<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 April 30, 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 May 28, 1999 there were 334,998,746 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>
Apr. 30, Oct. 31,
Dollars in thousands, except per share data 1999 1998
- ------------------------------------------------------------------------------
ASSETS
Current assets
Cash and short-term investments $ 974,440 $ 1,007,167
Receivables, less allowances
($44,215 - April; $47,921 - October) 209,282 246,577
Inventories 3,108 3,562
Prepaid expenses 56,397 63,165
Deferred and refundable income taxes 88,480 95,343
Other current assets 18,489 19,886
- ------------------------------------------------------------------------------
Total current assets 1,350,196 1,435,700
Property, plant and equipment, net 344,261 346,196
Long-term investments 200,302 114,815
Other assets 24,334 27,401
- ------------------------------------------------------------------------------
Total assets $ 1,919,093 $ 1,924,112
==============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 61,920 $ 77,987
Accrued compensation 56,044 52,348
Accrued marketing liabilities 19,243 16,383
Other accrued liabilities 65,968 62,206
Income taxes payable 61,647 64,057
Deferred revenue 132,854 141,714
- ------------------------------------------------------------------------------
Total current liabilities 397,676 414,695
Minority interests 10,573 15,919
Shareholders' equity
Common stock, par value $.10 a share
Authorized - 600,000,000 shares
Issued - 334,558,416 shares-April
337,592,460 shares-October 33,456 33,759
Additional paid-in capital 131,165 200,897
Retained earnings 1,357,961 1,290,337
Unearned stock compensation (6,423) (5,396)
Cumulative translation adjustment (1,842) (1,753)
Unrealized (loss) on investments (3,473) (24,346)
- ------------------------------------------------------------------------------
Total shareholders' equity 1,510,844 1,493,498
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,919,093 $ 1,924,112
==============================================================================
See notes to consolidated unaudited condensed financial statements.
</TABLE>
</PAGE>
<PAGE>
<TABLE> NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME
<S> <C> <C> <C> <C>
Fiscal Quarter Ended Six Months Ended
Amounts in thousands, Apr. 30, Apr. 30, Apr. 30, Apr. 30,
except per share data 1999 1998 1999 1998
- ------------------------------------------------------------------------------
Net sales $315,652 $262,250 $ 601,458 $ 514,292
Cost of sales 76,211 59,278 140,331 116,365
- ------------------------------------------------------------------------------
Gross profit 239,441 202,972 461,127 397,927
Operating expenses
Sales and marketing 106,455 101,424 211,792 205,635
Product development 58,083 60,850 112,088 121,088
General and administrative 25,411 26,350 51,405 51,924
- ------------------------------------------------------------------------------
Total operating expenses 189,949 188,624 375,285 378,647
- ------------------------------------------------------------------------------
Income from operations 49,492 14,348 85,842 19,280
Other income (expense)
Investment income 10,653 15,456 20,416 29,855
Other, net (6,358) (2,989) (12,335) (2,745)
- ------------------------------------------------------------------------------
Other income, net 4,295 12,467 8,081 27,110
- ------------------------------------------------------------------------------
Income before taxes 53,787 26,815 93,923 46,390
Income taxes 15,061 7,508 26,299 12,989
- ------------------------------------------------------------------------------
Net income $ 38,726 $ 19,307 $ 67,624 $ 33,401
==============================================================================
Weighted average shares outstanding
Basic 335,276 351,762 336,359 351,396
Diluted 351,116 356,586 351,319 354,779
==============================================================================
Net income per share
Basic $ 0.12 $ 0.05 $ 0.20 $ 0.10
Diluted $ 0.11 $ 0.05 $ 0 .19 $ 0.09
==============================================================================
See notes to consolidated unaudited condensed financial statements.
</TABLE>
</PAGE>
<PAGE>
<TABLE> NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<S> <C> <C>
Six Months Ended
----------------------------
Apr. 30, Apr 30,
Dollars in thousands 1999 1998
- ------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 67,624 $ 33,401
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation and amortization 32,585 40,227
Stock plans income tax benefits 25,356 1,150
Decrease in receivables 37,295 11,987
Decrease in inventories 454 4,340
Decrease (increase) in prepaid expenses 6,768 (4,467)
Decrease in deferred and refundable income taxes 6,858 17,860
Decrease in other current assets 1,397 2,243
(Decrease) in current liabilities, net (17,019) (37,453)
- ------------------------------------------------------------------------------
Net cash provided from operating activities 161,318 69,288
- ------------------------------------------------------------------------------
Cash flows from financing activities
Issuance of common stock, net 50,804 13,923
Repurchase of common stock (146,195) -
- ------------------------------------------------------------------------------
Net cash (used) provided from
financing activities (95,391) 13,923
- ------------------------------------------------------------------------------
Cash flows from investing activities
Expenditures for property, plant and equipment (31,677) (17,231)
Purchases of short-term investments (1,270,979) (1,037,871)
Maturities of short-term investments 969,270 552,398
Sales of short-term investments 363,271 379,014
Other (87,850) (11,221)
- ------------------------------------------------------------------------------
Net cash (used) by investing activities (57,965) (134,911)
- ------------------------------------------------------------------------------
Total increase (decrease) in cash
and cash equivalents $ 7,962 $ (51,700)
Cash and cash equivalents - beginning of period 177,083 208,543
- ------------------------------------------------------------------------------
Cash and cash equivalents - end of period 185,045 156,843
Short-term investments - end of period 789,395 927,792
- ------------------------------------------------------------------------------
Cash and short-term investments - end of period $ 974,440 $ 1,084,635
==============================================================================
See notes to consolidated unaudited condensed financial statements.
</TABLE>
</PAGE>
<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 prices at
end of period, 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.
The following is a summary of cash and short-term investments, all of which
are considered available-for-sale.
<S> <C> <C> <C> <C>
Gross Gross Fair Market
Cost at Unrealized Unrealized Value at
Apr. 30, Gains Losses Apr. 30,
(Dollars in thousands) 1999 1999
- ------------------------------------------------------------------------------
Cash and cash equivalents
Cash $ 146,929 $ - $ - $ 146,929
Taxable money market fund 31,116 - - 31,116
Municipal securities 7,000 - - 7,000
- ------------------------------------------------------------------------------
Cash and cash equivalents $ 185,045 $ - $ - $ 185,045
- ------------------------------------------------------------------------------
Short-term investments
Municipal securities $ 431,433 $ 6,435 $ (2) $ 437,866
Money market preferreds 177,900 - - 177,900
Mutual funds 120,098 - (43) 120,055
Equity securities 65,619 23,271 (35,316) 53,574
- ------------------------------------------------------------------------------
Short-term investments $ 795,050 $ 29,706 $ (35,361) $ 789,395
- ------------------------------------------------------------------------------
Cash and short-term
investments $ 980,095 $ 29,706 $ (35,361) $ 974,440
- ------------------------------------------------------------------------------
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross Fair Market
Cost at Unrealized Unrealized Value at
Oct. 31, Gains Losses Oct. 31,
(Dollars in thousands) 1998 1999
- ------------------------------------------------------------------------------
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 six months of fiscal 1999 the Company had realized gains of
$25 million on the sale of securities compared to realized gains of $5 million
in the first six months of fiscal 1998, while realizing losses on sales of
securities of $29 million in the first six months of fiscal 1999 and $2
million in the first six months of fiscal 1998.
C. Income Taxes
The Company's estimated effective tax rate for the first six months of fiscal
1999 was 28.0%, the same as in the first six months of fiscal 1998. The
Company paid cash amounts for income taxes of $4 million and $10 million, in
the first six months 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 April 30, 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 April 30, 1999 standby letters
of credit of approximately $3 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
commenced during the second quarter of fiscal 1999 for San Jose and will
commence upon the Company's occupation of the Provo building in fiscal 2000.
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 April 30, 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 April 30, 1999 was approximately $164 million, and is
included in long-term investments.
</TABLE>
</PAGE>
<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. In May 1999, the Company settled this legal
matter. The resolution of this legal matter did not have a material adverse
effect on the Company's 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 six months of fiscal 1999, 9 million of the Company's put warrant
obligations expired worthless and the Company exercised 6 million call options
to purchase 6 million shares of Novell common stock in connection with the
Company's stock repurchase 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 first six months of fiscal 1999 and fiscal 1998, sales to
international customers were approximately $277 million and $223 million,
respectively. In the first six months of fiscal 1999 and fiscal 1998, 72% and
67%, 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 12% of total
revenue in the first six months of 1999 and 13% of total revenue in the first
six months of fiscal 1998, no customer accounted for more than 10% of total
revenue in any period.
</PAGE>
<PAGE>
<TABLE>
G. Net Income Per Share
<S> <C> <C> <C> <C>
Fiscal Quarter Ended Six Months Ended
-------------------- ---------------------
Apr. 30, Apr. 30, Apr. 30, Apr. 30,
Amounts in thousands, 1999 1998 1999 1998
except per share data
- -----------------------------------------------------------------------------
Basic net income per share computation
Net income $ 38,726 $ 19,307 $ 67,624 $ 33,401
- ------------------------------------------------------------------------------
Weighted average
shares outstanding 335,276 351,762 336,359 351,396
- ------------------------------------------------------------------------------
Basic net income
per share $ .12 $ .05 $ 0.20 $ 0.10
==============================================================================
Diluted net income per share computation
Net income $ 38,726 $ 19,307 $ 67,624 $ 33,401
- ------------------------------------------------------------------------------
Weighted average shares outstanding
335,276 351,762 336,359 351,396
Incremental shares attributable to exercise of
outstanding options (treasury stock method)
15,839 4,824 14,960 3,383
- ------------------------------------------------------------------------------
Total 351,116 356,586 351,319 354,779
- ------------------------------------------------------------------------------
Diluted net income per share
$ 0.11 $ 0.05 $ 0.19 $ 0.09
==============================================================================
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 and six
months ended April 30, 1999 and April 30, 1998 were as follows:
<S> <C> <C> <C> <C>
Fiscal Quarter Ended Six Months Ended
--------------------- -------------------
Apr. 30, Apr. 30, Apr. 30, Apr. 30,
Dollars in thousands 1999 1998 1999 1998
- ------------------------------------------------------------------------------
Net income $ 38,726 $ 19,307 $ 67,624 $ 33,401
Unrealized gain/(loss) on investments
(6,459) 6,815 20,873 (3,597)
Unearned stock compensation (728) 194 (1,027) 1,032
Cumulative translation adjustment 35 54 (89) 168
- ------------------------------------------------------------------------------
Comprehensive income $ 31,574 $ 26,370 $ 87,381 $ 31,004
==============================================================================
</TABLE>
</PAGE>
<PAGE>
<TABLE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Introduction
Novell is the world's leading provider of directory-enabled networking
software. Novell solutions give businesses total control of their private
networks and the Internet, simplifying the management of user access and
identity. Novell's worldwide channel, developer, education, and technical
support programs are the most extensive in the network computing industry.
Results of Operations
<S> <C> <C> <C> <C> <C> <C>
Net Sales Q2 Q2 YTD YTD
1999 Change 1998 1999 Change 1998
- ------------------------------------------------------------------------------
Net sales (millions) $316 21% $262 $601 17% $514
==============================================================================
Novell's products 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
second quarter of 1998 to the second quarter of 1999, and from the first six
months of fiscal 1998 to the first six months of fiscal 1999, analysis of the
individual product categories characterizes the changes that have occurred.
The server platforms product category includes directory-enabled NetWare
(NetWare 4 and NetWare 5) and NetWare 3. Server platforms revenue increased
by $38 million or 26% in the second quarter of 1999 compared to the second
quarter of 1998. Directory-enabled NetWare increased $49 million or 41%
following strong acceptance of NetWare 5, while NetWare 3 revenue decreased
$11 million or 36% from the second quarter of fiscal 1998 compared to the
second quarter of fiscal 1999. In the first six months of fiscal 1999
compared to the first six months of fiscal 1998, server platforms revenue was
up $56 million or 19%. Directory-enabled NetWare increased $69 million or
28%, while NetWare 3 revenue slid $13 million or 25% during the six month
comparative periods.
The network infrastructure and applications product category 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
category. The product category had revenue of $75 million in the second
quarter of 1999 compared to $72 million in the second quarter of 1998. This
4% increase was driven by new product revenue from Z.E.N.works, as well as
strong growth in BorderManager and NDS for NT and Solaris. These increases
were somewhat offset by a decrease in host connectivity products and in Tuxedo
royalties, which ended in the fourth quarter of fiscal 1998. In the first six
months of fiscal 1999 compared to the first six months of fiscal 1998, network
infrastructure and applications revenue was up $10 million or 7%. This 7%
increase was driven by the same factors driving the quarter over quarter
revenue growth.
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 $53 million and $41 million in the
second 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 were flat and represented only 2% of total revenue in the
second quarter of 1999 compared to 3% in the second quarter of 1998. In the
first six months of fiscal 1999 compared to the first six months of fiscal
1998, service, training, consulting and other revenue increased by $21 million
or 27% due to the same factors driving the quarter over quarter revenue
growth.
International sales represented 46% of total sales in the first six months of
1999 compared to 43% in the first six months of 1998. This change is a result
of a 11% increase in domestic revenues compared to a 24% increase in
international revenues in the first six months of fiscal 1999 compared to the
first six months of fiscal 1998.
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Gross Profit Q2 Q2 YTD YTD
1999 Change 1998 1999 Change 1998
- -----------------------------------------------------------------------------
Gross profit (millions) $239 18% $203 $461 16% $398
Percentage of net sales 76% 77% 77% 77%
==============================================================================
The gross margin percentage decreased slightly in the second quarter of fiscal
1999 compared to the second quarter of fiscal 1998 due to higher royalty costs
and an increase in expenses associated with ramping up the Company's
consulting business, both as a percentage of net sales and in absolute
dollars. In the first six months of fiscal 1999 compared to the first six
months of fiscal 1998, the gross margin percentage remained flat. Higher
service, consulting and royalty costs were offset by lower material, inventory
and training and education costs.
<S> <C> <C> <C> <C> <C> <C>
Operating Expenses Q2 Q2 YTD YTD
1999 Change 1998 1999 Change 1998
- -----------------------------------------------------------------------------
Sales and marketing (millions)
$106 5% $101 $212 3% $206
Percentage of net sales 34% 39% 35% 40%
- ------------------------------------------------------------------------------
Product development (millions)
$ 58 -5% $ 61 $112 -7% $121
Percentage of net sales 18% 23% 19% 24%
- ------------------------------------------------------------------------------
General and administrative (millions)
$ 25 -4% $ 26 $ 51 -2% $ 52
Percentage of net sales 8% 10% 8% 10%
- ------------------------------------------------------------------------------
Total operating expenses (millions)
$190 1% $189 $375 -1% $379
Percentage of net sales 60% 72% 62% 74%
==============================================================================
Sales and marketing expenses increased by $5 million and $6 million,
respectively, in the second quarter of fiscal 1999 compared to the second
quarter of fiscal 1998 and in the first six months of fiscal 1999 compared to
the first six months of fiscal 1998, but decreased as a percentage of net
sales. Lower international selling expenses were partially offset by higher
marketing expenses in both comparative periods. 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 $3 million in the second quarter of
fiscal 1999 compared to the second quarter of fiscal 1998 and by $9 million,
or 7% in the first six months of fiscal 1999 compared to the first six months
of fiscal 1998. Product development expenses decreased as a percentage of net
sales, in both comparative periods, due to a more efficient product
development organization focused on delivering new products consistent with
its strategy.
General and administrative expenses decreased slightly by $1 million in both
the second quarter of fiscal 1999 compared to the second quarter of fiscal
1998 and in the six months of fiscal 1999 compared to the first six months of
fiscal 1999. General and administrative expenses also decreased as a
percentage of net sales, in both comparative periods, due to a higher revenue
base.
<S> <C> <C> <C>
YTD YTD
1999 Change 1998
- ------------------------------------------------------------------------------
Employees 4,591 - 4,570
Annualized revenue per employee (000's) $253 15% $220
==============================================================================
</TABLE>
</PAGE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Other Income, Net Q2 Q2 YTD YTD
1999 Change 1998 1999 Change 1998
- ------------------------------------------------------------------------------
Other income, net (millions) $ 4 -67% $ 12 $ 8 -70% $ 27
Percentage of net sales 1% 5% 1% 5%
==============================================================================
The primary component of other income, net is investment income, which was $11
million in the second quarter of fiscal 1999 compared to $15 million in the
second quarter of fiscal 1998. The decrease in the second quarter of 1999
compared to the second quarter in 1998 is the result of net realized capital
losses as the Company disposed of certain equity securities. In the second
quarter of 1999, in addition to investment income, the Company had immaterial
losses on foreign currency, the accrual for certain legal matters and the
write-off of certain long-term investments. In the first six months of fiscal
1999, net investment income was $20 million compared to $30 million in the
first six months of fiscal 1998. The decrease in the period was also the
result of net realized capital losses associated with certain equity
securities.
Income Taxes
<S> <C> <C> <C> <C> <C> <C>
Q2 Q2 YTD YTD
1999 Change 1998 1999 Change 1998
- ------------------------------------------------------------------------------
Income taxes (millions) $ 15 88% $ 8 $ 26 100% $ 13
Percentage of net sales 5% 3% 4% 3%
Effective tax rate 28% 28% 28% 28%
==============================================================================
The effective tax rate for fiscal 1999 is estimated to be 28%, the same as
fiscal 1998.
Net Income and Net Income Per Share
<S> <C> <C> <C> <C> <C> <C>
Q2 Q2 YTD YTD
1999 Change 1998 1999 Change 1998
- ------------------------------------------------------------------------------
Net income (millions) $ 39 105% $ 19 $ 68 106% $ 33
Percentage of net sales 12% 7% 11% 6%
Net income per share - basic $.12 $.05 $.20 $.10
Net income per share - diluted $.11 $.05 $.19 $.09
==============================================================================
Liquidity and Capital Resources
<S> <C> <C> <C>
Q2 Q4
1999 Change 1998
- ------------------------------------------------------------------------------
Cash and short-term investments (millions) $974 -3% $1,007
Percentage of total assets 51% 52%
==============================================================================
Cash and short-term investments decreased to $974 million at April 30, 1999
from $1,007 million at October 31, 1998. The major reason for this decrease
was the $146 million of cash used for repurchase of common stock, the $32
million used for expenditures on property, plant and equipment, the $66
million used to increase collateral associated with certain long-term
investments, partially offset by the $161 million provided by operating
activities and the $50 million from the issuance of common stock. 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
losses of $6 million as of April 30, 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.
</TABLE>
</PAGE>
<PAGE>
The Company's principal source of liquidity has been from operations. At
April 30, 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 six months of fiscal 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 six months of 1999, the Company
repurchased and retired approximately 10 million shares at a cost of
approximately $146 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.
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 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.
</PAGE>
<PAGE>
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 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.
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.
</PAGE>
<PAGE>
<TABLE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on April 12,
1999 for the following purposes:
1. To elect nine directors.
2. To ratify the selection of Ernst & Young LLP as independent auditors for
Novell, Inc.
3. To consider a shareholder proposal regarding the Company s shareholder
rights plan.
The following tables set forth the outcome of the matters voted upon at the
meeting and the number of votes cast for, against or withheld.
<S> <C> <C> <C>
Votes Votes
Proposal 1 For Withheld
- ------------------------------------------------------------------------------
Election of Directors
Eric E. Schmidt 298,089,204 1,466,931
John A. Young 298,034,410 1,521,725
Elaine R. Bond 297,891,695 1,664,440
Hans-Werner Hector 298,066,275 1,489,860
Reed E. Hundt 298,060,103 1,496,032
William N. Joy 298,128,243 1,427,892
Jack L. Messman 297,853,404 1,702,731
Richard L. Nolan 296,835,870 2,720,265
Larry W. Sonsini 297,918,041 1,638,094
- ------------------------------------------------------------------------------
Votes Votes Votes
Proposal 2 For Against Abstained
- ------------------------------------------------------------------------------
Ratify the selection of
Ernst & Young LLP
as Independent Auditors 298,140,476 627,160 788,339
- ------------------------------------------------------------------------------
Votes Votes Votes Broker
Proposal 3 For Against Abstained Non-Vote
- ------------------------------------------------------------------------------
Consider a shareholder proposal
regarding the Company's shareholder
rights plan. 127,255,971 89,074,751 8,834,507 74,390,906
- ------------------------------------------------------------------------------
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
April 30, 1999.
- --------------------------
*Filed herewith.
</TABLE>
</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: June 11, 1999 /s/ Dr. Eric Schmidt
------------------------
Dr. Eric Schmidt
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: June 11, 1999 /s/ Dennis R. Raney
--------------------------
Dennis R. Raney
Chief Financial Officer
(Principal Financial Officer)
Date: June 11, 1999 /s/ Ron Foster
--------------------------
Ron Foster
Vice President and Corporate
Controller
(Principal Accounting Officer)
</PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> APR-30-1999
<CASH> 185,045
<SECURITIES> 789,395
<RECEIVABLES> 209,282
<ALLOWANCES> (44,215)
<INVENTORY> 3,108
<CURRENT-ASSETS> 1,350,196
<PP&E> 700,486
<DEPRECIATION> (356,225)
<TOTAL-ASSETS> 1,919,093
<CURRENT-LIABILITIES> 397,676
<BONDS> 0
0
0
<COMMON> 33,456
<OTHER-SE> 1,477,388
<TOTAL-LIABILITY-AND-EQUITY> 1,919,093
<SALES> 601,458
<TOTAL-REVENUES> 601,458
<CGS> 140,331
<TOTAL-COSTS> 140,331
<OTHER-EXPENSES> 375,285
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 93,923
<INCOME-TAX> 26,299
<INCOME-CONTINUING> 67,624
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,624
<EPS-BASIC> .20
<EPS-DILUTED> .19
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