-----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, UBiCv1fjyCfhi+lzeso440PYzCZ03AWbRjTnaWvCTM/OOpEq0LnigAhmBmBVOIJg /xNM/I5NU0Gv+RtxPuILsQ== 0000758004-98-000034.txt : 19980915 0000758004-98-000034.hdr.sgml : 19980915 ACCESSION NUMBER: 0000758004-98-000034 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19980914 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: 98708564 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 July 31, 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 prededing 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO As of August 31, 1998 there were 352,091,255 shares of the registrant's common stock outstanding. Part I. Financial Information, Item 1. Financial Statements NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS Jul. 31, Oct. 31, Dollars in thousands, except per share data 1998 1997 - ----------------------------------------------------------------------------- ASSETS Current assets Cash and short-term investments $ 1,147,925 $ 1,033,473 Receivables, less allowances ($36,798 - July; $33,053 - October) 231,221 234,358 Inventories 4,274 10,656 Prepaid expenses 68,168 57,685 Deferred and refundable income taxes 99,879 134,210 - ----------------------------------------------------------------------------- Total current assets 1,551,467 1,470,382 Property, plant and equipment, net 347,624 373,865 Other assets 108,543 66,402 - ----------------------------------------------------------------------------- Total assets $ 2,007,634 $ 1,910,649 ============================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 66,498 $ 82,759 Accrued compensation 51,334 51,397 Accrued marketing liabilities 18,281 27,728 Other accrued liabilities 63,943 85,157 Income taxes payable 52,786 -- Deferred revenue 102,632 74,915 - ----------------------------------------------------------------------------- Total current liabilities 355,474 321,956 Minority interests 16,969 23,276 Shareholders' equity Common stock, par value $.10 a share Authorized - 600,000,000 shares Issued - 353,708,126 shares-July 350,937,812 shares-October 35,371 35,094 Additional paid-in capital 396,667 378,582 Retained earnings 1,248,318 1,188,361 Unearned stock compensation (6,026) (7,189) Cumulative translation adjustment (1,341) (666) Unrealized (loss) on investments (37,798) (28,765) - ----------------------------------------------------------------------------- Total shareholders' equity 1,635,191 1,565,417 - ----------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 2,007,634 $ 1,910,649 ============================================================================= See notes to consolidated unaudited condensed financial statements.
NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS Fiscal Quarter Ended Nine Months Ended ------------------------ --------------------- Amounts in thousands, Jul. 31, Jul. 31, Jul. 31, Jul. 31, except per share data 1998 1997 1998 1997 - ------------------------------------------------------------------------------ Net sales $272,016 $ 90,074 $786,308 $738,028 Cost of sales 60,839 61,671 172,999 214,817 - ------------------------------------------------------------------------------ Gross profit 211,177 28,403 613,309 523,211 Operating expenses Sales and marketing 93,669 97,769 293,657 341,727 Product development 54,452 69,428 170,284 209,625 General and administrative 32,970 33,711 100,002 110,959 Restructuring charges -- 55,335 -- 55,335 - ------------------------------------------------------------------------------ Total operating expenses 181,091 256,243 563,943 717,646 - ------------------------------------------------------------------------------ Income (loss) from operations 30,086 (227,840) 49,366 (194,435) Other income (expense) Investment income 7,390 14,619 37,245 41,154 Other, net (592) (4,736) (3,337) (11,079) - ------------------------------------------------------------------------------ Other income, net 6,798 9,883 33,908 30,075 - ------------------------------------------------------------------------------ Income (loss) before taxes 36,884 (217,957) 83,274 (164,360) Income tax expense (benefit) 10,328 (96,312) 23,317 (78,893) - ------------------------------------------------------------------------------ Net income (loss) $ 26,556 $(121,645) $ 59,957 $ (85,467) ============================================================================== Weighted average shares outstanding Basic 353,436 349,082 352,076 347,636 Diluted 362,083 349,381 357,213 348,127 ============================================================================== Net income (loss) per share Basic $ 0.08 $ (0.35) $ 0.17 $ (0.25) Diluted $ 0.07 $ (0.35) $ 0.17 $ (0.25) ============================================================================== See notes to consolidated unaudited condensed financial statements.
NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS Nine Months Ended ------------------------------ Jul. 31, Jul. 31, Amounts in thousands 1998 1997 - ------------------------------------------------------------------------------ Cash flows from operating activities Net income $ 59,957 $ (85,467) Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation and amortization 59,353 66,582 Stock plans' income tax benefits 3,408 2,970 Decrease in receivables 3,137 275,269 Decrease in inventories 6,382 1,169 (Increase) in prepaid expenses (10,483) (2,593) Decrease (increase) in deferred and refundable income taxes 39,522 (105,661) Increase (decrease) in current liabilities, net 33,518 (55,082) - ------------------------------------------------------------------------------ Net cash provided by operating activities 194,794 97,187 - ------------------------------------------------------------------------------ Cash flows from financing activities Issuance of common stock, net 26,349 9,875 Repurchase of common stock (12,427) -- Sale of put warrants -- 2,300 Settlement of put warrants -- (20,760) - ------------------------------------------------------------------------------ Net cash provided (used) by financing activities 13,922 (8,585) - ------------------------------------------------------------------------------ Cash flows from investing activities Expenditures for property, plant and equipment (42,617) (53,471) Purchases of short-term investments (1,574,104) (1,911,290) Maturities of short-term investments 964,366 1,425,255 Sales of short-term investments 456,464 465,559 Other (42,614) 22,321 - ------------------------------------------------------------------------------ Net cash (used) by investing activities (238,505) (51,626) - ------------------------------------------------------------------------------ Total (decrease) increase in cash and cash equivalents $ (29,789) $ 36,976 Cash and cash equivalents - beginning of period 208,543 145,521 - ------------------------------------------------------------------------------ Cash and cash equivalents - end of period 178,754 182,497 Short-term investments - end of period 969,171 873,370 - ------------------------------------------------------------------------------ Cash and short-term investments - end of period$ 1,147,925 $ 1,055,867 ============================================================================== 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) Jul. 31, 1998 Gains Losses Jul. 31, 1998 - ----------------------------------------------------------------------------- Cash and cash equivalents Cash $ 83,535 $ -- $ -- $ 83,535 Repurchase agreements 4,365 -- -- 4,365 Taxable money market fund 26,394 -- -- 26,394 Municipal securities 64,460 -- -- 64,460 - ----------------------------------------------------------------------------- Cash and cash equivalents$ 178,754 $ -- $ -- $ 178,754 - ----------------------------------------------------------------------------- Short-term investments Municipal securities $ 472,437 $ 4,505 $ (65) $ 476,877 Money market mutual funds 94,459 -- -- 94,459 Money market preferreds 307,310 7 (17) 307,300 Mutual funds 15,143 22 (4) 15,161 Equity securities 141,363 32,550 (98,539) 75,374 - ----------------------------------------------------------------------------- Short-term investments $1,030,712 $ 37,084 $ (98,625) $ 969,171 - ----------------------------------------------------------------------------- Cash and short-term investments $1,209,466 $ 37,084 $ (98,625) $1,147,925 Gross Gross Fair Cost at Unrealized Unrealized Market Value at (Dollars in thousands) Oct. 31, 1997 Gains Losses Oct. 31, 1997 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 nine months of fiscal 1998 the Company had realized gains of $11 million on the sale of securities compared to realized gains of $8 million in the first nine months of fiscal 1997, while realizing losses on sales of securities of $9 million in the first nine months of fiscal 1998. D. Income Taxes The Company's estimated effective tax rate for the first nine months of fiscal 1998 was 28.0% compared to 48.0% in the first nine months of fiscal 1997. The Company paid cash amounts for income taxes of $11 million and $9 million, in the first nine 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 July 31, 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 July 31, 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 July 31, 1998 was approximately $67 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 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. Shareholders Equity 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 between December 1998 and 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 between December 1998 and July 1999. The premiums received from the sale of the put warrants offset in full the cost of the call options. In the first nine 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 nine months of fiscal 1997, the Company settled all of its remaining put warrant obligations on 6 million shares for $21 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 nine months of fiscal 1998 and fiscal 1997, sales to international customers were approximately $333 million and $330 million, respectively. In the first nine months of fiscal 1998 and fiscal 1997, 66% and 53%, respectively, of international sales were to European countries. Except for Japan, which accounted for 14% of total sales in the third quarter of fiscal 1997, 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 nine months of fiscal 1998, 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 includes the dilutive effects of options, warrants and convertible securities, and therefore, is comparable to the earnings per share 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 Q3 Q3 YTD YTD 1998 Change 1997 1998 Change 1997 - ----------------------------------------------------------------------------- Net sales (millions) $272 202% $90 $786 7% $738 ============================================================================== Novell's third quarter of fiscal 1997 revenue was reduced from recent periods primarily due to the indirect distribution channel actions described above. Third quarter revenue in fiscal 1997 was principally from sales to large network users through the Company's major account, corporate and volume license programs. The decision to not ship to the indirect distribution channel in the third quarter of fiscal 1997 makes quarter over quarter and year over year comparisons difficult. 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 increased from the third quarter of 1997 to the third quarter of 1998, and from the first nine months of fiscal 1997 to the first nine months of fiscal 1998, analysis of the individual product categories characterizes the changes that have occurred. Server operating environments revenues increased by 318% or $122 million in the third quarter of 1998 compared to the third quarter of 1997. Both the NetWare 3 and NetWare 4 product line revenues increased significantly as the Company withheld shipments to its indirect distribution channel in the third quarter of fiscal 1997. In the first nine months of fiscal 1998, server operating environments revenues were flat over the same period in fiscal 1997. Increases of $37 million in the NetWare 4 product lines were offset by decreases of $37 million in the NetWare 3 product lines. Network services revenues increased by 187% or $45 million in the third quarter of 1998 compared to the third quarter of 1997 and increased by 23% or $40 million in the first nine months of fiscal 1998 compared to the first nine months of fiscal 1997. The $45 million increase between the third quarter of fiscal 1997 and the third quarter of fiscal 1998 is mainly the result of the Company's decision to withhold shipments to its indirect distribution channel in the third quarter of fiscal 1997. The $40 million increase in the first nine months of fiscal 1998 from the first nine months of 1997 is also due to the Company's decision to withhold shipments to its indirect distribution channel in the third quarter of fiscal 1997 as well as new product sales of Z.E.N. Works. Other revenue, which is made up of UNIX royalties, education, service, and other, increased by 56% or $15 million from the third quarter of fiscal 1997 to the third quarter of fiscal 1998 and increased by 7% or $8 million in the first nine months of fiscal 1998 compared to the first nine months of fiscal 1997. The increases relate primarily to higher service revenue in fiscal 1998 compared to fiscal 1997. International sales represented 42% of total sales in the first nine months of 1998 compared to 45% in the first nine months of 1997. This change is a result of a 11% increase in domestic revenues compared to a 1% increase in international revenues in the first nine months of fiscal 1998 compared to the first nine months of fiscal 1997. Gross profit Q3 Q3 YTD YTD 1998 Change 1997 1998 Change 1997 - ----------------------------------------------------------------------------- Gross profit (millions)$211 654% $28 $613 17% $523 Percentage of net sales 78% 31% 78% 71% ============================================================================== The gross margin percentage increased in the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997 and in the first nine months of fiscal 1998 compared to the first nine months of fiscal 1997 due to the fixed portion of cost of sales being a higher percentage of the lower revenues in the third quarter of fiscal 1997 as the Company withheld shipments to its indirect distribution channel. Additionally, lower inventory management costs contributed to the increase in gross margin percentage. Operating expenses Q3 Q3 YTD YTD 1998 Change 1997 1998 Change 1997 - ------------------------------------------------------------------------------ Sales and marketing (millions) $ 94 -4% $98 $294 -14% $342 Percentage of net sales 34% 109% 37% 46% - ------------------------------------------------------------------------------ Product development (millions) $ 54 -22% $ 69 $170 -19% $210 Percentage of net sales 20% 77% 22% 28% General and administrative (millions) $ 33 -3% $ 34 $100 -10% $111 Percentage of net sales 12% 38% 13% 15% - ------------------------------------------------------------------------------ Restructuring charges (millions) $ -- -- $ 55 $ -- -- $55 Percentage of net sales -- 61% -- 7% - ------------------------------------------------------------------------------ Total operating expenses (millions) $181 -29% $256 $564 -21% $718 Percentage of net sales 67% 284% 72% 97% ============================================================================== Sales and marketing expenses decreased as a percentage of net sales in the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997 as well as in the first nine months of fiscal 1998 compared to the first nine months of fiscal 1997 as the Company withheld shipments to its indirect distribution channel in the third quarter of fiscal 1997. The decrease in absolute dollars in both comparative periods is due to lower domestic and international sales expenses as well as lower product 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 third quarter of fiscal 1998 compared to the third quarter of fiscal 1997 as well as in the first nine months of fiscal 1998 compared to the first nine months of fiscal 1997 as the Company withheld shipments to its indirect distribution channel in the third quarter of fiscal 1997. The decrease in absolute dollars in both comparative periods is primarily due to work force reductions in fiscal 1997. General and administrative expenses decreased as a percentage of net sales in the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997 as well as in the first nine months of fiscal 1998 compared to the first nine months of fiscal 1997 as the Company withheld shipments to its indirect distribution channel in the third quarter of fiscal 1997. The decrease in absolute dollars in both comparative periods is primarily due to work force reductions in fiscal 1997. During the third quarter of fiscal 1997 the Company incurred $55 million of tax deductible restructuring charges for redundant facilities and excess personnel as the Company realigned its resources to better manage and control its business. Overall, operating expenses, excluding restructuring charges, have declined as revenues have increased in the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997, as well as in the first nine months of fiscal 1998 compared to the first nine months of fiscal 1997. YTD YTD 1998 Change 1997 - ------------------------------------------------------------------------------ Employees 4,502 -7% 4,831 Annualized revenue per employee (000's) $226 23% $184 ============================================================================== 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 Q3 Q3 YTD YTD 1998 Change 1997 1998 Change 1997 - ------------------------------------------------------------------------------ Other income, net (millions) $7 -30% $10 $34 13% $30 Percentage of net sales 3% 11% 4% 4% ============================================================================== The primary component of other income, net is investment income, which was $7 million in the third quarter of fiscal 1998 compared to $15 million in the third quarter of fiscal 1997 and was $37 million in the first nine months of fiscal 1998 compared to $41 million in the first nine months of fiscal 1997. The decrease is the result of realized capital losses as the Company disposed of certain equity securities as discussed below. 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 $67 million as of July 31, 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 continue to dispose of such shares over the coming periods. Income tax expense (benefit) Q3 Q3 YTD YTD 1998 Change 1997 1998 Change 1997 - ------------------------------------------------------------------------------ Income tax expense (benefit) (millions) $10 110% $(96) $23 129% $(79) Percentage of net sales 4% -107% 3% -11% Effective tax rate 28% 44% 28% 48% ============================================================================= At July 31, 1998 the Company had deferred tax assets of $109 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 $247 million of taxable income. Of
this, approximately $117 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 Q3 Q3 YTD YTD 1998 Change 1997 1998 Change 1997 - ------------------------------------------------------------------------------ Net income (loss) (millions) $27 122% $(122) $60 171% $(85) Percentage of net sales 10% -136% 8% -12% Net income (loss) per share - basic $.08 123% $(.35) $.17 168% $(.25) Net income (loss) per share - diluted $.07 120% $(.35) $.17 168% $(.25) ============================================================================== 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 includes the dilutive effects of options, warrants and convertible securities, and therefore, is comparable to the earnings per share 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 Q3 Q4 1998 Change 1997 - ------------------------------------------------------------------------------ Cash and short-term investments (millions) $1,148 11% $1,033 Percentage of total assets 57% 54% ============================================================================== Cash and short-term investments increased to $1,148 million at July 31, 1998 from $1,033 million at October 31, 1997. This increase can be attributed to $195 million provided by operating activities and $26 million provided by issuances of common stock, somewhat offset by $43 million of cash used for expenditures on property, plant and equipment, $12 million used to repurchase common stock, and $51 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 July 31, 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 nine 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. During the third fiscal quarter of fiscal 1998, the Company repurchased and retired approximately 1 million shares at a cost of approximately $12 million.
Future Results The Company's future results of operations involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially from historical results are the following: business conditions and the general economy; competitive factors, such as rival operating systems, acceptance of new products and price pressures; availability of third-party compatible products at reasonable prices; risk of nonpayment of accounts or notes receivable; risks associated with foreign operations; risk of product line or inventory obsolescence due to shifts in technologies or market demand; timing of software product introductions; market fluctuations of investment securities; and litigation. In the past, many information technology products were designed with two digit year codes that did not recognize century and millennium fields. As a result, these hardware and software products may not function or may give incorrect results beginning in the year 2000. The year 2000 issue is faced by substantially every company in the computer industry, as well as every company which relies on computer systems. In order to address this issue, such hardware and software products must be upgraded or replaced in order to correctly process dates beginning in the year 2000. 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. Throughout 1998 and 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 ofsuch 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 expects in mid-1999 to finalize its 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 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 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number Description - -------- ----------- 27* Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Registrant during the quarter ended July 31, 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: September 11, 1998 /s/ Dr. Eric Schmidt --------------------- Dr. Eric Schmidt Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: September 11, 1998 /s/ Dennis R. Raney ---------------------- Dennis R. Raney Senior Vice President and Chief Financial Officer (Principal Financial Officer) Date: September 11, 1998 /s/ Cliff Simpson -------------------- Cliff Simpson Vice President Finance and Corporate Controller (Principal Accounting Officer) EX-27 2
5 9-MOS OCT-31-1998 MAY-01-1998 JUL-31-1998 178,754 969,171 231,221 (36,798) 4,274 1,551,467 760,014 (412,390) 2,007,634 355,474 0 0 0 35,371 1,599,820 2,007,634 786,308 786,308 172,999 172,999 563,943 0 0 83,274 23,317 59,957 0 0 0 59,957 .17 .17
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