-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DvB0BJamQUuKAf4kXmxGVkxqRn+I1mGsio6o5d+IMdPzFt/8YhBV/oPoCujCd5mN M8IX85S6gp8/UJKmQriTjg== 0000758004-98-000017.txt : 19980615 0000758004-98-000017.hdr.sgml : 19980615 ACCESSION NUMBER: 0000758004-98-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980612 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOVELL INC CENTRAL INDEX KEY: 0000758004 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 870393339 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13351 FILM NUMBER: 98647313 BUSINESS ADDRESS: STREET 1: 122 EAST 1700 SOUTH CITY: PROVO STATE: UT ZIP: 84097 BUSINESS PHONE: 8012226600 MAIL ADDRESS: STREET 1: 122 E. 1700 S. CITY: PROVO STATE: UT ZIP: 84606 10-Q 1 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, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________ Commission File Number: 0-13351 NOVELL, INC. (Exact name of registrant as specified in its charter) Delaware 87-0393339 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 122 East 1700 South Provo, Utah 84606 (Address of principal executive offices and zip code) (801) 861-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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, 1998 there were 353,436,064 shares of the registrant's common stock outstanding. Part I. Financial Information, Item 1. Financial Statements NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS Apr. 30, Oct. 31, Dollars in thousands, except per share data 1998 1997 - ------------------------------------------------------------------------------ ASSETS Current assets Cash and short-term investments $ 1,084,635 $ 1,033,473 Receivables, less allowances ($34,841 - April; $33,053 - October) 220,128 234,358 Inventories 6,316 10,656 Prepaid expenses 62,152 57,685 Deferred and refundable income taxes 117,849 134,210 - ------------------------------------------------------------------------------ Total current assets 1,491,080 1,470,382 ============================================================================== Property, plant and equipment, net 340,708 373,865 Other assets 83,397 66,402 - ------------------------------------------------------------------------------ Total assets $ 1,915,185 $ 1,910,649 ============================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 60,875 $ 82,759 Accrued compensation 47,344 51,397 Accrued marketing liabilities 17,741 27,728 Other accrued liabilities 71,453 85,157 Income taxes payable 3,839 -- Deferred revenue 83,251 74,915 - ------------------------------------------------------------------------------ Total current liabilities 284,503 321,956 Minority interests 18,681 23,276 Shareholders' equity Common stock, par value $.10 a share Authorized - 600,000,000 shares Issued - 353,037,548 shares-April 350,937,812 shares-October 35,304 35,094 Additional paid-in capital 393,952 378,582 Retained earnings 1,221,762 1,188,361 Unearned stock compensation (6,157) (7,189) Cumulative translation adjustment (498) (666) Unrealized (loss) on investments (32,362) (28,765) - ------------------------------------------------------------------------------ Total shareholders' equity 1,612,001 1,565,417 - ------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 1,915,185 $ 1,910,649 ============================================================================== See notes to consolidated unaudited condensed financial statements.
NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS Fiscal Quarter Ended Six Months Ended ------------------------ -------------------- Amounts in thousands, Apr. 30, Apr. 30, Apr. 30, Apr. 30, except per share data 1998 1997 1998 1997 - ------------------------------------------------------------------------------ Net sales $262,250 $273,107 $514,292 $647,954 Cost of sales 57,021 77,175 112,160 153,146 - ------------------------------------------------------------------------------ Gross profit 205,229 195,932 402,132 494,808 Operating expenses Sales and marketing 98,253 116,068 199,988 243,958 Product development 58,046 68,442 115,832 140,197 General and administrative 34,582 39,517 67,032 77,248 - ------------------------------------------------------------------------------ Total operating expenses 190,881 224,027 382,852 461,403 - ------------------------------------------------------------------------------ Income (loss) from operations 14,348 (28,095) 19,280 33,405 Other income (expense) Investment income 15,456 9,921 29,855 26,535 Other, net (2,989) (3,506) (2,745) (6,343) - ------------------------------------------------------------------------------ Other income, net 12,467 6,415 27,110 20,192 - ------------------------------------------------------------------------------ Income (loss) before taxes 26,815 (21,680) 46,390 53,597 Income tax expense (benefit) 7,508 (7,046) 12,989 17,419 - ------------------------------------------------------------------------------ Net income (loss) $ 19,307 $ (14,634) $ 33,401 $ 36,178 ============================================================================== Weighted average shares outstanding Basic 351,762 347,320 351,396 346,913 Diluted 356,586 347,904 354,779 347,499 ============================================================================== Net income (loss) per share Basic $ 0.05 $ (0.04) $ 0.10 $ 0.10 Diluted $ 0.05 $ (0.04) $ 0.09 $ 0.10 ============================================================================== See notes to consolidated unaudited condensed financial statements.
NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS Six Months Ended ---------------------------- Apr. 30, Apr. 30, Amounts in thousands 1998 1997 - ------------------------------------------------------------------------------ Cash flows from operating activities Net income $ 33,401 $ 36,178 Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation and amortization 40,227 46,266 Stock plans income tax benefits 1,150 2,356 Decrease in receivables 14,230 119,820 Decrease (increase) in inventories 4,340 (1,563) (Increase) in prepaid expenses (4,467) (11,905) Decrease (increase) in deferred and refundable income taxes 17,860 (34,532) (Decrease) in current liabilities, net (37,453) (47,864) - ------------------------------------------------------------------------------ Net cash provided by operating activities 69,288 108,756 - ------------------------------------------------------------------------------ Cash flows from financing activities Issuance of common stock, net 13,923 7,673 Sale of put warrants -- 2,300 Settlement of put warrants -- (14,494) - ------------------------------------------------------------------------------ Net cash provided (used) by financing activities 13,923 (4,521) - ------------------------------------------------------------------------------ Cash flows from investing activities Expenditures for property, plant and equipment (17,231) (47,738) Purchases of short-term investments (1,037,871) (1,271,326) Maturities of short-term investments 552,398 951,279 Sales of short-term investments 379,014 303,908 Other (11,221) 3,661 - ------------------------------------------------------------------------------ Net cash (used) by investing activities (134,911) (60,216) - ------------------------------------------------------------------------------ Total (decrease) increase in cash and cash equivalents $ (51,700) $ 44,019 Cash and cash equivalents - beginning of period 208,543 145,521 - ------------------------------------------------------------------------------ Cash and cash equivalents - end of period 156,843 189,540 Short-term investments - end of period 927,792 854,566 - ------------------------------------------------------------------------------ Cash and short-term investments - end of period $1,084,635 $1,044,106 ============================================================================== See notes to consolidated unaudited condensed financial statements.
NOVELL, INC. NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS A. Quarterly Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The accompanying consolidated unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q but do not include all of the information and footnotes required by generally accepted accounting principles and should, therefore, be read in conjunction with the Company's fiscal 1997 Annual Report to Shareholders. These statements do include all normal recurring adjustments which the Company believes necessary for a fair presentation of the statements. The interim operating results are not necessarily indicative of the results for a full year. Certain reclassifications, none of which affected net income, have been made to the prior years amounts in order to conform to the current year's presentation. In the first quarter of fiscal 1997, the Company implemented a change to its fiscal year and month ending dates. The Company now recognizes its fiscal year end on the last calendar day of October, as opposed to prior years on the last Saturday in October. Likewise, each fiscal month now ends on the last calendar day of each month, and each fiscal quarter will have a unique number of days as opposed to the consistent 13 weeks in prior years. Implementing this change resulted in an extra five days in the first fiscal quarter of 1997 which the Company believes did not have a material impact on its financial position, results of operations, or cash flows. B. Significant Events During the third quarter of fiscal 1997, Novell took measures to reduce and realign its resources and better manage and control its business. These measures were in response to declines in sales of boxed products through indirect distribution channel customers, controlled shifts to multi-product licenses, lower licensing revenue of certain older products to OEM s, as well as competitive pressures in the small network market. Specifically, the Company did not ship boxed products to its indirect distribution channel customers except to accommodate product exchanges and returns. In addition, the Company reduced its workforce by 17%, or approximately 1,000 employees, and consolidated a number of facilities. This resulted in a one-time restructuring charge of $55 million, principally comprised of severance and excess facilities costs. The restructuring charge contributed a loss of $0.10 per share, net of tax, to the reported loss in fiscal 1997. C. Cash and Short-term Investments All marketable debt and equity securities are included in cash and short-term investments and are considered available-for-sale and carried at fair market value, with the unrealized gains and losses, net of tax, included in shareholders equity. Municipal securities included in short-term investments have contractual maturities from 1-5 years. Money market preferreds have contractual maturities of less than 180 days. No other short-term investments have contractual maturities. The cost of securities sold is based on the specific identification method. Such securities are anticipated to be used for current operations and are therefore classified as current assets, even though some maturities may extend beyond one year. The following is a summary of cash and short-term investments, all of which are considered available-for-sale. Gross Gross Fair Cost at Unrealized Unrealized Market Value at (Dollars in thousands) Apr. 30, 1998 Gains Losses Apr. 30, 1998 - ------------------------------------------------------------------------------ Cash and cash equivalents Cash $ 70,712 $ -- $ -- $ 70,712 Repurchase agreements 4,610 -- -- 4,610 Taxable money market fund 19,796 -- -- 19,796 Municipal securities 61,725 -- -- 61,725 - ------------------------------------------------------------------------------ Cash and cash equivalents $ 156,843 $ -- $ -- $ 156,843 - ------------------------------------------------------------------------------ Short-term investments Municipal securities $ 485,683 $ 2,901 $ (82) $ 488,502 Money market mutual funds 93,311 -- -- 93,311 Money market preferreds 235,743 -- (43) 235,700 Mutual funds 14,999 14 (10) 15,003 Equity securities 150,746 26,254 (81,724) 95,276 - ------------------------------------------------------------------------------ Short-term investments $ 980,482 $ 29,169 $ (81,859) $ 927,792 - ------------------------------------------------------------------------------ Cash and short-term investments $1,137,325 $ 29,169 $ (81,859) $ 1,084,635 - ------------------------------------------------------------------------------ Gross Gross Fair Cost at Unrealized Unrealized Market Value at Oct. 31, 1997 Gains Losses Oct. 31, 1997 (Dollars in thousands) - ------------------------------------------------------------------------------ Cash and cash equivalents Cash $ 84,151 $ -- $ -- $ 84,151 Repurchase agreements 4,932 -- -- 4,932 Money market fund 42,581 -- -- 42,581 Municipal securities 76,879 -- -- 76,879 - ----------------------------------------------------------------------------- Cash and cash equivalents $ 208,543 $ -- $ -- $ 208,543 - ------------------------------------------------------------------------------ Short-term investments Municipal securities $ 463,443 $ 4,551 $ (84) $ 467,910 Money market mutual funds 88,999 -- -- 88,999 Money market preferreds 150,817 -- (17) 150,800 Mutual funds 14,721 33 (1) 14,753 Equity securities 153,785 25,829 (77,146) 102,468 - ------------------------------------------------------------------------------ Short-term investments $ 871,765 $ 30,413 $ (77,248) $ 824,930 - ------------------------------------------------------------------------------ Cash and short-term investments $1,080,308 $ 30,413 $ (77,248) $ 1,033,473 - ------------------------------------------------------------------------------ During the first six months of fiscal 1998 the Company had realized gains of $5 million on the sale of securities compared to realized gains of $5 million in the first six months of fiscal 1997, while realizing losses on sales of securities of $2 million in the first six months of fiscal 1998. D. Income Taxes The Company's estimated effective tax rate for the first six months of fiscal 1998 was 28.0% compared to 32.5% in the first six months of fiscal 1997. The Company paid cash amounts for income taxes of $10 million and $7 million, in the first six months of fiscal 1998 and 1997, respectively.
E. Commitments and Contingencies The Company currently has a $10 million unsecured revolving bank line of credit, with interest at the prime rate. The line can be used for either letter of credit or working capital purposes. The line is subject to the terms of a loan agreement containing financial covenants and restrictions, none of which are expected to significantly affect the Company's operations. At April 30, 1998 there were no borrowings, letter of credit acceptances or commitments under such line. The Company has an additional $5 million credit facility with another bank which is not subject to a loan agreement. At April 30, 1998 standby letters of credit of approximately $200,000 were outstanding under this facility. In fiscal 1997, the Company entered into agreements to lease buildings being constructed on land owned by the Company in San Jose, California and in Provo, Utah. The lessor has committed to fund up to $272 million for construction of the buildings. The leases are for a period of seven years and can be renewed for two additional five year periods, subject to the approval of the lender and the Company, at the sole discretion of each party. Rent obligations will commence upon the Company's occupation of the buildings in fiscal 1999 and fiscal 2000. If the Company does not purchase the buildings, or arrange for the sale of the buildings, at the end of the lease, the Company will guarantee the lessor no more than 85% of the residual value of the buildings (approximately $272 million) as determined at the inception of the leases. In addition, the agreement calls for the Company to maintain a specific level of restricted cash to serve as collateral for the leases and maintain compliance with certain financial covenants. The value of restricted cash held as collateral at April 30, 1998 was approximately $41 million, and is included in other assets. In 1993, a suit was filed due to a failed contract against a company that Novell subsequently acquired. The plaintiff obtained a jury verdict against the acquired company in 1996. Novell does not believe that the resolution of this legal matter will have a material adverse effect on its financial position, results of operations, or cash flows. In February 1998, a suit was filed against Novell and certain of its officers and directors, alleging violation of federal securities laws. The lawsuit was broght 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. Put Warrants In the first six months of fiscal 1997, the Company sold put warrants on 2 million shares of its common stock for $2 million, callable on specific dates in the third quarter of fiscal 1997, giving a third party the right to sell shares of Novell common stock to the Company at contractually specified prices. During the first six months of fiscal 1997, the Company also settled put warrant obligations on 4 million shares for $14 million in cash. G. International Sales The Company markets internationally both directly to end users and through distributors who sell to dealers and end users. For the six months of fiscal 1998 and fiscal 1997, sales to international customers were approximately $223 million and $302 million, respectively. In the first six months of fiscal 1998 and fiscal 1997, 67% and 57%, respectively, of international sales were to European countries. No one foreign country accounted for 10% or more of total sales in either period. Except for one multinational distributor, which accounted for 13% of revenue in the first six months of fiscal 1998 and 14% of revenue in the first six months of 1997, no customer accounted for more than 10% of revenue in any period. H. Net Income (Loss) Per Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share. Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is what the Company previously reported as earnings per share. Earnings per share amounts for all periods have been presented and where appropriate, restated to conform to the Statement No. 128 requirements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction Novell is the world's leading provider of network software. The Company offers a wide range of network solutions, education, and support for distributed network, Internet, and small-business markets. During the third quarter of fiscal 1997, Novell took measures to reduce and realign its resources and better manage and control its business. The measures were in response to declines in sales of boxed products through indirect distribution channel customers, controlled shifts to multi-product licenses, lower licensing revenue of certain older products to OEM's, as well as competitive pressures in the small network market. Specifically, the Company did not ship boxed products to its indirect distribution channel customers except to accommodate product exchanges and returns. The Company believes this action, which significantly reduced reported revenue in the quarter, brought indirect distribution channel inventories of boxed software products in line with current market demand. The decision to withhold shipments to the Company's indirect distributor channel resulted in an operating loss in the third quarter of fiscal 1997. The Company will continue to monitor channel inventory levels to keep them in line with estimated market demand. In addition, the Company reduced its workforce by 17%, or approximately 1,000 employees, and consolidated a number of facilities. This resulted in a one-time restructuring charge of $55 million, principally comprised of severance and excess facilities costs. The restructuring charge contributed a loss of $0.10 per share, net of tax, to the reported loss in fiscal 1997. The workforce reduction and associated consolidation of facilities returned the Company to break even for the fourth quarter of fiscal 1997 and is expected to lower future operating expenses by approximately $100 million annually. In the first quarter of fiscal 1997, the Company implemented a change to its fiscal year and month ending dates. The Company now recognizes its fiscal year end on the last calendar day of October, as opposed to prior years which ended on the last Saturday in October. Likewise, each fiscal month end now ends on the last calendar day of each month, and each fiscal quarter has a unique number of days as opposed to the consistent 13 weeks in prior years. Implementing this change resulted in an extra five days in the first fiscal quarter of 1997, which the Company believes did not have a material impact on its financial position, results of operations, or cash flows. Results of Operations Net sales Q2 Q2 YTD YTD 1998 Change 1997 1998 Change 1997 - ------------------------------------------------------------------------------ Net sales (millions) $262 -4% $273 $514 -21% $648 ============================================================================== In general, the Company has experienced continued competitive pressures in the marketplace, resulting in the action taken in the third quarter of fiscal 1997 described above. These competitive pressures also resulted in lower overall revenues in the second quarter and the first six months of fiscal 1998 compared to the second quarter and the first six months of fiscal 1997. Novell's product lines can be categorized into three areas, all within the software industry. They are server operating environments; network services; and other. While revenue decreased from the second quarter of 1997 to the second quarter of 1998, and from the first six months of fiscal 1997 to the first six months of fiscal 1998, analysis of the individual product categories characterizes the changes that have occurred. Server operating environments revenues decreased by 7% or $18 million in the second quarter of 1998 compared to the second quarter of 1997 and by 29% or $121 million in the first six months of fiscal 1998 compared to the first six months of fiscal 1997. Generally, such decreases occurred due to lower unit sales in both the NetWare 3 and NetWare 4 product lines due to competitive pressures in the marketplace.
Network services revenues increased by 9% or $8 million in the second quarter of 1998 compared to the second quarter of 1997 and decreased by 4% or $5 million in the first six months of fiscal 1998 compared to the first six months of fiscal 1997. The $8 million increase between the second quarter of fiscal 1997 and the second quarter of fiscal 1998 is mainly the result of an increase in unit sales of network management products, and from the newly released Border Manager product. The $5 million decrease in the first six months of fiscal 1998 from the first six months of 1997 is due to decreases in TCP/IP Access products, Host Connectivity products, and GroupWare Applications, somewhat offset by increases in Tuxedo revenue and the newly released Border Manager product. Other revenue, which is made up of UNIX royalties, education, service, and other, decreased by 2% or $1 million from the second quarter of fiscal 1997 to the second quarter of fiscal 1998 and decreased by 10% or $8 million in the first six months of fiscal 1998 compared to the first six months of fiscal 1997. The decreases relate primarily to lower UNIX royalties in fiscal 1998 compared to fiscal 1997. International sales represented 43% of total sales in the first six months of 1998 compared to 47% in the first six months of 1997. This change is a result of a 16% decrease in domestic revenues compared to a 26% decrease in international revenues in the first six months of fiscal 1998 compared to the first six months of fiscal 1997. In the second quarter of fiscal 1998, the Company gave contractual notice to distributors of a change in its channel discount policy effective May 1, 1998. The change reduced its channel discount from 40 percent to 30 percent off published list prices. Published list prices for Novell products have not been affected by this change. Gross profit Q2 Q2 YTD YTD 1998 Change 1997 1998 Change 1997 - ------------------------------------------------------------------------------ Gross profit (millions) $205 5% $196 $402 -19% $495 Percentage of net sales 78% 72% 78% 76% ============================================================================== The gross margin percentage increased in the second quarter of fiscal 1998 compared to the second quarter of fiscal 1997 due to lower material costs as licensing revenues grew to a larger percentage of total revenues. Likewise, services and training related costs as well as lower inventory management costs contributed to the increase in gross margin percentage. The gross margin percentage also increased in the first six months of fiscal 1998 compared to the first six months of fiscal 1997 due to a reduction in material costs as licensing revenues grew to a larger percentage of total revenues and inventory management costs were reduced. Operating expenses Q2 Q2 YTD YTD 1998 Change 1997 1998 Change 1997 - ------------------------------------------------------------------------------ Sales and marketing (millions)$ 98 -16% $116 $200 -18% $244 Percentage of net sales 38% 42% 39% 38% - ------------------------------------------------------------------------------ Product development (millions)$ 58 -15% $ 68 $116 -17% $140 Percentage of net sales 22% 25% 23% 21% - ------------------------------------------------------------------------------ General and administrative (millions) $ 35 -13% $ 40 $ 67 -13% $77 Percentage of net sales 13% 15% 13% 12% - ------------------------------------------------------------------------------ Total operating expenses (millions) $191 -15% $224 $383 -17% $461 Percentage of net sales 73% 82% 75% 71% ============================================================================== Sales and marketing expenses decreased as a percentage of net sales in the second quarter of fiscal 1998 compared to the second quarter of fiscal 1997 and increased slightly in the first six months of fiscal 1998 compared to the first six months of fiscal 1997, but decreased in absolute dollars in both comparative periods due to lower marketing expenses. Sales and marketing expenses fluctuate as a percentage of net sales in any given period due to product promotions, advertising or other discretionary expenses. Product development expenses decreased as a percentage of net sales in the second quarter of fiscal 1998 compared to the second quarter of fiscal 1997 and increased slightly in the first six months of fiscal 1998 compared to the first six months of fiscal 1997, but decreased in absolute dollars in both comparative periods primarily due to work force reductions in fiscal 1997.
General and administrative expenses decreased as a percentage of net sales in the second quarter of fiscal 1998 compared to the second quarter of fiscal 1997, and increased slightly as a percentage of net sales in the first six months of fiscal 1998 compared to the first six months of fiscal 1997, but decreased in absolute dollars in both comparative periods, primarily due to work force reductions in fiscal 1997. Overall, operating expenses declined more rapidly than revenues in the second quarter of fiscal 1998 compared to the second quarter of fiscal 1997, but less rapidly than revenues in the first six months of fiscal 1998 compared to the first six months of fiscal 1997. YTD YTD 1998 Change 1997 - ------------------------------------------------------------------------------ Employees 4,570 -20% 5,746 Annualized revenue per employee (000's) $220 -1% $223 ============================================================================== In fiscal 1997, the Company reduced its workforce by approximately 1,000 employees as the Company realigned its resources to better manage and control its business. Other income, net Q2 Q2 YTD YTD 1998 Change 1997 1998 Change 1997 - ------------------------------------------------------------------------------ Other income, net (millions) $12 100% $6 $27 35% $20 Percentage of net sales 5% 2% 5% 3% ============================================================================== The primary component of other income, net is investment income, which was $15 million in the second quarter of fiscal 1998 compared to $10 million in the second quarter of fiscal 1997 and was $30 million in the first six months of fiscal 1998 compared to $27 million in the first six months of fiscal 1997. The increase is the result of higher realized capital gains as well as higher average yields on investments held. In order to achieve potentially higher returns, a limited portion of the Company's investment portfolio is invested in mutual funds which incur some market risk. The Company believes that the market risk has been limited by diversification and by use of a funds management timing service which switches funds out of mutual funds and into money market funds when preset thresholds are reached. The Company's investment portfolio includes certain equity securities with gross unrealized losses of $56 million as of April 30, 1998. The securities with unrealized losses are Corel Corporation common stock, which was obtained in March 1996 upon the Company's sale of its personal productivity applications product line and Santa Cruz Operation, Inc. common stock, which was obtained in December 1995 upon the sale of the Company's UnixWare product line. It is the Company's intention to dispose of such shares over the coming periods. Income tax expense (benefit) Q2 Q2 YTD YTD 1998 Change 1997 1998 Change 1997 - ------------------------------------------------------------------------------ Income tax expense (benefit) (millions) $8 214% $(7) $13 -24% $17 Percentage of net sales 3% -3% 3% 3% Effective tax rate 28% 33% 28% 33% - ------------------------------------------------------------------------------ At April 30, 1998 the Company had deferred tax assets of $102 million before a valuation allowance of $7 million. A portion of this asset is realizable based on the ability to offset existing deferred tax liabilities. Realization of the remaining asset is dependent on the Company's ability to generate approximately $233 million of taxable income. Of this, approximately $111 million must be earned outside the United States. Management believes that sufficient income will be earned in the future to realize this asset. Management will evaluate the realizability of the deferred tax assets quarterly and assess the need for additional valuation allowances. The estimated effective tax rate for fiscal 1998 is lower than the effective tax rate for fiscal 1997 as a result of the loss from operations in fiscal 1997.
Net income (loss) and net income (loss) per share Q2 Q2 YTD YTD 1998 Change 1997 1998 Change 1997 - ------------------------------------------------------------------------------ Net income (loss) (millions) $19 227% $(15) $33 -8% $36 Percentage of net sales 7% -5% 6% 6% Net income (loss) per share - basic $.05 $(.04) $.10 -- $.10 Net income (loss) per share - diluted$.05 $(.04) $.09 -10% $.10 ============================================================================== In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share. Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is what the Company previously reported as earnings per share. Earnings per share amounts for all periods have been presented and where appropriate, restated to conform to the Statement No. 128 requirements. Liquidity and Capital Resources Q2 Q4 1998 Change 1997 - ------------------------------------------------------------------------------ Cash and short-term investments (millions) $1,085 5% $1,033 Percentage of total assets 57% 54% ============================================================================== Cash and short-term investments increased to $1,085 million at April 30, 1998 from $1,033 million at October 31, 1997. This increase can be attributed to $69 million provided by operating activities and $14 million provided by financing activities, somewhat offset by $17 million of cash used for expenditures on property, plant and equipment, and $14 million used for other investing activities. The investment portfolio is diversified among security types, industry groups, and individual issuers. The Company's principal source of liquidity has been from operations. At April 30, 1998, the Company's principal unused sources of liquidity consisted of cash and short-term investments and available borrowing capacity of approximately $15 million under its credit facilities. The Company's liquidity needs are principally for the Company's financing of accounts receivable, capital assets, strategic investments and flexibility in a dynamic and competitive operating environment. During the first six months of 1998, the Company has continued to generate cash from operations. The Company anticipates being able to fund its current operations and capital expenditures planned for the foreseeable future with existing cash and short-term investments together with internally generated funds. The Company believes that borrowings under the Company's credit facilities, or public offerings of equity or debt securities are available if the need arises. Investments will continue in product development and in new and existing areas of technology. Cash may also be used to acquire technology through purchases and strategic acquisitions. Capital expenditures in fiscal 1998 are anticipated to be approximately $45 million, but could be reduced if the growth of the Company is less than presently anticipated. In June 1998, the Company announced its intent to repurchase and retire up to 10 percent, or approximately 35 million shares of Novell common stock over the next twelve months. Future Results The Company's future results of operations involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially from historical results are the following: business conditions and the general economy; competitive factors, such as rival operating systems, acceptance of new products and price pressures; availability of third-party compatible products at reasonable prices; risk of nonpayment of accounts or notes receivable; risks associated with foreign operations; risk of product line or inventory obsolescence due to shifts in technologies or market demand; timing of software product introductions; market fluctuations of investment securities; and litigation.
The Company is addressing the issues associated with the "year 2000." The Company is utilizing resources to identify, correct, reprogram and test both its systems used internally as well as the products it sells for year 2000 compliance. It is anticipated that all reprogramming efforts will be completed during fiscal 1998 with additional testing continuing through fiscal 1999. Novell believes that it has the product offerings, facilities, personnel, and competitive and financial resources for continued business success, but future revenues, costs, margins, product mix, and profits are all influenced by a number of factors, such as those discussed above, as well as risks described in detail in the Company's fiscal 1997 report on Form 10-K. Part II. Other Information Except as listed below, all information required by items in Part II is omitted because the items are inapplicable or the answer is negative. Item 1. Legal Proceedings. The information required by this item is incorporated herein by reference to Footnote E of the Company's financial statements contained in Part I, Item 1 of this Form 10-Q. Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders on April 7, 1998 for the following purposes: 1. To elect six directors. 2. To approve and ratify the adoption of an amendment to the Novell, Inc. 1989 Employee Stock Purchase Plan to increase the shares reserved for issuance thereunder from 12,000,000 to 18,000,000. 3. To ratify the selection 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. Votes Votes Proposal 1 For Withheld - ------------------------------------------------------------------------------ Election of Directors Eric E. Schmidt 305,236,289 4,840,691 John A. Young 302,773,827 7,303,153 Elaine R. Bond 262,576,579 47,500,401 Hans-Werner Hector 262,801,106 47,275,874 Jack L. Messman 260,610,914 49,466,066 Larry W. Sonsini 257,957,034 52,119,946 - ------------------------------------------------------------------------------ Votes Votes Votes Proposal 2 For Against Withheld/Abstained - ------------------------------------------------------------------------------ Approval and ratification of the adoption of an amendment to the Novell, Inc. 1989 Employee Stock Purchase Plan 298,799,558 9,382,798 1,894,624 - ------------------------------------------------------------------------------ Votes Votes Votes Proposal 3 For Against Withheld/Abstained - ------------------------------------------------------------------------------ Ratify the selection of Ernst & Young LLP as Independent Auditors 306,561,404 2,451,198 1,064,378 - ------------------------------------------------------------------------------ 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, 1998. ______________________________ *Filed herewith.
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 10, 1998 /s/ Dr. Eric Schmidt ------------------------- Dr. Eric Schmidt Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: June 10, 1998 /s/ Dennis R. Raney ------------------------- Dennis R. Raney Senior Vice President and Chief Financial Officer (Principal Financial Officer) Date: June 10, 1998 /s/ Cliff Simpson -------------------------- Cliff Simpson Vice President Finance and Corporate Controller (Principal Accounting Officer) EX-27 2
5 6-MOS OCT-31-1998 APR-30-1998 156,843 927,792 220,128 (34,841) 6,316 1,491,080 748,246 (407,538) 1,915,185 284,503 0 0 0 35,304 1,576,697 1,915,185 514,292 514,292 112,160 112,160 382,852 0 0 46,390 12,989 33,401 0 0 0 33,401 .10 .09
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