as follows:
On August 10, 2006, we sold our Japan consulting group
(“JCG”) to Nihon Unisys, LTD (“Unisys”) for
$4.0 million. $2.8 million of the selling price was
paid at closing and $1.2 million was contingent upon
certain key employees remaining employed by Unysis for a
12-month
period after closing. In the fourth quarter of fiscal 2007,
Unisys paid the contingent consideration of $0.2 million
for each key employee that was still employed by Unisys at the
end of the retention period, totaling $1.2 million. We
recorded a loss of $8.3 million in fiscal 2006 related to
the excess carrying amount of the JCG over its fair value, of
which $7.1 million was to write off goodwill. We also
recognized a gain of $1.2 million in fiscal 2007 related to
contingent consideration.
It is anticipated that the JCG will continue to be a key partner
for Novell with respect to subcontracting consulting services.
Likewise, the cash flows from the JCG to Novell are also
anticipated to increase as Novell plans to be a subcontractor
for the JCG. As a result of our expected continuing involvement,
the JCG has not been presented as a discontinued operation.
Results
of Operations
Revenue
We sell our products, services, and solutions primarily to
corporations, government entities, educational institutions,
resellers and distributors both domestically and
internationally. In the consolidated statements of operations,
we categorize revenue as software licenses, maintenance and
subscriptions, and services. During the third quarter of fiscal
2007, we began reporting our services revenue and related cost
of revenue in separate lines on the consolidated statements of
operations. All prior periods have been reclassified to conform
to the current year’s presentation. Software licenses
revenue includes sales of proprietary licenses, upgrade licenses
and certain royalties. Maintenance and subscriptions revenue
includes Linux subscriptions, upgrade protection contracts and
engineering-related revenue. Services revenue includes technical
support, training and professional services.
Revenue in our software licenses category increased in fiscal
2007 compared to fiscal 2006 primarily due to increased license
revenue from our identity and security management products and
increased license revenue from our systems and resource
management products as a result of the acquisition of Senforce.
These increases were offset somewhat by an anticipated decrease
in combined NetWare/OES license revenue.
Software license revenue decreased in fiscal 2006 compared to
fiscal 2005 primarily due to the impact of a large sale in the
EMEA region in fiscal 2005, which added $21.5 million to
license revenue in fiscal 2005, and a $28.5 million
expected decline in license sales of NetWare/OES and other
workgroup products. These decreases were offset somewhat by a
$9.0 million increase in license sales of our identity and
access management products.
Maintenance and subscriptions revenue increased in fiscal 2007
compared to fiscal 2006 primarily due to increased revenue from
our Linux platform products, which increased $31.3 million
or 69%.
Maintenance and subscriptions revenue decreased during fiscal
2006 compared to fiscal 2005 primarily due to a
$25.7 million decrease in NetWare/OES combined maintenance
revenue, offset somewhat by increased maintenance revenue from
our systems and resource management and identity and security
management products of $18.8 million and increased
subscriptions for our Linux open platform solutions of
$9.5 million. The change in the mix of our revenue towards
more maintenance and subscription contracts has somewhat
increased revenue in the maintenance and subscriptions category
compared to the software licenses category during fiscal 2006.
Services revenue decreased in fiscal 2007 compared to fiscal
2006 primarily due to decreased professional services revenue
related to our identity and security management and workgroup
products. Services revenue decreased in fiscal 2006 compared to
fiscal 2005 primarily due to a $21.9 million decrease in
professional services and other services revenue that was
expected as a result of the restructuring actions taken in the
fourth quarter of fiscal 2005.
Foreign exchange rate fluctuations favorably impacted revenue by
$15.2 million in fiscal 2007 compared to fiscal 2006.
We also analyze revenue by reporting segment. These reporting
segments are:
•
Open platform solutions
•
Identity and security management
•
Systems and resource management
•
Workgroup
•
Business consulting
Net revenue in the open platform solutions segment was as
follows:
Revenue from our open platform solutions segment increased in
fiscal 2007 compared to fiscal 2006 primarily due to increased
Linux platform products revenue, which increased approximately
69% due to the impact of the Microsoft transaction. In addition,
open platform-related services revenue increased approximately
81% in fiscal 2007 compared to fiscal 2006. Software licenses
within the open platform solutions segment decreased as most of
the revenue in this category is sold under subscriptions and
upgrade protection contracts, which we classify as maintenance
and subscriptions. Because much of the revenue we invoice is
deferred and recognized over time, we consider invoicing, or
bookings, to be a key indicator of current sales performance and
future revenue performance. For Linux platform products,
invoicing increased 200% in fiscal 2007 compared to fiscal 2006,
including the impact of the Microsoft agreement.
Revenue from our open platform solutions segment increased in
fiscal 2006 compared to fiscal 2005 primarily due to increased
services-related revenue.
Net revenue in the identity and security management segment
was as follows:
Revenue from our identity and security management segment
decreased in fiscal 2007 compared to fiscal 2006 primarily due
to decreased revenue from identity and security-related
services, such as professional services. Invoicing in the
identity and security management products increased 11% in
fiscal 2007 compared to fiscal 2006.
Revenue from our identity and security management segment
increased in fiscal 2006 compared to fiscal 2005 primarily due
to strong sales growth in our identity and access management
products, which increased by 30% in fiscal 2006 compared to
fiscal 2005.
Net revenue in the systems and resource management segment
was as follows:
Revenue from our systems and resource management segment
increased in fiscal 2007 compared to fiscal 2006 primarily due
to revenue from the acquisition of Senforce in fiscal 2007.
Invoicing increased 3% in fiscal 2007 compared to fiscal 2006.
Revenue from our systems and resource management segment
decreased in fiscal 2006 compared to fiscal 2005 primarily due
to $13.4 million of revenue recognized from a large
transaction in EMEA during the fourth quarter of fiscal 2005.
Net revenue in the workgroup segment was as follows:
Revenue from our workgroup segment decreased in fiscal 2007
compared to fiscal 2006 primarily due to a decrease in combined
NetWare/OES revenue of 12% and decreased revenue from
professional services. The decreases in the combined NetWare/OES
revenue were less than our expectation of a 15%-20% revenue
decline year-over-year due in part to revenue from our Novell
Open Workgroup Suite offering. Invoicing for the workgroup
products decreased by 7% in fiscal 2007 compared to fiscal 2006,
excluding the impact of the Microsoft agreement.
Revenue from our workgroup segment decreased in fiscal 2006
compared to fiscal 2005 primarily due to a decrease in our
combined NetWare/OES revenue and declines in our installed base,
offset somewhat by the release of OES in the middle of the
second quarter of fiscal 2005. Combined NetWare/OES revenue
decreased $49.4 million or 18% in fiscal 2006 compared to
fiscal 2005, which was in line with our expectations.
Business
consulting segment
Revenue from business consulting was $4.2 million in fiscal
2006 and $11.7 million in fiscal 2005. Business consulting
in fiscal 2006 and 2005 was comprised of our Japan consulting
group, which was divested during fiscal 2006. As noted above,
results of operations for CTP Switzerland and Salmon (previous
components of business consulting) are classified as
discontinued operations in our statements of operations.
Deferred
revenue
We have total deferred revenue of $767.7 million at
October 31, 2007 compared to $427.0 million at
October 31, 2006. Deferred revenue represents revenue that
is expected to be recognized in future periods under maintenance
contracts and subscriptions that are recognized ratably over the
related service periods, typically one to
three years. The increase in total deferred revenue of
$340.7 million is primarily attributable to deferred
revenue from the Microsoft agreements of approximately
$307.8 million.
Gross profit from software licenses and maintenance and
subscriptions as a percentage of related revenue in fiscal 2007
remained relatively flat compared to fiscal 2006. Gross profit
from services as a percentage of related revenue in fiscal 2007
increased compared to fiscal 2006 primarily due to improved
professional services margins.
Gross profit from software licenses as a percentage of related
revenue remained flat from fiscal 2005 through fiscal 2006.
Gross profit from maintenance and subscriptions as a percentage
of related revenue remained relatively flat from fiscal 2005 to
fiscal 2006. Gross profit from services as a percentage of
related revenue increased in fiscal 2006 compared to fiscal 2005
primarily due to professional services headcount reductions that
took place in fiscal 2005, offset somewhat by additional
stock-based compensation expense from the adoption of
SFAS No. 123(R).
The changes in gross profit in each of our segments as a
percentage of related revenue in fiscal 2007 compared to fiscal
2006 can be characterized as follows:
•
Open platform solutions — increased primarily due to
higher related revenue and the related economies of scale, due
in part to the impact of the Microsoft transaction.
Identity and security management — increased primarily
due to improved profitability from related professional services
engagements and lower royalty costs.
•
Systems and resource management — remained flat.
•
Workgroup — increased due primarily to lower
professional services costs.
•
Business consulting — eliminated with the sale of our
Japan consulting group in fiscal 2006. As noted above, results
of operations for CTP Switzerland and Salmon (previous
components of business consulting) are classified as
discontinued operations in our statements of operations.
The changes in gross profit in each of our segments as a
percentage of related revenue in fiscal 2006 compared to fiscal
2005 can be characterized as follows:
•
Open platform solutions — remained relatively flat.
•
Identity and security management — increased primarily
due to improved profitability from related professional services
engagements and lower royalty costs.
•
Systems and resource management — decreased due to
higher royalty costs.
•
Workgroup — remained relatively flat.
•
Business consulting — decreased due to the sale of our
Japan consulting group in fiscal 2006. As noted above, results
of operations for CTP Switzerland and Salmon (previous
components of business consulting) are classified as
discontinued operations in our statements of operations.
Sales and marketing expenses decreased in fiscal 2007 compared
to fiscal 2006 primarily due to tighter expense control and a
$1.8 million decrease in stock-based compensation expense
resulting from lower levels of executive awards. Sales and
marketing headcount was approximately 132 employees, or
12%, lower at the end of fiscal 2007 compared to the end of
fiscal 2006.
Sales and marketing expenses remained relatively flat in fiscal
2006 compared to fiscal 2005. Increased expense from the
adoption of SFAS No. 123(R), which totaled
approximately $11.5 million in fiscal 2006, and additional
sales expense related to the acquisition of
e-Security
in the second quarter of fiscal 2006 were offset by savings from
the fiscal 2005 headcount reductions and decreased spending on
marketing-related activities. Sales and marketing headcount was
approximately 78 employees, or 7%, lower at the end of
fiscal 2006 compared to the end of fiscal 2005.
Product development expenses increased in fiscal 2007 compared
to fiscal 2006 primarily due to planned incremental spending
related to our strategic initiative to reduce future costs and
optimize our product development efforts, an increase in
stock-based
compensation costs of $1.7 million and due to acquisitions
during fiscal 2007. Product development expenses increased in
fiscal 2007 in each of our reporting segments. Product
development expenses were reduced late in the fourth quarter of
fiscal 2007 and are expected to be lower in fiscal 2008 compared
to fiscal 2007. Product development headcount increased by
approximately 7 employees, or less than 1%, at the end of
fiscal 2007 compared to the end of fiscal 2006.
Product development expenses in fiscal 2006 decreased compared
to fiscal 2005 primarily due to planned savings as a result of
the fiscal 2005 headcount reductions, offset somewhat by
additional expense from the adoption of
SFAS No. 123(R), which totaled approximately
$8.2 million in fiscal 2006. Product development headcount
was approximately 255 employees, or 16%, lower at the end
of fiscal 2006 compared to the end of fiscal 2005.
General and administrative expenses increased in fiscal 2007
compared to fiscal 2006 due primarily to higher legal fees,
additional costs in the current year related to our review of
our historical stock-based compensation practices, which was
completed in May 2007 totaling $11.8 million, and foreign
exchange. These increases were offset somewhat by a decrease of
$0.9 million in expense related to stock-based compensation
during fiscal 2007. General and administrative headcount was
lower by approximately 47 employees, or 7%, at the end of
fiscal 2007 compared to the end of fiscal 2006.
General and administrative expenses increased in fiscal 2006
compared to fiscal 2005 due primarily to $22.8 million of
litigation-related expenses resulting from an adjustment to a
loss contingency based on changes in facts and circumstances,
partially offset by a settlement we received from one of our
insurance companies for past legal expenses, $11.1 million
of stock-based compensation expense resulting from the adoption
of SFAS No. 123(R), $3.0 million in increased
expenses related to an internal project aimed at streamlining
administrative and support functions, $1.9 million of
additional expenses resulting from our voluntary stock option
review, and a reduction in bad debt allowances and other
accruals that reduced general and administrative expenses in
fiscal 2005. These increases were offset somewhat by headcount
reductions and lower facilities expenses. General and
administrative headcount was lower by approximately
21 employees, or 3%, at the end of fiscal 2006 compared to
the end of fiscal 2005.
Purchased in-process research and development
(“IPR&D”) relates to technology that was not
technologically feasible at the date of the acquisition, meaning
it had not reached the working model stage, did not contain all
of the major functions planned for the product, and was not
ready for initial customer testing. IPR&D was valued based
on discounting forecasted cash flows that will be generated
directly from the related products. The IPR&D does not have
any alternative future use and did not otherwise qualify for
capitalization. As a result, the amount was expensed. IPR&D
in fiscal 2006 related to the acquisition of
e-Security
in the second quarter of fiscal 2006. Purchased IPR&D in
fiscal 2005 related to technology purchased in the acquisitions
of Immunix and Ximian.
During fiscal 2006, we recognized a $6.0 million gain on
the sale of our two corporate aviation assets and certain
corporate real estate assets. During fiscal 2005, we recognized
a $1.6 million gain on the sale of a facility in Lindon,
Utah.
Gain on settlement of potential litigation in fiscal 2005
related to an agreement with Microsoft to settle potential
antitrust litigation related to our NetWare operating system in
exchange for $536 million in cash. On November 18,2004, we received $536 million in cash from Microsoft. The
financial terms of the NetWare settlement agreement, net of
related legal fees of $88 million, resulted in a pre-tax
gain of approximately $447.6 million in the first quarter
of fiscal 2005.
The fiscal 2007 gain on sale of Japan consulting group relates
to the contingent earn-out, discussed in the Divestitures
section, above. The fiscal 2006 loss on sale of Japan consulting
group relates to the excess of the carrying value of the JCG
over its fair value at the time we entered into an agreement to
sell the JCG.
The executive termination benefits related to the termination of
our former Chief Executive Officer and Chief Financial Officer
by our Board of Directors during the third quarter of fiscal
2006. They received benefits pursuant to their severance
arrangements totaling $9.4 million, of which approximately
$2.7 million of the expense related to stock compensation
and $6.7 million related to severance and other benefits.
The impairments in fiscal 2007 related to developed technology,
customer relationship and trade name intangible assets acquired
as a part of the
e-Security
acquisition. In the third quarter of fiscal 2007, we determined
that
e-Security’s
financial performance declined significantly and that its
estimated future undiscounted direct cash flows would not be
sufficient to cover the carrying value of its intangible assets.
We used discounted cash flow models to estimate the value of
e-Security’s
intangible assets and determined that $2.5 million,
$1.3 million and $0.1 million of
e-Security’s
developed technology, customer relationship and trade name
intangible assets, respectively, had become impaired. The entire
$3.9 million impairment charge related to the identity and
security management operating segment.
The impairments of $1.2 million in fiscal 2006 related to
our Ximian trademark/trade name intangible assets that ceased
being utilized in the fourth quarter of fiscal 2006 and no
longer had any value. During fiscal 2005, we also determined
that $0.7 million of our trademarks and trade names were
impaired as they were no longer being utilized and no longer had
any value, and we also determined that certain internal use
software intangible assets with a net book value of
$0.8 million were fully impaired. The fair value of the
software was determined based on the fact that this software, as
well as a similar product from a competitor, are now both
available for free to the general public and the related
technology is not proprietary to either us or the competitor.
Restructuring
Expenses
Fiscal
2007
During fiscal 2007, we recorded net restructuring expenses of
$43.1 million, of which $43.3 million related to
restructuring activities recognized during fiscal 2007 and
$0.2 million related to net releases of previously recorded
restructuring liabilities. The fiscal 2007 restructuring action
is a continuation of the restructuring plan that we began
implementing during the fourth quarter of fiscal 2006 and
continued throughout fiscal 2007. This restructuring plan
relates to efforts to restructure our business to improve
profitability. These efforts center around three main
initiatives: (1) improving sales model and sales staff
specialization; (2) integrating our product development
approach and balancing between on and offshore development
locations; and (3) improving administrative and support
functions. Specific actions taken during fiscal 2007 included
reducing our workforce by 619 employees in sales,
professional services, general and administrative, operations,
product development, marketing, and technical support. These
reductions occurred in most geographic locations and levels of
the organization. Total restructuring expenses by operating
segment were as follows: $28.6 million in corporate
operating costs not allocated to our operating segments,
$5.5 million in identity and security management,
$5.4 million in workgroup, $2.2 million in systems and
resource management, and $1.6 million in open platform
solutions.
The remaining unpaid balance as of October 31, 2007 is for
severance, which will be paid over the next twelve months, and
lease costs for redundant facilities which will be paid over the
respective contractual period.
Fiscal
2006
During fiscal 2006, we recorded net restructuring expenses of
$4.4 million, $4.2 million of which related to
restructuring activity recognized during fiscal 2006 and
$0.2 million of which consisted of net adjustments related
to previously recorded merger liabilities and restructuring
liabilities. The adjustments to the merger liabilities have been
recorded in the statement of operations since the changes have
occurred outside the relevant purchase price allocation period.
The fiscal 2006 restructuring expenses related to efforts to
restructure our business to improve profitability, as discussed
above. Specific actions taken during fiscal 2006 included
reducing our workforce by 24 employees, exiting a facility
and liquidating two legal entities.
The following table summarizes the activity during fiscal 2006
related to this restructuring:
As of October 31, 2007, the remaining unpaid balance is for
various fees related to the liquidation of two legal entities,
which will be paid out when the liquidations are completed.
Fiscal
2005
During fiscal 2005, we recorded net restructuring expenses of
$57.7 million, of which $53.6 million related to
restructuring activity recognized during fiscal 2005 and
$5.3 million related to adjustments to previously recorded
merger liabilities to adjust lease accruals, less a net release
of $1.2 million related to an adjustment of prior period
restructuring liabilities. The adjustments to the merger
liabilities have been recorded in the statement of operations
since the changes have occurred outside the relevant purchase
price allocation period. These restructuring expenses related to
our continuing efforts to restructure our business to improve
profitability and to focus on Linux and identity-driven
computing. Specific actions taken included reducing our
workforce by 817 employees.
As of October 31, 2007, the remaining unpaid balances
include accrued liabilities related to severance benefits which
will be paid out once the related litigation has been resolved,
and lease costs for redundant facilities which will be paid over
the respective remaining contract terms.
Income
from operations
Foreign exchange rate fluctuations unfavorably impacted loss
from operations by approximately $4.7 million in fiscal
2007 compared to the same period in fiscal 2006. Foreign
exchange rate fluctuations unfavorably impacted loss from
operations by approximately $2.2 million in fiscal 2006
compared to the same period in fiscal 2005.
Investment income includes income from short-term investments.
Investment income for fiscal 2007 increased compared to fiscal
2006 due to higher interest rates and increased cash balances
primarily due to $355.6 million of cash received from the
Microsoft agreements.
Investment income from short-term and long-term investments
increased in fiscal 2006 compared to fiscal 2005 due to higher
interest rates, offset somewhat by lower cash balances.
During the fourth quarter of fiscal 2006, we sold all of our
rights, titles, interests and obligations for 22 of our 23
venture capital funds, which were classified in long-term
investments in the consolidated balance sheet, for total
proceeds of $71.3 million. The sale of one-half of one fund
closed in fiscal 2006, and the sale of the remaining one-
half of that fund closed at the beginning of fiscal 2007,
resulting in an additional gain in fiscal 2007 of
$3.6 million on proceeds of $5.0 million.
Interest expense and other, net for fiscal 2007 increased
compared to fiscal 2006 due primarily to additional interest
expense on our Debentures. Due to the voluntary review of our
historical stock-based compensation practices that was announced
in August 2006 and not completed until May 2007, we did not file
our third quarter fiscal 2006
Form 10-Q,
fiscal 2006
Form 10-K,
and first quarter fiscal 2007
Form 10-Q
in a timely manner. In September 2006, we received a letter from
Wells Fargo Bank, N.A., the trustee of our Debentures, which
asserted that we were in default under the indenture because of
the delay in filing our
Form 10-Q
for the period ended July 31, 2006. The letter stated that
the asserted default would not become an “event of
default” under the indenture if we cured the default within
60 days after the date of the notice. We believe that this
above-mentioned notice of default was invalid and without merit
because the indenture only requires us to provide the trustee
copies of SEC reports within 15 days after such filings are
actually made. However, in order to avoid the expense and
uncertainties of further disputing whether a default under the
indenture had occurred, we solicited consents from the holders
of the Debentures to proposed amendments to the indenture that
would give us until Thursday, May 31, 2007 to become
current in our SEC reporting obligations and a waiver of rights
to pursue remedies available under the indenture with respect to
any default caused by our not filing SEC reports timely. On
November 9, 2006, we received consents from the holders of
the Debentures, and therefore we and the trustee entered into a
first supplemental indenture implementing the proposed
amendments described in the consent solicitation statements.
Under the terms of the consent solicitation and first
supplemental indenture, we are paying an additional 7.3% per
annum, or $44.0 million, in special interest on the
Debentures from November 9, 2006 to, but excluding
November 9, 2007. In accordance with
EITF 96-19,
“Debtor’s Accounting for a Modification or Exchange of
Debt Instruments”
(“EITF 96-19”),
since the change in the terms of the Debentures did not result
in substantially different cash flows, this change in terms is
accounted for as a modification of debt and not an
extinguishment of debt, and therefore the additional
$44.0 million of special interest payments is expensed over
the period from November 9, 2006 through July 15,2009, the date the Debentures are first callable by either
party. During the period of November 9, 2006 through
July 15, 2009, the new effective interest rate on this
debt, including the $44.0 million, is 3.2%. The
$44.0 million are paid as special interest payments over
three periods; the first payment of $8.1 million occurred
in January 2007. The next payment of $22.0 million occurred
in July 2007 and the final payment of $13.9 million will
occur in January 2008. During fiscal 2007, we incurred interest
expense of $19.0 million, related to the Debentures and
made cash payments for interest of $33.1 million. In
addition, we expensed approximately $1.5 million in fees
paid to Citigroup for work performed on the consent process. On
May 25, 2007, we filed our delinquent reports bringing us
current with our SEC reporting obligations.
Interest expense and other, net decreased slightly in fiscal
2006 compared to fiscal 2005 due primarily to lower foreign
currency transaction losses.
Income
tax expense on income from continuing operations
We are subject to income taxes in numerous jurisdictions and the
use of estimates is required in determining our provision for
income taxes. In addition to the income taxes provided for
continuing operations noted above, we received an income tax
benefit from discontinued operations of less than
$0.1 million in fiscal 2007 and provided for an income tax
expense from discontinued operations of $1.6 million, and
$2.8 million in fiscal 2006, and 2005, respectively.
Due to the utilization of a significant amount of our net
operating loss carryforwards during fiscal 2005, substantially
all of the tax benefit received from the use of our remaining
net operating loss carryforwards to offset U.S. taxable
income in 2007 and 2006 was credited to additional paid-in
capital or goodwill and not to income tax expense. In addition,
the windfall tax benefit associated with stock-based
compensation is also credited to
additional paid-in capital. In connection with our adoption of
SFAS No. 123(R), we elected to follow the tax ordering
rules to determine the sequence in which deductions and net
operating loss carryforwards are utilized. Accordingly, during
fiscal 2007, a tax benefit relating to stock options of
$13.1 million was credited to additional paid-in capital
and a benefit of $4.9 million was credited to goodwill.
During fiscal 2006, a tax benefit relating to stock options of
$15.3 million was credited to additional paid-in capital
and a benefit of $6.6 million was credited to goodwill.
The effective tax rates for fiscal 2007 and fiscal 2006 differ
from the federal statutory rate of 35% primarily due to the
effects of foreign taxes, stock-based compensation plans,
non-deductible expenses, and differences between the book and
tax treatment of certain items of income. Additionally, the
benefit of the use of previously reserved U.S. net
operating losses was credited to goodwill or additional paid-in
capital. The effective tax rate on income from continuing
operations for fiscal 2007 was 412% compared to the effective
tax rate of 83% for fiscal 2006. The effective tax rate for
fiscal 2007 was higher than the effective tax rate for fiscal
2006 primarily because we had near break-even earnings from
operations, yet we had income tax expense associated with the
use of previously reserved U.S. net operating loss
carryovers. The benefit of the use of these U.S. net
operating loss carryovers was credited to goodwill or additional
paid-in capital. The effective tax rate on income from
continuing operations for fiscal 2006 was 83% compared to the
effective tax rate of 19% for fiscal 2005. The effective tax
rate for fiscal 2006 is higher than the effective tax rate for
fiscal 2005 primarily because the fiscal 2005 rate reflected a
benefit recorded to income tax expense from the use of a
significant amount of our net operating loss carryforwards.
In accordance with applicable accounting standards, we regularly
assess our ability to realize our deferred tax assets.
Assessments of the realization of deferred tax assets require
that management consider all available evidence, both positive
and negative, and make significant judgments about many factors,
including the amount and likelihood of future taxable income.
Based on all the available evidence, we continue to believe that
it is more likely than not that our remaining U.S. net
deferred tax assets, and certain foreign deferred tax assets,
are not currently realizable. As a result, we continue to
provide a full valuation allowance on our U.S. net deferred
tax assets and certain foreign deferred tax assets. The
valuation allowance on deferred tax assets increased by
$16.4 million in fiscal 2007 primarily due to stock-based
compensation and other originating assets, new acquisitions and
changes in our deferred tax liabilities. The valuation allowance
was reduced by approximately $18 million as a result of a
favorable interpretation of tax law in a foreign jurisdiction
that made it more likely than not that the use of tax net
operating losses would be sustained. This benefit was credited
to goodwill.
As of October 31, 2007, we had unrestricted U.S. net
operating loss carryforwards for federal tax purposes of
approximately $39.9 million. Substantially all of the
benefit of the use of these loss carryforwards will be recorded
as a credit to additional paid-in capital. If not utilized,
these carryforwards will expire in fiscal years 2023 through
2025. Additionally, we had $231.0 million in net operating
loss carryforwards from acquired companies that will expire in
years 2018 through 2026. These loss carryforwards from acquired
companies can be utilized to offset future taxable income, but
are subject to certain annual limitations. The benefit of the
use of these loss carryforwards will be recorded to first reduce
goodwill relating to the acquisition, second to reduce other
non-current intangible assets relating to the acquisition, and
third to reduce income tax expense. In addition, we have
approximately $181.0 million of foreign loss carryforwards,
of which $0.9 million, $4.0 million, and
$9.2 million are subject to expiration in years 2008, 2009,
and
2010-2014
respectively. The remaining losses do not expire. We have
$111.2 million in capital loss carryforwards, which, if not
utilized, will expire in fiscal years 2008 through 2011. We have
foreign tax credit carryforwards of $43.4 million that
expire between 2009 and 2017, general business credit
carryforwards of $104.9 million that expire between 2010
and 2027, and alternative minimum tax credit carryforwards of
$11.2 million that do not expire. We also have various
state net operating loss and credit carryforwards that expire in
accordance with the respective state statutes.
As of October 31, 2007, deferred tax assets of
approximately $35.6 million pertain to certain tax credits
and net operating loss carryforwards resulting from the exercise
of employee stock options. If realized, the tax benefit of these
credits and losses will be accounted for as a credit to
stockholders’ equity. Additionally, deferred tax assets of
$95.4 million relate to acquired entities. These acquired
deferred tax assets are subject to limitation under the change
of ownership rules of the Internal Revenue Code and have a full
valuation allowance. Approximately $72.6 million of future
tax benefit relating to these deferred tax assets will be
recorded to first reduce goodwill
relating to the acquisition, second to reduce other non-current
intangible assets relating to the acquisition, and third to
reduce income tax expense.
We have permanently reinvested the earnings of several of our
foreign subsidiaries. Accordingly, we have not provided deferred
income taxes on the excess of the book basis over the tax
outside basis in the stock of these foreign subsidiaries.
During fiscal 2006, we received a one-time tax benefit of
$4.2 million from the Internal Revenue Service relating to
net operating loss carrybacks made possible under the “Job
Creation and Worker Assistance Act of 2002.” We continue to
evaluate our tax reserves under SFAS No. 5,
“Accounting for Contingencies,” which requires us to
accrue for losses we believe are probable and can be reasonably
estimated. During fiscal 2007, we reduced our tax contingency
reserves by a net $8.7 million, primarily due to the fact
that we closed tax audits with several
non-U.S. foreign
tax authorities relating to certain prior tax periods. A portion
of the reduction in SFAS No. 5 contingency reserves
required cash payments to foreign jurisdictions. We reduced our
tax reserves by approximately $7 million due to a favorable
interpretation of a tax law in a foreign jurisdiction that made
it probable that a tax position would be sustained. The benefit
related to the favorable interpretation of tax law was credited
to goodwill. The amount reflected in the consolidated balance
sheet at October 31, 2007 is considered adequate based on
our assessment of many factors including: results of tax audits,
past experience and interpretations of tax law applied to the
facts of each matter. It is reasonably possible that our tax
reserves could be increased or decreased in the near term based
on these factors.
Dividends
on Series B Preferred Stock
On March 23, 2004, we entered into a definitive agreement
with IBM providing for an investment of $50.0 million by
IBM in Novell. The primary terms of the investment, which were
negotiated in November 2003, entailed the purchase by IBM of
1,000 shares of our Series B Preferred Stock that are
convertible into 8 million shares of our common stock at a
price of $6.25 per common share. The shares are entitled to a
dividend of 2% per annum, payable quarterly in cash. Dividend
expense was $0.2 million and $0.5 million in fiscal
2006 and fiscal 2005, respectively.
On June 17, 2004, 500 shares of Series B
Preferred Stock, with a carrying value of $25.0 million,
were converted into 4.0 million shares of our common stock.
On September 21, 2005, 313 shares of Series B
Preferred Stock, with a carrying value of $15.7 million,
were converted into 2.5 million shares of our common stock.
In November 2006, IBM converted all of the remaining outstanding
shares of Series B Preferred Stock into 1.5 million
shares of common stock.
Cumulative effect of a change in accounting principle
—
(897
)
—
Net income (loss)
$
(44,460
)
$
18,656
$
376,722
Expense from the adoption of SFAS No. 123(R) in the
first quarter of fiscal 2006 decreased income from continuing
operations by approximately $34.3 million and
$35.3 million during fiscal 2007 and 2006, respectively.
Discontinued operations relates to the sales of CTP Switzerland,
Salmon and Celerant consulting, discussed in the Divestitures
section, above.
In March 2005, the FASB issued Interpretation No. 47,
“Accounting for Conditional Asset Retirement
Obligations” (“FIN 47”), which responded to
diversity in practice of how SFAS No. 143,
“Accounting for Asset Retirement Obligations,” was
being implemented. Specifically, FIN 47 recognized that,
when uncertainty about the timing
and/or
settlement method existed, some entities were recognizing the
fair value of asset retirement
obligations (“AROs”) prior to retirement of the asset,
while others were recognizing the fair value of the obligation
only when it was probable that the asset would be retired on a
specific date or when the asset was actually retired.
FIN 47 clarified that the uncertainty surrounding the
timing and method of settlement when settlement is conditional
on a future event occurring should be reflected in the
measurement of the liability, not in the recognition of the
liability. AROs must be recognized even though uncertainty may
exist about the timing or method of settlement and therefore a
liability should be recognized when the ARO is incurred. We
adopted FIN 47 effective May 1, 2006. FIN 47
requires an entity to recognize the cumulative effect of
initially applying FIN 47 as a change in accounting
principle. Prior to the issuance of FIN 47, we accounted
for AROs when it became probable that the asset would be retired
or when the asset was actually retired. Our AROs result from
facility operating leases where we are the lessee and the lease
agreement contains a reinstatement clause, which generally
requires any leasehold improvements we make to the leased
property to be removed, at our cost, at the end of the lease.
Forward-looking
information
We expect to generate revenue of $920 to $945 million in
fiscal 2008 compared to revenue of $932 million in fiscal
2007.
Liquidity
and Capital Resources
October 31,
October 31,
Percentage
2007
2006
Change
($ in thousands)
Cash, cash equivalents, and short-term investments
$
1,857,637
$
1,466,287
27
%
Percentage of total assets
65
%
60
%
An overview of the significant cash flow activities are
explained below:
Fiscal 2007
Fiscal 2006
Fiscal 2005
(In thousands)
Net cash provided by operating activities
$
420,582
$
99,038
$
500,414
Issuance of common stock, net
$
18,392
$
40,131
$
22,108
Repurchases of common stock, 2006 retired, 2004 held in treasury
$
—
$
(400,000
)
$
—
Purchases of property, plant and equipment
$
(25,235
)
$
(26,668
)
$
(30,781
)
Proceeds from the sale of property, plant and equipment
$
—
$
24,992
$
10,421
Proceeds from sale of venture capital funds
$
4,964
$
71,298
$
—
Proceeds from repayment of note receivable
$
—
$
9,092
$
—
Proceeds from the sale of Celerant and the Japan consulting
group, net of cash divested
$
3,949
$
39,372
$
—
Proceeds from sales of and distributions from long-term
investments
$
2,917
$
10,972
$
—
Net cash paid for acquisitions
$
(29,704
)
$
(71,550
)
$
(33,829
)
Purchase of intangible assets
$
(1,175
)
$
(1,159
)
$
(15,500
)
Cash paid for equity share of OIN
$
—
$
(4,225
)
$
—
Restricted cash for acquisition of India joint venture
$
—
$
—
$
(7,500
)
Net cash provided by operating activities in fiscal 2007
included the receipt of $355.6 million in cash in
connection with the November 2006 Microsoft agreements. Net cash
provided by operating activities in fiscal 2005 included the
receipt of $447.6 million in cash, net of legal fees, in
connection with the November 2004 Microsoft settlement.
As of October 31, 2007, we had cash, cash equivalents and
other short-term investments of $455.1 million held in
accounts outside the United States. Our short-term investment
portfolio is diversified among security types, industry groups,
and individual issuers. To achieve potentially higher returns, a
portion of our investment portfolio is invested in equity
securities and mutual funds, which are subject to market risk.
Approximately $7.9 million of our short-term investments
are designated to fund deferred compensation payments, which are
paid out as requested
by the plan participants. Our short-term investment portfolio
includes gross unrealized gains and losses of $4.0 million
and $0.7 million, respectively, as of October 31,2007. We monitor our investments and record losses when a
decline in the investment’s market value is determined to
be other than temporary.
Included within our investment portfolio are AAA/AA rated
investments in auction-rate securities. During fiscal 2007,
auctions for $37.3 million of our investments in
auction-rate securities failed. The failure resulted in the
interest rate on these investments resetting at the maximum rate
allowed per security (LIBOR + 100, 125, or 150 bps) on the
regular auction date every 28 days. While we now earn
premium interest rates on the investments, until the auctions
are successful the investments are not liquid. In the event we
need to access these funds, we will not be able to do so without
a loss of principal, unless a future auction on these
investments is successful. During the fourth quarter of fiscal
2007, we also recorded an unrealized loss on these securities of
$2.5 million, with the offset recorded to other
comprehensive income in our consolidated balance sheet. If the
issuers are unable to successfully close future auctions and
their credit ratings deteriorate, we may be required to further
adjust the carrying value of these investments and realize an
impairment charge for an other than temporary decline in the
fair values. Based on our ability to access our cash and other
short-term investments, our expected operating cash flows and
our other sources of cash, we do not anticipate that the lack of
liquidity on these investments will affect our ability to
operate our business as usual.
According to the terms of the Open Invention Network, LLC
(“OIN”) agreement, under which we have a
$20.0 million or 17% interest in OIN, we could be required
to make future cash contributions which we would fund with cash
from operations and cash on hand.
As of October 31, 2007, we have various operating leases
related to our facilities. These leases have minimum annual
lease commitments of $27.7 million in fiscal 2008,
$21.1 million in fiscal 2009, $14.8 million in fiscal
2010, $12.2 million in fiscal 2011, $10.8 million in
fiscal 2012, and $38.4 million thereafter. Furthermore, we
have $30.5 million of minimum rentals to be received in the
future from subleases.
On July 2, 2004, we issued and sold $600.0 million
aggregate principal amount of our Debentures due 2024. The
Debentures pay interest at 0.50% per annum, payable
semi-annually on January 15 and July 15 of each year until
maturity, commencing January 15, 2005. As previously
disclosed, we solicited consents from the holders of the
Debentures to proposed amendments to the indenture that would
give us until Thursday, May 31, 2007 to become current in
our SEC reporting obligations and a waiver of rights to pursue
remedies available under the indenture with respect to any
default caused by our not filing SEC reports timely. On
November 9, 2006, we received consents from the holders of
the Debentures, and therefore we and the trustee of the
Debentures entered into a first supplemental indenture
implementing the proposed amendments described in the consent
solicitation statements. Under the terms of the consent
solicitation, we are paying an additional 7.3% per annum, or
approximately $44.0 million, in special interest on the
Debentures from November 9, 2006 to, but excluding,
November 9, 2007. The $44.0 million is being paid as
special interest payments over three periods; the first payment
of $8.1 million occurred in January 2007. The next payment
of $22.0 million occurred in July 2007 and the final
payment of $13.9 million will occur in January 2008. During
fiscal 2007, we incurred interest expense of $19.0 million,
related to the Debentures and made cash payments for interest of
$33.1 million during the same period. In addition, we paid
approximately $1.5 million in fees to Citigroup for work
performed on the consent process. On May 25, 2007, we filed
our delinquent reports bringing us current with our SEC
reporting obligations.
Interest on the Debentures assumes no conversions.
(b)
Purchase obligations represent future contracted payments under
normal take or pay arrangements entered into as a part of the
normal course of business that are not recorded as liabilities
at October 31, 2007.
Our principal source of liquidity continues to be cash from
operations, cash on hand, and short-term investments. At
October 31, 2007, our principal unused sources of liquidity
consisted of cash and cash equivalents of $1.1 billion and
short-term investments in the amount of $777.8 million.
During fiscal 2007, we generated $420.6 million of cash
flow from operations. Our liquidity needs for the next twelve
months are principally for financing of interest payments on the
Debentures, fixed assets, payments under our restructuring
plans, and product development, and to maintain flexibility in a
dynamic and competitive operating environment, including
pursuing potential acquisition and investment opportunities. Our
liquidity needs beyond the next twelve months include those
mentioned previously in addition to the possible redemption of
our Debentures.
We anticipate being able to fund our current operations,
potential future acquisitions, any further integration,
restructuring or additional merger-related costs, and planned
capital expenditures for the next twelve months with existing
cash and short-term investments together with cash generated
from operations and investment income. We believe that
borrowings under our credit facilities or offerings of equity or
debt securities are possible for expenditures beyond the next
twelve months, if the need arises, although such offerings may
not be available to us on acceptable terms and are dependent on
market conditions at such time. 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. We also anticipate having adequate
cash in fiscal 2008 for necessary capital expenditures.
Recent
Pronouncements
In June 2006, the FASB issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109”
(“FIN 48”). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with
SFAS No. 109, “Accounting for Income Taxes.”
FIN 48 prescribes a two-step process to determine the
amount of tax benefit to be recognized. First, the tax position
must be evaluated to determine the likelihood that it will be
sustained upon external examination. If the tax position is
deemed “more-likely-than-not” to be sustained, the tax
position is then assessed to determine the amount of benefit to
recognize in the financial statements. The amount of the benefit
that may be recognized is the largest amount that has a greater
than 50 percent likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods and disclosure relative to uncertain tax positions.
FIN 48 is effective for fiscal years beginning after
December 15, 2006 (Novell’s fiscal 2008). We are
currently evaluating the impact of this interpretation on our
financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements.” SFAS No. 157
defines fair value and provides enhanced guidance for using fair
value to measure assets and liabilities. It also expands the
amount of disclosure about the use of fair value to measure
assets and liabilities. The standard applies whenever other
standards require assets or liabilities to be measured at fair
value but does not expand the use of fair value to any new
circumstances. SFAS No. 157 is effective beginning the
first fiscal year that begins after November 15, 2007
(Novell’s fiscal 2009). We are currently evaluating the
impact of SFAS No. 157 on our financial position and
results of operations.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities.” SFAS No. 159 establishes
presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities.
Previously, accounting rules required different measurement
attributes for different assets and liabilities that created
artificial volatility in earnings. SFAS No. 159 helps
to mitigate this type of accounting-induced volatility by
enabling companies to report related assets and liabilities at
fair value, which would likely reduce the need for companies to
comply with detailed rules for hedge accounting.
SFAS No. 159 is effective as of the beginning of an
entity’s first fiscal year beginning after
November 15, 2007 (Novell’s fiscal 2009), though early
adoption is permitted. We are currently evaluating the impact of
this pronouncement on our financial position and results of
operations.
In March 2007, the Emerging Issues Task Force (“EITF”)
reached a consensus on issue number
06-10,
“Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Collateral Assignment Split-Dollar Life
Insurance Arrangements.”
EITF 06-10
provides guidance to help companies determine whether a
liability for the postretirement benefit associated with a
collateral assignment split-dollar life insurance arrangement
should be recorded in accordance with either
SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions,” (if, in
substance, a postretirement benefit plan exists), or Accounting
Principles Board Opinion No. 12 (if the arrangement is, in
substance, an individual deferred compensation contract).
EITF 06-10
also provides guidance on how a company should recognize and
measure the asset in a collateral assignment split-dollar life
insurance contract.
EITF 06-10
is effective for fiscal years beginning after December 15,2007 (Novell’s fiscal 2009), though early adoption is
permitted. We are currently evaluating the impact of this
pronouncement on our financial position and results of
operations.
In December 2007, the FASB issued SFAS No. 141(R),
“Business Combinations.” This Statement replaces FASB
Statement No. 141, “Business Combinations.”
SFAS No. 141(R) establishes principles and
requirements for how an acquiring company 1) recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling
interest in the acquiree, 2) recognizes and measures the
goodwill acquired in the business combination or a gain from a
bargain purchase, and 3) determines what information to
disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.
SFAS No. 141(R) is effective for business combinations
occurring on or after the beginning of the fiscal year beginning
on or after December 15, 2008 (Novell’s fiscal 2010).
We are currently evaluating the impact of this pronouncement on
our financial position and results of operations.
In December 2007, the FASB also issued SFAS No. 160,
“Noncontrolling interests in Consolidated Financial
Statements — an amendment of ARB No. 51.”
SFAS No. 160 requires the ownership interests in
subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement
of financial position within equity, but separate from the
parent’s equity. It also requires the amount of
consolidated net income attributable to the parent and to the
noncontrolling interest be clearly identified and presented on
the face of the consolidated statement of income.
SFAS No. 160 is effective for fiscal years and fiscal
quarters beginning on or after December 15, 2008
(Novell’s fiscal 2010). We are currently evaluating the
impact of this pronouncement on our financial position and
results of operations.
Item 7A.
Quantitative
and Qualitative Disclosures About Market Risk
We are exposed to financial market risks, including changes in
interest rates, foreign currency exchange rates, and market
prices of equity securities. To mitigate some of these risks, we
utilize currency forward contracts and currency options. We do
not use derivative financial instruments for speculative or
trading purposes, and no significant derivative financial
instruments were outstanding at October 31, 2007.
The primary objective of our short-term investment activities is
to preserve principal while maximizing yields without
significantly increasing risk. Our strategy is to invest in
widely diversified short-term investments, consisting primarily
of investment grade securities, substantially all of which
either mature within the next twelve months or have
characteristics of short-term investments. A hypothetical
50 basis point increase in interest rates would result in
approximately a $5.5 million decrease (less than 1%) in the
fair value of our available-for-sale securities.
Market
Risk
We also hold available-for-sale equity securities in our
short-term investment portfolio related to a deferred
compensation program. As of October 31, 2007, gross
unrealized gains, before tax effect on the short-term public
equity securities, totaled $0.9 million. A reduction in
prices of 10% of these short-term equity securities would result
in approximately a $0.8 million decrease (less than 1%) in
the fair value of our short-term investments.
Foreign
Currency Risk
We use derivatives to hedge those current net assets and
liabilities that, when re-measured or settled according to
accounting principles generally accepted in the U.S., impact our
consolidated statement of operations. Currency forward contracts
are utilized in these hedging programs. All forward contracts
entered into by us are components of hedging programs and are
entered into for the sole purpose of hedging an existing or
anticipated currency exposure, not for speculation or trading
purposes. Gains and losses on these currency forward contracts
would generally be offset by corresponding gains and losses on
the net foreign currency assets and liabilities that they hedge,
resulting in negligible net gain or loss overall on the hedged
exposures. When hedging balance sheet exposures, all gains and
losses on forward contracts are recognized in other income
(expense) in the same period as when the gains and losses on
re-measurement 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 consolidated statements of cash flows. Our
hedging programs reduce, but do not always entirely eliminate,
the impact of foreign currency exchange rate movements. If we
did not hedge against foreign currency exchange rate movement,
an increase or decrease of 10% in exchange rates would result in
an increase or decrease in income before taxes of approximately
$3.2 million. This number represents the exposure related
to balance sheet re-measurement only and assumes that all
currencies move in the same direction at the same time relative
to the U.S. dollar.
We do not currently hedge currency risk related to revenues or
expenses denominated in foreign currencies due to a number of
factors including net operating margin levels and diversity of
currencies. Foreign exchange rate fluctuations favorably
impacted revenue by $15.2 million in fiscal 2007 compared
to the same period in fiscal 2006. Foreign exchange rate
fluctuations unfavorably impacted loss from operations by
approximately $4.7 million in fiscal 2007 compared to the
same period in fiscal 2006.
All of the potential changes noted above are based on
sensitivity analyses performed on our financial position at
October 31, 2007. Actual results may differ materially.
Receivables (net of allowances of $3,897 and $5,574 at
October 31, 2007 and 2006, respectively)
208,318
233,986
Prepaid expenses
53,316
32,328
Other current assets
35,065
28,524
Total current assets
2,154,336
1,761,125
Property, plant and equipment, net
180,537
184,084
Long-term investments
37,304
2,263
Goodwill
404,612
424,701
Intangible assets, net
33,572
40,404
Deferred income taxes
14,518
4,770
Other assets
29,515
32,376
Total assets
$
2,854,394
$
2,449,723
LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
45,135
$
44,419
Accrued compensation
112,794
103,710
Other accrued liabilities
122,850
106,837
Income taxes payable
46,724
49,600
Deferred revenue
494,615
380,979
Total current liabilities
822,118
685,545
Deferred income taxes
884
4,186
Long-term deferred revenue
273,066
45,992
Senior convertible debentures
600,000
600,000
Total liabilities
1,696,068
1,335,723
Redeemable securities:
Series B Preferred Stock, $.10 par value,
Authorized — 1,000 shares;
Outstanding — 0 and 187 shares at
October 31, 2007 and 2006 (at redemption value),
respectively
—
9,350
Stockholders’ equity:
Series A preferred stock, $.10 par value,
Authorized — 499,000 shares; no shares issued
—
—
Common stock, par value $.10 per share, Authorized —
600,000,000 shares; Issued — 365,739,499 and
358,512,471 shares at October 31, 2007 and 2006,
respectively, Outstanding — 350,610,468 and
343,362,534 shares at October 31, 2007 and 2006,
respectively
36,574
35,851
Additional paid-in capital
413,182
338,954
Treasury stock, at cost — 15,129,031 and
15,149,937 shares at October 31, 2007 and 2006,
respectively
(124,512
)
(124,684
)
Retained earnings
795,984
840,449
Accumulated other comprehensive income
37,098
14,080
Total stockholders’ equity
1,158,326
1,104,650
Total liabilities, redeemable securities and stockholders’
equity
We are a global infrastructure software and services company. We
develop, implement, and support proprietary, mixed source and
open source software for use in business solutions by providing
our customers with enterprise infrastructure software and a full
range of training and support services. We help customers lower
costs, manage complexity and mitigate risk, allowing them to
focus on business innovation and growth. Our products enable
customers to solve business challenges by maximizing the
effectiveness of their information technology (“IT”)
environments.
We were incorporated in the State of Delaware on
January 25, 1983 and have established a reputation for
innovation and industry leadership. We currently have
approximately 4,100 employees in over 70 offices worldwide.
Our singular focus is providing global leadership in
enterprise-wide, desktop to data center operating systems based
on Linux and open source, and the software required to secure
and manage mixed IT environments. We enable customers to build
their own ’Open Enterprise’ by adding the strength,
flexibility and economy of open source software to their
existing IT infrastructures. We offer an open source platform
along with fully integrated identity, security, and systems
management solutions. Our specific offerings include identity
and access management products, a portfolio of systems
management products led by our ZENworks suite of offerings, and
workgroup products, including SUSE Linux Enterprise Server
(“SLES”), Open Enterprise Server, NetWare, and
collaboration products on several operating systems, including
Linux, NetWare, Windows, and UNIX. These technologies allow us
to help our customers manage both our open source platform and
the other heterogeneous components of their IT infrastructures.
By delivering these solutions to our customers, either directly
or through our global network of partners, we are able to help
customers achieve increased performance from their IT
infrastructure at a reduced cost.
To best align our business with our strategy, in the first
quarter of fiscal 2007 we re-organized our company into four
product-related business units and a business consulting unit.
This is a change from our prior practice of reporting along
geographic segments. Our business unit segments are Open
Platform Solutions, Identity and Security Management, Systems
and Resource Management, and Workgroup. They are described below
in more detail. All of the groups within our business consulting
segment, which included our Swiss-based consulting unit, our
U.K.-based Salmon Ltd. (“Salmon”) business consulting
unit, and our Japan consulting group, have been divested or are
in the process of being divested as of the end of fiscal 2007
since they were not part of our core business.
Open Platform Solutions. We deliver Linux
solutions for the enterprise, and the SUSE Linux Enterprise
platform underpins all of these products. SUSE Linux Enterprise
is a leading distribution that focuses considerable effort on
interoperability and virtualization within both open source and
proprietary systems and provides ease in usability and
management. Our primary open platform solutions offerings are:
Linux platform products:
•
SUSE Linux Enterprise Server is an enterprise-class, open source
server operating system for professional deployment in
heterogeneous IT environments of all sizes and sectors. This
operating system integrates all server services relevant in
Linux, including integrated virtualization, and constitutes a
stable and secure platform for the cost-efficient operation of
IT environments.
•
SUSE Linux Enterprise Desktop is a business desktop product that
brings together the Linux operating environment with a complete
set of office applications. Included among the more significant
business applications are OpenOffice (an office productivity
suite), Mozilla’s Firefox browser, and Novell Evolution, a
collaboration client for Linux.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Other open platform products:
•
openSUSE is a reliable and secure home computing product, which
includes an easy-to-install Linux operating system that lets
users browse the Web, send
e-mail, chat
with friends, organize digital photos, play movies and songs,
and create documents and spreadsheets. It also allows users to
host a Web site or blog, create a home network and develop their
own applications.
•
SUSE Engineering is product development work we perform for
customers.
Identity and Security Management. Our
security, identity, and access management solutions help
customers integrate, secure and manage information assets as
well as reduce complexity and ensure compliance. Adding
intelligence to every part of a customer’s IT environment
makes their systems more agile and secure. Our solutions
leverage automated, centrally managed policies to support the
enterprise. Our partners’ expertise, experience and
technology provide some of the most comprehensive information
security solutions in the industry today. Our primary identity
and security management offerings are:
Identity and access management products:
•
Identity Manager is a powerful data-sharing and synchronization
solution, often referred to as a
meta-directory
solution, which automatically distributes new and updated
information across every designated application and directory on
a network. This ensures that trusted customers, partners, and
suppliers are accessing consistent information, regardless of
the applications and directories to which they have access.
•
Access Manager helps customers maximize access without limiting
security or control. It simplifies and safeguards online
asset-sharing, allowing customers to control access to Web-based
and traditional business applications. Trusted users gain secure
authentication and access to portals, Web-based content and
enterprise applications while IT administrators gain centralized
policy-based management of authentication and access privileges
for Web-based environments and enterprise applications. Access
Manager supports a broad range of platforms and directory
services.
•
SecureLogin is a directory-integrated authentication solution
that delivers reliable, single sign-on access across
multi-platform networks, simplifying password management by
eliminating the need for users to remember more than one
password.
•
Sentinel automates the monitoring of IT for effectiveness
allowing users to detect and resolve threats in real-time.
Sentinel also provides documented evidence needed by some users
to comply with regulatory and industry compliance requirements.
Other identity and security management products:
•
eDirectory is a full-service, platform-independent directory
that significantly simplifies the complexities of managing users
and resources in a mixed Linux, NetWare, UNIX, and Windows
environment. It is a secure, scalable, directory service that
allows organizations to centrally store and manage information
across all networks and operating systems and leverage existing
IT investments.
Systems and Resource Management. With our
resource management solution, customers can define business and
IT policies to automate the management of multiple IT resources,
including the emerging challenge of managing virtual
environments. As a result, customers reduce IT effort, control
IT costs, and reduce IT skill requirements to fully manage and
leverage their IT investment. Our primary systems and resource
management offerings are ZENworks management products.
ZENworks management products protect the integrity of networks
by centralizing, automating, and simplifying every aspect of
network management, from distributing vital information across
the enterprise to maintaining
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
consistent policies on desktops, servers, and devices on Linux,
NetWare, and Windows environments. ZENworks management products
include:
•
ZENworks Suite
•
ZENworks Patch Management
•
ZENworks Asset Management
•
ZENworks Linux Management
•
ZENworks Configuration Management
•
ZENworks Orchestrator
•
ZENworks Security Management
Workgroup. We provide comprehensive and
adaptable workgroup solutions that provide all the
infrastructure, services and tools customers require to
effectively and securely collaborate across a myriad of devices.
We offer the security, reliability, and manageability our
customers’ employees need to efficiently get their jobs
done at lower cost. Our primary workgroup products are:
•
Open Enterprise Server (“OES”) is a secure, highly
available suite of services that provides proven networking,
communication, collaboration and application services in an
open, easy-to-deploy environment. OES provides customers the
choice of deploying on either NetWare or SUSE Linux Enterprise
Server and provides common management tools, identity-based
services and support backed by Novell.
•
NetWare and other NetWare-related products:
•
NetWare is our proprietary operating system platform that offers
secure continuous access to core network resources such as
files, printers, directories,
e-mail and
databases seamlessly across all types of networks, storage
platforms and client desktops.
•
Cluster Services is a scalable, highly available Storage Area
Network resource management tool that reduces administrative
costs and complexity of delivering uninterrupted access to
information and resources.
•
Collaboration products:
•
GroupWise collaboration products offer both traditional and
mobile users solutions for communication over intranets,
extranets and the Internet.
•
Teaming + Conferencing allows for social networking within an
enterprise where subject matter experts are easily identified
and where new team workspaces can be easily formed.
•
Other workgroup products:
•
BorderManager is a suite of network services used to connect a
network securely to the Internet or any other network, allowing
outside access to intranets and user access to the Internet.
•
Novell Open Workgroup Suite provides organizations of all sizes
with a secure, flexible and cost-effective IT infrastructure and
a proven set of workgroup services. Unlike a proprietary,
Windows-centric solution, the Novell Open Workgroup Suite is
comprised of a package of open, standards-based software from
all business segments. This suite offers a low-cost, open
alternative to Microsoft and includes a complete infrastructure
and productivity solution from the desktop to the server and
includes the following components:
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
•
GroupWise
•
ZENworks Suite
•
SUSE Linux Enterprise Desktop — open source desktop
•
OpenOffice.org for Linux and Windows — open source
productivity suite
In addition to our technology offerings, within each of our
product business units, we offer a worldwide network of
consultants, trainers, and technical support personnel to help
our customers and partners best utilize our software. We also
have partnerships with application providers, hardware and
software vendors, and consultants and systems integrators. In
this way we can offer a full solution to our customers.
•
Professional services: We provide technical
expertise to deliver world-class infrastructure solutions, based
on an innovative approach focused on solving our customers’
business problems. We deliver services ranging from discovery
workshops to strategy projects to solution implementations, all
using a consistent, well-defined methodology. Our professional
services approach is based on a strong commitment to open
standards, interoperability, and the right blend of technology
from Novell and other leading vendors.
•
Technical support: We provide phone-based,
web-based, and onsite technical support for our proprietary and
open source products through our Premium Service program.
Premium Service provides customers with the flexibility to
select the appropriate level of technical support services,
which may include stated response times, around-the-clock
support, service account management, and dedicated resources,
such as Novell’s most experienced engineers. The Dedicated
Support Engineer, Primary Support Engineer, Advantage Support
Engineer, and Account Management programs allow customers to
build an ongoing support relationship with Novell at an
appropriate level for their needs. We have committed a
significant amount of technical support resources to the Linux
open source platform. We also offer a full array of remote
monitoring services and managed services. These services help
customers increase system uptime, leveraging our experts to
monitor and maintain the technologies our customers have
employed.
•
Training services: We accelerate the adoption
and enable the effective use of our products and solutions
through the delivery of timely and relevant instructor-led and
technology-based training courses, assessments and performance
consulting services. Programs are delivered directly to
customers and through our global channel of authorized Novell
training partners. Our courses provide customers with a thorough
understanding of the implementation, configuration, and
administration of our products and solutions. Additionally, we
offer performance consulting services that provide clients and
partners with an evaluation of their proficiencies and their
knowledge gaps. We also deliver Advanced Technical Training at
an engineer level to customers and partners on a global basis.
We are subject to a number of risks similar to those of other
companies of similar size in our industry, including rapid
technological changes, competition, limited number of suppliers,
customer concentration, integration of acquisitions, government
regulations, management of international activities and
dependence on key individuals.
B.
Summary
of Significant Accounting Policies
The accompanying consolidated financial statements reflect the
application of significant accounting policies as described in
this note and elsewhere in the accompanying consolidated
financial statements.
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of Novell, Inc., its wholly-owned and majority-owned
subsidiaries and majority-owned joint ventures. All material
inter-company accounts and transactions have been eliminated in
consolidation.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Management’s
Estimates and Uncertainties
The preparation of financial statements in conformity with
accounting principles generally accepted in the
U.S. requires management to make estimates and assumptions
that affect the amounts reported and related disclosure of
contingent assets and liabilities in the financial statements
and accompanying notes. Actual results could differ materially
from those estimates.
Reclassifications
In fiscal 2007, we sold our U.K.-based Salmon Ltd.
(“Salmon”) business consulting unit and signed an
agreement to sell our CTP Switzerland business consulting unit.
The results of operations for CTP Switzerland and Salmon have
been classified as discontinued operations for all periods
presented (see Note E). Certain amounts unrelated to the
discontinued operations reported in prior years also have been
reclassified from what was previously reported to conform to the
current year’s presentation. In addition, during fiscal
2007, we began reporting our services revenue and related cost
of revenue in separate lines on the consolidated statements of
operations. All prior periods have been reclassified to conform
to the current year’s presentation. These reclassifications
did not have any impact on net income (loss) and net income
(loss) per share available to common stockholders.
Foreign
Currency Translation
The functional currency of all of our international
subsidiaries, except for our Irish subsidiaries and a German
holding company, is the local currency. These subsidiaries
generate and expend cash primarily in their respective local
currencies. The assets and liabilities of these subsidiaries are
translated at current month-end exchange rates. Revenue and
expenses are translated monthly at the average monthly exchange
rate. Translation adjustments are recorded in accumulated other
comprehensive income. With respect to our Irish subsidiaries and
German holding company, the functional currency is the
U.S. dollar for which translation gains and losses are
included in other income and expense. All transaction gains and
losses are reported in other income (expense). Foreign exchange
resulted in losses of $2.0 million, $0.7 million, and
$3.4 million during fiscal 2007, 2006, and 2005,
respectively.
Cash,
Cash Equivalents and Short-Term Investments
We consider all investments with an initial term to maturity of
three months or less at the date of purchase to be cash
equivalents. Short-term investments are diversified and
primarily consist of investment grade securities that
1) mature within the next 12 months; 2) have
characteristics of short-term investments; or 3) are
available to be used for current operations even if some
maturities may extend beyond one year.
All marketable debt and equity securities that are included in
cash, cash equivalents, and short-term investments are
considered available-for-sale and are carried at fair value. The
unrealized gains and losses related to these securities are
included in accumulated other comprehensive income in the
consolidated balance sheets. Other than temporary declines in
fair value are recorded in the consolidated statements of
operations. Fair values are based on quoted market prices where
available. If quoted market prices are not available, we use
third-party pricing services to assist in determining fair
value. In many instances, these services examine the pricing of
similar instruments to estimate fair value. When securities are
sold, their cost is determined based on the
first-in
first-out method. The realized gains and losses related to these
securities are included in investment income in the consolidated
statements of operations.
Concentrations
of Credit Risk
Financial instruments that subject us to credit risk primarily
consist of cash equivalents, short-term investments, accounts
receivable, and amounts due under subleases. Our credit risk is
managed by investing cash and
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
cash equivalents primarily in high-quality money market
instruments and securities of the U.S. government and its
agencies. The $3.3 million in mortgage-backed securities
debt that we hold (less than 0.4% of our short-term
investments), is all related to bonds from Freddie Mac and
Fannie Mae, which are not considered to be credit risks.
Accounts receivable include amounts owed by geographically
dispersed end users, distributors, resellers, and original
equipment manufacturer (“OEM”) customers. No
collateral is required. Accounts receivable are not sold or
factored. At October 31, 2007 and 2006, there were no
receivables greater than 10% of our total receivables
outstanding with any one customer. We generally have not
experienced any material losses related to receivables from
individual customers or groups of customers. Due to these
factors, no significant additional credit risk, beyond amounts
provided for, is believed by management to be inherent in our
accounts receivable. As of October 31, 2007, we had $37.3
million of
auction-rate
securities,whose issuers are AAA/AA rated, that had failed at
auction and are no longer considered liquid (see Note H.). We
continue to earn premium interest rates on these investments and
do not consider these investments to be permanently impaired.
Based on this and our ability to access our cash and other
short-term
investments we do not consider these securities to be a credit
risk. Our subleases are with many different parties and thus no
concentration of credit risk exists at October 31, 2007.
During the years ended October 31, 2007, 2006 and 2005,
there were no customers who accounted for more than 10% of total
net revenue.
Equity
Investments
We account for our equity investments where we hold more than
20 percent of the outstanding shares of the investee’s
stock or where we have the ability to significantly influence
the operations or financial decisions of the investee under the
equity method of accounting in accordance with Accounting
Principles Board Opinion No. 18, “The Equity Method of
Accounting for Investments in Common Stock.” We initially
record the investment at cost and adjust the carrying amount
each period to recognize our share of the earnings or losses of
the investee based on our percentage of ownership. We review our
equity investments periodically for indicators of impairment.
Property,
Plant and Equipment
Property, plant and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation and
amortization is computed on the straight-line method over the
estimated useful lives of the assets, or lease term, if shorter.
Such lives are as follows:
Asset Classification
Useful Lives
Buildings
30 years
Furniture and equipment
2 – 7 years
Leasehold improvements and other
3 – 10 years
We review our property, plant and equipment periodically for
indicators of impairment in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets,” or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors
that could indicate an impairment include significant
underperformance of the asset as compared to historical or
projected future operating results, significant changes in the
actual or intended use of the asset, or significant negative
industry or economic trends. When we determine that the carrying
value of an asset may not be recoverable, the related estimated
future undiscounted cash flows expected to result from the use
and eventual disposition of the asset are compared to the
carrying value of the asset. If the sum of the estimated future
cash flows is less than the carrying amount, we record an
impairment charge based on the difference between the carrying
value of the asset and its fair value, which we estimate
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
based on discounted expected future cash flows. For fiscal 2007,
2006, and 2005, we have not identified or recorded any
impairment of our property, plant and equipment.
Goodwill
and Intangible Assets
We review our goodwill annually for impairment in accordance
with SFAS No. 142, “Goodwill and Other Intangible
Assets.” We evaluate the recoverability of goodwill and
indefinite-lived intangible assets annually as of August 1,
or more frequently if events or changes in circumstances
warrant, such as a material adverse change in the business.
Goodwill is considered to be impaired when the carrying value of
a reporting unit exceeds its estimated fair value. Fair values
are estimated using a discounted cash flow methodology.
In accordance with SFAS No. 142, we do not amortize
goodwill or intangibles with indefinite lives resulting from
acquisitions. We review these assets periodically for potential
impairment issues. Separable intangible assets that are not
deemed to have an indefinite life are amortized over their
estimated useful lives.
We review our finite-lived intangibles assets for indicators of
impairment in accordance with SFAS No. 144 whenever
events or changes in circumstances indicate that the carrying
value may not be recoverable. When we determine that the
carrying value of an asset may not be recoverable, the related
estimated future undiscounted cash flows expected to result from
the use and eventual disposition of the asset are compared to
the carrying value of the asset. If the sum of the estimated
future cash flows is less than the carrying amount, we record an
impairment charge based on the difference between the carrying
value of the asset and its fair value, which we estimate based
on discounted expected future cash flows.
Disclosure
of Fair Value of Financial Instruments
Our financial instruments mainly consist of cash and cash
equivalents, short-term investments, accounts receivable,
accounts payable, accrued expenses, and the Debentures. The
carrying amounts of our cash equivalents and short-term
investments, accounts receivable, accounts payable and accrued
expenses approximate fair value due to the short-term nature of
these instruments. We periodically review the realizability of
each short-term and long-term investment when impairment
indicators exist with respect to the investment. If an
other-than-temporary impairment of the value of the investments
is deemed to exist, the carrying value of the investment is
written down to its estimated fair value. We consider an
impairment to be other-than-temporary when market evidence or
issuer-specific knowledge does not reflect long-term growth to
support current carrying values. As of October 31, 2007 and
2006, we did not hold any publicly-traded long-term equity
securities. Our Debentures have interest rates that approximate
current market rates; therefore, the carrying value approximates
fair value.
Revenue
Recognition and Related Reserves.
Our revenue is derived primarily from the sale of software
licenses, software maintenance, upgrade protection,
subscriptions of SUSE Linux Enterprise Server, technical
support, training, and professional services. Our customers
include: distributors, who sell our products to resellers,
dealers, and VARs; OEMs, who integrate our products with their
products or solutions; VARs, who provide solutions across
multiple vertical market segments which usually include
services; and end users, who may purchase our products and
services directly from Novell or from other partners or
resellers. Except for our SUSE Linux product, distributors do
not order to stock and only order products when they have an end
customer order, which they present to us. With respect to our
SUSE Linux product, distributors place orders and the product is
then sold through to end customers principally through the
retail channel. OEMs report the number of copies duplicated and
sold via an activity or royalty report. Software maintenance,
upgrade protection, technical support, and subscriptions of SLES
typically involve one to three year contract terms. Our standard
practice is to provide customers with a
30-day
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
general right of return. Such return provision allows for a
refund
and/or
credit of any amount paid by our customers.
Revenue is recognized in accordance with Statement of Position
(“SOP”)
97-2,
“Software Revenue Recognition,” and Staff Accounting
Bulletin No. 104, “Revenue Recognition,” and
related interpretations. When an arrangement does not require
significant production, modification, or customization of
software or does not contain services considered to be essential
to the functionality of the software, revenue is recognized when
the following four criteria are met:
•
Persuasive evidence of an arrangement exists — We
require evidence of an agreement with a customer specifying the
terms and conditions of the products or services to be delivered
typically in the form of a signed contract or statement of work
accompanied by a purchase order.
•
Delivery has occurred — For software licenses,
delivery takes place when the customer is given access to the
software programs via access to a website or shipped medium. For
services, delivery takes place as the services are provided.
•
The fee is fixed or determinable — Fees are fixed or
determinable if they are not subject to cancellation or other
payment terms that exceed our standard payment terms. Typical
payment terms are net 30 days.
•
Collection is probable — We perform a credit review of
all customers with significant transactions to determine whether
a customer is creditworthy and collection is probable. Prior
Novell-established credit history, credit reports, financial
statements, and bank references are used to assess
creditworthiness.
In general, revenue for transactions that do not involve
software customization or services considered essential to the
functionality of the software is recognized as follows:
•
Software license fees for our SUSE Linux product are recognized
when the product is sold through to an end customer;
•
Software license fees for sales through OEMs are recognized upon
receipt of license activity or royalty reports;
•
All other software license fees are recognized upon delivery of
the software;
•
Software maintenance, upgrade protection, technical support, and
subscriptions of SLES are recognized ratably over the contract
term; and
•
Professional services, training and other similar services are
recognized as the services are performed.
If the fee due from the customer is not fixed or determinable,
revenue is recognized as payments become due from the customer.
If collection is not considered probable, revenue is recognized
when the fee is collected. We record provisions against revenue
for estimated sales returns and allowances on product and
service-related sales in the same period as the related revenue
is recorded. We also record a provision to operating expenses
for bad debts resulting from customers’ inability to pay
for the products or services they have received. These estimates
are based on historical sales returns and bad debt expense,
analyses of credit memo data, and other known factors, such as
bankruptcy. If the historical data we use to calculate these
estimates does not accurately reflect future returns or bad
debts, adjustments to these reserves may be required that would
increase or decrease revenue or net income.
Many of our software arrangements include multiple elements.
Such elements typically include any or all of the following:
software licenses, rights to additional software products,
software maintenance, upgrade protection, technical support,
training and professional services. For multiple-element
arrangements that do not involve significant modification or
customization of the software and do not involve services that
are considered essential to the functionality of the software,
we allocate value to each element based on its relative
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
fair value, if sufficient Novell-specific objective evidence of
fair value exists for each element of the arrangement.
Novell-specific objective evidence of fair value is determined
based on the price charged when each element is sold separately.
If sufficient Novell-specific objective evidence of fair value
exists for all undelivered elements, but does not exist for the
delivered element, typically the software, then the residual
method is used to allocate value to each element. Under the
residual method, each undelivered element is allocated value
based on Novell-specific objective evidence of fair value for
that element, as described above, and the remainder of the total
arrangement fee is allocated to the delivered element, typically
the software. If sufficient Novell-specific objective evidence
of fair value does not exist for all undelivered elements and
the arrangement involves rights to unspecified additional
software products, all revenue is recognized ratably over the
term of the arrangement. If the arrangement does not involve
rights to unspecified additional software products, all revenue
is initially deferred until typically the only remaining
undelivered element is software maintenance or technical
support, at which time the entire fee is recognized ratably over
the remaining maintenance or support term.
In the case of multiple-element arrangements that involve
significant modification or customization of the software or
involve services that are considered essential to the
functionality of the software, contract accounting is applied.
When Novell-specific objective evidence of fair value exists for
software maintenance or technical support in arrangements
requiring contract accounting, the professional services and
license fees are combined and revenue is recognized on the
percentage of completion basis. The percentage of completion is
generally calculated using estimated hours incurred to date
relative to the total expected hours for the entire project. The
cumulative impact of any revision in estimates to complete or
recognition of losses on contracts is reflected in the period in
which the changes or losses become known. The maintenance or
support fee is unbundled from the other elements and revenue is
recognized ratably over the maintenance or support term.
When Novell-specific objective evidence of fair value does not
exist for software maintenance or support, then all revenue is
deferred until completion of the professional services, at which
time the entire fee is recognized ratably over the remaining
maintenance or support period.
For consolidated statements of operations classification
purposes only, we allocate the revenue first to those elements
for which we have Novell-specific objective evidence of fair
value, and any remaining recognized revenue is then allocated to
those items for which we lack Novell-specific objective evidence
of fair value.
Professional services contracts are either
time-and-materials
or fixed-price contracts. Revenue from
time-and-materials
contracts is recognized as the services are performed. Revenue
from fixed-price contracts is recognized based on the
proportional performance method, generally using estimated time
to complete to measure the completed effort. The cumulative
impact of any revision in estimates to complete or recognition
of losses on contracts is reflected in the period in which the
changes or losses become known. Professional services revenue
includes reimbursable expenses charged to our clients.
Microsoft
Agreements-related Revenue
On November 2, 2006, we entered into a Business
Collaboration Agreement, a Technical Collaboration Agreement,
and a Patent Cooperation Agreement with Microsoft Corporation
that collectively are designed to build, market and support a
series of new solutions to make Novell and Microsoft products
work better together for customers. Each of the agreements is
scheduled to expire on January 1, 2012.
Under the Business Collaboration Agreement, we are marketing a
combined offering with Microsoft. The combined offering consists
of SLES and a subscription for SLES support along with Microsoft
Windows Server, Microsoft Virtual Server and Microsoft Viridian,
and is offered to customers desiring to deploy Linux and Windows
in a virtualized setting. Microsoft made an upfront payment to
us of $240 million for SLES subscription
“certificates,” which Microsoft may use, resell or
otherwise distribute over the term of the agreement, allowing
the certificate holder to redeem single or multi-year
subscriptions for SLES support from
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
us (entitling the certificate holder to upgrades, updates and
technical support). Microsoft agreed to spend $60 million
over the term of the agreement for marketing Linux and Windows
virtualization scenarios and also agreed to spend
$34 million over the term of the agreement for a Microsoft
sales force devoted primarily to marketing the combined
offering. Microsoft agreed that for three years following the
initial date of the agreement it will not enter into an
agreement with any other Linux distributor to encourage adoption
of non-Novell Linux/Windows Server virtualization through a
program substantially similar to the SLES subscription
“certificate” distribution program.
The Technical Collaboration Agreement focuses primarily on four
areas:
•
Development of technologies to optimize SLES and Windows, each
running as guests in a virtualized setting on the other
operating system;
•
Development of management tools for managing heterogeneous
virtualization environments, to enable each party’s
management tools to command, control and configure the other
party’s operating system in a virtual machine environment;
•
Development of translators to improve interoperability between
Microsoft Office and OpenOffice document formats; and
•
Collaboration on improving directory and identity
interoperability and identity management between Microsoft
Active Directory software and Novell eDirectory software.
Under the Technical Collaboration Agreement, Microsoft agreed to
provide funding to help accomplish these broad objectives,
subject to certain limitations.
Under the Patent Cooperation Agreement, Microsoft agreed to
covenant with our customers not to assert its patents against
our customers for their use of our products and services for
which we receive revenue directly or indirectly, with certain
exceptions, while we agreed to covenant with Microsoft’s
customers not to assert our patents against Microsoft’s
customers for their use of Microsoft products and services for
which Microsoft receives revenue directly or indirectly, with
certain exceptions. In addition, we and Microsoft each
irrevocably released the other party, and its customers, from
any liability for patent infringement arising prior to
November 2, 2006, with certain exceptions. Both we and
Microsoft have payment obligations under the Patent Cooperation
Agreement. Microsoft made an upfront net balancing payment to us
of $108 million, and we will make ongoing payments to
Microsoft totaling a minimum of $40 million over the
five-year term of the agreement based on a percentage of our
Open Platform Solutions and Open Enterprise Server revenues.
As the three agreements are interrelated and were negotiated and
executed simultaneously, for accounting purposes we considered
all of the agreements to constitute one arrangement containing
multiple elements. The SLES subscription purchases of
$240 million were within the scope of Statement of Position
(“SOP”)
97-2,
“Software Revenue Recognition,” and are being
accounted for based on vendor specific objective evidence of
fair value. We will recognize the revenue ratably over the
respective subscription terms beginning upon customer
activation, or for subscriptions which expire un-activated, if
any, we will recognize revenue upon subscription expiration.
Objective evidence of the fair value of elements within the
Patent Cooperation Agreement and Technical Collaboration
Agreement did not exist. As such, we combined the
$108 million for the Patent Cooperation Agreement payment
and amounts we will receive for the Technical Collaboration
Agreement and are recognizing this revenue ratably over the
contractual term of the agreements of 5 years. Our periodic
payments to Microsoft will be recorded as a reduction of
revenue. The contractual expenditures by Microsoft, including
the dedicated sales force of $34 million and the marketing
funds of $60 million, do not obligate us to perform, and,
therefore, do not have an accounting consequence to us.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Cost of
Revenue
Cost of revenue includes the amortization of intangible assets
related to products or services sold, royalty costs and costs
associated with personnel providing professional services and
technical support services.
Expenses
Product development costs are expensed as incurred. Due to the
use of the working model approach under SFAS No. 86,
“Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed,” costs incurred subsequent
to the establishment of technological feasibility but prior to
the general release of the product, have not been significant
and therefore have not been capitalized.
Advertising costs are expensed as incurred. Advertising expenses
totaled $7.7 million, $3.6 million, and
$6.0 million, in fiscal 2007, 2006, and 2005, respectively.
Share-based
Payments
On November 1, 2005, we adopted SFAS No. 123(R),
“Share-Based Payment,” which requires us to account
for share-based payment transactions using a fair value-based
method and recognize the related expense in the results of
operations. Prior to our adoption of SFAS No. 123(R),
as permitted by SFAS No. 123, we accounted for share-based
payments to employees using the Accounting Principles Board
Opinion No. 25 (“APB 25”), “Accounting for
Stock Issued to Employees,” intrinsic value method and,
therefore, we generally recognized compensation expense for
restricted stock awards and did not recognize compensation cost
for employee stock options. SFAS No. 123(R) allows
companies to choose one of two transition methods: the modified
prospective transition method or the modified retrospective
transition method. We chose to use the modified prospective
transition methodology, and accordingly, we have not restated
the results of prior periods.
Under the fair value recognition provisions of
SFAS No. 123(R), share-based compensation cost is
estimated at the grant date based on the fair value of the award
and is recognized as expense over the requisite service period
of the award. The fair value of restricted stock awards is
determined by reference to the fair market value of our common
stock on the date of grant. Consistent with the valuation method
we used for disclosure-only purposes under the provisions of
SFAS No. 123, we use the Black-Scholes model to value
service condition and performance condition option awards under
SFAS No. 123(R). For awards with market conditions granted
subsequent to our adoption of SFAS No. 123(R), we use
a lattice valuation model to estimate fair value. For awards
with only service conditions and graded-vesting features, we
recognize compensation cost on a straight-line basis over the
requisite service period. For awards with performance or market
conditions granted with graded-vesting features subsequent to
our adoption of SFAS No. 123(R), we recognize
compensation cost based on the graded-vesting method.
Determining the appropriate fair value model and related
assumptions requires judgment, including estimating stock price
volatility, forfeiture rates, and expected terms. The expected
volatility rates are estimated based on historical and implied
volatilities of our common stock. The expected term represents
the average time that options that vest are expected to be
outstanding based on the vesting provisions and our historical
exercise, cancellation and expiration patterns. We estimate
pre-vesting forfeitures when recognizing compensation expense
based on historical rates and forward-looking factors. We update
these assumptions at least on an annual basis and on an interim
basis if significant changes to the assumptions are warranted.
We issue performance-based equity awards, typically to certain
senior executives, which vest upon the achievement of certain
financial performance goals, including revenue and operating
income targets. Determining the appropriate amount to expense
based on the anticipated achievement of the stated goals
requires judgment, including forecasting future financial
results. The estimate of expense is revised periodically based
on the probability of achieving the required performance targets
and adjustments are made as appropriate. The
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
cumulative impact of any revision is reflected in the period of
change. If the financial performance goals are not met, the
award does not vest, so no compensation cost is recognized and
any previously recognized compensation cost is reversed.
In the past, we have issued market condition equity awards,
typically granted to certain senior executives, the vesting of
which is accelerated upon the price of Novell common stock
meeting specified pre-established stock price targets. For
awards granted prior to our adoption of
SFAS No. 123(R), the fair value of each market
condition award was estimated as of the grant date using the
same option valuation model used for time-based options without
regard to the market condition criteria. As a result of our
adoption of SFAS No. 123(R), compensation cost is
recognized over the estimated requisite service period and is
not reversed if the market condition target is not met. If the
pre-established stock price targets are achieved, any remaining
expense on the date the target is achieved is recognized either
immediately or, in situations where there is a remaining minimum
time vesting period, ratably over that period.
Net
Income (Loss) Per Share
Basic and diluted net income (loss) per share available to
common stockholders is presented in conformity with
SFAS No. 128, “Earnings per Share,” and the
related interpretation in EITF Issue
No. 03-06,
“Participating Securities and the Two —
Class Method under FASB Statement No. 128.” Basic
net income (loss) per share available to common stockholders is
computed by dividing net income (loss) available to common
stockholders by the actual weighted-average number of common
shares outstanding during the period. Net income (loss)
available to common stockholders reflects net income (loss)
after deducting accumulated preferred stock dividends and
earnings allocated to participating preferred stockholders.
Diluted net income (loss) available to common stockholders is
based on the basic calculation but also excludes the minority
interest share of net income on a diluted basis and assumes the
conversion of the Series B Preferred Stock and Debentures
using the “if converted” method, if dilutive, and
includes the dilutive effect of potential common shares under
the treasury stock method. Potential common shares include stock
options, unvested restricted stock and, in certain
circumstances, convertible securities such as the Debentures and
Series B Preferred Stock.
Derivative
Instruments
A large portion of our revenue, expense, and capital purchasing
activities are transacted in U.S. dollars. However, we
enter into transactions in other currencies, primarily the Euro,
the British Pound Sterling, and certain other European, Latin
American and Asian currencies. To protect against reductions in
value caused by changes in foreign exchange rates, we have
established balance sheet and inter-company hedging programs. We
hedge currency risks of some assets and liabilities denominated
in foreign currencies through the use of one-month foreign
currency forward contracts. We do not currently hedge currency
risks related to revenue or expenses denominated in foreign
currencies.
We enter into these one-month hedging contracts two business
days before the end of each month and settle them at the end of
the following month. Due to the short period of time between
entering into the forward contracts and the year-end, the fair
value of the derivatives as of October 31, 2007 and 2006 is
insignificant. Gains and losses recognized during the year on
these foreign currency contracts are recorded as other income or
expense and would generally be offset by corresponding losses or
gains on the related hedged items, resulting in negligible net
exposure to our financial statements.
Recent
Pronouncements
In June 2006, the FASB issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109,”
(“FIN 48”). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS
No. 109,
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
“Accounting for Income Taxes.” FIN 48 prescribes
a two-step process to determine the amount of tax benefit to be
recognized. First, the tax position must be evaluated to
determine the likelihood that it will be sustained upon external
examination. If the tax position is deemed
“more-likely-than-not” to be sustained, the tax
position is then assessed to determine the amount of benefit to
recognize in the financial statements. The amount of the benefit
that may be recognized is the largest amount that has a greater
than 50 percent likelihood of being realized upon ultimate
settlement. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods and disclosure relative to uncertain tax positions.
FIN 48 is effective for fiscal years beginning after
December 15, 2006 (Novell’s fiscal 2008). We are
currently evaluating the impact of this interpretation on our
financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements.” SFAS No. 157
defines fair value and provides enhanced guidance for using fair
value to measure assets and liabilities. It also expands the
amount of disclosure about the use of fair value to measure
assets and liabilities. The standard applies whenever other
standards require assets or liabilities to be measured at fair
value but does not expand the use of fair value to any new
circumstances. SFAS No. 157 is effective beginning the
first fiscal year that begins after November 15, 2007
(Novell’s fiscal 2009). We are currently evaluating the
impact of SFAS No. 157 on our financial position and
results of operations.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities.” SFAS No. 159 establishes
presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities.
Previously, accounting rules required different measurement
attributes for different assets and liabilities that created
artificial volatility in earnings. SFAS No. 159 helps to
mitigate this type of accounting-induced volatility by enabling
companies to report related assets and liabilities at fair
value, which would likely reduce the need for companies to
comply with detailed rules for hedge accounting.
SFAS No. 159 is effective as of the beginning of an
entity’s first fiscal year beginning after
November 15, 2007 (Novell’s fiscal 2009), though early
adoption is permitted. We are currently evaluating the impact of
this pronouncement on our financial position and results of
operations.
In March 2007, the Emerging Issues Task Force (“EITF”)
reached a consensus on issue number
06-10,
“Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Collateral Assignment Split-Dollar Life
Insurance Arrangements.”
EITF 06-10
provides guidance to help companies determine whether a
liability for the postretirement benefit associated with a
collateral assignment split-dollar life insurance arrangement
should be recorded in accordance with either
SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions” (if, in
substance, a postretirement benefit plan exists), or Accounting
Principles Board Opinion No. 12. (if the arrangement is, in
substance, an individual deferred compensation contract).
EITF 06-10
also provides guidance on how a company should recognize and
measure the asset in a collateral assignment split-dollar life
insurance contract.
EITF 06-10
is effective for fiscal years beginning after December 15,2007 (Novell’s fiscal 2009), though early adoption is
permitted. We are currently evaluating the impact of this
pronouncement on our financial position and results of
operations.
In December 2007, the FASB issued SFAS No. 141(R),
“Business Combinations.” This Statement replaces FASB
Statement No. 141, “Business Combinations.”
SFAS No. 141(R) establishes principles and
requirements for how an acquiring company 1) recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling
interest in the acquiree, 2) recognizes and measures the
goodwill acquired in the business combination or a gain from a
bargain purchase, and 3) determines what information to
disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.
SFAS No. 141(R) is effective for business combinations
occurring on or after the beginning of the fiscal year beginning
on or after December 15, 2008 (Novell’s fiscal 2010).
We are currently evaluating the impact of this pronouncement on
our financial position and results of operations.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
In December 2007, the FASB also issued SFAS No. 160,
“Noncontrolling interests in Consolidated Financial
Statements — an amendment of ARB No. 51.”
SFAS No. 160 requires the ownership interests in
subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement
of financial position within equity, but separate from the
parent’s equity. It also requires the amount of
consolidated net income attributable to the parent and to the
noncontrolling interest be clearly identified and presented on
the face of the consolidated statement of income.
SFAS No. 160 is effective for fiscal years and fiscal
quarters beginning on or after December 15, 2008
(Novell’s fiscal 2010). We are currently evaluating the
impact of this pronouncement on our financial position and
results of operations.
C.
Staff
Accounting Bulletin No. 108
In September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108, “Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements”
(“SAB 108”). SAB 108 was issued in order to
eliminate the diversity of practice surrounding how public
companies quantify financial statement misstatements.
SAB 108 is effective for fiscal years ending after
November 15, 2006, but we adopted it early in fiscal 2006.
Traditionally, there have been two widely-recognized methods for
quantifying the effects of financial statement misstatements:
the “roll-over” method and the “iron
curtain” method. The roll-over method focuses primarily on
the impact of a misstatement on the income statement, including
the reversing effect of prior year misstatements, but its use
can lead to the accumulation of misstatements on the balance
sheet. The iron-curtain method, on the other hand, focuses
primarily on the effect of correcting the period-end balance
sheet with less emphasis on the reversing effects of prior year
errors on the income statement. Prior to our application of the
guidance in SAB 108, we consistently applied the roll-over
method when quantifying financial statement misstatements.
In SAB 108, the SEC staff established an approach that
requires quantification of financial statement misstatements
based on the effects of misstatements on each of the financial
statements and the related financial statement disclosures. This
model is commonly referred to as a “dual approach”
because it requires quantification of errors under both the iron
curtain and the roll-over methods.
SAB 108 permits us to initially apply its provisions to
errors that are material under the dual method but were not
previously material under our previously used method of
assessing materiality either by (i) restating prior
financial statements as if the dual approach had always been
applied or (ii) recording the cumulative effect of
initially applying the dual approach as adjustments to the
carrying values of the applicable balance sheet accounts as of
November 1, 2005 with an offsetting adjustment recorded to
the opening balance of retained earnings. We elected to record
the effects of applying SAB 108 using the cumulative effect
transition method and adjusted beginning retained earnings for
fiscal 2006 in the accompanying consolidated financial
statements for misstatements associated with our historical
stock-based compensation expense and related income tax effects
as described below. We do not consider any of the misstatements
to have a material impact on our consolidated financial
statements in any of the prior years affected under our previous
method for quantifying misstatements, the roll-over method.
Historical
Stock-Based Compensation Practices
On May 23, 2007, we announced that we had completed our
self-initiated, voluntary review of our historical stock-based
compensation practices and determined the related accounting
impact.
The review was conducted under the direction of the Audit
Committee of our Board of Directors, who engaged the law firm of
Cahill Gordon & Reindel LLP, with whom we had no
previous relationship, as independent outside legal counsel to
assist in conducting the review. The scope of the review covered
approximately 400 grant actions (on approximately 170 grant
dates) from November 1, 1996 through September 12,2006. Within these pools of
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
grants are more than 58,000 individual grants. In total, the
review encompassed awards relating to more than 230 million
shares of common stock granted over the ten-year period.
The Audit Committee, together with its independent outside legal
counsel, did not find any evidence of intentional wrongdoing by
any former or current Novell employees, officers or directors.
We have determined, however, that we utilized incorrect
measurement dates for some of the stock-based compensation
awards granted during the review period. The incorrect
measurement dates can be attributed primarily to the following
reasons:
Administrative Corrections — In the period of
fiscal 1997 to 2005, we corrected administrative errors
identified subsequent to the original authorization by awarding
stock options that we dated with the original authorization
date. The administrative errors included incorrect lists of
optionees, generally new hires who were inadvertently omitted
from the lists of optionees because of the delayed updating of
our personnel list, and miscalculations of the number of options
to be granted to particular employees on approved lists.
Number of Shares Approved Not Specified —
Documented authorization for certain grants, primarily in the
period from fiscal 1997 through 2000, lacked specificity for
some portion or all of the grant.
Authorization Incomplete or Received Late — For
certain grants, primarily in the period from fiscal 1997 through
2004, there is incomplete documentation to determine with
certainty when the grants were actually authorized or the
authorization was received after the stated grant date.
In light of the above findings, we and our advisors performed an
exhaustive process to uncover all information that could be used
in making a judgment as to appropriate measurement dates. We
used all available information to form conclusions as to the
most likely option granting actions that occurred and to form
conclusions as to the appropriate measurement dates.
Under APB No. 25, “Accounting for Stock Issued to
Employees,” because the exercise prices of the stock
options on the new measurement dates were, in some instances,
lower than the fair market value of the underlying stock on such
dates, we are required to record compensation expense for these
differences. As a result, stock-based compensation expense in a
cumulative after-tax amount of approximately $19.2 million
should have been reported in the consolidated financial
statements for the fiscal years ended October 31, 1997
through October 31, 2005. After considering the materiality
of the amounts of stock-based compensation and related income
tax effects that should have been recognized in each of the
applicable historic periods, including the interim periods of
fiscal 2005 and 2006, we determined that the errors were not
material to any prior period, on either a quantitative or
qualitative basis, under our previous method for quantifying
misstatements, the roll-over method. Therefore, we have not
restated our consolidated financial statements for prior
periods. In accordance with the provisions of SAB 108, we
decreased beginning retained earnings at November 1, 2005
by approximately $19.2 million, from $984.1 million to
$964.9 million, or a reduction of two percent, with the
offset to additional paid-in capital in the consolidated balance
sheet.
The following table summarizes the effects, net of income taxes,
(on a cumulative basis prior to fiscal 2005 and in fiscal
2005) resulting from changes in measurement dates and the
related application of the guidance applicable to the initial
compliance with SAB 108:
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
D.
Acquisitions
and Equity Investments
Senforce
Pursuant to an Agreement and Plan of Merger, dated
August 1, 2007, we acquired 100% of the outstanding stock
of Senforce Technologies, Inc., a provider of endpoint security
management, for $20.0 million in cash plus transaction
costs of $0.2 million. Endpoint security management focuses
on technology that provides data security for workstations,
laptops or mobile devices in order to ensure that data cannot be
accessed when they are lost or stolen. Senforce’s products
have been integrated into our security and identity management
products. Senforce’s results of operations were included in
our consolidated financial statements beginning on the
acquisition date.
The purchase price was allocated as follows:
Estimated
Estimated
Fair Value
Useful Life
(In thousands)
Fair value of net tangible liabilities assumed
$
(8
)
N/A
Identifiable intangible assets:
Developed technology
2,000
3 years
Customer relationships
500
3 years
Goodwill
17,728
Indefinite
Total net assets acquired
$
20,220
Developed technology and customer relationship assets are being
amortized over their estimated useful lives. Goodwill is not
amortized but is periodically evaluated for impairment.
Developed technology relates to Senforce’s products that
were commercially available and could be combined with Novell
products and services. Discounted expected future cash flows
attributable to the products were used to determine the value of
developed technology. This resulted in a valuation of
approximately $2.0 million related to developed technology
that had reached technological feasibility.
Goodwill from the acquisition resulted from our belief that the
security management products developed by Senforce are a
valuable addition to our systems and resource management product
offerings. We believe they will help us remain competitive in
the endpoint security management markets and increase our
revenue. The goodwill from the Senforce acquisition was
allocated to our systems and resource management operating
segment (see Note J).
If the Senforce acquisition had occurred on November 1,2005, the unaudited pro forma results of operations for Novell
for the fiscal 2007 and 2006 would have been:
Fiscal Year Ended
(Amounts in thousands, except per share amounts)
2007
2006
Net revenue
$
934,069
$
920,503
Net income (loss) available to common stockholders —
diluted
$
(49,345
)
$
11,879
Net income (loss) per share available to common
stockholders — diluted
$
(0.14
)
$
0.03
RedMojo
On November 17, 2006, we acquired 100% of the outstanding
stock of RedMojo Inc, a privately-held company that specialized
in cross-platform virtualization management software tools.
RedMojo’s products have been integrated into our systems
and resource management products. The purchase price was
approximately $9.7 million
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
in cash plus merger and transaction costs of approximately
$0.2 million. RedMojo’s results of operations were
included in our consolidated financial statements beginning on
the acquisition date.
The purchase price was allocated as follows:
Estimated
Estimated
Fair Value
Useful Life
(In thousands)
Identifiable intangible assets:
Developed technology
$
2,370
3 years
Goodwill
7,554
Indefinite
Total net assets acquired
$
9,924
Developed technology assets are being amortized over their
estimated useful lives. Goodwill is not amortized but is
periodically evaluated for impairment.
Developed technology relates to RedMojo products that were
commercially available and could be combined with Novell
products and services. Discounted expected future cash flows
attributable to the products were used to determine the value of
developed technology. This resulted in a valuation of
approximately $2.4 million related to developed technology
that had reached technological feasibility.
Goodwill from the acquisition resulted from our belief that the
virtualization products developed by RedMojo are a valuable
addition to our systems and resource management offerings. We
believe they will help us remain competitive in the
virtualization markets and increase our systems and resource
management revenue. The goodwill from the RedMojo acquisition
was allocated to our systems and resource management operating
segment (see Note J).
RedMojo’s revenue and income were immaterial in prior years
and would not have had a material impact to Novell’s
reported financial results.
e-Security
On April 19, 2006, we acquired 100% of the outstanding
stock of
e-Security,
Inc., a privately-held company headquartered in Vienna,
Virginia.
e-Security
provides security information, event management and compliance
software.
e-Security’s
products are now part of our identity and access management
sub-category. The purchase price was approximately
$71.7 million in cash, plus transaction costs of
$1.1 million.
e-Security’s
results of operations were included in our consolidated
financial statements beginning on the acquisition date.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
We estimated the fair values of the intangible assets as further
described below. Developed technology, customer relationships,
and trademarks/trade names are being amortized over their
estimated useful lives. Goodwill is not amortized but is
periodically evaluated for impairment.
The net tangible liabilities of
e-Security
consisted mainly of accounts payable and other liabilities
reduced by cash and cash equivalents, accounts receivable, and
fixed assets.
In-process research and development valued in the amount of
$2.1 million pertained to technology that was not
technologically feasible at the date of the acquisition, meaning
it had not reached the working model stage, did not contain all
of the major functions planned for the product, and was not
ready for initial customer testing. At the acquisition date,
e-Security
was working on the next two releases of its product called
Sentinel, one of which was released in the third calendar
quarter of 2006 and the second was released in 2007. These
releases had not yet achieved technological feasibility at the
time of acquisition. The in-process research and development was
valued based on discounting estimated future cash flows from the
related products. Completion of the development of the future
upgrades of the Sentinel products is dependent upon our
successful integration of the
e-Security
products with Novell products and services. The in-process
research and development does not have any alternative future
use and did not otherwise qualify for capitalization. As a
result, this amount was expensed upon acquisition.
Developed technology relates to
e-Security
products that were commercially available and could be combined
with Novell products and services. Discounted expected future
cash flows attributable to the products were used to determine
the value of developed technology. This resulted in a valuation
of approximately $6.9 million related to developed
technology that had reached technological feasibility.
The valuation of customer relationships in the amount of
$3.6 million, which relates primarily to customers under
maintenance agreements, was determined based on discounted
expected future cash flows to be received as a result of the
agreements and assumptions about their renewal rates.
Goodwill from the acquisition resulted from our belief that the
Sentinel products developed by
e-Security
are a valuable addition to our identity and access management
offerings. We believe they will help us remain competitive in
the security and compliance markets and increase our identity
and access management revenue. The goodwill from the
e-Security
acquisition was allocated among our operating segments (see
Note J).
If the
e-Security
acquisition had occurred on November 1, 2004, the unaudited
pro forma results of operations for fiscal 2006 and 2005 would
have been:
Fiscal Year Ended
(In thousands, except per share amounts)
2006
2005
Net revenue
$
923,827
$
997,313
Net income available to common stockholders — diluted
$
13,261
$
372,201
Net income per share available to common
stockholders — diluted
$
0.04
$
0.84
We analyze our intangible assets periodically for indicators of
impairment. During fiscal 2007, as part of our periodic review
of intangible assets, we determined that
e-Security’s
financial performance declined significantly and that its
estimated future undiscounted direct cash flows would not be
sufficient to cover the carrying value of its intangible assets.
We used discounted cash flow models to estimate the value of
e-Security’s
intangible assets and determined that $2.5 million,
$1.3 million and $0.1 million of
e-Security’s
developed technology, customer relationship and trade name
intangible assets, respectively, had become impaired. These
intangible assets were written down and the related charges were
recorded as a component of operating expense in the consolidated
statements of operations during fiscal 2007. The entire
$3.9 million impairment charge related to the identity and
security management operating segment.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Open
Invention Network, LLC
On November 8, 2005, Open Invention Network, LLC
(“OIN”) was established by us, IBM, Philips, Red Hat
and Sony. OIN is a privately-held company that has acquired and
intends to continue to acquire patents to promote Linux and open
source by offering its patents on a royalty-free basis to any
company, institution or individual that agrees not to assert its
patents against the Linux operating system or certain
Linux-related applications. In addition, OIN, in its discretion,
will enforce its patents to the extent it believes such action
will serve to further protect and promote Linux and open source.
Each party contributed capital with a fair value of
$20.0 million to OIN. We account for our 17% ownership
interest using the equity method of accounting. Our
$20.0 million contribution consisted of patents with a fair
value of $15.8 million, including $0.3 million of
prepaid acquisition costs, and cash of $4.2 million. At the
time of the contribution, the patents had a book value of
$14.4 million, including $0.3 million of prepaid
acquisition costs. The $1.4 million difference between the
fair value and book value of the patents is being amortized to
our investment in OIN account and equity income over the
remaining estimated useful life of the patents, which is
approximately nine years. Our investment in OIN as of
October 31, 2007 of $19.2 million is classified as
other assets in the consolidated balance sheets.
Onward
Novell
In December 2005, we acquired the remaining 50% ownership of our
sales and marketing joint venture in India from our joint
venture partner for approximately $7.5 million in cash and
other consideration. At the time of the acquisition, the net
book value of the minority interest was $5.3 million. The
$2.0 million difference between the net book value of the
minority interest and the amount we paid for the remaining 50%
ownership was recorded as goodwill.
Tally
Systems Corp.
On April 1, 2005, we acquired 100% of the outstanding stock
of Tally Systems Corp., a privately-held company headquartered
in Lebanon, New Hampshire. Tally provides automated PC hardware
and software recognition products and services used by customers
to manage hardware and software assets. This acquisition enables
us to enhance our current ZENworks product offerings. The
purchase price was approximately $17.3 million in cash,
plus transaction costs of $0.4 million and excess facility
costs of $4.5 million recorded as an acquisition liability.
In addition, as a part of the acquisition, we set up a bonus
pool of $0.5 million for Tally employees who satisfy
certain criteria. This bonus pool was not accrued as a component
of the purchase price and any bonus payments out of this pool
are expensed as they are earned.
Tally’s results of operations were included in the
consolidated financial statements beginning on the acquisition
date.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The purchase price was allocated to the tangible and
identifiable intangible assets and the excess of the total
purchase price over the amounts assigned was recorded as
goodwill. We estimated the fair values of the intangible assets
as further described below. Developed technology, contractual
relationships, customer relationships and internal use software
are being amortized over their estimated useful lives. Goodwill
is not amortized but is periodically evaluated for impairment.
Net tangible assets of Tally consisted mainly of cash and cash
equivalents, accounts receivable and fixed assets reduced by
accounts payable, deferred revenue and other liabilities.
Developed technology relates to Tally’s products that are
commercially available and can be combined with Novell products
and services as well as proprietary technology that could be
used in future product releases. To determine the value of
developed technology, the expected future cash flows
attributable to the products was discounted to take into account
risk associated with these assets. This resulted in a valuation
of approximately $3.2 million related to developed
technology, which had reached technological feasibility.
The valuation of contractual relationships in the amount of
$1.7 million, which relates to a contract with an original
equipment manufacturer reseller in Europe, was determined based
on estimated discounted future cash flows to be received as a
result of the relationship.
Goodwill from the acquisition resulted from our belief that the
asset management products developed by Tally are a valuable
addition to our ZENworks product line and will help us remain
competitive in the hardware and software management products
market. The goodwill from the Tally acquisition was allocated
among our operating segments (see Note J).
Immunix,
Inc.
On April 27, 2005, we acquired 100% of the outstanding
stock of Immunix, Inc., a privately-held company headquartered
in Portland, Oregon, which provides enterprise class, host
intrusion prevention solutions for the Linux platform. This
acquisition enables us to expand security offerings on the Linux
platform. The purchase price was approximately
$17.3 million in cash, plus transaction costs of
$0.4 million.
Immunix’s results of operations were included in the
consolidated financial statements beginning on the acquisition
date.
The purchase price was allocated as follows:
Estimated
Estimated
Fair Value
Useful Life
(In thousands)
Fair value of net tangible liabilities assumed
$
(112
)
N/A
In-process research and development
480
N/A
Identifiable intangible assets:
Developed technology
2,400
3 years
Trademarks/trade names
120
3 years
Customer relationships
80
1 year
Internal use software
10
3 years
Goodwill
14,676
Indefinite
Total net assets acquired
$
17,654
The purchase price was allocated to the tangible and
identifiable intangible assets and the excess of the total
purchase price over the amounts assigned was recorded as
goodwill. We estimated the fair values of the intangible assets
as further described below. Developed technology,
trademarks/trade names, customer relationships and
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
internal use software are being amortized over their estimated
useful lives. Goodwill is not amortized but is periodically
evaluated for impairment.
Net tangible liabilities of Immunix consisted mainly of accounts
payable and other liabilities reduced by cash and cash
equivalents, accounts receivable, and fixed assets.
In-process research and development in the amount of
$0.5 million pertains to technology that was not
technologically feasible at the date of the acquisition, meaning
it had not reached the working model stage, did not contain all
of the major functions planned for the product, and was not
ready for initial customer testing. At the acquisition date,
Immunix was working on the next release of its product called
AppArmortm,
which was released in September 2005. This future release had
not yet achieved technological feasibility. The in-process
research and development was valued based on discounting
estimated future cash flows from the related products.
Completion of the development of the future upgrades of these
products is dependent upon our delivery of our Linux
applications products and our successful integration of the
Immunix products. The in-process research and development does
not have any alternative future use and did not otherwise
qualify for capitalization. As a result, the entire amount was
expensed upon acquisition.
Developed technology relates to Immunix products that are
commercially available and can be combined with Novell products
and services. Discounted expected future cash flows attributable
to the products were used to determine the value of developed
technology. This resulted in a valuation of approximately
$2.4 million related to developed technology which had
reached technological feasibility.
Goodwill from the acquisition resulted from our belief that the
Linux platform security products developed by Immunix are a
valuable addition to our Linux offerings and will help us remain
competitive in the Linux market and increase our Linux revenue.
The goodwill from the Immunix acquisition was allocated among
our operating segments (see Note J).
If the Tally and Immunix acquisitions had occurred on
November 1, 2004, the unaudited pro forma results of
operations for fiscal 2005 would have been:
Net income available to common stockholders — diluted
$
376,049
Net income per share available to common
stockholders — diluted
$
0.85
E.
Divestitures
CTP
Switzerland
On October 31, 2007, we signed a share purchase agreement,
(“Agreement”) to sell our wholly-owned Cambridge
Technology Partners (“CTP”) Switzerland subsidiary to
a management-led buyout group for $0.5 million at close
plus an additional contingent payment of up to approximately
$0.3 million to be received over the next year based on an
earn-out model that is tied to CTP Switzerland’s management
bonuses. Final closing of the sale will occur on
January 31, 2008. The $0.5 million was placed into an
escrow account as of October 31, 2007 and will be held
until the close on January 31, 2008. Once the sale is
complete, there will be no further shareholder or operational
relationship between us and CTP Switzerland going forward.
Due to the signing of the Agreement prior to the end of fiscal
2007, CTP Switzerland was classified as a discontinued operation
in our consolidated statements of operations for fiscal 2007,
2006 and 2005. In addition, the Agreement triggered the need to
test the $3.9 million of goodwill related to CTP
Switzerland for impairment. Using an estimate of proceeds to be
received upon sale as an indicator of CTP Switzerland’s
fair value, we determined that the entire amount of CTP
Switzerland’s goodwill had become impaired, and was,
therefore, written off. In addition,
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
we recorded an impairment charge of $5.0 million to write
CTP Switzerland’s remaining assets down to their fair value
based on the estimated proceeds to be received upon the sale.
Both of these were recorded as a component of discontinued
operations in the consolidated statement of operations. After
the impairment noted, CTP Switzerland’s assets of
approximately $4.3 million and liabilities of approximately
$4.1 million are considered “held for sale”
however, due to their immateriality, we did not classify these
separately on our consolidated balance sheet.
Salmon
On March 12, 2007, we sold our shares in Salmon to Okam
Limited, a U.K. Limited Holding Company for $4.9 million,
plus an additional contingent payment of approximately
$3.9 million to be received if Salmon meets certain revenue
targets. There will be no further shareholder or operational
relationship between us and Salmon going forward. Salmon was a
component of our business consulting segment and Salmon’s
sale will not have an impact on our professional services
business and has been recorded as a component of the
discontinued operations in the consolidated statement of
operations.
During the first quarter of fiscal 2007, we determined that it
was more likely than not that Salmon would be sold. This
determination triggered the need to test the $11.9 million
of goodwill related to Salmon for impairment. Using an estimate
of proceeds to be received upon sale as an indicator of
Salmon’s fair value, we determined that $10.2 million
of Salmon’s goodwill had become impaired, and was,
therefore, written off during the quarter as a component of the
discontinued operations in the consolidated statement of
operations. In addition, we also determined that
$0.5 million of customer/contractual relationship
intangible assets and $0.1 million of non-compete agreement
intangible assets had become impaired and, therefore, were also
written off in the first quarter of fiscal 2007.
In the second quarter of fiscal 2007, we recognized a gain on
the consummation of the sale of approximately $0.6 million.
Salmon’s results of operations are classified as a
discontinued operation in our consolidated statements of
operations.
The gain on the sale of Salmon was calculated as follows:
(In thousands)
Sales price
$
4,914
Costs to sell
(102
)
4,812
Net book value of Salmon:
Cash
2,165
Other current assets
4,089
Goodwill
2,177
Other long-term assets
139
Liabilities
(4,386
)
4,184
Gain on sale of Salmon before income taxes
$
628
Celerant
On May 24, 2006, we sold our shares in Celerant consulting
to a group comprised of Celerant management and Caledonia
Investments plc for $77.0 million in cash. Celerant
consulting was acquired by Novell in 2001 as part of the
Cambridge Technology Partners acquisition. There are no on going
shareholder or operational relationships between us and Celerant
consulting. The sale of Celerant consulting does not impact our
professional services
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
business. Celerant’s results of operations are classified
as a discontinued operation in our consolidated statements of
operations.
Celerant consulting is accounted for as a discontinued
operation, and accordingly, its results of operations and the
gain on the sale of Celerant consulting are reported separately
in a single line item in our consolidated statement of
operations.
The gain on the sale of Celerant was calculated as follows:
On August 10, 2006, we sold our Japan consulting group
(“JCG”) to Nihon Unisys, LTD (“Unisys”) for
$4.0 million. $2.8 million of the selling price was
paid at closing and $1.2 million was contingent upon
certain key employees remaining employed by Unisys for the
12 month period after closing. In the fourth quarter of
fiscal 2007, Unisys paid the contingent consideration of
$0.2 million for each key employee that was still employed
by Unisys at the end of the retention period, totaling
$1.2 million. We recorded a loss of $8.3 million in
fiscal 2006 related to the excess carrying amount of the JCG
over its fair value, of which $7.1 million was to write off
goodwill. We also recognized a gain of $1.2 million in
fiscal 2007 related to contingent consideration.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The loss was calculated as follows:
(In thousands)
Fair value of JCG (including contingent selling price)
$
2,800
Costs to sell
(393
)
2,407
Net book value of JCG:
Current assets
2,935
Goodwill
7,106
Current liabilities
(619
)
Foreign exchange and other
1,258
10,680
Loss on sale of JCG before income taxes in fiscal 2006
$
(8,273
)
Contingent consideration received in fiscal 2007
$
1,200
Loss on sale of JCG before income taxes, net
$
(7,073
)
It is anticipated that the JCG will continue to be a key partner
for Novell with respect to subcontracting consulting services.
Likewise, the cash flows from the JCG to Novell are also
anticipated to increase as Novell plans to be a subcontractor
for the JCG. As a result of our expected continuing involvement,
the JCG has not been presented as a discontinued operation.
F.
Microsoft
Agreements
On November 2, 2006, we entered into a Business
Collaboration Agreement, a Technical Collaboration Agreement,
and a Patent Cooperation Agreement with Microsoft Corporation,
discussed above in Significant Accounting Policies.
During fiscal 2007, we recorded revenue of $43.6 million,
net related to the Microsoft agreements. At October 31,2007, we had deferred revenue relating to these agreements of
$307.8 million, of which $92.4 million is classified
as current deferred revenue and $215.4 million is
classified as long-term deferred revenue.
At October 31, 2007, approximately $7.9 million of our
equity securities are designated for deferred compensation
payments, which are paid out as requested by the participants of
the plan.
At October 31, 2007, contractual maturities of our
short-term investments were:
Cost
Fair Market Value
(In thousands)
Less than one year
$
166,088
$
165,938
Due in one to two years
113,223
113,622
Due in two to three years
261,905
263,238
Due in more than three years
150,313
151,193
No contractual maturity
82,974
83,827
Total short-term investments
$
774,503
$
777,818
We had net unrealized gains related to short-term investments of
$3.3 million at October 31, 2007 and net unrealized
losses of $3.6 million at October 31, 2006. We
realized gains on the sales of securities of $0.6 million,
$0.7 million, and $0.8 million, in fiscal 2007, 2006,
and 2005, respectively, while realizing losses on sales of
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
securities of $1.4 million, $2.1 million, and
$1.6 million, during those same periods, respectively. At
October 31, 2007, $132.9 million of the investments
with gross unrealized losses of $0.4 million (out of the
total gross unrealized losses of $0.7 million) had been in
a continuous unrealized loss position for more than
12 months and $125.8 million of the investments with
gross unrealized losses of $0.3 million had been in a
continuous unrealized loss position for less than
12 months. The unrealized losses on our investments were
caused primarily by interest rate increases and not the credit
quality of the issuers. The unrealized losses represent less
than 1% of the cost basis of the related investments and are not
considered to be severe. We have the ability to hold these
investments until a recovery of fair value, which may be at
maturity. We therefore do not consider these investments to be
other-than-temporarily impaired at October 31, 2007.
H.
Long-Term
Investments
During the fourth quarter of fiscal 2006, we sold all of our
rights, titles, interests and obligations for 22 of our 23
venture capital funds, which were classified in long-term
investments in the consolidated balance sheet for total proceeds
of $71.3 million. The sale of one-half of one fund closed
in fiscal 2006, and the sale of the remaining one-half of that
fund closed in the first quarter of fiscal 2007, resulting in an
additional gain in the first quarter of fiscal 2007 of
$3.6 million on proceeds of $5.0 million. The
remaining venture capital fund that was not sold has a book
value of zero. The remaining $5.0 million classified as
short-term investments were liquidated subsequent to
year-end.
During fiscal 2007, we reclassified all but $5.0 million of
our AAA/AA rated investments in auction-rate securities from
short-term investments to long-term investments. These
auction-rate securities were reclassified as long-term
investments during the fourth quarter of fiscal 2007 due to the
failure of $37.3 million of these securities to settle at
auction. The failure resulted in the interest rate on these
investments resetting at the maximum rate allowed per security
(LIBOR + 100, 125, or 150 bps) on the regular auction date
every 28 days. While we now earn premium interest rates on
the investments, until the auctions are successful the
investments are not liquid. In the event we need to access these
funds, we will not be able to do so without a loss of principal,
unless a future auction on these investments is successful.
During the fourth quarter of fiscal 2007, we also recorded an
unrealized loss on these securities of $2.5 million, with
the offset recorded to other comprehensive income in our
consolidated balance sheet. If the issuers are unable to
successfully close future auctions and their credit ratings
deteriorate, we may be further required to adjust the carrying
value of these investments and realize an impairment charge for
an other than temporary decline in the fair values. Based on our
ability to access our cash and other short-term investments, our
expected operating cash flows and our other sources of cash, we
do not anticipate that the lack of liquidity on these
investments will affect our ability to operate our business as
usual.
I.
Property,
Plant and Equipment
Property, plant and equipment consist of the following:
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
During fiscal 2006, we sold corporate aviation assets and
certain corporate real estate assets with a net book value of
$19.0 million for $25.0 million, net of commissions,
resulting in a gain of $6.0 million.
Depreciation and amortization expense related to property, plant
and equipment totaled $29.1 million, $31.2 million,
and $35.3 million, in fiscal 2007, 2006, and 2005,
respectively.
During fiscal 2005, we sold our facility in Lindon, Utah, which
had a net book value of $8.8 million, for
$10.4 million.
J.
Goodwill
and Intangible Assets
Goodwill
In the first quarter of fiscal 2007, we began operating and
reporting our financial results based on four new
product-related business unit segments based on information
solution categories and a new business consulting segment. The
new segments are:
•
Open platform solutions
•
Identity and security management
•
Systems and resource management
•
Workgroup
•
Business consulting
During fiscal 2007, we sold Salmon and signed an agreement to
sell CTP Switzerland, which were the last two components of our
business consulting segment, therefore eliminating the business
consulting segment. Business consulting in fiscal 2006 and 2005
was also comprised of our Japan consulting group, which was sold
in fiscal 2006.
Because we changed our segments beginning November 1, 2006,
we performed a goodwill impairment test in the first quarter of
fiscal 2007, which did not result in an impairment charge.
However, future performance of the new segments could result in
a non-cash impairment charge. Prior to fiscal 2007, we operated
and reported our financial results in three segments based on
geographic area:
•
Americas — included the United States, Canada and
Latin America
•
EMEA — included Eastern and Western Europe, Middle
East, and Africa
•
Asia Pacific — included China, Southeast Asia,
Australia, New Zealand, Japan, and India
The following table summarizes the allocation of goodwill from
the old geographical segments to the new segments based on the
relative fair values of the reporting units as of
November 1, 2006:
Adjustments during fiscal 2007 decreased goodwill by
$4.4 million. The adjustments were comprised principally of
$4.9 million in tax-related adjustments partially offset by
a $0.5 million increase in foreign currency adjustments.
The $4.9 million tax adjustments were attributable to the
SilverStream, Immunix, Ximian, Tally and Senforce acquisitions
and related to the reversal of deferred tax asset valuation
allowances for acquired net operating loss carryforwards that
were utilized by taxable income generated in fiscal 2007.
During the first quarter of fiscal 2007, we determined that it
was more likely than not that Salmon would be sold, which
required us to test the $11.9 million of goodwill related
to Salmon for impairment. Using an estimate of proceeds to be
received upon sale as an indicator of Salmon’s fair value,
we determined that $10.2 million of Salmon’s goodwill
had become impaired, and was, therefore, written off during the
quarter. The Salmon sale was completed during the second quarter
of fiscal 2007 and resulted in the write-off, included as a
component of the gain on sale calculation, of the remaining
$2.2 million of goodwill that was related to Salmon.
During the fourth quarter of fiscal 2007, we entered into an
agreement to sell our CTP Switzerland subsidiary. As a result of
this agreement, we tested the $3.9 million of goodwill
related to CTP Switzerland, the last remaining component of the
Business Consulting reporting unit. Using an estimate of
proceeds to be received upon sale as an indicator of CTP
Switzerland’s fair value, we determined that the entire
$3.9 million of goodwill was impaired, and was, therefore,
written off during the quarter as a component of the loss on
discontinued operations in the consolidated statements of
operations. The CTP Switzerland sale is anticipated to close
during the first quarter of fiscal 2008.
During the fourth quarter of fiscal 2007, the German tax
authorities issued new guidance conforming to German Supreme
Court rulings that resulted in: 1) the valuation allowance
being removed on deferred tax assets related to net operating
losses acquired as part of the SUSE acquisition, and 2) a
reduction in tax reserves, goodwill by $24.7 million.
On August 1, 2007, 2006 and 2005, we performed our annual
goodwill impairment test under SFAS No. 142. To
estimate the fair value of our reporting units, management made
estimates and judgments about future cash flows based on
assumptions that are consistent with both short-term and
long-range plans used to manage the business. We also considered
factors such as our market capitalization in assessing the fair
value of the reporting units. Based on the results of our
analyses, we determined that no goodwill impairment existed in
any of our reporting units for any year reported as a result of
the annual impairment test. This process requires subjective
judgment at many points throughout the analysis. Changes in
reporting units, and changes to the estimates used in the
analyses, including estimated future cash flows, could cause one
or more of the reporting units or indefinite-lived intangibles
to be
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
valued differently in future periods. It is at least reasonably
possible that future analysis could result in a non-cash
goodwill impairment charge and the amount could be material.
Intangible
Assets
The following is a summary of intangible assets, net of
accumulated amortization:
During the first quarter of fiscal 2007, we acquired developed
technology of $2.4 million related to the acquisition of
RedMojo, which has been integrated into our systems and resource
management products. During the second quarter of fiscal 2007,
we acquired developed technology for $0.9 million, which
has been integrated into our identity and security management
products. During the fourth quarter of fiscal 2007, we acquired
developed technology of $2.0 million and $0.5 million
of customer relationships related to the acquisition of
Senforce, which has been integrated into our systems and
resource management products.
As discussed above under the “Goodwill” subheading,
during fiscal 2007, we reviewed other long-lived assets related
to Salmon for impairment. This review resulted in the
determination that $0.5 million of customer/contractual
relationship intangible assets and $0.1 million of
non-compete agreement intangible assets had become impaired and,
therefore, were written off during fiscal 2007.
During fiscal 2006, we purchased developed technology for
$1.2 million, which was integrated into our workgroup
products, and we recorded $0.4 million for trademarks,
$3.6 million for customer relationships, and
$6.9 million for developed technology related to the
acquisition of
e-Security.
During fiscal 2006, we also contributed our patent portfolio
towards our 20% ownership interest in OIN. At the time of the
contribution, these patents, which we acquired for
$15.5 million, had a net book value of $14.1 million.
Developed technology at October 31, 2007 related primarily
to the systems and resource management product line as a result
of our acquisitions of Senforce, RedMojo, and Tally and to our
identity and security management product line from the
e-Security
acquisition. Trademarks and trade names at October 31, 2007
related primarily to the SUSE and
e-Security
individual product names, which we continue to use.
Customer/contractual relationships at October 31, 2007
related primarily to the customers we acquired as a part of our
acquisitions of Senforce,
e-Security,
and Tally. Internal use software at October 31, 2007
related to certain build tools we acquired through our
acquisition of SUSE and
e-Security.
We analyze our intangible assets periodically for indicators of
impairment. During fiscal 2007, as part of our periodic review
of intangible assets, we determined that
e-Security’s
financial performance declined significantly and that its
estimated future undiscounted direct cash flows would not be
sufficient to cover the carrying value of its intangible assets.
We used discounted cash flow models to estimate the value of
e-Security’s
intangible assets and determined that $2.5 million,
$1.3 million and $0.1 million of
e-Security’s
developed technology, customer relationship and trade name
intangible assets, respectively, had become impaired. These
intangible assets were
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
written down and the related charges were recorded as a
component of operating expense in the consolidated statements of
operations during fiscal 2007. The entire $3.9 million
impairment charge related to the identity and security
management operating segment.
During fiscal 2006, we determined that $1.2 million of our
trademarks and trade names related to our acquisition of Ximian
were impaired as they were no longer being utilized and no
longer had any value. These trademarks and trade names were
written off and the related charge recorded as a component of
operating expense in the consolidated statement of operations.
During fiscal 2005, we also determined that $0.7 million of
our trademarks and trade names related to the acquisition of
SilverStream were impaired as they were no longer being utilized
and no longer had any value. These trademarks and trade names
were written off and the related charge recorded as a component
of operating expense in the consolidated statement of
operations. During fiscal 2005, we also determined that internal
use software intangible assets related to the acquisition of
SUSE with a net book value of $0.8 million were fully
impaired. The fair value was determined based on the fact that
this software, as well as a similar product from a competitor,
is now both available for free to the general public and the
related technology is not proprietary to either us or the
competitor. This internal use software intangible asset was
written off and the related charge recorded as a component of
product development in the operating expenses section of the
consolidated statement of operations. In addition, during fiscal
2005, we determined that $0.4 million of our intangible
assets, primarily internal use software, were no longer being
utilized. Therefore, the intangible assets were written off in
fiscal 2005.
Amortization expense on intangible assets was $8.4 million,
$12.8 million, and $14.0 million in fiscal 2007, 2006,
and 2005, respectively. Amortization of intangible assets is
estimated to be approximately $5.4 million in fiscal 2008,
$3.2 million in fiscal 2009, and $0.8 million in
fiscal 2010, with nothing thereafter.
K. Income
Taxes
We account for income taxes in accordance with
SFAS No. 109, “Accounting for Income Taxes.”
SFAS No. 109 requires that we record deferred tax
assets and liabilities based upon the future tax consequence of
differences between the book and tax basis of assets and
liabilities, and other tax attributes. SFAS No. 109
also requires that we assess the ability to realize deferred tax
assets based upon a “more likely than not” standard
and provide a valuation allowance for any tax assets not deemed
realizable under this standard.
Due to the utilization of a significant amount of our net
operating loss carryforwards during fiscal 2005, substantially
all of the tax benefit received from the use of our remaining
net operating loss carryforwards to offset U.S. taxable
income in 2007 and 2006 was credited to additional paid-in
capital or goodwill and not to income tax expense. In addition,
the windfall tax benefit associated with stock-based
compensation is also credited to additional paid-in capital. In
connection with our adoption of SFAS No. 123(R), we
elected to follow the tax ordering rules to determine the
sequence in which deductions and net operating loss
carryforwards are utilized. Accordingly, during fiscal 2007, a
tax benefit relating to stock options of $13.1 million was
credited to additional paid-in capital and a benefit of
$4.9 million was credited to goodwill. During fiscal 2006,
a tax benefit relating to stock options of $15.3 million
was credited to additional paid-in capital and a benefit of
$6.6 million was credited to goodwill.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
In accordance with applicable accounting standards, we regularly
assess our ability to realize our deferred tax assets.
Assessments of the realization of deferred tax assets require
that management consider all available evidence, both positive
and negative, and make significant judgments about many factors,
including the amount and likelihood of future taxable income.
Based on all the available evidence, we continue to believe that
it is more likely than not that our remaining U.S. net
deferred tax assets, and certain foreign deferred tax assets,
are not currently realizable. As a result, we continue to
provide a full valuation allowance on our U.S. net deferred
tax assets and certain foreign deferred tax assets. The
valuation allowance on deferred tax assets increased by
$16.4 million in fiscal 2007 primarily due to stock-based
compensation and other originating assets, new acquisitions and
changes in our deferred tax liabilities. The valuation allowance
was reduced by approximately $18 million as a result of a
favorable interpretation of tax law in a foreign jurisdiction
that made it more likely than not that the use of tax net
operating losses would be sustained. This benefit was credited
to goodwill.
As of October 31, 2007, we had unrestricted U.S. net
operating loss carryforwards for federal tax purposes of
approximately $39.9 million. Substantially all of the
benefit of the use of these loss carryforwards will be recorded
as a credit to additional paid-in capital. If not utilized,
these carryforwards will expire in fiscal years 2023 through
2025. Additionally, we had $231.0 million in net operating
loss carryforwards from acquired companies that will expire in
years 2018 through 2026. These loss carryforwards from acquired
companies can be utilized to offset future taxable income, but
are subject to certain annual limitations. The benefit of the
use of these loss carryforwards will be recorded to first reduce
goodwill relating to the acquisition, second to reduce other
non-current intangible assets relating to the acquisition, and
third to reduce income tax expense. In addition, we have
approximately $181.0 million of foreign loss carryforwards,
of which $0.9 million, $4.0 million, and
$9.2 million are subject to expiration in years 2008, 2009,
and
2010-2014
respectively. The remaining losses do not expire. We have
$111.2 million in capital loss carryforwards, which, if not
utilized, will expire in fiscal years 2008 through 2011. We have
foreign tax credit carryforwards of $43.4 million that
expire between 2009 and 2017, general business credit
carryforwards of $104.9 million that expire between 2010
and 2027, and alternative minimum tax credit carryforwards of
$11.2 million that do not expire. We also have various
state net operating loss and credit carryforwards that expire in
accordance with the respective state statutes.
As of October 31, 2007, deferred tax assets of
approximately $35.6 million pertain to certain tax credits
and net operating loss carryforwards resulting from the exercise
of employee stock options. If realized, the tax benefit of these
credits and losses will be accounted for as a credit to
stockholders’ equity. Additionally, deferred tax assets of
$95.4 million relate to acquired entities. These acquired
deferred tax assets are subject to limitation under the change
of ownership rules of the Internal Revenue Code and have a full
valuation allowance. Approximately $72.6 million of future
tax benefit relating to these deferred tax assets will be
recorded to first reduce goodwill relating to the acquisition,
second to reduce other non-current intangible assets relating to
the acquisition, and third to reduce income tax expense.
We have permanently reinvested the earnings of several of our
foreign subsidiaries. Accordingly, we have not provided deferred
income taxes on the excess of the book basis over the tax
outside basis in the stock of these foreign subsidiaries.
During fiscal 2006, we received a one-time tax benefit of
$4.2 million from the Internal Revenue Service relating to
net operating loss carrybacks made possible under the “Job
Creation and Worker Assistance Act of 2002.” We continue to
evaluate our tax reserves under SFAS No. 5,
“Accounting for Contingencies,” which requires us to
accrue for losses we believe are probable and can be reasonably
estimated. During fiscal 2007, we reduced our tax contingency
reserves by a net $8.7 million, primarily due to the fact
that we closed tax audits with several
non-U.S. foreign
tax authorities relating to certain prior tax periods. A portion
of the reduction in SFAS No. 5 contingency reserves
required cash payments to foreign jurisdictions. We reduced our
tax reserves by approximately $7 million due to a favorable
interpretation of a tax law in a foreign jurisdiction that made
it probable that a tax position would be sustained. The benefit
related to the favorable interpretation of tax law was credited
to goodwill. The amount reflected in the consolidated balance
sheet at October 31, 2007 is considered adequate based
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
on our assessment of many factors including: results of tax
audits, past experience and interpretations of tax law applied
to the facts of each matter. It is reasonably possible that our
tax reserves could be increased or decreased in the near term
based on these factors.
L. Other
Accrued Liabilities
Other accrued liabilities consist of the following:
During fiscal 2007, we recorded net restructuring expenses of
$43.1 million, of which $43.3 million related to
restructuring activities recognized during fiscal 2007 and
$0.2 million related to net releases of previously recorded
restructuring liabilities. The fiscal 2007 restructuring action
is a continuation of the restructuring plan that we began
implementing during the fourth quarter of fiscal 2006 and
continued throughout fiscal 2007. This restructuring plan
relates to efforts to restructure our business to improve
profitability. These efforts center around three main
initiatives: (1) improving sales model and sales staff
specialization; (2) integrating our product development
approach and balancing between on and offshore development
locations; and (3) improving administrative and support
functions. Specific actions taken during fiscal 2007 included
reducing our workforce by 619 employees in sales,
professional services, general and administrative, operations,
product development, marketing, and technical support. These
reductions occurred in most geographic locations and levels of
the organization. Total restructuring expenses by operating
segment were as follows: $28.6 million in corporate
operating costs not allocated to our operating segments,
$5.5 million in identity and security management,
$5.4 million in workgroup, $2.2 million in systems and
resource management, and $1.6 million in open platform
solutions.
The following table summarizes the activity during fiscal 2007
related to this restructuring:
The remaining unpaid balance as of October 31, 2007 is for
severance, which will be paid over the next twelve months, and
lease costs for redundant facilities, which will be paid over
the respective contractual period.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Fiscal
2006
During fiscal 2006, we recorded net restructuring expenses of
$4.4 million, $4.2 million of which related to
restructuring activity recognized during fiscal 2006 and
$0.2 million of which consisted of net adjustments related
to previously recorded merger liabilities and restructuring
liabilities. The adjustments to the merger liabilities have been
recorded in the statement of operations since the changes have
occurred outside the relevant purchase price allocation period.
The fiscal 2006 restructuring expenses related to efforts to
restructure our business to improve profitability, as discussed
above. Specific actions taken during fiscal 2006 included
reducing our workforce by 24 employees, exiting a facility
and liquidating two legal entities.
The following table summarizes the activity during fiscal 2006
related to this restructuring:
As of October 31, 2007, the remaining unpaid balance is for
various fees related to the liquidation of two legal entities,
which will be paid out when the liquidations are completed.
Fiscal
2005
During fiscal 2005, we recorded net restructuring expenses of
$57.7 million, of which $53.6 million related to
restructuring activity recognized during fiscal 2005 and
$5.3 million related to adjustments to previously recorded
merger liabilities to adjust lease accruals, less a net release
of $1.2 million related to an adjustment of prior period
restructuring liabilities. The adjustments to the merger
liabilities have been recorded in the statement of operations
since the changes have occurred outside the relevant purchase
price allocation period. These restructuring expenses related to
our continuing efforts to restructure our business to improve
profitability and to focus on Linux and identity-driven
computing. Specific actions taken included reducing our
workforce by 817 employees.
As of October 31, 2007, the remaining unpaid balances
include accrued liabilities related to severance benefits which
will be paid out once the related litigation has been resolved,
and lease costs for redundant facilities which will be paid over
the respective remaining contract terms.
Fiscal
2004
During fiscal 2004, we recorded net restructuring expenses of
$19.1 million. These restructuring expenses were in
response to the evolution of our business strategy to develop a
competitive position in the Linux market. This strategy included
plans to support the Linux operating system in addition to the
NetWare operating system, by offering our products and services
that run on Linux, NetWare and other platforms. The acquisitions
of Ximian and SUSE were direct results of the evolution in our
business strategy. These changes were made to address market
penetration for Linux and NetWare and to address NetWare revenue
declines. Specific actions taken included reducing our workforce
by 136 employees during fiscal 2004. In addition, we
consolidated facilities, resulting in the closure of two sales
facilities and the disposal of excess equipment and tenant
improvements.
As of October 31, 2007, the remaining balance of the fiscal
2004 restructuring expenses included accrued liabilities related
to lease costs for redundant facilities, which will be paid over
the respective remaining contract terms.
Fiscal
2003
During the third quarter of fiscal 2003, we recorded a pre-tax
restructuring expense of approximately $27.8 million
resulting from the restructuring of our operations in response
to changes in general market conditions, changing customer
demands, and the evolution of our business strategy relative to
the identity-driven computing areas of our business and our
revised strategy. This strategy includes plans to support Linux
in addition to NetWare, by offering our products and services
that run on both NetWare and Linux platforms. These changes in
strategy and company structure were made to address the current
revenue declines. Specific actions taken included reducing our
workforce worldwide by approximately 600 employees
(approximately 10%). In addition, we consolidated facilities,
and disposed of excess equipment.
During the fourth quarter of fiscal 2003, we accrued an
additional $10 million related to the completion of
restructuring activities that were part of the previous
quarter’s plan of restructuring. The additional accrual
relates mainly to the severance of approximately
100 employees and the closing of excess facilities.
As of October 31, 2007, the remaining balance of the fiscal
2003 restructuring expense included accrued liabilities related
to redundant facilities, which will be paid over the respective
remaining contract terms.
During the third quarter of fiscal 2003, we also released
approximately $2.0 million related to excess restructuring
reserves related to the second quarter fiscal 2002 restructuring
event. The net impact of the third quarter fiscal 2003
restructuring and the release of the excess fiscal 2002
restructuring reserves was an expense of $26.0 million.
During the second quarter of fiscal 2003, we determined that the
amount we had originally accrued for facility-related costs in
previous restructurings was too low and accrued an additional
$8.0 million. The original liability was based on estimated
sublease rates and timing, which were affected by the decline in
the real estate market. This additional amount, which pertains
to three separate restructuring events, is included in the
applicable tables that follow.
Fiscal
2002
During the second quarter of fiscal 2002, we recorded a pre-tax
restructuring expense of $20.4 million. The expense was a
result of our continued move toward becoming a business
solutions provider, addressing changes in the market due to
technology changes, and becoming more customer-focused. Specific
actions taken included: reducing our workforce worldwide by
approximately 50 employees (less than 1%), consolidating
facilities, closing offices in unprofitable locations, and
disposing of excess property and equipment.
As of October 31, 2007, the remaining balance of the second
quarter 2002 restructuring expense included redundant
facilities, which will be paid over the respective remaining
contract terms.
The following table summarizes the merger liabilities balance
and activity during fiscal 2007:
We have a $20.0 million bank line of credit available for
letter of credit purposes. At October 31, 2007, there were
standby letters of credit of $14.7 million outstanding
under this line, all of which are collateralized by cash. The
bank line of credit expires on April 1, 2008. The bank line
of credit is subject to the terms of a credit agreement
containing financial covenants and restrictions, none of which
are expected to affect our operations. We are in full
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
compliance with all the financial covenants and restrictions
contained in this credit agreement. In addition, at
October 31, 2007, we had outstanding letters of credit of
an insignificant amount at other banks.
O. Asset
Retirement Obligations
In March 2005, the Financial Accounting Standards Board issued
Interpretation No. 47, “Accounting for Conditional
Asset Retirement Obligations” (“FIN 47”),
which responded to a diversity in practice of how
SFAS No. 143, “Accounting for Asset Retirement
Obligations,” was being implemented. Specifically,
FIN 47 recognized that, when uncertainty about the timing
and/or
settlement method existed, some entities were recognizing the
fair value of asset retirement obligations (“AROs”)
prior to retirement of the asset, while others were recognizing
the fair value of the obligation only when it was probable that
the asset would be retired on a specific date or when the asset
was actually retired. FIN 47 clarified that the uncertainty
surrounding the timing and method of settlement when settlement
is conditional on a future event occurring should be reflected
in the measurement of the liability, not in the recognition of
the liability. AROs must be recognized even though uncertainty
may exist about the timing or method of settlement and therefore
a liability should be recognized when the ARO is incurred. We
adopted FIN 47 on May 1, 2006. FIN 47 requires an
entity to recognize the cumulative effect of initially applying
FIN 47 as a change in accounting principle.
Prior to the issuance of FIN 47, we accounted for AROs when
it became probable that the asset would be retired or when the
asset was actually retired. Our AROs result from facility
operating leases where we are the lessee and the lease agreement
contains a reinstatement clause, which generally requires any
leasehold improvements we make to the leased property be
removed, at our cost, at the end of the lease.
Upon adoption, we recorded an increase to leasehold improvements
within our fixed assets of $0.9 million, an increase to
accrued liabilities of $1.8 million and an expense recorded
as a cumulative effect of implementing this accounting change of
$0.9 million. The liability for AROs recorded as of
October 31, 2007 is consistent with the liability recorded
at October 31, 2006 and approximates the liability that
would have been recorded as of October 31, 2005.
P. Senior
Convertible Debentures
On July 2, 2004, we issued and sold $600 million
aggregate principal amount of senior convertible debentures
(“Debentures”) due 2024. The Debentures pay interest
at 0.50% per annum, payable semi-annually on January 15 and July
15 of each year, commencing January 15, 2005. Each $1,000
principal amount of Debentures is convertible, at the option of
the holders, into approximately 86.79 shares of our common
stock prior to July 15, 2024 if (1) the price of our
common stock trades above 130% of the conversion price for a
specified duration, (2) the trading price of the Debentures
is below a certain threshold, subject to specified exceptions,
(3) the Debentures have been called for redemption, or
(4) specified corporate transactions have occurred. None of
the conversion triggers have been met as of October 31,2007. The conversion rate is subject to certain adjustments. The
conversion rate initially represents a conversion price of
$11.52 per share. Holders of the Debentures may require us to
repurchase all or a portion of their Debentures on July 15,2009, July 15, 2014 and July 15, 2019, or upon the
occurrence of certain events including a change in control. We
may redeem the Debentures for cash beginning on or after
July 20, 2009.
The Debentures were sold to an “accredited investor”
within the meaning of Rule 501 under the Securities Act of
1933, as amended (the “Securities Act”), in reliance
upon the private placement exemption afforded by
Section 4(2) of the Securities Act. The initial investor
offered and resold the Debentures to “qualified
institutional buyers” under Rule 144A of the
Securities Act. In connection with the issuance of the
Debentures, we agreed to file a shelf registration statement
with the SEC for the resale of the Debentures and the common
stock issuable upon conversion of the Debentures and use our
reasonable best efforts to cause it to become effective, within
an
agreed-upon
period. We also agreed to periodically update the shelf
registration and to keep it effective until the
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
earlier of the date the Debentures or the common stock issuable
upon conversion of the Debentures is eligible to be sold to the
public pursuant to Rule 144(k) of the Securities Act or the
date on which there are no outstanding registrable securities.
We filed the shelf registration statement and it became
effective within the initial required period. As of
October 31, 2007, the common stock issuable upon the
conversion of the Debentures was eligible for sale to the public
under Rule 144(k). Accordingly, we are no longer obligated
to maintain the shelf registration statement. We have evaluated
the terms of the call feature, redemption feature, and the
conversion feature under applicable accounting literature,
including SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and
EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own
Stock,” and concluded that none of these features should be
separately accounted for as derivatives.
In connection with the issuance of the Debentures, we incurred
$14.9 million of issuance costs, which primarily consisted
of investment banker fees and legal and other professional fees.
These costs are classified within Other Assets and are being
amortized as interest expense using the effective interest
method over the term from issuance through the first date that
the holders can require repurchase of the Debentures, which is
July 15, 2009. Amortization expense related to the issuance
costs was $3.0 million for each of the fiscal years ended
October 31, 2007 and 2006.
Due to the voluntary review of our historical stock-based
compensation practices that was announced in August 2006 and not
completed until May 2007, we did not file our third quarter
fiscal 2006
Form 10-Q,
fiscal 2006
Form 10-K,
and first quarter fiscal 2007
Form 10-Q
in a timely manner. In September 2006, we received a letter from
Wells Fargo Bank, N.A., the trustee of our Debentures, which
asserted that we were in default under the indenture because of
the delay in filing our
Form 10-Q
for the period ended July 31, 2006. The letter stated that
the asserted default would not become an “event of
default” under the indenture if we cured the default within
60 days after the date of the notice. We believe that this
above-mentioned notice of default was invalid and without merit
because the indenture only requires us to provide the trustee
copies of SEC reports within 15 days after such filings are
actually made. However, in order to avoid the expense and
uncertainties of further disputing whether a default under the
indenture had occurred, we solicited consents from the holders
of the Debentures to proposed amendments to the indenture that
would give us until Thursday, May 31, 2007 to become
current in our SEC reporting obligations and a waiver of rights
to pursue remedies available under the indenture with respect to
any default caused by our not filing SEC reports timely. On
November 9, 2006, we received consents from the holders of
the Debentures, and therefore we and the trustee entered into a
first supplemental indenture implementing the proposed
amendments described in the consent solicitation statements.
Under the terms of the consent solicitation and first
supplemental indenture, we are paying an additional 7.3% per
annum, or $44.0 million, in special interest on the
Debentures from November 9, 2006 to, but excluding
November 9, 2007. In accordance with
EITF 96-19,
“Debtor’s Accounting for a Modification or Exchange of
Debt Instruments”
(“EITF 96-19”),
since the change in the terms of the Debentures did not result
in substantially different cash flows, this change in terms is
accounted for as a modification of debt and not an
extinguishment of debt, and therefore the additional
$44.0 million of special interest payments is expensed over
the period from November 9, 2006 through July 15,2009, the date the Debentures are first callable by either
party. During the period of November 9, 2006 through
July 15, 2009, the new effective interest rate on this
debt, including the $44.0 million, is 3.2%. The
$44.0 million is being paid as special interest payments
over three periods; the first payment of $8.1 million
occurred in January 2007. The next payment of $22.0 million
occurred in July 2007 and the final payment of
$13.9 million will occur in January 2008. During fiscal
2007, we incurred interest expense of $19.0 million related
to the Debentures and made cash payments for interest of
$33.1 million. In addition, we expensed approximately
$1.5 million in fees paid to Citigroup for work performed
on the consent process. On May 25, 2007, we filed our
delinquent reports bringing us current with our SEC reporting
obligations.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Q. Guarantees
We have provided a guarantee to a foreign taxing authority in
the amount of $3.7 million related to a foreign tax audit.
It is expected that the terms of the foreign tax audit guarantee
will continue until the conclusion of the audit. In addition, at
October 31, 2007 we have provided guarantees in the amount
of $1.4 million, in total, to vendors of our foreign
subsidiaries to guarantee payments on contracts. We have also
provided other guarantees of insignificant amounts for various
purposes.
Like most software vendors, we are party to a variety of
agreements, primarily with customers, resellers, distributors,
and independent hardware and software vendors (generally,
“Customers”), pursuant to which we may be obligated to
indemnify the customer against third party allegations of
intellectual property infringement resulting from the
Customer’s use of our offerings or distribution of our
software, either of which may include proprietary
and/or open
source materials. In such circumstances, the Customer must
satisfy specified conditions to qualify for indemnification. Our
obligations under these agreements may be limited in terms of
time and/or
amount, and in some instances we may have recourse against third
parties.
It is not possible to predict the maximum potential amount of
future payments under these guarantees and indemnifications or
similar agreements due to the conditional nature of our
obligations and the unique facts and circumstances involved in
each particular agreement. To date, we have not been required to
make any payment guarantees and indemnifications. We do not
record a liability for potential litigation claims related to
indemnification agreements with our Customers unless and until
we conclude the likelihood of a material obligation is probable
and estimable.
R. Commitments
and Contingencies
As of October 31, 2007, we have various operating leases
related to our facilities. These leases have minimum annual
lease commitments of $27.7 million in fiscal 2008,
$21.1 million in fiscal 2009, $14.8 million in fiscal
2010, $12.2 million in fiscal 2011, $10.8 million in
fiscal 2012, and $38.4 million thereafter. Furthermore, we
have $30.5 million of minimum rentals to be received in the
future from subleases.
Rent expense, net of sublease rental income, for operating and
month-to-month leases was $16.7 million,
$18.5 million, and $23.3 million, in fiscal 2007,
2006, and 2005, respectively.
S. Legal
Proceedings
Between September and November of 2006, seven separate
derivative complaints were filed in Massachusetts state and
federal courts against us and many of our current and former
officers and directors asserting various claims related to
alleged options backdating. We are also named as a nominal
defendant in these complaints, although the actions are
derivative in nature and purportedly asserted on our behalf.
These actions arose out of our announcement of a voluntary
review of our historical stock-based compensation practices. The
complaints essentially allege that since 1999, we have
materially understated our compensation expenses and, as a
result, overstated actual income. The five actions filed in
federal court have been consolidated, and the parties to that
action have stipulated that the defendants’ answer or
motion to dismiss will be due 45 days after the filing of
an amended complaint. The two actions filed in state court have
also been consolidated and transferred to the Business
Litigation Session of Massachusetts Suffolk County Superior
Court, and the parties to that action have stipulated that the
defendants’ answer or motion to dismiss will be due
30 days after the filing of an amended complaint. While we
are still in the process of evaluating these claims, based on
the results of our own internal audit and rulings in similar
cases, we believe we have strong defenses to the claims asserted
in both consolidated cases. While there can be no assurance as
to the ultimate disposition of the litigation, we do not believe
that its resolution will have a material adverse effect on our
financial position, results of operations or cash flows.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
On November 12, 2004, we filed suit against Microsoft in
the U.S. District Court, District of Utah. We are seeking
treble and other damages under the Clayton Act, based on claims
that Microsoft eliminated competition in the office productivity
software market during the time that we owned the WordPerfect
word-processing application and the Quattro Pro spreadsheet
application. Among other claims, we allege that Microsoft
withheld certain critical technical information about Windows
from us, thereby impairing our ability to develop new versions
of WordPerfect and other office productivity applications, and
that Microsoft integrated certain technologies into Windows
designed to exclude WordPerfect and other Novell applications
from relevant markets. In addition, we allege that Microsoft
used its monopoly power to prevent original equipment
manufacturers from offering WordPerfect and other applications
to customers. On June 10, 2005, Microsoft’s motion to
dismiss the complaint was granted in part and denied in part. On
September 2, 2005, Microsoft sought appellate review of the
District Court’s denial of its motion. On October 15,2007, the U.S. Fourth Circuit Court of Appeals affirmed the
District Court’s ruling, thereby allowing Novell to proceed
with the remaining claims against Microsoft. While there can be
no assurance as to the ultimate disposition of the litigation,
we do not believe that its resolution will have a material
adverse effect on our financial position, results of operations
or cash flows.
On January 20, 2004, the SCO Group, Inc. filed suit against
us in the Third Judicial District Court of Salt Lake County,
State of Utah. Upon our motion the action was removed to the
U.S. District Court, District of Utah. SCO’s original
complaint alleged that our public statements and filings
regarding the ownership of the copyrights in UNIX and UnixWare
harmed SCO’s business reputation and affected its efforts
to protect its ownership interest in UNIX and UnixWare. Our
answer set forth numerous affirmative defenses and counterclaims
alleging slander of title and breach of contract, and seeking
declaratory actions and actual, special and punitive damages in
an amount to be proven at trial. On February 3, 2006, SCO
filed a Second Amended Complaint alleging that we had violated
supposed non-competition provisions of the agreement under which
we sold certain UNIX-related assets to SCO, that we infringe
SCO’s copyrights, and that we are engaging in unfair
competition by attempting to deprive SCO of the value of the
UNIX technology. SCO sought to require us to assign all
copyrights that we have registered in UNIX and UnixWare to SCO,
to prevent us from representing that we have any ownership
interest in the UNIX and UnixWare copyrights, to require us to
withdraw all representations we have made regarding our
ownership of the UNIX and UnixWare copyrights, and to cause us
to pay actual, special and punitive damages in an amount to be
proven at trial. As a result of SCO’s Second Amended
Complaint, SUSE filed a demand for arbitration before the
International Court of Arbitration in Zurich, Switzerland,
pursuant to a “UnitedLinux Agreement” in which SCO and
SUSE were parties. On August 10, 2007, the
U.S. District Court Judge issued a Memorandum Decision and
Order that granted Novell summary judgment against SCO on
significant issues in the litigation. The District Court
determined that we own the UNIX copyrights and dismissed certain
of SCO’s claims against us. In addition, the Court ruled
that we were entitled to a share of certain royalties SCO had
received from Sun Microsystems, Inc. and Microsoft through their
licenses with SCO. Prior to the commencement of the trial before
the U.S. District Court, SCO filed a petition for relief under
Chapter 11 of the U.S. Bankruptcy Code. Novell has since
obtained an order from the bankruptcy court allowing us to
proceed with the trial for the purpose of determining how much
is owed to Novell from the license royalties and to determine
whether SCO had authority to enter into the Sun and Microsoft
agreements. No trial date has been set. Hearings before the
International Court Tribunal in connection with the SUSE
Arbitration matter have been stayed by the Court in the SCO
bankruptcy case. Although there can be no assurance as to the
ultimate disposition of the suit, we do not believe that the
resolution of this litigation will have a material effect on our
financial position, results of operations or cash flows.
On July 12, 2002, Amer Jneid and other related plaintiffs
filed a complaint in the Superior Court of California, Orange
County, alleging claims for breach of contract, fraud in the
inducement, misrepresentation, infliction of emotional distress,
rescission, slander and other claims against us in connection
with our purchase of so-called “DeFrame” technology
from the plaintiffs and two affiliated corporations (TriPole
Corporation and Novetrix), and employment agreements Novell
entered into with the plaintiffs in connection with the
purchase. The complaint sought unspecified damages, including
“punitive damages.” The dispute (resulting in these
claims) arises out of the plaintiffs’ assertion that we
failed to properly account for license distributions which the
plaintiffs claim would have
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
entitled them to certain bonus payouts under the purchase and
employment agreements. After a lengthy jury trial in January
2007, the jury returned a verdict in favor of the various
plaintiffs on certain contract claims and in favor of us on
various remaining claims. As a result of the verdict, a judgment
was entered against us on August 27, 2007 in the amount of
$19.0 million plus an additional $4.5 million in prejudgment
interest. In addition, the Court has awarded plaintiffs
attorneys fees and costs related to the litigation. We have
filed and intend to file Notices of Appeal of the judgment and
the related orders to the California Court of Appeals. We
believe we have strong legal arguments that will likely result
in reversal of the judgment and the lower court’s orders.
Although Novell believes that settlement is also a possibility,
Novell has accrued $27 million for this matter. We have filed
various Notices of Appeal from the referenced judgment and
related orders and will pursue these appeals before the
California Court of Appeals. While there can be no assurance as
to the ultimate disposition of the litigation, we do not believe
that its resolution will have a material adverse effect on our
financial position or results of operations.
SilverStream, which we acquired in July 2002, and several of its
former officers and directors, as well as the underwriters who
handled SilverStream’s two public offerings, were named as
defendants in several class action complaints that were filed on
behalf of certain former stockholders of SilverStream who
purchased shares of SilverStream common stock between
August 16, 1999 and December 6, 2000. These complaints
are closely related to several hundred other complaints that the
same plaintiffs have brought against other issuers and
underwriters. These complaints all allege violations of the
Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended. In particular, they allege, among other
things, that there was undisclosed compensation received by the
underwriters of the public offerings of all of the issuers,
including SilverStream. A Consolidated Amended Complaint with
respect to all of these companies was filed in the
U.S. District Court, Southern District of New York, on
April 19, 2002. The plaintiffs are seeking monetary
damages, statutory compensation and other relief that may be
deemed appropriate by the Court. While we believe that
SilverStream and its former officers and directors have
meritorious defenses to the claims, a tentative settlement has
been reached between many of the defendants and the plaintiffs,
which contemplates a settlement of the claims, including the
ones against SilverStream and its former directors and officers.
Any settlement agreement must receive final approval from the
Court and efforts to pursue the same are ongoing. While there
can be no assurance as to the ultimate disposition of the
litigation, we do not believe that its resolution will have a
material adverse effect on our financial position, results of
operations or cash flows.
We account for legal reserves under SFAS No. 5, which
requires us to accrue for losses that we believe are probable
and can be reasonably estimated. We evaluate the adequacy of our
legal reserves based on our assessment of many factors,
including our interpretations of the law and our assumptions
about the future outcome of each case based on current
information. It is reasonably possible that our legal reserves
could be increased or decreased in the near term based on our
assessment of these factors. We are currently party to various
legal proceedings and claims involving former employees, either
asserted or unasserted, which arise in the ordinary course of
business. While the outcome of these matters cannot be predicted
with certainty, we do not believe that the outcome of any of
these claims or any of the above mentioned legal matters will
have a material adverse effect, individually or in the
aggregate, on our consolidated financial position, results of
operations or cash flows.
T. Redeemable
Preferred Stock
On March 23, 2004, we entered into a definitive agreement
with IBM in connection with IBM’s previously announced
$50 million investment in Novell. The primary terms of the
investment were negotiated in November 2003 and involved the
purchase by IBM of 1,000 shares of our Series B
redeemable preferred stock (“Series B Preferred
Stock”) that are convertible into 8 million shares of
our common stock at a conversion price of $6.25 per common
share. The Series B Preferred Stock was entitled to a
dividend of 2% per annum, payable quarterly in cash. Dividends
on the Series B Preferred Stock during fiscal 2006 and 2005
amounted to $0.2 million and $0.5 million,
respectively.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
On June 17, 2004, 500 shares of Series B
Preferred Stock, with a carrying value of $25.0 million,
were converted into 4.0 million shares of our common stock.
On September 21, 2005, 313 shares of Series B
Preferred Stock, with a carrying value of $15.7 million,
were converted into 2.5 million shares of our common stock.
On November 10, 2006, IBM converted the remaining 187
outstanding shares of our Series B Preferred Stock into
1.5 million shares of our common stock.
In December 1988, the Board of Directors adopted a Preferred
Share Rights Agreement. This plan was most recently amended in
September 1999 and expired on November 21, 2006. The plan
provided for a dividend of rights, which could not be exercised
until certain events occurred, to purchase shares of our
Series A Preferred Stock. Each common stockholder of record
had one right for each share of common stock owned. This plan
was adopted to ensure that all of our stockholders receive fair
value for their common stock in the event a third party proposes
to acquire us and to guard against coercive tactics to gain
control of us without offering fair value to our stockholders.
In connection with the plan, we had 499,000 authorized shares of
Series A Preferred Stock with a par value of $0.10 per
share, none of which were issued or outstanding at
October 31, 2007 or October 31, 2006.
Stock
Repurchase
On September 22, 2005, our board of directors approved a
share repurchase program for up to $200.0 million of our
common stock through September 21, 2006. On April 4,2006, our board of directors approved an amendment to the share
repurchase program increasing the limit on repurchase from
$200.0 million to $400.0 million and extending the
program through April 3, 2007. As of July 31, 2006, we
had completed the repurchase program purchasing
51.5 million shares of common stock at an average price of
$7.76 per share.
Stock
Award Plans
We currently have five broad-based stock award plans with
options available for grant to employees and consultants, and
one stock option plan with options available for grant to
members of the Board of Directors. We typically grant
nonstatutory options at fair market value on the date of grant.
In addition, we also grant restricted stock purchase rights and
restricted units. Our current practice is to grant nonstatutory
options or restricted units to mid- and upper-management at time
of hire. We also maintain an on-going annual grant program under
which certain employees are eligible for consideration based on
their past performance or future retention requirement. For the
past two years restricted units have been used for the annual
grant program. These plans are discussed in more detail below.
The 2000
Stock Plan and the 1991 Stock Plan
The 2000 Stock Plan (the “2000 Plan”), with an
aggregate of 16 million shares of common stock reserved for
issuance, provides for the grant of incentive stock options,
nonstatutory stock options, restricted stock purchase rights and
common stock equivalents (“CSE’s”) and was
approved by stockholders in April 2000. Shares of common stock
may also be issued under the 2000 Plan to satisfy our
obligations under our Stock Based Deferred Compensation Plan. As
of October 31, 2007, a total of 8,300,461 shares of
common stock remained available for issuance pursuant to the
2000 Plan. The 1991 Stock Plan (the “1991 Plan”), with
an aggregate of 80,277,765 shares of common stock reserved
for issuance, provides for the grant of nonqualified stock
options, restricted stock purchase rights, restricted units,
stock appreciation rights and long-term performance awards and
was most recently approved by the stockholders in March 1994. As
of October 31, 2007, a total of 34,681,286 shares of
common stock remained available for issuance pursuant to the
1991 Plan. Under both plans, options are granted at the fair
market value of our common stock at the date of grant (defined
in the plans as the closing price on the day prior to the grant
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
date), generally vest over 48 months (although options have
been granted that vest over 24 or 36 months), are
exercisable upon vesting and expire either four, eight or ten
years from the date of grant. Under both plans, restricted stock
purchase rights have been granted providing for the sale of our
common stock to certain employees at a purchase price of $0.10
per share. Shares of restricted common stock are subject to
repurchase by us at the original purchase price until such time
as they have vested. Grants of restricted stock generally vest
over a three- or four-year period. There were
427,150 shares of outstanding restricted common stock that
remained unvested and subject to repurchase at October 31,2007. Under the 1991 Plan, restricted units may be granted to
employees. These units vest annually over three years, annually
over four years, or at the end of three years from their date of
grant, have an exercise price of either $0 or $0.10 and are
payable in common stock. Under the 2000 Plan, CSE’s may be
issued to non-employee members of our Board of Directors, who
elect to have all or a portion of their board retainer deferred
through the purchase of CSE’s. The purchase price for
CSE’s is equal to the fair market value of our common stock
on the date of purchase (defined in the plan as the closing
price on the day prior to the grant date). Participating board
members who defer compensation into the award of CSE’s
specify the future date such common stock equivalents will be
converted into shares of our common stock.
The 2000
Nonqualified Stock Option Plan
The 2000 Nonqualified Stock Option Plan (the “2000 NQ
Plan”), with an aggregate of 28 million shares of
common stock reserved for issuance, provides for the grant of
nonstatutory stock options. As of October 31, 2007, a total
of 21,695,753 shares of common stock remained available for
issuance pursuant to the 2000 NQ Plan. Under the 2000 NQ Plan,
nonstatutory options are granted at the fair market value of our
common stock at the date of grant (defined in the plan as the
closing price on the day prior to the grant date), generally
vest over 48 months (although options have been granted
that vest over 24 months), are exercisable upon vesting and
expire either four, eight or ten years from the date of grant.
The
Novell/SilverStream 1997 Stock Option Plan
The Novell/SilverStream 1997 Stock Option Plan (the
“SilverStream 1997 Plan”), with an aggregate of
12,530,883 shares of common stock reserved for issuance,
after taking into account the retirement of
8,090,788 shares in January 2004 in connection with
Novell’s 2003 stock option exchange program, provides for
the grant of incentive stock options and nonstatutory stock
options, was most recently approved by stockholders of
SilverStream in May of 2002, and was assumed by us in July 2002
in connection with our acquisition of SilverStream. As of
October 31, 2007, a total of 6,069,778 shares of
common stock remained available for issuance pursuant to the
SilverStream 1997 Plan. Under the SilverStream 1997 Plan,
options are granted at the fair market value of our common stock
at the date of grant (defined in the plan as the closing price
on the day prior to the grant date). Options that had been
granted prior to our acquisition of SilverStream were granted at
the fair market value of SilverStream’s common stock at the
date of grant and were converted to options to acquire our
common stock based on the terms of the acquisition. Options
generally vest over 48 months (although options had been
granted before our acquisition of SilverStream that vest over 42
or 60 months), are exercisable upon vesting, and expire
eight or ten years from the date of grant.
The
Novell/SilverStream 2001 Stock Option Plan
The Novell/SilverStream 2001 Stock Option Plan (the
“SilverStream 2001 Plan”), with an aggregate of
2,426,494 shares of common stock reserved for issuance,
provides for the grant of nonstatutory stock options. We assumed
the SilverStream 2001 Plan in July 2002 in connection with the
acquisition of SilverStream. As of October 31, 2007, a
total of 865,457 shares of common stock remain available
for issuance pursuant to the SilverStream 2001 Plan. Under the
SilverStream 2001 Plan, options are granted at the fair market
value of our common stock at the date of grant. Options that had
been granted prior to our acquisition of SilverStream were
granted at the fair market value of SilverStream’s common
stock at the date of grant and were converted to options
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
to acquire our common stock based on the terms of the
acquisition. Options generally vest over 48 months
(although options had been granted before our acquisition of
SilverStream that vest over 42 months), are exercisable
upon vesting and expire eight or ten years from the date of
grant.
The Stock
Option Plan for Non-Employee Directors
The Stock Option Plan for Non-Employee Directors (the
“Director Plan”), with an aggregate of
1,500,000 shares of common stock reserved for issuance,
provides for two types of non-discretionary stock option grants
to non-employee members of our Board of Directors: an initial
grant of 30,000 options at the time a director is first elected
or appointed to the Board, with options vesting annually over
four years and exercisable upon vesting; and an annual grant of
15,000 options upon reelection to the Board, with options
vesting annually over two years and exercisable upon vesting.
Under the Director Plan, options are granted at the fair market
value of our common stock at the date of grant (defined in the
plans as the closing price on the day prior to the grant date).
The Director Plan was approved by the stockholders in April
1996. As of October 31, 2007, a total of
1,152,000 shares of common stock remained available for
issuance pursuant to the Director Plan. Options expire ten years
from the date of grant.
Additional
Stock Option Plans
Miscellaneous plans assumed due to acquisitions (including two
additional SilverStream plans not mentioned above that were also
assumed in connection with the SilverStream acquisition) have
terminated, and no further options may be granted under these
plans. Options previously granted under these plans that have
not yet expired or otherwise become unexercisable continue to be
administered under such plans, and any portions that expire or
become unexercisable for any reason shall be cancelled and be
unavailable for future issuance.
A summary of the status of our stock award plans as of
October 31, 2007, 2006 and 2005 is presented below.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The following table summarizes information about stock awards
outstanding at October 31, 2007:
Awards Outstanding
Weighted-
Awards Exercisable
Number of
Average
Weighted-
Number of
Weighted-
Awards
Remaining
Average
Awards
Average
Range of Exercise Prices
Outstanding
Contractual Life
Exercise Price
Exercisable
Exercise Price
(Number of awards in thousands)
$0.00 – $3.72
10,391
2.08
$
0.63
2,193
$
2.97
$3.75 – $5.02
4,730
3.62
4.53
4,730
4.53
$5.08 – $5.55
4,117
5.15
5.55
2,544
5.54
$5.62 – $6.35
3,519
6.11
6.13
1,322
6.16
$6.42 – $8.00
3,222
6.03
7.24
1,035
7.23
$8.02 – $9.06
1,586
6.00
8.44
627
8.41
$9.13 – $9.14
5,507
0.13
9.14
5,507
9.14
$9.19 – $10.63
3,333
2.48
9.67
3,071
9.69
$10.68 – $38.88
2,665
3.66
11.85
2,523
11.90
$0.00 – $38.88
39,070
3.30
$
5.71
23,552
$
7.35
The following table summarizes general information as of
October 31, 2007:
Fiscal 2007
Fiscal 2006
(Number of shares and awards in thousands)
Awards available for future grants
33,714
35,970
Shares of common stock outstanding
350,610
343,363
Awards granted during the year as a percentage of outstanding
common stock
3
%
3
%
During fiscal 2007, we provided a tender offer to certain of our
employees, which provided them with a mechanism to cure
potentially adverse tax consequences according to IRS
Section 409A as a result of our internal stock option
review, discussed in Note C. This tender offer resulted in
1,258,178 shares of previously granted awards being
canceled and re-granted with a new grant date. All other grant
agreement provisions remained the same as the original grant.
These awards also maintained their previous unrecognized
compensation expense and term.
Employee
Stock Purchase Plan
In May 2003, the stockholders approved a 10.0 million share
increase to our 1989 Employee Stock Purchase Plan (the
“Purchase Plan”). As amended, we are now authorized to
issue up to 34.0 million shares of our common stock to our
employees who work at least 20 hours a week and more than
five months a year. In May 2003, the Purchase Plan was further
amended to limit the number of shares that can be purchased by
employees during any fiscal year to 3.0 million shares.
Under the terms of the Purchase Plan, there are two six-month
offer periods per year, and employees can choose to have up to
10% of their salary withheld to purchase our common stock. The
employee stock purchase plan was suspended in April 2005 and
then amended in September 2005 to provide that the purchase
price of the common stock is 95% of the fair market value of
Novell’s common stock on the purchase date. The amended
plan began in January 2006.
Under the Purchase Plan, we issued 0.3 million shares to
employees in fiscal 2007, 0.1 million shares to employees
in fiscal 2006, and 1.2 million shares to employees in
fiscal 2005. This plan has approximately 4.6 million shares
available for future issuance.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Shares
Reserved for Future Issuance
As of October 31, 2007, there were 72,784,674 shares
of common stock reserved for stock award exercises and releases,
4,588,743 shares of common stock reserved for issuances
under the stock purchase plan, and 52,074,300 shares
reserved for the conversion of the Debentures.
V.
Stock-Based
Compensation
As discussed in Note B, we adopted
SFAS No. 123(R) on November 1, 2005. Prior to
fiscal 2006, we accounted for stock-based compensation under APB
25. The adoption of SFAS No. 123(R) had a significant
impact on our results of operations. Our consolidated statement
of operations for fiscal 2007, 2006, and 2005 includes the
following amounts of stock-based compensation expense in the
respective captions:
Total unrecognized stock-based compensation expense expected to
be recognized over an estimated weighted-average amortization
period of 2.5 years was $79.8 million at
October 31, 2007.
SFAS No. 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating
cash flow as required under APB 25 and related interpretations.
This requirement reduced our net operating cash flows and
increased our net financing cash flows by $13.1 million in
fiscal 2007 and $15.3 million in fiscal 2006. Our deferred
compensation cost at October 31, 2005 of $3.4 million,
which was accounted for under APB 25, was reclassified into
additional paid-in capital as required under
SFAS No. 123(R). The cumulative effect related to
outstanding restricted stock awards as of October 31, 2005,
which are not expected to vest based on an estimate of
forfeitures, was not material.
Stock-based compensation during fiscal 2007 included
$2.5 million related to the modification of certain vested
stock awards that otherwise would have expired during the period
when our stock awards were not exercisable due to the delay in
filing of our SEC financial reports in connection with our
review of our historical stock-based compensation practices
(“Suspension Period”). We modified vested stock-based
compensation awards held by terminated employees whose post
termination exercise period was affected by the Suspension
Period, giving them 60 days to exercise their awards once
the Suspension Period ended.
Stock
Plans
All stock-based compensation awards are issued under one of the
six stock award plans discussed in Note U. When granting
stock options, we grant nonstatutory options at fair market
value on the date of grant (defined in the plans as the closing
price on the day prior to the grant date). We also grant
restricted stock purchase rights and restricted units.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Time-Based
Stock Awards
Our weighted-average assumptions used in the Black-Scholes
valuation model for equity awards with time-based vesting
provisions granted during the fiscal 2007 and 2006 are shown
below:
The expected volatility rate was estimated based on equal
weighting of the historical volatility of Novell common stock
over a four year period and the implied volatilities of Novell
common stock. The expected term was estimated based on our
historical experience of exercise, cancellation, and expiration
patterns. The risk-free interest rates are based on four year
U.S. Treasury STRIPS.
The pre-vesting forfeiture rate used for the fiscal year ended
October 31, 2007 and 2006 was 10%, which was based on
historical rates and forward-looking factors. As required under
SFAS No. 123(R), we adjust the estimated forfeiture
rate to our actual experience.
A summary of the time-based stock awards, which includes stock
options and restricted stock units, as of October 31, 2007,
and changes during the fiscal year then ended, is as follows:
The weighted-average grant-date fair value of time-based stock
awards granted during fiscal 2007 was $5.81. The total intrinsic
value of awards exercised or released during fiscal 2007 was
$22.8 million. As of October 31, 2007, there was
$70.1 million of unrecognized compensation cost related to
time-based stock awards. That cost is expected to be recognized
over a weighted-average period of 2.2 years.
As of October 31, 2007, there was $1.2 million of
unrecognized compensation cost related to unvested restricted
stock. That cost is expected to be recognized over a
weighted-average period of 1.6 years. The total fair value
of time-based restricted stock that vested during fiscal 2007
was $0.9 million.
Performance-Based
and Market-Condition Awards
We have issued performance-based equity awards to certain senior
executives. These awards have the potential to vest over one to
four years upon the achievement of certain Novell-specific
financial performance goals, specifically related to the
achievement of budgeted revenue and operating income targets in
each fiscal year. The performance-based options were granted at
an exercise price equal to the fair market value of Novell
common stock on the date the option was legally granted and have
a contractual life ranging from two to eight years.
We have issued market-condition equity awards to certain senior
executives the vesting of which is accelerated or contingent
upon the price of Novell common stock meeting certain
pre-established stock price targets. Certain of these awards
will vest on the sixth anniversary of the grant date if the
market-condition was not previously achieved. The
market-condition options are generally granted at an exercise
price equal to the fair market value of Novell common stock on
the date of the grant and have a contractual life of eight
years. No market-condition awards were granted during the twelve
months ended October 31, 2007.
The fair value of each performance-based option was estimated on
the grant date using the Black-Scholes option valuation model
without consideration of the performance measures or market
conditions. The inputs for expected volatility, expected term,
expected dividends, and risk-free interest rate used in
estimating the fair value of performance-based awards in fiscal
2007, are the same as those noted above under time-based stock
awards.
The weighted-average grant-date fair value of awards granted
during fiscal 2007 was $5.88. The total intrinsic value of stock
awards exercised or released during fiscal 2007 was less than
$0.1 million. As of October 31, 2007, there was
$7.7 million of unrecognized compensation cost related to
performance-based and market-condition awards. That cost is
expected to be recognized over a weighted-average period of
3 years.
A status of the unvested, performance-based and market-condition
restricted stock as of October 31, 2007, and changes during
the fiscal year then ended, is as follows:
As of October 31, 2007, there was $0.8 million of
unrecognized compensation cost related to unvested,
performance-based and market-condition restricted stock. That
cost is expected to be recognized ratably over a one to two year
period. No performance-based or market-condition restricted
stock vested during fiscal 2007.
As of October 31, 2007, there were 630,716 stock awards
that have been legally granted and remain outstanding but have
not yet been valued because all of the conditions necessary to
establish the grant date for SFAS No. 123(R) purposes
have not yet occurred. The grant date of these stock awards will
not occur until budgets are approved by our Board of Directors
for the respective years specified in the performance targets.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Fiscal
2005
For fiscal 2005 had we accounted for all employee stock-based
compensation based on the fair value method as prescribed by
SFAS No. 123, our net income and net income per share
would have been the following pro forma amounts:
Less: total stock-based compensation expense determined under
fair
value-based
method for all awards, net of related tax effects
(50,420
)
Add: total stock-based compensation expense recorded in the
statement of operations
2,653
Pro forma
$
328,955
Net income per common share:
As reported basic
$
0.98
Pro forma basic
$
0.86
As reported diluted
$
0.86
Pro forma diluted
$
0.75
For purposes of the above table, the fair value of each option
grant was estimated as of the date of grant using the
Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in fiscal 2005: a
risk-free interest rate of approximately 3.8%; a dividend yield
of 0.0%; a weighted-average expected life of 4.4 years; and
a volatility factor of the expected market price of our common
stock of 0.55. The weighted-average fair value of options
granted in fiscal 2005 was $3.17.
Employee
Stock Purchase Plan
Subsequent to the issuance of SFAS No. 123(R), we
amended and re-introduced our Employee Stock Purchase Plan
(“ESPP”). The amended ESPP eliminated the “look
back” feature of the plan and reduced the purchase discount
to 5% off of the end of offering period stock price. As a result
of these amendments, our ESPP is considered non-compensatory
under SFAS No. 123(R) and, accordingly, no
compensation expense has been recorded for issuances under the
ESPP. During fiscal 2007 and 2006, we issued 0.3 million
and 0.1 million shares, respectively, of common stock under
the ESPP.
W.
Employee
Savings and Retirement Plans
We adopted a 401(k) savings and retirement plan in December
1986. The plan covers all Novell U.S. employees who are
21 years of age or older who are scheduled to complete
1,000 hours of service during any consecutive
12-month
period. Our 401(k) retirement and savings plan allows us to
contribute an amount equal to 100% of each employee’s
contribution up to the higher of 4% of the employee’s
compensation or the maximum contribution allowed by tax laws.
Company matching contributions on our 401(k) savings and
retirement plan and other retirement plans were
$20.5 million, $20.6 million, and $23.1 million,
in fiscal 2007, 2006, and 2005, respectively.
In fiscal 2007, we adopted SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and
Other Post retirement Plans, an amendment of SFAS Nos. 87,
88, 106, and 132(R),” (“SFAS No. 158”).
This statement required us to recognize, in our balance sheet,
the under-funded status of our defined benefit pension plans
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
sponsored by our subsidiaries. This was measured as the present
value of the benefit obligation since the assets we have
designated to fund the pension obligation do not qualify as plan
assets in accordance with SFAS No. 87. The recognition
of the SFAS No. 87 transition obligation of
$0.7 million and the actuarial gain of $2.1 million
was offset with an adjustment to accumulated other comprehensive
income in shareholders’ equity. SFAS No. 158 did
not change how post-retirement benefits are accounted for and
reported in the statements of operations. We have adapted our
fiscal 2007 and 2006 disclosures, as required under
SFAS No. 158, to reflect the changes in the benefit
obligations we must recognize.
The defined benefit pension plan sponsored by one of our German
subsidiaries covers 113 current employees and 189 former
employees or retirees as of October 31, 2007. The plan was
closed to new members as of November 2004. Actuarial gains or
losses are being amortized over a 21.5 year period, and the
amortization charges are included within the overall net
periodic pension costs, which are charged to the statements of
operations. Other plan information is as follows:
Fiscal 2007
Fiscal 2006
Fiscal 2005
(In thousands)
Change in benefit obligation
Benefit obligation at beginning of fiscal year
$
12,001
$
12,217
$
9,076
Service cost
814
857
751
Interest cost
646
539
473
Actuarial (gain) loss
(2,801
)
(1,299
)
2,318
Benefits paid
(17
)
(7
)
(7
)
Foreign exchange
2,561
(306
)
(394
)
Benefit obligation at end of fiscal year
$
13,204
$
12,001
$
12,217
Funded status (benefit obligation)
$
(13,204
)
$
(12,001
)
$
(12,217
)
Unrecognized net actuarial (gain) loss
—
620
1,917
Unrecognized net obligation
—
640
729
Accrued benefit cost
$
(13,204
)
$
(10,741
)
$
(9,571
)
Components of accumulated other comprehensive income
SFAS No. 87 transition obligation
$
(691
)
Actuarial gain
2,100
Accumulated other comprehensive income related to implementation
of SFAS No. 158
The amount of accumulated other comprehensive income that is
expected to be amortized in fiscal 2008 is approximately
$35,938. Estimated benefit payments for fiscal years 2008, 2009,
2010, 2011, 2012, and thereafter are $33,233, $43,774, $43,774,
$49,229, $54,080, and $778,822, respectively. At
October 31, 2007, we had assets
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
valued at $13.3 million designated to fund the German
pension obligation, which do not qualify as plan assets in
accordance with SFAS No. 87.
We also have other retirement plans in certain foreign countries
in which we employ personnel. Each plan is consistent with local
laws and business practices.
X.
Net
Income (Loss) Per Share Attributable to Common
Stockholders
The following table reconciles the numerators and denominators
of the earnings per share calculation for the fiscal years ended
October 31, 2007, 2006, and 2005:
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Incremental shares attributable to the assumed conversion of the
Debentures have been excluded from the calculation of diluted
earnings per share in fiscal 2007 and 2006 as their effect would
have been anti-dilutive.
Incremental shares attributable to the assumed conversion of
Series B Preferred Stock have been excluded from the
calculation of diluted earnings per share in fiscal years 2006
and 2005 as their effect would have been anti-dilutive.
Incremental shares attributable to options with exercise prices
that were at or greater than the average market price (“out
of the money”) at October 31, 2007, 2006, and 2005
were also excluded from the calculation of diluted earnings per
share as their effect would have been antidilutive. At
October 31, 2007, 2006, and 2005, there were 19,186,638,
21,521,748, and 22,725,998 out of the money options,
respectively, that had been excluded. In addition, in fiscal
2007, 4,459,435 in-the-money options have been excluded from the
calculation of diluted earnings per share as their effect would
have been anti-dilutive due to our net loss position.
Y.
Comprehensive
Income
Our accumulated other comprehensive income is comprised of the
following:
Total change in gross unrealized gain (loss) on investments
during the year
$
2,961
$
3,558
$
(8,550
)
Adjustment for net realized gains on investments included in net
income (loss)
1,424
495
783
Net unrealized gain (loss) on investments
4,385
4,053
(7,767
)
Minimum pension liability
—
633
623
Adjustment to initially apply SFAS No. 158
1,409
—
—
Cumulative translation adjustments
17,224
1,950
(1,592
)
Other comprehensive income (loss)
$
23,018
$
6,636
$
(8,736
)
The components of accumulated other comprehensive income were
not tax affected due to the fact that the related deferred tax
assets were fully reserved at October 31, 2007, 2006, and
2005, respectively.
Z.
Related
Party Transactions
During fiscal 2007, 2006, and 2005, we received consulting
services from J.D. Robinson Incorporated. Mr. Robinson, a
director of Novell, is Chairman and Chief Executive Officer and
the sole shareholder of J.D. Robinson Incorporated. The
agreement provides for payments of $0.2 million per year
for these services. In each of fiscal 2007, 2006, and 2005,
services in the amount of $0.2 million were provided by
J.D. Robinson.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
AA.
Segment
Information
In the first quarter of fiscal 2007, we began operating and
reporting our financial results based on four new
product-related business unit segments based on information
solution categories and a new business consulting segment. The
new segments are:
•
Open platform solutions
•
Identity and security management
•
Systems and resource management
•
Workgroup
•
Business consulting
During fiscal 2007, we sold Salmon and signed an agreement to
sell CTP Switzerland, which were the last two components of our
business consulting segment, therefore eliminating our business
consulting segment. Salmon and CTP Switzerland’s results of
operations are shown as discontinued operations. Business
consulting in fiscal 2006 and 2005 was comprised of our Japan
consulting group, which was sold in fiscal 2006.
Our performance is evaluated by our Chief Executive Officer and
our other chief decision makers (executive leadership team)
based on reviewing revenue and segment operating income (loss)
information for each segment. We changed our operating and
reporting structure to increase integration and teamwork
internally, to build stronger business-focused units and to be
better equipped to address customer needs. As our strategy
continues to evolve, the way in which management views financial
information to best evaluate performance and operating results
may also change.
Prior to fiscal 2007, we operated and reported our financial
results in three segments based on geographic area:
•
Americas — included the United States, Canada and
Latin America
•
EMEA — included Eastern and Western Europe, Middle
East, and Africa
•
Asia Pacific — included China, Southeast Asia,
Australia, New Zealand, Japan, and India
The four product-related operating segments sell our software
and services. These offerings are sold directly and through
original equipment manufacturers, resellers, and distributors
who sell to dealers and end users. Operating results by segment
are as follows:
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Fiscal 2006
Operating
Net Revenue
Gross Profit
Income (Loss)
(In thousands)
Open platform solutions
$
73,461
$
41,237
$
(5,220
)
Identity and security management
209,938
91,513
36,890
Systems and resource management
174,183
141,407
115,887
Workgroup
457,533
366,507
320,953
Business consulting
4,216
1,751
1,751
Stock-based compensation expense
—
(4,096
)
(35,002
)
Common unallocated operating costs
—
—
(477,453
)
Total per statements of operations
$
919,331
$
638,319
$
(42,194
)
Fiscal 2005
Operating
Net Revenue
Gross Profit
Income (Loss)
(In thousands)
Open platform solutions
$
68,718
$
38,953
$
(3,624
)
Identity and security management
201,304
73,305
8,952
Systems and resource management
182,148
149,133
121,359
Workgroup
522,328
415,092
351,024
Business consulting
11,651
2,432
2,432
Stock-based compensation expense
—
(6
)
(1,748
)
Common unallocated operating costs
—
—
(54,784
)
Total per statements of operations
$
986,149
$
678,909
$
423,611
Common unallocated operating costs include corporate services
common to all segments such as sales and marketing, general and
administrative costs, restructuring expenses, impairments,
purchased in-process research and development, and litigation
settlement income or expense that are not considered by our
chief operating decision makers in evaluating segment operating
performance. In addition, common unallocated operating costs in
fiscal 2005 also includes a $447.6 million net gain on
settlement of potential litigation with Microsoft. Stock-based
compensation expenses have not been allocated for management
reporting purposes.
Geographic
Information
Revenue outside the United States is comprised of revenue to
customers in Europe, Africa, the Middle East, Canada, South
America, Australia, and Asia Pacific. Other than revenue from
Ireland, international revenue was not material individually in
any other international location. Inter-company revenue between
geographic areas is accounted for at prices representative of
unaffiliated party transactions.
“U.S. operations” include shipments to customers
in the U.S., licensing to OEMs, and exports of finished goods
directly to international customers, primarily in Canada, South
America, and Asia. “Irish operations” include
shipments of product from Ireland to customers throughout
Europe, the Middle East, and Africa, and licensing to OEMs. The
Irish operation acts as the sales principal and thus records the
revenue on shipments it makes. The Irish operation uses our
other European, Middle Eastern, and African subsidiaries as
commissionaires and commission agents to assist in the sales of
software and in turn pays them a commission. This inter-company
commission is included in the eliminations. “Other
international operations” primarily includes revenue from
professional services and other service contracts.
In fiscal 2007, 2006, and 2005, sales to international customers
were $465.4 million, $454.1 million, and
$515.9 million, respectively. In fiscal 2007, 2006, and
2005, revenue in the EMEA segment accounted for 67%, 66%, and
69%, of our total international revenue, respectively. No one
foreign country accounted for more than 10% of total revenue in
fiscal 2007, 2006 and 2005. There were no customers who
accounted for more than 10% of revenue in any period.
AB.
Executive
Termination Benefits
During fiscal 2006, our former Chief Executive Officer and Chief
Financial Officer were terminated by our Board of Directors.
They received benefits pursuant to their respective severance
agreements totaling $9.4 million, of which approximately
$2.7 million related to stock compensation and
$6.7 million related to severance and other benefits.
Report
of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Novell, Inc.:
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15 (a)(1) present fairly, in
all material respects, the financial position of Novell, Inc.
and its subsidiaries at October 31, 2007 and 2006, and the
results of their operations and their cash flows for each of the
three years in the period ended October 31, 2007 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under
Item 15(a)(2) presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
October 31, 2007, based on criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible
for these financial statements and financial statement schedule,
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in
Management’s Annual Report on Internal Control over
Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on these financial
statements, the financial statement schedule and on the
Company’s internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Notes B and O to the consolidated financial
statements, the Company changed the manner in which it accounts
for share-based payments and conditional asset retirement
obligation in fiscal 2006.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Income (loss) from continuing operations before taxes
13,124
7,005
(29,405
)
36,456
27,180
Income (loss) from continuing operations
1,521
1,398
(17,722
)
19,341
4,538
Income (loss) before cumulative effect of a change in accounting
principle
1,865
3,342
(5,524
)
19,870
19,553
Net income (loss)
1,865
3,342
(6,421
)
19,870
18,656
Income (loss) from continuing operations per share, basic
$
0.00
$
0.00
$
(0.05
)
$
0.06
$
0.01
Income (loss) from continuing operations per share, diluted
$
0.00
$
0.00
$
(0.05
)
$
0.05
$
0.01
Net income (loss) per common share, basic
$
0.00
$
0.01
$
(0.02
)
$
0.06
$
0.05
Net income (loss) per common share, diluted
$
0.00
$
0.01
$
(0.02
)
$
0.05
$
0.05
Item 9.
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 9A.
Controls
and Procedures
Effectiveness
of Disclosure Controls and Procedures.
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures as of the end of the
period covered by this report were effective such that the
information required to be disclosed by us in reports filed
under the Securities Exchange Act of 1934 is (i) recorded,
processed, summarized and reported within the time periods
specified in the SEC’s rules and forms and
(ii) accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding
disclosure. A controls system cannot provide absolute assurance,
however, that the
objectives of the controls system are met, and no evaluation of
controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been
detected.
Management’s
Annual Report on Internal Control over Financial
Reporting.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is defined in
Rules 13a-15(f)
and
15d-15(f) of
the Exchange Act as a process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial
Officer and effected by our board of directors, management and
other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles and includes those
policies and procedures that:
•
pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect transactions and dispositions of
our assets;
•
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that our receipts and expenditures are being made only in
accordance with authorizations of our management and
directors; and
•
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal
control over financial reporting as of October 31, 2007
using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on this assessment using
those criteria, our management concluded that, as of
October 31, 2007, our internal control over financial
reporting was effective. The effectiveness of the Company’s
internal control over financial reporting as of October 31,2007 has been audited by PricewaterhouseCoopers LLP, our
independent registered public accounting firm, as stated in
their report, which appears under Item 8.
Changes
in Internal Control Over Financial Reporting.
None
Item 9B.
Other
Information
None
PART III
Item 10.
Directors,
Executive Officers, and Corporate Governance
Information about our Directors is incorporated by reference to
the information contained in the section of our Proxy Statement
captioned “Election of Directors.” Information about
compliance with Section 16(a) of the Exchange Act is
incorporated by reference to the information contained in the
section of our Proxy Statement captioned
“Section 16(a) Beneficial Ownership Reporting
Compliance.” Information about our Code of Business Ethics
governing our employees, including our Chief Executive Officer
and our Chief Financial Officer and Principal Accounting
Officer, and the Non-Employee Director Code of Ethics governing
our Directors, is incorporated by reference to the information
contained in the section of our Proxy Statement captioned
“Corporate Governance — Codes of Ethics.”
Information regarding the procedures by which our stockholders
may recommend nominees to our board of directors is incorporated
by reference to the information contained in the section of our
Proxy Statement captioned “Governance — Director
Nominations.” Information about our Audit Committee,
including the members of the Committee, and our Audit Committee
financial experts, is incorporated by reference to the
information contained in the section of our Proxy Statement
captioned “Corporate Governance — Board
Committees.” The balance of the information required by
this item is contained in the discussion entitled Executive
Officers of the Registrant in Part I of this
Form 10-K.
Our Code of Business Ethics meets the definition of “code
of ethics” under the rules and regulations of the SEC and
is posted on our website at
http://www.novell.com/company/ir/cg/through the Corporate Governance page.
Item 11.
Executive
Compensation
The information required by Item 11 of
Form 10-K
is incorporated by reference to the information contained in the
section of our 2008 Proxy Statement captioned “Executive
Compensation.”
Item 12.
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by Item 12 of
Form 10-K
is incorporated by reference to the information contained in the
section of our 2008 Proxy Statement captioned “Share
Ownership by Principal Stockholders and Management.”
Item 13.
Certain
Relationships and Related Transactions and Director
Independence
The information required by Item 13 of
Form 10-K
is incorporated by reference to the information contained in the
sections of our 2008 Proxy Statement captioned “Executive
Compensation — Employment Contracts, Termination of
Employment and
Change-in-Control
Arrangements” and “Certain Transactions.”
Item 14.
Principal
Accountant Fees and Services
The information required by Item 14 of
Form 10-K
is incorporated by reference to the information contained in the
section of our 2008 Proxy Statement captioned “Information
About Our Independent Registered Public Accounting Firm.”
PART IV
Item 15.
Exhibits
and Financial Statement Schedules
(a) (1.)
Financial
Statements:
The following documents are filed as a part of this Annual
Report on Form
10-K for
Novell, Inc.:
Schedules other than that listed above are omitted because they
are not required, not applicable or because the required
information is shown in the consolidated financial statements or
notes thereto.
(3.) Exhibits:
A list of the exhibits required to be filed as part of this
report is set forth in the Exhibit Index on page 127
of this
Form 10-K,
which immediately precedes such exhibits, and is incorporated
herein by reference.
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
Name
Title
Date
/s/ Ronald
W. Hovsepian
(Ronald
W. Hovsepian)
President and Chief Executive Officer (Principal Executive
Officer)
Amendment No. 1 to Agreement and Plan of Reorganization, dated
as of May 24, 2001, by and among Novell, Inc., Ceres Neptune
Acquisition Corp. and Cambridge Technology Partners
(Massachusetts), Inc. (1) (Annex A)
Form of certificate representing the shares of Novell common
stock. (5) (Exhibit 4.3)
4.3
Preferred Shares Rights Agreement, dated as of December 7, 1988,
as amended and restated effective September 20, 1999, by and
between Novell, Inc. and Chase Mellon Shareholder Services,
L.L.C. (6) (Exhibit 1)
Registration Rights Agreement dated July 2, 2004 between the
Registrant and Citigroup Global Markets Inc., for itself and on
behalf of certain purchasers. (7) (Exhibit 10.1)
10.2*
Novell, Inc. 1989 Employee Stock Purchase Plan. (9) (Exhibit 4.1)
10.3*
Novell, Inc. 1991 Stock Plan. (10) (Exhibit 4.1)
10.4*
Novell, Inc. 2000 Stock Plan. (11) (Exhibit 4.2)
10.5*
Novell, Inc. 2000 Stock Option Plan. (11) (Exhibit 4.1)
10.6*
UNIX System Laboratories, Inc. Stock Option Plan. (12) (Exhibit
4.3)
10.7*
Novell, Inc. Stock Option Plan for Non-Employee Directors. (13)
(Exhibit 4.1)
Incorporated by reference to the Exhibit identified in
parentheses, filed as an exhibit to the Registrant’s
Registration Statement on
Form S-1,
filed November 30, 1984, and amendments thereto (File
No. 2-
94613).
Portions of this exhibit have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a
request for confidential treatment.