Item 1. Business
(a) General Development of Business
Pittway Corporation ("Pittway" or "Registrant"), formerly Standard Shares, Inc. ("Standard"), was incorporated under Delaware law in 1925. Pittway and its subsidiaries are referred to herein collectively as the "Company".
The Company operates in two reportable industry segments: alarm and other security products, and publishing.
Acquisitions and dispositions of businesses by the Company, other than the discontinued operations discussed below, in each of the three years ended December 31, 1995 were not significant to the Company's sales or results of operations.
During the first half of 1994, the Company sold its 16.67% ownership in First Alert, Inc., a manufacturer of residential fire protection products, as part of an initial public offering of that company's common stock. Financial information relating to this transaction is set forth in Note 10 ("Fair Value of Financial Instruments") to the Consolidated Financial Statements contained in the 1995 Annual Report to Stockholders, pages 39-40, which Note is incorporated herein by reference.
In April 1993, the Company distributed its investment in the AptarGroup, Inc. (formerly known as the Seaquist Division packaging group) to stockholders in a tax-free spinoff. AptarGroup, Inc. is a manufacturer of aerosol valves, dispensing pumps and closures which are sold to packagers and marketers in the personal care, fragrance/cosmetics, pharmaceutical, household products and food industries. In October 1992, the Company sold its Barr Company, a contract packager for marketers of aerosol and liquid fill (non-aerosol) personal and household products, to a Canadian packaging company. In July 1992, the Company sold its First Alert/BRK Electronics business to a new company formed by BRK management and an investment firm. Financial information relating to these transactions is set forth in Note 1 ("Discontinued Operations") to the Consolidated Financial Statements contained in the 1995 Annual Report to Stockholders, page 36, which Note is incorporated herein by reference.
(b) Financial Information about Industry Segments
Financial information relating to industry segments for each of the three years ended December 31, 1995 is set forth in Note 13 ("Segment Information") to the Consolidated Financial Statements contained in the 1995 Annual Report to Stockholders, pages 41-42, which Note is incorporated herein by reference.
(c) Narrative Description of Business
The principal operations, products and services rendered by the Company:
Alarm and Other Security Products Segment
This segment involves the design, manufacture and sale of an extensive line of burglar alarm, commercial fire detection, closed circuit television,
access control and other alarm components and systems as well as the distribution of alarm and other security products manufactured by other companies. By offering a broad line of alarm products needed for security systems, the Company provides a full range of services to independent alarm dealers and installers which range in size from one-person operations to the largest national alarm service companies. In every major domestic market area, quick delivery is provided through the Company's computerized regional warehouses and convenience center outlets, authorized distributors and dealers. Various products sold through the alarm system distribution group are purchased from non-affiliated suppliers and manufacturers to offer a broad range of products. Some of the products purchased are resold under the Company's Ademco brand name, others are resold under brand names owned by its suppliers. In the Canadian and overseas markets, alarm and other security products are sold through the Company's distribution centers, authorized distributors and sales agents. The Company also offers AlarmNet to alarm companies in major U.S. markets. AlarmNet is a wireless cellular-like communication network designed to transmit security alarm signals by radio instead of over telephone lines.
Commercial fire detectors and fire controls are sold through the Company's regional warehouses, electrical and building supply wholesalers and alarm and fire safety distributors.
Raw materials essential to the Company's businesses are purchased worldwide in the ordinary course of business from numerous suppliers. The vast majority of these materials are generally available from more than one supplier and no serious shortages or delays have been encountered. Certain raw materials used in producing some of the Company's products can be obtained only from one or two suppliers, the shortage of which could adversely impact production of alarm equipment and commercial fire detectors by the Company. The Company believes that the loss of any other single source of supply would not have a material adverse effect on its overall business.
Through its NESCO subsidiary the Company offers a wide variety of services to independent distributors of its fire alarm systems products, including assistance with system design, bonding, technical help, training, marketing and administrative support. The Company also offers a brand name marketing program to independent burglar alarm dealers.
Sales and marketing methods common to this industry segment include communications through the circulation of catalogs and merchandising bulletins, direct mail campaigns, and national and local advertising in trade publications. The Company's principal advantages in marketing are its reputation, broad product line, high quality products, extensive integrated distribution network, efficient customer service, competitive prices and brand names.
Within the industry there is competition from large and small manufacturers in both the domestic and foreign markets. While competitors will continue to introduce new products similar to those sold by the Company, the Company believes that its research and development efforts and the breadth and quality of its distribution network will permit it to remain competitive.
Publishing Segment
This segment is a publisher of 33 national business and trade publications. A variety of magazine-related products are also offered including directories, readership lists, CD-ROMs, on-line computer services, and custom publishing. The Company's publications serve both specific industries and broad functional markets which include specialized manufacturing, service industries, technical and professional fields and general management. Most publications are distributed on a monthly basis with several others distributed on a biweekly, annual or biennial frequency. The publications are generally distributed free through controlled circulation. The principal source of revenue is from the sale of advertising space within the magazines. Other facets of the business include: the operation of a printing plant for the printing and production of most of the Company's publications and those of other publishers; a national direct mail-marketing organization serving the pharmaceutical, health care and business services markets; a printer which provides mailing service capabilities to the Company's direct mail-marketing organization and to outside customers; research and telemarketing services; direct-response card mailer service; trade shows and special publications.
Within the publishing and marketing communications fields, competition exists in the form of other publications and media communication businesses. Reductions in advertising schedules by domestic industrial companies due to economic and other competitive pressures directly impacts the display advertising levels of the Company's publishing segment. The Company competes with one or more other magazines for advertising revenue in each of its magazine titles. The Company's principal sales advantages include relevant editorial content and innovative marketing complemented by specialized multi-magazine supplements. The Company believes that its competitive position also benefits from improvements in productivity and from cost control programs. The Company places great emphasis on providing quality products and services to its customers.
Real Estate and Other Ventures
The Company is involved in the marketing, sale and development of land near Tampa, Florida for residential and commercial use. Saddlebrook Village, a 2,000 acre parcel of land nearby, is approved for development as a master planned community. Saddlebrook Corporate Center, a nearby 450 acre parcel, was originally planned as a business park for mixed use development, although the partial conversion to a residential community is being considered due to the demand for residential housing. Principal competition comes from other residential and commercial developments in Florida.
The Company owns 8,606,085 shares of Cylink Corporation (Cylink) a leading supplier of network information security products that enable the secure transmission of data over private local area networks and wide area networks and public packet switched networks, such as the Internet. Cylink further offers a line of spread spectrum radio products that are used for wireless voice and data communications. The Company also owns 4,157,375 shares of United States Satellite Broadcasting Company Inc. (USSB), a company which provides subscription television programming via high-power direct broadcast satellite to households throughout the Continental U.S. Both of these companies made initial public offerings of their respective stocks in February of 1996. Additionally, the Company has approximately an
11% interest in a joint venture that develops wireless signaling equipment for communication between fixed points.
The Company has a limited partnership interest in a real estate developer with major commercial and residential high rise properties in Chicago, Dallas, Los Angeles and Boston. See Item 7 of this Form 10-K. The Company also has invested, as a 5% limited partner, in four rental apartment complexes located in Chicago, Indianapolis and Washington, D.C. which provide certain tax advantages.
Other Information
Patents and Trademarks -
While the Company owns or is licensed under a number of patents which are cumulatively important to each of its business units, the loss of any single patent or group of patents would not have a material adverse effect on the Company's overall business.
Products manufactured by the Company are sold primarily under its own trademarks and tradenames. Some products purchased and resold by the Company's alarm and security products business are sold under the Company's tradenames while others are sold under tradenames owned by its suppliers.
Customers -
Neither of the Company's industry segments is dependent upon a single customer or a few customers. The loss of any one or more of these customers would not have a material adverse effect on the Company's results of operations.
Research and Development -
The Company is engaged in programs to develop and improve products as well as develop new and improved manufacturing methods. Expenditures for Company sponsored research and development activities in the alarm and other security products segment were $16.6 million in 1995, $11.8 million in 1994 and $10.8 million in 1993. These costs, which are expensed in the Company's consolidated income statement, were associated with a number of products in varying stages of development, none of which represents a significant item of cost or is projected to be a significant addition to the Company's line of products.
Product Liability -
Due to the nature of the alarm security business, the Company has been, and continues to be, subjected to numerous claims and lawsuits alleging defects in its products. This exposure has been lessened by the sale of First Alert/BRK Electronics. It is likely, due to the present litigious atmosphere in the United States, that additional claims and lawsuits will be filed in future years. The Company believes that it maintains sufficient insurance to cover this exposure.
While it believes that resolution of existing claims and lawsuits will not have a material adverse effect on the Company's financial statements, management is unable to estimate the financial impact of claims and lawsuits which may be filed in the future.
Environmental Matters -
The Company anticipates that compliance with various laws and regulations relating to protection of the environment will not have a material effect on its capital expenditures, earnings or competitive position.
Employees -
At December 31, 1995, there were approximately 6,000 persons employed by the Company, including 4,800 employed in the United States. Approximately 1,200 of the employees working in the United States were represented by labor unions. The Company considers its relations with its employees and the unions representing its employees to be good.
(d) Financial Information About Foreign and Domestic Operations and Export Sales
Financial information concerning foreign and domestic operations and export sales is set forth in Note 13 ("Segment Information") to the Consolidated Financial Statements contained in the 1995 Annual Report to Stockholders, pages 41-42, which Note is incorporated herein by reference.
Item 2.

Item 2. Properties
The Company's principal properties and their general characteristics are as follows: Principal Lease Approximate Location Use Expiration Square Feet Alarm and Other Security Products Segment- Syosset, New York (1) N/A 340,000 Syosset, New York (3) 1997 14,000 Syosset, New York (1) 1997 6,000 Syosset, New York (1) 2000 17,000 Syosset, New York (1) 2014 10,000 Torrance, California (1) 1998 48,000 Miami, Florida (2) 2000 14,000 El Paso, Texas (2) 2001 19,000 Louisville, Kentucky (3) 2001 4,000 Raleigh, North Carolina (1) 1998 8,000 Northford, Connecticut (1) N/A 179,000 St. Charles, Illinois (1) 2003 158,000 St. Charles, Illinois (1) 2004 50,000 West Chicago, Illinois (1) 1998 21,000 Norcross, Georgia (3) 1998 6,000 Melbourne, Australia (2) 1998 5,000 Sydney, Australia (2) 1998 25,000 Alleur, Belgium (2) 1997 5,000 Toronto, Canada (2) 1998 7,000 Concord, Ontario, Canada (2) 1997 7,000 Brighton, England (1) 1997 24,000 Lichfield Staffs, England (4) 2014 20,000 East Kilbride, Scotland (1) N/A 15,000 Hilden, Germany (2) 1999 8,000 Tsuen Wan, TN, Hong Kong (2) 1997 5,000
Principal Lease Approximate Location Use Expiration Square Feet Alarm and Other Security Products Segment- (continued) Milan, Italy (1) N/A 14,000 Milan, Italy (2) 2001 8,000 Trieste, Italy (1) N/A 40,000 Juarez, Mexico (4) 1999 68,000 Madrid, Spain (2) 2000 8,000 Barcelona, Spain (2) 2005 6,000
Distribution Centers Hub Locations: Atlanta, Georgia (2) 2005 29,000 Boston, Massachusetts (2) 1999 14,000 Los Angeles, California (2) 1999 30,000 Chicago, Illinois (2) 2005 40,000 Clearwater, Florida (2) 2004 27,000 Memphis, Tennessee (2) 2006 15,000 Fairfield, New Jersey (2) 1996 16,000 Richmond, Virginia (2) 2004 14,000 Louisville, Kentucky (2) 1999 60,000 Phoenix, Arizona (2) 2004 15,000 Toronto, Canada (2) 1997 11,000
Publishing Segment- Cleveland, Ohio (3) 2000 179,000 Cleveland, Ohio (2) 1996 30,000 Berea, Ohio (5) N/A 100,000 New York, New York (3) 2000 10,000 Dunedin, Florida (3) 2000 8,000 Safety Harbor, Florida (1) 1997 19,000 Tampa, Florida (5) 1999 30,000
General Corporate- Chicago, Illinois (3) 2001 12,000
Other properties in the alarm and other security products segment include 82 full-line convenience centers in addition to those hub locations listed above which function as retail-like sales distribution outlets to serve the North American market. These 82 centers are under leases expiring through 2002 and range in size from 1,500 to 11,500 square feet. Other properties in the publishing segment include 12 sales and/or editorial offices under leases expiring through 2003 located in major cities throughout the United States. The Company believes the above facilities are adequate for its present needs.
(1) Offices, Manufacturing and Warehousing (2) Warehousing (3) General Offices (4) Manufacturing (5) Printing N/A Not applicable - facilities are owned by the Company
Item 3.

Item 3. Legal Proceedings
On May 10, 1989, the Circuit Court of the Sixth Judicial Circuit in and for Pasco County, Florida, entered a judgment against Saddlebrook Resorts, Inc. ("Saddlebrook"), a former subsidiary of the Company, in a lawsuit which arose out of the development of Saddlebrook's resort and a portion of the adjoining residential properties owned and currently under development by the Company. The lawsuit (James H. Porter and Martha Porter, Trustees, et al. vs. Saddlebrook Resorts, Inc. and The County of Pasco, Florida; Case No. CA83- 1860), alleges damage to plaintiffs' adjoining property caused by surface water effects from improvements to the properties. Damages of approximately $8 million were awarded to the plaintiffs and an injunction was entered requiring, among other things, that Saddlebrook work with local regulatory authorities to take corrective actions. Saddlebrook made two motions for a new trial, based on separate grounds. One such motion was granted on December 18, 1990. Such grant was appealed by the plaintiffs. The other such motion was denied on February 28, 1991. Saddlebrook appealed such denial. The appeals were consolidated, fully briefed and heard in February 1992. Saddlebrook received a favorable ruling on March 18, 1992, dismissing the judgment and remanding the case to the Circuit Court for a new trial. An agreed order has been entered by the Court preserving the substance of the injunction pending final disposition of this matter. As part of its plan to comply with the agreed order, Saddlebrook filed applications with the regulatory agency to undertake various remediation efforts. Plaintiffs, however, filed petitions for administrative review of the applications, which administrative hearing was concluded in February 1992. On March 31, 1992, the hearing officer issued a recommended order accepting Saddlebrook's expert's testimony. The agency's governing board was scheduled to consider this recommended order on April 28, 1992, however, shortly before the hearing, the plaintiffs voluntarily dismissed their petitions and withdrew their challenges to the staff's proposal to issue a permit.
At the April 28, 1992 hearing the governing board closed its file on the matter and issued the permits. Saddlebrook appealed the board's refusal to issue a final order. On July 9, 1993 a decision was rendered for Saddlebrook remanding jurisdiction to the governing board for further proceedings, including entry of a final order which was issued on October 25, 1993. The plaintiffs appealed the Appellate Court decision to the Florida Supreme Court and appealed the issuance of the final order to the Second District Court of Appeals. The Florida Supreme Court heard the appeal on May 3, 1994 and denied plaintiffs' appeal. The other appeal was voluntarily dismissed by the plaintiffs on June 17, 1994. On remand to the trial court, Saddlebrook's motion for summary judgment, based on collateral estoppel on the ground that plaintiffs' claims were fully retried and rejected in a related administrative proceeding was granted on December 7, 1994. Plaintiffs filed for a rehearing which was denied. Plaintiffs have appealed the trial court's decision granting summary judgment.
Until October 14, 1989, Saddlebrook disputed responsibility for ultimate liability and costs (including costs of corrective action). On that date, the Company and Saddlebrook entered into an agreement with regard to such matters. The agreement, as amended and restated on July 16, 1993, provides for the Company and Saddlebrook to split equally the costs of the defense of the litigation and the costs of certain related litigation and proceedings, the costs of the ultimate judgment, if any, and the costs of any mandated remedial work. Subject to certain conditions, the agreement
permits Saddlebrook to obtain subordinated loans from the Company to enable Saddlebrook to pay its one-half of the costs of the latter two items. No loans have been made to date.
The Company believes that the ultimate outcome of the aforementioned lawsuit will not have a material adverse effect on its financial statements.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.

Item 5. Market For Registrant's Common Equity and Related Stock- holder Matters
The information set forth under the heading "Market Prices, Security Holders and Dividend Information" appearing on page 45 of the Company's 1995 Annual Report to Stockholders is incorporated herein by reference.
Item 6.

Item 6. Selected Financial Data
The information set forth under the heading "Supplemental Information -Five Year Summary of Selected Financial Data" appearing on page 44 of the Company's 1995 Annual Report to Stockholders is incorporated herein by reference.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information set forth under the heading "Management's Discussion and Analysis" appearing on pages 46-47 of the Company's 1995 Annual Report to Stockholders is incorporated herein by reference.
Item 8.

Item 8. Financial Statements and Supplementary Data
The Company's Consolidated Financial Statements and Summary of Accounting Policies and Notes thereto, together with the report thereon of Price Waterhouse LLP dated February 21, 1996, appearing on pages 29-43 of the Company's 1995 Annual Report to Stockholders are incorporated herein by reference.
Item 9.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
PART III
Information required to be furnished in this part of the Form 10-K has been omitted because the Registrant will file with the Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than April 30, 1996.
Item 10.

Item 10. Directors and Executive Officers of the Registrant
The information set forth under the headings "Nominees for Election by the Holders of Class A Stock", "Nominees for Election by the Holders of Common Stock", "Executive Officers" and "Section 16(a) Reports" in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 9, 1996 is incorporated herein by reference.
Item 11.

Item 11. Executive Compensation
The information set forth under the headings "Compensation Committee Interlocks and Insider Participation", "Compensation", "Compensation Committee Report on Executive Compensation" and "Performance Graph" in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 9, 1996 is incorporated herein by reference.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 9, 1996 is incorporated herein by reference.
Item 13.

Item 13. Certain Relationships and Related Transactions
The information set forth under the headings "Certain Transactions" (and the information set forth under the heading "Compensation Committee Interlocks and Insider Participation" which is cross-referenced under the heading "Certain Transactions") in the Registrant's Proxy Statement for the annual meeting of stockholders to be held on May 9, 1996 is incorporated herein by reference.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial statements and financial statement schedule filed as a part of this report are listed in the Index to Consolidated Financial Statements and Financial Statement Schedules on page 13 of this Form 10-K and are incorporated herein by reference.
Exhibits required by Item 601 of Regulation S-K are listed in the Index to Exhibits on pages 16-17 of this Form 10-K, which is incorporated herein by reference. Each management contract or compensatory plan or arrangement required to be filed as an Exhibit to this report pursuant to Item 14 (c) of Form 10-K is so identified on the Index to Exhibits.
(b) Reports on Form 8-K: The registrant announced a potential significant increase in the value of its investments in United States Satellite Broadcasting, Inc. and Cylink Corporation in a filing on Form 8-K dated December 21, 1995.
The registrant announced a three for two stock split in its Common and Class A stock in a filing on Form 8-K dated January 23, 1996.
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.
PITTWAY CORPORATION (Registrant)
BY /s/ Paul R. Gauvreau Paul R. Gauvreau Financial Vice President and Treasurer Date: March 27, 1996
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 indicated on March 27, 1996.
/s/ Neison Harris /s/ Anthony Downs Neison Harris, Director and Anthony Downs, Director Chairman of the Board
/s/ King Harris /s/ Leo A. Guthart King Harris, Director, President Leo A. Guthart, Director and Chief Executive Officer
/s/ Paul R. Gauvreau /s/ Irving B. Harris Paul R. Gauvreau, Principal Irving B. Harris, Director Financial and Accounting Officer
/s/ Eugene L. Barnett /s/ William W. Harris Eugene L. Barnett, Director William W. Harris, Director
/s/ Sidney Barrows /s/ Jerome Kahn, Jr Sidney Barrows, Director Jerome Kahn, Jr., Director
/s/ Fred Conforti /s/Leo F. Mullin Fred Conforti, Director Leo F. Mullin, Director
/s/ E. David Coolidge III E. David Coolidge III, Director
PITTWAY CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following documents are filed as a part of this report:
Page reference in Annual Report to Stockholders
Financial Statements required by Item 8 of this Form:
Consolidated Balance Sheet at December 31, 1995 and 1994........................................ 30-31 For each of the three years ended December 31, 1995 - Consolidated Statement of Income................... 29 Consolidated Statement of Cash Flows............... 32 Consolidated Statement of Stockholders' Equity..... 33 Summary of Accounting Policies and Notes to Consolidated Financial Statements.................... 34-42 Report of Independent Accountants...................... 43
Page reference in Form 10-K
Financial Statement Schedule required by Article 12 of Regulation S-X:
Report of Independent Accountants on Financial Statement Schedule................................... 14 Consolidated Financial Statement Schedule - II. Valuation and Qualifying Accounts............... 15
The consolidated financial statements of Pittway Corporation, listed in the above index together with the Report of Independent Accountants, which are included in the Company's 1995 Annual Report to Stockholders, are incorporated herein by reference.
All other schedules have been omitted because the required information is not present, or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or notes thereto. Summarized financial information for the limited real estate partnerships and other ventures is omitted because, when considered in the aggregate, they do not constitute a significant subsidiary.
With the exception of the aforementioned information and information incorporated by reference in Part I (in Item 1) and Part II (in Items 5, 6, 7 and 8) of this Form 10-K, the Company's 1995 Annual Report to Stockholders is not deemed to be filed as part of this report.
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors of Pittway Corporation
Our audits of the consolidated financial statements referred to in our report dated February 21, 1996 appearing on page 43 of the 1995 Annual Report to Stockholders of Pittway Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in the index on page 13 of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
As discussed in Notes 5 and 7 to the consolidated financial statements, in 1993 the Company changed its method of accounting for income taxes and for postretirement benefits other than pensions.
/s/ Price Waterhouse LLP Price Waterhouse LLP
Chicago, Illinois February 21, 1996
INDEX TO EXHIBITS
Sequential Number and Description of Exhibit Page Number***
3.1 Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of the Registrant's Annual Report on Form 10-K for the year ended February 29, 1988).
3.2 Certificate of Amendment to Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 4.2 of the Registrant's Form S-8 Registration Statement No. 33 - 33312 filed with the Commission on February 2, 1990).
3.3 Bylaws of Registrant, as amended (incorporated by reference to Exhibit 3.3 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995).
4. Composite Conformed Copy of separate Note Purchase Agreements Dated as of December 15, 1995, each, between the Registrant and one of Metropolitan Life Insurance Company, Metropolitan Property and Casualty Insurance Company, Nationwide Life Insurance Company, Employers Life Insurance Company of Wausau, and West Coast Life Insurance Company without exhibits.
10.1 Pittway Corporation 1990 Stock Awards Plan, as amended, (incorporated by reference to Exhibit 4.4 to the Registrant's Form S-8 Registration Statement No. 33 - 54753 filed with the Commission on July 27, 1994).
10.2 Agreement of employment dated as of July 1, 1990 with Sal F. Marino, as amended (incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.)**
10.3 Second Extension and Amendment of Agreement of Employment with Sal F. Marino dated December 31, 1993 (incorporated by reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.)**
10.4 Third Extension and Amendment of Agreement of Employment with Sal F. Marino dated December 31, 1994 (incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.)**
INDEX TO EXHIBITS - cont'd.
Sequential Number and Description of Exhibit Page Number***
10.5 Fourth Extension and Amendment of Agreement of Employment with Sal F. Marino dated December 31, 1995.**
10.6 Employment Agreement with King Harris dated as of January 1, 1996.**
10.7 Employment Agreement with Leo A. Guthart dated as of January 1, 1996.**
13. 1995 Annual Report to Stockholders.*
21. Subsidiaries of the Registrant.
23. Consent of Independent Accountants.
27. Financial Data Schedule (submitted only in electronic format).
* Such report, except to the extent incorporated herein by reference, is being furnished for the information of the Securities and Exchange Commission only and is not to be deemed filed as a part of this Form 10-K.
** This document is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this report pursuant to Item 14 (c) of Form 10-K.
*** This information appears only in the manually signed original of this Form 10-K.


ITEM 1. BUSINESS
THE COMPANY
Novell, Inc. ("Novell" or the "Company") is a leading provider of network software. Novell software products provide the infrastructure for a networked world, enabling customers to connect with other people and the information they need, anytime and anyplace. Novell partners with other technology and market leaders to make networks an integral part of everyday life.
The Company was incorporated in Delaware on January 25, 1983. Novell's executive offices are located at 1555 North Technology Way, Orem, Utah 84057. Its telephone number at that address is (801) 222-6000.
The Company markets its products through 40 U.S. and 60 international sales offices. The Company sells its products primarily to distributors and national retail chains, who in turn sell the Company's products to retail dealers. The Company also sells its products to OEMs, system integrators, and VARs as well as direct to large corporations.
The Company primarily conducts product development activities in San Jose, California; Summit, New Jersey; and Orem and Provo, Utah. It also contracts out some product development activities to third-party developers.
Over the past several years, the Company has issued common stock or paid cash to acquire technology companies, invested cash in other technology companies, and formed strategic alliances with still other technology companies. Novell undertook these transactions to promote a pervasive computing environment, and in many cases to also broaden the Company's business as a system and application software supplier.
In June 1993, the Company acquired UNIX System Laboratories, Inc. (USL) by issuing approximately 11 million shares Novell common stock valued at $332 million in exchange for all of the outstanding stock of USL not previously owned by Novell and assumed liabilities of $9 million. The transaction was accounted for as a purchase and, on this basis, resulted in a one-time write-off of $269 million for purchased research and development in the third quarter of fiscal 1993.
In June 1994, the Company completed a merger with WordPerfect Corporation (WordPerfect), whereby WordPerfect was merged into Novell. Approximately 51 million shares of Novell common stock were exchanged for all of the outstanding common stock of WordPerfect. In addition, the outstanding employee stock options to purchase WordPerfect common stock were converted into options to purchase approximately 8 million shares of Novell common stock. The transaction was accounted for as a pooling of interests and therefore all prior financial statements incorporated by reference herein have been restated as if the merger took place at the beginning of such periods.
Additionally, in June 1994, the Company acquired from Borland International, Inc. (Borland) its Quattro Pro spreadsheet product line for $110 million of cash and assumed liabilities of $10 million, and purchased a three-year license to reproduce and distribute up to one million copies of current and future versions of Borland's Paradox relational database product for $35 million of cash. The transaction was accounted for as a purchase and, on this basis, resulted in a one-time write-off of $114 million for purchased research and development.
On October 30, 1995, the Company announced its intention to sell its personal productivity applications product line. Novell's personal productivity applications product line was acquired in the WordPerfect and Quattro Pro transactions. Certain other acquired product lines such as GroupWise are not being sold. The Company is actively negotiating with several parties regarding the sale of the personal productivity applications product line and anticipates that it will announce a sale in early 1996.
On December 6, 1995, Novell completed the sale of its UnixWare product line to the Santa Cruz Operation, Inc. (SCO). The Company expects to report a gain on this transaction in the first quarter of fiscal 1996. Under the agreement, Novell received approximately 6.1 million shares of SCO common stock,
resulting in an ownership position of approximately 17% of the outstanding SCO common stock. The agreement also calls for Novell to receive a revenue stream from SCO based on revenue performance of the purchased UnixWare product line. This revenue stream is not to exceed $84 million net present value, and will end by the year 2002. In addition, Novell will continue to receive revenue from existing licenses for older versions of UNIX System source code.
BUSINESS STRATEGY
Novell believes that the definition of computer networks is changing as traditional stand-alone computer resources and new categories of computing devices increasingly become integrated across networks. Networks are expanding into every area of life, providing access to valuable information wherever people work, live, or travel. In the process, the boundaries of geography and technology that once separated private and public data networks are falling away to create a single information resource for businesses and consumers.
The Company sees its business opportunity in providing software to enable this convergence of networks into a managed Internet or Smart Global Network providing access to information anytime, anyplace. It has enhanced its NetWare network operating system products to make networks smart -- affordable to own and operate, easy to manage and use, and capable of connecting heterogeneous systems. It has also expanded its product line beyond NetWare to include products for accessing, managing, and interconnecting smart networks, and for extending networks beyond personal computer workgroups to connect office equipment such as printers and fax machines, industrial controls, utility meters, cable TV set-top boxes, and other intelligent devices.
The Company believes that the convergence of information resources in the Smart Global Network is shifting the value of information technology from the power of stand-alone systems to the ability of systems to connect into the network. Together with its partners, the Company intends to be a driving force in expanding the value of networks for customers worldwide.
TECHNOLOGIES
Making Networks Smart. Novell delivers advanced network services in the NetWare network operating system and in compatible products that add functionality for administrators and end users. These services add intelligence to the network to reduce costs of ownership and administration, simplify management tasks for administrators, and make access to network-based information easier for end users. In the first release of NetWare eleven years ago, those services were file and print only. Over the past decade the services provided by Novell and third parties have expanded significantly to include directory, network and systems management, messaging, multiprotocol routing, and security. The Company's NetWare 4 operating system includes NetWare Directory Services (NDS), a distributed database of users, network equipment, computer systems, and other network resources. NDS provides centralized network management, security, and information access capabilities to enable organizations to efficiently maintain and expand complex networks. The capabilities of NDS are also integrated with compatible Novell network software products and over 140 third-party solutions. An additional Novell product, the TUXEDO System, provides tools to help customers develop and deploy transaction-intensive client/server applications for distribution across networks. The Company shipped its first product integrating TUXEDO with NetWare and NDS in 1995.
Interconnecting Smart Networks. Novell is developing network software to support NetWare Connect Services (NCS), a managed class of wide-area networking and Internet services made available to customers through major telecommunications carriers. These services enable organizations to out-source the complexity and some of the cost of maintaining wide-area networks, to make Internet access more manageable, reliable, and secure, and to extend local-area-networks beyond the immediate enterprise to support communication and collaboration with customers, partners, and suppliers. Novell in partnership with AT&T made the service available in the U.S. in 1995. International partners Deutsche Telecom, Telstra, NTT, and UniSource will be among the first to make the service widely available in Europe and the Pacific Rim in 1996. NCS partners worldwide are cooperating to provide interoperability among their networks and maintain a common directory for the service based on NetWare Directory Services.
Extending Networks Beyond Personal Computer Workgroups. The NetWare network operating system and related Novell products provide a platform for extending networks beyond traditional personal computer local-area networks (LANs) and integrating diverse technologies. This includes the seamless integration of multiple desktop systems and host environments. Novell believes that customer environments are inherently heterogeneous and therefore require an information system that integrates dissimilar technologies. The goal of Novell's strategy of integrating various desktop systems is to allow IBM, IBM-compatible, Apple Macintosh, and UNIX-based PCs and workstations to access and share simultaneously a common set of network resources and information. This gives customers the freedom to choose the desktop and application server systems that best fit their application requirements. In addition to the integration of desktops, host environments from vendors such as IBM, DEC, HP and Olivetti and numerous other UNIX system vendors are integrated into the NetWare network so that users can access host-based resources and information from their desktops across the network. Through Novell Embedded Systems Technology (NEST), the Company continues to extend NetWare services to connect office and industrial equipment, TV cable set-top boxes, electric utility energy management equipment, and a broad range of other intelligent devices. In addition, Novell is working with leading software developers and manufacturers to network computers and telephone PBX switches in a new class of integrated solutions.
Providing Network Access. Novell network access products connect desktop PC and Macintosh users with applications and services that run on UNIX host computers and the Internet through TCP/IP communications protocols. The company also provides dial-in client and server products for remote access to network resources. Novell mobile NetWare client technology allows users to maintain a virtual network on their portable computers, even when disconnected, and then synchronize files when they reconnect to the network. NetWare Web Server provides a complete add-on solution for NetWare 4 servers to support both internal communication and external publishing on the Internet's World Wide Web. A three dimensional network browser is also in development to provide point-and-click access to network services, electronic publishing that simplifies creation and access to network-based information, and intelligent browsing capabilities for accessing distributed network resources. Novell products also include the GroupWise family of workgroup collaboration products for electronic mail, calendaring and scheduling, document management and forms processing. The Company is expanding the functionality of GroupWise in 1996 for greater integration with network directories, management and Internet access applications.
PROGRAMS
Technical Support Alliance. In May 1991 Novell announced the formation of the Technical Support Alliance (TSA), with 40 current members including Apple, Compaq, Hewlett-Packard, Intel, IBM, Lotus, Microsoft, and Oracle. The TSA was organized to provide one-stop multivendor support. Member companies provide cooperative efforts to support their customers.
Certified Novell Engineer Program. Through the Certified Novell Engineer (CNE) program, Novell is strengthening the networking industry's Level I support self-sufficiency. CNEs are individuals who receive high-level training, information, and advanced technical telephone support (Level II) from Novell. CNEs may be employed by resellers, independent support organizations, or Novell Support Organizations (NSOs). The NSO program pools the capabilities of the industry's best support providers. NSOs have contractual agreements with Novell that are designed to ensure quality service on a national or global level for NetWare, UnixWare, and other Novell products.
Novell Authorized Education Centers. Novell offers education to end users through nearly 1,300 independent Novell Authorized Education Centers (NAECs) worldwide, which use Novell-developed courses to instruct students in the use and maintenance of Novell products. Novell also offers self-paced training products.
Novell Labs. Through its Independent Manufacturer Support Program (IMSP), Novell works with third-party manufacturers to test and certify hardware and software components designed to interoperate with the NetWare and UnixWare operating systems. Novell distributes these test results to inform customers about products that have formally demonstrated NetWare and UnixWare compatibility. In effect, IMSP certifica-
tion programs help vendors to market their products through Novell's distribution channels. The primary goal of IMSP is to foster working relationships between Novell and third-party hardware and software suppliers. Secondary goals include promoting certified products to industry resellers, anticipating industry products' direction through comarketing efforts, and working with vendors to codevelop critical network components.
DeveloperNet Novell delivers products, software development kits, information, and support services to software developers through the DeveloperNet subscription program, its primary communications channel to the developer community. Over 1,000 independent software vendors and corporate developers now subscribe to the program. Novell launched DeveloperNet in September 1995 as part of its renewed network focus and initiative code-named Net2000 to provide developers with common interfaces to a rich set of network services.
PARTNERSHIPS
Development Partners. When customers request a new service or function be added to Novell products, Novell investigates the most effective way to deliver that functionality to the user. Very often the best way is for Novell to partner with a company who has expertise in that specific area. By partnering, the combination of Novell's core expertise in networks and the partner's expertise in the given product area combine to deliver a better solution faster than if Novell would have attempted to develop it alone.
Systems Partners. Novell partners with companies who have complimentary software and hardware. The resulting solution is a powerful combination of products that deliver enterprise-wide connectivity solutions. These partners include system suppliers like IBM, DEC and HP, as well as system integration experts like Memorex Telex, Arthur Andersen, and EDS.
Application Partners. Novell works very closely with application developers to provide integrated software products and support for end users. As network applications grow in importance, this program will help assure broad availability of well integrated multivendor applications.
Enterprise Consulting Partners. This select group of the industry's leading systems integrators and consulting organizations work with Novell to deliver distributed client/server solutions for customers with large enterprise-wide networks.
Multiple Channel Distribution Network. The Company markets its products through a broad range of distributors, dealers, value added resellers, systems integrators, and OEMs as well as to major end users.
Worldwide Service and Support. The Company is committed to providing service and support on a worldwide basis to its resellers and to their end-user customers. The Company has established agreements with third party service vendors to expand and complement the service provided directly by the Company's service personnel and the Company's resellers.
NOVELL PRODUCTS
The Company's products fall within three categories: systems software, information access and management products, and groupware. Novell products work together, interoperate with thousands of third-party solutions, and span data networks from workgroup LANs to the Internet.
Systems Products provide a foundation of network services that can be extended across heterogeneous computing platforms and intelligent devices in the Smart Global Network. These products include the NetWare 3 network operating system, which provides users with access to data and resources controlled by a single server, and the more advanced NetWare 4, which features NetWare Directory Services and provides the user with access to the resources of the entire enterprise or wide-area network. The Company also offers NetWare Symmetrical Processing for use on cost-effective multiprocessor hardware that can be readily scaled to meet the requirements of large and complex networks. Novell system software also includes development kits to enable manufacturers to embed Novell Embedded Systems Technology in microprocessor-based products. In addition, the Company develops and markets the TUXEDO System for the development and deployment of distributed client/server applications.
Information Access and Management Products extend and leverage NetWare services to enable customers to access and manage data, applications and resources distributed across enterprise networks and the Internet. These products include the LAN Workplace TCP/IP solution for connecting personal computer users to UNIX systems and the Internet ; the ManageWise strategic management solution for end-to-end management of the Novell environment; the LANalyzer monitoring and analysis tool for troubleshooting NetWare networks; the NetWare Connect server product and NetWare Mobile client product for remote access to network resources; the NetWare Navigator for centralized, automated software and data distribution for Novell networks; the NetWare for SAA solution for connecting NetWare and IBM mainframe environments, and other host connectivity products. In addition, the Company's NetWare Telephony Services platform and Telephony Services API (TSAPI) enable customers to connect computer and telephone PBX systems in integrated network solutions.
Novell information access and management products are also integral to the NetWare Connect Service, the secure business Internet made available in the U.S. by AT&T. The Company also offers PerfectWorks products that combine network access technology with PC applications and thus bring networking to small-office and home-office users.
Groupware Products utilize NetWare network services to provide rich access to network-based information. The Company's GroupWise family of groupware products now serves over 5 million users with integrated E-Mail, group calendaring, scheduling, online conferencing, forms and document management. GroupWise integrates these capabilities along with Internet E-mail, fax and voice messages in a "Universal In-Box" for network-based communication and collaboration.
PRODUCT DEVELOPMENT
Due to the rapid pace of technological change in its industry, the Company believes that its future success will depend, in part, on its ability to enhance and develop its software products to satisfactorily meet dynamic market needs.
During fiscal 1995, 1994, and 1993, product development expenses were approximately $368 million, $347 million, and $290 million, respectively. The Company's product development effort consists primarily of work performed by employees; however, the Company also utilizes third-party technology partners to assist with product development.
SALES AND MARKETING
Novell markets its NetWare family of network products, the UnixWare operating system and its personal productivity applications products through distributors, dealers, vertical market resellers, systems integrators, and OEMs who meet the Company's criteria, as well as to major end users. In addition, the Company conducts sales and marketing activities and provides technical support, training, and field service to its customers from its offices in San Jose, California; Summit, New Jersey; Provo and Orem, Utah; and from its 40 U.S. and 60 international sales offices.
Distributors. Novell has established a network of independent distributors, which resell the Company's products to dealers, VARs, and computer retail outlets. As of December 31, 1995, there were approximately 15 U.S. distributors and approximately 80 international distributors.
Dealers. The Company also markets its products to large-volume dealers and regional and national computer retail chains.
VARs and Systems Integrators. Novell also sells directly to value added resellers and systems integrators who market data processing systems to vertical markets, and whose volume of purchases warrants buying directly from the Company.
OEMs. The Company licenses its systems software to domestic and international OEMs for integration with their products. With the acquisition of USL, the number of OEM agreements has increased significantly, both domestically and internationally.
End Users. Generally, the Company refers prospective end-user customers to its resellers. However, the Company has the internal resources to work directly with major end users and has developed U.S. and international master license agreements with approximately 450 of them to date. Additionally, some upgrade products are sold directly to end users.
International Sales. In fiscal 1995, 1994, and 1993, approximately 47%, 43%, and 43%, respectively, of the Company's net sales were to customers outside the U.S. -- primarily distributors. To date, substantially all international sales except Japanese sales, Indian sales, and certain European sales to non-multinational distributors that were shipped from a new distribution center in Dublin, Ireland have been invoiced by the Company in U.S. dollars. In fiscal 1996 the Company anticipates that a substantial portion of international revenues will continue to be invoiced in U.S. dollars. The exceptions to the U.S. dollar invoicing will be Japanese sales through the Company's joint venture in Japan, Indian sales through the Company's joint venture in India and its distribution center in Dublin, Ireland. No one foreign country accounted for more than 10% of net sales in any period. In fiscal 1995 and 1994, the Company had one multinational distributor, which accounted for 15% and 12% of revenue, respectively. The Company had two multinational distributors, which accounted for 15% and 11% of revenue in fiscal 1993. Otherwise, no customer accounted for more than 10% of revenue in any period.
Marketing. The Company's marketing activities include distribution of sales literature and press releases, advertising, periodic product announcements, support of NetWare user groups, publication of technical and other articles in the trade press, and participation in industry seminars, conferences, and trade shows. The marketing departments of the Company employ many technical laboratories which test and evaluate networked computer equipment and individual devices. The knowledge derived from these laboratories is the basis for the technical publications published by the Company. These activities are designed to educate the market about local area networks in general, as well as to promote the Company's products. Through the Professional Developers Program, the Company strongly supports independent software and hardware vendors in developing products that work on Novell networks. Thousands of multiuser application software packages are now compatible with the NetWare operating system. In March 1995, the eleventh annual BrainShare Conference (formerly Developers' Conference) was held to inform and educate developers about Novell product strategy, Novell open architecture programming interfaces, and Novell third-party product certification programs.
SERVICE, SUPPORT, AND EDUCATION
The purpose of any service program is to help users get the most out of the products they buy. Novell offers a variety of support alternatives and encourages users to select the services that best meet their needs. These include the worldwide service and support organization, the Technical Support Alliance, the Certified Novell Engineer program, Novell Authorized Education Centers, the Independent Manaufacturer Support Program, and the Client-Server Testing Program.
MANUFACTURING SUPPLIERS
The Company's products, which consist primarily of software diskettes and manuals, are duplicated by outside vendors. This allows the Company to minimize the need for expensive capital equipment in an industry in which multiple high-volume manufacturers are available.
BACKLOG
Lead times for the Company's products are typically short. Consequently, the Company does not believe that backlog is a reliable indicator of future sales or earnings. The absence of significant backlog may contribute to unpredictability in the Company's net income and to fluctuations in the Company's stock price. See "Factors Affecting Earnings and Stock Price." The Company's backlog of orders at January 20, 1996, was approximately $112 million, compared with $51 million at January 20, 1995.
COMPETITION
Novell competes in the highly competitive market for computer software. Novell believes that the principal competitive factors are technical innovation to meet dynamic market needs, hardware independence and compatibility, marketing strength, system/performance, customer service and support, reliability, ease of use, price/performance, and connectivity with minicomputer and mainframe hosts.
The market for computer software, has become increasingly competitive due to Microsoft's growing presence in all sectors of the software business. The Company does not have the product breadth and market power of Microsoft. Microsoft's dominant position provides it with competitive advantages, including the ability to unilaterally determine the direction of future operating systems and to leverage its strength in one or more product areas to achieve a dominant position in new markets. This position may enable Microsoft to increase its market position even if the Company succeeds in introducing products with performance and features superior to those offered by Microsoft.
Microsoft's ability to offer networking functionality in future versions of MS Windows and MS Windows NT and in any other Microsoft operating systems and application software, or to provide incentives to customers to purchase certain products in order to obtain favorable sales terms or necessary compatibility or information with respect to other products, may significantly inhibit the Company's ability to maintain its business. Moreover, Microsoft's ability to offer products on a bundled basis can be expected to impair the Company's competitive position with respect to particular products. In addition, as Microsoft creates new operating systems and applications, there can be no assurance that Novell will be able to ensure that its products will be compatible with those of Microsoft.
As the Company sharpened its focus, it decided to sell two lines of business -- UnixWare and the WordPerfect personal productivity applications, which did not contribute to Novell's network focus. Even with a sharpened focus, the Company is aware of several new competitive operating systems currently under development and scheduled for introduction within the next year and beyond. If any of these competing products achieves market acceptance, Novell's business and results of operations could be materially adversely affected.
LICENSES, PATENTS AND TRADEMARKS
The Company relies on copyright, trade secret and trademark law, as well as provisions in its license, distribution and other agreements in order to protect its intellectual property rights. Additionally, the Company has numerous patents pending. No assurance can be given that such patents pending will be issued or, if issued, will provide protection for the Company's competitive position. Although Novell intends to protect its patent rights vigorously, there can be no assurance that these measures will be successful. Additionally, no assurance can be given that the claims on any patents held by the Company will be sufficiently broad to protect the Company's technology. In addition, no assurance can be given that any patents issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. The loss of patent protection on the Company's technology or the circumvention of its patent protection by competitors could have a material adverse effect on the Company's ability to compete successfully in its products business.
The software industry is characterized by frequent litigation regarding copyright, patent and other intellectual property rights. The Company has from time to time had infringement claims asserted by third parties against it and its products. While there are no known or pending threatened claims against the Company, the unsatisfactory resolution of which would have a material adverse effect on the Company's results of operations and financial condition, there can be no assurance that such third party claims will not be asserted, or if asserted, will be resolved in a satisfactory manner. In addition, there can be no assurance that third parties will not assert other claims against the Company with respect to any third-party technology. In the event of litigation to determine the validity of any third-party claims, such litigation could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation is determined in favor of the Company.
In the event of an adverse result in any such litigation, the Company could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology which is the subject of the litigation. There can be no assurance that the Company would be successful in such development or that any such licenses would be available. In addition, the laws of certain countries in which Novell's products are or may be developed, manufactured or sold may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States.
EMPLOYEES
As of December 31, 1995, the Company had 7,272 employees. The functional distribution of its employees was: sales and marketing -- 2,004; product development -- 2,556; general and administrative -- 972; service, support, education, and operations -- 1,740. Of these, 404 employees are located in U.S. field offices, and 1,733 employees are in offices outside the U.S. All other Company personnel are based at the Company's facilities in Utah, California, and New Jersey. None of the employees is represented by a labor union, and the Company considers its employee relations to be excellent.
Competition for qualified personnel in the computer industry is intense. To make a long-term relationship with the Company rewarding, Novell endeavors to give its employees and consultants challenging work, educational opportunities, competitive wages, sales commission plans, bonuses, and through stock option and purchase plans, opportunities to participate financially in the ownership and success of the Company.
FACTORS AFFECTING EARNINGS AND STOCK PRICE
In addition to factors described above under "Competition" which may adversely affect the Company's earnings and stock price, other factors may also adversely affect the Company's earnings and stock price. The ability of the Company to maintain its competitive technological position will depend, in large part, on its ability to attract and retain highly qualified development and managerial personnel. Competition for such personnel is intense and there is a risk of departure due to the competitive environment in the software industry. The loss of a significant group of key personnel would adversely affect the Company's product development efforts.
The Company recently announced the sale of its UnixWare product line and its intention to sell its personal productivity application product line. The Company's ability to successfully transition out of these product lines in fiscal 1996 is important to the success of the Company. The extent that management can quickly devote most of its attention on its core business is important to the ongoing success of the Company.
A reason the Company is seeking to sell its personal productivity applications product line is to reduce non-leveraged sales, marketing, and customer support expenditures. Nevertheless, the Company will retain the Groupware applications line and may incur relatively higher expenditures than are incurred in the sale of network operating systems.
As is common in the computer software industry, Novell has experienced delays in the introduction of new products, due to the complexity of software products, the need for extensive testing of software to ensure compatibility of new releases with a wide variety of application software and hardware devices and the need to "debug" products prior to extensive distribution. Significant delays in developing, completing or shipping new or enhanced products would adversely affect the Company.
Moreover, the Company may experience delays in market acceptance of new releases of its products as the Company engages in marketing and education of the user base regarding the advantages and system requirements for the new products and as customers evaluate the advantages and disadvantages of upgrading. The Company has encountered these issues on each major new release of its products, and expects that it will encounter such issues in the future. Novell's ability to achieve desired levels of sales growth depends at least in part on the successful completion, introduction and sale of new versions of its products. There can be no assurance that the Company will be able to respond effectively to technological changes or new product announcements by others, or that the Company's research and development efforts will be successful. Should
Novell experience material delays or sales shortfalls with respect to new product releases, the Company's sales and net income could be adversely affected.
A fundamental goal of the Company will be the delivery of groupware application solutions combining network services and workgroup applications. The future success of this strategy will depend in part on the Company's ability to develop and market new competitive products for workgroup productivity and information processing. Development of these products has already required and will continue to require a substantial investment in research and development, particularly as a result of the decision to offer products across multiple operating environments. Although Novell's existing network of distributors should assist in this transition, marketing and distribution of these products may require developing new marketing and sales strategies and will entail significant expense. The Company has had only limited experience in the market for these products, and there can be no assurance that the Company will be successful in developing and marketing these new products.
The Company's future earnings and stock price could be subject to significant volatility, particularly on a quarterly basis. The Company's revenues and earnings may be unpredictable due to its shipment patterns. As is typical in the software industry, a high percentage of the Company's revenues are expected to be earned in the third month of each fiscal quarter and will tend to be concentrated in the latter half of that month. Accordingly, quarterly financial results will be difficult to predict and quarterly financial results may fall short of anticipated levels. Because the Company's backlog early in a quarter will not generally be large enough to assure that it will meet its revenue targets for any particular quarter, quarterly results may be difficult to predict until the end of the quarter. A shortfall in shipments at the end of any particular quarter may cause the results of that quarter to fall significantly short of anticipated levels. Due to analysts' expectations of continued growth and the historically high price/earnings ratio at which Novell's Common Stock trades, any such shortfall in earnings can be expected to have an immediate and very significant adverse effect on the trading price of Novell's Common Stock in any given period. The past pattern of new application and operating system product introductions has caused revenues to fluctuate, sometimes significantly, on a quarter-by-quarter basis. Such revenue fluctuations may contribute to the volatility of the trading price of Novell Common Stock in any given period.
In addition, the market prices for securities of software companies have been volatile in recent years. The market price of Novell Common Stock, in particular, has been subject to wide fluctuations in the past. As a result of the foregoing factors and other factors that may arise in the future, the market price of Novell's Common Stock may be subject to significant fluctuations within a short period of time. These fluctuations may be due to factors specific to the Company, to changes in analysts' earnings estimates, or to factors affecting the computer industry or the securities markets in general.
ITEM 1A.

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.
Robert J. Frankenberg joined the Company in April 1994 as President and Chief Executive Officer. In August 1994 he became Chairman of the Board of Directors. Prior to joining Novell, he was with Hewlett Packard, an international computation and measurement company, for 25 years in various engineering, management and marketing positions. Most recently he served as Vice President and General Manager of the Personal Information Products Group.
Mary M. Burnside joined the Company in January 1988 and in January 1989 she became Senior Vice President, Operations and was elected a corporate officer. In November 1991 she became Executive Vice President, Corporate Services Group. In August 1993 she joined the Office of the President as Chief Operating Officer. In April 1994 she became Executive Vice President and Chief Operating Officer.
Richard W. King joined the Company in 1985 and became Vice President, Software Development in April 1986. In September 1987 he became Vice President, NetWare Products Division and in September 1991 he became Vice President, Service and Support. In August 1993 he was promoted to Executive Vice President, NetWare Systems Group and was elected a corporate officer.
Joseph A. Marengi joined the Company in June 1989 through the Excelan merger and held various sales positions with the Company until October 1992 when he became Senior Vice President, Worldwide Sales. In August 1993 he was elected a corporate officer. In April 1994 he became Executive Vice President, Worldwide Sales.
Steven Markman joined the Company in August 1994 as Executive Vice President, Information Access & Management Group. From March 1994 to August 1994 he was with First Pacific Networks, Inc., a cable telephony company as Vice President of Engineering. From April 1991 to February 1994 he was with Network Equipment Technologies, Inc., a network systems company as Senior Vice President and General Manager. From June 1988 to April 1991 he was with Hewlett Packard, an international computation and measurement company, where he served most recently as General Manager for the Information Networks Division.
James R. Tolonen, a Certified Public Accountant, joined the Company in June 1989 through the Excelan merger and became a Senior Vice President and Chief Financial Officer in August 1989 and was elected a corporate officer. In August 1993 he joined the Office of the President as Chief Financial Officer. In April 1994 he became Executive Vice President and Chief Financial Officer.
Jeffrey H. Waxman joined the Company in June 1995 as Executive Vice President, Applications Group. From December 1992 to June 1995 he was President and Chief Executive Officer of ServiceSoft Corporation, a developer of customer service software and hardware. From January 1992 to November 1992 he was an independent consultant in the software industry. From June 1988 to January 1992 he was President and CEO of Uniplex, Inc. a developer and publisher of core office technology for Open Systems.
David R. Bradford joined the Company in October 1985 as Corporate Counsel. He became Corporate Secretary in January 1986, Senior Corporate Counsel in April 1986, and Senior Vice President, General Counsel, and Corporate Secretary in April 1989.
Christine G. Hughes joined the Company in December 1994 as Senior Vice President, Corporate Marketing. From July 1991 to November 1994 she was with Xerox Corporation, a worldwide provider of document services, in various positions, most recently as Vice President, Integrated Marketing -- U.S. Operations. From January 1990 to July 1991 she was President of Myriad Technologies, a market research and consulting company.
R. Duff Thompson joined the Company in June 1994 through the WordPerfect merger and became Senior Vice President, Corporate Development in October 1994 and was elected a corporate officer. He joined WordPerfect in December 1986 and served most recently as Executive Vice President in the Office of the President and General Counsel.
Stephen C. Wise joined the Company in June 1989 through the Excelan merger and became Vice President, Accounting and Planning in January 1990 and was elected a corporate officer. In January 1991 he became Vice President and Corporate Controller and in December 1993 he became Senior Vice President, Finance.
Darcy G. Mott, a Certified Public Accountant, joined the Company in September 1986. He served in various finance positions and became Corporate Controller in February 1989. He was elected a corporate officer in November 1989 and became Treasurer in January 1991. In December 1995 he became Vice President and Treasurer.
ITEM 2.

ITEM 2. PROPERTIES
The Company owns and occupies a 1,000,000 square-foot office complex on 99 acres in Orem, Utah, which is used as corporate headquarters and a product development center. It also owns and occupies a 550,000 square-foot office complex on 46 acres in Provo, Utah, which is used as a product development center. It also owns a 380,000 square-foot manufacturing and distribution facility on 23 acres in Lindon, Utah, all of which is leased to a third party manufacturer. The Company also owns a 100,000 square-foot office building in Herndon, Virginia. The Company occupies approximately 1/3 of the space in this building and leases the remainder to tenants. The Company also owns a 52,000 square foot building in San Jose, California, which it had previously leased. It is used primarily for product development. Additionally, the Company owns approximately 48 acres of undeveloped land in San Jose, California and has capacity to expand on its land in Orem and Provo, Utah.
The Company has subsidiaries in Argentina, Australia, Austria, Belgium, Brazil, Canada, Colombia, Czech Republic, Denmark, Finland, France, Germany, Hong Kong, Hungary, India, Ireland, Italy, Japan, Korea, Mexico, Netherlands, Norway, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, United Kingdom, and Venezuela -- each of which leases its facilities.
The Company leases offices for product development in San Jose and Scotts Valley, California; Summit, New Jersey; and Hungerford, U.K.; and a distribution facility in San Jose, California. The Company also leases sales and support offices in Arizona, California (7), Colorado, Connecticut, District of Columbia, Florida (2), Georgia, Illinois (2), Massachusetts, Michigan, Minnesota, Missouri (2), New Jersey, New York (2), North Carolina, Ohio (3), Oregon, Pennsylvania (2), Tennessee, Texas (2), Utah, Washington, Chile, China, New Zealand, Russia, Taiwan, and United Arab Emirates.
The terms of such leases vary from month to month to up to ten years.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
In December of 1991, Roger Billings and his International Academy of Science, (the Academy) filed suit against Novell alleging that the Company infringes on a patent allegedly owned by the Academy. In June 1994, Novell filed a petition with the U.S. Patent and Trademark Office (Patent Office) requesting it invalidate the patent. In August 1994, the Patent Office granted Novell's request for re-examination of the patent, finding a "substantial new question of patentability." Also, in August 1994, the trial court issued a ruling, which among other things, vacated the trial date which had been previously set in the action. In June 1995, the Patent Office, upon re-examiniation, overturned the Academy patent, stating that there was no patentable subject matter. In December 1995, the Academy filed a petition with the Patent Office seeking to amend its patent. The Company believes that the ultimate resolution of this legal proceeding will not have a material adverse effect on its financial position, results of operation, or cash flows.
The Company is a party to a number of additional legal claims arising in the ordinary course of its business. The Company believes the ultimate resolution of these claims will not have a material adverse effect on its financial position, results of operations, or cash flows.
ITEM 4.

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.

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information required by Item 5 of Form 10-K is incorporated herein by reference to the information contained in the section captioned "Selected Consolidated Quarterly Financial Data" on page 39 of the Company's Annual Report to Shareholders for the fiscal year ended October 28, 1995.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 of Form 10-K is incorporated herein by reference to the information contained in the section captioned "Selected Consolidated Financial Data" on page 20 of the Company's Annual Report to Shareholders for the fiscal year ended October 28, 1995.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by Item 7 of Form 10-K is incorporated herein by reference to the information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 21 through 25 of the Company's Annual Report to Shareholders for the fiscal year ended October 28, 1995.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 of Form 10-K is incorporated herein by reference to the Company's consolidated financial statements and related notes thereto, together with the report of the independent auditors presented on pages 26 through 38 of the Company's Annual Report to Shareholders for the fiscal year ended October 28, 1995, and to the information contained in the section captioned "Selected Consolidated Quarterly Financial Data" on page 39 of the Company's Annual Report to Shareholders for the fiscal year ended October 28, 1995.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required with respect to identification of directors is incorporated herein by reference to the information contained in the section captioned "Election of Directors" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 10, 1996, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended. Information regarding executive officers of Novell is set forth under the caption "Executive Officers" in Item 1a hereof.
Each director and each officer of the Company who is subject to Section 16 of the Securities Exchange Act of 1934 (the "Act") is required by Section 16(a) of the Act to report to the Securities and Exchange Commission by a specified date his or her transactions in the Company's securities. In fiscal 1995, there were no compliance exceptions to this requirement.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the sections captioned "Executive Compensation" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 10, 1996, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in the section captioned "Securities Ownership of Certain Beneficial Owners and Management" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 10, 1996, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in the section captioned "Certain Transactions" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 10, 1996, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Act of 1934, as amended.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this annual report on Form 10-K for Novell, Inc.:
1. The Consolidated Financial Statements, the Notes to Consolidated Financial Statements and the Report of Ernst & Young LLP, Independent Auditors, listed below are incorporated herein by reference to pages 26 through 38 of the Company's Annual Report to Shareholders for the fiscal year ended October 28, 1995.
Consolidated Statements of Income for the fiscal years ended October 28, 1995, October 29, 1994, and October 30, 1993.
Consolidated Balance Sheets at October 28, 1995 and October 29, 1994.
Consolidated Statements of Shareholders' Equity for the fiscal years ended October 28, 1995, October 29, 1994, and October 30, 1993.
Consolidated Statements of Cash Flows for the fiscal years ended October 28, 1995, October 29, 1994, and October 30, 1993.
Notes to Consolidated Financial Statements.
Report of Ernst & Young LLP, Independent Auditors.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ended October 28, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Novell, Inc. (Registrant)
Date: January 22, 1996 By /s/ ROBERT J. FRANKENBERG
------------------------------------ (Robert J. Frankenberg Chairman of the Board, President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
REPORT OF PRICE WATERHOUSE LLP, INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF WORDPERFECT CORPORATION
In our opinion, the consolidated balance sheet and the related consolidated statements of income, shareholders' equity and of cash flows (not presented separately herein) of WordPerfect Corporation present fairly, in all material respects, the financial position of WordPerfect Corporation and its subsidiaries at December 31, 1993 and the results of their operations and their cash flows for the year ended December 31, 1993 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Salt Lake City, Utah March 22, 1994
NOVELL, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
- --------------- (1) Write-off of uncollectible accounts
EXHIBIT INDEX