<PAGE> 1
Filed Pursuant to Rule 424(b)(3) and Rule 424(c)
Registration No. 333-87589
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 30, 1999)
-----------------------------
PROSPECTUS SUPPLEMENT
-----------------------------
VERITAS SOFTWARE CORPORATION
785,016 SHARES
COMMON STOCK
-----------------------------
This prospectus supplement supplements the prospectus dated September
30, 1999, as supplemented April 27, 2000 (the "Prospectus"), to which this
prospectus supplement is attached. This prospectus supplement should be read in
conjunction with the Prospectus, which is to be delivered with this prospectus
supplement. This prospectus supplement is qualified by reference to the
Prospectus except to the extent that the information in this prospectus
supplement supersedes the information contained in the Prospectus. All
capitalized terms used but not defined in this prospectus supplement have the
meanings given to them in the Prospectus.
-----------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SHARES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS OR THIS PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus supplement is May 17, 2000.
<PAGE> 2
FINANCIAL INFORMATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 340,469 $ 148,244
Short-term investments.................................... 510,981 544,137
Accounts receivable, net of allowance for doubtful
accounts of $6,046 at March 31, 2000 and $5,693 at
December 31, 1999...................................... 126,448 132,180
Deferred income taxes..................................... 23,803 23,803
Other current assets...................................... 18,925 13,381
---------- ----------
Total current assets.............................. 1,020,626 861,745
Long-term investments....................................... 49,004 65,036
Property and equipment, net................................. 88,233 76,958
Goodwill and other intangibles, net......................... 2,991,076 3,226,749
Other non-current assets.................................... 8,429 2,789
---------- ----------
Total assets...................................... $4,157,368 $4,233,277
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 32,774 $ 30,229
Accrued compensation and benefits......................... 41,769 35,560
Accrued acquisition and restructuring costs............... 22,089 24,202
Other accrued liabilities................................. 35,229 41,727
Income taxes payable...................................... 173 6,804
Customer advances......................................... 6,521 5,208
Deferred revenue.......................................... 124,296 86,979
---------- ----------
Total current liabilities......................... 262,851 230,709
Convertible subordinated notes.............................. 454,557 451,044
Deferred income taxes....................................... 144,384 157,867
Other non-current liabilities............................... 529 596
Stockholders' equity:
Common stock.............................................. 4,004,457 3,926,945
Accumulated deficit....................................... (706,757) (532,374)
Accumulated other comprehensive loss...................... (2,653) (1,510)
---------- ----------
Total stockholders' equity........................ 3,295,047 3,393,061
---------- ----------
Total liabilities and stockholders' equity........ $4,157,368 $4,233,277
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 3
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
--------- --------
<S> <C> <C>
Net revenue:
User license fees......................................... $ 204,316 $ 55,786
Services.................................................. 40,324 16,118
--------- --------
Total net revenue................................. 244,640 71,904
Cost of revenue:
User license fees......................................... 11,778 1,955
Services.................................................. 18,299 6,527
Amortization of developed technology...................... 15,395 --
--------- --------
Total cost of revenue............................. 45,472 8,482
--------- --------
Gross profit................................................ 199,168 63,422
Operating expenses:
Selling and marketing..................................... 87,583 26,823
Research and development.................................. 35,113 13,816
General and administrative................................ 14,911 3,289
Amortization of goodwill and other intangibles............ 219,759 --
--------- --------
Total operating expenses.......................... 357,366 43,928
--------- --------
Income (loss) from operations............................... (158,198) 19,494
Interest and other income, net.............................. 11,263 3,031
Interest expense............................................ (7,523) (1,433)
--------- --------
Income (loss) before income taxes........................... (154,458) 21,092
Provision for income taxes.................................. 19,925 7,509
--------- --------
Net income (loss)........................................... $(174,383) $ 13,583
========= ========
Net income (loss) per share -- basic........................ $ (0.44) $ 0.06
========= ========
Net income (loss) per share -- diluted...................... $ (0.44) $ 0.06
========= ========
Number of shares used in computing per share
amounts -- basic.......................................... 394,471 215,199
========= ========
Number of shares used in computing per share
amounts -- diluted........................................ 394,471 239,111
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 4
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(174,383) $ 13,583
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 9,416 2,785
Amortization of goodwill and other intangibles......... 219,759 --
Amortization of developed technology................... 15,395 --
Amortization of original issue discount on convertible
notes................................................. 3,513 --
Deferred income taxes.................................. (13,483) --
Changes in operating assets and liabilities:
Accounts receivable.................................. 5,732 2,487
Other assets......................................... (11,184) (9,071)
Accounts payable..................................... 2,545 (568)
Accrued compensation and benefits.................... 6,209 (3,794)
Accrued acquisition and restructuring costs.......... (2,113) --
Other accrued liabilities............................ (6,565) 292
Income taxes payable................................. (6,631) 3,964
Customer advances and deferred revenue............... 38,630 5,504
--------- --------
Net cash provided by operating activities......... 86,840 15,182
Cash flows from investing activities:
Purchases of investments.................................. (244,356) (83,409)
Investment maturities..................................... 293,544 42,290
Purchases of property and equipment....................... (20,172) (8,635)
--------- --------
Net cash provided by (used in) for investing
activities...................................... 29,016 (49,754)
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 77,512 7,053
--------- --------
Net cash provided by financing activities......... 77,512 7,053
Effect of exchange rate changes............................. (1,143) (243)
--------- --------
Net increase (decrease) in cash and cash equivalents........ 192,225 (27,762)
Cash and cash equivalents at beginning of period............ 148,244 139,086
--------- --------
Cash and cash equivalents at end of period.................. $ 340,469 $111,324
========= ========
Supplemental disclosures:
Cash paid for interest.................................... $ 4,322 $ --
Cash paid for income taxes................................ $ 1,865 $ 3,217
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 5
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, considered necessary for a fair
presentation have been included. The results for the interim periods presented
are not necessarily indicative of the results that may be expected for any
future period. The following information should be read in conjunction with the
consolidated financial statements and notes thereto included in the VERITAS
Software Corporation's Annual Report on Form 10-K for the year ended December
31, 1999.
2. USE OF ESTIMATES
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 condensed consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
3. STOCK SPLIT
On January 27, 2000, the Company announced a three-for-two split in the
form of a stock dividend paid on March 3, 2000 to stockholders of record on
February 18, 2000. All share and per share data have been restated to give
retroactive effect to this stock split.
4. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted-average
number of common shares outstanding during the period. Diluted net income per
share is computed using the weighted-average number of common shares and
dilutive potential common shares outstanding during the period. However,
dilutive potential common shares outstanding are not included in the denominator
for the three months ended March 31, 2000 as their effect would be
anti-dilutive. Potential common shares consist of employee stock options using
the treasury stock method and common shares issuable upon conversion of the
convertible subordinated notes. The following table sets forth the computation
of basic and diluted net income (loss) per common share (in thousands, except
per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
--------- --------
<S> <C> <C>
Numerator:
Net income (loss)......................................... $(174,383) $ 13,583
========= ========
Denominator:
Denominator for basic net income (loss) per
share -- weighted-average shares outstanding........... 394,471 215,199
Common stock equivalents.................................. -- 23,912
--------- --------
Denominator for diluted net income (loss) per share....... 394,471 239,111
========= ========
Basic net income (loss) per share........................... $ (0.44) $ 0.06
========= ========
Diluted net income (loss) per share......................... $ (0.44) $ 0.06
========= ========
</TABLE>
6
<PAGE> 6
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Common stock equivalents included in the denominator for purposes of
computing diluted net income (loss) per share do not include 10,465,067 shares
issuable upon conversion of the outstanding 5.25% convertible subordinated notes
and 13,010,144 shares issuable upon conversion of the outstanding 1.856%
convertible subordinated notes, as their effect would be anti-dilutive for all
periods presented. For the three months ended March 31, 2000, common stock
equivalents included in the denominator for purposes of computing diluted net
loss per share do not include 42,635,214 potential common shares, all related to
employee stock options, as their effect would be anti-dilutive.
5. COMPREHENSIVE INCOME (LOSS)
The following are the components of comprehensive income (loss) (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
--------- -------
<S> <C> <C>
Net income (loss)...................................... $(174,383) $13,583
Foreign currency translation adjustments............... (1,143) (243)
--------- -------
Comprehensive income (loss)............................ $(175,526) $13,340
========= =======
</TABLE>
6. SUMMARY FINANCIAL INFORMATION OF SUBSIDIARY
VERITAS and its wholly-owned subsidiary, VERITAS Operating Corporation, are
co-obligors on VERITAS' 5.25% convertible subordinated notes due 2004 and 1.856%
convertible subordinated notes due 2006. In accordance with Staff Accounting
Bulletin No. 53, Financial Statement Requirements in Filings Involving the
Guarantee of Securities by the Parent, VERITAS provides the following unaudited
summary financial information with respect to VERITAS Operating Corporation. The
following presents the operations of, and the assets held by, the legal entity
VERITAS Operating Corporation and does not necessarily, nor is intended to,
represent the operations of VERITAS Operating Corporation had it continued as a
separate entity absent the NSMG acquisition (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- -------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total net revenue....................................... $176,802 $71,904
Amortization of goodwill and other intangibles.......... 12,866 --
Income from operations.................................. 36,878 19,494
Net income.............................................. 18,062 13,583
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital...................................... $ 639,660 $ 530,672
Goodwill and other intangibles....................... 185,416 199,590
Total assets......................................... 1,117,095 987,359
Long-term obligations................................ 455,075 451,629
Retained earnings.................................... 54,134 36,072
Stockholders' equity................................. 504,077 433,478
</TABLE>
7
<PAGE> 7
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. SEGMENT INFORMATION
The Company operates in one segment, storage management solutions. The
Company's products and services are sold throughout the world, through direct,
original equipment manufacturer, reseller and distributor channels. The
Company's chief operating decision maker, the chief executive officer, evaluates
the performance of the Company based upon stand-alone software product and
service revenue by product channels and revenues by geographic regions of the
segment and does not receive separate, discrete financial information about
asset allocation, expense allocation or profitability from the Company's storage
products or services.
Geographic information (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
-------- -------
<S> <C> <C>
User license fees(1):
United States........................................ $152,801 $43,228
Europe(2)............................................ 40,389 8,917
Other(3)............................................. 11,126 3,641
-------- -------
Total...................................... 204,316 55,786
-------- -------
Services(1):
United States........................................ 32,957 12,578
Europe(2)............................................ 6,086 2,679
Other(3)............................................. 1,281 861
-------- -------
Total...................................... 40,324 16,118
-------- -------
Total net revenue.......................... $244,640 $71,904
======== =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
Long-lived assets(4):
United States...................................... $3,062,393 $3,289,545
Europe(2).......................................... 14,399 11,918
Other(3)........................................... 2,517 2,244
---------- ----------
Total.................................... $3,079,309 $3,303,707
========== ==========
</TABLE>
- ---------------
(1) License and services revenues are attributed to geographic regions based on
location of customers.
(2) Europe includes the Middle East and Africa.
(3) Other includes Canada, Latin America, Japan and the Asia Pacific region.
(4) Long-lived assets include all long-term assets except those specifically
excluded under SFAS No. 131, such as deferred income taxes and long-term
investments. Reconciliation to total assets reported (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
Total long-lived assets............................ $3,079,309 $3,303,707
Other assets, including current.................... 1,078,059 929,570
---------- ----------
Total consolidated assets................ $4,157,368 $4,233,277
========== ==========
</TABLE>
8
<PAGE> 8
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
No customer represented 10% or more of the Company's net revenue for the
three months ended March 31, 2000. One customer accounted for approximately
$8.9 million, or 12%, of the Company's net revenues for the three months
ended March 31, 1999.
8. COMMITMENTS AND CONTINGENCIES
Facilities lease commitments
During the first quarter of 2000, the Company amended and revised its
existing lease agreement, originally signed in the second quarter of 1999, for
new corporate campus facilities in Mountain View, California. These facilities
will replace certain facilities that the Company currently leases in Mountain
View. The new corporate campus facilities will be developed in one phase for a
total of 425,000 square feet and will provide space for sales, marketing,
administration and research and development functions. The lease term for these
facilities is five years beginning in March 2000, with an option to extend the
lease term for two successive periods of one year each. The revised total
approximate minimum lease payments for these facilities for the next five years
will be $0 for 2000, $5.3 million for 2001, $10.6 million for 2002 and $10.3
million for 2003 and 2004. The Company has an option to purchase the property
(land and facilities) for $139.4 million or, at the end of the lease, to arrange
for the sale of the property to a third party with the Company retaining an
obligation to the owner for the difference between the sales price and the
guaranteed residual value up to $123.8 million if the sales price is less than
this amount, subject to certain provisions of the lease. The Company anticipates
occupying the new corporate campus facilities and beginning the lease payments
in the second quarter of 2001. The lease agreement requires the Company to
maintain specified financial covenants such as earnings before interest, taxes,
depreciation and amortization (EBITDA), debt on EBITDA and quick ratio, all of
which the Company was in compliance with as of March 31, 2000.
During the first quarter of 2000, the Company signed a lease agreement for
its existing facilities in Roseville, Minnesota. The Company will improve and
expand its existing facilities of 62,000 square feet and will develop adjacent
property adding 260,000 square feet to the campus, with the first phase of
142,000 square feet being completed in the second quarter of 2001. The
facilities will provide space for research and development functions. The lease
term for these facilities is five years beginning in March 2000, with an option
to extend the lease term for two successive periods of one year each. The total
approximate minimum lease payments for these facilities for the next five years
will be $0.6 million in 2000, $1.9 million in 2001 and $2.9 million in 2002,
2003 and 2004. The Company has an option to purchase the property (land and
facilities) for $40 million or, at the end of the lease, to arrange for the sale
of the property to a third party with the Company retaining an obligation to the
owner for the difference between the sales price and the guaranteed residual
value up to $34.3 million if the sales price is less than this amount, subject
to certain provisions of the lease. The Company anticipates occupying the new
campus facilities and beginning the lease payments in the second quarter of
2001. The lease agreement requires the Company to maintain specified financial
covenants such as earnings before interest, taxes, depreciation and amortization
(EBITDA), debt on EBITDA and quick ratio, all of which the Company was in
compliance with as of March 31, 2000.
9. POTENTIAL ACQUISITION
On March 29, 2000, the Company, Seagate Technology, Inc. and an investor
group including certain members of Seagate Technology's management announced a
transaction in which the Company will acquire all of the shares of its common
stock held by Seagate Technology, certain other securities and cash. The Company
is not acquiring Seagate Technology's disc drive business or any other Seagate
Technology operating business. In the transaction, the Company will issue to the
Seagate Technology stockholders approximately 109.3 million shares of its common
stock to obtain approximately 128.1 million shares of the Company's common stock
held by Seagate Technology. In addition, the Company will issue shares of its
9
<PAGE> 9
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
common stock to the Seagate Technology stockholders to obtain certain other
securities held by Seagate Technology at the closing date and, at the Company's
election, the Company may also issue shares of its common stock to the Seagate
Technology stockholders to obtain up to $750 million in retained cash at the
closing date. The Company will be indemnified for liabilities, including tax
liabilities and other matters that may arise in connection with the transaction.
The transaction is intended to qualify as a tax-free reorganization.
10
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and accompanying notes, which appear elsewhere in this prospectus
supplement. The following discussion contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934 and Section
27A of the Securities Act of 1933, that involve risks and uncertainties. These
forward-looking statements include statements that reflect our plans, estimates
and beliefs, based on information available to us at the time of this report. We
assume no obligation to update any such forward-looking statements. Actual
results could differ materially from those anticipated in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those detailed from time to time in our filings with the
Securities and Exchange Commission and those discussed below and elsewhere in
this prospectus supplement, particularly in "Risk Factors."
Unless expressly stated or the content otherwise requires, the terms "we",
"our", "us" and "VERITAS" refer to VERITAS Software Corporation and its
subsidiaries.
OVERVIEW
VERITAS is a leading independent supplier of storage management software.
Storage management software has grown significantly in importance and market
impact during the last few years. Computing operations have moved from being
part of the infrastructural background of a business enterprise to being a
critical component in the success of a business, particularly given businesses'
requirements that data remain protected and accessible at all times. Our
products help our customers manage complex and diverse computing environments
efficiently and cost-effectively, by making sure that their data is protected,
can be accessed at all times, and can be managed and used in compliance with
business policies. Our products help to improve the levels of centralization,
control, automation and manageability in computing environments, and they allow
information technology, or IT, managers to be significantly more effective with
constrained resources and limited budgets. Our products offer protection against
data loss and file corruption, allow rapid recovery after disk or computer
system failure, enable IT managers and end users to work efficiently with large
numbers of files, and make it possible to manage data distributed on large
networks of computer systems without harming productivity or interrupting users.
These products provide continuous availability of data in clustered computer
systems that share disk resources to maintain smooth business operations and are
highly scalable in order to keep up with the rapid growth of data and
technologies deployed in businesses.
We develop and sell products for most popular operating systems, including
versions of UNIX and Windows NT. Our software solutions are used by customers
across a broad spectrum of industries, including many leading global
corporations and e-commerce businesses. We also provide a full range of services
to assist our customers in planning and implementing their storage management
solutions.
We market our products and services to original equipment manufacturers and
end user customers through a combination of direct sales and indirect sales
channels such as resellers, value-added resellers, hardware distributors,
application software vendors and systems integrators.
We derive user license fee revenue from shipments of our software products
to end-user customers through direct sales channels, indirect sales channels and
original equipment manufacturer customers. Our original equipment manufacturer
customers either bundle our products with the original equipment manufacturer
products licensed by such original equipment manufacturers or offer them as
options. Some original equipment manufacturers also resell our products. We
receive a royalty each time the original equipment manufacturer licenses to a
customer a copy of the original equipment manufacturer's products that
incorporates one or more of our products. Our license agreements with our
original equipment manufacturer customers generally contain no minimum sales
requirements and we cannot assure you that any original equipment manufacturer
will either commence or continue shipping operating systems incorporating our
products in the future. When we enter into new agreements with original
equipment manufacturer customers and resellers, a significant period of time may
elapse before we realize any associated revenue, due to development work that we
must generally undertake under these agreements and the time needed for the
sales
11
<PAGE> 11
and marketing organizations within these customers and distributors to become
familiar with and gain confidence in our products.
Our services revenue consists of fees derived from annual maintenance
agreements, from consulting and training services and from porting fees.
Original equipment manufacturer maintenance agreements covering our products
provide for technical and emergency support and minor unspecified product
upgrades for a fixed annual fee. Maintenance agreements covering products that
are licensed through channels other than original equipment manufacturers
provide for technical support and unspecified product upgrades for an annual
service fee based on the number of user licenses purchased and the level of
service subscribed. Porting fees consist of fees derived from porting and other
non-recurring engineering efforts when we port, or adapt, our storage management
products to an original equipment manufacturer's operating system and when we
develop new product features or extensions of existing product features at the
request of a customer. In most cases, we retain the rights to technology derived
from porting and non-recurring engineering work and therefore generally perform
this work on a relatively low, and sometimes negative, margin.
Our international sales are generated primarily through our international
sales subsidiaries. International revenue, most of which is collectible in
foreign currencies, accounted for approximately 24% of our total revenue for the
three months ended March 31, 2000 and 22% of our total revenue for the three
months ended March 31, 1999. Our international revenue increased 253% to $58.9
million for the three months ended March 31, 2000 from $16.1 million for the
three months ended March 31, 1999. Since much of our international operating
expenses are also incurred in local currencies, which is the foreign
subsidiaries' functional currency, the relative impact of exchange rates on net
income or loss is less than the impact on revenues. Although our operating and
pricing strategies take into account changes in exchange rates over time, our
operating results may be affected in the short term by fluctuations in foreign
currency exchange rates. Our international subsidiaries purchase licenses for
resale from the parent company resulting in intercompany receivables and
payables. These receivables and payables are carried on our books in the foreign
currency that existed at the time of the transaction. These receivables and
payables are eliminated for financial statement reporting purposes. Prior to
elimination, the amounts carried in foreign currencies are converted to the
functional currency at the then current rate, or "marked to market", which may
give rise to currency remeasurement gains and losses. Such gains or losses are
recognized on our statement of operations as a component of other income, net.
To date, such gains or losses have not been material.
We believe that our success depends upon continued expansion of our
international operations. We currently have sales and service offices and
resellers located in North America, Europe, Asia Pacific, South America and the
Middle East and a development center in India. International expansion will
require us to establish additional foreign offices, hire more personnel and
recruit new international resellers, resulting in the diversion of significant
management attention and the expenditure of financial resources. To the extent
that we are unable to meet these additional requirements, growth in
international sales will be limited, which would have an adverse effect on our
business, operating results and financial condition. International operations
also subject us to a number of risks inherent in developing and selling products
outside the United States, including potential loss of developed technology,
limited protection of intellectual property rights, imposition of government
regulation, imposition of export duties and restrictions, cultural differences
in the conduct of business, and political and economic instability. Furthermore,
some global markets, including Asia, Russia and Latin America, are currently
undergoing significant economic turmoil that could result in deferral of
purchase of information technology products and services by potential customers
located in such markets, thereby further limiting our ability to expand
international operations.
On May 28, 1999, we acquired the Network & Storage Management Group
business of Seagate Software, Inc., which we refer to as NSMG. On June 1, 1999
we acquired TeleBackup Systems, Inc., which we refer to as TeleBackup. On August
10, 1999, we acquired certain assets of NuView, Inc., which we refer to as
NuView. In the following paragraphs, all share and per share data have been
restated to give retroactive effect to our stock splits effected as stock
dividends through March 31, 2000.
The NSMG business developed and marketed software products and provided
related services enabling information technology professionals to manage
distributed network resources and to secure and protect
12
<PAGE> 12
enterprise data. Its products offered features such as system backup, disaster
recovery, migration, replication, automated client protection, storage resource
management, scheduling, event correlation and desktop management. In connection
with the NSMG acquisition, in consideration for the contribution of assets and
liabilities related to the NSMG business by Seagate Technology, Inc., Seagate
Software, Inc., and their respective subsidiaries, and based on the average
closing price of our common stock of $20.26 per share for 5 days before and
after June 7, 1999, the measurement date for the transaction, we issued
155,583,486 shares of our common stock to Seagate Software, Inc. and issued
options to purchase 15,626,358 shares of our common stock to our employees who
were former NSMG employees. We accounted for the NSMG acquisition using the
purchase method of accounting, and we are incurring charges of $221.5 million
per quarter primarily related to the amortization of developed technology,
goodwill and other intangibles over their estimated useful life of four years.
The total NSMG purchase price was $3,464.5 million and included $3,151.4 million
for the issuance of our common stock, $269.7 million for the exchange of options
to purchase our common stock and $43.4 million of acquisition-related costs. The
purchase price was allocated, based on an independent valuation, to goodwill of
$3,015.8 million, distribution channels of $233.8 million, original equipment
manufacturer agreements of $23.4 million, developed technology of $233.7
million, assembled workforce of $12.8 million, trademarks of $22.8 million,
in-process research and development of $101.2 million, net deferred tax
liabilities of $179.5 million, other intangibles of $1.5 million and tangible
net liabilities assumed of $1.0 million. For the three months ended March 31,
2000, we recorded $206.9 million for the amortization of goodwill and other
intangibles, and $14.6 million for the amortization of developed technology
related to this acquisition.
Acquisition-related costs consisted of direct transaction costs of $20.0
million, operating lease commitments on duplicative facilities of $8.2 million
and involuntary termination benefits of $15.2 million. Non-cash charges included
in the acquisition-related costs approximated $11.7 million. At March 31, 2000,
$17.5 million in direct transaction costs, $0.5 million in operating lease
commitments on duplicative facilities and $2.0 million in involuntary
termination benefits were paid against the acquisition-related costs accrual and
$11.7 million of non-cash involuntary termination benefits were charged against
the acquisition-related costs accrual. The remaining acquisition-related costs
accrual of $11.7 million is anticipated to be utilized primarily for servicing
operating lease payments or negotiated buyout of operating lease commitments,
the lease terms of which will expire at various times through the year 2013. In
addition, we recorded a restructuring charge of $11.0 million in 1999 as a
result of the NSMG acquisition. This restructuring charge related to exit costs
with respect to duplicative facilities that we plan to vacate, which include
$0.9 million of write-off of redundant equipment and leasehold improvements, and
involuntary termination benefits. Involuntary termination benefits relate to the
salary and fringe benefit expense for terminated employees in research and
development. The involuntarily terminated employees represented 2% of the global
workforce. At March 31, 2000, $0.9 million in severance costs and $0.2 million
of cancellation of facility leases and other contracts were paid against the
restructuring charge accrual and $0.9 million of write-off of redundant
equipment and leasehold improvements had been written off. The remaining
restructuring charge accrual of $9.0 million is anticipated to be utilized
primarily for servicing operating lease payments or negotiated buyout of
operating lease commitments, the lease terms of which will expire at various
times through the year 2012.
TeleBackup designed, developed and marketed software solutions for local
and remote backup and recovery of electronic information stored on networked,
remote and mobile personal computers. TeleBackup became our wholly-owned
subsidiary in exchange for the issuance of 6,842,795 shares of either our common
stock or exchangeable shares to the holders of TeleBackup common shares and the
exchange of options to purchase 154,706 shares of our common stock to our
employees who were former employees of TeleBackup. We accounted for the
TeleBackup acquisition using the purchase method of accounting, and we are
incurring charges of $9.0 million per quarter primarily related to the
amortization of developed technology, goodwill and other intangibles over their
estimated useful life of four years. Based on the average closing price of our
common stock of $19.60 per share for 5 days before and after June 1, 1999, the
measurement date for the transaction, the total purchase price for TeleBackup
was $143.1 million. The TeleBackup purchase price included $134.1 million
related to the issuance of our common stock, $2.8 million for the issuance of
options to purchase our common stock and $6.2 million in acquisition-related
costs. The acquisition costs of $6.2 million consist primarily of direct
transaction costs and involuntary termination benefits. At March 31, 2000, of
the
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<PAGE> 13
total $6.2 million acquisition costs, we paid $5.6 million in direct transaction
costs with the majority of the remaining $0.6 million anticipated to be utilized
by August 2000. The purchase price was allocated, based on an independent
valuation, to goodwill of $133.1 million, distribution channels of $1.0 million,
original equipment manufacturer agreements of $2.1 million, developed technology
of $6.6 million, assembled workforce of $0.3 million, trademarks of $1.3
million, in-process research and development of $1.9 million, net deferred tax
liabilities of $3.0 million and tangible net liabilities assumed of $0.2
million. For the three months ended March 31, 2000, we recorded $8.6 million for
amortization of goodwill and other intangibles, and $0.4 million for the
amortization of developed technology related to this acquisition.
Under an asset purchase agreement, we acquired certain assets of NuView,
including its Windows NT cluster management solution, Cluster X, for a total
cost of approximately $67.9 million. We accounted for the acquisition using the
purchase method of accounting, and we are incurring charges of $4.3 million per
quarter primarily related to the amortization of developed technology, goodwill
and other intangibles over their estimated useful life of four years. The
purchase price included $47.7 million related to the issuance of our common
stock, $0.8 million for the issuance of options to purchase our common stock to
former NuView employees, $0.2 million in acquisition-related costs and $19.2
million payable in cash, of which $12.4 million has been paid. The purchase
price was allocated, based on an independent valuation, to goodwill of $62.6
million, developed technology of $2.4 million, assembled workforce of $0.6
million, trademarks of $0.3 million, covenant-not-to-compete of $0.9 million and
in-process research and development of $1.1 million. For the three months ended
March 31, 2000, we recorded $4.1 million for amortization of goodwill and other
intangibles, and $0.2 million for the amortization of developed technology
related to this acquisition.
RECENT DEVELOPMENT
On March 29, 2000, VERITAS, Seagate Technology, Inc. and an investor group
including certain members of Seagate Technology's management announced a
transaction in which we will acquire all of the shares of our common stock held
by Seagate Technology, certain other securities and cash. We are not acquiring
Seagate Technology's disc drive business or any other Seagate Technology
operating business. In the transaction, we will issue to the Seagate Technology
stockholders approximately 109.3 million shares of our common stock to obtain
approximately 128.1 million shares of our common stock held by Seagate
Technology. In addition, we will issue shares of our common stock to the Seagate
Technology stockholders to obtain certain other securities held by Seagate
Technology at the closing date and, at our election, we may also issue shares of
our common stock to the Seagate Technology stockholders to obtain up to $750
million in retained cash at the closing date. We will be indemnified for
liabilities, including tax liabilities and other matters that may arise in
connection with the transaction. The transaction is intended to qualify as a
tax-free reorganization.
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RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenue represented
by certain line items from our condensed consolidated statement of operations
for the three months ended March 31, 2000 and 1999, respectively, and the
percentage changes between the comparable periods:
<TABLE>
<CAPTION>
PERCENTAGE OF PERIOD-TO-PERIOD
TOTAL NET REVENUE PERCENTAGE CHANGE
------------------- ------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31, 2000
------------------- ------------------
2000 1999 COMPARED TO 1999
----- ----- ------------------
<S> <C> <C> <C>
Net revenue:
User license fees............................. 84% 78% 266%
Services...................................... 16 22 150%
--- ---
Total revenue......................... 100 100 240%
Cost of revenue:
User license fees............................. 5 3 502%
Services...................................... 8 9 180%
Amortization or developed technology.......... 6 0 n/m
--- ---
Total cost of revenue................. 19 12 436%
--- ---
Gross profit.................................... 81 88 214%
Operating expenses:
Selling and marketing......................... 36 37 227%
Research and development...................... 14 19 154%
General and administrative.................... 6 5 353%
Amortization of goodwill and other
intangibles................................ 90 0 n/m
--- ---
Total operating expenses.............. 146 61 714%
--- ---
Income (loss) from operations................... (65) 27
Interest and other income, net.................. 5 4
Interest expense................................ (3) (2)
--- ---
Income (loss) before income taxes............... (63) 29
Provision for income taxes...................... 8 (10)
--- ---
Net income (loss)............................... (71)% 19%
=== ===
</TABLE>
- ---------------
n/m = not meaningful
Net Revenue. Total net revenue increased 240% from $71.9 million for the
three months ended March 31, 1999 to $244.6 million for the three months ended
March 31, 2000. We believe that the percentage increase in total revenue
achieved in this period is not necessarily indicative of future results. Our
revenue comprises user license fees and service revenue. User license fees
represented 84% of total net revenue for the three months ended March 31, 2000,
and 78% of total net revenue for the three months ended March 31, 1999.
User License Fees. User license fees increased 266% from $55.8 million for
the three months ended March 31, 1999 to $204.3 million for the three months
ended March 31, 2000. The increase was primarily the result of the acquisition
of NSMG in the second quarter of 1999, continued growth in market acceptance of
our software products, a greater volume of large end-user transactions,
increased revenue from original equipment manufacturer resales of bundled and
unbundled products and the introduction of new products. In particular, our user
license fees from storage products increased by approximately 315% from $42.1
million for the three months ended March 31, 1999 to $174.7 million for the
three months ended March 31, 2000, and accounted for 86% of user license fees in
the three months ended March 31, 2000 and 75% of user license fees in the three
months ended March 31, 1999.
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<PAGE> 15
Service Revenue. Service revenue is derived primarily from contracts for
software maintenance and technical support and, to a lesser extent, consulting
services, training services and porting fees. Service revenue increased 150%
from $16.1 million for the three months ended March 31, 1999 to $40.3 million
for the three months ended March 31, 2000. The increase was primarily due to
increased sales of service and support contracts on new licenses, renewal of
service and support contracts on existing licenses and, to a lesser extent, an
increase in demand for consulting and training services and the acquisition of
NSMG.
Cost of Revenue. Total cost of revenue increased 436% from $8.5 million for
the three months ended March 31, 1999 to $45.5 million for the three months
ended March 31, 2000. Gross margin on user license fees is substantially higher
than gross margin on service revenue, reflecting the low materials, packaging
and other costs of software products compared with the relatively high personnel
costs associated with providing maintenance, technical support, consulting,
training services and development efforts. Cost of service revenue also varies
based upon the mix of maintenance, technical support, consulting and training
services. We expect gross margin to fluctuate on a quarterly basis in the
future, reflecting the timing differences between increasing our organizational
investments and the corresponding revenue growth that is expected as a result.
Cost of User License Fees (including amortization of developed
technology). Cost of user license fees consists primarily of royalties, media,
manuals and distribution costs. Also included in the cost of user license fees
is the amortization of developed technology acquired in the NSMG, TeleBackup and
NuView acquisitions in 1999. Cost of user license fees increased 1,290% from
$2.0 million for the three months ended March 31, 1999 to $27.2 million for the
three months ended March 31, 2000. The increase in cost of user license fees is
due to the amortization of developed technology acquired in the NSMG, TeleBackup
and NuView acquisitions. Gross margin on user license fees decreased from 96%
for the three months ended March 31, 1999 to 87% for the three months ended
March 31, 2000. The decrease in gross margin on user license fees was due to the
inclusion of the amortization of developed technology. If we excluded the
amortization of developed technology from the cost of user license fees, the
gross margin would be 94% for the three months ended March 31, 2000. The gross
margin on user license fees may vary from period to period based on the license
revenue mix and certain products having higher royalty rates than other
products. We do not expect gross margin on user license fees to increase
significantly.
Cost of Service Revenue. Cost of service revenue consists primarily of
personnel-related costs in providing maintenance, technical support, consulting
and training to customers. Cost of service revenue increased 180% from $6.5
million for the three months ended March 31, 1999 to $18.3 million for the three
months ended March 31, 2000. Gross margin on service revenue decreased from 60%
for the three months ended March 31, 1999 to 55% for the three months ended
March 31, 2000. The increase in absolute dollars and the decrease in the gross
margin were primarily due to personnel additions in customer support and
training and consulting organizations, in anticipation of increased demand for
such services. We expect the cost of service revenue will continue to increase
in absolute dollars in future periods and the gross margin on service revenue
may increase slightly as a percentage.
Amortization of Developed Technology. Amortization of developed technology
was $15.4 million for the three months ended March 31, 2000. This amount mainly
represents the amortization of the developed technology recorded upon
acquisitions of NSMG, TeleBackup and NuView in 1999. The useful life of the
developed technology acquired in the NSMG, TeleBackup and NuView acquisitions is
four years and the amortization is expected to be approximately $15.4 million
per quarter.
Operating Expenses. The NSMG and the TeleBackup acquisitions have
contributed to increases in all operating expense categories. However, due to
the integration that has taken place to date, it is not possible to quantify the
portion of the increase that is directly related to these acquisitions.
Selling and Marketing. Selling and marketing expenses consist primarily of
salaries, related benefits, commissions, consultant fees and other costs
associated with our sales and marketing efforts. Selling and marketing expenses
increased 227% from $26.8 million for the three months ended March 31, 1999 to
$87.6 million for the three months ended March 31, 2000. Selling and marketing
expenses as a percentage of total net revenue decreased slightly from 37% for
the three months ended March 31, 1999 to 36% for the three months ended March
31, 2000. We intend to continue to expand our global sales and marketing
infrastructure,
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<PAGE> 16
and accordingly, expect our selling and marketing expenses to increase in
absolute dollars and increase slightly as a percentage of total revenue in the
future.
Research and Development. Research and development expenses consist
primarily of salaries, related benefits, third-party consultant fees and other
engineering related costs. Research and development expenses increased 154% from
$13.8 million for the three months ended March 31, 1999 to $35.1 million for the
three months ended March 31, 2000. The increase was primarily due to increased
staffing levels associated with new hires and the acquisitions. As a percentage
of net revenue, research and development expenses decreased from 19% for the
three months ended March 31, 1999 to 14% for the three months ended March 31,
2000. We believe that a significant level of research and development investment
is required to remain competitive, and expect such expenses will continue to
increase in absolute dollars in future periods and may increase slightly as a
percentage of total net revenue. Research and development expenses can be
expected to fluctuate from time to time to the extent that we make periodic
incremental investments in research and development and our level of revenue
fluctuates.
General and Administrative. General and administrative expenses consist
primarily of salaries, related benefits and fees for professional services, such
as legal and accounting services. General and administrative expenses increased
353% from $3.3 million for the three months ended March 31, 1999 to $14.9
million for the three months ended March 31, 2000. General and administrative
expenses as a percentage of revenue increased from 5% for the three months ended
March 31, 1999 to 6% for the three months ended March 31, 2000. The increase in
absolute dollars was primarily due to additional personnel costs, including
additional personnel related to the acquisitions in the second quarter of 1999
and, to a lesser extent, to an increase in other expenses associated with
enhancing our infrastructure to support expansion of our operations. General and
administrative expenses are expected to increase in absolute dollars, but not to
change significantly as a percentage of revenue in the future, as we expand our
operations.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and other intangibles was $219.8 million for the three months ended March 31,
2000. This amount mainly represents the amortization of goodwill, distribution
channels, trademarks and other intangible assets recorded upon acquisitions of
NSMG, TeleBackup and NuView in 1999. The estimated useful life of the goodwill
and other intangibles is four years and the amortization is expected to be
approximately $219.8 million per quarter.
Interest and Other Income, Net. Interest and other income, net increased
272% from $3.0 million for the three months ended March 31, 1999 to $11.3
million for the three months ended March 31, 2000. The increase was due to
increased amounts of interest income attributable to the higher level of funds
available for investment, primarily from the net proceeds of the issuance of the
1.856% convertible subordinated notes in August 1999, and, to a lesser extent,
from the net cash provided by operating activities. Foreign exchange transaction
gains and losses which are included in other income, net, have not had a
material effect on our results of operations.
Interest Expense. Interest expense increased 425% from $1.4 million for the
three months ended March 31, 1999 to $7.5 million for the three months ended
March 31, 2000. Interest expense consists primarily of interest accrued under
the 5.25% convertible subordinated notes issued in October 1997 and the 1.856%
convertible subordinated notes issued in August 1999.
Income Taxes. We had effective tax rates of 13% of pre-tax loss for the
three months ended March 31, 2000, compared to a tax provision of 36% for the
three months ended March 31, 1999. Our 2000 effective tax rate was negative and
differed from the combined federal and state statutory rates primarily due to
acquisition related charges that were non-deductible for tax purposes.
New Accounting Pronouncements. In December 1998, the AICPA issued SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. SOP 98-9 amends SOP 97-2 Software Revenue Recognition to require
recognition of revenue using the "residual method" when certain criteria are
met. We were required to implement these provisions of SOP 98-9 on January 1,
2000. SOP 98-9 also amends SOP 98-4, an earlier amendment to SOP 97-2, which
extended the deferral of the application of certain passages of SOP 97-2. The
adoption of SOP 98-9 did not have a material impact on our financial
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<PAGE> 17
position, results of operations or cash flows for the three months ended March
31, 2000 and is not expected to have a material effect for the year ending
December 31, 2000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. We will be required to
implement SFAS No. 133 as of the beginning of our fiscal year 2001. Our foreign
currency exchange rate hedging activities have been insignificant to date and we
do not believe that the impact of SFAS No. 133 will be material to our financial
position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" or
SAB 101. SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. All registrants are expected to
apply the accounting and disclosures described in SAB 101. The impact of SAB 101
was not material on our consolidated results of operation, financial position,
and cash flows for the three months ended March 31, 2000 and is not expected to
be material for the year ending December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short-term investments totaled $851.5
million at March 31, 2000 and represented 73% of our tangible assets, net. Cash
and cash equivalents are highly liquid with original maturities of ninety days
or less. Short-term investments consist mainly of investment grade commercial
paper, medium-term notes, corporate notes, governments securities and market
auction preferreds. At March 31, 2000, we had $454.6 million of long-term
obligations and stockholders' equity was approximately $3,295.0 million.
Net cash provided by operating activities was $86.8 million in the three
months ended March 31, 2000, and $15.2 million in the three months ended March
31, 1999. For the three months ended March 31, 2000, cash provided by operating
activities resulted primarily from income, after adjustments to exclude non-cash
charges including amortization of intangibles related to acquisition activities,
and an increase in deferred revenue, offset somewhat by a decrease in deferred
income taxes and an increase in other assets. For the three months ended March
31, 1999, cash provided by operating activities resulted primarily from net
income, an increase in deferred revenue, and a reduction in accounts receivable,
offset somewhat by an increase in other assets.
Our investing activities provided cash of $29.0 million in the three months
ended March 31, 2000 primarily due to the net decrease in short-term and
long-term investments of $49.2 million partially offset by capital expenditures
of $20.2 million. Our investing activities used cash of $49.8 million in the
three months ended March 31, 1999 due to the net increase in short-term
investments of $41.1 million and capital expenditures of $8.6 million.
Financing activities provided cash of $77.5 million in the three months
ended March 31, 2000, and $7.1 million in the three months ended March 31, 1999
from the issuance of common stock under our employee stock plans.
In October 1997, we issued $100.0 million of 5.25% convertible subordinated
notes due 2004 (the "5.25% notes"), for which we received net proceeds of $97.5
million. We and our wholly-owned subsidiary, VERITAS Operating Corporation, are
co-obligors on the 5.25% notes. The 5.25% notes provide for semi-annual interest
payments of $2.6 million each May 1 and November 1. The 5.25% notes are
convertible into shares of our common stock at any time prior to the close of
business on the maturity date, unless previously redeemed or repurchased, at a
conversion price of $9.56 per share, subject to adjustment in certain events,
equivalent to a conversion rate of 104.65 shares of common stock per $1,000
principal amount at maturity. On or after November 5, 2002, the 5.25% notes will
be redeemable over a period of time until maturity at our option at declining
premiums to par. The debt issuance costs are being amortized over the term of
the 5.25% notes using the interest method.
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<PAGE> 18
In August 1999, we and our wholly-owned subsidiary, VERITAS Operating
Corporation, issued $465.8 million, aggregate principal amount at maturity, of
1.856% convertible subordinated notes due 2006 (the "1.856% notes") for which we
received net proceeds of approximately $334.1 million. The interest rate of
1.856% together with the accrual of original issue discount represent a yield to
maturity of 6.5%. VERITAS and VERITAS Operating Corporation are co-obligors on
the 1.856% notes. The 1.856% notes provide for semi-annual interest payments of
$4.3 million each February 13 and August 13, commencing February 13, 2000. The
1.856% notes are convertible into shares of our common stock at any time prior
to the close of business on the maturity date, unless previously redeemed or
repurchased, at a conversion price of $35.80 per share, subject to adjustment in
certain events, equivalent to an initial conversion rate of 27.934 shares of
common stock per $1,000 principal amount at maturity. On or after August 16,
2002, the 1.856% notes will be redeemable over a period of time until maturity
at our option at the issuance price plus accrued original issue discount and any
accrued interest. The debt issuance costs are being amortized over the term of
the 1.856% notes using the interest method.
Following the issuance of the 5.25% notes and the 1.856% notes, we have a
ratio of long-term debt to total capitalization at March 31, 2000 of
approximately 12%. As a result of this additional indebtedness, our principal
and interest payment obligations increased substantially. The degree to which we
will be leveraged could materially and adversely affect our ability to obtain
financing for working capital, acquisitions or other purposes and could make us
more vulnerable to industry downturns and competitive pressures. We will require
substantial amounts of cash to fund scheduled payments of principal and interest
on our indebtedness, including the 5.25% notes and the 1.856% notes, future
capital expenditures and any increased working capital requirements. If we are
unable to meet our cash requirements out of cash flow from operations, we cannot
assure you that we will be able to obtain alternative financing.
During the first quarter of 2000, we amended and revised our existing lease
agreement for new corporate campus facilities in Mountain View, California.
These facilities will replace certain facilities we currently lease in Mountain
View. The new corporate campus facilities will be developed in one phase for a
total of 425,000 square feet and will provide space for sales, marketing,
administration and research and development functions. The lease term for these
facilities is five years beginning in March 2000, with an option to extend the
lease term for two successive periods of one year each. We have an option to
purchase the property (land and facilities) for $139.4 million or, at the end of
the lease, to arrange for the sale of the property to a third party with us
retaining an obligation to the owner for the difference between the sale price
and the guaranteed residual value up to $123.8 million if the sales price is
less than this amount, subject to certain provisions of the lease. We anticipate
occupying the new corporate campus facilities and beginning the lease payments
in the second quarter of 2001. The lease agreement requires us to maintain
specified financial covenants such as earnings before interest, taxes,
depreciation and amortization (EBITDA), debt on EBITDA and quick ratio, all of
which we were in compliance with as of March 31, 2000.
During the first quarter of 2000, we signed a lease agreement for our
existing facilities in Roseville, Minnesota. We will improve and expand our
existing facilities of approximately 62,000 square feet and will develop
adjacent property adding approximately 260,000 square feet to the campus, with
the first phase of approximately 142,000 square feet being completed in the
second quarter of 2001. The facilities will provide space for research and
development functions. The lease term for these facilities is five years
beginning in March 2000, with an option to extend the lease term for two
successive periods of one year each. We have an option to purchase the property
(land and facilities) for $40 million or, at the end of the lease, to arrange
for the sale of the property to a third party with us retaining an obligation to
the owner for the difference between the sale price and the guaranteed residual
value up to $34.3 million if the sales price is less than this amount, subject
to certain provisions of the lease. We anticipate occupying the new campus
facilities and beginning the lease payments in the second quarter of 2001. The
lease agreement requires us to maintain specified financial covenants such as
earnings before interest, taxes, depreciation and amortization (EBITDA), debt on
EBITDA and quick ratio, all of which we were in compliance with as of March 31,
2000.
We believe that our current cash, cash equivalents and short-term
investment balances and cash flow from operations will be sufficient to meet our
working capital and capital expenditure requirements for at least the next 12
months. After that time, we may require additional funds to support our working
capital
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requirements or for other purposes and may seek to raise such additional funds
through public or private equity financing or from other sources. We cannot
assure you that additional financing will be available at all or that if
available, we will be able to obtain it on terms favorable to us.
RISK FACTORS
In addition to other information in this prospectus supplement, the
following factors should be considered carefully in evaluating VERITAS and its
business.
We face many new difficulties managing a larger company
The NSMG and TeleBackup acquisitions have created new challenges for us. If
we fail to meet those challenges, our business and quarterly and annual results
of operations could be adversely affected and the value of your investment could
decline. We grew rapidly before these acquisitions. After these acquisitions,
our workforce was approximately twice the size of our workforce prior to the
acquisitions. This growth is likely to continue to strain our management control
systems and resources, including decision support, accounting, management
information systems and facilities. We must continue to improve our financial
and management controls and our reporting systems and procedures to manage our
employees and to obtain additional facilities.
We are incurring significant accounting charges in connection with the NSMG,
TeleBackup and NuView acquisitions that are creating net losses immediately and
in the future
The significant costs of integration associated with the NSMG, TeleBackup
and NuView acquisitions increase the risk that we will not realize the
anticipated benefits. Because we accounted for these acquisitions using purchase
method of accounting, we recorded goodwill and other intangible assets of
approximately $3,754.9 million in 1999. This amount is being amortized over four
years, and is resulting in charges to operations of approximately $234.8 million
per quarter.
We have a significant amount of debt that we may be unable to service or repay
In October 1997, we issued $100.0 million in aggregate principal amount of
5.25% convertible subordinated notes due 2004. In August 1999, we issued $465.8
million aggregate principal amount at maturity of 1.856% convertible
subordinated notes due 2006. The annual interest payments on our outstanding
notes as of March 31, 2000 are $5.3 million and $8.6 million respectively, which
we expect to fund from cash flow from operations. We will need to generate
substantial amounts of cash from our operations to fund interest payments and to
repay the principal amount of debt when it matures, while at the same time
funding capital expenditures and our other working capital needs. If we do not
have sufficient cash to repay our debts as they become due, we may be unable to
refinance our debt on reasonable terms or at all. For example, the notes could
be declared immediately due and payable if we do not make timely payments. While
our cash flow has been sufficient to fund interest payments to date, if we
cannot meet our debt obligations from the cash generated by our business, we may
not be able to develop and sell new products, respond to changing business or
economic conditions adequately, make acquisitions or otherwise fund our
business.
We might fail to successfully complete the integration of the businesses of
VERITAS, NSMG and TeleBackup
We continue to experience difficulties in integrating the businesses of
NSMG and TeleBackup with our own. If we fail to successfully complete the
integration, our businesses and our quarterly and annual results of operations
may be adversely affected. The difficulties that we face include:
- integrating our products with those of NSMG and TeleBackup, including
consolidating products with duplicative functionality and converging the
technologies supporting the various products despite their lack of a
common technology architecture;
- maintaining brand recognition for key products formerly associated with
NSMG, such as VERITAS Backup Exec, while migrating customer
identification of the brands to VERITAS;
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- resolving channel conflicts that may arise between our original equipment
manufacturer and direct sales channels and the retail channels acquired
in the NSMG acquisition;
- coordinating and streamlining geographically dispersed operations, such
as engineering facilities in California, Florida, Minnesota, North
Carolina, Maryland, Massachusetts, Washington, Canada, India and the
United Kingdom; and
- resolving differences between the corporate cultures of VERITAS, NSMG and
TeleBackup.
Our operating results may fluctuate significantly as a result of factors
outside our control, which could cause the market price of our notes and of our
securities to decline
Fluctuations in our results of operations are likely to affect the market
price of our common stock and subordinated notes in a manner that may be
unrelated to our long-term operating performance. The more likely it is that
market prices of our securities will fluctuate, the riskier is your decision to
buy, sell or hold our securities. In addition, the number of factors that could
affect our results of operation makes an investment in our securities riskier
than many other investments. Our revenues in any quarter will depend
substantially on orders we receive and ship in that quarter. In addition, we
typically receive a significant portion of orders in any quarter during the last
two weeks of the quarter, and we cannot predict whether those orders will be
placed, fulfilled and shipped in that period. If we have lower revenue than we
expect, we probably will not be able to reduce our operating expenses quickly in
response. Therefore, any significant shortfall in revenues or delay of customer
orders could have an immediate adverse effect on our operating results in that
quarter. The results of operations of VERITAS, and of the NSMG and TeleBackup
businesses we acquired in 1999, have fluctuated in the past, and our operating
results are likely to fluctuate significantly in the future. Factors that could
affect our results of operations include:
- the timing and magnitude of sales through original equipment
manufacturers;
- the unpredictability of the timing and level of sales to large
distributors in the retail channel and our direct sales force, which tend
to generate sales later in our quarters than original equipment
manufacturer sales;
- the timing and magnitude of large orders;
- the timing and amount of our marketing, sales and product development
expenses;
- the introduction, timing and market acceptance of new products;
- the timing of revenue recognition for sales of software products and
services;
- changes in data storage and networking technology or introduction of new
operating system upgrades by original equipment manufacturers, which
could require us to modify our products or develop new products;
- the relative growth rates of the Windows NT, UNIX and Linux markets;
- the rate of adoption of Microsoft's release of Windows 2000 by users;
- pricing policies and distribution terms; and
- the timing and magnitude of acquisitions.
We depend on large orders with lengthy sales cycles for a significant portion
of our revenues
Our revenues for a quarter could fluctuate significantly based on whether a
large order near the end of a quarter is closed or delayed. Customer orders can
range in value from a few thousand to a few million dollars. The length of time
between initial contact with a potential customer and sale of a product, or our
sales cycle, outside the retail channel is typically complex and lengthy, so it
can last from three to nine months. These direct sales also represent our
largest orders. Therefore, our revenues for a period are likely to be affected
by
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<PAGE> 21
the timing of larger orders, which makes that revenue difficult to predict. The
factors that could delay or defer an order, include:
- time needed for technical evaluations of our software by customers;
- customer budget restrictions;
- customer internal review and testing procedures; and
- engineering work needed to integrate our software with the customers'
systems.
We may be unable to hire and retain needed sales and engineering personnel
Our personnel needs are more acute than those facing most companies. We
need to hire additional sales, engineering, service and administrative
personnel. If we are unable to hire and retain these employees, our business and
quarterly and annual results of operations would be adversely affected.
Competition for people with the skills we require is intense. Additions of new
personnel and departures of existing personnel could disrupt our business and
may result in the departure of other employees. We also depend on the continued
service of our key personnel. Even though we have entered into employment
agreements with key management personnel, these agreements cannot prevent their
departure. We do not have key person life insurance covering any of our
personnel, nor do we currently intend to obtain any of this insurance.
We distribute our products through multiple distribution channels, each of
which is subject to risks
Historically, we sold products through original equipment manufacturers and
through direct sales. As a result of the NSMG and TeleBackup acquisitions in
1999, however, we also have a retail distribution channel as well. If we fail to
manage our distribution channels successfully, our business and quarterly and
annual results of operations would be adversely affected.
Retail distribution. Some of the software products of the former NSMG
business are sold primarily in the retail channel. As a result, we face
different challenges than we face in selling most of our other products. For
example:
- the VERITAS brand does not have the same level of recognition in the
retail channel;
- retail distribution typically involves shorter product life cycles; and
- the retail channel has higher risks of product returns, higher marketing
expenses and less predictable market demand.
Moreover, our retail distributors have no obligation to continue selling
the products previously sold by NSMG and TeleBackup and may terminate their
relationship with us at any time.
Direct sales. We also depend on our direct sales force to sell our
products. This involves a number of risks, including:
- longer sales cycles for direct sales;
- our need to hire, train, retain and motivate our sales force; and
- the length of time it takes our new sales representatives to become
productive.
Original equipment manufacturers. A portion of our revenue is expected to
come from original equipment manufacturers that incorporate our storage
management software into systems they sell. We have no control over the shipping
dates or volumes of systems the original equipment manufacturers ship and they
have no obligation to ship systems incorporating our software. They also have no
obligation to recommend or offer our software products exclusively or at all.
They have no minimum sales requirements and can terminate our relationship at
any time. These original equipment manufacturers also could choose to develop
their own storage management products internally and incorporate those products
into their systems in lieu of our products. Finally, the original equipment
manufacturers that we do business with compete with one another. To the extent
that one of our of original equipment manufacturer customers views the products
we have
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<PAGE> 22
developed for another original equipment manufacturer as competing with its
products, it may decide to stop doing business with us, which could harm our
business.
Development agreements for original equipment manufacturers. We have
important original equipment manufacturer agreements with Hewlett-Packard, Sun
Microsystems, Microsoft, Dell, Seagate Technology and Compaq Computer. Under
these agreements we develop "lite" versions of our products to be included in
these original equipment manufacturers' systems software and products.
Developing products for these original equipment manufacturers causes us to
divert significant resources from other activities that are also important to
our business. If these "lite" versions do not result in substantial revenue, our
business could be harmed.
Our distribution channels could conflict with one another
We have many different distribution channels. If we cannot use these
distribution channels efficiently, our business and quarterly and annual results
of operations could be adversely affected. Our original equipment manufacturers,
resellers and direct sales force might target similar sales opportunities, which
could lead to inefficient allocation of sales resources. We may also try to sell
full versions of the products to customers of the original equipment
manufacturers for whom we have developed "lite" versions of our products. This
would result in us marketing similar products to end-users. These overlapping
sales efforts could also harm our relationships with our original equipment
manufacturers and other sales channels and result in them being less willing to
market our products aggressively. If our indirect sales decline, we would need
to accelerate our investments in alternative distribution channels. We may not
be able to do this in a timely manner, or at all.
Our development agreements with Microsoft could cause us to lose customers
We have important agreements with Microsoft under which we develop software
for its Windows operating system. Microsoft is not obligated under the
agreements to include our software in any of its future releases of Windows
2000. If for any reason our software is not included in the future, we will lose
our expected opportunity to market additional products to the Windows 2000 or
Windows NT installed customer base, as well as suffer negative publicity. In
addition, we would lose a part of the investment we have made in developing
products for inclusion in Windows 2000.
Microsoft could develop competing products
Microsoft can also develop enhancements to and derivative products from our
software products that are embedded in Windows 2000 or Windows NT products. If
Microsoft develops any enhancements or derivative products, or enhances its own
base products with equivalent functionality, Microsoft could choose to compete
with us.
Sales of a small number of product lines make up a substantial portion of our
revenue
For the foreseeable future, we expect to derive a substantial majority of
our revenue from a limited number of software products. If many customers do not
purchase these products as a result of competition, technological change or
other factors, our revenue would decrease and our business and quarterly and
annual results of operations would be adversely affected. For example, for the
three months ended March 31, 2000 and 1999 we derived approximately $174.7
million, or 86%, and $42.1 million, or 75%, of our license revenue from storage
management products, including VERITAS Volume Manager, VERITAS File System,
VERITAS NetBackup and VERITAS Backup Exec. Also, our VERITAS NetBackup and
VERITAS Backup Exec products perform some overlapping functions. Customers may
select one product over the other, resulting in reduced revenue for the product
not selected. Therefore, we may not receive the same aggregate level of revenue
from these products as we have received in the past.
Our products have relatively short life cycles
Our software products have a limited life cycle and it is difficult to
estimate when they will become obsolete. This makes it difficult for us to
forecast revenue and makes your investment more risky. If we do not develop and
introduce new products before our existing products have completed their
lifecycles, we would not
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<PAGE> 23
be able to sustain our level of sales. In addition, to succeed, many customers
must adopt our new products early in each product's lifecycle. Therefore, if we
do not attract sufficient customers early in a product's life, we may not
realize the amount of revenue we anticipated for the product. We cannot be sure
that we will continue to be successful in marketing our key products.
We derive significant revenues from only a few customers
For the three months ended March 31, 2000, no customer accounted for
greater than 10% of our net revenue. For the three months ended March 31,1999,
we derived 12% of our revenue from sales to Sun Microsystems. If Sun
Microsystems, or any other significant customer, were to reduce its purchases
from us, our revenue and therefore our business would be harmed unless we were
to increase sales to other customers substantially. We do not have a contract
with Sun Microsystems or any other customer that requires the customer to
purchase any specified number of software licenses from us. Therefore, we cannot
be sure that these customers will continue to purchase our products at current
levels.
We face uncertainties porting products to new operating systems and developing
new products
Some of our products operate primarily on the UNIX computer operating
system. We are currently redesigning, or porting, these products to operate on
the Windows NT operating system. We are also developing new products for UNIX
and for Windows NT. We may not be able to accomplish any of this work quickly or
cost-effectively. These activities require substantial capital investment, the
devotion of substantial employee resources and the cooperation of the owners of
the operating systems to or for which the products are being ported or
developed. Our porting and development work for the Windows NT market has
required us to hire additional personnel with Windows NT expertise and to devote
engineering resources to these projects. We must obtain from operating system
owners a source code license to certain portions of the operating system
software to port some of our products to or develop products for the operating
system. Operating system owners have no obligation to assist in these porting or
development efforts. If they do not grant us a license or if they do not renew
our license, we would not be able to expand our product line easily into other
areas. For example, we rely on a source code license from Microsoft with respect
to our Windows NT development projects. Microsoft is under no obligation to
renew the source code license, which is subject to annual renewal.
We face intense competition on several fronts
We face a variety of tough competitors, principal among which are:
- internal development groups within original equipment manufacturers that
provide storage management functions to support their systems;
- other software vendors and hardware companies that offer products with
some of our products' features, such as controller and disk subsystem
manufacturers;
- hardware and software vendors that offer storage application products;
- hardware and software vendors that offer high availability and clustering
products; and
- software vendors focused on remote backup technologies and electronic
data vaulting services.
Many of our competitors have greater financial, technical sales, marketing
and other resources than we do and could attempt to increase their presence in
the storage management market by acquiring or forming strategic alliances with
other competitors or business partners.
Expanding our international sales depends on economic stability in regions
that have been unstable
An investment in our securities is riskier than an investment in many other
companies because we have begun to expand in overseas markets such as Asia,
Russia and Latin America that have experienced significant economic turmoil in
recent years. Continued turmoil could adversely affect our plans to increase
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<PAGE> 24
sales in these regions. Economic recession could also affect our ability to
maintain or increase sales in these or other regions in the future. Our concern
is that recession in these markets could lead to:
- restrictions on government spending imposed by the International Monetary
Fund;
- customers' reduced access to working capital to fund software purchases;
and
- reduced bank lending or other sources of financing for customers and
potential customers.
Any of these factors could cause foreign customers to reduce their purchase
of our products substantially.
Our foreign-based operations and sales create special problems that could hurt
our results
An investment in our securities is riskier than an investment in most
businesses because we have significant offshore operations, including
development facilities, sales personnel and customer support operations. For
example, as of March 31, 2000, we had approximately 215 engineers located in
Pune, India, performing product development work. These offshore operations are
subject to risks, including:
- potential loss of developed technology through piracy, misappropriation,
or more lax laws regarding intellectual property protection;
- imposition of governmental controls, including trade restrictions;
- fluctuations in currency exchange rates and economic instability;
- longer payment cycles for sales in foreign countries;
- difficulties in staffing and managing the offshore operations;
- seasonal reductions in business activity in the summer months in Europe
and other countries; and
- political unrest, particularly in areas in which we have facilities.
In addition, our international sales are denominated in local currency,
creating risk of foreign currency translation gains and losses that could harm
our quarterly and annual results of operations. If we generate profits or losses
in foreign countries, our effective income tax rate could also be adversely
affected. Currency instability in Asia and other financial markets may make our
products more expensive than products sold by other vendors that are priced in
one of the affected currencies. Therefore, customers in these markets may choose
not to purchase our products.
Our growth strategy is riskier than others because it is based upon
acquisitions of other businesses
An investment in our securities is riskier than investments in many other
companies because we plan to continue to pursue our strategy of growth through
acquisition. We have grown aggressively through acquisitions in the past and
expect to pursue acquisitions in the future.
Acquisitions involve a number of special risks and challenges, including:
- diversion of management attention, particularly in the case of multiple
concurrent acquisitions;
- integration of the acquired company's operations and employees with an
existing business;
- incorporation of technology into existing product lines;
- loss of key employees; and
- presentation of a unified corporate image.
In the past, we have lost certain employees of acquired companies whom we
desired to retain. In some cases, the integration of the operations of acquired
companies took longer than we anticipated. In addition, if the employees of
target companies remain geographically apart from our existing staff, we may not
realize some or all of the anticipated economies of scale.
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<PAGE> 25
RECENT DEVELOPMENT -- RISK FACTORS
The following risks relate to the proposed transaction described more fully
in the section titled "Recent Development" in Management's Discussion and
Analysis of Financial Condition and Results of Operations. In that transaction,
Seagate Technology, Inc. has agreed to sell all of its property and assets and
the property and assets of its consolidated subsidiaries, other than certain
designated assets, to Suez Acquisition Company (Cayman) Limited, which we refer
to as the stock purchase, and the related merger of a wholly owned subsidiary of
VERITAS with and into Seagate Technology, following which Seagate Technology
will become our wholly owned subsidiary, which we refer to as the merger.
Seagate Technology will remain liable to third parties after the stock purchase
and the merger
In the stock purchase, Seagate Technology will sell all of its operating
businesses to Suez Acquisition Company, and Suez Acquisition Company has agreed
to assume and indemnify Seagate Technology and us for substantially all
liabilities arising in connection with these businesses. However, third parties
may nevertheless try to seek recourse against Seagate Technology for these
liabilities. Seagate Technology currently is a large, multinational enterprise
that owns or leases facilities and offices in numerous states and foreign
countries. As a result, Seagate Technology, which will be our wholly owned
subsidiary, could continue to face a wide range of possible liabilities after
the stock purchase and the merger are completed, both for actions, events or
circumstances arising or occurring before the stock purchase and the merger as
well as after. Some areas of potential liability include:
- environmental cleanup costs and liabilities for claims made under
federal, state or foreign environmental laws;
- tax liabilities;
- obligations under federal, state and foreign pension and retirement
benefit laws;
- existing and future litigation arising from the restructuring that
Seagate Technology commenced last year, including litigation initiated by
terminated employees; and
- existing and future patent litigation.
If Suez Acquisition Company fails to indemnify Seagate Technology or us
under the indemnification agreement for any of these liabilities, we could
experience a material adverse effect on our business and financial performance.
Suez Acquisition Company may be unable to satisfy its obligations under the
indemnification agreement
Under the terms of the indemnification agreement, Suez Acquisition Company
has agreed to indemnify Seagate Technology and us for substantially all
liabilities arising in connection with Seagate Technology's operating
businesses, whether these liabilities arise before or after the stock purchase
and the merger. After the stock purchase, Suez Acquisition Company will have
consolidated indebtedness that will be substantially greater than Seagate
Technology's indebtedness prior to the stock purchase and the merger. As a
result of this increased level of indebtedness, if Seagate Technology or we make
a claim for indemnity under the indemnification agreement, Suez Acquisition
Company may be insolvent or otherwise financially incapable of satisfying its
indemnification obligations. Any failure by Suez Acquisition Company to satisfy
its indemnification obligations could have a material adverse effect on our
business and financial performance.
Failure to complete the stock purchase and the merger could negatively impact
our stock price
The stock purchase agreement and the merger contain a number of conditions
to the obligations of the parties to close the stock purchase and the merger. In
addition, the stock purchase agreement and the merger agreement may be
terminated under a number of circumstances. If the stock purchase and the merger
are not completed for any reason, we may be subject to a number of material
risks. These risks include the following:
- the market price of our common stock may decline to the extent that the
current market price of our common stock reflects a market assumption
that the stock purchase and the merger will be completed;
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<PAGE> 26
- we may be required to pay a fee to Suez Acquisition Company if the stock
purchase agreement is terminated for certain reasons; and
- fees, costs and expenses incurred by us in connection with the merger,
such as legal, accounting and financial advisor fees, costs and expenses,
must be paid even if the stock purchase and the merger are not completed.
The stock purchase and the merger may be delayed if Seagate Technology, VERITAS
and Suez Acquisition Company are unable to timely obtain all necessary consents
from governmental authorities
In order to complete the stock purchase and the merger, Seagate Technology,
VERITAS and Suez Acquisition Company have each filed notifications under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and have made
and will make various filings with state and foreign governmental authorities
with jurisdiction over applicable antitrust laws. It is a condition to the
obligations of Seagate Technology, VERITAS and Suez Acquisition Company to
effect the stock purchase and the merger that they comply with the
Hart-Scott-Rodino Antitrust Improvements Act and that all applicable waiting
periods under that statute expire. Although Seagate Technology, VERITAS and Suez
Acquisition Company do not currently anticipate any challenges to the stock
purchase or the merger based upon antitrust grounds, the Department of Justice,
the Federal Trade Commission or any state or foreign governmental authorities
could take action under various antitrust laws against the stock purchase or the
merger as they deem necessary in the public interest. Private parties may also
seek to take action under various antitrust laws against the stock purchase
and/or the merger. If any of these events occur, the stock purchase and the
merger may be delayed. Based upon available information, we believe that the
stock purchase and the merger comply with all significant federal, state and
foreign antitrust laws. We cannot assure you, however, that there will not be a
challenge to the stock purchase and/or the merger based on antitrust grounds, or
that if so challenged, Seagate Technology, VERITAS and Suez Acquisition Company
will prevail.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE RATE SENSITIVITY
We do not use derivative financial instruments for speculative purposes. We
engage in exchange rate hedging from time to time but this activity has been
insignificant to date and we do not hold or issue foreign exchange contracts for
trading purposes. Our international sales are generated primarily through our
international sales subsidiaries. Most international revenue is collectible in
foreign currencies. Since much of our international operating expenses are also
incurred in local currencies, which is the foreign subsidiaries functional
currency, the impact of exchange rates on net income or loss is relatively less
than the impact on revenue. Although our operating and pricing strategies take
into account changes in exchange rates over time, our results of operations may
be affected significantly in the short term by fluctuations in foreign currency
exchange rates. Our international subsidiaries purchase licenses for resale from
the parent company resulting in intercompany receivables and payables. These
receivables and payables are carried on these foreign subsidiaries' books at the
historical local currency that existed at the time of the transaction. These
receivables and payables are eliminated for financial statement reporting
purposes. Prior to elimination, the amounts carried in foreign currencies are
converted to the functional currency at the then current rate or "marked to
market." The marked to market process may give rise to currency remeasurement
gains and losses. These gains or losses are recognized on our statement of
operations as a component of other income, net. To date, any such gains or
losses have not been material. We do not believe our total exposure is
significant.
INTEREST RATE SENSITIVITY
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio and long-term debt obligations. Our primary
investment objective is to preserve principal while at the same time maximizing
yields without significantly increasing risk. Our portfolio includes money
markets funds, commercial paper, medium-term notes, corporate notes, government
securities and market auction preferreds.
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The diversity of our portfolio helps us to achieve our investment objective. As
of March 31, 2000, approximately 90% of our investment portfolio is composed of
investments with original maturities of one year or less and approximately 34%
of our investment portfolio matures less than 90 days from the date of purchase.
Long-term debt of $454.6 million consists of 5.25% convertible subordinated
notes due 2004 of $100.0 million (the "5.25% notes") and 1.856% convertible
subordinated notes due 2006 of $354.6 million (the "1.856% notes"). The interest
rate of 1.856% on the 1.856% notes together with the accrual of original issue
discount represent a yield to maturity of 6.5%. The nominal interest rate on
these notes is fixed and the notes provide for semi-annual interest payments of
approximately $2.6 million each May 1 and November 1 for the 5.25% notes and
approximately $4.3 million each February 13 and August 13 for the 1.856% notes.
The notes are convertible into our common stock at any time prior to the close
of business on the maturity date, unless previously redeemed or repurchased,
subject to adjustment in certain events.
The following table presents the amounts of our cash equivalents,
investments and long-term debt that may be subject to interest rate risk and the
average interest rates as of March 31, 2000 by year of maturity (dollars in
thousands):
<TABLE>
<CAPTION>
2001 AND FAIR VALUE
2000 THEREAFTER 2000 TOTAL 2000 TOTAL 1999 TOTAL
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash equivalents and short-term
investments:
Fixed rate....................... $691,407 $ 72,432 $763,839 $ 763,839 $194,330
Average fixed rate............... 5.99% 6.62% 6.05% 6.05% 5.04%
Variable rate.................... $ 8,500 $ 1,500 $ 10,000 $ 10,000 $ --
Average variable rate............ 5.89% 6.00% 5.91% 5.91% --
Total cash equivalents and
short-term investments:
Investments...................... $699,907 $ 73,932 $773,839 $ 773,839 $194,330
Average rate..................... 5.99% 6.61% 6.05% 6.05% 5.04%
Long-term investments:
Fixed rate....................... $ 39,004 $ 10,000 $ 49,004 $ 49,004 $ 47,859
Average fixed rate............... 5.38% 7.19% 5.75% 5.75% 5.21%
Long-term debt:
Fixed rate....................... $ -- $454,557 $454,557 $2,827,472 $100,000
Average fixed rate............... -- 6.22% 6.22% 6.22% 5.25%
</TABLE>
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INCREASE IN NUMBER OF AUTHORIZED SHARES
On May 10, 2000, our stockholders approved an amendment to our Restated
Certificate of Incorporation to increase the number of shares of common stock
that we are authorized to issue from 500 million to 2 billion. The amendment
became effective May 10, 2000.
IBM BUSINESS AGREEMENT
On May 16, 2000, we announced a business agreement with IBM in support
of AIX/Monterey. As part of the agreement, we will be porting and optimizing our
complete set of storage management solutions, including VERITAS Volume Manager
and VERITAS File System, to AIX/Monterey for IBM POWER and Intel IA-64
processor-based systems. AIX/Monterey is a code name that refers to both AIX for
the IBM POWER processors as well as the future delivery of the UNIX operating
system for Intel's IA-64 Itanium processor-based systems.
