-----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, GkygtXPNXKESoc4+x4U9uyYFzmED54ONkG9zBNz8G6Zvyu/ikfRD8cXcJwHBUus1 n2Zn4kyX/WxB95/UaRioqA== 0000758004-99-000016.txt : 19990319 0000758004-99-000016.hdr.sgml : 19990319 ACCESSION NUMBER: 0000758004-99-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990317 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: 99567482 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 January 31, 1999 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to _____________ Commission File Number: 0-13351 NOVELL, INC. (Exact name of registrant as specified in its charter) Delaware 87-0393339 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 122 East 1700 South Provo, Utah 84606 (Address of principal executive offices and zip code) (801) 861-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO As of February 26, 1999 there were 336,468,842 shares of the registrant's common stock outstanding. Part I. Financial Information, Item 1. Financial Statements NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS Jan. 31, Oct. 31, Dollars in thousands, except per share data 1999 1998 - ------------------------------------------------------------------------------ ASSETS Current assets Cash and short-term investments $ 1,015,422 $ 1,007,167 Receivables, less allowances ($40,913 - January; $47,921 - October) 206,227 246,577 Inventories 2,737 3,562 Prepaid expenses 63,189 63,165 Deferred and refundable income taxes 79,839 95,343 Other current assets 39,514 19,886 - ----------------------------------------------------------------------------- Total current assets 1,406,928 1,435,700 Property, plant and equipment, ne 341,172 346,196 Long-term investments 156,842 114,815 Other assets 25,729 27,401 - ------------------------------------------------------------------------------ Total assets $ 1,930,671 $ 1,924,112 ============================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 73,644 $ 77,987 Accrued compensation 52,948 52,348 Accrued marketing liabilities 17,527 16,383 Other accrued liabilities 58,938 62,206 Income taxes payable 61,158 64,057 Deferred revenue 137,421 141,714 - ----------------------------------------------------------------------------- Total current liabilities 401,636 414,695 Minority interests 15,933 15,919 Shareholders' equity Common stock, par value $.10 a share Authorized - 600,000,000 shares Issued - 335,944,700 shares-January 337,592,460 shares-October 33,594 33,759 Additional paid-in capital 164,859 200,897 Retained earnings 1,319,235 1,290,337 Unearned stock compensation (5,695) (5,396) Cumulative translation adjustment (1,877) (1,753) Unrealized gain/(loss) on investments 2,986 (24,346) - ----------------------------------------------------------------------------- Total shareholders' equity 1,513,102 1,493,498 - ----------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,930,671 $ 1,924,112 ============================================================================= See notes to consolidated unaudited condensed financial statements. Page 2
NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME Fiscal Quarter Ended Amounts in thousands, Jan. 31, Jan. 31, except per share data 1999 1998 - ----------------------------------------------------------------------------- Net sales $285,806 $252,042 Cost of sales 64,120 57,087 - ----------------------------------------------------------------------------- Gross profit 221,686 194,955 Operating expenses Sales and marketing 105,337 104,211 Product development 54,005 60,238 General and administrative 25,994 25,574 - ----------------------------------------------------------------------------- Total operating expenses 185,336 190,023 Income from operations 36,350 4,932 Other income (expense) Investment income 9,763 14,399 Other, net (5,977) 244 - ----------------------------------------------------------------------------- Other income, net 3,786 14,643 - ----------------------------------------------------------------------------- Income before taxes 40,136 19,575 Income taxes 11,238 5,481 - ----------------------------------------------------------------------------- Net income $ 28,898 $ 14,094 ============================================================================= Weighted average shares outstanding Basic 337,441 351,031 Diluted 351,522 352,971 ============================================================================= Net income per share Basic $ 0.09 $ 0.04 Diluted $ 0.08 $ 0.04 ============================================================================= See notes to consolidated unaudited condensed financial statements. PAGE 3
NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS Fiscal Quarter Ended Jan. 31, Jan. 31, Amounts in thousands 1999 1998 - ----------------------------------------------------------------------------- Cash flows from operating activities Net income $ 28,898 $ 14,094 Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation and amortization 16,940 19,889 Stock plans income tax benefits 13,347 132 Decrease in receivables 40,350 13,692 Decrease (increase) in inventories 825 1,478 (Increase) decrease in prepaid expenses (24) (8,520) Decrease (increase) in deferred and refundable income taxes 15,499 14,378 (Increase) in other current assets (19,628) (4,373) (Decrease) in current liabilities, net (13,059) (11,613) - ----------------------------------------------------------------------------- Net cash provided from operating activities 83,148 39,157 - ----------------------------------------------------------------------------- Cash flows from financing activities Issuance of common stock, net 27,293 1,424 Repurchase of common stock (76,843) -- - ----------------------------------------------------------------------------- Net cash provided (used) from financing activities (49,550) 1,424 - ----------------------------------------------------------------------------- Cash flows from investing activities Expenditures for property, plant and equipment (12,215) (8,694) Purchases of short-term investments (643,484) (484,596) Maturities of short-term investments 492,629 342,605 Sales of short-term investments 146,379 145,517 Other (40,460) (9,804) ---------------------------------------------------------------------------- Net cash (used) by investing activities (57,151) (14,972) - ------------------------------------------------------------------------------ Total increase in cash and cash equivalents $ (23,553) $ 25,609 Cash and cash equivalents - beginning of period 177,083 208,543 - ------------------------------------------------------------------------------ Cash and cash equivalents - end of period 153,530 234,152 Short-term investments - end of period 861,892 810,992 - ------------------------------------------------------------------------------ Cash and short-term investments - end of period $ 1,015,422 $1,045,144 ============================================================================== See note to consolidated unaudited condensed financial statements. Page 4
NOVELL, INC. NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS A. Quarterly Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The accompanying consolidated unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q but do not include all of the information and footnotes required by generally accepted accounting principles and should, therefore, be read in conjunction with the Company's fiscal 1998 Annual Report to Shareholders. These statements do include all normal recurring adjustments which the Company believes necessary for a fair presentation of the statements. The interim operating results are not necessarily indicative of the results for a full year. Certain reclassifications, none of which affected net income, have been made to the prior years amounts in order to conform to the current year's presentation. B. Cash and Short-term Investments All marketable debt and equity securities are included in cash and short-term investments and are considered available-for-sale and carried at fair market value, with the unrealized gains and losses, net of tax, included in shareholders equity. Fair market values are based on quoted market pries where available; if quoted market prices are not available, then fair market values are based on quoted market prices of comparable instruments. Municipal securities included in short-term investments have contractual maturities from 1-5 years. Money market preferreds have contractual maturities of less than 180 days. No other short-term investments have contractual maturities. The cost of securities sold is based on the specific identification method. Such securities are anticipated to be used for current operations and are therefore classified as current assets, even though some maturities may extend beyond one year. The following is a summary of cash and short-term investments, all of which are considered available-for-sale. Gross Gross Fair Market Cost at Unrealized Unrealized Value at (Dollars in thousands) Jan. 31, 1999 Gains Losses Jan. 31, 1999 - ------------------------------------------------------------------------------ Cash and cash equivalents Cash $ 114,254 $ -- $ -- $ 114,254 Repurchase agreements 3,719 -- -- 3,719 Taxable money market fund 21,557 -- -- 21,557 Municipal securities 14,000 -- -- 14,000 - ------------------------------------------------------------------------------ Cash and cash equivalents $ 153,530 $ -- $ -- $ 153,530 - ------------------------------------------------------------------------------ Short-term investments Municipal securities $ 437,518 $ 8,908 $ -- $ 446,426 Money market preferreds 202,703 -- (3) 202,700 Mutual funds 116,578 -- -- 116,578 Equity securities 100,229 37,245 (41,286) 96,188 - ------------------------------------------------------------------------------ Short-term investments $ 857,028 $ 46,153 $ (41,289) $ 861,892 - ------------------------------------------------------------------------------ Cash and short-term investments $1,010,558 $ 46,153 $ (41,289) $1,015,422 - ------------------------------------------------------------------------------ PAGE 5
Gross Gross Fair Market Cost at Unrealized Unrealized Value at (Dollars in thousands) Oct. 31, 1998 Gains Losses Oct. 31, 1998 - ------------------------------------------------------------------------------ Cash and cash equivalents Cash $ 98,444 $ -- $ -- $ 98,444 Repurchase agreements 8,092 -- -- 8,092 Money market fund 55,957 -- -- 55,957 Municipal securities 14,590 -- -- 14,590 - ------------------------------------------------------------------------------ Cash and cash equivalents $ 177,083 $ -- $ -- $ 177,083 - ------------------------------------------------------------------------------ Short-term investments Municipal securities $ 448,195 $ 8,027 $ -- $ 456,222 Money market mutual funds 95,631 -- -- 95,631 Money market preferreds 181,719 -- (19) 181,700 Mutual funds 15,340 -- -- 15,340 Equity securities 128,837 30,159 (77,805) 81,191 - ------------------------------------------------------------------------------ Short-term investments $ 869,722 $38,186 $(77,824) $ 830,084 - ------------------------------------------------------------------------------ Cash and short-term investments $ 1,046,805 $38,186 $ (77,824) $ 1,007,167 - ------------------------------------------------------------------------------ During the first quarter of fiscal 1999 the Company had realized gains of $13 million on the sale of securities compared to realized gains of $3 million in the first quarter of fiscal 1998, while realizing losses on sales of securities of $15 million in the first quarter of fiscal 1999 and $1 million in the first quarter of fiscal 1998. C. Income Taxes The Company's estimated effective tax rate for the first quarter of fiscal 1999 was 28.0%, the same as in the first quarter of fiscal 1998. The Company paid cash amounts for income taxes of $2 million and $1 million, in the first quarter of fiscal 1999 and 1998, respectively. D. Commitments and Contingencies The Company currently has a $10 million unsecured revolving bank line of credit, with interest at the prime rate. The line can be used for either letter of credit or working capital purposes. The line is subject to the terms of a loan agreement containing financial covenants and restrictions, none of which are expected to significantly affect the Company's operations. At January 31, 1999 there were no borrowings, letter of credit acceptances or commitments under such line. The Company has an additional $5 million line of credit with another bank which is not subject to a loan agreement. At January 31, 1999 standby letters of credit of approximately $1 million were outstanding under this line of credit. In fiscal 1997, the Company entered into agreements to lease buildings being constructed on land owned by the Company in San Jose, California and in Provo, Utah. The lessor has committed to fund up to $272 million for construction of the buildings. The leases are for a period of seven years and can be renewed for two additional five year periods, subject to the approval of the lender and the Company, at the sole discretion of each party. Rent obligations will commence upon the Company's occupation of the buildings in fiscal 1999 for San Jose and fiscal 2000 for Provo. Annual rent under each agreement is determined by taking the portion of the committed amount actually utilized and associated capitalized interest accrued during the construction period and multiplying this amount by the secured interest rate. If the Company does not purchase the buildings, or arrange for the sale of the buildings, at the end of the lease, the Company will guarantee the lessor no more than 85% of the residual value of the buildings. The guaranteed residual value at January 31, 1999, was approximately $218 million. In addition, the agreement calls for the Company to maintain a specific level of restricted cash to serve as collateral for the leases and maintain compliance with certain financial covenants. The value of restricted cash held as collateral at January 31, 1999 was approximately $135 million, and is included in long-term investments. Page 6
In 1993, a suit was filed due to a failed contract against a company that Novell subsequently acquired. The plaintiff obtained a jury verdict against the acquired company in 1996. Novell does not believe that the resolution of this legal matter will have a material adverse effect on its financial position, results of operations, or cash flows. In February 1998, a suit was filed against Novell and certain of its officers and directors, alleging violation of federal securities laws. The lawsuit was brought as a purported class action on behalf of purchasers of Novell common stock from November 1, 1996 through April 22, 1997. The case is in its preliminary stages. Novell believes that the case is without merit, and intends to vigorously defend against the allegations. While there can be no assurance as to the ultimate disposition of the case, Novell does not believe that the resolution of this litigation will have a material adverse effect on its financial position, results of operations, or cash flows. The Company is a party to a number of legal claims arising in the ordinary course of business. The Company believes the ultimate resolution of the claims will not have a material adverse effect on its financial position, results of operations, or cash flows. E. Put Warrants In connection with the Company's stock repurchase program, the Company sold put warrants on 15 million shares of its common stock during the third quarter of fiscal 1998, giving a third party the right to sell shares of Novell common stock to the Company at contractually specified prices. The put warrants are exercisable only at maturity, expire at various dates through July 1999, and can only be settled in shares. Additionally, during the third quarter of fiscal 1998, the Company purchased call options on 10 million shares of its common stock, giving the Company the right to purchase shares of Novell common stock at contractually specified prices. The call options are exercisable only at maturity and expire at various dates through July 1999. The premiums received from the sale of the put warrants offset in full the cost of the call options. In the first quarter of fiscal 1999, the Company settled 6 million of its put warrant obligations and exercised 4 million call options to purchase 4 million shares of Novell common stock in connection with the Company's stock purchase program. F. International Sales The Company operates in one business segment and markets internationally both directly to end users and through distributors who sell to dealers and end users. For the fiscal quarters ended January 31, 1999 and January 31, 1998, sales to international customers were approximately $130 million and $109 million, respectively. In the first quarters of fiscal 1999 and fiscal 1998, 72% and 65%, respectively, of international sales were to European countries. No one foreign country accounted for 10% or more of total sales in either period. Except for one multi-national distributor, which accounted for 13% of revenue in the first quarter of 1999 and 15% of revenue in the first quarter of fiscal 1998, no customer accounted for more than 10% of revenue in any period. G. Net Income Per Share Q1 Q1 Amounts in thousands, except per share data 1999 1998 - ----------------------------------------------------------------------------- Basic net income per share computation Net income $ 28,898 $ 14,094 - ------------------------------------------------------------------------------ Weighted average shares outstanding 337,441 351,031 - ------------------------------------------------------------------------------ Basic net income per share $.09 $.04 ============================================================================== Diluted net income per share computation Net income $ 28,898 $ 14,094 - ------------------------------------------------------------------------------ Weighted average shares outstanding 337,441 351,031 Incremental shares attributable to exercise of outstanding options (treasury stock method) 14,081 1,940 - ------------------------------------------------------------------------------ Total 351,522 352,971 - ------------------------------------------------------------------------------ Diluted net income per share $ .08 $ .04 ============================================================================ H. Comprehensive Income In the first quarter of 1999, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS 130 establishes new rules for the reporting and displaying of comprehensive income. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities, unearned stock compensation and cumulative translation adjustments, which prior to adoption were only reported separately in shareholders equity, to be included in comprehensive income. The components of comprehensive income, net of tax, for the three months ended January 31, 1999 and January 31, 1998 were as follows: Q1 Q1 Dollars in thousands 1999 1998 - ----------------------------------------------------------------------------- Net income $ 28,898 $ 14,094 Unrealized gain/(loss) on investments 27,332 (10,412) Unearned stock compensation (184) 515 Cumulative translation adjustment (76) 70 - ------------------------------------------------------------------------------ Comprehensive income $ 55,970 $ 4,267 ============================================================================== Page 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction Novell is the leading provider of network software enabled by directory services. Novell Internet solutions make networks more manageable and secure, and reduce the total cost of ownership for organizations of every kind and size. Novell worldwide channel, developer, education and technical support programs are the most extensive in the network computing industry. Results of Operations Net Sales Q1 Q1 1999 Change 1998 - ------------------------------------------------------------------------------ Net sales (millions) $286 13% $252 ============================================================================== Novell's product lines can be categorized into three areas, all within the software industry. They are server platforms; network infrastructure and applications; and service, training, consulting and other. While revenue increased from the first quarter of 1998 to the first quarter of 1999, analysis of the individual product categories characterizes the changes that have occurred. The server platforms product line includes directory-enabled NetWare (NetWare 4 and NetWare 5) and NetWare 3. Server platforms revenue increased by $18 million or 12% in the first quarter of 1999 compared to the first quarter of 1998. Directory-enabled NetWare increased $20 million or 16% following the release of NetWare 5, while NetWare 3 revenue decreased $2 million or 10% from the first quarter 1998 compared to the first quarter of fiscal 1997. The network infrastructure and applications product line includes NetWare for SAA host connectivity products, BorderManager, NDS integration and high availability service products. Collaboration and management products such as GroupWise, ManageWise, and Z.E.N.works are also included in this product line. The product line had revenue of $75 million in the first quarter of 1999 compared to $68 million in the first quarter of 1998. This 11% increase was driven by new product revenue from Z.E.N.works, as well as strong growth in BorderManager, ManageWise and GroupWise. These increases were somewhat offset by a decrease in Tuxedo royalties, which ended in the fourth quarter of fiscal 1998. Service, training, consulting, and other includes revenue from customer service, training products and courses, consulting for network solutions, UNIX royalties, and other. These revenues were $45 million and $36 million in the first quarter of 1999 and 1998, respectively. The increase was a result of new consulting revenue, as well as growth in service and training revenue. UNIX royalties decreased by $2 million and represented only 2% of total revenue in the first quarter of 1999 compared to the first quarter of 1998. International sales represented 45% of total sales in the first quarter of 1999 compared to 43% in the first quarter of 1998. This change is a result of a 9% increase in domestic revenues compared to a 19% increase in international revenues in the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998. Gross Profit Q1 Q1 1999 Change 1998 - ----------------------------------------------------------------------------- Gross profit (millions) $222 14% $195 Percentage of net sales 78% 77% ============================================================================== The gross margin percentage increased slightly in the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998 due to lower material costs and a decrease in expenses associated with training and education programs both as a percentage of net sales and in absolute dollars. Somewhat offsetting these reductions was an increase in service related expenses. Page 9 Operating Expenses Q1 Q1 1999 Change 1998 - ----------------------------------------------------------------------------- Sales and marketing (millions) $105 -1% $104 Percentage of net sales 37% 41% - ------------------------------------------------------------------------------ Product development (millions) $54 -10% $60 Percentage of net sales 19% 24% - ------------------------------------------------------------------------------ General and administrative (millions) $26 -- $26 Percentage of net sales 9% 10% - ------------------------------------------------------------------------------ Total operating expenses (millions) $185 -3% $190 Percentage of net sales 65% 75% ============================================================================= Sales and marketing expenses increased slightly by $1 million in the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998 but decreased as a percentage of net sales. Lower international selling expenses were partially offset by higher marketing expenses. Sales and marketing expenses fluctuate as a percentage of net sales in any given period due to product promotions, advertising or other discretionary expenses. Product development expenses decreased by $6 million in the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998 and decreased as a percentage of net sales due to a more productive product development organization focused on delivering new products consistent with its strategy. General and administrative expenses remained flat at $26 million in the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998, while decreasing as a percentage of net sales due to a higher revenue base. Q1 Q1 1999 Change 1998 - ------------------------------------------------------------------------------ Employees 4,642 -- 4,638 Annualized revenue per employee (000's) $249 16% $214 ============================================================================== Other Income, Net Q1 Q1 1999 Change 1998 - ------------------------------------------------------------------------------ Other income, net (millions) $4 -73% $15 Percentage of net sales 1% 6% ============================================================================== The primary component of other income, net is investment income, which was $10 million in the first quarter of fiscal 1999 compared to $14 million in the first quarter of fiscal 1998. The decrease in the first quarter of 1999 compared to the first quarter in 1998 is the result of net realized capital losses as the Company disposed of certain equity securities. In the first quarter of 1999, in addition to investment income, the Company had losses on the disposal of fixed assets, the accrual for certain legal matters and the write-off of certain long-term investments. Income Taxes Q1 Q1 1999 Change 1998 - ------------------------------------------------------------------------------ Income taxes (millions) $11 120% $5 Percentage of net sales 4% 2% Effective tax rate 28% 28% ============================================================================= The effective tax rate for fiscal 1999 is estimated to be 28%, the same as fiscal 1998. Page 10
Net Income and Net Income Per Share Q1 Q1 1999 Change 1998 - ----------------------------------------------------------------------------- Net income (millions) $29 107% $14 Percentage of net sales 10% 6% Net income per share - basic $.09 125% $.04 Net income per share - diluted $.08 100% $.04 ============================================================================== Liquidity and Capital Resources Q1 Q4 1999 Change 1998 - ------------------------------------------------------------------------------ Cash and short-term investments (millions) $1,015 1% $1,007 Percentage of total assets 53% 52% ============================================================================== Cash and short-term investments increased to $1,015 million at January 31, 1999 from $1,007 million at October 31, 1998. The major reason for this increase was the $83 million provided by operating activities, the $27 million from the issuance of common stock, offset by the $77 million of cash used for repurchase of common stock, the $12 million used for expenditures on property, plant and equipment, and the $13 million used by other investing activities. The investment portfolio is diversified among security types, industry groups, and individual issuers. To achieve potentially higher returns, a limited portion of the Company's investment portfolio is invested in mutual funds which incur market risk. The Company believes that the market risk has been limited by diversification and by use of a funds management timing service which switches funds out of mutual funds and into money market funds when preset signals occur. The Company's investment portfolio includes securities with gross unrealized gains of $5 million as of January 31, 1999. Certain securities with material unrealized losses are Corel common stock, which was obtained in March 1996 upon the Company's sale of its personal productivity applications product line and SCO common stock, which was obtained in December 1995 upon the sale of the Company's UnixWare product line. It is the Company's intention to continue to dispose of such shares over the coming periods. The Company's principal source of liquidity has been from operations. At January 31, 1999, the Company's principal unused sources of liquidity consisted of cash and short-term investments and available borrowing capacity of approximately $15 million under its credit facilities. The Company's liquidity needs are principally for the Company's financing of accounts receivable, capital assets, strategic investments, product development and flexibility in a dynamic and competitive operating environment. During the first fiscal quarter of 1999, the Company has continued to generate cash from operations. The Company anticipates being able to fund its current operations and capital expenditures planned for the foreseeable future with existing cash and short- term investments together with internally generated funds. The Company believes that borrowings under the Company's credit facilities, or public offerings of equity or debt securities are available if the need arises. Investments will continue in product development and in new and existing areas of technology. Cash may also be used to acquire technology through purchases and strategic acquisitions. Capital expenditures in fiscal 1999 are anticipated to be approximately $45 million, but could be reduced if the growth of the Company is less than presently anticipated. In June 1998, the Company announced its intent to repurchase and retire up to 10 percent, or approximately 35 million shares, of Novell common stock over the next twelve months. During the first quarter of 1999, the Company repurchased and retired approximately 5 million shares at a cost of approximately $77 million. During fiscal 1998, the Company repurchased and retired approximately 21 million shares at a cost of approximately $245 million. Future Results The Company's future results of operations involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially from historical results are the following: business conditions and the general economy; competitive factors, such as rival operating systems, acceptance of new products and price pressures; availability of third-party compatible products at reasonable prices; risk of nonpayment of accounts or notes receivable; risks associated with foreign operations; risk of product line or inventory obsolescence due to shifts in technologies or market demand; timing of software product introductions; market fluctuations of investment securities; and litigation. Page 11
In the past, many information technology products were designed with two digit year codes that did not recognize century and millennium fields. As a result, these hardware and software products may not function or may give incorrect results beginning in the year 2000. The year 2000 issue is faced by substantially every company in the computer industry, as well as every company which relies on computer systems. The Company has created a company-wide Year 2000 team to identify and resolve Year 2000 issues associated either with the Company's internal systems or the products and services sold by the company. As part of this effort, the Company is communicating with its main suppliers of technology products and services regarding the Year 2000 status of such products or services. The Company has identified and is testing its main internal systems and expects to complete testing by mid 1999. In 1999 the Company expects to complete implementation of any needed year 2000-related modifications to its information systems. The Company is also currently assessing its internal non-information technology systems, and expects to complete testing and any needed modifications to these systems in 1999. The Company's total cost relating to these activities has not been and is not expected to be material to the Company's financial position, results of operations, or cash flows. The Company believes that necessary modifications will be made on a timely basis. However, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of such modifications, or that the Company s suppliers will adequately prepare for the year 2000 issue. It is possible that any such delays, increased costs, or supplier failures could have a material adverse impact on the Company's operations and financial results, by, for example, impacting the Company's ability to deliver products or services to its customers. The Company has begun contingency planning and expects to finalized in mid-1999 its main assessment of and contingency planning for potential operational or performance problems related to year 2000-related issues with its information systems. The Company's year 2000 effort has included testing products currently or recently on the Company's price list for year 2000 issues. Generally, for products that were identified as needing updates to address year 2000 issues, the Company has prepared or is preparing updates, or has removed or is removing the product from its price list. Some of the Company's customers are using product versions that the Company will not support for year 2000 issues; the Company is encouraging these customers to migrate to current product versions that are year 2000 ready. For third party products which the Company distributes with its products, the Company has sought information from the product manufacturers regarding the products year 2000 readiness status. Customers who use the third-party products are directed to the product manufacturer for detailed year 2000 status information. On its year 2000 web site at www.novell.com/year2000/, the Company provides information regarding which of its products are year 2000 ready and other general information related to the Company's year 2000 efforts. The Company's total costs relating to these activities has not been and is not expected to be material to the Company's financial position or results of operations. The Company believes its current products, with any applicable updates, are well-prepared for year 2000 date issues, and the Company plans to support these products for date issues that may arise related to the year 2000. However, there can be no guarantee that one or more current Company products do not contain year 2000 date issues that may result in material costs to the Company. Because it is in the business of selling software products, the Company's risk of being subjected to lawsuits relating to year 2000 issues with its software products is likely to be greater than that of companies in other industries. Because computer systems may involve different hardware, firmware and software components from different manufacturers, it may be difficult to determine which component in a computer system may cause a year 2000 issue. As a result, the Company may be subjected to year 2000-related lawsuits independent of whether its products and services are year 2000 ready. The outcomes of any such lawsuits and the impact on the Company cannot be determined at this time. Novell believes that it has the product offerings, facilities, personnel, and competitive and financial resources for continued business success, but future revenues, costs, margins, product mix, and profits are all influenced by a number of factors, such as those discussed above, as well as risks described in detail in the Company's fiscal 1998 report on Form 10-K. Page 12 Part II. Other Information Except as listed below, all information required by items in Part II is omitted because the items are inapplicable or the answer is negative. Item 1. Legal Proceedings. The information required by this item is incorporated herein by reference to Footnote D of the Company's financial statements contained in Part I, Item 1 of this Form 10-Q. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number Description - ------- ----------- 27* Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Registrant during the quarter ended January 31, 1999. ____________________________ *Filed herewith. Page 13 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: March 17, 1999 /s/ Dr. Eric Schmidt --------------------------- Dr. Eric Schmidt Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: March 17, 1999 /s/ Dennis R. Raney ---------------------------- Dennis R. Raney Chief Financial Officer (Principal Financial Officer) Date: March 17, 1999 /s/ Ron Foster ---------------------------- Ron Foster Vice President and Corporate Controller (Principal Accounting Officer) Page 14
EX-27 2
5 3-MOS OCT-31-1999 JAN-31-1999 153,530 861,892 206,227 (40,913) 2,737 1,406,928 702,287 (361,115) 1,930,671 401,636 0 0 0 33,594 1,479,508 1,930,671 285,806 285,806 64,120 64,120 185,336 0 0 40,136 11,238 28,898 0 0 0 28,898 .09 .08
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