The Company's 1998 Annual Meeting of Shareholders (the "Meeting") was held on April 7, 1998 at 2:00 p.m., Mountain Daylight Savings Time, at the Company's offices located at 1555 North Technology Way, Orem, Utah. Dr. Eric E. Schmidt, Chairman of the Board and Chief Executive Officer, presided at the Meeting. David R. Bradford, General Counsel and Corporate Secretary, conducted the formal business of the Meeting; Betty A. DePaola, Assistant Corporate Secretary, acted as secretary of the Meeting (the "Secretary"); and Patricia Dedrick, of ChaseMellon Shareholder Services, LLC, acted as Judge of Election (the "Judge") of the Meeting.
Call to Order
The Meeting was called to order by Dr. Schmidt.
Introduction of Executive Officers and Certain Guests
Dr. Schmidt next introduced the executive officers in attendance at the Meeting and certain other guests, including Ray Noorda.
Agenda, Notice and Affidavit of Mailing, and Certified List of Shareholders
Cautionary Statement
Dr. Schmidt stated that he or other representatives of the Company could make, during the course of the Meeting, statements regarding future events or the future financial performance of the Company which involve risk and uncertainty. He emphasized that these statements would be solely predictions and actual events could differ materially from those anticipated. He referred all persons interested to the Company's most recent filings with the Securities and Exchange Commission, which contain and identify important factors that could cause the actual events to differ materially from those contained in such projections and/or forward-looking statements.
Meeting Agenda
Dr. Schmidt stated that the purpose of the Meeting was to act upon the matters described in the Company's Proxy Statement that was mailed to shareholders of record (the "Shareholders of Record") as of February 13, 1998 (the "Record Date"), to report on the Company's operations during the past year and the Company's current outlook, and to transact such other business as may have properly come before the Meeting.
Notice and Affidavit of Mailing
Dr. Schmidt next announced that Notice of the Meeting was mailed on February 24, 1998 to all Shareholders of Record and that the Company has the Affidavit of Corporate Investor Communications, Inc. ("CIC") certifying that such mailing took place on such date. At that point in the Meeting, the Chairman asked that Mr. Bradford conduct the remaining business portions of the Meeting.
Mr. Bradford asked the Secretary to annex to the minutes of the Meeting (i) the Affidavit of CIC that Notice of the Annual Meeting of Shareholders was Mailed, and (ii) Form of Notice.
Certified List of Shareholders
The Secretary then read aloud the Notice of the Meeting to those in attendance. Following the reading of the Notice, the Secretary presented the Certified List of the Company's Shareholders of Record as of the Record Date, prepared and certified by ChaseMellon Shareholder Services, LLC, the Company's Registrar and Transfer Agent. As required by the Company's Bylaws and Delaware Law, this list was maintained for inspection at the principal offices of the Company for the 10 days preceding the Meeting.
Presence of Quorum
The Secretary introduced the Judge and stated that she was appointed by the Board of Directors to act as the Judge of Election at the Meeting. The Secretary then asked the Judge to report on whether a quorum was present at the Meeting.
The Judge stated that 351,304,421 shares of the Company's Common Stock were outstanding as of the Record Date, and reported that more than 88 percent of the those outstanding shares were represented at the Meeting, at that time, either in person or by proxy.
On the basis of the Judge's report, Mr. Bradford, acting on behalf of, and as instructed by, Dr. Schmidt, declared that a quorum was present and that the meeting was duly convened and competent to proceed with the transaction of business.
Reading of the Minutes of the 1997 Annual Meeting of Shareholders
Mr. Bradford noted that the first item of business was the reading of the minutes of the 1997 Annual Meeting of Shareholders, which was held on May 2, 1997 (the "1997 Annual Meeting"). A Shareholder of Record moved to dispense with the reading of such minutes and approve them as recorded. The motion was duly seconded. Mr. Bradford then asked for a vote. The motion was carried and the minutes were approved as recorded. Mr. Bradford instructed the Secretary to annex to the Minutes the minutes of the 1997 Annual Meeting.
Introduction of the Matters to be Voted upon by Shareholders
Mr. Bradford then discussed the three proposals properly submitted for shareholder approval at the Meeting, as follows:
Proposal One—To Elect Six Directors
The first proposal, Item 1 on the Ballot, was to elect six directors of the Company to hold office until the Company's next Annual Meeting of Shareholders, or until their successors are duly elected. Six candidates were nominated by the Board of Directors, namely: Eric E. Schmidt; John A. Young; Elaine R. Bond; Hans-Werner Hector; Jack L. Messman; and Larry W. Sonsini. The affirmative vote of the holders of a majority of the shares present in person or by proxy and entitled to vote at the Meeting was required to elect the six nominees for director. Mr. Bradford declared that the proxies solicited by management would be voted in favor of electing the six nominees.
There being no further director nominations, Mr. Bradford entertained a motion from a Shareholder of Record that nominations be closed, and such motion was duly seconded. Mr. Bradford next entertained a motion from Shareholder of Record that the six nominees for director be elected, and such motion was duly seconded. Mr. Bradford then instructed shareholders on voting procedures.
Proposal Two—To Approve and Ratify the Adoption of an Amendment to the Novell, Inc. 1989 Employee Stock Purchase Plan to Increase the Number of Shares Reserved for Issuance Thereunder from 12,000,000 to 18,000,000
The second proposal, Item 2 on the Ballot, was to approve and ratify the adoption of an amendment to the Novell, Inc. 1989 Employee Stock Purchase Plan (the "1989 ESPP") to increase the number of shares reserved for issuance thereunder from 12,000,000 to 18,000,000. The affirmative vote of the holders of a majority of the shares present in person or by proxy and entitled to vote at the Meeting was required to approve this proposal. Mr. Bradford declared that the proxies solicited by management would be voted in favor of this proposal. Mr. Bradford then entertained a motion from a Shareholder of Record that the adoption of an amendment to the 1989 ESPP be approved and ratified, and such motion was duly seconded.
Proposal Three—To Ratify the Appointment of Ernst & Young LLP as Independent Auditors for Novell, Inc.
The third and final proposal, Item 3 on the Ballot, was to ratify the appointment of Ernst & Young as independent auditors for the Company. The affirmative vote of a majority of the shares present in person or by proxy and entitled to vote at the Meeting was required to approve this proposal. Mr. Bradford declared that the proxies solicited by management would be voted in favor of this proposal. Mr. Bradford then entertained a motion from a Shareholder of Record that the appointment of Ernst & Young as independent auditors for the Company be ratified, and motion was duly seconded.
Polls Closed
Mr. Bradford next entertained a motion from a Shareholder of Record that balloting cease and the polls be closed, and such motion was duly seconded. Mr. Bradford then asked for a vote. The motion was carried and he instructed the Judge to proceed with the canvassing of the votes.
Report of the Chief Financial Officer
Mr. Bradford then turned the time over to Dennis Raney, the Company's newly appointed Chief Financial Officer, to deliver his report. Mr. Raney reported on the Company's financial status.
Report of the Vice President of Marketing
Following his report on the Company's financial condition, Mr. Raney turned the time over to John Slitz, Senior Vice President of Marketing, to discuss the Company's current and future marketing initiatives.
Report of the Chief Executive Officer
Following Mr. Slitz's report, Dr. Schmidt, in his capacity as Chief Executive Officer, delivered his report concerning the Company's past year and current outlook. Click above for the text Dr. Schmidt's presentation. Click Real Player [ http://www.novell.com/corp/ir/images/schmidt_share.ram ] to watch Dr. Schmidt's multi-media presentation.
Report of the Inspector of Election
Following his report, Dr. Schmidt then instructed Mr. Bradford to complete the remaining business of the Meeting.
Mr. Bradford asked the Judge to report on voting. The Judge again noted that there were 351,304,421 shares of the Company's Common Stock outstanding as of the Record Date. The Judge certified that 310,076,980 shares were present at the Meeting, in person or by proxy, and voted thereat. The Judge then certified the results of voting as follows:
Accordingly, Mr. Bradford, acting on behalf of, and as instructed by, Dr. Schmidt, announced that each of the six nominees for director had been elected as Directors of Novell, Inc. to hold office until the next Annual Meeting of Shareholders, or until his or her successor is duly elected. In addition, based on the Judge's report, Mr. Bradford announced each of the other two proposals had been approved and/or ratified.
Mr. Bradford then directed the Judge to present this report to the Secretary to be annexed to the minutes of the Meeting.
Adjournment
The Chairman then announced that the scheduled business of the meeting was concluded
and entertained a motion from a Shareholder of Record to adjourn, which was duly
seconded. The Chairman then asked for a vote. The motion was carried and the Meeting
was adjourned.
Report of the Chief Executive Officer: Dr. Eric Schmidt
What I would like to do is talk a little bit about networking and what we have
been doing with the company. I have been in the company for a year and I'm very
pleased to be here. I'm very pleased to represent the company in all of its many
initiatives and endeavors. It's interesting that everyone is obsessed with the year
2000 and, when I look back in history, the year 2000 is not such a big deal. The
year 1900 saw in the preceding 10 or 20 years the invention of the automobile, the
diesel engine, the airplane, and the electric light bulb. All the changes that created
the industrial age that we have all benefitted from and all we have to deal with
is the implications of the Internet. Pretty serious.
The Internet is a pretty big deal. Statistics indicate that 65,000 Web pages are
created per hour right now. The estimate is about 1.5 million pages per day. Current
estimate is that there are 320 million Web pages in the world. No one actually knows
that number because the most accurate search engines are only accurate to one-third
of the number of pages. This Internet or network lifestyle that's creating an opportunity
for us is extremely large. One of the interesting statistics is the growth rate
of people buying airplane tickets over the Web. I don't know if any of you who came
here did that, but the compounding rate is a factor of five over the next year to
a $6 billion industry with all sorts of implications for how people buy and travel.
It goes on and on, and the thing that I have discovered in the last 12 months is that everywhere I look networks matter. That's what we're about and the good news is that's what everything else is about, as well. The network is becoming the centerpiece of every unique activity that seems to be interesting. And I don't just mean in terms of the Internet. I mean in the way that people use networks for business productivity, personal entertainment, constituencies, financial investments. All of that. Networks really matter a lot. and what I realized is that, in fact, as this network phenomena occurs, something changes and the thing that occurs is that there is a new face of networking. That new face of networking is not a single face, it's not an interface, it's a human face. In fact, it's as many human faces as there are connected to networks with all of the implications of what humanity means. The crazy ideas, the interesting experiments, the new paradigm that we have created. And that is the opportunity that Novell has.
We find ourselves extraordinarily well positioned to benefit from the wide spread adoption of networking both today and in the 21st century. Networks really do matter. They are probably the single most important thing that we will be doing in our lives to change society. In fact, the networks that we build, which are based on the principal of intelligent interconnected networks, are where the value is. It's where the creativity is and it's where the real opportunity is.
When I showed up, I tackled a number of problems. The first problem, which was a surprise to me, had to do with our business model. And, as Dennis highlighted, the issues that we faced involving cost structure, inventory — those kinds of things — were very painful. And we had to do this both in terms of expenses and headcount. We had to do a big restructuring in the channel. We got all that done very quickly. The advice to all of us was: it's going to be painful, get it done quickly so we could then go about the business of growing our business, growing our profits, and bringing back shareholder value.
This also meant, for example, that we had to take literally hundreds and hundreds of product initiatives. Many were interesting but not particularly relevant to the core networking vision of the company, which my predecessors initially developed and built an enormous franchise for. And we are returning to that model. It's clear to me that the opportunity is really around a networking platform. It's around the NetWare brand and all the services that run on top of that.
So, what we had to do was to establish some priorities: marketing priorities, product priorities, and organizational priorities. We had to develop a much more rigorous structure in how the organization was managed, what its deliverables were, and how we accounted for things. And we have been working that through as fast as we can. In general, things look pretty good. We have been able to ship at least one new product every month. What I realized fairly quickly in talking to customers is that many of them are extraordinarily loyal but they had been waiting for products that had been promised for sometime. And all we had to do was ship products that they had wanted and, indeed, we have begun that.
What's clear to me now is that we are doing a product driven transformation of the corporation. The corporation was represented by products which were innovative in their time, but based on protocols which had gone out of favor. Other initiatives had moved in and the company had not moved with it. The changes that we have made and the leadership of the team that you see before you have brought that.
We are now in a situation where for the next six months we are shipping more new products than at any time in the history of the company. We are beginning to go through a product cycle that will reposition the company to the right places in terms of the Internet and the center of modern computing, modern networking, and modern technology. So we are we on the right path. We're not done, we're not even half way through. Are we shipping products which people covet? Are the products those that our customers care about? Does the value that these products create make a difference to the corporations?
So, for example, BorderManager — a product which has ten times greater caching in IP protocol performance than any proxy cache competitor. It's an unbelievable product. It makes your network ten times faster if you buy one. The payback is immediate. Take a look at FastCache, one component of Border Manager that just does the caching function. Following GroupWise 5.2, we just announced GroupWise 5.5 beta. Again, the reviews have been awesome. The phrase has been, "GroupWise surges with 5.5." Of course, the code name was Surge.
ManageWise 2.5, the dominant player in managing physical layer and small business and NetWare servers. Again, a very successful product for us. Perhaps the most strategic products are NDS for NT. NDS is our directory. All of the analysts and all of our customers say that we have the only directory that matters and we also have the only directory that works. We are engaged in a lot of fun with Microsoft over NDS for NT. NDS for NT runs very well on NT and Microsoft initially withdrew support over it because of the competition with Active Directory. Then they reversed themselves for numerous reasons including wanting to work better with us.
This product is interesting because it allows our directory message, which is the killer strategy in the company today, to provide real customer value. We are going from being a tactical part of people's networks to being a strategic issue for the CIO. And we are doing that with, for example a product called ZEN Works. ZEN stands for Zero Effort Networking and it's a product which uses the directory tree, wanders through the network and allows Chief Information Officers to better manage their assets and reduce their total cost of ownership.
Now, the numbers here are pretty staggering. All of the estimates indicate, for example, that ZEN Works plus NetWare use 69 percent fewer staffing to do the same functions as our competitors' products. And you go, "No big deal, it just fewer people." It turns out that 3/4 of the cost of information technology are people related. It's a huge benefit that we get from doing this. And, of course, NetWare 5 is by far the most significant product this year and the highest priority in the company. The NetWare platform accounts for roughly 2/3 of our revenue. NetWare 5 moves the platform to the TCP/IP platform, and you go, "Well you know it's kind of interesting we're moving from one protocol to another." Once you're on TCP/IP, all of the scalability and other platform principals that the NetWare platform has always been known for —performance and scalability— become possible in the TCP/IP world. People covet this.
We have had some fun. We announced our Java server performance. Java server performance is 2 ½ times faster on NetWare than it is on the Microsoft Java VM, and the Microsoft Java VM until our announcement two weeks ago was the fastest on the planet. So it gives you some sense of the technology innovation that the corporation has been able to apply to this new and very, very fast growing space. And that's what we are so excited about. So, universally, customers say, "We trust and rely on your products and we're confident that you could do this. You have to deliver the products." And that's been our initiative and you can see we are delivering it and it's going to get even better over the next six months.
The core strategy is really around cost of ownership. As much as I like to talk about products and initiatives, the fact of the matter is the average executive customer wants to know in what way do we solve their problem. And you heard from John's comments that we have repositioned the momentum of the company by virtue of our move into the Internet, the new products coming out. And our next big initiative is all around marketing the message of how we solve the networking and marketing problems that people have in their world.
This is why our products matter and this is why Novell is relevant again. Take a look at Border Manager. I mentioned earlier we have one million people using Border. Border is a product that shipped in September of last year. So one of the benefits of Novell and one of the interesting things about it is that when we get these products out, the channel and the structure that again was built over many years is an enormous asset. I mean can you imagine if we were a start-up what people would be saying about our million users? You get the idea.
This new face of networking as we have articulated it accommodates the depth and breath of what people actually experience on networks. The problem that you have if you're on a corporate network or if you're part of a university or government or whatever kind of network you're on is, in fact, you have relationships of different kinds. You have ones based on geography, ones based on security, ones based on clubs that you're a part of, ones based on special training. And it is those relationship that constitute what we call your digital persona. And you go well, I don't really quite know what that is. But think about it, on networks you have to have rights and responsibilities and access and security that's just at the same level if not more so that you have in real space.
The issues in cyberspace around security and scaling and authentication are just as important, if not more important, because networks contain so much important information. And, of course, because they are networks you can, in fact, have a tremendous impact. If you're a person who is thief, you can go in and steal a million things rather than one thing and so our customers recognize this and they see the directory as the platform to build this on and this is where our leadership begins.
The technologies that enable this are the ones you see here on the chart. Whether they are document management or various applications, all the various protocols that people like myself care very deeply about and things like Internet access. And this, offering this solution, this complete solution is what Novell is all about.
With ZEN Works, we can, in fact, control and administer remote clients so we can make sure people are using the right software in the right way. When we wonder around from machine to machine, the software that you need becomes available to you without you even knowing about it. A huge breakthrough for many of our customers. And, of course, what's interesting is that if you ask the customers what their problem is, they say charitably, "This is what my network looks like. It's a complete mess." And one of the surprises for me over the summer was in talking with customers. I would talk about the technology that I have described and I would say, "Well, what do you want us to work on?" Just as kind of a sanity check. And they would say, "Yes, we are very interested in this Internet thing but, you know, our real problem is that the Internet activities also have to coexist with security access, servers, mainframes, and so forth that you have all sold us over the last 15 years."
So, in fact an integrated approach, a cross platform approach, a total solutions approach is how you solve this, and the way we achieve this is by using the directory. Literally, we take the information that is now spread out throughout entire companies. One person told me that they counted that there were 120 different places where information about a specific employee needed to be and, as you can imagine, the information is corrupted, wrong, and so forth and so on. By having it in one place we get an enormous cost savings and an ability to do new things.
I personally believe that the directory as a phenomena is as important as the SQL database business was 15 years ago. If I told you 15 years ago that companies will take this relatively strange query language called SQL and they will put all of their corporate data in it and then it will become the most mission critical part of their corporation, you would have said, "You don't get it Eric." But, in fact, that's what happened. At the time it wasn't obvious to people that that will occur. It's clear to me now in talking to our customers that the notion of a directory that controls the intelligent network is the most significant platform opportunity ahead of anyone that isn't controlled by an existing monopolist that is available in the industry as a whole.
We are fortunate to have the majority market share. Some estimates have it at 2/3; some estimates have it higher. All based around NDS, Novell Directory Services. So by doing this we have an opportunity to compete with Microsoft in an interesting way. Microsoft has a product called Active Directory. Their current directory solutions are so bad they don't even talk about them. And this new product, which of course they have announced but doesn't actually exist yet, is receding in the future for numerous scalability, technical issues, and so forth and so on.
So our sense within the company is that we have a window here. There's a period of time during which if we move quickly and, of course, that's what we are doing as quickly as we can, we get these products out, and we get customers excited about them. Of course, they have to work and indeed it looks very good there. Then, of course, we have a much, much stronger opportunity to go and complete the solution based on this new model based on the directory.
So, in that sense, NDS is a single service on the network that promises to deliver a unified network experience for you. And I don't think that you want your digital persona — who you are on the network, your relationships, what you do, all of your information — tied to your desktop. I think you want to be able to move from place to place. The future is a mobile future. So this is, of course, what NDS does and that's why it's so central to our strategy.
Let me conclude by talking a little bit about the assets inside the company. I think that one of the great delights from my perspective was discovering the very mini assets that exist within the corporation. I began, as you could imagine, by wondering the hallways of engineering and I would wonder up to somebody and say, "Well, what is it that you do that's better than anyone else." Of course, engineers always give you an answer to that question and the list was pretty impressive. And we have worked during this period of time to get this product road map established.
What was more surprising to me was the strength of the channel and the brand, which again is a many, many year phenomena and something for which I view myself as having inherited this enormous good. Eighty-one percent of Fortune 500 customers use Novell products, in particular, NetWare. It gives you an idea. Can you imagine a software company having that as its objective based on the products that we're describing. It's incredible. So, the loyalty, the commitment, and, in fact, what people say is over and over again, "We love the products. We need you to restore the viability of the company, and we need you to get your marketing focused around the issues." Again, I think John has demonstrated to you they will buy a lot more product. That's the psychology that exists in the market today.
I hope that what we have done in my brief comments and the comments from Dennis and John is indicate that there is a new face of networking. That this new face of networking is very much defined by the products and strategy we are doing. That Novell is extremely likely to be the defining and or dominant force in that space. And that opportunity is right before us and we are pretty excited and pretty charged up to do it.
If you think about it, the best way to predict the future is to invent it and that's exactly what we are doing. Thank you.
Copyright 1998