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, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from
to
Commission File Number: 0-13351
NOVELL, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0393339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 29, 2000 there were 329,428,357 shares of the Registrant's Common
Stock outstanding.
PART I. FINANCIAL INFORMATION, ITEM 1. FINANCIAL STATEMENTS
NOVELL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
Jan. 31, Oct. 31,
DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA 2000 1999
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 947,515 $ 895,404
Receivables, less allowances ($37,830 - January; $36,318 - October) 236,857 284,510
Inventories 4,028 3,753
Prepaid expenses 43,954 47,738
Deferred and refundable income taxes -- 60,266
OTHER CURRENT ASSETS 33,465 43,945
- -------------------------------------------------------------------------------------------------------------------
Total current assets 1,265,819 1,335,616
Property, plant and equipment, net 341,816 347,012
Long-term investments 375,752 229,114
OTHER ASSETS 35,622 30,577
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 2,019,009 $ 1,942,319
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 57,523 $ 85,037
Accrued compensation 61,747 62,778
Accrued marketing liabilities 11,056 11,449
Other accrued liabilities 47,395 50,133
Income taxes payable 37,490 57,085
Deferred taxes 10,451 --
DEFERRED REVENUE 180,706 173,150
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 406,368 439,632
Minority interests 11,629 10,446
SHAREHOLDERS' EQUITY
Common stock, par value $.10 per share
Authorized - 600,000,000 shares
Issued - 327,700,063 shares-January
326,593,911 shares-October 32,771 32,659
Additional paid-in capital -- --
Retained earnings 1,468,646 1,432,624
Accumulated other comprehensive income 109,285 35,189
OTHER (9,690) (8,231)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,601,012 1,492,241
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,019,009 $ 1,942,319
===================================================================================================================
See notes to consolidated unaudited condensed financial statements.
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME
FISCAL QUARTER ENDED
Dollars in thousands, Jan. 31, Jan. 31,
EXCEPT PER SHARE DATA 2000 1999
- ------------------------------------------------------------------------------------------------------------------
NET SALES $ 316,043 $ 285,806
COST OF SALES 76,921 64,126
- -------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 239,122 221,680
OPERATING EXPENSES
Sales and marketing 114,130 105,386
Product development 58,677 55,604
GENERAL AND ADMINISTRATIVE 19,785 24,395
- -------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 192,592 185,385
- -------------------------------------------------------------------------------------------------------------------
Income from operations 46,530 36,295
OTHER INCOME (EXPENSE)
Investment income 17,558 9,763
OTHER, NET (1,817) (5,922)
- -------------------------------------------------------------------------------------------------------------------
OTHER INCOME, NET 15,741 3,841
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES 62,271 40,136
INCOME TAXES 17,436 11,238
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 44,835 $ 28,898
===================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 326,906 337,441
Diluted 342,105 351,522
===================================================================================================================
NET INCOME PER SHARE
Basic $ 0.14 $ 0.09
Diluted $ 0.13 $ 0.08
===================================================================================================================
See notes to consolidated unaudited condensed financial statements.
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
-----------------------
Jan. 31, Jan. 31,
DOLLARS IN THOUSANDS 2000 1999
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 44,835 $ 28,898
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 18,505 16,940
Stock plans' income tax benefits 29,677 13,347
Decrease in receivables 47,653 40,485
(Increase) decrease in inventories (275) 825
Decrease (increase) in prepaid expenses 3,784 (24)
Decrease in deferred and refundable income taxes 19,442 15,499
Decrease (increase) in other current assets 10,480 (19,763)
(DECREASE) IN CURRENT LIABILITIES, NET (33,264) (13,059)
- -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 140,837 83,148
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net 37,164 27,293
REPURCHASE OF COMMON STOCK (88,781) (76,843)
- -------------------------------------------------------------------------------------------------------------------
NET CASH USED BY FINANCING ACTIVITIES (51,617) (49,550)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (10,674) (12,215)
Purchases of short-term investments (294,999) (643,484)
Maturities of short-term investments 280,750 492,629
Sales of short-term investments 163,507 153,969
Expenditures for other long-term investments (130,009) (1,749)
Increase in restricted cash (16,629) (40,278)
OTHER 15,594 1,567
----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 7,540 (49,561)
- --------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 96,760 (15,963)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 274,269 155,493
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD 371,029 139,530
SHORT-TERM INVESTMENTS - END OF PERIOD 576,486 875,892
- -------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS - END OF PERIOD $ 947,515 $ 1,015,422
===================================================================================================================
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
Issuance of restricted stock for acquisitions $ 10,656 $ --
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 1999 Annual Report to Shareholders. These financial
statements do include all normal recurring adjustments that the Company
believes necessary for a fair presentation of the statements. The interim
operating results are not necessarily indicative of the results for a full
year. Certain reclassifications, none of which affected net income, have
been made to the prior years' amounts in order to conform to the current
years' presentation.
B. CASH AND SHORT-TERM INVESTMENTS
All marketable debt and equity securities are included in cash and short-term
investments and are considered available-for-sale and carried at fair market
value, with the unrealized gains and losses, net of tax, included in
comprehensive income. Fair market values are based on quoted market prices at
the end of the period, where available; if quoted market prices are not
available, then fair market values are based on quoted market prices of
comparable instruments. Municipal securities included in short-term investments
have contractual maturities from 1-7 years. Money market preferreds have
contractual maturities of less than 180 days. No other short-term investments
have contractual maturities. The cost of securities sold is based on the
specific identification method. Such securities are anticipated to be used for
current operations and are therefore classified as current assets, even though
some maturities may extend beyond one year.
The following is a summary of cash and short-term investments, all of which are
considered available-for-sale.
Gross Gross Fair
Cost at Unrealized Unrealized Market Value at
(DOLLARS IN THOUSANDS) JAN. 31, 2000 GAINS LOSSES JAN. 31, 2000
------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Cash $ 319,807 $ - $ - $ 319,807
MONEY MARKET FUND 51,222 - - 51,222
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS 371,029 - - 371,029
- -------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS
Municipal securities 289,418 - (3,345) 286,073
Money market mutual funds 5,173 - - 5,173
Money market preferreds 31,502 1 (3) 31,500
Mutual funds 76,872 61 (794) 76,139
EQUITY SECURITIES 7,431 170,170 - 177,601
- -------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 410,396 170,232 (4,142) 576,486
- -------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS $ 781,425 $ 170,232 $ (4,142) $ 947,515
- -------------------------------------------------------------------------------------------------------------------
Gross Gross Fair
Cost at Unrealized Unrealized Market Value at
(DOLLARS IN THOUSANDS) OCT. 31, 1999 GAINS LOSSES OCT. 31, 1999
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
Cash $ 186,689 $ - $ - $ 186,689
MONEY MARKET FUND 87,580 - - 87,580
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS 274,269 - - 274,269
- -------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS
Municipal securities 411,938 3 (2,393) 409,548
Money market mutual funds 93,894 - - 93,894
Money market preferreds 33,000 - - 33,000
Mutual funds 15,873 - (102) 15,771
EQUITY SECURITIES 4,949 64,619 (646) 68,922
- -------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 559,654 64,622 (3,141) 621,135
- -------------------------------------------------------------------------------------------------------------------
CASH AND SHORT-TERM INVESTMENTS $ 833,923 $ 64,622 $ (3,141) $ 895,404
- -------------------------------------------------------------------------------------------------------------------
During the first three months of fiscal 2000 the Company realized gains of $7
million and realized losses of $1 million on the sale of securities compared to
realized gains of $13 million and realized losses of $15 million in the first
three months of fiscal 1999.
C. INCOME TAXES
The Company's estimated effective tax rate for the first three months of fiscal
2000 was 28.0%, the same as in the first three months of fiscal 1999. The
Company paid cash amounts for income taxes of $2 million in the first three
months of fiscal 2000 and fiscal 1999.
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, 2000
borrowings, letter of credit acceptances or commitments of approximately $1.3
million were outstanding under such line.
The Company also has a $10 million line of credit with another bank which is not
subject to a loan agreement. At January 31, 2000 standby letters of credit of
approximately $0.5 million were outstanding under this line of credit.
In fiscal 1997, the Company entered into agreements to lease buildings being
constructed on land owned by the Company in San Jose, California and in Provo,
Utah. The lessor has committed to fund up to $218 million for construction of
the buildings. The leases are for a period of seven years and can be renewed for
two additional five year periods, by either the lender or the Company, subject
to the approval of the other party. Rent obligations commenced during the second
quarter of fiscal 1999 for San Jose and will commence upon the Company's
occupation of the Provo building in the second quarter of fiscal 2000. Annual
rent under each agreement is determined by taking the portion of the committed
amount actually utilized and associated capitalized interest accrued during the
construction period multiplied by the secured interest rate. If the Company does
not purchase the buildings, or arrange for the sale of the buildings, at the end
of the lease, the Company will guarantee the lessor no more than 85% of the
residual value of the buildings. The guaranteed residual value at January 31,
2000, was approximately $185 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, 2000 was
approximately $203 million, and is included in long-term investments.
In February 1998, a suit was filed against Novell and certain of its officers
and directors, alleging violation of federal securities laws. The lawsuit was
brought as a purported class action on behalf of purchasers of Novell common
stock from November 1, 1996 through April 22, 1997. The case is in its
preliminary stages. Novell believes that the case is without merit, and intends
to vigorously defend against the allegations. While there can be no assurance as
to the ultimate disposition of the case, Novell does not believe that the
resolution of this litigation will have a material adverse effect on its
financial position, results of operations, or cash flows.
The Company is a party to a number of legal claims arising in the ordinary
course of business. The Company believes the ultimate resolution of the claims
will not have a material adverse effect on its financial position, results of
operations, or cash flows.
E. SEGMENT INFORMATION
The Company operates in one business segment, directory-enabled networking
software and services. The Company's products are sold throughout the world. In
the United States, products are sold through direct, OEM, reseller, and
distributor channels. Internationally, products are marketed through
distributors who sell to dealers and end users. Performance of the Company is
evaluated by the Company's chief decision makers, the Chief Executive Officer
and Executive Council, based on total Company results. Revenue is evaluated
based on geographic region and by product category. Separate financial
information is not available by product category in regards to asset allocation,
expense allocation, or profitability.
Novell's products can be categorized into the following four areas, all within
the directory-enabled networking software and services segment.
o Directory-enabled server platforms, which includes NetWare 4 and NetWare 5
o Directory-enabled applications products, which include NetWare for SAA host
connectivity products, BorderManager, NDS integration and high availability
service products, as well as collaboration and management products including
GroupWise, ManageWise, and ZENworks
o Service, education and consulting revenue, which is generated from customer
service, educational products and courses, and consulting for network
solutions
o Pre-directory product revenue consisting of NetWare 3, non-directory-enabled
infrastructure products and UNIX royalties
REVENUE BY PRODUCT CATEGORY
FISCAL QUARTER ENDED
--------------------------
Jan. 31, Jan. 31,
DOLLARS IN THOUSANDS 2000 1999
- ----------------------------------------------------------------------------------------------------------
Directory-enabled server platforms $ 154,321 $ 145,818
Directory-enabled applications 79,740 72,763
Service, education and consulting 50,424 36,859
Other 31,558 30,366
--------- ---------
Total net sales $ 316,043 $ 285,806
========= =========
Sales outside the U.S. are comprised of sales to international customers in
Europe, the Middle East, Canada, South America, and Asia Pacific. Other than
sales in Ireland, international sales were not material individually in any
other international location. Intercompany sales between geographic areas are
accounted for at prices representative of unaffiliated party transactions. "U.S.
operations" include shipments to customers in the U.S., licensing to OEMs, and
exports of finished goods directly to international customers, primarily in
Canada, South America, and Asia.
For the first three months of fiscal 2000 and fiscal 1999, sales to
international customers were approximately $150 million and $130 million,
respectively. In the first three months of fiscal 2000 and fiscal 1999, 66% and
72%, respectively, of international sales were to European countries. No one
foreign country accounted for 10% or more of total sales in either period.
Except for one multi-national distributor, which accounted for 10% of total
revenue in the first three months of fiscal 2000 and 13% of total revenue in the
first three months of fiscal 1999, no customer accounted for more than 10% of
total revenue in any period.
F. NET INCOME PER SHARE
FISCAL QUARTER ENDED
---------------------------
Jan. 31, Jan. 31,
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA 2000 1999
- ----------------------------------------------------------------------------------------------------------
Basic net income per share computation
NET INCOME $ 44,835 $ 28,898
- ----------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 326,906 337,441
- ----------------------------------------------------------------------------------------------------------
Basic net income per share $ 0.14 $ 0.09
==========================================================================================================
Diluted net income per share computation
NET INCOME $ 44,835 $ 28,898
- ----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 326,906 337,441
Incremental shares attributable to exercise of
OUTSTANDING OPTIONS (TREASURY STOCK METHOD) 15,199 14,081
- ----------------------------------------------------------------------------------------------------------
TOTAL 342,105 351,522
- ----------------------------------------------------------------------------------------------------------
Diluted net income per share $ 0.13 $ 0.08
==========================================================================================================
G. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, for the three months ended
January 31, 2000 and 1999 were as follows:
FISCAL QUARTER ENDED
--------------------------
Jan. 31, Jan. 31,
DOLLARS IN THOUSANDS 2000 1999
- ----------------------------------------------------------------------------------------------------------
Net income $ 44,835 $ 28,898
Change in net unrealized gain on investments 74,646 27,332
CHANGE IN CUMULATIVE TRANSLATION ADJUSTMENT (550) (124)
- -----------------------------------------------------------------------------------------------------------
Comprehensive income $ 118,931 $ 56,106
==========================================================================================================
The components of accumulated other comprehensive income, net of related tax, at
January 31, 2000 and 1999, are as follows:
FISCAL QUARTER ENDED
--------------------------
Jan. 31, Oct. 31,
DOLLARS IN THOUSANDS 2000 1999
- ----------------------------------------------------------------------------------------------------------
Unrealized gain on investment $ 112,408 $ 62,108
CUMULATIVE TRANSLATION ADJUSTMENT (3,123) (820)
- -----------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income $ 109,285 $ 61,288
==========================================================================================================
H. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," (SFAS 133). SFAS 133 established accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS 133
requires all companies to recognize derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. This statement is effective for all fiscal quarters of fiscal years
beginning after July 1, 2000. The Company is currently assessing the potential
impact SFAS 133 will have on the statement of financial position of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this Quarterly Report contain forward-looking
statements that involve risks and uncertainties. All forward-looking statements
are based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements. The
Company's actual results may differ materially from the results discussed in
such forward-looking statements as a result of a number of factors, which
include, but are certainly not limited to, those set forth below in the sections
entitled "Future Results," "Year 2000," and "Euro Conversion." Readers should
carefully review the risk factors described in other documents that the Company
files from time to time with the Commission, including the Annual Report on Form
10-K and the Quarterly Reports on Form 10-Q to be filed by the Company in Fiscal
2000.
INTRODUCTION
Novell is the world's leading provider of directory-enabled networking software.
Novell solutions give businesses total control of their private networks and the
Internet, simplifying the management of user access and identity. Novell's
worldwide channel, consulting, developer, education, and technical support
programs are the most extensive in the network computing industry.
RESULTS OF OPERATIONS
NET SALES
Q1 Q1
2000 CHANGE 1999
------------------------------------------------------------------------------------
Net sales (millions) $316 11% $286
====================================================================================
Novell's products can be categorized into the following four areas, all within
the directory-enabled networking software services segment.
oDirectory-enabled server platforms, which includes NetWare 4 and NetWare 5
oDirectory-enabled applications products, or Net Services Software, which
include NetWare for SAA host connectivity products, BorderManager, NDS
integration and high availability service products, as well as collaboration
and management products including GroupWise, ManageWise, and ZENworks
o Service, education and consulting revenue, which is generated from customer
service, educational products and courses, and consulting for network
solutions
o Pre-directory product revenue consisting of NetWare 3, non-directory-enabled
infrastructure products and UNIX royalties
Revenue from the directory-enabled server platforms category increased $8.5
million or 6% in the first quarter of 2000 compared to the first quarter of
1999. This increase in revenue is due to strong customer acceptance of the
Internet Protocol based NetWare 5, which more than offset the decline in sales
of the older NetWare 4 products .
Revenue from the directory-enabled applications products was $79.7 million in
the first quarter of 2000 compared to $72.8 million in the first quarter of
1999. This 10% increase was driven by an increase in sales of ZENworks,
BorderManager and NDS for NT and Solaris, somewhat offset by a decrease in
NetWare for SAA.
Service, education and consulting revenues were $50.4 million and $36.9 million
in the first quarter of 2000 and 1999, respectively. The increase in the first
quarter of 2000 was a result of increased directory-related consulting revenue
and increased service revenue as a result of increased site licenses, and growth
in consulting.
Pre-directory products revenue was $31.6 million in the first quarter of 2000
compared to $30.4 million in the first quarter of 1999. The increase in the
first quarter of 2000 was primarily the result of higher royalty revenue related
to the UNIX royalties. Without this revenue, pre-directory products revenue
would have decreased, as expected, due to increased sales of directory-enabled
products and introductions of newer versions of non-directory products.
International sales represented 48% of total sales in the first three months of
2000 compared to 45% in the first three months of 1999 due to stronger sales
growth in each of the international regions. International sales increased 16%
compared to a 6% increase in domestic revenues in the first three months of
fiscal 2000 as compared to the same period of 1999
GROSS PROFIT
Q1 Q1
2000 CHANGE 1999
------------------------------------------------------------------------------------
Gross profit (millions) $239 8% $222
Percentage of net sales 76% 78%
=====================================================================================
Gross profit as a percentage of sales decreased slightly in the first quarter of
fiscal 2000 compared to the first quarter of fiscal 1999 due primarily to
increased royalty costs, costs for services related to the consulting business,
and training and education costs.
OPERATING EXPENSES
Q1 Q1
2000 CHANGE 1999
------------------------------------------------------------------------------------
Sales and marketing (millions) $114 8% $105
PERCENTAGE OF NET SALES 36% 37%
--------------------------------------------------------------------------------------
Product development (millions) $ 59 6% $ 56
PERCENTAGE OF NET SALES 19% 20%
--------------------------------------------------------------------------------------
General and administrative (millions) $ 20 -19% $ 24
PERCENTAGE OF NET SALES 6% 9%
--------------------------------------------------------------------------------------
Total operating expenses (millions) $193 4% $185
Percentage of net sales 61% 65%
======================================================================================
Sales and marketing expenses increased by $8.7 million, in the first quarter of
fiscal 2000 compared to the first quarter of fiscal 1999. At the same time
however, sales and marketing expenses decreased slightly as a percentage of net
sales. 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 increased in the first quarter of fiscal 2000
compared to the first quarter of fiscal 1999. Product development expenses also
decreased slightly as a percentage of net sales in the first quarter of 2000 due
to increased sales levels and a more efficient product development organization
focused on delivering new products consistent with the Company's strategy.
General and administrative expenses decreased in total and as a percentage of
net sales in the first quarter of fiscal 2000 compared to the first quarter of
fiscal 1999. These decreases were primarily due to a continued focus on
controlling costs as well as a higher revenue base.
YTD YTD
2000 CHANGE 1999
-------------------------------------------------------------------------------------------------
Employees 5,338 15% 4,642
Annualized revenue per average employee (000's) $ 235 -5% $ 248
Annualized net income per average employee (000's) $ 33 33% $ 25
=================================================================================================
Headcount increased from the first quarter of 1999 to the first quarter of 2000,
primarily due to increases in the education, consulting, worldwide sales, and
product development areas. Headcount has increased in these areas to support the
Company's growth in new product and services revenue.
OTHER INCOME, NET
Q1 Q1
2000 CHANGE 1999
------------------------------------------------------------------------------------
Other income, net (millions) $ 16 310% $ 4
Percentage of net sales 5% 1%
=====================================================================================
The primary component of other income, net is investment income, which was $17.6
million in the first quarter of fiscal 2000 compared to $9.8 million in the
first quarter of fiscal 1999. In the first quarter of 2000, the Company realized
capital losses of $0.9 million and realized capital gains of $6.7 million,
compared to realized capital losses of $15.3 million and realized capital gains
of $13.0 million in the first quarter of 1999. In addition to investment income,
the Company recognized a gain on foreign currency in the first quarter of 2000
compared to a loss in the same period of 1999, and received more sublease income
during the first quarter of 2000
INCOME TAXES
Q1 Q1
2000 CHANGE 1999
------------------------------------------------------------------------------------
Income taxes (millions) $ 17 55% $ 11
Percentage of net sales 6% 4%
Effective tax rate 28% 28%
=====================================================================================
The effective tax rate for fiscal 2000 is estimated to be 28%, the same as
fiscal 1999.
NET INCOME AND NET INCOME PER SHARE
Q1 Q1
2000 CHANGE 1999
------------------------------------------------------------------------------------
Net income (millions) $ 45 55% $ 29
Percentage of net sales 14% 10%
Net income per share - basic $.14 $.09
Net income per share - diluted $.13 $.08
====================================================================================
LIQUIDITY AND CAPITAL RESOURCES
Q1 Q4
2000 CHANGE 1999
-------------------------------------------------------------------------------------------------
Cash and short-term investments (millions) $948 6% $895
Percentage of total assets 47% 46%
=================================================================================================
Cash and short-term investments increased by $52 million at Jan. 31, 2000 from
$895 million at October 31, 1999. During the quarter, cash and short-term
investments increased due to $141 million provided from operating activities,
$105 million from the sale of short-term investments, and $37 million from the
issuance of common stock. These increases were offset by cash outflows of $114
million for purchases of long-term investments and other long term investing
activities, $89 million for the repurchase of common stock, $17 million to
increase collateral associated with certain long-term investments, and $11
million to purchase property, plant and equipment.
The Company's investment portfolio includes equity securities with gross
unrealized losses of $4 million and gross unrealized gains of $187 as of January
31, 2000. There are no individual securities with material unrealized losses at
the end of the first quarter of 2000.
The investment portfolio is diversified among security types, industry groups,
and individual issuers. To achieve potentially higher returns, a limited portion
of the Company's investment portfolio is invested in mutual funds, which incur
market risk. The Company believes that the market risk has been limited by
diversification and by use of a funds management timing service which switches
funds out of mutual funds and into money market funds when preset signals occur.
The Company's principal source of liquidity has been from operations. At January
31, 2000, the Company's principal unused sources of liquidity consisted of cash
and short-term investments and available borrowing capacity of approximately $18
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 three months of fiscal 2000, 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
2000 are anticipated to be approximately $75 million, but could be reduced if
the growth of the Company is less than presently anticipated.
In July 1999, the Board of Directors authorized up to $500 million for the
repurchase of additional outstanding shares of the Company's common stock
through October 31, 2000. As of January 31, 2000, 12.7 million shares had been
repurchased under this plan at a total cost of $288 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.
Novell believes that it has the product offerings, facilities, personnel, and
competitive and financial resources for continued business success, but future
revenues, costs, margins, product mix, and profits are all influenced by a
number of factors, such as those discussed above, as well as risks described in
detail in the Company's fiscal 1999 report on Form 10-K.
YEAR 2000
In the past, many information technology products were designed with two digit
year codes that did not recognize century and millennium fields. As a result,
these hardware and software products may not function or may give incorrect
results beginning in the Year 2000. The Year 2000 issue is faced by
substantially every company in the computer industry, as well as every company
that relies on computer systems. To address this issue, such hardware and
software products were upgraded or replaced to correctly process dates beginning
in the Year 2000.
The Company has a general contingency plan to address extreme events such as
earthquake, flood, or serious equipment failures. The Company's Year 2000
contingency planning is an extension of this effort. Based on the Company's
planning efforts, the worst-case Y2K-related scenarios that were identified
include:
o temporary loss of power--to address this risk Novell has its own power
generation capability in critical locations; o temporary loss of voice
and/or data communications or other utility services--to help minimize this
risk Novell uses multiple telecommunications providers;
o temporary inability to access key information systems due to a Y2K related
failure--to address this risk Novell has identified manual procedures to at
least partly facilitate needed processes until systems are restored;
o temporary inability to ship products due to a Y2K issue with the systems of a
key business partner--to minimize this risk Novell uses multiple partners.
The Company's Year 2000 effort included Year 2000 testing for Novell products
currently on, and some that were previously on, the Company's price list.
Generally, for products that were identified as needing updates to address Year
2000 issues, the Company has prepared updates or has removed 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.
The Company's total cost relating to these activities was not material to the
Company's financial position, results of operations, or cash flows. The
modifications were made on a timely basis. The Company did not experience a
delay in, or increased costs associated with, the implementation of such
modifications, nor did the Company experience problems due to suppliers
inadequately preparing for the Year 2000 issue. The Company also did not
experience an inability to deliver products or services to its customers.
The Company's Year 2000 Web site at www.novell.com/year2000/ provides
information on its products that are Year 2000 ready and general information on
the Company's Year 2000 efforts. For third party products which the Company
distributes with its products, the Company has sought Year 2000 readiness status
from the product manufacturers. Customers who use these third-party products are
directed to the product manufacturers for detailed Year 2000 status information.
The Company believes that its current products, with any applicable updates, are
prepared for Year 2000 date issues, and the Company plans to provide support for
these products' Year 2000 date-related issues, as described in the Company's
support policy statements. However, there can be no guarantee that one or more
current Company products do not contain Year 2000 date issues that may result in
material costs to the Company. Because it is in the business of selling software
products, the Company's risk of being subjected to lawsuits relating to Year
2000 issues with its software products is likely to be greater than that of
companies in other industries. Because computer systems may involve hardware,
firmware and software components from different manufacturers, it may be
difficult to determine which component in a computer system may cause a Year
2000 issue. As a result, the Company may be subjected to Year 2000 related
lawsuits independent of whether its products and services are Year 2000 ready.
The outcomes of any such lawsuits and the impact on the Company cannot be
determined at this time.
EURO CONVERSION
On January 1, 1999, 11 of the 15 members of the European Union established fixed
conversion rates among their existing sovereign currencies and adopted the euro
as their common legal currency. At the end of a three-year transition period
during which companies may choose to operate either in the euro or national
currencies the legacy currencies will be eliminated. In June 1998, the Company
formed a cross-functional team to assess the impact of the conversion on the
Company's operations and to address associated issues.
The Company is currently conducting transactions in the euro and expects to have
all affected information systems fully converted by April 2001. Novell does not
expect the euro conversion to have a material effect on its competitive position
or financial results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks, including changes in interest
rates, foreign currency exchange rates and marketable equity security prices. To
mitigate these risks, the Company utilizes currency forward contracts and
currency options. The Company does not use derivative financial instruments for
speculative or trading purposes, and no derivative financial instruments were
outstanding at January 31, 2000.
The primary objective of the Company's investment activities is to preserve
principal while maximizing yields without significantly increasing risk. This is
accomplished by investing in widely diversified short-term investments,
consisting primarily of investment grade securities, substantially all of which
either mature within the next twelve months or have characteristics of
short-term investments. A hypothetical 50 basis point increase in interest rates
would result in an approximate $4 million decrease (approximately 0.6%) in the
fair value of the Company's available-for-sale securities.
The Company hedges currency risks of investments denominated in foreign
currencies with currency forward contracts. Gains and losses on these foreign
currency investments would generally be offset by corresponding losses and gains
on the related hedging instruments, resulting in negligible net exposure to the
Company. A substantial majority of the Company's revenue, expense and capital
purchasing activities are transacted in U.S. dollars. However, the Company does
enter into transactions in other currencies, primarily Japanese yen and certain
other Asian and European currencies. To protect against reductions in value and
the volatility of future cash flows caused by changes in foreign exchange rates,
the Company has established balance sheet hedging programs. Currency forward
contracts and currency options are utilized in these hedging programs. The
Company's hedging programs reduce, but do not always entirely eliminate, the
impact of foreign currency exchange rate movements. If the Company did not hedge
against foreign currency exchange rate movement, an adverse change of 10% in
exchange rates would result in a decline in income before taxes of approximately
$10 million.
The Company is exposed to equity price risks on equity securities included in
its portfolio of investments entered into for the promotion of business and
strategic objectives. These investments are generally in small capitalization
stocks in the high-technology industry sector. The Company typically does not
attempt to reduce or eliminate its market exposure on these securities. A 10%
adverse change in equity prices would result in an approximate $18 million
decrease in the fair value of the Company's available-for-sale securities.
All of the potential changes noted above are based on sensitivity analyses
performed on the Company's financial position at January 31, 2000. Actual
results may differ materially.
PART II. OTHER INFORMATION
Except as listed below, all information required by items in Part II is omitted
because the items are inapplicable or the answer is negative.
ITEM 1. LEGAL PROCEEDINGS.
The information required by this item is incorporated herein by reference to
Footnote D of the Company's financial statements contained in Part I, Item 1 of
this Form 10-Q.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
NUMBER DESCRIPTION
27* Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the quarter ended
January 31, 2000.
*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: March 15, 2000 /S/ DR. ERIC SCHMIDT
--------------------
Dr. Eric Schmidt
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: March 15, 2000 /S/ DENNIS R. RANEY
-------------------
Dennis R. Raney
Chief Financial Officer
(Principal Financial Officer)
Date: March 15, 2000 /S/ RON FOSTER
--------------
Ron Foster
Vice President and Corporate Controller
(Principal Accounting Officer)