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
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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
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Total current assets 1,538,150 1,590,759
Property, plant and equipment, net 399,598 394,684
Other assets 57,152 64,023
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Total assets $ 1,994,900 $ 2,049,466
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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
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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
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Total shareholders' equity 1,642,071 1,615,509
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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)
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Net cash provided from operating activities 108,756 100,054
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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)
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Net cash (used) provided by investing activities (60,216) 17,842
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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
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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
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Cash and short-term investments $1,098,541 $ 15,162 $ (69,597) $1,044,106
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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
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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
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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)