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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required)
For the Fiscal Year Ended October 29, 1994
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No Fee Required)
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) 429-7000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
Preferred Share Purchase Rights
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the registrant's common stock held by
nonaffiliates on December 31, 1994 (based on the last reported price of the
Common Stock on the NASDAQ National Market System on such date) was
$5,356,907,418.
As of December 31, 1994 there were 365,308,188 shares of the registrant's
common stock outstanding.
Portions of Registrant's Annual Report to Shareholders for the fiscal year
ended October 29, 1994, are incorporated by reference in Parts II and IV of
this Form 10-K to the extent stated herein. Portions of Registrant's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
April 12, 1995, are incorporated by reference in Part III of this Form 10-K to
the extent stated herein.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Novell, Inc. ("Novell" or the "Company") is a leading provider of
networking and application software. The Company's products provide the
distributed infrastructure, network services, advanced network access, and
network applications required to make networked information and computing an
integral part of daily life.
The Company was incorporated in Delaware on January 25, 1983. Novell's
executive offices are located at 1555 North Technology Way, Orem, Utah 84057.
Its telephone number at that address is (801) 429-7000.
The Company markets its products through 40 U.S. and 56 international
sales offices. The Company sells its products primarily to distributors and
national retail chains, who in turn sell the Company's products to retail
dealers. The Company also sells its products to OEMs, system integrators, and
VARs as well as direct to large corporations.
The Company primarily conducts product development activities in San Jose,
California; Summit, New Jersey; and Orem and Provo, Utah. It also contracts
out some product development activities to third-party developers.
The Company has issued common stock or paid cash to acquire or merge with
technology companies, invested cash in other technology companies, and formed
strategic alliances with still other technology companies. Novell undertook
these transactions to broaden the Company's business as a system and
application software supplier as well as to promote a pervasive computing
environment.
In June 1994, the Company completed a merger with WordPerfect Corporation
(WordPerfect) whereby WordPerfect was merged into Novell. Approximately 51
million shares of Novell common stock were exchanged for all of the outstanding
common stock of WordPerfect. In addition, the outstanding employee stock
options to purchase WordPerfect common stock were converted into options to
purchase approximately 8 million shares of Novell common stock. The
transaction was accounted for as a pooling of interests and therefore, all
prior period financial statements incorporated by reference herein have been
restated as if the merger took place at the beginning of such periods.
Additionally, in June 1994, the Company acquired the Quattro Pro
spreadsheet product line from Borland International, Inc. for $110 million of
cash and assumed liabilities of $10 million. This transaction was accounted
for as a purchase and, on this basis, resulted in a one-time write-off of $114
million for purchased research and development. At the same time, the Company
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.
In June 1993, the Company acquired UNIX System Laboratories, Inc. (USL) by
issuing approximately 11 million shares Novell common stock valued at $332
million in exchange for all of the outstanding stock of USL, not previously
owned by Novell, and assumed liabilities of $9 million. The transaction was
accounted for as a purchase and, on this basis, resulted in a one-time
write-off of $269 million for purchased research and development in the third
quarter of fiscal 1993.
The Company will continue to look for similar acquisitions, investments or
strategic alliances which it believes complement its overall business strategy.
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BUSINESS STRATEGY
Novell believes that computer networks are expanding as traditional
stand-alone computer resources and new categories of computing devices
increasingly become integrated across networks to become network resources.
The Company sees its business opportunity as making networks easier to access,
simpler to use and more effective through operating systems, network services,
access software and network applications that create useful information from
the data available through networks.
Novell's strategy over recent periods has been to broaden its product
offerings and strengthen its competitive position as the leading supplier of
network software. It has expanded its business beyond NetWare network
operating system products to include UNIX system software valued as an
application platform and used for integrating applications with computer
networks. Most recently, the Company expanded into application software
products to develop new network applications that take advantage of the network
to increase user productivity.
The Company believes that the capabilities of computer networks are
leading to a pervasive computing future that will change the definition of
networks from connecting information systems and computing devices to
connecting people with other people and the information they need, giving them
the power to act on it anytime, anyplace.
TECHNOLOGIES
Network Infrastructure. Novell's NetWare network operating system
provides a platform for the integration of multiple technologies. This
includes the seamless integration of multiple desktop systems and host
environments. Novell believes that customer environments are inherently
heterogeneous and therefore require an information system that integrates
dissimilar technologies. The goal of Novell's strategy of integrating various
desktop systems is to allow IBM, IBM-compatible, Apple Macintosh, and
UNIX-based PCs and workstations to access and share simultaneously a common set
of network resources and information. This gives customers the freedom to
choose the desktop and application server systems that best fit their
application requirements. In addition to the integration of desktops, host
environments from vendors such as IBM, DEC, HP and Olivetti and numerous other
UNIX system vendors are integrated into the NetWare network so that users can
access host-based resources and information from their desktops across the
network. Novell continues to extend this hardware and infrastructure
integration to other communication devices such as PBXs and embedded systems
such as cash registers and process control devices. The overall objective is
to seamlessly connect users by easily allowing them to use the underlying
network technology to share resources and information across heterogenous
systems.
Network Services. Novell delivers advanced network services on top of the
NetWare integration platform. These services enhance the functionality
available to users on the network. In the first release of NetWare eleven
years ago, those services were file and print only. Over the past decade the
services provided by Novell and third parties have expanded significantly to
include communications, network and systems management, messaging,
multiprotocol routing, software licensing and distribution, imaging and
document management, and telephony services. The Company's latest additions to
its services offerings include: a distributed directory that maintains a
network wide "yellow pages" of users, network equipment, computer systems, data
and network resources; and advanced disk compression capabilities that lower
the hardware requirements of networks.
Network Access. Novell network access products connect desktop PC and
Macintosh users with applications
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and services that run on UNIX host computers and the Internet through TCP/IP
communications protocols. The company also provides dial-in network access
products for remote access of network resources. Novell is developing mobile
NetWare client technology for synchronizing data used by mobile users with
network data when the users reconnect to a network. A three dimensional
network browser is also in development to provide point-and-click access to
network services, electronic publishing that simplifies creation and access
to network-based information, and intelligent browsing capabilities for
accessing distributed network resources. Novell system software is also being
developed to support next-generation public data networks that significantly
expand commercial and interpersonal network use. Novell, in partnership with
AT&T and other telecommunications providers, is working to deploy a worldwide
business-to-business internetwork, a secure commercial information highway.
Network Applications. Novell application technology spans from
secure on-line transaction processing for client server networks and legacy
systems to business applications and consumer applications. Novell delivers a
business application development and run-time framework for enterprise
transaction systems that scale from PCs, to network servers, to mainframe
computing systems. The Company's personal and group productivity business
applications are available as network applications which take advantage of
network services to support the productivity needs of businesses as well as
individuals. Novell applications address words, numbers, graphics and
electronic publishing to make useful information from data. Novell
applications also include a family of workgroup collaboration products for
electronic mail, calendaring and scheduling, document management and forms
processing. The Company is increasing the network orientation of its
applications by integrating them with network directories, management and
other services.
PROGRAMS
Technical Support Alliance. In May 1991 Novell announced the formation of
the Technical Support Alliance (TSA), with 41 current members including Apple,
Compaq, Hewlett-Packard, Intel, IBM, Lotus, Microsoft, and Oracle. The TSA
was organized to provide one-stop multivendor support. Member companies
provide cooperative efforts to support their customers.
Certified Novell Engineer Program. Through the Certified Novell Engineer
(CNE) program, Novell is strengthening the networking industry's Level I
support self-sufficiency. CNEs are individuals who receive high-level
training, information, and advanced technical telephone support (Level II) from
Novell. CNEs may be employed by resellers, independent support organizations,
or Novell Support Organizations (NSOs). The NSO program pools the capabilities
of the industry's best support providers. NSOs have contractual agreements
with Novell that are designed to ensure quality service on a national or global
level for NetWare, UnixWare, and other Novell products.
Novell Authorized Education Centers. Novell offers education to end
users through more than 1,300 independent Novell Authorized Education Centers
(NAECs) worldwide, which use Novell-developed courses to instruct students in
the use and maintenance of Novell products. Novell also offers self-paced
training products.
Novell Labs. Through its Independent Manufacturer Support Program (IMSP),
Novell works with third-party manufacturers to test and certify hardware and
software components designed to interoperate with the NetWare and UnixWare
operating systems. Novell distributes these test results to inform customers
about products that have formally demonstrated NetWare and UnixWare
compatibility. In effect, IMSP certification programs help vendors to market
their products through Novell's distribution channels. The primary goal of
IMSP is to foster working relationships between Novell and third-party hardware
and software suppliers. Secondary goals include promoting certified products
to industry resellers, anticipating industry products' direction through
comarketing efforts, and
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working with vendors to codevelop critical network components.
Client-Server NetWare Loadable Module (NLM) Testing Program. Novell is
committed to ensuring the highest quality customer solutions by raising the
level of importance that quality assurance and testing hold in the software
development cycle. The NLM testing program is a result of that commitment; it
allows developers to submit client-server NLM applications for testing.
PARTNERSHIPS
Development Partners. When customers request a new service or function be
added to Novell products, Novell investigates the most effective way to deliver
that functionality to the user. Very often the best way is for Novell to
partner with a company who has expertise in that specific area. By partnering,
the combination of Novell's core expertise in networks and the partner's
expertise in the given product area combine to deliver a better solution faster
than if Novell would have attempted to develop it alone.
Systems Partners. Novell partners with companies who have complimentary
software and hardware. The resulting solution is a powerful combination of
products that deliver enterprise-wide connectivity solutions. These partners
include system suppliers like IBM, DEC and HP, as well as system integration
experts like Memorex Telex, Arthur Andersen, EDS, etc.
Application Partners. Novell works very closely with application
developers to provide integrated software products and support for end users.
As network applications grow in importance, this program will help assure broad
availability of well integrated multivendor applications.
Multiple Channel Distribution Network. The Company markets its products
through a broad range of distributors, dealers, value added resellers, systems
integrators, and OEMs as well as to major end users.
Worldwide Service and Support. The Company is committed to providing
service and support on a worldwide basis to its resellers and to their end-user
customers. The Company has established agreements with third party service
vendors to expand and complement the service provided directly by the Company's
service personnel and the Company's resellers.
PRODUCT GROUPS
The Company's products fall within four operating groups: NetWare Systems
Group (NSG), Novell Applications Group (NAG), Information Access and Management
Group (IAMG), and UNIX Systems Group (USG).
NetWare Systems Group. NSG, with headquarters in Provo, Utah, is
chartered to extend the capabilities of NetWare, continuing Novell's industry
leadership in network operating systems and services. NSG provides the
operating system software and network services products for the users of
NetWare networks. NSG includes three divisions: the NetWare Products Division,
the Extended Networks Division and the AppWare Division.
The NetWare Products Division develops and markets NetWare, the core
network operating system, including key network services such as directory,
security, data storage/retrieval, and print services. The division provides
integrated client support for all industry standard desktops: DOS, MS Windows,
Macintosh, OS/2 and UNIX.
The Extended Networks Division provides software for manufacturers of
office equipment, industrial controls and consumer devices to create NetWare
ready products. The division's first product is Novell Embedded Systems
Technology (NEST). NEST software development kits enable printers, copiers,
fax machines, cellular telephones, pagers, set-top cable television boxes
and utility meters to be networked using NetWare networks.
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The AppWare Division provides AppWare software development tools that are
used to easily link applications with NetWare network services and UnixWare
application servers. AppWare and AppWare Loadable Module software components
from Novell and numerous industry partners enable customers to create custom
network applications.
Novell Applications Group. NAG, with headquarters in Orem, Utah,
develops personal and group productivity products and consumer applications.
The product group has three divisions: the Business Applications Division, the
GroupWare Division and the Consumer Products Division.
The Business Applications Division has responsibility for the
PerfectOffice suite as well as individual MS Windows applications including
WordPerfect, Quattro Pro and Presentations. In addition, the division supports
WordPerfect on the Macintosh, UNIX and DOS platforms and delivers electronic
publishing solutions through the Envoy electronic document publisher and
viewer. The division's objective is to deliver leading network applications
that enhance business and personal productivity.
The GroupWare Division is responsible for workgroup collaboration
applications including GroupWise electronic mail, calendaring and scheduling;
SoftSolutions document management; Informs forms processing and database access
software. Novell's NetWare MHS messaging infrastructure software is also the
responsibility of this division. Among other efforts, the division is
developing electronic conferencing and integrated voicemail capabilities to add
to GroupWise solutions.
The Consumer Products Division is delivering Main Street, an expanding
product line of consumer education, entertainment and productivity software
that includes the essential tools to run a small or home business.
Information Access and Management Group. IAMG, with headquarters in San
Jose, California, brings together communications, connectivity and management
software in five business divisions. The group is responsible for Novell's LAN
WorkPlace TCP/IP software product line. It provides NetWare for SAA, the
defacto market standard software for connecting desktop computers with IBM
system 370 and AS/400 host computers. IAMG also provides the Novell
Distributed Management Services software for end-to-end management of
enterprise information systems. IAMG is pursuing new initiatives aimed at
establishing a secure commercial public data network with tools to publish
information and browse network resources.
IAMG's five divisions are the Advanced Access Applications Division,
Network Management Division, Network Infrastructure Division, Host Connectivity
Division and Telephony Services Division. IAMG is also responsible for the
common protocol technology used across Novell and by many industry partners,
including the market standard TCP/IP communications protocol and the Novell
NLSP wide-area network routing protocol.
UNIX System Group. USG, with headquarters in Summit, New Jersey, is
extending the value of UNIX from its status as today's preferred platform for
line-of-business applications on mid-range and larger systems to a leadership
role on industry standard computers. USG has two divisions, the UnixWare
Division and the TUXEDO Division.
The UnixWare Division's charter is to establish UnixWare as a highly
scalable network application server platform with exceptionally fast access and
processing capabilities on eight, sixteen, and ultimately 32 bit processor
symmetrical multiprocessing systems that use industry standard Intel
processors. Key products include UnixWare and UNIX source products.
The TUXEDO Division provides secure on-line transaction processing
software for client server networks and legacy systems. TUXEDO is a business
application development and run-time framework for enterprise transaction
systems that scale from PCs, to network servers, to mainframe computing
systems.
PRODUCT DEVELOPMENT
Due to the rapid pace of technological change in its industry, the Company
believes that its future success will depend, in part, on its ability to
enhance and develop its network and applications software products to
satisfactorily
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meet dynamic market needs.
During fiscal 1994, 1993, and 1992, product development expenses were
approximately $347 million, $290 million, and $227 million, respectively. The
Company's product development effort consists primarily of work performed by
employees; however, the Company also utilizes third-party technology partners
to assist with product development.
SALES AND MARKETING
Novell markets its NetWare family of network products, the UnixWare
operating system and WordPerfect application products through distributors,
dealers, vertical market resellers, systems integrators, and OEMs who meet the
Company's criteria, as well as to major end users. In addition, the Company
conducts sales and marketing activities and provides technical support,
training, and field service to its customers from its offices in San Jose and
Sunnyvale, California; Summit, New Jersey; Provo and Orem, Utah; and from its
40 U.S. and 56 international sales offices.
Distributors. Novell has established a network of independent distributors,
which resell the Company's products to dealers, VARs, and computer retail
outlets. As of December 31, 1994, there were approximately 10 U.S.
distributors and approximately 80 international distributors.
Dealers. The Company also markets its products to large-volume dealers and
regional and national computer retail chains.
VARs and Systems Integrators. Novell also sells directly to value added
resellers and systems integrators who market data processing systems to
vertical markets, and whose volume of purchases warrants buying directly from
the Company.
OEMs. The Company licenses its systems software to domestic and international
OEMs for integration with their products. With the acquisition of USL, the
number of OEM agreements has increased significantly, both domestically and
internationally.
End Users. Generally, the Company refers prospective end-user customers to its
resellers. However, the Company has the internal resources to work directly
with major end users and has developed U.S. and international master license
agreements with approximately 250 of them to date. Additionally, some upgrade
products are sold directly to end users.
International Sales. In fiscal 1994, 1993, and 1992, approximately 43%, 43%,
and 46%, respectively, of the Company's net sales were to customers outside the
U.S.--primarily distributors. To date, substantially all international sales
except Japanese sales and WordPerfect international sales have been invoiced by
the Company in U.S. dollars. In fiscal 1995 the Company anticipates that a
substantial portion of international revenues will continue to be invoiced in
U.S. dollars. The exceptions to the U.S. dollar invoicing will be Japanese
sales through the Company's joint venture in Japan and certain European sales
to non-multinational distributors that will be shipped from a new distribution
center in Dublin, Ireland. No one foreign country accounted for more than 10%
of net sales in any period. In fiscal 1994 the Company had one multinational
distributor which accounted for 12% of revenue. The Company had two
multinational distributors, which accounted for 15% and 11% of revenue in
fiscal 1993 and 12% and 13% of revenue in fiscal 1992, respectively.
Otherwise, no one customer accounted for more than 10% of revenue in any
period.
Marketing. The Company's marketing activities include distribution of sales
literature and press releases, advertising, periodic product announcements,
support of NetWare user groups, publication of technical and other articles in
the trade press, and participation in industry seminars, conferences, and trade
shows. The marketing departments of the Company employ many technical
laboratories which test and evaluate networked computer equipment and
individual devices. The knowledge derived from these laboratories is the basis
for the technical publications published by the Company. These activities are
designed to educate the market about local area networks in general, as well as
to promote the Company's products. Through the Professional Developers
Program,
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the Company strongly supports independent software and hardware vendors in
developing products that work on Novell networks. Thousands of multiuser
application software packages are now compatible with the NetWare operating
system. In March 1994, the tenth annual BrainShare Conference (formerly
Developers' Conference) was held to inform and educate developers about Novell
product strategy, Novell open architecture programming interfaces, and Novell
third-party product certification programs.
SERVICE, SUPPORT, AND EDUCATION
The purpose of any service program is to help users get the most out of
the products they buy. Novell offers a variety of support alternatives and
encourages users to select the services that best meet their needs. These
include the worldwide service and support organization, the Technical Support
Alliance, the Certified Novell Engineer program, Novell Authorized Education
Centers, the Independent Manaufacturer Support Program, and the Client-Server
Testing Program.
MANUFACTURING SUPPLIERS
The Company's products, which consist primarily of software diskettes and
manuals, are duplicated by outside vendors. This allows the Company to
minimize the need for expensive capital equipment in an industry in which
multiple high-volume manufacturers are available.
BACKLOG
Lead times for the Company's products are typically short. Consequently,
the Company does not believe that backlog is a reliable indicator of future
sales or earnings. The absence of significant backlog may contribute to
unpredictability in the Company's net income and to fluctuations in the
Company's stock price. See "Factors Affecting Earnings and Stock Price." The
Company's backlog of orders at January 20, 1995, was approximately $51 million,
compared with $35 million at January 21, 1994.
COMPETITION
Novell competes in the highly competitive market for computer software,
including in particular, network and general purpose operating systems, network
services, desktop operating systems and application software. Novell believes
that the principal competitive factors are technical innovation to meet dynamic
market needs, hardware independence and compatibility, marketing strength in
operating systems and applications, system/performance, customer service and
support, reliability, ease of use, price/performance, and connectivity with
minicomputer and mainframe hosts.
The market for operating systems software, including network and general
purpose operating systems, client operating systems and application
software, has become increasingly problematic due to Microsoft's growing
dominance in all sectors of the software business. The Company does not have
the product breadth and market power of Microsoft. Microsoft's dominant
position provides it with enormous competitive advantages, including the
ability to unilaterally determine the direction of future operating systems and
to leverage its strength in one or more product areas to achieve a dominant
position in new markets. This position may enable Microsoft to increase its
market position even if the Company succeeds in introducing products with
performance and features superior to those offered by Microsoft.
Microsoft's ability to offer networking functionality in future versions
of MS Windows and MS Windows NT and in any other Microsoft operating systems
and application software, or to provide incentives to customers to purchase
certain products in order to obtain favorable sales terms or necessary
compatibility or information with respect to other products, may significantly
inhibit the Company's ability to maintain its business. Moreover, Microsoft's
ability to offer products on a bundled basis can be expected to impair the
Company's competitive position with respect to particular products. In
addition, as Microsoft creates new operating systems and applications, there
can be no assurance that Novell will be able to ensure that its products will
be compatible with those of Microsoft.
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The Company is aware of several new competitive operating systems
currently under development and scheduled for introduction within the next year
and beyond. If any of these operating systems achieves market acceptance for
use with the types of applications sold by Novell and Novell does not introduce
application programs for them in a timely manner, Novell's business and results
of operations could be materially adversely affected.
In the market for MS Windows word processing applications, WordPerfect for
MS Windows competes with, among others, Microsoft's Word and Lotus' Ami Pro.
Novell believes that the Company's share of the Windows word processing market
will be a critical factor in its future success. Although the Company has
increased its share of this market during the past year, it remains second to
Microsoft which has achieved a dominant position in sales of application
software in the MS Windows market. The market for MS Windows applications is
currently characterized by severe competitive pressure, and attempts by major
participants to maintain or increase market can be expected to continue to
result in rapid reductions in product prices. In addition, the Company's
principal competitors, including Microsoft, are combining a number of
application programs in a "bundle" or "suite" for sale as one unit or arranging
with hardware manufacturers to preload application programs on new computers.
The price for a bundle or suite is typically significantly less than the price
for separately purchased applications, and many end users are likely to prefer
the bundle or suite over a more expensive combination of other individually
purchased applications, even if the latter applications offer superior
performance or features. Microsoft, Lotus and the Company offer bundles or
suites of their respective products at prices significantly discounted from the
prices of stand alone products. In the past, Microsoft and Lotus have each
achieved a significantly greater market share in sales of software suites.
There can be no assurance that the new PerfectOffice suite offered by the
Company will result in a significant increase in market share or that any such
success will be sustained. To the extent that bundling, suites and preloading
arrangements by competitors are more successful than those of the Company, the
Company's business and results of operations could be materially adversely
affected.
LICENSES, PATENTS AND TRADEMARKS
The Company relies on copyright, patent, trade secret and trademark law,
as well as provisions in its license, distribution and other agreements in
order to protect its intellectual property rights. Additionally, the Company
has numerous patents pending in foreign countries. No assurance can be given
that such patents pending will be issued or, if issued, will provide protection
for the Company's competitive position. Although Novell intends to protect its
patent rights vigorously, there can be no assurance that these measures will be
successful. Additionally, no assurance can be given that the claims on any
patents held by the Company will be sufficiently broad to protect the Company's
technology. In addition, no assurance can be given that any patents issued to
the Company will not be challenged, invalidated or circumvented or that the
rights granted thereunder will provide competitive advantages to the Company.
The loss of patent protection on the Company's technology or the circumvention
of its patent protection by competitors could have a material adverse effect on
the Company's ability to compete successfully in its products business.
The software industry is characterized by frequent litigation regarding
copyright, patent and other intellectual property rights. The Company has from
time to time had infringement claims asserted by third parties against it and
its products. While there are no known or pending threatened claims against
the Company, the unsatisfactory resolution of which would have a material
adverse effect on the Company's results of operations and financial condition,
there can be no assurance that such third party claims will not be asserted, or
if asserted, will be resolved in a satisfactory manner. In addition, there can
be no assurance that third parties will not assert other claims against the
Company with respect to any third-party technology. In the event of litigation
to determine the validity of any third-party claims, such litigation could
result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel, whether or not such litigation is
determined in favor of the Company.
In the event of an adverse result in any such litigation, the Company
could be required to expend significant resources to develop non-infringing
technology or to obtain licenses to the technology which is the subject of the
litigation. There can be no assurance that the Company would be successful in
such development or that any such licenses would be available. In addition,
the laws of certain countries in which Novell's products are or may be
developed, manufactured or sold may not protect the Company's products and
intellectual property rights to the
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same extent as the laws of the United States.
EMPLOYEES
As of December 31, 1994, the Company had 7,914 employees. The functional
distribution of its employees was: sales and marketing--2,097; product
development and marketing--2,723; general and administrative--937; service,
support and education--1,866; and operations--291. Of these, 375 employees are
located in U.S. field offices, and 1,586 employees are in offices outside the
U.S. All other Company personnel are based at the Company's facilities in
Utah, California, and New Jersey. None of the employees is represented by a
labor union, and the Company considers its employee relations to be excellent.
Competition for qualified personnel in the computer industry is intense.
To make a long-term relationship with the Company rewarding, Novell endeavors
to give its employees and consultants challenging work, educational
opportunities, competitive wages, sales commission plans, bonuses, and through
stock option and purchase plans, opportunities to participate financially in
the ownership and success of the Company.
FACTORS AFFECTING EARNINGS AND STOCK PRICE
In addition to factors described above under "Competition" which may
adversely affect the Company's earnings and stock price, other factors may also
adversely affect the Company's earnings and stock price. The successful
combination of companies is difficult and in the high technology industry may
be more difficult to accomplish than in other industries. There can be no
assurance that Novell will be successful in integrating acquired businesses
into its own, that it will retain their key technical and management personnel
or that Novell will realize any other anticipated benefits of the acquisitions.
The ability of the Company to maintain its competitive technological
position will depend, in large part, on its ability to attract and retain
highly qualified development and managerial personnel. Competition for such
personnel is intense. While the acquisitions in fiscal 1993 and 1994 have
increased the Company's human resources in these areas, there is a risk of
departure of key employees due to the competitive environment in the software
industry. The loss of a significant group of key personnel would adversely
affect the Company's product development efforts.
Approximately 80% and 86% of WordPerfect's revenues during 1993 and 1992,
respectively, were derived from sales of various versions of WordPerfect's
flagship document processing product, WordPerfect. Although additional
products are currently being sold or developed, Novell believes that
WordPerfect in its various forms will continue to be the Company's primary
application product for the foreseeable future.
As is common in the computer software industry, the Company has
experienced delays in its product development and "debugging" efforts, and the
Company can be expected to experience similar delays from time to time in the
future. Significant delays in developing, completing or shipping new or enhanced
products would adversely affect the Company. There can be no assurance that
the Company will be able to respond effectively to technological changes or new
product announcements by others, or that the Company's research and development
efforts will be successful. In the past, Novell has experienced delays in the
introduction of new products, due to the complexity of software products, the
need for extensive testing of software to ensure compatibility of new releases
with a wide variety of application software and hardware devices and the need
to "debug" products prior to extensive distribution. Moreover, the Company may
experience delays in market acceptance of new releases of its products as the
Company engages in marketing and education of the user base regarding the
advantages and system requirements for the new products and as customers
evaluate the advantages and disadvantages of upgrading. The Company has
encountered these issues on each major new release of its products, and expects
that it will encounter such issues in the future. Novell's ability to achieve
desired levels of sales growth depends at least in part on the successful
completion, introduction and sale of new versions of its products. Should
Novell experience material
10
<PAGE> 11
delays or sales shortfalls with respect to these product releases, the
Company's sales and net income could be adversely affected.
A fundamental goal of the Company will be the delivery of workgroup
application solutions combining networking services and workgroup applications.
The future success of this strategy will depend in part on the Company's
ability to develop and market new competitive products for workgroup
productivity and information processing. Development of these products has
already required and will continue to require a substantial investment in
research and development, particularly as a result of the decision to offer
products across multiple operating environments. Although Novell's existing
network of distributors should assist in this transition, marketing and
distribution of these products may require developing new marketing and sales
strategies and will entail significant expense. The Company has had only
limited experience in the market for these products, and there can be no
assurance that the Company will be successful in developing and marketing these
new products.
The Company's future earnings and stock price could be subject to
significant volatility, particularly on a quarterly basis. The Company's
revenues and earnings may be unpredictable due to its anticipated shipment
patterns. As is typical in the software industry, a high percentage of the
Company's revenues are expected to be earned in the third month of each fiscal
quarter and will tend to be concentrated in the latter half of that month.
Accordingly, quarterly financial results will be difficult to predict and
quarterly financial results may fall short of anticipated levels. Because the
Company's backlog early in a quarter will not generally be large enough to
assure that it will meet its revenue targets for any particular quarter,
quarterly results may be difficult to predict until the end of the quarter. A
shortfall in shipments at the end of any particular quarter may cause the
results of that quarter to fall significantly short of anticipated levels. Due
to analysts' expectations of continued growth and the historically high
price/earnings ratio at which Novell's Common Stock trades, any such shortfall
in earnings can be expected to have an immediate and very significant adverse
effect on the trading price of Novell's Common Stock in any given period. The
past pattern of new application and operating system product introductions has
caused revenues to fluctuate, sometimes significantly, on a quarter-by-quarter
basis. Such revenue fluctuations may contribute to the volatility of the
trading price of Novell Common Stock in any given period.
The acquisitions in fiscal 1994 have resulted in greater involvement by
Novell in the market for applications software. To compete successfully in the
applications market, Novell anticipates incurring significantly higher
expenditures in sales, marketing and customer support as a percent of net sales
than is typically incurred in the sale of operating systems. Accordingly, the
Company can be expected to incur greater operating expenses, both in aggregate
dollars and as a percentage of total net sales, than Novell has incurred in the
past. Although the Company will seek to offset such higher operating costs
through higher sales levels derived from a broader product offering and
continued cost controls, there can be no assurance that the Company will be
successful in such efforts.
In addition, the market prices for securities of software companies have
generally been volatile in recent years. The market price of Novell Common
Stock, in particular, has been subject to wide fluctuations in the past. As a
result of the foregoing factors and other factors that may arise in the future,
the market price of Novell's Common Stock may be subject to significant
fluctuations within a short period of time. These fluctuations may be due to
factors specific to the Company, to changes in analysts' earnings estimates, or
to factors affecting the computer industry or the securities markets in
general.
11
<PAGE> 12
ITEM 1a. Executive Officers of the Registrant
Set forth below are the names, ages, titles with Novell, and present and
past positions of the persons currently serving as executive officers of
Novell.
<TABLE>
<CAPTION>
HAS BEEN
OFFICER
NAME AGE SINCE POSITION OR OFFICE
- ---- --- ----- ------------------
<S> <C> <C> <C>
Robert J. Frankenberg 47 1994 Chairman of the Board, President,
and Chief Executive Officer
Mary M. Burnside 47 1989 Executive Vice President and Chief Operating Officer
Michael J. DeFazio 48 1994 Executive Vice President, UNIX Systems Group
Richard W. King 38 1993 Executive Vice President, NetWare Systems Group
Joseph A. Marengi 41 1993 Executive Vice President, Worldwide Sales
Steven Markman 49 1994 Executive Vice President, Information Access &
Management Group
Adrian Rietveld 40 1994 Executive Vice President, Novell Applications Group
James R. Tolonen 45 1989 Executive Vice President and Chief Financial Officer
David R. Bradford 44 1986 Senior Vice President, General Counsel,
and Corporate Secretary
Ernest J. Harris 47 1994 Senior Vice President, Human Resources
Christine G. Hughes 48 1994 Senior Vice President, Corporate Marketing
John C. Lewis 40 1994 Senior Vice President, Services and Support
David C. Moon 36 1994 Senior Vice President, Development, Applications Group
R. Duff Thompson 43 1994 Senior Vice President, Corporate Development
Stephen C. Wise 40 1990 Senior Vice President, Finance
Darcy G. Mott 42 1989 Treasurer
</TABLE>
Raymond J. Noorda, a founder of the Company, was President, Chief
Executive Officer, and a director of the Company since March 1983, and Chairman
of the Board since January 1986. In April 1994 he resigned as President and
Chief Executive Officer, in August 1994 as Chairman of the Board, and in
October as a Member of the Board of Directors.
Robert J. Frankenberg joined the Company in April 1994 as President and
Chief Executive Officer. In August 1994 he became Chairman of the Board of
Directors. Prior to joining Novell, he was with Hewlett Packard, an
international computation and measurement company, for 25 years in various
engineering, management and marketing positions. Most recently he served as
Vice President and General Manager of the Personal Information Products Group.
Mary M. Burnside joined the Company in January 1988 and in January 1989
she became Senior Vice President, Operations and was elected a corporate
officer. In November 1991 she became Executive Vice President, Corporate
Services Group. In August 1993 she joined the Office of the President as Chief
Operating Officer. In April 1994 she became Executive Vice President and Chief
Operating Officer.
Michael J. DeFazio joined the Company as Vice President, UNIX Systems
Group, when the Company acquired USL in June 1993. In January 1994 he became
Executive Vice President, UNIX Systems Group and was
12
<PAGE> 13
elected a corporate officer. Prior to the USL acquisition, he had been with
USL since its formation in 1989, most recently as Executive Vice President,
UNIX System V Software since 1989.
John W. Edwards joined the Company in August 1988 and held various
marketing positions until April 1992 when he became Executive Vice President,
Desktop Systems Group and was elected a corporate officer. In August 1993 he
became Executive Vice President, AppWare Systems Group. In October 1994 he
became Senior Vice President, Customer Relations and resigned as a corporate
officer.
Richard W. King joined the Company in 1985 and became Vice President,
Software Development in April 1986. In September 1987 he became Vice
President, NetWare Products Division and in September 1991 he became Vice
President, Service and Support. In August 1993 he was promoted to Executive
Vice President, NetWare Systems Group and was elected a corporate officer.
Joseph A. Marengi joined the Company in June 1989 through the Excelan
merger and held various sales positions with the Company until October 1992
when he became Senior Vice President, Worldwide Sales. In August 1993 he was
elected a corporate officer. In April 1994 he became Executive Vice President,
Worldwide Sales.
Kanwal S. Rekhi joined the Company in June 1989 through the Excelan
merger and became an Executive Vice President and Director of the Company. He
served in this capacity until January 1995, when he resigned from the Company.
He continues to serve as a consultant to the Company and as a member of the
Board of Directors.
Steven Markman joined the Company in August 1994 as Executive Vice
President, Information Access & Management Group. From March 1994 to August
1994 he was with First Pacific Networks, Inc., a cable telephony company as
Vice President of Engineering. From April 1991 to February 1994 he was with
Network Equipment Technologies, Inc., a network systems company as Senior Vice
President and General Manager. From June 1988 to April 1991 he was with
Hewlett Packard, an international computation and measurement company, where
he served most recently as General Manager for the Information Networks
Division.
Adrian Rietveld joined the Company in June 1994 through the WordPerfect
merger as Executive Vice President, Novell Applications Group and was elected a
corporate officer. He joined WordPerfect in 1988 and served in various
positions until November 1992 when he became Senior Vice President, Sales and
Marketing. In January 1994 he was promoted to President and Chief Executive
Officer of WordPerfect.
James R. Tolonen, a Certified Public Accountant, joined the Company in
June 1989 through the Excelan merger and became a Senior Vice President and
Chief Financial Officer in August 1989 and was elected a corporate officer. In
August 1993 he joined the Office of the President as Chief Financial Officer.
In April 1994 he became Executive Vice President and Chief Financial Officer.
David R. Bradford joined the Company in October 1985 as Corporate
Counsel. He became Corporate Secretary in January 1986, Senior Corporate
Counsel in April 1986, and Senior Vice President, General Counsel, and
Corporate Secretary in April 1989.
Robert W. Davis joined the Company in June 1989 through the Excelan
merger and held various marketing positions until November 1992 when he became
Vice President, Connectivity Products. In August 1993 he became Vice
President Marketing, UNIX Systems Group. In January 1994 he became Senior Vice
President, Corporate Marketing and was elected a corporate officer. In
September 1994 he resigned from the Company.
Ernest J. Harris joined the Company in June 1989 through the Excelan
merger and became Vice President, Human Resources in August 1989. In May 1990
he became Senior Vice President, Human Resources and in January 1994 was
elected a corporate officer.
13
<PAGE> 14
Christine G. Hughes joined the Company in December 1994 as Senior Vice
President, Corporate Marketing. From July 1991 to November 1994 she was with
Xerox Corporation, a worldwide provider of document services, in various
positions, most recently as Vice President, Integrated Marketing -- U.S.
Operations. From January 1990 to July 1991 she was President of Myriad
Technologies, a market research and consulting company. From 1983 to 1989 she
was with Gartner Group, a technology market research company, as Vice
President, Office Technology Group.
John C. Lewis joined the Company in June 1994 through the WordPerfect
merger and became Senior Vice President, Services and Support in October 1994
and was elected a corporate officer. He joined WordPerfect in February 1985
and served in various positions prior to the merger, most recently as Executive
Vice President in the Office of the President.
David C. Moon joined the Company in June 1994 through the WordPerfect
merger and became Senior Vice President, Development, Applications Group in
October 1994 and was elected a corporate officer. He joined WordPerfect in
December 1982 and served in various positions prior to the merger, most
recently as Senior Vice President and Chief Technology Officer.
Jan E. Newman joined the Company in June 1986 and held various positions
until March 1991 when he became Vice President, Support and Services. He was
made Vice President, NetWare Products in November 1991. In April 1992 he
became Executive Vice President, NetWare Systems Group and was elected as a
corporate officer. In August 1993 he became Senior Vice President, Service and
Support and Novell Labs. In October 1994 he became Vice President, Services
and Support and resigned as a corporate officer.
R. Duff Thompson joined the Company in June 1994 through the WordPerfect
merger and became Senior Vice President, Corporate Development in October 1994
and was elected a corporate officer. He joined WordPerfect in December 1986
and served most recently as Executive Vice President in the Office of the
President and General Counsel.
Stephen C. Wise joined the Company in June 1989 through the Excelan
merger and became Vice President, Accounting and Planning in January 1990 and
was elected a corporate officer. In January 1991 he became Vice President and
Corporate Controller and in December 1993 he became Senior Vice President,
Finance.
Darcy G. Mott, a Certified Public Accountant, joined the Company in
September 1986. He served in various finance positions and became Corporate
Controller in February 1989. He was elected a corporate officer in November
1989 and became Treasurer in January 1991.
14
<PAGE> 15
ITEM 2. Properties
The Company owns and occupies a 1,000,000 square-foot office complex on
99 acres in Orem, Utah, which is used as corporate headquarters and a product
development center. It also owns and occupies a 550,000 square-foot office
complex on 46 acres in Provo, Utah, which is used as a product development
center. It also owns a 380,000 square-foot manufacturing and distribution
facility on 23 acres in Lindon, Utah, all but 40,000 square-feet of which is
leased to a third party manufacturer. The Company also owns a 175,000
square-foot office complex in Austin, Texas. During 1991 through 1994,
approximately 80,000 square-feet of this complex was used as a product
development center however, the facility is now leased to tenants.
Additionally, the Company owns a 100,000 square-foot office building in
Herndon, Virginia. The Company occupies approximately 1/2 of the space in this
building and leases the remainder to tenants. The Company also owns a 52,000
square foot building in San Jose, California, which it had previously leased.
It is used primarily for product development. Additionally, the Company owns
approximately 48 acres of undeveloped land in San Jose, California and has
capacity to expand on its land in Orem and Provo, Utah.
The Company has subsidiaries in Argentina, Australia, Austria, Belgium,
Brazil, Canada, Chile, China, Commonwealth of Independent States, Czech
Republic, Denmark, Finland, France, Germany, India, Italy, Japan, Korea,
Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Singapore, South
Africa, Spain, Sweden, Switzerland, and the United Kingdom--each of which
leases its facilities.
The Company leases offices for product development in San Jose, Scotts
Valley, Sunnyvale, and Walnut Creek, California; Boulder, Colorado; Summit, New
Jersey; Salt Lake City and Sandy, Utah; Toronto, Canada; and Hungerford, U.K.;
and a distribution facility in San Jose, California. The Company also leases
sales and support offices in Arizona, California (6), Colorado, Connecticut,
Florida (2), Georgia, Illinois (2), Massachusetts, Michigan, Minnesota,
Missouri, New Jersey, New York (2), North Carolina, Ohio (2), Oregon,
Pennsylvania (2), Tennessee, Texas (2), Utah, Washington, Hong Kong, Taiwan,
and United Arab Emirates.
The terms of such leases vary from month to month to up to ten years.
ITEM 3. Legal Proceedings
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 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. On June 6, 1994, Novell
filed a petition with the U.S. Patent and Trademark Office requesting 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 operation.
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.
15
<PAGE> 16
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters
The information required by Item 5 of Form 10-K is incorporated herein
by reference to the information contained in the section captioned "Selected
Consolidated Quarterly Financial Data" on page 41 of the Company's Annual
Report to Shareholders for the fiscal year ended October 29, 1994.
ITEM 6. Selected Financial Data
The information required by Item 6 of Form 10-K is incorporated herein
by reference to the information contained in the section captioned "Selected
Consolidated Financial Data" on page 22 of the Company's Annual Report to
Shareholders for the fiscal year ended October 29, 1994.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by Item 7 of Form 10-K is incorporated herein
by reference to the information contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 23 through 27 of the Company's Annual Report to
Shareholders for the fiscal year ended October 29, 1994.
ITEM 8. Financial Statements and Supplementary Data
The information required by Item 8 of Form 10-K is incorporated herein
by reference to the Company's consolidated financial statements and related
notes thereto, together with the report of the independent auditors presented
on pages 28 through 40 of the Company's Annual Report to Shareholders for the
fiscal year ended October 29, 1994, and to the information contained in the
section captioned "Selected Consolidated Quarterly Financial Data" on page 41
of the Company's Annual Report to Shareholders for the fiscal year ended
October 29, 1994.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
16
<PAGE> 17
PART III
ITEM 10. Directors and Executive Officers of Registrant
The information required with respect to identification of directors is
incorporated herein by reference to the information contained in the section
captioned "Election of Directors" of the Registrant's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held April 12, 1995, to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
under the Securities and Exchange Act of 1934, as amended. Information
regarding executive officers of Novell is set forth under the caption
"Executive Officers" in Item 1a hereof.
Each director and each officer of the Company who is subject to Section
16 of the Securities Exchange Act of 1934 (the "Act") is required by Section
16(a) of the Act to report to the Securities and Exchange Commission by a
specified date his or her transactions in the Company's securities. In fiscal
1994, there were no compliance exceptions to this requirement.
ITEM 11. Executive Compensation
The information required by Item 11 of Form 10-K is incorporated by
reference to the information contained in the sections captioned "Executive
Compensation" of the Registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held April 12, 1995, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Securities
Ownership of Certain Beneficial Owners and Management" of the Registrant's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held
April 12, 1995, to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended.
ITEM 13. Certain Relationships and Related Transactions
The information required by Item 13 of Form 10-K is incorporated by
reference to the information contained in the section captioned "Certain
Transactions" of the Registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on April 12, 1995, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Act of 1934, as amended.
17
<PAGE> 18
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as a part of this annual report on
Form 10-K for Novell, Inc.:
1. The Consolidated Financial Statements, the Notes to
Consolidated Financial Statements and the Report of Ernst &
Young LLP, Independent Auditors, listed below are
incorporated herein by reference to pages 28 through 40 of
the Company's Annual Report to Shareholders for the fiscal
year ended October 29, 1994.
Consolidated Statements of Income for the fiscal
years ended October 29, 1994, October 30, 1993, and
October 31, 1992.
Consolidated Balance Sheets at October 29, 1994 and
October 30, 1993.
Consolidated Statements of Shareholders' Equity for the
fiscal years ended October 29, 1994, October 30, 1993,
and October 31, 1992.
Consolidated Statements of Cash Flows for the fiscal
years ended October 29, 1994, October 30, 1993, and
October 31, 1992.
Notes to Consolidated Financial Statements.
Report of Ernst & Young LLP, Independent Auditors.
_______________________________________________________
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Price Waterhouse LLP, Independent Accountants 20
2. Financial Statement Schedules:
Schedule VIII -- Valuation and Qualifying Accounts 21
Schedules other than that listed above are omitted
because they are not required, not applicable or because the
required information is shown in the consolidated financial
statements or notes thereto.
3. Exhibits:
A list of the exhibits required to be filed as
part of this report is set forth in the Exhibit
Index, which immediately precedes such exhibits, and
is incorporated herein by this reference thereto. 22
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the
quarter ended October 29, 1994.
</TABLE>
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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: January 23, 1995 By /s/ Robert J. Frankenberg
-------------------------
(Robert J. Frankenberg
Chairman of the Board,
President and Chief
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Title Date
---- ----- ----
/s/ Robert J. Frankenberg Chairman of the Board, January 23, 1995
- --------------------------------- President, Chief Executive
(Robert J. Frankenberg) Officer and Director
(Principal Executive Officer)
/s/ James R. Tolonen Executive Vice President January 23, 1995
- --------------------------------- and Chief Financial Officer
(James R. Tolonen) (Principal Financial Officer)
/s/ Stephen C. Wise Senior Vice President, Finance January 23, 1995
- --------------------------------- (Principal Accounting Officer)
(Stephen C. Wise)
/s/ Alan C. Ashton Director January 23, 1995
- ---------------------------------
(Alan C. Ashton, Ph.D.)
/s/ Bruce W. Bastian Director January 23, 1995
- ---------------------------------
(Bruce W. Bastian)
/s/ Elaine R. Bond Director January 23, 1995
- ---------------------------------
(Elaine R. Bond)
/s/ Jack L. Messman Director January 23, 1995
- ---------------------------------
(Jack L. Messman)
/s/ Kanwal S. Rekhi Director January 23, 1995
- ---------------------------------
(Kanwal S. Rekhi)
/s/ Larry W. Sonsini Director January 23, 1995
- ---------------------------------
(Larry W. Sonsini)
/s/ Ian R. Wilson Director January 23, 1995
- ---------------------------------
(Ian R. Wilson)
</TABLE>
19
<PAGE> 20
REPORT OF PRICE WATERHOUSE LLP, INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of WordPerfect Corporation
In our opinion, the consolidated balance sheet and the related
consolidated statements of income, shareholders' equity and of cash flows (not
presented separately herein) of WordPerfect Corporation present fairly, in all
material respects, the financial position of WordPerfect Corporation and its
subsidiaries at December 31, 1993 and the results of their operations and their
cash flows for the years ended December 31, 1993 and 1992, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Salt Lake City, Utah
March 22, 1994
20
<PAGE> 21
NOVELL, INC.
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Accounts Receivable Allowance
---------------------------------------------------------------------
(In thousands)
Balance at Additions Balance at
Beginning Charged to End of
of Period Operations Deductions(1) Period
---------- ---------- ------------- ------
<S> <C> <C> <C> <C>
Fiscal year ended
October 31, 1992 $23,300 $15,983 $784 $38,499
Fiscal year ended
October 30, 1993 $38,499 $22,047 $10,344 $50,202
Fiscal year ended
October 29, 1994 $50,202 $43,037 $10,305 $82,934
</TABLE>
(1) Write-off of uncollectible accounts
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1 Restated Certificate of Incorporation.(4) (Exhibit 3.1)
3.2 By-Laws.(1) (Exhibit 3.1)
4.1 Reference is made to Exhibit 3.1.
4.2 Form of certificate representing the shares of Novell Common Stock.(1) (Exhibit 4.3)
4.3 Rights Agreement dated December 7, 1988, between Novell, Inc. and Mellon Bank (East) N.A., as Rights Agent,
relating to the Shareholder Rights Plan.(3) (Exhibit 1)
10.1 Novell, Inc., Employee Retirement and Savings Plan dated December 8, 1986.(2) (Exhibit 10.9)
10.2 Agreement and Plan of Reorganization dated March 23, 1989, among Novell, Inc.; Lansub Corporation; and
Excelan, Inc.(5) (Appendix A)
10.3 Novell, Inc. 1989 Employee Stock Purchase Plan.(6) (Exhibit 4.1)
10.4 Agreement and Plan of Reorganization dated July 16, 1991, among Novell, Inc.; MDAC Corp.; and Digital Research
Inc.(7) (Appendix A)
10.5 Novell, Inc. 1991 Stock Plan.(8) (Exhibit 10.1)
10.6 Agreement and Plan of Reorganization and Merger dated February 12, 1993, among Novell, Inc.; Novell Acquisition
Corp.; UNIX System Laboratories, Inc.; and American Telephone and Telegraph Company.(9) (Appendix A).
10.7 UNIX System Laboratories, Inc. Stock Option Plan.(10) (Exhibit 4.3)
10.8 Agreement and Plan of Reorganization dated March 21, 1994 and amended May 31, 1994, among Novell, Inc.;
Novell Acquisition Corp.; WordPerfect Corporation, Alan C. Ashton, Bruce W. Bastian, and Melanie L. Bastian.(11)
(Appendix A & Exhibit 1.1)
10.9 Novell, Inc. Novell/WordPerfect Stock Plan.(12)(Exhibit 10.1)
11 Statement regarding computation of per share earnings.(13)
13 Company's Annual Report to Shareholders for the fiscal year ended October 29, 1994.(13)
21 Subsidiaries of the Registrant.(13)
23.1 Consent of Ernst & Young LLP, independent auditors.(13)
23.2 Consent of Price Waterhouse LLP, independent accountants.(13)
27 Financial Data Schedule(13)
(1) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's
Registration Statement on Form S-1, filed November 30, 1984, and amendments thereto (File No. 2-94613).
(2) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's
Annual Report on Form 10-K, filed for the fiscal year ended October 25, 1986 (File No. 0-13351).
(3) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's
Current Report on Form 8-K, dated December 7, 1988 (File No. 0-13351).
(4) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's
Annual Report on Form 10-K, filed for the fiscal year ended October 29, 1988 (File No. 0-13351).
(5) Incorporated by reference to the Appendix identified in parentheses, filed as an appendix in the Registrant's
Registration Statement on Form S-4, filed May 9, 1989 (File No. 33-28470).
(6) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's
Registration Statement on Form S-8, filed September 28, 1989 (File No. 33-31299).
(7) Incorporated by reference to the Appendix identified in parentheses, filed as an appendix in the Registrant's
Registration Statement on Form S-4, filed September 24, 1991 (File No. 33-42254).
(8) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's
Registration Statement on Form S-8, filed June 5, 1992 (File No. 33-48395).
(9) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's
Registration Statement of Form S-4, filed May 13, 1993 (File No. 33-60120).
(10) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's
Registration Statement on Form S-8, filed July 2, 1993 (File No. 33-65440).
(11) Incorporated by reference to the Appendix and Exhibit identified in parentheses, filed as an appendix and
exhibit in the Registrant's Registration Statement on Form S-4, filed June 13, 1994 (File No. 33-53215).
(12) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrants'
Registration Statement of Form S-8, filed July 8, 1994 (File No. 33-54483).
(13) Filed herewith.
</TABLE>
22
<PAGE> 1
EXHIBIT 11
NOVELL, INC.
STATEMENT REGARDING COMPUTATION OF PER-SHARE EARNINGS
The computation of common and common share equivalents is as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------
October 31, 1992 October 30, 1993 October 29, 1994
---------------- ---------------- ----------------
<S> <C> <C> <C>
Weighted average number
of common shares outstanding* 348,245 358,490 361,648
Number of common share equivalents
resulting from stock options,
computed using the treasury stock
method* 11,239 9,410 6,684
------- ------- -------
Number of common and common
share equivalents used in
computation* 359,484 367,900 368,332
======= ======= =======
</TABLE>
*All share amounts reflect the August 26, 1992 two-for-one stock split and
the June 1994 merger with WordPerfect Corporation.
<PAGE> 1
EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL DATA
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
OCT. 29 Oct. 30 Oct. 31 Oct. 26 Oct. 27
1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
Net sales $1,998,077 $1,830,411 $1,512,488 $1,262,073 $1,003,444
Gross profit 1,531,011 1,427,809 1,185,781 994,831 783,965
Income from operations 269,943 108,098 428,146 428,673 331,209
Income before taxes 297,383 138,157 461,807 461,212 351,840
Income taxes 90,652 97,437 139,829 97,896 58,872
Net income 206,731 40,720 321,978 363,316 292,968
Net income per share .56 .11 .90 1.05 .90
- ---------------------------------------------------------------------------------------------------
BALANCE SHEET
Cash and short-term investments $ 861,809 $ 719,197 $ 631,829 $ 513,113 $ 362,109
Working capital 990,411 859,308 727,068 561,653 397,166
Total assets 1,963,481 1,745,337 1,430,475 1,133,500 789,068
Long-term debt -- 84,289 12,256 2,471 10,816
Shareholders' equity 1,486,987 1,146,026 1,115,047 884,282 603,438
- ---------------------------------------------------------------------------------------------------
KEY RATIOS
Current ratio 3.1 3.2 3.5 3.4 3.3
Return on sales 10% 2% 21% 29% 29%
Return on average total assets 11% 3% 25% 38% 45%
Return on average equity 16% 4% 32% 49% 63%
- ---------------------------------------------------------------------------------------------------
GROWTH PERCENTAGES
Net sales 9% 21% 20% 26% 36%
Net income 408% -87% -11% 24% 95%
Net income per share 409% -88% -14% 17% 91%
===================================================================================================
</TABLE>
22.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Novell's business is connecting people with other people and the information
they need, enabling them to act on it anytime, anyplace. Novell is a leading
provider of networking and application software. The Company's software
products provide the distributed infrastructure, network services, advanced
network access and network applications required to make networked information
and computing an integral part of everyone's daily life.
Over the past several years, 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 a pervasive computing
environment, and in many cases to also broaden the Company's business as a
system and application software supplier.
In June 1994, the Company completed a merger with WordPerfect Corporation
(WordPerfect) whereby WordPerfect was merged directly into Novell.
Approximately 51 million shares of Novell common stock were exchanged for all
of the outstanding common stock of WordPerfect. In addition, the outstanding
employee stock options to purchase WordPerfect common stock were converted into
options to purchase approximately 8 million shares of Novell common stock. The
transaction was accounted for as a pooling of interests and therefore, all prior
period financial statements presented herein have been restated as if the merger
took place at the beginning of such periods.
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 million for purchased research and
development.
In June 1993, the Company acquired UNIX System Laboratories, Inc. (USL) by
issuing approximately 11 million shares of Novell common stock valued at $322
million in exchange for all of the outstanding stock of USL not previously
owned by Novell and assumed liabilities of $9 million. The transaction was
accounted for as a purchase and, on this basis, resulted in a one-time
write-off of $269 million for purchased research and development in the third
quarter of fiscal 1993.
The Company will continue to look for similar acquisitions, investments or
strategic alliances which it believes complement its overall business strategy.
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
NET SALES 1994 Change 1993 Change 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales (millions) $1,998 9% $1,830 21% $1,512
================================================================================
</TABLE>
With the acquisition of WordPerfect in fiscal 1994 and USL in fiscal 1993,
Novell has redefined itself into four product groups, all within the software
industry. They are the NetWare Systems Group, the Novell Applications Group,
the UNIX Systems Group, and the Information Access and Management Group. While
revenue has increased in both fiscal 1994 and fiscal 1993, analysis of the
individual product groups characterizes the changes that have occurred.
The NetWare Systems Group (NSG) represented 46% of total revenues in fiscal
1994, 45% in fiscal 1993 and 50% in fiscal 1992. NSG revenues grew by 11% in
fiscal 1994 compared to fiscal 1993, and by 8% in fiscal 1993 compared to
fiscal 1992. Most of the growth in both years has been in the NetWare 3 and 4
product families while NetWare 2 has decreased each year.
The Novell Applications Group (NAG) represented 30% of total revenues in
fiscal 1994, 39% in fiscal 1993, and 38% in fiscal 1992. NAG revenues decreased
by 17% in fiscal 1994 compared to fiscal 1993, and increased by 22% in fiscal
1993 compared to fiscal 1992. The decrease in fiscal 1994 is primarily the
result of a decrease in WordPerfect for DOS revenues. The increase in fiscal
1993 compared to fiscal 1992 was the result of a strong increase in WordPerfect
for Windows, offset by a smaller decline in WordPerfect for DOS.
23.
<PAGE> 3
The UNIX Systems Group (USG) represented 9% of total revenues in fiscal 1994,
3% in fiscal 1993 and 0% in fiscal 1992. The change between years is
attributable to the fact that USL was acquired in June 1993, and therefore
fiscal 1993 included only 4 1/2 months of USL revenues subsequent to the merger
date, while there were no USG revenues in fiscal 1992. Additionally, in the
second quarter of fiscal 1994, the Company sold a one-time fully paid license
for UNIX technology to Sun Microsystems for $81 million, representing 4% of
total revenue for the Company for the year.
The Information Access and Management Group (IAMG) represented 11% of total
revenues in fiscal 1994, 9% in fiscal 1993 and 8% in fiscal 1992. IAMG revenues
grew by 28% in fiscal 1994 compared to fiscal 1993, and by 48% in fiscal 1993
compared to fiscal 1992. Most of the growth in fiscal 1994 was attributable to
connectivity products, while the growth in fiscal 1993 also included strong
increases in communications products.
International sales represented 43% of total sales in both fiscal 1994 and
1993, and 44% of total sales in fiscal 1992. The Company expects that
international sales will continue to grow at least at the same rate as domestic
sales in fiscal 1995.
<TABLE>
<CAPTION>
GROSS PROFIT
1994 Change 1993 Change 1992
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross profit (millions) $1,531 7% $1,428 20% $1,186
Percentage of net sales 77% 78% 78%
=====================================================================================
</TABLE>
In connection with the Sun Microsystems transaction described above, the
Company expensed certain 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,
resulting in a lower gross profit percentage in fiscal 1994. Future
fluctuations in gross profit margins will be primarily attributable to price
changes, changes in sales mix by product or distribution channel, and special
product promotions.
<TABLE>
<CAPTION>
OPERATING EXPENSES
1994 Change 1993 Change 1992
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and marketing (millions) $562 10% $510 34% $380
Percentage of net sales 28% 28% 25%
Product development (millions) $347 19% $290 28% $227
Percentage of net sales 17% 16% 15%
General and administrative (millions) $162 -1% $163 25% $130
Percentage of net sales 8% 9% 9%
=====================================================================================
</TABLE>
Sales and marketing expenses have remained flat as a percentage of net sales in
fiscal 1994 compared to fiscal 1993, however, increased as a percentage of net
sales from fiscal 1992 to 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 have increased as a percentage of net sales in
each of the past two fiscal years, particularly from the acquisitions in fiscal
1993 and from planned headcount increases in an effort to increase the
Company's investment in new products in both years.
General and administrative expenses have decreased as a percentage of net
sales in fiscal 1994, compared to fiscal 1993 and 1992. The decrease is
primarily attributable to lower bad debt expenses in fiscal 1994 compared to
fiscal 1993 and 1992.
24.
<PAGE> 4
<TABLE>
<CAPTION>
OPERATING EXPENSES (CONTINUED)
1994 Change 1993 Change 1992
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Restructuring charges (millions) $ 51 -- $ 42 -- --
Percentage of net sales 3% 2% --
Other nonrecurring charges (millions) $ 139 -- $ 315 -- $ 20
Percentage of net sales 7% 17% 1%
Total operating expenses (millions) $1,261 -4% $1,320 74% $758
Percentage of net sales 63% 72% 50%
===========================================================================================
</TABLE>
During the fourth quarter of fiscal 1994, the Company incurred a restructuring
charge of $51 million. In September, the Company formulated a plan, whereby
duplicate facilities, excess personnel, and products to be discontinued were
identified. The restructuring charge includes $26 million related to redundant
or excess facilities and equipment costs which are being closed or abandoned.
Operating expenses related to such facilities and equipment up to the time of
closure or abandonment were not included in the restructuring charge.
Additionally, $16 million of the restructuring charge related to employee
severance costs for approximately 1,100 employees who have been or will be
terminated. The charge does not include salaries and wages paid to such
employees up to their termination date, nor does it include any expenses
related to an additional 650 employees who are being transferred to third
parties to perform outsourced functions such as manufacturing. The remaining $9
million of the restructuring charge relates to products which have been
eliminated from the Company's product lines. Anticipated savings from this
restructuring plan is estimated to be approximately $50 million per year.
In the third quarter of fiscal 1993 a restructuring charge of $42 million
was incurred, most of which related to a reduction in force and facilities at
WordPerfect. A portion of this restructuring had been completed before the end
of fiscal 1994; however, approximately $15 million of the original liability
remains to be expended in fiscal 1995.
In fiscal 1994, 1993 and 1992, the Company incurred other nonrecurring
charges, primarily related to the write-off of purchased research and
development in connection with acquisitions. In fiscal 1994 the charges related
primarily to the write-off of $114 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 million of non-tax
deductible purchased research and development in connection with the acquisition
of SoftSolutions. The remaining $10 million of nonrecurring charges in fiscal
1994 related primarily to one-time expenses incurred to align the Novell and
WordPerfect employee benefit plans.
In fiscal 1993 the Company wrote off $315 million of non-tax deductible
purchased research and development in connection with the acquisitions of USL,
Serius Corporation and Fluent, Inc., and a personal information manager
software product.
In fiscal 1992 the Company wrote off $20 million of non-tax deductible
purchased research and development in connection with the acquisitions of
Reference Software International, Beagle Bros., Inc. and MagicSoft, Inc.
Overall, operating expenses excluding nonrecurring charges have grown more
rapidly than revenues in fiscal 1994 compared to 1993 due to higher product
development expenses. Operating expenses excluding nonrecurring charges in
fiscal 1993 grew more rapidly than revenues due to higher discretionary sales
and marketing expenses.
25.
<PAGE> 5
<TABLE>
<CAPTION>
1994 Change 1993 Change 1992
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Employees 8,457 -19% 10,451 21% 8,621
Revenue per employee (thousands) $211 $192 $198
==============================================================================
</TABLE>
Early in fiscal 1994 WordPerfect reduced its workforce by approximately 1,000
employees. Subsequent to the merger between Novell and WordPerfect, there was
an additional reduction in force of approximately 1,100. During the first half
of fiscal 1995 an additional 650 employees' functions will be outsourced as
part of the restructuring.
<TABLE>
<CAPTION>
OTHER INCOME (EXPENSE)
1994 Change 1993 Change 1992
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Other income (expense), net
(millions) $27 -9% $30 -11% $34
Percentage of net sales 1% 2% 2%
=============================================================================
</TABLE>
The primary component of other income (expense) is investment income, which was
$36 million, $28 million and $31 million in fiscal 1994, 1993 and 1992,
respectively. The increase in fiscal 1994 compared to fiscal 1993 is
attributable to a larger investment portfolio from cash generated from
operations in excess of cash used in acquisitions. The decrease in fiscal 1993
compared to fiscal 1992 is attributable to a smaller investment portfolio due
to a cash distribution to WordPerfect shareholders at the end of fiscal 1992.
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.
In fiscal 1994, offsetting investment income were merger expenses and
interest expense related to notes payable to the WordPerfect shareholders.
Required adoption of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, and Statement
of Financial Accounting Standards No. 119, Disclosure About Derivative
Financial Instruments and Fair Value of Financial Instruments, both in the
first quarter of fiscal 1995, is not expected to have a material impact on the
consolidated financial statements of the Company.
<TABLE>
<CAPTION>
INCOME TAXES
1994 Change 1993 Change 1992
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income taxes (millions) $91 -7% $97 -30% $140
Percentage of net sales 5% 5% 9%
Effective tax rate 31% 71% 30%
==============================================================================
</TABLE>
The effective tax rate for fiscal 1994 is lower than the fiscal 1993 effective
tax rate primarily as a result of WordPerfect's prior S corporation status
change to C corporation status and the impact of non-tax deductible charges for
purchased research and development.
Excluding non-tax deductible one-time charges related to the write-off of
purchased research and development of $15 million in fiscal 1994, $315 million
in fiscal 1993, and $20 million in fiscal 1992, and adjusting all periods to
reflect a provision for income taxes as if WordPerfect and its S corporation
subsidiaries had never been S corporations, the Company's effective tax rate
would have been 34% for fiscal 1994, and 33% for fiscal 1993 and 1992.
The increase in fiscal 1994 is attributable to non-tax deductible merger
expenses.
The Company adopted Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes, in the first quarter of fiscal 1994. The
adoption did not have a material effect on the financial statements of the
Company.
26.
<PAGE> 6
<TABLE>
<CAPTION>
NET INCOME AND NET INCOME PER SHARE
1994 Change 1993 Change 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income (millions) $207 408% $ 41 -87% $322
Percentage of net sales 10% 2% 21%
Net income per share $.56 409% $.11 -88% $.90
===============================================================================
</TABLE>
The restructuring and nonrecurring charges and normalization of income taxes
for WordPerfect represented net decreases in net income of $121 million or $.33
per share in fiscal 1994, and $288 million or $.78 per share in fiscal 1993 and
represented no material change in fiscal 1992.
<TABLE>
<CAPTION>
LIQUIDITY AND CAPITAL RESOURCES
1994 Change 1993 Change 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and short-term
investments (millions) $862 20% $719 14% $632
Percentage of total
assets 44% 41% 44%
===============================================================================
</TABLE>
Cash and short-term investments increased to $862 million at October 29, 1994
from $719 million at October 30, 1993. The major reasons for this increase
were the $380 million of cash provided by operating activities, the $36 million
provided from the issuance of common stock for stock option exercises, and the
$25 million provided from other financing activities, offset by the $119
million used for repayment of debt, the $110 million used to acquire the
Quattro Pro product line, and the $73 million used for capital asset purchases.
The investment portfolio is diversified among security types, industry groups
and individual issuers. The Company's principal sourcer of liquidity has been
from operations. At October 29, 1994, 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 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 forseeable 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 deby 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 1995 are anticipated to
be approximately $80 million, but could be reduced if the growth of the Company
is less that presently anticipated. In addition, substantially all of the
restructuring charges accrued in fiscal 1994 are expected to be paid during
fiscal 1995.
27.
<PAGE> 7
CONSOLIDATED STATEMENTS OF INCOME
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
OCT. 29 Oct. 30 Oct. 31
1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,998,077 $1,830,411 $1,512,488
Cost of sales 467,066 402,602 326,707
- --------------------------------------------------------------------------------
Gross profit 1,531,011 1,427,809 1,185,781
Operating expenses
Sales and marketing 562,034 509,722 380,079
Product development 346,706 290,239 226,809
General and administrative 161,855 163,249 130,380
Restructuring charges 51,463 42,000 --
Other nonrecurring charges 139,010 314,501 20,367
- --------------------------------------------------------------------------------
Total operating expenses 1,261,068 1,319,711 757,635
Income from operations 269,943 108,098 428,146
Other income (expense)
Investment income 36,360 28,131 30,715
Merger expenses (5,778) -- --
Other, net (3,142) 1,928 2,946
- --------------------------------------------------------------------------------
Other income, net 27,440 30,059 33,661
- --------------------------------------------------------------------------------
Income before taxes 297,383 138,157 461,807
Income taxes 90,652 97,437 139,829
- --------------------------------------------------------------------------------
Net income $ 206,731 $ 40,720 $ 321,978
================================================================================
Weighted average shares outstanding 368,332 367,900 359,484
================================================================================
Net income per share $ .56 $ .11 $ .90
================================================================================
</TABLE>
See notes to consolidated financial statements.
28.
<PAGE> 8
CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
OCT. 29 Oct. 30
1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 861,809 $ 719,197
Receivables, less allowances
($82,934 - 1994, $50,202 - 1993) 391,342 395,334
Inventories 32,221 29,833
Prepaid expenses 69,324 40,076
Deferred income taxes 98,435 72,969
- -------------------------------------------------------------------------------
Total current assets 1,453,131 1,257,409
Property, plant and equipment, net 394,682 403,752
Other assets 115,668 84,176
- -------------------------------------------------------------------------------
Total assets $1,963,481 $1,745,337
===============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 67,176 $ 84,906
Accrued compensation 81,639 69,061
Accrued marketing liabilities 66,800 51,553
Other accrued liabilities 121,165 103,204
Income taxes payable 78,139 55,589
Deferred revenue 47,801 33,788
- -------------------------------------------------------------------------------
Total current liabilities 462,720 398,101
Long-term debt -- 84,289
Minority interests 13,774 10,205
Put warrants -- 106,716
SHAREHOLDERS' EQUITY
Common stock, par value $.10 per share
Authorized -- 400,000,000 shares
Issued -- 364,354,887 shares, 1994
359,431,077 shares, 1993 36,436 35,943
Additional paid-in capital 645,419 485,253
Retained earnings 802,361 635,551
Unearned stock compensation (4,766) (9,814)
Cumulative translation adjustment 7,537 (907)
- -------------------------------------------------------------------------------
Total shareholders' equity 1,486,987 1,146,026
- -------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,963,481 $1,745,337
===============================================================================
</TABLE>
See notes to consolidated financial statements.
29.
<PAGE> 9
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Common Stock Additional Unearned Cumulative
------------------ Paid-in Retained Stock Translation
Shares Amount Capital Earnings Compensation Adjustments Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - OCT. 26, 1991 337,973 $33,797 $ 266,941 $ 579,267 $ -- $ 4,277 $ 884,282
DRI acquisition 6,000 600 27,016 (24,906) -- -- 2,710
SoftCopy acquisition 1,380 138 (138) -- -- -- --
Stock issued from stock plans 6,662 667 35,223 -- -- -- 35,890
Stock plans' income tax benefits -- -- 51,567 -- -- -- 51,567
Cumulative translation adjustment -- -- -- -- -- (3,175) (3,175)
Distributions to shareholders -- -- -- (178,205) -- -- (178,205)
Net income -- -- -- 321,978 -- -- 321,978
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE - OCT. 31, 1992 352,015 $35,202 $ 380,609 $ 698,134 $ -- $ 1,102 $1,115,047
USL acquisition 11,132 1,113 320,645 -- -- -- 321,758
STI acquisition 800 80 2,370 (3,680) -- -- (1,230)
Stock issued from stock plans 6,654 665 63,290 -- (14,944) -- 49,011
Stock plans' income tax benefits -- -- 45,660 -- -- -- 45,660
Shares repurchased and retired (11,130) (1,113) (229,645) -- -- -- (230,758)
Shares cancelled (40) (4) (1,156) -- 1,160 -- --
Sale of put warrants -- -- (96,520) -- -- -- (96,520)
Unearned stock compensation -- -- -- -- 3,970 -- 3,970
Cumulative translation adjustment -- -- -- -- -- (2,009) (2,009)
Distributions to shareholders -- -- -- (99,623) -- -- (99,623)
Net income -- -- -- 40,720 -- -- 40,720
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE - OCT. 30, 1993 359,431 $35,943 $ 485,253 $ 635,551 $ (9,814) $ (907) $1,146,026
Stock issued from stock plans 4,988 499 35,814 -- (612) -- 35,701
Stock plans' income tax benefits -- -- 21,747 -- -- -- 21,747
Shares cancelled (64) (6) (1,833) -- 1,839 -- --
Settlement of put warrants -- -- 104,438 -- -- -- 104,438
Unearned stock compensation -- -- -- -- 3,821 -- 3,821
Cumulative translation adjustment -- -- -- -- -- 8,444 8,444
Distributions to shareholders -- -- -- (65) -- -- (65)
WordPerfect fiscal year conversion -- -- -- (39,856) -- -- (39,856)
Net income -- -- -- 206,731 -- -- 206,731
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE - OCT. 29, 1994 364,355 $36,436 $ 645,419 $ 802,361 $ (4,766) $ 7,537 $1,486,987
=================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
30.
<PAGE> 10
CONSOLIDATED STATEMENT OF CASH FLOWS
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
OCT. 29 Oct. 30 Oct. 31
1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 206,731 $ 40,720 $ 321,978
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED (USED) BY OPERATING ACTIVITIES
Write-off of purchased research and development 129,389 314,501 20,367
Depreciation and amortization 86,379 75,425 59,971
WordPerfect fiscal year conversion (39,856) -- --
Stock plans' income tax benefits 21,747 45,660 51,567
Decrease (increase) in receivables 3,992 (76,018) (83,987)
(Increase) decrease in inventories (2,388) (3,237) 3,182
(Increase) in prepaid expenses (29,248) (13,298) (211)
(Increase) in deferred income taxes (70,294) (53,796) (3,787)
Increase in current liabilities 73,487 67,519 29,087
- ----------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 379,939 397,476 398,167
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net 35,701 40,990 36,000
Repurchases of common stock -- (230,758) --
Distributions to shareholders (65) (23,889) (80,871)
Repayment of debt (118,901) (5,896) (1,746)
Other 24,531 13,350 4,000
- ----------------------------------------------------------------------------------------------------------
Net cash used by financing activities (58,734) (206,203) (42,617)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (73,488) (110,256) (117,347)
(Increase) in short-term investments (297,782) (39,915) (114,274)
Cash received from acquisitions -- 37,242 2,569
Cash paid for acquisitions (110,000) (35,500) (22,960)
Other 4,895 (5,750) (1,762)
- ----------------------------------------------------------------------------------------------------------
Net cash used by investing activities (476,375) (154,179) (253,774)
- ----------------------------------------------------------------------------------------------------------
Total (decrease) increase in cash and cash equivalents $(155,170) $ 37,094 $ 101,776
Cash and cash equivalents -- beginning of period 383,596 346,502 244,726
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents -- end of period 228,426 383,596 346,502
Short-term investments -- end of period 633,383 335,601 285,327
- ----------------------------------------------------------------------------------------------------------
Cash and short-term investments -- end of period $ 861,809 $ 719,197 $ 631,829
==========================================================================================================
</TABLE>
See notes to consolidated financial statements.
31.
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany accounts and transactions have been
eliminated.
The following summarizes the significant accounting policies of the Company
- - The Company considers all highly liquid instruments purchased with a term to
maturity of three months or less to be cash equivalents.
- - Short-term investments are stated at the lower of cost or market. The
investment portfolio is widely diversified consisting primarily of short-term
investment grade securities, substantially all of which either mature within the
next twelve months or have characteristics of short-term investments.
- - Accounts receivable include geographically dispersed distributors, resellers
and OEM customers. No collateral is required. Reserves are provided for product
exchanges and bad debts.
- - Inventories are stated at the lower of cost (first-in, first-out method) or
market.
- - Plant and equipment are carried at cost less accumulated depreciation and
amortization.
- - Provision for depreciation and amortization is computed on the straight-line
method over the estimated useful lives of the assets, or lease term if shorter,
and are as follows:
Asset Classification Useful Lives
- --------------------------------------------------------------------------
Buildings 30 years
Furniture and equipment 3-5 years
Leasehold improvements and other 3-7 years
Intangible assets 3-15 years
- - Assets and liabilities of the Company's wholly owned subsidiaries,
denominated in the local currency of the subsidiary, are remeasured into U.S.
dollars (the functional currency) at year-end exchange rates except for
equipment and leasehold improvements which are remeasured at average rates of
exchange prevailing when acquired. Income and expense items are remeasured at
average rates of exchange prevailing during the year, except that depreciation
is remeasured at historical rates. These remeasurement gains and losses are
included in net income in the period incurred.
- - For the Company's Japanese subsidiary and certain WordPerfect entities, the
functional currency has been determined to be the local currency, and therefore,
assets and liabilities are translated at year-end exchange rates, and income
statement items are translated at average exchange rates prevailing during the
year. Such translation adjustments are recorded as a separate component of
shareholders' equity.
- - Revenue on product sales is recognized upon shipment. Certain sales require
continuing service, support and performance by the Company, and accordingly, a
portion of the revenue is deferred until the future service, support and
performance is provided. Reserves for sales returns and allowances are recorded
in the same period as the related revenues.
- - Product development costs are expensed as incurred. Application of
Statements of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed, has not had any
material effect in the consolidated financial statements of the Company.
- - Required adoption of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, and Statement
of Financial Accounting Standards No. 119, Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments, both in the first quarter
of fiscal 1995, is not expected to have a material impact on the consolidated
financial statements of the Company.
- - Net income per share is computed using the weighted average number of common
shares outstanding during each year, including common stock equivalents (unless
antidilutive). Common stock equivalents consist of outstanding stock options.
- - The consolidated financial statements give retroactive effect to the
acquisition of WordPerfect Corporation (WordPerfect), which was accounted for as
a pooling of interests and to the August 26, 1992 stock split.
Certain reclassifications, none of which affected net income, have been
made to the prior years' amounts in order to conform to the current year's
presentation.
32.
<PAGE> 12
B. MERGERS, ACQUISITIONS AND STRATEGIC INVESTMENTS
In June 1994, the Company completed a merger with WordPerfect whereby
WordPerfect was merged directly into Novell. Approximately 51 million shares of
Novell common stock were exchanged 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
8 million shares of Novell common stock. The transaction was accounted for as a
pooling of interests and therefore, all prior period financial statements
presented have been restated as if the merger took place at the beginning of
such periods.
WordPerfect had a calendar year end and, accordingly, the WordPerfect
statements of income for the years ended December 31, 1993 and 1992 have been
combined with the Novell statements of income for the fiscal years ended October
30, 1993 and October 31, 1992, respectively. In order to conform WordPerfect's
year end to Novell's fiscal year end, the consolidated statement of income for
fiscal 1994 includes two months (November and December 1993) for WordPerfect
which are also included in the consolidated statement of income for the fiscal
year ended October 30, 1993. Accordingly, an adjustment has been made in fiscal
1994 to retained earnings for the duplication of net income of $40 million for
such two month period. Other results of operations for such two month period of
WordPerfect include net sales of $137 million, income before taxes of $35
million, and income tax benefits of $5 million.
Separate results of operations for the periods prior to the merger with
WordPerfect are as follows:
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS Fiscal Year Fiscal Year
ENDED Ended Ended
APR. 30 Oct. 30 Oct. 31
(Dollars in thousands) 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES
Novell $ 717,975 $1,122,896 $ 933,370
WordPerfect 305,233 707,515 579,118
- -------------------------------------------------------------------------------------------------------
Combined $1,023,208 $1,830,411 $1,512,488
NET INCOME
Novell $ 177,726 $ (35,160) $ 249,030
WordPerfect 13,098 75,880 72,948
- -------------------------------------------------------------------------------------------------------
Combined $ 190,824 $ 40,720 $ 321,978
OTHER CHANGES
IN SHAREHOLDERS'
EQUITY
Novell $ 139,862 $ 93,853 $ 90,191
WordPerfect (37,937) (103,594) (181,404)
- -------------------------------------------------------------------------------------------------------
Combined $ 101,925 $ (9,741) $ (91,213)
=======================================================================================================
</TABLE>
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 million for purchased research and development.
In June 1993, the Company acquired UNIX System Laboratories, Inc. (USL) by
issuing approximately 11 million shares of Novell common stock valued at $322
million in exchange for all of the outstanding stock of USL not previously owned
by Novell and assumed liabilities of $9 million. The transaction was accounted
for as a purchase and, on this basis a one-time write-off of $269 million for
purchased research and development was incurred. Pro forma information related
to the USL acquisition has not been presented due to materiality.
33.
<PAGE> 13
C. CASH AND SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
OCT. 29 Oct. 30
(Dollars in thousands) 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS
Cash $101,331 $ 96,542
Repurchase agreements 19,309 16,550
Tax exempt money market fund 29,394 51,041
Taxable money market investments 13,357 39,000
Municipal securities 65,035 180,463
- --------------------------------------------------------------------------------
Cash and cash equivalents $228,426 $383,596
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS
Municipal securities $201,491 $200,025
Money market mutual funds 104,388 51,170
Money market preferreds 306,700 --
Mutual funds 13,017 62,267
Other 7,787 22,139
- --------------------------------------------------------------------------------
Short-term investments $633,383 $335,601
- --------------------------------------------------------------------------------
Cash and short-term investments $861,809 $719,197
================================================================================
</TABLE>
During fiscal 1992, the Company distributed cash of $81 million and short-term
investments of $97 million to the shareholders of WordPerfect. During fiscal
1993, the Company distributed cash of $24 million and issued notes payable of
$75 million to the shareholders of WordPerfect. In fiscal 1994, after the merger
with Novell was completed, the notes payable to the shareholders of WordPerfect
were paid off.
D. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
OCT. 29 Oct. 30
(Dollars in thousands) 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C>
Buildings and land $ 232,225 $ 230,094
Furniture and equipment 425,118 392,488
Leasehold improvements and other 44,159 40,614
- -------------------------------------------------------------------------------
Property, plant, and equipment at cost 701,502 663,196
Accumulated depreciation (306,820) (259,444)
- -------------------------------------------------------------------------------
Property, plant, and equipment, net $ 394,682 $ 403,752
===============================================================================
</TABLE>
E. INCOME TAXES
Novell, Inc. adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109 effective October 31, 1993 for fiscal year 1994.
WordPerfect adopted the provisions of SFAS No. 109 effective January 1, 1993 for
calendar year 1993. Because the two companies adopted the change in accounting
methods in different years, the October 30, 1993 year reflects SFAS No. 109 for
WordPerfect and APB 11 for Novell, Inc. Adoption of SFAS No. 109 had no material
impact on the financial statements of the Company. As permitted under the new
rules, prior years' financial statements have not been restated.
Prior to the adoption of SFAS No. 109, income tax expense for both
companies 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.
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 September 30, 1993, WordPerfect and related entities elected to be
taxed as S corporations whereby the income tax effects accrued directly to the
shareholders. Adoption of SFAS No. 109 required no establishment of deferred
income taxes since no material differences between the financial reporting and
the tax bases of assets and liabilities existed. On September 30, 1993,
WordPerfect and related domestic entities terminated their S corporation
elections. On December 31, 1993, the WordPerfect related foreign entities
terminated their S corporation elections. As a result, deferred income taxes
under the provisions of SFAS No. 109 were established on the dates the S
corporation elections were terminated.
As of October 29, 1994, the Company has net operating loss carryforwards
from acquired companies of approximately $38 million that expire in years 1999
through 2008. Subject to certain annual limitations, these losses can be used to
offset the future taxable income of these businesses. A valuation allowance of
approximately $9 million has been recognized to offset the deferred tax assets
related to those carryforwards.
34.
<PAGE> 14
E. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
Fiscal Year Ended OCT. 29 Oct. 30 Oct. 31
(Dollars in thousands) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TAXES ON INCOME
Current
Federal $132,543 $109,954 $102,607
State 21,344 19,158 21,044
Foreign 22,362 22,121 19,965
- --------------------------------------------------------------------------------------------------------------------------------
Total current 176,249 151,233 143,616
- --------------------------------------------------------------------------------------------------------------------------------
Deferred
Federal (55,788) 5,461 (3,593)
State (10,510) 1,631 (134)
Foreign (3,751) (2,295) (60)
Change in tax status (15,548) (58,593) --
- --------------------------------------------------------------------------------------------------------------------------------
Total deferred (85,597) (53,796) (3,787)
- --------------------------------------------------------------------------------------------------------------------------------
Total taxes on income $ 90,652 $ 97,437 $139,829
================================================================================================================================
DIFFERENCES BETWEEN THE U.S. STATUTORY AND EFFECTIVE TAX RATES
U.S. statutory rate 35.0% 35.0% 34.0%
State income taxes, net of federal tax effect 3.5 3.5 3.7
Research and development tax credits (2.6) (2.4) (1.0)
Tax-exempt FSC income (2.1) (1.5) (1.6)
S Corporation earnings prior to change in tax status (1.6) (.5) (6.2)
Foreign taxes .4 1.6 2.5
Other, net 1.4 (1.0) (1.2)
- --------------------------------------------------------------------------------------------------------------------------------
Subtotal 34.0 34.7 30.2
Change in tax status (5.2) (42.4) --
Non-deductible charge for purchased research and development 1.7 78.2 --
- --------------------------------------------------------------------------------------------------------------------------------
Effective tax rate 30.5% 70.5% 30.2%
================================================================================================================================
DOMESTIC AND FOREIGN COMPONENTS OF INCOME BEFORE TAXES
Domestic $312,563 $122,664 $423,663
Foreign (15,180) 15,493 38,144
- --------------------------------------------------------------------------------------------------------------------------------
Total income before taxes $297,383 $138,157 $461,807
================================================================================================================================
Cash paid for income taxes $115,016 $ 86,306 $ 93,850
================================================================================================================================
DEFERRED INCOME TAXES AS OF OCTOBER 29, 1994
Receivable valuation accounts $ 33,076
Restructuring provision 17,031
Acquired intangibles 31,435
Reserves and accruals 26,421
Fixed assets 10,463
Inventory valuation accounts 9,456
Other individually immaterial items 24,399
- --------------------------------------------------------------------------------------------
Total deferred tax assets 152,281
Valuation allowance for deferred tax assets (9,018)
- --------------------------------------------------------------------------------------------
Net deferred tax assets $143,263
============================================================================================
</TABLE>
35.
<PAGE> 15
F. COMMITMENTS AND CONTINGENCIES
Rent expense for operating and month-to-month leases was $34 million, $31
million and $21 million in fiscal 1994, 1993 and 1992, respectively.
As of October 29, 1994, the Company has various operating leases with
remaining terms of more than one year. These leases have minimum annual lease
commitments of $26 million in fiscal 1995, $22 million in fiscal 1996, $15
million in fiscal 1997, $9 million in fiscal 1998, $7 million in fiscal 1999,
and $29 million thereafter.
The Company has entered into a commitment to sponsor certain sporting
teams. The Company has commitments in fiscal 1995 totaling $6 million.
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 October 29,
1994, 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 October 29, 1994 standby letters of
credit of $200,000 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. 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 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. On June 6, 1994, Novell
filed a petition with the U.S. Patent and Trademark Office requesting 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 operation.
The Company is a party to a number of additional legal proceedings 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
or results of operations.
G. PUT WARRANTS
During fiscal 1993, the Company sold put warrants on 5 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 million and therefore reversed the
put warrant obligation back to additional paid-in capital.
H. SHAREHOLDERS' EQUITY
In December 1988, the Board of Directors adopted a Shareholder Rights Plan and
amended it in March 1992. The plan provides for a dividend of rights, which
cannot be exercised until certain events occur, to purchase shares of preferred
stock of the Company or, after certain events, shares of common stock of the
Company. Each shareholder of record receives one right for each share of common
stock that he or she owns. This plan was adopted to ensure that all shareholders
of the Company receive fair value for their common stock in the event of any
proposed takeover of the Company and to guard against coercive tactics to gain
control of the Company without offering fair value to the Company's
shareholders.
The Company has 500,000 authorized shares of preferred stock with a par
value of $.10 per share, none of which was outstanding at October 29, 1994 or
October 30, 1993.
36.
<PAGE> 16
In March 1993, shareholders approved the Novell 1991 Stock Plan as amended with
an affirmative vote of 69% of the shares voted. During fiscal 1994, the Company
completed the acquisition of WordPerfect Corporation and thereby assumed 8
million stock options related to its respective stock option plan. Under all
Company stock option plans, 87 million shares of common stock have been reserved
for issuance of stock options, 41 million shares have been exercised, 39 million
shares are outstanding, 5 million shares are available for future grants and 2
million shares have expired. The shares reserved for issuance are increased each
November 1st through November 1, 1998, based on a calculation of 2.9% of total
common stock outstanding at previous fiscal year end. Generally, grants to date
have been nonqualified stock options at fair market value on the date of grant
for a term of seven or ten years and are exercisable 25% per year beginning one
year from the date of grant. The Company also has a stock option plan for
non-employee directors, under which 800,000 shares have been reserved for
issuance of nonqualified stock options. The following table is a summary of
activity for the Company's stock option plans and has been restated to include
the WordPerfect stock options for all periods presented.
<TABLE>
<CAPTION>
OCT. 29 Oct. 30 Oct. 31
1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPTIONS OUTSTANDING
Beginning balance 37,282,781 29,443,827 22,772,435
Options granted 20,602,634 14,730,714 13,735,144
Options exercised (4,036,142) (5,183,180) (5,868,283)
Options cancelled (14,739,567) (1,708,580) (1,245,499)
- ---------------------------------------------------------------------------------------------------------------------
Ending balance 39,109,706 37,282,781 29,443,827
=====================================================================================================================
EXCHANGE PROGRAM (INCLUDED ABOVE)
Options cancelled 11,149,199 -- --
Options regranted 7,430,961 -- --
RESTRICTED STOCK GRANT (INCLUDED ABOVE)
Options granted 306,500 -- --
OPTION PRICE DATA
Grant price range $.10-21.13 $.61-31.25 $22.63-29.38
Weighted average grant price $15.79 $24.50 $25.43
Exercise price range $.10-25.00 $.17-28.75 $.17-23.25
Weighted average exercise price $5.18 $4.76 $3.77
Cancelled price range $.61-29.00 $1.87-29.00 $.87-28.75
Weighted average cancelled price $25.70 $20.69 $13.07
Weighted average outstanding price $13.25 $15.85 $11.10
OPTION TERMS
Percentage vesting per year 25% 25% 25%
Maximum term 7 OR 10 YEARS 7 or 10 years 7 years
Percentage granted at fair market value on date
of grant 99% 100% 100%
AS OF YEAR END
Options exercisable 15,863,911 8,965,246 7,323,329
Options available for future grants 5,476,318 4,014,599 14,824,282
OTHER INFORMATION
Shares of common stock outstanding at year end 364,354,887 359,431,077 352,015,281
Annual option reserve increase based on evergreen
provision 8,933,478 -- --
Options granted as a percentage of outstanding
common stock, net of cancellations 1.6% 3.6% 3.6%
Option holders as a percentage of total employees 100% 37% 37%
</TABLE>
37.
<PAGE> 17
In 1994 the Company implemented a stock option exchange program whereby option
holders could exchange higher priced options for new options on a two new shares
for three old shares ratio. All option holders except for directors and officers
were permitted to participate in the program. The Novell, Inc. 1989 Employee
Stock Purchase Plan (Purchase Plan) permits eligible employees to purchase
shares of common stock through payroll deductions at lower of 85% of fair market
value at the beginning or end of each six month offering period. As of October
29, 1994, 4 million shares have been issued under the Purchase Plan.
I. RESTRUCTURING CHARGES
During the fourth quarter of fiscal 1994, the Company incurred a restructuring
charge of $51 million. In September, the Company formulated a plan, whereby
duplicate facilities, excess personnel, and products to be discontinued were
identified. The restructuring charge includes $26 million related to redundant
or excess facilities and equipment costs which are being closed or abandoned.
Operating expenses related to such facilities and equipment up to the time of
closure or abandonment were not included in the restructuring charge.
Additionally, $16 million of the restructuring charge related to employee
severance costs for approximately 1,100 employees who have been or will be
terminated. The charge does not include salaries and wages paid to such
employees up to their termination date, nor does it include any expenses related
to an additional 650 employees who are being transferred to third parties to
perform outsourced functions such as manufacturing. The remaining $9 million of
the restructuring charge relates to products which have been eliminated from the
Company's product lines. Anticipated savings from this restructuring plan is
estimated to be approximately $50 million per year.
In the third quarter of fiscal 1993 a restructuring charge of $42 million
was incurred, most of which related to a reduction in force and facilities at
WordPerfect. A portion of this restructuring had been completed before the end
of fiscal 1994, however approximately $15 million of the original liability
remains to be expended in fiscal 1995.
J. OTHER NONRECURRING CHARGES
In fiscal 1994, 1993, and 1992, the Company incurred other nonrecurring charges,
primarily related to the write-off of purchased research and development in
connection with acquisitions. In fiscal 1994 the charges related primarily to
the write-off of $114 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 million of non-tax deductible purchased
research and development in connection with the acquisition of SoftSolutions.
The remaining $10 million of nonrecurring charges in fiscal 1994 related
primarily to one-time expenses incurred to align the Novell and WordPerfect
employee benefit plans.
In fiscal 1993, the Company wrote off $315 million of non-tax deductible
purchased research and development in connection with the acquisitions of USL,
Serius Corporation and Fluent, Inc., and a personal information manager software
product.
In fiscal 1992, the Company wrote off $20 million on non-tax deductible
purchased research and development in connection with the acquisitions of
Reference Software International, Beagle Bros., Inc. and MagicSoft, Inc.
K. EMPLOYEE SAVINGS AND RETIREMENT PLAN
The Company adopted a 401(k) savings and retirement plan in December 1986. The
plan covers all employees who are 21 years of age or older who are scheduled to
complete 1,000 hours of service during any consecutive twelve-month period. The
Company's retirement and savings plan contribution has been a 50% matching
contribution for employee contributions up to 6% of each employee's compensation
and was $15 million, $12 million and $8 million in fiscal 1994, 1993 and 1992,
respectively.
38.
<PAGE> 18
L. RELATED PARTY TRANSACTIONS
WordPerfect was co-founded in 1979 by Alan C. Ashton, Ph.D. (Dr. Ashton) and
Bruce W. Bastian (Mr. Bastian). Dr. Ashton and Mr. Bastian joined the Novell
Board of Directors in October 1994.
Prior to September 30, 1993, WordPerfect had been organized as numerous
legal entities under the common control of Dr. Ashton and Mr. Bastian. These
entities, including WordPerfect, WP Leasing, Inc., ABP Development, WordPerfect
Publishing Corporation, ComputerShow, WP Properties, WordPerfect International,
Reference Software International (RSI), and SoftCopy, Inc., owned the assets and
conducted the operations of WordPerfect. On September 30, 1993, the common stock
of RSI owned by the shareholders was contributed to WordPerfect. Also the
owner's interest in WP Properties was transferred to WordPerfect in exchange for
$5 million cash and notes of $75 million, payable to the existing shareholders
of WordPerfect, which represented WP Properties' net book value at the date of
the transfer. Subsequent to the merger with Novell, the shareholder notes
together with accrued interest were paid in full. Also on September 30, 1993,
the common stock of ComputerShow was distributed to the shareholders of
WordPerfect at ComputerShow's net book value of $1 million. The common stock of
the remaining entities were contributed to WordPerfect on December 31, 1993.
WordPerfect entered into agreements with Mr. Lewis Bastian, a brother of
Mr. Bastian, in connection with the development and sale of DataPerfect, a
general purpose database software program, and TOOL, an object- oriented
language used for software development. Pursuant to these agreements,
WordPerfect paid Mr. Lewis Bastian consulting fees and royalty payments of
$718,000 and $474,000 in fiscal 1993 and 1992, respectively. In February 1994,
WordPerfect agreed to pay Mr. Lewis Bastian $3 million over four years in
exchange for a termination of these agreements.
WordPerfect entered into management agreements with a distribution company
controlled by an individual who has now become an officer of the Company.
Payments of approximately $7 million were made pursuant to these management
agreements in fiscal 1992. This payment included a negotiated termination of
these management agreements.
The consolidated financial statements include the operating results of each
of the entities involved in the related party transactions outlined above for
all periods presented either as a result of the transactions being between
companies under common control or the transactions being at amounts which
approximate book value. Further, the results of operations attributable to the
ownership interests acquired were not significant in any period in relation to
the consolidated operating results of the Company.
In fiscal 1994, 1993 and 1992, legal fees of approximately $2 million, $2
million and $716,000, respectively, were paid to Wilson, Sonsini, Goodrich &
Rosati, a professional corporation in which a director of the Company is a
senior partner.
M. INTERNATIONAL SALES
The Company markets internationally through distributors who sell to dealers and
end users. In fiscal 1994, 1993 and 1992 export sales to international customers
were approximately $861 million, $783 million and $700 million, respectively. In
fiscal 1994, 1993 and 1992, respectively, 58%, 60% and 69% of export sales were
to European countries. No one foreign country accounted for more than 10% of
total sales in any period. In fiscal 1994, the Company had one multinational
distributor, which accounted for 12% of revenue. The Company had two
multinational distributors, which accounted for 15% and 11% of revenue in fiscal
1993 and 12% and 13% of revenue in fiscal 1992, respectively. Otherwise, no
customer accounted for more than 10% of revenue in any period.
N. PRO FORMA DATA
If WordPerfect had been a C corporation for all periods presented, fiscal 1994
would have had income tax expense of $106 million, net income of $191 million,
and net income per share of $.52. Fiscal 1993 would have had income tax expense
of $151 million, a net loss of $13 million, and a net loss per share of $.04.
Fiscal 1992 would have had income tax expense of $161 million, net income of
$301 million and net income per share of $.84.
39.
<PAGE> 19
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
NOVELL, INC.
We have audited the accompanying consolidated balance sheets of Novell, Inc. as
of October 29, 1994 and October 30, 1993, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended October 29, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of WordPerfect Corporation, which statements reflect total
assets constituting 23% in 1993, and total revenues constituting 39% in 1993,
and 38% in 1992 of the related consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for WordPerfect Corporation, is
based solely on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Novell, Inc. at October 29, 1994 and
October 30, 1993, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended October 29, 1994, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Jose, California
December 13, 1994
40.
<PAGE> 20
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL 1994
Net sales $488,278 $534,930 $488,924 $485,945 $1,998,077
Gross profit 384,501 389,533 383,420 373,557 1,531,011
Income (loss) before taxes 126,444 144,811 (4,740) 30,868 297,383
Net income (loss) 94,460 96,364 (4,465) 20,372 206,731
Net income (loss) per share .26 .26 (.01) .06 .56
COMMON STOCK PRICE PER SHARE
High 25 3/8 26 1/4 19 1/2 17 23/32 26 1/4
Low 19 1/4 15 14 14 3/4 13 3/4
FISCAL 1993
Net sales $432,324 $454,998 $433,872 $509,217 $1,830,411
Gross profit 340,995 362,946 332,410 391,458 1,427,809
Income (loss) before taxes 137,766 140,384 (272,532) 132,539 138,157
Net income (loss) 97,420 97,938 (257,421) 102,783 40,720
Net income (loss) per share .27 .27 (.69) .28 .11
COMMON STOCK PRICE PER SHARE
High 33 1/2 35 1/4 33 1/2 23 1/4 35 1/4
Low 23 3/4 25 3/4 17 5/8 17 17
FISCAL 1992
Net sales $348,257 $355,985 $391,722 $416,524 $1,512,488
Gross profit 271,842 280,931 308,278 324,730 1,185,781
Income before taxes 107,330 121,369 117,708 115,400 461,807
Net income 74,391 88,846 80,868 77,873 321,978
Net income per share .21 .25 .22 .22 .90
COMMON STOCK PRICE PER SHARE
High 32 1/2 32 28 1/2 32 1/8 32 1/2
Low 21 3/8 23 7/8 24 5/16 22 1/2 21 3/8
</TABLE>
Novell's common stock trades in the over-the-counter market under the NASDAQ
symbol "NOVL."
No dividends have been declared on the Company's common stock. There were 11,932
shareholders of record at December 31, 1994.
41.
<PAGE> 21
DIRECTORS AND OFFICERS
B O A R D O F D I R E C T O R S
Robert J. Frankenberg Kanwal S. Rekhi
Chairman of the Board Executive Vice President
President and Chief Executive Officer Corporate Technology
Alan C. Ashton, Ph. D. Larry W. Sonsini
Founder of WordPerfect Corporation Partner,
Wilson, Sonsini, Goodrich, Rosati
Bruce W. Bastian
Founder of WordPerfect Corporation Ian R. Wilson *+
Chairman of the Board
Elaine R. Bond *+ President and Chief Executive Officer
Chase Fellow/Sr. Consultant Windmill Holdings Corporation
The Chase Manhattan Bank, N.A.
Jack L. Messman *+
President and Chief Executive Officer * Member of Audit Committee
Union Pacific Resources Co. + Member of Compensation Committee
C O R P O R A T E E X E C U T I V E O F F I C E R S
Robert J. Frankenberg David R. Bradford
President and Chief Executive Officer Senior Vice President
General Counsel and Corporate Secretary
Mary M. Burnside
Executive Vice President Ernest J. Harris
Chief Operating Officer Senior Vice President
Human Resources
Michael J. DeFazio
Executive Vice President Christine G. Hughes
UNIX Systems Group Senior Vice President
Corporate Marketing
Richard W. King
Executive Vice President John C. Lewis
NetWare Systems Group Senior Vice President
Services and Support
Joseph A. Marengi
Executive Vice President David C. Moon
Worldwide Sales Senior Vice President
Development, Application Group
Steven Markman
Executive Vice President R. Duff Thompson
Information Access & Management Group Senior Vice President
Corporate Development
Kanwal S. Rekhi
Executive Vice President Stephen C. Wise
Corporate Technology Senior Vice President
Finance
Adrian Rietveld
Executive Vice President Darcy G. Mott
Novell Application Group Treasurer
James R. Tolonen
Executive Vice President
Chief Financial Officer
42.
<PAGE> 1
EXHIBIT 21
NOVELL, INC.
SUBSIDIARIES OF THE REGISTRANT
As of October 29, 1994, the following companies were subsidiaries of Novell,
Inc.:
<TABLE>
<CAPTION>
State of Incorporation
or Country in which
Wholly owned Organized
------------ ----------------------
<S> <C>
Fluent, Inc. Delaware
Novell de Argentina S.A. Argentina
Novell Pty, Ltd. Australia
Novell Belgium B.V.B.A. Belgium
Novell do Brasil Software Ltda. Brazil
Novell Canada, Ltd. Canada
Novell Europe, Inc. Delaware
Novell S.A.R.L. France
Novell GmbH Germany
Novell International, Ltd. Barbados
Novell Italia S.R.L. Italy
Novell Korea Co., Ltd. Korea
Novell de Mexico, S.A.DE C.V. Mexico
Novell Polska Sp.Zo.o Poland
Novell Software Development Pvt., Ltd. India
Novell Spain S.A. Spain
Novell Svenska A.B. Sweden
Novell Schweiz A.G. Switzerland
Novell U.K., Ltd. United Kingdom
Serius Corporation Delaware
Majority Owned
--------------
Novell Japan, Ltd. Japan
Onward Novell Software Pvt., Ltd. India
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Novell, Inc. of our report dated December 13, 1994, included in the 1994
Annual Report to Shareholders of Novell, Inc.
Our audits also included the financial statement schedule of Novell, Inc.,
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-14531, No. 33-29798, No. 33-31299, No. 33-36673,
No. 33-41719, No. 33-48395, No. 33-54483, No. 33-64998, No. 33-65440, No.
33-66704, No. 33-67276 and No. 33-68336) pertaining to the Employee Stock
Option and Stock Purchase Plans of Novell, Inc. of our report dated December
13, 1994, with respect to the consolidated financial statements incorporated
herein by reference, and our report included in the preceding paragraph with
respect to the financial statement schedule included in this Annual Report
(Form 10-K) of Novell, Inc.
/s/ ERNST & YOUNG LLP
San Jose, California
January 20, 1995
<PAGE> 1
EXHIBIT 23.2
CONSENT OF PRICE WATERHOUSE LLP
INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus of the
Registration Statements on Form S-8 (No. 33-14531, No. 33-29798, No. 33-31299,
No. 33-36673, No. 33-41719, No. 33-48395, No. 33-54483, No. 33-64998,
No. 33-65440, No. 33-66704, No. 33-67276 and No. 33-68336) of Novell, Inc.
of our report dated March 22, 1994 appearing on page 19 of this Form 10-K.
/s/ Price Waterhouse LLP
Salt Lake City, Utah
January 20, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-29-1994
<PERIOD-END> OCT-29-1994
<CASH> 228,426
<SECURITIES> 633,383
<RECEIVABLES> 391,342
<ALLOWANCES> (82,934)
<INVENTORY> 32,221
<CURRENT-ASSETS> 1,453,131
<PP&E> 701,502
<DEPRECIATION> (306,820)
<TOTAL-ASSETS> 1,963,481
<CURRENT-LIABILITIES> 462,720
<BONDS> 0
<COMMON> 36,436
0
0
<OTHER-SE> 1,450,551
<TOTAL-LIABILITY-AND-EQUITY> 1,963,481
<SALES> 1,998,077
<TOTAL-REVENUES> 1,998,077
<CGS> 467,066
<TOTAL-COSTS> 467,066
<OTHER-EXPENSES> 1,261,068
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 297,383
<INCOME-TAX> 90,652
<INCOME-CONTINUING> 206,731
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 206,731
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
</TABLE>
