-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, lVaS7If4YvOmFbEOwYikBU+6/qh2l4RKkWy7oLHAnSat7EVcjAxOU2aS3bbYNvHO BO1pJz4zQlP7EGb+pTV1HA== 0000950149-95-000010.txt : 19950607 0000950149-95-000010.hdr.sgml : 19950607 ACCESSION NUMBER: 0000950149-95-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19941029 FILED AS OF DATE: 19950125 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOVELL INC CENTRAL INDEX KEY: 0000758004 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 870393339 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13351 FILM NUMBER: 95502868 BUSINESS ADDRESS: STREET 1: 122 EAST 1700 SOUTH CITY: PROVO STATE: UT ZIP: 84606 BUSINESS PHONE: 8014297000 MAIL ADDRESS: STREET 1: 122 E. 1700 S. CITY: PROVO STATE: UT ZIP: 84606 10-K 1 FORM 10-K FOR FISCAL YEAR ENDED OCTOBER 29, 1994 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K /X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the Fiscal Year Ended October 29, 1994 or / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from ____________________ to ____________________ Commission File Number: 0-13351 NOVELL, INC. (Exact name of registrant as specified in its charter) Delaware 87-0393339 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1555 N. Technology Way Orem, Utah 84057 (Address of principal executive offices and zip code) (801) 429-7000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share Preferred Share Purchase Rights Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the registrant's common stock held by nonaffiliates on December 31, 1994 (based on the last reported price of the Common Stock on the NASDAQ National Market System on such date) was $5,356,907,418. As of December 31, 1994 there were 365,308,188 shares of the registrant's common stock outstanding. Portions of Registrant's Annual Report to Shareholders for the fiscal year ended October 29, 1994, are incorporated by reference in Parts II and IV of this Form 10-K to the extent stated herein. Portions of Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 12, 1995, are incorporated by reference in Part III of this Form 10-K to the extent stated herein. 2 PART I ITEM 1. BUSINESS THE COMPANY Novell, Inc. ("Novell" or the "Company") is a leading provider of networking and application software. The Company's products provide the distributed infrastructure, network services, advanced network access, and network applications required to make networked information and computing an integral part of daily life. The Company was incorporated in Delaware on January 25, 1983. Novell's executive offices are located at 1555 North Technology Way, Orem, Utah 84057. Its telephone number at that address is (801) 429-7000. The Company markets its products through 40 U.S. and 56 international sales offices. The Company sells its products primarily to distributors and national retail chains, who in turn sell the Company's products to retail dealers. The Company also sells its products to OEMs, system integrators, and VARs as well as direct to large corporations. The Company primarily conducts product development activities in San Jose, California; Summit, New Jersey; and Orem and Provo, Utah. It also contracts out some product development activities to third-party developers. The Company has issued common stock or paid cash to acquire or merge with technology companies, invested cash in other technology companies, and formed strategic alliances with still other technology companies. Novell undertook these transactions to broaden the Company's business as a system and application software supplier as well as to promote a pervasive computing environment. In June 1994, the Company completed a merger with WordPerfect Corporation (WordPerfect) whereby WordPerfect was merged into Novell. Approximately 51 million shares of Novell common stock were exchanged for all of the outstanding common stock of WordPerfect. In addition, the outstanding employee stock options to purchase WordPerfect common stock were converted into options to purchase approximately 8 million shares of Novell common stock. The transaction was accounted for as a pooling of interests and therefore, all prior period financial statements incorporated by reference herein have been restated as if the merger took place at the beginning of such periods. Additionally, in June 1994, the Company acquired the Quattro Pro spreadsheet product line from Borland International, Inc. for $110 million of cash and assumed liabilities of $10 million. This transaction was accounted for as a purchase and, on this basis, resulted in a one-time write-off of $114 million for purchased research and development. At the same time, the Company purchased a three year license to reproduce and distribute up to one million copies of current and future versions of Borland's Paradox relational database product for $35 million of cash. In June 1993, the Company acquired UNIX System Laboratories, Inc. (USL) by issuing approximately 11 million shares Novell common stock valued at $332 million in exchange for all of the outstanding stock of USL, not previously owned by Novell, and assumed liabilities of $9 million. The transaction was accounted for as a purchase and, on this basis, resulted in a one-time write-off of $269 million for purchased research and development in the third quarter of fiscal 1993. The Company will continue to look for similar acquisitions, investments or strategic alliances which it believes complement its overall business strategy. 2 3 BUSINESS STRATEGY Novell believes that computer networks are expanding as traditional stand-alone computer resources and new categories of computing devices increasingly become integrated across networks to become network resources. The Company sees its business opportunity as making networks easier to access, simpler to use and more effective through operating systems, network services, access software and network applications that create useful information from the data available through networks. Novell's strategy over recent periods has been to broaden its product offerings and strengthen its competitive position as the leading supplier of network software. It has expanded its business beyond NetWare network operating system products to include UNIX system software valued as an application platform and used for integrating applications with computer networks. Most recently, the Company expanded into application software products to develop new network applications that take advantage of the network to increase user productivity. The Company believes that the capabilities of computer networks are leading to a pervasive computing future that will change the definition of networks from connecting information systems and computing devices to connecting people with other people and the information they need, giving them the power to act on it anytime, anyplace. TECHNOLOGIES Network Infrastructure. Novell's NetWare network operating system provides a platform for the integration of multiple technologies. This includes the seamless integration of multiple desktop systems and host environments. Novell believes that customer environments are inherently heterogeneous and therefore require an information system that integrates dissimilar technologies. The goal of Novell's strategy of integrating various desktop systems is to allow IBM, IBM-compatible, Apple Macintosh, and UNIX-based PCs and workstations to access and share simultaneously a common set of network resources and information. This gives customers the freedom to choose the desktop and application server systems that best fit their application requirements. In addition to the integration of desktops, host environments from vendors such as IBM, DEC, HP and Olivetti and numerous other UNIX system vendors are integrated into the NetWare network so that users can access host-based resources and information from their desktops across the network. Novell continues to extend this hardware and infrastructure integration to other communication devices such as PBXs and embedded systems such as cash registers and process control devices. The overall objective is to seamlessly connect users by easily allowing them to use the underlying network technology to share resources and information across heterogenous systems. Network Services. Novell delivers advanced network services on top of the NetWare integration platform. These services enhance the functionality available to users on the network. In the first release of NetWare eleven years ago, those services were file and print only. Over the past decade the services provided by Novell and third parties have expanded significantly to include communications, network and systems management, messaging, multiprotocol routing, software licensing and distribution, imaging and document management, and telephony services. The Company's latest additions to its services offerings include: a distributed directory that maintains a network wide "yellow pages" of users, network equipment, computer systems, data and network resources; and advanced disk compression capabilities that lower the hardware requirements of networks. Network Access. Novell network access products connect desktop PC and Macintosh users with applications 3 4 and services that run on UNIX host computers and the Internet through TCP/IP communications protocols. The company also provides dial-in network access products for remote access of network resources. Novell is developing mobile NetWare client technology for synchronizing data used by mobile users with network data when the users reconnect to a network. A three dimensional network browser is also in development to provide point-and-click access to network services, electronic publishing that simplifies creation and access to network-based information, and intelligent browsing capabilities for accessing distributed network resources. Novell system software is also being developed to support next-generation public data networks that significantly expand commercial and interpersonal network use. Novell, in partnership with AT&T and other telecommunications providers, is working to deploy a worldwide business-to-business internetwork, a secure commercial information highway. Network Applications. Novell application technology spans from secure on-line transaction processing for client server networks and legacy systems to business applications and consumer applications. Novell delivers a business application development and run-time framework for enterprise transaction systems that scale from PCs, to network servers, to mainframe computing systems. The Company's personal and group productivity business applications are available as network applications which take advantage of network services to support the productivity needs of businesses as well as individuals. Novell applications address words, numbers, graphics and electronic publishing to make useful information from data. Novell applications also include a family of workgroup collaboration products for electronic mail, calendaring and scheduling, document management and forms processing. The Company is increasing the network orientation of its applications by integrating them with network directories, management and other services. PROGRAMS Technical Support Alliance. In May 1991 Novell announced the formation of the Technical Support Alliance (TSA), with 41 current members including Apple, Compaq, Hewlett-Packard, Intel, IBM, Lotus, Microsoft, and Oracle. The TSA was organized to provide one-stop multivendor support. Member companies provide cooperative efforts to support their customers. Certified Novell Engineer Program. Through the Certified Novell Engineer (CNE) program, Novell is strengthening the networking industry's Level I support self-sufficiency. CNEs are individuals who receive high-level training, information, and advanced technical telephone support (Level II) from Novell. CNEs may be employed by resellers, independent support organizations, or Novell Support Organizations (NSOs). The NSO program pools the capabilities of the industry's best support providers. NSOs have contractual agreements with Novell that are designed to ensure quality service on a national or global level for NetWare, UnixWare, and other Novell products. Novell Authorized Education Centers. Novell offers education to end users through more than 1,300 independent Novell Authorized Education Centers (NAECs) worldwide, which use Novell-developed courses to instruct students in the use and maintenance of Novell products. Novell also offers self-paced training products. Novell Labs. Through its Independent Manufacturer Support Program (IMSP), Novell works with third-party manufacturers to test and certify hardware and software components designed to interoperate with the NetWare and UnixWare operating systems. Novell distributes these test results to inform customers about products that have formally demonstrated NetWare and UnixWare compatibility. In effect, IMSP certification programs help vendors to market their products through Novell's distribution channels. The primary goal of IMSP is to foster working relationships between Novell and third-party hardware and software suppliers. Secondary goals include promoting certified products to industry resellers, anticipating industry products' direction through comarketing efforts, and 4 5 working with vendors to codevelop critical network components. Client-Server NetWare Loadable Module (NLM) Testing Program. Novell is committed to ensuring the highest quality customer solutions by raising the level of importance that quality assurance and testing hold in the software development cycle. The NLM testing program is a result of that commitment; it allows developers to submit client-server NLM applications for testing. PARTNERSHIPS Development Partners. When customers request a new service or function be added to Novell products, Novell investigates the most effective way to deliver that functionality to the user. Very often the best way is for Novell to partner with a company who has expertise in that specific area. By partnering, the combination of Novell's core expertise in networks and the partner's expertise in the given product area combine to deliver a better solution faster than if Novell would have attempted to develop it alone. Systems Partners. Novell partners with companies who have complimentary software and hardware. The resulting solution is a powerful combination of products that deliver enterprise-wide connectivity solutions. These partners include system suppliers like IBM, DEC and HP, as well as system integration experts like Memorex Telex, Arthur Andersen, EDS, etc. Application Partners. Novell works very closely with application developers to provide integrated software products and support for end users. As network applications grow in importance, this program will help assure broad availability of well integrated multivendor applications. Multiple Channel Distribution Network. The Company markets its products through a broad range of distributors, dealers, value added resellers, systems integrators, and OEMs as well as to major end users. Worldwide Service and Support. The Company is committed to providing service and support on a worldwide basis to its resellers and to their end-user customers. The Company has established agreements with third party service vendors to expand and complement the service provided directly by the Company's service personnel and the Company's resellers. PRODUCT GROUPS The Company's products fall within four operating groups: NetWare Systems Group (NSG), Novell Applications Group (NAG), Information Access and Management Group (IAMG), and UNIX Systems Group (USG). NetWare Systems Group. NSG, with headquarters in Provo, Utah, is chartered to extend the capabilities of NetWare, continuing Novell's industry leadership in network operating systems and services. NSG provides the operating system software and network services products for the users of NetWare networks. NSG includes three divisions: the NetWare Products Division, the Extended Networks Division and the AppWare Division. The NetWare Products Division develops and markets NetWare, the core network operating system, including key network services such as directory, security, data storage/retrieval, and print services. The division provides integrated client support for all industry standard desktops: DOS, MS Windows, Macintosh, OS/2 and UNIX. The Extended Networks Division provides software for manufacturers of office equipment, industrial controls and consumer devices to create NetWare ready products. The division's first product is Novell Embedded Systems Technology (NEST). NEST software development kits enable printers, copiers, fax machines, cellular telephones, pagers, set-top cable television boxes and utility meters to be networked using NetWare networks. 5 6 The AppWare Division provides AppWare software development tools that are used to easily link applications with NetWare network services and UnixWare application servers. AppWare and AppWare Loadable Module software components from Novell and numerous industry partners enable customers to create custom network applications. Novell Applications Group. NAG, with headquarters in Orem, Utah, develops personal and group productivity products and consumer applications. The product group has three divisions: the Business Applications Division, the GroupWare Division and the Consumer Products Division. The Business Applications Division has responsibility for the PerfectOffice suite as well as individual MS Windows applications including WordPerfect, Quattro Pro and Presentations. In addition, the division supports WordPerfect on the Macintosh, UNIX and DOS platforms and delivers electronic publishing solutions through the Envoy electronic document publisher and viewer. The division's objective is to deliver leading network applications that enhance business and personal productivity. The GroupWare Division is responsible for workgroup collaboration applications including GroupWise electronic mail, calendaring and scheduling; SoftSolutions document management; Informs forms processing and database access software. Novell's NetWare MHS messaging infrastructure software is also the responsibility of this division. Among other efforts, the division is developing electronic conferencing and integrated voicemail capabilities to add to GroupWise solutions. The Consumer Products Division is delivering Main Street, an expanding product line of consumer education, entertainment and productivity software that includes the essential tools to run a small or home business. Information Access and Management Group. IAMG, with headquarters in San Jose, California, brings together communications, connectivity and management software in five business divisions. The group is responsible for Novell's LAN WorkPlace TCP/IP software product line. It provides NetWare for SAA, the defacto market standard software for connecting desktop computers with IBM system 370 and AS/400 host computers. IAMG also provides the Novell Distributed Management Services software for end-to-end management of enterprise information systems. IAMG is pursuing new initiatives aimed at establishing a secure commercial public data network with tools to publish information and browse network resources. IAMG's five divisions are the Advanced Access Applications Division, Network Management Division, Network Infrastructure Division, Host Connectivity Division and Telephony Services Division. IAMG is also responsible for the common protocol technology used across Novell and by many industry partners, including the market standard TCP/IP communications protocol and the Novell NLSP wide-area network routing protocol. UNIX System Group. USG, with headquarters in Summit, New Jersey, is extending the value of UNIX from its status as today's preferred platform for line-of-business applications on mid-range and larger systems to a leadership role on industry standard computers. USG has two divisions, the UnixWare Division and the TUXEDO Division. The UnixWare Division's charter is to establish UnixWare as a highly scalable network application server platform with exceptionally fast access and processing capabilities on eight, sixteen, and ultimately 32 bit processor symmetrical multiprocessing systems that use industry standard Intel processors. Key products include UnixWare and UNIX source products. The TUXEDO Division provides secure on-line transaction processing software for client server networks and legacy systems. TUXEDO is a business application development and run-time framework for enterprise transaction systems that scale from PCs, to network servers, to mainframe computing systems. PRODUCT DEVELOPMENT Due to the rapid pace of technological change in its industry, the Company believes that its future success will depend, in part, on its ability to enhance and develop its network and applications software products to satisfactorily 6 7 meet dynamic market needs. During fiscal 1994, 1993, and 1992, product development expenses were approximately $347 million, $290 million, and $227 million, respectively. The Company's product development effort consists primarily of work performed by employees; however, the Company also utilizes third-party technology partners to assist with product development. SALES AND MARKETING Novell markets its NetWare family of network products, the UnixWare operating system and WordPerfect application products through distributors, dealers, vertical market resellers, systems integrators, and OEMs who meet the Company's criteria, as well as to major end users. In addition, the Company conducts sales and marketing activities and provides technical support, training, and field service to its customers from its offices in San Jose and Sunnyvale, California; Summit, New Jersey; Provo and Orem, Utah; and from its 40 U.S. and 56 international sales offices. Distributors. Novell has established a network of independent distributors, which resell the Company's products to dealers, VARs, and computer retail outlets. As of December 31, 1994, there were approximately 10 U.S. distributors and approximately 80 international distributors. Dealers. The Company also markets its products to large-volume dealers and regional and national computer retail chains. VARs and Systems Integrators. Novell also sells directly to value added resellers and systems integrators who market data processing systems to vertical markets, and whose volume of purchases warrants buying directly from the Company. OEMs. The Company licenses its systems software to domestic and international OEMs for integration with their products. With the acquisition of USL, the number of OEM agreements has increased significantly, both domestically and internationally. End Users. Generally, the Company refers prospective end-user customers to its resellers. However, the Company has the internal resources to work directly with major end users and has developed U.S. and international master license agreements with approximately 250 of them to date. Additionally, some upgrade products are sold directly to end users. International Sales. In fiscal 1994, 1993, and 1992, approximately 43%, 43%, and 46%, respectively, of the Company's net sales were to customers outside the U.S.--primarily distributors. To date, substantially all international sales except Japanese sales and WordPerfect international sales have been invoiced by the Company in U.S. dollars. In fiscal 1995 the Company anticipates that a substantial portion of international revenues will continue to be invoiced in U.S. dollars. The exceptions to the U.S. dollar invoicing will be Japanese sales through the Company's joint venture in Japan and certain European sales to non-multinational distributors that will be shipped from a new distribution center in Dublin, Ireland. No one foreign country accounted for more than 10% of net sales in any period. In fiscal 1994 the Company had one multinational distributor which accounted for 12% of revenue. The Company had two multinational distributors, which accounted for 15% and 11% of revenue in fiscal 1993 and 12% and 13% of revenue in fiscal 1992, respectively. Otherwise, no one customer accounted for more than 10% of revenue in any period. Marketing. The Company's marketing activities include distribution of sales literature and press releases, advertising, periodic product announcements, support of NetWare user groups, publication of technical and other articles in the trade press, and participation in industry seminars, conferences, and trade shows. The marketing departments of the Company employ many technical laboratories which test and evaluate networked computer equipment and individual devices. The knowledge derived from these laboratories is the basis for the technical publications published by the Company. These activities are designed to educate the market about local area networks in general, as well as to promote the Company's products. Through the Professional Developers Program, 7 8 the Company strongly supports independent software and hardware vendors in developing products that work on Novell networks. Thousands of multiuser application software packages are now compatible with the NetWare operating system. In March 1994, the tenth annual BrainShare Conference (formerly Developers' Conference) was held to inform and educate developers about Novell product strategy, Novell open architecture programming interfaces, and Novell third-party product certification programs. SERVICE, SUPPORT, AND EDUCATION The purpose of any service program is to help users get the most out of the products they buy. Novell offers a variety of support alternatives and encourages users to select the services that best meet their needs. These include the worldwide service and support organization, the Technical Support Alliance, the Certified Novell Engineer program, Novell Authorized Education Centers, the Independent Manaufacturer Support Program, and the Client-Server Testing Program. MANUFACTURING SUPPLIERS The Company's products, which consist primarily of software diskettes and manuals, are duplicated by outside vendors. This allows the Company to minimize the need for expensive capital equipment in an industry in which multiple high-volume manufacturers are available. BACKLOG Lead times for the Company's products are typically short. Consequently, the Company does not believe that backlog is a reliable indicator of future sales or earnings. The absence of significant backlog may contribute to unpredictability in the Company's net income and to fluctuations in the Company's stock price. See "Factors Affecting Earnings and Stock Price." The Company's backlog of orders at January 20, 1995, was approximately $51 million, compared with $35 million at January 21, 1994. COMPETITION Novell competes in the highly competitive market for computer software, including in particular, network and general purpose operating systems, network services, desktop operating systems and application software. Novell believes that the principal competitive factors are technical innovation to meet dynamic market needs, hardware independence and compatibility, marketing strength in operating systems and applications, system/performance, customer service and support, reliability, ease of use, price/performance, and connectivity with minicomputer and mainframe hosts. The market for operating systems software, including network and general purpose operating systems, client operating systems and application software, has become increasingly problematic due to Microsoft's growing dominance in all sectors of the software business. The Company does not have the product breadth and market power of Microsoft. Microsoft's dominant position provides it with enormous competitive advantages, including the ability to unilaterally determine the direction of future operating systems and to leverage its strength in one or more product areas to achieve a dominant position in new markets. This position may enable Microsoft to increase its market position even if the Company succeeds in introducing products with performance and features superior to those offered by Microsoft. Microsoft's ability to offer networking functionality in future versions of MS Windows and MS Windows NT and in any other Microsoft operating systems and application software, or to provide incentives to customers to purchase certain products in order to obtain favorable sales terms or necessary compatibility or information with respect to other products, may significantly inhibit the Company's ability to maintain its business. Moreover, Microsoft's ability to offer products on a bundled basis can be expected to impair the Company's competitive position with respect to particular products. In addition, as Microsoft creates new operating systems and applications, there can be no assurance that Novell will be able to ensure that its products will be compatible with those of Microsoft. 8 9 The Company is aware of several new competitive operating systems currently under development and scheduled for introduction within the next year and beyond. If any of these operating systems achieves market acceptance for use with the types of applications sold by Novell and Novell does not introduce application programs for them in a timely manner, Novell's business and results of operations could be materially adversely affected. In the market for MS Windows word processing applications, WordPerfect for MS Windows competes with, among others, Microsoft's Word and Lotus' Ami Pro. Novell believes that the Company's share of the Windows word processing market will be a critical factor in its future success. Although the Company has increased its share of this market during the past year, it remains second to Microsoft which has achieved a dominant position in sales of application software in the MS Windows market. The market for MS Windows applications is currently characterized by severe competitive pressure, and attempts by major participants to maintain or increase market can be expected to continue to result in rapid reductions in product prices. In addition, the Company's principal competitors, including Microsoft, are combining a number of application programs in a "bundle" or "suite" for sale as one unit or arranging with hardware manufacturers to preload application programs on new computers. The price for a bundle or suite is typically significantly less than the price for separately purchased applications, and many end users are likely to prefer the bundle or suite over a more expensive combination of other individually purchased applications, even if the latter applications offer superior performance or features. Microsoft, Lotus and the Company offer bundles or suites of their respective products at prices significantly discounted from the prices of stand alone products. In the past, Microsoft and Lotus have each achieved a significantly greater market share in sales of software suites. There can be no assurance that the new PerfectOffice suite offered by the Company will result in a significant increase in market share or that any such success will be sustained. To the extent that bundling, suites and preloading arrangements by competitors are more successful than those of the Company, the Company's business and results of operations could be materially adversely affected. LICENSES, PATENTS AND TRADEMARKS The Company relies on copyright, patent, trade secret and trademark law, as well as provisions in its license, distribution and other agreements in order to protect its intellectual property rights. Additionally, the Company has numerous patents pending in foreign countries. No assurance can be given that such patents pending will be issued or, if issued, will provide protection for the Company's competitive position. Although Novell intends to protect its patent rights vigorously, there can be no assurance that these measures will be successful. Additionally, no assurance can be given that the claims on any patents held by the Company will be sufficiently broad to protect the Company's technology. In addition, no assurance can be given that any patents issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. The loss of patent protection on the Company's technology or the circumvention of its patent protection by competitors could have a material adverse effect on the Company's ability to compete successfully in its products business. The software industry is characterized by frequent litigation regarding copyright, patent and other intellectual property rights. The Company has from time to time had infringement claims asserted by third parties against it and its products. While there are no known or pending threatened claims against the Company, the unsatisfactory resolution of which would have a material adverse effect on the Company's results of operations and financial condition, there can be no assurance that such third party claims will not be asserted, or if asserted, will be resolved in a satisfactory manner. In addition, there can be no assurance that third parties will not assert other claims against the Company with respect to any third-party technology. In the event of litigation to determine the validity of any third-party claims, such litigation could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation is determined in favor of the Company. In the event of an adverse result in any such litigation, the Company could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology which is the subject of the litigation. There can be no assurance that the Company would be successful in such development or that any such licenses would be available. In addition, the laws of certain countries in which Novell's products are or may be developed, manufactured or sold may not protect the Company's products and intellectual property rights to the 9 10 same extent as the laws of the United States. EMPLOYEES As of December 31, 1994, the Company had 7,914 employees. The functional distribution of its employees was: sales and marketing--2,097; product development and marketing--2,723; general and administrative--937; service, support and education--1,866; and operations--291. Of these, 375 employees are located in U.S. field offices, and 1,586 employees are in offices outside the U.S. All other Company personnel are based at the Company's facilities in Utah, California, and New Jersey. None of the employees is represented by a labor union, and the Company considers its employee relations to be excellent. Competition for qualified personnel in the computer industry is intense. To make a long-term relationship with the Company rewarding, Novell endeavors to give its employees and consultants challenging work, educational opportunities, competitive wages, sales commission plans, bonuses, and through stock option and purchase plans, opportunities to participate financially in the ownership and success of the Company. FACTORS AFFECTING EARNINGS AND STOCK PRICE In addition to factors described above under "Competition" which may adversely affect the Company's earnings and stock price, other factors may also adversely affect the Company's earnings and stock price. The successful combination of companies is difficult and in the high technology industry may be more difficult to accomplish than in other industries. There can be no assurance that Novell will be successful in integrating acquired businesses into its own, that it will retain their key technical and management personnel or that Novell will realize any other anticipated benefits of the acquisitions. The ability of the Company to maintain its competitive technological position will depend, in large part, on its ability to attract and retain highly qualified development and managerial personnel. Competition for such personnel is intense. While the acquisitions in fiscal 1993 and 1994 have increased the Company's human resources in these areas, there is a risk of departure of key employees due to the competitive environment in the software industry. The loss of a significant group of key personnel would adversely affect the Company's product development efforts. Approximately 80% and 86% of WordPerfect's revenues during 1993 and 1992, respectively, were derived from sales of various versions of WordPerfect's flagship document processing product, WordPerfect. Although additional products are currently being sold or developed, Novell believes that WordPerfect in its various forms will continue to be the Company's primary application product for the foreseeable future. As is common in the computer software industry, the Company has experienced delays in its product development and "debugging" efforts, and the Company can be expected to experience similar delays from time to time in the future. Significant delays in developing, completing or shipping new or enhanced products would adversely affect the Company. There can be no assurance that the Company will be able to respond effectively to technological changes or new product announcements by others, or that the Company's research and development efforts will be successful. In the past, Novell has experienced delays in the introduction of new products, due to the complexity of software products, the need for extensive testing of software to ensure compatibility of new releases with a wide variety of application software and hardware devices and the need to "debug" products prior to extensive distribution. Moreover, the Company may experience delays in market acceptance of new releases of its products as the Company engages in marketing and education of the user base regarding the advantages and system requirements for the new products and as customers evaluate the advantages and disadvantages of upgrading. The Company has encountered these issues on each major new release of its products, and expects that it will encounter such issues in the future. Novell's ability to achieve desired levels of sales growth depends at least in part on the successful completion, introduction and sale of new versions of its products. Should Novell experience material 10 11 delays or sales shortfalls with respect to these product releases, the Company's sales and net income could be adversely affected. A fundamental goal of the Company will be the delivery of workgroup application solutions combining networking services and workgroup applications. The future success of this strategy will depend in part on the Company's ability to develop and market new competitive products for workgroup productivity and information processing. Development of these products has already required and will continue to require a substantial investment in research and development, particularly as a result of the decision to offer products across multiple operating environments. Although Novell's existing network of distributors should assist in this transition, marketing and distribution of these products may require developing new marketing and sales strategies and will entail significant expense. The Company has had only limited experience in the market for these products, and there can be no assurance that the Company will be successful in developing and marketing these new products. The Company's future earnings and stock price could be subject to significant volatility, particularly on a quarterly basis. The Company's revenues and earnings may be unpredictable due to its anticipated shipment patterns. As is typical in the software industry, a high percentage of the Company's revenues are expected to be earned in the third month of each fiscal quarter and will tend to be concentrated in the latter half of that month. Accordingly, quarterly financial results will be difficult to predict and quarterly financial results may fall short of anticipated levels. Because the Company's backlog early in a quarter will not generally be large enough to assure that it will meet its revenue targets for any particular quarter, quarterly results may be difficult to predict until the end of the quarter. A shortfall in shipments at the end of any particular quarter may cause the results of that quarter to fall significantly short of anticipated levels. Due to analysts' expectations of continued growth and the historically high price/earnings ratio at which Novell's Common Stock trades, any such shortfall in earnings can be expected to have an immediate and very significant adverse effect on the trading price of Novell's Common Stock in any given period. The past pattern of new application and operating system product introductions has caused revenues to fluctuate, sometimes significantly, on a quarter-by-quarter basis. Such revenue fluctuations may contribute to the volatility of the trading price of Novell Common Stock in any given period. The acquisitions in fiscal 1994 have resulted in greater involvement by Novell in the market for applications software. To compete successfully in the applications market, Novell anticipates incurring significantly higher expenditures in sales, marketing and customer support as a percent of net sales than is typically incurred in the sale of operating systems. Accordingly, the Company can be expected to incur greater operating expenses, both in aggregate dollars and as a percentage of total net sales, than Novell has incurred in the past. Although the Company will seek to offset such higher operating costs through higher sales levels derived from a broader product offering and continued cost controls, there can be no assurance that the Company will be successful in such efforts. In addition, the market prices for securities of software companies have generally been volatile in recent years. The market price of Novell Common Stock, in particular, has been subject to wide fluctuations in the past. As a result of the foregoing factors and other factors that may arise in the future, the market price of Novell's Common Stock may be subject to significant fluctuations within a short period of time. These fluctuations may be due to factors specific to the Company, to changes in analysts' earnings estimates, or to factors affecting the computer industry or the securities markets in general. 11 12 ITEM 1a. Executive Officers of the Registrant Set forth below are the names, ages, titles with Novell, and present and past positions of the persons currently serving as executive officers of Novell.
HAS BEEN OFFICER NAME AGE SINCE POSITION OR OFFICE - ---- --- ----- ------------------ Robert J. Frankenberg 47 1994 Chairman of the Board, President, and Chief Executive Officer Mary M. Burnside 47 1989 Executive Vice President and Chief Operating Officer Michael J. DeFazio 48 1994 Executive Vice President, UNIX Systems Group Richard W. King 38 1993 Executive Vice President, NetWare Systems Group Joseph A. Marengi 41 1993 Executive Vice President, Worldwide Sales Steven Markman 49 1994 Executive Vice President, Information Access & Management Group Adrian Rietveld 40 1994 Executive Vice President, Novell Applications Group James R. Tolonen 45 1989 Executive Vice President and Chief Financial Officer David R. Bradford 44 1986 Senior Vice President, General Counsel, and Corporate Secretary Ernest J. Harris 47 1994 Senior Vice President, Human Resources Christine G. Hughes 48 1994 Senior Vice President, Corporate Marketing John C. Lewis 40 1994 Senior Vice President, Services and Support David C. Moon 36 1994 Senior Vice President, Development, Applications Group R. Duff Thompson 43 1994 Senior Vice President, Corporate Development Stephen C. Wise 40 1990 Senior Vice President, Finance Darcy G. Mott 42 1989 Treasurer
Raymond J. Noorda, a founder of the Company, was President, Chief Executive Officer, and a director of the Company since March 1983, and Chairman of the Board since January 1986. In April 1994 he resigned as President and Chief Executive Officer, in August 1994 as Chairman of the Board, and in October as a Member of the Board of Directors. Robert J. Frankenberg joined the Company in April 1994 as President and Chief Executive Officer. In August 1994 he became Chairman of the Board of Directors. Prior to joining Novell, he was with Hewlett Packard, an international computation and measurement company, for 25 years in various engineering, management and marketing positions. Most recently he served as Vice President and General Manager of the Personal Information Products Group. Mary M. Burnside joined the Company in January 1988 and in January 1989 she became Senior Vice President, Operations and was elected a corporate officer. In November 1991 she became Executive Vice President, Corporate Services Group. In August 1993 she joined the Office of the President as Chief Operating Officer. In April 1994 she became Executive Vice President and Chief Operating Officer. Michael J. DeFazio joined the Company as Vice President, UNIX Systems Group, when the Company acquired USL in June 1993. In January 1994 he became Executive Vice President, UNIX Systems Group and was 12 13 elected a corporate officer. Prior to the USL acquisition, he had been with USL since its formation in 1989, most recently as Executive Vice President, UNIX System V Software since 1989. John W. Edwards joined the Company in August 1988 and held various marketing positions until April 1992 when he became Executive Vice President, Desktop Systems Group and was elected a corporate officer. In August 1993 he became Executive Vice President, AppWare Systems Group. In October 1994 he became Senior Vice President, Customer Relations and resigned as a corporate officer. Richard W. King joined the Company in 1985 and became Vice President, Software Development in April 1986. In September 1987 he became Vice President, NetWare Products Division and in September 1991 he became Vice President, Service and Support. In August 1993 he was promoted to Executive Vice President, NetWare Systems Group and was elected a corporate officer. Joseph A. Marengi joined the Company in June 1989 through the Excelan merger and held various sales positions with the Company until October 1992 when he became Senior Vice President, Worldwide Sales. In August 1993 he was elected a corporate officer. In April 1994 he became Executive Vice President, Worldwide Sales. Kanwal S. Rekhi joined the Company in June 1989 through the Excelan merger and became an Executive Vice President and Director of the Company. He served in this capacity until January 1995, when he resigned from the Company. He continues to serve as a consultant to the Company and as a member of the Board of Directors. Steven Markman joined the Company in August 1994 as Executive Vice President, Information Access & Management Group. From March 1994 to August 1994 he was with First Pacific Networks, Inc., a cable telephony company as Vice President of Engineering. From April 1991 to February 1994 he was with Network Equipment Technologies, Inc., a network systems company as Senior Vice President and General Manager. From June 1988 to April 1991 he was with Hewlett Packard, an international computation and measurement company, where he served most recently as General Manager for the Information Networks Division. Adrian Rietveld joined the Company in June 1994 through the WordPerfect merger as Executive Vice President, Novell Applications Group and was elected a corporate officer. He joined WordPerfect in 1988 and served in various positions until November 1992 when he became Senior Vice President, Sales and Marketing. In January 1994 he was promoted to President and Chief Executive Officer of WordPerfect. James R. Tolonen, a Certified Public Accountant, joined the Company in June 1989 through the Excelan merger and became a Senior Vice President and Chief Financial Officer in August 1989 and was elected a corporate officer. In August 1993 he joined the Office of the President as Chief Financial Officer. In April 1994 he became Executive Vice President and Chief Financial Officer. David R. Bradford joined the Company in October 1985 as Corporate Counsel. He became Corporate Secretary in January 1986, Senior Corporate Counsel in April 1986, and Senior Vice President, General Counsel, and Corporate Secretary in April 1989. Robert W. Davis joined the Company in June 1989 through the Excelan merger and held various marketing positions until November 1992 when he became Vice President, Connectivity Products. In August 1993 he became Vice President Marketing, UNIX Systems Group. In January 1994 he became Senior Vice President, Corporate Marketing and was elected a corporate officer. In September 1994 he resigned from the Company. Ernest J. Harris joined the Company in June 1989 through the Excelan merger and became Vice President, Human Resources in August 1989. In May 1990 he became Senior Vice President, Human Resources and in January 1994 was elected a corporate officer. 13 14 Christine G. Hughes joined the Company in December 1994 as Senior Vice President, Corporate Marketing. From July 1991 to November 1994 she was with Xerox Corporation, a worldwide provider of document services, in various positions, most recently as Vice President, Integrated Marketing -- U.S. Operations. From January 1990 to July 1991 she was President of Myriad Technologies, a market research and consulting company. From 1983 to 1989 she was with Gartner Group, a technology market research company, as Vice President, Office Technology Group. John C. Lewis joined the Company in June 1994 through the WordPerfect merger and became Senior Vice President, Services and Support in October 1994 and was elected a corporate officer. He joined WordPerfect in February 1985 and served in various positions prior to the merger, most recently as Executive Vice President in the Office of the President. David C. Moon joined the Company in June 1994 through the WordPerfect merger and became Senior Vice President, Development, Applications Group in October 1994 and was elected a corporate officer. He joined WordPerfect in December 1982 and served in various positions prior to the merger, most recently as Senior Vice President and Chief Technology Officer. Jan E. Newman joined the Company in June 1986 and held various positions until March 1991 when he became Vice President, Support and Services. He was made Vice President, NetWare Products in November 1991. In April 1992 he became Executive Vice President, NetWare Systems Group and was elected as a corporate officer. In August 1993 he became Senior Vice President, Service and Support and Novell Labs. In October 1994 he became Vice President, Services and Support and resigned as a corporate officer. R. Duff Thompson joined the Company in June 1994 through the WordPerfect merger and became Senior Vice President, Corporate Development in October 1994 and was elected a corporate officer. He joined WordPerfect in December 1986 and served most recently as Executive Vice President in the Office of the President and General Counsel. Stephen C. Wise joined the Company in June 1989 through the Excelan merger and became Vice President, Accounting and Planning in January 1990 and was elected a corporate officer. In January 1991 he became Vice President and Corporate Controller and in December 1993 he became Senior Vice President, Finance. Darcy G. Mott, a Certified Public Accountant, joined the Company in September 1986. He served in various finance positions and became Corporate Controller in February 1989. He was elected a corporate officer in November 1989 and became Treasurer in January 1991. 14 15 ITEM 2. Properties The Company owns and occupies a 1,000,000 square-foot office complex on 99 acres in Orem, Utah, which is used as corporate headquarters and a product development center. It also owns and occupies a 550,000 square-foot office complex on 46 acres in Provo, Utah, which is used as a product development center. It also owns a 380,000 square-foot manufacturing and distribution facility on 23 acres in Lindon, Utah, all but 40,000 square-feet of which is leased to a third party manufacturer. The Company also owns a 175,000 square-foot office complex in Austin, Texas. During 1991 through 1994, approximately 80,000 square-feet of this complex was used as a product development center however, the facility is now leased to tenants. Additionally, the Company owns a 100,000 square-foot office building in Herndon, Virginia. The Company occupies approximately 1/2 of the space in this building and leases the remainder to tenants. The Company also owns a 52,000 square foot building in San Jose, California, which it had previously leased. It is used primarily for product development. Additionally, the Company owns approximately 48 acres of undeveloped land in San Jose, California and has capacity to expand on its land in Orem and Provo, Utah. The Company has subsidiaries in Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Commonwealth of Independent States, Czech Republic, Denmark, Finland, France, Germany, India, Italy, Japan, Korea, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, and the United Kingdom--each of which leases its facilities. The Company leases offices for product development in San Jose, Scotts Valley, Sunnyvale, and Walnut Creek, California; Boulder, Colorado; Summit, New Jersey; Salt Lake City and Sandy, Utah; Toronto, Canada; and Hungerford, U.K.; and a distribution facility in San Jose, California. The Company also leases sales and support offices in Arizona, California (6), Colorado, Connecticut, Florida (2), Georgia, Illinois (2), Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York (2), North Carolina, Ohio (2), Oregon, Pennsylvania (2), Tennessee, Texas (2), Utah, Washington, Hong Kong, Taiwan, and United Arab Emirates. The terms of such leases vary from month to month to up to ten years. ITEM 3. Legal Proceedings On November 10, 1993, a suit was filed against Novell and certain of its officers and directors alleging violation of federal securities laws. Another lawsuit alleging similar claims was filed August 26, 1994. Both lawsuits were brought as purported class actions on behalf of purchasers of Novell common stock. Novell does not believe that the resolution of these legal matters will have a material adverse effect on its financial position or results of operations. In December of 1991, Roger Billings and his International Academy of Science, (the Academy) filed suit against Novell alleging that the Company infringes on a patent allegedly owned by the Academy. On June 6, 1994, Novell filed a petition with the U.S. Patent and Trademark Office requesting it invalidate the patent. In August 1994, the Patent Office granted Novell's request for re-examination of the patent, finding a "substantial new question of patentability." Also, in August of 1994, the trial court issued a ruling, which among other things, vacated the trial date which had been previously set in the action. The Company believes that the ultimate resolution of this legal proceeding will not have a material adverse effect on its financial position or results of operation. The Company is a party to a number of additional legal proceedings arising in the ordinary course of its business. The Company believes the ultimate resolution of these claims will not have a material adverse effect on its financial position or results of operations. 15 16 ITEM 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters The information required by Item 5 of Form 10-K is incorporated herein by reference to the information contained in the section captioned "Selected Consolidated Quarterly Financial Data" on page 41 of the Company's Annual Report to Shareholders for the fiscal year ended October 29, 1994. ITEM 6. Selected Financial Data The information required by Item 6 of Form 10-K is incorporated herein by reference to the information contained in the section captioned "Selected Consolidated Financial Data" on page 22 of the Company's Annual Report to Shareholders for the fiscal year ended October 29, 1994. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by Item 7 of Form 10-K is incorporated herein by reference to the information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 23 through 27 of the Company's Annual Report to Shareholders for the fiscal year ended October 29, 1994. ITEM 8. Financial Statements and Supplementary Data The information required by Item 8 of Form 10-K is incorporated herein by reference to the Company's consolidated financial statements and related notes thereto, together with the report of the independent auditors presented on pages 28 through 40 of the Company's Annual Report to Shareholders for the fiscal year ended October 29, 1994, and to the information contained in the section captioned "Selected Consolidated Quarterly Financial Data" on page 41 of the Company's Annual Report to Shareholders for the fiscal year ended October 29, 1994. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 16 17 PART III ITEM 10. Directors and Executive Officers of Registrant The information required with respect to identification of directors is incorporated herein by reference to the information contained in the section captioned "Election of Directors" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 12, 1995, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended. Information regarding executive officers of Novell is set forth under the caption "Executive Officers" in Item 1a hereof. Each director and each officer of the Company who is subject to Section 16 of the Securities Exchange Act of 1934 (the "Act") is required by Section 16(a) of the Act to report to the Securities and Exchange Commission by a specified date his or her transactions in the Company's securities. In fiscal 1994, there were no compliance exceptions to this requirement. ITEM 11. Executive Compensation The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the sections captioned "Executive Compensation" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 12, 1995, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. ITEM 12. Security Ownership of Certain Beneficial Owners and Management The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in the section captioned "Securities Ownership of Certain Beneficial Owners and Management" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 12, 1995, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. ITEM 13. Certain Relationships and Related Transactions The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in the section captioned "Certain Transactions" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 12, 1995, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Act of 1934, as amended. 17 18 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) The following documents are filed as a part of this annual report on Form 10-K for Novell, Inc.: 1. The Consolidated Financial Statements, the Notes to Consolidated Financial Statements and the Report of Ernst & Young LLP, Independent Auditors, listed below are incorporated herein by reference to pages 28 through 40 of the Company's Annual Report to Shareholders for the fiscal year ended October 29, 1994. Consolidated Statements of Income for the fiscal years ended October 29, 1994, October 30, 1993, and October 31, 1992. Consolidated Balance Sheets at October 29, 1994 and October 30, 1993. Consolidated Statements of Shareholders' Equity for the fiscal years ended October 29, 1994, October 30, 1993, and October 31, 1992. Consolidated Statements of Cash Flows for the fiscal years ended October 29, 1994, October 30, 1993, and October 31, 1992. Notes to Consolidated Financial Statements. Report of Ernst & Young LLP, Independent Auditors. _______________________________________________________
Page ---- Report of Price Waterhouse LLP, Independent Accountants 20 2. Financial Statement Schedules: Schedule VIII -- Valuation and Qualifying Accounts 21 Schedules other than that listed above are omitted because they are not required, not applicable or because the required information is shown in the consolidated financial statements or notes thereto. 3. Exhibits: A list of the exhibits required to be filed as part of this report is set forth in the Exhibit Index, which immediately precedes such exhibits, and is incorporated herein by this reference thereto. 22 (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the quarter ended October 29, 1994.
18 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Novell, Inc. (Registrant) Date: January 23, 1995 By /s/ Robert J. Frankenberg ------------------------- (Robert J. Frankenberg Chairman of the Board, President and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ Robert J. Frankenberg Chairman of the Board, January 23, 1995 - --------------------------------- President, Chief Executive (Robert J. Frankenberg) Officer and Director (Principal Executive Officer) /s/ James R. Tolonen Executive Vice President January 23, 1995 - --------------------------------- and Chief Financial Officer (James R. Tolonen) (Principal Financial Officer) /s/ Stephen C. Wise Senior Vice President, Finance January 23, 1995 - --------------------------------- (Principal Accounting Officer) (Stephen C. Wise) /s/ Alan C. Ashton Director January 23, 1995 - --------------------------------- (Alan C. Ashton, Ph.D.) /s/ Bruce W. Bastian Director January 23, 1995 - --------------------------------- (Bruce W. Bastian) /s/ Elaine R. Bond Director January 23, 1995 - --------------------------------- (Elaine R. Bond) /s/ Jack L. Messman Director January 23, 1995 - --------------------------------- (Jack L. Messman) /s/ Kanwal S. Rekhi Director January 23, 1995 - --------------------------------- (Kanwal S. Rekhi) /s/ Larry W. Sonsini Director January 23, 1995 - --------------------------------- (Larry W. Sonsini) /s/ Ian R. Wilson Director January 23, 1995 - --------------------------------- (Ian R. Wilson)
19 20 REPORT OF PRICE WATERHOUSE LLP, INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of WordPerfect Corporation In our opinion, the consolidated balance sheet and the related consolidated statements of income, shareholders' equity and of cash flows (not presented separately herein) of WordPerfect Corporation present fairly, in all material respects, the financial position of WordPerfect Corporation and its subsidiaries at December 31, 1993 and the results of their operations and their cash flows for the years ended December 31, 1993 and 1992, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP Salt Lake City, Utah March 22, 1994 20 21 NOVELL, INC. SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS
Accounts Receivable Allowance --------------------------------------------------------------------- (In thousands) Balance at Additions Balance at Beginning Charged to End of of Period Operations Deductions(1) Period ---------- ---------- ------------- ------ Fiscal year ended October 31, 1992 $23,300 $15,983 $784 $38,499 Fiscal year ended October 30, 1993 $38,499 $22,047 $10,344 $50,202 Fiscal year ended October 29, 1994 $50,202 $43,037 $10,305 $82,934
(1) Write-off of uncollectible accounts 21 22 EXHIBIT INDEX
Exhibit Number Description - ------ ----------- 3.1 Restated Certificate of Incorporation.(4) (Exhibit 3.1) 3.2 By-Laws.(1) (Exhibit 3.1) 4.1 Reference is made to Exhibit 3.1. 4.2 Form of certificate representing the shares of Novell Common Stock.(1) (Exhibit 4.3) 4.3 Rights Agreement dated December 7, 1988, between Novell, Inc. and Mellon Bank (East) N.A., as Rights Agent, relating to the Shareholder Rights Plan.(3) (Exhibit 1) 10.1 Novell, Inc., Employee Retirement and Savings Plan dated December 8, 1986.(2) (Exhibit 10.9) 10.2 Agreement and Plan of Reorganization dated March 23, 1989, among Novell, Inc.; Lansub Corporation; and Excelan, Inc.(5) (Appendix A) 10.3 Novell, Inc. 1989 Employee Stock Purchase Plan.(6) (Exhibit 4.1) 10.4 Agreement and Plan of Reorganization dated July 16, 1991, among Novell, Inc.; MDAC Corp.; and Digital Research Inc.(7) (Appendix A) 10.5 Novell, Inc. 1991 Stock Plan.(8) (Exhibit 10.1) 10.6 Agreement and Plan of Reorganization and Merger dated February 12, 1993, among Novell, Inc.; Novell Acquisition Corp.; UNIX System Laboratories, Inc.; and American Telephone and Telegraph Company.(9) (Appendix A). 10.7 UNIX System Laboratories, Inc. Stock Option Plan.(10) (Exhibit 4.3) 10.8 Agreement and Plan of Reorganization dated March 21, 1994 and amended May 31, 1994, among Novell, Inc.; Novell Acquisition Corp.; WordPerfect Corporation, Alan C. Ashton, Bruce W. Bastian, and Melanie L. Bastian.(11) (Appendix A & Exhibit 1.1) 10.9 Novell, Inc. Novell/WordPerfect Stock Plan.(12)(Exhibit 10.1) 11 Statement regarding computation of per share earnings.(13) 13 Company's Annual Report to Shareholders for the fiscal year ended October 29, 1994.(13) 21 Subsidiaries of the Registrant.(13) 23.1 Consent of Ernst & Young LLP, independent auditors.(13) 23.2 Consent of Price Waterhouse LLP, independent accountants.(13) 27 Financial Data Schedule(13) (1) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-1, filed November 30, 1984, and amendments thereto (File No. 2-94613). (2) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Annual Report on Form 10-K, filed for the fiscal year ended October 25, 1986 (File No. 0-13351). (3) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Current Report on Form 8-K, dated December 7, 1988 (File No. 0-13351). (4) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Annual Report on Form 10-K, filed for the fiscal year ended October 29, 1988 (File No. 0-13351). (5) Incorporated by reference to the Appendix identified in parentheses, filed as an appendix in the Registrant's Registration Statement on Form S-4, filed May 9, 1989 (File No. 33-28470). (6) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-8, filed September 28, 1989 (File No. 33-31299). (7) Incorporated by reference to the Appendix identified in parentheses, filed as an appendix in the Registrant's Registration Statement on Form S-4, filed September 24, 1991 (File No. 33-42254). (8) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-8, filed June 5, 1992 (File No. 33-48395). (9) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement of Form S-4, filed May 13, 1993 (File No. 33-60120). (10) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-8, filed July 2, 1993 (File No. 33-65440). (11) Incorporated by reference to the Appendix and Exhibit identified in parentheses, filed as an appendix and exhibit in the Registrant's Registration Statement on Form S-4, filed June 13, 1994 (File No. 33-53215). (12) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrants' Registration Statement of Form S-8, filed July 8, 1994 (File No. 33-54483). (13) Filed herewith.
22 EX-11 2 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 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):
Fiscal Year Ended ----------------- October 31, 1992 October 30, 1993 October 29, 1994 ---------------- ---------------- ---------------- Weighted average number of common shares outstanding* 348,245 358,490 361,648 Number of common share equivalents resulting from stock options, computed using the treasury stock method* 11,239 9,410 6,684 ------- ------- ------- Number of common and common share equivalents used in computation* 359,484 367,900 368,332 ======= ======= =======
*All share amounts reflect the August 26, 1992 two-for-one stock split and the June 1994 merger with WordPerfect Corporation. EX-13 3 COMPANY'S ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 SELECTED CONSOLIDATED FINANCIAL DATA DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
OCT. 29 Oct. 30 Oct. 31 Oct. 26 Oct. 27 1994 1993 1992 1991 1990 - --------------------------------------------------------------------------------------------------- STATEMENT OF INCOME Net sales $1,998,077 $1,830,411 $1,512,488 $1,262,073 $1,003,444 Gross profit 1,531,011 1,427,809 1,185,781 994,831 783,965 Income from operations 269,943 108,098 428,146 428,673 331,209 Income before taxes 297,383 138,157 461,807 461,212 351,840 Income taxes 90,652 97,437 139,829 97,896 58,872 Net income 206,731 40,720 321,978 363,316 292,968 Net income per share .56 .11 .90 1.05 .90 - --------------------------------------------------------------------------------------------------- BALANCE SHEET Cash and short-term investments $ 861,809 $ 719,197 $ 631,829 $ 513,113 $ 362,109 Working capital 990,411 859,308 727,068 561,653 397,166 Total assets 1,963,481 1,745,337 1,430,475 1,133,500 789,068 Long-term debt -- 84,289 12,256 2,471 10,816 Shareholders' equity 1,486,987 1,146,026 1,115,047 884,282 603,438 - --------------------------------------------------------------------------------------------------- KEY RATIOS Current ratio 3.1 3.2 3.5 3.4 3.3 Return on sales 10% 2% 21% 29% 29% Return on average total assets 11% 3% 25% 38% 45% Return on average equity 16% 4% 32% 49% 63% - --------------------------------------------------------------------------------------------------- GROWTH PERCENTAGES Net sales 9% 21% 20% 26% 36% Net income 408% -87% -11% 24% 95% Net income per share 409% -88% -14% 17% 91% ===================================================================================================
22. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Novell's business is connecting people with other people and the information they need, enabling them to act on it anytime, anyplace. Novell is a leading provider of networking and application software. The Company's software products provide the distributed infrastructure, network services, advanced network access and network applications required to make networked information and computing an integral part of everyone's daily life. Over the past several years, the Company has issued common stock or paid cash to acquire technology companies, invested cash in other technology companies, and formed strategic alliances with still other technology companies. Novell undertook all of these transactions to promote a pervasive computing environment, and in many cases to also broaden the Company's business as a system and application software supplier. In June 1994, the Company completed a merger with WordPerfect Corporation (WordPerfect) whereby WordPerfect was merged directly into Novell. Approximately 51 million shares of Novell common stock were exchanged for all of the outstanding common stock of WordPerfect. In addition, the outstanding employee stock options to purchase WordPerfect common stock were converted into options to purchase approximately 8 million shares of Novell common stock. The transaction was accounted for as a pooling of interests and therefore, all prior period financial statements presented herein have been restated as if the merger took place at the beginning of such periods. Additionally, in June 1994, the Company acquired from Borland International, Inc. its Quattro Pro spreadsheet product line for $110 million of cash and assumed liabilities of $10 million, and purchased a three year license to reproduce and distribute up to one million copies of current and future versions of Borland's Paradox relational database product for $35 million of cash. The transaction was accounted for as a purchase and, on this basis, resulted in a one-time write-off of $114 million for purchased research and development. In June 1993, the Company acquired UNIX System Laboratories, Inc. (USL) by issuing approximately 11 million shares of Novell common stock valued at $322 million in exchange for all of the outstanding stock of USL not previously owned by Novell and assumed liabilities of $9 million. The transaction was accounted for as a purchase and, on this basis, resulted in a one-time write-off of $269 million for purchased research and development in the third quarter of fiscal 1993. The Company will continue to look for similar acquisitions, investments or strategic alliances which it believes complement its overall business strategy.
RESULTS OF OPERATIONS NET SALES 1994 Change 1993 Change 1992 - -------------------------------------------------------------------------------- Net sales (millions) $1,998 9% $1,830 21% $1,512 ================================================================================
With the acquisition of WordPerfect in fiscal 1994 and USL in fiscal 1993, Novell has redefined itself into four product groups, all within the software industry. They are the NetWare Systems Group, the Novell Applications Group, the UNIX Systems Group, and the Information Access and Management Group. While revenue has increased in both fiscal 1994 and fiscal 1993, analysis of the individual product groups characterizes the changes that have occurred. The NetWare Systems Group (NSG) represented 46% of total revenues in fiscal 1994, 45% in fiscal 1993 and 50% in fiscal 1992. NSG revenues grew by 11% in fiscal 1994 compared to fiscal 1993, and by 8% in fiscal 1993 compared to fiscal 1992. Most of the growth in both years has been in the NetWare 3 and 4 product families while NetWare 2 has decreased each year. The Novell Applications Group (NAG) represented 30% of total revenues in fiscal 1994, 39% in fiscal 1993, and 38% in fiscal 1992. NAG revenues decreased by 17% in fiscal 1994 compared to fiscal 1993, and increased by 22% in fiscal 1993 compared to fiscal 1992. The decrease in fiscal 1994 is primarily the result of a decrease in WordPerfect for DOS revenues. The increase in fiscal 1993 compared to fiscal 1992 was the result of a strong increase in WordPerfect for Windows, offset by a smaller decline in WordPerfect for DOS. 23. 3 The UNIX Systems Group (USG) represented 9% of total revenues in fiscal 1994, 3% in fiscal 1993 and 0% in fiscal 1992. The change between years is attributable to the fact that USL was acquired in June 1993, and therefore fiscal 1993 included only 4 1/2 months of USL revenues subsequent to the merger date, while there were no USG revenues in fiscal 1992. Additionally, in the second quarter of fiscal 1994, the Company sold a one-time fully paid license for UNIX technology to Sun Microsystems for $81 million, representing 4% of total revenue for the Company for the year. The Information Access and Management Group (IAMG) represented 11% of total revenues in fiscal 1994, 9% in fiscal 1993 and 8% in fiscal 1992. IAMG revenues grew by 28% in fiscal 1994 compared to fiscal 1993, and by 48% in fiscal 1993 compared to fiscal 1992. Most of the growth in fiscal 1994 was attributable to connectivity products, while the growth in fiscal 1993 also included strong increases in communications products. International sales represented 43% of total sales in both fiscal 1994 and 1993, and 44% of total sales in fiscal 1992. The Company expects that international sales will continue to grow at least at the same rate as domestic sales in fiscal 1995.
GROSS PROFIT 1994 Change 1993 Change 1992 - ------------------------------------------------------------------------------------- Gross profit (millions) $1,531 7% $1,428 20% $1,186 Percentage of net sales 77% 78% 78% =====================================================================================
In connection with the Sun Microsystems transaction described above, the Company expensed certain software and other intangibles remaining on the balance sheet related to the USL acquisition in fiscal 1993. Accordingly, $35 million of costs associated with the sale of the license to Sun Microsystems were charged to cost of sales during the second quarter of fiscal 1994, resulting in a lower gross profit percentage in fiscal 1994. Future fluctuations in gross profit margins will be primarily attributable to price changes, changes in sales mix by product or distribution channel, and special product promotions.
OPERATING EXPENSES 1994 Change 1993 Change 1992 - ------------------------------------------------------------------------------------- Sales and marketing (millions) $562 10% $510 34% $380 Percentage of net sales 28% 28% 25% Product development (millions) $347 19% $290 28% $227 Percentage of net sales 17% 16% 15% General and administrative (millions) $162 -1% $163 25% $130 Percentage of net sales 8% 9% 9% =====================================================================================
Sales and marketing expenses have remained flat as a percentage of net sales in fiscal 1994 compared to fiscal 1993, however, increased as a percentage of net sales from fiscal 1992 to fiscal 1993. Sales and marketing expenses fluctuate as a percentage of net sales in any given period due to product promotions, advertising or other discretionary expenses. Product development expenses have increased as a percentage of net sales in each of the past two fiscal years, particularly from the acquisitions in fiscal 1993 and from planned headcount increases in an effort to increase the Company's investment in new products in both years. General and administrative expenses have decreased as a percentage of net sales in fiscal 1994, compared to fiscal 1993 and 1992. The decrease is primarily attributable to lower bad debt expenses in fiscal 1994 compared to fiscal 1993 and 1992. 24. 4
OPERATING EXPENSES (CONTINUED) 1994 Change 1993 Change 1992 - ------------------------------------------------------------------------------------------- Restructuring charges (millions) $ 51 -- $ 42 -- -- Percentage of net sales 3% 2% -- Other nonrecurring charges (millions) $ 139 -- $ 315 -- $ 20 Percentage of net sales 7% 17% 1% Total operating expenses (millions) $1,261 -4% $1,320 74% $758 Percentage of net sales 63% 72% 50% ===========================================================================================
During the fourth quarter of fiscal 1994, the Company incurred a restructuring charge of $51 million. In September, the Company formulated a plan, whereby duplicate facilities, excess personnel, and products to be discontinued were identified. The restructuring charge includes $26 million related to redundant or excess facilities and equipment costs which are being closed or abandoned. Operating expenses related to such facilities and equipment up to the time of closure or abandonment were not included in the restructuring charge. Additionally, $16 million of the restructuring charge related to employee severance costs for approximately 1,100 employees who have been or will be terminated. The charge does not include salaries and wages paid to such employees up to their termination date, nor does it include any expenses related to an additional 650 employees who are being transferred to third parties to perform outsourced functions such as manufacturing. The remaining $9 million of the restructuring charge relates to products which have been eliminated from the Company's product lines. Anticipated savings from this restructuring plan is estimated to be approximately $50 million per year. In the third quarter of fiscal 1993 a restructuring charge of $42 million was incurred, most of which related to a reduction in force and facilities at WordPerfect. A portion of this restructuring had been completed before the end of fiscal 1994; however, approximately $15 million of the original liability remains to be expended in fiscal 1995. In fiscal 1994, 1993 and 1992, the Company incurred other nonrecurring charges, primarily related to the write-off of purchased research and development in connection with acquisitions. In fiscal 1994 the charges related primarily to the write-off of $114 million of tax deductible purchased research and development in connection with the acquisition of the Quattro Pro spreadsheet product line from Borland International, Inc. During the first quarter of fiscal 1994, the Company also wrote off $15 million of non-tax deductible purchased research and development in connection with the acquisition of SoftSolutions. The remaining $10 million of nonrecurring charges in fiscal 1994 related primarily to one-time expenses incurred to align the Novell and WordPerfect employee benefit plans. In fiscal 1993 the Company wrote off $315 million of non-tax deductible purchased research and development in connection with the acquisitions of USL, Serius Corporation and Fluent, Inc., and a personal information manager software product. In fiscal 1992 the Company wrote off $20 million of non-tax deductible purchased research and development in connection with the acquisitions of Reference Software International, Beagle Bros., Inc. and MagicSoft, Inc. Overall, operating expenses excluding nonrecurring charges have grown more rapidly than revenues in fiscal 1994 compared to 1993 due to higher product development expenses. Operating expenses excluding nonrecurring charges in fiscal 1993 grew more rapidly than revenues due to higher discretionary sales and marketing expenses. 25. 5
1994 Change 1993 Change 1992 - ------------------------------------------------------------------------------ Employees 8,457 -19% 10,451 21% 8,621 Revenue per employee (thousands) $211 $192 $198 ==============================================================================
Early in fiscal 1994 WordPerfect reduced its workforce by approximately 1,000 employees. Subsequent to the merger between Novell and WordPerfect, there was an additional reduction in force of approximately 1,100. During the first half of fiscal 1995 an additional 650 employees' functions will be outsourced as part of the restructuring.
OTHER INCOME (EXPENSE) 1994 Change 1993 Change 1992 - ----------------------------------------------------------------------------- Other income (expense), net (millions) $27 -9% $30 -11% $34 Percentage of net sales 1% 2% 2% =============================================================================
The primary component of other income (expense) is investment income, which was $36 million, $28 million and $31 million in fiscal 1994, 1993 and 1992, respectively. The increase in fiscal 1994 compared to fiscal 1993 is attributable to a larger investment portfolio from cash generated from operations in excess of cash used in acquisitions. The decrease in fiscal 1993 compared to fiscal 1992 is attributable to a smaller investment portfolio due to a cash distribution to WordPerfect shareholders at the end of fiscal 1992. In order to achieve potentially higher returns, a limited portion of the Company's investment portfolio is invested in mutual funds which incur some market risk. The Company believes that the market risk has been limited by diversification and by use of a funds management timing service which switches funds out of mutual funds and into money market funds when preset signals occur. In fiscal 1994, offsetting investment income were merger expenses and interest expense related to notes payable to the WordPerfect shareholders. Required adoption of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, and Statement of Financial Accounting Standards No. 119, Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments, both in the first quarter of fiscal 1995, is not expected to have a material impact on the consolidated financial statements of the Company.
INCOME TAXES 1994 Change 1993 Change 1992 - ------------------------------------------------------------------------------ Income taxes (millions) $91 -7% $97 -30% $140 Percentage of net sales 5% 5% 9% Effective tax rate 31% 71% 30% ==============================================================================
The effective tax rate for fiscal 1994 is lower than the fiscal 1993 effective tax rate primarily as a result of WordPerfect's prior S corporation status change to C corporation status and the impact of non-tax deductible charges for purchased research and development. Excluding non-tax deductible one-time charges related to the write-off of purchased research and development of $15 million in fiscal 1994, $315 million in fiscal 1993, and $20 million in fiscal 1992, and adjusting all periods to reflect a provision for income taxes as if WordPerfect and its S corporation subsidiaries had never been S corporations, the Company's effective tax rate would have been 34% for fiscal 1994, and 33% for fiscal 1993 and 1992. The increase in fiscal 1994 is attributable to non-tax deductible merger expenses. The Company adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, in the first quarter of fiscal 1994. The adoption did not have a material effect on the financial statements of the Company. 26. 6
NET INCOME AND NET INCOME PER SHARE 1994 Change 1993 Change 1992 - ------------------------------------------------------------------------------- Net income (millions) $207 408% $ 41 -87% $322 Percentage of net sales 10% 2% 21% Net income per share $.56 409% $.11 -88% $.90 ===============================================================================
The restructuring and nonrecurring charges and normalization of income taxes for WordPerfect represented net decreases in net income of $121 million or $.33 per share in fiscal 1994, and $288 million or $.78 per share in fiscal 1993 and represented no material change in fiscal 1992.
LIQUIDITY AND CAPITAL RESOURCES 1994 Change 1993 Change 1992 - ------------------------------------------------------------------------------- Cash and short-term investments (millions) $862 20% $719 14% $632 Percentage of total assets 44% 41% 44% ===============================================================================
Cash and short-term investments increased to $862 million at October 29, 1994 from $719 million at October 30, 1993. The major reasons for this increase were the $380 million of cash provided by operating activities, the $36 million provided from the issuance of common stock for stock option exercises, and the $25 million provided from other financing activities, offset by the $119 million used for repayment of debt, the $110 million used to acquire the Quattro Pro product line, and the $73 million used for capital asset purchases. The investment portfolio is diversified among security types, industry groups and individual issuers. The Company's principal sourcer of liquidity has been from operations. At October 29, 1994, the Company's principal unused sources of liquidity consisted of cash and short-term investments and available borrowing capacity of approximately $20 million under its credit facilities. The Company's liquidity needs are principally for the Company's financing of accounts receivable, capital assets, acquisitions and strategic investments and to have flexibility in a dynamic and competitive operating environment. During fiscal 1994 the Company has continued to generate cash from operations. The Company anticipates being able to fund its current operations and capital expenditures planned for the forseeable future with existing cash and short-term investments together with internally generated funds. Borrowings under the Company's credit facilities, or public offerings of equity or deby securities are available if the need arises. As the Company grows, investments will continue in product development in new and existing areas of technology. Cash may also be used to acquire technology through purchases and strategic acquisitions. Capital expenditures in fiscal 1995 are anticipated to be approximately $80 million, but could be reduced if the growth of the Company is less that presently anticipated. In addition, substantially all of the restructuring charges accrued in fiscal 1994 are expected to be paid during fiscal 1995. 27. 7 CONSOLIDATED STATEMENTS OF INCOME DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
OCT. 29 Oct. 30 Oct. 31 1994 1993 1992 - -------------------------------------------------------------------------------- Net sales $1,998,077 $1,830,411 $1,512,488 Cost of sales 467,066 402,602 326,707 - -------------------------------------------------------------------------------- Gross profit 1,531,011 1,427,809 1,185,781 Operating expenses Sales and marketing 562,034 509,722 380,079 Product development 346,706 290,239 226,809 General and administrative 161,855 163,249 130,380 Restructuring charges 51,463 42,000 -- Other nonrecurring charges 139,010 314,501 20,367 - -------------------------------------------------------------------------------- Total operating expenses 1,261,068 1,319,711 757,635 Income from operations 269,943 108,098 428,146 Other income (expense) Investment income 36,360 28,131 30,715 Merger expenses (5,778) -- -- Other, net (3,142) 1,928 2,946 - -------------------------------------------------------------------------------- Other income, net 27,440 30,059 33,661 - -------------------------------------------------------------------------------- Income before taxes 297,383 138,157 461,807 Income taxes 90,652 97,437 139,829 - -------------------------------------------------------------------------------- Net income $ 206,731 $ 40,720 $ 321,978 ================================================================================ Weighted average shares outstanding 368,332 367,900 359,484 ================================================================================ Net income per share $ .56 $ .11 $ .90 ================================================================================
See notes to consolidated financial statements. 28. 8 CONSOLIDATED BALANCE SHEETS DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
OCT. 29 Oct. 30 1994 1993 - ------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and short-term investments $ 861,809 $ 719,197 Receivables, less allowances ($82,934 - 1994, $50,202 - 1993) 391,342 395,334 Inventories 32,221 29,833 Prepaid expenses 69,324 40,076 Deferred income taxes 98,435 72,969 - ------------------------------------------------------------------------------- Total current assets 1,453,131 1,257,409 Property, plant and equipment, net 394,682 403,752 Other assets 115,668 84,176 - ------------------------------------------------------------------------------- Total assets $1,963,481 $1,745,337 =============================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 67,176 $ 84,906 Accrued compensation 81,639 69,061 Accrued marketing liabilities 66,800 51,553 Other accrued liabilities 121,165 103,204 Income taxes payable 78,139 55,589 Deferred revenue 47,801 33,788 - ------------------------------------------------------------------------------- Total current liabilities 462,720 398,101 Long-term debt -- 84,289 Minority interests 13,774 10,205 Put warrants -- 106,716 SHAREHOLDERS' EQUITY Common stock, par value $.10 per share Authorized -- 400,000,000 shares Issued -- 364,354,887 shares, 1994 359,431,077 shares, 1993 36,436 35,943 Additional paid-in capital 645,419 485,253 Retained earnings 802,361 635,551 Unearned stock compensation (4,766) (9,814) Cumulative translation adjustment 7,537 (907) - ------------------------------------------------------------------------------- Total shareholders' equity 1,486,987 1,146,026 - ------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,963,481 $1,745,337 ===============================================================================
See notes to consolidated financial statements. 29. 9 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AMOUNTS IN THOUSANDS
Common Stock Additional Unearned Cumulative ------------------ Paid-in Retained Stock Translation Shares Amount Capital Earnings Compensation Adjustments Total - --------------------------------------------------------------------------------------------------------------------------------- BALANCE - OCT. 26, 1991 337,973 $33,797 $ 266,941 $ 579,267 $ -- $ 4,277 $ 884,282 DRI acquisition 6,000 600 27,016 (24,906) -- -- 2,710 SoftCopy acquisition 1,380 138 (138) -- -- -- -- Stock issued from stock plans 6,662 667 35,223 -- -- -- 35,890 Stock plans' income tax benefits -- -- 51,567 -- -- -- 51,567 Cumulative translation adjustment -- -- -- -- -- (3,175) (3,175) Distributions to shareholders -- -- -- (178,205) -- -- (178,205) Net income -- -- -- 321,978 -- -- 321,978 - --------------------------------------------------------------------------------------------------------------------------------- BALANCE - OCT. 31, 1992 352,015 $35,202 $ 380,609 $ 698,134 $ -- $ 1,102 $1,115,047 USL acquisition 11,132 1,113 320,645 -- -- -- 321,758 STI acquisition 800 80 2,370 (3,680) -- -- (1,230) Stock issued from stock plans 6,654 665 63,290 -- (14,944) -- 49,011 Stock plans' income tax benefits -- -- 45,660 -- -- -- 45,660 Shares repurchased and retired (11,130) (1,113) (229,645) -- -- -- (230,758) Shares cancelled (40) (4) (1,156) -- 1,160 -- -- Sale of put warrants -- -- (96,520) -- -- -- (96,520) Unearned stock compensation -- -- -- -- 3,970 -- 3,970 Cumulative translation adjustment -- -- -- -- -- (2,009) (2,009) Distributions to shareholders -- -- -- (99,623) -- -- (99,623) Net income -- -- -- 40,720 -- -- 40,720 - --------------------------------------------------------------------------------------------------------------------------------- BALANCE - OCT. 30, 1993 359,431 $35,943 $ 485,253 $ 635,551 $ (9,814) $ (907) $1,146,026 Stock issued from stock plans 4,988 499 35,814 -- (612) -- 35,701 Stock plans' income tax benefits -- -- 21,747 -- -- -- 21,747 Shares cancelled (64) (6) (1,833) -- 1,839 -- -- Settlement of put warrants -- -- 104,438 -- -- -- 104,438 Unearned stock compensation -- -- -- -- 3,821 -- 3,821 Cumulative translation adjustment -- -- -- -- -- 8,444 8,444 Distributions to shareholders -- -- -- (65) -- -- (65) WordPerfect fiscal year conversion -- -- -- (39,856) -- -- (39,856) Net income -- -- -- 206,731 -- -- 206,731 - --------------------------------------------------------------------------------------------------------------------------------- BALANCE - OCT. 29, 1994 364,355 $36,436 $ 645,419 $ 802,361 $ (4,766) $ 7,537 $1,486,987 =================================================================================================================================
See notes to consolidated financial statements. 30. 10 CONSOLIDATED STATEMENT OF CASH FLOWS DOLLARS IN THOUSANDS
OCT. 29 Oct. 30 Oct. 31 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 206,731 $ 40,720 $ 321,978 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Write-off of purchased research and development 129,389 314,501 20,367 Depreciation and amortization 86,379 75,425 59,971 WordPerfect fiscal year conversion (39,856) -- -- Stock plans' income tax benefits 21,747 45,660 51,567 Decrease (increase) in receivables 3,992 (76,018) (83,987) (Increase) decrease in inventories (2,388) (3,237) 3,182 (Increase) in prepaid expenses (29,248) (13,298) (211) (Increase) in deferred income taxes (70,294) (53,796) (3,787) Increase in current liabilities 73,487 67,519 29,087 - ---------------------------------------------------------------------------------------------------------- Net cash provided from operating activities 379,939 397,476 398,167 - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock, net 35,701 40,990 36,000 Repurchases of common stock -- (230,758) -- Distributions to shareholders (65) (23,889) (80,871) Repayment of debt (118,901) (5,896) (1,746) Other 24,531 13,350 4,000 - ---------------------------------------------------------------------------------------------------------- Net cash used by financing activities (58,734) (206,203) (42,617) - ---------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property, plant and equipment (73,488) (110,256) (117,347) (Increase) in short-term investments (297,782) (39,915) (114,274) Cash received from acquisitions -- 37,242 2,569 Cash paid for acquisitions (110,000) (35,500) (22,960) Other 4,895 (5,750) (1,762) - ---------------------------------------------------------------------------------------------------------- Net cash used by investing activities (476,375) (154,179) (253,774) - ---------------------------------------------------------------------------------------------------------- Total (decrease) increase in cash and cash equivalents $(155,170) $ 37,094 $ 101,776 Cash and cash equivalents -- beginning of period 383,596 346,502 244,726 - ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents -- end of period 228,426 383,596 346,502 Short-term investments -- end of period 633,383 335,601 285,327 - ---------------------------------------------------------------------------------------------------------- Cash and short-term investments -- end of period $ 861,809 $ 719,197 $ 631,829 ==========================================================================================================
See notes to consolidated financial statements. 31. 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated. The following summarizes the significant accounting policies of the Company - - The Company considers all highly liquid instruments purchased with a term to maturity of three months or less to be cash equivalents. - - Short-term investments are stated at the lower of cost or market. The investment portfolio is widely diversified consisting primarily of short-term investment grade securities, substantially all of which either mature within the next twelve months or have characteristics of short-term investments. - - Accounts receivable include geographically dispersed distributors, resellers and OEM customers. No collateral is required. Reserves are provided for product exchanges and bad debts. - - Inventories are stated at the lower of cost (first-in, first-out method) or market. - - Plant and equipment are carried at cost less accumulated depreciation and amortization. - - Provision for depreciation and amortization is computed on the straight-line method over the estimated useful lives of the assets, or lease term if shorter, and are as follows: Asset Classification Useful Lives - -------------------------------------------------------------------------- Buildings 30 years Furniture and equipment 3-5 years Leasehold improvements and other 3-7 years Intangible assets 3-15 years - - Assets and liabilities of the Company's wholly owned subsidiaries, denominated in the local currency of the subsidiary, are remeasured into U.S. dollars (the functional currency) at year-end exchange rates except for equipment and leasehold improvements which are remeasured at average rates of exchange prevailing when acquired. Income and expense items are remeasured at average rates of exchange prevailing during the year, except that depreciation is remeasured at historical rates. These remeasurement gains and losses are included in net income in the period incurred. - - For the Company's Japanese subsidiary and certain WordPerfect entities, the functional currency has been determined to be the local currency, and therefore, assets and liabilities are translated at year-end exchange rates, and income statement items are translated at average exchange rates prevailing during the year. Such translation adjustments are recorded as a separate component of shareholders' equity. - - Revenue on product sales is recognized upon shipment. Certain sales require continuing service, support and performance by the Company, and accordingly, a portion of the revenue is deferred until the future service, support and performance is provided. Reserves for sales returns and allowances are recorded in the same period as the related revenues. - - Product development costs are expensed as incurred. Application of Statements of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, has not had any material effect in the consolidated financial statements of the Company. - - Required adoption of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, and Statement of Financial Accounting Standards No. 119, Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments, both in the first quarter of fiscal 1995, is not expected to have a material impact on the consolidated financial statements of the Company. - - Net income per share is computed using the weighted average number of common shares outstanding during each year, including common stock equivalents (unless antidilutive). Common stock equivalents consist of outstanding stock options. - - The consolidated financial statements give retroactive effect to the acquisition of WordPerfect Corporation (WordPerfect), which was accounted for as a pooling of interests and to the August 26, 1992 stock split. Certain reclassifications, none of which affected net income, have been made to the prior years' amounts in order to conform to the current year's presentation. 32. 12 B. MERGERS, ACQUISITIONS AND STRATEGIC INVESTMENTS In June 1994, the Company completed a merger with WordPerfect whereby WordPerfect was merged directly into Novell. Approximately 51 million shares of Novell common stock were exchanged for all of the outstanding common stock of WordPerfect. In addition, outstanding employee stock options to purchase WordPerfect common stock were converted into options to purchase approximately 8 million shares of Novell common stock. The transaction was accounted for as a pooling of interests and therefore, all prior period financial statements presented have been restated as if the merger took place at the beginning of such periods. WordPerfect had a calendar year end and, accordingly, the WordPerfect statements of income for the years ended December 31, 1993 and 1992 have been combined with the Novell statements of income for the fiscal years ended October 30, 1993 and October 31, 1992, respectively. In order to conform WordPerfect's year end to Novell's fiscal year end, the consolidated statement of income for fiscal 1994 includes two months (November and December 1993) for WordPerfect which are also included in the consolidated statement of income for the fiscal year ended October 30, 1993. Accordingly, an adjustment has been made in fiscal 1994 to retained earnings for the duplication of net income of $40 million for such two month period. Other results of operations for such two month period of WordPerfect include net sales of $137 million, income before taxes of $35 million, and income tax benefits of $5 million. Separate results of operations for the periods prior to the merger with WordPerfect are as follows:
UNAUDITED SIX MONTHS Fiscal Year Fiscal Year ENDED Ended Ended APR. 30 Oct. 30 Oct. 31 (Dollars in thousands) 1994 1993 1992 - ------------------------------------------------------------------------------------------------------- NET SALES Novell $ 717,975 $1,122,896 $ 933,370 WordPerfect 305,233 707,515 579,118 - ------------------------------------------------------------------------------------------------------- Combined $1,023,208 $1,830,411 $1,512,488 NET INCOME Novell $ 177,726 $ (35,160) $ 249,030 WordPerfect 13,098 75,880 72,948 - ------------------------------------------------------------------------------------------------------- Combined $ 190,824 $ 40,720 $ 321,978 OTHER CHANGES IN SHAREHOLDERS' EQUITY Novell $ 139,862 $ 93,853 $ 90,191 WordPerfect (37,937) (103,594) (181,404) - ------------------------------------------------------------------------------------------------------- Combined $ 101,925 $ (9,741) $ (91,213) =======================================================================================================
Additionally, in June 1994, the Company acquired from Borland International, Inc. its Quattro Pro spreadsheet product line for $110 million of cash and assumed liabilities of $10 million, and purchased a three year license to reproduce and distribute up to one million copies of current and future versions of Borland's Paradox relational database product for $35 million of cash. The transaction was accounted for as a purchase and, on this basis, resulted in a one-time write-off of $114 million for purchased research and development. In June 1993, the Company acquired UNIX System Laboratories, Inc. (USL) by issuing approximately 11 million shares of Novell common stock valued at $322 million in exchange for all of the outstanding stock of USL not previously owned by Novell and assumed liabilities of $9 million. The transaction was accounted for as a purchase and, on this basis a one-time write-off of $269 million for purchased research and development was incurred. Pro forma information related to the USL acquisition has not been presented due to materiality. 33. 13 C. CASH AND SHORT-TERM INVESTMENTS
OCT. 29 Oct. 30 (Dollars in thousands) 1994 1993 - -------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS Cash $101,331 $ 96,542 Repurchase agreements 19,309 16,550 Tax exempt money market fund 29,394 51,041 Taxable money market investments 13,357 39,000 Municipal securities 65,035 180,463 - -------------------------------------------------------------------------------- Cash and cash equivalents $228,426 $383,596 - -------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS Municipal securities $201,491 $200,025 Money market mutual funds 104,388 51,170 Money market preferreds 306,700 -- Mutual funds 13,017 62,267 Other 7,787 22,139 - -------------------------------------------------------------------------------- Short-term investments $633,383 $335,601 - -------------------------------------------------------------------------------- Cash and short-term investments $861,809 $719,197 ================================================================================
During fiscal 1992, the Company distributed cash of $81 million and short-term investments of $97 million to the shareholders of WordPerfect. During fiscal 1993, the Company distributed cash of $24 million and issued notes payable of $75 million to the shareholders of WordPerfect. In fiscal 1994, after the merger with Novell was completed, the notes payable to the shareholders of WordPerfect were paid off. D. PROPERTY, PLANT AND EQUIPMENT
OCT. 29 Oct. 30 (Dollars in thousands) 1994 1993 - ------------------------------------------------------------------------------- Buildings and land $ 232,225 $ 230,094 Furniture and equipment 425,118 392,488 Leasehold improvements and other 44,159 40,614 - ------------------------------------------------------------------------------- Property, plant, and equipment at cost 701,502 663,196 Accumulated depreciation (306,820) (259,444) - ------------------------------------------------------------------------------- Property, plant, and equipment, net $ 394,682 $ 403,752 ===============================================================================
E. INCOME TAXES Novell, Inc. adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109 effective October 31, 1993 for fiscal year 1994. WordPerfect adopted the provisions of SFAS No. 109 effective January 1, 1993 for calendar year 1993. Because the two companies adopted the change in accounting methods in different years, the October 30, 1993 year reflects SFAS No. 109 for WordPerfect and APB 11 for Novell, Inc. Adoption of SFAS No. 109 had no material impact on the financial statements of the Company. As permitted under the new rules, prior years' financial statements have not been restated. Prior to the adoption of SFAS No. 109, income tax expense for both companies was determined using the deferred method (APB 11). Deferred tax expense was based on items of income and expense that were reported in different years in the financial statements and tax returns and were measured at the tax rate in effect in the year the difference originated. SFAS No. 109 requires the use of the liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Prior to September 30, 1993, WordPerfect and related entities elected to be taxed as S corporations whereby the income tax effects accrued directly to the shareholders. Adoption of SFAS No. 109 required no establishment of deferred income taxes since no material differences between the financial reporting and the tax bases of assets and liabilities existed. On September 30, 1993, WordPerfect and related domestic entities terminated their S corporation elections. On December 31, 1993, the WordPerfect related foreign entities terminated their S corporation elections. As a result, deferred income taxes under the provisions of SFAS No. 109 were established on the dates the S corporation elections were terminated. As of October 29, 1994, the Company has net operating loss carryforwards from acquired companies of approximately $38 million that expire in years 1999 through 2008. Subject to certain annual limitations, these losses can be used to offset the future taxable income of these businesses. A valuation allowance of approximately $9 million has been recognized to offset the deferred tax assets related to those carryforwards. 34. 14 E. INCOME TAXES (CONTINUED)
Fiscal Year Ended OCT. 29 Oct. 30 Oct. 31 (Dollars in thousands) 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------------- TAXES ON INCOME Current Federal $132,543 $109,954 $102,607 State 21,344 19,158 21,044 Foreign 22,362 22,121 19,965 - -------------------------------------------------------------------------------------------------------------------------------- Total current 176,249 151,233 143,616 - -------------------------------------------------------------------------------------------------------------------------------- Deferred Federal (55,788) 5,461 (3,593) State (10,510) 1,631 (134) Foreign (3,751) (2,295) (60) Change in tax status (15,548) (58,593) -- - -------------------------------------------------------------------------------------------------------------------------------- Total deferred (85,597) (53,796) (3,787) - -------------------------------------------------------------------------------------------------------------------------------- Total taxes on income $ 90,652 $ 97,437 $139,829 ================================================================================================================================ DIFFERENCES BETWEEN THE U.S. STATUTORY AND EFFECTIVE TAX RATES U.S. statutory rate 35.0% 35.0% 34.0% State income taxes, net of federal tax effect 3.5 3.5 3.7 Research and development tax credits (2.6) (2.4) (1.0) Tax-exempt FSC income (2.1) (1.5) (1.6) S Corporation earnings prior to change in tax status (1.6) (.5) (6.2) Foreign taxes .4 1.6 2.5 Other, net 1.4 (1.0) (1.2) - -------------------------------------------------------------------------------------------------------------------------------- Subtotal 34.0 34.7 30.2 Change in tax status (5.2) (42.4) -- Non-deductible charge for purchased research and development 1.7 78.2 -- - -------------------------------------------------------------------------------------------------------------------------------- Effective tax rate 30.5% 70.5% 30.2% ================================================================================================================================ DOMESTIC AND FOREIGN COMPONENTS OF INCOME BEFORE TAXES Domestic $312,563 $122,664 $423,663 Foreign (15,180) 15,493 38,144 - -------------------------------------------------------------------------------------------------------------------------------- Total income before taxes $297,383 $138,157 $461,807 ================================================================================================================================ Cash paid for income taxes $115,016 $ 86,306 $ 93,850 ================================================================================================================================ DEFERRED INCOME TAXES AS OF OCTOBER 29, 1994 Receivable valuation accounts $ 33,076 Restructuring provision 17,031 Acquired intangibles 31,435 Reserves and accruals 26,421 Fixed assets 10,463 Inventory valuation accounts 9,456 Other individually immaterial items 24,399 - -------------------------------------------------------------------------------------------- Total deferred tax assets 152,281 Valuation allowance for deferred tax assets (9,018) - -------------------------------------------------------------------------------------------- Net deferred tax assets $143,263 ============================================================================================
35. 15 F. COMMITMENTS AND CONTINGENCIES Rent expense for operating and month-to-month leases was $34 million, $31 million and $21 million in fiscal 1994, 1993 and 1992, respectively. As of October 29, 1994, the Company has various operating leases with remaining terms of more than one year. These leases have minimum annual lease commitments of $26 million in fiscal 1995, $22 million in fiscal 1996, $15 million in fiscal 1997, $9 million in fiscal 1998, $7 million in fiscal 1999, and $29 million thereafter. The Company has entered into a commitment to sponsor certain sporting teams. The Company has commitments in fiscal 1995 totaling $6 million. The Company currently has a $10 million unsecured revolving bank line of credit, with interest at the prime rate. The line can be used for either letter of credit or working capital purposes. The line is subject to the terms of a loan agreement containing financial covenants and restrictions, none of which are expected to significantly affect the Company's operations. At October 29, 1994, there were no borrowings, letter of credit acceptances or commitments under such line. The Company has an additional $10 million credit facility with another bank which is not subject to a loan agreement. At October 29, 1994 standby letters of credit of $200,000 were outstanding under this agreement. On November 10, 1993, a suit was filed against Novell and certain of its officers and directors alleging violation of federal securities laws. Another lawsuit alleging similar claims was filed August 26, 1994. Both lawsuits were brought as purported class actions on behalf of purchasers of Novell common stock. Novell does not believe that the resolution of these legal matters will have a material adverse effect on its financial position or results of operations. In December of 1991, Roger Billings and his International Academy of Science, (the Academy) filed suit against Novell alleging that the Company infringes on a patent allegedly owned by the Academy. On June 6, 1994, Novell filed a petition with the U.S. Patent and Trademark Office requesting it invalidate the patent. In August 1994, the Patent Office granted Novell's request for re-examination of the patent, finding a "substantial new question of patentability." Also, in August of 1994, the trial court issued a ruling, which among other things, vacated the trial date which had been previously set in the action. The Company believes that the ultimate resolution of this legal proceeding will not have a material adverse effect on its financial position or results of operation. The Company is a party to a number of additional legal proceedings arising in the ordinary course of business. The Company believes the ultimate resolution of the claims will not have a material adverse effect on its financial position or results of operations. G. PUT WARRANTS During fiscal 1993, the Company sold put warrants on 5 million shares of its stock, callable on specific dates in the first quarter of fiscal 1994, giving third parties the right to sell shares of Novell common stock to the Company at contractually specified prices. The put warrant balance on the balance sheet at October 30, 1993 is the amount the Company would have been obligated to pay if all the put warrants were exercised at the strike price without a cash-out settlement. During the first quarter of fiscal 1994, the Company settled all of its put warrant obligations for cash of $2 million and therefore reversed the put warrant obligation back to additional paid-in capital. H. SHAREHOLDERS' EQUITY In December 1988, the Board of Directors adopted a Shareholder Rights Plan and amended it in March 1992. The plan provides for a dividend of rights, which cannot be exercised until certain events occur, to purchase shares of preferred stock of the Company or, after certain events, shares of common stock of the Company. Each shareholder of record receives one right for each share of common stock that he or she owns. This plan was adopted to ensure that all shareholders of the Company receive fair value for their common stock in the event of any proposed takeover of the Company and to guard against coercive tactics to gain control of the Company without offering fair value to the Company's shareholders. The Company has 500,000 authorized shares of preferred stock with a par value of $.10 per share, none of which was outstanding at October 29, 1994 or October 30, 1993. 36. 16 In March 1993, shareholders approved the Novell 1991 Stock Plan as amended with an affirmative vote of 69% of the shares voted. During fiscal 1994, the Company completed the acquisition of WordPerfect Corporation and thereby assumed 8 million stock options related to its respective stock option plan. Under all Company stock option plans, 87 million shares of common stock have been reserved for issuance of stock options, 41 million shares have been exercised, 39 million shares are outstanding, 5 million shares are available for future grants and 2 million shares have expired. The shares reserved for issuance are increased each November 1st through November 1, 1998, based on a calculation of 2.9% of total common stock outstanding at previous fiscal year end. Generally, grants to date have been nonqualified stock options at fair market value on the date of grant for a term of seven or ten years and are exercisable 25% per year beginning one year from the date of grant. The Company also has a stock option plan for non-employee directors, under which 800,000 shares have been reserved for issuance of nonqualified stock options. The following table is a summary of activity for the Company's stock option plans and has been restated to include the WordPerfect stock options for all periods presented.
OCT. 29 Oct. 30 Oct. 31 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------- OPTIONS OUTSTANDING Beginning balance 37,282,781 29,443,827 22,772,435 Options granted 20,602,634 14,730,714 13,735,144 Options exercised (4,036,142) (5,183,180) (5,868,283) Options cancelled (14,739,567) (1,708,580) (1,245,499) - --------------------------------------------------------------------------------------------------------------------- Ending balance 39,109,706 37,282,781 29,443,827 ===================================================================================================================== EXCHANGE PROGRAM (INCLUDED ABOVE) Options cancelled 11,149,199 -- -- Options regranted 7,430,961 -- -- RESTRICTED STOCK GRANT (INCLUDED ABOVE) Options granted 306,500 -- -- OPTION PRICE DATA Grant price range $.10-21.13 $.61-31.25 $22.63-29.38 Weighted average grant price $15.79 $24.50 $25.43 Exercise price range $.10-25.00 $.17-28.75 $.17-23.25 Weighted average exercise price $5.18 $4.76 $3.77 Cancelled price range $.61-29.00 $1.87-29.00 $.87-28.75 Weighted average cancelled price $25.70 $20.69 $13.07 Weighted average outstanding price $13.25 $15.85 $11.10 OPTION TERMS Percentage vesting per year 25% 25% 25% Maximum term 7 OR 10 YEARS 7 or 10 years 7 years Percentage granted at fair market value on date of grant 99% 100% 100% AS OF YEAR END Options exercisable 15,863,911 8,965,246 7,323,329 Options available for future grants 5,476,318 4,014,599 14,824,282 OTHER INFORMATION Shares of common stock outstanding at year end 364,354,887 359,431,077 352,015,281 Annual option reserve increase based on evergreen provision 8,933,478 -- -- Options granted as a percentage of outstanding common stock, net of cancellations 1.6% 3.6% 3.6% Option holders as a percentage of total employees 100% 37% 37%
37. 17 In 1994 the Company implemented a stock option exchange program whereby option holders could exchange higher priced options for new options on a two new shares for three old shares ratio. All option holders except for directors and officers were permitted to participate in the program. The Novell, Inc. 1989 Employee Stock Purchase Plan (Purchase Plan) permits eligible employees to purchase shares of common stock through payroll deductions at lower of 85% of fair market value at the beginning or end of each six month offering period. As of October 29, 1994, 4 million shares have been issued under the Purchase Plan. I. RESTRUCTURING CHARGES During the fourth quarter of fiscal 1994, the Company incurred a restructuring charge of $51 million. In September, the Company formulated a plan, whereby duplicate facilities, excess personnel, and products to be discontinued were identified. The restructuring charge includes $26 million related to redundant or excess facilities and equipment costs which are being closed or abandoned. Operating expenses related to such facilities and equipment up to the time of closure or abandonment were not included in the restructuring charge. Additionally, $16 million of the restructuring charge related to employee severance costs for approximately 1,100 employees who have been or will be terminated. The charge does not include salaries and wages paid to such employees up to their termination date, nor does it include any expenses related to an additional 650 employees who are being transferred to third parties to perform outsourced functions such as manufacturing. The remaining $9 million of the restructuring charge relates to products which have been eliminated from the Company's product lines. Anticipated savings from this restructuring plan is estimated to be approximately $50 million per year. In the third quarter of fiscal 1993 a restructuring charge of $42 million was incurred, most of which related to a reduction in force and facilities at WordPerfect. A portion of this restructuring had been completed before the end of fiscal 1994, however approximately $15 million of the original liability remains to be expended in fiscal 1995. J. OTHER NONRECURRING CHARGES In fiscal 1994, 1993, and 1992, the Company incurred other nonrecurring charges, primarily related to the write-off of purchased research and development in connection with acquisitions. In fiscal 1994 the charges related primarily to the write-off of $114 million of tax deductible purchased research and development in connection with the acquisition of the Quattro Pro spreadsheet product line from Borland International, Inc. During the first quarter of fiscal 1994, the Company also wrote off $15 million of non-tax deductible purchased research and development in connection with the acquisition of SoftSolutions. The remaining $10 million of nonrecurring charges in fiscal 1994 related primarily to one-time expenses incurred to align the Novell and WordPerfect employee benefit plans. In fiscal 1993, the Company wrote off $315 million of non-tax deductible purchased research and development in connection with the acquisitions of USL, Serius Corporation and Fluent, Inc., and a personal information manager software product. In fiscal 1992, the Company wrote off $20 million on non-tax deductible purchased research and development in connection with the acquisitions of Reference Software International, Beagle Bros., Inc. and MagicSoft, Inc. K. EMPLOYEE SAVINGS AND RETIREMENT PLAN The Company adopted a 401(k) savings and retirement plan in December 1986. The plan covers all employees who are 21 years of age or older who are scheduled to complete 1,000 hours of service during any consecutive twelve-month period. The Company's retirement and savings plan contribution has been a 50% matching contribution for employee contributions up to 6% of each employee's compensation and was $15 million, $12 million and $8 million in fiscal 1994, 1993 and 1992, respectively. 38. 18 L. RELATED PARTY TRANSACTIONS WordPerfect was co-founded in 1979 by Alan C. Ashton, Ph.D. (Dr. Ashton) and Bruce W. Bastian (Mr. Bastian). Dr. Ashton and Mr. Bastian joined the Novell Board of Directors in October 1994. Prior to September 30, 1993, WordPerfect had been organized as numerous legal entities under the common control of Dr. Ashton and Mr. Bastian. These entities, including WordPerfect, WP Leasing, Inc., ABP Development, WordPerfect Publishing Corporation, ComputerShow, WP Properties, WordPerfect International, Reference Software International (RSI), and SoftCopy, Inc., owned the assets and conducted the operations of WordPerfect. On September 30, 1993, the common stock of RSI owned by the shareholders was contributed to WordPerfect. Also the owner's interest in WP Properties was transferred to WordPerfect in exchange for $5 million cash and notes of $75 million, payable to the existing shareholders of WordPerfect, which represented WP Properties' net book value at the date of the transfer. Subsequent to the merger with Novell, the shareholder notes together with accrued interest were paid in full. Also on September 30, 1993, the common stock of ComputerShow was distributed to the shareholders of WordPerfect at ComputerShow's net book value of $1 million. The common stock of the remaining entities were contributed to WordPerfect on December 31, 1993. WordPerfect entered into agreements with Mr. Lewis Bastian, a brother of Mr. Bastian, in connection with the development and sale of DataPerfect, a general purpose database software program, and TOOL, an object- oriented language used for software development. Pursuant to these agreements, WordPerfect paid Mr. Lewis Bastian consulting fees and royalty payments of $718,000 and $474,000 in fiscal 1993 and 1992, respectively. In February 1994, WordPerfect agreed to pay Mr. Lewis Bastian $3 million over four years in exchange for a termination of these agreements. WordPerfect entered into management agreements with a distribution company controlled by an individual who has now become an officer of the Company. Payments of approximately $7 million were made pursuant to these management agreements in fiscal 1992. This payment included a negotiated termination of these management agreements. The consolidated financial statements include the operating results of each of the entities involved in the related party transactions outlined above for all periods presented either as a result of the transactions being between companies under common control or the transactions being at amounts which approximate book value. Further, the results of operations attributable to the ownership interests acquired were not significant in any period in relation to the consolidated operating results of the Company. In fiscal 1994, 1993 and 1992, legal fees of approximately $2 million, $2 million and $716,000, respectively, were paid to Wilson, Sonsini, Goodrich & Rosati, a professional corporation in which a director of the Company is a senior partner. M. INTERNATIONAL SALES The Company markets internationally through distributors who sell to dealers and end users. In fiscal 1994, 1993 and 1992 export sales to international customers were approximately $861 million, $783 million and $700 million, respectively. In fiscal 1994, 1993 and 1992, respectively, 58%, 60% and 69% of export sales were to European countries. No one foreign country accounted for more than 10% of total sales in any period. In fiscal 1994, the Company had one multinational distributor, which accounted for 12% of revenue. The Company had two multinational distributors, which accounted for 15% and 11% of revenue in fiscal 1993 and 12% and 13% of revenue in fiscal 1992, respectively. Otherwise, no customer accounted for more than 10% of revenue in any period. N. PRO FORMA DATA If WordPerfect had been a C corporation for all periods presented, fiscal 1994 would have had income tax expense of $106 million, net income of $191 million, and net income per share of $.52. Fiscal 1993 would have had income tax expense of $151 million, a net loss of $13 million, and a net loss per share of $.04. Fiscal 1992 would have had income tax expense of $161 million, net income of $301 million and net income per share of $.84. 39. 19 REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND SHAREHOLDERS NOVELL, INC. We have audited the accompanying consolidated balance sheets of Novell, Inc. as of October 29, 1994 and October 30, 1993, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended October 29, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of WordPerfect Corporation, which statements reflect total assets constituting 23% in 1993, and total revenues constituting 39% in 1993, and 38% in 1992 of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for WordPerfect Corporation, is based solely on the report of other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Novell, Inc. at October 29, 1994 and October 30, 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 29, 1994, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP San Jose, California December 13, 1994 40. 20 SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED) DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
FIRST SECOND THIRD FOURTH FISCAL QUARTER QUARTER QUARTER QUARTER YEAR - ------------------------------------------------------------------------------------------------ FISCAL 1994 Net sales $488,278 $534,930 $488,924 $485,945 $1,998,077 Gross profit 384,501 389,533 383,420 373,557 1,531,011 Income (loss) before taxes 126,444 144,811 (4,740) 30,868 297,383 Net income (loss) 94,460 96,364 (4,465) 20,372 206,731 Net income (loss) per share .26 .26 (.01) .06 .56 COMMON STOCK PRICE PER SHARE High 25 3/8 26 1/4 19 1/2 17 23/32 26 1/4 Low 19 1/4 15 14 14 3/4 13 3/4 FISCAL 1993 Net sales $432,324 $454,998 $433,872 $509,217 $1,830,411 Gross profit 340,995 362,946 332,410 391,458 1,427,809 Income (loss) before taxes 137,766 140,384 (272,532) 132,539 138,157 Net income (loss) 97,420 97,938 (257,421) 102,783 40,720 Net income (loss) per share .27 .27 (.69) .28 .11 COMMON STOCK PRICE PER SHARE High 33 1/2 35 1/4 33 1/2 23 1/4 35 1/4 Low 23 3/4 25 3/4 17 5/8 17 17 FISCAL 1992 Net sales $348,257 $355,985 $391,722 $416,524 $1,512,488 Gross profit 271,842 280,931 308,278 324,730 1,185,781 Income before taxes 107,330 121,369 117,708 115,400 461,807 Net income 74,391 88,846 80,868 77,873 321,978 Net income per share .21 .25 .22 .22 .90 COMMON STOCK PRICE PER SHARE High 32 1/2 32 28 1/2 32 1/8 32 1/2 Low 21 3/8 23 7/8 24 5/16 22 1/2 21 3/8
Novell's common stock trades in the over-the-counter market under the NASDAQ symbol "NOVL." No dividends have been declared on the Company's common stock. There were 11,932 shareholders of record at December 31, 1994. 41. 21 DIRECTORS AND OFFICERS B O A R D O F D I R E C T O R S Robert J. Frankenberg Kanwal S. Rekhi Chairman of the Board Executive Vice President President and Chief Executive Officer Corporate Technology Alan C. Ashton, Ph. D. Larry W. Sonsini Founder of WordPerfect Corporation Partner, Wilson, Sonsini, Goodrich, Rosati Bruce W. Bastian Founder of WordPerfect Corporation Ian R. Wilson *+ Chairman of the Board Elaine R. Bond *+ President and Chief Executive Officer Chase Fellow/Sr. Consultant Windmill Holdings Corporation The Chase Manhattan Bank, N.A. Jack L. Messman *+ President and Chief Executive Officer * Member of Audit Committee Union Pacific Resources Co. + Member of Compensation Committee C O R P O R A T E E X E C U T I V E O F F I C E R S Robert J. Frankenberg David R. Bradford President and Chief Executive Officer Senior Vice President General Counsel and Corporate Secretary Mary M. Burnside Executive Vice President Ernest J. Harris Chief Operating Officer Senior Vice President Human Resources Michael J. DeFazio Executive Vice President Christine G. Hughes UNIX Systems Group Senior Vice President Corporate Marketing Richard W. King Executive Vice President John C. Lewis NetWare Systems Group Senior Vice President Services and Support Joseph A. Marengi Executive Vice President David C. Moon Worldwide Sales Senior Vice President Development, Application Group Steven Markman Executive Vice President R. Duff Thompson Information Access & Management Group Senior Vice President Corporate Development Kanwal S. Rekhi Executive Vice President Stephen C. Wise Corporate Technology Senior Vice President Finance Adrian Rietveld Executive Vice President Darcy G. Mott Novell Application Group Treasurer James R. Tolonen Executive Vice President Chief Financial Officer 42. EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 NOVELL, INC. SUBSIDIARIES OF THE REGISTRANT As of October 29, 1994, the following companies were subsidiaries of Novell, Inc.:
State of Incorporation or Country in which Wholly owned Organized ------------ ---------------------- Fluent, Inc. Delaware Novell de Argentina S.A. Argentina Novell Pty, Ltd. Australia Novell Belgium B.V.B.A. Belgium Novell do Brasil Software Ltda. Brazil Novell Canada, Ltd. Canada Novell Europe, Inc. Delaware Novell S.A.R.L. France Novell GmbH Germany Novell International, Ltd. Barbados Novell Italia S.R.L. Italy Novell Korea Co., Ltd. Korea Novell de Mexico, S.A.DE C.V. Mexico Novell Polska Sp.Zo.o Poland Novell Software Development Pvt., Ltd. India Novell Spain S.A. Spain Novell Svenska A.B. Sweden Novell Schweiz A.G. Switzerland Novell U.K., Ltd. United Kingdom Serius Corporation Delaware Majority Owned -------------- Novell Japan, Ltd. Japan Onward Novell Software Pvt., Ltd. India
EX-23.1 5 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Novell, Inc. of our report dated December 13, 1994, included in the 1994 Annual Report to Shareholders of Novell, Inc. Our audits also included the financial statement schedule of Novell, Inc., listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-14531, No. 33-29798, No. 33-31299, No. 33-36673, No. 33-41719, No. 33-48395, No. 33-54483, No. 33-64998, No. 33-65440, No. 33-66704, No. 33-67276 and No. 33-68336) pertaining to the Employee Stock Option and Stock Purchase Plans of Novell, Inc. of our report dated December 13, 1994, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Novell, Inc. /s/ ERNST & YOUNG LLP San Jose, California January 20, 1995 EX-23.2 6 CONSENT OF PRICE WATERHOUSE LLP 1 EXHIBIT 23.2 CONSENT OF PRICE WATERHOUSE LLP INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus of the Registration Statements on Form S-8 (No. 33-14531, No. 33-29798, No. 33-31299, No. 33-36673, No. 33-41719, No. 33-48395, No. 33-54483, No. 33-64998, No. 33-65440, No. 33-66704, No. 33-67276 and No. 33-68336) of Novell, Inc. of our report dated March 22, 1994 appearing on page 19 of this Form 10-K. /s/ Price Waterhouse LLP Salt Lake City, Utah January 20, 1995 EX-27 7 FINANCIAL DATA SCHEDULE
5 YEAR OCT-29-1994 OCT-29-1994 228,426 633,383 391,342 (82,934) 32,221 1,453,131 701,502 (306,820) 1,963,481 462,720 0 36,436 0 0 1,450,551 1,963,481 1,998,077 1,998,077 467,066 467,066 1,261,068 0 0 297,383 90,652 206,731 0 0 0 206,731 .56 .56
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