<PAGE>
<TABLE>
<C>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 July 30, 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
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 August 26, 1994 there were 363,047,498 shares of the registrant's
common stock outstanding.
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<TABLE>
Part I.
Financial Information, Item 1. Financial Statements
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS
<S> <C> <C>
Dollars in thousands, except per share data Jul. 30, 1994 Oct. 30, 1993
ASSETS
Current assets
Cash and cash equivalents $ 167,155 $ 383,596
Short-term investments 590,931 335,601
Receivables, less allowances ($80,020 - July; $50,202 - October) 384,197 395,334
Inventories 30,468 29,833
Prepaid expenses 72,476 40,076
Deferred taxes 86,872 72,969
Total current assets 1,332,009 1,257,409
Property, plant and equipment, net 406,840 403,752
Other assets 124,538 84,176
Total assets $1,863,387 $1,745,337
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 2,254 $ 9,436
Accounts payable 57,745 75,470
Accrued salaries and wages 62,930 69,061
Accrued marketing liabilities 63,966 51,553
Other accrued liabilities 106,370 103,204
Income taxes payable 61,837 55,589
Deferred revenue 40,514 33,788
Total current liabilities 395,616 398,101
Long-term debt -- 84,289
Deferred income taxes 10,814 --
Minority interests 13,215 10,205
Put warrants -- 106,716
Shareholders' equity
Common stock, par value $.10 a share
Authorized - 400,000,000 shares
Issued - 362,740,872 shares-July
359,431,077 shares-October 36,274 35,943
Additional paid-in capital 626,559 485,253
Retained earnings 781,989 635,551
Unearned stock compensation (5,867) (9,814)
Cumulative translation adjustment 4,787 (907)
Total shareholders' equity 1,443,742 1,146,026
Total liabilities and shareholders' equity $1,863,387 $1,745,337
See notes to consolidated unaudited condensed financial statements.
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<TABLE>
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<S> <C> <C> <C> <C>
Fiscal Quarter Ended Nine Months Ended
Amounts in thousands, Jul. 30, Jul. 31, Jul. 30, Jul. 31,
except per share data 1994 1993 1994 1993
Net sales $488,924 $433,872 $1,512,132 $1,321,194
Cost of sales 105,504 101,462 354,678 284,843
Gross profit 383,420 332,410 1,157,454 1,036,351
Operating expenses
Sales and marketing 145,713 142,452 398,594 369,307
Product development 90,619 75,490 257,079 209,554
General and administrative 37,191 38,177 123,582 118,402
Write-off of purchased research
and development 114,420 314,501 129,389 314,501
Restructuring charges -- 42,000 -- 42,000
387,943 612,620 908,644 1,053,764
Income (loss) from operations (4,523) (280,210) 248,810 (17,413)
Other income (expense)
Investment income 7,062 6,615 25,923 19,806
Merger expenses (5,778) -- (5,778) --
Other, net (1,501) 1,063 (2,440) 3,225
(217) 7,678 17,705 23,031
Income (loss) before taxes (4,740) (272,532) 266,515 5,618
Income taxes (275) (15,111) 80,156 67,681
Net income (loss) $(4,465) $(257,421) $186,359 $(62,063)
Net income (loss) per share $(0.01) $(0.69) $ 0.51 $(0.17)
Weighted average shares outstanding 368,313 372,379 368,290 366,923
Pro forma data:
Income (loss) before taxes $(4,740) $(272,532) $266,515 $ 5,618
Income taxes (275) 13,396 95,704 106,990
Net income (loss) $(4,465) $(285,928) $170,811 $(101,372)
Net income (loss) per share $(0.01) $(0.77) 0.46 $(0.28)
See notes to consolidated unaudited condensed financial statements.
</TABLE>
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<TABLE>
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<S> <C> <C>
Nine Months Ended
Jul. 30, Jul. 31,
Amounts in thousands 1994 1993
Cash flows from operating activities
Net income (loss) $186,359 $(62,063)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities
Write-off of purchased research & development 129,389 314,501
Depreciation and amortization 62,531 55,301
Restructuring charges -- 42,000
Elimination of duplicate net income from WordPerfect (39,856) --
Stock plans income tax benefits 16,862 43,141
Minority interest in earnings (loss) 974 (781)
Decrease (increase) in receivables 11,137 (36,101)
(Increase) decrease in inventories (635) (4,059)
(Increase) decrease in prepaid expenses (32,400) (10,851)
(Increase) in deferred taxes (50,387) (50,662)
(Decrease) in accounts payable (17,725) (11,567)
(Decrease) in accrued salaries and wages (6,131) 13,726
Increase in accrued marketing liabilities 12,413 7,970
Increase in other accrued liabilities 3,166 8,709
Increase (decrease) in income taxes payable 6,248 6,608
Increase (decrease) in deferred revenue 6,726 2,181
288,671 318,053
Cash flows from financing activities
Borrowings 26,809 --
Repayment of debt (118,280) (8,636)
Issuance of common stock, net 21,491 31,624
Distribution to shareholders (65) (20,211)
Repurchase of treasury stock -- (60,556)
Sale/settlement of put warrants (2,278) 1,975
(72,323) (55,804)
Cash flows from investing activities
Expenditures for property, plant and equipment (62,826) (87,801)
(Increase) in short-term investments (255,330) 163,716
Cash from acquisitions using common stock -- 37,242
Cash paid for acquisitions (110,000) (35,500)
Other (4,633) (2,848)
(432,789) 74,809
Summary
Increase in cash and cash equivalents (216,441) 337,058
Cash and cash equivalents - beginning of period 383,596 346,562
Cash and cash equivalents - end of period $167,155 $683,620
See notes to consolidated unaudited condensed financial statements.
</TABLE>
</PAGE>
<PAGE>
<PAGE>
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 historical consolidated financial statements of
Novell, Inc. (Novell) and WordPerfect Corporation (WordPerfect). 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
On June 24, 1994 Novell completed a merger with WordPerfect, a developer
of application software for personal computers, whereby WordPerfect was
merged directly into Novell. Novell issued common stock in exchange for
all of the outstanding common stock of WordPerfect. In addition,
outstanding employee stock options to purchase WordPerfect common stock
were converted into options to purchase approximately 7.8 million shares
of Novell common stock. The transaction was accounted for as pooling of
interests and therefore, the consolidated unaudited financial statements
for all periods presented herein have been restated to reflect the
combination of Novell and WordPerfect.
WordPerfect had a calendar year end and, accordingly the WordPerfect
statement of income for the year ended December 31, 1993 has been combined
with the Novell statement of operations for the fiscal year ended October
30, 1993. In order to conform WordPerfect's year end to Novell's fiscal
year end, the consolidated unaudited condensed statement of operations for
the nine months ended July 30, 1994 includes two months (November and
December 1993) for WordPerfect, which are also included in the
consolidated statement of operations for the year ended October 30, 1993.
Accordingly, an adjustment has been made in the nine months ended July 30,
1994 to retained earnings for the duplication of net income of $39.9
million for such two month period. Other results for such two month
period of WordPerfect include net sales of $136.6 million, income before
taxes of $34.6 million and an income tax benefit of $5.3 million. The
consolidated financial statements for the nine months ended July 31, 1993
combine Novell's financial statements for the nine months ended July 31,
1993 with the WordPerfect's financial statements for the nine months ended
September 30, 1993.
Additionally in June 1994, the Company acquired Borland International,
Inc.'s QuattroPro spreadsheet product line for $110 million of cash and
assumed liabilities of $10 million, and a three-year license to reproduce
and distribute up to one million copies of current and future versions of
Borland's Paradox relational database product for $35 million of cash.
The transaction was accounted for as a purchase and, on this basis,
resulted in a one-time tax deductible write-off of $114.4 million for
purchased research and development in the third quarter of fiscal 1994.
</PAGE>
<PAGE>
<PAGE>
In January 1994, WordPerfect acquired all of the outstanding stock of
SoftSolutions Technology Corporation (SoftSolutions), a developer of
network document management software, for $5.8 million of cash and notes
payable of $9.2 million. The transaction was accounted for as a purchase
and, on this basis, resulted in a one-time write-off of $15.0 million for
purchased research and development in the first quarter of fiscal 1994.
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 of 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 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 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 of cash and assumed
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 for purchased
research and development in the third quarter of fiscal 1993.
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.
/PAGE
<PAGE>
<PAGE>
C. Income Taxes
Effective January 1, 1993, WordPerfect adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes.
Under SFAS 109, the liability method is used in accounting for income
taxes. Under this method, deferred tax assets and liabilities are
determined based on the differences between financial reporting and the
tax basis 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 September 30, 1993, WordPerfect elected to be taxed as an S
corporation whereby the income tax effects of WordPerfect's activities
accrued directly to its shareholders; therefore, adoption of SFAS 109
required no establishment of corporate deferred income taxes. WordPerfect
and its affilitated entities terminated their S corporation elections on
either September 30, 1993 or December 31, 1993. As a result, deferred
income taxes under the provisions of SFAS 109 were established on the
dates the S corporation elections were terminated.
Novell adopted the provisions of SFAS 109 effective October 31, 1993 for
fiscal year 1994. As permitted under the new rules, prior years financial
statements have not been restated. Adoption of SFAS 109 had no material
effect on the financial statements of Novell.
The Company's estimated effective tax rate for the first nine months of
fiscal 1994 is 30%. Excluding non-tax deductible one-time charges related
to the write-off of purchased research and development of $15.0 million in
fiscal 1994 and $314.5 million in fiscal 1993 and adjusting both periods
to reflect a provision for income taxes as if WordPerfect and its S
corporation subsidiaries had been C corporations, the Company's estimated
effective tax rate for the first nine months of fiscal 1994 would be 34%
compared to 33.4% for the first nine months of fiscal 1993. The increase
is attributable to non-tax deductible merger expenses. The Company paid
cash amounts for income taxes of $108.5 million and $60.2 million, in the
first nine months of fiscal 1994 and 1993, respectively.
D. Debt
At the time of the merger, WordPerfect had long-term notes payable to
shareholders of $78 million and other short and long-term debt of $40
million, all of which was paid before July 30, 1994.
E. Commitments and Contingencies
On November 10, 1993, a suit was filed against Novell and certain of its
officers and directors alleging violation of federal securities laws.
Another lawsuit alleging similar claims was filed August 26, 1994. Both
lawsuits were brought as purported class actions on behalf of purchasers
of Novell common stock. Novell does not believe that the resolution of
these legal matters will have a material adverse effect on its financial
position or results of operations.
In December 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. On June 6, 1994,
Novell filed a petition with the U.S. Patent and Trademark office
requesting that it invalidate the patent. In August 1994, the Patent
Office granted Novell's request for re-examination of the patent, finding
a "substantial new question of patentability". Also, in August of 1994,
the trial court issued a ruling, which among other things, vacated the
trial date which had been previously set in the action. 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.
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.
F. Put Warrants
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.
G. Export Sales
The Company markets internationally through distributors who sell to
dealers and end users. For the nine months ended July 30, 1994 and July
31, 1993, sales to international customers were approximately $632.6
million and $535.4 million, respectively. In the first nine months of
fiscal 1994 and fiscal 1993, 64% and 67%, respectively, of interntional
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 13% of revenue in the first nine
months of 1994 and 14% of revenue in the first nine months of fiscal 1993,
no customer accounted for more than 10% of revenue in any period.
H. Restructuring Charges
In the third quarter of fiscal 1993, the Company recorded a $42.0 million
nonrecurring charge to restructure and streamline its operations. This
provision includes employee severance costs, the write down of assets to
estimated realizable values, outside professional fees and other expenses
associated with the restructuring plan.
I. Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number
of common shares outstanding during the periods, including common stock
equivalents (unless antidilutive). Common stock equivalents consist of
outstanding stock options.
J. Pro Forma Data
The consolidated unaudited condensed statement of operations include a pro
forma presentation for income taxes which would have been recorded if
WordPerfect had been a C corporation for all periods presented.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
Novell is a leading developer of network services, specialized and general
purpose operating system products, both standalone and network applications,
and programming tools. Over the past several years, in addition to its
internal growth, the Company has issued common stock or paid 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 to also broaden the Company's business as a system software
supplier.
On June 24, 1994 Novell, Inc. (Novell) completed a merger with WordPerfect,
a developer of application software for personal computers, whereby WordPerfect
was merged directly into Novell. Novell issued common stock in exchange for
all of the outstanding common stock of WordPerfect. In addition, outstanding
employee stock options to purchase WordPerfect common stock were converted into
options to purchase approximately 7.8 million shares of Novell common stock.
The transaction was accounted for as pooling of interests and therefore, the
consolidated unaudited financial statements for all periods presented herein
have been restated to reflect the combination of Novell and WordPerfect.
Additionally, in June 1994, the Company acquired from Borland International,
Inc. its Quattro Pro spreadsheet product line for $110 million of cash and
assumed liabilities of $10 million, and purchased a three year license to
reproduce and distribute up to one million copies of current and future
versions of Borland's Paradox relational database product for $35 million of
cash. The transaction was accounted for as a purchase and, on this basis,
resulted in a one-time write-off of $114.4 million for purchased research and
development in the third quarter of fiscal 1994.
In January 1994, WordPerfect acquired all of the outstanding stock of
SoftSolutions Technology Corporation (SoftSolutions), a developer of network
document management software, for $5.8 million of cash and notes payable of
$9.2 million. The transaction was accounted for as a purchase and, on this
basis, resulted in a one-time write-off of $15.0 million for purchased research
and development in the first quarter of fiscal 1994.
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 of 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.
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 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 of 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 April 1991, the Company invested $15.0 million 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 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.
The Company will continue to look for acquisitions, investments, or strategic
alliances which it believes will complement its overall business strategy.
Results of Operations
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Net Sales
Q3 Q3 YTD YTD
1994 Change 1993 1994 Change 1993
Net sales (millions) $488.9 13% $433.9 $1,512.1 14% $1,321.2
</TABLE>
During the second quarter of fiscal 1994, the Company sold a one time
fully paid license for UNIX technology to Sun Microsystems for $80.5 million.
This transaction accounted for 6% growth in net sales for the first nine months
of fiscal 1994 compared to the first nine months of fiscal 1993. In addition,
approximately 2% and 3% of the growth in the third quarter and first nine
months of fiscal 1994 respectively, compared to the same periods of fiscal 1993
is attributable to the acquisition of USL in mid-June 1993, as its revenue was
not included in the first six months of fiscal 1993.
The remaining growth in net sales in the third quarter and in the first
nine months of fiscal 1994 compared to the same periods in fiscal 1993 is the
result of increases in the Company's NetWare 3, NetWare J, software royalties,
USL products, connectivity products, WordPerfect for Windows, Suite products,
and training, offset by decreases in other NetWare products, other application
group products, and WordPerfect for DOS.
Net sales were also favorably affected by growth in both domestic and
international sales in the first nine months of fiscal 1994 compared to the
first nine months of fiscal 1993. Excluding the Sun Microsystems transaction
described above, international sales grew 18% while domestic sales grew 2% in
the first nine months of fiscal 1994 compared to the first nine months of 1993.
International sales were appproximately 42% of net sales in the first nine
months of fiscal 1994 and 41% in first nine months of 1993. The Company
expects that total international sales will continue to grow during the
remainder of fiscal 1994.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Gross Profit Q3 Q3 YTD YTD
1994 Change 1993 1994 Change 1993
Gross profit (millions) $383.4 15% $332.4 $1,157.5 12% $1,036.4
Percentage of net sales 78.4% 76.6% 76.5% 78.4%
</TABLE>
In connection with the Sun Microsystems transaction described above, the
Company revalued the software and other intangibles remaining on the balance
sheet related to the USL acquisition in fiscal 1993. Accordingly, $35 million
of costs associated with the sale of the license to Sun Microsystems were
charged to cost of sales during the second quarter of fiscal 1994. Excluding
the Sun Microsystems revenue and the related costs, the gross profit percentage
would have been 77.7% in first nine months of fiscal 1994.
The increase of 1.8 percentage points in the third quarter of fiscal 1994
compared to the third quarter of fiscal 1993 is attributable to relatively
lower per unit material costs. Excluding the Sun Microsystems revenue and
related costs impact, the gross profit margin is fairly flat for the first nine
months of fiscal 1994 and fiscal 1993. The Company expects the gross profit
margin in fiscal 1994 to be down slightly compared to the gross profit margin
in fiscal 1993 primarily due to the Paradox license amortization, price
changes, changes in sales mix by product or distribution channel, and special
product promotions.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Operating Expenses
Q3 Q3 YTD YTD
1994 Change 1993 1994 Change 1993
Sales and marketing (millions) $145.7 2% $142.5 $398.6 8% $369.3
Percentage of net sales 29.8% 32.8% 27.8%* 27.9%
Product development (millions) $ 90.6 20% $75.5 $257.1 23% $209.6
Percentage of net sales 18.5% 17.4% 18.0%* 15.9%
General and administrative (millions) $ 37.2 (3)% $38.2 $123.6 4% $118.4
Percentage of net sales 7.6% 8.8% 8.6%* 9.0%
Write-off of purchased R&D $114.4 (64)% $314.5 129.4 (59)% $314.5
Percentage of net sales 23.4% 72.5% 9.0%* 23.8%
Restructuring charges -- NA $42.0 -- NA $ 42.0
Percentage of net sales -- 9.7% -- 3.2%
Total operating expenses (millions) $387.9 (37)% $612.6 $908.6 (14)% $1,053.8
Percentage of net sales 79.3% 141.2% 63.4 %* 79.8%
*Excludes the Sun Microsystems revenue of $80.5 million in the second quarter
of fiscal 1994.
</TABLE>
Sales and marketing expenses were fairly flat at 28% of net sales in the
first nine months of fiscal 1994 compared to the same period in fiscal 1993.
Total sales and marketing expenses in the third quarter of fiscal 1994
decreased as a percentage of sales from 33% to 30% as compared to the same
period in fiscal 1993. Sales and marketing expenses fluctuate as a percentage
of net sales in any given period due to product promotions, advertising, or
other discretionary expenses.
Product development expenses increased as a percentage of net sales from
16% in the first nine months of fiscal 1993 to 18% in the first nine months of
fiscal 1994. They also increased from 17% in the third quarter of fiscal 1993
to 19% in the third quarter of fiscal 1994. These increases are a result of
the acquisitions in fiscal 1993 and 1994 and from planned headcount increases
in an effort to increase the Company's investment in new products. The
acquisitions had relatively higher product development expenses as a percentage
of net sales.
General and administrative expenses remained flat at 9% of net sales for
both the first nine months of fiscal 1994 and fiscal 1993. Even though these
expenses were flat between years, the comparative periods of fiscal 1994 had
relatively higher legal fees and lower bad debt expense compared to the same
periods of fiscal 1993, which tended to offset each other. General and
administrative expenses decreased as a percentage of net sales from 9% in the
third quarter of fiscal 1993 to 8% in the third quarter of fiscal 1994 due to
lower legal expenses on a comparative basis.
During the third quarter of fiscal 1994, the Company wrote off $114.4
million of tax deductible purchased research and development in connection with
the acquisition of the Quattro Pro spreadsheet product line from Borland,
International, Inc. During the first quarter of fiscal 1994, the Company also
wrote off $15.0 million of non-tax deductible purchased research and
development in connection with the acquisition of SoftSolutions. During the
third quarter of fiscal 1993, the Company wrote off $314.5 million of non-tax
deductible purchased research and development in connection with the
acquisitions of USL, Serius, Fluent, and a personal information manager
software product. An additional $42.0 million tax deductible charge was
incurred related to restructuring of operations.
Overall, excluding nonrecurring items, operating expenses have grown more
rapidly than revenues in both the third quarter and first nine months of fiscal
1994 compared to the same periods of fiscal 1993 due to the higher product
development expenses related to acquisitions.
<TABLE>
<S> <C> <C> <C>
YTD YTD
1994 Change 1993
Employees 9,402 (10)% 10,451
Annualized revenue per employee (000's) $192 2% $189
</TABLE>
Annualized revenue per employee in fiscal 1994 excludes the $80.5 million of
net sales from the Sun Microsystems transaction.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Other Income (Expense)
Q3 Q3 YTD YTD
1994 Change 1993 1994 Change 1993
Other income (expense), net (millions) $(0.2) NA $7.7 $17.7 (23)% $23.0
Percentage of net sales 0% 1.8% 1.2% 1.7%
</TABLE>
The decrease in other income (expense) is primarily the result of merger
expenses in the third quarter of fiscal 1994 of $5.8 million related to the
WordPerfect acquisition.
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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Income Taxes
Q3 Q3 YTD YTD
1994 Change 1993 1994 Change 1993
Income taxes (millions) $(0.3) 27% $(15.1) $80.2 18% $67.7
Percentage of net sales NA NA 5.3% 5.1%
Effective tax rate NA NA 30.1% NA
</TABLE>
The Company's estimated effective tax rate for the first nine months of
fiscal 1994 is 30%. Excluding non-tax deductible one-time charges related to
the write-off of purchased research and development of $15.0 million in fiscal
1994 and $314.5 million in fiscal 1993 and adjusting both periods to reflect a
provision for income taxes as if WordPerfect and its S corporation subsidiaries
had never been S corporations, the Company's estimated effective tax rate for
the first nine months of fiscal 1994 would be 34% compared to 33.4% for the
first nine months of fiscal 1993. The increase is attributable to non-tax
deductible merger expenses. The Company paid cash amounts for income taxes of
$108.5 million and $60.2 million, in the first nine months of fiscal 1994 and
1993, respectively.
Net Income (Loss) and
Net Income (Loss) Per Share
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Q3 Q3 YTD YTD
1994 Change 1993 1994 Change 1993
Net income (loss) (millions) $4.5 NA $(257.4) $186.4 NA $(62.1)
Percentage of net sales 0.9% (59.3)% 12.3% (4.7)%
Net income (loss) per share $(0.01) $(0.69) $0.51 $(0.17)
</TABLE>
Excluding the impact of nonrecurring items and adjusting all periods to
reflect a provision for income taxes as if WordPerfect and its S corporation
subsidiaries had been C corporations, pro forma net income for the first nine
months of fiscal 1994 would have been $236.9 million or 16.5% of net sales
compared to $240.9 million or 18.2% of net sales in the first nine months of
fiscal 1993.
Liquidity and Capital Resources
Cash and short-term investments increased to $758.1 million at July 30,
1994 from $719.2 million at October 30, 1993. The major reasons for this
increase were the $288.7 million of cash provided by operating activities and
the $26.8 million provided by borrowings and the $21.5 million provided from
the issuance of common stock for stock option exercises, offset by the $118.3
million used to retire all of the short and long-term debt of WordPerfect, the
$62.8 million used for capital asset purchases and the $110.0 million used for
acquisitions. 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 30, 1994, the Company's principal
unused sources of liquidity consisted of cash and short-term investments and
available borrowing capacity of approximately $19.8 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.
<PAGE>
Part II. Other Information
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>
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, 1994 /s/ Robert J. Frankenberg
President, and Chief Executive
Officer
(Principal Executive Officer)
Date September 9, 1994 /s/ James R. Tolonen
Chief Financial Officer
(Principal Financial
and Accounting Executive
Officer)
