-----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, ICRFlhgqhyFQLWqHJUxd85gxomxk6MXZq9Jz5poLWJeos+MwWnHR/5uDKLWAQxFa ua1i06tLOr8SGVVEdsCuTg== 0000758004-96-000007.txt : 19960911 0000758004-96-000007.hdr.sgml : 19960911 ACCESSION NUMBER: 0000758004-96-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960727 FILED AS OF DATE: 19960910 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOVELL INC CENTRAL INDEX KEY: 0000758004 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 870393339 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13351 FILM NUMBER: 96627946 BUSINESS ADDRESS: STREET 1: 1555 N. TECHNOLOGY WAY CITY: OREM STATE: UT ZIP: 84097 BUSINESS PHONE: 8012226600 MAIL ADDRESS: STREET 1: 122 E. 1700 S. CITY: PROVO STATE: UT ZIP: 84606 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Quarter Ended July 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 84097 (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 August 24, 1996 there were 343,930,347 shares of the registrant's common stock outstanding. Part I. Financial Information, Item 1. Financial Statements NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS - ---------------------------------------------------------------------- Jul. 27, Oct. 28, Dollars in thousands, except per share data 1996 1995 - ---------------------------------------------------------------------- ASSETS Current assets Cash and short-term investments $993,712 $1,321,231 Receivables, less allowances ($55,763 - July; $74,857 - October) 400,977 470,437 Inventories 12,709 23,025 Prepaid expenses 31,749 50,576 Deferred income taxes 77,539 59,913 - ---------------------------------------------------------------------- Total current assets 1,516,686 1,925,182 Property, plant and equipment, net 381,405 390,452 Other assets 49,350 101,196 - ---------------------------------------------------------------------- Total assets $1,947,441 $2,416,830 ====================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $74,374 $116,305 Accrued compensation 58,315 97,637 Accrued marketing liabilities 48,476 72,339 Other accrued liabilities 117,398 90,623 Income taxes payable -- 29,942 Deferred revenue 35,335 54,099 - ---------------------------------------------------------------------- Total current liabilities 333,898 460,945 Minority interests 17,034 17,623 Put warrants 90,025 -- Shareholders' equity Common stock, par value $.10 a share Authorized - 600,000,000 shares Issued - 343,819,711 shares-July 371,567,158 shares-October 34,382 37,157 Additional paid-in capital 262,185 737,481 Retained earnings 1,209,917 1,163,624 - ---------------------------------------------------------------------- Total shareholders' equity 1,506,484 1,938,262 - ---------------------------------------------------------------------- Total liabilities and shareholders' equity $1,947,441 $2,416,830 ====================================================================== See notes to consolidated unaudited condensed financial statements.
NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME Fiscal Quarter Ended Nine Months Ended -------------------- ----------------- Amounts in thousands, Jul. 27, Jul. 29, Jul. 27, Jul. 29, except per share data 1996 1995 1996 1995 - --------------------------------------------------------------------------------- Net sales $365,091 $537,922 $991,190 $1,560,655 Cost of sales 75,618 125,600 240,243 366,930 - --------------------------------------------------------------------------------- Gross profit 289,473 412,322 750,947 1,193,725 Operating expenses Sales and marketing 124,853 149,010 375,610 437,187 Product development 60,345 89,788 208,701 272,605 General and administrative 34,299 39,368 107,568 109,132 Restructuring charges -- -- 18,442 -- - --------------------------------------------------------------------------------- Total operating expenses 219,497 278,166 710,321 818,924 - --------------------------------------------------------------------------------- Income from operations 69,976 134,156 40,626 374,801 Other income (expense) Investment income 15,558 14,572 41,715 39,176 Gain on sale of assets -- -- 19,815 -- Other, net (822) 4,604 (5,110) 6,102 - --------------------------------------------------------------------------------- Other income, net 14,736 19,176 56,420 45,278 - --------------------------------------------------------------------------------- Income before taxes 84,712 153,332 97,046 420,079 Income taxes 25,953 51,366 30,085 140,726 - --------------------------------------------------------------------------------- Net income $58,759 $101,966 $66,961 $279,353 ================================================================================= Weighted average shares outstanding 352,129 376,494 362,052 374,302 ================================================================================= Net income per share $ 0.17 $ 0.27 $ 0.18 $ 0.75 ================================================================================= See notes to consolidated unaudited condensed financial statements.
NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS Nine Months Ended ----------------- Jul. 27, Jul. 29, Amounts in thousands 1996 1995 - ---------------------------------------------------------------------------- Cash flows from operating activities Net income $66,961 $279,353 Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation and amortization 77,970 69,398 Gain on sale of assets (19,815) -- Stock plans income tax benefits 9,964 22,954 Decrease (increase) in receivables 69,460 (75,973) Decrease (increase) in inventories 10,316 (2,913) Decrease in prepaid expenses 18,827 17,796 Decrease in deferred income taxes 11,917 7,046 (Decrease) increase in current liabilities, net (127,047) 32,694 - ---------------------------------------------------------------------------- Net cash provided from operating activities 118,553 350,355 - ---------------------------------------------------------------------------- Cash flows from financing activities Issuance of common stock, net 35,145 48,974 Repurchase of common stock (455,700) -- Sale of put warrants 12,195 -- - ---------------------------------------------------------------------------- Net cash (used) provided from financing activities (408,360) 48,974 - ---------------------------------------------------------------------------- Cash flows from investing activities Expenditures for property, plant and equipment (77,249) (48,131) Proceeds from sale of assets 10,750 -- Decrease (increase) in short-term investments 209,117 (241,083) Other (1,925) 17,337 - ---------------------------------------------------------------------------- Net cash used by investing activities 140,693 (271,877) Total (decrease) increase in cash and cash equivalents $(149,114) $ 127,452 Cash and cash equivalents - beginning of period 312,164 228,426 - ---------------------------------------------------------------------------- Cash and cash equivalents - end of period 163,050 355,878 Short-term investments - end of period 830,662 874,466 - ---------------------------------------------------------------------------- Cash and short-term investments - end of period $ 993,712 $1,230,344 ============================================================================ 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. 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 that quarter. Because the Company has experienced strong growth in revenue from expanding multi-product network software licensing programs, theCompany decided to reduce and rebalance channelinventories 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 second quarter. Additionally, net returns of approximately $20 million were accepted during the second quarter related to this policy change. 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 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. On August 29, 1996, the Company announced the resignation of Robert J. Frankenberg as Chairman, President and Chief Executive Officer. John A. Young, a member of the Companys Board of Directors, was named Chairman of the Board. Joseph A. Marengi, formerly Executive Vice President, Worldwide Sales, was named President. The Company also announced it has commenced a search for a new Chief Executive Officer. On September 6, 1996, the Company also announced the resignation of Stephen C. Wise as Senior Vice President, Finance, effective September 27, 1996. Pursuant to a share repurchase program whereby the Company is authorized to repurchase up to 10 percent of its outstanding common stock in fiscal 1996, the Company repurchased and retired approximately 33 million shares at a cost of approximately $456 million in the first nine 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) Jul. 27, 1996 Gains Losses Jul. 27, 1996 - ------------------------------------------------------------------------------------------ Cash and cash equivalents Cash $ 88,794 $ -- $ -- $ 88,794 Repurchase agreements 51,786 -- -- 51,786 Tax exempt money market fund -- -- -- -- Municipal securities 24,000 -- -- 24,000 - ----------------------------------------------------------------------------------------- Cash and cash equivalents $ 164,580 $ -- $ -- $ 164,580 - ----------------------------------------------------------------------------------------- Short-term investments Municipal securities $ 362,628 $ 1,328 $ -- $ 363,956 Money market mutual funds 75,551 -- -- 75,551 Money market preferreds 190,500 45 -- 190,545 Mutual funds 14,010 18 -- 14,028 Equity securities 172,521 12,531 -- 185,052 - ----------------------------------------------------------------------------------------- Short-term investments $ 815,210 $13,922 $ -- $ 829,132 - ----------------------------------------------------------------------------------------- Cash and short-term investments $ 979,790 $13,922 $ -- $ 993,712 - ----------------------------------------------------------------------------------------- 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 nine months of fiscal 1996 the Company had realized gains of $8 million on the sale of securities compared to realized gains of $4 million on the sale of securities in the first nine months of fiscal 1995. D. Income Taxes The Company's estimated effective tax rate for the first nine months of fiscal 1996 was 31% compared to 33.5% in fiscal 1995. The reduction in the effective tax rate is due primarily to revised estimates of earnings for fiscal 1996. The Company paid cash amounts for income taxes of $15 million and $105 million, in the first nine 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 July 27, 1996 there were no borrowings, letter of credit acceptances or commitments under such line. The Company has an additional $5 million credit facility with another bank which is not subject to a loan agreement. At July 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 third quarter of fiscal 1996, the Company sold put warrants on 2 million shares of its stock, callable in the first quarter of fiscal 1997, giving a third party the right to sell shares of Novell common stock to the Company at contractually specified prices. Also, 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. During the third quarter of fiscal 1996, the Company settled 2 million of its put warrant obligations. The put warrant balance on the balance sheet is the amount the Company would be obligated to pay if all the outstanding 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 nine months ended July 27, 1996 and July 29, 1995, sales to international customers were approximately $498 million (50% of revenue) and $712 million (46% of revenue), respectively. In the first nine months of fiscal 1996 and fiscal 1995, 54% 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 multi-national distributor, which accounted for 17% of revenue in the first nine months of fiscal 1995, no customer accounted for more than 10% of revenue in the first nine months of either fiscal 1996 or fiscal 1995. H. Net Income Per Share Net income 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. The Company offers a wide range of network solutions for distributed network, Internet, intranet and small-business markets. During the first nine months of fiscal 1996 the Company sold off and discontinued two product lines in order to focus on its network software business. 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. 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 that 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 second quarter. Additionally, net returns of approximately $20 million were accepted during the second quarter related to this policy change. 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. On August 29, 1996, the Company announced the resignation of Robert J. Frankenberg as Chairman, President and Chief Executive Officer. John A. Young, a member of the Companys Board of Directors, was named Chairman of the Board. Joseph A. Marengi, formerly Executive Vice President, Worldwide Sales, was named President. The Company also announced it has commenced a search for a new Chief Executive Officer. On September 6, 1996, the Company also announced the resignation of Stephen C. Wise as Senior Vice President, Finance, effective September 27, 1996. Results of Operations - --------------------- Net Sales Q3 Q3 YTD YTD 1996 Change 1995 1996 Change 1995 - --------------------------------------------------------------------------- Net sales (millions) $365 -32% $538 $991 -37% $1,561 ===========================================================================
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. Additionally, the Company has redefined its product lines. The analysis that follows describes the product lines consistent with how the Company currently views its business. 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 $216 million in the third quarter of fiscal 1996 compared to $295 million in the third quarter of fiscal 1995. In the first nine months of fiscal 1996 server operating environments revenue was $512 million compared to $796 million in the first nine months of fiscal 1995. The decrease in the third quarter of fiscal 1996 over the same period in fiscal 1995 is a result of flat NetWare 4 sales combined with declining sales of NetWare 3. The decrease between the first nine months of fiscal 1996 and fiscal 1995 is primarily attributable to the reduction in distribution channel inventory in the second quarter of fiscal 1996 as well as an overall decrease in sales of NetWare 3. In spite of the distribution stocking policy change, NetWare 4 grew 7% in the first nine months of fiscal 1996 compared to the first nine months of fiscal 1995 while NetWare 3 declined by 60% in the same comparable periods. The server operating environments product line represented 52% of revenue in the first nine months of fiscal 1996 compared to 51% of revenue in the first nine 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 $92 million in the third quarter of fiscal 1996 compared to $93 million in the third quarter of fiscal 1995. In the first nine months of fiscal 1996, network services revenue was $233 million compared to revenue of $232 million in the first nine months of fiscal 1995. Revenue was flat from the third quarter of fiscal 1995 to the third quarter of 1996 with strong growth in management & administrative products offset by decreases in distributed network services and application services. In spite of the distribution stocking policy change, revenue in the first nine months of fiscal 1996 was flat with revenue in the first nine months of fiscal 1995 due to strong growth in management & administration products. Network services revenue represented 24% of total revenue in the first nine months of fiscal 1996 compared to 15% of revenue in the first nine months of fiscal 1995. UNIX royalties were $18 million in the third quarter of 1996 compared to $20 million in the third quarter of 1995. In the first nine months of fiscal 1996, UNIX royalties were $68 million compared to $59 million in the first nine 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 7% of revenues in the first nine months of fiscal 1996 compared to 4% of revenues in the first nine months of fiscal 1995. Education, service, and other revenues were $39 million in the third quarter of fiscal 1996 compared to $41 million of revenue in the third quarter of fiscal 1995. In the first nine months of fiscal 1996, education, service, and other revenues were $116 million compared to $113 million in the first nine months of fiscal 1995. Education, service, and other revenues were 12% of revenue in the first nine months of fiscal 1996 compared to 7% of revenue in the first nine 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 $63 million in the first nine months of fiscal 1996 compared to $364 million in the first nine months of fiscal 1995. Discontinued product lines were 6% of revenues in the first nine months of fiscal 1996 compared to 23% of revenues in the first nine months of fiscal 1995. International sales accounted for 50% of revenues in the first nine months of fiscal 1996 compared to 46% of revenues in the first nine 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 - ------------ Q3 Q3 YTD YTD 1996 Change 1995 1996 Change 1995 - ------------------------------------------------------------------------- Gross profit (millions) $289 -30% $412 $751 -37% $1,194 Percentage of net sales 79% 77% 76% 76% =========================================================================
The gross margin percentage increased in the third quarter of fiscal 1996 compared to the third quarter of fiscal 1995 due to lower material and service costs. They remained flat in the first nine months of fiscal 1996 compared to the first nine months of fiscal 1995. Operating Expenses - ------------------ Q3 Q3 YTD YTD 1996 Change 1995 1996 Change 1995 - ------------------------------------------------------------------------------------ Sales and marketing (millions) $125 -16% $149 $376 -14% $437 Percentage of net sales 34% 28% 38% 28% Product development (millions) $60 -33% $90 $209 -23% $273 Percentage of net sales 16% 17% 21% 17% General and administrative (millions) $34 -13% $39 $108 -1% $109 Percentage of net sales 9% 7% 11% 7% Restructuring charges (millions) -- -- -- $18 -- -- Percentage of net sales -- -- 2% -- Total operating expenses (millions) $219 -21% $278 $710 -13% $819 Percentage of net sales 60% 52% 72% 52% ====================================================================================
Total operating expenses, excluding nonrecurring charges, declined 21% in the third quarter of fiscal 1996 compared to the third quarter of fiscal 1995 and by 16% in the first nine months of fiscal 1996 compared to the first nine months of fiscal 1995. These decreases are due to the sale of the UnixWare product line and the personal productivity applications product line and the associated transfer of employees to the acquiring companies 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 third quarter of fiscal 1996 and in the first nine months of fiscal 1996 compared to the same periods in fiscal 1995. These decreases are primarily attributable to lower corporate & product marketing and domestic sales expenses as a result of the sale of the personal productivity applications product line. Sales and marketing expenses increased as a percentage of net sales in the first nine months of fiscal 1996 compared to the first nine 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 third quarter of fiscal 1996 and in the first nine 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 as a percentage of net sales in the first nine months of fiscal 1996 compared to the first nine 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 decreased in the third quarter of fiscal 1996 compared to the third quarter of fiscal 1995 and were relatively flat in the first nine months of both fiscal 1996 and fiscal 1995. The decrease in the third quarter of fiscal 1996 compared to the third quarter of fiscal 1995 was primarily the result of lower information services and finance costs. 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 first nine months of fiscal 1996 compared to the first nine 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. YTD YTD 1996 Change 1995 - ------------------------------------------------------------------------- Employees 5,737 -25% 7,599 Annualized revenue per employee (thousand's) $198 -24% $259 =========================================================================
In the first nine months of fiscal 1996, Novell reduced its employment by 2,025 employees as the Company prepared for and completed the sale of its UnixWare and personal productivity applications product lines and terminated or transitioned former UNIX Systems Group and personal productivity group employees to SCO, Corel, 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) - ---------------------- Q3 Q3 YTD YTD 1996 Change 1995 1996 Change 1995 - ------------------------------------------------------------------------------------ Other income (expense), net (millions) $15 -21% $19 $56 24% $45 Percentage of net sales 4% 4% 6% 3% ====================================================================================
The primary component of other income (expense) is investment income, which was $16 million in the third quarter of fiscal 1996 compared to $15 million in the third quarter of fiscal 1995 and was $42 million in the first nine months of fiscal 1996 compared to $39 million in the first nine months of fiscal 1995. The increase on a quarter to quarter comparison as well as on a year to date comparison is due to higher capital gains on the sale of certain equity investments in the third fiscal quarter of fiscal 1996 somewhat offset by lower interest and dividend income due to lower cash balances as the Company repurchased approximately 33 million shares of its common stock at a cost of $456 millon. 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 - ------------ Q3 Q3 YTD YTD 1996 Change 1995 1996 Change 1995 - ------------------------------------------------------------------------------ Income taxes (millions) $26 -49% $51 $30 -79% $141 Percentage of net sales 7% 9% 3% 9% Effective tax rate 31% 34% 31% 34% ==============================================================================
The Company's estimated tax rate for fiscal 1996 is 31% compared to 33.5% for fiscal 1995. The third quarter rate of 30.6% includes an adjustment reflecting the revision from 33.5% used in both the first and second quarter of fiscal 1996. The reduction in the effective tax rate is due primarily to revised estimates of earnings for fiscal 1996. Net Income and Net Income Per Share - ----------------------------------- Q3 Q3 YTD YTD 1996 Change 1995 1996 Change 1995 - --------------------------------------------------------------------------------- Net income (millions) $59 -42% $102 $67 -76% $279 Percentage of net sales 16% 19% 7% 18% Net income per share $0.17 $0.27 $0.18 $0.75 =================================================================================
Liquidity and Capital Resources - ------------------------------- Q3 YE 1996 Change 1995 - ------------------------------------------------------------------------------- Cash and short-term investments (millions) $994 -25% $1,321 Percentage of total assets 51% 55% ===============================================================================
Cash and short-term investments decreased to $994 million at July 27, 1996 from $1,321 million at October 28, 1995. The major reasons for this decrease were the $456 million used to repurchase Novell common stock and $77 million used for property, plant and equipment expenditures; offset by the $119 million of cash provided by operating activities, $47 million provided by other financing activities, and $40 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 July 27, 1996, 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, 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 $90 million, up from the original estimate of $60 million, as the Company purchased an office complex to house its United Kingdom subsidiary. Capital expenditures 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 10 percent of its outstanding common stock in the open market during fiscal 1996. During the first nine months of 1996, approximately 33 million shares were repurchased and retired at a cost of approximately $456 million. Forward Looking Information As previously disclosed, during the 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. 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 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number Description 27* Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Registrant during the quarter ended July 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: September 9, 1996 /s/ Joseph A. Marengi --------------------- Joseph A. Marengi President (Principal Executive Officer) Date: September 9, 1996 /s/ James R. Tolonen -------------------- James R. Tolonen Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: September 9, 1996 /s/ Stephen C. Wise -------------------- Stephen C. Wise Senior Vice President, Finance (Principal Accounting Officer) EX-27 2
5 9-MOS OCT-26-1996 JUL-27-1996 163,050 830,662 400,977 (55,763) 12,709 1,516,686 716,578 (335,173) 1,947,441 333,898 0 34,382 0 0 1,472,102 1,947,441 991,190 991,190 240,243 240,243 710,321 0 0 97,046 30,085 66,961 0 0 0 66,961 .18 .18
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