-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GvPfNs8fSz5W+JbIHE4ujS76aTvURJGxaWEQO2y4lX72qSC93ykuNzUqTszBtnCY 1p5GhKk/Hh52a8sZs1M+hA== 0000758004-96-000005.txt : 19960605 0000758004-96-000005.hdr.sgml : 19960605 ACCESSION NUMBER: 0000758004-96-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960427 FILED AS OF DATE: 19960604 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOVELL INC CENTRAL INDEX KEY: 0000758004 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 870393339 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13351 FILM NUMBER: 96576598 BUSINESS ADDRESS: STREET 1: 122 EAST 1700 SOUTH CITY: PROVO STATE: UT ZIP: 84606 BUSINESS PHONE: 8014297000 MAIL ADDRESS: STREET 1: 122 E. 1700 S. CITY: PROVO STATE: UT ZIP: 84606 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Quarter Ended April 27, 1996 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.) 1555 N. Technology Way Orem, Utah 84057 (Address of principal executive offices and zip code) (801) 222-6000 (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 25, 1996 there were 353,083,302 shares of the registrant's common stock outstanding. Part I. Financial Information, Item 1. Financial Statements - ------------------------------------------------------------- NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS - ------------------------------------------------------------- Apr. 27, Oct. 28, Dollars in thousands, except per share data 1996 1995 - -------------------------------------------------------------------------- ASSETS Current assets Cash and short-term investments $1,181,015 $1,321,231 Receivables, less allowances ($43,679 - April; $74,857 - October) 357,122 470,437 Inventories 16,942 23,025 Prepaid expenses 31,784 50,576 Deferred income taxes 72,285 59,913 - --------------------------------------------------------------------------- Total current assets 1,659,148 1,925,182 Property, plant and equipment, net 357,442 390,452 Other assets 50,288 101,196 - --------------------------------------------------------------------------- Total assets $2,066,878 $2,416,830 =========================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $88,591 $116,305 Accrued compensation 68,319 97,637 Accrued marketing liabilities 47,994 72,339 Other accrued liabilities 117,488 90,623 Income taxes payable -- 29,942 Deferred revenue 38,810 54,099 - --------------------------------------------------------------------------- Total current liabilities 361,202 460,945 Minority interests 17,174 17,623 Put warrants 90,025 -- Shareholders' equity Common stock, par value $.10 a share Authorized - 600,000,000 shares Issued - 352,146,711 shares-April 371,567,158 shares-October 35,215 37,157 Additional paid-in capital 381,764 737,481 Retained earnings 1,181,498 1,163,624 - --------------------------------------------------------------------------- Total shareholders' equity 1,598,477 1,938,262 - --------------------------------------------------------------------------- Total liabilities and shareholders' equity $2,066,878 $2,416,830 =========================================================================== 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. 27, Apr. 29, Apr. 27, Apr. 29, except per share data 1996 1995 1996 1995 - ------------------------------------------------------------------------ Net sales $188,180 $529,508 $626,099 $1,022,733 Cost of sales 68,614 124,455 164,625 241,330 Gross profit 119,566 405,053 461,474 781,403 Operating expenses Sales and marketing 127,292 148,374 250,757 288,177 Product development 69,723 93,000 148,356 182,817 General and administrative 34,731 35,794 73,269 69,764 Restructuring charges -- -- 18,442 -- - ------------------------------------------------------------------------ Total operating expenses 231,746 277,168 490,824 540,758 - ------------------------------------------------------------------------ Income (loss) from operations (112,180) 127,885 (29,350) 240,645 Other income (expense) Investment income 11,257 15,037 26,157 24,604 Gain on sale of assets 19,815 -- 19,815 -- Other, net (2,138) 1,240 (4,288) 1,498 - ------------------------------------------------------------------------ Other income, net 28,934 16,277 41,684 26,102 - ------------------------------------------------------------------------ Income (loss) before taxes (83,246) 144,162 12,334 266,747 Income taxes (27,887) 48,294 4,132 89,360 - ------------------------------------------------------------------------ Net income (loss) $(55,359) $95,868 $8,202 $177,387 ======================================================================== Weighted average shares outstanding 362,442 374,383 367,013 373,205 ======================================================================== Net income (loss) per share $(0.15) $0.26 $0.02 $0.48 ======================================================================== See notes to consolidated unaudited condensed financial statements.
NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS Six Months Ended ________________ Apr. 27, Apr. 29, Amounts in thousands 1996 1995 - ---------------------------------------------------------------------------- Cash flows from operating activities Net income $ 8,202 $ 177,387 Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation and amortization 51,190 46,211 Gain on sale of assets (19,815) __ Stock plans income tax benefits 4,863 15,409 Decrease (increase) in receivables 113,315 (8,011) Decrease in inventories 6,083 2,679 Decrease in prepaid expenses 18,792 11,412 Decrease in deferred income taxes 17,167 3,523 (Decrease) increase in current liabilities, net (99,743) 239 - ---------------------------------------------------------------------------- Net cash provided from operating activities 100,054 248,849 - ---------------------------------------------------------------------------- Cash flows from financing activities Issuance of common stock, net 23,630 35,909 Repurchase of common stock (316,559) -- Sale of put warrants 10,055 -- - ---------------------------------------------------------------------------- Net cash (used) provided from financing activities (282,874) 35,909 - ---------------------------------------------------------------------------- Cash flows from investing activities Expenditures for property, plant and equipment (28,997) (32,532) Proceeds from sale of assets 10,750 -- Decrease (increase) in short-term investments 38,631 (145,429) Other (2,542) 4,852 - ----------------------------------------------------------------------------- Net cash used by investing activities 17,842 (173,109) - ----------------------------------------------------------------------------- Total (decrease) increase in cash and cash equivalents $(164,978) $111,649 - ----------------------------------------------------------------------------- Cash and cash equivalents - beginning of period 312,164 228,426 Cash and cash equivalents - end of period 147,186 340,075 Short-term investments - end of period 1,033,829 778,812 - ---------------------------------------------------------------------------- Cash and short-term investments - end of period $1,181,015 $1,118,887 ============================================================================ See notes to consolidated unaudited condensed financial statements.
NOVELL, INC. NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS A.Quarterly Financial Statements 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 1995 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. B.Significant Events In December 1995, Novell sold its UnixWare product line to the Santa Cruz Operation, Inc. (SCO). The Company realized a small gain and recorded $19 million of royalty revenue from this transaction in the first quarter of fiscal 1996. Under the agreement, Novell received approximately 6 million shares of SCO common stock, resulting in an ownership position of approximately 17% of the outstanding SCO common stock. The agreement also calls for Novell to receive a revenue stream from SCO based on revenue performance of the purchased UnixWare product line. This revenue stream is not to exceed $84 million net present value, and will end by the year 2002. In addition, Novell will continue to receive revenue from existing licenses for older versions of UNIX System source code. As previously disclosed, during the second fiscal quarter of fiscal 1996, the Company implemented a change to its traditional distribution stocking policy that significantly reduced revenue and earnings in the quarter. Because the Company has experienced strong growth in revenue from expanding multi-product network software licensing programs, the Company decided to reduce and rebalance channel inventories to change the mix and volume of product in the channel and better match evolving purchase patterns. The Company estimates that it reduced product inventories in the worldwide distribution channels during the second quarter of 1996 by approximately $225 million. This was accomplished primarily by reducing shipments to distributors during the quarter. Additionally, net returns of approximately $20 million were accepted during the quarter related to this policy change. This reduction decreased second quarter revenue which caused the Company to record a loss in the quarter. In March 1996, the Company completed the sale of its personal productivity applications product line to Corel Corporation (Corel). The Company received approximately 10 million shares of Corel common stock and approximately $11 million in cash. This resulted in a ownership position of approximately 17% of the outstanding Corel common stock. The Company also is entitled to and has nominated a candidate for Corel s Board of Directors. The Company reported a one-time gain of $20 million in the second quarter of fiscal 1996 related to this transaction. Net of tax, the gain was $13 million, or $0.04 per share. Additionally, Corel licensed GroupWise client software, Envoy electronic publishing software, and other technologies from Novell for a minimum royalty obligation of $70 million over the next five years. Pursuant to a share repurchase program whereby the Company is authorized to repurchase 37 million shares of its common stock in fiscal 1996, the Company repurchased and retired approximately 23 million shares at a cost of approximately $317 million in the first six months of fiscal 1996. 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. 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 and some equity securities have restrictions on disposition. 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. 27, 1996 Gains Losses Apr. 27, 1996 - ---------------------------------------------------------------------------------------------- Cash and cash equivalents Cash $ 90,867 $ -- $ -- $ 90,867 Repurchase agreements 36,066 -- -- 36,066 Tax exempt money market fund 5,053 -- -- 5,053 Municipal securities 15,200 -- -- 15,200 - ---------------------------------------------------------------------------------------------- Cash and cash equivalents $ 147,186 $ -- $ -- $ 147,186 - ---------------------------------------------------------------------------------------------- Short-term investments Municipal securities $ 364,742 $ 2,095 $ $ 366,837 Money market mutual funds 121,219 -- -- 121,219 Money market preferreds 294,500 45 -- 294,545 Mutual funds 13,864 17 -- 13,881 Equity securities 172,373 64,974 -- 237,347 - --------------------------------------------------------------------------------------------- Short-term investments $ 966,698 $67,131 $ -- $1,033,829 - --------------------------------------------------------------------------------------------- Cash and short-term investments $1,113,884 $67,131 $ -- $1,181,015 - --------------------------------------------------------------------------------------------- Gross Gross Fair Cost at Unrealized Unrealized Market Value at (Dollars in thousands) Oct. 28, 1995 Gains Losses Oct. 28, 1995 - ------------------------------------------------------------------------------------------------ Cash and cash equivalents Cash $ 152,930 $ -- $ -- $ 152,930 Repurchase agreements 23,794 -- -- 23,794 Tax exempt money market fund 63,065 -- -- 63,065 Municipal securities 72,375 -- -- 72,375 - ------------------------------------------------------------------------------------------------ Cash and cash equivalents $ 312,164 $ -- $ -- $ 312,164 - ------------------------------------------------------------------------------------------------ Short-term investments Municipal securities $ 375,491 $ 3,220 $ -- $ 378,711 Money market mutual funds 38,475 -- -- 38,475 Money market preferreds 442,500 176 -- 442,676 Mutual funds 91,423 30 -- 91,453 Equity securities 23,055 34,697 -- 57,752 - ----------------------------------------------------------------------------------------------- Short-term investments $ 970,944 $ 38,123 $ -- $ 1,009,067 - ----------------------------------------------------------------------------------------------- Cash and short-term investments $1,283,108 $ 38,123 $ -- $ 1,321,231 - ----------------------------------------------------------------------------------------------- During the first six months of fiscal 1996 the Company had realized gains of $4 million on the sale of securities compared to realized gains of $3 million on the sale of securities in the first six months of fiscal 1995.
D. Income Taxes The Company's estimated effective tax rate for both the first six months of fiscal 1996 and 1995 was 33.5%. The Company paid cash amounts for income taxes of $12 million and $76 million, in the first six months of fiscal 1996 and 1995, 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 27, 1996 there were no borrowings, letter of credit acceptances or commitments under such line. The Company has an additional $10 million credit facility with another bank which is not subject to a loan agreement. At April 27, 1996 standby letters of credit of approximately $300,000 were outstanding under this agreement. 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 During the second quarter of fiscal 1996, the Company sold put warrants on 7 million shares of its stock, callable on specific dates in the third and fourth quarter of fiscal 1996 and in the second 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 balance on the balance sheet is the amount the Company would be obligated to pay if all the put warrants were exercised. The proceeds from the issuance of the put options were accounted for as 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 six months ended April 27, 1996 and April 29, 1995, sales to international customers were approximately $322 million and $470 million, respectively. In the first six months of fiscal 1996 and fiscal 1995, 54% and 56%, respectively, of international sales were to European countries. Except for Japan, which accounted for 11% of sales in the first six months of fiscal 1996, no one foreign country accounted for 10% or more of total sales in either period. Except for one multi-national distributor, which accounted for 18% of revenue in the first six months of fiscal 1995, no customer accounted for more than 10% of revenue in the first six months of either fiscal 1996 or fiscal 1995. H. Net Income (Loss) Per Share Net income (loss) per share is computed using the weighted average number of common shares outstanding during the periods, including common stock equivalents (unless antidilutive). Common stock equivalents consist of outstanding stock options. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction Novell is the world s leading network software provider. Novell software products provide the infrastructure for a networked world, enabling Novell s customers to connect with other people and the information they need, anytime and anyplace. Novell partners with other technology and market leaders to help customers make networks a part of their everyday lives. In December 1995, Novell sold its UnixWare product line to the Santa Cruz Operation, Inc. (SCO). The Company realized a small gain and recorded $19 million of royalty revenue from this transaction in the first quarter of fiscal 1996. Under the agreement, Novell received approximately 6 million shares of SCO common stock, resulting in an ownership position of approximately 17% of the outstanding SCO common stock. The agreement also calls for Novell to receive a revenue stream from SCO based on revenue performance of the purchased UnixWare product line. This revenue stream is not to exceed $84 million net present value, and will end by the year 2002. In addition, Novell will continue to receive revenue from existing licenses for older versions of UNIX System source code. As previously disclosed, during the second quarter of fiscal 1996, the Company implemented a change to its traditional distribution stocking policy that significantly reduced revenue and earnings in the quarter. Because the Company had experienced strong growth in revenue from expanding multi-product network software licensing programs, the Company decided to reduce and rebalance channel inventories to change the mix and volume of product in the channel and better match evolving purchase patterns. The Company estimates that it reduced product inventories in the worldwide distribution channels during the second quarter of 1996 by approximately $225 million. This was accomplished primarily by reducing shipments to distributors during the quarter. Additionally, net returns of approximately $20 million were accepted during the quarter related to this policy change. This reduction decreased second quarter revenue which caused the Company to record a loss in the quarter. In March 1996, the Company completed the sale of its personal productivity applications product line to Corel Corporation (Corel). The Company received approximately 10 million shares of Corel common stock and approximately $11 million in cash. This resulted in an ownership position of approximately 17% of the outstanding Corel common stock. The Company also is entitled to and has nominated a candidate for Corel s Board of Directors. The Company reported a one-time gain of $20 million in its second quarter of fiscal 1996 related to this transaction. Net of tax, the gain was $13 million, or $0.04 per share. Additionally, Corel licensed GroupWise client software, Envoy electronic publishing software, and other technologies from Novell for a minimum royalty obligation of $70 million over the next five years. Results of Operations Net Sales - --------- Q2 Q2 YTD YTD 1996 Change 1995 1996 Change 1995 - ---------------------------------------------------------------------------- Net sales (millions) $188 -65% $530 $626 -39% $1,023 ============================================================================
With the change in its distribution stocking policy and the sale of its personal productivity applications in the second quarter of fiscal 1996, the components of revenue in fiscal 1996 are significantly different than the components of revenue in fiscal 1995. Specifically, none of the $188 million of revenue in the second quarter of fiscal 1996 came from the normal distribution channel which has provided 50% to 60% of revenue historically. Royalty revenue was $107 million, non-royalty revenue from Japan was $31 million, non-royalty revenue from education and service was $24 million, discontinued product lines revenue was $21 million, and other sources provided $5 million of revenue. Additionally, the Company has redefined its product lines. The analysis that follows describes the product lines consistent with how the Company views its business currently and in the future. Continuing product lines can be categorized into server operating environments, network services, UNIX royalties, and education, service and other. Historical revenues also include revenue from product lines that have been sold or discontinued, such as the personal productivity applications product line which was sold to Corel in March 1996. The server operating environments product line includes NetWare 4 and NetWare 3 products. Server operating environments revenue was $65 million in the second quarter of fiscal 1996 compared to $244 million in the second quarter of fiscal 1995. In the first six months of fiscal 1996 server operating environments revenue was $296 million compared to $501 million in the first six months of fiscal 1995. The decreases between periods is primarily attributable to the reduction in distribution channel inventory. In spite of the distribution stocking policy change, NetWare 4 grew 13% in the first six months of fiscal 1996 compared to the first six months of fiscal 1995 while NetWare 3 declined by 64% in the same comparable periods. The server operating environments product line represented 47% of revenue in the first six months of fiscal 1996 compared to 49% of revenue in the first six months of fiscal 1995. The network services product line includes distributed network services, application services, and management & administration products. The network services product line had revenue of $49 million in the second quarter of fiscal 1996 compared to $77 million in the second quarter of fiscal 1995. In the first six months of fiscal 1996, network services revenue was $141 million compared to revenue of $140 million in the first six months of fiscal 1995. The decrease from the second quarter of fiscal 1995 to the second quarter of 1996 is primarily attributable to the change in the distribution stocking policy. In spite of the distribution stocking policy change, revenue in the first six months of fiscal 1996 was flat with revenue in the first six months of fiscal 1995 due to strong growth in the application services and management & administration products. Network services revenue represented 23% of total revenue in the first six months of fiscal 1996 compared to 14% of revenue in the first six months of fiscal 1995. UNIX royalties were $18 million in the second quarter of 1996 compared to $22 million in the second quarter of 1995. In the first six months of fiscal 1996, UNIX royalties were $50 million compared to $36 million in the first six months of fiscal 1995. The increase was attributable to a one-time $19 million paid up royalty recognized in the sale of the UNIX product line to SCO in the first quarter of fiscal 1996. UNIX royalties were 8% of revenues in the first six months of fiscal 1996 compared to 4% of revenues in the first six months of fiscal 1995. Education, service, and other revenues were $35 million in the second quarter of fiscal 1996 compared to $41 million of revenue in the second quarter of fiscal 1995. In the first six months of fiscal 1996, education, service, and other revenues were $77 million compared to $72 million in the first six months of fiscal 1995. Education, service, and other revenues were 12% of revenue in the first six months of fiscal 1996 compared to 7% of revenue in the first six months of fiscal 1995. Revenue from discontinued product lines, made up primarily of the personal productivity applications product line which was sold to Corel in March 1996, was $21 million in the second quarter of fiscal 1996 compared to $146 million in the second quarter of fiscal 1995. In the first six months of fiscal 1996, revenue from discontinued product lines was $63 million compared to $274 million in the first six months of fiscal 1995. Discontinued product lines were 10% of revenues in the first six months of fiscal 1996 compared to 27% of revenues in the first six months of fiscal 1995. International sales accounted for 51% of revenues in the first six months of fiscal 1996 compared to 46% of revenues in the first six months of fiscal 1995. The reason for this increase is that a relatively larger portion of the decrease in distribution channel inventories in the second quarter of fiscal 1996 occurred in the United States. Gross Profit - ------------ Q2 Q2 YTD YTD 1996 Change 1995 1996 Change 1995 - ---------------------------------------------------------------------------- Gross profit (millions) $120 -70% $405 $461 -41% $781 Percentage of net sales 64% 76% 74% 76% ============================================================================
The gross margin percentage decreased in the second quarter of fiscal 1996 compared to the second quarter of fiscal 1995 and in the first six months of fiscal 1996 compared to the first six months of fiscal 1995 due to the fixed portion of cost of sales being a much higher percentage of the lower revenues in the second quarter of fiscal 1996 due to the change in the distribution stocking policy. Operating Expenses - ------------------ Q2 Q2 YTD YTD 1996 Change 1995 1996 Change 1995 - -------------------------------------------------------------------------------- Sales and marketing (millions) $127 -14% $148 $251 13% $288 Percentage of net sales 68% 28% 40% 28% - -------------------------------------------------------------------------------- Product development (millions) $70 -25% $93 $148 -19% $183 Percentage of net sales 37% 18% 24% 18% - -------------------------------------------------------------------------------- General and administrative (millions) $35 -3% $36 $73 4% $70 Percentage of net sales 18% 7% 12% 7% - -------------------------------------------------------------------------------- Restructuring charges (millions) -- -- -- $18 -- -- Percentage of net sales -- -- 3% -- - -------------------------------------------------------------------------------- Total operating expenses (millions) $232 -16% $277 $491 -9% $541 Percentage of net sales 123% 52% 78% 53% - --------------------------------------------------------------------------------
Total operating expenses, excluding nonrecurring charges, declined 16% in the second quarter of fiscal 1996 compared to the second quarter of fiscal 1995 and by 13% in the first six months of fiscal 1996 compared to the first six months of fiscal 1995. These decreases are due to the sale of the UNIXWare product line and the personal productivity applications product line and to company-wide cost controls as the Company took significant actions to refocus on network software. On an absolute dollar basis, sales and marketing expenses decreased significantly in both the second quarter of fiscal 1996 and in the first six months of fiscal 1996 compared to the same periods in fiscal 1995. These decreases are primarily attributable to lower corporate marketing and domestic sales expenses. Sales and marketing expenses increased significantly as a percentage of net sales in the second quarter of fiscal 1996 compared to the second quarter of fiscal 1995 and in the first six months of fiscal 1996 compared to the first six months of fiscal 1995 due to much lower revenues in the second quarter of fiscal 1996 as a result of the change in the distribution stocking policy. Sales and marketing expenses fluctuate as a percentage of net sales in any given period due to product promotions, advertising or other discretionary expenses. On an absolute dollar basis, product development expenses decreased significantly in the second quarter of fiscal 1996 and in the first six months of fiscal 1996 compared to the same periods in fiscal 1995. These decreases relate to a reduction in expenses due to the sale of the UNIXWare product line to SCO in the first quarter of fiscal 1996 and to the sale of the personal productivity applications product line to Corel in the second quarter of fiscal 1996. Product development expenses increased significantly as a percentage of net sales in the second quarter of fiscal 1996 compared to the second quarter of fiscal 1995 and in the first six months of fiscal 1996 compared to the first six months of fiscal 1995 due to much lower revenues in the second quarter of fiscal 1996 as a result of the change in the distribution stocking policy. On an absolute dollar basis, general and administrative expenses were relatively flat for all comparable periods. Reductions in general and administrative expenses as a result of the merger with WordPerfect Corporation were made before the beginning of fiscal 1995 resulting in flat expenses in fiscal 1996 compared to fiscal 1995. General and administrative expenses increased as a percentage of net sales in the second quarter of fiscal 1996 compared to the second quarter of fiscal 1995 and in the first six months of fiscal 1996 compared to the first six months of fiscal 1995 due to much lower revenues in the second quarter of fiscal 1996 as a result of the change in the distribution stocking policy. During the first quarter of 1996, the Company wrote off $18 million of tax deductible restructuring charges for severance and redundant facilities as the Company prepared for the sale of its personal productivity applications product line. Q2 YE 1996 Change 1995 - ------------------------------------------------------------------------------ Employees 5,860 -23% 7,572 Annualized revenue per employee (thousand's) $184 -28% $255 ==============================================================================
In the first six months of fiscal 1996, Novell reduced its employment by 1,902 employees as the Company prepared for and completed the sale of its personal productivity applications product line and transitioned former UNIX Systems Group employees to SCO and other third parties. The decline in annualized revenue per employee is due to lower revenue in the second quarter of fiscal 1996 as a result of the change in the distribution stocking policy. Other Income (Expense) - --------------------- Q2 Q2 YTD YTD 1996 Change 1995 1996 Change 1995 - ------------------------------------------------------------------------------------- Other income (expense), net (millions) $29 81% $16 $42 62% $26 Percentage of net sales 15% 3% 7% 3% =====================================================================================
The primary component of other income (expense) is investment income, which was $11 million in the second quarter of fiscal 1996 compared to $15 million in the second quarter of fiscal 1995 and was $26 million in the first six months of fiscal 1996 compared to $25 million in the first six months of fiscal 1995. The decrease on a quarter to quarter comparison and the relative flatness on a year to date comparison is due to the Company's share repurchase program in fiscal 1996 whereby it has repurchased approximately 23 million shares of its common stock at a cost of $317 million. This has reduced cash available for investment, and therefore, investment income. 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. Also included in other income (expense), the Company recorded a gain of $20 million on the sale of its personal productivity applications product line in the second quarter of fiscal 1996. Income Taxes - ------------ Q2 Q2 YTD YTD 1996 Change 1995 1996 Change 1995 - -------------------------------------------------------------------------- Income taxes (millions) $(28) -158% $48 $4 -96% $89 Percentage of net sales -15% 9% 1% 9% Effective tax rate 34% 34% 34% 34% ==========================================================================
The Company's estimated tax rate for fiscal 1996 is 33.5%, the same as in fiscal 1995. Net Income and Net Income Per Share - ----------------------------------- Q2 Q2 YTD YTD 1996 Change 1995 1996 Change 1995 - ------------------------------------------------------------------------------- Net income (millions) $(55) -157% $96 $8 -95% $177 Percentage of net sales -29% 18% 1% 17% Net income per share $(0.15) $0.26 $0.02 $0.48 ===============================================================================
Liquidity and Capital Resources - ------------------------------- Q2 YE 1996 Change 1995 - ------------------------------------------------------------------------------ Cash and short-term investments (millions) $1,181 -11% $1,321 Percentage of total assets 57% 55% ==============================================================================
Cash and short-term investments decreased to $1,181 million at April 27, 1996 from $1,321 million at October 28, 1995. The major reasons for this decrease were the $317 million used to repurchase Novell common stock and $29 million used for property, plant and equipment expenditures; offset by the $100 million of cash provided by operating activities, $34 million provided by other financing activities, and $72 million from 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 27, 1996, the Company's principal unused sources of liquidity consisted of cash and short-term investments and available borrowing capacity of approximately $20 million under its credit facilities. The Company's liquidity needs are principally for the Company's financing of accounts receivable, capital assets, acquisitions and strategic investments and to have flexibility in a dynamic and competitive operating environment. During fiscal 1996, 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. Borrowings under the Company's credit facilities, or public offerings of equity or debt securities are available if the need arises. As the Company grows, investments will continue in product development in new and existing areas of technology. Cash may also be used to acquire technology through purchases and strategic acquisitions. Capital expenditures in fiscal 1996 are anticipated to be approximately $60 million, but could be reduced if the growth of the Company is less than presently anticipated. In addition, the Company has announced a share repurchase program whereby the Company is authorized to repurchase up to 37 million shares of its common stock in the open market during fiscal 1996. During the first six months of 1996, approximately 23 million shares were repurchased and retired at a cost of approximately $317 million. Forward Looking Information As previously disclosed, during second fiscal quarter of fiscal 1996, Novell implemented a change to its traditional distribution stocking policy that significantly reduced revenue and earnings in the quarter. The Company estimates that it reduced product inventories in its worldwide distribution channels during the second quarter of 1996 by approximately $225 million. The resetting of channel inventories is expected to reduce ongoing cost of sales and lessen costs associated with channel promotions, product rotations, and new product releases, thereby leading to improved earnings in the second half of fiscal 1996. The above statements relating to Novell s change in distribution stocking policy and possible improved earnings in the second half of fiscal 1996 are forward looking and involve a number of risks and uncertainties. As such, actual results could materially differ from those we are projecting in these forward looking statements. Unanticipated declines in revenue due to competitive, market and general economic factors could limit the Company's ability to gain the benefit of improved earnings resulting from the new channel inventory structure. Novell s projections of increasing licensing revenue are based on historical trends which, should they reverse, would negatively impact growth projections of revenue and earnings. Further uncertainties are associated with any impact to our distribution channel resulting from this change in distribution stocking policy. Novell believes this action is in the best interests of its customers, channel partners and shareholders, but implementing this program may result in some short-term business interruption as the Company, our partners, and customers work through this change. 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 10, 1996 for the following purposes: 1. To elect eight directors; 2. To approve and ratify the adoption of amendments to the Novell, Inc. Stock Option Plan for Non-Employee Directors, including an increase in the shares reserved for issuance thereunder from 800,000 to 1,500,000 shares. 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 Robert J. Frankenberg 299,597,082 4,519,514 Alan C. Ashton 299,521,136 4,595,460 Elaine R. Bond 277,919,725 26,196,871 Hans-Werner Hector 298,365,654 5,750,942 Jack L. Messman 277,965,392 26,151,204 Larry W. Sonsini 275,654,218 28,462,378 Ian R. Wilson 299,958,864 4,157,732 John A. Young 300,056,889 4,059,707
Votes Votes Votes Proposal 2 For Against Withheld/Abstained - -------------------------------------------------------------------------------------------- Approval and ratification of the adoption of amendments to the Novell, Inc. Stock Option Plan for Non-Employee Directors 246,572,871 50,019,133 1,866,651 ============================================================================================
At the Annual Meeting of Shareholders on April 10, 1996, the following proposal was brought to the floor by a shareholder. Votes Votes For Against - ----------------------------------------------------------------------------------- Rescind the amendments to the Novell, Inc. Stock Option Plan for Non-Employee Directors 22,036,169 219,186,724 ===================================================================================
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 27, 1996. *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: May 31, 1996 /s/ Robert J. Frankenberg ------------------------- Robert J. Frankenberg Chairman of the Board, President, Chief Executive Officer and Director (Principal Executive Officer) Date: May 31, 1996 /s/ James R. Tolonen -------------------- James R. Tolonen Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: May 31, 1996 /s/ Stephen C. Wise ------------------- Stephen C. Wise Senior Vice President,Finance (Principal Accounting Officer) EX-27 2
5 6-MOS OCT-26-1996 APR-27-1996 147,186 1,033,829 357,122 (43,679) 16,942 1,659,148 675,718 (318,276) 2,066,878 361,202 0 35,215 0 0 1,563,262 2,066,878 626,099 626,099 164,625 164,625 490,824 0 0 12,334 4,132 8,202 0 0 0 8,202 .02 .02
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