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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 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)
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
87-0393339 (I.R.S. Employer Identification No.) |
122 East 1700 South
Provo, Utah 84606
(Address of principal executive offices and zip code)
Provo, Utah 84606
(Address of principal executive offices and zip code)
(801) 861-7000
(Registrant's telephone number, including area code)
(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 27, 1998 there were 351,627,630 shares of the registrant's common stock outstanding. |
| Part I. Financial Information, Item 1. Financial Statements |
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS
CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS
| Dollars in thousands, except per share data | Jan. 31, 1998 |
Oct. 31, 1997 |
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| ASSETS Current assets |
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| Cash and short-term investments Receivables, less allowances ($45,457 - January; $33,053 - October) Inventories Prepaid expenses Deferred and refundable income taxes |
$ 1,045,144
225,039 9,178 66,205 119,833 |
$ 1,033,473
234,358 10,656 57,685 134,210 |
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| Total current assets Property, plant and equipment, net Other assets |
1,465,399 363,508 73,754 |
1,470,382 373,865 66,402 |
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| Total assets | $ 1,902,661 | $ 1,910,649 | ||
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| LIABILITIES AND
SHAREHOLDERS' EQUITY Current liabilities |
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| Accounts payable Accrued compensation Accrued marketing liabilities Other accrued liabilities Income taxes payable Deferred revenue |
$ 66,490 48,041 24,059 83,336 4,831 83,586 |
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$ 82,759 51,397 27,728 85,157 -- 74,915 |
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| Total current liabilities Minority interests |
310,343 20,711 |
321,956 23,276 |
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| Shareholders' equity | ||||
| Common stock, par value $.10 a
share Authorized - 600,000,000 shares Issued - 351,145,781 shares-January Issued - 350,937,812 shares-October Additional paid-in capital Retained earnings Unearned stock compensation Cumulative translation adjustment Unrealized gain (loss) on investments |
35,115 380,117 1,202,455 (6,351) (552) (39,177) |
35,094 378,582 1,188,361 (7,189) (666) (28,765) |
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| Total shareholders' equity | 1,571,607 | 1,565,417 | ||
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| Total liabilities and shareholders' equity | $ 1,902,661 | $ 1,910,649 | ||
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| See notes to consolidated unaudited condensed financial statements. |
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME
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NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
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| See notes to consolidated unaudited condensed financial statements. |
NOVELL, INC.
NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS
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 approximately 1,000 employees, or 17% 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. On March 12, 1998, the Company announced the resignation of James R. Tolonen as Senior Vice President and Chief Financial Officer. The Company also announced that Dennis R. Raney has joined the Company as interim Chief Financial Officer while the Company continues to actively recruit a Chief Operating Officer. 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 90 days. No other short-term investments have contractual maturities. The cost of securities sold is based on the specific identification method. Such securities are available to be used for current operations and are therefore classified as current assets, eventhough 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. |
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| (Dollars in thousands) | Cost at Jan. 31, 1998 |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Market Value at Jan. 31, 1998 |
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| Cash and cash equivalents | ||||
| Cash Repurchase agreements Taxable money market fund Municipal securities |
$ 75,555 770 39,362 118,465 |
$ -- -- -- -- |
$ -- -- -- -- |
$ 75,555 770 39,362 118,465 |
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| Cash and cash equivalents | $ 234,152 | $ -- | $ -- | $ 234,152 |
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| Short-term investments | ||||
| Municipal securities Money market mutual funds Money market preferreds Mutual funds Equity securities |
$ 468,883 48 146,065 106,226 153,555 |
$ 6,073 -- 2 46 24,878 |
$ (99) -- (17) -- (94,668) |
$ 474,857 48 146,050 106,272 83,765 |
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| Short-term investments | $ 874,777 | $ 30,999 | $ (94,784) | $ 810,992 |
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| Cash and short-term investments | $ 1,108,929 | $ 30,999 | $ (94,784) | $ 1,045,144 |
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| (Dollars in thousands) | Cost at Oct. 31, 1997 |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Market Value at Oct. 31, 1997 |
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| Cash and cash equivalents | ||||
| Cash Repurchase agreements Tax exempt money market fund Municipal securities |
$ 84,151 4,932 42,581 76,879 |
$ -- -- -- -- |
$ -- -- -- -- |
$ 84,151 4,932 42,581 76,879 |
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| Cash and cash equivalents | $ 208,543 | $ -- | $ -- | $ 208,543 |
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| Short-term investments | ||||
| Municipal securities Money market mutual funds Money market preferreds Mutual funds Equity securities |
$ 463,443 88,999 150,817 14,721 153,785 |
$ 4,551 -- -- 33 25,829 |
$ (84) -- (17) (1) (77,146) |
$ 467,910 88,999 150,800 14,753 102,468 |
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| Short-term investments | $ 871,765 | $ 30,413 | $ (77,248) | $ 824,930 |
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| Cash and short-term investments | $ 1,080,308 | $ 30,413 | $ (77,248) | $ 1,033,473 |
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| During the first quarter of fiscal 1998 the Company had realized
gains of $3 million on the sale of securities compared to realized
gains of $6 million in the first quarter of fiscal 1997, while
realizing losses on sales of securities of $1 million in the first
quarter of fiscal 1998. D. Income Taxes The Company's estimated effective tax rate for the first quarter of fiscal 1998 was 28.0% compared to 32.5% in the first quarter of fiscal 1997. The Company paid cash amounts for income taxes of $1 million and $3 million, in the first quarter 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 January 31, 1998 there were no borrowings, letter of credit acceptances or commitments under such line. The Company has an additional $5 million line of credit with another bank which is not subject to a loan agreement. At January 31, 1998 standby letters of credit of approximately $200,000 were outstanding under this line of credit. In fiscal 1997, the Company entered into agreements to lease buildings being constructed on land owned by the Company in San Jose, California and in Provo, Utah. The lessor has committed to fund up to $272 million for construction of the buildings. The leases are for a period of seven years and can be renewed for two additional five year periods, subject to the approval of the lender and the Company, at the sole discretion of each party. Rent obligations will commence upon the Company's occupation of the buildings in fiscal 1999 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 January 31, 1998 was approximately $ 28 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. 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 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. The put warrant liability is the amount the Company would be obligated to pay if all the outstanding put warrants were exercised at the strike price without a cash settlement. During fiscal 1997, the Company also settled all of its remaining put warrants obligations on 6 million shares for cash of $21 million and therefore reversed the put warrant obligation back to additional paid-in capital. G. International Sales The Company markets internationally both directly to end users and through distributors who sell to dealers and end users. For the fiscal quarters ended January 31, 1998 and January 31, 1997, sales to international customers were approximately $109 million and $172 million, respectively. In the first quarters of fiscal 1998 and fiscal 1997, 65% and 62%, 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 15% of revenue in the first quarter of 1998 and 18% of revenue in the first quarter of fiscal 1997, no customer accounted for more than 10% of revenue in any period. H.Net Income 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 approximately 1,000 employees, or 17%, 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 |
| Q1 1998 |
Change | Q1 1997 |
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| Net sales (millions) | $ 252 | -33% | $ 375 |
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| In general, the Company has experience 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 first quarter
of fiscal 1998 compared to the first quarter of fiscal 1997. Novell's product lines can be categorized into server operating environments; network services; UNIX royalties; and education, service and other. While revenue decreased from the first quarter of 1997 to the first quarter of 1998, analysis of the individual product categories characterizes the changes that have occurred. Server operating environments revenues decreased by $103 million or 41% in the first quarter of 1998 compared to the first quarter of 1997. Decreases occurred in both the NetWare 4 product family of $60 million or a 32% decline from the first quarter of 1997 and in the NetWare 3 product family of $43 million or a 66% decline from the first quarter of 1997. Network services revenues decreased by $13 million or 16% in the first quarter of 1998 compared to the first quarter of 1997. The decrease is mainly the result of decreases in TCP/IP access products of $9 million, GroupWare application products of $6 million, Host Connectivity products of $5 million and Network management products of $4 million, somewhat offset by a $7 million increase in Tuxedo, and the Company's border manager product of $5 million. UNIX royalties revenues decreased $3 million or 29% in the first quarter of 1998 compared to the first quarter of 1997. The decrease was attributable to declining sales of UNIX licenses. Education, service and other revenues decreased by $5 million or 14% in the first quarter of 1998 compared to the first quarter of 1997. The decrease was a result of lower revenues in training and other product categories, partially offset by an increase in service related revenue. International sales represented 43% of total sales in the first quarter of 1998 compared to 46% in the first quarter of 1997. This change is a result of a 30% decrease in domestic revenues compared to a 36% decrease in international revenues in the first quarter of fiscal 1998 compared to the first quarter of fiscal 1997. |
| Gross Profit |
| Q1 1998 |
Change | Q1 1997 |
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| Gross profit (millions) Percentage of net sales |
$ 197 78 % |
-34 % |
$ 299 80 % |
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| The gross margin percentage decreased in the first quarter of fiscal 1998 compared to the first quarter of fiscal 1997 due to the fixed portion of cost of sales being a higher percentage of the lower revenue in the first quarter of fiscal 1998 notwithstanding the substantial cost reductions in absolute dollars. |
| Operating Expenses |
| Q1 1998 |
Change | Q1 1997 |
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| Sales and marketing (millions) Percentage of net sales |
$ 102 40 % |
-20 % |
$ 128 34 % |
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| Product development (millions) Percentage of net sales |
$ 58 23 % |
-19 % |
$ 72 19 % |
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| General and administrative (millions) Percentage of net sales |
$ 32 13 % |
-14 % |
$ 37 10 % |
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| Total operating expenses (millions) Percentage of net sales |
$ 192 76 % |
-19 % |
$ 237 63 % |
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| Sales and marketing expenses decreased by $26 million in the first
quarter of fiscal 1998 compared to the first quarter of fiscal 1997
primarily due to workforce reductions and lower facilities costs
as a result of the Company's restructuring in the third quarter
of fiscal 1997. Sales and marketing expenses increased as a
percentage of net sales in the first quarter of fiscal 1998
compared to the first quarter of fiscal 1997 due to a lower revenue
base. Sales and marketing expenses fluctuate as a percentage of
net sales in any given period due to product promotions, advertising
or other discretionary expenses. Product development expenses decreased by $14 million in the first quarter of fiscal 1998 compared to the first quarter of fiscal 1997 primarily due to workforce reductions in fiscal 1997 but increased as a percentage of net sales due to a lower revenue base. General and administrative expenses decreased by $5 million in the first quarter of fiscal 1998 compared to the first quarter of fiscal 1997 primarily due to workforce reductions in fiscal 1997, while increasing as a percentage of net sales due to a lower revenue base. Overall, operating expenses have declined less rapidly than revenues in the first quarter of fiscal 1998 compared to the first quarter of fiscal 1997, but have decreased as a percentage of net sales as compared to the fourth quarter of fiscal 1997. |
| Q1 1998 |
Change | Q1 1997 |
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| Employees Annualized revenue per employee (000's) |
4,638 $ 214 |
-20 % -17 % |
5,796 $ 257 |
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| 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 (Expense) |
| Q1 1998 |
Change | Q1 1997 |
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| Other income, net (millions) Percentage of net sales |
$ 15 6 % |
7 % |
$ 14 4 % |
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| The primary component of other income, net is investment income, which was $14 million in the first quarter of fiscal 1998 compared to $17 million in the first quarter of fiscal 1997. The decrease is the result of higher realized capital gains in the first quarter of fiscal 1997. 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 signals occur. |
| Income Taxes |
| Q1 1998 |
Change | Q1 1997 |
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| Income taxes (millions) Percentage of net sales Effective tax rate |
$ 5 2 % 28 % |
-79 % |
$ 24 6 % 33 % |
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| The effective tax rate for fiscal 1998 is estimated to be 28% compared to a tax benefit of 48% in fiscal 1997 due to a loss before taxes in fiscal 1997 compared to anticipated earnings in fiscal 1998. |
| Net Income and Net Income Per Share |
| Q1 1998 |
Change | Q1 1997 |
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| Net income (millions) Percentage of net sales Net income per share - basic & diluted |
$ 14 6 % $ .04 |
-73 % -73 % |
$ 51 14 % $ .15   |
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| 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 |
| Q1 1998 |
Change | Q1 1997 |
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| Cash and short-term investments (millions) Percentage of total assets |
$ 1,045 55 % |
1 % |
$ 1,033 54 % |
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| Cash and short-term investments increased to $1,045 million at
January 31, 1998 from $1,033 million at October 31, 1997. The major
reason for this increase was the $39 million provided by operating
activities, offset by the $9 million of cash used for expenditures on
property, plant and equipment, and the $10 million used by 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 January 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 fiscal quarter 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. |
| 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. 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 27* |
Description 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, 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)
|
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| Date: March 16, 1998 | /s/ Dr. Eric Schmidt Dr. Eric Schmidt Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
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| Date: March 16, 1998 | /s/ Dennis R. Raney Dennis R. Raney Chief Financial Officer (Principal Financial Officer)
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| Date: March 16, 1998 | /s/ Cliff Simpson Cliff Simpson Vice President Finance and Corporate Controller (Principal Accounting Officer) |