-----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, BhEIYXv4WJcMbG1B7W2eHWXOKnB2O7u35KUZrRMoEvAQlUOPDKDED/Bn4XlXoN91 M4MN8/j95b4+gf1kHKtpsQ== 0000758004-97-000011.txt : 19970617 0000758004-97-000011.hdr.sgml : 19970617 ACCESSION NUMBER: 0000758004-97-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970430 FILED AS OF DATE: 19970616 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: 97624566 BUSINESS ADDRESS: STREET 1: 122 EAST 1700 SOUTH CITY: PROVO 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 April 30, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from__________ to__________ Commission File Number: 0-13351 NOVELL, INC. (Exact name of registrant as specified in its charter) Delaware 87-0393339 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 122 East 1700 South Provo, Utah 84606 (Address of principal executive offices and zip code) (801) 861-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO As of May 31, 1997 there were 349,084,897 shares of the registrant's common stock outstanding. Part I. Financial Information, Item 1. Financial Statements NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS Dollars in thousands, Apr. 30, Oct. 26, except per share data 1997 1996 - -------------------------------------------------------------------- ASSETS Current assets Cash and short-term investments $ 1,044,106 $ 1,024,755 Receivables, less allowances ($48,278 - April; $60,940 - October) 332,507 452,327 Inventories 18,400 16,837 Prepaid expenses 70,914 59,009 Deferred income taxes 72,223 37,831 - -------------------------------------------------------------------- Total current assets 1,538,150 1,590,759 Property, plant and equipment, net 399,598 394,684 Other assets 57,152 64,023 - -------------------------------------------------------------------- Total assets $ 1,994,900 $ 2,049,466 ==================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 71,570 $ 96,933 Accrued compensation 41,554 54,731 Accrued marketing liabilities 45,045 48,402 Other accrued liabilities 84,750 118,133 Income taxes payable 21,872 -- Deferred revenue 52,117 46,573 - -------------------------------------------------------------------- Total current liabilities 316,908 364,772 Minority interests 16,171 17,035 Put warrants 19,750 52,150 Shareholders' equity Common stock, par value $.10 a share Authorized - 600,000,000 shares Issued - 348,777,827 shares-April 346,059,050 shares-October 34,878 34,606 Additional paid-in capital 347,694 309,831 Retained earnings 1,302,835 1,266,657 Unearned stock compensation (8,599) (4,141) Cumulative translation adjustment (1,303) 1,183 Unrealized gain (loss) on investments (33,434) 7,373 - --------------------------------------------------------------------- Total shareholders' equity 1,642,071 1,615,509 - --------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,994,900 $ 2,049,466 ===================================================================== See notes to consolidated unaudited condensed financial statements.
NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS Fiscal Quarter Ended Six Months Ended -------------------- ------------------ Amounts in thousands, Apr. 30, Apr. 27, Apr. 30, Apr. 27, except per share data 1997 1996 1997 1996 - ---------------------------------------------------------------------- Net sales $273,107 $188,180 $647,954 $626,099 Cost of sales 77,175 68,614 153,146 164,625 - ---------------------------------------------------------------------- Gross profit 195,932 119,566 494,808 461,474 Operating expenses Sales and marketing 116,068 127,292 243,958 250,757 Product development 68,442 69,723 140,197 148,356 General and administrative 39,517 34,731 77,248 73,269 Restructuring charges -- -- -- 18,442 - ---------------------------------------------------------------------- Total operating expenses 224,027 231,746 461,403 490,824 Income (loss) from operations (28,095) (112,180) 33,405 (29,350) Other income (expense) Investment income 9,921 11,257 26,535 26,157 Gain on sale of assets -- 19,815 -- 19,815 Other, net (3,506) (2,138) (6,343) (4,288) - ---------------------------------------------------------------------- Other income, net 6,415 28,934 20,192 41,684 - ---------------------------------------------------------------------- Income (loss) before taxes (21,680) (83,246) 53,597 12,334 Income taxes (7,046) (27,887) 17,419 4,132 Net income (loss) $ (14,634) $ (55,359) $ 36,178 $ 8,202 ====================================================================== Weighted average shares outstanding 347,904 362,442 347,499 367,013 ====================================================================== Net income (loss) per share $ (0.04) $ ( 0.15) $ 0.10 $ 0.02 ====================================================================== See notes to consolidated unaudited condensed financial statements.
NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS Six Months Ended ---------------------- Apr. 30, Apr. 27, Amounts in thousands 1997 1996 - ------------------------------------------------------------------------------ Cash flows from operating activities Net income $ 36,178 $ 8,202 Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation and amortization 46,266 51,190 Gain on sale of assets -- (19,815) Stock plans income tax benefits 2,356 4,863 Decrease in receivables 119,820 113,315 (Increase) decrease in inventories (1,563) 6,083 (Increase) decrease in prepaid expenses (11,905) 18,792 (Increase) decrease in deferred income taxes (34,532) 17,167 (Decrease) in current liabilities, net (47,864) (99,743) - ------------------------------------------------------------------------------ Net cash provided from operating activities 108,756 100,054 - ------------------------------------------------------------------------------ Cash flows from financing activities Issuance of common stock, net 7,673 23,630 Repurchases of common stock -- (316,559) Sale of put warrants 2,300 10,055 Settlement of put warrants (14,494) -- - ------------------------------------------------------------------------------ Net cash (used) from financing activities (4,521) (282,874) - ------------------------------------------------------------------------------ Cash flows from investing activities Expenditures for property, plant and equipment (47,738) (28,997) Purchases of short-term investments (1,271,326) (1,895,848) Maturities of short-term investments 951,279 1,605,453 Sales of short-term investments 303,908 329,026 Proceeds from sale of assets -- 10,750 Other 3,661 (2,542) - ------------------------------------------------------------------------------ Net cash (used) provided by investing activities (60,216) 17,842 - ------------------------------------------------------------------------------ Total increase (decrease) in cash and cash equivalents $ 44,019 $(164,978) Cash and cash equivalents - beginning of period 145,521 312,164 - ------------------------------------------------------------------------------ Cash and cash equivalents - end of period 189,540 147,186 Short-term investments - end of period 854,566 1,033,829 - ------------------------------------------------------------------------------ Cash and short-term investments - end of period $1,044,106 $1,181,015 ============================================================================== See notes to consolidated unaudited condensed financial statements.
NOVELL, INC. NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS A. Quarterly Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The accompanying consolidated unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q but do not include all of the information and footnotes required by generally accepted accounting principles and should therefore, be read in conjunction with the Company's fiscal 1996 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. In the first quarter of fiscal 1997, the Company implemented a change to its fiscal year and month ending dates. The Company will now recognize 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 end will now end 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. The Company believes that implementing this change did not have a material impact on its financial position, results of operations, or cash flows. B. Significant Events 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 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 approximately $50 million over the next five years. 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. The change in the Company s traditional distribution stocking policy was to respond to changing market conditions. Over the past two years, direct customer and OEM licensing programs have grown from less than 5% of revenue to more than 40% of revenue. Such licensing revenues do not flow through the Company s historical distribution channel. This change, along with the evolution that is taking place in the method of software distribution to permit eventual electronic distribution of products changes the Company s reliance on boxed product flowing through a distribution channel. In order to deal with this changing environment the Company responded by not shipping product to distributors during the second quarter of fiscal 1996 which had the effect of reducing inventories within the distribution channel. The Company estimates that it reduced product inventories in the worldwide distribution channel during the second fiscal quarter of 1996 by approximately $225 million. Additionally, net returns of approximately $20 million were accepted during the second quarter related to this policy change. Due to disappointing sales of boxed products by distributors and lower licensed revenue of certain older products to original equipment manufacturers (OEM s) as well as competitive pressures in the small network market, Novell will take corrective measures to realign its resources and better manage and control its business. The Company plans to reduce its workforce by approximately 18% or 1,000 employees in the third quarter of fiscal 1997. In addition, the Company intends to reduce product inventories in its distribution channel in the third quarter of fiscal 1997. Current levels of product inventories are no longer appropriate as the Company's business continues to experience competitive pressures and to shift from a high reliance on boxed software distribution to a changing mix of boxed products and multi- product licenses. The Company will implement this reduction in channel inventory held by distributors by not shipping additional products to distributors in its third fiscal quarter of 1997, thus decreasing revenue by a corresponding amount. In the second quarter of fiscal 1997, this distribution channel accounted for approximately $100 million of revenue. The Company will assist resellers to meet customer needs by appropriately matching existing inventory in the channel to specific product demand around the globe. The decision to withhold shipments to distributors is expected to result in an operating loss in the third fiscal quarter of 1997. The workforce reduction is estimated to yield a one- time restructuring charge ranging from $25 million to $35 million in the third fiscal quarter of 1997, principally comprised of severance and excess facilities costs. 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. All equity securities included as short term investments are investments the Company has made in technology companies or equity securities received by the Company through its dispositions of certain product lines to Corel and Santa Cruz Operation, Inc. in fiscal 1996. 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 anticipated to be used for current operations and are therefore classified as current assets, even though some maturities may extend beyond one year. The following is a summary of cash and short-term investments, all of which are considered available-for-sale. Gross Gross Fair Cost at Unrealized Unrealized Market Value at (Dollars in thousands) Apr. 30, 1997 Gains Losses Apr. 30, 1997 - ---------------------------------------------------------------------------------------- Cash and cash equivalents Cash $ 107,671 $ -- $ -- $ 107,671 Repurchase agreements 2,081 -- -- 2,081 Taxable money market fund 39,383 -- -- 39,383 Municipal securities 40,405 -- -- 40,405 - ---------------------------------------------------------------------------------------- Cash and cash equivalents $ 189,540 $ -- $ -- $ 189,540 - ---------------------------------------------------------------------------------------- Short-term investments Municipal securities $ 462,131 $ 567 $ (989) $ 461,709 Money market mutual funds 82,036 -- -- 82,026 Money market preferreds 177,901 -- -- 177,901 Mutual funds 14,436 1 (23) 14,414 Equity securities 172,507 14,594 (68,585) 118,516 - ---------------------------------------------------------------------------------------- Short-term investments $ 909,001 $ 15,162 $ (69,597) $ 854,566 - ---------------------------------------------------------------------------------------- Cash and short-term investments $1,098,541 $ 15,162 $ (69,597) $1,044,106 - ----------------------------------------------------------------------------------------
Gross Gross Fair Cost at Unrealized Unrealized Market Value at (Dollars in thousands) Oct. 26, 1996 Gains Losses Oct. 26, 1996 - ------------------------------------------------------------------------------------------ Cash and cash equivalents Cash $ 77,374 $ $ $ 77,374 Repurchase agreements 4,526 4,526 Tax exempt money market fund 36,821 36,821 Municipal securities 26,800 26,800 - ------------------------------------------------------------------------------------------ Cash and cash equivalents $ 145,521 $ $ $ 145,521 - ------------------------------------------------------------------------------------------ Short-term investments Municipal securities $ 376,510 $ 1,524$ (12) $ 378,022 Money market mutual funds 78,514 78,514 Money market preferreds 224,000 224,000 Mutual funds 14,151 14 (10) 14,155 Equity securities 174,054 35,432 (24,943) 184,543 - ------------------------------------------------------------------------------------------ Short-term investments $ 867,229 $36,970 $ (24,965) $ 879,234 - ------------------------------------------------------------------------------------------ Cash and short-term investments $1,012,750 $36,970 $ (24,965) $1,024,755 - ------------------------------------------------------------------------------------------ During the first six months of fiscal 1997 the Company had realized gains of $5 million on the sale of securities compared to realized gains of $4 million in the first six months of fiscal 1996. D. Income Taxes The Company's estimated effective tax rate for the first six months of fiscal 1997 was 32.5% compared to 33.5% in the first six months of fiscal 1996. The Company paid cash amounts for income taxes of $7 million and $12 million, in the first six months of fiscal 1997 and 1996, respectively. E. Commitments and Contingencies The Company currently has a $10 million unsecured revolving bank line of credit, with interest at the prime rate. The line can be used for either letter of credit or working capital purposes. The line is subject to the terms of a loan agreement containing financial covenants and restrictions, none of which are expected to significantly affect the Company s operations. At April 30, 1997 there were no borrowings, letter of credit acceptances or commitments under such line. The Company has an additional $5 million credit facility with another bank which is not subject to a loan agreement. At April 30, 1997 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 In the first six months of fiscal 1997, the Company sold put warrants on 2 million shares of its common stock for $2 million, callable on specific dates in the third quarter of fiscal 1997, giving a third party the right to sell shares of Novell common stock to the Company at contractually specified prices. In the first six months of fiscal 1997, the Company settled put warrant obligations on 4 million shares for cash of $14 million. During the first six months of fiscal 1996, the Company sold put warrants on 9 million shares of its common stock for $12 million, callable on specific dates in the third and fourth quarters of fiscal 1996 and the first and second quarters of fiscal 1997. During the first six months of fiscal 1996, put warrant obligations on 2 million shares expired with no cash settlement required. 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. The Company expects to settle the put warrant obligations with cash and thereby eliminate the liability. As of the end of the second quarter of fiscal 1997, the cash settlement would be approximately $5 million. 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 30, 1997 and April 27, 1996, sales to international customers were approximately $302 million and $322 million, respectively. In the first six months of fiscal 1997 and fiscal 1996, 57% and 54%, 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 14% of revenue in the first six months of 1997, no customer accounted for more than 10% of revenue in any period. H. Net Income (Loss) Per Share 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 fiscal 1996, Novell sold its UnixWare and personal productivity applications product lines in exchange for significant ownership interests in the two acquiring companies. Also during fiscal 1996, the Company significantly reduced the amount of its product held by distributors by reducing shipments into the distribution channel by approximately $225 million in the second quarter. These actions significantly reduced fiscal 1996 reported revenue and make meaningful year-to-year comparisons difficult. Results of Operations Net Sales Q2 Q2 YTD YTD 1997 Change 1996 1997 Change 1996 - ------------------------------------------------------------------- Net sales (millions) $273 45% $188 $648 4% $626 =================================================================== Novell s product lines can be categorized into three areas, all within the software industry. They are server operating environments; network services; and UNIX royalties, education, service and other. While revenue increased from both the second quarter of 1996 to the second quarter of 1997 and the first six months of fiscal 1996 to the first six months of 1997, analysis of the individual product categories characterizes the changes that have occurred. Additionally, 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. The decision to not ship to the distribution channel in the second quarter of fiscal 1996 accounts for a significant portion of the computed growth between the second quarter of fiscal 1996 and the second quarter of fiscal 1997. Server operating environments revenues increased by 164% or $104 million in the second quarter of 1997 compared to the second quarter of 1996. Growth in the IntranetWare product family of $96 million or 267% growth from the second quarter of 1996 was somewhat augmented by an increase in the NetWare 3 product family of $7 million or a 26% increase from the second quarter of 1996. Network services revenues increased by 28% or $14 million in the second quarter of 1997 compared to the second quarter of 1996. The increase is mainly the result of increases in network management products of $8 million or 140% and an increase in GroupWise, the Company s electronic messaging workgroup application, of $5 million or 25%. UNIX royalties revenue decreased 49% or $9 million in the second quarter of 1997 compared to the second quarter of 1996. Education, service and other revenues decreased by $3 million or 7% in the second quarter of 1997 compared to the second quarter of 1996. The decrease was a result of lower revenues in training, with an increase in service related revenue. International sales represented 47% of total sales in the first six months of 1997 compared to 51% in the first six months of 1996. This change is a result of a 13% increase in domestic revenues compared to a 5% decrease in international revenues in the first six months of fiscal 1997 compared to the first six months of fiscal 1996.
Gross Profit Q2 Q2 YTD YTD 1997 Change 1996 1997 Change 1996 - --------------------------------------------------------------------------------------- Gross profit (millions) $196 63% $120 $495 7% $461 Percentage of net sales 72% 64% 76% 74% ======================================================================================= The gross margin percentage increased in the second quarter of fiscal 1997 compared to the second quarter of fiscal 1996 and in the first six months of fiscal 1997 compared to the first six months of fiscal 1996 due to the fixed portion of cost of sales being a higher percentage of the lower revenues in the second quarter of fiscal 1996 due to the change in the distribution stocking policy as well as to lower material costs due to an increase in licensing revenue and the decrease in sales from the lower margin personal productivity applications product line. Operating Expenses Q2 Q2 YTD YTD 1997 Change 1996 1997 Change 1996 - --------------------------------------------------------------------------------------- Sales and marketing (millions) $116 -9% $127 $244 -3% $251 Percentage of net sales 42% 68% 38% 40% Product development (millions) $ 68 -3% $ 70 $140 -5% $148 Percentage of net sales 25% 37% 22% 24% General and administrative (millions) $ 40 14% $ 35 $ 77 5% $73 Percentage of net sales 15% 18% 12% 12% Restructuring charges (millions) -- -- -- -- -- $18 Percentage of net sales -- -- -- -- 3% Total operating expenses (millions) $224 -3% $232 $461 -6% $491 Percentage of net sales 82% 123% 71% 78% ======================================================================================= Sales and marketing expenses decreased as a percentage of net sales in both the second quarter of fiscal 1997 compared to the second quarter of fiscal 1996 as well as in the first six months of fiscal 1997 compared to the first six months of fiscal 1996. The decrease as a percentage of net sales and in absolute dollars is attributable to lower marketing expenses. Sales and marketing expenses fluctuate as a percentage of net sales in any given period due to product promotions, advertising or other discretionary expenses. Product development expenses decreased as a percentage of net sales in the second quarter of fiscal 1997 compared to the second quarter of fiscal 1996 as well as in the first six months of fiscal 1997 compared to the first six months of fiscal 1996 but decreased in absolute dollars primarily due to the sale of the UnixWare and personal productivity application product lines in the first six months of fiscal 1996. General and administrative expenses decreased as a percentage of net sales in the second quarter of fiscal 1997 compared to the second quarter of fiscal 1996, while increasing in absolute dollars. General and administrative expenses remained flat as a percentage of net sales while increasing in absolute dollars in the first six months of fiscal 1997 compared to the first six months of fiscal 1996. During the first quarter of fiscal 1996 the Company incurred $18 million of tax deductible restructuring charges for redundant facilities and excess personnel as the Company prepared for the sale of its personal productivity applications product line. Overall, operating expenses, excluding nonrecurring charges, have declined while revenues have increased in both the second quarter of fiscal 1997 compared to the second quarter of fiscal 1996 as well as in the first six months of fiscal 1997 compared to the first six months of fiscal 1996. YTD YTD 1997 Change 1996 - ------------------------------------------------------------------- Employees 5,746 -2% 5,860 Annualized revenue per employee (000's) $223 21% $184 =================================================================== In fiscal 1996, the Company reduced its employment by 1,725 employees as the Company completed the sale of it s UnixWare and personal productivity applications product lines and terminated or transitioned former UnixWare and personal productivity group employees to Corel, SCO, and other third parties.
Other Income (Expense) Q2 Q2 YTD YTD 1997 Change 1996 1997 Change 1996 - ---------------------------------------------------------------------------------------- Other income (expense), net (millions) $6 -79% $29 $20 -52% $42 Percentage of net sales 2% 15% 3% 7% ======================================================================================== The primary component of other income (expense) is investment income, which was $10 million in the second quarter of fiscal 1997 compared to $11 million in the second quarter of fiscal 1996 and was $27 million in the first six months of fiscal 1997 compared to $26 million in the first six months of fiscal 1996. The relative flatness is the result of higher realized capital gains as well as higher average yields on lower average cash balances. 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 (expenses), 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 1997 Change 1996 1997 Change 1996 - ---------------------------------------------------------------------------------------- Income taxes (millions) $(7) -75% $(28) $17 325% $4 Percentage of net sales -3% -15% 3% 1% Effective tax rate 33% 34% 33% 34% ======================================================================================== Net Income (Loss) and Net Income (Loss) Per Share Q2 Q2 YTD YTD 1997 Change 1996 1997 Change 1996 - ----------------------------------------------------------------------------------------- Net income (loss) (millions) $ (15) -73% $ (55) $ 36 -20% $8 Percentage of net sales -5% -29% 6% 1% Net income (loss) per share $(.04) $(.15) $.10 -12% $.02 ========================================================================================= Liquidity and Capital Resources Q2 Q4 1997 Change 1996 - ----------------------------------------------------------------------------------------- Cash and short-term investments (millions) $1,044 2% $1,025 Percentage of total assets 52% 50% ========================================================================================= Cash and short-term investments increased to $1,044 million at April 30, 1997 from $1,025 million at October 26, 1996. The major reason for this increase was the $109 million provided by operating activities, offset by the $48 million of cash used for expenditures on property, plant and equipment, the $14 million used to settle put warrants, and the $28 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 April 30, 1997, the Company's principal unused sources of liquidity consisted of cash and short-term investments and available borrowing capacity of approximately $15 million under its credit facilities. The Company's liquidity needs are principally for the Company's financing of accounts receivable, capital assets, strategic investments and flexibility in a dynamic and competitive operating environment. During the first six months of 1997, 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. 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 1997 are anticipated to be approximately $60 million, down from the original estimate of $80 million, as the Company experienced less than previously estimated growth, and could be further reduced if the growth of the Company is less than presently anticipated.
Forward Looking Information Due to disappointing sales of boxed products by distributors and lower licensed revenue of certain older products to original equipment manufacturers (OEM s) as well as competitive pressures in the small network market, Novell will take corrective measures to realign its resources and better manage and control its business. In the second quarter of fiscal 1997, these distribution channels accounted for approximately $140 million of revenue. The Company intends to reduce product inventories in its distribution channel in the third quarter of fiscal 1997. Current levels of product inventories are no longer appropriate as the Company's business continues to experience competitive pressures and to shift from a high reliance on boxed software distribution to a changing mix of boxed products and multi-product licenses. The Company will implement this reduction in channel inventory held by distributors by not shipping additional products to distributors in its third fiscal quarter of 1997, thus decreasing revenue by a corresponding amount. The Company will assist resellers to meet customer needs by appropriately matching existing inventory in the channel to specific product demand around the globe. In addition, the Company plans to reduce its workforce by approximately 18% or 1,000 employees in the third quarter fo fiscal 1997. The decision to withhold shipments to distributors is expected to result in an operating loss in the third quarter of fiscal 1997. The workforce reduction is estimated to yield a one-time restructuring charge ranging from $25 million to $35 million in the third quarter of fiscal 1997, principally comprised of severance and excess facilities costs. 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 inventory obsolescence due to shifts in technologies or market demand; timing of software product introductions; and litigation. Novell believes that it has the product offerings, facilities, personnel, and competitive and financial resources for continued business success, but future revenues, costs, margins, product mix, and profits are all influenced by a number of factors, as discussed above. 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 May 2, 1997 for the following purposes: 1. To elect seven directors: 2. To approve and ratify the adoption of an amendment to the Novell, Inc. 1989 Employee Stock Purchase Plan to increase the shares reserved for issuance thereunder from 8,000,000 to 12,000,000. 3. To ratify the selection of Ernst & Young, LLP as independent auditors for Novell, Inc. The following tables set forth the outcome of the matters voted upon at the meeting and the number of votes cast for, against or withheld. Votes Votes Proposal 1 For Withheld - -------------------------------------------------------------------------------------- Election of Directors Eric E. Schmidt 283,827,522 8,556,903 Elaine R. Bond 282,924,981 9,459,444 Hans-Werner Hector 283,309,269 9,084,739 Jack L. Messman 282,968,469 9,415,956 Larry W. Sonsini 281,360,993 11,023,432 Ian R. Wilson 282,800,799 9,583,626 John A. Young 283,299,686 9,084,739 - -------------------------------------------------------------------------------------- Votes Votes Votes Proposal 2 For Against Withheld/Abstained - ------------------------------------------------------------------------------------- Approval and ratification of the adoption of an amendment to the Novell, Inc. 1989 Employee Stock Purchase Plan 271,753,215 19,195,071 1,436,139 - ------------------------------------------------------------------------------------- Votes Votes Votes Proposal 3 For Against Withheld/Abstained - ------------------------------------------------------------------------------------- Ratify the selection of Ernst & Young, LLP as Independent Auditors 287,912,713 3,543,404 928,308 - ------------------------------------------------------------------------------------- Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number Description 27* Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Registrant during the quarter ended April 30, 1997. - ------------------------------- *Filed herewith
SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Novell, Inc. ------------ (Registrant) Date: June 13, 1997 /s/ Dr. Eric E. Schmidt ----------------------------- Dr. Eric E. Schmidt Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: June 13, 1997 /s/ James R. Tolonen ----------------------------- James R. Tolonen Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) EX-27 2
5 6-MOS OCT-31-1997 APR-30-1997 189,540 854,566 332,507 (48,278) 18,400 1,533,150 765,951 (366,353) 1,994,900 316,908 0 0 0 34878 1,607,193 1,994,900 647,954 647,954 153,146 153,146 461,403 0 0 53,597 17,419 36,178 0 0 0 36,178 .10 .10
-----END PRIVACY-ENHANCED MESSAGE-----