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, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from
-------
to
-----------
Commission File Number: 0-13351
NOVELL, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0393339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 South Novell Place
Provo, Utah 84606
(Address of principal executive offices and zip code)
(801) 861-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
As of August 31, 2000 there were 328,207,679 shares of the Registrant's Common
Stock outstanding.
<PAGE>
4
PART I. FINANCIAL INFORMATION, ITEM 1. FINANCIAL STATEMENTS
NOVELL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<S> <C> <C>
Jul. 31, Oct. 31,
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA 2000 1999
-------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 676,642 $ 895,404
Receivables, less allowances ($33,700 - July; $36,318 - October) 214,003 284,510
Inventories 3,215 3,753
Prepaid expenses 30,263 47,738
Deferred and refundable income taxes 53,079 60,266
OTHER CURRENT ASSETS 36,724 43,945
--------------------------------------------------------------------------------------------------------------------
Total current assets 1,013,926 1,335,616
Property, plant and equipment, net 309,290 347,012
Long-term investments 413,109 229,114
OTHER ASSETS 56,389 30,577
--------------------------------------------------------------------------------------------------------------------
Total assets $1,792,714 $ 1,942,319
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 81,324 $ 85,037
Accrued compensation 62,424 62,778
Accrued marketing liabilities 14,375 11,449
Other accrued liabilities 53,954 50,133
Income taxes payable - 57,085
DEFERRED REVENUE 184,677 173,150
-------------------------------------------------------------------------------------------------------------------
Total current liabilities 396,754 439,632
Minority interests 11,909 10,446
SHAREHOLDERS' EQUITY
Common stock, par value $.10 per share
Authorized - 600,000,000 shares
Issued - 326,159,290 shares-July
326,593,911 shares-October 32,616 32,659
Additional paid in capital 34,658 -
Retained earnings 1,364,558 1,432,624
Accumulated other comprehensive income (17,174) 35,189
OTHER (30,607) (8,231)
-------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,384,051 1,492,241
-------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,792,714 $ 1,942,319
====================================================================================================================
</TABLE>
See notes to consolidated unaudited condensed financial statements.
<PAGE>
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME
<TABLE>
<S> <C> <C> <C> <C>
FISCAL QUARTER ENDED NINE MONTHS ENDED
-------------------------- -----------------------
Dollars in thousands, Jul. 31, Jul. 31, Jul. 31, Jul. 31,
EXCEPT PER SHARE DATA 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------
Net sales $ 270,019 $ 326,808 $ 888,411 $ 928,266
COST OF SALES 85,547 76,089 249,145 223,223
-------------------------------------------------------------------------------------------------------------------
Gross profit 184,472 250,719 639,266 705,043
OPERATING EXPENSES
Sales and marketing 123,991 108,806 364,054 320,647
Product development 60,574 58,782 180,611 174,068
GENERAL AND ADMINISTRATIVE 18,790 20,692 58,715 62,102
-------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 203,355 188,280 603,380 556,817
-------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (18,883) 62,439 35,886 148,226
OTHER INCOME (EXPENSE)
Investment income 32,892 10,260 87,470 30,676
OTHER, NET (2,105) (4,211) (6,097) (16,491)
--------------------------------------------------------------------------------------------------------------------
OTHER INCOME, NET 30,787 6,049 81,373 14,185
-------------------------------------------------------------------------------------------------------------------
Income before taxes 11,904 68,488 117,259 162,411
INCOME TAXES 3,332 19,177 32,832 45,476
-------------------------------------------------------------------------------------------------------------------
Net income $ 8,572 $ 49,311 $ 84,427 $ 116,935
===================================================================================================================
Weighted average shares outstanding
Basic 325,315 334,488 326,336 335,735
Diluted 327,259 350,951 336,970 351,196
===================================================================================================================
Net income per share
Basic $ 0.03 $ 0.15 $ 0.26 $ 0.35
Diluted $ 0.03 $ 0.14 $ 0.25 $ 0.33
===================================================================================================================
</TABLE>
See notes to consolidated unaudited condensed financial statements.
<PAGE>
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
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<S> <C> <C>
NINE MONTHS ENDED
-------------------------------
Jul. 31, Jul. 31,
DOLLARS IN THOUSANDS 2000 1999
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 84,427 $ 116,935
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 61,982 47,517
Stock plans' income tax benefits 61,453 46,972
Decrease in receivables 70,507 11,916
Decrease in inventories 538 617
Decrease in prepaid expenses 17,475 14,960
Decrease in deferred and refundable income taxes 31,144 20,711
Decrease in other current assets 7,221 2,541
(DECREASE) IN CURRENT LIABILITIES, NET (42,878) (14,159)
-------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 291,869 248,010
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net 74,545 79,832
REPURCHASE OF COMMON STOCK (301,011) (203,638)
-------------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (226,466) (123,806)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (43,359) (50,988)
Proceed from sale of property, plant and equipment 33,079 -
Purchases of short-term investments (701,969) (1,597,672)
Maturities of short-term investments 626,277 1,190,733
Sales of short-term investments 330,666 552,468
Expenditures for other long-term investments (186,780) (35,022)
Increase in restricted cash (36,881) (77,195)
OTHER 851 1,608
----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 21,884 (16,068)
--------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 87,287 108,136
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 274,269 155,493
--------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD 361,556 263,629
SHORT-TERM INVESTMENTS - END OF PERIOD 315,086 728,572
--------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS - END OF PERIOD $ 676,642 $ 992,201
====================================================================================================================
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
Issuance of restricted stock for acquisitions $ 17,366 $ --
</TABLE>
See notes to consolidated unaudited condensed financial statements.
<PAGE>
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 1999 Annual Report to Shareholders. These financial
statements do include all normal recurring adjustments that the Company
believes necessary for a fair presentation of the statements. The interim
operating results are not necessarily indicative of the results for a full
year. Certain reclassifications, none of which affected net income, have
been made to the prior years' amounts in order to conform to the current
years' presentation.
B. CASH AND SHORT-TERM INVESTMENTS
Marketable debt and equity securities that are included in cash and
short-term investments are considered available-for-sale and carried at
fair market value, with the unrealized gains and losses, net of tax,
included in comprehensive income. Fair market values are based on quoted
market prices at the end of the 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 and corporate
notes and bonds included in short-term investments have contractual
maturities from 1-7 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.
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross Fair
Cost at Unrealized Unrealized Market Value at
(DOLLARS IN THOUSANDS) JUL. 31, 2000 GAINS LOSSES JUL. 31, 2000
------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Cash $ 100,831 $ - $ - $ 100,831
MONEY MARKET FUND 260,725 - - 260,725
-------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS 361,556 - - 361,556
--------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS
Corporate Notes and Bonds 46,216 104 - 46,320
Municipal securities 181,936 - (1,936) 180,000
Mutual funds 52,713 1 (4,128) 48,586
EQUITY SECURITIES 23,815 22,639 (6,274) 40,180
-------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 304,680 22,744 (12,338) 315,086
-------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS $ 666,236 $ 22,744 $ (12,338) $ 676,642
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross Fair
Cost at Unrealized Unrealized Market Value at
(DOLLARS IN THOUSANDS) OCT. 31, 1999 GAINS LOSSES OCT. 31, 1999
-------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Cash $ 186,689 $ - $ - $ 186,689
MONEY MARKET FUND 87,580 - - 87,580
-------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS 274,269 - - 274,269
-------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS
Municipal securities 411,938 3 (2,393) 409,548
Money market mutual funds 93,894 - - 93,894
Money market preferreds 33,000 - - 33,000
Mutual funds 15,873 - (102) 15,771
EQUITY SECURITIES 4,949 64,619 (646) 68,922
-------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 559,654 64,622 (3,141) 621,135
-------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS $ 833,923 $ 64,622 $ (3,141) $ 895,404
-------------------------------------------------------------------------------------------------------------------
</TABLE>
During the first nine months of fiscal 2000 the Company realized gains of
$52.7 million and realized losses of $1.6 million on the sale of securities
compared to realized gains of $49.4 million and realized losses of $56.3
million in the first nine months of fiscal 1999.
C. LONG-TERM INVESTMENTS
The Company's long-term investments consist of investments in start-up
software and internet companies, venture capital funds, other publicly
traded securities, and restricted cash held as collateral. Investments in
start-up software and internet companies and venture capital funds are
recorded at cost as the company does not have controlling interest in any
of the respective companies. Investments in publicly traded securities are
stated at fair value, based on market quotes. As of July 31, 2000, there
were $33.8 million in unrealized losses on long-term investments.
D. INCOME TAXES
The Company's estimated effective tax rate for the first nine months of
fiscal 2000 was 28.0%, the same as in the first nine months of fiscal 1999.
The Company paid cash amounts for income taxes of $21.3 million in the
first nine months of fiscal 2000 and $5.5 million during the same period of
fiscal 1999.
E. COMMITMENTS AND CONTINGENCIES
The Company currently has a $10 million unsecured revolving bank line of
credit, with interest payable 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, 2000 borrowings, letter of credit
acceptances or commitments of approximately $1.9 million were outstanding
under this line. The Company also has a $10 million line of credit with
another bank, which is not subject to a loan agreement. At July 31, 2000
there were no standby letters of credit 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 funded $223 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, by either the
lender or the Company, subject to the approval of the other party. Rent
obligations commenced during the second quarter of fiscal 1999 for the San
Jose buildings and during the second quarter of fiscal 2000 for the Provo
building. 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 multiplied 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 July 31, 2000, was
approximately $190 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 July 31, 2000
was approximately $223.0 million, and is included in long-term investments.
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. SEGMENT INFORMATION
The Company operates in one business segment, directory-enabled networking
software and services. The Company's products are sold throughout the
world. In the United States, products are sold through direct, OEM,
reseller, and distributor channels. Internationally, products are marketed
through distributors who sell to dealers and end users. Performance of the
Company is evaluated by the Company's chief decision makers, the Chief
Executive Officer and Executive Council, based on total Company results.
Revenue is evaluated based on geographic region and by product category.
Separate financial information is not available by product category in
regards to asset allocation, expense allocation, or profitability. Novell's
products can be categorized into the following four areas, all within the
directory-enabled networking software and services segment.
o Directory-enabled server platforms, which includes NetWare 4 and
NetWare 5
o Directory-enabled applications products, which include NetWare for
SAA host connectivity products, BorderManager, NDS integration and
high availability service products, as well as collaboration and
management products including GroupWise, ManageWise, and ZENworks
o Service, education and consulting revenue, which is generated
from customer service, educational products and courses, and
consulting for network solutions
o Pre-directory product revenue consisting of NetWare 3, non-directory-
enabled infrastructure products and UNIX royalties
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
REVENUE BY PRODUCT CATEGORY FISCAL QUARTER ENDED NINE MONTHS ENDED
--------------------------- ------------------------------- ----------------------------
Jul. 31, Jul. 31, Jul. 31, Jul. 31,
DOLLARS IN THOUSANDS 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------
Directory-enabled server platforms $ 119,966 $ 169,266 $ 389,648 $ 483,910
Directory-enabled applications 78,144 80,148 237,098 225,501
Service, education and consulting 55,556 49,054 161,936 130,487
Pre-directory product revenue 16,353 28,340 99,729 88,368
------------ ------------ ----------- ----------
Total net sales $ 270,019 $ 326,808 $ 888,411 $ 928,266
========== ========== ========= =========
</TABLE>
Sales outside the U.S. are comprised of sales to international customers in
Europe, the Middle East, Canada, South America, and Asia Pacific. Other
than sales in Ireland, international sales were not material individually
in any other international location. For the first nine months of fiscal
2000 and fiscal 1999, sales to international customers were approximately
$385 million and $421 million, respectively. In the first nine months of
fiscal 2000 and fiscal 1999, 66% and 71%, respectively, of international
sales were to European countries. No one foreign country accounted for 10%
or more of total sales in either period. There were no customers accounting
for more than 10% of total revenue during the first nine months of fiscal
2000. One multi-national distributor accounted for 11% of total revenue
during the first nine months of fiscal 1999.
G. NET INCOME PER SHARE
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FISCAL QUARTER ENDED NINE MONTHS ENDED
-------------------------- -------------------------
Jul. 31, Jul. 31, Jul. 31, Jul. 31,
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
Basic net income per share computation
NET INCOME $ 8,572 $ 49,311 $ 84,427 $ 116,935
-------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 325,315 334,488 326,336 335,735
-------------------------------------------------------------------------------------------------------------------
Basic net income per share $ 0.03 $ 0.15 $ 0.26 $ 0.35
===================================================================================================================
Diluted net income per share computation
NET INCOME $ 8,572 $ 49,311 $ 84,427 $ 116,935
-------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 325,315 334,488 326,336 335,735
Incremental shares attributable to exercise of
OUTSTANDING OPTIONS (TREASURY STOCK METHOD) 1,944 16,463 10,634 15,461
-------------------------------------------------------------------------------------------------------------------
TOTAL 327,259 350,951 336,970 351,196
-------------------------------------------------------------------------------------------------------------------
Diluted net income per share $ 0.03 $ 0.14 $ 0.25 $ 0.33
===================================================================================================================
</TABLE>
<PAGE>
H. COMPREHENSIVE INCOME
The components of comprehensive income (loss), net of tax, for the quarter
and first nine months ended July 31, 2000 and 1999 were as follows:
<TABLE>
<S> <C> <C> <C> <C>
FISCAL QUARTER ENDED NINE MONTHS ENDED
-------------------------------- -----------------------------
Jul. 31, Jul. 31, Jul. 31, Jul. 31,
DOLLARS IN THOUSANDS 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
Net income $ 8,572 $ 49,311 $ 84,427 $ 116,935
Change in net unrealized gain on investments (32,329) 1,554 (52,110) 22,427
CHANGE IN CUMULATIVE TRANSLATION ADJUSTMENT (176) (732) (253) (821)
-------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (23,933) $ 50,133 $ 32,064 $ 138,541
==================================================================================================================
</TABLE>
The components of accumulated other comprehensive income, net of related
tax, at July 31, 2000 and 1999, are as follows:
<TABLE>
<S> <C> <C>
Jul. 31, Oct. 31,
DOLLARS IN THOUSANDS 2000 1999
-------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investment $ (14,348) $ 37,762
CUMULATIVE TRANSLATION ADJUSTMENT (2,826) (2,573)
--------------------------------------------------------------------------------------------------
Accumulated other comprehensive income $ (17,174) $ 35,189
=================================================================================================
</TABLE>
<PAGE>
I. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133). SFAS 133 established
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. SFAS 133 requires all companies to recognize derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. This statement is effective for
all fiscal quarters of fiscal years beginning after July 1, 2000. The
Company is currently assessing the potential impact SFAS 133 will have on
the statement of financial position of the Company. In December 1999, the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101
summarizes certain of the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company is required to adopt SAB 101 no later than the first quarter of
fiscal 2001. Novell is currently evaluating the impact of SAB 101 on the
Company's results of operations and financial position.
M. SUBSEQUENT EVENTS
On September 6, 2000, the Company announced it was reducing its workforce
by approximately 16 percent, writing off certain assets, and implementing
cost savings in an effort to improve the Company's business performance and
to free up dollars to spend on key sales, marketing and development
initiatives. The Company anticipates taking a restructuring charge related
to these actions of approximately $40 to $50 million in its fourth fiscal
quarter of 2000.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this Quarterly Report contain forward-looking
statements that involve risks and uncertainties. All forward-looking statements
are based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements. The
Company's actual results may differ materially from the results discussed in
such forward-looking statements as a result of a number of factors, which
include, but are certainly not limited to, those set forth below in the sections
entitled "Future Results," and "Euro Conversion." Readers should carefully
review the risk factors described in other documents that the Company files from
time to time with the Commission, including the Annual Report on Form 10-K and
the Quarterly Reports on Form 10-Q to be filed by the Company in Fiscal 2000.
INTRODUCTION
Novell, Inc., is a leading provider of Net services software that delivers
services to secure and power all types of networks--the Internet, intranets, and
extranets; wired to wireless; corporate and public--across leading operating
systems. Novell's Net services software provides the foundation for one Net--a
single global network that supports new applications and forms of business.
Worldwide channel, consulting, education and technical support programs, along
with strategic alliances, combine Novell Net services software with third-party
products and services to form complete Net solutions.
RESULTS OF OPERATIONS
NET SALES
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Q3 Q3 YTD YTD
2000 CHG 1999 2000 CHG 1999
-------------------------------------------------------------------------------------------------------------------
Net sales (thousands) $ 270,019 (17.4)% $ 326,808 $ 888,411 (4.3)% $928,266
===================================================================================================================
</TABLE>
Novell's products can be categorized into the following four areas, all within
the directory-enabled networking software services segment.
o Directory-enabled server platforms, which includes NetWare 4 and NetWare 5
o Directory-enabled applications products, or Net Services Software, which
include NetWare for SAA host connectivity products, BorderManager, NDS
integration and high availability service products, as well as collaboration
and management products including GroupWise, ManageWise, and ZENworks
o Service, education and consulting revenue, which is generated from customer
service, educational products and courses, and consulting for network
solutions
o Pre-directory product revenue consisting of NetWare 3, non-directory-enabled
infrastructure products and UNIX royalties
Revenue from the directory-enabled server platforms category decreased $49.3
million or 29% in the third quarter of 2000 compared to the third quarter of
1999. Year-to-date, directory-enabled server platform revenue decreased $94.3
million or 20%. These decreases are due primarily to the decline in the
Company's packaged software business, which saw a decline in sales of 63% from
the prior year third quarter and 54% year-to-date compared to the same period of
1999. Lower packaged software sales resulted from: o the Company's focus on
building a direct sales force and organizational changes, o inadequate attention
by the Company to its channel resellers in generating demand, training and
support for Novell products,
and
o the launch of competitor products, which shifted reseller's training and
promoting efforts from Novell's products. In addition, the Company believes that
a portion of the decline was due to lower demand related to post Y2K purchases.
Revenue from the directory-enabled applications products was $78.1 million in
the third quarter of 2000 compared to $80.1 million in the third quarter of
1999. The 2.5% decrease was mainly due to decreased sales of the Company's
management and collaboration products and NetWare for SAA, offset slightly by
increased sales of Border Manager. At the end of the third quarter 2000,
year-to-date directory-enabled applications product revenue was $237.1 million
compared to $225.5 million for the same period of 1999. The increase in
year-to-date revenue was driven by increased sales of management & collaboration
products, Border Manager, NDS for NT and Solaris, and Single Sign-on, slightly
offset by a decrease in NetWare for SAA.
Service, education and consulting revenues were $55.6 million and $49.1 million
in the third quarter of 2000 and 1999, respectively. Year-to-date service,
education and consulting revenues were $161.9 million and $130.5 million, in
2000 and 1999, respectively. The increase in the third quarter and year-to-date
revenue was a result of increased directory-related consulting revenue,
increased service revenue as a result of increased site licenses, and an overall
growth in consulting.
Pre-directory products revenue was $16.4 million in the third quarter of 2000
compared to $28.3 million in the third quarter of 1999. Pre-directory products
revenue year-to-date 2000 was $99.7 million compared to $88.4 million for the
same period of 1999. The decrease in revenue from third quarter 1999 to 2000 was
primarily due to the discontinuation of NetWare 3 products. The increase in
year-to-date revenue was primarily the result of a $35.5 million royalty payment
from Caldera, Inc., the principal portion of which relates to an antitrust
settlement between Caldera, Inc. and Microsoft recorded in the second quarter of
fiscal 2000, and higher royalty revenue related to the UNIX royalties. Without
the Caldera revenue, year-to-date pre-directory products revenue would have
decreased $24.2 million or 27% year-to-date compared to the same period of 1999.
This decrease was due primarily to the lower sales through channel resellers and
the announced discontinuation of the NetWare 3 products.
International sales represented 43% of total sales in the first nine months of
2000 compared to 45% in the first nine months of fiscal 1999. Without the
effects of the Caldera revenue recorded in the U.S., international sales
represented 45% of total sales in the first nine months of 2000. During the
first nine months of fiscal 2000, international revenue decreased 8% and
domestic revenue, excluding Caldera, decreased 8% compared to the same period of
1999. Internationally, weak sales in Europe more than offset increased sales in
Japan and Canada causing the decline.
The Company is currently addressing the decline in sales, particularly the
decrease in channel sales, in an effort to improve results in future periods.
The Company has reorganized their sales force and product groups to better
service its customers and to focus it resources on taking advantage of new
opportunities . The Company anticipates these changes will take a couple of
quarters to fully implement before realizing the benefits from these changes.
GROSS PROFIT
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Q3 Q3 YTD YTD
2000 CHG 1999 2000 CHG 1999
-------------------------------------------------------------------------------------------------------------------
Gross profit (thousands) $184,472 (26.4)% $250,719 $639,266 (9.3)% $705,043
Percentage of net sales 68.3% 76.7% 72.0% 76.0%
==================================================================================================================
</TABLE>
Gross profit as a percentage of sales decreased in the third quarter and
year-to-date 2000 compared to the same periods of fiscal 1999 due primarily to
the effects of decreased product sales levels, higher costs for services related
to the Company's consulting business, and increased training and education
costs. Year-to-date, these increases were slightly offset by the effects of the
Caldera revenue and lower royalty costs. Excluding the Caldera revenue, gross
profit as a percentage of sales would have been 70.1% year-to-date 2000.
<PAGE>
OPERATING EXPENSES
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Q3 Q3 YTD YTD
2000 CHG 1999 2000 CHG 1999
-------------------------------------------------------------------------------------------------------------------
Sales and marketing (thousands) $ 123,991 14.0% $ 108,806 $364,054 13.5% $320,647
PERCENTAGE OF NET SALES 45.9% 33.3% 41.0% 34.5%
------------------------------------------------------------------------------------------------------------------
Product development (thousands) $ 60,574 3.0% $ 58,782 $180,611 3.8% $174,068
PERCENTAGE OF NET SALES 22.4% 18.0% 20.3% 18.8%
------------------------------------------------------------------------------------------------------------------
General and administrative (thousands) $ 18,790 (9.2)% $ 20,692 $ 58,715 (5.5)% $ 62,102
PERCENTAGE OF NET SALES 7.0% 6.3% 6.6% 6.7%
------------------------------------------------------------------------------------------------------------------
Total operating expenses (thousands) $ 203,355 8.0% $ 188,280 $603,380 8.4% $556,817
Percentage of net sales 75.3% 57.6% 67.9% 60.0%
==================================================================================================================
</TABLE>
Sales and marketing expenses increased by $15.2 million, in the third quarter of
fiscal 2000 and by $43.4 million year-to-date in fiscal 2000 compared to the
same periods of fiscal 1999. Sales and marketing expenses fluctuate in any given
period due to timing of product promotions, advertising or other discretionary
expenses. Also during fiscal 2000, the Company increased its sales and marketing
expenditures, where appropriate, in an effort to focus on improving future sales
growth by reorganizing these groups around new geographies, solution selling,
channel support and new product groups. Lower sales during fiscal 2000 caused
sales and marketing expenses as a percentage of sales to increase.
Product development expenses increased $1.8 million in the third quarter and
$6.5 million year-to-date in fiscal 2000 compared to the same periods of fiscal
1999. Product development expenses also increased as a percentage of net sales
in the third quarter and year-to-date 2000 due to lower sales levels.
General and administrative expenses decreased in total during the third quarter
of fiscal 2000 compared to the third quarter of fiscal 1999, primarily due to
lower operating costs, slightly offset by increased bad debt expense. Decreased
sales levels in fiscal 2000 caused general and administrative expenses as a
percentage of sales to increase in the third quarter of fiscal 2000 compared to
the same period of fiscal 1999. Year-to-date general and administrative expenses
decreased in total and as a percentage of sales as the Company continued to
focus on controlling these types of costs.
On September 6, 2000, the Company announced it was reducing its workforce by
approximately 16 percent, writing off certain assets, and implementing cost
savings in an effort to improve the Company's business performance and to free
up dollars to spend on key sales, marketing and development initiatives. The
Company anticipates taking a restructuring charge related to these actions of
approximately $40 to $50 million in its fourth fiscal quarter of 2000.
Workforce reductions are estimated to affect 900 positions and overall quarterly
cost of doing business is expected to decrease by approximately $25 million
beginning in the first fiscal quarter of 2001. Total quarterly savings from the
restructuring are approximately $45 million, but increased spending on Net
service related initiatives will offset approximately $20 million of the initial
quarterly savings.
<TABLE>
<S> <C> <C> <C>
YTD YTD
2000 CHANGE 1999
-------------------------------------------------------------------------------------------------------------------
Employees 5,479 5.3% 5,204
Annualized revenue per average employee (000's) $ 222 (12.9)% $255
Annualized net income per average employee (000's) $ 21.0 (34.6)% $ 32.1
===================================================================================================================
</TABLE>
Headcount increased from the third quarter of 1999 to the third quarter of 2000,
primarily due to increases in the education, consulting, worldwide sales, and
product development areas.
OTHER INCOME, NET
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Q3 Q3 YTD YTD
2000 CHG 1999 2000 CHG 1999
-------------------------------------------------------------------------------------------------------------------
Other income, net (thousands) $ 30,787 409.0% $6,049 $ 81,373 473.7% $14,185
Percentage of net sales 11.4% 1.9% 9.2% 1.5%
===================================================================================================================
</TABLE>
The primary component of other income, net is investment income, which was $32.9
million in the third quarter of fiscal 2000 compared to $10.3 million in the
third quarter of fiscal 1999. Year-to-date investment income was $87.5 million
in 2000 compared to $30.1 million in 1999. Included in investment income during
the first nine months of 2000 were realized capital losses of $1.6 million and
realized capital gains of $52.7 million. During the first nine months of 1999,
realized capital losses were $56.3 million and realized capital gains were $49.4
million.
In addition to investment income, the Company recognized a gain on foreign
currency and higher sublease income from an increase in subleases in fiscal
2000. This additional income was slightly offset by higher losses on fixed asset
sales during the third quarter of fiscal 2000. During the first nine months of
fiscal 1999, the Company incurred a loss on foreign currency and increased
miscellaneous expenses related to the write-off of certain long-term
investments.
INCOME TAXES
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Q3 Q3 YTD YTD
2000 CHG 1999 2000 CHG 1999
-------------------------------------------------------------------------------------------------------------------
Income taxes (thousands) $ 3,332 (82.6)% $19,177 $ 32,832 (27.8)% $45,476
Percentage of net sales 1.2% 5.9% 3.7% 4.9%
Effective tax rate 28.0% 28.0% 28.0% 28.0%
=================================================================================================================
</TABLE>
The effective tax rate for fiscal 2000 is estimated to be 28%, the same as
fiscal 1999.
NET INCOME AND NET INCOME PER SHARE
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Q3 Q3 YTD YTD
2000 CHG 1999 2000 CHG 1999
-------------------------------------------------------------------------------------------------------------------
Net income (thousands) $8,572 (82.6)% $49,311 $84,427 (27.8)% $116,935
Percentage of net sales 3.2% 15.1% 9.5% 12.6%
Net income per share - basic $0.03 $0.15 $0.26 $0.35
Net income per share - diluted $0.03 $0.14 $0.25 $0.33
==================================================================================================================
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<S> <C> <C> <C>
Q3 Q4
2000 CHANGE 1999
-------------------------------------------------------------------------------------------------------------------
Cash and short-term investments (thousands) $676,642 (24.4)% $895,404
Percentage of total assets 37.7% 46.1%
==================================================================================================================
</TABLE>
Cash and short-term investments decreased by $218.8 million at July 31, 2000
from $895.4 million at October 31, 1999. During the first nine months of fiscal
2000, cash and short-term investments decreased due to cash outflows of $301.0
million for the repurchase of common stock, $237.0 million for net purchases of
long-term investments and other long term investing activities, $36.9 million to
increase collateral associated with certain long-term investments, and $43.4
million to purchase property, plant and equipment. These cash outflows were
offset by $291.9 million provided from operating activities, $74.5 million from
the issuance of common stock, and $33.1 million cash received from the sale of
certain facilities in Orem, Utah.
The Company's investment portfolio includes equity securities with gross
unrealized gains of $22.7 million and gross unrealized losses of $46.2 million
as of July 31, 2000. Included in the Company's unrealized losses at July 31,
2000 was the Company's investment in marchFIRST, Inc., which had unrealized
losses of $33.8 million. No other individual security had material unrealized
losses as of the end of the second quarter 2000.
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 equity securities and
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 principal source of liquidity has been from operations. At July
31, 2000, the Company's principal unused sources of liquidity consisted of cash
and short-term investments and available borrowing capacity of approximately
$18.1 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 nine months of fiscal 2000, the Company 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
2000 are anticipated to be approximately $65.0 million, but could be reduced if
the growth of the Company is less than presently anticipated.
In July 1999, the Board of Directors authorized up to $500 million for the
repurchase of outstanding shares of the Company's common stock through October
31, 2000. During the first half of fiscal 2000, 10.6 million shares were
repurchased under this plan at a total cost of $301.0 million completing the
repurchases under this plan. In August 2000, the Board of Directors authorized
up to an additional $500 million for the repurchase of additional outstanding
shares.
As the Company continues to consolidate its Utah operations to its Provo
facility, the properties currently owned and occupied in Orem, Utah become
unnecessary and are being sold. On May 5, 2000, the Company finalized the sale
of a portion of these buildings. The remaining buildings are expected to be sold
over the next two years.
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: changes in business
conditions and the general economy; competitive factors such as rival operating
systems, the Company's ability to respond and correct problems with declining
sales through channel distributors, customer acceptance of new products and
price pressures; availability of third-party compatible products at below market
prices; risk of nonpayment of accounts or notes receivable; risks associated
with foreign operations; risk of product line or inventory obsolescence due to
shifts in technologies or market demand; timing of software product
introductions; market fluctuations of investment securities; and litigation. In
addition, there is no certainty that the changes the Company is making to
address declining sales and efforts to reduce expenses will result in increased
sales, lower overall expenses or increased profitability in future periods.
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 1999 report on Form 10-K.
EURO CONVERSION
On January 1, 1999, 11 of the 15 members of the European Union established fixed
conversion rates among their existing sovereign currencies and adopted the euro
as their common legal currency. At the end of a three-year transition period
during which companies may choose to operate either in the euro or national
currencies the legacy currencies will be eliminated. In June 1998, the Company
formed a cross-functional team to assess the impact of the conversion on the
Company's operations and to address associated issues.
The Company is currently conducting transactions in the euro and expects to have
all affected information systems fully converted by April 2001. Novell does not
expect the euro conversion to have a material effect on its competitive position
or financial results.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks, including changes in interest
rates, foreign currency exchange rates and marketable equity security prices. To
mitigate these risks, the Company utilizes currency forward contracts and
currency options. The Company does not use derivative financial instruments for
speculative or trading purposes, and no derivative financial instruments were
outstanding at July 31, 2000.
The primary objective of the Company's investment activities is to preserve
principal while maximizing yields without significantly increasing risk. This is
accomplished by investing in widely diversified short-term investments,
consisting primarily of investment grade securities, substantially all of which
either mature within the next twelve months or have characteristics of
short-term investments. A hypothetical 50 basis point increase in interest rates
would result in an approximate $5 million decrease (approximately 1%) in the
fair value of the Company's available-for-sale securities.
The Company hedges currency risks of investments denominated in foreign
currencies with currency forward contracts. Gains and losses on these foreign
currency investments would generally be offset by corresponding losses and gains
on the related hedging instruments, resulting in negligible net exposure to the
Company. A substantial majority of the Company's revenue, expense and capital
purchasing activities are transacted in U.S. dollars. However, the Company does
enter into transactions in other currencies, primarily Japanese yen, Canadian
Dollar, and certain other Asian and European currencies. To protect against
reductions in value and the volatility of future cash flows caused by changes in
foreign exchange rates, the Company has established balance sheet hedging
programs. Currency forward contracts and currency options are utilized in these
hedging programs. The Company's hedging programs reduce, but do not always
entirely eliminate, the impact of foreign currency exchange rate movements. If
the Company did not hedge against foreign currency exchange rate movement, an
adverse change of 10% in exchange rates would result in a decline in income
before taxes of approximately $10 million.
The Company is exposed to equity price risks on equity securities included in
its portfolio of investments entered into for the promotion of business and
strategic objectives. These investments are generally in small capitalization
stocks in the high-technology industry sector. The Company typically does not
attempt to reduce or eliminate its market exposure on these securities. A 10%
adverse change in equity prices would result in an approximate $7 million
decrease in the fair value of the Company's available-for-sale securities.
The Company is also exposed to market risk related to certain of its long-term
investments. These include investments in start-up software and internet
companies, long-term equity securities and venture capital funds. The Company
typically does not attempt to reduce or eliminate its market exposure on these
investments. If these investments were permanently impaired, a 10% adverse
change in the market value of these investments could result in an approximate
$19 million decrease in the value of the Company's recorded investments.
All of the potential changes noted above are based on sensitivity analyses
performed on the Company's financial position at July 31, 2000. Actual results
may differ materially.
<PAGE>
PART II. OTHER INFORMATION
<PAGE>
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on April 11, 2000 for the
following purposes:
1. To elect nine directors.
2. To approve the adoption of the Novell, Inc. 2000 Stock Plan.
3. To ratify the appointment of Ernst & Young, LLP, as independent auditors for
Novell, Inc.
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.
Proposal #1
Election of Directors
Votes For Votes Withheld
Eric. E. Schmidt 293,659,694 2,045,422
John A. Young 293,522,735 2,182,381
Elaine R. Bond 293,493,148 2,211,968
Hans-Warner Hector 293,609,792 2,095,324
Reed E. Hundt 293,572,124 2,132,992
William N. Joy 293,650,262 2,054,854
Jack L. Messman 293,519,313 2,185,803
Richard L. Nolan 293,588,508 2,116,608
Larry W. Sonsini 254,405,846 41,299,270
Proposal #2
To approve the adoption of the Novell, Inc 2000 Stock Plan
Votes For Votes Against Votes Abstained
193,301,545 100,392,858 2,011,751
Proposal #3
To ratify the appointment of Ernst & Young, LLP, as independent auditors for
Novell, Inc.
Votes For Votes Against Votes Abstained
293,638,940 1,123,079 944,285
<PAGE>
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, 2000.
*Filed herewith.
<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)
<TABLE>
<S> <C> <C>
Date: September 13, 2000 /S/ DR. ERIC SCHMIDT
-----------------------------------
Dr. Eric Schmidt
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: September 13, 2000 /S/ DENNIS R. RANEY
-----------------------------------
Dennis R. Raney
Chief Financial Officer
(Principal Financial Officer)
Date: September 13, 2000 /S/ RON FOSTER
-----------------------------------
Ron Foster
Vice President and Corporate Controller
(Principal Accounting Officer)
</TABLE>
