<PAGE>
<TABLE> <C>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
<C>
Form 10-Q
<S>
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Quarter Ended January 29, 1994
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
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Provo, Utah 84606
(Address of principal executive offices and zip code)
(801) 429-7000
(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 February 26, 1994 there were 309,668,991 shares of the registrant's
common stock outstanding.
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Part I. Financial Information, Item 1. Financial Statements
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NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS
<S> <C> <C>
Dollars in thousands,except per share data Jan. 29, 1994 Oct. 30, 1993
ASSETS
Current assets
Cash and cash equivalents $ 430,556 $ 328,469
Short-term investments 335,028 335,601
Receivables, less allowances
($50,410 - January; $44,266 - October) 301,947 331,662
Other 67,048 56,474
Total current assets 1,134,579 1,052,206
Property, plant and equipment, net 216,121 216,849
Other assets 88,255 74,800
Total assets $1,438,955 $1,343,855
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable 31,088 38,794
Accrued salaries and wages 40,781 53,756
Accrued marketing liabilities 28,784 29,892
Other accrued liabilities 41,609 41,566
Income taxes payable 58,877 50,588
Deferred revenue 16,685 15,839
Total current liabilities 217,824 230,435
Deferred income taxes 23,992 --
Minority interests 11,629 10,205
Put warrants -- 106,716
Shareholders' equity
Common stock, par value $.10 a share
Authorized - 400,000,000 shares
Issued - 309,021,297 shares-January
308,050,977 shares-October 30,902 30,805
Additional paid-in capital 525,430 411,064
Retained earnings 635,052 562,238
Unearned stock compensation (7,800) (9,814)
Cumulative translation adjustment 1,926 2,206
Total shareholders' equity 1,185,510 996,499
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Total liabilities and shareholders' equity $1,438,955 $1,343,855
See notes to consolidated unaudited condensed financial statements.
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NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF INCOME
<C>
Fiscal Quarter Ended
<S> <C> <C>
Amounts in thousands, Jan. 29, Jan. 30,
except per share data 1994 1993
Net sales $311,384 $260,174
Cost of sales 64,140 50,451
Gross profit 247,244 209,723
Operating expenses
Sales and marketing 69,219 53,585
Product development 56,530 34,245
General and administrative 22,814 21,047
148,563 108,877
Income from operations 98,681 100,846
Other income (expense)
Investment income 10,949 6,902
Other, net (136) (351)
10,813 6,551
Income before taxes 109,494 107,397
Income taxes 36,680 36,515
Net income $ 72,814 $70,882
Net income per share $ 0.23 $0.23
Weighted average shares outstanding 313,937 310,858
See notes to consolidated unaudited condensed financial statements.
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NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<C>
Fiscal Quarter Ended
<S> <C> <C>
Jan. 29, Jan. 30,
Amounts in thousands 1994 1993
Cash flows from operating activities
Net income $72,814 $70,882
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation and amortization 12,793 8,934
Stock plans income tax benefits 7,012 26,979
Minority interest in earnings 651 467
Decrease in receivables 29,715 2,605
Decrease (increase) in other current assets (10,574) 2,552
(Decrease) in accounts payable (7,706) (10,521)
(Decrease) in accrued salaries and wages (12,975) (8,556)
(Decrease) increase in accrued
marketing liabilities (1,108) 10,067
Increase (decrease) in other accrued
liabilities 43 (1,886)
Increase in income taxes payable 8,289 6,029
Increase in deferred revenue 846 638
99,800 108,190
Cash flows from financing activities
Issuance of common stock, net 4,281 12,260
Settlement of put warrants (2,278) -
Proceeds from minority interests investment 773 392
2,776 12,652
Cash flows from investing activities
Expenditures for property, plant
and equipment (11,319) (13,247)
Decrease (increase) in short-term investments 573 (75,478)
Other 10,257 (1,931)
(489) (90,656)
<PAGE>
Summary
Increase in cash and cash equivalents 102,087 30,186
Cash and cash equivalents -
beginning of period 328,469 259,933
Cash and cash equivalents - end of period $430,556 $290,119
See notes to consolidated unaudited condensed financial statements.
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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 1993 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. Mergers, Acquisitions, and Strategic Investments
In April 1991, the Company purchased a minority equity position in UNIX
System Laboratories, Inc., (USL) a subsidiary of AT&T that develops and
licenses the UNIX operating system and other standards-based software to
vendors worldwide. This cash investment of $15.0 million was accounted for
using the cost method. Later, in December 1991, the Company announced the
formation of Univel, a 55% owned joint venture with USL, formed to
accelerate the expanded use of the UNIX operating system in the personal
computer and network computing marketplace. Novell and USL contributed
cash and technology rights to Univel. In June 1993, the Company acquired
the remaining unowned portion of USL by issuing approximately 11.1 million
shares of Novell common stock valued at $321.8 million in exchange for all
of the outstanding stock of USL not previously owned by Novell and assumed
additional liabilities of $9.4 million. The transaction was accounted for
as a purchase and, on this basis a one-time write-off of $268.7 million for
purchased research and development was incurred.
Univel has been included in the consolidated financial statements of Novell
since December 1991 by virtue of Novell's 55% ownership interest. That
ownership interest is now 100% since the June 1993 acquisition of USL,
whereby both USL and Univel are now included in the consolidated financial
statements of Novell.
In June 1993, the Company purchased all of the outstanding stock not
previously owned by Novell of Serius Corporation (Serius), a developer of
object-based application tools, for $17.0 million cash and assumed
<PAGE>
liabilities of $5.0 million, whereby Serius became a wholly owned
subsidiary of Novell. Novell's previous ownership was a $1.1 million cash
investment. The transaction was accounted for as a purchase and on this
basis, resulted in a one-time write-off of $22.1 million in the third
quarter of fiscal 1993.
In June 1993, the Company acquired all of the outstanding stock of Software
<PAGE>
Transformation, Inc. (STI), a developer of software development tools, by
issuing approximately 800,000 shares of Novell Common stock in exchange for
all of the outstanding stock of STI. The transaction was accounted for as
a pooling of interests, however, prior periods were not restated due to
immateriality.
</PAGE>
<PAGE>
In July 1993, the Company acquired all of the outstanding stock of Fluent,
Inc. (Fluent), a developer of multimedia software for personal computers,
for $18.5 million cash and assumed liabilities of $3.0 million, whereby
Fluent became a wholly owned subsidiary of Novell. The transaction was
accounted for as a purchase and, on this basis, resulted in a one-time
write-off of $20.7 million in the third quarter of fiscal 1993.
C. Income Taxes
The Company's estimated effective tax rate for the first quarter of fiscal
1994 was 33.5%. The estimated tax rate for fiscal 1994 is equal to the
fiscal 1993 rate, excluding the one-time charge related to purchased
research and development in the third quarter of fiscal 1993, which was not
deductible for income tax purposes. The Company paid cash amounts for
income taxes of $14.5 million and $5.6 million, in the first quarter of
fiscal 1994 and 1993, respectively.
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes. The Company adopted the provisions of SFAS No. 109 effective
October 31, 1993 for fiscal year 1994. As permitted under the new rules,
prior years financial statements have not been restated.
SFAS No. 109, requires the use of the liability method of accounting for
deferred income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected
to reverse.
Prior to the adoption of SFAS No. 109, income tax expense was determined
using the deferred method (APB 11). Deferred tax expense was based on items
of income and expense that were reported in different years in the
financial statements and tax returns and were measured at the tax rate in
effect in the year the difference originated. Adoption of SFAS No. 109 had
no material impact on the financial statements of the Company.
<PAGE>
At the beginning of fiscal 1994, deferred tax asset and liabilities under
SFAS No. 109 were comprised of the following (in thousands):
Deferred tax assets:
Receivable valuation accounts $14,767
Inventory reserves 4,101
Advertising accruals 2,557
<PAGE>
Compensation and benefits accruals 4,160
Loss carryforwards 17,831
Other, net 3,797
Total deferred tax assets 47,213
Valuation allowance (9,017)
Deferred tax assets $38,196
Deferred tax liabilities:
Difference in book and tax bases of
intangible assets $25,157
Total deferred tax liabilities $25,157
Net deferred tax assets $13,039
</PAGE>
<PAGE>
D. Commitments and Contingencies
The Company currently has a $10.0 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 January 29, 1994, there were no borrowings,
letter of credit acceptances, or commitments under such line.
The Company has an additional $10.0 million credit facility with another
bank which is not subject to a loan agreement. At January 29, 1994,
standby letters of credit of $275,000 were outstanding under this
agreement.
On November 10, 1993, a suit was filed against Novell and certain of its
officers and directors alleging violation of federal securities laws.
The lawsuit was brought as a purported class action on behalf of
purchasers of Novell common stock from June 23, 1993 through July 26,
1993. Although the case is in its earliest stages, Novell does not
believe that the resolution of this legal matter will have a material
adverse effect on its financial position or results of operations.
In December of 1991, Roger Billings and his International Academy of
Science, (the Academy) filed suit against Novell alleging that the
Company infringes on a patent allegedly owned by the Academy. The case
is still in its pretrial phase. The Company believes that the ultimate
resolution of this legal proceeding will not have a material adverse
effect on its financial position or results of operations.
<PAGE>
The Company is a party to a number of additional legal proceedings
arising in the ordinary course of its business. The Company believes
the ultimate resolution of these claims will not have a material adverse
effect on its financial position or results of operations.
E. Put Warrants
<PAGE>
During fiscal 1993, the Company sold put warrants on 5.0 million shares
of its stock, callable on specific dates in the first quarter of fiscal
1994, giving third parties the right to sell shares of Novell common
stock to the Company at contractually specified prices. The put warrant
balance on the balance sheet at October 30, 1993 is the amount the
Company would have been obligated to pay if all the put warrants were
exercised at the strike price without a cash-out settlement. During the
first quarter of fiscal 1994, the Company settled all of its put warrant
obligations for cash of $2.3 million and therefore reversed the put
warrant obligation back to paid-in capital.
</PAGE>
<PAGE>
F. Export Sales
The Company markets internationally through distributors who sell to
dealers and end users. For the fiscal quarters ended January 29, 1994
and January 30, 1993, export sales to foreign customers were
approximately $146.6 million and $130.4 million, respectively. In the
first quarters of fiscal 1994 and fiscal 1993, 62% and 67%,
respectively, of export sales were to European countries. Except for
Germany, which accounted for 18% of revenue in the first quarter of
fiscal 1993, no one foreign country accounted for 10% or more of total
sales in either period. Except for one multi-national distributor,
which accounted for 10% of revenue in the first quarter of 1994 and 12%
of revenue in the first quarter of fiscal 1993, no customer accounted
for more than 10% of revenue in any period.
G. 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.
</PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
Novell's business strategy is to be a leading supplier of software
products for the network computing industry. Over the past several years, in
addition to its internal growth, the Company has issued common stock or paid
<PAGE>
cash to acquire technology companies, invested cash in other technology
companies, and formed strategic alliances with still other technology
companies. Novell undertook all of these transactions to promote the growth
of the network computing industry, and in many cases to also broaden the
Company's business as a system software supplier.
In April 1991, the Company invested $15.0 million in UNIX System
<PAGE>
Laboratories, Inc. (USL), a subsidiary of AT&T that develops and licenses the
UNIX operating system and other standards-based software to customers
worldwide. In December 1991, the Company announced the formation of Univel, a
joint venture with USL, formed to accelerate the expanded use of the UNIX
operating system in the personal computer and network computing marketplace.
Novell and USL contributed cash and technology rights to Univel. Then in June
1993, the Company acquired the remaining portion of USL by issuing
approximately 11.1 million shares of Novell common stock valued at $321.8
million in exchange for all of the outstanding stock of USL not previously
owned by Novell and assumed additional liabilities of $9.4 million. The
transaction was accounted for as a purchase and, on this basis, resulted in a
one-time write-off of $268.7 million for purchased research and development in
the third quarter of fiscal 1993.
In June 1993, the Company purchased all of the outstanding stock not
previously owned by Novell of Serius Corporation (Serius), a developer of
object-based application tools, for $17.0 million cash and assumed liabilities
of $5.0 million, whereby Serius became a wholly owned subsidiary of Novell.
Novell previously had invested cash of $1.1 million in Serius. This
transaction was accounted for as a purchase and, on this basis, resulted in a
one-time write-off of $22.1 million for purchased research and development in
the third quarter of fiscal 1993.
In June 1993, the Company acquired all of the outstanding stock of
Software Transformation, Inc. (STI), a developer of software development
tools, by issuing approximately 800,000 shares of Novell common stock in
exchange for all of the outstanding stock of STI. The transaction was
accounted for as a pooling of interests, however, prior periods were not
restated due to immateriality.
In July 1993, the Company acquired all of the outstanding stock of
Fluent, Inc. (Fluent), a developer of multimedia software for personal
computers, for $18.5 million cash and assumed liabilities of $3.0 whereby
Fluent became a wholly owned subsidiary of Novell. The transaction was
accounted for as a purchase and, on this basis resulted in a one-time write-
off of $20.7 million for purchased research and development in the third
quarter of fiscal 1993.
</PAGE>
<PAGE>
The Company will continue to look for similar acquisitions, investments,
or strategic alliances which it believes complement its overall business
strategy.
Results of Operations
<PAGE>
Net Sales
Q1 Q1
1994 Change 1993
Net sales (millions) $311.4 20% $260.2
<PAGE>
The growth in net sales in the first quarter fiscal 1994 compared to the
first quarter of fiscal 1993 is the result of volume increases in the
Company's NetWare 4, NetWare 3, NetWare J, software
royalties, training, and connectivity products, offset by volume decreases in
NetWare 2, NetWare SFT III, network management products, hardware royalties
and UnixWare. The shift to high-end networking products has occurred as
customers shift to network-based computing solutions that rely on NetWare
network services. In addition, approximately 8% of the growth in the first
quarter of fiscal 1994 compared to the first quarter of fiscal 1993 is
attributable to the acquisition of USL in mid-June 1993 as its revenue was not
included in the first quarter of fiscal 1993.
Net sales were also favorably affected by growth in both domestic and
international sales in the first quarter of fiscal 1994 compared to the first
quarter of fiscal 1993. Domestic sales grew more rapidly than international
sales in the first quarter of fiscal 1994 compared to the first quarter of
1993 due to the strength of the U.S. economy. Export sales were approximately
47% of net sales in the first quarter of fiscal 1994 compared to 50% the first
quarter of 1993, however, they still grew at a rate of 12%. The rate of
export sales growth began to slow down in late fiscal 1992, primarily due to
an economic slowdown in Europe. However, despite this slowdown in Europe, the
Company expects that total export sales will continue to grow during the
remainder of fiscal 1994 because of growth in non-European markets.
Gross Profit Q1 Q1
1994 Change 1993
Gross profit (millions) $247.2 18% $209.7
Percentage of net sales 79.4% 80.6%
The gross margin percentage decreased in the first quarter of fiscal 1994
compared to the first quarter of fiscal 1993. The slight decrease between
years is attributable to higher costs related to product transitions and to
the amortization of purchased software acquired in the USL acquisition.
Future fluctuations in the gross profit margin will be primarily attributable
to price changes, changes in sales mix by product or distribution channel, and
special product promotions. The Company expects the gross profit margin in
fiscal 1994 to be down slightly compared to the gross profit margin in fiscal
1993 due to the continued amortization of the purchased software described
above.
Operating Expenses
Q1 Q1
1994 Change 1993
Sales and marketing (millions) $69.2 29% $53.6
Percentage of net sales 22.2% 20.6%
<PAGE>
Product development (millions) $56.5 65% $34.2
Percentage of net sales 18.2% 13.1%
General and administrative (millions) $22.8 8% $21.1
Percentage of net sales 7.3% 8.1%
Total operating expenses (millions) $148.6 36% $108.9
Percentage of net sales 47.7% 41.8%
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Sales and marketing expenses increased slightly as a percentage of net
sales in the first quarter of fiscal 1994 compared to the first quarter of
fiscal 1993. The increase is attributable to relatively higher international
selling expenses and higher marketing expenses. Sales and marketing expenses
may increase due to product promotions.
Product development expenses increased as a percentage of net sales in the
first quarter of fiscal 1994 compared to the first quarter of fiscal 1993 as a
result of the acquisitions in fiscal 1993 and from planned headcount increases
in an effort to increase the Company's investment in new products. The
acquisitions have relatively higher product development expenses as a
percentage of net sales.
General and administrative expenses remained flat as a percentage of net
sales in the first quarter of fiscal 1993 compared to the first quarter of
fiscal 1993. Even though these expenses were flat between years, the first
quarter of fiscal 1994 had relatively higher legal fees and lower bad debt
expense compared to the first quarter of fiscal 1993. These changes tended to
offset each other.
Overall, operating expenses have grown more rapidly than revenues in the
first quarter of fiscal 1994 compared to the first quarter of fiscal 1993 due
to the acquisitions in fiscal 1993. Headcount growth has remained consistent
with revenue growth as the Company took steps to make the organization more
efficient subsequent to the acquisitions.
Q1 Q1
1994 Change 1993
Employees 4,372 18% 3,709
Annualized revenue per employee (000's) $283 - $283
Other Income (Expense)
Q1 Q1
1994 Change 1993
Other income (expense), net (millions) $10.8 64% $6.6
Percentage of net sales 3.5% 2.5%
The primary component of other income (expense) is investment income,
which was $10.9 million in the first quarter of fiscal 1994 compared to $6.9
million in the first quarter of fiscal 1993. The increases are the result of
a larger investment portfolio and capital gains related to the sale of some of
the Company's holdings in Gupta Technologies, Inc. In order to achieve
potentially higher returns, a limited portion of the Company's investment
<PAGE>
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.
</PAGE>
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Income Taxes
Q1 Q1
1994 Change 1993
Income taxes (millions) $36.7 1% $36.5
Percentage of net sales 11.8% 14.0%
Effective tax rate 33.5 34.0%
The Company's estimated effective tax rate for fiscal 1994 remained at
33.5% which is equal to the fiscal 1993 rate, excluding the effect of the one-
time write-off of purchased research and development in fiscal 1993, which was
not tax deductible.
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes, in the first quarter of fiscal 1994.
Adoption of SFAS No. 109 had no material effect on the financial statements of
the Company.
Liquidity and Capital Resources
Cash and short-term investments increased to $765.6 million at January 29,
1994 from $664.1 million at October 30, 1993. The major reasons for this
increase were the $99.8 million of cash provided by operating activities and
the $2.8 million provided by financing activities, offset by the $500,000 used
by investing activities. The investment portfolio is diversified among
security types, industry groups, and individual issuers. The Company's
principal sources of liquidity have been derived from product sales, sales of
the Company's securities, and available lines of credit. At January 29, 1994,
the Company's principal unused sources of liquidity consisted of cash and
short-term investments and available borrowing capacity of approximately $19.7
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 1994 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 1994 are
anticipated to be approximately $80 million, but could be reduced if the
growth of the Company is less than presently anticipated.
Part II. Other Information
<PAGE>
All information required by items in Part II is omitted because the items are
inapplicable, the answer is negative or substantially the same information has
been previously reported by the registrant.
</PAGE>
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<PAGE>
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 March 10, 1993 /s/ Raymond J. Noorda
Raymond J. Noorda
Chairman of the Board,
President, and Chief
Executive Officer
(Principal Executive Officer)
Date March 10, 1993 /s/ James R. Tolonen
James R. Tolonen
Office of the President and Chief
Financial Officer
(Principal Financial
and Accounting Executive Officer)
</PAGE>
<PAGE>
