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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
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)
<TABLE>
<S> <C>
DELAWARE 87-0393339
(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, 1999 (based on the last reported price of the
Common Stock on the NASDAQ National Market System on such date) was
$12,991,771,310.
As of December 31, 1999 there were 326,533,928 shares of the Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Shareholders for the fiscal year
ended October 31, 1999, 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 11, 2000,
are incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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PART I
In addition to historical information, this Annual Report on Form 10-K
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. As contained herein, the words "expects,"
"anticipates," "believes," "intends," "will," and similar types of expressions
identify forward-looking statements, which are based on information that is
currently available to the Company, speak only as of the date hereof, and are
subject to certain risks and uncertainties. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or to reflect any change in events,
conditions, or circumstances on which any such forward-looking statement is
based, in whole or in part. The Company's actual results may differ materially
from the results discussed in such forward-looking statements. Factors that may
cause such a difference include but are certainly not limited to, those
discussed in the sections below entitled "Competition" and "Additional Factors
Affecting Earnings and Stock Price." Readers should carefully review the risk
factors described in other documents the Company files from time to time with
the Securities and Exchange Commission, including the Quarterly Reports on Form
10-Q to be filed by the Company in 2000. All period references are to the
Company's fiscal years ended October 31, 1999, 1998, and 1997, unless otherwise
indicated.
ITEM 1. BUSINESS
THE COMPANY
Novell is a leading provider of network and Internet directory software and
services. Novell Internet solutions make networks more manageable and secure,
integrating the complete range of computer platforms, applications, services and
devices, and they reduce the total cost of ownership for organizations of every
kind and size. Novell's worldwide channel, developer, education, consulting and
technical support programs are among 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 38 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; Provo and Orem, Utah, and India. 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. With products like NetWare 5 and Novell Directory Services (NDS),
Novell continues to expand in Internet directory products based on open
standards. The Company's education and training, service and support, and
consulting areas continued to grow as the Company retained its position of being
the leading expert in providing these services.
In fiscal 1999, the Company continued its focus on delivering new products
consistent with its strategy and enjoyed the benefits of a lower cost and
restructured organization. The results were significant. The Company delivered a
number of new applications, utilizing directory technology, which robustly
captures the benefits of networking and the Internet. 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.
Indirect distribution channel product shipments, which includes revenue from
individually boxed products sold by computer resellers and systems integrators,
education materials, and support and consulting services not included in
site-license contracts, accounted for only approximately one-third of total
revenue in 1999.
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Fiscal 1999 also saw a continued growth in earnings, incrementally every
quarter. 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. These expense
controls were complemented by sequential revenue growth each quarter of fiscal
1999.
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 also provides NDS for NT that integrates with Microsoft's Windows NT, and
NDS for Solaris and others that integrate with various other operating systems.
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 ZENworks is an example. ZENworks allows
customers to manage desktops throughout their network from Novell's directory.
ZENworks 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
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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 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.
STRATEGIC RELATIONSHIPS
Development Partners. When customers request that Novell add a new service
or function to its products, Novell investigates the most effective way to
deliver that functionality to the user. In certain situations, Novell will
determine that the best way to add a new service or function to its products is
to form a strategic relationship with a company that has expertise in that area.
By forming strategic relationships, the combination of Novell's core expertise
in networks and the strategic 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 forms strategic relationships with companies who
have complementary software and hardware. The resulting solution is a powerful
combination of products that deliver enterprise-wide connectivity solutions.
These strategic 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 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.
In November 1999, Novell and Whittman-Hart, Inc., formed a strategic
alliance to accelerate the deployment of Novell Directory Services (NDS) in
enterprise and e-business solutions. The alliance will enable both companies to
satisfy the needs of mid-sized businesses for secure, manageable e-business
solutions that span the enterprise and the Internet. In connection with this
alliance, Novell invested $100 million in Whittman-Hart in exchange for shares
of Whittman-Hart's common stock. In addition, the
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companies agreed to jointly develop customized NDS solutions for mid-sized
businesses. Further, Whittman-Hart agreed to establish a "Solutions Development
Center" to train employees in regard to these solutions and demonstrate them to
customers, and Whittman-Hart will train over 600 consultants in NDS and other
Novell-related solutions, including qualification of these consultants as Novell
Certified Directory Engineers(SM).
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.
Directory-Enabled Server Operating Systems, or Net Services Software
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, and NetWare 4.
Directory-enabled Applications
Network Infrastructure -- 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.
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.
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, ZENworks, and
ConsoleOne.
Collaboration -- One of the best assets a company has is the collective
knowledge of its employees. Novell's products are designed to allow users to
share files, send e-mails, manage documents and publish documents to the
Internet so as to enable a company to leverage the collective knowledge of its
employees. Products include: GroupWise, GroupWise WebPublisher, NetWare NFS
Services, Replication Services, and Novell Distributed Print Services.
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 1999, 1998, and 1997, product development expenses were
approximately $228 million, $236 million and $301 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.
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SALES AND MARKETING
Novell markets its networking 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, 1999, there were approximately 10 U.S. distributors
and approximately 120 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 international master license
agreements with approximately 1,100 of them to date. Additionally, some upgrade
products are sold directly to end users. Customers can also purchase a few
limited products and services through Novell's commercial website, "Shop
Novell", or be directed to a Dealer, and or Reseller near their geographic
location.
International Sales. In fiscal 1999, 1998, and 1997, approximately 45%,
42%, and 44%, 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 2000, the Company anticipates that a
large 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 1999, 1998 and 1997, the Company had one multinational
distributor, which accounted for 11%, 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
1999, 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.
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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 issued over 580,000 certifications at its customer and
partner sites around the world. Novell education continues to pioneer the
certification process with new programs focused on Novell's Directory and on the
Internet, we now offer a Certified Directory Engineer (CDE) certification
program. Education has also established quality standards and recently gained
ISO 9001 certification.
Novell consulting is responsible for delivering advanced consultative
expertise to Novell's customers and partners throughout the world. Novell
Consulting, using proven methodologies, designs and delivers technology-based
business solutions focusing on intranet, and e-Business. Consulting also
delivers expertise in design, planning, and implementation of the traditional
Novell award-winning products.
MANUFACTURING SUPPLIERS
The Company's products, which consist primarily of software diskettes and
manuals, are duplicated by outside vendors. This allows the Company to minimize
the need for expensive capital equipment in an industry in which multiple
high-volume manufacturers are available.
BACKLOG
Lead times for the Company's products are typically short. Consequently,
the Company does not believe that backlog is a reliable indicator of future
sales or earnings. The Company's practice is to ship its products promptly upon
the receipt of purchase orders from its customers and, therefore, backlog is not
significant.
COMPETITION
Novell competes in the highly competitive market for computer software.
Novell believes that the principal competitive factors are technical innovation
to meet dynamic market needs, marketing strength, system/performance, customer
service and support, reliability, ease of use, and price/performance.
The market for computer software remains competitive due to such factors as
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 that 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
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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, 1999, the Company had 5,629 employees. The functional
distribution of its employees was: sales and marketing -- 1,755; product
development -- 1,676; general and administrative -- 819; service, support,
education, and operations -- 1,379. Of these, 1,757 employees are in locations
outside the U.S. All other Company personnel are based at the Company's
facilities in Utah, California, and various U.S. field offices. None of the
employees is represented by a labor union, and the Company considers its
employee relations to be excellent.
Competition for qualified personnel in the computer industry is intense. To
make a long-term relationship with the Company rewarding, Novell endeavors to
give its employees and in some cases its consultants, challenging work,
educational opportunities, competitive wages, sales commission plans, bonuses,
and opportunities to participate financially in the ownership and success of the
Company through stock option and stock purchase plans.
ADDITIONAL 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
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"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 significant adverse effect on the trading price of Novell's Common
Stock in any given period. The past pattern of new product introductions has
caused revenues to fluctuate, sometimes significantly, on a quarter-by-quarter
basis. Such revenue fluctuations may contribute to the volatility of the trading
price of Novell Common Stock in any given period.
In addition, the market prices for securities of software companies have
been historically volatile. The market price of Novell Common Stock, in
particular, has been subject to wide fluctuations in the past. As a result of
the foregoing factors and other factors that may arise in the future, the market
price of Novell's Common Stock may be subject to significant fluctuations within
a short period of time. These fluctuations may be due to factors specific to the
Company, to changes in analysts' earnings estimates, or to factors affecting the
computer industry or the securities markets in general.
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 currently utilizing internally 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 15 through 17 of the Company's
Annual Report to Shareholders for the fiscal year ended October 31, 1999.
9
<PAGE> 10
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 400,000 square-feet is leased to
various tenants. It also owns and occupies a 500,000 square-foot office complex,
with plans to expand the complex by up to 400,000 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 545,000 square-foot office
complex which is used as a product development center and administrative
offices, of which, approximately 219,000 square-feet is 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, Panama, Peru, Poland, Portugal, Puerto
Rico, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United
Kingdom, Uruguay, and Venezuela -- each of which leases its facilities.
The Company leases sales and support offices in Arizona, California (5),
Colorado, Connecticut, Florida (2), Georgia, Illinois, Massachusetts, Michigan,
Minnesota, Missouri (2), New York (2), Ohio (3), Oregon, Pennsylvania (2),
Tennessee, Texas (4), Utah, Washington, China, Malaysia, Russia, Taiwan,
Thailand, and United Arab Emirates. The Company also leases an office in
Berkeley Heights, New Jersey.
The terms of such leases vary from month to month to up to ten years. The
Company believes that its existing facilities are adequate to meet its current
requirements and it anticipates that suitable additional or substitute space
will be available, as necessary, pursuant to terms that are favorable to the
Company.
ITEM 3. LEGAL PROCEEDINGS
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 defend vigorously against the allegations. While there can be no
assurance as to the ultimate disposition of the lawsuit, 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 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.
10
<PAGE> 11
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........... 44 1997 Chairman of the Board and Chief Executive Officer
Ronald E. Heinz, Jr. ..... 41 1996 Senior Vice President, Worldwide Sales
Stewart G. Nelson......... 39 1997 Senior Vice President, Products & Marketing
Richard A. Nortz.......... 55 1997 Senior Vice President, Customer Services
Dennis R. Raney........... 57 1998 Senior Vice President, Chief Financial Officer
(Chief Accounting Officer)
</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.
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.
Stewart G. Nelson joined the Company in June 1994 through the WordPerfect
merger and has served in various product development positions. In October 1997,
he was elected a corporate officer, in June 1998 he became Senior Vice President
of Product Development, and in November 1999 he was named as Senior Vice
President, Marketing and Products. 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 from 1991 to 1995, and also spent time as acting
General Manager of Wang's European Operations.
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 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.
11
<PAGE> 12
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 36 of the Company's Annual Report
to Shareholders for the fiscal year ended October 31, 1999.
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 10 of the Company's Annual Report to
Shareholders for the fiscal year ended October 31, 1999.
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 11 through 18 of the Company's Annual Report to Shareholders for the
fiscal year ended October 31, 1999.
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
19 through 35 of the Company's Annual Report to Shareholders for the fiscal year
ended October 31, 1999, and to the information contained in the section
captioned "Selected Consolidated Quarterly Financial Data" on page 36 of the
Company's Annual Report to Shareholders for the fiscal year ended October 31,
1999.
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
(the "Proxy Statement") for the Annual Meeting of Shareholders to be held April
11, 2000, 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 the Registrant's executive officers is set forth above
following Item 4 in Part I hereof under the heading entitled "Executive
Officers."
Each director and executive officer of the Registrant 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
1999, there were compliance exceptions to this requirement, as more fully
described in the section captioned "Section 16(a) Beneficial Ownership Reporting
Compliance" of the Proxy Statement, and such information is hereby incorporated
by reference.
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 11, 2000, 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 11, 2000, 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 11, 2000, 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) 1. FINANCIAL STATEMENTS.
The following documents are filed as a part of this Annual Report on Form
10-K for Novell, Inc.:
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 19
through 35 of the Company's Annual Report to Shareholders for the fiscal
year ended October 31, 1999.
Consolidated Statements of Operations for the fiscal years ended October
31, 1999, October 31, 1998, and October 31, 1997.
Consolidated Balance Sheets at October 31, 1999 and October 31, 1998.
Consolidated Statements of Shareholders' Equity for the fiscal years
ended October 31, 1999, October 31, 1998, and October 31, 1997.
Consolidated Statements of Cash Flows for the fiscal years ended October
31, 1999, October 31, 1998, and October 31, 1997.
Notes to Consolidated Financial Statements.
Report of Ernst & Young LLP, Independent Auditors.
2. FINANCIAL STATEMENT SCHEDULES:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Schedule II -- Valuation and Qualifying Accounts............ 16
</TABLE>
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:
<TABLE>
<S> <C>
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
The following reports on Form 8-K were filed by the Registrant during
the quarter ended October 31, 1999.
Joint press release between Novell, Inc. and Whittman-Hart, Inc.
announcing Novell's investment of $100 million in Whittman-Hart, and the
formation of an alliance between the two companies to jointly develop
Novell Directory Services(R) (NDS(R)) solutions for mid-sized
businesses, dated as of September 30, 1999 as filed on October 14, 1999.
Preferred Shares Rights Agreement, dated as of December 7, 1988, as
amended and restated effective September 20, 1999, by and between
Novell, Inc. and ChaseMellon Shareholder Services, L.L.C., as filed on
December 12, 1999.
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 27, 2000 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 27, 2000
- -------------------------------------------------------- Executive Officer and
(Dr. Eric Schmidt) Director (Principal
Executive Officer)
/s/ DENNIS R. RANEY Senior Vice President, Chief January 27, 2000
- -------------------------------------------------------- Financial Officer (Principal
(Dennis R. Raney) Financial and Accounting
Officer)
/s/ JOHN A. YOUNG Vice Chairman of the Board January 27, 2000
- --------------------------------------------------------
(John A. Young)
/s/ ELAINE R. BOND Director January 27, 2000
- --------------------------------------------------------
(Elaine R. Bond)
/s/ HANS-WERNER HECTOR Director January 27, 2000
- --------------------------------------------------------
(Hans-Werner Hector)
/s/ REED E. HUNDT Director January 27, 2000
- --------------------------------------------------------
(Reed E. Hundt)
Director January 27, 2000
- --------------------------------------------------------
(William N. Joy)
/s/ JACK L. MESSMAN Director January 27, 2000
- --------------------------------------------------------
(Jack L. Messman)
/s/ RICHARD L. NOLAN Director January 27, 2000
- --------------------------------------------------------
(Richard A. Nolan)
Director January 27, 2000
- --------------------------------------------------------
(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 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
Fiscal year ended October 31,
1999............................. $47,921 $ 69,713 $3,581 $ 80,984 $3,913 $36,318
</TABLE>
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation, as amended and
restated April 23, 1997.(4)(Exhibit 3.1)
3.2 By-Laws, as amended and restated September 21,
1998.(3)(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 Preferred Shares Rights Agreement, dated as of December 7,
1988, as amended and restated effective September 20, 1999,
by and between the Registrant and ChaseMellon Shareholder
Services, L.L.C, filed on December 12, 1999. (15) (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 31, 1999.(16)
21 Subsidiaries of the Registrant.(16)
23.1 Consent of Ernst & Young LLP, independent auditors.(16)
27 Financial Data Schedule.(16)
</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
November 20, 1998 (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).
<PAGE> 18
(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) Incorporated by reference to the Exhibit identified in parentheses, filed
as an exhibit in the Registrant's Current Report on Form 8-A12G, dated
December 13, 1999 (File No. 0-13351).
(16) Filed herewith.
<PAGE> 1
EXHIBIT 13
NOVELL, INC. ANNUAL REPORT 1999
ALL ONE NET
CORPORATE PROFILE
Everywhere we look the Net matters. Around the world the Net transforms every
aspect of business. As the world's largest network software company, Novell
believes that the Net is the centerpiece of every computing endeavor. More
businesses, government agencies and educational institutions rely on Net
services software from Novell to manage and control their networks than all
other alternatives combined.
Today's digital economy revolution is about greater efficiencies, communicating
more effectively and doing e-business over what's fast becoming one Net. The
barriers between traditional business networks and the Internet are coming down.
Novell is helping customers achieve the promise of e-business with innovative
new products and partnerships with top technology companies.
"Within three years, business-to-business relationships that matter will be on
the web. Scalable Net services software from Novell will be a seamless,
interoperable part of these transactions, providing security, manageability, and
personal control."
- - Dr. Eric E. Schmidt
1
<PAGE> 2
LETTER TO OUR SHAREHOLDERS
"...next generation Net services software products will tame the explosive
demands of e-business and help Novell profit from the limitless opportunities of
a digital economy."
Fiscal 1999 was a year of accelerating growth in Novell's business led by
widespread acceptance of Novell(R) Directory Services(R) (NDS(R)) and a new
NetWare services platform with Internet protocol support. It was a year of
building market momentum around Net services software products, important
industry partnerships, and our initial steps to extend the value of Novell's
directory technology into the Internet. We took NDS to Solaris* to make it
available on the leading Internet servers, and also to Windows NT*, as well as
NetWare. We began to deliver the first network management services intended to
make Novell the leading supplier of Net services software to secure and manage
how business is done over the Internet.
In the context of our overall industry, the unbelievable growth of the Internet,
the opening-up of bandwidth for easy access, the availability of limitless
storage--will fundamentally change the way we use and rely on networks over the
next five years. For Novell, these forces create a tremendous opportunity to
build the next generation of Net services that ride on top of this global
network infrastructure. We anticipate a future where Novell software is a
seamless, interoperable part of Net transactions between users of networks in
business, government, education and in life across the Net.
Taken as a whole, this growth translates to a very large market for Net services
software as the barriers between traditional business networks and the Internet
come down to create one Net. Novell is already the market leader in management
software for traditional networks. With what we have accomplished over the last
two years, we have positioned the company to grow as the leading Net services
software provider in a one-Net digital economy.
2
<PAGE> 3
Promises Kept
In 1999 Novell accomplished what it set out to do. We met important business
objectives that management set for the company.
> We achieved our objective to move to a new growth phase in Novell's business
around our traditional business model, established customer base, and the
accelerated delivery of new products. The market embraced our moving NetWare,
the most scalable network services platform on the planet, to IP. More than a
dozen new Net services products were launched that expand the value of
directory-based solutions. New offerings included Novell Single Sign-On, NDS for
NT, NDS for Solaris, NetWare Cluster Services(TM), NetWare Enterprise Print
services; and the extraordinarily fast Novell Internet Caching System(TM)
software, the first Novell software for hardware OEMs to use to create appliance
products that deploy network services.
> We delivered the latest version of NDS that scales to Internet requirements of
billions of objects that represent people and resources such as data, files,
computers, even other directories, in NDS. Right after fiscal year-end we
launched NDS eDirectory(TM) to serve both .coms and traditional businesses that
need to recognize users from the Internet and securely manage their access to
information and services. CNN Interactive was one of the first adopters.
Competing on the Web is all about delivering a quality experience for web users.
Novell software enhances Web ease-of-use, performance and security.
3
<PAGE> 4
> We are committed to enhance the value of Net services from partners as well as
from Novell. America Online and AltaVista are both using NDS to carry instant
messaging services into corporate networks. Novell is working with Red Hat and
others to take NDS eDirectory to the Linux* operating system, to developers that
use Linux, and to the various categories of network service providers, from
traditional Internet Service Providers, to newer Application Service Providers.
Sun has embraced NDS on Solaris servers with the objective of reinforcing its
presence in Internet sites. And Lucent has new applications that use NDS to
implement policy-based management of Net resources--from switches to IP
addresses.
> A major priority was to expand consulting support for deployment of Net
services, directory solutions and new e-business solutions. We increased the
Novell Consulting services team from a staff of 128 at the start of the year to
over 300 at year-end. In September, Novell announced a $100 million investment
in Whittman-Hart, the leading middle-market IT consulting firm in the U.S. The
firm is training 600 of its consultants to design and help deploy
directory-based e-commerce solutions that address the needs of mid-sized
businesses. These steps are only the beginning. In 2000, we expect to expand our
partnerships with other leading consulting and systems integrator organizations
around the world.
> Finally, better alignment of our marketing organization with Novell's sales
and business objectives was required. By year-end we had consolidated Novell
product marketing and product management into a single organization aligned with
a new corporate marketing team. Experienced new leadership is in place and
charged to deliver a clear, compelling, consistent marketing message around the
value of Net services software and Novell's role in the digital economy.
4
<PAGE> 5
Growth in Novell's Business
Our strategy and business objectives for the long-term are balanced against a
disciplined approach to achieving operational objectives quarter-by-quarter. In
1999 this translated to improved financial performance. Total revenue increased
to $1.27 billion, up 17 percent from fiscal 1998, compared to 8 percent revenue
growth in fiscal 1998. Income from operations of $223 million was 18 percent of
revenue, up from 9 percent of revenue a year ago, and up each consecutive
quarter through the year. After-tax net income of $191 million reached 15
percent of revenue, up 87 percent from the year earlier.
Revenue growth by product category captures the basic premise of Novell's
business: customer deployments of Novell's market-leading directory platform,
and the move to Net services based on directory, drive demand for all categories
of Novell's software and services. Directory-enabled NetWare server software
grew 24 percent to $659 million.
Revenue from software for infrastructure, management and collaboration services
increased 39 percent to $315 million, fueled by growth from ZENworks(TM) for
Workstations, BorderManager(TM), GroupWise(R) and NDS for NT and Solaris.
Service, education, and consulting revenue grew 40 percent to $181 million with
growth across each component. When declining revenue from pre-directory products
is set aside, total directory-related revenue increased 30 percent to account
for 91 percent of total Novell revenue.
5
<PAGE> 6
A key financial objective for fiscal 1999 was to increase income from operations
to 20 percent of revenue by year-end. We achieved this goal with sharp focus on
operating expense discipline. Operating margins rose each consecutive quarter,
finishing at 22 percent of revenue in the fourth quarter.
In addition to the investment we made in Whittman-Hart, we made a half dozen
pre-IPO Internet investments in companies that complement Novell's Net services
strategy, or that are poised to benefit from the growth of networks, including:
Edgix, EnCommerce, Oblix and Red Hat. We also invested directly in Novell,
spending $403 million to purchase and retire 23 million shares of common stock
in fiscal 1999.
Next Generation Net Services Software
Novell is building these services to deploy within the remarkable arena that the
Internet has become. Our vision has been validated.
We've entered 2000 on a solid business footing. Globally, Novell is helping its
customers create digital enterprises. We believe we can build Novell's business
franchise around Net services software that is valued for securely managing how
business is done on the Net, how governments respond to their constituents on
the Net, how education is offered on the Net, and how individuals use the Net.
Our model is to provide flexible Net services software that enhances customer
networks and supports the mix of resources that are typical in their
organizations: from varied client workstations that typically run
6
<PAGE> 7
Microsoft operating systems, to IBM mainframes, to servers from Compaq, other
Intel OEMs, and Sun, to applications from PeopleSoft, Lotus and Oracle, to
switches and routers from Cisco, Lucent and Nortel. We contribute to, and
benefit from, the efforts of these and other important vendors whose products
come together on the Net and use NDS as a platform for better management, or to
deploy their own services. With directory software as the underpinning, Net
services enhance the manageability and value of applications and devices, and
personalize the experience of every user accessing the rich resources of the
Net.
The next generation of Net services software products will change the Internet
from a collection of destinations, to a way for individuals to get things done,
invoke services, exchange information, do business and be recognized as members
of communities. These products will tame the explosive demands of e-business and
help Novell profit from the limitless opportunities of a digital economy.
DR. ERIC E. SCHMIDT Chairman and Chief Executive Officer
December 22, 1999
RESULTS
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
- ----------- -----------
<S> <C>
$1.272 Billion in Revenue $1.084 Billion in Revenue
Q1 $ 286* Q1 $ 252*
Q2 $ 316* Q2 $ 262*
Q3 $ 327* Q3 $ 272*
Q4 $ 345* Q4 $ 298*
*In Millions *In Millions
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
- ----------- -----------
<S> <C>
$0.55 Earnings Per Share $0.29 Earnings Per Share
Q1 $ 0.08 Q1 $ 0.04
Q2 $ 0.11 Q2 $ 0.05
Q3 $ 0.14 Q3 $ 0.07
Q4 $ 0.21 Q4 $ 0.12
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1999
- -----------
<S> <C> <C>
Revenue by Product Segment
Directory-Enabled Server Platforms 52% +24% Year-Over-Year Percentage Change
Net Services Software 25% +39% Year-Over-Year Percentage Change
Service, Education & Consulting 14% +40% Year-Over-Year Percentage Change
Pre-Directory Products 9% -40% Year-Over-Year Percentage Change
</TABLE>
7
<PAGE> 8
CUSTOMER QUOTES
SCALABLE
COMPAQ COMPUTER CORPORATION
Rick Becker, Director, Software Marketing
"eDirectory is another proof point underscoring Novell's commitment to bring
Internet solutions to customers on their choice of operating systems. Compaq's
ProLiant servers combined with Novell's NDS eDirectory bring a proven, scalable
and highly available solution to customers seeking to capitalize on e-business
opportunities."
SCALABLE
ALTAVISTA
Rod Schrock, President & CEO
"We were looking for a scalable directory solution to provide authentication
services for AltaVista's messaging service. NDS eDirectory met our needs with
flying colors."
SECURE
AMERICA ONLINE, INC.
David Gang, Senior Vice President, Strategic Development
"AOL is pleased to be working with Novell on scalable and secure instant
messaging integrated with Novell Directory Services. Together, the NDS Directory
and AOL Instant Messenger will offer enterprise users the benefits of highly
personalized, real-time communications in a cross-platform environment."
CHOICE
SUN MICROSYSTEMS, INC.
Mark Canepa, Vice President & General Manager of Workgroup Servers
"Running NDS eDirectory on the Sun platform gives Novell customers choice.
Novell customers no longer have to rely on servers based on PC technology. They
can now run their NDS directory and directory-enabled applications on Sun
Enterprise Servers, the industry's most scalable server platform."
POWER
RED HAT, INC.
Paul McNamara, General Manager, Enterprise Business Unit
"Today's enterprises demand powerful directory services to manage an
ever-changing, Internet-enabled user community. We're committed to working with
Novell to bring the power of NDS eDirectory to the Linux-based OS and its
growing ecosystem of ISPs and developers."
MANAGE
PEOPLESOFT
Peter Gassner, Vice President & General Manager, PeopleTools Technology
"NDS eDirectory provides the user management, security facilities and
scalability needed to centrally manage the vast user populations of PeopleSoft
e-business applications. As an LDAP directory, it will enable our customers to
manage their business-to-business and business-to-consumer transactions from
native facilities within PeopleSoft's Applications for e-Business."
INTEGRATED
LUCENT TECHNOLOGIES
Karyn Mashima, Vice President of Strategy & Chief Technical Officer, Enterprise
Networks "Lucent is deeply involved in using directories as an integral part of
our advanced network services and policy-based networking solutions. Directory
technology is well-suited to supporting systems as varied as integrated
messaging and authentication, to policy-driven QoS managers. We welcome and use
Novell's open, platform-independent versions of NDS as flexible and scalable
systems for managing directory services in our systems."
OPEN
OBLIX, INC.
Gordon Eubanks, President & CEO
"Oblix's support of Novell's NDS eDirectory will enable Global 1000
organizations to develop highly valuable and secure e-business solutions.
Building trusted relationships with customers, employees, partners and all users
in an e-business environment is essential for a long-term competitive advantage.
With Novell, we can deliver the most open and scalable solutions for these
customers."
8
<PAGE> 9
<TABLE>
<CAPTION>
FINANCIAL CONTENTS
<S> <C>
10 Selected Consolidated Financial Data
11 Management's Discussion and Analysis of Financial Condition and
Results of Operations
19 Consolidated Statements of Operations
20 Consolidated Balance Sheets
21 Consolidated Statements of Shareholders' Equity
22 Consolidated Statements of Cash Flows
23 Notes to Consolidated Financial Statements
35 Report of Ernst & Young LLP, Independent Auditors
36 Selected Consolidated Quarterly Financial Data--Unaudited
37 Directors and Executives
38 Office Locations
39 Corporate Directory
40 Contact Novell
</TABLE>
9
<PAGE> 10
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Dollars in thousands, Oct. 31 Oct. 31 Oct. 31 Oct. 26 Oct. 28
except per share data 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Statement of operations
Net sales $1,272,820 $1,083,887 $ 1,007,311 $1,374,856 $2,041,174
Gross profit 986,799 835,270 718,694 1,058,027 1,540,695
Income (loss) from operations 223,052 98,446 (200,004) 108,944 452,109
Income (loss) before taxes 243,836 141,634 (150,570) 179,988 508,729
Income tax expense (benefit) 53,089 39,658 (72,274) 53,997 170,424
Net income (loss) 190,747 101,976 (78,296) 125,991 338,305
Net income (loss) per share
Basic $ .57 $ .29 $ (.22) $ .35 $ .92
Diluted $ .55 $ .29 $ (.22) $ .35 $ .90
Balance sheet
Cash and short-term investments $ 895,404 $1,007,167 $ 1,033,473 $1,024,755 $1,321,231
Working capital 895,984 1,021,005 1,148,426 1,225,987 1,464,237
Total assets 1,942,319 1,924,112 1,910,649 2,049,466 2,416,830
Shareholders' equity 1,492,241 1,493,498 1,565,417 1,615,509 1,938,262
</TABLE>
See the results of operations for discussion of data comparisons.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this Annual Report contain forward-looking
statements that involve risks and uncertainties. All forward-looking statements
are based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements. The
Company's actual results may differ materially from the results discussed in
such forward-looking statements as a result of a number of factors, which
include, but are certainly not limited to, those set forth below in the sections
entitled "Future Results," "Year 2000," "Euro Conversion," "Financial Market
Risks," and those factors set forth in the Company's Annual Report on Form 10-K
in the sections entitled "Competition" and "Additional Factors Affecting
Earnings and Stock Price."
Introduction
Novell is a leading provider of network and Internet directory software and
services. Novell Internet solutions make networks more manageable and secure,
integrating the complete range of computer platforms, applications, services and
devices, and they reduce the total cost of ownership for organizations of every
kind and size. Novell's worldwide channel, developer, education, consulting and
technical support programs are among 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. With products like NetWare 5 and Novell Directory Services (NDS),
Novell continues to expand in Internet directory products based on open
standards. The Company's education and training, service and support, and
consulting areas continued to grow as the Company retained its position of being
the leading expert in providing these services.
In fiscal 1999, the Company continued its focus on delivering new products
consistent with its strategy and enjoyed the benefits of a lower cost and
restructured organization. The results were significant. The Company delivered a
number of new applications, utilizing directory technology, which robustly
captures the benefits of networking and the Internet. 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.
Indirect distribution channel product shipments, which includes revenue from
individually boxed products sold by computer resellers and systems integrators,
education materials, and support and consulting services not included in
site-license contracts, accounted for approximately only one-third of total
revenue in 1999.
Fiscal 1999 also saw continued growth in earnings, incrementally each quarter.
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. These expense controls
were complemented by sequential revenue growth each quarter of fiscal 1999.
Results of operations
Net sales
<TABLE>
<CAPTION>
1999 Change 1998 Change 1997
<S> <C> <C> <C> <C> <C>
Net sales (millions) $1,273 17% $1,084 8% $1,007
</TABLE>
11
<PAGE> 12
Novell's products can be categorized into the following four areas, all within
the directory-enabled networking software services segment.
- - Directory-enabled server platforms, which includes NetWare 4 and NetWare 5
- - Directory-enabled applications products, or Net Services Software, which
include NetWare for SAA host connectivity products, BorderManager, NDS
integration and high availability service products, as well as collaboration
and management products including GroupWise, ManageWise, and ZENworks
- - Service, education and consulting revenue, which is generated from customer
service, educational products and courses, and consulting for network
solutions
- - Pre-directory product revenue consisting of NetWare 3, non-directory-enabled
infrastructure products and UNIX royalties
The following analysis describes the product lines consistent with the Company's
current ongoing business. Prior year amounts have been restated to conform to
current year classification of product types. Also, the Company's decision to
not ship to the indirect distribution channel in the third quarter of fiscal
1997 makes year-over-year comparisons to fiscal 1997 results difficult.
Directory-enabled server platforms revenue was $659 million in fiscal 1999
compared to $534 million in fiscal 1998 and $475 million in fiscal 1997. The
increase from fiscal 1998 to fiscal 1999 was primarily the result of increased
sales of NetWare 5, which more than offset the decline in sales of NetWare 4.
The increase between fiscal 1997 and 1998 was the result of directory-enabled
NetWare sales growth and the introduction of NetWare 5 in the fourth quarter of
fiscal 1998. The directory-enabled server platforms product line represented 52%
of total revenue in fiscal 1999 compared to 49% of total revenue in fiscal 1998
and 47% of total revenue in fiscal 1997.
Revenue from directory-enabled applications products was $315 million in fiscal
1999 compared to $227 million in fiscal 1998 and $160 million in fiscal 1997.
The increase in fiscal 1999 revenue compared to fiscal 1998 was primarily the
result of strong sales growth in management and collaboration products, NDS for
NT, and BorderManager. The increase between fiscal 1997 and 1998 was the result
of revenue from newly introduced products such as BorderManager and ZENworks and
growth in sales of GroupWise. Directory-enabled applications revenues
represented 25% of total revenue in fiscal 1999 compared to 21% of total revenue
in fiscal 1998 and 16% of total revenue in fiscal 1997.
Service, education and consulting revenue was $181 million in fiscal 1999
compared to $129 million in fiscal 1998 and $102 million in fiscal 1997. The
increase in fiscal 1999 revenue from fiscal 1998 was primarily the result of
growth in each of the related areas as the Company continued to focus on
expanding the service, education and consulting business. The increase from
fiscal 1997 to 1998 was due to the growth of service and education revenue.
Service, education and consulting revenues were 14% of total revenue compared to
12% of total revenue in fiscal 1998 and 10% of total revenue in fiscal 1997.
Revenue from pre-directory products was $118 million in fiscal 1999 compared to
$194 million in 1998 and $270 million in fiscal 1997. The decrease in fiscal
1999 revenue compared to fiscal 1998 was primarily due to the one-time benefit
of $36 million in Tuxedo royalty income in fiscal 1998 and the expected decline
in sales of older, pre-directory products. The decrease in fiscal 1998 revenue
compared to fiscal 1997 was primarily the result of declines in UNIX royalties
and declining sales of non-directory enabled products including NetWare 3.
Sales outside the U.S., comprised of sales to international customers in Europe,
the Middle East, Canada, South America, and Asia Pacific, represented 45% of
total revenue in fiscal 1999 compared to 42% of total revenue in fiscal 1998 and
44% of total revenue in fiscal 1997. Sales outside the U.S. increased as a
12
<PAGE> 13
percentage of total revenue in 1999 due to strong sales in Europe. International
sales as a percentage of revenue decreased in 1998 compared to 1997 due to weak
sales in the Company's Japanese subsidiary.
Gross profit
<TABLE>
<CAPTION>
1999 Change 1998 Change 1997
<S> <C> <C> <C> <C> <C>
Gross profit (millions) $987 18% $835 16% $719
Percentage of net sales 78% 77% 71%
</TABLE>
The increase in gross profit percentage in fiscal 1999 compared to 1998 and 1997
was primarily attributable to lower inventory management costs as the Company
continued to tighten its management of product flowing into its indirect
distribution channel. In addition, overhead as a percentage of revenue was lower
in fiscal 1999 compared to 1998 and 1997. Material costs in 1999 and 1998 were
also 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 delivery channel decreased
significantly each successive fiscal year to approximately 39% of revenue in
fiscal 1999, compared to 57% in 1997.
Operating expenses
<TABLE>
<CAPTION>
1999 Change 1998 Change 1997
<S> <C> <C> <C> <C> <C>
Sales and marketing (millions) $434 9% $399 -13% $460
Percentage of net sales 34% 37% 46%
Product development (millions) $228 -3% $236 -22% $301
Percentage of net sales 18% 22% 30%
General and administrative (millions) $102 -1% $103 -- $103
Percentage of net sales 8% 9% 10%
Restructuring charges (millions) -- -- -- -100% $ 55
Percentage of net sales -- -- 5%
Total operating expenses (millions) $764 4% $737 -20% $919
Percentage of net sales 60% 68% 91%
</TABLE>
Operating expenses increased slightly in absolute dollars in fiscal 1999
compared to fiscal 1998 due to additional spending in the sales and marketing
areas for new product introductions and sales force expansion. Operating
expenses in fiscal 1998 declined from fiscal 1997 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 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 1999 compared to
fiscal 1998 and fiscal 1997 due to a larger increase in revenue,
proportionately, in each respective year, and the Company's continued efforts to
bring these expenses in line with industry leading benchmarks.
Sales and marketing expenses increased by 9% in fiscal 1999 compared to fiscal
1998 primarily due to increased sales commissions on higher revenues, sales
force expansion, and increased corporate marketing expenses related to the
launch of new products. Sales and marketing expenses decreased by 13% from
fiscal 1997 to 1998 primarily due to corrective actions the Company took in
fiscal 1997, including decreased sales promotion and advertising expenses
resulting from the Company integrating 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 by 3% in fiscal 1999 compared to fiscal
1998 due to continued focus on operational control. Product development expenses
decreased by 22% from fiscal 1997 to 1998 primarily due to workforce reductions
in the latter half of fiscal 1997 and operational control efforts in fiscal
1998.
13
<PAGE> 14
General and administrative expenses remained relatively flat in total, but
decreased as a percentage of sales, in fiscal 1999 compared to fiscal 1998 and
fiscal 1997 reflecting the Company's continued efforts to manage these costs and
continue the benefits from the workforce reductions in 1997 and the
consolidation of certain functions in 1998.
During the third quarter of 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, accruals of $5 million remain
as of October 31, 1999, primarily related to redundant facility charges.
<TABLE>
<CAPTION>
1999 Change 1998 Change 1997
<S> <C> <C> <C> <C> <C>
Employees 5,430 19% 4,557 -4% 4,770
Revenue per average employee (thousands) $254 $232 $189
</TABLE>
In fiscal 1999, headcount increased reflecting the growth in the Company's
sales, with the largest increases coming from worldwide sales, product
development and network and directory consulting areas. The Company will
continue to monitor headcount to ensure the Company is in line with industry
leading benchmarks.
In fiscal 1998, headcount decreased as the Company continued to align employment
within the framework of the competitive environment in which the Company
operates. 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. Other income, net
<TABLE>
<CAPTION>
1999 Change 1998 Change 1997
<S> <C> <C> <C> <C> <C>
Other income, net (millions) $21 -52% $43 -12% $49
Percentage of net sales 2% 4% 5%
</TABLE>
The primary component of other income, net, is net investment income, which was
$41 million, $45 million, and $61 million in fiscal 1999, 1998, and 1997,
respectively. The decrease in other income, net, in fiscal 1999 compared to
fiscal 1998 was primarily due to the write-off of certain long-term investments,
net realized losses on the disposal of certain equity securities, partially
offset by the negative minority interest impact of profit improvements in the
Company's Japanese subsidiary. Lower average cash balances due to the repurchase
of common stock during the year kept investment income flat to fiscal 1998. The
decrease in fiscal 1998 compared to fiscal 1997 was the result of net realized
losses as the Company disposed of certain equity securities.
Income tax expense (benefit)
<TABLE>
<CAPTION>
1999 Change 1998 Change 1997
<S> <C> <C> <C> <C> <C>
Income tax expense (benefit) (millions) $53 34% $40 156% $(72)
Percentage of net sales 4% 4% -7%
Effective tax (benefit) rate 22% 28% (48%)
</TABLE>
During October 1999, the Company reached a settlement with the Internal Revenue
Service (IRS) for years 1994 through 1997. This settlement resulted in a $15.2
million reduction in the provision for income taxes during the fourth quarter of
1999. The reduction is a result of the favorable settlement of items related to
corporate acquisitions, research and development tax credits, and various
foreign items including foreign sales corporation benefits, foreign tax credits,
and other immaterial items.
At October 31, 1999, the Company had deferred tax assets of $110 million. A
portion of these assets is realizable based on the Company's ability to offset
existing deferred tax liabilities. Realization of the remaining portion of these
assets is dependent on the Company's ability to generate approximately $154
million of taxable income. Of this, approximately $42 million must be earned in
certain jurisdictions outside the United
14
<PAGE> 15
States. Management believes that sufficient income will be earned in the future
to realize these assets. Management will evaluate the realizability of the
deferred tax assets quarterly and assess the need for valuation allowances.
The effective tax rate for fiscal 1999 was lower than the effective tax rate for
fiscal 1998 due to the settlement the Company reached with the Internal Revenue
Service. 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. The effective tax rate of
22% for fiscal 1999 is not indicative of the expected effective tax rate in
future fiscal years.
Net income (loss) and
Net income (loss) per share
<TABLE>
<CAPTION>
1999 Change 1998 Change 1997
<S> <C> <C> <C> <C> <C>
Net income (loss) (millions) $191 87% $102 231% $(78)
Percentage of net sales 15% 9% -8%
Net income (loss) per share
Basic $.57 97% $.29 232% $(.22)
Diluted $.55 90% $.29 232% $(.22)
</TABLE>
Net income per share increased in fiscal 1999 compared to fiscal 1998 and fiscal
1997 due to the increased revenue and profitability discussed above, along with
the decrease in the number shares outstanding due to the Company's stock
repurchase program.
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,
directory and applications; acceptance of new products and price pressures;
availability of third-party compatible products at below market 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.
Year 2000
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 were required to be upgraded or replaced to correctly process
dates beginning in the Year 2000.
The Company created a company-wide Year 2000 team which identified and resolved
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
communicated with its main suppliers of technology products and services
regarding the Year 2000 status of such products and services. The Company
identified and tested its main internal systems and completed the implementation
of needed Year 2000 related modifications to its information systems. The
Company also completed testing and implementation of needed Year 2000 related
modifications on its main internal non-information technology systems, which are
also date-sensitive.
15
<PAGE> 16
The Company has a general contingency plan to address extreme events such as
earthquake, flood, or serious equipment failures. The Company's Year 2000
contingency planning is an extension of this effort. Based on the Company's
planning efforts, the worst-case Y2K-related scenarios that were identified
include:
- - temporary loss of power--to address this risk Novell has its own power
generation capability in critical locations;
- - temporary loss of voice and/or data communications or other utility
services--to help minimize this risk Novell uses multiple telecommunications
providers;
- - temporary inability to access key information systems due to a Y2K related
failure--to address this risk Novell has identified manual procedures to at
least partly facilitate needed processes until systems are restored;
- - temporary inability to ship products due to a Y2K issue with the systems of a
key business partner--to minimize this risk Novell uses multiple partners.
The Company's Year 2000 effort 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 updates or has removed the product from
its price list. 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 total cost relating to these activities was not material to the
Company's financial position, results of operations, or cash flows. The
modifications were made on a timely basis. The Company did not experience a
delay in, or increased costs associated with, the implementation of such
modifications, nor did the Company experience problems due to suppliers
inadequately preparing for the Year 2000 issue. The Company also did not
experience an inability to deliver products or services to its customers.
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 these third-party products are
directed to the product manufacturers for detailed Year 2000 status information.
The Company believes that its current products, with any applicable updates, are
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 that 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.
Euro Conversion
On January 1, 1999, 11 of the 15 members of the European Union established fixed
conversion rates among their existing sovereign currencies and adopted the euro
as their common legal currency. At the end of a three-year transition period
during which companies may choose to operate either in the euro or national
currencies the legacy currencies will be eliminated. In June 1998, the Company
formed a cross-functional team to assess the impact of the conversion on the
Company's operations and to address associated issues.
16
<PAGE> 17
The Company is currently conducting transactions in the euro and expects to have
all affected information systems fully converted by April 2001. Novell does not
expect the euro conversion to have a material effect on its competitive position
or financial results.
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 1999 report on Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
Oct. 31 Oct. 31 Oct. 31
1999 Change 1998 Change 1997
<S> <C> <C> <C> <C> <C>
Cash and short-term investments (millions) $895 -11% $1,007 -3% $1,033
Percentage of total assets 46% 52% 54%
</TABLE>
Cash and short-term investments decreased to $895 million at October 31, 1999
from $1,007 million at October 31, 1998. This decrease can be attributed to $69
million of cash used for expenditures on property, plant and equipment, $403
million used to repurchase common stock, and $92 million cash used to increase
the cash reserved as collateral for building leases. These expenditures were
partially offset by $329 million provided by operating activities and $95
million provided by issuances of common stock, and $28 million provided by other
investing activities including short-term investing activities.
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 transfers
funds out of mutual funds and into money market funds when preset signals occur.
The Company's investment portfolio includes securities with net unrealized gains
of $61 million, before effects of deferred taxes, as of October 31, 1999. The
majority of the Company's unrealized gains are due to the Company's investment
in Red Hat, Inc., which completed its initial public offering of common stock in
August 1999. Prior to the public offering, this investment was classified as a
long-term investment.
The Company's principal source of liquidity continues to be from operations. At
October 31, 1999, the Company's principal unused sources of liquidity consisted
of cash and short-term investments and available borrowing capacity of
approximately $18 million under its credit facilities. The Company's liquidity
needs are principally for financing of accounts receivable, capital assets,
strategic investments, product development, and flexibility in a dynamic and
competitive operating environment.
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 2000 are anticipated to
be approximately $75 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
following twelve months. During fiscal 1998 and fiscal 1999, 21 million and 14
million shares, respectively, were repurchased and retired under this plan at a
total cost of approximately $245 million and $204 million, respectively. In July
1999, the Board of Directors authorized up to $500 million for the repurchase of
additional outstanding shares of the Company's
17
<PAGE> 18
common stock through October 31, 2000. During the fourth quarter of 1999, the
Company repurchased approximately 9 million shares under this plan at a cost of
$199 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, 1999.
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 $5 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 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. If the Company did not hedge
against foreign currency exchange rate movement, an adverse change of 10% in
exchange rates would result in a decline in income before taxes of approximately
$10 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 approximate $7 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 position at October 31, 1999. Actual
results may differ materially.
18
<PAGE> 19
CONSOLIDATED STATEMENTS OF OPERATIONS
Amounts in thousands, except per share data
<TABLE>
<CAPTION>
Oct. 31 Oct. 31 Oct. 31
Fiscal year ended 1999 1998 1997
<S> <C> <C> <C>
Net sales $1,272,820 $1,083,887 $1,007,311
Cost of sales 286,021 248,617 288,617
Gross profit 986,799 835,270 718,694
Operating expenses
Sales and marketing 434,339 398,532 460,027
Product development 227,636 235,744 300,599
General and administrative 101,772 102,548 102,737
Restructuring charges -- -- 55,335
Total operating expenses 763,747 736,824 918,698
Income (loss) from operations 223,052 98,446 (200,004)
Other income (expense)
Investment income 41,472 44,727 61,315
Other, net (20,688) (1,539) (11,881)
Other income, net 20,784 43,188 49,434
Income (loss) before taxes 243,836 141,634 (150,570)
Income tax expense (benefit) 53,089 39,658 (72,274)
Net income (loss) $190,747 $101,976 $(78,296)
Weighted average shares outstanding
Basic 334,460 350,525 348,149
Diluted 349,393 356,437 348,149
Net income (loss) per share
Basic $.57 $.29 $(.22)
Diluted $.55 $.29 $(.22)
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 20
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Amounts in thousands, except share and Oct. 31 Oct. 31
per share data 1999 1998
<S> <C> <C>
Assets
Current assets
Cash and short-term investments $ 895,404 $1,007,167
Receivables, less allowances
($36,318--1999, $47,921--1998) 305,195 246,577
Inventories 3,753 3,562
Prepaid expenses 47,738 63,165
Deferred and refundable income taxes 60,266 95,343
Other current assets 23,260 19,886
Total current assets 1,335,616 1,435,700
Property, plant, and equipment, net 347,012 346,196
Long-term investments 229,114 114,815
Other assets 30,577 27,401
Total assets $1,942,319 $1,924,112
Liabilities and
shareholders' equity
Current liabilities
Accounts payable $ 85,037 $ 77,987
Accrued compensation 62,778 52,348
Accrued marketing liabilities 11,449 16,383
Other accrued liabilities 50,133 62,206
Income taxes payable 57,085 64,057
Deferred revenue 173,150 141,714
Total current liabilities 439,632 414,695
Minority interests 10,446 15,919
Shareholders' equity
Common stock, par value $.10 per share
Authorized -- 600,000,000 shares
Issued -- 326,593,911 shares, 1999
337,592,460 shares, 1998 32,659 33,759
Additional paid-in capital -- 200,897
Other (8,231) (5,396)
Retained earnings 1,432,624 1,290,337
Accumulated other comprehensive income (loss) 35,189 (26,099)
Total shareholders' equity 1,492,241 1,493,498
Total liabilities and shareholders' equity $ 1,942,319 $ 1,924,112
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 21
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Common Additional Other
Stock Stock Paid-In Retained Comprehensive
Amounts in thousands Shares Amount Capital Earnings Income (Loss) Other Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--Oct. 26, 1996 346,059 $ 34,606 $ 309,831 $ 1,266,657 $ 8,556 $(4,141) $ 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)
Amortization of unearned
stock compensation -- -- -- -- -- 5,460 5,460
Sale of put warrants -- -- 2,300 -- -- -- 2,300
Settlement of put warrants -- -- 31,390 -- -- -- 31,390
Unrealized loss on investments -- -- -- -- (36,138) -- (36,138)
Cumulative translation adjustment -- -- -- -- (1,849) -- (1,849)
Net (loss) -- -- -- (78,296) -- -- (78,296)
Comprehensive (loss) -- -- -- -- -- -- (116,283)
Balance--Oct. 31, 1997 350,938 $ 35,094 $ 378,582 $ 1,188,361 $(29,431) $(7,189) $ 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)
Amortization of unearned
stock compensation -- -- -- -- -- 2,825 2,825
Unrealized gain on investments -- -- -- -- 4,419 -- 4,419
Cumulative translation adjustment -- -- -- -- (1,087) -- (1,087)
Net income -- -- -- 101,976 -- -- 101,976
Comprehensive income -- -- -- -- -- -- 105,308
Balance--Oct. 31, 1998 337,593 $ 33,759 $ 200,897 $ 1,290,337 $(26,099) $(5,396) $ 1,493,498
Stock issued from stock plans 11,946 1,194 102,690 -- -- (6,251) 97,633
Stock plans' income tax benefits -- -- 50,659 -- -- -- 50,659
Shares cancelled (94) (9) (2,409) -- -- -- (2,418)
Shares repurchased and retired (22,851) (2,285) (351,837) (48,460) -- -- (402,582)
Amortization of unearned
stock compensation -- -- -- -- -- 3,416 3,416
Unrealized gain on investments -- -- -- -- 62,108 -- 62,108
Cumulative translation adjustment -- -- -- -- (820) -- (820)
Net income -- -- -- 190,747 -- -- 190,747
Comprehensive income -- -- -- -- -- -- 252,035
Balance--Oct. 31, 1999 326,594 $ 32,659 $-- $ 1,432,624 $ 35,189 $(8,231) $ 1,492,241
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in thousands
<TABLE>
<CAPTION>
Oct. 31 Oct. 31 Oct. 31
Fiscal year ended 1999 1998 1997
<S> <C> <C> <C>
Cash flows from
operating activities
Net income (loss) $ 190,747 $ 101,976 $ (78,296)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Depreciation and amortization 70,156 76,170 91,075
Stock plans' income tax benefits 50,657 10,261 3,927
(Increase) decrease in receivables (58,618) (29,164) 221,190
(Increase) decrease in inventories (191) 7,094 6,181
Decrease (increase) in prepaids 15,427 (5,480) (9,404)
Decrease (increase) in deferred and
refundable income taxes 38,979 43,662 (93,082)
(Increase) decrease in other current assets (3,374) (2,941) (3,221)
Increase (decrease) in current liabilities, net 24,937 92,739 (42,816)
Net cash provided by operating activities 328,720 294,317 95,554
Cash flows from
financing activities
Issuance of common stock, net 95,215 54,650 23,114
Repurchases of common stock (402,582) (244,964) --
Sale of put warrants -- -- 2,300
Settlement of put warrants -- -- (20,760)
Net cash (used) provided by financing activities (307,367) (190,314) 4,654
Cash flows from
investing activities
Expenditures for property, plant, and equipment (69,181) (57,375) (64,796)
Purchases of short-term investments (1,743,695) (2,048,391) (2,148,664)
Maturities of short-term investments 1,346,432 1,490,661 1,502,451
Sales of short-term investments 689,910 535,405 664,379
Increase in restricted cash (91,668) (83,107) (11,371)
Other (34,375) 5,754 20,815
Net cash (used) provided by investing activities 97,423 (157,053) (37,186)
Total increase (decrease) in cash and
cash equivalents 118,776 (53,050) 63,022
Cash and cash equivalents--beginning of period 155,493 208,543 145,521
Cash and cash equivalents--end of period 274,269 155,493 208,543
Short-term investments--end of period 621,135 851,674 824,930
Cash and short-term investments--end of period $ 895,404 $ 1,007,167 $ 1,033,473
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 23
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 7 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 amounts owed by geographically dispersed end
users, distributors, resellers, and OEM customers. No collateral is required.
Reserves are provided for sales returns, product exchanges and bad debts.
- - Plant and equipment are carried at cost less accumulated depreciation and
amortization.
- - Provision for depreciation and amortization is computed on the straight-line
method over the estimated useful lives of the assets, or lease term if
shorter, and are as follows:
Asset classification
<TABLE>
<CAPTION>
Useful Lives
<S> <C>
Buildings 30 years
Furniture and equipment 3-5 years
Leasehold improvements and other 3-20 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 (loss) in the period incurred and were not
material for fiscal years 1999, 1998, and 1997.
23
<PAGE> 24
- - 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 accumulated comprehensive income
(loss).
- - In fiscal 1999, the Company adopted Statement of Position 97-2 (SOP 97-2),
"Software Revenue Recognition," which 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. The implementation of SOP 97-2 did not have a material impact on
the recognized revenue of the Company.
Revenue on product sales is recognized upon shipment or transfer of title to
the customer. 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
$29 million, $28 million, and $42 million in fiscal 1999, 1998, and 1997,
respectively.
- - Net income (loss) per share is calculated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," (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.
The Financial Accounting Standards Board issued the American Institute of
Certified Public Accountants Statement of Position 98-9 (SOP 98-9),
"Modification of SOP 97-2, Software Revenue Recognition." SOP 98-9 amends SOP
97-2 to require recognition of revenue in accordance with the "residual" method
in limited circumstances. The provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
Company does not believe that implementation of this SOP will have a material
impact on the financial position of the Company.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," (SFAS 133). SFAS 133 established accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS 133
requires all companies to recognize derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. This statement is effective for all fiscal quarters of fiscal years
beginning after July 1, 2000. The Company is currently assessing the potential
impact SFAS 133 will have on the statement of financial position 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.
24
<PAGE> 25
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) 1999 Gains Losses 1999
<S> <C> <C> <C> <C>
Cash and cash equivalents
Cash $ 186,689 $ -- $ -- $ 186,689
Money market fund 87,580 -- -- 87,580
Cash and cash equivalents 274,269 -- -- 274,269
Short-term investments
Municipal securities 411,938 3 (2,393) 409,548
Money market mutual funds 93,894 -- -- 93,894
Money market preferreds 33,000 -- -- 33,000
Mutual funds 15,873 -- (102) 15,771
Equity securities 4,949 64,619 (646) 68,922
Short-term investments 559,654 64,622 (3,141) 621,135
Cash and short-term investments $ 833,923 $64,622 $ (3,141) $ 895,404
</TABLE>
<TABLE>
<CAPTION>
Fair Market
Cost at Gross Gross Value at
Oct. 31 Unrealized Unrealized Oct. 31
(Dollars in thousands) 1999 Gains Losses 1999
<S> <C> <C> <C> <C>
Cash and cash equivalents
Cash $ 106,536 $ -- $ -- $ 106,536
Money market fund 48,957 -- -- 48,957
Cash and cash equivalents 155,493 -- -- 155,493
Short-term investments
Municipal securities 469,785 8,027 -- 477,812
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 891,312 38,186 (77,824) 851,674
Cash and short-term investments $1,046,805 $38,186 $(77,824) $1,007,167
</TABLE>
The Company had net after tax unrealized gains of $38 million, and net after tax
unrealized losses of $24 million and $29 million at the end of fiscal 1999, 1998
and 1997, respectively. The Company realized gains on the sales of securities of
$51 million, $14 million, and $28 million in fiscal 1999, 1998, and 1997,
respectively, while realizing losses on sales of securities of $62 million, $16
million and $11 million during those same periods, respectively.
25
<PAGE> 26
C. PROPERTY, PLANT, AND EQUIPMENT
<TABLE>
<CAPTION>
Oct. 31 Oct. 31
(Dollars in thousands) 1999 1998
<S> <C> <C>
Buildings and land $257,025 $251,465
Furniture and equipment 345,405 352,286
Leasehold improvements and other 87,929 91,806
Property, plant, and equipment at cost 690,359 695,557
Accumulated depreciation (343,347) (349,361)
Property, plant, and equipment, net $347,012 $346,196
</TABLE>
D. INCOME TAXES
<TABLE>
<CAPTION>
Oct. 31 Oct. 31 Oct. 31
Fiscal year ended (Dollars in thousands) 1999 1998 1997
<S> <C> <C> <C>
Tax expense (benefit)
Current
Federal $21,366 $13,783 $(53,862)
State 11,791 9,934 (8,720)
Foreign 30,671 11,399 5,512
Total current 63,828 35,116 (57,070)
Deferred
Federal (15,250) (2,167) (8,636)
State 352 (1,878) 680
Foreign 4,159 8,587 (7,248)
Total deferred (10,739) 4,542 (15,204)
Total tax expense (benefit) $53,089 $39,658 $(72,274)
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 3.2 3.9 (3.5)
Research and development tax credits (5.3) (3.7) (5.0)
Tax exempt income (3.7) (7.6) (6.5)
Foreign losses not tax benefited (realized) -- (3.2) 4.7
Other, net (1.2) 3.6 (2.7)
Subtotal 28.0% 28.0% (48.0)%
Non-recurring tax benefit (6.2) -- --
Effective tax (benefit) rate 21.8% 28.0% (48.0)%
Domestic and foreign components of
income before taxes
Domestic $29,515 $66,892 $(100,673)
Foreign 214,321 74,742 (49,897)
Total income before taxes $243,836 $141,634 $(150,570)
Cash paid for income taxes $17,800 $18,735 $16,498
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
Oct. 31 Oct. 31
(Dollars in thousands) 1999 1998
<S> <C> <C>
Deferred income taxes
Deferred tax assets
Accrued compensation and benefits $8,656 $6,801
Credit carryforwards 48,259 7,024
Depreciation 4,694 9,802
Foreign earnings -- 13,624
Foreign net operating loss carryforwards 12,425 16,766
Federal and state net operating loss carryforwards 18,669 2,316
Receivable valuation accounts 8,794 15,254
Accruals 5,967 5,256
Restructuring provision 1,408 3,026
Other individually immaterial items 668 1,345
Total deferred tax assets 109,540 81,214
Deferred tax liabilities
Intangibles from acquisitions (2,592) --
Foreign earnings (34,725) --
Unrealized gain on investments (23,720) (2,727)
Total deferred tax liabilities (61,037) (2,727)
Net deferred tax assets $48,503 $78,487
</TABLE>
During October 1999, the Company reached a settlement with the Internal Revenue
Service (IRS) for years 1994 through 1997. All years prior to 1994 had been
settled. This settlement resulted in a 6.2% reduction in the provision for
income taxes during the fourth quarter of 1999. The reduction is a result of the
favorable settlement of items related to corporate acquisitions, research and
development tax credits, and various foreign items including foreign sales
corporation benefits, foreign tax credits, and other immaterial items.
Realization of the Company's net deferred tax assets is dependent upon the
Company generating sufficient taxable income in future years in appropriate tax
jurisdictions to obtain benefit from the reversal of temporary differences and
from tax credit carryforwards. The amount of deferred tax assets considered
realizable is subject to adjustment in future periods if estimates of future
taxable income are reduced.
As of October 31, 1999, the Company has U.S. net operating loss carryforwards
for federal tax purposes of approximately $40 million that expire in 2019, not
including $4 million from acquired companies that expire in years 2010 through
2013. Subject to certain annual limitations, these losses can be used to offset
future taxable income. In addition, the Company has approximately $31 million of
foreign loss carryforwards, of which, $11 million, $14 million, and $1 million
are subject to expire in 2002, 2003, and 2004, respectively. The Company also
has various credit carryforwards of approximately $43 million that expire
between 2003 and 2019. The remaining credits do not expire.
27
<PAGE> 28
E. COMMITMENTS AND CONTINGENCIES
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, 1999,
there were standby letters of credit of $1.3 million outstanding under this
agreement. The Company has an additional $10 million credit facility with
another bank which is not subject to a loan agreement. At October 31, 1999,
standby letters of credit of $0.5 million were outstanding under this agreement.
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 $218 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 by either the lender or the Company, subject to
the approval of the other party. Rent obligations on the San Jose facility
commenced upon the Company's occupancy of the building in February 1999. Rent
obligations on the Provo facility will commence upon occupancy of the building
in fiscal 2000. 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, 1999, was approximately $185
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, 1999 was approximately $186 million, and is
included in long-term investments.
Rent expense for operating and month-to-month leases was $25 million, $18
million, and $23 million in fiscal 1999, 1998, and 1997, respectively.
As of October 31, 1999, the Company has various operating leases related to the
Company's facilities with remaining terms of more than one year. These leases
have minimum annual lease commitments of $28.4 million in fiscal 2000, $28.2
million in fiscal 2001, $24.6 million in fiscal 2002, $22.9 million in fiscal
2003, $14.8 million in fiscal 2004, and $2.5 million thereafter. Furthermore,
the Company has $46.0 million of minimum rentals to be received in the future.
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. However, depending on the amount and timing, an
unfavorable resolution of these matters could materially affect the Company's
future operations or cash flows in a particular period.
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 15 million put
warrant obligations, which could only be settled in shares, expired in July
1999.
28
<PAGE> 29
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 expired at various
dates through July 1999. The premiums received from the sale of the put warrants
offset in full the cost of the call options. During fiscal 1999, the Company
exercised all of its call options to purchase 10 million shares of Novell common
stock in connection with the Company's stock repurchase program.
G. SHAREHOLDERS' EQUITY
In December 1988, the Board of Directors adopted a Shareholder Rights Plan. This
plan was most recently amended in September 1999. 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 were outstanding at October 31, 1999 or October
31, 1998.
At October 31, 1999, 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 and grants to
consultants) 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>
Fiscal year ended (Dollars in thousands, Oct. 31 Oct. 31 Oct. 31
except per share amounts) 1999 1998 1997
<S> <C> <C> <C>
Net income (loss)
As reported $190,747 $101,976 $(78,296)
Pro forma $118,319 $61,991 $(106,509)
Net income (loss) per share
As reported basic $0.57 $0.29 $(0.22)
Pro forma basic $0.35 $0.18 $(0.30)
As reported diluted $0.55 $0.29 $(0.22)
Pro forma diluted $0.34 $0.18 $(0.30)
</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 1999,
1998 and 1997: a risk-free interest rate of approximately 5.5% for fiscal 1999,
5.4% for fiscal 1998 and 6.3% for fiscal 1997; a dividend yield of 0.0% for all
years; a weighted-average expected life of five years for fiscal 1999 and 1998;
and four years for fiscal 1997; and a volatility factor of the expected market
price of the Company's common stock of 0.58 for fiscal 1999, 0.51 for fiscal
1998; and 0.45 for fiscal 1997. 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
29
<PAGE> 30
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.
The Company currently has three stock 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 80,278,305
shares of common stock for issuance under the 1991 Plan. This share reserve has
increased over the past six years, 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 (the "1997 Plan") was approved by the Board
of Directors in 1997 to grant options to the Company's Chief Executive Officer,
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. There are 781,000
shares of outstanding common stock subject to repurchase.
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,
1999, 1998, and 1997 and changes during the years ended on those dates is
presented below.
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1999 1998 1997
Weighted- Weighted- Weighted-
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
(Number of options in thousands) Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 48,401 $8.89 41,073 $8.19 41,331 $14.77
Granted
Price at fair value 21,335 23.04 19,289 10.14 47,867 8.05
Price greater than fair value -- -- -- -- 600 17.53
Price less than fair value 316 0.10 100 0.10 975 0.02
Exercised (10,758) 7.64 (5,967) 7.09 (3,151) 3.91
Cancelled/expired (4,017) 13.35 (6,094) 9.84 (46,549) 14.13
Outstanding at end of year 55,277 $14.22 48,401 $8.89 41,073 $8.19
Options exercisable at year end 17,460 $8.78 15,531 $7.87 2,753 $13.92
</TABLE>
30
<PAGE> 31
The following table summarizes information about stock options outstanding at
October 31, 1999.
<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 2 3.19 $ 1.83 2 $ 1.83
$1.84--$6.91 9,257 6.11 $ 6.91 7,343 $ 6.91
$7.50--$9.88 19,628 8.05 $ 9.14 7,913 $ 9.06
$9.94--$23.94 12,005 9.08 $15.86 1,986 $12.46
$24.06--$24.06 12,027 9.39 $24.06 55 $24.06
$24.31--$31.25 2,358 9.11 $26.67 161 $29.98
$1.83--$31.25 55,277 8.29 $14.22 17,460 $ 8.78
</TABLE>
Other information
<TABLE>
<CAPTION>
Fiscal Fiscal
(Number of shares and options in thousands) 1999 1998
<S> <C> <C>
Options available for future grants 8,690 16,560
Other information
Shares of common stock outstanding at year end 326,594 337,592
Annual option reserve increase based on evergreen provision 9,790 10,177
Options granted as a percentage of outstanding
common stock, net of cancellations 5% 4%
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 49% of the eligible employees have participated in
the Purchase Plan in fiscal 1999 and 45% in 1998. Under the Purchase Plan, the
Company issued 1,186,536 and 1,708,028 shares to employees in fiscal 1999 and
1998, 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 1999,
1998, and 1997: a dividend yield of 0.0% for all years; an expected life of 6
months for all years; an expected volatility factor of 0.58 for fiscal 1999,
0.51 for fiscal 1998, and 0.45 in fiscal 1997; and a risk-free interest rate of
approximately 5.5% for all years. The weighted average fair value of the
purchase rights granted on April 26, 1999, October 26, 1998, April 28, 1998,
October 28, 1997, April 28, 1997 and October 28,1996 was $7.11, $3.88, $2.64,
$2.25, $1.99 and $2.66, respectively.
31
<PAGE> 32
H. COMPREHENSIVE INCOME
In the first quarter of 1999, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS
130 establishes new rules for the reporting and displaying of comprehensive
income. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities and cumulative translation adjustments to be
included in comprehensive income. The components of other comprehensive income
include:
<TABLE>
<CAPTION>
Oct. 31 Oct. 31 Oct. 31
Fiscal year ended (Dollars in thousands) 1999 1998 1997
<S> <C> <C> <C>
Gain on investments during the year, net of tax expense
(benefit) of $44,255, $5,323, and $(21,305), respectively $ 70,454 $ 8,475 $(33,917)
Less: adjustment for net realized losses included in net income,
net of tax benefit of $5,243, $2,548, and $1,390, respectively (8,346) (4,056) (2,221)
Net unrealized gain (loss) on investments 62,108 4,419 (36,138)
Cumulative translation adjustments, net of tax benefit of $515,
$683, and $1,161, respectively (820) (1,087) (1,849)
Other comprehensive income (loss) $ 61,288 $ 3,332 $(37,987)
</TABLE>
I. 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 the total
restructuring charge, accruals of $5 million remain as of October 31, 1999,
primarily related to redundant facility charges.
J. 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 contributed an amount which was
equal to 50% of the employee's contribution up to 6% of each employee's
compensation to the retirement and savings plan. On January 1, 1995, the
Company's retirement and savings plan contribution was changed to allow the
Company to contribute an amount equal to 100% of the employee's contribution up
to 4% of each employee's compensation.
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.
Company matching contributions on 401(k) and other retirement plans were $14
million, $13 million, and $15 million in fiscal 1999, 1998, and 1997,
respectively.
K. RELATED PARTY TRANSACTIONS
In fiscal 1999, 1998, and 1997, legal fees of approximately $2 million, $1
million and $1 million, respectively, were paid to Wilson, Sonsini, Goodrich &
Rosati, a law firm in which a director of the Company is a senior partner.
32
<PAGE> 33
L. SEGMENT INFORMATION
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
(SFAS 131). SFAS 131 supersedes Statement of Financial Accounting Standards No.
14 "Financial Reporting for Segments of a Business Enterprise" and establishes
standards for reporting information about operating segments. These segments are
defined as components of an enterprise that are evaluated regularly by the chief
operating decision maker(s) in determining how to allocate resources and assess
performance based on available, separate financial information.
The Company operates in one business segment, directory-enabled networking
software and services. The Company's products are sold throughout the world. In
the United States, products are sold through direct, OEM, reseller, and
distributor channels. Internationally, products are marketed through
distributors who sell to dealers and end users. Performance of the Company is
evaluated by the Company's chief decision makers, the Chief Executive Officer
and Executive Council, based on total Company results. Revenue is evaluated
based on geographic region and by product category. Separate financial
information is not available by product category in regards to asset allocation,
expense allocation, or profitability.
Novell's products can be categorized into the following four areas, all within
the directory-enabled networking software and services segment.
- - Directory-enabled server platforms, which includes NetWare 4 and NetWare 5
- - Directory-enabled applications products, or Net Services Software, which
include NetWare for SAA host connectivity products, BorderManager, NDS
integration and high availability service products, as well as collaboration
and management products including GroupWise, ManageWise, and ZENworks
- - Service, education and consulting revenue, which is generated from customer
service, educational products and courses, and consulting for network
solutions
- - Pre-directory product revenue consisting of NetWare 3, non-directory-enabled
infrastructure products and UNIX royalties
Revenue by product category
<TABLE>
<CAPTION>
Oct. 31 Oct. 31 Oct. 31
Fiscal year ended (Dollars in thousands) 1999 1998 1997
<S> <C> <C> <C>
Directory-enabled server platforms $ 659,494 $ 533,694 $ 474,662
Directory-enabled applications 315,006 226,882 160,254
Service, education and consulting 180,710 129,431 102,139
Other 117,610 193,880 270,256
Total net sales $1,272,820 $1,083,887 $1,007,311
</TABLE>
Sales outside the U.S. are comprised of sales to international customers in
Europe, the Middle East, Canada, South America, and Asia Pacific. Other than
sales in Ireland, international sales were not material individually in any
other international location. 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.
33
<PAGE> 34
Geographic information
<TABLE>
<CAPTION>
Oct. 31 Oct. 31 Oct. 31
Fiscal year ended (Dollars in thousands) 1999 1998 1997
<S> <C> <C> <C>
Net sales
U.S. operations $ 838,221 $ 766,548 $ 721,164
Irish operations 400,522 296,500 231,955
Other international operations 59,316 52,548 99,365
Eliminations (25,239) (31,709) (45,173)
Total net sales $1,272,820 $1,083,887 $1,007,311
Identifiable assets
U.S. operations $ 685,188 $ 548,820 $ 322,437
Irish operations 33,216 29,178 32,493
Other international operations 48,829 50,196 231,135
Eliminations (172,191) (155,343) (166,154)
Total identifiable assets $ 595,042 $ 472,851 $ 419,911
</TABLE>
Reconciliation of long-lived assets to total assets
<TABLE>
<CAPTION>
Oct. 31 Oct. 31 Oct. 31
Fiscal year ended (Dollars in thousands) 1999 1998 1997
<S> <C> <C> <C>
Long-lived assets $ 595,042 $ 472,851 $ 419,911
Other long term assets 11,661 15,561 20,356
Current assets 1,335,616 1,435,700 1,470,382
Total assets $1,942,319 $1,924,112 $1,910,649
</TABLE>
In fiscal 1999, 1998, and 1997, sales to international customers were
approximately $575 million, $452 million, and $452 million, respectively. In
fiscal 1999, 1998, and 1997, international sales to European countries were 70%,
67%, and 55% of international sales, respectively. No one foreign country
accounted for more than 10% of total sales in any period. In fiscal 1999, 1998,
and 1997, the Company had one multinational distributor, which accounted for
11%, 15%, and 11% of revenue, respectively. Otherwise, no customer accounted for
more than 10% of revenue in any period.
M. NET INCOME PER SHARE
<TABLE>
<CAPTION>
Oct. 31 Oct. 31 Oct. 31
Fiscal year ended (Amounts in thousands except per share data) 1999 1998 1997
<S> <C> <C> <C>
Basic net income (loss) per share computation
Net income (loss) $190,747 $101,976 $(78,296)
Weighted average shares outstanding 334,460 350,525 348,149
Basic net income (loss) per share $.57 $.29 $(.22)
Diluted net income (loss) per share computation
Net income (loss) $190,747 $101,976 $(78,296)
Weighted average shares outstanding 334,460 350,525 348,149
Incremental shares attributable to exercise of outstanding
options (treasury stock method) 14,933 5,912 --
Total 349,393 356,437 348,149
Diluted net income (loss) per share $.55 $.29 $(.22)
</TABLE>
34
<PAGE> 35
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, 1999 and October 31, 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended October 31, 1999. 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, 1999 and October 31, 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
October 31, 1999, in conformity with generally accepted accounting principles.
Ernst & Young LLP
San Jose, California
November 19, 1999
35
<PAGE> 36
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA--UNAUDITED
<TABLE>
<CAPTION>
First Second Third Fourth Fiscal
Dollars in thousands, except per share data Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
Fiscal 1999
Net sales $285,806 $315,652 $326,808 $344,554 $1,272,820
Gross profit 221,680 239,441 253,294 272,384 986,799
Income before taxes 40,136 53,787 68,488 81,425 243,836
Net income 28,898 38,726 49,311 73,812 190,747
Net income per share
Basic .09 .12 .15 .22 .57
Diluted .08 .11 .14 .21 .55
Common stock price per share
High 20 3/4 28 1/8 31 3/16 27 31 3/16
Low 13 15/16 17 1/4 21 13/16 16 1/16 13 15/16
Fiscal 1998
Net sales $252,042 $262,250 $272,016 $297,579 $1,083,887
Gross profit 194,955 202,972 208,947 228,396 835,270
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 6 13/16 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 296,279 193,133 25,715 203,567 718,694
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
</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 10,100 shareholders of record at December 31, 1999.
36
<PAGE> 37
DIRECTORS AND EXECUTIVES
Board of Directors
Eric E. Schmidt
Chairman of the Board and
Chief Executive Officer
John A. Young (n)(l)
Vice Chairman of the Board
and Retired President and Chief Executive Officer
Hewlett-Packard Company
Elaine R. Bond (s)
Retired Chase Fellow and Senior Consultant
The Chase Manhattan Bank, N.A.
Hans-Werner Hector (s)
Cofounder
SAP AG, Germany
Reed E. Hundt (n)(l)
Special Consultant
McKinsey & Company
William N. Joy (n)
Cofounder and Vice President of Research
Sun Microsystems, Inc.
Jack L. Messman (s)(l)
President and Chief Executive Officer
Cambridge Technology Partners
Richard L. Nolan (n)(l)
William Barclay Harding Professor
of Management of Technology
Harvard Business School
Larry W. Sonsini
Partner
Wilson, Sonsini, Goodrich & Rosati
s Member of Audit Committee
n Member of Compensation Committee
l Member of Corporate Governance Committee
CORPORATE EXECUTIVE STAFF
Eric E. Schmidt
Chairman of the Board and
Chief Executive Officer
Ronald E. Heinz, Jr.
Senior Vice President
Worldwide Sales
Stewart G. Nelson
Senior Vice President
Products and Marketing
Richard A. Nortz
Senior Vice President
Customer Services
Dennis R. Raney
Senior Vice President and
Chief Financial Officer,
Chief Accounting Officer
37
<PAGE> 38
OFFICE LOCATIONS
UNITED STATES OFFICES INTERNATIONAL OFFICES
Arizona Argentina Japan
Phoenix Buenos Aires Tokyo
California Australia Korea
Irvine Brisbane Seoul
Los Angeles Canberra
Sacramento Melbourne Malaysia
San Diego West Perth Petaling Jaya
San Francisco North Sydney
San Jose Mexico
Austria Mexico City
Colorado Vienna
Englewood Netherlands
Belgium Rotterdam
Connecticut Antwerp
Glastonbury New Zealand
Brazil Auckland
Florida Brasilia Wellington
Ft. Lauderdale Gerais
Tampa Sao Paulo Norway
Oslo
Georgia Canada
Alpharetta Calgary Panama
Halifax Panama City
Illinois Hull
Rolling Meadows Markham Peru
Montreal Lima
Massachusetts Sainte-Foy
Wellesley Vancouver Puerto Rico
Hato Rey
Michigan Chile
Southfield Santiago Poland
Warsaw
Minnesota China, People's
Bloomington Republic of Portugal
Beijing Lisbon
Missouri Guangzhou
Kansas City Shanghai Russia
St. Louis Moscow
Colombia
New Jersey Bogota Singapore
Berkeley Heights Singapore
Czech Republic
New York Prague South Africa
New York Cape Town
Pittsford Denmark Johannesburg
Copenhagen
Ohio Spain
Cincinnati Finland Barcelona
Columbus Helsinki Madrid
Independence
France Sweden
Oregon Paris Stockholm
Portland
Germany Switzerland
Pennsylvania Berlin Zurich
East Norriton Dusseldorf
Pittsburgh Frankfurt Taiwan
Munich Taipei
Tennessee
Memphis Hong Kong Thailand
Wanchai Bangkok
Texas
Addison Hungary United Arab Emirates
Austin Budapest Dubai
Houston
San Antonio India United Kingdom
Ahmedabad Bracknell
Utah Bangalore
Orem Bombay Uruguay
Provo Calcutta Montevideo
Salt Lake City Chennai
Jaipur Venezuela
Virginia New Delhi Caracas
Herndon Secunderabad
Washington Ireland
Kirkland Dublin
Israel
Herzliyya
Italy
Milan
38
<PAGE> 39
CORPORATE DIRECTORY
Novell Corporate Novell Venezuela
Headquarters Plaza La Castellana
122 East 1700 South Torre Ban Caracas
Provo, Utah 84606 Piso 10, oficina 10-04
Ph 801 861 7000 La Castellana
Toll free 800 453 1267 Caracas, Venezuela
Ph 582 264 2534
Fx 582 264 2171
AMERICAS REGION
Novell Argentina ASIA-PACIFIC REGION
Av. Leandro N. Alem 1110,
Piso 9 degrees, 1001 Buenos Aires Novell Australia
Argentina Level 18
Ph 54 11 4312 2626 201 Miller Street
Fx 54 11 4312 8025 North Sydney, NSW 2060
Australia
Novell Brazil Ph 61 2 9925 3000
Av. Nacoes Unidas, 12.995 Fx 61 2 9922 2113
8 degrees Andar
04578-000 - Sao Paulo - SP Novell New Zealand
Brazil L12, 44-52 Wellesley Street
Ph 55 11 5505 4040 Auckland 1
Fx 55 11 5505 4041 New Zealand
Ph 64 9 308 1400
Novell Canada Fx 64 9 308 1409
3100 Steeles Avenue East
Suite 500 Novell China
Markham, Ontario L3R 8T3 Floor 11 Canway Building
Canada No. 66 Nan Li Shi Road
Ph 905 940 2670 Beijing 100045, China
Fx 905 940 2688 Ph 86 10 680 28855
Fx 86 10 680 28720
Novell Chile
Av. Nueva Tajamar 555 Novell Hong Kong
Of. 901, Las Condes Room 4601-5
Santiago, Chile China Resources Building
Ph 562 3397 070 26 Harbour Road
Fx 562 3397 071 Wanchai, Hong Kong, China
Ph 852 2 588 5288
Novell Colombia Fx 852 2 827 6555
Teleport Business Park
Calle 114 # 9-45 Novell India*
Torre B oficina 709 Onward Novell Software Ltd.
Santa Fe de Bogota 62 MIDC
Colombia 13th Street
Ph 571 6292969 Andheri (East)
Fx 571 6293509 Bombay 400 093, India
Ph 91 022 8342244
Novell Mexico Fx 91 022 8342223
Blvd. Manuel Avila
Comacho #138-1 Novell Japan Ltd.*
Col. Lomas de Chapultepec Toei Mishuku Bldg.
Mexico D.F., C.P. 11000 1-13-1 Mishuku
Ph 525 284 2700 Setagaya-Ku,
Fx 525 284 2799 Tokyo 154-8361, Japan
Ph 81 3 5481 1294
Novell Panama Fx 81 3 5481 1934
Calle 53 Marbella,
World Trade Center Novell Korea
Piso 2, Oficina 10 Will-Bes Co. Building
Cuidad de Panama 11th Floor
Panama 942-1, Daechi-dong
Ph 507 206 8714 Kangnam-Ku
Fx 507 206 8777 Seoul, Korea 135-280
Ph 82 2 528 1400
Novell Peru Fx 82 2 528 1414
Martir Olaya 129 Office 1701
Centro Empresarial Pardo Novell Malaysia
Miraflores Unit 501 Level 5 Uptown 1
Lima, Peru 1 Jalan 5521/58
Ph 511 214 1340 Damansara Uptown
Fx 511 214 1087 47400 Petaling Jaya
Selangor Darul Ehsan
Novell Puerto Rico Malaysia
255 Ponce de Leon Ph 60 3 712 6100
Royal Bank Center, Suite 202 Fx 60 3 712 6155
Hato Rey, Puerto Rico 00918
Ph 787 771 3816 Novell Singapore
Fx 787 771 3811 300 Beach Road, #28-00
The Concourse
Novell Uruguay Singapore 199555
Cerrito 534, piso 4 Ph 65 296 2866
11000 Montevideo, Uruguay Fx 65 296 1266
Ph 598 2 915 5032
Fx 598 2 915 4932 Novell Taiwan
Room E-F, 5th Floor No. 168
Tun-Hwa North Road
Taipei, Taiwan, R.O.C.
Ph 886 22 718 9733
Fx 886 22 514 9806
*Joint venture
39
<PAGE> 40
Novell Thailand Novell Middle East
16th Flr., TISCO Tower P.O. Box 9313
48 North Sathorn Rd. 17th Floor
Silom, Bangrak Dubai World Trade Center
Bangkok, Thailand 10500 Dubai, United Arab Emirates
Ph 662 638 0310 Ph 971 433 16 444
Fx 662 638 0311 Fx 971 433 19 248
Novell Netherlands
EUROPE, MIDDLE EAST, Barbizonlaan 25
AFRICA REGION 2908 MB Capelle a/d IJssel
PO Box 85024
Novell Austria 3009 MA Rotterdam
Heiligenstadter Lande 27c The Netherlands
1190 Vienna, Austria Ph 31 10 286 4722
Ph 43 1 367 7444 Fx 31 10 286 4010
Fx 43 1 367 7444 20
Novell Norway
Novell Belgium Ostensjoveien 34
Koningin Astridplein 1, 3rd Floor Postboks 6555 Etterstad
2018 Antwerp, Belgium 0606 Oslo, Norway
Ph 32 3 206 17 93 Ph 47 23 37 77 70
Fx 32 3 206 17 99 Fx 47 23 37 77 71
Novell Czech Republic Novell Poland
Prague City Center ul. Sienna 64
Klimenstska 46 00-825 Warsaw, Poland
11002 Prague 1 Ph 48 22 620 39 79
Czech Republic Fx 48 22 620 31 03
Ph 420 2 2185 6611
Fx 420 2 2185 6622 Novell Portugal
Regus Business Centre
Novell Denmark Centro Empresarial Torres
Slotsmarken 12 de Lisbon
DK 2970 Hersholm, Denmark Rua Tomas da Fonseca
Ph 45 45 16 00 20 Torre G 1 degrees
Fx 45 45 16 00 40 1600 Lisbon, Portugal
Ph 351 1723 06 30
Novell Finland Fx 351 1722 35 33
Sinimaentie 10 C
02630 Espoo, Finland Novell Russia
Ph 35 89 502 95 1 Suite 524
Fx 35 89 502 95 300 Radisson Slavyanskaya Hotel
2, Berezhkovskaya nab.
Novell France 121059 Moscow, Russia
Tour Framatome Ph 7 095 941 8075/73
1, Place de la Coupole Fx 7 095 941 8066
92084 Paris la Defense Cedex
France Novell South Africa
Ph 33 1 47 96 60 60 Morning View Office Park
Fx 33 1 47 78 94 72 214 Rivonia Road
Morningside
Novell Germany PO Box 1840
Monschauer Strasse 12 Rivonia 2128
40549 Dusseldorf, Germany Gauteng
Ph 49 211 56310 Republic of South Africa
Fx 49 211 563 1250 Ph 27 11 322 8300
Fx 27 11 322 8400
Novell Hungary
East-West Business Center Novell Spain
1088 Budapest 27th Floor, Torre Europa
Rakoczi ut 1-3, Hungary Paseo de la Castellana, 95
Ph 36 1 235 7656 28046 Madrid, Spain
Fx 36 1 266 6360 Ph 34 1 555 65 67
Fx 34 1 555 29 15
Novell Ireland
2nd Floor Novell Sweden
The Treasury Building Kronborgsgrand 1
Lower Grand Canal Street 16487 Kista
Dublin 2, Ireland Stockholm, Sweden
Ph 353 1 605 8025 Ph 46 84774100
Fx 353 1 605 8155 Fx 46 84774101
Novell Israel Novell Switzerland
Ackerstein Building Leutschenbachstrasse 41
Medinat Hayehudim St 103 8050 Zurich, Switzerland
Herzliyya 46776, Israel Ph 41 1 308 47 47
Ph 972 9951 4455 Fx 41 1 302 04 01
Fx 972 9951 4466
United Kingdom
Novell Italia Novell House
Piazza Don Mapelli 75 1, Arlington Square
20099 Sesto San Giovanni Downshire Way
Milan, Italy Bracknell
Ph 39 02 2626 326 2 Berkshire RG12 1WA
Fx 39 02 2626 319 5 United Kingdom
Ph 44 1344 724000
Fx 44 1344 724001
39, continued
<PAGE> 41
CONTACT NOVELL
NOVELL
www.novell.com
Corporate, product, program, financial, and shareholder information, including
press releases and quarterly earnings announcements, can be found on Novell's
Web site.
CUSTOMER INFORMATION
[email protected]
Novell's Customer Response Center provides information on Novell products,
programs, and services. Call toll free 888-321-4CRC or email [email protected].
FINANCIAL LITERATURE REQUESTS
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 at
800-317-3195 or by emailing Novell's investor relations department at
[email protected].
INVESTOR RELATIONS
[email protected]
Novell, Inc.
2211 North First Street
San Jose, CA 95131
800-317-3185
408-967-8080
Novell's Investor Relations staff responds to financial inquiries and requests
for financial literature.
SHAREHOLDER SERVICES
[email protected]
Novell, Inc.
2211 North First Street
San Jose, CA 95131
800-NOVL-STK
408-967-8644
Novell shareholder services provides information on Novell's Annual Meeting,
changes in stock registration, and other stock administration services.
NEWS HOTLINE
800-668-5329
Call Novell's toll-free, menu-driven fax distribution system for Novell press
releases.
40
<PAGE> 42
ANNUAL MEETING
The Company's Annual Meeting will be held on Tuesday, April 11, 2000 at 2:00
p.m. local time at Novell, 122 East 1700 South, Provo, Utah 84606.
FORM 10-K
www.novell.com/corp/ir/sec.html
[email protected]
Novell's Form 10-K is available on Novell's Investor Relations Web site. For a
printed copy, email [email protected] or write:
Investor Relations
Novell, Inc.
2211 North First Street
San Jose, CA 95131
TRANSFER AGENT AND REGISTRAR
www.chasemellon.com
ChaseMellon Shareholder Services, LLC
Ridgefield Park, NY
Toll free 888-581-9375
INDEPENDENT AUDITORS
Ernst & Young LLP, San Jose, CA.
Copyright (C) 2000, Novell, Inc., All Rights Reserved.
Novell, NetWare, GroupWise, NDS and Novell Directory Services are registered
trademarks, and BorderManager, eDirectory, NetWare Cluster Services, Novell
Internet Caching System and ZENworks are trademarks of Novell, Inc. in the
United States and other countries.
*Solaris is a trademark of Sun Microsystems, Inc. Windows NT is a registered
trademark of Microsoft Corporation. All other third-party marks are the property
of their respective owners.
Designed and produced by Chikamura Design, San Francisco
Principal photography by Joe Gibbs, San Francisco
Dr. Eric Schmidt portrait by Barbara Ries, San Raphael
(inside back cover)
<PAGE> 43
scalable
secure
power
choice
manage
integrated
open
all one net
Novell Corporate Headquarters
o 122 East 1700 South o Provo, Utah 84606 o 801 861-7000 o 479-000117-001
(BACK COVER)
<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>
Fluent, Inc........................................................................... 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 Corporation (Malaysia) Sdn Bhd................................................. Malaysia
Novell Software de Colombia S.A....................................................... Colombia
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)................................................................. Austria
Novell GmbH........................................................................... Germany
Novell Hong Kong Ltd.................................................................. Hong Kong
Novell Hungary Software Ltd........................................................... Hungary
Novell International, Ltd............................................................. Barbados
Novell Ireland Real Estate Ltd........................................................ Ireland
Novell Ireland Software Limited....................................................... Ireland
Novell Israel Software Ltd............................................................ 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 de Panama S.A. ................................................................ Panama
Novell Peru S.A....................................................................... Peru
Novell Polska Sp.Z.o.o................................................................ Poland
Novell Portugal Informatica LDA....................................................... Portugal
Novell Pty, Ltd....................................................................... Australia
Novell de Puerto Rico, Inc. .......................................................... Puerto Rico
Novell S.A.R.L........................................................................ France
Novell Singapore Pte Ltd.............................................................. Singapore
Novell Software Development Pvt., Ltd................................................. India
Novell Software Latino America Norte, CA.............................................. Venezuela
Novell South Africa Proprietary Ltd................................................... South Africa
Novell Spain S.A...................................................................... Spain
Novell Svenska A.B.................................................................... Sweden
Novell Schweiz A.G.................................................................... Switzerland
Novell U.K., Ltd...................................................................... United Kingdom
Novell Uruguay S.A.................................................................... Uruguay
Novonyx, Inc.......................................................................... Delaware
Reference Software International...................................................... California
Softsolutions Technology Corporation.................................................. Utah
Ukiah Software, Inc. ................................................................. California
WordPerfect Danmark................................................................... Utah
WordPerfect International............................................................. Utah
WordPerfect America Latina............................................................ Utah
WordPerfect Publishing Corporation.................................................... Utah
MAJORITY OWNED
Novell Japan, Ltd..................................................................... Japan
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 19, 1999, included in the
1999 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 19, 1999, 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, 1999.
/s/ ERNST & YOUNG LLP
San Jose, California
January 26, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> OCT-31-1999
<CASH> 274,269
<SECURITIES> 621,135
<RECEIVABLES> 341,513
<ALLOWANCES> (36,318)
<INVENTORY> 3,753
<CURRENT-ASSETS> 1,335,616
<PP&E> 690,359
<DEPRECIATION> (343,347)
<TOTAL-ASSETS> 1,942,319
<CURRENT-LIABILITIES> 439,632
<BONDS> 0
0
0
<COMMON> 32,659
<OTHER-SE> 1,459,582
<TOTAL-LIABILITY-AND-EQUITY> 1,942,319
<SALES> 1,272,820
<TOTAL-REVENUES> 1,272,820
<CGS> 286,021
<TOTAL-COSTS> 286,021
<OTHER-EXPENSES> 763,747
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 243,836
<INCOME-TAX> 53,089
<INCOME-CONTINUING> 190,747
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 190,747
<EPS-BASIC> .57
<EPS-DILUTED> .55
</TABLE>
