-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HdoEvQgkIepkTmUDjY+2KVThOvDWCcrPLIhEK1rPGAFWy5wB4TU7C/+HAL18MzAT YOEnzn4vrM5gra0hq9l0bA== 0000950149-99-000088.txt : 19990201 0000950149-99-000088.hdr.sgml : 19990201 ACCESSION NUMBER: 0000950149-99-000088 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19990129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOVELL INC CENTRAL INDEX KEY: 0000758004 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 870393339 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13351 FILM NUMBER: 99516804 BUSINESS ADDRESS: STREET 1: 122 EAST 1700 SOUTH CITY: PROVO STATE: UT ZIP: 84097 BUSINESS PHONE: 8012226600 MAIL ADDRESS: STREET 1: 122 E. 1700 S. CITY: PROVO STATE: UT ZIP: 84606 10-K 1 FORM 10-K FOR THE FISCAL YEAR ENDED 10/31/1998 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER 0-13351 NOVELL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 87-00393339 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
122 EAST 1700 SOUTH PROVO, UTAH 84606 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) (801) 861-7000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.10 PER SHARE PREFERRED SHARE PURCHASE RIGHTS Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's common stock held by nonaffiliates on December 31, 1998 (based on the last reported price of the Common Stock on the NASDAQ National Market System on such date) was $6,099,717,048. As of December 31, 1998 there were 337,790,476 shares of the registrant's common stock outstanding. Portions of Registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1998, are incorporated by reference in Parts II and IV of this Form 10-K to the extent stated herein. Portions of Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 12, 1999, are incorporated by reference in Part III of this Form 10-K to the extent stated herein. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS THE COMPANY Novell is the leading provider of network software enabled by directory services. Novell Internet solutions make networks more manageable and secure, and reduce the total cost of ownership for organizations of every kind and size. Novell's worldwide channel, developer, education and technical support programs are the most extensive in the network computing industry. The Company was incorporated in Delaware on January 25, 1983. Novell's executive offices are located at 122 East 1700 South, Provo, Utah 84606. Its telephone number at that address is (801) 861-7000. The Company markets its products through 37 U.S. and 64 international sales offices. The Company sells its products to end users through licensing agreements as well as through distributors and national retail chains, who in turn sell the Company's products to retail dealers. The Company also sells its products to OEMs, system integrators, and value added resellers (VARs). The Company primarily conducts product development activities in San Jose, California; and Provo and Orem, Utah. It also contracts out some product development activities to third-party developers. Changes in the economic and business environment for network software have occurred in the last several years, which have led to strategic and operational changes at Novell. The Company has evolved its business to focus on software applications which leverage network capabilities and capitalize on the growth of the Internet. In fiscal 1998, the Company focused on delivering new products consistent with the Company's strategy and began harvesting the benefits of the lower cost and restructured organization. The results were significant. Benefitting from a more productive product development organization, the Company shipped its NetWare 5 server platform ahead of schedule. This major new product release, based on pure Internet Protocol and Novell's third-generation directory, solidly positions the Company as a networking and Internet leader. The Company, along with NetWare 5, delivered a number of new applications, utilizing directory technology which robustly captures the benefits of networking and the Internet. The Company initiated its technology transition in fiscal 1996 with the sale of its UnixWare product line to Santa Cruz Operation, Inc. (SCO) as well as the sale of its personal productivity applications product line to Corel Corporation (Corel). New software delivery technologies have enabled the Company to continue its shift from heavy reliance on physical distribution of product toward lower cost licensing agreements. Distribution channel product shipments dropped to less than one-third of total revenue in 1998. In both the third quarter of fiscal 1997 and the second quarter of fiscal 1996, the Company realigned distribution channel inventory by constraining product shipments to distribution channel partners. The Company believes these actions, which significantly reduced reported revenue in both periods, brought indirect distribution channel inventory in line with current market demand. Fiscal 1998 also realized the full benefit of cost restructuring programs which began in fiscal 1996 and 1997. Capitalizing on workforce and facility reductions in fiscal 1997 and 1996, the Company redirected and leveraged its remaining resources to focus on critical objectives with the highest return to the business. The Company grew earnings incrementally every quarter in fiscal 1998. Through operational control, rigorous business practices, and improved internal management systems, expense structures were reduced as a percentage of revenue and moved closer to leading software company benchmarks. A newly integrated marketing team, focused on key initiatives across the Company, reduced redundant promotion and advertising expenditures. These expense controls were complemented by sequential revenue growth each quarter of fiscal 1998. Fiscal 1998 also saw a strengthening of the management team with the addition of Dennis R. Raney, Senior Vice President and Chief Financial Officer, as well as R. Michael Sheridan, Vice President, Strategic Businesses. 2 3 BUSINESS STRATEGY Novell provides standards-based network software for intranets and the Internet. The Internet has accelerated the pace at which networks are becoming a strategic asset for business, becoming the primary provider of a vast range of services essential to business including personal communications, publishing of information, supply chain management and electronic transactions. Novell provides network software to make these services available to network users wherever and whenever they are needed, more quickly and at a lower cost than ever before. The Company's network solutions enable businesses to protect and expand their investments in these services in an increasingly networked world. Novell's network solutions provide essential network management, messaging and groupware capabilities integrated through Novell's industry leading directory services. Networks are inherently a varied mix of infrastructure, computer systems, applications and other devices. Novell software provides the framework and applications for managing, maintaining and accessing the information and services of these networks. Novell has oriented all of its products to Internet standards, enabling customers to increase the performance of traditional local and wide area networks. Today, businesses are rapidly developing corporate intranets that leverage the broad range of capabilities of the Internet. TECHNOLOGIES Establishing Novell Directory Services as a de facto industry standard. Novell Directory Services (NDS) is a key part of Novell's strategy for providing unique value in business intranets and the Internet. NDS can maintain a replicated database of users, network equipment, computer systems, applications, files and other network resources. It provides distributed access control that can be centrally administered, security, management and administration of information resources across computer networks. NDS is integrated with the company's NetWare 4 and 5 server operating systems and Novell provides a version called NDS for NT that integrates with Microsoft's Windows NT. NDS provides full support for Internet protocols, including the lightweight directory access protocol (LDAP). With NDS on leading server platforms, Novell and its partners will provide value-added network services software that uses the directory as a foundation. Novell's Z.E.N.works is an example. Z.E.N.works allows customers to manage desktops throughout their network from Novell's directory. Z.E.N.works has become one of Novell's fastest growing products. Netware 5. In 1998, Novell released Netware 5, a major update to its networking platform. Netware 5 includes a new microkernel, support for record-breaking Java server-side execution, a next generation file system, and Novell Distributed Print Services. Netware 5 joined Netware 4.2 and Netware 3.2 as Year 2000 ready solutions for Novell customers. Providing Novell Directory Services for the Internet. Novell's BorderManager product leverages NDS to authenticate trusted users and provide them with remote access and Virtual Private Networking (VPN) services across BorderManager's firewall. BorderManager also accelerates web page access across the Internet through its very fast caching technology. By using the cache in reverse mode, in front of a web server, about 10,000 web hits per second can be accommodated. Providing value-added network services software for business intranets and the Internet. Novell delivers network services that run on a company's NetWare network operating system for business intranets and the Internet. These network services add value to the network by reducing costs of ownership and administration, simplifying management tasks for administrators, and making access to network-based information easier for end users. In the first release of NetWare, network services encompassed only file and print. Over the past decade, network services provided by Novell have expanded to include host communications, network management, collaboration and messaging, Web services, security, and advanced file and print. Providing network applications for network solutions. GroupWise is Novell's leading network application for end users, providing electronic mail, calendaring, scheduling, and task and document management features. In 1998, the Company expanded the functionality of GroupWise by including extended document management capabilities and web publishing features. ManageWise is the leading management software offering for managing all network resources from the servers that run NetWare and NT server operating 3 4 systems to the clients, computers, and other devices that access information resources. To provide complete network management solutions, ManageWise integrates with leading enterprise management products. 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 multi-vendor support. Member companies provide cooperative efforts to support their customers. Certified Novell Engineer Program. Through the Certified Novell Engineer (CNE) program, Novell is strengthening the networking industry's Level I support self-sufficiency. CNEs are individuals who receive high-level training, information, and advanced technical telephone support (Level II) from Novell. CNEs may be employed by resellers, independent support organizations, or Novell Support Organizations (NSOs). The NSO program pools the capabilities of the industry's best support providers. NSOs have contractual agreements with Novell that are designed to ensure quality service on a national or global level for NetWare and other Novell products. Novell Authorized Education Centers. Novell offers education to end users through nearly 1,300 independent Novell Authorized Education Centers (NAECs) worldwide, which use Novell-developed courses to instruct students in the use and maintenance of Novell products. Novell also offers self-paced training products. PARTNERSHIPS Development Partners. When customers request that a new service or function be added to Novell products, Novell investigates the most effective way to deliver that functionality to the user. Sometimes the best way is for Novell to partner with a company who has expertise in that specific area. By partnering, the combination of Novell's core expertise in networks and the partner's expertise in the given product area combine to deliver a better solution faster than if Novell attempted to develop it alone. Systems Partners. Novell partners with companies who have complementary software and hardware. The resulting solution is a powerful combination of products that deliver enterprise-wide connectivity solutions. These partners include system suppliers like IBM, Compaq, DEC and HP, as well as system integration experts like Memorex Telex, Arthur Andersen, and EDS. Application Partners. Novell works very closely with application developers to provide integrated software products and support for end users. As network applications grow in importance, this program will help assure broad availability of well integrated, multi-vendor applications. Enterprise Consulting Partners. 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 and delivers 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 a global corporation, servicing its customers from offices located throughout the world. It 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 work together, interoperate with thousands of third-party solutions, and span data networks from workgroup LANs to the Internet. 4 5 Directory -- The directory enables businesses to manage their entire heterogeneous network as a single, unified entity -- all from a centralized location. Tasks that used to take hours can now be done in a few minutes. Products include: Novell Directory Services (NDS), NDS for NT, and NDS for Solaris. Platform -- Novell is known for delivering proven network reliability, scalability, performance, and security, backed by the largest support infrastructure in the world -- delivering up to 23 days a year more server uptime for users. Products include: NetWare 5, NetWare for Small Business, NetWare 4, and NetWare 3. Management -- Novell's management tools allow businesses to control and administer most aspects of their network from one central site. Network administrators can change users, perform routine administration duties, and even roll out software to users. Products include: ManageWise, Z.E.N.works, and ConsoleOne. Communicate -- They say a company's best asset is the collective knowledge of its employees. Novell's products leverage that advantage with products designed to allow users to share files, send e-mails, manage documents and publish documents to the Internet. Products include: GroupWise, GroupWise WebPublisher, NetWare NFS Services, Replication Services, and Novell Distributed Print Services. Connect -- Novell can help expand networks to branch offices, into intranets, and the Internet to get the most out of networks. But more importantly, Novell products can keep these connections fast and secure. Products include: BorderManager, NetScape Servers for NetWare, intraNetWare HostPublisher, Host Connectivity, and High Availability Servers. 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 1998, 1997, and 1996, product development expenses were approximately $225 million, $283 million, and $276 million, respectively. The Company's product development effort consists primarily of work performed by employees; however, the Company also utilizes third-party technology partners to assist with product development. SALES AND MARKETING Novell markets its NetWare family of network products through distributors, dealers, vertical market resellers, systems integrators, and OEMs who meet the Company's criteria, as well as to major end users. In addition, the Company conducts sales and marketing activities and provides technical support, training, and field service to its customers from its offices in San Jose, California; Provo and Orem, Utah; and from its 37 U.S. and 64 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, 1998, there were approximately 10 U.S. distributors and approximately 100 international distributors. Dealers. The Company also markets its products to large-volume dealers and regional and national computer retail chains. VARs and Systems Integrators. Novell also sells directly to VARs and systems integrators who market data processing systems to vertical markets, and whose volume of purchases warrants buying directly from the Company. OEMs. The Company licenses its systems software to domestic and international OEMs for integration with their products. End Users. Generally, the Company refers prospective end-user customers to its resellers. However, the Company has the internal resources to work directly with major end users and has developed U.S. and 5 6 international master license agreements with approximately 1,200 of them to date. Additionally, some upgrade products are sold directly to end users. International Sales. In fiscal 1998, 1997, and 1996, approximately 42%, 45%, and 50%, respectively, of the Company's net sales were to customers outside the U.S. To date, substantially all international sales except Japanese sales, Indian sales, and certain European sales to non-multinational distributors that were shipped from its distribution center in Dublin, Ireland have been invoiced by the Company in U.S. dollars. In fiscal 1999, the Company anticipates that a portion of international revenues will continue to be invoiced in U.S. dollars. The exceptions to the U.S. dollar invoicing will be Japanese sales through the Company's joint venture in Japan, Indian sales through the Company's joint venture in India and certain sales from its distribution center in Dublin, Ireland. No one foreign country accounted for more than 10% of net sales in any period. In fiscal 1998 and 1997, the Company had one multinational distributor which accounted for 15% and 11% of revenue, respectively. Otherwise, no customer accounted for more than 10% of revenue in any period. Marketing. The Company's marketing activities include distribution of sales literature and press releases, advertising, periodic product announcements, support of NetWare user groups, publication of technical and other articles in the trade press, and participation in industry seminars, conferences, and trade shows. The marketing departments of the Company employ many technical laboratories which test and evaluate networked computer equipment and individual devices. The knowledge derived from these laboratories is the basis for the technical literature published by the Company. These activities are designed to educate the market about networks in general, as well as to promote the Company's products. Through the Professional Developers Program, the Company strongly supports independent software and hardware vendors in developing products that work on Novell networks. Thousands of multiuser application software packages are now compatible with the NetWare operating system. In March 1998, the fourteenth annual BrainShare Conference was held to inform and educate developers about Novell product strategy, Novell open architecture programming interfaces, and Novell third-party product certification programs. CUSTOMER SERVICES Novell's Customer Services is composed of Technical Services, Education and Consulting Services. The Technical Services Group has an established infrastructure worldwide with support centers in the United States, Europe and Asia. These centers are World Class and have established quality standards with ISO 9001 certification around the world. Novell Technical Services offers a wide variety of flexible support offerings. Novell Education is the pioneer in the networking certification arena. Novell Education has certified over 125,000 CNEs and 250,000 Certified Novell Administrators (CNAs) at its customer and partner sites around the world. Novell education continues to pioneer the certification process with future programs focused on Novell's Directory and on the Internet. MANUFACTURING SUPPLIERS The Company's products, which consist primarily of software diskettes and manuals, are duplicated by outside vendors. This allows the Company to minimize the need for expensive capital equipment in an industry in which multiple high-volume manufacturers are available. BACKLOG Lead times for the Company's products are typically short. Consequently, the Company does not believe that backlog is a reliable indicator of future sales or earnings. The Company's practice is to ship its products promptly upon the receipt of purchase orders from its customers and, therefore, backlog is not significant. COMPETITION Novell competes in the highly competitive market for computer software. Novell believes that the principal competitive factors are technical innovation to meet dynamic market needs, marketing strength, system/performance, customer service and support, reliability, ease of use, and price/performance. 6 7 The market for computer software remains competitive due to Microsoft's presence in all sectors of the software business. The Company does not have the product breadth and market power of Microsoft. Microsoft's ability to ship networking products with features and functionality which are competitive with Novell, together with its ability to offer incentives to customers to purchase certain products in order to obtain favorable sales terms or necessary compatibility or information with respect to other products, may significantly inhibit the Company's ability to grow its business. In addition, as Microsoft creates new operating systems and applications, there can be no assurance that Novell will be able to ensure that its products will be compatible with those of Microsoft. Additionally, the Company may face competition from other industry companies which could introduce competitive operating systems. If any of these competing products achieves market acceptance, Novell's business and results of operations could be materially adversely affected. COPYRIGHT, LICENSES, PATENTS AND TRADEMARKS The Company relies on copyright, patent, trade secret and trademark law, as well as provisions in its license, distribution and other agreements in order to protect its intellectual property rights. The Company has been issued what it considers to be valuable patents and has numerous other patents pending. No assurance can be given that the patents pending will be issued or, if issued, will provide protection for the Company's competitive position. The Company has an increasing concern that computer industry companies that have huge financial resources and patent portfolios such as Lucent, AT&T, Microsoft, and IBM, will increasingly assert patent infringement claims against smaller companies such as Novell. While Novell has no reason to think it would not have defensible claims, the cost and time of defending such claims can be significant. Although Novell intends to protect its patent rights vigorously, there can be no assurance that these measures will be successful nor that the claims on any patents held by the Company will be sufficiently broad to protect the Company's technology. In addition, no assurance can be given that any patents issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company. The loss of patent protection on the Company's technology or the circumvention of its patent protection by competitors could have a material adverse effect on the Company's ability to compete successfully in its business. The software industry is characterized by frequent litigation regarding copyright, patent and other intellectual property rights. The Company has from time to time had infringement claims asserted by third parties against it and its products. While there are no known or pending threatened claims against the Company, the unsatisfactory resolution of which would have a material adverse effect on the Company's results of operations and financial condition, there can be no assurance that such third party claims will not be asserted, or if asserted, will be resolved in a satisfactory manner. In addition, there can be no assurance that third parties will not assert other claims against the Company with respect to any third-party technology. In the event of litigation to determine the validity of any third-party claims, such litigation could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation is determined in favor of the Company. In the event of an adverse result in any such litigation, the Company could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology which is the subject of the litigation. There can be no assurance that the Company would be successful in such development or that any such licenses would be available. In addition, the laws of certain countries in which Novell's products are or may be developed, manufactured or sold may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. EMPLOYEES As of December 31, 1998, the Company had 4,510 employees. The functional distribution of its employees was: sales and marketing -- 1,488; product development -- 1,357; general and administrative -- 705; service, support, education, and operations -- 960. Of these, 1,319 employees are in locations outside the U.S. All other Company personnel are based at the Company's facilities in Utah, California, and various 7 8 U.S. field offices. None of the employees is represented by a labor union, and the Company considers its employee relations to be excellent. Competition for qualified personnel in the computer industry is intense. To make a long-term relationship with the Company rewarding, Novell endeavors to give its employees and in some cases its consultants, challenging work, educational opportunities, competitive wages, sales commission plans, bonuses, and through stock option and stock purchase plans, opportunities to participate financially in the ownership and success of the Company. FACTORS AFFECTING EARNINGS AND STOCK PRICE In addition to factors described above under "Competition" which may adversely affect the Company's earnings and stock price, other factors may also adversely affect the Company's earnings and stock price. The ability of the Company to maintain its competitive technological position will depend, in large part, on its ability to attract and retain highly qualified development and managerial personnel. Competition for such personnel is intense and there is a risk of departure due to the competitive environment in the software industry. The loss of a significant group of key personnel would adversely affect the Company's product development efforts. As is common in the computer software industry, Novell has experienced delays in the introduction of new products, due to the complexity of software products, the need for extensive testing of software to ensure compatibility of new releases with a wide variety of application software and hardware devices and the need to "debug" products prior to extensive distribution. Significant delays in developing, completing or shipping new or enhanced products would adversely affect the Company. Moreover, the Company may experience delays in market acceptance of new releases of its products as the Company engages in marketing and education of the user base regarding the advantages and system requirements for the new products and as customers evaluate the advantages and disadvantages of upgrading. The Company has encountered these issues on each major new release of its products, and expects that it will encounter such issues in the future. Novell's ability to achieve desired levels of sales growth depends at least in part on the successful completion, introduction and sale of new versions of its products. There can be no assurance that the Company will be able to respond effectively to technological changes or new product announcements by others, or that the Company's research and development efforts will be successful. Should Novell experience material delays or sales shortfalls with respect to new product releases, the Company's sales and net income could be adversely affected. Another goal of the Company is to achieve widespread acceptance and adoption of Novell's Directory Services (NDS) and the products and applications that take advantage of directory services. The Company's ability to achieve success with NDS is dependent on a number of factors including but not limited to the following: development of key directory products and upgrades, the acceptance of those products by large industry partners, the marketing of those products through appropriate channels of distribution, and the acceptance of those products in major accounts. The Company has only had limited success in introducing new technologies and there can be no assurance of success with NDS. The Company's future earnings and stock price could be subject to significant volatility, particularly on a quarterly basis. The Company's revenues and earnings may be unpredictable due to its shipment patterns. As is typical in the software industry, a high percentage of the Company's revenues are expected to be earned in the third month of each fiscal quarter and will tend to be concentrated in the latter half of that month. Accordingly, quarterly financial results will be difficult to predict and quarterly financial results may fall short of anticipated levels. Because the Company's backlog early in a quarter will not generally be large enough to assure that it will meet its revenue targets for any particular quarter, quarterly results may be difficult to predict until the end of the quarter. A shortfall in shipments at the end of any particular quarter may cause the results of that quarter to fall significantly short of anticipated levels. Due to analysts' expectations of continued growth, any such shortfall in earnings can be expected to have an immediate and very significant adverse effect on the trading price of Novell's Common Stock in any given period. The past pattern of new product introductions has caused revenues to fluctuate, sometimes significantly, on a quarter-by-quarter basis. Such 8 9 revenue fluctuations may contribute to the volatility of the trading price of Novell Common Stock in any given period. In addition, the market prices for securities of software companies have been historically volatile. The market price of Novell Common Stock, in particular, has been subject to wide fluctuations in the past. As a result of the foregoing factors and other factors that may arise in the future, the market price of Novell's Common Stock may be subject to significant fluctuations within a short period of time. These fluctuations may be due to factors specific to the Company, to changes in analysts' earnings estimates, or to factors affecting the computer industry or the securities markets in general. There is also a substantial risk that Novell will be sued for issues or problems associated with the Year 2000. While Novell has not yet been sued and has made substantial efforts in assuring its shipping products and the products it is utilizing in-house conform to appropriate Year 2000 design parameters, there can be no assurance that third party claims will not be asserted or, if asserted, would be resolved in a manner satisfactory to Novell. For further discussion of the Company's Year 2000 risks, please refer to the "Future Results" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 14 through 15 of the Company's Annual Report to Shareholders for the fiscal year ended October 31, 1998. 9 10 ITEM 1a. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names, ages, titles with Novell, and present and past positions of the persons currently serving as executive officers of Novell.
HAS BEEN OFFICER NAME AGE SINCE POSITION OR OFFICE ---- --- -------- ------------------ Eric E. Schmidt..................... 43 1997 Chairman of the Board and Chief Executive Officer David R. Bradford................... 48 1986 Senior Vice President, General Counsel, and Corporate Secretary Ronald E. Heinz, Jr................. 40 1996 Senior Vice President, Worldwide Sales Jennifer A. Konecny-Costa........... 52 1996 Senior Vice President, Human Resources Stewart G. Nelson................... 38 1997 Senior Vice President, Product Development Richard A. Nortz.................... 54 1997 Senior Vice President, Customer Services Dennis R. Raney..................... 56 1998 Senior Vice President and Chief Financial Officer Glenn Ricart........................ 49 1996 Senior Vice President and Chief Technology Officer John F. Slitz, Jr................... 49 1997 Senior Vice President, Marketing Christopher M. Stone................ 42 1997 Senior Vice President, Strategy and Corporate Development
Eric E. Schmidt joined the Company in March 1997 and became Chairman of the Board and Chief Executive Officer in April 1997. Prior to joining Novell, he served as Chief Technology Officer and Corporate Executive Officer at Sun Microsystems, Inc. (Sun). In his 14 years at Sun, he held a range of progressively more responsible executive positions. David R. Bradford joined the Company in October 1985 as Corporate Counsel. He became Corporate Secretary in January 1986, Senior Corporate Counsel in April 1986, and Senior Vice President, General Counsel, and Corporate Secretary in April 1989. Ronald E. Heinz, Jr. joined the Company in February 1989 and has served in various sales and marketing positions including Vice President, North America and Latin America Sales and Marketing. In January 1997 he became Senior Vice President, Worldwide Sales and was elected a corporate officer. Jennifer A. Konecny-Costa joined the Company in June 1996 as Senior Vice President, Human Resources and was elected a corporate officer. From 1994 to June 1996, she was Vice President, Human Resources at Wilson, Sonsini, Goodrich & Rosati, a law firm representing high technology companies. Prior to that, she was Vice President, Human Resources from 1988 through 1994 at Silicon Graphics, a software company. Stewart G. Nelson joined the Company in June 1994 through the WordPerfect merger and has served in various product development positions including Vice President and General Manger, Applications. In October 1997, he was elected a corporate officer and became Senior Vice President, Product Development in June 1998. Prior to joining Novell, he held various product development positions at WordPerfect from 1987 to 1994. Richard A. Nortz joined the Company in October 1995 as Senior Vice President, Technical Services. In February 1997, he became Senior Vice President, Customer Services and was elected a corporate officer. Prior to joining Novell, he was Senior Vice President for Wang Laboratories' worldwide customer service business, and also spent time as acting General Manager of Wang's European Operations from 1991 to 1995. Dennis R. Raney joined the Company in March 1998 as Chief Financial Officer and was elected a corporate officer. In June 1998, he became Senior Vice President and Chief Financial Officer. Prior to joining Novell, he was the Chief Financial Officer at QAD, Inc., an enterprise planning company. He also held Chief 10 11 Financial Officer positions at General Magic and California Microwave. In addition, he was also Senior Vice President and Chief Financial Officer at Bristol-Meyers Squibb Pharmaceutical Group. Prior to this he spent 24 years at Hewlett-Packard in various finance, international and real estate positions. Glenn Ricart joined the Company in August 1995 as Senior Vice President, Corporate Research and Development. In February 1996 he became the Chief Technology Officer and was elected a corporate officer. Prior to joining Novell, he served at the University of Maryland since 1982 in various capacities including, Director of the Computer Science Center, Affiliate Associate Professor of the Computer Science Department and as the Assistant Vice Chancellor for Academic Information Technology. In September 1994 he began a sabbatical at the Advanced Research Projects Agency, a branch of the United States Department of Defense. John F. Slitz, Jr. joined the Company in August 1997 as Senior Vice President, Marketing and was elected a corporate officer. From 1995 to July 1997, he was Vice President of Object Technology/Application Development Marketing at International Business Machines (IBM). Prior to joining IBM, he was Vice President of Marketing at Object Management Group, Inc. from 1990 to 1995. Christopher M. Stone joined the Company in September 1997 as Senior Vice President, Strategic Business Development and was elected a corporate officer. Prior to joining Novell, he founded and was Chairman of the Board and Chief Executive Officer of the Object Management Group from 1989 to August 1997. ITEM 2. PROPERTIES The Company owns and occupies a 1,000,000 square-foot office complex on 99 acres in Orem, Utah, which is used as a product development center and administrative offices, of which approximately 450,000 square-feet is subleased to various tenants. It also owns and occupies a 550,000 square-foot office complex, with plans to expand the complex by up to 580,000 square-feet in fiscal 2000, on 46 acres in Provo, Utah, which is used as corporate headquarters and a product development center. Additionally, the Company owns approximately 48 acres of land in San Jose, California on which it leases a 530,000 square-foot office complex which is used as a product development center and administrative offices, of which, approximately 245,000 square-feet is to be subleased to various tenants. 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 20,000 square-feet of the space in this building and leases the remainder to tenants. The Company also has an Irish subsidiary which owns a 72,000 square-foot office building in the United Kingdom and leases the building to the Company's United Kingdom subsidiary. The Company also has the capacity to expand on its land in San Jose, California, and in Provo and Orem, Utah. The Company has subsidiaries in Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, Colombia, Czech Republic, Denmark, Finland, France, Germany, Hong Kong, Hungary, India, Ireland, Israel, Italy, Japan, Korea, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, United Kingdom, Uruguay, and Venezuela -- each of which leases its facilities. The Company leases an office for product development in Berkeley Heights, New Jersey. The Company also leases sales and support offices in Arizona, California (5), Colorado, Connecticut, Florida (2), Georgia, Illinois, Massachusetts, Michigan, Minnesota, Missouri (2), New York (2), North Carolina, Ohio (3), Oregon, Pennsylvania (2), Tennessee, Texas (3), Utah, Washington, China, Malaysia, Russia, Taiwan, Thailand, and United Arab Emirates. The terms of such leases vary from month to month to up to ten years. 11 12 ITEM 3. LEGAL PROCEEDINGS In 1993, a suit was filed, due to a failed contract, against a company that Novell subsequently acquired. The plaintiff obtained a jury verdict against the acquired company in 1996. Novell does not believe the resolution of this legal matter will have a material adverse effect on its financial position, results of operations, or cash flows. The Company is a party to a number of additional legal claims arising in the ordinary course of its business. The Company believes the ultimate resolution of these claims will not have a material adverse effect on its financial position, results of operations, or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The information required by Item 5 of Form 10-K is incorporated herein by reference to the information contained in the section captioned "Selected Consolidated Quarterly Financial Data" on page 33 of the Company's Annual Report to Shareholders for the fiscal year ended October 31, 1998. 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 9 of the Company's Annual Report to Shareholders for the fiscal year ended October 31, 1998. 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 10 through 16 of the Company's Annual Report to Shareholders for the fiscal year ended October 31, 1998. 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 17 through 32 of the Company's Annual Report to Shareholders for the fiscal year ended October 31, 1998, and to the information contained in the section captioned "Selected Consolidated Quarterly Financial Data" on page 33 of the Company's Annual Report to Shareholders for the fiscal year ended October 31, 1998. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 12 13 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information required with respect to identification of directors is incorporated herein by reference to the information contained in the section captioned "Election of Directors" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 12, 1999, 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 1998, there were no compliance exceptions to this requirement. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 of Form 10-K is incorporated by reference to the information contained in the sections captioned "Executive Compensation" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 12, 1999, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 of Form 10-K is incorporated by reference to the information contained in the section captioned "Securities Ownership of Certain Beneficial Owners and Management" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 12, 1999, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 of Form 10-K is incorporated by reference to the information contained in the section captioned "Certain Transactions" of the Registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 12, 1999, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Act of 1934, as amended. 13 14 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this annual report on Form 10-K for Novell, Inc.: 1. The Consolidated Financial Statements, the Notes to Consolidated Financial Statements and the Report of Ernst & Young LLP, Independent Auditors, listed below are incorporated herein by reference to pages 17 through 32 of the Company's Annual Report to Shareholders for the fiscal year ended October 31, 1998. Consolidated Statements of Operations for the fiscal years ended October 31, 1998, October 31, 1997, and October 26, 1996. Consolidated Balance Sheets at October 31, 1998 and October 31, 1997. Consolidated Statements of Shareholders' Equity for the fiscal years ended October 31, 1998, October 31, 1997, and October 26, 1996. Consolidated Statements of Cash Flows for the fiscal years ended October 31, 1998, October 31, 1997, and October 26, 1996. Notes to Consolidated Financial Statements. Report of Ernst & Young LLP, Independent Auditors.
PAGE ---- 2. FINANCIAL STATEMENT SCHEDULES: Schedule II -- Valuation and Qualifying Accounts............ 16 Schedules other than that listed above are omitted because they are not required, not applicable or because the required information is shown in the consolidated financial statements or notes thereto. 3. EXHIBITS: A list of the exhibits required to be filed as part of this report is set forth in the Exhibit Index, which immediately precedes such exhibits, and is incorporated herein by this reference thereto........................................... 17
(b)REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Registrant during the quarter ended October 31, 1998. 14 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Novell, Inc. (Registrant) Date: January 28, 1999 By /s/ DR. ERIC SCHMIDT ------------------------------------ (Dr. Eric Schmidt, Chairman of the Board, and Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ DR. ERIC SCHMIDT Chairman of the Board, Chief January 28, 1999 - -------------------------------------------------------- Executive Officer and (Dr. Eric Schmidt) Director (Principle Executive Officer) /s/ DENNIS R. RANEY Senior Vice President and January 28, 1999 - -------------------------------------------------------- Chief Financial Officer (Dennis R. Raney) (Principal Financial and Accounting Officer) /s/ JOHN A. YOUNG Vice Chairman of the Board January 28, 1999 - -------------------------------------------------------- (John A. Young) /s/ ELAINE R. BOND Director January 28, 1999 - -------------------------------------------------------- (Elaine R. Bond) /s/ HANS-WERNER HECTOR Director January 28, 1999 - -------------------------------------------------------- (Hans-Werner Hector) /s/ REED E. HUNDT Director January 28, 1999 - -------------------------------------------------------- (Reed E. Hundt) /s/ WILLIAM N. JOY Director January 28, 1999 - -------------------------------------------------------- (William N. Joy) /s/ JACK L. MESSMAN Director January 28, 1999 - -------------------------------------------------------- (Jack L. Messman) /s/ RICHARD L. NOLAN Director January 28, 1999 - -------------------------------------------------------- (Richard A. Nolan) /s/ LARRY W. SONSINI Director January 28, 1999 - -------------------------------------------------------- (Larry W. Sonsini)
15 16 NOVELL, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS ACCOUNTS RECEIVABLE ALLOWANCE (IN THOUSANDS)
ADDITIONS ADDITIONS DEDUCTIONS DEDUCTIONS BALANCE AT CHARGED TO CHARGED TO FROM FROM BAD BALANCE BEGINNING RETURN BAD DEBT RETURN DEBT AT END OF PERIOD RESERVES RESERVES RESERVES RESERVES OF PERIOD ---------- ---------- ---------- ---------- ---------- --------- Fiscal year ended October 26, 1996............................. $74,857 $314,979 $6,481 $323,438 $11,939 $60,940 Fiscal year ended October 31, 1997............................. $60,940 $185,545 $4,437 $210,205 $ 7,664 $33,053 Fiscal year ended October 31, 1998............................. $33,053 $102,513 $1,701 $ 87,342 $ 2,004 $47,921
16 17 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Restated Certificate of Incorporation.(4)(Exhibit 3.1) 3.2 By-Laws.(1)(Exhibit 3.1) 4.1 Reference is made to Exhibit 3.1. 4.2 Form of certificate representing the shares of Novell Common Stock.(1)(Exhibit 4.3) 4.3 Rights Agreement dated December 7, 1988, between Novell, Inc. and Mellon Bank (East) N.A., as Rights Agent, relating to the Shareholder Rights Plan.(3)(Exhibit 1) 10.1 Novell, Inc., Employee Retirement and Savings Plan dated December 8, 1996.(2) (Exhibit 10.9) 10.2 Agreement and Plan of Reorganization dated March 23, 1989, among Novell, Inc.; Lansub Corporation; and Excelan, Inc.(5)(Appendix A) 10.3 Novell, Inc. 1989 Employee Stock Purchase Plan.(6)(Exhibit 4.1) 10.4 Agreement and Plan of Reorganization dated July 16, 1991, among Novell, Inc.; MDAC Corp.; and Digital Research Inc.(7)(Appendix A) 10.5 Novell, Inc. 1991 Stock Plan.(8)(Exhibit 4.1) 10.6 Agreement and Plan of Reorganization and Merger dated February 12, 1993, among Novell, Inc.; Novell Acquisition Corp.; UNIX System Laboratories, Inc.; and American Telephone and Telegraph Company.(9)(Appendix A) 10.7 UNIX System Laboratories, Inc. Stock Option Plan.(10)(Exhibit 4.3) 10.8 Agreement and Plan of Reorganization dated March 21, 1994 and amended May 31, 1994, among Novell, Inc.; Novell Acquisition Corp.; WordPerfect Corporation, Alan C. Ashton, Bruce W. Bastian, and Melanie L. Bastian.(11)(Appendix A & Exhibit 1.1) 10.9 Novell, Inc. Novell/WordPerfect Stock Plan.(12)(Exhibit 10.1) 10.10 Novell, Inc. Stock Option Plan for Non-Employee Directors.(13) (Exhibit 4.1) 10.11 Novell, Inc. 1997 Non-Statutory Stock Option Plan.(14) (Exhibit 4.1) 13 Company's Annual Report to Shareholders for the fiscal year ended October 26, 1996.(14) 21 Subsidiaries of the Registrant.(14) 23.1 Consent of Ernst & Young LLP, independent auditors.(14) 27 Financial Data Schedule.(14)
- --------------- (1) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-1, filed November 30, 1984, and amendments thereto (File No. 2-94613). (2) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Annual Report on Form 10-K, filed for the fiscal year ended October 25, 1986 (File No. 0-13351). (3) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Current Report on Form 8-K, dated December 7, 1988 (File No. 0-13351). (4) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Annual Report on Form 10-K, filed for the fiscal year ended October 29, 1988 (File No. 0-13351). (5) Incorporated by reference to the Appendix identified in parentheses, filed as an appendix in the Registrant's Registration Statement on Form S-4, filed May 9, 1989 (File No. 33-28470). (6) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-8, filed August 24, 1998 (File No. 333-62087). (7) Incorporated by reference to the Appendix identified in parentheses, filed as an appendix in the Registrant's Registration Statement on Form S-4, filed September 24, 1991 (File No. 33-42254). (8) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-8, filed May 29, 1996 (File No. 333-04775). (9) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement of Form S-4, filed May 13, 1993 (File No. 33-60120). (10) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement on Form S-8, filed July 2, 1993 (File No. 33-65440). (11) Incorporated by reference to the Appendix and Exhibit identified in parentheses, filed as an appendix and exhibit in the Registrant's Registration Statement on Form S-4, filed June 13, 1994 (File No. 33-53215). (12) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement of Form S-8, filed July 8, 1994 (File No. 33-55483). (13) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement of Form S-8, filed May 30, 1996 (File No. 333-04823). (14) Incorporated by reference to the Exhibit identified in parentheses, filed as an exhibit in the Registrant's Registration Statement of Form S-8, filed August 24, 1998 (File No. 333-62103). (15) Filed herewith. 17 EX-13 2 COMPANY'S ANNUAL REPORT TO SHAREHOLDERS 1 NOVELL Everywhere we look networks matter. Around the world networks transform every aspect of business. As the world's largest network software company, Novell believes that the network is the centerpiece of every computing endeavor. More businesses, government agencies and educational institutions rely on NetWare(R) server platforms and Novell Directory Services(R) to manage and control their networks than all other alternatives combined. Directory software has become vital to how networks are managed and used in an Internet economy and Novell is the network directory leader. 2 Directory software is vital to an Internet world. Whenever you enter a password to access something private--through a bank ATM, a voicemail system, an e-mail program, an accounting package, a Web site--you tap into a directory. Directories control how you access data, applications, devices, and the expanding services of the Internet. Novell is the network directory leader. Over the last four years, Novell Directory Services(R) (NDS)(TM) has gained leading market share as the first full-service network directory. Now the industry is recognizing the value and promise of directories, and Novell Directory Services (NDS) is years ahead of any competitor. 3 A decade and a half ago, Novell helped launch the era of connected computing. Now, we've leapt far ahead of competitors in what has become the crucial area of directory technology. The world's leading network directory is NDS. It meets two of the biggest challenges that businesses face in the networked world: how to secure and manage distributed information resources. NDS maintains information--or profiles--that defines relationships between all the resources on a network and the people that need them. Increasingly, these profiles will maintain your personal preferences and provide you with an electronic identity that you can control. New directory-enabled applications from Novell and other vendors draw on these profiles to manage network performance, control access to resources, and provide the trusted relationships necessary to build the network economy. Applications integrated with the directory provide services customized for each user to enhance information access and help eliminate everyday, repetitive tasks. With NDS, it's about identity, it's about simplicity, and it's about time. How? NDS helps network users utilize information more effectively. NDS stores and manages the identities that can be used to determine who you are in cyberspace: what applications and information you can access, what products you buy and what communities of the Internet you call your own. Leveraging these unique profiles, NDS creates a consistent computing experience never before available. The network looks and acts the same regardless of your location: at the main office, at a hotel on the other side of the country, or in an Internet cafe on the other side of the world. 4 Innovation and diversity fuel growth in network solutions. Novell's objective is to make NDS the ubiquitous directory that supports resources from any vendor on a heterogeneous network. We're making sure that NDS supports open industry standards, and, in many cases, we're helping drive these standards. Beyond that, we're extending the power of NDS through partnerships. Among others, AT&T, Cisco Systems, IBM, Lucent Technologies, Nortel Networks, Oracle, and PeopleSoft are all supporting the integration of their products with NDS. And when Microsoft delivers its Active Directory, Novell will support network users with seamless interoperability. Our goal is ambitious: to give individuals network identities that define their relationships with all the resources on the network. The directory opportunity is enormous. Network resources are expected to triple in the next three years. Novell is expanding the market for directory solutions by taking NDS to a wide variety of systems and platforms. In 1998, NDS for NT brought the management and security advantages of NDS to customers with Windows NT-based networks. In early 1999, we will begin shipping NDS for Solaris*, bringing NDS to the most popular UNIX* platform. Novell intends to expand its business around directory-enabled applications. Many are in development, and other Novell products already use NDS. For example, NetWare(R) uses NDS to provide secure access to network services. BorderManager(TM) to protect networks and speed user access to the Internet. Z.E.N.works(TM) to remotely manage and download software to Windows PCs. GroupWise(R) to enable the management of both e-mail and the entire network from a single location. And ManageWise(R) to monitor the performance of NT and NetWare servers. 5 THE CHAIRMAN'S LETTER To Our Shareholders--When we calibrate Novell's accomplishments in 1998 against our plans and objectives for 1999, it is clear our strategy as the network directory leader is working. The management focus we now have in the company, the product strategy, product cycles and positioning, all contributed to real improvements at Novell. We stabilized the business and began to grow revenue, enabling us to deliver four quarters of successive earnings growth. With the support of customers, partners, and shareholders, we have infused new integrity to the Novell brand. ACCELERATING PRODUCT DELIVERIES Novell delivered more new products to market in 1998, at a faster pace, than in any other year in the history of this company. Of all these achievements, the delivery of NetWare(R) 5 was most important. It shipped on September 9 to move Novell(R) and Novell Directory Services(R) (NDS(TM)) squarely into the Internet marketplace. NetWare 5 is a pure IP server solution, and with NDS we offer a very, very powerful directory with tremendous scalability, many advanced features, and the potential of numerous add-on applications. NetWare 5 and NDS elevate the value of Novell's network solution. While we began the decade as the file and print sharing, local-area networking company, today we are the directory leader for wide-area business networks. We are now taking Novell's directory leadership to the Internet. As an important indication of the future we see for Novell, the new products were all designed to contribute to directory solutions. Of note, we shipped Z.E.N.works(TM), which is a stellar example of the compelling value of directory-enabled applications. It relies on NDS to deliver dramatic cost savings by centrally managing and updating software for network connected PCs that run the various Windows* operating systems from Microsoft. In addition, we delivered GroupWise(R) 5.5, ManageWise(R) 2.6, NDS for NT, NetWare High Availability Server(TM), NetWare for SAA* 3, and BorderManager FastCache (TM). 6 Directory is becoming vital to an Internet world. Novell is positioned to build on its leadership in directory. We see the complexity of information systems shifting from traditional desktop PCs and central host computers to servers and the network. Information that becomes more highly distributed across networks requires directory software that can manage, control and secure these resources. With NDS and new directory-enabled applications from Novell, we intend to make an ever more significant contribution to the growing prominence of networks. DIRECTORY SOLUTIONS DRIVE GROWTH Novell posted solid results in fiscal 1998. Revenue grew to $1.084 billion, up from the $1.007 billion in fiscal 1997. Having appropriately sized our operating structure to match our revenue levels, we reduced operating expenses by $128 million, a 15-percent improvement over the prior year. This carefully managed effort led to a progression of increasing profitability through the year. After tax net income reached $102 million for the full year, compared to a ($78 million) loss in the prior year. Earnings per share, on a diluted basis, ramped to $0.29, compared with a loss of ($0.22) per share in fiscal 1997. It was gratifying that growth in the deployment of directory solutions drove Novell's results during the year. Revenue from Novell's directory-enabled servers, NetWare 4 and NetWare 5, accounted for $534 million, or 49 percent of total revenue, up 12 percent from the prior year. Other software products, including new directory-enabled applications and network infrastructure software, were up 25 percent. Our market objective is to aggressively build directory market share by converting Novell's file and print sharing installed base to directory deployments. Novell becomes a strategic vendor partner for customers that deploy NDS to manage their networks. Thus, it was significant that in 1998 licensing of Novell products for large network deployments in business and government grew 39 percent to $502 million. The pace of these gains increased through the year. By the fourth fiscal quarter, this licensing revenue contributed just over half of total revenue, and was up 54 percent from the prior year. Longer term, Novell's goal is to build its business around directory-enabled applications that rely on NDS to be deployed across the network. Novell applications will draw on detailed profiles maintained in the directory to manage the relationships between users, applications and all other resources on a network. Approximately 20 percent of Novell's revenue in 1998 came from directory-enabled applications. Over time, we intend for this category of products to contribute an ever larger portion of total revenue. We believe growth in the market for directory solutions has just begun. We expect the compelling value of directory to be meaningful across all market segments, from large, mid-size, and small networks to Internet Service Providers. 7 RECASTING NOVELL AS A PREFERRED INTERNET PARTNER To support our objectives, we have recast the Novell organization around values of high performance and excellence. We made valuable additions to our management team in 1998 with the appointment of Dennis R. Raney, Senior Vice President and Chief Financial Officer, and R. Michael Sheridan, Vice President, Strategic Businesses. Leadership from our new management team translates to a more effective organization, better systems and a more efficient Novell. I am also very pleased with the additions we made to the Novell Board of Directors in 1998. Novell's board brings world-class talent and perspective to the business opportunity that we see in an Internet economy. Joining the board was Reed E. Hundt, former Chairman of the Federal Communications Commission; William N. Joy, Sun Microsystems' Co-founder and Vice President of Research; and Richard L. Nolan, William Barclay Harding Professor of Business Administration at Harvard Business School. The improvements in our business have also enhanced our ability to partner with a number of industry leaders. NDS is becoming a ubiquitous directory solution, a defacto industry standard for discovering, managing and controlling information resources. To help realize this objective, we have engaged industry partners to ensure their products can be integrated with NDS. We are very proud of a succession of agreements that began during the year, and carried into early fiscal 1999, including Cisco, Citrix, IBM, Intel, Lucent, Nortel and Oracle, among others. These partners are helping define multi-vendor solutions that rely on the directory to work as one. PREPARING FOR THE INTERNET ECONOMY Taken as a whole, Novell is poised to become a more consequential player in the Internet arena as we increase our leadership in the directory space. Our opportunity is to build on the momentum generated by our successes in 1998. To that end, we plan to expand the role of Novell's directory products across our market base of business, government and education networks, and believe we can amplify this success through Internet markets. All told, our objectives are clear, our technology is superior, and I'm confident we can leverage these strengths to further accelerate the pace of Novell's growth. /s/ DR. ERIC E. SCHMIDT Dr. Eric E. Schmidt Chairman and Chief Executive Officer December 21,1998 8 SELECTED CONSOLIDATED FINANCIAL DATA
DOLLARS IN THOUSANDS, OCT. 31 OCT. 31 OCT. 26 OCT. 28 OCT. 29 EXCEPT PER SHARE DATA 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS Net sales $ 1,083,877 $ 1,007,311 $ 1,374,856 $ 2,041,174 $ 1,998,077 Gross profit 845,238 729,865 1,068,095 1,551,841 1,531,011 Income (loss) from operations 98,446 (200,004) 108,944 452,109 269,943 Income (loss) before taxes 141,634 (150,570) 179,988 508,729 297,383 Income tax expense (benefit) 39,658 (72,274) 53,997 170,424 90,652 Net income (loss) 101,978 (78,296) 125,991 338,305 206,731 Net income (loss) per share Basic .29 (.22) .35 .92 .57 Diluted .29 (.22) .35 .90 .56 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET Cash and short-term investments $ 1,007,167 $ 1,033,473 $ 1,024,755 $ 1,321,231 $ 861,809 Working capital 1,021,005 1,148,426 1,225,987 1,464,237 990,411 Total assets 1,924,112 1,910,649 2,049,466 2,416,830 1,963,481 Shareholders' equity 1,493,498 1,565,417 1,615,509 1,938,262 1,486,987 - ----------------------------------------------------------------------------------------------------------------------------------
See the results of operations for discussion of data comparisons. 9 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Novell is the leading provider of network software enabled by directory services. Novell Internet solutions make networks more manageable and secure, and reduce the total cost of ownership for organizations of every kind and size. Novell's worldwide channel, developer, education and technical support programs are the most extensive in the network computing industry. Changes in the economic and business environment for network software have occurred in the last several years, which have led to strategic and operational changes at Novell. The Company has evolved its business to focus on software applications which leverage network capabilities and capitalize on the growth of the Internet. In fiscal 1998, the Company focused on delivering new products consistent with its strategy and began harvesting the benefits of the lower cost and restructured organization. The results were significant. Benefiting from a more productive product development organization, the Company shipped its NetWare 5 server platform ahead of schedule. This major new product release, based on pure Internet Protocol and Novell's third-generation directory, solidly positions the Company as a networking and Internet leader. The Company, along with NetWare 5, delivered a number of new applications, utilizing directory technology which robustly captures the benefits of networking and the Internet. The Company initiated its technology transition in fiscal 1996 with the sale of its UnixWare product line to Santa Cruz Operation, Inc. (SCO),as well as the sale of its personal productivity applications product line to Corel Corporation (Corel). New software delivery technologies have enabled the Company to continue its shift from heavy reliance on physical distribution of product toward lower cost licensing agreements. Distribution channel product shipments dropped to less than one-third of total revenue in 1998. In both the third quarter of fiscal 1997 and the second quarter of fiscal 1996, the Company realigned distribution channel inventory by constraining product shipments to distribution channel partners. The Company believes these actions, which significantly reduced reported revenue in both periods, brought indirect distribution channel inventory in line with current market demand. Fiscal 1998 also realized the full benefit of cost restructuring programs which began in fiscal 1996 and 1997. Capitalizing on workforce and facility reductions in fiscal 1997 and 1996, the Company redirected and leveraged its remaining resources to focus on critical objectives with the highest return to the business. The Company grew earnings incrementally every quarter in fiscal 1998. Through operational control, rigorous business practices, and improved internal management systems, expense structures were reduced as a percentage of revenue and moved closer to leading software company benchmarks. A newly integrated marketing team, focused on key initiatives across the Company, reduced redundant promotional and advertising expenditures. These expense controls were complemented by sequential revenue growth each quarter of fiscal 1998. Fiscal 1998 also saw a strengthening of the management team with the addition of Dennis R. Raney, Senior Vice President and Chief Financial Officer, as well as R. Michael Sheridan, Vice President, Strategic Businesses. RESULTS OF OPERATIONS
NET SALES 1998 Change 1997 Change 1996 - ------------------------------------------------------------------------------------------------------ Net sales (millions) $1,084 8% $1,007 -27% $1,375 - ------------------------------------------------------------------------------------------------------
The sale of its UnixWare product line and of its personal productivity applications product line in fiscal 1996, and the decision to not ship to the indirect distribution channel in both the third quarter of fiscal 1997 and in the second quarter of fiscal 1996, make year-over-year comparisons difficult. 10 10 The analysis that follows describes the product lines consistent with the Company's current ongoing business. Novell's product lines can be categorized into three areas, all within the software industry. They are server platforms; network infrastructure and applications; and service, training, consulting and other. Fiscal 1996 revenue also includes sales from product lines that subsequently were sold or discontinued, such as the personal productivity applications product line which was sold to Corel in March 1996, and the UnixWare product line sold to SCO in December 1995. The server platforms product line includes directory-enabled NetWare (NetWare 4 and NetWare 5) and NetWare 3. Server platforms revenue was $626 million in fiscal 1998 compared to $613 million in fiscal 1997, and $754 million in fiscal 1996. The slight increase between fiscal 1997 and 1998 was the result of directory-enabled NetWare sales growth outpacing the sales declines in NetWare 3. The decrease between fiscal 1996 and 1997 is primarily attributable to a 50% decline in sales of NetWare 3, flat sales of NetWare 4 and the impact of not shipping into the indirect distribution channel in the second quarter of fiscal 1996 and the third quarter of fiscal 1997, as discussed previously. The server platforms product line represented 58% of revenue in fiscal 1998, compared to 61% of revenue in fiscal 1997, and 55% in fiscal 1996. The network infrastructure and applications product line includes NetWare for SAA host connectivity products, Tuxedo royalties, BorderManager, NDS integration and high availability service products. Collaboration and management products such as GroupWise, ManageWise, and Z.E.N.works are also included in this product line. The product line had revenue of $292 million in fiscal 1998 compared to $233 million in fiscal 1997, and $328 in fiscal 1996. The increase between fiscal 1997 and 1998 was the result of revenue from newly introduced products such as BorderManager and Z.E.N.works, growth in sales of GroupWise and final royalty revenue from Tuxedo. Revenue was down from fiscal 1996 to 1997 with decreases in most products as the Company transitioned to directory-enabled applications. Network infrastructure and applications product line revenues represented 27% of revenue in fiscal 1998 compared to 23% of revenue in fiscal 1997, and 24% in fiscal 1996. Service, training, consulting, and other includes revenue from customer service, training products and courses, consulting for network solutions, UNIX royalties, and other. These revenues were $166 million in fiscal 1998 compared to $161 million in fiscal 1997, and $230 million in fiscal 1996. The increase from fiscal 1997 to 1998 was due to the growth of service revenue more than offsetting declines in UNIX royalties and other. The decline from fiscal 1996 to 1997 is mainly the result of declining sales of UNIX licenses as well as a one-time $19 million paid-up royalty recognized on the sale of UNIX technology to SCO in fiscal 1996. Service, training, consulting, and other revenues were 15% of revenue in fiscal 1998 compared to 16% of revenue in fiscal 1997, and 16% in fiscal 1996. Revenue from sold or discontinued product lines, made up primarily of the personal productivity applications product line, which was sold to Corel in March 1996, was $63 million in fiscal 1996. Sold or discontinued product lines were 5% of revenue in fiscal 1996. International sales represented 42% of revenue in fiscal 1998 compared to 45% of total revenue in fiscal 1997 and 50% of revenue in fiscal 1996. International sales decreased as a percentage of revenue in all comparative periods due to weakness in sales at the Company's Japanese subsidiary.
GROSS PROFIT 1998 Change 1997 Change 1996 - ---------------------------------------------------------------------------------------------------------- Gross profit (millions) $845 16% $730 -32% $1,068 Percentage of net sales 78% 72% 78% - ----------------------------------------------------------------------------------------------------------
11 11 The higher gross profit percentage in fiscal 1998 compared to fiscal 1997 is attributable to lower inventory management costs as the Company tightened its management of product flowing into its indirect distribution channel, as well as to the fixed portion of cost of sales being a higher percentage of the lower revenues in fiscal 1997 compared to fiscal 1998. Additionally, material costs were reduced as a greater percentage of the Company's revenues were derived from multi-product licenses rather than from the inventory intensive distribution channel. The Company's reliance on the indirect distribution channel fell significantly each successive fiscal year to approximately 33% of revenue in fiscal 1998. The lower gross profit percentage in fiscal 1997 compared to fiscal 1996 is attributable to increased inventory management costs and to the fixed portion of cost of sales being a higher percentage of lower revenue in fiscal 1997.
OPERATING EXPENSES 1998 CHANGE 1997 CHANGE 1996 - -------------------------------------------------------------------------------------------------------------------------- Sales and marketing (millions) $386 -13% $444 -14% $519 Percentage of net sales 36% 44% 38% Product development (millions) $225 -20% $283 3% $276 Percentage of net sales 21% 28% 20% General and administrative (millions) $135 - 9% $148 1% $146 Percentage of net sales 12% 15% 11% Restructuring charges (millions) -- -- $ 55 206% $ 18 Percentage of net sales -- 5% 1% Total operating expenses (millions) $747 -20% $930 - 3% $959 Percentage of net sales 69% 92% 70% - --------------------------------------------------------------------------------------------------------------------------
Operating expenses declined in absolute dollars in fiscal 1998 through tighter operational control, continuous expense management and new internal management systems installed in fiscal 1998. In addition, the Company realized the benefits from corrective measures taken in fiscal 1997 and 1996 to restructure and realign its remaining resources to better manage and control its business. Operating expenses decreased as a percentage of net sales in fiscal 1998 compared to fiscal 1997 and increased as a percentage of net sales in fiscal 1997 compared to fiscal 1996. Sales and marketing expenses decreased by 13% from fiscal 1997 to 1998 and by 14% from fiscal 1996 to 1997 primarily due to corrective actions the Company took in fiscal 1997. In addition, sales promotion and advertising expenses decreased as the Company integrated its marketing teams to focus on key initiatives across the Company, while reducing redundant expenses. Sales and marketing expenses can fluctuate as a percentage of net sales in any given period due to product promotions, advertising, and other discretionary expenses. Product development expenses decreased significantly by 20% from fiscal 1997 to 1998 primarily due to workforce reductions in the latter half of fiscal 1997 and to continued operational control in fiscal 1998. Product development expenses increased slightly from fiscal 1996 to 1997. General and administrative expenses decreased by 9% from fiscal 1997 to 1998 primarily due to workforce reductions in the latter half of fiscal 1997 and consolidation of administrative functions in fiscal 1998. General and administrative expenses remained relatively flat from fiscal 1996 to 1997. During the third quarter fiscal 1997, the Company incurred $55 million of tax deductible restructuring charges for excess personnel and redundant facilities as the Company restructured and realigned its remaining resources to better manage and control its business. Of this charge, reserves of $10 million remain as of October 31, 1998, of which approximately $1 million relates to severance costs for excess personnel. 12 12 During the first quarter of fiscal 1996, the Company incurred $18 million of tax deductible restructuring charges for excess personnel and redundant facilities as the Company prepared for the sale of its personal productivity applications product line. Of this charge, reserves of $2 million remain as of October 31, 1998, none of which relates to severance costs for excess personnel.
1998 Change 1997 Change 1996 - --------------------------------------------------------------------------------------------------------------- Employees 4,557 -4% 4,770 -19% 5,870 Revenue per employee (thousands) $ 232 $ 189 $ 202 - ---------------------------------------------------------------------------------------------------------------
In fiscal 1998, the Company continued to align employment within the framework of the competitive environment in which the Company operates. Employment was somewhat reduced as the Company moved its resource levels closer to industry leading benchmarks. In the third quarter of fiscal 1997, the Company reduced its headcount by approximately 1,000 employees as the Company restructured its resources to better align with expected business levels. In fiscal 1996, the Company reduced its employment by 1,725 employees as the Company completed the sale of its UnixWare and personal productivity applications product lines and terminated or transitioned former UnixWare and personal productivity group employees to SCO, Corel, and other third parties.
OTHER INCOME, NET 1998 Change 1997 Change 1996 - ------------------------------------------------------------------------------------------------------------------------ Other income, net (millions) $43 -12% $49 -31% $71 Percentage of net sales 4% 5% 5% - ------------------------------------------------------------------------------------------------------------------------
The primary component of other income, net, is investment income, which was $45 million, $61 million, and $58 million in fiscal 1998, 1997, and 1996, respectively. The decrease in fiscal 1998 compared to fiscal 1997 is the result of net realized capital losses as the Company disposed of certain equity securities. The increase in fiscal 1997 compared to fiscal 1996 was attributable to a higher yield on a smaller average investment portfolio. In fiscal 1996, in addition to investment income, the Company had a gain of approximately $20 million on the sale of its personal productivity applications product line.
INCOME TAX EXPENSE (BENEFIT) 1998 Change 1997 Change 1996 - ------------------------------------------------------------------------------------------------------------------------ Income tax expense (benefit) (millions) $40 156% $(72) -233% $54 Percentage of net sales 4% -7% 4% Effective tax (benefit) rate 28% (48%) 30% - ------------------------------------------------------------------------------------------------------------------------
At October 31, 1998, the Company had deferred tax assets of $89 million before a valuation allowance of $7 million. A portion of this asset is realizable based on the ability to offset existing deferred tax liabilities. Realization of the remaining asset is dependent on the Company's ability to generate approximately $245 million of taxable income. Of this, approximately $144 million must be earned outside the United States. Management believes that sufficient income will be earned in the future to realize this asset. Management will evaluate the realizability of the deferred tax assets quarterly and assess the need for additional valuation allowances. The effective tax rate for fiscal 1998 was lower than the effective tax benefit rate for fiscal 1997 due to the Company's return to profitability and the resulting impact of tax benefits in fiscal 1998. Likewise, the effective tax rate for fiscal 1997 was higher than the effective tax rate for fiscal 1996 as a result of the loss from operations in fiscal 1997. 13 13
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE 1998 Change 1997 Change 1996 - ------------------------------------------------------------------------------------------------------------ Net income (loss) (millions) $102 231% $ (78) -162% $126 Percentage of net sales 9% -8% 9% Net income (loss) per share Basic $.29 232% $(.22) -163% $.35 Diluted $.29 232% $(.22) -163% $.35 - ------------------------------------------------------------------------------------------------------------
FUTURE RESULTS The Company's future results of operations involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially from historical results are the following: business conditions and the general economy; competitive factors, such as rival operating systems, acceptance of new products and price pressures; availability of third-party compatible products at reasonable prices; risk of nonpayment of accounts or notes receivable; risks associated with foreign operations; risk of product line or inventory obsolescence due to shifts in technologies or market demand; timing of software product introductions; market fluctuations of investment securities; and litigation. In the past, many information technology products were designed with two digit year codes that did not recognize century and millennium fields. As a result, these hardware and software products may not function or may give incorrect results beginning in the Year 2000. The Year 2000 issue is faced by substantially every company in the computer industry, as well as every company which relies on computer systems. To address this issue, such hardware and software products must be upgraded or replaced to correctly process dates beginning in the Year 2000. The Company has created a company-wide Year 2000 team to identify and resolve Year 2000 issues associated either with the Company's internal systems or the products and services sold by the Company. As part of this effort, the Company is communicating with its main suppliers of technology products and services regarding the Year 2000 status of such products and services. The Company has identified and tested the majority of its main internal systems, and expects to complete testing by mid-1999. The Company has completed a significant portion of the implementation of needed Year 2000 related modifications to its information systems, and expects to complete implementation during 1999. The Company has also begun assessing its internal non-information technology systems, and expects to complete testing and any needed modifications to these systems in 1999. The Company's total cost relating to these activities has not been and is not expected to be material to the Company's financial position, results of operations, or cash flows. The Company believes that necessary modifications will be made on a timely basis. However, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of such modifications, or that the Company's suppliers will adequately prepare for the Year 2000 issue. It is possible that any such delays, increased costs, or supplier failures could have a material adverse impact on the Company's operations and financial results, by, for example, impacting the Company's ability to deliver products or services to its customers. The Company expects in mid-1999 to finalize its assessment of risks and contingency planning for potential operational or performance problems related to Year 2000 issues with its information systems. The Company's Year 2000 effort has included Year 2000 testing for Novell products currently on, and some that were previously on, the Company's price list. Generally, for products that were identified as needing updates to address Year 2000 issues, the Company has prepared or is preparing updates, or has removed or is removing the product from its price list. The Company's total costs relating to these activities 14 14 has not been and is not expected to be material to the Company's financial position or results of operations. Some of the Company's customers are using product versions that the Company will not support for Year 2000 issues; the Company is encouraging these customers to migrate to current product versions that are Year 2000 ready. The Company's Year 2000 Web site at www.novell.com/year2000/provides information on its products that are Year 2000 ready and general information on the Company's Year 2000 efforts. For third party products which the Company distributes with its products, the Company has sought Year 2000 readiness status from the product manufacturers. Customers who use the third-party products are directed to the product manufacturer for detailed Year 2000 status information. The Company believes that its current products, with any applicable updates, are well prepared for Year 2000 date issues, and the Company plans to provide support for these products' Year 2000 date-related issues, as described in the Company's support policy statements. However, there can be no guarantee that one or more current Company products do not contain Year 2000 date issues may result in material costs to the Company. Because it is in the business of selling software products, the Company's risk of being subjected to lawsuits relating to Year 2000 issues with its software products is likely to be greater than that of companies in other industries. Because computer systems may involve hardware, firmware and software components from different manufacturers, it may be difficult to determine which component in a computer system may cause a Year 2000 issue. As a result, the Company may be subjected to Year 2000 related lawsuits independent of whether its products and services are Year 2000 ready. The outcomes of any such lawsuits and the impact on the Company cannot be determined at this time. Novell believes that it has the product offerings, facilities, personnel, and competitive and financial resources for continued business success, but future revenues, costs, margins, product mix, and profits are all influenced by a number of factors, such as those discussed above, as well as risks described in detail in the Company's fiscal 1998 report on Form 10-K. LIQUIDITY AND CAPITAL RESOURCES
1998 Change 1997 Change 1996 - --------------------------------------------------------------------------------------------------------------------------- Cash and short-term investments (millions) $1,007 -3% $1,033 1% $1,025 Percentage of total assets 52% 54% 50% - ---------------------------------------------------------------------------------------------------------------------------
Cash and short-term investments decreased to $1,007 million at October 31, 1998 from $1,033 million at October 31, 1997. This decrease can be attributed to $294 million provided by operating activities, $55 million provided by issuances of common stock, and $10 million provided by other investing activities, more than offset by $57 million of cash used for expenditures on property, plant and equipment, $245 million used to repurchase common stock, and the $83 million cash, reserved as collateral for building leases. The investment portfolio is diversified among security types, industry groups, and individual issuers. To achieve potentially higher returns, a limited portion of the Company's investment portfolio is invested in mutual funds which incur market risk. The Company believes that the market risk has been limited by diversification and by use of a funds management timing service which switches funds out of mutual funds and into money market funds when preset signals occur. The Company's investment portfolio includes securities with gross unrealized losses of $40 million as of October 31, 1998. The securities with material unrealized losses are Corel common stock, which was obtained in March 1996 upon the Company's sale of its personal productivity applications product line and SCO common stock, which was obtained in December 1995 upon the sale of the Company's UnixWare product line. It is the Company's intention to continue to dispose of such shares over the coming periods. 15 15 The Company's principal source of liquidity has been from operations. At October 31, 1998, the Company's principal unused sources of liquidity consisted of cash and short-term investments and available borrowing capacity of approximately $15 million under its credit facilities. The Company's liquidity needs are principally for the Company's financing of accounts receivable, capital assets, strategic investments, product development, and flexibility in a dynamic and competitive operating environment. During fiscal 1998, the Company has continued to generate cash from operations. The Company anticipates being able to fund its current operations and capital expenditures planned for the foreseeable future with existing cash and short-term investments together with internally generated funds. The Company believes that borrowings under the Company's credit facilities, or public offerings of equity or debt securities are available if the need arises. Investments will continue in product development and in new and existing areas of technology. Cash may also be used to acquire technology through purchases and strategic acquisitions. Capital expenditures in fiscal 1999 are anticipated to be approximately $45 million, but could be reduced if the growth of the Company is less than presently anticipated. In June 1998, the Company announced its intent to repurchase and retire up to 10 percent, or approximately 35 million shares, of Novell common stock over the next twelve months. During fiscal 1998, the Company repurchased and retired approximately 21 million shares at a cost of approximately $245 million. FINANCIAL MARKET RISKS The Company is exposed to financial market risks, including changes in interest rates, foreign currency exchange rates and marketable equity security prices. To mitigate these risks, the Company utilizes currency forward contracts and currency options. The Company does not use derivative financial instruments for speculative or trading purposes, and no derivative financial instruments were outstanding at October 31, 1998. The primary objective of the Company's investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified short-term investments, consisting primarily of investment grade securities, substantially all of which either mature within the next twelve months or have characteristics of short-term investments. A hypothetical 50 basis point increase in interest rates would result in an approximate $6 million decrease (less than 0.6%) in the fair value of the Company's available-for-sale securities. The Company hedges currency risks of investments denominated in foreign currencies with currency forward contracts. Gains and losses on these foreign currency investments would generally be offset by corresponding losses and gains on the related hedging instruments, resulting in negligible net exposure to the Company. A substantial majority of the Company's revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, the Company does enter into these transactions in other currencies, primarily Japanese yen and certain other Asian and European currencies. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, the Company has established balance sheet hedging programs. Currency forward contracts and currency options are utilized in these hedging programs. The Company's hedging programs reduce, but do not always entirely eliminate, the impact of foreign currency exchange rate movements. An adverse change of 10% in exchange rates would result in a decline in income before taxes of approximately $6 million. The Company is exposed to equity price risks on equity securities included in its portfolio of investments entered into for the promotion of business and strategic objectives. These investments are generally in small capitalization stocks in the high-technology industry sector. The Company typically does not attempt to reduce or eliminate its market exposure on these securities. A 10% adverse change in equity prices would result in an approximately $8 million decrease in the fair value of the Company's available-for-sale securities. All of the potential changes noted above are based on sensitivity analyses performed on the Company's financial positions at October 31, 1998. Actual results may differ materially. 16 16 CONSOLIDATED STATEMENTS OF OPERATIONS
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA OCT. 31 OCT. 31 OCT. 26 Fiscal year ended 1998 1997 1996 - ------------------------------------------------------------------------------------------------- Net sales $1,083,887 $1,007,311 $1,374,856 Cost of sales 238,649 277,446 306,761 - ------------------------------------------------------------------------------------------------- Gross profit 845,238 729,865 1,068,095 Operating expenses Sales and marketing 386,114 443,494 518,846 Product development 225,247 282,680 275,627 General and administrative 135,431 148,360 146,236 Restructuring charges -- 55,335 18,442 - ------------------------------------------------------------------------------------------------- Total operating expenses 746,792 929,869 959,151 - ------------------------------------------------------------------------------------------------- Income (loss) from operations 98,446 (200,004) 108,944 Other income (expense) Investment income 44,727 61,315 58,195 Gain on sale of assets -- -- 19,815 Other, net (1,539) (11,881) (6,966) - ------------------------------------------------------------------------------------------------- Other income, net 43,188 49,434 71,044 - ------------------------------------------------------------------------------------------------- Income (loss) before taxes 141,634 (150,570) 179,988 Income tax expense (benefit) 39,658 (72,274) 53,997 - ------------------------------------------------------------------------------------------------- Net income (loss) $ 101,976 $ (78,296) $ 125,991 - ------------------------------------------------------------------------------------------------- Weighted average shares outstanding Basic 350,525 348,149 355,478 Diluted 356,437 349,429 357,919 - ------------------------------------------------------------------------------------------------- Net income (loss) per share Basic $ .29 $ (.22) $ .35 Diluted $ .29 $ (.22) $ .35 - -------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 17 17 CONSOLIDATED BALANCE SHEETS
OCT. 31 OCT. 31 DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 1998 1997 - ---------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and short-term investments $1,007,167 $1,033,473 Receivables, less allowances ($47,921--1998, $33,053--1997) 246,577 211,531 Inventories 3,562 10,656 Prepaid expenses 63,165 57,685 Deferred and refundable income taxes 95,343 134,210 Other current assets 19,886 22,827 - ---------------------------------------------------------------------------------------------- Total current assets 1,435,700 1,470,382 Property, plant, and equipment, net 346,196 373,865 Long-term investments 114,815 19,107 Other assets 27,401 47,295 - ---------------------------------------------------------------------------------------------- Total assets $1,924,112 $1,910,649 - ---------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 77,987 $ 82,759 Accrued compensation 52,348 51,397 Accrued marketing liabilities 16,383 27,728 Other accrued liabilities 62,206 85,157 Income taxes payable 64,057 -- Deferred revenue 141,714 74,915 - ---------------------------------------------------------------------------------------------- Total current liabilities 414,695 321,956 Minority interests 15,919 23,276 SHAREHOLDERS' EQUITY Common stock, par value $.10 per share Authorized 600,000,000 shares Issued 337,592,460 shares, 1998 350,937,812 shares, 1997 33,759 35,094 Additional paid-in capital 200,897 378,582 Retained earnings 1,290,337 1,188,361 Unearned stock compensation (5,396) (7,189) Cumulative translation adjustment (1,753) (666) Unrealized (loss) on investments (24,346) (28,765) - ---------------------------------------------------------------------------------------------- Total shareholders' equity 1,493,498 1,565,417 - ---------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,924,112 $1,910,649 - ----------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 18 18 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON COMMON ADDITIONAL STOCK STOCK PAID-IN RETAINED AMOUNTS IN THOUSANDS SHARES AMOUNT CAPITAL EARNINGS OTHER TOTAL - ------------------------------------------------------------------------------------------------------------------------------ BALANCE--OCT. 28, 1995 371,567 $37,157 $737,481 $1,140,666 $ 22,958 $1,938,262 Stock issued from stock plans 7,651 765 58,485 -- (11,091) 48,159 Stock plans' income tax benefits -- -- 14,027 -- -- 14,027 Shares cancelled (159) (16) (2,119) -- 1,655 (480) Shares repurchased and retired (33,000) (3,300) (452,401) -- -- (455,701) Sale of put warrants -- -- (77,830) -- -- (77,830) Settlement of put warrants -- -- 32,188 -- -- 32,188 Unrealized loss on investments -- -- -- -- (16,054) (16,054) Unearned stock compensation -- -- -- -- 8,013 8,013 Cumulative translation adjustment -- -- -- -- (1,066) (1,066) Net income -- -- -- 125,991 -- 125,991 - ------------------------------------------------------------------------------------------------------------------------------ BALANCE--OCT. 26, 1996 346,059 $34,606 $309,831 $1,266,657 $ 4,415 $1,615,509 Stock issued from stock plans 5,142 514 33,841 -- (8,508) 25,847 Stock plans' income tax benefits -- -- 3,927 -- -- 3,927 Shares cancelled (263) (26) (2,707) -- -- (2,733) Sale of put warrants -- -- 2,300 -- -- 2,300 Settlement of put warrants -- -- 31,390 -- -- 31,390 Unrealized loss on investments -- -- -- -- (36,138) (36,138) Unearned stock compensation -- -- -- -- 5,460 5,460 Cumulative translation adjustment -- -- -- -- (1,849) (1,849) Net (loss) -- -- -- (78,296) -- (78,296) - ------------------------------------------------------------------------------------------------------------------------------ BALANCE--OCT. 31, 1997 350,938 $35,094 $378,582 $1,188,361 $(36,620) $1,565,417 Stock issued from stock plans 7,675 767 55,130 -- (1,032) 54,865 Stock plans' income tax benefits -- -- 10,261 -- -- 10,261 Shares cancelled (20) (2) (212) -- -- (214) Shares repurchased and retired (21,000) (2,100) (242,864) -- -- (244,964) Unrealized gain on investments -- -- -- -- 4,419 4,419 Unearned stock compensation -- -- -- -- 2,825 2,825 Cumulative translation adjustment -- -- -- -- (1,087) (1,087) Net income -- -- -- 101,976 -- 101,976 - ------------------------------------------------------------------------------------------------------------------------------ BALANCE--OCT. 31, 1998 337,593 $33,759 $ 200,897 $1,290,337 $ (31,495) $1,493,498 - ------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 19 19 CONSOLIDATED STATEMENTS OF CASH FLOWS DOLLARS IN THOUSANDS
OCT. 31 OCT. 31 OCT. 26 Fiscal year ended 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 101,976 $ (78,296) $ 125,991 ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES Depreciation and amortization 76,170 91,075 104,782 Gain on non-cash sale of assets -- -- (19,815) Stock plans' income tax benefits 10,261 3,927 14,027 (Increase) decrease in receivables (32,105) 217,969 18,110 Decrease in inventories 7,094 6,181 6,188 (Increase) decrease in prepaids (5,480) (9,404) 2,295 Decrease (increase) in deferred and refundable income taxes 43,662 (93,082) 36,550 Increase (decrease) in current liabilities, net 92,739 (42,816) (96,173) - ------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 294,317 95,554 191,955 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock, net 54,650 23,114 47,679 Repurchases of common stock (244,964) -- (455,701) Sale of put warrants -- 2,300 12,195 Settlement of put warrants -- (20,760) (5,687) - ------------------------------------------------------------------------------------------------------------------------ Net cash (used) provided by financing activities (190,314) 4,654 (401,514) - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property, plant, and equipment (57,375) (64,796) (101,001) Purchases of short-term investments (2,048,391) (2,148,664) (3,163,643) Maturities of short-term investments 1,512,251 1,502,451 2,698,313 Sales of short-term investments 535,405 664,379 588,174 Proceeds from sale of assets -- -- 10,750 Increase in restricted cash (83,107) (11,371) -- Other 5,754 20,815 10,323 - ------------------------------------------------------------------------------------------------------------------------ Net cash (used) provided by investing activities (135,463) (37,186) (42,916) - ------------------------------------------------------------------------------------------------------------------------ Total increase (decrease) in cash and cash equivalents $ 31,460 $ 63,022 $ (166,643) Cash and cash equivalents--beginning of period 208,543 145,521 312,164 - ------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents--end of period 177,083 208,543 145,521 Short-term investments--end of period 830,084 824,930 879,234 - ------------------------------------------------------------------------------------------------------------------------ Cash and short-term investments--end of period $1,007,167 $ 1,033,473 $1,024,755 - ------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 20 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated. The following summarizes the significant accounting policies of the Company: - - The Company considers all highly liquid debt instruments purchased with a term to maturity of three months or less to be cash equivalents. Short-term investments are widely diversified, consisting primarily of short-term investment grade securities, substantially all of which either mature within the next twelve months or have characteristics of short-term investments. Municipal securities included in short-term investments have contractual maturities ranging from 1 to 5 years. Money market preferreds have contractual maturities of less than 180 days. No other short-term investments have contractual maturities. All marketable debt and equity securities are included in cash and short-term investments and are considered available-for-sale and carried at fair market value, with the unrealized gains and losses, net of tax, included in shareholders' equity. Fair market values are based on quoted market prices where available; if quoted market prices are not available, then fair market values are based on quoted market prices of comparable instruments. The cost of securities sold is based on the specific identification method. Such securities are anticipated to be used for current operations and are therefore classified as current assets, even though some maturities may extend beyond one year. - - Accounts receivable include geographically dispersed end users, distributors, resellers, and OEM customers. No collateral is required. Reserves are provided for sales returns, product exchanges and bad debts. - - Plant and equipment are carried at cost less accumulated depreciation and amortization. - - Provision for depreciation and amortization is computed on the straight-line method over the estimated useful lives of the assets, or lease term if shorter, and are as follows:
ASSET CLASSIFICATION USEFUL LIVES - ---------------------------------------------------------------------- Buildings 30 years Furniture and equipment 3-5 years Leasehold improvements and other 3-7 years Intangible assets 3-15 years - ----------------------------------------------------------------------
- - Assets and liabilities of the Company's wholly owned subsidiaries, denominated in the local currency of the subsidiary, are remeasured into U.S. dollars (the functional currency) at year-end exchange rates except for equipment and leasehold improvements, which are remeasured at average rates of exchange prevailing when acquired. Income and expense items are remeasured at average rates of exchange prevailing during the year, except that depreciation is remeasured at historical rates. Remeasurement gains and losses are included in net income in the period incurred. - - For the Company's subsidiaries in Japan and India, the functional currency has been determined to be the local currency, and therefore assets and liabilities are translated at year-end exchange rates and income statement items are translated at average exchange rates prevailing during the year. Such translation adjustments are recorded in shareholders' equity. 21 21 - - Revenue on product sales is recognized upon shipment. Certain sales require continuing service, support, and performance by the Company, and accordingly a portion of the revenue is deferred until the future service, support, and performance are provided. Reserves for sales returns and allowances are recorded in the same period as the related revenues. - - Product development costs are expensed as incurred. Application of Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," has not had any material effect on the consolidated financial statements. - - The cost of advertising is expensed as incurred. Advertising expenses totaled $28 million, $42 million, and $48 million in fiscal 1998, 1997, and 1996, respectively. - - In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 replaced the calculation of primary and fully diluted net income (loss) per share with basic and diluted net income (loss) per share. Accordingly, prior period net income (loss) per share has been restated in accordance with SFAS 128. Basic earnings per share exclude any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share includes any dilutive effects of options, warrants, and convertible securities, and therefore, is comparable to the earnings per share the Company previously reported as earnings per share. In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 requires that all items to be recognized as comprehensive income be reported in a financial statement that is displayed with the same prominence as the other financial statements. SFAS 130 will be effective for the Company beginning in fiscal 1999. The Company anticipates no material costs associated with implementing the required disclosures. In 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," (SFAS 131). SFAS 131 changes the way public companies report information about their operating segments in annual and interim reports. SFAS 131 will be effective for the Company beginning in fiscal 1999. The Company has consistently reported information about its operating segments and believes it is essentially already in compliance with SFAS 131. The Financial Accounting Standards Board approved the new American Institute of Certified Public Accountants Statement of Position (SOP 97-2), "Software Revenue Recognition." SOP 97-2 requires that revenue recognized from software arrangements be allocated to each element of the arrangement based on the relative fair values of the elements, such as software products, upgrades, enhancements, post contract customer support, installation, or training. Under SOP 97-2, the determination of fair value is based on objective evidence, which is specific to the vendor, when the products are sold separately. If such evidence of fair value for each element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist or until all elements of the arrangement are delivered or fair value exists for all undelivered elements. The provisions of SOP 97-2 will be effective for the Company beginning in fiscal 1999. The Company does not believe that implementing this SOP will have a material impact on the recognized revenue of the Company. Certain reclassifications, none of which affect net income, have been made to the prior years' amounts in order to conform to the current year's presentation. 22 22 B. CASH AND SHORT-TERM INVESTMENTS
Fair Market Cost at Gross Gross Value at Oct. 31 Unrealized Unrealized Oct. 31 (Dollars in thousands) 1998 Gains Losses 1998 - ---------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS Cash $ 98,444 $ -- $ -- $ 98,444 Repurchase agreements 8,092 -- -- 8,092 Money market fund 55,957 -- -- 55,957 Municipal securities 14,590 -- -- 14,590 - ---------------------------------------------------------------------------------------------- Cash and cash equivalents $ 177,083 $ -- $ -- $ 177,083 - ---------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS Municipal securities $ 448,195 $ 8,027 $ -- $ 456,222 Money market mutual funds 95,631 -- -- 95,631 Money market preferreds 181,719 -- (19) 181,700 Mutual funds 15,340 -- -- 15,340 Equity securities 128,837 30,159 (77,805) 81,191 - ---------------------------------------------------------------------------------------------- Short-term investments $ 869,722 $ 38,186 (77,824) $ 830,084 - ---------------------------------------------------------------------------------------------- Cash and short-term investments $1,046,805 $ 38,186 $ (77,824) $1,007,167 - ----------------------------------------------------------------------------------------------
Fair Market Cost at Gross Gross Value at Oct. 31 Unrealized Unrealized Oct. 31 (Dollars in thousands) 1997 Gains Losses 1997 - ---------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS Cash $ 84,151 $ -- $ -- $ 84,151 Repurchase agreements 4,932 -- -- 4,932 Money market fund 42,581 -- -- 42,581 Municipal securities 76,879 -- -- 76,879 - ---------------------------------------------------------------------------------------------- Cash and cash equivalents $ 208,543 $ -- $ -- $ 208,543 - ---------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS Municipal securities $ 463,443 $ 4,551 $ (84) $ 467,910 Money market mutual funds 88,999 -- -- 88,999 Money market preferreds 150,817 (17) 150,800 Mutual funds 14,721 33 (1) 14,753 Equity securities 153,785 25,829 (77,146) 102,468 - ---------------------------------------------------------------------------------------------- Short-term investments $ 871,765 $ 30,413 $ (77,248) $ 824,930 - ---------------------------------------------------------------------------------------------- Cash and short-term investments $1,080,308 $ 30,413 $ (77,248) $1,033,473 - ----------------------------------------------------------------------------------------------
The Company had unrealized losses of $24 million and $29 million at the end of fiscal 1998 and 1997, respectively, and unrealized gains of $7 million, net of deferred taxes, at the end of fiscal 1996. The Company realized gains on the sales of securities of $14 million, $28 million, and $20 million in fiscal 1998, 1997, and 1996, respectively, while realizing losses on sales of securities of $16 million in fiscal 1998 and $11 million in fiscal 1997. 23 23 C. PROPERTY, PLANT, AND EQUIPMENT
Oct. 31 Oct. 31 (Dollars in thousands) 1998 1997 - ----------------------------------------------------------------------- Buildings and land $ 251,465 $ 262,564 Furniture and equipment 352,286 420,448 Leasehold improvements and other 91,806 82,372 - ----------------------------------------------------------------------- Property, plant, and equipment at cost 695,557 765,384 Accumulated depreciation (349,361) (391,519) - ----------------------------------------------------------------------- Property, plant, and equipment, net $ 346,196 $ 373,865 - -----------------------------------------------------------------------
D. INCOME TAXES
Oct. 31 Oct. 31 Oct. 26 Fiscal year ended (Dollars in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- TAX EXPENSE (BENEFIT) Current Federal $ 13,783 $ (53,862) $ (19,649) State 9,934 (8,720) (1,352) Foreign 11,399 5,512 12,085 - ------------------------------------------------------------------------------------------------------------- Total current 35,116 (57,070) (8,916) - ------------------------------------------------------------------------------------------------------------- Deferred Federal (2,167) (8,636) 54,794 State (1,878) 680 8,060 Foreign 8,587 (7,248) 59 - ------------------------------------------------------------------------------------------------------------- Total deferred 4,542 (15,204) 62,913 - ------------------------------------------------------------------------------------------------------------- Total tax expense (benefit) $ 39,658 $ (72,274) $ 53,997 - ------------------------------------------------------------------------------------------------------------- DIFFERENCES BETWEEN THE U.S. STATUTORY AND EFFECTIVE TAX RATES U.S. statutory rate 35.0% (35.0%) 35.0% State income taxes, net of federal tax effect 3.9 (3.5) 3.1 Research and development tax credits (3.7) (5.0) (1.3) Tax exempt income (7.6) (6.5) (5.6) Foreign losses not tax benefited (realized) (3.2) 4.7 -- Other, net 3.6 (2.7) (1.2) - ------------------------------------------------------------------------------------------------------------- Effective tax (benefit) rate 28.0% (48.0%) 30.0% - ------------------------------------------------------------------------------------------------------------- DOMESTIC AND FOREIGN COMPONENTS OF INCOME BEFORE TAXES Domestic $ 66,892 $(100,673) $ 180,198 Foreign 74,742 (49,897) (210) - ------------------------------------------------------------------------------------------------------------- Total income before taxes $ 141,634 $(150,570) $ 179,988 - ------------------------------------------------------------------------------------------------------------- Cash paid for income taxes $ 18,735 $ 16,498 $ 26,370 - -------------------------------------------------------------------------------------------------------------
24 24
OCT. 31 OCT. 31 (Dollars in thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- DEFERRED INCOME TAXES Deferred tax assets Credit carryforwards $ 7,024 $ -- Receivable valuation accounts 15,254 8,094 Restructuring provision 3,026 5,493 Reserves and accruals 12,057 15,329 Foreign earnings and loss carryforwards 30,390 47,442 Other individually immaterial items 20,925 26,619 - ------------------------------------------------------------------------------------------------------------------------- 88,676 102,977 Valuation allowance for deferred tax assets (7,462) (7,462) - ------------------------------------------------------------------------------------------------------------------------- 81,214 95,515 DEFERRED TAX LIABILITIES Unrealized gain on investments (2,727) (2,748) - ------------------------------------------------------------------------------------------------------------------------- Net deferred tax assets $ 78,487 $ 92,767 - -------------------------------------------------------------------------------------------------------------------------
At October 31, 1998, the Company had deferred tax assets of $89 million before a valuation allowance of $7 million. A portion of this asset is realizable based on the ability to offset existing deferred tax liabilities. Realization of the remaining asset is dependent of the Company's ability to generate approximately $245 million of taxable income. Of this, approximately $144 million must be earned outside the United States. Management believes that sufficient income will be earned in the future to realize this asset. Management will evaluate the realizability of the deferred tax assets quarterly and assess the need for additional valuation allowances. As of October 31, 1998, the Company has U.S. net operating loss carryforwards from acquired companies of approximately $15 million that expire in years 2003 through 2008. Subject to certain annual limitations, these losses can be used to offset the future taxable income of these businesses. A valuation allowance of approximately $7 million has been recognized to offset the deferred tax assets related to those carryforwards. In addition, the Company has approximately $45 million of foreign loss carryforwards of which $10 million and $15 million are subject to expire in 2002 and 2003, respectively. E. COMMITMENTS AND CONTINGENCIES Rent expense for operating and month-to-month leases was $18 million, $23 million, and $29 million in fiscal 1998, 1997, and 1996, respectively. As of October 31, 1998, the Company has various operating leases with remaining terms of more than one year. These leases have minimum annual lease commitments of $22 million in fiscal 1999, $24 million in fiscal 2000, $21 million in fiscal 2001, $19 million in fiscal 2002, $18 million in fiscal 2003, and $20 million thereafter. Furthermore, the Company has $20 million of minimum rentals to be received in the future. The Company currently has a $10 million unsecured revolving bank line of credit, with interest at the prime rate. The line can be used for either letter of credit or working capital purposes. The line is subject to the terms of a loan agreement containing financial covenants and restrictions, none of which are expected to significantly affect the Company's operations. At October 31, 1998, there were no borrowings, letter of credit acceptances, or commitments under such line. The Company has an additional $5 million credit facility with another bank which is not subject to a loan agreement. At October 31, 1998, standby letters of credit of $1 million were outstanding under this agreement. 25 25 In fiscal 1997, the Company entered into agreements to lease buildings being constructed on land owned by the Company in San Jose, California and in Provo, Utah. The lessor has committed to fund up to $272 million for construction of the buildings. The leases are for a period of seven years and can be renewed for two additional five year periods, subject to the approval of the lender and the Company, at the sole discretion of each party. Rent obligations will commence upon the Company's occupancy of the buildings in fiscal 1999 for San Jose and fiscal 2000 for Provo. Annual rent under each agreement is determined by taking the portion of the committed amount actually utilized and associated capitalized interest accrued during the construction period and multiplying this amount by the secured interest rate. If the Company does not purchase the buildings, or arrange for the sale of the buildings, at the end of the lease, the Company will guarantee the lessor no more than 85% of the residual value of the buildings. The guaranteed residual value at October 31, 1998, was approximately $245 million. In addition, the agreement calls for the Company to maintain a specific level of restricted cash to serve as collateral for the leases and maintain compliance with certain financial covenants. The value of restricted cash held as collateral at October 31, 1998 was approximately $93 million, and is included in long-term investments. In 1993, a suit was filed due to a failed contract against a company that Novell subsequently acquired. The plaintiff obtained a jury verdict against the acquired company in 1996. Novell does not believe that the resolution of this legal matter will have a material adverse effect on its financial position, results of operations, or cash flows. In February 1998, a suit was filed against Novell and certain of its officers and directors, alleging violation of federal securities laws. The lawsuit was brought as a purported class action on behalf of purchasers of Novell common stock from November 1, 1996 through April 22, 1997. The case is in its preliminary stages. Novell believes that the case is without merit, and intends to vigorously defend against the allegations. While there can be no assurance as to the ultimate disposition of the case, Novell does not believe that the resolution of this litigation will have a material adverse effect on its financial position, results of operations, or cash flows. The Company is a party to a number of legal claims arising in the ordinary course of business. The Company believes the ultimate resolution of the claims will not have a material adverse effect on its financial position, results of operations, or cash flows. F. PUT WARRANTS In connection with the Company's stock repurchase program, the Company sold put warrants on 15 million shares of its common stock during the third quarter of fiscal 1998, giving a third party the right to sell shares of Novell common stock to the Company at contractually specified prices. The put warrants are exercisable only at maturity, expire at various dates between December 1998 and July 1999, and can only be settled in shares. Additionally, during the third quarter of fiscal 1998, the Company purchased call options on 10 million shares of its common stock, giving the Company the right to purchase shares of Novell common stock at contractually specified prices. The call options are exercisable only at maturity and expire at various dates between December 1998 and July 1999. The premiums received from the sale of the put warrants offset in full the cost of the call options. During fiscal 1997, the Company sold put warrants on two million shares of its common stock for $2 million, callable on specific dates in the third quarter of fiscal 1997, giving a third party the right to sell shares of Novell common stock to the Company at contractually specified prices. The put warrant liability is the amount the Company would be obligated to pay if all the outstanding put warrants were exercised at the strike price without a cash settlement. During fiscal 1997, the Company settled all of its remaining put 26 26 warrant obligations on six million shares for cash of $21 million and, therefore, reversed the put warrant obligation back to additional paid-in capital. During fiscal 1996, the Company sold put warrants on nine million shares of its common stock for $12 million, callable on specific dates in the third and fourth quarters of fiscal 1996 and in the first and second quarters of fiscal 1997. During fiscal 1996, the Company settled put warrant obligations on five million shares for cash of $6 million. G. SHAREHOLDERS' EQUITY In December 1988, the Board of Directors adopted a Shareholder Rights Plan and amended it in March 1992 and December 1996. The plan provides for a dividend of rights, which cannot be exercised until certain events occur, to purchase shares of preferred stock of the Company. Each shareholder of record receives one right for each share of common stock owned. This plan was adopted to ensure that all shareholders of the Company receive fair value for their common stock in the event of any proposed takeover of the Company and to guard against coercive tactics to gain control of the Company without offering fair value to the Company's shareholders. The Company has 500,000 authorized shares of preferred stock with a par value of $0.10 per share, none of which was outstanding at October 31, 1998 or October 31, 1997. At October 31, 1998, the Company had authorized stock-based compensation plans under which options to purchase shares of Company common stock could be granted to employees, consultants and outside directors. The Company applies APB Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its plans. Accordingly, no compensation expense (except compensation expense related to restricted stock purchase grants)has been recognized for the Company's stock-based plans. If compensation expense for the Company's stock-based compensation plans had been determined consistent with statement of Financial Accounting Standards No. 123 (SFAS 123), the Company's net income (loss)and net income (loss)per share would have been the pro forma amounts indicated below.
Oct. 31 Oct. 31 Oct. 26 Fiscal year ended (In thousands, except per share amounts) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- Net income (loss) As reported $ 101,976 $ (78,296) $125,991 Pro forma $ 61,991 (106,509) $116,505 Net income (loss) per share As reported basic $ 0.29 $ (0.22) $ 0.35 Pro forma basic $ 0.18 $ (0.30) $ 0.33 As reported diluted $ 0.29 $ (0.22) $ 0.35 Pro forma diluted $ 0.18 $ (0.31) $ 0.33 - ----------------------------------------------------------------------------------------------------------------------
For the purpose of the above table, the fair value of each option grant is estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in fiscal 1998, 1997, and 1996: a risk-free interest rate of approximately 5.4% for fiscal 1998 and 6.3% for fiscal 1997 and 1996; a dividend yield of 0.0% for all years; a weighted-average expected life of five years for fiscal 1998; and four years for fiscal 1997 and 1996; and a volatility factor of the expected market price of the Company's common stock of 0.51 for fiscal 1998; and 0.45 for fiscal 1997 and 1996. Because the method of accounting prescribed by SFAS 123 has not been applied to options granted prior to October 28, 1995, the resulting pro forma compensation expense may not be representative of that to be expected in future years. Furthermore, SFAS 123 is applicable only to options granted subsequent to October 28, 1995, therefore its pro forma effect will not be fully reflected until approximately fiscal 2000. 27 27 The Company currently has three option plans. The Company's 1991 Stock Plan, as amended, (the "1991 Plan") provides for the issuance of incentive and nonstatutory stock options, stock purchase rights, stock appreciation rights and long-term performance awards to employees, consultants and outside directors of the Company. The Company grants nonstatutory options to virtually all employees and restricted stock purchase rights to selective management. Nonstatutory options are granted at the fair market value of the Company's common stock at the date of grant, vest over a four-year period, are exercisable upon vesting and expire ten years from the date of grant. The Company has reserved 70,488,124 shares of common stock for issuance under the 1991 Plan. This share reserve has increased over the past five years and will increase on November 1, 1998, based on a calculation of 2.9% of the total common stock outstanding at the previous fiscal year end. The Company also has a Non-Employee Director Stock Option Plan, as amended, (the "Director Plan") under which 1,500,000 shares are reserved for issuance. This Director Plan allows for two types of non discretionary stock option grants; an initial grant of 30,000 options at the time a director is first elected/appointed to the Board, with options vesting over four years and exercisable upon vesting; and an annual grant of 15,000 options upon reelection to the Board, with options vesting over two years and exercisable upon vesting. All options expire ten years from the date of grant. The 1997 Stock Plan was approved by the Board of Directors in 1997 to grant options to Eric E. Schmidt, at his time of hire. The options were granted at fair market value, vest over five years and expire ten years from grant. The Company reserved 1,250,000 shares of common stock for issuance under the 1997 Stock Plan. The Company's 1986 Stock Option Plan and assumed plans due to acquisitions have terminated, and no further options may be granted under these plans. Options previously granted under these plans will continue to be administered under such plans, and any portions that expire or become unexercisable for any reason shall cancel and be unavailable for future issuance. A summary of the status of the Company's stock option plans as of October 31, 1998 and October 31, 1997 and changes during the years ended on those dates is presented below.
Fiscal 1998 Fiscal 1997 ------------------------------------------------------------------- Weighted- Weighted- Number of Average Number of Average Number of options in thousands Options Exercise Price Options Exercise Price - ------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 41,073 $ 8.19 41,331 $14.77 Granted Price at Fair Value 19,289 $10.14 47,867 $ 8.05 Price greater than Fair Value -- -- 600 $17.53 Price less than Fair Value 100 $ 0.10 975 $ 0.02 Exercised (5,967) $ 7.09 (3,151) $ 3.91 Cancelled/expired (6,094) $ 9.84 (46,549) $14.13 - ------------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 48,401 $ 8.89 41,073 $ 8.19 Options exercisable at year end 15,531 2,753 - -------------------------------------------------------------------------------------------------------------------------------
28 28 The following table summarizes information about stock options outstanding at October 31, 1998.
Options Outstanding Options Exercisable - ------------------------------------------------------------------------------------------------------------------------------ Weighted- Average Weighted- Weighted- Options Remaining Average Options Average Number of options in thousands Outstanding Contractual Life Exercise Price Exercisable Exercise Price - ------------------------------------------------------------------------------------------------------------------------------ $ 1.83 3 4.14 $ 1.83 3 $ 1.83 $ 1.84-- $ 6.91 16,382 6.86 $ 6.89 11,035 $ 6.89 $ 7.50-- $ 8.75 13,536 8.61 $ 8.51 3,487 $ 8.59 $ 9.38-- $ 9.94 10,814 9.44 $ 9.86 166 $ 9.57 $10.00-- $12.44 5,931 9.55 $11.19 220 $ 10.76 $13.13-- $31.25 1,735 8.20 $16.76 620 $ 19.90 - ------------------------------------------------------------------------------------------------------------------------------ $ 1.83-- $31.25 48,401 8.30 $ 8.89 15,531 $ 7.87 - ------------------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION In 1997, the Company implemented a stock option exchange program whereby option holders could exchange higher priced options for new options on a four new shares for five old shares ratio. Vesting remained the same as the original grant but exercisability was suspended for one year. All option holders except for outside directors and the CEO were permitted to participate in the program.
Fiscal Fiscal Number of shares and options in thousands 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- EXCHANGE PROGRAM (INCLUDED ABOVE) Options cancelled -- 31,457 Options regranted -- 24,884 OPTIONS AVAILABLE FOR FUTURE GRANTS 16,560 19,798 OTHER INFORMATION Shares of common stock outstanding at year end 337,592 350,938 Annual option reserve increase based on evergreen provision 10,177 10,036 Options granted as a percentage of outstanding common stock, net of cancellations 4% .8% Option holders as a percentage of total employees 100% 100% - ---------------------------------------------------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN Under the Company's 1989 Employee Stock Purchase Plan, as amended, (the "Purchase Plan"), the Company is authorized to issue up to 18,000,000 shares of common stock to its employees who work at least 20 hours a week and six months a year. Under the terms of the Purchase Plan, there are two six month offerings per year, and employees can choose to have up to 10%of their salary withheld to purchase the Company's common stock. The purchase price of the stock is 85% of the lower of the subscription date fair market value and the purchase date fair market value. Approximately 45% of the eligible employees have participated in the Purchase Plan in fiscal 1998 and 1997. Under the Purchase Plan, the Company issued 1,708,028 and 1,991,504 shares to employees in fiscal 1998 and 1997, respectively. In accordance with APB 25, the Company does not recognize compensation expense related to employee purchase rights under the Purchase Plan. To comply with the pro forma reporting requirements of SFAS 123, compensation expense is estimated for the fair value of the employees' purchase rights using the Black-Scholes model with the following assumptions for these rights granted in fiscal 1998, 1997, and 1996: a dividend yield of 0.0% for all years; an expected life of 6 months for all years; an expected volatility factor of 0.51 for fiscal 1998, and 0.45 in fiscal 1997 and 1996; and a risk-free interest rate of 29 29 approximately 5.5% for all years. The weighted average fair value of the purchase rights granted on April 28, 1998, October 28, 1997, April 28, 1997, October 28, 1996, April 29, 1996, and October 30, 1995, was $2.64, $2.25, $1.99, and $2.66, $3.62, and 4.33, respectively. H. RESTRUCTURING CHARGES During the third quarter of fiscal 1997, the Company incurred $55 million of tax deductible restructuring charges which included $28 million for excess personnel and $27 million for redundant facilities as the Company restructured and realigned its remaining resources to better manage and control its business. The charge for excess personnel related to approximately 1,000 employees with $21 million of severance paid and charged against the amount accrued. Of this charge, reserves of $10 million remain as of October 31, 1998, of which approximately $1 million relates to severance cost for excess personnel. During the first quarter of fiscal 1996, the Company incurred $18 million of tax deductible restructuring charges for excess personnel and redundant facilities as the Company prepared for the sale of its personal productivity applications product line. Of this charge, reserves of $2 million remain as of October 31, 1998, none of which relates to severance costs for excess personnel. I. EMPLOYEE SAVINGS AND RETIREMENT PLAN The Company adopted a 401(k) savings and retirement plan in December 1986. The plan covers all U.S. employees who are 21 years of age or older who are scheduled to complete 1,000 hours of service during any consecutive twelve-month period. Prior to January 1, 1995, the Company's retirement and savings plan contributions has been a 50% matching contribution for employee contributions up to 6% of each employee's compensation. On January 1, 1995, the Company's retirement and savings plan contribution was changed to be a 100% matching contribution for employee contributions up to 4% of each employee's compensation. Company matching contributions were $13 million, $15 million and $16 million in fiscal 1998, 1997, and 1996, respectively. The Company also has other retirement plans in certain countries outside of the U.S. in which the Company employs personnel. Each plan is consistent with local laws and business practices. J. RELATED PARTY TRANSACTIONS In fiscal 1998, 1997, and 1996, legal fees of approximately $1 million per year were paid to Wilson, Sonsini, Goodrich & Rosati, a law firm in which a director of the Company is a senior partner. K. SALES BY GEOGRAPHY
Oct. 31 Oct. 31 Oct. 26 Fiscal year ended (Dollars in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Net sales U.S. operations $ 750,454 $ 707,228 $ 902,684 Irish operations 296,500 231,954 344,512 Other international operations 37,335 68,508 128,564 Eliminations (402) (379) (904) - ------------------------------------------------------------------------------------------------------------------------- Total net sales $ 1,083,887 $1,007,311 $ 1,374,856 - -------------------------------------------------------------------------------------------------------------------------
30 30
Oct. 31 Oct. 31 Oct. 26 Fiscal year ended (Dollars in thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Income from operations U.S. operations $ 257,921 $ 59,919 $ 417,618 Irish operations 69,181 (20,003) 9,098 Other international operations (10,897) (6,780) (129) Eliminations (217,759) (233,140) (317,643) - ------------------------------------------------------------------------------------------------------------------------- Total income from operations $ 98,446 $ (200,004) $ 108,944 - ------------------------------------------------------------------------------------------------------------------------- Identifiable assets U.S. operations $1,908,385 $1,974,222 $2,102,574 Irish operations 88,062 12,228 57,471 Other international operations 10,092 33,732 46,816 Eliminations (82,427) (109,533) (157,395) - ------------------------------------------------------------------------------------------------------------------------- Total identifiable assets $1,924,112 $1,910,649 $2,049,466 - -------------------------------------------------------------------------------------------------------------------------
The Company operates in one business segment and markets internationally through distributors who sell to dealers and end users. Intercompany sales between geographic areas are accounted for at prices representative of unaffiliated party transactions. "U.S. operations" include shipments to customers in the U.S., licensing to OEMs, and exports of finished goods directly to international customers, primarily in Canada, South America, and Asia. In fiscal 1998, 1997, and 1996, sales to international customers were approximately $452 million, $452 million, and $682 million, respectively. In fiscal 1998, 1997, and 1996, international sales to European countries were 67%, 55%, and 55%, respectively. No one foreign country accounted for more than 10% of total sales in any period. In fiscal 1998, and 1997, the Company had one multinational distributor, which accounted for 15%, and 11% of revenue, respectively. Otherwise, no customer accounted for more than 10% of revenue in any period. L. NET INCOME PER SHARE
Oct. 31 Oct. 31 Oct. 26 Fiscal year ended (Dollars in thousands, except per share data) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Basic net income (loss) per share computation Net income (loss) $101,976 $(78,296) $125,991 - --------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 350,525 348,149 355,478 - --------------------------------------------------------------------------------------------------------------------------- Basic net income (loss) per share $ .29 $ (.22) $ .35 - --------------------------------------------------------------------------------------------------------------------------- Diluted net income (loss) per share computation Net income (loss) $101,976 $(78,296) $125,991 - --------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 350,525 348,149 355,478 Incremental shares attributable to exercise of outstanding options (treasury stock method) 5,912 1,280 2,441 Total $356,437 $349,429 $357,919 - --------------------------------------------------------------------------------------------------------------------------- Diluted net income (loss) per share $ .29 $ (.22) $ .35 - ---------------------------------------------------------------------------------------------------------------------------
31 31 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND SHAREHOLDERS--NOVELL, INC. We have audited the accompanying consolidated balance sheets of Novell, Inc. as of October 31, 1998 and October 31, 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended October 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Novell, Inc. at October 31, 1998 and October 31, 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 31, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP San Jose, California November 23, 1998 32 32 SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA--UNAUDITED
DOLLARS IN THOUSANDS, First Second Third Fourth Fiscal EXCEPT PER SHARE DATA Quarter Quarter Quarter Quarter Year - ----------------------------------------------------------------------------------------------------------------- FISCAL 1998 Net sales $ 252,042 $ 262,250 $ 272,016 $ 297,579 $ 1,083,887 Gross profit 196,903 205,229 211,177 231,929 845,238 Income before taxes 19,575 26,815 36,884 58,360 141,634 Net income 14,094 19,307 26,556 42,019 101,976 Net income per share Basic .04 .05 .08 .12 .29 Diluted .04 .05 .07 .12 .29 COMMON STOCK PRICE PER SHARE High 9 5/8 11 1/8 13 5/8 15 3/8 15 3/8 Low 61 3/16 7 3/16 9 29/64 9 1/2 6 13/16 FISCAL 1997 Net sales $ 374,847 $ 273,107 $ 90,074 $ 269,283 $ 1,007,311 Gross profit 298,876 195,932 28,403 206,654 729,865 Income (loss) before taxes 75,277 (21,680) (217,957) 13,790 (150,570) Net income (loss) 50,812 (14,634) (121,645) 7,171 (78,296) Net income (loss) per share Basic .15 (.04) (.35) .02 (.22) Diluted .15 (.04) (.35) .02 (.22) COMMON STOCK PRICE PER SHARE High 12 3/4 13 8 3/4 10 1/2 13 Low 8 7/8 7 6 9/32 7 3/8 6 9/32 FISCAL 1996 Net sales $ 437,919 $ 188,180 $ 365,091 $ 383,666 $ 1,374,856 Gross profit 341,908 119,566 289,473 317,148 1,068,095 Income (loss) before taxes 95,580 (83,246) 84,712 82,942 179,988 Net income (loss) 63,561 (55,359) 58,759 59,030 125,991 Net income (loss) per share Basic .17 (.15) .17 .17 .35 Diluted .17 (.15) .17 .17 .35 COMMON STOCK PRICE PER SHARE High 19 1/8 14 5/8 15 5/8 12 1/4 19 1/8 Low 12 11 3/8 10 1/8 10 10
Novell's common stock trades in the over-the-counter market under the NASDAQ symbol "NOVL." No dividends have been declared on the Company's common stock. There were 10,844 shareholders of record at December 31, 1998. 33 33 DIRECTORS AND EXECUTIVES BOARD OF DIRECTORS ERIC E. SCHMIDT Chairman of the Board and Chief Executive Officer JOHN A. YOUNG ** *** Vice Chairman of the Board Retired President and Chief Executive Officer Hewlett-Packard Company ELAINE R. BOND * Retired Chase Fellow and Sr. Consultant The Chase Manhattan Bank, N.A. HANS-WERNER HECTOR * Cofounder SAP AG, Germany REED E. HUNDT ** *** Special Consultant McKinsey & Company WILLIAM N. JOY ** Cofounder and Vice President of Research Sun Microsystems, Inc. JACK L. MESSMAN * *** President and Chief Executive Officer Union Pacific Resources Group, Inc. RICHARD L. NOLAN ** *** William Barclay Harding Professor of Management of Technology Harvard Business School LARRY W. SONSINI * Partner Wilson, Sonsini, Goodrich & Rosati * Member of Audit Committee ** Member of Compensation Committee *** Member of Corporate Governance Committee CORPORATE EXECUTIVE STAFF ERIC E. SCHMIDT Chairman of the Board and Chief Executive Officer DAVID R. BRADFORD Senior Vice President, General Counsel and Corporate Secretary RONALD E. HEINZ, JR. Senior Vice President Worldwide Sales JENNIFER A. KONECNY-COSTA Senior Vice President Human Resources STEWART G. NELSON Senior Vice President Product Development RICHARD A. NORTZ Senior Vice President Customer Services DENNIS R. RANEY Senior Vice President and Chief Financial Officer GLENN RICART Senior Vice President and Chief Technology Officer JOHN F. SLITZ, JR. Senior Vice President Marketing CHRISTOPHER M. STONE Senior Vice President Strategy and Corporate Development 34 34 OFFICE LOCATIONS
UNITED STATES OFFICES INTERNATIONAL OFFICES ARIZONA ARGENTINA JAPAN Phoenix Buenos Aires Tokyo CALIFORNIA AUSTRALIA KOREA Irvine Brisbane Seoul Los Angeles Canberra Sacramento Melbourne MALAYSIA San Diego Perth Petaling Jaya San Francisco Sydney San Jose MEXICO AUSTRIA Mexico City COLORADO Vienna Englewood NETHERLANDS BELGIUM Rotterdam CONNECTICUT Antwerp Glastonbury Brussels NEW ZEALAND Auckland FLORIDA BRAZIL Wellington Ft. Lauderdale Brasilia Tampa Sao Paulo NORWAY Oslo GEORGIA CANADA Atlanta Calgary POLAND Halifax Warsaw ILLINOIS Hull Rolling Meadows Markham PORTUGAL Montreal Lisbon MASSACHUSETTS Vancouver Wellesley RUSSIA CHILE Moscow MICHIGAN Santiago Southfield SINGAPORE CHINA, Singapore MINNESOTA PEOPLE'S Bloomington REPUBLIC OF SOUTH AFRICA Beijing Cape Town MISSOURI Guangzhou Johannesburg Kansas City Shanghai St. Louis SPAIN COLOMBIA Barcelona NEW JERSEY Bogota Madrid Berkeley Heights CZECH REPUBLIC NEW YORK Prague SWEDEN New York Stockholm Pittsford DENMARK Copenhagen SWITZERLAND NORTH CAROLINA Zurich Charlotte FINLAND Helsinki TAIWAN OHIO Taipei Cincinnati FRANCE Columbus Paris THAILAND Independence Bangkok GERMANY OREGON Berlin UNITED ARAB EMIRATES Portland Dusseldorf Dubai Frankfurt PENNSYLVANIA Munich UNITED KINGDOM Berwyn Bracknell Pittsburgh HONG KONG Wanchai URUGUAY TENNESSEE Montevideo Memphis HUNGARY Budapest VENEZUELA TEXAS Caracas Austin INDIA Dallas Bangalore Houston Bombay Calcutta UTAH Chennai Orem New Delhi Provo Salt Lake City IRELAND Dublin VIRGINIA Herndon ISRAEL Herzliyya WASHINGTON Kirkland ITALY Milan
35 35 CORPORATE DIRECTORY NOVELL CORPORATE ASIA-PACIFIC REGION EUROPE, MIDDLE EAST, NOVELL NETHERLANDS HEADQUARTERS AFRICA REGION Barbizonlaan 25 122 East 1700 South NOVELL AUSTRALIA 2908 MB Capelle a/d IJssel Provo, Utah 84606 Level 18 NOVELL AUSTRIA PO Box 85024 Ph 801 861 7000 201 Miller Street Heiligenstadter Lande 27c 3009 MA Rotterdam Toll free 800 453 1267 North Sydney, NSW 2060 A-1190 Vienna, Austria The Netherlands Fx 801 228 7077 Australia Ph 43 1 367 7444 Ph 31 10 286 4444 Ph 61 2 9925 3000 Fx 43 1 367 7444 Fx 31 10 286 4010 Fx 61 2 9922 2113 AMERICAS REGION NOVELL BELGIUM NOVELL NORWAY NOVELL CHINA Koningin Aztridplein 5 Grensesvingen 9 NOVELL ARGENTINA 6/F Annex Bldg., 2018 Antwerp, Belgium Postboks 6555 Etterstad Av. Leandro N. Alem 1110, Sinochem Mansion Ph 32 3 206 17 93 0606 Oslo, Norway Piso 9(degree), 1001 Buenos Aires A2 Fuxing Menwai Ave. Fx 32 3 206 17 99 Ph 47 22 08 77 70 Argentina Beijing 100045, P.R. China Fx 47 22 08 77 71 Ph 54 11 4312 2626 Ph 86 10 685 68616 NOVELL CZECH REPUBLIC Fx 54 11 4312 8025 Fx 86 10 685 68615 Klimenstska 46 NOVELL POLAND 11002 Prague 1 ul. Sienna 64 NOVELL BRAZIL NOVELL HONG KONG Czech Republic 00-825 Warsaw, Poland Av. Nacoes Unidas, 12.995 Room 4601-5 Ph 42 2 2185 6611 Ph 48 22 620 39 79 8(degree) Andar China Resources Building Fx 42 2 2185 6622 Fx 48 22 620 31 03 04578-000 - Sao Paulo - SP 26 Harbour Road Brazil Wanchai, Hong Kong NOVELL DENMARK Novell Portugal Ph 55 11 5505 4040 Ph 852 2 588 5288 Slotsmarken 12 Centro Empresarial Torres Fx 55 11 5505 4041 Fx 852 2 827 6555 DK 2970 Hersholm, Denmark de Lisbon Ph 45 45 16 00 20 Torre G 1(degree) Andar Sala 111 NOVELL CANADA NOVELL INDIA* Fx 45 45 16 00 40 Rua Tomas da Fonseca 3100 Steeles Avenue East Onward Novell Software Ltd. 1600 Lisbon, Portugal Suite 500 62 MIDC NOVELL FINLAND Ph 351 1723 06 30 Markham, Ontario L3R 8T3 13th Street Sinimaenlie 10 C Fx 351 1722 35 33 Canada Andheri (East) 02630 Espoo, Finland Ph 905 940 2670 Bombay 400 093, India Ph 35 89 502 95 1 NOVELL RUSSIA Fx 905 940 2688 Ph 91 22 8342244 Fx 35 89 502 95 300 Suite 524 Fx 91 22 8342223 Radisson Slavyanskaya Hotel NOVELL CHILE NOVELL FRANCE 2, Berezhkovskaya nab. Av. Nueva Tajamar 555 NOVELL JAPAN LTD.* Tour Framatome 121059 Moscow, Russia Of. 901, Las Condos Toei Mishuku Bldg. 1, Place de la Coupole Local Ph 7 095 941 8075 Santiago, Chile 1-13-1 Mishuku 92084 Paris la Defense Cedex Local Fx 7 095 941 8066 Ph 562 3397 070 Setagaya-Ku, France Satellite Ph 44 1 819133 215 Fx 562 3397 071 Tokyo 154, Japan Ph 33 1 47 96 60 00 Satellite Fx 44 1 819133 238 Ph 81 3 5481 8206 Fx 33 1 47 78 94 72 NOVELL COLOMBIA Fx 81 3 5481 4100 NOVELL SOUTH AFRICA Calle 114 # 9-45 NOVELL GERMANY Morning View Office Park Torre B oficina 709-710 NOVELL KOREA Monschauer Strasse 12 Bldg 4, Rivonia Road Barrio Santa Barbara Will-Bes Co. Building 40549 Dusseldorf, Germany Morningside Santa Fe de Bogota 11th Floor Ph 49 211 56310 PO Box 1840 Colombia 942-1, Daechi-dong Fx 49 211 563 1250 Rivonia 2128 Ph 571 6292969 Kangnam-Ku Republic of South Africa Fx 571 6293509 Seoul, Korea 135-280 NOVELL HUNGARY Ph 27 11 322 8300 Ph 82 2 528 1424 East-West Business Center Fx 27 11 322 8400 NOVELL MEXICO Fx 82 2 528 1414 1088 Budapest Periferico Sur 4124 Rakoczi ut 1-3, Hungary NOVELL SPAIN Piso 8, Torre Zafiro II NOVELL MALAYSIA Ph 36 1 235 7656 27th Floor, Torre Europa Pedregal De San Angel Unit 501 Level 5 Uptown 1 Fx 36 1 266 6360 Paseo de la Castellana, 95 Mexico, D.F., C.P. 01900 7 Jalan SS 21/39 28046 Madrid, Spain Mexico Damansara Uptown NOVELL IRELAND Ph 34 1 555 65 67 Ph 525 728 3560 47400 Petaling Jaya 2nd Floor Fx 34 1 555 29 15 Fx 525 728 3566 Selangor Darul Ehsan The Treasury Building Malaysia Lower Grand Canal Street NOVELL SWEDEN NOVELL URUGUAY Ph 60 3 712 6100 Dublin 2, Ireland Kronborgsgrand 1 Boulevar Espana 2665 Fx 60 3 712 6155 Ph 353 1 605 8000 16487 Kista Suite 905 Fx 353 1 605 8200 Stockholm, Sweden Montevideo, Uruguay NOVELL SINGAPORE Ph 46 84774108 Ph 541 312 2626 x101 300 Beach Road, #28-00 NOVELL ISRAEL Fx 46 4684774101 Fx 541 312 2626 x116 The Concourse Ackerstein Building Singapore 199555 Medinat Hayehudim St 103 NOVELL SWITZERLAND NOVELL VENEZUELA Ph 65 296 2866 Herzliyya 46776, Israel Imperial Gebaude Plaza La Castellana Fx 65 296 1266 Ph 972 9951 4455 2 Oberschoss Torre Ban Caracas Fx 972 9951 4466 Leutschenbachstrasse 41 Piso 10, oficina 1004 NOVELL TAIWAN CH-8050 Zurich, Switzerland La Castellana Room E-F, 5th Floor NOVELL ITALIA Ph 41 1 308 47 47 Caracas, Venezuela 168 Tun-Hwa North Road Piazza Don Mapelli 75 Fx 41 1 302 04 01 Ph 582 264 2534 Taipei, Taiwan, R.O.C. Edifico U3 Fx 582 264 2171 Ph 886 2 718 9733 Sesto San Giovanni UNITED KINGDOM Fx 886 2 514 9806 20099 Milan, Italy NOVELL HOUSE Ph 39 2 262 95 1 1, Arlington Square NOVELL THAILAND Fx 39 2 26295 800 Downshire Way Level 23, CPTower Bracknell 313 Silom Road NOVELL MIDDLE EAST Berkshire RG12 1WA Bangkok, Thailand 10500 P.O. Box 9313 United Kingdom Ph 662 231 8166 17th Floor Ph 44 1344 724000 Fx 662 231 8246 Dubai World Trade Center Fx 44 1344 724001 Dubai, United Arab Emirates Ph 971 43 16 444 Fx 971 43 19 248 *Joint venture
36 36 C O N T A C T Novell on the Internet www.novell.com Corporate, product, program, financial, and shareholder information, including press releases and quarterly earnings announcements, is available at Novell's World Wide Web site. Novell News Hotline 800 668-5329 Press releases are available toll-free from Novell's menu-driven fax distribution system. Financial Literature 800 317-3195 www.novell.com/ir irmail@novell.com Novell's Annual Report, Corporate Fact Book, SEC filings, earnings announcements, and other financial information are available on Novell's Investor Relations Web site at www.novell.com/ir. Mailed copies of financial materials can be obtained from Novell's automated telephone access system or by emailing Novell's investor relations department at irmail@novell.com. Shareholder Services Novell, Inc. 2211 North First Street San Jose, CA 95131 800 NOVL STK 408 967-8644 shareholder_services@novell.com Information on Novell's Annual Meeting, changes in stock registration, and other stock administration services is available through Novell's shareholder representatives. Investor Relations Novell, Inc. 2211 North First Street San Jose, CA 95131 800 317-3195 408 967-8080 irmail@novell.com Investor-related inquiries are answered by Novell's Investor Relations staff. Customer Information Novell, Inc. 122 East 1700 South Provo, UT 84606 888 321-4CRC (4272) crc@novell.com Information on Novell's products, programs, and services can be obtained from Novell's Customer Response Center by calling toll free 888 321-4CRC or by emailing crc@novell.com. Annual Meeting The Company's Annual Meeting will be held on Monday, April 12, 1999, at 2:00 p.m. local time at Novell, 2211 North First Street, San Jose, CA 95131. Form 10-K A copy of the Company's Form 10-K is available without charge. To obtain a copy, please write: Investor Relations Novell, Inc. 2211 North First Street San Jose, CA 95131 Independent Auditors Ernst & Young LLP, San Jose, CA Transfer Agent and Registrar ChaseMellon Shareholder Services, LLC Ridgefield Park, NJ Toll free 888 581-9375 www.chasemellon.com Copyright (C) 1999, Novell, Inc. All Rights Reserved. Novell, NetWare, GroupWise, ManageWise and Novell Directory Services are registered trademarks and BorderManager, Border-Manager FastCache, High Availability Server, NDS, and Z.E.N.works are trademarks of Novell, Inc., in the United States and other countries. *SAA is a registered trademark of International Business Machines Corporation. Solaris is a registered trademark of Sun Microsystems, Inc. UNIX is a registered trademark of X/Open Company, Ltd. Windows and Windows NT are registered trademarks of Microsoft Corporation. Designed and produced by Chikamura Design, San Francisco EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 NOVELL, INC. SUBSIDIARIES OF THE REGISTRANT As of October 31, 1998, the following companies were subsidiaries of Novell, Inc.:
STATE OF INCORPORATION OR WHOLLY OWNED COUNTRY IN WHICH ORGANIZED ------------ -------------------------- ABP Development Company..................................... Utah Fluent, Inc................................................. Delaware Novell Acquisition Corporation.............................. Delaware Novell de Argentina S.A..................................... Argentina Novell Belgium N.V.......................................... Belgium Novell do Brasil Software Ltda.............................. Brazil Novell Canada, Ltd.......................................... Canada Novell Chile S.A............................................ Chile Novell de Columbia S.A...................................... Columbia Novell Praha SRO............................................ Czech Republic Novell Denmark A/S.......................................... Denmark Novell Europe, Inc.......................................... Delaware Novell European Support Center GmbH......................... Germany Novell Finland OY........................................... Finland Novell GmbH................................................. Austria Novell GmbH................................................. Germany Novell Hong Kong............................................ Hong Kong Novell Hungary KFT.......................................... Hungary Novell International, Ltd................................... Barbados Novell Ireland Real Estate Ltd.............................. Ireland Novell Ireland Software Limited............................. Ireland Novell Israel............................................... Israel Novell Italia S.R.L......................................... Italy Novell Joint Venture Holding, Inc........................... Delaware Novell Korea Co., Ltd....................................... Korea Novell de Mexico, S.A.DE C.V................................ Mexico Novell Netherland B.V....................................... Netherlands Novell New Zealand Ltd...................................... New Zealand Novell Norge A/S............................................ Norway Novell Peru S.A............................................. Peru Novell Polska Sp.Z.o.o...................................... Poland Novell Portugal Informatica LDA............................. Portugal Novell Pty, Ltd............................................. Australia Novell S.A.R.L.............................................. France Novell Services Asia Pacific Pty Ltd........................ Australia Novell Singapore Pte Ltd.................................... Singapore Novell Software Development Pvt., Ltd....................... India Novell Software Latino America Norte, CA.................... Venezuela Novell South Africa Propietary Ltd.......................... South Africa Novell Spain S.A............................................ Spain Novell Svenska A.B.......................................... Sweden Novell Schweiz A.G.......................................... Switzerland
2
STATE OF INCORPORATION OR WHOLLY OWNED COUNTRY IN WHICH ORGANIZED ------------ -------------------------- Novell U.K., Ltd............................................ United Kingdom Novell Uruguay S.A.......................................... Uruguay Reference Software International............................ California Softcopy Europe............................................. Utah Softsolutions............................................... Utah WordPerfect Danmark......................................... Utah WordPerfect International................................... Utah WordPerfect Lantino America................................. Utah WordPerfect Pacific......................................... Utah WordPerfect Publishing Corporation.......................... Utah MAJORITY OWNED - ------------------------------------------------------------ Novell Japan, Ltd........................................... Japan Novonyx, Inc................................................ Delaware Onward Novell Software Pvt., Ltd............................ India
EX-23.1 4 CONSENT OF ERNST & YOUNG, LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Novell, Inc. of our report dated November 23, 1998, included in the 1998 Annual Report to Shareholders of Novell, Inc. Our audits also included the financial statement schedule of Novell, Inc., listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-14531, No. 33-29798, No. 33-36673, No. 33-54483, No. 33-64998, No. 33-65440, No. 33-66704, No. 33-67276, No. 33-68336, No. 333-04775, No. 333-04823, No. 333-62087, and No. 333-62103) pertaining to the Employee Stock Option and Stock Purchase Plans of Novell, Inc. of our report dated November 23, 1998, with respect to the consolidated financial statements of Novell, Inc. incorporated by reference in this Annual Report (Form 10-K) for the year ended October 31,1998. /s/ ERNST & YOUNG LLP San Jose, California January 29, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 YEAR OCT-31-1998 OCT-31-1998 177,083 830,084 294,498 (47,921) 3,562 1,435,700 695,557 (349,361) 1,924,112 414,695 0 0 0 33,759 1,459,739 1,924,112 1,083,887 1,083,887 238,649 238,649 746,792 0 0 141,634 39,658 101,976 0 0 0 101,976 .29 .29
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