-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PyoxQk23QEiAWinpZ/D72qwHFCo7XoLoACX9f76/S7iWFXTX4MCtOKniD9bAzE67 C/7lPNQ4qIhnShitsD+53w== 0000950149-98-000115.txt : 19980130 0000950149-98-000115.hdr.sgml : 19980130 ACCESSION NUMBER: 0000950149-98-000115 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980129 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOVELL INC CENTRAL INDEX KEY: 0000758004 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 870393339 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13351 FILM NUMBER: 98516418 BUSINESS ADDRESS: STREET 1: 122 EAST 1700 SOUTH CITY: PROVO STATE: UT ZIP: 84097 BUSINESS PHONE: 8012226600 MAIL ADDRESS: STREET 1: 122 E. 1700 S. CITY: PROVO STATE: UT ZIP: 84606 10-K 1 ANNUAL REPORT FOR YEAR ENDED 10/31/97 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 FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________ COMMISSION FILE NUMBER 0-13351 NOVELL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 87-00393339 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
122 EAST 1700 SOUTH PROVO, UTAH 84606 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) (801) 861-7000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share Preferred Share Purchase Rights Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's common stock held by nonaffiliates on December 31, 1997 (based on the last reported price of the Common Stock on the NASDAQ National Market System on such date) was $2,600,886,744. As of December 31, 1997 there were 351,058,686 shares of the registrant's common stock outstanding. Portions of Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1997, are incorporated by reference in Parts II and IV of this Form 10-K to the extent stated herein. Portions of Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 7, 1998, are incorporated by reference in Part III of this Form 10-K to the extent stated herein. ================================================================================ 2 PART I ITEM 1. BUSINESS THE COMPANY Novell, Inc. ("Novell" or the "Company") is the world's leading provider of network software. The Company offers a wide range of network solutions, education, and support for distributed network, Internet, and small-business markets. The Company was incorporated in Delaware on January 25, 1983. Novell's executive offices are located at 122 East 1700 South, Provo, Utah 84606. Its telephone number at that address is (801) 861-7000 The Company markets its products through 36 U.S. and 60 international sales offices. The Company sells its products through distributors and national retail chains, who in turn sell the Company's products to retail dealers. The Company also sells its products to OEMs, system integrators, and VARs as well as direct to end users through licensing agreements. The Company primarily conducts product development activities in San Jose, California; and Provo and Orem, Utah. It also contracts out some product development activities to third-party developers. During the third quarter of fiscal 1997, Novell took measures to reduce and realign its resources and better manage and control its business. These measures were in response to declines in sales of boxed products through the indirect distribution channel customers, controlled shifts to multi-product licenses, lower licensed revenue of certain older products to OEM's, as well as competitive pressures in the small network market. Specifically, the Company did not ship boxed products to its indirect distribution channel customers except to accommodate product exchanges and returns. The Company believes this action, which significantly reduced reported revenue in the quarter, brought indirect distribution channel inventories of boxed software products in line with current market demand. The decision to withhold shipments to the Company's indirect distributor channel resulted in an operating loss in the third quarter of fiscal 1997. In addition, the Company reduced its workforce by approximately 1,000 employees or 17%, and consolidated a number of facilities. This resulted in a one-time restructuring charge of $55 million, principally comprised of severance and excess facilities costs. The restructuring charge contributed a loss of $0.10 per share, net of tax, to the reported loss in fiscal 1997. The workforce reduction and associated consolidation of facilities returned the Company to break even for the fourth quarter of fiscal 1997 and is expected to lower future operating expenses by approximately $100 million annually. During the second quarter of fiscal 1996, the Company implemented a change to its traditional distribution stocking policy that significantly reduced revenue and earnings in that quarter. The change in the Company's traditional distribution stocking policy was to respond to changing market conditions over the prior two years. Direct customer and OEM licensing programs grew from less than 5% of revenue to more than 40% of revenue. This shift in customer buying preferences changed the Company's reliance on boxed product flowing through an indirect distribution channel. In order to deal with this changing environment, the Company did not ship boxed product to its indirect distribution channel customers except to accommodate product exchanges and returns during the second quarter of fiscal 1996, which had the effect of reducing inventories within the indirect distribution channel, as well as significantly reducing revenue in the quarter. In March 1996, the Company completed the sale of its personal productivity applications product line to Corel Corporation (Corel). The Company received approximately 10 million shares of Corel common stock and approximately $11 million of cash. This resulted in an ownership position of approximately 17% of the outstanding Corel common stock. The Company reported a one-time gain of $20 million in the second quarter of fiscal 1996 related to this transaction. Net of tax, the gain was $13 million, or $0.04 per share. Additionally, Corel licensed GroupWise client software, Envoy electronic publishing software, and other technologies from Novell for a minimum royalty obligation of approximately $50 million over the next five years. During fiscal 1997, Novell sold approximately one million shares of Corel common stock at a loss of approximately $6 million which was more than offset by gains on the sales of other equity securities. 2 3 In December 1995, Novell sold its UnixWare product line to the Santa Cruz Operation, Inc. (SCO). The Company realized a small gain and recorded $19 million of Unix technology royalty revenue from this transaction in the first quarter of fiscal 1996. Under the agreement, Novell received approximately six million shares of SCO common stock, resulting in ownership of approximately 17% of the outstanding SCO common stock. In addition, Novell continues to receive revenue from previously existing licenses for certain versions of UNIX System source code shipped prior to the sale to SCO. BUSINESS STRATEGY Novell provides standards-based network software for intranets and the Internet. The Internet has accelerated the pace at which networks are becoming the center of information technology solutions. Networks have become the primary information asset in business. Novell provides network software to make these information resources available to network users where and when they are needed. The Company's network solutions enable businesses to protect and expand their investments in information resources in an increasingly networked world. Novell's network solutions integrate information resources and provide necessary network management, messaging and groupware capabilities for customers worldwide. Networks are inherently a mix of varied computer systems, applications and other devices. Novell software creates an infrastructure for managing, maintaining and accessing distributed network resources. Through Novell's Open Solutions Architecture, Novell has oriented all of its products to Internet standards, enabling customers to increase the performance of traditional local and wide area networks. Today, businesses are rapidly developing corporate intranets that leverage the rapid and easy file access available on the World Wide Web. Corporate intranets maintain and provide secure access to distributed information assets across networks. Novell network software provides customers with choices for significantly enhancing the affordability, management, and ease of use of the changing mix of computer operating systems and applications that are important to information technology solutions. Together with its partners, the Company is a driving force in expanding the value of networks for customers worldwide. TECHNOLOGIES Establishing Novell Directory Services as a de facto industry standard. Novell Directory Services (NDS) is a key part of Novell's strategy for providing infrastructure software for business intranets and the Internet. NDS is a distributed database of users, network equipment, computer systems, applications, files and other network resources. It provides distributed centralized access control, security, management and administration of information resources across computer networks. NDS is integrated with the company's NetWare server operating system and in 1997 became available as a standalone product for single servers that run other leading server operating systems. NDS provides full support for Internet protocols, including the lightweight directory access protocol (LDAP). To establish NDS as the de facto industry standard for all server platforms, Novell distributed in 1997, single-server NDS royalty-free to computer server OEMs to include with their UNIX server operating systems. Novell will also make a binary version of NDS that runs on the Windows NT server operating system available to manufacturers of Intel servers. With NDS on leading server platforms, Novell and its partners will provide value-added network services software that uses the directory as a foundation. The first of these products from Novell will enable replication and synchronization of the directory between individual servers on the network. Providing Novell Directory Services for the Internet. Since 1994, Novell has been partnering with telecommunications carriers and Internet service providers (ISPs) to provide NDS for the Internet. Novell's partners use NDS as the basis for business intranet services that enable their customers to out-source the complexity and lower the cost of maintaining wide-area networks. These services provide managed Internet access that authenticates users and provides secure, reliable communications and access to confidential business information resources over the Internet. AT&T in the United States and NTT in Japan were the first to make NDS for the Internet available. Other carriers and ISPs plan to make the service available in 1998. 3 4 Novell's partners are cooperating to provide interoperability between their networks and maintain a replicated NDS directory that spans between their different services. Providing value-added network services software for business intranets and the Internet. Novell delivers network services that run on the company's NetWare network operating system for business intranets and the Internet. These network services add intelligence to the network to reduce costs of ownership and administration, simplify management tasks for administrators, and make access to network-based information easier for end users. In the first release of NetWare, network services encompassed only file and print. Over the past decade, network services provided by Novell have expanded to include host communications, network management, collaboration and messaging, Web services, security, and advanced file and print. Providing network applications for network solutions. GroupWise is Novell's leading network application, providing electronic mail, calendaring, scheduling, and task and document management features. GroupWise can be hosted on servers running the NetWare, Windows NT and UNIX operating systems. In 1996, the Company expanded the functionality of GroupWise by including Internet access and greater integration with network directories and management products. ManageWise is the market leading management software offering for managing all network resources from the servers that run NetWare and NT server operating systems to the clients, computers, and other devices that access information resources. To provide complete network management solutions, ManageWise integrates with enterprise management products from Hewlett Packard, IBM, Sun and others. PROGRAMS Technical Support Alliance. In May 1991, Novell announced the formation of the Technical Support Alliance (TSA), with 40 current members including Apple, Compaq, Hewlett-Packard, Intel, IBM, Lotus, Microsoft, and Oracle. The TSA was organized to provide one-stop multivendor support. Member companies provide cooperative efforts to support their customers. Certified Novell Engineer Program. Through the Certified Novell Engineer (CNE) program, Novell is strengthening the networking industry's Level I support self-sufficiency. CNEs are individuals who receive high-level training, information, and advanced technical telephone support (Level II) from Novell. CNEs may be employed by resellers, independent support organizations, or Novell Support Organizations (NSOs). The NSO program pools the capabilities of the industry's best support providers. NSOs have contractual agreements with Novell that are designed to ensure quality service on a national or global level for NetWare and other Novell products. Novell Authorized Education Centers. Novell offers education to end users through nearly 1,300 independent Novell Authorized Education Centers (NAECs) worldwide, which use Novell-developed courses to instruct students in the use and maintenance of Novell products. Novell also offers self-paced training products. DeveloperNet. Novell's DeveloperNet delivers software, tools, training, education, support and partnering opportunities to developers through the global DeveloperNet subscription. This program is the primary communication channel to the developer community, with over 15,000 DeveloperNet subscribers. Novell's development initiative gives developers the flexibility to build network-aware applications for the Internet and business intranets by using the development tools of their choice. Through Novell's Open Solution Architecture, Novell is committed to making its network services accessible to developers using Java, Scripting, RAD Components and C/C++. DeveloperNet Labs. DeveloperNet Labs works with third-party manufacturers to test and certify hardware and software components designed to interoperate with Novell products. Novell distributes these test results to inform customers about products that have formally demonstrated Novell product compatibility. DeveloperNet Lab certification programs help vendors to market their products through Novell's distribution channels. The primary goal of DeveloperNet Labs is to foster working relationships between Novell and third-party hardware and software suppliers. Secondary goals include promoting certified products to industry 4 5 resellers, anticipating industry products' direction through co-marketing efforts, and working with vendors to co-develop critical network components. Yes Program. Novell developed the Yes program and the Yes logo to help customers identify and purchase third-party hardware and software products that are compatible with Novell products. The program is designed to be the method by which third-party compatible products are branded and recognized by Novell. The Yes logo is recognized around the world as a mark that indicates a specific product's compatibility with Novell products. PARTNERSHIPS Development Partners. When customers request a new service or function be added to Novell products, Novell investigates the most effective way to deliver that functionality to the user. Sometimes the best way is for Novell to partner with a company who has expertise in that specific area. By partnering, the combination of Novell's core expertise in networks and the partner's expertise in the given product area combine to deliver a better solution faster than if Novell would have attempted to develop it alone. Systems Partners. Novell partners with companies who have complimentary software and hardware. The resulting solution is a powerful combination of products that deliver enterprise-wide connectivity solutions. These partners include system suppliers like IBM, Compaq, DEC and HP, as well as system integration experts like Memorex Telex, Arthur Andersen, and EDS. Application Partners. Novell works very closely with application developers to provide integrated software products and support for end users. As network applications grow in importance, this program will help assure broad availability of well integrated multivendor applications. Enterprise Consulting Partners. This select group of the industry's leading systems integrators and consulting organizations work with Novell to deliver distributed client/server solutions for customers with large enterprise-wide networks. Multiple Channel Distribution Network. The Company markets its products through a broad range of distributors, dealers, value added resellers, systems integrators, and OEMs as well as to major end users. Worldwide Service and Support. The Company is committed to providing service and support on a worldwide basis to its resellers and to their end-user customers. The Company has established agreements with service vendors to expand and complement the service provided directly by the Company's service personnel and the Company's resellers. NOVELL PRODUCTS The Company's products fall within three categories: Server Operating Environments, Network Services, and Collaboration Products. Novell products work together, interoperate with thousands of third-party solutions, and span data networks from workgroup LANs to the Internet. Server Operating Environments provide the foundation of networking and network services that can be extended throughout an organization's network, intranets and the Internet. These products include: NetWare 3 network operating system, which provides users with access to data and resources controlled by a single server; NetWare 4 network operating system, which features NetWare Directory Services (NDS) and provides the user with access to the resources of the entire enterprise or wide-area network and adds Intranet/Internet connectivity and Web site hosting capabilities; and NetWare for Small Business, a version of NetWare that leverages the strengths of NetWare and GroupWise with ease of installation and administration required by small business. NetWare 5, the latest version of the NetWare product line, is currently in beta testing. Network Services improve the manageability and productivity of the network and increase network efficiency. Products include: NDS, NDS for NT, Border Manager, Border Manager Fast Cache, Novell Application Launcher, Novell Replication Services, NetWare for SAA, NetWare Host Publisher, and ManageWise. 5 6 Collaboration Products utilize NetWare network services to provide rich access to network-based information. The Company's GroupWise family of groupware products now serves over 8 million users with integrated E-Mail, group calendaring, scheduling, online conferencing, and forms and document management. GroupWise is the premier collaboration product for intranets and the Internet and integrates these capabilities along with Internet E-mail, fax and voice messages. PRODUCT DEVELOPMENT Due to the rapid pace of technological change in its industry, the Company believes that its future success will depend, in part, on its ability to enhance and develop its software products to satisfactorily meet dynamic market needs. During fiscal 1997, 1996, and 1995, product development expenses were approximately $283 million, $276 million, and $368 million, respectively. The Company's product development effort consists primarily of work performed by employees; however, the Company also utilizes third-party technology partners to assist with product development. SALES AND MARKETING Novell markets its NetWare family of network products through distributors, dealers, vertical market resellers, systems integrators, and OEMs who meet the Company's criteria, as well as to major end users. In addition, the Company conducts sales and marketing activities and provides technical support, training, and field service to its customers from its offices in San Jose, California; Provo and Orem, Utah; and from its 36 U.S. and 60 international sales offices. Distributors. Novell has established a network of independent distributors, which resell the Company's products to dealers, VARs, and computer retail outlets. As of December 31, 1997, there were approximately 10 U.S. distributors and approximately 100 international distributors. Dealers. The Company also markets its products to large-volume dealers and regional and national computer retail chains. VARs and Systems Integrators. Novell also sells directly to value added resellers and systems integrators who market data processing systems to vertical markets, and whose volume of purchases warrants buying directly from the Company. OEMs. The Company licenses its systems software to domestic and international OEMs for integration with their products. End Users. Generally, the Company refers prospective end-user customers to its resellers. However, the Company has the internal resources to work directly with major end users and has developed U.S. and international master license agreements with approximately 800 of them to date. Additionally, some upgrade products are sold directly to end users. International Sales. In fiscal 1997, 1996, and 1995, approximately 45%, 50%, and 47%, respectively, of the Company's net sales were to customers outside the U.S. To date, substantially all international sales except Japanese sales, Indian sales, and certain European sales to non-multinational distributors that were shipped from its distribution center in Dublin, Ireland have been invoiced by the Company in U.S. dollars. In fiscal 1998 the Company anticipates that a portion of international revenues will continue to be invoiced in U.S. dollars. The exceptions to the U.S. dollar invoicing will be Japanese sales through the Company's joint venture in Japan, Indian sales through the Company's joint venture in India and certain sales from its distribution center in Dublin, Ireland. No one foreign country accounted for more than 10% of net sales in any 6 7 period. In fiscal 1997 and 1995, the Company had one multinational distributor which accounted for 11% and 15% of revenue, respectively. Otherwise, no customer accounted for more than 10% of revenue in any period. Marketing. The Company's marketing activities include distribution of sales literature and press releases, advertising, periodic product announcements, support of NetWare user groups, publication of technical and other articles in the trade press, and participation in industry seminars, conferences, and trade shows. The marketing departments of the Company employ many technical laboratories which test and evaluate networked computer equipment and individual devices. The knowledge derived from these laboratories is the basis for the technical literature published by the Company. These activities are designed to educate the market about networks in general, as well as to promote the Company's products. Through the Professional Developers Program, the Company strongly supports independent software and hardware vendors in developing products that work on Novell networks. Thousands of multiuser application software packages are now compatible with the NetWare operating system. In March 1997, the thirteenth annual BrainShare Conference was held to inform and educate developers about Novell product strategy, Novell open architecture programming interfaces, and Novell third-party product certification programs. TECHNICAL SERVICES AND EDUCATION Novell's Customer Services is composed of Technical Services and Education. The Technical Services Group has an established infrastructure worldwide with support centers in the United States, Europe and Asia. These centers are World Class and have established quality standards with ISO 9001 certification around the world. Novell Technical Services offers a wide variety of flexible support offerings. Novell Education is the pioneer in the networking certification arena. Novell Education has certified over 120,000 CNE and 250,000 Certified Novell Administrators (CNAs) at its customer and partner sites around the world. Novell education continues to pioneer the certification process with its newest program, "Certified Internet Professional." MANUFACTURING SUPPLIERS The Company's products, which consist primarily of software diskettes and manuals, are duplicated by outside vendors. This allows the Company to minimize the need for expensive capital equipment in an industry in which multiple high-volume manufacturers are available. BACKLOG Lead times for the Company's products are typically short. Consequently, the Company does not believe that backlog is a reliable indicator of future sales or earnings. The Company's practice is to ship its products promptly upon the receipt of purchase orders from its customers and, therefore, backlog is not significant. COMPETITION Novell competes in the highly competitive market for computer software. Novell believes that the principal competitive factors are technical innovation to meet dynamic market needs, marketing strength, system/performance, customer service and support, reliability, ease of use, and price/performance. The market for computer software, has become increasingly competitive due to Microsoft's growing presence in all sectors of the software business. The Company does not have the product breadth and market power of Microsoft. Microsoft's dominant position provides it with distinct competitive advantages. This position may enable Microsoft to increase its market position even if the Company succeeds in introducing products with performance and features superior to those offered by Microsoft. Microsoft's increasing ability to ship networking products with features and functionality which are competitive with Novell, together with its ability to offer incentives to customers to purchase certain products in order to obtain favorable sales terms or necessary compatibility or information with respect to other products, may significantly inhibit the Company's ability to grow its business. In addition, as Microsoft creates new operating systems and 7 8 applications, there can be no assurance that Novell will be able to ensure that its products will be compatible with those of Microsoft. Additionally, the Company may face competition from other industry companies which could introduce competitive operating systems. If any of these competing products achieves market acceptance, Novell's business and results of operations could be materially adversely affected. COPYRIGHT, LICENSES, PATENTS AND TRADEMARKS The Company relies on copyright, patent, trade secret and trademark law, as well as provisions in its license, distribution and other agreements in order to protect its intellectual property rights. The Company has been issued what it considers to be valuable patents and has numerous other patents pending. No assurance can be given that the patents pending will be issued or, if issued, will provide protection for the Company's competitive position. The Company has an increasing concern that Computer industry companies that have huge financial resources and patent portfolios such as Lucent, AT&T, Microsoft, and IBM, will increasingly assert patent infringement claims against smaller companies such as Novell. While Novell has no reason to think it would not have defensible claims, the cost and time of defending such claims can be enormous. Although Novell intends to protect its patent rights vigorously, there can be no assurance that these measures will be successful nor that the claims on any patents held by the Company will be sufficiently broad to protect the Company's technology. In addition, no assurance can be given that any patents issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. The loss of patent protection on the Company's technology or the circumvention of its patent protection by competitors could have a material adverse effect on the Company's ability to compete successfully in its business. The software industry is characterized by frequent litigation regarding copyright, patent and other intellectual property rights. The Company has from time to time had infringement claims asserted by third parties against it and its products. While there are no known or pending threatened claims against the Company, the unsatisfactory resolution of which would have a material adverse effect on the Company's results of operations and financial condition, there can be no assurance that such third-party claims will not be asserted, or if asserted, will be resolved in a satisfactory manner. In addition, there can be no assurance that third parties will not assert other claims against the Company with respect to any third-party technology. In the event of litigation to determine the validity of any third-party claims, such litigation could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation is determined in favor of the Company. In the event of an adverse result in any such litigation, the Company could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology which is the subject of the litigation. There can be no assurance that the Company would be successful in such development or that any such licenses would be available. In addition, the laws of certain countries in which Novell's products are or may be developed, manufactured or sold may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. EMPLOYEES As of December 31, 1997, the Company had 4,797 employees. The functional distribution of its employees was: sales and marketing -- 1,426; product development -- 1,643; general and administrative -- 763; service, support, education, and operations -- 965. Of these, 1,546 employees are in offices outside the U.S. All other Company personnel are based at the Company's facilities in Utah, California, and various U.S. field offices. None of the employees is represented by a labor union, and the Company considers its employee relations to be excellent. Competition for qualified personnel in the computer industry is intense. To make a long-term relationship with the Company rewarding, Novell endeavors to give its employees and in some cases its consultants, challenging work, educational opportunities, competitive wages, sales commission plans, bonuses, and through 8 9 stock option and, stock purchase plans, opportunities to participate financially in the ownership and success of the Company. FACTORS AFFECTING EARNINGS AND STOCK PRICE In addition to factors described above under "Competition" which may adversely affect the Company's earnings and stock price, other factors may also adversely affect the Company's earnings and stock price. The ability of the Company to maintain its competitive technological position will depend, in large part, on its ability to attract and retain highly qualified development and managerial personnel. Competition for such personnel is intense and there is a risk of departure due to the competitive environment in the software industry. The loss of a significant group of key personnel would adversely affect the Company's product development efforts. As is common in the computer software industry, Novell has experienced delays in the introduction of new products, due to the complexity of software products, the need for extensive testing of software to ensure compatibility of new releases with a wide variety of application software and hardware devices and the need to "debug" products prior to extensive distribution. Significant delays in developing, completing or shipping new or enhanced products would adversely affect the Company. Moreover, the Company may experience delays in market acceptance of new releases of its products as the Company engages in marketing and education of the user base regarding the advantages and system requirements for the new products and as customers evaluate the advantages and disadvantages of upgrading. The Company has encountered these issues on each major new release of its products, and expects that it will encounter such issues in the future. Novell's ability to achieve desired levels of sales growth depends at least in part on the successful completion, introduction and sale of new versions of its products. There can be no assurance that the Company will be able to respond effectively to technological changes or new product announcements by others, or that the Company's research and development efforts will be successful. Should Novell experience material delays or sales shortfalls with respect to new product releases, the Company's sales and net income could be adversely affected. A goal of the Company is to deliver groupware application solutions combining network services and workgroup applications. The future success of this strategy will depend in part on the Company's ability to develop and market new competitive products for workgroup productivity and information processing. Development of these products has already required and will continue to require a substantial investment in research and development, particularly as a result of the decision to offer products across multiple operating environments. Although Novell's existing network of distributors should assist in this transition, marketing and distribution of these products may require developing new marketing and sales strategies and will entail significant expense. The Company has had only limited experience in the market for these products, and there can be no assurance that the Company will be successful in developing and marketing these new products. The Company's future earnings and stock price could be subject to significant volatility, particularly on a quarterly basis. The Company's revenues and earnings may be unpredictable due to its shipment patterns. As is typical in the software industry, a high percentage of the Company's revenues are expected to be earned in the third month of each fiscal quarter and will tend to be concentrated in the latter half of that month. Accordingly, quarterly financial results will be difficult to predict and quarterly financial results may fall short of anticipated levels. Because the Company's backlog early in a quarter will not generally be large enough to assure that it will meet its revenue targets for any particular quarter, quarterly results may be difficult to predict until the end of the quarter. A shortfall in shipments at the end of any particular quarter may cause the results of that quarter to fall significantly short of anticipated levels. Due to analysts' expectations of continued growth, any such shortfall in earnings can be expected to have an immediate and very significant adverse effect on the trading price of Novell's Common Stock in any given period. The past pattern of new product introductions has caused revenues to fluctuate, sometimes significantly, on a quarter-by-quarter basis. Such revenue fluctuations may contribute to the volatility of the trading price of Novell Common Stock in any given period. In addition, the market prices for securities of software companies have been historically volatile. The market price of Novell Common Stock, in particular, has been subject to wide fluctuations in the past. As a result of the foregoing factors and other factors that may arise in the future, the market price of Novell's Common Stock may be subject to significant fluctuations within a short period of time. These fluctuations may be due to factors specific to the Company, to changes in analysts' earnings estimates, or to factors affecting the computer industry or the securities markets in general. 9 10 ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names, ages, titles with Novell, and present and past positions of the persons currently serving as executive officers of Novell.
HAS BEEN OFFICER NAME AGE SINCE POSITION OR OFFICE - -------------------------- --- -------- ----------------------------------------------- Eric E. Schmidt 42 1997 Chairman of the Board and Chief Executive Officer David R. Bradford 47 1986 Senior Vice President, General Counsel, and Corporate Secretary Ronald E. Heinz, Jr. 39 1996 Senior Vice President, Worldwide Sales Jennifer A. Konecny-Costa 51 1996 Senior Vice President, Human Resources Stewart G. Nelson 37 1997 Vice President, Product Development Darcy G. Mott 45 1989 Vice President and Treasurer Richard A. Nortz 53 1997 Senior Vice President, Customer Services Glenn Ricart 48 1996 Senior Vice President and Chief Technology Officer John F. Slitz, Jr. 48 1997 Senior Vice President, Marketing Christopher M. Stone 41 1997 Senior Vice President, Strategic Business Development James R. Tolonen 48 1989 Senior Vice President and Chief Financial Officer
ERIC E. SCHMIDT joined the Company in March 1997 and became Chairman of the Board and Chief Executive Officer in April 1997. Prior to joining Novell, he served as Chief Technology Officer and Corporate Executive Officer at Sun Microsystems, Inc. (Sun). In his 14 years at Sun, he held a range of progressively more responsible executive positions. DAVID R. BRADFORD joined the Company in October 1985 as Corporate Counsel. He became Corporate Secretary in January 1986, Senior Corporate Counsel in April 1986, and Senior Vice President, General Counsel, and Corporate Secretary in April 1989. RONALD E. HEINZ, JR. joined the Company in February 1989 and has served in various sales and marketing positions including Vice President, North America and Latin America Sales and Marketing. In January 1997 he became Senior Vice President, Worldwide Sales and was elected a corporate officer. JENNIFER A. KONECNY-COSTA joined the Company in June 1996 as Senior Vice President, Human Resources and was elected a corporate officer. From 1994 to June 1996, she was Vice President, Human Resources at Wilson, Sonsini, Goodrich & Rosati, a law firm representing high technology companies. Prior to that, she was Vice President, Human Resources from 1988 through 1994 at Silicon Graphics, a software company. DARCY G. MOTT, a Certified Public Accountant, joined the Company in September 1986. He served in various finance positions and became Corporate Controller in February 1989. He was elected a corporate officer in November 1989 and became Treasurer in January 1991. In December 1995 he became Vice President and Treasurer. STEWART G. NELSON joined the Company in June 1994 through the WordPerfect merger and has served in various product development positions including Vice President and General Manger, Applications. In October 1997, he became Vice President, Product Development and was elected a corporate officer. Prior to joining Novell, he held various product development positions at WordPerfect from 1987 to 1994. 10 11 RICHARD A. NORTZ joined the Company in October 1995 as Senior Vice President, Technical Services. In February 1997, he became Senior Vice President, Customer Services and was elected a corporate officer. Prior to joining Novell, he was Senior Vice President for Wang Laboratories' worldwide customer service business, and also spent time as acting General Manager of Wang's European Operations from 1991-1995. GLENN RICART joined the Company in August 1995 as Senior Vice President, Corporate Research and Development. In February 1996 he became the Chief Technology Officer and was elected a corporate officer. Prior to joining Novell, he served at the University of Maryland since 1982 in various capacities including, Director of the Computer Science Center, Affiliate Associate Professor of the Computer Science Department and as the Assistant Vice Chancellor for Academic Information Technology. In September 1994 he began a sabbatical at the Advanced Research Projects Agency, a branch of the United States Department of Defense. JOHN F. SLITZ, JR. joined the Company in August 1997 as Senior Vice President, Marketing and was elected a corporate officer. From 1995 to July 1997, he was Vice President of Object Technology/Application Development Marketing at International Business Machines (IBM). Prior to joining IBM, he was Vice President of Marketing at Object Management Group, Inc. from 1990 to 1995. CHRISTOPHER M. STONE joined the Company in September 1997 as Senior Vice President, Strategic Business Development and was elected a corporate officer. Prior to joining Novell, he founded and was Chairman of the Board and Chief Executive Officer of the Object Management Group from 1989 to August 1997. JAMES R. TOLONEN, a Certified Public Accountant, joined the Company in 1989 through the Excelan merger and became a Senior Vice President and Chief Financial Officer in August 1989 and was elected a corporate officer. ITEM 2. PROPERTIES The Company owns and occupies a 1,000,000 square-foot office complex on 99 acres in Orem, Utah, which is used as a product development center and administrative offices, of which, approximately 250,000 square-feet is subleased to various tenants. It also owns and occupies a 550,000 square-foot office complex, with plans to expand the complex by up to 580,000 square-feet in fiscal 2000, on 46 acres in Provo, Utah, which is used as corporate headquarters and a product development center. It also owns a 380,000 square-foot manufacturing and distribution facility on 23 acres in Lindon, Utah, all of which is leased to a third party manufacturer. The Company also owns a 100,000 square-foot office building in Herndon, Virginia. The Company occupies approximately 1/3 of the space in this building and leases the remainder to tenants. The Company also owns two buildings, totaling 90,000 square feet in San Jose, California, which are used primarily for product development. The Company also has an Irish subsidiary which owns a 72,000 square-foot office building in the United Kingdom and leases the building to the Company's United Kingdom subsidiary. Additionally, the Company owns approximately 48 acres of land in San Jose, California on which it is currently constructing a 530,000 square-foot office complex to replace the buildings it currently owns and leases in San Jose, California. The campus is expected to be complete and occupied in fiscal 1999. The Company also has the capacity to expand on its land in Provo and Orem, Utah. The Company has subsidiaries in Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, Colombia, Czech Republic, Denmark, Finland, France, Germany, Hong Kong, Hungary, India, Ireland, Israel, Italy, Japan, Korea, Mexico, Netherlands, New Zealand, Norway, Poland, Singapore, South Africa, Spain, Sweden, Switzerland, United Kingdom, Uruguay, and Venezuela -- each of which leases its facilities. The Company leases offices for product development in San Jose, California and Berkeley Heights, New Jersey; and a distribution facility in San Jose, California. The Company also leases sales and support offices in Arizona, California (6), Colorado, Connecticut, Florida (2), Georgia, Illinois, Massachusetts, Michigan, Minnesota, Missouri (2), New York (2), North Carolina, Ohio (3), Oregon, Pennsylvania (2), Tennessee, Texas (3), Utah, Washington, China, Malaysia, Russia, Taiwan, Thailand, and United Arab Emirates. The terms of such leases vary from month to month to up to ten years. 11 12 ITEM 3. LEGAL PROCEEDINGS In 1993, a suit was filed due to a failed contract against a company that Novell subsequently acquired. The plaintiff obtained a jury verdict against the acquired company in 1996. Novell does not believe the resolution of this legal matter will have a material adverse effect on its financial position, results of operations, or cash flows. The Company is a party to a number of additional legal claims arising in the ordinary course of its business. The Company believes the ultimate resolution of these claims will not have a material adverse effect on its financial position, results of operations, or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The information required by Item 5 of Form 10-K is incorporated herein by reference to the information contained in the section captioned "Selected Consolidated Quarterly Financial Data" on page 26 of the Company's Annual Report to Shareholders for the fiscal year ended October 31, 1997. ITEM 6. SELECTED FINANCIAL DATA The information required by Item 6 of Form 10-K is incorporated herein by reference to the information contained in the section captioned "Selected Consolidated Financial Data" on page 5 of the Company's Annual Report to Shareholders for the fiscal year ended October 31, 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by Item 7 of Form 10-K is incorporated herein by reference to the information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 6 through 10 of the Company's Annual Report to Shareholders for the fiscal year ended October 31, 1997. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 8 of Form 10-K is incorporated herein by reference to the Company's consolidated financial statements and related notes thereto, together with the report of the independent auditors presented on pages 11 through 25 of the Company's Annual Report to Shareholders for the fiscal year ended October 31, 1997, and to the information contained in the section captioned "Selected Consolidated Quarterly Financial Data" on page 26 of the Company's Annual Report to Shareholders for the fiscal year ended October 31, 1997. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 12 13 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required with respect to identification of directors is incorporated herein by reference to the information contained in the section captioned "Election of Directors" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 7, 1998, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended. Information regarding executive officers of Novell is set forth under the caption "Executive Officers" in Item 1a hereof. Each director and each officer of the Company who is subject to Section 16 of the Securities Exchange Act of 1934 (the "Act") is required by Section 16(a) of the Act to report to the Securities and Exchange Commission by a specified date his or her transactions in the Company's securities. In fiscal 1997, there were no compliance exceptions to this requirement. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the sections captioned "Executive Compensation" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 7, 1998, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in the section captioned "Securities Ownership of Certain Beneficial Owners and Management" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 7, 1998, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in the section captioned "Certain Transactions" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 7, 1998, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Act of 1934, as amended. 13 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this annual report on Form 10-K for Novell, Inc.: 1. The Consolidated Financial Statements, the Notes to Consolidated Financial Statements and the Report of Ernst & Young LLP, Independent Auditors, listed below are incorporated herein by reference to pages 11 through 25 of the Company's Annual Report to Shareholders for the fiscal year ended October 31, 1997. Consolidated Statements of Operations for the fiscal years ended October 31, 1997, October 26, 1996, and October 28, 1995. Consolidated Balance Sheets at October 31, 1997 and October 26, 1996. Consolidated Statements of Shareholders' Equity for the fiscal years ended October 31, 1997, October 26, 1996, and October 28, 1995. Consolidated Statements of Cash Flows for the fiscal years ended October 31, 1997, October 26, 1996, and October 28, 1995. Notes to Consolidated Financial Statements. Report of Ernst & Young LLP, Independent Auditors. 2. Financial Statement Schedules:
PAGE ---- Schedule II -- Valuation and Qualifying Accounts............................ 16 Schedules other than that listed above are omitted because they are not required, not applicable or because the required information is shown in the consolidated financial statements or notes thereto.
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................................. 17
(b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the quarter ended October 31, 1997. 14 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NOVELL, INC. (Registrant) Date: January 26, 1998 By /S/ DR. ERIC SCHMIDT ------------------------------------ Dr. Eric Schmidt Chairman of the Board, and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE - ----------------------------------------------- ---------------------------- ----------------- /S/ DR. ERIC SCHMIDT Chairman of the Board, January 26, 1998 - ----------------------------------------------- Chief Executive Officer (Dr. Eric Schmidt and Director (Principal Executive Officer) /S/ JAMES R. TOLONEN Senior Vice President and January 26, 1998 - ----------------------------------------------- Chief Financial Officer (James R. Tolonen) (Principal Financial and Accounting Officer) /S/ ELAINE R. BOND Director January 26, 1998 - ----------------------------------------------- (Elaine R. Bond) /S/ HANS-WERNER HECTOR Director January 26, 1998 - ----------------------------------------------- (Hans-Werner Hector) /S/ JACK L. MESSMAN Director January 26, 1998 - ----------------------------------------------- (Jack L. Messman) /S/ LARRY W. SONSINI Director January 26, 1998 - ----------------------------------------------- (Larry W. Sonsini) /S/ IAN R. WILSON Director January 26, 1998 - ----------------------------------------------- (Ian R. Wilson) /S/ JOHN A. YOUNG Director January 26, 1998 - ----------------------------------------------- (John A. Young)
15 16 NOVELL, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS ACCOUNTS RECEIVABLE ALLOWANCE (IN THOUSANDS)
ADDITIONS ADDITIONS DEDUCTIONS DEDUCTIONS BALANCE AT CHARGED TO CHARGED TO FROM FROM BAD BALANCE BEGINNING RETURN BAD DEBT RETURN DEBT AT END OF PERIOD RESERVES RESERVES RESERVES RESERVES OF PERIOD ---------- ---------- ---------- ---------- ---------- --------- Fiscal year ended October 28, 1995................. $ 82,934 $290,613 $ 10,470 $305,679 $ 3,481 $ 74,857 Fiscal year ended October 26, 1996................. $ 74,857 $314,979 $ 6,481 $323,438 $ 11,939 $ 60,940 Fiscal year ended October 31, 1997................. $ 60,940 $185,545 $ 4,437 $210,205 $ 7,664 $ 33,053
16 17 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, 1996.(2)(Exhibit 10.9) 10.2 Agreement and Plan of Reorganization dated March 23, 1989, among Novell, Inc.; Lansub Corporation; and Excelan, Inc.(5)(Appendix A) 10.3 Novell, Inc. 1989 Employee Stock Purchase Plan.(6)(Exhibit 4.1) 10.4 Agreement and Plan of Reorganization dated July 16, 1991, among Novell, Inc.; MDAC Corp.; and Digital Research Inc.(7)(Appendix A) 10.5 Novell, Inc. 1991 Stock Plan.(8)(Exhibit 4.1) 10.6 Agreement and Plan of Reorganization and Merger dated February 12, 1993, among Novell, Inc.; Novell Acquisition Corp.; UNIX System Laboratories, Inc.; and American Telephone and Telegraph Company.(9)(Appendix A) 10.7 UNIX System Laboratories, Inc. Stock Option Plan.(10)(Exhibit 4.3) 10.8 Agreement and Plan of Reorganization dated March 21, 1994 and amended May 31, 1994, among Novell, Inc.; Novell Acquisition Corp.; WordPerfect Corporation, Alan C. Ashton, Bruce W. Bastian, and Melanie L. Bastian.(11)(Appendix A & Exhibit 1.1) 10.9 Novell, Inc. Novell/WordPerfect Stock Plan.(12)(Exhibit 10.1) 10.10 Novell, Inc. Stock Option Plan for Non-Employee Directors.(13)(Exhibit 4.1) 11 Statement regarding computation of per share earnings.(14) 13 Company's Annual Report to Shareholders for the fiscal year ended October 26, 1996.(14) 21 Subsidiaries of the Registrant.(14) 23.1 Consent of Ernst & Young LLP, independent auditors.(14) 27 Financial Data Schedule.(14)
- --------------- (1) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-1, filed November 30, 1984, and amendments thereto(File No. 2-94613). (2) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Annual Report on Form 10-K, filed for the fiscal year ended October 25, 1986(File No. 0-13351). (3) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Current Report on Form 8-K, dated December 7, 1988(File No. 0-13351). (4) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Annual Report on Form 10-K, filed for the fiscal year ended October 29, 1988 (File No. 0-13351). (5) Incorporated by reference to the Appendix identified in parentheses, filed as an appendix in the Registrant's Registration Statement on Form S-4, filed May 9, 1989 (File No. 33-28470). (6) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-8, filed October 22, 1997 (File No. 333-38435). (7) Incorporated by reference to the Appendix identified in parentheses, filed as an appendix in the Registrant's Registration Statement on Form S-4, filed September 24, 1991 (File No. 33-42254). (8) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-8, filed May 29, 1996 (File No. 333-04775). (9) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement of Form S-4, filed May 13, 1993 (File No. 33-60120). (10) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-8, filed July 2, 1993 (File No. 33-65440). (11) Incorporated by reference to the Appendix and Exhibit identified in parentheses, filed as an appendix and exhibit in the Registrant's Registration Statement on Form S-4, filed June 13, 1994 (File No. 33-53215). (12) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement of Form S-8, filed July 8, 1994 (File No. 33-54483). (13) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement of Form S-8, filed May 30, 1996 (File No. 333-04823). (14) Filed herewith. 17 EX-11 2 STMNT REGARDING COMP. 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 28, OCTOBER 26, OCTOBER 31, 1995 1996 1997 ----------- ----------- ----------- Weighted average number of common shares outstanding.......... 367,963 355,478 348,148 Number of common share equivalents resulting from stock options, computed using the treasury stock method............. 6,621 2,441 1,281 ------- ------- ------- Number of common and common share equivalents used in computation................................................... 374,584 357,919 349,429 ======= ======= =======
EX-13 3 ANNUAL REPORT FOR YEAR ENDED 10/31/97 1 Form 10-K 1997 [LOGO] 2 CORPORATE PROFILE Everywhere we look networks matter. Customers around the world are deploying networks to transform every aspect of their business. As the world's largest network software company, Novell believes that the network is the centerpiece of every computing endeavor. More businesses run their networks with Novell's NetWare than all other alternatives combined. Novell now intends to become a leader in Internet software that makes possible increasingly intelligent interconnected networks. 3 TO OUR SHAREHOLDERS Clarity of direction and strategy are essential for software companies to sustain growth. The Novell that I joined in April 1997, mid-way through the company's fiscal year, had lost touch with this simple truth. In seven months, we have corrected that. We have addressed three priority areas. First, realigning Novell's business model with market realities to set the stage for restoring the company's financial performance. Second, accelerating the rate of new product introductions that customers want. And third, establishing a new rigor within Novell's management team around a handful of key initiatives. In a year of declining revenue, the first step was to stabilize Novell's business and align our business model with market realities. We appraised the entire organization and made changes, including a significant reduction in management ranks. We replaced seven layers of management with four to enable Novell to be more effective in delivering new products on time. Overall, we reduced the size of our workforce by more than 1,000 employees, or approximately 17 percent. Having done this, we believe we can better control costs, while gaining the benefit of new performance measures and incentives based on responsiveness to customers. Before the year was completed, we saw evidence that we were succeeding. After reporting losses in the second and third quarters of fiscal 1997, and a $55 million restructuring charge in the third quarter, market demand for our products led to fourth-quarter revenue near second-quarter levels and a return to profitability. We saw product demand return across our entire distribution channel -- value added resellers, multi-product licensing programs, and original equipment manufacturers. DELIVERING NEXT-GENERATION PRODUCTS Building an established software company into a formidable competitor with revitalized revenue and earnings growth is accomplished on the strength of new products. As the fourth quarter of 1997 unfolded, we began to set a new, faster pace for product introductions and marketing initiatives. We now expect Novell to release at least one new product a month for beta testing or customer shipment in the coming year. This accelerated business tempo signals a major shift for Novell and an expanded portfolio of solutions for our customers. 4 At the most general level, Novell's objective is to become a pure Internet/intranet network software leader based on these next-generation products. Each product will take advantage of Novell(R) Directory Services(TM) (NDS(TM)) to support open, interconnected, and increasingly intelligent networks that are the future of information and commerce at every level. And, we believe, our new products will collectively benefit from industry trends that are expanding business networks and requiring more network software -- Novell's core strength. In the second half of fiscal 1997 we began to ship the first of Novell's next-generation products. We intend to complete this effort by bringing a series of new offerings to market through the second half of fiscal 1998. In August 1997, we introduced Novell BorderManager(TM), the first of an innovative new class of Internet software products called Border Services. The second of these products, FastCache(TM), started shipping in first-quarter 1998. These products advance Novell into the fast growing Internet markets for caching, Internet security, and virtual private networking. In October, we announced NDS(TM) for NT and started shipping it in the first quarter of 1998. NDS for NT is a major step in accelerating market standardization on NDS. This product provides tremendous management efficiencies and directory integration for our customers' NT resources. Due in mid-1998 is the centerpiece of Novell's next-generation products, NetWare(R) 5(TM), code named Moab. The next release of our server operating system, NetWare 5 is based on the communications standard of the World Wide Web and will take Novell's server software fully into the Internet market. NetWare 5 entered initial beta testing in October 1997 and will begin a large scale beta with tens of thousands of users in January 1998. Our next-generation products will increasingly take advantage of new Internet technologies, including the industry-standard Java(TM) technology for developing and deploying applications. We will use Java on the server to support network applications and to build smart new services that live across the network. We intend to be first to break Java into the network mainstream with NetWare 5 as an incredibly fast and scalable Java server platform. FOCUSED MANAGEMENT Equal to the end-of-year progress with products and the realignment of our business model with market realities, the executive management team gained a new clarity of focus around a few key initiatives. This also marks a significant shift for the company. In the last quarter of fiscal 1997 we demonstrated how a shared, singular focus on product delivery and expense management -- along with tight focus on a set of product initiatives -- has the potential to return the company to profitability. 5 Before the close of 1997, I strengthened the management team with the appointment of two key executives. We named John Slitz, Jr., as senior vice president, Novell marketing, to provide central leadership for all marketing functions in the company. John is charged with creating a cohesive marketing organization that is highly effective in revitalizing our brand identity and bringing Novell closer together with its customers. We appointed Christopher Stone as senior vice president of strategy and corporate development to lead key technology initiatives and reestablish Novell as a compelling vendor partner. We believe that under Chris' direction, support for the specialized telecommunications needs of Internet Service Providers (ISPs) will become a larger part of our business. We have an opportunity to drive the integration of Novell's standards-based network services within the ISP marketplace over the next two years. There is enormous potential for growth in this market segment. LOOKING AHEAD Fiscal 1997 ended with solid fundamentals -- an annualized revenue run rate exceeding $1 billion, more than $1 billion in cash and short-term investments, no debt, major market presence, and worldwide channel partners who stand behind our disciplined business practices. Late in the year, indications were that the actions we implemented were taking hold, reflecting the hard work of Novell's employees around the world and their dedication to fully revitalizing Novell's business. I have no illusions about what is required to transform Novell as an Internet leader. Given the size of Novell's business, a single next-generation product will not by itself enable us to achieve our objective of revitalizing this business. Until our next-generation products are in the market and we are successful in growing revenues, product development and other expenses necessary to complete this task will restrain Novell earnings. A complete transition will require the cumulative benefit of all our new Internet products, the business changes launched in 1997, and improvements that will continue through the next fiscal year. My overarching objective is to aggressively reconnect with customers and channel partners in 1998. If we accomplish this, we have the potential for a re-energized customer community that relies more than ever on Novell's innovation in networking. We enter 1998 a smaller, more agile organization that is clear about what it must accomplish. I am solidly optimistic that we can build on the new Novell for the benefit of our customers, shareholders, and employees. [SIG] Dr. Eric E. Schmidt/Chairman and Chief Executive Officer/December 21, 1997 6
FINANCIAL CONTENTS 5 Selected Consolidated Financial Data 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Consolidated Statements of Operations 12 Consolidated Balance Sheets 13 Consolidated Statements of Shareholders' Equity 14 Consolidated Statements of Cash Flows 15 Notes to Consolidated Financial Statements 25 Report of Ernst & Young LLP, Independent Auditors 26 Selected Consolidated Quarterly Financial Data -- Unaudited 27 Directors and Executives 28 Corporate Directory 29 Other Information
7 SELECTED CONSOLIDATED FINANCIAL DATA DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
OCT. 31 Oct. 26 Oct. 28 Oct. 29 Oct. 30 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- STATEMENT OF OPERATIONS Net sales $ 1,007,311 $ 1,374,856 $ 2,041,174 $ 1,998,077 $ 1,830,411 Gross profit 729,865 1,068,095 1,551,841 1,531,011 1,427,809 Income (loss) from operations (200,004) 108,944 452,109 269,943 108,098 Income (loss) before taxes (150,570) 179,988 508,729 297,383 138,157 Income tax expense (benefit) (72,274) 53,997 170,424 90,652 97,437 Net income (loss) (78,296) 125,991 338,305 206,731 40,720 Net income (loss) per share (.22) .35 .90 .56 .11 BALANCE SHEET Cash and short-term investments $ 1,033,473 $ 1,024,755 $ 1,321,231 $ 861,809 $ 719,197 Working capital 1,148,426 1,225,987 1,464,237 990,411 859,308 Total assets 1,910,649 2,049,466 2,416,830 1,963,481 1,745,337 Long-term debt -- -- -- -- 84,289 Shareholders' equity 1,565,417 1,615,509 1,938,262 1,486,987 1,146,026
8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Novell is the world's leading provider of network software. The Company offers a wide range of network solutions, education, and support for distributed network, Internet, and small-business markets. During the third quarter of fiscal 1997, Novell took measures to reduce and realign its resources and better manage and control its business. These measures were in response to declines in sales of boxed products through indirect distribution channel customers, controlled shifts to multi-product licenses, lower licensing revenue of certain older products to OEM's, as well as competitive pressures in the small network market. Specifically, the Company did not ship boxed products to its indirect distribution channel customers except to accommodate product exchanges and returns. The Company believes this action, which significantly reduced reported revenue in the quarter, brought indirect distribution channel inventories of boxed software products in line with current market demand. The decision to withhold shipments to the Company's indirect distributor channel resulted in an operating loss in the third quarter of fiscal 1997. The Company will continue to monitor channel inventory levels to keep them in line with estimated market demand. In addition, the Company reduced its workforce by approximately 1,000 employees, or 17%, and consolidated a number of facilities. This resulted in a one-time restructuring charge of $55 million, principally comprised of severance and excess facilities costs. The restructuring charge contributed a loss of $0.10 per share, net of tax, to the reported loss in fiscal 1997. The workforce reduction and associated consolidation of facilities returned the Company to break even for the fourth quarter of fiscal 1997 and is expected to lower future operating expenses by approximately $100 million annually. During the second quarter of fiscal 1996, the Company implemented a change to its traditional distribution stocking policy that significantly reduced revenue and earnings in that quarter. The change in the Company's traditional distribution stocking policy was to respond to changing market conditions over the prior two years. Direct customer and OEM licensing programs grew from less than 5% of revenue to more than 40% of revenue. This shift in customer buying preferences changed the Company's reliance on boxed product flowing through the indirect distribution channel. In order to deal with this changing environment, the Company did not ship boxed product to its indirect distribution channel customers except to accommodate product exchanges and returns during the second quarter of fiscal 1996, which had the effect of reducing inventories within the indirect distribution channel, as well as significantly reducing revenue in the quarter. In March 1996, the Company completed the sale of its personal productivity applications product line to Corel Corporation (Corel). The Company received approximately 10 million shares of Corel common stock and approximately $11 million of cash. This resulted in an ownership position of approximately 17% of the outstanding Corel common stock. The Company reported a one-time gain of $20 million in the second quarter of fiscal 1996 related to this transaction. Net of tax, the gain was $13 million, or $0.04 per share. Additionally, Corel licensed GroupWise(R) client software, Envoy(R) electronic publishing software, and other technologies from Novell for a minimum royalty obligation of approximately $50 million over the next five years. During fiscal 1997, Novell sold approximately one million shares of Corel common stock at a loss of approximately $6 million, which was more than offset by gains on the sales of other equity securities. In December 1995, Novell sold its UnixWare* product line to the Santa Cruz Operation, Inc. (SCO). The Company realized a small gain and recorded $19 million of UNIX* technology royalty revenue from this transaction in the first quarter of fiscal 1996. Under the agreement, Novell received approximately six million shares of SCO common stock, resulting in ownership of approximately 17% of the outstanding SCO common stock. In addition, Novell continues to receive revenue from previously existing licenses for certain versions of UNIX System source code shipped prior to the sale to SCO. 9 RESULTS OF OPERATIONS
NET SALES 1997 Change 1996 Change 1995 - --------- ---- ------ ---- ------ ---- Net sales (millions) $1,007 -27% $1,375 -33% $2,041
The sale of its UnixWare product line in the first quarter of fiscal 1996 and the sale of its personal productivity applications product line, along with the decision to not ship to the indirect distribution channel in both the third quarter of fiscal 1997 and in the second quarter of fiscal 1996 makes year-over-year comparisons difficult. The analysis that follows describes the product lines consistent with the Company's current ongoing business. Novell's product lines can be categorized into server operating environments; network services; UNIX royalties; and education, service and other. Prior years' revenues also include revenue from product lines that subsequently were sold or discontinued, such as the personal productivity applications product line which was sold to Corel in March 1996, and the UnixWare product line sold to SCO in December 1995. The server operating environments product line includes the NetWare(R) operating system family of products. Server operating environments revenue was $613 million in fiscal 1997 compared to $754 million in fiscal 1996, and $1,045 million in fiscal 1995. The decrease between fiscal 1996 and 1997 is primarily attributable to a 50% decline in sales of NetWare 3,(TM) flat sales of intraNetWare and NetWare 4(TM) and to the impact of not shipping into the indirect distribution channel in the second quarter of fiscal 1996 and the third quarter of fiscal 1997, as discussed previously. The decrease in fiscal 1996 from fiscal 1995 is a result of an 18% growth in intraNetWare and NetWare 4 sales offset by a 57% decline in sales of NetWare 3 and by the impact of not shipping into the indirect distribution channel in the second quarter of fiscal 1996. The server operating environments product line represented 61% of revenue in fiscal 1997 compared to 55% of revenue in fiscal 1996, and 51% in fiscal 1995. The network services product line includes infrastructure products and application products. Infrastructure products include TCP/IP access products, host connectivity products, Tuxedo(R), and mobile/remote connectivity products, among others. Application products include ManageWise(R) and GroupWise products. The network services product line had revenue of $233 million in fiscal 1997 compared to $328 million in fiscal 1996, and $343 million in fiscal 1995. Revenue was down from fiscal 1996 to fiscal 1997 with a 14% decrease in application products as well as a 43% decrease in infrastructure products. Revenue in fiscal 1996 was down slightly from revenue in fiscal 1995 due to increases in application products of 41% offset by a 26% decrease in infrastructure products. Network services revenue represented 23% of revenue in fiscal 1997 compared to 24% in fiscal 1996, and 17% in fiscal 1995. UNIX royalties were $36 million in fiscal 1997 compared to $79 million in fiscal 1996, and $75 million in fiscal 1995. The decrease from fiscal 1996 to fiscal 1997 is attributable to declining sales of UNIX licenses. The increase from fiscal 1995 to fiscal 1996 was attributable to a one-time $19 million paid-up royalty recognized in the sale of UNIX technology to SCO in fiscal 1996. UNIX royalties were 4% of revenue in fiscal 1997 compared to 6% of revenue in fiscal 1996, and 4% of revenue in fiscal 1995. Education, service, and other revenues were $125 million in fiscal 1997 compared to $151 million in fiscal 1996, and $166 million in fiscal 1995. Education, service, and other revenues were 12% of revenue in fiscal 1997 compared to 11% of revenue in fiscal 1996, and 8% of revenue in fiscal 1995. The decreases between years is attributable to lower product revenue in those years for which education and services are provided by the Company. Revenue from sold or discontinued product lines, made up primarily of the personal productivity applications product line which was sold to Corel in March 1996, was $63 million in fiscal 1996 and $412 million in fiscal 1995. Sold or discontinued product lines were 5% of revenue in fiscal 1996 compared to 20% of revenue in fiscal 1995. 10 International sales accounted for 45% of revenue in fiscal 1997 compared to 50% of revenue in fiscal 1996, and 47% of revenue in fiscal 1995.
GROSS PROFIT 1997 Change 1996 Change 1995 - ------------ ---- ------ ---- ------ ---- Gross profit (millions) $730 -32% $1,068 -31% $1,552 Percentage of net sales 72% 78% 76%
The lower gross profit percentage in fiscal 1997 compared to fiscal 1996 is attributable to increased inventory reserves and to the fixed portion of cost of sales being a higher percentage of the lower revenue in fiscal 1997. The higher gross profit percentage in fiscal 1996 compared to fiscal 1995 was the result of lower material costs due to an increase in licensing revenue and the decrease in sales from the lower margin personal productivity applications product line.
OPERATING EXPENSES 1997 Change 1996 Change 1995 - ------------------ ------- ------ ------- ------ ------- Sales and marketing (millions) $ 444 -14% $519 -10 $ 579 Percentage of net sales 44% 38% 28% Product development (millions) $ 283 3% $276 -25% $ 368 Percentage of net sales 28% 20% 18% General and administrative (millions) $ 148 1% $146 -5% $ 153 Percentage of net sales 15% 11% 7% Restructuring charges (millions) $ 55 206% $ 18 -- -- Percentage of net sales 5% 1% -- Total operating expenses (millions) $ 930 -3% $959 -13% $1,100 Percentage of net sales 92% 70% 54%
Operating expenses declined in absolute dollars due to corrective measures the Company took in fiscal 1997 and fiscal 1996 to realign resources and better manage and control its business. These expenses increased as a percentage of net sales in fiscal 1997 compared to fiscal 1996 and fiscal 1995. Sales and marketing expenses decreased by 14% from fiscal 1996 to fiscal 1997 primarily due to corrective actions the Company took in fiscal 1997 to realign resources and better manage and control its business. Sales and marketing expenses decreased by 10% from fiscal 1995 to fiscal 1996, primarily due to the sale of the UnixWare and personal productivity applications product lines, even though they increased as a percentage of net sales in fiscal 1996 compared to fiscal 1995. Sales and marketing expenses can fluctuate as a percentage of net sales in any given period due to product promotions, advertising, or other discretionary expenses. Product development expenses increased slightly from fiscal 1996 to fiscal 1997 as the Company focused on enhancing existing products as well as bringing new products to market. Product development expenses decreased by 25% from fiscal 1995 to fiscal 1996, primarily due to the sale of the UnixWare and personal productivity applications product lines, yet have increased as a percentage of lower net sales. General and administrative expenses remained relatively flat from fiscal 1996 to fiscal 1997 and decreased by 5% from fiscal 1995 to fiscal 1996, primarily due to the sale of the UnixWare and personal productivity applications product lines, yet increased as a percentage of lower net sales. During the third quarter of fiscal 1997, the Company incurred $55 million of tax deductible restructuring charges for excess personnel and redundant facilities as the Company realigned its resources to better manage and control its business. Of this charge, reserves of $11 million remain as of October 31, 1997. 11 During the first quarter of fiscal 1996, the Company incurred $18 million of tax deductible restructuring charges for excess personnel and redundant facilities as the Company prepared for the sale of its personal productivity applications product line. There is no reserve related to this charge as of October 31, 1997.
1997 Change 1996 Change 1995 ---- ------ ---- ------ ---- Employees 4,770 -19% 5,870 -24% 7,762 Revenue per employee (thousands) $189 $202 $252
In the third quarter of fiscal 1997, the Company reduced its employment by approximately 1,000 employees as the Company realigned its resources to better manage and control its business. In fiscal 1996, the Company reduced its employment by 1,725 employees as the Company completed the sale of its UnixWare and personal productivity applications product lines and terminated or transitioned former UnixWare and personal productivity group employees to Corel, SCO, and other third parties.
OTHER INCOME, NET 1997 Change 1996 Change 1995 - ----------------- ---- ------ ---- ------ ---- Other income, net (millions) $49 -31% $71 25% $57 Percentage of net sales 5% 5% 3%
The primary component of other income, net is investment income, which was $61 million, $58 million, and $54 million in fiscal 1997, 1996, and 1995, respectively. The increase in fiscal 1997 compared to fiscal 1996 was attributable to a higher yield on a smaller average investment portfolio. The increase in fiscal 1996 compared to fiscal 1995 is the result of a flat yield on a slightly higher average investment portfolio. To achieve potentially higher returns, a limited portion of the Company's investment portfolio is invested in mutual funds which incur market risk. The Company believes that the market risk has been limited by diversification and by use of a funds management timing service which switches funds out of mutual funds and into money market funds when preset signals occur. In fiscal 1997, in addition to investment income, the Company had foreign currency exchange losses, losses on the disposal of fixed assets, and the settlement of certain legal matters. In fiscal 1996, in addition to the investment income, the Company had a gain on the sale of its personal productivity applications product line of approximately $20 million, offset by foreign currency exchange losses. In fiscal 1995, in addition to the investment income, the Company had a gain on the disposal of its Austin, Texas facility, offset by foreign currency exchange losses.
INCOME TAX EXPENSE (BENEFIT) 1997 Change 1996 Change 1995 - ---------------------------- ---- ------ ------ ------ ---- Income tax expense (benefit) (millions) $(72) -233% $54 -68% $170 Percentage of net sales -7% 4% 8% Effective tax rate 48% 30% 34%
At October 31, 1997, the Company had deferred tax assets of $103 million before a valuation allowance of $7 million. A portion of this asset is realizable based on the ability to offset existing deferred tax liabilities. Realization of the remaining asset is dependent on the Company's ability to generate approximately $236 million of taxable income. Of this, approximately $112 million must be earned outside the United States. Management believes that sufficient income will be earned in the future to realize this asset. Management will evaluate the realizability of the deferred tax assets quarterly and assess the need for additional valuation allowances. The effective tax rate for fiscal 1997 was higher than the effective tax rate for fiscal 1996 as a result of the loss from operations in fiscal 1997. The effective tax rate for fiscal 1996 was lower than the effective tax rate for fiscal 1995 as a result of lower earnings for fiscal 1996. 12
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE 1997 Change 1996 Change 1995 - --------------------------- ---- ------- ------- -------- ------ Net income (loss) (millions) $ (78) -162% $126 63% $338 Percentage of net sales -8% 9% 17% Net income (loss) per share $(.22) -163% $.35 -61% $.90
FUTURE RESULTS The Company's future results of operations involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially from historical results are the following: business conditions and the general economy; competitive factors, such as rival operating systems, acceptance of new products and price pressures; availability of third-party compatible products at reasonable prices; risk of nonpayment of accounts or notes receivable; risks associated with foreign operations; risk of product line or inventory obsolescence due to shifts in technologies or market demand; timing of software product introductions; market fluctuations of investment securities; and litigation. The Company is addressing the issues associated with the "year 2000." The Company is utilizing resources to identify, correct, reprogram and test both its systems used internally as well as the products it sells for year 2000 compliance. It is anticipated that all reprogramming efforts will be completed during fiscal 1998. Novell believes that it has the product offerings, facilities, personnel, and competitive and financial resources for continued business success, but future revenues, costs, margins, product mix, and profits are all influenced by a number of factors, such as those discussed above. LIQUIDITY AND CAPITAL RESOURCES
1997 Change 1996 Change 1995 ---- ------ ---- ------ ---- Cash and short-term investments (millions) $1,033 1% $1,025 -22% $1,321 Percentage of total assets 54% 50% 55%
Cash and short-term investments increased to $1.033 billion at October 31, 1997 from $1.025 billion at October 26, 1996. The major reason for this increase was the $96 million provided by operating activities offset primarily by the $65 million used for property, plant, and equipment expenditures and $23 million used by other investing activities. The investment portfolio is diversified among security types, industry groups, and individual issuers. The Company's principal source of liquidity has been from operations. At October 31, 1997, the Company's principal unused sources of liquidity consisted of cash and short-term investments and available borrowing capacity of approximately $15 million under its credit facilities. The Company's liquidity needs are principally for the Company's financing of accounts receivable, capital assets, strategic investments, and flexibility in a dynamic and competitive operating environment. During fiscal 1997, the Company has continued to generate cash from operations. The Company anticipates being able to fund its current operations and capital expenditures planned for the foreseeable future with existing cash and short-term investments together with internally generated funds. Borrowings under the Company's credit facilities, or public offerings of equity or debt securities, are available if the need arises. Investments will continue in product development and in new and existing areas of technology. Cash may also be used to acquire technology through purchases and strategic acquisitions. Capital expenditures in fiscal 1998 are anticipated to be approximately $45 million, but could be reduced if the growth of the Company is less than presently anticipated. 13 CONSOLIDATED STATEMENTS OF OPERATIONS AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
OCT. 31 Oct. 26 Oct. 28 Fiscal year ended 1997 1996 1995 ----------- ----------- ----------- Net sales $ 1,007,311 $ 1,374,856 $ 2,041,174 Cost of sales 277,446 306,761 489,333 ----------- ----------- ----------- Gross profit 729,865 1,068,095 1,551,841 Operating expenses Sales and marketing 443,494 518,846 579,370 Product development 282,680 275,627 367,562 General and administrative 148,360 146,236 152,800 Restructuring charges 55,335 18,442 -- ----------- ----------- ----------- Total operating expenses 929,869 959,151 1,099,732 Income (loss) from operations (200,004) 108,944 452,109 Other income (expense) Investment income 61,315 58,195 53,839 Gain on sale of assets -- 19,815 -- Other, net (11,881) (6,966) 2,781 ----------- ----------- ----------- Other income, net 49,434 71,044 56,620 ----------- ----------- ----------- Income (loss) before taxes (150,570) 179,988 508,729 Income tax expense (benefit) (72,274) 53,997 170,424 ----------- ----------- ----------- Net income (loss) $ (78,296) $ 125,991 $ 338,305 ----------- ----------- ----------- Weighted average shares outstanding 349,429 357,919 374,584 ----------- ----------- ----------- Net income (loss) per share $ (.22) $ .35 $ .90 ----------- ----------- -----------
See notes to consolidated financial statements. 14 CONSOLIDATED BALANCE SHEETS DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
OCT. 31 Oct. 26 1997 1996 ---------- ---------- ASSETS CURRENT ASSETS Cash and short-term investments $1,033,473 $1,024,755 Receivables, less allowances ($33,053 -- 1997, $60,940 -- 1996) 234,358 452,327 Inventories 10,656 16,837 Prepaid expenses 57,685 48,281 Deferred and refundable income taxes 134,210 48,559 ---------- ---------- Total current assets 1,470,382 1,590,759 Property, plant, and equipment, net 373,865 394,684 Other assets 66,402 64,023 ---------- ---------- Total assets $1,910,649 $2,049,466 ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 82,759 $ 96,933 Accrued compensation 51,397 54,731 Accrued marketing liabilities 27,728 48,402 Other accrued liabilities 85,157 118,133 Deferred revenue 74,915 46,573 ---------- ---------- Total current liabilities 321,956 364,772 Minority interests 23,276 17,035 Put warrants -- 52,150 SHAREHOLDERS' EQUITY Common stock, par value $.10 per share Authorized 600,000,000 shares Issued 350,937,812 shares, 1997 346,059,050 shares, 1996 35,094 34,606 Additional paid-in capital 378,582 309,831 Retained earnings 1,188,361 1,266,657 Unearned stock compensation (7,189) (4,141) Cumulative translation adjustment (666) 1,183 Unrealized gain (loss) on investments (28,765) 7,373 ---------- ---------- Total shareholders' equity 1,565,417 1,615,509 ---------- ---------- Total liabilities and shareholders' equity $1,910,649 $2,049,466 ---------- ----------
See notes to consolidated financial statements. 15 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AMOUNTS IN THOUSANDS
Common Common Additional Stock Stock Paid-in Retained Shares Amount Capital Earnings Other Total ------- ----------- ----------- ----------- ----------- ----------- BALANCE -- OCT. 29, 1994 364,355 $ 36,436 $ 645,419 $ 802,361 $ 2,771 $ 1,486,987 Stock issued from stock plans 7,315 732 68,459 -- (4,909) 64,282 Stock plans' income tax benefits -- -- 25,128 -- -- 25,128 Shares cancelled (103) (11) (1,525) -- 1,451 (85) Unrealized gain on investments -- -- -- -- 23,427 23,427 Unearned stock compensation -- -- -- -- 5,506 5,506 Cumulative translation adjustment -- -- -- -- (5,288) (5,288) Net income -- -- -- 338,305 -- 338,305 ------- ----------- ----------- ----------- ----------- ----------- BALANCE -- OCT. 28, 1995 371,567 $ 37,157 $ 737,481 $ 1,140,666 $ 22,958 $ 1,938,262 Stock issued from stock plans 7,651 765 58,485 -- (11,091) 48,159 Stock plans' income tax benefits -- -- 14,027 -- -- 14,027 Shares cancelled (159) (16) (2,119) -- 1,655 (480) Shares repurchased and retired (33,000) (3,300) (452,401) -- -- (455,701) Sale of put warrants -- -- (77,830) -- -- (77,830) Settlement of put warrants -- -- 32,188 -- -- 32,188 Unrealized loss on investments -- -- -- -- (16,054) (16,054) Unearned stock compensation -- -- -- -- 8,013 8,013 Cumulative translation adjustment -- -- -- -- (1,066) (1,066) Net income -- -- -- 125,991 -- 125,991 ------- ----------- ----------- ----------- ----------- ----------- BALANCE -- OCT. 26, 1996 346,059 $ 34,606 $ 309,831 $ 1,266,657 $ 4,415 $ 1,615,509 Stock issued from stock plans 5,142 514 33,841 -- (8,508) 25,847 Stock plans' income tax benefits -- -- 3,927 -- -- 3,927 Shares cancelled (263) (26) (2,707) -- -- (2,733) Sale of put warrants -- -- 2,300 -- -- 2,300 Settlement of put warrants -- -- 31,390 -- -- 31,390 Unrealized loss on investments -- -- -- -- (36,138) (36,138) Unearned stock compensation -- -- -- -- 5,460 5,460 Cumulative translation adjustment -- -- -- -- (1,849) (1,849) Net (loss) -- -- -- (78,296) -- (78,296) ------- ----------- ----------- ----------- ----------- ----------- BALANCE -- OCT. 31, 1997 350,938 $ 35,094 $ 378,582 $ 1,188,361 $ (36,620) $ 1,565,417 ======= =========== =========== =========== =========== ===========
16 CONSOLIDATED STATEMENTS OF CASH FLOWS DOLLARS IN THOUSANDS
Oct. 31 Oct. 26 Oct. 28 Fiscal year ended 1997 1996 1995 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (78,296) $ 125,991 $ 338,305 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities Depreciation and amortization 91,075 104,782 94,190 Gain on non-cash sale of assets -- (19,815) -- Stock plans' income tax benefits 3,927 14,027 25,128 Decrease (increase) in receivables 217,969 18,110 (79,095) Decrease in inventories 6,181 6,188 9,196 (Increase) decrease in prepaids (9,404) 2,295 18,748 (Increase) decrease in deferred and refundable income taxes (93,082) 36,550 45,228 (Decrease) in current liabilities, net (42,816) (96,173) (1,775) ----------- ----------- ----------- Net cash provided by operating activities 95,554 191,955 449,925 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock, net 23,114 47,679 64,197 Repurchases of common stock -- (455,701) -- Sale of put warrants 2,300 12,195 -- Settlement of put warrants (20,760) (5,687) -- ----------- ----------- ----------- Net cash provided (used) by financing activities 4,654 (401,514) 64,197 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property, plant, and equipment (64,796) (101,001) (84,454) Purchases of short-term investments (2,148,664) (3,163,643) (4,432,301) Maturities of short-term investments 1,502,451 2,698,313 3,417,724 Sales of short-term investments 664,379 588,174 662,320 Proceeds from sale of assets -- 10,750 -- Other 9,444 10,323 6,327 ----------- ----------- ----------- Net cash (used) provided by investing activities (37,186) 42,916 (430,384) ----------- ----------- ----------- Total increase (decrease) in cash and cash equivalents $ 63,022 $ (166,643) $ 83,738 Cash and cash equivalents -- beginning of period 145,521 312,164 228,426 ----------- ----------- ----------- Cash and cash equivalents -- end of period 208,543 145,521 312,164 Short-term investments -- end of period 824,930 879,234 1,009,067 ----------- ----------- ----------- Cash and short-term investments -- end of period $ 1,033,473 $ 1,024,755 $ 1,321,231 =========== =========== ===========
See notes to consolidated financial statements. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated. The following summarizes the significant accounting policies of the Company: - - The Company considers all highly liquid debt instruments purchased with a term to maturity of three months or less to be cash equivalents. Short-term investments are widely diversified, consisting primarily of short-term investment grade securities, substantially all of which either mature within the next twelve months or have characteristics of short-term investments. Municipal securities included in short-term investments have contractual maturities ranging from 1 to 5 years. Money market preferreds have contractual maturities of less than 90 days. No other short-term investments have contractual maturities. All marketable debt and equity securities are included in cash and short-term investments and are considered available-for-sale and carried at fair market value, with the unrealized gains and losses, net of tax, included in shareholders' equity. The cost of securities sold is based on the specific identification method. Such securities are anticipated to be used for current operations and are therefore classified as current assets, even though some maturities may extend beyond one year. - - Accounts receivable include geographically dispersed end users, distributors, resellers, and OEM customers. No collateral is required. Reserves are provided for sales returns, product exchanges and bad debts. - - Inventories are stated at the lower of cost (first-in, first-out method) or market. - - Plant and equipment are carried at cost less accumulated depreciation and amortization. - - Provision for depreciation and amortization is computed on the straight-line method over the estimated useful lives of the assets, or lease term if shorter, and are as follows: 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 and Indian subsidiaries, the functional currency has been determined to be the local currency, and therefore assets and liabilities are translated at year-end exchange rates and income statement items are translated at average exchange rates prevailing during the year. Such translation adjustments are recorded in shareholders' equity. - - Revenue on product sales is recognized upon shipment. Certain sales require continuing service, support, and performance by the Company, and accordingly a portion of the revenue is deferred until the future service, support, and performance are provided. Reserves for sales returns and allowances are recorded in the same period as the related revenues. 18 - - Product development costs are expensed as incurred. Application of Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," has not had any material effect on the consolidated financial statements. - - The cost of advertising is expensed as incurred. Advertising expenses totaled $42 million, $48 million, and $57 million in fiscal 1997, 1996, and 1995 respectively. - - Net income per share is computed using the weighted average number of common shares outstanding during each year, including common stock equivalents (unless antidilutive). Common stock equivalents consist of outstanding stock options. The Company intends to adopt Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share" effective for the Company for the year ended October 31, 1998. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. The Company does not expect the new diluted disclosure to be materially different from the current earnings per share disclosure. The Financial Accounting Standards Board approved the new American Institute of Certified Public Accountants Statement of Position (SOP 97-2), "Software Revenue Recognition." SOP 97-2 will be effective for the Company beginning in fiscal 1999. The Company is currently assessing the impact, if any, of SOP 97-2 on its revenue recognition policy. Certain reclassifications, none of which affected net income, have been made to the prior years' amounts in order to conform to the current year's presentation. B SIGNIFICANT EVENTS During the third quarter of fiscal 1997, Novell took measures to reduce and realign its resources and better manage and control its business. These measures were in response to declines in sales of boxed products through indirect distribution channel customers, controlled shifts to multi-product licenses, lower licensing revenue of certain older products to OEM's, as well as competitive pressures in the small network market. Specifically, the Company did not ship boxed products to its indirect distribution channel customers except to accommodate product exchanges and returns. In addition, the Company reduced its workforce by approximately 1,000 employees, or 17%, and consolidated a number of facilities. This resulted in a one-time restructuring charge of $55 million, principally comprised of severance and excess facilities costs. The restructuring charge contributed a loss of $0.10 per share, net of tax, to the reported loss in fiscal 1997. During the second quarter of fiscal 1996, the Company implemented a change to its traditional distribution stocking policy that significantly reduced revenue and earnings in that quarter. The change in the Company's traditional distribution stocking policy was to respond to changing market conditions over the prior two years. Direct customer and OEM licensing programs grew from less than 5% of revenue to more than 40% of revenue. This shift in customer buying preferences changed the Company's reliance on boxed product flowing through the indirect distribution channel. In order to deal with this changing environment, the Company did not ship boxed product to its indirect distribution channel customers except to accommodate product exchanges and returns during the second quarter of fiscal 1996, which had the effect of reducing inventories within the indirect distribution channel, as well as significantly reducing revenue in the quarter. In March 1996, the Company completed the sale of its personal productivity applications product line to Corel Corporation (Corel). The Company received approximately 10 million shares of Corel common stock and approximately $11 million of cash. This resulted in an ownership position of approximately 17% of the outstanding Corel common stock. The Company reported a one-time gain of $20 million in the second quarter of fiscal 1996 related to this transaction. Net of tax, the gain was $13 million, or $0.04 per share. Additionally, Corel licensed GroupWise client software, Envoy electronic publishing software, and other technologies from Novell for a minimum royalty obligation of approximately $50 million over the next five years. 19 In December 1995, Novell sold its UnixWare product line to the Santa Cruz Operation, Inc. (SCO). The Company realized a small gain and recorded $19 million of UNIX technology royalty revenue from this transaction in the first quarter of fiscal 1996. Under the agreement, Novell received approximately six million shares of SCO common stock, resulting in ownership of approximately 17% of the outstanding SCO common stock. In addition, Novell continues to receive revenue from previously existing licenses for certain versions of UNIX System source code shipped prior to the sale to SCO. C CASH AND SHORT-TERM INVESTMENTS
FAIR MARKET Cost at Gross Gross VALUE AT Oct. 31 Unrealized Unrealized OCT. 31 (Dollars in thousands) 1997 Gains Losses 1997 ---------- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS Cash $ 84,151 $ -- $ -- $ 84,151 Repurchase agreements 4,932 -- -- 4,932 Money market fund 42,581 -- -- 42,581 Municipal securities 76,879 -- -- 76,879 ---------- ---------- ---------- ---------- Cash and cash equivalents $ 208,543 $ -- $ -- $ 208,543 ---------- ---------- ---------- ---------- SHORT-TERM INVESTMENTS Municipal securities $ 463,443 $ 4,551 $ (84) $ 467,910 Money market mutual funds 88,999 -- -- 88,999 Money market preferreds 150,817 -- (17) 150,800 Mutual funds 14,721 33 (1) 14,753 Equity securities 153,785 25,829 (77,146) 102,468 ---------- ---------- ---------- ---------- Short-term investments $ 871,765 $ 30,413 $ (77,248) $ 824,930 ---------- ---------- ---------- ---------- Cash and short-term investments $1,080,308 $ 30,413 $ (77,248) $1,033,473 ========== ========== ========== ==========
FAIR MARKET Cost at Gross Gross VALUE AT Oct. 26 Unrealized Unrealized OCT. 26 (Dollars in thousands) 1996 Gains Losses 1996 ---------- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS Cash $ 77,374 $ -- $ -- $ 77,374 Repurchase agreements 4,526 -- -- 4,526 Money market fund 36,821 -- -- 36,821 Municipal securities 26,800 -- -- 26,800 ---------- ---------- ---------- ---------- Cash and cash equivalents $ 145,521 $ -- $ -- $ 145,521 ---------- ---------- ---------- ---------- SHORT-TERM INVESTMENTS Municipal securities $ 376,510 $ 1,524 $ (12) $ 378,022 Money market mutual funds 78,514 -- -- 78,514 Money market preferreds 224,000 -- -- 224,000 Mutual funds 14,151 14 (10) 14,155 Equity securities 174,054 35,432 (24,943) 184,543 ---------- ---------- ---------- ---------- Short-term investments $ 867,229 $ 36,970 $ (24,965) $ 879,234 ---------- ---------- ---------- ---------- Cash and short-term investments $1,012,750 $ 36,970 $ (24,965) $1,024,755 ========== ========== ========== ==========
20 Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," was adopted in the first quarter of fiscal 1995, resulting in unrealized losses of $29 million and unrealized gains of $7 million, net of deferred taxes, as of the end of fiscal 1997 and 1996, respectively. The Company realized gains on the sales of securities of $28 million, $20 million, and $7 million in fiscal 1997, 1996, and 1995, respectively, while realizing losses on sales of securities of $11 million in fiscal 1997. D PROPERTY, PLANT, AND EQUIPMENT
OCT. 31 Oct. 26 (Dollars in thousands) 1997 1996 --------- --------- Buildings and land $ 262,564 $ 246,250 Furniture and equipment 420,448 401,661 Leasehold improvements and other 82,372 75,218 --------- --------- Property, plant, and equipment at cost 765,384 723,129 Accumulated depreciation (391,519) (328,445) --------- --------- Property, plant, and equipment, net $ 373,865 $ 394,684 ========= =========
E INCOME TAXES At October 31, 1997, the Company had deferred tax assets of $103 million before a valuation allowance of $7 million. A portion of this asset is realizable based on the ability to offset existing deferred tax liabilities. Realization of the remaining asset is dependent on the Company's ability to generate approximately $236 million of taxable income. Of this, approximately $112 million must be earned outside the United States. Management believes that sufficient income will be earned in the future to realize this asset. Management will evaluate the realizability of the deferred tax assets quarterly and assess the need for additional valuation allowances. As of October 31, 1997, the Company has U.S. net operating loss carryforwards from acquired companies of approximately $24 million that expire in years 1999 through 2008. Subject to certain annual limitations, these losses can be used to offset the future taxable income of these businesses. A valuation allowance of approximately $7 million has been recognized to offset the deferred tax assets related to those carryforwards. In addition, the Company has approximately $50 million of foreign loss carryforwards of which $8 million is subject to expire in 2002.
OCT. 31 Oct. 26 Oct. 28 Fiscal year ended (Dollars in thousands) 1997 1996 1995 - ---------------------------------------- --------- --------- --------- TAX EXPENSE (BENEFIT) Current Federal $ (53,862) $ (19,649) $ 85,344 State (8,720) (1,352) 20,829 Foreign 5,512 12,085 36,048 --------- --------- --------- Total current (57,070) (8,916) 142,221 --------- --------- --------- Deferred Federal (8,636) 54,794 24,382 State 680 8,060 4,423 Foreign (7,248) 59 (602) --------- --------- --------- Total deferred (15,204) 62,913 28,203 --------- --------- --------- Total tax expense (benefit) $ (72,274) $ 53,997 $ 170,424 ========= ========= =========
21
OCT. 31 Oct. 26 Oct. 28 Fiscal year ended (Dollars in thousands) 1997 1996 1995 --------- -------- -------- DIFFERENCES BETWEEN THE U.S. STATUTORY AND EFFECTIVE TAX RATES U.S. statutory rate (35.0%) 35.0% 35.0% State income taxes, net of federal tax effect (3.5) 3.1 3.2 Research and development tax credits (5.0) (1.3) (1.6) FSC benefit -- (0.9) (0.7) Tax exempt income (6.5) (5.6) (2.0) Foreign losses not tax benefited 4.7 -- -- Other, net (2.7) (0.3) (0.4) --------- -------- -------- Effective tax rate (48.0%) 30.0% 33.5% ========= ======== ======== DOMESTIC AND FOREIGN COMPONENTS OF INCOME BEFORE TAXES Domestic $(100,673) $180,198 $450,094 Foreign (49,897) (210) 58,635 --------- -------- -------- Total income before taxes $(150,570) $179,988 $508,729 ========= ======== ======== Cash paid for income taxes $ 16,498 $ 26,370 $162,020 ========= ======== ========
OCT. 31 Oct. 26 DEFERRED INCOME TAXES AS OF 1997 1996 --------- -------- Deferred tax assets Receivable valuation accounts $ 8,094 $ 17,824 Restructuring provision 5,493 6,141 Reserves and accruals 15,329 22,388 Foreign earnings and loss carryforwards 47,442 13,496 Other individually immaterial items 26,619 25,367 --------- -------- 102,977 85,216 Valuation allowance for deferred tax assets (7,462) (7,462) --------- -------- 95,515 77,754 Deferred tax liabilities Unrealized gain on investments (2,748) (26,997) --------- -------- Net deferred tax assets $ 92,767 $ 50,757 ========= ========
F COMMITMENTS AND CONTINGENCIES Rent expense for operating and month-to-month leases was $23 million, $29 million, and $32 million in fiscal 1997, 1996, and 1995, respectively. As of October 31, 1997, the Company has various operating leases with remaining terms of more than one year. These leases have minimum annual lease commitments of $25 million in fiscal 1998, $15 million in fiscal 1999, $10 million in fiscal 2000, $7 million in fiscal 2001, $7 million in fiscal 2002, and $24 million thereafter. Furthermore, the Company has $21 million of minimum rentals to be received in the future. The Company currently has a $10 million unsecured revolving bank line of credit, with interest at the prime rate. The line can be used for either letter of credit or working capital purposes. The line is subject to the terms of a loan agreement containing financial covenants and restrictions, none of which are expected to significantly affect the Company's operations. At October 31, 1997, there were no borrowings, letter of credit acceptances, or commitments under such line. The Company has an additional $5 million credit facility with another bank which is not subject to a loan agreement. At October 31, 1997, standby letters of credit of $200,000 were outstanding under this agreement. 22 In August 1997, the Company entered into an agreement to lease five buildings being constructed on land owned by the Company in San Jose, California. The lessor of the building has committed to fund up to $157 million for construction of the buildings, with the portion of the committed amount actually utilized to be determined by the Company. Rent obligations for the buildings will commence upon the Company's occupation of the buildings in fiscal 1999. Additionally in December 1997, the Company entered into an agreement to lease two buildings being constructed on land owned by the Company in Provo, Utah. The lessor of the building has committed to fund up to $115 million for the construction of the buildings, with the portion of the committed amount actually utilized to be determined by the Company. Rent obligations for the building will commence upon the Company's occupation of the buildings in fiscal 2000. Each lease is for a period of seven years. Each lease can be renewed for two additional five year periods, subject to the approval of the lender and the Company at the sole discretion of each party. Annual rent under each agreement is determined by taking the portion of the committed amount actually utilized and associated capitalized interest accrued during the construction period and multiplying this amount by the secured interest rate. The Company may, at its option, purchase the buildings during the term of the lease at approximately the amount expended by the lessor to construct and improve the buildings. If the Company does not purchase the buildings, or arrange for the sale of the buildings, at the end of the lease, the Company will guarantee the lessor no more than 85% of the residual value of the buildings (approximately $272 million) as determined at the inception of the leases. In addition, the agreement calls for the Company to maintain a specific level of restricted cash to serve as collateral for the leases and maintain compliance with certain financial covenants. The value of restricted cash held as collateral at October 31, 1997 was approximately $11 million. In 1993, a suit was filed due to a failed contract against a company that Novell subsequently acquired. The plaintiff obtained a jury verdict against the acquired company in 1996. Novell does not believe that the resolution of this legal matter will have a material adverse effect on its financial position, results of operations, or cash flows. The Company is a party to a number of additional legal claims arising in the ordinary course of business. The Company believes the ultimate resolution of the claims will not have a material adverse effect on its financial position, results of operations, or cash flows. G PUT WARRANTS During fiscal 1997, the Company sold put warrants on two million shares of its common stock for $2 million, callable on specific dates in the third quarter of fiscal 1997, giving a third party the right to sell shares of Novell common stock to the Company at contractually specified prices. The put warrant liability is the amount the Company would be obligated to pay if all the outstanding put warrants were exercised at the strike price without a cash settlement. During fiscal 1997, the Company settled all of its remaining put warrant obligations on six million shares for cash of $21 million and therefore reversed the put warrant obligation back to additional paid-in capital. During fiscal 1996, the Company sold put warrants on nine million shares of its common stock for $12 million, callable on specific dates in the third and fourth quarters of fiscal 1996 and the first and second quarters of fiscal 1997. During fiscal 1996, the Company settled put warrant obligations on five million shares for cash of $6 million. H SHAREHOLDERS' EQUITY In December 1988, the Board of Directors adopted a Shareholder Rights Plan and amended it in March 1992 and December 1996. The plan provides for a dividend of rights, which cannot be exercised until certain events occur, to purchase shares of preferred stock of the Company. Each shareholder of record receives one right for each share of common stock that he or she owns. This plan was adopted to ensure that all shareholders of the Company receive fair value for their common stock in the event of any proposed takeover of the Company and to guard against coercive tactics to gain control of the Company without offering fair value to the Company's shareholders. 23 The Company has 500,000 authorized shares of preferred stock with a par value of $0.10 per share, none of which was outstanding at October 31, 1997 or October 26, 1996. At October 31, 1997, the Company had authorized stock-based compensation plans under which options to purchase shares of Company common stock could be granted to employees, consultants and outside directors. The Company applies APB Opinion No. 25 "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its plans. Accordingly, no compensation expense (except compensation expense related to restricted stock purchase grants) has been recognized for the Company's stock-based plans. If compensation expense for the Company's stock-based compensation plans had been determined consistent with Statement of Financial Accounting Standards No. 123 (SFAS 123), the Company's net income (loss) and net income (loss) per share would have been the pro forma amounts indicated below.
Oct. 31 Oct. 26 Fiscal year ended (In thousands, except per share amounts) 1997 1996 --------- -------- NET INCOME (LOSS) As reported $ (78,296) $125,991 Pro forma $(106,509) $116,505 NET INCOME (LOSS) PER SHARE As reported $ (0.22) $ 0.35 Pro forma $ (0.31) $ 0.33
For the purpose of the above table, the fair value of each option grant is estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 1997 and 1996: a risk-free interest rate of approximately 6% for both fiscal 1997 and 1996; a dividend yield of 0.0% for both years; a weighted-average expected life of 4 years for both years; and a volatility factor of the expected market price of the Company's common stock of 0.45 for both years. Because the method of accounting prescribed by SFAS 123 has not been applied to options granted prior to October 28, 1995, the resulting pro forma compensation expense may not be representative of that to be expected in future years. The Company currently has two option plans. The Company's 1991 Stock Plan, as amended, (the "1991 Plan") provides for the issuance of incentive and nonstatutory stock options, stock purchase rights, stock appreciation rights and long-term performance awards to employees, consultants and outside directors of the Company. The Company grants nonstatutory options to virtually all employees and certain restricted stock purchase rights to selective management. The options generally are granted at the fair market value of the Company's common stock at the date of grant, vest over a four-year period, are exercisable upon vesting and expire ten years from the date of grant. The Company has reserved 60,310,928 shares of common stock for issuance under the 1991 Plan. This share reserve has increased over the past four years and will continue to increase on November 1, 1997 and November 1, 1998, based on a calculation of 2.9% of the total common stock outstanding at the previous fiscal year end. The Company also has a Non-Employee Director Stock Option Plan, as amended, (the "Director Plan") under which 1,500,000 shares are reserved for issuance. This Director Plan allows for two types of non discretionary stock option grants; an initial grant of 30,000 options at the time a director is first elected/appointed to the Board, with options vesting over four years and exercisable upon vesting; and an annual grant of 15,000 options upon reelection to the Board, with options vesting over two years and exercisable upon vesting. All options expire ten years from the date of grant. The Company's 1986 Stock Option Plan and assumed plans due to acquisitions have terminated, and no further options may be granted under these plans. Options previously granted under these plans will continue to be administered under such plans, and any portions that expire or become unexercisable for any reason shall cancel and be unavailable for future issuance. 24 A summary of the status of the Company's stock option plans as of October 31, 1997 and October 26, 1996 and changes during the years ended on those dates is presented below.
Fiscal 1997 Fiscal 1996 -------------------------- -------------------------- Weighted- Weighted- Number of Average Number of Average Number of options in thousands Options Exercise Price Options Exercise Price ------------------------------ --------- -------------- --------- -------------- Outstanding at beginning of year 41,331 $14.77 41,281 $15.24 Granted Price at Fair Value 46,617 $ 8.05 17,596 $12.59 Price greater than Fair Value 600 $17.53 -- -- Price less than Fair Value 975 $ 0.02 932 $ .10 Exercised (3,151) $ 3.91 (5,956) $ 5.36 Cancelled/expired (46,549) $14.13 (12,522) $16.67 ------- ------ ------- ------ Outstanding at end of year 39,823 $ 8.19 41,331 $14.77 Options exercisable at year end 2,753 16,584 ------- ------ ------- ------
The following table summarizes information about stock options outstanding at October 31, 1997.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- --------------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- OPTIONS REMAINING AVERAGE OPTIONS AVERAGE Number of options in thousands OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ------------------------------ ----------- ---------------- -------------- ----------- -------------- $ 1.83 3 5.14 $ 1.83 3 $ 1.83 $ 1.84 -- $ 6.91 24,208 7.76 $ 6.89 134 $ 3.85 $ 7.50 -- $ 8.75 11,801 9.45 $ 8.61 843 $ 8.44 $ 9.38 -- $14.91 2,113 8.24 $ 11.18 776 $12.04 $ 15.38 -- $31.25 1,698 6.93 $ 19.81 997 $21.42 ------ ---- ------- ----- ------ $ 1.83 -- $31.25 39,823 8.26 $ 8.19 2,753 $13.92 ------ ---- ------- ----- ------
OTHER INFORMATION In 1997, the Company implemented a stock option exchange program whereby option holders could exchange higher priced options for new options on a four new shares for five old shares ratio. Vesting remained the same as the original grant but exercisability was suspended for one year. All option holders except for outside directors and the CEO were permitted to participate in the program.
FISCAL Fiscal Number of shares and options in thousands 1997 1996 ------- ------- EXCHANGE PROGRAM (INCLUDED ABOVE) Options cancelled 31,457 -- Options regranted 24,884 -- OTHER INFORMATION Shares of common stock outstanding at year end 350,938 346,059 Annual option reserve increase based on evergreen provision 10,036 10,775 Options granted as a percentage of outstanding common stock, net of cancellations .5% 1.7% Option holders as a percentage of total employees 100% 100%
25 EMPLOYEE STOCK PURCHASE PLAN Under the Company's 1989 Employee Stock Purchase Plan, as amended, (the "Purchase Plan"), the Company is authorized to issue up to 12,000,000 shares of common stock to its employees who work at least 20 hours a week and six months a year. Under the terms of the Purchase Plan, there are two six month offerings per year, and employees can choose to have up to 10% of their salary withheld to purchase the Company's common stock. The purchase price of the stock is 85% of the lower of the subscription date fair market value and the purchase date fair market value. Approximately 45% of the eligible employees have participated in the Purchase Plan in fiscal 1997 and 1996. Under the Purchase Plan, the Company issued 1,991,504 and 1,686,701 shares to employees in fiscal 1997 and 1996, respectively. In accordance with APB 25, the Company does not recognize compensation expense related to employee purchase rights under the Purchase Plan. To comply with the pro forma reporting requirements of SFAS 123, compensation expense is estimated for the fair value of the employees' purchase rights using the Black-Scholes model with the following assumptions for these rights granted in 1997 and 1996: a dividend yield of 0.0% for both years; an expected life of 6 months for both years; an expected volatility factor of 0.45 for both years; and a risk-free interest rate of approximately 5.5% for 1997 and 1996. The weighted average fair value of the purchase rights granted on April 28, 1997, October 28, 1996, April 29, 1996, and October 30, 1995 was $2.72, $3.64, $5.12, and $5.93, respectively. I RESTRUCTURING CHARGES During the third quarter of fiscal 1997, the Company incurred $55 million of tax deductible restructuring charges which included $28 million for excess personnel and $27 million for redundant facilities as the Company realigned its resources to better manage and control its business. The charge for excess personnel related to approximately 1,000 employees with $21 million of severance paid and charged against the amount accrued. Of this total charge, reserves of $11 million remain as of October 31, 1997. During the first quarter of fiscal 1996, the Company incurred $18 million of tax deductible restructuring charges for excess personnel and redundant facilities as the Company prepared for the sale of its personal productivity applications product line. There is no reserve related to this charge as of October 31, 1997. J EMPLOYEE SAVINGS AND RETIREMENT PLAN The Company adopted a 401(k) savings and retirement plan in December 1986. The plan covers all employees who are 21 years of age or older who are scheduled to complete 1,000 hours of service during any consecutive twelve-month period. Prior to January 1, 1995, the Company's retirement and savings plan contribution has been a 50% matching contribution for employee contributions up to 6% of each employee's compensation. On January 1, 1995, the Company's retirement and savings plan contribution was changed to be a 100% matching contribution for employee contributions up to 4% of each employee's compensation. Company matching contributions were $15 million, $16 million, and $17 million in fiscal 1997, 1996, and 1995, respectively. K RELATED PARTY TRANSACTIONS In fiscal 1997, 1996, and 1995, legal fees of approximately $1 million, $1 million, and $2 million, respectively, were paid to Wilson, Sonsini, Goodrich & Rosati, a law firm in which a director of the Company is a senior partner. 26 L SALES BY GEOGRAPHY
OCT. 31 Oct. 26 Oct. 28 Fiscal year ended (Dollars in thousands) 1997 1996 1995 ----------- ----------- ----------- Net sales U.S. operations $ 707,228 $ 902,684 $ 1,623,565 Irish operations 231,954 344,512 228,812 Other international operations 68,508 128,564 189,568 Eliminations (379) (904) (771) ----------- ----------- ----------- Total net sales $ 1,007,311 $ 1,374,856 $ 2,041,174 =========== =========== =========== Income from operations U.S. operations $ 59,919 $ 417,618 $ 658,774 Irish operations (20,003) 9,098 3,481 Other international operations (6,780) (129) 20,008 Eliminations (233,140) (317,643) (230,154) ----------- ----------- ----------- Total income from operations $ (200,004) $ 108,944 $ 452,109 =========== =========== =========== Identifiable assets U.S. operations $ 1,974,222 $ 2,102,574 $ 2,437,599 Irish operations 12,228 57,471 54,065 Other international operations 33,732 46,816 58,288 Eliminations (109,533) (157,395) (133,122) ----------- ----------- ----------- Total identifiable assets $ 1,910,649 $ 2,049,466 $ 2,416,830 =========== =========== ===========
The Company operates in one business segment and markets internationally through distributors who sell to dealers and end users. Intercompany sales between geographic areas are accounted for at prices representative of unaffiliated party transactions. "U.S. operations" include shipments to customers in the U.S., licensing to OEMs, and exports of finished goods directly to international customers, primarily in Canada, South America, and Asia. In fiscal 1997, 1996, and 1995, sales to international customers were approximately $452 million, $682 million, and $960 million, respectively. In fiscal 1997, 1996, and 1995, international sales to European countries were 55%, 55%, and 56%, respectively. No one foreign country accounted for more than 10% of total sales in any period. In fiscal 1997 and 1995, the Company had one multinational distributor, which accounted for 11% and 15% of revenue, respectively. Otherwise, no customer accounted for more than 10% of revenue in any period. 27 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND SHAREHOLDERS -- NOVELL, INC. We have audited the accompanying consolidated balance sheets of Novell, Inc. as of October 31, 1997 and October 26, 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended October 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Novell, Inc. at October 31, 1997 and October 26, 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP San Jose, California November 24, 1997 28 SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA -- UNAUDITED DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
First Second Third Fourth Fiscal Quarter Quarter Quarter Quarter Year ----------- ----------- ----------- ----------- ----------- FISCAL 1997 Net sales $ 374,847 $ 273,107 $ 90,074 $ 269,283 $ 1,007,311 Gross profit 298,876 195,932 28,403 206,654 729,865 Income (loss) before taxes 75,277 (21,680) (217,957) 13,790 (150,570) Net income (loss) 50,812 (14,634) (121,645) 7,171 (78,296) Net income (loss) per share .15 (.04) (.35) .02 (.22) COMMON STOCK PRICE PER SHARE High 12 3/4 13 8 3/4 10 1/2 13 Low 8 7/8 7 6 9/32 7 3/8 6 9/32 FISCAL 1996 Net sales $ 437,919 $ 188,180 $ 365,091 $ 383,666 $ 1,374,856 Gross profit 341,908 119,566 289,473 317,148 1,068,095 Income (loss) before taxes 95,580 (83,246) 84,712 82,942 179,988 Net income (loss) 63,561 (55,359) 58,759 59,030 125,991 Net income (loss) per share .17 (.15) .17 .17 .35 COMMON STOCK PRICE PER SHARE High 19 1/8 14 5/8 15 5/8 12 1/4 19 1/8 Low 12 11 3/8 10 1/8 10 10 FISCAL 1995 Net sales $ 493,225 $ 529,508 $ 537,922 $ 480,519 $ 2,041,174 Gross profit 376,350 405,053 412,322 358,116 1,551,841 Income before taxes 122,585 144,162 153,332 88,650 508,729 Net income 81,519 95,868 101,966 58,952 338,305 Net income per share .22 .26 .27 .16 .90 COMMON STOCK PRICE PER SHARE High 20 7/8 22 1/4 23 1/4 21 5/8 23 1/4 Low 15 3/4 17 5/8 17 7/8 13 3/4 13 3/4
Novell's common stock trades in the over-the-counter market under the NASDAQ symbol "NOVL." No dividends have been declared on the Company's common stock. There were 12,628 shareholders of record at December 31, 1997. 29 DIRECTORS AND EXECUTIVES BOARD OF DIRECTORS ERIC E. SCHMIDT Chairman of the Board and Chief Executive Officer JOHN A. YOUNG ** Vice Chairman of the Board Retired President and Chief Executive Officer Hewlett-Packard Company ELAINE R. BOND * ** Retired Chase Fellow and Sr. Consultant The Chase Manhattan Bank, N.A. HANS-WERNER HECTOR * Cofounder SAP AG, Germany JACK L. MESSMAN * ** *** President and Chief Executive Officer Union Pacific Resources Group, Inc. LARRY W. SONSINI Partner Wilson, Sonsini, Goodrich & Rosati IAN R. WILSON *** Managing Partner Dartford Partnership * Member of Audit Committee ** Member of Compensation Committee *** Member of Corporate Governance Committee CORPORATE EXECUTIVE STAFF ERIC E. SCHMIDT Chairman of the Board and Chief Executive Officer DAVID R. BRADFORD Senior Vice President, General Counsel, and Corporate Secretary RONALD E. HEINZ, JR. Senior Vice President Worldwide Sales JENNIFER A. KONECNY-COSTA Senior Vice President Human Resources RICHARD A. NORTZ Senior Vice President Customer Services JOHN F. SLITZ, JR. Senior Vice President Marketing CHRISTOPHER M. STONE Senior Vice President Strategic Business Development GLENN RICART Senior Vice President and Chief Technology Officer JAMES R. TOLONEN Senior Vice President and Chief Financial Officer DARCY G. MOTT Vice President and Treasurer STEWART G. NELSON Vice President, Product Development 30 CORPORATE DIRECTORY NOVELL CORPORATE HEADQUARTERS 122 East 1700 South Provo, Utah 84606 Ph 801 861 7000 Toll-free 800 453 1267 Fx 801 228 7077 AMERICAS REGION NOVELL ARGENTINA Av. Leandro N. Alem 1110, Piso 9(degrees), 1001 Buenos Aires Argentina Ph 541 312 2626 Fx 541 312 8025 NOVELL BRAZIL Av. Nacoes Unidas, 12.995 8(degrees) Andar 04578-000 - Sao Paulo - SP Brazil Ph 55 11 5505 4040 Fx 55 11 5505 4041 NOVELL CANADA 3100 Steeles Avenue East Suite 500 Markham, Ontario L3R 8T3 Canada Ph 905 940 2670 Fx 905 940 2688 NOVELL CHILE Av. Nueva Tajamor 555 Of. 901, Las Condes Santiago, Chile Ph 562 3397 070 Fx 562 3397 071 NOVELL COLOMBIA Calle 114 # 9-45 Torre B oficina 709-710 Barrio Santa Barbara Santa Fe de Bogota Colombia Ph 571 6292969 Fx 571 6293509 NOVELL MEXICO Periferico Sur 4124 Piso 8, Torre Zafiro II Pedregal De San Angel Mexico, D.F., C.P. 01900 Mexico Ph 525 728 3560 Fx 525 728 3566 NOVELL VENEZUELA Plaza La Castellana Torre Ban Caracas Piso 10, oficina 1004 La Castellana Caracas, Venezuela Ph 582 642 534 Fx 582 642 171 ASIA-PACIFIC REGION NOVELL AUSTRALIA Level 18 201 Miller Street North Sydney, NSW 2060 Australia Ph 61 2 9925 3000 Fx 61 2 9922 2113 NOVELL CHINA 6/F Annex Bldg., Sinochem Mansion A2 Fuxing Menwai Ave. Beijing 100045, P.R.China Ph 86 10 685 68616 Fx 86 10 685 68615 NOVELL HONG KONG Room 4601-5 China Resources Building 26 Harbour Road Wanchai, Hong Kong Ph 852 2 588 5288 Fx 852 2 827 6555 NOVELL INDIA* Onward Novell Software Ltd. 62 MIDC 13th Street Andheri (East) Bombay 400 093, India Ph 91 22 8342244 Fx 91 22 8342223 NOVELL JAPAN LTD.* Toei Mishuku Bldg. 1-13-1 Mishuku Setagaya-Ku, Tokyo 154, Japan Ph 81 3 5481 1551 Fx 81 3 5481 4100 NOVELL KOREA 11th Floor, Kunja Building 942-1, Daechi-dong Kangnam-Ku Seoul, Korea 135-280 Ph 82 2 528 1400 Fx 82 2 528 1414 NOVELL MALAYSIA Suite 23.3 Level 23 Menara Genesis 33 Jalan Sultan Ismail 50250 Kuala Lumpur Malaysia Ph 60 3 243 0678 Fx 60 3 243 0728 NOVELL SINGAPORE 300 Beach Road, #28-00 The Concourse Singapore 199555 Ph 65 296 2866 Fx 65 296 1266 NOVELL TAIWAN Room E-F, 5th Floor 168 Tun-Hwa North Road Taipei, Taiwan, R.O.C. Ph 886 2 718 9733 Fx 886 2 514 9806 NOVELL THAILAND Level 23, CPTower 313 Silom Road Bangkok, Thailand 10500 Ph 662 231 8166 Fx 662 231 8246 EUROPE, MIDDLE EAST, AFRICA REGION NOVELL AUSTRIA Theresianumgasse 7 A-1040 Vienna, Austria Ph 43 1 504 5200 Fx 43 1 504 5211 NOVELL BELGIUM Koningin Aztridplein 2018 Antwerp, Belgium Ph 32 3 206 01 793 Fx 32 3 206 17 99 NOVELL CZECH REPUBLIC Klimenstska 46 11002 Prague 1 Czech Republic Ph 42 2 2185 6611 Fx 42 2 2185 6622 NOVELL DENMARK Slotsmarken 12 DK 2970 Horsholm, Denmark Ph 45 45 16 00 20 Fx 45 45 16 00 40 NOVELL FINLAND Sinimaentie 10 C 02630 Espoo, Finland Ph 35 89 502 95 1 Fx 35 89 502 95 300 NOVELL FRANCE Tour Framatome 1, Place de la Coupole 92084 Paris la Defense Cedex France Ph 33 1 47 96 60 00 Fx 33 1 47 78 94 72 NOVELL GERMANY Monschauer Strasse 12 40549 Dusseldorf, Germany Ph 49 211 56310 Fx 49 211 563 1250 NOVELL HUNGARY East-West Business Center 1088 Budapest Rakoczi ut 1-3, Hungary Ph 36 1 266 7770 Fx 36 1 266 6360 NOVELL IRELAND 2nd Floor The Treasury Building Lower Grand Canal Street Dublin 2, Ireland Ph 353 1 605 8000 Fx 353 1 605 8200 NOVELL ISRAEL Ackerstein Building Medinat Hayehudim St 103 Herzliyya 46776, Israel Ph 972 95 27 774 Fx 972 95 65 336 NOVELL ITALIA Piazza Don Mapelli 75 Edifico U3 Sesto San Giovanni 20099 Milan, Italy Ph 39 2 262 95 1 Fx 39 2 26295 800 NOVELL MIDDLE EAST P.O. Box 9313 17th Floor Dubai World Trade Center Dubai, United Arab Emirates Ph 971 43 16 444 Fx 971 43 19 248 NOVELL NETHERLANDS Barbizonlaan 25 2908 MB Capelle a/d IJssel PO Box 85024 3009 MA Rotterdam The Netherlands Ph 31 10 286 4444 Fx 31 10 286 4010 NOVELL NORWAY Grensesvingen 9 Postboks 6555 Etterstad 0606 Oslo, Norway Ph 47 22 08 77 70 Fx 47 22 08 77 71 NOVELL POLAND ul. Sienna 64 00-825 Warsaw, Poland Ph 48 22 620 39 79 Fx 48 22 620 31 03 NOVELL RUSSIA Suite 524 Radisson Slavyanskaya Hotel 2, Borozhkovokaya nab. 121059 Moscow, Russia Local Ph 7 095 941 8075 Local Fx 7 095 941 8066 Satellite Ph 44 1 819133 215 Satellite Fx 44 1 819133 238 NOVELL SOUTH AFRICA Morning View Office Park Bldg 4, Rivonia Road Morningside PO Box 1840 Rivonia 2128 Republic of South Africa Ph 27 11 322 8300 Fx 27 11 322 8400 NOVELL SPAIN 27th Floor, Torre Europa Paseo de la Castellana, 95 28046 Madrid, Spain Ph 34 1 555 65 67 Fx 34 1 555 29 15 NOVELL SWEDEN Kronborgsgrand 1 Kolding 3 Stockholm, Sweden Ph 46 84774108 Fx 46 4684774101 31 NOVELL SWITZERLAND Imperial Gebaude 2 Oberschoss Leutschenbachstrasse 41 CH-8050 Zurich, Switzerland Ph 41 1 308 47 47 Fx 41 1 302 04 01 UNITED KINGDOM NOVELL HOUSE 1, Arlington Square Downshire Way Bracknell Berks RG12 1WA United Kingdom Ph 44 1344 724000 Fx 44 1344 724001 *Joint venture 32 OTHER INFORMATION NOVELL ON THE INTERNET http://www.novell.com Corporate, product, program, financial, and shareholder information, including press releases and quarterly earnings announcements, is available at Novell's World Wide Web site. NOVELL NEWS HOTLINE 800 668-5329 Press releases are available toll-free from Novell's menu-driven fax distribution system. FINANCIAL LITERATURE 800 467-2498 408 577-8400 www.novell.com/corp/ir/index.html irmail@novell.com Novell's Annual Report, Corporate Fact Book, SEC filings, earnings announcements, and other financial information are available on Novell's Investor Relations Web site at www.novell.com/corp/ir/index.html. Mailed copies of financial materials can be obtained from Novell's automated telephone access system or by emailing Novell's investor relations department at irmail@novell.com. SHAREHOLDER SERVICES Novell, Inc. 2180 Fortune Drive San Jose, CA 95131 800 NOVL STK 408 577-8644 shareholder_services@novell.com Information on Novell's Annual Meeting, changes in stock registration, and other stock administration services is available through Novell's shareholder representatives. INVESTOR RELATIONS Novell, Inc. 2180 Fortune Drive San Jose, CA 95131 800 317-3195 408 577-8384 irmail@novell.com Investor-related inquiries are answered by Novell's Investor Relations staff. CUSTOMER INFORMATION Novell, Inc. 122 East 1700 South Provo, UT 84606 888 321-4CRC (4272) crc@novell.com Information on Novell's products, programs, and services can be obtained from Novell's Customer Response Center by calling toll free 888 321-4CRC or by emailing crc@novell.com. ANNUAL MEETING The Company's Annual Meeting will be held on Tuesday, April 7, 1998, at 2:00 p.m. local time at Novell, 1555 North Technology Way, Building J Auditorium, Orem, Utah 84097. FORM 10-K A copy of the Company's Form 10-K is available without charge. To obtain a copy, please write: Investor Relations Novell, Inc. 2180 Fortune Drive San Jose, CA 95131 INDEPENDENT AUDITORS Ernst & Young LLP, San Jose, CA TRANSFER AGENT AND REGISTRAR ChaseMellon Shareholder Services, LLC Ridgefield Park, NJ Copyright (C) 1998, Novell, Inc. All Rights Reserved. Novell, NetWare, Envoy, GroupWise, ManageWise, and Tuxedo are registered trademarks and NDS, NetWare 3, NetWare 4, NetWare 5, Novell BorderManager, BorderManager FastCache, and Novell Directory Services are trademarks of Novell, Inc. in the United States and other countries. * Java is a trademark or registered trademark of Sun Microsystems, Inc. in the United States and other countries. Corel is a registered trademark of Corel Corporation in the United States and other countries. The Santa Cruz Operation and SCO are registered trademarks of The Santa Cruz Operation, Inc. UNIX is a registered trademark of X/Open Company, Ltd. UnixWare is a registered trademark of The Santa Cruz Operation, Inc. in the U.S. and other countries. Designed and produced by Chikamura Design, San Francisco EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 NOVELL, INC. SUBSIDIARIES OF THE REGISTRANT As of October 31, 1997, the following companies were subsidiaries of Novell, Inc.:
STATE OF INCORPORATION OR WHOLLY OWNED COUNTRY IN WHICH ORGANIZED - ---------------------------------------------------------------------- -------------------------- Fluent, Inc........................................................... Delaware Novell de Argentina S.A............................................... Argentina Novell Austria........................................................ Austria Novell Belgium B.V.B.A................................................ Belgium Novell do Brasil Software Ltda........................................ Brazil Novell Canada, Ltd.................................................... Canada Novell Chile.......................................................... Chile Novell Columbia....................................................... Columbia Novell Czech Republic................................................. Czech Republic Novell Denmark A/S.................................................... Denmark Novell Europe, Inc.................................................... Delaware Novell European Support Center GmbH................................... Germany Novell Finland OY..................................................... Finland Novell GmbH........................................................... Germany Novell Hong Kong...................................................... Hong Kong Novell Hungary KFT.................................................... Hungary Novell International, Ltd............................................. Barbados Novell Ireland Software Limited....................................... Ireland Novell Israel......................................................... Israel Novell Italia S.R.L................................................... Italy Novell Korea Co., Ltd................................................. Korea Novell Latino America Norte, CA....................................... Venezuela Novell de Mexico, S.A.DE C.V.......................................... Mexico Novell Netherland B.V................................................. Netherlands Novell New Zealand.................................................... New Zealand Novell Norge A/S...................................................... Norway Novell Peru........................................................... Peru Novell Polska Sp.Zo.o................................................. Poland Novell Portugal Informatica LDA....................................... Portugal Novell Pty, Ltd....................................................... Australia Novell S.A.R.L........................................................ France Novell Services Asia Pacific Pty Ltd.................................. Australia Novell Singapore...................................................... Singapore Novell Software Development Pvt., Ltd................................. India Novell South Africa Propietary Ltd.................................... South Africa Novell Spain S.A...................................................... Spain Novell Svenska A.B.................................................... Sweden Novell Schweiz A.G.................................................... Switzerland Novell U.K., Ltd...................................................... United Kingdom Novell Uruguay........................................................ Uruguay MAJORITY OWNED - ---------------------------------------------------------------------- Novell Japan, Ltd..................................................... Japan Novonyx, Inc.......................................................... Delaware Onward Novell Software Pvt., Ltd...................................... India
EX-23.1 5 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Novell, Inc. of our report dated November 24, 1997, included in the 1997 Annual Report to Shareholders of Novell, Inc. Our audits also included the financial statement schedule of Novell, Inc., listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-14531, No. 33-29798, No. 33-36673, No. 33-54483, No. 33-64998, No. 33-65440, No. 33-66704, No. 33-67276, No. 33-68336, No. 333-04775, No. 333-04823, and No. 333-38435) pertaining to the Employee Stock Option and Stock Purchase Plans of Novell, Inc. of our report dated November 24, 1997, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Novell, Inc. /s/ ERNST & YOUNG LLP San Jose, California January 27, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 YEAR OCT-31-1997 OCT-31-1997 208,543 824,930 234,358 (33,053) 10,656 1,470,382 765,384 (391,519) 1,910,649 321,956 0 0 0 35,094 1,530,323 1,910,649 1,007,311 1,007,311 277,446 277,446 929,869 0 0 (150,570) (72,274) (78,296) 0 0 0 (78,296) (.22) (.22)
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