-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P3gwMTEH4EiTxN1hdIJbFZyElrwB6C4bQN78knfbC1MUgBMcmI7HHWp4eMEfcaTZ SEG175zVBbK8R6rEJ5diMg== 0000758004-02-000003.txt : 20020415 0000758004-02-000003.hdr.sgml : 20020415 ACCESSION NUMBER: 0000758004-02-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020131 FILED AS OF DATE: 20020315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOVELL INC CENTRAL INDEX KEY: 0000758004 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 870393339 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13351 FILM NUMBER: 02576944 BUSINESS ADDRESS: STREET 1: 1800 SOUTH NOVELL PLACE CITY: PROVO STATE: UT ZIP: 84606 BUSINESS PHONE: 8018617000 MAIL ADDRESS: STREET 1: 1800 SOUTH NOVELL PLACE CITY: PROVO STATE: UT ZIP: 84606 10-Q 1 q102.txt FIRST QUARTER REPORT ON FORM 10 Q 28 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark one) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended January 31, 2002 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ------- to ----------- Commission File Number: 0-13351 NOVELL, INC. (Exact name of registrant as specified in its charter) Delaware 87-0393339 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1800 South Novell Place Provo, Utah 84606 (Address of principal executive offices and zip code) (801) 861-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO As of February 28, 2002, there were 362,595,128 shares of the Registrant's Common Stock outstanding. Part I. Financial Information Item 1. Financial Statements NOVELL, INC. CONSOLIDATED CONDENSED BALANCE SHEETS January 31, 2002 October 31, 2001 ----------------- ---------------- Amounts in thousands, except share and per share data (Unaudited) ASSETS Current assets: Cash and short-term investments $ 735,519 $ 705,243 Receivables (less allowances of $42,065 - January 31, 2002 and $47,249 - October 31, 2001) 159,086 227,044 Inventories 1,079 947 Prepaid expenses 27,063 29,808 Deferred and refundable income taxes 34,316 34,595 Other current assets 22,592 29,729 ---------------- --------------- Total current assets 979,655 1,027,366 Property, plant and equipment, net 470,148 496,620 Goodwill and intangible assets 195,223 192,016 Long-term investments 112,533 114,971 Other assets 73,700 73,033 ---------------- --------------- Total assets $ 1,831,259 $ 1,904,006 ================ =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 57,069 $ 77,571 Accrued compensation 88,805 87,382 Accrued marketing liabilities 13,091 13,672 Restructuring and merger related liabilities 47,082 91,049 Other accrued liabilities 55,329 59,793 Income taxes payable 37,734 38,175 Deferred revenue 227,039 243,261 ---------------- --------------- Total current liabilities 526,149 610,903 Minority interests 21,395 22,436 Shareholders' equity: Common stock, par value $.10 per share Authorized - 600,000,000 shares Issued - 362,616,173 shares-January 31, 2002 362,341,403 shares-October 31, 2001 36,262 36,234 Preferred stock, par value $.10 per share Authorized - 500,000 shares, Issued - 0 shares -- -- Additional paid in capital 257,635 256,332 Retained earnings 993,837 985,486 Accumulated other comprehensive income 3,576 2,455 Other (7,595) (9,840) ----------------- ---------------- Total shareholders' equity 1,283,715 1,270,667 ---------------- --------------- Total liabilities and shareholders' equity $ 1,831,259 $ 1,904,006 ================ ===============
See notes to consolidated unaudited condensed financial statements. NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS Three Months Ended ---------------------------------------------- January 31, 2002 January 31, 2001 Amounts in thousands, except per share data Net sales $ 271,063 $ 245,035 Cost of sales 110,773 66,954 --------------- --------------- Gross profit 160,290 178,081 Operating expenses: Sales and marketing 87,366 121,419 Product development 41,123 46,846 General and administrative 30,325 23,100 --------------- --------------- Total operating expenses 158,814 191,365 Income (loss) from operations 1,476 (13,284) Other income, net Investment income 2,608 17,287 Other, net 7,846 544 --------------- --------------- Other income, net 10,454 17,831 Income before taxes 11,930 4,547 Income tax expense 3,579 1,273 --------------- --------------- Net income before cumulative effect of change in accounting principle 8,351 3,274 Cumulative effect of change in accounting principle -- (11,048) --------------- ---------------- Net income (loss) $ 8,351 $ (7,774) =============== ================ Net income (loss) per share - Basic: Before cumulative effect of change in accounting principle $ 0.02 $ 0.01 Cumulative effect of change in accounting principle -- (0.03) -------------- --------------- $ 0.02 $ (0.02) ============== =============== Net income (loss) per share - Diluted: Before cumulative effect of change in accounting principle $ 0.02 $ 0.01 Cumulative effect of change in accounting principle -- (0.03) -------------- --------------- $ 0.02 $ (0.02) ============== =============== Weighted average shares outstanding: Basic 362,428 322,183 Diluted 362,970 322,183
See notes to consolidated unaudited condensed financial statements. NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS Three Months Ended January 31, 2002 January 31, 2001 Dollars in thousands Cash flows from operating activities Net income (loss) $ 8,351 $ (7,774) Adjustments to reconcile net income (loss) to net cash provided by operating activities Gain on sale of fixed assets (8,672) -- Depreciation and amortization 18,888 19,421 Loss on impaired investments 5,440 2,700 Decrease in receivables 67,958 35,577 (Increase) decrease in inventories (132) 723 Decrease in prepaid expenses 2,745 662 Decrease in deferred and refundable income taxes 65 4,439 Decrease (increase) in other current assets 7,137 (1,535) (Decrease) increase in current liabilities, net (81,024) 13,642 -------------- ------------- Net cash provided from operating activities 20,756 67,855 Cash flows from financing activities Issuance of common stock, net 1,712 4,314 Repurchase of common stock -- (64,910) ------------- -------------- Net cash provided (used) by financing activities 1,712 (60,596) Cash flows from investing activities Expenditures for property, plant and equipment (2,517) (7,252) Proceeds from the sale of property, plant and equipment 16,050 -- Purchases of short-term investments (246,172) (285,812) Maturities of short-term investments 140,877 213,259 Sales of short-term investments 113,363 58,336 Expenditures for other long-term investments (7,658) (13,712) Other 1,985 (18,205) ------------- -------------- Net cash provided (used) by investing activities 15,928 (53,386) Total increase (decrease) in cash and cash equivalents 38,396 (46,127) Cash and cash equivalents - beginning of period 337,927 289,537 ------------- ------------- Cash and cash equivalents - end of period 376,323 243,410 Short-term investments - end of period 359,196 412,039 ------------- ------------- Cash and short-term investments - end of period $ 735,519 $ 655,449 ============= =============
See notes to consolidated unaudited condensed financial statements. NOVELL, INC. NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS A. Quarterly Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. As discussed under the heading "Critical Accounting Policies" in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," actual results could differ materially from those estimates. The accompanying consolidated unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q but do not include all of the information and footnotes required by generally accepted accounting principles and should, therefore, be read in conjunction with the Company's fiscal 2001 Annual Report on Form 10-K. These financial statements do include all normal recurring adjustments that the Company believes necessary for a fair presentation of the statements. The interim operating results are not necessarily indicative of the results for a full year. Certain reclassifications, none of which affected net income (loss), have been made to the prior years' amounts in order to conform to the current year's presentation. B. Cash and Short-term Investments The Company considers all highly liquid debt instruments purchased with a term to maturity of three months or less to be cash equivalents. Short-term investments are widely diversified, consisting primarily of short-term investment grade securities, substantially all of which either mature within the next 12 months or have characteristics of short-term investments. Municipal securities included in short-term investments have contractual maturities ranging from one to seven years. Money market preferreds have contractual maturities of less than 180 days. No other short-term investments have contractual maturities. All marketable debt and equity securities that are included in cash and short-term investments are considered available-for-sale and are carried at fair market value. The unrealized gains and losses related to these securities are included in other comprehensive income, net of tax and after applicable tax valuation allowances. Fair market values are based on quoted market prices where available; if quoted market prices are not available, then fair market values are based on quoted market prices of comparable instruments. The cost of securities sold is based on the specific identification method. Such securities are anticipated to be used for current operations and are therefore classified as current assets, even though some maturities may extend beyond one year. The following is a summary of cash and short-term investments, all of which are considered available-for-sale. Gross Gross Fair Market Cost at Unrealized Unrealized Value at January 31, 2002 Gains Losses January 31, 2002 ---------------- ----- ------ ---------------- (Amounts in thousands) Cash and cash equivalents: Cash $ 133,650 $ -- $ -- $ 133,650 Corporate debt 45,931 -- -- 45,931 Money market funds 196,742 -- -- 196,742 ---------- -------- -------- ---------- Total cash and cash equivalents 376,323 -- -- 376,323 Short-term investments: State and local government debt 78,574 2,290 (239) 80,625 Corporate debt 246,944 1,758 (77) 248,625 Money market preferreds 17,015 -- (15) 17,000 Equity securities 9,934 3,339 (327) 12,946 ---------- -------- ---------- ---------- Total short-term investments 352,467 7,388 (659) 359,196 Total cash and short-term investments $ 728,790 $ 7,388 $ (659) $ 735,519 ========== ======== ========== ========== Gross Gross Fair Market Cost at Unrealized Unrealized Value at October 31, 2001 Gains Losses October 31, 2001 ---------------- ----- ------ ---------------- (Amounts in thousands) Cash and cash equivalents: Cash $ 156,088 $ -- $ -- $ 156,088 Corporate debt 3,995 -- -- 3,995 Money market funds 177,844 -- -- 177,844 ---------- ------- --------- ---------- Total cash and cash equivalents 337,927 -- -- 337,927 Short-term investments: State and local government debt 151,459 5,074 -- 156,533 Corporate debt 138,679 2,255 (9) 140,925 Money market preferreds 17,034 -- (34) 17,000 Mutual funds 41,014 -- -- 41,014 Equity securities 12,336 538 (1,030) 11,844 ---------- ------- --------- --------- Total short-term investments 360,522 7,867 (1,073) 367,316 Total cash and short-term investments $ 698,449 $ 7,867 $ (1,073) $ 705,243 ========== ======== ========== =========
During the first three months of fiscal 2002, the Company realized gains of $3.2 million and realized losses of $0.1 million on the sale of securities. During the first three months of fiscal 2001, the Company realized gains of $6.4 million and realized losses of $0.1 million from the sale of securities. The Company did not record any impairment losses during the first quarter of fiscal 2002 or 2001 related to short-term investments whose decline in market value was determined to be other than temporary. The Company reviews all of its investments for impairment and recognizes impairment losses as appropriate. C. Long-term Assets The primary components of long-term investments are investments made through the Novell Venture account, Cambridge Technology Capital Fund I L.P. ("CTC I") and strategic long-term equity investments. Long-term investments are recorded at cost. Investments made through the Novell Venture account generally are in private companies, primarily small capitalization stocks in the high-technology industry sector, and funds managed by venture capitalists. Investments made through CTC I generally are in expansion-stage, private companies providing products and services within the technology industry. The value of the investments made through the Novell Venture account and CTC I are dependent on the performance, successful acquisition, and/or initial public offering of the investees. The Company routinely reviews its investments in private securities and venture funds for impairment. During the first quarters of fiscal 2002 and 2001, the Company recognized impairment losses on long-term investments totaling $5.4 million and $2.7 million, respectively. D. Goodwill and Intangible Assets The following is a summary of goodwill and other intangible assets: January 31, 2002 October 31, 2001 (Amounts in thousands) Cambridge goodwill $ 180,559 $ 180,460 Other goodwill 9,286 7,335 Intangible assets 5,378 4,221 ------------ ------------ Goodwill and other intangible assets $ 195,223 $ 192,016 ============ ============
Goodwill not attributed to the Cambridge acquisition and other intangible assets relate to several small acquisitions. Intangible assets are amortized over a two to three year period. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 supersedes APB Opinion No. 17, "Intangible Assets," and states that goodwill and other intangible assets with indefinite lives are no longer amortized but are reviewed for impairment annually, or more frequently if impairment indicators arise. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The provisions under SFAS No. 142 relating to the discontinuance of amortization of goodwill and indefinite lived intangible assets is effective for assets acquired after June 30, 2001, and upon adoption of the statement to assets acquired prior to June 30, 2001. In addition, the provisions of SFAS No. 142 relating to impairment apply to assets acquired prior to July 1, 2001 upon adoption of SFAS 142. Novell has elected to adopt this statement beginning in the first quarter of fiscal 2002, and has discontinued amortization of goodwill acquired prior to July 1, 2001. Goodwill and intangibles will be reviewed for impairment on a periodic basis. The following table shows what net income would have been had the provision been applied at the beginning of fiscal 2001: Quarter ended Quarter ended (Amounts in thousands) January 31, 2002 January 31, 2001 ---------------- ---------------- Income before extraordinary item As reported $ 8,351 $ 3,274 Pro forma $ 3,436 Net income (loss) As reported $ 8,351 $ (7,774) Pro forma $ (7,612) Basic earnings (loss) per share As reported $ 0.02 $ (0.02) Pro forma $ (0.02) Diluted earnings (loss) per share As reported $ 0.02 $ (0.02) Pro forma $ (0.02)
SFAS No. 142 also requires companies to perform an impairment test within six months of adopting the statement. Steps required in the impairment test include: Step 1 - identifying reporting units, assigning assets and liabilities to the reporting units, assigning goodwill to reporting units, and determining if the fair value of each reporting unit is less than its carrying amount. If the fair value is below carrying value, Step 2 - determining the impairment amount - is performed. The Company will complete this test during the second quarter of fiscal 2002. E. Income Taxes The Company's estimated effective tax rate for the first three months of fiscal 2002 is 30%, compared to 28%, before the effect of the cumulative change in accounting principle, for the first three months of fiscal 2001. The rate for the first quarter of fiscal 2002 differs from the effective tax rate for the first quarter of fiscal 2001 primarily as a result of changes in the forecasted income before taxes for fiscal 2002. The Company paid cash amounts for income taxes of $1.2 million in the first three months of fiscal 2002 and $1.0 million during the same period of fiscal 2001. F. Line of Credit The Company currently has a $10 million unsecured revolving bank line of credit. The line of credit expires on March 3, 2003 and can be renewed at the option of the Company for a one-year period. The line can be used for either letter of credit or working capital purposes and is subject to the terms of a loan agreement containing financial covenants and restrictions, none of which are expected to significantly affect the Company's operations. At January 31, 2002, there were standby letters of credit of $2.9 million outstanding under this agreement. A subsidiary of the Company also has a Letter Agreement and stand-by letters of credit of $1.5 million at January 31, 2002 with the same bank. The Letter Agreement is subject to financial covenants and restrictions, none of which are expected to significantly affect the Company's operations. The Company has an additional credit facility with another bank, which is not subject to a loan agreement. At January 31, 2002, there was a minimal amount of standby letters of credit outstanding under this arrangement. G. Restructuring At the end of the fourth quarter of fiscal 2001, the Company incurred $50.7 million of pre-tax, restructuring charges resulting from general market conditions, customer demands, and the Company's evolution of its business strategy. The new business strategy focuses on eBusiness solutions along with Net services software designed to secure and power the networked world across leading operating systems. This included refining the Company's consulting initiatives, refocusing research and development efforts, defining sales and marketing efforts to be more customer and solutions oriented, and adjusting the overall cost structure given current revenue levels and Company direction. Specific actions included reducing the Company's workforce worldwide by approximately 1,100 (approximately 16%), consolidating excess facilities and disposing of excess property and equipment, terminating a management consulting contract that no longer fits with the Company's strategic focus, and abandoning and writing off technologies that no longer fit within the integrated Company's new strategy. The Company also realigned its remaining resources to better manage and control its business. The following table summarizes the costs and activities during the first quarter of fiscal 2002, related to the fourth quarter 2001 restructuring. Balance at Cash Non-Cash Balance at October 31, 2001 Payments Charges January 31, 2002 ---------------- -------- ------- ---------------- (Amounts in thousands) Severance and benefits $ 32,793 $ (21,253) $ -- $ 11,540 Excess facilities and property and equipment 10,896 (3,055) (2,030) 5,811 Other restructuring-related costs 911 (226) -- 685 ------------ ------------ ----------- ------------ $ 44,600 $ (24,534) $ (2,030) $ 18,036 ============ =========== =========== ============
As of January 31, 2002, the remaining portion of the fourth quarter 2001 restructuring charge included accrued liabilities largely related to severance and benefits, which will be paid out during fiscal 2002, and redundant facilities costs, which will be paid over the respective remaining lease terms. During the third quarter of fiscal 2001, the Company recorded a restructuring charge of approximately $30.4 million, pre-tax, as a result of the Company's acquisition of Cambridge Technology Partners, Inc. ("Cambridge") and changes in the Company's business to move towards an eBusiness strategy. Specific actions included reducing the Company's workforce worldwide by approximately 280 employees (approximately 5% before the addition of Cambridge) across all functional areas, consolidating facilities and disposing of excess property and equipment, abandoning and writing off technologies that no longer fit within the Company's new strategy, and discontinuing unprofitable product lines. The following table summarizes the activity during the first quarter of 2002, related to the third quarter 2001 restructuring costs. Balance at Cash Non-Cash Balance at October 31, 2001 Payments Charges January 31, 2002 ---------------- -------- ------- ---------------- (Amounts in thousands) Severance and benefits $ 3,377 $ (377) $ -- $ 3,000 Abandoned technology 211 (211) -- -- Excess facilities and property and equipment 9,736 (3,298) -- 6,438 Exit unprofitable product lines 486 (486) -- -- Other restructuring-related costs 527 (162) -- 365 ------------ ---------- ---------- ------------ $ 14,337 $ (4,534) $ -- $ 9,803 ============ =========== =========== ============
As of January 31, 2002, the remaining portion of the third quarter 2001 restructuring charge included accrued liabilities largely related to severance and benefits, which will be paid out during fiscal 2002, and excess facilities costs, which will be paid over the respective remaining lease terms. During the fourth quarter of fiscal 2000, the Company recorded a restructuring charge of approximately $47.9 million, pre-tax, as a result of the Company's plan to change its business strategy to address changes in the market due to technology changes, customer demands, and methods of distribution. The new business strategy focuses on a Net services business model and on electronic or e-solutions. Specific actions taken included reducing the Company's workforce worldwide by approximately 700 employees (approximately 13%), consolidating facilities and disposing of excess property and equipment, abandoning and writing off technologies that no longer fit within the Company's new strategy, discontinuing unprofitable products and closing offices in unprofitable locations. The following table summarizes the activity during the first quarter of fiscal 2002, related to the fiscal 2000 restructuring. Balance at Cash Non-Cash Balance at October 31, 2001 Payments Charges January 31, 2002 ---------------- -------- -------- ---------------- (Amounts in thousands) Severance and benefits $ 71 $ (71) $ -- $ -- Excess facilities and property and equipment 2,318 (219) -- 2,099 Other restructuring-related costs 1,432 (283) -- 1,149 ------------ ------------ ----------- ------------ $ 3,821 $ (573) $ -- $ 3,248 ============ =========== =========== ============
As of January 31, 2002, the remaining portion of the fiscal 2000 restructuring charge included accrued liabilities related mainly to redundant facilities and other fixed contracts, which will be paid over the respective remaining contract terms. H. Commitments and Contingencies On December 21, 2001, the Company formed a venture capital fund, Novell Technology Capital Fund I, L.P. (the "Fund"), and related entities that include Novell Technology GPLP I, L.P. ("GPLP"), the general partner of the Fund. The Fund was established to achieve a superior return on investments for its partners by locating, analyzing and investing in high-growth-oriented businesses. The general partner of GPLP is a wholly-owned corporate subsidiary of Novell. Novell has committed to an aggregate investment of $15 million in GPLP and the Fund, primarily through a limited partnership commitment to the Fund. This commitment may increase as additional limited partners are brought into the Fund, to a cap of $30 million. Additionally, Novell is entitled to 68.25% of the amounts allocable to GPLP by the Fund, which is generally equal to 20% of the net gains of the Fund. Mr. Messman, a director and the Company's Chief Executive Officer and President, committed to an investment of $182,500 in the Fund as a limited partner. Mr. Linsalata, the Company's Senior Vice President, Venture Investments, committed to an investment of $100,000 in the Fund as a limited partner, and to an investment of $82,500 in GPLP as a limited partner. Additionally, Mr. Linsalata is entitled to 13.75% of the amounts allocable to GPLP by the Fund, which is generally equal to 20% of the net gains of the Fund. No amounts have been distributed by the Fund or GPLP. The financial and operating results of NTC I and related entities have been consolidated in Novell's financial statements for the first quarter of fiscal 2002. The Board of Directors also established the Novell Venture account within Novell's investment portfolio for the purpose of making investments in private companies, mainly small capitalization stocks in the high-technology industry sector, and funds managed by venture capitalists for the promotion of the Company's business and strategic objectives. As of January 31, 2002, the Company had invested $76.7 million into these externally managed venture capital funds and had commitments to contribute an additional $90.8 million over the next two to three years, as requested by the fund managers. Novell, through its acquisition of Cambridge, also owns both limited and general partnership interests in the Cambridge Technology Capital Fund I ("CTC I") of approximately 24%. As of January 31, 2002, the Company had contributed $5.7 million to CTC I and had commitments to contribute an additional $300,000 through 2007. In February 1998, a suit was filed in the U.S. District Court, District of Utah, against Novell and certain of its officers and directors, alleging violation of federal securities laws by concealing the true nature of Novell's financial condition and seeking unspecified damages. The lawsuit was brought as a purported class action on behalf of purchasers of Novell common stock from November 1, 1996 through April 22, 1997. The Federal District Court dismissed the original complaint on November 2, 2000, however, the plaintiffs filed an amended complaint on November 22, 2000 in an effort to remedy inadequacies in the original complaint. Novell has moved the court to dismiss the amended complaint on the same grounds relied on in the court's dismissal of the original complaint. If the case continues, Novell intends to vigorously defend against the allegations. While there can be no assurance as to the ultimate disposition of the lawsuit, Novell does not believe that the resolution of this litigation will have a material adverse effect on its financial position, results of operations, or cash flows. In January 1995, Lantec, Inc. filed suit against Novell in the U.S. District Court, the District of Utah, for alleged anti-trust violations arising from Novell's acquisition of the GroupWise technology. The plaintiffs were seeking to demonstrate damages of $300 million. On April 19, 2001, the judge ruled in favor of Novell and dismissed the original complaint; however, on June 8, 2001 the plaintiffs filed a notice of appeal. Novell intends to vigorously defend against the claims. While there can be no assurance as to the ultimate disposition of the lawsuit, Novell does not believe that the resolution of this litigation will have a material adverse effect on its financial position, results of operations, or cash flows. The Company is also a party to a number of legal claims arising in the ordinary course of business. The Company believes the ultimate resolution of the claims will not have a material adverse effect on its financial position, results of operations, or cash flows. I. Segment Information The Company is organized and operates as three business segments: product, consulting, and Volera, Inc. The Company's products and services are sold throughout the world. The Company's offerings within the product segment are sold domestically via direct, OEM, reseller, and distributor channels, and internationally through distributors who sell to dealers and end users. The following is a description of each of the three segments: o Product - includes Net Management Services products (Directory-Enabled OS, Management and Collaboration products, and UNIX royalties), NDS Directory Services and other directory products, and product-related customer service, support, and education. o Consulting - includes Novell and Cambridge IT services consulting and Celerant management consulting o Volera, Inc. - Novell's majority-owned subsidiary, which provides Content Distribution Network software. Beginning November 1, 2001, performance of the Company is evaluated by the Company's chief decision makers, the Chief Executive Officer and Executive Management Committee, based on evaluation of revenue, gross margin and operating profit for each business unit. Revenue is also evaluated based on results by geographic region. Separate financial information is not available by business unit in regards to asset allocation. Segment operating results were calculated for the fourth quarter of fiscal 2001 for comparative purposes. However except for revenue, operating results by segment are not available for the first quarter of fiscal 2001. Prior to the acquisition of Cambridge, the Company's systems did not support the breakout of operating results other than net sales. Operating results, other than net sales, were available on a total company basis only. Operating Results by Segment Quarter ended January 31, 2002 Product Consulting Volera Total Novell ------- ---------- ------ ------------ Amounts in thousands Net sales $ 199,257 $ 69,671 $ 2,135 $ 271,063 Cost of sales 37,169 72,695 909 110,773 ---------- ---------- ---------- ---------- Gross profit 162,088 (3,024) 1,226 160,290 Segment operating expenses 122,725 27,273 7,125 157,123 ----------- ---------- ---------- ---------- Segment income (loss) from operations $ 39,363 $ (30,297) $ (5,899) 3,167 ========== =========== =========== Unallocated operating expenses 1,691 ---------- Income (loss) from operations $ 1,476 ========== Quarter ended January 31, 2001 Product Consulting Volera Total Novell ------- ---------- ------ ------------ Amounts in thousands Net sales $ 230,103 $ 13,074 $ 1,858 $ 245,035 Quarter ended October 31, 2001 Product Consulting Volera Total Novell ------- ---------- ------ ------------ Amounts in thousands Net sales $ 215,004 $ 90,419 $ 2,187 $ 307,610 Cost of sales 39,345 79,206 1,516 120,067 ---------- ---------- ---------- ---------- Gross profit 175,659 11,213 671 187,543 Segment operating expenses 141,817 32,539 10,711 185,067 ----------- ---------- ---------- ---------- Segment income (loss) from operations $ 33,842 $ (21,326) $ (10,040) 2,476 ========== =========== =========== Unallocated operating expenses 54,446 ---------- Income (loss) from operations $ (51,970) ===========
Segment operating expenses include direct segment costs along with management's allocation of certain common sales, marketing, and general and administrative costs to each business unit. Unallocated operating expenses included approximately $1.7 million of integration expense in the first quarter of fiscal 2002 and approximately $4.7 million of integration costs and $49.8 of restructuring costs in the fourth quarter of fiscal 2001. Prior to fiscal 2002, the company operated in one segment. Management and the Company's decision makers evaluated the company based on total Company results. Revenue was evaluated based on geographic location and product category. Separate financial information was not available by product category and geographic location. The following table shows first quarter 2002 and 2001 revenue under the previous segment categories. Revenue by product category Three Months Ended --------------------------- ----------------------------------- Amounts in thousands January 31, 2002 January 31, 2001 -------------------- ---------------- ----------------- Net services $ 153,714 $ 186,860 Net directory services 11,324 7,632 Net content services 2,135 1,858 Consulting, support services and education 103,890 48,685 ---------- ---------- Total net sales $ 271,063 $ 245,035 ========== ==========
Sales outside the U.S. are comprised of sales to international customers in Europe, the Middle East, Canada, South America, and Asia Pacific. International sales in any single international location were not material to the Company as a whole. For the first three months of fiscal 2002 and fiscal 2001, sales to international customers were approximately $127.5 million and $106.4 million, respectively. In the first three months of fiscal 2002 and fiscal 2001, 75% and 66%, respectively, of international sales were to European countries. No one foreign country accounted for 10% or more of total net sales in either period. There were no customers accounting for more than 10% of total revenue during the first three months of fiscal 2002 or fiscal 2001. J. Net Income (Loss) Per Share Three Months Ended ------------------------------------ Amounts in thousands, except per share data January 31, 2002 January 31, 2001 ------------------------------------------- ---------------- ---------------- Basic net income per share computation Net income (loss) $ 8,351 $ (7,774) ----------- ------------ Weighted average shares outstanding 362,428 322,183 ----------- ----------- Basic net income (loss) per share $ 0.02 $ (0.02) =========== =========== Diluted net income per share computation Net income (loss) $ 8,351 $ (7,774) ----------- ------------ Weighted average shares outstanding 362,428 322,183 Incremental shares attributable to exercise of outstanding options (treasury stock method) 542 -- ----------- ----------- Total 362,970 322,183 ----------- ----------- Diluted net income (loss) per share $ 0.02 $ (0.02) =========== ===========
K. Comprehensive Income (Loss) The components of comprehensive income (loss), net of tax, for the three months ended January 31, 2002 and 2001 were as follows: Three Months Ended ------------------------------------- Amounts in thousands January 31, 2002 January 31, 2001 -------------------- ---------------- ---------------- Net income (loss) $ 8,351 $ (7,774) Change in net unrealized loss on investments (246) (18,084) Change in cumulative translation adjustment 1,367 714 ----------- ----------- Comprehensive income (loss) $ 9,472 $ (25,144) =========== ============
The components of accumulated other comprehensive income, net of related tax, at January 31, 2002 and October 31, 2001, are as follows: January 31, 2002 October 31, 2001 Amounts in thousands Net unrealized gain on investment: $ 4,786 $ 5,032 Cumulative translation adjustment (1,210) (2,577) ------------ ------------ Accumulated other comprehensive income $ 3,576 $ 2,455 =========== ===========
L. Derivative Instruments The Company hedges currency risks of some assets and liabilities denominated in foreign currencies through the use of one-month forward contracts. Due to the short period of time between entering into the forward contracts and the quarter end, the fair value of the derivatives as of January 31, 2002 is insignificant and accordingly did not have a material impact on our financial position or results of operations. M. Recent Accounting Pronouncements In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. The provisions of SFAS 144 will be effective for fiscal year 2002 and will be applied prospectively. The Company is currently in the process of evaluating the potential impact that the adoption of SFAS 144 will have on its consolidated financial position and results of operations. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. In some cases, such forward-looking statements may be identified by the use of terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "potential," or "continue" or the negative thereof or other comparable terminology. Such forward-looking statements include statements regarding, among other things, our revenue expectations, future business strategies, market conditions, and opportunities, and liquidity. All forward-looking statements are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results may differ materially from the results discussed in such forward-looking statements as a result of a number of factors, which include, but are not limited to, those set forth below in the section titled "Risk Factors Affecting Future Results of Operations." Introduction Novell, Inc., ("Novell" or the "Company") provides eBusiness solutions and Net services software designed to secure and power the networked world. Novell and its services division, Cambridge Technology Partners ("Cambridge"), help organizations solve complex business challenges, simplify their systems and processes, and capture new opportunities. Novell provides worldwide channel, consulting, education and developer programs to support its offerings. Critical Accounting Policies The Company considers certain accounting policies related to revenue recognition and impairment of long-lived assets and valuation of deferred tax assets to be critical policies due to the estimation processes involved in each. Revenue recognition. The Company's IT consulting services business derives a significant portion of its revenue from fixed-price, fixed-time contracts, which require the accurate estimation of the cost, scope and duration of each engagement. Revenue and the related costs for these projects are recognized based on percentage of completion, using time-to-completion to measure the percent complete with revisions to estimates reflected in the period in which changes become known. If the Company does not accurately estimate the resources required or the scope of work to be performed, or does not manage its projects properly within the planned periods of time or satisfy its obligations under the contracts, then future consulting margins may be significantly and negatively affected or losses on existing contracts may need to be recognized. Any such resulting reductions in margins or contract losses could be material to the Company's results of operations. The Company records a provision for estimated sales returns and allowances on product and service related sales in the same period as the related revenues are recorded. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. If the historical data the Company uses to calculate these estimates does not properly reflect future returns, revenue could be overstated. Impairment of long-lived assets and valuation of deferred tax assets. The Company's long-lived assets include long-term investments, goodwill and other intangible assets. At January 31, 2002, the Company had $113 million of long-term investments, $195 million of goodwill and other intangible assets, and $94 million of net deferred tax assets, current and non-current, accounting for approximately 22% of the Company's total assets. The fair value of the long-term investments is dependant on the performance of the companies or venture funds in which the Company has invested, as well as volatility inherent in the external markets for these investments. In assessing potential impairment for these investments, the Company will consider these factors as well as forecasted financial performance of its investees. If these forecasts are not met, the Company may have to record additional impairment charges not previously recognized. During the quarter ended January 31, 2002, the Company recognized $5 million of impairment losses related to its long-term investments. In assessing the recoverability of the Company's goodwill and other intangibles, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded. On November 1, 2001 the Company adopted Statement of Financial Accounting Standards No. 142 ("FAS 142"), "Goodwill and Other Intangible Assets," and is, therefore, required to analyze its goodwill for impairment issues during the first six months of fiscal 2002, and then on a periodic basis thereafter. The company's first goodwill impairment analysis under FAS 142 will be complete during the second quarter of fiscal 2002. During the first quarter of fiscal 2002, the Company did not record any impairment losses related to goodwill and other intangible assets. Carrying value of the Company's net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to record additional valuation allowances against its deferred tax assets resulting in additional income tax expense in the Company's consolidated statement of operations. Management evaluates the realizability of the deferred tax assets quarterly and assesses the need for additional valuation allowances quarterly. Results of Operations Net Sales Three months ended January 31, 2002 2001 Change Net sales (thousands) $ 271,063 $ 245,035 10.6% Beginning in fiscal 2002, Novell's operations are organized by operating segment - - product, consulting, and Volera, Inc. o Product - includes Net Management Services products (Directory-Enabled OS, Management and Collaboration products, and UNIX royalties), NDS Directory Services and other directory products, and product-related customer service, support, and education o Consulting - includes Novell and Cambridge IT services consulting and Celerant management consulting o Volera, Inc. - Novell's majority-owned subsidiary, which provides Content Distribution Network software Product sales decreased to $199.3 million or 13.4% in the first quarter of fiscal 2002 compared to the same period of fiscal 2001. Within the product segment, sales from Net Management Services products decreased $37.1 million or 18% in the first quarter of fiscal 2002 compared to the first quarter of fiscal 2001 primarily due to decreased sales of older Netware versions, which have not been completely offset by sales of Netware version 6, decreased sales of management and collaboration products, and lower Unix royalties. Sales from Net Directory Services products increased $3.7 million or 48.4% in the first quarter of fiscal 2002 compared to the same period of fiscal 2001 primarily due to increased sales from DirXML. Product related service, education, and support decreased $1.3 million. The Company believes net product sales over the remaining three quarters of fiscal 2002 will remain relatively flat compared to the first quarter of fiscal 2002. Consulting sales were $69.7 million or 433% higher in the first quarter of fiscal 2002 compared to the first quarter of fiscal 2001, due to the acquisition of Cambridge in the third quarter of fiscal 2001. Cambridge and Celerant sales added $57.8 million to the first quarter of fiscal 2002. Without Cambridge and Celerant, sales in the first quarter of fiscal 2002, consulting sales would have been $11.9 million compared to $13.1 million in the first quarter of fiscal 2001. Consulting sales decreased $20.7 million in the first quarter of fiscal 2002 compared to the fourth quarter of fiscal 2001 primarily due to a weakened services market and decreased demand for the Company's systems integration and e-business solutions consulting. The Company expects to see slight declines in consulting sales over the remaining three quarters of fiscal 2002. Net sales from Volera, Inc. were relatively flat in the first quarter of fiscal 2002 compared to the first quarter of fiscal 2001 and is expected to increase over the prior year during the next few quarters. International sales represented 47% of total net sales in the first quarter of fiscal 2002 compared to 43% in the first quarter of fiscal 2001. During the first quarter of fiscal 2002, international sales increased 20% while domestic sales increased 4% compared to the same period of fiscal 2001. The increase in domestic sales during the first quarter was due to the addition of Cambridge, offset by a decline in the IT consulting market. Internationally, sales increased due to the addition of Cambridge and recovering European market conditions. Total net sales have decreased 12% in the first quarter of fiscal 2002 compared to the fourth quarter of fiscal 2001. Product sales were down 7%, consulting sales were down 23% and Volera sales were down 2% in the first quarter of fiscal 2002 compared to the fourth quarter of fiscal 2001. The Company expects total net sales for fiscal 2002 to be between $1.06 billion and $1.08 billion. The Company is working to address the decline in domestic sales, particularly related to the consulting segment, in an effort to improve results in future periods. The Company is near completion of its integration of Cambridge and during the first quarter of fiscal 2002, the Company reorganized its sales force to focus on direct selling and on solutions offerings. The Company anticipates that it will take several quarters to fully realize the benefits from these actions. Gross Profit Three months ended January 31, 2002 2001 Change Gross profit (thousands) $ 160,290 $ 178,081 (10.0)% Percentage of net sales 59.1% 72.7% Gross profit as a percentage of net sales decreased in the first quarter of 2002 compared to the same period of fiscal 2001, primarily due to the effects of decreased sales levels and a higher mix of lower-margin consulting business. The mix between product sales and consulting sales has shifted due to the acquisition of Cambridge, causing product sales to become a smaller percentage of total sales. During the first quarter of fiscal 2002, gross margin for the consulting segment was a negative $3.0 million. The negative margin is primarily due to decreased consulting sales and the costs of excess consultants who were not fully utilized on consulting engagements. The Company does not expect gross profit margins to reach first quarter fiscal 2001 levels in the future due to the increase in the consulting business. However, the Company believes the current gross profit margin of 59.1% is too low and is currently addressing ways to increase this in future periods. Operating Expenses Three months ended January 31, (dollars in thousands) 2002 2001 Change ---- ---- ------ Sales and marketing $ 87,366 $ 121,419 (28.0)% Percentage of net sales 32.2% 49.6% Product development 41,123 46,846 (12.2)% Percentage of net sales 15.2% 19.1% General and administrative 30,325 23,100 31.3 % Percentage of net sales 11.2% 9.4% Total operating expenses $ 158,814 $ 191,365 (17.0)% Percentage of net sales 58.6% 78.1% Sales and marketing expenses decreased by $34.1 million in the first quarter of fiscal 2002 compared to the same period in fiscal 2001, primarily due to decreased spending on marketing campaigns and lower headcount due to the restructurings in the third and fourth quarters of fiscal 2001. Sales and marketing headcount decreased by 130 heads year-over-year. In addition, sales and marketing expenses fluctuate in any given period due to timing of product promotions, advertising or other discretionary expenses. Product development expenses decreased $5.7 million in the first quarter of fiscal 2002 compared to the same period in fiscal 2001, due primarily to decreased headcount as a result of the restructurings that took place in the third and fourth quarters of fiscal 2001. Product development headcount decreased by 134 year-over-year. Product development expense as a percentage of sales decreased due to the addition of Cambridge consulting sales, which does not have any associated product development costs. General and administrative expenses increased $7.2 million during the first quarter of fiscal 2002 compared to the same period of fiscal 2001. The increase in general and administrative expense dollars and as a percentage of sales was primarily due to the addition of Cambridge general and administrative costs, integration costs related to the acquisition, and increased headcount as a result of the Cambridge acquisition, offset somewhat by the restructurings that took place in the third and fourth quarters of fiscal 2001. Restructuring At the end of the fourth quarter of fiscal 2001, the Company incurred $50.7 million of pre-tax restructuring charges resulting from general market conditions, customer demands and the Company's evolution of its business strategy. The new business strategy focuses on eBusiness solutions along with Net services software designed to secure and power the networked world across leading operating systems. This included refining the Company's consulting initiatives, refocusing research and development efforts, defining sales and marketing efforts to be more customer and solutions oriented, and adjusting the overall cost structure given current sales levels and Company direction. The restructuring charge included $32.8 million of severance and employee related costs for a reduction in workforce of approximately 1,100 personnel (approximately 16%), $10.9 million for excess facilities and related property and equipment disposals, $5.0 million for future committed payments related to termination of a management consulting contract that no longer fits with the Company's strategic focus, and $2 million for other related charges. The Company also realigned its remaining resources to better manage and control its business. Of the total $50.7 million charge, cash payments of $24.4 million have been paid out as January 31, 2002. After writing off certain non-cash charges, accruals of $18.0 million relating to the fourth quarter restructuring remain as of January 31, 2002, primarily related to severance and benefits to be paid out during fiscal 2002 and excess facility charges, which will be paid over the respective lease terms. During the third quarter of fiscal 2001, the Company recorded a restructuring charge of approximately $30.4 million, pre-tax, as a result of the Company's acquisition of Cambridge and changes in the Company's business to move towards the Company's eBusiness strategy. Specific actions and the related charges taken included $16.0 million to reduce the Company's workforce worldwide by approximately 280 employees across all functional areas (approximately 5% before the addition of Cambridge), $10.7 million to consolidate facilities and dispose of excess property and equipment, $0.9 million to abandon and write off technologies that no longer fit within the Company's new strategy, $2.1 million to discontinue unprofitable product lines, and $0.7 million for other related restructuring costs. Of the total $30.4 million third quarter 2001 charge, cash payments of $19.3 million have been paid out as January 31, 2002. After writing off certain non-cash charges, accruals of $9.8 million remain as of January 31, 2002, primarily related to severance and benefits to be paid out during fiscal 2002 and excess facility charges, which will be paid over the respective lease terms. As a result of the two fiscal 2001 restructurings, the Company estimates that its operating expenses will be reduced by approximately $170 million annually compared to fourth quarter fiscal 2001 levels, before increased strategic expenditures. As of the end of the first quarter of fiscal 2002, the company had recognized approximately $38 million in savings due to the restructurings over the fourth quarter 2001 expense levels. During the fourth quarter of fiscal 2000, the Company incurred $47.9 million of pre-tax restructuring charges resulting from the Company's plan to change its business strategy to address changes in the market due to technology changes, customer demands, and methods of distribution. The new business strategy focuses on a Net services business model and on electronic or e-solutions. This included a reorganization of the Company into new business units, refocusing research and development efforts, analyzing profitability of products and discontinuing unprofitable ones, defining sales and marketing efforts to be more customer-oriented and market driven, and adjusting the Company's overall cost structure given current sales levels. The charge included $17.0 million of severance for a reduction in workforce of approximately 700 personnel (approximately 13%), $5.1 million for redundant facilities, $22.8 million for abandonment of technologies that no longer fit with the Company's strategic focus, and $3.0 million for other related charges. Of the total $47.9 million fiscal 2000 restructuring charge, cash payments of $21.6 million have been paid out as of January 31, 2002. After writing off certain non-cash charges, accruals of $3.2 million remain as of January 31, 2002, primarily related to excess facility and long-term contract charges to be paid out over the contract terms. The Company could incur additional restructuring charges in the future as it continues to develop its eBusiness strategy and react to market conditions. Employee Headcount (dollars in thousands) January 31, 2002 January 31, 2001 Change ---------------------- ---------------- ---------------- ------ Employees at end of period 6,267 4,794 30.7 % Annualized sales per average employee $ 163 $ 202 (19.2)%
Headcount increased from the first quarter of 2001, primarily due to the acquisition of Cambridge, which added approximately 2,700 employees, offset somewhat by the restructuring related reductions that occurred during the third and fourth quarters of fiscal 2001. Other Income, Net Three months ended January 31, (dollars in thousands) 2002 2001 Change ---------------------- ---- ---- ------ Other income, net $ 10,454 $ 17,831 (41.4)% Percentage of net sales 3.9% 7.3% The primary component of other income is related to investment income or losses. During the first quarter of fiscal 2002, investment income of $8.0 million was offset by investment impairment losses of $5.4 million. Investment income during the first quarter of fiscal 2001 included income of $17.3 million from equity sales offset somewhat by $2.7 million of investment impairment losses. The $5.4 million investment impairment relates to certain investments in the Company's portfolio, whose declines in market values was determined to be other than temporary. Also included in other income during the first quarter of fiscal 2002 was an $8.8 million gain on the sale of a building. Income Taxes Expense Three months ended January 31, (dollars in thousands) 2002 2001 Change ---------------------- ---- ---- ------ Income tax expense $ 3,579 $ 1,273 181.1% Percentage of net sales 1.3% 0.5% Effective tax expense rate 30.0% 28.0% The Company's effective tax rate for the first quarter of fiscal 2002 and for fiscal 2002 is estimated to be 30% compared to 28% in the first quarter of fiscal 2001 and 21% for fiscal 2001, before restructuring charges and investment impairment. The rate for the first quarter of fiscal 2002 differs from the effective tax rates for the first quarter of fiscal 2001 and for fiscal 2001 primarily as a result of changes in the forecasted income before taxes for fiscal 2002. Net Income (Loss) and Net Income (Loss) Per Share (dollars in thousands, except Three months ended January 31, ------------------------------ per share data) 2002 2001 Change ---- ---- ------ Income before accounting change $ 8,351 $ 3,274 155.1% Percentage of net sales 3.1% 1.3 % Net income (loss) $ 8,351 $(7,774) 207.4% Percentage of net sales 3.1% (3.2)% Income per share, before accounting change - basic $ 0.02 $ 0.01 Net income (loss) per share - basic $ 0.02 $ (0.02) Income per share, before accounting change - diluted $ 0.02 $ 0.01 Net income (loss) per share - basic $ 0.02 $ (0.02)
Liquidity and Capital Resources January 31, 2002 October 31, 2001 Change ---------------- ---------------- ------ Cash and short-term investments (000s) $735,519 $705,243 4.3% Percentage of total assets 40.2% 37.0%
Cash and short-term investments increased by $30.3 million to $735.5 million at January 31, 2002, up from $705.2 million at October 31, 2001. During the first three months of fiscal 2002, cash and short-term investments increased primarily due to $20.7 million provided from operating activities, $16.1 million cash received from the sale of a building, and $1.7 million from the net issuance of common stock. These cash inflows were offset by cash outflows of $5.8 million for net purchases of long-term investments and other long-term investing activities and $2.5 million to purchase property, plant and equipment. Included in the $20.7 million of cash provided from operating activities was approximately $43.0 million of cash payments made during the quarter related to fiscal 2001 merger and restructuring actions accrued at October 31, 2001. The Company's short-term investment portfolio is diversified among security types, industry groups, and individual issuers. To achieve potentially higher returns, a portion of the Company's investment portfolio is invested in equity securities and mutual funds, which incur market risk. The Company's short-term investment portfolio includes equity securities with gross unrealized gains of $7.0 million and gross unrealized losses of $0.3 million as of January 31, 2002. The Company monitors its investments and records losses when a decline in the investment's market value is determined to be other than temporary. The Company also invests excess cash in long-term investments through the Novell Venture account, Cambridge Technology Capital Fund I L.P. ("CTC I"), Novell Technology Capital Fund I, L.P. ("NTC I"), and strategic long-term equity investments. Investments made through the Novell Venture account, CTC I, and NTC I generally are in expansion-stage private companies, primarily small capitalization stocks, in the high-technology industry sector. The Novell Venture account funds are managed largely by external venture capitalists. CTC I and NTC I are managed internally. The value of the investments made through the Novell Venture account and CTC I are dependent on the performance, successful acquisition, and/or initial public offering of the investees. The Company monitors its investments and records losses when a decline in the investment's market value is determined to be other than temporary. The Company's principal source of liquidity has been from operations. At January 31, 2002, the Company's principal unused sources of liquidity consisted of cash and short-term investments and available borrowing capacity of approximately $7 million under its credit facilities. The Company's liquidity needs are principally for the Company's financing of accounts receivable, capital assets, strategic investments, product development and flexibility in a dynamic and competitive operating environment. During the first three months of fiscal 2002, the Company continued to generate a positive cash flow from operations. The Company anticipates being able to fund its current operations, integration, restructuring and merger-related costs, and planned capital expenditures for the foreseeable future with existing cash and short-term investments together with internally generated funds. The Company believes that borrowings under the Company's credit facilities or offerings of equity or debt securities are available if the need arises, although offerings may not be available to the Company on acceptable terms, if at all. Investments will continue in product development and in new and existing areas of technology. Cash may also be used to acquire technology through purchases and strategic acquisitions. Capital expenditures in fiscal 2002 are anticipated to be approximately $40 million, but could be reduced if the growth of the Company is less than presently anticipated. The Company also has commitments to invest up to an additional $90.8 million in externally managed venture capital funds and up to $15 million in internally managed venture capital funds over the next two to three years. During the fourth quarter of 2001, the Board of Directors extended the Company's stock repurchase program through June 30, 2003 and authorized the use of up to $400 million for the repurchase of additional outstanding shares of the Company's common stock. As of January 31, 2002, $89 million of the authorized amount had been spent to repurchase 14 million shares under this plan at an average price of $6.19 per share. There were no shares repurchased during the first quarter of fiscal 2002. Recent Pronouncements In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. The provisions of SFAS 144 will be effective for fiscal year 2002 and will be applied prospectively. The Company is currently in the process of evaluating the potential impact that the adoption of SFAS 144 will have on its consolidated financial position and results of operations. Risk Factors Affecting Future Results of Operations The Company's future results of operations involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially from historical results are the following: business conditions and the general economy; competitive factors, such as rival operating systems, directories and applications; acceptance of new products and services and price pressures; availability of third-party compatible products at below market prices; risk of nonpayment of accounts or notes receivable; risks associated with foreign operations; risk of product line or inventory obsolescence due to shifts in technologies or market demand; timing of software product introductions; further declines in the demand for information technology consulting services; risk of consulting clients terminating or reducing the scope of engagements; market fluctuations of investment securities; and litigation. Other factors may also adversely affect the Company's earnings and stock price, including but not limited to: o competition for qualified employees o competition from other product and service companies o delays in the introduction of new products and services o success of new products, technologies or services o stock market fluctuations unrelated to Company performance o failure to properly estimate costs of fixed fee engagements o failure to properly manage consulting engagements within fixed-fees agreed to by customers o inability to fully utilize consultants on client engagements The Current Economic Climate and Outlook in the Technology and Information Technology Services Sector Is Very Weak The weakened economic climate, particularly in the technology sector, has had an adverse effect on Novell's stock price and operations. Future economic projections for this sector do not anticipate a quick recovery. A continuation of the weakened economy could have further negative effects on the Company's stock price and operations in the future. Our Financial Results May Vary The Company often experiences a higher volume of sales at the end of each quarter and during the Company's fourth quarter. Because of this, fixed costs that are out of line with sales levels may not be detected until late in any given quarter and results of operations could be adversely affected. Operating results have been, and may also be affected, by other factors including, but not limited to: o timing of orders from customers and shipments to customers o product mix, including a shift from higher margin to lower margin products or services o delays or problems with our fulfillment agents o impact of foreign currency exchange rates on the price of our products in international locations o inability to respond to the decline in sales through the distribution channel o inability to derive benefits from our restructurings and new corporate strategy o inability to deliver solutions as expected by our consulting customers o differences in estimates versus actual results We Compete in a Challenging Market for Computer Software and Consulting Services Novell competes in a highly challenging market for computer software. One pervasive factor underlying all of the Company's business endeavors is the presence of Microsoft in all sectors of the software business, and Microsoft's dominance in many of those sectors. In a finding upheld by the Circuit Court for the District of Columbia, the United States District Court found that Microsoft violated Section 2 of the Sherman Act by unlawfully acting to maintain its monopoly over desktop operating systems. The Company believes that Microsoft is exploiting its desktop operating monopoly in a way that is designed to extend its market power into the market for server operating systems, and to claim control of network and web services such as authentication, using many of the same anti-competitive practices found by the United States District Court to be in violation of the nation's anti-trust laws. The Company is concerned that the Second Revised Proposed Final Judgment of the litigation between the Department of Justice and Microsoft will not benefit competition or consumers in a meaningful way and, if approved, could result in continued harm to the Company. Additionally, the Company does not have the product breadth and market power of Microsoft. Microsoft's ability to ship networking products with features and functionality that compete with Novell's, together with its ability to offer incentives to customers to purchase certain products in order to obtain favorable sales terms or necessary compatibility or information with respect to other products, may significantly inhibit Novell's ability to grow its business. Microsoft has significant financial resources, which could allow it to aggressively price its products and services for long periods of time to the potential detriment of competitors. Microsoft in the past has also employed tactics that limit or block effective and efficient interoperability with Novell's products. Microsoft frequently bundles software features into its operating system for free which compete directly with stand-alone products from Novell. As Microsoft creates new operating systems and applications, there can be no assurance that Novell will be able to ensure its products will be compatible with those of Microsoft. Although these market conditions and the judgments reached in litigation concerning Microsoft may affect overall Novell performance, the Company believes its strong product offering and "One Net" business strategy will be competitive in the marketplace. Additionally, if the more meaningful relief being sought by the nine litigating states is imposed on Microsoft, there could be a restoration of competition in the marketplace that would benefit Novell. The market for consulting services is highly competitive due to such factors as the existence of several large consulting firms specializing in the information systems area such as Compaq Computer Corporation, Hewlett-Packard Company, IBM, Accenture, Cap Gemini and the three remaining consulting arms of the "Big Five" accounting firms. Many of these companies have greater financial, technical and marketing resources and greater name recognition in the consulting area, which could inhibit the Company's ability to grow its consulting business. Additionally, the Company may face competition from other industry companies, which could introduce competitive products and/or services. If any of these competing products or services achieves market acceptance, Novell's business and results of operations could be materially adversely affected. Novell believes that additional factors that affect success in the marketplace include technical innovation to meet dynamic market needs, marketing strength, system performance, customer service and support, reliability, ease of use, security, and price compared to performance. Novell seeks to address all of these factors with its marketing and product development. However, these factors are also addressed by competitors, including Microsoft, in ways that may cause Novell's chances of success to be diminished. We Face Intense Competition for Qualified Personnel in the Computer and Consulting Industries The ability of the Company to maintain its competitive technological position will depend, in large part, on its ability to attract and retain highly qualified development, consulting, and managerial personnel. Competition for such personnel is intense and there is a risk of departure due to the competitive environment in the software and consulting industries. The loss of a significant group of key personnel would adversely affect the Company's performance. The failure to successfully promote and hire suitable replacements in a timely manner could have a material adverse effect on the Company's business. We Depend on a Number of Key Executives Who Have Recently Joined Us and Whom We May Not Be Able to Retain Most members of our senior management have recently joined us. Many of these individuals have not previously worked with one another, and it will take time for the management team to become integrated and work effectively together. It may also take time for these individuals to effect change within the organizations that lie within their respective areas of responsibility. Due to the competitive nature of our industry, we may not be able to retain all of our senior managers. Although Our Acquisition of Cambridge Was Intended to Result in Benefits to the Combined Company, those Benefits May Not Be Realized. Additionally, Neither Novell nor Cambridge Is Experienced in Organizing an Integration of Businesses of this Complexity and Scale Achieving the benefits of the Cambridge acquisition will depend in part on the successful integration of personnel, operations and technology. The integration of the two companies has been and will be a complex, time consuming and expensive process and may continue to disrupt Novell's business if not completed in a timely and efficient manner. The challenges involved in this integration include the following: o Obtaining synergies from the companies' professional services organizations; o Obtaining synergies from the companies' service and product offerings effectively and quickly; o Coordinating sales efforts so that customers can do business easily with the combined company; o Integrating technology, back office, human resources, accounting and financial systems; o Bringing together marketing efforts so that the market receives useful information about the combined company; o Assimilating our employees into a common business culture; and o Retaining key officers and employees who possess the necessary skills and experience to quickly and effectively transition and integrate the businesses. Neither Novell nor Cambridge has experience in integrating operations on the complexity and scale presented by the merger. The integration process has been and will continue to be complicated and has been and will continue to involve a number of special risks and challenges, including the possibility that management may be distracted from regular business operations. It is not certain that Novell and Cambridge can be successfully integrated in a timely manner or that the anticipated benefits will be realized. Failure to effectively complete the integration could materially harm the business and operating results of the combined company. In addition, goodwill related to the acquisition of Cambridge could become impaired. We Have Experienced Delays in the Introduction and Acceptance of New Products and Solutions Due to Various Factors As is common in the computer software industry, Novell has in the past experienced delays in the introduction of new products due to a number of factors, including the complexity of software products, the need for extensive testing of software to ensure compatibility of new releases with a wide variety of application software and hardware devices, and the need to "debug" products prior to extensive distribution. Novell could, in the future, experience the same difficulties in introducing new solutions. Significant delays in developing, completing or shipping new or enhanced products and solutions would adversely affect the Company. Moreover, the Company may experience delays in market acceptance of new releases of its products and solutions as the Company engages in marketing and education of the user base regarding the advantages and system requirements for new products and solutions, and as customers evaluate the advantages and disadvantages of upgrading. The Company has encountered these issues on each major new release of its products, and expects that it will encounter such issues in the future. Novell's ability to achieve desired levels of sales growth depends at least in part on the successful completion, introduction and sale of new versions of its products and sales of its solutions. There can be no assurance that the Company will be able to respond effectively to technological changes or new product announcements by others, or that the Company's research and development efforts will be successful. Should Novell experience material delays or sales shortfalls with respect to new product or solutions releases, the Company's sales and net income could be adversely affected. If Third Parties Claim that We Infringed Upon Their Intellectual Property, Our Ability to Use Some Technologies and Products Could Be Limited and We May Incur Significant Costs to Resolve these Claims Litigation regarding intellectual property rights is common in the Internet and software industries. Novell expects third-party infringement claims involving Internet technologies and software products and services to increase. If an infringement claim is filed against Novell, it may be prevented from using some technologies and may incur significant costs to resolve the claim. Novell has in the past received letters suggesting that it is infringing upon the intellectual rights of others, and it may from time to time encounter disputes over rights and obligations concerning intellectual property. Novell's products and services may be found to infringe on the intellectual property rights of third parties. In addition, Novell has agreed, and may agree in the future, to indemnify customers against claims that its products infringe upon the intellectual property rights of others. Novell could incur substantial costs in defending itself and its customers against infringement claims. In the event of a claim of infringement, Novell and its customers may be required to obtain one or more licenses from third parties. In such instances, Novell or its customers may not be able to obtain necessary licenses from third parties at a reasonable cost or at all. We May Not Be Able to Protect Our Confidential Information, Which May Adversely Affect Our Business The Company generally enters into contractual relationships with its employees that protect its confidential information. In the event that the Company's trade secrets or other proprietary information are misappropriated, the Company's business could be seriously harmed. In addition, the Company may not be able to timely detect unauthorized use of its intellectual property and take appropriate steps to enforce its rights. In the event the Company is unable to enforce these contractual obligations, its business could be adversely affected. We May Not Be Successful at Introducing New Technologies One goal of the Company is to achieve widespread acceptance and adoption of Novell's Net Services and e-solutions products, Directory Services ("NDS"), and the products and applications that take advantage of directory services. The Company's ability to achieve success with its Net Services and NDS solutions is dependent on a number of factors including, but not limited to, the following: development of key Net Services and directory products and upgrades, the acceptance of those products by large industry partners, the marketing of those products through appropriate channels of distribution, and the acceptance of those products in major accounts. The Company has only had limited success in introducing new technologies and there can be no assurance of success with Net Services or NDS solutions. Our Existing Product Sales May Deteriorate More Rapidly Than Sales of Our New Products Increase The Company has several existing products, which it has been selling and upgrading for many years. Technology shifts or competition could occur causing sales of these products to decline at a faster rate than the Company is able to increase sales of new products or technologies. Although sales s from Net Directory Services increased during the first quarter of fiscal 2002, sales s from Net Management Services decreased by 18%, resulting in overall declines in net product sales by 13% in the first quarter of fiscal 2002 compared to the same period of fiscal 2001. We Face Increased Risks in Conducting a Global Business, Which May Damage Business Results Novell is a multi-national corporation with offices and subsidiaries around the world and, as such, it faces risks in doing business abroad that it does not face domestically. Certain aspects inherent in transacting business internationally could negatively impact the operating results of the Company, including: o costs and difficulties in staffing and managing international operations; o unexpected changes in regulatory requirements; o tariffs and other trade barriers; o difficulties in enforcing contractual and intellectual property rights; o longer payment cycles; o local political, social and economic conditions; o potentially adverse tax consequences, including restrictions on repatriating earnings and the threat of "double taxation"; and o fluctuations in currency exchange rates. Some of Our Short-term, Long-term, and Venture Capital Fund Investments Have Become Impaired. Additional Investments Could Become Impaired Novell's investment portfolio includes investments in public equity securities, small capitalization stocks in the high-technology industry sector, and funds managed by venture capitalists. Many of these investments have lost a significant portion of their value at least on a short-term basis, and possibly on a permanent basis. Additional investments may also lose value. During the first quarter of fiscal 2002, Novell recorded an impairment charge of $5 million related to some of the long-term investments in its portfolio whose market value had experienced an other-than-temporary decline. As of January 31, 2001, the Company had net unrealized gains or approximately $5 million, net of taxes, on investments. However, there can be no assurances that these gains will be realized and that losses will not occur. Our Existing Relationships With Other Information Technology Services Organizations May Be Impaired Novell relies on existing relationships with information technology services organizations that recommend, design and implement solutions for their customers that include Novell Net services products. A change in the willingness of these information technology service organizations to do business with Novell could undercut Novell's efforts to become a solutions-based Net services software company. Our Business May Be Negatively Affected if We Do Not Continue to Adapt to Rapid Technological Change, Evolving Business Practices and Changing Consumer Requirements The software industry and Internet professional services market is characterized by rapidly changing technology, evolving business practices and changing client needs. Accordingly, Novell's future success will depend in part on its ability to continue to adapt and meet these challenges. Among the most important challenges facing the Company are the need to continue to: o effectively identify and use leading technologies; o develop strategic and technical expertise; o influence and respond to emerging industry standards and other technology changes and to orient management teams to capitalize on these changes; o recruit and retain qualified project personnel; o enhance current services; o develop new services that meet changing customer needs; and o effectively advertise and market services. Our Services Contracts Contain Pricing Risks Novell's Cambridge IT services business derives a significant portion of its sales from fixed-price, fixed-time contracts. Because of the complex nature of the services provided, it is sometimes difficult to accurately estimate the cost, scope and duration of particular client engagements. If the Company does not accurately estimate the resources required for a project, does not accurately assess the scope of work associated with a project, does not manage the project properly, or does not satisfy its obligations in a manner consistent with the contract, then the Company's costs to complete the project could increase substantially. The Company has occasionally had to commit unanticipated additional resources to complete projects, and it may have to take similar action in the future. The Company may not be compensated for these additional costs or the commitment of these additional resources. Our Cambridge IT Services Clients Can Cancel or Reduce the Scope of Their Engagements With Us on Short Notice If the Company's clients cancel or reduce the scope of an engagement with the Cambridge IT services business, the Company may be unable to reassign its professionals to new engagements without delay. Personnel and related costs constitute a substantial portion of the Company's operating expenses. Because these expenses are relatively fixed, and because the Company establishes the levels of these expenses well in advance of any particular quarter, cancellations or reductions in the scope of client engagements could result in the under-utilization of the Company's professional services employees, causing significant reductions in operating results for a particular quarter. Our Stock Price Will Fluctuate The Company's future earnings and stock price could be subject to significant volatility, particularly on a quarterly basis. Due to analysts' expectations of continued growth, any shortfall in earnings can be expected to have an immediate and significant adverse effect on the trading price of Novell's Common Stock in any given period. Sales fluctuations may also contribute to the volatility of the trading price of Novell Common Stock in any given period. In addition, the market prices for securities of software companies have been very volatile recently and historically they have also been volatile as well. The market price of Novell Common Stock, in particular, has been subject to wide fluctuations in the past. As a result of the foregoing factors and other factors that may arise in the future, the market price of Novell's Common Stock may be subject to significant fluctuations within a short period of time. These fluctuations may be due to factors specific to the Company, to changes in analysts' earnings estimates, or to factors affecting the computer industry or the securities markets in general. Item 3. Qualitative and Quantitative Disclosures About Market Risk The Company is exposed to financial market risks, including changes in interest rates, foreign currency exchange rates and marketable equity security prices. To mitigate some of these risks, the Company utilizes currency forward contracts and currency options. The Company does not use derivative financial instruments for speculative or trading purposes, and no derivative financial instruments were outstanding at January 31, 2002. Interest Rate Risk The primary objective of the Company's investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified short-term investments, consisting primarily of investment grade securities, substantially all of which either mature within the next 12 months or have characteristics of short-term investments. A hypothetical 50 basis point increase in interest rates would result in an approximate $2.2 million decrease (less than 0.5%) in the fair value of the Company's available-for-sale securities. Market Risk The Company also holds available-for-sale equity securities in its short-term investment portfolio. As of January 31, 2002, unrealized gains, before tax effect, on short-term public equity securities totaled $3 million. A 10% adverse change in prices of these short-term equity securities would result in an approximate $1.3 million decrease in the fair value of the Company's short-term investments. In addition, the Company invests in equity securities, included in its long-term portfolio of investments, for the promotion of business and strategic objectives. These investments are generally in small capitalization stocks in the high-technology industry sector, both public and private. Because of the nature of these investments, the Company is exposed to equity price risks. The Company typically does not attempt to reduce or eliminate its market exposure on these securities. A 10% adverse change in equity prices of long-term equity securities would result in an approximately $11 million decrease in the fair value of the Company's available-for-sale long-term securities. Foreign Currency Risk The Company hedges currency risks of investments denominated in foreign currencies with currency forward contracts. Gains and losses on these foreign currency investments would generally be offset by corresponding losses and gains on the related hedging instruments, resulting in negligible net exposure to the Company. A large portion of the Company's sales , expense and capital purchasing activities are transacted in U.S. dollars. However, the Company does enter into transactions in other currencies, primarily European, Japanese yen and certain other Latin American and Asian currencies. To protect against reductions in value caused by changes in foreign exchange rates, the Company has established balance sheet hedging programs. Currency forward contracts and currency options are utilized in these hedging programs. The Company's hedging programs reduce, but do not always entirely eliminate, the impact of foreign currency exchange rate movements. If the Company did not hedge against foreign currency exchange rate movement, an adverse change of 10% in exchange rates would result in a decline in income before taxes of approximately $7.5 million. All of the potential changes noted above are based on sensitivity analyses performed on the Company's financial position at January 31, 2002. Actual results may differ materially. Part II. Other Information Except as listed below, all information required by items in Part II is omitted because the items are inapplicable or the answer is negative. Item 1. Legal Proceedings. The information required by this item is incorporated herein by reference to Footnote H of the Company's financial statements contained in Part I, Item 1 of this Form 10-Q. Item 4. Submission of Matters to a Vote of Security Holders None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number Description 3.2 By-Laws, as amended and restated February 26, 2002 10.1 Separation agreement between Novell, Inc. and Rich Nortz, dated July 12, 2001 10.2 Letter agreement between Novell, Inc. and RRE Advisors, LLC, dated December 15, 1995 (b) Reports on Form 8-K. Notice of Novell's scheduled report of fourth quarter results and related conference call to be held on November 29, 2001, as filed on November 6, 2001 under Item 5. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Novell, Inc. (Registrant) Date: March 15, 2002 /s/ Ronald C. Foster ----------------------- Ronald C. Foster Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) EX-3.(II) 3 ex32.txt AMENDED AND RESTATED BYLAWS Adopted February 26, 2002 Adopted February 11, 2002 Adopted November 12, 2001 Adopted September 21, 1998 Adopted May 27, 1998 Adopted Feb. 16, 1995 BY-LAWS OF NOVELL, INC. (A DELAWARE CORPORATION) ARTICLE I OFFICES AND FISCAL YEAR SECTION 1.01. Registered Office. The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware until otherwise established by a vote of a majority of the board of directors in office, and a statement of such change is filed in the manner provided by statute. SECTION 1.02. Other Offices. The corporation may also have offices at such other places within or without the State of Delaware as the board of directors may from time to time determine or the business of the corporation requires. SECTION 1.03. Fiscal Year. The fiscal year of the corporation shall end on the last day of October in each year. ARTICLE II Meetings of Stockholders SECTION 2.01. Place of Meeting. All meetings of the stockholders of the corporation shall be held at the registered office of the corporation, or at such other place within or without the State of Delaware as shall be designated by the board of directors in the notice of such meeting. SECTION 2.02. Annual Meeting. The board of directors may fix the date and time of the annual meeting of the stockholders, but if no such date and time is fixed by the board, the meeting for any calendar year shall be held on the Second Tuesday of March in such year, if not a legal holiday, and if a legal holiday then on the next succeeding business day at 10:00 o'clock A.M., and at said meeting the stockholders then entitled to vote shall elect directors and shall transact such other business as may properly be brought before the meeting. SECTION 2.03. Special Meetings. Special meetings of the stockholders of the corporation for any purpose or purposes for which meetings may lawfully be called, may be called at any time by the chairman of the board, a majority of the board of directors, the president, or at the request, in writing, of stockholders owning a majority of the amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. At any time, upon written request of any person or persons who have duly called a special meeting, which written request shall state the purpose or purposes of the meeting, it shall be the duty of the secretary to fix the date of the meeting to be held at such date and time as the secretary may fix, not less than ten nor more than sixty days after the receipt of the request, and to give due notice thereof. If the secretary shall neglect or refuse to fix the time and date of such meeting and give notice thereof, the person or persons calling the meeting may do so. SECTION 2.04. Notice of Meetings. Written notice of the place, date and hour of every meeting of the stockholders, whether annual or special, shall be given to each stockholder of record entitled to vote at the meeting not less than ten nor more than sixty days before the date of the meeting. Every notice of a special meeting shall state the purpose or purposes thereof. SECTION 2.05. Quorum, Manner of Acting and Adjournment. The holders of a majority of the stock issued and outstanding (not including treasury stock) and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute, by the certificate of incorporation or by these by-laws. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At any such adjourned meeting, at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. When a quorum is present at any meeting, the vote of the holders of the majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the applicable statute or these by-laws, a different vote is required in which case such express provision shall govern and control the decision of such question. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Except upon those questions governed by the aforesaid express provisions, the stockholders present in person or by proxy at a duly organized meeting can continue to do business until adjournment, notwithstanding withdrawal of enough stockholders to leave less than a quorum. SECTION 2.06. Organization of Annual Stockholder's Meeting. The Chairman of the Board of Directors shall preside at each meeting of shareholders. In the absence of the Chairman, the meeting shall be chaired by an officer of the corporation in accordance with the following order: Vice-Chairman, President, Executive Vice President, Senior Vice President and Vice President. The Secretary or in his or her absence an Assistant Secretary or in the absence of the Secretary and all Assistant Secretaries a person whom the Chairman of the meeting shall appoint shall act as Secretary of the meeting and keep a record of the proceeding thereof. The Board of Directors of the Company shall be entitled to make such rules or regulations for the conduct of meetings of shareholders as it shall deem necessary, appropriate or convenient. Subject to the rules and regulations of the Board of Directors, if any, the Chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the Judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to shareholders of record of the Company and their duly authorized and constituted proxies, and such other persons as the Chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comment by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot, unless, and to the extent, determined by the Board of Directors or the chairman of the meeting, meetings of shareholders shall not be required to be held in accordance with rules of parliamentary procedure. SECTION 2.07. Voting. Each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of capital stock having voting power held by such stockholder. No proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. Every proxy shall be executed in writing by the stockholder or by his duly authorized attorney-in-fact and filed with the secretary of the corporation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until notice thereof has been given to the secretary of the corporation. A duly executive proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice such death or incapacity is given to the secretary of the corporation. SECTION 2.08. Consent of Stockholders in Lieu of Meeting. Any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the board of directors. Any stockholder of record or other person or entity seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the secretary, request the board of directors to fix a record date. The board of directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date (unless a record date has previously been fixed by the board of directors pursuant to the first sentence of this paragraph). If no record date has been fixed by the board of directors pursuant to the first sentence of this paragraph or otherwise within ten (10) days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or to any officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the board of directors and prior action by the board of directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be the date on which the board of directors adopts the resolution taking such prior action. In the event of the delivery, in the manner provided by the second paragraph of this Section 2.08 to the corporation of the requisite written consent or consents to take corporate action and/or any related revocation or revocations, the corporation shall appoint inspectors of elections for the purpose of promptly performing a ministerial review of the validity of the consents and/or revocations. For the purpose of permitting the inspectors to perform such review, no action by written consent without a meeting shall be effective until such date as the inspectors certify to the corporation that the consents delivered to the corporation in accordance with the second paragraph of this Section 2.08 represent at least the minimum number of votes that would be necessary to take the corporate action. Nothing contained in this Section shall in any way be construed to suggest or imply that the board of directors or any stockholder shall not be entitled to contest the validity of any consent or revocation thereof, whether before or after such certification by the inspectors, or to take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation). Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated written consent received in accordance with the second paragraph of this Section 2.08, a written consent or consents signed by a sufficient number of holders to take such action are delivered to the corporation in the manner prescribed in this Section 2.08. SECTION 2.09. Voting Lists. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting. The list shall be arranged in alphabetical order showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period or at least ten days prior to the meeting either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 2.10. Judges of Election. All elections of directors shall be by written ballot, unless otherwise provided in the certificate of incorporation; the vote upon any other matter need not be by ballot. In advance of any meeting of stockholders the board of directors may appoint judges of election, who need not be stockholders, to act at such meeting or any adjournment thereof. If judges of election are not so appointed, the chairman of any such meeting may, and upon the demand of any stockholder or his proxy at the meeting and before voting begins shall, appoint judges of election. The number of judges shall be either one or three, as determined, in the case of judges appointed upon demand of a stockholder, by stockholders present entitled to cast a majority or the votes which all stockholders present are entitled to cast thereon. No person who is a candidate for office shall act as a judge. In case any person appointed as judge fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the board of directors in advance of the convening of the meeting, or at the meeting by the chairman of the meeting. If judges of election are appointed as aforesaid, they shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the result, and do such acts as may be proper to conduct the election or vote with fairness to all stockholders. If there be three judges of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all. On request of the chairman of the meeting or of any stockholder or his proxy, the judges shall make a report in writing of any challenge or question or matter determined by them, and execute a certificate of any fact found by them. SECTION 2.11. Nominations and Proposals. Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at any meeting of stockholders only (a) pursuant to the Corporation's notice of meeting; (b) by or at the direction of the Board of Directors; or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in these by-laws, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 2.11. In addition to any other applicable legal or regulatory requirements, for nominations or other business to be properly brought before a stockholders meeting by a stockholder pursuant to clause (c) of the preceding sentence, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation, and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice must be given either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation and received by the Secretary not later than sixty (60) days prior to the first anniversary of the date on which notice of the prior year's annual meeting was first mailed to stockholders. In no event shall the public announcement of an adjournment of a stockholders meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (or any successor thereto) and Rule 14a-11 thereunder (or any successor thereto) (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner, and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. Notwithstanding any provision herein to the contrary, no business shall be conducted at a stockholders meeting except in accordance with the procedures set forth in this Section 2.11. The person presiding over the stockholders meeting shall, if the facts warrant, determine and declare at the meeting that the nomination was not properly made or that the business was not properly brought before the meeting, as the case may be, in accordance with the provisions of this Section 2.11, and, if he or she should so determine, he or she shall so declare at the meeting that any such person not properly nominated shall not be eligible to receive votes in the election of directors at the meeting or that any such business not properly brought before the meeting shall not be transacted, as the case may be. ARTICLE III Board of Directors SECTION 3.01. Powers. The board of directors shall have full power to manage the business and affairs of the corporation; and all powers of the corporation, except those specifically reserved or granted to the stockholders by statute, the certificate of incorporation or these by-laws, are hereby granted to and vested in the board of directors. SECTION 3.02. Number and Term of Office. The board of directors shall consist of such number of directors, not less than three nor more than seven, as may be determined from time to time by resolution of the board of directors. Each director shall serve until the next annual meeting of the stockholders and until his successor shall have been elected and qualified, except in the event of his death, resignation or removal. All directors of the corporation shall be natural persons, but need not be residents of Delaware or stockholders of the corporation. SECTION 3.03. Vacancies. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. SECTION 3.04. Resignations. Any director of the corporation may resign at any time by giving written notice to the president or the secretary of the corporation. Such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 3.05. Organization. At every meeting of the board of directors, the chairman of the board, if there be one, or, in the case of a vacancy in the office or absence of the chairman of the board, one of the following officers present in the order stated: the vice chairman of the board, if there be one, the president, the vice presidents in their order of rank and seniority, or a chairman chosen by a majority of the directors present, shall preside, and the secretary, or, in his absence, an assistant secretary, or in the absence of the secretary and the assistant secretaries, any person appointed by the chairman of the meeting, shall act as secretary. SECTION 3.06. Place of Meeting. The board of directors may hold its meetings, both regular and special, at such place or places within or without the State of Delaware as the board of directors may from time to time appoint, or as may be designated in the notice calling the meeting. SECTION 3.07. Organization Meeting. The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place for such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. SECTION 3.08. Regular Meetings. Regular meetings of the board of directors may be held without notice at such time and place as shall be designated from time to time by resolution of the board of directors. If the date fixed for any such regular meeting be a legal holiday under the laws of the State where such meeting is to be held, then the same shall be held on the next succeeding business day, not a Saturday, or at such other time as may be determined by resolution of the board of directors. At such meetings, the directors shall transact such business as may properly be brought before the meeting. SECTION 3.09. Special Meeting. Special meetings of the board of directors shall be held whenever called by the president or by two or more of the directors. Notice of each such meeting shall be given to each director by telephone or in writing at least 24 hours (in the case of notice by telephone) or 48 hours (in the case of notice by telegram) or five days (in the case of notice by mail) before the time at which the meeting is to be held. Each such notice shall state the time and place of the meeting to be so held. SECTION 3.10. Quorum, Manner of Acting and Adjournment. At all meetings for the board a majority of the directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Unless otherwise restricted by the certificate of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if all members of the board consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board. SECTION 3.11. Executive and Other Committees. The board of directors may, by resolution adopted by a majority of the whole board, designate an executive committee and one or more other committees, each committee to consist of one or more directors. The board may designate one or more directors as alternative members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member, and the alternate or alternates, if any, designated for such member, of any committee the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another director to act at the meeting in the place of any such absent or disqualified member. Any such committee to the extent provided in the resolution establishing such committee shall have and may exercise all the power and authority of the board of directors in the management of the business and affairs of the corporation, including the power or authority to declare a dividend or to authorize the issuance of stock, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the Delaware General Corporation Law ("DGCL"), fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), adopting an agreement of merger or consolidation under Section 251 or 252 or the DGCL, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the by-laws of the corporation; and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to Section 253 of the DGCL. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. Each committee so formed shall keep regular minutes of its meetings and report the same to the board of directors when required. SECTION 3.12. Compensation of Directors. Unless otherwise restricted by the certificate of incorporation, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. SECTION 3.13. Notification of Director Nominations. Nominations for the election of Directors may be made by the Board of Directors or by any shareholder entitled to vote for the election of Directors. Any shareholder entitled to vote for the election of Directors at a meeting may nominate persons for election as Directors only if written notice of such shareholder's intent to make such nomination is given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Company not later that (i) with respect to an election to be held at an annual meeting of shareholders, 90 days in advance of such meeting, and (ii) with respect to an election to be held at a special meeting of shareholders for the election of Directors, the close of business on the seventh day following the date on which notice of such meeting is first given to shareholders. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated, (b) a representation that such shareholder is a holder of record of stock of the Company, the number of shares currently held by such shareholder, whether or not such shareholder is entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, (c) a description of all arrangements or understandings between such shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such shareholder, (d) such other information regarding each nominee proposed by such shareholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated by the Board of Directors, and (e) the consent of each nominee to serve as a Director of the Company if elected. The Chairman of a shareholder meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. ARTICLE IV Notice - Waivers - Meetings SECTION 4.01. Notice, What Constitutes. Whenever, under the provision of the statutes of Delaware or the certificate of incorporation or of these by-laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given in accordance with Section 3.09 of Article III hereof. SECTION 4.02 Waivers of Notice. Whenever any written notice is required to be given under the provisions of the certificate of incorporation, these by-laws, or by statute, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Except in the case of a special meeting of stockholders, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice of such meeting. Attendance of a person, either in person or by proxy, at any meeting, shall constitute a waiver of notice of such meeting, except where a person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. SECTION 4.03. Conference Telephone Meetings. One or more directors may participate in a meeting of the board, or of a committee of the board, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this section shall constitute presence in person at such meeting. ARTICLE V Officers SECTION 5.01. Number, Qualifications and Designation. The officers of the corporation shall be chosen by the board of directors and shall be a president, one or more vice presidents, a secretary, a treasurer, and such other officers as may be elected in accordance with the provisions of Section 5.03 of this Article. One person may hold more than one office. Officers may be, but need not be, directors or stockholders of the corporation. The board of directors may elect from among the members of the board a chairman of the board and a vice chairman of the board who shall be officers of the corporation. SECTION 5.02. Election and Term of Office. The officers of the corporation, except those elected by delegated authority pursuant to Section 5.03 of this Article, shall be elected annually by the board of directors, and each such officer shall hold his office until his successor shall have been elected and qualified, or until his earlier resignation or removal. Any officer may resign at any time upon written notice to the corporation. SECTION 5.03. Subordinate Officers, Committees and Agents. The board of directors may from time to time elect such other officers and appoint such committees, employees or other agents as it deems necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as are provided in these by-laws, or as the board of directors may from time to time determine. The board of directors may delegate to any officer or committee the power to elect subordinate officers and to retain or appoint employees or other agents, or committees thereof, and to prescribe the authority and duties of such subordinate officers, committees, employees or other agents. SECTION 5.04. The Chairman and Vice Chairman of the Board. The chairman of the board or in his absence, the vice chairman of the board, shall preside at all meetings of the stockholders and of the board of directors, and shall perform such other duties as may from time to time be assigned to them by the board of directors. SECTION 5.05. The President. The president shall be the chief executive officer of the corporation and shall have general supervision over the business and operations of the corporation, subject, however, to the control of the board of directors. He shall sign, execute, and acknowledge, in the name of the corporation, deeds, mortgages, bonds, contracts or other instruments, authorized by the board of directors, except in cases where the signing and execution thereof shall be expressly delegated by the board of directors, or by these by-laws, to some other officer or agent of the corporation; and, in general, shall perform all duties incident to the office of the president, and such other duties as from time to time may be assigned to him by the board of directors. SECTION 5.06. The Vice Presidents. The vice presidents shall perform the duties of the president in his absence and such other duties as may from time to time be assigned to them by the board of directors or by the president. SECTION 5.07. The Secretary. The secretary, or an assistant secretary, shall attend all meetings of the stockholders and of the board of directors and shall record the proceedings of the stockholders and of the directors and of committees of the board in a book or books to be kept for that purpose; see that notices are given and records and reports properly kept and filed by the corporation as required by law; be the custodian of the seal of the corporation and see that it is affixed to all documents to be executed on behalf of the corporation under its seal; and, in general, perform all duties incident to the office of secretary, and such other duties as may from time to time be assigned to him by the board of directors or the president. SECTION 5.08. The Treasurer. The treasurer or an assistant treasurer shall have or provide for the custody of the funds or other property of the corporation and shall keep a separate book account of the same to his credit as treasurer; collect and receive or provide for the collection and receipt of moneys earned by or in any manner due to or received by the corporation; deposit all funds in his custody as treasurer in such banks or other places of deposit as the board of directors may from time to time designate; whenever so required by the board of directors, render an account showing his transactions as treasurer and the financial condition of the corporation; and, in general, discharge such other duties as may from time to time be assigned to him by the board of directors or the president. SECTION 5.09. Officers' Bonds. No officer of the corporation need provide a bond to guarantee the faithful discharge of his duties unless the board of directors shall by resolution so require a bond in which event such officer shall give the corporation a bond (which shall be renewed if and as required) in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office. SECTION 5.10. Salaries. The salaries of the officers and agents of the corporation elected by the board of directors shall be fixed from time to time by the board of directors. ARTICLE VI Certificates of Stock, Transfer, Etc. SECTION 6.01. Issuance. Each stockholder shall be entitled to a certificate or certificates for shares of stock of the corporation owned by him upon his request therefor. The stock certificates of the corporation shall be numbered and registered in the stock ledger and transfer books of the corporation as they are issued. They shall be signed by the president or a vice president and by the secretary or an assistant secretary or the treasurer or an assistant treasurer, and shall bear the corporate seal, which may be a facsimile, engraved or printed. Any of or all the signatures upon such certificate may be a facsimiles, engraved or printed. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer, transfer agent or registrar, before the certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent or registrar at the date of its issue. SECTION 6.02. Transfer. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. No transfer shall be made which would be inconsistent with the provisions of Article 8, Title 6 of the Delaware Uniform Commercial Code-investment Securities. SECTION 6.03. Stock Certificates. Stock certificates of the corporation shall be in such form as provided by statute and approved by the board of directors. The stock record books and the blank stock certificates books shall be kept by the secretary or by any agency designated by the board of directors for that purpose. SECTION 6.04. Lost, Stolen, Destroyed or Mutilated Certificates. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. SECTION 6.05. Record Holder of Shares. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. SECTION 6.06. Determination of Stockholders of Record. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty day prior to any other action. If no record date is fixed: (1) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (2) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, shall be the day on which the first written consent is expressed. (3) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. ARTICLE VII Indemnification of Directors, Officers and Other Authorized Representatives SECTION 7.01. Indemnification of Authorized Representative in Third Party Proceedings. The corporation shall indemnify any person who was or is an "authorized representative" of the corporation (which shall mean for purposes of this Article a director or officer of the corporation, or a person serving at the request of the corporation as a director, officer, or trustee, of another corporation, partnership, joint venture, trust or other enterprise) and who was or is a "party" (which shall include for purposes of this Article the giving of testimony or similar involvement) or is threatened to be made a party to any "third party proceeding" (which shall mean for purposes of this Article any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative, other than an action by or in the right of the corporation) by reason of the fact that such person was or is an authorized representative of the corporation, against expenses (which shall include for purposes of this Article attorneys' fees), judgments, penalties, fines and amounts paid in settlement actually and reasonable incurred by such person in connection with such third party proceeding if such person acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal third party proceeding (including any action or investigation which could or does lead to a criminal third party proceeding) had no reasonable cause to believe such conduct was unlawful. The termination of any third party proceeding by judgment, order, settlement, indictment, conviction or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the authorized representative did not act in good faith and in a manner which such person reasonable believed to be in or not opposed to, the best interests of the corporation, and, with respect to any criminal third party proceeding, had reasonable cause to believe that such conduct was unlawful. SECTION 7.02. Indemnification of Authorized Representatives in Corporate Proceedings. The corporation shall indemnify any person who was or is an authorized representative of the corporation and who was or is a party or is threatened to be made a party to any "corporate proceeding" (which shall mean for the purposes of this Article any threatened, pending or competed action or suit by or in the right of the corporation to procure a judgment in its favor or investigative proceeding by the corporation) by reason of the fact that such person was or is an authorized representative of the corporation, against expenses actually and reasonable incurred by such person in connection with the defense or settlement of such corporate action if such person acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of such person's duty to the corporation unless and only to the extent that the Court of Chancery or the court in which such corporate proceeding was pending shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such authorized representative is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. SECTION 7.03. Mandatory Indemnification of Authorized Representatives. To the extent that an authorized representative of the corporation has been successful on the merits or otherwise in defense of any third party or corporate proceeding or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses actually and reasonably incurred by such person in connection therewith. SECTION 7.04. Determination of Entitlement to Indemnification. Any indemnification under Section 7.01, 7.02, or 7.03 of this Article (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the authorized representative is proper in the circumstances because such person has either met the applicable standard of conduct set forth in Section 7.01 or 7.02 or had been successful on the merits or otherwise as set forth in Section 7.03 and that the amount requested has been actually and reasonably incurred. Such determination shall be made: (1) By the board of directors by a majority of a quorum consisting of directors who were not parties to such third party or corporate proceeding, or (2) If such a quorum is not obtainable, or, even if obtainable, a majority vote of such a quorum so directs, by independent legal counsel in written opinion, or (3) By the stockholders. SECTION 7.05. Advancing Expenses. Expenses actually and reasonably incurred in defending a third party or corporate proceeding shall be paid on behalf of an authorized representative by the corporation in advance of the final disposition of such third party or corporate proceeding as authorized in the manner provided in Section 7.04 of this Article upon receipt of an undertaking by or on behalf of the authorized representative to repay such amount unless it shall ultimately be determined that such person is entitled to be indemnified by the corporation as authorized in this Article. The financial ability of such authorized representative to make such repayment shall not be a prerequisite to the making of an advance. SECTION 7.06. Employee Benefit Plans. For purposes of this Article, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include and excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Article. SECTION 7.07. Scope of Article. The indemnification of authorized representatives, as authorized by this Article, shall (1) not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any statute, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity, (2) continue as to a person who has ceased to be an authorized representative and (3) inure to the benefit of the heirs, executors and administrators of such a person. SECTION 7.08. Reliance on Provisions. Each person who shall act as an authorized representative of the corporation shall be deemed to be doing so in reliance upon rights of indemnification provided by this Article. ARTICLE VIII General Provisions SECTION 8.01. Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares or the capital stock of the corporation, subject to the provisions of the certificate of incorporation. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. SECTION 8.02. Annual Statements. The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. SECTION 8.03. Contracts. Except as otherwise provided in these by-laws, the board of directors may authorized any officer or officers including the chairman and vice chairman of the board of directors, or any agent or agents, to enter into any contract or to execute or deliver any instrument on behalf of the corporation and such authority may be general or confined to specific instances. SECTION 8.04. Checks. All checks, notes, bills of exchange or other orders in writing shall be signed by such person or persons as the board of directors may from time to time designate. SECTION 8.05. Corporate Seal. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. SECTION 8.06 Deposits. All funds of the corporation shall be deposited from time to time to the credit of the corporation in such banks, trust companies, or other depositories as the board of directors may approve or designate, and all such funds shall be withdrawn only upon checks signed by such one or more officers or employees as the board of directors shall from time to time determine. SECTION 8.07 Corporate Records. At least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of and number of shares registered in the name of each stockholder, shall be open to the examination of any stockholder, for any purpose germane to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Every stockholder shall, upon written demand under oath stating the purpose thereof, have a right to examine, in person or by agent or attorney, during the usual hours for business, for any proper purpose, the stock ledger, books or records of account, and records of the proceedings of the stockholders and directors, and make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. Where the stockholder seeks to inspect the books and records of the corporation, other than its stock ledger or list of stockholders, the stockholder shall first establish (1) compliance with the provisions of this section respecting the form and manner of making demand for inspection of such document; and (2) that the inspection sought is for a proper purpose. Where the stockholder seeks to inspect the stock ledger or list of stockholders of the corporation and has complied with the provisions of this section respecting the form and manner of making demand for inspection of such documents, the burden of proof shall be upon the corporation to establish that the inspection sought is for an improper purpose. Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonable related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger and the stock list and to make copies or extracts therefrom. The court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the court may deem just and proper. SECTION 8.10. Amendment of By-Laws. These by-laws may be altered, amended or repealed or new by-laws may be adopted by the stockholders or by the board of directors, when such power is conferred upon the board of directors by the certificate of incorporation, at any regular meeting of the stockholders or of the board of directors or at any special meeting of the stockholders or of the board of directors if notice of such alteration, amendment, repeal or adoption of new by-laws be contained in the notice of such special meeting. EX-10 4 ex101.txt EXHIBIT 10.1 Mr. Richard A. Nortz July 12, 2001 Page 15 [NOVELL, INC. LETTERHEAD] July 12, 2001 Mr. Richard A. Nortz 11826 Hidden Canyon Lane Sandy, Utah 84092 Dear Rich: This letter agreement (the "Agreement") confirms the agreement that we have reached regarding your separation from employment with Novell, Inc. ("Novell" or the "Company"). The purpose of this Agreement is to establish an amicable arrangement for ending your employment relationship, to release the Company and its affiliates from any claims that you may have against any of them, and to permit you to receive certain separation pay, acceleration of vesting of stock options, and related benefits. You understand that the benefits under this Agreement are greater than those offered to you in lieu of those for which you otherwise might be eligible under the Novell, Inc. Senior Management Severance Plan ("Plan"). You acknowledge that you are entering into this Agreement voluntarily. By entering into this Agreement, you understand that you are giving up your right to the fullest extent permitted by law to bring legal claims against the Company including, among others, claims relating to your employment and its termination. If you were not to enter into this Agreement and were to bring any claims against the Company, the Company would dispute the merits of those claims and would contend that it acted lawfully and for good business reasons with respect to you. Neither the Company nor you want your employment relationship to end with a legal dispute. You understand that by offering to enter into this Agreement the Company is not admitting in any way that it violated any legal obligation that it owed to you or to any other person. To the contrary, the Company's willingness to enter into this Agreement demonstrates that it is continuing to deal with you fairly and in good faith. With those understandings and in exchange for the promises of you and the Company set forth below, you and the Company agree as follows: 1. Effective Date This Agreement shall be deemed to have been executed as of the date of your signature below (the "Execution Date"). The Agreement shall become effective on the eighth (8th) day following the Execution Date (the "Effective Date") unless you exercise your right to revoke in accordance with Section 13 below. 2. Resignation You hereby resign from your employment with Novell effective as of January 31, 2002 provided that the Company may accelerate said resignation on 30 days advance notice (January 31, 2002 or such earlier date selected by the Company hereafter referred to as the "Resignation Date"). You agree that on the Resignation Date all offices and positions that you hold with Novell and all related or affiliated entities also terminate. The Company will pay to you all base salary earned by you through the Resignation Date and all accrued but unused vacation pay due to you based on your employment through the Resignation Date. 3. Interim Employment (a) You acknowledge and agree that between the date of this letter and the Resignation Date (the "Interim Period") that you shall report to Novell's Chief Operating Officer and shall perform such tasks as may be assigned to you, including transitioning various matters to the Company's five geographic presidents. (b) Your eligibility for Severance Payments, Additional Severance and other payments and benefits under Sections 3 and 4 above (collectively, the "Severance Benefits") hereunder will terminate if, prior to the Resignation Date, you voluntarily resign from your employment with the Company without the consent of the Company or your employment is terminated by the Company for "cause." For purposes of this Agreement, Novell shall be deemed to have cause to terminate your employment if any of the following occur and, within 14 days following your receipt of a written demand from the Company describing its basis for believing cause exists, you have failed to effectively cure such basis for cause: (i) your continued violations of your obligations to the Company which are demonstrably willful or deliberate on your part; (ii) your engaging in willful misconduct which is injurious to the Company or its affiliates; (iii) your commission of a felony, an act fraud against or the misappropriation of property belonging to the Company or its affiliates; (iv) your breach, in any material respect, of the terms of any confidentiality or proprietary information agreement between you and the Company, including without limitation any breach by you of your obligations under Section 8 hereinbelow; or v) a determination by the Company's Chief Operating Officer and Chief Executive Officer that you have committed a material violation of the Standards of Employee Conduct, which standards may be altered from time to time by the Company, as defined in the most current version of the Company's Employee Handbook. You understand and agree that the foregoing definition of cause applies only for purposes of this Agreement, but is not intended to amend or modify the at-will nature of your employment relationship. (c) During the Interim Period, your Base Salary shall remain at an annualized rate of $425,000 per year. 4. Payments In exchange for and subject to the terms and conditions of this Agreement, including, without limitation, the general releases of claims in Section 7 (including the subsequent delivery of the release contemplated by Section 7(d)), Novell shall: (a) Pay you Eight Hundred and Fifty Thousand Dollars ($850,000) (i.e., an amount equal to 200% of your Base Salary (the "Severance Payment"). The Severance Payment shall be paid by check or wire transfer, as you direct, by the Company to you in equal installments over twenty-four (24) months, such installments payable in accordance with Novell's regular payroll practices for senior executives, subject to your continuing compliance with Section 8 below, with the first such payment being made on the first regular payroll date next following the Resignation Date. For purposes of this Agreement, the term "Base Salary" shall mean your gross base salary on an annualized basis, exclusive of bonuses, commissions and other incentive pay, as in effect immediately prior to the Resignation Date. (b) Pay you Five Hundred and Ten Thousand Dollars ($510,000) (the "Additional Severance"). Subject to your continuing compliance with Section 8 below, the Additional Severance shall be paid by check or wire transfer, as you direct, by the Company to you as follows: (i) Two Hundred and Fifty-Five Thousand Dollars ($255,000) in a lump sum within 14 days following the Resignation Date and (ii) Two Hundred and Fifty-Five Thousand Dollars ($255,000) payable in four (4) equal quarterly installments of Sixty-Three Thousand Seven Hundred and Fifty Dollars ($63,750) each, with the first such installment due three (3) months following the Resignation Date and the final installment due fifteen (15) months following the Resignation Date. (c) Accelerate the vesting of that portion or portions of your stock options and restricted stock grants, which would have vested within two years after the Resignation Date. Subject to the original term of the option grant or grants, the vested options shall otherwise remain exercisable, subject to your continuing compliance with Section 8 below, for a period of up to twelve (12) months following the Resignation Date (January 31, 2002). The Company hereby waives its repurchases rights with respect to vested restricted stock. (d) Provide you with reimbursement for financial planning and tax return preparation, not to exceed Eleven Thousand Dollars ($11,000) in the aggregate, for each of calendar year 2001 and 2002. 5. Benefits Your eligibility to participate in all Company employee benefit plans and programs will cease effective on or after the Resignation Date pursuant to applicable benefit plan terms and benefit practices. Any continuing rights to benefits that you may have are governed by the terms of those benefit plans and programs and the Consolidated Omnibus Budget Reconciliation Act of 1986, as amended. The Company shall pay you a monthly amount equal to the premium it would have paid on your behalf if you had remained employed, under your health and dental plan elections in effect as of the Resignation Date, until the earlier of the date on which you become eligible for health or dental coverage through another employer or the second (2nd) anniversary of the Resignation Date. 6. Tax Deductions and Reporting Novell shall reduce all payments made to you under this Agreement by those deductions and withholdings that it reasonably determines to be required for tax purposes and shall make such tax-related reporting that it reasonably determines to be required with respect to payments under this Agreement. 7. General Releases of Claims You voluntarily release and discharge Novell and its affiliates and subsidiaries, its and their respective predecessors, successors, and assigns, and the current and former officers, directors, investors, shareholders, employees, and agents of the foregoing (any and all of which hereinafter are referred to as the "Released Parties") generally from all charges, complaints, claims, promises, agreements, causes of action, damages, and debts of any nature whatsoever, known or unknown (collectively referred to as "Claims"), which you have, claim to have, ever had, or ever claimed to have had against the Released Parties. This general release of Claims includes, without implication of limitation, all Claims related to your employment with the Company, the compensation provided to you by the Company, rights or benefits under the Plan, the circumstances of your termination from employment with the Company, or your activities on behalf of the Company, including, without implication of limitation, any Claims of wrongful discharge, breach of contract, breach of an implied covenant of good faith and fair dealing, tortious interference with advantageous relations, any intentional or negligent misrepresentation, and unlawful discrimination or retaliation under any federal, state or local common law, statute, order, ordinance or regulation (including, without implication of limitation, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, The Americans with Disabilities Act and any similar California state or local law or ordinance). You also waive any Claim for reinstatement, damages of any nature, severance pay, attorney's fees, or costs. Notwithstanding anything in this general release to the contrary, this general release shall not be construed to limit your right to enforce this Agreement. (a) You shall not hereafter pursue or accept damages or other relief in any type of claim or action against any of the Released Parties with respect to anything that has occurred up to your execution of this Agreement; provided, however, that nothing in this Agreement shall be construed to limit your rights under this Agreement. (b) You hereby represent and warrant that you have not heretofore assigned any Claim otherwise released pursuant to this Agreement to any third party. You further represent and warrant that you have not heretofore filed any Claim with any court or administrative agency. (c) As a condition precedent to the Company's obligation to provide to you the Severance Benefits, you shall execute on or after the Resignation Date, deliver to the Company and not revoke the additional Release attached hereto as Exhibit A. 8. Employee Covenants In accordance with the terms of this severance offer, the Company's obligation to provide and your eligibility to receive the Severance Benefits are expressly conditioned upon your compliance with the following covenants. You understand and acknowledge that, in accordance with the terms of this severance offer, in the event you breach your obligations to the Company under the following covenants, the Company's obligation to provide Severance Benefits to you shall cease, without prejudice to any other remedies that may be available to the Company. (a) Covenant Concerning Confidential Information. You acknowledge that, by reason of your duties for Company you had access to and were brought into frequent contact with and became informed of confidential or proprietary information which the Company possesses or to which the Company has access, and which related to the Company and/or its business, is not generally known to the public or in the trade and is a competitive asset and/or constitutes a "trade secret," as that term is defined by the laws of Utah, of the Company (collectively, "Confidential Information"). You further acknowledge and agree that Confidential Information includes, without limitation, all information, whether reduced to writing (or in a form from which information can be obtained, translated, or derived into reasonably usable form), or maintained in your mind or memory, which derives independent economic value, actual or potential, from not being readily known to or ascertainable by proper means by others who can obtain economic value from the disclosure or use of such information, including without limitation, non-public (A) planning data and marketing strategies; (B) terms of any new products and investment strategies; (C) information relating to personnel matters; (D) financial results and information about business condition; (E) terms of any investment, management or advisory agreement or other material contract; (F) proprietary software and related documents; (G) client and prospecting lists and contact persons at such clients and prospects; (H) business relationships (prospective or otherwise); and (I) material information concerning Customers or their operations, condition (financial or otherwise) or plans. You hereby acknowledge and agree that reasonable efforts have been put forth by the Company to maintain the confidentiality of such Confidential Information. (b) You acknowledge that your employment created a relationship of confidence and trust on your part with respect to Confidential Information to which you have access during your employment, and that Confidential Information, whether compiled or created by you or the Company is and will remain the sole property of the Company. You faithfully shall keep Confidential Information in strict confidence and shall not, either directly or indirectly, at any time, make known, divulge, reveal, furnish, make available, or use Confidential Information without the prior written consent of an authorized officer of the Company. You understand and acknowledge that your obligations under this Section 8(a) will survive termination of your employment, regardless of reason, and will continue indefinitely unless and until any such Confidential Information has become, in Company's reasonable judgment, stale, or, through no fault of yours, generally known to the public or you are required by law (after providing the Company with prior notice and a prior opportunity to contest such requirement) to make disclosure. (c) You shall not, directly or indirectly, use the Company's Confidential Information to compete with the business or activities of the Company. (d) Covenant Concerning Solicitation of Customers. (i) While you remain employed by the Company and for two years from the Resignation Date (the "Restricted Period"), you shall not, in any capacity, directly or indirectly, alone or with others (A) solicit of any Customer business that is competitive with the Company's current business or planned business, (B) divert, entice, or otherwise take away from the Company the business or patronage of any Customer, (C) solicit or induce any Customer to terminate or reduce its business relationship with the Company; (D) refer a Customer to another provider of services or products competitive with those of the Company; or (E) attempt to do any of the foregoing. (ii) For purposes of this Section 8(b), "Customer" refers to any person or entity with whom you had contact in your capacity as an employee of Company and who (A) is purchasing goods or services from the Company on the Resignation Date , (B) has placed an order(s) for goods or services with the Company as of the Resignation Date, (C) regularly purchases goods or services from the Company, even if no orders are pending as of the Resignation Date, (D) has purchased goods or services from the Company within six (6) months preceding the Resignation Date, or (E) you solicited, directly or indirectly, in whole or in part, on behalf of Company within one (1) year preceding the Resignation Date. (e) Covenant Concerning Solicitation of Employees. (i) During the Restricted Period, you shall not in any capacity, directly or indirectly: (A) solicit, encourage or take any other action which is intended to induce any Person to terminate his or her employment or other relationship with the Company; (B) interfere in any manner with the contractual or employment relationship between the Company and any Person; or (C) hire or retain any Person. (ii) For purposes of this Section 8(c), the term "Person" refers to any individual who provided services to the Company, directly or indirectly, as an employee, independent contractor or consultant (other than entities and individuals working for entities such as law firms, accounting firms or management consulting firms) on or after January 1, 2001. (f) Covenant Concerning Unfair Competition. During the Restricted Period, you shall not directly or indirectly engage in (whether as employee, consultant, proprietor, partner, director of otherwise), or have any ownership interest in, or participate in the financing, operation, management or control of, any person, firm, corporation or business that is a Restricted Business in a Restricted Territory without the prior written consent of the Chief Executive Officer of Novell. You acknowledge and agree in your capacity as Senior Vice President of Field Operations for Novell, you had access to Confidential Information, including, without limitation, Novell's business plans and strategies, especially with respect to sales, marketing and product development, and that you had access to and benefited from Novell's goodwill with its customers and prospective customers. You further acknowledge and agree that your use or disclosure of Confidential Information or misappropriation of Novell's goodwill would be especially harmful to Novell. You further acknowledge and agree that it would be impossible for you to perform any services for or on behalf of a Restricted Business without using and/or disclosing (inadvertently or otherwise) Confidential Information or misappropriating (inadvertently or otherwise) goodwill of Novell. You agree that this Section 8(d) is intended to protect Confidential Information and goodwill and is reasonably and narrowly drafted for that purpose. For purposes of this Agreement, the term "Restricted Business" shall mean any of the following entities or their respective affiliates; International Business Machines; Sun Microsystems; Microsoft; Oracle; Genuity; Critical Path; Network Appliances; Cashflow; or Entegrity ("Restricted Companies"). You acknowledge and agree that in your capacity as Senior Vice President of Field Operations for Novell, you had access to Confidential Information, including, without limitation, Novell's business plans and strategies, that use or disclosure of that Confidential Information to Restricted Companies would be especially harmful to Novell and that it would be impossible for you to perform any services for or on behalf of the foregoing entities without using or disclosing (inadvertently or otherwise) Confidential Information. You agree that this Section 8(d) is intended to protect Confidential Information and is reasonably and narrowly drafted for that purpose. You further acknowledge and agree that this Section 8(d) does not prohibit or restrain you from pursuing an entire business, trade or profession and that the skills, experience and training that qualify you to be a Sr. V.P. of Field Operations are readily transferable to a wide range of business pursuits beyond the limited restrictions contained herein.. For purposes of this Agreement, the term "Restricted Territory" shall mean the counties, cities, municipalities or states of the United States. (g) Cooperation. You shall cooperate fully with Novell in the defense or prosecution of any claims or actions now in existence or which may be brought in the future against or on behalf of Novell which relate to events or occurrences that transpired while you were employed by Novell. Your full cooperation in connection with such claims or actions shall include, but not be limited to, being available to meet with counsel to prepare for discovery or trial and to act as a witness on behalf of Novell at mutually convenient times. Similarly, you shall cooperate fully with Novell in connection with any investigation or review by any federal, state or local agency or regulatory authority as any such investigation or review relates to events or occurrences that transpired while you were employed by Novell. Novell shall attempt to make requests for such cooperation so as not to interfere with your search for or performance of your subsequent employment. Novell shall provide and reimburse you for any reasonable out-of-pocket expenses incurred in connection with your performance of obligations pursuant to this Section 8(e). (h) Nondisparagement. You shall not take any action or make any statement, written or oral, to any person which disparages or criticizes Novell or its affiliates, or their officers, directors, employees, or practices, or which could disrupt or impair its or their normal operations. Novell shall direct its senior managers who are informed of this Agreement not to take any action or make any statement, written or oral, which disparages or criticizes you. (i) Return of Property. All documents, records, materials, software, equipment, and other physical property, and all copies of any of the foregoing, whether or not pertaining to Confidential Information, that have come into your possession or been produced by you in connection with your employment ("Property") have been and remain solely the property of the Company. You agree that you will return to the Company all Property immediately. (j) Disclosure of Certain Provisions. You shall disclose the existence and terms of this Section 8 to any prospective employer, partner or co-venturer prior to entering into an employment, partnership or other business relationship with such person or entity. (k) Breach. You specifically acknowledge and agree that (i) any breach by you of the provisions of Section 8 of this Agreement will result in irreparable injury to the Company, (ii) a remedy at law alone will be an inadequate remedy for such breach, and (iii) in addition to any other remedy the Company, it shall be entitled (a) to discontinue further payments to you, (b) to immediate return by you of all consideration theretofore provided to you under this Agreement, and (c) to enforce the specific performance of this Agreement by and to obtain both temporary and permanent injunctive relief without the necessity of proving actual damages. (l) Interpretation. The covenants contained herein are intended to be construed as a series of separate covenants, one for each county, city and state or other political subdivision within the United States. Except for geographic coverage, each such separate covenant shall be deemed identical in terms to the covenants contained in the preceding paragraphs. If, at any judicial proceeding, the court shall refuse to enforce any of these separate covenants (or any part thereof) deemed included in such paragraphs (after giving effect to Section 10 below), then such an unenforceable covenant (or such part) shall be deemed to be eliminated from this Agreement for the purpose of those proceedings to the extent necessary to prevent the remaining separate covenants (or portions thereof) to be enforced. 9. Confidentiality of Agreement You agree that you shall keep the terms of this Agreement terms strictly confidential except as provided in Paragraph 8(h) hereof. Notwithstanding the foregoing, nothing in this Agreement shall prevent you from making disclosure regarding the terms of this Agreement (a) to your attorneys and accountants, but only to the extent necessary to receive legal, accounting or tax advice, or (b) unless required by court order or other legal process after first providing Novell with notice and an opportunity to oppose such order or process. 10. Severability You agree that if any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the court may amend such portion or provision so as to comply with the law in a manner consistent with the intention of this Agreement, the remainder of this Agreement, or the application of such illegal or unenforceable portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of the Plan shall be valid and enforceable to the fullest extent permitted by law. 11. Applicable Law, Jurisdiction and Venue This Agreement shall be deemed to be made and entered into in the State of Utah, and shall in all respects be interpreted, enforced and governed under the internal laws of Utah, without giving effect to choice of law principles thereunder. To that extent, you hereby agree to consent to exclusive personal jurisdiction and venue of the State and Federal courts situated within or for Utah for purposes of enforcing this Agreement, and waive any objection that you might have to personal jurisdiction or venue in those courts. 12. Assignment; Successors and Assigns, etc. Neither the Company nor you may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party; provided that the Company may assign its rights under this Agreement without your consent in the event that it shall effect a reorganization, consolidate with or merge into any other corporation, partnership, organization or other entity ("Purchaser"), or transfer all or substantially all of its properties or assets to any Purchaser and provided further, the Company shall ensure that any such Purchaser assumes the remaining payment obligations under Sections 3, 4 and 5 above. This Agreement shall inure to the benefit of and be binding upon the Company and you, their respective successors, executors, administrators, heirs and permitted assigns. 13. Notices, Acknowledgments and Other Terms You are advised to consult with an attorney before signing this Agreement. This Agreement constitutes the entire agreement between you and the Company, and all previous agreements or promises between you and the Company, with the exception of those Option Agreements and Restricted Stock Agreements and the equity plan(s) to which they relate as described herein and the Intellectual Property Agreement by and between you and the Company dated October 3, 1995, are hereby superseded, null, and void. You understand and agree that this is a full and final agreement applying not only to all claims as described above that you know of, anticipate, or have been told about, but also to all claims that are unknown, unanticipated, and undisclosed to you. You acknowledge that you have been given the opportunity, if you so desire, to consider this Agreement for twenty-one (21) days before executing it. If not signed by you and returned to me so that I receive it within twenty-one (21) days of your receipt of the Agreement, this Agreement will not be valid. In addition, if you breach any of the conditions of the Agreement within the twenty-one (21) day period, the offer of this Agreement will be withdrawn and your execution of the Agreement will not be valid. In the event that you execute and return this Agreement within less than twenty-one (21) days of the date of its delivery to you, you acknowledge that such decision was entirely voluntary and that you had the opportunity to consider this letter agreement for the entire twenty-one (21) day period. You further agree that any changes to this Agreement negotiated by the parties since it was first presented to you on July 12, 2001 do not start a new twenty-one (21) day period. The Company acknowledges that for a period of seven (7) days from the date of the execution of this Agreement, you shall retain the right to revoke this Agreement by written notice that I receive before the end of such period, and that this Agreement shall not become effective or enforceable until the expiration of such revocation period. By signing this Agreement, you acknowledge that you are doing so voluntarily. You also acknowledge that you are not relying on any representations by the Company or any other representative of the Company concerning the meaning of any aspect of this Agreement. In the event of any dispute, this Agreement shall be construed as a whole, shall be interpreted in accordance with its fair meaning, and shall not be construed strictly for or against either you or the Company. The law of the State of Utah shall govern any dispute about this Agreement, including any interpretation or enforcement of this Agreement, without giving effect to the conflict of laws principles of Utah law. In the event that any provision or portion of a provision of this Agreement shall be determined to be unenforceable, the remainder of this Agreement shall be enforced to the fullest extent possible as if such provision or portion of a provision were not included. This Agreement may be modified only by a written agreement signed by you and an authorized representative of the Company. If you agree to these terms, please sign and date below and return this Agreement to me within the time limitation set forth above. Sincerely, NOVELL, INC. By: /s/ Alan J. Friedman 8/10/01 Accepted and agreed to: /s/ Richard A. Nortz Aug 6, 2001 ------------------------------------------ Richard A. Nortz Date EX-10 5 ex102.txt EXHIBIT 10.2 RRE Advisors, LLC 126 East 56th Street, New York NY 10022 James D. Robinson III Chairman & Chief Executive Officer December 15, 1995 Dear Jim: This letter will confirm our agreement that I will serve as a senior advisor to you in your role as President and CEO of Cambridge Technology Partners (CTP). My services will include advising on domestic and international strategy and business opportunities for a period of twelve months, beginning January 1, 1996. For these services, Cambridge Technology Partners shall pay a total fee in the amount of $200,000, payable to RRE Advisors, LLC (RRE), 25 percent of which is payable in the first month of each quarter, and will reimburse RRE for any reasonable related expenses. Per your request, we will provide an invoice for services thirty days before the payment is due. All non-public information that is provided to me by you, except as required by law, will be kept strictly confidential. After January 1, 1997, it is expected that this agreement will continue in effect unless cancelled within 90 days notice by either party. Should such cancellation become effective, CTP shall pay to RRE any pro rata amount of the annual fee payable and reimburse for any open expenses. Please indicate your acceptance of the terms of this letter by signing and returning the enclosed copy of this letter. Sincerely, /s/ Jim Agreed to and accepted as of This 22nd day of December, 1995 /s/ A.M. Toscanini CFO Mr. James K. Sims President and CEO Cambridge Technology Partners 304 Vassar Street Cambridge, MA 02134 Via facsimile: 617-374-8500 -----END PRIVACY-ENHANCED MESSAGE-----