<PAGE>
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 27, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ______
to ______
Commission File Number: 0-13351
NOVELL, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0393339
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
1555 N. Technology Way
Orem, Utah 84057
(Address of principal executive offices and zip code)
(801) 222-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ____
As of May 25, 1996 there were 353,083,302 shares of the
registrant's common stock outstanding.
</PAGE>
<PAGE>
<TABLE>
Part I. Financial Information, Item 1. Financial Statements
- -------------------------------------------------------------
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS
- -------------------------------------------------------------
<S> <C> <C>
Apr. 27, Oct. 28,
Dollars in thousands, except per share data 1996 1995
- --------------------------------------------------------------------------
ASSETS
Current assets
Cash and short-term investments $1,181,015 $1,321,231
Receivables, less allowances ($43,679 - April;
$74,857 - October) 357,122 470,437
Inventories 16,942 23,025
Prepaid expenses 31,784 50,576
Deferred income taxes 72,285 59,913
- ---------------------------------------------------------------------------
Total current assets 1,659,148 1,925,182
Property, plant and equipment, net 357,442 390,452
Other assets 50,288 101,196
- ---------------------------------------------------------------------------
Total assets $2,066,878 $2,416,830
===========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $88,591 $116,305
Accrued compensation 68,319 97,637
Accrued marketing liabilities 47,994 72,339
Other accrued liabilities 117,488 90,623
Income taxes payable -- 29,942
Deferred revenue 38,810 54,099
- ---------------------------------------------------------------------------
Total current liabilities 361,202 460,945
Minority interests 17,174 17,623
Put warrants 90,025 --
Shareholders' equity
Common stock, par value $.10 a share
Authorized - 600,000,000 shares
Issued - 352,146,711 shares-April
371,567,158 shares-October 35,215 37,157
Additional paid-in capital 381,764 737,481
Retained earnings 1,181,498 1,163,624
- ---------------------------------------------------------------------------
Total shareholders' equity 1,598,477 1,938,262
- ---------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,066,878 $2,416,830
===========================================================================
See notes to consolidated unaudited condensed financial statements.
</PAGE>
</TABLE>
<PAGE>
<TABLE>
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Fiscal Quarter Ended Six Months Ended
-------------------- ----------------
<S> <C> <C> <C> <C>
Amounts in thousands, Apr. 27, Apr. 29, Apr. 27, Apr. 29,
except per share data 1996 1995 1996 1995
- ------------------------------------------------------------------------
Net sales $188,180 $529,508 $626,099 $1,022,733
Cost of sales 68,614 124,455 164,625 241,330
Gross profit 119,566 405,053 461,474 781,403
Operating expenses
Sales and marketing 127,292 148,374 250,757 288,177
Product development 69,723 93,000 148,356 182,817
General and administrative 34,731 35,794 73,269 69,764
Restructuring charges -- -- 18,442 --
- ------------------------------------------------------------------------
Total operating expenses 231,746 277,168 490,824 540,758
- ------------------------------------------------------------------------
Income (loss)
from operations (112,180) 127,885 (29,350) 240,645
Other income (expense)
Investment income 11,257 15,037 26,157 24,604
Gain on sale of assets 19,815 -- 19,815 --
Other, net (2,138) 1,240 (4,288) 1,498
- ------------------------------------------------------------------------
Other income, net 28,934 16,277 41,684 26,102
- ------------------------------------------------------------------------
Income (loss) before taxes (83,246) 144,162 12,334 266,747
Income taxes (27,887) 48,294 4,132 89,360
- ------------------------------------------------------------------------
Net income (loss) $(55,359) $95,868 $8,202 $177,387
========================================================================
Weighted average shares
outstanding 362,442 374,383 367,013 373,205
========================================================================
Net income (loss) per share $(0.15) $0.26 $0.02 $0.48
========================================================================
See notes to consolidated unaudited condensed financial statements.
</PAGE>
</TABLE>
<PAGE>
<TABLE>
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
________________
<S> <C> <C>
Apr. 27, Apr. 29,
Amounts in thousands 1996 1995
- ----------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 8,202 $ 177,387
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation and amortization 51,190 46,211
Gain on sale of assets (19,815) __
Stock plans income tax benefits 4,863 15,409
Decrease (increase) in receivables 113,315 (8,011)
Decrease in inventories 6,083 2,679
Decrease in prepaid expenses 18,792 11,412
Decrease in deferred income taxes 17,167 3,523
(Decrease) increase in current liabilities, net (99,743) 239
- ----------------------------------------------------------------------------
Net cash provided from operating activities 100,054 248,849
- ----------------------------------------------------------------------------
Cash flows from financing activities
Issuance of common stock, net 23,630 35,909
Repurchase of common stock (316,559) --
Sale of put warrants 10,055 --
- ----------------------------------------------------------------------------
Net cash (used) provided from financing activities (282,874) 35,909
- ----------------------------------------------------------------------------
Cash flows from investing activities
Expenditures for property, plant and equipment (28,997) (32,532)
Proceeds from sale of assets 10,750 --
Decrease (increase) in short-term investments 38,631 (145,429)
Other (2,542) 4,852
- -----------------------------------------------------------------------------
Net cash used by investing activities 17,842 (173,109)
- -----------------------------------------------------------------------------
Total (decrease) increase in cash and
cash equivalents $(164,978) $111,649
- -----------------------------------------------------------------------------
Cash and cash equivalents - beginning of period 312,164 228,426
Cash and cash equivalents - end of period 147,186 340,075
Short-term investments - end of period 1,033,829 778,812
- ----------------------------------------------------------------------------
Cash and short-term investments - end of period $1,181,015 $1,118,887
============================================================================
See notes to consolidated unaudited condensed financial statements.
</PAGE>
</TABLE>
<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 Company's fiscal 1995 Annual Report to
Shareholders. These statements do include all normal
recurring adjustments which the Company believes necessary for
a fair presentation of the statements. The interim operating
results are not necessarily indicative of the results for a
full year.
B.Significant Events
In December 1995, Novell sold its UnixWare product line to the
Santa Cruz Operation, Inc. (SCO). The Company realized a
small gain and recorded $19 million of royalty revenue from
this transaction in the first quarter of fiscal 1996. Under
the agreement, Novell received approximately 6 million shares
of SCO common stock, resulting in an ownership position of
approximately 17% of the outstanding SCO common stock. The
agreement also calls for Novell to receive a revenue stream
from SCO based on revenue performance of the purchased
UnixWare product line. This revenue stream is not to exceed
$84 million net present value, and will end by the year 2002.
In addition, Novell will continue to receive revenue from
existing licenses for older versions of UNIX System source
code.
As previously disclosed, during the second fiscal quarter of
fiscal 1996, the Company implemented a change to its
traditional distribution stocking policy that significantly
reduced revenue and earnings in the quarter. Because the
Company has experienced strong growth in revenue from
expanding multi-product network software licensing programs,
the Company decided to reduce and rebalance channel
inventories to change the mix and volume of product in the
channel and better match evolving purchase patterns. The
Company estimates that it reduced product inventories in the
worldwide distribution channels during the second quarter of
1996 by approximately $225 million. This was accomplished
primarily by reducing shipments to distributors during the
quarter. Additionally, net returns of approximately $20
million were accepted during the quarter related to this
policy change. This reduction decreased second quarter
revenue which caused the Company to record a loss in the
quarter.
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 a ownership position of approximately 17% of
the outstanding Corel common stock. The Company also is
entitled to and has nominated a candidate for Corel s Board of
Directors. The Company reported a one-time gain of $20
million in the second quarter of fiscal 1996 related to this
transaction. Net of tax, the gain was $13 million, or $0.04
per share. Additionally, Corel licensed GroupWise client
software, Envoy electronic publishing software, and other
technologies from Novell for a minimum royalty obligation of
$70 million over the next five years.
Pursuant to a share repurchase program whereby the Company is
authorized to repurchase 37 million shares of its common stock
in fiscal 1996, the Company repurchased and retired
approximately 23 million shares at a cost of approximately
$317 million in the first six months of fiscal 1996.
</PAGE>
<PAGE>
C.Cash and Short-term Investments
All marketable debt and equity securities are included in cash
and short-term investments and are considered available-for-
sale and carried at fair market value, with the unrealized
gains and losses, net of tax, included in shareholders
equity. Such securities are anticipated to be used for
current operations and are therefore classified as current
assets, even though some maturities may extend beyond one year
and some equity securities have restrictions on disposition.
The following is a summary of cash and short-term investments,
all of which are considered available-for-sale.
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross Fair
Cost at Unrealized Unrealized Market Value at
(Dollars in thousands) Apr. 27, 1996 Gains Losses Apr. 27, 1996
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents
Cash $ 90,867 $ -- $ -- $ 90,867
Repurchase agreements 36,066 -- -- 36,066
Tax exempt money market fund 5,053 -- -- 5,053
Municipal securities 15,200 -- -- 15,200
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents $ 147,186 $ -- $ -- $ 147,186
- ----------------------------------------------------------------------------------------------
Short-term investments
Municipal securities $ 364,742 $ 2,095 $ $ 366,837
Money market mutual funds 121,219 -- -- 121,219
Money market preferreds 294,500 45 -- 294,545
Mutual funds 13,864 17 -- 13,881
Equity securities 172,373 64,974 -- 237,347
- ---------------------------------------------------------------------------------------------
Short-term investments $ 966,698 $67,131 $ -- $1,033,829
- ---------------------------------------------------------------------------------------------
Cash and short-term investments $1,113,884 $67,131 $ -- $1,181,015
- ---------------------------------------------------------------------------------------------
Gross Gross Fair
Cost at Unrealized Unrealized Market Value at
(Dollars in thousands) Oct. 28, 1995 Gains Losses Oct. 28, 1995
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents
Cash $ 152,930 $ -- $ -- $ 152,930
Repurchase agreements 23,794 -- -- 23,794
Tax exempt money market fund 63,065 -- -- 63,065
Municipal securities 72,375 -- -- 72,375
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 312,164 $ -- $ -- $ 312,164
- ------------------------------------------------------------------------------------------------
Short-term investments
Municipal securities $ 375,491 $ 3,220 $ -- $ 378,711
Money market mutual funds 38,475 -- -- 38,475
Money market preferreds 442,500 176 -- 442,676
Mutual funds 91,423 30 -- 91,453
Equity securities 23,055 34,697 -- 57,752
- -----------------------------------------------------------------------------------------------
Short-term investments $ 970,944 $ 38,123 $ -- $ 1,009,067
- -----------------------------------------------------------------------------------------------
Cash and short-term investments $1,283,108 $ 38,123 $ -- $ 1,321,231
- -----------------------------------------------------------------------------------------------
During the first six months of fiscal 1996 the Company had
realized gains of $4 million on the sale of securities
compared to realized gains of $3 million on the sale of
securities in the first six months of fiscal 1995.
</PAGE>
</TABLE>
<PAGE>
D. Income Taxes
The Company's estimated effective tax rate for both the first
six months of fiscal 1996 and 1995 was 33.5%. The Company
paid cash amounts for income taxes of $12 million and $76
million, in the first six months of fiscal 1996 and 1995,
respectively.
E. Commitments and Contingencies
The Company currently has a $10 million unsecured revolving
bank line of credit, with interest at the prime rate. The
line can be used for either letter of credit or working
capital purposes. The line is subject to the terms of a loan
agreement containing financial covenants and restrictions,
none of which are expected to significantly affect the
Company's operations. At April 27, 1996 there were no
borrowings, letter of credit acceptances or commitments under
such line.
The Company has an additional $10 million credit facility
with another bank which is not subject to a loan agreement.
At April 27, 1996 standby letters of credit of approximately
$300,000 were outstanding under this agreement.
The Company is a party to a number of legal claims arising in
the ordinary course of business. The Company believes the
ultimate resolution of the claims will not have a material
adverse effect on its financial position, results of
operations, or cash flows.
F. Put Warrants
During the second quarter of fiscal 1996, the Company sold
put warrants on 7 million shares of its stock, callable on
specific dates in the third and fourth quarter of fiscal 1996
and in the second quarter of fiscal 1997, giving a third
party the right to sell shares of Novell common stock to the
Company at contractually specified prices. The put warrant
balance on the balance sheet is the amount the Company would
be obligated to pay if all the put warrants were exercised.
The proceeds from the issuance of the put options were
accounted for as additional paid-in capital.
G. International Sales
The Company markets internationally both directly to end
users and through distributors who sell to dealers and end
users. For the six months ended April 27, 1996 and April 29,
1995, sales to international customers were approximately
$322 million and $470 million, respectively. In the first
six months of fiscal 1996 and fiscal 1995, 54% and 56%,
respectively, of international sales were to European
countries. Except for Japan, which accounted for 11% of
sales in the first six months of fiscal 1996, no one foreign
country accounted for 10% or more of total sales in either
period. Except for one multi-national distributor, which
accounted for 18% of revenue in the first six months of
fiscal 1995, no customer accounted for more than 10% of
revenue in the first six months of either fiscal 1996 or
fiscal 1995.
H. Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted
average number of common shares outstanding during the
periods, including common stock equivalents (unless
antidilutive). Common stock equivalents consist of
outstanding stock options.
</PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Introduction
Novell is the world s leading network software provider. Novell
software products provide the infrastructure for a networked
world, enabling Novell s customers to connect with other people
and the information they need, anytime and anyplace. Novell
partners with other technology and market leaders to help
customers make networks a part of their everyday lives.
In December 1995, Novell sold its UnixWare product line to the
Santa Cruz Operation, Inc. (SCO). The Company realized a small
gain and recorded $19 million of royalty revenue from this
transaction in the first quarter of fiscal 1996. Under the
agreement, Novell received approximately 6 million shares of SCO
common stock, resulting in an ownership position of approximately
17% of the outstanding SCO common stock. The agreement also
calls for Novell to receive a revenue stream from SCO based on
revenue performance of the purchased UnixWare product line. This
revenue stream is not to exceed $84 million net present value,
and will end by the year 2002. In addition, Novell will continue
to receive revenue from existing licenses for older versions of
UNIX System source code.
As previously disclosed, 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 the quarter. Because the Company had experienced
strong growth in revenue from expanding multi-product network
software licensing programs, the Company decided to reduce and
rebalance channel inventories to change the mix and volume of
product in the channel and better match evolving purchase
patterns. The Company estimates that it reduced product
inventories in the worldwide distribution channels during the
second quarter of 1996 by approximately $225 million. This was
accomplished primarily by reducing shipments to distributors
during the quarter. Additionally, net returns of approximately
$20 million were accepted during the quarter related to this
policy change. This reduction decreased second quarter
revenue which caused the Company to record a loss in the quarter.
In March 1996, the Company completed the sale of its personal
productivity applications product line to Corel Corporation
(Corel). The Company received approximately 10 million shares of
Corel common stock and approximately $11 million in cash. This
resulted in an ownership position of approximately 17% of the
outstanding Corel common stock. The Company also is entitled to
and has nominated a candidate for Corel s Board of Directors.
The Company reported a one-time gain of $20 million in its second
quarter of fiscal 1996 related to this transaction. Net of tax,
the gain was $13 million, or $0.04 per share. Additionally,
Corel licensed GroupWise client software, Envoy electronic
publishing software, and other technologies from Novell for a
minimum royalty obligation of $70 million over the next five
years.
<TABLE>
Results of Operations
<S> <C> <C> <C> <C> <C> <C>
Net Sales
- --------- Q2 Q2 YTD YTD
1996 Change 1995 1996 Change 1995
- ----------------------------------------------------------------------------
Net sales (millions) $188 -65% $530 $626 -39% $1,023
============================================================================
</TABLE>
</PAGE>
<PAGE>
With the change in its distribution stocking policy and the sale
of its personal productivity applications in the second quarter
of fiscal 1996, the components of revenue in fiscal 1996 are
significantly different than the components of revenue in fiscal
1995. Specifically, 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.
Royalty revenue was $107 million, non-royalty revenue from Japan
was $31 million, non-royalty revenue from education and service
was $24 million, discontinued product lines revenue was $21
million, and other sources provided $5 million of revenue.
Additionally, the Company has redefined its product lines. The
analysis that follows describes the product lines consistent with
how the Company views its business currently and in the future.
Continuing product lines can be categorized into server operating
environments, network services, UNIX royalties, and education,
service and other. Historical revenues also include revenue from
product lines that have been sold or discontinued, such as the
personal productivity applications product line which was sold to
Corel in March 1996.
The server operating environments product line includes NetWare 4
and NetWare 3 products. Server operating environments revenue
was $65 million in the second quarter of fiscal 1996 compared to
$244 million in the second quarter of fiscal 1995. In the first
six months of fiscal 1996 server operating environments revenue
was $296 million compared to $501 million in the first six months
of fiscal 1995. The decreases between periods is primarily
attributable to the reduction in distribution channel inventory.
In spite of the distribution stocking policy change, NetWare 4
grew 13% in the first six months of fiscal 1996 compared to the
first six months of fiscal 1995 while NetWare 3 declined by 64%
in the same comparable periods. The server operating
environments product line represented 47% of revenue in the first
six months of fiscal 1996 compared to 49% of revenue in the first
six months of fiscal 1995.
The network services product line includes distributed network
services, application services, and management & administration
products. The network services product line had revenue of $49
million in the second quarter of fiscal 1996 compared to $77
million in the second quarter of fiscal 1995. In the first six
months of fiscal 1996, network services revenue was $141 million
compared to revenue of $140 million in the first six months of
fiscal 1995. The decrease from the second quarter of fiscal 1995
to the second quarter of 1996 is primarily attributable to the
change in the distribution stocking policy. In spite of the
distribution stocking policy change, revenue in the first six
months of fiscal 1996 was flat with revenue in the first six
months of fiscal 1995 due to strong growth in the application
services and management & administration products. Network
services revenue represented 23% of total revenue in the first
six months of fiscal 1996 compared to 14% of revenue in the first
six months of fiscal 1995.
UNIX royalties were $18 million in the second quarter of 1996
compared to $22 million in the second quarter of 1995. In the
first six months of fiscal 1996, UNIX royalties were $50 million
compared to $36 million in the first six months of fiscal 1995.
The increase was attributable to a one-time $19 million paid up
royalty recognized in the sale of the UNIX product line to SCO in
the first quarter of fiscal 1996. UNIX royalties were 8% of
revenues in the first six months of fiscal 1996 compared to 4% of
revenues in the first six months of fiscal 1995.
Education, service, and other revenues were $35 million in the
second quarter of fiscal 1996 compared to $41 million of revenue
in the second quarter of fiscal 1995. In the first six months of
fiscal 1996, education, service, and other revenues were $77
million compared to $72 million in the first six months of fiscal
1995. Education, service, and other revenues were 12% of revenue
in the first six months of fiscal 1996 compared to 7% of revenue
in the first six months of fiscal 1995.
</PAGE>
<PAGE>
Revenue from discontinued product lines, made up primarily of the
personal productivity applications product line which was sold to
Corel in March 1996, was $21 million in the second quarter of
fiscal 1996 compared to $146 million in the second quarter of
fiscal 1995. In the first six months of fiscal 1996, revenue
from discontinued product lines was $63 million compared to $274
million in the first six months of fiscal 1995. Discontinued
product lines were 10% of revenues in the first six months of
fiscal 1996 compared to 27% of revenues in the first six months
of fiscal 1995.
International sales accounted for 51% of revenues in the first
six months of fiscal 1996 compared to 46% of revenues in the
first six months of fiscal 1995. The reason for this increase is
that a relatively larger portion of the decrease in distribution
channel inventories in the second quarter of fiscal 1996 occurred
in the United States.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Gross Profit
- ------------ Q2 Q2 YTD YTD
1996 Change 1995 1996 Change 1995
- ----------------------------------------------------------------------------
Gross profit (millions) $120 -70% $405 $461 -41% $781
Percentage of net sales 64% 76% 74% 76%
============================================================================
</TABLE>
The gross margin percentage decreased in the second quarter of
fiscal 1996 compared to the second quarter of fiscal 1995 and in
the first six months of fiscal 1996 compared to the first six
months of fiscal 1995 due to the fixed portion of cost of sales
being a much higher percentage of the lower revenues in the
second quarter of fiscal 1996 due to the change in the
distribution stocking policy.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Operating Expenses
- ------------------ Q2 Q2 YTD YTD
1996 Change 1995 1996 Change 1995
- --------------------------------------------------------------------------------
Sales and marketing (millions) $127 -14% $148 $251 13% $288
Percentage of net sales 68% 28% 40% 28%
- --------------------------------------------------------------------------------
Product development (millions) $70 -25% $93 $148 -19% $183
Percentage of net sales 37% 18% 24% 18%
- --------------------------------------------------------------------------------
General and
administrative (millions) $35 -3% $36 $73 4% $70
Percentage of net sales 18% 7% 12% 7%
- --------------------------------------------------------------------------------
Restructuring
charges (millions) -- -- -- $18 -- --
Percentage of net sales -- -- 3% --
- --------------------------------------------------------------------------------
Total operating
expenses (millions) $232 -16% $277 $491 -9% $541
Percentage of net sales 123% 52% 78% 53%
- --------------------------------------------------------------------------------
</TABLE>
Total operating expenses, excluding nonrecurring charges,
declined 16% in the second quarter of fiscal 1996 compared to the
second quarter of fiscal 1995 and by 13% in the first six months
of fiscal 1996 compared to the first six months of fiscal 1995.
These decreases are due to the sale of the UNIXWare product line
and the personal productivity applications product line and to
company-wide cost controls as the Company took significant
actions to refocus on network software.
</PAGE>
<PAGE>
On an absolute dollar basis, sales and marketing expenses
decreased significantly in both the second quarter of fiscal 1996
and in the first six months of fiscal 1996 compared to the same
periods in fiscal 1995. These decreases are primarily
attributable to lower corporate marketing and domestic sales
expenses. Sales and marketing expenses increased significantly as
a percentage of net sales in the second quarter of fiscal 1996
compared to the second quarter of fiscal 1995 and in the first
six months of fiscal 1996 compared to the first six months of
fiscal 1995 due to much lower revenues in the second quarter of
fiscal 1996 as a result of the change in the distribution
stocking policy. Sales and marketing expenses fluctuate as a
percentage of net sales in any given period due to product
promotions, advertising or other discretionary expenses.
On an absolute dollar basis, product development expenses
decreased significantly in the second quarter of fiscal 1996 and
in the first six months of fiscal 1996 compared to the same
periods in fiscal 1995. These decreases relate to a reduction in
expenses due to the sale of the UNIXWare product line to SCO in
the first quarter of fiscal 1996 and to the sale of the personal
productivity applications product line to Corel in the second
quarter of fiscal 1996. Product development expenses increased
significantly as a percentage of net sales in the second quarter
of fiscal 1996 compared to the second quarter of fiscal 1995 and
in the first six months of fiscal 1996 compared to the first six
months of fiscal 1995 due to much lower revenues in the second
quarter of fiscal 1996 as a result of the change in the
distribution stocking policy.
On an absolute dollar basis, general and administrative expenses
were relatively flat for all comparable periods. Reductions in
general and administrative expenses as a result of the merger
with WordPerfect Corporation were made before the beginning of
fiscal 1995 resulting in flat expenses in fiscal 1996 compared to
fiscal 1995. General and administrative expenses increased as a
percentage of net sales in the second quarter of fiscal 1996
compared to the second quarter of fiscal 1995 and in the first
six months of fiscal 1996 compared to the first six months of
fiscal 1995 due to much lower revenues in the second quarter of
fiscal 1996 as a result of the change in the distribution
stocking policy.
During the first quarter of 1996, the Company wrote off $18
million of tax deductible restructuring charges for severance
and redundant facilities as the Company prepared for the sale of
its personal productivity applications product line.
<TABLE>
<S> <C> <C> <C>
Q2 YE
1996 Change 1995
- ------------------------------------------------------------------------------
Employees 5,860 -23% 7,572
Annualized revenue per employee (thousand's) $184 -28% $255
==============================================================================
</TABLE>
In the first six months of fiscal 1996, Novell reduced its
employment by 1,902 employees as the Company prepared for and
completed the sale of its personal productivity applications
product line and transitioned former UNIX Systems Group employees
to SCO and other third parties.
The decline in annualized revenue per employee is due to lower
revenue in the second quarter of fiscal 1996 as a result of the
change in the distribution stocking policy.
<TABLE>
<S> <C> <C> <C> <C> <C>
Other Income (Expense)
- --------------------- Q2 Q2 YTD YTD
1996 Change 1995 1996 Change 1995
- -------------------------------------------------------------------------------------
Other income (expense), net (millions) $29 81% $16 $42 62% $26
Percentage of net sales 15% 3% 7% 3%
=====================================================================================
</TABLE>
</PAGE>
<PAGE>
The primary component of other income (expense) is investment
income, which was $11 million in the second quarter of fiscal
1996 compared to $15 million in the second quarter of fiscal 1995
and was $26 million in the first six months of fiscal 1996
compared to $25 million in the first six months of fiscal 1995.
The decrease on a quarter to quarter comparison and the relative
flatness on a year to date comparison is due to the Company's
share repurchase program in fiscal 1996 whereby it has
repurchased approximately 23 million shares of its common stock
at a cost of $317 million. This has reduced cash available for
investment, and therefore, investment income. In order to
achieve potentially higher returns, a limited portion of the
Company's investment portfolio is invested in mutual funds which
incur some market risk. The Company believes that the market
risk has been limited by diversification and by use of a funds
management timing service which switches funds out of mutual
funds and into money market funds when preset signals occur.
Also included in other income (expense), the Company recorded a
gain of $20 million on the sale of its personal productivity
applications product line in the second quarter of fiscal 1996.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Income Taxes
- ------------ Q2 Q2 YTD YTD
1996 Change 1995 1996 Change 1995
- --------------------------------------------------------------------------
Income taxes (millions) $(28) -158% $48 $4 -96% $89
Percentage of net sales -15% 9% 1% 9%
Effective tax rate 34% 34% 34% 34%
==========================================================================
</TABLE>
</PAGE>
<PAGE>
The Company's estimated tax rate for fiscal 1996 is 33.5%, the same
as in fiscal 1995.
<TABLE>
Net Income and Net Income Per Share
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Q2 Q2 YTD YTD
1996 Change 1995 1996 Change 1995
- -------------------------------------------------------------------------------
Net income (millions) $(55) -157% $96 $8 -95% $177
Percentage of net sales -29% 18% 1% 17%
Net income per share $(0.15) $0.26 $0.02 $0.48
===============================================================================
</TABLE>
<TABLE>
<S> <C> <C> <C>
Liquidity and Capital Resources
- ------------------------------- Q2 YE
1996 Change 1995
- ------------------------------------------------------------------------------
Cash and short-term investments (millions) $1,181 -11% $1,321
Percentage of total assets 57% 55%
==============================================================================
</TABLE>
Cash and short-term investments decreased to $1,181 million at
April 27, 1996 from $1,321 million at October 28, 1995. The
major reasons for this decrease were the $317 million used to
repurchase Novell common stock and $29 million used for property,
plant and equipment expenditures; offset by the $100 million of
cash provided by operating activities, $34 million provided by
other financing activities, and $72 million from other investing
activities. The investment portfolio is diversified among
security types, industry groups, and individual issuers. The
Company's principal source of liquidity has been from operations.
At April 27, 1996, the Company's principal unused sources of
liquidity consisted of cash and short-term investments and
available borrowing capacity of approximately $20 million under
its credit facilities. The Company's liquidity needs are
principally for the Company's financing of accounts receivable,
capital assets, acquisitions and strategic investments and to
have flexibility in a dynamic and competitive operating
environment.
During fiscal 1996, the Company has continued to generate cash
from operations. The Company anticipates being able to fund its
current operations and capital expenditures planned for the
foreseeable future with existing cash and short-term investments
together with internally generated funds. Borrowings under the
Company's credit facilities, or public offerings of equity or
debt securities are available if the need arises. As the Company
grows, investments will continue in product development in new
and existing areas of technology. Cash may also be used to
acquire technology through purchases and strategic acquisitions.
Capital expenditures in fiscal 1996 are anticipated to be
approximately $60 million, but could be reduced if the growth of
the Company is less than presently anticipated. In addition, the
Company has announced a share repurchase program whereby the
Company is authorized to repurchase up to 37 million shares of
its common stock in the open market during fiscal 1996. During
the first six months of 1996, approximately 23 million shares
were repurchased and retired at a cost of approximately $317
million.
</PAGE>
<PAGE>
Forward Looking Information
As previously disclosed, during second fiscal quarter of fiscal
1996, Novell implemented a change to its traditional distribution
stocking policy that significantly reduced revenue and earnings
in the quarter. The Company estimates that it reduced product
inventories in its worldwide distribution channels during the
second quarter of 1996 by approximately $225 million. The
resetting of channel inventories is expected to reduce ongoing
cost of sales and lessen costs associated with channel
promotions, product rotations, and new product releases, thereby
leading to improved earnings in the second half of fiscal 1996.
The above statements relating to Novell s change in distribution
stocking policy and possible improved earnings in the second half
of fiscal 1996 are forward looking and involve a number of risks
and uncertainties. As such, actual results could materially
differ from those we are projecting in these forward looking
statements. Unanticipated declines in revenue due to
competitive, market and general economic factors could limit the
Company's ability to gain the benefit of improved earnings
resulting from the new channel inventory structure. Novell s
projections of increasing licensing revenue are based on
historical trends which, should they reverse, would negatively
impact growth projections of revenue and earnings. Further
uncertainties are associated with any impact to our distribution
channel resulting from this change in distribution stocking
policy. Novell believes this action is in the best interests of
its customers, channel partners and shareholders, but
implementing this program may result in some short-term business
interruption as the Company, our partners, and customers work
through this change.
</PAGE>
<PAGE>
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 April 10,
1996 for the following purposes:
1. To elect eight directors;
2. To approve and ratify the adoption of amendments to the
Novell, Inc. Stock Option Plan for Non-Employee Directors,
including an increase in the shares reserved for issuance
thereunder from 800,000 to 1,500,000 shares.
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.
<TABLE>
<S> <C> <C>
Votes Votes
Proposal 1 For Withheld
- -----------------------------------------------------------------
Election of Directors
Robert J. Frankenberg 299,597,082 4,519,514
Alan C. Ashton 299,521,136 4,595,460
Elaine R. Bond 277,919,725 26,196,871
Hans-Werner Hector 298,365,654 5,750,942
Jack L. Messman 277,965,392 26,151,204
Larry W. Sonsini 275,654,218 28,462,378
Ian R. Wilson 299,958,864 4,157,732
John A. Young 300,056,889 4,059,707
</TABLE>
<TABLE>
<S> <C> <C> <C>
Votes Votes Votes
Proposal 2 For Against Withheld/Abstained
- --------------------------------------------------------------------------------------------
Approval and ratification of the
adoption of amendments to the
Novell, Inc. Stock Option Plan
for Non-Employee Directors 246,572,871 50,019,133 1,866,651
============================================================================================
</TABLE>
At the Annual Meeting of Shareholders on April 10, 1996, the
following proposal was brought to the floor by a shareholder.
<TABLE>
<S> <C> <C>
Votes Votes
For Against
- -----------------------------------------------------------------------------------
Rescind the amendments to the Novell, Inc.
Stock Option Plan for Non-Employee Directors 22,036,169 219,186,724
===================================================================================
</TABLE>
</PAGE>
<PAGE>
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 27, 1996.
*Filed herewith
</PAGE>
<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: May 31, 1996 /s/ Robert J. Frankenberg
-------------------------
Robert J. Frankenberg
Chairman of the Board,
President, Chief Executive
Officer and Director
(Principal Executive Officer)
Date: May 31, 1996 /s/ James R. Tolonen
--------------------
James R. Tolonen
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 31, 1996 /s/ Stephen C. Wise
-------------------
Stephen C. Wise
Senior Vice President,Finance
(Principal Accounting Officer)
</PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-26-1996
<PERIOD-END> APR-27-1996
<CASH> 147,186
<SECURITIES> 1,033,829
<RECEIVABLES> 357,122
<ALLOWANCES> (43,679)
<INVENTORY> 16,942
<CURRENT-ASSETS> 1,659,148
<PP&E> 675,718
<DEPRECIATION> (318,276)
<TOTAL-ASSETS> 2,066,878
<CURRENT-LIABILITIES> 361,202
<BONDS> 0
35,215
0
<COMMON> 0
<OTHER-SE> 1,563,262
<TOTAL-LIABILITY-AND-EQUITY> 2,066,878
<SALES> 626,099
<TOTAL-REVENUES> 626,099
<CGS> 164,625
<TOTAL-COSTS> 164,625
<OTHER-EXPENSES> 490,824
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,334
<INCOME-TAX> 4,132
<INCOME-CONTINUING> 8,202
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,202
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
