SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Quarter Ended April 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ________
to ________
Commission File Number: 0-13351
NOVELL, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0393339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
122 East 1700 South
Provo, Utah 84606
(Address of principal executive offices and zip code)
(801) 861-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
As of May 31, 1998 there were 353,436,064 shares of the registrant's common
stock outstanding.
Part I. Financial Information, Item 1. Financial Statements
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS
Apr. 30, Oct. 31,
Dollars in thousands, except per share data 1998 1997
- ------------------------------------------------------------------------------
ASSETS
Current assets
Cash and short-term investments $ 1,084,635 $ 1,033,473
Receivables, less allowances
($34,841 - April; $33,053 - October) 220,128 234,358
Inventories 6,316 10,656
Prepaid expenses 62,152 57,685
Deferred and refundable income taxes 117,849 134,210
- ------------------------------------------------------------------------------
Total current assets 1,491,080 1,470,382
==============================================================================
Property, plant and equipment, net 340,708 373,865
Other assets 83,397 66,402
- ------------------------------------------------------------------------------
Total assets $ 1,915,185 $ 1,910,649
==============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 60,875 $ 82,759
Accrued compensation 47,344 51,397
Accrued marketing liabilities 17,741 27,728
Other accrued liabilities 71,453 85,157
Income taxes payable 3,839 --
Deferred revenue 83,251 74,915
- ------------------------------------------------------------------------------
Total current liabilities 284,503 321,956
Minority interests 18,681 23,276
Shareholders' equity
Common stock, par value $.10 a share
Authorized - 600,000,000 shares
Issued - 353,037,548 shares-April
350,937,812 shares-October 35,304 35,094
Additional paid-in capital 393,952 378,582
Retained earnings 1,221,762 1,188,361
Unearned stock compensation (6,157) (7,189)
Cumulative translation adjustment (498) (666)
Unrealized (loss) on investments (32,362) (28,765)
- ------------------------------------------------------------------------------
Total shareholders' equity 1,612,001 1,565,417
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,915,185 $ 1,910,649
==============================================================================
See notes to consolidated unaudited condensed financial statements.
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Fiscal Quarter Ended Six Months Ended
------------------------ --------------------
Amounts in thousands, Apr. 30, Apr. 30, Apr. 30, Apr. 30,
except per share data 1998 1997 1998 1997
- ------------------------------------------------------------------------------
Net sales $262,250 $273,107 $514,292 $647,954
Cost of sales 57,021 77,175 112,160 153,146
- ------------------------------------------------------------------------------
Gross profit 205,229 195,932 402,132 494,808
Operating expenses
Sales and marketing 98,253 116,068 199,988 243,958
Product development 58,046 68,442 115,832 140,197
General and administrative 34,582 39,517 67,032 77,248
- ------------------------------------------------------------------------------
Total operating expenses 190,881 224,027 382,852 461,403
- ------------------------------------------------------------------------------
Income (loss) from operations 14,348 (28,095) 19,280 33,405
Other income (expense)
Investment income 15,456 9,921 29,855 26,535
Other, net (2,989) (3,506) (2,745) (6,343)
- ------------------------------------------------------------------------------
Other income, net 12,467 6,415 27,110 20,192
- ------------------------------------------------------------------------------
Income (loss) before taxes 26,815 (21,680) 46,390 53,597
Income tax expense (benefit) 7,508 (7,046) 12,989 17,419
- ------------------------------------------------------------------------------
Net income (loss) $ 19,307 $ (14,634) $ 33,401 $ 36,178
==============================================================================
Weighted average shares outstanding
Basic 351,762 347,320 351,396 346,913
Diluted 356,586 347,904 354,779 347,499
==============================================================================
Net income (loss) per share
Basic $ 0.05 $ (0.04) $ 0.10 $ 0.10
Diluted $ 0.05 $ (0.04) $ 0.09 $ 0.10
==============================================================================
See notes to consolidated unaudited condensed financial statements.
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
----------------------------
Apr. 30, Apr. 30,
Amounts in thousands 1998 1997
- ------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 33,401 $ 36,178
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation and amortization 40,227 46,266
Stock plans income tax benefits 1,150 2,356
Decrease in receivables 14,230 119,820
Decrease (increase) in inventories 4,340 (1,563)
(Increase) in prepaid expenses (4,467) (11,905)
Decrease (increase) in deferred
and refundable income taxes 17,860 (34,532)
(Decrease) in current liabilities, net (37,453) (47,864)
- ------------------------------------------------------------------------------
Net cash provided by operating activities 69,288 108,756
- ------------------------------------------------------------------------------
Cash flows from financing activities
Issuance of common stock, net 13,923 7,673
Sale of put warrants -- 2,300
Settlement of put warrants -- (14,494)
- ------------------------------------------------------------------------------
Net cash provided (used) by financing activities 13,923 (4,521)
- ------------------------------------------------------------------------------
Cash flows from investing activities
Expenditures for property, plant and equipment (17,231) (47,738)
Purchases of short-term investments (1,037,871) (1,271,326)
Maturities of short-term investments 552,398 951,279
Sales of short-term investments 379,014 303,908
Other (11,221) 3,661
- ------------------------------------------------------------------------------
Net cash (used) by investing activities (134,911) (60,216)
- ------------------------------------------------------------------------------
Total (decrease) increase in cash
and cash equivalents $ (51,700) $ 44,019
Cash and cash equivalents - beginning of period 208,543 145,521
- ------------------------------------------------------------------------------
Cash and cash equivalents - end of period 156,843 189,540
Short-term investments - end of period 927,792 854,566
- ------------------------------------------------------------------------------
Cash and short-term investments
- end of period $1,084,635 $1,044,106
==============================================================================
See notes to consolidated unaudited condensed financial statements.
NOVELL, INC.
NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS
A. Quarterly Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. The accompanying
consolidated unaudited condensed financial statements have been prepared in
accordance with the instructions to Form 10-Q but do not include all of the
information and footnotes required by generally accepted accounting principles
and should, therefore, be read in conjunction with the Company's fiscal 1997
Annual Report to Shareholders. These statements do include all normal
recurring adjustments which the Company believes necessary for a fair
presentation of the statements. The interim operating results are not
necessarily indicative of the results for a full year. Certain
reclassifications, none of which affected net income, have been made to the
prior years amounts in order to conform to the current year's presentation.
In the first quarter of fiscal 1997, the Company implemented a change to its
fiscal year and month ending dates. The Company now recognizes its fiscal
year end on the last calendar day of October, as opposed to prior years on the
last Saturday in October. Likewise, each fiscal month now ends on the last
calendar day of each month, and each fiscal quarter will have a unique number
of days as opposed to the consistent 13 weeks in prior years. Implementing
this change resulted in an extra five days in the first fiscal quarter of 1997
which the Company believes did not have a material impact on its financial
position, results of operations, or cash flows.
B. Significant Events
During the third quarter of fiscal 1997, Novell took measures to reduce and
realign its resources and better manage and control its business. These
measures were in response to declines in sales of boxed products through
indirect distribution channel customers, controlled shifts to multi-product
licenses, lower licensing revenue of certain older products to OEM s, as well
as competitive pressures in the small network market. Specifically, the
Company did not ship boxed products to its indirect distribution channel
customers except to accommodate product exchanges and returns. In addition,
the Company reduced its workforce by 17%, or approximately 1,000 employees,
and consolidated a number of facilities. This resulted in a one-time
restructuring charge of $55 million, principally comprised of severance and
excess facilities costs. The restructuring charge contributed a loss of $0.10
per share, net of tax, to the reported loss in fiscal 1997.
C. Cash and Short-term Investments
All marketable debt and equity securities are included in cash and short-term
investments and are considered available-for-sale and carried at fair market
value, with the unrealized gains and losses, net of tax, included in
shareholders equity. Municipal securities included in short-term investments
have contractual maturities from 1-5 years. Money market preferreds have
contractual maturities of less than 180 days. No other short-term investments
have contractual maturities. The cost of securities sold is based on the
specific identification method. Such securities are anticipated to be used
for current operations and are therefore classified as current assets, even
though some maturities may extend beyond one year.
The following is a summary of cash and short-term investments, all of which
are considered available-for-sale.
Gross Gross Fair
Cost at Unrealized Unrealized Market Value at
(Dollars in thousands) Apr. 30, 1998 Gains Losses Apr. 30, 1998
- ------------------------------------------------------------------------------
Cash and cash equivalents
Cash $ 70,712 $ -- $ -- $ 70,712
Repurchase agreements 4,610 -- -- 4,610
Taxable money market fund 19,796 -- -- 19,796
Municipal securities 61,725 -- -- 61,725
- ------------------------------------------------------------------------------
Cash and cash equivalents $ 156,843 $ -- $ -- $ 156,843
- ------------------------------------------------------------------------------
Short-term investments
Municipal securities $ 485,683 $ 2,901 $ (82) $ 488,502
Money market mutual funds 93,311 -- -- 93,311
Money market preferreds 235,743 -- (43) 235,700
Mutual funds 14,999 14 (10) 15,003
Equity securities 150,746 26,254 (81,724) 95,276
- ------------------------------------------------------------------------------
Short-term investments $ 980,482 $ 29,169 $ (81,859) $ 927,792
- ------------------------------------------------------------------------------
Cash and short-term
investments $1,137,325 $ 29,169 $ (81,859) $ 1,084,635
- ------------------------------------------------------------------------------
Gross Gross Fair
Cost at Unrealized Unrealized Market Value at
Oct. 31, 1997 Gains Losses Oct. 31, 1997
(Dollars in thousands)
- ------------------------------------------------------------------------------
Cash and cash equivalents
Cash $ 84,151 $ -- $ -- $ 84,151
Repurchase agreements 4,932 -- -- 4,932
Money market fund 42,581 -- -- 42,581
Municipal securities 76,879 -- -- 76,879
- -----------------------------------------------------------------------------
Cash and cash equivalents $ 208,543 $ -- $ -- $ 208,543
- ------------------------------------------------------------------------------
Short-term investments
Municipal securities $ 463,443 $ 4,551 $ (84) $ 467,910
Money market mutual funds 88,999 -- -- 88,999
Money market preferreds 150,817 -- (17) 150,800
Mutual funds 14,721 33 (1) 14,753
Equity securities 153,785 25,829 (77,146) 102,468
- ------------------------------------------------------------------------------
Short-term investments $ 871,765 $ 30,413 $ (77,248) $ 824,930
- ------------------------------------------------------------------------------
Cash and short-term
investments $1,080,308 $ 30,413 $ (77,248) $ 1,033,473
- ------------------------------------------------------------------------------
During the first six months of fiscal 1998 the Company had realized gains of
$5 million on the sale of securities compared to realized gains of $5 million
in the first six months of fiscal 1997, while realizing losses on sales of
securities of $2 million in the first six months of fiscal 1998.
D. Income Taxes
The Company's estimated effective tax rate for the first six months of fiscal
1998 was 28.0% compared to 32.5% in the first six months of fiscal 1997. The
Company paid cash amounts for income taxes of $10 million and $7 million, in
the first six months of fiscal 1998 and 1997, respectively.
E. Commitments and Contingencies
The Company currently has a $10 million unsecured revolving bank line of
credit, with interest at the prime rate. The line can be used for either
letter of credit or working capital purposes. The line is subject to the
terms of a loan agreement containing financial covenants and restrictions,
none of which are expected to significantly affect the Company's operations.
At April 30, 1998 there were no borrowings, letter of credit acceptances or
commitments under such line.
The Company has an additional $5 million credit facility with another bank
which is not subject to a loan agreement. At April 30, 1998 standby letters
of credit of approximately $200,000 were outstanding under this facility.
In fiscal 1997, the Company entered into agreements to lease buildings being
constructed on land owned by the Company in San Jose, California and in Provo,
Utah. The lessor has committed to fund up to $272 million for construction of
the buildings. The leases are for a period of seven years and can be renewed
for two additional five year periods, subject to the approval of the lender
and the Company, at the sole discretion of each party. Rent obligations will
commence upon the Company's occupation of the buildings in fiscal 1999 and
fiscal 2000. If the Company does not purchase the buildings, or arrange
for the sale of the buildings, at the end of the lease, the Company will
guarantee the lessor no more than 85% of the residual value of the
buildings (approximately $272 million) as determined at the inception of
the leases. In addition, the agreement calls for the Company to maintain a
specific level of restricted cash to serve as collateral for the leases and
maintain compliance with certain financial covenants. The value of restricted
cash held as collateral at April 30, 1998 was approximately $41 million, and
is included in other assets.
In 1993, a suit was filed due to a failed contract against a company that
Novell subsequently acquired. The plaintiff obtained a jury verdict against
the acquired company in 1996. Novell does not believe that the resolution of
this legal matter will have a material adverse effect on its financial
position, results of operations, or cash flows.
In February 1998, a suit was filed against Novell and certain of its officers
and directors, alleging violation of federal securities laws. The lawsuit was
broght as a purported class action on behalf of purchasers of Novell common
stock from November 1, 1996 through April 22, 1997. The case is in its
preliminary stages. Novell believes that the case is without merit,
and intends to vigorously defend against the allegations. While there can
be no assurance as to the ultimate disposition of the case, Novell does not
believe that the resolution of this litigation will have a material
adverse effect on its financial position, results of operations, or cash
flows.
The Company is a party to a number of legal claims arising in the ordinary
course of business. The Company believes the ultimate resolution of the
claims will not have a material adverse effect on its financial position,
results of operations, or cash flows.
F. Put Warrants
In the first six months of fiscal 1997, the Company sold put warrants on 2
million shares of its common stock for $2 million, callable on specific dates
in the third quarter of fiscal 1997, giving a third party the right to sell
shares of Novell common stock to the Company at contractually specified
prices. During the first six months of fiscal 1997, the Company also settled
put warrant obligations on 4 million shares for $14 million in cash.
G. International Sales
The Company markets internationally both directly to end users and through
distributors who sell to dealers and end users. For the six months of fiscal
1998 and fiscal 1997, sales to international customers were approximately $223
million and $302 million, respectively. In the first six months of fiscal
1998 and fiscal 1997, 67% and 57%, respectively, of international sales were
to European countries. No one foreign country accounted for 10% or more of
total sales in either period. Except for one multinational distributor, which
accounted for 13% of revenue in the first six months of fiscal 1998 and 14% of
revenue in the first six months of 1997, no customer accounted for more than
10% of revenue in any period.
H. Net Income (Loss) Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is what the Company previously reported as earnings per
share. Earnings per share amounts for all periods have been presented and
where appropriate, restated to conform to the Statement No. 128 requirements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
Novell is the world's leading provider of network software. The Company
offers a wide range of network solutions, education, and support for
distributed network, Internet, and small-business markets.
During the third quarter of fiscal 1997, Novell took measures to reduce and
realign its resources and better manage and control its business. The
measures were in response to declines in sales of boxed products through
indirect distribution channel customers, controlled shifts to multi-product
licenses, lower licensing revenue of certain older products to OEM's, as well
as competitive pressures in the small network market. Specifically, the
Company did not ship boxed products to its indirect distribution channel
customers except to accommodate product exchanges and returns. The Company
believes this action, which significantly reduced reported revenue in the
quarter, brought indirect distribution channel inventories of boxed software
products in line with current market demand. The decision to withhold
shipments to the Company's indirect distributor channel resulted in an
operating loss in the third quarter of fiscal 1997. The Company will continue
to monitor channel inventory levels to keep them in line with estimated market
demand. In addition, the Company reduced its workforce by 17%, or
approximately 1,000 employees, and consolidated a number of facilities. This
resulted in a one-time restructuring charge of $55 million, principally
comprised of severance and excess facilities costs. The restructuring charge
contributed a loss of $0.10 per share, net of tax, to the reported loss
in fiscal 1997. The workforce reduction and associated consolidation
of facilities returned the Company to break even for the fourth quarter
of fiscal 1997 and is expected to lower future operating expenses
by approximately $100 million annually.
In the first quarter of fiscal 1997, the Company implemented a change to its
fiscal year and month ending dates. The Company now recognizes its fiscal
year end on the last calendar day of October, as opposed to prior years which
ended on the last Saturday in October. Likewise, each fiscal month end now
ends on the last calendar day of each month, and each fiscal quarter has a
unique number of days as opposed to the consistent 13 weeks in prior years.
Implementing this change resulted in an extra five days in the first fiscal
quarter of 1997, which the Company believes did not have a material impact on
its financial position, results of operations, or cash flows.
Results of Operations
Net sales
Q2 Q2 YTD YTD
1998 Change 1997 1998 Change 1997
- ------------------------------------------------------------------------------
Net sales (millions) $262 -4% $273 $514 -21% $648
==============================================================================
In general, the Company has experienced continued competitive pressures in the
marketplace, resulting in the action taken in the third quarter of fiscal 1997
described above. These competitive pressures also resulted in lower overall
revenues in the second quarter and the first six months of fiscal 1998
compared to the second quarter and the first six months of fiscal 1997.
Novell's product lines can be categorized into three areas, all within the
software industry. They are server operating environments; network services;
and other. While revenue decreased from the second quarter of 1997 to the
second quarter of 1998, and from the first six months of fiscal 1997 to the
first six months of fiscal 1998, analysis of the individual product categories
characterizes the changes that have occurred.
Server operating environments revenues decreased by 7% or $18 million in the
second quarter of 1998 compared to the second quarter of 1997 and by 29%
or $121 million in the first six months of fiscal 1998 compared to the
first six months of fiscal 1997. Generally, such decreases occurred due
to lower unit sales in both the NetWare 3 and NetWare 4 product lines due to
competitive pressures in the marketplace.
Network services revenues increased by 9% or $8 million in the second quarter
of 1998 compared to the second quarter of 1997 and decreased by 4% or $5
million in the first six months of fiscal 1998 compared to the first six
months of fiscal 1997. The $8 million increase between the second quarter of
fiscal 1997 and the second quarter of fiscal 1998 is mainly the result of
an increase in unit sales of network management products, and from the
newly released Border Manager product. The $5 million decrease in the
first six months of fiscal 1998 from the first six months of 1997 is due
to decreases in TCP/IP Access products, Host Connectivity products, and
GroupWare Applications, somewhat offset by increases in Tuxedo revenue and the
newly released Border Manager product.
Other revenue, which is made up of UNIX royalties, education, service, and
other, decreased by 2% or $1 million from the second quarter of fiscal 1997 to
the second quarter of fiscal 1998 and decreased by 10% or $8 million in the
first six months of fiscal 1998 compared to the first six months of fiscal
1997. The decreases relate primarily to lower UNIX royalties in fiscal 1998
compared to fiscal 1997.
International sales represented 43% of total sales in the first six months of
1998 compared to 47% in the first six months of 1997. This change is a result
of a 16% decrease in domestic revenues compared to a 26% decrease in
international revenues in the first six months of fiscal 1998 compared to the
first six months of fiscal 1997.
In the second quarter of fiscal 1998, the Company gave contractual notice to
distributors of a change in its channel discount policy effective May 1, 1998.
The change reduced its channel discount from 40 percent to 30 percent off
published list prices. Published list prices for Novell products have not
been affected by this change.
Gross profit
Q2 Q2 YTD YTD
1998 Change 1997 1998 Change 1997
- ------------------------------------------------------------------------------
Gross profit (millions) $205 5% $196 $402 -19% $495
Percentage of net sales 78% 72% 78% 76%
==============================================================================
The gross margin percentage increased in the second quarter of fiscal 1998
compared to the second quarter of fiscal 1997 due to lower material costs as
licensing revenues grew to a larger percentage of total revenues. Likewise,
services and training related costs as well as lower inventory management
costs contributed to the increase in gross margin percentage. The gross
margin percentage also increased in the first six months of fiscal 1998
compared to the first six months of fiscal 1997 due to a reduction in material
costs as licensing revenues grew to a larger percentage of total revenues and
inventory management costs were reduced.
Operating expenses
Q2 Q2 YTD YTD
1998 Change 1997 1998 Change 1997
- ------------------------------------------------------------------------------
Sales and marketing (millions)$ 98 -16% $116 $200 -18% $244
Percentage of net sales 38% 42% 39% 38%
- ------------------------------------------------------------------------------
Product development (millions)$ 58 -15% $ 68 $116 -17% $140
Percentage of net sales 22% 25% 23% 21%
- ------------------------------------------------------------------------------
General and administrative
(millions) $ 35 -13% $ 40 $ 67 -13% $77
Percentage of net sales 13% 15% 13% 12%
- ------------------------------------------------------------------------------
Total operating expenses
(millions) $191 -15% $224 $383 -17% $461
Percentage of net sales 73% 82% 75% 71%
==============================================================================
Sales and marketing expenses decreased as a percentage of net sales in the
second quarter of fiscal 1998 compared to the second quarter of fiscal 1997
and increased slightly in the first six months of fiscal 1998 compared to the
first six months of fiscal 1997, but decreased in absolute dollars in both
comparative periods due to lower marketing expenses. Sales and marketing
expenses fluctuate as a percentage of net sales in any given period due to
product promotions, advertising or other discretionary expenses.
Product development expenses decreased as a percentage of net sales in the
second quarter of fiscal 1998 compared to the second quarter of fiscal 1997
and increased slightly in the first six months of fiscal 1998 compared to the
first six months of fiscal 1997, but decreased in absolute dollars in
both comparative periods primarily due to work force reductions in fiscal
1997.
General and administrative expenses decreased as a percentage of net sales in
the second quarter of fiscal 1998 compared to the second quarter of fiscal
1997, and increased slightly as a percentage of net sales in the first six
months of fiscal 1998 compared to the first six months of fiscal 1997, but
decreased in absolute dollars in both comparative periods, primarily due
to work force reductions in fiscal 1997.
Overall, operating expenses declined more rapidly than revenues in the second
quarter of fiscal 1998 compared to the second quarter of fiscal 1997, but less
rapidly than revenues in the first six months of fiscal 1998 compared to the
first six months of fiscal 1997.
YTD YTD
1998 Change 1997
- ------------------------------------------------------------------------------
Employees 4,570 -20% 5,746
Annualized revenue per employee (000's) $220 -1% $223
==============================================================================
In fiscal 1997, the Company reduced its workforce by approximately 1,000
employees as the Company realigned its resources to better manage and control
its business.
Other income, net
Q2 Q2 YTD YTD
1998 Change 1997 1998 Change 1997
- ------------------------------------------------------------------------------
Other income, net (millions) $12 100% $6 $27 35% $20
Percentage of net sales 5% 2% 5% 3%
==============================================================================
The primary component of other income, net is investment income, which was $15
million in the second quarter of fiscal 1998 compared to $10 million in the
second quarter of fiscal 1997 and was $30 million in the first six months of
fiscal 1998 compared to $27 million in the first six months of fiscal 1997.
The increase is the result of higher realized capital gains as well as higher
average yields on investments held. In order to achieve potentially higher
returns, a limited portion of the Company's investment portfolio is invested
in mutual funds which incur some market risk. The Company believes that the
market risk has been limited by diversification and by use of a funds
management timing service which switches funds out of mutual funds and into
money market funds when preset thresholds are reached.
The Company's investment portfolio includes certain equity securities with
gross unrealized losses of $56 million as of April 30, 1998. The securities
with unrealized losses are Corel Corporation common stock, which was obtained
in March 1996 upon the Company's sale of its personal productivity
applications product line and Santa Cruz Operation, Inc. common stock, which
was obtained in December 1995 upon the sale of the Company's UnixWare product
line. It is the Company's intention to dispose of such shares over the coming
periods.
Income tax expense (benefit)
Q2 Q2 YTD YTD
1998 Change 1997 1998 Change 1997
- ------------------------------------------------------------------------------
Income tax expense (benefit) (millions) $8 214% $(7) $13 -24% $17
Percentage of net sales 3% -3% 3% 3%
Effective tax rate 28% 33% 28% 33%
- ------------------------------------------------------------------------------
At April 30, 1998 the Company had deferred tax assets of $102 million before a
valuation allowance of $7 million. A portion of this asset is realizable
based on the ability to offset existing deferred tax liabilities. Realization
of the remaining asset is dependent on the Company's ability to generate
approximately $233 million of taxable income. Of this, approximately $111
million must be earned outside the United States. Management believes that
sufficient income will be earned in the future to realize this asset.
Management will evaluate the realizability of the deferred tax assets
quarterly and assess the need for additional valuation allowances.
The estimated effective tax rate for fiscal 1998 is lower than the effective
tax rate for fiscal 1997 as a result of the loss from operations in fiscal
1997.
Net income (loss) and net income (loss) per share
Q2 Q2 YTD YTD
1998 Change 1997 1998 Change 1997
- ------------------------------------------------------------------------------
Net income (loss) (millions) $19 227% $(15) $33 -8% $36
Percentage of net sales 7% -5% 6% 6%
Net income (loss) per share - basic $.05 $(.04) $.10 -- $.10
Net income (loss) per share - diluted$.05 $(.04) $.09 -10% $.10
==============================================================================
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is what the Company previously reported as earnings per
share. Earnings per share amounts for all periods have been presented and
where appropriate, restated to conform to the Statement No. 128 requirements.
Liquidity and Capital Resources
Q2 Q4
1998 Change 1997
- ------------------------------------------------------------------------------
Cash and short-term investments (millions) $1,085 5% $1,033
Percentage of total assets 57% 54%
==============================================================================
Cash and short-term investments increased to $1,085 million at April 30, 1998
from $1,033 million at October 31, 1997. This increase can be attributed to
$69 million provided by operating activities and $14 million provided by
financing activities, somewhat offset by $17 million of cash used for
expenditures on property, plant and equipment, and $14 million used for other
investing activities. The investment portfolio is diversified among security
types, industry groups, and individual issuers. The Company's principal
source of liquidity has been from operations. At April 30, 1998, the
Company's principal unused sources of liquidity consisted of cash and
short-term investments and available borrowing capacity of approximately $15
million under its credit facilities. The Company's liquidity needs are
principally for the Company's financing of accounts receivable, capital
assets, strategic investments and flexibility in a dynamic and competitive
operating environment.
During the first six months of 1998, the Company has continued to generate
cash from operations. The Company anticipates being able to fund its current
operations and capital expenditures planned for the foreseeable future with
existing cash and short-term investments together with internally generated
funds. The Company believes that borrowings under the Company's credit
facilities, or public offerings of equity or debt securities are available if
the need arises. Investments will continue in product development and in new
and existing areas of technology. Cash may also be used to acquire technology
through purchases and strategic acquisitions. Capital expenditures in fiscal
1998 are anticipated to be approximately $45 million, but could be reduced if
the growth of the Company is less than presently anticipated.
In June 1998, the Company announced its intent to repurchase and retire up to
10 percent, or approximately 35 million shares of Novell common stock over the
next twelve months.
Future Results
The Company's future results of operations involve a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially from historical results are the following: business conditions and
the general economy; competitive factors, such as rival operating systems,
acceptance of new products and price pressures; availability of third-party
compatible products at reasonable prices; risk of nonpayment of accounts or
notes receivable; risks associated with foreign operations; risk of product
line or inventory obsolescence due to shifts in technologies or market demand;
timing of software product introductions; market fluctuations of investment
securities; and litigation.
The Company is addressing the issues associated with the "year 2000." The
Company is utilizing resources to identify, correct, reprogram and test both
its systems used internally as well as the products it sells for year 2000
compliance. It is anticipated that all reprogramming efforts will be
completed during fiscal 1998 with additional testing continuing through fiscal
1999.
Novell believes that it has the product offerings, facilities, personnel, and
competitive and financial resources for continued business success, but future
revenues, costs, margins, product mix, and profits are all influenced by a
number of factors, such as those discussed above, as well as risks described
in detail in the Company's fiscal 1997 report on Form 10-K.
Part II. Other Information
Except as listed below, all information required by items in Part II is
omitted because the items are inapplicable or the answer is negative.
Item 1. Legal Proceedings.
The information required by this item is incorporated herein by reference to
Footnote E of the Company's financial statements contained in Part I, Item 1
of this Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on April 7, 1998 for the
following purposes:
1. To elect six directors.
2. To approve and ratify the adoption of an amendment to the Novell, Inc.
1989 Employee Stock Purchase Plan to increase the shares reserved for
issuance thereunder from 12,000,000 to 18,000,000.
3. To ratify the selection of Ernst & Young LLP as independent auditors
for Novell, Inc.
The following tables set forth the outcome of the matters voted upon at the
meeting and the number of votes cast for, against or withheld.
Votes Votes
Proposal 1 For Withheld
- ------------------------------------------------------------------------------
Election of Directors
Eric E. Schmidt 305,236,289 4,840,691
John A. Young 302,773,827 7,303,153
Elaine R. Bond 262,576,579 47,500,401
Hans-Werner Hector 262,801,106 47,275,874
Jack L. Messman 260,610,914 49,466,066
Larry W. Sonsini 257,957,034 52,119,946
- ------------------------------------------------------------------------------
Votes Votes Votes
Proposal 2 For Against Withheld/Abstained
- ------------------------------------------------------------------------------
Approval and ratification of the
adoption of an amendment to the
Novell, Inc. 1989 Employee
Stock Purchase Plan 298,799,558 9,382,798 1,894,624
- ------------------------------------------------------------------------------
Votes Votes Votes
Proposal 3 For Against Withheld/Abstained
- ------------------------------------------------------------------------------
Ratify the selection of
Ernst & Young LLP
as Independent Auditors 306,561,404 2,451,198 1,064,378
- ------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
- ------- -----------
27* Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the quarter ended
April 30, 1998.
______________________________
*Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Novell, Inc.
------------
(Registrant)
Date: June 10, 1998 /s/ Dr. Eric Schmidt
-------------------------
Dr. Eric Schmidt
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: June 10, 1998 /s/ Dennis R. Raney
-------------------------
Dennis R. Raney
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: June 10, 1998 /s/ Cliff Simpson
--------------------------
Cliff Simpson
Vice President Finance and
Corporate Controller
(Principal Accounting Officer)