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, 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 May 31, 2000 there were 324,783,746 shares of the Registrant's Common
Stock outstanding.
<PAGE>
17
PART I. FINANCIAL INFORMATION, ITEM 1. FINANCIAL STATEMENTS
NOVELL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<S> <C> <C>
Apr. 30, Oct. 31,
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA 2000 1999
-------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 646,709 $ 895,404
Receivables, less allowances ($53,039 - April; $36,318 - October) 239,202 284,510
Inventories 3,591 3,753
Prepaid expenses 38,752 47,738
Deferred and refundable income taxes 31,353 60,266
OTHER CURRENT ASSETS 37,182 43,945
-------------------------------------------------------------------------------------------------------------------
Total current assets 996,789 1,335,616
Property, plant and equipment, net 341,912 347,012
Long-term investments 371,319 229,114
OTHER ASSETS 62,520 30,577
-------------------------------------------------------------------------------------------------------------------
Total assets $1,772,540 $ 1,942,319
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 73,933 $ 85,037
Accrued compensation 59,097 62,778
Accrued marketing liabilities 11,369 11,449
Other accrued liabilities 48,742 50,133
Income taxes payable 5,039 57,085
DEFERRED REVENUE 168,201 173,150
-------------------------------------------------------------------------------------------------------------------
Total current liabilities 366,381 439,632
Minority interests 12,008 10,446
SHAREHOLDERS' EQUITY
Common stock, par value $.10 per share
Authorized - 600,000,000 shares
Issued - 324,546,665 shares-April
326,593,911 shares-October 32,455 32,659
Retained earnings 1,355,986 1,432,624
Accumulated other comprehensive income 15,331 35,189
OTHER (9,621) (8,231)
-------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,394,151 1,492,241
-------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,772,540 $ 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 SIX MONTHS ENDED
Dollars in thousands, Apr. 30, Apr. 30, Apr. 30, Apr. 30,
EXCEPT PER SHARE DATA 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------
Net sales $ 302,349 $ 315,652 $ 618,392 $ 601,458
COST OF SALES 84,384 79,367 163,598 147,134
-------------------------------------------------------------------------------------------------------------------
Gross profit 217,965 236,285 454,794 454,324
OPERATING EXPENSES
Sales and marketing 125,933 106,455 240,063 211,841
Product development 61,360 59,682 120,037 115,286
GENERAL AND ADMINISTRATIVE 22,433 20,656 39,925 41,410
-------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 209,726 186,793 400,025 368,537
-------------------------------------------------------------------------------------------------------------------
Income from operations 8,239 49,492 54,769 85,787
OTHER INCOME (EXPENSE)
Investment income 37,020 10,653 54,578 20,416
OTHER, NET (2,175) (6,358) (3,992) (12,280)
-------------------------------------------------------------------------------------------------------------------
OTHER INCOME, NET 34,845 4,295 50,586 8,136
-------------------------------------------------------------------------------------------------------------------
Income before taxes 43,084 53,787 105,355 93,923
INCOME TAXES 12,064 15,061 29,500 26,299
-------------------------------------------------------------------------------------------------------------------
Net income $ 31,020 $ 38,726 $ 75,855 $ 67,624
===================================================================================================================
Weighted average shares outstanding
Basic 326,788 335,276 326,847 336,359
Diluted 341,546 351,116 341,825 351,319
===================================================================================================================
Net income per share
Basic $ 0.09 $ 0.12 $ 0.23 $ 0.20
Diluted $ 0.09 $ 0.11 $ 0.22 $ 0.19
===================================================================================================================
</TABLE>
See notes to consolidated unaudited condensed financial statements.
<PAGE>
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C>
SIX MONTHS ENDED
-------------------------------
Apr. 30, Apr. 30,
DOLLARS IN THOUSANDS 2000 1999
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 75,855 $ 67,624
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 39,961 32,585
Stock plans' income tax benefits 56,398 25,356
Decrease in receivables 45,308 36,832
Decrease in inventories 162 454
Decrease in prepaid expenses 8,986 6,768
Decrease in deferred and refundable income taxes 29,457 6,858
Decrease in other current assets 6,763 1,860
(DECREASE) IN CURRENT LIABILITIES, NET (73,251) (17,019)
-------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 189,639 161,318
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net 70,608 50,804
REPURCHASE OF COMMON STOCK (301,011) (146,195)
-------------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (230,403) (95,391)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (28,140) (31,677)
Purchases of short-term investments (484,530) (1,270,979)
Maturities of short-term investments 413,654 969,270
Sales of short-term investments 287,585 363,271
Expenditures for other long-term investments (150,349) (16,098)
Increase in restricted cash (27,217) (69,395)
OTHER 444 (2,357)
-----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 11,447 (57,965)
--------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (29,317) 7,962
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 274,269 177,083
-------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD 244,952 185,045
SHORT-TERM INVESTMENTS - END OF PERIOD 401,757 789,395
-------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS - END OF PERIOD $ 646,709 $ 974,440
===================================================================================================================
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
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
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) APR.30, 2000 GAINS LOSSES APR.30, 2000
------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Cash $ 160,921 $ - $ - $ 160,921
MONEY MARKET FUND 84,031 - - 84,031
-------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS 244,952 - - 244,952
-------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS
Corporate Notes and Bonds 100,452 - (48) 100,404
Municipal securities 179,671 - (3,718) 175,953
Mutual funds 51,370 - (2,569) 48,801
EQUITY SECURITIES 11,450 65,149 - 76,599
-------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 342,943 65,149 (6,335) 401,757
-------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS $ 587,895 $ 65,149 $ (6,335) $ 646,709
-------------------------------------------------------------------------------------------------------------------
</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 six months of fiscal 2000 the Company realized gains of $33.2
million and realized losses of $1.6 million on the sale of securities compared
to realized gains of $24.7 million and realized losses of $28.9 million in the
first six 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. These 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 April 30, 2000, there were $18.1 million in unrealized
gains on long-term investments.
D. INCOME TAXES
The Company's estimated effective tax rate for the first six months of fiscal
2000 was 28.0%, the same as in the first three months of fiscal 1999. The
Company paid cash amounts for income taxes of $19.6 million in the first six
months of fiscal 2000 and $4.0 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 April 30, 2000
borrowings, letter of credit acceptances or commitments of approximately $1.4
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 April 30, 2000 standby letters of credit of
approximately $0.5 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 $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 April 30, 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 April 30, 2000 was approximately $213.4
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 SIX MONTHS ENDED
--------------------------- ------------------------------- ---------------------
Apr. 30, Apr. 30, Apr. 30, Apr. 30,
DOLLARS IN THOUSANDS 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------
Directory-enabled server platforms $ 115,361 $ 168,826 $ 269,681 $ 314,644
Directory-enabled applications 79,214 72,590 158,954 145,353
Service, education and consulting 55,956 44,574 106,380 81,433
Pre-directory product revenue 51,818 29,662 83,377 60,028
------------ ------------ ----------- ----------
Total net sales $ 302,349 $ 315,652 $ 618,392 $ 601,458
========== ========== ========= =========
</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. Intercompany sales between geographic areas are
accounted for at prices representative of unaffiliated party transactions. "U.S.
operations" include shipments to customers in the U.S., licensing to OEMs, and
exports of finished goods directly to international customers, primarily in
Canada, South America, and Asia.
For the first six months of fiscal 2000 and fiscal 1999, sales to international
customers were approximately $276 million and $277 million, respectively. In the
first six months of fiscal 2000 and fiscal 1999, 66% and 72%, 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 six months of fiscal 2000. One multi-national distributor accounted for
12% of total revenue during the first six months of fiscal 1999.
G. NET INCOME PER SHARE
<TABLE>
<S> <C> <C> <C> <C>
FISCAL QUARTER ENDED SIX MONTHS ENDED
-------------------------- ---------------------
Apr. 30, Apr. 30, Apr. 30, Apr. 30,
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
Basic net income per share computation
NET INCOME $ 31,020 $ 38,726 $ 75,855 $ 67,624
-------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 326,788 335,276 326,847 336,359
-------------------------------------------------------------------------------------------------------------------
Basic net income per share $ 0.09 $ 0.12 $ 0.23 $ 0.20
===================================================================================================================
Diluted net income per share computation
NET INCOME $ 31,020 $ 38,726 $ 75,855 $ 67,624
-------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 326,788 335,276 326,847 336,359
Incremental shares attributable to exercise of
OUTSTANDING OPTIONS (TREASURY STOCK METHOD) 14,758 15,840 14,978 14,960
-------------------------------------------------------------------------------------------------------------------
TOTAL 341,546 351,116 341,825 351,319
-------------------------------------------------------------------------------------------------------------------
Diluted net income per share $ 0.09 $ 0.11 $ 0.22 $ 0.19
===================================================================================================================
</TABLE>
<PAGE>
H. COMPREHENSIVE INCOME
The components of comprehensive income (loss), net of tax, for the quarter and
first six months ended April 30, 2000 and 1999 were as follows:
<TABLE>
<S> <C> <C> <C> <C>
FISCAL QUARTER ENDED SIX MONTHS ENDED
---------------------------- ---------------------------
Apr. 30, Apr. 30, Apr. 30, Apr. 30,
DOLLARS IN THOUSANDS 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
Net income $ 31,020 $ 38,726 $ 75,855 $ 67,624
Change in net unrealized gain on investments (94,427) (6,459) (19,781) 20,873
CHANGE IN CUMULATIVE TRANSLATION ADJUSTMENT 473 35 (77) (89)
-------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (62,934) $ 32,302 $ 55,997 $ 88,408
==================================================================================================================
</TABLE>
The components of accumulated other comprehensive income, net of related tax, at
April 30, 2000 and 1999, are as follows:
<TABLE>
<S> <C> <C>
Apr. 30, Oct. 31,
DOLLARS IN THOUSANDS 2000 1999
-------------------------------------------------------------------------------------------------
Unrealized gain on investment $ 17,981 $ 37,762
CUMULATIVE TRANSLATION ADJUSTMENT (2,650) (2,573)
--------------------------------------------------------------------------------------------------
Accumulated other comprehensive income $ 15,331 $ 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.
<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," "Year 2000," 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 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, consulting, developer, education, and technical support
programs are the most extensive in the network computing industry.
RESULTS OF OPERATIONS
NET SALES
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Q2 Q2 YTD YTD
2000 CHG 1999 2000 CHG 1999
-------------------------------------------------------------------------------------------------------------------
Net sales (thousands) $ 302,349 (4.2)% $ 315,652 $ 618,392 2.8% $ 601,458
===================================================================================================================
</TABLE>
Novell's products can be categorized into the following four areas, all within
the directory-enabled networking software services segment.
oDirectory-enabled server platforms, which includes NetWare 4 and NetWare 5
oDirectory-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 $53.5
million or 32% in the second quarter of 2000 compared to the second quarter of
1999. Year-to-date, directory-enabled server platform revenue decreased $45.0
million or 14%. These decreases are due primarily to the decline in the
Company's packaged software business, which saw a decline in sales of 83% during
the quarter and 49% year-to-date. The decline in packaged software sales
resulted from the Company's focus on building a direct sales force and
inadequate attention to its channel resellers in generating demand, training and
support for Novell products. Additionally, the launch of competitor products
shifted reseller efforts to training and promotional activities related to these
launches. The Company also believes that a portion of the decline was due to
lower demand related to post Y2K purchases. The Company is addressing the
channel problem in an effort to improve sales results in future periods.
Revenue from the directory-enabled applications products was $79.2 million in
the second quarter of 2000 compared to $72.6 million in the second quarter of
1999. At the end of the second quarter 2000, year-to-date directory-enabled
applications product revenue was $159.0 million compared to $145.4 million for
the same period of 1999. The 9% increase in second quarter and year-to-date
revenue and was driven by an increase in sales of the Company's Management &
Collaboration products, Border Manager, and NDS for NT and Solaris, slightly
offset by a decrease in NetWare for SAA.
Service, education and consulting revenues were $56.0 million and $44.6 million
in the second quarter of 2000 and 1999, respectively. Year-to-date service,
education and consulting revenues were $106.4 million and $81.4 million, in 2000
and 1999, respectively. The increase in the second 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 $51.8 million in the second quarter of 2000
compared to $29.7 million in the second quarter of 1999. Pre-directory products
revenue year-to-date 2000 was $83.4 million compared to $60.0 million for the
same period of 1999. The increase in revenue in the second quarter and
year-to-date 2000 was primarily the result of revenue from a $35.5 million
royalty payment from Caldera, Inc., the principal portion of which relates to an
antitrust settlement between Caldera, Inc. and Microsoft, and higher royalty
revenue related to the UNIX royalties. Without the Caldera revenue,
pre-directory products revenue would have decreased $13.3 million or 44% during
the second quarter of 2000 and $12.1 million or 20% year-to-date 2000 compared
to the same periods of 1999, respectively. These decreases were due primarily to
the lower sales through channel resellers and the announced discontinuation of
the NetWare 3 products.
International sales represented 45% of total sales in the first six months of
2000 compared to 46% in the first six months of 1999 due to the effects of the
Caldera settlement recorded in U.S revenue. Without this revenue, international
sales represented 47% of total sales in the first six months of 2000. This
increase is due to stronger sales growth in the Asia Pacific, Latin America, and
Canadian regions. During the first six months of fiscal 2000, international
sales remained flat and domestic revenues, excluding Caldera, decreased 5%
compared to the same period of 1999
GROSS PROFIT
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Q2 Q2 YTD YTD
2000 CHG 1999 2000 CHG 1999
-------------------------------------------------------------------------------------------------------------------
Gross profit (thousands) $ 217,965 (7.8)% $ 236,285 $ 454,794 0.1% $ 454,324
Percentage of net sales 72.1% 74.9% 73.5% 75.5%
==================================================================================================================
</TABLE>
Gross profit as a percentage of sales decreased in the second 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. These increases were slightly offset by the effects of the Caldera
revenue. Year-to-date cost of sales were also offset by lower royalty expenses
and material and variance costs. Excluding Caldera revenue, gross profit as a
percentage of sales would have been 68.4% during the second quarter and 71.9%
year-to-date 2000.
<PAGE>
OPERATING EXPENSES
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Q2 Q2 YTD YTD
2000 CHG 1999 2000 CHG 1999
-------------------------------------------------------------------------------------------------------------------
Sales and marketing (thousands) $ 125,933 18.3% $ 106,455 $ 240,063 13.3% $ 211,841
PERCENTAGE OF NET SALES 41.7% 33.7% 38.8% 35.2%
------------------------------------------------------------------------------------------------------------------
Product development (thousands) $ 61,360 2.8% $ 59,682 $ 120,037 4.1% $ 115,286
PERCENTAGE OF NET SALES 20.3% 18.9% 19.4% 19.2%
------------------------------------------------------------------------------------------------------------------
General and administrative (thousands) $ 22,433 8.6% $ 20,656 $ 39,925 (3.6)% $ 41,410
PERCENTAGE OF NET SALES 7.4% 6.5% 6.5% 6.9%
------------------------------------------------------------------------------------------------------------------
Total operating expenses (thousands) $ 209,726 12.3% $ 186,793 $ 400,025 8.5% $ 368,537
Percentage of net sales 69.4% 59.2% 64.7% 61.3%
==================================================================================================================
</TABLE>
Sales and marketing expenses increased by $19.5 million, in the second quarter
of fiscal 2000 and by $28.2 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 has increased its sales and
marketing expenditures where appropriate in an effort to focus on improving
future sales growth. Lower sales in the second quarter of 2000 caused sales and
marketing expenses as a percentage of sales to increase.
Product development expenses increased $1.7 million in the second quarter and
$4.8 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 second quarter and year-to-date 2000 due to lower sales levels in the
second quarter of fiscal 2000 and increased headcount in the product development
organization as the Company continues to invest in developing new products
consistent with the Company's strategy.
General and administrative expenses increased in total and as a percentage of
net sales in the second quarter of fiscal 2000 compared to the second quarter of
fiscal 1999, due primarily to increased bad debt expense offset slightly by
lower operating costs. 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.
<TABLE>
<S> <C> <C> <C>
YTD YTD
2000 CHANGE 1999
-------------------------------------------------------------------------------------------------------------------
Employees 5,373 8.5% 4,951
Annualized revenue per average employee (000's) $ 229 (9.5)% $253
Annualized net income per average employee (000's) $ 28.1 (1.3)% $28.4
==================================================================================================================
</TABLE>
Headcount increased from the second quarter of 1999 to the second quarter of
2000, primarily due to increases in the education, consulting, worldwide sales,
and product development areas. Headcount has increased in these areas to support
the Company's growth in the new products and services.
OTHER INCOME, NET
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Q2 Q2 YTD YTD
2000 CHG 1999 2000 CHG 1999
-------------------------------------------------------------------------------------------------------------------
Other income, net (thousands) $ 34,845 711.3% $ 4,295 $ 50,586 521.8% $ 8,136
Percentage of net sales 11.5% 1.4% 8.2% 1.4%
==================================================================================================================
</TABLE>
The primary component of other income, net is investment income, which was $37.0
million in the second quarter of fiscal 2000 compared to $10.7 million in the
second quarter of fiscal 1999. Year-to-date investment income was $54.6 million
in 2000 compared to $20.4 million in 1999. Included in investment income during
the first half of 2000 were realized capital losses of $1.6 million and realized
capital gains of $33.2 million. During the first half of 1999, realized capital
losses were $28.9 million and realized capital gains were $24.7 million.
In addition to investment income, the Company recognized a gain on foreign
currency and higher sublease income from an increase in subleases in the second
quarter and year-to-date 2000 compared to a loss in the same periods of 1999.
This additional income was slightly offset by higher losses on fixed asset sales
and lower dividend income.
INCOME TAXES
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Q2 Q2 YTD YTD
2000 CHG 1999 2000 CHG 1999
-------------------------------------------------------------------------------------------------------------------
Income taxes (thousands) $ 12,064 (19.9)% $ 15,061 $ 29,500 12.2% $ 26,299
Percentage of net sales 4.0% 4.8% 4.8% 4.4%
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>
Q2 Q2 YTD YTD
2000 CHG 1999 2000 CHG 1999
-------------------------------------------------------------------------------------------------------------------
Net income (thousands) $ 31,020 (19.9)% $ 38,726 $ 75,855 12.2% $ 67,624
Percentage of net sales 10.3% 12.3% 12.3% 11.2%
Net income per share - basic $0.09 $0.12 $0.23 $0.20
Net income per share - diluted $0.09 $0.11 $0.22 $0.19
==================================================================================================================
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<S> <C> <C> <C>
Q2 Q4
2000 CHANGE 1999
-------------------------------------------------------------------------------------------------------------------
Cash and short-term investments (thousands) $ 646,709 (27.8)% $ 895,404
Percentage of total assets 37% 46%
===================================================================================================================
</TABLE>
Cash and short-term investments decreased by $248.7 million at April 30, 2000
from $895.4 million at October 31, 1999. During the first six months of fiscal
2000, cash and short-term investments decreased due to cash outflows of $301.0
million for the repurchase of common stock, $150.3 million for purchases of
long-term investments and other long term investing activities, $27.2 million to
increase collateral associated with certain long-term investments, $28.1 million
to purchase property, plant and equipment, and $2.7 million from the net
purchases of short-term investments. These cash outflows were offset by $189.6
million provided from operating activities and $70.6 million from the issuance
of common stock.
The Company's investment portfolio includes equity securities with gross
unrealized losses of $35.8 million and gross unrealized gains of $65.1 million
as of April 30, 2000. Included in the Company's net unrealized gains at April
30, 2000 was the Company's investment in Marchfirst, Inc., which had unrealized
net losses of $18.1 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 April
30, 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 six 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 $75.0 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 additional outstanding shares of the Company's common stock
through October 31, 2000. As of April 30, 2000, 19.9 million shares had been
repurchased under this plan at a total cost of $500 million completing this
repurchase.
As the Company continues to consolidate its Utah operations to its Provo
facility, the properties currently owned and occupied in Orem, Utah become
unnecessary. 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: 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 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.
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.
YEAR 2000
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
that relies on computer systems. To address this issue, such hardware and
software products were upgraded or replaced to correctly process dates beginning
in the Year 2000.
The Company has a general contingency plan to address extreme events such as
earthquake, flood, or serious equipment failures. The Company's Year 2000
contingency planning was an extension of this effort.
The Company's total cost relating to these activities was not material to the
Company's financial position, results of operations, or cash flows. The
modifications were made on a timely basis. The Company did not experience a
delay in, or increased costs associated with, the implementation of such
modifications, nor did the Company experience problems due to suppliers
inadequately preparing for the Year 2000 issue. The Company also did not
experience an inability to deliver products or services to its customers.
The Company believes that its current products, with any applicable updates, are
prepared for Year 2000 date issues. The Company also plans to continue to
provide support for these products' Year 2000 date-related issues, as described
in the Company's support policy statements. 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
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.
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 April 30, 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 $9 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 $8 million
decrease in the fair value of the Company's available-for-sale securities.
All of the potential changes noted above are based on sensitivity analyses
performed on the Company's financial position at April 30, 2000. Actual results
may differ materially.
<PAGE>
PART II. OTHER INFORMATION
Except as listed below, all information required by items in Part II is omitted
because the items are inapplicable or the answer is negative.
ITEM 1. LEGAL PROCEEDINGS.
The information required by this item is incorporated herein by reference to
Footnote D of the Company's financial statements contained in Part I, Item 1 of
this Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
NUMBER DESCRIPTION
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, 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)
Date: June 13, 2000 /S/ DR. ERIC SCHMIDT
--------------------
Dr. Eric Schmidt
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: June 13, 2000 /S/ DENNIS R. RANEY
-------------------
Dennis R. Raney
Chief Financial Officer
(Principal Financial Officer)
Date: June 13, 2000 /S/ RON FOSTER
--------------
Ron Foster
Vice President and Corporate Controller
(Principal Accounting Officer)
<PAGE>
