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
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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
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Total current assets 1,516,686 1,925,182
Property, plant and equipment, net 381,405 390,452
Other assets 49,350 101,196
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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
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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
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Total shareholders' equity 1,506,484 1,938,262
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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
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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 --
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Total operating expenses 219,497 278,166 710,321 818,924
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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
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Other income, net 14,736 19,176 56,420 45,278
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Income before taxes 84,712 153,332 97,046 420,079
Income taxes 25,953 51,366 30,085 140,726
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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
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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
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Net cash provided from operating activities 118,553 350,355
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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 --
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Net cash (used) provided from financing activities (408,360) 48,974
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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
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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
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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
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Short-term investments $ 815,210 $13,922 $ -- $ 829,132
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Cash and short-term investments $ 979,790 $13,922 $ -- $ 993,712
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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
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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
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Cash and short-term investments $1,283,108 $38,123 $ -- $1,321,231
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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)