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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Commission File Number: 0-13351

NOVELL, INC.
(Exact name of registrant as specified in its charter)

404 Wyman Street
Waltham, MA 02451
(Address of principal executive offices and zip code)

(781) 464-8000
(Registrant's telephone number, including area code)

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 ý    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes ý    No o

        As of February 27, 2004, there were 383,849,036 shares of the registrant's common stock outstanding.

Part I. Financial Information

Item 1. Financial Statements

NOVELL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)

See notes to unaudited condensed consolidated financial statements.

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NOVELL, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)

See notes to unaudited condensed consolidated financial statements.

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NOVELL, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)

See notes to unaudited condensed consolidated financial statements.

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NOVELL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2004

A.    Quarterly Financial Statements

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q but do not include all of the information and notes required by accounting principles generally accepted in the United States and should, therefore, be read in conjunction with our fiscal 2003 Annual Report on Form 10-K. These financial statements include all normal recurring adjustments that we believe are necessary for a fair presentation of the statements. The interim operating results are not necessarily indicative of the results for a full year. Certain reclassifications, none of which affected net loss, have been made to the prior year's amounts in order to conform to the current year's presentation.

B.    Foreign Currency Translation

        The functional currency for most of our international subsidiaries is the local currency. The functional currency of our Irish operating subsidiaries and related entities is the U.S. dollar. These subsidiaries generate and expend cash primarily in their respective local currency. Assets and liabilities of these subsidiaries are translated at current month-end exchange rates. Revenues and expenses are translated monthly at the average monthly exchange rate. Such translation adjustments are recorded in accumulated other comprehensive income.

C.    Acquisition of SUSE LINUX

        On January 12, 2004, we purchased substantially all of the outstanding stock of SUSE LINUX AG ("SUSE"), a privately-held company and a leading provider of Linux-based products, for approximately $210 million in cash, plus estimated merger and transaction costs of $7 million. The acquisition of SUSE enables us to offer a full range of enterprise solutions on the Linux platform, from the server to the desktop. This transaction was accounted for as a purchase. SUSE's results of operations have been incorporated into ours beginning on the acquisition date of January 12, 2004.

        The purchase price was preliminarily allocated as follows:

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        We recorded additional goodwill and a deferred income tax liability of $17 million resulting from the future tax consequences of the non-deductibility of identified net intangible assets recorded in connection with this acquisition.

        Goodwill from the SUSE acquisition resulted from our belief that SUSE's technology is valuable to our product offerings. The purchase price allocation will be adjusted as integration plans, including restructuring, are finalized, as allowed by Statement of Financial Accountings Standards (SFAS) No. 141, "Business Combinations." We used an independent valuation firm to estimate the fair values of the intangible assets.

        As integration plans are finalized, the goodwill arising from the SUSE acquisition will be allocated to our geographic segments. Revenues of $2.2 million and expenses of $2.9 million were recorded by SUSE for the period from January 12, 2004 to January 31, 2004, and are included in the EMEA geographic segment and the Cross-Platform Services solutions group (see Note M). If the SUSE acquisition had occurred at November 1, 2003, the estimated pro forma revenues, net income and net income per share (basic and diluted), for the first quarter of fiscal 2004 would have been $275.0 million, $9.2 million and $0.02, respectively. If the SUSE acquisition had occurred at November 1, 2002, the estimated pro forma revenues, net loss and net loss per share (basic and diluted), for the first quarter of fiscal 2003 would have been $267.8 million, $16.1 million, and $0.04, respectively.

D.    Cash, Cash Equivalents and Short-term Investments

        We consider all highly liquid debt instruments purchased with a term to maturity of three months or less to be cash equivalents. Short-term investments are diversified, primarily consisting of investment grade securities that either mature within the next 12 months or have other characteristics of short-term investments.

        All marketable debt and equity securities that are included in cash, cash equivalents and short-term investments are considered available-for-sale and are carried at fair market value. The unrealized gains and losses related to these securities are included in accumulated other comprehensive income (loss), net of tax, after any applicable tax valuation allowances (see Note O). Unrealized gains and losses at January 31, 2004 were $1.6 million and $0.1 million, respectively. Unrealized gains and losses at October 31, 2003 were $2.1 million and $0.3 million, respectively. Fair market values are based on quoted market prices where available; if quoted market prices are not available, the fair market values are based on quoted market prices of similar instruments of companies that are comparable in size, product offerings, and market sector. When securities are sold, their cost is determined based on the specific identification method.

        At January 31, 2004, Novell had cash and cash equivalents of $266 million and short-term investments of $339 million. During the first quarter of fiscal 2004, we realized gains of $1.9 million and losses of $0.1 million from the sale of short-term investments. During the first quarter of fiscal 2003, we realized gains of $0.4 million and losses of $0.1 million from the sale of short-term investments. No impairment losses were recorded on short-term investments during the first quarters of fiscal 2004 and fiscal 2003.

E.    Long-Term Investments

        At January 31, 2004, long-term investments mainly consist of investments made in venture capital partnerships and other direct investments we made for strategic purposes in equity securities of privately-held securities. Long-term investments are accounted for initially at cost and written down to fair value when indicators of impairment are deemed to be other than temporary.

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        We routinely review our long-term investments for impairment. To assess impairment we analyze forecasted financial performance of the investees, the liquidation preference value of the stock we hold, and our estimate of the potential for investment recovery based on all these factors. During the first quarters of fiscal 2004 and fiscal 2003, we recognized impairment losses on long-term investments totaling $1.1 million and $10.8 million, respectively.

F.     Goodwill and Intangible Assets

Goodwill

        The following is a summary of goodwill resulting from the following acquisitions:

        Goodwill is allocated to our operating segments—Americas, EMEA, Asia Pacific, and Celerant Management Consulting. We consider these segments to be the reporting units for allocating and evaluating goodwill.

        Goodwill recorded in connection with the SUSE acquisition is not yet allocated to our geographic operating segments because integration is still underway. We expect to make this allocation in the second quarter of fiscal 2004.

        Goodwill is allocated to our operating segments as follows:

Intangibles

        The following is a summary of identifiable intangible assets, net of accumulated amortization:

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        Developed technology relates primarily to the exteNd product line that we acquired as a part of our July 2002 acquisition of SilverStream Software, Inc. Customer relationships relate to values allocated for service contracts, partner memberships and alliances entered into by SUSE, which we will continue to use. Internal use software relates to software internally developed by SUSE, which we will continue to use. Trademarks and trade names relate to SUSE brand names ($24.2 million), Ximian brand names ($1.2 million) and SilverStream brand names ($0.7 million), which we continue to use. Developed technology, customer relationships and internal use software are being amortized over three years. Amortization for the first quarters of fiscal 2004 and fiscal 2003 was $1.5 million and $3.0 million, respectively. Trade names have an indefinite life and therefore are not amortized but are reviewed for impairment at least annually.

        In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," we do not amortize goodwill or intangible assets with indefinite lives. We review these assets periodically for potential impairment. During the fourth quarters of fiscal 2002 and fiscal 2003, we completed our annual impairment review based on August 1, 2002 and 2003 balances and determined that there was no impairment as of those dates. Additionally, we determined that no goodwill or intangible asset impairments existed in any of our operating segments at January 31, 2004.

        In connection with the SUSE acquisition, we recorded additional goodwill and a deferred income tax liability of $17.1 million resulting from the future tax consequences of the non-deductibility of identified net intangible assets recorded in this transaction.

G.    Income Taxes

        Income tax expense for the first quarter of fiscal 2004 was $6.3 million and relates primarily to income tax expenses incurred on foreign earnings. These foreign earnings cannot be offset by net operating losses, which are primarily related to the U.S. tax jurisdiction. The effective tax rate on income for the first quarter of fiscal 2004 and the estimated effective tax rate for fiscal 2004 is 38.5%. The effective tax rate for fiscal 2003 was 194.3%. The fiscal 2004 effective tax rate differed from the effective tax rate for 2003 because of the establishment of a full valuation allowance resulting in adjustments of $131 million during fiscal 2003. This valuation allowance was recorded as a result of our analysis of the facts and circumstances at the time, which led us to conclude that we could no longer forecast future U.S. taxable income under the more likely than not standard required by SFAS No. 109, "Accounting for Income Taxes." The Company's cumulative pre-tax book loss for three consecutive years ended October 31, 2003, imposed a high standard for compelling, positive evidence of the likelihood of, and ability to forecast, future taxable income in the near term.

        In connection with our acquisition of all the outstanding stock of SUSE, we recorded a $17.1 million deferred income tax liability resulting from the future tax consequences of the non-deductibility of identified intangible assets of $43.5 million recorded in the transaction.

        We paid income taxes of $1.2 million in the first quarter of fiscal 2004 and $3 million for the first quarter of fiscal 2003.

H.    Line of Credit

        We have a $20 million bank line of credit available for letter of credit purposes. At January 31, 2004, there were standby letters of credit of $15.3 million outstanding under this line, $13 million of which is secured by cash. The bank line expires at April 1, 2004 and is expected to be renewed at that time. The bank line is subject to the terms of a credit agreement containing financial covenants and restrictions, none of which are expected to affect our operations. We are in compliance with all financial covenants as of January 31, 2004. In addition, at January 31, 2004, we had outstanding letters of credit of an insignificant amount at some other banks.

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I.     Restructuring

        We recorded no restructuring charges during the first quarter of fiscal 2004. We did record pretax restructuring charges related to plans of restructuring announced in the third quarter of fiscal 2003, the second quarter of fiscal 2002, the fourth quarter of fiscal 2001 and the third quarter of fiscal 2001. These restructuring charges were in response to changes in general market conditions, changing customer demands and the evolution of our business strategy relative to the identity management and web services area of our business and our revised strategies. The full details of these restructurings are disclosed in our Annual Report on Form 10-K for the 2003 fiscal year.

        The following table summarizes the activity during the first quarter fiscal 2004 related to these restructurings:

        As of January 31, 2004, the remaining balances include accrued liabilities related to severance and benefits, which will be paid out over the remaining severance obligation period, not to exceed two years, lease costs for redundant facilities, which will be paid over the respective remaining contract terms, and various severed employee related costs, which will be paid over the next three quarters.

J.     Guarantees

        During the first quarter of fiscal 2002, we sold our subsidiary in the Czech Republic. As a part of this transaction, we provided a guarantee to the landlord of the building we leased in the Czech Republic whereby we agreed to pay any and all monies due under the lease, including legal fees if the new lessee defaults on the lease. During fiscal 2003, we paid approximately $100,000 against this guarantee and at January 31, 2004, we have accrued an additional $0.7 million, which represents our liability exposure if the new lessee continues in default, excluding legal fees. In addition, we have provided a guarantee in the amount of $2 million related to a foreign tax audit. No amounts have been paid against this guarantee. It is expected the term of the guarantee will continue until the conclusion of the audit.

        As an element of our standard contract terms, we include an indemnification clause in our agreements with our customers that indemnify the licensee against certain liability and damages arising from intellectual property infringement claims arising from their use or distribution of our software.

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These terms are relatively common in the high technology industry. We do not record a liability for potential litigation claims related to indemnification agreements with our customers, unless and until we conclude the likelihood of a material obligation is probable.

        During the first quarter of fiscal 2004, we implemented our Novell Linux Indemnification Program. Under this program, indemnification is offered for copyright infringement claims made by third parties against registered Novell customers who obtain SUSE™ Enterprise Linux Server 8 and who, after January 12, 2004, obtain upgrade protection and a qualifying technical support contract from us or a participating Novell or SUSE channel partner. At January 31, 2004, we did not record a liability for potential claims related to the Novell Linux Indemnification Program because we do not believe the likelihood of a material obligation is probable or estimable.

K.    Commitments and Contingencies

        As of January 31, 2004, we had a carrying value of $47.7 million related to long-term investments in various venture capital funds and had commitments to contribute an additional $47.5 million to these funds, of which approximately $13.2 million could be contributed in fiscal 2004, approximately $16.1 million in fiscal 2005, and approximately $18.2 million thereafter as requested by the fund managers.

L.    Legal Proceedings

        In January 2004, the SCO Group, Inc. ("SCO") filed suit against us in the Third Judicial District Court of Salt Lake County, State of Utah. Novell removed the claim to the U.S. District Court, District of Utah. SCO alleges that our public statements and filings regarding the ownership of the copyrights in UNIX and UnixWare have harmed SCO's business reputation and affected its efforts to protect its ownership interest in UNIX and UnixWare. SCO seeks to require us to assign all copyrights that we have registered in UNIX and UnixWare to SCO, to prevent us from representing that we have any ownership interest in the UNIX and UnixWare copyrights, to require us to withdraw all representations we have made regarding our ownership of the UNIX and UnixWare copyrights, and actual, special and punitive damages in an amount to be proven at trial. We believe that we have meritorious defenses to these claims and intend to vigorously defend ourselves in this suit. Although there can be no assurance as to the ultimate disposition of the suit, we do not believe that the resolution of this litigation will have a material adverse effect on our financial position, results of operations or cash flows.

        In May 2002, France Telecom SA and U.S. Philips Corporation, alleged co-owners of a U.S. patent, filed suit in the U.S. District Court, District of Delaware, against Novell. The plaintiffs allege that Novell's NetWare client software infringes the patent. In the suit, the plaintiffs seek unspecified monetary damages and an injunction prohibiting infringement of the patent. We intend to vigorously defend ourselves in this suit. Although there can be no assurance as to the ultimate disposition of the suit, we do not believe that the resolution of this litigation will have a material adverse effect on our financial position, results of operations or cash flows.

        SilverStream and several of its former officers and directors, as well as the underwriters, who handled SilverStream's two public offerings, were named as defendants in several class action complaints that were filed on behalf of certain former stockholders of SilverStream who purchased shares of SilverStream common stock between August 16, 1999 and December 6, 2000. These complaints are closely related to several hundred other complaints that the same plaintiffs have brought against other issuers and underwriters. These complaints all allege violations of the Securities Exchange Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. In particular, they allege, among other things, that there was undisclosed compensation received by the underwriters of the public offerings of all of these issuers, including SilverStream's. The plaintiffs are seeking monetary damages, statutory compensation and other relief that may be deemed appropriate by the court. While

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Novell believes that SilverStream and its former officers and directors have meritorious defenses to the claims, a Memorandum of Understanding has been reached between many of the defendants and the plaintiffs, which contemplate a settlement of the claims. The finalization of any settlement, however, has not been completed. While there can be no assurance as to the ultimate disposition of the litigation, we do not believe that its resolution will have a material adverse effect on our financial position, results of operations or cash flows.

        In February 1998, a suit was filed in the U.S. District Court, District of Utah, against us and certain of our officers and directors, alleging violation of federal securities laws by concealing the true nature of our financial condition and seeking unspecified damages. The lawsuit was brought as a purported class action on behalf of purchasers of our common stock from November 1, 1996 through April 22, 1997. After a first dismissal of the suit on November 3, 2000 and a subsequent amendment to the complaint filed on February 20, 2001, the U.S. District Court dismissed the amended complaint with prejudice for failure to state a claim. Much of the District Court's Order of Dismissal was recently affirmed by the Tenth Circuit Court of Appeals while certain claims were remanded for the District Court's further review. Novell believes it has meritorious defenses to these remaining claims. While there can be no assurance as to the ultimate disposition of the lawsuit, we do not believe that the resolution of this litigation will have a material adverse effect on our financial position, results of operations or cash flows.

        We are currently party to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of any of these claims or any of the above mentioned legal matters will have a material adverse effect on our consolidated financial position, results of operations or cash flow.

M.   Segment Information

        Beginning November 1, 2002, we reorganized our operations and began reporting our financial results in four new segments; three are based on geographic area and a fourth is Celerant Management Consulting. The geographic segments are Americas, EMEA, and Asia Pacific. Performance is evaluated by our Chief Executive Officer and Worldwide Management Committee, our chief decision makers, and is based on reviewing revenue and segment operating income (loss) information for each of the segments. These geographic segments include:

•

Americas—includes the United States, Canada, and Latin America



•

EMEA—includes Eastern and Western Europe, Middle East, and Africa



•

Asia Pacific—includes China, Japan, Southeast Asia, Australia, New Zealand, and India

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        All geographic segments sell our products, services and solution offerings. These offerings are sold direct or via OEM, reseller, and distributor channels. Operating results by segment are as follows: