<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 January 31, 1999
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 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 26, 1999 there were 336,468,842 shares of the registrant's
common stock outstanding.
</PAGE>
<PAGE>
<TABLE>
Part I. Financial Information, Item 1. Financial Statements
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS
<S> <C> <C>
Jan. 31, Oct. 31,
Dollars in thousands, except per share data 1999 1998
- ------------------------------------------------------------------------------
ASSETS
Current assets
Cash and short-term investments $ 1,015,422 $ 1,007,167
Receivables, less allowances
($40,913 - January; $47,921 - October) 206,227 246,577
Inventories 2,737 3,562
Prepaid expenses 63,189 63,165
Deferred and refundable income taxes 79,839 95,343
Other current assets 39,514 19,886
- -----------------------------------------------------------------------------
Total current assets 1,406,928 1,435,700
Property, plant and equipment, ne 341,172 346,196
Long-term investments 156,842 114,815
Other assets 25,729 27,401
- ------------------------------------------------------------------------------
Total assets $ 1,930,671 $ 1,924,112
==============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 73,644 $ 77,987
Accrued compensation 52,948 52,348
Accrued marketing liabilities 17,527 16,383
Other accrued liabilities 58,938 62,206
Income taxes payable 61,158 64,057
Deferred revenue 137,421 141,714
- -----------------------------------------------------------------------------
Total current liabilities 401,636 414,695
Minority interests 15,933 15,919
Shareholders' equity
Common stock, par value $.10 a share
Authorized - 600,000,000 shares
Issued - 335,944,700 shares-January
337,592,460 shares-October 33,594 33,759
Additional paid-in capital 164,859 200,897
Retained earnings 1,319,235 1,290,337
Unearned stock compensation (5,695) (5,396)
Cumulative translation adjustment (1,877) (1,753)
Unrealized gain/(loss) on investments 2,986 (24,346)
- -----------------------------------------------------------------------------
Total shareholders' equity 1,513,102 1,493,498
- -----------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,930,671 $ 1,924,112
=============================================================================
See notes to consolidated unaudited condensed financial statements.
Page 2
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<PAGE>
<TABLE> NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME
<S> <C> <C>
Fiscal Quarter Ended
Amounts in thousands, Jan. 31, Jan. 31,
except per share data 1999 1998
- -----------------------------------------------------------------------------
Net sales $285,806 $252,042
Cost of sales 64,120 57,087
- -----------------------------------------------------------------------------
Gross profit 221,686 194,955
Operating expenses
Sales and marketing 105,337 104,211
Product development 54,005 60,238
General and administrative 25,994 25,574
- -----------------------------------------------------------------------------
Total operating expenses 185,336 190,023
Income from operations 36,350 4,932
Other income (expense)
Investment income 9,763 14,399
Other, net (5,977) 244
- -----------------------------------------------------------------------------
Other income, net 3,786 14,643
- -----------------------------------------------------------------------------
Income before taxes 40,136 19,575
Income taxes 11,238 5,481
- -----------------------------------------------------------------------------
Net income $ 28,898 $ 14,094
=============================================================================
Weighted average shares outstanding
Basic 337,441 351,031
Diluted 351,522 352,971
=============================================================================
Net income per share
Basic $ 0.09 $ 0.04
Diluted $ 0.08 $ 0.04
=============================================================================
See notes to consolidated unaudited condensed financial statements.
PAGE 3
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<PAGE>
<TABLE> NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<S> <C> <C>
Fiscal Quarter Ended
Jan. 31, Jan. 31,
Amounts in thousands 1999 1998
- -----------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 28,898 $ 14,094
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation and amortization 16,940 19,889
Stock plans income tax benefits 13,347 132
Decrease in receivables 40,350 13,692
Decrease (increase) in inventories 825 1,478
(Increase) decrease in prepaid expenses (24) (8,520)
Decrease (increase) in deferred
and refundable income taxes 15,499 14,378
(Increase) in other current assets (19,628) (4,373)
(Decrease) in current liabilities, net (13,059) (11,613)
- -----------------------------------------------------------------------------
Net cash provided from operating activities 83,148 39,157
- -----------------------------------------------------------------------------
Cash flows from financing activities
Issuance of common stock, net 27,293 1,424
Repurchase of common stock (76,843) --
- -----------------------------------------------------------------------------
Net cash provided (used) from financing activities (49,550) 1,424
- -----------------------------------------------------------------------------
Cash flows from investing activities
Expenditures for property, plant and equipment (12,215) (8,694)
Purchases of short-term investments (643,484) (484,596)
Maturities of short-term investments 492,629 342,605
Sales of short-term investments 146,379 145,517
Other (40,460) (9,804)
----------------------------------------------------------------------------
Net cash (used) by investing activities (57,151) (14,972)
- ------------------------------------------------------------------------------
Total increase in cash and cash equivalents $ (23,553) $ 25,609
Cash and cash equivalents - beginning of period 177,083 208,543
- ------------------------------------------------------------------------------
Cash and cash equivalents - end of period 153,530 234,152
Short-term investments - end of period 861,892 810,992
- ------------------------------------------------------------------------------
Cash and short-term investments - end of period $ 1,015,422 $1,045,144
==============================================================================
See note to consolidated unaudited condensed financial statements.
Page 4
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<PAGE>
<TABLE> 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 1998
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.
B. 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. Fair market values are based on quoted market pries
where available; if quoted market prices are not available, then fair market
values are based on quoted market prices of comparable instruments. 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.
<S> <C> <C> <C> <C>
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
(Dollars in thousands) Jan. 31, 1999 Gains Losses Jan. 31, 1999
- ------------------------------------------------------------------------------
Cash and cash equivalents
Cash $ 114,254 $ -- $ -- $ 114,254
Repurchase agreements 3,719 -- -- 3,719
Taxable money market fund 21,557 -- -- 21,557
Municipal securities 14,000 -- -- 14,000
- ------------------------------------------------------------------------------
Cash and cash equivalents $ 153,530 $ -- $ -- $ 153,530
- ------------------------------------------------------------------------------
Short-term investments
Municipal securities $ 437,518 $ 8,908 $ -- $ 446,426
Money market preferreds 202,703 -- (3) 202,700
Mutual funds 116,578 -- -- 116,578
Equity securities 100,229 37,245 (41,286) 96,188
- ------------------------------------------------------------------------------
Short-term investments $ 857,028 $ 46,153 $ (41,289) $ 861,892
- ------------------------------------------------------------------------------
Cash and
short-term investments $1,010,558 $ 46,153 $ (41,289) $1,015,422
- ------------------------------------------------------------------------------
PAGE 5
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</PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross Fair Market
Cost at Unrealized Unrealized Value at
(Dollars in thousands) Oct. 31, 1998 Gains Losses Oct. 31, 1998
- ------------------------------------------------------------------------------
Cash and cash equivalents
Cash $ 98,444 $ -- $ -- $ 98,444
Repurchase agreements 8,092 -- -- 8,092
Money market fund 55,957 -- -- 55,957
Municipal securities 14,590 -- -- 14,590
- ------------------------------------------------------------------------------
Cash and cash equivalents $ 177,083 $ -- $ -- $ 177,083
- ------------------------------------------------------------------------------
Short-term investments
Municipal securities $ 448,195 $ 8,027 $ -- $ 456,222
Money market mutual funds 95,631 -- -- 95,631
Money market preferreds 181,719 -- (19) 181,700
Mutual funds 15,340 -- -- 15,340
Equity securities 128,837 30,159 (77,805) 81,191
- ------------------------------------------------------------------------------
Short-term investments $ 869,722 $38,186 $(77,824) $ 830,084
- ------------------------------------------------------------------------------
Cash and
short-term investments $ 1,046,805 $38,186 $ (77,824) $ 1,007,167
- ------------------------------------------------------------------------------
During the first quarter of fiscal 1999 the Company had realized gains of $13
million on the sale of securities compared to realized gains of $3 million in
the first quarter of fiscal 1998, while realizing losses on sales of
securities of $15 million in the first quarter of fiscal 1999 and $1 million
in the first quarter of fiscal 1998.
C. Income Taxes
The Company's estimated effective tax rate for the first quarter of fiscal
1999 was 28.0%, the same as in the first quarter of fiscal 1998. The Company
paid cash amounts for income taxes of $2 million and $1 million, in the first
quarter of fiscal 1999 and 1998, respectively.
D. 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 January 31, 1999 there were no borrowings, letter of credit acceptances or
commitments under such line.
The Company has an additional $5 million line of credit with another bank
which is not subject to a loan agreement. At January 31, 1999 standby letters
of credit of approximately $1 million were outstanding under this line of
credit.
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 for
San Jose and fiscal 2000 for Provo. Annual rent under each agreement is
determined by taking the portion of the committed amount actually utilized and
associated capitalized interest accrued during the construction period and
multiplying this amount by the secured interest rate. 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. The guaranteed residual value at January 31,
1999, was approximately $218 million. 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 January 31,
1999 was approximately $135 million, and is included in long-term investments.
Page 6
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<PAGE>
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.
E. Put Warrants
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 through 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 through July 1999. The premiums received from the sale of the
put warrants offset in full the cost of the call options.
In the first quarter of fiscal 1999, the Company settled 6 million of its put
warrant obligations and exercised 4 million call options to purchase 4 million
shares of Novell common stock in connection with the Company's stock purchase
program.
F. International Sales
The Company operates in one business segment and markets internationally both
directly to end users and through distributors who sell to dealers and end
users. For the fiscal quarters ended January 31, 1999 and January 31, 1998,
sales to international customers were approximately $130 million and $109
million, respectively. In the first quarters of fiscal 1999 and fiscal 1998,
72% and 65%, respectively, of international sales were to European countries.
No one foreign country accounted for 10% or more of total sales in either
period. Except for one multi-national distributor, which accounted for 13% of
revenue in the first quarter of 1999 and 15% of revenue in the first quarter
of fiscal 1998, no customer accounted for more than 10% of revenue in any
period.
</PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
G. Net Income Per Share
Q1 Q1
Amounts in thousands, except per share data 1999 1998
- -----------------------------------------------------------------------------
Basic net income per share computation
Net income $ 28,898 $ 14,094
- ------------------------------------------------------------------------------
Weighted average shares outstanding 337,441 351,031
- ------------------------------------------------------------------------------
Basic net income per share $.09 $.04
==============================================================================
Diluted net income per share computation
Net income $ 28,898 $ 14,094
- ------------------------------------------------------------------------------
Weighted average shares outstanding 337,441 351,031
Incremental shares attributable to exercise of outstanding
options (treasury stock method) 14,081 1,940
- ------------------------------------------------------------------------------
Total 351,522 352,971
- ------------------------------------------------------------------------------
Diluted net income per share $ .08 $ .04
============================================================================
H. Comprehensive Income
In the first quarter of 1999, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS
130 establishes new rules for the reporting and displaying of comprehensive
income. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities, unearned stock compensation and cumulative
translation adjustments, which prior to adoption were only reported separately
in shareholders equity, to be included in comprehensive income. The
components of comprehensive income, net of tax, for the three months ended
January 31, 1999 and January 31, 1998 were as follows:
<C> <C>
Q1 Q1
Dollars in thousands 1999 1998
- -----------------------------------------------------------------------------
Net income $ 28,898 $ 14,094
Unrealized gain/(loss) on investments 27,332 (10,412)
Unearned stock compensation (184) 515
Cumulative translation adjustment (76) 70
- ------------------------------------------------------------------------------
Comprehensive income $ 55,970 $ 4,267
==============================================================================
Page 8
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</PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
Novell is the leading provider of network software enabled by directory
services. Novell Internet solutions make networks more manageable and secure,
and reduce the total cost of ownership for organizations of every kind and
size. Novell worldwide channel, developer, education and technical support
programs are the most extensive in the network computing industry.
Results of Operations
Net Sales
Q1 Q1
1999 Change 1998
- ------------------------------------------------------------------------------
Net sales (millions) $286 13% $252
==============================================================================
Novell's product lines can be categorized into three areas, all within the
software industry. They are server platforms; network infrastructure and
applications; and service, training, consulting and other. While revenue
increased from the first quarter of 1998 to the first quarter of 1999,
analysis of the individual product categories characterizes the changes that
have occurred.
The server platforms product line includes directory-enabled NetWare (NetWare
4 and NetWare 5) and NetWare 3. Server platforms revenue increased by $18
million or 12% in the first quarter of 1999 compared to the first quarter of
1998. Directory-enabled NetWare increased $20 million or 16% following the
release of NetWare 5, while NetWare 3 revenue decreased $2 million or 10% from
the first quarter 1998 compared to the first quarter of fiscal 1997.
The network infrastructure and applications product line includes NetWare for
SAA host connectivity products, BorderManager, NDS integration and high
availability service products. Collaboration and management products such as
GroupWise, ManageWise, and Z.E.N.works are also included in this product line.
The product line had revenue of $75 million in the first quarter of 1999
compared to $68 million in the first quarter of 1998. This 11% increase was
driven by new product revenue from Z.E.N.works, as well as strong growth in
BorderManager, ManageWise and GroupWise. These increases were somewhat
offset by a decrease in Tuxedo royalties, which ended in the fourth quarter of
fiscal 1998.
Service, training, consulting, and other includes revenue from customer
service, training products and courses, consulting for network solutions, UNIX
royalties, and other. These revenues were $45 million and $36 million in the
first quarter of 1999 and 1998, respectively. The increase was a result of
new consulting revenue, as well as growth in service and training revenue.
UNIX royalties decreased by $2 million and represented only 2% of total
revenue in the first quarter of 1999 compared to the first quarter of 1998.
International sales represented 45% of total sales in the first quarter of
1999 compared to 43% in the first quarter of 1998. This change is a result of
a 9% increase in domestic revenues compared to a 19% increase in international
revenues in the first quarter of fiscal 1999 compared to the first quarter of
fiscal 1998.
Gross Profit
Q1 Q1
1999 Change 1998
- -----------------------------------------------------------------------------
Gross profit (millions) $222 14% $195
Percentage of net sales 78% 77%
==============================================================================
The gross margin percentage increased slightly in the first quarter of fiscal
1999 compared to the first quarter of fiscal 1998 due to lower material costs
and a decrease in expenses associated with training and education programs
both as a percentage of net sales and in absolute dollars. Somewhat
offsetting these reductions was an increase in service related expenses.
Page 9
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Operating Expenses
Q1 Q1
1999 Change 1998
- -----------------------------------------------------------------------------
Sales and marketing (millions) $105 -1% $104
Percentage of net sales 37% 41%
- ------------------------------------------------------------------------------
Product development (millions) $54 -10% $60
Percentage of net sales 19% 24%
- ------------------------------------------------------------------------------
General and administrative (millions) $26 -- $26
Percentage of net sales 9% 10%
- ------------------------------------------------------------------------------
Total operating expenses (millions) $185 -3% $190
Percentage of net sales 65% 75%
=============================================================================
Sales and marketing expenses increased slightly by $1 million in the first
quarter of fiscal 1999 compared to the first quarter of fiscal 1998 but
decreased as a percentage of net sales. Lower international selling expenses
were partially offset by higher 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.
Product development expenses decreased by $6 million in the first quarter of
fiscal 1999 compared to the first quarter of fiscal 1998 and decreased as a
percentage of net sales due to a more productive product development
organization focused on delivering new products consistent with its strategy.
General and administrative expenses remained flat at $26 million in the first
quarter of fiscal 1999 compared to the first quarter of fiscal 1998, while
decreasing as a percentage of net sales due to a higher revenue base.
<C> <C> <C>
Q1 Q1
1999 Change 1998
- ------------------------------------------------------------------------------
Employees 4,642 -- 4,638
Annualized revenue per employee (000's) $249 16% $214
==============================================================================
<C> <C> <C>
Other Income, Net
Q1 Q1
1999 Change 1998
- ------------------------------------------------------------------------------
Other income, net (millions) $4 -73% $15
Percentage of net sales 1% 6%
==============================================================================
The primary component of other income, net is investment income, which was $10
million in the first quarter of fiscal 1999 compared to $14 million in the
first quarter of fiscal 1998. The decrease in the first quarter of 1999
compared to the first quarter in 1998 is the result of net realized capital
losses as the Company disposed of certain equity securities. In the first
quarter of 1999, in addition to investment income, the Company had losses on
the disposal of fixed assets, the accrual for certain legal matters and the
write-off of certain long-term investments.
Income Taxes <C> <C> <C>
Q1 Q1
1999 Change 1998
- ------------------------------------------------------------------------------
Income taxes (millions) $11 120% $5
Percentage of net sales 4% 2%
Effective tax rate 28% 28%
=============================================================================
The effective tax rate for fiscal 1999 is estimated to be 28%, the same as
fiscal 1998.
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<PAGE>
<TABLE>
Net Income and Net Income Per Share
<S> <C> <C> <C>
Q1
Q1
1999 Change 1998
- -----------------------------------------------------------------------------
Net income (millions) $29 107% $14
Percentage of net sales 10% 6%
Net income per share - basic $.09 125% $.04
Net income per share - diluted $.08 100% $.04
==============================================================================
<C> <C> <C>
Liquidity and Capital Resources
Q1 Q4
1999 Change 1998
- ------------------------------------------------------------------------------
Cash and short-term investments (millions) $1,015 1% $1,007
Percentage of total assets 53% 52%
==============================================================================
Cash and short-term investments increased to $1,015 million at January 31,
1999 from $1,007 million at October 31, 1998. The major reason for this
increase was the $83 million provided by operating activities, the $27 million
from the issuance of common stock, offset by the $77 million of cash used for
repurchase of common stock, the $12 million used for expenditures on property,
plant and equipment, and the $13 million used by other investing activities.
The investment portfolio is diversified among security types, industry groups,
and individual issuers. To achieve potentially higher returns, a limited
portion of the Company's investment portfolio is invested in mutual funds
which incur 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 signals occur.
The Company's investment portfolio includes securities with gross unrealized
gains of $5 million as of January 31, 1999. Certain securities with material
unrealized losses are Corel common stock, which was obtained in March 1996
upon the Company's sale of its personal productivity applications product line
and SCO 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.
The Company's principal source of liquidity has been from operations. At
January 31, 1999, 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, product development and
flexibility in a dynamic and competitive operating environment.
During the first fiscal quarter of 1999, 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 1999 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 first quarter of 1999, the Company
repurchased and retired approximately 5 million shares at a cost of
approximately $77 million. During fiscal 1998, the Company repurchased and
retired approximately 21 million shares at a cost of approximately $245
million.
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.
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<PAGE>
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.
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. In 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
of such 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 has begun contingency planning and expects to finalized in mid-1999
its main 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 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 1998 report on Form 10-K.
Page 12
</PAGE>
<PAGE>
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 D 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
January 31, 1999.
____________________________
*Filed herewith.
Page 13
</PAGE>
<PAGE>
<TABLE>
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.
<S> <C>
Novell, Inc.
-------------
(Registrant)
Date: March 17, 1999 /s/ Dr. Eric Schmidt
---------------------------
Dr. Eric Schmidt
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: March 17, 1999 /s/ Dennis R. Raney
----------------------------
Dennis R. Raney
Chief Financial Officer
(Principal Financial Officer)
Date: March 17, 1999 /s/ Ron Foster
----------------------------
Ron Foster
Vice President and Corporate Controller
(Principal Accounting Officer)
Page 14
</TABLE>
</PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
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<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> JAN-31-1999
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<RECEIVABLES> 206,227
<ALLOWANCES> (40,913)
<INVENTORY> 2,737
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0
0
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