-----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, FIwcxgnE1M4WAwEhKMny/5QIkIGKVGb9xzZpY1l2a6ZNSxvwwydxnQQKX5VKRa8H dVUYdsBqOdkwXq+psYpvow== 0000758004-97-000013.txt : 19970918 0000758004-97-000013.hdr.sgml : 19970918 ACCESSION NUMBER: 0000758004-97-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19970915 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: SEC FILE NUMBER: 000-13351 FILM NUMBER: 97680370 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 July 31, 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 August 31, 1997 there were 349,569,231 shares of the registrant's common stock outstanding. /TABLE
Part I. Financial Information, Item 1. Financial Statements NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS Jul. 31, Oct. 26, Dollars in thousands, except per share data 1997 1996 - ----------------------------------------------------------------- - ----------------- ASSETS Current assets Cash and short-term investments $ 1,055,867 $1,024,755 Receivables, less allowances ($48,288 - July; $60,940 - October) 177,058 452,327 Inventories 15,668 16,837 Prepaid expenses 61,602 59,009 Deferred & refundable income taxes 142,880 37,831 - ----------------------------------------------------------------- - ------------------ Total current assets 1,453,075 1,590,759 Property, plant and equipment, net 386,144 394,684 Other assets 48,297 64,023 - ----------------------------------------------------------------- - ------------------ Total assets $ 1,887,516 $2,049,466 ================================================================= ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 64,522 $ 96,933 Accrued compensation 50,227 54,731 Accrued marketing liabilities 28,639 48,402 Other accrued liabilities 102,614 118,133 Income taxes payable -- -- Deferred revenue 63,688 46,573 - ----------------------------------------------------------------- - ------------------ Total current liabilities 309,690 364,772 Minority interests 24,311 17,035 Put warrants -- 52,150 Shareholders' equity Common stock, par value $.10 a share Authorized - 600,000,000 shares Issued - 349,205,124 shares-July 346,059,050 shares-October 34,921 34,606 Additional paid-in capital 363,951 309,831 Retained earnings 1,181,190 1,266,657 Unearned stock compensation (7,470) (4,141) Cumulative translation adjustment (110) 1,183 Unrealized gain (loss) on investments (18,967) 7,373 - ----------------------------------------------------------------- - ------------------ Total shareholders' equity 1,553,515 1,615,509 - ----------------------------------------------------------------- - ------------------ Total liabilities and shareholders' equity $ 1,887,516 $2,049,466 ================================================================= ============== See notes to consolidated unaudited condensed financial statements.
/PAGE NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS Fiscal Quarter Ended Nine Months Ended Amounts in thousands, Jul. 31, Jul. 27, Jul. 31, Jul. 27, except per share data 1997 1996 1997 1996 - ----------------------------------------------------------------- - ------------------ Net sales $ 90,074 $365,091 $738,028 $991,190 Cost of sales 61,671 75,618 214,817 240,243 - ----------------------------------------------------------------- - ------------------ Gross profit 28,403 289,473 523,211 750,947 Operating expenses Sales and marketing 97,769 124,853 341,727 375,610 Product development 69,428 60,345 209,625 208,701 General and administrative 33,711 34,299 110,959 107,568 Restructuring charges 55,335 -- 55,335 18,442 - ----------------------------------------------------------------- - ------------------ Total operating expenses 256,243 219,497 717,646 710,321 Income (loss) from operations (227,840) 69,976 (194,435) 40,626 Other income (expense) Investment income 14,619 15,558 41,154 41,715 Gain on sale of assets -- -- - -- 19,815 Other, net (4,736) (822) (11,079) (5,110) - ----------------------------------------------------------------- - ------------------ Other income, net 9,883 14,736 30,075 56,420 - ----------------------------------------------------------------- - ------------------ Income (loss) before taxes (217,957) 84,712 (164,360) 97,046 Income taxes (96,312) 25,953 (78,893) 30,085 - ----------------------------------------------------------------- - ----------------- Net income (loss) $ (121,645) $ 58,759 $ (85,467) $ 66,961 ================================================================= ============== Weighted average shares outstanding 349,381 352,129 348,127 362,052 ================================================================= ============== Net income (loss) per share $ (0.35) $ 0.17 $ (0.25) $ 0.18 ================================================================= ============== See notes to consolidated unaudited condensed financial statements.
/PAGE NOVELL, INC. CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS Nine Months Ended Jul. 31, Jul. 27, Amounts in thousands 1997 1996 - ----------------------------------------------------------------- - --------------- Cash flows from operating activities Net (loss) income $ (85,467) $ 66,961 Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation and amortization 66,582 77,970 Gain on sale of assets -- (19,815) Stock plans income tax benefits 2,970 9,964 Decrease in receivables 275,269 69,460 Decrease in inventories 1,169 10,316 (Increase) decrease in prepaid expenses (2,593) 18,827 (Increase) decrease in deferred & refundable income taxes(105,661) 11,917 (Decrease) in current liabilities, net (55,082) (127,047) - ----------------------------------------------------------------- - ----------------- Net cash provided by operating activities 97,187 118,553 - ----------------------------------------------------------------- - ----------------- Cash flows from financing activities Issuance of common stock, net 9,875 35,145 Repurchases of common stock -- (455,700) Sale of put warrants 2,300 12,195 Settlement of put warrants (20,760) -- - ----------------------------------------------------------------- - ----------------- Net cash (used) by financing activities (8,585) (408,360) - ----------------------------------------------------------------- - ----------------- Cash flows from investing activities Expenditures for property, plant and equipment (53,471) (77,249) Purchases of short-term investments (1,911,290) (2,437,316) Maturities of short-term investments 1,425,255 2,204,944 Sales of short-term investments 465,559 441,489 Proceeds from sale of assets -- 10,750 Other 22,321 (1,925) - ----------------------------------------------------------------- - ------------------ Net cash (used) provided by investing activities (51,626) 140,693 - ----------------------------------------------------------------- - ------------------ Total increase (decrease) in cash and cash equivalents $36,976 $(149,114) Cash and cash equivalents - beginning of period 145,521 312,164 - ----------------------------------------------------------------- - ----------------- Cash and cash equivalents - end of period 182,497 163,050 Short-term investments - end of period 873,370 830,662 - ----------------------------------------------------------------- - ---------------- Cash and short-term investments - end of period $1,055,867 $993,712 ================================================================= ============== See notes to consolidated unaudited condensed financial statements.
/PAGE 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 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 UNIX technology 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 ownership 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 Systems source code. 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 previous two years, direct customer and OEM licensing programs had grown from less than 5% of revenue to more than 40% of revenue. Such licensing revenues do not flow through the Company's historical indirect 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 an indirect distribution channel. In order to deal with this changing environment, the Company did not ship to its indirect distribution channel customers, except to accommodate product exchanges and returns during the second quarter of fiscal 1996, which had the effect of reducing inventories within the indirect distribution channel. In response to a further decline in sales of boxed products through the indirect distribution channel customers 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 took corrective measures during the third quarter of fiscal 1997 to realign its resources and better manage and control its business. Specifically, during the third quarter of fiscal 1997, the Company did not ship products to its indirect distribution channel customers, except to accommodate product exchanges and returns. Indirect distribution channel inventory at the already reduced 1996 levels was no longer appropriate as the Company's business continued to experience competitive pressures and a continuing shift from reliance on boxed software distribution to a changing mix of boxed products and multi-product licenses. The Company believes this action brought indirect distribution channel inventories of boxed software products in line with current market demand. In addition, the Company reduced its workforce by approximately 18% or 1,000 employees and consolidated a number of facilities. The decision to withhold shipments to the Company's indirect distributor channel resulted in an operating loss in the third fiscal quarter of 1997. In addition, a one-time restructuring charge of $55 million was incurred, principally comprised of severance and excess facilities costs. The restructuring charge contributed ($0.10) per share, net of tax, to the reported loss in the third quarter of fiscal 1997. The workforce reduction and associated consolidation of facilities, is expected to lower operating expenses by $100 million annually. 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) Jul. 31, 1997 Gains Losses Jul. 31, 1997 - ----------------------------------------------------------------- - ------------------------------------- Cash and cash equivalents Cash $ 94,237 $ -- $ -- $ 94,237 Repurchase agreements 2,859 -- -- 2,859 Taxable money market fund 20,981 -- -- 20,981 Municipal securities 64,420 -- -- 64,420 - ----------------------------------------------------------------- - ------------------------------------------- Cash and cash equivalents $ 182,497 $ -- $ -- $ 182,497 - ----------------------------------------------------------------- - -------------------------------------------- Short-term investments Municipal securities $ 463,103 $ 5,135 $ (67) $ 468,171 Money market mutual funds 6,790 -- -- 6,790 Money market preferreds 170,917 -- (17) 170,900 Mutual funds 95,089 45 -- 95,134 Equity securities 168,353 25,487 (61,465) 132,375 - ----------------------------------------------------------------- - ---------------------------------------------------------- Short-term investments $ 904,252 $ 30,667 $ (61,549) $ 873,370 - ----------------------------------------------------------------- - ------------------------------------------------ Cash and short-term investments $1,086,749 $ 30,667 $ (61,549) $1,055,867 - ----------------------------------------------------------------- - -------------------------------------------------- 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 nine months of fiscal 1997 the Company had realized gains of $8 million on the sale of securities compared to realized gains of $8 million in the first nine months of fiscal 1996. D. Income Taxes The Company's estimated effective tax rate for the first nine months of fiscal 1997 was 48.0% compared to 31.0% in the first nine months of fiscal 1996. The Company paid cash amounts for income taxes of $9 million and $15 million, in the first nine 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 July 31, 1997 there were no borrows, 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 31, 1997 standby letters of credit of approximately $300,000 were outstanding under this agreement. In August 1997, the Company entered into an agreement to lease 5 buildings being constructed on land owned by the Company in San Jose, California. The lessor of the building has committed to fund up to $157 million for construction of the buildings, with the portion of the committed amount actually utilized to be determined by the Company. Rent obligations for the buildings will commence upon the Company's occupation of the buildings in fiscal 1999. The Company may, at its option, purchase the buildings during the term of the lease at approximately the amount expended by the lessor to construct and improve the buildings. If the Company does not purchase the buildings, or arrange for the sale of the buildings, at the end of the lease, the Company will guarantee the lessor no more than 85% of the residual value of the buildings as determined at the inception of the lease. In addition, the agreement requires the Company to maintain a specific level of restricted cash to serve as collateral for the leases and maintain compliance with certain financial covenants. The 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 nine 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. 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. In the first nine months of fiscal 1997, the Company settled all of its remaining put warrant obligations on 6 million shares for cash of $21 million and therefore reversed the put warrant obligation back to additional paid-in capital. During the first nine 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 nine months of fiscal 1996, put warrant obligations on 2 million shares expired with no cash settlement required. 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 31, 1997 and July 27, 1996, sales to international customers were approximately $330 million and $498 million, respectively. In the first nine months of fiscal 1997 and fiscal 1996, 53% and 54%, respectively, of international sales were to European countries. Except for Japan, which accounted for 14% of total sales in the third quarter of fiscal 1997, no one foreign country accounted for 10% or more of total sales in any period. No customer accounted for more than 10% of revenue in any period. 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. The Company offers a wide range of network solutions for distributed network, Internet, intranet and small-business markets. 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 UNIX technology 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 ownership 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 Systems source code. 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 indirect 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 an indirect distribution channel. In order to deal with this changing environment, the Company did not ship to its indirect distribution channel customers, except to accommodate product exchanges and returns during the second quarter of fiscal 1996, which had the effect of reducing inventories within the indirect distribution channel. In response to a further decline in sales of boxed products through the indirect distribution channel customers 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 took corrective measures during the third quarter of fiscal 1997 to realign its resources and better manage and control its business. Specifically, the Company did not ship products to its indirect distribution channel customers, except to accommodate product exchanges and returns. Indirect distribution channel inventory at the already reduced 1996 levels was no longer appropriate as the Company's business continued to experience competitive pressures and a continuing shift from reliance on boxed software distribution to a changing mix of boxed products and multi-product licenses. The Company believes this action brought indirect distribution channel inventories of boxed software products in line with current market demand. In addition, the Company reduced its workforce by approximately 18% or 1,000 employees and consolidated a number of facilities. The decision to withhold shipments to the Company's indirect distributor channel resulted in an operating loss in the third fiscal quarter of 1997. In addition, a one-time restructuring charge of $55 million was incurred, principally comprised of severance and excess facilities costs. The restructuring charge contributed ($0.10) per share, net of tax, to the reported loss in the third quarter of fiscal 1997. The workforce reduction and associated consolidation of facilities, is expected to lower operating expenses by $100 million annually. Results of Operations Net Sales Q3 Q3 YTD YTD 1997 Change 1996 1997 Change 1996 - ----------------------------------------------------------------- - ---------- Net sales (millions) $90 -75% $365 $738 -26% $991 ================================================================= ===========
Novell s third quarter of fiscal 1997 revenue was reduced from recent periods primarily due to the indirect distribution channel actions described above, which the Company took in response to changing market conditions. Third quarter revenue was principally from sales to large network users through the Company's major account, corporate and volume license programs. Additionally, none of the $188 million of revenue in the second quarter of fiscal 1996 came from the indirect distribution channel. The decision to not ship to the indirect distribution channel in both the third quarter of fiscal 1997 and the second quarter of fiscal 1996 makes quarter over quarter and year over years comparisons difficult. Novell s product lines can be categorized into server operating environments; network services; UNIX royalties; and education, service and other. While revenue decreased from both the third quarter of 1996 to the third quarter of 1997 and the first nine months of fiscal 1996 to the first nine months of 1997, analysis of the individual product categories characterizes the changes that have occurred. Server operating environments revenues decreased by 82% or $177 million in the third quarter of 1997 compared to the third quarter of 1996. Both the IntranetWare product family and the NetWare 3 product family revenue decreased significantly as the Company withheld shipments to its indirect distribution channel in the third quarter of fiscal 1997. In the first nine months of fiscal 1997, server operating environments revenues decreased by 10% or $50 million over the same period in fiscal 1996. While NetWare 3 product family revenue decreased by $97 million, IntranetWare product family revenues grew by $47 million or 16% in the first nine months of fiscal 1997 compared to the first nine months of fiscal 1996. Network services revenues decreased by 74% or $68 million in the third quarter of 1997 compared to the third quarter of 1996. The decrease encompassed all product lines as the Company withheld shipments to its indirect distribution channel in the third quarter of fiscal 1997. In the first nine months of fiscal 1997, network services revenues decreased by 29% or $68 million over the same period in fiscal 1996. The decrease encompassed all product lines. UNIX royalties revenue decreased 59% or $10 million in the third quarter of 1997 compared to the third quarter of 1996. In the first nine months of fiscal 1997, UNIX royalties revenues decreased by 61% or $41 million over the same period in fiscal 1996. Education, service and other revenues decreased by $19 million or 49% in the third quarter of 1997 compared to the third quarter of 1996. The decrease was a result of lower revenues in both service related and training revenue as the Company withheld shipments to its indirect distribution channel in the third quarter of fiscal 1997. In the first nine months of fiscal 1997, education, service and other revenues decreased by 26% or $31 million over the same period in fiscal 1996. International sales represented 45% of total sales in the first nine months of 1997 compared to 50% in the first nine months of 1996. This change is a result of a 17% decrease in domestic revenues compared to a 34% decrease in international revenues in the first nine months of fiscal 1997 compared to the first nine months of fiscal 1996. Gross Profit Q3 Q3 YTD YTD 1997 Change 1996 1997 Change 1996 - ----------------------------------------------------------------- - ----------------- Gross profit (millions) $28 -90% $289 $523 -30% $751 Percentage of net sales 31% 79% 71% 76% ================================================================= =====================
The gross margin percentage decreased in the third quarter of fiscal 1997 compared to the third quarter of fiscal 1996 and in the first nine months of fiscal 1997 compared to the first nine months of fiscal 1996 due to the fixed portion of cost of sales being a higher percentage of the lower revenues in the third quarter of fiscal 1997 as the Company withheld shipments to its indirect distribution channel in the third quarter of fiscal 1997. Operating Expenses Q3 Q3 YTD YTD 1997 Change 1996 1997 Change 1996 - ----------------------------------------------------------------- - -------------------------------- Sales and marketing (millions) $ 98 -22% $125 $342 -9% $376 Percentage of net sales 109% 34% 46% 38% - ----------------------------------------------------------------- - --------------------------------- Product development (millions) $ 69 15% $ 60 $210 -- $209 Percentage of net sales 77% 16% 28% 21% - ----------------------------------------------------------------- - --------------------------------- General and administrative (millions) $ 34 $ 34 $111 3% $108 Percentage of net sales 38% -- 9% 15% 11% - ----------------------------------------------------------------- - --------------------------------- Restructuring charges (millions) $ 55 -- -- $55 205% $18 Percentage of net sales 61% -- 7% 2% - ----------------------------------------------------------------- - --------------------------------- Total operating expenses (millions) $ 256 17% $219 $718 1% $710 Percentage of net sales 284% 60% 97% 72% ================================================================= =================================
Sales and marketing expenses increased as a percentage of net sales in both the third quarter of fiscal 1997 compared to the third quarter of fiscal 1996 as well as in the first nine months of fiscal 1997 compared to the first nine months of fiscal 1996 as the Company withheld shipments to its indirect distribution channel in the third quarter of fiscal 1997. The decrease in absolute dollars is attributable to lower domestic sales expenses as well as lower corporate and product 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 increased as a percentage of net sales in the third quarter of fiscal 1997 compared to the third quarter of fiscal 1996 as well as in the first nine months of fiscal 1997 compared to the first nine months of fiscal 1996 as the Company withheld shipments to its indirect distribution channel in the third quarter of fiscal 1997. Product development expenses increased in absolute dollars in the third quarter of fiscal 1997 compared to the third quarter of fiscal 1996 while remaining flat in absolute dollars in the first nine months of fiscal 1997 compared to the first nine months of fiscal 1996. General and administrative expenses increased as a percentage of net sales in the third quarter of fiscal 1997 compared to the third quarter of fiscal 1996, while remaining flat in absolute dollars. General and administrative expenses increased as a percentage of net sales while increasing slightly in absolute dollars in the first nine months of fiscal 1997 compared to the first nine months of fiscal 1996. During the third quarter of fiscal 1997 the Company incurred $55 million of tax deductible restructuring charges for redundant facilities and excess personnel as the Company realigned its resources to better manage and control its business. 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 as revenues have decreased in both the third quarter of fiscal 1997 compared to the third quarter of fiscal 1996 as well as in the first nine months of fiscal 1997 compared to the first nine months of fiscal 1996. YTD YTD 1997 Change 1996 - ----------------------------------------------------------------- - --------------------------- Employees 4,831 -16% 5,737 Annualized revenue per employee (000's) $184 -7% $198 ================================================================= =============================
In the third quarter of fiscal 1997, the Company reduced its employment by approximately 1,000 employees as the Company realigned its resources to better manage and control its business. 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) Q3 Q3 YTD YTD 1997 Change 1996 1997 Change 1996 - ----------------------------------------------------------------- - ----------------------------------------- Other income (expense), net (millions) $10 -33% $15 $30 -46% $56 Percentage of net sales 11% -- 4% 4% 6% ================================================================= =====================================
The primary component of other income (expense) is investment income, which was $15 million in the third quarter of fiscal 1997 compared to $16 million in the third quarter of fiscal 1996 and was $41 million in the first nine months of fiscal 1997 compared to $42 million in the first nine months of fiscal 1996. The relative flatness is the result of 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 Q3 Q3 YTD YTD 1997 Change 1996 1997 Change 1996 - ----------------------------------------------------------------- - ---------------------------------------- Income taxes (millions) $(96) -469% $26 $ (79) -363% $30 Percentage of net sales -106% 7% -11% 3% Effective tax rate 44% 31% 48% 31% ================================================================= =======================================
The effective tax rate increased from 31% in fiscal 1996 to 48% in fiscal 1997 due to the loss from operations in fiscal 1997. Net Income (Loss) and Net Income (Loss) Per Share Q3 Q3 YTD YTD 1997 Change 1996 1997 Change 1996 - ----------------------------------------------------------------- - ----------------------------------- Net income (loss) (millions) $(122) -307% $59 $(85) -227% $67 Percentage of net sales -136% 16% - -12% 7% Net income (loss) per share $(.35) -306% $ .17 $(.25) -239% $.18 ================================================================= ====================================
Liquidity and Capital Resources Q3 Q4 1997 Change 1996 - ----------------------------------------------------------------- - --------------------------------------- Cash and short-term investments (millions) $1,056 3% $1,025 Percentage of total assets 56% 50 ================================================================= =======================================
Cash and short-term investments increased to $1,056 million at July 31, 1997 from $1,025 million at October 26, 1996. The major reason for this increase was the $97 million provided by operating activities, offset primarily by the $53 million of cash used for expenditures on property, plant and equipment, and the $9 million used by financing 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 31, 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 nine 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. Borrows 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. 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 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 31, 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: September 11, 1997 /s/ Dr. Eric Schmidt Dr. Eric Schmidt Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: September 11, 1997 /s/ James R. Tolonen James R. Tolonen Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) EX-27 2
5 9-MOS OCT-31-1997 JUL-31-1997 182,497 873,370 177,058 (48,288) 15,668 1,453,075 765,523 (379,379) 1,887,516 309,690 0 0 0 34,921 1,518,594 1,887,516 90,074 90,074 61,671 61,671 256,243 0 0 (217,957) (96,312) (121,645) 0 0 0 (121,645) (.35) (.35)
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