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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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<S> <C> <C>
/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 28, 1995
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
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NOVELL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
87-0393339
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
1555 N. TECHNOLOGY WAY
OREM, UTAH 84057
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(801) 222-6000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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, 1995 (based on the last reported price of the
Common Stock on the NASDAQ National Market System on such date) was
$5,001,667,863.
As of December 31, 1995 there were 367,868,618 shares of the registrant's
common stock outstanding.
Portions of Registrant's Annual Report to Shareholders for the fiscal year
ended October 28, 1995, 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 10, 1996,
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 network
software. Novell software products provide the infrastructure for a networked
world, enabling customers to connect with other people and the information they
need, anytime and anyplace. Novell partners with other technology and market
leaders to make networks an integral part of everyday 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) 222-6000.
The Company markets its products through 40 U.S. and 60 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.
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 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 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.
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 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 from Borland
International, Inc. (Borland) 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.
On October 30, 1995, the Company announced its intention to sell its
personal productivity applications product line. Novell's personal productivity
applications product line was acquired in the WordPerfect and Quattro Pro
transactions. Certain other acquired product lines such as GroupWise are not
being sold. The Company is actively negotiating with several parties regarding
the sale of the personal productivity applications product line and anticipates
that it will announce a sale in early 1996.
On December 6, 1995, Novell completed the sale of its UnixWare product line
to the Santa Cruz Operation, Inc. (SCO). The Company expects to report a gain on
this transaction in the first quarter of fiscal 1996. Under the agreement,
Novell received approximately 6.1 million shares of SCO common stock,
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resulting in an ownership position of approximately 17% of the outstanding SCO
common stock. The agreement also calls for Novell to receive a revenue stream
from SCO based on revenue performance of the purchased UnixWare product line.
This revenue stream is not to exceed $84 million net present value, and will end
by the year 2002. In addition, Novell will continue to receive revenue from
existing licenses for older versions of UNIX System source code.
BUSINESS STRATEGY
Novell believes that the definition of computer networks is changing as
traditional stand-alone computer resources and new categories of computing
devices increasingly become integrated across networks. Networks are expanding
into every area of life, providing access to valuable information wherever
people work, live, or travel. In the process, the boundaries of geography and
technology that once separated private and public data networks are falling away
to create a single information resource for businesses and consumers.
The Company sees its business opportunity in providing software to enable
this convergence of networks into a managed Internet or Smart Global Network
providing access to information anytime, anyplace. It has enhanced its NetWare
network operating system products to make networks smart -- affordable to own
and operate, easy to manage and use, and capable of connecting heterogeneous
systems. It has also expanded its product line beyond NetWare to include
products for accessing, managing, and interconnecting smart networks, and for
extending networks beyond personal computer workgroups to connect office
equipment such as printers and fax machines, industrial controls, utility
meters, cable TV set-top boxes, and other intelligent devices.
The Company believes that the convergence of information resources in the
Smart Global Network is shifting the value of information technology from the
power of stand-alone systems to the ability of systems to connect into the
network. Together with its partners, the Company intends to be a driving force
in expanding the value of networks for customers worldwide.
TECHNOLOGIES
Making Networks Smart. Novell delivers advanced network services in the
NetWare network operating system and in compatible products that add
functionality for administrators and end users. These services add intelligence
to the network to reduce costs of ownership and administration, simplify
management tasks for administrators, and make access to network-based
information easier for end users. 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
directory, network and systems management, messaging, multiprotocol routing, and
security. The Company's NetWare 4 operating system includes NetWare Directory
Services (NDS), a distributed database of users, network equipment, computer
systems, and other network resources. NDS provides centralized network
management, security, and information access capabilities to enable
organizations to efficiently maintain and expand complex networks. The
capabilities of NDS are also integrated with compatible Novell network software
products and over 140 third-party solutions. An additional Novell product, the
TUXEDO System, provides tools to help customers develop and deploy
transaction-intensive client/server applications for distribution across
networks. The Company shipped its first product integrating TUXEDO with NetWare
and NDS in 1995.
Interconnecting Smart Networks. Novell is developing network software to
support NetWare Connect Services (NCS), a managed class of wide-area networking
and Internet services made available to customers through major
telecommunications carriers. These services enable organizations to out-source
the complexity and some of the cost of maintaining wide-area networks, to make
Internet access more manageable, reliable, and secure, and to extend
local-area-networks beyond the immediate enterprise to support communication and
collaboration with customers, partners, and suppliers. Novell in partnership
with AT&T made the service available in the U.S. in 1995. International partners
Deutsche Telecom, Telstra, NTT, and UniSource will be among the first to make
the service widely available in Europe and the Pacific Rim in 1996. NCS partners
worldwide are cooperating to provide interoperability among their networks and
maintain a common directory for the service based on NetWare Directory Services.
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Extending Networks Beyond Personal Computer Workgroups. The NetWare
network operating system and related Novell products provide a platform for
extending networks beyond traditional personal computer local-area networks
(LANs) and integrating diverse 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. Through Novell Embedded Systems Technology (NEST), the
Company continues to extend NetWare services to connect office and industrial
equipment, TV cable set-top boxes, electric utility energy management equipment,
and a broad range of other intelligent devices. In addition, Novell is working
with leading software developers and manufacturers to network computers and
telephone PBX switches in a new class of integrated solutions.
Providing Network Access. Novell network access products connect desktop
PC and Macintosh users with applications and services that run on UNIX host
computers and the Internet through TCP/IP communications protocols. The company
also provides dial-in client and server products for remote access to network
resources. Novell mobile NetWare client technology allows users to maintain a
virtual network on their portable computers, even when disconnected, and then
synchronize files when they reconnect to the network. NetWare Web Server
provides a complete add-on solution for NetWare 4 servers to support both
internal communication and external publishing on the Internet's World Wide Web.
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
products also include the GroupWise family of workgroup collaboration products
for electronic mail, calendaring and scheduling, document management and forms
processing. The Company is expanding the functionality of GroupWise in 1996 for
greater integration with network directories, management and Internet access
applications.
PROGRAMS
Technical Support Alliance. In May 1991 Novell announced the formation of
the Technical Support Alliance (TSA), with 40 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 nearly 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 certifica-
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tion 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
working with vendors to codevelop critical network components.
DeveloperNet Novell delivers products, software development kits,
information, and support services to software developers through the
DeveloperNet subscription program, its primary communications channel to the
developer community. Over 1,000 independent software vendors and corporate
developers now subscribe to the program. Novell launched DeveloperNet in
September 1995 as part of its renewed network focus and initiative code-named
Net2000 to provide developers with common interfaces to a rich set of network
services.
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, and EDS.
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.
Enterprise Consulting Partners. This select group of the industry's
leading systems integrators and consulting organizations work with Novell to
deliver distributed client/server solutions for customers with large
enterprise-wide networks.
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.
NOVELL PRODUCTS
The Company's products fall within three categories: systems software,
information access and management products, and groupware. Novell products work
together, interoperate with thousands of third-party solutions, and span data
networks from workgroup LANs to the Internet.
Systems Products provide a foundation of network services that can be
extended across heterogeneous computing platforms and intelligent devices in the
Smart Global Network. These products include the NetWare 3 network operating
system, which provides users with access to data and resources controlled by a
single server, and the more advanced NetWare 4, which features NetWare Directory
Services and provides the user with access to the resources of the entire
enterprise or wide-area network. The Company also offers NetWare Symmetrical
Processing for use on cost-effective multiprocessor hardware that can be readily
scaled to meet the requirements of large and complex networks. Novell system
software also includes development kits to enable manufacturers to embed Novell
Embedded Systems Technology in microprocessor-based products. In addition, the
Company develops and markets the TUXEDO System for the development and
deployment of distributed client/server applications.
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Information Access and Management Products extend and leverage NetWare
services to enable customers to access and manage data, applications and
resources distributed across enterprise networks and the Internet. These
products include the LAN Workplace TCP/IP solution for connecting personal
computer users to UNIX systems and the Internet ; the ManageWise strategic
management solution for end-to-end management of the Novell environment; the
LANalyzer monitoring and analysis tool for troubleshooting NetWare networks; the
NetWare Connect server product and NetWare Mobile client product for remote
access to network resources; the NetWare Navigator for centralized, automated
software and data distribution for Novell networks; the NetWare for SAA solution
for connecting NetWare and IBM mainframe environments, and other host
connectivity products. In addition, the Company's NetWare Telephony Services
platform and Telephony Services API (TSAPI) enable customers to connect computer
and telephone PBX systems in integrated network solutions.
Novell information access and management products are also integral to the
NetWare Connect Service, the secure business Internet made available in the U.S.
by AT&T. The Company also offers PerfectWorks products that combine network
access technology with PC applications and thus bring networking to small-office
and home-office users.
Groupware Products utilize NetWare network services to provide rich access
to network-based information. The Company's GroupWise family of groupware
products now serves over 5 million users with integrated E-Mail, group
calendaring, scheduling, online conferencing, forms and document management.
GroupWise integrates these capabilities along with Internet E-mail, fax and
voice messages in a "Universal In-Box" for network-based communication and
collaboration.
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 software products to satisfactorily meet dynamic market needs.
During fiscal 1995, 1994, and 1993, product development expenses were
approximately $368 million, $347 million, and $290 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 its personal productivity applications 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,
California; Summit, New Jersey; Provo and Orem, Utah; and from its 40 U.S. and
60 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, 1995, there were approximately 15 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.
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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 450 of them to date. Additionally, some upgrade
products are sold directly to end users.
International Sales. In fiscal 1995, 1994, and 1993, approximately 47%,
43%, and 43%, 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, Indian sales, and certain European sales to
non-multinational distributors that were shipped from a new distribution center
in Dublin, Ireland have been invoiced by the Company in U.S. dollars. In fiscal
1996 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, Indian sales through the Company's joint venture in India and its
distribution center in Dublin, Ireland. No one foreign country accounted for
more than 10% of net sales in any period. In fiscal 1995 and 1994, the Company
had one multinational distributor, which accounted for 15% and 12% of revenue,
respectively. The Company had two multinational distributors, which accounted
for 15% and 11% of revenue in fiscal 1993. Otherwise, no 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, 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 1995, the eleventh 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, 1996, was approximately $112 million,
compared with $51 million at January 20, 1995.
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COMPETITION
Novell competes in the highly competitive market for computer software.
Novell believes that the principal competitive factors are technical innovation
to meet dynamic market needs, hardware independence and compatibility, marketing
strength, system/performance, customer service and support, reliability, ease of
use, price/performance, and connectivity with minicomputer and mainframe hosts.
The market for computer software, has become increasingly competitive due
to Microsoft's growing presence 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 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.
As the Company sharpened its focus, it decided to sell two lines of
business -- UnixWare and the WordPerfect personal productivity applications,
which did not contribute to Novell's network focus. Even with a sharpened focus,
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 competing products achieves market acceptance, Novell's
business and results of operations could be materially adversely affected.
LICENSES, PATENTS AND TRADEMARKS
The Company relies on copyright, 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. 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.
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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 same extent as the laws of the United States.
EMPLOYEES
As of December 31, 1995, the Company had 7,272 employees. The functional
distribution of its employees was: sales and marketing -- 2,004; product
development -- 2,556; general and administrative -- 972; service, support,
education, and operations -- 1,740. Of these, 404 employees are located in U.S.
field offices, and 1,733 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 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 and there is a
risk of departure 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.
The Company recently announced the sale of its UnixWare product line and
its intention to sell its personal productivity application product line. The
Company's ability to successfully transition out of these product lines in
fiscal 1996 is important to the success of the Company. The extent that
management can quickly devote most of its attention on its core business is
important to the ongoing success of the Company.
A reason the Company is seeking to sell its personal productivity
applications product line is to reduce non-leveraged sales, marketing, and
customer support expenditures. Nevertheless, the Company will retain the
Groupware applications line and may incur relatively higher expenditures than
are incurred in the sale of network operating systems.
As is common in the computer software industry, 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. Significant
delays in developing, completing or shipping new or enhanced products would
adversely affect the Company.
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. 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. Should
9
<PAGE> 10
Novell experience material delays or sales shortfalls with respect to new
product releases, the Company's sales and net income could be adversely
affected.
A fundamental goal of the Company will be the delivery of groupware
application solutions combining network 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 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.
In addition, the market prices for securities of software companies have
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.
10
<PAGE> 11
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.......... 48 1994 Chairman of the Board, President, and Chief
Executive Officer
Mary M. Burnside............... 48 1989 Executive Vice President and Chief Operating
Officer
Richard W. King................ 39 1993 Executive Vice President, NetWare Systems
Group
Joseph A. Marengi.............. 42 1993 Executive Vice President, Worldwide Sales
Steven Markman................. 50 1994 Executive Vice President, Information Access &
Management Group
James R. Tolonen............... 46 1989 Executive Vice President and Chief Financial
Officer
Jeffrey H. Waxman.............. 49 1995 Executive Vice President, Applications Group
David R. Bradford.............. 45 1986 Senior Vice President, General Counsel, and
Corporate Secretary
Christine G. Hughes............ 49 1994 Senior Vice President, Corporate Marketing
R. Duff Thompson............... 44 1994 Senior Vice President, Corporate Development
Stephen C. Wise................ 41 1990 Senior Vice President, Finance
Darcy G. Mott.................. 43 1989 Vice President and Treasurer
</TABLE>
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.
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.
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.
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.
11
<PAGE> 12
Jeffrey H. Waxman joined the Company in June 1995 as Executive Vice
President, Applications Group. From December 1992 to June 1995 he was President
and Chief Executive Officer of ServiceSoft Corporation, a developer of customer
service software and hardware. From January 1992 to November 1992 he was an
independent consultant in the software industry. From June 1988 to January 1992
he was President and CEO of Uniplex, Inc. a developer and publisher of core
office technology for Open Systems.
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.
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.
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. In December 1995 he became Vice President
and Treasurer.
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 of which is leased to a third party
manufacturer. The Company also owns a 100,000 square-foot office building in
Herndon, Virginia. The Company occupies approximately 1/3 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, Colombia, Czech Republic, Denmark, Finland, France, Germany,
Hong Kong, Hungary, India, Ireland, Italy, Japan, Korea, Mexico, Netherlands,
Norway, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland,
United Kingdom, and Venezuela -- each of which leases its facilities.
The Company leases offices for product development in San Jose and Scotts
Valley, California; Summit, New Jersey; and Hungerford, U.K.; and a distribution
facility in San Jose, California. The Company also leases sales and support
offices in Arizona, California (7), Colorado, Connecticut, District of Columbia,
Florida (2), Georgia, Illinois (2), Massachusetts, Michigan, Minnesota, Missouri
(2), New Jersey, New York (2), North Carolina, Ohio (3), Oregon, Pennsylvania
(2), Tennessee, Texas (2), Utah, Washington, Chile, China, New Zealand, Russia,
Taiwan, and United Arab Emirates.
The terms of such leases vary from month to month to up to ten years.
12
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
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. In June 1994, Novell filed
a petition with the U.S. Patent and Trademark Office (Patent 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 1994, the trial court issued a ruling, which
among other things, vacated the trial date which had been previously set in the
action. In June 1995, the Patent Office, upon re-examiniation, overturned the
Academy patent, stating that there was no patentable subject matter. In December
1995, the Academy filed a petition with the Patent Office seeking to amend its
patent. The Company believes that the ultimate resolution of this legal
proceeding will not have a material adverse effect on its financial position,
results of operation, or cash flows.
The Company is a party to a number of additional legal claims 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, results of operations, or cash flows.
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 39 of the Company's Annual Report
to Shareholders for the fiscal year ended October 28, 1995.
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 20 of the Company's Annual Report to
Shareholders for the fiscal year ended October 28, 1995.
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 21 through 25 of the Company's Annual Report to Shareholders for the
fiscal year ended October 28, 1995.
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
26 through 38 of the Company's Annual Report to Shareholders for the fiscal year
ended October 28, 1995, and to the information contained in the section
captioned "Selected Consolidated Quarterly Financial Data" on page 39 of the
Company's Annual Report to Shareholders for the fiscal year ended October 28,
1995.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
13
<PAGE> 14
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 10, 1996, 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 1995, 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 10, 1996, 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 10, 1996, 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 10, 1996, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Act of 1934, as amended.
14
<PAGE> 15
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
26 through 38 of the Company's Annual Report to Shareholders for the
fiscal year ended October 28, 1995.
Consolidated Statements of Income for the fiscal years ended October
28, 1995, October 29, 1994, and October 30, 1993.
Consolidated Balance Sheets at October 28, 1995 and October 29, 1994.
Consolidated Statements of Shareholders' Equity for the fiscal years
ended October 28, 1995, October 29, 1994, and October 30, 1993.
Consolidated Statements of Cash Flows for the fiscal years ended
October 28, 1995, October 29, 1994, and October 30, 1993.
Notes to Consolidated Financial Statements.
Report of Ernst & Young LLP, Independent Auditors.
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Report of Price Waterhouse LLP, Independent Accountants 17
2. Financial Statement Schedules:
Schedule II Valuation and Qualifying Accounts 18
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. 19
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended October 28, 1995.
15
<PAGE> 16
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 22, 1996 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>
NAME TITLE DATE
- ------------------------------------------ -------------------------------- -----------------
<C> <S> <C>
/s/ ROBERT J. FRANKENBERG Chairman of the Board, January 22, 1996
- ------------------------------------------ President, Chief Executive
(Robert J. Frankenberg) Officer and Director (Principal
Executive Officer)
/s/ JAMES R. TOLONEN Executive Vice President and January 22, 1996
- ------------------------------------------ Chief Financial Officer
(James R. Tolonen) (Principal Financial Officer)
/s/ STEPHEN C. WISE Senior Vice President, Finance January 22, 1996
- ------------------------------------------ (Principal Accounting Officer)
(Stephen C. Wise)
/s/ ALAN C. ASHTON Director January 22, 1996
- ------------------------------------------
(Alan C. Ashton, Ph.D.)
/s/ ELAINE R. BOND Director January 22, 1996
- ------------------------------------------
(Elaine R. Bond)
/s/ HANS WERNER HECTOR Director January 22, 1996
- ------------------------------------------
(Hans Werner Hector)
/s/ JACK L. MESSMAN Director January 22, 1996
- ------------------------------------------
(Jack L. Messman)
/s/ LARRY W. SONSINI Director January 22, 1996
- ------------------------------------------
(Larry W. Sonsini)
/s/ IAN R. WILSON Director January 22, 1996
- ------------------------------------------
(Ian R. Wilson)
/s/ JOHN A. YOUNG Director January 22, 1996
- ------------------------------------------
(John A. Young)
</TABLE>
16
<PAGE> 17
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 year ended December 31, 1993 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 audit. We conducted our audit 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 audit provide a reasonable
basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Salt Lake City, Utah
March 22, 1994
17
<PAGE> 18
NOVELL, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ACCOUNTS RECEIVABLE ALLOWANCE
-----------------------------
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED TO AT END
OF PERIOD OPERATIONS DEDUCTIONS(1) OF PERIOD
---------- ----------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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
Fiscal year ended October 28, 1995............ $82,934 $(4,596) $ 3,481 $74,857
</TABLE>
- ---------------
(1) Write-off of uncollectible accounts
18
<PAGE> 19
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 28,
1995.(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 Registrant's Registration Statement of Form S-8, filed July 8, 1994
(File No. 33-54483).
(13) Filed herewith.
</TABLE>
19
<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 30, 1993 OCTOBER 29, 1994 OCTOBER 28, 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Weighted average number of common shares
outstanding*................................. 358,490 361,648 367,963
Number of common share equivalents resulting
from stock options, computed using the
treasury stock method*....................... 9,410 6,684 6,621
------- ------- -------
Number of common and common share equivalents
used in computation*......................... 367,900 368,332 374,584
======= ======= =======
</TABLE>
- ---------------
*All share amounts reflect the June 1994 merger with WordPerfect Corporation.
20
<PAGE> 1
EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL DATA
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Oct. 28 Oct. 29 Oct. 30 Oct. 31 Oct. 26
1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
Net sales $2,041,174 $1,998,077 $1,830,411 $1,512,488 $1,262,073
Gross profit 1,551,841 1,531,011 1,427,809 1,185,781 994,831
Income from operations 452,109 269,943 108,098 428,146 428,673
Income before taxes 508,729 297,383 138,157 461,807 461,212
Income taxes 170,424 90,652 97,437 139,829 97,896
Net income 338,305 206,731 40,720 321,978 363,316
Net income per share .90 .56 .11 .90 1.05
- -----------------------------------------------------------------------------------------------------------
BALANCE SHEET
Cash and short-term investments $1,321,281 $ 861,809 $ 719,197 $ 631,829 $ 513,113
Working capital 1,464,237 990,411 859,308 727,068 561,653
Total assets 2,415,830 1,963,481 1,745,337 1,430,475 1,133,600
Long-term debt -- -- 84,289 12,250 2,471
Shareholders' equity 1,938,262 1,486,987 1,146,026 1,115,047 884,282
- -----------------------------------------------------------------------------------------------------------
KEY RATIOS
Current ratio 4.2 3.1 3.2 3.5 3.4
Return on net sales 17% 10% 2% 21% 29%
Return on average total assets 15% 11% 3% 25% 38%
Return on average equity 20% 16% 4% 32% 49%
- -----------------------------------------------------------------------------------------------------------
GROWTH PERCENTAGES
Net sales 2% 9% 21% 20% 26%
Net income 64% 408% -87% -11% 24%
Net income per share 61% 409% -88% -14% 17%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Novell is a leading provider of networking software. The Company's software
products provide the distributed infrastructure, network services, advanced
network access, and network applications to connect people with other people and
the information they need, enabling them to act on it anytime, anyplace.
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 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.
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 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. (Borland) 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.
On October 30, 1995, the Company announced its intention to sell its
personal productivity applications product line. Novell's personal productivity
applications product line was acquired in the WordPerfect and Quattro Pro
transactions. Certain other acquired product lines such as GroupWise are not
being sold. The Company is actively negotiating with several parties regarding
the sale of the personal productivity applications product line and anticipates
that it will announce a sale in early 1996.
On December 6, 1995, Novell completed the sale of its UnixWare product line
to the Santa Cruz Operation, Inc. (SCO). The Company expects to report a gain on
this transaction in the first quarter of fiscal 1996. Under the agreement,
Novell received approximately 6.1 million shares of SCO common stock, resulting
in an ownership position of approximately 17% of the outstanding SCO common
stock. The agreement also calls for Novell to receive a revenue stream from SCO
based on revenue performance of the purchased UnixWare product line. This
revenue stream is not to exceed $84 million net present value, and will end by
the year 2002. In addition, Novell will continue to receive revenue from
existing licenses for older versions of UNIX System source code.
21
<PAGE> 3
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NET SALES
1995 Change 1994 Change 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales (millions) $2,041 2% $1,998 9% $1,830
=================================================================================================
</TABLE>
Through fiscal 1995, Novell has had 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 1995 and fiscal 1994, analysis of the
individual product groups characterizes the changes that have occurred.
The NetWare Systems Group (NSG) represented 52% of total revenues in fiscal
1995, 46% in fiscal 1994, and 45% in fiscal 1993. NSG revenues grew by 16% in
fiscal 1995 compared to fiscal 1994, and by 11% in fiscal 1994 compared to
fiscal 1993. The growth in fiscal 1995 has been in NetWare 4, while NetWare 3
and other NSG products declined. In fiscal 1994, both NetWare 4 and NetWare 3
grew over the fiscal 1993 levels.
The Novell Applications Group (NAG) represented 24% of total revenues in
fiscal 1995, 29% in fiscal 1994, and 38% in fiscal 1993. NAG revenues decreased
by 17% in fiscal 1995 compared to fiscal 1994, and by 18% in fiscal 1994
compared to fiscal 1993. The decrease in fiscal 1995 compared to fiscal 1994 was
primarily the result of a decrease in WordPerfect revenues offset by increases
in the PerfectOffice suite and GroupWise. The decrease in fiscal 1994 compared
to fiscal 1993 was primarily the result of a decrease in WordPerfect for DOS
revenues. The personal productivity applications product line, which the Company
intends to sell in early 1996, accounted for $407 million of revenue in
fiscal 1995.
The UNIX Systems Group (USG) represented 5% of total revenues in fiscal
1995, 9% in fiscal 1994, and 3% in fiscal 1993. The decrease in fiscal 1995
compared to fiscal 1994 was due to the fact that fiscal 1994 included a one-time
fully paid license for UNIX technology sold to Sun Microsystems for $81 million,
representing 4% of total revenue in fiscal 1994. The increase in fiscal 1994
compared to fiscal 1993 was 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.
The Information Access and Management Group (IAMG) represented 12% of total
revenues in fiscal 1995, 11% in fiscal 1994, and 10% in fiscal 1993. IAMG
revenues grew by 9% in fiscal 1995 compared to fiscal 1994, and by 31% in fiscal
1994 compared to fiscal 1993. Most of the growth in fiscal 1995 was attributable
to network management products, while the growth in fiscal 1994 was attributable
to host connectivity products.
Service, training, and other revenues represented 7% of revenue in fiscal
1995, 5% of revenue in fiscal 1994, and 4% of revenue in fiscal 1993.
International sales represented 47% of total sales in fiscal 1995 and 43%
of total sales in both fiscal 1994 and 1993. The Company expects that
international sales will continue to grow at least at the same rate as domestic
sales in fiscal 1996.
<TABLE>
<CAPTION>
GROSS PROFIT
1995 Change 1994 Change 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross profit (millions) $1,552 1% $1,531 7% $1,428
Percentage of net sales 76% 77% 78%
===================================================================================================
</TABLE>
The lower gross profit percentage in fiscal 1995 compared to fiscal 1994 is
attributable to increased royalty costs and product training and education costs
in fiscal 1995. The lower gross profit percentage in fiscal 1994 compared to
fiscal 1993 was due to $35 million of costs associated with the sale of the
license to Sun Microsystems which were charged to cost of sales, 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.
22
<PAGE> 4
<TABLE>
<CAPTION>
OPERATING EXPENSES
1995 Change 1994 Change 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and marketing (millions) $ 579 3% $ 562 10% $ 510
Percentage of net sales 28% 28% 28%
Product development (millions) $ 368 6% $ 347 19% $ 290
Percentage of net sales 18% 17% 16%
General and administrative (millions) $ 153 -6% $ 162 1% $ 163
Percentage of net sales 7% 8% 9%
Restructuring charges (millions) -- -- $ 51 -- $ 42
Percentage of net sales -- 3% 2%
Other nonrecurring charges (millions) -- -- $ 139 -- $ 315
Percentage of net sales -- 7% 17%
Total operating expenses (millions) $1,100 -13% $1,261 -4% $1,320
Percentage of net sales 54% 63% 72%
=====================================================================================================
</TABLE>
Sales and marketing expenses have remained flat as a percentage of net sales in
fiscal 1995, 1994, and 1993. Sales and marketing expenses can fluctuate as a
percentage of net sales in any given quarterly 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 in an effort to increase the Company's
investment in new products.
General and administrative expenses decreased slightly as a percentage of
net sales in fiscal 1995 compared to fiscal 1994 and also decreased in fiscal
1994 compared to fiscal 1993. The decrease in fiscal 1995 was attributable to
workforce reductions after the merger with WordPerfect. The decrease in fiscal
1994 was primarily attributable to lower bad debt expenses in fiscal 1994
compared to fiscal 1993.
During the fourth quarter of fiscal 1994, the Company incurred a
restructuring charge of $51 million. In September 1994, the Company formulated a
plan whereby duplicate facilities, excess personnel, and products to be
discontinued were identified. The restructuring charge included $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 terminated. The charge did not include salaries and wages paid to such
employees up to their termination date, nor did it include any expenses related
to an additional 650 employees who were transferred to third parties to perform
outsourced functions. The remaining $9 million of the restructuring charge
related to products which have been eliminated from the Company's product lines.
Savings from this restructuring plan were approximately $50 million in fiscal
1995. Of the original reserve, approximately $10 million remained at the end of
fiscal 1995 related to a lease obligation.
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. None of the original liability remained at the end of fiscal 1995.
In fiscal 1994 and 1993, 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. 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 Technology
Corporation. 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.
23
<PAGE> 5
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.
Operating expenses excluding nonrecurring charges have grown slightly more
rapidly than revenues both in fiscal 1995 compared to fiscal 1994 and in fiscal
1994 compared to fiscal 1993 due to higher product development expenses.
<TABLE>
<CAPTION>
1995 Change 1994 Change 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Employees 7,762 -8% 8,457 -19% 10,451
Revenue per employee (thousands) $ 252 $ 211 $ 192
====================================================================================================
</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 were outsourced as part of
the fiscal 1994 restructuring.
Subsequent to fiscal 1995, the Company reduced its workforce by
approximately 400 employees in anticipation of selling the personal productivity
applications product line. In addition, approximately 300 employees have left or
will leave the Company in connection with the sale of the UnixWare business, a
majority of whom have been hired by SCO or Hewlett-Packard. The Company expects
that its workforce will be reduced by approximately 1,500 additional employees
in connection with the sale of the personal productivity applications product
line in early 1996.
OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
1995 Change 1994 Change 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Other income (expense), net (millions) $57 111% $27 -9% $30
Percentage of net sales 3% 1% 2%
===================================================================================================
</TABLE>
The primary component of other income (expense) is investment income, which was
$54 million, $36 million, and $28 million in fiscal 1995, 1994, and 1993,
respectively. The increases in fiscal 1995 compared to fiscal 1994 and in fiscal
1994 compared to fiscal 1993 were attributable to a larger investment portfolio
due to cash being generated from operations in excess of other cash uses. To
achieve potentially higher returns, a limited portion of the Company's
investment portfolio is invested in mutual funds which incur 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 1995, in addition to the investment income, the Company had a
gain on the disposal of its Austin, Texas facility, offset by foreign currency
exchange losses. In fiscal 1994, investment income was offset by merger expenses
and interest expense related to notes payable to WordPerfect shareholders.
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," was adopted in the first
quarter of fiscal 1995, resulting in unrealized gains of $23 million, net of
deferred taxes, as of the end of fiscal 1995.
24
<PAGE> 6
<TABLE>
<CAPTION>
INCOME TAXES
1995 Change 1994 Change 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income taxes (millions) $170 87% $91 -7% $97
Percentage of net sales 8% 5% 5%
Effective tax rate 34% 31% 71%
===================================================================================================
</TABLE>
The effective tax rate for fiscal 1995 was higher than the effective tax rate
for fiscal 1994 as a result of WordPerfect's S corporation status change to C
corporation status in the first quarter of fiscal 1994. The effective tax rate
for fiscal 1994 was 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 in fiscal 1993.
NET INCOME AND NET INCOME PER SHARE
<TABLE>
<CAPTION>
1995 Change 1994 Change 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net income (millions) $338 63% $207 408% $ 41
Percentage of net sales 17% 10% 2%
Net income per share $.90 61% $.56 409% $.11
===================================================================================================
</TABLE>
The nonrecurring UNIX license revenues, acquisition related expense items, and
normalization of income taxes for WordPerfect represented a decrease in net
income of $91 million or $.25 per share in fiscal 1994 and $288 million or $.78
per share in fiscal 1993.
<TABLE>
<CAPTION>
LIQUIDITY AND CAPITAL RESOURCES
1995 Change 1994 Change 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and short-term investments (millions) $1,321 53% $862 20% $719
Percentage of total assets 55% 44% 41%
=====================================================================================================
</TABLE>
Cash and short-term investments increased to $1.321 billion at October 28, 1995
from $862 million at October 29, 1994. The major reasons for this increase were
the $450 million of cash provided by operating activities and the $64 million
provided from the issuance of common stock from employee stock plans, offset by
the $84 million used for capital expenditures. The investment portfolio is
diversified among security types, industry groups, and individual issuers. The
Company's principal source of liquidity has been from operations. At October 28,
1995, 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,
strategic investments, and flexibility in a dynamic and competitive operating
environment.
During fiscal 1995, the Company has continued to generate cash from
operations. The Company anticipates being able to fund its current operations
and capital expenditures planned for the foreseeable future with existing cash
and short-term investments together with internally generated funds. Borrowings
under the Company's credit facilities, or public offerings of equity or debt
securities, are available if the need arises. As the Company grows, investments
will continue in product development and in new and existing areas of
technology. Cash may also be used to acquire technology through purchases and
strategic acquisitions. Capital expenditures in fiscal 1996 are anticipated to
be approximately $60 million, but could be reduced if the growth of the Company
is less than presently anticipated. In addition, the Company has announced a
share repurchase program whereby the Company is authorized to repurchase up to
37 million shares of its common stock in the open market during fiscal 1996.
25
<PAGE> 7
CONSOLIDATED STATEMENTS OF INCOME
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED Oct. 28 Oct. 29 Oct. 30
1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $2,041,174 $1,998,077 $1,830,411
Cost of sales 489,333 467,066 402,602
- --------------------------------------------------------------------------------
Gross profit 1,551,841 1,531,011 1,427,809
Operating expenses
Sales and marketing 579,370 562,034 509,722
Product development 367,562 346,706 290,239
General and administrative 152,800 161,855 163,249
Restructuring charges -- 51,463 42,000
Other nonrecurring charges -- 139,010 314,501
- --------------------------------------------------------------------------------
Total operating expenses 1,099,732 1,261,068 1,319,711
Income from operations 452,109 269,943 108,098
Other income (expense)
Investment income 53,839 36,360 28,131
Merger expenses -- (5,778) --
Other, net 2,781 (3,142) 1,928
- --------------------------------------------------------------------------------
Other income, net 56,620 27,440 30,059
- --------------------------------------------------------------------------------
Income before taxes 508,729 297,383 138,157
Income taxes 170,424 90,652 97,437
- --------------------------------------------------------------------------------
Net income $ 338,305 $ 206,731 $ 40,720
================================================================================
Weighted average shares outstanding 374,584 368,332 367,900
================================================================================
Net income per share $ .90 $ .56 $ .11
================================================================================
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 8
CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
Oct. 28 Oct. 29
1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and short-term investments $1,321,231 $ 861,809
Receivables, less allowances ($74,857-1995, $82,934-1994) 470,437 391,342
Inventories 23,025 32,221
Prepaid expenses 50,576 69,324
Deferred income taxes 59,913 98,435
- ----------------------------------------------------------------------------------------
Total current assets 1,925,182 1,453,131
Property, plant, and equipment, net 390,452 394,682
Other assets 101,196 115,668
- ----------------------------------------------------------------------------------------
Total assets $2,416,830 $1,963,481
========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 116,305 $ 67,176
Accrued compensation 97,637 81,639
Accrued marketing liabilities 72,339 66,800
Other accrued liabilities 90,623 121,165
Income taxes payable 29,942 78,139
Deferred revenue 54,099 47,801
- ----------------------------------------------------------------------------------------
Total current liabilities 460,945 462,720
Minority interests 17,623 13,774
SHAREHOLDERS' EQUITY
Common stock, par value $.10 per share
Authorized--600,000,000 shares
Issued--371,567,158 shares, 1995
364,354,887 shares, 1994 37,157 36,436
Additional paid-in capital 737,481 645,419
Retained earnings 1,163,624 805,132
- ----------------------------------------------------------------------------------------
Total shareholders' equity 1,938,262 1,486,987
- ----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,416,830 $1,963,481
========================================================================================
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 9
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Retained
-----------------------
Shares Amount Capital Earnings Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE -- OCT. 31, 1992 352,015 $35,202 $ 380,609 $ 699,236 $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 $ 624,830 $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 $ 805,132 $1,486,987
Stock issued from stock plans 7,315 732 68,459 (4,909) 64,282
Stock plans' income tax benefits -- -- 25,128 -- 25,128
Shares cancelled (103) (11) (1,525) 1,451 (85)
Unrealized gain on investments -- -- -- 23,427 23,427
Unearned stock compensation -- -- -- 5,506 5,506
Cumulative translation adjustment -- -- -- (5,288) (5,288)
Net income -- -- -- 338,305 338,305
- ----------------------------------------------------------------------------------------------------------------------
BALANCE -- OCT. 28, 1995 371,567 $37,157 $ 737,481 $1,163,624 $1,938,262
======================================================================================================================
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 10
CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED Oct. 28 Oct. 29 Oct. 30
1995 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 338,305 $ 206,731 $ 40,720
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED (USED) BY OPERATING ACTIVITIES
Write-off of purchased research and development -- 129,389 314,501
Depreciation and amortization 94,190 86,379 75,425
WordPerfect fiscal year conversion -- (39,856) --
Stock plans' income tax benefits 25,128 21,747 45,660
(Increase) decrease in receivables (79,095) 3,992 (76,018)
Decrease (increase) in inventories 9,196 (2,388) (3,237)
Decrease (increase) in prepaids 18,748 (29,248) (13,298)
Decrease (increase) in deferred income taxes 45,228 (70,294) (53,796)
(Decrease) increase in current liabilities, net (1,775) 73,487 67,519
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 449,925 379,939 397,476
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net 64,197 35,701 40,990
Repurchases of common stock -- -- (230,758)
Distributions to shareholders -- (65) (23,889)
Repayment of debt -- (118,901) (5,896)
Other -- 24,531 13,350
- --------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 64,197 (58,734) (206,203)
- --------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant, and equipment (84,454) (73,488) (110,256)
(Increase) in short-term investments (352,257) (297,782) (39,915)
Cash received from acquisitions -- -- 37,242
Cash paid for acquisitions -- (110,000) (35,500)
Other 6,327 4,895 (5,750)
- --------------------------------------------------------------------------------------------------------
Net cash used by investing activities (430,384) (476,375) (154,179)
- --------------------------------------------------------------------------------------------------------
Total increase (decrease) in cash and cash equivalents $ 83,738 $(155,170) $ 37,094
Cash and cash equivalents -- beginning of period 228,426 383,596 346,502
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents -- end of period 312,164 228,426 383,596
Short-term investments -- end of period 1,009,067 633,383 335,601
- --------------------------------------------------------------------------------------------------------
Cash and short-term investments -- end of period $1,321,231 $ 861,809 $ 719,197
========================================================================================================
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 11
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 debt instruments purchased with a term
to maturity of three months or less to be cash equivalents. Short-term
investments are 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. All
marketable debt and equity securities are included in cash and short-term
investments and are considered available-for-sale and carried at fair market
value, with the unrealized gains and losses, net of tax, included in
shareholders' equity. Such securities are anticipated to be used for current
operations and are therefore classified as current assets, even though some
maturities may extend beyond one year.
- - 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:
<TABLE>
<CAPTION>
Asset Classification Useful Lives
- ------------------------------------------------------------
<S> <C>
Buildings 30 years
Furniture and equipment 3-5 years
Leasehold improvements and other 3-7 years
Intangible assets 3-15 years
</TABLE>
- - 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 and Indian subsidiaries, 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 in 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 are 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 Statement
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 on the consolidated financial statements.
- - 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.
- - Required adoption of the American Institute of Certified Public Accountants
Statement of Position 94-6, "Disclosure of Certain Significant Risks and
Uncertainties," in fiscal 1996 is not expected to have a material impact on the
consolidated financial statements of the Company.
- - Required adoption of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," effective for the Company during the first fiscal quarter of
1997, is not expected to have a material impact on the consolidated financial
statements of the Company.
- - The Company intends to adopt Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," effective for the Company during
the first fiscal quarter of 1997. The Company has chosen to disclose the impact
of stock-based compensation in its footnotes and will not include such impact on
its recorded earnings.
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.
30
<PAGE> 12
B. MERGERS, ACQUISITIONS, AND STRATEGIC INVESTMENTS
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, 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 and, accordingly, the WordPerfect statement
of income for the year ended December 31, 1993 has been combined with the Novell
statement of income for the fiscal year ended October 30, 1993. 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.
Additionally, in June 1994, the Company acquired from Borland
International, Inc. (Borland) 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.
C. CASH AND SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
Fair Market
Cost at Gross Gross Value at Cost at
Oct. 28 Unrealized Unrealized Oct. 28 Oct. 29
(Dollars in thousands) 1995 Gains Losses 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS
Cash $ 152,930 $ -- $-- $ 152,930 $101,331
Repurchase agreements 23,794 -- -- 23,794 19,309
Tax exempt money market fund 63,065 -- -- 63,065 29,394
Taxable money market investments -- -- -- -- 13,357
Municipal securities 72,375 -- -- 72,375 65,035
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 312,164 $ -- $-- $ 312,164 $228,426
- -------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS
Municipal securities $ 375,491 $ 3,220 $-- $ 378,711 $201,491
Money market mutual funds 38,475 -- -- 38,475 104,388
Money market preferreds 442,500 176 -- 442,676 306,700
Mutual funds 91,423 30 -- 91,453 13,017
Equity securities 23,055 34,697 -- 57,752 7,787
- -------------------------------------------------------------------------------------------------------
Short-term investments $ 970,944 $38,123 $-- $1,009,067 $633,383
- -------------------------------------------------------------------------------------------------------
Cash and short-term investments $1,283,108 $38,123 $-- $1,321,231 $861,809
=======================================================================================================
</TABLE>
31
<PAGE> 13
C. CASH AND SHORT-TERM INVESTMENTS (CONTINUED)
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," was adopted in the first quarter of
fiscal 1995, resulting in unrealized gains of $23 million, net of deferred
taxes, as of the end of fiscal 1995.
The Company realized gains on the sales of securities of $7 million, $7
million, and $4 million in fiscal 1995, 1994, and 1993, respectively. In fiscal
1994, the Company realized losses on the sales of securities of $2 million.
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. 28 Oct. 29
(Dollars in thousands) 1995 1994
- ----------------------------------------------------------------
<S> <C> <C>
Buildings and land $ 214,218 $ 232,225
Furniture and equipment 403,177 425,118
Leasehold improvements and other 66,127 44,159
- ----------------------------------------------------------------
Property, plant, and equipment
at cost 683,522 701,502
Accumulated depreciation (293,070) (306,820)
- ----------------------------------------------------------------
Property, plant, and equipment, net $ 390,452 $ 394,682
================================================================
</TABLE>
E. INCOME TAXES
Novell, Inc. adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes," 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).
Prior to September 30, 1993, WordPerfect and related affiliates elected to
be taxed as S corporations whereby the income tax effects accrued directly to
the shareholders. On September 30, 1993, the WordPerfect and related domestic
affiliates terminated their S corporation elections. On December 31, 1993, the
WordPerfect related foreign affiliates 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 28, 1995, the Company has net operating loss carryforwards
from acquired companies of approximately $27 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.
32
<PAGE> 14
E. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED Oct. 28 Oct. 29 Oct. 30
(Dollars in thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TAXES ON INCOME
Current
Federal $ 85,344 $132,543 $109,954
State 20,829 21,344 19,158
Foreign 36,048 22,362 22,121
- -------------------------------------------------------------------------------------------------------------
Total current 142,221 176,249 151,233
- -------------------------------------------------------------------------------------------------------------
Deferred
Federal 24,382 (55,788) 5,461
State 4,423 (10,510) 1,631
Foreign (602) (3,751) (2,295)
Change in tax status -- (15,548) (58,593)
- -------------------------------------------------------------------------------------------------------------
Total deferred 28,203 (85,597) (53,796)
- -------------------------------------------------------------------------------------------------------------
Total taxes on income $ 170,424 $ 90,652 $ 97,437
=============================================================================================================
DIFFERENCES BETWEEN THE U.S. STATUTORY AND EFFECTIVE TAX RATES
U.S. statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal tax effect 3.2 3.5 3.5
Research and development tax credits (1.6) (2.6) (2.4)
FSC benefit (0.7) (2.1) (1.5)
Tax exempt income (2.0) (2.0) (1.3)
Other, net (0.4) 2.2 1.4
- -------------------------------------------------------------------------------------------------------------
Subtotal 33.5 34.0 34.7
Change in tax status -- (5.2) (42.4)
Non-deductible charge for purchased research and development -- 1.7 78.2
- -------------------------------------------------------------------------------------------------------------
Effective tax rate 33.5% 30.5% 70.5%
=============================================================================================================
DOMESTIC AND FOREIGN COMPONENTS OF INCOME BEFORE TAXES
Domestic $ 450,094 $312,563 $122,664
Foreign 58,635 (15,180) 15,493
- -------------------------------------------------------------------------------------------------------------
Total income before taxes $ 508,729 $297,383 $138,157
=============================================================================================================
Cash paid for income taxes $ 162,020 $115,016 $ 86,306
=============================================================================================================
DEFERRED INCOME TAXES
- -------------------------------------------------------------------------------------------------------------
Deferred tax assets
Receivable valuation accounts $ 20,869 $ 33,076
Restructuring provision 8,428 17,031
Acquired intangibles 29,746 31,435
Reserves and accruals 25,310 35,877
Foreign earnings 12,136 3,626
Other individually immaterial items 25,259 31,236
- -------------------------------------------------------------------------------------------------------------
121,748 152,281
Valuation allowance for deferred tax assets (9,018) (9,018)
- -------------------------------------------------------------------------------------------------------------
112,730 143,263
Deferred tax liabilities
UNREALIZED GAIN ON INVESTMENTS (14,695) --
- -------------------------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS $ 98,035 $143,263
=============================================================================================================
</TABLE>
33
<PAGE> 15
F. COMMITMENTS AND CONTINGENCIES
Rent expense for operating and month-to-month leases was $32 million, $34
million, and $31 million in fiscal 1995, 1994, and 1993, respectively.
As of October 28, 1995, the Company has various operating leases with
remaining terms of more than one year. These leases have minimum annual lease
commitments of $35 million in fiscal 1996, $28 million in fiscal 1997, $17
million in fiscal 1998, $14 million in fiscal 1999, $12 million in fiscal 2000,
and $45 million thereafter.
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 28,
1995, 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 28, 1995, standby letters
of credit of $100,000 were outstanding under this agreement.
In December 1991, Roger Billings and his International Academy of Science
(Academy), filed suit against Novell alleging that the Company infringes on a
patent allegedly owned by the Academy. In June 1994, Novell filed a petition
with the U.S. Patent and Trademark Office (Patent 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 1994, the trial court issued a ruling, which
among other things, vacated the trial date which had been previously set in the
action. In June 1995, the Patent Office, upon re-examination, overturned the
Academy patent, stating that there was no patentable subject matter. In December
1995, the Academy filed a petition with the Patent Office seeking to amend its
patent. The Company believes that the ultimate resolution of this legal
proceeding will not have a material adverse effect on its financial position,
results of operations, or cash flows.
The Company is a party to a number of additional legal claims arising in
the ordinary course of business. The Company believes the ultimate resolution of
the claims will not have a material adverse effect on its financial position,
results of operations, or cash flows.
G. 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 28, 1995 or
October 29, 1994.
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, 98 million shares of common stock have been reserved
for issuance of stock options, 47 million shares have been exercised, 41 million
shares are outstanding, 8 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 granted 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 nonemployee
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.
34
<PAGE> 16
G. SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
Oct. 28 Oct. 29 Oct. 30
1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPTIONS OUTSTANDING
Beginning balance 39,109,706 37,282,781 29,443,827
Options granted 12,575,366 20,602,634 14,730,714
Options exercised (5,834,579) (4,036,142) (5,183,180)
Options cancelled (4,569,581) (14,739,567) (1,708,580)
- -------------------------------------------------------------------------------------------------------------------
Ending balance 41,280,912 39,109,706 37,282,781
===================================================================================================================
EXCHANGE PROGRAM (INCLUDED ABOVE)
Options cancelled -- 11,149,199 --
Options regranted -- 7,430,961 --
Restricted stock grant (included above)
Options granted 50,000 306,500 --
Option price data
Grant price range $.10 - 21.50 $.10 - 21.13 $.61 - 31.25
Weighted average grant price $ 19.14 $ 15.79 $ 24.50
Exercise price range $.10 - 21.25 $.10 - 25.00 $.17 - 28.75
Weighted average exercise price $ 7.41 $ 5.18 $ 4.76
Cancelled price range $.61 - 29.00 $.61 - 29.00 $1.87 -29.00
Weighted average cancelled price $ 18.19 $ 25.70 $ 20.69
Weighted average outstanding price $ 15.24 $ 13.25 $ 15.85
OPTION TERMS
Percentage vesting per year 25% 25% 25%
Maximum term 7 or 10 years 7 or 10 years 7 or 10 years
Percentage granted at fair market value on date of grant 99% 99% 100%
AS OF YEAR END
Options exercisable 17,418,497 15,863,911 8,965,246
Options available for future grants 8,009,685 5,476,318 4,014,599
Other information
Shares of common stock outstanding at year end 371,567,158 364,354,887 359,431,077
Annual option reserve increase based on evergreen provision 10,566,291 8,933,478 --
Options granted as a percentage of outstanding common stock,
net of cancellations 2.2% 1.6% 3.6%
Option holders as a percentage of total employees 100% 100% 37%
</TABLE>
35
<PAGE> 17
G. SHAREHOLDERS' EQUITY (CONTINUED)
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. On April 12,
1995, shareholders approved an amendment to increase the reserve by 4 million
shares. As of October 28, 1995, 5 million shares have been issued under the
Purchase Plan.
H. RESTRUCTURING CHARGES
During the fourth quarter of fiscal 1994, the Company incurred a restructuring
charge of $51 million. In September 1994, the Company formulated a plan whereby
duplicate facilities, excess personnel, and products to be discontinued were
identified. The restructuring charge included $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 terminated. The
charge did 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 were transferred to third parties to perform outsourced functions.
The remaining $9 million of the restructuring charge related to products which
have been eliminated from the Company's product lines. Savings from this
restructuring plan were approximately $50 million in fiscal 1995. Of the
original reserve, approximately $10 million remained at the end of fiscal 1995
related to a lease obligation.
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. None of the original liability remained at the end of fiscal 1995.
I. OTHER NONRECURRING CHARGES
In fiscal 1994 and 1993, 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. 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 Technology
Corporation. 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.
J. 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.
Prior to January 1, 1995, 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. On January 1, 1995, the Company's retirement and
savings plan contribution was changed to be a 100% matching contribution for
employee contributions up to 4% of each employee's compensation. Company
matching contributions were $17 million, $15 million, and $12 million in fiscal
1995, 1994, and 1993, respectively.
36
<PAGE> 18
K. RELATED PARTY TRANSACTIONS
In fiscal 1995, 1994, and 1993, legal fees of approximately $2 million per year
were paid to Wilson, Sonsini, Goodrich & Rosati, a law firm in which a director
of the Company is a senior partner.
L. INTERNATIONAL SALES
The Company markets internationally through distributors who sell to dealers and
end users. In fiscal 1995, 1994, and 1993, sales to international customers were
approximately $960 million, $861 million, and $783 million, respectively. In
fiscal 1995, 1994, and 1993, international sales to European countries were 56%,
58%, and 60%, respectively. No one foreign country accounted for more than 10%
of total sales in any period. In fiscal 1995 and 1994, the Company had one
multinational distributor, which accounted for 15% and 12% of revenue,
respectively. The Company had two multinational distributors, which accounted
for 15% and 11% of revenue in fiscal 1993. Otherwise, no customer accounted for
more than 10% of revenue in any period.
M. 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.
N. SUBSEQUENT EVENTS
On October 30, 1995, the Company announced its intention to sell its personal
productivity applications product line. Novell's personal productivity
applications product line was acquired in the WordPerfect and Quattro Pro
transactions. Certain other acquired product lines such as GroupWise are not
being sold. The Company is actively negotiating with several parties regarding
the sale of the personal productivity applications product line and anticipates
that it will announce a sale in early 1996.
On December 6, 1995, Novell completed the sale of its UnixWare product line
to the Santa Cruz Operation, Inc. (SCO). The Company expects to report a gain on
this transaction in the first quarter of fiscal 1996. Under the agreement,
Novell received approximately 6.1 million shares of SCO common stock, resulting
in an ownership position of approximately 17% of the outstanding SCO common
stock. The agreement also calls for Novell to receive a revenue stream from SCO
based on revenue performance of the purchased UnixWare product line. This
revenue stream is not to exceed $84 million net present value, and will end by
the year 2002. In addition, Novell will continue to receive revenue from
existing licenses for older versions of UNIX System source code.
37
<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 28, 1995 and October 29, 1994, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended October 28, 1995. 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
revenues constituting 39% in 1993 of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, 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 provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Novell, Inc. at October 28, 1995 and
October 29, 1994, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended October 28, 1995, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------
ERNST & YOUNG LLP
San Jose, California
December 12, 1995
38
<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 1995
Net sales $493,225 $529,508 $537,922 $480,519 $2,041,174
Gross profit 376,350 405,053 412,322 358,116 1,551,841
Income before taxes 122,585 144,162 153,332 88,650 508,729
Net income 81,519 95,868 101,966 58,952 338,305
Net income per share .22 .26 .27 .16 .90
COMMON STOCK PRICE PER SHARE
High 20 7/8 22 1/4 23 1/4 21 3/4 23 1/4
Low 15 3/4 17 5/8 17 7/8 13 3/4 13 3/4
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 5/8 26 1/4 19 1/2 17 15/32 26 1/4
Low 19 1/4 15 14 13 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
</TABLE>
Novell's common stock trades in the over-the counter market under the NASDAQ
symbol "NOVL."
The dividends have been declared on the Company's common stock. There were
13,286 shareholders of record at December 31, 1995.
39
<PAGE> 1
EXHIBIT 21
NOVELL, INC.
SUBSIDIARIES OF THE REGISTRANT
As of October 28, 1995, the following companies were subsidiaries of
Novell, Inc.:
<TABLE>
<CAPTION>
STATE OF INCORPORATION OR
WHOLLY OWNED COUNTRY IN WHICH ORGANIZED
- ---------------------------------------------------------------------- --------------------------
<S> <C>
Fluent, Inc........................................................... Delaware
Novell de Argentina S.A............................................... Argentina
Novell Austria........................................................ Austria
Novell Belgium B.V.B.A................................................ Belgium
Novell do Brasil Software Ltda........................................ Brazil
Novell Canada, Ltd.................................................... Canada
Novell Columbia....................................................... Columbia
Novell Czech Republic................................................. Czech Republic
Novell Denmark A/S.................................................... Denmark
Novell Europe, Inc.................................................... Delaware
Novell European Support Center GmbH................................... Germany
Novell Finland OY..................................................... Finland
Novell GmbH........................................................... Germany
Novell Hong Kong...................................................... Hong Kong
Novell Hungary KFT.................................................... Hungary
Novell International, Ltd............................................. Barbados
Novell Ireland Software Limited....................................... Ireland
Novell Israel......................................................... Israel
Novell Italia S.R.L................................................... Italy
Novell Korea Co., Ltd................................................. Korea
Novell Latino America Norte, CA....................................... Venezuela
Novell de Mexico, S.A.DE C.V.......................................... Mexico
Novell Netherland B.V................................................. Netherlands
Novell Norway......................................................... Norway
Novell Polska Sp.Zo.o................................................. Poland
Novell Portugal Informatica LDA....................................... Portugal
Novell Pty, Ltd....................................................... Australia
Novell S.A.R.L........................................................ France
Novell Services Asia Pacific Pty Ltd.................................. Australia
Novell Singapore...................................................... Singapore
Novell Software Development Pvt., Ltd................................. India
Novell South Africa Propietary Ltd.................................... South Africa
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>
21
<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 12, 1995, included in the
1995 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 12, 1995, 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 22, 1996
22
<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 17 of this Form 10-K.
/S/ PRICE WATERHOUSE LLP
Salt Lake City, Utah
January 23, 1996
23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
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37,157
0
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