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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 0-13351
NOVELL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 87-00393339
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
122 EAST 1700 SOUTH
PROVO, UTAH 84606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(801) 861-7000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
Preferred Share Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's common stock held by
nonaffiliates on December 31, 1997 (based on the last reported price of the
Common Stock on the NASDAQ National Market System on such date) was
$2,600,886,744.
As of December 31, 1997 there were 351,058,686 shares of the registrant's
common stock outstanding.
Portions of Registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1997, 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 7,
1998, 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 the world's leading provider of
network software. The Company offers a wide range of network solutions,
education, and support for distributed network, Internet, and small-business
markets.
The Company was incorporated in Delaware on January 25, 1983. Novell's
executive offices are located at 122 East 1700 South, Provo, Utah 84606. Its
telephone number at that address is (801) 861-7000
The Company markets its products through 36 U.S. and 60 international sales
offices. The Company sells its products through 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 end users through licensing agreements.
The Company primarily conducts product development activities in San Jose,
California; and Provo and Orem, Utah. It also contracts out some product
development activities to third-party developers.
During the third quarter of fiscal 1997, Novell took measures to reduce and
realign its resources and better manage and control its business. These measures
were in response to declines in sales of boxed products through the indirect
distribution channel customers, controlled shifts to multi-product licenses,
lower licensed revenue of certain older products to OEM's, as well as
competitive pressures in the small network market. Specifically, the Company did
not ship boxed products to its indirect distribution channel customers except to
accommodate product exchanges and returns. The Company believes this action,
which significantly reduced reported revenue in the quarter, brought indirect
distribution channel inventories of boxed software products in line with current
market demand. The decision to withhold shipments to the Company's indirect
distributor channel resulted in an operating loss in the third quarter of fiscal
1997. In addition, the Company reduced its workforce by approximately 1,000
employees or 17%, and consolidated a number of facilities. This resulted in a
one-time restructuring charge of $55 million, principally comprised of severance
and excess facilities costs. The restructuring charge contributed a loss of
$0.10 per share, net of tax, to the reported loss in fiscal 1997. The workforce
reduction and associated consolidation of facilities returned the Company to
break even for the fourth quarter of fiscal 1997 and is expected to lower future
operating expenses by approximately $100 million annually.
During the second quarter of fiscal 1996, the Company implemented a change
to its traditional distribution stocking policy that significantly reduced
revenue and earnings in that quarter. The change in the Company's traditional
distribution stocking policy was to respond to changing market conditions over
the prior two years. Direct customer and OEM licensing programs grew from less
than 5% of revenue to more than 40% of revenue. This shift in customer buying
preferences changed the Company's reliance on boxed product flowing through an
indirect distribution channel. In order to deal with this changing environment,
the Company did not ship boxed product to its indirect distribution channel
customers except to accommodate product exchanges and returns during the second
quarter of fiscal 1996, which had the effect of reducing inventories within the
indirect distribution channel, as well as significantly reducing revenue in the
quarter.
In March 1996, the Company completed the sale of its personal productivity
applications product line to Corel Corporation (Corel). The Company received
approximately 10 million shares of Corel common stock and approximately $11
million of cash. This resulted in an ownership position of approximately 17% of
the outstanding Corel common stock. The Company reported a one-time gain of $20
million in the second quarter of fiscal 1996 related to this transaction. Net of
tax, the gain was $13 million, or $0.04 per share. Additionally, Corel licensed
GroupWise client software, Envoy electronic publishing software, and other
technologies from Novell for a minimum royalty obligation of approximately $50
million over the next five years. During fiscal 1997, Novell sold approximately
one million shares of Corel common stock at a loss of approximately $6 million
which was more than offset by gains on the sales of other equity securities.
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In December 1995, Novell sold its UnixWare product line to the Santa Cruz
Operation, Inc. (SCO). The Company realized a small gain and recorded $19
million of Unix technology royalty revenue from this transaction in the first
quarter of fiscal 1996. Under the agreement, Novell received approximately six
million shares of SCO common stock, resulting in ownership of approximately 17%
of the outstanding SCO common stock. In addition, Novell continues to receive
revenue from previously existing licenses for certain versions of UNIX System
source code shipped prior to the sale to SCO.
BUSINESS STRATEGY
Novell provides standards-based network software for intranets and the
Internet. The Internet has accelerated the pace at which networks are becoming
the center of information technology solutions. Networks have become the primary
information asset in business. Novell provides network software to make these
information resources available to network users where and when they are needed.
The Company's network solutions enable businesses to protect and expand their
investments in information resources in an increasingly networked world.
Novell's network solutions integrate information resources and provide
necessary network management, messaging and groupware capabilities for customers
worldwide. Networks are inherently a mix of varied computer systems,
applications and other devices. Novell software creates an infrastructure for
managing, maintaining and accessing distributed network resources.
Through Novell's Open Solutions Architecture, Novell has oriented all of
its products to Internet standards, enabling customers to increase the
performance of traditional local and wide area networks. Today, businesses are
rapidly developing corporate intranets that leverage the rapid and easy file
access available on the World Wide Web. Corporate intranets maintain and provide
secure access to distributed information assets across networks.
Novell network software provides customers with choices for significantly
enhancing the affordability, management, and ease of use of the changing mix of
computer operating systems and applications that are important to information
technology solutions. Together with its partners, the Company is a driving force
in expanding the value of networks for customers worldwide.
TECHNOLOGIES
Establishing Novell Directory Services as a de facto industry
standard. Novell Directory Services (NDS) is a key part of Novell's strategy for
providing infrastructure software for business intranets and the Internet. NDS
is a distributed database of users, network equipment, computer systems,
applications, files and other network resources. It provides distributed
centralized access control, security, management and administration of
information resources across computer networks. NDS is integrated with the
company's NetWare server operating system and in 1997 became available as a
standalone product for single servers that run other leading server operating
systems. NDS provides full support for Internet protocols, including the
lightweight directory access protocol (LDAP). To establish NDS as the de facto
industry standard for all server platforms, Novell distributed in 1997,
single-server NDS royalty-free to computer server OEMs to include with their
UNIX server operating systems. Novell will also make a binary version of NDS
that runs on the Windows NT server operating system available to manufacturers
of Intel servers. With NDS on leading server platforms, Novell and its partners
will provide value-added network services software that uses the directory as a
foundation. The first of these products from Novell will enable replication and
synchronization of the directory between individual servers on the network.
Providing Novell Directory Services for the Internet. Since 1994, Novell
has been partnering with telecommunications carriers and Internet service
providers (ISPs) to provide NDS for the Internet. Novell's partners use NDS as
the basis for business intranet services that enable their customers to
out-source the complexity and lower the cost of maintaining wide-area networks.
These services provide managed Internet access that authenticates users and
provides secure, reliable communications and access to confidential business
information resources over the Internet. AT&T in the United States and NTT in
Japan were the first to make NDS for the Internet available. Other carriers and
ISPs plan to make the service available in 1998.
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Novell's partners are cooperating to provide interoperability between their
networks and maintain a replicated NDS directory that spans between their
different services.
Providing value-added network services software for business intranets and
the Internet. Novell delivers network services that run on the company's NetWare
network operating system for business intranets and the Internet. These network
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,
network services encompassed only file and print. Over the past decade, network
services provided by Novell have expanded to include host communications,
network management, collaboration and messaging, Web services, security, and
advanced file and print.
Providing network applications for network solutions. GroupWise is Novell's
leading network application, providing electronic mail, calendaring, scheduling,
and task and document management features. GroupWise can be hosted on servers
running the NetWare, Windows NT and UNIX operating systems. In 1996, the Company
expanded the functionality of GroupWise by including Internet access and greater
integration with network directories and management products. ManageWise is the
market leading management software offering for managing all network resources
from the servers that run NetWare and NT server operating systems to the
clients, computers, and other devices that access information resources. To
provide complete network management solutions, ManageWise integrates with
enterprise management products from Hewlett Packard, IBM, Sun and others.
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 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.
DeveloperNet. Novell's DeveloperNet delivers software, tools, training,
education, support and partnering opportunities to developers through the global
DeveloperNet subscription. This program is the primary communication channel to
the developer community, with over 15,000 DeveloperNet subscribers. Novell's
development initiative gives developers the flexibility to build network-aware
applications for the Internet and business intranets by using the development
tools of their choice. Through Novell's Open Solution Architecture, Novell is
committed to making its network services accessible to developers using Java,
Scripting, RAD Components and C/C++.
DeveloperNet Labs. DeveloperNet Labs works with third-party manufacturers
to test and certify hardware and software components designed to interoperate
with Novell products. Novell distributes these test results to inform customers
about products that have formally demonstrated Novell product compatibility.
DeveloperNet Lab certification programs help vendors to market their products
through Novell's distribution channels. The primary goal of DeveloperNet Labs is
to foster working relationships between Novell and third-party hardware and
software suppliers. Secondary goals include promoting certified products to
industry
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resellers, anticipating industry products' direction through co-marketing
efforts, and working with vendors to co-develop critical network components.
Yes Program. Novell developed the Yes program and the Yes logo to help
customers identify and purchase third-party hardware and software products that
are compatible with Novell products. The program is designed to be the method by
which third-party compatible products are branded and recognized by Novell. The
Yes logo is recognized around the world as a mark that indicates a specific
product's compatibility with Novell products.
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. Sometimes 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, Compaq, 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 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: Server Operating
Environments, Network Services, and Collaboration Products. Novell products work
together, interoperate with thousands of third-party solutions, and span data
networks from workgroup LANs to the Internet.
Server Operating Environments provide the foundation of networking and
network services that can be extended throughout an organization's network,
intranets and the Internet. These products include: NetWare 3 network operating
system, which provides users with access to data and resources controlled by a
single server; NetWare 4 network operating system, which features NetWare
Directory Services (NDS) and provides the user with access to the resources of
the entire enterprise or wide-area network and adds Intranet/Internet
connectivity and Web site hosting capabilities; and NetWare for Small Business,
a version of NetWare that leverages the strengths of NetWare and GroupWise with
ease of installation and administration required by small business. NetWare 5,
the latest version of the NetWare product line, is currently in beta testing.
Network Services improve the manageability and productivity of the network
and increase network efficiency. Products include: NDS, NDS for NT, Border
Manager, Border Manager Fast Cache, Novell Application Launcher, Novell
Replication Services, NetWare for SAA, NetWare Host Publisher, and ManageWise.
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Collaboration Products utilize NetWare network services to provide rich
access to network-based information. The Company's GroupWise family of groupware
products now serves over 8 million users with integrated E-Mail, group
calendaring, scheduling, online conferencing, and forms and document management.
GroupWise is the premier collaboration product for intranets and the Internet
and integrates these capabilities along with Internet E-mail, fax and voice
messages.
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 1997, 1996, and 1995, product development expenses were
approximately $283 million, $276 million, and $368 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 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; Provo and Orem, Utah; and from its 36 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, 1997, there were approximately 10 U.S. distributors
and approximately 100 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.
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 800 of them to date. Additionally, some upgrade
products are sold directly to end users.
International Sales. In fiscal 1997, 1996, and 1995, approximately 45%,
50%, and 47%, respectively, of the Company's net sales were to customers outside
the U.S. To date, substantially all international sales except Japanese sales,
Indian sales, and certain European sales to non-multinational distributors that
were shipped from its distribution center in Dublin, Ireland have been invoiced
by the Company in U.S. dollars. In fiscal 1998 the Company anticipates that a
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 certain sales from its distribution center in Dublin,
Ireland. No one foreign country accounted for more than 10% of net sales in any
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period. In fiscal 1997 and 1995, the Company had one multinational distributor
which accounted for 11% and 15% of revenue, respectively. 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 literature published by the Company. These activities are designed to
educate the market about 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
1997, the thirteenth annual BrainShare Conference was held to inform and educate
developers about Novell product strategy, Novell open architecture programming
interfaces, and Novell third-party product certification programs.
TECHNICAL SERVICES AND EDUCATION
Novell's Customer Services is composed of Technical Services and Education.
The Technical Services Group has an established infrastructure worldwide with
support centers in the United States, Europe and Asia. These centers are World
Class and have established quality standards with ISO 9001 certification around
the world. Novell Technical Services offers a wide variety of flexible support
offerings.
Novell Education is the pioneer in the networking certification arena.
Novell Education has certified over 120,000 CNE and 250,000 Certified Novell
Administrators (CNAs) at its customer and partner sites around the world. Novell
education continues to pioneer the certification process with its newest
program, "Certified Internet Professional."
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 Company's practice is to ship its products promptly upon
the receipt of purchase orders from its customers and, therefore, backlog is not
significant.
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, marketing strength, system/performance, customer
service and support, reliability, ease of use, and price/performance.
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 distinct competitive advantages.
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 increasing ability to ship networking
products with features and functionality which are competitive with Novell,
together with its ability to offer 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 grow its business. In addition, as Microsoft creates new
operating systems and
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applications, there can be no assurance that Novell will be able to ensure that
its products will be compatible with those of Microsoft.
Additionally, the Company may face competition from other industry
companies which could introduce competitive operating systems. If any of these
competing products achieves market acceptance, Novell's business and results of
operations could be materially adversely affected.
COPYRIGHT, LICENSES, PATENTS AND TRADEMARKS
The Company relies on copyright, patent, trade secret and trademark law, as
well as provisions in its license, distribution and other agreements in order to
protect its intellectual property rights. The Company has been issued what it
considers to be valuable patents and has numerous other patents pending. No
assurance can be given that the patents pending will be issued or, if issued,
will provide protection for the Company's competitive position. The Company has
an increasing concern that Computer industry companies that have huge financial
resources and patent portfolios such as Lucent, AT&T, Microsoft, and IBM, will
increasingly assert patent infringement claims against smaller companies such as
Novell. While Novell has no reason to think it would not have defensible claims,
the cost and time of defending such claims can be enormous. Although Novell
intends to protect its patent rights vigorously, there can be no assurance that
these measures will be successful nor 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 business.
The software industry is characterized by frequent litigation regarding
copyright, patent and other intellectual property rights. The Company has from
time to time had infringement claims asserted by third parties against it and
its products. While there are no known or pending threatened claims against the
Company, the unsatisfactory resolution of which would have a material adverse
effect on the Company's results of operations and financial condition, there can
be no assurance that such third-party claims will not be asserted, or if
asserted, will be resolved in a satisfactory manner. In addition, there can be
no assurance that third parties will not assert other claims against the Company
with respect to any third-party technology. In the event of litigation to
determine the validity of any third-party claims, such litigation could result
in significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation is determined
in favor of the Company.
In the event of an adverse result in any such litigation, the Company could
be required to expend significant resources to develop non-infringing technology
or to obtain licenses to the technology which is the subject of the litigation.
There can be no assurance that the Company would be successful in such
development or that any such licenses would be available. In addition, the laws
of certain countries in which Novell's products are or may be developed,
manufactured or sold may not protect the Company's products and intellectual
property rights to the same extent as the laws of the United States.
EMPLOYEES
As of December 31, 1997, the Company had 4,797 employees. The functional
distribution of its employees was: sales and marketing -- 1,426; product
development -- 1,643; general and administrative -- 763; service, support,
education, and operations -- 965. Of these, 1,546 employees are in offices
outside the U.S. All other Company personnel are based at the Company's
facilities in Utah, California, and various U.S. field offices. 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 in some cases its consultants, challenging work,
educational opportunities, competitive wages, sales commission plans, bonuses,
and through
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stock option and, stock 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.
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
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 goal of the Company is to deliver 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, 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 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 historically volatile. 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.
9
<PAGE> 10
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>
Eric E. Schmidt 42 1997 Chairman of the Board and Chief Executive
Officer
David R. Bradford 47 1986 Senior Vice President, General Counsel, and
Corporate Secretary
Ronald E. Heinz, Jr. 39 1996 Senior Vice President, Worldwide Sales
Jennifer A. Konecny-Costa 51 1996 Senior Vice President, Human Resources
Stewart G. Nelson 37 1997 Vice President, Product Development
Darcy G. Mott 45 1989 Vice President and Treasurer
Richard A. Nortz 53 1997 Senior Vice President, Customer Services
Glenn Ricart 48 1996 Senior Vice President and Chief Technology
Officer
John F. Slitz, Jr. 48 1997 Senior Vice President, Marketing
Christopher M. Stone 41 1997 Senior Vice President, Strategic Business
Development
James R. Tolonen 48 1989 Senior Vice President and Chief Financial
Officer
</TABLE>
ERIC E. SCHMIDT joined the Company in March 1997 and became Chairman of the
Board and Chief Executive Officer in April 1997. Prior to joining Novell, he
served as Chief Technology Officer and Corporate Executive Officer at Sun
Microsystems, Inc. (Sun). In his 14 years at Sun, he held a range of
progressively more responsible executive positions.
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.
RONALD E. HEINZ, JR. joined the Company in February 1989 and has served in
various sales and marketing positions including Vice President, North America
and Latin America Sales and Marketing. In January 1997 he became Senior Vice
President, Worldwide Sales and was elected a corporate officer.
JENNIFER A. KONECNY-COSTA joined the Company in June 1996 as Senior Vice
President, Human Resources and was elected a corporate officer. From 1994 to
June 1996, she was Vice President, Human Resources at Wilson, Sonsini, Goodrich
& Rosati, a law firm representing high technology companies. Prior to that, she
was Vice President, Human Resources from 1988 through 1994 at Silicon Graphics,
a software company.
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.
STEWART G. NELSON joined the Company in June 1994 through the WordPerfect
merger and has served in various product development positions including Vice
President and General Manger, Applications. In October 1997, he became Vice
President, Product Development and was elected a corporate officer. Prior to
joining Novell, he held various product development positions at WordPerfect
from 1987 to 1994.
10
<PAGE> 11
RICHARD A. NORTZ joined the Company in October 1995 as Senior Vice
President, Technical Services. In February 1997, he became Senior Vice
President, Customer Services and was elected a corporate officer. Prior to
joining Novell, he was Senior Vice President for Wang Laboratories' worldwide
customer service business, and also spent time as acting General Manager of
Wang's European Operations from 1991-1995.
GLENN RICART joined the Company in August 1995 as Senior Vice President,
Corporate Research and Development. In February 1996 he became the Chief
Technology Officer and was elected a corporate officer. Prior to joining Novell,
he served at the University of Maryland since 1982 in various capacities
including, Director of the Computer Science Center, Affiliate Associate
Professor of the Computer Science Department and as the Assistant Vice
Chancellor for Academic Information Technology. In September 1994 he began a
sabbatical at the Advanced Research Projects Agency, a branch of the United
States Department of Defense.
JOHN F. SLITZ, JR. joined the Company in August 1997 as Senior Vice
President, Marketing and was elected a corporate officer. From 1995 to July
1997, he was Vice President of Object Technology/Application Development
Marketing at International Business Machines (IBM). Prior to joining IBM, he was
Vice President of Marketing at Object Management Group, Inc. from 1990 to 1995.
CHRISTOPHER M. STONE joined the Company in September 1997 as Senior Vice
President, Strategic Business Development and was elected a corporate officer.
Prior to joining Novell, he founded and was Chairman of the Board and Chief
Executive Officer of the Object Management Group from 1989 to August 1997.
JAMES R. TOLONEN, a Certified Public Accountant, joined the Company in 1989
through the Excelan merger and became a Senior Vice President and Chief
Financial Officer in August 1989 and was elected a corporate officer.
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 a product development center and
administrative offices, of which, approximately 250,000 square-feet is subleased
to various tenants. It also owns and occupies a 550,000 square-foot office
complex, with plans to expand the complex by up to 580,000 square-feet in fiscal
2000, on 46 acres in Provo, Utah, which is used as corporate headquarters and 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 two buildings, totaling 90,000 square feet in San Jose, California, which
are used primarily for product development. The Company also has an Irish
subsidiary which owns a 72,000 square-foot office building in the United Kingdom
and leases the building to the Company's United Kingdom subsidiary.
Additionally, the Company owns approximately 48 acres of land in San Jose,
California on which it is currently constructing a 530,000 square-foot office
complex to replace the buildings it currently owns and leases in San Jose,
California. The campus is expected to be complete and occupied in fiscal 1999.
The Company also has the capacity to expand on its land in Provo and Orem, Utah.
The Company has subsidiaries in Argentina, Australia, Austria, Belgium,
Brazil, Canada, Chile, Colombia, Czech Republic, Denmark, Finland, France,
Germany, Hong Kong, Hungary, India, Ireland, Israel, Italy, Japan, Korea,
Mexico, Netherlands, New Zealand, Norway, Poland, Singapore, South Africa,
Spain, Sweden, Switzerland, United Kingdom, Uruguay, and Venezuela -- each of
which leases its facilities.
The Company leases offices for product development in San Jose, California
and Berkeley Heights, New Jersey; and a distribution facility in San Jose,
California. The Company also leases sales and support offices in Arizona,
California (6), Colorado, Connecticut, Florida (2), Georgia, Illinois,
Massachusetts, Michigan, Minnesota, Missouri (2), New York (2), North Carolina,
Ohio (3), Oregon, Pennsylvania (2), Tennessee, Texas (3), Utah, Washington,
China, Malaysia, Russia, Taiwan, Thailand, and United Arab Emirates.
The terms of such leases vary from month to month to up to ten years.
11
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS
In 1993, a suit was filed due to a failed contract against a company that
Novell subsequently acquired. The plaintiff obtained a jury verdict against the
acquired company in 1996. Novell does not believe the resolution of this legal
matter will 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 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 26 of the Company's Annual Report
to Shareholders for the fiscal year ended October 31, 1997.
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 5 of the Company's Annual Report to
Shareholders for the fiscal year ended October 31, 1997.
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 6 through 10 of the Company's Annual Report to Shareholders for the fiscal
year ended October 31, 1997.
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
11 through 25 of the Company's Annual Report to Shareholders for the fiscal year
ended October 31, 1997, and to the information contained in the section
captioned "Selected Consolidated Quarterly Financial Data" on page 26 of the
Company's Annual Report to Shareholders for the fiscal year ended October 31,
1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
12
<PAGE> 13
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 7, 1998, 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 1997, 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 7, 1998, 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 7, 1998, 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 April 7, 1998, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Act of 1934, as amended.
13
<PAGE> 14
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 11
through 25 of the Company's Annual Report to Shareholders for the
fiscal year ended October 31, 1997.
Consolidated Statements of Operations for the fiscal years ended October
31, 1997, October 26, 1996, and October 28, 1995.
Consolidated Balance Sheets at October 31, 1997 and October 26, 1996.
Consolidated Statements of Shareholders' Equity for the fiscal years
ended October 31, 1997, October 26, 1996, and October 28, 1995.
Consolidated Statements of Cash Flows for the fiscal years ended October
31, 1997, October 26, 1996, and October 28, 1995.
Notes to Consolidated Financial Statements.
Report of Ernst & Young LLP, Independent Auditors.
2. Financial Statement Schedules:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Schedule II -- Valuation and Qualifying Accounts............................ 16
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.
</TABLE>
3. Exhibits:
<TABLE>
<S> <C>
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................................. 17
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended October 31, 1997.
14
<PAGE> 15
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 26, 1998 By /S/ DR. ERIC SCHMIDT
------------------------------------
Dr. Eric Schmidt
Chairman of the Board,
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/ DR. ERIC SCHMIDT Chairman of the Board, January 26, 1998
- ----------------------------------------------- Chief Executive Officer
(Dr. Eric Schmidt and Director
(Principal Executive
Officer)
/S/ JAMES R. TOLONEN Senior Vice President and January 26, 1998
- ----------------------------------------------- Chief Financial Officer
(James R. Tolonen) (Principal Financial and
Accounting Officer)
/S/ ELAINE R. BOND Director January 26, 1998
- -----------------------------------------------
(Elaine R. Bond)
/S/ HANS-WERNER HECTOR Director January 26, 1998
- -----------------------------------------------
(Hans-Werner Hector)
/S/ JACK L. MESSMAN Director January 26, 1998
- -----------------------------------------------
(Jack L. Messman)
/S/ LARRY W. SONSINI Director January 26, 1998
- -----------------------------------------------
(Larry W. Sonsini)
/S/ IAN R. WILSON Director January 26, 1998
- -----------------------------------------------
(Ian R. Wilson)
/S/ JOHN A. YOUNG Director January 26, 1998
- -----------------------------------------------
(John A. Young)
</TABLE>
15
<PAGE> 16
NOVELL, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE ALLOWANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS DEDUCTIONS DEDUCTIONS
BALANCE AT CHARGED TO CHARGED TO FROM FROM BAD BALANCE
BEGINNING RETURN BAD DEBT RETURN DEBT AT END
OF PERIOD RESERVES RESERVES RESERVES RESERVES OF PERIOD
---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fiscal year ended
October 28, 1995................. $ 82,934 $290,613 $ 10,470 $305,679 $ 3,481 $ 74,857
Fiscal year ended
October 26, 1996................. $ 74,857 $314,979 $ 6,481 $323,438 $ 11,939 $ 60,940
Fiscal year ended
October 31, 1997................. $ 60,940 $185,545 $ 4,437 $210,205 $ 7,664 $ 33,053
</TABLE>
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
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,
1996.(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 4.1)
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)
10.10 Novell, Inc. Stock Option Plan for Non-Employee Directors.(13)(Exhibit 4.1)
11 Statement regarding computation of per share earnings.(14)
13 Company's Annual Report to Shareholders for the fiscal year ended October 26,
1996.(14)
21 Subsidiaries of the Registrant.(14)
23.1 Consent of Ernst & Young LLP, independent auditors.(14)
27 Financial Data Schedule.(14)
</TABLE>
- ---------------
(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
October 22, 1997 (File No. 333-38435).
(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
May 29, 1996 (File No. 333-04775).
(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) Incorporated by reference to the Exhibit identified in parentheses, filed
as an exhibit in the Registrant's Registration Statement of Form S-8, filed
May 30, 1996 (File No. 333-04823).
(14) Filed herewith.
17
<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 28, OCTOBER 26, OCTOBER 31,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average number of common shares outstanding.......... 367,963 355,478 348,148
Number of common share equivalents resulting from stock
options, computed using the treasury stock method............. 6,621 2,441 1,281
------- ------- -------
Number of common and common share equivalents used in
computation................................................... 374,584 357,919 349,429
======= ======= =======
</TABLE>
<PAGE> 1
Form 10-K 1997
[LOGO]
<PAGE> 2
CORPORATE PROFILE
Everywhere we look networks matter. Customers around the world are
deploying networks to transform every aspect of their business. As the world's
largest network software company, Novell believes that the network is the
centerpiece of every computing endeavor. More businesses run their networks with
Novell's NetWare than all other alternatives combined. Novell now intends to
become a leader in Internet software that makes possible increasingly
intelligent interconnected networks.
<PAGE> 3
TO OUR SHAREHOLDERS
Clarity of direction and strategy are essential for software companies to
sustain growth. The Novell that I joined in April 1997, mid-way through the
company's fiscal year, had lost touch with this simple truth. In seven months,
we have corrected that.
We have addressed three priority areas. First, realigning Novell's business
model with market realities to set the stage for restoring the company's
financial performance. Second, accelerating the rate of new product
introductions that customers want. And third, establishing a new rigor within
Novell's management team around a handful of key initiatives.
In a year of declining revenue, the first step was to stabilize Novell's
business and align our business model with market realities. We appraised the
entire organization and made changes, including a significant reduction in
management ranks. We replaced seven layers of management with four to enable
Novell to be more effective in delivering new products on time. Overall, we
reduced the size of our workforce by more than 1,000 employees, or approximately
17 percent. Having done this, we believe we can better control costs, while
gaining the benefit of new performance measures and incentives based on
responsiveness to customers. Before the year was completed, we saw evidence that
we were succeeding.
After reporting losses in the second and third quarters of fiscal 1997, and a
$55 million restructuring charge in the third quarter, market demand for our
products led to fourth-quarter revenue near second-quarter levels and a return
to profitability. We saw product demand return across our entire distribution
channel -- value added resellers, multi-product licensing programs, and original
equipment manufacturers.
DELIVERING NEXT-GENERATION PRODUCTS
Building an established software company into a formidable competitor with
revitalized revenue and earnings growth is accomplished on the strength of new
products. As the fourth quarter of 1997 unfolded, we began to set a new, faster
pace for product introductions and marketing initiatives. We now expect Novell
to release at least one new product a month for beta testing or customer
shipment in the coming year. This accelerated business tempo signals a major
shift for Novell and an expanded portfolio of solutions for our customers.
<PAGE> 4
At the most general level, Novell's objective is to become a pure
Internet/intranet network software leader based on these next-generation
products. Each product will take advantage of Novell(R) Directory Services(TM)
(NDS(TM)) to support open, interconnected, and increasingly intelligent networks
that are the future of information and commerce at every level. And, we believe,
our new products will collectively benefit from industry trends that are
expanding business networks and requiring more network software -- Novell's core
strength.
In the second half of fiscal 1997 we began to ship the first of Novell's
next-generation products. We intend to complete this effort by bringing a series
of new offerings to market through the second half of fiscal 1998.
In August 1997, we introduced Novell BorderManager(TM), the first of an
innovative new class of Internet software products called Border Services. The
second of these products, FastCache(TM), started shipping in first-quarter 1998.
These products advance Novell into the fast growing Internet markets for
caching, Internet security, and virtual private networking.
In October, we announced NDS(TM) for NT and started shipping it in the first
quarter of 1998. NDS for NT is a major step in accelerating market
standardization on NDS. This product provides tremendous management efficiencies
and directory integration for our customers' NT resources.
Due in mid-1998 is the centerpiece of Novell's next-generation products,
NetWare(R) 5(TM), code named Moab. The next release of our server operating
system, NetWare 5 is based on the communications standard of the World Wide Web
and will take Novell's server software fully into the Internet market. NetWare 5
entered initial beta testing in October 1997 and will begin a large scale beta
with tens of thousands of users in January 1998.
Our next-generation products will increasingly take advantage of new Internet
technologies, including the industry-standard Java(TM) technology for developing
and deploying applications. We will use Java on the server to support network
applications and to build smart new services that live across the network. We
intend to be first to break Java into the network mainstream with NetWare 5 as
an incredibly fast and scalable Java server platform.
FOCUSED MANAGEMENT
Equal to the end-of-year progress with products and the realignment of our
business model with market realities, the executive management team gained a new
clarity of focus around a few key initiatives. This also marks a significant
shift for the company. In the last quarter of fiscal 1997 we demonstrated how a
shared, singular focus on product delivery and expense management -- along with
tight focus on a set of product initiatives -- has the potential to return the
company to profitability.
<PAGE> 5
Before the close of 1997, I strengthened the management team with the
appointment of two key executives. We named John Slitz, Jr., as senior vice
president, Novell marketing, to provide central leadership for all marketing
functions in the company. John is charged with creating a cohesive marketing
organization that is highly effective in revitalizing our brand identity and
bringing Novell closer together with its customers.
We appointed Christopher Stone as senior vice president of strategy and
corporate development to lead key technology initiatives and reestablish Novell
as a compelling vendor partner. We believe that under Chris' direction, support
for the specialized telecommunications needs of Internet Service Providers
(ISPs) will become a larger part of our business. We have an opportunity to
drive the integration of Novell's standards-based network services within the
ISP marketplace over the next two years. There is enormous potential for growth
in this market segment.
LOOKING AHEAD
Fiscal 1997 ended with solid fundamentals -- an annualized revenue run rate
exceeding $1 billion, more than $1 billion in cash and short-term investments,
no debt, major market presence, and worldwide channel partners who stand behind
our disciplined business practices. Late in the year, indications were that the
actions we implemented were taking hold, reflecting the hard work of Novell's
employees around the world and their dedication to fully revitalizing Novell's
business.
I have no illusions about what is required to transform Novell as an Internet
leader. Given the size of Novell's business, a single next-generation product
will not by itself enable us to achieve our objective of revitalizing this
business. Until our next-generation products are in the market and we are
successful in growing revenues, product development and other expenses necessary
to complete this task will restrain Novell earnings. A complete transition will
require the cumulative benefit of all our new Internet products, the business
changes launched in 1997, and improvements that will continue through the next
fiscal year.
My overarching objective is to aggressively reconnect with customers and channel
partners in 1998. If we accomplish this, we have the potential for a
re-energized customer community that relies more than ever on Novell's
innovation in networking. We enter 1998 a smaller, more agile organization that
is clear about what it must accomplish. I am solidly optimistic that we can
build on the new Novell for the benefit of our customers, shareholders, and
employees.
[SIG]
Dr. Eric E. Schmidt/Chairman and Chief Executive Officer/December 21, 1997
<PAGE> 6
<TABLE>
<CAPTION>
FINANCIAL CONTENTS
<S> <C>
5 Selected Consolidated Financial Data
6 Management's Discussion and Analysis of Financial
Condition and Results of Operations
11 Consolidated Statements of Operations
12 Consolidated Balance Sheets
13 Consolidated Statements of Shareholders' Equity
14 Consolidated Statements of Cash Flows
15 Notes to Consolidated Financial Statements
25 Report of Ernst & Young LLP, Independent Auditors
26 Selected Consolidated Quarterly Financial Data -- Unaudited
27 Directors and Executives
28 Corporate Directory
29 Other Information
</TABLE>
<PAGE> 7
SELECTED CONSOLIDATED FINANCIAL DATA
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
OCT. 31 Oct. 26 Oct. 28 Oct. 29 Oct. 30
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Net sales $ 1,007,311 $ 1,374,856 $ 2,041,174 $ 1,998,077 $ 1,830,411
Gross profit 729,865 1,068,095 1,551,841 1,531,011 1,427,809
Income (loss) from operations (200,004) 108,944 452,109 269,943 108,098
Income (loss) before taxes (150,570) 179,988 508,729 297,383 138,157
Income tax expense (benefit) (72,274) 53,997 170,424 90,652 97,437
Net income (loss) (78,296) 125,991 338,305 206,731 40,720
Net income (loss) per share (.22) .35 .90 .56 .11
BALANCE SHEET
Cash and short-term investments $ 1,033,473 $ 1,024,755 $ 1,321,231 $ 861,809 $ 719,197
Working capital 1,148,426 1,225,987 1,464,237 990,411 859,308
Total assets 1,910,649 2,049,466 2,416,830 1,963,481 1,745,337
Long-term debt -- -- -- -- 84,289
Shareholders' equity 1,565,417 1,615,509 1,938,262 1,486,987 1,146,026
</TABLE>
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
Novell is the world's leading provider of network software. The Company offers
a wide range of network solutions, education, and support for distributed
network, Internet, and small-business markets.
During the third quarter of fiscal 1997, Novell took measures to reduce and
realign its resources and better manage and control its business. These measures
were in response to declines in sales of boxed products through indirect
distribution channel customers, controlled shifts to multi-product licenses,
lower licensing revenue of certain older products to OEM's, as well as
competitive pressures in the small network market. Specifically, the Company did
not ship boxed products to its indirect distribution channel customers except to
accommodate product exchanges and returns. The Company believes this action,
which significantly reduced reported revenue in the quarter, brought indirect
distribution channel inventories of boxed software products in line with current
market demand. The decision to withhold shipments to the Company's indirect
distributor channel resulted in an operating loss in the third quarter of fiscal
1997. The Company will continue to monitor channel inventory levels to keep them
in line with estimated market demand. In addition, the Company reduced its
workforce by approximately 1,000 employees, or 17%, and consolidated a number of
facilities. This resulted in a one-time restructuring charge of $55 million,
principally comprised of severance and excess facilities costs. The
restructuring charge contributed a loss of $0.10 per share, net of tax, to the
reported loss in fiscal 1997. The workforce reduction and associated
consolidation of facilities returned the Company to break even for the fourth
quarter of fiscal 1997 and is expected to lower future operating expenses by
approximately $100 million annually.
During the second quarter of fiscal 1996, the Company implemented a change to
its traditional distribution stocking policy that significantly reduced revenue
and earnings in that quarter. The change in the Company's traditional
distribution stocking policy was to respond to changing market conditions over
the prior two years. Direct customer and OEM licensing programs grew from less
than 5% of revenue to more than 40% of revenue. This shift in customer buying
preferences changed the Company's reliance on boxed product flowing through the
indirect distribution channel. In order to deal with this changing environment,
the Company did not ship boxed product to its indirect distribution channel
customers except to accommodate product exchanges and returns during the second
quarter of fiscal 1996, which had the effect of reducing inventories within the
indirect distribution channel, as well as significantly reducing revenue in the
quarter.
In March 1996, the Company completed the sale of its personal productivity
applications product line to Corel Corporation (Corel). The Company received
approximately 10 million shares of Corel common stock and approximately $11
million of cash. This resulted in an ownership position of approximately 17% of
the outstanding Corel common stock. The Company reported a one-time gain of $20
million in the second quarter of fiscal 1996 related to this transaction. Net of
tax, the gain was $13 million, or $0.04 per share. Additionally, Corel licensed
GroupWise(R) client software, Envoy(R) electronic publishing software, and other
technologies from Novell for a minimum royalty obligation of approximately $50
million over the next five years. During fiscal 1997, Novell sold approximately
one million shares of Corel common stock at a loss of approximately $6 million,
which was more than offset by gains on the sales of other equity securities.
In December 1995, Novell sold its UnixWare* product line to the Santa Cruz
Operation, Inc. (SCO). The Company realized a small gain and recorded $19
million of UNIX* technology royalty revenue from this transaction in the first
quarter of fiscal 1996. Under the agreement, Novell received approximately six
million shares of SCO common stock, resulting in ownership of approximately 17%
of the outstanding SCO common stock. In addition, Novell continues to receive
revenue from previously existing licenses for certain versions of UNIX System
source code shipped prior to the sale to SCO.
<PAGE> 9
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NET SALES 1997 Change 1996 Change 1995
- --------- ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Net sales (millions) $1,007 -27% $1,375 -33% $2,041
</TABLE>
The sale of its UnixWare product line in the first quarter of fiscal 1996 and
the sale of its personal productivity applications product line, along with the
decision to not ship to the indirect distribution channel in both the third
quarter of fiscal 1997 and in the second quarter of fiscal 1996 makes
year-over-year comparisons difficult.
The analysis that follows describes the product lines consistent with the
Company's current ongoing business.
Novell's product lines can be categorized into server operating environments;
network services; UNIX royalties; and education, service and other. Prior years'
revenues also include revenue from product lines that subsequently were sold or
discontinued, such as the personal productivity applications product line which
was sold to Corel in March 1996, and the UnixWare product line sold to SCO in
December 1995.
The server operating environments product line includes the NetWare(R) operating
system family of products. Server operating environments revenue was $613
million in fiscal 1997 compared to $754 million in fiscal 1996, and $1,045
million in fiscal 1995. The decrease between fiscal 1996 and 1997 is primarily
attributable to a 50% decline in sales of NetWare 3,(TM) flat sales of
intraNetWare and NetWare 4(TM) and to the impact of not shipping into the
indirect distribution channel in the second quarter of fiscal 1996 and the third
quarter of fiscal 1997, as discussed previously. The decrease in fiscal 1996
from fiscal 1995 is a result of an 18% growth in intraNetWare and NetWare 4
sales offset by a 57% decline in sales of NetWare 3 and by the impact of not
shipping into the indirect distribution channel in the second quarter of fiscal
1996. The server operating environments product line represented 61% of revenue
in fiscal 1997 compared to 55% of revenue in fiscal 1996, and 51% in fiscal
1995.
The network services product line includes infrastructure products and
application products. Infrastructure products include TCP/IP access products,
host connectivity products, Tuxedo(R), and mobile/remote connectivity products,
among others. Application products include ManageWise(R) and GroupWise products.
The network services product line had revenue of $233 million in fiscal 1997
compared to $328 million in fiscal 1996, and $343 million in fiscal 1995.
Revenue was down from fiscal 1996 to fiscal 1997 with a 14% decrease in
application products as well as a 43% decrease in infrastructure products.
Revenue in fiscal 1996 was down slightly from revenue in fiscal 1995 due to
increases in application products of 41% offset by a 26% decrease in
infrastructure products. Network services revenue represented 23% of revenue in
fiscal 1997 compared to 24% in fiscal 1996, and 17% in fiscal 1995.
UNIX royalties were $36 million in fiscal 1997 compared to $79 million in fiscal
1996, and $75 million in fiscal 1995. The decrease from fiscal 1996 to fiscal
1997 is attributable to declining sales of UNIX licenses. The increase from
fiscal 1995 to fiscal 1996 was attributable to a one-time $19 million paid-up
royalty recognized in the sale of UNIX technology to SCO in fiscal 1996. UNIX
royalties were 4% of revenue in fiscal 1997 compared to 6% of revenue in fiscal
1996, and 4% of revenue in fiscal 1995.
Education, service, and other revenues were $125 million in fiscal 1997 compared
to $151 million in fiscal 1996, and $166 million in fiscal 1995. Education,
service, and other revenues were 12% of revenue in fiscal 1997 compared to 11%
of revenue in fiscal 1996, and 8% of revenue in fiscal 1995. The decreases
between years is attributable to lower product revenue in those years for which
education and services are provided by the Company.
Revenue from sold or discontinued product lines, made up primarily of the
personal productivity applications product line which was sold to Corel in March
1996, was $63 million in fiscal 1996 and $412 million in fiscal 1995. Sold or
discontinued product lines were 5% of revenue in fiscal 1996 compared to 20% of
revenue in fiscal 1995.
<PAGE> 10
International sales accounted for 45% of revenue in fiscal 1997 compared to 50%
of revenue in fiscal 1996, and 47% of revenue in fiscal 1995.
<TABLE>
<CAPTION>
GROSS PROFIT 1997 Change 1996 Change 1995
- ------------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Gross profit (millions) $730 -32% $1,068 -31% $1,552
Percentage of net sales 72% 78% 76%
</TABLE>
The lower gross profit percentage in fiscal 1997 compared to fiscal 1996 is
attributable to increased inventory reserves and to the fixed portion of cost of
sales being a higher percentage of the lower revenue in fiscal 1997. The higher
gross profit percentage in fiscal 1996 compared to fiscal 1995 was the result of
lower material costs due to an increase in licensing revenue and the decrease in
sales from the lower margin personal productivity applications product line.
<TABLE>
<CAPTION>
OPERATING EXPENSES 1997 Change 1996 Change 1995
- ------------------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Sales and marketing (millions) $ 444 -14% $519 -10 $ 579
Percentage of net sales 44% 38% 28%
Product development (millions) $ 283 3% $276 -25% $ 368
Percentage of net sales 28% 20% 18%
General and administrative (millions) $ 148 1% $146 -5% $ 153
Percentage of net sales 15% 11% 7%
Restructuring charges (millions) $ 55 206% $ 18 -- --
Percentage of net sales 5% 1% --
Total operating expenses (millions) $ 930 -3% $959 -13% $1,100
Percentage of net sales 92% 70% 54%
</TABLE>
Operating expenses declined in absolute dollars due to corrective measures the
Company took in fiscal 1997 and fiscal 1996 to realign resources and better
manage and control its business. These expenses increased as a percentage of net
sales in fiscal 1997 compared to fiscal 1996 and fiscal 1995.
Sales and marketing expenses decreased by 14% from fiscal 1996 to fiscal 1997
primarily due to corrective actions the Company took in fiscal 1997 to realign
resources and better manage and control its business. Sales and marketing
expenses decreased by 10% from fiscal 1995 to fiscal 1996, primarily due to the
sale of the UnixWare and personal productivity applications product lines, even
though they increased as a percentage of net sales in fiscal 1996 compared to
fiscal 1995. Sales and marketing expenses can fluctuate as a percentage of net
sales in any given period due to product promotions, advertising, or other
discretionary expenses.
Product development expenses increased slightly from fiscal 1996 to fiscal 1997
as the Company focused on enhancing existing products as well as bringing new
products to market. Product development expenses decreased by 25% from fiscal
1995 to fiscal 1996, primarily due to the sale of the UnixWare and personal
productivity applications product lines, yet have increased as a percentage of
lower net sales.
General and administrative expenses remained relatively flat from fiscal 1996 to
fiscal 1997 and decreased by 5% from fiscal 1995 to fiscal 1996, primarily due
to the sale of the UnixWare and personal productivity applications product
lines, yet increased as a percentage of lower net sales.
During the third quarter of fiscal 1997, the Company incurred $55 million of tax
deductible restructuring charges for excess personnel and redundant facilities
as the Company realigned its resources to better manage and control its
business. Of this charge, reserves of $11 million remain as of October 31, 1997.
<PAGE> 11
During the first quarter of fiscal 1996, the Company incurred $18 million of tax
deductible restructuring charges for excess personnel and redundant facilities
as the Company prepared for the sale of its personal productivity applications
product line. There is no reserve related to this charge as of October 31, 1997.
<TABLE>
<CAPTION>
1997 Change 1996 Change 1995
---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Employees 4,770 -19% 5,870 -24% 7,762
Revenue per employee (thousands) $189 $202 $252
</TABLE>
In the third quarter of fiscal 1997, the Company reduced its employment by
approximately 1,000 employees as the Company realigned its resources to better
manage and control its business.
In fiscal 1996, the Company reduced its employment by 1,725 employees as the
Company completed the sale of its UnixWare and personal productivity
applications product lines and terminated or transitioned former UnixWare and
personal productivity group employees to Corel, SCO, and other third parties.
<TABLE>
<CAPTION>
OTHER INCOME, NET 1997 Change 1996 Change 1995
- ----------------- ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Other income, net (millions) $49 -31% $71 25% $57
Percentage of net sales 5% 5% 3%
</TABLE>
The primary component of other income, net is investment income, which was $61
million, $58 million, and $54 million in fiscal 1997, 1996, and 1995,
respectively. The increase in fiscal 1997 compared to fiscal 1996 was
attributable to a higher yield on a smaller average investment portfolio. The
increase in fiscal 1996 compared to fiscal 1995 is the result of a flat yield on
a slightly higher average investment portfolio. 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 1997, in addition to investment income, the Company had foreign
currency exchange losses, losses on the disposal of fixed assets, and the
settlement of certain legal matters. In fiscal 1996, in addition to the
investment income, the Company had a gain on the sale of its personal
productivity applications product line of approximately $20 million, offset by
foreign currency exchange losses. 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.
<TABLE>
<CAPTION>
INCOME TAX EXPENSE (BENEFIT) 1997 Change 1996 Change 1995
- ---------------------------- ---- ------ ------ ------ ----
<S> <C> <C> <C> <C> <C>
Income tax expense (benefit) (millions) $(72) -233% $54 -68% $170
Percentage of net sales -7% 4% 8%
Effective tax rate 48% 30% 34%
</TABLE>
At October 31, 1997, the Company had deferred tax assets of $103 million before
a valuation allowance of $7 million. A portion of this asset is realizable based
on the ability to offset existing deferred tax liabilities. Realization of the
remaining asset is dependent on the Company's ability to generate approximately
$236 million of taxable income. Of this, approximately $112 million must be
earned outside the United States. Management believes that sufficient income
will be earned in the future to realize this asset. Management will evaluate the
realizability of the deferred tax assets quarterly and assess the need for
additional valuation allowances.
The effective tax rate for fiscal 1997 was higher than the effective tax rate
for fiscal 1996 as a result of the loss from operations in fiscal 1997. The
effective tax rate for fiscal 1996 was lower than the effective tax rate for
fiscal 1995 as a result of lower earnings for fiscal 1996.
<PAGE> 12
<TABLE>
<CAPTION>
NET INCOME (LOSS) AND
NET INCOME (LOSS) PER SHARE 1997 Change 1996 Change 1995
- --------------------------- ---- ------- ------- -------- ------
<S> <C> <C> <C> <C> <C>
Net income (loss) (millions) $ (78) -162% $126 63% $338
Percentage of net sales -8% 9% 17%
Net income (loss) per share $(.22) -163% $.35 -61% $.90
</TABLE>
FUTURE RESULTS
The Company's future results of operations involve a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially from historical results are the following: business conditions and
the general economy; competitive factors, such as rival operating systems,
acceptance of new products and price pressures; availability of third-party
compatible products at reasonable prices; risk of nonpayment of accounts or
notes receivable; risks associated with foreign operations; risk of product line
or inventory obsolescence due to shifts in technologies or market demand; timing
of software product introductions; market fluctuations of investment securities;
and litigation.
The Company is addressing the issues associated with the "year 2000." The
Company is utilizing resources to identify, correct, reprogram and test both its
systems used internally as well as the products it sells for year 2000
compliance. It is anticipated that all reprogramming efforts will be completed
during fiscal 1998.
Novell believes that it has the product offerings, facilities, personnel, and
competitive and financial resources for continued business success, but future
revenues, costs, margins, product mix, and profits are all influenced by a
number of factors, such as those discussed above.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
1997 Change 1996 Change 1995
---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C>
Cash and short-term investments (millions) $1,033 1% $1,025 -22% $1,321
Percentage of total assets 54% 50% 55%
</TABLE>
Cash and short-term investments increased to $1.033 billion at October 31, 1997
from $1.025 billion at October 26, 1996. The major reason for this increase was
the $96 million provided by operating activities offset primarily by the $65
million used for property, plant, and equipment expenditures and $23 million
used by other investing activities. The investment portfolio is diversified
among security types, industry groups, and individual issuers. The Company's
principal source of liquidity has been from operations. At October 31, 1997, the
Company's principal unused sources of liquidity consisted of cash and short-term
investments and available borrowing capacity of approximately $15 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 1997, 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. 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 1998 are anticipated to be approximately $45
million, but could be reduced if the growth of the Company is less than
presently anticipated.
<PAGE> 13
CONSOLIDATED STATEMENTS OF OPERATIONS
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
OCT. 31 Oct. 26 Oct. 28
Fiscal year ended 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 1,007,311 $ 1,374,856 $ 2,041,174
Cost of sales 277,446 306,761 489,333
----------- ----------- -----------
Gross profit 729,865 1,068,095 1,551,841
Operating expenses
Sales and marketing 443,494 518,846 579,370
Product development 282,680 275,627 367,562
General and administrative 148,360 146,236 152,800
Restructuring charges 55,335 18,442 --
----------- ----------- -----------
Total operating expenses 929,869 959,151 1,099,732
Income (loss) from operations (200,004) 108,944 452,109
Other income (expense)
Investment income 61,315 58,195 53,839
Gain on sale of assets -- 19,815 --
Other, net (11,881) (6,966) 2,781
----------- ----------- -----------
Other income, net 49,434 71,044 56,620
----------- ----------- -----------
Income (loss) before taxes (150,570) 179,988 508,729
Income tax expense (benefit) (72,274) 53,997 170,424
----------- ----------- -----------
Net income (loss) $ (78,296) $ 125,991 $ 338,305
----------- ----------- -----------
Weighted average shares outstanding 349,429 357,919 374,584
----------- ----------- -----------
Net income (loss) per share $ (.22) $ .35 $ .90
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
<PAGE> 14
CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
OCT. 31 Oct. 26
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $1,033,473 $1,024,755
Receivables, less allowances
($33,053 -- 1997, $60,940 -- 1996) 234,358 452,327
Inventories 10,656 16,837
Prepaid expenses 57,685 48,281
Deferred and refundable income taxes 134,210 48,559
---------- ----------
Total current assets 1,470,382 1,590,759
Property, plant, and equipment, net 373,865 394,684
Other assets 66,402 64,023
---------- ----------
Total assets $1,910,649 $2,049,466
---------- ----------
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 82,759 $ 96,933
Accrued compensation 51,397 54,731
Accrued marketing liabilities 27,728 48,402
Other accrued liabilities 85,157 118,133
Deferred revenue 74,915 46,573
---------- ----------
Total current liabilities 321,956 364,772
Minority interests 23,276 17,035
Put warrants -- 52,150
SHAREHOLDERS' EQUITY
Common stock, par value $.10 per share
Authorized 600,000,000 shares
Issued 350,937,812 shares, 1997
346,059,050 shares, 1996 35,094 34,606
Additional paid-in capital 378,582 309,831
Retained earnings 1,188,361 1,266,657
Unearned stock compensation (7,189) (4,141)
Cumulative translation adjustment (666) 1,183
Unrealized gain (loss) on investments (28,765) 7,373
---------- ----------
Total shareholders' equity 1,565,417 1,615,509
---------- ----------
Total liabilities and shareholders' equity $1,910,649 $2,049,466
---------- ----------
</TABLE>
See notes to consolidated financial statements.
<PAGE> 15
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
Common Common Additional
Stock Stock Paid-in Retained
Shares Amount Capital Earnings Other Total
------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE -- OCT. 29, 1994 364,355 $ 36,436 $ 645,419 $ 802,361 $ 2,771 $ 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 $ 1,140,666 $ 22,958 $ 1,938,262
Stock issued from stock plans 7,651 765 58,485 -- (11,091) 48,159
Stock plans' income tax benefits -- -- 14,027 -- -- 14,027
Shares cancelled (159) (16) (2,119) -- 1,655 (480)
Shares repurchased and retired (33,000) (3,300) (452,401) -- -- (455,701)
Sale of put warrants -- -- (77,830) -- -- (77,830)
Settlement of put warrants -- -- 32,188 -- -- 32,188
Unrealized loss on investments -- -- -- -- (16,054) (16,054)
Unearned stock compensation -- -- -- -- 8,013 8,013
Cumulative translation adjustment -- -- -- -- (1,066) (1,066)
Net income -- -- -- 125,991 -- 125,991
------- ----------- ----------- ----------- ----------- -----------
BALANCE -- OCT. 26, 1996 346,059 $ 34,606 $ 309,831 $ 1,266,657 $ 4,415 $ 1,615,509
Stock issued from stock plans 5,142 514 33,841 -- (8,508) 25,847
Stock plans' income tax benefits -- -- 3,927 -- -- 3,927
Shares cancelled (263) (26) (2,707) -- -- (2,733)
Sale of put warrants -- -- 2,300 -- -- 2,300
Settlement of put warrants -- -- 31,390 -- -- 31,390
Unrealized loss on investments -- -- -- -- (36,138) (36,138)
Unearned stock compensation -- -- -- -- 5,460 5,460
Cumulative translation adjustment -- -- -- -- (1,849) (1,849)
Net (loss) -- -- -- (78,296) -- (78,296)
------- ----------- ----------- ----------- ----------- -----------
BALANCE -- OCT. 31, 1997 350,938 $ 35,094 $ 378,582 $ 1,188,361 $ (36,620) $ 1,565,417
======= =========== =========== =========== =========== ===========
</TABLE>
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
Oct. 31 Oct. 26 Oct. 28
Fiscal year ended 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) $ (78,296) $ 125,991 $ 338,305
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Depreciation and amortization 91,075 104,782 94,190
Gain on non-cash sale of assets -- (19,815) --
Stock plans' income tax benefits 3,927 14,027 25,128
Decrease (increase) in receivables 217,969 18,110 (79,095)
Decrease in inventories 6,181 6,188 9,196
(Increase) decrease in prepaids (9,404) 2,295 18,748
(Increase) decrease in deferred and
refundable income taxes (93,082) 36,550 45,228
(Decrease) in current liabilities, net (42,816) (96,173) (1,775)
----------- ----------- -----------
Net cash provided by operating activities 95,554 191,955 449,925
----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Issuance of common stock, net 23,114 47,679 64,197
Repurchases of common stock -- (455,701) --
Sale of put warrants 2,300 12,195 --
Settlement of put warrants (20,760) (5,687) --
----------- ----------- -----------
Net cash provided (used) by financing activities 4,654 (401,514) 64,197
----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Expenditures for property, plant, and equipment (64,796) (101,001) (84,454)
Purchases of short-term investments (2,148,664) (3,163,643) (4,432,301)
Maturities of short-term investments 1,502,451 2,698,313 3,417,724
Sales of short-term investments 664,379 588,174 662,320
Proceeds from sale of assets -- 10,750 --
Other 9,444 10,323 6,327
----------- ----------- -----------
Net cash (used) provided by investing activities (37,186) 42,916 (430,384)
----------- ----------- -----------
Total increase (decrease) in cash and
cash equivalents $ 63,022 $ (166,643) $ 83,738
Cash and cash equivalents -- beginning of period 145,521 312,164 228,426
----------- ----------- -----------
Cash and cash equivalents -- end of period 208,543 145,521 312,164
Short-term investments -- end of period 824,930 879,234 1,009,067
----------- ----------- -----------
Cash and short-term investments -- end of period $ 1,033,473 $ 1,024,755 $ 1,321,231
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
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.
Municipal securities included in short-term investments have contractual
maturities ranging from 1 to 5 years. Money market preferreds have contractual
maturities of less than 90 days. No other short-term investments have
contractual maturities. 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. The cost of securities sold is based on
the specific identification method. 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 end users, distributors,
resellers, and OEM customers. No collateral is required. Reserves are provided
for sales returns, 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>
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.
<PAGE> 18
- - 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.
- - The cost of advertising is expensed as incurred. Advertising expenses totaled
$42 million, $48 million, and $57 million in fiscal 1997, 1996, and 1995
respectively.
- - Net income per share is computed using the weighted average number of common
shares outstanding during each year, including common stock equivalents
(unless antidilutive). Common stock equivalents consist of outstanding stock
options.
The Company intends to adopt Statement of Financial Accounting Standards (SFAS)
No. 128 "Earnings Per Share" effective for the Company for the year ended
October 31, 1998. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. The Company does not expect the new diluted disclosure to be materially
different from the current earnings per share disclosure.
The Financial Accounting Standards Board approved the new American Institute of
Certified Public Accountants Statement of Position (SOP 97-2), "Software Revenue
Recognition." SOP 97-2 will be effective for the Company beginning in fiscal
1999. The Company is currently assessing the impact, if any, of SOP 97-2 on its
revenue recognition policy.
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.
B SIGNIFICANT EVENTS
During the third quarter of fiscal 1997, Novell took measures to reduce and
realign its resources and better manage and control its business. These measures
were in response to declines in sales of boxed products through indirect
distribution channel customers, controlled shifts to multi-product licenses,
lower licensing revenue of certain older products to OEM's, as well as
competitive pressures in the small network market. Specifically, the Company did
not ship boxed products to its indirect distribution channel customers except to
accommodate product exchanges and returns. In addition, the Company reduced its
workforce by approximately 1,000 employees, or 17%, and consolidated a number of
facilities. This resulted in a one-time restructuring charge of $55 million,
principally comprised of severance and excess facilities costs. The
restructuring charge contributed a loss of $0.10 per share, net of tax, to the
reported loss in fiscal 1997.
During the second quarter of fiscal 1996, the Company implemented a change to
its traditional distribution stocking policy that significantly reduced revenue
and earnings in that quarter. The change in the Company's traditional
distribution stocking policy was to respond to changing market conditions over
the prior two years. Direct customer and OEM licensing programs grew from less
than 5% of revenue to more than 40% of revenue. This shift in customer buying
preferences changed the Company's reliance on boxed product flowing through the
indirect distribution channel. In order to deal with this changing environment,
the Company did not ship boxed product to its indirect distribution channel
customers except to accommodate product exchanges and returns during the second
quarter of fiscal 1996, which had the effect of reducing inventories within the
indirect distribution channel, as well as significantly reducing revenue in the
quarter.
In March 1996, the Company completed the sale of its personal productivity
applications product line to Corel Corporation (Corel). The Company received
approximately 10 million shares of Corel common stock and approximately $11
million of cash. This resulted in an ownership position of approximately 17% of
the outstanding Corel common stock. The Company reported a one-time gain of $20
million in the second quarter of fiscal 1996 related to this transaction. Net of
tax, the gain was $13 million, or $0.04 per share. Additionally, Corel licensed
GroupWise client software, Envoy electronic publishing software, and other
technologies from Novell for a minimum royalty obligation of approximately $50
million over the next five years.
<PAGE> 19
In December 1995, Novell sold its UnixWare product line to the Santa Cruz
Operation, Inc. (SCO). The Company realized a small gain and recorded $19
million of UNIX technology royalty revenue from this transaction in the first
quarter of fiscal 1996. Under the agreement, Novell received approximately six
million shares of SCO common stock, resulting in ownership of approximately 17%
of the outstanding SCO common stock. In addition, Novell continues to receive
revenue from previously existing licenses for certain versions of UNIX System
source code shipped prior to the sale to SCO.
C CASH AND SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
FAIR MARKET
Cost at Gross Gross VALUE AT
Oct. 31 Unrealized Unrealized OCT. 31
(Dollars in thousands) 1997 Gains Losses 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS
Cash $ 84,151 $ -- $ -- $ 84,151
Repurchase agreements 4,932 -- -- 4,932
Money market fund 42,581 -- -- 42,581
Municipal securities 76,879 -- -- 76,879
---------- ---------- ---------- ----------
Cash and cash equivalents $ 208,543 $ -- $ -- $ 208,543
---------- ---------- ---------- ----------
SHORT-TERM INVESTMENTS
Municipal securities $ 463,443 $ 4,551 $ (84) $ 467,910
Money market mutual funds 88,999 -- -- 88,999
Money market preferreds 150,817 -- (17) 150,800
Mutual funds 14,721 33 (1) 14,753
Equity securities 153,785 25,829 (77,146) 102,468
---------- ---------- ---------- ----------
Short-term investments $ 871,765 $ 30,413 $ (77,248) $ 824,930
---------- ---------- ---------- ----------
Cash and short-term investments $1,080,308 $ 30,413 $ (77,248) $1,033,473
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
FAIR MARKET
Cost at Gross Gross VALUE AT
Oct. 26 Unrealized Unrealized OCT. 26
(Dollars in thousands) 1996 Gains Losses 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS
Cash $ 77,374 $ -- $ -- $ 77,374
Repurchase agreements 4,526 -- -- 4,526
Money market fund 36,821 -- -- 36,821
Municipal securities 26,800 -- -- 26,800
---------- ---------- ---------- ----------
Cash and cash equivalents $ 145,521 $ -- $ -- $ 145,521
---------- ---------- ---------- ----------
SHORT-TERM INVESTMENTS
Municipal securities $ 376,510 $ 1,524 $ (12) $ 378,022
Money market mutual funds 78,514 -- -- 78,514
Money market preferreds 224,000 -- -- 224,000
Mutual funds 14,151 14 (10) 14,155
Equity securities 174,054 35,432 (24,943) 184,543
---------- ---------- ---------- ----------
Short-term investments $ 867,229 $ 36,970 $ (24,965) $ 879,234
---------- ---------- ---------- ----------
Cash and short-term investments $1,012,750 $ 36,970 $ (24,965) $1,024,755
========== ========== ========== ==========
</TABLE>
<PAGE> 20
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 losses of $29 million and unrealized gains
of $7 million, net of deferred taxes, as of the end of fiscal 1997 and 1996,
respectively. The Company realized gains on the sales of securities of $28
million, $20 million, and $7 million in fiscal 1997, 1996, and 1995,
respectively, while realizing losses on sales of securities of $11 million in
fiscal 1997.
D PROPERTY, PLANT, AND EQUIPMENT
<TABLE>
<CAPTION>
OCT. 31 Oct. 26
(Dollars in thousands) 1997 1996
--------- ---------
<S> <C> <C>
Buildings and land $ 262,564 $ 246,250
Furniture and equipment 420,448 401,661
Leasehold improvements and other 82,372 75,218
--------- ---------
Property, plant, and equipment at cost 765,384 723,129
Accumulated depreciation (391,519) (328,445)
--------- ---------
Property, plant, and equipment, net $ 373,865 $ 394,684
========= =========
</TABLE>
E INCOME TAXES
At October 31, 1997, the Company had deferred tax assets of $103 million before
a valuation allowance of $7 million. A portion of this asset is realizable based
on the ability to offset existing deferred tax liabilities. Realization of the
remaining asset is dependent on the Company's ability to generate approximately
$236 million of taxable income. Of this, approximately $112 million must be
earned outside the United States. Management believes that sufficient income
will be earned in the future to realize this asset. Management will evaluate the
realizability of the deferred tax assets quarterly and assess the need for
additional valuation allowances.
As of October 31, 1997, the Company has U.S. net operating loss carryforwards
from acquired companies of approximately $24 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 $7 million has been recognized to offset the deferred tax assets
related to those carryforwards. In addition, the Company has approximately $50
million of foreign loss carryforwards of which $8 million is subject to expire
in 2002.
<TABLE>
<CAPTION>
OCT. 31 Oct. 26 Oct. 28
Fiscal year ended (Dollars in thousands) 1997 1996 1995
- ---------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
TAX EXPENSE (BENEFIT)
Current
Federal $ (53,862) $ (19,649) $ 85,344
State (8,720) (1,352) 20,829
Foreign 5,512 12,085 36,048
--------- --------- ---------
Total current (57,070) (8,916) 142,221
--------- --------- ---------
Deferred
Federal (8,636) 54,794 24,382
State 680 8,060 4,423
Foreign (7,248) 59 (602)
--------- --------- ---------
Total deferred (15,204) 62,913 28,203
--------- --------- ---------
Total tax expense (benefit) $ (72,274) $ 53,997 $ 170,424
========= ========= =========
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
OCT. 31 Oct. 26 Oct. 28
Fiscal year ended (Dollars in thousands) 1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
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 (3.5) 3.1 3.2
Research and development tax credits (5.0) (1.3) (1.6)
FSC benefit -- (0.9) (0.7)
Tax exempt income (6.5) (5.6) (2.0)
Foreign losses not tax benefited 4.7 -- --
Other, net (2.7) (0.3) (0.4)
--------- -------- --------
Effective tax rate (48.0%) 30.0% 33.5%
========= ======== ========
DOMESTIC AND FOREIGN COMPONENTS OF INCOME BEFORE TAXES
Domestic $(100,673) $180,198 $450,094
Foreign (49,897) (210) 58,635
--------- -------- --------
Total income before taxes $(150,570) $179,988 $508,729
========= ======== ========
Cash paid for income taxes $ 16,498 $ 26,370 $162,020
========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
OCT. 31 Oct. 26
DEFERRED INCOME TAXES AS OF 1997 1996
--------- --------
<S> <C> <C>
Deferred tax assets
Receivable valuation accounts $ 8,094 $ 17,824
Restructuring provision 5,493 6,141
Reserves and accruals 15,329 22,388
Foreign earnings and loss carryforwards 47,442 13,496
Other individually immaterial items 26,619 25,367
--------- --------
102,977 85,216
Valuation allowance for deferred tax assets (7,462) (7,462)
--------- --------
95,515 77,754
Deferred tax liabilities
Unrealized gain on investments (2,748) (26,997)
--------- --------
Net deferred tax assets $ 92,767 $ 50,757
========= ========
</TABLE>
F COMMITMENTS AND CONTINGENCIES
Rent expense for operating and month-to-month leases was $23 million, $29
million, and $32 million in fiscal 1997, 1996, and 1995, respectively.
As of October 31, 1997, the Company has various operating leases with remaining
terms of more than one year. These leases have minimum annual lease commitments
of $25 million in fiscal 1998, $15 million in fiscal 1999, $10 million in fiscal
2000, $7 million in fiscal 2001, $7 million in fiscal 2002, and $24 million
thereafter. Furthermore, the Company has $21 million of minimum rentals to be
received in the future.
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 31, 1997,
there were no borrowings, letter of credit acceptances, or commitments under
such line.
The Company has an additional $5 million credit facility with another bank which
is not subject to a loan agreement. At October 31, 1997, standby letters of
credit of $200,000 were outstanding under this agreement.
<PAGE> 22
In August 1997, the Company entered into an agreement to lease five buildings
being constructed on land owned by the Company in San Jose, California. The
lessor of the building has committed to fund up to $157 million for construction
of the buildings, with the portion of the committed amount actually utilized to
be determined by the Company. Rent obligations for the buildings will commence
upon the Company's occupation of the buildings in fiscal 1999. Additionally in
December 1997, the Company entered into an agreement to lease two buildings
being constructed on land owned by the Company in Provo, Utah. The lessor of the
building has committed to fund up to $115 million for the construction of the
buildings, with the portion of the committed amount actually utilized to be
determined by the Company. Rent obligations for the building will commence upon
the Company's occupation of the buildings in fiscal 2000. Each lease is for a
period of seven years. Each lease can be renewed for two additional five year
periods, subject to the approval of the lender and the Company at the sole
discretion of each party. Annual rent under each agreement is determined by
taking the portion of the committed amount actually utilized and associated
capitalized interest accrued during the construction period and multiplying this
amount by the secured interest rate. The Company may, at its option, purchase
the buildings during the term of the lease at approximately the amount expended
by the lessor to construct and improve the buildings. If the Company does not
purchase the buildings, or arrange for the sale of the buildings, at the end of
the lease, the Company will guarantee the lessor no more than 85% of the
residual value of the buildings (approximately $272 million) as determined at
the inception of the leases. In addition, the agreement calls for the Company to
maintain a specific level of restricted cash to serve as collateral for the
leases and maintain compliance with certain financial covenants. The value of
restricted cash held as collateral at October 31, 1997 was approximately $11
million.
In 1993, a suit was filed due to a failed contract against a company that Novell
subsequently acquired. The plaintiff obtained a jury verdict against the
acquired company in 1996. Novell does not believe that the resolution of this
legal matter will 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 PUT WARRANTS
During fiscal 1997, the Company sold put warrants on two million shares of its
common stock for $2 million, callable on specific dates in the third quarter of
fiscal 1997, giving a third party the right to sell shares of Novell common
stock to the Company at contractually specified prices. The put warrant
liability is the amount the Company would be obligated to pay if all the
outstanding put warrants were exercised at the strike price without a cash
settlement. During fiscal 1997, the Company settled all of its remaining put
warrant obligations on six million shares for cash of $21 million and therefore
reversed the put warrant obligation back to additional paid-in capital. During
fiscal 1996, the Company sold put warrants on nine million shares of its common
stock for $12 million, callable on specific dates in the third and fourth
quarters of fiscal 1996 and the first and second quarters of fiscal 1997. During
fiscal 1996, the Company settled put warrant obligations on five million shares
for cash of $6 million.
H SHAREHOLDERS' EQUITY
In December 1988, the Board of Directors adopted a Shareholder Rights Plan and
amended it in March 1992 and December 1996. 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. 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.
<PAGE> 23
The Company has 500,000 authorized shares of preferred stock with a par value of
$0.10 per share, none of which was outstanding at October 31, 1997 or October
26, 1996.
At October 31, 1997, the Company had authorized stock-based compensation plans
under which options to purchase shares of Company common stock could be granted
to employees, consultants and outside directors. The Company applies APB Opinion
No. 25 "Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its plans. Accordingly, no compensation expense (except
compensation expense related to restricted stock purchase grants) has been
recognized for the Company's stock-based plans. If compensation expense for the
Company's stock-based compensation plans had been determined consistent with
Statement of Financial Accounting Standards No. 123 (SFAS 123), the Company's
net income (loss) and net income (loss) per share would have been the pro forma
amounts indicated below.
<TABLE>
<CAPTION>
Oct. 31 Oct. 26
Fiscal year ended (In thousands, except per share amounts) 1997 1996
--------- --------
<S> <C> <C>
NET INCOME (LOSS)
As reported $ (78,296) $125,991
Pro forma $(106,509) $116,505
NET INCOME (LOSS) PER SHARE
As reported $ (0.22) $ 0.35
Pro forma $ (0.31) $ 0.33
</TABLE>
For the purpose of the above table, the fair value of each option grant is
estimated as of the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in fiscal 1997
and 1996: a risk-free interest rate of approximately 6% for both fiscal 1997 and
1996; a dividend yield of 0.0% for both years; a weighted-average expected life
of 4 years for both years; and a volatility factor of the expected market price
of the Company's common stock of 0.45 for both years. Because the method of
accounting prescribed by SFAS 123 has not been applied to options granted prior
to October 28, 1995, the resulting pro forma compensation expense may not be
representative of that to be expected in future years.
The Company currently has two option plans. The Company's 1991 Stock Plan, as
amended, (the "1991 Plan") provides for the issuance of incentive and
nonstatutory stock options, stock purchase rights, stock appreciation rights and
long-term performance awards to employees, consultants and outside directors of
the Company. The Company grants nonstatutory options to virtually all employees
and certain restricted stock purchase rights to selective management. The
options generally are granted at the fair market value of the Company's common
stock at the date of grant, vest over a four-year period, are exercisable upon
vesting and expire ten years from the date of grant. The Company has reserved
60,310,928 shares of common stock for issuance under the 1991 Plan. This share
reserve has increased over the past four years and will continue to increase on
November 1, 1997 and November 1, 1998, based on a calculation of 2.9% of the
total common stock outstanding at the previous fiscal year end. The Company also
has a Non-Employee Director Stock Option Plan, as amended, (the "Director Plan")
under which 1,500,000 shares are reserved for issuance. This Director Plan
allows for two types of non discretionary stock option grants; an initial grant
of 30,000 options at the time a director is first elected/appointed to the
Board, with options vesting over four years and exercisable upon vesting; and an
annual grant of 15,000 options upon reelection to the Board, with options
vesting over two years and exercisable upon vesting. All options expire ten
years from the date of grant.
The Company's 1986 Stock Option Plan and assumed plans due to acquisitions have
terminated, and no further options may be granted under these plans. Options
previously granted under these plans will continue to be administered under such
plans, and any portions that expire or become unexercisable for any reason shall
cancel and be unavailable for future issuance.
<PAGE> 24
A summary of the status of the Company's stock option plans as of October 31,
1997 and October 26, 1996 and changes during the years ended on those dates is
presented below.
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1996
-------------------------- --------------------------
Weighted- Weighted-
Number of Average Number of Average
Number of options in thousands Options Exercise Price Options Exercise Price
------------------------------ --------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 41,331 $14.77 41,281 $15.24
Granted
Price at Fair Value 46,617 $ 8.05 17,596 $12.59
Price greater than Fair Value 600 $17.53 -- --
Price less than Fair Value 975 $ 0.02 932 $ .10
Exercised (3,151) $ 3.91 (5,956) $ 5.36
Cancelled/expired (46,549) $14.13 (12,522) $16.67
------- ------ ------- ------
Outstanding at end of year 39,823 $ 8.19 41,331 $14.77
Options exercisable at year end 2,753 16,584
------- ------ ------- ------
</TABLE>
The following table summarizes information about stock options outstanding at
October 31, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ---------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
OPTIONS REMAINING AVERAGE OPTIONS AVERAGE
Number of options in thousands OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------------ ----------- ---------------- -------------- ----------- --------------
<C> <C> <C> <C> <C> <C>
$ 1.83 3 5.14 $ 1.83 3 $ 1.83
$ 1.84 -- $ 6.91 24,208 7.76 $ 6.89 134 $ 3.85
$ 7.50 -- $ 8.75 11,801 9.45 $ 8.61 843 $ 8.44
$ 9.38 -- $14.91 2,113 8.24 $ 11.18 776 $12.04
$ 15.38 -- $31.25 1,698 6.93 $ 19.81 997 $21.42
------ ---- ------- ----- ------
$ 1.83 -- $31.25 39,823 8.26 $ 8.19 2,753 $13.92
------ ---- ------- ----- ------
</TABLE>
OTHER INFORMATION
In 1997, the Company implemented a stock option exchange program whereby option
holders could exchange higher priced options for new options on a four new
shares for five old shares ratio. Vesting remained the same as the original
grant but exercisability was suspended for one year. All option holders except
for outside directors and the CEO were permitted to participate in the program.
<TABLE>
<CAPTION>
FISCAL Fiscal
Number of shares and options in thousands 1997 1996
------- -------
<S> <C> <C>
EXCHANGE PROGRAM (INCLUDED ABOVE)
Options cancelled 31,457 --
Options regranted 24,884 --
OTHER INFORMATION
Shares of common stock outstanding at year end 350,938 346,059
Annual option reserve increase based on evergreen provision 10,036 10,775
Options granted as a percentage of outstanding
common stock, net of cancellations .5% 1.7%
Option holders as a percentage of total employees 100% 100%
</TABLE>
<PAGE> 25
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's 1989 Employee Stock Purchase Plan, as amended, (the
"Purchase Plan"), the Company is authorized to issue up to 12,000,000 shares of
common stock to its employees who work at least 20 hours a week and six months a
year. Under the terms of the Purchase Plan, there are two six month offerings
per year, and employees can choose to have up to 10% of their salary withheld to
purchase the Company's common stock. The purchase price of the stock is 85% of
the lower of the subscription date fair market value and the purchase date fair
market value. Approximately 45% of the eligible employees have participated in
the Purchase Plan in fiscal 1997 and 1996. Under the Purchase Plan, the Company
issued 1,991,504 and 1,686,701 shares to employees in fiscal 1997 and 1996,
respectively.
In accordance with APB 25, the Company does not recognize compensation expense
related to employee purchase rights under the Purchase Plan. To comply with the
pro forma reporting requirements of SFAS 123, compensation expense is estimated
for the fair value of the employees' purchase rights using the Black-Scholes
model with the following assumptions for these rights granted in 1997 and 1996:
a dividend yield of 0.0% for both years; an expected life of 6 months for both
years; an expected volatility factor of 0.45 for both years; and a risk-free
interest rate of approximately 5.5% for 1997 and 1996. The weighted average fair
value of the purchase rights granted on April 28, 1997, October 28, 1996, April
29, 1996, and October 30, 1995 was $2.72, $3.64, $5.12, and $5.93, respectively.
I RESTRUCTURING CHARGES
During the third quarter of fiscal 1997, the Company incurred $55 million of tax
deductible restructuring charges which included $28 million for excess personnel
and $27 million for redundant facilities as the Company realigned its resources
to better manage and control its business. The charge for excess personnel
related to approximately 1,000 employees with $21 million of severance paid and
charged against the amount accrued. Of this total charge, reserves of $11
million remain as of October 31, 1997.
During the first quarter of fiscal 1996, the Company incurred $18 million of tax
deductible restructuring charges for excess personnel and redundant facilities
as the Company prepared for the sale of its personal productivity applications
product line. There is no reserve related to this charge as of October 31, 1997.
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 $15 million, $16 million, and $17 million in fiscal
1997, 1996, and 1995, respectively.
K RELATED PARTY TRANSACTIONS
In fiscal 1997, 1996, and 1995, legal fees of approximately $1 million, $1
million, and $2 million, respectively, were paid to Wilson, Sonsini, Goodrich &
Rosati, a law firm in which a director of the Company is a senior partner.
<PAGE> 26
L SALES BY GEOGRAPHY
<TABLE>
<CAPTION>
OCT. 31 Oct. 26 Oct. 28
Fiscal year ended (Dollars in thousands) 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales
U.S. operations $ 707,228 $ 902,684 $ 1,623,565
Irish operations 231,954 344,512 228,812
Other international operations 68,508 128,564 189,568
Eliminations (379) (904) (771)
----------- ----------- -----------
Total net sales $ 1,007,311 $ 1,374,856 $ 2,041,174
=========== =========== ===========
Income from operations
U.S. operations $ 59,919 $ 417,618 $ 658,774
Irish operations (20,003) 9,098 3,481
Other international operations (6,780) (129) 20,008
Eliminations (233,140) (317,643) (230,154)
----------- ----------- -----------
Total income from operations $ (200,004) $ 108,944 $ 452,109
=========== =========== ===========
Identifiable assets
U.S. operations $ 1,974,222 $ 2,102,574 $ 2,437,599
Irish operations 12,228 57,471 54,065
Other international operations 33,732 46,816 58,288
Eliminations (109,533) (157,395) (133,122)
----------- ----------- -----------
Total identifiable assets $ 1,910,649 $ 2,049,466 $ 2,416,830
=========== =========== ===========
</TABLE>
The Company operates in one business segment and markets internationally through
distributors who sell to dealers and end users. Intercompany sales between
geographic areas are accounted for at prices representative of unaffiliated
party transactions. "U.S. operations" include shipments to customers in the
U.S., licensing to OEMs, and exports of finished goods directly to international
customers, primarily in Canada, South America, and Asia. In fiscal 1997, 1996,
and 1995, sales to international customers were approximately $452 million, $682
million, and $960 million, respectively. In fiscal 1997, 1996, and 1995,
international sales to European countries were 55%, 55%, and 56%, respectively.
No one foreign country accounted for more than 10% of total sales in any period.
In fiscal 1997 and 1995, the Company had one multinational distributor, which
accounted for 11% and 15% of revenue, respectively. Otherwise, no customer
accounted for more than 10% of revenue in any period.
<PAGE> 27
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 31, 1997 and October 26, 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended October 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Novell, Inc. at
October 31, 1997 and October 26, 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
October 31, 1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Jose, California
November 24, 1997
<PAGE> 28
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 1997
Net sales $ 374,847 $ 273,107 $ 90,074 $ 269,283 $ 1,007,311
Gross profit 298,876 195,932 28,403 206,654 729,865
Income (loss) before taxes 75,277 (21,680) (217,957) 13,790 (150,570)
Net income (loss) 50,812 (14,634) (121,645) 7,171 (78,296)
Net income (loss) per share .15 (.04) (.35) .02 (.22)
COMMON STOCK PRICE PER SHARE
High 12 3/4 13 8 3/4 10 1/2 13
Low 8 7/8 7 6 9/32 7 3/8 6 9/32
FISCAL 1996
Net sales $ 437,919 $ 188,180 $ 365,091 $ 383,666 $ 1,374,856
Gross profit 341,908 119,566 289,473 317,148 1,068,095
Income (loss) before taxes 95,580 (83,246) 84,712 82,942 179,988
Net income (loss) 63,561 (55,359) 58,759 59,030 125,991
Net income (loss) per share .17 (.15) .17 .17 .35
COMMON STOCK PRICE PER SHARE
High 19 1/8 14 5/8 15 5/8 12 1/4 19 1/8
Low 12 11 3/8 10 1/8 10 10
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 5/8 23 1/4
Low 15 3/4 17 5/8 17 7/8 13 3/4 13 3/4
</TABLE>
Novell's common stock trades in the over-the-counter market under the NASDAQ
symbol "NOVL."
No dividends have been declared on the Company's common stock. There were 12,628
shareholders of record at December 31, 1997.
<PAGE> 29
DIRECTORS AND EXECUTIVES
BOARD OF DIRECTORS
ERIC E. SCHMIDT
Chairman of the Board and
Chief Executive Officer
JOHN A. YOUNG **
Vice Chairman of the Board
Retired President and Chief Executive Officer
Hewlett-Packard Company
ELAINE R. BOND * **
Retired Chase Fellow and Sr. Consultant
The Chase Manhattan Bank, N.A.
HANS-WERNER HECTOR *
Cofounder
SAP AG, Germany
JACK L. MESSMAN * ** ***
President and Chief Executive Officer
Union Pacific Resources Group, Inc.
LARRY W. SONSINI
Partner
Wilson, Sonsini, Goodrich & Rosati
IAN R. WILSON ***
Managing Partner
Dartford Partnership
* Member of Audit Committee
** Member of Compensation Committee
*** Member of Corporate Governance Committee
CORPORATE EXECUTIVE STAFF
ERIC E. SCHMIDT
Chairman of the Board and
Chief Executive Officer
DAVID R. BRADFORD
Senior Vice President,
General Counsel, and Corporate Secretary
RONALD E. HEINZ, JR.
Senior Vice President
Worldwide Sales
JENNIFER A. KONECNY-COSTA
Senior Vice President
Human Resources
RICHARD A. NORTZ
Senior Vice President
Customer Services
JOHN F. SLITZ, JR.
Senior Vice President
Marketing
CHRISTOPHER M. STONE
Senior Vice President
Strategic Business Development
GLENN RICART
Senior Vice President and
Chief Technology Officer
JAMES R. TOLONEN
Senior Vice President and
Chief Financial Officer
DARCY G. MOTT
Vice President and
Treasurer
STEWART G. NELSON
Vice President, Product Development
<PAGE> 30
CORPORATE DIRECTORY
NOVELL CORPORATE
HEADQUARTERS
122 East 1700 South
Provo, Utah 84606
Ph 801 861 7000
Toll-free 800 453 1267
Fx 801 228 7077
AMERICAS REGION
NOVELL ARGENTINA
Av. Leandro N. Alem 1110,
Piso 9(degrees), 1001 Buenos Aires
Argentina
Ph 541 312 2626
Fx 541 312 8025
NOVELL BRAZIL
Av. Nacoes Unidas, 12.995
8(degrees) Andar
04578-000 - Sao Paulo - SP
Brazil
Ph 55 11 5505 4040
Fx 55 11 5505 4041
NOVELL CANADA
3100 Steeles Avenue East
Suite 500
Markham, Ontario L3R 8T3
Canada
Ph 905 940 2670
Fx 905 940 2688
NOVELL CHILE
Av. Nueva Tajamor 555
Of. 901, Las Condes
Santiago, Chile
Ph 562 3397 070
Fx 562 3397 071
NOVELL COLOMBIA
Calle 114 # 9-45
Torre B oficina 709-710
Barrio Santa Barbara
Santa Fe de Bogota
Colombia
Ph 571 6292969
Fx 571 6293509
NOVELL MEXICO
Periferico Sur 4124
Piso 8, Torre Zafiro II
Pedregal De San Angel
Mexico, D.F., C.P. 01900
Mexico
Ph 525 728 3560
Fx 525 728 3566
NOVELL VENEZUELA
Plaza La Castellana
Torre Ban Caracas
Piso 10, oficina 1004
La Castellana
Caracas, Venezuela
Ph 582 642 534
Fx 582 642 171
ASIA-PACIFIC REGION
NOVELL AUSTRALIA
Level 18
201 Miller Street
North Sydney, NSW 2060
Australia
Ph 61 2 9925 3000
Fx 61 2 9922 2113
NOVELL CHINA
6/F Annex Bldg.,
Sinochem Mansion
A2 Fuxing Menwai Ave.
Beijing 100045, P.R.China
Ph 86 10 685 68616
Fx 86 10 685 68615
NOVELL HONG KONG
Room 4601-5
China Resources Building
26 Harbour Road
Wanchai, Hong Kong
Ph 852 2 588 5288
Fx 852 2 827 6555
NOVELL INDIA*
Onward Novell Software Ltd.
62 MIDC
13th Street
Andheri (East)
Bombay 400 093, India
Ph 91 22 8342244
Fx 91 22 8342223
NOVELL JAPAN LTD.*
Toei Mishuku Bldg.
1-13-1 Mishuku
Setagaya-Ku,
Tokyo 154, Japan
Ph 81 3 5481 1551
Fx 81 3 5481 4100
NOVELL KOREA
11th Floor, Kunja Building
942-1, Daechi-dong
Kangnam-Ku
Seoul, Korea 135-280
Ph 82 2 528 1400
Fx 82 2 528 1414
NOVELL MALAYSIA
Suite 23.3 Level 23
Menara Genesis
33 Jalan Sultan Ismail
50250 Kuala Lumpur
Malaysia
Ph 60 3 243 0678
Fx 60 3 243 0728
NOVELL SINGAPORE
300 Beach Road, #28-00
The Concourse
Singapore 199555
Ph 65 296 2866
Fx 65 296 1266
NOVELL TAIWAN
Room E-F, 5th Floor
168 Tun-Hwa North Road
Taipei, Taiwan, R.O.C.
Ph 886 2 718 9733
Fx 886 2 514 9806
NOVELL THAILAND
Level 23, CPTower
313 Silom Road
Bangkok, Thailand 10500
Ph 662 231 8166
Fx 662 231 8246
EUROPE, MIDDLE EAST,
AFRICA REGION
NOVELL AUSTRIA
Theresianumgasse 7
A-1040 Vienna, Austria
Ph 43 1 504 5200
Fx 43 1 504 5211
NOVELL BELGIUM
Koningin Aztridplein 2018
Antwerp, Belgium
Ph 32 3 206 01 793
Fx 32 3 206 17 99
NOVELL CZECH REPUBLIC
Klimenstska 46
11002 Prague 1
Czech Republic
Ph 42 2 2185 6611
Fx 42 2 2185 6622
NOVELL DENMARK
Slotsmarken 12
DK 2970 Horsholm, Denmark
Ph 45 45 16 00 20
Fx 45 45 16 00 40
NOVELL FINLAND
Sinimaentie 10 C
02630 Espoo, Finland
Ph 35 89 502 95 1
Fx 35 89 502 95 300
NOVELL FRANCE
Tour Framatome
1, Place de la Coupole
92084 Paris la Defense Cedex
France
Ph 33 1 47 96 60 00
Fx 33 1 47 78 94 72
NOVELL GERMANY
Monschauer Strasse 12
40549 Dusseldorf, Germany
Ph 49 211 56310
Fx 49 211 563 1250
NOVELL HUNGARY
East-West Business Center
1088 Budapest
Rakoczi ut 1-3, Hungary
Ph 36 1 266 7770
Fx 36 1 266 6360
NOVELL IRELAND
2nd Floor
The Treasury Building
Lower Grand Canal Street
Dublin 2, Ireland
Ph 353 1 605 8000
Fx 353 1 605 8200
NOVELL ISRAEL
Ackerstein Building
Medinat Hayehudim St 103
Herzliyya 46776, Israel
Ph 972 95 27 774
Fx 972 95 65 336
NOVELL ITALIA
Piazza Don Mapelli 75
Edifico U3
Sesto San Giovanni
20099 Milan, Italy
Ph 39 2 262 95 1
Fx 39 2 26295 800
NOVELL MIDDLE EAST
P.O. Box 9313
17th Floor
Dubai World Trade Center
Dubai, United Arab Emirates
Ph 971 43 16 444
Fx 971 43 19 248
NOVELL NETHERLANDS
Barbizonlaan 25
2908 MB Capelle a/d IJssel
PO Box 85024
3009 MA Rotterdam
The Netherlands
Ph 31 10 286 4444
Fx 31 10 286 4010
NOVELL NORWAY
Grensesvingen 9
Postboks 6555 Etterstad
0606 Oslo, Norway
Ph 47 22 08 77 70
Fx 47 22 08 77 71
NOVELL POLAND
ul. Sienna 64
00-825 Warsaw, Poland
Ph 48 22 620 39 79
Fx 48 22 620 31 03
NOVELL RUSSIA
Suite 524
Radisson Slavyanskaya Hotel
2, Borozhkovokaya nab.
121059 Moscow, Russia
Local Ph 7 095 941 8075
Local Fx 7 095 941 8066
Satellite Ph 44 1 819133 215
Satellite Fx 44 1 819133 238
NOVELL SOUTH AFRICA
Morning View Office Park
Bldg 4, Rivonia Road
Morningside
PO Box 1840
Rivonia 2128
Republic of South Africa
Ph 27 11 322 8300
Fx 27 11 322 8400
NOVELL SPAIN
27th Floor, Torre Europa
Paseo de la Castellana, 95
28046 Madrid, Spain
Ph 34 1 555 65 67
Fx 34 1 555 29 15
NOVELL SWEDEN
Kronborgsgrand 1
Kolding 3
Stockholm, Sweden
Ph 46 84774108
Fx 46 4684774101
<PAGE> 31
NOVELL SWITZERLAND
Imperial Gebaude
2 Oberschoss
Leutschenbachstrasse 41
CH-8050 Zurich, Switzerland
Ph 41 1 308 47 47
Fx 41 1 302 04 01
UNITED KINGDOM
NOVELL HOUSE
1, Arlington Square
Downshire Way
Bracknell
Berks RG12 1WA
United Kingdom
Ph 44 1344 724000
Fx 44 1344 724001
*Joint venture
<PAGE> 32
OTHER INFORMATION
NOVELL ON THE INTERNET
http://www.novell.com
Corporate, product, program, financial, and shareholder information, including
press releases and quarterly earnings announcements, is available at Novell's
World Wide Web site.
NOVELL NEWS HOTLINE
800 668-5329
Press releases are available toll-free from Novell's menu-driven fax
distribution system.
FINANCIAL LITERATURE
800 467-2498
408 577-8400
www.novell.com/corp/ir/index.html
[email protected]
Novell's Annual Report, Corporate Fact Book, SEC filings, earnings
announcements, and other financial information are available on Novell's
Investor Relations Web site at www.novell.com/corp/ir/index.html. Mailed copies
of financial materials can be obtained from Novell's automated telephone access
system or by emailing Novell's investor relations department at
[email protected].
SHAREHOLDER SERVICES
Novell, Inc.
2180 Fortune Drive
San Jose, CA 95131
800 NOVL STK
408 577-8644
[email protected]
Information on Novell's Annual Meeting, changes in stock registration, and other
stock administration services is available through Novell's shareholder
representatives.
INVESTOR RELATIONS
Novell, Inc.
2180 Fortune Drive
San Jose, CA 95131
800 317-3195
408 577-8384
[email protected]
Investor-related inquiries are answered by Novell's Investor Relations staff.
CUSTOMER INFORMATION
Novell, Inc.
122 East 1700 South
Provo, UT 84606
888 321-4CRC (4272)
[email protected]
Information on Novell's products, programs, and services can be obtained from
Novell's Customer Response Center by calling toll free 888 321-4CRC or by
emailing [email protected].
ANNUAL MEETING
The Company's Annual Meeting will be held on Tuesday, April 7, 1998, at 2:00
p.m. local time at Novell, 1555 North Technology Way, Building J Auditorium,
Orem, Utah 84097.
FORM 10-K
A copy of the Company's Form 10-K is available without charge. To obtain a copy,
please write:
Investor Relations
Novell, Inc.
2180 Fortune Drive
San Jose, CA 95131
INDEPENDENT AUDITORS
Ernst & Young LLP, San Jose, CA
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, LLC
Ridgefield Park, NJ
Copyright (C) 1998, Novell, Inc. All Rights Reserved.
Novell, NetWare, Envoy, GroupWise, ManageWise, and Tuxedo are registered
trademarks and NDS, NetWare 3, NetWare 4, NetWare 5, Novell BorderManager,
BorderManager FastCache, and Novell Directory Services are trademarks of Novell,
Inc. in the United States and other countries.
* Java is a trademark or registered trademark of Sun Microsystems, Inc. in the
United States and other countries. Corel is a registered trademark of Corel
Corporation in the United States and other countries. The Santa Cruz Operation
and SCO are registered trademarks of The Santa Cruz Operation, Inc. UNIX is a
registered trademark of X/Open Company, Ltd. UnixWare is a registered trademark
of The Santa Cruz Operation, Inc. in the U.S. and other countries.
Designed and produced by Chikamura Design, San Francisco
<PAGE> 1
EXHIBIT 21
NOVELL, INC.
SUBSIDIARIES OF THE REGISTRANT
As of October 31, 1997, 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 Chile.......................................................... Chile
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 New Zealand.................................................... New Zealand
Novell Norge A/S...................................................... Norway
Novell Peru........................................................... Peru
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
Novell Uruguay........................................................ Uruguay
MAJORITY OWNED
- ----------------------------------------------------------------------
Novell Japan, Ltd..................................................... Japan
Novonyx, Inc.......................................................... Delaware
Onward Novell Software Pvt., Ltd...................................... India
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Novell, Inc. of our report dated November 24, 1997, included in the
1997 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. 33-36673, No. 33-54483, No.
33-64998, No. 33-65440, No. 33-66704, No. 33-67276, No. 33-68336, No. 333-04775,
No. 333-04823, and No. 333-38435) pertaining to the Employee Stock Option and
Stock Purchase Plans of Novell, Inc. of our report dated November 24, 1997, 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 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 208,543
<SECURITIES> 824,930
<RECEIVABLES> 234,358
<ALLOWANCES> (33,053)
<INVENTORY> 10,656
<CURRENT-ASSETS> 1,470,382
<PP&E> 765,384
<DEPRECIATION> (391,519)
<TOTAL-ASSETS> 1,910,649
<CURRENT-LIABILITIES> 321,956
<BONDS> 0
0
0
<COMMON> 35,094
<OTHER-SE> 1,530,323
<TOTAL-LIABILITY-AND-EQUITY> 1,910,649
<SALES> 1,007,311
<TOTAL-REVENUES> 1,007,311
<CGS> 277,446
<TOTAL-COSTS> 277,446
<OTHER-EXPENSES> 929,869
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (150,570)
<INCOME-TAX> (72,274)
<INCOME-CONTINUING> (78,296)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (78,296)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
