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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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)
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<S> <C>
DELAWARE 87-00393339
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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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.
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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.
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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
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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.
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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
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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.
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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
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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
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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.
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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.
<TABLE>
<CAPTION>
HAS BEEN
OFFICER
NAME AGE SINCE POSITION OR OFFICE
---- --- -------- ------------------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
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
</TABLE>
(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
<PAGE> 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.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/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)
</TABLE>
15
<PAGE> 16
NOVELL, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE ALLOWANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
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
---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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)
</TABLE>
- ---------------
(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
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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).
<PAGE> 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.
<PAGE> 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
<PAGE> 8
SELECTED CONSOLIDATED
FINANCIAL DATA
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS, OCT. 31 OCT. 31 OCT. 26 OCT. 28 OCT. 29
EXCEPT PER SHARE DATA 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See the results of operations for discussion of data comparisons.
9
<PAGE> 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
<TABLE>
<CAPTION>
NET SALES 1998 Change 1997 Change 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales (millions) $1,084 8% $1,007 -27% $1,375
- ------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
GROSS PROFIT 1998 Change 1997 Change 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross profit (millions) $845 16% $730 -32% $1,068
Percentage of net sales 78% 72% 78%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 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.
<TABLE>
<CAPTION>
OPERATING EXPENSES 1998 CHANGE 1997 CHANGE 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
1998 Change 1997 Change 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Employees 4,557 -4% 4,770 -19% 5,870
Revenue per employee (thousands) $ 232 $ 189 $ 202
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
OTHER INCOME, NET 1998 Change 1997 Change 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Other income, net (millions) $43 -12% $49 -31% $71
Percentage of net sales 4% 5% 5%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
INCOME TAX EXPENSE (BENEFIT) 1998 Change 1997 Change 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income tax expense (benefit) (millions) $40 156% $(72) -233% $54
Percentage of net sales 4% -7% 4%
Effective tax (benefit) rate 28% (48%) 30%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 13
<TABLE>
<CAPTION>
NET INCOME (LOSS) AND
NET INCOME (LOSS) PER SHARE 1998 Change 1997 Change 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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
<TABLE>
<CAPTION>
1998 Change 1997 Change 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and short-term investments (millions) $1,007 -3% $1,033 1% $1,025
Percentage of total assets 52% 54% 50%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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
<PAGE> 16
CONSOLIDATED STATEMENTS OF
OPERATIONS
<TABLE>
<CAPTION>
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
OCT. 31 OCT. 31 OCT. 26
Fiscal year ended 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
17
<PAGE> 17
CONSOLIDATED
BALANCE SHEETS
<TABLE>
<CAPTION>
OCT. 31 OCT. 31
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 18
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON COMMON ADDITIONAL
STOCK STOCK PAID-IN RETAINED
AMOUNTS IN THOUSANDS SHARES AMOUNT CAPITAL EARNINGS OTHER TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 19
CONSOLIDATED STATEMENTS OF
CASH FLOWS
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
OCT. 31 OCT. 31 OCT. 26
Fiscal year ended 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 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:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION USEFUL LIVES
- ----------------------------------------------------------------------
<S> <C>
Buildings 30 years
Furniture and equipment 3-5 years
Leasehold improvements and other 3-7 years
Intangible assets 3-15 years
- ----------------------------------------------------------------------
</TABLE>
- - 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
<PAGE> 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
<PAGE> 22
B. CASH AND SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
Fair Market
Cost at Gross Gross Value at
Oct. 31 Unrealized Unrealized Oct. 31
(Dollars in thousands) 1998 Gains Losses 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fair Market
Cost at Gross Gross Value at
Oct. 31 Unrealized Unrealized Oct. 31
(Dollars in thousands) 1997 Gains Losses 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 23
C. PROPERTY, PLANT, AND EQUIPMENT
<TABLE>
<CAPTION>
Oct. 31 Oct. 31
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
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
- -----------------------------------------------------------------------
</TABLE>
D. INCOME TAXES
<TABLE>
<CAPTION>
Oct. 31 Oct. 31 Oct. 26
Fiscal year ended (Dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 24
<TABLE>
<CAPTION>
OCT. 31 OCT. 31
(Dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
Oct. 31 Oct. 31 Oct. 26
Fiscal year ended (In thousands, except per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
-------------------------------------------------------------------
Weighted- Weighted-
Number of Average Number of Average
Number of options in thousands Options Exercise Price Options Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 28
The following table summarizes information about stock options outstanding at
October 31, 1998.
<TABLE>
<CAPTION>
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
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 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
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
<TABLE>
<CAPTION>
Fiscal Fiscal
Number of shares and options in thousands 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE> 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
<TABLE>
<CAPTION>
Oct. 31 Oct. 31 Oct. 26
Fiscal year ended (Dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE> 30
<TABLE>
<CAPTION>
Oct. 31 Oct. 31 Oct. 26
Fiscal year ended (Dollars in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
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
<TABLE>
<CAPTION>
Oct. 31 Oct. 31 Oct. 26
Fiscal year ended (Dollars in thousands, except per share data) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 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
<PAGE> 32
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA--UNAUDITED
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS, First Second Third Fourth Fiscal
EXCEPT PER SHARE DATA Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 34
OFFICE
LOCATIONS
<TABLE>
<CAPTION>
UNITED STATES OFFICES INTERNATIONAL OFFICES
<S> <C> <C>
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
</TABLE>
35
<PAGE> 35
CORPORATE
DIRECTORY
<TABLE>
<S> <C> <C> <C>
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
</TABLE>
36
<PAGE> 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
[email protected]
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 [email protected].
Shareholder Services
Novell, Inc.
2211 North First Street
San Jose, CA 95131
800 NOVL STK
408 967-8644
[email protected]
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
[email protected]
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)
[email protected]
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 [email protected].
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
<PAGE> 1
EXHIBIT 21
NOVELL, INC.
SUBSIDIARIES OF THE REGISTRANT
As of October 31, 1998, the following companies were subsidiaries of
Novell, Inc.:
<TABLE>
<CAPTION>
STATE OF INCORPORATION OR
WHOLLY OWNED COUNTRY IN WHICH ORGANIZED
------------ --------------------------
<S> <C>
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
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
STATE OF INCORPORATION OR
WHOLLY OWNED COUNTRY IN WHICH ORGANIZED
------------ --------------------------
<S> <C>
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
</TABLE>
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 177,083
<SECURITIES> 830,084
<RECEIVABLES> 294,498
<ALLOWANCES> (47,921)
<INVENTORY> 3,562
<CURRENT-ASSETS> 1,435,700
<PP&E> 695,557
<DEPRECIATION> (349,361)
<TOTAL-ASSETS> 1,924,112
<CURRENT-LIABILITIES> 414,695
<BONDS> 0
0
0
<COMMON> 33,759
<OTHER-SE> 1,459,739
<TOTAL-LIABILITY-AND-EQUITY> 1,924,112
<SALES> 1,083,887
<TOTAL-REVENUES> 1,083,887
<CGS> 238,649
<TOTAL-COSTS> 238,649
<OTHER-EXPENSES> 746,792
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 141,634
<INCOME-TAX> 39,658
<INCOME-CONTINUING> 101,976
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 101,976
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
