Back to GetFilings.com
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