<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Quarter Ended July 31, 1998
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.)
122 East 1700 South
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 prededing 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 August 31, 1998 there were 352,091,255 shares of the registrant's
common stock outstanding.
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<TABLE>
Part I. Financial Information, Item 1. Financial Statements
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS
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Jul. 31, Oct. 31,
Dollars in thousands, except per share data 1998 1997
- -----------------------------------------------------------------------------
ASSETS
Current assets
Cash and short-term investments $ 1,147,925 $ 1,033,473
Receivables, less allowances
($36,798 - July; $33,053 - October) 231,221 234,358
Inventories 4,274 10,656
Prepaid expenses 68,168 57,685
Deferred and refundable income taxes 99,879 134,210
- -----------------------------------------------------------------------------
Total current assets 1,551,467 1,470,382
Property, plant and equipment, net 347,624 373,865
Other assets 108,543 66,402
- -----------------------------------------------------------------------------
Total assets $ 2,007,634 $ 1,910,649
=============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 66,498 $ 82,759
Accrued compensation 51,334 51,397
Accrued marketing liabilities 18,281 27,728
Other accrued liabilities 63,943 85,157
Income taxes payable 52,786 --
Deferred revenue 102,632 74,915
- -----------------------------------------------------------------------------
Total current liabilities 355,474 321,956
Minority interests 16,969 23,276
Shareholders' equity
Common stock, par value $.10 a share
Authorized - 600,000,000 shares
Issued - 353,708,126 shares-July
350,937,812 shares-October 35,371 35,094
Additional paid-in capital 396,667 378,582
Retained earnings 1,248,318 1,188,361
Unearned stock compensation (6,026) (7,189)
Cumulative translation adjustment (1,341) (666)
Unrealized (loss) on investments (37,798) (28,765)
- -----------------------------------------------------------------------------
Total shareholders' equity 1,635,191 1,565,417
- -----------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,007,634 $ 1,910,649
=============================================================================
See notes to consolidated unaudited condensed financial statements.
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<TABLE>
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Fiscal Quarter Ended Nine Months Ended
------------------------ ---------------------
<S> <C> <C> <C> <C>
Amounts in thousands, Jul. 31, Jul. 31, Jul. 31, Jul. 31,
except per share data 1998 1997 1998 1997
- ------------------------------------------------------------------------------
Net sales $272,016 $ 90,074 $786,308 $738,028
Cost of sales 60,839 61,671 172,999 214,817
- ------------------------------------------------------------------------------
Gross profit 211,177 28,403 613,309 523,211
Operating expenses
Sales and marketing 93,669 97,769 293,657 341,727
Product development 54,452 69,428 170,284 209,625
General and administrative 32,970 33,711 100,002 110,959
Restructuring charges -- 55,335 -- 55,335
- ------------------------------------------------------------------------------
Total operating expenses 181,091 256,243 563,943 717,646
- ------------------------------------------------------------------------------
Income (loss) from operations 30,086 (227,840) 49,366 (194,435)
Other income (expense)
Investment income 7,390 14,619 37,245 41,154
Other, net (592) (4,736) (3,337) (11,079)
- ------------------------------------------------------------------------------
Other income, net 6,798 9,883 33,908 30,075
- ------------------------------------------------------------------------------
Income (loss) before taxes 36,884 (217,957) 83,274 (164,360)
Income tax expense (benefit) 10,328 (96,312) 23,317 (78,893)
- ------------------------------------------------------------------------------
Net income (loss) $ 26,556 $(121,645) $ 59,957 $ (85,467)
==============================================================================
Weighted average shares outstanding
Basic 353,436 349,082 352,076 347,636
Diluted 362,083 349,381 357,213 348,127
==============================================================================
Net income (loss) per share
Basic $ 0.08 $ (0.35) $ 0.17 $ (0.25)
Diluted $ 0.07 $ (0.35) $ 0.17 $ (0.25)
==============================================================================
See notes to consolidated unaudited condensed financial statements.
</TABLE>
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<PAGE>
<TABLE> NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
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Nine Months Ended
------------------------------
Jul. 31, Jul. 31,
Amounts in thousands 1998 1997
- ------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 59,957 $ (85,467)
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation and amortization 59,353 66,582
Stock plans' income tax benefits 3,408 2,970
Decrease in receivables 3,137 275,269
Decrease in inventories 6,382 1,169
(Increase) in prepaid expenses (10,483) (2,593)
Decrease (increase) in deferred
and refundable income taxes 39,522 (105,661)
Increase (decrease) in current liabilities, net 33,518 (55,082)
- ------------------------------------------------------------------------------
Net cash provided by operating activities 194,794 97,187
- ------------------------------------------------------------------------------
Cash flows from financing activities
Issuance of common stock, net 26,349 9,875
Repurchase of common stock (12,427) --
Sale of put warrants -- 2,300
Settlement of put warrants -- (20,760)
- ------------------------------------------------------------------------------
Net cash provided (used) by financing activities 13,922 (8,585)
- ------------------------------------------------------------------------------
Cash flows from investing activities
Expenditures for property, plant and equipment (42,617) (53,471)
Purchases of short-term investments (1,574,104) (1,911,290)
Maturities of short-term investments 964,366 1,425,255
Sales of short-term investments 456,464 465,559
Other (42,614) 22,321
- ------------------------------------------------------------------------------
Net cash (used) by investing activities (238,505) (51,626)
- ------------------------------------------------------------------------------
Total (decrease) increase in cash
and cash equivalents $ (29,789) $ 36,976
Cash and cash equivalents - beginning of period 208,543 145,521
- ------------------------------------------------------------------------------
Cash and cash equivalents - end of period 178,754 182,497
Short-term investments - end of period 969,171 873,370
- ------------------------------------------------------------------------------
Cash and short-term investments - end of period$ 1,147,925 $ 1,055,867
==============================================================================
See notes to consolidated unaudited condensed financial statements.
</TABLE>
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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. Actual results could differ 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 1997
Annual Report to Shareholders. These statements do include all normal
recurring adjustments which 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, have been made to the
prior years amounts in order to conform to the current year's presentation.
In the first quarter of fiscal 1997, the Company implemented a change to
its fiscal year and month ending dates. The Company now recognizes its fiscal
year end on the last calendar day of October, as opposed to prior years on the
last Saturday in October. Likewise, each fiscal month now ends on the
last calendar day of each month, and each fiscal quarter will have a unique
number of days as opposed to the consistent 13 weeks in prior years.
Implementing this change resulted in an extra five days in the first fiscal
quarter of 1997 which the Company believes did not have a material impact on
its financial position, results of operations, or cash flows.
B. Significant Events
During the third quarter of fiscal 1997, Novell took measures to reduce and
realign its resources and better manage and control its business. These
measures were in response to declines in sales of boxed products through
indirect distribution channel customers, controlled shifts to multi-product
licenses, lower licensing revenue of certain older products to OEM's, as well
as competitive pressures in the small network market. Specifically, the
Company did not ship boxed products to its indirect distribution channel
customers except to accommodate product exchanges and returns. In addition,
the Company reduced its workforce by 17%, or approximately 1,000 employees,
and consolidated a number of facilities. This resulted in a one-time
restructuring charge of $55 million, principally comprised of severance and
excess facilities costs. The restructuring charge contributed a loss of $0.10
per share, net of tax, to the reported loss in fiscal 1997.
C. Cash and Short-term Investments
All marketable debt and equity securities are included in cash and short-term
investments and are considered available-for-sale and carried at fair market
value, with the unrealized gains and losses, net of tax, included in
shareholders equity. Municipal securities included in short-term investments
have contractual maturities from 1-5 years. Money market preferreds have
contractual maturities of less than 180 days. No other short-term investments
have contractual maturities. 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.
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<TABLE>
The following is a summary of cash and short-term investments, all of which
are considered available-for-sale.
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Gross Gross Fair
Cost at Unrealized Unrealized Market Value at
(Dollars in thousands) Jul. 31, 1998 Gains Losses Jul. 31, 1998
- -----------------------------------------------------------------------------
Cash and cash equivalents
Cash $ 83,535 $ -- $ -- $ 83,535
Repurchase agreements 4,365 -- -- 4,365
Taxable money market fund 26,394 -- -- 26,394
Municipal securities 64,460 -- -- 64,460
- -----------------------------------------------------------------------------
Cash and cash equivalents$ 178,754 $ -- $ -- $ 178,754
- -----------------------------------------------------------------------------
Short-term investments
Municipal securities $ 472,437 $ 4,505 $ (65) $ 476,877
Money market mutual funds 94,459 -- -- 94,459
Money market preferreds 307,310 7 (17) 307,300
Mutual funds 15,143 22 (4) 15,161
Equity securities 141,363 32,550 (98,539) 75,374
- -----------------------------------------------------------------------------
Short-term investments $1,030,712 $ 37,084 $ (98,625) $ 969,171
- -----------------------------------------------------------------------------
Cash and short-term
investments $1,209,466 $ 37,084 $ (98,625) $1,147,925
Gross Gross Fair
Cost at Unrealized Unrealized Market Value at
(Dollars in thousands) Oct. 31, 1997 Gains Losses Oct. 31, 1997
Cash and cash equivalents
Cash $ 84,151 $ -- $ -- $ 84,151
Repurchase agreements 4,932 -- -- 4,932
Money market fund 42,581 -- -- 42,581
Municipal securities 76,879 -- -- 76,879
- ------------------------------------------------------------------------------
Cash and cash equivalents $ 208,543 $ -- $ -- $ 208,543
- ------------------------------------------------------------------------------
Short-term investments
Municipal securities $ 463,443 $ 4,551 $ (84) $ 467,910
Money market mutual funds 88,999 -- -- 88,999
Money market preferreds 150,817 -- (17) 150,800
Mutual funds 14,721 33 (1) 14,753
Equity securities 153,785 25,829 (77,146) 102,468
Short-term investments $ 871,765 $ 30,413 $ (77,248) $ 824,930
- ------------------------------------------------------------------------------
Cash and short-term
investments $1,080,308 $ 30,413 $ (77,248) $1,033,473
- ------------------------------------------------------------------------------
During the first nine months of fiscal 1998 the Company had realized gains of
$11 million on the sale of securities compared to realized gains of $8 million
in the first nine months of fiscal 1997, while realizing losses on sales of
securities of $9 million in the first nine months of fiscal 1998.
D. Income Taxes
The Company's estimated effective tax rate for the first nine months of fiscal
1998 was 28.0% compared to 48.0% in the first nine months of fiscal 1997. The
Company paid cash amounts for income taxes of $11 million and $9 million, in
the first nine months of fiscal 1998 and 1997, respectively.
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E. Commitments and Contingencies
The Company currently has a $10 million unsecured revolving bank line of
credit, with interest at the prime rate. The line can be used for either
letter of credit or working capital purposes. The line 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 July 31, 1998 there were no borrowings, letter of credit acceptances
or commitments under such line.
The Company has an additional $5 million credit facility with another
bank which is not subject to a loan agreement. At July 31, 1998 standby
letters of credit of approximately $200,000 were outstanding under this
facility.
In fiscal 1997, the Company entered into agreements to lease buildings being
constructed on land owned by the Company in San Jose, California and in Provo,
Utah. The lessor has committed to fund up to $272 million for construction
of the buildings. The leases are for a period of seven years and can be
renewed for two additional five year periods, subject to the approval of the
lender and the Company, at the sole discretion of each party. Rent
obligations will commence upon the Company's occupation of the buildings in
fiscal 1999 and fiscal 2000. If the Company does not purchase the buildings,
or arrange for the sale of the buildings, at the end of the lease, the Company
will guarantee the lessor no more than 85% of the residual value of the
buildings (approximately $272 million) as determined at the inception of the
leases. In addition, the agreement calls for the Company to maintain a
specific level of restricted cash to serve as collateral for the leases and
maintain compliance with certain financial covenants. The value of restricted
cash held as collateral at July 31, 1998 was approximately $67 million, and is
included in other assets.
In 1993, a suit was filed due to a failed contract against a company that
Novell subsequently acquired. The plaintiff obtained a jury verdict
against the acquired company in 1996. Novell does not believe that the
resolution of this legal matter will have a material adverse effect on its
financial position, results of operations, or cash flows.
In February 1998, a suit was filed against Novell and certain of its
officers and directors, alleging violation of federal securities laws. 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 case
is in its preliminary stages. Novell believes that the case is without merit,
and intends to vigorously defend against the allegations. While there can be
no assurance as to the ultimate disposition of the case, Novell does
not believe that the resolution of this litigation will have a material
adverse effect on its financial position, results of operations, or cash
flows.
The Company is a party to a number of legal claims arising in the ordinary
course of business. The Company believes the ultimate resolution of the
claims will not have a material adverse effect on its financial position,
results of operations, or cash flows.
F. Shareholders Equity
In connection with the Company's stock repurchase program, the Company sold
put warrants on 15 million shares of its common stock during the third quarter
of fiscal 1998, giving a third party the right to sell shares of Novell common
stock to the Company at contractually specified prices. The put warrants are
exercisable only at maturity, expire at various dates between December 1998
and July 1999, and can only be settled in shares.
Additionally, during the third quarter of fiscal 1998, the Company purchased
call options on 10 million shares of its common stock, giving the Company the
right to purchase shares of Novell common stock at contractually specified
prices. The call options are exercisable only at maturity and expire at
various dates between December 1998 and July 1999. The premiums received from
the sale of the put warrants offset in full the cost of the call options.
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<PAGE>
In the first nine months of fiscal 1997, the Company sold put warrants on 2
million shares of its common stock for $2 million, callable on specific dates
in the third quarter of fiscal 1997, giving a third party the right to sell
shares of Novell common stock to the Company at contractually specified
prices. During the first nine months of fiscal 1997, the Company settled all
of its remaining put warrant obligations on 6 million shares for $21 million
in cash.
G. International Sales
The Company markets internationally both directly to end users and through
distributors who sell to dealers and end users. For the nine months of fiscal
1998 and fiscal 1997, sales to international customers were approximately $333
million and $330 million, respectively. In the first nine months of fiscal
1998 and fiscal 1997, 66% and 53%, respectively, of international sales were
to European countries. Except for Japan, which accounted for 14% of total
sales in the third quarter of fiscal 1997, no one foreign country accounted
for 10% or more of total sales in either period. Except for one multinational
distributor, which accounted for 13% of revenue in the first nine months of
fiscal 1998, no customer accounted for more than 10% of revenue in any period.
H. Net Income (Loss) Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share includes the dilutive effects of options, warrants and
convertible securities, and therefore, is comparable to the earnings per share
the Company previously reported as earnings per share. Earnings per share
amounts for all periods have been presented and where appropriate, restated to
conform to the Statement No. 128 requirements.
</PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
Novell is the world's leading provider of network software. The Company
offers a wide range of network solutions, education, and support for
distributed network, Internet, and small-business markets.
During the third quarter of fiscal 1997, Novell took measures to reduce and
realign its resources and better manage and control its business. The
measures were in response to declines in sales of boxed products through
indirect distribution channel customers, controlled shifts to multi-product
licenses, lower licensing revenue of certain older products to OEM's, as well
as competitive pressures in the small network market. Specifically, the
Company did not ship boxed products to its indirect distribution channel
customers except to accommodate product exchanges and returns. The Company
believes this action, which significantly reduced reported revenue in the
quarter, brought indirect distribution channel inventories of boxed software
products in line with current market demand. The decision to withhold
shipments to the Company's indirect distributor channel resulted in an
operating loss in the third quarter of fiscal 1997. The Company will continue
to monitor channel inventory levels to keep them in line with estimated market
demand. In addition, the Company reduced its workforce by 17%, or
approximately 1,000 employees, and consolidated a number of facilities. This
resulted in a one-time restructuring charge of $55 million, principally
comprised of severance and excess facilities costs. The restructuring charge
contributed a loss of $0.10 per share, net of tax, to the reported loss in
fiscal 1997. The workforce reduction and associated consolidation of
facilities returned the Company to break even for the fourth quarter of fiscal
1997 and is expected to lower future operating expenses by approximately $100
million annually.
In the first quarter of fiscal 1997, the Company implemented a change to its
fiscal year and month ending dates. The Company now recognizes its fiscal
year end on the last calendar day of October, as opposed to prior years which
ended on the last Saturday in October. Likewise, each fiscal month end now
ends on the last calendar day of each month, and each fiscal quarter has a
unique number of days as opposed to the consistent 13 weeks in prior years.
Implementing this change resulted in an extra five days in the first fiscal
quarter of 1997, which the Company believes did not have a material impact on
its financial position, results of operations, or cash flows.
Results of Operations
Net sales
Q3 Q3 YTD YTD
1998 Change 1997 1998 Change 1997
- -----------------------------------------------------------------------------
Net sales (millions) $272 202% $90 $786 7% $738
==============================================================================
Novell's third quarter of fiscal 1997 revenue was reduced from recent periods
primarily due to the indirect distribution channel actions described above.
Third quarter revenue in fiscal 1997 was principally from sales to large network
users through the Company's major account, corporate and volume license
programs. The decision to not ship to the indirect distribution channel in the
third quarter of fiscal 1997 makes quarter over quarter and year over year
comparisons difficult.
Novell's product lines can be categorized into three areas, all within the
software industry. They are server operating environments; network services;
and other. While revenue increased from the third quarter of 1997 to the
third quarter of 1998, and from the first nine months of fiscal 1997 to the
first nine months of fiscal 1998, analysis of the individual product
categories characterizes the changes that have occurred.
Server operating environments revenues increased by 318% or $122 million in
the third quarter of 1998 compared to the third quarter of 1997. Both the
NetWare 3 and NetWare 4 product line revenues increased significantly as the
Company withheld shipments to its indirect distribution channel in the third
quarter of fiscal 1997. In the first nine months of fiscal 1998, server
operating environments revenues were flat over the same period in fiscal 1997.
Increases of $37 million in the NetWare 4 product lines were offset by
decreases of $37 million in the NetWare 3 product lines.
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<TABLE>
Network services revenues increased by 187% or $45 million in the third
quarter of 1998 compared to the third quarter of 1997 and increased by 23% or
$40 million in the first nine months of fiscal 1998 compared to the first nine
months of fiscal 1997. The $45 million increase between the third quarter of
fiscal 1997 and the third quarter of fiscal 1998 is mainly the result of the
Company's decision to withhold shipments to its indirect distribution channel
in the third quarter of fiscal 1997. The $40 million increase in the first
nine months of fiscal 1998 from the first nine months of 1997 is also due to
the Company's decision to withhold shipments to its indirect distribution
channel in the third quarter of fiscal 1997 as well as new product sales of
Z.E.N. Works.
Other revenue, which is made up of UNIX royalties, education, service, and
other, increased by 56% or $15 million from the third quarter of fiscal 1997
to the third quarter of fiscal 1998 and increased by 7% or $8 million in the
first nine months of fiscal 1998 compared to the first nine months of fiscal
1997. The increases relate primarily to higher service revenue in fiscal 1998
compared to fiscal 1997.
International sales represented 42% of total sales in the first nine months of
1998 compared to 45% in the first nine months of 1997. This change is a
result of a 11% increase in domestic revenues compared to a 1% increase in
international revenues in the first nine months of fiscal 1998 compared to the
first nine months of fiscal 1997.
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Gross profit
Q3 Q3 YTD YTD
1998 Change 1997 1998 Change 1997
- -----------------------------------------------------------------------------
Gross profit (millions)$211 654% $28 $613 17% $523
Percentage of net sales 78% 31% 78% 71%
==============================================================================
The gross margin percentage increased in the third quarter of fiscal 1998
compared to the third quarter of fiscal 1997 and in the first nine months of
fiscal 1998 compared to the first nine months of fiscal 1997 due to the fixed
portion of cost of sales being a higher percentage of the lower revenues in
the third quarter of fiscal 1997 as the Company withheld shipments to its
indirect distribution channel. Additionally, lower inventory management costs
contributed to the increase in gross margin percentage.
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Operating expenses
Q3 Q3 YTD YTD
1998 Change 1997 1998 Change 1997
- ------------------------------------------------------------------------------
Sales and marketing
(millions) $ 94 -4% $98 $294 -14% $342
Percentage of net sales 34% 109% 37% 46%
- ------------------------------------------------------------------------------
Product development
(millions) $ 54 -22% $ 69 $170 -19% $210
Percentage of net sales 20% 77% 22% 28%
General and administrative
(millions) $ 33 -3% $ 34 $100 -10% $111
Percentage of net sales 12% 38% 13% 15%
- ------------------------------------------------------------------------------
Restructuring charges
(millions) $ -- -- $ 55 $ -- -- $55
Percentage of net sales -- 61% -- 7%
- ------------------------------------------------------------------------------
Total operating expenses
(millions) $181 -29% $256 $564 -21% $718
Percentage of net sales 67% 284% 72% 97%
==============================================================================
Sales and marketing expenses decreased as a percentage of net sales in the
third quarter of fiscal 1998 compared to the third quarter of fiscal 1997 as
well as in the first nine months of fiscal 1998 compared to the first nine
months of fiscal 1997 as the Company withheld shipments to its indirect
distribution channel in the third quarter of fiscal 1997. The decrease in
absolute dollars in both comparative periods is due to lower domestic and
international sales expenses as well as lower product marketing expenses.
Sales and marketing expenses fluctuate as a percentage of net sales in any
given period due to product promotions, advertising or other discretionary
expenses.
</TABLE>
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<TABLE>
Product development expenses decreased as a percentage of net sales in the
third quarter of fiscal 1998 compared to the third quarter of fiscal 1997 as
well as in the first nine months of fiscal 1998 compared to the first nine
months of fiscal 1997 as the Company withheld shipments to its indirect
distribution channel in the third quarter of fiscal 1997. The decrease in
absolute dollars in both comparative periods is primarily due to work force
reductions in fiscal 1997.
General and administrative expenses decreased as a percentage of net sales in
the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997
as well as in the first nine months of fiscal 1998 compared to the first nine
months of fiscal 1997 as the Company withheld shipments to its indirect
distribution channel in the third quarter of fiscal 1997. The decrease in
absolute dollars in both comparative periods is primarily due to work force
reductions in fiscal 1997.
During the third quarter of fiscal 1997 the Company incurred $55 million of
tax deductible restructuring charges for redundant facilities and excess
personnel as the Company realigned its resources to better manage and control
its business.
Overall, operating expenses, excluding restructuring charges, have declined
as revenues have increased in the third quarter of fiscal 1998 compared to the
third quarter of fiscal 1997, as well as in the first nine months of
fiscal 1998 compared to the first nine months of fiscal 1997.
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YTD YTD
1998 Change 1997
- ------------------------------------------------------------------------------
Employees 4,502 -7% 4,831
Annualized revenue per employee (000's) $226 23% $184
==============================================================================
In fiscal 1997, the Company reduced its workforce by approximately 1,000
employees as the Company realigned its resources to better manage and control
its business.
<S> <C> <C> <C> <C> <C> <C>
Other income, net
Q3 Q3 YTD YTD
1998 Change 1997 1998 Change 1997
- ------------------------------------------------------------------------------
Other income, net
(millions) $7 -30% $10 $34 13% $30
Percentage of net sales 3% 11% 4% 4%
==============================================================================
The primary component of other income, net is investment income, which was $7
million in the third quarter of fiscal 1998 compared to $15 million in the
third quarter of fiscal 1997 and was $37 million in the first nine months of
fiscal 1998 compared to $41 million in the first nine months of fiscal 1997.
The decrease is the result of realized capital losses as the Company disposed
of certain equity securities as discussed below. In order to achieve
potentially higher returns, a limited portion of the Company's investment
portfolio is invested in mutual funds which incur some market risk. The
Company believes that the market risk has been limited by diversification and
by use of a funds management timing service which switches funds out of mutual
funds and into money market funds when preset thresholds are reached.
The Company's investment portfolio includes certain equity securities with
gross unrealized losses of $67 million as of July 31, 1998. The securities
with unrealized losses are Corel Corporation common stock, which was obtained
in March 1996 upon the Company's sale of its personal productivity
applications product line and Santa Cruz Operation, Inc. common stock, which
was obtained in December 1995 upon the sale of the Company's UnixWare product
line. It is the Company's intention to continue to dispose of such shares
over the coming periods.
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Income tax expense (benefit)
Q3 Q3 YTD YTD
1998 Change 1997 1998 Change 1997
- ------------------------------------------------------------------------------
Income tax expense
(benefit) (millions) $10 110% $(96) $23 129% $(79)
Percentage of net sales 4% -107% 3% -11%
Effective tax rate 28% 44% 28% 48%
=============================================================================
At July 31, 1998 the Company had deferred tax assets of $109 million before a
valuation allowance of $7 million. A portion of this asset is realizable
based on the ability to offset existing deferred tax liabilities. Realization
of the remaining asset is dependent on the Company's ability to generate
approximately $247 million of taxable income. Of
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<TABLE>
this, approximately $117 million must be earned outside the United States.
Management believes that sufficient income will be earned in the future to
realize this asset. Management will evaluate the realizability of the
deferred tax assets quarterly and assess the need for additional valuation
allowances.
The estimated effective tax rate for fiscal 1998 is lower than the effective
tax rate for fiscal 1997 as a result of the loss from operations in fiscal
1997.
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) and net income (loss) per share
Q3 Q3 YTD YTD
1998 Change 1997 1998 Change 1997
- ------------------------------------------------------------------------------
Net income
(loss) (millions) $27 122% $(122) $60 171% $(85)
Percentage of net sales 10% -136% 8% -12%
Net income (loss)
per share - basic $.08 123% $(.35) $.17 168% $(.25)
Net income (loss)
per share - diluted $.07 120% $(.35) $.17 168% $(.25)
==============================================================================
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share includes the dilutive effects of options, warrants and
convertible securities, and therefore, is comparable to the earnings per share
the Company previously reported as earnings per share. Earnings per share
amounts for all periods have been presented and where appropriate, restated to
conform to the Statement No. 128 requirements.
<S> <C> <C> <C>
Liquidity and Capital Resources
Q3 Q4
1998 Change 1997
- ------------------------------------------------------------------------------
Cash and short-term investments (millions) $1,148 11% $1,033
Percentage of total assets 57% 54%
==============================================================================
Cash and short-term investments increased to $1,148 million at July 31, 1998
from $1,033 million at October 31, 1997. This increase can be attributed to
$195 million provided by operating activities and $26 million provided by
issuances of common stock, somewhat offset by $43 million of cash used for
expenditures on property, plant and equipment, $12 million used to repurchase
common stock, and $51 million used for other investing activities. The
investment portfolio is diversified among security types, industry groups, and
individual issuers. The Company's principal source of liquidity has been from
operations. At July 31, 1998, the Company's principal unused sources of
liquidity consisted of cash and short-term investments and available borrowing
capacity of approximately $15 million under its credit facilities. The
Company's liquidity needs are principally for the Company's financing of
accounts receivable, capital assets, strategic investments and flexibility in
a dynamic and competitive operating environment.
During the first nine months of 1998, the Company has continued to generate
cash from operations. The Company anticipates being able to fund its current
operations and capital expenditures planned 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 public offerings of equity or debt securities are available if
the need arises. 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 1998 are anticipated to be approximately $45 million, but could be
reduced if the growth of the Company is less than presently anticipated.
In June 1998, the Company announced its intent to repurchase and retire up to
10 percent, or approximately 35 million shares of Novell common stock over the
next twelve months. During the third fiscal quarter of fiscal 1998, the
Company repurchased and retired approximately 1 million shares at a cost of
approximately $12 million.
</TABLE>
</PAGE>
<PAGE>
Future Results
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,
acceptance of new products and price pressures; availability of third-party
compatible products at reasonable 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; market fluctuations of investment
securities; and litigation.
In the past, many information technology products were designed with two digit
year codes that did not recognize century and millennium fields. As a result,
these hardware and software products may not function or may give incorrect
results beginning in the year 2000. The year 2000 issue is faced by
substantially every company in the computer industry, as well as every company
which relies on computer systems. In order to address this issue, such
hardware and software products must be upgraded or replaced in order to
correctly process dates beginning in the year 2000.
The Company has created a company-wide Year 2000 team to identify and resolve
Year 2000 issues associated either with the Company's internal systems or the
products and services sold by the company. As part of this effort, the
Company is communicating with its main suppliers of technology products and
services regarding the Year 2000 status of such products or services. The
Company has identified and is testing its main internal systems and expects to
complete testing by mid 1999. Throughout 1998 and 1999 the Company expects to
complete implementation of any needed year 2000-related modifications to its
information systems. The Company is also currently assessing its internal
non-information technology systems, and expects to complete testing and any
needed modifications to these systems in 1999.
The Company's total cost relating to these activities has not been and is
not expected to be material to the Company's financial position, results
of operations, or cash flows. The Company believes that necessary
modifications will be made on a timely basis. However, there can be no
assurance that there will not be a delay in, or increased costs associated
with, the implementation ofsuch modifications, or that the Company's suppliers
will adequately prepare for the year 2000 issue. It is possible that any such
delays, increased costs, or supplier failures could have a material adverse
impact on the Company's operations and financial results, by, for example,
impacting the Company's ability to deliver products or services to its
customers. The Company expects in mid-1999 to finalize its assessment of and
contingency planning for potential operational or performance problems related
to year 2000-related issues with its information systems.
The Company's year 2000 effort has included testing products currently or
recently on the Company's price list for year 2000 issues. Generally, for
products that were identified as needing updates to address year 2000 issues,
the Company has prepared or is preparing updates, or has removed or is
removing the product from its price list. Some of the Company's customers are
using product versions that the Company will not support for year 2000 issues;
the Company is encouraging these customers to migrate to current product
versions that are year 2000 ready.
For third party products which the Company distributes with its products, the
Company has sought information from the product manufacturers regarding the
products year 2000 readiness status. Customers who use the third-party
products are directed to the product manufacturer for detailed year 2000
status information. On its year 2000 web site at www.novell.com/year2000/,
the Company provides information regarding which of its products are year
2000 ready and other general information related to the Company's year 2000
efforts. The Company's total costs relating to these activities has not
been and is not expected to be material to the Company's financial position
or results of operations.
The Company believes its current products, with any applicable updates,
are well-prepared for year 2000 date issues, and the Company plans to
support these products for date issues that may arise related to the year
2000. However, there can be no guarantee that one or more current Company
products do not contain year 2000 date issues that may result in material
costs to the Company. Because it is in the business of selling software
products, the Company's risk of being subjected to
</PAGE>
<PAGE>
lawsuits relating to year 2000 issues with its software products is likely
to be greater than that of companies in other industries. Because computer
systems may involve different hardware, firmware and software components from
different manufacturers, it may be difficult to determine which component in
a computer system may cause a year 2000 issue. As a result, the Company may
be subjected to year 2000-related lawsuits independent of whether its products
and services are year 2000 ready. The outcomes of any such lawsuits and the
impact on the Company cannot be determined at this time.
Novell believes that it has the product offerings, facilities, personnel, and
competitive and financial resources for continued business success, but future
revenues, costs, margins, product mix, and profits are all influenced by a
number of factors, such as those discussed above, as well as risks described
in detail in the Company s fiscal 1997 report on Form 10-K.
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 E of the Company's financial statements contained in Part I, Item 1
of this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
- -------- -----------
27* Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the quarter ended
July 31, 1998.
________________________
*Filed herewith.
</PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and 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: September 11, 1998 /s/ Dr. Eric Schmidt
---------------------
Dr. Eric Schmidt
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: September 11, 1998 /s/ Dennis R. Raney
----------------------
Dennis R. Raney
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: September 11, 1998 /s/ Cliff Simpson
--------------------
Cliff Simpson
Vice President Finance and
Corporate Controller
(Principal Accounting Officer)
</PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 178,754
<SECURITIES> 969,171
<RECEIVABLES> 231,221
<ALLOWANCES> (36,798)
<INVENTORY> 4,274
<CURRENT-ASSETS> 1,551,467
<PP&E> 760,014
<DEPRECIATION> (412,390)
<TOTAL-ASSETS> 2,007,634
<CURRENT-LIABILITIES> 355,474
<BONDS> 0
0
0
<COMMON> 35,371
<OTHER-SE> 1,599,820
<TOTAL-LIABILITY-AND-EQUITY> 2,007,634
<SALES> 786,308
<TOTAL-REVENUES> 786,308
<CGS> 172,999
<TOTAL-COSTS> 172,999
<OTHER-EXPENSES> 563,943
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 83,274
<INCOME-TAX> 23,317
<INCOME-CONTINUING> 59,957
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,957
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
