<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-41318
JOINT PROXY STATEMENT/PROSPECTUS
[VERITAS LOGO] [SEAGATE LOGO]
Seagate Technology, Inc., VERITAS Software Corporation and Suez Acquisition
Company (Cayman) Limited, a company formed by a group of private equity firms,
are proposing to engage in a three-party transaction involving the sale of
Seagate's operating assets to Suez Acquisition Company, followed by a merger
between Seagate and a subsidiary of VERITAS. Seagate's senior management team
will also be participating in the transactions through an equity investment in
the entity that will hold Seagate's operating assets following the leveraged
buyout.
As described in more detail in this document, the combined transaction
involves:
- a sale to the private equity group of Seagate's operating assets for
$2.050 billion and the assumption by the private equity group of
substantially all of Seagate's liabilities. Seagate is required to
transfer $765 million of cash to the private equity group. The portion of
the purchase price available for payment to Seagate's stockholders in
connection with the leveraged buyout is $1.285 billion, subject to some
other adjustments described elsewhere in this document; and
- a subsequent merger between Seagate and a subsidiary of VERITAS in which
Seagate's stockholders will collectively receive: 109,330,300 shares of
VERITAS common stock, an additional number of shares of VERITAS common
stock determined shortly before the merger, an amount equal to the net
cash received from the leveraged buyout and other Seagate cash and an
interest in some Seagate tax attributes. The additional shares VERITAS
may issue would be in exchange for up to $500 million of the cash that
otherwise would be paid in connection with the merger and in exchange for
purchasing some of Seagate's investment securities.
Based upon the market prices of VERITAS common stock and Seagate's
investment securities as of October 11, 2000, Seagate's estimated cash balance
as of October 11, 2000 and the total number of fully-diluted outstanding shares
of Seagate common stock as of October 11, 2000, Seagate's stockholders would
receive the following per share cash and stock amounts if VERITAS elects to
retain $0, $250 million or $500 million of cash, respectively, in connection
with the merger.
<TABLE>
<CAPTION>
CASH RETAINED VALUE OF
BY VERITAS CASH AMOUNT STOCK AMOUNT
------------- ----------- ------------
<S> <C> <C>
$ 0 $7.35 $62.82
$250 million $6.31 $63.86
$500 million $5.27 $64.90
</TABLE>
These amounts are only estimates. The actual cash and stock amounts will
not be determined until the day the merger is completed, although the
109,330,300 shares of VERITAS to be received in the merger are fixed. For a more
detailed description of how the cash and stock amounts are determined, see "What
Will I Receive From the Merger?" beginning on page 2 of this document,
"Summary -- The Merger Agreement and the Merger" beginning on page 27 of this
document and "The Merger Agreement and the Merger -- The Merger Consideration"
beginning on page 140 of this document.
Based on these assumptions, the per share price for the operating assets
would be approximately $5.12 per Seagate share (which compares to the operating
assets' June 30, 2000 book value less $765 million, of $7.96 per Seagate share),
and the per share price payable in the merger, which includes a pass-through of
the consideration paid for the operating assets, would be approximately $70.17
per share (which compares to a June 30, 2000 book value for all of Seagate of
$16.78 per Seagate share).
Please read carefully the summary of the combined transaction beginning on
page 1 of this document, the full description of the combined transaction
beginning on page 123, and the agreements and other documents related to the
combined transaction attached as Annexes A through L to this document. Also,
please review carefully the charts on pages 6 and 7 and page 19 of this document
which show the components and calculation of the overall transaction
consideration.
THE LEVERAGED BUYOUT AND THE MERGER INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES. PLEASE READ THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE
56, FOR A DISCUSSION OF SPECIFIC RISKS THAT YOU SHOULD CONSIDER IN DETERMINING
HOW TO VOTE IN CONNECTION WITH THE LEVERAGED BUYOUT AND THE MERGER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE LEVERAGED BUYOUT, THE MERGER
BETWEEN SEAGATE AND A SUBSIDIARY OF VERITAS OR THE SECURITIES TO BE OFFERED TO
SEAGATE STOCKHOLDERS IN CONNECTION WITH THE MERGER, PASSED UPON THE MERITS OR
FAIRNESS OF THE LEVERAGED BUYOUT OR THE MERGER, OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THE DISCLOSURE IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THIS DOCUMENT IS DATED OCTOBER 23, 2000 AND WAS FIRST MAILED TO
STOCKHOLDERS ON OR ABOUT OCTOBER 23, 2000.
<PAGE> 2
THIS DOCUMENT INCORPORATES IMPORTANT BUSINESS AND FINANCIAL INFORMATION
ABOUT SEAGATE AND VERITAS THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS
DOCUMENT. THIS INFORMATION IS AVAILABLE UPON WRITTEN OR ORAL REQUEST AT THE
FOLLOWING:
<TABLE>
<S> <C>
SEAGATE TECHNOLOGY, INC. VERITAS SOFTWARE CORPORATION
920 DISC DRIVE 1600 PLYMOUTH STREET
SCOTTS VALLEY, CALIFORNIA 95066 MOUNTAIN VIEW, CALIFORNIA
ATTENTION: BILL ROWLEY 94043
INVESTOR RELATIONS ATTENTION: DAVE GALIOTTO
(831) 439-2371 (650) 318-4047
[email protected] [email protected]
</TABLE>
IN ORDER TO RECEIVE TIMELY DELIVERY OF THIS INFORMATION, YOU MUST REQUEST
THIS INFORMATION NO LATER THAN FIVE BUSINESS DAYS BEFORE THE SPECIAL MEETINGS
DESCRIBED IN THIS DOCUMENT, OR NOVEMBER 14, 2000.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Questions and Answers for Seagate Stockholders.............. 1
Questions and Answers for VERITAS Stockholders.............. 13
Consideration Components.................................... 19
Diagrams of the Transactions................................ 20
Summary..................................................... 23
The Parties............................................... 23
The Stock Purchase Agreement and the Leveraged Buyout..... 24
The Merger Agreement and the Merger....................... 27
Appraisal Rights.......................................... 31
The Indemnification Agreement............................. 31
The Exclusivity Agreement................................. 31
Amendments to Stock Purchase Agreement, Merger Agreement
and Indemnification Agreement.......................... 31
Interests of Directors and Other Executive Officers of
Seagate in the Leveraged Buyout and the Merger......... 32
Interests of Directors of VERITAS in the Merger........... 32
Opinion of Seagate's Financial Advisor.................... 32
Opinion of VERITAS' Financial Advisor..................... 33
Regulatory Filings and Approvals Required to Complete the
Leveraged Buyout and the Merger........................ 34
Material United States Federal Income Tax Consequences of
the Merger............................................. 34
Accounting Treatment of the Leveraged Buyout and the
Merger................................................. 35
Litigation Regarding the Leveraged Buyout and the
Merger................................................. 35
Cautionary Statement Regarding Forward Looking Statements
Contained in this Document............................. 36
Summary Selected Historical Financial Data.................. 37
Summary Selected Historical Financial Data for Seagate.... 37
Summary Selected Historical Financial Data for VERITAS.... 42
Summary Selected Pro Forma Financial Data................... 47
Summary Selected Unaudited Pro Forma Condensed Financial
Data for Seagate and Seagate's Operating Assets........ 47
Summary Selected Unaudited Pro Forma Combined Condensed
Consolidated Financial Data for VERITAS................ 50
Comparative Historical and Pro Forma Per Share Data......... 52
Seagate Comparative Per Share Data........................ 52
VERITAS Comparative Per Share Data........................ 53
Comparative Per Share Market Price Data and Dividend
Information............................................... 54
Seagate Market Purchases.................................... 55
Risk Factors................................................ 56
Risks to Seagate Stockholders Relating to the Leveraged
Buyout and the Merger.................................. 56
Risks to Both Seagate and VERITAS Stockholders Relating to
the Leveraged Buyout and the Merger.................... 59
Risks Relating to VERITAS................................. 61
Special Factors Regarding the Leveraged Buyout and the
Merger.................................................... 70
Background of the Leveraged Buyout and the Merger......... 70
Consideration of the Leveraged Buyout and the Merger by
Seagate................................................ 80
Seagate's Reasons for the Leveraged Buyout and the
Merger................................................ 80
Recommendation of the Board of Directors of
Seagate/Fairness...................................... 85
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Opinion of Seagate's Financial Advisor................. 85
Interests of Directors and Other Executive Officers of
Seagate in the Leveraged Buyout and the Merger........ 97
Consideration of the Merger and the Leveraged Buyout by
VERITAS................................................ 103
VERITAS' Purposes and Reasons for the Merger........... 103
Recommendation of the Board of Directors of VERITAS.... 105
Fairness of the Merger and the Leveraged Buyout to
Seagate Stockholders.................................. 107
Opinion of VERITAS' Financial Advisor.................. 109
Interests of Directors of VERITAS in the Merger........ 114
Effect of the Merger on VERITAS........................ 115
Plans Relating to Seagate After the Merger............. 115
Consideration of the Leveraged Buyout and the Merger by
Suez Acquisition Company............................... 115
Purpose of the Leveraged Buyout........................ 115
Fairness of the Leveraged Buyout and the Merger to
Seagate Stockholders.................................. 115
Consideration of the Leveraged Buyout and the Merger by
Mr. Luczo.............................................. 117
Summary Seagate Financial Projections..................... 117
Other Material Contracts and Agreements Between Seagate
and VERITAS............................................ 119
The Stock Purchase Agreement and the Leveraged Buyout....... 123
The Parties............................................... 123
The Asset Transfer and the Leveraged Buyout............... 123
Purchase Price............................................ 124
Adjustments............................................... 124
Financing of the Purchase Price........................... 125
Rollover Equity........................................... 127
Representations and Warranties............................ 128
Covenants Relating to Conduct of Business by Seagate Prior
to the Completion of the Leveraged Buyout.............. 130
Covenants Relating to Solicitations by Seagate Prior to
the Completion of the Leveraged Buyout................. 131
Covenants Relating to Employee Matters.................... 132
Covenant to Recommend the Leveraged Buyout to the Seagate
Stockholders........................................... 133
Covenants Relating to Directors' and Officers'
Indemnification and Insurance.......................... 133
The Completion of the Leveraged Buyout; Conditions to the
Completion of the Leveraged Buyout..................... 134
Suez Acquisition Company Indemnification Obligations
Following the Completion of the Leveraged Buyout....... 135
Amendment or Waiver of Terms of the Stock Purchase
Agreement.............................................. 135
Termination of the Stock Purchase Agreement; Termination
Fees and Payments...................................... 136
The Merger Agreement and the Merger......................... 138
The Parties............................................... 138
Terms of the Merger....................................... 138
Effects of the Merger..................................... 138
The Merger Consideration.................................. 140
Effectiveness of the Merger............................... 146
Exchange and Payment Procedures for Seagate
Stockholders........................................... 146
No Dividends.............................................. 148
Transfer of Seagate Common Stock.......................... 148
Representations and Warranties............................ 148
Covenants Relating to Solicitations by Seagate Prior to
the Completion of the Merger........................... 151
Covenant Relating to Modification of the Stock Purchase
Agreement.............................................. 152
Covenant to Seek Waivers for Claims Relating to
Cancellation of Shares and Options..................... 152
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Covenant to Recommend the Merger to the Seagate
Stockholders and the VERITAS Stockholders.............. 152
Covenants Relating to Directors' and Officers'
Indemnification and Insurance.......................... 153
The Closing; Conditions to the Closing.................... 153
Amendment or Waiver of Terms of the Merger Agreement...... 155
Termination; Termination Fees and Payments................ 155
Amendments to Stock Purchase Agreement, Merger Agreement
and Indemnification Agreement.......................... 158
Restrictions on Sales of Shares by Affiliates............. 158
Appraisal Rights.......................................... 159
Listing on the Nasdaq National Market of VERITAS Common
Stock to Be Issued in the Merger....................... 163
Delisting and Deregistration of Seagate Common Stock After
the Merger............................................. 163
Litigation Regarding the Leveraged Buyout and Merger...... 163
Other Agreements Related to the Leveraged Buyout and the
Merger.................................................... 165
The Indemnification Agreement............................. 165
The Exclusivity Agreement................................. 167
Regulatory Filings and Approvals Required to Complete the
Leveraged Buyout and the Merger........................... 169
Material United States Federal Income Tax Consequences of
the Merger................................................ 169
Accounting Treatment of the Leveraged Buyout and the
Merger.................................................... 175
The Seagate Special Meeting................................. 176
The VERITAS Special Meeting................................. 179
Selected Historical Financial Data and Management's
Discussion and Analysis of Selected Historical Financial
Data for Seagate.......................................... 182
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Seagate...................... 184
Overview.................................................. 184
Results of Operations..................................... 189
Other..................................................... 194
Liquidity and Capital Resources........................... 195
Disclosures About Market Risk............................. 195
Selected Historical Financial Data for VERITAS.............. 198
Management's Discussion and Analysis of Financial Condition
and Results of Operations of VERITAS...................... 199
Overview.................................................. 199
Management's Discussion and Analysis of Financial
Condition and Results of Operations for VERITAS for the
Year Ended December 31, 1999........................... 204
Management's Discussion and Analysis of Financial
Condition and Results of Operations for VERITAS for the
Three and Six Months Ended June 30, 2000............... 210
Selected Pro Forma Financial Data........................... 219
Unaudited Pro Forma Condensed Financial Statements for
Seagate and Seagate's Operating Assets................. 219
Prior Seagate Acquisition Related Transactions......... 220
Unaudited Pro Forma Combined Condensed Consolidated
Financial Statements for VERITAS....................... 234
Comparison of Rights of Holders of Seagate Common Stock and
VERITAS Common Stock...................................... 248
Additional Information Regarding Seagate.................... 254
Additional Information Regarding VERITAS.................... 254
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Other Stockholder Proposals................................. 255
Proposals by Seagate Stockholders......................... 255
Proposals by VERITAS Stockholders......................... 255
Legal Matters............................................... 256
Experts..................................................... 256
Where You Can Find Additional Information................... 257
Additional Documents and Other Information Incorporated by
Reference................................................. 257
Cautionary Statement Regarding Information Contained in this
Document.................................................. 261
Index to Financial Statements............................... F-1
</TABLE>
<TABLE>
<S> <C>
ANNEX A Stock Purchase Agreement
ANNEX B Agreement and Plan of Merger and Reorganization
ANNEX C Indemnification Agreement
ANNEX D Consolidated Amendment and Consent
ANNEX E Consolidated Amendment and Consent No. 2
ANNEX F Exclusivity Agreement
ANNEX G Opinion of Morgan Stanley & Co. Incorporated (Financial
Advisor to Seagate)
ANNEX H Opinion of Credit Suisse First Boston Corporation (Financial
Advisor to VERITAS)
ANNEX I Delaware General Corporation Law Section 262
ANNEX J Tax Opinion of Willkie Farr & Gallagher
ANNEX K Tax Opinion of Wilson Sonsini Goodrich & Rosati,
Professional Corporation
ANNEX L Second Amended and Restated Complaint and Memorandum of
Understanding
</TABLE>
<PAGE> 7
QUESTIONS AND ANSWERS FOR SEAGATE STOCKHOLDERS
Q: WHY IS SEAGATE PROPOSING THE LEVERAGED BUYOUT AND THE MERGER BETWEEN SEAGATE
AND A VERITAS SUBSIDIARY?
A: Seagate's board of directors believes that, during the several quarters
preceding the announcement of the transactions discussed in this document,
Seagate's stock had been trading at a significant discount relative to the
value of Seagate's assets, in particular its operating assets and the shares
of VERITAS common stock it holds. For example, during the period beginning
January 4, 1999 to late October 1999, the market price of VERITAS common
stock increased 200%, while the market price of Seagate common stock did not
increase at all, despite the fact that Seagate held approximately 32.5% of
the outstanding shares of VERITAS common stock during this period. Moreover,
after subtracting the after-tax market value of Seagate's investment
securities and the shares of VERITAS common stock it holds and the value of
the net cash from Seagate's total market capitalization, the implied public
market valuation of Seagate's operating assets has recently ranged from a
high of approximately $1.68 billion on February 16, 2000 to a low of
approximately a negative $620 million on March 7, 2000. After reviewing
several alternatives with its financial advisor, Seagate's board of directors
has concluded that the leveraged buyout and the merger together create an
opportunity to unlock the value of Seagate's underlying assets for the
benefit of its stockholders. Seagate's board of directors believes that the
leveraged buyout and the merger will unlock this value by enabling Seagate's
stockholders to receive cash and direct ownership of VERITAS common stock in
a manner which should be tax-free at the corporate and stockholder level with
respect to the VERITAS stock.
Q: CAN THE MERGER BETWEEN SEAGATE AND A VERITAS SUBSIDIARY BE COMPLETED WITHOUT
THE LEVERAGED BUYOUT?
A: No. The merger is conditioned on the completion of the leveraged buyout. If
the leveraged buyout does not happen, neither will the merger. Similarly, the
leveraged buyout is conditioned on all of the conditions to the merger being
satisfied (other than the completion of the leveraged buyout). As a result,
although you will be able to separately consider and vote upon the leveraged
buyout and the merger, your vote on the leveraged buyout is effectively a
vote on the merger, and vice-versa. Neither the leveraged buyout nor the
merger will happen unless the leveraged buyout is approved by the
stockholders of Seagate, the merger is approved by the stockholders of
Seagate, the issuance of VERITAS shares in connection with the merger is
approved by the stockholders of VERITAS, and all of the other conditions to
the completion of both the leveraged buyout and the merger are satisfied.
Q: WHO WILL OWN SEAGATE FOLLOWING THE LEVERAGED BUYOUT AND THE MERGER BETWEEN
SEAGATE AND VERITAS?
A: Following the leveraged buyout, Suez Acquisition Company will own all of
Seagate's operating assets and will have the right to use the "Seagate" name.
Suez Acquisition Company is a newly formed company controlled by Silver Lake
Partners L.P., Texas Pacific Group, August Capital, Chase Capital Partners
and Goldman Sachs. Silver Lake Partners L.P. is a private equity firm the
general partner of which is Silver Lake Technology Associates, L.L.C. Silver
Lake Technology Associates is a Delaware limited liability company, the
managing members of which are James A. Davidson, Glenn H. Hutchins, David J.
Roux and Integral Capital Partners. Texas Pacific Group is a private equity
firm which is managed by entities controlled by David Bonderman,
1
<PAGE> 8
James G. Coulter and William S. Price III. As a condition to completing the
leveraged buyout, the private equity firms that control Suez Acquisition
Company are requiring that Stephen J. Luczo, Charles C. Pope, William D.
Watkins, Donald L. Waite, Townsend H. Porter and Thomas S. Mulvaney,
Seagate's President and Chief Executive Officer, Executive Vice President and
Chief Financial Officer, Executive Vice President and Chief Operating Officer
of Disc Drive Operations, Recording Media Operations and Recording Heads
Operations, Executive Vice President and Chief Administrative Officer,
Executive Vice President/Chief Technology Officer of Product and Technology
Development, and Senior Vice President, Internet Solutions, respectively, as
well as other members of Seagate's senior management team, participate in the
ownership of Suez Acquisition Company by converting a portion of their equity
in Seagate into deferred compensation and equity in an entity that will
control Seagate's operating assets following the leveraged buyout.
Immediately following the leveraged buyout, VERITAS will acquire Seagate in
the merger. Because all of Seagate's operating assets will be sold to Suez
Acquisition Company in connection with the leveraged buyout, VERITAS will not
acquire any of the operating assets of Seagate as a result of the merger.
Q: DO MEMBERS OF SEAGATE'S SENIOR MANAGEMENT TEAM HAVE ANY OTHER SPECIAL
INTERESTS IN THE LEVERAGED BUYOUT AND THE MERGER?
A: Yes. Members of Seagate's senior management team will be entering into
employment agreements with Suez Acquisition Company or one of its
subsidiaries in connection with the leveraged buyout. These persons include
Messrs. Luczo, Watkins, Pope, Waite, Porter and Mulvaney. Members of
Seagate's senior management team will also be entitled to receive additional
options to purchase equity in an entity that will control Seagate's operating
assets following the leveraged buyout.
Q: WHAT WILL I RECEIVE FROM THE MERGER?
A: As a result of the merger each of Seagate's stockholders will receive their
proportionate share of:
- 109,330,300 shares of VERITAS common stock; and
- a number of shares of VERITAS common stock determined by dividing the
aggregate negotiated discount to the average market prices of investment
securities of Gadzoox Networks and Lernout & Hauspie held by Seagate
shortly before the completion of the merger, by the average closing
price per share of VERITAS common stock for the five consecutive trading
days ending two trading days immediately prior to the completion of the
merger.
The fixed number of 109,330,300 shares of VERITAS common stock to be issued
to Seagate's stockholders represents a negotiated discount of approximately
14.6% with respect to the 128,059,966 shares of VERITAS common stock
currently held by Seagate through a Seagate subsidiary.
The exact number of shares of VERITAS common stock to be issued in exchange
for these investment securities will be determined on the day the merger is
completed, based upon the respective market prices of VERITAS common stock
and the investment securities. The negotiated discount from market value of
40% and the reduction for estimated taxes that will be applied to these
investment securities reflect the view that these investment securities may
not be readily tradeable in the hands of VERITAS, and that any sale of these
investment securities by VERITAS will be
2
<PAGE> 9
subject to applicable federal and state income taxes. VERITAS agreed to
acquire these investment securities in connection with the merger because
the private equity group was not willing to acquire those investment
securities for cash in connection with the leveraged buyout.
Since entering into the merger agreement, Seagate has sold all of its
SanDisk Corporation stock and Veeco Instruments stock, realizing gross
proceeds of $375.8 million. In addition, Seagate has sold a portion of its
Lernout & Hauspie stock, realizing gross proceeds of approximately $3.2
million. Seagate currently believes that it may be unable to sell any of its
shares of stock in Gadzoox Networks until after the anticipated completion
of the merger due to contractual and legal restrictions on Seagate's ability
to sell those investment securities. These restrictions will continue to
apply following the merger and represent part of the reason for the
negotiated discount being applied to these securities in the merger.
However, to the extent that Seagate is able to sell these shares prior to
the completion of the merger, Seagate's stockholders will realize the value
of the cash proceeds in the merger, less any taxes payable by Seagate in
connection with any sale, rather than the discounted value being applied to
Seagate investment securities in the merger. The market value and negotiated
discounts based upon a discounted post-tax value for these securities,
excluding 297,120 shares of Lernout & Hauspie held in escrow, based on
October 11, 2000 closing prices is:
<TABLE>
<CAPTION>
DISCOUNTED VALUE
(AFTER ESTIMATED TAXES
ISSUED TAX BASIS MARKET VALUE AT A 40% RATE) NO. OF SHARES HELD
------ ---------- ------------ ---------------------- ------------------
(MILLIONS) (MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C>
Gadzoox Networks..... $31.9 $27.0 $22.5 5,274,015
Lernout & Hauspie.... $36.9 $36.1 $27.8 3,319,369
</TABLE>
In connection with the merger between Seagate and a VERITAS subsidiary and
as additional consideration payable upon the completion of the merger, each
of Seagate's stockholders will also be entitled to receive their
proportionate share of cash equal in amount to:
- approximately $1.285 billion of the $2.050 billion of the cash received
by Seagate (less from $150 million to $250 million of rollover equity,
as described more fully beginning on page 90 of this document) in
connection with the leveraged buyout; and
- all of Seagate's other cash on hand at the completion of the merger
after deducting $150 million to be withheld and deposited in a trust
pending the resolution of some Seagate tax audits (as described more
fully beginning on page 134 of this document), and an additional amount
necessary to satisfy Seagate's estimated tax liabilities, satisfy tax
withholding obligations resulting from the acceleration of Seagate
options in connection with the merger, redeem Seagate's existing
indebtedness in connection with the leveraged buyout, and pay Seagate's
transaction expenses.
We currently estimate this net cash amount to be approximately $7.35 per
share based on Seagate's estimated cash balance at October 11, 2000 and
assuming that VERITAS does not make the elections described in the following
paragraph. This per share cash amount excludes approximately $0.21 per share
of cash that will be paid to Seagate stockholders following court approval
of the settlement of existing class action litigation and dismissal with
prejudice of the underlying complaints in this litigation and related
3
<PAGE> 10
lawsuits pending in California. See "Litigation Regarding the Leveraged
Buyout and the Merger" on page 163 of this document.
VERITAS has the right to elect to reduce this cash portion of the
consideration payable in connection with the merger by either $250 million
or $500 million. VERITAS must choose one of these amounts during the 15
trading days ending two trading days prior to the day of the Seagate special
meeting. If VERITAS makes this election, VERITAS would issue additional
shares of VERITAS common stock with an equivalent market value based upon
the average market price of VERITAS common stock shortly before the time the
election is made. As a result, Seagate's stockholders may realize some of
the value of the leveraged buyout in the form of VERITAS common stock,
rather than cash. In the event that VERITAS elects to reduce the cash
portion of the merger consideration by either $250 million or $500 million,
the net cash available for distribution to Seagate stockholders at the
completion of the merger will be either approximately $6.31 or $5.27,
respectively.
As of October 11, 2000, the 128,059,966 shares of VERITAS common stock held
by a Seagate subsidiary had a market value of approximately $17.7 billion,
and Seagate's investment securities had a market value of approximately
$63.1 million. Seagate's estimated cash balance (including net proceeds from
the leveraged buyout after deducting $150 million to be withheld and
deposited in a trust pending the resolution of some Seagate tax audits, and
an additional amount of cash necessary to satisfy Seagate's estimated tax
liabilities, satisfy tax withholding obligations resulting from the
acceleration of Seagate options in connection with the merger, redeem
Seagate's existing indebtedness, and pay Seagate's transaction expenses) as
of October 11, 2000 would be approximately $1.77 billion. Also as of October
11, 2000, there were 241.1 million shares of Seagate common stock
outstanding, calculated on a pro forma basis assuming the net exercise of
all outstanding in-the-money stock options and rights under the Seagate
employee stock purchase plan. Based upon the market price of VERITAS common
stock and Seagate's investment securities as of October 11, 2000, Seagate's
estimated net cash balance as of October 11, 2000 and the total number of
fully-diluted outstanding shares of Seagate common stock as of October 11,
2000, Seagate's stockholders would receive:
- $7.35 per share in cash and $62.82 per share in VERITAS common stock in
connection with the merger if VERITAS elects not to reduce cash payable in
connection with the merger;
- $6.31 per share in cash and $63.86 per share in VERITAS common stock if
VERITAS elects to reduce the cash payable in connection with the merger by
$250 million and issue additional shares of VERITAS common stock in place
of that cash; or
- $5.27 per share in cash and $64.90 per share in VERITAS common stock if
VERITAS elects to reduce the cash payable in connection with the merger by
$500 million and issue additional shares of VERITAS common stock in place
of that cash.
These cash and per share amounts are only estimates. The actual amounts will
not be determined until the day the merger is completed and will likely
differ from these estimates. In addition, these per share cash amounts
exclude approximately $0.21 per share of cash that will be paid to Seagate
stockholders following court approval of the settlement of existing class
action litigation and dismissal with prejudice of the underlying complaints
in this litigation and related lawsuits pending in California. See
4
<PAGE> 11
"Litigation Regarding the Leveraged Buyout and the Merger" on page 163 of
this document.
The value of the total consideration that Seagate's stockholders will
receive in connection with the merger is not fixed because:
- the most significant component of the consideration payable in the merger
consists of a fixed number of shares of VERITAS common stock (109,330,300
shares), the market price of which will continue to fluctuate;
- the market price of any shares of VERITAS common stock issued to Seagate's
stockholders in place of up to $500 million of the cash to be paid to
Seagate's stockholders in connection with the merger will also continue to
fluctuate; and
- the market price of Seagate's remaining investment securities will
continue to fluctuate and, therefore, the amount of VERITAS common stock
issuable in exchange for those investment securities will continue to
fluctuate.
As a result of the merger, Seagate stockholders will also acquire the right
to payments based on some potential tax refunds and tax credits utilized by
VERITAS following the completion of the merger that are attributable to
Seagate's taxable periods, or that portion of a taxable period, ending on or
prior to the completion of the merger plus $150 million reduced by some
potential Seagate tax liabilities. Although Seagate and VERITAS will
estimate the value of the right to receive these amounts shortly before the
completion of the merger, Seagate's stockholders will not be entitled to
receive anything with respect to this right unless and until VERITAS
actually receives these tax refunds or utilizes these tax credits in future
periods or the amount of Seagate taxes are finally determined. Seagate
expects to have a federal net operating loss in the year in which the merger
occurs, which loss it expects to fully realize as a carryback to its fiscal
year ended June 30, 2000. Seagate anticipates that the majority of the net
operating loss will not be available to be carried back with respect to
various Seagate state income tax returns. Accordingly, these state net
operating losses will not result in a tax benefit that will be available to
Seagate stockholders. In any event, Seagate stockholders will not be
entitled to receive any amounts with respect to this right relating to net
operating loss carryforwards used in years beginning after the completion of
the merger.
To give you a better understanding of how the transactions work together, we
have listed below the estimated consideration that would be payable in the
merger, and the stock portion and cash portion of that consideration, at
various VERITAS stock prices ranging from $70.00 per share to $160.00 per
share. The amounts in the table below do not include amounts potentially
payable following the completion of the merger as a result of the receipt or
utilization of Seagate's tax refunds and credits ranging in the aggregate
from approximately $151.9 million to $290 million, or $0.63 per share to
$1.20 per share, depending on the VERITAS price. The calculations in the
following table are based upon the following assumptions:
- the closing per share prices of shares of Gadzoox Networks and Lernout &
Hauspie on October 11, 2000 ($5.125 and $10.875, respectively);
- between 234.9 million (at an assumed VERITAS share price of $70.00 per
share) and 241.8 million (at an assumed VERITAS share price of $160.00 per
share) shares of Seagate common stock outstanding, calculated on a pro
forma basis assuming the net exercise of all outstanding in-the-money
stock options (other than stock options to be converted into Suez
Acquisition Company stock options), the
5
<PAGE> 12
exchange of certain shares of restricted stock, and the exercise of all
rights under the Seagate employee stock purchase plan. The number of
Seagate shares outstanding varies with fluctuations in the VERITAS stock
price because the number of Seagate shares issuable upon the net exercise
of Seagate stock options increases, and the number of Seagate options
required to be included in the equity rollover decreases, as the market
price of the VERITAS stock increases;
- the amount of cash varies as a function of the VERITAS stock price because
the higher the VERITAS stock price the greater the amount of withholding
taxes withheld from available cash;
- Seagate's estimated cash balance as of October 11, 2000 (including net
proceeds from the leveraged buyout after deducting an amount of cash
necessary to satisfy Seagate's estimated tax liabilities, redeem Seagate's
existing indebtedness, and pay Seagate's transaction expenses); and
- other transaction related items.
<TABLE>
<CAPTION>
VERITAS RETAINS $0MM CASH
---------------------------------------------------------
NUMBER OF VALUE OF
VERITAS VERITAS VERITAS AMOUNT OF TOTAL
PRICE SHARES SHARES CASH CONSIDERATION
------- --------- -------- --------- -------------
<S> <C> <C> <C> <C>
$ 70.00 0.469 $32.80 $7.57 $40.37
$ 80.00 0.465 $37.22 $7.55 $44.77
$ 90.00 0.463 $41.64 $7.53 $49.17
$100.00 0.460 $46.04 $7.53 $53.57
$110.00 0.459 $50.46 $7.52 $57.98
$120.00 0.457 $54.85 $7.53 $62.38
$130.00 0.456 $59.25 $7.53 $66.78
$140.00 0.455 $63.68 $7.30 $70.98
$150.00 0.454 $68.12 $7.05 $75.17
$160.00 0.453 $72.55 $6.80 $79.35
</TABLE>
<TABLE>
<CAPTION>
VERITAS RETAINS $250MM IN CASH
---------------------------------------------------------
NUMBER OF VALUE OF
VERITAS VERITAS VERITAS AMOUNT OF TOTAL
PRICE SHARES SHARES CASH CONSIDERATION
------- --------- -------- --------- -------------
<S> <C> <C> <C> <C>
$ 70.00 0.484 $33.87 $6.50 $40.37
$ 80.00 0.479 $38.28 $6.49 $44.77
$ 90.00 0.474 $42.69 $6.48 $49.17
$100.00 0.471 $47.09 $6.48 $53.57
$110.00 0.468 $51.50 $6.48 $57.98
$120.00 0.466 $55.89 $6.49 $62.38
$130.00 0.464 $60.29 $6.49 $66.78
$140.00 0.462 $64.72 $6.26 $70.98
$150.00 0.461 $69.16 $6.01 $75.17
$160.00 0.460 $73.58 $5.77 $79.35
</TABLE>
6
<PAGE> 13
<TABLE>
<CAPTION>
VERITAS RETAINS $500MM CASH
---------------------------------------------------------
NUMBER OF VALUE OF
VERITAS VERITAS VERITAS AMOUNT OF TOTAL
PRICE SHARES SHARES CASH CONSIDERATION
------- --------- -------- --------- -------------
<S> <C> <C> <C> <C>
$ 70.00 0.499 $34.93 $5.44 $40.37
$ 80.00 0.492 $39.34 $5.43 $44.77
$ 90.00 0.486 $43.74 $5.43 $49.17
$100.00 0.481 $48.14 $5.43 $53.57
$110.00 0.478 $52.54 $5.44 $57.98
$120.00 0.475 $56.94 $5.44 $62.38
$130.00 0.472 $61.33 $5.45 $66.78
$140.00 0.470 $65.76 $5.22 $70.98
$150.00 0.468 $70.19 $4.98 $75.17
$160.00 0.466 $74.62 $4.73 $79.35
</TABLE>
Please note that the total value of the merger consideration is constant at
a given point in time, regardless of which election VERITAS makes. While the
VERITAS election affects the mix of cash and stock payable in connection
with the merger, it does not affect the total value. For example, at an
assumed VERITAS stock price of $100.00, the total consideration is $53.57
regardless of whether VERITAS elects to reduce the cash portion of the
consideration by $0, $250 million or $500 million.
Note also that the amount of cash payable varies as the VERITAS stock price
increases. The cash paid in connection with the merger is reduced by the
amount of the withholding tax that arises upon the acceleration and
conversion of Seagate options. This withholding tax increases as the VERITAS
stock price increases.
Finally, note that the per share amounts in the tables above exclude
approximately $0.21 per share of cash that will be paid to Seagate
stockholders following court approval of the settlement of existing class
action litigation and dismissal with prejudice of the underlying complaints
in this litigation and related lawsuits pending in California. See
"Litigation Regarding the Leveraged Buyout and the Merger" on page 163 of
this document.
For a detailed description of the manner in which the stock portion and the
cash portion of the merger consideration are determined under the merger
agreement, see "The Merger Agreement and the Merger -- The Merger
Consideration" beginning on page 140 of this document. Also, on page 19 we
have included a graphical depiction of the components utilized to arrive at
the overall transaction consideration.
Based upon the market prices of VERITAS common stock and Seagate's
investment securities as of October 11, 2000, Seagate's estimated cash
balance as of October 11, 2000 and the total number of fully-diluted
outstanding shares of Seagate common stock as of October 11, 2000, the per
share price paid by Suez Acquisition Company for the operating assets would
be approximately $5.12 per Seagate share, which compares to the operating
assets' June 30, 2000 book value less $765 million, of $7.96 per Seagate
share. Based on these assumptions, the per share price payable in the
merger, which includes a pass-through of the consideration paid for the
operating assets, would be approximately $70.17 per share. This compares to
a June 30, 2000 book value for all of Seagate of $16.78 per Seagate share.
Based upon the historical net book value of Seagate's operating assets at
June 30, 2000, the sale of assets to Suez Acquisition Company is expected to
result in an accounting loss of approximately $821 million and an additional
tax liability of approximately $380 million.
7
<PAGE> 14
Q: HOW WILL I KNOW EXACTLY HOW MANY SHARES OF VERITAS COMMON STOCK AND HOW MUCH
CASH I WILL RECEIVE IN THE MERGER, AND THE VALUE OF MY PROPORTIONATE SHARE OF
SEAGATE'S TAX REFUNDS AND CREDITS?
A: The exact amount of cash payable, and the exact fraction of a share of
VERITAS common stock issuable, in exchange for each outstanding share of
Seagate common stock in connection with the merger, will be determined on the
day the merger is completed.
Seagate and VERITAS have established a toll-free telephone number you can
call beginning 10 days prior to the special meeting. The number is
1-866-366-2506. Seagate stockholders may call this telephone number to find
out the number and value of VERITAS shares that would be issued in
connection with the merger and the amount of cash that would be paid in
connection with the merger, had the merger occurred on the day immediately
following the date on which the telephone number is called. The recorded
message on this telephone number will be updated each day until the day of
the special meeting. WE ENCOURAGE SEAGATE STOCKHOLDERS TO CALL THIS
TELEPHONE NUMBER. Please be aware, however, that the estimated number and
value of VERITAS shares to be issued and the estimated amount of cash to be
paid, as provided in this recorded message, necessarily will be different
than the actual number and value of VERITAS shares to be issued and the
amount of cash to be paid in connection with the merger due to daily
fluctuations in the market price of VERITAS common stock and the market
prices of Seagate's investment securities. The actual number of VERITAS
shares to be issued, the amount of cash to be paid and the total
consideration to be paid, in connection with the merger will not be
determined until the day the merger is completed, which we believe will be
shortly after the day of the special meeting.
We will estimate fair market value of the Seagate stockholders' right to
receive the value of Seagate's future tax refunds and credits if and when
collected or utilized, respectively, together with the $150 million of
retained cash pending the final determination with respect to some Seagate
tax audits shortly before the completion of the merger. However, the actual
amount ultimately received by Seagate stockholders, if any, may be more or
less than the estimated fair market value of the right itself at the
completion of the merger.
Q: WHAT ARE THE TAX CONSEQUENCES TO ME OF THE LEVERAGED BUYOUT AND THE MERGER?
A: We intend, but it is not certain, that the merger between Seagate and a
subsidiary of VERITAS will qualify as a "reorganization" within the meaning
of Section 368(a) of the Internal Revenue Code. If it qualifies, Seagate
stockholders will recognize gain, if any, for federal income tax purposes,
but only up to the amount of cash received and, in general, the fair market
value as of the closing of the merger of their proportionate share of any
amounts paid following the completion of the merger for tax refunds and
credits attributable to Seagate and the $150 million of retained cash net of
potential Seagate tax liabilities. To the extent a Seagate stockholder's
adjusted tax basis in his, her or its shares of Seagate common stock exceeds
the consideration received in exchange for such shares in connection with the
merger, the resulting loss will not be recognized for federal income tax
purposes. If the merger fails to qualify as a "reorganization," it would be a
fully taxable transaction.
8
<PAGE> 15
The leveraged buyout will have no direct tax consequences to Seagate
stockholders. However, the amount of cash Seagate's stockholders receive in
connection with the merger will depend in part on the amount of cash Seagate
receives in connection with the leveraged buyout.
For a more complete description of the tax consequences of the merger, see
"Material United States Federal Income Tax Consequences of the Merger"
beginning on page 169 of this document.
Q: WHAT AM I BEING ASKED TO VOTE UPON?
A: Seagate stockholders are being asked to:
- authorize and approve the stock purchase agreement, and the sale by
Seagate of its operating assets to Suez Acquisition Company in the
leveraged buyout; and
- adopt and approve the merger agreement, and the merger of a wholly owned
subsidiary of VERITAS with Seagate.
Q: WHAT VOTE OF SEAGATE'S STOCKHOLDERS IS REQUIRED TO APPROVE THE LEVERAGED
BUYOUT AND THE MERGER?
A: The affirmative vote of the holders of a majority of the outstanding shares
of Seagate common stock is required to authorize and approve the stock
purchase agreement and the leveraged buyout, and to adopt and approve the
merger agreement and the merger between Seagate and a wholly owned subsidiary
of VERITAS. THEREFORE, IF YOU FAIL TO VOTE OR IF YOU ABSTAIN FROM VOTING ON
EITHER THE STOCK PURCHASE AGREEMENT AND THE LEVERAGED BUYOUT, OR THE MERGER
AGREEMENT AND THE MERGER, IT WILL HAVE THE SAME EFFECT AS A VOTE AGAINST
EITHER THE LEVERAGED BUYOUT OR THE MERGER, AS APPLICABLE.
Q: HAS THE BOARD OF DIRECTORS OF SEAGATE APPROVED THE LEVERAGED BUYOUT AND THE
MERGER?
A: The board of directors of Seagate, acting without the participation of Mr.
Luczo, has unanimously approved the stock purchase agreement and the
leveraged buyout, and the merger agreement and the merger between Seagate and
a subsidiary of VERITAS. The Seagate board of directors (acting without Mr.
Luczo) unanimously recommends that Seagate stockholders vote FOR:
- the stock purchase agreement and the leveraged buyout; and
- the merger agreement and the merger between Seagate and a subsidiary of
VERITAS.
Q: DID THE SEAGATE BOARD OF DIRECTORS RECEIVE A FAIRNESS OPINION FROM AN
INVESTMENT BANKER IN CONNECTION WITH THE LEVERAGED BUYOUT AND THE MERGER?
A: The board of directors of Seagate retained Morgan Stanley & Co. Incorporated
to advise it in connection with a possible business combination,
restructuring or other transaction. Prior to approval by Seagate's board of
directors of the leveraged buyout and the merger on March 29, 2000 and of
certain amendments to the transaction documents on August 25, 2000, Morgan
Stanley delivered its oral opinions to Seagate's board of directors,
subsequently confirmed in writing on March 29, 2000 and August 29, 2000,
respectively, to the effect that, as of March 29, 2000 and August 29, 2000,
respectively, and based upon and subject to the various considerations set
forth in its opinions, the consideration to be received by holders of Seagate
common stock in connection with the merger was fair, from a financial point
of view, to those holders. A
9
<PAGE> 16
copy of Morgan Stanley's opinion dated August 29, 2000 is attached to this
document as Annex G. PLEASE NOTE THAT MORGAN STANLEY'S OPINIONS SPEAK AS OF
THE DATES THEY WERE ISSUED AND THE AUGUST 29, 2000 OPINION WILL NOT BE
UPDATED.
Morgan Stanley's opinions did not address any individual components of the
consideration payable in connection with the merger, such as the
consideration payable to Seagate in the leveraged buyout or the exchange
ratio for the fixed stock portion payable in the merger. However, the merger
consideration (which includes, among other things, net amounts received in
the leveraged buyout) is made up, in part, of these components.
In connection with the preparation and delivery of its opinions, and in
discussions with the Seagate board, Morgan Stanley performed some
alternative financial analyses of Seagate's operating assets. Some of these
analyses resulted in valuation ranges in excess of the price being paid in
the leveraged buyout by Suez Acquisition Company. The Seagate board was
aware of these alternative analyses but believes the leveraged buyout is
fair to Seagate's unaffiliated stockholders because it allows the overall
merger transaction to occur and for the other reasons discussed in more
detail in "Special Factors Regarding the Leveraged Buyout and the
Merger -- Consideration of the Leveraged Buyout and the Merger by Seagate"
beginning on page 80 of this document.
Morgan Stanley and some of its officers, employees and affiliates have
committed to invest up to $50.1 million in Silver Lake Partners' $2.3
billion fund. Morgan Stanley's commitment is $1 million, and the remainder
consists of commitments from approximately 130 officers, employees and
affiliates of Morgan Stanley. The aggregate amount of these commitments that
could be drawn for the leveraged buyout would represent approximately 0.8%
of the equity required for the leveraged buyout. These commitments were made
before Morgan Stanley began advising the Seagate board of directors
regarding the transactions described in this document. Pursuant to other
pre-existing agreements, Morgan Stanley Dean Witter & Co., the parent of
Morgan Stanley, has the right to receive approximately 0.86% of Silver Lake
Partners' contractual right to participate in 20% (or approximately 0.17%)
of any profits earned upon disposition of the assets acquired in the
leveraged buyout, and certain officers of Morgan Stanley have committed to
acquire up to $550,000 of limited partnership interests in funds affiliated
with TPG Partners III, L.P. In addition, Morgan Stanley and some of its
officers, directors and affiliates also committed to invest up to
approximately $43.5 million in certain investment funds that have joined or
may join the investor group organized by Silver Lake Partners to effect the
leveraged buyout. The aggregate amount of these commitments that could be
drawn for the leveraged buyout would represent approximately 0.1% of the
equity required for the leveraged buyout. Pursuant to its engagement letter
with Seagate, upon completion of the merger, Morgan Stanley will be entitled
to receive a cash fee, based upon a percentage of the aggregate value of the
merger. The minimum fee payable to Morgan Stanley is $10 million and the
maximum fee is $50 million. Seagate currently believes the fee payable to
Morgan Stanley will be at the high end of this range.
For a more complete description of Morgan Stanley's opinion, as well as the
commitments to invest in Silver Lake Partners and its fee arrangements with
Seagate, see "Special Factors Regarding the Leveraged Buyout and the
Merger -- Consideration of the Leveraged Buyout and the Merger by
Seagate -- Opinion of Seagate's Financial Advisor" beginning on page 85 of
this document, including the detailed description of Morgan Stanley's fee on
page 96.
10
<PAGE> 17
Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE
LEVERAGED BUYOUT AND THE MERGER?
A: Yes. In evaluating the stock purchase agreement and the leveraged buyout, and
the merger agreement and the merger, Seagate stockholders should carefully
consider the factors discussed in the section entitled "Risk Factors"
beginning on page 56 of this document.
Q: WHAT DO I NEED TO DO NOW?
A: After you have carefully read this document, PLEASE COMPLETE AND SIGN THE
PROXY CARD ENCLOSED WITH THIS DOCUMENT, AND RETURN THE PROXY CARD IN THE
ENCLOSED RETURN ENVELOPE AS SOON AS POSSIBLE so that your shares of Seagate
common stock may be represented at the special meeting of Seagate's
stockholders called to consider and vote upon the leveraged buyout and the
merger. If you sign and return the enclosed proxy card but do not include
instructions on how to vote your proxy at the special meeting, your shares
will be voted FOR approval of the leveraged buyout and the merger.
Q: WHAT HAPPENS IF I DON'T RETURN A PROXY CARD?
A: If you do not return a signed proxy card, it will have the same effect as a
vote against the leveraged buyout and the merger (unless you attend the
special meeting in person and vote in favor of the leveraged buyout and/or
the merger).
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares ONLY if you provide instructions to the
broker on how to vote. If you do not provide your broker with these
instructions, your broker's "non-votes" will have the same effect as a vote
against the leveraged buyout and the merger between Seagate and a subsidiary
of VERITAS. You should follow the directions provided to you by your broker
regarding how to instruct your broker to vote your shares.
Q: CAN I CHANGE MY VOTE AFTER I HAVE SUBMITTED MY PROXY?
A: Yes. You may change your vote in any of the following three ways at any time
before your proxy is voted at the special meeting. First, you may send a
written notice to the Secretary of Seagate before the special meeting stating
that you would like to revoke your proxy. Second, you may complete and submit
a later-dated signed proxy card before the special meeting. Third, you may
attend the special meeting and vote in person. Simply attending the special
meeting without voting, however, will not revoke your proxy. If your shares
are held in "street name" by your broker, you must contact your broker for
instructions on how to revoke your proxy. Also, if your shares are held of
record by a broker, bank or other nominee, and you want to vote at the
special meeting, you will need to bring to the special meeting a letter from
the broker, bank or other nominee confirming your beneficial ownership of the
shares.
Q: SHOULD I SEND IN MY SEAGATE STOCK CERTIFICATES NOW?
A: No. After Seagate and VERITAS complete the merger, VERITAS will send you
written instructions for exchanging your Seagate stock certificates for the
consideration payable to you as a result of the merger.
11
<PAGE> 18
Q: AM I ENTITLED TO DISSENTERS' OR APPRAISAL RIGHTS IN CONNECTION WITH THE
LEVERAGED BUYOUT AND THE MERGER?
A: Under applicable law, holders of Seagate common stock are entitled to
appraisal rights in connection with the merger.
For a description of your appraisal rights, see "The Merger Agreement and
the Merger -- Appraisal Rights" beginning on page 159 of this document.
Q: WHEN DO YOU EXPECT THE LEVERAGED BUYOUT AND THE MERGER TO BE COMPLETED?
A: We are working toward completing the leveraged buyout and the merger as
quickly as possible. We hope to complete both the leveraged buyout and the
merger during the fourth calendar quarter of 2000.
Q: WHERE CAN I FIND MORE INFORMATION ABOUT SEAGATE AND VERITAS?
A: Both Seagate and VERITAS file reports, proxy and information statements and
other information with the Securities and Exchange Commission. You may read
and copy this information at the SEC's public reference facilities. Please
call the SEC at 1-800-SEC-0330 for information about these facilities. This
information is also available at the Internet site the SEC maintains at
www.sec.gov. For more information on where you can find additional
information about Seagate and VERITAS, see "Where You Can Find Additional
Information" beginning on page 257 of this document.
Q: WHOM SHOULD I CONTACT WITH QUESTIONS ABOUT THE LEVERAGED BUYOUT OR THE
MERGER?
A: You should contact Bill Rowley in our Investor Relations Department, at
831-439-2371, or by e-mail at [email protected], with any
questions about the stock purchase agreement and the leveraged buyout or the
merger agreement and the merger. Normal toll charges will apply to telephone
calls made to this number. We will try to answer questions submitted by
e-mail no later than two business days after they are received.
12
<PAGE> 19
QUESTIONS AND ANSWERS FOR VERITAS STOCKHOLDERS
Q: WHAT DOES THE LEVERAGED BUYOUT MEAN TO ME?
A: VERITAS Software Corporation is not a party to the stock purchase agreement,
and you are not being asked to approve the leveraged buyout. However, it is
important that you understand that Seagate is selling all of its operating
assets prior to the merger between Seagate and a VERITAS subsidiary. As a
result, when VERITAS acquires Seagate in the merger, Seagate's assets will
consist of:
- the 128,059,966 shares of VERITAS common stock that a Seagate subsidiary
currently holds;
- Seagate's remaining investment securities in Gadzoox Networks and Lernout
& Hauspie; and
- any remaining cash after giving effect to the leveraged buyout.
Seagate may sell some or all of its shares of Gadzoox Networks and Lernout &
Hauspie before the completion of the leveraged buyout.
For a more complete description of the leveraged buyout, see "The Stock
Purchase Agreement and the Leveraged Buyout" beginning on page 123 of this
document.
Q: WHAT AM I BEING ASKED TO VOTE UPON?
A: You are being asked to consider and approve the issuance by VERITAS of new
shares of VERITAS common stock to Seagate stockholders in connection with the
merger between Seagate and a VERITAS subsidiary. The exact number of shares
to be issued to Seagate's stockholders in connection with the merger will be
determined in accordance with the terms of the merger agreement, which are
described in more detail under "The Merger Agreement and the Merger -- The
Merger Consideration" beginning on page 140 of this document. Based on the
closing market price of VERITAS common stock and the common stock of Gadzoox
Networks and Lernout & Hauspie on the Nasdaq National Market on October 11,
2000, and assuming that VERITAS elects to reduce the cash payable in
connection with the merger by $250 million or $500 million and issue
additional shares of VERITAS common stock in place of this cash, VERITAS
would issue approximately 111.505 million or 113.316 million new shares of
its common stock, respectively, in the merger. The actual number of shares to
be issued will be higher or lower than this number, and will not be
determined until on or possibly after the day of the special meeting.
Seagate and VERITAS have established a toll-free telephone number you can
call beginning 10 days prior to the special meeting. The number is
1-866-366-2506. VERITAS stockholders may call this telephone number to find
out the number of VERITAS shares that would be issued in connection with the
merger had the merger occurred on the day immediately following the date on
which the telephone number is called. The recorded message on this telephone
number will be updated each day until the day of the special meeting. WE
ENCOURAGE VERITAS STOCKHOLDERS TO CALL THIS TELEPHONE NUMBER. Please be
aware, however, that the estimated number of shares to be issued as provided
in this recorded message necessarily will be different than the actual
number of shares to be issued in connection with the merger. The actual
number of shares issued in connection with the merger will not be determined
until on, or possibly after, the day of the special meeting.
13
<PAGE> 20
Q: WHY IS VERITAS ACQUIRING SEAGATE?
A: VERITAS proposes to acquire Seagate under the terms of the merger agreement
because the transaction will reduce the total number of outstanding shares of
VERITAS common stock and increase the liquidity of the outstanding VERITAS
common stock. Based on the closing price on October 11, 2000 of VERITAS
common stock and the common stock of Gadzoox Networks and Lernout & Hauspie
on the Nasdaq National Market, VERITAS would issue approximately 111.505
million or 113.316 million new shares of its common stock in connection with
the merger, assuming that VERITAS elects to reduce the cash payable in
connection with the merger by $250 million or $500 million, respectively.
Please note that the actual number of shares issued will be higher or lower,
depending on the variables described in this document. In the merger, VERITAS
will indirectly acquire the 128,059,966 shares of VERITAS common stock
currently held by a Seagate subsidiary. The result is that fewer shares of
VERITAS common stock will be outstanding after the merger, and each remaining
outstanding share of VERITAS common stock will thus represent a slightly
larger percentage ownership interest in VERITAS and a slightly greater
percentage of the total voting power. The new shares of VERITAS common stock
will be issued to all of Seagate's stockholders, and these holders, unless
they are affiliates of Seagate or VERITAS, will be able to freely trade their
shares of VERITAS common stock (unlike the 128,059,966 shares held by
Seagate, which are subject to contractual transfer restrictions as well as
transfer restrictions under applicable securities laws). VERITAS believes
that this will increase the liquidity of VERITAS common stock. The merger
will also eliminate the potential for downward pressure on the market price
of VERITAS common stock caused by having a single 31.7% stockholder.
You should note that it is possible, though unlikely, that VERITAS could end
up having to issue more than the 128,059,966 shares currently held by
Seagate. However, this would only happen if the market prices of Seagate's
remaining investment securities rose significantly while the market price of
VERITAS common stock fell significantly. Although VERITAS would have to
offer more shares than anticipated in this unlikely circumstance, VERITAS
would nonetheless own the appreciated investment securities that caused
VERITAS to issue more shares.
It is important to note that VERITAS will not acquire any of the operating
assets of Seagate in the merger. All of these assets will instead be sold to
Suez Acquisition Company in the leveraged buyout. The only assets that
Seagate will hold at the time of the merger are shares of VERITAS common
stock, Seagate's investment securities and any cash remaining after giving
effect to the leveraged buyout. In connection with the merger, VERITAS is
obligated to pay to Seagate's stockholders, as part of the consideration,
cash in an amount equal to all of the cash held by Seagate immediately prior
to the completion of the merger, less the amount of Seagate's cash that
VERITAS elects to retain (either $0, $250 million or $500 million) by
issuing additional shares of VERITAS common stock in lieu of paying that
cash to Seagate's stockholders.
For a more complete description of VERITAS' reasons for the merger, see
"Special Factors Regarding the Leveraged Buyout and the
Merger -- Consideration of the Merger and the Leveraged Buyout by
VERITAS -- VERITAS' Purposes and Reasons for the Merger" beginning on page
103 of this document.
14
<PAGE> 21
Q: WHAT WILL I RECEIVE FROM THE LEVERAGED BUYOUT AND THE MERGER?
A: You will not receive any consideration in the leveraged buyout or the merger.
As noted above, you are receiving this document in connection with the
solicitation of your approval of the issuance of new shares of VERITAS common
stock to stockholders of Seagate in connection with the merger.
Q: CAN THE MERGER BE COMPLETED WITHOUT THE LEVERAGED BUYOUT?
A: No. The merger with Seagate is conditioned on the completion of the leveraged
buyout. If the leveraged buyout does not happen, neither will the merger.
Similarly, the leveraged buyout is conditioned on all of the conditions to
the merger being satisfied other than the completion of the leveraged buyout
itself. Neither the leveraged buyout nor the merger with Seagate will happen
unless the leveraged buyout and the merger are approved by the stockholders
of Seagate, the issuance of new shares of VERITAS common stock in connection
with the merger is approved by the stockholders of VERITAS, and all of the
other conditions to the completion of both the leveraged buyout and the
merger are satisfied.
Q: HOW WILL THE LEVERAGED BUYOUT AND THE MERGER WITH SEAGATE AFFECT ME?
A: You will continue to hold the same number of shares of VERITAS common stock
after the merger. The leveraged buyout and the merger will not have any
effect on your ownership of the VERITAS shares you hold or on your voting
rights with respect to those shares. However, as described in the response to
"Why is VERITAS acquiring Seagate?", each share of VERITAS common stock that
you hold after the merger will represent a slightly larger ownership
percentage of VERITAS and a slightly greater percentage of the total voting
power.
Q: HOW WILL THE LEVERAGED BUYOUT AND THE MERGER WITH SEAGATE AFFECT VERITAS'
BUSINESS AND OPERATIONS?
A: VERITAS presently plans to continue conducting its businesses and operations
following the merger in the same manner as it currently conducts them.
Q: DO DIRECTORS OR EXECUTIVE OFFICERS OF VERITAS HAVE ANY OTHER SPECIAL
INTERESTS IN THE LEVERAGED BUYOUT AND THE MERGER?
A: Yes. Stephen Luczo and Gregory Kerfoot, who are directors of VERITAS, are
executive officers of Seagate and Seagate Software, respectively. Mr. Luczo
also is a director of Seagate and a member of Seagate's senior management
team who will participate in the ownership of Suez Acquisition Company.
Messrs. Luczo and Kerfoot did not participate in discussions or negotiations
on behalf of VERITAS in connection with the merger agreement or the merger.
Q: WHAT ELSE DO I NEED TO DO IN ADDITION TO COMPLETING AND RETURNING THE
ENCLOSED PROXY?
A: Nothing. You will not be asked to turn in any certificates for your VERITAS
shares or take any other action in connection with the merger agreement, the
merger or the share issuance by VERITAS other than returning the enclosed
proxy.
Q: WHAT VOTE OF VERITAS STOCKHOLDERS IS NEEDED TO APPROVE THE PROPOSAL?
A: Approval of the issuance of new shares of VERITAS common stock in connection
with the merger requires the affirmative vote of the holders of a majority of
the outstanding
15
<PAGE> 22
shares of VERITAS common stock. Therefore, if you fail to vote or if you
abstain from voting, it will have the same effect as a vote against the share
issuance. Seagate currently holds 128,059,966 shares of VERITAS common stock,
or approximately 31.7% of the outstanding VERITAS shares. Under the terms of
the merger agreement, Seagate is required to vote all of its shares of
VERITAS common stock in favor of the share issuance in connection with the
merger.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO THE VERITAS STOCKHOLDERS?
A: VERITAS stockholders will not recognize any gain or loss on their shares of
VERITAS common stock as a result of the merger with Seagate.
Q: WHAT SHOULD I DO NOW?
A: After you have carefully read this document, PLEASE COMPLETE, DATE AND SIGN
THE PROXY CARD ENCLOSED WITH THIS DOCUMENT AND RETURN THE PROXY CARD IN THE
ENCLOSED POSTAGE-PAID ENVELOPE AS SOON AS POSSIBLE so that your shares of
VERITAS common stock may be represented at the special meeting. If you sign
and return the enclosed proxy card but do not include instructions on how to
vote your proxy, your shares will be voted FOR the issuance of VERITAS common
stock to the Seagate stockholders in connection with the merger.
Q: IF VERITAS SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE
MY SHARES FOR ME?
A: Your broker will not be able to vote your VERITAS shares without instructions
from you. If you do not provide your broker with these instructions, your
broker's "non-votes" will be treated as shares present at the special meeting
but which have not been voted, and will have the same effect as a vote
against approval of the share issuance. As a result, it is important that you
follow the directions provided by your broker regarding how to instruct your
broker to vote your shares.
Q: CAN I CHANGE MY VOTE AFTER I HAVE SUBMITTED MY PROXY?
A: Yes. You may change your vote in one of the following three ways at any time
before your proxy is voted at the special meeting. First, you may send a
written notice to the Secretary of VERITAS before the special meeting stating
that you would like to revoke your proxy. Second, you may complete and submit
a later-dated signed proxy card before the special meeting. Third, you may
attend the special meeting and vote in person. Simply attending the special
meeting without voting, however, will not revoke your proxy. If your shares
are held in "street name" by your broker, you must contact your broker for
instructions on how to revoke your proxy. Also, if your shares are held of
record by a broker, bank or other nominee, you will need to bring to the
special meeting a letter from the broker, bank or other nominee confirming
your beneficial ownership of the shares.
Q: WHEN DO YOU EXPECT THE MERGER WITH SEAGATE TO BE COMPLETED?
A: We are working toward completing the merger as quickly as possible. We hope
to complete the merger during the fourth calendar quarter of 2000.
Q: HAS THE BOARD OF DIRECTORS OF VERITAS APPROVED THE MERGER WITH SEAGATE?
A: Yes. The board of directors of VERITAS, acting without the participation of
Mr. Luczo (who is the Chief Executive Officer of Seagate, a director of
Seagate and a
16
<PAGE> 23
member of Seagate's senior management team who will participate in the
ownership of Suez Acquisition Company) and Mr. Kerfoot (who is an executive
officer of Seagate Software), has unanimously approved the merger agreement
and the merger, and the issuance of new shares of VERITAS common stock in
connection with the merger. The VERITAS board of directors, acting without
the participation of Messrs. Luczo and Kerfoot, unanimously recommends that
you vote FOR the issuance of new shares of VERITAS common stock to the
Seagate stockholders in connection with the merger.
Q: DID THE VERITAS BOARD OF DIRECTORS RECEIVE A FAIRNESS OPINION FROM AN
INVESTMENT BANKER IN CONNECTION WITH THE MERGER?
A: Yes. The board of directors of VERITAS retained Credit Suisse First Boston
Corporation to advise it on the merger. Prior to approval of the merger with
Seagate by the VERITAS board of directors, Credit Suisse First Boston
delivered its oral opinion to VERITAS' board of directors on March 28, 2000,
which it later confirmed in writing as of March 29, 2000, to the effect that
as of the date of the opinion, the exchange ratio for the stock portion of
the consideration issuable in connection with the merger was fair to VERITAS
from a financial point of view. A copy of Credit Suisse First Boston's
opinion is attached to this document as Annex H. You should read Credit
Suisse First Boston's opinion carefully. Credit Suisse First Boston's opinion
does not constitute a recommendation to any stockholder as to how to vote on
any matter at the VERITAS special meeting.
Credit Suisse First Boston and some of its affiliates and their officers and
employees have established investment funds that have committed to invest
(1) an aggregate of $20 million to acquire interests in Silver Lake
Partners, and (2) an aggregate of $10 million to acquire interests in Texas
Pacific Group. These commitments were made substantially before Credit
Suisse First Boston began advising VERITAS regarding the transactions
described in this document.
VERITAS has agreed to pay Credit Suisse First Boston a fee of $5 million
upon the rendering of Credit Suisse First Boston's opinion to VERITAS' board
of directors and a fee of $25 million upon consummation of the merger,
against which the opinion fee will be credited.
For a more complete description of Credit Suisse First Boston's fairness
opinion, as well as Credit Suisse First Boston's commitments to invest in
Silver Lake Partners and in Texas Pacific Group and its fee arrangements
with VERITAS, see "Special Factors Regarding the Leveraged Buyout and the
Merger -- Consideration of the Merger and the Leveraged Buyout by
VERITAS -- Opinion of VERITAS' Financial Advisor" beginning on page 109 of
this document.
Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE
ISSUANCE OF NEW VERITAS SHARES TO THE SEAGATE STOCKHOLDERS?
A: Yes. In evaluating the proposed issuance of new shares of VERITAS common
stock to the Seagate stockholders, you should carefully consider the factors
discussed under "Risk Factors -- Risks to Both Seagate and VERITAS
Stockholders Relating to the Leveraged Buyout and the Merger" beginning on
page 59 of this document.
17
<PAGE> 24
Q: SHOULD I SEND IN MY VERITAS STOCK CERTIFICATES?
A: No. You are not being asked to exchange any shares of VERITAS common stock
that you own in connection with the merger or the other transactions
described in this document. PLEASE DO NOT SEND IN YOUR VERITAS STOCK
CERTIFICATES.
Q: AM I ENTITLED TO DISSENTERS' OR APPRAISAL RIGHTS IN CONNECTION WITH THE
MERGER OR THE LEVERAGED BUYOUT?
A: No. Under applicable law, holders of VERITAS common stock are not entitled to
appraisal rights in connection with the merger or the leveraged buyout.
Q: WHERE CAN I FIND MORE INFORMATION ABOUT VERITAS AND SEAGATE?
A: Both VERITAS and Seagate file reports, proxy and information statements and
other information with the Securities and Exchange Commission. You may read
and copy this information at the SEC's public reference facilities. Please
call the SEC at 1-800-SEC-0330 for information about these facilities. This
information is also available at the Internet site the SEC maintains at
www.sec.gov. See "Where You Can Find Additional Information" beginning on
page 257 of this document.
Q: WHOM SHOULD I CONTACT IF I HAVE ANY QUESTIONS ABOUT THE LEVERAGED BUYOUT OR
THE MERGER?
A: You should contact Dave Galiotto by telephone at 650-318-4047 or by e-mail at
[email protected], with any questions about the leveraged buyout, the
merger, the issuance of new shares of VERITAS common stock to Seagate's
stockholders or related transactions. Normal toll charges will apply to
telephone calls made to this number. We will try to answer questions
submitted by e-mail no later than two business days after they are received.
18
<PAGE> 25
CONSIDERATION COMPONENTS
The following identifies the components of the consideration payable in the
merger transaction, based upon the assumptions described on page 4 of this
document.
<TABLE>
<CAPTION>
CURRENTLY ESTIMATED AMOUNT
--------------------------
(IN MILLIONS)
<S> <C>
I. CASH AVAILABLE:
1. $2.050 billion received in the leveraged buyout,
less $ 2,050
2. $765 million delivered to Suez Acquisition Company
in the leveraged buyout, plus (765)
3. Seagate cash on hand, less 2,352
4. Retirement of Seagate funded debt, less (781)
5. Estimated taxes, less (150)
6. Withholding taxes, less (456)
7. Value of rollover equity, less (162)
8. Transaction expenses, less (72)
9. Other liabilities not assumed by Suez, less (45)
10. Funding of tax trust. (150)
Total cash available before VERITAS election
in the merger (1 through 10 above). $ 1,821
II. MERGER CONSIDERATION:*
1. Total cash available before VERITAS election, after
deducting $50 million litigation settlement holdback
(1 through 10 above), less $ 1,771
($7.35 per share)**
2. VERITAS Election ($0, $250 or $500 million), plus (0, 250 or 500)
3. 109,330,300 new VERITAS shares, plus 15,094***
4. Determined value of additional VERITAS shares for
unsold
investment securities, plus 50
5. Additional VERITAS shares if VERITAS
makes election specified in No. 2, plus 0, 250
or 500
6. Estimated tax refund amount, plus 34
7. Funding of tax trust, plus 150
8. Escrowed Lernout & Hauspie shares. 3
</TABLE>
* All amounts based on October 11, 2000 stock prices and Seagate estimated cash
at October 11, 2000.
** Based upon an estimated 241.1 million shares of Seagate common stock
outstanding on October 11, 2000, calculated on a pro forma basis assuming the
net exercise of all outstanding in-the-money stock options and rights under
the Seagate employee stock purchase plan.
*** Calculated as 128,059,966 shares owned by Seagate at October 11, 2000,
multiplied by discount rate per agreement of approximately 14.6%. Resulting
shares of 109,330,300 are multiplied by $138.0625, representing the fair
value of VERITAS shares as of October 11, 2000.
19
<PAGE> 26
DIAGRAMS OF THE TRANSACTIONS
The following diagram depicts the asset transfers and payments associated
with the leveraged buyout and the merger.
[Asset Transfers and Payments Flow Chart]
* Consists of shares of Gadzoox Networks and Lernout & Hauspie, to the extent
not sold prior to the completion of the merger. All other investments are
included in the operating assets.
** Estimated at $7.35 per share. Equal to Seagate's existing cash plus $2.050
billion (less value of rollover equity) received in the leveraged buyout,
minus $765 million of Seagate's cash to be acquired by Suez Acquisition
Company, approximately $781 million necessary to repay or redeem Seagate's
existing debt, $456 million to satisfy tax withholding obligations arising in
connection with the acceleration of Seagate options, $72 million for
transaction costs, $150 million required to satisfy Seagate's estimated tax
liabilities, and $150 million to be withheld and deposited in a trust pending
the resolution of some Seagate tax audits. Does not give effect to VERITAS'
right to elect to reduce the cash paid in connection with the merger by $250
million or $500 million and to issue additional VERITAS shares in place of
that cash, resulting in estimated net cash per share of $6.31 and $5.27,
respectively. Note that these per share amounts exclude approximately $0.21
per share in cash that will be paid to Seagate stockholders following court
approval of the settlement of existing class action litigation and dismissal
with prejudice of the underlying complaints in this litigation and related
lawsuits pending in California.
20
<PAGE> 27
The following diagram depicts the transfers occurring in connection with
the merger between Seagate and a subsidiary of VERITAS.
[MERGER DIAGRAM]
21
<PAGE> 28
The following is a diagram depicting the currently contemplated structure
of Seagate and VERITAS immediately following the merger.
[VERITAS DIAGRAM]
* Based upon the market value of Seagate's investment securities and VERITAS
common stock as of October 11, 2000, and assuming VERITAS elects to reduce the
cash portion of the consideration payable in connection with the merger by
$500 million and to issue additional VERITAS shares in place of that cash.
22
<PAGE> 29
SUMMARY
The following is a summary of this document. This summary highlights
selected information contained in this document, but may not contain all of the
information that is important to you. To fully understand the leveraged buyout
and the merger, we encourage you to read this entire document carefully, as well
as the additional documents attached hereto as Annexes and any other documents
to which we refer you under "Additional Documents and Other Information
Incorporated by Reference" beginning on page 257 of this document. We also
caution you not to place undue reliance on forward looking statements contained
in this document or in the documents to which we refer you. See "-- Cautionary
Statement Regarding Forward Looking Statements Contained in this Document" on
page 36 of this document.
THE PARTIES
[SEAGATE LOGO]
SEAGATE TECHNOLOGY, INC.
920 Disc Drive
Scotts Valley, California 95066
(831) 438-6550
http://www.seagate.com
Seagate Technology, Inc. designs, manufactures and markets products for
storage, retrieval and management of data on computer systems and other systems
that receive, store and transmit data. These products include disc drives and
disc drive components, tape drives and software. Seagate designs, manufactures
and markets a broad line of rigid disc drives. These products are used in
computer systems ranging from desktop personal computers to large, sophisticated
enterprise computers. Seagate also designs and markets tape drives ranging in
capacity from 4 gigabytes to 240 gigabytes for low cost storage and protection
of large volumes of data electronically. Seagate currently produces tape backup
solutions for desktop personal computers and midrange servers to complement its
line of disc drive products. Through its Seagate Software Holdings, Inc.
subsidiary, Seagate also develops and markets software products and provides
related services enabling business users and information technology
professionals to manage enterprise information.
[VERITAS LOGO]
VERITAS SOFTWARE CORPORATION
1600 Plymouth Street
Mountain View, California 94043
(650) 335-8000
http://www.veritas.com
VERITAS Software Corporation is a leading independent supplier of storage
management software for the data availability market. Storage management
software has grown significantly in importance and market impact during the last
few years. Over time the information technology operations of an enterprise have
moved from just being a piece of their computing infrastructure to providing
competitive advantage through their providing highly available mission critical
data that is accessible at all times. VERITAS
23
<PAGE> 30
products assist businesses 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. Since VERITAS' products help to improve the levels of centralization,
control, automation and manageability in computing environments, they allow
information technology, or IT, managers to be significantly more effective with
constrained resources and limited budgets. More specifically, VERITAS' products
offer protection against data loss and file corruption, allow rapid recovery
after disk or computer system failure, enable IT managers 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. In addition, VERITAS' products provide continuous availability of data in
clustered computer systems that share disk resources to maintain smooth business
operations. VERITAS' products are highly scalable in order to keep up with the
rapid growth of data and technologies deployed in businesses. In summary,
VERITAS' products help its customers manage their data storage in complex and
diverse computing environments efficiently and cost-effectively.
SUEZ ACQUISITION COMPANY (CAYMAN) LIMITED
P.O. Box 265GT
Walker House
George Town
Grand Cayman
Cayman Islands
(650) 233-8120
Suez Acquisition Company (Cayman) Limited is a newly formed limited company
organized under the laws of the Cayman Islands. Suez Acquisition Company was
organized solely for the purpose of entering into the stock purchase agreement
with Seagate and Seagate Software. Suez Acquisition Company also has the right
under the stock purchase agreement to assign its rights under that agreement to
one or more designees. Suez Acquisition Company is controlled by Silver Lake
Partners and Texas Pacific Group. Silver Lake Partners L.P. is a private
investment firm headquartered in Menlo Park, California and New York, New York,
the general partner of which is Silver Lake Technology Associates, L.L.C. Silver
Lake Technology Associates is a Delaware limited liability company, the managing
members of which are James A. Davidson, Glenn H. Hutchins, David J. Roux and
Integral Capital Partners. Texas Pacific Group is a private investment firm
headquartered in Fort Worth, Texas, which is managed by entities controlled by
David Bonderman, James G. Coulter and William S. Price III.
THE STOCK PURCHASE AGREEMENT AND THE LEVERAGED BUYOUT (PAGE 123)
STRUCTURE AND PURCHASE PRICE
Under the terms of the stock purchase agreement, Seagate has agreed to sell
all of its operating assets and assign substantially all of its liabilities
(including any liabilities arising out of the pending litigation between Seagate
and Convolve) to Suez Acquisition Company in a leveraged buyout. Suez
Acquisition Company is a newly formed company controlled by a private equity
group comprised of Silver Lake Partners, Texas Pacific Group, August Capital,
Chase Capital Partners, Goldman Sachs and most of Seagate's senior management
team. The private equity group has agreed to pay Seagate $2.050 billion in cash
(less the amount of rollover equity, as described beginning on page 127) in
exchange for all of its operating assets and $765 million of its cash, so the
portion of the purchase price available for payment to Seagate's stockholders in
connection
24
<PAGE> 31
with the leveraged buyout is $1.285 billion. These operating assets include all
of the operating assets of Seagate and its consolidated subsidiaries. Seagate
will also be required to use additional cash to cover Seagate's current tax
liabilities, redeem its existing indebtedness and pay transaction costs, as more
fully described under "The Stock Purchase Agreement and the Leveraged
Buyout -- Adjustments" beginning on page 124 of this document.
Based upon Seagate's estimated cash balance as of October 11, 2000 and
after giving effect to the retirement of Seagate's outstanding debt, the
consummation of the leveraged buyout, payment of accrued bonuses and provision
for estimated taxes, Seagate currently estimates that approximately $7.35 per
outstanding Seagate share will be available for distribution to Seagate
stockholders in connection with the merger. This amount, less the amount by
which VERITAS may elect to reduce the cash payable in the merger, will be
distributed to Seagate's stockholders in connection with the merger. If VERITAS
elects to reduce the cash by $250 million or $500 million, the corresponding
amounts would be $6.31 and $5.27, respectively. These amounts are only
estimates. The actual amount will not be determined until the day the merger is
completed and probably will be different than this estimate. In addition, these
per share amounts exclude approximately $0.21 per share in cash that will be
paid to Seagate stockholders following court approval of the settlement of
existing class action litigation and dismissal with prejudice of the underlying
complaints in this litigation and related lawsuits pending in California.
FINANCING OF THE PURCHASE PRICE
Prior to the execution of the stock purchase agreement, Suez Acquisition
Company delivered to Seagate copies of commitment letters from Silver Lake
Partners, L.P., TPG Partners III, L.P., August Capital, Chase Capital Partners
and GS Private Equity Partners, L.P., to provide equity financing in an
aggregate amount of at least $800 million. In addition, Suez Acquisition Company
delivered to Seagate copies of commitment letters from The Chase Manhattan Bank,
Goldman Sachs Credit Partners L.P. and Merrill Lynch Capital Corporation to
provide senior secured credit facilities of $900 million in the aggregate
(including a $200 million revolver facility) and $400 million in senior
subordinated financing. The equity and debt financing described above, together
with the rollover equity described below, will provide the funds necessary to
consummate the leveraged buyout.
ROLLOVER EQUITY
Most of Seagate's senior management team have agreed that, in lieu of
receiving consideration in connection with the merger, they will convert a
portion of their Seagate equity with an aggregate value of between $150 million
and $250 million (targeted at $200 million, but no less than $150 million) into
deferred compensation and equity in the entity that will own Seagate's operating
assets following the completion of the leveraged buyout. Although the aggregate
amount of cash that Seagate receives from Suez Acquisition Company in the
leveraged buyout will be reduced by the aggregate value of this converted
equity, the per share cash amount received by Seagate in the leveraged buyout
(and, therefore, the per share amount received by Seagate's stockholders in the
merger) will not be reduced.
NO SOLICITATIONS BY SEAGATE
Until the closing of the leveraged buyout, Seagate generally may not
solicit, initiate or encourage an offer or proposal for an alternative
transaction. However, Seagate may enter
25
<PAGE> 32
into discussions with a third party regarding some types of alternative
transactions if the alternative transaction is superior, from a financial point
of view, to the leveraged buyout and the merger in the case of some types of
alternative transactions, or to the leveraged buyout itself in the case of other
types of alternative transactions.
For a more detailed description of the restrictions imposed by the stock
purchase agreement on Seagate's ability to solicit alternative transactions, see
"The Stock Purchase Agreement and the Leveraged Buyout -- Covenants Relating to
Solicitations by Seagate Prior to the Completion of the Leveraged Buyout"
beginning on page 131 of this document.
CONDITIONS TO THE COMPLETION OF THE LEVERAGED BUYOUT
The completion of the leveraged buyout is subject to a number of customary
conditions, including approval of the leveraged buyout by Seagate's
stockholders, the absence of any governmental orders prohibiting the leveraged
buyout, governmental antitrust clearance, and the completion of Suez Acquisition
Company's financing for the leveraged buyout. It is also a condition to the
completion of the leveraged buyout that Seagate have $765 million in cash on
hand, plus an additional amount of cash necessary to satisfy Seagate's unpaid
tax liabilities, pay for certain transaction costs and bonuses, and redeem its
outstanding indebtedness.
For a more detailed description of the conditions to the completion of the
leveraged buyout, see "The Stock Purchase Agreement and the Leveraged
Buyout -- The Completion of the Leveraged Buyout; Conditions to the Completion
of the Leveraged Buyout -- Conditions to the Completion of the Leveraged Buyout"
beginning on page 134 of this document.
TERMINATION OF THE STOCK PURCHASE AGREEMENT
The stock purchase agreement may be terminated at any time prior to the
completion of the leveraged buyout under customary circumstances, including the
following:
- the mutual agreement of Seagate and Suez Acquisition Company;
- the failure to complete the leveraged buyout by December 31, 2000;
- the issuance of a governmental order permanently prohibiting the
leveraged buyout;
- the failure to receive the approval of the leveraged buyout by Seagate's
stockholders at the Seagate special meeting at which the leveraged buyout
is considered and voted upon;
- the acceptance by Seagate of a superior acquisition proposal from a third
party and payment by Seagate of a termination fee to Suez Acquisition
Company; or
- the withdrawal by Seagate's board of directors of its support for the
leveraged buyout.
For a more detailed description of the bases upon which Seagate and Suez
Acquisition Company may terminate the stock purchase agreement, see "The Stock
Purchase Agreement and the Leveraged Buyout -- Termination of the Stock Purchase
Agreement; Termination Fees and Payments -- Termination" beginning on page 136
of this document.
26
<PAGE> 33
TERMINATION FEES AND PAYMENTS
Seagate is required to pay Suez Acquisition Company an $80 million
termination fee in cash if the stock purchase agreement is terminated under some
circumstances.
For a detailed description of the circumstances under which Seagate is
required to pay Suez Acquisition Company a termination fee, see "The Stock
Purchase Agreement and the Leveraged Buyout -- Termination of the Stock Purchase
Agreement; Termination Fees and Payments -- Termination Fees and Payments"
beginning on page 137 of this document.
THE MERGER AGREEMENT AND THE MERGER (PAGE 138)
STRUCTURE AND EFFECTS
In the merger, a wholly owned subsidiary of VERITAS will merge with
Seagate, the VERITAS subsidiary will cease to exist and Seagate will continue as
a wholly owned subsidiary of VERITAS.
As a result of the merger:
- each share of Seagate common stock outstanding immediately prior to the
time the merger takes place (other than those being canceled) will be
converted into the right to receive the merger consideration described
below;
- the shares of Seagate restricted stock and stock options to purchase
shares of Seagate common stock held by members of Seagate's senior
management team that are being converted into deferred compensation and
equity in the entity that will own Seagate's operating assets following
the completion of the leveraged buyout will be canceled;
- all options to purchase shares of Seagate common stock (other than the
options held by Seagate's senior management team that are being canceled
as described above), whether vested or unvested, will be converted into
shares of Seagate common stock on a net issue basis and then (after
withholding) immediately converted into the right to receive the merger
consideration described below; and
- all rights to purchase shares of Seagate common stock outstanding under
the Seagate employee stock purchase plan will be fully exercised, and all
shares of Seagate common stock acquired as a result of this exercise will
be converted into the merger consideration described below.
Outstanding shares of VERITAS common stock will not be converted or
exchanged in the merger.
THE MERGER CONSIDERATION
The consideration that Seagate's stockholders will receive in the merger
consists of a stock portion, a cash portion and the right to receive amounts
equal to tax refunds and credits attributable to Seagate that are received or
utilized following the completion of the merger. The total number of shares of
VERITAS common stock to be issued in connection with the merger, the cash
payable in connection with the merger, and any of Seagate's tax refunds and
credits, will be divided among all of the shares of Seagate
27
<PAGE> 34
common stock outstanding immediately prior to the time the merger takes place
(other than those being canceled), including:
- all shares of Seagate common stock issuable upon the net exercise of all
stock options to acquire Seagate common stock, other than shares deducted
and withheld in order to satisfy applicable withholding tax obligations
of Seagate, and other than stock options held by members of Seagate's
senior management team, which stock options will be converted into
deferred compensation and an equity interest in the entity that will own
Seagate's operating assets following the leveraged buyout; and
- all shares of Seagate common stock issuable upon the exercise of rights
under Seagate's employee stock purchase plan.
The Stock Portion
A portion of the consideration issuable to Seagate's stockholders in
connection with the merger will consist of shares of VERITAS common stock. The
total number of shares of VERITAS common stock to be issued in the merger will
equal the sum of the following:
- 109,330,300 shares of VERITAS common stock;
- a number of shares of VERITAS common stock determined by dividing the
amount (either $0, $250 million or $500 million) by which VERITAS elects
to reduce the cash portion payable in connection with the merger by the
average closing price per share of VERITAS common stock for the five
consecutive trading days ending on the trading day immediately preceding
the date that VERITAS makes its election; and
- a number of shares of VERITAS common stock determined by dividing the
aggregate negotiated discount to the average market prices of the shares
of Gadzoox Networks and Lernout & Hauspie held by Seagate shortly before
the completion of the merger, by the average closing price per share of
VERITAS common stock for the five consecutive trading days ending two
trading days immediately prior to the completion of the merger.
The Cash Portion
A portion of the consideration payable to Seagate's stockholders in
connection with the merger will consist of an amount of cash equal to:
- the cash received by Seagate in connection with the leveraged buyout; and
- all of Seagate's other available cash on hand at the time the merger is
completed (i.e., all cash remaining after delivering $765 million to the
private equity group in connection with the leveraged buyout, withholding
and depositing $150 million in a trust pending the resolution of some
Seagate tax audits, and providing for the payment of Seagate's current
tax liabilities, tax withholding obligations, outstanding debt, and
transaction expenses).
As stated above, we currently estimate this to represent approximately
$7.35, $6.31 or $5.27 per outstanding Seagate share if VERITAS elects to reduce
the cash payable in connection with the merger by $0, $250 million or $500
million, respectively, and issue additional VERITAS shares in place of that
cash. Note that these per share amounts exclude approximately $0.21 per share in
cash that will be paid to Seagate stockholders following court approval of the
settlement of existing class action litigation and dismissal
28
<PAGE> 35
with prejudice of the underlying complaints in this litigation and related
lawsuits pending in California.
The merger agreement permits VERITAS to elect to reduce the cash portion of
the consideration payable in connection with the merger by either $250 million
or $500 million. VERITAS must choose one of these amounts during the 15 trading
days ending two trading days prior to the day of the Seagate special meeting. If
VERITAS chooses to reduce the cash portion of the consideration payable in
connection with the merger in this manner, VERITAS will issue an additional
number of its shares based upon the average market price of VERITAS common stock
shortly before the time VERITAS makes its election.
Seagate Tax Refunds and Credits
A portion of the consideration payable to Seagate's stockholders in
connection with the merger will consist of the right to receive an amount equal
to any tax refunds received and tax credits utilized following the completion of
the merger that are attributable to Seagate for taxable years or periods (or any
portion of a taxable year or period) ending immediately prior to the completion
of the merger.
Upon receipt of a tax refund or the utilization of a tax credit, VERITAS is
required to remit an amount in cash equal to the amount of tax refund received
or credit utilized to the administrator of a trust. All funds collected by the
administrator plus the $150 million described above under the heading "The Cash
Portion" will be invested in short-term money market instruments and either
applied to pay income tax liabilities of Seagate and expenses, fees and taxes
associated with the operation of the trust or paid to those persons who were
Seagate stockholders at the time of the merger when available for distribution.
The trust will be initially funded with $150 million out of cash otherwise
available for distribution to Seagate stockholders in connection with the
completion of the merger. The administrator will distribute any amounts held in
the trust in excess of $150 million on a quarterly basis. The first such
distribution is not expected until the second quarter of 2001. The $150 million
retained in the trust will be distributed upon the completion of Seagate tax
audits or the expiration of the applicable period for assessment with respect to
those taxable periods beginning on or after July 1, 1999 and ending on or before
the closing date of the merger.
Each Seagate stockholder's interest in Seagate's tax refunds and credits is
a non-transferable right and will be evidenced by appropriate documentation as
agreed upon by Seagate and VERITAS prior to the completion of the merger.
Escrowed Lernout & Hauspie Shares
A portion of Seagate's shares (297,120 shares) of Lernout & Hauspie are
being held in escrow in accordance with the terms of agreements governing
Lernout & Hauspie's recently completed acquisition of Dragon Systems. These
escrowed shares, with a fair value of $3.2 million as of October 11, 2000, are
included as part of Seagate's investment securities that VERITAS will acquire in
the merger. However, VERITAS will not issue additional VERITAS shares for these
securities. Instead, upon resolution of certain acquisition related
contingencies with Lernout & Hauspie, some or all of these escrowed shares will
be transferred to the trustee or administrator that will administer the
distribution of the tax refund amount and the shares will be sold or
distributed, when permitted under applicable law and in accordance with any
contractual restrictions, and the
29
<PAGE> 36
proceeds distributed to Seagate stockholders along with amounts relating to the
tax refunds and credits described above, following completion of the merger.
NO SOLICITATIONS BY SEAGATE
Until the completion of the merger, Seagate generally may not solicit,
initiate or encourage an offer or proposal for an alternative transaction.
However, Seagate may enter into discussions with a third party regarding some
types of alternative transactions if the alternative transaction is superior,
from a financial point of view, to the merger.
For a more detailed description of the restrictions imposed by the merger
agreement on Seagate's ability to solicit alternative transactions, see "The
Merger Agreement and the Merger -- Covenants Relating to Solicitations by
Seagate Prior to the Completion of the Merger" beginning on page 151 of this
document.
CONDITIONS TO THE COMPLETION OF THE MERGER
The completion of the merger is subject to a number of customary
conditions, including approval of the merger by Seagate's stockholders, approval
of the issuance of VERITAS shares in connection with the merger by VERITAS'
stockholders, the absence of any governmental orders prohibiting the merger and
governmental antitrust clearance. It is also a condition to the completion of
the merger that Seagate and Suez Acquisition Company have completed the
leveraged buyout.
In addition, it is a condition to the completion of the merger that each of
Seagate and VERITAS receives opinions from their respective tax counsel that the
merger should qualify as a "reorganization" within the meaning of Section 368(a)
of the Internal Revenue Code. In the event that tax counsel were unable to
deliver the tax opinions, the merger would not be consummated unless the
condition requiring the delivery of the tax opinions was waived. Neither VERITAS
nor Seagate intends to waive this condition. If tax counsel were unable to
deliver the tax opinions, revised proxy materials would be circulated to Seagate
stockholders describing the altered tax consequences of the merger and a new
vote of the Seagate stockholders would be held.
For a more detailed description of the conditions to the completion of the
merger, see "The Merger Agreement and the Merger -- The Closing; Conditions to
the Closing -- Conditions to the Closing" beginning on page 153 of this
document.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time prior to the completion
of the merger under customary circumstances, including the following:
- the mutual agreement of Seagate and VERITAS;
- the failure to complete the merger by December 31, 2000;
- the issuance of a governmental order permanently prohibiting the merger;
- the failure to receive the approval of the merger by Seagate's
stockholders at Seagate's special meeting;
- the failure to receive the approval of VERITAS' stockholders for the
issuance of VERITAS shares in connection with the merger at the VERITAS
special meeting;
- the acceptance by Seagate of a superior acquisition proposal from a third
party and payment of a termination fee to VERITAS; or
- the withdrawal by Seagate's board of directors or VERITAS' board of
directors of its support for the merger.
30
<PAGE> 37
For a more detailed description of the basis upon which Seagate and VERITAS
may terminate the merger agreement, see "The Merger Agreement and the Merger --
Termination; Termination Fees and Payments -- Termination" beginning on page 155
of this document.
TERMINATION FEES AND PAYMENTS
Under the terms of the merger agreement, Seagate must pay VERITAS a $440
million termination fee in cash if the merger agreement is terminated under some
circumstances.
For a detailed description of the circumstances under which Seagate is
required to pay VERITAS a termination fee, see "The Merger Agreement and the
Merger -- Termination; Termination Fees and Payments -- Termination Fees and
Payments" beginning on page 157 of this document.
APPRAISAL RIGHTS (PAGE 159)
Holders of shares of Seagate common stock who do not wish to accept the
consideration payable to Seagate's stockholders under the terms of the merger
agreement and who follow the procedures required under Delaware law will be
entitled to appraisal rights. Holders of shares of Seagate common stock are not
entitled to appraisal rights solely in connection with the leveraged buyout.
Holders of shares of VERITAS common stock are not entitled to appraisal
rights in connection with the leveraged buyout or the merger.
THE INDEMNIFICATION AGREEMENT (PAGE 165)
In connection with the leveraged buyout and the merger, Seagate, VERITAS
and Suez Acquisition Company entered into an indemnification agreement. Under
the terms of the indemnification agreement, Suez Acquisition Company has agreed
to indemnify Seagate and VERITAS against liabilities relating to Seagate's
operating business, while Seagate and VERITAS have agreed to indemnify Suez
Acquisition Company against liabilities associated with the assets to be
retained by Seagate and acquired by VERITAS in the merger.
The indemnification agreement also contains provisions relating to the
payment of taxes and the preparation of tax returns following the completion of
the leveraged buyout and the merger.
THE EXCLUSIVITY AGREEMENT (PAGE 167)
VERITAS and Suez Acquisition Company are parties to a letter agreement that
provides, in part, that VERITAS will be obligated to pay to Suez Acquisition
Company a $50 million termination fee in cash if the stock purchase agreement is
terminated under some circumstances and VERITAS enters into some specified types
of alternative transactions within 90 days after the termination of the stock
purchase agreement.
AMENDMENTS TO STOCK PURCHASE AGREEMENT, MERGER AGREEMENT AND INDEMNIFICATION
AGREEMENT (PAGE 158)
A consolidated amendment to the stock purchase agreement, the merger
agreement and the indemnification agreement, which was executed on August 29,
2000, reduced the amount of cash Seagate is required to have on hand as a
condition to completion of the
31
<PAGE> 38
leveraged buyout to $765 million from $775 million, clarified the manner of
satisfying applicable tax withholding obligations in connection with the merger,
established certain agreements with respect to Seagate's tax refunds and
credits, and corrected and clarified other provisions in the agreements.
A second consolidated amendment to the stock purchase agreement, the merger
agreement and the indemnification agreement, which was executed on October 18,
2000, increased the purchase price to be paid by Suez Acquisition Company for
Seagate's operating assets from $2 billion to $2.050 billion, changed VERITAS'
right to elect to retain either $500 million or $750 million of cash to a right
to elect to retain either $250 million or $500 million of cash, specified that
VERITAS' election to retain cash must be made during the 15 trading days ending
two trading days prior to the Seagate special meeting, and reduced the maximum
amount that may be withheld at the completion of the merger and deposited in a
trust from $300 million to $150 million.
INTERESTS OF DIRECTORS AND OTHER EXECUTIVE OFFICERS OF SEAGATE IN THE LEVERAGED
BUYOUT AND THE MERGER (PAGE 97)
Mr. Luczo and other executive officers of Seagate have interests in the
leveraged buyout and the merger that are different from, or in addition to, the
interests of Seagate's stockholders generally and which may create potential
conflicts of interest. In addition, Mr. Luczo and other executive officers of
Seagate will receive benefits in connection with the leveraged buyout and the
merger that are not available to other Seagate stockholders.
INTERESTS OF DIRECTORS OF VERITAS IN THE MERGER (PAGE 114)
Stephen Luczo and Gregory Kerfoot, who are directors of VERITAS, are
executive officers of Seagate and Seagate Software, respectively. Mr. Luczo also
is a director of Seagate and a member of Seagate's senior management who will
participate in the ownership of Suez Acquisition Company. Messrs. Luczo and
Kerfoot did not participate in discussions or negotiations on behalf of VERITAS
in connection with the merger agreement or the merger.
OPINION OF SEAGATE'S FINANCIAL ADVISOR (PAGE 85)
In making its determination on whether to approve and recommend the
leveraged buyout and the merger, the board of directors of Seagate considered,
among other things, the oral opinions of Morgan Stanley to Seagate's board of
directors on March 29, 2000 and August 25, 2000, subsequently confirmed in
writing on March 29, 2000 and August 29, 2000, respectively, to the effect that,
as of March 29, 2000 and August 29, 2000, respectively, and based upon and
subject to the various considerations set forth in its opinions, the
consideration to be received by the holders of Seagate common stock in
connection with the merger was fair, from a financial point of view, to those
holders. The opinions of Morgan Stanley are subject to the limitations and
qualifications described in the opinions. A copy of the opinion of Morgan
Stanley dated August 29, 2000 is attached to this document as Annex G. We
encourage you to carefully read the August 29, 2000 Morgan Stanley opinion in
its entirety. THE MORGAN STANLEY OPINIONS ARE DIRECTED TO SEAGATE'S BOARD OF
DIRECTORS AND DO NOT CONSTITUTE A RECOMMENDATION TO ANY SEAGATE STOCKHOLDER AS
TO ANY MATTER RELATING TO THE LEVERAGED BUYOUT OR THE MERGER.
PLEASE NOTE THAT THE MORGAN STANLEY OPINIONS SPEAK AS OF THE DATES THEY
WERE ISSUED AND THE AUGUST 29, 2000 OPINION WILL NOT BE UPDATED.
32
<PAGE> 39
Morgan Stanley's opinions did not address any individual components of the
consideration payable in connection with the merger, such as the consideration
payable to Seagate in the leveraged buyout or the exchange ratio for the fixed
stock portion payable in the merger. However, the merger consideration (which
includes, among other things, net amounts received in the leveraged buyout) is
made up, in part, of these components.
Morgan Stanley and some of its officers, employees and affiliates have
committed to invest up to $50.1 million in Silver Lake Partners' $2.3 billion
fund. Morgan Stanley's commitment is $1 million, and the remainder consists of
commitments from approximately 130 officers, employees and affiliates of Morgan
Stanley. The aggregate amount of these commitments that could be drawn for the
leveraged buyout would represent approximately 0.8% of the equity required for
the leveraged buyout. These commitments were made before Morgan Stanley began
advising the Seagate board of directors regarding the transactions described in
this document. Pursuant to other pre-existing agreements, Morgan Stanley Dean
Witter & Co., the parent of Morgan Stanley, has the right to receive
approximately 0.86% of Silver Lake Partners' contractual right to participate in
20% (or approximately 0.17%) of any profits earned upon disposition of the
assets acquired in the leveraged buyout, and certain officers of Morgan Stanley
have committed to acquire up to $550,000 of limited partnership interests in
funds affiliated with TPG Partners III, L.P. In addition, Morgan Stanley and
some of its officers, directors and affiliates also committed to invest up to
approximately $43.5 million in certain investment funds that have joined or may
join the investor group organized by Silver Lake Partners to effect the
leveraged buyout. The aggregate amount of these commitments that could be drawn
for the leveraged buyout would represent approximately 0.1% of the equity
required for the leveraged buyout. Pursuant to its engagement letter with
Seagate, upon completion of the merger, Morgan Stanley will be entitled to
receive a cash fee, based upon a percentage of the aggregate value of the
merger. The minimum fee payable to Morgan Stanley is $10 million and the maximum
fee is $50 million. Seagate currently believes the fee payable to Morgan Stanley
will be at the high end of this range.
In connection with the preparation and delivery of its opinions, and in
discussions with the Seagate board, Morgan Stanley performed some alternative
financial analyses of Seagate's operating assets. Some of these analyses
resulted in valuation ranges in excess of the price being paid in the leveraged
buyout by Suez. The Seagate board was aware of these alternative analyses of the
operating assets but believes the leveraged buyout is fair to Seagate's
unaffiliated stockholders because it allows the overall merger transaction to
occur and for the other reasons discussed in more detail in "Special Factors
Regarding the Leveraged Buyout and the Merger -- Consideration of the Leveraged
Buyout and the Merger by Seagate" beginning on page 80 of this document.
OPINION OF VERITAS' FINANCIAL ADVISOR (PAGE 109)
In making its determination on whether to approve the merger between
Seagate and VERITAS, the board of directors of VERITAS considered, among other
things, the oral opinion of Credit Suisse First Boston rendered to the board of
directors of VERITAS on March 28, 2000, which was subsequently confirmed in
writing as of March 29, 2000, to the effect that, as of the date of the opinion
and based upon and subject to the various considerations set forth in its
opinion, the exchange ratio for the stock component of the consideration payable
to Seagate's stockholders in connection with the merger was fair from a
financial point of view to VERITAS. The opinion of Credit Suisse First Boston is
subject to the limitations and qualifications described in the opinion, a copy
of which is attached to this document as Annex H. THE CREDIT SUISSE FIRST BOSTON
OPINION IS DIRECTED
33
<PAGE> 40
TO THE VERITAS BOARD OF DIRECTORS AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY VERITAS STOCKHOLDER AS TO ANY MATTER RELATING TO THE MERGER.
Credit Suisse First Boston and some of its affiliates and their officers
and employees have established investment funds that have committed to invest
(i) an aggregate of $20 million to acquire interests in Silver Lake Partners,
and (ii) an aggregate of $10 million to acquire interests in Texas Pacific
Group. These commitments were made substantially before Credit Suisse First
Boston began advising VERITAS regarding the transactions described in this
document.
REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE LEVERAGED BUYOUT AND
THE MERGER (PAGE 169)
In order to complete the leveraged buyout and the merger, each of Seagate,
VERITAS and Mr. Stephen Luczo, a director and executive officer of Seagate and a
member of Seagate's senior management team who will participate in the ownership
of Suez Acquisition Company, filed notifications under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and Seagate made various filings
with state and foreign governmental authorities with jurisdiction over
applicable antitrust laws. It is a condition to the obligations of Seagate,
VERITAS and Suez Acquisition Company to complete the leveraged buyout and the
merger that they comply with the Hart-Scott-Rodino Antitrust Improvements Act
and that all applicable waiting periods under that statute expire. The waiting
periods under the Hart-Scott-Rodino Antitrust Improvements Act for Seagate's,
VERITAS' and Mr. Luczo's filings have expired.
Seagate, VERITAS and Suez Acquisition Company are not aware of any other
significant governmental or regulatory approval required for completion of the
leveraged buyout or the merger, other than the effectiveness of the registration
statement of which this document forms a part, and compliance with the
applicable corporate laws of the state of Delaware.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (PAGE 169)
Consummation of the merger is conditioned upon the receipt by Seagate and
VERITAS of opinions from their respective counsel that the merger should be
treated as a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code. These opinions will be subject to certain assumptions,
limitations and qualifications, and will be based upon the truth and accuracy of
certain factual representations of Seagate and VERITAS. As discussed under
"Material United States Federal Income Tax Consequences of the Merger" beginning
on page 169 of this document, these opinions will be qualified and the
conclusion that the merger qualifies as a "reorganization" is not free from
doubt. Furthermore, these opinions will be based upon currently existing
provisions of the Internal Revenue Code, existing Treasury regulations
thereunder and current administrative rulings and court decisions, all of which
are subject to change. Nonetheless, in the event tax counsel were unable to
deliver the tax opinions, the merger would not be consummated unless the
condition requiring the delivery of the tax opinions was waived. Neither VERITAS
nor Seagate intends to waive this condition. If tax counsel were unable to
deliver the tax opinions, revised proxy materials would be circulated to Seagate
stockholders describing the altered tax consequences of the merger and a new
vote of the Seagate stockholders would be held.
34
<PAGE> 41
Assuming that the merger qualifies as a reorganization, and that the shares
of Seagate common stock surrendered in the merger were held as capital assets:
- Seagate stockholders will be required to recognize gain for federal
income tax purposes on the exchange of shares of Seagate common stock for
VERITAS common stock, cash and, in general, the right to receive
Seagate's tax refunds and credits, but only up to the amount of cash
received plus, in general, the fair market value of their proportionate
share in the right to receive Seagate's tax refunds and credits and $150
million reduced by some potential Seagate tax liabilities. Seagate's
stockholders will not be permitted to recognize any loss on the exchange;
- the leveraged buyout will have no direct tax consequence to Seagate's
stockholders, but the cash received in the merger will be based in part
on the consideration received by Seagate from Suez Acquisition Company in
connection with the leveraged buyout; and
- neither Seagate nor VERITAS will recognize gain or loss as a result of
the merger.
In addition, it should be noted that VERITAS stockholders will not
recognize any gain or loss on their shares of VERITAS common stock as a result
of the merger.
ACCOUNTING TREATMENT OF THE LEVERAGED BUYOUT AND THE MERGER (PAGE 175)
The leveraged buyout will be accounted for by Seagate as a sale of assets
and liabilities to Suez Acquisition Company in exchange for cash. The merger
will be accounted for by VERITAS at the estimated fair value of the assets and
liabilities remaining in Seagate, immediately prior to the merger.
LITIGATION REGARDING THE LEVERAGED BUYOUT AND THE MERGER (PAGE 163)
After the announcement of the leveraged buyout and merger, seventeen
putative class action lawsuits were filed in the Chancery Court of Delaware
alleging that Seagate and its directors breached their fiduciary duties in
connection with the leveraged buyout and merger. VERITAS was also named as a
defendant in some of these lawsuits. On October 13, 2000, the parties to these
lawsuits reached an agreement in principle to settle them. The primary elements
of this agreement include (1) Suez Acquisition Company will increase the cash
purchase price in the leveraged buyout by $50 million in cash, from $2.0 billion
to $2.050 billion; (2) the merger agreement will be amended to (a) replace
VERITAS' right to elect to retain either $500 million or $750 million of cash
with a right to elect to retain either $250 million or $500 million of cash, (b)
reduce the maximum amount that may be held back in escrow to cover potential
Seagate tax liabilities from $300 million to $150 million, and (c) specify that
VERITAS' election to retain cash must be made during the 15 trading days ending
two trading days prior to the Seagate special meeting; (3) Suez will pay any
attorneys' fees that may be awarded to the plaintiff's counsel; and (4) prior to
the closing of the transaction, Seagate will obtain a fairness opinion from
Lehman Brothers regarding the combined consideration to be received by Seagate
stockholders in the merger and the leveraged buyout taken together. The $50
million of additional consideration will be paid upon court approval of the
settlement and dismissal with prejudice of the underlying complaints in the
Delaware lawsuits and the five California lawsuits referred to in the last
paragraph of this section. Although Seagate expects final court approval and
dismissal to occur within the 120 day period following the completion of the
merger, it is possible that settlement and dismissal could take substantially
longer. The $50 million of additional consideration will be held in escrow by
VERITAS, and earn interest at the 90 day treasury bill rate, pending
distribution to
35
<PAGE> 42
Seagate stockholders. See "Litigation Regarding the Leveraged Buyout and the
Merger" beginning on page 163 of this document.
The Seagate board of directors has not received the Lehman Brothers opinion
referred to above, but will obtain the opinion from Lehman Brothers at least two
weeks prior to the Seagate special meeting. When this opinion is received,
Seagate will file an amendment to the Schedule 13E-3 transaction statement filed
in connection with the transactions described in this document to include the
text of that opinion, together with a description of the analysis utilized in
rendering the opinion. In addition, Seagate will also file a Current Report on
Form 8-K under the Securities Exchange Act of 1934, which will contain the
Lehman Brothers opinion and analysis as exhibits, at least two weeks prior to
the date of the Seagate special meeting. Copies of the Lehman Brothers opinion,
when obtained by the Seagate board of directors, can be obtained from Seagate by
calling Bill Rowley, Seagate Investor Relations, at (831) 439-2371.
In addition to the Delaware lawsuits, five putative class action lawsuits
were filed in California Superior Court, also alleging that the directors and
some of the officers of Seagate breached their fiduciary duties in connection
with the leveraged buyout and the merger. VERITAS and Silver Lake Partners are
also named as defendants in some of these lawsuits. Seagate, VERITAS and Silver
Lake Partners believe these lawsuits are without merit and intend to contest
them vigorously.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS CONTAINED IN THIS
DOCUMENT
This document contains forward looking statements, including statements
with respect to the financial condition, results of operations and business of
Seagate and VERITAS, and on the expected impact of the leveraged buyout and the
merger on the financial performance of Seagate and of the merger on the
financial performance of VERITAS. Words such as anticipates, expects, intends,
plans, believes, seeks, estimates and similar expressions identify forward
looking statements. These forward looking statements are not guarantees of
future performance and are subject to certain risks and uncertainties that could
cause actual results to differ materially from the results contemplated by the
forward looking statements.
IN EVALUATING THE LEVERAGED BUYOUT AND THE MERGER, YOU SHOULD CAREFULLY CONSIDER
THE DISCUSSION OF THESE AND OTHER FACTORS DESCRIBED UNDER "RISK FACTORS"
BEGINNING ON PAGE 56 OF THIS DOCUMENT.
36
<PAGE> 43
SUMMARY SELECTED HISTORICAL FINANCIAL DATA
SUMMARY SELECTED HISTORICAL FINANCIAL DATA FOR SEAGATE
The following summary selected historical financial data for Seagate for
fiscal 1996 through fiscal 2000 was derived from Seagate's audited financial
statements for the same periods. This financial data is only a summary and
should be read in conjunction with the Seagate financial statements and related
notes included in this document.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------------------
JUNE 30, JULY 2, JULY 3, JUNE 27, JUNE 28,
2000 1999 1998 1997 1996
-------- ------- ------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
HISTORICAL STATEMENTS OF OPERATIONS DATA:
Revenues.................................... $6,448 $6,802 $6,819 $8,940 $8,588
Income (loss) from operations............... (561) 258 (686) 858 287
Net income (loss)........................... 310 1,176 (530) 658 213
Basic net income (loss) per share*.......... 1.41 4.99 (2.20) 2.84 1.07
Diluted net income (loss) per share*........ 1.35 4.54 (2.20) 2.62 .96
Shares used in computing basic net income
(loss) per share*......................... 219.4 235.8 241.3 231.5 198.7
Shares used in computing diluted net income
(loss) per share*......................... 229.5 242.5 241.3 257.3 237.4
HISTORICAL BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................... $2,015 $1,623 $1,827 $2,283 $1,174
Working capital............................. 2,031 1,772 2,240 2,716 1,961
Total assets................................ 7,167 7,072 5,645 6,723 5,240
Long-term obligations, net of current
portion................................... 703 703 704 702 798
Total stockholders' equity.................. 3,847 3,563 2,937 3,476 2,466
</TABLE>
---------------
* See (1) in Net Income Per Share footnote at F-19 of Notes to Consolidated
Financial Statements.
The results of operations for fiscal 2000 include a $537 million gain on
sale of VERITAS common stock, a $679 million gain on the sale of SanDisk
Corporation common stock, $231 million in gains on the exchange of certain
investments in other equity securities, a $207 million net restructuring charge,
a $326 million charge related to Seagate's equity interest in VERITAS, a $105
million write-off of in-process research and development incurred primarily in
connection with the acquisition of XIOtech Corporation, a $64 million charge in
connection with various legal settlements, a $286 million compensation charge
related to the reorganization of Seagate Software, and a $28 million charge
related to employee separations.
The results of operations for fiscal 1999 include a $60 million
restructuring charge, a $78 million charge to operations for milestone payments
related to the acquisition of Quinta Corporation, a $1,670 million gain on the
contribution of the Network Storage Management Group business of Seagate
Software, or NSMG, to VERITAS net of various transaction costs, and a $119
million charge related to Seagate's equity ownership in VERITAS.
Seagate's fiscal 1998 results of operations include a $347 million
restructuring charge, a $223 million write-off of in-process research and
development incurred primarily in connection with the acquisition of Quinta
Corporation, a $76 million charge for mark-to-
37
<PAGE> 44
market adjustments on certain of Seagate's foreign currency forward exchange
contracts and a $22 million reduction in the charge recorded in fiscal 1997 as a
result of the adverse judgment in the Amstrad PLC litigation.
The fiscal 1997 results of operations include a $153 million charge as a
result of the adverse judgment in the Amstrad PLC litigation. Fiscal 1996
results of operations include a $242 million restructuring charge as a result of
the merger with Conner Peripherals, Inc. and a $99 million write-off of
in-process research and development primarily incurred in connection with the
acquisition of software companies.
Prior periods have been restated to reflect the merger with Conner
Peripherals in February 1996 on a pooling of interests basis, a two-for-one
stock split, effected in the form of a stock dividend, in November 1996, and
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
adopted in the second quarter of fiscal 1998.
RECENT DEVELOPMENTS -- SEAGATE
On October 10, 2000, Seagate announced financial results for the first
quarter of its 2001 fiscal year. Revenue for the quarter ended September 29,
2000 was $1.748 billion, as compared with $1.682 billion for the comparable
year-ago quarter ended October 1, 1999, and $1.548 billion for the immediately
preceding quarter ended June 30, 2000. Seagate shipped a record 11.6 million
disc drives in its quarter ended September 29, 2000; however, Seagate's ability
to satisfy total customer demand was constrained by a limited supply of
electrical components from some external suppliers.
Gross margin as a percentage of revenue was 21.1% for the quarter ended
September 29, 2000 compared with 16.5% for the comparable year-ago period and
21.8% for the immediately preceding quarter. The decrease in gross margin as a
percentage of revenue from the immediately preceding quarter was primarily due
to continued price declines for both enterprise and personal storage products,
as well as the increased cost of some externally sourced electrical components.
Operating expenses, excluding cost of sales, were $333 million for the
quarter ended September 29, 2000 and included restructuring charges of $20
million. Operating expenses were $379 million for the comparable year-ago
quarter and $373 million for the immediately preceding quarter. The decrease
from the comparable year-ago quarter was primarily due to a decrease in
restructuring costs, partially offset by increases in product development and
marketing and administrative expenses. The decrease from the immediately
preceding quarter was primarily due to charges for legal settlements in the
immediately preceding quarter and decreased marketing and administrative
expenses in the current quarter.
Net other income was $77 million in the quarter ended September 29, 2000
and included $122 million of gains on sales of SanDisk stock and Veeco
Instruments stock as well as charges of $67 million related to Seagate's equity
interest in VERITAS.
Net income and diluted net income per share were $75 million and $0.31,
respectively, for the quarter ended September 29, 2000, compared with $2 million
and $0.01 for the comparable year-ago quarter and $231 million and $0.96 for the
immediately preceding quarter.
The following consolidated condensed financial statements have been
prepared by Seagate, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles
38
<PAGE> 45
have been condensed or omitted pursuant to such rules and regulations. Seagate
believes the disclosures included in the following unaudited consolidated
condensed financial statements, when read in conjunction with the consolidated
financial statements of Seagate as of June 30, 2000 and notes thereto, are
adequate to make the information presented not misleading.
The following consolidated condensed financial statements reflect, in the
opinion of management, all material adjustments necessary to summarize fairly
the consolidated financial position, results of operations and cash flows for
such periods. Such adjustments are of a normal recurring nature.
The results of operations for the three month period ended September 29,
2000 are not necessarily indicative of the results that may be expected for the
entire fiscal year ending June 29, 2001.
39
<PAGE> 46
SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
SEPTEMBER 29, OCTOBER 1,
2000 1999
------------- ----------
<S> <C> <C>
Revenue............................................... $1,748 $1,682
Cost of sales......................................... 1,380 1,404
Product development................................... 159 140
Marketing and administrative.......................... 138 118
Amortization of goodwill and other intangibles........ 16 9
Restructuring costs................................... 20 112
------ ------
Total Operating Expenses......................... 1,713 1,783
Income (Loss) from Operations.................... 35 (101)
Interest income....................................... 34 21
Interest expense...................................... (12) (13)
Activity related to equity interest in Veritas........ (67) (99)
Gain on sale of Veritas stock......................... -- 193
Gain on sale of SanDisk stock......................... 102 --
Gain on sale of Veeco stock........................... 20 --
Other................................................. -- (1)
------ ------
Other Income, net................................ 77 101
------ ------
Income before income taxes............................ 112 --
Provision (benefit) for income taxes.................. 37 (2)
------ ------
Net Income....................................... $ 75 $ 2
====== ======
NET INCOME PER SHARE:
Basic............................................... $ 0.33 $ 0.01
Diluted............................................. $ 0.31 $ 0.01
NUMBER OF SHARES USED IN PER SHARE COMPUTATIONS:
Basic............................................... 228.2 218.6
Diluted............................................. 240.4 224.1
</TABLE>
40
<PAGE> 47
SEAGATE TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 29, JUNE 30,
2000 2000
------------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................... $1,303 $ 875
Short-term investments.................................. 1,048 1,140
Accounts receivable, net................................ 777 678
Inventories............................................. 362 430
Deferred income taxes................................... 207 219
Other current assets.................................... 150 167
------ ------
Total Current Assets.................................. 3,847 3,509
Property, equipment and leasehold improvements, net..... 1,603 1,608
Investment in Veritas Software Corporation, net......... 1,055 1,122
Goodwill and other intangibles, net..................... 335 353
Other assets............................................ 235 575
------ ------
Total Assets.......................................... $7,075 $7,167
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................................ $ 658 $ 707
Accrued employee compensation........................... 173 195
Accrued expenses........................................ 453 494
Accrued income taxes.................................... 85 81
Current portion of long-term debt....................... 1 1
------ ------
Total Current Liabilities............................. 1,370 1,478
Deferred income taxes................................... 861 1,020
Other liabilities....................................... 119 119
Long-term debt, less current portion.................... 703 703
------ ------
Total Liabilities..................................... 3,053 3,320
Stockholders' Equity.................................. 4,022 3,847
------ ------
Total Liabilities and Stockholders' Equity............ $7,075 $7,167
====== ======
</TABLE>
41
<PAGE> 48
SUMMARY SELECTED HISTORICAL FINANCIAL DATA FOR VERITAS
The following summary selected historical financial data for VERITAS for
years ended December 31, 1995 through December 31, 1999 was derived from
VERITAS' audited financial statements for the same periods, and the summary
selected historical financial data for the six month period ended June 30, 2000
and 1999 was derived from VERITAS' unaudited financial statements for the same
periods. This financial data is only a summary and should be read in conjunction
with the VERITAS financial statements and related notes included in this
document.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ ---------------------
1999 1998 1997 1996 1995 2000 1999
---------- -------- -------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
STATEMENT OF
OPERATIONS DATA:
Total net revenue.... $ 596,112 $210,865 $121,125 $ 72,746 $ 47,826 $ 520,076 $ 186,552
Amortization of
developed
technology......... 35,659 -- -- -- -- 30,948 5,006
Amortization of
goodwill and other
intangibles........ 510,943 -- -- -- -- 439,517 71,557
Acquisition and
restructuring
costs.............. 11,000 -- 8,490 -- -- -- 11,000
In-process research
and development.... 104,200 600 -- 2,200 -- -- 103,100
Income (loss) from
operations......... (475,237) 53,668 20,076 11,858 1,193 (309,346) (139,846)
Net income (loss).... (502,958) 51,648 22,749 12,129 2,371 (346,724) (148,746)
Net income (loss) per
share -- basic..... $ (1.59) $ 0.24 $ 0.11 $ 0.06 $ 0.01 $ (0.87) $ (0.61)
Net income (loss) per
share -- diluted... $ (1.59) $ 0.22 $ 0.10 $ 0.06 $ 0.01 $ (0.87) $ (0.61)
Number of shares used
in computing per
share amounts --
basic.............. 316,892 211,558 205,300 193,617 181,590 397,645 245,493
Number of shares used
in computing per
share amounts --
diluted............ 316,892 232,519 222,716 209,228 193,780 397,645 245,493
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
-------------------------------------------------------- JUNE 30,
1999 1998 1997 1996 1995 2000
---------- -------- -------- --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Working capital.............. $ 631,036 $198,842 $188,578 $ 67,413 $ 23,451 $ 838,777
Total assets................. 4,233,277 349,117 241,880 94,524 48,100 4,077,544
Long-term obligations........ 451,640 100,773 100,911 1,468 6,205 456,587
Accumulated deficit.......... (532,374) (29,416) (81,064) (103,813) (115,942) (879,098)
Stockholders' equity......... 3,393,061 169,854 104,193 74,955 23,602 3,199,960
</TABLE>
In 1999, VERITAS acquired the NSMG business, TeleBackup and NuView. Because
VERITAS accounted for the NSMG, TeleBackup and NuView acquisitions using the
42
<PAGE> 49
purchase method of accounting, VERITAS recorded developed technology, goodwill
and other intangible assets of approximately $3,754.9 million in total. These
assets are being amortized over their estimated useful life of four years, and
result in charges to operations of approximately $234.8 million per quarter.
VERITAS also recorded one-time non-cash charges of $104.2 million in its
statements of operations in 1999, related to the write-off of in-process
research and development. VERITAS also recorded a one-time restructuring charge
in 1999 of $11.0 million related primarily to costs for its duplicative
facilities that it plans to vacate.
RECENT DEVELOPMENTS -- VERITAS
On October 12, 2000, VERITAS announced financial results for its third
quarter ended September 30, 2000. VERITAS achieved third quarter revenue of
$317.2 million, an increase of 73% over last year's third quarter revenue of
$183.4 million. VERITAS' revenue for the nine-month period ended September 30,
2000 was $837.2 million, an increase of 126% over last year's nine-month revenue
of $370.0 million. VERITAS believes that the increases in total revenue achieved
in these periods are not necessarily indicative of future results. Total revenue
consists of user license fees and services revenue. For user license fees, the
increases were primarily the result of the continued growth in market acceptance
of VERITAS' 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. For services revenue,
the increases were due primarily 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. For the nine-month period ended September 30, 2000, the
increases in user license fees and services revenue were also the result of the
acquisition of NSMG on May 28, 1999.
The operating margin for the quarter ended September 30, 2000, excluding
purchase accounting amortization and write-off of in-process research and
development, remained consistent with the quarter ended September 30, 1999, at
32%. The operating margin for the nine-month period ended September 30, 2000,
excluding purchase accounting amortization, write-off of in-process research and
development and acquisition and restructuring costs, increased to 31% compared
with 30% for the same period last year.
For the current third quarter, VERITAS reported a net loss of $148.1
million, or $0.37 per share, compared with a net loss of $183.6 million, or
$0.48 per share for the prior year. Included in the current year third quarter's
net loss is $235.3 million of purchase accounting amortization. Included in the
prior year third quarter's net loss is $234.9 million of purchase accounting
amortization and a one-time charge of $1.1 million for the write-off of
in-process research and development. For the current year nine-month period,
VERITAS reported a net loss of $494.8 million, or $1.24 per share, compared with
a net loss of $332.3 million, or $1.14 per share for the same period in the
prior year. Included in the current year nine-month period's net loss is $705.8
million of purchase accounting amortization. Included in the prior year
nine-month period's net loss is $311.4 million of purchase accounting
amortization, a one-time charge of $104.2 million for the write-off of
in-process research and development and $11.0 million of acquisition and
restructuring costs.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. They do not include all of the information and
footnotes required by generally
43
<PAGE> 50
accepted accounting principles for annual financial statements. In the opinion
of VERITAS' 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.
44
<PAGE> 51
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
2000 1999 2000 1999
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
NET REVENUE:
User license fees............... $ 256,925 $ 157,643 $ 686,092 $ 306,725
Services........................ 60,246 25,758 151,155 63,228
--------- --------- ---------- ---------
Total net revenue............ 317,171 183,401 837,247 369,953
COST OF REVENUE:
User license fees............... 9,270 5,891 29,247 10,673
Services........................ 21,707 10,787 60,171 25,568
Amortization of developed
technology................... 15,553 15,258 46,501 20,264
--------- --------- ---------- ---------
Total cost of revenue........ 46,530 31,936 135,919 56,505
--------- --------- ---------- ---------
GROSS PROFIT...................... 270,641 151,465 701,328 313,448
OPERATING EXPENSES:
Selling and marketing........... 116,936 67,895 310,628 139,290
Research and development........ 46,328 28,924 120,646 63,290
General and administrative...... 20,465 11,020 52,971 21,431
Amortization of goodwill and
other intangibles............ 219,758 219,626 659,275 291,183
In-Process research and
development.................. -- 1,100 -- 104,200
Acquisition and restructuring
costs........................ -- -- -- 11,000
--------- --------- ---------- ---------
Total operating
expenses............. 403,487 328,565 1,143,520 630,394
--------- --------- ---------- ---------
Loss from operations.............. (132,846) (177,100) (442,192) (316,946)
Interest and other income, net.... 15,648 7,266 39,688 13,445
Interest expense.................. (8,266) (5,301) (23,314) (8,143)
--------- --------- ---------- ---------
Loss before income taxes.......... (125,464) (175,135) (425,818) (311,644)
Provision for income taxes........ 22,642 8,441 69,012 20,678
--------- --------- ---------- ---------
NET LOSS.......................... $(148,106) $(183,576) $ (494,830) $(332,322)
========= ========= ========== =========
NET LOSS PER SHARE -- BASIC....... $ (0.37) $ (0.48) $ (1.24) $ (1.14)
========= ========= ========== =========
NET LOSS PER SHARE -- DILUTED..... $ (0.37) $ (0.48) $ (1.24) $ (1.14)
========= ========= ========== =========
SHARES USED IN PER SHARE
CALCULATION -- BASIC............ 403,613 384,847 399,655 292,115
========= ========= ========== =========
SHARES USED IN PER SHARE
CALCULATION -- DILUTED.......... 403,613 384,847 399,655 292,115
========= ========= ========== =========
</TABLE>
45
<PAGE> 52
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments................... $ 948,578 $ 692,381
Accounts receivable, net.......................... 169,115 132,180
Deferred income taxes............................. 23,803 23,803
Other current assets.............................. 32,334 13,381
---------- ----------
Total current assets........................... 1,173,830 861,745
Long-term investments............................... 127,466 65,036
Property and equipment.............................. 130,163 76,958
Goodwill and other intangibles...................... 2,521,759 3,226,749
Other non-current assets............................ 45,513 2,789
---------- ----------
Total assets................................... $3,998,731 $4,233,277
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 33,287 $ 30,229
Accrued compensation and benefits................. 59,480 35,560
Accrued acquisition and restructuring costs....... 18,087 24,202
Other accrued liabilities......................... 57,655 47,531
Income taxes payable.............................. 8,433 6,804
Deferred revenue.................................. 138,456 86,979
---------- ----------
Total current liabilities...................... 315,398 231,305
Non-current liabilities:
Convertible subordinated notes.................... 459,812 451,044
Deferred income taxes............................. 124,405 157,867
---------- ----------
Total non-current liabilities.................. 584,217 608,911
Stockholders' equity................................ 3,099,116 3,393,061
---------- ----------
Total liabilities and stockholders' equity..... $3,998,731 $4,233,277
========== ==========
</TABLE>
46
<PAGE> 53
SUMMARY SELECTED PRO FORMA FINANCIAL DATA
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA FOR SEAGATE AND
SEAGATE'S OPERATING ASSETS
Seagate has completed several recent transactions, including:
- a reorganization of Seagate Software in October 1999; and
- the acquisition of XIOtech Corporation in January 2000.
Seagate has provided summary pro forma financial data to give you a better
picture of what the distribution of the assets and liabilities of Seagate might
have looked like had the leveraged buyout, the liquidation of Seagate's
short-term investments, the retirement of Seagate's long-term debt, the merger
between Seagate and a VERITAS subsidiary, the payment of transaction related
costs and other adjustments, and the distribution of excess cash and future tax
refunds and credits to the stockholders of Seagate, occurred at the beginning of
fiscal 2000. This financial information is provided for illustrative purposes
only and is not necessarily indicative of what the results of operations or the
distribution of assets and liabilities would have been for Seagate or Seagate's
operating assets had the transactions described above occurred on the assumed
dates.
Seagate derived this data from the unaudited pro forma combined condensed
statement of operations of Seagate and Seagate's operating assets for the year
ended June 30, 2000. The unaudited pro forma combined statements of operations
for Seagate give effect to the Seagate Software reorganization and the XIOtech
acquisition as if they occurred as of the beginning of fiscal 2000. The
unaudited pro forma combined statements of operations for Seagate's operating
assets include all of the operating activities of Seagate and exclude the impact
on earnings relating to Seagate's equity investments in VERITAS, Gadzoox
Networks, SanDisk Corporation, Veeco Instruments and Lernout & Hauspie to be
retained by Seagate in connection with the leveraged buyout and acquired by
VERITAS in connection with the merger. The pro forma unaudited statements of
operations for Seagate's operating assets give you a picture of what Seagate's
operating assets might have looked like had they been separated from Seagate and
had the XIOtech acquisition occurred at the beginning of fiscal 2000.
The unaudited pro forma balance sheet of Seagate assumes that the sale of
Seagate's operating assets in the leveraged buyout, the liquidation of Seagate's
short-term investments, the retirement of Seagate's long-term debt, the
completion of the merger, the payment of transaction related costs and other
adjustments in connection with the leveraged buyout and the merger, and the
distribution of cash and future tax refunds and credits to the stockholders of
Seagate, occurred at the beginning of fiscal 2000.
The summary selected unaudited pro forma condensed financial data for
Seagate and Seagate's operating assets should be read in conjunction with the
selected unaudited pro forma condensed financial data for Seagate and Seagate's
operating assets and the related notes included in this document beginning on
page 219. They should also be read in conjunction with the audited Seagate
financial statements for the year ended June 30, 2000 which are included in this
document beginning on page F-1. The selected unaudited pro forma condensed
financial data for Seagate is not necessarily indicative of what the actual
results of operations and financial positions would have been had the Seagate
Software reorganization, and the XIOtech acquisition actually taken place at the
beginning of fiscal 2000. The selected unaudited pro forma condensed statement
of operations data for Seagate's operating assets is not necessarily indicative
of what the actual results of
47
<PAGE> 54
operations would have been had Seagate's operating assets been operated
separately from Seagate and had the XIOtech acquisition actually taken place at
the beginning of fiscal 2000. The selected unaudited pro forma condensed balance
sheet information is not necessarily indicative of what the actual distribution
of assets and liabilities of Seagate would have been had the sale of Seagate's
operating assets in the leveraged buyout, the liquidation of Seagate's
short-term investments, retirement of Seagate's long-term debt, the completion
of the merger, the payment of transaction related costs and other adjustments in
connection with the leveraged buyout and the merger, and the distribution of
cash and future tax refunds and credits to the stockholders of Seagate, occurred
at June 30, 2000.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA FOR SEAGATE
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED JUNE 30, 2000
---------------------
(AMOUNTS IN MILLIONS,
EXCEPT PER SHARE
DATA)
<S> <C>
Total net revenue........................................... $6,448
(Loss) from operations...................................... (195)
Net income/(loss)........................................... 633
Net income/(loss) per share -- basic*....................... 2.79
Net income/(loss) per share -- diluted*..................... 2.67
Number of shares used in computing per share
amounts -- basic*......................................... 226.8
Number of shares used in computing per share
amounts -- diluted*....................................... 236.9
</TABLE>
---------------
* See (1) in Net Income Per Share footnote at F-19 of Notes to Consolidated
Financial Statements.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA FOR SEAGATE'S OPERATING
ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED JUNE 30, 2000
---------------------
(AMOUNTS IN MILLIONS)
<S> <C>
Total net revenue........................................... $6,448
(Loss) from operations...................................... (190)
Net income/(loss)........................................... (30)
</TABLE>
Seagate's operating business has neither a formal capital structure nor
shares outstanding. Accordingly, no pro forma net income/(loss) per share
information is provided for Seagate's operating assets.
48
<PAGE> 55
UNAUDITED PRO FORMA BALANCE SHEET DISTRIBUTION DATA FOR SEAGATE
<TABLE>
<CAPTION>
NET
CASH ASSETS
------- -----------
(AMOUNTS IN MILLIONS)
<S> <C> <C>
Balance at June 30, 2000................................... $ 875 $ 3,847
Conversion of short-term investments to cash............... 1,140 --
Retirement of long-term debt............................... (774) (70)
Cashless exercise of stock options......................... -- (456)
Tax indemnification for Seagate tax liabilities............ (125) (125)
Management bonuses......................................... (45) (45)
Sale of Operating Assets --
Cash received(1)......................................... 1,838 1,838
Assets sold.............................................. (765) (2,464)
Equity investments, retained cash, and other included in
merger with VERITAS(2)................................... (956) (1,539)
Income taxes and other adjustments(3)...................... (125) 77
Cash used to fund the tax refund trust..................... (150) (150)
Excess cash to be distributed to stockholders.............. (913) (913)
Remaining after all transactions........................... $ -- $ --
</TABLE>
---------------
(1) Assumes members of Seagate's senior management team convert $162 million of
Seagate equity value into equity of Seagate's operating assets in connection
with the leveraged buyout.
(2) Assumes VERITAS exercises its right to reduce the cash payable in connection
with the merger by $500 million and issue additional shares of VERITAS
common stock in place of this cash. In addition, assumes VERITAS retains
$456 million in cash to pay for Seagate employer and employee withholding
tax liabilities.
(3) Income taxes and other adjustments include cash used to pay transaction
costs of $80 million and $69 million for foreign taxes and receipt of $24
million for the settlement of SanDisk shares subsequent to June 30, 2000.
49
<PAGE> 56
SUMMARY SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL
DATA FOR VERITAS
VERITAS has provided the following summary unaudited pro forma combined
condensed consolidated financial statements to give you a better picture of what
the results of operations and financial position of VERITAS might have looked
like had the Seagate transaction and the NSMG, TeleBackup and NuView
acquisitions occurred as of January 1, 1999.
SEAGATE TRANSACTION
The VERITAS unaudited pro forma combined condensed consolidated financial
statements give effect to the issuance of VERITAS common stock and cash for all
of the outstanding common stock of Seagate, immediately after the sale of all of
the operating assets and liabilities of Seagate to Suez Acquisition Company in
the leveraged buyout. The effect of the transactions is that VERITAS is not
acquiring any of Seagate's operating business. Therefore, when VERITAS acquires
Seagate immediately after the leveraged buyout, the only assets Seagate will
hold will be shares of VERITAS common stock, its investment securities, and
cash.
The VERITAS unaudited pro forma combined condensed consolidated balance
sheet as of June 30, 2000 combines the historical balance sheet of VERITAS as of
June 30, 2000 and the pro forma balance sheet of Seagate as of June 30, 2000
which gives effect to the sale of its operating assets and liabilities to Suez
Acquisition Company, assuming the transactions took place on June 30, 2000.
Since VERITAS is not acquiring any operating business of Seagate, there is
no statement of operations of Seagate to combine with the statement of
operations of VERITAS. The VERITAS unaudited pro forma combined condensed
consolidated statements of operations for the six months ended June 30, 2000 and
the year ended December 31, 1999 show only a pro forma adjustment to the VERITAS
historical statements of operations for the net reduction in VERITAS shares
outstanding as a result of the acquisition of the remaining assets of Seagate.
The VERITAS unaudited pro forma combined condensed consolidated statement of
operations for the year ended December 31, 1999 shows, in addition, certain pro
forma adjustments for the acquisitions by VERITAS during 1999 of NSMG,
TeleBackup and NuView as described below.
NSMG, TELEBACKUP AND NUVIEW ACQUISITIONS
The VERITAS unaudited pro forma combined condensed consolidated statement
of operations for the year ended December 31, 1999 combines VERITAS' historical
results of operations for the year ended December 31, 1999 with NSMG's
historical results of operations for the period from January 1, 1999 to May 28,
1999 and TeleBackup's historical results of operations from January 1, 1999 to
June 1, 1999, the respective closing dates of the transactions, and give effect
to the acquisitions of NSMG, TeleBackup and NuView using the purchase method of
accounting assuming that the acquisitions took place on January 1, 1999. The
results of operations of NuView from January 1, 1999 to the date of acquisition
have been excluded as they were not significant; however, the pro forma
adjustments give effect to the acquisition of NuView using the purchase method
of accounting.
50
<PAGE> 57
The following VERITAS summary unaudited pro forma combined condensed
consolidated financial statements should be read in conjunction with the
selected unaudited pro forma combined condensed consolidated financial data for
VERITAS and the related notes included in this document beginning on page 234.
They also should be read in conjunction with the audited financial statements of
VERITAS that are included in this document, beginning on page F-56, and the
audited financial statements of NSMG beginning on page F-92 and of TeleBackup
beginning on page F-129. The VERITAS unaudited pro forma combined condensed
consolidated financial statements do not necessarily indicate what the actual
operating results or financial position would have been had the NSMG,
TeleBackup, NuView acquisitions and the acquisition of the designated assets of
Seagate taken place on January 1, 1999. They also do not purport to indicate
VERITAS' future results of operations or financial position.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1999 2000
------------ ----------
(IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
VERITAS UNAUDITED PRO FORMA COMBINED CONDENSED
STATEMENT OF OPERATIONS DATA:
Total net revenue..................................... $ 700 $ 520
Loss from operations.................................. (718) (309)
Net loss.............................................. (738) (347)
Net loss per share -- basic........................... $(1.99) $(0.90)
Net loss per share -- diluted......................... $(1.99) $(0.90)
Number of shares used in computing per share
amounts -- basic.................................... 370 385
Number of shares used in computing per share
amounts -- diluted.................................. 370 385
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30,
2000
-------------
(IN MILLIONS)
<S> <C>
VERITAS UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
DATA:
Working capital............................................. $1,139
Total assets................................................ 5,884
Long-term obligations....................................... 457
Accumulated deficit......................................... (879)
Total stockholders' equity.................................. 3,944
</TABLE>
51
<PAGE> 58
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
SEAGATE COMPARATIVE PER SHARE DATA
The following tables present certain unaudited historical and pro forma per
share data that reflects the Seagate Software reorganization and the XIOtech
acquisition as if such transactions had occurred as of the beginning of fiscal
2000. Such pro forma financial data also includes the effects of the leveraged
buyout and the merger. The data presented below should be read in conjunction
with the selected unaudited pro forma condensed financial data for Seagate
included in this document beginning on page 219, and the historical financial
statements of Seagate included in this document beginning on page F-3. The
unaudited pro forma combined financial data does not necessarily indicate the
operating results that would have been achieved had the foregoing transactions
been in effect as of the beginning of the periods presented or future results of
operations or financial position.
The historical book value per share of Seagate common stock is computed by
dividing stockholders' equity as of the end of each period for which such
computation is made by the number of shares of common stock outstanding at the
end of each period.
The pro forma comparative per share data has been calculated assuming 9.1
million shares of Seagate common stock that were issued in October 1999 in
connection with the Seagate Software reorganization were outstanding as of July
3, 1999 and 8.0 million shares of Seagate common stock that were issued in
connection with XIOtech acquisition in January 2000 were outstanding as of July
3, 1999.
After consideration of the sale of Seagate's operating assets to Suez
Acquisition Company in the leveraged buyout, the completion of the merger, and
the distribution of excess cash to Seagate's stockholders, there will be no net
assets remaining in Seagate and, therefore, no pro forma book value per share
has been included in this summary information.
SEAGATE -- HISTORICAL
<TABLE>
<CAPTION>
YEAR ENDED
OR AS OF
JUNE 30,
2000
------------
<S> <C>
Net income per share -- basic*.............................. $ 1.41
Net income per share -- diluted*............................ $ 1.35
Book value per common share................................. $16.78
</TABLE>
---------------
* See (1) of Net Income Per Share footnote at F-19 of Notes to Consolidated
Financial Statements.
SEAGATE -- PRO FORMA
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
2000
------------
<S> <C>
Net income (loss) per share -- basic........................ $2.79
Net income (loss) per share -- diluted...................... $2.67
</TABLE>
52
<PAGE> 59
VERITAS COMPARATIVE PER SHARE DATA
The following tables present certain unaudited historical and pro forma per
share data that reflects the acquisitions of NSMG, TeleBackup and NuView and the
merger between Seagate and a VERITAS subsidiary as if these acquisitions and the
merger had taken place on January 1, 1999. The data presented below should be
read in conjunction with the historical financial statements of VERITAS included
in this document beginning on page F-56, and the VERITAS unaudited pro forma
combined condensed consolidated financial data included in this document
beginning on page 234. The VERITAS unaudited pro forma combined condensed
financial statements do not necessarily indicate what the actual operating
results or financial positions would have been had the acquisitions and merger
taken place on January 1, 1999. They also do not purport to indicate VERITAS'
future results of operations or financial position.
The historical book value per VERITAS common share is computed by dividing
stockholders' equity as of the end of each period presented by the number of
shares of common stock outstanding at the end of each period.
The pro forma comparative per share data is calculated assuming that 155.6
million shares issued in the NSMG acquisition in May 1999, 6.8 million shares
issued in the TeleBackup acquisition and 1.4 million shares issued in the NuView
acquisition were outstanding as of January 1, 1999. It also assumes that the
number of shares outstanding as of January 1, 1999 was reduced by 12.6 million
shares, representing the difference between the approximately 128.1 million
VERITAS shares that VERITAS will acquire in the merger less an estimated 115.5
million VERITAS shares to be issued to Seagate's stockholders in connection with
the merger.
VERITAS -- HISTORICAL
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
OR AS OF OR AS OF
DECEMBER 31, 1999 JUNE 30, 2000
----------------- ----------------
<S> <C> <C>
Net income (loss) per share -- basic...... $(1.59) $(0.87)
Net income (loss) per share -- diluted.... $(1.59) $(0.87)
Book value per common share............... $ 8.68 $ 7.95
</TABLE>
VERITAS -- PRO FORMA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED OR AS OF
DECEMBER 31, 1999 JUNE 30, 2000
----------------- ----------------
<S> <C> <C>
Net income (loss) per share -- basic...... $(1.99) $(0.90)
Net income (loss) per share -- diluted.... $(1.99) $(0.90)
Book value per common share............... $10.93 $10.11
Equivalent pro forma net income (loss) per
Seagate share -- basic and diluted*..... $(0.97) $(0.44)
Equivalent pro forma book value per
Seagate share*.......................... $ 5.31 $ 4.92
</TABLE>
* Calculated using an exchange ratio of 0.486 of a VERITAS share for each
Seagate share. The exchange ratio is based upon the closing per share prices of
VERITAS and of Seagate's remaining investment securities, the number of shares
of Seagate common stock outstanding, Seagate's estimated cash balance, all as of
June 30, 2000, and the assumption that VERITAS retains $500 million of cash.
53
<PAGE> 60
COMPARATIVE PER SHARE MARKET PRICE DATA AND DIVIDEND INFORMATION
As of October 11, 2000, 231,187,451 shares of common stock, par value $0.01
per share, of Seagate were outstanding and listed for trading on The New York
Stock Exchange under the trading symbol "SEG." As of October 11, 2000,
404,186,411 shares of common stock, par value $0.001 per share, of VERITAS were
outstanding and listed for trading on the Nasdaq National Market under the
trading symbol "VRTS." The following table shows, for the periods indicated, the
high and low reported sales prices for shares of Seagate common stock, as
reported on The New York Stock Exchange, and for VERITAS common stock, as
reported on the Nasdaq National Market. The prices for VERITAS in the following
table reflect the two-for-one stock dividend of VERITAS common stock effected on
July 9, 1999, and the three-for-two stock dividends effected on November 19,
1999 and March 3, 2000.
<TABLE>
<CAPTION>
VERITAS SEAGATE
------------------ ----------------
HIGH LOW HIGH LOW
------- ------- ------ ------
<S> <C> <C> <C> <C>
CALENDAR YEAR 1998:
First Quarter......................... $ 8.76 $ 6.09 $27.19 $17.75
Second Quarter........................ 9.66 7.61 29.63 19.44
Third Quarter......................... 12.92 9.33 27.38 16.13
Fourth Quarter........................ 14.22 5.82 34.50 19.81
CALENDAR YEAR 1999:
First Quarter......................... $ 19.65 $ 13.55 $44.25 $25.63
Second Quarter........................ 21.59 14.25 33.50 25.63
Third Quarter......................... 35.67 20.86 36.88 25.13
Fourth Quarter........................ 95.42 32.95 48.81 26.56
CALENDAR YEAR 2000:
First Quarter......................... $168.69 $ 76.04 $76.44 $38.88
Second Quarter........................ 140.19 $ 82.00 $66.50 $35.75
Third Quarter......................... $149.81 $ 87.50 $70.56 $44.63
Fourth Quarter (through October 11)... $149.75 $125.00 $68.13 $63.13
</TABLE>
On October 11, 2000, the last sale price of Seagate common stock, as
reported on The New York Stock Exchange, was $66.75 per share. On October 11,
2000, the last sale price of VERITAS common stock, as reported on the Nasdaq
National Market, was $138.0625 per share.
Seagate stockholders and VERITAS stockholders should obtain current market
quotations for Seagate common stock and VERITAS common stock. The market price
of Seagate common stock and VERITAS common stock has fluctuated substantially
due to volatility in the marketplace. The market prices of Seagate common stock
and VERITAS common stock will fluctuate between the date of this document and
the completion of the leveraged buyout and the merger. Accordingly, we can give
you no assurances regarding the market prices of Seagate common stock or VERITAS
common stock before or after the date on which the leveraged buyout and the
merger are completed.
Seagate's present policy is to retain its earnings to finance future
growth. Seagate has never paid cash dividends and has no present intention to
pay cash dividends.
VERITAS has never declared or paid cash dividends on its capital stock.
Whether or not the merger is consummated, VERITAS anticipates that it will
retain future earnings, if any, to fund development and growth of its business
and does not anticipate paying any cash dividends in the foreseeable future.
54
<PAGE> 61
SEAGATE MARKET PURCHASES
The following table sets forth the aggregate number of shares of Seagate
common stock purchased by Seagate in the open market during the first six months
of calendar year 1998 and 1999 for each of the periods indicated, the high and
low purchase price paid by Seagate during each period and the average purchase
price paid by Seagate during each period. Seagate has not purchased any shares
of Seagate common stock in the open market during calendar year 2000.
<TABLE>
<CAPTION>
SHARES HIGH LOW AVERAGE
PURCHASED PRICE PRICE PRICE
---------- ------ ------ -------
<S> <C> <C> <C> <C>
CALENDAR YEAR 1998:
Third Quarter........................ 50,000 $24.23 $24.23 $24.19
Fourth Quarter....................... 3,218,500 $31.75 $30.08 $31.03
CALENDAR YEAR 1999:
First Quarter........................ 23,126,600 $41.11 $27.13 $32.04
Second Quarter....................... 615,600 $26.78 $26.40 $26.44
Third Quarter........................ 21,356,473 $35.65 $25.56 $30.02
Fourth Quarter....................... 4,017,742 $44.38 $28.63 $32.10
</TABLE>
55
<PAGE> 62
RISK FACTORS
The leveraged buyout and the merger involve a high degree of risk. By
voting in favor of the stock purchase agreement and the leveraged buyout, and
the merger agreement and the merger, Seagate stockholders will be choosing to
invest in VERITAS common stock. By voting in favor of the share issuance,
VERITAS stockholders will be choosing to cause VERITAS to acquire Seagate (after
the sale of Seagate's operating businesses in the leveraged buyout). An
investment in VERITAS common stock involves a high degree of risk. In addition
to the other information contained or incorporated by reference in this
document, Seagate stockholders should carefully consider all of the following
risks in deciding whether to vote for the stock purchase agreement and the
leveraged buyout, and the merger agreement and the merger and VERITAS
stockholders should carefully consider the risks set forth below under "-- Risks
to Both Seagate and VERITAS Stockholders Relating to the Leveraged Buyout and
the Merger" in deciding whether to vote for the share issuance.
RISKS TO SEAGATE STOCKHOLDERS RELATING TO THE LEVERAGED BUYOUT AND THE MERGER
IF THE MARKET PRICE OF VERITAS COMMON STOCK DECLINES, SEAGATE AND VERITAS MAY
BE UNABLE TO TERMINATE THE MERGER AGREEMENT AND SEAGATE STOCKHOLDERS WILL
RECEIVE SHARES WITH A LOWER MARKET VALUE IN CONNECTION WITH THE MERGER
A significant portion of the consideration to be issued to Seagate's
stockholders in connection with the merger will consist of a fixed number of
shares of VERITAS common stock. There will be no adjustment to the fixed number
of shares of VERITAS common stock issued to Seagate's stockholders in connection
with the merger based upon changes in the market price of VERITAS common stock.
In addition, neither Seagate nor VERITAS may terminate the merger agreement or
"walk away" from the merger solely due to changes in the market price of VERITAS
common stock. Accordingly, the specific dollar value of the consideration that
Seagate's stockholders will receive in connection with the merger will depend,
in part, on the market value of VERITAS common stock, and may decrease from the
date Seagate's stockholders submit their proxies. The market price of VERITAS
common stock is subject to fluctuations in the market for publicly traded equity
securities generally and has experienced significant volatility.
VERITAS cannot predict or give any assurances as to the market price of its
common stock at any time before or after the completion of the merger. Seagate
stockholders should obtain recent market quotations for VERITAS common stock in
making a determination on how to vote on the merger agreement and the merger. In
addition, you should call the toll free telephone number that Seagate and
VERITAS have established in order to find out the most recent estimate as to the
amount of cash payable and the number of shares of VERITAS common stock issuable
in exchange for each share of Seagate common stock in connection with the
merger.
THE MERGER MAY FAIL TO QUALIFY AS A "REORGANIZATION" WITHIN THE MEANING OF
SECTION 368(a) OF THE INTERNAL REVENUE CODE
Seagate and VERITAS intend the merger to qualify as a "reorganization"
within the meaning of Section 368(a) of the Internal Revenue Code, and
completion of the merger is conditioned upon the receipt by Seagate and VERITAS
of opinions from their respective legal counsel that the merger should qualify
as a "reorganization." These opinions, however, are not binding on the Internal
Revenue Service or a court. In addition, these
56
<PAGE> 63
opinions are subject to important qualifications, and the conclusions set forth
in the opinions are not free from doubt.
In order for the merger between Seagate and a VERITAS subsidiary to qualify
as a "reorganization," several requirements must be satisfied, three of which
are of particular importance given the circumstances surrounding the merger.
First, VERITAS must continue Seagate's historic business or use a significant
portion of Seagate's historic business assets in a business. Following the sale
of Seagate's operating assets to Suez Acquisition Company, Seagate will be a
holding company that owns indirectly approximately 31.7% of the outstanding
VERITAS common stock, as well as stock in certain other public companies. Under
existing legal authority, it is uncertain how the requirement of historic
business continuity applies to a holding company. The Internal Revenue Service
could successfully assert that this requirement has not been satisfied and,
consequently, that the merger between Seagate and VERITAS fails to qualify as a
"reorganization."
Second, the surviving corporation must hold "substantially all" of the
properties of Seagate following the merger. For purposes of issuing private
letter rulings, the Internal Revenue Service has stated that 70% of the fair
market value of the gross assets and 90% of the fair market value of the net
assets of the target corporation will be considered "substantially all" of the
target's properties, and tax counsel intend to follow this safe harbor standard
in rendering the required tax opinions. VERITAS intends to fund part of the cash
component of the consideration payable in connection with the merger with cash
provided from Seagate, but only to the extent that such cash does not exceed the
safe harbor amount. VERITAS cannot assure you, however, that it will be able to
provide a sufficient amount of cash from its own funds. Even if tax counsel
concludes that the safe harbor standard is met, the Internal Revenue Service may
successfully assert that the "substantially all" requirement has not been
satisfied and that the merger fails to qualify as a "reorganization."
Third, VERITAS must acquire at least 80% of the Seagate common stock for
consideration consisting of VERITAS common stock. Because the consideration
payable in connection with the merger consists of VERITAS common stock, cash and
tax refunds and credits attributable to Seagate, the percentage of the total
consideration represented by the VERITAS common stock will vary with
fluctuations in the market price of VERITAS common stock. In addition, the value
of the tax refunds and credits attributable to Seagate is subject to challenge
because it represents a good faith estimate, rather than a precise calculation,
of the value as of the completion of the merger. For these reasons, VERITAS
common stock could be determined to represent less than 80% of the total merger
consideration, in which case the merger would fail to qualify as a
"reorganization."
Seagate and VERITAS do not intend to seek a ruling from the Internal
Revenue Service that the merger will qualify as a "reorganization." If the
Internal Revenue Service were to determine that the merger does not qualify as a
"reorganization," each Seagate stockholder would recognize capital gain or loss
equal to the difference between that stockholder's basis in the Seagate common
stock exchanged in the merger and the fair market value, as of the completion of
the merger, of the VERITAS common stock and the cash received in the merger,
and, in general, the proportionate share of the right to receive Seagate's
future tax refunds and credits.
57
<PAGE> 64
VERITAS' REVENUES, EARNINGS PER SHARE AND BOOK VALUE PER SHARE ARE ALL
SIGNIFICANTLY LOWER THAN SEAGATE'S
If the merger is completed, Seagate stockholders will become VERITAS
stockholders and will no longer own any shares or other interests in Seagate.
VERITAS has significantly smaller revenues and earnings per share than Seagate.
For example, Seagate's annual revenues for its fiscal year ending June 30, 2000
were over $6.4 billion, while VERITAS' annual revenues for its fiscal year
ending December 31, 1999 were approximately $596 million. Seagate's diluted net
income per share for its fiscal year ending June 30, 2000 was $1.35, while
VERITAS had a net loss per share of $(1.59) for its fiscal year ending December
31, 1999. VERITAS' equivalent pro forma net loss per Seagate share was $(0.97)
for its fiscal year ending December 31, 1999, determined by multiplying the
VERITAS pro forma net loss per share of ($1.99) for this period by 0.486, which
is an estimated fractional number of VERITAS shares to be issued in exchange for
a Seagate share in the merger. There can be no assurance that VERITAS will ever
achieve the levels of revenues or earnings attained by Seagate. In addition,
VERITAS' net book value per share as of December 31, 1999 was $8.68, while
Seagate's was $16.78 as of June 30, 2000. VERITAS' equivalent pro forma book
value per Seagate share was $4.92 as of June 30, 2000, determined by multiplying
the VERITAS pro forma book value per share of $10.11 as of June 30, 2000 by
0.486, which is the estimated fractional number of VERITAS shares to be issued
in exchange for a Seagate share in the merger as of June 30, 2000.
THE RIGHTS OF VERITAS STOCKHOLDERS ARE MORE LIMITED THAN THOSE OF SEAGATE
STOCKHOLDERS
Following the merger between Seagate and VERITAS, Seagate stockholders will
become VERITAS stockholders. There are important differences between the rights
of Seagate stockholders and the rights of VERITAS stockholders. For example:
- Seagate stockholders can cumulate votes for the election of directors,
while VERITAS stockholders cannot;
- Seagate stockholders can remove directors without cause, by a majority
vote, while members of VERITAS' board may only be removed by VERITAS
stockholders for cause and by a two-thirds vote;
- Seagate stockholders may take action by written consent in lieu of a
stockholders meeting, while VERITAS stockholders may take action only at
a stockholders meeting;
- The holders of 10% of the outstanding shares of Seagate capital stock may
call a special meeting of Seagate stockholders, while VERITAS
stockholders cannot; and
- Seagate stockholders can generally amend their certificate of
incorporation by a majority vote, while some provisions in VERITAS'
certificate of incorporation and bylaws can be amended only by a
two-thirds vote.
For a more detailed discussion of the differences in the rights between
Seagate stockholders and VERITAS stockholders, see "Comparison of Rights of
Holders of Seagate Common Stock and VERITAS Common Stock" beginning on page 248
of this document.
58
<PAGE> 65
RISKS TO BOTH SEAGATE AND VERITAS STOCKHOLDERS RELATING TO THE LEVERAGED BUYOUT
AND THE MERGER
SEAGATE WILL REMAIN LIABLE TO THIRD PARTIES AFTER THE LEVERAGED BUYOUT AND THE
MERGER
In the leveraged buyout, Seagate will sell all of its operating assets to
Suez Acquisition Company, and Suez Acquisition Company will assume and indemnify
VERITAS and Seagate for substantially all liabilities arising in connection with
Seagate's operating assets. However, third parties may nevertheless try to seek
recourse against Seagate for these liabilities. Seagate currently is a large,
multinational enterprise that owns or leases facilities and offices in numerous
states and foreign countries and employs over 60,000 persons worldwide. As a
result, Seagate could continue to face a wide range of possible liabilities
after the leveraged buyout and the merger are completed, both for actions,
events or circumstances arising or occurring before the leveraged buyout 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 commenced last year, including litigation initiated by terminated
employees; and
- existing and future patent litigation.
If Suez Acquisition Company fails to indemnify VERITAS or Seagate under the
indemnification agreement for any of these liabilities, VERITAS could experience
a material adverse effect on its business and financial performance.
THE MERGER CONSIDERATION MAY BE SUBJECT TO RECOVERY UNDER FRAUDULENT
CONVEYANCE LAWS
The leveraged buyout and the merger may be subject to review under state or
federal fraudulent transfer laws in the event that, following the leveraged
buyout, a bankruptcy case or lawsuit is commenced by or on behalf of unpaid
creditors of Suez Acquisition Company or any of its affiliates. Under those
laws, a court could attempt to proceed against the consideration paid to
Seagate's stockholders in the merger, or direct that amounts deposited with the
trustee administering the distribution of Seagate's tax refunds and credits be
held for the benefit of creditors. A court might take one or more of these
actions if it determined that
(1) when the leveraged buyout was completed, Seagate's operating assets
were acquired for less than fair consideration or reasonably equivalent value;
and
(2) at the time of the leveraged buyout, Seagate, Suez Acquisition Company
and their affiliates:
- were or became insolvent;
- were engaged in a business or transaction for which their unencumbered
assets constituted unreasonably small capital; or
- intended to incur or reasonably should have believed that they would
incur debts beyond their ability to pay those debts as they matured.
A court could also proceed against the consideration paid to Seagate's
stockholders in the merger, or against Seagate's tax refunds and credits and the
$150 million in retained cash otherwise payable to Seagate's former stockholders
following the merger, if the court found
59
<PAGE> 66
that Seagate effected the leveraged buyout with an actual intent to hinder,
delay or defraud its creditors.
FAILURE TO COMPLETE THE LEVERAGED BUYOUT AND THE MERGER BETWEEN SEAGATE AND A
VERITAS SUBSIDIARY COULD NEGATIVELY AFFECT THE STOCK PRICE, FUTURE BUSINESS
AND/OR OPERATIONS OF SEAGATE AND THE STOCK PRICE OF VERITAS
The stock purchase agreement and the merger agreement contain a number of
conditions to the obligations of the parties to complete the leveraged buyout
and the merger. In addition, the stock purchase agreement and the merger
agreement may be terminated under a number of circumstances. If the leveraged
buyout and the merger are not completed for any reason, Seagate and VERITAS may
be subject to a number of material risks. These risks include the following:
- the market price of Seagate and/or VERITAS common stock may decline to
the extent that the current market prices of Seagate or VERITAS common
stock reflect a market assumption that the leveraged buyout and the
merger between Seagate and a VERITAS subsidiary will be completed;
- Seagate may be required to pay a substantial termination fee to Suez
Acquisition Company and/or to VERITAS if the stock purchase agreement
and/or the merger agreement are terminated under some circumstances;
- VERITAS may be required to pay a fee to Suez Acquisition Company if the
stock purchase agreement is terminated under some circumstances; and
- fees, costs and expenses incurred by Seagate and VERITAS in connection
with the leveraged buyout and the merger, such as legal, accounting and
financial advisor fees, costs and expenses, must be paid even if the
leveraged buyout and the merger are not completed.
If the stock purchase agreement and/or the merger agreement are terminated
and/or Seagate is required to pay the foregoing fees and expenses, it could have
a material adverse effect on Seagate's business, financial condition and results
of operations, which could ultimately affect the market price of Seagate common
stock.
In addition, in response to the public announcement of the leveraged buyout
and the merger, any of Seagate's customers, suppliers and strategic partners may
delay or defer decisions concerning Seagate, or terminate or modify their
existing business with Seagate. If any of Seagate's customers, suppliers or
strategic partners actually delay or defer decisions with respect to Seagate, or
terminate or modify their existing business with Seagate, it could have a
material adverse effect on Seagate's business.
THE LEVERAGED BUYOUT AND THE MERGER MAY BE DELAYED IF SEAGATE AND VERITAS ARE
UNABLE TO TIMELY OBTAIN ALL NECESSARY CONSENTS FROM GOVERNMENTAL AUTHORITIES
In order to complete the leveraged buyout and the merger, each of Seagate,
VERITAS and Mr. Stephen Luczo, a director and executive officer of Seagate and a
member of Seagate's senior management team who will participate in the ownership
of Suez Acquisition Company, filed notifications under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and Seagate made various filings
with state and foreign governmental authorities with jurisdiction over
applicable antitrust laws. It is a condition to the obligations of Seagate,
VERITAS and Suez Acquisition Company to complete the leveraged buyout and the
merger that they comply with the Hart-Scott-
60
<PAGE> 67
Rodino Antitrust Improvements Act and that all applicable waiting periods under
that statute expire. The waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act for Seagate's, VERITAS' and Mr. Luczo's filings have expired.
Although Seagate, VERITAS and Suez Acquisition Company do not currently
anticipate any challenges to the leveraged buyout 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 leveraged buyout 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 leveraged buyout and/or the merger. If any of
these events occur, the leveraged buyout and the merger may be delayed. Based
upon available information, Seagate, VERITAS and Suez Acquisition Company
believe that the leveraged buyout and the merger comply with all significant
federal, state and foreign antitrust laws.
RISKS RELATING TO VERITAS
VERITAS FACES MANY NEW DIFFICULTIES MANAGING A LARGER COMPANY
Growth has created new challenges for VERITAS. As of June 30, 2000, VERITAS
had 3,809 full-time employees, as compared to 2,974 as of December 31, 1999 and
945 as of December 31, 1998. If VERITAS fails to meet the challenges created by
this growth, its business and quarterly and annual results of operations could
be adversely affected, and the value of your investment in VERITAS securities
could decline. The growth in the number of its employees is likely to continue
to strain its management control systems and resources, including decision
support, accounting, human resources, management information systems and
facilities. VERITAS must continue to improve its financial and management
controls and its reporting systems and procedures to manage its employees, as
well as continue to obtain additional facilities to accommodate its growth.
VERITAS IS 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 VERITAS will not realize the
anticipated benefits. Because VERITAS accounted for these acquisitions using the
purchase method of accounting, VERITAS 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. As a result of these charges, net losses are
expected to continue in the foreseeable future.
VERITAS HAS A SIGNIFICANT AMOUNT OF DEBT THAT IT MAY BE UNABLE TO SERVICE OR
REPAY
In October 1997, VERITAS issued $100.0 million in aggregate principal
amount of 5.25% convertible subordinated notes due 2004. In August 1999, VERITAS
issued $465.8 million aggregate principal amount at maturity of 1.856%
convertible subordinated notes due 2006. The annual interest payments on
VERITAS' outstanding notes as of June 30, 2000 are $5.2 million and $8.6 million
respectively, and VERITAS expects to fund these payments from cash flow from
operations. VERITAS will need to continue to generate substantial amounts of
cash from its 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 other working capital needs. If VERITAS does not have
sufficient
61
<PAGE> 68
cash to repay its debts as they become due, VERITAS may be unable to refinance
its debt on reasonable terms or at all. For example, the notes could be declared
immediately due and payable if VERITAS does not make timely payments. While its
cash flow has been sufficient to fund interest payments to date, if VERITAS
cannot meet its debt obligations from the cash generated by its business,
VERITAS may not be able to develop and sell new products, respond to changing
business or economic conditions adequately, make acquisitions or otherwise fund
its business.
VERITAS MIGHT FAIL TO SUCCESSFULLY COMPLETE THE INTEGRATION OF THE BUSINESSES
OF VERITAS, NSMG AND TELEBACKUP
VERITAS continues to experience challenges in integrating the businesses of
NSMG and TeleBackup with its own. If VERITAS fails to successfully complete the
integration, its businesses and its quarterly and annual results of operations
may be adversely affected. The difficulties that VERITAS faces include:
- integrating its 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;
- resolving channel conflicts that may arise between its 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 and NSMG.
VERITAS' STRATEGY OF FOCUSING ON THE BROADER MARKET CATEGORY OF DATA
AVAILABILITY MIGHT NOT SUCCEED, WHICH COULD ADVERSELY AFFECT ITS ABILITY TO
EXPAND ITS BUSINESS
VERITAS recently announced its strategy for continued expansion of its
business, focusing on data availability, which is a broader market category that
includes storage management software. To the extent that this strategy does not
result in the anticipated growth of revenue, its business and results of
operations would be adversely affected. VERITAS' branding campaign to grow
awareness of its name and position itself as a data availability company might
not succeed. VERITAS' initiative of dividing its internal product development
and product marketing groups according to the computing platforms on which its
products operate will require the devotion of substantial employee resources and
management attention, and VERITAS might not be successful in undertaking this
initiative. To the extent these initiatives are not successful, VERITAS'
business and results of operations would be adversely affected.
62
<PAGE> 69
VERITAS' OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AS A RESULT OF FACTORS
OUTSIDE ITS CONTROL, WHICH COULD CAUSE THE MARKET PRICE OF ITS NOTES AND OF
ITS SECURITIES TO DECLINE
Fluctuations in VERITAS' results of operations are likely to affect the
market price of its common stock and subordinated notes in a manner that may be
unrelated to its long-term operating performance. The more likely it is that
market prices of VERITAS' securities will fluctuate, the riskier is your
decision to buy, sell or hold VERITAS' securities. In addition, the number of
factors that could affect VERITAS' results of operation makes an investment in
VERITAS securities riskier than many other investments. VERITAS' revenues in any
quarter will depend substantially on orders received and shipped in that
quarter. In addition, VERITAS typically receives a significant portion of orders
during the last two weeks of any quarter, and VERITAS cannot predict whether
those orders will be placed, fulfilled and shipped in that period. If VERITAS
has lower revenue than expected, it probably will not be able to reduce its
operating expenses quickly in response. Therefore, any significant shortfall in
revenues or delay of customer orders could have an immediate adverse effect on
VERITAS' operating results in that quarter. The results of operations of
VERITAS, and of the NSMG and TeleBackup businesses acquired in 1999, have
fluctuated in the past, and its operating results are likely to fluctuate
significantly in the future. Factors that could affect VERITAS' 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 by VERITAS' direct sales force,
which tend to generate sales later in VERITAS' quarters than original
equipment manufacturer sales;
- the timing and magnitude of large end-user orders;
- the timing and amount of VERITAS' 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 VERITAS to modify its 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.
VERITAS DEPENDS ON LARGE ORDERS WITH LENGTHY SALES CYCLES FOR A SIGNIFICANT
PORTION OF ITS REVENUES
VERITAS' 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 VERITAS' sales cycle, outside the retail channel is typically
complex and lengthy, so it can last from three to nine
63
<PAGE> 70
months. These direct sales also represent VERITAS' largest orders. Therefore,
VERITAS' revenues for a period are likely to be affected by 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 VERITAS' software by customers;
- customer budget restrictions;
- customer internal review and testing procedures; and
- engineering work needed to integrate VERITAS' software with the
customers' systems.
VERITAS MAY BE UNABLE TO HIRE AND RETAIN NEEDED SALES AND ENGINEERING
PERSONNEL
VERITAS' personnel needs are more acute than those facing most companies.
VERITAS needs to hire additional sales, engineering, service and administrative
personnel to support the expansion of VERITAS' business and meet increased
customer demand for its products and services. If VERITAS is unable to hire and
retain these employees, its business and quarterly and annual results of
operations would be adversely affected. Competition for people with the skills
VERITAS requires is intense. Additions of new personnel and departures of
existing personnel could disrupt VERITAS' business and may result in the
departure of other employees. VERITAS also depends on the continued service of
its key personnel. Even though VERITAS has entered into employment agreements
with key management personnel, these agreements cannot prevent their departure.
VERITAS does not have key person life insurance covering any of its personnel,
nor does it currently intend to obtain any of this insurance.
VERITAS DISTRIBUTES ITS PRODUCTS THROUGH MULTIPLE DISTRIBUTION CHANNELS, EACH
OF WHICH IS SUBJECT TO RISKS
Historically, VERITAS sold products through original equipment
manufacturers and through direct sales. As a result of the NSMG and TeleBackup
acquisitions in 1999, however, VERITAS established a retail distribution channel
as well. If VERITAS fails to manage its distribution channels successfully, its
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, VERITAS faces
different challenges selling these products than it faces selling most of its
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, VERITAS' retail distributors have no obligation to continue
selling the products previously sold by NSMG and TeleBackup and may terminate
their relationship with VERITAS at any time.
64
<PAGE> 71
Direct sales. VERITAS also depends on its direct sales force to sell its
products. This involves a number of risks, including:
- longer sales cycles for direct sales;
- the need to hire, train, retain and motivate a sales force; and
- the length of time it takes VERITAS' new sales representatives to become
productive.
Original equipment manufacturers. A portion of VERITAS' revenue is expected
to come from original equipment manufacturers that incorporate its storage
management software into systems they sell. VERITAS has no control over the
shipping dates or volumes of systems the original equipment manufacturers ship
and they have no obligation to ship systems incorporating its software. They
also have no obligation to recommend or offer VERITAS' software products
exclusively or at all. They have no minimum sales requirements and can terminate
their relationship with VERITAS 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 VERITAS'
products. Finally, in part because VERITAS seeks to leverage these relationships
for the purpose of selling additional VERITAS products to the original equipment
manufacturers' installed customer base, the original equipment manufacturers
that VERITAS does business with compete with one another. To the extent that one
of VERITAS' original equipment manufacturer customers views the products VERITAS
has developed for another original equipment manufacturer as competing with its
products, it may decide to stop doing business with VERITAS, and this could harm
VERITAS' business.
Development agreements for original equipment manufacturers. VERITAS has
important original equipment manufacturer agreements with Hewlett-Packard, IBM,
Microsoft and Sun Microsystems. Unlike some of VERITAS' other original equipment
manufacturer agreements under which VERITAS sells off-the-shelf versions of its
products, under these agreements VERITAS has developed unique or "lite" versions
of its products to be included in these original equipment manufacturers'
systems software and products. If these versions of VERITAS' software do not
result in substantial revenue, VERITAS' business could be harmed.
VERITAS' DISTRIBUTION CHANNELS COULD CONFLICT WITH ONE ANOTHER
VERITAS has many different distribution channels. If VERITAS cannot use
these distribution channels efficiently, its business and quarterly and annual
results of operations could be adversely affected. VERITAS' original equipment
manufacturers, resellers and direct sales force might target similar sales
opportunities, which could lead to inefficient allocation of sales resources.
VERITAS may also try to sell full versions of the products to customers of the
original equipment manufacturers for whom VERITAS has developed "lite" versions
of its products. This would result in VERITAS marketing similar products to
end-users. These overlapping sales efforts could also harm VERITAS'
relationships with its original equipment manufacturers and other sales channels
and result in them being less willing to market VERITAS' products aggressively.
If VERITAS' indirect sales decline, VERITAS would need to accelerate its
investments in alternative distribution channels. VERITAS may not be able to do
this in a timely manner, or at all.
65
<PAGE> 72
VERITAS' DEVELOPMENT AGREEMENTS WITH MICROSOFT COULD CAUSE VERITAS TO LOSE
CUSTOMERS
VERITAS has important agreements with Microsoft under which it develops
software for its Windows operating system. Microsoft is not obligated under the
agreements to include VERITAS software in any of its future releases of Windows
2000. If for any reason VERITAS' software is not included in the future, VERITAS
will lose its expected opportunity to market additional products to the Windows
2000 or Windows NT installed customer base, as well as suffer negative
publicity. In addition, VERITAS would lose a part of the investment it has made
in developing products for inclusion in Windows 2000.
MICROSOFT COULD DEVELOP COMPETING PRODUCTS
Microsoft can also develop enhancements to and derivative products from
VERITAS' 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 VERITAS.
SALES OF A SMALL NUMBER OF PRODUCT LINES MAKE UP A SUBSTANTIAL PORTION OF
VERITAS' REVENUE
For the foreseeable future, VERITAS expects to derive a substantial
majority of its 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, VERITAS' revenue would decrease and its
business and quarterly and annual results of operations would be adversely
affected. For example, for the six months ended June 30, 2000 and 1999, VERITAS
derived approximately $358.5 million, or 84%, and $124.8 million, or 84%, of its
license revenue from storage management products, including VERITAS Volume
Manager, VERITAS File System, VERITAS NetBackup and VERITAS Backup Exec. Also,
the 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, VERITAS may not receive the
same aggregate level of revenue from these products as VERITAS has received in
the past.
VERITAS' PRODUCTS HAVE RELATIVELY SHORT LIFE CYCLES
VERITAS' software products have a limited life cycle and it is difficult to
estimate when they will become obsolete. This makes it difficult for VERITAS to
forecast revenue and makes an investment in VERITAS more risky. If VERITAS does
not develop and introduce new products before its existing products have
completed their lifecycles, VERITAS would not be able to sustain its level of
sales. In addition, to succeed, many customers must adopt VERITAS' new products
early in each product's lifecycle. Therefore, if VERITAS does not attract
sufficient customers early in a product's life, it may not realize the amount of
revenue it anticipated for the product. VERITAS cannot be sure that it will
continue to be successful in marketing its key products.
VERITAS DERIVES SIGNIFICANT REVENUES FROM ONLY A FEW CUSTOMERS
Even though for the six months ended June 30, 2000 and 1999 no single
customer accounted for greater than 10% of VERITAS' total net revenue, VERITAS
still derives significant revenue from a small number of customers. If any of
these customers were to reduce its purchases from VERITAS, its revenue and
therefore its business would be
66
<PAGE> 73
harmed unless VERITAS were to increase sales to other customers substantially.
VERITAS does not have a contract with any of these customers that requires a
customer to purchase any specified number of software licenses from VERITAS.
Therefore, VERITAS cannot be sure that these customers will continue to purchase
its products at current levels.
VERITAS FACES UNCERTAINTIES PORTING PRODUCTS TO NEW OPERATING SYSTEMS AND
DEVELOPING NEW PRODUCTS
Some of VERITAS products operate primarily on the UNIX computer operating
system. VERITAS is currently redesigning, or porting, these products to operate
on the Windows NT operating system. VERITAS is also developing new products for
UNIX and for Windows NT. In addition, VERITAS recently entered into an agreement
with IBM under which VERITAS will port its complete set of storage management
solutions to AIX/Monterey for IBM POWER and Intel IA-64 processor-systems.
VERITAS 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. For example, VERITAS porting and development work for the Windows NT
market has required VERITAS to hire additional personnel with Windows NT
expertise and to devote engineering resources to these projects. VERITAS must
obtain from operating system owners a source code license to certain portions of
the operating system software to port some of its 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 VERITAS a
license or if they do not renew VERITAS' license, VERITAS would not be able to
expand its product line easily into other areas. For example, VERITAS relies on
a source code license from Microsoft with respect to VERITAS' Windows NT
development projects. Microsoft is under no obligation to renew the source code
license, which is subject to annual renewal.
VERITAS FACES INTENSE COMPETITION ON SEVERAL FRONTS
VERITAS faces 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 VERITAS' 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 VERITAS' competitors have greater financial, technical sales,
marketing and other resources than VERITAS does and could attempt to increase
their presence in the storage management market by acquiring or forming
strategic alliances with other competitors or business partners.
67
<PAGE> 74
EXPANDING VERITAS' INTERNATIONAL SALES DEPENDS ON ECONOMIC STABILITY IN
REGIONS THAT HAVE BEEN UNSTABLE
An investment in VERITAS' securities is riskier than an investment in many
other companies because VERITAS has 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 VERITAS' plans
to increase sales in these regions. Economic recession could also affect
VERITAS' ability to maintain or increase sales in these or other regions in the
future. VERITAS' 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 VERITAS' products substantially.
VERITAS' FOREIGN-BASED OPERATIONS AND SALES CREATE SPECIAL PROBLEMS THAT COULD
HURT VERITAS' RESULTS
An investment in VERITAS' securities is riskier than an investment in most
businesses because VERITAS has significant offshore operations, including
development facilities, sales personnel and customer support operations. For
example, as of June 30, 2000, VERITAS had approximately 240 employees 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 such as
higher interest rates and spiraling inflation;
- 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 VERITAS has facilities.
In addition, VERITAS' international sales are denominated in local
currency, creating risk of foreign currency translation gains and losses that
could harm VERITAS' quarterly and annual results of operations. If VERITAS
generates profits or losses in foreign countries, its effective income tax rate
could also be adversely affected. Currency instability in Asia and other
financial markets may make VERITAS' 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 VERITAS' products.
VERITAS' GROWTH STRATEGY IS RISKIER THAN OTHERS BECAUSE IT IS BASED UPON
ACQUISITIONS OF OTHER BUSINESSES
An investment in VERITAS' securities is riskier than investments in many
other companies because VERITAS plans to continue to pursue its strategy of
growth through
68
<PAGE> 75
acquisition. VERITAS has grown aggressively through acquisitions in the past and
expects 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, VERITAS has lost some of the employees of acquired companies
whom VERITAS desired to retain. In some cases, the integration of the operations
of acquired companies took longer than VERITAS anticipated. In addition, if the
employees of target companies remain geographically apart from VERITAS' existing
staff, VERITAS may not realize some or all of the anticipated economies of
scale.
VERITAS' STRATEGY OF INVESTING IN DEVELOPMENT-STAGE COMPANIES INVOLVES A
NUMBER OF RISKS AND UNCERTAINTIES
An investment in VERITAS' securities is riskier than investments in many
other companies because VERITAS plans to pursue its strategy of investing in
development-stage companies. Each of these investments involves a number of
risks and uncertainties, including:
- diversion of management attention;
- inability to identify strategic opportunities;
- inability to value investments appropriately;
- inability to manage investments effectively; and
- loss of cash invested.
69
<PAGE> 76
SPECIAL FACTORS
REGARDING THE LEVERAGED BUYOUT AND THE MERGER
BACKGROUND OF THE LEVERAGED BUYOUT AND THE MERGER
On May 28, 1999, Seagate and its direct and indirect subsidiaries, Seagate
Software and Seagate Software Network & Storage Management Group, Inc., VERITAS
and a predecessor to VERITAS, consummated an Amended and Restated Agreement and
Plan of Reorganization, dated as of April 15, 1999. In this document, we refer
to this Amended and Restated Agreement and Plan of Reorganization as the
software acquisition agreement, and the transactions contemplated thereby as the
software acquisition. The software acquisition agreement provided for the
contribution by Seagate, Seagate Software, and some of their respective
subsidiaries to a VERITAS predecessor of (i) the outstanding stock of Seagate
Software Network & Storage Management Group, Inc. and some other subsidiaries of
Seagate Software, and (ii) those assets used primarily in the network and
storage management business of Seagate Software. We occasionally refer to
Seagate Software's network and storage management business as the NSMG business
in this document. In consideration for these contributions, the VERITAS
predecessor issued shares of its common stock to Seagate Software and offered to
grant stock options to purchase its common stock to certain of Seagate
Software's employees who become its employees or employees of its subsidiaries
in connection with the software acquisition. In addition, in connection with the
software acquisition, the VERITAS predecessor assumed specified liabilities of
the NSMG business. Simultaneously with the consummation of the software
acquisition, all outstanding securities of the VERITAS predecessor were
converted into common stock of VERITAS with identical rights, preferences and
privileges, on a share for share basis.
As a result of the software acquisition, Seagate Software acquired a total
of 155,583,468 shares of VERITAS common stock and former employees of the NSMG
business received options to purchase an aggregate of 15,626,358 shares of
VERITAS common stock. These share and option amounts have been adjusted to
reflect the two-for-one stock dividend of VERITAS common stock effected on July
9, 1999 and the three-for-two stock dividends effected on November 19, 1999 and
March 3, 2000.
In connection with the software acquisition, Seagate, Seagate Software, the
VERITAS predecessor and VERITAS also entered into a stockholder agreement. The
stockholder agreement provides for, among other things, Seagate representation
rights on the VERITAS board of directors, restrictions on the sale of the shares
of VERITAS common stock acquired by Seagate Software in the software
acquisition, voting agreements between Seagate and VERITAS, standstill
restrictions relating to the acquisition of securities of VERITAS by Seagate,
and preemptive rights of Seagate in respect of the outstanding shares of VERITAS
common stock. For a more complete description of the stockholder agreement, see
"-- Other Material Contracts and Agreements between Seagate and
VERITAS -- Stockholder Agreement" beginning on page 120 of this document.
Pursuant to Seagate's rights under the stockholder agreement, Stephen
Luczo, the President and Chief Executive Officer of Seagate, and Gregory
Kerfoot, an executive officer of Seagate Software, were appointed to the board
of directors of VERITAS following the software acquisition.
Following the software acquisition and throughout the summer and into the
fall of 1999, the market price of VERITAS common stock increased substantially.
By
70
<PAGE> 77
September 30, 1999, VERITAS' stock price had increased by approximately 150%
from its closing price on January 4, 1999. During this same period, however, the
market price of Seagate common stock did not increase in value to reflect the
increasing value of the VERITAS common stock held by Seagate. On September 30,
1999, Seagate's stock price was approximately equal to its price on January 4,
1999. Throughout the summer of 1999, the Seagate board of directors discussed
the fact that the market price of Seagate common stock did not reflect the
board's assessment of the underlying value of Seagate's operating assets and its
investment security assets, including its holdings of VERITAS common stock. At
this time, the board of directors of Seagate also discussed the possibility of
selling some of its holdings of VERITAS common stock and purchasing shares of
Seagate common stock in the market as a strategy for partially remedying the
disparity between the market price of Seagate common stock and the underlying
value of its assets. Pursuant to authorization from the Seagate board of
directors, beginning in July 1999 and ending in November 1999, Seagate acquired
approximately 25 million shares of its common stock in open market purchases at
prices ranging from $25.56 to $44.38 per share. The Seagate board of directors
also continued to implement a number of operational and other initiatives which
it had instituted when Mr. Luczo became President and Chief Executive Officer of
Seagate.
Throughout the summer and into the fall of 1999, members of the Seagate
board of directors and certain members of Seagate management received a number
of unsolicited calls from various financial institutions regarding the
perception in the investment community that the market price of Seagate common
stock did not reflect the underlying value of Seagate's assets and operational
improvements, particularly given the market value of its holdings in VERITAS
common stock. Also during the summer and into the fall of 1999, members of the
Seagate board of directors and members of Seagate's management received numerous
unsolicited calls from Seagate stockholders to discuss the market price of
Seagate common stock relative to the market value of its holdings of VERITAS
common stock.
On October 8, 1999, the Executive Committee of Seagate's board of directors
(consisting of Lawrence Perlman, Gary Filler and Mr. Luczo) held a meeting to
discuss, among other things, the fact that the market price of Seagate common
stock continued to remain depressed despite the increasing value of its
investment security assets, particularly its holdings of VERITAS common stock
and the improvement of Seagate's overall operating and financial performance. By
late October 1999, VERITAS' stock price had increased by over 200% since January
4, 1999, while Seagate's stock price had not increased at all during the same
period. At this meeting the Executive Committee authorized Mr. Luczo to speak
with Morgan Stanley about potential alternatives available to Seagate that would
enable Seagate to address this issue. At board meetings on November 1 and 2, in
addition to regular board matters, members of the Executive Committee informed
the board of the October 8 Executive Committee meeting and generally discussed
the points covered at the October 8 Executive Committee meeting. The Board
authorized the co-chairmen and senior management to continue speaking with
Morgan Stanley about alternatives.
On November 8, 1999, Mr. Luczo met informally with representatives of
Silver Lake Partners. This meeting was arranged by Morgan Stanley and was an
informational and marketing oriented meeting, during which representatives of
Silver Lake Partners outlined to Mr. Luczo Silver Lake Partners' investment
strategy and expressed a general interest in exploring whether some type of
transaction between Seagate and Silver Lake Partners would be possible.
71
<PAGE> 78
On November 22, 1999, Mr. Luczo met with representatives of Silver Lake
Partners. Representatives of Silver Lake Partners repeated Silver Lake Partners'
possible interest in exploring whether some type of transaction involving
Seagate and Silver Lake Partners would be possible, and outlined the role that
VERITAS might play in such a transaction, although Silver Lake Partners had not
yet engaged in any discussions with VERITAS. Without discussing valuation, the
general concept proposed by representatives of Silver Lake Partners involved a
leveraged buyout by Silver Lake Partners (with the participation of certain
members of Seagate's senior management team) of Seagate's operating businesses
(excluding the VERITAS shares held by Seagate) and a subsequent transaction
involving Seagate and VERITAS in which the VERITAS shares held by Seagate could
be delivered to Seagate's stockholders without a corporate and stockholder tax.
On November 24, 1999, Mr. Pope and representatives of VERITAS held a
conference call to discuss possible strategies in connection with Seagate
Software's ownership position of VERITAS common stock, and possible alternatives
for Seagate Software to sell a portion of its VERITAS shares in a tax efficient
manner.
On December 1, 1999, representatives of Silver Lake Partners again met with
Mr. Luczo and other members of Seagate's management team who gave Silver Lake
Partners an overview of Seagate's business and strategy, which consisted solely
of publicly available information.
In early December 1999, the other members of Seagate's Executive Committee
were informed of the proposed Silver Lake Partners transaction. Members of the
Executive Committee informed each of the other members of the Seagate board of
directors of these developments. On December 16, 1999, representatives of Silver
Lake Partners met with Mr. Luczo and Mr. Pope and gave them a detailed
description of Silver Lake Partners' proposal. Throughout the remainder of
December and throughout January 2000 until the January 27, 2000 meeting of the
Seagate board of directors, Morgan Stanley reviewed possible options available
to Seagate based upon input from Seagate's management team and members of
Seagate's Executive Committee, including the feasibility of the type of
transaction suggested by Silver Lake Partners.
During this same period, Silver Lake Partners continued to explore the
feasibility of a possible transaction between Seagate and Silver Lake Partners,
including meetings or other contacts with members of Seagate's management and
Morgan Stanley from time to time. On January 19, 2000, the Executive Committee
met and discussed contacts made with Silver Lake and strategic alternatives. On
January 21, 2000, Mr. Luczo, Mr. Pope, and other members of Seagate's senior
management team met with representatives of Silver Lake Partners and discussed
the feasibility of pursuing a transaction between Seagate and Silver Lake
Partners. Representatives of Silver Lake Partners informed Mr. Luczo that,
although there were a large number of items that would need to be addressed
before definitely going forward (e.g., due diligence, arranging financing,
confirming VERITAS' interest in a transaction, valuation, etc.), it was still
interested in further exploring a possible transaction between Seagate and
Silver Lake Partners.
After the completion of regularly scheduled matters at a January 27, 2000
meeting of the Seagate board of directors, representatives of Morgan Stanley
reviewed with the board of directors possible options available to Seagate. The
discussion included a wide range of possible options (including a continued
liquidation of the shares of VERITAS common stock held by Seagate, a transaction
involving VERITAS and a purchase of Seagate's operating businesses, a sale of
Seagate, a spin-off of the VERITAS shares held by Seagate and a spin-off of
Seagate's operating businesses), an illustrative relative comparison of
72
<PAGE> 79
possible valuations, and a preliminary discussion of positive and negative
factors associated with each alternative. At this meeting, Mr. Luczo also
briefed the board of directors on discussions to date between Seagate and Silver
Lake Partners.
At the January 27, 2000 meeting of the Seagate board of directors, in a
general discussion among the directors, Seagate's management and representatives
of Morgan Stanley, there was a discussion regarding some form of transaction
involving the separation of Seagate's operating business from the ownership of
the VERITAS shares then held by Seagate (and other publicly traded securities
owned by Seagate). These discussions focused on the fact that the stock market
did not appropriately value Seagate's operating businesses and its ownership of
the VERITAS shares. Moreover, Mr. Luczo indicated that it was becoming
increasingly difficult for Seagate to attract and retain qualified management
and employees in light of competition in Seagate's markets from internet,
e-commerce and other new economy companies with the ability to offer
considerable equity upside. Mr. Luczo stated management's belief that a
transaction separating the VERITAS shares held by Seagate from Seagate's
operating businesses (if it could be accomplished without significant corporate
level tax) might be a desirable means of providing Seagate's stockholders with a
better return on their investment in Seagate's common stock than they could
receive if Seagate continued with its current plan of operating its business and
selling its shares of VERITAS common stock in taxable sales. However, Mr. Luczo
stated that he and Seagate's senior management were committed to pursuing
whatever alternative the board of directors preferred, including maintaining the
status quo.
The representatives of Morgan Stanley and, given his potential interest in
a possible transaction with Silver Lake Partners, Mr. Luczo were then excused
from the remainder of the January 27, 2000 meeting of the Seagate board of
directors, which was devoted to exploring possible strategic alternatives. The
Seagate board of directors and representatives from its outside counsel, Wilson
Sonsini Goodrich & Rosati, Professional Corporation, discussed a number of
topics. Representatives of Wilson Sonsini generally advised the Seagate board of
directors of its fiduciary duties. Because of Mr. Luczo's potential conflict of
interest, representatives of Wilson Sonsini recommended, and the board of
directors resolved, that both Mr. Luczo and all other members of Seagate's
senior management should be excluded from the portion of any future meetings of
the Seagate board of directors during which possible transactions were
discussed. The Seagate board of directors (excluding Mr. Luczo) assigned Mr.
Perlman and Mr. Filler, the Co-Chairmen of the Seagate board of directors, the
additional responsibility of overseeing day to day developments regarding a
possible transaction involving Silver Lake Partners and VERITAS and exploring
other alternatives. The Seagate board of directors (excluding Mr. Luczo) further
authorized the Seagate Co-Chairmen to retain Morgan Stanley to advise the board
of directors regarding possible alternatives available to Seagate, including a
transaction involving Silver Lake Partners and VERITAS. The Seagate board of
directors (excluding Mr. Luczo) also requested Morgan Stanley to continue
reviewing alternatives, and develop and report to the Seagate Co-Chairmen its
views regarding potential third parties (excluding Silver Lake Partners and
VERITAS) that might be interested in a pursuing an acquisition of Seagate or
other business combination with Seagate. Finally, the Seagate board of directors
(excluding Mr. Luczo) implemented a number of procedural initiatives, including
a prohibition on senior management contact with interested third parties unless
pre-approved by the Seagate Co-Chairmen, a requirement that the distribution of
information regarding Seagate to third parties be pre-cleared by the Seagate
Co-Chairmen or the board of director's advisors, and a requirement
73
<PAGE> 80
that representatives of Morgan Stanley be invited to attend all meetings
regarding Seagate that might be held with Silver Lake Partners and/or its
financing sources. Following the January 27, 2000 meeting, consistent with its
instructions from the Seagate board of directors, representatives of Morgan
Stanley contacted Silver Lake Partners and invited Silver Lake Partners to
proceed with its evaluation of a potential transaction with Seagate.
After the January 27, 2000 meeting of the Seagate board of directors, the
Seagate Co-Chairmen and representatives of Morgan Stanley and Wilson Sonsini met
telephonically at least once a week during February to discuss alternatives and
developments. During this same period, representatives of Morgan Stanley, on
behalf of Seagate, contacted a select number of potential strategic third
parties approved by the Seagate board of directors to explore whether they might
have an interest in pursuing an acquisition of Seagate or other business
combination with Seagate.
On January 27, 2000, the board of directors of VERITAS held its regular
quarterly board meeting. In the meeting, members of the board raised the
possibility of a three-way transaction involving Silver Lake Partners and
Seagate.
On February 3, 2000, Mr. Luczo and Mr. Pope met with representatives of
Silver Lake Partners to discuss the merits of a potential transaction.
On February 4, 2000, Mr. Luczo and Mr. Pope, and representatives of Morgan
Stanley and Wilson Sonsini met with representatives of Silver Lake Partners and
VERITAS, their respective financial advisors and legal counsel to Silver Lake
Partners. The meeting was exploratory in nature and focused on the possible
structures a transaction among Seagate, Silver Lake Partners and VERITAS might
involve, and did not involve discussions of valuation or specific transaction
terms, other than tax treatment. At this meeting, representatives of VERITAS
expressed the view that VERITAS would only pursue a transaction with Seagate and
Silver Lake Partners if the terms of the transaction contemplated that Silver
Lake Partners would acquire all of the operating businesses of Seagate and that
Silver Lake Partners would assume and be liable for all liabilities of Seagate.
On February 8, 2000, Seagate and Silver Lake Partners entered into a
customary confidentiality agreement.
On February 10, 2000, Seagate and Morgan Stanley entered into an engagement
letter under which Seagate agreed to pay certain fees and expenses of Morgan
Stanley for financial advice and assistance rendered by Morgan Stanley in
connection with a possible transaction involving Seagate. The Seagate board of
directors (excluding Mr. Luczo) retained Morgan Stanley to assist them in the
negotiation and analysis of any transaction that might ensue and for the purpose
of delivering an opinion in such a transaction as to the fairness of the
consideration to be received by the stockholders of Seagate.
During February 2000, representatives of Seagate's senior management had a
number of meetings with representatives of Silver Lake Partners and its
financing sources regarding business diligence and financing structures. At
least one representative of Morgan Stanley attended each of these meetings.
During these meetings, there was no negotiation or discussion of the terms and
conditions of any particular transaction. Also during these meetings,
representatives of Seagate's management team discussed and responded to
questions concerning Seagate's history, strategy and prospects. Silver Lake
Partners was also provided by Morgan Stanley with a set of financial projections
for Seagate prepared by Seagate and reviewed by the Seagate Co-Chairmen.
74
<PAGE> 81
Over the same time period and into March 2000, Silver Lake Partners
continued to investigate a potential transaction involving Seagate, including
further contacts with representatives of VERITAS regarding the structure and
details of a unified bid and initial contacts with representatives of Texas
Pacific Group, August Capital, Chase Capital Partners and Goldman Sachs.
During the month of March 2000, the Seagate Co-Chairmen and representatives
of Morgan Stanley and Wilson Sonsini continued to have conference calls at least
weekly regarding a possible transaction among Seagate, Silver Lake Partners and
VERITAS and other alternatives. In addition, during this same period of time,
the Co-Chairmen had multiple discussions with each other and individually with
representatives of Morgan Stanley and Wilson Sonsini regarding a possible
transaction among Seagate, Silver Lake Partners and VERITAS and other
alternatives. During a meeting of the Seagate board of directors held on March
3, 2000, the Seagate board of directors (excluding Mr. Luczo) reviewed
activities conducted to date. Representatives of Morgan Stanley reported on the
apparent lack of interest by strategic third parties to consider a business
combination involving Seagate, and it became clear to the Seagate board of
directors that any transaction involving Seagate and VERITAS would likely
involve a financial buyer. Based on Morgan Stanley's review of Silver Lake
Partners and the amount of equity that would likely need to be raised (which
would involve contacting a number of other large private equity sources) to
finance the acquisition of Seagate's operating businesses, the Seagate board of
directors (excluding Mr. Luczo) concluded that Silver Lake Partners would act as
a proxy for the private equity market by virtue of its solicitations of other
private equity sources. The Seagate board of directors (excluding Mr. Luczo)
also discussed the benefits and risks of alternative structures, and concluded
that a tax-free transaction with VERITAS combined with taxable sale of assets to
Silver Lake Partners appeared to offer substantial benefits to Seagate's
stockholders. The Seagate board of directors (excluding Mr. Luczo) also
discussed the fact that VERITAS would likely require a material financial
benefit to its stockholders in return for allowing Seagate's stockholders to
receive new VERITAS shares in a tax efficient manner. The Seagate board of
directors (excluding Mr. Luczo) also discussed the fact that Silver Lake
Partners would ultimately be constrained in the amount of debt it could raise in
connection with a cash acquisition. Representatives of Morgan Stanley reported
that, based on information provided to it, Morgan Stanley believed that Silver
Lake Partners and VERITAS would be in a position to make a formal proposal by
March 12, 2000. The Seagate board of directors (excluding Mr. Luczo) authorized
the Seagate Co-Chairmen and Morgan Stanley to continue exploring a transaction
involving Seagate, Silver Lake Partners and VERITAS, as well as other
alternatives.
By the end of the first week of March 2000, it became clear through
discussions with Credit Suisse First Boston, VERITAS' financial advisor, that
VERITAS' view was that it would require a substantial discount to proceed with a
transaction with Seagate (i.e., VERITAS would issue fewer shares of VERITAS
common stock in the merger than the number of VERITAS shares owned by Seagate
Software), in return for participating in a tax-free reorganization with
Seagate. Prior to this time, Seagate and VERITAS had not negotiated or discussed
a specific discount, but had proceeded on the general assumption that VERITAS
would receive some discount for engaging in a transaction with Seagate on the
general terms previously discussed. At a March 10 meeting between Mark Leslie,
the Chief Executive Officer of VERITAS, and the Seagate Co-Chairmen, Mr. Leslie
suggested that VERITAS viewed an appropriate discount to be within the 25 - 30%
range, while Mr. Filler and Mr. Perlman expressed their view of the appropriate
discount to be
75
<PAGE> 82
within the 5 - 10% range. After further negotiation, Mr. Leslie, Mr. Filler and
Mr. Perlman arrived at an approximately 14.6% discount as being a discount they
would raise for the consideration of their respective boards of directors. At
this meeting, Mr. Leslie and the Seagate Co-Chairmen also discussed the
appropriate treatment of Seagate's other investment assets, how these assets
would affect the discount applied to the VERITAS common stock, and how these
other investment securities would be valued if VERITAS were to acquire them. No
other terms or conditions of a possible transaction were negotiated at this
meeting.
On March 13, 2000, representatives of Silver Lake Partners and its
financial advisors met with representatives of Morgan Stanley and Wilson Sonsini
to give a presentation of the joint proposal that Silver Lake Partners and
VERITAS intended to make.
On March 15, 2000, Mr. Luczo, Mr. Pope and representatives of Morgan
Stanley and Wilson Sonsini met with representatives of Silver Lake Partners and
VERITAS. During this meeting, representatives of Silver Lake Partners and
VERITAS presented a joint proposal involving Silver Lake Partners' purchase of
Seagate's operating assets and a subsequent merger of Seagate and VERITAS. Under
this joint proposal (after giving effect to the proposed Silver Lake Partners
transaction), VERITAS would cause a wholly owned subsidiary to merge with and
into Seagate and Seagate stockholders would receive approximately 109,330,300
newly issued shares of VERITAS common stock, a number of additional shares of
VERITAS common stock equal to 50% of the market value for the shares of Gadzoox
Networks, SanDisk Corporation, CVC, Inc. (which were subsequently converted into
shares of Veeco Instruments) and Dragon Systems (which were subsequently
converted into shares of Lernout & Hauspie) less taxes estimated at 40%, and
cash equal to the net amount of cash held by Seagate after giving effect to the
proposed transaction between Seagate and Silver Lake Partners. Under this joint
proposal, Silver Lake Partners would purchase all of Seagate's assets for $2
billion of cash. This $2 billion amount, plus cash on hand at Seagate, less (1)
$800 million (to be retained by the ongoing company for operating purposes) and
an amount equal to Seagate's outstanding indebtedness, (2) any negative working
capital (excluding cash), (3) a deduction for all tax liabilities, (4) any
liabilities arising under Section 280G of the Internal Revenue Code, and (5)
transaction expenses would be distributed to Seagate stockholders in the merger
with VERITAS. In addition, the joint proposal specified that all outstanding
stock options would be fully vested and converted into the right to receive the
merger consideration as part of the proposed transaction. Silver Lake Partners's
proposal was supplemented by committed financing, but subject to reaching
satisfactory arrangements with Seagate's senior management team and further due
diligence of Seagate. Silver Lake Partners and VERITAS indicated that their
joint proposal was a unified proposal.
At a meeting of the Seagate board of directors (excluding Mr. Luczo) held
on March 15, 2000, representatives of Morgan Stanley and Wilson Sonsini reviewed
with the Seagate board of directors the financial and legal terms, respectively,
of the proposed transactions with Silver Lake Partners and VERITAS. The Seagate
board of directors (excluding Mr. Luczo) requested Morgan Stanley to prepare a
financial analysis of the proposed transactions and requested the Seagate
Co-Chairmen, and representatives of Morgan Stanley and Wilson Sonsini to clarify
the terms of the proposed transactions and attempt to negotiate more favorable
terms regarding value and deal certainty.
During the next several days, the Seagate Co-Chairmen, and representatives
of Morgan Stanley and Wilson Sonsini, on behalf of Seagate, negotiated and
clarified the terms of the proposed transactions with representatives of Silver
Lake Partners and
76
<PAGE> 83
VERITAS. On March 17, 2000, Silver Lake Partners and VERITAS delivered a revised
proposal. The revised proposal differed from the March 15, 2000 proposal by
increasing the value to be received by Seagate stockholders in two ways: (1) by
decreasing the liquidity discounts associated with the investment securities to
those ultimately contained in the merger agreement and (2) by agreeing that
Silver Lake Partners would assume the first $100 million of any liabilities
arising under Section 280G of the Internal Revenue Code in connection with the
proposed transactions. Again, Silver Lake Partners and VERITAS indicated that
their revised proposal was a unified proposal. On March 19, 2000, Wilson Sonsini
delivered to Silver Lake Partners and VERITAS, and their respective financial
and legal advisors, draft forms of agreements for the proposed transactions.
On March 22, 2000, the Seagate board of directors (excluding Mr. Luczo) met
to review the status of negotiations with Silver Lake Partners and VERITAS.
Representatives of Wilson Sonsini reviewed with the Seagate board of directors
(excluding Mr. Luczo) its fiduciary obligations as directors and summarized the
material terms of the draft agreements for the proposed transactions.
Representatives of Morgan Stanley reviewed the financial aspects of the proposed
transactions, the changes made from the March 15, 2000 proposal, remaining open
issues and its preliminary financial analysis of the proposed transactions.
Representatives of Morgan Stanley also discussed generally the proposed
transactions compared with alternatives potentially available to Seagate and the
likely timing for completing the proposed transactions. The Seagate board of
directors (excluding Mr. Luczo) concluded that Seagate should continue
negotiating the terms of the proposed transactions.
From March 22 through March 29, 2000, Seagate, Silver Lake Partners and
VERITAS and their respective financial and legal advisors continued to negotiate
the terms and conditions of the definitive agreements for the proposed
transactions. In the course of these negotiations the Seagate representatives
generally negotiated for a higher purchase price and elimination of purchase
price adjustments and transaction conditions. Silver Lake Partners' general
position was that it could not pay more cash consideration, especially in light
of the fact that it would be assuming all of Seagate's historical known and
unknown liabilities (excluding funded debt and current taxes). As Silver Lake
Partners continued to conduct diligence it also sought to adjust the proposed
price to eliminate risks for Seagate's known and unknown liabilities. Silver
Lake Partners and Seagate also spent considerable time negotiating regarding
Silver Lake Partners' proposed working capital adjustment. These discussions
also included negotiation of the circumstances under which the Seagate board of
directors could terminate either transaction to accept a superior proposal or
change its recommendation of either transaction. In general VERITAS and Silver
Lake Partners took the position that Seagate would be permitted to terminate
either agreement only in response to an offer superior to both the merger and
the leveraged buyout, while Seagate took the position that it should be
permitted to terminate either agreement in response to an offer superior to that
under the relevant agreement. In connection with these termination discussions
VERITAS' advisors proposed a termination fee of approximately $800 million and
Silver Lake's advisors proposed a termination fee of approximately $150 million
plus expenses.
On March 23, 2000, certain members of the VERITAS board of directors
participated in a conference call to discuss the latest proposed terms and
issues of a proposed transaction. Messrs. Luczo and Kerfoot did not participate.
Representatives from Credit Suisse First Boston and Willkie Farr & Gallagher
were present. The attendees held an extensive discussion of the terms of the
proposed transaction, followed by numerous
77
<PAGE> 84
questions from the board members. The parties also discussed results of due
diligence efforts that had been undertaken regarding Seagate and its businesses
and operations.
On March 28, 2000, the VERITAS board of directors (excluding Messrs. Luczo
and Kerfoot), together with representatives of Credit Suisse First Boston and
Willkie Farr & Gallagher, met to review and discuss the negotiated terms of the
merger agreement and the indemnification agreement. Representatives of Credit
Suisse First Boston and Willkie Farr & Gallagher reviewed with the VERITAS board
of directors the changes in the terms of the merger agreement and the
indemnification agreement since the last meeting of the VERITAS board of
directors. The VERITAS board of directors also discussed the most recent due
diligence assessments received from various advisors with respect to accrued and
potential liabilities of Seagate. Representatives of Credit Suisse First Boston
concluded by delivering Credit Suisse First Boston's oral opinion to the VERITAS
board of directors, which it later confirmed in writing as of March 29, 2000,
that the stock portion exchange ratio was fair to VERITAS from a financial point
of view as of the date of the opinion and based upon and subject to the various
consideration set forth in its opinion. Based on Credit Suisse First Boston's
opinion and other factors considered during the meeting, the VERITAS board of
directors, acting without Messrs. Luczo and Kerfoot, unanimously determined that
the merger agreement and the merger were advisable and in the best interests of
the VERITAS stockholders and approved the merger agreement, the merger, and the
issuance of new shares of VERITAS common stock in connection with the merger.
On March 29, 2000, the Seagate board of directors (excluding Mr. Luczo),
together with representatives of Morgan Stanley and Wilson Sonsini, met to
review the negotiated agreements for the proposed transactions. Representatives
of Wilson Sonsini summarized the terms of the definitive stock purchase
agreement and merger agreement, including the provisions that permitted the
Seagate board of directors to terminate either of the stock purchase agreement
or the merger agreement in response to an offer superior to that contemplated by
each of those agreements, and the related termination fees of $440 million for
the merger and $80 million for the leveraged buyout. Representatives of Morgan
Stanley reviewed with the Seagate board of directors the financial changes since
the last meeting of the board of directors, which included the elimination of
any downward adjustment to the purchase price based on negative working capital
(excluding cash) and provision for the retention by Seagate's stockholders of
any tax refunds and other tax assets that might be associated with the proposed
transactions. Representatives of Morgan Stanley then presented the Seagate board
of directors with its financial analysis of the proposed transactions.
Representatives of Morgan Stanley concluded by delivering Morgan Stanley's oral
opinion, subsequently confirmed in writing, to the Seagate board of directors,
to the effect that the consideration to be received by the holders of Seagate
common stock in connection with the merger was fair, from a financial point of
view, to those holders. Morgan Stanley's opinion did not address any individual
components of the consideration payable in connection with the merger, such as
the consideration payable to Seagate in the leveraged buyout or the exchange
ratio for the fixed stock portion payable in the merger. However, the merger
consideration (which includes, among other things, net amounts received in the
leveraged buyout) is made up, in part, of these components. Because the merger
and the leveraged buyout are each conditioned upon the closing of the other and
were considered as a whole, Morgan Stanley's opinion covered the consideration
to be received in the combined transaction and not the components of each. Based
on Morgan Stanley's advice, opinion and valuation analysis and other factors
considered during the meeting, the Seagate board of directors (excluding and
acting without Mr. Luczo)
78
<PAGE> 85
unanimously determined that the proposed transactions together were fair to, and
in the best interest of, Seagate's stockholders and approved the stock purchase
agreement and the stock purchase, and the merger agreement and the merger.
On March 29, 2000, after the closing of the financial markets, the parties
executed the stock purchase agreement, the merger agreement, the indemnification
agreement and the exclusivity agreement, and Seagate and VERITAS issued a press
release announcing the leveraged buyout and the merger.
In April 2000, Seagate and Silver Lake Partners executed an amendment to
the stock purchase agreement. Under the terms of this amendment, Silver Lake
Partners consented to certain strategic investments proposed to be made by
Seagate having a value of up to $25 million, and to a $25 million reduction in
the amount of required cash to be held by Seagate at closing from $800 million
to $775 million.
On August 18, 2000, the VERITAS board of directors (other than Messrs.
Luczo and Kerfoot, who did not participate) met and approved and authorized the
terms of a proposed amendment to the stock purchase agreement, the merger
agreement and the indemnification agreement.
The Seagate board of directors (excluding Mr. Luczo, who did not
participate) met on August 21 and August 25 to review and approve the terms of
proposed amendments to the stock purchase agreement, the merger agreement and
the indemnification agreement. In connection with its consideration of the
proposed amendments, and in light of the revised terms of the proposed
transaction resulting from the proposed amendments, the Seagate board of
directors requested that Morgan Stanley update its fairness opinion. At the
August 25 meeting, Morgan Stanley delivered its opinion, subsequently confirmed
in writing on August 29, 2000, to the effect that, as of August 25, 2000, and
based upon and subject to the various considerations set forth in its opinion,
the consideration to be received by holders of Seagate common stock in
connection with the merger was fair, from a financial point of view, to those
holders. After receiving the updated opinion of Morgan Stanley, the Seagate
board of directors (excluding and acting without Mr. Luczo) authorized and
approved the terms of the amendment to the stock purchase agreement, the merger
agreement and the indemnification agreement.
On August 29, 2000, Seagate, VERITAS and Suez Acquisition Company executed
a consolidated amendment to the stock purchase agreement, the merger agreement
and the indemnification agreement.
On October 12, 2000, the VERITAS board of directors held its regular
quarterly board meeting. In the meeting, the VERITAS board of directors (other
than Messrs. Luczo and Kerfoot, who did not participate in the deliberations)
reviewed and approved the terms of another set of proposed amendments to the
stock purchase agreement, the merger agreement and the indemnification
agreement.
On October 13, 2000, VERITAS, Seagate and Suez Acquisition Company entered
into a memorandum of understanding with the plaintiffs in pending class action
litigation. Pursuant to the terms of the memorandum of understanding, the
parties agreed that: (1) Suez will increase the cash purchase price in the
leveraged buyout by $50 million of cash, from $2.0 billion to $2.050 billion;
(2) the merger agreement will be amended to (a) allow VERITAS to elect to retain
$250 million or $500 million of cash, rather than $500 million or $750 million
of cash, (b) reduce the maximum amount that may be held back in escrow to cover
potential Seagate tax liabilities from $300 million to $150 million, and (c)
specify that VERITAS' election to retain cash must be made during the 15
79
<PAGE> 86
trading days ending two trading days prior to the Seagate special meeting; (3)
Suez will pay any attorney's fees that may be awarded to the plaintiff's
counsel; and (4) prior to the closing of the transaction, Seagate will obtain a
fairness opinion from Lehman Brothers regarding the combined consideration to be
received by Seagate stockholders in the merger and the leveraged buyout taken
together.
On October 18, 2000, Seagate, VERITAS and Suez Acquisition Company executed
a second consolidated amendment to the stock purchase agreement, the merger
agreement and the indemnification agreement. This second consolidated amendment
reflects the changes to the transaction required by the memorandum of
understanding.
CONSIDERATION OF THE LEVERAGED BUYOUT AND THE MERGER BY SEAGATE
SEAGATE'S REASONS FOR THE LEVERAGED BUYOUT AND THE MERGER
In connection with its recommendation, the Seagate board of directors
(excluding Mr. Luczo) considered a number of factors, including the following:
- the relatively high value of the VERITAS shares held by Seagate as
compared to the value of the remainder of Seagate's assets and Seagate's
overall market capitalization and the terms of the existing stockholder
agreement between Seagate and VERITAS which restricts Seagate's ability
to dispose of its VERITAS shares;
- the fact that the merger should enable Seagate's stockholders to acquire
VERITAS shares representing a significant percentage of the VERITAS
shares currently owned by Seagate, without the imposition of a corporate
or a shareholder level tax, and the risks associated with the tax
structure of the transactions;
- the historical market prices and trading activity of Seagate's common
stock, including (1) the fact that the historical market price of Seagate
common stock did not reflect the full value of the shares of VERITAS
common stock held by Seagate together with Seagate's other assets, (2)
the fact that, based upon the market price of Seagate common stock and
VERITAS common stock, Seagate's operating assets had a low and sometimes
negative value in the market, even after accounting for the tax liability
that Seagate would incur if it sold its VERITAS shares, (3) based on the
closing price of VERITAS common stock on March 8, 2000 and certain other
assumptions, the combined consideration to be received by Seagate's
stockholders in connection with the leveraged buyout and the merger
represented approximately a 51% and 67% premium over the average closing
price of Seagate common stock during the 10 and 30 trading day period
ending March 8, 2000 (which was the last "unaffected" trading day prior
to a significant increase in the closing price per share and trading
volume of the Seagate common stock that occurred on March 9, 2000 and a
public report that appeared on March 10, 2000 speculating that Seagate
and VERITAS were in discussions regarding a potential business
combination), respectively, and (4) based on the closing price of VERITAS
common stock on March 28, 2000 (which was the last trading day prior to
the meeting of the Seagate board of directors at which the leveraged
buyout and the merger were approved), the combined consideration to be
received by Seagate's stockholders in connection with the leveraged
buyout and the merger represented approximately a 35% premium over the
average closing price of Seagate common stock during the 30 trading day
period ending March 28, 2000;
- the presentations of Morgan Stanley on March 29, 2000 and August 25, 2000
regarding the merger and the leveraged buyout and Morgan Stanley's oral
opinions to the Seagate board of directors on March 29, 2000 and August
25, 2000, subsequently
80
<PAGE> 87
confirmed in writing on March 29, 2000 and August 29, 2000, respectively,
to the effect that, as of March 29, 2000 and August 29, 2000,
respectively, the consideration to be received by holders of Seagate
common stock in connection with the combined transaction was fair, from a
financial point of view, to those holders;
- the fact that, in connection with the preparation and delivery of its
opinions, and in discussions with the Seagate board, Morgan Stanley
performed some alternative financial analysis of Seagate's operating
assets, resulting in valuation ranges in excess of the price being paid
in the leveraged buyout by Suez Acquisition Company for those operating
assets;
- the fact that, despite Morgan Stanley's contact with potential third
parties to explore whether they might have an interest in pursuing an
acquisition of Seagate or other business combination with Seagate, none
of these parties had such an interest or made any proposal regarding such
a transaction and no third party has made a proposal regarding an
acquisition of Seagate or its operating assets since the announcement of
the transactions on March 30, 2000;
- the fact that Morgan Stanley and some of its officers, employees and
affiliates have pre-existing contractual obligations to invest in limited
partnership interests in Silver Lake Partners' fund, a Morgan Stanley
affiliate has a pre-existing contractual right to receive less than .9%
of Silver Lake Partners' contractual right to participate in 20% of any
profits earned upon disposition of the assets acquired in the leverage
buyout, and certain officers have committed to acquire up to $550,000 of
limited partnership interests in funds affiliated with TPG Partners III,
L.P.;
- information with respect to the financial condition, results of
operations, business and prospects of Seagate, as well as the risks
involved in achieving such prospects, and general economic and market
conditions affecting Seagate;
- results of the process undertaken by Morgan Stanley in connection with
the solicitation of indications of interest from a selected group of
third parties, and in connection with identifying possible alternatives
to the leveraged buyout and the merger;
- the treatment of Seagate's outstanding stock options and restricted stock
in the merger;
- the fact that none of the parties contacted by Morgan Stanley had
indicated any interest in pursuing a transaction;
- other alternatives available to Seagate;
- information with respect to the financial condition, results of
operations and prospects of VERITAS, as well as the risks involved in
achieving such prospects, and the general economic and market conditions
affecting VERITAS, including the historical trading prices of VERITAS
common stock and its volatility and the effect the transaction might have
on the trading price of VERITAS stock;
- the structure of the leveraged buyout and the merger, the likelihood of
consummating the leveraged buyout and the merger, the existence of
executed financing commitments for the leveraged buyout, the likely
closing date for the leveraged buyout and the merger, and the conclusion
that Silver Lake Partners is a significant participant in the capital
markets specializing in transactions involving technology companies;
- the fact that consummation of the leveraged buyout and the merger would
allow Seagate's stockholders to participate in the future growth and
success of VERITAS, as well as allowing them to directly make the
investment decision to sell or hold
81
<PAGE> 88
shares of VERITAS common stock received by them in connection with the
merger;
- the fact that consummation of the leveraged buyout and the merger would
preclude the Seagate stockholders from having the opportunity to
participate in the future prospects of Seagate's operating assets;
- actual and potential conflicts of interests of Mr. Luczo, Mr. Pope and
certain other members of Seagate's senior management team who will have
the opportunity to benefit from any increases in the value of Seagate's
operating assets following the closing of the stock purchase and the
merger by virtue of their equity participation;
- the terms and conditions of the stock purchase agreement and the merger
agreement, including the anticipated tax treatment of the transaction and
the fact that each of the stock purchase agreement and the merger
agreement is subject to approval by Seagate's stockholders; and
- the amount of the negotiated termination fees and the ability for
Seagate's board of directors, to the extent it determines it is required
to do so as provided therein, to terminate either agreement in order to
approve a competing, more favorable transaction or transactions.
In view of the various factors considered by the Seagate board of directors
in connection with its evaluation of the leveraged buyout and the merger, the
Seagate board of directors did not, except as discussed in the next sentence,
find it necessary to quantify or otherwise attempt to assign relative weights or
importance to the factors considered in making its determination, nor did it
evaluate whether such factors were of equal importance. The most important
positive factor considered by the Seagate board of directors was the fact that
Seagate's stockholders would receive the value of at least 85.4% of the VERITAS
shares held by Seagate in a transaction that should be tax free at the corporate
and stockholder level. Based upon all of the above factors and the evaluation of
all the relevant information provided to it by Morgan Stanley, the Seagate board
of directors (excluding Mr. Luczo) unanimously determined that the leveraged
buyout and the merger, considered together, were fair to Seagate's stockholders.
The Seagate board of directors believed, based upon discussions with Morgan
Stanley, that the benefits from the elimination of the overhang of Seagate as a
single 32.5% stockholder of VERITAS would help to offset any negative impact
associated with the issuance of additional tradeable shares of VERITAS common
stock. In considering the volatility associated with the VERITAS shares, the
Seagate board of directors noted that Seagate's stockholders were already
indirectly exposed to volatility in the market price of VERITAS stock by virtue
of Seagate's ownership of a significant block of that stock.
In determining whether to proceed with the transaction, the Seagate board
of directors considered a number of possible alternatives, including a spin-off
of Seagate's operating assets followed by a merger with VERITAS. On balance, the
Seagate board of directors concluded that the leveraged buyout and merger were
preferable to this approach because (1) a spun-off public entity would be
subject to the same operating risks as Seagate, (2) all or a portion of
Seagate's cash and VERITAS shares would need to be transferred to the spun-off
entity to satisfy its ongoing tax liabilities, (3) the value of the spun company
would likely be adversely affected by the elimination of the capital cushion
provided by the VERITAS shares, (4) without that capital cushion a spun company
would face even greater challenges in attracting and maintaining key employees
(including current management) and (5) VERITAS did not indicate any willingness
to engage in such a transaction. In addition to these risks, the Seagate board
of directors concluded,
82
<PAGE> 89
based on advice from its financial and legal advisors, that this spin-off
alternative, in particular a tax free spin-off, possibly could take
substantially more time to complete and that the implied value of this approach
as compared to the proposed transaction were essentially similar under Morgan
Stanley's analyses.
In considering the factors described above, individual members of the
Seagate board of directors may have given different weights or assigned
different levels of importance to different factors. Except for the fact that
the transactions would preclude Seagate stockholders from participating in the
future prospects of Seagate's operating assets, the actual and potential
conflicts of interests of Seagate senior management discussed above, the
pre-existing contractual obligations of Morgan Stanley and its officers,
directors and affiliates to invest in funds affiliated with Texas Pacific Group
and to invest in and participate in the profits of Silver Lake Partners
discussed above, and the fact that Morgan Stanley performed some alternative
financial analyses of Seagate's operating assets resulting in valuation ranges
in excess of the price being paid in the leveraged buyout, the Seagate board of
directors considered the foregoing factors to be positive factors.
Notwithstanding these negative factors, the Seagate board of directors believes
the leveraged buyout and the merger, considered together, are fair to and are in
the best interest of Seagate's stockholders. The board of directors also
believes that the leveraged buyout, by itself, is fair to Seagate's unaffiliated
stockholders because it enables the overall merger transaction to occur.
Although members of Seagate's senior management team will have the opportunity
to participate in the future prospects of Seagate's operating assets, they will
also bear the risk of any decrease in the value of these operating assets. As a
result of the leveraged buyout and the merger, Seagate's operating assets will
also have significant amounts of indebtedness and significantly less asset value
that may reduce its value in the future. Although Morgan Stanley and some of
officers and employees have contractual commitments to invest in funds
affiliated with Texas Pacific Group, and to invest in and participate in the
profits of Silver Lake Partners, the Seagate board of directors concluded that
these commitments were not material because (1) the commitments to invest in
Silver Lake Partners represented only a small percentage of the Silver Lake
Partners fund (i.e., less than .05% for Morgan Stanley, and less than 2.3% for
Morgan Stanley and all participating officers and employees), (2) the
commitments to invest in funds affiliated with Texas Pacific Group represented
only a small percentage of the funds affiliated with Texas Pacific Group (i.e.,
less than .02% for all participating officers), (3) the funding commitments were
commitments to invest in funds affiliated with Texas Pacific Group and Silver
Lake Partners' as limited partners, (4) the profit participation represented
only a small percentage of the contractual profit participation of Silver Lake
Partners (i.e., less than .9% for an affiliate of Morgan Stanley), (5) the
structure of Morgan Stanley's fee was designed to provide for the payment of a
higher fee to Morgan Stanley for obtaining a higher overall valuation, (6) at
the time Seagate retained Morgan Stanley in connection with a possible strategic
business combination, restructuring or other transaction, the Silver Lake
Partners transaction was one of many other potential transactions, and (7) the
board of directors had a favorable impression of the overall quality of the
advice it received from Morgan Stanley.
The Seagate board of directors (excluding Mr. Luczo) further believes that
the following procedural safeguards were sufficient to ensure that each of the
leveraged buyout and the merger were considered in a manner that was
procedurally fair to Seagate's stockholders notwithstanding any actual or
potential conflicts of interest of Mr. Luczo and
83
<PAGE> 90
Mr. Pope and other members of Seagate's senior management team participating in
the purchase of Seagate's operating assets:
- Mr. Luczo did not participate in any deliberations of the Seagate board
of directors regarding the leveraged buyout and the merger, and the
remainder of the Seagate board of directors consists entirely of
non-management, non-affiliated independent directors who have no
relationship with VERITAS or Silver Lake Partners;
- the Seagate board of directors retained Morgan Stanley as its financial
advisor to assist it in evaluating the merger and the leveraged buyout,
and the board of directors received advice from Morgan Stanley;
- the Seagate board of directors engaged in extensive deliberations in
evaluating the leveraged buyout and the merger, as well as the
negotiation process;
- the consideration to be received by Seagate's stockholders from the
leveraged buyout and the merger and the terms and conditions of the stock
purchase agreement and the merger agreement resulted from arm's-length
bargaining between the Seagate board of directors (through its
Co-Chairmen) and its representatives, on the one hand, and Silver Lake
Partners and VERITAS and their respective representatives, on the other;
- the fact that both the stock purchase agreement and the merger agreement
are subject to the approval of the holders of at least a majority of
Seagate's outstanding common stock, Seagate stockholders will have
appraisal rights in the merger and that the senior members of Seagate's
management team (consisting of officers at or above the level of senior
vice president) who will participate in the ownership of Suez Acquisition
Company own, collectively, less than one percent of Seagate's outstanding
common stock and therefore cannot exercise voting power sufficient to
cause approval of the transactions;
- the fact that under both the stock purchase agreement and the merger
agreement the Seagate board of directors is permitted to negotiate with
third parties who submit business transaction proposals which are
superior to those contemplated under the relevant agreement and, if the
Seagate board of directors so determines and pays the negotiated
termination fees, to terminate that agreement in order to enter into a
more favorable transaction;
- the fact that Seagate is not required to complete the leveraged buyout
unless the merger closes at the same time, and vice versa; and
- the belief of the Seagate board of directors that the leveraged buyout
and the merger would receive wide publicity and accordingly any third
party able and willing to make a superior proposal would be aware of the
transaction. This publicity, when considered with the fact that the
Seagate board of directors could terminate the relevant agreement in
order to accept a superior business transaction proposal, does not unduly
restrict the ability of the Seagate board of directors to respond to any
such proposal.
The merger consideration that the members of the Seagate board of directors
will receive in connection with the merger with respect to stock options held by
them was not discussed by the Seagate board of directors during its
deliberations of the leveraged buyout or the merger.
On August 25, 2000, the Seagate board of directors (other than Mr. Luczo,
who did not participate in the deliberations) determined that the amendments
reflected in the consolidated amendment to the stock purchase agreement, the
merger agreement and the
84
<PAGE> 91
indemnification agreement, were appropriate and that such amendments did not
affect in any material respect the considerations described above, and approved
such amendments.
The independent Seagate directors did not retain an "unaffiliated
representative," within the meaning of Regulation M-A under the Securities Act
of 1933 and the Securities Exchange Act of 1934, to act solely on behalf of
unaffiliated stockholders of Seagate for purposes of negotiating the terms of
the leveraged buyout or the merger, because the independent directors of
Seagate, who, as noted above, have no affiliation with Silver Lake Partners or
VERITAS, acted solely on behalf of the unaffiliated stockholders of Seagate
within the meaning of Regulation M-A and Rule 13e-3 under the Exchange Act.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF SEAGATE/FAIRNESS
Under Rule 13e-3 under the Securities Exchange Act of 1934, Seagate may be
required to state whether it reasonably believes that the leveraged buyout, by
itself, and the merger, by itself, as well as the merger and leveraged buyout,
as a combined transaction, are fair to unaffiliated stockholders of Seagate.
After carefully evaluating the factors described above under "-- Seagate's
Reasons for the Leveraged Buyout and the Merger," both positive and negative,
the board of directors of Seagate has determined that the leveraged buyout and
the merger, as a combined transaction, the leveraged buyout by itself, and the
merger by itself, are fair to and in the best interests of the stockholders of
Seagate and unanimously recommends that the stockholders of Seagate vote for
approval and adoption of the stock purchase agreement and the merger agreement,
and for approval of the leveraged buyout and the merger.
In considering the recommendation of the board of directors of Seagate with
respect to the leveraged buyout and the merger, you should be aware that Mr.
Luczo and certain other members of Seagate's senior management team have certain
interests in the leveraged buyout and the merger that are different from, or are
in addition to, the interests of Seagate's stockholders generally and which
create conflicts of interest. In addition, certain of the directors and officers
of Seagate will receive benefits (such as customary indemnification) in
connection with the leveraged buyout and the merger that are not available to
other Seagate stockholders. For a more complete description of these interests
and benefits, see "-- Interests of Directors and Other Executive Officers of
Seagate in the Leveraged Buyout and the Merger" beginning on page 97 of this
document.
OPINION OF SEAGATE'S FINANCIAL ADVISOR
Under an engagement letter dated February 10, 2000, Seagate retained Morgan
Stanley to provide it with financial advisory services in connection with a
possible strategic business combination, restructuring or other transaction. The
board of directors of Seagate selected Morgan Stanley to act as its financial
advisor based on Morgan Stanley's qualifications, expertise and reputation, and
its knowledge of the business and affairs of Seagate. At the meetings of the
board of directors of Seagate on March 29, 2000 and August 25, 2000, Morgan
Stanley delivered oral opinions to the board of directors of Seagate,
subsequently confirmed in writing on March 29, 2000 and August 29, 2000,
respectively, to the effect that, as of March 29, 2000 and August 29, 2000,
respectively, and based upon and subject to the various considerations set forth
in its opinions, the consideration to be received by holders of Seagate common
stock in connection with the merger was fair, from a financial point of view, to
those holders. Morgan Stanley's fairness opinions did not address the separate
components of the consideration payable in
85
<PAGE> 92
connection with the merger, such as the consideration payable to Seagate in the
leveraged buyout or the exchange ratio for the fixed stock portion payable in
the merger. However, the merger consideration (which includes, among other
things, net amounts received in the leveraged buyout) is made up, in part, of
these components.
PLEASE NOTE THAT THE MORGAN STANLEY OPINIONS SPEAK AS OF THE DATES THEY
WERE ISSUED, AND THE AUGUST 29, 2000 OPINION WILL NOT BE UPDATED.
THE FULL TEXT OF THE WRITTEN OPINION OF MORGAN STANLEY DATED AUGUST 29,
2000 IS ATTACHED AS ANNEX G TO THIS DOCUMENT AND SETS FORTH THE ASSUMPTIONS
MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF
THE REVIEW UNDERTAKEN BY MORGAN STANLEY IN RENDERING ITS OPINION. SEAGATE'S
STOCKHOLDERS ARE URGED TO, AND SHOULD, READ THE OPINION CAREFULLY AND IN ITS
ENTIRETY. THE MORGAN STANLEY OPINION DATED AUGUST 29, 2000 WAS DIRECTED TO THE
BOARD OF DIRECTORS OF SEAGATE AND ADDRESSED ONLY THE FAIRNESS OF THE
CONSIDERATION TO BE RECEIVED BY HOLDERS OF SEAGATE COMMON STOCK IN CONNECTION
WITH THE MERGER FROM A FINANCIAL POINT OF VIEW AS OF THE DATE OF THE OPINION. IT
DID NOT ADDRESS ANY OTHER ASPECT OF THE MERGER AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY HOLDER OF SEAGATE COMMON STOCK AS TO HOW TO VOTE AT THE
SEAGATE SPECIAL MEETING. THE SUMMARY OF THE OPINION OF MORGAN STANLEY SET FORTH
IN THIS DOCUMENT IS QUALIFIED BY REFERENCE TO THE FULL TEXT OF ITS OPINION.
In connection with rendering its opinions, Morgan Stanley, among other
things:
- reviewed certain publicly available financial statements and other
information concerning Seagate;
- reviewed certain publicly available financial statements and other
information concerning VERITAS;
- reviewed certain internal financial statements and other financial and
operating data concerning Seagate prepared by the management of Seagate;
- reviewed certain financial projections prepared by the management of
Seagate;
- discussed with senior executives of Seagate the past and current
operations and financial condition and the prospects of Seagate;
- discussed with senior executives of VERITAS the past and current
operations and financial condition and the prospects of VERITAS,
including a review of publicly available projections of certain equity
research analyst estimates;
- reviewed the reported prices and trading activity for the Seagate common
stock, for the VERITAS common stock, and those for publicly traded
securities of certain other companies whose shares are owned by Seagate,
including Gadzoox Networks, SanDisk Corporation and CVC, Inc. (which were
subsequently converted into shares of Veeco Instruments);
- reviewed the pro forma impact of the merger on the earnings per share of
VERITAS;
- analyzed alternative transaction structures involving some or all of the
assets of Seagate;
- participated in certain discussions and negotiations among
representatives of Seagate, VERITAS and Suez Acquisition Company;
- reviewed the merger agreement, and certain related documents, including
the stock purchase agreement, and the amendments to those agreements; and
- performed such other analyses and considered such other factors as Morgan
Stanley has deemed appropriate.
86
<PAGE> 93
Morgan Stanley assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by Morgan Stanley for the
purposes of its opinions, including the information prepared by the management
of Seagate as to the computation and timing of the tax refund amount and other
certain tax related items. Other than the discussions with senior executives of
VERITAS referred to in the fifth bullet point above, in connection with the
preparation of its opinions, Morgan Stanley was not provided access to any
non-public information prepared by or relating to VERITAS and has instead relied
on the publicly available projections of certain equity research analyst
estimates reporting on VERITAS. With respect to the financial projections,
Morgan Stanley assumed that they were reasonably prepared on bases reflecting
the best currently available estimates and judgments of the future financial
performance of Seagate. Morgan Stanley did not make and did not assume
responsibility for making any independent valuation or appraisal of the assets
or liabilities of Seagate or VERITAS, nor has it been furnished with any such
appraisals.
Morgan Stanley assumed with the consent of the board of directors of
Seagate that the merger will be consummated in accordance with the terms set
forth in the merger agreement and will be treated as a tax-free reorganization
pursuant to the Internal Revenue Code of 1986, as amended. Morgan Stanley also
assumed that the leveraged buyout will be consummated in accordance with the
terms set forth in the stock purchase agreement. Morgan Stanley's opinions were
necessarily based on financial, economic, market and other conditions on, and
the information made available to it as of, the dates of its opinions.
Morgan Stanley's opinions did not in any manner address the prices at which
the Seagate common stock or the VERITAS common stock would actually trade at any
time.
The following is a brief summary of some of the analyses Morgan Stanley
performed in connection with its opinion letter dated March 29, 2000 and
reviewed with the Seagate board of directors on March 29, 2000. Some of these
summaries of financial analyses include information presented in tabular format.
In order to understand fully the financial analyses used by Morgan Stanley, the
tables must be read together with the text of each summary. The tables alone do
not constitute a complete description of the financial analyses.
Merger Consideration Analysis
Morgan Stanley reviewed the components of the consideration to be received
by holders of Seagate common stock in connection with the merger and analyzed
the value of the stock and cash portions of this consideration, excluding the
tax refund amount, over a range of prices of VERITAS common stock. As part of
this analysis, Morgan Stanley also calculated the premia those estimated
valuations implied to the closing price per share of the Seagate common stock
over various time periods ending on March 28, 2000, which was the last trading
day prior to the meeting of the board of directors of Seagate at which the
merger between Seagate and VERITAS was approved, and also over various time
periods ending on March 8, 2000, which was the last "unaffected" trading day
prior to a significant increase in the closing price per share and trading
volume of the Seagate common stock that occurred on March 9, 2000 and a public
report that appeared on March 10, 2000 speculating that Seagate and VERITAS were
in discussions regarding a potential business combination. Morgan Stanley
calculated the premia, based on the closing price per share of VERITAS common
stock on March 28, 2000 of $154.94, to be 14% and 35% relative to the closing
price per share of the Seagate common stock on
87
<PAGE> 94
March 28, 2000 and the average closing price per share for the 30-trading day
period ending March 28, 2000, respectively. Morgan Stanley also calculated the
premia to be 42%, 51% and 67% for the 1-trading day, 10-trading day and
30-trading day periods ending on March 8, 2000, respectively. Morgan Stanley
also observed the following based on a range of prices analyzed for the VERITAS
common stock:
<TABLE>
<CAPTION>
IMPLIED PREMIUM TO SEAGATE COMMON STOCK
--------------------------------------------------------------
30-TRADING 10-TRADING 30-TRADING
APPROXIMATE VALUE DAY DAY DAY
PER SHARE AVERAGE FOR AVERAGE FOR AVERAGE FOR
OF SEAGATE CLOSING PERIOD CLOSING PERIOD PERIOD
COMMON STOCK PRICE ON ENDING PRICE ON ENDING ENDING
VERITAS COMMON ----------------------- MARCH 28, MARCH 28, MARCH 8, MARCH 8, MARCH 8,
STOCK PRICE STOCK CASH TOTAL 2000 2000 2000 2000 2000
-------------- ------ ----- ------ --------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$168.69................................ $78.20 $5.03 $83.23 22% 45% 53% 62% 79%
(Highest closing price through March
28, 2000)
$158.81................................ $74.06 $5.04 $79.10 16% 38% 45% 54% 70%
(Closing price on March 8, 2000)
$154.94................................ $72.43 $5.05 $77.48 14% 35% 42% 51% 67%
(Closing price on March 28, 2000)
$153.25................................ $71.72 $5.05 $76.77 13% 34% 41% 50% 65%
(5-trading day average for period
ending March 8, 2000)
$140.50................................ $66.37 $5.07 $71.44 5% 25% 31% 39% 54%
(10-trading day average for period
ending March 8, 2000)
$119.70................................ $57.63 $5.12 $62.75 (8)% 9% 15% 22% 35%
(30-trading day average for period
ending March 8, 2000)
</TABLE>
Morgan Stanley noted that the value of the consideration varied with and was
dependent on the VERITAS common stock price. While the implied value of the
consideration was approximately $77.48 using the closing share prices as of
March 28, 2000, the value of the consideration was $62.75 when using average
share prices for the 30-trading day period ending March 8, 2000. The estimated
values of the stock and cash portions of the consideration set forth in the
table above were derived based upon Seagate's ownership of 128.1 million shares
of VERITAS common stock, an assumption that VERITAS would elect to retain $500
million of Seagate's cash and issue additional shares of VERITAS common stock,
rather than distribute that cash, to Seagate's stockholders in connection with
the merger, that Seagate has a tax basis in the assets to be sold to Suez
Acquisition Company in the leveraged buyout of approximately $2 billion and an
effective tax rate of 40%, and that transaction costs (including cost associated
with any retirement of debt and other fees and expenses) will be approximately
$150 million. Morgan Stanley also discussed with the board of directors of
Seagate the estimated values of the stock and cash components of the
consideration payable in connection with the merger between Seagate and VERITAS
assuming that VERITAS would elect to retain either no cash or $750 million in
cash and noted that the aggregate value of the consideration would not change,
but for purposes of its written presentation showed the estimated values on the
basis that VERITAS would elect to retain $500 million in cash. Morgan Stanley
noted that while the mix of cash and stock to be received by Seagate
stockholders would change
88
<PAGE> 95
based on this election, the total value of the merger consideration would not
change, as shown in the following table:
<TABLE>
<CAPTION>
VERITAS ISSUES SHARES
FOR $500 MILLION OF VERITAS ISSUES NO SHARES
CASH FOR CASH
--------------------- ------------------------
APPROXIMATE APPROXIMATE
TOTAL VALUE TOTAL VALUE
(MILLION) (MILLION)
--------------------- ------------------------
<S> <C> <C>
Buyer Purchase Price.............................. $ 2,000.0 $ 2,000.0
Less: Cash Retained by VERITAS.................... $ (500.0) $ 0.0
Plus: Net Excess Cash (Deficit)................... $ (248.9) $ (248.9)
--------- ---------
Cash Consideration.............................. $ 1,251.1 $ 1,751.1
VERITAS Shares.................................... $16,939.4 $16,939.4
Investments....................................... $ 505.1 $ 505.1
Retained VERITAS Cash............................. $ 500.0 $ 0.0
--------- ---------
Stock Consideration............................. $17,944.4 $17,444.4
Total.................................... $19,195.5 $19,195.5
Approximate value per share of Seagate common
stock........................................... $ 77.48 $ 77.48
</TABLE>
The estimated values set forth in the table above were derived based upon
Seagate's ownership of 128.1 million shares of VERITAS common stock, the closing
price per share of VERITAS common stock on March 28, 2000 of $154.94, and the
assumption that Seagate has a tax basis in assets to be sold to Suez Acquisition
Company in the leveraged buyout of approximately $2 billion and an effective tax
rate of 40%.
Implied Valuation of Seagate Operating Assets
In view of the significant public market valuation of the VERITAS common
stock and the other securities owned by Seagate, Morgan Stanley reviewed the
stock price performance of Seagate common stock in relation to the stock price
performance of VERITAS common stock and the publicly traded common stock of each
of the publicly traded securities of certain other companies whose shares are
owned by Seagate, including Gadzoox Networks, SanDisk Corporation (all of which
shares were subsequently sold) and CVC, Inc. (which were subsequently converted
into shares of Veeco Instruments and subsequently sold) for the one-year period
ending on March 28, 2000. Morgan Stanley also estimated the after-tax value to
Seagate, based upon an effective tax rate of 40%, of those securities, the
securities of Dragon Systems (which were subsequently converted into shares of
Lernout & Hauspie) and the net cash held during such period by Seagate, and
estimated the implied public market valuation of Seagate's operating assets by
subtracting the values above from total market value of the Seagate common
stock. Morgan Stanley calculated that for the 30 trading days ending on March 8,
2000, the implied value of Seagate's operating assets ranged from a high of
approximately $1.68 billion on February 16, 2000 to a low of approximately a
negative $620 million on March 7, 2000. Morgan Stanley also reviewed the implied
public market valuation of Seagate's operating assets using the methodology
described above for the period from March 9, 2000 through March 28, 2000, during
which period the implied value of Seagate's operating assets ranged from a high
of approximately $3.99 billion on March 20, 2000 to a low of approximately $416
million on March 9, 2000, and had an implied value of $3.47 billion on March 28,
2000. However, Morgan Stanley did not factor the implied valuations of the
operating assets during this period into its analysis because it believed that
the Seagate common stock was no longer trading on an "unaffected" basis
following March 8, 2000. Morgan Stanley noted that the significant increase in
the closing price per share and trading volumes of the Seagate common stock for
the period following March 8, 2000 suggested that an analysis of Seagate's
implied valuation for its securities and operating assets
89
<PAGE> 96
would no longer be meaningful. Morgan Stanley observed that the implied public
market valuation of the securities owned by Seagate might not be realizable for
Seagate given liquidity and other constraints that would arise in selling its
positions in VERITAS common stock and the other publicly traded securities owned
by Seagate, and the implied public market valuations of Seagate's operating
assets described above did not incorporate any illiquidity or other discounts to
the value of the securities owned by Seagate that might arise if Seagate
attempted to sell those securities. Morgan Stanley further noted that a similar
analysis that treated the VERITAS common stock owned by Seagate on a pre-tax
basis (instead of on an after-tax basis) would result in lower implied values
for Seagate's operating assets.
Transaction Premia Analysis
Morgan Stanley reviewed the recent stock price performance of Seagate
common stock and VERITAS common stock over various time periods ending on March
8, 2000 and on March 28, 2000. Morgan Stanley also estimated the implied value
of the consideration to be received by holders of Seagate common stock in
connection with the merger between Seagate and VERITAS based upon the averages
for the VERITAS common stock for the time periods indicated below, and the
premia those values implied to the average price of the Seagate common stock
over the corresponding periods, using the same time period for each stock price.
Morgan Stanley observed the following:
<TABLE>
<CAPTION>
VERITAS IMPLIED SEAGATE
COMMON VALUE OF COMMON IMPLIED
STOCK PRICE CONSIDERATION STOCK PRICE PREMIUM
----------- ------------- ----------- -------
<S> <C> <C> <C> <C>
PERIOD ENDING MARCH 28, 2000
March 28, 2000...................... $155 $77 $68 14%
30-trading day average.............. $143 $73 $57 26%
PERIOD ENDING MARCH 8, 2000
March 8, 2000....................... $159 $79 $55 45%
5-trading day average............... $153 $77 $54 41%
10-trading day average.............. $140 $71 $51 39%
30-trading day average.............. $120 $63 $47 35%
60-trading day average.............. $105 $56 $45 26%
120-trading day average............. $ 76 $45 $39 15%
</TABLE>
Realized Value Analysis
Morgan Stanley compared the value realized for the VERITAS shares and the
other securities held by Seagate in the merger with the estimated value that
Seagate would realize on an after-tax basis assuming that Seagate continued to
sell its positions in the VERITAS common stock and the other publicly traded
securities owned by Seagate in the public markets using share prices as of March
28, 2000. This analysis showed that the value realized in the merger associated
with these securities represented a nominal 40% premium to the value that
Seagate would realize on an after-tax basis assuming that Seagate sold its
positions in VERITAS common stock and the other publicly traded securities owned
by Seagate. This analysis also indicated that the retirement of a portion of the
VERITAS shares owned by Seagate following the merger would be immediately
accretive to the earnings per share of the VERITAS common stock by approximately
5%, assuming no change in VERITAS' net income. Taking into account the implied
financial benefits that would be expected to accrue to holders of Seagate common
stock resulting from this accretion, the analysis showed that the consideration
to be received by holders of
90
<PAGE> 97
Seagate common stock in connection with the merger represented an effective
premium of 47% to the value that Seagate would receive on an after-tax basis
relative to Seagate's selling its positions in VERITAS common stock and the
other publicly traded securities owned by Seagate.
Morgan Stanley also compared the implied value of the consideration to be
received by holders of Seagate common stock in connection with the merger with
the estimated value of Seagate's operating businesses and investments using a
hypothetical "sum-of-the-parts" analysis. For purposes of this analysis, Morgan
Stanley valued Seagate's positions in VERITAS common stock and the other
publicly traded securities owned by Seagate on an after-tax basis assuming that
Seagate sold those positions in their entirety at market prices as of March 28,
2000, and added to this estimated value the amount of Seagate's net cash and an
assumed range of values for Seagate's operating businesses from $1 billion to $4
billion. This analysis showed that the implied value of the consideration to be
received by holders of Seagate common stock in connection with the merger
implied a premium ranging from 12% to 36% to this analysis of the
"sum-of-the-parts" valuation of Seagate. Morgan Stanley also observed that this
analysis of the "sum-of-the-parts" valuation of Seagate may not be realizable or
sustainable for Seagate given liquidity and other constraints that would arise
in selling its positions in VERITAS common stock and the other publicly traded
securities owned by Seagate.
Alternative Transaction Structures
In addition to the analyses summarized above, Morgan Stanley also reviewed
various alternatives to the merger, the potential ranges of value that might be
realized in these alternatives, and the timing and execution risks that might be
associated with those alternatives.
The alternatives reviewed by Morgan Stanley included:
- retaining Seagate's operating assets, continuing to sell shares of
VERITAS common stock periodically in the market, paying taxes on these
sales, and using the after-tax proceeds for repurchasing shares of
Seagate common stock. This alternative is referred to as the Status Quo.
Assuming that Seagate's operating assets traded at multiples ranging from
10x to 15x earnings forecasted by Seagate's management's base case
projections, that the VERITAS common stock had returns ranging from -20%
to 40% annually, that Seagate continued to sell its position in VERITAS
and paid taxes on these sales, Morgan Stanley calculated an implied
present value per share, discounted at 20% per annum, to the holders of
Seagate common stock, under the Status Quo ranging from approximately
$33.69 to $95.39;
- distributing the shares of a company holding all assets excluding the
VERITAS shares and certain operating businesses to Seagate stockholders
in a tax-free spin-off, whereby the assets of the remaining Seagate would
be only the shares of VERITAS common stock and those operating
businesses. This alternative is referred to as the HoldCo / Tax-Free
Spin. Assuming that the spun-off entity comprising Seagate's disc drive
business traded within a band of equity values ranging from $1.5 billion
to $3.5 billion and the distributing company would trade at a discount
ranging from 5% to 20% to the pre-tax value of the underlying shares of
VERITAS common stock, Morgan Stanley calculated an implied per share
value to the holders of Seagate common stock under the HoldCo / Tax-Free
Spin ranging from approximately $69.75 to $88.78;
91
<PAGE> 98
- distributing the shares of a company holding all assets excluding the
VERITAS shares to Seagate stockholders in a taxable spin-off, whereby the
only assets of Seagate after the spin-off would be shares of VERITAS
common stock. This alternative is referred to as the HoldCo / Taxable
Spin. Assuming that the spun-off entity comprising Seagate's operating
assets traded within the same band of equity values as under the HoldCo /
Tax-Free Spin ranging from $1.5 billion to $3.5 billion, and the
distributing company would trade at a discount ranging from 5% to 20% to
the pre-tax value of the underlying shares of VERITAS common stock,
Morgan Stanley calculated an implied per share value to the holders of
Seagate common stock under the HoldCo / Taxable Spin ranging from
approximately $69.75 to $88.78. Morgan Stanley noted that the range of
implied per share values to the holders of the Seagate common stock under
the HoldCo / Taxable Spin would be the same as under the HoldCo /
Tax-Free Spin; and
- distributing the shares of a company holding the operating businesses to
Seagate stockholders in a taxable spin-off, then merging Seagate with
VERITAS in the same structure as the merger. This alternative is referred
to as the VERITAS Merger / Spin. Assuming that Seagate effected a merger
with VERITAS that was identical to the proposed merger except that the
operating assets would be spun-off in a taxable spin and the spun-off
entity comprising Seagate's operating assets traded within a band of
equity values ranging from $1.5 billion to $3.5 billion, Morgan Stanley
calculated an implied per share value to the holders of Seagate common
stock under the VERITAS Merger / Spin alternative ranging from
approximately $75.76 to $86.78. The high end of such range includes the
implied financial benefit to holders of Seagate common stock related to
the reduction in the number of outstanding shares of VERITAS.
The table below summarizes the potential ranges of value estimated by
Morgan Stanley based upon the assumptions described above.
<TABLE>
<CAPTION>
TRANSACTION STRUCTURE IMPLIED VALUE PER SHARE OF SEAGATE COMMON STOCK
--------------------- -----------------------------------------------
<S> <C>
Proposed merger between Seagate $77.48 - $82.47
and VERITAS...................
Status Quo...................... $33.69 - $95.39
HoldCo / Tax-free Spin.......... $69.75 - $88.78
HoldCo / Taxable Spin........... $69.75 - $88.78
VERITAS Merger / Spin........... $75.76 - $86.78
</TABLE>
The high end of the range described above for the proposed merger includes the
implied financial benefit to holders of Seagate common stock related to the
reduction in the number of outstanding shares of VERITAS common stock and an
assumed potential tax refund in the amount of $1.60 per share of Seagate common
stock. Morgan Stanley noted that the proposed merger did not provide an option
for Seagate to effect the VERITAS Merger / Spin alternative described above.
Morgan Stanley also noted that the proposed merger and leveraged buyout
potentially offered greater certainty in terms of value and timing than the
alternative transaction structures described above.
Morgan Stanley also reviewed for illustrative purposes estimated ranges of
values for Seagate's operating businesses derived using various methodologies,
including a comparable companies analysis, a discounted equity analysis, a
discounted cash flow analysis, and a hypothetical "sum-of-the-parts" analysis of
Seagate's disc drives, tapes, information management, and storage area network
segments. As part of this review, Morgan Stanley
92
<PAGE> 99
analyzed the two cases developed by Seagate management, as well as a third case
developed by Morgan Stanley as a sensitivity case, which reflected Seagate
management's base case but assumed that gross margins for the desktop segment of
Seagate's disk drive business remained constant for years 2000 through 2008. For
each of these analyses, Morgan Stanley calculated an implied value for Seagate's
operating assets, in each case assuming that the operating assets included $800
million in cash and $50 million in other liabilities that would be assumed by
Suez Acquisition Company in the leveraged buyout. In the comparable companies
analysis, based upon multiples of projected calendar year 2000 revenues ranging
from 0.20x to 0.45x, Morgan Stanley calculated an implied equity value of the
operating businesses ranging from approximately $2.2 billion to $4.0 billion. In
the discounted equity value analysis, based upon multiples of projected calendar
year 2001 net income ranging from 8x to 16x and discount rates ranging from 15%
to 20%, Morgan Stanley calculated an implied equity value of the operating
businesses ranging from approximately $1.5 billion to $3.1 billion for the base
case, approximately $1.2 billion to $2.4 billion for the sensitivity case, and
approximately $2.9 billion to $6.0 billion for the upside case. Based upon
multiples of projected calendar year 2002 net income ranging from 8x to 16x and
discount rates ranging from 15% to 20%, Morgan Stanley calculated an implied
equity value of the operating businesses ranging from approximately $1.8 billion
to $4.0 billion for the base case, approximately $1.2 billion to $2.7 billion
for the sensitivity case, and approximately $3.4 billion to $7.3 billion for the
upside case. In the discounted cash flow analysis, based upon multiples of
calendar year 2006 EBITDA ranging from 6.0x to 9.0x and a discount rate of 15%,
Morgan Stanley calculated an implied equity value of the operating businesses
ranging from approximately $3.5 billion to $4.4 billion for the base case,
approximately $2.4 billion to $2.9 billion for the sensitivity case, and
approximately $5.4 billion to $6.9 billion for the upside case. In the
hypothetical "sum-of-the-parts" analysis, Morgan Stanley calculated an implied
equity value of the operating businesses ranging from approximately $2.6 billion
to $4.7 billion. While Morgan Stanley's opinion as to the fairness from a
financial point of view of the consideration to be received by holders of
Seagate common stock in connection with the merger did not address the fairness
of the sale price for the operating businesses considered separately, the amount
of the consideration was based, in part, on the amount of the proceeds from the
sale of the operating businesses.
93
<PAGE> 100
The table below summarizes the implied ranges of equity values for
Seagate's operating businesses estimated by Morgan Stanley based upon the
assumptions described above.
<TABLE>
<CAPTION>
IMPLIED EQUITY VALUE
VALUATION METHODOLOGY OF OPERATING BUSINESSES
--------------------- -----------------------
(IN BILLIONS)
<S> <C>
Comparable Companies Analysis...................... $2.2 - $4.0
Discounted Equity Analysis
2001 Net Income
Base Case..................................... $1.5 - $3.1
Sensitivity Case.............................. $1.2 - $2.4
Upside Case................................... $2.9 - $6.0
2002 Net Income
Base Case..................................... $1.8 - $4.0
Sensitivity Case.............................. $1.2 - $2.7
Upside Case................................... $3.4 - $7.3
Discounted Cash Flow Analysis
Base Case..................................... $3.5 - $4.4
Sensitivity Case.............................. $2.4 - $2.9
Upside Case................................... $5.4 - $6.9
"Sum-of-the-Parts" Analysis
Base Case..................................... $2.6 - $4.7
</TABLE>
While many of the implied equity values for Seagate's operating businesses
summarized in the table above exceeded the $2 billion purchase price in the
leveraged buyout, Morgan Stanley arrived at its opinion that the consideration
to be received by holders of Seagate common stock in connection with the merger
was fair, from a financial point of view, to those holders, by considering all
of its analyses of the merger and the leveraged buyout, taken as a whole.
VERITAS Stock Price Study
Morgan Stanley compared the per share daily closing market price movements
of the VERITAS common stock for the 1-year period ending on March 28, 2000 to
the movements during the same period of:
- an index of the per share market prices of the common stock of a group of
software and other companies consisting of Microsoft Corporation, Cisco
Systems, Inc., Oracle Corporation, i2 Technologies, Inc., Siebel Systems,
Inc. and Legato Systems, Inc.;
- the Nasdaq 100; and
- the S&P 500.
This analysis showed that during this period the VERITAS common stock
outperformed the index of comparable companies and the two other market indices.
Morgan Stanley also compared the closing price per share of the VERITAS common
stock on March 28, 2000 as a multiple of the projected 2001 earnings per share
of the VERITAS common stock, the projected five-year earnings per share growth
rate for the VERITAS common stock, and the aggregate market value for the
VERITAS common stock to projected 2001 sales, with the corresponding multiples
for the comparable software companies referred to above as well as VeriSign,
Inc. and Broadvision, Inc. The earnings per share, growth rate and sales
estimates were obtained from Institutional Brokers Estimate System.
94
<PAGE> 101
In connection with its written opinion dated August 29, 2000, Morgan
Stanley reviewed the analysis used to render its March 29, 2000 opinion by
performing procedures to update certain analyses and by reviewing the
assumptions upon which such analyses were based and the factors considered in
connection therewith.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. In arriving
at its opinions, Morgan Stanley considered the results of all of its analyses as
a whole and did not attribute any particular weight to any analysis or factor
considered by it. Furthermore, Morgan Stanley believes that selecting any
portion of its analyses, without considering all analyses, would create an
incomplete view of the process underlying its opinion. In addition, Morgan
Stanley may have given various analyses and factors more or less weight than
other analyses and factors, and may have deemed various assumptions more or less
probable than other assumptions, so that the ranges of valuations resulting from
any particular analysis described above should not be taken to be Morgan
Stanley's view of the actual value of Seagate. In performing its analyses,
Morgan Stanley made numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond the control of Seagate or VERITAS. Any estimates contained in Morgan
Stanley's analyses are not necessarily indicative of future results or actual
values, which may be significantly more or less favorable than those suggested
by such estimates.
The analyses performed were prepared solely as part of Morgan Stanley's
analysis of the fairness of the consideration to be received by holders of
Seagate common stock in connection with the merger from a financial point of
view to those holders and were conducted in connection with the delivery of the
Morgan Stanley opinion to the board of directors of Seagate. The analyses do not
purport to be appraisals or to reflect the prices at which Seagate or any of its
assets might actually be sold.
The consideration to be received by holders of Seagate common stock in
connection with the merger was determined through arm's-length negotiations
between the board of directors of Seagate and VERITAS. Morgan Stanley provided
advice to the board of directors of Seagate during such negotiations; however,
Morgan Stanley did not recommend any specific consideration to the board of
directors of Seagate or that any specific consideration constituted the only
appropriate consideration for the merger.
The board of directors of Seagate retained Morgan Stanley based upon Morgan
Stanley's qualifications, experience and expertise. Morgan Stanley is an
internationally recognized investment banking and advisory firm. Morgan Stanley,
as part of its investment banking business, is continuously engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate, estate and other purposes. In the past, Morgan Stanley
and its affiliates have provided financial advisory and financing services for
Seagate and financing services for VERITAS, and have received fees for the
rendering of these services. During the past two years, Morgan Stanley and its
affiliates have received an aggregate of approximately $10.3 million in fees
from Seagate and approximately $13.3 million in fees from VERITAS for these
services. In the ordinary course of Morgan Stanley's trading and brokerage
activities, Morgan Stanley or its affiliates may at any time hold long or short
positions, may trade or otherwise effect transactions, for its own account or
for the account of customers in the equity securities of Seagate, VERITAS or any
other parties involved in the transaction. Morgan Stanley and some of its
officers, employees and
95
<PAGE> 102
affiliates, including officers and employees who assisted Seagate in connection
with the merger, have committed to answer capital calls, if and when made by
Silver Lake Partners and one of its affiliates, to invest up to an aggregate of
approximately $50.1 million in the overall Silver Lake Partners fund and in that
affiliate. The aggregate amount of these commitments that could be drawn for the
leveraged buyout would represent approximately 0.8% of the equity required for
the leveraged buyout. Pursuant to other pre-existing agreements, Morgan Stanley
Dean Witter & Co., the parent of Morgan Stanley, has the right to receive
approximately 0.86% of Silver Lake Partners' contractual right to participate in
20% (or approximately 0.17%) of any profits earned upon disposition of the
assets acquired in the leveraged buyout, and certain officers of Morgan Stanley
have committed to acquire up to $550,000 of limited partnership interests in
funds affiliated with TPG Partners III, L.P. In addition, Morgan Stanley and
some of its officers, directors and affiliates also committed to invest up to
approximately $43.5 million in certain investment funds that have joined or may
join the investor group organized by Silver Lake Partners to effect the
leveraged buyout. The aggregate amount of these commitments that could be drawn
for the leveraged buyout would represent approximately 0.1% of the equity
required for the leveraged buyout. Under the engagement letter with Seagate,
Morgan Stanley provided financial advisory services and a financial fairness
opinion in connection with the merger and Seagate agreed to pay Morgan Stanley:
- an announcement fee in the amount of $2.5 million payable in cash upon
public announcement that Seagate entered into the merger agreement; and
- a completion fee payable in cash upon closing of the transaction based
upon a percentage of the aggregate value of the transaction, where the
aggregate value means the value of the consideration received per share
of Seagate common stock multiplied by the total number of shares
outstanding, including shares that would be outstanding upon exercise of
any in-the-money stock options, warrants or convertible preferred
securities. The relevant percentages are as follows: (1) 0.45% if the
aggregate value of the transaction is less than or equal to $4 billion;
(2) $18 million, plus 0.17% of the aggregate value above $4 billion if
the aggregate value of the transaction is greater than $4 billion and
less than $14 billion; (3) 0.23% if the aggregate value of the
transaction is greater than $14 billion and less than or equal to $15
billion; (4) 0.26% if the aggregate value of the transaction is greater
than $15 billion and less than or equal to $16 billion; and (5) 0.29% if
the aggregate value of the transaction is greater than $16 billion. The
value of common stock to be used to calculate the aggregate value is
based on the average of (1) the average closing price of that common
stock over the five trading days up to the announcement of the
transaction, and (2) the average closing price of that common stock over
the five trading days up to the date of the closing of the transaction.
The completion fee payable to Morgan Stanley is subject to a minimum of
$10 million and a maximum of $50 million. Any announcement fee previously
paid to Morgan Stanley will be credited against the completion fee.
Seagate currently believes the fee payable to Morgan Stanley will be at
the high end of this range.
Seagate has also agreed to reimburse Morgan Stanley for its expenses incurred in
performing its services. In addition, Seagate has also agreed to indemnify
Morgan Stanley and its affiliates, their respective directors, officers, agents
and employees and each person, if any, controlling Morgan Stanley or any of its
affiliates against possible liabilities and expenses, including possible
liabilities under the federal securities laws, related to or arising out of
Morgan Stanley's engagement.
96
<PAGE> 103
The full text of Morgan Stanley's presentations to the board of directors
of Seagate on March 22, 2000, March 29, 2000 and August 25, 2000 has been
included as exhibit (c)(1), (c)(2) and (c)(3), respectively, to the Schedule
13E-3 filed by Seagate, VERITAS and Suez Acquisition Company in connection with
the leveraged buyout and the merger and the foregoing summary is qualified by
reference to those exhibits.
INTERESTS OF DIRECTORS AND OTHER EXECUTIVE OFFICERS OF SEAGATE IN THE
LEVERAGED BUYOUT AND THE MERGER
In considering the recommendations of Seagate's board of directors,
stockholders of Seagate should be aware that Mr. Luczo and other members of
Seagate's senior management team have certain interests in the leveraged buyout
and the merger that are different from, or in addition to, the interests of
Seagate's stockholders generally and which create potential conflicts of
interest. In addition, certain of the directors and officers of Seagate will
receive benefits in connection with the leveraged buyout and the merger that are
not available to other Seagate stockholders. These interests and benefits
include the following:
Participation on Boards of Directors
Currently, Stephen Luczo, the Chief Executive Officer of Seagate, is a
member of the board of directors of Seagate and VERITAS. Mr. Luczo is a director
of VERITAS by virtue of the stockholder agreement described in more detail under
"-- Other Material Contracts and Agreements Between Seagate and
VERITAS -- Stockholder Agreement" beginning on page 120 of this document.
Mr. Luczo will also be joining the board of directors of Suez Acquisition
Company following the closing of the leveraged buyout and the merger.
Employment Agreements
Suez Acquisition Company and each of Messrs. Luczo, Watkins, Waite, Porter,
Pope, Mulvaney and other senior executives of Seagate have agreed that they will
enter into employment agreements to be effective at the completion of the merger
in a form to be mutually agreed upon. Each of the employment agreements will
have a three-year term, subject to automatic successive one year renewals
thereafter.
Under the employment agreements, Mr. Luczo will serve as Chief Executive
Officer, Mr. Watkins will serve as President and Chief Operating Officer, Mr.
Waite will serve as Executive Vice President and Chief Administrative Officer,
Mr. Porter will serve as Executive Vice President and Chief Technical Officer,
Mr. Pope will serve as Executive Vice President and Chief Financial Officer and
Mr. Mulvaney will serve as a Senior Vice President of Suez Acquisition Company.
97
<PAGE> 104
Set forth below is a chart showing such executives' base salaries and
bonuses for attaining specified target performance goals after the leveraged
buyout and the merger. An executive may elect to defer the payment of all or a
portion of his bonus.
------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXECUTIVE BASE SALARY TARGET BONUS
----------------------------
<S> <C> <C>
Stephen J. Luczo $1,000,000 125% of Base Salary
----------------------------
William D. Watkins $ 850,000 125% of Base Salary
----------------------------
Donald L. Waite $ 500,000 100% of Base Salary
----------------------------
Townsend H. Porter $ 500,000 100% of Base Salary
----------------------------
Charles C. Pope $ 550,000 100% of Base Salary
----------------------------
Thomas F. Mulvaney $ 350,000 80% of Base Salary
----------------------------
</TABLE>
The executives also will be entitled to participate in employee benefit
programs comparable, in the aggregate, to those employee benefit programs made
available to senior executives of Seagate immediately prior to the effective
time of the transactions.
Under the employment agreements, in the event an executive's employment is
terminated by Suez Acquisition Company without "Cause" or by the executive with
"Good Reason" (as each such term will be defined in the employment agreements),
such executive will receive, subject to compliance with the restrictive
covenants described below, (i) continued payment of base salary and target
bonus, and (ii) continued participation in Suez Acquisition Company's health,
dental and life insurance programs, for one year following such termination of
employment (two years in the case of Messrs. Luczo and Watkins). However, if the
executive's employment is terminated by Suez Acquisition Company without Cause
or by the executive for Good Reason within two years following the effective
time of the transactions, the executive will be entitled to severance benefits
under his or her management retention agreement (as described below).
Under the employment agreements, the executives will be subject to
customary confidentiality and nondisclosure covenants and a
noncompete/nonsolicitation covenant during the term of employment and for the
period in which the employee receives severance following the executive's
termination of employment.
The employment agreements will also contain other customary provisions.
Management Retention Agreements
Seagate has entered into management retention agreements with a number of
its key executive officers. The management retention agreements provide that,
upon a change of control, the executive will be entitled to (1) a lump sum
payment equal to two (three in the case of Messrs. Luczo and Watkins) times the
sum of the executive's (a) base salary and (b) the highest annual bonus paid
within the last three fiscal years, (2) accelerated vesting of stock options and
restricted shares (as modified below), (3) a pro rata portion of the executive's
target bonus for the year of termination, and (4) continued participation in
health, dental and life insurance programs of Seagate or Suez Acquisition
Company. In addition, the management retention agreements of Messrs. Luczo,
Watkins, Waite, Porter, Pope and Mulvaney further provide that, in the event the
severance payments are subject to excise tax under Section 4999 of the Internal
Revenue Code of 1986, as amended, Suez Acquisition Company will provide such
executives an additional payment sufficient to pay the excise taxes and all
related excise and income taxes on such additional payment.
98
<PAGE> 105
As of the effective time of the merger, Suez Acquisition Company will
assume all obligations and liabilities under the management retention
agreements. In consideration for these assumptions, Messrs. Luczo, Watkins,
Waite, Porter, Pope, Mulvaney and several other executives of Seagate agreed to
the following modifications of their management retention agreements: (1) the
closing of the transactions will be deemed to be a "Change of Control" for
purposes of the management retention agreements; provided, that no further
corporate transactions will constitute a Change of Control; (2) the transactions
will not constitute a termination of employment for purposes of the management
retention agreements; (3) the definition of Good Reason was modified; and (4)
the provisions relating to the accelerated vesting of stock options and
restricted shares will only apply to stock options and restricted shares granted
to Messrs. Luczo, Watkins, Waite, Porter, Pope and Mulvaney in substitution for
unvested stock options to acquire Seagate common stock and restricted shares of
Seagate (as described below).
Equity Rollover
As of the record date for the Seagate special meeting, Messrs. Luczo,
Watkins, Waite, Porter, Pope and Mulvaney owned an aggregate of approximately
496,000 shares of Seagate's outstanding common stock and held stock options to
purchase an aggregate of approximately 1,373,000 shares of Seagate common stock.
Messrs. Luczo, Watkins, Waite, Porter, Pope, Mulvaney and certain other
executives of Seagate have agreed to convert restricted shares of Seagate common
stock and unvested stock options to purchase shares of Seagate common stock with
an aggregate value (as defined below) of between $150 million and $250 million
into deferred compensation with an aggregate value of between $150 million and
$250 million and equity in the entity which will hold Seagate's operating assets
following completion of the leveraged buyout representing the right to future
appreciation of the entity. For purposes of this paragraph, "Value" means (1)
with respect to restricted stock, the fair market value of Seagate common stock
times the number of shares of restricted stock, and (2) with respect to stock
options, the excess of (x) the fair market value per share of Seagate common
stock, times the number of shares of Seagate common stock subject to the stock
option, over (y) the aggregate exercise price of the stock option.
A significant number of shares of Seagate common stock and stock options to
purchase shares of Seagate common stock held by Messrs. Luczo, Watkins, Waite,
Porter, Pope, Mulvaney and other executives of Seagate will not be exchanged for
equity in the entity which will hold Seagate's operating assets following
completion of the leveraged buyout, but will be converted in the merger into the
right to receive aggregate consideration of approximately $223 million, based
upon (1) the closing share price of VERITAS, Gadzoox Networks and Lernout &
Hauspie on October 11, 2000, (2) 241.1 million shares of Seagate common stock
outstanding as of October 11, 2000, calculated on a pro forma basis assuming the
net exercise of all outstanding in-the-money stock options (other than certain
stock options to be converted into Suez Acquisition Company stock options) and
rights under the Seagate employee stock purchase plan, (3) the estimated cash
balance of Seagate on October 11, 2000, and (4) other transaction related items.
The aggregate value of the restricted stock and stock options held by Messrs.
Luczo, Watkins, Waite, Porter, Pope and Mulvaney to be converted into deferred
compensation and equity in the entity which will hold Seagate's operating assets
following completion of the leveraged buyout, and the amount of consideration to
be received by each of Messrs. Luczo, Watkins, Waite, Porter, Pope and Mulvaney
in connection with the merger, is set forth below. All such information is
estimated and subject to change prior to
99
<PAGE> 106
the closing of the leveraged buyout and the merger. In addition, the following
amounts do not give effect to the distribution of approximately $0.21 per share
that will be paid to Seagate stockholders following court approval of the
settlement of existing class action litigation and dismissal with prejudice of
the underlying complaints in this litigation and related lawsuits pending in
California.
<TABLE>
<CAPTION>
CONSIDERATION TO BE CONSIDERATION TO BE
RECEIVED IN MERGER RECEIVED IN MERGER
AGGREGATE VALUE OF RELATED TO STOCK RELATED TO COMMON
SENIOR MANAGER CONVERTED AMOUNT(1) OPTIONS STOCK OWNED
-------------- -------------------- ------------------- -------------------
<S> <C> <C> <C>
Stephen J. Luczo.......... $22,778,535 $65,148,850 $22,566,344
William D. Watkins........ $11,972,568 $32,767,010 $ 5,414,707
Donald L. Waite........... $ 9,578,315 $22,040,319 $11,577,546
Townsend H. Porter........ $ 7,044,831 $18,350,619 $ 7,044,831
Thomas F. Mulvaney........ $ 7,574,192 $16,380,540 $ 3,155,285
Charles C. Pope........... $ 6,726,431 $15,879,003 $ 2,943,922
</TABLE>
-------------------------
(1) Amounts reflect aggregate amounts to be received in respect of the
conversion of Seagate common stock in connection with the merger but do not
reflect the actual gain realized because the cost basis in such shares of
Seagate common stock has not been deducted from amounts shown.
Following the leveraged buyout and the merger, but without giving effect to
the grant of additional stock options described in the following paragraph, it
is expected that Messrs. Luczo, Watkins, Waite, Porter, Pope and Mulvaney will
own, in the aggregate, shares of common stock in the entity which will hold
Seagate's operating assets following the leveraged buyout, representing
approximately 5.22% of that entity's outstanding common stock calculated on a
fully-diluted basis, and stock options representing approximately 2.54% of the
common stock of that entity calculated on a fully-diluted basis.
Messrs. Luczo, Watkins, Waite, Porter, Pope, Mulvaney and some other
executives of Seagate will be entitled to receive, promptly following the
effective time of the merger, additional stock options to purchase equity in the
entity which will hold Seagate's operating assets following the completion of
the leveraged buyout. Each such additional stock option will have an exercise
price equal to the fair market value of the shares. The additional options will
become exercisable with respect to 25% of the shares on the first anniversary of
the date of grant and with respect to 1/48 of the shares each month thereafter,
subject to such executive's continued employment with Suez Acquisition Company
or any of its consolidated subsidiaries.
In considering the leveraged buyout and the merger, the Seagate board of
directors took into account the fact that the executives mentioned above would
receive equity interests in Seagate's operating assets in exchange for a portion
of their equity interests in Seagate.
Stock Option Payments
The merger agreement provides that, except for the portion of the options
rolled over by executives of Seagate, each holder of an outstanding option to
purchase Seagate common stock will have their option fully vested and
automatically exercised through a "net exercise" immediately prior to the
effective time of the merger. Upon the automatic exercise, each optionee will
receive the per share merger consideration received by the stockholders of
Seagate for the shares the optionee receives from the "net exercise." The
100
<PAGE> 107
"net exercise" does not require any payment to Seagate for the exercise price of
the option or the tax withholding required upon exercise. Instead, Seagate and
VERITAS will deduct from the total number of Seagate shares otherwise issuable
to an optionholder in connection with the net exercise a number of shares
derived by dividing the sum of the aggregate exercise price and tax withholding
by the average closing price of a share of Seagate common stock for the five
consecutive trading days ending two trading days immediately preceding the
closing of the merger.
The directors and executive officers of Seagate who own stock options in
Seagate immediately prior to the merger will receive the consideration described
above in the merger in exchange for all of their Seagate stock options other
than those converted by certain executives of Seagate into stock options of the
entity which will hold Seagate's operating assets, as described above. As of
October 11, 2000, there were stock options outstanding to purchase an aggregate
of 30.9 million shares of Seagate's common stock at a weighted average exercise
price of $25.96 per share.
The following table sets forth information with respect to the stock
options held, as of October 11, 2000, by the directors and certain members of
Seagate's senior management team who will participate in the ownership of the
entity which will hold Seagate's operating assets, which will not be converted
into stock options of that entity and for which consideration will be received
in connection with the merger, and with respect to the proceeds expected to be
received in respect of such stock options in connection with the merger. All of
this information is estimated and subject to change prior to the closing of the
leveraged buyout and the merger.
<TABLE>
<CAPTION>
SHARES UNDERLYING VALUE OF CONSIDERATION
NAME OF OPTION HOLDER OPTIONS TO BE RECEIVED($)(1)
--------------------- ----------------- ----------------------
<S> <C> <C>
Officers:
Stephen J. Luczo (Director)............... 1,411,250 $65,148,850
William D. Watkins........................ 734,384 $32,767,010
Donald L. Waite........................... 485,000 $22,040,319
Townsend H. Porter........................ 420,000 $18,350,619
Charles C. Pope........................... 356,875 $15,879,003
Thomas F. Mulvaney........................ 381,961 $16,380,540
Directors:
Lawrence Perlman.......................... 298,742 $12,567,226
Gary B. Filler............................ 238,359 $10,055,801
Kenneth E. Haughton....................... 104,574 $ 4,076,393
Robert A. Kleist.......................... 104,574 $ 4,076,393
Laurel L. Wilkening....................... 98,991 $ 3,894,596
Thomas P. Stafford........................ 100,608 $ 3,918,070
</TABLE>
-------------------------
(1) Based upon (i) the closing share prices of VERITAS, Gadzoox Networks and
Lernout & Hauspie on October 11, 2000, (ii) 241.1 million shares of Seagate
common stock outstanding as of October 11, 2000, calculated on a pro forma
basis assuming the net exercise of all outstanding stock options (other than
certain stock options to be converted into stock options of the entity which
will hold Seagate's operating assets) and rights under the Seagate employee
stock purchase plan, (iii) the estimated cash balance of Seagate on October
11, 2000, and (iv) other transaction related items. Also does not give
effect to the distribution of approximately $0.21 per share that will be
paid to Seagate stockholders following court approval of the
101
<PAGE> 108
settlement of existing class action litigation and dismissal with prejudice
of the underlying complaints in this litigation and related lawsuits pending
in California.
Director and Officer Indemnification and Insurance
Under the terms of the stock purchase agreement, Suez Acquisition Company
has agreed to fulfill (either directly or through one or more of the
subsidiaries it acquires from Seagate) the indemnification obligations of
Seagate and any of the foregoing subsidiaries of Seagate to their respective
directors and officers under Seagate's charter documents and any indemnification
agreements between Seagate or any of the foregoing subsidiaries of Seagate and
their respective directors and officers. In addition, Suez Acquisition Company
has agreed to include exculpation and indemnification clauses in its charter
documents that are at least as favorable to the covered persons as the
indemnification and exculpation clauses in Seagate's certificate of
incorporation and bylaws as in effect on the date of the stock purchase
agreement. Moreover, Suez Acquisition Company has agreed to use its best efforts
to maintain the directors' and officers' liability insurance policies currently
maintained by Seagate for a period of six years following the closing of the
leveraged buyout, provided that Suez Acquisition Company will not be required to
expend more than 150% of the annual premium currently paid for such policy in
order to maintain the policy during this six year period.
The merger agreement provides that VERITAS will fulfill and honor in all
respects the obligations of Seagate under any indemnification agreements between
Seagate and any of its directors and officers, as in effect prior to the date of
the merger agreement, but only to the extent that the obligations under such
indemnification agreements relate to approval and adoption of the merger. In
addition, the merger agreement provides that, for a period of six years after
the merger, VERITAS will cause Seagate to maintain the indemnification
obligations, and the exculpation, expense advancement and elimination of
liability provisions, contained in Seagate's certificate of incorporation and
bylaws immediately prior to the merger to the extent that such provisions apply
to the adoption and approval of the merger, and for a period of six years after
the merger, VERITAS will not permit Seagate to amend, repeal or otherwise modify
these provisions in a manner that adversely affects the rights of any directors,
officers, employees or agents of Seagate, except as otherwise required by
applicable law. The merger agreement further provides that VERITAS will use its
commercially reasonable efforts to maintain in effect, for a period of six years
following the merger, a policy of directors' and officers' liability insurance
for the benefit of the directors and officers of Seagate who are currently
covered under Seagate's directors' and officers' liability insurance on terms
that are comparable to those of Seagate's current directors' and officers'
insurance coverage.
Special Director Compensation
In connection with the leveraged buyout and the merger, in March of 2000
the board of directors of Seagate agreed to pay $100,000 to each of Messrs.
Perlman and Filler, the Co-Chairmen of the Seagate board of directors, as
compensation for their additional supervisory efforts in connection with the
leveraged buyout and the merger. In addition, at a board meeting held on October
10, 2000, the Seagate board of directors agreed to pay an additional $75,000 to
each of Messrs. Perlman and Filler, payable in three $25,000 monthly
installments commencing in October 2000, for ongoing supervisory efforts in
connection with the leveraged buyout and the merger. None of these payments are
contingent upon the closing of the leveraged buyout or merger. In addition
102
<PAGE> 109
Messrs. Perlman and Filler also receive a payment of $2,000 per week during the
pendency of the leveraged buyout and the merger.
CONSIDERATION OF THE MERGER AND THE LEVERAGED BUYOUT BY VERITAS
VERITAS' PURPOSES AND REASONS FOR THE MERGER
VERITAS' principal purposes and reasons for the merger are as follows:
- to increase the percentage ownership of VERITAS represented by each share
of VERITAS common stock outstanding immediately prior to the effective
time by effectively reducing the total number of outstanding shares of
VERITAS common stock;
- to increase liquidity of VERITAS common stock in the public trading
market;
- to eliminate the risk of downward pressure on VERITAS' stock price caused
by Seagate Software's current ownership of approximately 31.7% of the
outstanding shares of VERITAS common stock; and
- to avoid the possibility that a competitor or potential competitor of
VERITAS might seek to acquire Seagate and thereby acquire a 31.7%
ownership stake in VERITAS.
VERITAS seeks to achieve these purposes by merging an acquisition
subsidiary established by it with and into Seagate. At the effective time of the
merger, each share of Seagate common stock outstanding immediately prior to the
effective time (other than shares to be canceled as described under "The Merger
Agreement and the Merger -- Effects of the Merger" beginning on page 138 of this
document) will be converted into the right to receive the merger consideration.
As a result of the merger, Seagate will become a wholly owned subsidiary of
VERITAS.
Seagate Software, a wholly owned subsidiary of Seagate, currently holds
128,059,966 shares of VERITAS common stock. In the merger, VERITAS will
indirectly acquire these 128,059,966 shares by acquiring Seagate and will issue
109,330,300 new shares of its common stock as part of the merger consideration
in exchange for these 128,059,966 shares. The exact total number of new shares
of VERITAS common stock to be issued in the merger, however, will depend on
variables described under "The Merger Agreement and the Merger -- The Merger
Consideration" beginning on page 140 of this document, and will not be
determined until two days prior to the completion of the merger. Based on the
closing price on October 11, 2000 of VERITAS common stock and the common stock
of Gadzoox Networks and Lernout & Hauspie on the Nasdaq National Market, VERITAS
would expect to issue approximately 111.505 million or 113.316 million new
shares of its common stock, respectively, in the merger, assuming that VERITAS
elected to reduce the cash payable in connection with the merger by $250 million
or $500 million, respectively, and issue additional shares of VERITAS common
stock in place of this cash. Thus, following the merger there will be fewer
outstanding shares of VERITAS common stock held by public stockholders and,
therefore, each share that is outstanding and held by public stockholders will
represent a slightly higher percentage ownership of VERITAS. Similarly, the
proportional voting power of each outstanding share of VERITAS common stock held
by public stockholders will be slightly greater. Following the merger, the
VERITAS shares held by Seagate Software will be held as treasury shares and will
not be considered outstanding following the merger for quorum, voting and
financial presentation purposes, including determining earnings per share.
103
<PAGE> 110
It is possible, though unlikely, that VERITAS could end up having to issue
more than the 128,059,966 shares currently held by Seagate. However, this would
only happen if the market prices of Seagate's investment securities rose
significantly while the market price of VERITAS common stock fell significantly.
Although VERITAS would have to offer more shares than anticipated in this
unlikely circumstance, VERITAS would nonetheless own the appreciated investment
securities that caused VERITAS to issue more shares.
In order for the merger to qualify as a "reorganization" under Section
368(a) of the Internal Revenue Code, certain requirements must be satisfied. One
of these requirements is that VERITAS acquire at least 80% of the Seagate common
stock for VERITAS common stock. If the market price of VERITAS common stock
falls significantly, it is possible that a decision by VERITAS not to elect to
reduce the cash consideration payable in connection with the merger could result
in the merger failing to satisfy this 80% requirement.
The merger will eliminate the potential of downward pressure on VERITAS'
stock price caused by having a single 31.7% stockholder. This risk of downward
pressure on the price of a company's stock is caused by the possibility that one
or more holders may sell a large number of shares at one time or within a short
period of time. VERITAS believes it is possible that removing this risk caused
by Seagate's large ownership position could have a positive effect on the price
of VERITAS common stock in the public market.
VERITAS also believes that the merger may enhance the liquidity of VERITAS
common stock in the public trading market by increasing the number of beneficial
owners of VERITAS common stock immediately after the merger as compared to the
number immediately prior to the merger. In the merger, VERITAS will issue new
shares of its common stock to all of the stockholders of Seagate entitled to
receive the merger consideration. As of the record date for the Seagate special
meeting, there were approximately 5,500 record holders of Seagate common stock
representing approximately 107,000 beneficial owners. In addition, the VERITAS
shares issued to Seagate stockholders (other than Seagate stockholders that are
affiliates of Seagate or VERITAS) will be freely tradable, as compared to the
VERITAS shares held by Seagate Software, which are subject to contractual resale
restrictions as well as restrictions under applicable securities laws.
VERITAS is proposing the merger at this time because the merger is part of
a series of related transactions that include the leveraged buyout and the other
transactions contemplated under the stock purchase agreement. VERITAS has no
other reason for proposing the merger at this particular time (as opposed to any
other time) and is not aware of any material development affecting the future
value of the Seagate common stock that is not described in this document.
VERITAS is not engaging in the leveraged buyout and did not participate in
conceiving or structuring that transaction. The merger was structured in order
to pass through to the Seagate stockholders the consideration paid by Suez
Acquisition Company to Seagate in the leveraged buyout immediately prior to
consummation of the merger without any economic interest in this consideration
on the part of VERITAS. The provisions of the merger agreement preventing
amendments to the stock purchase agreement without VERITAS' consent were
negotiated by VERITAS in order to ensure that the terms of that agreement could
not be altered in a manner that would effectively limit VERITAS' rights or
increase VERITAS' obligations under the merger agreement.
104
<PAGE> 111
RECOMMENDATION OF THE BOARD OF DIRECTORS OF VERITAS
On March 28, 2000, the VERITAS board of directors (other than Messrs. Luczo
and Kerfoot, who did not participate in the deliberations) (1) unanimously
determined that the terms of the merger agreement and the merger are advisable
and in the best interests of the VERITAS stockholders, (2) unanimously approved
the merger agreement and authorized the execution and delivery of the merger
agreement by VERITAS, and (3) unanimously recommended that the stockholders of
VERITAS approve the issuance of new shares of VERITAS common stock in connection
with the merger.
In reaching its determinations referred to above, the VERITAS board of
directors considered the factors listed below. The following discussion of the
factors considered by the VERITAS board of directors is not intended to be
exhaustive but summarizes all material factors considered. The VERITAS board did
not assign any relative or specific weights to the following factors, and
individual members of the board may have given differing weights to differing
factors and may have viewed certain factors more positively or negatively than
others. Throughout its deliberations, the board received the advice of its
financial and legal advisors, who are experienced in advising on transactions
similar to the merger. The positive factors considered by the VERITAS board are
as follows:
- As described above, the merger will slightly increase the percentage
ownership of VERITAS represented by each share of VERITAS common stock
outstanding, as compared with such percentage immediately prior to the
merger.
- The merger may enhance the liquidity of VERITAS common stock in the
public trading market by increasing the number of beneficial owners of
VERITAS common stock immediately after the merger as compared to the
number immediately prior to the merger. Also, the VERITAS shares issued
to Seagate stockholders (other than Seagate stockholders that are
affiliates of Seagate or VERITAS) will be freely tradable, as compared to
the VERITAS shares held by Seagate Software, which are subject to
contractual resale restrictions as well as restrictions under applicable
securities laws.
- The merger will eliminate potential downward pressure on VERITAS' stock
price caused by Seagate Software's approximately 31.7% ownership of
VERITAS' outstanding common stock.
- If the leveraged buyout and the merger are not consummated, there is a
risk that a competitor or potential competitor of VERITAS might
subsequently seek to acquire Seagate and thereby acquire a 31.7%
ownership stake in VERITAS.
- Under the terms of the merger, VERITAS has the option of issuing
additional shares of VERITAS common stock, in lieu of distributing $250
million or $500 million of cash to Seagate's stockholders in the merger.
- In the merger, VERITAS is indirectly acquiring securities of Gadzoox
Networks and Lernout & Hauspie (except to the extent that Seagate sells
all or a portion of these shares prior to the effective time of the
merger). The values assigned to these shares in the merger agreement
represent a substantial discount from the current market prices of these
securities. The discounts reflect both the expected capital gains taxes
that will be owed on the sale of these shares and the discount to current
market price likely to be incurred if VERITAS sells such shares (since
they represent substantial percentages of the respective outstanding
shares of their respective companies and are subject to restrictions on
resale under applicable
105
<PAGE> 112
securities laws and, in some instances, contractual resale restrictions).
VERITAS ultimately may be able to sell these shares for a higher price
than the prices determined under the merger agreement, although there can
be no assurance that VERITAS will be able to do so, or that VERITAS will
be able to sell these shares for as much as the prices determined under
the merger agreement.
- Credit Suisse First Boston, VERITAS' financial advisor, delivered its
opinion orally on March 28, 2000, and subsequently in writing as of March
29, 2000, to the effect that, as of such date, and subject to the matters
stated in the opinion, the exchange ratio for the stock portion of the
merger consideration was fair to VERITAS, from a financial point of view.
- Because Suez Acquisition Company is backed by prominent venture capital
firms and has received written financing commitments with respect to the
leveraged buyout, as described in "The Stock Purchase Agreement and the
Leveraged Buyout -- Financing of the Purchase Price," it appears
reasonably likely that the leveraged buyout, which is a condition to the
merger, can be completed.
- The VERITAS board of directors and its financial advisor conducted arm's
length negotiations with Seagate and Suez Acquisition Company and their
respective financial advisors regarding the terms of the merger and the
merger consideration, and the board believes that the terms of the merger
consideration are as favorable to VERITAS as could reasonably be attained
under the circumstances. (Messrs. Luczo and Kerfoot did not participate
in these negotiations on behalf of VERITAS.)
- Suez Acquisition Company and its subsidiaries have agreed to indemnify
VERITAS and Seagate and their subsidiaries for substantially all
liabilities relating to or arising from the operation of Seagate's
operating businesses prior to the merger, as well as substantially all
liabilities arising from Suez Acquisition Company's operation of these
businesses from and after the merger.
The VERITAS board also identified and considered a number of potentially
negative factors in its deliberations concerning the merger, including the
following:
- the fact that Suez Acquisition Company will be highly leveraged and could
become unable to satisfy its indemnity obligations under the
indemnification agreement;
- the possibility that the merger may not be consummated because of a
failure by Seagate to obtain the requisite vote of its stockholders in
favor of the leveraged buyout and the merger;
- the possibility that lawsuits, including securities class actions
lawsuits, would be filed seeking to enjoin the leveraged buyout and the
merger; and
- the possibility that the merger may not be consummated, even if approved
by VERITAS' and Seagate's stockholders.
The board of directors of VERITAS concluded, however, that on balance the
potential benefits of the merger to VERITAS and its stockholders outweighed the
risks associated with the merger.
On August 18, 2000, the VERITAS board of directors (other than Messrs.
Luczo and Kerfoot, who did not participate in the deliberations) determined that
the amendments to the merger agreement contained in the amendment agreement were
appropriate and in the
106
<PAGE> 113
best interests of the VERITAS stockholders and that such amendments did not
affect in any material respect the considerations described above.
FAIRNESS OF THE MERGER AND THE LEVERAGED BUYOUT TO SEAGATE STOCKHOLDERS
Because Seagate currently owns approximately 31.7% of the outstanding
shares of VERITAS' common stock and because two executive officers of Seagate
are members of VERITAS' board of directors, VERITAS may be deemed to be an
affiliate of Seagate for purposes of Rule 13e-3 under the Securities Exchange
Act of 1934. As a result, VERITAS may be required, under Rule 13e-3, to state
whether it reasonably believes that the merger, by itself, and the merger and
the leveraged buyout, as a combined transaction, are fair to unaffiliated
stockholders of Seagate (i.e., the holders of Seagate common stock other than
directors and executive officers of Seagate).
VERITAS AND THE BOARD OF DIRECTORS OF VERITAS ARE MAKING THE STATEMENTS
INCLUDED IN THIS SUB-SECTION SOLELY FOR THE PURPOSES OF COMPLYING WITH THE
REQUIREMENTS OF RULE 13e-3 AND RELATED RULES UNDER THE EXCHANGE ACT. VERITAS AND
THE BOARD OF DIRECTORS OF VERITAS HEREBY EXPRESSLY DISCLAIM ANY FIDUCIARY
RELATIONSHIP OR OBLIGATION TO THE STOCKHOLDERS OF SEAGATE (OTHER THAN
OBLIGATIONS UNDER THE SECURITIES ACT OF 1933 AND THE RULES AND REGULATIONS
PROMULGATED THEREUNDER IN CONNECTION WITH THE OFFER AND SALE OF VERITAS COMMON
STOCK IN CONNECTION WITH THE MERGER).
The board of directors of VERITAS (other than Messrs. Luczo and Kerfoot,
who did not participate in the deliberations) has concluded that the merger, by
itself (including the merger consideration, which will be determined as
described in "The Merger Agreement and the Merger -- The Merger Consideration"
beginning on page 140 of this document), and the merger and the leveraged
buyout, as a combined transaction, are fair to unaffiliated Seagate
stockholders. The VERITAS board's conclusion is based on the following factors:
- the fact that members of the Seagate board of directors, with the
exception of Mr. Luczo, who did not participate in the negotiations or
deliberations on behalf of Seagate, consisted solely of directors
unaffiliated with Suez Acquisition Company, VERITAS or the members of
Seagate's senior management team who will participate in the ownership of
Suez Acquisition Company;
- the fact that the Seagate board of directors retained and was advised by
legal counsel experienced in advising on transactions similar to the
leveraged buyout and the merger;
- the fact that the Seagate board of directors retained and was advised by
Morgan Stanley & Co. as its financial advisor to assist it in evaluating
the leveraged buyout and the merger;
- the fact that the Seagate board of directors has stated that it engaged
in numerous and lengthy deliberations to evaluate the leveraged buyout
and the merger, alternatives to the leveraged buyout and the merger, and
engaged in a lengthy negotiating process that resulted in the terms of
the merger and leveraged buyout, as described above in "-- Background of
the Leveraged Buyout and the Merger" beginning on page 70 of this
document;
- the fact that the leveraged buyout and the merger, and the terms of the
stock purchase agreement and the merger agreement, were unanimously
approved and recommended by the Seagate board of directors (other than
Mr. Luczo, who did not participate in these deliberations);
107
<PAGE> 114
- the fact that both the stock purchase agreement and the merger agreement
are subject to the approval of the holders of at least a majority of
Seagate's outstanding common stock, Seagate stockholders will have
dissenters rights in the merger and that the senior members of Seagate's
management team (consisting of officers at or above the level of senior
vice president) who will participate in the ownership of Suez Acquisition
Company own, collectively, less than one percent of Seagate's outstanding
common stock and therefore cannot exercise voting power sufficient to
cause approval of the transactions;
- the fact that under both the stock purchase agreement and the merger
agreement the Seagate board of directors is permitted to negotiate with
third parties who submit business transaction proposals which are
superior to those contemplated under the relevant agreement and, if the
Seagate board of directors so determines, to terminate that agreement,
upon payment of a termination fee, in order to enter into a more
favorable transaction;
- the fact that Seagate is not required to complete the leveraged buyout
unless the merger closes at the same time as the leveraged buyout, and
vice versa;
- the fact that the Seagate board of directors has stated its belief that
the leveraged buyout and the merger would receive wide publicity and
accordingly any third party able and willing to make a superior proposal
would be aware of the transactions, and that this publicity, when
considered with the fact that the Seagate board of directors could
terminate the relevant agreement, upon payment of a termination fee, in
order to accept a superior business transaction proposal, does not unduly
restrict the ability of the Seagate board of directors to respond to any
such proposal;
- the fact that the process undertaken by the Seagate board of directors
resulted in receipt of an opinion of Morgan Stanley & Co. on March 29,
2000, which opinion was updated and reissued on August 29, 2000, to the
effect that the merger consideration to be received by holders of Seagate
common stock in the merger (which includes, among other things, net
amounts received by Seagate in the leveraged buyout) was fair to the
stockholders of Seagate from a financial point of view to those holders;
and
- the fact that the price and terms and conditions of the stock purchase
agreement and the merger agreement were the result of arm's-length
negotiations between the Seagate board of directors, Suez Acquisition
Company and VERITAS and their respective financial advisors.
VERITAS has not assigned any relative or specific weights to these factors.
However, VERITAS believes that each of the factors is material to its
determination that the transactions are fair, and has characterized each of the
factors as positive.
VERITAS also has considered the fact that the leveraged buyout, the stock
purchase agreement, the merger and the merger agreement are not conditioned on
the approval of a majority of the unaffiliated Seagate stockholders, and that
some of Seagate's directors and officers have entered into employment agreements
with Suez Acquisition Company and have other interests that are different from,
or in addition to, the interests of the unaffiliated Seagate stockholders, as
described under "-- Consideration of the Leveraged Buyout and the Merger by
Seagate -- Interests of Directors and Other Executive Officers of Seagate in the
Leveraged Buyout and the Merger" beginning on page 97 of this document. While
the approval of a majority of the Seagate common stock held by unaffiliated
Seagate stockholders may have served as an indication of the views of such
108
<PAGE> 115
unaffiliated stockholders as to the fairness of the transactions, Seagate, Suez
Acquisition Company and VERITAS did not structure the leveraged buyout or the
merger to require the approval of a majority of the Seagate common stock held by
the unaffiliated Seagate stockholders because such approvals are not required
under applicable Delaware law. VERITAS believes that the fairness of the
transactions was established by the factors set forth above.
OPINION OF VERITAS' FINANCIAL ADVISOR
On March 28, 2000, Credit Suisse First Boston rendered its oral opinion,
which it subsequently confirmed in writing as of March 29, 2000, that, as of
that date, based upon and subject to the various considerations set forth in the
Credit Suisse First Boston opinion, the exchange ratio for the stock portion of
the merger consideration was fair to VERITAS from a financial point of view. The
merger consideration was determined through negotiations between the managements
of VERITAS and the Seagate board of directors. Credit Suisse First Boston did
not recommend that any specific merger consideration constituted the appropriate
consideration for the merger.
The full text of the Credit Suisse First Boston opinion sets forth, among
other things, assumptions made, procedures followed, matters considered and
limitations on the scope of the review undertaken by Credit Suisse First Boston
in rendering its opinion. The full text of the opinion is attached as Annex H to
this document and is incorporated by reference in its entirety. VERITAS
stockholders are urged to, and should, read the Credit Suisse First Boston
opinion carefully and in its entirety. The Credit Suisse First Boston opinion
addresses only the fairness of the stock portion exchange ratio to VERITAS from
a financial point of view as of the date of the Credit Suisse First Boston
opinion, and does not constitute a recommendation to any stockholder as to how
such stockholder should vote at the VERITAS special meeting. The summary of the
Credit Suisse First Boston opinion in this document is qualified by reference to
the full text of the Credit Suisse First Boston opinion.
In arriving at its opinion, Credit Suisse First Boston reviewed certain
publicly available business and financial information relating to VERITAS and
Seagate, as well as the merger agreement and the stock purchase agreement.
Credit Suisse First Boston also reviewed certain other information provided to
it or discussed with it by VERITAS, and met with Suez Acquisition Company and
the management of VERITAS and advisors to VERITAS and Suez Acquisition Company
to discuss the business and prospects of VERITAS and Seagate. Credit Suisse
First Boston also considered certain financial and stock market data of VERITAS
and Seagate, and Credit Suisse First Boston considered the pro forma effect of
the merger on VERITAS. Credit Suisse First Boston also considered such other
information, financial studies, analyses and investigations and financial,
economic and market criteria which it deemed relevant.
In connection with its review, Credit Suisse First Boston did not assume
any responsibility for independent verification of any of the foregoing
information and relied on its being complete and accurate in all material
respects. With respect to financial forecasts for Seagate and VERITAS, Credit
Suisse First Boston reviewed and discussed with the management of VERITAS
publicly available financial forecasts relating to Seagate and VERITAS and
assumed that such forecasts represent reasonable estimates and judgments as to
the future financial performance of Seagate and VERITAS, respectively. VERITAS
also informed Credit Suisse First Boston of its belief that the merger should,
and Credit Suisse First Boston assumed that the merger would, be treated as a
tax-free reorganization for federal income tax purposes. In addition, Credit
Suisse First Boston did not make an
109
<PAGE> 116
independent evaluation or appraisal of the assets or liabilities (absolute,
accrued, contingent or otherwise) of Seagate, nor was Credit Suisse First Boston
furnished with any such evaluations or appraisals. The Credit Suisse First
Boston opinion is necessarily based upon financial, economic, market and other
conditions as they existed and could be evaluated on the date of the Credit
Suisse First Boston opinion. Credit Suisse First Boston did not express any
opinion as to what the value of the VERITAS common stock actually will be when
issued to Seagate's stockholders pursuant to the merger or the prices at which
shares of VERITAS common stock will trade subsequent to the merger.
In preparing the Credit Suisse First Boston opinion, Credit Suisse First
Boston performed a variety of financial and comparative analyses. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. Credit Suisse First
Boston believes that its analyses must be considered as a whole and that
selecting portions of its analyses and of the factors considered by it, without
considering all analyses and factors, could create a misleading view of the
processes underlying the Credit Suisse First Boston opinion. In addition, Credit
Suisse First Boston may have given various analyses more or less weight than
other analyses, and may have deemed various assumptions more or less probable
than other assumptions, so that the range of valuation resulting from any
particular analysis described below should not be taken to be Credit Suisse
First Boston's view of the actual value of VERITAS or Seagate. In performing its
analyses, Credit Suisse First Boston made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of VERITAS or Seagate. The
analyses performed by Credit Suisse First Boston are not necessarily indicative
of actual values or actual future results, which may be significantly more or
less favorable than suggested by such analyses. In addition, analyses relating
to the value of businesses or assets do not purport to be appraisals or to
necessarily reflect the prices at which businesses or assets may actually be
sold. The analyses performed were prepared solely as part of Credit Suisse First
Boston's analysis of the fairness of the stock portion exchange ratio to VERITAS
from a financial point of view and were provided to the VERITAS board of
directors in connection with the delivery of the Credit Suisse First Boston
opinion.
The following is a summary of the material financial analyses performed by
Credit Suisse First Boston in connection with the preparation of its opinion,
and reviewed with the VERITAS board of directors at several meetings of the
VERITAS board of directors culminating in a meeting held on March 28, 2000.
Certain of the summaries of those financial analyses include information
presented in tabular format. In order to understand fully the material financial
analyses used by Credit Suisse First Boston, the tables should be read together
with the text of each summary. The tables alone do not constitute a complete
description of the material financial analyses.
Historical Stock Price Analysis
Credit Suisse First Boston analyzed the prices at which Seagate common
stock and VERITAS common stock traded from September 1, 1999 through March 22,
2000. Credit Suisse First Boston noted that VERITAS common stock had appreciated
from $27.44 a share on September 1, 1999 to $162.25 a share on March 22, 2000.
Credit Suisse First Boston also noted that Seagate common stock had appreciated
(albeit to a lesser degree than VERITAS common stock) over the same period.
110
<PAGE> 117
Consideration Analysis
Credit Suisse First Boston analyzed the aggregate number of shares of
VERITAS common stock that would be issued by VERITAS in the merger, based upon
certain assumptions including (i) the closing prices of VERITAS, Gadzoox
Networks, SanDisk Corporation and CVC, Inc. (which were subsequently converted
into shares of Veeco Instruments) common stock as of March 22, 2000, (ii) the
value of the Dragon Systems common stock (which was subsequently converted into
common stock of Lernout & Hauspie) and (iii) the amount of Seagate's cash
retained by VERITAS in connection with the merger between Seagate and VERITAS.
The following table summarizes the results of this analysis:
<TABLE>
<S> <C>
VERITAS shares attributable to VERITAS shares held by
Seagate
VERITAS shares assumed held by Seagate at closing........... 128,059,966
Multiplied by 0.853743...................................... 0.853743
Illustrative VERITAS shares issued.......................... 109,330,300
VERITAS shares attributable to Seagate's other equity
holdings
Estimated aggregate after-tax discounted market value....... $431.4 million
Divided by assumed VERITAS share price at closing........... $ 162.25(1)
Illustrative VERITAS shares issued.......................... 2,658,985
VERITAS shares attributable to the reduction by VERITAS of
the cash component of the consideration payable in the
merger(2)
Cash reduction.............................................. $ 500 million
Divided by assumed VERITAS share price ten days prior to
Seagate stockholder vote.................................. $ 162.25(1)
Illustrative VERITAS shares issued.......................... 3,081,664
Total illustrative VERITAS shares issued.................. 115,070,949
</TABLE>
-------------------------
(1) Closing price on March 22, 2000.
(2) Represents the reduction by VERITAS of the cash component of the
consideration payable in the merger subsequent to the consummation of the
leveraged buyout.
Based on the above, Credit Suisse First Boston noted that VERITAS would be
issuing in the merger approximately 10.1% fewer shares of VERITAS common stock
than the number of shares of VERITAS common stock held by Seagate as of March
22, 2000 while retaining $500 million in cash and a portfolio of other
securities.
Value Recapture Analysis
Credit Suisse First Boston noted that the merger would permit VERITAS to
"recapture" value. The value recapture would be attributable to the difference
between the value of the VERITAS shares to be issued in the merger and the value
of the securities and cash to be held by Seagate at the time of the merger.
The total value to be recaptured was calculated as the difference between
the value of the number of shares of VERITAS common stock to be issued in the
merger and the sum of the value of the VERITAS common stock assumed to be held
by Seagate at the time of the merger, the assumed after-tax value at closing,
not accounting for any liquidity discounts, of Seagate's equity holdings in
Gadzoox Networks, SanDisk Corporation, CVC,
111
<PAGE> 118
Inc. (which was subsequently converted into stock of Veeco Instruments) and
Dragon Systems (which was subsequently converted into stock of Lernout &
Hauspie) and the amount of cash to be retained by VERITAS in the merger. Based
upon the closing prices on March 22, 2000 plus an assumed value for Seagate's
equity holdings in Dragon Systems:
- the difference in the value of the illustrative 115,070,949 VERITAS
shares to be issued in the merger and the value of the 128,059,966
VERITAS shares held by Seagate would be approximately $2,107 million;
- the after-tax market value of Seagate's equity holdings in Gadzoox
Networks, SanDisk Corporation, CVC, Inc. (which was subsequently
converted into stock of Veeco Instruments) and Dragon Systems (which was
subsequently converted into stock of Lernout & Hauspie), not accounting
for any liquidity discounts, would be approximately $591 million; and
- assuming that Seagate retains $500 million in cash at closing of the
merger, the total value to be recaptured by VERITAS in the merger would
be approximately $3,198 million.
Credit Suisse First Boston analyzed the sensitivity of the total value to
be recaptured by VERITAS in the merger to changes in the assumed stock prices
for VERITAS and various assumed values for the stock of Gadzoox Networks,
SanDisk Corporation, CVC, Inc. (which was subsequently converted into stock of
Veeco Instruments) and Dragon Systems (which was subsequently converted into
stock of Lernout & Hauspie).
The following table sets forth the amount of the total value to recaptured
by VERITAS in the merger (in millions) for three different prices of VERITAS
common stock (reflected in the three columns in the table below captioned $120,
$162.25 -- the closing trading price on March 22, 2000, and $200) and for five
different aggregate discounted values for Seagate's equity holdings in Gadzoox
Networks, SanDisk Corporation, CVC, Inc. (which was subsequently converted into
stock of Veeco Instruments) and Dragon Systems (which was subsequently converted
into stock of Lernout & Hauspie) (reflected in the five rows in the table below
captioned $250, $300, $431.4 -- the aggregate discounted value based on the
closing prices on March 22, 2000, $500 and $600).
<TABLE>
<CAPTION>
ASSUMED VERITAS
ASSUMED DISCOUNTED SHARE PRICE
AFTER-TAX VALUE OF ------------------------------
EQUITY HOLDINGS $120 $162.25(1) $200
------------------ ------ ---------- ------
<S> <C> <C> <C>
$250............................................. $2,334 $3,125 $3,832
$300............................................. $2,354 $3,145 $3,852
$431.4(2)........................................ $2,407 $3,198 $3,905
$500............................................. $2,434 $3,226 $3,933
$600............................................. $2,474 $3,266 $3,973
</TABLE>
-------------------------
(1) Closing price of VERITAS common stock on March 22, 2000.
(2) Based on closing share prices of Gadzoox Networks, SanDisk Corporation and
CVC, Inc. (which was subsequently converted into shares of Veeco
Instruments) on March 22, 2000 and other assumptions.
The foregoing table shows that over such ranges of VERITAS share prices and
values for Seagate's other equity holdings the total value to be recaptured by
VERITAS in the merger would range from approximately $2,334 million to
approximately $3,973 million.
112
<PAGE> 119
The foregoing analysis calculates the values that VERITAS would realize if
VERITAS common stock and Seagate's other equity holdings had the values used in
the foregoing table. The foregoing analysis does not purport to constitute an
opinion as to the value of any of such securities or as to the price at which
any of such securities may be traded in the future or as to any amount of value
that VERITAS actually may realize from the merger.
Pro Forma Merger Analysis
Credit Suisse First Boston analyzed certain pro forma effects of the
merger, including, among other things, the impact of the merger on the estimated
revenues per share and earnings per share for VERITAS for the second half of
calendar year 2000 and for calendar year 2001. For purposes of this analysis,
Credit Suisse First Boston used the following publicly available estimates of
its research analyst for the future financial performance of VERITAS:
<TABLE>
<CAPTION>
SECOND HALF OF
CALENDAR YEAR 2000 CALENDAR YEAR 2001
------------------ ------------------
<S> <C> <C>
Revenues................................. $575.4 million $1,498.5 million
Weighted average shares outstanding...... 455.6 million 475.9 million
Earnings per share....................... $0.26 $0.64
</TABLE>
Using this information and assuming that approximately 13.0 million shares
of VERITAS common stock will be retired in the merger and other assumptions,
Credit Suisse First Boston calculated the resulting accretion/(dilution) to
VERITAS' revenues per share and earnings per share for the second half of
calendar year 2000 and calendar year 2001, as set forth in the following table:
<TABLE>
<CAPTION>
ACCRETION/(DILUTION)
----------------------------------------
SECOND HALF OF
CALENDAR YEAR 2000 CALENDAR YEAR 2001
------------------ ------------------
<S> <C> <C>
Revenues per share......................... 2.9% 2.8%
Earnings per share......................... 16.7% 13.5%
</TABLE>
As noted above, for purposes of this analysis, Credit Suisse First Boston
used publicly available estimates of a research analyst for projections of the
future financial performance of VERITAS. VERITAS's management did not prepare
these projections and it has not otherwise endorsed or confirmed these
projections. VERITAS does not as a matter of course publicly disclose
projections as to future revenues or earnings. VERITAS stockholders are
cautioned not to rely on these projections.
As described above, Credit Suisse First Boston's opinion and presentation
to the VERITAS board of directors was one of many factors taken into
consideration by the VERITAS board of directors in making its determination to
recommend the merger agreement and the transactions contemplated thereby.
Consequently, the analyses described above should not be viewed as determinative
of the opinion of the VERITAS board of directors or the management of VERITAS
with respect to the value of the assets to be acquired through a merger with
Seagate or whether the VERITAS board of directors would have been willing to
agree to a different stock portion exchange ratio.
The VERITAS board of directors retained Credit Suisse First Boston to act
as its financial advisor in connection with the merger. Credit Suisse First
Boston was selected by the VERITAS board of directors based on Credit Suisse
First Boston's qualifications,
113
<PAGE> 120
expertise and reputation, as well as its investment banking relationship and
familiarity with VERITAS. Credit Suisse First Boston is an internationally
recognized investment banking and advisory firm. Credit Suisse First Boston, as
part of its investment banking business, is continuously engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. In the past, Credit Suisse First
Boston has performed certain investment banking services for VERITAS and has
received customary fees for such services. During the past two years, Credit
Suisse First Boston and its affiliates have received an aggregate of
approximately $2 million in fees for such services. In the ordinary course of
its business, Credit Suisse First Boston and its affiliates may actively trade
the debt and equity securities of VERITAS and Seagate for its own account and
for the accounts of its customers and, accordingly, may at any time hold a long
or short position in such securities. Credit Suisse First Boston and certain of
its affiliates and their officers and employees have established investment
funds that have committed to invest (i) an aggregate of $20 million to acquire
beneficial ownership of limited partnership interests in Silver Lake Partners,
which is a limited partnership that has commitments from third party investors
to invest up to $2.3 billion in Silver Lake Partners, and (ii) an aggregate of
$10 million to acquire beneficial ownership of limited partnership interests in
Texas Pacific Group, which is a limited partnership that has commitments from
third party investors to invest in Texas Pacific Group. These commitments were
made substantially before Credit Suisse First Boston began advising VERITAS
regarding the transactions described herein.
Pursuant to an engagement letter dated March 21, 2000, VERITAS engaged
Credit Suisse First Boston to provide financial advisory services to VERITAS in
connection with the merger, including, among other things, rendering its opinion
and making the presentation referred to above. Pursuant to the terms of the
engagement letter, VERITAS has agreed to pay Credit Suisse First Boston a fee of
$5 million upon the rendering of Credit Suisse First Boston's opinion to
VERITAS' board of directors and a fee of $25 million upon consummation of the
merger, against which the opinion fee, to the extent paid, will be credited. In
addition, VERITAS has agreed to reimburse Credit Suisse First Boston for its
out-of-pocket expenses, including attorney's fees, incurred in connection with
its engagement and to indemnify Credit Suisse First Boston and certain related
persons against certain liabilities and expenses arising out of or in
conjunction with its rendering of services under its engagement, including
liabilities arising under the federal securities laws.
INTERESTS OF DIRECTORS OF VERITAS IN THE MERGER
In considering the recommendation of the board of directors of VERITAS to
VERITAS stockholders with respect to the share issuance, and its determination
that the merger agreement and the merger are fair to unaffiliated Seagate
stockholders, VERITAS stockholders and Seagate stockholders should be aware of
some inherent conflicts of interest, including those referred to below, that
give rise to divided interests in considering these matters. The board of
directors of VERITAS was aware of these actual and potential conflicts of
interest when it approved the merger agreement, the merger and the share
issuance.
Seagate Software currently owns approximately 31.7% of the outstanding
shares of the outstanding common stock of VERITAS. Two members of the VERITAS
board of directors, Stephen Luczo and Gregory Kerfoot, are executive officers of
Seagate and Seagate Software, respectively. Mr. Luczo also is a director of
Seagate and a member of Seagate's senior management team who will participate in
the ownership of Suez Acquisition Company. Messrs. Luczo and Kerfoot did not
participate in VERITAS'
114
<PAGE> 121
substantive discussions or consideration of the merger agreement and the merger
or the issuance of new shares of VERITAS common stock in connection with the
merger.
EFFECT OF THE MERGER ON VERITAS
Following consummation of the merger, VERITAS presently expects to continue
its operations and businesses substantially as they are currently conducted.
PLANS RELATING TO SEAGATE AFTER THE MERGER
VERITAS has no present plans or proposals relating to Seagate after the
merger that would result in an extraordinary corporate transaction involving
Seagate or Seagate Software, such as a merger, reorganization, liquidation, or
sale or transfer of a material amount of their respective assets, or involving
any material change in the corporate structure of Seagate or Seagate Software.
However, VERITAS will continue to evaluate the assets of Seagate and Seagate
Software after the merger from time to time, and may propose or develop new
plans and proposals regarding Seagate, Seagate Software or their respective
assets which VERITAS considers to be in the best interests of VERITAS and its
stockholders. VERITAS presently plans to cause Seagate Software to continue to
hold after the merger the 128,059,966 shares of VERITAS common stock Seagate
Software currently holds. These shares will be classified as treasury shares and
will have no voting rights. VERITAS has no present plans to cause Seagate to
sell its shares of Gadzoox Networks or Lernout & Hauspie.
CONSIDERATION OF THE LEVERAGED BUYOUT AND THE MERGER BY SUEZ ACQUISITION COMPANY
PURPOSE OF THE LEVERAGED BUYOUT
Suez Acquisition Company's purpose for the leveraged buyout is to acquire
control of Seagate's operating assets. Because Suez Acquisition Company is
participating in the leveraged buyout with certain directors and executive
officers of Seagate, Suez Acquisition Company may be deemed to be an affiliate
of Seagate for purposes of Rule 13e-3 under the Exchange Act. As a result, Suez
Acquisition Company may be required, under Rule 13e-3, to state whether it
reasonably believes that the leveraged buyout and the merger as a combined
transaction, the leveraged buyout by itself, and the merger by itself, are fair
to unaffiliated stockholders of Seagate (i.e., the holders of Seagate common
stock other than directors and executive officers of Seagate). The following
statements as to Suez Acquisition Company's belief as to the fairness of the
leveraged buyout and the merger as a combined transaction, the leveraged buyout
by itself, and the merger by itself, to unaffiliated stockholders of Seagate are
solely for the purposes of compliance with Rule 13e-3 and related rules under
the Exchange Act. SUEZ ACQUISITION COMPANY HEREBY EXPRESSLY DISCLAIMS ANY
FIDUCIARY RELATIONSHIP OR OBLIGATION TO THE STOCKHOLDERS OF SEAGATE.
FAIRNESS OF THE LEVERAGED BUYOUT AND THE MERGER TO SEAGATE STOCKHOLDERS
For the following reasons, Suez Acquisition Company believes that the
leveraged buyout and the merger as a combined transaction, the leveraged buyout
by itself, and the merger by itself, are fair to unaffiliated Seagate
stockholders:
- the leveraged buyout and the merger and alternatives to the leveraged
buyout and the merger were considered and approved by only those members
of the board of directors of Seagate who are unaffiliated with Suez
Acquisition Company and VERITAS;
115
<PAGE> 122
- the board of directors of Seagate retained and was advised by its legal
counsel, Wilson Sonsini Goodrich & Rosati, Professional Corporation, and
its financial advisor, Morgan Stanley & Co., Inc. in considering the
leveraged buyout and the merger and alternatives to the leveraged buyout
and the merger;
- the terms of the stock purchase agreement and the merger agreement were
the result of arm's-length negotiations among members of the board of
directors of Seagate unaffiliated with Suez Acquisition Company and
VERITAS, Suez Acquisition Company, VERITAS and their respective financial
and legal advisors;
- the members of the board of directors of Seagate unaffiliated with Suez
Acquisition Company and VERITAS unanimously approved and recommended the
leveraged buyout and the merger and the terms of the stock purchase
agreement and the merger agreement;
- the fact that both the stock purchase agreement and the merger agreement
are subject to the approval of the holders of at least a majority of
Seagate's outstanding common stock, Seagate stockholders will have
dissenters rights in the merger and that the senior members of Seagate's
management team (consisting of officers at or above the level of senior
vice president) who will participate in the ownership of Suez Acquisition
Company own, collectively, less than one percent of Seagate's outstanding
common stock and therefore cannot exercise voting power sufficient to
cause approval of the transactions;
- the fact that under both the stock purchase agreement and the merger
agreement the Seagate board of directors is permitted to negotiate with
third parties who submit business transaction proposals which are
superior to those contemplated under the relevant agreement and, if the
Seagate board of directors so determines, to terminate that agreement,
upon payment of a termination fee, in order to enter into a more
favorable transaction;
- the fact that the Seagate board of directors has stated that it engaged
in numerous and lengthy deliberations to evaluate the leveraged buyout
and the merger, considered alternatives to the leveraged buyout and the
merger, and engaged in a lengthy negotiating process that resulted in the
terms of the leveraged buyout and the merger, as described above in
"-- Background of the Leveraged Buyout and the Merger" beginning on page
70 of this document;
- the fact that the Seagate board of directors has stated its belief that
the leveraged buyout and the merger would receive wide publicity and
accordingly any third party able and willing to make a superior proposal
would be aware of the transactions, and that this publicity, when
considered with the fact that the Seagate board of directors could
terminate the relevant agreement, upon payment of a termination fee, in
order to accept a superior business transaction proposal, does not unduly
restrict the ability of the Seagate board of directors to respond to any
such proposal;
- the fact that Seagate is not required to complete the leveraged buyout
unless the merger closes at the same time as the leveraged buyout, and
vice versa;
- the fact that the process undertaken by the Seagate board of directors
resulted in receipt of an opinion of Morgan Stanley & Co. on March 29,
2000, which opinion was updated and reissued on August 29, 2000, to the
effect that the merger consideration to be received by holders of Seagate
common stock in the merger (which includes, among other things, net
amounts received by Seagate in the
116
<PAGE> 123
leveraged buyout) was fair to the stockholders of Seagate from a
financial point of view to those holders; and
- the fact that, although in connection with the preparation and delivery
of its opinions described above, Morgan Stanley performed some
alternative financial analyses of Seagate's operating assets, resulting
in valuation ranges in excess of the price being paid in the leveraged
buyout by Suez Acquisition Company for those operating assets, the
leveraged buyout enables the overall merger transaction to occur.
Suez Acquisition Company has not assigned any relative or specific weights
to the factors described above. Suez Acquisition Company has not received any
report, opinion or appraisal from any outside party that is related to the
leveraged buyout or the merger.
CONSIDERATION OF THE LEVERAGED BUYOUT AND THE MERGER BY MR. LUCZO
Because Mr. Luczo is a director of each of Seagate and VERITAS and is
obtaining an equity interest in Suez Acquisition Company, Mr. Luczo may be
deemed to be an affiliate of Seagate for purposes of Rule 13e-3 under the
Securities Exchange Act of 1934. As a result, Mr. Luczo is required under Rule
13e-3, to state whether he reasonably believes that the transactions are fair to
the unaffiliated Seagate stockholders.
As stated above, Mr. Luczo has interests in the leveraged buyout and the
merger that are different from, or in addition to, the interests of Seagate's
stockholders generally and which may create potential conflicts of interest.
Accordingly, Mr. Luczo did not participate in any deliberations of the board of
directors of Seagate or VERITAS regarding the leveraged buyout and the merger,
and did not participate in the negotiation of the leveraged buyout with Suez
Acquisition Company. Nonetheless, for the same reasons relied upon by Suez
Acquisition Company in expressing its opinion on fairness, as described above,
which reasons Mr. Luczo expressly adopts, Mr. Luczo also believes that the
merger and the leveraged buyout as a combined transaction, the leveraged buyout
by itself, and the merger by itself, are fair to unaffiliated Seagate
stockholders.
Mr. Luczo has not assigned any relative or specific weights to the factors
described above. Mr. Luczo has not received any report, opinion or appraisal
from any outside party that is related to the leveraged buyout or the merger
that is not included in this document.
SUMMARY SEAGATE FINANCIAL PROJECTIONS
In connection with analyzing available strategic alternatives, Seagate
prepared two sets of non-public financial projections for possible distribution
to interested third parties. These projections, the material portions of which
are stated below, were provided to Suez Acquisition Company in connection with
the discussions and negotiations between Seagate and Suez Acquisition Company
described in this document. The following projections do not give effect to the
leveraged buyout or the financing of the leveraged buyout.
Seagate does not as a matter of course publicly disclose projections as to
future revenues or earnings. The projections provided to Suez Acquisition
Company were not prepared with a view to public disclosure and are included in
this document only because such information was made available to Suez
Acquisition Company. These projections were based on a variety of assumptions,
including Seagate's ability to achieve strategic goals, objectives and targets
over applicable periods. These assumptions involve judgments with respect to
future economic, competitive and regulatory conditions, financial market
conditions and future business decisions, all of which are difficult or
impossible to predict
117
<PAGE> 124
and many of which are beyond Seagate's control or, after the leveraged buyout,
Suez Acquisition Company's control. The projections provided to Suez Acquisition
Company and set forth below were not prepared with a view to compliance with the
published guidelines of the Securities and Exchange Commission regarding
projections, and were not prepared in accordance with the guidelines established
by the American Institute of Certified Public Accountants for preparation and
presentation of financial projections. In addition, the projections provided to
Suez Acquisition Company and set forth below were not reviewed by an independent
public accounting firm. Suez Acquisition Company did not rely on the projections
and Seagate stockholders are cautioned not to rely on them either.
The projections provided to Suez Acquisition Company and set forth below
constitute forward looking statements which reflect numerous assumptions made by
Seagate's management, particularly with respect to Seagate's software, SAN/NAS
(XIOtech) and consumer businesses, which are still under development. In
addition, factors such as industry performance, market acceptance of new
products, changes in customer preferences, general business, economic,
regulatory, market and financial conditions, all of which are difficult to
predict, may cause the projections provided to Suez Acquisition Company and set
forth below or the underlying assumptions to such projections to be inaccurate.
Accordingly, there can be no assurance that these projections will be realized,
and actual results may be materially greater or less than those contained in
these projections. See "Summary -- Cautionary Statement Regarding Forward
Looking Statements Contained in this Document" on page 36 of this document.
Seagate does not intend to update or otherwise revise the following
projections to reflect circumstances existing after the date when made or to
reflect the occurrence of future events even in the event that any or all of the
assumptions underlying the following projections are shown to be in error.
Under one scenario, Seagate projects that the revenues, gross profit and
EBITA of Seagate's operating businesses for its fiscal years ended June 29,
2001 - 2008 will be as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
-----------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2006 2007 2008
-------- ------- ------- -------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.............. $7,417.1 8,563.8 9,503.5 10,416.3 11,359.0 12,349.7 13,582.6 15,132.2
Gross profit......... $1,405.8 1,692.1 2,042.1 2,309.9 2,622.9 3,022.9 3,536.3 4,201.9
EBITA................ $ 188.8 316.1 448.9 498.6 613.9 724.2 842.1 988.2
</TABLE>
Under another scenario, Seagate projects that the revenues, gross profit
and EBITA of Seagate's operating businesses for its fiscal years ended June 29,
2001 - 2008 will be as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 2006 2007 2008
-------- -------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.............. $8,185.1 10,145.9 11,283.1 12,626.1 13,960.5 15,404.2 17,131.5 19,298.7
Gross profit......... $1,592.5 2,277.1 2,599.3 2,986.8 3,421.5 3,915.1 4,585.7 5,442.4
EBITA................ $ 364.5 774.1 782.6 866.8 999.8 1,167.0 1,348.9 1,563.3
</TABLE>
118
<PAGE> 125
OTHER MATERIAL CONTRACTS AND AGREEMENTS BETWEEN SEAGATE AND VERITAS
SOFTWARE ACQUISITION AGREEMENT
On May 28, 1999, Seagate, Seagate Software, the Seagate Software Network &
Storage Management Group, Inc., VERITAS and a predecessor to VERITAS closed and
consummated an amended and restated agreement and plan of reorganization, dated
as of April 19, 1999. We occasionally refer to this amended and restated
agreement as the software acquisition agreement, and the transactions
contemplated thereby as the software acquisition, in this document. The software
acquisition agreement provided for the contribution by Seagate, Seagate
Software, and certain of their respective subsidiaries to a VERITAS predecessor
of (1) the outstanding stock of Seagate Software Network & Storage Management
Group, Inc. and certain other subsidiaries of Seagate Software, and (2) those
assets used primarily in the network and storage management business of Seagate
Software. We occasionally refer to Seagate Software's network and storage
management business as the NSMG business in this document. In consideration for
these contributions, the VERITAS predecessor issued shares of its common stock
to Seagate Software and offered to grant stock options to purchase its common
stock to certain of Seagate Software's employees who become its employees or
employees of its subsidiaries in connection with the software acquisition. In
addition, in connection with the software acquisition, the VERITAS predecessor
assumed certain liabilities of the NSMG business. Subsequent to the consummation
of the software acquisition, all outstanding securities of the VERITAS
predecessor were assumed and converted into common stock of VERITAS with
identical rights, preferences and privileges, on a share for share basis.
As a result of the software acquisition, Seagate Software acquired a total
of 155,583,468 shares of VERITAS common stock and former employees of the NSMG
business received options to purchase an aggregate of 15,626,358 shares of
VERITAS common stock. These share and option amounts have been adjusted to
reflect the two-for-one stock dividend of VERITAS common stock effected on July
9, 1999 and the three-for-two stock dividends, effected on November 19, 1999 and
March 3, 2000.
REGISTRATION RIGHTS AGREEMENT
In connection with the transactions contemplated by the software
acquisition agreement, Seagate, Seagate Software, the VERITAS predecessor and
VERITAS entered into a registration rights agreement. Under the registration
rights agreement, Seagate Software has the right, subject to specified
limitations, to request that VERITAS register with the Securities and Exchange
Commission the sale or other transfer of the shares of VERITAS issued to Seagate
Software in connection with the software acquisition. In addition, under the
registration rights agreement, Seagate Software has the right, subject to
specified limitations, to include the shares of VERITAS issued to Seagate
Software in connection with the software acquisition in any registration of
VERITAS equity securities with the Securities and Exchange Commission effected
by VERITAS for its own account. Seagate and VERITAS have agreed to terminate the
registration rights agreement at the completion of the merger.
TRANSITION SERVICES AND FACILITIES USE AGREEMENT
In connection with the transactions contemplated by the software
acquisition agreement, Seagate, Seagate Software, the VERITAS predecessor and
VERITAS entered into a transition services and facilities use agreement. Under
the transition services and facilities use agreement, VERITAS has the right to
use specified facilities and other
119
<PAGE> 126
services of Seagate and Seagate Software for a period of two years following the
completion of the software acquisition, including certain management information
services, telephone and other telecommunications systems, engineering and
administrative support services.
STOCKHOLDER AGREEMENT
In connection with the software acquisition, Seagate, Seagate Software, the
VERITAS predecessor and VERITAS entered into a stockholder agreement. Under the
terms of the stockholder agreement, so long as Seagate and Seagate Software
continue to own at least 5.0% and not more than 15.0% of the outstanding shares
of VERITAS common stock, Seagate and Seagate Software are entitled to name one
nominee to the VERITAS board of directors. So long as Seagate and Seagate
Software continue to own at least 15.0% of the outstanding shares of VERITAS
common stock, Seagate and Seagate Software are entitled to name two nominees to
the VERITAS board of directors. Each of the foregoing nominees must be
reasonably acceptable to VERITAS. Under the terms of the stockholder agreement,
VERITAS is also obligated to use its best efforts to cause to be voted the
shares held by VERITAS' management or board of directors in favor of the
nominees selected by Seagate and Seagate Software, and to cause the VERITAS
board of directors to unanimously recommend that its stockholders vote in favor
of the nominees selected by Seagate and Seagate Software.
Under the terms of the stockholder agreement, so long as Seagate and
Seagate Software collectively own at least 5.0% of the outstanding shares of
VERITAS common stock, Seagate and Seagate Software may only sell shares of
VERITAS common stock in accordance with prescribed per quarter sale limitations
running through Seagate's quarter ending June 2000. Moreover, Seagate and
Seagate Software may not transfer, assign, pledge or otherwise dispose of any
shares of VERITAS common stock acquired in the software acquisition for one year
after the closing of the software acquisition. After that date, they may not
sell their shares of VERITAS common stock except under certain prescribed
limitations, such as to VERITAS or to a person or persons that VERITAS has
previously approved in writing, in a bona fide underwritten public offering,
under Rule 144 under the Securities Act of 1933, in other private transactions
so long as such private transactions do not result in any single person or group
owning 5% or more of the total outstanding voting stock of VERITAS, in response
to a tender offer not opposed by the VERITAS board of directors, in a merger or
consolidation approved by the VERITAS board of directors in which VERITAS is
acquired, or in a plan of liquidation that is authorized by the VERITAS board of
directors.
So long as Seagate Technology and Seagate Software own at least 5.0% of the
outstanding VERITAS common stock, under the terms of the stockholder agreement
they must vote all shares of VERITAS common stock owned by them in the same
proportion as the votes cast by all other holders of VERITAS common stock.
Seagate and Seagate Software may, however, vote their shares of VERITAS common
stock in their sole discretion in certain limited circumstances. These voting
provisions do not apply, however, to any proposals relating to any
recapitalization or reorganization accomplished in connection with any merger,
acquisition, consolidation or reorganization, any transaction of a type
contemplated by Section 351 of the Internal Revenue Code or any other similar
transaction where (1) VERITAS is acquired by a third party, (2) there has been a
"change of control" so that the stockholders of VERITAS prior to a transaction
own, in the aggregate, less than a majority of the outstanding stock of VERITAS
or the acquiring entity after the transaction, (3) VERITAS acquires another
entity, or (4) VERITAS
120
<PAGE> 127
acquires all or substantially all of the assets of another entity. In addition,
under the terms of the stockholder agreement, neither Seagate nor Seagate
Software may exercise dissenters' or appraisal rights for any event described in
clauses (1) through (4) of the preceding sentence that has been approved by the
VERITAS board of directors.
Under the terms of the stockholder agreement, until the fifth anniversary
of the software acquisition, Seagate and Seagate Software may not, without
VERITAS' prior written consent:
- acquire, or enter into discussions, negotiations, arrangements or
understandings with any third party to acquire beneficial ownership of
any VERITAS voting securities if Seagate or Seagate Software would then
beneficially own and/or have the right to acquire more than the
percentage of VERITAS common stock held by it immediately after the
closing of the software acquisition, which is referred to herein as the
standstill percentage;
- make, or in any way participate in, any solicitation of proxies with
respect to the voting of any voting securities of VERITAS; or
- seek, either alone or in concert with others, to control the VERITAS
board of directors or the policies of VERITAS.
Under the terms of the stockholder agreement, the limitations described
above will be suspended upon the earlier to occur of:
- the date that a third party not affiliated with Seagate or Seagate
Software commences a tender or exchange offer, that is not withdrawn or
terminated, and that would result in a person or group beneficially
owning in the aggregate more than 50.0% of the total voting power of
VERITAS; and
- the public announcement by VERITAS that it has entered into any agreement
with respect to a merger, consolidation, reorganization or similar
transaction involving VERITAS in which all the stockholders of VERITAS
collectively will own less than 50.0% of the outstanding voting stock of
the surviving or acquiring entity immediately after the transaction; or
- the sale or disposition of substantially all of VERITAS' assets.
If either Seagate or Seagate Software acquires shares of VERITAS common
stock that cause it to own a percentage of the outstanding shares of VERITAS
common stock that is greater than the standstill percentage, it will not be
obliged to dispose of any VERITAS voting stock to the extent the increased
shares were acquired:
- as a result of a recapitalization of VERITAS or a repurchase or exchange
of securities by VERITAS or any other action taken by VERITAS or its
affiliates;
- as the result of any acquisition of VERITAS voting stock made during the
period when the "standstill" obligations are suspended as described
above;
- by way of stock dividend or other distribution or rights or offerings
made available to holders of shares of VERITAS voting stock generally;
- with the consent of a majority of the members of the VERITAS board of
directors that have not been designated by Seagate or Seagate Software;
or
- as part of a transaction on behalf of certain retirement plans for the
benefit of Seagate or Seagate Software employees.
Additionally, under the terms of the stockholder agreement, Seagate
Software has the right to maintain its percentage ownership of the outstanding
shares of VERITAS common stock in the event that VERITAS sells securities to a
third party as part of a strategic
121
<PAGE> 128
business relationship with that party. Seagate and VERITAS have agreed to
terminate the stockholder agreement at the completion of the merger.
DEVELOPMENT LICENSE AGREEMENT
Contemporaneously with the execution of the software acquisition agreement,
Seagate entered into a development and license agreement with the VERITAS
predecessor and VERITAS. Under the development agreement, VERITAS granted to
Seagate a non-exclusive worldwide license of certain VERITAS software products,
including the software products of the NSMG business, for internal use,
modification and preparation of derivative works by Seagate and for distribution
by Seagate to end-users and distributors, subject to certain limitations. In
addition, under the development agreement, Seagate and VERITAS agreed upon
certain co-operative marketing efforts with respect to the foregoing software
products. Seagate pays royalties to VERITAS with respect to the distribution of
the foregoing software products. The development agreement further provides for
the development by VERITAS of new products or technologies, and additional
features or enhancements to the VERITAS software products requested by Seagate.
The initial term of the development agreement is 10 years, but the development
agreement is automatically renewed on an annual basis thereafter absent notice
of termination from either Seagate or VERITAS.
CROSS-LICENSE AND ORIGINAL EQUIPMENT MANUFACTURER AGREEMENT
Contemporaneously with the execution of the software acquisition agreement,
Seagate Software Information Management Group, Inc., or Seagate IMG, entered
into a cross-license and original equipment manufacturer agreement with the
VERITAS predecessor and VERITAS. Under the cross-license agreement, VERITAS
granted to Seagate IMG a non-exclusive worldwide license of certain VERITAS
software products, including the NSMG business products, for internal use,
modification and preparation of derivative works by Seagate IMG. In addition,
under the cross-license agreement, VERITAS granted to Seagate IMG a license to
distribute certain VERITAS software products to end-users and distributors,
subject to certain limitations. Seagate IMG pays royalties to VERITAS with
respect to the distribution of certain of the foregoing software products. Under
the cross-license agreement, Seagate IMG licenses a restricted version of
Seagate IMG's Crystal Reports software product to VERITAS on a royalty-free
basis for distribution when bundled with, or incorporated into, a product of the
NSMG business. The cross-license agreement further provides for the development
by VERITAS of new products or technologies, and additional features or
enhancements to the VERITAS software products requested by Seagate IMG. The
initial term of the cross-license agreement is three years, but the
cross-license agreement is automatically renewed on an annual basis thereafter
absent notice of termination from either Seagate IMG or VERITAS.
122
<PAGE> 129
THE STOCK PURCHASE AGREEMENT AND THE LEVERAGED BUYOUT
The following is a summary description of the terms of the stock purchase
agreement, as amended, and the leveraged buyout that we believe are important to
you. However, the following summary does not describe all of the terms of the
stock purchase agreement, as amended, only those that we believe to be material.
Statements made in this document with respect to the terms of the stock purchase
agreement, the leveraged buyout and the related transactions under the stock
purchase agreement are in each case qualified by reference to the stock purchase
agreement, as amended. A copy of the stock purchase agreement and the amendments
thereto are attached to this document as Annex A, Annex D and Annex E,
respectively, and are incorporated herein by reference. We encourage you to read
the stock purchase agreement and the amendment thereto in their entirety.
THE PARTIES
The parties to the stock purchase agreement are Seagate, Seagate Software
and Suez Acquisition Company.
Seagate Software is a Delaware corporation whose current business consists
solely of the ownership of (1) shares of VERITAS common stock acquired from
VERITAS in connection with the software acquisition described under "Special
Factors Regarding the Leveraged Buyout and the Merger -- Other Material
Contracts and Agreements Between Seagate and VERITAS -- Software Acquisition
Agreement" beginning on page 119 of this document, and (2) shares of Seagate
IMG. The principal executive offices of Seagate Software are located at 915 Disc
Drive, Scotts Valley, California 95066 and its telephone number is 831-438-1550.
THE ASSET TRANSFER AND THE LEVERAGED BUYOUT
Under the terms of the stock purchase agreement, Seagate has agreed to sell
all of its operating assets and assign substantially all of its liabilities
(including any liabilities arising out of the pending litigation between Seagate
and Convolve) to Suez Acquisition Company. In order to accomplish this sale of
assets, Seagate has agreed to transfer all of its operating assets and assign
substantially all of its liabilities to its subsidiaries, including a newly
created subsidiary. We refer to this newly created subsidiary as new Seagate in
this document. We refer to this transfer of assets as the asset transfer in this
document. Following the asset transfer, the only assets directly held by Seagate
will be the capital stock of Seagate Software, cash on hand in excess of
approximately $765 million and the amount of cash needed to satisfy Seagate's
tax liabilities and redeem its existing indebtedness, the capital stock of its
directly held subsidiaries (including new Seagate) and any remaining investments
in Gadzoox Networks and Lernout & Hauspie. Seagate Software, which currently
holds Seagate's investment in VERITAS, will continue to hold these securities
following the asset transfer. The assets to be transferred include all of
Seagate's other equity interests in third parties such as its significant equity
interests in CacheVision, an independent company formed in July 2000 with
Thomson Multimedia to develop storage systems to be incorporated in consumer
electronic products, and in Iolon, Inc., a private venture financed company to
which Seagate contributed certain of its optical technology for use in
telecommunication switching applications.
Following the asset transfer, Seagate will sell to Suez Acquisition Company
all of its subsidiaries (including new Seagate) other than Seagate Software, and
Seagate Software will sell to Suez Acquisition Company any indirect subsidiaries
of Seagate then held by
123
<PAGE> 130
Seagate Software. Seagate has agreed to cooperate with Suez Acquisition Company
in any proposed restructuring of this asset transfer under certain conditions.
See "-- Covenants Relating to Conduct of Business by Seagate Prior to the
Completion of the Leveraged Buyout" beginning on page 130 of this document.
Immediately following and contingent upon the completion of the leveraged
buyout, under the terms of the merger agreement, Seagate will merge with a
wholly owned subsidiary of VERITAS as more fully described under "The Merger
Agreement and the Merger" beginning on page 138 of this document.
PURCHASE PRICE
In connection with the leveraged buyout, Suez Acquisition Company has
agreed to assume substantially all of Seagate's liabilities and pay Seagate an
aggregate of $2.050 billion in cash, less the adjustments discussed in the next
heading, and less the aggregate value of certain Seagate restricted stock and
stock options held by members of Seagate's senior management team that will be
converted into restricted stock and stock options in the entity that will hold
Seagate's operating assets. In this document, we occasionally refer to this
Seagate restricted stock and these Seagate stock options as the rollover equity,
and the aggregate value of such rollover equity as the rollover equity value.
For a description of the calculation of the rollover equity value, see "Special
Factors Regarding the Leveraged Buyout and the Merger -- Consideration of the
Leveraged Buyout and the Merger by Seagate -- Interests of Directors and Other
Executive Officers of Seagate in the Leveraged Buyout and the Merger -- Equity
Rollover" beginning on page 99 of this document.
Based upon the market prices of VERITAS common stock and Seagate's
investment securities as of October 11, 2000, Seagate's cash balance as of
October 11, 2000 and the total number of fully-diluted outstanding shares of
Seagate common stock as of October 11, 2000, the per share price paid by Suez
Acquisition Company for the operating assets would be approximately $5.12 per
Seagate share, which compares to the operating assets' June 30, 2000 book value
less $765 million, of $7.96 per Seagate share. Based on these assumptions, the
per share price payable in the merger, which includes a pass-through of the
consideration paid for the operating assets, would be approximately $70.17 per
share. These per share amounts, however, exclude approximately $0.21 per share
that will be paid to Seagate stockholders following court approval of the
settlement of existing class action litigation and dismissal with prejudice of
the underlying complaints in this litigation and related lawsuits pending in
California. See "Litigation Regarding the Leveraged Buyout and the Merger" on
page 163 of this document. This compares to a June 30, 2000 book value for all
of Seagate of $16.78 per Seagate share. Based upon the historical net book value
of Seagate's operating assets at June 30, 2000, the sale of assets to Suez
Acquisition Company is expected to result in an accounting loss of approximately
$821 million and an additional tax liability of approximately $380 million.
ADJUSTMENTS
The gross $2.050 billion purchase price is subject to the condition that
Seagate transfer to Suez Acquisition Company $765 million of cash in the
leveraged buyout. This results in the cash portion of the purchase price
available for payment to Seagate's stockholders in connection with the merger to
be approximately $1.285 billion (less the amount of rolled equity). In addition,
prior to or at the closing Seagate must discharge (or
124
<PAGE> 131
give Suez Acquisition Company additional cash to satisfy) the following, to the
extent not previously paid:
- all accrued and unpaid taxes of Seagate and its consolidated
subsidiaries, excluding taxes resulting from the asset transfer, but
including taxes resulting from the leveraged buyout and any alternative
minimum taxes for which Seagate may be liable as a result of the October
1999 reorganization of Seagate IMG;
- all indebtedness of Seagate and its consolidated subsidiaries, including
any interest on such indebtedness and any premiums payable as a result of
the retirement of any such debt;
- any "excess parachute payments" within the meaning of Section 280G of the
Internal Revenue Code payable as a result of the acceleration of the
vesting restrictions applicable to Seagate stock options in the manner
contemplated by the merger agreement, to the extent such payments are in
excess of $100 million;
- the aggregate amount of all year-end bonuses and profit sharing payments
required to be paid by Seagate and its consolidated subsidiaries in
August 2000; and
- all unpaid fees and expenses of Seagate's investment bankers, attorneys,
consultants, accountants and advisors that are incurred in connection
with the leveraged buyout and the merger.
FINANCING OF THE PURCHASE PRICE
Seagate Technology International and Seagate Technology (U.S.) Holdings,
Inc., each a wholly owned subsidiary of new Seagate, will incur approximately
$1.1 billion of long-term debt to help finance the leveraged buyout, and Suez
Acquisition Company will contribute approximately $800 million to finance the
leveraged buyout.
TERM LOAN FACILITIES AND REVOLVING FACILITY
The Chase Manhattan Bank, Goldman Sachs Credit Partners L.P. and Merrill
Lynch Capital Corporation have delivered commitment letters providing for the
establishment of senior secured credit facilities to be provided to Seagate
Technology International in accordance with the terms of a credit agreement to
be entered into simultaneously with the consummation of the leveraged buyout.
The senior credit facilities are to be provided by a syndicate of banks and
other financial institutions led by The Chase Manhattan Bank, as administrative
agent, and Seagate Technology International and Seagate Technology (U.S.)
Holdings, Inc. will be the borrowers under the senior credit facilities as set
forth in the following paragraph.
The terms of the commitment letters provide for two secured term loan
facilities in an aggregate principal amount of $700 million, consisting of the
$200 million term loan A facility with a maturity of five years and the $500
million term loan B facility with a maturity of six years, and a $200 million
revolving credit facility. Approximately 14% of each of the term loan A facility
and the term loan B facility will be allocated to Seagate Technology (U.S.)
Holdings, Inc., and Seagate Technology International and Seagate Technology
(U.S.) Holdings, Inc. will be jointly and severally liable for all amounts due
under the senior credit facilities. Seagate Technology International and Seagate
Technology (U.S.) Holdings, Inc. will be permitted to borrow under the term loan
A facility and the term loan B facility only upon the date of closing of the
transactions. The revolving credit facility commitment will terminate five years
from the date of the closing of the senior credit facilities.
125
<PAGE> 132
The commitment letters provide that the term loan A facility, the term loan
B facility and the revolving credit facility will initially bear interest,
subject to performance based stepdowns applicable to the term loan A facility
and the revolving credit facility, at a rate equal to (a) in the case of the
term loan A facility and the revolving credit facility, LIBOR plus 2.50% or, at
the option of Seagate Technology International, the alternate base rate (as
defined in the senior credit facilities) plus 1.50% or (b) in the case of the
term loan B facility, LIBOR plus 3.00% or, at the option of Seagate Technology
International, the alternate base rate plus 2.00%.
In addition to paying interest on outstanding principal under the senior
credit facilities, pursuant to the commitment letters, Seagate Technology
International is required to pay a commitment fee to the lenders under the
revolving credit facility in respect of the unutilized commitments thereunder at
a rate equal to .50% per annum.
The commitment letters provide that the senior credit facilities will be
subject to a mandatory prepayment with, in general:
- 100% of the net cash proceeds of certain asset sales;
- 75% of the net cash proceeds of certain incurrences of debt;
- 75% of the excess cash flow of Suez Acquisition Company and its
subsidiaries; and
- if there are borrowings outstanding under a senior subordinated credit
facility, 50% of the net cash proceeds of certain equity offerings.
Seagate Technology International and Seagate Technology (U.S.) Holdings,
Inc. may voluntarily repay outstanding loans under the senior credit facilities
without penalty other than breakage costs.
Under the commitment letters, the obligations under the senior credit
facilities and the related documents will be secured by a first priority lien
upon substantially all of the real and personal property of Seagate Technology
International, Suez Acquisition Company and each of Suez Acquisition Company's
other existing or subsequently acquired domestic, Cayman Islands, Northern
Ireland, Scotland, Singapore, Netherlands subsidiaries and on certain other
assets, and a pledge of all of the capital stock of Seagate Technology
International, and all of the capital stock of Suez Acquisition Company's other
existing or subsequently acquired or organized subsidiaries held by Suez
Acquisition Company, Seagate Technology International or any guarantor of the
senior credit facilities. The obligations of Seagate Technology International
under the senior credit facilities are guaranteed by Suez Acquisition Company
and all of Suez Acquisition Company's existing or subsequently acquired or
organized subsidiaries organized under the laws of Canada, England or Wales,
Japan, Mexico, Northern Ireland, Scotland, Singapore, Thailand, the Cayman
Islands, the Netherlands, the United States, other than certain dormant or
otherwise non-material subsidiaries.
The commitment letters provide that the term loan A facility will amortize
under a schedule to be agreed upon providing for nominal semi-annual
installments during the first year thereof and semi-annual installments to be
agreed upon during the remaining term thereof, and the term loan B facility will
amortize under a schedule to be agreed upon providing for nominal semi-annual
installments during the first five years thereof and semi-annual installments in
amounts to be agreed upon during the remaining term thereof.
Principal amounts outstanding under the revolving credit facility will be
due and payable in full at maturity, five years from the date of the closing of
the senior credit facilities.
126
<PAGE> 133
The commitment letters provide that the senior credit facilities will
contain a number of covenants that, among other things, restrict the ability of
Suez Acquisition Company and its subsidiaries to:
- dispose of assets;
- incur additional indebtedness;
- incur guarantee obligations;
- repay other indebtedness;
- make certain restricted payments and dividends;
- create liens on assets;
- make investments, loans or advances;
- make certain acquisitions;
- engage in mergers or consolidations;
- make capital expenditures;
- enter into sale and leaseback transactions; or
- engage in certain transactions with affiliates.
In addition, the commitment letters provide that under the senior credit
facilities, Suez Acquisition Company will be required to comply with financial
ratios and tests to be agreed upon. The senior credit facilities will also
contain certain customary events of default.
The commitments of The Chase Manhattan Bank, Goldman Sachs Credit Partners
L.P. and Merrill Lynch Capital Corporation to provide financing under the
commitment letters are subject to a number of conditions, including:
- the deposits by Seagate Technology International of $750 million into one
or more accounts that will be pledged to secure the senior credit
facilities; and
- other customary conditions.
SENIOR SUBORDINATED NOTES FINANCING
Seagate and Suez Acquisition Company expect that approximately $400 million
of the purchase price for the leveraged buyout will be funded by the issuance by
Seagate Technology International of senior subordinated notes. The senior
subordinated notes will be general unsecured obligations of Seagate Technology
International, junior to all existing and future senior indebtedness of Seagate
Technology International and pari passu in right of payment to any future senior
subordinated indebtedness of Seagate Technology International. Suez Acquisition
Company and each of its subsidiaries that guarantees the obligations under the
senior credit facilities will guarantee payment on the notes on an unsecured
senior subordinated basis. The interest rate, interest payment dates, maturity
and other material terms of the senior subordinated notes will be determined
prior to the consummation of the leveraged buyout.
ROLLOVER EQUITY
In connection with the leveraged buyout, Suez Acquisition Company is
requiring certain members of Seagate's senior management team to convert a
portion of their
127
<PAGE> 134
unvested Seagate stock options and restricted stock with an aggregate value of
between $150 million and $250 million (targeted at $200 million, but no less
than $150 million) into deferred compensation and equity of the entity which
will hold Seagate's operating assets following the leveraged buyout. The $2
billion purchase price to be paid to Seagate by Suez Acquisition Company in
connection with the leveraged buyout will be reduced by the equity rollover
value. Although the aggregate cash to be paid to Seagate stockholders in
connection with the merger will be reduced by the equity rollover value and the
aggregate number of shares of Seagate common stock entitled to a proportionate
share of the merger consideration will also be reduced so that the per share
amount received by an unaffiliated stockholder will not be reduced. For a more
complete description of the rollover equity, see "Special Factors Regarding the
Leveraged Buyout and the Merger -- Consideration of the Leveraged Buyout and the
Merger by Seagate -- Interests of Directors and Other Executive Officers of
Seagate in the Leveraged Buyout and Merger" beginning on page 97 of this
document.
REPRESENTATIONS AND WARRANTIES
Seagate has made certain customary representations and warranties to Suez
Acquisition Company in the stock purchase agreement, including as to the
following:
- the due organization, valid existence and good standing of Seagate and
its subsidiaries;
- the validity and compliance with the charter documents of Seagate,
Seagate Software and each other subsidiary of Seagate to be sold to Suez
Acquisition Company;
- subsidiaries of Seagate;
- the capital structure of Seagate, including Seagate's outstanding debt
securities;
- the authority of Seagate and Seagate Software to enter into the stock
purchase agreement and consummate the leveraged buyout;
- the absence of conflicts between the stock purchase agreement and the
charter documents of Seagate and Seagate Software, applicable law and the
material contracts of Seagate and its subsidiaries, other than as
disclosed to Suez Acquisition Company;
- third party consents required by Seagate or its subsidiaries in
connection with the leveraged buyout;
- the accuracy of all forms, reports and other documents filed by Seagate
with the Securities and Exchange Commission since July 3, 1998 and the
financial statements included therein;
- the absence of certain changes or events relating to Seagate and its
subsidiaries since the date of the last audited financial statements of
Seagate filed with the Securities and Exchange Commission, other than as
disclosed to Suez Acquisition Company;
- compliance by Seagate and its subsidiaries with applicable tax laws, and
the payment of all due and payable taxes by Seagate and its subsidiaries;
- compliance by Seagate and its subsidiaries with all applicable laws and
the terms of material contracts of Seagate and it subsidiaries, other
than as disclosed to Suez Acquisition Company;
128
<PAGE> 135
- maintenance of and compliance with all material governmental permits
applicable to Seagate and its subsidiaries;
- the absence of any material litigation involving Seagate or its
subsidiaries, other than as disclosed to Suez Acquisition Company;
- the absence of any liabilities for brokers fees or agents commissions,
other than fees payable to Morgan Stanley as more fully described under
"Special Factors Regarding the Leveraged Buyout and the
Merger -- Consideration of the Leveraged Buyout and the Merger by
Seagate -- Opinion of Seagate's Financial Advisor" beginning on page 85
of this document;
- compliance with applicable laws relating to employee matters and
employees benefit plans maintained by Seagate and its subsidiaries, other
than as disclosed to Suez Acquisition Company;
- the absence of any liens on the property and assets of Seagate and its
subsidiaries to be sold to Suez Acquisition Company under the stock
purchase agreement, other than as disclosed to Suez Acquisition Company;
- compliance with all applicable laws relating to the environment by
Seagate and its subsidiaries;
- the absence of any controversies relating to labor matters;
- material contracts of Seagate and its subsidiaries, and their compliance
with the terms of these material contracts, other than as disclosed to
Suez Acquisition Company;
- the accuracy and completeness of all information provided by Seagate and
its subsidiaries for inclusion in this document;
- certain actions of the board of directors of Seagate relating to the
stock purchase agreement and the leveraged buyout;
- the absence of any state antitakeover statutes applicable to the stock
purchase agreement and the leveraged buyout;
- the delivery of a fairness opinion by Morgan Stanley in respect of the
merger consideration;
- intellectual property of Seagate and its subsidiaries;
- insurance of Seagate and subsidiaries; and
- the completeness of the assets being sold to Suez Acquisition Company
under the stock purchase agreement.
All of the representations and warranties of Seagate contained in the stock
purchase agreement were made after giving effect to the asset transfer, the
merger agreement and the merger, to the extent relevant. In addition, the
representations and warranties of Seagate contained in the stock purchase
agreement will not survive the closing of the leveraged buyout, notwithstanding
any investigation of Seagate and its subsidiaries by Suez Acquisition Company
either before or after the closing.
129
<PAGE> 136
Suez Acquisition Company has also made certain customary representations
and warranties to Seagate in the stock purchase agreement, including as to the
following:
- due organization, valid existence and good standing of Suez Acquisition
Company;
- the validity and compliance with the charter documents of Suez
Acquisition Company;
- the authority of Suez Acquisition Company to enter into the stock
purchase agreement and consummate the leveraged buyout;
- the absence of conflicts between the stock purchase agreement and the
charter documents of Suez Acquisition Company, applicable law and the
material contracts of Suez Acquisition Company, other than as disclosed
to Seagate;
- third party consents required in connection with the leveraged buyout;
- the absence of any litigation involving Suez Acquisition Company that
could reasonably be expected to have a material adverse effect on Suez
Acquisition Company;
- the accuracy and completeness of all information provided by Suez
Acquisition Company for inclusion in this document;
- the sufficiency of Suez Acquisition Company's financing arrangements to
effect the leveraged buyout in accordance with the stock purchase
agreement;
- the status of Suez Acquisition Company under Section 203 of the General
Corporation Law of Delaware;
- the organization of Suez Acquisition Company solely for purposes of
effecting the leveraged buyout;
- the delivery to Seagate of all agreements between Suez Acquisition
Company and VERITAS; and
- the solvency, following the leveraged buyout, of the subsidiaries of
Seagate to be acquired by Suez Acquisition Company in connection with the
leveraged buyout.
COVENANTS RELATING TO CONDUCT OF BUSINESS BY SEAGATE PRIOR TO THE COMPLETION OF
THE LEVERAGED BUYOUT
Under the terms of the stock purchase agreement, until the closing of the
leveraged buyout (or the termination of the stock purchase agreement), Seagate
has agreed to:
- carry on its business and to cause its subsidiaries to carry on their
businesses diligently and in the usual, regular and ordinary course in a
manner consistent with its past practices and applicable law;
- pay and perform its liabilities and obligations when due; and
- use its commercially reasonable efforts to preserve intact its present
business organizations, keep available the services of its present
officers and employees, and preserve its relationships with its
customers, suppliers, distributors, licensors, licensees and others with
whom Seagate does business.
In addition, under the terms of the stock purchase agreement, until the
closing of the leveraged buyout (or the termination of the stock purchase
agreement), Seagate has agreed to certain customary restrictions on its ability
to engage in certain activities.
130
<PAGE> 137
Notwithstanding these restrictions, Seagate will be permitted to effect the
asset transfer, sell any assets to be retained by Seagate following the
leveraged buyout (other than the shares of VERITAS common stock held by Seagate
Software, which Seagate Software is required to continue to hold pursuant to the
terms of the merger agreement) or engage in any activity to which Suez
Acquisition Company otherwise provides its consent.
In order to effectuate the leveraged buyout in the manner contemplated by
the parties, under the terms of the stock purchase agreement, Seagate has agreed
to effect the asset transfer prior to the closing of the leveraged buyout. In
addition, Seagate has agreed to cooperate with Suez Acquisition Company in any
proposed restructuring of the asset transfer or the business organizations of
Seagate to the extent requested by Suez Acquisition Company and Suez Acquisition
Company may assign its rights to one or more designees in connection with such
restructurings, provided that any such restructuring will not decrease the
consideration paid to Seagate upon the leveraged buyout, increase the liability
to be retained by VERITAS or otherwise create additional costs and expenses for
Seagate in connection with the leveraged buyout.
Due to the fact that the leveraged buyout and the merger are
interdependent, under the terms of the stock purchase agreement, Seagate has
also agreed that it will not amend, modify, supplement, mutually terminate, or
waive any provisions of, the merger agreement without the consent of Suez
Acquisition Company.
COVENANTS RELATING TO SOLICITATIONS BY SEAGATE PRIOR TO THE COMPLETION OF THE
LEVERAGED BUYOUT
Under the terms of the stock purchase agreement, until the closing of the
leveraged buyout (or the termination of the stock purchase agreement), Seagate,
its subsidiaries and their agents, advisors and representatives may not solicit,
initiate, encourage, or induce any third party to make, submit or announce, an
offer or proposal regarding any of the following:
- the acquisition by any third party of more than 15% in interest or
beneficial ownership of the voting power of the total outstanding capital
stock of Seagate through an issuance of securities by Seagate, or a
direct purchase, tender or exchange offer, merger, consolidation or other
business combination;
- a sale, lease, exchange, transfer, license or disposition by Seagate of
more than 15% of the fair market value of its consolidated property and
assets; or
- a sale or other disposition by Seagate of more than 15% of the assets to
be sold to Suez Acquisition Company.
In addition, under the terms of the stock purchase agreement, Seagate may
not participate in any discussions or negotiations regarding any of the
transactions described above, furnish information to any third party regarding
or otherwise facilitate any such transactions. Seagate has also agreed that it
will not enter into a letter of intent or similar document, or any other
contract, agreement or commitment regarding any of the transactions described
above, or otherwise approve, recommend or endorse any such transactions.
Notwithstanding the foregoing restrictions, under the terms of the stock
purchase agreement, until the stock purchase agreement and the leveraged buyout
are approved by the stockholders of Seagate, Seagate may enter into a
confidentiality or non-disclosure agreement with any third party, furnish
information regarding Seagate to any third party,
131
<PAGE> 138
and enter into discussions or negotiations with any third party regarding any of
the transactions described above if all of the following occur:
- Seagate receives a bona fide written offer from a third party regarding
any of the following transactions:
- a merger, consolidation or other business combination or transaction
involving Seagate pursuant to which Seagate's stockholders would hold
less than 50% of the surviving entity;
- a sale or other disposition by Seagate of property and assets
representing all or substantially all of Seagate's consolidated assets;
- the acquisition by any third party of beneficial ownership of more than
50% of the voting power of the total outstanding capital stock of
Seagate; or
- a sale or other disposition by Seagate of all or more than 95% of the
assets to be sold to Suez Acquisition Company in the leveraged buyout;
provided that the board of directors of Seagate determines, after
consultation with its outside financial advisors, that the proposed
transaction is more favorable to the stockholders of Seagate, from a
financial point of view, than the leveraged buyout and the merger
considered together (or the leveraged buyout individually in the case of a
transaction described in the final bullet point immediately above). We
occasionally refer to any of the proposals described above (as qualified
by this proviso paragraph) as a superior proposal in this document;
- Seagate, its subsidiaries and their respective agents, advisors and
representatives have not violated the terms of the stock purchase agreement
regarding restrictions on its ability to solicit third party proposals as
described above;
- the board of directors of Seagate concludes in good faith, after consulting
with its legal counsel, that it is reasonably necessary to engage in such
action in order to comply with its fiduciary obligations to the stockholders
of Seagate under applicable law;
- Seagate obtains a customary confidentiality or non-disclosure agreement from
the third party which contains terms and conditions which are substantially
the same as the terms of Seagate's confidentiality agreement with Suez
Acquisition Company; and
- prior to furnishing any non-public information to the third party or
entering into discussions or negotiations with the third party, Seagate
notifies Suez Acquisition Company of its intention to furnish such
information or to enter into such discussions or negotiations and provides
Suez Acquisition Company with the same information (to the extent not
already provided to Suez Acquisition Company) and the terms and conditions
of any such discussions and negotiations.
COVENANTS RELATING TO EMPLOYEE MATTERS
Following the closing of the leveraged buyout, Suez Acquisition Company has
agreed to offer employment to all of Seagate's employees, initially on the same
terms and conditions of employment available prior to the closing.
Under the terms of the stock purchase agreement, Suez Acquisition Company
has agreed to assume sole sponsorship of and liability under all employee
benefit plans covering or providing benefits to any former or current directors,
officers and employees of Seagate or its subsidiaries, other than Seagate's
stock incentive plans. Suez Acquisition Company
132
<PAGE> 139
will assume, however, the 1999 Stock Option Plan of Seagate IMG and any Seagate
stock options which are converted into Suez Acquisition Company options under
the rollover agreements with the members of Seagate's senior management team who
are participating in Suez Acquisition Company. Suez Acquisition Company has
retained the right to amend or terminate any of the employee benefit plans it
assumes from Seagate, but if any of these plans are terminated, all Seagate
employees who accept employment following the closing will be entitled to
participate in any replacement plan provided by Suez Acquisition Company on
substantially the same terms. Moreover, if Suez Acquisition Company replaces any
of the Seagate employee benefit plans with a new plan, Suez Acquisition Company
has agreed to ensure that all Seagate employees who accept employment following
the closing will be eligible to receive full credit under these benefit plans
for time served with Seagate prior to the leveraged buyout, and that any
otherwise applicable preexisting condition limitations under any new benefit
plans will be waived.
COVENANT TO RECOMMEND THE LEVERAGED BUYOUT TO THE SEAGATE STOCKHOLDERS
Under the terms of the stock purchase agreement, the board of directors of
Seagate has agreed to recommend that Seagate stockholders vote in favor of the
stock purchase agreement and the leveraged buyout, as well as the merger
agreement and the merger. Moreover, Seagate's board of directors has agreed that
it will not withdraw, amend or modify its recommendation in favor of the stock
purchase agreement and the leveraged buyout, or the merger agreement and the
merger. Notwithstanding the foregoing commitment, the board of directors of
Seagate may withdraw, amend or modify its recommendation if all of the following
occur:
- Seagate receives a superior proposal;
- Seagate, its subsidiaries and their respective agents, advisors and
representatives have not violated the terms of the stock purchase
agreement regarding restrictions on their ability to solicit third party
proposals as described above; and
- the board of directors of Seagate concludes in good faith, after
consulting with its legal counsel, that such withdrawal, amendment or
modification is necessary in order to comply with its fiduciary
obligations to the stockholders of Seagate under applicable law.
COVENANTS RELATING TO DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE
Under the terms of the stock purchase agreement, Suez Acquisition Company
has agreed to fulfill (either directly or through one or more of the
subsidiaries it acquires from Seagate) the indemnification obligations of
Seagate and any of the foregoing subsidiaries of Seagate to their respective
directors and officers under Seagate's certificate of incorporation and bylaws
and any indemnification agreements between Seagate or any of the foregoing
subsidiaries of Seagate and their respective directors and officers. In
addition, Suez Acquisition Company has agreed to include exculpation and
indemnification clauses in its charter documents that are at least as favorable
to the covered persons as the indemnification and exculpation clauses in
Seagate's charter documents as in effect on the date of the stock purchase
agreement. Moreover, Suez Acquisition Company has agreed to use its best efforts
to maintain the directors' and officers' liability insurance policies currently
maintained by Seagate for a period of six years following the closing of the
leveraged buyout, provided that Suez Acquisition Company will not be required to
expend more than 150% of the annual premium currently paid for such policy in
order to maintain the policy during the foregoing six year period.
133
<PAGE> 140
THE COMPLETION OF THE LEVERAGED BUYOUT; CONDITIONS TO THE COMPLETION OF THE
LEVERAGED BUYOUT
THE COMPLETION OF THE LEVERAGED BUYOUT
The closing date of the leveraged buyout will be determined by Seagate and
Suez Acquisition Company, but will be no later than the second business day
following the satisfaction or waiver of the conditions to the completion of the
leveraged buyout that are to be satisfied other than on the closing date.
CONDITIONS TO THE COMPLETION OF THE LEVERAGED BUYOUT
Seagate and Suez Acquisition Company are required to close the leveraged
buyout only if each of the following conditions are either satisfied or waived:
- approval of the stock purchase agreement and the leveraged buyout, and
the merger agreement and the merger, by the stockholders of Seagate;
- the absence of any stop order issued by the Securities and Exchange
Commission suspending the effectiveness of the registration statement of
which this document forms a part, and the absence of any similar
proceeding in respect of this document;
- the absence of any law or governmental order (including a court order)
which has the effect of making the leveraged buyout illegal or otherwise
prohibiting the leveraged buyout;
- compliance with all requirements under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, in respect of the leveraged buyout;
and
- satisfaction of all of the conditions to the merger contained in the
merger agreement, other than the condition that the leveraged buyout and
the merger be closed.
Seagate is required to close the leveraged buyout only if each of the
following additional conditions are either satisfied or waived:
- accuracy in all material respects of all representations and warranties
of Suez Acquisition Company contained in the stock purchase agreement as
of the date of the stock purchase agreement and as of the closing date,
except to the extent that any inaccuracies would not, in the aggregate,
reasonably be expected to have a material adverse effect on Suez
Acquisition Company;
- compliance in all material respects with, and performance in all material
respects of, all agreements and covenants required to be complied with or
performed by Suez Acquisition Company prior to the closing of the
leveraged buyout; and
- the continued effectiveness of the merger agreement, and the absence of
any expressed intention on the part of VERITAS to terminate the merger
agreement.
Suez Acquisition Company is required to close the leveraged buyout only if
each of the following additional conditions are either satisfied or waived:
- accuracy in all material respects of all representations and warranties
of Seagate contained in the stock purchase agreement as of the date of
the stock purchase agreement and as of the closing date, except to the
extent that any inaccuracies would not, in the aggregate, reasonably be
expected to have a material adverse effect on Seagate;
134
<PAGE> 141
- compliance in all material respects with, and performance in all material
respects of, all agreements and covenants required to be complied with or
performed by Seagate prior to the closing of the leveraged buyout;
- receipt by Suez Acquisition Company of the proceeds of the debt financing
under its commitments from Chase Manhattan Bank and Goldman Sachs Credit
Partners, L.P.; and
- the availability of at least $765 million in cash among the assets to be
acquired by Suez Acquisition Company in connection with the leveraged
buyout. This required cash is subject to adjustment to reflect the
following, but only to the extent that any of the following is not paid
by Seagate prior to the closing of the leveraged buyout:
- any accrued and unpaid taxes of Seagate and its subsidiaries, including
taxes payable as a result of the leveraged buyout, but excluding any
taxes payable as a result of the asset transfer;
- any indebtedness of Seagate, including any interest payable thereon and
any premium payable in connection with the retirement of any such
indebtedness;
- any "excess parachute payments" within the meaning of Section 280G of
the Internal Revenue Code of 1986, as amended, in excess of $100
million;
- the aggregate amount of all unpaid year-end bonuses and profit sharing
payments required to be paid by Seagate and its subsidiaries in August
2000; and
- all fees and expenses of Seagate's investment bankers, attorneys,
consultants, accountants and advisors incurred in connection with the
stock purchase agreement and the leveraged buyout, and the merger
agreement and the merger.
SUEZ ACQUISITION COMPANY INDEMNIFICATION OBLIGATIONS FOLLOWING THE COMPLETION OF
THE LEVERAGED BUYOUT
Under the terms of the stock purchase agreement, Suez Acquisition Company
has agreed to indemnify Seagate as provided in the indemnification agreement.
The indemnification agreement provides, among other things, that Suez
Acquisition Company will indemnify Seagate for substantially all of the
liabilities of Seagate relating to the ownership, operations or conduct by
Seagate of its businesses, properties and assets prior to the completion of the
leveraged buyout.
For a more complete description of the terms of the indemnification
agreement, see "Other Agreements Related to the Leveraged Buyout and the
Merger -- The Indemnification Agreement" beginning on page 165 of this document.
AMENDMENT OR WAIVER OF TERMS OF THE STOCK PURCHASE AGREEMENT
Seagate, Seagate Software and Suez Acquisition Company may amend the stock
purchase agreement at any time by mutual agreement only and only with the
consent of VERITAS (which consent is required under the terms of the merger
agreement).
135
<PAGE> 142
TERMINATION OF THE STOCK PURCHASE AGREEMENT; TERMINATION FEES AND PAYMENTS
TERMINATION
The stock purchase agreement may be terminated under the following
conditions:
- by mutual consent, duly authorized by the board of directors of Seagate
and Suez Acquisition Company;
- by either Seagate or Suez Acquisition Company if:
- the leveraged buyout has not been closed by December 31, 2000, but only
if the party seeking to terminate the stock purchase agreement after
December 31, 2000 has not been a principal cause of the failure to
close the stock purchase agreement by that date;
- any governmental authority has issued an order (including a court
order) which has the effect of permanently prohibiting the leveraged
buyout, provided that the governmental order has become final and
nonappealable; or
- the stockholders of Seagate fail to approve the stock purchase
agreement and the leveraged buyout, provided that neither party may
terminate the stock purchase agreement on this basis if the failure to
obtain the requisite approval of Seagate's stockholders was caused by
the actions of the party seeking termination and those actions
constituted a material breach of the stock purchase agreement;
- by Seagate if:
- there has been a breach of the representations and warranties of Suez
Acquisition Company contained in the stock purchase agreement, which
breach would cause a failure of the condition to closing relating to
the accuracy of the representations and warranties made by Suez
Acquisition Company in the stock purchase agreement; or
- prior to obtaining the approval of Seagate's stockholders of the stock
purchase agreement and the leveraged buyout:
- Seagate receives a superior proposal;
- Seagate, its subsidiaries and their agents, advisors and
representatives have not violated the terms of the stock purchase
agreement regarding restrictions on its ability to solicit third
party proposals as described above;
- the board of directors of Seagate concludes in good faith, after
consulting with its legal counsel, that the termination of the stock
purchase agreement is necessary in order to comply with its
fiduciary obligations to the stockholders of Seagate under
applicable law; and
- Seagate pays Suez Acquisition Company the $80 million termination
fee described below concurrently with such termination; or
- by Suez Acquisition Company if:
- there has been a breach of the representations and warranties of
Seagate contained in the stock purchase agreement, which breach would
cause a failure of the condition to closing relating to the accuracy of
the representations and warranties made by Seagate in the stock
purchase agreement; or
136
<PAGE> 143
- the board of directors of Seagate withdraws, modifies or amends its
recommendation in favor of the stock purchase agreement and the
leveraged buyout, and the merger agreement and the merger, or fails to
reject within 10 days a third party tender offer or exchange offer
commenced for more than 15% of the equity securities of Seagate.
TERMINATION FEES AND PAYMENTS
Under the terms of the stock purchase agreement, Seagate is required to pay
Suez Acquisition Company an $80 million termination fee in cash if:
- Seagate terminates the stock purchase agreement following receipt of a
superior offer;
- Suez Acquisition Company terminates the stock purchase agreement because
the board of directors of Seagate withdraws, modifies or amends its
recommendation in favor of the stock purchase agreement and the leveraged
buyout, or fails to reject within 10 days a third party tender offer or
exchange offer commenced for more than 15% of the equity securities of
Seagate;
- either Seagate or Suez Acquisition Company terminates the stock purchase
agreement because (1) the stockholders of Seagate fail to approve the
stock purchase agreement and the leveraged buyout, (2) a proposal to
acquire more than 15% of Seagate's outstanding capital stock or property
and assets is made prior to the Seagate special meeting, and (3) within
twelve months following the termination of the stock purchase agreement,
Seagate enters into an agreement to effect a business combination
involving the acquisition of more than 50% of Seagate's outstanding
capital stock or assets; or
- either Seagate or Suez Acquisition Company terminates the stock purchase
agreement because (1) they have not closed the leveraged buyout by
December 31, 2000, (2) a proposal to acquire more than 15% of Seagate's
outstanding capital stock or property and assets is made prior to
December 31, 2000, (3) following the foregoing proposal but before the
termination of the stock purchase agreement, Seagate shall have
intentionally breached any of the terms of the stock purchase agreement
in any material respect and such breach contributed to the failure to
close the leveraged buyout by December 31, 2000, and (4) within twelve
months following the termination of the stock purchase agreement, Seagate
enters into an agreement to effect a business combination involving the
acquisition of more than 50% of Seagate's outstanding capital stock or
assets.
137
<PAGE> 144
THE MERGER AGREEMENT AND THE MERGER
The following is a summary description of the terms of the merger
agreement, as amended, and the merger that we believe are important to you.
However, the following summary does not describe all of the terms of the merger
agreement, as amended, only those that we believe to be material. Statements
made in this document with respect to the terms of the merger agreement, the
merger and the related transactions under the merger agreement are in each case
qualified by reference to the merger agreement, as amended. A copy of the merger
agreement and the amendments thereto are attached to this document as Annex B,
Annex D and Annex E, respectively, and are incorporated herein by reference. We
encourage you to read the merger agreement and the amendment thereto in their
entirety.
THE PARTIES
The parties to the merger agreement are Seagate, VERITAS and Victory Merger
Sub, Inc., a wholly owned subsidiary of VERITAS. We occasionally refer to
Victory Merger Sub, Inc. as merger sub in this document.
Merger sub is a Delaware corporation that was formed by VERITAS solely for
the purpose of implementing the merger and will engage in no other operations.
In the merger, merger sub will be merged with and into Seagate and will cease to
exist. The principal executive offices of merger sub are located at VERITAS'
principal executive offices: c/o VERITAS Software Corporation, 1600 Plymouth
Street, Mountain View, California 94043, and its telephone number is (650)
335-8000.
TERMS OF THE MERGER
The merger will be completed when all of the conditions contained in the
merger agreement are satisfied or waived, including (1) approval and adoption by
the Seagate stockholders of the stock purchase agreement and the leveraged
buyout, and the merger agreement and the merger, and (2) the approval and
adoption by the VERITAS stockholders of the issuance of new shares of VERITAS
common stock in connection with the merger.
EFFECTS OF THE MERGER
At the effective time of the merger, merger sub will be merged with and
into Seagate, merger sub will cease to exist and Seagate will continue as the
corporation surviving the merger. Seagate will then be a wholly owned subsidiary
of VERITAS. The certificate of incorporation and bylaws of merger sub
immediately prior to the effective time will remain the certificate of
incorporation and bylaws of the surviving corporation following the merger. Each
of the members of the board of directors of Seagate at the time of the merger
will resign and Mr. Jay Jones, a senior vice president of VERITAS, will be
elected as the sole director of the surviving corporation. VERITAS will appoint
new officers of the surviving corporation.
At the effective time, by virtue of the merger and without any action on
the part of VERITAS, merger sub or Seagate:
- each share of Seagate common stock outstanding immediately prior to the
effective time (other than shares canceled as described in the next two
bullet points) will be converted into the right to receive the merger
consideration (which is described under "-- The Merger Consideration"
beginning on page 140 of this document);
138
<PAGE> 145
- each share of Seagate common stock held in the treasury of Seagate, or
owned by merger sub or any wholly-owned subsidiary of Seagate or of
VERITAS will be canceled;
- certain restricted shares of Seagate common stock held by members of
Seagate's senior management team who will participate in the ownership of
Suez Acquisition Company that are being converted into deferred
compensation and equity of Suez Acquisition Company (as described under
"Special Factors Regarding the Leveraged Buyout and the
Merger -- Consideration of the Leveraged Buyout and the Merger by
Seagate -- Interests of Directors and Other Executive Officers of Seagate
in the Leveraged Buyout and the Merger -- Equity Rollover" beginning on
page 99 of this document) will be canceled;
- certain unvested options to purchase Seagate common stock held by members
of Seagate's senior management team who will participate in the ownership
of Suez Acquisition Company that are being converted into deferred
compensation and equity of Suez Acquisition Company (as described under
"Special Factors Regarding the Leveraged Buyout and the
Merger -- Consideration of the Leveraged Buyout and the Merger by
Seagate -- Interests of Directors and Other Executive Officers of Seagate
in the Leveraged Buyout and the Merger -- Equity Rollover" beginning on
page 99 of this document) will be canceled;
- the vesting restrictions applicable to all options to purchase Seagate
common stock outstanding immediately prior to the effective time under
all Seagate stock option plans (other than the options being canceled as
described in the previous bullet point) will be accelerated such that no
vesting restrictions remain; these accelerated options will be converted
into shares of Seagate common stock (the number of such shares to be
determined as described in the next paragraph), and these shares of
Seagate common stock (other than shares deducted and withheld to satisfy
applicable withholding obligations of Seagate) will then be immediately
converted into the right to receive the merger consideration;
- all rights to purchase shares of Seagate common stock outstanding under
Seagate's 1999 employee stock purchase plan immediately prior to the
effective time will be exercised and each share of Seagate common stock
purchased pursuant to such exercise will be converted into the right to
receive the merger consideration; and
- each share of merger sub's common stock issued and outstanding
immediately prior to the effective time will be converted into one share
of common stock of the surviving corporation.
The number of shares of Seagate common stock that will be deemed issued in
respect of each option that is accelerated (as described in the fifth bullet
point in the previous paragraph) will equal (1) the aggregate number of shares
of Seagate common stock issuable upon the exercise in full of such option minus
(2) the number of shares equal to (a)(i) the per share exercise price of such
option, multiplied by (ii) the aggregate number of shares of Seagate common
stock issuable upon the exercise in full of such option, divided by (c) the
average closing price of a share of Seagate common stock, as reported on The New
York Stock Exchange, for the five consecutive trading days ending two trading
days immediately preceding the effective time of the merger. A number of these
shares will be deducted and withheld as required to satisfy applicable
withholding obligations of Seagate.
139
<PAGE> 146
Shares of Seagate common stock outstanding immediately prior to the
effective time held by a holder who has demanded and perfected his or her right
to appraisal will not be converted into the right to receive the merger
consideration. The holder will instead be entitled to the rights that are
afforded under the Delaware General Corporation Law. A description of these
rights may be found under "-- Appraisal Rights" beginning on page 159 of this
document.
THE MERGER CONSIDERATION
The merger consideration payable for each outstanding share of Seagate
common stock (other than shares being canceled as described above in "-- Effects
of the Merger") will consist of an amount of cash (sometimes referred to in this
document as the cash portion) and a fraction of a share of VERITAS common stock
(sometimes referred to in this document as the stock portion) and a
proportionate interest in the tax refund amount. Neither the cash portion, the
stock portion, or the fair market value of the tax refund amount will be
determined until the day the merger is completed. Seagate and VERITAS have
established a toll-free telephone number that Seagate stockholders and VERITAS
stockholders can call beginning 10 days prior to the special meetings. This
number is 1-866-366-2506. Seagate and VERITAS stockholders may call this
telephone number to find out the amount of cash and VERITAS common stock that
Seagate's stockholders would be entitled to receive in connection with the
merger, and the number of shares of VERITAS common stock that VERITAS would
issue in connection with the merger, in each case, as if the merger were
completed on the day immediately following the date on which the telephone
number is called. The recorded message on this telephone number will be updated
each day until the day of the special meetings. Seagate stockholders and VERITAS
stockholders are cautioned, however, that the amounts provided in this recorded
message necessarily will be different than the actual amounts to be received or
issued in connection with the merger. These actual amounts will not be
determined until on, or possibly after, the day of the special meetings.
The aggregate consideration payable in the merger in exchange for all
shares of Seagate common stock eligible to receive the merger consideration will
be based on four components:
- the amount of cash held by Seagate immediately prior to the effective
time of the merger;
- the number of shares of VERITAS common stock held by Seagate Software at
the effective time of the merger;
- the negotiated value of the shares of Gadzoox Networks and Lernout &
Hauspie held by Seagate at the effective time of the merger; and
- the value of the tax refund amount.
This aggregate consideration will then be allocated to the number of shares
of Seagate common stock to be converted in the merger, which will be based on:
- the number of shares of Seagate common stock outstanding at the time of
the merger;
- the number of restricted Seagate shares held by members of Seagate's
senior management team who will participate in the ownership of Suez
Acquisition Company that are being converted into shares of Suez
Acquisition Company (as described under "Special Factors Regarding the
Leveraged Buyout and the
140
<PAGE> 147
Merger -- Consideration of the Leveraged Buyout and the Merger by
Seagate -- Interests of Directors and Other Executive Officers of Seagate
in the Leveraged Buyout and the Merger -- Equity Rollover" beginning on
page 99 of this document);
- the net number of shares of Seagate common stock issued upon acceleration
and conversion of outstanding options to purchase Seagate common stock
(after withholding), as described in the fifth bullet point of the second
paragraph of "-- Effects of the Merger;" and
- the number of shares of Seagate common stock to be canceled, as described
in the second and third bullet points of the second paragraph of
"-- Effects of the Merger."
VERITAS and Seagate will determine the total number of shares of Seagate
common stock to be converted in the merger on the day the merger is completed.
In this section, we sometimes refer to this total number of shares to be so
converted in the merger as the "Total Seagate Shares."
THE STOCK PORTION
The stock portion of the merger consideration will consist of a fraction of
a share of VERITAS common stock. This fraction will be determined on the day the
merger is completed. The fraction will be determined by calculating the total
number of VERITAS shares to be issued in connection with the merger, and then
dividing this total by the Total Seagate Shares.
The total number of VERITAS shares to be issued in connection with the
merger consists of three components:
- the 109,330,300 shares being issued in consideration for the 128,059,966
VERITAS shares held by Seagate Software;
- the number of shares to be issued in lieu of part of the cash portion in
the event that VERITAS elects to reduce the cash portion by $250 million
or $500 million, as described below under "-- The Cash Portion"; and
- the number of shares to be issued in consideration for the shares held by
Seagate of Gadzoox Networks and Lernout & Hauspie.
The 109,330,300 shares is a fixed number derived by multiplying the
128,059,966 VERITAS shares held by Seagate Software by .853743. This discount of
approximately 14.6% was agreed to in arm's-length negotiations between Seagate
and VERITAS as consideration for VERITAS' willingness to participate in the
transactions described in this document, including its willingness to accept the
potential risk of liabilities arising out of Seagate's operating businesses in
the event that Suez Acquisition Company is unable to satisfy its obligations
under the indemnification agreement.
The number of shares to be issued as a result of VERITAS' election to
reduce the cash portion will be determined by dividing the amount so elected
(either $0, $250 million or $500 million) by the average closing price per share
of VERITAS common stock, as reported on the Nasdaq National Market, for the five
consecutive trading days ending on the day immediately preceding the date that
VERITAS makes its election.
In order to determine the number of shares to be issued as consideration
for the shares of Gadzoox Networks and Lernout & Hauspie held by Seagate, the
parties first will
141
<PAGE> 148
calculate the aggregate value of these investment securities as provided in the
merger agreement. The merger agreement provides that the value of these
securities will be based on average closing prices on the Nasdaq National
Market, but will be discounted to reflect contractual, legal and practical
limitations on transferability, as well as to reflect estimated taxes that would
be payable if Seagate sold these securities.
For example, the value of the Gadzoox Networks shares will be determined as
described below:
Step 1: Determine the average closing price of a share of Gadzoox Networks
common stock, as reported on the Nasdaq National Market, for the
five consecutive trading days ending two trading days immediately
preceding the date of completion of the merger.
Step 2: Multiply the average price determined in Step 1 by 0.6. (The
purpose of this Step 2 is to discount the per-share value to
reflect restrictions on transfer described above and the liquidity
risk associated with a large block of Gadzoox Networks stock).
Step 3: Subtract Seagate's tax basis in a share of Gadzoox Networks common
stock from the amount determined in Step 2.
Step 4: Multiply the result from Step 3 by 0.4. (The purpose of Steps 3
and 4 is to approximate the taxes that would be payable on a sale
of the Gadzoox Networks shares).
Step 5: Subtract the result from Step 4 from the result in Step 2. (The
result of this Step 5 is intended to be the discounted, after-tax
value per share.)
Step 6: Multiply the result from Step 5 by the number of Gadzoox Networks
shares that Seagate holds immediately prior to the effective time
of the merger.
The value of Seagate's shares of Lernout & Hauspie will be determined in
the same way as described for the Gadzoox Networks shares in Steps 1 through 6
above.
Once the values of all of the securities are calculated as described above,
the total aggregate value of all such securities together will be divided by the
average closing price per share of VERITAS common stock, as reported on the
Nasdaq National Market, for the five consecutive trading days preceding the
second date before the completion of the merger. The result of this calculation
will be the number of VERITAS shares issuable in consideration for the
securities.
The market value and negotiated discounts (after estimated taxes) for these
securities, based on October 11, 2000 closing prices and the number of shares
held by Seagate as of October 11, 2000 is:
<TABLE>
<CAPTION>
DISCOUNTED VALUE
(AFTER ESTIMATED TAXES NO. OF
ISSUED TAX BASIS MARKET VALUE AT A 40% RATE) SHARES HELD
------ ---------- ------------ ----------------------- -----------
(MILLIONS) (MILLIONS) (MILLIONS)
<S> <C> <C> <C> <C>
Gadzoox Networks..... $31.9 $27.0 $22.5 5,274,015
Lernout & Hauspie.... $36.9 $36.1 $27.8 3,319,369*
</TABLE>
---------------
* Excludes 297,120 shares to be held in escrow for a period of time following
the completion of the merger. See "-- Escrowed Lernout & Hauspie Shares" on
page 145 of this document.
Seagate and VERITAS will determine the stock portion on the day the merger
is completed. Seagate stockholders may call 1-866-366-2506 to find out an
estimate of the
142
<PAGE> 149
stock portion as if the merger were completed on the day immediately following
the date on which the telephone number is called. The recorded message on this
telephone number will be updated each day until the day of the special meetings.
Seagate stockholders are cautioned, however, that the estimated stock portion in
the recorded message necessarily will be different than the actual stock
portion. The actual stock portion will not be determined until on, or possibly
after, the day of the special meetings.
Seagate stockholders should note that the most significant component of the
consideration payable in the merger consists of a fixed number of shares of
VERITAS common stock (109,330,300 shares), and that there will be no adjustment
to this fixed number based upon changes in the market price of VERITAS common
stock. As a result, the specific dollar value of the merger consideration will
depend, in part, on the market value of VERITAS common stock, and may decrease
from the date Seagate stockholders submit their proxies. The market price of
VERITAS common stock is subject to the general price fluctuations in the market
for publicly traded equity securities generally and has experienced significant
volatility.
THE CASH PORTION
The cash portion of the merger consideration will consist of:
- the net cash received by Seagate in connection with the leveraged buyout;
and
- all of Seagate's other cash on hand at the time the merger is completed
(i.e., all cash remaining after delivering $765 million to the private
equity group in connection with the leveraged buyout, withholding and
depositing $150 million in a trust pending the resolution of some Seagate
tax audits, and providing for payment of Seagate's current tax
liabilities, tax withholding obligations, outstanding debt, and
transaction expenses).
Seagate and VERITAS will determine the cash portion on the day the merger
is completed. Seagate stockholders may call 1-866-366-2506 to find out an
estimate of the cash portion as if the merger were completed on the day
immediately following the date on which the telephone number is called. The
recorded message on this telephone number will be updated each day until the day
of the special meetings. Seagate stockholders are cautioned, however, that the
estimated cash portion in the recorded message necessarily will be different
than the actual cash portion. The actual cash portion will not be determined
until on, or possibly after, the day of the special meetings.
The merger agreement permits VERITAS to elect to reduce the cash portion by
either $250 million or $500 million. VERITAS must choose one of these amounts
during the 15 trading days ending two trading days prior to the date of the
Seagate special meeting. If VERITAS chooses to reduce the cash portion, it will
issue additional shares of VERITAS common stock as part of the consideration
payable in the merger, as described above under "-- The Stock Portion."
The cash portion of the merger consideration also includes the right to
receive a pro rata portion of $50 million to be distributed to Seagate
stockholders following court approval of the settlement of existing class action
litigation and dismissal with prejudice of the underlying complaints in this
litigation and related lawsuits pending in California.
SEAGATE'S TAX REFUNDS AND CREDITS
A portion of the merger consideration will consist of the right to receive
the benefit of any net operating loss carryback which results in a tax refund
and tax credits utilized
143
<PAGE> 150
following the completion of the merger that are attributable to Seagate for
taxable years or periods (or any portion of a taxable year or period) ending on
or prior to the effective time of the merger. On or prior to the completion of
the merger, Seagate is required to appoint an administrator to oversee the
collection and distribution of the Seagate tax refunds and credits.
Seagate expects that the federal net operating loss giving rise to the tax
refund and some tax credits will be fully utilized by carrying back such losses
and credits to Seagate's taxable year ending June 30, 2000, and the refund
attributable such carryback will be realized on or before June 30, 2001,
although it is possible that some amount of the net operating loss will be
available for use as a carry forward in future years, in which case the tax
benefit associated with such carry forward will not be available to Seagate
stockholders. The parties have also agreed that $150 million of cash, otherwise
for distribution to Seagate stockholders in connection with the merger, will be
withheld at closing and will be retained under the control of the administrator
until the conclusion of tax audits and the expiration of the period for
assessment with respect to those taxable periods beginning on or after July 1,
1999 and ending on or before the closing date of the merger. To the extent the
cash amount accumulated in the trust exceeds $150 million, such excess will be
distributed to Seagate stockholders entitled thereto on a quarterly basis,
provided that the amount available for distribution is at least $5 million. Upon
the conclusion of the federal tax audits in respect of the taxable year in which
the potentially available tax refund arises and the tax credit is expected to be
utilized and the taxable year in which the loss and credit originated, the
administrator will make payments in respect of any Seagate income taxes due with
respect to such audit and expenses and the remainder of the $150 million will be
distributed to the holders of the rights to receive such tax refunds and
credits, less $25 million to be retained if other non-federal audits, contests
or statute of limitations are still pending or running, as the case may be. Upon
the completion of the last audit or the expiration of the last statute of
limitations with respect to taxable periods beginning on or after July 1, 1999
and ending on or before the closing date of the merger, the remaining amount
held in the account will be distributed as quickly as possible to the holders of
the rights to receive the benefit of those tax refunds and credits and the $150
million of retained cash.
The administrator will have the right to review any claims for tax refunds
and tax returns in which tax credits are utilized that give rise to a tax refund
or credit amount. Upon receipt of a refund or upon the effective utilization of
a tax credit, VERITAS is required to remit an amount of cash equal to such
refund or in the amount of the utilized credit to the administrator within 10
business days of receipt of such refunds or utilization of such credits. Amounts
remitted thereafter are subject to an interest charge of 8% per annum. All funds
collected by the administrator will be invested in short-term money market
instruments and paid to those persons who were Seagate stockholders as of the
effective time of the merger at the end of each calendar quarter. The first
distribution with respect to a Seagate stockholder's right to tax refunds or
credit is not expected to occur at the earliest until the second quarter of
2001. The amounts collected will be decreased by the amount of the
administrator's fees of 1% of amounts distributed to the Seagate stockholders,
third party expenses and amounts paid to VERITAS to reimburse it for taxes
imposed on income earned on the collection account.
Each Seagate stockholder's interest in Seagate's tax refunds and credits
and the $150 million of retained cash is a non-transferable right and will be
evidenced by appropriate documentation as agreed upon by Seagate and VERITAS
prior to the completion of the merger. A person's right to receive his, her or
its proportionate interest
144
<PAGE> 151
in Seagate's tax refunds and credits is limited to amounts received net of
payments of Seagate taxes as described above, expenses and reimbursement for
taxes on the trust's income, in respect of claims for refunds or the utilization
of credits that arise as a result of a settlement or a final determination with
respect to the audit, examination or contest that involves an item giving rise
to a tax refund or the utilization of credits, or the expiration of the statute
of limitations of a taxable year in which the net operations loss or credits
arose or were utilized.
In connection with the merger, Seagate anticipates that it may recognize a
significant compensation deduction in connection with the mandatory exercise of
employee stock options. The size of this deduction will vary directly with the
value of merger consideration. In addition, Seagate and Suez Acquisition Company
will make tax elections in connection with the leveraged buyout which will
result in additional losses being recognized in Seagate's taxable year in which
the leveraged buyout occurs. It is anticipated, although not certain, that the
compensation deduction and the loss recognized in connection with such elections
will offset the net gain, if any, recognized in connection with the sale of
Seagate's operating assets and all other taxable income accrued in the tax
period within which the merger occurs (before taking into account this
compensation deduction and the tax benefits of the elections), thus creating a
net operating loss for such period. This net operating loss, if any and to the
full extent permitted by law, will be carried back to prior taxable years in
which Seagate paid federal income tax and should be reflected in the amounts
potentially available to the Seagate stockholders. Seagate expects federal net
operating losses that arise in the year in which the merger occurs will be fully
realized as a carryback to its fiscal year ended June 30, 2000; although it is
possible that some amount of the net operating loss will be available for use as
carryforwards in future years. Seagate's stockholders will not be entitled to
receive any amounts with respect to this right relating to net operating loss
carryforwards used in years beginning after the completion of the merger. It is
anticipated that the majority of the net operating loss will not be available to
be carried back under various state income tax regimes that are applicable to
Seagate. Accordingly, these state net operating losses will not result in a tax
benefit that will be available to the Seagate stockholders.
Each share of Seagate common stock outstanding immediately prior to the
completion of the merger (other than certain shares to be canceled) will be
entitled to receive a proportionate share of the amounts Seagate's stockholders
receive in respect of Seagate's tax refunds and credits and the $150 million of
retained cash (net of payments of Seagate income taxes as described above,
expenses and fees and reimbursement for taxes on the trust's income) based upon
the total number of shares of Seagate common stock outstanding immediately prior
to the effective time of the merger, including:
- all shares of Seagate common stock issuable upon the acceleration and net
exercise of all stock options to acquire Seagate common stock, other than
(1) such shares that are deducted and withheld by Seagate in order to
satisfy applicable withholding obligations and (2) stock options held by
members of Seagate's senior management team that are being converted into
options of Suez Acquisition Company; and
- all shares of Seagate common stock issuable upon the exercise of all
rights under Seagate's employee stock purchase plan.
ESCROWED LERNOUT & HAUSPIE SHARES
A portion of Seagate's shares (297,120 shares) of Lernout & Hauspie are
being held in escrow in accordance with the terms of agreements governing
Lernout & Hauspie's
145
<PAGE> 152
recently completed acquisition of Dragon Systems. These escrowed shares with a
fair value of $3.2 million as of October 11, 2000 are included as part of
Seagate's investment securities that VERITAS will acquire in the merger;
however, VERITAS will deliver no separate consideration for them. Instead, when
and if they are released from escrow, these escrowed shares will be transferred
to the trustee or administrator that will administer the distribution of the tax
refund amount, and will be sold (or distributed) when permitted under applicable
law and in accordance with any contractual restrictions, and the proceeds
distributed to Seagate stockholders, along with tax refunds and credits,
following completion of the merger.
ADJUSTMENTS AND WITHHOLDING
The merger consideration will be adjusted to reflect the effect of any
stock split, reverse stock split, stock dividend, reorganization,
recapitalization, exchange of shares or other similar change with respect to
VERITAS common stock or Seagate common stock occurring prior to the effective
time.
The exchange agent, VERITAS and Seagate are entitled to deduct and withhold
from the merger consideration payable to any holder or former holder of Seagate
common stock, or any holder of options to purchase Seagate common stock that are
accelerated immediately prior to the effective time and converted into the right
to receive the merger consideration (as described above under "-- Effects of the
Merger" beginning on page 138 of this document), such amounts as may be required
to be deducted or withheld under applicable tax or other legal requirements. Any
amounts that are withheld will be treated for all purposes under the merger
agreement as having been delivered or otherwise paid to the person to whom such
amounts would otherwise have been delivered or paid.
No fractional shares will be issued pursuant to the merger. In lieu of
issuing any fractional shares, former holders of Seagate common stock will be
entitled to receive cash equal to the product obtained by multiplying such
fractional share amount (after aggregating all fractional shares to which a
former holder of Seagate common stock would be entitled) by the average closing
price of a share of VERITAS common stock, as reported on the Nasdaq National
Market, for the five consecutive trading days ending two trading days
immediately preceding the effective time.
EFFECTIVENESS OF THE MERGER
The merger will become effective when a certificate of merger is duly filed
with the Secretary of State of the State of Delaware in accordance with the
relevant provisions of the Delaware General Corporation Law or at such other
time as may be agreed upon in writing by VERITAS and Seagate and specified in
the certificate of merger.
EXCHANGE AND PAYMENT PROCEDURES FOR SEAGATE STOCKHOLDERS
VERITAS has selected ChaseMellon Shareholder Services, LLC to act as
exchange agent. Promptly following the completion of the merger, VERITAS will
deposit with the exchange agent the aggregate amount of cash and the number of
shares of VERITAS common stock required to pay the merger consideration (other
than the tax refund amount, which is dealt with as described below). Promptly
following the effective time, the exchange agent will mail to each holder of
record of certificates of Seagate common stock a letter of transmittal and
instructions for surrendering certificates that, prior to the effective time,
represented shares of Seagate common stock, in exchange for certificates
representing shares of VERITAS common stock issuable and cash payable in respect
of
146
<PAGE> 153
such surrendered certificates. Upon due execution and delivery to the exchange
agent and acceptance by the exchange agent of a letter of transmittal,
accompanied by certificates formerly representing shares of Seagate common
stock, the holder of such surrendered certificates will be entitled to the
merger consideration (other than the tax refund amount, which is dealt with as
described below).
SEAGATE STOCKHOLDERS SHOULD NOT DELIVER THEIR SEAGATE COMMON SHARE
CERTIFICATES NOW. SEAGATE STOCKHOLDERS SHOULD SEND THEM ONLY ACCORDING TO THE
INSTRUCTIONS INCLUDED IN THE LETTER OF TRANSMITTAL WHICH WILL BE MAILED TO
SEAGATE STOCKHOLDERS PROMPTLY AFTER THE EFFECTIVE TIME OF THE MERGER. IN ALL
CASES, THE MERGER CONSIDERATION WILL BE PROVIDED ONLY IN ACCORDANCE WITH THE
PROCEDURES SET FORTH IN THE MERGER AGREEMENT AND THE LETTER OF TRANSMITTAL.
Promptly following the effective time, the exchange agent will mail to each
holder of any option to purchase Seagate common stock that was converted into
the right to receive the merger consideration, as described above under
"-- Effects of the Merger" beginning on page 138 of this document, a letter of
transmittal and instructions for receiving certificates representing shares of
VERITAS common stock issuable and cash payable pursuant to the merger. Upon due
execution and delivery to the exchange agent of a letter of transmittal and
acceptance thereof by the exchange agent, the holder of such option will be
entitled to the merger consideration (other than the tax refund amount, which is
dealt with as described below) in respect of each share of Seagate common stock
deemed issued to such holder immediately prior to the effective time.
VERITAS strongly recommends that letters of transmittal and certificates
for Seagate common stock be sent only by registered United States mail, return
receipt requested, appropriately insured. Holders of Seagate common stock whose
certificates are lost will be required to make an affidavit claiming such
certificate or certificates have been lost, stolen or destroyed and, if required
by VERITAS, such holders will further be required to post a bond in such amount
as VERITAS may reasonably require as indemnity against any claim that may be
made against VERITAS with respect to such certificate.
Any amounts held by the exchange agent and not validly claimed by Seagate
stockholders within six months after the effective time will be delivered to
VERITAS upon its demand. Following delivery to VERITAS, any holder of
certificates formerly representing shares of Seagate common stock and any holder
of Seagate options that were deemed converted into shares of Seagate common
stock that have not complied with the terms and conditions for the receipt of
the merger consideration set forth in the merger agreement will thereafter
become general creditors of VERITAS in respect of the merger consideration.
VERITAS will only issue to Seagate stockholders a VERITAS stock certificate
or a check in lieu of a fractional share in the name in which the surrendered
Seagate stock certificate is registered. If Seagate stockholders wish to have
their certificates issued to another name, they must present the exchange agent
with all documents required to show and effect the unrecorded transfer of
ownership and show that they paid any applicable stock transfer taxes.
Upon receipt of a refund or upon the effective utilization of a tax credit
(or, if applicable, upon receipt of any net proceeds from the sale of all or a
portion of the shares of Lernout & Hauspie capital stock), VERITAS is required
to remit any such amounts to the administrator of the tax refund amount within
10 business days of receipt. All funds collected by the administrator will be
invested in short-term money market instruments
147
<PAGE> 154
and distributed to Seagate stockholders at the end of each calendar quarter
commencing with the first such day that is at least 45 days following the
closing of the merger, if the amount available for distribution is at least $5
million.
NO DIVIDENDS
Until they have exchanged their certificates for VERITAS certificates in
the manner described above under "-- Exchange and Payment Procedures for Seagate
Stockholders" beginning on page 146 of this document, Seagate stockholders will
not be entitled to receive any dividends or other distributions on VERITAS
common stock.
Subject to applicable laws, promptly following surrender of their Seagate
stock certificates and the issuance of the corresponding VERITAS certificates,
Seagate stockholders will be paid the amount of dividends or other
distributions, without interest, with a record date after the completion of the
merger which were previously paid with respect to their whole shares of VERITAS
common stock.
TRANSFER OF SEAGATE COMMON STOCK
No transfer of shares of Seagate common stock will be made on the stock
transfer books of Seagate after the close of business on the day immediately
prior to the effective time. If, on or after the effective time, certificates
for shares of Seagate common stock are presented, they will be canceled and
exchanged for the right to receive the merger consideration, as provided above
under "-- Exchange and Payment Procedures for Seagate Stockholders" beginning on
page 146 of this document.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations and warranties of
Seagate to VERITAS and merger sub, including with regard to the following
matters:
- the due organization and valid existence of Seagate and its subsidiaries
and similar corporate matters;
- the capitalization of Seagate and its subsidiaries;
- the due authorization, execution and delivery of the merger agreement and
the stock purchase agreement and their binding effect on Seagate;
- the absence of conflicts with respect to Seagate's charter documents,
laws, judgments or obligations by which Seagate is bound;
- that no material consents are required (other than the filing and
effectiveness of the registration statement, the filing of this document,
the filing of a certificate of merger and filings required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) in
connection with Seagate's execution of the merger agreement and the stock
purchase agreement;
- the completeness and accuracy of Seagate's filings with the Securities
and Exchange Commission and the accuracy of its financial statements;
- the absence of liabilities other than liabilities being retained by
Seagate under the terms of the merger agreement or arising in connection
with the transactions under the merger agreement, and other than
liabilities for which VERITAS is entitled to indemnification under the
indemnification agreement described under "Other
148
<PAGE> 155
Agreements Related to the Leveraged Buyout and the Merger -- The
Indemnification Agreement" beginning on page 165 of this document;
- the absence of any material adverse effect on Seagate or its subsidiaries
since December 31, 1999;
- compliance in all material respects with laws and obligations by which
Seagate is bound;
- maintenance of and compliance with permits that are material to the
operation of Seagate's business;
- the absence of threatened or pending litigation that would reasonably be
expected to have a material adverse effect on Seagate;
- that no brokers or finders have been employed by Seagate in connection
with the merger or the leveraged buyout other than Morgan Stanley;
- the absence of liens or encumbrances with respect to assets that will not
be transferred to Suez Acquisition Company in connection with the
leveraged buyout;
- the accuracy of the information provided by Seagate for inclusion in the
registration statement or this document;
- that the board of directors of Seagate has determined that the merger,
the leveraged buyout and the transactions contemplated by the merger
agreement and the stock purchase agreement are fair to, advisable and in
the best interests of its stockholders, that the board has duly approved
the merger, the leveraged buyout, the merger agreement, the stock
purchase agreement and the other transactions contemplated by these
agreements, and has determined to recommend that the stockholders of
Seagate approve the same;
- the inapplicability of state takeover statutes to the merger, the
leveraged buyout, the merger agreement, the stock purchase agreement or
the other transactions contemplated by these agreements;
- the receipt of a written opinion from Morgan Stanley to the Seagate board
of directors to the effect that the merger consideration was fair to the
stockholders of Seagate from a financial point of view;
- the continuous beneficial ownership since May 28, 1999 by Seagate
Software of all shares of VERITAS common stock held, directly or
indirectly, by Seagate;
- the lack of involvement of Seagate or any of its affiliates in an
intercompany transaction with respect to the VERITAS common stock which
may be subject to gain recognition under applicable Treasury Regulations
under the Internal Revenue Code;
- Seagate's filing of accurate tax returns and the timely payment or
establishment of an adequate reserve for the payment of taxes owed and
the absence of any proposed deficiency for any such taxes; and
- that Seagate is not a United States real property holding company, as
defined in the Internal Revenue Code.
These representations and warranties are subject, in certain cases, to
specified exceptions and qualifications.
149
<PAGE> 156
The merger agreement also contains representations and warranties of
VERITAS and merger sub to Seagate, including with regard to the following
matters:
- the due organization and valid existence of VERITAS and its subsidiaries
and similar corporate matters;
- the capitalization of VERITAS and merger sub;
- the due authorization, execution and delivery of the merger agreement and
its binding effect on VERITAS and merger sub;
- the absence of conflicts with respect to VERITAS and merger sub's charter
documents, laws, judgments or obligations by which VERITAS or merger sub
is bound;
- that no material consents are required (other than the filing and
effectiveness of the registration statement, the filing of this document,
the filing of a certificate of merger and filings required under the
Hart-Scott-Rodino Antitrust Improvements Act) in connection with VERITAS
or merger sub's execution of the merger agreement;
- the completeness and accuracy of VERITAS' filings with the Securities and
Exchange Commission and the accuracy of its financial statements;
- the absence of any material adverse effect on VERITAS since December 31,
1998;
- the absence of threatened or pending litigation that would reasonably be
expected to have a material adverse effect on VERITAS;
- that no brokers or finders have been employed by VERITAS in connection
with the merger other than Credit Suisse First Boston Corporation;
- the accuracy of the information provided by VERITAS for inclusion in the
registration statement or this document;
- that the board of directors of VERITAS has determined that the merger and
the other transactions contemplated in the merger agreement are advisable
and in the best interests of VERITAS and its stockholders, and that the
board has duly approved the merger, the merger agreement and the other
transactions contemplated in the merger agreement, and has determined to
recommend that the stockholders of VERITAS approve the share issuance;
- the receipt of a written opinion from Credit Suisse First Boston
Corporation to the effect that the stock portion of the merger
consideration to be paid by VERITAS is fair to VERITAS from a financial
point of view; and
- that merger sub was formed solely for the purpose of engaging in
transactions contemplated by the merger agreement and has not engaged in
any business activities, conducted any operations or incurred any
liabilities other than in connection with the transactions contemplated
under the merger agreement.
These representations and warranties are subject, in certain cases, to
specified exceptions and qualifications.
The representations and warranties of each of the parties to the merger
agreement will expire upon completion of the merger.
150
<PAGE> 157
COVENANTS RELATING TO SOLICITATIONS BY SEAGATE PRIOR TO THE COMPLETION OF THE
MERGER
Under the merger agreement, Seagate has agreed that, prior to the effective
time of the merger or the termination of the merger agreement, Seagate, its
subsidiaries and their officers, directors, agents, advisors and representatives
may not solicit, initiate, encourage, or induce any third party to make, submit
or announce, an offer or proposal regarding any of the following:
- the acquisition by any third party of more than 15% in interest or
beneficial ownership of the voting power of the total outstanding capital
stock of Seagate through an issuance of securities by Seagate, or a
direct purchase, tender or exchange offer, merger, consolidation or other
business combination;
- a sale, lease, exchange, transfer, license or disposition by Seagate of
more than 15% of the fair market value of its consolidated property and
assets; or
- the liquidation or dissolution of Seagate, excluding in all cases any
disposition of the operating assets being sold to Suez Acquisition
Company in the leveraged buyout.
In addition, under the terms of the merger agreement, Seagate may not
participate in any discussions or negotiations regarding any of the transactions
described above, furnish information to any third party regarding or otherwise
facilitate such transactions. Seagate has also agreed that it will not enter
into a letter of intent or similar document, or any contract, agreement or
commitment regarding any of the transactions described above, or otherwise
approve, recommend or endorse any such transactions.
Notwithstanding the foregoing restrictions, under the terms of the merger
agreement, Seagate may, prior to the date of approval of the merger agreement
and the merger by the stockholders of Seagate, enter into a confidentiality or
non-disclosure agreement with any third party, furnish information regarding
Seagate to any third party, and enter into discussions or negotiations with any
third party if all of the following occur:
- Seagate receives a bona fide written offer from a third party regarding
any of the following transactions:
- a merger, consolidation or other business combination transaction
involving Seagate pursuant to which Seagate's stockholders would hold
less than fifty percent of the surviving entity;
- a sale or other disposition by Seagate of property and assets
representing all or substantially all of Seagate's consolidated assets;
or
- the acquisition by any third party of beneficial ownership of more than
fifty percent of the voting power of the total outstanding capital
stock of Seagate;
provided that the board of directors of Seagate determines, after
consultation with its outside financial advisors, that the proposed
transaction is more favorable to the stockholders of Seagate, from a
financial point of view, than the merger agreement and the merger;
- Seagate, its subsidiaries and their respective agents, advisors and
representatives have not violated restrictions regarding Seagate's
ability to solicit third party proposals as described above;
- the board of directors of Seagate concludes in good faith, after
consulting with its legal counsel that it is reasonably necessary to
engage in such action in order to
151
<PAGE> 158
comply with its fiduciary obligations to the stockholders of Seagate
under applicable law;
- Seagate obtains a customary confidentiality or non-disclosure agreement
from the third party which contains terms and conditions which are
substantially the same as the terms of Seagate's confidentiality
agreement with VERITAS; and
- prior to furnishing any non-public information to the third party or
entering into discussions or negotiations with the third party, Seagate
notifies VERITAS of its intention to furnish such information or to enter
into such discussions or negotiations and provides VERITAS with the same
information (to the extent not already provided to VERITAS) and the terms
and conditions of any such discussions and negotiations.
COVENANT RELATING TO MODIFICATION OF THE STOCK PURCHASE AGREEMENT
Seagate has agreed not to waive, amend or modify, and has agreed to cause
Seagate Software not to waive, amend or modify, any terms of the stock purchase
agreement, provided that Seagate may terminate the stock purchase agreement in
accordance with the termination provisions in the merger agreement.
COVENANT TO SEEK WAIVERS FOR CLAIMS RELATING TO CANCELLATION OF SHARES AND
OPTIONS
Seagate has agreed to use its best efforts to obtain from certain senior
executive officers of Seagate a waiver of any claims he or she may have against
VERITAS or Seagate resulting from the cancellation of the restricted shares of
Seagate common stock and the unvested options to purchase shares of Seagate
stock that are being converted into shares of, or options to purchase, as
applicable, Suez Acquisition Company stock held by such executive officers of
Seagate (as described under "Special Factors Regarding the Leveraged Buyout and
the Merger -- Consideration of the Leveraged Buyout and the Merger by
Seagate -- Interests of Directors and Other Executive Officers of Seagate in the
Leveraged Buyout and the Merger -- Equity Rollover" beginning on page 99 of this
document). Seagate is also obligated to use its best efforts to obtain similar
waivers from any individual that is party to any employment, severance or change
in control or similar agreement with Seagate or who participates in any Seagate
plan providing severance or change in control benefits.
COVENANT TO RECOMMEND THE MERGER TO THE SEAGATE STOCKHOLDERS AND THE VERITAS
STOCKHOLDERS
VERITAS and Seagate have agreed to seek and solicit the requisite vote of
stockholders at their respective special meetings for, in the case of Seagate,
the adoption and approval of the stock purchase agreement and the leveraged
buyout, and the merger agreement and the merger, and, in the case of VERITAS,
the adoption and approval of the issuance of new shares of VERITAS common stock
in connection with the merger. Both the VERITAS and the Seagate boards of
directors are obligated to recommend to their respective stockholders that they
vote in favor of such matters. Notwithstanding the foregoing commitment, the
board of directors of Seagate may withdraw, amend or modify its recommendation
if all of the following occur:
- Seagate receives a proposal from a third party that meets one of the
criteria set forth in the first bullet point of the third paragraph under
"-- Covenants Relating to
152
<PAGE> 159
Solicitations by Seagate Prior to the Completion of the Merger" beginning
on page 151 of this document;
- Seagate, its subsidiaries and their respective agents, advisors and
representatives have not violated the terms of the merger agreement
regarding restrictions on their ability to solicit third party proposals
as described above; and
- the board of directors of Seagate concludes in good faith, after
consulting with its legal counsel, that such withdrawal, amendment or
modification is necessary in order to comply with its fiduciary
obligations to the stockholders of Seagate under applicable law.
COVENANTS RELATING TO DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE
The merger agreement provides that VERITAS will fulfill and honor in all
respects the obligations of Seagate under any indemnification agreements between
Seagate and any of its directors and officers, as in effect prior to the date of
the merger agreement, but only to the extent that the obligations under such
indemnification agreements relate to approval and adoption of the merger. In
addition, the merger agreement provides that, for a period of six years after
the merger, VERITAS will cause Seagate to maintain the indemnification
obligations, and the exculpation, expense advancement and elimination of
liability provisions, contained in Seagate's certificate of incorporation and
bylaws immediately prior to the merger to the extent that such provisions apply
to the adoption and approval of the merger, and will not permit Seagate to
amend, repeal or otherwise modify these provisions in a manner that adversely
affects the rights of any directors, officers, employees or agents of Seagate,
except as otherwise required by applicable law. The merger agreement further
provides that VERITAS will use commercially reasonable efforts to maintain in
effect, for a period of six years following the merger, a policy of directors'
and officers' liability insurance for the benefit of the directors and officers
of Seagate who are currently covered under Seagate's directors' and officers'
liability insurance on terms that are comparable to those of Seagate's current
directors' and officers' insurance coverage.
THE CLOSING; CONDITIONS TO THE CLOSING
THE CLOSING
The closing date of the merger will be determined by Seagate and VERITAS,
but will be no later than the second business day following the satisfaction or
waiver of the conditions to the closing that are to be satisfied other than on
the closing date. At the closing, Seagate and VERITAS will effect the merger by
filing a certificate of merger with the Secretary of State of the State of
Delaware in accordance with Delaware law.
CONDITIONS TO THE CLOSING
The obligations of each of Seagate, VERITAS and merger sub to consummate
the merger are subject to the fulfillment or waiver at or prior to the effective
time of certain conditions, including the following:
- approval of the merger agreement and the merger by the requisite vote of
the stockholders of Seagate at the Seagate special meeting, and approval
of the share issuance by the requisite vote of the stockholders of
VERITAS at the VERITAS special meeting;
153
<PAGE> 160
- the Securities and Exchange Commission having declared the registration
statement (of which this document is a part) effective and no stop order
or similar proceeding having been initiated or threatened;
- no law, ruling, court or other order or injunction having been enacted or
issued directing that the transactions contemplated by the merger
agreement not be consummated, and all requirements under the
Hart-Scott-Rodino Antitrust Improvements Act relating to the contemplated
transactions having expired or terminated early;
- VERITAS and Seagate having received written opinions from their
respective tax counsels that the merger should constitute a
"reorganization" within the meaning of the applicable sections of the
Internal Revenue Code, and such opinions not having been withdrawn; and
- the closing of the leveraged buyout, and the absence of any assets or
liabilities of Seagate and Seagate Software other than the assets being
retained by Seagate and liabilities relating to these assets or
liabilities for which VERITAS is entitled to indemnification under the
indemnification agreement.
In the event that tax counsel were unable to deliver the tax opinions
referred to above, the merger would not be consummated unless the condition
requiring the delivery of tax opinions was waived. Neither VERITAS nor Seagate
intends to waive this condition. If tax counsel were unable to deliver the tax
opinions, revised proxy materials would be circulated to Seagate stockholders
describing the altered tax consequences of the merger and a new vote of the
Seagate stockholders would be held.
The obligation of Seagate to effect the merger and other transactions
contemplated under the merger agreement is further subject to the fulfillment or
waiver on or prior to the effective time of the following conditions:
- accuracy in all material respects of all representations and warranties
of VERITAS contained in the merger agreement as of the date of the merger
agreement and as of the closing date (except for representations and
warranties made only as of a specified date), except to the extent that
any inaccuracies would not, in the aggregate, reasonably be expected to
have a material adverse effect on VERITAS; and
- the performance in all material respects by VERITAS and merger sub of
their obligations under the merger agreement.
The obligation of VERITAS and merger sub to effect the merger and the other
transactions under the merger agreement is further subject to the fulfillment or
waiver at or prior to the effective time of the following conditions:
- accuracy in all material respects of all representations and warranties
of Seagate contained in the merger agreement as of the date of the merger
agreement and as of the closing date (except for representations and
warranties made only as of a specified date), except to the extent that
any inaccuracies would not, in the aggregate, reasonably be expected to
have a material adverse effect on Seagate;
- the performance in all material respects by Seagate of its obligations
under the merger agreement;
- accuracy in all material respects of the representations and warranties
of Suez Acquisition Company and its subsidiaries under the
indemnification agreement as of
154
<PAGE> 161
the date of the merger agreement and as of the closing date and the
binding effect of the indemnification agreement on Suez Acquisition
Company and each of its subsidiaries;
- that all subsidiaries of Suez Acquisition Company have executed and
delivered a joinder agreement agreeing to be bound by the terms of the
indemnification agreement; and
- the closing of the bank financing arrangements contemplated under the
stock purchase agreement on the terms and conditions specified in the
commitment letters referred to in the stock purchase agreement, and the
absence of any material change to any term of these financing
arrangements that would adversely impact the ability of Suez Acquisition
Company and its subsidiaries to satisfy their obligations under the
indemnification agreement.
AMENDMENT OR WAIVER OF TERMS OF THE MERGER AGREEMENT
The merger agreement provides that VERITAS and Seagate may amend the merger
agreement or extend the time for performance, waive any inaccuracies in the
representations and warranties and waive compliance by the other party with any
of the agreements or fulfillment of conditions to its own obligations in whole
or in part if the waiver or extension is in writing and signed on behalf of such
party. However, under the terms of the stock purchase agreement, Seagate is not
allowed to agree to any such amendment, modification or waiver without the
consent of Suez Acquisition Company.
TERMINATION; TERMINATION FEES AND PAYMENTS
TERMINATION
The merger agreement provides that it may be terminated at any time prior
to the effective time, before or after its approval and adoption by the Seagate
stockholders and the VERITAS stockholders at their respective special meetings:
- by mutual written consent, with the authorization of the VERITAS and
Seagate boards of directors;
- by either Seagate or VERITAS:
- if the merger has not been completed by December 31, 2000, provided
that this termination right is not available to any party if the merger
has not occurred by this date principally because of a failure by that
party to fulfill its obligations under the merger agreement;
- if a governmental entity has taken any action restraining, enjoining or
prohibiting the merger; or
- if less than the required majority of Seagate stockholders votes in
favor of the merger agreement and the merger or less than the required
majority of VERITAS stockholders votes in favor of the approval of the
issuance of new shares of VERITAS common stock in connection with the
merger, provided that this termination right is not available to
Seagate if the failure to obtain the approval of Seagate stockholders
was caused by a material breach by Seagate of the merger agreement;
155
<PAGE> 162
- by Seagate:
- if there has been a breach of the representations and warranties of
VERITAS contained in the merger agreement, which breach would cause a
failure of the condition to closing relating to the accuracy of the
representations and warranties made by VERITAS in the merger agreement,
and VERITAS fails to cure the breach within 35 days after Seagate
delivers notice to VERITAS; or
- if the VERITAS board of directors withdraws or modifies in any manner
adverse to Seagate its recommendation in favor of the merger; or
- if, prior to the receipt of approval of the stockholders of Seagate of
the merger agreement and merger:
- Seagate receives a bona fide written offer made by a third
party to consummate (1) a merger, consolidation, business
combination or other similar transaction involving Seagate that
would result in the stockholders of Seagate prior to completion
of such transaction holding less than 50% of the equity
interest in the surviving or resulting entity of such
transaction; (2) a sale of at least 50% of Seagate's assets and
properties (excluding inventory and used equipment sold in the
ordinary course of business); or (3) the acquisition by any
person or group (including by way of a tender offer or an
exchange offer or issuance by Seagate), directly or indirectly,
of beneficial ownership or a right to acquire beneficial
ownership of shares representing more than 50% of the voting
power of the then outstanding shares of capital stock of
Seagate, and any financing required to consummate the
transaction contemplated by such offer is committed or is
likely in the judgment of the board of directors of Seagate to
be obtained by such third party on a timely basis;
- the Seagate board of directors reasonably determines, after
consultation with its financial advisor, that the offer is more
favorable to the stockholders of Seagate, from a financial
point of view, than the terms of the merger agreement and the
merger;
- Seagate has not violated the terms of the merger agreement
regarding restrictions on its ability to solicit third party
proposals;
- the Seagate board of directors further concludes in good faith,
after consultation with its outside counsel, that there is a
reasonable probability that the failure to accept such offer
would result in a violation of its fiduciary obligations under
applicable law;
- Seagate enters into an agreement in connection with the offer;
and
- Seagate pays VERITAS the termination fee described below; or
- by VERITAS:
- if there has been a breach of the representations and warranties of
Seagate contained in the merger agreement, which breach would cause a
failure of the condition to closing relating to the accuracy of the
representations and warranties made by Seagate in the merger agreement,
and Seagate fails to cure the breach within 35 days after VERITAS
delivers notice to Seagate;
- if the Seagate board of directors withdraws or modifies in any manner
adverse to VERITAS its recommendation in favor of the merger agreement
or the merger,
156
<PAGE> 163
or takes any action or makes any statement inconsistent with its
recommendation; or
- if a person unaffiliated with VERITAS commences a tender or exchange
offer relating to the securities of Seagate and Seagate, in the
statement it delivers to its securityholders as required under
applicable federal securities laws, does not recommend rejection of such
tender or exchange offer.
In the event of termination, the merger agreement will become null and void
except that obligations relating to the payment of termination fees as more
fully described below under "-- Termination Fees and Payments." Also, any party
that intentionally breaches any provision of the merger agreement will continue
to be liable for its breach after the merger agreement is terminated.
All fees (other than termination fees described below) and expenses
incurred in connection with the merger agreement and the transactions under the
merger agreement will be paid by the party that incurs such expenses, whether or
not the merger is consummated.
TERMINATION FEES AND PAYMENTS
Under the terms of the merger agreement, Seagate must pay VERITAS a
termination fee of $440 million in the following circumstances:
- if the Seagate board of directors withdraws or modifies in any manner
adverse to VERITAS its recommendation in favor of the merger agreement or
the merger, or takes any action or makes any statement inconsistent with
its recommendation, and VERITAS terminates the merger agreement as a
result of these actions;
- if a person unaffiliated with VERITAS commences a tender or exchange
offer relating to the securities of Seagate and Seagate, in its statement
to its securityholders required under federal securities law, does not
recommend within 10 business days rejection of the tender or exchange
offer, and VERITAS terminates the merger agreement as a result of
Seagate's failure;
- if Seagate terminates the merger agreement following receipt of a bona
fide written offer which would allow Seagate to terminate the merger
agreement as described above under "Termination; Termination Fees and
Payments -- Termination";
- if VERITAS terminates the merger agreement because less than the required
majority of Seagate stockholders voted in favor of the merger agreement
and the merger and (1) prior to the time of the vote of the Seagate
stockholders, a third party had announced or communicated to Seagate a
proposal for an alternative transaction (described in the next paragraph)
and (2) within 12 months following VERITAS' termination of the merger
agreement, Seagate enters into an agreement relating to or consummates an
alternative transaction (with the termination fee being payable at the
time Seagate enters into an agreement relating to or consummates an
alternative transaction); or
- if either VERITAS or Seagate terminates the merger agreement because the
merger has not occurred on or prior to December 31, 2000 and (1) prior to
the termination date, a third party has announced or communicated to
Seagate a proposal for an alternative transaction, (2) following the
announcement or communication of this proposal, Seagate had intentionally
breached (and not cured) any of its covenants or agreements in the merger
agreement, and this breach
157
<PAGE> 164
contributed to the failure of the merger to occur on or before December
31, 2000 and (3) within 12 months following the termination, Seagate
enters into an agreement relating to or consummates an alternative
transaction (with the termination fee being payable at the time Seagate
enters into an agreement relating to or consummates an alternative
transaction).
An alternative transaction is any transaction or series of related
transactions (excluding any such transaction proposed by VERITAS) involving:
- any acquisition or purchase of more than 50% in interest of the total
outstanding voting securities of Seagate;
- any tender offer or exchange offer that if consummated would result in
any person or group of affiliated persons beneficially owning more than
50% of the total outstanding voting securities of Seagate;
- any merger, consolidation, business combination or similar transaction
involving Seagate pursuant to which the stockholders of Seagate
immediately preceding such transaction would hold less than 50% of the
equity interests in the surviving or resulting entity of such
transaction;
- any sale, lease (other than in the ordinary course of business),
exchange, transfer, license (other than in the ordinary course of
business), acquisition or disposition of more than 50% of the assets and
properties of Seagate; or
- any liquidation or dissolution of Seagate, excluding in all cases any
disposition of the operating assets to Suez Acquisition Company under the
stock purchase agreement.
AMENDMENTS TO STOCK PURCHASE AGREEMENT, MERGER AGREEMENT AND INDEMNIFICATION
AGREEMENT
Under a consolidated amendment to the stock purchase agreement, the merger
agreement and the indemnification agreement, which was executed on August 29,
2000, the amount of cash Seagate is required to have on hand as a condition to
completion of the leveraged buyout was reduced from $775 million to $765
million. In addition, the consolidated amendment clarified the manner of
satisfying applicable tax withholding obligations in connection with the merger,
and established other agreements with respect to Seagate's tax refunds and
credits.
A second consolidated amendment to the stock purchase agreement, the merger
agreement and the indemnification agreement, which was executed on October 18,
2000, increased the purchase price to be paid by Suez Acquisition Company for
Seagate's operating assets was increased from $2 billion to $2.050 billion,
changed VERITAS' right to elect to retain either $500 million or $750 million of
cash to a right to elect to retain either $250 million or $500 million of cash,
specified that VERITAS' election to retain cash must be made during the 15
trading days ending two trading days prior to the Seagate special meeting, and
reduced the maximum amount that may be withheld at the completion of the merger
and deposited in a trust from $300 million to $150 million.
RESTRICTIONS ON SALES OF SHARES BY AFFILIATES
The shares of VERITAS common stock to be issued in the merger will be
registered under the Securities Act of 1933, as amended. These shares will be
freely transferable under the Securities Act, except for shares of VERITAS stock
issued to any person who is
158
<PAGE> 165
an affiliate of Seagate or of VERITAS. Persons who may be deemed to be
affiliates include individuals or entities that control, are controlled by, or
are under common control with Seagate or VERITAS and may include some of their
respective officers and directors, as well as their respective principal
stockholders. Affiliates may not sell their shares of VERITAS common stock
acquired in the merger except pursuant to (1) an effective registration
statement under the Securities Act covering the resale of those shares, (2) an
exemption under Rule 144 or Rule 145 under the Securities Act, as applicable, or
(3) any other applicable exemption under the Securities Act.
APPRAISAL RIGHTS
Holders of shares of VERITAS common stock are not entitled to appraisal
rights under Section 262 of the Delaware General Corporation Law in connection
with the leveraged buyout or the merger.
Holders of shares of Seagate common stock are entitled to appraisal rights
under Section 262 of the Delaware General Corporation Law. A holder having a
beneficial interest in shares of Seagate common stock held of record in the name
of another person, such as a broker or nominee, must act promptly to cause the
record holder to follow the steps summarized below properly and in a timely
manner to perfect whatever appraisal rights the beneficial owner may have.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO APPRAISAL RIGHTS UNDER THE DELAWARE GENERAL CORPORATION LAW AND IS QUALIFIED
BY THE FULL TEXT OF SECTION 262, WHICH IS REPRINTED IN ITS ENTIRETY AS ANNEX I
TO THIS DOCUMENT.
All references in Section 262 and in this summary to a "stockholder" are to
the record holder of shares of Seagate common stock as to which appraisal rights
are asserted. As used in this document, "surviving corporation" means Seagate,
the corporation surviving the merger.
Holders of shares of Seagate common stock who do not wish to accept,
pursuant to the merger, the merger consideration provided for in the merger
agreement and who follow the procedures set forth in Section 262 of the Delaware
General Corporation Law will be entitled to have their shares of Seagate common
stock appraised by the Delaware Court of Chancery and to receive payment in cash
of the "fair value" of such shares of common stock, exclusive of any element of
value arising from the accomplishment or expectation of the merger, together
with a fair rate of interest, if any, as determined by such court.
Under Section 262 of the Delaware General Corporation Law, where a merger
is to be submitted for approval and adoption at a meeting of stockholders, as in
the case of the Seagate special meeting, the corporation submitting the proposed
merger to a vote of its stockholders must notify each of its stockholders
entitled to appraisal rights that such appraisal rights are available. Such
notice must be given by the corporation to its stockholders entitled to
appraisal rights no less than 20 days prior to the meeting at which the merger
proposal will be submitted to the stockholders for a vote and such notice must
include a copy of Section 262 of the Delaware General Corporation Law. THIS
DOCUMENT CONSTITUTES SUCH NOTICE TO THE HOLDERS OF SHARES OF SEAGATE COMMON
STOCK, AND THE APPLICABLE STATUTORY PROVISIONS OF THE DELAWARE GENERAL
CORPORATION LAW ARE ATTACHED TO THIS DOCUMENT AS ANNEX I. Any holder who wishes
to exercise such appraisal rights, or who wishes to preserve his or her right to
do so, should review the following discussion and Annex I to this document
carefully because failure to timely and properly comply with the
159
<PAGE> 166
procedures specified will result in the loss of appraisal rights under the
Delaware General Corporation Law.
A HOLDER OF SHARES OF SEAGATE COMMON STOCK WISHING TO EXERCISE HIS OR HER
APPRAISAL RIGHTS MUST DELIVER TO THE SECRETARY OF SEAGATE, BEFORE THE VOTE ON
THE MERGER AND THE MERGER AGREEMENT AT THE SEAGATE SPECIAL MEETING, A WRITTEN
DEMAND FOR APPRAISAL OF HIS OR HER SHARES OF SEAGATE COMMON STOCK AND MUST NOT
VOTE HIS OR HER SHARES OF SEAGATE COMMON STOCK IN FAVOR OF APPROVAL AND ADOPTION
OF THE MERGER AND THE MERGER AGREEMENT. Because a proxy which does not contain
voting instructions will, unless revoked, be voted for approval and adoption of
the merger and the merger agreement, a holder of shares of Seagate common stock
who votes by proxy and who wishes to exercise his appraisal rights must:
- vote against approval and adoption of the merger and the merger
agreement; or
- abstain from voting on approval and adoption of the merger and the merger
agreement.
Neither voting (in person or by proxy) against, abstaining from voting on
or failing to vote on the proposal to approve and adopt the merger and the
merger agreement will constitute a written demand for appraisal within the
meaning of Section 262 of the Delaware General Corporation Law. The written
demand for appraisal must be in addition to and separate from any such proxy or
vote. In addition, a holder wishing to exercise his or its appraisal rights must
continue to hold all of such holder's other shares of Seagate common stock from
the date of the demand for appraisal until the completion of the merger.
Only the person who is the holder of record on the date the written demand
for appraisal is made is entitled to assert appraisal rights for the Seagate
common stock registered in that holder's name. A demand for appraisal should be
executed by or on behalf of the holder of record, fully and correctly, as his or
her name appears on the stock certificate(s). If the shares of Seagate common
stock are owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, execution of the demand should be made in that capacity,
and if the shares of common stock are owned of record by more than one person,
as in a joint tenancy and tenancy-in-common, the demand should be executed by or
on behalf of all joint owners. An authorized agent, including one or more joint
owners, may execute a demand for appraisal on behalf of a holder of record;
however, the agent must identify the record owner or owners and expressly
disclose the fact that, in executing the demand, the agent is agent for such
owner or owners.
A record holder such as a broker who holds shares of Seagate common stock
as nominee for several beneficial owners may exercise appraisal rights with
respect to the shares of Seagate common stock held for one or more beneficial
owners while not exercising such rights with respect to the shares of Seagate
common stock held for other beneficial owners. In such a case, the written
demand should set forth the number of shares of Seagate common stock as to which
appraisal is sought and when no number of shares of Seagate common stock is
expressly mentioned the demand will be presumed to cover all shares of Seagate
common stock held in the name of the record owner. Holders who hold their shares
of Seagate common stock in brokerage accounts or other nominee forms and who
wish to exercise appraisal rights are urged to consult with their brokers to
determine the appropriate procedures for the making of a demand for appraisal by
such a nominee.
All written demands for appraisal must be delivered to the Secretary of
Seagate, either in person or by mail (certified mail, return receipt requested,
being the recommended form of transmittal) addressed to him at: Seagate
Technology, Inc., 920 Disc Drive, Scotts Valley,
160
<PAGE> 167
California 95066. All written demands for appraisal must be received by Seagate
before the taking of the vote on the merger agreement and the merger.
Within 10 days after the effective time of the merger, the surviving
corporation must send a notice as to the effectiveness of the merger to each
former stockholder of Seagate who has made such a written demand for appraisal
and who has not voted in favor of approval and adoption of the merger and the
merger agreement. Within 120 days after the effective time, but not thereafter,
the surviving corporation, or any holder who is entitled to appraisal rights
under Section 262 of the Delaware General Corporation Law and has complied with
the requirements of that section, may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of the shares of Seagate
common stock. The surviving corporation is under no obligation to and does not
presently intend to file a petition in respect of the appraisal of the fair
value of the shares of Seagate common stock. Accordingly, it is the obligation
of the holders to initiate all necessary action to perfect their appraisal
rights within the time prescribed in Section 262 of the Delaware General
Corporation Law.
Within 120 days after the effective time, any holder who has complied with
the requirements under Section 262 of the Delaware General Corporation Law for
exercise of appraisal rights will be entitled, upon written request, to receive
from the surviving corporation a statement setting forth the aggregate number of
shares of Seagate common stock with respect to which demands for appraisal have
been received and which have not voted in favor of approval and adoption of the
merger and the merger agreement, and the aggregate number of holders of such
shares of Seagate common stock. Such statements must be mailed within 10 days
after a written request therefor has been received by the surviving corporation.
If a petition for appraisal is duly filed by a holder of shares of Seagate
common stock and a copy thereof is delivered to the surviving corporation, the
surviving corporation will then be obligated within 20 days to provide the
Delaware Court of Chancery with a duly verified list containing the names and
addresses of all holders of shares of Seagate common stock who have demanded
appraisal of their shares. After notice to such holders, the Delaware Court of
Chancery is empowered to conduct a hearing upon the petition to determine those
holders who have complied with Section 262 of the Delaware General Corporation
Law and who have become entitled to appraisal rights under that section. The
Delaware Court of Chancery may require the holders who have demanded payment for
their shares of Seagate common stock to submit their stock certificates to the
Register in Chancery for a notation thereon of the pendency of the appraisal
proceedings, and if any holder fails to comply with such direction, the Delaware
Court of Chancery may dismiss the proceedings as to such holder.
After determining the holders entitled to an appraisal, the Delaware Court
of Chancery will appraise the "fair value" of their shares of Seagate common
stock, exclusive of any element of value arising from the accomplishment or
expectation of the merger, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. Holders considering
seeking appraisal should be aware that the fair value of their shares of Seagate
common stock as determined under Section 262 of the Delaware General Corporation
Law could be more than, the same as or less than the consideration they would
receive pursuant to the merger agreement if they did not seek appraisal of their
shares of Seagate common stock and that investment banking opinions as to
fairness from a financial point of view are not necessarily opinions as to fair
value under Section 262 of the Delaware General Corporation Law. The Delaware
Supreme Court has stated that
161
<PAGE> 168
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered in the appraisal proceedings. More specifically, the Delaware
Supreme Court has stated that: "Fair value, in an appraisal context, measures
'that which has been taken from the stockholder, viz., his proportionate
interest in a going concern.' In the appraisal process the corporation is valued
'as an entity,' not merely as a collection of assets or by the sum of the market
price of each share of its stock. Moreover, the corporation must be viewed as an
on-going enterprise, occupying a particular market position in the light of
future prospects." In addition, Delaware courts have decided that the statutory
appraisal remedy, depending on factual circumstances, may or may not be a
dissenter's exclusive remedy. The Court also will determine the amount of
interest, if any, to be paid upon the amounts to be received by persons whose
shares of Seagate common stock have been appraised. The costs of the action may
be determined by the Court and taxed upon the parties as the Court deems
equitable. The Court also may order that all or a portion of the expenses
incurred by any stockholder in connection with an appraisal, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts
utilized in the appraisal proceeding, be charged pro rata against the value of
all of the shares of Seagate common stock that have effectively pursued
appraisal.
From and after the effective time, a holder who has duly demanded an
appraisal in compliance with Section 262 of the Delaware General Corporation Law
will not be entitled to vote the shares of Seagate common stock subject to the
appraisal demand for any purpose or be entitled to the payment of dividends or
other distributions, if any, on those shares (except dividends or other
distributions, other than the merger consideration, payable to holders of record
of shares of Seagate common stock as of a date prior to the effective time).
If any holder who demands appraisal of his shares of Seagate common stock
under Section 262 of the Delaware General Corporation Law fails to perfect, or
effectively withdraws or loses, his right to appraisal as provided in the
Delaware General Corporation Law, the shares of Seagate common stock of such
stockholder will be converted into the right to receive the merger consideration
in accordance with the merger agreement. A holder will fail to perfect, or
effectively lose or withdraw, his or her right to appraisal if he or she:
- fails to provide a written demand for appraisal of his or her shares of
Seagate common stock before the taking of the vote on the merger;
- votes for approval and adoption of the merger and the merger agreement
(or submits an executed proxy without voting instructions);
- does not file a petition for appraisal in the Court of Chancery within
120 days after the effective time of the merger; or
- delivers to Seagate (or, after the effective time, to the surviving
corporation) a written withdrawal of his or her demand for appraisal and
an acceptance of the merger, except that any such attempt to withdraw
made more than 60 days after the effective time will require the written
approval of the surviving corporation.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW FOR PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH
RIGHTS.
162
<PAGE> 169
LISTING ON THE NASDAQ NATIONAL MARKET OF VERITAS COMMON STOCK TO BE ISSUED IN
THE MERGER
VERITAS has agreed to cause the new shares of VERITAS common stock to be
issued in the merger to be approved for listing on the Nasdaq National Market,
subject to official notice of issuance prior to the effective time.
DELISTING AND DEREGISTRATION OF SEAGATE COMMON STOCK AFTER THE MERGER
If the merger is completed, Seagate's common stock will be delisted from
The New York Stock Exchange and will be deregistered under the Securities
Exchange Act of 1934, as amended. Seagate will thereafter no longer be required
to file quarterly, annual or other reports with the Securities and Exchange
Commission.
LITIGATION REGARDING THE LEVERAGED BUYOUT AND MERGER
After the announcement of the leveraged buyout and merger, seventeen
putative class action lawsuits were filed in the Chancery Court of Delaware
alleging that Seagate and its directors breached their fiduciary duties in
connection with the leveraged buyout and merger. VERITAS was also named as a
defendant in certain of the lawsuits. On April 1, 2000, those seventeen lawsuits
were consolidated into one action by order of the Chancery Court (the "Delaware
Action"). On April 19, 2000, Seagate and its directors were served with an
amended and consolidated class action complaint. At that time, certain of
Seagate's officers, VERITAS, and Silver Lake Partners were named as defendants.
On May 22, 2000, the Delaware Chancery Court certified the Delaware Action as a
class action. On September 15, 2000, Seagate and its directors, VERITAS and
Silver Lake Partners were served with a second amended and consolidated class
action complaint, a copy of which is attached to this document as part of Annex
L. On October 13, 2000, the parties reached an agreement in principle to settle
the Delaware Action, the terms of which are included in a Memorandum of
Understanding also attached to this document as part of Annex L. The primary
elements of the agreement include (1) Suez Acquisition Company will increase the
cash purchase price in the leveraged buyout by $50 million in cash, from $2.0
billion to $2.050 billion; (2) the merger agreement will be amended to (a)
replace VERITAS' right to elect to retain either $500 million or $750 million of
cash with a right to elect to retain either $250 million or $500 million of
cash, (b) reduce the maximum amount that may be held back in escrow to cover
potential Seagate tax liabilities from $300 million to $150 million, and (c)
specify that VERITAS' election to retain cash must be made during the 15 trading
days ending two trading days prior to the Seagate special meeting; (3) Suez will
pay any attorney's fees that may be awarded to the plaintiff's counsel; and (4)
prior to the closing of the transaction, Seagate will obtain a fairness opinion
from Lehman Brothers regarding the combined consideration to be received by
Seagate stockholders in the merger and the leveraged buyout taken together. The
$50 million of additional consideration will be paid upon court approval of the
settlement and dismissal with prejudice of the Delaware Action and of the five
California lawsuits referred to in the last paragraph of this section. Although
Seagate expects final court approval and dismissal to occur within the 120 day
period following the completion of the merger, it is possible that settlement
and dismissal could take substantially longer. The $50 million of additional
consideration will be held in escrow by VERITAS, and earn interest at the 90 day
treasury bill rate, pending distribution to Seagate stockholders. In the event
that VERITAS determines, in its reasonable judgment, that the conditions to
release of the $50 million of additional consideration have become incapable of
being satisfied, the
163
<PAGE> 170
$50 million of additional consideration and any interest on such amount will be
returned to Suez Acquisition Company.
The Seagate board of directors has not received the Lehman Brothers opinion
referred to above, but will obtain the opinion from Lehman Brothers at least two
weeks prior to the Seagate special meeting. When this opinion is received,
Seagate will file an amendment to the Schedule 13E-3 transaction statement filed
in connection with the transactions described in this document to include the
text of that opinion, together with a description of the analysis utilized in
rendering the opinion. In addition, Seagate will also file a Current Report on
Form 8-K under the Securities Exchange Act of 1934, which will contain the
Lehman Brothers opinion and analysis as exhibits, at least two weeks prior to
the date of the Seagate special meeting. Copies of the Lehman Brothers opinion,
when obtained by the Seagate board of directors, can be obtained from Seagate by
calling Bill Rowley, Seagate Investor Relations, at (831) 439-2371.
In addition to the Delaware Action, five putative class action lawsuits
were filed in California Superior Court, also alleging that the directors and
certain of the officers of Seagate breached their fiduciary duties in connection
with the leveraged buyout and merger (the "California Actions"). VERITAS and
Silver Lake Partners are also named as defendants in certain of the lawsuits. On
June 8, 2000, the defendants filed a Petition for Coordination seeking
coordination of the five California Actions in a single forum. The principal
relief sought in the California Actions is certification of the putative class,
an injunction against the leveraged buyout and merger, recission of the
leveraged buyout and merger in the event that they are consummated, and payment
of an unspecified sum in damages. Seagate, VERITAS and Silver Lake Partners
believe that the California Actions are without merit and intend to contest them
vigorously.
164
<PAGE> 171
OTHER AGREEMENTS RELATED TO THE LEVERAGED BUYOUT AND THE MERGER
The following is a summary description of the terms of certain agreements,
as amended, entered into in connection with the leveraged buyout and the merger
that we believe are important to you. However, the following summary does not
describe all of the terms of the agreements described below, only those that we
believe to be material. The following summary is qualified by reference to the
agreements, as amended, described below. A copy of the agreements described
below, as amended, are attached to this document as Annex C, Annex D, Annex E
and Annex F, respectively, and are incorporated herein by reference. We
encourage you to read the agreements described below in their entirety.
THE INDEMNIFICATION AGREEMENT
In connection with the leveraged buyout and the merger, Seagate, VERITAS
and Suez Acquisition Company entered into an indemnification agreement, as
amended. Under the terms of the indemnification agreement, Suez Acquisition
Company and its subsidiaries have jointly and severally agreed to indemnify
Seagate and VERITAS and their respective affiliates from and against losses,
claims, damages, fines, expenses and other costs, including reasonable
attorneys' fees and disbursements, related to:
- all liabilities, other than designated liabilities (which are described
in the next paragraph), and liabilities relating to taxes (for which Suez
Acquisition Company has agreed to indemnify Seagate and VERITAS and their
respective affiliates to the extent set forth in the final two bullet
points of this paragraph) arising out of or related to the ownership,
operations or conduct by Seagate and its predecessors or affiliates
(other than VERITAS and its subsidiaries) of their respective businesses,
properties, assets or liabilities on or prior to the closing of the
leveraged buyout;
- all liabilities, other than designated liabilities, arising out of or
related to the ownership, operations or conduct by Suez Acquisition
Company or any of its subsidiaries of their respective businesses,
properties, assets or liabilities after the closing of the leveraged
buyout;
- the enforcement by Seagate and VERITAS and their affiliates of their
rights under the indemnification agreement;
- any breach by Suez Acquisition Company of its agreements, obligations,
covenants, representations or warranties contained in the indemnification
agreement, the stock purchase agreement or certain other agreements
relating to the indemnification agreement or the stock purchase agreement
to which Suez Acquisition Company is a party;
- all liabilities for taxes of Seagate and Seagate Software relating to
periods ending on (or treated as ending on) the date of the leveraged
buyout; and
- all liabilities for taxes, whenever arising, of the subsidiaries sold to
Suez Acquisition Company or attributable to the assets of Seagate
transferred to such subsidiaries (as described under "The Stock Purchase
Agreement and the Leveraged Buyout -- The Asset Transfer and the
Leveraged Buyout" beginning on page 123 of this document). Note, however,
that the cash to be included in the assets acquired by Suez Acquisition
Company in the leveraged buyout will be increased (thereby decreasing the
cash available to be paid to Seagate stockholders as the cash portion of
the merger consideration) by the amount of accrued and unpaid taxes of
Seagate, including taxes payable as a result of the leveraged buyout.
165
<PAGE> 172
The term "designated liabilities" refers to liabilities that Suez
Acquisition Company will not assume in connection with the stock purchase.
Instead, Seagate will retain these liabilities. These liabilities include:
- all liabilities relating to the shares of common stock of VERITAS held by
Seagate Software, as well as the shares of Gadzoox Networks and Lernout &
Hauspie held by Seagate;
- all liabilities arising from the merger and the other transactions under
the merger agreement;
- all obligations of Seagate to VERITAS in respect of the software business
that Seagate sold to VERITAS in May of 1999 in exchange for shares of
VERITAS common stock;
- all employee benefit plans of Seagate that have not been assumed by Suez
Acquisition Company (all of which plans will be terminated following the
merger); and
- all liabilities relating to Seagate's employee stock purchase plan.
Seagate, VERITAS and their respective affiliates have agreed to indemnify
Suez Acquisition Company and its subsidiaries from and against all losses,
claims, damages, fines, expenses and other costs, including reasonable
attorneys' fees and disbursements, suffered by Suez Acquisition Company or its
subsidiaries related to:
- all designated liabilities;
- the ownership, operations or conduct by Seagate or Seagate Software of
their respective businesses, properties, assets or liabilities after the
closing of the merger;
- the enforcement by Suez Acquisition Company and its subsidiaries of their
rights under the indemnification agreement;
- any breach by VERITAS of its agreements, obligations, covenants,
representations or warranties contained in the indemnification agreement,
the merger agreement or other agreements entered into by VERITAS in
connection with the indemnification agreement or the merger agreement;
- all taxes of Seagate for which Suez Acquisition Company is not obligated
to indemnify VERITAS and its affiliates as described in the last two
bullet points of the second preceding paragraph of this section; and
- any taxes payable by VERITAS or its affiliates arising out of or
attributable to the breach by VERITAS of any of its representations or
covenants in the indemnification agreement.
The indemnification agreement includes representations and warranties by
Suez Acquisition Company and its subsidiaries and by VERITAS, as well as certain
covenants, including the following:
- for a period of five years from the date of the leveraged buyout, Suez
Acquisition Company has agreed to provide to VERITAS and its affiliates
reasonable access to Suez Acquisition Company's books and records and to
cause its auditors to provide reasonable access to their work papers;
- for a period of five years from the date of the closing of the leveraged
buyout, Suez Acquisition Company has agreed to provide VERITAS with true
and complete copies of the financing agreements between Suez Acquisition
Company and its lenders and any amendments to those financing agreements,
as well as copies of any annual or quarterly financial statements that it
is required to deliver to its senior lenders;
166
<PAGE> 173
- Suez Acquisition Company has agreed to notify VERITAS no more than five
business days after receiving notification or obtaining knowledge of any
event that would have a material adverse effect on Suez Acquisition
Company or substantially impair the ability of Suez Acquisition Company
or any of its subsidiaries or perform its obligations under the
indemnification agreement; and
- Suez Acquisition Company has agreed that, on the date of the closing of
the leveraged buyout, it will cause each of its subsidiaries to execute
and deliver to VERITAS a joinder agreement agreeing to be bound by all of
the terms and provisions of the indemnification agreement.
The indemnification agreement also provides that, upon the closing of the
leveraged buyout, Suez Acquisition Company will place $55 million of cash into
an escrow account, to be held according to the terms of an escrow agreement. The
escrow agent and the terms of the escrow agreement each will be agreed upon by
VERITAS, Seagate and Suez Acquisition Company. The escrow agreement will permit
VERITAS to withdraw all or a portion of the escrowed funds, including any income
earned on the escrowed funds, in order to satisfy tax liabilities for which Suez
Acquisition Company is required to indemnify VERITAS and Seagate under the
indemnification agreement, to the extent that Suez Acquisition Company fails to
satisfy this obligation.
The indemnification agreement also contains provisions about the treatment
of indemnification payments for tax purposes, the preparation of certain tax
returns relating to Seagate and Seagate Software and procedures to be followed
if there are certain tax claims and other indemnification procedures.
The indemnification agreement is governed by New York law.
THE EXCLUSIVITY AGREEMENT
In connection with the leveraged buyout and the merger, VERITAS and Suez
Acquisition Company entered into a letter agreement. In this agreement, VERITAS
has agreed that, prior to termination of the stock purchase agreement, it will
not (and will cause its officers, directors, affiliates, employees and advisors
not to):
- solicit, initiate, encourage or induce the making, submission or
announcement of, any transaction involving a purchase by any person of
more than 15% of the outstanding voting securities of Seagate, a merger,
business combination, sale of assets, or other similar transaction
involving Seagate that meets the criteria set forth in the letter
agreement;
- participate in any discussions, negotiations or other communications with
any person regarding, or furnish to any person any information with
respect to, or take any other actions to facilitate any inquiries or the
making of any proposal that constitutes or may lead to, such a
transaction;
- approve, endorse or recommend any such transaction; or
- enter into any letter of intent, contract, agreement, understanding or
commitment relating to any such transaction.
The letter agreement provides that VERITAS is obligated to pay Suez
Acquisition Company a fee of $50 million if all of the following occur:
- the stock purchase agreement is terminated in any of the events described
in the next paragraph;
167
<PAGE> 174
- if such termination is by Suez Acquisition Company, Suez Acquisition
Company had not, at the time of termination, materially breached any of
its representations, warranties, covenants or agreements in the stock
purchase agreement; and
- within 90 days of such termination, VERITAS enters into any agreement
with respect to a transaction described in the first bullet point of the
previous paragraph of this section.
The termination events referenced in the first bullet point of the
preceding paragraph include:
- if the board of directors of Seagate withdraws or modifies in any manner
adverse to Suez Acquisition Company its recommendation in favor of the
stock purchase agreement and the leveraged buyout, or the merger
agreement and the merger, or takes any action or makes any statement
inconsistent with its recommendation, and Suez Acquisition Company
terminates the stock purchase agreement as a result of these actions;
- if a person unaffiliated with Suez Acquisition Company commences a tender
or exchange offer for in excess of 15% of the outstanding equity
securities of Seagate, and Seagate, in its statement to its
securityholders required under federal securities law, does not recommend
rejection of such tender or exchange offer, and Suez Acquisition Company
terminates the stock purchase agreement as a result of Seagate's failure;
- Seagate receives a superior proposal (as described under "The Stock
Purchase Agreement and the Leveraged Buyout -- Covenants Relating to
Solicitations by Seagate Prior to the Completion of the Leveraged Buyout"
beginning on page 131 of this document);
- Seagate, its subsidiaries and their agents, advisors and representatives
have not violated the terms of the stock purchase agreement regarding
restrictions on its ability to solicit third party proposals as described
above;
- the board of directors of Seagate concludes in good faith, after
consulting with its legal counsel, that the termination of the stock
purchase agreement is necessary in order to comply with its fiduciary
obligations to the stockholders of Seagate under applicable law; and
- Seagate pays Suez Acquisition Company the $80 million termination fee (as
described under "The Stock Purchase Agreement and the Leveraged Buyout --
Termination of the Stock Purchase Agreement; Termination Fees and
Payments -- Termination Fees and Payments" on page 137 of this document)
concurrently with such termination.
168
<PAGE> 175
REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE
THE LEVERAGED BUYOUT AND THE MERGER
In order to complete the leveraged buyout and the merger, each of Seagate,
VERITAS and Mr. Stephen Luczo, a director and executive officer of Seagate and a
member of Seagate's senior management team who will participate in the ownership
of Suez Acquisition Company, filed notifications under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and Seagate made various filings
with state and foreign governmental authorities with jurisdiction over
applicable antitrust laws. It is a condition to the obligations of Seagate,
VERITAS and Suez Acquisition Company to effect the leveraged buyout and the
merger that they comply with the Hart-Scott-Rodino Antitrust Improvements Act
and that all applicable waiting periods under that statute expire. The waiting
periods under the Hart-Scott-Rodino Antitrust Improvements Act for Seagate's,
VERITAS' and Mr. Luczo's filings have expired.
Although Seagate, VERITAS and Suez Acquisition Company do not currently
anticipate any challenges to the leveraged buyout 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 leveraged buyout 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 leveraged buyout and/or the merger. Based
upon available information, Seagate, VERITAS and Suez Acquisition Company
believe that the leveraged buyout 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 leveraged buyout and/or the merger based on
antitrust grounds, or that if so challenged, Seagate, VERITAS and Suez
Acquisition Company will prevail.
Seagate, VERITAS and Suez Acquisition Company are not aware of any other
significant governmental or regulatory approval required for completion of the
leveraged buyout or the merger, other than the effectiveness of the registration
statement of which this document forms a part, and compliance with the
applicable corporate laws of the state of Delaware.
MATERIAL UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER
The following discussion summarizes the material federal income tax
consequences of the exchange pursuant to the merger of shares of Seagate common
stock for the merger consideration. The following description of the material
United States federal income tax consequences of the merger represents the
opinion of Willkie Farr & Gallagher, counsel to VERITAS, and Wilson Sonsini
Goodrich & Rosati, Professional Corporation, counsel to Seagate. This discussion
is based on currently existing provisions of the Internal Revenue Code, existing
Treasury regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change. Any such change, which may or may
not be retroactive, could alter the tax consequences to VERITAS, Seagate or the
Seagate stockholders as described herein.
Seagate stockholders should be aware that this discussion does not address
all federal income tax considerations that may be relevant to particular
stockholders of Seagate in light of their particular circumstances, such as
stockholders who are banks, insurance companies, tax-exempt organizations,
dealers in securities, or foreign persons, stockholders who acquired their
shares in connection with stock option or leveraged buyout plans or in
169
<PAGE> 176
other compensatory transactions, who hold Seagate common stock as part of an
integrated investment (including a "straddle") comprised of shares of Seagate
common stock and one or more other positions, or who have previously entered
into a constructive sale of Seagate common stock. In addition, the following
discussion does not address the tax consequences of the merger under foreign,
state or local tax laws or the tax consequences of transactions effectuated
prior or subsequent to or concurrently with the merger (whether or not such
transactions are in connection with the merger), including, without limitation,
transactions in which Seagate common stock is acquired or VERITAS common stock
is disposed of.
ACCORDINGLY, SEAGATE STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE
APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE
MERGER IN THEIR PARTICULAR CIRCUMSTANCES.
Consummation of the merger is conditioned upon the receipt by VERITAS and
Seagate of opinions from their respective counsel that the merger should be
treated as a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code. We occasionally refer to these opinions as the tax
opinions in this document. The tax opinions will be subject to certain
assumptions, limitations and qualifications referred to in this document, and
will based upon the truth and accuracy of certain factual representations of
VERITAS, merger sub and Seagate.
Tax counsels' opinions are qualified as described in this section of the
document and, therefore, the conclusion that the merger should qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
is not free from doubt. In the event tax counsel were unable to deliver the tax
opinions, the merger would not be consummated unless the condition requiring the
delivery of the tax opinions were waived. Neither Seagate nor VERITAS intends to
waive this condition. If tax counsel were unable to deliver the tax opinions,
revised proxy materials would be circulated to Seagate stockholders describing
the altered tax consequences of the merger and a new vote of Seagate
stockholders would be held.
In stating that the reorganization "should" qualify as a reorganization,
tax counsel intends to convey (1) that there is some uncertainty about the
result and, therefore, tax counsel cannot express an unqualified opinion as to
the merger qualifying as a "reorganization," and (2) at the same time, the
existence of strong factual and legal arguments favoring reorganization
treatment means that tax counsel are of the view that such treatment is
significantly more likely than not to result.
Assuming that the merger qualifies as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code and that the shares of Seagate
common stock surrendered in the merger were held as capital assets, then,
subject to the assumptions, limitations and qualifications referred to in this
document and in the tax opinions, the merger would result in the following
federal income tax consequences:
- In exchange for their Seagate common stock, Seagate stockholders will
receive VERITAS common stock, cash and non-transferable rights to
receive, when, as and if received by VERITAS, their proportionate
interests in the tax refund amount plus $150 million of retained cash
reduced by some Seagate tax liabilities. A Seagate stockholder's
proportionate interest in the tax refund amount and the $150 million of
retained cash, subject to adjustment, is referred to as the tax refund
right in this section titled "Material United States Federal Income Tax
Consequences of the Merger". When Seagate stockholders exchange their
Seagate
170
<PAGE> 177
common stock for VERITAS common stock, cash and the tax refund right,
they will recognize gain, if any, only to the extent of the amount of
cash received plus, except as discussed below, the fair market value of
the tax refund right received. Seagate stockholders can call
1-866-366-2506 to obtain estimates of the amount of cash payable and the
number of VERITAS shares issuable in connection with the merger as well
as the estimated fair market value of the tax refund right. Any gain will
be measured by the sum of (x) the fair market value of the VERITAS common
stock received plus the amount of cash received plus, except as discussed
below, the fair market value of the tax refund right, minus (y) the tax
basis of the Seagate common stock exchanged therefor. Such gain should
generally be capital gain, and should generally be long-term capital gain
if the Seagate common stock exchanged in the merger has been held for
more than one year. Seagate stockholders whose tax basis exceeds the
merger consideration will not recognize any loss upon the receipt of
VERITAS common stock, cash and the tax refund right.
- Cash payments received by holders of Seagate common stock in lieu of
fractional shares of VERITAS common stock will be treated as if
fractional shares had been issued in the merger and then redeemed by
VERITAS. A stockholder of Seagate receiving such cash will generally
recognize capital gain or loss upon such payment, equal to the difference
(if any) between such stockholder's tax basis in the fractional share and
the amount of cash received.
- The aggregate tax basis of the VERITAS common stock received by Seagate
stockholders in the merger will be the same as the aggregate tax basis of
the Seagate common stock surrendered in exchange therefore, decreased by
the tax basis allocated to fractional share interests for which cash is
received and by the amount of cash consideration received (other than
cash received for fractional share interests) and by the fair market
value of the tax refund right received (unless so-called "open
transaction" treatment applies, as discussed below), and increased by the
amount of gain recognized on the exchange. The aggregate tax basis of the
tax refund rights received by Seagate stockholders in the merger will be
the fair market value of the tax refund right at the time of the merger
(unless "open transaction" treatment applies). Seagate stockholders can
call 1-866-366-2506 to obtain estimates of the amount of cash payable and
the number of VERITAS shares issuable in connection with the merger as
well as the estimated fair market value of the tax refund right.
- The holding period of the VERITAS common stock received in the merger
will include the period for which the Seagate common stock surrendered in
exchange therefor was held.
- Neither VERITAS, merger sub nor Seagate will recognize gain solely as a
result of the merger.
- Any payment in the future to a holder of a tax refund right should be
treated as a payment under a contract for the sale or exchange of Seagate
common stock to which Section 483 of the Internal Revenue Code applies.
(This treatment should apply whether or not so-called "open transaction"
treatment applies in respect of the tax refund right.) Given the
contingent nature of the tax refund right, it is not anticipated that it
will be treated as a debt instrument for federal income tax purposes.
Under Section 483 of the Internal Revenue Code, a portion of any payment
pursuant to a tax refund right will be treated as interest, which will be
ordinary income to the holder of the tax refund right. The interest
amount will
171
<PAGE> 178
equal the excess of the amount received over its present value at the
effective time of the merger, calculated using the applicable federal
rate as the discount rate. The applicable federal rate is a rate
reflecting an average of market yields on Treasury debt obligations for
different ranges of maturities that is published monthly by the Internal
Revenue Service. The relevant applicable federal rate will be the lesser
of 5.80% compounded semi-annually or the lowest applicable federal rate
in effect during the 3-month period ending with the month that includes
the effective date of the merger. The maturity range of the relevant
applicable federal rate will correspond to the period from the effective
date of the merger to the date the amount is received or deemed received.
The holder of a tax refund right must include in income Section 483
interest using such holder's regular method of accounting (such amount
being taken into account when paid, in the case of a cash method holder,
and when fixed, in the case of an accrual method holder). The portion of
any payment pursuant to a tax refund right that is not treated as
interest under Section 483 will be treated as sales proceeds. The federal
income tax treatment of a partial payment on a tax refund right is not
provided for under current law. Therefore the tax treatment of such
payments, is uncertain.
Under the so-called "open transaction" doctrine, no current tax consequence
attaches to the receipt of an item of property whose fair market value cannot
reasonably be determined. Seagate stockholders may wish to consult their tax
advisors concerning the possible applicability of the open transaction doctrine
to the receipt of the tax refund right. If the open transaction doctrine were
applicable to the tax refund right (i) the right would not be taken into account
in determining such holder's taxable gain upon receipt of the merger
consideration, (ii) apparently, the holder would take no tax basis in the tax
refund right and (iii) in general, amounts thereafter received on account of the
right would be treated partially as interest income under Section 483 (as
discussed above) and the balance, in general, as capital gain. It is the
position of the Internal Revenue Service, reflected by Treasury Regulations,
that only in "rare and extraordinary cases" is the value of property so
uncertain that open transaction treatment is available. It is noted that an
estimate of the value of the tax refund right will be made, and that the Seagate
stock is publicly-traded and therefore readily susceptible of valuation. It is
not known whether these facts preclude open transaction treatment in respect of
the tax refund right. Due to the lack of available precedent and the inherently
factual nature of the question, tax counsel are not able to express any view as
to the availability of open transaction reporting in respect of the tax refund
right. Accordingly, holders are urged to consult their tax advisors regarding
this issue.
Any cash payment received in connection with the settlement of the class
action lawsuit described on page 163 of this document should, in general, be
treated for Federal income tax purposes in the same manner as the tax refund
right.
In addition, VERITAS stockholders will not recognize any gain or loss on
their shares of VERITAS common stock as a result of the merger.
There are numerous requirements that must be satisfied in order for the
merger to qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code. Three of these requirements are of particular
importance given the sale of Seagate's operating assets to Suez Acquisition
Company for cash, the distribution of all or a portion of such cash to Seagate's
stockholders in connection with the merger and fluctuations in the trading
values of VERITAS common stock and Seagate's investment securities. These three
requirements are discussed in detail below.
172
<PAGE> 179
First, the merger must satisfy the "continuity of business enterprise"
rule, which requires that the acquiring corporation continue the historic
business of the acquired corporation or use a significant portion of the
historic assets of the acquired corporation in a business. This requirement is
sometimes referred to as the business continuity requirement in this document.
The application of the business continuity requirement to a holding company is
uncertain and, according to Treasury regulations, requires an analysis of all
the facts and circumstances, including, for example, the percentage ownership of
the holding company in its subsidiaries that own operating assets. Immediately
prior to the merger, and after the sale of the operating assets to Suez
Acquisition Company, Seagate will be a holding company that owns indirectly
approximately 31.7% of the outstanding VERITAS common stock, as well as stock in
several other public and private companies. A published ruling of the Internal
Revenue Service and case law have found the business continuity requirement to
be satisfied in circumstances where a parent corporation merges into a
wholly-owned or majority-owned subsidiary. Such authorities do not specifically
address a situation where the parent corporation owns less than a majority of
the subsidiary's stock, as is the case with respect to Seagate's ownership of
VERITAS. The Internal Revenue Service has ruled privately that the business
continuity requirement was satisfied under such circumstances, but private
rulings are not binding on the Internal Revenue Service or any court.
Furthermore, the Internal Revenue Service temporarily suspended the issuance of
private ruling in this area from December 1994 until January 1999. Since the
ruling suspension was lifted, counsel is not aware of any private rulings
involving a merger of a parent corporation and its minority-owned subsidiary
having been released. Although there can be no assurance that the Internal
Revenue Service will not take a contrary position, and the matter is not free
from doubt, it is the opinion of counsel that the reasoning of the public and
private rulings described above should apply to the merger, particularly in
light of the fact that Seagate acquired its VERITAS common stock in 1999 in a
tax-free exchange for certain assets of Seagate's software business, a business
that VERITAS continues to operate. If the reasoning of public and private
rulings described above does apply to the merger, the continuity of business
enterprise rule will be satisfied.
Second, the merger must satisfy the requirement that, following the merger,
the surviving corporation hold "substantially all" of the properties of Seagate.
For purposes of issuing private letter rulings, the Internal Revenue Service has
stated that 70% of the fair market value of the gross assets and 90% of the fair
market value of the net assets of the target corporation will be considered
"substantially all" of the target's properties, and tax counsel intend to follow
this safe harbor standard in rendering the required tax opinions. VERITAS
expects to fund part of the cash portion of the merger consideration with cash
of Seagate. If the cash provided from Seagate (including cash paid to dissenters
and cash used to pay transaction expenses) were to exceed 10% of the net assets
of Seagate immediately prior to the merger, the merger would not be within the
safe harbor referred to above. Accordingly, VERITAS intends to limit the amount
of Seagate cash paid so that such cash does not exceed the safe harbor amount,
and to provide the remaining cash from its own funds. There can be no assurance,
however, that VERITAS will be able to provide such funds. Also, it is unclear if
certain expenses incurred in connection with the merger between Seagate and
VERITAS should be taken into account in determining whether Seagate holds
substantially all of its properties after the merger. Accordingly, the Internal
Revenue Service could disagree with the result of this determination made by
VERITAS and conclude that the substantially all of the properties requirement
has not been satisfied.
173
<PAGE> 180
Third, VERITAS must acquire at least 80% of the Seagate common stock for
VERITAS common stock. This requirement is sometimes referred to as the 80%
requirement in this document. Because the merger consideration consists of
VERITAS common stock, cash and the tax refund amount, the percentage of the
total consideration represented by the VERITAS common stock will vary with
fluctuations in the market price of such stock. For example, if the market value
of the VERITAS common stock declines, the stock portion of the merger
consideration will represent a lesser percentage of the total consideration
exchanged for the Seagate common stock. In addition, the value of the tax refund
right cannot be determined until after the merger. As a result of fluctuations
in the market price of the VERITAS common stock and/or an increase in the value
of the tax refund right, VERITAS common stock could represent less than 80% of
the total merger consideration. If, in the judgment of tax counsel to Seagate or
VERITAS, the 80% requirement or the Internal Revenue Service ruling guidelines
described in the preceding paragraph were not satisfied as of the closing date,
tax counsel would be unable to deliver the tax opinions, and the merger would
not be consummated unless the condition requiring their delivery were waived.
Neither Seagate nor VERITAS intends to waive this condition. If tax counsel were
unable to deliver the tax opinions, a new shareholder vote would be solicited.
Even if, in the judgment of tax counsel, the 80% requirement has been satisfied,
since the judgment depends in part on the valuation of the tax refund right, it
is possible that the Internal Revenue Service would disagree with such valuation
and conclude that the 80% requirement has not been satisfied.
No ruling has been or will be obtained from the Internal Revenue Service in
connection with the merger. Seagate stockholders should be aware that the tax
opinions do not bind the Internal Revenue Service and that the Internal Revenue
Service is therefore not precluded from successfully asserting a contrary
opinion. The tax opinions are also subject to certain assumptions and
qualifications and will be based on the truth and accuracy of certain
representations made by VERITAS, merger sub and Seagate, including, without
limitation, representations in certificates to be delivered to counsel by the
respective management of VERITAS, merger sub and Seagate.
A successful Internal Revenue Service challenge to the reorganization
status of the merger generally would result in Seagate stockholders recognizing
taxable capital gain or loss with respect to each share of Seagate common stock
surrendered equal to the difference between the stockholder's tax basis in such
share and the fair market value, as of the closing of the merger, of the VERITAS
common stock plus the amount of cash plus (unless so-called "open transaction"
treatment were applicable) the fair market value of the tax refund right
received in exchange therefor. In such event, a stockholder's aggregate basis in
the VERITAS common stock so received generally should equal its fair market
value as of the closing of the merger and the holding period for such stock
would begin the day after the closing of the merger.
THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF MATERIAL UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE
A COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT THERETO.
THUS, SEAGATE STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING
REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FOREIGN, FEDERAL, STATE, LOCAL,
AND OTHER APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX
LAWS.
174
<PAGE> 181
ACCOUNTING TREATMENT OF THE LEVERAGED BUYOUT AND THE MERGER
The leveraged buyout will be accounted for by Seagate as a sale of assets
and liabilities to Suez Acquisition Company in exchange for cash. The merger
will be accounted for by VERITAS at the estimated fair value of the assets and
liabilities remaining in Seagate immediately prior to the merger.
175
<PAGE> 182
THE SEAGATE SPECIAL MEETING
DATE, TIME AND PLACE OF THE SEAGATE SPECIAL MEETING
The date, time and place of the special meeting of Seagate stockholders are
as follows:
November 21, 2000
9:00 a.m. Pacific Time
The Westin San Francisco Airport Hotel
1 Old Bayshore Highway
Millbrae, California 94030
PURPOSES OF THE SPECIAL MEETING
The special meeting has been called and is being held so that stockholders
of Seagate may consider and vote upon the following:
- a proposal to adopt and approve the stock purchase agreement and the
leveraged buyout;
- a proposal to adopt and approve the merger agreement and merger pursuant
to which a wholly owned subsidiary of VERITAS will merge with and into
Seagate and Seagate will become a wholly owned subsidiary of VERITAS; and
- any other business as may properly come before the special meeting or any
adjournment or postponement thereof.
RECORD DATE FOR THE SPECIAL MEETING; OUTSTANDING SHARES OF SEAGATE COMMON STOCK
The board of directors of Seagate has fixed the close of business on
October 20, 2000 as the record date for the determination of stockholders
entitled to vote at the special meeting. Only holders of record of Seagate
common stock at the close of business on the record date are entitled to notice
of and to vote at the special meeting. As of the close of business on the record
date, there were approximately 231,160,000 shares of Seagate common stock
outstanding and entitled to vote, held of record by approximately 5,500
stockholders, although Seagate has been informed that there are approximately
107,000 beneficial owners of Seagate common stock.
VOTE REQUIRED TO APPROVE PROPOSALS; QUORUM REQUIRED TO TRANSACT BUSINESS AT THE
SPECIAL MEETING
Holders of Seagate common stock are entitled to one vote for each share of
Seagate common stock held as of the record date for the special meeting.
Approval of each of the proposals to be voted upon by stockholders of Seagate at
the special meeting requires the affirmative vote of the holders of a majority
of the outstanding common stock of Seagate as of the record date for the special
meeting. Attendance at the special meeting in person or by proxy of a majority
of the outstanding common stock of Seagate is required for a quorum to conduct
business at the special meeting.
As of the record date, Seagate's directors, executive officers and their
affiliates as a group beneficially owned 5,469,775 shares of Seagate common
stock, representing approximately 2.37% of the outstanding shares of Seagate
common stock. Seagate currently believes that each of its directors and
executive officers plans to vote their
176
<PAGE> 183
respective shares of Seagate common stock in favor of the proposal to adopt and
approve the stock purchase agreement and the leveraged buyout, and the proposal
to adopt and approve the merger agreement and the merger.
TREATMENT OF ABSTENTIONS AND BROKER NON-VOTES AT THE SPECIAL MEETING
Abstentions will be included in determining the number of shares present
and voting at the special meeting and will have the same effect as votes against
the proposals considered and voted upon at the special meeting. In the event
that a broker, bank, custodian, nominee or other record holder of Seagate common
stock indicates on a proxy that it does not have discretionary authority to vote
certain shares on a particular matter, which is called a broker non-vote, those
shares will not be considered for purposes of determining the number of shares
entitled to vote with respect to a particular proposal on which the broker has
expressly not voted, but will be counted for purposes of determining the
presence or absence of a quorum for the transaction of business at the special
meeting. Since the vote of the holders of a majority of the outstanding Seagate
common stock is required to approve each of the proposals, broker non-votes will
have the same effect as a vote against the proposals.
EXPENSES OF PROXY SOLICITATION FOR THE SPECIAL MEETING
Seagate will pay the expenses of soliciting proxies to be voted at the
special meeting. Following the original mailing of the proxies and other
solicitation materials, including this document, Seagate and its agents also may
solicit proxies by mail, telephone, telegraph or in person. In addition, Seagate
has retained Innisfree M&A Incorporated to coordinate the solicitation of such
proxies by and through such nominees for a fee of approximately $50,000, plus
reasonable out-of-pocket costs and expenses.
Following the original mailing of the proxies and other solicitation
materials (including this document), Seagate will request brokers, custodians,
nominees and other record holders of Seagate common stock to forward copies of
the proxy and other solicitation materials (including this document) to persons
for whom such brokers, custodians, nominees and other record holders hold shares
of Seagate common stock and to request authority for the exercise of proxies. In
such cases, upon the request of these record holders, Seagate will reimburse
such record holders for their reasonable expenses.
PROXIES FOR THE SPECIAL MEETING; REVOCATION OF PROXIES
The proxy accompanying this document is solicited on behalf of the board of
directors of Seagate for use at the special meeting. Please complete, date and
sign the accompanying proxy and promptly return it in the enclosed envelope or
otherwise mail it to Seagate. All properly signed proxies that Seagate receives
prior to the votes taken at the special meeting that are not revoked will be
voted at the special meeting according to the instructions indicated on the
proxies or, if no direction is indicated, to approve the stock purchase
agreement and the leveraged buyout, and to approve the merger agreement and the
merger. You may revoke your proxy at any time before it is voted at the special
meeting by taking any of the following actions:
- delivering a written notice to the Secretary of Seagate by any means,
including facsimile, bearing a date later than the date of the
earlier-delivered proxy, stating that the earlier delivered proxy is
revoked;
177
<PAGE> 184
- signing and delivering a proxy relating to the same shares of Seagate
common stock and bearing a date later than the date of any
earlier-delivered proxy prior to the votes taken at the special meeting;
or
- attending the special meeting and voting in person, although attendance
at the special meeting will not, by itself, revoke a proxy. Please note,
however, that if your shares of Seagate common stock are held of record
by a broker, bank or other nominee and you wish to vote at the special
meeting, you must bring to the special meeting a letter from the broker,
bank or other nominee confirming your beneficial ownership of the shares.
However, if Seagate stockholders hold their shares in "street name" through
their broker, they must contact their broker for instructions on how to revoke a
proxy.
The board of directors of Seagate is unaware of any matter that is not
referred to in this document to be presented for action at the special meeting.
If any other matters are properly brought before the special meeting, the
persons named in the proxies will have discretion to vote on such matters in
accordance with their best judgment.
178
<PAGE> 185
THE VERITAS SPECIAL MEETING
DATE, TIME AND PLACE OF THE VERITAS SPECIAL MEETING
November 21, 2000
9:00 a.m. Pacific Time
900 Alta Avenue
Mountain View, California 94043
PURPOSE OF THE SPECIAL MEETING
VERITAS is furnishing this document to VERITAS stockholders in connection
with the solicitation of proxies by VERITAS' board of directors. The VERITAS
board of directors will use the proxies at the special meeting of VERITAS
stockholders and at any adjournment or postponement of the special meeting. This
document, which includes the notice of the special meeting, and the accompanying
form of proxy are first being mailed to VERITAS stockholders on or about October
23, 2000.
At the special meeting, the stockholders of VERITAS will be asked to
approve the issuance of new shares of VERITAS common stock in connection with
the merger. No other business will be conducted at the special meeting.
RECORD DATE AND OUTSTANDING SHARES
VERITAS' board of directors has fixed the close of business on October 20,
2000 as the record date for the VERITAS special meeting. Only holders of record
of VERITAS common stock at the close of business on the record date are entitled
to notice of and to vote at the meeting. As of the close of business on the
record date, there were approximately 404,550,000 shares of VERITAS common stock
outstanding and entitled to vote, held of record by approximately 615
stockholders, although VERITAS has been informed that there are in excess of
150,000 beneficial owners.
VOTE AND QUORUM REQUIRED
Holders of VERITAS common stock are entitled to one vote for each share
held as of the record date on all matters properly presented at the special
meeting.
In order to conduct business at the VERITAS special meeting, a quorum
consisting of at least a majority of VERITAS' outstanding shares of common stock
must be present in person or represented by proxy. Shares of VERITAS common
stock represented at the special meeting by a properly executed, dated and
returned proxy will be treated as present at the special meeting for purposes of
determining a quorum, regardless of whether the proxy is marked as casting a
vote on the proposal or abstaining.
VOTE REQUIRED FOR THE SHARE ISSUANCE; CERTAIN COMMON STOCK VOTING IN FAVOR OF
THE PROPOSAL
The issuance of new shares of VERITAS common stock in connection with the
merger must be approved and adopted by the affirmative vote of the holders of at
least a majority of the issued and outstanding common stock.
As of the record date, Seagate Software owned approximately 31.7% of the
outstanding shares of VERITAS common stock. Seagate has agreed to vote all of
its VERITAS shares in favor of the approval and adoption of the share issuance.
Other than Seagate Software, directors, executive officers and affiliates of
VERITAS as a group
179
<PAGE> 186
beneficially owned approximately 13.81% of the outstanding shares of VERITAS
common stock. VERITAS currently believes that each of its directors and
executive officers plans to vote their respective shares of VERITAS common stock
in favor of the proposal to issue additional shares of VERITAS common stock to
Seagate stockholders in connection with the merger.
All shares represented by proxies in the enclosed form that are properly
executed and returned on or before the date of the special meeting, and not
revoked, will be voted at the special meeting or any adjournment or postponement
thereof in accordance with any instructions indicated on such proxies. If no
instructions are indicated, such proxies will be voted FOR the approval of the
issuance of new shares of VERITAS common stock in connection with the merger.
Brokers are prohibited from exercising discretionary authority as to the
share issuance for beneficial owners who have not returned proxies to brokers.
These broker non-vote shares will be counted for the purpose of determining if a
quorum is present but will not be included in the vote totals for matters as to
which discretionary authority is prohibited.
For voting purposes at the VERITAS special meeting, only shares
affirmatively voted in favor of approval of the issuance of new shares of
VERITAS common stock in connection with the merger will be counted as favorable
votes for the approval and adoption of this proposal. Any broker non-votes and
abstaining votes will not be counted in favor of approval and adoption. Since
the vote of a majority of the outstanding VERITAS common stock is required to
approve the share issuance, broker non-votes and abstentions will have the same
effects as votes cast against the share issuance.
REVOCATION OF PROXIES
The grant of a proxy on the enclosed form does not preclude a VERITAS
stockholder from voting in person at the VERITAS special meeting. Any
stockholder who has given a proxy pursuant to this solicitation may revoke it by
attending the special meeting and giving oral notice of his or her intention to
vote in person, without compliance with any other formalities. Attendance at the
special meeting by a stockholder who has executed and delivered a proxy to
VERITAS will not in and of itself constitute a revocation of such proxy. Also,
please note that if your VERITAS shares are held of record by a broker, bank or
other nominee and you wish to vote at the meeting, you must bring to the meeting
a letter from the broker, bank or other nominee confirming your beneficial
ownership of the shares.
Any proxy given pursuant to this solicitation may be revoked at any time
prior to the special meeting by delivering to the Secretary of VERITAS a written
statement revoking it or by delivering a duly executed proxy bearing a later
date.
However, if VERITAS stockholders hold their shares in "street name" through
their broker, they must contact their broker for instructions on how to revoke a
proxy. In the event the board of directors determines so to adjourn or postpone
the meeting, the persons named in the endorsed form of proxy and acting
thereunder will vote in accordance with their best judgment on such adjournment
or postponement.
SOLICITATION OF PROXIES
VERITAS will pay the expenses of soliciting proxies to be voted at the
VERITAS special meeting. Proxies will be solicited initially by mail. Following
the original mailing of the proxies and other soliciting materials, VERITAS and
its agents also may solicit proxies
180
<PAGE> 187
by mail, telephone, telegraph or in person. If the VERITAS special meeting is
adjourned or postponed, additional proxies may be solicited during such
adjournment period. VERITAS has retained a proxy solicitation firm, ChaseMellon
Shareholder Services LLC, to aid it in the solicitation process. VERITAS has
agreed to pay ChaseMellon a fee of $8,500 for this service. Following the
original mailing of the proxies and other soliciting materials, VERITAS will
request brokers, custodians, nominees and other record holders of VERITAS common
stock to forward copies of the proxy and other soliciting materials to persons
for whom they hold shares of VERITAS common stock and to request authority for
the exercise of proxies. In these cases VERITAS, upon the request of the record
holders, will reimburse the record holders for their reasonable expenses.
Your vote is important. Please return your marked proxy card promptly so
your shares can be represented, even if you plan to attend the meeting in
person.
VERITAS STOCKHOLDERS SHOULD NOT SEND ANY CERTIFICATES REPRESENTING VERITAS
COMMON STOCK WITH THEIR PROXY CARD.
181
<PAGE> 188
SELECTED HISTORICAL FINANCIAL DATA
AND MANAGEMENT'S DISCUSSION AND ANALYSIS
OF SELECTED HISTORICAL FINANCIAL DATA FOR SEAGATE
The following selected historical financial data for Seagate for fiscal
1996 through fiscal 2000 was derived from Seagate's audited financial statements
for the same periods. This financial data reflects selected portions of the
foregoing financial statements and should be read in conjunction with the
Seagate financial statements and related notes included in this document.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------------------
JUNE 30, JULY 2, JULY 3, JUNE 27, JUNE 28,
2000 1999 1998 1997 1996
-------- ------- ------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
HISTORICAL STATEMENTS OF OPERATIONS DATA:
Revenues.................................... $6,448 $6,802 $6,819 $8,940 $8,588
Income (loss) from operations............... (561) 258 (686) 858 287
Net income (loss)........................... 310 1,176 (530) 658 213
Basic net income (loss) per share*.......... 1.41 4.99 (2.20) 2.84 1.07
Diluted net income (loss) per share*........ 1.35 4.54 (2.20) 2.62 .96
Shares used in computing basic net income
(loss) per share*......................... 219.4 235.8 241.3 231.5 198.7
Shares used in computing diluted net income
(loss) per share*......................... 229.5 242.5 241.3 257.3 237.4
HISTORICAL BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................... $2,015 $1,623 $1,827 $2,283 $1,174
Working capital............................. 2,031 1,772 2,240 2,716 1,961
Total assets................................ 7,167 7,072 5,645 6,723 5,240
Long-term obligations, net of current
portion................................... 703 703 704 702 798
Total stockholders' equity.................. 3,847 3,563 2,937 3,476 2,466
</TABLE>
---------------
* See (1) in Net Income Per Share footnote at F-19 of Notes to Consolidated
Financial Statements.
The 2000 results of operations include a $537 million gain on sale of
VERITAS common stock, a $679 million gain on the sale of SanDisk common stock,
$231 million in gains on the exchange of certain investments in equity
securities, a $207 million net restructuring charge, a $326 million charge
related to the Seagate's equity interest in VERITAS, a $105 million write-off of
in-process research and development incurred primarily in connection with the
acquisition of XIOtech Corporation, a $64 million charge in connection with
various legal settlements, a $286 million compensation charge related to the
reorganization of Seagate Software, and a $28 million charge related to employee
separations
The results of operations for fiscal 1999 include a $60 million
restructuring charge, a $78 million charge to operations for milestone payments
related to the acquisition of Quinta Corporation, $1,670 million gain on the
contribution of NSMG to VERITAS net of various transaction costs, and a $119
million charge related to Seagate's equity ownership in VERITAS.
Seagate Technology's fiscal 1998 results of operations include a $347
million restructuring charge, a $233 million write-off of in-process research
and development
182
<PAGE> 189
incurred primarily in connection with the acquisition of Quinta Corporation, a
$76 million charge for mark-to-market adjustments on certain of Seagate
Technology's foreign currency forward exchange contracts and a $22 million
reduction in the charge recorded in fiscal 1997 as a result of the adverse
judgment in the Amstrad PLC litigation.
The fiscal 1997 results of operations include a $153 million charge as a
result of the adverse judgment in the Amstrad PLC litigation. The fiscal 1996
results of operations include a $242 million restructuring charge as a result of
the merger with Conner Peripherals, Inc. and a $99 million write-off of
in-process research and development primarily incurred in connection with the
acquisition of software companies.
Prior periods have been restated to reflect the merger with Conner
Peripherals, Inc. in February 1996 on a pooling of interests basis, a
two-for-one stock split, effected in the form of a stock dividend, in November
1996, and Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" adopted in the second quarter of fiscal 1998.
183
<PAGE> 190
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF SEAGATE
The following discussion should be read in conjunction with the five-year
summary of selected financial data on page 37 and Seagate's consolidated
financial statements and the notes thereto beginning on page F-3. All references
to years represent fiscal years unless otherwise noted.
OVERVIEW
Seagate designs, manufactures and markets products for storage, retrieval
and management of data on computer and data communications systems. These
products include disc drives, tape drives and software. Seagate designs,
manufactures and markets a broad line of rigid magnetic disc drives for use in
computer systems ranging from desktop personal computers to workstations and
supercomputers, as well as in multimedia applications. Seagate sells its
products to original equipment manufacturers for inclusion in their computer
systems or subsystems, and to distributors who typically sell to small OEMs,
dealers, system integrators and other resellers. In addition, Seagate markets a
broad line of Travan and Digital Audio Tape ("DAT") products. These products are
dedicated back-up storage peripherals designed to meet the needs of market
sectors ranging from desktop PCs to midrange servers.
Seagate has pursued a strategy of vertical integration and accordingly
designs and manufactures rigid disc drive components including recording heads,
discs, disc substrates and motors. It also assembles certain of the key
subassemblies for use in its products including printed circuit board and head
stack assemblies.
As an extension of our core rigid disc drive business and to address
Internet and e-commerce driven grown opportunities, we announced the formation
of our Intelligent Storage Platforms group in May 1999. The Intelligent Storage
Platforms group develops products for new network devices, the Internet, high
performance servers and other information-centric computing applications. These
solutions combine hardware, software and services to provide new products for
Seagate's existing OEM and strategic distributor customer base and address the
needs of emerging markets for storage and storage-related applications. In
fiscal year 2000, the Intelligent Storage Platforms group was renamed and
consolidated with some other business units of Seagate to form the Internet
Solutions Group. In January 2000, Seagate strengthened its capabilities in
intelligent storage solutions by acquiring XIOtech Corporation, a privately-held
provider of storage area network products.
Seagate has also identified an opportunity for use of its products in
consumer applications and in fiscal 2000 began developing products for storage
intensive consumer applications by combining Seagate's expertise in storage
technology with the development of core competencies in audio/visual ("A/V")
recording, home networking, satellite and cable communications. Seagate has
shipped more than 200,000 rigid disc drives for personal video recorder
products. In July 2000, Seagate and Thomson Multimedia formed an independent
company called CacheVision. CacheVision brings together Seagate's product
development activities and Thomson Multimedia's A/V technologies expertise and
marketing presence to develop cost-optimized, time-to-market integrated systems
to be incorporated into consumer electronic products such as televisions,
set-top boxes, personal video recorders and DVD players. Seagate expects to sell
rigid disc drive products to CacheVision as an OEM customer.
184
<PAGE> 191
Seagate has also invested in, and intends to continue investigating
opportunities to invest in software activities. Seagate anticipates that users
of computer systems will increasingly rely upon client/server network computing
environments and believes that as this reliance increases, users will demand
software that more efficiently and securely stores, manages, and accesses data
and transforms it into usable information. As such, Seagate has broadened its
core competencies to include software products and technologies to meet these
requirements.
On May 28, 1999, Seagate completed the contribution of its Network &
Storage Management Group ("NSMG") software business to VERITAS. As part of the
NSMG contribution to VERITAS, Seagate received an equity position in VERITAS.
Seagate retained ownership of its Seagate IMG subsidiary. Seagate IMG includes
Crystal Services, Inc., and Holistic Systems, Ltd. and offers business
intelligence software solutions. Seagate IMG's products include features such as
query and reporting, automated report scheduling and distribution, information
delivery across the World Wide Web, on-line analytical processing ("OLAP"),
forecasting, statistical analysis, discovery and data mining. Seagate IMG's
primary products are Seagate Crystal Reports, Seagate Crystal Info and Seagate
Holos.
Business Combinations -- In Process Research and Development
Seagate has a history of business combinations and during the three most
recent fiscal years these included the acquisition of XIOtech in fiscal 2000,
the contribution of NSMG to VERITAS in fiscal 1999 and the acquisitions of
Quinta Corporation and Eastman Storage Software Management Group in fiscal 1998.
In connection with certain business combinations, Seagate has recognized
significant write-offs of in-process research and development. The completion of
the underlying in-process projects acquired within each business combination was
the most significant and uncertain assumption utilized in the valuation analysis
of the in-process research and development. Such uncertainties could give rise
to unforeseen budget over runs and/or revenue shortfalls in the event that
Seagate is unable to successfully complete a certain R&D project. Seagate is
primarily responsible for estimating the fair value of the purchased R&D in all
business combinations accounted for under the purchase method. The nature of
research and development projects acquired, the estimated time and costs to
complete the projects and significant risks associated with the projects are
described below.
XIOtech Corporation
XIOtech was acquired in January 2000. XIOtech designs, manufactures and
markets a centralized data storage system. This system is based on an exclusive
set of sophisticated data management and data movement tools. It offers storage
virtualization, multi-node server clustering, and zero backup window solutions.
The main component of the system is MAGNITUDE, a fully implemented SAN.
MAGNITUDE is sold in a cabinet containing software-based architecture that
allows the incorporation of all of the components of a SAN in one centralized
configuration. XIOtech also designs, develops and produces software, namely the
REDI suite of software, which runs MAGNITUDE's software based architecture. The
REDI software suite is application specific and gives customers the capability
of better managing their data. XIOtech is currently developing the next
generation technologies for both products, named Thunderbolt and REDI 7.0,
respectively.
At the time of completing the XIOtech acquisition, Seagate estimated the
cost to complete both Thunderbolt and REDI 7.0 at approximately $1 million. The
anticipated
185
<PAGE> 192
release date for the Thunderbolt is the first half of fiscal 2001 and the third
quarter of fiscal 2001 for the REDI 7.0.
Contribution of NSMG to VERITAS
On May 28, 1999, Seagate and Seagate Software Holdings, Inc. ("Seagate
Software") closed and consummated an Agreement and Plan of Reorganization dated
as of October 5, 1998 with VERITAS and VERITAS Operating Corporation. The
transaction provided for the contribution by Seagate, Seagate Software, and
certain of their respective subsidiaries to VERITAS of (a) the outstanding stock
of NSMG and certain other subsidiaries of Seagate Software and (b) those assets
used primarily in the network and storage management business of Seagate
Software (the "NSMG business"), in consideration for the issuance of shares of
common stock of VERITAS to Seagate Software and the offer by VERITAS to grant
options to purchase common stock of VERITAS to certain of Seagate Software's
employees who become employees of VERITAS or its subsidiaries. As part of the
transaction, VERITAS assumed certain liabilities of the NSMG business. The
transaction was structured to qualify as a tax-free exchange.
Subsequent to the transaction, all outstanding securities of VERITAS
Operating Corporation were assumed and converted into common stock of VERITAS
with identical rights, preferences and privileges, on a share for share basis.
As a result of the contribution of the NSMG business to VERITAS, Seagate
Software received a total of 155,583,468 shares of VERITAS common stock and
former employees of the NSMG business received options to purchase an aggregate
of 15,626,358 shares of VERITAS common stock. Share and option amounts for
VERITAS have been adjusted to reflect the two-for-one stock split effective July
9, 1999 by VERITAS, and the subsequent three-for-two stock splits on November
22, 1999 and March 6, 2000.
Seagate accounted for the contribution of NSMG to VERITAS as a non-monetary
transaction using the fair value of the assets and liabilities exchanged.
Immediately after the transaction, Seagate Software owned approximately 41.63%
(155,583,468) of the outstanding shares of VERITAS. Because Seagate still owns a
portion of the NSMG business through its ownership of VERITAS, Seagate did not
recognize 100% of the gain on the exchange. The gain recorded is equal to the
difference between 58.37% of the fair value of the VERITAS common stock received
and 58.37% of Seagate's basis in the NSMG assets and liabilities exchanged.
Seagate is accounting for its ongoing investment in VERITAS using the equity
method. The difference between the recorded amount of Seagate's investment in
VERITAS and the amount of its underlying equity in the net assets of VERITAS was
allocated based upon the fair value of the underlying tangible and intangible
assets and liabilities of VERITAS. The intangible assets included amounts
allocated to in-process research and development and resulted in a $85 million
write-off in 1999 included in activity related to equity interest in VERITAS in
the accompanying statement of operations. Intangible assets including goodwill
are being amortized over four years.
Seagate includes in its financial results its share of the net income or
loss of VERITAS, excluding certain NSMG purchase accounting related amounts
recorded by VERITAS, but including Seagate's amortization of the difference
between its recorded investment and the underlying assets and liabilities of
VERITAS. Because of practicality considerations, the net income or loss of
VERITAS is included in the results of Seagate on a one quarter lag basis. Thus,
the results of VERITAS for the period from May 29, 1999 to June 30, 1999, the
period subsequent to the contribution of NSMG to VERITAS,
186
<PAGE> 193
and for the period from July 1, 1999 through March 31, 2000 were included in
Seagate's results for the fiscal year ended June 30, 2000. Seagate eliminates
from VERITAS' income (loss) the effect of VERITAS' accounting for the NSMG
business contribution, including VERITAS' amortization expenses related to
intangible assets. Excluding amortization of intangibles, the total equity
income recorded by Seagate related to VERITAS in fiscal 2000 was $30 million.
In a separate but related transaction to the NSMG contribution to VERITAS,
on June 9, 1999, Seagate exchanged 5,275,772 shares of its common stock for
3,267,255 of the outstanding shares of Seagate Software common stock owned by
employees, directors and consultants of Seagate Software. The exchange ratio was
determined based on the estimated value of Seagate Software common stock divided
by the fair market value of Seagate common stock.
The estimated value of Seagate Software common stock exchanged into Seagate
common stock was determined based upon the sum of the fair value of the NSMG
business, as measured by the fair value of the shares received from VERITAS,
plus the estimated fair value of the Information Management Group of Seagate
Software as determined by the Seagate board of directors, plus the assumed
proceeds from the exercise of all outstanding Seagate Software stock options,
divided by the number of fully converted shares of Seagate Software. The board
of directors of Seagate considered a number of factors in determining the
estimated fair value of the Seagate IMG business, including historical and
projected revenues, earnings and cash flows, as well as other factors and
consultations with financial advisors.
The fair value of the Seagate Software shares acquired less the original
purchase price paid by the employees was recorded as compensation expense for
those shares outstanding and vested less than six months. The purchase of
Seagate Software shares outstanding and vested more than six months was
accounted for as the purchase of a minority interest and, accordingly, the fair
value of the shares exchanged has been allocated to all of the identifiable
tangible and intangible assets and liabilities of Seagate Software. In
connection with the acquisition, Seagate Software recorded the acquisition of
the minority interest, Seagate recorded compensation expense amounting to
approximately $124 million and wrote off purchased research and development
amounting to $2 million in the fourth quarter of fiscal 1999. Associated
intangible assets and goodwill are being amortized to operations over three to
four years.
The value allocated to projects identified as in-process technology at
VERITAS and Seagate Software, for the minority interest acquired, were charged
to expense in the fourth quarter of fiscal 1999. These write-offs were necessary
because the acquired technologies had not reached technological feasibility at
the date of purchase and have no future alternative uses. Seagate Software
expects that the acquired in-process research and development will be
successfully developed, but there can be no assurance that commercial viability
of these products will be achieved.
The nature of the efforts required to develop the purchased in-process
technology into commercially viable products principally relate to the
completion of all planning, designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements. The value of the purchased in-process technology for
VERITAS was estimated as the projected net cash flows related to such products,
including costs to complete the development of the technology and the future
revenues to be earned upon commercialization of the products, excluding revenues
attributable to
187
<PAGE> 194
future development efforts. These cash flows were then discounted back to their
net present value. The projected net cash flows from such projects were based on
management's estimates of revenues and operating profits related to such
projects.
As of the date of the contribution of NSMG to VERITAS, Seagate Software's
management and VERITAS' management anticipated the costs to complete the
in-process technologies at approximately $5.8 million and $44.2 million,
respectively.
Quinta
Quinta's research and development efforts revolve around Optically Assisted
Winchester ("OAW") technology. OAW refers to Quinta's newly designed recording
technology that, upon completion, would be implemented into Winchester hard disc
drives. OAW combines traditional magnetic recording technology with Winchester
hard disc drives and optical recording capabilities; optical recording
technology enables greater data storage capacity. By integrating advanced
optical features along with a highly fine and sophisticated tracking and
delivery system within the head design, OAW would multiply the areal density of
disc drives.
Through August 8, 1997, the acquisition date, Quinta had demonstrated
significant achievements in developing its technology. However, further
technological milestones were required before technological feasibility could be
achieved. Quinta's development process consists of the following development
milestones: (i) route light (optical fiber), (ii) flying head use, (iii)
recording media, (iv) mirror creation and demonstration (two stage servo), (v)
complete assembly, (vi) form factor containment, (vii) design verification test,
(viii) customer qualification, and (ix) delivery. Future products were expected
to include fixed and removable drives and cartridges. Seagate expected to
introduce products incorporating Quinta's OAW technology within 12 months of the
acquisition date.
At the time of completing the Quinta acquisition, Seagate estimated that
additional R&D spending of $9.4 million and $3.9 million in fiscal 1998 and
1999, respectively, would be required to complete the project. Since that time,
Seagate has redirected its efforts so that Seagate is focused less on the
development of a specific product and more on the advancement of optical
technology in general. As such, the spending elements associated with the
development of optical technology are embedded in the R&D budgets of Seagate's
product design centers and component technology organizations.
At the present time Seagate has no immediate plans to release a storage
device which makes specific use of Quinta's OAW technology. Delay in releasing
such a storage device is not expected to materially affect Seagate's future
earnings.
Seagate Software Reorganization
On October 20, 1999, the stockholders of Seagate Software, then a
majority-owned subsidiary of Seagate, approved the merger of Seagate Daylight
Merger Corp., a wholly-owned subsidiary of Seagate, with and into Seagate
Software. Seagate Software's assets consisted of the assets of Seagate IMG and
its investment in the common stock of VERITAS. The merger was effected on
October 20, 1999. As a result of the merger, Seagate Software became a
wholly-owned subsidiary of Seagate. In connection with the merger, Seagate
Software's stockholders and optionees received payment in the form of 3.23
shares of Seagate's common stock per share of Seagate Software common stock less
any amounts due for the payment of the exercise price for such options. All
outstanding Seagate Software stock options were accelerated immediately prior to
the merger. Seagate
188
<PAGE> 195
issued 9,124,046 shares of its common stock from treasury shares to optionees
and minority stockholders of Seagate Software.
In connection with the reorganization, Seagate Software also formed Seagate
IMG, a wholly-owned subsidiary. Seagate Software transferred the Seagate IMG
assets into Seagate IMG. This new company, Seagate IMG, is now the operating
entity for the Seagate IMG business. Seagate IMG has established stock option
plans. Total shares available for issuance under these plans are 22,700,000. As
of June 30, 2000, Seagate IMG had granted 9,501,899 options to purchase common
stock to employees of Seagate IMG at an average exercise price of $4 per share,
and 1,050 shares had been exercised.
Seagate Software accounted for the exchange of shares of its common stock
as the acquisition of a minority interest for Seagate Software common stock
outstanding and vested more than six months held by employees and all stock held
by former employees and consultants. The fair value of the shares of Seagate
issued was $19 million and was recorded as purchase price and allocated to the
assets and liabilities received. Seagate accounted for the exchange of shares of
its common stock for stock options in Seagate Software held by employees and
stock held and vested by employees less than six months as the settlement of an
earlier stock award. During the quarter ended December 31, 1999, Seagate
recorded compensation expense of $284 million, plus $2 million in payroll taxes,
related to the purchase of minority interest in Seagate Software.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Seagate's Consolidated
Statements of Operations as a percentage of revenue for each of the three years
in the period ended June 30, 2000.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
-----------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Revenue................................................... 100% 100% 100%
Cost of sales............................................. 81 77 85
--- --- ---
Gross margin.............................................. 19 23 15
Product development....................................... 9 9 9
Marketing and administrative.............................. 8 8 7
Amortization of goodwill and other intangibles............ 1 -- 1
In-process research and development....................... 2 -- 3
Restructuring............................................. 3 1 5
Unusual items............................................. 5 1 --
--- --- ---
Income (loss) from operations............................. (9) 4 (10)
Other income, net......................................... 18 23 --
--- --- ---
Income (loss) before income taxes......................... 9 27 (10)
Benefit (provision) for income taxes...................... (4) (10) 2
--- --- ---
Net income (loss)......................................... 5% 17% (8)%
=== === ===
</TABLE>
2000 vs 1999 -- Revenue in fiscal 2000 was $6.448 billion, 5% lower than
revenue in fiscal 1999. The decrease in revenue from the prior year was due
primarily to a continuing decline in the average unit sales prices of Seagate's
products as a result of intensely competitive market conditions and a shift in
mix away from Seagate's higher priced products. The decrease in average unit
sales price and effect of mix on revenue was partially offset by a higher level
of unit shipments, an increase of 28% as compared to
189
<PAGE> 196
fiscal 1999. Seagate's overall average unit sales price on its disc drive
products was $160, $148, $140, and $140 for the four quarters of fiscal 2000,
respectively. Average price erosion from fiscal 1999 to fiscal 2000 was
approximately 23%. Seagate expects that price erosion in the data storage
industry will continue for the foreseeable future. This competition and
continuing price erosion may adversely affect Seagate's results of operations in
any given quarter and such an adverse effect often cannot be anticipated until
late in any given quarter.
The decrease in gross margin as a percentage of revenue from the prior year
was primarily due to Seagate's contribution of NSMG to VERITAS on May 28, 1999.
Excluding NSMG, Seagate's gross margin would have been 21% for fiscal 1999. In
addition, the decrease in gross margin as a percentage of revenue from the prior
year was a result of price erosion due to intense price competition, as
discussed in the paragraph above. This decrease was partially offset by cost
savings as a result of Seagate's restructuring activities and its program to
implement operational efficiencies. These efficiencies include implementation of
advanced manufacturing processes resulting in lower average unit costs per disc
drive produced.
Product development expenses increased by $6 million (1%) compared with
fiscal 1999, primarily due to increases of $22 million in salaries and related
costs, $12 million in depreciation and $11 million in occupancy costs. These
expenses were substantially offset by decreases of $33 million in product
development expenses related to the NSMG business, $4 million in equipment
expense and $3 million in recruitment and relocation costs.
Marketing and administrative expenses decreased by $19 million (4%)
compared with fiscal 1999, primarily due to decreases of $96 million in
marketing and administrative expenses related to the NSMG business and $23
million in advertising and promotion expenses. These decreases were partially
offset by increases of $36 million in salaries and related costs, $30 million in
outside services, $23 million in the provision for bad debts, and $11 million in
marketing and administrative expenses related to the Seagate IMG business
software products and services.
Amortization of goodwill and other intangibles increased by $12 million
(31%) compared with fiscal 1999, primarily due to additional amortization of $15
million related to goodwill and intangibles arising from the acquisition of
XIOtech partially offset by $3 million in write-offs, in fiscal 1999, of certain
intangible assets, related to past acquisitions of companies, whose value had
become permanently impaired.
On January 28, 2000, Seagate acquired XIOtech, a provider of virtual
storage and SAN solutions, for 8,031,804 shares of Seagate common stock, issued
from treasury shares, and options with a combined fair value of $359 million.
This acquisition was accounted for as a purchase and, accordingly, the results
of operations of XIOtech have been included in the consolidated financial
statements from the date of acquisition. The purchase price has been allocated
based on the estimated fair value of net tangible and intangible assets acquired
as well as in-process research and development costs. As a result of the
acquisition, Seagate incurred a one-time write-off of in-process research and
development of $105 million. Goodwill and other intangibles arising from the
acquisition are being amortized on a straight-line basis over periods ranging
from four months to seven years. Amortization of goodwill and other intangibles
was $20 million in fiscal 2000 (including $4 million for developed technology
included in cost of sales) and is expected to be approximately $40 million per
year in subsequent years (including $8 million for developed
190
<PAGE> 197
technology included in cost of sales). XIOtech's revenue and expenses are
immaterial to Seagate's consolidated revenue and expenses.
In fiscal 2000, Seagate recorded restructuring charges of $218 million, net
of $2 million of reversals of amounts recorded in the same period, $5 million of
restructuring accruals recorded in fiscal 1999 and $4 million of restructuring
accruals recorded in fiscal 1998, resulting in a net restructuring charge of
$207 million. The $218 million restructuring charge was a result of a
restructuring plan established to align Seagate's global workforce and
manufacturing capacity with existing and anticipated future market requirements
and necessitated by Seagate's improved productivity and operating efficiencies
(the "fiscal 2000 restructuring plan"). These actions include workforce
reductions, capacity reductions including closure of facilities or portions of
facilities, write-off of excess equipment and consolidation of operations in
Seagate's recording media operations, disc drive assembly and test facilities,
printed circuit board assembly manufacturing, recording head operations,
software operations, customer service operations, sales and marketing
activities, and research and development activities. In connection with the
fiscal 2000 restructuring plan, Seagate plans to reduce its workforce by
approximately 23,000 employees, primarily in manufacturing. Approximately 18,300
of the 23,000 employees had been terminated as of June 30, 2000. As a result of
employee terminations and the write-off of equipment and facilities in
connection with the restructuring charges recorded during the year ended June
30, 2000 related to the fiscal 2000 restructuring plan, Seagate estimates that
after the completion of these restructuring activities, annual salary and
depreciation expense will be reduced by approximately $151 million and $88
million, respectively. Seagate anticipates that the implementation of the fiscal
2000 restructuring plan will be substantially complete by December 29, 2000. In
connection with the restructuring plan implemented in fiscal 1999, Seagate's
planned workforce reduction had been completed as of March 31, 2000 and the
other restructuring activities were substantially complete as of March 31, 2000.
The $350 million charge to unusual items in fiscal 2000 consisted of the
$286 million compensation charge related to the reorganization of Seagate
Software and the $64 million charge related to various legal settlements. See
"-- Overview -- Seagate Software Reorganization" beginning on page F-43 of this
document and "-- Overview -- Litigation" on page F-53.
Net other income in fiscal 2000 decreased by $445 million compared with
fiscal 1999. The decrease in net other income was primarily due to a gain of
$1.670 billion in fiscal 1999 on the contribution of Seagate's NSMG business to
VERITAS and an increase of $207 million in activity related to Seagate's equity
interest in VERITAS. These decreases were partially offset by gains on the sale
of portions of Seagate's investments in VERITAS and SanDisk of $537 million and
$679 million, respectively, in fiscal 2000. Additionally, Seagate realized gains
on the exchange of certain investments in equity securities totaling $231
million in the fourth quarter of fiscal 2000.
Seagate recorded a $299 million provision for income taxes at an effective
rate of 49% in fiscal 2000 compared with a $697 million provision for income
taxes at an effective rate of 37% in fiscal 1999. The reduction in the provision
for income taxes was primarily due to the loss from operations in fiscal 2000
and a reduction in 2000 in the level of recorded net gains attributable to
SanDisk, VERITAS and other equity securities. Excluding the tax effects of net
non-deductible charges associated with the acquisition of the minority interest
in Seagate Software, the acquisition of XIOtech, the net gain from the sales of
SanDisk and VERITAS common stock and activity related to Seagate's equity
investment
191
<PAGE> 198
in VERITAS, certain non-recurring restructuring costs, and the effects of
Seagate's settlement of litigation with Rodime PLC (the "Rodime Settlement"),
the pro forma effective tax rate used to record the provision for income taxes
for the year ended June 30, 2000 was 28%.
Seagate provided income taxes at the U.S. statutory rate of 35% on
substantially all of its current year foreign earnings in fiscal 2000 compared
with approximately 55% of such earnings in fiscal 1999 due to dividends received
by Seagate from its foreign subsidiaries. A substantial portion of Seagate's
Asia Pacific manufacturing operations at plant locations in Singapore, Thailand,
Malaysia and China operate under various tax holidays which expire in whole or
in part during fiscal 2001 through 2010. The tax holidays had no impact on net
income in fiscal 2000. The net impact of these tax holidays was to increase net
income by approximately $35 million ($.14 per share, diluted) in fiscal 1999.
During fiscal 2000, Seagate settled a number of the disputed tax matters
reflected in the statutory notices of deficiencies dated June 27, 1997 and June
12, 1998 that were received from the Internal Revenue Service relative to
Seagate Technology, Inc.'s taxable years 1991 through 1993 and Conner
Peripherals, Inc.'s taxable years 1991 and 1992, respectively. Seagate believes
that it has meritorious defenses against the remaining asserted deficiencies and
that the likely outcome of a re-determination of these asserted deficiencies by
the United States Tax Court will not result in an additional provision for
income taxes.
1999 vs 1998 -- Revenue in fiscal 1999 was flat when compared to fiscal
1998. A higher level of unit shipments, an increase of 9% as compared to fiscal
1998, combined with a shift in mix to Seagate's higher priced products was
offset by a continuing decline in the average unit sales prices of Seagate's
products as a result of intensely competitive market conditions. Revenue
decreased to $1.643 billion in the fourth quarter of fiscal 1999 from $1.805
billion in the third quarter of fiscal 1999 as a result of price erosion.
Seagate's overall average unit sales price on its disc drive products was $194,
$194, $196 and $177 for the four quarters of fiscal 1999, respectively. Average
price erosion from fiscal 1998 to fiscal 1999 was 9%.
The increase in gross margin as a percentage of revenue from the prior year
was primarily due to cost savings as a result of Seagate's restructuring
activities and an intensive program of cost reduction resulting in lower average
unit costs per disc produced. Excluding the gross margin of Seagate Software
which subsidiary's products generally have higher gross margins, Seagate's gross
margins would have been 19% and 11% in fiscal 1999 and fiscal 1998,
respectively.
Product development expenses decreased by $4 million (1%) compared with
fiscal 1998, primarily due to a decrease of $23 million in occupancy costs, and
a $19 million accrual in fiscal year 1998 for payments to former shareholders of
Quinta for achievement of certain product development milestones. These
decreases were substantially offset by increases of $12 million in salaries and
related costs, $12 million in profit sharing accruals and $11 million in
depreciation. The decrease of $23 million in occupancy costs from the comparable
year-ago period was primarily due to the closure of certain of Seagate's product
design centers pursuant to its January 1998 restructuring plan.
Marketing and administrative expenses increased by $32 million (6%)
compared with fiscal 1998, primarily due to increases of $28 million related to
Seagate's software products and services, particularly those of Seagate IMG, $17
million in salaries and related costs, $8 million in legal settlement expenses,
$7 million in profit sharing accruals and $6 million
192
<PAGE> 199
in depreciation. These expenses were partially offset by decreases of $27
million in occupancy costs and $13 million in advertising and promotion
expenses. The decrease of $27 million in occupancy costs from the comparable
year-ago period was primarily due to the closure of certain of Seagate's
facilities pursuant to its January 1998 restructuring plan.
Of the $223 million charge for the write-off of in-process research and
development in fiscal 1998, $214 million was a result of the August 1997
acquisition of Quinta and $7 million was a result of the June 1998 acquisition
of Eastman Storage Software Management Group. See "-- Overview -- Business
Combinations" beginning on page F-27 of this document.
In fiscal 1999, Seagate recorded restructuring charges of $72 million and
reversed $12 million of restructuring accruals recorded in fiscal 1998,
resulting in a net restructuring charge of $60 million. The $12 million reversal
was a result of Seagate abandoning its plan to seek an agreement with an
external vendor to supply parts currently manufactured at a facility in
Thailand. The $72 million restructuring charge was a result of steps Seagate is
taking to further improve the efficiency of its operations. These actions
included closure of Seagate's microchip manufacturing facility in Scotland;
discontinuance of Seagate's recording head suspension business located in
Malaysia and Minnesota; consolidation of global customer service operations by
relocating such operations in Singapore, Scotland and Costa Mesa, California to
Mexico; and closure of Seagate's recording media substrate facility in Mexico.
In connection with this restructuring, Seagate's workforce was reduced by
approximately 1,250 employees. As a result of this workforce reduction and the
write-off or write-down of equipment and facilities in connection with
implementing the fiscal 1999 restructuring plan, Seagate estimates that annual
salary and depreciation expense will be reduced by approximately $27 million and
$16 million, respectively. Seagate's implementation of the restructuring plan
was substantially complete as of March 31, 2000.
The $78 million charge to unusual items in fiscal 1999 was in connection
with an amendment to the purchase agreement for the August 1997 acquisition of
Quinta. See "-- Overview -- Business Combinations" beginning on page F-27 of
this document. The $22 million in income in unusual items in fiscal 1998
represents a $22 million reduction of the $153 million charge recorded in 1997
to settle a lawsuit against Seagate by Amstrad PLC.
Net other income in fiscal 1999 increased by $1.633 billion compared with
fiscal 1998. The increase in net other income was primarily due to the net gain
of $1.670 billion on the contribution of Seagate's NSMG business to VERITAS
partially offset by the charge related to Seagate's equity investment in VERITAS
of $119 million in the fourth quarter of fiscal 1999. The net gain of $1.670
billion consisted of a gain of $1.806 billion net of compensation expense of
$124 million and merger-related expenses of $12 million. In addition, the
increase in net other income was due to $76 million of expenses related to
mark-to-market adjustments in fiscal 1998 on certain of Seagate's foreign
currency forward exchange contracts for the Thai baht and the Malaysian ringgit.
Seagate recorded a $697 million provision for income taxes at an effective
rate of 37% in fiscal 1999 compared with a $174 million benefit for income taxes
at an effective rate of 25% in fiscal 1998. The increase in the provision for
income taxes was primarily due to income from operations in fiscal 1999 and to
income taxes provided on the pre-tax gain of $1.670 billion recorded on the
contribution of Seagate's NSMG business to VERITAS. Excluding the effects of the
NSMG contribution, the non-deductible charges from the Quinta acquisition and
certain non-recurring restructuring costs, the pro forma effective tax rate used
to record the provision for income taxes was approximately 28% in fiscal 1999.
193
<PAGE> 200
Seagate provided income taxes at the U.S. statutory rate on approximately
55% of its fiscal 1999 foreign earnings compared with approximately all of such
earnings in fiscal 1998. A substantial portion of Seagate's Asia Pacific
manufacturing operations at plant locations in Singapore, Thailand, Malaysia and
China operate under various tax holidays which expire in whole or in part during
fiscal 2001 through 2010. The net impact of these tax holidays was to increase
net income by approximately $35 million ($.14 per share, diluted) in fiscal
1999. The tax holidays had no impact on the net loss in fiscal 1998.
OTHER
For fiscal 2000, the net gain resulting from the remeasurement of foreign
financial statements into U.S. dollars was $4 million. Such net gains (losses)
did not have a significant effect on the results of operations for fiscal 1999
or fiscal 1998. The effect of inflation on operating results for fiscal 2000,
1999 and 1998 has been insignificant. Seagate believes this is due to the
absence of any significant inflation factors in the industry in which Seagate
participates.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" is effective for all fiscal
quarters beginning after June 15, 2000. This statement establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires that derivatives be recognized in the balance sheet at fair value
and specifies the accounting for changes in fair value. Seagate is in the
process of assessing the impact of this pronouncement on its financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("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. Seagate is still assessing the
impact of SAB 101 on its consolidated results of operations, financial position
and cash flows. Seagate is required to adopt SAB 101 in the fourth quarter of
fiscal 2001.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues, clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000. Seagate is still assessing the impact of FIN 44 on its
consolidated results of operations, financial position, and cash flows.
Seagate records unrealized gains and losses on the mark-to-market of its
investments as a component of accumulated other comprehensive income. As of June
30, 2000 and July 2, 1999, total accumulated other comprehensive income (loss)
was $86 million and $(7) million, respectively. During fiscal 2000, several
marketable equity securities held by Seagate including SanDisk Corporation,
Gadzoox Networks, Inc., Veeco Instruments, Inc., and Lernout & Hauspie Speech
Products N.V. were included in this mark-to-market calculation resulting in a
$95 million unrealized gain, net of taxes. No such similar amounts were recorded
in fiscal 1999. Such investments are subject to changes in valuation based upon
the market price of their common stock. Between June 30, 2000 and September 22,
2000, these investments, excluding the investments in SanDisk Corporation
194
<PAGE> 201
and Veeco Instruments which were sold during the same period, had temporarily
decreased in fair value by $85 million, net of taxes. In July 2000, Seagate sold
its remaining investment in SanDisk for net proceeds of approximately $105
million.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, Seagate's cash, cash equivalents and short-term
investments totaled $2.015 billion, an increase of $392 million from the prior
year-end balances. This increase was primarily a result of proceeds from sales
of VERITAS and SanDisk common stock of $834 million and $680 million,
respectively, $192 million from sales of Seagate's common stock, and net cash
provided by operating activities. However, this increase was partially offset by
expenditures of $580 million for property, equipment and leasehold improvements
and the repurchase of approximately 25 million shares of Seagate's common stock
for $776 million. Seagate's cash and cash equivalents are maintained in highly
liquid investments with remaining maturities of 90 days or less at the time of
purchase, while its short-term investments primarily consist of readily
marketable debt securities with remaining maturities of more than 90 days at the
time of purchase.
As of June 30, 2000, Seagate had committed lines of credit of $86 million
that can be used for standby letters of credit or bankers' guarantees. At June
30, 2000, $57 million of these lines of credit were utilized. In addition,
Seagate has a $300 million credit facility that can be used for borrowings. As
of June 30, 2000 this facility was unutilized.
Seagate made investments in property and equipment in fiscal 2000 totaling
$623 million. This amount comprised $241 million for manufacturing facilities
and equipment for the recording head operations in the United States, Northern
Ireland, Thailand and Malaysia; $289 million for manufacturing facilities and
equipment related to Seagate's subassembly and disc drive final assembly and
test facilities in the United States, Asia Pacific and the United Kingdom; $86
million for expansion of Seagate's thin-film media operations in the United
States, Singapore, Northern Ireland and Mexico; and $7 million for other
purposes. Seagate presently anticipates investments of approximately $632
million in property and equipment in 2001. Seagate plans to finance these
investments from existing cash balances and future cash flows from operations.
During the year ended June 30, 2000, Seagate acquired approximately 25
million shares of its common stock for approximately $776 million. The
repurchase of a portion of these shares completed the June 1997 stock repurchase
program as amended in February 1999. The remainder of the shares were
repurchased under an April 1999 amendment to the program in which up to an
additional 25 million shares of Seagate's common stock was authorized to be
acquired in the open market. In November 1999, Seagate's board of directors
authorized an increase to its existing stock repurchase program pursuant to
which up to an additional 50 million shares of Seagate's common stock may be
acquired in the open market. Seagate effected no repurchases in the quarters
ended March 31, 2000 or June 30, 2000, and has no present intention to
repurchase additional shares.
Seagate believes that its cash balances together with cash flows from
operations and its borrowing capacity will be sufficient to meet its working
capital needs for the foreseeable future.
DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk -- Seagate's exposure to market risk for changes in
interest rates relates primarily to Seagate's investment portfolio and long-term
debt obligations. Seagate does not use derivative financial instruments in its
investment portfolio. Seagate places its
195
<PAGE> 202
investments with high credit quality issuers and, by policy, limits the amount
of credit exposure to any one issuer. As stated in its policy, Seagate is averse
to principal loss and ensures the safety and preservation of its invested funds
by limiting default risk, market risk and reinvestment risk.
Seagate mitigates default risk by investing in only the safest and highest
credit quality securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer, guarantor or depository. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity.
Seagate has no cash flow exposure due to rate changes for long-term debt
obligations. Seagate primarily enters into debt obligations to support general
corporate purposes including capital expenditures and working capital needs.
The tables below present principal (or notional) amounts and related
weighted average interest rates by year of maturity for Seagate's investment
portfolio and debt obligations as of June 30, 2000 and July 2, 1999.
All investments mature, by policy, in three years or less, except for
certain types of investments that may mature in more than three years but whose
weighted average maturity is three years or less.
<TABLE>
<CAPTION>
FAIR VALUE
2001 2002 2003 2004 2005 THEREAFTER TOTAL JUNE 30, 2000
------ ----- ----- ----- ----- ---------- ------ -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash equivalents
Fixed rate............. $ 795 $ -- $ -- $ -- $ -- $ -- $ 795 $ 791
Average interest
rate............... 5.73% -- -- -- -- -- 5.73%
Short-term investments
Fixed rate............. 281 310 184 -- -- -- 775 745
Average interest
rate............... 6.21% 5.72% 6.80% -- -- 6.15%
Variable rate.......... 395 -- -- -- -- -- 395 395
Average interest
rate............... 6.61% -- -- -- -- -- 6.61%
Total investment
securities............. 1,471 310 184 -- -- -- 1,965 1,931
Average interest
rate............... 6.06% 5.72% 6.80% -- -- 6.07%
Long-Term Debt
Fixed rate............. -- -- -- 200 -- 500 700 630
Average interest
rate............... -- -- -- 7.13% -- 7.50% 7.40%
</TABLE>
196
<PAGE> 203
<TABLE>
<CAPTION>
FAIR VALUE
2000 2001 2002 2003 2004 THEREAFTER TOTAL JULY 2, 1999
----- ----- ----- ------ ----- ---------- ------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash equivalents
Fixed rate.............. $ 350 $ -- $ -- $ -- $ -- $ -- $ 350 $ 350
Average interest
rate................ 5.29% -- -- -- -- -- 5.29%
Short-term investments
Fixed rate.............. 202 364 432 -- -- -- 998 994
Average interest
rate................ 5.48% 6.02% 6.61% -- -- -- 6.17%
Variable rate........... 233 -- -- -- -- -- 233 233
Average interest
rate................ 5.03% -- -- -- -- -- 5.03%
Total investment
securities.............. 785 364 432 -- -- -- 1,581* 1,577
Average interest
rate................ 5.26% 6.02% 6.61% -- -- -- 5.80%
Long-Term Debt
Fixed rate.............. -- -- -- -- 200 500 700 663
Average interest
rate................ -- -- -- -- 7.03% 7.45% 7.33% --
</TABLE>
---------------
* Includes $4 million of accreted interest to be received at maturity.
Foreign Currency Risk -- Seagate transacts business in various foreign
countries. Its primary foreign currency cash flows are in emerging market
countries in Asia and in certain European countries. During fiscal 1998, Seagate
employed a foreign currency hedging program utilizing foreign currency forward
exchange contracts and purchased currency options to hedge local currency cash
flows from payroll, inventory, other operating expenditures and fixed asset
purchases in Singapore, Thailand, Malaysia, and Ireland. Under this program,
increases or decreases in Seagate's local currency operating expenses and other
cash outflows, as measured in U.S. dollars, partially offset realized gains and
losses on the hedging instruments. The goal of this hedging program was to
economically guarantee or lock in the exchange rates on Seagate's foreign
currency cash outflows rather than to eliminate the possibility of short-term
earnings volatility. Based on uncertainty in the Southeast Asian foreign
currency markets, Seagate has temporarily suspended purchasing foreign currency
forward exchange and option contracts for the Thai baht, Malaysian ringgit and
Singapore dollar. Seagate does not use foreign currency forward exchange
contracts or purchased currency options for trading purposes. As of July 3,
1998, Seagate had effectively closed out all of its foreign currency forward
exchange contracts by purchasing offsetting contracts. As of June 30, 2000,
Seagate had no outstanding foreign currency forward exchange or purchased
currency option contracts.
Under Seagate's foreign currency hedging program, gains and losses related
to qualified hedges of firm commitments and anticipated transactions were
deferred and recognized in income or as adjustments of carrying amounts when the
hedged transaction occurred. All other foreign currency hedge contracts were
marked-to-market and unrealized gains and losses were included in current period
net income. Because not all economic hedges qualified as accounting hedges,
certain unrealized gains and losses were recognized in income in advance of the
actual foreign currency cash flows. This mismatch of accounting gains and losses
and foreign currency cash flows was especially pronounced during the first and
second quarters of fiscal 1998 as a result of the declines in value of the Thai
baht and Malaysian ringgit, relative to the U.S. dollar. This mismatch resulted
in a pre-tax charge of $76 million for the year ended July 3, 1998.
197
<PAGE> 204
SELECTED HISTORICAL FINANCIAL DATA FOR VERITAS
The following selected consolidated financial data are derived from
VERITAS' consolidated financial statements. Share and per share data applicable
to prior periods has been restated to give retroactive effect to VERITAS' stock
splits effected as stock dividends through June 30, 2000. This data should be
read in conjunction with the consolidated financial statements and notes thereto
attached to this document.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------ --------------------
1999 1998 1997 1996 1995 2000 1999
--------- -------- -------- -------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total net revenue................ $ 596,112 $210,865 $121,125 $ 72,746 $ 47,826 $ 520,076 $186,552
Amortization of developed
technology..................... 35,659 -- -- -- -- 30,948 5,006
Amortization of goodwill and
other intangibles.............. 510,943 -- -- -- -- 439,517 71,557
Acquisition and restructuring
costs.......................... 11,000 -- 8,490 -- -- -- 11,000
In-process research and
development.................... 104,200 600 -- 2,200 -- -- 103,100
Income (loss) from operations.... (475,237) 53,668 20,076 11,858 1,193 (309,346) (139,846)
Net income (loss)................ (502,958) 51,648 22,749 12,129 2,371 (346,724) (148,746)
Net income (loss) per
share -- basic................. $ (1.59) $ 0.24 $ 0.11 $ 0.06 $ 0.01 $ (0.87) $ (0.61)
Net income (loss) per share --
diluted........................ $ (1.59) $ 0.22 $ 0.10 $ 0.06 $ 0.01 $ (0.87) $ (0.61)
Number of shares used in
computing per share
amounts -- basic............... 316,892 211,558 205,300 193,617 181,590 397,645 245,493
Number of shares used in
computing per share
amounts -- diluted............. 316,892 232,519 222,716 209,228 193,780 397,645 245,493
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------- AS OF
1999 1998 1997 1996 1995 JUNE 30, 2000
---------- -------- -------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital..................... $ 631,036 $198,842 $188,578 $ 67,413 $ 23,451 $ 838,777
Total assets........................ 4,233,277 349,117 241,880 94,524 48,100 4,077,544
Long-term obligations............... 451,640 100,773 100,911 1,468 6,205 456,587
Accumulated deficit................. (532,374) (29,416) (81,064) (103,813) (115,942) (879,098)
Stockholders' equity................ 3,393,061 169,854 104,193 74,955 23,602 3,199,960
</TABLE>
In 1999, VERITAS acquired the NSMG business, TeleBackup and NuView. Because
VERITAS accounted for the NSMG, TeleBackup and NuView acquisitions using the
purchase method of accounting, VERITAS recorded developed technology, goodwill
and other intangible assets of approximately $3,754.9 million in total. These
assets are being amortized over their estimated useful life of four years, and
result in charges to operations of approximately $234.8 million per quarter.
VERITAS also recorded one-time non-cash charges of $104.2 million in its
statements of operations in 1999, related to the write-off of in-process
research and development. VERITAS also recorded a one-time restructuring charge
in 1999 of $11.0 million related primarily to costs for its duplicative
facilities that its plans to vacate.
198
<PAGE> 205
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF VERITAS
The following discussion should be read in conjunction with the selected
historical financial data for VERITAS, and the financial statements of VERITAS
and related notes, included in this document.
OVERVIEW
VERITAS is a leading independent supplier of storage management software
for the data availability market. Storage management software has grown
significantly in importance and market impact during the last few years. Over
time the information technology operations of an enterprise have moved from just
being a piece of their computing infrastructure to providing competitive
advantage through their providing highly available mission critical data that is
accessible at all times. VERITAS' products help its 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. VERITAS' 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.
VERITAS' 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.
VERITAS recently announced its strategy for continued expansion of its
business, focusing on data availability, which is a broader market category that
includes storage management software. To support this strategy, VERITAS has
initiated a comprehensive worldwide branding campaign to grow awareness of its
name and position itself as a data availability company. VERITAS is also
undertaking a number of new business initiatives, including dividing its
internal product development and product marketing groups according to the
computing platforms on which VERITAS' products operate. Each of these new
business initiatives is being driven by a dedicated group of employees focused
on that initiative's success, and will require the devotion of substantial
employee resources and management attention. To the extent these initiatives are
not successful, VERITAS' business and results of operations would be adversely
affected.
VERITAS develops and sells products for most popular operating systems,
including versions of UNIX and Windows NT. VERITAS' software solutions are used
by customers across a broad spectrum of industries, including many leading
global corporations and e-commerce businesses. VERITAS also provides a full
range of services to assist its customers in planning and implementing their
storage management solutions.
VERITAS markets its 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.
199
<PAGE> 206
VERITAS derives user license fee revenue from shipments of its software
products to end-user customers through direct sales channels, indirect sales
channels and original equipment manufacturer customers. VERITAS' original
equipment manufacturer customers either bundle VERITAS' products with the
products licensed by such original equipment manufacturers or offer them as
options. Some original equipment manufacturers also resell VERITAS' products.
VERITAS receives 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 its products. VERITAS' license agreements with
its original equipment manufacturer customers generally contain no minimum sales
requirements and VERITAS cannot assure you that any original equipment
manufacturer will either commence or continue shipping operating systems
incorporating its products in the future. When VERITAS enters into new
agreements with original equipment manufacturer customers and resellers, a
significant period of time may elapse before VERITAS realizes any associated
revenue, due to development work that VERITAS must generally undertake under
these agreements and the time needed for the sales and marketing organizations
within these customers and distributors to become familiar with and gain
confidence in VERITAS' products.
VERITAS' 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 VERITAS'
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 VERITAS ports, or adapts, its
storage management products to an original equipment manufacturer's operating
system and when VERITAS develops new product features or extensions of existing
product features at the request of a customer. In most cases, VERITAS retains
the rights to technology derived from porting and non-recurring engineering work
and therefore generally performs this work on a relatively low, and sometimes
negative, margin.
VERITAS' international sales are generated primarily through its
international sales subsidiaries. International revenue, most of which is
collectible in foreign currencies, accounted for approximately 24% of VERITAS'
total revenue for the six months ended June 30, 2000 and 23% of its total
revenue for the three months ended June 30, 1999, for 24% of its total revenue
for the six months ended June 30, 2000 and 23% for the six months ended June 30,
1999. VERITAS' international revenue increased 151% to $66.2 million for the
three months ended June 30, 2000 from $26.4 million for the three months ended
June 30, 1999 and increased 194% to $125.1 million for the six months ended June
30, 2000 from $42.5 million for the six months ended June 30, 1999. Since much
of VERITAS' 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 VERITAS' operating and pricing strategies take into account
changes in exchange rates over time, VERITAS' operating results may be affected
in the short term by fluctuations in foreign currency exchange rates. VERITAS'
international subsidiaries purchase licenses for resale from the parent company
resulting in intercompany receivables and payables. These receivables and
payables are carried on VERITAS' books in the foreign currency that existed at
the time of the transaction. These receivables and payables are eliminated for
financial statement
200
<PAGE> 207
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 in VERITAS' statement of operations
as a component of other income, net. To date, such gains or losses have not been
material.
VERITAS believes that its success depends upon continued expansion of its
international operations. VERITAS currently has 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 VERITAS 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 VERITAS is unable to meet these additional requirements, growth in
international sales will be limited, which would have an adverse effect on
VERITAS' business, operating results and financial condition. International
operations also subject VERITAS 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.
On May 28, 1999, VERITAS acquired the Network & Storage Management Group
business of Seagate Software, Inc., which is referred to as NSMG. On June 1,
1999 VERITAS acquired TeleBackup Systems, Inc., which is referred to as
TeleBackup. On August 10, 1999, VERITAS acquired certain assets of NuView, Inc.,
which is referred to as NuView. In the following paragraphs, all share and per
share data applicable to prior periods have been restated to give retroactive
effect to VERITAS' stock splits effected as stock dividends through June 30,
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 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 VERITAS' common stock of $20.26 per share for 5 days before and
after June 7, 1999, the measurement date for the transaction, VERITAS issued
155,583,486 shares of its common stock to Seagate Software, Inc. and issued
options to purchase 15,626,358 shares of its common stock to its employees who
were former NSMG employees. VERITAS accounted for the NSMG acquisition using the
purchase method of accounting, and VERITAS is 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 VERITAS common stock, $269.7 million for
the exchange of options to purchase VERITAS 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,
201
<PAGE> 208
other intangibles of $1.5 million and tangible net liabilities assumed of $1.0
million. For the three months ended June 30, 2000, VERITAS 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
and for the six months ended June 30, 2000, VERITAS recorded $413.8 million for
the amortization of goodwill and other intangibles, and $29.2 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 June 30, 2000,
$17.8 million in direct transaction costs, $1.1 million in operating lease
commitments on duplicative facilities and $3.2 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 $9.6 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, VERITAS 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 VERITAS plans 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 June 30, 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 VERITAS' wholly-owned
subsidiary in exchange for the issuance of 6,842,795 shares of either VERITAS
common stock, or exchangeable shares exchangeable into VERITAS common stock, to
the holders of TeleBackup common shares and the exchange of options to purchase
154,706 shares of VERITAS common stock to its employees who were former
employees of TeleBackup. VERITAS accounted for the TeleBackup acquisition using
the purchase method of accounting, and VERITAS is 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 VERITAS' 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
VERITAS common stock, $2.8 million for the issuance of options to purchase
VERITAS 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 June 30, 2000, of the total $6.2
million acquisition costs, VERITAS paid $5.7 million in direct transaction costs
with
202
<PAGE> 209
the majority of the remaining $0.5 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 June 30, 2000, VERITAS 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 and for the six
months ended June 30, 2000, VERITAS recorded $17.2 million for amortization of
goodwill and other intangibles, and $0.8 for the amortization of developed
technology related to this acquisition.
Under an asset purchase agreement, VERITAS acquired certain assets of
NuView, including its Windows NT cluster management solution, Cluster X, for a
total cost of approximately $67.9 million. VERITAS accounted for the acquisition
using the purchase method of accounting, and VERITAS is 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
VERITAS common stock, $0.8 million for the issuance of options to purchase
VERITAS common stock to former NuView employees, $0.2 million in
acquisition-related costs and $19.2 million payable in cash, of which $12.8
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 June 30, 2000, VERITAS 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 and for the
six months ended June 30, 2000, VERITAS recorded $8.2 million for amortization
of goodwill and other intangibles, and $0.3 million for the amortization of
developed technology related to this acquisition.
For the year ended December 31, 1999 and the six months ended June 30,
2000, VERITAS incurred net losses due to the amortization of developed
technology, goodwill and other intangibles related to the acquisitions of the
NSMG business, TeleBackup and NuView. Because of these acquisitions, VERITAS
will incur total charges of $234.8 million per quarter until the second quarter
of 2003 related to the amortization of developed technology, goodwill and other
intangibles. Because of these significant quarterly charges it is likely that
VERITAS will remain unprofitable at least through the second quarter of 2003.
203
<PAGE> 210
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR VERITAS FOR THE YEAR ENDED DECEMBER 31, 1999
Results of Operations
The following table sets forth, for the periods indicated, certain items in
VERITAS' statements of operations expressed as a percentage of total revenue.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net revenue:
User license fees............................... 84% 80% 79%
Services........................................ 16 20 21
--- --- ---
Total net revenue....................... 100 100 100
Cost of revenue:
User license fees............................... 4 4 4
Services........................................ 6 10 10
Amortization of developed technology............ 6 -- --
--- --- ---
Total cost of revenue................... 16 14 14
--- --- ---
Gross profit...................................... 84 86 86
Operating expenses:
Selling and marketing........................... 37 36 35
Research and development........................ 16 19 21
General and administrative...................... 6 5 7
Amortization of goodwill and other
intangibles.................................. 86 -- --
Acquisition and restructuring costs............. 2 -- 7
In-process research and development............. 17 -- --
--- --- ---
Total operating expenses................ 164 60 70
--- --- ---
Income from operations............................ (80) 26 16
Interest and other income, net.................... 4 6 4
Interest expense.................................. (2) (3) (1)
--- --- ---
Income before income taxes........................ (78) 29 19
Provision for income taxes........................ 6 4 1
--- --- ---
Net income........................................ (84)% 25% 18%
=== === ===
</TABLE>
Net Revenue
Net revenue increased 183% to $596.1 million in 1999 from $210.9 million in
1998, when it increased 74% from $121.1 million in 1997. While VERITAS believes
that the percentage increases in net revenue achieved in these periods are not
necessarily indicative of future results, VERITAS expects net revenue to
continue to grow in 2000. VERITAS' revenue comprises user license fees and
service revenue.
User License Fees. User license fees increased 197% to $498.0 million in
1999 from $167.7 million in 1998, when it increased 75% from $95.7 million in
1997. The increase in 1999 was primarily the result of the acquisition of NSMG
in the second quarter of 1999,
204
<PAGE> 211
continued growth in market acceptance of VERITAS' software products, a greater
volume of large end-user transactions, increased revenue from original equipment
manufacturers, or OEMs, resales of bundled and unbundled products and the
introduction of new products. The increase in 1998 was primarily the result of
the continued growth in market acceptance of VERITAS' software products, a
greater volume of large end-user transactions, increased revenue from OEM
resales of bundled and unbundled products and the introduction of new products.
In particular, VERITAS' user license fees from storage products increased by
approximately 187% in 1999 from 1998, and accounted for 86% of user license fees
in 1999, 88% of user license fees in 1998 and 89% of user license fees in 1997.
Service Revenue. VERITAS derives service revenue primarily from contracts
for software maintenance and technical support and, to a lesser extent,
consulting services, training services and porting fees. Porting fees are
derived from funded development efforts that are typically associated with
VERITAS' agreements with original equipment manufacturers. Service revenue
increased 127% to $98.1 million in 1999, from $43.2 million in 1998, when it
increased 70% from $25.4 million in 1997. The increases in both 1999 and 1998
were primarily due to increased sales of service and support contracts on new
licenses, renewal of service and support contracts on existing licenses, an
increase in demand for consulting and training services and, to a lesser extent
in 1999, the acquisition of NSMG in the second quarter of 1999. VERITAS expects
that service revenue will continue to grow as a percentage of its net revenue.
Cost of Revenue
Cost of revenue increased 221% to $94.6 million in 1999 from $29.5 million
in 1998, when it increased 79% from $16.4 million in 1997. 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.
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 revenue is the
amortization of developed technology acquired in the NSMG, TeleBackup and NuView
acquisitions. The estimated useful life of the developed technology acquired is
four years and VERITAS expects the amortization to be approximately $15.1
million per quarter. Cost of user license fees (including amortization of
developed technology) increased 541% to $56.4 million in 1999 from $8.8 million
in 1998, and increased 86% in 1998 from $4.7 million in 1997. The increase in
1999 was primarily the result of the amortization of developed technology, and
to a lesser extent, a larger percentage of license fees being generated from the
sale of products with higher royalty rates. VERITAS pays royalties for certain
technology licensed from others and incorporated in VERITAS' products. The
increase in 1998 was primarily the result of a larger percentage of license fees
being generated from the sale of products with higher royalty rates. Gross
margin on user license fees decreased to 89% in 1999 and remained constant at
95% in 1998 and 1997. The decrease in gross margin on user license fees in 1999
was due to the amortization of developed technology. If VERITAS excluded the
amortization of developed technology from the cost of user license fees, the
gross margin would have been 96% in 1999. 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
205
<PAGE> 212
than other products. VERITAS does not expect gross margin on user license fees
to increase.
Cost of Service Revenue. Cost of service revenue consists primarily of
personnel-related costs in providing maintenance, technical support, consulting
and training to customers, and development efforts in porting. Cost of service
revenue increased 85% to $38.2 million in 1999 from $20.7 million in 1998, and
increased 76% in 1998 from $11.7 million in 1997. Gross margin on service
revenue was 61% in 1999, 52% in 1998 and 54% in 1997. The increase in absolute
dollars was due primarily to personnel additions in VERITAS' customer support,
training and consulting organizations, in anticipation of increased demand for
such services. The gross margin improvement in 1999 was the result of increased
productivity and higher service revenue growth due to support fees from a larger
installed customer base.
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 related directly to these acquisitions.
Selling and Marketing. Selling and marketing expenses consist primarily of
salaries, related benefits, commissions, consultant fees and other costs
associated with VERITAS' sales and marketing efforts. Selling and marketing
expenses increased 191% to $222.0 million in 1999 from $76.4 million in 1998,
and increased 78% in 1998 from $42.9 million in 1997. Selling and marketing
expenses as a percentage of net revenue remained relatively consistent at 37% in
1999, 36% in 1998 and 35% in 1997. The increase in absolute dollars is primarily
attributable to increased sales and marketing staffing and, to a lesser extent,
increased costs associated with new marketing programs. VERITAS intends to
continue to expand its global sales and marketing infrastructure, and
accordingly, VERITAS expects its selling and marketing expenses to increase in
absolute dollars but not necessarily change significantly as a percentage of net
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 135% to
$94.5 million in 1999 from $40.2 million in 1998, and increased 60% in 1998 from
$25.2 million in 1997. The increases were due primarily to increased staffing
levels associated with new hires and VERITAS' acquisitions and expansion of
development efforts for new technology. As a percentage of net revenue, research
and development expenses decreased to 16% in 1999 from 19% in 1998 and 21% in
1997. VERITAS believes that a significant level of research and development
investment is required to remain competitive, and expect these expenses will
continue to increase in absolute dollars in future periods and may increase
slightly as a percentage of net revenue. Research and development expenses can
be expected to fluctuate from time to time to the extent that VERITAS makes
periodic incremental investments in research and development and its 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
225% to $34.2 million in 1999 from $10.5 million in 1998, and increased 31% in
1998 from $8.0 million in 1997. General and administrative expenses as a
percentage of revenue were 6% in 1999, 5% in 1998 and 7% in 1997. The increases
in absolute dollars in 1999 and 1998 were due to additional
206
<PAGE> 213
personnel costs, including additional personnel related to the acquisitions in
the second quarter of 1999, and, to a lesser extent, to an increase in the
provision for the allowance for doubtful accounts and other expenses associated
with enhancing our infrastructure to support expansion of VERITAS' operations.
VERITAS expects general and administrative expenses to increase in absolute
dollars, but not to change significantly as a percentage of net revenue, as it
expands its operations.
Amortization of goodwill and other intangibles. Amortization of goodwill
and other intangibles was $510.9 million in 1999. This amount for the most part
represents seven months of amortization of goodwill, distribution channels,
trademarks and other intangibles assets recorded upon the acquisitions of NSMG
and TeleBackup and five months of amortization of goodwill and other intangibles
assets recorded upon the acquisition of NuView. The estimated useful life of the
goodwill and the other intangibles is four years and VERITAS expects the
amortization to be approximately $219.7 million per quarter.
Acquisition and restructuring costs. In 1999, upon the acquisition of NSMG,
VERITAS recorded a one-time charge to acquisition and restructuring costs of
$11.0 million, which included approximately $9.7 million in exit costs with
respect to duplicative facilities that it plans to vacate and approximately $1.3
million in severance benefits.
Acquisition and restructuring costs are summarized below (in thousands):
<TABLE>
<CAPTION>
CASH PAYMENTS OR
PROVISION NON-CASH CHARGES FROM ACCRUED AS OF
RECORDED AT ACQUISITION DATE TO DECEMBER 31,
ACQUISITION DATE DECEMBER 31, 1999 1999
---------------- --------------------- --------------
<S> <C> <C> <C>
Cancellation of facility
leases and other
contracts................ $ 8,717 $ -- $8,717
Involuntary termination
benefits................. 1,335 (897) 438
Write off of redundant
equipment and leasehold
improvements............. 948 (948) --
------- ------- ------
$11,000 $(1,845) $9,155
======= ======= ======
</TABLE>
Of the accrued balance as of December 31, 1999, $8.7 million relates to
servicing operating lease payments or negotiated buyout of operating lease
commitments on duplicative facilities, the lease terms of which will expire at
various times through the year 2012. The remaining $0.4 million is expected to
be utilized by May 2000.
In 1997, as a result of the OpenVision merger, VERITAS incurred charges of
$8.5 million, consisting of approximately $4.2 million for transaction fees and
professional services, $1.9 million for contract terminations and asset
write-offs and $2.4 million for other costs incident to the OpenVision merger.
Of the total charge, $1.2 million resulted from the write-down of redundant
assets and facilities, primarily consisting of intangible assets related to a
prior acquisition which were redundant as a result of OpenVision having a
similar product line. The remaining $7.3 million, involving banking, legal and
accounting fees and other direct costs in connection with the elimination of
duplicative facilities, was fully paid as of December 31, 1999.
In-Process Research and Development. In-process research and development
was $104.2 million in 1999. This amount represents one-time charges of $101.2
million
207
<PAGE> 214
recorded upon the acquisition of NSMG in May 1999, $1.9 million recorded upon
the acquisition of TeleBackup in June 1999 and $1.1 million recorded upon the
acquisition of certain assets of NuView in August 1999.
VERITAS obtained outside valuations for these acquisitions, and values were
assigned to developed technology, in-process research and development and other
intangibles. The fair value of the in-process research and development for each
of the acquisitions was determined using the income approach, which discounts
expected future cash flows from projects under development to their net present
value. Each project was analyzed to determine the characteristics and
applications of the technology; the complexity, cost and time to complete the
remaining development efforts; any alternative future use or current
technological feasibility; and the stage of completion. The projected future
cash flows from the projects under development were based on management's
estimates of revenues and operating profits related to the projects. Revenues on
the projects related to in-process research and development were estimated to
begin in 1999 through 2003, with the majority of the revenues occurring between
2000 and 2002. The risk-adjusted discount rate applied to after-tax cash flows
was 20%, compared to an estimated weighted-average cost of capital of 15%.
VERITAS believes the amounts determined for in-process research and development
are representative of fair value and do not exceed the amounts an independent
third party would pay for the projects assumed.
The total charge for in-process research and technology was estimated to be
$101.2 million, for the NSMG acquisition, completed in May 1999. Seven
in-process research and development projects were identified and valued, with
two projects under the data protection product group that accounted for
approximately 71% of the value assigned to in-process research and development.
The data protection software products provide backup and restore functions,
including scheduled automated unattended data backup operations. The remaining
products identified and valued were under the application solutions and
replication product groups. The application solutions software provides
scaleable solution for managing the behavior of different types of networks
worldwide from one central location and the replication software products
deliver flexible and intelligent data replication for Windows NT environments.
Costs to complete all of the NSMG in-process research and development projects
were estimated to be $6.0 million. At the date of acquisition, the development
of all products ranged from 48% to 90% complete and averaged approximately 76%
complete, with expected completion dates through December 1999. At December 31,
1999, the completion and release of some products have been delayed through May
2000. VERITAS does not expect the delays to have any significant impacts on its
return on investments, results of operations or financial position. At December
31, 1999, VERITAS estimates approximately $1.5 million to complete the
development of the in-process research and development projects acquired from
NSMG.
All in-process research and development projects related to the TeleBackup
and NuView acquisitions were individually insignificant and were completed or
abandoned as of December 31, 1999.
Interest and Other Income, Net. Interest and other income, net increased to
$23.3 million in 1999 from $11.8 million in 1998, and $4.9 million in 1997. The
increases were due primarily to increased amounts of interest income
attributable to the higher level of funds available for investment, primarily
from the issuance of the convertible subordinated notes in October 1997 and
August 1999 and, to a lesser extent, from the net cash provided by operating
activities. Foreign exchange transaction gains and losses that
208
<PAGE> 215
are included in other income, net, have not had a significant effect on VERITAS'
results of operations.
Interest Expense. Interest expense increased to $15.7 million in 1999 from
$5.7 million in 1998, and $1.2 million in 1997. Interest expense in 1999, 1998
and 1997 consisted primarily of interest accrued under the 1.856% convertible
subordinated notes due 2006 issued in August 1999 and the 5.25% convertible
subordinated notes due 2004 issued in October 1997.
Income Taxes. VERITAS had effective tax rates of negative 8% in 1999,
positive 14% in 1998 and positive 4% in 1997. VERITAS' 1999 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. VERITAS' 1998 and 1997 effective tax rates were lower than the
combined federal and state statutory rates primarily due to the utilization of
federal net operating loss carryforwards, other credit carryforwards and
reduction of the valuation allowance on deferred income taxes, offset by the
impact of state and foreign taxes.
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. VERITAS was required to implement these provisions of SOP 98-9 for its
fiscal year ending December 31, 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. VERITAS does not believe the impact of SOP 98-9 will be
material to its financial position, results of operations or cash flows.
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. VERITAS will be
required to implement SFAS No. 133 as of the beginning of its fiscal year 2001.
VERITAS' foreign currency exchange rate hedging activities have been
insignificant to date and it does not believe that the impact of SFAS No. 133
will be material to its financial position, results of operations or cash flows.
209
<PAGE> 216
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR VERITAS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000
Results of Operations
The following table sets forth the percentage of total revenue represented
by certain line items from VERITAS' condensed consolidated statement of
operations for the three and six months ended June 30, 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
JUNE 30, JUNE 30, 2000
------------------ ------------------
2000 1999 COMPARED TO 1999
----- ----- ------------------
<S> <C> <C> <C>
Net revenue:
User license fees............. 82% 81% 141%
Services...................... 18 19 137%
--- ---- ----
Total revenue......... 100 100 140%
Cost of revenue:
User license fees............. 3 3 190%
Services...................... 7 7 144%
Amortization or developed
technology................. 6 4 211%
--- ---- ----
Total cost of
revenue............. 16 14 173%
--- ---- ----
Gross profit.................... 84 86 135%
Operating expenses:
Selling and marketing......... 39 39 138%
Research and development...... 14 18 91%
General and administrative.... 6 6 147%
Amortization of goodwill and
other intangibles.......... 80 62 207%
In-process research and
development................ -- 90 (100)%
Acquisition and restructuring
costs...................... -- 10 (100)%
--- ---- ----
Total operating
expenses............ 139 225 48%
--- ---- ----
Loss from operations............ (55) (139) (5)%
Interest and other income,
net........................... 5 3 306%
Interest expense................ (3) (1) 434%
--- ---- ----
Loss before income taxes........ (53) (137) (7)%
Provision for income taxes...... 10 4 459%
--- ---- ----
Net loss........................ (63)% (141)% 6%
=== ==== ====
</TABLE>
210
<PAGE> 217
<TABLE>
<CAPTION>
PERCENTAGE OF PERIOD-TO-PERIOD
TOTAL NET REVENUE PERCENTAGE CHANGE
------------------ ------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, 2000
------------------ ------------------
2000 1999 COMPARED TO 1999
----- ----- ------------------
<S> <C> <C> <C>
Net revenue:
User license fees............. 83% 80% 188%
Services...................... 17 20 143%
--- ---- ----
Total revenue......... 100 100 179%
Cost of revenue:
User license fees............. 4 2 318%
Services...................... 7 8 160%
Amortization or developed
technology................. 6 _3 518%
--- ---- ----
Total cost of
revenue............. 17 13 264%
--- ---- ----
Gross profit.................... 83 87 166%
Operating expenses:
Selling and marketing......... 37 38 171%
Research and development...... 14 18 116%
General and administrative.... 6 6 212%
Amortization of goodwill and
other intangibles.......... 85 38 514%
In-process research and
development................ -- 55 (100)%
Acquisition and restructuring
costs...................... -- 6 (100)%
--- ---- ----
Total operating
expenses............ 142 161 145%
--- ---- ----
Loss from operations............ (59) (74) 121%
Interest and other income,
net........................... 4 3 289%
Interest expense................ (3) (2) 429%
--- ---- ----
Loss before income taxes........ (58) (73) 120%
--- ---- ----
Provision for income taxes...... 9 7 279%
--- ---- ----
Net loss........................ (67)% (80)% 133%
=== ==== ====
</TABLE>
Net Revenue. Total net revenue increased 140% from $114.6 million for the
three months ended June 30, 1999 to $275.4 million for the three months ended
June 30, 2000, and increased 179% from $186.6 million for the six months ended
June 30, 1999 to $520.1 million for the six months ended June 30, 2000. VERITAS
believes that the percentage increases in total revenue achieved in these
periods are not necessarily indicative of future results. VERITAS' revenue
comprises user license fees and service revenue. User license fees represented
82% of total net revenue for the three months ended June 30, 2000, and 81% of
total net revenue for the three months ended June 30, 1999. User license fees
represented 83% of total net revenue for the six months ended June 30, 2000, and
80% of total net revenue for the six months ended June 30, 1999.
User License Fees. User license fees increased 141% from $93.3 million for
the three months ended June 30, 1999 to $224.9 million for the three months
ended June 30, 2000, and increased 188% from $149.1 million for the six months
ended June 30, 1999 to $429.2 million for the six months ended June 30, 2000.
The increases were primarily the result of the acquisition of NSMG on May 28,
1999, continued growth in market acceptance of VERITAS' 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, VERITAS
211
<PAGE> 218
user license fees from storage products increased by approximately 187% from
$124.8 million for the six months ended June 30, 1999 to $358.5 million for the
six months ended June 30, 2000, and accounted for 84% of user license fees for
the six months ended June 30, 2000 and 1999.
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 137%
from $21.4 million for the three months ended June 30, 1999 to $50.6 million for
the three months ended June 30, 2000, and increased 143% from $37.5 million for
the six months ended June 30, 1999 to $90.9 million for the six months ended
June 30, 2000. The increases were due primarily 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. Service revenue
represented 18% of total revenue for the three months ended June 30, 2000 and is
expected to grow slightly as a percentage of total revenue in the future.
Cost of Revenue. Total cost of revenue increased 173% from $16.1 million
for the three months ended June 30, 1999 to $43.9 million for the three months
ended June 30, 2000 and increased 264% from $24.6 million for the six months
ended June 30, 1999 to $89.4 million for the six months ended June 30, 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. VERITAS
expects gross margin to fluctuate on a quarterly basis in the future, reflecting
the timing differences between increasing its organizational investments and the
corresponding revenue growth that VERITAS expects 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 203% from $7.8
million for the three months ended June 30, 1999 to $23.8 million for the three
months ended June 30, 2000 and increased 420% from $9.8 million for the six
months ended June 30, 1999 to $50.9 million for the six months ended June 30,
2000. The increase in cost of user license fees is due primarily to the
amortization of developed technology acquired in the NSMG, TeleBackup and NuView
acquisitions. Gross margin on user license fees decreased from 92% for the three
months ended June 30, 1999 to 89% for the three months ended June 30, 2000, and
decreased from 93% for the six months ended June 30, 1999 to 88% for the six
months ended June 30, 2000. The decrease in gross margin on user license fees
was due to the inclusion of the amortization of developed technology. If VERITAS
excluded the amortization of developed technology from the cost of user license
fees, the gross margin would be 96% for the three months ended June 30, 2000 and
95% for the six months ended June 30, 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. VERITAS does 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
212
<PAGE> 219
customers. Cost of service revenue increased 144% from $8.3 million for the
three months ended June 30, 1999 to $20.2 million for the three months ended
June 30, 2000, and increased 160% from $14.8 million for the six months ended
June 30, 1999 to $38.5 million for the six months ended June 30, 2000. Gross
margin on service revenue decreased from 61% for the three months ended June 30,
1999 to 60% for the three months ended June 30, 2000. Gross margin on service
revenue also decreased from 61% for the six months ended June 30, 1999 to 58%
for the six months ended June 30, 2000. The increase in absolute dollars and the
decrease in the gross margin were due primarily to significant personnel
additions in customer support and training and consulting organizations, in
anticipation of increased demand for these services. VERITAS expects that 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 $15.6 million and $30.9 million for the three and six months ended June 30,
2000. These amounts mainly represent the amortization of the developed
technology recorded upon acquisitions of NSMG, TeleBackup and NuView in 1999.
The useful life of the developed technology acquired is four years and VERITAS
expects the amortization to be approximately $15.6 million per quarter.
Operating Expenses. The NSMG acquisition on May 28, 1999 and the TeleBackup
acquisition on June 1, 1999 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 related
directly 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 138% from $44.6 million for the three months ended June 30, 1999 to
$106.1 million for the three months ended June 30, 2000, and increased 171% from
$71.4 million for the six months ended June 30, 1999 to $193.7 million for the
six months ended June 30, 2000. Selling and marketing expenses as a percentage
of total net revenue remained constant at 39% for the three months ended June
30, 1999 and for the three months ended June 30, 2000, and decreased from 38%
for the six months ended June 30, 1999 to 37% for the six months ended June 30,
2000. VERITAS intends to continue to expand its global sales and marketing
infrastructure, and accordingly, expects its selling and marketing expenses to
increase in absolute dollars but not change significantly 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 91% from
$20.6 million for the three months ended June 30, 1999 to $39.2 million for the
three months ended June 30, 2000, and increased 116% from $34.4 million for the
six months ended June 30, 1999 to $74.3 for the six months ended June 30, 2000.
The increases were due primarily to increased staffing levels associated with
new hires and the NSMG, TeleBackup and NuView acquisitions. As a percentage of
total net revenue, research and development expenses decreased from 18% for the
three and six months ended June 30, 1999 to 14% for the three and six months
ended June 30, 2000. VERITAS believes that a significant level of research and
development investment is required to remain competitive, and VERITAS expects
these expenses will continue to increase in absolute dollars in future periods
and may increase slightly as a percentage of total net revenue. VERITAS expects
research and development expenses to fluctuate from time to time to the extent
that VERITAS makes
213
<PAGE> 220
periodic incremental investments in research and development and its 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
147% from $7.1 million for the three months ended June 30, 1999 to $17.6 million
for the three months ended June 30, 2000, and increased 212% from $10.4 million
for the six months ended June 30, 1999 to $32.5 for the six months ended June
30, 2000. General and administrative expenses as a percentage of revenue
remained constant at 6% for the three and six months ended June 30, 1999 and 6%
for the three and six months ended June 30, 2000. The increases in absolute
dollars were due primarily 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
VERITAS' infrastructure to support expansion of its operations. VERITAS expects
general and administrative expenses to increase in absolute dollars, but not to
change significantly as a percentage of revenue in the future, as it expands its
operations.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and other intangibles was $219.8 million and $439.5 million for the three and
six months ended June 30, 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 VERITAS
expects the amortization to be approximately $219.8 million per quarter.
In-process Research and Development. Upon the acquisition of NSMG and
TeleBackup in 1999, VERITAS recorded one-time charges to in-process research and
development of $103.1 million in the second quarter of 1999.
Acquisition and Restructuring Costs. Upon the acquisition of NSMG, VERITAS
recorded a one-time charge, in the second quarter of 1999, to acquisitions and
restructuring costs of $11.0 million, which included approximately $9.7 million
in exit costs with respect to duplicate facilities that VERITAS plans to vacate
and approximately $1.3 million in severance benefits.
Interest and Other Income, Net. Interest and other income, net increased
306% from $3.1 million for the three months ended June 30, 1999 to $12.8 million
for the three months ended June 30, 2000, and increased 289% from $6.2 million
for the six months ended June 30, 1999 to $24.0 million for the six months ended
June 30, 2000. The increases were 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 VERITAS'
results of operations.
Interest Expense. Interest expense increased 434% from $1.4 million for the
three months ended June 30, 1999 to $7.5 million for the three months ended June
30, 2000, and increased 429% from $2.8 million for the six months ended June 30,
1999 to $15.0 million for the six months ended June 30, 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.
214
<PAGE> 221
Income Taxes. VERITAS had effective tax rates of 18% of pre-tax loss for
the three months ended June 30, 2000, and 3% of pre-tax loss for the three
months ended June 30, 1999. VERITAS had effective tax rates of 15% of pre-tax
loss for the six months ended June 30, 2000, and 9% of pre-tax loss for the six
months ended June 30, 1999. VERITAS' effective tax rates were negative and
differed from the combined federal and state statutory rates due primarily to
acquisition related charges that were non-deductible for tax purposes.
New Accounting Pronouncements. 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,
as amended by SFAS No. 137 and 138, establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. VERITAS will be required to
implement SFAS No. 133 as of the beginning of our fiscal year 2001. VERITAS'
foreign currency exchange rate hedging activities have been insignificant to
date and VERITAS does not believe that SFAS No. 133 will have a material impact
on its financial position, results of operations or cash flows.
In December 1999, the SEC 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. In recent actions, the SEC has further delayed the required
implementation date which, for VERITAS, is the fourth quarter of 2000,
retroactive to the beginning of the fiscal year. The SEC has recently issued
additional implementation guidance in the form of "Frequently Asked Questions
and Answers". VERITAS' preliminary conclusion is that the implementation of SAB
101 will not have a material impact on its financial position, results of
operations or cash flows for the year ending December 31, 2000.
Liquidity and Capital Resources
VERITAS' cash, cash equivalents and short-term investments totaled $944.6
million at June 30, 2000 and represented 72% of VERITAS' 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 June 30, 2000, VERITAS had $456.6 million of
long-term obligations and stockholders' equity was approximately $3,200.0
million.
Net cash provided by operating activities was $162.6 million in the six
months ended June 30, 2000, and $51.6 million in the six months ended June 30,
1999. For the six months ended June 30, 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,
increases in deferred revenue and accrued compensation and benefits, offset
somewhat by a decrease in deferred income taxes. For the six months ended June
30, 1999, cash provided by operating activities resulted primarily from income
after adjustments to exclude the non-cash charges including amortization of
intangibles related to acquisition activities, and an increase in deferred
revenue.
VERITAS' investing activities used cash of $30.4 million in the six months
ended June 30, 2000 due primarily to capital expenditures of $48.1 million and
strategic investments of $12.0 million partially offset by the net decrease in
short-term and long-term investments of $32.2 million. VERITAS' investing
activities used cash of
215
<PAGE> 222
$86.8 million in the six months ended June 30, 1999 due primarily to the net
increase in short-term and long-term investments of $64.4 million and capital
expenditures of $23.7 million.
VERITAS has begun to make investments in development-stage companies that
it believes provide strategic opportunities for VERITAS. VERITAS intends that
these investments will complement our own research and development efforts,
provide access to new technologies and emerging markets, and create
opportunities for additional sales of its products and services. As of June 30,
2000, VERITAS had invested $12.0 million as part of this initiative. VERITAS
cannot assure you that this initiative will have the above mentioned desired
results, or even that it will not lose all or any part of these investments.
Financing activities provided cash of $145.4 million in the six months
ended June 30, 2000, and $16.7 million in the six months ended June 30, 1999
from the issuance of common stock under the Company's employee stock plans and
the related income tax benefits.
In October 1997, VERITAS issued $100.0 million of 5.25% convertible
subordinated notes due 2004 (the "5.25% notes"), for which VERITAS received net
proceeds of $97.5 million. VERITAS and its wholly-owned subsidiary, VERITAS
Operating Corporation, are co-obligors on the 5.25% notes and are
unconditionally and jointly and severally liable for all payments under 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 VERITAS 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 VERITAS' 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. As of June 30, 2000 the aggregate principal amount at
maturity, for the 5.25% notes, is $98.9 million.
In August 1999, VERITAS and its 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
VERITAS 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 and are unconditionally and jointly and severally liable for
all payments under 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 VERITAS
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 VERITAS' 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. As of June 30, 2000 the aggregate principal amount at maturity, for the
1.856% notes, is $465.3 million.
216
<PAGE> 223
Following the issuance of the 5.25% notes and the 1.856% notes, VERITAS has
had a ratio of long-term debt to total capitalization at June 30, 2000 of
approximately 12%. As a result of this additional indebtedness, VERITAS'
principal and interest payment obligations increased substantially. The degree
to which VERITAS will be leveraged could materially and adversely affect its
ability to obtain financing for working capital, acquisitions or other purposes
and could make VERITAS more vulnerable to industry downturns and competitive
pressures. VERITAS will require substantial amounts of cash to fund scheduled
payments of principal and interest on its indebtedness, including the 5.25%
notes and the 1.856% notes, future capital expenditures and any increased
working capital requirements. If VERITAS is unable to meet its cash requirements
out of cash flow from operations, it may be unable to obtain alternative
financing.
During the first quarter of 2000, VERITAS revised its existing lease
agreement for new corporate campus facilities in Mountain View, California.
These facilities will replace certain facilities VERITAS 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. VERITAS 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 VERITAS 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. VERITAS anticipates occupying the new corporate campus facilities and
beginning the lease payments in the second quarter of 2001. The lease agreement
requires VERITAS to maintain specified financial covenants such as earnings
before interest, taxes, depreciation and amortization (EBITDA), debt on EBITDA
and quick ratio, all of which VERITAS was in compliance with as of June 30,
2000.
During the first quarter of 2000, VERITAS signed a lease agreement for its
existing facilities in Roseville, Minnesota. VERITAS will improve and expand its
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. VERITAS 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 VERITAS 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. VERITAS anticipates
occupying the new campus facilities and beginning the lease payments in the
second quarter of 2001. The lease agreement requires VERITAS to maintain
specified financial covenants such as earnings before interest, taxes,
depreciation and amortization (EBITDA), debt on EBITDA and quick ratio, all of
which VERITAS was in compliance with as of June 30, 2000.
During the third quarter of 2000, VERITAS signed a lease agreement for the
lease of 65 acres of land and subsequent improvements for new corporate campus
facilities in Milpitas, California. VERITAS will develop the site in two phases,
adding a total of 990,990 square feet, with the first phase of 466,000 square
feet being completed in the fourth quarter of 2002. VERITAS expects to complete
the second phase of 524,990 square
217
<PAGE> 224
feet in the second quarter of 2003. The facilities will provide space for
research and development functions. The lease term for the first phase is five
years beginning in July 2000, with an option to extend the lease term for two
successive periods of one year each. VERITAS has an option to purchase the
property (land and first phase facilities) for $243 million or, at the end of
the lease, to arrange for the sale of the property to a third party with VERITAS
retaining an obligation to the owner for the difference between the sales price
and the guaranteed residual value up to $220 million if the sales price is less
than this amount, subject to certain provisions of the lease. VERITAS
anticipates occupying the new campus facilities and beginning the lease payments
in the second quarter of 2002 for the first phase and second quarter of 2003 for
the second phase. VERITAS expects to start negotiating the financing terms of
the second phase in the second quarter of 2001.
VERITAS believes that its current cash, cash equivalents and short-term
investment balances and cash flow from operations will be sufficient to meet its
working capital and capital expenditure requirements for at least the next 12
months. After that time, VERITAS may require additional funds to support its
working capital requirements or for other purposes and may seek to raise such
additional funds through public or private equity financing or from other
sources. VERITAS cannot assure you that additional financing will be available
at all or that if available, VERITAS will be able to obtain it on terms
favorable to VERITAS.
218
<PAGE> 225
SELECTED PRO FORMA FINANCIAL DATA
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS FOR SEAGATE AND SEAGATE'S
OPERATING ASSETS
The following unaudited pro forma condensed financial statements consist of
the unaudited pro forma condensed statements of operations of Seagate for the
year ended June 30, 2000, and the unaudited pro forma condensed balance sheet of
Seagate as of June 30, 2000. Also, the unaudited condensed statement of
operations for the year ended June 30, 2000, includes the column entitled
"Seagate Operating Assets", representing the pro forma operating results for the
operating business to be sold to Suez Acquisition Company.
The transactions described in this joint proxy statement/prospectus and by
these pro forma financial statements are the subject of stockholder litigation
described on page 163 of this document.
Seagate's pro forma condensed statements of operations have been prepared
to illustrate the historical results of operations of Seagate as if certain
transactions had occurred at the beginning of fiscal 2000. The unaudited pro
forma condensed statements of operations of Seagate (the column entitled "Pro
Forma Seagate") include the historical results of Seagate adjusted for
acquisition related transactions that have occurred in fiscal 2000 as if these
transactions occurred on July 3, 1999, the first day of fiscal 2000. These
transactions include the reorganization of Seagate Software in October 1999 and
the acquisition of XIOtech in January 2000. The Seagate unaudited pro forma
condensed balance sheet gives effect to the sale of Seagate's operating assets
to Suez Acquisition Company in the leveraged buyout, the merger with VERITAS,
and the distribution of excess cash to Seagate stockholders as if these
transactions had taken place on June 30, 2000. The merger with VERITAS includes
Seagate's equity investment in VERITAS and its investments in Gadzoox Networks,
SanDisk, Veeco Instruments and Lernout & Hauspie.
The proforma condensed statements of operations of Seagate include the
Seagate operating assets (the column entitled "Seagate Operating Assets") that
has been included to provide Seagate stockholders with a clearer view of the pro
forma operating results from the assets and liabilities to be sold to Suez
Acquisition Company. The unaudited pro forma condensed statements of operations
of the Seagate operating assets includes the pro forma operations of Seagate
described above, excluding amounts relating to the assets to be exchanged with
VERITAS.
The unaudited pro forma condensed financial statements of Seagate and of
the Seagate's operating assets are not necessarily indicative of what the actual
financial results would have been had the transactions described above taken
place on July 3, 1999, and do not purport to indicate the future results of
operations or financial position of Seagate or Seagate's operating assets. The
proforma condensed statements of operations of the Seagate's operating assets do
not reflect any adjustments that may result from the new accounting basis in the
assets and liabilities to be recorded by Suez Acquisition Company as a result of
its purchase of Seagate's operating assets.
The unaudited pro forma statements of operations for Seagate's operating
assets exclude all amounts relating to the equity investment in VERITAS
including the amortization of the intangibles and goodwill and Seagate's share
of the net income of VERITAS. In addition, the unaudited pro forma statements of
operations of Seagate's operating assets exclude the amortization of intangibles
and goodwill and, if applicable, equity in income associated with Seagate's
investments in Gadzoox Networks, SanDisk Corporation, Veeco Instruments and
Lernout & Hauspie.
219
<PAGE> 226
PRIOR SEAGATE ACQUISITION RELATED TRANSACTIONS
In a transaction in October 1999, Seagate stockholders approved the merger
of Seagate Daylight Merger Corp., a wholly owned subsidiary of Seagate, with and
into Seagate Software. Seagate Software's assets consisted of the assets of
Seagate's IMG and an investment in the common stock of VERITAS. The merger was
effected on October 20, 1999. As a result of the merger, Seagate Software became
a wholly owned subsidiary of Seagate. In connection with the merger, Seagate
Software's stockholders and optionees received payment in the form of 3.23
shares of Seagate's common stock per share of Seagate Software common stock less
any amounts due for the payment of the exercise price for such options. All
outstanding Seagate Software stock options were accelerated immediately prior to
the merger. Seagate issued 9,124,046 shares issued from treasury shares to
optionees and minority stockholders of Seagate Software. In connection with the
reorganization, Seagate Software also formed a wholly owned subsidiary that
assumed the name "Seagate Software, Inc.", which we refer to in this document as
Seagate IMG. Seagate Software transferred the IMG assets into the software
operating company. Seagate Software accounted for the exchange of shares of its
common stock as the acquisition of a minority interest for Seagate Software
common stock outstanding and vested more than six months held by employees and
all stock held by former employees and consultants. The fair value of the shares
of Seagate issued was $19 million and was recorded as purchase price and
allocated to the assets and liabilities received. Seagate accounted for the
exchange of shares of its common stock for stock options in Seagate Software
held by employees and stock held and vested by employees less than six months as
the settlement of an earlier stock award. Seagate recorded compensation expense
of $284 million, plus $2 million in payroll taxes, related to the purchase of
minority interest in Seagate Software. The unaudited pro forma statements of
operations of Seagate and the unaudited pro forma statements of operations of
Seagate's operating assets do not include the effect of the one time
compensation charge and related transaction costs of this transaction.
During January 2000, Seagate acquired XIOtech, a provider of virtual
storage and storage area network (SAN) solutions, for approximately $359 million
of common stock issued from treasury shares and options to purchase common
stock. As a result of this acquisition, Seagate recorded a write off of $105
million for in-process research and development costs. It also recorded certain
intangible assets, including developed technology of $37 million and goodwill of
$214 million which are being amortized over periods up to seven years. The
unaudited pro forma statements of operations of Seagate and the unaudited pro
forma statements of operations of Seagate's operating assets include the
recurring effect of the amortization of the related intangibles and goodwill as
if the XIOtech acquisition had occurred on July 3, 1999, and exclude the effect
of the one time write off of in-process research and development.
The Seagate unaudited pro forma condensed financial statements should be
read in conjunction with the annual and interim financial statements and notes
of Seagate that are included in this document.
220
<PAGE> 227
SEAGATE
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PLUS: LESS: PRO FORM ADJUSTMENTS
PRO FORMA ADJUSTMENTS ---------------------------------
RELATING TO RECURRING INCOME RELATED TO
AND NON-RECURRING ASSETS AND SEAGATE REMAINING
CHARGES FOR ACQUISITION PRO FORMA LIABILITIES EXCHANGED OPERATING AFTER ALL
SEAGATE ACTIVITIES IN FISCAL 2000 SEAGATE WITH VERITAS ASSETS TRANSACTIONS
------- ------------------------- --------- --------------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue.................. $6,448 $ $6,448 $ $6,448 $
Cost of Sales............ 5,194 5(3a) 5,199 5,199
------ ----- ------ ------ ------ ------
Gross Margin............. 1,254 (5) 1,249 1,249 --
Operating expenses
Product development.... 587 587 587
Marketing and
administrative....... 515 515 515
Unusual items.......... 350 (286)(3b) 64 64
In-process research and
development.......... 105 (105)(3c)
Restructuring.......... 207 207 207
Amortization of
goodwill and other
intangibles.......... 51 20(3a) 71 5(3d) 66
------ ----- ------ ------ ------ ------
Total Operating
Expenses........... 1,815 (371) 1,444 5 1,439 --
------ ----- ------ ------ ------ ------
Income (loss) from
Operations............. (561) 366 (195) (5) (190) --
Interest expense......... (52) (52) (52)
Interest income.......... 101 101 101
Activity related to
equity interest in
VERITAS................ (326) (326) (326)(3e)
Gain on sale of VERITAS
stock.................. 537 537 537(3f)
Gain on sale of SanDisk
stock.................. 679 679 679(3f)
Gain on exchange of
certain investments in
equity securities...... 231 231 2(3g) 30
199(3h)
------ ----- ------ ------ ------ ------
Other income
(expense) net...... 1,170 -- 1,170 1,091 79 --
------ ----- ------ ------ ------ ------
Income (loss) before
income taxes........... 609 366 975 1,086 (111) --
Benefit (provision) for
income taxes........... (299) (43)(3b) (342) (423)(3i) 81
------ ----- ------ ------ ------ ------
Net Income (loss)........ $ 310 $ 323 $ 633 $ 663 $ (30) $ --
====== ===== ====== ====== ====== ======
Net Income (loss) per
share:
Basic.................. $ 1.41 $ 2.79
Diluted................ $ 1.35 $ 2.67
Number of shares used in
per share computations:
Basic.................. 219.4 226.8
Diluted................ 229.5 236.9
</TABLE>
See accompanying notes to Seagate Unaudited Pro Forma Condensed Financial
Statements.
221
<PAGE> 228
SEAGATE
UNAUDITED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 2000
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------------------------------------------------
CONVERSION OF
SHORT-TERM
INVESTMENTS INTO
SEAGATE CASH AND CASHLESS INCOME TAXES
TECHNOLOGY, RETIREMENT OF EXERCISE OF SALE OF AND OTHER
INC. LONG-TERM DEBT STOCK OPTIONS OPERATING ASSETS ADJUSTMENTS
----------- ---------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............... $ 875 $ 1,140(3j) $ $ 1,838(3l) $ (80)(3m)
(774)(3j) (765)(3l) (44)(3n)
(125)(3l) 24(3o)
(70)(3l) (150)(3x)
Short-term investments.................. 1,140 (1,140)(3j)
Accounts receivable, net................ 678 (678)(3l)
Income tax refund....................... 44(3n)
101(3p)
Inventories............................. 430 (430)(3l)
Deferred income taxes................... 219 (219)(3r)
Other current assets.................... 167 (167)(3l)
------ ------- ------- ------- -----
Total current assets................... 3,509 (774) -- (397) (324)
Property, equipment and leasehold
improvements, net...................... 1,608 (1,608)(3l)
Investment in VERITAS, net.............. 1,122
Goodwill and other intangibles, net..... 353 (353)(3l)
Tax indemnification from SAC............ -- 125(3q)
Restricted cash......................... 150(3x)
Other assets............................ 575 (121)(3l) (24)(3o)
------ ------- ------- ------- -----
TOTAL ASSETS......................... $7,167 $ (774) $ -- $(2,479) $ (73)
====== ======= ======= ======= =====
Accounts payable........................ $ 707 $ $ $ (707)(3l) $
Accrued employee compensation........... 195 (7)(3k) (188)(3l)
456(3k)
Accrued expenses........................ 365 (365)(3l)
Accrued warranty........................ 129 (129)(3l)
Accrued income taxes.................... 81 (81)(3l) (30)(3n)
380(3n)
(451)(3n)
81(3q)
101(3p)
Payable to Seagate stockholders......... 295(3s)
Current portion of long-term debt....... 1 (1)(3j)
------ ------- ------- ------- -----
Total current liabilities.............. 1,478 (1) 449 (1,470) 376
Deferred income taxes................... 1,020 (69)(3l) (438)(3r)
44(3q)
Accrued warranty........................ 109 (109)(3l)
Other liabilities....................... 10 (10)(3l)
Long-term debt, less current portion.... 703 (703)(3j)
------ ------- ------- ------- -----
Total liabilities.................... 3,320 (704) 449 (1,658) (18)
------ ------- ------- ------- -----
Common stock............................ 3
Additional paid in capital.............. 1,972 783(3k) (4)(3l) (25)(3t)
Deferred compensation................... (33) 4(3l) 25(3t)
Accumulated other comprehensive income
(loss)................................. 86
Retained earnings....................... 2,527 (70)(3j) (1,232)(3k) (821)(3l) (80)(3m)
101(3n)
219(3r)
(295)(3s)
Treasury common stock at cost........... (708)
------ ------- ------- ------- -----
Stockholders' equity................... 3,847 (70) (449) (821) (55)
------ ------- ------- ------- -----
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................. $7,167 $ (774) $ -- $(2,479) $ (73)
====== ======= ======= ======= =====
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------------------------
EQUITY INVESTMENTS,
RETAINED CASH
SEAGATE PRIOR AND OTHER
TO MERGER EXCHANGED CASH DISTRIBUTION TAX REMAINING
WITH FOR VERITAS TO SEAGATE REFUND AFTER ALL
VERITAS STOCK IN MERGER STOCKHOLDERS AMOUNT TRANSACTIONS
------------- ------------------- ----------------- ------ ------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............... $1,869 $ (956)(3u) $(913)(3v) $ $
Short-term investments..................
Accounts receivable, net................
Income tax refund....................... 145 (145)(3w)
Inventories.............................
Deferred income taxes...................
Other current assets....................
------ ------- ----- ----- -------
Total current assets................... 2,014 (956) (913) (145) --
Property, equipment and leasehold
improvements, net......................
Investment in VERITAS, net.............. 1,122 (1,122)(3u)
Goodwill and other intangibles, net.....
Tax indemnification from SAC............ 125 (125)(3u)
Restricted cash......................... 150 (150)(3x)
Other assets............................ 430 (430)(3u)
------ ------- ----- ----- -------
TOTAL ASSETS......................... $3,841 $(2,633) $(913) $(295) $ --
====== ======= ===== ===== =======
Accounts payable........................ $ $ $ $ $
Accrued employee compensation........... 456 (456)(3u)
Accrued expenses........................
Accrued warranty........................
Accrued income taxes.................... 81 (81)(3u)
Payable to Seagate stockholders......... 295 (295)(3w)
Current portion of long-term debt.......
------ ------- ----- ----- -------
Total current liabilities.............. 832 (537) -- (295) --
Deferred income taxes................... 557 (557)(3u)
Accrued warranty........................
Other liabilities.......................
Long-term debt, less current portion....
------ ------- ----- ----- -------
Total liabilities.................... 1,389 (1,094) -- (295) --
------ ------- ----- ----- -------
Common stock............................ 3 (3)(3u)
Additional paid in capital.............. 2,726 (2,726)(3u)
Deferred compensation................... (4) 4(3u)
Accumulated other comprehensive income
(loss)................................. 86 (86)(3u)
Retained earnings....................... 349 564(3u) (913)(3v)
Treasury common stock at cost........... (708) 708(3u)
------ ------- ----- ----- -------
Stockholders' equity................... 2,452 (1,539) (913) -- --
------ ------- ----- ----- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................. $3,841 $(2,633) $(913) $(295) $ --
====== ======= ===== ===== =======
</TABLE>
See accompanying notes to Seagate Unaudited Pro Forma Condensed Financial
Statements.
222
<PAGE> 229
SEAGATE
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
1. PRO FORMA BASIS OF PRESENTATION
The Seagate pro forma condensed statements of operations reflect the effect
of various significant transactions that occurred in fiscal year 2000 as if the
transactions had occurred at the beginning of fiscal 2000 including: the
reorganization of Seagate Software, Inc. in October 1999; and the acquisition of
XIOtech in January 2000. In addition, the Seagate pro forma condensed statement
of operations includes pro forma adjustment columns to indicate the income and
expense relating to the operating assets to be sold to Suez Acquisition Company
and the assets and liabilities to be exchanged with VERITAS. After the sale of
the operating assets to Suez Acquisition Company and the exchange with VERITAS,
Seagate will no longer exist as a separate publicly held company and the Seagate
shareholders will have received cash, VERITAS stock, and a right to receive
future payments attributable to tax refunds as consideration for their Seagate
shares.
The unaudited pro forma condensed statements of operations for the Seagate
Operating Assets reflect the pro forma operations of Seagate discussed above,
adjusted to eliminate the effects of income and loss relating to the assets and
liabilities exchanged with VERITAS.
The unaudited pro forma condensed balance sheet of Seagate as of June 30,
2000 reflects the historical balance sheet of Seagate adjusted to show the early
liquidation and conversion of Seagate's short-term investments into cash, the
cashless exercise of employee stock options, the sale of Seagate's operating
assets to Suez Acquisition Company in the leveraged buyout, the retirement of
the Seagate's long-term debt, the assets and liabilities included in the merger
with VERITAS, and the distribution of excess cash to Seagate stockholders, as if
this series of transactions had occurred on June 30, 2000. After this series of
transactions all assets and liabilities of Seagate will have been sold,
paid-off, distributed to stockholders, or merged into VERITAS. The former
stockholders of Seagate will receive rights to future payments from VERITAS
attributable to the tax refund amount which consists of restricted cash
(representing the reserve amount) and additional cash payments should Seagate
tax refunds be received by VERITAS subsequent to the Seagate merger with
VERITAS. It is currently anticipated that the tax refund amount will aggregate
approximately $295 million, or a per share amount ranging from $0.63 per share
to $1.22 per share depending upon the VERITAS share price and based upon the
estimated number of shares of Seagate to be outstanding immediately prior to the
merger with VERITAS. The actual dates of payments to Seagate shareholders
depends upon the timing and resolution of anticipated audits by governmental
authorities of refund claims and related tax returns of Seagate.
Pro forma adjustments to reflect prior acquisition activity of Seagate
include the following:
REORGANIZATION OF SEAGATE SOFTWARE IN OCTOBER 1999
In October 1999, Seagate Daylight Merger Corp., a wholly-owned subsidiary
of Seagate, merged with and into Seagate Software. Seagate Software's assets
consisted of the assets of the IMG business and its investment in the common
stock of VERITAS which Seagate Software acquired in May 1999 from the
contribution of the NSMG business to VERITAS described above. In connection with
this merger, Seagate Software's
223
<PAGE> 230
stockholders and optionees received payment in the form of 3.23 shares of
Seagate's common stock per share of Seagate Software common stock less any
amounts due for the payment of the exercise price for such options. All
outstanding Seagate Software stock options were accelerated immediately prior to
this merger. Seagate issued 9,124,046 shares from available treasury shares to
optionees and minority stockholders of Seagate Software. In connection with the
reorganization, Seagate Software also formed a wholly-owned subsidiary that
assumed the name "Seagate Software, Inc." and is now the operating entity for
the IMG business. Seagate Software accounted for the exchange of shares of its
common stock as the acquisition of a minority interest for Seagate Software
common stock outstanding and vested more than six months held by employees and
all stock held by former employees and consultants. The fair value of the shares
of Seagate issued was $19 million and was recorded as purchase price and
allocated to the assets and liabilities received. Due to the immateriality of
the purchase price, the allocation to intangible assets is not included here.
Seagate accounted for the exchange of shares of its common stock for stock
options in Seagate Software held by employees and stock held and vested by
employees less than six months as the settlement of an earlier stock award. As a
result, during the quarter ended December 31, 1999, Seagate recorded
compensation expense of $284 million, plus $2 million in payroll taxes, related
to the settlement of the stock options of Seagate Software.
ACQUISITION OF XIOTECH IN JANUARY 2000
On January 28, 2000, Seagate acquired XIOtech, a provider of virtual
storage and storage area network (SAN) solutions, for Seagate common stock and
options to purchase common stock with a combined fair value of $359 million from
treasury shares. This acquisition was accounted for as a purchase and,
accordingly, the results of operations of XIOtech have been included in the
consolidated financial statements from the date of acquisition. The purchase
price has been allocated based on the estimated fair market value of net
tangible and intangible assets acquired as well as in-process research and
development costs. As a result of the acquisition, Seagate incurred a one-time
write-off of in-process research and development of $105 million. Goodwill and
other intangibles arising from the acquisition are being amortized on a
straight-line basis over periods ranging from four months to seven years.
Amortization of goodwill and other intangibles was $20 million for fiscal 2000
(including $4 million for developed technology included in cost of sales) and is
expected to be approximately $40 million per year in subsequent years (including
$4 million for developed technology included in cost of sales). XIOtech's
revenue and expenses are immaterial to Seagate's consolidated revenue and
expenses.
ALLOCATION OF INVESTMENT IN XIOTECH (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
AMORTIZATION ANNUAL
LIFE AMORTIZATION
------------ ------------
<S> <C> <C> <C>
Tangible assets less liabilities assumed........ $ 12.1
Developed technology............................ 37.3 4.5 years $ 8.3
Tradenames...................................... 4.8 5 years 1.0
Assembled workforce............................. 2.1 4 months 2.1
Customer list................................... 2.0 1 year 2.0
In-process research and development............. 104.8
Goodwill........................................ 214.1 7 years 30.6
Deferred tax liability.......................... (18.2)
</TABLE>
224
<PAGE> 231
In addition to the pro forma adjustments described above, the pro forma
adjustments also include amounts related to certain equity investments held by
Seagate in VERITAS, Gadzoox Networks, SanDisk Corporation, Veeco Instruments and
Lernout & Hauspie. These equity investments are being retained by Seagate after
the sale of Seagate's operating assets to Suez Acquisition Company in the
leveraged buyout and will be included in the exchange of Seagate common stock
for VERITAS common stock in the merger between Seagate and VERITAS.
2. THE PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING FOR SEAGATE ASSUMES THE
FOLLOWING:
For the year ended June 30, 2000 (in millions):
<TABLE>
<S> <C>
Weighted average actual shares outstanding for the year
ended June 30, 2000....................................... 219.4
Shares issued in connection with reorganization of Seagate
Software and the settlement of employee stock awards in
October 1999, as adjusted for shares already included..... 2.8
Shares issued in exchange for the acquisition of XIOtech in
January 2000, as adjusted for shares already included..... 4.6
-----
Total pro forma shares assumed outstanding for the year
ended June 30, 2000 -- basic.......................... 226.8
Incremental common shares attributable to exercise of
outstanding options (assuming proceeds would be used to
purchase treasury stock).................................. 9.4
Incremental common shares attributable to restricted stock
grants (using Modified Treasury Stock Method)............. 0.7
-----
Total pro forma shares assumed outstanding for the year
ended June 30, 2000 -- diluted............................ 236.9
=====
</TABLE>
Seagate's operating assets do not have a formal capital structure nor
shares outstanding. Accordingly, no pro forma earnings per share information is
provided for Seagate's operating assets.
3. PRO FORMA ADJUSTMENTS
The unaudited pro forma condensed statements give effect to the following
pro forma adjustments:
(a) To record an additional seven months of amortization expense in the
year ended June 30, 2000, associated with developed technology,
goodwill and other intangibles acquired in the XIOtech acquisition in
January 2000.
(b) To eliminate compensation expense and related payroll taxes recorded
in October 1999, relating to the exchange of Seagate stock for shares
of Seagate Software, Inc. held by employees less than 6 months.
(c) To eliminate the write-off of in-process research and development
expenses in connection with the acquisition of XIOtech in January
2000.
225
<PAGE> 232
(d) To eliminate all equity income and amortization expense for
intangible assets and goodwill relating to the equity investments
that will be included in the merger with VERITAS as follows (in
millions):
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 2000
-------------
<S> <C>
Amortization of intangibles related to Lernout &
Hauspie............................................. $3
Amortization of intangibles related to SanDisk........ 2
--
$5
</TABLE>
Amortization of intangibles related to Seagate's investment in Veeco
Instruments are not material for the year ended June 30, 2000.
Seagate has no intangible assets and goodwill associated with its
investment in Gadzoox Networks because the investment is accounted
for at cost, as adjusted to fair value through other comprehensive
income.
(e) To eliminate equity in the income of VERITAS and all amortization
expense for intangible assets and goodwill relating to the equity
investment in VERITAS as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 2000
-------------
<S> <C>
Amortization of other intangible assets and goodwill
related to the investment in VERITAS................ $357
Equity in VERITAS income.............................. (31)
----
$326
</TABLE>
(f) To eliminate the gains recognized by Seagate upon the sale of a
portion of its equity investments in the common stocks of SanDisk
Corporation and VERITAS.
(g) To eliminate Seagate's equity in the income of SanDisk Corporation
and Lernout & Hauspie. Seagate's equity in the income and losses of
Veeco Instruments is immaterial.
(h) To eliminate the gains recorded of $127 million and $72 million,
respectively, related to the exchange of equity investments in Dragon
Systems to Lernout & Hauspie and CVC, Inc. to Veeco Instruments.
(i) To eliminate the tax effects of equity income and amortization
expense for intangible assets and goodwill relating to the equity
investments that will be included in the merger with VERITAS; equity
income of VERITAS and all amortization expense for intangible assets
and goodwill relating to the equity investments in VERITAS; the net
gain from the sales of SanDisk and VERITAS common stock; and the net
gain from the exchange of CVC, Inc. to Veeco and Dragon Systems, to
Lernout & Hauspie.
(j) To reflect the presumed liquidation and conversion of short-term
investments to cash and the redemption of long-term debt by Seagate,
including a call premium on the redemption estimated at $70 million,
prior to the merger with VERITAS.
(k) Prior to the merger with VERITAS, all employee options, except those
representing the equity rollover, will be accelerated and assumed net
exercised. The "net exercise" does not require any payment to Seagate
for the exercise
226
<PAGE> 233
price of the option or the tax withholding required upon exercise.
Instead, for purposes of the net exercise provisions Seagate will
deduct from the total number of shares issuable upon exercise in full
of the option a number of shares equal to the number of shares
derived from dividing the sum of the aggregate exercise price by the
average closing price of a share of Seagate common stock for the five
consecutive trading days ending two trading days immediately
preceding the closing of the merger. In addition, a number of shares
will be deducted and withheld as required to satisfy applicable
payroll withholding obligations of Seagate. VERITAS will withhold
from the cash distribution to shareholders amounts related to cash
payments for withholding taxes.
In addition to the above, all share equivalents under the employee
stock purchase plan will be assumed net purchased and exchanged for
merger consideration. As well, certain shares of restricted stock
will be exchanged for merger consideration.
An employer and employee payroll withholding tax liability amounting
to $456 million will arise as a result of the payment of merger
consideration under the employee stock plans described above.
(l) This column includes all assets and liabilities of Seagate's
operating assets that are being sold to Suez Acquisition Company
including $765 million of cash and all remaining assets and
liabilities of Seagate except for equity investments in VERITAS,
Gadzoox Networks, SanDisk Corporation, Veeco Instruments and Lernout
& Hauspie, long-term debt to be redeemed, cash to be retained by
VERITAS, and cash and other rights, including the tax refund amount,
to be paid or distributed to Seagate stockholders. The estimated
historical net book value of the net assets sold to Suez Acquisition
Company is determined as follows (in millions):
<TABLE>
<S> <C>
Operating assets sold..................................... $ 4,317
Operating liabilities sold................................ (1,658)
-------
Book value of net assets sold............................. $ 2,659
=======
</TABLE>
The estimated loss on the sale of net assets to Suez Acquisition
Company is determined as follows (in millions):
<TABLE>
<S> <C>
Estimated cash to be received (see below)................. $ 1,838
Less: book value of net assets sold....................... (2,659)
-------
Book loss on sale......................................... (821)
Tax liability resulting from taxable gain on sale (see
note 3(n) below)........................................ (380)
-------
Loss on sale.............................................. $(1,201)
=======
</TABLE>
The estimated cash to be received from Suez Acquisition Company is
determined as follows (in millions):
<TABLE>
<S> <C>
Cash proceeds before litigation settlement holdback
adjustment............................................... $2,050
Less: Litigation settlement holdback....................... (50)
Less: Rolled equity value adjustment....................... (162)
------
Estimated cash to be received from Suez Acquisition
Company.................................................. $1,838
======
</TABLE>
227
<PAGE> 234
Cash includes $125 million for tax related indemnifications provided
by Suez Acquisition Company to Seagate for certain tax liabilities.
These tax liabilities are expected to be paid by VERITAS after the
merger and in return, VERITAS is to be reimbursed by Suez Acquisition
Company. Cash also includes $45 million relating to accrued
management bonuses to be paid prior to the merger, and $25 million
relating to accrued foreign taxes.
Under the terms of the agreement with Suez Acquisition Company,
certain executives of Seagate have agreed to convert certain
restricted shares of Seagate common stock and unvested stock options
to purchase shares of Seagate common stock with an aggregate value of
between $150 million and $250 million into: (i) deferred
compensation; and (ii) equity of Suez Acquisition Company. The actual
value will vary within this range based upon the price of Seagate
stock shortly prior to the transaction. Based upon the price of
Seagate stock (as of October 11, 2000), the rolled equity value
adjustment is $162 million.
(m) Estimated transaction costs are $80 million and will be paid at the
time of closing or shortly thereafter.
228
<PAGE> 235
(n) To reflect tax payments and other payments and other tax effects of
certain transactions as follows (in millions):
<TABLE>
<S> <C> <C> <C>
TAX BENEFIT FROM FOREIGN TAXES PAID
Foreign tax credit attributable to payment
of the foreign tax liability resulting
from the reorganization of Seagate
Software in October 1999................ $ 44
TAX BENEFIT FROM STOCK OPTION ACTIVITY
Corporate tax deduction for compensation
expense attributable to net exercise of
employee stock options, acceleration of
vesting of restricted stock, and related
employer payroll taxes.................. $ 1,290
U.S. statutory rate..................... x 35%
--------
Tax benefit from stock option
activity........................... $ 451
TAX BENEFIT FROM TRANSACTION COSTS
Deductible portion of the transaction
costs associated with the merger........ 85
U.S. statutory rate..................... x 35%
--------
Tax benefit from transaction costs... 30
TAX (LIABILITY) FROM THE SALE OF SEAGATE'S
OPERATING ASSETS TO SUEZ ACQUISITION
COMPANY
Cash proceeds to be received from Suez
Acquisition Company..................... 1,838
Plus: Cash distributions received from
foreign affiliates treated as sale
proceeds for U.S. tax purposes.......... 1,093
Plus: Non-deductible golden parachute
costs................................... 31
Less: Net tax basis in assets sold to Suez
Acquisition Company..................... (1,877)
--------
Gain on the sale of operating assets to
Suez Acquisition Company............. 1,085
U.S. statutory rate..................... x 35%
--------
Tax (liability) from the sale of
Seagate's operating assets to Suez
Acquisition Company................ (380) 101
-----
Reserve amount....................... 150
-------
Tax refund amount.................... 295
=======
Divided by: Seagate shares outstanding on
a fully diluted basis................... / 241.1
-------
Tax refund amount per share.......... $ 1.22
=======
</TABLE>
229
<PAGE> 236
(o) To record receipt of cash in July 2000 for settlement of another
accounts receivable related to a SanDisk stock sale that occurred in
June 2000.
(p) To reclass income taxes refundable to tax refund amount.
(q) Suez Acquisition Company has agreed to indemnify and reimburse
VERITAS for certain income tax liabilities amounting to $125 million
which are expected to be paid by VERITAS after the merger. Based on
review of financing arrangements, credit information, projections,
the expected timing of the payments under the tax indemnification and
an escrow to be established for $55 million of the payments, VERITAS
and Seagate have concurred that the full $125 million represents
probable payments under the indemnification agreement. The full
amount of the indemnification has been recorded as a pro forma
adjustment by Seagate and represents an asset of Seagate immediately
prior to the merger.
(r) To eliminate accrued and deferred income taxes resulting from the
leveraged buyout and the merger.
(s) To record payable to Seagate stockholders for amounts included in
the tax refund amount to be paid by VERITAS.
(t) To eliminate the remaining deferred compensation related to
restricted shares cancelled.
(u) This column includes Seagate's equity investments in VERITAS
Software, Gadzoox Networks, SanDisk, Veeco Instruments and Lernout &
Hauspie, cash, and other assets and liabilities of Seagate included
in the VERITAS merger. This column excludes cash amounts to be
distributed to Seagate stockholders at the time of the merger and it
excludes the tax refund amount to be paid by VERITAS.
Cash to be retained by VERITAS is comprised of (in millions):
<TABLE>
<S> <C>
Amounts to pay for employer and employee payroll withholding
tax liabilities........................................... $456
Amounts retained by VERITAS in return for additional VERITAS
shares issued to Seagate stockholders in the merger....... 500
----
$956
</TABLE>
Under the terms of the merger agreement with VERITAS, VERITAS has
the right to retain certain cash amounts in addition to amounts
necessary to pay for Seagate employer and employee payroll
withholding tax liabilities. VERITAS may retain cash of $0, $250 or
$500 million in return for additional VERITAS shares to be issued to
Seagate stockholders. The pro forma financial statements presume
that VERITAS will elect to retain $500 million of cash and that
Seagate will not dispose of any of its investments in Gadzoox
Networks, SanDisk Corporation, Veeco Instruments or Lernout &
Hauspie prior to the merger.
Suez Acquisition Company has agreed to indemnify and reimburse
VERITAS for certain income tax liabilities amounting to $125 million
which are expected to be paid by VERITAS after the merger. Based on
review of financing arrangements, credit information, projections,
the expected timing of the payments under the tax indemnification
and an escrow to be established for $55 million of the payments,
VERITAS and Seagate have concurred that the
230
<PAGE> 237
full $125 million represents probable payments under the
indemnification agreement. The full amount of the indemnification
has been recorded as a pro forma adjustment by Seagate and
represents an asset of Seagate immediately prior to the merger.
The book value of Seagate's investment in VERITAS is included in the
amount entitled Investment in VERITAS of $1,122 million. The book
value of Seagate's investments in Gadzoox Networks, SanDisk, Veeco
Instruments and Lernout & Hauspie are included in Other Assets of
$430 million. Other Assets includes a mark-to-market adjustment of
$158 million, net of related income taxes, to reflect the fair value
of Seagate investments in Gadzoox Networks, Veeco, Lernout & Hauspie
and SanDisk.
Accrued employee compensation of $456 million relates to employer
and employee payroll withholding tax liabilities resulting from the
cashless exercise of Seagate stock options prior to the merger.
Accrued income taxes of $81 million relate to Seagate income tax
liabilities to be paid by VERITAS after the merger and reimbursed by
indemnification from Suez Acquisition Company.
The deferred income taxes relate to the difference between Seagate's
book and tax basis in its VERITAS investment, deferred taxes for the
mark-to-market adjustment on the investments in SanDisk and Gadzoox,
and $44 million of other tax liabilities of Seagate to be paid by
VERITAS for which VERITAS will be reimbursed through indemnification
by Suez Acquisition Company.
All Seagate capital accounts are shown as eliminated in this column
except for amounts related to cash to be distributed to Seagate
stockholders.
231
<PAGE> 238
(v) Excess cash to be distributed to former Seagate stockholders. A
summary of cash available for distribution is as follows (in
millions):
<TABLE>
<S> <C>
Seagate cash and cash equivalents at June 30, 2000......... $ 875
Cash provided by:
Sale of Seagate Operating Assets...................... 1,838
Conversion of short-term investments to cash.......... 1,140
Cash used for:
Redemption of long-term debt.......................... (774)
Foreign tax obligations resulting from the 1999
reorganization of Seagate Software.................. (44)
Transaction costs..................................... (80)
Cash retained by Seagate Operating Assets for
operations.......................................... (765)
Tax indemnification payable by Suez Acquisition
Company to VERITAS.................................. (125)
Cash retained by Seagate Operating Assets to pay for
year end employee bonuses........................... (45)
Cash retained by Seagate Operating Assets to pay for
foreign tax liabilities............................. (25)
Conversion of other receivables related to sale of
SanDisk stock not settled as of June 30, 2000....... 24
Payroll taxes arising from cashless exercise of stock
options............................................. (456)
Cash retained by VERITAS and used to fund the reserve
amount (included in the tax refund amount to be paid
by VERITAS)......................................... (150)
VERITAS election to retain cash and issue additional
stock to Seagate stockholders....................... (500)
------
Cash available for distribution to Seagate stockholders.... $ 913
======
</TABLE>
The amount of cash distributed by Seagate to its stockholders would be
reduced if, and to the extent, necessary for the merger to satisfy the Internal
Revenue Service's safe harbor standard that VERITAS acquire "substantially all"
of Seagate's properties, as discussed on page 169 under the heading "Material
United States Federal Income Tax Consequences of the Merger." In that case, the
amount of any such reduction would be paid to Seagate stockholders by VERITAS
out of its own funds. Seagate stockholders would receive $913 million in the
aggregate, in part distributed by Seagate and in part distributed by VERITAS.
The cash available for distribution to Seagate stockholders does not
include $50 million related to the agreement in principle to settle the class
action complaint. This amount will be distributed upon approval of the
settlement terms by the courts and dismissal of the underlying complaints and
related lawsuits pending in California with prejudice. Upon distribution of the
additional $50 million the tax refund amount will be reduced by approximately
$18 million because the taxable gain will increase.
(w) To record former Seagate stockholders' right to receive from VERITAS
the tax refund amount. It is currently anticipated that such amount
will total approximately $295 million, or $1.22 per share based on
the estimated number of shares to be outstanding immediately prior to
the merger with VERITAS. The tax refund amount will be paid to
Seagate stockholders after tax refunds are received by VERITAS
subsequent to the merger. All refunds received by VERITAS will be
forwarded to an administrator and held in trust for the benefit of
former Seagate stockholders. All funds collected by the administrator
will be applied to pay income tax liabilities of Seagate and
expenses, fees, and
232
<PAGE> 239
taxes associated with the operation of the trust or paid to the
former Seagate stockholders existing at the time of the merger, when
available for payment. The administrator will pay any amounts held in
the trust in excess of $150 million on a quarterly basis. The first
such payment is not expected until the second quarter of 2001. The
$150 million retained in the trust will be paid upon the completion
of Seagate tax audits or the expiration of the applicable period for
assessment with respect to those taxable periods beginning on or
after July 1, 1999 and ending on or before the closing date of the
merger. The obligation to make payments in respect of the tax refund
amount that arises as a result of the merger is solely that of
VERITAS.
After the sale of the Seagate operating assets to Suez Acquisition
Company, in addition to rights to receive tax refund amounts, former
Seagate stockholders will also receive their share of the fair value
of some or all of the 297,120 shares of Lernout & Hauspie held in
escrow until resolution of certain acquisition related contingencies.
The escrow shares, when and if released to the administrator of the
tax refund amount, will be sold or distributed when permitted under
applicable law and in accordance with any other contractual
restrictions. As of October 11, 2000 such shares had a market value
of $3.2 million and such amount, if paid to Seagate stockholders,
will be based on the then current fair value of the Lernout & Hauspie
stock and will be in addition to the $295 million described above.
(x) To reclass $150 million from operating cash to restricted cash. This
cash will be paid to VERITAS and used to fund the reserve amount,
which will ultimately be paid to shareholders as part of the tax
refund amount.
233
<PAGE> 240
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR
VERITAS
The following unaudited pro forma combined condensed consolidated financial
statements consist of the VERITAS unaudited pro forma combined condensed
consolidated statement of operations for the year ended December 31, 1999 and
the six months ended June 30, 2000 and the VERITAS unaudited pro forma combined
condensed consolidated balance sheet as of June 30, 2000.
SEAGATE TRANSACTION
The VERITAS unaudited pro forma combined condensed consolidated financial
statements give effect to the issuance of VERITAS common stock and cash for all
of the outstanding common stock of Seagate immediately after the sale of all of
the operating assets and liabilities of Seagate to Suez Acquisition Company as
more fully described on pages 123-163. The effect of the transactions is that
VERITAS is not acquiring any business of Seagate but is acquiring only certain
assets and assuming only certain liabilities of Seagate which are held by
Seagate after the sale of the operating assets and liabilities to Suez
Acquisition Company. For purposes of the pro forma financial statements as of
June 30, 2000, the assets of Seagate being acquired by VERITAS include VERITAS
common stock obtained by Seagate Software, a subsidiary of Seagate, in the NSMG
acquisition in May 1999, equity securities of Gadzoox Networks, SanDisk
Corporation, Veeco Instruments and Lernout & Hauspie and cash and cash
equivalents, all of which have been recorded at their respective fair values.
The VERITAS unaudited pro forma combined condensed consolidated balance
sheet as of June 30, 2000 combines the historical balance sheet of VERITAS as of
June 30, 2000 and the pro forma balance sheet of Seagate as of June 30, 2000
which gives effect to the sale of its operating assets and liabilities to Suez
Acquisition Company, assuming the transactions took place on June 30, 2000.
Since VERITAS is not acquiring any business of Seagate, there is no
statement of operations of Seagate to combine with the statement of operations
of VERITAS. The VERITAS unaudited pro forma combined condensed consolidated
statements of operations for the six months ended June 30, 2000 and the year
ended December 31, 1999 show only a pro forma adjustment to the VERITAS
historical statements of operations for the net reduction in VERITAS shares
outstanding as a result of the acquisition of the remaining assets of Seagate.
The VERITAS unaudited pro forma combined condensed consolidated statement of
operations for the year ended December 31, 1999, in addition, shows certain pro
forma adjustments for the acquisitions by VERITAS during 1999 of NSMG,
TeleBackup and NuView as described below.
For a description of the litigation regarding this transaction, see
"Litigation Regarding the Leveraged Buyout and the Merger" beginning on page 163
of this document.
NSMG, TELEBACKUP AND NUVIEW ACQUISITIONS
The VERITAS unaudited pro forma combined condensed consolidated statement
of operations for the year ended December 31, 1999 combines VERITAS' historical
results of operations for the year ended December 31, 1999 with NSMG's
historical results of operations for the period from January 1, 1999 to May 28,
1999 and TeleBackup's historical results of operations from January 1, 1999 to
June 1, 1999, the respective closing dates of the transactions, and give effect
to the acquisitions of NSMG, TeleBackup and NuView using the purchase method of
accounting assuming that the acquisitions took place on January 1, 1999. The
results of operations of NuView from January 1, 1999 to
234
<PAGE> 241
the date of acquisition have been excluded as they were not significant;
however, the pro forma adjustments give effect to the acquisition of NuView
using the purchase method of accounting.
The VERITAS unaudited pro forma combined condensed consolidated financial
statements should be read in conjunction with the related notes included in this
document and the audited financial statements of VERITAS, NSMG and TeleBackup
that are included elsewhere in this document. The VERITAS unaudited pro forma
combined condensed consolidated financial statements do not necessarily indicate
what the actual operating results or financial position would have been had the
NSMG, TeleBackup, NuView acquisitions and the acquisition of the designated
assets of Seagate taken place on January 1, 1999. They also do not purport to
indicate VERITAS' future results of operations or financial position.
235
<PAGE> 242
VERITAS
UNAUDITED PRO FORMA COMBINED
CONDENSED STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
VERITAS
PRO FORMA
COMBINED
VERITAS YEAR
YEAR ENDED NSMG AND TELEBACKUP ENDED SEAGATE
DECEMBER 31, JANUARY 1, 1999 PRO FORMA DECEMBER 31, PRO FORMA
1999 THROUGH ACQUISITION DATE ADJUSTMENTS 1999 ADJUSTMENTS
------------ ------------------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net revenue:
User license fees.............. $ 498 99 $ -- $ 597 --
Services....................... 98 6 (1)(a) 103 --
------ ---- ----- ------ ---
Total net revenue........... 596 105 (1) 700 --
Cost of revenue:
User license fees.............. 20 6 -- 26 --
Services....................... 38 1 -- 39 --
Amortization of developed
technology.................. 36 1 24(b) 61 --
1(c)
(1)(e)
------ ---- ----- ------ ---
Total cost of revenue....... 94 8 24 126 --
------ ---- ----- ------ ---
Gross profit..................... 502 97 (25) 574 --
Operating expenses:
Selling and marketing.......... 222 39 -- 261 --
Research and development....... 95 15 -- 110 --
General and administrative..... 34 9 -- 43 --
Amortization of goodwill and
other intangibles........... 511 3 345(b) 878 --
14(c)
8(d)
(3)(e)
Acquisition and restructuring
costs....................... 11 -- (11)(f)
In-process research and
development................. 104 -- (104)(f) -- --
------ ---- ----- ------ ---
Total operating expenses.... 977 66 249 1,292 --
------ ---- ----- ------ ---
Income (loss) from operations.... (475) 31 (274) (718) --
Interest and other income, net... 23 1 -- 24 --
Interest expense................. (16) -- -- (16) --
------ ---- ----- ------ ---
Income (loss) before income
taxes.......................... (468) 32 (274) (710) --
Provision for (benefit from)
income taxes................... 35 8 (15)(g) 28 --
------ ---- ----- ------ ---
Net income (loss)................ (503) 24 $(259) (738) --
====== ==== ===== ====== ===
Net income (loss) per share --
basic.......................... $(1.59) $(1.93)
====== ======
Net income (loss) per share --
diluted........................ $(1.59) $(1.93)
====== ======
Number of shares used in
computing per share
amounts -- basic............... 317 383 (13)(o)
====== ====== ===
Number of shares used in
computing per share
amounts -- diluted............. 317 383 (13)(o)
====== ====== ===
<CAPTION>
VERITAS
PRO FORMA
INCLUDING SEAGATE
YEAR ENDED
DECEMBER 31,
1999
-----------------
<S> <C>
Net revenue:
User license fees.............. $ 597
Services....................... 103
------
Total net revenue........... 700
Cost of revenue:
User license fees.............. 26
Services....................... 39
Amortization of developed
technology.................. 61
------
Total cost of revenue....... 126
------
Gross profit..................... 574
Operating expenses:
Selling and marketing.......... 261
Research and development....... 110
General and administrative..... 43
Amortization of goodwill and
other intangibles........... 878
Acquisition and restructuring
costs.......................
In-process research and
development................. --
------
Total operating expenses.... 1,292
------
Income (loss) from operations.... (718)
Interest and other income, net... 24
Interest expense................. (16)
------
Income (loss) before income
taxes.......................... (710)
Provision for (benefit from)
income taxes................... 28
------
Net income (loss)................ (738)
======
Net income (loss) per share --
basic.......................... $(1.99)
======
Net income (loss) per share --
diluted........................ $(1.99)
======
Number of shares used in
computing per share
amounts -- basic............... 370
======
Number of shares used in
computing per share
amounts -- diluted............. 370
======
</TABLE>
See accompanying Notes to VERITAS Unaudited Pro Forma Combined Condensed
Financial Statements.
236
<PAGE> 243
VERITAS
UNAUDITED PRO FORMA COMBINED
CONDENSED STATEMENT OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
VERITAS
PRO FORMA
VERITAS INCLUDING SEAGATE
SIX MONTHS SIX MONTHS
ENDED SEAGATE ENDED
JUNE 30, PRO FORMA JUNE 30,
2000 ADJUSTMENTS 2000
------------ ----------- -----------------
<S> <C> <C> <C>
Net revenue:
User license fees.................... $ 429 $ -- $ 429
Services............................. 91 -- 91
------ ---- ------
Total net revenue................. 520 -- 520
Cost of revenue:
User license fees.................... 20 -- 20
Services............................. 38 -- 38
Amortization of developed
technology........................ 31 -- 31
------ ---- ------
Total cost of revenue............. 89 -- 89
------ ---- ------
Gross profit........................... 431 431
Operating expenses:
Selling and marketing................ 194 -- 194
Research and development............. 74 -- 74
General and administrative........... 32 -- 32
Amortization of goodwill and other
intangibles....................... 440 -- 440
------ ---- ------
Total operating expenses.......... 740 -- 740
------ ---- ------
Income (loss) from operations.......... (309) -- (309)
Interest and other income, net......... 24 -- 24
Interest expense....................... (15) -- (15)
------ ---- ------
Income (loss) before income taxes...... (300) -- (300)
Provision for (benefit from) income
taxes................................ 47 -- 47
------ ---- ------
Net income (loss)...................... $ (347) $ -- $ (347)
====== ==== ======
Net income (loss) per share -- basic... $(0.87) $(0.90)
====== ======
Net income (loss) per
share -- diluted..................... $(0.87) $(0.90)
====== ======
Number of shares used in computing per
share amounts -- basic............... 398 (13)(o) 385
====== ==== ======
Number of shares used in computing per
share amounts -- diluted............. 398 (13)(o) 385
====== ==== ======
</TABLE>
See accompanying Notes to VERITAS Unaudited Pro Forma Combined Condensed
Financial Statements.
237
<PAGE> 244
VERITAS
UNAUDITED PRO FORMA COMBINED
CONDENSED BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
VERITAS
PRO FORMA
VERITAS SEAGATE COMBINED
JUNE 30, JUNE 30, PRO FORMA JUNE 30,
2000 2000* ADJUSTMENTS 2000
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............. $ 424 $1,869 $ (913)(h) $1,380
Short-term investments................ 521 -- -- 521
Accounts receivable................... 138 -- -- 138
Other current assets.................. 40 145 -- 185
------ ------ -------- ------
Total current assets.............. 1,123 2,014 (913) 2,224
Long-term investments................... 56 -- -- 56
Investment in VERITAS stock............. -- 1,122 (1,122)(i) --
Property and equipment, net............. 107 -- -- 107
Goodwill and other intangibles, net..... 2,758 -- -- 2,758
Other non-current assets................ 34 705 -- 739
------ ------ -------- ------
Total assets...................... $4,078 $3,841 $ (2,035) $5,884
====== ====== ======== ======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable...................... 37 -- 50(j) 87
Payable to Seagate stockholders....... -- 295 -- 295
Accrued liabilities................... 119 456 -- 575
Customer advances..................... 2 -- -- 2
Deferred revenue...................... 126 -- -- 126
------ ------ -------- ------
Total current liabilities......... 284 751 50 1,085
Convertible subordinated notes.......... 457 -- -- 457
Deferred income taxes and other
non-current liabilities............... 137 638 (377)(k) 398
Stockholders' equity:
Common stock and additional paid-in
capital............................. 4,074 2,017 (2,017)(l) 4,818
13,058(m)
(12,314)(n)
Accumulated deficit................... (879) 349 (349)(l) (879)
Accumulated other comprehensive
loss................................ 5 86 (86)(l) 5
------ ------ -------- ------
Total stockholders' equity........ 3,200 2,452 (1,708) 3,944
------ ------ -------- ------
Total liabilities and
stockholders' equity........... $4,078 $3,841 $ (2,035) $5,884
====== ====== ======== ======
</TABLE>
See accompanying Notes to VERITAS Unaudited Pro Forma Combined Condensed
Financial Statements.
* The Seagate unaudited pro forma combined condensed balance sheet as of June
30, 2000 reflects Seagate's financial position immediately after the sale of
its operating assets and liabilities to Suez Acquisition Company.
238
<PAGE> 245
VERITAS
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRO FORMA PRESENTATION
SEAGATE TRANSACTION
The VERITAS unaudited pro forma combined condensed consolidated financial
statements reflect the issuance of 115.5 million shares of VERITAS common stock
and $913 million of cash for all of the outstanding common stock of Seagate,
immediately after the sale of all of the operating assets and liabilities of
Seagate to Suez Acquisition Company. The effect of the transactions is that
VERITAS is not acquiring any business of Seagate but is acquiring only certain
assets and assuming only certain liabilities of Seagate which are held by
Seagate after the sale of the operating assets and liabilities to Suez
Acquisition Company. For purposes of the pro forma financial statements as of
June 30, 2000, the assets of Seagate being acquired by VERITAS include VERITAS
common stock obtained by Seagate Software, a subsidiary of Seagate, in the NSMG
acquisition in May 1999, equity securities of Gadzoox Networks, SanDisk
Corporation, Veeco Instruments and Lernout & Hauspie, and cash and cash
equivalents, all of which have been recorded at their respective fair values.
The actual number of shares of VERITAS stock to be issued will depend on
the actual number of shares of the equity securities of the four enterprises
held by Seagate at closing, the market value of the four equity securities
immediately prior to closing, the amount of cash by which VERITAS elects to
reduce the cash portion of the merger consideration and the market value of
VERITAS' common stock immediately prior to closing. The amount of cash to be
paid to the Seagate shareholders will be equal to Seagate's cash at closing,
which will include the net proceeds received and retained by Seagate in
connection with the sale of its operating assets and liabilities to Suez
Acquisition Company, after transferring an amount equal to $765 million plus the
amount of certain tax liabilities and indebtedness of Seagate existing at the
closing, to Suez Acquisition Company and less the cash by which VERITAS may
elect to reduce the cash portion of the merger consideration in exchange for
additional shares of VERITAS common stock.
VERITAS may elect to reduce the cash portion of the merger consideration by
either $0, $250 million or $500 million, with the following impacts on the
number of shares of VERITAS common stock to issue and the cash to pay for all
outstanding common stock of Seagate, immediately after the sale of all operating
assets and liabilities of Seagate to Suez Acquisition Company:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
AMOUNT BY WHICH
VERITAS ELECTS TO REDUCE THE NUMBER OF SHARES OF
CASH PORTION OF THE MERGER VERITAS COMMON STOCK CASH TO BE DISTRIBUTED TO
CONSIDERATION TO BE ISSUED SEAGATE STOCKHOLDERS
-------------------------------------------------------------------------------
<S> <C> <C>
$0 111.1 million $1,413 million
-------------------------------------------------------------------------------
$250 million 113.3 million $1,163 million
-------------------------------------------------------------------------------
$500 million 115.5 million $913 million
-------------------------------------------------------------------------------
</TABLE>
239
<PAGE> 246
VERITAS
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
The amount of cash by which VERITAS elects to reduce the cash portion of
the merger consideration has no impact on the total consideration received by
the Seagate stockholders, as shown on pages 6 and 7.
The VERITAS unaudited pro forma combined condensed consolidated financial
statements have been based on amounts as of June 30, 2000 for both VERITAS and
Seagate and assume that VERITAS will elect to reduce the cash portion of the
merger consideration by $500 million immediately prior to the closing. For
purposes of these pro forma statements, all calculations have been made using
the closing market price and the remaining shares held by Seagate as of June 30,
2000 of VERITAS' common stock and the equity securities of the four enterprises.
Since June 30, 2000 through October 11, 2000, Seagate has sold all of its
SanDisk Corporation stock, all of its Veeco Instruments stock and a portion of
its Lernout & Hauspie stock. As of October 11, 2000 the remaining equity
securities held by Seagate had a market value of approximately $63.1 million.
The lower market value of the remaining equity securities would have reduced the
number of shares of VERITAS common stock to be issued by 1.3 million.
The cash and equity securities obtained by VERITAS have been reflected in
the VERITAS unaudited pro forma combined condensed consolidated balance sheet at
their respective fair values. A material difference could result between the
aggregate value of these equity securities as currently reflected in these pro
forma financial statements and the final aggregate value to be recorded by
VERITAS as of the effective time. Significant factors affecting this aggregate
value are sales of these equity securities by Seagate prior to the effective
time and the stock market price of these equity securities shortly before the
effective time. The acquisition of the VERITAS common stock held by Seagate
Software has been treated by VERITAS as a treasury stock transaction, and
amounts in excess of par value have been reflected as a reduction in additional
paid-in capital.
In addition, the Seagate stockholders have the right to receive the value
of certain tax refunds claimed and credits utilized by VERITAS that are
attributable to Seagate and relate to periods ending on or prior to the
effective time of the transaction and, in certain instances, net proceeds
realized upon the sale by Seagate of its shares in one of its equity
investments. A tax refund of $145 million has been reflected in the VERITAS
unaudited pro forma combined condensed consolidated financial statements as a
payable to the Seagate stockholders.
NSMG, TELEBACKUP AND NUVIEW ACQUISITIONS
NSMG ACQUISITION
The VERITAS unaudited pro forma combined condensed financial statements
reflect the contribution of assets and liabilities of NSMG and the issuance of
155,583,486 shares of VERITAS common stock which was based on the average
closing price of VERITAS common stock of $20.26 per share for 5 days before and
after June 7, 1999, the measurement date for the transaction. In addition,
VERITAS issued options to purchase 15,626,358 shares of its common stock to its
employees who were former NSMG employees. The value of the options issued by
VERITAS in exchange for the Seagate
240
<PAGE> 247
VERITAS
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Software options was determined by estimating their fair value as of May 28,
1999, using the Black-Scholes option pricing model with the following weighted
average assumptions:
- risk free interest rate of 5.15%;
- dividend yield of 0.0%;
- expected option life of 0.5 years for vested options;
- expected option life of 3.0 years for unvested options; and
- volatility factor of the expected market price of VERITAS common stock of
0.65.
The NSMG acquisition has been accounted for under the purchase method of
accounting.
TELEBACKUP ACQUISITION
The VERITAS unaudited pro forma combined condensed financial statements
also reflect the issuance of 6,842,795 shares for the outstanding equity
interest of TeleBackup based on the capitalization of VERITAS and TeleBackup as
of June 1, 1999 and the average closing price of VERITAS common stock of $19.60
per share for 5 days before and after June 1, 1999, the closing date of the
transaction. In addition, VERITAS exchanged options to purchase 154,706 shares
of its common stock to its employees who were former employees of TeleBackup.
The value of the options issued by VERITAS in the exchange for the TeleBackup
options was determined by estimating their fair value as of June 1, 1999, using
the Black-Scholes option pricing model with the following weighted average
assumptions:
- risk-free interest rate of 5.15%;
- dividend yield of 0.0%;
- expected option life of 0.5 years; and
- volatility factor of the expected market price of VERITAS common stock of
0.65.
The TeleBackup acquisition has been accounted for under the purchase method
of accounting.
NUVIEW ACQUISITION
The VERITAS unaudited pro forma combined condensed financial statements
reflect the acquisition of certain assets of NuView and the issuance of
1,435,525 shares of VERITAS common stock which was based on the average closing
price of VERITAS common stock of $33.25 per share. In addition, VERITAS issued
options to purchase 57,076 shares of its common stock to its employees who were
former employees of NuView. In the acquisition cost, VERITAS assumed only a
portion of the value of the unvested options issued. The value of the unvested
options issued by VERITAS in exchange for the NuView unvested options was
determined by estimating their fair value
241
<PAGE> 248
VERITAS
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
as of August 10, 1999 using the Black-Scholes option pricing model with the
following weighted average assumptions:
- risk free interest rate of 6.46%;
- dividend yield of 0.0%;
- expected option life of 2.5 years for unvested options; and
- volatility factor of the expected market price of VERITAS common stock of
.58.
The NuView acquisition has been accounted for under the purchase method of
accounting.
The VERITAS unaudited pro forma combined condensed financial statements
have been prepared on the basis of assumptions relating to the allocation of the
amount of consideration paid, to the assets and liabilities of NSMG, TeleBackup
and NuView based on estimates of their fair value. Below is a table of the
acquisition cost, purchase price allocation and annual amortization of the
intangible assets acquired, in thousands:
NSMG
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION AMORTIZATION
LIFE OF INTANGIBLES
------------ --------------
<S> <C> <C> <C>
Acquisition cost
Value of securities issued
Common stock................... $3,151,350
Stock options.................. 269,741
Acquisition costs................. 43,381
----------
Total acquisition cost....... $3,464,472
==========
Purchase price allocation
Tangible net liabilities
assumed........................ $ (952)
Intangible assets acquired
Distribution channel/OEM
agreements................... 257,200 4 $ 64,300
Developed technology........... 233,700 4 58,425
Trademark/assembled
workforce/other
intangibles.................. 37,110 4 9,278
In-process research and
development.................. 101,200
Goodwill....................... 3,015,733 4 753,933
Deferred tax liabilities....... (179,519)
---------- --------
Total........................ $3,464,472 $885,936
========== ========
</TABLE>
242
<PAGE> 249
VERITAS
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
TELEBACKUP
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION AMORTIZATION
LIFE OF INTANGIBLES
------------ --------------
<S> <C> <C> <C>
Acquisition cost
Value of securities issued
Common stock................ $134,100
Stock options............... 2,762
Acquisition costs.............. 6,200
--------
Total acquisition cost.... $143,062
========
Purchase price allocation
Tangible net liabilities
assumed..................... $ (243)
Intangible assets acquired
Distribution channel/OEM
agreements................ 3,100 4 $ 775
Developed technology........ 6,600 4 1,650
Trademark/assembled
workforce................. 1,630 4 407
In-process research and
development............... 1,900
Goodwill.................... 133,107 4 33,277
Deferred tax liabilities.... (3,032)
-------- -------
Total..................... $143,062 $36,109
======== =======
</TABLE>
NUVIEW
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION AMORTIZATION
LIFE OF INTANGIBLES
------------ --------------
<S> <C> <C> <C>
Acquisition cost
Value of securities issued
Cash........................ $ 19,200
Common stock................ 47,732
Stock options............... 796
Acquisition costs.............. 150
--------
Total acquisition cost.... $ 67,878
========
Purchase price allocation
Tangible net assets acquired... $ 39
Intangible assets acquired
Developed technology........ 2,400 4 $ 600
Trademark/assembled
workforce/other
intangibles............... 1,750 4 437
In-process research and
development............... 1,100
Goodwill.................... 62,589 4 15,647
-------- -------
Total..................... $ 67,878 $16,684
======== =======
</TABLE>
Tangible net liabilities of the NSMG business assumed principally include
accounts payable, accrued compensation and other current liabilities. Assets
acquired principally include cash, accounts receivable, fixed assets and other
current assets.
243
<PAGE> 250
VERITAS
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Tangible net liabilities of TeleBackup assumed principally include accounts
payable and other current liabilities. Assets acquired principally include cash
and fixed assets.
Tangible net assets acquired from NuView include principally property and
equipment.
The value of the distribution channels and original equipment manufacturer
agreements was determined by considering, among other factors, the size of the
current and potential future customer bases, the quality of existing
relationships with customers, the historical costs to develop customer
relationships, the expected income and associated risks. Associated risks
included the inherent difficulties and uncertainties in transitioning the
business relationships from the acquired entity to VERITAS and risks related to
the viability of and potential changes to future target markets.
To determine the value of the developed technology, the expected future
cash flows attributable to all existing technology was discounted, taking into
account risks related to the characteristics and applications of the technology,
existing and future markets, and assessments of the life cycle stage of the
technology. The analysis resulted in a valuation for developed technology which
had reached technological feasibility and therefore was capitalizable. The
developed technology is being amortized on the straight-line basis over its
estimated useful life of four years which is expected to exceed the ratio of
current revenues to the total of current and anticipated revenues.
The value of trademarks was determined by considering, among other factors,
the assumption that in lieu of ownership of a trademark, a company would be
willing to pay a royalty in order to exploit the related benefits of such
trademark.
The value of the assembled workforce was derived by estimating the costs to
replace the existing employees, including recruiting, hiring, and training costs
for each category of employee.
The value allocated to projects identified as in-process research and
development of the NSMG business, TeleBackup and NuView was charged to expense
in 1999 but has not been reflected in the VERITAS unaudited pro forma combined
condensed statements of operations as it is non-recurring in nature.
The write-offs were necessary because the acquired in-process research and
development had not yet reached technological feasibility and had no future
alternative uses. VERITAS expects that the acquired in-process research and
development will be successfully developed, but these products may not achieve
commercial viability.
The nature of the efforts required to develop the purchased in-process
research and development into commercially viable products principally relate to
the completion of all planning, designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements.
The value of the purchased in-process research and development was
determined by estimating the projected net cash flows related to the products,
including costs to complete the development of the technology and the future
revenues to be earned upon
244
<PAGE> 251
VERITAS
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
commercialization of the products. These cash flows were then discounted back to
their net present value. The projected net cash flows from the projects were
based on management's estimates of revenues and operating profits related to the
projects.
The total charge for in-process research and technology was estimated to be
$101.2 million, for the NSMG acquisition, completed in May 1999. Seven
in-process research and development projects were identified and valued, with
two projects under the data protection product group that accounted for
approximately 71% of the value assigned to in-process research and development.
The data protection software products provide backup and restore functions,
including scheduled automated unattended data backup operations. The remaining
products identified and valued were under the application solutions and
replication product groups. The application solutions software provides
scaleable solution for managing the behavior of different types of networks
worldwide from one central location and the replication software products
deliver flexible and intelligent data replication for Windows NT environments.
Costs to complete all of the NSMG in-process research and development projects
were estimated to be $6.0 million. At the date of acquisition, the development
of all products ranged from 48% to 90% complete and averaged approximately 76%
complete, with expected completion dates through December 1999. At June 30,
2000, we have completed the development of all in-process research and
development projects acquired from NSMG. All in-process research and development
projects related to the TeleBackup and NuView acquisitions were individually
insignificant and were completed or abandoned as of June 30, 2000.
Goodwill is determined based on the residual difference between the amount
paid and the values assigned to identified tangible and intangible assets.
2. PRO FORMA NET LOSS PER SHARE
The VERITAS unaudited pro forma combined condensed statements of operations
have been prepared as if the NSMG, TeleBackup and NuView acquisitions and the
Seagate merger had occurred at the beginning of the periods presented. The pro
forma basic and diluted net loss per share are based on the weighted average
number of shares of VERITAS common stock outstanding during each period and the
number of shares of VERITAS common stock issued in connection with the NSMG,
TeleBackup and NuView acquisitions and the number of shares to be issued in the
Seagate transaction based on amount as of June 30, 2000, less the amount of
VERITAS treasury shares acquired in the Seagate transaction. The effect of stock
options and other potential common securities have not been included in the
computation of pro forma diluted net loss per share because their effect would
be antidilutive.
3. CONVERSION OF TELEBACKUP TO U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
AND US$
The financial statements for TeleBackup which were prepared in accordance
with Canadian generally accepted accounting principles have been conformed to
U.S. generally accepted accounting principles for purposes of including them in
the VERITAS unaudited pro forma combined condensed financial statements. None of
the adjustments necessary to conform the TeleBackup financial statements to U.S.
generally accepted accounting
245
<PAGE> 252
VERITAS
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
3. CONVERSION OF TELEBACKUP TO U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
AND US$ (CONTINUED)
principles were material to either the historical financial statements of
TeleBackup or the VERITAS unaudited pro forma combined condensed financial
statements. The balance sheet and statements of operations for TeleBackup were
translated to U.S. dollars using average exchange rates for the VERITAS
unaudited pro forma combined condensed statements of operations and period-end
and historical exchange rates for the VERITAS unaudited pro forma combined
condensed balance sheet, as applicable.
4. PRO FORMA ADJUSTMENTS
(a) To eliminate the effect of the intercompany transactions between
VERITAS and TeleBackup.
(b) To reflect amortization of goodwill, distribution channel/original
equipment manufacturer agreements, developed technology and trademark/assembled
workforce/other intangibles related to the NSMG acquisition for the period from
January 1, 1999 to May 28, 1999, the closing date of the transaction.
(c) To reflect amortization of goodwill, distribution channel/original
equipment manufacturer agreements, developed technology, and trademark/assembled
workforce related to the TeleBackup acquisition for the period from January 1,
1999 to June 1, 1999, the closing date of the transaction.
(d) To reflect amortization of goodwill, developed technology,
trademark/assembled workforce/other intangibles related to the NuView
acquisition for the period from January 1, 1999 to August 10, 1999, the closing
date of the transaction.
(e) To reflect the elimination of NSMG's amortization of developed
technology, goodwill and other intangibles.
(f) To eliminate the non-recurring in-process research and development
charges related to the NSMG, TeleBackup and NuView acquisitions and the
restructuring charge related to the NSMG acquisition.
(g) To adjust to the tax provision for VERITAS based upon pro forma losses
incurred.
(h) Cash to be distributed to former Seagate stockholders. For a summary of
cash available for distribution, see note 3(v) to Seagate's Pro Forma Financial
Statements on page 222.
(i) Elimination of Seagate's investment in VERITAS shares of common stock.
(j) Estimated transaction costs are $50 million and will be paid at the of
closing or shortly thereafter.
(k) To eliminate the deferred taxes liabilities associated with the
investment in VERITAS and adjust the deferred taxes liabilities associated with
the investments in Gadzoox Networks, SanDisk Corporation, Veeco Instruments and
Lernout & Hauspie.
(l) To eliminate all equity accounts of Seagate.
246
<PAGE> 253
VERITAS
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. PRO FORMA ADJUSTMENTS (CONTINUED)
(m) To record the 115.5 million shares to be issued by VERITAS to the
former Seagate stockholders at $113.0156 per share, the closing market price of
VERITAS common stock as of June 30, 2000.
(n) To record the 128.1 million shares of VERITAS treasury stock acquired
in the transaction at an effective cost of $96.16 per share.
(o) To reflect the difference between the 128.1 million shares of VERITAS
treasury stock acquired in the transaction less an estimated 115.5 million
shares of VERITAS to be issued to the Seagate stockholders.
247
<PAGE> 254
COMPARISON OF RIGHTS OF HOLDERS OF
SEAGATE COMMON STOCK AND
VERITAS COMMON STOCK
The following is a summary of certain differences between the rights of
holders of Seagate common stock and holders of VERITAS common stock. While we
believe that the description covers the material differences, this summary may
not contain all of the information that is important to holders of Seagate
common stock who will receive VERITAS common stock in connection with the
merger. Seagate stockholders should read the following summary and the other
documents referred to carefully for a more complete understanding of the
differences between the rights of holders of Seagate common stock and holders of
VERITAS common stock.
The rights of holders of Seagate common stock with respect to such stock
are governed by the certificate of incorporation and bylaws of Seagate, each as
currently in effect, and the General Corporation Law of the State of Delaware.
At the effective time of the merger, all outstanding shares of Seagate common
stock will be converted into the right to receive the consideration described in
this document, including shares of VERITAS common stock. As a result, at the
effective time of the merger, Seagate stockholders will become VERITAS
stockholders. As VERITAS stockholders, the rights of former holders of Seagate
common stock who acquire shares of VERITAS common stock will be governed by the
certificate of incorporation and bylaws of VERITAS, each as in effect as of the
effective time of the merger, and the General Corporation Law of the State of
Delaware.
APPLICABLE STATE CORPORATE LAW
Both Seagate and VERITAS are incorporated under the laws of the State of
Delaware and are governed by the General Corporation Law of the State of
Delaware. As a result, from and after the effective time of the merger, the
rights of former holders of Seagate common stock who acquire shares of VERITAS
common stock in connection with the merger will continue to be governed by the
General Corporation Law of the State of Delaware.
CERTIFICATES OF INCORPORATION AND BYLAWS
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Seagate has two classes of authorized capital stock, designated "common
stock" and "preferred stock," each with a par value of $0.01 per share. Seagate
is authorized to issue 600,000,000 shares of common stock and, as of October 11,
2000, there were 231,187,451 shares of common stock outstanding. Seagate is
authorized to issue 1,000,000 shares of preferred stock, with any rights that
the board of directors of Seagate may determine. However, there are no shares of
Seagate preferred stock outstanding.
VERITAS has three classes of authorized capital stock, designated "Common
Stock" and "Preferred Stock," each with a par value of $0.001 per share, and
"Special Voting Stock" with a par value of $1.00 per share. VERITAS is
authorized to issue 2,000,000,000 shares of common stock and, as of October 11,
2000, there were 404,186,411 shares of common stock outstanding. VERITAS is
authorized to issue 10,000,000 shares of preferred stock, with any rights the
board of directors of VERITAS may determine. However, there are no shares of
VERITAS preferred stock outstanding. Further, VERITAS is authorized
248
<PAGE> 255
to issue one share of special voting stock, which is currently outstanding and
held by a trustee.
VOTING RIGHTS
Except with respect to the election of directors, holders of Seagate common
stock are entitled to one vote on all matters submitted to Seagate stockholders
for their approval for each share of common stock held. Holders of Seagate
common stock are entitled to cumulate votes for the election of directors. In
other words, with respect to the election of directors, each holder of Seagate
common stock is entitled to that number of votes which is equal to the total
number of shares of Seagate common stock held, multiplied by the number of
directors being elected. The foregoing votes may be allocated by each Seagate
stockholder in any manner, including for a single director, or for two or more
directors, at the discretion of each such Seagate stockholder.
Holders of VERITAS common stock are also entitled to one vote on all
matters submitted to VERITAS stockholders for their approval for each share
held. However, holders of VERITAS common stock are not entitled to cumulate
votes for the election of directors. The holder of VERITAS' special voting
stock, who is entitled to one vote for each share of non-voting stock issued by
one of VERITAS' subsidiaries and not held by VERITAS (979,001 shares as of June
30, 2000), votes together with holders of VERITAS common stock on all matters
submitted to VERITAS stockholders for their approval.
BOARD OF DIRECTORS
Board Size
Under the certificate of incorporation of Seagate, the size of Seagate's
board of directors is determined by Seagate's bylaws. Currently, Seagate's
bylaws provide that the board of directors of Seagate will consist of seven
directors. The size of Seagate's board of directors may only be changed by
amending either the certificate of incorporation or bylaws of Seagate. However,
because Seagate's board of directors is authorized to amend Seagate's bylaws,
the board of directors may change the size of the board of directors without the
approval of Seagate stockholders.
Under the certificate of incorporation of VERITAS, the size of VERITAS'
board of directors is determined by resolution of the board of directors.
Currently, VERITAS' board of directors consists of nine directors, and there is
one vacant seat. The size of VERITAS' board of directors may only be changed by
a resolution of the board of directors itself.
Board Classification
The board of directors of Seagate is not classified into groups.
Accordingly, all seven directors are elected at each successive annual meeting
of Seagate stockholders. The board of directors of VERITAS, however, is
classified into three groups. Each group of directors consists of an equal
number of directors to the extent possible, each holding office for a period of
three years. Thus, approximately a third of the members of VERITAS' board of
directors are elected at each successive annual meeting of VERITAS stockholders.
Board Vacancies
Under the bylaws of Seagate, any vacancy on Seagate's board of directors,
whether resulting from the death, resignation or removal of a director or an
increase in the size of the board of directors, may be filled only by the
remaining members of the board of
249
<PAGE> 256
directors (even if less than a quorum), or the sole remaining director. In the
event that a director resigns as of a future date, the vacancy created by the
resignation of such director may be filled by a vote of the board of directors
including the resigning director.
Under the certificate of incorporation of VERITAS, any vacancy on VERITAS'
board of directors, whether from the death, resignation or removal of a director
or an increase in the size of the board of directors, may also be filled only by
the remaining members of the board of directors (even if less than a quorum), or
the sole remaining director. Any director so elected will hold office until the
expiration of the term of the director group to which such director was
appointed, provided that each such director will be appointed to the director
group with the longest remaining term to the extent consistent with the even
apportionment of directors among director groups.
Removal of Directors
Under the bylaws of Seagate, any member of Seagate's board of directors, or
the entire board of directors, may be removed with or without cause by the
holders of a majority of the outstanding shares of Seagate capital stock
entitled to vote generally for the election of directors. Notwithstanding the
foregoing, if less than the entire board of directors is removed, no director
may be removed if the votes cast against his or her removal would be sufficient
to elect such director if voted cumulatively.
Under the certificate of incorporation of VERITAS, members of the board of
directors, or the entire board of directors, may only be removed for cause and
only by the holders of at least two-thirds of the voting power of VERITAS'
outstanding capital stock entitled to vote generally for the election of VERITAS
directors, voting together as a single class.
STOCKHOLDER ACTION BY WRITTEN CONSENT
Under the Seagate bylaws, Seagate stockholders may take formal action at a
meeting of Seagate stockholders duly called and held in accordance with the
Seagate bylaws and applicable law, or pursuant to a written consent signed by
Seagate stockholders holding at least that number of shares of Seagate capital
stock that would be required to authorize or take such action at a meeting of
Seagate stockholders at which all shares of Seagate capital stock entitled to
vote on such action were present and voted.
Under the certificate of incorporation of VERITAS, the VERITAS stockholders
may only take formal action at a meeting of VERITAS stockholders duly called and
held in accordance with the VERITAS bylaws and applicable law, and may not take
action by written consent.
ABILITY TO CALL SPECIAL MEETINGS
Under the bylaws of Seagate, a special meeting of Seagate stockholders may
be called by the board of directors of Seagate, the chairman of the board of
directors, Seagate's president, or the holders of at least 10% of the
outstanding shares of Seagate capital stock entitled to vote at the meeting. If
any person or group of persons other than the Seagate board of directors desires
to call a special meeting of Seagate stockholders, the person or group must give
timely notice to the Secretary of Seagate. Such notice is timely made only if
delivered to Seagate's principal executive offices at least 90 days, but not
more than 120 days, before the date of the proposed special meeting. The
foregoing notice must also contain detailed information regarding the proposed
purpose for the special meeting and, if
250
<PAGE> 257
directors are to be elected at the special meeting, detailed information
regarding nominees for election to the board of directors.
Under the bylaws of VERITAS, a special meeting of VERITAS stockholders may
be called only by a majority of the members of the board of directors, the
chairman of the board of directors or the chief executive officer of VERITAS.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND PROPOSALS
Under the bylaws of Seagate, stockholder proposals (and nominations of
directors) will not be considered at any meeting of Seagate stockholders unless
timely made. Stockholder proposals (and nominations of directors) are timely
made only if delivered to Seagate's principal executive offices at least 120
days before the date of the then current year corresponding to the date of
Seagate's proxy statement delivered to its stockholders in connection with the
previous annual meeting of Seagate stockholders. If no annual meeting of Seagate
stockholders was held during the previous year or if the date of the annual
meeting of Seagate stockholders during the previous year was changed by more
than 30 days from the date contemplated by Seagate's proxy statement delivered
to its stockholders in connection with such meeting, then stockholder proposals
are timely made only if delivered to Seagate's principal executive offices by
the later of 120 days in advance of such annual meeting or 10 days following the
date on which such annual meeting is first publicly announced. In addition,
valid stockholder proposals (or nominations of directors) must contain detailed
information regarding the proposal and, if nominations of directors are made,
detailed information regarding nominees for election to the board of directors.
Under the bylaws of VERITAS, stockholder proposals (and nominations of
directors) will not be considered at any annual meeting of VERITAS stockholders
unless timely made. Stockholder proposals (and nominations of directors) are
timely made only if delivered to VERITAS' principal executive offices at least
60 days, but not more than 90 days, before the first anniversary of the prior
year's annual meeting of VERITAS stockholders. Notwithstanding the foregoing, if
the annual meeting of VERITAS stockholders is more than 30 days before or more
than 60 days after such anniversary date, stockholder proposals (and nominations
for directors) are timely made only if they are delivered to VERITAS' principal
executive offices at least 60 days, but not more than 90 days, prior to such
annual meeting or 10 days following the date on which such annual meeting is
first publicly announced. In addition, valid stockholder proposals (or
nominations of directors) must contain detailed information regarding the
proposal and, if nominations of directors are made, detailed information
regarding nominees for election to the board of directors.
In addition to the foregoing, under the VERITAS bylaws, if the size of
VERITAS' board of directors is to be increased and VERITAS fails to publicly
announce the board increase or the nominees for director on the increased board
at least 70 days before the first anniversary of the preceding year's annual
meeting of VERITAS stockholders (or, if such annual meeting is to be held more
than 30 days before, or 60 days after, such anniversary date, at least 70 days
before the date of such annual meeting), then stockholder nominations of
directors for any new vacancies created by the increased board are timely made
if delivered to VERITAS' principal executive offices no later than 10 days
following the date on which the increase in the size of the board of directors
is first publicly announced.
The bylaws of VERITAS also provide that the only business that may be
conducted at a special meeting of VERITAS stockholders is such business as is
set forth in the
251
<PAGE> 258
notice of the special meeting, provided that, if a special meeting of VERITAS
stockholders is validly called and the board of directors determines that
directors will be elected at the special meeting, then stockholder nominations
of directors for such election will be accepted, but only if timely made. Such
nominations will be timely only if delivered to VERITAS' principal executive
offices at least 60 days, but not more than 90 days, prior to such special
meeting or no later than 10 days after the date on which such special meeting is
announced.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS
Under Seagate's certificate of incorporation, Seagate has reserved the
right to amend, alter, change or repeal any provision of its certificate of
incorporation in accordance with applicable provisions of the General
Corporation Law of the State of Delaware, which generally require the
affirmative vote of the holders of a majority of outstanding capital stock
entitled to vote to approve an amendment to a certificate of incorporation.
Under Seagate's certificate of incorporation, the board of directors of Seagate
is authorized to make, alter, amend or repeal any bylaws of Seagate.
Under VERITAS' certificate of incorporation, VERITAS has reserved the right
to amend, alter, change or repeal any provision of its certificate of
incorporation in accordance with applicable provisions of the General
Corporation Law of the State of Delaware, which generally require the
affirmative vote of the holders of a majority of outstanding capital stock
entitled to vote to approve an amendment to a certificate of incorporation.
However, the certificate of incorporation of VERITAS also requires the holders
of at least two-thirds of the voting power of all outstanding capital stock of
VERITAS entitled to vote generally in the election of directors, voting together
as a single class, to adopt any provision which is inconsistent with the
provisions of VERITAS' certificate of incorporation relating to directors, the
ability of VERITAS' board of directors and stockholders to amend the bylaws of
VERITAS, the prohibition on the ability of VERITAS stockholders to act by
written consent, and amendments to VERITAS' certificate of incorporation. Under
VERITAS' certificate of incorporation, the board of directors and the
stockholders of VERITAS are authorized to make, alter, amend or repeal any
bylaws of VERITAS. However, the certificate of incorporation also provides that
the VERITAS stockholders may amend the bylaws only with the affirmative vote of
the holders of two-thirds of the voting power of all outstanding capital stock
of VERITAS entitled to vote for the election of directors generally, voting
together as a single class.
LIMITATION OF LIABILITY OF DIRECTORS
The General Corporation Law of the State of Delaware permits a corporation
to include a provision in its certificate of incorporation or bylaws enabling
the corporation to limit or eliminate the personal liability of its directors to
the corporation or its stockholders for damages arising out of a breach of the
directors' fiduciary duties, subject to certain limitations.
Under the certificate of incorporation of Seagate, the personal liability
of Seagate's directors to Seagate and its stockholders, for monetary damages
arising out of a breach of the directors' fiduciary duties as a director, has
been expressly eliminated to the fullest extent permitted by the General
Corporation Law of the State of Delaware.
Under the certificate of incorporation of VERITAS, the personal liability
of VERITAS' directors to VERITAS and its stockholders, for monetary damages
arising out of a breach of the directors' fiduciary duties as a director, also
has been expressly
252
<PAGE> 259
eliminated to the fullest extent permitted by the General Corporation Law of the
State of Delaware. In addition, VERITAS' certificate of incorporation provides
that if the General Corporation Law of the State of Delaware is amended to
authorize the further elimination or limitation of the liability of a director,
then the liability of VERITAS' directors will be eliminated or limited to the
fullest extent permitted by the General Corporation Law of the State of Delaware
as so amended.
While these provisions provide the directors of Seagate and VERITAS with
protection against awards for monetary damages arising out of a breach of
fiduciary duties, they do not eliminate the duty itself. Accordingly, these
provisions will have no effect on the availability of equitable remedies such as
an injunction or rescission based upon a director's breach of his or her
fiduciary duties.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of the State of Delaware permits a corporation
to indemnify its directors, officers, employees and agents for any liability
arising out of an action or threatened action, other than an action by or in the
right of the corporation, to which such person is a party due to his or her
service as a director, officer, employee or agent, provided that such person
acted in good faith and in a manner he or she reasonably believed to be in, or
not opposed to, the best interests of the corporation, and with respect to any
criminal action, which he or she had no reason to believe was unlawful. The
General Corporation Law of the State of Delaware permits a corporation to
indemnify its directors, officers, employees and agents for any liability
arising out of an action or threatened action by or in the right of the
corporation to which such person is a party due to his or her service as a
director, officer, employee or agent, provided that such person acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed to,
the best interests of the corporation, except that there may be no such
indemnification if the person is found liable to the corporation unless, in such
a case, the court determines that the person is entitled to indemnification.
Under Seagate's bylaws, Seagate must indemnify any person who is or was a
director, officer, employee or agent of Seagate for any expenses, judgments and
fines actually incurred and amounts paid in settlement in connection with any
third party action, suit or other proceeding (other than a suit by or in the
right of Seagate) to the fullest extent permitted by the General Corporation Law
of the State of Delaware. Under Seagate's bylaws, Seagate must also indemnify
any person who is or was a director, officer, employee or agent of Seagate for
expenses actually and reasonably incurred in connection with the defense or
settlement of any action, suit or other proceeding by or in the right of Seagate
to the fullest extent permitted by the General Corporation Law of the State of
Delaware. In the later case, however, Seagate is not required to indemnify any
person who is adjudicated to be liable to Seagate unless otherwise required by a
court of competent jurisdiction. To the extent that Seagate is required to
indemnify a person for expenses in accordance with the foregoing, Seagate's
bylaws require Seagate to advance such expenses to a person entitled to
indemnification during a proceeding if the person provides Seagate with an
undertaking to repay such expenses if it is ultimately determined that the
person is not entitled to indemnification under Seagate's bylaws. The
indemnification provisions of Seagate's bylaws are not exclusive of any other
rights that a person may have under any bylaws, agreements between Seagate and
such person, or vote of Seagate stockholders or disinterested directors or
otherwise.
253
<PAGE> 260
Under VERITAS' bylaws, VERITAS must indemnify any person who is or was a
director or officer of VERITAS (or any predecessor of VERITAS) for any expenses,
liabilities and losses reasonably incurred in connection with any action, suit
or proceeding to the fullest extent permitted by the General Corporation Law of
the State of Delaware. Notwithstanding the foregoing, VERITAS is required to
indemnify the foregoing persons only if the actions taken by a person and giving
rise to such action, suit or proceeding were authorized by VERITAS' board of
directors. To the extent that VERITAS is required to indemnify a person for
expenses in accordance with the foregoing, VERITAS is also required to advance
expenses during a proceeding if the person provides VERITAS with an undertaking
to repay such expenses if it is ultimately determined that such person is not
entitled to indemnification under VERITAS' bylaws. Notwithstanding the
foregoing, VERITAS is not required to advance expenses to any person against
whom VERITAS brings a claim alleging that such person has breached his or her
fiduciary duty of loyalty to VERITAS, committed an act or omission not in good
faith or that involves intentional misconduct or a knowing violation of the law,
or derived an improper personal benefit.
DELAWARE ANTITAKEOVER LAWS
Seagate and VERITAS are each subject to the provisions of Section 203 of
the General Corporation Law of the State of Delaware. Under certain
circumstances, the provisions of Section 203 may make the consummation of
various business transactions by "interested stockholders," as defined in
Section 203, with either Seagate or VERITAS more difficult for a three-year
period following the time that a stockholder becomes an "interested
stockholder." Under Section 203, a corporation may waive the protective
provisions of Section 203 in its certificate of incorporation or bylaws.
However, neither Seagate nor VERITAS has so waived the provisions of Section
203.
STOCKHOLDER RIGHTS PLAN
VERITAS has in place a stockholder rights plan. Under the plan, a person or
an entity, or a group of persons or entities, become an "acquiring person" if,
without prior approval of the VERITAS board, such person(s) acquire, or publicly
announce an intent to acquire, 15% or more of VERITAS' outstanding common stock.
Seagate does not have a stockholder rights plan.
ADDITIONAL INFORMATION REGARDING SEAGATE
In addition to the financial information contained in this document, you
can find additional information about Seagate in the reports, proxy and
information statements and other documents filed by Seagate with the Securities
and Exchange Commission. For more information on how you can obtain copies of
these filings, see "Where You Can Find Additional Information" beginning on page
257 of this document.
ADDITIONAL INFORMATION REGARDING VERITAS
In addition to the financial information contained in this document, you
can find additional information about VERITAS in the reports, proxy and
information statements and other documents filed by VERITAS with the Securities
and Exchange Commission. For more information on how you can obtain copies of
these filings, see "Where You Can Find Additional Information" beginning on page
257 of this document.
254
<PAGE> 261
OTHER STOCKHOLDER PROPOSALS
PROPOSALS BY SEAGATE STOCKHOLDERS
If the merger is consummated, there will be no public stockholders of
Seagate and no public participation in any future meetings of stockholders of
Seagate. However, if the merger is not consummated, Seagate's public
stockholders will continue to be entitled to attend and participate in meetings
of Seagate's stockholders.
If the merger is not consummated, the next annual meeting of Seagate
stockholders is expected to be held on or about December 20, 2000. In the event
that the merger is not completed, any Seagate stockholder that wishes Seagate to
consider a proposal for inclusion in its proxy statement for the 2000 annual
meeting of Seagate stockholders must have delivered a copy of such proposal to
the Secretary of Seagate at its principal executive offices located at 920 Disc
Drive, Scotts Valley, California 95066 no later than May 28, 2000. If any
Seagate stockholder intends to present a proposal at the 2000 annual meeting of
Seagate stockholders, but does not intend to submit the proposal for inclusion
in the Seagate proxy statement relating to the annual meeting, such stockholder
must deliver a copy of the proposal to the Secretary of Seagate at its principal
executive offices listed above no later than August 8, 2000. If, however, the
date of the 2000 annual meeting of Seagate stockholders is more than 30 days
before or after December 20, 2000, delivery of the proposal will be timely if
received by Seagate not later than the close of business on the later of the
120th calendar day in advance of the 2000 annual meeting of Seagate stockholders
or the 10th calendar day following the day Seagate publicly announces the date
of the annual meeting. If Seagate does not receive the proposal within this time
frame, Seagate's management will use its discretionary authority to vote the
shares it represents by proxy as the board of directors may recommend.
PROPOSALS BY VERITAS STOCKHOLDERS
The next annual meeting of VERITAS stockholders is expected to be held on
or about May 11, 2001. Any VERITAS stockholder that wishes VERITAS to consider
including a proposal in its proxy statement for its 2001 annual stockholders
meeting must deliver a copy of such proposal to the Secretary of VERITAS at its
principal executive offices at 1600 Plymouth Street, Mountain View, California
94043 no later than December 11, 2000.
If any VERITAS stockholder intends to present a proposal at its 2001 annual
stockholders meeting, but does not intend to have it included in VERITAS' proxy
statement relating to this meeting, such stockholder must deliver a copy of the
proposal to the Secretary of VERITAS at its principal executive offices listed
above no later than March 11, 2001, and no earlier than February 9, 2001. If,
however, the date of the 2001 annual stockholders meeting is more than 30 days
before or more than 60 days after May 10, 2001, delivery of the proposal will be
timely if received by VERITAS by the close of business not earlier than the 90th
day prior to the 2001 annual stockholders meeting and by the later of the 60th
day prior to this meeting or the 10th day following the day VERITAS publicly
announces the date of this meeting. If VERITAS does not receive the proposal
within this time frame, VERITAS management will use its discretionary authority
to vote the shares it represents by proxy as the board of directors may
recommend.
255
<PAGE> 262
LEGAL MATTERS
The validity of the shares of VERITAS common stock to be issued in
connection with the merger and offered by this document, and certain of the
United States federal income tax consequences of the merger, will be passed upon
by Willkie Farr & Gallagher, legal counsel to VERITAS. Certain of the United
States federal income tax consequences of the merger will also be passed upon by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel to Seagate.
Investment partnerships composed of members of and persons associated with
Wilson Sonsini Goodrich & Rosati have committed to make investments in Silver
Lake Partners in the amount of $5 million. These commitments were made
substantially before Wilson Sonsini Goodrich & Rosati began advising Seagate
regarding the transactions described herein.
EXPERTS
The consolidated financial statements of Seagate Technology, Inc. at June
30, 2000 and July 2, 1999, and for each of the three years in the period ended
June 30, 2000 appearing herein, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein. Such consolidated financial statements are included herein and
incorporated herein by reference in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements and schedule of VERITAS Software
Corporation at December 31, 1999 and 1998, and for each of the three years in
the period ended December 31, 1999 appearing herein, have been audited by Ernst
& Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein. Such consolidated financial statements and schedule
are included herein in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
The combined financial statements of the Network & Storage Management Group
at July 3, 1998 and June 27, 1997 and for each of the three years in the period
ended July 3, 1998 appearing herein have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein. Such combined financial statements are included herein in reliance upon
such report given on the authority of such firm as experts in accounting and
auditing.
The financial statements of TeleBackup at December 31, 1997 and 1998 and
for the years in the three year period ended December 31, 1998 have been
included in this document in reliance upon the report of KMPG LLP, independent
chartered accountants, appearing elsewhere in this document, and upon the
authority of that firm as experts in accounting and auditing.
256
<PAGE> 263
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Seagate and VERITAS file reports, proxy and information statements and
other information with the Securities and Exchange Commission. Copies of these
reports, proxy and information statements and other information may be inspected
and copied at the public reference facilities maintained by the Securities and
Exchange Commission at the following locations:
<TABLE>
<S> <C> <C>
Washington, D.C. Chicago, Illinois New York, New York
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, New York 10048
Washington, D.C. 20549 Chicago, Illinois 60661
</TABLE>
Copies of these reports, proxy and information statements and other
information can also be obtained by mail at prescribed rates from the Public
Reference Section of the Securities and Exchange Commission located at 450 Fifth
Street, N.W., Washington, D.C. 20549, or by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Securities and Exchange Commission also
maintains a website, located at http://www.sec.gov, which contains reports,
proxy and information statements and other information regarding each of Seagate
and VERITAS, including the reports, proxy and information statements and other
information incorporated by reference herein as more fully described below.
VERITAS has filed a registration statement under the Securities Act of
1933, as amended, with the Securities and Exchange Commission with respect to
the shares of VERITAS common stock to be issued to Seagate stockholders in
connection with the merger. This document constitutes the joint proxy
statement/prospectus of VERITAS filed as part of the registration statement.
This document, however, does not contain all of the information contained in the
registration statement because certain parts have been omitted in accordance
with the rules and regulations of the Securities and Exchange Commission. You
may inspect and copy the registration statement at any of the Securities and
Exchange Commission locations listed above.
Seagate, VERITAS and Suez Acquisition Company have filed a Schedule 13E-3
under the Securities and Exchange Act of 1934, as amended, in connection with
stock purchase and the merger. You may inspect and copy the Schedule 13E-3 at
any of the Securities and Exchange Commission locations listed above.
ADDITIONAL DOCUMENTS AND OTHER INFORMATION
INCORPORATED BY REFERENCE
INCORPORATION BY REFERENCE OF CERTAIN SEAGATE REPORTS, PROXY AND INFORMATION
STATEMENTS AND OTHER INFORMATION
The rules and regulations of the Securities and Exchange Commission allow
Seagate to incorporate into this document by reference certain reports, proxy
and information statements and other information, which means that important
information may be disclosed to you by Seagate by referring you to another
report, proxy or information statement or other information filed separately by
Seagate with the Securities and Exchange Commission. The reports, proxy and
information statements and other information incorporated into this document by
reference are deemed to be part of this document, except for any information
superseded by information contained in, or incorporated by reference into, this
document. This document hereby incorporates by
257
<PAGE> 264
reference the report listed below, which has been previously filed by Seagate
with the Securities and Exchange Commission, provided that any reference to any
claim of reliance on the Private Securities Litigation Reform Act's forward
looking statement safe harbor contained in such document is excluded, and is not
incorporated herein by reference. The following report contains information
about Seagate and its financial condition, results of operations and business
that are important to you, and we encourage you to read it carefully in
connection with your review of this document.
(1) Annual Report on Form 10-K, filed by Seagate with the Securities and
Exchange Commission on August 23, 2000 to report results for its fiscal
year ended June 30, 2000.
(2) Current Report on Form 8-K, filed by Seagate with the Securities and
Exchange Commission on October 18, 2000.
Seagate is also incorporating by reference all additional reports, proxy
and information statements and other information filed by Seagate with the
Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, between the date of this document and the
special meeting of stockholders of Seagate described herein.
Seagate has supplied all information contained in or incorporated by
reference in this document relating to Seagate, provided that any reference to
any claim of reliance on the Private Securities Litigation Reform Act's forward
looking statement safe harbor contained in any such document is excluded, and is
not incorporated herein by reference.
You may have been sent some of the reports, proxy and information
statements and other information incorporated by reference in this document by
Seagate, but you can also obtain any of them through the Securities and Exchange
Commission at the locations described above, or through Seagate at the following
address:
SEAGATE TECHNOLOGY, INC.
920 Disc Drive
Scotts Valley, California 95066
(831) 438-6550
If you would like to request any reports, proxy and information statements
or other information from Seagate, please do so by November 14, 2000 to receive
them before the special meeting of stockholders of Seagate described herein.
INCORPORATION BY REFERENCE OF CERTAIN VERITAS REPORTS, PROXY AND INFORMATION
STATEMENTS AND OTHER INFORMATION
The rules and regulations of the Securities and Exchange Commission allow
VERITAS to incorporate into this document by reference certain reports, proxy
and information statements and other information, which means that important
information may be disclosed to you by VERITAS by referring you to another
report, proxy or information statement or other information filed separately by
VERITAS with the Securities and Exchange Commission. The reports, proxy and
information statements and other information incorporated into this document by
reference are deemed to be part of this document, except for any information
superseded by information contained in, or incorporated by reference into, this
document. This document hereby incorporates by reference the reports, proxy and
information statements and other information listed below, which have been
previously filed by VERITAS with the Securities and Exchange Commission,
provided that any reference to any claim of reliance on the Private Securities
258
<PAGE> 265
Litigation Reform Act's forward looking statement safe harbor contained in any
such document is excluded, and is not incorporated herein by reference. The
following reports, proxy and information statements and other information
contain information about VERITAS and its financial condition, results of
operations and business that are important to you, and we encourage you to read
them carefully in connection with your review of this document.
(1) Description of VERITAS' common stock contained in Item 1 of Form 8-A, filed
with the Securities and Exchange Commission on June 2, 1999 (which Item 1
refers to the section "Description of New VERITAS Capital Stock" contained
in VERITAS' (formerly named "VERITAS Holding Corporation") Form S-4, filed
with the Securities and Exchange Commission on April 16, 1999) and any
amendments or reports filed for the purpose of updating such description.
(2) Annual Report on Form 10-K, filed by VERITAS with the Securities and
Exchange Commission on March 30, 2000, to report results for its fiscal
year ended December 31, 1999.
(3) Current Report on Form 8-K, filed by VERITAS with the Securities and
Exchange Commission on January 28, 2000.
(4) Current Report on Form 8-K, filed by VERITAS with the Securities and
Exchange Commission on April 5, 2000.
(5) Current Report on Form 8-K, filed by VERITAS with the Securities and
Exchange Commission on April 20, 2000.
(6) Quarterly Report on Form 10-Q, filed by VERITAS with the Securities and
Exchange Commission on May 12, 2000, to report results for its fiscal
quarter ended March 31, 2000.
(7) Current Report on Form 8-K, filed by VERITAS with the Securities and
Exchange Commission on May 18, 2000.
(8) Current Report on Form 8-K, filed by VERITAS with the Securities and
Exchange Commission on July 19, 2000.
(9) Quarterly Report on Form 10-Q, filed by VERITAS with the Securities and
Exchange Commission on August 11, 2000, to report results for its fiscal
quarter ended June 30, 2000.
(10) Current Report on Form 8-K, filed by VERITAS with the Securities and
Exchange Commission on October 13, 2000.
VERITAS is also incorporating by reference all additional reports, proxy
and information statements and other information filed by VERITAS with the
Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, between the date of this joint proxy
statement/prospectus and the special meeting of stockholders of VERITAS
described herein, provided that any reference to any claim of reliance on the
Private Securities Litigation Reform Act's forward looking statement safe harbor
contained in any such report, proxy or information statement is excluded, and is
not incorporated herein by reference.
VERITAS has supplied all information contained in or incorporated by
reference in this document relating to VERITAS.
259
<PAGE> 266
You may have been sent some of the reports, proxy and information
statements and other information incorporated by reference in this document by
VERITAS, but you can also obtain any of them through the Securities and Exchange
Commission at the locations described above, or through VERITAS at the following
address:
VERITAS SOFTWARE CORPORATION
1600 Plymouth Drive
Mountain View, California 94043
(650) 335-8000
If you would like to request any reports, proxy statements or other
information from VERITAS, please do so by November 14, 2000 to receive them
before the special meeting of stockholders of VERITAS described herein.
260
<PAGE> 267
CAUTIONARY STATEMENT REGARDING INFORMATION
CONTAINED IN THIS DOCUMENT
This document does not constitute an offer to sell, or a solicitation of an
offer to purchase, the VERITAS common stock or the solicitation of a proxy in
any jurisdiction to or from any person to whom or from whom it is unlawful to
make the offer, solicitation of an offer or proxy solicitation in that
jurisdiction. Neither the delivery of this document nor any distribution of
securities means, under any circumstances, that there has been no change in the
information set forth or incorporated in this document by reference or in the
affairs of Seagate or VERITAS since the date of this document.
The information contained in this document with respect to Suez Acquisition
Company was provided by Suez Acquisition Company.
261
<PAGE> 268
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SEAGATE TECHNOLOGY, INC. -- Consolidated Financial
Statements
Report of Ernst & Young LLP, Independent Auditors...... F-3
Consolidated Balance Sheets
As of June 30, 2000 and July 2, 1999................. F-4
Consolidated Statements of Operations
Years ended June 30, 2000, July 2, 1999, and July 3,
1998................................................ F-5
Consolidated Statements of Cash Flows
Years ended June 30, 2000, July 2, 1999, and July 3,
1998................................................ F-6
Consolidated Statements of Stockholders' Equity
Years ended June 30, 2000, July 2, 1999, and July 3,
1998................................................ F-7
Notes to Consolidated Financial Statements............. F-8
VERITAS SOFTWARE CORPORATION -- CONSOLIDATED FINANCIAL
STATEMENTS
Report of Ernst & Young LLP, Independent Auditors...... F-56
Consolidated Balance Sheets
As of December 31, 1999 and 1998..................... F-57
Consolidated Statements of Operations
Years Ended December 31, 1999, 1998 and 1997......... F-58
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997......... F-59
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997......... F-60
Notes to Consolidated Financial Statements............. F-61
Schedule II -- Valuation and Qualifying Accounts....... F-81
VERITAS SOFTWARE CORPORATION -- CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Condensed Consolidated Balance Sheets as of June 30,
2000.................................................. F-82
Condensed Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 2000 and
1999.................................................. F-83
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999............... F-84
Notes to Condensed Consolidated Financial Statements... F-85
NETWORK & STORAGE MANAGEMENT GROUP COMBINED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors...... F-92
Combined Balance Sheets
As of June 27, 1997, July 3, 1998 and April 2, 1999
(unaudited)......................................... F-93
Combined Statements of Operations
Years Ended June 28, 1996, June 27, 1997, July 3,
1998, and Nine Months Ended April 3, 1998, and April
2, 1999 (unaudited)................................. F-94
Combined Statements of Cash Flows
Years Ended June 28, 1996, June 27, 1997, July 3,
1998, and Nine Months Ended April 3, 1998, and April
2, 1999 (unaudited)................................. F-95
Combined Statements of Group Equity
Years Ended June 28, 1996, June 27, 1997, July 3,
1998 and Nine Months Ended April 2, 1999
(unaudited)......................................... F-96
Notes to Combined Financial Statements................. F-97
TELEBACKUP SYSTEMS INC.
Auditors' Report to the Directors...................... F-128
</TABLE>
F-1
<PAGE> 269
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Balance Sheets
As of December 31, 1997 and 1998 and March 31, 1999
(unaudited)......................................... F-129
Statements of Operations and Deficit
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999
(unaudited)......................................... F-130
Statements of Changes in Financial Position
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999
(unaudited)......................................... F-131
Notes to Financial Statements.......................... F-132
</TABLE>
F-2
<PAGE> 270
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Seagate Technology, Inc.
We have audited the accompanying consolidated balance sheets of Seagate
Technology, Inc. as of June 30, 2000 and July 2, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 2000. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Seagate Technology, Inc. at June 30, 2000 and July 2, 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 2000, in conformity with accounting standards generally
accepted in the United States.
/s/ Ernst & Young LLP
San Jose, California
July 12, 2000
F-3
<PAGE> 271
SEAGATE TECHNOLOGY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, JULY 2,
2000 1999
-------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 875 $ 396
Short-term investments...................................... 1,140 1,227
Accounts receivable, net.................................... 678 872
Inventories................................................. 430 451
Deferred income taxes....................................... 219 252
Other current assets........................................ 167 114
------ ------
Total Current Assets...................................... 3,509 3,312
------ ------
Property, equipment and leasehold improvements, net......... 1,608 1,687
Investment in VERITAS Software, net......................... 1,122 1,745
Goodwill and other intangibles, net......................... 353 144
Other assets................................................ 575 184
------ ------
Total Assets.............................................. $7,167 $7,072
====== ======
LIABILITIES
Accounts payable............................................ $ 707 $ 714
Accrued employee compensation............................... 195 205
Accrued expenses............................................ 365 414
Accrued warranty............................................ 129 163
Accrued income taxes........................................ 81 43
Current portion of long-term debt........................... 1 1
------ ------
Total Current Liabilities................................. 1,478 1,540
------ ------
Deferred income taxes....................................... 1,020 1,103
Accrued warranty............................................ 109 126
Other liabilities........................................... 10 37
Long-term debt, less current portion........................ 703 703
------ ------
Total Liabilities......................................... 3,320 3,509
------ ------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value -- 1,000,000 shares
authorized; none issued or outstanding.................... -- --
Common stock, $.01 par value -- 600,000,000 shares
authorized; shares issued -- 251,890,019 in 2000 and
1999...................................................... 3 3
Additional paid-in capital.................................. 1,960 1,991
Retained earnings........................................... 2,539 2,355
Accumulated other comprehensive income (loss)............... 86 (7)
Deferred compensation....................................... (33) (43)
Treasury common stock at cost; 22,638,025 shares in 2000 and
23,172,130 shares in 1999................................. (708) (736)
------ ------
Total Stockholders' Equity................................ 3,847 3,563
------ ------
Total Liabilities and Stockholders' Equity................ $7,167 $7,072
====== ======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 272
SEAGATE TECHNOLOGY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
----------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Revenue................................................ $6,448 $6,802 $6,819
Cost of sales.......................................... 5,194 5,250 5,830
Product development.................................... 587 581 585
Marketing and administrative........................... 515 534 502
Amortization of goodwill and other intangibles......... 51 39 40
In-process research and development.................... 105 2 223
Restructuring.......................................... 207 60 347
Unusual items.......................................... 350 78 (22)
------ ------ ------
Total Operating Expenses............................. 7,009 6,544 7,505
------ ------ ------
Income (Loss) from Operations........................ (561) 258 (686)
Interest income........................................ 101 102 98
Interest expense....................................... (52) (48) (51)
Gain on contribution of NSMG to VERITAS, net........... -- 1,670 --
Activity related to equity interest in VERITAS......... (326) (119) --
Gain on sale of VERITAS stock.......................... 537 -- --
Gain on sale of SanDisk stock.......................... 679 -- --
Gain on exchange of certain investments in equity
securities........................................... 231 -- --
Other, net............................................. -- 10 (65)
------ ------ ------
Other Income (Expense), net.......................... 1,170 1,615 (18)
Income (loss) before income taxes...................... 609 1,873 (704)
Benefit (provision) for income taxes................... (299) (697) 174
------ ------ ------
Net Income (Loss).................................... $ 310 $1,176 $ (530)
====== ====== ======
Net income (loss) per share:*
Basic................................................ $ 1.41 $ 4.99 $(2.20)
Diluted.............................................. 1.35 4.54 (2.20)
Number of shares used in per share computations:*
Basic................................................ 219.4 235.8 241.3
Diluted.............................................. 229.5 242.5 241.3
</TABLE>
-------------------------
* See (1) in Net Income Per Share note, of notes to consolidated financial
statements.
See notes to consolidated financial statements.
F-5
<PAGE> 273
SEAGATE TECHNOLOGY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................... $ 310 $ 1,176 $ (530)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................... 693 696 664
Deferred income taxes........................... (121) 661 (33)
In-process research and development............. 105 2 223
Non-cash portion of restructuring charge........ 109 35 203
Gain on contribution of NSMG to VERITAS, net.... -- (1,670) --
Activity related to equity interest in
VERITAS....................................... 326 119 --
Gain on sale of VERITAS stock................... (537) -- --
Gain on sale of SanDisk stock................... (679) -- --
Gain on exchange of certain investments in
equity securities............................. (231) -- --
Compensation expense related to SSI exchange
offer......................................... 284 -- --
Other, net...................................... 55 36 41
Changes in operating assets and liabilities:
Accounts receivable............................. 190 (114) 242
Inventories..................................... (15) 29 213
Accounts payable................................ (54) 104 (278)
Accrued expenses, employee compensation and
warranty...................................... (222) (124) (262)
Accrued income taxes............................ (154) 52 (37)
Other assets and liabilities.................... 14 198 54
------- ------- -------
Net cash provided by operating activities.......... 73 1,200 500
INVESTING ACTIVITIES
Acquisition of property, equipment and leasehold
improvements....................................... (580) (603) (709)
Purchases of short-term investments.................. (3,352) (6,596) (4,810)
Maturities and sales of short-term investments....... 3,429 6,519 4,889
Proceeds from sale of VERITAS stock.................. 834 -- --
Proceeds from sale of SanDisk stock.................. 680 -- --
Acquisitions of businesses, net of cash acquired..... -- -- (204)
Other, net........................................... (18) (26) (14)
------- ------- -------
Net cash provided by (used in) investing
activities...................................... 993 (706) (848)
FINANCING ACTIVITIES
Sale of common stock................................. 191 98 67
Purchase of treasury stock........................... (776) (859) (105)
Other, net........................................... -- -- (1)
------- ------- -------
Net cash used in financing activities.............. (585) (761) (39)
Effect of exchange rate changes on cash and cash
equivalents........................................ (2) (3) 6
------- ------- -------
Increase (decrease) in cash and cash equivalents... 479 (270) (381)
Cash and cash equivalents at the beginning of the
year............................................... 396 666 1,047
------- ------- -------
Cash and cash equivalents at the end of the year..... $ 875 $ 396 $ 666
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 274
SEAGATE TECHNOLOGY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED COMMON STOCK ADDITIONAL ACCUMULATED TREASURY
JUNE 30, 2000, JULY 2, --------------- PAID-IN RETAINED OTHER COMPRE- DEFERRED COMMON
1999, AND JULY 3, 1998 SHARES AMOUNT CAPITAL EARNINGS HENSIVE INCOME COMPENSATION STOCK TOTAL
---------------------- ------ ------ ---------- -------- -------------- ------------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 27, 1997............ 252 $3 $1,903 $1,946 $-- $(57) $(319) $3,476
Comprehensive income
Net loss.......................... (530) (530)
Unrealized gain on marketable
securities...................... 1 1
Foreign currency translation...... (1) (1)
------
Comprehensive income (loss)....... (530)
Purchase of treasury stock at
cost.............................. (105) (105)
Stock options exercised and employee
stock purchase plan............... (98) 166 68
Issuance of restricted stock, net of
cancellations..................... 6 (20) (6) 20 --
Amortization of deferred
compensation...................... 8 8
Income tax benefit from stock
options exercised................. 12 12
Other stock-based compensation...... 8 8
--- -- ------ ------ --- ---- ----- ------
Balance at July 3, 1998............. 252 3 1,929 1,298 -- (55) (238) 2,937
Comprehensive income
Net income........................ 1,176 1,176
Unrealized gain on marketable
securities...................... (6) (6)
Foreign currency translation...... (1) (1)
------
Comprehensive income.............. 1,169
Purchase of treasury stock at
cost.............................. (859) (859)
Stock options exercised and employee
stock purchase plan............... (106) 204 98
Issuance of restricted stock, net of
cancellations..................... (2) (6) 2 6 --
Amortization of deferred
compensation...................... 10 10
Income tax benefit from stock
options exercised................. 26 26
Other stock-based compensation...... 38 (7) 151 182
--- -- ------ ------ --- ---- ----- ------
Balance at July 2, 1999............. 252 3 1,991 2,355 (7) (43) (736) 3,563
Comprehensive income................
Net income........................ 310 310
Unrealized gain on marketable
securities...................... 93 93
------
Comprehensive income.............. 403
Purchase of treasury stock at
cost.............................. (776) (776)
Stock options exercised and employee
stock purchase plan............... (5) (62) 258 191
Exchange of SSI stock for SEG
stock............................. (249) (64) 324 11
Acquisition of XIOtech.............. 137 222 359
Issuance of restricted stock, net of
cancellations..................... (4) 4 --
Amortization of deferred
compensation...................... 6 6
Compensation expense related to
employee separations.............. 28 28
Income tax benefit from stock
options exercised................. 57 57
Other stock-based compensation...... 5 5
--- -- ------ ------ --- ---- ----- ------
Balance at June 30, 2000............ 252 $3 $1,960 $2,539 $86 $(33) $(708) $3,847
=== == ====== ====== === ==== ===== ======
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 275
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- Seagate Technology, Inc. (the "Company" or
"Seagate") designs, manufactures and markets products for storage, retrieval and
management of data on computer and data communications systems. The Company has
three operating segments, disc drives, software and tape drives, however, only
the disc drive and software businesses are reportable segments under the
criteria of SFAS No. 131. The Company sells its products to original equipment
manufacturers ("OEM") for inclusion in their computer systems or subsystems, and
to distributors who typically sell to small OEMs, dealers, system integrators
and other resellers.
Accounting 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 financial
statements and accompanying notes. Actual results could differ materially from
those estimates.
The actual results with regard to warranty expenditures could have a
material unfavorable impact on the Company if the actual rate of unit failure or
the cost to repair a unit is greater than what the Company has used in
estimating the warranty expense accrual.
The actual results with regard to restructuring charges could have a
material unfavorable impact on the Company if the actual expenditures to
implement the restructuring plan are greater than what the Company estimated
when establishing the restructuring accrual.
Given the volatility of the markets in which the Company participates, the
Company makes adjustments to the value of inventory based on estimates of
potentially excess and obsolete inventory after considering forecasted demand
and forecasted average selling prices. However, forecasts are subject to
revisions, cancellations, and rescheduling. Actual demand will inevitably differ
from such anticipated demand, and such differences may have a material effect on
the financial statements.
Basis of Consolidation -- The consolidated financial statements include the
accounts of the Company and its wholly-owned and majority-owned subsidiaries
after eliminations. Total outstanding minority interests are not material for
any period presented.
The Company operates and reports financial results on a fiscal year of 52
or 53 weeks ending on the Friday closest to June 30. Accordingly, fiscal 2000
ended on June 30, 2000, fiscal 1999 ended on July 2, 1999, and fiscal 1998 ended
on July 3, 1998. Fiscal year 2000 comprised 52 weeks, fiscal year 1999 comprised
52 weeks and fiscal year 1998 comprised 53 weeks. All references to years in
these notes to consolidated financial statements represent fiscal years unless
otherwise noted.
Reclassifications -- Certain amounts in prior year financial statements and
notes thereto have been reclassified to conform to current year presentation.
Foreign Currency Translation -- The U.S. dollar is the functional currency
for most of the Company's foreign operations. Gains and losses on the
translation into U.S. dollars of amounts denominated in foreign currencies are
included in net income for those operations
F-8
<PAGE> 276
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
whose functional currency is the U.S. dollar and as a separate component of
stockholders' equity for those operations whose functional currency is the local
currency.
Derivative Financial Instruments -- Seagate transacts business in various
foreign countries. Its primary currency cash flows are in emerging market
countries in Asia and in certain European countries. During 1998 and 1997,
Seagate employed a foreign currency hedging program utilizing foreign currency
forward exchange contracts and purchased currency options to hedge local
currency cash flows for payroll, inventory, other operating expenditures and
fixed asset purchases in Singapore, Thailand, Malaysia and Northern Ireland.
These local currency cash flows were designated as either firm commitments or as
anticipated transactions depending upon the contractual or legal nature of local
currency commitments in Singapore, Thailand, Malaysia and Northern Ireland.
Anticipated transactions were hedged with purchased currency options and with
foreign currency forward exchange contracts; firm commitments were hedged with
foreign currency forward exchange contracts.
The Company may enter into foreign currency forward exchange and option
contracts to manage exposure related to certain foreign currency commitments,
certain foreign currency denominated balance sheet positions and anticipated
foreign currency denominated expenditures. The Company does not enter into
derivative financial instruments for trading purposes. Foreign currency forward
exchange contracts designated and effective as hedges of firm commitments and
option contracts designated and effective as hedges of firm commitments or
anticipated transactions are treated as hedges for accounting purposes. Gains
and losses related to qualified accounting hedges of firm commitments or
anticipated transactions are deferred and are recognized in income or as
adjustments to the carrying amounts when the hedged transaction occurs. All
other foreign currency forward exchange contracts are marked-to-market and
unrealized gains and losses are included in current period net income as a
component of other income (expense).
Premiums on foreign currency option contracts used to hedge firm
commitments and anticipated transactions are amortized on a straight-line basis
over the life of the contract. Forward points on foreign currency forward
exchange contracts which qualify as hedges of firm commitments are recognized in
income as adjustments to the carrying amount when the hedged transaction occurs.
The Company may, from time to time, adjust its foreign currency hedging
position by taking out additional contracts or by terminating or offsetting
existing foreign currency forward exchange and option contracts. These
adjustments may result from changes in the Company's underlying foreign currency
exposures or from fundamental shifts in the economics of particular exchange
rates, as occurred in the first and second quarters of fiscal 1998 with respect
to the Thai baht, Malaysian ringgit and Singapore dollar. For foreign currency
forward exchange and option contracts qualifying as accounting hedges, gains or
losses on terminated contracts and offsetting contracts are deferred and are
recognized in income as adjustments to the carrying amount of the hedged item in
the period the hedged transaction occurs. For foreign currency forward exchange
and option contracts not qualifying as accounting hedges, gains and losses on
terminated contracts, or on contracts that are offset, are recognized in income
in the period of contract termination or offset.
F-9
<PAGE> 277
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition and Product Warranty -- Revenue from sales of products
is recognized when persuasive evidence of an arrangement exists including a
fixed price to the buyer, delivery has occurred, and collectibility is
reasonably assured. Estimated product returns are provided for in accordance
with SFAS 48. The Company warrants its products against defects in design,
materials and workmanship generally for two to five years depending upon the
capacity category of the disc drive, with the higher capacity products being
warranted for the longer periods. A provision for estimated future costs
relating to warranty expense is recorded when revenue is recorded.
The Company's software revenue is primarily derived from the sale of
product licenses, software maintenance, technical support, training and
consulting. During the first quarter of fiscal 1999, the Company began
recognizing license revenue in accordance with the American Institute of
Certified Public Accountant's Statement of Position 97-2, "Software Revenue
Recognition." Revenue from software license agreements is primarily recognized
at the time of product delivery, provided that fees are fixed or determinable,
evidence of an arrangement exists, collectibility is probable and the Company
has vendor-specific objective evidence of fair value. Revenue from resellers,
including VARs, OEMs and distributors, are primarily recognized at the time of
product delivery to the reseller. The Company's policy is to defer such revenue
if resale contingencies exist. Some of the factors that are considered to
determine the existence of such contingencies include payment terms,
collectibility and past history with the customer. Product returns are reserved
for in accordance with SFAS 48. Such returns are estimated based on historical
return rates. The Company considers other factors such as fixed and determinable
fees, resale contingencies, arms length contract terms and the ability to
reasonably estimate returns to ensure compliance with SFAS 48. Service revenue
from customer maintenance fees for ongoing customer support and product updates
is recognized ratably over the maintenance term, which is typically 12 months.
Service revenue from training and consulting is recognized when such services
are performed.
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. The Company
implemented the provisions of SOP 98-9 during its fiscal year ending June 30,
2000. The adoption of this pronouncement did not have a material impact on the
Company's financial statements and results of operations.
Inventory -- Inventories are valued at the lower of standard cost (which
approximates actual cost using the first-in, first-out method) or market. Market
value is based upon an estimated average selling price reduced by normal gross
margins.
Property, Equipment, and Leasehold Improvements -- Land, equipment,
buildings and leasehold improvements are stated at cost. Equipment and buildings
are depreciated using the straight-line method over the estimated useful lives
of the assets. Leasehold improvements are amortized using the straight-line
method over the shorter of the estimated life of the asset or the remaining term
of the lease.
Advertising Expense -- The cost of advertising is expensed as incurred.
Advertising costs were $21 million, $56 million and $68 million in 2000, 1999
and 1998, respectively.
F-10
<PAGE> 278
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock-Based Compensation -- The Company accounts for employee stock-based
compensation under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APBO 25") and related interpretations. Pro forma
net income and net income per share are disclosures required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and are included in the Stock-Based Benefit
Plans - Pro Forma Information note to the consolidated financial statements.
Impact of Recently Issued Accounting Standards -- Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") is effective for all fiscal quarters beginning after
June 15, 2000 and will be adopted by the Company in its fiscal year 2001. This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that derivatives be
recognized in the balance sheet at fair value and specifies the accounting for
changes in fair value. The Company is still assessing the impact of the adoption
of SFAS 133 on its financial statements and related results.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("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 Company is still assessing
the impact of SAB 101 on its consolidated results of operations, financial
position and cash flows. The Company is required to adopt SAB 101 in the fourth
quarter of fiscal 2001, retroactive to the beginning of the year.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation -- an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues, clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of the previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000. The Company is still assessing the impact of FIN 44 on
its consolidated results of operations, financial position, and cash flows.
Cash, Cash Equivalents and Short-Term Investments -- The Company considers
all highly liquid investments with a remaining maturity of 90 days or less at
the time of purchase to be cash equivalents. Cash equivalents are carried at
cost, which approximates fair value. The Company's short-term investments
primarily comprise readily marketable debt securities with remaining maturities
of more than 90 days at the time of purchase. The Company has classified its
entire investment portfolio as available-for-sale. Available-for-sale securities
are classified as cash equivalents or short-term investments and are stated at
fair value with unrealized gains and losses included in accumulated other
comprehensive income which is a component of stockholders' equity. The amortized
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity. Such amortization and accretion are included in
interest income. Realized gains and losses are included in other income
(expense). The cost of securities sold is based on the specific identification
method.
F-11
<PAGE> 279
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Equity Investments -- The Company enters into certain equity investments
for the promotion of business and strategic objectives, and typically does not
attempt to reduce or eliminate the inherent market risks on these investments.
Both marketable and non-marketable investments are included in other assets. A
substantial majority of the Company's marketable investments are classified as
available-for-sale as of the balance sheet date and are reported at fair value,
with unrealized gains and losses, net of tax, recorded in stockholders' equity.
The cost of securities sold is based on the specific identification method.
Realized gains or losses and declines in value, if any, judged to be other than
temporary on available-for-sale securities are reported in other income or
expense. Non-marketable investments are recorded at cost.
Concentration of Credit Risk -- The Company's customer base for disc drive
products is concentrated with a small number of systems manufacturers and
distributors. Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily accounts receivable, cash
equivalents and short-term investments. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The allowance for noncollection of accounts
receivable is based upon the expected collectibility of all accounts receivable.
The Company places its cash equivalents and short-term investments in investment
grade, short-term debt instruments and limits the amount of credit exposure to
any one commercial issuer.
Supplier Concentration -- Certain of the raw materials used by the Company
in the manufacture of its products are available from a limited number of
suppliers. Shortages could occur in these essential materials due to an
interruption of supply or increased demand in the industry. For example, all of
the Company's disc drive products require ASIC chips which are produced by a
limited number of manufacturers. During the fourth quarter of fiscal 2000 the
Company experienced shortages and delays with regards to receipt of such chips
and expects similar delays and shortages to continue in fiscal 2001. If the
Company were unable to procure certain of such materials, it would be required
to reduce its manufacturing operations which could have a material adverse
effect upon its results of operations.
F-12
<PAGE> 280
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FINANCIAL INSTRUMENTS
The following is a summary of the fair value of available-for-sale
securities at June 30, 2000:
<TABLE>
<CAPTION>
AMORTIZED GROSS GROSS
COST UNREALIZED GAIN UNREALIZED LOSS FAIR VALUE
--------- --------------- --------------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Money market mutual funds....... $ 266 $ -- $ -- $ 266
U.S. government and agency
obligations................... 323 -- (6) 317
Repurchase agreements........... 16 -- -- 16
Auction rate preferred stock.... 374 -- -- 374
Municipal bonds................. 1 -- -- 1
Corporate securities............ 733 -- (2) 731
Mortgage-backed and asset-backed
securities.................... 218 -- (4) 214
Euro/Yankee time deposits....... 12 -- -- 12
------ ---- ----- ------
Subtotal........................ 1,943 -- (12) 1,931
Marketable equity securities*... 334 471 (376) 429
------ ---- ----- ------
Total available-for-sale
securities.................... $2,277 $471 $(388) $2,360
====== ==== ===== ======
Included in other assets........ $ 429
Included in cash and cash
equivalents................... 791
Included in short-term
investments................... 1,140
------
$2,360
======
</TABLE>
-------------------------
* No such similar amounts were recorded in fiscal 1999.
F-13
<PAGE> 281
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of the fair value of available-for-sale
securities at
July 2, 1999:
<TABLE>
<CAPTION>
AMORTIZED GROSS
COST UNREALIZED LOSS FAIR VALUE
--------- --------------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Money market mutual funds................ $ 74 $-- $ 74
U.S. government and agency obligations... 314 (4) 310
Repurchase agreements.................... -- -- --
Auction rate preferred stock............. 222 -- 222
Municipal bonds.......................... 109 -- 109
Corporate securities..................... 515 (1) 514
Mortgage-backed and asset-backed
securities............................. 302 (2) 300
Euro/Yankee time deposits................ 48 -- 48
------ --- ------
$1,584 $(7) $1,577
====== === ======
Included in cash and cash equivalents.... $ 350
Included in short-term investments....... 1,227
------
$1,577
======
</TABLE>
The fair value of the Company's investment in debt securities, by
contractual maturity, is as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000 JULY 2, 1999
------------- ------------
(IN MILLIONS)
<S> <C> <C>
Due in less than 1 year.............................. $ 939 $ 486
Due in 1 to 3 years.................................. 352 794
------ ------
$1,291 $1,280
====== ======
</TABLE>
Fair Value Disclosures -- The carrying value of cash and cash equivalents
approximates fair value. The fair values of short-term investments, notes,
debentures (see Long-Term Debt and Lines of Credit footnote) and foreign
currency forward exchange and option contracts are estimated based on quoted
market prices.
The carrying values and fair values of the Company's financial instruments
are as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000 JULY 2, 1999
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Cash equivalents.................... $ 791 $ 791 $ 350 $ 350
Short-term investments.............. 1,140 1,140 1,227 1,227
Marketable equity securities........ 429 429 -- --
7.125% senior notes, due 2004....... (200) (187) (200) (194)
7.37% senior notes, due 2007........ (200) (180) (200) (189)
7.45% senior debentures, due 2037... (200) (177) (200) (188)
7.875% senior debentures, due
2017.............................. (100) (85) (100) (92)
</TABLE>
F-14
<PAGE> 282
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Derivative Financial Instruments -- The Company may enter into foreign
currency forward exchange and option contracts to manage exposure related to
certain foreign currency commitments, certain foreign currency denominated
balance sheet positions and anticipated foreign currency denominated
expenditures. The Company does not enter into derivative financial instruments
for trading purposes. Based on uncertainty in the Southeast Asian foreign
currency markets, beginning in the second quarter of 1998 the Company
temporarily suspended its hedging program. At July 3, 1998, the Company had
effectively closed out all of its foreign currency forward exchange contracts by
purchasing offsetting contracts. As of June 30, 2000, the Company had no
outstanding foreign currency forward exchange or purchased currency option
contracts.
Net foreign currency transaction gains and losses included in the
determination of net income (loss) were a gain of $1 million for fiscal 2000 and
losses of $1 million and $252 million for fiscal 1999, and fiscal 1998,
respectively. The Company transacts business in various foreign countries. Its
primary foreign currency cash flows are in emerging market countries in Asia and
in certain European countries. During fiscal 1998, the Company employed a
foreign currency hedging program utilizing foreign currency forward exchange
contracts and purchased currency options to hedge local currency cash flows for
payroll, inventory, other operating expenditures and fixed asset purchases in
Singapore, Thailand and Malaysia. During fiscal 1998 the Singapore dollar, Thai
baht, and Malaysian ringgit declined in value relative to the U.S. dollar. The
transaction loss of $252 million for fiscal 1998 primarily included losses
incurred on closing out these foreign currency forward exchange contracts.
ACCOUNTS RECEIVABLE
Accounts receivable are summarized below:
<TABLE>
<CAPTION>
2000 1999
----- -----
(IN MILLIONS)
<S> <C> <C>
Accounts receivable......................................... $752 $925
Less allowance for noncollection............................ (74) (53)
---- ----
$678 $872
==== ====
</TABLE>
INVENTORIES
Inventories are summarized below:
<TABLE>
<CAPTION>
2000 1999
----- -----
(IN MILLIONS)
<S> <C> <C>
Components.................................................. $142 $143
Work-in-process............................................. 51 54
Finished goods.............................................. 237 254
---- ----
$430 $451
==== ====
</TABLE>
F-15
<PAGE> 283
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED USEFUL LIFE 2000 1999
---------------------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Land................................. $ 48 $ 40
Equipment............................ 3-4 years 2,472 2,365
Building and leasehold
improvements....................... Life of lease-30 years 982 932
Construction in progress............. 252 196
------- -------
3,754 3,533
Less accumulated depreciation and
amortization....................... (2,146) (1,846)
------- -------
$ 1,608 $ 1,687
======= =======
</TABLE>
Equipment and leasehold improvements include assets under capitalized
leases. Amortization of leasehold improvements is included in depreciation
expense. Depreciation expense was $597 million, $574 million and $549 million in
2000, 1999 and 1998, respectively.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of the purchase price of acquired companies
over the estimated fair value of the tangible and specifically identified
intangible net assets acquired. Other intangible assets consist of trademarks,
assembled workforces, distribution networks, developed technology, and customer
bases related to acquisitions accounted for by the purchase method. Amortization
of purchased intangibles, other than acquired developed technology, is provided
on the straight-line basis over the respective useful lives of the assets
ranging from 36 to 60 months for trademarks, 24 to 48 months for assembled
workforces and distribution networks, and 12 to 36 months for customer bases.
In-process research and development without alternative future use is expensed
when acquired.
In accordance with SFAS 121, the carrying value of other intangibles and
related goodwill is reviewed if the facts and circumstances suggest that they
may be permanently impaired. If this review indicates these assets' carrying
value will not be recoverable, as determined based on the undiscounted net cash
flows of the entity acquired over the remaining amortization period, the
Company's carrying value is reduced to its estimated fair value, first by
reducing goodwill, and second by reducing long-term assets and other intangibles
(generally based on an estimate of discounted future net cash flows). Goodwill
and other intangibles are being amortized on a straight-line basis over periods
ranging from two to fifteen years. Accumulated amortization was $205 million and
$177 million as of June 30, 2000 and July 2, 1999, respectively.
DEVELOPED TECHNOLOGY
The Company applies Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed" ("SFAS 86"), to software technologies developed internally, acquired
in business acquisitions, and purchased.
F-16
<PAGE> 284
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Internal development costs are included in research and development and are
expensed as incurred. SFAS 86 requires the capitalization of certain internal
development costs once technological feasibility is established, which based on
the Company's development process generally occurs upon the completion of a
working model. As the time period between the completion of a working model and
the general availability of software has been short, capitalization of internal
development costs has not been material to date. As of June 30, 2000 there are
no capitalized internal development costs remaining on the Company's balance
sheet. Capitalized costs are amortized based on the greater of the straight-line
basis over the estimated product life or the ratio of current revenue to the
total of current and anticipated future revenue.
Purchased developed technology is amortized based on the greater of the
straight-line basis over the estimated useful life (30 to 48 months) or the
ratio of current revenue to the total of current and anticipated future revenue.
The recoverability of the carrying value of purchased developed technology is
reviewed periodically. The carrying value of developed technology is compared to
the estimated future gross revenue from that product reduced by the estimated
future costs of completing and disposing of that product, including the costs of
performing maintenance and customer support (net undiscounted cash flows) and to
the extent that the carrying value exceeds the undiscounted cash flows the
difference is written off.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on capitalization of the costs incurred for computer software developed
or obtained for internal use. It also provides guidance for determining whether
computer software is internal-use software and on accounting for the proceeds of
computer software originally developed or obtained for internal use and then
subsequently sold to the public. SOP 98-1 was adopted by the Company in fiscal
2000 and the adoption of this statement did not have a material impact on its
financial statements.
LONG-TERM DEBT AND LINES OF CREDIT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
2000 1999
----- -----
(IN MILLIONS)
<S> <C> <C>
7.125% senior notes, due 2004............................... $200 $200
7.37% senior notes, due 2007................................ 200 200
7.45% senior debentures, due 2037........................... 200 200
7.875% senior debentures, due 2017.......................... 100 100
Capitalized lease obligations with interest at 14% to 19.25%
collateralized by certain manufacturing equipment and
buildings................................................. 4 4
---- ----
704 704
Less current portion........................................ 1 1
---- ----
$703 $703
==== ====
</TABLE>
F-17
<PAGE> 285
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At June 30, 2000, future minimum principal payments on long-term debt and
capital lease obligations were as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
2001....................................... $ 1
2002....................................... 1
2003....................................... 1
2004....................................... 201
2005....................................... --
After 2005................................. 500
----
$704
====
</TABLE>
The Company's 7.125% senior notes due 2004, 7.37% senior notes due 2007 and
7.875% senior debentures due 2017 are redeemable at the option of the Company at
any time, at a redemption price equal to the greater of (i) 100% of their
principal amount plus accrued interest or (ii) the sum of the present values of
the remaining scheduled payments of principal and interest discounted to the
date of redemption at a discount rate (the "discount rate") as set forth in the
indenture governing the notes and debentures plus 10 basis points. The Company's
7.45% senior debentures due 2037 are redeemable at the option of the Company at
any time, at a redemption price equal to the greater of (i) 100% of their
principal amount plus accrued interest, (ii) the sum of the present values of
the remaining scheduled payments of principal and interest discounted to the
date of redemption at the discount rate plus 10 basis points, calculated as if
the principal amount were payable in full on March 1, 2009, or (iii) the sum of
the present values of the remaining scheduled payments of principal and interest
discounted to the date of redemption at the discount rate plus 10 basis points.
In addition, the Company's 7.45% senior debentures due 2037 will be redeemable
on March 1, 2009, at the option of the holders thereof, at 100% of their
principal amount, together with interest payable to the date of redemption. The
Company's 7.125% senior notes due 2004, 7.37% senior notes due 2007 and 7.875%
senior debentures due 2017 will not be redeemable at the option of the holders
thereof prior to maturity. These securities were issued in February 1997 in an
offering registered under the Securities Act of 1933, as amended.
As of June 30, 2000, the Company had committed lines of credit of $86
million that can be used for standby letters of credit or bankers' guarantees.
At June 30, 2000, $57 million of these lines of credit were utilized. In
addition, the Company has a $300 million credit facility that can be used for
borrowings. As of June 30, 2000, this facility was unutilized.
F-18
<PAGE> 286
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
--------------------------------------
JUNE 30, JULY 2, JULY 3,
2000 1999 1998
---------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Basic Net Income (Loss) Per Share Computation
Numerator:
Net income (loss)............................... $ 310 $1,176 $ (530)
------ ------ ------
Denominator:
Weighted average number of common shares
outstanding during the period(1)............. 219.4 235.8 241.3
------ ------ ------
Basic net income (loss) per share(1).............. $ 1.41 $ 4.99 $(2.20)
====== ====== ======
Diluted Net Income (Loss) Per Share Computation
Numerator:
Net income (loss)............................... $ 310 $1,176 $ (530)
Adjustment to net income for dilutive effect of
subsidiary Seagate Software, Inc.'s
outstanding stock options.................... -- (75) --
------ ------ ------
Total................................... $ 310 $1,101 $ (530)
------ ------ ------
Denominator:
Weighted average number of common shares
outstanding during the period(1)............. 219.4 235.8 241.3
Incremental common shares attributable to
exercise of outstanding options (assuming
proceeds would be used to purchase treasury
stock and restricted stock outstanding)(1)... 10.1 6.7 --
------ ------ ------
Total(1)................................ 229.5 242.5 241.3
------ ------ ------
Diluted net income (loss) per share(1)............ $ 1.35 $ 4.54 $(2.20)
====== ====== ======
</TABLE>
-------------------------
(1) Prior to fiscal 2000, weighted average outstanding shares used to compute
basic net income (loss) per share have been amended to exclude the effects
of restricted shares outstanding. The result of doing so was to increase
basic net income per share in fiscal 1999 by $0.05 and basic net loss per
share in 1998 by $(0.03). Prior to fiscal 2000, diluted net income (loss)
per share has been amended to include the incremental effects of restricted
shares using the modified treasury stock method. The result of doing so was
to increase diluted net income per share in fiscal 1999 by $0.01 and diluted
net loss per share in fiscal 1998 by $(0.03).
Options to purchase 1.3 million, 6.2 million, and 9.7 million shares of
common stock were outstanding during fiscal 2000, 1999, and 1998, respectively,
but were not included in the computation of diluted net income per share because
the options' exercise price was greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.
F-19
<PAGE> 287
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPENSATION
Tax-Deferred Savings Plan
The Company has a tax-deferred savings plan, the Seagate Technology, Inc.
Savings and Investment Plan ("the 40l(k) plan"), for the benefit of qualified
employees. The 40l(k) plan is designed to provide employees with an accumulation
of funds at retirement. Qualified employees may elect to make contributions to
the 401(k) plan on a monthly basis. The Company may make annual contributions to
the 401(k) plan at the discretion of the Board of Directors. During the fiscal
years ended June 30, 2000 and July 2, 1999, the Company made contributions
totaling approximately $14 million to the 401(k) plan in each year. No material
contributions were made by the Company during fiscal year 1998.
Stock-Based Benefit Plans
Stock Option Plans -- Options granted under the Company's stock option
plans are granted at fair market value, expire ten years from the date of the
grant and generally vest in four equal annual installments, commencing one year
from the date of the grant.
Following is a summary of stock option activity for the three years ended
June 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
(SHARES IN MILLIONS)
<S> <C> <C>
Balance June 27, 1997............................... 22.0 $22.92
Granted............................................. 18.3 27.10
Exercised........................................... (2.4) 13.34
Canceled............................................ (11.9) 32.62
-----
Balance July 3, 1998................................ 26.0 22.30
Granted............................................. 14.1 23.98
Exercised........................................... (4.3) 15.15
Canceled............................................ (1.9) 25.49
-----
Balance July 2, 1999................................ 33.9 23.73
Granted............................................. 8.3 30.97
Exercised........................................... (7.3) 21.48
Canceled............................................ (2.0) 26.12
-----
Balance June 30, 2000............................... 32.9 $25.80
=====
</TABLE>
In fiscal 1998, the Company offered to all optionees below the level of
Senior Vice President, who held options with an exercise price higher than the
prevailing fair market value of the Company's common stock the right to exchange
their options for new options exercisable at such fair market value. In
connection with this transaction, 8.4 million options were exchanged. The number
of options shown as granted and canceled in the above table reflects this
exchange of options. Such options had a weighted average exercise price before
repricing of $34.20 and the new options were granted at a weighted average price
of $24.45.
F-20
<PAGE> 288
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Options available for grant were 13.0 million at June 30, 2000; 5.0 million
at July 2, 1999; and 13.6 million at July 3, 1998. On October 30, 1997, the
stockholders approved an amendment to the 1991 Incentive Stock Option Plan to
increase the number of shares of common stock reserved for issuance thereunder
by 15 million.
The following table summarizes information about options outstanding at
June 30, 2000.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
----------------------------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER AVERAGE
EXERCISE PRICES OF SHARES (IN YEARS) EXERCISE PRICE OF SHARES EXERCISE PRICE
--------------- --------- ---------------- ---------------- --------- --------------
(SHARES IN MILLIONS)
<S> <C> <C> <C> <C> <C>
$ .00 - $ 6.38 0.7 4.01 $ 4.33 0.6 $ 4.86
6.63 - 20.38 5.8 7.02 18.16 1.6 12.17
20.50 - 28.94 19.9 7.71 27.74 8.1 24.42
29.00 - 47.75 5.9 8.28 35.71 1.8 35.38
47.88 - 71.75 0.6 9.61 62.31 -- 51.47
---- ---- ------ ---- ------
$ .00 - $71.75 32.9 7.64 $25.78 12.1 $23.57
</TABLE>
On March 4, 1998, the Board of Directors approved the adoption of the 1998
Nonstatutory Stock Option Plan and the reservation of 3.5 million shares of
common stock for issuance thereunder.
Executive Stock Plan -- The Company has an Executive Stock Plan under which
senior executives of the Company are granted the right to purchase shares of the
Company's common stock at $.01 per share. The difference between the fair market
value of the shares on the measurement date and the exercise price is recorded
as deferred compensation and is charged to operations over the vesting period of
four to seven years. The Company has the right to repurchase the restricted
stock from an executive upon his or her voluntary or involuntary termination of
employment with the Company for any reason at the same price paid by the
executive. If an executive voluntarily resigns at or above age 65, the Company
may release from the repurchase option, or if his or her employment terminates
as a result of death, disability, termination by the Company other than for
cause or constructive termination within the two-year period following a change
of control, the Company will release from the repurchase option a pro rata
number of shares based on the number of months that have passed since the grant
date divided by the
F-21
<PAGE> 289
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
number of months in the vesting period. The following is a summary of restricted
stock activity under the Executive Stock Plan for the three years ended June 30,
2000:
<TABLE>
<CAPTION>
RESTRICTED SHARES OUTSTANDING
-----------------------------
(SHARES IN THOUSANDS)
<S> <C>
Balance June 27, 1997......................... 2,185
Granted..................................... 454
Repurchased................................. (254)
Released from restrictions.................. (44)
-----
Balance July 3, 1998.......................... 2,341
Granted..................................... 145
Repurchased................................. (216)
Released from restrictions.................. (357)
-----
Balance July 2, 1999.......................... 1,913
Granted..................................... 30
Repurchased................................. (135)
Released from restrictions.................. (53)
-----
Balance June 30, 2000......................... 1,755
=====
</TABLE>
At June 30, 2000, 291,000 shares were available for future grants. In
addition, the Company has a Restricted Stock Plan which also has a deferred
compensation component. Under this plan the deferred compensation is amortized
over a period of seven years. There are two employees remaining in the plan and
no shares are available for future grant. The aggregate amount charged to
operations for amortization of deferred compensation under both plans was $6
million, $10 million, and $8 million in 2000, 1999 and 1998, respectively.
Stock Purchase Plan -- The Company also maintains an Employee Stock
Purchase Plan. A total of 19,600,000 shares of common stock have been authorized
for issuance under the Purchase Plan. The Purchase Plan permits eligible
employees who have completed thirty days of employment prior to the inception of
the offering period to purchase common stock through payroll deductions
generally at the lower of 85% of the fair market value of the common stock at
the beginning or at the end of each six-month offering period. Under the plan,
1,515,000; 1,604,000; and 1,348,000 shares of common stock were issued from
treasury shares in fiscal 2000, 1999, and 1998, respectively.
Common stock reserved for future issuance under the Company's Employee
Stock Purchase Plan aggregated 4,307,000 shares at June 30, 2000.
Treasury Shares -- During fiscal 2000, 1999, and 1998, the Company
repurchased 25 million, 27 million, and 4 million shares of common stock at an
average price of $30.76, $31.82, and $28.31 per share, respectively.
Pro Forma Information -- The Company has elected to follow APBO 25 and
related interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options. Under
F-22
<PAGE> 290
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APBO 25, the Company generally recognized no compensation expense with respect
to such options.
Pro forma information regarding net income and earnings per share is
required by SFAS 123 for stock options granted after June 30, 1995 as if the
Company had accounted for its stock options under the fair value method of SFAS
123. The fair value of the Company's stock options was estimated using a
Black-Scholes option valuation model. The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options which have
no vesting restrictions and are fully transferable. In addition, the
Black-Scholes model requires the input of highly subjective assumptions,
including the expected stock price volatility. Because the Company's stock
options granted to employees have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options granted to employees.
The fair value of the Company's stock options granted to employees was
estimated assuming no expected dividends and the following weighted average
assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Stock Option Plan Shares
Expected life (in years)................................ 3.9 3.8 3.2
Risk-free interest rate................................. 6.0% 5.3% 5.5%
Volatility.............................................. .60 .56 .45
Employee Stock Purchase Plan Shares
Expected life (in years)................................ .5 .5 .6
Risk-free interest rate................................. 5.9% 4.6% 5.5%
Volatility.............................................. .78 .68 .63
</TABLE>
The weighted average fair value of stock options granted under the Company's
Stock Option Plans was $16.66, $11.09, and $10.05 per share in 2000, 1999, and
1998, respectively. The weighted average fair value of shares granted under the
Company's Employee Stock Purchase Plan was $11.47, $10.18, and $12.03 per share
in fiscal 2000, 1999, and 1998, respectively. The weighted average purchase
price of shares granted under the Company's Employee Stock Purchase Plan was
$23.38, $22.72, and $26.99 per share in 2000, 1999, and 1998, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period (for stock options) and
the six month purchase period for stock purchases under the Stock Purchase Plan.
The Company's pro forma information follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Pro forma net income (loss)....................... $ 217 $1,018 $ (600)
Pro forma basic net income (loss) per share....... 0.99 4.64 (2.49)
Pro forma diluted net income (loss) per share..... 0.96 4.29 (2.49)
</TABLE>
The effects on pro forma disclosures of applying SFAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
Because SFAS 123 is
F-23
<PAGE> 291
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
applicable only to options granted subsequent to June 30, 1995, the pro forma
effect was not fully reflected in fiscal years prior to 1999.
Post-Retirement Health Care Plan
In fiscal 2000, the Company adopted a post-retirement health care plan
which offers medical coverage to eligible U.S. retirees and their eligible
dependents. Substantially all U.S. employees become eligible for these benefits
after 15 years of service and attaining age 60 and older.
The following table provides a reconciliation of the changes in the
post-retirement health care plan's benefit obligation and a statement of the
funded status as of June 30, 2000 (in millions):
<TABLE>
<S> <C>
Change in Benefit Obligation
Benefit obligation at beginning of year..................... $ --
Service cost................................................ 4
Amortization of unrecognized prior service cost............. 2
----
Benefit obligation at end of year........................... $ 6
====
Funded Status of the Plan
Fair value of plan assets at end of year.................... $ --
Unrecognized prior service cost............................. (22)
Accrued benefit liability recognized in the balance sheet at
June 30, 2000............................................. (6)
----
Accrued benefit cost........................................ $(28)
====
</TABLE>
Net periodic benefit cost for the year ended June 30, 2000 was as follows
(in millions):
<TABLE>
<S> <C>
Service cost................................................ $ 2
Interest cost............................................... 2
Amortization of prior service cost.......................... 2
---
Net periodic benefit cost................................... $ 6
===
</TABLE>
Weighted-Average Actuarial Assumptions
A discount rate of 7.0% was used in the determination of the accumulated
benefit obligation.
The Company's future medical benefit costs were estimated to increase at an
annual rate of 10% during 2000, decreasing to an annual growth rate of 5% in
2010 and thereafter. The Company's cost is capped at 200% of the fiscal 1999
employer cost and, therefore, will not be subject to medical trends after the
capped cost is attained. A 1% change in these annual trend rates would not have
a significant impact on the accumulated post-retirement benefit obligation at
June 30, 2000, or 2000 benefit expense. Claims are paid as incurred.
F-24
<PAGE> 292
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
The provision for (benefit from) income taxes consisted of the following:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- -----
(IN MILLIONS)
<S> <C> <C> <C>
Current Tax Expense (Benefit)
Federal.............................................. $367 $ 20 $(157)
State................................................ 50 1 --
Foreign.............................................. 3 15 16
---- ---- -----
420 36 (141)
---- ---- -----
Deferred Tax Expense (Benefit)
Federal.............................................. (121) 573 (19)
State................................................ -- 86 (20)
Foreign.............................................. -- 2 6
---- ---- -----
(121) 661 (33)
---- ---- -----
Provision for (Benefit from) Income Taxes.............. $299 $697 $(174)
==== ==== =====
</TABLE>
The income tax benefit related to the exercise of stock options reduces
taxes currently payable and is credited to additional paid-in capital. Such
amounts approximated $57 million, $26 million, and $12 million for fiscal 2000,
1999, and 1998, respectively.
Income (loss) before income taxes consisted of the following:
<TABLE>
<CAPTION>
2000 1999 1998
---- ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Domestic.............................................. $526 $1,547 $(778)
Foreign............................................... 83 326 74
---- ------ -----
$609 $1,873 $(704)
==== ====== =====
</TABLE>
F-25
<PAGE> 293
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
JUNE 30, JULY 2,
2000 1999
-------- -------
(IN MILLIONS)
<S> <C> <C>
DEFERRED TAX ASSETS
Accrued warranty........................................... $ 97 $ 114
Inventory valuation accounts............................... 35 31
Receivable reserves........................................ 26 28
Accrued compensation and benefits.......................... 45 31
Depreciation............................................... 20 32
Restructuring reserves..................................... 27 17
Other reserves and accruals................................ 28 42
Acquisition related items.................................. 32 38
Net operating loss and tax credit carry-forwards........... 5 69
Other assets............................................... 13 3
------- -------
Total Deferred Tax Assets........................ 328 405
Valuation allowance........................................ (38) (56)
------- -------
Net Deferred Tax Assets.......................... 290 349
------- -------
DEFERRED TAX LIABILITIES
Unremitted income of foreign subsidiaries.................. (543) (558)
Acquisition related items.................................. (170) (14)
Deferred gain on VERITAS................................... (378) (615)
Other liabilities.......................................... -- (13)
------- -------
Total Deferred Tax Liabilities................... (1,091) (1,200)
------- -------
Net Deferred Tax Liabilities..................... $ (801) $ (851)
======= =======
AS REPORTED ON THE BALANCE SHEET
Deferred Income Tax Assets................................. $ 219 $ 252
Deferred Income Tax Liabilities............................ (1,020) (1,103)
------- -------
Net Deferred Tax Liability....................... $ (801) $ (851)
======= =======
</TABLE>
The valuation allowance has been provided for deferred tax assets related
to certain foreign net operating loss carry-forwards, foreign tax credit
carry-forwards and future tax benefits associated with the acquisition of
certain software companies. The valuation allowance decreased by $18 million and
$26 million in 2000 and 1999, respectively, and increased by $25 million in
1998.
The Company, as of June 30, 2000, has foreign net operating loss
carry-forwards of approximately $5 million.
F-26
<PAGE> 294
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The differences between the provision for (benefit from) income taxes at
the U.S. statutory rate and the effective rate are summarized as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- -----
(IN MILLIONS)
<S> <C> <C> <C>
Provision (benefit) at U.S. statutory rate............. $213 $656 $(246)
State income tax provision (benefit), net of federal
income tax benefit................................... 33 72 (15)
Benefit from net earnings of foreign subsidiaries
considered to be permanently invested in non-U.S.
operations........................................... -- (68) --
Write-off of in-process research and development....... 37 21 75
Compensation expense SSI exchange offer................ 62 -- --
VERITAS................................................ (6) (10) --
Valuation reserve...................................... (18) 17 25
Use of R&D credit carryforwards........................ (17) -- --
Other individually immaterial items.................... (5) 9 (13)
---- ---- -----
Provision for (benefit from) income taxes.............. $299 $697 $(174)
==== ==== =====
</TABLE>
A substantial portion of the Company's Asia Pacific manufacturing
operations in Singapore, Thailand, Malaysia and China operate under various tax
holidays which expire in whole or in part during fiscal years 2001 through 2010.
Certain tax holidays may be extended if specific conditions are met. The tax
holidays had no impact on net income in 2000. The net impact of these tax
holidays was to increase net income by approximately $35 million ($.14 per
share, diluted) in 1999. The tax holidays had no impact on the net loss in 1998.
Cumulative undistributed earnings of the Company's Asia Pacific subsidiaries for
which no income taxes have been provided aggregated approximately $1.634 billion
at June 30, 2000. These earnings are considered to be permanently invested in
non-U.S. operations. Additional federal and state taxes of approximately $585
million would have to be provided if these earnings were repatriated to the U.S.
During fiscal 2000, the Company settled a number of the disputed tax
matters reflected in the statutory notices of deficiencies dated June 27, 1997
and June 12, 1998 that were received from the Internal Revenue Service relative
to Seagate Technology, Inc.'s taxable years 1991 through 1993 and Conner
Peripherals, Inc.'s taxable years 1991 and 1992, respectively. The Company
believes that it has meritorious defenses against the remaining asserted
deficiencies and that the likely outcome of a re-determination of these asserted
deficiencies by the United States Tax Court will not result in an additional
provision for income taxes.
Certain of the Company's foreign and state tax returns for various fiscal
years are under examination by taxing authorities. The Company believes that
adequate amounts of tax have been provided for any final assessments which may
result from these examinations.
BUSINESS COMBINATIONS
The Company has a history of business combinations and during the three
most recent fiscal years these included the acquisition of XIOtech Corporation
in fiscal 2000,
F-27
<PAGE> 295
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the contribution of NSMG to VERITAS in fiscal 1999, and the acquisition of
Quinta Corporation and Eastman Storage Software Management Group in fiscal 1998.
In connection with certain business combinations, the Company has recognized
significant write-offs of in-process research and development. The completion of
the underlying in-process projects acquired within each business combination was
the most significant and uncertain assumption utilized in the valuation of the
in-process research and development. Such uncertainties could give rise to
unforseen budget over runs and/or revenue shortfalls in the event that the
Company is unable to successfully complete a certain R&D project. The Company is
primarily responsible for estimating the fair value of the purchased R&D in all
business combinations accounted for under the purchase method. The nature of
research and development projects acquired, the estimated time and costs to
complete the projects and significant risks associated with the projects are
described below.
Valuation Methodology
In accordance with the provisions of APB Opinion 16, all identifiable
assets, including identifiable intangible assets, were assigned a portion of the
cost of the acquired enterprise (purchase price) on the basis of their
respective fair values. This included the portion of the purchase price properly
attributed to incomplete research and development projects expensed according to
the requirements of Interpretation 4 of SFAS No. 2.
Valuation of acquired intangible assets. Intangible assets were identified
through (i) analysis of the acquisition agreement, (ii) consideration of the
Company's intentions for future use of the acquired assets, and (iii) analysis
of data available concerning XIOtech's, Quinta's and Eastman's (collectively
referred to as the "Targets") products, technologies, markets, historical
financial performance, estimates of future performance and the assumptions
underlying those estimates. The economic and competitive environment in which
the Company and the Targets operate was also considered in the valuation
analysis.
To determine the value of in-process research and development, the Company
considered, among other factors, the state of development of each project, the
time and cost needed to complete each project, expected income, associated risks
which included the inherent difficulties and uncertainties in completing each
project and thereby achieving technological feasibility and risks related to the
viability of and potential changes to future target markets. This analysis
resulted in amounts assigned to in-process research and development for projects
that had not yet reached technological feasibility and which did not have
alternative future uses. The Income Approach, which includes analysis of
markets, cash flows, and risks associated with achieving such cash flows, was
the primary technique utilized in valuing each in-process research and
development project. The underlying in-process projects acquired were the most
significant and uncertain assumptions utilized in the valuation analysis of
in-process research and development projects.
To determine the value of developed technologies, the expected future cash
flows of existing product technologies were evaluated, taking into account risks
related to the characteristics and applications of each product, existing and
future markets and assessments of the life cycle stage of each product. Based on
this analysis, the existing technologies that had reached technological
feasibility were capitalized.
F-28
<PAGE> 296
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
To determine the value of the distribution networks and customer bases,
Seagate, considered, among other factors, the size of the current and potential
future customer bases, the quality of existing relationships with customers, the
historical costs to develop customer relationships, the expected income and
associated risks. Associated risks included the inherent difficulties and
uncertainties in transitioning the business relationships from the acquired
entity to Seagate and risks related to the viability of and potential changes to
future target markets.
To determine the value of trademarks, the Company considered, among other
factors, the assumption that in lieu of ownership of a trademark, Seagate would
be willing to pay a royalty in order to exploit the related benefits of such
trademark.
To determine the value of assembled workforces, the Company considered,
among other factors, the costs to replace existing employees including search
costs, interview costs and training costs.
Goodwill is determined based on the residual difference between the amount
paid and the values assigned to identified tangible and intangible assets. If
the values assigned to identified tangible and intangible assets exceed the
amounts paid, including the effect of deferred taxes, the values assigned to
long-term assets were reduced proportionately.
The underlying in-process projects acquired within each acquisition was the
most significant and uncertain assumption utilized in the valuation analysis.
Such uncertainties could give rise to unforeseen budget over runs and/or revenue
shortfalls in the event that the Company is unable to successfully complete a
certain research and development project. Seagate management recognizes that the
Company is primarily responsible for estimating the fair value of the purchased
research and development in all acquisitions accounted for under the purchase
method.
The following details specific information about significant acquisitions
including related assumptions used in the purchase price allocation.
ACQUISITION OF XIOTECH CORPORATION:
In January 2000, the Company acquired XIOtech, for 8,031,804 shares of
Seagate common stock, issued from treasury shares, and options with a combined
fair value of $359 million. XIOtech designs, manufactures and markets a
centralized data storage system. This system is based on an exclusive set of
sophisticated data management and data movement tools. It offers storage
virtualization, multi-node server clustering, and zero backup window solutions.
The main component of the system is MAGNITUDE, a fully implemented storage area
network ("SAN"). MAGNITUDE is sold in a cabinet containing software-based
architecture that allows the incorporation of all of the components of a SAN in
one centralized configuration.
XIOtech also designs, develops and produces software, namely the REDI suite
of software, which runs MAGNITUDE's software based architecture. The REDI
software suite is application specific and gives customers the capability of
better managing their data. XIOtech is currently developing the next generation
technologies for both products, named Thunderbolt and REDI 7.0, respectively.
F-29
<PAGE> 297
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At the time of completing the XIOtech acquisition, the Company estimated
the cost to complete both Thunderbolt and REDI 7.0 at approximately $1 million.
The anticipated release date for the Thunderbolt is the first half of fiscal
2001 and for the REDI 7.0 is in the third quarter of fiscal 2001.
Assumptions used in estimating the fair value of intangible assets:
Revenue
Future revenue estimates were generated for the following technologies: (i)
MAGNITUDE, (ii) REDI, (iii) Thunderbolt, the next generation development of
MAGNITUDE and (iv) REDI 7.0, the next generation development of REDI. Aggregate
revenue was estimated to be approximately $47.6 million in fiscal 2000 and to
increase to approximately $230 million for fiscal year 2001 when the in-process
projects were expected to be complete and shipping. Revenue was estimated to
increase to approximately $650 million and $1,060 million in fiscal years 2002
and 2003, respectively. Estimated revenues decreased 29% in fiscal 2004 to $750
million. The estimated revenue growth is consistent with the introduction of new
technology. Revenue estimates were based on (i) aggregate revenue growth rates
for the business as a whole, (ii) individual product revenue, (iii) growth rates
for the storage management software market, (iv) the aggregate size of the
storage management software market, (v) anticipated product development and
introduction schedules, (vi) product sales cycles, and (vii) the estimated life
of a product's underlying technology.
Operating expenses
Estimated operating expenses used in the valuation analysis of XIOtech
included (i) cost of goods sold, (ii) general and administrative expense, (iii)
selling and marketing expense, and (iv) research and development expense. In
developing future expense estimates, an evaluation of Seagate and XIOtech's
overall business model, specific product results, including both historical and
expected direct expense levels (as appropriate), and an assessment of general
industry metrics was conducted.
Cost of goods sold. Estimated cost of goods sold, expressed as a percentage
of revenue, for the developed and in-process technologies ranged from
approximately 46% to 55%.
General and administrative ("G&A") expense. Estimated G&A expense,
expressed as a percentage of revenue, for the developed and in-process
technologies ranged from 5% in fiscal 2000 to less than 1% in fiscal 2004
declining as production levels and related revenue increased and thus
efficiencies in production are assumed to be attained.
Selling and marketing ("S&M") expense. Estimated S&M expense, expressed as
a percentage of revenue, for the developed and in-process technologies ranged
from 20% in fiscal 2001 to a sustainable 15% in fiscal 2002 and beyond. For
fiscal 2000, however, when the Thunderbolt and REDI 7.0 technology was estimated
to become commercially available, S&M expense was estimated to be 45% due to the
relatively low revenue expectation in the initial commercialization period.
F-30
<PAGE> 298
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Research and development ("R&D") expense. Estimated R&D expense consists of
the costs associated with activities undertaken to correct errors or keep
products updated with current information (also referred to as "maintenance"
R&D). Maintenance R&D includes all activities undertaken after a product is
available for general release to customers to correct errors or keep the product
updated with current information. These activities include routine changes and
additions. The maintenance R&D expense was estimated to be 2% of revenue for the
developed and in-process technologies in fiscal 2000 and 3% throughout the
remainder of the estimation period.
In addition, as of the date of the acquisition, Seagate's management and
XIOtech's management anticipated the costs to complete the in-process
technologies at approximately $0.95 million.
Effective tax rate
The effective tax rate utilized in the analysis of the in-process
technologies was 40%, which reflects the Company's combined federal and state
statutory income tax rates, exclusive of non-recurring charges at the time of
the acquisition and estimated for future years.
Discount rate
The discount rates selected for XIOtech's developed and in-process
technologies was 16% and 23%, respectively. In the selection of the appropriate
discount rates, consideration was given to the Weighted Average Cost of Capital
("WACC") of approximately 16% at the date of acquisition. The discount rate
utilized for the in-process technology was determined to be higher than
Seagate's WACC due to the fact that the technology had not yet reached
technological feasibility as of the date of valuation. In utilizing a discount
rate greater than the Company's WACC, management has reflected the risk premium
associated with achieving the forecasted cash flows associated with these
projects.
As a result of this acquisition, the Company incurred a one-time write-off
of in-process research and development of approximately $105 million. This
acquisition was accounted for as a purchase and, accordingly, the results of
operations of Quinta have been included in the Company's consolidated financial
statements from the date of acquisition.
The following is a summary of the purchase price allocation (in millions):
<TABLE>
<S> <C>
Tangible assets less liabilities assumed.................... $ 12
Developed technology........................................ 37
Tradenames.................................................. 5
Assembled workforce......................................... 2
Customer list............................................... 2
In-process research and development......................... 105
Goodwill.................................................... 214
Deferred tax liability...................................... (18)
----
$359
====
</TABLE>
F-31
<PAGE> 299
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACQUISITION OF QUINTA CORPORATION:
In April and June 1997, the Company invested an aggregate of $20 million to
acquire approximately ten percent (10%) of the outstanding stock of Quinta
Corporation ("Quinta"), a developer of ultra-high capacity disc drive
technologies, including a new optically-assisted Winchester ("OAW") technology.
In August 1997, the Company completed the acquisition of Quinta. Pursuant to the
purchase agreement with Quinta, the shareholders of Quinta, other than Seagate,
received cash payments aggregating $230 million upon the closing of the
acquisition and were eligible to receive additional cash payments aggregating
$96 million upon the achievement of certain product development and early
production milestones. Of the $96 million, $19 million was charged to operations
in fiscal 1998. Of the $19 million charged to operations, $5 million was paid in
fiscal 1998. In July 1998, the Company and Quinta amended the purchase agreement
to eliminate the product development and early production milestones and provide
that the former shareholders of Quinta will be eligible to receive the remaining
$77 million and the $14 million that had been accrued but unpaid in fiscal 1998.
In the first quarter of fiscal 1999, the Company recorded a charge to operations
for the remaining $77 million.
Quinta's research and development project revolves around an OAW
technology. OAW refers to Quinta's newly designed recording technology that,
upon completion, would be implemented into Winchester hard disk drives. OAW
combines traditional magnetic recording technology with Winchester hard disc
drives and optical recording capabilities; optical recording technology enables
greater data storage capacity. By integrating advanced optical features along
with a highly fine and sophisticated tracking and delivery system within the
head design, OAW would multiply the real density of disc drives.
Through August 8, 1997, the acquisition date, Quinta had demonstrated
significant achievements in developing its technology. However, further
technological milestones were required before technological feasibility could be
achieved. Quinta's development process consists of the following development
milestones: (i) route light (optical fiber), (ii) flying head use, (iii)
recording media, (iv) mirror creation and demonstration (two stage servo), (v)
complete assembly, (vi) form factor containment, (vii) design verification test,
(viii) customer qualification, and (ix) delivery.
Assumptions used in estimating the fair value of intangible assets:
Revenue
Future revenue estimates were generated for the following product that the
OAW technology would be utilized in: (i) fixed drives, (ii) removable drive,
(iii) fixed/ removable drives, and (iv) cartridges. No revenue was expected
through fiscal 1998 since the underlying technology was anticipated not to be
technologically feasible until fiscal 1999. Revenue was estimated to be
approximately $26.6 million in fiscal 1999 and to increase to approximately $212
million for fiscal year 2000 when the in-process project was expected to be
complete and shipping. Revenue growth was expected to decline to a sustainable
20% growth by fiscal 2005. The estimated revenue growth is consistent with the
introduction of new technology. Revenue estimates were based on (i) aggregate
revenue growth rates for the business as a whole, (ii) individual product
revenue, (iii) growth rates for the disc drive market, (iv) the aggregate size
of the disc drive market, (v) anticipated product development and introduction
schedules, (vi) product sales cycles, and (vii) the
F-32
<PAGE> 300
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estimated life of a product's underlying technology. Quinta's development cycle,
in total, was expected to take approximately 18 to 24 months.
Operating expenses
Estimated operating expenses used in the valuation analysis of Quinta
included (i) cost of goods sold, (ii) general and administrative expense, (iii)
selling and marketing expense, and (iv) research and development expense. In
developing future expense estimates, an evaluation of Seagate's overall business
model, specific product results, including both historical and expected direct
expense levels (as appropriate), and an assessment of general industry metrics
was conducted. Due to Quinta's limited operating history, an analysis of
Quinta's historical performance was not meaningful.
Cost of goods sold. Estimated cost of goods sold, expressed as a percentage
of revenue, for the in-process technologies ranged from approximately 65% to
80%.
General and administrative ("G&A") expense. Estimated G&A expense,
expressed as a percentage of revenue, for the in-process technologies ranged
from 2.6% in fiscal 2000 to a sustainable 3.5% in fiscal 2001 and beyond. For
fiscal 1999, however, when the OAW technology would become commercially
available, G&A expense was estimated to be 6.4% due to the relatively low
revenue expectation in the initial commercialization period.
Selling and marketing ("S&M") expense. Estimated S&M expense, expressed as
a percentage of revenue, for the in-process technologies ranged from 3.3% in
fiscal 2000 to a sustainable 3.5% in fiscal 2001 and beyond. For fiscal 1999,
however, when the OAW technology would become commercially available, S&M
expense was estimated to be 8.7% due to the relatively low revenue expectation
in the initial commercialization period.
Research and development ("R&D") expense. Estimated R&D expense consists of
the costs associated with activities undertaken to correct errors or keep
products updated with current information (also referred to as "maintenance"
R&D). Maintenance R&D includes all activities undertaken after a product is
available for general release to customers to correct errors or keep the product
updated with current information. These activities include routine changes and
additions. The maintenance R&D expense was estimated to be 0.5% of revenue for
the in-process technologies throughout the estimation period.
Effective tax rate
The effective tax rate utilized in the analysis of the in-process
technologies was 38%, which reflects the Company's combined federal and state
statutory income tax rates, exclusive of non-recurring charges at the time of
the acquisition and estimated for future years.
Discount rate
The discount rates selected for Quinta's in-process technology was 25%. In
the selection of the appropriate discount rates, consideration was given to (i)
the WACC of approximately 15% at the date of acquisition and (ii) the Weighted
Average Return on Assets of approximately 25%. The discount rate utilized for
the in-process technology was
F-33
<PAGE> 301
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
determined to be higher than Seagate's WACC due to the fact that the technology
had not yet reached technological feasibility as of the date of valuation. In
utilizing a discount rate greater than the Company's WACC, management has
reflected the risk premium associated with achieving the forecasted cash flows
associated with these projects.
As a result of this acquisition, the Company incurred a one-time write-off
of in-process research and development of approximately $214 million. Intangible
assets arising from the acquisition of Quinta are being amortized on a
straight-line basis over two years. This acquisition was accounted for as a
purchase and, accordingly, the results of operations of Quinta have been
included in the Company's consolidated financial statements from the date of
acquisition.
The following is a summary of the purchase price allocation (in millions):
<TABLE>
<S> <C>
Tangible assets less liabilities assumed.................... $ 34
In-process research and development......................... 214
Assembled workforce......................................... 2
----
$250
====
</TABLE>
CONTRIBUTION OF NSMG TO VERITAS AND THE PURCHASE OF OUTSTANDING SHARES OF
SEAGATE SOFTWARE BY SEAGATE:
Contribution of NSMG to VERITAS
On May 28, 1999, Seagate and Seagate Software closed and consummated an
Agreement and Plan of Reorganization dated as of October 5, 1998 with VERITAS
and VERITAS Operating Corporation. The transaction provided for the contribution
by Seagate, Seagate Software, and certain of their respective subsidiaries to
VERITAS of (a) the outstanding stock of NSMG and certain other subsidiaries of
Seagate Software and (b) those assets used primarily in the network and storage
management business of Seagate Software (the "NSMG business"), in consideration
for the issuance of shares of common stock of VERITAS to Seagate Software and
the offer by VERITAS to grant options to purchase common stock of VERITAS to
certain of Seagate Software's employees who become employees of VERITAS or its
subsidiaries. As part of the transaction, VERITAS assumed certain liabilities of
the NSMG business. The transaction was structured to qualify as a tax-free
exchange.
Subsequent to the transaction, all outstanding securities of VERITAS
Operating Corporation were assumed and converted into common stock of VERITAS
with identical rights, preferences and privileges, on a share for share basis.
As a result of the contribution of the NSMG business to VERITAS, Seagate
Software received a total of 155,583,468 shares of VERITAS common stock and
former employees of the NSMG business received options to purchase an aggregate
of 15,626,358 shares of VERITAS common stock. Share and option amounts for
VERITAS have been adjusted to reflect the two-for-one stock split effective July
9, 1999 by VERITAS, and the subsequent three-for-two stock splits on November
22, 1999 and March 6, 2000.
Seagate accounted for the contribution of NSMG to VERITAS as a non-monetary
transaction using the fair value of the assets and liabilities exchanged.
Immediately after the transaction, Seagate Software owned approximately 41.63%
(155,583,468 shares) of
F-34
<PAGE> 302
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the outstanding shares of VERITAS. Because Seagate still owns a portion of the
NSMG business through its ownership of VERITAS, Seagate did not recognize 100%
of the gain on the exchange. The gain recorded is equal to the difference
between 58.37% of the fair value of the VERITAS common stock received and 58.37%
of Seagate's basis in the NSMG assets and liabilities exchanged. Seagate is
accounting for its ongoing investment in VERITAS using the equity method. The
difference between the recorded amount of Seagate's investment in VERITAS and
the amount of its underlying equity in the net assets of VERITAS was allocated
based upon the fair value of the underlying tangible and intangible assets and
liabilities of VERITAS. The intangible assets included amounts allocated to
in-process research and development and resulted in a $85 million write-off in
1999 included in activity related to equity interest in VERITAS in the
accompanying statement of operations. Intangible assets including goodwill are
being amortized over four years.
Seagate includes in its financial results its share of the net income or
loss of VERITAS, excluding certain NSMG purchase accounting related amounts
recorded by VERITAS, but including Seagate's amortization of the difference
between its recorded investment and the underlying assets and liabilities of
VERITAS. Because of practicality considerations, the net income or loss of
VERITAS is included in the results of Seagate on a one quarter lag basis. Thus,
the results of VERITAS for the period from May 29, 1999 to June 30, 1999, the
period subsequent to the contribution of NSMG to VERITAS, and for the period
from July 1, 1999 through March 31, 2000 were included in the Company's results
for the fiscal year ended June 30, 2000. The Company eliminates from VERITAS'
income (loss) the effect of VERITAS' accounting for the NSMG business
contribution, including VERITAS' amortization expenses related to intangible
assets. Excluding amortization of intangibles, the total equity income recorded
by Seagate related to VERITAS in fiscal 2000 was $30 million.
Seagate exchange offer
In a separate but related transaction to the NSMG contribution to VERITAS,
on June 9, 1999, the Company exchanged 5,275,772 shares of its common stock for
3,267,255 of the outstanding shares of Seagate Software common stock owned by
employees, directors and consultants of Seagate Software. The exchange ratio was
determined based on the estimated value of Seagate Software common stock divided
by the fair market value of Seagate common stock.
The estimated value of Seagate Software common stock exchanged into Seagate
common stock was determined based upon the sum of the fair value of the NSMG
business, as measured by the fair value of the shares received from VERITAS,
plus the estimated fair value of the Information Management Group of Seagate
Software as determined by the Seagate Board of Directors, plus the assumed
proceeds from the exercise of all outstanding Seagate Software stock options,
divided by the number of fully converted shares of Seagate Software. The Board
of Directors of Seagate considered a number of factors in determining the
estimated fair value of the IMG business, including historical and projected
revenues, earnings and cash flows, as well as other factors and consultations
with financial advisors.
F-35
<PAGE> 303
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of the Seagate Software shares acquired less the original
purchase price paid by the employees was recorded as compensation expense for
those shares outstanding and vested less than six months. The purchase of
Seagate Software shares outstanding and vested more than six months was
accounted for as the purchase of a minority interest and, accordingly, the fair
value of the shares exchanged has been allocated to all of the identifiable
tangible and intangible assets and liabilities of Seagate Software. In
connection with the acquisition, Seagate Software recorded the acquisition of
the minority interest, Seagate recorded compensation expense amounting to
approximately $124 million and wrote off purchased research and development
amounting to $2 million in the fourth quarter of fiscal 1999. Associated
intangible assets and goodwill are being amortized to operations over three to
four years.
Computation of pro rata gain on contribution of NSMG to VERITAS
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Fair value of shares received............................... $3,151
Times: pro rata percentage accounted for at fair value...... 58.37%
------
Adjusted fair value of securities received.................. $1,839
------
Book value of NSMG.......................................... $ 57
Times: pro rate percentage accounted for at fair value...... 58.37%
------
Book value exchanged........................................ 33
------
Pro rata gain............................................... $1,806
======
</TABLE>
Computation of original investment in VERITAS
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Book value of NSMG.......................................... $ 57
Times: pro rata percentage accounted for at fair value...... 41.63%
------
Portion of investment in VERITAS with no step up in basis... 24
Plus: Adjusted fair value of securities received............ 1,839
------
Investment in VERITAS....................................... $1,863
======
</TABLE>
F-36
<PAGE> 304
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Allocation of original investment in VERITAS
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Allocation of investment to VERITAS assets and liabilities:
Net tangible assets....................................... $ 114
Intangible assets:
Distribution channel................................... 9
Developed technology................................... 46
Trademark and workforce................................ 16
In-process research and development.................... 40
Allocation of investment to NSMG assets and liabilities:
Net tangible assets....................................... 24
Intangible assets:
Distribution channel................................... 66
Developed technology................................... 92
Trademark and workforce................................ 14
In-process research and development.................... 45
Goodwill.................................................. 1,397
------
Total original investment in VERITAS........................ $1,863
======
</TABLE>
Value of minority interest acquired in October 1999
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA)
----------------------
<S> <C>
Number of Seagate Software shares and options exchanged for
Seagate stock held by former employees, consultants and
shares held more than six months by employees............. 1,010,010
Times: Exchange ratio into Seagate stock.................... 1.699
----------
Number of Seagate shares issued............................. 1,716,007
Value per share of Seagate common stock as of June 9,
1999...................................................... $ 30.75
----------
Total value Seagate shares issued........................... $ 53
Less: Proceeds from assumed exercise of Seagate Software
stock options............................................. (1)
----------
Total value of minority interest............................ $ 52
==========
</TABLE>
Allocation of minority interest purchase price to the intangible assets of
Seagate Software
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Distribution channel........................................ $ 2
Developed technology........................................ 4
Trademark and workforce..................................... 1
In-process research and development......................... 2
Goodwill.................................................... 45
---
Subtotal.................................................. 54
Deferred tax liability...................................... (2)
---
Total..................................................... $52
===
</TABLE>
F-37
<PAGE> 305
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Compensation relating to stock purchased from employees
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA)
----------------------
<S> <C>
Seagate Software options exercised and exchanged for Seagate
stock..................................................... 2,240,470
Plus: Seagate Software stock held for less than 6 months and
exchanged for Seagate stock............................... 16,775
----------
Total Seagate Software shares exchanged..................... 2,257,245
Times: Exchange ratio into Seagate Technology stock......... 1.699
----------
Number of Seagate shares issued............................. 3,835,059
----------
Value per share of Seagate common stock on June 9, 1999..... $ 30.75
Less: Average price paid per Seagate Technology share....... $ (4.01)
----------
Average compensation expense per Seagate share issued....... $ 26.74
----------
Total compensation expense........................ $ 103
==========
</TABLE>
Reconciliation of amounts included in Gain on contribution of NSMG to
VERITAS, net
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Pro rata gain............................................... $1,806
Less:
Compensation expense...................................... 124
Transaction costs......................................... 12
------
Gain on contribution of NSMG to VERITAS, net................ $1,670
======
</TABLE>
Activity related to equity interest in VERITAS
<TABLE>
<CAPTION>
2000 1999
----- -----
(IN MILLIONS)
<S> <C> <C>
Write-off of in-process research and development............ $ -- $ 85
Equity interest in VERITAS' net income/loss................. (30) --
Amortization of intangible assets including goodwill........ 356 34
---- ----
Activity related to equity interest in VERITAS.............. $326 $119
==== ====
</TABLE>
All activity related to the equity interest in VERITAS in 1999 was recorded in
the fourth quarter of that year.
ALLOCATION OF TANGIBLE AND INTANGIBLE ASSETS AND LIABILITIES RELATED TO NSMG AND
VERITAS
OVERVIEW
NSMG offers network and storage management software solutions, which focus
on the information availability component of Enterprise Information Management
("EIM") by enabling IT professionals to manage distributed network resources and
to secure and protect enterprise data. NSMG's products include features such as
system backup, disaster
F-38
<PAGE> 306
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recovery, migration, replication, automated client protection, storage resource
management, scheduling, event correlation and desktop management.
VERITAS develops, markets and supports advanced storage management and high
availability products for open system environments. VERITAS' products provide
performance improvement and reliability enhancement features that are critical
for many commercial applications. Some of the key features of storage management
products include protection against data loss and file corruption, rapid
recovery after disk or system failure, the ability to process large files
efficiently and the ability to manage the storage systems without interrupting
users. The high availability products provide an automated failover between
computer systems organized in clusters sharing disk resources.
In accordance with the provisions of Accounting Principles Board ("APB")
Opinions No. 16 and 17, all identifiable assets acquired were analyzed to
determine their Fair Market Values. As the basis for identifying the in-process
research and development ("R&D"), the development projects were evaluated in the
context of Interpretation 4 of Financial Accounting Standards Board Statement
No. 2. In accordance with these provisions, the developmental projects were
examined to determine if there were any alternative future uses. Such evaluation
consisted of a specific review of the efforts, including the overall objectives
of the project, progress toward the objectives, and the uniqueness of the
developments of these objectives. Further, each in-process R&D project was
reviewed to determine if technological feasibility had been achieved.
DESCRIPTION OF METHODOLOGY
Tangible net assets of VERITAS principally include cash and investments,
accounts receivable, fixed assets and other current assets. Liabilities
principally include accounts payable, accrued compensation, and other accrued
liabilities.
To estimate the value of the developed technology, the expected future cash
flows attributable to all existing technology was discounted, taking into
account risks related to the characteristics and applications of the technology,
existing and future markets, and assessments of the life cycle stage of the
technology. The developed technology is being amortized on the straight-line
basis over its estimated useful life (four years) which is expected to exceed
the ratio of current revenues to the total of current and anticipated revenues.
The value of the distribution networks and original equipment manufacturer
agreements was estimated by considering, among other factors, the size of the
current and potential future customer bases, the quality of existing
relationships with customers, the historical costs to develop customer
relationships, the expected income and associated risks. Associated risks
included the inherent difficulties and uncertainties in transitioning business
relationships and risks related to the viability of and potential changes to
future target markets.
The value of trademarks was estimated by considering, among other factors,
the assumption that in lieu of ownership of a trademark, a company would be
willing to pay a royalty in order to exploit the related benefits of such
trademark.
F-39
<PAGE> 307
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The value of the assembled workforce was estimated as the costs to replace
the existing employees, including recruiting, hiring, and training costs for
each category of employee.
The value allocated to projects identified as in-process technology at
VERITAS and Seagate Software, for the minority interest acquired, were charged
to expense in the fourth quarter of fiscal 1999. These write-offs were necessary
because the acquired technologies had not reached technological feasibility at
the date of purchase and have no future alternative uses. Seagate Software
expects that the acquired in-process research and development will be
successfully developed, but there can be no assurance that commercial viability
of these products will be achieved.
The nature of the efforts required to develop the purchased in-process
technology into commercially viable products principally relate to the
completion of all planning, designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements. The value of the purchased in-process technology for
VERITAS was estimated as the projected net cash flows related to such products,
including costs to complete the development of the technology and the future
revenues to be earned upon commercialization of the products, excluding revenues
attributable to future development efforts. These cash flows were then
discounted back to their net present value. The projected net cash flows from
such projects were based on management's estimates of revenues and operating
profits related to such projects.
Goodwill is calculated as the residual difference between the estimated
amount paid and the values assigned to identified tangible and intangible assets
and liabilities.
VALUATION ASSUMPTIONS
Revenue
Revenue estimates were based on (i) aggregate revenue growth rates for the
businesses as a whole, (ii) growth rates for the storage management software
market, (iii) the aggregate size of the storage management software market, (iv)
anticipated product development and introduction schedules, (v) product sales
cycles, and (vi) the estimated life of a product's underlying technology.
Future revenue estimates were generated based on the worldwide storage
management software market and the backup, restore and archive market. The
overall storage management software market is forecasted to increase at a
compound annual growth rate of 14.2%, from a 1997 value of $2.543 billion to a
2002 value of $4.941 billion. The backup, restore and archive software sector of
storage management software, in which NSMG competes, is expected to grow much
faster than other sectors.
NSMG is positioned for continued growth in its backup, restore, and archive
software products. The backup, restore, and archive segment is the fastest
growing in the storage management software market. Moreover, NSMG competes, and
is one of the leaders in providing this type of software for the Windows NT
operating environment. Revenue for Windows 95 and Windows NT is projected to
grow at a 43.3% compound annual growth rate (1997 through 2002), higher than for
any other operating environment.
F-40
<PAGE> 308
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue for NSMG was forecasted by product line for the years 1999 through
2001. Revenue was expected to be $350 million for the 1999 calendar year.
Thereafter, NSMG is expected to grow slightly greater than the 43.3% industry
average through 2003. The revenue by product was allocated between existing,
in-process, and future technology; indicating a four-year life cycle (revenue
contribution from technology), which is consistent with NSMG's past experience
with technology life cycles.
VERITAS is an open systems supplier. The market for open systems suppliers
grew 101.2% between 1996 and 1997. In addition, VERITAS looks to grow and
increase its market share through positioning itself as a provider of software
services in the Windows NT operating environment. As above, revenue for Windows
is projected to grow at a 43.3% compound annual growth rate (1997 through 2002).
Revenue for VERITAS was forecasted by product line for the years 1999
through 2001. Revenue was expected to be $270 million for the 1999 calendar
year. Thereafter, VERITAS is expected to grow at 67.9% and 58.4% for years 2000
and 2001, respectively, a rate greater than the 43.3% industry average. For
years 2002 through 2005, revenues are expected to level off at a 40% growth
rate. The revenue by product was allocated between existing, in-process, and
future technology indicating a four-year life cycle (revenue contribution from
technology) for NT based products and a three-year life cycle for Unix based
products which is consistent with VERITAS' past experience with technology life
cycles.
OPERATING EXPENSES
Estimated operating expenses used in the valuation analysis of NSMG and
VERITAS included (i) cost of goods sold, (ii) general and administrative
expense, (iii) sales and marketing expense, and (iv) research and development
expense. In developing future expense estimates, an evaluation of both NSMG and
VERITAS's overall business models, specific product results, including both
historical and expected direct expense levels (as appropriate), and an
assessment of general industry metrics was conducted.
Cost of goods sold. Cost of goods sold, for the developed and in-process
technologies was estimated to be approximately 8.6% of revenues from 2000 to
2006 for NSMG. Cost of goods sold, for the developed and in-process technologies
was estimated to be approximately 14.7% of revenues from 2000 to 2005 for
VERITAS.
General and administrative ("G&A") expense. G&A expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 9.2% in 1999 and expected to be reduced to 6.7% by 2002 for
NSMG. G&A expense for VERITAS, expressed as a percentage of revenue, for the
developed and in-process technologies was held constant at 4.4% of revenues for
the forecast period of 2000 to 2005.
Selling and marketing ("S&M") expense. S&M expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 37.4% for years 2000 to 2006 related to NSMG. S&M expense for
VERITAS, expressed as a percentage of revenue, for the developed and in-process
technologies was estimated to be 34.7% for years 2000 to 2005.
F-41
<PAGE> 309
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Research and development ("R&D") expense. R&D expense consists of the costs
associated with activities undertaken to correct errors or keep products updated
with current information (also referred to as "maintenance" R&D). Maintenance
R&D includes all activities undertaken after a product is available for general
release to customers to correct errors or keep the product updated with current
information. These activities include routine changes and additions. The
maintenance R&D expense was estimated to be 17.4% of revenue for the developed
and in-process technologies for the years 2000 to 2006 for NSMG. R&D expense for
VERITAS was estimated as 18.2% of revenue in 1999 and was reduced to 16% by
2002, continuing at that rate until 2005.
In addition, as of the date of the contribution of NSMG to VERITAS, Seagate
Software's management and VERITAS Software's management anticipated the costs to
complete the in-process technologies at approximately $5.8 million and $44.2
million, respectively.
EFFECTIVE TAX RATE
The effective tax rate utilized in the analysis of developed and in-process
technologies was 33%, which reflects VERITAS' combined effective federal and
state statutory income tax rates, exclusive of non-recurring charges at the time
of the contribution and estimated for future years.
DISCOUNT RATE
The discount rates selected for the developed and in-process technologies
were 12% and 17%, respectively. In the selection of the appropriate discount
rates, consideration was given to (i) the Weighted Average Rate of Return
(approximately 14% at the date of acquisition) and (ii) the Weighted Average
Return on Assets (approximately 18%) that investors expect for company's with
similar anticipated growth rates and other characteristics as the NSMG and
VERITAS businesses. The discount rate utilized for the in-process technology was
determined to be higher than the WARR due to the fact that the technology had
not yet reached technological feasibility as of the date of valuation. In
utilizing a discount rate greater than the WARR, management has reflected the
risk premium associated with achieving the forecasted cash flows associated with
these projects. The discount rate was adjusted downward from the WARR for the
developed technologies to reflect less technological and/or market risk
associated with forecasted sales of the existing products.
ALLOCATION OF TANGIBLE AND INTANGIBLE ASSETS AND LIABILITIES RELATED TO THE
SEAGATE SOFTWARE MINORITY INTEREST ACQUIRED BY SEAGATE
Seagate Software's investment in VERITAS comprises over 85% of the fair
value of Seagate Software. Accordingly, the assumptions utilized in the
allocation of the purchase price of the minority interest of Seagate Software
acquired by Seagate were materially the same as those used in the allocation of
the tangible and intangible assets and liabilities of NSMG and VERITAS.
F-42
<PAGE> 310
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA FINANCIAL INFORMATION
The pro forma financial information presented below is presented as if the
contribution of NSMG to VERITAS and the purchase of the Seagate Software
minority interest by Seagate had occurred at the beginning of fiscal 1998. The
pro forma statements of operations for the twelve months ended July 2, 1999 and
July 3, 1998, include the historical results of Seagate less the historic
results of the NSMG business, plus Seagate's equity interest in the pro forma
results of VERITAS, including recurring amortization of related goodwill and
intangibles plus recurring amortization of goodwill and intangibles associated
with the purchase of shares of Seagate Software stock by Seagate. Non-recurring
transactions, such as the gain on the NSMG contribution to VERITAS, compensation
expense relating to the acquisition of stock held less than six months by
employees of Seagate Software, transaction costs and the write-off of in-process
research and development are excluded from the pro forma presentation. The pro
forma financial results are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------------
JULY 2, 1999 JULY 3, 1998
-------------- --------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenue........................................... $6,600 $ 6,644
Loss before income taxes.......................... (110) (1,127)
Net loss.......................................... (34) (789)
Net loss per share -- basic and diluted........... $(0.14) $ (3.27)
</TABLE>
As of June 30, 2000, the Company held approximately 32% of the outstanding
common stock of VERITAS. The Company accounts for its investment in VERITAS
under the equity method and records its equity interest in VERITAS' net income
(loss) on a one-quarter lag. The Company's recorded equity in the net income of
VERITAS for the year ended June 30, 2000 was $30 million, and differs from the
Company's proportionate share of VERITAS' reported net loss for the twelve
months ended March 31, 2000. This difference is primarily because the Company
eliminates from VERITAS' net income (loss) the effect of VERITAS' accounting for
the NSMG business contribution, including VERITAS' amortization expense related
to intangible assets. The Company was not required to record its equity interest
in VERITAS' net income (loss) in fiscal 1999 because the NSMG business
contribution occurred late in the fourth quarter.
The Company's activity related to equity interest in VERITAS for the year
ended June 30, 2000 consisted of recorded equity in the net income of VERITAS of
$30 million, as described above, and the Company's amortization expense for
goodwill and other intangible assets relating to the investment in VERITAS
amounting to $356 million. The Company's activity related to equity interest in
VERITAS for the year ended July 2, 1999 consisted of amortization of goodwill
and other intangible assets relating to the investment in VERITAS of $34 million
and in-process research and development of $85 million.
SEAGATE SOFTWARE REORGANIZATION
On October 20, 1999, the stockholders of Seagate Software, then a
majority-owned subsidiary of the Company, approved the merger of Seagate
Daylight Merger Corp., a wholly-owned subsidiary of the Company, with and into
Seagate Software. Seagate
F-43
<PAGE> 311
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Software's assets consisted of the assets of IMG and its investment in the
common stock of VERITAS Software Corporation. The merger was effected on October
20, 1999. As a result of the merger, Seagate Software became a wholly-owned
subsidiary of the Company. In connection with the merger, Seagate Software's
stockholders and optionees received payment in the form of 3.23 shares of the
Company's common stock per share of Seagate Software common stock less any
amounts due for the payment of the exercise price for such options. All
outstanding Seagate Software stock options were accelerated immediately prior to
the merger. Seagate issued 9,124,046 shares of its common stock from treasury
shares to optionees and minority stockholders of Seagate Software.
In connection with the reorganization, Seagate Software also formed IMG, a
wholly-owned subsidiary. Seagate Software transferred the IMG assets into IMG.
This new company, IMG, is now the operating entity for the IMG business. IMG has
established stock option plans. Total shares available for issuance under these
plans are 24,700,000. As of June 30, 2000, IMG had granted 9,501,899 options to
purchase common stock to employees of IMG at an average exercise price of $4 per
share, and 1,050 shares had been exercised.
Seagate Software accounted for the exchange of shares of its common stock
as the acquisition of a minority interest for Seagate Software common stock
outstanding and vested more than six months held by employees and all stock held
by former employees and consultants. The fair value of the shares of Seagate
issued was $19 million and was recorded as purchase price and allocated to the
assets and liabilities received. The Company accounted for the exchange of
shares of its common stock for stock options in Seagate Software held by
employees and stock held and vested by employees less than six months as the
settlement of an earlier stock award. During the quarter ended December 31,
1999, the Company recorded compensation expense of $284 million, plus $2 million
in payroll taxes, related to the purchase of minority interest in Seagate
Software.
ALLOCATION OF MINORITY INTEREST PURCHASE PRICE TO THE INTANGIBLE ASSETS OF
SEAGATE SOFTWARE
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
Distribution channel........................................ $ 1
Developed technology........................................ 1
Goodwill.................................................... 18
---
Subtotal.................................................. 20
Deferred tax liability...................................... (1)
---
Total....................................................... $19
===
</TABLE>
F-44
<PAGE> 312
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPENSATION RELATING TO STOCK PURCHASED FROM EMPLOYEES
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA)
----------------------
<S> <C>
Seagate Software options exercised and exchanged for Seagate
stock..................................................... 3,723,015
Plus: Seagate Software stock held for less than 6 months and
exchanged for Seagate stock............................... 17,952
-----------
Total Seagate Software shares exchanged........... 3,740,967
Times: Exchange ratio into Seagate stock.................... 3.23
-----------
Number of Seagate shares issued............................. 12,083,323
-----------
Value per share of Seagate common stock on October 20,
1999...................................................... $ 29.00
Less: Average price paid per Seagate share.................. $ (5.50)
-----------
Average compensation expense per Seagate share issued....... $ 23.50
-----------
Total compensation expense........................ $ 284
===========
</TABLE>
RESTRUCTURING
In fiscal 2000, the Company recorded restructuring charges of $218 million.
The $218 million restructuring charge was a result of a restructuring plan
established to align the Company's global workforce and manufacturing capacity
with existing and anticipated future market requirements and necessitated by the
Company's improved productivity and operating efficiencies (the "fiscal 2000
restructuring plan"). These actions included workforce reductions, capacity
reductions including closure of facilities or portions of facilities, write-off
of excess equipment and consolidation of operations in the Company's recording
media operations, disc drive assembly and test facilities, printed circuit board
assembly manufacturing, recording head operations, software operations, customer
service operations, sales and marketing activities, and research and development
activities. The restructuring charges were comprised of $81 million for the
write-off of excess manufacturing, assembly and test equipment formerly utilized
in Singapore, Thailand and Northern California; $90 million for employee
termination costs; $29 million for the write-off of owned facilities located in
Singapore; $11 million in lease termination and holding costs; $5 million in
renovation costs to restore facilities in Singapore and Northern California to
their pre-lease condition; and $2 million in contract cancellations associated
with one of the Singapore facilities. Prior to this period, there was no
indication of permanent impairment of the assets associated with the closure and
consolidation of facilities. In connection with the fiscal 2000 restructuring
plan, the Company plans to reduce its workforce by approximately 23,000
employees primarily in manufacturing. Approximately 18,300 of the 23,000
employees had been terminated as of June 30, 2000. As a result of employee
terminations and the write-off of equipment and facilities in connection with
the restructuring charges recorded during the year ended June 30, 2000 related
to the fiscal 2000 restructuring plan, the Company estimates that after the
completion of these restructuring activities, annual salary and depreciation
expense will be reduced by approximately $151 million and $88 million,
respectively. The Company anticipates that the implementation of the fiscal 2000
restructuring plan will be substantially complete by December 29, 2000.
F-45
<PAGE> 313
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In fiscal 2000, the Company reversed $11 million of its restructuring
accruals comprised of $2 million of restructuring reserves recorded in the same
period, $5 million of restructuring reserves recorded in fiscal 1999 and $4
million of restructuring reserves recorded in fiscal 1998. This reversal
included $3 million of valuation reserves classified elsewhere on the balance
sheet and the reversal of amounts included in the restructuring reserve for
facility lease costs. In addition, reclassifications between cost categories
within the restructuring reserve were made as a result of differences between
original estimates and amounts actually incurred or expected to be incurred.
During the third quarter of fiscal 1999, the Company recorded a
restructuring charge of $72 million as a result of steps the Company is taking
to further improve the efficiency of its operations. These actions included
closure of the Company's microchip manufacturing facility in Scotland;
discontinuance of the Company's recording head suspension business located in
Malaysia and Minnesota; consolidation of global customer service operations by
relocating such operations in Singapore, Scotland and Costa Mesa, California to
Reynosa, Mexico; and closure of the Company's recording media substrate facility
in Mexico. The restructuring charges were comprised of $37 million for the
write-off or write-down of excess manufacturing, assembly and test equipment
formerly utilized in Scotland, Malaysia and Minnesota; $16 million for lease
termination and holding costs for facilities located in Scotland and Singapore;
$10 million for employee termination costs; $3 million for the write-off of
goodwill associated with the recording media substrate operation in Mexico; $2
million for the write-down of owned facilities located in Malaysia; $1 million
for the write-down of leasehold improvements in Singapore; $1 million for the
write-off of tooling; $1 million for contract cancellations associated with the
suspension business; and $1 million for repayment of various grants previously
received from the Scottish government. Prior to this period, there was no
indication of permanent impairment of the assets associated with the closure and
consolidation of facilities. Evaluations of the resale market for certain assets
were used to estimate fair value.
As of July 2, 1999, all of the equipment located at the microchip facility
in Scotland had been sold and the lease on this facility had been terminated.
The Company is in the final stages of disposing all of the assets for its
suspension business. The facility that was previously occupied by the suspension
operations is currently being used for other operations.
In connection with the fiscal 1999 restructuring, the Company's planned
workforce reduction had been completed as of March 31, 2000 and the other
restructuring activities were substantially complete as of March 31, 2000.
In fiscal 1999, the Company reversed $12 million of its restructuring
accruals originally recorded in fiscal year 1998 as a result of the Company
abandoning its plan to seek an agreement with an external vendor to supply parts
currently manufactured at a facility in Thailand. This reversal included $10
million of valuation reserves classified elsewhere on the balance sheet and
reversal of amounts included in the restructuring reserve of $1 million for
facility lease costs and $1 million for contract cancellations. In addition,
reclassifications between cost categories within the restructuring reserve were
made as a result of differences between original estimates and amounts actually
incurred or expected to be incurred. This was primarily a result of an increase
in the period of time
F-46
<PAGE> 314
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estimated to obtain a suitable sub-lessee for certain leased buildings located
at the former San Jose, California design facility offset by lower severance and
benefits costs than originally estimated.
In the second and third quarters of fiscal 1998, the Company recorded
restructuring charges aggregating $347 million. The Company had experienced
reductions in revenue from the third quarter of fiscal year 1997 to the fourth
quarter of fiscal year 1997 of 21%, from the fourth quarter of fiscal year 1997
to the first quarter of fiscal year 1998 of 4% and from the first quarter of
fiscal year 1998 to the second quarter of fiscal year 1998 of an additional 12%.
During the second quarter of fiscal 1998, forecasted production needs were much
lower than the current capacity of the Company and the Company recognized that
the recent oversupply in the marketplace was not a short-term anomaly. In this
period, the Company also decided to discontinue production of several products,
rendering test and manufacturing equipment unique to those products obsolete.
Prior to this period, there was no indication of permanent impairment of these
assets associated with the recent excess capacity of the Company or the products
to be discontinued. These charges reflect steps the Company is taking to align
worldwide operations with current market conditions by reducing existing
capacity in all areas of the Company and improving the productivity of its
operations and the efficiency of its development efforts by consolidating
manufacturing and R&D operations. Actions include exiting production of mobile
products; early discontinuation of several other products; closing and selling
the Clonmel, Ireland drive manufacturing facility; closing and subleasing the
San Jose and Moorpark, California design center facilities; aborting production
expansion projects in Cork, Ireland; and divesting the Company of the new
Philippines manufacturing facility, which was nearing completion. Included in
the restructuring charge are the write-down and write-off of tangible assets
comprised of manufacturing, assembly and test equipment and tooling formerly
utilized in California, Singapore, Thailand, Ireland and facilities located in
California, the Philippines and Thailand totaling $200 million and intangible
assets totaling $2.5 million for goodwill associated with permanently impaired
media manufacturing equipment.
The majority of the tangible assets have been disposed of or sold including
the disposal of the Clonmel, Ireland facility in May 1998 and the sublease of
one of the five buildings at the San Jose, California design center. The Company
is marketing three additional buildings in the San Jose, California design
center for sublease. The fifth building has a remaining lease term so short as
to make a sublease impractical. Equipment formerly utilized at these facilities,
in addition to equipment associated with restructuring actions in Singapore and
Thailand, has been relocated to other sites or scrapped. Of the $137 million in
write-offs and write-downs of equipment, $109 million was scrapped and $28
million is awaiting final disposition. In addition, $10 million of equipment was
transferred at net book value for use in operations at other sites. Subsequent
to the recording of the restructuring reserve, depreciation related to certain
assets that continued in use, was included in operations. At the time these
assets were identified as available for sale no further depreciation was
recorded. The write-off of intangibles and other assets includes capital
equipment deposits and goodwill associated with permanently impaired equipment.
Costs associated with aborting production expansion projects in Cork, Ireland
include primarily architect costs, lease termination costs associated with
equipment leased
F-47
<PAGE> 315
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
by contractors, and lease termination costs for temporary housing used by
contractor personnel.
Certain facilities including design centers in California, as well as
manufacturing facilities in Thailand continued in use after restructuring
amounts were recorded. The Moorpark, California product design center remained
in use for six months after the write-down of leasehold improvements and
equipment totaling $9 million. This facility has been subleased for a portion of
the remaining minimum lease term. One Thailand manufacturing facility continues
to be utilized until a satisfactory agreement can be made with an external
vendor to supply parts currently manufactured at this location. At the time the
decision to exit this facility was made, the Company believed that it had
identified a supplier for parts. It was subsequently determined that the
supplier could not meet the Company's quality standards.
As of January 1, 1999, the Company's planned workforce reduction associated
with the fiscal 1998 restructuring had been completed. The implementation of the
1998 restructuring plan was substantially complete as of July 2, 1999.
The following table summarizes the Company's restructuring activities:
<TABLE>
<CAPTION>
SEVERANCE INTANGIBLES &
AND EXCESS OTHER CONTRACT
BENEFITS FACILITIES EQUIPMENT ASSETS CANCELLATIONS OTHER TOTAL
--------- ---------- --------- ------------- ------------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
FY 1998 restructuring
charge...................... $ 57 $ 78 $ 137 $ 11 $ 43 $ 21 $ 347
FY 1999 restructuring
charge...................... 10 19 37 4 1 1 72
Cash charges.................. (60) (23) -- -- (38) (12) (133)
Non-cash charges.............. -- (59) (174) (15) -- -- (248)
Adjustments and
reclassifications........... (3) 3 -- -- (3) 1 (2)
---- ---- ----- ---- ---- ---- -----
Reserve balances, July 2,
1999........................ $ 4 $ 18 $ -- $ -- $ 3 $ 11 $ 36
FY 2000 restructuring
charge...................... 90 40 81 -- 2 5 218
Cash charges.................. (69) (11) -- -- -- (2) (82)
Non-cash charges.............. -- (29) (81) -- -- -- (110)
Adjustments and
reclassifications........... (2) (8) -- -- -- 2 (8)
---- ---- ----- ---- ---- ---- -----
Reserve balances, June 30,
2000........................ $ 23 $ 10 $ -- $ -- $ 5 $ 16 $ 54
==== ==== ===== ==== ==== ==== =====
</TABLE>
BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company designs, manufactures and markets products for storage,
retrieval and management of data on computer and data communications systems.
These products include disc drives and disc drive components, tape drives and
software. The Company has three operating segments: disc drives, software and
tape drives, however, only the disc drive and software businesses are reportable
segments under the criteria of SFAS No. 131. The "other" category in the
following revenue and gross profit tables consists of tape drives and
out-of-warranty repair. The CEO evaluates performance and allocates resources
based on revenue and gross profit from operations. Gross profit from operations
is defined as revenue less cost of sales. The Company does not evaluate or
allocate assets or depreciation by operating segment, nor does the CEO evaluate
segments on these criteria. The CEO has been identified as the Chief Operating
Decision Maker as defined by SFAS No. 131.
F-48
<PAGE> 316
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the Company's operations by business
segment:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Revenue:
Disc Drives................................. $ 6,013 $ 6,101 $ 6,152
Software.................................... 126 343 293
Other....................................... 309 358 374
-------- -------- --------
Consolidated................................ $ 6,448 $ 6,802 $ 6,819
======== ======== ========
Gross Profit:
Disc Drives................................. $ 1,061 $ 1,163 $ 667
Software.................................... 99 291 242
Other....................................... 94 98 80
-------- -------- --------
Consolidated................................ $ 1,254 $ 1,552 $ 989
======== ======== ========
Total Assets:
Disc Drives................................. $ 19,900 $ 16,553 $ 16,685
Other....................................... 1,066 586 292
-------- -------- --------
Operating Segments.......................... 20,966 17,139 16,977
Investment in VERITAS....................... 1,122 1,745 --
Eliminations................................ (14,921) (11,812) (11,332)
-------- -------- --------
Consolidated................................ $ 7,167 $ 7,072 $ 5,645
======== ======== ========
</TABLE>
In fiscal 2000, 1999 and 1998, Compaq Computer Corporation accounted for
more than 10% of consolidated revenue for a total of $1.100 billion, $1.144
billion, and $873 million, respectively. Sales to Compaq Computer Corporation
were from the Company's disc drive segment.
Enterprise-wide information is provided in accordance with SFAS No. 131.
Long-lived assets consist of property, equipment and leasehold improvements,
capital leases, equity investments, goodwill and other intangibles, and other
non-current assets as recorded by the Company's operations in each area.
F-49
<PAGE> 317
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the Company's operations by geographic area:
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenue from external customers:(1)
United States..................................... $2,917 $3,440 $3,641
The Netherlands................................... 1,312 1,361 1,447
Singapore......................................... 1,378 1,194 1,119
Other............................................. 841 807 612
------ ------ ------
Consolidated...................................... $6,448 $6,802 $6,819
====== ====== ======
Long-lived Assets:
United States..................................... $1,521 $ 826 $ 771
Singapore......................................... 392 546 607
Investment in VERITAS............................. 1,122 1,745 --
Other............................................. 623 643 652
------ ------ ------
Consolidated...................................... $3,658 $3,760 $2,030
====== ====== ======
</TABLE>
-------------------------
(1) Revenue is attributed to countries based on the shipping location.
ACCUMULATED OTHER COMPREHENSIVE INCOME
The Company records unrealized gains and losses on the mark-to-market of
its investments as a component of accumulated other comprehensive income. As of
June 30, 2000 and July 2, 1999, total accumulated other comprehensive income
(loss) was $86 million and $(7) million, respectively. During fiscal 2000,
several marketable equity securities held by the Company including SanDisk
Corporation, Gadzoox Networks, Inc., Veeco Instruments, Inc., and Lernout &
Hauspie Speech Products N.V. were included in this mark-to-market calculation
resulting in a $95 million unrealized gain, net of taxes. No such similar
amounts were recorded in fiscal 1999. Such investments are subject to changes in
valuation based upon the market price of their common stock. Between June 30,
2000 and August 9, 2000, these investments, excluding the investment in SanDisk
which was sold during the same period, had temporarily decreased in fair value
by $56 million, net of taxes. In July 2000, the Company sold its remaining
investment in SanDisk for net proceeds of approximately $105 million.
The components of accumulated other comprehensive income (loss), net of
related tax, at June 30, 2000 and July 2, 1999 were as follows:
<TABLE>
<CAPTION>
JUNE 30, JULY 2,
2000 1999
-------- -------
(IN MILLIONS)
<S> <C> <C>
Unrealized gain (loss) on securities........................ $88 $(5)
Foreign currency translation adjustments.................... (2) (2)
--- ---
Accumulated other comprehensive income (loss)............... $86 $(7)
=== ===
</TABLE>
F-50
<PAGE> 318
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PENDING GOING PRIVATE TRANSACTION AND MERGER
On March 29, 2000, Seagate, Seagate Software Holdings, Inc. ("Seagate
Software"), a subsidiary of Seagate, and Suez Acquisition Company (Cayman)
Limited ("SAC"), an entity affiliated with, among others, Silver Lake Partners
and Texas Pacific Group, entered into a Stock Purchase Agreement (the "Stock
Purchase Agreement"), and Seagate, VERITAS Software Corporation ("VERITAS") and
a wholly owned subsidiary of VERITAS entered into an Agreement and Plan of
Merger and Reorganization (the "Merger Agreement").
Under the Stock Purchase Agreement, SAC has agreed to purchase, in exchange
for $2 billion in cash, all of the operating assets of Seagate and its
consolidated subsidiaries, including Seagate's disc drive, tape drive and
software businesses and operations and $775 million of cash reserves, but
excluding the approximately 128 million shares of VERITAS common stock currently
held by Seagate Software and Seagate's equity investments in Gadzoox Networks,
Inc., SanDisk Corporation, Veeco Instruments, Inc. and Lernout & Hauspie Speech
Products N.V., to the extent held at the closing. In addition, under the Stock
Purchase Agreement, SAC has agreed to assume substantially all of the operating
liabilities of Seagate and its consolidated subsidiaries. This transaction is
referred to herein as the SAC transaction.
Under the Merger Agreement, immediately following and contingent upon the
consummation of the SAC transaction, a wholly-owned subsidiary of VERITAS will
merge with and into Seagate, with Seagate to survive the merger and to become a
wholly-owned subsidiary of VERITAS. This transaction is referred to herein as
the Merger. VERITAS is not acquiring Seagate's disc drive business or any other
Seagate operating business. In the Merger, the Seagate stockholders will receive
merger consideration consisting of VERITAS stock and cash. The Merger is
intended to qualify as a tax-free reorganization.
On March 29, 2000, Seagate, VERITAS and SAC entered into an Indemnification
Agreement, pursuant to which these entities and certain other subsidiaries of
Seagate have agreed to certain indemnification provisions regarding tax and
other matters that may arise in connection with the SAC transaction and the
Merger. Also on March 29, 2000, VERITAS and SAC entered into a letter agreement,
pursuant to which VERITAS agreed to a no-shop provision and an alternative
termination fee provision.
All of the transactions contemplated by the SAC transaction and the Merger
are herein referred to as the VERITAS/Silver Lake transaction. The
VERITAS/Silver Lake transaction is expected to close in the second quarter of
fiscal 2001, subject to the approval of the VERITAS stockholders and Seagate
stockholders, funding of the debt commitments and clearance by the United States
Securities and Exchange Commission, as well as other customary closing
conditions. Seagate expects that while the VERITAS/Silver Lake transaction is
pending, the value of Seagate common stock will depend primarily on the value of
VERITAS common stock.
COMMITMENTS
Leases -- The Company leases certain property, facilities and equipment
under non-cancelable lease agreements. Land and facility leases expire at
various dates through 2015 and contain various provisions for rental adjustments
including, in certain cases, a provision
F-51
<PAGE> 319
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
based on increases in the Consumer Price Index. All of the leases require the
Company to pay property taxes, insurance and normal maintenance costs.
Future minimum lease payments for operating leases with initial or
remaining terms of one year or more were as follows at June 30, 2000:
<TABLE>
<CAPTION>
OPERATING
LEASES
-------------
(IN MILLIONS)
<S> <C>
2001............................................... $ 44
2002............................................... 36
2003............................................... 29
2004............................................... 25
2005............................................... 19
After 2005......................................... 131
----
$284
====
</TABLE>
Total rent expense for all land, facility and equipment operating leases
was approximately $44 million, $56 million, and $58 million for 2000, 1999 and
1998, respectively.
Capital Expenditures -- The Company's commitments for construction of
manufacturing facilities and equipment approximated $52 million at June 30,
2000.
Joint Venture -- In July 2000, the Company and Thomson Multimedia formed an
independent company called CacheVision. CacheVision brings together the
Company's product development activities and Thomson Multimedia's A/V
technologies expertise and marketing presence to develop cost-optimized,
time-to-market integrated systems to be incorporated into consumer electronic
products such as televisions, set-top boxes, personal video recorders, and DVD
players. The Company expects to sell rigid disc drive products to CacheVision as
an OEM customer. This information is unaudited.
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
2000 1999 1998
---- ------ ----
(IN MILLIONS)
<S> <C> <C> <C>
Cash Transactions:
Cash paid for interest................................... $ 52 $ 52 $52
Cash paid for income taxes, net of refunds............... 577 (109) (1)
Non-Cash Transactions:
Contribution of NSMG to VERITAS.......................... $ -- $1,806 $--
Acquisition of minority interest......................... 19 52 --
Acquisition of XIOtech Corporation....................... 359 -- --
</TABLE>
F-52
<PAGE> 320
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of depreciation and amortization expense are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Depreciation................................................ $597 $574 $549
Amortization:
Goodwill and intangibles.................................. 52 51 56
Deferred compensation..................................... 6 10 8
Other assets.............................................. 38 61 51
---- ---- ----
$693 $696 $664
==== ==== ====
</TABLE>
LITIGATION
Class Actions
VERITAS/Silver Lake -- Following the Company's announcement of the VERITAS/
Silver Lake transaction, a number of stockholders filed lawsuits in both
Delaware and California against the Company, the individual members of the Board
of Directors and certain executive officers, VERITAS and Silver Lake. Following
the announcement, 17 complaints were filed in the Chancery Court of Delaware. On
April 18, 2000, those 17 lawsuits were consolidated into one action by the
Delaware Chancery Court. On April 19, 2000, plaintiffs filed an amended
consolidated complaint. On May 22, 2000, the Delaware Chancery Court certified
the Delaware action as a class action. In California, three complaints were
filed in Santa Clara County Superior Court and two complaints were filed in
Santa Cruz County Superior Court. On June 8, 2000, the defendants filed a
Petition for Coordination seeking coordination of the five California actions in
a single forum. The complaints in both jurisdictions all essentially allege that
the members of the Company's Board of Directors breached their fiduciary duties
to the Company's shareholders by entering into the transaction with
VERITAS/Silver Lake. The complaints also allege that the directors and executive
officers have conflicting financial interests and did not secure the highest
possible price for the Company's shares. All the complaints are styled as class
actions, and seek to enjoin the transaction with VERITAS/Silver Lake and secure
damages from all defendants. None of the defendants has yet responded to the
complaints. The Delaware plaintiffs have initiated discovery in preparation for
filing a motion for a preliminary injunction. The Company and the individual
defendants believe that none of the lawsuits has any merit and intend to defend
all these claims vigorously.
Intellectual Property Litigation
Papst Licensing, GmbH -- Papst has given the Company notice that it
believes certain former Conner Peripherals, Inc. disc drives infringe several of
its patents covering the use of spindle motors in disc drives. Papst further
claims that, post merger, Seagate disc drives designed at the Longmont design
center infringe Papst patents. It is the opinion of the Company's patent counsel
that the former Conner disc drives do not infringe any valid claims of the
patents. The Company also believes that subsequent to the merger with Conner,
the Company's earlier paid-up license under Papst's patents extinguishes any
ongoing liability. The Company also believes it enjoys the benefit of a license
under Papst's patents since Papst Licensing had granted a license to motor
vendors of Conner. Papst is
F-53
<PAGE> 321
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
currently involved in litigation with other disc drive and disc drive motor
manufacturers. The Company believes this matter is without merit and intends to
defend it vigorously.
Rodime PLC -- In late 1992, Rodime PLC filed a complaint alleging
infringement on a certain patent. The process of litigation ensued and elapsed
through January 2000. On January 18, 2000, the U.S. Supreme court denied the
Company's petition for certiorari. On the following day, through a mediation
process, the Company and Rodime agreed to a settlement amount of $45 million to
bring the related litigation to an end. As a result, a previously recorded
estimate of related settlement costs was revised and a charge of $39 million was
recorded in the three months ended December 31, 1999.
Terastor/Maxoptix -- In November 1997, TeraStor Corporation ("TeraStor")
filed a cross-complaint against the Company in an action pending in the Superior
Court of California, County of Santa Clara entitled Maxoptix Corporation v.
TeraStor Corporation and Gordon Knight. The cross-complaint alleges causes of
action against the Company for unfair business practices, misappropriation of
trade secrets, attempted monopolization, refusal to deal, breach of contract,
specific performance, breach of the covenant of good faith and fair dealing,
fraud, negligent misrepresentation, intentional interference with prospective
economic advantage and negligent interference with prospective economic
advantage. The allegations against the Company arose out of the Company's
dealings with TeraStor pursuant to a joint development agreement concerning the
development of magneto optical recording heads. In December 1997 TeraStor sought
a preliminary injunction against the Company seeking to prevent certain Company
employees who formerly worked with TeraStor under the joint development
agreement from engaging in work related to the Company's Quinta subsidiary. In
January 1998 the Court denied TeraStor's motion for injunctive relief. The
Company has asserted cross-claims against TeraStor for trade secret
misappropriation, fraud, negligent misrepresentation, breach of contract,
declaratory relief, rescission, violation of Business & Professions Code Section
17200, common law unfair competition, intentional interference with contractual
relations, negligent interference with contractual relations, and inducing
breach of fiduciary duty. The Company also filed claims against Rick Wilmer and
Amyl Ahola, two former Seagate employees employed by TeraStor, for breach of
contract and breach of fiduciary duty. Trial is currently set to begin on
September 18, 2000. On June 28, 2000, the parties reached agreements during
settlement mediation that would resolve the litigation. Such definitive
agreements are subject to final acceptance. Related settlement costs were
recorded as of June 30, 2000.
Convolve, Inc. -- On July 13, 2000, Convolve, Inc. ("Convolve"), and
Massachusetts Institute of Technology filed suit against Compaq Computer
Corporation and the Company in federal court in New York, alleging patent
infringement, misappropriation of trade secrets, breach of contract, tortious
interference with contract and fraud, relating to Convolve's Input Shaping(R)
and Quick and Quiet(TM) technology. Plaintiffs claim their technology is
incorporated in the Company's sound barrier technology, which was announced on
June 7, 2000. The complaint seeks injunctive relief and $800 million in damages.
Plaintiffs moved for expedited discovery, which was denied by the court. The
court ordered plaintiffs to identify their trade secrets to defendants before
discovery can begin. The Company answered the complaint on August 2, 2000 and
filed cross-claims for declaratory judgment that two Convolve patents are
invalid and not infringed and that the
F-54
<PAGE> 322
SEAGATE TECHNOLOGY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company owns any intellectual property based upon any information the company
disclosed to Convolve. Convolve served a trade secrets disclosure on August 4,
2000. The Company believes this matter is without merit and intends to defend it
vigorously.
Other Matters
The Company is involved in a number of other judicial and administrative
proceedings incidental to its business. Although occasional adverse decisions
(or settlements) may occur, the Company believes that the final disposition of
such matters will not have a material adverse effect on the Company's financial
position or results of operations.
F-55
<PAGE> 323
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Stockholders and Board of Directors
VERITAS Software Corporation
We have audited the accompanying consolidated balance sheets of VERITAS
Software Corporation as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the index at page F-1. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of VERITAS
Software Corporation at December 31, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
January 25, 2000
F-56
<PAGE> 324
VERITAS SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 148,244 $139,086
Short-term investments.................................... 544,137 72,040
Accounts receivable, net of allowance for doubtful
accounts of $5,693 and $2,572, respectively............ 132,180 52,697
Deferred income taxes..................................... 23,803 4,272
Other current assets...................................... 13,381 9,237
---------- --------
Total current assets.............................. 861,745 277,332
Long-term investments....................................... 65,036 31,925
Property and equipment, net................................. 76,958 26,518
Goodwill and other intangibles, net......................... 3,226,749 4,005
Deferred income taxes....................................... -- 7,928
Other assets................................................ 2,789 1,409
---------- --------
$4,233,277 $349,117
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 30,229 $ 4,958
Accrued compensation and benefits......................... 35,560 11,267
Accrued acquisition and restructuring costs............... 24,202 478
Other accrued liabilities................................. 41,727 10,718
Income taxes payable...................................... 6,804 13,424
Customer advances......................................... 5,208 --
Deferred revenue.......................................... 86,979 37,645
---------- --------
Total current liabilities......................... 230,709 78,490
Convertible subordinated notes.............................. 451,044 100,000
Deferred income taxes....................................... 157,867 --
Other non-current liabilities............................... 596 773
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
10,000 shares authorized: none issued and
outstanding.......................................... -- --
Common stock, $.001 par value:
500,000 shares authorized; 390,898 and 214,329 shares
issued and outstanding at December 31, 1999 and
1998................................................. 391 214
Additional paid-in capital................................ 3,926,554 199,644
Accumulated deficit....................................... (532,374) (29,416)
Deferred compensation..................................... -- (32)
Accumulated other comprehensive loss...................... (1,510) (556)
---------- --------
Total stockholders' equity........................ 3,393,061 169,854
---------- --------
$4,233,277 $349,117
========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-57
<PAGE> 325
VERITAS SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Net revenue:
User license fees.............................. $ 498,014 $167,703 $ 95,714
Services....................................... 98,098 43,162 25,411
--------- -------- --------
Total net revenue...................... 596,112 210,865 121,125
Cost of revenue:
User license fees.............................. 20,735 8,798 4,731
Services....................................... 38,161 20,663 11,714
Amortization of developed technology........... 35,659 -- --
--------- -------- --------
Total cost of revenue.................. 94,555 29,461 16,445
--------- -------- --------
Gross profit..................................... 501,557 181,404 104,680
Operating expenses:
Selling and marketing.......................... 221,989 76,392 42,868
Research and development....................... 94,477 40,239 25,219
General and administrative..................... 34,185 10,505 8,027
Amortization of goodwill and other
intangibles................................. 510,943 -- --
Acquisition and restructuring costs............ 11,000 -- 8,490
In-process research and development............ 104,200 600 --
--------- -------- --------
Total operating expenses............... 976,794 127,736 84,604
--------- -------- --------
Income (loss) from operations.................... (475,237) 53,668 20,076
Interest and other income, net................... 23,328 11,821 4,889
Interest expense................................. (15,659) (5,700) (1,206)
--------- -------- --------
Income (loss) before income taxes................ (467,568) 59,789 23,759
Provision for income taxes....................... 35,390 8,141 1,010
--------- -------- --------
Net income (loss)................................ $(502,958) $ 51,648 $ 22,749
========= ======== ========
Net income (loss) per share -- basic............. $ (1.59) $ 0.24 $ 0.11
========= ======== ========
Net income (loss) per share -- diluted........... $ (1.59) $ 0.22 $ 0.10
========= ======== ========
Number of shares used in computing per share
amounts -- basic............................... 316,892 211,558 205,300
========= ======== ========
Number of shares used in computing per share
amounts -- diluted............................. 316,892 232,519 222,716
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-58
<PAGE> 326
VERITAS SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES ACCUMULATED
COMMON STOCK ADDITIONAL RECEIVABLE OTHER
---------------- PAID-IN ACCUMULATED FROM DEFERRED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS COMPENSATION INCOME (LOSS)
------- ------ ---------- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996......... 202,676 $203 $ 179,207 $(103,813) $(282) $(97) $ (263)
Components of comprehensive income:
Net income (loss)................ -- -- -- 22,749 -- -- --
Foreign currency translation
adjustment..................... -- -- -- -- -- -- (303)
Total comprehensive income..... -- -- -- -- -- -- --
Exercise of stock options.......... 3,750 4 3,266 -- -- -- --
Issuance of common stock under
employee stock purchase plan..... 1,147 1 2,506 -- -- -- --
Payments on notes receivable from
stockholders..................... -- -- -- -- 282 -- --
Amortization of deferred
compensation..................... -- -- -- -- -- 33 --
Tax benefit related to stock
options.......................... -- -- 700 -- -- -- --
------- ---- ---------- --------- ----- ---- -------
BALANCE AT DECEMBER 31, 1997......... 207,573 208 185,679 (81,064) -- (64) (566)
Components of comprehensive income:
Net income (loss)................ -- -- -- 51,648 -- -- --
Foreign currency translation
adjustment..................... -- -- -- -- -- -- 10
Total comprehensive income..... -- -- -- -- -- -- --
Exercise of stock options.......... 5,547 5 10,398 -- -- -- --
Issuance of common stock under
employee stock purchase plan..... 1,209 1 3,567 -- -- -- --
Amortization of deferred
compensation..................... -- -- -- -- -- 32 --
------- ---- ---------- --------- ----- ---- -------
BALANCE AT DECEMBER 31, 1998......... 214,329 214 199,644 (29,416) -- (32) (556)
Components of comprehensive income:
Net income (loss)................ -- -- -- (502,958) -- -- --
Foreign currency translation
adjustment..................... -- -- -- -- -- -- (954)
Total comprehensive income..... -- -- -- -- -- -- --
Exercise of stock options.......... 11,909 12 101,940 -- -- -- --
Issuance of common stock under
employee stock purchase plan..... 798 1 6,973 -- -- -- --
Issuance of common stock related to
the NSMG acquisition............. 155,583 156 3,151,196 -- -- -- --
Issuance of options to purchase
shares of common stock related to
the NSMG acquisition............. -- -- 281,418 -- -- -- --
Issuance of common stock related to
the TeleBackup acquisition....... 6,842 7 134,095 -- -- -- --
Issuance of options to purchase
shares of common stock related to
the TeleBackup acquisition....... -- -- 2,762 -- -- -- --
Issuance of common stock related to
the NuView acquisition........... 1,436 1 48,526 -- -- -- --
Amortization of deferred
compensation..................... -- -- -- -- -- 32 --
------- ---- ---------- --------- ----- ---- -------
BALANCE AT DECEMBER 31, 1999......... 390,898 $391 $3,926,554 $(532,374) $ -- $ -- $(1,510)
======= ==== ========== ========= ===== ==== =======
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE AT DECEMBER 31, 1996......... $ 74,955
Components of comprehensive income:
Net income (loss)................ 22,749
Foreign currency translation
adjustment..................... (303)
----------
Total comprehensive income..... 22,446
Exercise of stock options.......... 3,270
Issuance of common stock under
employee stock purchase plan..... 2,507
Payments on notes receivable from
stockholders..................... 282
Amortization of deferred
compensation..................... 33
Tax benefit related to stock
options.......................... 700
----------
BALANCE AT DECEMBER 31, 1997......... 104,193
Components of comprehensive income:
Net income (loss)................ 51,648
Foreign currency translation
adjustment..................... 10
----------
Total comprehensive income..... 51,658
Exercise of stock options.......... 10,403
Issuance of common stock under
employee stock purchase plan..... 3,568
Amortization of deferred
compensation..................... 32
----------
BALANCE AT DECEMBER 31, 1998......... 169,854
Components of comprehensive income:
Net income (loss)................ (502,958)
Foreign currency translation
adjustment..................... (954)
----------
Total comprehensive income..... (503,912)
Exercise of stock options.......... 101,952
Issuance of common stock under
employee stock purchase plan..... 6,974
Issuance of common stock related to
the NSMG acquisition............. 3,151,352
Issuance of options to purchase
shares of common stock related to
the NSMG acquisition............. 281,418
Issuance of common stock related to
the TeleBackup acquisition....... 134,102
Issuance of options to purchase
shares of common stock related to
the TeleBackup acquisition....... 2,762
Issuance of common stock related to
the NuView acquisition........... 48,527
Amortization of deferred
compensation..................... 32
----------
BALANCE AT DECEMBER 31, 1999......... $3,393,061
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-59
<PAGE> 327
VERITAS SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (502,958) $ 51,648 $ 22,749
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 24,126 7,346 3,113
Amortization of goodwill and other intangibles.......... 510,943 -- --
Amortization of developed technology.................... 35,659 -- --
In-process research and development..................... 104,200 600 --
Restructuring costs..................................... 948 -- 1,218
Amortization of original issue discount on convertible
notes................................................. 5,402 -- --
Deferred income taxes................................... (36,775) (8,000) (4,200)
Changes in operating assets and liabilities, net of
effects of business acquisitions:
Accounts receivable................................... (77,174) (22,127) (14,601)
Other receivable...................................... 22,935 -- --
Other assets.......................................... (3,367) (8,136) (267)
Accounts payable...................................... 19,389 3,469 (208)
Accrued compensation and benefits..................... 17,539 4,611 3,480
Accrued acquisition and restructuring costs........... (15,269) -- --
Other accrued liabilities............................. 10,169 2,525 2,387
Income taxes payable.................................. (8,956) 10,694 3,779
Customer advances and deferred revenue................ 37,203 20,167 9,370
---------- --------- ---------
Net cash provided by operating activities................... 144,014 62,797 26,820
Cash flows from investing activities:
Purchases of investments.................................. (764,097) (284,819) (144,907)
Investment maturities..................................... 258,891 296,048 79,921
Payment received on note.................................. -- -- 108
Purchase of property and equipment........................ (59,671) (23,424) (6,181)
Cash acquired from Seagate Software....................... 1,044 -- --
Cash acquired from TeleBackup............................. 1,493 -- --
Purchase of NuView, Inc. ................................. (11,400) -- --
Purchase of Frontier Software Devel. Pvt. Ltd. ........... (1,325) -- --
Purchase of Windward Technologies, Inc. .................. -- (1,250) --
Purchase of other businesses and technologies............. (1,900) -- --
---------- --------- ---------
Net cash used for investing activities...................... (576,965) (13,445) (71,059)
Financing activities:
Proceeds from issuance of common stock.................... 108,926 13,971 5,777
Net proceeds from issuance of convertible debt............ 334,137 -- 97,500
Payments of notes payable................................. -- -- (612)
Payments on notes receivable from stockholders............ -- -- 282
---------- --------- ---------
Net cash provided by financing activities................... 443,063 13,971 102,947
Effect of exchange rate changes............................. (954) 134 (490)
---------- --------- ---------
Net increase in cash and cash equivalents................... 9,158 63,457 58,218
Cash and cash equivalents at beginning of year.............. 139,086 75,629 17,411
---------- --------- ---------
Cash and cash equivalents at end of year.................... $ 148,244 $ 139,086 $ 75,629
========== ========= =========
Supplemental disclosures:
Cash paid for interest.................................... $ 5,300 $ 5,521 $ --
========== ========= =========
Cash paid for income taxes................................ $ 15,834 $ 6,245 $ 1,703
========== ========= =========
Supplemental schedule of noncash investing and financing
transactions:
Issuance of common stock and options for business
acquisitions............................................ $3,618,161 $ -- $ --
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-60
<PAGE> 328
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
VERITAS Software Corporation (the Company), a Delaware corporation, is a
leading independent supplier of storage management software. The Company's
products help its 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. The Company's products help to improve the levels of
centralization, control, automation and manageability in computing environments,
they allow information technology, or IT, managers to be more effective with
constrained resources and limited budgets. Its 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.
In addition, the Company's products provide continuous availability of data in
clustered computer systems that share disk resources to maintain smooth business
operations. Its products are highly scalable in order to keep up with the rapid
growth of data and technologies deployed in businesses. The Company develops and
sells products for all popular operating systems, including versions of UNIX and
Windows NT. Its software solutions are used in a broad spectrum of industries,
including many leading global corporations and e-commerce businesses. The
Company also provides a full range of services to assist its customers in
planning and implementing their storage management solutions. The Company
markets its 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.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Stock splits
On June 7, 1999, the Company announced a two-for-one stock split in the
form of a stock dividend paid on July 8, 1999 to stockholders of record on June
18, 1999. On October 14, 1999, the Company announced a three-for-two split in
the form of a stock dividend paid on November 19, 1999 to stockholders of record
on November 2, 1999. 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 the these stock splits.
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 consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
F-61
<PAGE> 329
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents include cash and highly liquid investments with
insignificant interest rate risk and with original maturities of three months or
less when purchased. The Company invests its excess cash in diversified
instruments maintained primarily in U.S. financial institutions in an effort to
preserve principal and to maintain safety and liquidity.
Short-term investments include investments with original maturities of one
year or less when purchased. The Company has determined its short-term
investments are held to maturity under the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", (SFAS No. 115) and accordingly such amounts are recorded at
amortized cost.
At December 31, 1999, amortized cost approximated fair value for all cash
equivalents and short-term investments. To date, there have been no significant
realized or unrealized gains or losses on the short-term investments.
Long-Term Investments
Investments with remaining maturities greater than one year from date of
purchase are classified as long-term. The Company accounts for its long-term
investments in accordance with SFAS No. 115 and these investments are classified
as held to maturity as of the balance sheet date. At December 31, 1999,
amortized cost approximated fair value for all long-term investments and, to
date, there have been no significant realized or unrealized gains or losses on
the Company's long-term investments.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are calculated using the straight-line method over the estimated useful lives
or, in the case of leasehold improvements, the term of the related lease, if
shorter. The estimated useful lives of furniture and equipment and computer
equipment is generally three to five years. The Company also depreciates a
building located in India over fifteen years. Depreciation and amortization of
property and equipment charged to costs and expenses was approximately $23.1
million for the year ended December 31, 1999, $6.9 million for the year ended
December 31, 1998 and $3.1 million for the year ended December 31, 1997.
Goodwill and other intangibles
Goodwill represents the excess of the purchase price of net tangible and
intangible assets acquired in business combinations over their estimated fair
value. Other intangibles mainly represent distribution channels, original
equipment manufacturer agreements, developed technology, assembled workforce and
trademarks acquired in business combinations. Goodwill and other intangibles are
being amortized on a straight-line basis over their estimated useful life of
four years. The Company reviews goodwill and other intangibles to assess
recoverability from future operations using undiscounted cash flows. In
management's opinion, no material impairment exists at December 31, 1999.
Accumulated amortization of goodwill and other intangibles was $548.6 million as
of December 31, 1999 and $0.5 million as of December 31, 1998.
F-62
<PAGE> 330
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
In October of 1997 the Accounting Standards Executive Committee issued
Statement of Position (SOP) 97-2 "Software Revenue Recognition", which has been
amended by SOP 98-4 and SOP 98-9. These statements set forth generally accepted
accounting principles for recognizing revenue on software transactions. SOP
97-2, as amended by SOP 98-4, was effective for revenue recognized under
software license and service arrangements beginning January 1, 1998. SOP 98-9
amends SOP 97-2 and requires recognition of revenue using the "residual method"
when certain criteria are met. The implementation of these provisions of SOP
98-9 will be effective for the Company's fiscal year ending December 31, 2000.
The Company does not believe the impact of SOP 98-9 will be material to its
financial position, results of operations and cash flows.
The Company derives revenue from software licenses and customer support and
other services. Service revenue includes contracts for software maintenance and
technical support, consulting, training, and porting fees. In software
arrangements that include rights to multiple software products and/or services,
the Company allocates the total arrangement fee among each of the deliverables
based on the relative fair value of each of the deliverables, determined based
on vendor-specific objective evidence of fair value.
The Company recognizes revenue from licensing of software products to an
end user upon delivery of the software product to the customer, unless the fee
is not fixed or determinable, or collectibility is not considered probable. For
licensing of the Company's software to OEMs, revenue is not recognized until the
software is sold by the OEM to an end-user customer. For licensing of the
Company's software through our indirect sales channels, revenue is recognized
when the software is sold by the reseller, value-added reseller or distributor
to an end-user customer. The Company considers all arrangements with payment
terms extending beyond twelve months and other arrangements with payment terms
longer than normal not to be fixed or determinable. If collectibility is not
considered probable, revenue is recognized when the fee is collected.
Customer support revenue is recognized on a straight-line basis over the
period that the support is provided. Other software service arrangements are
evaluated to determine whether those services are essential to the functionality
of the other elements of the arrangement. When software services are considered
essential, revenue under the arrangement is recognized using contract
accounting. When software services are not considered essential, the revenue
allocable to the software services is recognized as the services are performed.
The Company generally considers software services essential unless the software
is paid for before the services commence and the services are limited to
training or normal installation.
Revenue is recognized using contract accounting for arrangements involving
customization or modification of the software or where software services are
considered essential to the functionality of the software. Revenue from these
software arrangements is recognized using the percentage-of-completion method
with progress-to-completion measured using labor cost inputs.
F-63
<PAGE> 331
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Software Development Costs
Under Statement of Financial Accounting Standards No. 86 "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
certain software development costs incurred subsequent to the establishment of
technological feasibility are capitalized and amortized over the estimated lives
of the related products. Technological feasibility is established upon
completion of a working model, which is typically demonstrated by initial beta
shipment. The period between the achievement of technological feasibility and
the general release of the Company's products has been of short duration. As of
December 31, 1999 such capitalizable software development costs were
insignificant and all software development costs have been charged to research
and development expense in the accompanying consolidated statements of
operations.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of investments in debt
securities and trade receivables. The Company primarily invests its excess cash
in commercial paper rated A-1/P-1, medium-term notes, corporate notes,
government securities, market auction preferreds with approved financial
institutions, and other specific money market instruments of similar liquidity
and credit quality. The Company is exposed to credit risks in the event of
default by the financial institutions or issuers of investments to the extent
recorded on the balance sheet. The Company generally does not require
collateral. The Company maintains allowances for credit losses, and such losses
have been within management's expectations. For the years ended December 31,
1999 and 1997 no customer accounted for greater than 10% of revenues. For the
year ended December 31, 1998, one customer accounted for approximately 12% or
$25.8 million of the Company's revenue.
Net Income Per Share
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common shares and dilutive
potential common shares outstanding during the period. Dilutive common shares
consist of employee stock options using the treasury stock method and common
shares issued assuming conversion of the convertible subordinated notes, if
dilutive.
Accounting for Stock-Based Compensation
The Company accounts for employee stock based compensation in accordance
with APB Opinion No. 25 "Accounting for Stock Issued to Employees" and related
interpretations. Pro forma net income and net income per share disclosures
required by Statement of Financial Accounting Standards No. 123, Accounting for
Stock Based Compensation", are included in Note 9.
Translation of Foreign Currencies
Assets and liabilities of certain foreign subsidiaries, whose functional
currency is the local currency, are translated at year-end exchange rates.
Income and expense items are
F-64
<PAGE> 332
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
translated at the average rates of exchange prevailing during the year. The
adjustment resulting from translating the financial statements of such foreign
subsidiaries is reflected as a separate component of stockholder's equity.
Certain other transaction gains or losses, which have not been material, are
reported in results of operations.
Impairment of Long-Lived Assets
The Company reviews the assets for impairment and determines whether an
event or change in facts and circumstances indicates that the carrying amount of
property and equipment or other long-lived assets may not be recoverable. The
Company determines recoverability of the assets by comparing the carrying amount
of the asset to net future undiscounted cash flows that the asset is expected to
generate. The impairment recognized is the amount by which the carrying amount
exceeds the fair market value of the asset. No events or changes in facts and
circumstances occurred during the year that would indicate that any impairment
of assets existed.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133). SFAS No. 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. The Company will be required to implement SFAS No. 133 as of
the beginning of its fiscal year 2001. The Company's exchange rate hedging
activities have been insignificant to date and the Company does not believe the
impact of SFAS No. 133 will be material to its financial position, results of
operations or cash flows.
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. The Company will be
required to implement these provisions of SOP 98-9 for its fiscal year ending
December 31, 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 Company does not believe the impact of SOP 98-9 will be material to
the Company's financial position, results of operations or cash flows.
NOTE 2. BUSINESS COMBINATIONS
On May 28, 1999, the Company acquired the Network & Storage Management
Group business of Seagate Software, Inc., which the Company refers to as "NSMG."
The NSMG business develops and markets software products and provides related
services enabling information technology professionals to manage distributed
network resources and to secure and protect enterprise data. Its products offer
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
F-65
<PAGE> 333
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$20.26 per share for 5 days before and after June 7, 1999, the measurement date
for the transaction, the Company issued 155,583,486 shares of its common stock
to Seagate Software, Inc. and issued options to purchase 15,626,358 shares of
its common stock to its employees who were former NSMG employees. The Company
accounted for the NSMG acquisition using the purchase method of accounting, and
incurs 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 1999, the Company recorded $482.5 million for the amortization of
goodwill and other intangibles, and $34.1 million for the amortization of
developed technology related to this acquisition. The Consolidated Statements of
Operations include the results of operations of NSMG subsequent to the
acquisition date.
Acquisition-related costs consist 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 approximate $11.7 million. At December 31,
1999, $17.4 million in direct transaction costs, $0.3 million in operating lease
commitments on duplicative facilities and $1.8 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 $12.2 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, the Company 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 the Company plans 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. Involuntarily terminated employees
represented approximately 2% of the global workforce. At December 31, 1999, $0.9
million in severance costs 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 $9.2 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.
On June 1, 1999 the Company acquired TeleBackup Systems, Inc., which the
Company refers to as "TeleBackup." TeleBackup designs, develops and markets
software solutions for local and remote backup and recovery of electronic
information stored on networked, remote and mobile personal computers.
TeleBackup became a wholly owned
F-66
<PAGE> 334
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
subsidiary of the Company in exchange for the issuance of 6,842,795 shares of
either its common stock or exchangeable shares to the holders of TeleBackup
common shares and the exchange of options to purchase 154,706 shares of its
common stock to its employees who were former employees of TeleBackup. The
Company accounted for the TeleBackup acquisition using the purchase method of
accounting, and incurs 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
December, 1999, of the total $6.2 million acquisition costs, the Company paid
$5.3 million in direct transaction costs with the majority of the remaining $0.9
million anticipated to be utilized by May 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 1999, the Company recorded
$20.1 million for amortization of goodwill and other intangibles, and $1.0
million for the amortization of developed technology related to this
acquisition. The Consolidated Statements of Operations include the results of
operations of TeleBackup subsequent to the acquisition date.
On August 10, 1999, the Company acquired certain assets of NuView, Inc.,
which the Company refers to as "NuView". Under an asset purchase agreement, the
Company acquired certain assets of NuView, including its Windows NT cluster
management solution, Cluster X, for a total cost of approximately $67.9 million.
The Company accounted for the acquisition using the purchase method of
accounting, and incurs 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 the Company's common stock, $0.8 million for
the issuance of options to purchase the Company's common stock to former NuView
employees, $0.2 million in acquisition-related costs and $19.2 million payable
in cash, of which $11.4 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 1999, the Company recorded $8.1 million for
amortization of goodwill and other intangibles, and $0.3 million for the
amortization of developed technology related to this acquisition. The
Consolidated Statements of Operations include the results of operations of
NuView subsequent to the acquisition date.
The following unaudited pro forma summary results of operations data have
been prepared assuming that the NSMG, TeleBackup and NuView acquisitions had
occurred at the beginning of the periods presented. The consolidated results are
not necessarily
F-67
<PAGE> 335
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
indicative of results of future operations nor of results that would have
occurred had the acquisitions been consummated as of the beginning of the
periods presented. The pro forma information excludes the impact of the one-time
charges related to in-process research and development costs of $104.2 million
and the restructuring charges of $11.0 million recorded in 1999 (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Net revenue................................ $ 700,027 $ 409,998
========= =========
Net loss................................... $(738,049) $(814,993)
========= =========
Basic and diluted net loss per share....... $ (1.93) $ (2.18)
========= =========
</TABLE>
Effective April 25, 1997, the Company merged with OpenVision, a
publicly-held company that provided storage management applications and services
for client/server computing environments. This transaction was accounted for as
a pooling of interests. Approximately 65,745,000 shares of the Company's common
stock were issued in the OpenVision merger and the Company reserved
approximately 9,780,000 shares of its common stock for issuance pursuant to the
assumption of outstanding options, warrants and other rights to purchase
OpenVision common stock.
The following information shows revenue and net income of the separate
companies during the periods preceding the merger (in thousands):
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Net revenue:
VERITAS................................................ $ 12,454
OpenVision............................................. 13,156
Combined company....................................... 95,515
--------
$121,125
========
Net income:
VERITAS................................................ $ 3,752
OpenVision............................................. 1,665
Combined company....................................... 17,332
--------
$ 22,749
========
</TABLE>
Note: April 1, 1997 was used as an approximation of the effective date of
the Merger.
As a result of the OpenVision merger, the Company incurred charges to
operations of $8.5 million during the second quarter of 1997, consisting of
approximately $4.2 million for transaction fees and professional services, $1.9
million for contract terminations and asset write-offs and $2.4 million for
other costs incident to the merger. Of the total charge, $1.2 million resulted
from the write-down of redundant assets and facilities, primarily consisting of
intangible assets related to a prior acquisition which became redundant as a
result of OpenVision having a similar product line. The remaining $7.3 million,
involving banking, legal and accounting fees and other direct costs and payments
in connection with the elimination of duplicative facilities, was fully paid as
of December 31, 1999.
F-68
<PAGE> 336
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash, cash equivalents and short-term investments consist of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash and cash equivalents:
Cash....................................... $ 55,233 $ 6,893
Money market funds......................... 5,234 172
Commercial paper........................... 77,771 132,021
Corporate notes............................ 10,006 --
-------- --------
Cash and cash equivalents.................... 148,244 139,086
-------- --------
Short-term investments:
Commercial paper........................... 207,465 1,357
Market auction preferreds.................. 11,713 20,659
Government securities...................... 91,599 --
Corporate notes............................ 233,360 50,024
-------- --------
Short-term investments....................... 544,137 72,040
-------- --------
Cash, cash equivalents and short-term
investments................................ $692,381 $211,126
======== ========
</TABLE>
Long-term investments consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
Long-term investments:
Government securities....................... $18,838 $ 9,497
Medium-term corporate notes................. 46,198 22,428
------- -------
Long-term investments......................... $65,036 $31,925
======= =======
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Furniture and equipment...................... $ 24,176 $ 6,962
Computer equipment........................... 96,828 34,251
Building..................................... 1,445 1,008
Leasehold improvements....................... 17,266 3,765
-------- --------
139,715 45,986
Less -- accumulated depreciation and
amortization............................... (62,757) (19,468)
-------- --------
Property and equipment, net.................. $ 76,958 $ 26,518
======== ========
</TABLE>
NOTE 5. CONVERTIBLE SUBORDINATED NOTES
In October 1997, the Company issued $100.0 million of 5.25% convertible
subordinated notes due 2004 (the "5.25% notes"), for which the Company received
net
F-69
<PAGE> 337
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
proceeds of $97.5 million. The Company and its wholly-owned subsidiary, VERITAS
Operating Corporation, are co-obligors on the 5.25% notes and are
unconditionally and jointly and severally liable for all payments under the
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 the
Company's 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
the 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. The fair value of the 5.25% notes as of December 31,
1999 was $1,000.9 million based on the quoted value on the convertible debt
market. The fair value of the 5.25% notes as of December 31, 1998 and 1997 was
$139.1 million and $100.0 million calculated using the per share conversion
price on the principal amount of the notes and the closing price of VERITAS'
stock.
In August 1999, the Company and its 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 the Company 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 and are unconditionally and jointly and
severally liable for all payments under the 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
the Company's 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 a
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
the period of time until maturity at the Company's option at 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. The fair value of the 1.856% notes as of December 31, 1999 was $1,259.3
million based on the quoted value on the convertible debt market.
NOTE 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 it intended to,
represent the operations of VERITAS Operating
F-70
<PAGE> 338
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Corporation had it continued as a separate entity absent the NSMG acquisition
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total net revenue.................................... $451,095 $210,865
Amortization of goodwill and other intangibles....... 28,441 --
In-process research and development.................. 3,000 --
Acquisition and restructuring costs.................. -- --
Income from operations............................... 96,714 53,668
Net income........................................... 65,488 51,648
BALANCE SHEET DATA:
Working capital...................................... $530,672 $198,842
Goodwill and other intangibles....................... 199,590 --
Total assets......................................... 987,359 349,117
Long-term obligations................................ 451,629 100,773
Retained earnings (accumulated deficit).............. 36,072 (29,416)
Stockholders' equity................................. 433,478 169,854
</TABLE>
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company currently has operating leases for its facilities through
October 31, 2012. Rental expense under operating leases was approximately $15.6
million, $6.1 million and $4.3 million for the years ended December 31, 1999,
1998, and 1997, respectively. In addition to the basic rent, the Company is
responsible for all taxes, insurance and utilities related to the facilities.
The approximate minimum lease payments as of December 31, 1999 are as follows
(in thousands):
<TABLE>
<S> <C>
2000..................................... $ 23,549
2001..................................... 21,453
2002..................................... 18,195
2003..................................... 17,039
2004..................................... 15,267
Thereafter............................... 39,599
--------
Minimum lease payments................... $135,102
========
</TABLE>
In the ordinary course of business, various lawsuits and claims have been
filed against the Company. While the outcome of these matters is currently not
determinable, management believes that the ultimate resolution of these matters
will not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
NOTE 8. BENEFIT PLANS
The Company has adopted a retirement savings plan (the VERITAS Software
401(k) Plan), qualified under Section 401(k) of the Internal Revenue Code, which
is a pretax savings plan covering substantially all United States employees.
Under the plan employees may contribute up to 20% of their pretax salary,
subject to certain limitations. Employees
F-71
<PAGE> 339
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
are eligible to participate beginning the first day of the month following their
date of hire. The Company matches approximately 50% of the employee
contributions up to $2,500 per year and contributed approximately $3.1 million
in 1999. For 1998 and 1997, the Company matched approximately 25% of the
employee contributions up to $1,200 per year and contributed approximately $0.6
million in 1998 and $0.3 million in 1997.
NOTE 9. STOCK COMPENSATION PLANS
At December 31, 1999, the Company had three stock-based compensation plans,
which are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Since the exercise price of options
granted under such plans is generally equal to the market value on the date of
grant, no compensation cost has been recognized for grants under its stock
option plans and stock purchase plans. If compensation cost for the Company's
stock-based compensation plans had been determined consistent with SFAS No. 123,
the Company's net income (loss) and earnings (loss) per share would have been
reduced to the pro forma amounts indicated below (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1999 1998 1997
--------- ------- -------
<S> <C> <C> <C>
Net income (loss)
As reported.............................. $(502,958) $51,648 $22,749
Pro forma................................ $(540,474) $32,102 $12,358
Basic earnings (loss) per share
As reported.............................. $ (1.59) $ 0.24 $ 0.11
Pro forma................................ $ (1.71) $ 0.15 $ 0.06
Diluted earnings (loss) per share
As reported.............................. $ (1.59) $ 0.22 $ 0.10
Pro forma................................ $ (1.71) $ 0.14 $ 0.06
</TABLE>
SFAS No. 123 is only applicable to options granted subsequent to January 1,
1995. As a result, the pro forma effect of adopting SFAS No. 123 is not fully
reflected until the year ending December 31, 1999.
Stock Option Plans
The Company has two stock option plans. The Company's 1993 Equity Incentive
Plan (the 1993 Plan) provides for the issuance of either incentive or
nonstatutory stock options to employees and consultants of the Company. The
options generally are granted at the fair market value of the Company's common
stock at the date of grant, expire ten years from the date of grant, vest over a
four-year period and are exercisable immediately upon vesting. The Company has
reserved 89,596,000 shares of common stock for issuance under the 1993 Plan. The
Company has also reserved 2,531,250 shares for issuance under the Company's 1993
Director's Stock Option Plan (the Director's Plan). Generally options expire ten
years from date of grant, vest over the term of each directors board membership
and are exercisable immediately upon vesting. As of December 31, 1999,
39,840,353 shares were available for future grant under the plans.
For the pro forma amounts determined under SFAS No. 123, as set forth
above, the fair value of each option grant is estimated on the date of grant
using the Black-Scholes
F-72
<PAGE> 340
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
option-pricing model with the following weighted-average assumptions used for
grants in 1999, 1998 and 1997: risk-free interest rates averaging 5.55% in 1999,
5.15% in 1998 and 6.19% in 1997; a dividend yield of 0.0% for all years; a
weighted-average expected life of 5 years for all years; and a volatility factor
of the expected market price of the Company's common stock of 0.65 for 1999,
0.65 for 1998 and 0.60 for 1997.
A summary of the status of the Company's stock option plans (including the
options assumed in the Acquisitions and the Merger) as of December 31, 1999,
1998 and 1997 and changes during the years ended on those dates is presented
below (number of shares in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year...................... 36,948 $ 4.88 34,601 $2.86 25,817 $1.58
Granted..................... 16,717 $23.36 10,469 $9.76 14,369 $4.68
Assumed in business
combinations.............. 15,896 $ 3.40 -- $ -- -- $ --
Exercised................... (11,909) $ 3.21 (5,547) $1.88 (3,474) $0.92
Forfeited................... (3,230) $ 9.07 (2,575) $4.03 (2,111) $2.94
-------- ------ ------- ----- ------- -----
Outstanding at end of
year...................... 54,422 $10.28 36,948 $4.88 34,601 $2.86
======== ====== ======= ===== ======= =====
Options exercisable at year
end....................... 22,625 15,201 11,516
Weighted-average fair value
of options granted during
the year.................. $ 13.93 $ 5.75 $ 2.69
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999 (number of shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1999 LIFE PRICE 1998 PRICE
--------------- -------------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.01 - $ 1.66 5,637 5.34 $ 0.99 5,326 $ 0.98
$ 1.68 - $ 2.42 6,285 6.91 $ 2.06 4,243 $ 2.08
$ 2.43 - $ 3.68 5,964 6.81 $ 2.73 3,641 $ 2.68
$ 3.70 - $ 4.79 7,265 8.01 $ 4.49 3,058 $ 4.55
$ 4.84 - $ 8.58 6,319 7.88 $ 6.31 2,779 $ 6.08
$ 8.70 - $11.33 5,519 8.48 $10.11 1,795 $10.01
$12.00 - $17.56 6,286 9.24 $16.09 973 $15.69
$17.94 - $21.81 7,891 9.50 $20.67 775 $20.35
$23.33 - $62.83 3,001 9.74 $37.87 35 $30.35
$72.12 - $72.13 255 9.96 $72.13 -- $72.13
------ ---- ------ ------ ------
$ 0.01 - $72.13 54,422 7.97 $10.28 22,625 $ 4.63
====== ==== ====== ====== ======
</TABLE>
F-73
<PAGE> 341
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLANS
Under the Company's 1993 Employee Stock Purchase Plan (the 1993 Purchase
Plan), the Company is authorized to issue up to 21,910,295 shares of common
stock to its full-time employees, nearly all of whom are eligible to
participate. Under the terms of the 1993 Purchase Plan, employees can choose to
have up to 10% of their wages withheld to purchase the Company's common stock.
The purchase price of the stock is 85% of the lower of the subscription date
fair market value and the purchase date fair market value.
Substantially all of the eligible employees have participated in the either
the 1993 Purchase Plan or the 1996 Purchase Plan in 1999, 1998 and 1997. Under
the 1993 Purchase Plan, the Company issued 796,495 shares to employees in 1999,
764,573 shares in 1998, and 672,075 shares in 1997.
In accordance with APB 25, the Company does not recognize compensation cost
related to employee purchase rights under the Plan. To comply with the pro forma
reporting requirements of SFAS No. 123, compensation cost is estimated for the
fair value of the employees' purchase rights using the Black-Scholes
option-pricing model with the following assumptions for these rights granted in
1999, 1998 and 1997: a dividend yield of 0.0% for all years; an expected life
ranging up to 2 years for all years; an expected volatility factor of 0.65 in
1999, 0.65 in 1998 and 0.60 in 1997; and risk-free interest rates ranging from
4.57% to 5.77% in 1999, from 5.14% to 5.39% in 1998 and from 5.27% to 5.84% in
1997. The weighted-average fair value of the purchase rights granted was $8.70
in 1999, $3.15 in 1998 and $2.06 in 1997.
NOTE 10. STOCKHOLDERS' EQUITY
On October 4, 1998, the Board of Directors of the Company adopted a
Stockholder Rights Plan, declaring a dividend of one preferred share purchase
right (a Right) for each outstanding share of common stock, par value $0.001 per
share, of VERITAS. The rights are initially attached to the Company's common
stock and will not trade separately. If a person or group acquires 20 percent or
more of the Company's common stock, or announces an intention to make a tender
offer for the Company's common stock the consummation of which would result in
acquiring 20 percent or more of the Company's common stock, then the rights will
be distributed and will then trade separately from the common stock. Each Right
entitles the registered holder to purchase from the Company one one-hundredth of
a share of Series A Junior Participating Preferred Stock, par value $0.001 per
share, of the Company. The rights expire October 5, 2008, unless the expiration
date is extended or unless the rights are earlier redeemed or exchanged by the
Company.
The Company is authorized to issue up to 10,000,000 shares of undesignated
preferred stock. No such preferred shares have been issued to date.
Total common shares reserved for issuance at December 31, 1999 under all
stock compensation plans are 114,037,545 shares (see Note 9).
F-74
<PAGE> 342
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Federal
Current................................... $ 64,452 $11,858 $ 539
Deferred.................................. (35,245) (8,075) (3,500)
State
Current................................... 9,340 2,514 1,939
Deferred.................................. (5,077) 75 (700)
Foreign..................................... 1,920 1,769 2,732
-------- ------- -------
Total............................. $ 35,390 $ 8,141 $ 1,010
======== ======= =======
</TABLE>
The tax benefits associated with the disqualifying disposition of stock
options or employee stock purchase plan shares reduced the income taxes
currently payable by $63.0 million for 1999. Such benefits are credited to
additional paid-in capital when realized.
The provision for income taxes differs from the amount computed by applying
the federal statutory rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Federal tax at statutory rate.............................. 35.0% 35.0% 35.0%
Benefit of loss carryforwards.............................. -- (9.3) (35.9)
State taxes................................................ (0.9) 4.2 5.4
Foreign taxes.............................................. (0.4) 3.0 9.4
Change in valuation allowance.............................. -- (13.4) (17.7)
Acquisition and restructuring costs........................ -- -- 6.5
In-process research and development charge and
non-deductible goodwill.................................. (42.2) -- --
Alternative minimum tax, net............................... -- -- 2.3
Tax credits................................................ 0.5 (7.1) --
Other...................................................... 0.4 1.2 (0.7)
----- ----- -----
Total............................................ (7.6)% 13.6% 4.3%
===== ===== =====
</TABLE>
F-75
<PAGE> 343
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......... $ 26,946 $ 23,276 $ 22,499
Reserves and accruals not currently
deductible............................. 28,315 6,146 2,205
Acquired intangibles..................... 12,521 1,895 2,114
Tax credit carryforwards................. 2,861 -- 2,246
Other.................................... 2,170 1,655 887
--------- -------- --------
Total.......................... 72,813 32,972 29,951
Valuation allowance...................... (11,602) (20,772) (25,751)
--------- -------- --------
Net deferred tax assets.................. $ 61,211 $ 12,200 $ 4,200
========= ======== ========
Deferred tax liabilities:
Acquired intangibles..................... (195,275) -- --
--------- -------- --------
Net deferred tax assets (liabilities).... $(134,064) $ 12,200 $ 4,200
========= ======== ========
</TABLE>
The valuation allowance decreased by approximately $9.2 million in 1999,
$5.0 million in 1998 and $13.6 million in 1997. As of December 31, 1999, the
$11.6 million valuation allowance reflected above relates to the tax benefits of
certain assets acquired with the acquisition of NSMG and will be credited to
goodwill if realized.
As of December 31, 1999, the Company had federal tax loss carryforwards of
approximately $74.0 million and federal tax credit carryforwards of
approximately $2.9 million. The federal tax loss carryforwards will expire in
2008 through 2011, and the federal tax credit carryforwards will expire in 2003
through 2014, if not utilized. Because of the change in ownership provisions of
the Internal Revenue Code, a substantial portion of the Company's net operating
loss and credit carryforwards may be subject to annual limitations. The annual
limitation may result in the expiration of net operating loss and credit
carryforwards before utilization.
Management has determined based on the Company's history of prior earnings,
its expectations for the future and the extended period over which the benefits
of certain deferred tax assets will be realized, as well as the limitations on
its ability to utilize certain net operating loss carryforwards, that a
valuation allowance continues to be necessary.
The realization of the Company's deferred tax assets, which relate
primarily to net operating loss carryforwards and temporary differences is
dependent on generating sufficient taxable income in future periods. Although
realization is not assured, management believes it is more likely than not that
the net deferred tax assets will be realized.
F-76
<PAGE> 344
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Numerator:
Net income (loss)...................... $(502,958) $ 51,648 $ 22,749
========= ======== ========
Denominator:
Weighted-average shares................ 316,892 211,558 205,300
--------- -------- --------
Denominator for basic earnings (loss)
per share........................... 316,892 211,558 205,300
Common stock equivalents............... -- 20,961 17,416
--------- -------- --------
Denominator for diluted earnings (loss)
per share........................... 316,892 232,519 222,716
========= ======== ========
Basic earnings (loss) per share.......... $ (1.59) $ 0.24 $ 0.11
========= ======== ========
Diluted earnings (loss) per share........ $ (1.59) $ 0.22 $ 0.10
========= ======== ========
</TABLE>
Common stock equivalents included in the denominator for purposes of
computing diluted earnings per share do not include 10,465,067 shares issuable
upon conversion of the 5.25% convertible subordinated notes and 13,010,144
shares issuable upon conversion of the 1.856% convertible subordinated notes, as
their effect would be anti-dilutive for all periods presented (see Note 5). In
1999, common stock equivalents included in the denominator for purposes of
computing diluted earnings per share do not include 39,406,524 potential common
shares, all related to employee stock options, as their effect would be
anti-dilutive.
NOTE 13. SIGNIFICANT DEVELOPMENT AND LICENSE AGREEMENTS
In January 1997 the Company entered into a cross-license and development
arrangement with Sun Microsystems whereby each party granted the other a
royalty-based license to bundle or resell substantially all then-available
products of both companies. Under this arrangement, 5% of each royalty dollar
received by the Company is to be set aside to fund future "best efforts",
non-recurring engineering services to be performed by the Company at the
direction of Sun. Under these NRE projects, the scope of which is mutually
agreed to by both parties, Sun bears the risk of the development effort. In
accordance with SFAS No. 68 the Company has recognized a liability equal to 5%
of each royalty dollar received from Sun under this arrangement. The liability
to Sun as of December 31, 1999 was $1.2 million. As of December 31, 1998 there
was no liability to Sun. The liability to Sun as of December 31, 1997 was $0.2
million.
NOTE 14. SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS No.
131), in fiscal 1998. SFAS No. 131 supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise"
and establishes standards for reporting information about operating segments.
Operating segments are
F-77
<PAGE> 345
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker, or group, in deciding how to allocate resources and in assessing
performance.
The Company operates in one segment, storage management solutions. The
Company's products and services are sold throughout the world, through direct,
OEM, 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 revenue of product channels and the geographic regions of
the segment and does not receive discrete financial information about asset
allocation, expense allocation or profitability from the Company's storage
products or services.
Geographic information (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
User license fees(1):
United States........................... $372,485 $121,910 $ 67,888
Europe(2)............................... 94,986 33,172 12,971
Other(3)................................ 30,543 12,621 14,855
-------- -------- --------
Total........................... $498,014 $167,703 $ 95,714
======== ======== ========
Services(1):
United States........................... $ 78,756 $ 34,759 $ 20,463
Europe(2)............................... 15,450 7,869 4,865
Other(3)................................ 3,892 534 83
-------- -------- --------
Total........................... $ 98,098 $ 43,162 $ 25,411
======== ======== ========
Total net revenue............... $596,112 $210,865 $121,125
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------
1999 1998 1997
---------- ------- -------
<S> <C> <C> <C>
Long-lived assets(4):
United States........................... $3,289,545 $25,202 $ 9,412
Europe(2)............................... 11,918 3,644 1,114
Other(3)................................ 2,244 380 67
---------- ------- -------
Total........................... $3,303,707 $29,226 $10,593
========== ======= =======
</TABLE>
---------------
(1) License and Service revenues are attributed to geographic regions based on
location of customers.
(2) Europe includes the Middle East and Africa.
(3) Other consists of Canada, Latin America, Japan and the Asia Pacific region.
F-78
<PAGE> 346
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) Long-lived assets include all long-term assets except those specifically
excluded under SFAS No. 131, such as deferred income taxes and financial
instruments. Reconciliation to total assets reported (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Total long-lived assets................. $3,303,707 $ 29,226 $ 10,593
Other assets, including current......... 929,570 319,891 231,287
---------- -------- --------
Total consolidated assets..... $4,233,277 $349,117 $241,880
========== ======== ========
</TABLE>
No customer represented 10% or more of the Company's net revenue in 1999 and
1997. One customer represented approximately 12% or $25.8 million of the
Company's net revenue in 1998.
NOTE 15. RELATED PARTY TRANSACTIONS
The Company paid $0.8 million in 1998 and $6.7 million in 1999 in service
fees related to the acquisition of NSMG to Donaldson, Lufkin & Jenrette (DLJ), a
company affiliated with a director of the Company until February 1999. The
Company had no outstanding receivable or payable balance with DLJ at December
31, 1999.
NOTE 16. SUBSEQUENT EVENTS (UNAUDITED)
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 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 and 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 December 31, 1999.
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
F-79
<PAGE> 347
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 corporate campus facilities and
beginning the lease payments in the second quarter of 2001.
On March 29, 2000, the Company, Seagate Technology, Inc. and an investor
group including Seagate Technology's management group 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 for
approximately 128 million shares of the Company's common stock held by Seagate
Technology. In addition, the Company will issue shares of its common stock for
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
for 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.
F-80
<PAGE> 348
VERITAS SOFTWARE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
PROVISION
FROM CHARGED TO
BALANCE AT BUSINESSES OPERATING BALANCE AT
BEGINNING OF YEAR ACQUIRED EXPENSES DEDUCTIONS(1) END OF YEAR
----------------- ---------- ---------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended December
31, 1999......... $2,572 $1,477 $2,425 $781 $5,693
Year ended December
31, 1998......... $1,597 $ -- $1,032 $ 57 $2,572
Year ended December
31, 1997......... $ 697 $ -- $ 900 $ -- $1,597
</TABLE>
---------------
(1) Deductions related to the allowance for doubtful accounts represent amounts
written off against the allowance.
F-81
<PAGE> 349
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
2000
-----------
(UNAUDITED)
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 423,759
Short-term investments.................................... 520,809
Accounts receivable, net of allowance for doubtful
accounts of $6,088 at June 30, 2000 and $5,693 at
December 31, 1999...................................... 138,545
Deferred income taxes..................................... 23,803
Other current assets...................................... 16,024
----------
Total current assets.............................. 1,122,940
Long-term investments....................................... 56,138
Property and equipment, net................................. 106,525
Goodwill and other intangibles, net......................... 2,757,674
Other non-current assets.................................... 34,267
----------
Total assets...................................... $4,077,544
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 37,108
Accrued compensation and benefits......................... 52,181
Accrued acquisition and restructuring costs............... 19,903
Other accrued liabilities................................. 46,534
Income taxes payable...................................... 322
Customer advances......................................... 1,996
Deferred revenue.......................................... 126,119
----------
Total current liabilities......................... 284,163
Convertible subordinated notes.............................. 456,587
Deferred income taxes....................................... 136,834
Stockholders' equity:
Common stock.............................................. 4,073,821
Accumulated deficit....................................... (879,098)
Accumulated other comprehensive income (loss)............. 5,237
----------
Total stockholders' equity........................ 3,199,960
----------
Total liabilities and stockholders' equity........ $4,077,544
==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-82
<PAGE> 350
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenue:
User license fees............... $ 224,851 $ 93,296 $ 429,167 $ 149,082
Services........................ 50,585 21,352 90,909 37,470
--------- --------- --------- ---------
Total net revenue....... 275,436 114,648 520,076 186,552
Cost of revenue:
User license fees............... 8,199 2,827 19,977 4,782
Services........................ 20,165 8,254 38,464 14,781
Amortization of developed
technology................... 15,553 5,006 30,948 5,006
--------- --------- --------- ---------
Total cost of revenue... 43,917 16,087 89,389 24,569
--------- --------- --------- ---------
Gross profit...................... 231,519 98,561 430,687 161,983
Operating expenses:
Selling and marketing........... 106,109 44,572 193,692 71,395
Research and development........ 39,205 20,550 74,318 34,366
General and administrative...... 17,595 7,122 32,506 10,411
Amortization of goodwill and
other intangibles............ 219,758 71,557 439,517 71,557
Acquisition and restructuring
costs........................ -- 11,000 -- 11,000
In-process research and
development.................. -- 103,100 -- 103,100
--------- --------- --------- ---------
Total operating
expenses.............. 382,667 257,901 740,033 301,829
--------- --------- --------- ---------
Loss from operations.............. (151,148) (159,340) (309,346) (139,846)
Interest and other income, net.... 12,777 3,148 24,040 6,179
Interest expense.................. (7,525) (1,409) (15,048) (2,842)
--------- --------- --------- ---------
Loss before income taxes.......... (145,896) (157,601) (300,354) (136,509)
Provision for income taxes........ 26,445 4,728 46,370 12,237
--------- --------- --------- ---------
Net loss.......................... $(172,341) $(162,329) $(346,724) $(148,746)
========= ========= ========= =========
Net loss per share -- basic....... $ (0.43) $ (0.59) $ (0.87) $ (0.61)
========= ========= ========= =========
Net loss per share -- diluted..... $ (0.43) $ (0.59) $ (0.87) $ (0.61)
========= ========= ========= =========
Number of shares used in computing
per share Amounts -- basic...... 400,787 275,467 397,645 245,493
========= ========= ========= =========
Number of shares used in computing
per share Amounts -- diluted.... 400,787 275,467 397,645 245,493
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-83
<PAGE> 351
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
2000 1999
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(346,724) $ (148,746)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization......................... 19,639 7,888
Amortization of goodwill and other intangibles........ 439,517 71,557
Amortization of developed technology.................. 30,948 5,006
In-process research and development................... -- 103,100
Restructuring costs................................... -- 948
Amortization of original issue discount on convertible
notes............................................... 7,016 --
Deferred income taxes................................. (26,967) (7,922)
Changes in operating assets and liabilities:
Accounts receivable................................. (6,365) (2,521)
Other assets........................................ (7,286) 3,250
Accounts payable.................................... 6,879 (629)
Accrued compensation and benefits................... 16,621 2,356
Accrued acquisition and restructuring costs......... (4,299) (7,287)
Other liabilities................................... 4,211 490
Income taxes payable................................ (6,482) 5,447
Customer advances and deferred revenue.............. 35,928 18,682
--------- ----------
Net cash provided by operating activities........ 162,636 51,619
Cash flows from investing activities:
Purchases of investments................................. (448,444) (164,926)
Investment maturities.................................... 480,670 100,557
Purchases of property and equipment...................... (48,076) (23,670)
Cash acquired from Seagate Software...................... -- 1,044
Cash acquired from TeleBackup............................ -- 1,493
Strategic investments in businesses...................... (12,000) --
Purchase of businesses and technologies.................. (2,520) (1,325)
--------- ----------
Net cash used in investing activities...................... (30,370) (86,827)
Cash flows from financing activities:
Proceeds from issuance of common stock................... 145,403 16,668
--------- ----------
Net cash provided by financing activities........ 145,403 16,668
Effect of exchange rate changes............................ (2,154) (561)
--------- ----------
Net increase (decrease) in cash and cash equivalents....... 275,515 (19,101)
Cash and cash equivalents at beginning of period........... 148,244 139,086
--------- ----------
Cash and cash equivalents at end of period................. $ 423,759 $ 119,985
========= ==========
Supplemental disclosures:
Cash paid for interest................................... $ 6,947 $ 2,625
Cash paid (received) for income taxes.................... $ (2,088) $ 6,133
Supplemental schedule of noncash investing and financing
transactions:
Issuance of common stock for business acquisitions....... $ -- $3,557,953
Issuance of common stock for conversion of notes......... $ 1,473 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-84
<PAGE> 352
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 stock 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 in prior periods have been
restated to give retroactive effect to this stock split.
4. NET LOSS PER SHARE
Basic net 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 and six months ended June 30, 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
F-85
<PAGE> 353
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator:
Net loss................ $(172,341) $(162,329) $(346,724) $(148,746)
========= ========= ========= =========
Denominator:
Denominator for basic
net loss per share --
weighted-average
shares outstanding... 400,787 275,467 397,645 245,493
Common stock
equivalents.......... -- -- -- --
--------- --------- --------- ---------
Denominator for diluted
net income loss per
share................ 400,787 275,467 397,645 245,493
========= ========= ========= =========
Basic net loss per
share................... $ (0.43) $ (0.59) $ (0.87) $ (0.61)
========= ========= ========= =========
Diluted net loss per
share................... $ (0.43) $ (0.59) $ (0.87) $ (0.61)
========= ========= ========= =========
</TABLE>
Common stock equivalents included in the denominator for purposes of
computing diluted net loss per share do not include 10,349,675 shares issuable
upon conversion of the outstanding 5.25% convertible subordinated notes and
12,996,684 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 and six months ended June 30, 2000, common stock
equivalents included in the denominator for purposes of computing diluted net
loss per share do not include 36,866,696 and 39,812,006 potential common shares
respectively, all related to employee stock options, as their effect would be
anti-dilutive.
5. COMPREHENSIVE LOSS
The following are the components of comprehensive loss (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss.................. $(172,341) $(162,329) $(346,724) $(148,746)
Other comprehensive income
(loss), net of tax:
Foreign currency
translation
adjustments.......... (1,011) (318) (2,154) (561)
Unrealized gain on
marketable
securities........... 8,901 -- 8,901 --
--------- --------- --------- ---------
Comprehensive loss........ $(164,451) $(162,647) $(339,977) $(149,307)
========= ========= ========= =========
</TABLE>
F-86
<PAGE> 354
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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. VERITAS and VERITAS Operating
Corporation are unconditionally and jointly and severally liable for all
payments under the notes. 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 consolidated
summary financial information with respect to VERITAS Operating Corporation. As
a result of a reorganization of VERITAS' corporate structure completed on June
30, 2000, the consolidated financial information of VERITAS Operating
Corporation is identical to the consolidated financial information of VERITAS,
its parent company. Prior periods have been restated to reflect this
reorganization of the Company's subsidiaries under common control (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total net revenue......... $ 275,436 $ 114,648 $ 520,076 $ 186,552
Amortization of developed
technology.............. 15,553 5,006 30,948 5,006
Amortization of goodwill
and other intangibles... 219,758 71,557 439,517 71,557
Acquisition and
restructuring costs..... -- 11,000 -- 11,000
In-process research and
development............. -- 103,100 -- 103,100
Loss from operations...... (151,148) (159,340) (309,346) (139,846)
Net loss.................. (172,341) (162,329) (346,724) (148,746)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................... $ 838,777 $ 630,440
Goodwill and other intangibles, net............... 2,757,674 3,226,749
Total assets...................................... 4,077,544 4,233,277
Long-term obligations............................. 456,587 451,044
Accumulated deficit............................... (879,098) (532,374)
Stockholders' equity.............................. 3,199,960 3,393,061
</TABLE>
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 sales 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
F-87
<PAGE> 355
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
User license fees(1):
United States............... $165,609 $ 71,528 $318,410 $114,756
Europe(2)................... 34,619 15,750 75,008 24,667
Other(3).................... 24,623 6,018 35,749 9,659
-------- -------- -------- --------
Total............... 224,851 93,296 429,167 149,082
-------- -------- -------- --------
Services(1):
United States............... 43,658 16,726 76,615 29,304
Europe(2)................... 5,641 3,527 11,727 6,206
Other(3).................... 1,286 1,099 2,567 1,960
-------- -------- -------- --------
Total............... 50,585 21,352 90,909 37,470
-------- -------- -------- --------
Total net revenue... $275,436 $114,648 $520,076 $186,552
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
Long-lived assets(4):
United States................................... $2,843,967 $3,289,545
Europe(2)....................................... 15,728 11,918
Other(3)........................................ 4,504 2,244
---------- ----------
Total................................... $2,864,199 $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>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
Total long-lived assets........... $2,864,199 $3,303,707
Other assets, including current... 1,213,345 929,570
---------- ----------
Total consolidated
assets................ $4,077,544 $4,233,277
========== ==========
</TABLE>
No customer represented 10% or more of the Company's net revenue for the three
or six months ended June 30, 2000. One customer accounted for approximately
$12.6 million, or
F-88
<PAGE> 356
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
11%, of the Company's net revenue for the three months ended June 30, 1999 and
$21.5 million, or 12%, for the six months ended June 30, 1999.
8. COMMITMENTS AND CONTINGENCIES
Facilities lease commitments
During the first quarter of 2000, the Company amended 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 total approximate minimum lease
payments for these facilities for the next five years will be $0 for 2000, $5.7
million for 2001, $11.4 million for 2002 and $11.1 million for 2003 and 2004.
The minimum lease payments will fluctuate from time to time depending on short
term interest rates and one of the Company's quarterly financial ratios. 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 June 30, 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, $2.0 million in 2001 and $3.1 million in 2002,
2003 and 2004. The minimum lease payments will fluctuate from time to time
depending on short term interest rates and one of the Company's quarterly
financial ratios. 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
F-89
<PAGE> 357
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
June 30, 2000.
9. POTENTIAL TRANSACTION
On March 29, 2000, the Company, Seagate Technology, Inc. and Suez
Acquisition Company (Cayman) Limited, a corporation founded by an investor group
including some of the members of Seagate Technology's management, announced a
transaction in which the Company will effectively acquire all of the shares of
its common stock, certain other securities and cash held by Seagate Technology.
The transaction is structured as a leveraged buyout of Seagate Technology
pursuant to which Seagate Technology will sell all of its operating assets to
Suez Acquisition Company and Suez Acquisition Company will assume and indemnify
Seagate Technology and the Company for substantially all liabilities arising in
connection with those operating assets. At the closing, and after the operating
assets and liabilities of Seagate Technology have been transferred to Suez
Acquisition Company, a wholly-owned subsidiary of the Company will merge with
and into Seagate Technology, following which Seagate Technology will become a
wholly-owned subsidiary of the Company. The Company will issue to the Seagate
Technology stockholders approximately 109.3 million shares of its common stock
to obtain through the merger approximately 128.1 million shares of its common
stock held by Seagate Technology. In addition, the Company will issue shares of
its common stock to the Seagate Technology stockholders to obtain certain other
securities held by Seagate Technology at the closing date and, at its 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 is not acquiring Seagate Technology's disc drive business or any
other Seagate Technology operating business. The transaction is intended to
qualify as a tax-free reorganization.
10. SUBSEQUENT EVENT
During the third quarter of 2000, the Company signed a lease agreement for
the lease of 65 acres of land and subsequent improvements for new corporate
campus facilities in Milpitas, California. The Company will develop the site in
two phases, adding a total of 990,990 square feet, with the first phase of
466,000 square feet being completed in the fourth quarter of 2002. The Company
expects to complete the second phase of 524,990 square feet in the second
quarter of 2003. The facilities will provide space for research and development
functions. The lease term for the first phase is five years beginning in July
2000, with an option to extend the lease term for two successive periods of one
year each. The total approximate minimum lease payments for the first phase
facilities for the next five years will be $0 in 2000 and 2001 and $14.6 million
in 2002, $19.4 million in 2003 and 2004. The minimum lease payments will
fluctuate from time to time depending on short term interest rates and one of
the Company's quarterly financial ratios. The Company has an option to purchase
the property (land and first phase facilities) for $243 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
F-90
<PAGE> 358
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
difference between the sales price and the guaranteed residual value up to $220
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 2002 for
the first phase and second quarter of 2003 for the second phase. The Company
expects to start negotiating the financing terms of the second phase in the
second quarter of 2001.
F-91
<PAGE> 359
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Seagate Software, Inc.
We have audited the accompanying combined balance sheets of the Network &
Storage Management Group, a division of Seagate Software, Inc., as of July 3,
1998 and June 27, 1997, and the related combined statements of operations, group
equity and cash flows for each of the three years in the period ended July 3,
1998. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Network
& Storage Management Group at July 3, 1998 and June 27, 1997, and the combined
results of its operations and its cash flows for each of the three years in the
period ended July 3, 1998, in conformity with generally accepted accounting
principles.
As discussed more fully in the Summary of Significant Accounting Policies
footnote, the Network & Storage Management Group has modified the methods used
to assess impairment of goodwill and, accordingly, has restated the consolidated
financial statements for the fiscal years ended July 3, 1998 and June 27, 1997
to reflect this change.
/s/ ERNST & YOUNG LLP
San Jose, California
September 21, 1998,
except for the second paragraph of the Summary
of Significant Accounting Policies footnote, as to
which the date is
April 8, 1999
F-92
<PAGE> 360
NETWORK & STORAGE MANAGEMENT GROUP
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 27, JULY 3, APRIL 2,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash...................................... $ 921 $ 4,879 $ 2,024
Accounts receivable, net.................. 14,387 15,982 23,090
Inventories............................... 2,907 711 399
Loan receivable from Seagate Technology
and affiliates.......................... -- -- 42,111
Other current assets...................... 2,589 480 3,349
--------- --------- -----------
Total current assets.................... 20,804 22,052 70,973
Equipment and leasehold improvements,
net..................................... 17,066 11,338 12,733
Goodwill and other intangibles, net....... 56,217 41,331 31,564
--------- --------- -----------
Total assets............................ $ 94,087 $ 74,721 $ 115,270
========= ========= ===========
LIABILITIES
Loan payable to Seagate Technology and
affiliates.............................. $ 25,616 $ 10,636 $ --
Accounts payable.......................... 5,674 3,782 4,754
Accrued employee compensation............. 8,304 8,011 10,107
Accrued expenses.......................... 9,785 7,143 9,533
Accrued income taxes...................... -- 1,290 18,828
Deferred revenue.......................... 3,573 3,880 7,740
--------- --------- -----------
Total current liabilities............... 52,952 34,742 50,962
Deferred income taxes..................... 6,233 1,691 697
Other liabilities......................... 301 255 --
--------- --------- -----------
Total liabilities....................... 59,486 36,688 51,659
Commitments and contingencies
GROUP EQUITY
Contributed capital....................... 258,010 258,586 258,884
Accumulated deficit....................... (223,409) (220,553) (195,273)
--------- --------- -----------
Total group equity...................... 34,601 38,033 63,611
--------- --------- -----------
Total liabilities and group equity...... $ 94,087 $ 74,721 $ 115,270
========= ========= ===========
</TABLE>
See notes to combined financial statements.
F-93
<PAGE> 361
NETWORK & STORAGE MANAGEMENT GROUP
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED NINE MONTHS ENDED
------------------------------- -------------------
JUNE 28, JUNE 27, JULY 3, APRIL 3, APRIL 2,
1996 1997 1998 1998 1999
--------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Licensing..................... $ 102,869 $130,661 $160,192 $120,102 $156,118
Licensing from Seagate
Technology.................. 9,374 4,920 5,048 4,167 5,135
Maintenance, support and
other....................... 4,499 5,921 9,806 7,270 8,972
--------- -------- -------- -------- --------
Total revenues.............. 116,742 141,502 175,046 131,539 170,225
Cost of revenues:
Licensing..................... 13,211 11,834 13,714 10,991 8,241
Licensing from Seagate
Technology.................. 3,999 1,834 411 402 329
Maintenance, support and
other....................... 194 789 2,067 1,379 2,598
Amortization of developed
technologies................ 9,941 17,655 7,143 6,394 2,360
--------- -------- -------- -------- --------
Total cost of revenues...... 27,345 32,112 23,335 19,166 13,528
--------- -------- -------- -------- --------
Gross profit.................. 89,397 109,390 151,711 112,373 156,697
Operating expenses:
Sales and marketing........... 55,875 68,238 68,314 51,365 63,649
Research and development...... 32,543 33,565 31,677 24,015 26,718
General and administrative.... 20,031 26,021 22,254 17,089 15,557
In-process research and
development................. 61,066 -- 6,800 -- --
Amortization of goodwill and
other intangibles........... 13,035 20,250 13,236 10,656 7,697
Restructuring costs........... 9,502 2,524 -- -- --
--------- -------- -------- -------- --------
Total operating expenses.... 192,052 150,598 142,281 103,125 113,621
--------- -------- -------- -------- --------
Income (loss) from
operations.................. (102,655) (41,208) 9,430 9,248 43,076
Interest expense.............. (1,013) (2,733) (768) (768) (74)
Other, net.................... 308 155 55 24 1,472
--------- -------- -------- -------- --------
Interest and other, net....... (705) (2,578) (713) (744) 1,398
--------- -------- -------- -------- --------
Income (loss) before income
taxes....................... (103,360) (43,786) 8,717 8,504 44,474
Benefit from (provision for)
income taxes................ 8,764 10,586 (5,861) (5,835) (19,194)
--------- -------- -------- -------- --------
Net income (loss)............. $ (94,596) $(33,200) $ 2,856 $ 2,669 $ 25,280
========= ======== ======== ======== ========
</TABLE>
See notes to combined financial statements.
F-94
<PAGE> 362
NETWORK & STORAGE MANAGEMENT GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED NINE MONTHS ENDED
--------------------------------- ---------------------
JUNE 28, JUNE 27, JULY 3, APRIL 3, APRIL 2,
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................. $ (94,596) $ (33,200) $ 2,856 $ 2,669 $ 25,280
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization.................. 24,274 32,642 28,018 23,783 16,314
Deferred income taxes.......................... (1,700) (7,505) (4,542) (3,508) (994)
Write-off of in-process research and
development................................. 61,066 -- 6,800 -- --
Write-off or write-down of goodwill and
intangibles................................. 2,157 13,106 1,900 1,900 --
Write-offs due to restructure.................. 4,427 1,494 -- -- --
Other.......................................... 400 -- -- -- --
Changes in operating assets and liabilities:
Accounts receivable......................... (8,420) 7,432 (1,360) (3,050) (7,108)
Inventories................................. 117 (1,588) 2,206 2,358 312
Other current assets........................ 848 (419) 2,118 768 (2,869)
Accounts payable............................ 2,636 (1,581) (2,218) (1,757) 972
Accrued employee compensation............... 1,211 1,738 (371) 1,146 2,096
Accrued expenses............................ 5,899 -- (2,671) (1,342) 2,390
Accrued income taxes........................ (950) 3,486 1,866 7,598 17,836
Deferred revenue............................ 88 (81) 232 (101) 3,860
Other liabilities........................... (3,130) (399) (46) (40) (255)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities.................................. (5,673) 15,125 34,788 30,424 57,834
INVESTING ACTIVITIES
Acquisitions of businesses, net of cash acquired... (31,102) -- (10,000) -- --
Acquisition of equipment and leasehold
improvements, net................................ (9,380) (12,625) (3,530) (4,034) (7,652)
Acquisition of intangibles......................... -- -- (2,320) -- (290)
Other, net......................................... 4 -- -- -- --
--------- --------- --------- --------- ---------
Net cash used in investing activities.......... (40,478) (12,625) (15,850) (4,034) (7,942)
FINANCING ACTIVITIES
Funding by Seagate Technology for acquisitions of
businesses....................................... 27,143 -- -- -- --
Borrowings from Seagate Technology................. 131,287 144,427 160,347 104,202 108,784
Repayments to Seagate Technology................... (113,665) (150,398) (175,327) (129,938) (161,531)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities.................................. 44,765 (5,971) (14,980) (25,736) (52,747)
Effect of exchange rate changes on cash............ (2) -- -- -- --
--------- --------- --------- --------- ---------
Increase (decrease) in cash.................... (1,388) (3,471) 3,958 654 (2,855)
Elimination of Arcada's net cash activity for
the duplicated six months ended December 30,
1995........................................ 1,768 -- -- -- --
Cash at the beginning of the period................ 4,012 4,392 921 921 4,879
--------- --------- --------- --------- ---------
Cash at the end of the period...................... $ 4,392 $ 921 $ 4,879 $ 1,575 $ 2,024
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest........................... $ 32 $ 156 $ -- $ -- $ --
Cash paid for income taxes....................... 1,694 304 1,814 $ 451 $ 1,055
</TABLE>
See notes to combined financial statements.
F-95
<PAGE> 363
NETWORK & STORAGE MANAGEMENT GROUP
COMBINED STATEMENTS OF GROUP EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
FOR THE NINE MONTHS ENDED APRIL 2, 1999, OTHER
AND FOR THE YEARS ENDED JULY 3, 1998, JUNE 27, CONTRIBUTED COMPREHENSIVE ACCUMULATED
1997 AND JUNE 28, 1996, CAPITAL INCOME DEFICIT TOTAL
---------------------------------------------- ----------- ------------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1995.................... $140,610 $ 2 $ (95,693) $ 44,919
Acquisition by Seagate Technology of OnDemand
Software, Inc. and minority interest of
Arcada Holdings, Inc...................... 98,249 -- -- 98,249
Acquisition by Seagate Technology of Calypso
Software Systems, Inc..................... 13,799 -- -- 13,799
Income tax benefit from Seagate Technology
stock option exercises.................... 1,866 -- -- 1,866
Foreign currency translation adjustment..... -- (2) -- (2)
Net loss.................................... -- -- (94,596) (94,596)
Elimination of Arcada Holdings, Inc. activity
for the duplicated six months ended December
30, 1995.................................. -- -- 80 80
-------- ------ --------- --------
BALANCE AT JUNE 28, 1996.................... 254,524 -- (190,209) 64,315
Income tax benefit from Seagate Technology
stock option exercises.................... 3,486 -- -- 3,486
Net loss.................................... -- -- (33,200) (33,200)
-------- ------ --------- --------
BALANCE AT JUNE 27, 1997.................... 258,010 -- (223,409) 34,601
Income tax benefit from Seagate Technology
stock option exercises.................... 576 -- -- 576
Net income.................................. -- -- 2,856 2,856
-------- ------ --------- --------
BALANCE AT JULY 3, 1998..................... 258,586 -- (220,553) 38,033
Income tax benefit from Seagate Technology
stock option exercises (unaudited)........ 298 -- -- 298
Net income (unaudited)...................... -- -- 25,280 25,280
-------- ------ --------- --------
BALANCE AT APRIL 2, 1999
(unaudited)................................. $258,884 -- $(195,273) $ 63,611
======== ====== ========= ========
</TABLE>
See notes to combined financial statements.
F-96
<PAGE> 364
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business. The Network & Storage Management Group ("NSMG" or
the "Network & Storage Management Group") develops and markets software products
and provides related services enabling information technology ("IT")
professionals to manage distributed network resources and to secure and protect
enterprise data. The Network & Storage Management Group operates in a single
industry segment, and its products offer features such as system backup,
disaster recovery, migration, replication, automated client protection, storage
resource management, scheduling, event correlation and desktop management.
The Network & Storage Management Group is an operating division of Seagate
Software, Inc. ("Seagate Software"), which is a majority-owned and consolidated
subsidiary of Seagate Technology, Inc. ("Seagate Technology"), a data technology
company that provides products for storing, managing and accessing digital
information on computer systems. Seagate Software is headquartered in Scotts
Valley, California and has 49 offices and operations in 18 countries worldwide.
Restatement of Financial Statements. The Network & Storage Management Group
had previously allocated a portion of goodwill to developed technology and
evaluated the impairment of goodwill based on the revenues from the related
software. Using this method, the Network & Storage Management Group recorded
write-downs and write-offs of goodwill in fiscal 1997 in the amount of
$10,259,000. The Network & Storage Management Group has re-evaluated its
methodology and determined that goodwill should not be allocated to developed
technology under Accounting Principles Board Opinion 17, "Intangible Assets." As
a result, the Network & Storage Management Group has made adjustments to
decrease the amounts of goodwill previously written-down and written-off from
$10,259,000 to $6,173,000 in fiscal 1997. The additional goodwill of $4,086,000
is being amortized over the remaining estimated useful lives of approximately 5
years.
The effect of this adjustment on previously reported combined financial
statements as of and for the years ended July 3, 1998 and June 27, 1997 is as
follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
AS REPORTED AS RESTATED
AS OF AND FOR AS OF AND FOR
THE YEARS ENDED THE YEARS ENDED
---------------------- ----------------------
JUNE 27, JULY 3, JUNE 27, JULY 3,
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Amortization of goodwill...... $ 23,987 $ 12,456 $ 20,250 $ 13,236
Income (loss) from
operations.................. (44,945) 10,210 (41,208) 9,430
Net income (loss)............. (36,937) 3,636 (33,200) 2,856
Goodwill and other intangible
assets, net................. 52,480 38,374 56,217 41,331
Accumulated deficit........... (227,146) (223,510) (223,409) (220,553)
</TABLE>
F-97
<PAGE> 365
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The effect of this adjustment on previously reported combined financial
statements as of and for the nine months ended April 3, 1998 is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
AS REPORTED AS RESTATED
----------------- -----------------
AS OF AND FOR THE AS OF AND FOR THE
NINE MONTHS ENDED NINE MONTHS ENDED
APRIL 3, 1998 APRIL 3, 1998
----------------- -----------------
(UNAUDITED) (UNAUDITED)
----------------- -----------------
<S> <C> <C>
Amortization of goodwill.................. $ 10,071 $ 10,656
Income from operations.................... 9,833 9,248
Net income................................ 3,254 2,669
Goodwill and other intangible assets,
net..................................... 36,014 39,168
Accumulated deficit....................... (223,892) (220,741)
</TABLE>
Basis of presentation. These financial statements have been prepared using
the historical basis of accounting and are presented as if the Network & Storage
Management Group had existed as an entity separate from Seagate Software and
Seagate Technology during the periods presented. These financial statements
include the historical assets, liabilities, revenues and expenses that are
directly related to the Network & Storage Management Group's operations. For
certain assets and liabilities of Seagate Software that are not specifically
identifiable with the Network & Storage Management Group, estimates have been
used to allocate such assets and liabilities to the Network & Storage Management
Group by applying methodologies management believes are appropriate.
The unaudited quarterly consolidated financial statements presented have
been prepared on a basis consistent with the audited consolidated financial
statements, pursuant to the rules and regulations of the Securities and Exchange
Commission.
The statements of operations include all revenues and costs attributable to
the Network & Storage Management Group, including allocations of certain
corporate administration, finance, and management costs. Such costs were
proportionately allocated to the Network & Storage Management Group based on
detailed inquiries and estimates of time incurred by Seagate Software's
corporate marketing and general and administrative departmental managers. In
addition, certain of Seagate Software's operations are shared locations
involving activities that pertain to the Network & Storage Management Group as
well as to other businesses of Seagate Software. Costs incurred in shared
locations are allocated based on specific identification, or where specific
identification is not possible, such costs are allocated between the Network &
Storage Management Group and other businesses of Seagate Software using
methodologies that management believes are reasonable. Transactions and balances
between entities and locations within the Network & Storage Management Group
have been eliminated.
From August 1994 to June 1996, Seagate Technology acquired seven software
companies that were engaged in developing and marketing network and/or storage
management software products. In addition, in February 1996, Seagate Technology
merged with Conner Peripherals, Inc. ("Conner") in a transaction accounted for
as a pooling-of-interests. In connection with the merger, Seagate Technology
purchased the outstanding minority interests in Conner's storage management
software operations under Arcada
F-98
<PAGE> 366
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Holdings, Inc. ("Arcada"). Also, in June 1998, the Network & Storage Management
Group acquired Eastman Software for $10,000,000 in cash. The amount of capital
contributed by Seagate Technology for acquisitions is determined by the amounts
paid for such acquisitions by Seagate Technology on behalf of the Network &
Storage Management Group. The accompanying financial statements present the
combined results of operations of the acquired companies from the dates of
acquisition.
The Network & Storage Management Group operates and reports financial
results on a fiscal year of 52 or 53 weeks ending on the Friday closest to June
30. Accordingly, fiscal 1996 ended on June 28, 1996, fiscal 1997 ended on June
27, 1997, and fiscal 1998 ended on July 3, 1998. Fiscal years 1996 and 1997 were
comprised of 52 weeks, and fiscal 1998 was comprised of 53 weeks. Fiscal 1999
will be a 52-week year and will end on July 2, 1999. All references to years in
the notes to combined financial statements represent fiscal years unless
otherwise noted.
Arcada, which was acquired by the Network & Storage Management Group
pursuant to Seagate Technology's merger with Conner, had a fiscal year that
ended on the Saturday closest to December 31. Accordingly, Arcada's statement of
operations for the year ended December 30, 1995 has been combined with the
Network & Storage Management Group's statement of operations for the year ended
June 30, 1995. In order to conform Arcada's fiscal year end to the Network &
Storage Management Group's fiscal year end, the Network & Storage Management
Group's combined statement of operations for the year ended June 28, 1996
includes six months (July 1, 1995 through December 30, 1995) for Arcada which
are also included in the Network & Storage Management Group's combined statement
of operations for the year ended June 30, 1995.
Economic dependence on Seagate Technology. The Network & Storage Management
Group incurred net losses of $94,596,000 and $33,200,000 during 1996 and 1997,
respectively, and had a working capital deficit of $12,690,000 at July 3, 1998.
On July 4, 1998, Seagate Software and Seagate Technology renewed the Revolving
Loan Agreement on substantially the same terms and conditions as the prior
agreement that was dated June 28, 1996. Under the Revolving Loan Agreement,
Seagate Technology finances certain of Seagate Software's working capital needs.
The Revolving Loan Agreement provides for maximum outstanding borrowings of up
to $60,000,000 and is renewable every two years. Outstanding borrowings by the
Network & Storage Management Group from Seagate Technology and affiliates were
$25,616,000 and $10,636,000 at June 27, 1997 and July 3, 1998, respectively and
a net receivable of $42,111,000 (unaudited) at April 2, 1999. Borrowings from
Seagate Technology consist primarily of amounts used to fund the Network &
Storage Management Group's operating activities. A net receivable position
existed as of April 2, 1999 primarily due to an increase in loan repayments to
Seagate Technology resulting from an increase in cash generated from operations.
The loan balance is offset and presented on the balance sheet as a net
receivable or net payable in accordance with the terms of the loan agreement.
Beginning in fiscal 1999, the Network & Storage Management Group will pay
interest at the LIBOR rate plus 2% per annum on such borrowings; the Network &
Storage Management Group previously paid interest at 6%. Interest expense as
presented in the statement of operations primarily relates to interest incurred
under the Revolving Loan Agreement.
F-99
<PAGE> 367
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The Network & Storage Management Group and Seagate Software are
economically dependent on Seagate Technology and believe that to the extent
future cash flows from operations and borrowings under the existing loan
agreement with Seagate Technology are not sufficient to fund the Network &
Storage Management Group's working capital deficit and planned activities during
the next 12 months, that additional funding will be available at a reasonable
cost from Seagate Technology.
Accounting 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 financial
statements and accompanying notes. Actual results could differ materially from
those estimates.
Concentration of credit risk. Financial instruments that potentially
subject the Network & Storage Management Group to significant concentrations of
credit risk consist primarily of cash and accounts receivable. The Network &
Storage Management Group places its cash and cash equivalents in high credit
quality financial institutions. Accounts receivable are derived from revenues
earned from customers primarily located in North America. The Network & Storage
Management Group performs ongoing credit evaluations of its customers and
generally does not require collateral. The Network & Storage Management Group
maintains reserves for potential credit losses and historically such losses have
been immaterial. Revenue from one third-party customer, Ingram Micro, accounted
for 17%, 22% and 27% of the Network & Storage Management Group's total revenues
in 1996, 1997 and 1998, and 28% (unaudited) in the nine months ended April 3,
1998 and 28% (unaudited) in the nine months ended April 2, 1999. Revenue from
another third-party customer, Tech Data, accounted for 12% of the Network &
Storage Management Group's total revenues in 1998.
Foreign currency translation. The U.S. dollar is the functional currency
for all of the Network & Storage Management Group's foreign operations. Gains
and losses on the remeasurement into U.S. dollars of amounts denominated in
foreign currencies are included in net income.
Earnings per share. The Network & Storage Management Group is a division of
Seagate Software and has no formal capital structure. Accordingly, earnings per
share information is not presented.
Cash management. Seagate Technology uses a centralized cash management
function for all of its domestic operations, including domestic operations of
the Network & Storage Management Group.
Cash and cash equivalents. The Network & Storage Management Group considers
all highly liquid investments with an original maturity of 90 days or less at
the time of purchase to be cash equivalents. The Network & Storage Management
Group typically uses available cash in excess of amounts required for operating
activities to pay amounts due under the Revolving Loan Agreement. Accordingly,
the Network & Storage Management Group has not had significant cash equivalents
to date.
Inventories. Inventories are stated at the lower of cost (first in, first
out method) or market, and consist primarily of materials used in software
products, related supplies and packaging materials.
F-100
<PAGE> 368
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Equipment and leasehold improvements. Equipment and leasehold improvements
are stated at cost. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets, which range from two to five years.
Assets under capital leases and leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease term.
Goodwill and other intangible assets. Goodwill represents the excess of the
purchase price of acquired companies over the estimated fair values of tangible
and intangible net assets acquired. Goodwill is amortized on a straight-line
basis over five to seven years. The carrying values of long-term assets and
intangibles other than developed technology ("other intangibles") are reviewed
if facts and circumstances suggest that they may be impaired. If this review
indicates that carrying values of long-term assets and other intangibles and
associated goodwill will not be recoverable based on projected undiscounted
future cash flows, carrying values are reduced to estimated fair values by first
reducing goodwill and second by reducing long-term assets and other intangibles.
Other intangible assets consist of trademarks, assembled workforces,
distribution networks, developed technology, customer bases, and covenants not
to compete related to acquisitions accounted for by the purchase method. See
Note on Business Combinations and Acquisitions. Amortization of purchased
intangibles, other than acquired developed technology, is provided on the
straight-line basis over the respective useful lives of the assets ranging from
36 to 60 months for trademarks, 24 to 48 months for assembled workforces and
distribution networks, 12 to 36 months for customer bases and 18 to 24 months
for covenants not to compete. In-process research and development without
alternative future use is expensed when acquired.
Developed technology and capitalized software development costs. The
Network & Storage Management Group applies Statement of Financial Accounting
Standards No. 86 ("SFAS 86"), "Accounting for the Costs of Computer Software to
Be Sold, Leased, or Otherwise Marketed", to software technologies developed
internally, acquired in business acquisitions, and purchased.
Internal development costs are included in research and development and are
expensed as incurred. SFAS 86 requires the capitalization of certain internal
development costs once technological feasibility is established, which based on
the Network & Storage Management Group's development process generally occurs
upon the completion of a working model. As the time period between the
completion of a working model and the general availability of software has been
short, capitalization of internal development costs has not been material to
date. Capitalized costs are amortized based on the greater of the straight-line
basis over the estimated product life (generally 30 to 48 months) or the ratio
of current revenues to the total of current and anticipated future revenues.
Purchased developed technology, including developed technology acquired in
business acquisitions, is amortized based on the greater of the straight-line
basis over the estimated useful life (30 to 48 months) or the ratio of current
revenues to the total of current and anticipated future revenues. The
recoverability of the carrying value of purchased developed technology and
associated goodwill is reviewed periodically. The carrying value of developed
technology is compared to the estimated future gross revenues from that product
reduced by the estimated future costs of completing and disposing of that
product,
F-101
<PAGE> 369
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
including the costs of performing maintenance and customer support (net
undiscounted cash flows) and to the extent that the carrying value exceeds the
undiscounted cash flows the difference is written off. If the developed
technology was acquired in a business combination the carrying value of any
related goodwill is also compared to the estimated net discounted cash flows
less the carrying value of the developed technology and if the carrying value of
the goodwill exceeds the net undiscounted cash flows the difference is written
off.
Fair value disclosures. The Network & Storage Management Group maintains
its cash principally with major banks in interest- and non-interest-bearing bank
accounts. There are no realized or unrealized gains or losses and fair value
approximates carrying value for all cash balances.
Pushdown and carveout accounting. Seagate Technology has provided
substantial services to Seagate Software, including general management,
treasury, tax, financial reporting, benefits administration, insurance,
information technology, legal, accounts payable and receivable and credit
functions. Seagate Technology has charged Seagate Software for these services
through corporate expense allocations, and such expenses in turn have been
reallocated by Seagate Software to the Network & Storage Management Group and to
the other businesses of Seagate Software. The amount of corporate expense
allocations is dependent upon the total amount of allocable costs incurred by
Seagate Technology on behalf of Seagate Software and the Network & Storage
Management Group less amounts charged as a specific cost or expense rather than
by allocation. Included in the Network & Storage Management Group's general and
administrative expenses are Seagate Technology allocation charges of $1,771,000,
$1,462,000 and $730,000 for 1996, 1997 and 1998, respectively and $525,000
(unaudited) and $387,000 (unaudited) for the nine months ended April 3, 1998 and
April 2, 1999, respectively. Included in sales and marketing expenses are
Seagate Technology allocation charges of $14,000, $12,000 and $462,000 for 1996,
1997 and 1998, respectively and $459,000 (unaudited) and $216,000 (unaudited)
for the nine months ended April 3, 1998 and April 2, 1999, respectively. The
increase in sales and marketing expenses in 1998 was due to proportional cost
allocations from Seagate Technology's corporate branding program, which
consisted of television and newspaper advertisements.
The Network & Storage Management Group's employees participated in Seagate
Technology's profit sharing plan through the first quarter of fiscal 1998 and in
Seagate Technology's management bonus plan during 1997. The Network & Storage
Management Group has since adopted its own bonus plan. Compensation expenses
recorded by the Network & Storage Management Group under Seagate Technology's
plans totaled $700,000, $2,664,000 and $0 for 1996, 1997 and 1998, respectively.
The employees of the Network & Storage Management Group also participate in
Seagate Technology Employee Stock Purchase Plan (the "Purchase Plan"). The
Purchase Plan permits eligible employees who have completed thirty days of
employment prior to the inception of the offering period to purchase common
stock of Seagate Technology through payroll deductions at the lower of 85% of
the fair market value of the common stock at the beginning or at the end of each
six-month offering period. Under the plan, approximately 34,500, 71,200 and
75,700 shares of common stock of Seagate Technology
F-102
<PAGE> 370
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
were issued to the Network & Storage Management Group's employees in 1996, 1997
and 1998, respectively.
The U.S. employees of the Network & Storage Management Group also
participate in the Seagate Technology tax-deferred savings plan, the Seagate
Technology, Inc. Savings and Investment Plan (the "401(k) plan"). The 401(k)
plan is designed to provide qualified employees with an accumulation of funds at
retirement. Qualified employees may elect to make contributions to the 401(k)
plan on a monthly basis. The Network & Storage Management Group may make annual
contributions to the 401(k) plan at the discretion of the Board of Directors.
Network & Storage Management Group contributions were immaterial in fiscal years
1996 and 1997 and were $560,000 in fiscal year 1998.
Revenue recognition. During fiscal 1998 and prior, the Network & Storage
Management Group recognized revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position 91-1, "Software Revenue
Recognition". The Network & Storage Management Group's total revenues are
derived from license revenues for its various software products as well as
maintenance, support, training and consulting. Revenues for maintenance, support
services, training and consulting are recognized separately from software
licenses. License revenues are recognized upon delivery of the product if no
significant vendor obligations remain and collection of the resulting receivable
is probable. Allowances for estimated future returns are provided upon shipment.
Maintenance and support revenues consist of ongoing support and product updates
and are recognized ratably over the term of the contract, which is typically
twelve months. Revenues from training and consulting are recognized when the
services are performed.
Revenues from resellers, including VARs, OEMs, distributors and Seagate
Technology, are primarily recognized at the time of product delivery to the
reseller. The Company's policy is to defer such revenues if resale contingencies
exist. Factors considered in the determination of whether such contingencies
exist include, but are not limited to, payment terms, collectibility and past
history with the customer.
Product returns are reserved for in accordance with SFAS 48. Such returns
are estimated based on historical return rates. The Company considers other
factors such as fixed and determinable fees, resale contingencies, arms length
contract terms and the ability to reasonably estimate returns to ensure
compliance with SFAS 48. Additionally, the Network and Storage Management Group
continually reviews its estimated product return provisions to ensure that they
are reasonable in relation to actual product returns, which are quantified based
on approved return authorization forms received prior to fiscal cutoff dates.
Historically, the Network and Storage Management Group's estimated product
return rates have not varied materially from actual product return rates.
In October 1997 and March 1998, the American Institute of Certified Public
Accountants issued Statements of Position 97-2, "Software Revenue Recognition"
("SOP 97-2") and 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2, Software Revenue Recognition" ("SOP 98-4"). SOP 97-2 and SOP 98-4 provide
guidance on recognizing revenue on software transactions and supersede SOP 91-1.
The Network & Storage Management Group has assessed the impact of the
requirements of SOP 97-2 and SOP 98-4 and has changed certain of its policies
and procedures. The Network & Storage
F-103
<PAGE> 371
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Management Group's adoption of SOP 97-2 and SOP 98-4 for transactions entered
into after July 3, 1998 did not have a significant impact on revenues or results
of operations for the first nine months of fiscal 1999.
Advertising expense. The cost of advertising is expensed as incurred. The
Network & Storage Management Group does not incur any direct response
advertising costs. Advertising costs totaled $13,914,000, $18,571,000 and
$12,358,000 in 1996, 1997 and 1998, respectively.
Accounts receivable. Accounts receivable are summarized below, in
thousands:
<TABLE>
<CAPTION>
JUNE 27, JULY 3, APRIL 2,
1997 1998 1999
-------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable........................... $15,340 $16,780 $ 33,165
Less allowance for non-collection............. (953) (798) (10,075)
------- ------- --------
$14,387 $15,982 $ 23,090
======= ======= ========
</TABLE>
Inventory. The write-downs of inventory to the lower of cost or market were
$800,000, $531,000 and $3,674,000 in 1996, 1997 and 1998, respectively. The
write-down in fiscal 1998 was a result of consolidating Seagate Software's
fulfillment warehouses and changing their strategy to have fulfillment
activities handled by an outsourcing partner. As a result of this consolidation
excess and obsolete components and finished goods were written down. The
write-down in fiscal 1997 and 1996 related to excess and obsolete components and
finished goods inventory.
Equipment and leasehold improvements. Equipment and leasehold improvements
consisted of the following, in thousands:
<TABLE>
<CAPTION>
JUNE 27, JULY 3, APRIL 2,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Equipment................................... $ 24,063 $ 21,366 $ 24,616
Leasehold improvements...................... 5,274 5,783 8,276
-------- -------- --------
29,337 27,149 32,892
Less accumulated depreciation and
amortization.............................. (12,271) (15,811) (20,159)
-------- -------- --------
$ 17,066 $ 11,338 $ 12,733
======== ======== ========
</TABLE>
Depreciation is recognized on the straight-line basis over the respective
useful lives of the assets, ranging from two to five years for equipment and the
life of the lease for building and leasehold improvements. Depreciation expense
was $3,455,000, $7,393,000 and $9,111,000 in 1996, 1997 and 1998, respectively.
F-104
<PAGE> 372
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Goodwill and other intangibles. Goodwill and other intangibles consisted of
the following, in thousands:
<TABLE>
<CAPTION>
JUNE 27, JULY 3, APRIL 2,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill........................................ $ 50,286 $ 49,039 $ 49,139
Developed technology............................ 28,486 28,449 28,638
Trademarks...................................... 3,653 3,653 3,653
Assembled workforce............................. 4,638 2,568 2,568
Distribution network............................ 2,925 2,925 2,925
Other intangibles............................... 8,604 9,743 9,743
-------- -------- --------
98,592 96,377 96,666
Accumulated amortization........................ (42,375) (55,046) (65,102)
-------- -------- --------
Goodwill and other intangibles.................. $ 56,217 $ 41,331 $ 31,564
======== ======== ========
</TABLE>
Amortization of developed technologies is included in costs of revenues. In
1996, 1997 and 1998 amortization expense for goodwill and other intangibles
includes write-offs and write-downs to the estimated fair value of $2,157,000,
$6,173,000 and $1,900,000, respectively. In 1997 the amortization of acquired
developed technologies included in cost of revenues includes write-downs and
write-offs to net realizable value of $6,918,000.
Periodically, the Network & Storage Management Group reviews the carrying
value of its intangibles other than developed technology to ascertain if there
has been any impairment. In 1996, the former owner of Frye Computer Systems,
Inc. (a 1995 acquisition) and its original founder, Mr. Frye, left the Network &
Storage Management Group. With his departure, the Network & Storage Management
Group decided to release Mr. Frye from the remaining period of his covenant not
to compete and to not use the Frye name trademark in future products. As a
result, the remaining carrying value of the covenant not to compete and
trademark and associated goodwill totalling $2,157,000 were written off.
The Network & Storage Management Group also periodically reviews the net
realizable value of developed technology under the guidance of SFAS No. 86. The
Network & Storage Management Group compares the estimated undiscounted future
cash flows on a product by product basis to the unamortized cost of developed
technology. Unamortized costs in excess of the estimated undiscounted cash flows
are written off. The impairment write-offs for developed technology recorded in
1997 were caused by a number of factors including the Network & Storage
Management Group's decision to stop selling products or technologies such as
DOS, new acquisitions, or new product designs. The Network & Storage Management
Group is not currently generating revenue from any products for which the
related developed technology has been impaired.
In addition, the Network & Storage Management Group assesses the impairment
of goodwill not within the scope of SFAS 121 under Accounting Principles Board
Opinion No. 17, "Intangible Assets" (APB 17). During 1997, the Network & Storage
Management Group wrote-off and wrote-down goodwill amounting to $6,173,000. The
write-offs and write-downs related to the decision to abandon and stop selling
all current and future
F-105
<PAGE> 373
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
products acquired from Frye Computer Systems, Inc., the decision to abandon and
stop selling virtually all current and future products acquired in the
acquisition of Palindrome Corporation, and the decision to close down and sell
Calypso Software Systems, Inc.
The Network & Storage Management Group has capitalized the assembled
workforce in most of its acquisitions. When the Network & Storage Management
Group reviews the carrying value of its intangibles, if there remains less than
5% of the original workforce the related intangible is deemed impaired. In 1998,
the Network & Storage Management Group wrote off the workforces and associated
goodwill for three previous acquisitions, Network Computing, Inc., Netlabs,
Inc., and Creative Interaction Technologies, Inc. because less than 5% of the
original workforce remained.
The following table provides quantitative information about the write-offs
and write-downs of goodwill and other intangibles, in thousands:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------- --------------------- ---------------------
DEVELOPED
INTANGIBLE GOODWILL TECHNOLOGY GOODWILL INTANGIBLE GOODWILL
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
COVENANT NOT TO COMPETE
Frye Computer Systems,
Inc................ $1,188 $744
TRADEMARK
Frye Computer Systems,
Inc................ 225
DEVELOPED TECHNOLOGY
Netlabs, Inc.......... $ 780
Palindrome
Corporation........ 2,740 $2,930
Calypso Software
Systems, Inc....... 1,627 2,573
Creative Interaction
Technologies,
Inc................ 1,176
Frye Computer Systems,
Inc................ 463 670
Network Computing,
Inc................ 132
ASSEMBLED WORKFORCE
Network Computing,
Inc................ $120 $ 155
Netlabs, Inc.......... 431 1,045
Creative Interaction
Technologies,
Inc................ 82 67
------ ---- ------ ------ ---- ------
Total.............. $1,413 $744 $6,918 $6,173 $633 $1,267
====== ==== ====== ====== ==== ======
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
The Network & Storage Management Group intends to adopt Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), and No. 131, "Disclosures about Segments of an Enterprise and Related
Information"
F-106
<PAGE> 374
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
("SFAS 131") during fiscal 1999. Both standards will require additional
disclosure, but will not have a material effect on the Network & Storage
Management Group's financial position or results of operations. SFAS 130
establishes standards for the reporting and display of comprehensive income,
including net income and items that are currently reported directly as a
component of stockholders' equity such as changes in foreign currency
translation adjustments and changes in the fair value of available-for-sale
financial instruments. SFAS 131 changes the way companies report segment
information and requires segments to be determined based on how management
measures performance and makes decisions about allocating resources. The Network
& Storage Management Group has not provided the disclosures related to SFAS 130
for the nine month periods ended April 3, 1998 and April 2, 1999, as these
amounts are immaterial.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on capitalization of the costs incurred for computer software developed
or obtained for internal use. It also provides guidance for determining whether
computer software is internal-use software and on accounting for the proceeds of
computer software originally developed or obtained for internal use and then
subsequently sold to the public. The Network & Storage Management Group has not
yet determined the impact, if any, of adopting this statement. The disclosures
prescribed by SOP 98-1 will be effective for the Network & Storage Management
Group's combined financial statements for the fiscal year ending June 30, 2000.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that derivatives
be recognized in the balance sheet at fair value and specifies the accounting
for changes in fair value. In June 1999, the FASB issued SFAS 137, "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133" to defer the effective date of SFAS 133 until
fiscal years beginning after June 15, 2000. The Network & Storage Management
Group generally does not use derivative financial instruments and the impact of
SFAS 133 is not anticipated to be material when adopted.
BUSINESS COMBINATIONS AND ACQUISITIONS
The Network & Storage Management Group has a history of acquisitions and
during the three most recent fiscal years acquired Arcada Holdings, Inc.,
Calypso Software Systems, Inc., OnDemand Software, Inc. and Sytron Corporation
in 1996, made no acquisitions in 1997, and acquired Eastman Software Storage
Management Group, Inc. in 1998.
In accordance with the provisions of APB Opinion 16, all identifiable
assets, including identifiable intangible assets, were assigned a portion of the
cost of the acquired enterprise (purchase price) on the basis of their
respective fair values. This included the portion of the purchase price properly
attributed to incomplete research and development projects that should be
expensed according to the requirements of Interpretation 4 of SFAS No. 2.
F-107
<PAGE> 375
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Valuation of acquired intangible assets. To determine the value of
developed technologies, the expected future cash flows of existing product and
core technologies were evaluated, taking into account risks related to the
characteristics and applications of each product, existing and future markets
and assessments of the life cycle stage of each product. Based on this analysis,
the existing technologies that had reached technological feasibility were
capitalized.
To determine the value of in-process research and development, the Network
& Storage Management Group considered, among other factors, the state of
development of each project, the time and cost needed to complete each project,
expected income, associated risks which included the inherent difficulties and
uncertainties in completing each project and thereby achieving technological
feasibility and risks related to the viability of and potential changes to
future target markets. This analysis resulted in amounts assigned to in-process
research and development for projects that had not yet reached technological
feasibility and which did not have alternative future uses. The Income Approach,
which includes analysis of markets, cash flows, and risks associated with
achieving such cash flows, was the primary technique utilized in valuing each
in-process research and development project. The underlying in-process projects
acquired were the most significant and uncertain assumptions utilized in the
valuation analysis of in-process research & development projects.
To determine the value of developed technologies, the expected future cash
flows of existing product technologies were evaluated, taking into account risks
related to the characteristics and applications of each product, existing and
future markets and assessments of the life cycle stage of each product. Based on
this analysis, the existing technologies that had reached technological
feasibility were capitalized.
To determine the value of the distribution networks and customer bases, the
Network & Storage Management Group considered, among other factors, the size of
the current and potential future customer bases, the quality of existing
relationships with customers, the historical costs to develop customer
relationships, the expected income and associated risks. Associated risks
included the inherent difficulties and uncertainties in transitioning the
business relationships from the acquired entity to the Network & Storage
Management Group and risks related to the viability of and potential changes to
future target markets.
To determine the value of trademarks, the Network & Storage Management
Group considered, among other factors, the assumption that in lieu of ownership
of a trademark, the Network & Storage Management Group would be willing to pay a
royalty in order to exploit the related benefits of such trademark.
To determine the value of assembled workforces, the Network & Storage
Management Group considered, among other factors, the costs to replace existing
employees including search costs, interview costs and training costs.
Goodwill is determined based on the residual difference between the amount
paid and the values assigned to identified tangible and intangible assets. If
the values assigned to identified tangible and intangible assets exceed the
amounts paid, including the effect of deferred taxes, the values assigned to
long-term assets were reduced proportionally.
F-108
<PAGE> 376
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Acquisition of Sytron Corporation. In July 1995, Arcada Software, Inc., a
majority-owned subsidiary of Arcada, acquired the assets and liabilities of
Sytron Corporation, a company that developed, produced and marketed software
products for data storage management. The purchase price of approximately
$5,017,000 was paid in cash. Arcada accounted for the acquisition using the
purchase method, and the results of operations of Sytron are only included in
the Network & Storage Management Group's operations since the acquisition was
completed. The following is a summary of the purchase price allocation, in
thousands:
<TABLE>
<S> <C>
Current assets and other tangible assets.................... $ 848
Liabilities assumed......................................... (508)
Developed technology........................................ 1,487
In-process research and development......................... 2,817
Goodwill.................................................... 373
------
$5,017
======
</TABLE>
Acquisition of minority interest of Arcada Holdings, Inc. The combination
of Seagate Software with Arcada Holdings, Inc. ("Arcada"), a company which
developed, marketed and supported data protection and storage management
software products that operated across multiple desktop and client/server
environments, was accounted for as a pooling-of-interests and, accordingly, all
prior periods presented in the accompanying combined financial statements
include the accounts and operations of Arcada. Arcada's results of operations
for the duplicated six months ended December 30, 1995 were as follows, in
thousands:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 30, 1995
-----------------
<S> <C>
Net revenues.......................................... $37,700
Operating expenses.................................... 29,320
Other income.......................................... 588
Net loss.............................................. (80)
</TABLE>
In connection with the pooling-of-interests, the Network & Storage
Management Group acquired the then outstanding minority interest of Arcada. The
minority interest was approximately 31% on a fully diluted basis. The
acquisition of the minority interest was accounted for as a purchase and in
connection with the acquisition, Seagate Technology issued 2,553,000 shares of
common stock with a fair market value of approximately $52,009,000 and 1,817,000
options to purchase common stock with a fair market value of approximately
$33,065,000 (aggregate fair value of $85,074,000). The value of the shares of
Seagate Technology common stock issued to shareholders of Arcada was determined
based on the average market price of Seagate Technology's common stock five days
before and five days after October 3, 1995, the date that the terms of the
acquisition were agreed to. The options were issued to employees of Arcada and
Conner, Arcada's parent, in exchange for options of Arcada. The options have a
term of 10 years and vest 1/16 per quarter over 4 years. The value of the
options were based on the intrinsic value of the options, which approximates the
fair value. The following is a
F-109
<PAGE> 377
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
summary of the purchase price allocation for the acquisition of the minority
interest, in thousands:
<TABLE>
<S> <C>
Assembled workforce......................................... $ 1,355
Distribution network........................................ 94
Corporate accounts.......................................... 375
Strategic alliances......................................... 1,437
OEM agreements.............................................. 3,217
Value added resellers....................................... 2,030
Trademarks.................................................. 2,811
Developed technology........................................ 4,623
In-process research and development......................... 43,949
Deferred tax liability...................................... (6,254)
Goodwill.................................................... 31,437
-------
$85,074
=======
</TABLE>
Intangible assets were identified through (i) analysis of the acquisition
agreement, (ii) consideration of the Network & Storage Management Group's
intentions for future use of the acquired assets, and (iii) analysis of data
available concerning Arcada's products, technologies, markets, historical
financial performance, estimates of future performance and the assumptions
underlying those estimates. The economic and competitive environment in which
the Network & Storage Management Group and Arcada operate was also considered in
the valuation analysis.
Specifically, purchased research and development ("purchased R&D") was
identified and valued through extensive interviews and discussions with the
Network & Storage Management Group and Arcada management and the analysis of
data provided by Arcada concerning Arcada's developmental products their
respective stage of development, the time and resources needed to complete them,
their expected income generating ability, target markets and associated risks.
The Income Approach, which includes an analysis of the markets, cash flows, and
risks associated with achieving such cash flows, was the primary technique
utilized in valuing each purchased R&D project. A portion of the purchase price
was allocated to the developmental projects based on the appraised fair values
of such projects.
DISCUSSION OF IN-PROCESS RESEARCH & DEVELOPMENT ONE TIME WRITE-OFF
OVERVIEW
As of the acquisition date, Arcada had spent a significant amount of money
on research and development related to the re-development efforts to add
features and utilities to the Desktop, NetWare and Windows NT products such as
disk grooming, hierarchical storage management, upgraded graphical user
interfaces, file and server replication, and server mirroring in order to
continue to meet increasingly complex user needs.
In accordance with SFAS 86, paragraph 38 ("Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed"), "the cost of
software purchased to be integrated with another product or process will be
capitalized only if technological feasibility was established for the software
component and if all research and development
F-110
<PAGE> 378
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
activities for the other components of the product or process were completed at
the time of the purchase." Although Seagate purchased existing products from
Arcada, since the majority of the original underlying code and base technology
for the NetWare and Windows NT product families was completed in the 1990 time
frame, the technologies, as of the date of valuation, were undergoing
significant re-development.
ASSUMPTIONS
Revenue
Future revenue estimates were generated for the following product families:
(i) Desktop, (ii) NetWare, and (iii) Windows NT. Aggregate revenue for Arcada
products was estimated to be approximately $94 million for the ten and one-half
months ending December 31, 1996. Revenues were estimated to increase to
approximately $161 million and $234 million for calendar years 1997 and 1998
when most of the in-process projects were expected to be complete and shipping.
Thereafter, revenue was estimated to increase at rates ranging from 35% to 40%
for calendar years 1999 through 2002. Revenue estimates were based on (i)
aggregate revenue growth rates for the business as a whole, (ii) individual
product revenues, (iii) growth rates for the storage management software market,
(iv) the aggregate size of the storage management software market, (v)
anticipated product development and introduction schedules, (vi) product sales
cycles, and (vii) the estimated life of a product's underlying technology. The
estimated product development cycle for the new products ranged from 12 to 18
months.
Operating expenses
Operating expenses used in the valuation analysis of Arcada included (i)
cost of goods sold, (ii) general and administrative expense, (iii) selling and
marketing expense, and (iv) research and development expense. In developing
future expense estimates, an evaluation of both Seagate Software and Arcada's
overall business model, specific product results, including both historical and
expected direct expense levels (as appropriate), and an assessment of general
industry metrics was conducted.
Cost of goods sold. Cost of goods sold, expressed as a percentage of
revenue, for the developed and in-process technologies ranged from approximately
5% to 30% (30% for Desktop, 10% for NetWare, and 5% for Windows NT). The Network
& Storage Management Group's cost of goods sold was 23% for fiscal 1996, 23% for
fiscal 1997, and 13% for fiscal 1998.
General and administrative ("G&A") expense. G&A expense, expressed as a
percentage of revenue, for the developed and in-process technologies ranged from
12% in calendar 1996 to 8% in calendar 1998 and beyond.
Selling and marketing ("S&M") expense. S&M expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 30% throughout the estimation period.
Research and development ("R&D") expense. R&D expense consists of the costs
associated with activities undertaken to correct errors or keep products updated
with current information (also referred to as "maintenance" R&D). Maintenance
R&D includes all activities undertaken after a product is available for general
release to customers to
F-111
<PAGE> 379
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
correct errors or keep the product updated with current information. These
activities include routine changes and additions. The maintenance R&D expense
was estimated to be 5% of revenue for the developed technologies and 3% of
revenue for the in-process technologies throughout the estimation period.
In addition, as of the date of acquisition, the Network & Storage
Management Group management anticipated the costs to complete the Desktop,
NetWare, and Windows NT technologies at approximately $6.8 million, $4.5
million, and $7.5 million, respectively. Since the acquisition date, all
projects originally acquired from Arcada were commercially released prior to the
end of the fourth quarter of fiscal 1997.
Effective tax rate
The effective tax rate utilized in the analysis of developed and in-process
technologies was 38%, which reflects Seagate's combined federal and state
statutory income tax rates, exclusive of non-recurring charges at the time of
the acquisition and estimated for future years.
Discount rate
The discount rates selected for Arcada's developed and in-process
technologies were 15% and 17.5% respectively. In the selection of the
appropriate discount rates, consideration was given to (i) the Weighted Average
Cost of Capital (approximately 13% to 15% at the date of acquisition) of its
parent, Seagate Technology, Inc. and (ii) the Weighted Average Return on Assets
(approximately 18%). The discount rate utilized for the in-process technology
was determined to be higher than Seagate's WACC due to the fact that the
technology had not yet reached technological feasibility as of the date of
valuation. In utilizing a discount rate greater than Seagate's WACC, management
has reflected the risk premium associated with achieving the forecasted cash
flows associated with these projects.
Acquisition of OnDemand Software, Inc. In March 1996, the Network & Storage
Management Group acquired all of the outstanding shares and stock options of
OnDemand Software, Inc. ("OnDemand"), a company engaged in developing, producing
and marketing WinINSTALL, a product which automates installation, upgrades and
uninstalls of network applications throughout the enterprise. The purchase price
of approximately $13,425,000 was paid in cash. The Network & Storage Management
Group accounted for the acquisition using the purchase method, and the results
of operations of OnDemand are only included in the Network & Storage Management
Group's operations since the date
F-112
<PAGE> 380
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
the acquisition was completed. The following is a summary of the purchase price
allocation, in thousands:
<TABLE>
<S> <C>
Current assets and other tangible assets.................... $ 832
Liabilities assumed......................................... (227)
Assembled workforce......................................... 270
Developed technology........................................ 2,000
Covenant not to compete..................................... 50
In-process research and development......................... 8,900
Goodwill.................................................... 1,600
-------
$13,425
=======
</TABLE>
OnDemand develops and markets electronic software distribution products
involved in network management in the client/server environment. OnDemand's
flagship product is WinINSTALL. As of the date of acquisition, OnDemand was in
the process of developing the next generation of WinINSTALL Version 6.0. A
significant feature of Version 6.0 (not available by any competitive product)
was a rollback with clone capability, which would allow the user to selectively
return a PC to a previous state upon installation failure or upon user demand.
In order for WinINSTALL Version 6.0 to become a commercially viable product,
OnDemand, as of the valuation date, had undergone or was in the process of
undergoing significant development efforts, including (i) developing rollback
facilities, including clone capability, (ii) expanding global editor to be
included in the WinINSTALL registry file, (iii) improving WinINSTALL Remote to
ease package generation and distribution, (iv) adding a feature that would allow
optional electronic mail notification on installation failure and on
installation refusals due to reaching license limitations, and (v) expanding
copy options and interactive install displays, adding substitution variables,
and allowing version control of backup files.
As of the date of acquisition, Company management anticipated the costs to
complete WinINSTALL Version 6.0 at approximately $920,000. Since the acquisition
date, the acquired in-process research and development from OnDemand has been
completed and the related products have been released prior to the end of fiscal
1997.
Acquisition of Calypso Software Systems, Inc. In May 1996, the Network &
Storage Management Group acquired all of the outstanding shares of Calypso
Software Systems, Inc. ("Calypso"), a company engaged in developing, producing
and marketing software for managing systems and applications in complex,
distributed client/server computer networks. The purchase price of approximately
$13,865,000 was paid in cash. The Network & Storage Management Group accounted
for the acquisition using the purchase method, and the results of operations of
Calypso are only included in the Network &
F-113
<PAGE> 381
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Storage Management Group's operations since the date the acquisition was
completed. The following is a summary of the purchase price allocation, in
thousands:
<TABLE>
<S> <C>
Current assets and other tangible assets.................... $ 1,209
Liabilities assumed......................................... (245)
Assembled workforce......................................... 400
Developed technology........................................ 3,600
Customer base............................................... 540
In-process research and development......................... 5,400
Goodwill.................................................... 2,961
-------
$13,865
=======
</TABLE>
Calypso is a software developer in the enterprise network/system management
market. Calypso provides software which is designed to enable companies to
automate the management of their distributed applications. At the date of
acquisition, Calypso had two main products: Maestro Vision ("Maestro") and
Atrium Extendible Management System ("EMS") for Spectrum. Both existing
products, as of the acquisition date, were planned to be phased out over the
following 24 months. Calypso, at the acquisition date, was in the process of
developing the next generation Atrium EMS product that can be sold stand-alone.
Both Maestro and Atrium EMS for Spectrum were originally designed for use only
on certain system platforms, Cabletron and Spectrum, respectively. However,
Atrium EMS (stand-alone) would allow systems managers on any system platform to
distribute software; monitor CPU, memory, and operating system administration;
manage applications, file systems, and print services; and perform UNIX and NT
system administration.
As of the date of acquisition, Calypso had undergone or was in the process
of undergoing the re-write of code in C+, adding navigator capabilities,
developing web server and browser interoperability, developing CORBA
interoperability, and developing Network OLE/COM interoperability for Atrium EMS
(stand-alone). The estimated cost to complete, at the date of acquisition, was
approximately $750,000. These in process research and development projects were
successfully completed prior to a restructuring of operations in the third
quarter of fiscal 1997. As a result of this restructuring and a change in the
Company's strategic direction, in the first quarter of fiscal 1998 the Company
disposed of all the developed and in process technologies originally acquired
from Calypso.
Acquisition of Eastman Software Storage Management Group, Inc. In June
1998, the Network & Storage Management Group acquired all of the outstanding
capital stock of Eastman Software Storage Management Group, Inc. ("Eastman"), a
company engaged in developing, producing and marketing hierarchical storage
management products for the Windows NT platform. The purchase price of
approximately $10,000,000 was paid in cash. Approximately $6,800,000 of the
total purchase price represented the value of in-process technology that had not
yet reached technological feasibility, had no alternative future uses and was
charged to the Network & Storage Management Group's operations in the quarter
ended July 3, 1998. The Network & Storage Management Group accounted for the
acquisition using the purchase method, and the results of operations of Eastman
are only included in the Network & Storage Management Group's operations since
the date the acquisition was completed. Pro forma financial information is not
presented as such
F-114
<PAGE> 382
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
amounts are not material. The following is a summary of the purchase price
allocation, in thousands:
<TABLE>
<S> <C>
Current assets and other tangible assets.................... $ 535
Liabilities assumed......................................... (508)
Assembled workforce......................................... 340
Developed technology........................................ 500
In-process research and development......................... 6,800
Microsoft agreement......................................... 1,500
Goodwill.................................................... 833
-------
$10,000
=======
</TABLE>
OVERVIEW
Eastman Software Storage Management Group's two primary products are
OPEN/stor for Windows NT and AvailHSM for NetWare. By integrating Eastman's
product line, the Network & Storage Management Group will be able to convert
their Storage Migrator product into a stand-alone HSM application for Windows NT
environments. As of the date of acquisition the Network & Storage Management
Group abandoned the AvailHSM product and technology due to dated features and
functionality; the valuation analysis did not include a fair value for the
AvailHSM product.
As for OPEN/stor at the date of acquisition the Network & Storage
Management Group planned to phase out the product over the following 12 to 15
months. NSMG's purpose for the acquisition was for the next generation
technologies that were underway at Eastman referenced by project names Sakkara
and Phoenix. These projects were complete re-writes of Eastman's prior
generation technology that would allow the product to be sold stand-alone upon
completion.
In accordance with SFAS 86, paragraph 38 ("Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed"), "the cost of
software purchased to be integrated with another product or process will be
capitalized only if technological feasibility was established for the software
component and if all research and development activities for the other
components of the product or process were completed at the time of the
purchase." Although the Network & Storage Management Group purchased existing
products from Eastman, the existing products did not operate on a stand-alone
basis. Therefore, as mentioned above, all of the original underlying code and
base technology for the next generation products were in the process of being
completely re-written as date of valuation.
ASSUMPTIONS
Revenue
Future revenue estimates were generated for the following technologies: (i)
OPEN/stor, (ii) Sakkara, and (iii) Phoenix. Aggregate revenue for existing
Eastman products was estimated to be approximately $167,000 for the one month
ending June 30, 1998. Revenues were estimated to increase to approximately $3.9
million and $7.1 million for fiscal years 1999 and 2000 when most of the
in-process projects were expected to be
F-115
<PAGE> 383
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
complete and shipping. Thereafter, revenue was estimated to increase at rates
ranging from 20% to 30% for fiscal years 2001 through 2006. Revenue estimates
were based on (i) aggregate revenue growth rates for the business as a whole,
(ii) individual product revenues, (iii) growth rates for the storage management
software market, (iv) the aggregate size of the storage management software
market, (v) anticipated product development and introduction schedules, (vi)
product sales, cycles, and (vii) the estimated life of a product's underlying
technology.
Operating expenses
Operating expenses used in the valuation analysis of Eastman included (i)
cost of goods sold, (ii) general and administrative expense, (iii) selling and
marketing expense, and (iv) research and development expense. In developing
future expense estimates, an evaluation of both the Network & Storage Management
Group's and Eastman's overall business model, specific product results,
including both historical and expected direct expense levels (as appropriate),
and an assessment of general industry metrics was conducted.
Cost of goods sold. Cost of goods sold expressed as a percentage of revenue
for the developed and in-process technologies was estimated to be approximately
5% throughout the estimation period. The Network & Storage Management Group's
cost of goods sold was 23% for fiscal 1996 and 23% for fiscal 1997.
General and administrative ("G&A") expenses. G&A expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be approximately 10% throughout the estimation period.
Selling and marketing ("S&M") expense. S&M expense, expressed as a
percentage of revenue, for the developed and in-process technologies was
estimated to be 27% throughout the estimation period.
Research and development ("R&D") expense. R&D expense consists of the costs
associated with activities undertaken to correct errors or keep products updated
with current information (also referred to as "maintenance" R&D). Maintenance
R&D includes all activities undertaken after a product is available for general
release to customers to correct errors or keep the product updated with current
information. These activities include routine changes and additions. The
maintenance R&D expense was estimated to be 5% of revenue for the developed and
in-process technologies throughout the estimation period.
In addition, as of the date of acquisition, the Network & Storage
Management Group's management anticipated the costs to complete the in-process
technologies at approximately $1.8 million.
EFFECTIVE TAX RATE
The effective tax rate utilized in the analysis of developed and in-process
technologies was 38%, which reflects Seagate Software's combined federal and
state statutory income tax rates, exclusive of non-recurring charges at the time
of the acquisition and estimated for future years.
F-116
<PAGE> 384
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DISCOUNT RATE
The discount rates selected for Eastman's developed and in-process
technologies were 15% and 20%, respectively. In the selection of the appropriate
discount rates, consideration was given to (i) the Weighted Average Cost of
Capital (approximately 15% at the date of acquisition) and (ii) the Weighted
Average Return on Assets (approximately 18%). The discount rate utilized for the
in-process technology was determined to be higher than Seagate Software's WACC
due to the fact that the technology had not yet reached technological
feasibility as of the date of valuation. In utilizing a discount rate greater
than Seagate Software's WACC, management has reflected the risk premium
associated with achieving the forecasted cash flows associated with these
projects.
STOCK OPTION PLANS
The Seagate Software option plan provides for the issuance of either
incentive or nonstatutory stock options to employees and consultants of Seagate
Software and Seagate Technology. Seagate Software has reserved a total of
12,600,000 shares under the Plan. Options granted under Seagate Software's Plan
are granted at fair market value, expire ten years from the date of the grant
and vest over four years; 20% at the end of years one and two and 30% at the end
of years three and four.
The following table summarizes information about Seagate Software options
outstanding as of July 3, 1998 for employees of the Network & Storage Management
Group. Certain of Seagate Software's operations are shared locations involving
activities that pertain to the Network & Storage Management Group as well as to
other businesses of Seagate Software. Options outstanding for employees in
shared locations have been allocated based on specific identification for each
employee.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING EXERCISABLE OPTIONS
-------------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES SHARES LIFE (IN YEARS) PRICE OF SHARES PRICE
--------------- --------- --------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 4.00 1,293,677 7.9 $ 4.00 495,911 $4.00
$ 6.00 1,875,278 9.0 6.00 132,420 6.00
$ 7.50 -- 11.00 879,597 9.6 8.86 4,780 8.08
$ 12.75 1,467,378 10.0 12.75 -- --
--------- -------
Total 5,515,930 9.1 7.78 633,111 4.45
========= =======
</TABLE>
Pro forma information. In October 1995, the Financial Accounting Standards
Board released Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). SFAS 123 provides an alternative to
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" ("APBO 25") and requires additional disclosures. Seagate Software and
the Network & Storage Management Group have elected to follow APBO 25 in
accounting for stock options granted. Under APBO 25, Seagate Software and the
Network & Storage Management Group generally have not recognized compensation
expense with respect to such options.
F-117
<PAGE> 385
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Pro forma information regarding net income and earnings per share is
required by SFAS 123 for stock options granted after June 30, 1995, as if the
Network & Storage Management Group had accounted for Seagate Software stock
options under the fair value method of SFAS 123. The fair value of Seagate
Software options granted to Network & Storage Management Group employees was
estimated using a Black-Scholes option valuation model. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In
addition, the Black-Scholes model requires the input of highly subjective
assumptions, including the expected stock price volatility. Because the Seagate
Software stock options granted to the Network & Storage Management Group's
employees have characteristics significantly different from those of
exchange-traded options (and are not fully transferable) and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the Black-Scholes model does not necessarily provide a
reliable single measure of the fair value of its stock options granted to
employees.
The fair value of Seagate Software stock options granted to the Network &
Storage Management Group's employees was estimated assuming no expected
dividends and the following weighted average assumptions:
<TABLE>
<CAPTION>
SEAGATE SOFTWARE SEAGATE TECHNOLOGY
INCENTIVE EMPLOYEE STOCK
STOCK OPTION PURCHASE
PLAN SHARES PLAN SHARES
-------------------- --------------------
1996 1997 1998 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years)............ 3.65 3.65 3.67 .50 .50 .56
Risk-free interest rate............. 5.6% 6.2% 5.7% 5.4% 5.4% 5.5%
Volatility.......................... .55 .55 .55 .46 .46 .63
</TABLE>
The weighted average exercise price and weighted average fair value of
Seagate Software stock options granted to Network & Storage Management Group
employees in 1998 under Seagate Software's Plan were $9.04 and $4.20 per share,
respectively. The weighted average purchase price and weighted average fair
value of shares granted to Networ & Storage Management Group employees in 1998
under Seagate Technology Employee Stock Purchase Plan (the "Purchase Plan") were
$26.99 and $12.03, respectively.
For purposes of pro forma disclosures, the estimated fair value of options
granted to the Network & Storage Management Group's employees is amortized over
the options' vesting period for Seagate Software stock options and over the
six-month purchase period for stock purchases under the Purchase Plan. For
purposes of the determination of pro forma net loss, pro forma expense relating
to stock options under FAS 123 was allocated based on Network & Storage
Management Group headcount as a percentage of total Seagate Software headcount.
The pro forma net loss was $94,846,000, $35,406,000 and $844,000 in 1996, 1997
and 1998, respectively. Because the Network & Storage Management Group does not
have a formal capital structure, pro forma net loss per share is not presented.
F-118
<PAGE> 386
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The effects on pro forma disclosures of applying SFAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
Because SFAS 123 is applicable only to options granted subsequent to June 30,
1995, and Seagate Software did not commence granting stock options for the
purchase of Seagate Software common stock until June 1996, the pro forma effect
will not be fully reflected until 2000.
INCOME TAXES
The Network & Storage Management Group is included in the consolidated
federal and certain combined and consolidated foreign and state income tax
returns of Seagate Technology. Seagate Technology and Seagate Software have
entered into a tax sharing agreement (the "Tax Allocation Agreement") pursuant
to which the Network & Storage Management Group computes hypothetical tax
returns (with certain modifications) as if the Network & Storage Management
Group was not joined in consolidated or combined returns with Seagate
Technology. The Network & Storage Management Group must pay Seagate Technology
the positive amount of any such hypothetical taxes. If the hypothetical tax
returns show entitlement to refunds, including any refunds attributable to a
carryback, then Seagate Technology will pay the Network & Storage Management
Group the amount of such refunds. At the end of fiscal 1996 and 1997, there were
no intercompany tax-related balances outstanding between the Network & Storage
Management Group and Seagate Technology. At the end of fiscal 1998, a $6,958,000
intercompany tax-related balance was due from the Network & Storage Management
Group to Seagate Technology.
The (benefit from) provision for income taxes consisted of the following,
in thousands:
<TABLE>
<CAPTION>
JUNE 28, JUNE 27, JULY 3,
1996 1997 1998
-------- -------- -------
<S> <C> <C> <C>
Current tax expense
Federal....................................... $(6,035) $ (2,991) $ 8,282
State......................................... (1,171) (563) 908
Foreign....................................... 228 473 1,213
------- -------- -------
Total current tax expense............. (6,978) (3,081) 10,403
Deferred tax expense
Federal....................................... (1,506) (6,330) (3,831)
State......................................... (280) (1,175) (711)
------- -------- -------
Total deferred tax expense............ (1,786) (7,505) (4,542)
------- -------- -------
(Benefit from) provision for income taxes....... $(8,764) $(10,586) $ 5,861
======= ======== =======
</TABLE>
The (benefit from) provision for income taxes has been computed on a
separate return basis subject to the following modifications as required by the
Tax Allocation Agreement: (i) profitable members of the consolidated return
group are prohibited from applying tax net operating loss carryforwards and tax
credit carryforwards to reduce their separately computed tax liabilities to the
extent that current year tax losses or tax credits of other members are
available to reduce a profitable member's separate tax liability; and (ii)
members must reimburse other members to the extent they use another member's tax
attributes to reduce their separately computed tax liabilities. Pursuant to the
terms of the
F-119
<PAGE> 387
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Tax Allocation Agreement, the tax benefits of certain of the Network & Storage
Management Group's fiscal 1996 and 1997 tax losses and credits are recognized in
the year such losses and credits are utilized by Seagate Technology in its tax
returns.
The pro forma information assuming a tax provision based on a separate
filing basis is as follows, in thousands:
<TABLE>
<CAPTION>
YEAR ENDED
JULY 3, 1998
------------
<S> <C>
Income before provision for income taxes.................... $8,717
Provision for income taxes.................................. 3,064
------
Net income.................................................. $5,653
======
</TABLE>
The income tax benefits related to the exercise of employee stock options
reduced amounts due to or increased amounts due from Seagate Technology pursuant
to the Tax Allocation Agreement and were credited to additional paid-in capital.
Such amounts approximated $1,866,000, $3,486,000 and $576,000 in 1996, 1997 and
1998, respectively.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Network & Storage Management Group's deferred tax assets and
liabilities were as follows, in thousands:
<TABLE>
<CAPTION>
JUNE 27, JULY 3,
1997 1998
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS
Reserves and accruals not currently deductible........... $ 5,001 $ 5,526
Depreciation............................................. 819 (980)
Acquisition-related items................................ 8,445 8,534
Domestic and foreign net operating loss carryforwards.... 12,779 12,788
Tax credit carryforwards................................. 1,155 1,155
Other.................................................... 1,170 1,535
-------- --------
Total deferred tax assets...................... 29,369 28,558
Valuation allowance...................................... (29,369) (28,558)
-------- --------
Net deferred tax assets........................ -- --
======== ========
DEFERRED TAX LIABILITIES
Acquisition-related items................................ (6,233) (1,691)
-------- --------
Total deferred tax liabilities................. (6,233) (1,691)
-------- --------
Net deferred tax liabilities................... $ (6,233) $ (1,691)
======== ========
</TABLE>
A valuation allowance has been provided for the deferred tax assets as of
the end of fiscal 1997 and 1998. Realization of the deferred tax assets is
dependent on future earnings, the timing and amount of which are uncertain. In
addition, the net operating loss and tax credit carryforwards of acquired
subsidiaries are subject to further limitations on utilization due to the
"change in ownership" provisions of Internal Revenue Code Section 382 and the
"separate return limitation year" rules of the federal consolidated return
regulations. Approximately $5,416,000 of the valuation allowance as of July 3,
1998,
F-120
<PAGE> 388
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
is attributable to deferred tax assets that when realized will reduce
unamortized goodwill or other intangible assets of the acquired subsidiaries.
The valuation allowance increased by $12,197,000 and $2,942,000 in 1996 and
1997, respectively and decreased by $811,000 in 1998.
As of July 3, 1998, the Network & Storage Management Group has domestic and
foreign net operating loss carryforwards of approximately $36,538,000 expiring
in 2003 through 2010, if not used to offset future taxable income. In addition,
the Network & Storage Management Group, as of July 3, 1998, has research and
development tax credit carryforwards of approximately $1,155,000 expiring in
2005 through 2011, if not used to offset future tax liabilities.
The reconciliation between the (benefit from) provision for income taxes at
the U.S. statutory rate and the effective rate is summarized as follows, in
thousands:
<TABLE>
<CAPTION>
JUNE 28, JUNE 27, JULY 3,
1996 1997 1998
-------- -------- -------
<S> <C> <C> <C>
(Benefit) provision at U.S. statutory rate...... $(36,176) $(15,325) $3,051
State income taxes (benefit), net............... (761) (563) 909
Foreign taxes in excess of the U.S. statutory
rate.......................................... 18 75 153
In-process research and development............. 15,382 -- --
Goodwill and other acquisition-related items.... 2,833 4,307 2,894
Valuation allowance............................. 9,936 1,395 (811)
Other........................................... 4 (475) (335)
-------- -------- ------
$ (8,764) $(10,586) $5,861
======== ======== ======
</TABLE>
Cumulative undistributed earnings of certain foreign operations of the
Network & Storage Management Group, of $2,276,000 are considered to be
permanently invested in non-U.S. operations. No income tax has been provided on
these amounts. Additional state and federal taxes that would have to be provided
if these earnings were repatriated to the U.S. cannot be determined at this
time.
F-121
<PAGE> 389
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
COMMITMENTS
Leases. The Network & Storage Management Group leases certain property,
facilities and equipment under non-cancelable lease agreements. Facility leases
expire at various dates through 2008 and contain various provisions for rental
adjustments. The leases require the Network & Storage Management Group to pay
property taxes, insurance and normal maintenance costs. The Network & Storage
Management Group also occupies certain facilities owned by Seagate Technology.
Future minimum payments for operating leases were as follows at July 3, 1998, in
thousands:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1999................................................. $ 5,137
2000................................................. 4,605
2001................................................. 2,995
2002................................................. 2,603
2003................................................. 2,471
After 2003........................................... 34,287
-------
$52,098
=======
</TABLE>
Total rent expense for all facility and equipment operating leases was
approximately $2,743,000, $4,094,000 and $4,781,000 for 1996, 1997 and 1998,
respectively.
LEGAL PROCEEDINGS
On December 22, 1998, a former employee commenced an action in the Superior
Court of Santa Cruz County against Seagate Software, Inc. claiming promissory
fraud and fraudulent inducement to enter a contract, breach of a contract,
constructive wrongful discharge and related claims, seeking monetary and
injunctive relief. Specifically, the former employee alleges that a Seagate
Software officer agreed to sell him a division of the Network & Storage
Management Group business. On May 10, 1999 the plaintiff filed a dismissal with
prejudice of all claims with the Superior Court.
The Network & Storage Management Group business is engaged in various legal
actions arising in the ordinary course of business and believes that the
ultimate outcome of these actions will not have a material adverse effect on the
Network & Storage Management Group business' financial position, liquidity or
results of operations.
RESTRUCTURING COSTS
Restructuring charges were $9.5 million in fiscal 1996 and $2.5 million in
fiscal 1997. The 1996 restructuring charges pertain to the acquisition of Arcada
Holdings, Inc. in February 1996. As a result of the acquisition, the Network &
Storage Management Group business had obtained duplicate technologies and
product lines in data protection and storage management software as those assets
acquired in the Palindrome Corporation ("Palindrome") acquisition in fiscal
1995. The Network & Storage Management Group determined that it would be
beneficial to consolidate the world-wide sales, marketing, research and
development, technical support and other operations and administrative functions
of its network and storage management business. A restructuring plan was
F-122
<PAGE> 390
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
approved by the Seagate Software Board of Directors in March 1996 and the plan
resulted in facility closures and staff reductions of 43 at the Arcada
facilities in Westboro, Massachusetts, the United Kingdom and France, as well as
staff reductions of 69 at the former Palindrome facility in Naperville,
Illinois. In addition, because Arcada had a better industry reputation and
superior products to those of Palindrome, the Network & Storage Management
Group's plan and strategy going forward was to focus on the technologies and
products acquired from Arcada. The revenue and net operating loss relating to
products acquired from Palindrome for fiscal 1996 was $15.9 million and $2.1
million, respectively. For fiscal 1997, the revenue and net operating loss
relating to products acquired from Palindrome was $3.3 million and $3.7 million,
respectively.
The non-cash restructuring charges included amounts for abandonment of the
Palindrome trademarks, impairment of the capitalized workforce intangible assets
pertaining to the acquisition of Palindrome because of the planned layoff of
personnel, write-off of a duplicate trade show booth, and write-off of obsolete
Palindrome marketing materials. Cash restructuring charges included amounts for
severance and benefits to terminated Palindrome employees, costs for facilities
lease termination, other contract cancellation fees, and merger related costs
incurred by Arcada in the acquisition of the Arcada minority pooling of
interests by Seagate Technology.
The fiscal 1997 restructuring charges netted to $2.5 million, comprised of
a $3.4 million restructuring charge that included the closure of the Network &
Storage Management Group's facility located in Cupertino, California. This
facility closure resulted in cash charges for severance and benefits for 69
employee terminations and non-cash charges for excess facilities and the write
down of equipment. In addition, the $3.4 million included amounts related to the
decision, after concluding a sale was no longer viable, to no longer pursue the
technologies acquired in the fiscal 1996 acquisition of Calypso Software
Systems, Inc. and to shut down its operations. This decision resulted in cash
charges for severance and benefits for 35 employee terminations and non-cash
charges for the write off of certain remaining intangible assets of Calypso. The
revenue and net operating loss relating to products acquired from Calypso for
fiscal 1996 was $444,000 and $53,000, respectively. For fiscal 1997, the revenue
and net operating loss relating to products acquired from Calypso was $640,000
and $47,000, respectively.
The restructuring charges recorded in fiscal 1997 were reduced by $957,000
for the reversal of amounts pertaining to the fiscal 1996 restructuring charges
as a result of a higher than planned number of voluntary employee terminations
without severance benefits prior to the facility shutdown and completion of
other aspects of the restructuring plan at less than the originally estimated
cost, net of an increase in the accrual for facilities lease payments due to
changes in estimates of the costs to terminate leases after facilities closure.
F-123
<PAGE> 391
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
A summary of Network & Storage Management Group business restructuring
activities is provided below (in thousands):
<TABLE>
<CAPTION>
SEVERANCE CONTRACT LEGAL AND
AND EMPLOYEE CANCELLATION ACCOUNTING
BENEFITS FACILITIES EQUIPMENT INVENTORY INTANGIBLES FEES FEES
------------ ---------- --------- --------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 restructuring charges..... $1,554 $1,571 $ 1,018 $ 300 $ 4,312 $ 67 $ 525
Cash charges................... (518) -- -- -- -- -- (568)
Non-cash charges............... -- (121) (116) -- (4,052) -- --
------ ------ ------- ----- ------- ---- -----
Reserve balances, June 28,
1996......................... 1,036 1,450 902 300 260 67 (43)
1997 restructuring charges..... 770 505 728 -- 1,378 -- --
Cash charges................... (975) (915) -- -- -- -- --
Non-cash charges............... -- (72) (44) -- (1,378) -- --
Adjustments and
reclassifications............ (351) 267 (172) (300) (260) (67) 43
------ ------ ------- ----- ------- ---- -----
Reserve balances, June 27,
1997......................... 480 1,235 1,414 -- -- -- --
Cash charges................... (373) (519) (9) -- -- -- --
Non-cash charges............... -- -- (1,045) -- -- -- --
Adjustments and
reclassifications............ (107) 467 (360) -- -- -- --
------ ------ ------- ----- ------- ---- -----
Reserve balances, July 3,
1998......................... -- 1,183 -- -- -- -- --
Cash charges (unaudited)....... -- (375) -- -- -- -- --
------ ------ ------- ----- ------- ---- -----
Reserve balances, April 2, 1999
(unaudited).................. $ -- $ 808 $ -- $ -- $ -- -- $ --
====== ====== ======= ===== ======= ==== =====
<CAPTION>
OTHER
EXPENSES TOTAL
-------- -------
<S> <C> <C>
1996 restructuring charges..... $ 155 $ 9,502
Cash charges................... -- (1,086)
Non-cash charges............... (138) (4,427)
----- -------
Reserve balances, June 28,
1996......................... 17 3,989
1997 restructuring charges..... 100 3,481
Cash charges................... -- (1,890)
Non-cash charges............... -- (1,494)
Adjustments and
reclassifications............ (117) (957)
----- -------
Reserve balances, June 27,
1997......................... -- 3,129
Cash charges................... -- (901)
Non-cash charges............... -- (1,045)
Adjustments and
reclassifications............ -- --
----- -------
Reserve balances, July 3,
1998......................... -- 1,183
Cash charges (unaudited)....... -- (375)
----- -------
Reserve balances, April 2, 1999
(unaudited).................. $ -- $ 808
===== =======
</TABLE>
The Network & Storage Management Group's remaining restructuring reserves
at April 2, 1999 pertain to continuing lease payments on facilities that were
closed and abandoned as a result of the Palindrome restructuring. The Network &
Storage Management Group has been unable to sublease these facilities and
anticipates that the remaining restructuring reserves will be utilized over the
period through lease termination in fiscal 2002.
The fiscal 1996 restructuring reserve of $9,502,000 was for the following
specific items:
Severance and employee benefits ($1,554,000) -- Severance and employee
benefits included amounts for consolidation of operations and termination of
employees at the Arcada facilities in Westboro, Massachusetts, the United
Kingdom and France, as well as at the former Palindrome facility in Naperville,
Illinois.
Excess facilities ($1,571,000) -- This accrual was designed to provide for
rent termination costs and rent expense for facilities located in Naperville,
Westboro, the United Kingdom and France that are to be closed as a result of the
restructuring actions.
Equipment ($1,018,000) -- This amount is a reserve for equipment at the
Naperville, Westboro, the United Kingdom and France facilities. It consists of
computer equipment, furniture and fixtures and software at these facilities that
will not be used after the locations are closed. All the equipment provided for
in this reserve has been abandoned.
Inventory ($300,000) -- This consists of obsolete packaging material that
will no longer be used and OEM inventory of $80,000 that will no longer be sold.
F-124
<PAGE> 392
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Intangibles ($4,312,000) -- This write-off consists of Palindrome
intangible assets of $3,534,000, $390,000 of developed technology related to
Atlas and $388,000 of goodwill related to the Sytron acquisition. The Palindrome
intangible assets were further broken down into trademark of $1,000,000,
workforce of $1,188,000, distribution network of $69,000 and goodwill of
$1,277,000. The Company decided to pursue the Arcada brand name and trade mark
and abandon the Palindrome trademark. As a result, Network & Storage Management
Group business determined that it would lay off substantially all employees (121
employees) of Palindrome located at the Naperville facility. At the time of
original purchase, Network & Storage Management Group business proportionally
allocated goodwill to long-lived intangible assets based upon the original
purchase price. The amounts of goodwill included in the restructuring reserve
relate to the remaining unamortized goodwill associated with the intangible
assets written off.
Contract cancellation ($67,000) -- This $67,000 item is a canceled contract
for outsourced Technical Support with a vendor used by Palindrome.
Legal/Accounting fees ($525,000) -- This $525,000 represents an estimate of
the legal and accounting fees that were to be incurred by Arcada from the
acquisition of Arcada stock by Seagate Technology.
Other ($155,000) -- This represents a trade show booth valued at $100,000
that is redundant and $55,000 for obsolete marketing materials.
The above assets were not impaired in a prior period because their
impairment arose specifically from the restructuring actions taken as a result
of the acquisition of the minority interest in Arcada in the third quarter of
fiscal 1996. Prior to the acquisition, Palindrome products were marketed and
sold as part of the Seagate Software portfolio.
In fiscal 1997, Seagate Software recorded an additional restructuring
reserve of $3,481,000 that resulted primarily from the plan to shutdown
Manchester operations and the decision to try to sell the Calypso technology and
a separate decision to consolidate NSMG operations which resulted in the
shutdown of the Company's facility in Cupertino, California.
Severance and employee benefits ($770,000) -- Severance and employee
benefits included amounts for the shutdown and termination of employees at the
Cupertino, California facility due to a consolidation of operations and the
shutdown and termination of employees at the Calypso facility in Manchester, New
Hampshire due to a decision to no longer pursue the Calypso products and
technologies.
Excess facilities ($505,000) -- This accrual was designed to provide for
rent termination costs and rent expense for facilities closures in Manchester,
New Hampshire and Cupertino, California.
Equipment ($728,000) -- This reserve is for equipment in the Manchester and
Cupertino facilities that would not be used after the shutdowns. It consisted of
largely of computer equipment but also included amounts for furniture and
fixtures and software. All the equipment provided for in this reserve has been
abandoned.
Intangibles ($1,378,000) -- This asset consisted of Calypso related
intangibles first capitalized upon the acquisition of Calypso in fiscal 1996.
The amounts written down
F-125
<PAGE> 393
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
included Net Developed Technology of $1,086,000 and Assembled Workforce of
$292,000. These assets were written off based on management's plan to sell
Calypso and its products and technologies.
Other ($100,000) -- This represents miscellaneous additional costs related
to the Manchester (Calypso) shutdown.
The above assets were not impaired in a period prior to recording the
restructuring reserves because their impairment arose specifically from the
business decision and plan in the fourth quarter of fiscal 1997 to close the
Manchester (Calypso) facility and abandon that technology and the additional
decision to consolidate operations of the company and close the Cupertino
facility.
EXPORT SALES
Export sales were $32,468,000, $40,748,000 and $57,752,000 in 1996, 1997
and 1998, respectively.
LEGAL PROCEEDINGS (UNAUDITED)
On December 22, 1998, a former employee commenced an action in the Superior
Court of Santa Cruz County against Seagate Software, Inc., claiming promissory
fraud and fraudulent inducement to enter a contract, breach of a contract,
constructive wrongful discharge and related claims, seeking monetary and
injunctive relief. Specifically, the former employee alleges that a Seagate
Software officer agreed to sell him a division of the Network & Storage
Management Group business. On May 10, 1999 the plaintiff filed a dismissal with
prejudice of all claims with the Superior Court.
In addition to the above, the Network & Storage Management Group business
is engaged in legal actions arising in the ordinary course of business and
believes that the ultimate outcome of these actions will not have a material
adverse effect on the Network & Storage Management Group business' financial
position, liquidity or results of operations.
SUBSEQUENT EVENT (UNAUDITED)
The Network & Storage Management Group, its parent company, Seagate
Software, Inc. and Seagate Software's parent company, Seagate Technology, Inc.
("STI") announced on October 5, 1998 that they had entered into an Agreement and
Plan of Reorganization (the "Plan") as of such date with VERITAS Holding
Corporation ("New VERITAS") and VERITAS Software Corporation ("VERITAS"). The
Plan was amended and restated on April 15, 1999. VERITAS provides end-to-end
storage management software solutions.
The Plan provided for the contribution by Seagate Software, STI and certain
of their respective subsidiaries to New VERITAS of (a) the outstanding stock of
the Network & Storage Management Group and certain other subsidiaries of Seagate
Software and (b) those assets used primarily in the network storage management
business of Seagate Software (the "NSMG Business"), in consideration for the
issuance of shares of common stock of New VERITAS to Seagate Software and the
offer by New VERITAS to grant
F-126
<PAGE> 394
NETWORK & STORAGE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
options to purchase common stock of New VERITAS to certain of Seagate Software's
employees who become employees of New VERITAS or its subsidiaries. As part of
the Plan, New VERITAS also assumed certain liabilities of the NSMG Business.
As a result of the closing in May 1999, New VERITAS issued approximate 69.1
million shares (on a post split basis) of its common stock to Seagate Software
and 6.9 million options to purchase the common stock of New VERITAS were granted
to NSMG business employees. The aggregate number of shares and options of New
VERITAS received by Seagate Software and NSMG business employees equals
approximately 40% of the fully diluted capitalization of New VERITAS (assuming
conversion of all convertible securities, including the VERITAS convertible
debentures, and exercise of assumed options and warrants) at the effective time
of the closing.
In connection with the contribution of the NSMG Business to New VERITAS,
VERITAS became a wholly-owned subsidiary of New VERITAS through a merger with a
subsidiary of New VERITAS of which VERITAS is the surviving entity. Upon
consummation of the merger, the former security holders of VERITAS were issued
New VERITAS securities representing approximately 60% of the fully diluted
capitalization of New VERITAS as of the closing.
F-127
<PAGE> 395
AUDITORS' REPORT TO THE DIRECTORS
We have audited the balance sheets of Telebackup Systems Inc. as at
December 31, 1997 and 1998 and the statements of operations and deficit and
changes in financial position for each of the years in the three year period
ended December 31, 1998. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at December 31, 1997 and 1998
and the results of its operations and the changes in its financial position for
each of the years in the three year period ended December 31, 1998 in accordance
with generally accepted accounting principles in Canada.
Generally accepted accounting principles in Canada differ in some respects
from those applicable in the United States (note 13).
Chartered Accountants
Calgary, Canada
February 5, 1999
F-128
<PAGE> 396
TELEBACKUP SYSTEMS INC.
BALANCE SHEETS
(AMOUNTS IN CANADIAN DOLLARS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and temporary investments........ $ 1,236,453 $ 6,151,624 $ 5,347,597
Restricted cash (note 2).............. 124,123 -- --
Accounts receivable................... 332,597 656,197 1,465,829
Investment tax credit receivable...... 50,000 -- --
Inventory............................. 83,994 -- --
Prepaid expenses...................... 8,278 30,515 55,531
----------- ----------- -----------
1,835,445 6,838,336 6,868,957
Capital assets (note 3)................. 1,003,132 860,925 808,848
Debt issuance costs (net of amortization
$17,641).............................. 431,590 -- --
----------- ----------- -----------
$ 3,270,167 $ 7,699,261 $ 7,677,805
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable...................... $ 111,574 $ 262,815 $ 345,714
Accrued liabilities................... 31,174 46,936 90,665
Deferred revenue...................... -- 2,710,805 2,824,579
Current portion of long-term debt
(note 4)........................... 124,800 124,800 124,800
----------- ----------- -----------
267,548 3,145,356 3,385,758
Long-term debt (note 4)................. 3,004,260 302,260 271,020
Shareholders' equity (deficiency):
Share capital (note 5)................ 2,982,155 8,885,247 9,171,872
Warrants.............................. 80,000 --
Deficit............................... (3,063,796) (4,633,602) (5,150,845)
----------- ----------- -----------
(1,641) 4,251,645 4,021,027
Combination agreement (note 12).........
Commitments (note 7)....................
Canadian and United States accounting
policy differences (note 13)..........
----------- ----------- -----------
$ 3,270,167 $ 7,699,261 $ 7,677,805
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-129
<PAGE> 397
TELEBACKUP SYSTEMS INC.
STATEMENTS OF OPERATIONS AND DEFICIT
(AMOUNTS IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales...... $ 233,353 $ 347,235 $ 1,384,411 $ 657,697 $ 577,798
Maintenance and
support......... 18,531 23,112 200,000 50,000 --
Custom software
development..... -- 115,700 1,838,565 -- 659,385
----------- ----------- ----------- ----------- -----------
251,884 486,047 3,422,976 707,697 1,237,183
Cost of sales:
Product sales...... 106,058 123,930 311,369 154,171 162,421
Maintenance,
support and
custom software
development..... 43,359 61,444 512,347 -- 146,989
----------- ----------- ----------- ----------- -----------
149,417 185,374 823,716 154,171 309,410
Gross profit......... 102,467 300,673 2,599,260 553,526 927,773
Expenses:
General and
administrative.. 496,753 808,256 1,180,981 143,392 620,958
Selling and
marketing....... 306,870 495,538 1,090,763 234,568 361,737
Marketing and
royalty
agreement....... 100,000 100,000 200,000 25,000 50,000
Research and
development..... 302,650 576,475 1,045,717 197,526 336,638
Interest and bank
charges, net.... 13,514 81,937 97,754 9,278 (64,074)
Depreciation and
amortization.... 24,117 108,073 553,851 143,963 139,757
----------- ----------- ----------- ----------- -----------
1,243,904 2,170,279 4,169,066 753,727 1,445,016
----------- ----------- ----------- ----------- -----------
Net loss............. (1,141,437) (1,869,606) (1,569,806) (200,201) (517,243)
Deficit, beginning of
period............. (52,753) (1,194,190) (3,063,796) (3,063,796) (4,633,602)
----------- ----------- ----------- ----------- -----------
Deficit, end of
period............. $(1,194,190) $(3,063,796) $(4,633,602) $(3,263,997) $(5,150,845)
=========== =========== =========== =========== ===========
Net loss per share... $ (0.18) $ (0.25) $ (0.17) $ (0.02) $ (0.05)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-130
<PAGE> 398
TELEBACKUP SYSTEMS INC.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
(AMOUNTS IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------- -----------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash provided by (used in):
Operations:
Net loss.................. $(1,141,437) $(1,869,606) $(1,569,806) $ (200,201) $ (517,243)
Items not involving cash:
Depreciation and
amortization......... 24,117 108,073 553,851 143,963 139,757
Software development
costs................ 37,673 -- -- -- --
Changes in non-cash
working capital:
Accounts receivable..... 918 (328,141) (323,600) (605,713) (809,632)
Investment tax credit
receivable........... (30,000) -- 50,000 50,000 --
Inventory............... (121,623) 37,629 83,994 -- --
Prepaid expenses........ 12,218 (4,436) (22,237) 4,016 (25,016)
Accounts payable........ 19,420 21,418 151,241 (52,457) 82,899
Accrued liabilities..... 32,349 (5,175) 15,762 1,440 43,729
Deferred revenue........ -- -- 2,710,805 -- 113,774
Due from shareholder.... 31,600 -- -- -- --
----------- ----------- ----------- ---------- ----------
(1,134,765) (2,040,238) 1,650,010 (658,952) (971,732)
Investing:
Net additions to capital
assets.................. (183,636) (887,589) (350,580) (12,979) (87,680)
Financing:
Issue of share capital,
net..................... 1,856,401 953,446 6,273,618 275,140 286,625
Warrants.................. -- 80,000 -- -- --
Increase (decrease) in
long-term debt, net..... 350,000 2,824,360 150,360 (12,201) (31,240)
Debt issuance costs....... -- (449,231) -- -- --
Conversion of
debentures.............. -- (45,300) (2,932,360) (163,265) --
Issue of promissory
notes................... -- 150,000 -- -- --
Repayment of promissory
notes................... -- (150,000) -- -- --
----------- ----------- ----------- ---------- ----------
2,206,401 3,363,275 3,491,618 99,674 255,385
----------- ----------- ----------- ---------- ----------
Increase (decrease) in cash
and temporary
investments............... 888,000 435,448 4,791,048 (572,257) (804,027)
Cash and temporary
investments, beginning of
year...................... 37,128 925,128 1,360,576 1,360,576 6,151,624
----------- ----------- ----------- ---------- ----------
Cash and temporary
investments, end of
year...................... $ 925,128 $ 1,360,576 $ 6,151,624 $ 788,319 $5,347,597
=========== =========== =========== ========== ==========
</TABLE>
Cash and temporary investments are defined to include restricted cash.
See accompanying notes to financial statements.
F-131
<PAGE> 399
TELEBACKUP SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(AMOUNTS IN CANADIAN DOLLARS)
CORPORATE PROFILE
The Company develops and markets computer software designed to allow data
backup via a modem or network.
These financial statements are prepared in accordance with accounting
principles generally accepted in Canada.
1. SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue recognition:
In the third quarter of 1998, the Company adopted the American Institute of
Certified Public Accountants Statement of Position (SOP) 97-2 with respect to
software revenue recognition. Pursuant to SOP 97-2, four specific criteria must
be met prior to recognizing revenue for a single-element arrangement or for
amounts allocated to individual elements in a multiple-element arrangement.
These four criteria are (a) persuasive evidence of an arrangement exists; (b)
delivery has occurred; (c) the vendor's fee is fixed or determinable; and (d)
collectibility is probable. This change in revenue recognition has been applied
on a retroactive basis which did not affect revenue for the years ended December
31, 1997 and 1996.
The Company sells its software and any related hardware by way of a direct
sale or on a revenue sharing basis.
The Company previously recognized direct sales revenues from software
licenses and hardware upon delivery and installation of the software and
hardware products. Sales made on a revenue sharing basis may have required the
purchaser to make an initial payment, as well as additional payments based upon
a percentage of the future revenues generated by the purchaser. The initial
payment was recorded as revenue at the time of delivery and installation of the
software and hardware products. Future revenue sharing payments were recorded as
revenue if and when earned.
(b) Capital assets:
Capital assets are recorded at cost. Depreciation is provided using the
following methods and rates:
<TABLE>
<CAPTION>
ASSETS METHOD RATE
------ ------ ----
<S> <C> <C>
Computer equipment............................ Declining balance 30%
Furniture and fixtures........................ Declining balance 30%
World rights.................................. Straight-line 20%
Software technology........................... Straight-line 50%
Royalty reduction............................. Straight-line 50%
</TABLE>
F-132
<PAGE> 400
TELEBACKUP SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(AMOUNTS IN CANADIAN DOLLARS)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(c) Debt issuance costs:
Debt issuance costs are amortized to income over the term of the related
debt financing.
(d) Software research and development costs:
Research costs are expensed as incurred. Costs related to internal
development of software are expensed as incurred unless criteria for deferral
and subsequent amortization are met. Specifically, internal software development
costs are deferred once technological feasibility for a product is established.
As at December 31, 1997, December 31, 1998, and March 31, 1999, the Company has
not deferred internal software development costs, as completed development has
coincided with technological feasibility.
(e) Investment tax credits:
Scientific Research and Experimental Development ("SRED") investment tax
credits are accrued when qualifying expenditures are made and there is
reasonable assurance that the credits will be realized. The Company accounts for
investment tax credits using the cost reduction method.
(f) Inventory:
Inventory, consisting primarily of turnkey computer systems assembled for
demonstration purposes and ultimate sale, is recorded at the lesser of cost
determined on a first-in first-out basis and market value.
(g) Per share data:
Basic earnings per share is calculated using the weighted average number of
common shares outstanding during the year. Fully diluted per share data has not
been disclosed as the effect of the exercise of share options is not dilutive.
2. RESTRICTED CASH
Restricted cash consists of cash held in trust in connection with the
payment of interest on certain debt.
F-133
<PAGE> 401
TELEBACKUP SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(AMOUNTS IN CANADIAN DOLLARS)
3. CAPITAL ASSETS
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
DECEMBER 31, 1997 COST DEPRECIATION VALUE
----------------- ---------- ------------ -----------
<S> <C> <C> <C>
Computer equipment.............. $ 312,560 $ 73,630 $ 238,930
Furniture and fixtures.......... 16,101 4,399 11,702
World rights.................... 50,000 12,500 37,500
Software technology............. 300,000 25,000 275,000
Royalty reduction............... 440,000 -- 440,000
---------- -------- ----------
$1,118,661 $115,529 $1,003,132
========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
DECEMBER 31, 1998 COST DEPRECIATION VALUE
----------------- ---------- ------------ -----------
<S> <C> <C> <C>
Computer equipment.............. $ 629,185 $174,305 $ 454,880
Furniture and fixtures.......... 50,056 11,736 38,320
World rights.................... 50,000 22,500 27,500
Software technology............. 300,000 179,775 120,225
Royalty reduction............... 440,000 220,000 220,000
---------- -------- ----------
$1,469,241 $608,316 $ 860,925
========== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
MARCH 31, 1999 COST DEPRECIATION VALUE
-------------- ---------- ------------ -----------
<S> <C> <C> <C>
Computer equipment.............. $ 716,865 $216,259 $ 500,606
Furniture and fixtures.......... 50,056 14,539 35,517
World rights.................... 50,000 25,000 25,000
Software technology............. 300,000 217,275 82,725
Royalty reduction............... 440,000 275,000 165,000
---------- -------- ----------
$1,556,921 $748,073 $ 808,848
========== ======== ==========
</TABLE>
In October 1997, the Company entered into an agreement to license, on a
permanent, unlimited and fully paid basis, a third party's patented data
reduction process technology. In exchange for the license, the Company had
agreed to issue 200,000 Common Shares at $1.50 per share, the market value of
the shares.
In November 1997, the Company renegotiated its royalty commitment whereby
the royalty was converted from a 10% royalty to a $200,000 fixed annual royalty
with a $2 million buyout option. The Company had agreed to issue 200,000 Common
Shares at $2.20 per share, the market value of the shares, in exchange for the
new royalty agreement.
F-134
<PAGE> 402
TELEBACKUP SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(AMOUNTS IN CANADIAN DOLLARS)
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
----------------------- ---------
1997 1998 1999
---------- --------- ---------
<S> <C> <C> <C>
Debentures........................ $2,705,060 $ -- $ --
Operating line of credit.......... 500,000 427,060 395,820
---------- --------- ---------
3,205,060 427,060 395,820
Less:
Current portion of operating
line......................... (124,800) (124,800) (124,800)
Unamortized allocation to
warrants of debenture
proceeds..................... (76,000) -- --
---------- --------- ---------
$3,004,260 $ 302,260 $ 271,020
========== ========= =========
</TABLE>
(a) Debentures:
On September 30, 1997, the Company sold 27,500 Units, each consisting of a
$100 principal amount debenture and warrants to purchase 33 Common shares of the
Company. The debentures are unsecured, redeemable, convertible and due September
30, 2002 with interest at 6% payable semi-annually. The debentures are
convertible at $1.50 per share. In conjunction with the debenture offering, the
Company granted to the Agent, an option to purchase up to 2,751 Units at $100
per unit. During 1998, the Agent purchased all 2,751 Units and was issued
debentures and warrants in accordance with the terms of the Units.
The Debentures were redeemable by the Company:
(i) anytime after September 30, 1999 following a period of twenty
consecutive trading days during which the weighted average market price of
the Common Shares equals or exceeds $3.00; or
(ii) anytime following any period of twenty consecutive trading days
during the weighted average market price of the Common Shares equals or
exceeds $6.00.
During 1997 $45,300 of debentures were converted into 30,198 common shares.
In 1998, an additional $275,100 of debentures were issued to the Agent, and
$2,932,360 of debentures were converted into 1,979,054 common shares and $11,800
of debentures where redeemed for cash. Unamortized debt issuance costs related
to the convertible debentures were charged to share capital upon conversion of
the related debentures.
(b) Credit facilities:
At March 31, 1999 the Company has drawn $395,820 (December 31, 1998 --
$427,060, December 31, 1997 -- $500,000) on its operating line of credit due on
demand. Borrowings bear interest at the bank's prime rate plus 3%.
Notwithstanding the demand feature of the facility, it is classified as
long-term as monthly payments of $10,420 plus interest are required to maturity
on June 30, 2002. The operating line is renewable annually, however no principal
payments were required prior to January 31, 1998 providing that certain
conditions were satisfied. Annual principal repayments are approximately
F-135
<PAGE> 403
TELEBACKUP SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(AMOUNTS IN CANADIAN DOLLARS)
4. LONG-TERM DEBT (CONTINUED)
$124,800 (December 31, 1998 -- $124,800, December 31, 1997 -- $124,800) plus
accrued interest.
In addition, the Company has a revolving line of credit authorized to a
limit of $150,000 which bears interest at the bank's prime rate plus 2%.
Both credit facilities are secured by a general security agreement and an
assignment of life insurance on an officer of the Company.
(c) Interest expense:
Interest on long-term debt amounted to $20,566 and $7,242 for the three
months ended March 31, 1998 and 1999, respectively. Interest on long-term debt
amounted to $13,126, $73,912 and $168,410 for the years ended December 31, 1996,
1997 and 1998, respectively.
5. SHARE CAPITAL
(a) Authorized:
Unlimited number of Common shares.
(b) Issued and to be issued:
<TABLE>
<CAPTION>
NUMBER AMOUNT
---------- ----------
<S> <C> <C>
December 31, 1995............................. 2,737,500 $ 172,308
Share split 2:1 basis......................... 2,737,500 --
Issued for cash, net of issue costs of
$338,599.................................... 1,600,000 1,661,401
Issued pursuant to private placement for
cash........................................ 195,000 195,000
---------- ----------
December 31, 1996............................. 7,270,000 2,028,709
Issued on exercise of stock options........... 173,000 216,250
Issued on conversion of debenture............. 30,198 45,300
To be issued, net of issue costs of $48,104
(note 3).................................... 400,000 691,896
---------- ----------
December 31, 1997............................. 7,873,198 2,982,155
Issued on exercise of stock options........... 312,000 417,990
Issued on conversion of debentures, net of
costs of $406,526........................... 1,979,054 2,561,834
Issued on exercise of warrants, net of costs
of $140,211................................. 994,493 2,843,268
Allocation to warrants of debenture
proceeds.................................... -- 80,000
---------- ----------
December 31, 1998............................. 11,158,745 $8,885,247
Issued on exercise of stock options........... 204,700 286,625
---------- ----------
March 31, 1999................................ 11,363,445 $9,171,872
========== ==========
</TABLE>
F-136
<PAGE> 404
TELEBACKUP SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(AMOUNTS IN CANADIAN DOLLARS)
5. SHARE CAPITAL (CONTINUED)
The 400,000 common shares which were to be issued at December 31, 1997,
were subject to relevant regulatory approval, which was received during 1998.
On January 31, 1996, the shareholders of the Company approved a two for one
Common share split which became effective February 16, 1996.
(c) Stock options and warrants:
At December 31, the Company had issued options to employees and directors
which will allow for the purchase of 755,000, 839,500 and 592,000 common shares
for the years 1996, 1997 and 1998, respectively, at prices $1.25, $1.25 to $2.20
and $1.25 to $2.85 per share for the years 1996, 1997 and 1998, respectively.
These options expire on various dates during 2001 and 2003.
At March 31, 1999, the Company had issued 387,300 options to employees and
directors exercisable at prices of $1.25 and $2.85 per share and expiring on
various dates during 2001 and 2003.
The Company issued 907,698 warrants in conjunction with the convertible
debentures. Each warrant entitled the holder to purchase one additional Common
Share at a price of $3.00 on or before September 30, 1999. The Company had the
right upon 30 days written notice to redeem the warrants for $0.001 at any time
following a period of 20 consecutive trading days during which the weighted
average market price of the Company's common shares equaled or exceeded $4.00
per share. At December 31, 1998, 903,710 warrants had been exercised, and 3,988
warrants had been redeemed for aggregate consideration of $3.99.
6. INCOME TAXES
Income tax expense differs from the amount which would be computed by
applying the federal and provincial combined statutory income tax rate to income
before income taxes. The reasons for the difference are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------- ----------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income tax rate....... 44.6% 44.6% 44.6% 44.6% 44.6%
Computed expected tax
recovery............ $(509,081) $(833,844) $(700,133) (89,290) (230,690)
Unrecognized benefit
of tax losses....... 509,081 833,844 700,133 89,290 230,690
--------- --------- --------- --------- ---------
$ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
</TABLE>
The Company has available deductions for income tax purposes of
approximately $4,400,000 at March 31, 1999 (December 31, 1998 -- $4,000,000,
December 31, 1997 -- $2,400,000) consisting of SRED expenditures and operating
losses. The operating losses
F-137
<PAGE> 405
TELEBACKUP SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(AMOUNTS IN CANADIAN DOLLARS)
6. INCOME TAXES (CONTINUED)
begin expiring in 2002. The Company also estimates that it has available SRED
investment tax credits to reduce future income tax payable of approximately
$200,000 at March 31, 1999 (December 31, 1998 -- $175,000, (December 31,
1997 -- $100,000).
The Company earned refundable SRED investment tax credits prior to becoming
a public company. These credits are shown as current assets, and along with the
credits above, are subject to technical and financial audit by Revenue Canada.
At December 31, 1998, the refundable credits had been received.
7. COMMITMENTS
(a) On December 29, 1994, the Company entered into an agreement which
allowed the Company utilization of certain technology rights in exchange for a
royalty commitment. On November 19, 1997, the royalty commitment was
renegotiated, whereby the royalty was converted from a percentage-based royalty
to a flat-fee royalty with a buy-out option, which provides the Company the
right to call the buy-out option at any time (note 3)
(b) The Company is committed to minimum rentals under premises leases of
approximately $341,600 per year to 2002 and $231,600 per year to 2004.
8. RELATED PARTIES
(a) During the periods ended March 31, 1998 and 1999 and during the years
ended December 31, 1996, 1997 and 1998, the Company purchased computer equipment
totalling nil, nil, $278,975, $42,820 and nil, respectively, from a shareholder.
(b) During the year ended December 31, 1997, interest of $15,000 was paid
to two directors of the Company on account of $150,000 in promissory notes which
were issued and repaid.
(c) The Company leases office space from a shareholder for $3,600 per
month.
9. FINANCIAL INSTRUMENTS AND MAJOR CUSTOMERS
The carrying value of cash and temporary investments, accounts receivable
and accounts payable approximate their fair values due to the short maturity of
these instruments. The fair value of the debentures was approximately $2,141,000
at December 31, 1997. The fair value of the Company's operating line
approximates its carrying value due to its variable interest rate.
During 1998, two customers of the Company individually represented 49% and
48% respectively, of the Company's revenues. In 1997, five customers of the
Company individually represented 24%, 21%, 20%, 17% and 10%, respectively, of
the Company's revenues. During 1996, three customers of the Company individually
represented 42%, 35%, and 20%, respectively, of the Company's revenues.
F-138
<PAGE> 406
TELEBACKUP SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(AMOUNTS IN CANADIAN DOLLARS)
10. SEGMENT INFORMATION
The Company's method for determining what information to report about
operating segments is based on the way that management organizes the operating
segments within the Company for making operating decisions and assessing
financial performance.
The Company's chief operating decision maker is considered to be the
Company's President and CEO. The President and CEO reviews financial information
presented on a consolidated basis for purposes of making operating decisions and
assessing financial performance. The financial information reviewed by the
President and CEO is identical to the information presented in the accompanying
Statements of Operations. Therefore, the Company operates in a single operating
segment: developing and marketing computer software designed to allow data
backup via a modem or network. The Company does not have significant
international operations.
11. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
12. COMBINATION AGREEMENT
On September 1, 1998 the Company signed a Combination Agreement (the
"Agreement") with VERITAS Software Corporation (VERITAS). Consummation of the
Agreement is subject to a number of conditions, including regulatory clearances
in Canada and the United States, judicial clearance in Canada and formal
approval by the shareholders of both companies.
Under the terms of the Agreement, at the effective time the Company will
issue to its shareholders, exchangeable shares which are exchangeable into
common shares of VERITAS. The number of exchangeable shares to be issued to the
Company's shareholders will be based on a sliding scale which is tied to an
average of the VERITAS common share price for the 10 days prior to the closing
of the transaction. In general terms, the total number of exchangeable shares to
be issued shall equal (a) in the event that the average price is between
U.S.$33.81 per share and U.S.$41.32 per share, 1,710,000 common shares of
VERITAS (b) in the event that the average price is less than $33.81 per share,
the number of common shares of VERITAS determined by dividing
F-139
<PAGE> 407
TELEBACKUP SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(AMOUNTS IN CANADIAN DOLLARS)
12. COMBINATION AGREEMENT (CONTINUED)
$57,808,000 (U.S.) by such average price, provided however, that, in such case,
in no event shall the total exceed 1,900,000 common shares of VERITAS, (c) in
the event that the average price is more than $41.32 per common share, the
number of common shares of VERITAS determined by dividing $70,654,000 (U.S.) by
such average price, provided however, that, in such case, in no event shall the
total be less than 1,555,000 common shares of VERITAS.
In the event that the Company's shareholders do not approve the terms of
the Agreement, the Company shall pay to VERITAS a fee of U.S. $3 million and
grant a worldwide, perpetual, royalty-free and fully-paid license to certain
Company software. Also, should the Company be acquired within 12 months after
the termination of the Agreement as described above a further U.S. $10 million
amount becomes payable to VERITAS.
In the event that the VERITAS shareholders do not approve the terms of the
Agreement, VERITAS shall pay the Company a fee of U.S. $2 million and upon such
payment, shall have a worldwide, perpetual, royalty-free and fully-paid license
to use, modify, create derivative works of, copy and distribute certain Company
software.
On May 26, 1999 the shareholders of the Company voted to approve the
combination agreement with VERITAS.
F-140
<PAGE> 408
TELEBACKUP SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(AMOUNTS IN CANADIAN DOLLARS)
13. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES
The Company's financial statements have been prepared in accordance with
accounting principles generally accepted ("GAAP") in Canada which, in the case
of the Company, conform in all material respects with those in the United
States, except as outlined below:
(a) Statement of Operations:
The application of U.S. GAAP would have the effect of including in
compensation expense the value of common share purchase options granted to
certain officers and employees by the Company's founding shareholders, as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net loss as
reported........... $(1,141,437) $(1,869,606) $(1,569,806) (200,201) (517,243)
Increase in
compensation
expense............ -- -- 132,000 79,000 18,000
----------- ----------- ----------- ----------- -----------
Net loss, U.S.
GAAP............... $(1,141,437) $(1,869,606) $(1,701,806) (279,201) (535,243)
=========== =========== =========== =========== ===========
Net loss per share
U.S. GAAP.......... $ (0.18) $ (0.25) $ (0.18) (0.03) (0.05)
=========== =========== =========== =========== ===========
</TABLE>
The Company retroactively adopted SOP 97-2 (see note 1(a)) for Canadian
GAAP purposes in the third quarter of 1998. For US GAAP purposes SOP 97-2
requires prospective adoption beginning in the Company's first quarter of 1998.
In the case of the Company's 1996 and 1997 revenue as recorded in accordance
with Canadian GAAP, the application of SOP 97-2 would not have had any effect.
As a result the Company's revenues as recorded in the Statement of Operations
are the same under both Canadian and US GAAP.
F-141
<PAGE> 409
TELEBACKUP SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(AMOUNTS IN CANADIAN DOLLARS)
13. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (CONTINUED)
(b) Balance Sheet:
The application of U.S. GAAP would have the following effect on the Balance
Sheet as at December 31, 1997 from reclassifying shares issued which required
regulatory approval from shareholders' deficit to liabilities. At December 31,
1998 the application of U.S. GAAP would not have an effect on assets or on the
Balance Sheet captions presented below.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------
INCREASE
AS REPORTED (DECREASE) U.S. GAAP
----------- ---------- ----------
<S> <C> <C> <C>
Liabilities................................... $3,271,808 $ 740,000 $4,011,808
Shareholders' deficiency...................... (1,641) (740,000) (741,641)
</TABLE>
In addition, under Canadian GAAP, at March 31, 1999 the Company classified
$271,020 (December 31, 1998 -- $302,260, December 31, 1997 -- $375,200) of a
demand loan as a long-term liability because that portion of the scheduled
installment payments are due beyond one year. Under U.S. GAAP, the entire note
would be considered a current liability.
(c) Statement of Changes in Financial Position:
The application of U.S. GAAP would have the effect of eliminating non-cash
items and excluding restricted cash from the definition of cash as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------ ---------------
1996 1997 1998 1998 1999
---- --------- ----------- -------- ----
<S> <C> <C> <C> <C> <C>
Investing:
Net additions of capital assets
acquired with shares.......... $-- $ 740,000 $ -- $ -- $--
Restricted cash.................. -- (124,123) 124,123 -- --
Financing:
Issue of shares for non-cash
consideration and non-cash
charges....................... -- (785,300) (2,561,834) (163,265) --
Conversion of debentures......... -- 45,300 2,932,360 163,265
Debt issue costs................. -- -- (370,526) -- --
== ========= =========== ======== ==
</TABLE>
F-142
<PAGE> 410
TELEBACKUP SYSTEMS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
(AMOUNTS IN CANADIAN DOLLARS)
13. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED
STATES (CONTINUED)
The Statement of Changes in Financial Position major categories would be
presented under U.S. GAAP as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------------- -----------------------
1996 1997 1998 1998 1999
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating
activities......... $(1,134,765) $(2,040,238) $1,650,010 $ (658,952) $ (971,732)
Investing
activities......... (183,636) (271,712) (226,457) (12,979) (87,680)
Financing
activities......... 2,206,401 2,623,275 3,491,618 99,674 255,385
=========== =========== ========== ========== ==========
888,000 311,325 4,915,171 (572,257) (804,027)
Cash position at
beginning of
year............... 37,128 925,128 1,236,453 1,360,576 6,151,624
----------- ----------- ---------- ---------- ----------
Cash position at end
of year............ $ 925,128 $ 1,236,453 $6,151,624 $ 788,319 $5,347,597
=========== =========== ========== ========== ==========
</TABLE>
(d) Comprehensive income (loss):
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and disclosure of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general purpose financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997 and requires reclassification of financial
statements for earlier periods to be provided for comparative purposes. The
Company adopted SFAS No. 130 on January 1, 1998, however, no incremental
disclosures are required as the Company does not have any elements of
comprehensive income (loss) except for the net loss reported in the Statements
of Operations.
F-143
<PAGE> 411
ANNEX A
EXECUTION COPY
STOCK PURCHASE AGREEMENT
BY AND AMONG
SUEZ ACQUISITION COMPANY (CAYMAN) LIMITED,
SEAGATE TECHNOLOGY, INC.,
AND
SEAGATE SOFTWARE HOLDINGS, INC.
DATED AS OF MARCH 29, 2000
<PAGE> 412
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
STOCK PURCHASE AGREEMENT............................................. 1-A
ARTICLE I DEFINITIONS............................................... 1-A
1.1 Certain Defined Terms....................................... 1-A
ARTICLE II PURCHASE AND SALE........................................ 5-A
2.1 Purchase and Sale of the Shares............................. 5-A
2.2 Purchase Price; Allocation of Purchase Price................ 5-A
2.3 Closing..................................................... 5-A
2.4 Closing Deliveries by Seller and SSHI....................... 6-A
2.5 Closing Deliveries by Purchaser............................. 6-A
2.6 Adjustment of Required Cash................................. 6-A
2.7 Transaction Structure....................................... 7-A
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER................ 8-A
3.1 Organization; Good Standing................................. 8-A
3.2 Charter Documents........................................... 8-A
3.3 Subsidiaries................................................ 8-A
3.4 Capital Structure........................................... 8-A
3.5 Authority................................................... 9-A
3.6 Conflicts................................................... 9-A
3.7 Consents.................................................... 10-A
3.8 SEC Filings; Seller Financial Statements.................... 10-A
3.9 [Reserved].................................................. 11-A
3.10 Absence of Certain Changes or Events........................ 11-A
3.11 Tax Matters................................................. 11-A
3.12 Compliance.................................................. 13-A
3.13 Permits..................................................... 13-A
3.14 Litigation.................................................. 13-A
3.15 Brokers' and Finders' Fees.................................. 13-A
3.16 Employee Benefit Plans...................................... 13-A
3.17 Absence of Liens............................................ 15-A
3.18 Environmental Matters....................................... 15-A
3.19 Labor Matters............................................... 17-A
3.20 Agreements, Contracts and Commitments....................... 17-A
Statements; Registration Statement; Proxy
3.21 Statement/Prospectus........................................ 17-A
3.22 Board Approval.............................................. 18-A
3.23 State Takeover Statutes..................................... 18-A
3.24 Fairness Opinion............................................ 18-A
3.25 Intellectual Property....................................... 18-A
3.26 Assets...................................................... 19-A
3.27 Insurance................................................... 19-A
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER..............
19-A
4.1 Organization; Good Standing................................. 19-A
4.2 Charter Documents........................................... 20-A
4.3 Authority................................................... 20-A
4.4 Conflicts................................................... 20-A
4.5 Consents.................................................... 20-A
</TABLE>
i
<PAGE> 413
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
4.6 Litigation.................................................. 21-A
4.7 Statements; Registration Statement; Proxy Statement......... 21-A
4.8 Financing................................................... 21-A
4.9 Delaware Law................................................ 21-A
4.10 Newly Organized............................................. 21-A
4.11 Related Agreements.......................................... 21-A
4.12 Solvency.................................................... 21-A
4.13 No Amendment to VERITAS Merger Agreement.................... 22-A
ARTICLE V CONDUCT PRIOR TO CLOSING.................................. 22-A
5.1 Conduct of Business......................................... 22-A
5.2 Restrictions on Conduct of Business......................... 22-A
ARTICLE VI ADDITIONAL AGREEMENTS.................................... 25-A
6.1 Registration Statement; Proxy Statement; Other Filings...... 25-A
6.2 Meeting of Seller Stockholders.............................. 26-A
6.3 Access to Information....................................... 27-A
6.4 Confidentiality............................................. 27-A
6.5 No Solicitation............................................. 28-A
6.6 Public Disclosure........................................... 29-A
6.7 Legal Requirements.......................................... 29-A
6.8 Notification of Certain Matters............................. 29-A
6.9 Commercially Reasonable Efforts and Further Assurances...... 29-A
6.10 Indemnification............................................. 30-A
6.11 Regulatory Filings; Reasonable Efforts...................... 30-A
6.12 Use of Names................................................ 31-A
6.13 Debt Offer.................................................. 31-A
6.14 Commitment Letters; Rolled Options.......................... 31-A
6.15 Transaction Expenses........................................ 31-A
6.16 Non-Assignable Assets....................................... 32-A
ARTICLE VII EMPLOYEE MATTERS........................................ 32-A
7.1 Employee Liabilities........................................ 32-A
7.2 Employee Benefit Plans...................................... 32-A
7.3 WARN Act.................................................... 33-A
ARTICLE VIII TAX MATTERS............................................ 33-A
8.1 Conveyance Taxes............................................ 33-A
8.2 Section 338(h)(10) Election................................. 33-A
8.3 Tax Matters Schedule........................................ 34-A
ARTICLE IX CONDITIONS TO CLOSING.................................... 34-A
Conditions to Obligations of Each Party to Effect the
9.1 Closing..................................................... 34-A
9.2 Additional Conditions to Obligations of Seller.............. 35-A
9.3 Additional Conditions to the Obligations of Purchaser....... 35-A
ARTICLE X TERMINATION, AMENDMENT AND WAIVER......................... 36-A
10.1 Termination................................................. 36-A
10.2 Notice of Termination; Effect of Termination................ 38-A
10.3 Fees and Expenses........................................... 38-A
10.4 Amendment................................................... 39-A
10.5 Extension; Waiver........................................... 39-A
</TABLE>
ii
<PAGE> 414
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE XI INDEMNIFICATION.......................................... 40-A
11.1 Survival.................................................... 40-A
11.2 Indemnification............................................. 40-A
ARTICLE XII GENERAL PROVISIONS...................................... 40-A
12.1 Notices..................................................... 40-A
12.2 Interpretation.............................................. 42-A
12.3 Counterparts................................................ 42-A
12.4 Entire Agreement............................................ 42-A
12.5 Severability................................................ 42-A
12.6 Other Remedies; Specific Performance........................ 42-A
12.7 Governing Law............................................... 43-A
12.8 Rules of Construction....................................... 43-A
12.9 Assignment.................................................. 43-A
12.10 Waiver of Jury Trial........................................ 43-A
12.11 No Third Party Rights....................................... 43-A
12.12 Attorneys' Fees............................................. 43-A
</TABLE>
iii
<PAGE> 415
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered into
as of March 29, 2000 by and among Suez Acquisition Company (Cayman) Limited, a
limited company organized under the laws of the Cayman Islands ("Purchaser"),
Seagate Technology, Inc., a Delaware corporation ("Seller"), and Seagate
Software Holdings, Inc., a Delaware corporation ("SSHI").
RECITALS:
A. Seller owns beneficially all of the issued and outstanding shares
(collectively, the "Shares") of capital stock of each Sold Subsidiary (as
defined herein).
B. Seller and SSHI wish to sell to Purchaser, and Purchaser wishes to
purchase from Seller and SSHI, the Shares, upon the terms and subject to the
conditions set forth herein.
C. Seller and Purchaser desire to make certain representations and
warranties, and mutual covenants and agreements in connection with the
transactions contemplated hereby.
D. Simultaneously and in connection with entering into this Agreement,
Seller is entering into the VERITAS Merger Agreement (as defined below) with
VERITAS (as defined below).
NOW, THEREFORE, in consideration of the foregoing premises, and the
covenants, promises and representations set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged and accepted, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Defined Terms. For all purposes of and under this Agreement,
the following terms shall have the following respective meanings:
(a) "Action" means any claim, action, suit, arbitration, inquiry,
proceeding or investigation by or before any Governmental Authority.
(b) "Adjustment Amount" means, to the extent not paid or discharged on
or prior to the Closing Date, the sum of (i) accrued and unpaid Taxes of
Seller and its Subsidiaries (including the Sold Subsidiaries) determined in
accordance with the principles arrived at in determining the February 28,
2000 balance sheet of Seller (i.e., $278,000,000 minus Taxes reflected in
such amount to the extent paid or settled since such date, plus additions
to such amount in respect of items identified or arising since such date,
plus an amount equal to 40% of the aggregate income of Seller and its
Subsidiaries since such date) excluding Taxes caused by or relating to the
Split and including, without limitation, any Taxes payable by virtue of the
transactions contemplated hereby and any U.S. alternative minimum tax for
which Seller or any of its Subsidiaries may be liable arising out of or
attributable to the 1999 reorganization of Seagate Software Information
Management Group (Canada), Inc. (the "Canadian Reorganization"), (ii)
Indebtedness of Seller and its Subsidiaries (including any interest thereon
and any premium payable in connection with the retirement thereof), (iii)
the Overage Amount, if any, (iv) the Bonus Amount, and (v) any Transaction
Expenses.
1-A
<PAGE> 416
(c) "Affiliate" means, with respect to any specified Person, any other
Person that directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with, such specified
Person.
(d) "Bonus Amount" means the aggregate amount of year-end bonuses and
profit sharing payments required to be paid by Seller and its Subsidiaries
in July of 2000.
(e) "Cash" means cash, cash equivalents and short-term investments
(including all securities available for sale) as determined in accordance
with GAAP and consistent with the determination thereof in the Recent SEC
Reports (as defined in Section 3.8(a) hereof).
(f) "Code" means the Internal Revenue Code of 1986, as amended, or any
successor statute thereto.
(g) "Commitment Letters" means the debt commitment letter attached as
Schedule I hereto.
(h) "control" (including the correlative terms "controlled by" and
"under common control with"), with respect to the relationship between or
among two or more persons, means the possession, directly or indirectly or
as trustee or executor, of the power to direct or cause the direction of
the affairs or management of a person, whether through the ownership of
voting securities, as trustee or executor, by contract or otherwise,
including, without limitation, the ownership, directly or indirectly, of
securities having the power to elect a majority of the board of directors
or similar body governing the affairs of such person.
(i) "Delaware Law" means the General Corporation Law of the State of
Delaware, as amended, or any successor statute thereto.
(j) "Designated Assets" means the securities set forth on Schedule II
hereto.
(k) "Designated Liabilities" means all Liabilities (including with
respect to Taxes) of Seller and its Subsidiaries relating to (i) the
Designated Assets, (ii) transactions pursuant to the OD Documents, (iii)
obligations to VERITAS (indemnification or otherwise) in respect of the
software business sold to VERITAS in exchange for shares of VERITAS common
stock, (iv) any Non-Assumed Plan (as defined in Section 7.1 hereof), and
(v) Seller's stock purchase plan. Without expanding the definition of
Designated Liabilities, Designated Liabilities shall not include
Liabilities relating to the transactions contemplated by this Agreement or
any Liabilities included in the Adjustment Amount.
(l) "DOJ" means the United States Department of Justice, or any
successor agency thereto.
(m) "Equity Commitments" means the equity commitment letters attached
as Schedule III hereto.
(n) "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended, or any successor statute thereto.
(o) "Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any successor statute thereto.
(p) "FTC" means the United States Federal Trade Commission, or any
successor agency thereto.
2-A
<PAGE> 417
(q) "GAAP" means United States generally accepted accounting
principles.
(r) "Governmental Authority" or "Governmental Authorities" means any
United States federal, state or local or any foreign government,
governmental, regulatory or administrative authority, agency or commission
or any court, tribunal, or judicial or arbitral body.
(s) "Governmental Order" means any order, writ, judgment, injunction,
decree, stipulation, determination or award entered by or with any
Governmental Authority.
(t) "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and any successor statute thereto.
(u) "Indebtedness" means, with respect to any person, (i) all
indebtedness of such person, whether or not contingent, for borrowed money,
(ii) all obligations of such person evidenced by notes, bonds, debentures
or other similar instruments, (iii) all obligations, contingent or
otherwise, of such person under acceptance, letter of credit or similar
facilities, and (iv) all Indebtedness of others referred to in clauses (i)
through (iii) above, inclusive, guaranteed directly or indirectly in any
manner by such person (excluding guarantees of collection), or in effect
guaranteed directly or indirectly by such person, including by way of an
agreement (A) to pay or purchase such Indebtedness or to advance or supply
funds for the payment or purchase of such Indebtedness, (B) to purchase,
sell or lease (as lessee or lessor) property, or to purchase or sell
services, primarily for the purpose of enabling the debtor to make payment
of such Indebtedness or to assure the holder of such Indebtedness against
loss, (C) to supply funds to or in any other manner invest in the debtor
(including any agreement to pay for property or services irrespective of
whether such property is received or such services are rendered), or (D)
otherwise to assure a creditor against loss.
(v) "Indenture" means the Indenture dated as of March 1, 1997 between
Seller and First Trust of California, National Association, pursuant to
which the Debentures (as defined in Section 3.4(b) hereof) have been
issued.
(w) "IRS" means the United States Internal Revenue Service, or any
successor agency thereto.
(x) "knowledge" (or any word or phrase of similar import) means, with
respect to any matter in question, the knowledge of the executive officers
or directors of the person in question and its Subsidiaries.
(y) "Law" or "Laws" means any federal, state, local or foreign
statute, law, ordinance, regulation, rule, code, order, judgment, decree or
other requirement or rule of law.
(z) "Liability" or "Liabilities" means any and all debts, liabilities
and obligations of any type or nature whatsoever, whether accrued or fixed,
absolute or contingent, matured or unmatured or determined or determinable,
including, without limitation, those arising under any Law (including,
without limitation, any Environmental Law), Action or Governmental Order
and those arising under any contract, agreement, arrangement, commitment or
undertaking.
(aa) "Lien" means any lien, security interest, adverse claim, charge,
mortgage or other encumbrance.
3-A
<PAGE> 418
(bb) "Material Adverse Effect" means any change in, or effect on
Seller or any of its Subsidiaries that, individually or in the aggregate
with any other circumstances, changes in, or effects on, Seller or any of
its Subsidiaries is materially adverse to the operations or Liabilities,
financial condition or results of operations of the Sold Subsidiaries and
their respective Subsidiaries, taken as a whole (after giving effect to the
Split), excluding (i) any change in or effect on Seller or any of its
Subsidiaries that is related to compliance by Seller or its Subsidiaries
with the terms of this Agreement, and (ii) any Liability which results in
an increase in the Required Cash pursuant to Section 2.6 hereof or which is
a Designated Liability.
(cc) "OD Documents" means the Agreement and Plan of Merger and
Reorganization, dated as of March 29, 2000, by and among Seller and VERITAS
Software Corporation, a Delaware corporation ("VERITAS"), as the same may
be amended, supplemented and modified from time to time in accordance with
its terms (the "VERITAS Merger Agreement").
(dd) "Overage Amount" means any "excess parachute payments" within the
meaning of Section 280G of the Code payable as a result of the acceleration
of Star Options (as defined in the VERITAS Merger Agreement) pursuant to
the OD Documents in excess of $100,000,000.
(ee) "Required Cash" means $800,000,000, as adjusted pursuant to
Section 2.6 hereof.
(ff) "Roll Agreement" means the Rollover Commitment Agreements
previously delivered to the parties hereto.
(gg) "Rolled Option Value" means the aggregate Rollover Value (as
defined in the Roll Agreement).
(hh) "SEC" means the United States Securities and Exchange Commission,
or any successor agency thereto.
(ii) "Securities Act" means the Securities Act of 1933, as amended, or
any successor statute thereto.
(jj) "Split" means the transfer to the Sold Subsidiaries, prior to the
Closing Date, of all assets (including, without limitation, the securities
of iCompression, TurboLinux and MetaByte currently held by Seller (the
"Private Securities") or the Cash or other proceeds realized by Seller from
the sale, disposition or transfer of such Private Securities) (and such
Cash or other proceeds shall be in addition to any Required Cash) and
Liabilities of Seller and Seagate Software Holdings, Inc., other than the
Designated Assets and the Designated Liabilities, to be transferred
pursuant to an agreement in a form consistent with the terms hereof to be
agreed upon by Seller and Purchaser prior to Closing and reasonably
satisfactory to VERITAS.
(kk) "Subsidiary" or "Subsidiaries" means any and all corporations,
limited liability companies, general or limited partnerships, joint
ventures, business trusts, associations and other business enterprises and
entities controlled by a person directly or indirectly through one or more
intermediaries.
(ll) "TA Statement" means an estimate of the Adjustment Amount by the
Chief Financial Officer of Seller to be prepared in collaboration with
Purchaser based on Seller's month-end immediately preceding delivery of
such estimate together with a certificate of the Chief Financial Officer of
Seller specifying (i) that the TA Statement fairly presents his or her good
faith best effort estimate of the Adjustment
4-A
<PAGE> 419
Amount as at the then scheduled Closing Date and (ii) the assumed VERITAS
Price utilized therein for the purposes of calculating any Overage Amount.
(mm) "Tax" or "Taxes" shall mean any and all federal, state, local and
foreign taxes, assessments and other governmental charges, duties,
impositions and Liabilities relating to taxes, including, without
limitation, taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with
respect to such amounts and any obligations under any agreements or
arrangements with any other person with respect to such amounts, and any
Liability for taxes of a predecessor entity (if any).
(nn) "Transaction Expenses" means the fees and expenses of Seller's or
its Subsidiaries' investment bankers, attorneys, consultants, accountants
and advisors incurred in connection with this Agreement, the OD Documents
and the transactions contemplated hereby and thereby.
(oo) "VERITAS Price" means the closing price for a share of VERITAS
Common Stock, as reported on the Nasdaq National Market.
ARTICLE II
PURCHASE AND SALE
2.1 Purchase and Sale of the Shares. Upon the terms and subject to the
conditions of this Agreement, at the Closing (as defined in Section 2.3 hereof),
(i) Seagate Technology, Inc. shall sell to Purchaser or one of its Designees (as
defined in Section 12.10 hereof), and Purchaser shall, or shall cause one of its
Designees to, purchase from Seller, all of the outstanding capital stock of each
of the Subsidiaries of Seller listed on Schedule IV hereto, and (ii) SSHI shall
sell to Purchaser or one of its Designees, and Purchaser shall, or shall cause
one of its Designees to, purchase from SSHI, all of the outstanding capital
stock of Seagate Software Information Management Group, Inc., a Delaware
corporation ("SSIMG") (such Subsidiaries set forth on Schedule IV and SSIMG
being referred to herein, collectively, as the "Sold Subsidiaries"), in exchange
for payment of the "Purchase Price" set forth in Section 2.2 hereof.
2.2 Purchase Price; Allocation of Purchase Price. The aggregate purchase
price for the Shares shall be $2,000,000,000 in cash, minus the Rolled Option
Value (the "Purchase Price"), plus the assumption of all Liabilities (other than
the Designated Liabilities) of Seller and SSHI.
2.3 Closing. Upon the terms and subject to the conditions of this
Agreement, the sale and purchase of the Shares contemplated by this Agreement
shall take place at a closing (the "Closing") to be held at the offices of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, located at One
Market Street, Spear Tower, Suite 1600, San Francisco, California 94105, at a
time and date to be specified by the parties hereto, which shall be no later
than second (2nd) business day following the satisfaction or, if permitted
pursuant hereto, waiver of the conditions set forth in Article IX hereof, or at
such other location, date and time as Purchaser and Seller shall mutually agree.
The date upon which the Closing actually occurs shall be referred to herein as
the "Closing Date."
5-A
<PAGE> 420
2.4 Closing Deliveries by Seller and SSHI. At the Closing, Seller or SSHI
(as applicable) shall deliver, or cause to be delivered, to Purchaser and/or its
Designees, as appropriate, the following:
(a) stock certificates evidencing the Shares, duly endorsed in blank
or accompanied by stock powers duly executed in blank, and with all
required stock transfer tax stamps affixed thereto, representing all of the
issued and outstanding shares of capital stock of each of the Sold
Subsidiaries, free and clear of all Liens;
(b) a receipt for the Purchase Price; and
(c) the certificates and other documents required to be delivered as a
condition to the Closing pursuant to Section 9.3 hereof.
2.5 Closing Deliveries by Purchaser. At the Closing, Purchaser shall
deliver, or cause to be delivered, to Seller the following:
(a) cash in an amount equal to the Purchase Price, by wire transfer in
immediately available funds to an account designated in writing by Seller
at least two (2) business days prior to the Closing;
(b) an assumption of the Seagate Software Information Management
Group, Inc. Stock Option Plan; and
(c) the certificates and other documents required to be delivered as a
condition to the Closing pursuant to Section 9.2 hereof.
2.6 Adjustment of Required Cash. The amount of Required Cash shall be
subject to adjustment prior to Closing in the manner set forth below:
(a) TA Statement. No later than fifteen (15) calendar days prior to
the date of Seller Stockholder Meeting, Seller shall deliver to Purchaser
the TA Statement. If the Closing does not occur within twenty (20) calendar
days of delivery of the TA Statement, a revised TA Statement shall be
delivered to Purchaser, and such revised TA Statement shall constitute the
TA Statement for all purposes hereof and shall be subject to Sections
2.6(b) and 2.6(c) below.
(b) TA Statement Disputes.
(i) Subject to the terms of Section 2.6(b)(ii) hereof, the TA
Statement shall be deemed to be and shall be final, binding and
conclusive on Seller and Purchaser.
(ii) Purchaser shall be entitled to dispute any amounts reflected
on the TA Statement, but only on the basis that the amounts reflected on
the TA Statement contain errors or are based on erroneous assumptions or
were not arrived at in accordance with Seller's accounting practices and
policies applied on a basis consistent with Seller's past accounting
practices and policies; provided, however, that Purchaser shall have
notified Seller in writing of each disputed item, specifying the amount
thereof in dispute and setting forth, in reasonable detail, the basis
for such dispute, within seven (7) calendar days of Seller's delivery of
the TA Statement to Purchaser. In the event of such a dispute, Seller
and Purchaser shall attempt to reconcile their disputed amounts, and any
resolution by them as to any disputed amounts shall be final, binding
and conclusive on Seller and Purchaser. In the event that Seller and
Purchaser are unable to reach a resolution of any disputed amounts
within five (5) calendar days after receipt by Seller of Purchaser's
written notice of dispute delivered in accordance with the
6-A
<PAGE> 421
foregoing, Seller and Purchaser shall submit the items remaining in
dispute for resolution to Arthur Andersen LLP (or, if such firm shall
decline to act or is not, at the time of such submission, independent of
Seller and Purchaser, to another independent accounting firm of
international reputation mutually acceptable to Seller and Purchaser)
(either Arthur Andersen LLP or such other accounting firm being referred
to herein as the "Independent Accounting Firm"), which shall, on an
expedited basis, within five (5) calendar days after such submission,
determine and report to Seller and Purchaser upon such remaining
disputed items, and such report shall be final, binding and conclusive
on Seller and Purchaser. The fees and disbursements of the Independent
Accounting Firm shall be allocated between Seller and Purchaser in the
same proportion that the aggregate amount of such remaining disputed
items so submitted to the Independent Accounting Firm that is
unsuccessfully disputed by each such party (as finally determined by the
Independent Accounting Firm) bears to the total amount of such remaining
disputed items so submitted.
(iii) In acting under this Agreement, the Independent Accounting
Firm shall be entitled to the privileges and immunities of an
arbitrator.
(iv) The TA Statement shall be deemed final for the purposes of and
under this Section 2.6 upon the earlier to occur of (i) the failure of
Purchaser to notify Seller of a dispute within seven (7) calendar days
of Seller's delivery of the TA Statement to Purchaser pursuant to
Section 2.6(b)(ii) hereof, (ii) the resolution of all disputes, pursuant
to Section 2.6(b)(ii) hereof, by Seller and Purchaser, and (iii) the
resolution of all disputes, pursuant to Section 2.6(b)(ii) hereof, by
the Independent Accounting Firm. At the Closing, (i) the Adjustment
Amount set forth in the final TA Statement shall be recalculated by
using the VERITAS Price on the trading day immediately preceding the
Effective Time under the VERITAS Merger Agreement in substitution for
that utilized in the estimated TA Statement, as may be adjusted by the
Independent Accounting Firm and (ii) the amount of Required Cash shall
be increased upward on a dollar for dollar basis, in an amount equal to
the Adjustment Amount (as recalculated pursuant to the foregoing clause
of this Section 2.6(b)(iv)).
2.7 Transaction Structure. The parties agree to cooperate and take all
requisite actions prior to the Closing Date to merge, form, consolidate or alter
the tax status of any of the Sold Subsidiaries or any Subsidiaries of the Sold
Subsidiaries to the extent desirable in the Purchaser's judgment for commercial,
regulatory, tax or other reasons, and further agree that the Purchaser may at
any time change the structure of the transactions contemplated by this
Agreement, including without limitation, by determining the order in which the
Sold Subsidiaries (and any assets of the Sold Subsidiaries) are transferred, and
the Seller shall cooperate in such efforts, including by entering into
appropriate amendments to this Agreement, provided, however, that such actions
shall not decrease the amount or change the kind of the consideration paid to
Seller pursuant to this Agreement, increase Designated Liabilities or add
transaction costs to those costs arising out of the transactions contemplated by
this Agreement (unless Purchaser agrees to pay such additional costs). On or
prior to the Closing Date, Seller shall effectuate the Split.
7-A
<PAGE> 422
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Purchaser, subject to the
exceptions and qualifications specifically set forth or disclosed in writing in
the disclosure letter delivered by Seller to Purchaser, dated as of the date
hereof (the "Seller Disclosure Schedule"), and after giving effect to the OD
Documents, the Split and the transactions contemplated thereby, if relevant for
the purposes of determining compliance herewith as follows:
3.1 Organization; Good Standing. Seller and each of its Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation or organization, with the corporate or
other power and authority to own, lease and operate its assets and properties
and to carry on its business as now being conducted, and is duly qualified to do
business and in good standing in each jurisdiction in which the failure to be so
qualified would not reasonably be expected, individually or in the aggregate, to
have a Material Adverse Effect.
3.2 Charter Documents. Seller has delivered or made available to Purchaser
a true and correct copy of the Certificate of Incorporation and Bylaws of Seller
and SSHI and the organizational documents of each of the Sold Subsidiaries, each
as amended to date and in effect as of the date hereof, and each such instrument
is in full force and effect. Seller and SSHI are not in violation of any of the
provisions of their Certificate of Incorporation or Bylaws.
3.3 Subsidiaries. Section 3.3 of the Seller Disclosure Schedule contains a
complete and accurate list of each Subsidiary of Seller, indicating the
jurisdiction of incorporation of each such Subsidiary and Seller's proportionate
equity interest therein. Each Subsidiary of Seller that is not a Sold Subsidiary
(other than SSHI) is owned, directly or indirectly, by a Sold Subsidiary.
3.4 Capital Structure.
(a) The authorized capital stock of each Sold Subsidiary is as set forth in
Section 3.4(a) of the Seller Disclosure Schedule. All of the Shares are owned
beneficially and of record by Seller or one of its Subsidiaries, except for
director's qualifying shares and similar statutory de minimis holdings. All of
the Shares are duly authorized and validly issued, fully paid and nonassessable,
and are not subject to any preemptive rights created by statute, the
organizational documents of Seller or any of its Subsidiaries, or any agreement
or document to which Seller or any of its Subsidiaries is a party or by which of
Seller or any of its Subsidiaries is bound and, when transferred to Purchaser
will be free and clear of all Liens. Except as set forth in Section 3.4(a) of
the Seller Disclosure Schedule, there are no equity securities, partnership
interests or other similar ownership interests of any class or series of any
Sold Subsidiary, or any securities convertible into, or exercisable or
exchangeable for, such equity securities, partnership interests or similar
ownership interests of any Sold Subsidiary, which are issued, reserved for
issuance or outstanding. Except as set forth in Section 3.4(a) of the Seller
Disclosure Schedule, there are no options, warrants, equity securities,
partnership interests or other similar ownership interests, calls, rights
(including preemptive rights), commitments or agreements of any kind or
character to which Seller or any of its Subsidiaries is a party or by which
Seller or any of its Subsidiaries is bound obligating Seller or any of its
Subsidiaries to issue, deliver or sell (or cause to be issued, delivered or
sold), or repurchase, redeem or otherwise acquire (or cause the repurchase,
redemption or acquisition of), any shares of capital stock of any Sold
Subsidiary or any Subsidiaries thereof, or obligating Seller or any of its
8-A
<PAGE> 423
Subsidiaries to grant, extend, accelerate the vesting of or enter into any such
option, warrant, equity security, partnership interest or similar ownership
interest, call, right, commitment or agreement. There are no registration
rights, proxies or other agreements or understandings with respect to any equity
security, partnership interest or other similar ownership interest of any class
or series of any capital stock of any Sold Subsidiary or any Subsidiaries
thereof.
(b) The only outstanding Indebtedness of Seller and its Subsidiaries is (i)
$200 million in principal amount of 7.125% Senior Notes Due March 1, 2004 (the
"2004 Senior Notes") issued pursuant to the Indenture, dated as of March 1, 1997
(the "Indenture"), (ii) $200 million in aggregate principal amount of 7.37%
Senior Notes Due March 1, 2007 (the "2007 Senior Notes") issued pursuant to the
Indenture, (iii) $100 million in principal amount of 7.875% Senior Debentures
due March 1, 2017 (the "2017 Senior Debentures") issued pursuant to the
Indenture, (iv) $200 million in principal amount of 7.45% Senior Debentures due
March 1, 2037 (the "2037 Senior Debentures") and, together with the 2004 Notes,
the 2007 Notes and the 2017 Senior Debentures, the "Debentures") issued pursuant
to the Indenture. Other than the Debentures, which are redeemable in full in
accordance with their respective terms, there is no Indebtedness of Seller or
its Subsidiaries.
3.5 Authority. Each of Seller and SSHI has all necessary corporate power
and authority to enter into this Agreement and the OD Documents, to perform its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the OD Documents by Seller and SSHI, and the performance by Seller and SSHI
of its obligations hereunder and thereunder and the consummation by Seller and
SSHI of the transactions contemplated hereby and thereby, have been duly
authorized by all necessary corporate action on the part of Seller and SSHI,
subject only to the approval and adoption of this Agreement and the OD Documents
by the stockholders of Seller in accordance with Delaware Law. The affirmative
vote of the holders of at least a majority of the outstanding shares of Seller
Common Stock is the only vote required for the stockholders of Seller to approve
this Agreement, the OD Documents and the transactions contemplated hereby and
thereby under the applicable rules of The New York Stock Exchange, Inc. (the
"NYSE"), Delaware Law and all other legal and regulatory requirements applicable
thereto (the "Required Stockholder Approval"). This Agreement and the OD
Documents have been duly executed and delivered by Seller and SSHI and, assuming
the due authorization, execution and delivery of this Agreement by Purchaser and
the OD Documents by the other party or parties thereto, constitute the valid and
binding obligations of Seller and SSHI, enforceable in accordance with their
respective terms, subject to (i) the effect of any applicable laws of general
application relating to bankruptcy, reorganization, insolvency, moratorium or
other similar laws affecting creditors' rights and the relief of debtors
generally, and (ii) the effect of rules of law and general principles of equity,
including, without limitation, rules of law and general principles of equity
governing specific performance, injunctive relief and other equitable remedies
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
3.6 Conflicts. The execution and delivery of this Agreement by Seller and
SSHI does not, and the performance by Seller and SSHI of its obligations
hereunder and the consummation by Seller and SSHI of the transactions
contemplated hereby will not, (i) conflict with or violate the Certificate of
Incorporation or Bylaws of Seller and SSHI or the organizational documents of
any of its Subsidiaries, (ii) subject to compliance with the requirements set
forth in Section 3.7 hereof, conflict with or violate any Law, rule,
9-A
<PAGE> 424
regulation, order, judgment or decree applicable to Seller or any of its
Subsidiaries, or by which Seller, any of its Subsidiaries or any of their
respective assets and properties are bound or affected, or (iii) result in any
breach of, or constitute a default (or an event that with notice or lapse of
time or both would become a default) under, or impair the rights of Seller or
any of its Subsidiaries under, or alter the obligations of any third party
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a Lien on any of the assets or
properties of Seller or any of its Subsidiaries pursuant to, any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Seller or any of its Subsidiaries is a
party or by which Seller, any of its Subsidiaries or any of their respective
assets and properties are bound or affected, except to the extent such conflict,
violation, breach, default, impairment or other effect could not, in the case of
clause (ii) or (iii) of this Section 3.6, individually or in the aggregate, (a)
reasonably be expected to have a Material Adverse Effect, or (b) reasonably be
expected to have a material adverse effect on, or materially delay, the ability
of Purchaser, Seller or SSHI to consummate the transactions contemplated hereby.
3.7 Consents. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Authority is required
by or with respect to Seller or any of its Subsidiaries in connection with the
execution and delivery of this Agreement and the OD Documents by Seller, or the
performance by Seller of its obligations hereunder and thereunder or the
consummation by Seller of the transactions contemplated hereby and thereby,
except for (i) the filing of the Proxy Statement (as defined in Section 6.1(a)
hereof) with the SEC in accordance with the Exchange Act, (ii) consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under the HSR Act or any applicable state antitrust Laws, (iii)
consents, approvals, orders, authorizations, registrations, declarations and
filings as may be required under the Laws of any foreign country, and (iv) such
other consents, authorizations, filings, approvals and registrations which, if
not obtained or made, would not have a Material Adverse Effect or have a
material adverse effect on, or materially delay, the ability of Seller or
Purchaser to consummate the transactions contemplated hereby.
3.8 SEC Filings; Seller Financial Statements.
(a) Seller has filed all forms, reports and documents required to be filed
with the SEC since July 3, 1998, and has made available (through on-line
databases) to Purchaser such forms, reports and documents in the form filed with
the SEC. All such required forms, reports and documents (including all exhibits
and schedules thereto and all documents incorporated by reference therein) are
referred to herein as the "Seller SEC Reports." As of their respective dates,
the Seller SEC Reports (i) complied in all material respects with the applicable
requirements of the Securities Act or the Exchange Act, and the rules and
regulations of the SEC promulgated thereunder, and (ii) did not at the time each
such Seller SEC Report was filed (or if amended or superseded by a filing prior
to the date of this Agreement, then on the date of such filing) contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. None of
the Subsidiaries of Seller is required to file any forms, reports or other
documents with the SEC. Except to the extent revised or superseded by a
subsequent filing with the SEC, none of the Seller SEC Reports filed by Seller
since July 3, 1999 and prior to the date of this Agreement (collectively, the
"Recent SEC Reports") contains any untrue statement of a material fact or omits
to state any material fact required to be stated therein or necessary in order
to make the statements
10-A
<PAGE> 425
therein, in the light of the circumstances under which they were made, not
misleading. The consolidated financial statements of Seller included in all
Seller SEC Reports comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, in the case
of unaudited consolidated quarterly statements, as permitted by Form 10-Q of the
SEC) applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly present the consolidated financial
position of Seller and its consolidated Subsidiaries as of the dates thereof and
the consolidated financial position of Seller and its consolidated Subsidiaries
as of the dates thereof and the consolidated results of their operations and
cash flows for the periods then ended (subject, in the case of unaudited
quarterly statements, to normal year-end audit adjustments). Except as reflected
in the most recent consolidated balance sheet of Seller included in the Recent
SEC Reports most recently filed by Seller with the SEC prior to the date hereof
(such consolidated balance sheet being referred to herein as the "Current Seller
Balance Sheet" and the date thereof being referred to herein as the "Current
Balance Sheet Date"), as of the Current Balance Sheet Date, neither Seller nor
any of its Subsidiaries had, and since such date neither Seller nor any of such
Subsidiaries has incurred, any Liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) which, individually or in the
aggregate, would reasonably be expected to have a Material Adverse Effect.
3.9 [Reserved]
3.10 Absence of Certain Changes or Events. Except as reflected in the
Recent SEC Reports or Section 3.10 of the Seller Disclosure Schedule, since the
date of the last audited financial statements of Seller included in the Recent
SEC Reports, Seller has conducted its business only in the ordinary course
consistent with past practice, and there is not and has not been (i) any
condition, event or occurrence which, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect, or (ii) any condition,
event or occurrence which could reasonably be expected to prevent, hinder or
materially delay the ability of Seller to consummate the transactions
contemplated by this Agreement or the VERITAS Merger Agreement. Except as set
forth in Section 3.10 of the Seller Disclosure Schedule, since the date of
Seller's most recent periodic report on Form 10-Q included in the Recent SEC
Reports, there is not and has not been any event or action described in Section
5.2 hereof.
3.11 Tax Matters.
(a) Seller and each of its Subsidiaries have timely filed all federal,
state, local and foreign returns, estimates, information statements and reports
("Returns") relating to Taxes required to be filed by Seller and each of its
Subsidiaries with any Tax authority, except such Returns which are not material
to Seller or any such Subsidiaries, and all such Returns are true, correct and
complete in all material respects. Seller and each of its Subsidiaries have paid
all Taxes due and payable on such Returns.
(b) As of the Closing Date, Seller and each of its Subsidiaries will have
withheld with respect to its employees all federal and state income Taxes, Taxes
payable pursuant to the Federal Insurance Contribution Act, Taxes payable
pursuant to the Federal Unemployment Tax Act and other Taxes required to be
withheld, except such Taxes which are not material to Seller or any such
Subsidiaries.
(c) Neither Seller nor any of its Subsidiaries has been delinquent in the
payment of any material Tax. Section 3.11(c) of the Seller Disclosure Schedule
contains a complete
11-A
<PAGE> 426
and accurate list of all material Tax deficiencies outstanding, proposed or
assessed against Seller or any of its Subsidiaries, and a complete and accurate
list of all Seller's or any of its Subsidiaries' executed and unexpired waiver
of any statute of limitations on or extending the period for the assessment or
collection of any Liabilities for any Tax.
(d) Section 3.11(d) of the Seller Disclosure Schedule contains a complete
and accurate list of all audits or other examinations of any Return of Seller or
any of its Subsidiaries by any Tax authority is presently in progress, and a
complete and accurate list of all Seller's or any of its Subsidiaries'
notifications of any request for such an audit or other examination.
(e) Section 3.11(e) of the Seller Disclosure Schedule contains a complete
and accurate list of all adjustments relating to any Returns filed by Seller or
any of its Subsidiaries that have been proposed in writing formally or
informally by any Tax authority to Seller or any of its Subsidiaries or any
representative thereof.
(f) Neither Seller nor any of its Subsidiaries has any Liability for any
material unpaid Taxes which has not been accrued for or reserved on the Current
Seller Balance Sheet in accordance with GAAP, contingent or otherwise, which is
material to Seller or any of its Subsidiaries, other than any Liability for
unpaid Taxes that may have accrued in connection with the operation of the
business of Seller and its Subsidiaries in the ordinary course.
(g) Section 3.11(g) of the Seller Disclosure Schedule contains a complete
and accurate list of all contracts, agreements, plans or arrangements to which
Seller or any of its Subsidiaries is a party as of the date of this Agreement
(including, without limitation, the provisions of this Agreement), covering any
employee or former employee of Seller or any of its Subsidiaries that,
individually or collectively, would reasonably be expected to give rise to the
payment of any amount that would not be deductible pursuant to Sections 280G,
404 or 162(m) of the Code. The Seller Disclosure Schedule contains a complete
and accurate list of contracts, agreements, plans or arrangements to which
Seller is a party or by which it is bound to compensate any individual for
excise taxes paid pursuant to Section 4999 of the Code. Except as set forth in
Section 3.11(g) of the Seller Disclosure Schedule, no Seller Plan (as defined in
Section 3.16(a) hereof) exists that could result in the payment to any present
or former employee of Seller or any of its Subsidiaries of any money or other
property, or accelerate or provide any other rights or benefits to any present
or former employee of Seller or any of its Subsidiaries as a result of the
transaction contemplated by this Agreement or the OD Documents.
(h) There are no Liens with respect to Taxes upon the assets of Seller or
any of its Subsidiaries, other than with respect to Taxes not yet due and
payable or which are being contested in good faith.
(i) Neither Seller nor any of its Subsidiaries has filed any consent
agreement under Section 341(f) of the Code, or agreed to have Section 341(f)(2)
of the Code apply to any disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by Seller or any of its Subsidiaries.
(j) Section 3.11(j) of the Seller Disclosure Schedule contains a complete
and accurate list of all Seller's and any of its Subsidiaries' Tax-sharing, Tax
indemnity or Tax allocation agreements or arrangements.
(k) None of the assets or properties of Seller or any of its Subsidiaries
are Tax exempt use property within the meaning of Section 168(h) of the Code.
12-A
<PAGE> 427
(l) Seller has no excess loss accounts with respect to the stock of any of
its Subsidiaries. The transactions contemplated by this Agreement will not
result in the recognition of a material amount of deferred intercompany gain
under the deferred intercompany transaction rules of the Code.
3.12 Compliance. Neither Seller nor any of its Subsidiaries is, in any
material respect, in conflict with, or in default or violation of (i) any Law
(including the Foreign Corrupt Practices Act of 1977), rule, regulation, order,
judgment or decree applicable to Seller or any of its Subsidiaries or by which
Seller or any of its Subsidiaries or any of their respective assets and
properties are bound or affected, or (ii) any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Seller or any of its Subsidiaries is a party or by which
Seller or any of its Subsidiaries or its or any of their respective assets and
properties are bound or affected. No investigation or review by any Governmental
Authority is pending or, to the knowledge of Seller, threatened, against Seller
or any of its Subsidiaries, nor has any Governmental Authority indicated an
intention to conduct the same, other than routine investigations in the ordinary
course of Seller's business. There is no agreement, judgment, injunction, order
or decree binding upon Seller or any of its Subsidiaries which has, or could
reasonably be expected to have, the effect of prohibiting or materially
impairing any business practice of Seller or any of its Subsidiaries, any
acquisition of material property by Seller or any of its Subsidiaries or the
conduct of business by Seller or any of its Subsidiaries as currently conducted.
3.13 Permits. Seller and its Subsidiaries hold all permits, licenses,
variances, exemptions, orders and approvals from Governmental Authorities which
are material to the operation of the business of Seller and its Subsidiaries,
and Seller and its Subsidiaries are in compliance in all material respects with
the terms of such permits, licenses, variances, exemptions, order and approvals.
3.14 Litigation. There is no Action, suit, proceeding, claim, arbitration
or investigation pending against Seller or any of its Subsidiaries or as to
which Seller or any of its Subsidiaries has received any notice of assertion,
nor to the knowledge of Seller, is there any threatened Action, suit,
proceeding, claim, arbitration or investigation pending against Seller or any of
its Subsidiaries, in either case which individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect.
3.15 Brokers' and Finders' Fees. Except for fees payable to Morgan Stanley
& Co. Incorporated, neither Seller nor any of its Subsidiaries has incurred, nor
will Seller or any of its Subsidiaries incur, directly or indirectly, any
Liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with this Agreement or any transaction contemplated
hereby.
3.16 Employee Benefit Plans.
(a) Section 3.16(a) of the Seller Disclosure Schedule contains a complete
and accurate list of all employee compensation, incentive, fringe or benefit
plans, programs, policies, commitments, agreements (including, without
limitation, all employment, severance, change of control or similar agreements)
or other arrangements (whether or not set forth in a written document and
including, without limitation, all "employee benefit plans" within the meaning
of Section 3(3) of ERISA) maintained or contributed to by Seller or a Seller
affiliate covering any active or former employee, director or consultant of
Seller (each, a "Seller Employee" and, collectively, the "Seller Employees"
which shall, for all purposes of and under this Section 3.16, mean an employee
of Seller or a Seller Affiliate
13-A
<PAGE> 428
(as defined below)), any Subsidiary of Seller or any trade or business (whether
or not incorporated) which is a member of a controlled group or which is under
common control with Seller within the meaning of Section 414(b), (c) or (m) of
the Code (each, a "Seller Affiliate" and, collectively, the "Seller Affiliates")
(each, a "Seller Plan" and, collectively, the "Seller Plans"). Seller has
provided or made available to Purchaser: (i) correct and complete copies of all
documents embodying each Seller Plan, including, without limitation, all
amendments thereto, all trust documents related thereto, and all material
written agreements and contracts related thereto; (ii) the most recent annual
reports (Form Series 5500 and all schedules and financial statements attached
thereto), if any, required under ERISA or the Code in connection with each
Seller Plan; (iii) the most recent summary plan description together with the
summary(ies) of material modifications thereto, if any, required under ERISA
with respect to each Seller Plan; (iv) all IRS determination, opinion,
notification and advisory letters with respect to each Seller Plan; (v) all
material correspondence to or from any Governmental Authority relating to any
Seller Plan; (vi) all forms and related notices required under the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended, with respect to each
Seller Plan; (vii) the most recent discrimination tests for each Seller Plan
required to perform such tests; (viii) the most recent actuarial valuations, if
any, prepared for each Seller Plan; (ix) if the Seller Plan is funded, the most
recent annual and periodic accounting of the assets of each Seller Plan; and (x)
all communication to Seller Employees relating to any Seller Plan and any
proposed Seller Plan, in each case, relating to any amendments, terminations,
establishments, increases or decreases in benefits, acceleration of payments or
vesting schedules, or other events which would result in any material Liability
to Seller or any Seller Affiliate in respect of any Seller Plan.
(b) Each Seller Plan has been maintained and administered in all material
respects in compliance with its terms and with the requirements prescribed by
any and all Laws applicable thereto (including, without limitation, ERISA and
the Code). No Action, suit or other litigation (excluding claims for benefits
incurred in the ordinary course of Seller Plan activities) has been brought, or
to the knowledge of Seller, is threatened, against or with respect to any such
Seller Plan. There are no audits, inquiries or proceedings pending or, to the
knowledge of Seller, threatened by the IRS or the United States Department of
Labor with respect to any Seller Plans. All contributions, reserves or premium
payments required to be made or accrued as of the date hereof to the Seller
Plans have been timely made or accrued. Any Seller Plan intended to be qualified
under Section 401(a) of the Code, and each trust intended to qualify under
Section 501(a) of the Code (i) has either obtained from the IRS a favorable
determination, notification, advisory and/or opinion letter, as applicable, as
to its qualified status under the Code, or still has a remaining period of time
under applicable treasury regulations or IRS pronouncements in which to apply
for such letter and to make any amendments necessary to obtain a favorable
determination as to its qualified status under the Code, and (ii) except with
respect to amendments for which the Internal Revenue Service has allowed until
December 31, 2000, incorporates or has been amended to incorporate all
provisions required to comply with the Tax Reform Act of 1986 and subsequent
legislation. To the knowledge of Seller, no condition or circumstance exists
giving rise to a material likelihood that any such Seller Plan would not be
treated by the IRS as qualified under the Code, except as set forth in Section
3.16(b) of the Seller Disclosure Schedule. Seller does not have any plan or
commitment to establish any new Seller Plan, to modify any existing Seller Plan
(except to the extent required by Law or to conform any such Seller Plan to the
requirements of any applicable Law, in each case as previously disclosed to
Purchaser in writing, or as required by the terms of any Seller Plan or this
Agreement), or to enter into any new
14-A
<PAGE> 429
Seller Plan. Each Seller Plan can be amended, terminated or otherwise
discontinued after the Closing Date in accordance with its terms, without
Liability to Purchaser, Seller or any of the Seller Affiliates (other than
ordinary administration expenses).
(c) Neither Seller, any of its Subsidiaries, nor any of the Seller
Affiliates has at any time ever maintained, established, sponsored, participated
in, or contributed to any plan subject to Title IV of ERISA or Section 412 of
the Code, and at no time has Seller contributed to or been requested to
contribute to any "multiemployer plan," as such term is defined in ERISA. To
Seller's knowledge, there are no circumstances which could reasonably be
expected to subject Seller, any of its Subsidiaries, or any officer or director
of Seller or any of its Subsidiaries, to any material Liability or penalty under
Section 4975 through 4980B of the Code or Title I of ERISA. No "prohibited
transaction," within the meaning of Section 4975 of the Code or Sections 406 and
407 of ERISA, and not otherwise exempt under Section 4975 of the Code and
Section 408 of ERISA, has occurred with respect to any Seller Plan which could
reasonably be expected to subject Seller or any Seller Affiliates to material
Liability.
(d) Except as set forth in Section 3.16(d) of the Seller Disclosure
Schedule, none of the Seller Plans promises or provides retiree medical or other
retiree welfare benefits to any person except as required by applicable Law, and
neither Seller nor any of its Subsidiaries has represented, promised or
contracted (whether in oral or written form) to provide such retiree benefits to
any Seller Employee, former employee, director, consultant or other person,
except to the extent required by applicable Law.
(e) Each Seller International Employee Plan (as defined below) has been
established, maintained and administered in compliance in all material respects
with its terms and conditions and with the requirements prescribed by any and
all applicable Laws. No Seller International Employee Plan has unfunded
Liabilities that, as of the Closing, will not be offset by insurance or fully
accrued. Except as required by applicable Law, no condition exists that would
prevent Seller or Purchaser from terminating or amending any Seller
International Employee Plan at any time for any reason. For all purposes of and
under this Agreement, the term "Seller International Employee Plan" shall mean
each Seller Plan that has been adopted or maintained by Seller or any of its
Subsidiaries, whether informally or formally, for the benefit of current or
former employees of Seller or any of its Subsidiaries who are not United States
citizens and who are employed outside the United States.
3.17 Absence of Liens. Seller and each of its Subsidiaries has good and
valid title to, or in the case of leased assets and properties valid leasehold
interests in, all of its material tangible assets and properties, real, personal
and mixed, used in their respective businesses, free and clear of any Liens,
except (i) as reflected in the consolidated balance sheet of Seller included in
the Recent SEC Reports, (ii) for Liens for Taxes not yet due and payable, and
(iii) for such imperfections of title and encumbrances, if any, which would not
be material to Seller or any of its Subsidiaries.
3.18 Environmental Matters.
(a) For all purposes of and under this Agreement, the following terms shall
have the following respective meanings:
(i) "Environmental Claim" or "Environmental Claims" means any and all
administrative, regulatory or judicial actions, suits, causes of action,
demands, demand letters, claims, Liens, notices of non-compliance,
potential liability or violation, investigations, proceedings, consent
orders or consent or settlement agreements
15-A
<PAGE> 430
relating in any way to any Environmental Laws or any Environmental Permits,
including, without limitation, (A) any and all claims or directions by
Governmental Authorities for enforcement, investigation, cleanup, removal,
response, remedial or other actions or damages pursuant to any applicable
Environmental Law, and (B) any and all Claims by any Person seeking damages
(including with respect to natural resource damages, property damage,
diminution in value and personal injury) contribution, indemnification,
cost recovery, compensation or injunctive relief resulting from Hazardous
Materials or arising from alleged injury or threat of injury to health,
safety or the environment.
(ii) "Environmental Law" or "Environmental Laws" means any Law, now or
hereafter in effect and as amended, and any judicial or administrative
interpretation thereof, including any judicial or administrative order,
consent decree or judgment, relating to the environment, natural resources,
health, safety or Hazardous Materials, including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. sec.sec. 9601 et seq.; the Resource Conservation and Recovery Act,
42 U.S.C. sec.sec. 6901 et seq.; the Hazardous Materials Transportation
Act, 49 U.S.C. sec.sec. 5101 et seq.; the Clean Water Act, 33 U.S.C.
sec.sec. 1251 et seq.; the Toxic Substances Control Act, 15 U.S.C.
sec.sec. 2601 et seq.; the Clean Air Act, 42 U.S.C. sec.sec. 7401 et seq.;
the Safe Drinking Water Act, 42 U.S.C. sec.sec. 300f et seq.; the
Occupational Safety and Health Act, 29 U.S.C. sec.sec. 1651 et seq., the
Atomic Energy Act, 42 U.S.C. sec.sec. 2014 et seq.; the Federal
Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. sec.sec. 136 et seq.
and the Federal Food, Drug and Cosmetic Act, 21 U.S.C. sec.sec. 301 et seq.
and analogous state, provincial and foreign laws.
(iii) "Environmental Permit" or "Environmental Permits" means all
permits, approvals, registrations, identification numbers, licenses and
other authorizations required under any applicable Environmental Laws.
(iv) "Hazardous Material" or "Hazardous Materials" means (A) petroleum
and petroleum products, radioactive materials, asbestos in any form that is
or could become friable, urea formaldehyde foam insulation, transformers or
other equipment that contain polychlorinated biphenyls, and radon gas, (B)
any other chemicals, materials or substances defined as or included in the
definition of "hazardous substances", "hazardous wastes", "hazardous
materials", "extremely hazardous wastes", "restricted hazardous wastes",
"toxic substances", "toxic pollutants", "contaminants" or "pollutants", or
words of similar import, under any applicable Environmental Law, and (C)
any other chemical, material or substance the use, handling, generation,
treatment, storing, release or exposure to which is regulated by any
Governmental Authority.
(b) Except as would not reasonably be expected to result in a Material
Adverse Effect, (i) neither Seller nor any of its Subsidiaries has transported,
stored, used, manufactured, disposed of, released or exposed its employees or
others to any Hazardous Materials in violation of any Law, and (ii) neither
Seller nor any of its Subsidiaries has disposed of, transported, sold, used,
released, exposed its employees or others to or manufactured any product
containing a Hazardous Material (collectively, "Hazardous Materials Activities")
in violation of any Environmental Law.
(c) Except as set forth in Section 3.18(c) of the Seller Disclosure
Schedule, (i) no material Action, proceeding, revocation proceeding, amendment
procedure, writ, injunction or claim is pending, or to the knowledge of Seller,
threatened, concerning any Environmental Permit, Hazardous Material or any
Hazardous Materials Activities of Seller
16-A
<PAGE> 431
or any of its Subsidiaries; and (ii) Seller is not aware of any fact or
circumstance which could involve Seller or any of its Subsidiaries in any
material Environmental Claim or impose upon Seller or any of its Subsidiaries
any material Liabilities under any Environmental Law.
(d) Except as would not reasonably be expected to result in a Material
Adverse Effect, (i) each of Seller and its Subsidiaries are consistently and
reliably in compliance in all respects with all applicable Environmental Laws;
and (ii) Seller has obtained and is, as presently operating, consistently and
reliably in compliance with the conditions of all Environmental Permits
necessary under any Environmental Law for the continued conduct of the business
and operations of Seller in the manner now conducted.
(e) No investigation or review with respect to such matters is pending or
threatened, nor has any Governmental Authority or other person indicated an
intention to conduct the same, other than routine investigations and reviews
taken in the ordinary course of business.
3.19 Labor Matters. (i) There are no controversies pending or, to the
knowledge of Seller, threatened, between Seller or any of its Subsidiaries and
any of their respective employees; (ii) as of the date hereof, neither Seller
nor any of its Subsidiaries is a party to any collective bargaining agreement or
other labor union contract applicable to persons employed by Seller or any of
its Subsidiaries, nor does Seller know of any activities or proceedings of any
labor union to organize any such employees; and (iii) as of the date hereof,
Seller has no any knowledge of any strikes, slowdowns, work stoppages or
lockouts, or threats thereof, by or with respect to any employees of Seller or
any of its Subsidiaries.
3.20 Agreements, Contracts and Commitments. Except as set forth in Section
3.20 of the Seller Disclosure Schedule, neither Seller nor any of its
Subsidiaries is a party to or is bound by any of the following to the extent
currently in force:
(a) any employment or consulting agreement, contract or commitment
with any officer or director of Seller, other than those that are
terminable on no more than thirty (30) days' notice;
(b) any agreement, contract or commitment relating to the disposition
or acquisition by Seller or any of its Subsidiaries, after the date hereof,
of a material amount of assets or properties other than in the ordinary
course of business;
(c) any agreement, contract or commitment to license any third party
to manufacture or reproduce any Seller product, service or technology, or
any agreement, contract or commitment to sell or distribute any Seller
products, service or technology, except in each case for agreements entered
into in the ordinary course of business; or
(d) any mortgages, indentures, guarantees, loans or credit agreements,
security agreements or other agreements, contracts or commitments relating
to the borrowing of money or extension of credit.
3.21 Statements; Registration Statement; Proxy Statement/Prospectus. None
of the information supplied or to be supplied by Seller for inclusion or
incorporation by reference in (i) the Registration Statement (as defined in
Section 6.1(a) hereof) will, at the time it is declared or ordered effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading, or (ii) the Proxy Statement (as defined in
Section 6.1(a) hereof) will, on the date it is first mailed to the stockholders
of Seller, at the time of the Seller
17-A
<PAGE> 432
Stockholders' Meeting (as defined in Section 6.1(a) hereof) and at the Closing
Date, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
false or misleading, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the Seller Stockholders' Meeting which has become false or
misleading. The Proxy Statement will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
promulgated thereunder. Notwithstanding the foregoing, Seller makes no
representation or warranty with respect to any information supplied by Purchaser
which is contained in the Proxy Statement.
3.22 Board Approval. The Board of Directors of Seller has (i) determined
that this Agreement and the transactions contemplated hereby are fair to,
advisable and in the best interests of Seller and its stockholders, (ii) duly
approved this Agreement and the transactions contemplated hereby, and (iii)
resolved to recommend that the stockholders of Seller approve this Agreement and
the transactions contemplated hereby.
3.23 State Takeover Statutes. The Board of Directors of Seller has
approved this Agreement and the transactions contemplated hereby, and such
approval is sufficient to render inapplicable to this Agreement and the
transactions contemplated hereby the provisions of Section 203 of Delaware Law
to the extent, if any, such provisions are applicable to this Agreement and the
transactions contemplated hereby. No other state takeover statute or similar
statute or regulation applies to or purports to apply to this Agreement or the
transactions contemplated hereby.
3.24 Fairness Opinion. Seller has received a written opinion from Morgan
Stanley & Co. Incorporated, dated as of the date hereof, to the effect that, as
of the date hereof, the Merger Consideration (as defined in the VERITAS Merger
Agreement) payable pursuant to the VERITAS Merger Agreement is fair to the
stockholders of Seller from a financial point of view.
3.25 Intellectual Property.
(a) Seller or its Subsidiaries own, or possess licenses or other valid
rights to use, and immediately prior to Closing the Sold Subsidiaries or one or
more of their Subsidiaries will own, or possess licenses or other valid rights
to use, all Intellectual Property (as defined in Section 3.25(d) hereof)
necessary for the conduct of the business of Seller and its Subsidiaries as
currently conducted. Except as set forth in Section 3.25(a) of the Seller
Disclosure Schedule, (i) the conduct of the business of Seller and its
Subsidiaries as currently conducted does not infringe or otherwise violate any
Intellectual Property of any third party except where such infringement would
not reasonably be expected to have a Material Adverse Effect, and (ii) no person
is infringing or otherwise violating any Intellectual Property of Seller or its
Subsidiaries, except where such infringement would not reasonably be expected to
have a Material Adverse Effect. Except as set forth in Section 3.25(a) of the
Seller Disclosure Schedule, the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and thereby will not result
in the loss of, or any encumbrance on, the rights of Seller or any of its
Subsidiaries with respect to the Intellectual Property owned or used by them and
no claims, order, actions or proceedings are pending or, to the knowledge of
Seller, threatened, that seek to question the ownership or scope, cancel or
limit the scope or validity of the Intellectual Property owned or used by Seller
or any of its Subsidiaries or the rights of Seller or any of its Subsidiaries
therein, except in each case for such claims,
18-A
<PAGE> 433
orders, actions, proceedings, losses, encumbrances or rights as would not have a
Material Adverse Effect.
(b) Seller and each of its Subsidiaries has implemented policies and
consistently followed practices regarding the preservation of its Proprietary
Information (as defined in Section 3.25(d) hereof) from unauthorized disclosure
to third parties and regarding the use and disclosure of its Proprietary
Information by its employees and contractors.
(c) Section 3.25(c) of the Seller Disclosure Schedule contains a complete
and accurate list of all material Intellectual Property held or owned by Seller
and its Subsidiaries that has been issued or registered by, or filed with, any
Governmental Authority and all material Intellectual Property licenses to which
Seller or any of its Subsidiaries is a party.
(d) For all purposes of and under this Agreement, (i) "Intellectual
Property" shall mean intellectual or property of a similar nature including
without limitation all United States and foreign patents and patent
applications, United States and foreign trademark registrations or any analogous
rights and applications therefor, United States and foreign copyright
registrations and applications therefor, Proprietary Information and all other
intellectual property rights, including, without limitation, inventions,
processes, formulae, technology, know-how, techniques or other data and
information, confidential and proprietary trade secrets, computer software,
technical manuals and documentation used in connection with any of the
foregoing, and licenses and rights with respect to the foregoing or property of
like nature, and (ii) "Proprietary Information" shall mean the trade secrets,
proprietary technology, know-how and other confidential information relation to
the business of Seller and its subsidiaries as currently conducted.
3.26 Assets. The assets held directly or indirectly by the Sold
Subsidiaries (after giving effect to the Split), constitute all of the assets of
Seller and its Subsidiaries other than the Designated Assets.
3.27 Insurance. Seller and each of its Subsidiaries maintain, and all
times during the prior three years have maintained, fire and casualty, general
liability, business interruption, product liability, and sprinkler and water
damage insurance which it believes to be reasonably prudent for similarly sized
and similarly situated businesses. All premiums due and payable under all such
policies and bonds have been paid, Seller and each of its Subsidiaries is
otherwise in material compliance with the terms of such policies and bonds and,
to the knowledge of Seller, there is no threatened termination of, or material
premium increase with respect to, any of such policies.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller, subject to the
exceptions and qualifications set forth or disclosed in the disclosure letter
delivered by Purchaser to Seller, dated as of the date hereof (the "Purchaser
Disclosure Schedule"), as follows:
4.1 Organization; Good Standing. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, with the corporate power and authority to
own, lease and operate its assets and property and to carry on its business as
now being conducted and as proposed to be conducted, and is duly qualified to do
business and in good standing as a foreign corporation in each jurisdiction in
which the failure to be so qualified would not reasonably be expected to have a
material
19-A
<PAGE> 434
adverse effect on, or materially delay, the ability of Purchaser or Seller to
consummate the transactions contemplated by this Agreement.
4.2 Charter Documents. Purchaser has delivered to Seller a true and
correct copy of the organizational documents of Purchaser, each as amended to
date and in effect as of the date hereof, and each such instrument is in full
force and effect. Purchaser is not in violation of any of the provisions of its
organizational documents.
4.3 Authority. Purchaser has all requisite corporate power and authority
to enter into this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by Purchaser, and the performance by Purchaser of its obligations
hereunder and the consummation by Purchaser of the transactions contemplated
hereby, have been duly authorized by all necessary corporate action on the part
of Purchaser. No vote of the holders of the outstanding shares of capital stock
of Purchaser is required to approve this Agreement or the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Purchaser and, assuming the due authorization, execution and delivery by Seller,
constitutes the valid and binding obligations of Purchaser, enforceable in
accordance with their respective terms, subject to (i) the effect of any
applicable laws of general application relating to bankruptcy, reorganization,
insolvency, moratorium or other similar laws affecting creditors' rights and the
relief of debtors generally, and (ii) the effect of rules of law and general
principles of equity, including, without limitation, rules of law and general
principles of equity governing specific performance, injunctive relief and other
equitable remedies (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
4.4 Conflicts. The execution and delivery of this Agreement by Purchaser
does not, and the performance by Purchaser of its obligations hereunder the
consummation by Purchaser of the transactions contemplated hereby will not, (i)
conflict with or violate the organizational documents of Purchaser, (ii) subject
compliance with the requirements set forth in Section 4.5 hereof, conflict with
or violate any Law, rule, regulation, order, judgment or decree applicable to
Purchaser or by which Purchaser or its assets and properties are bound or
affected, or (iii) result in any breach of, or constitute a default (or an event
that with notice or lapse of time or both would become a default) under, or
impair the rights of Purchaser under, or alter the rights or obligations of any
third party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a Lien on any of
the assets or properties of Purchaser pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which Purchaser is a party or by which Purchaser or
its assets and properties are bound or affected, except to the extent such
conflict, violation, breach, default, impairment or other effect could not, in
the case of clause (ii) or (iii) of this Section 4.4, individually or in the
aggregate, reasonably be expected to have a material adverse effect on, or
materially delay, the ability of Purchaser or Seller to consummate the
transactions contemplated by this Agreement.
4.5 Consents. No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Authority is required
by or with respect to Purchaser in connection with the execution and delivery of
this Agreement by Purchaser, or the performance by Seller of its obligations
hereunder or the consummation by Seller of the transactions contemplated hereby,
except for (i) consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under the HSR Act or any applicable
state antitrust Laws, (ii) consents, approvals, orders, authorizations,
20-A
<PAGE> 435
registrations, declarations and filings as may be required under the Laws of any
foreign country, and (iii) such other consents, authorizations, filings,
approvals and registrations which, if not obtained or made, would not reasonably
be expected to have a material adverse effect on, or materially delay, the
ability of Purchaser or Seller to consummate the transactions contemplated
hereby.
4.6 Litigation. There is no Action, suit, proceeding, claim, arbitration
or investigation pending against Purchaser or as to which Purchaser has received
any notice of assertion, nor to the knowledge of Purchaser, is there any
threatened Action, suit, proceeding, claim, arbitration or investigation pending
against Purchaser, which could reasonably be expected to have a material adverse
effect on Purchaser.
4.7 Statements; Registration Statement; Proxy Statement. None of the
information supplied or to be supplied by Purchaser or its Affiliates for
inclusion or incorporation by reference in (i) the Registration Statement will,
at the time it is declared or ordered effective under the Securities Act,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or (ii) the Proxy Statement will, on the date the Proxy Statement is
first mailed to the stockholders of Seller, at the time of the Seller
Stockholders' Meeting and at the Closing Date, will contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not false or misleading, or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Seller
Stockholders' Meeting which has become false or misleading. Notwithstanding the
foregoing, Purchaser makes no representation or warranty with respect to any
information supplied by Seller which is contained in the Proxy Statement.
4.8 Financing. For all purposes of and under this Agreement, the
Commitment Letters and the Equity Commitments shall be referred to together as
the "Financing Agreements" and the financing to be provided thereunder shall be
referred to as the "Financing." The aggregate proceeds of Financing are in an
amount sufficient to consummate the transactions contemplated hereby in
accordance with the terms hereof. None of the Commitment Letters or the Equity
Commitments has been withdrawn and Purchaser does not know of any facts or
circumstances that may reasonably be expected to result in any of the conditions
set forth in the Commitment Letters or the Equity Commitments not being
satisfied.
4.9 Delaware Law. Purchaser was not immediately, prior to the execution
and delivery of this Agreement, an "interested stockholder" of Seller within the
meaning of Section 203 of Delaware Law, and neither Purchaser nor any of its
Affiliates beneficially owns any shares of Common Stock of Seller on the date
hereof.
4.10 Newly Organized. Purchaser was formed solely for the purpose of
engaging in the transactions contemplated by this Agreement and has engaged in
no other business activities.
4.11 Related Agreements. Purchaser has delivered to Seller true and
correct copies of any and all contracts and agreements between VERITAS and
Purchaser and their respective Affiliates.
4.12 Solvency. Immediately after giving effect to the transactions
contemplated by this Agreement and the closing of the Financing in order to
effect the transactions
21-A
<PAGE> 436
contemplated by this Agreement, the Sold Subsidiaries and their respective
Subsidiaries shall be able to pay their debts as they become due in the ordinary
course of business and shall own assets having a present fair saleable value
greater than the combined stated liabilities and identified contingent
liabilities of such entities. Immediately after giving effect to the
transactions contemplated by this Agreement and the closing of the Financing to
be obtained in order to effect the transactions contemplated by this Agreement,
the Sold Subsidiaries and their respective Subsidiaries shall have adequate
capital to carry on their businesses. No transfer of property is being made and
no obligation is being incurred in connection with the transactions contemplated
by this Agreement and the closing of any Financing to be obtained in order to
effect the transactions contemplated by this Agreement with the intent to
hinder, delay or defraud either present or future creditors of Purchaser,
Seller, the Sold Subsidiaries or any of their respective Subsidiaries.
4.13 No Amendment to VERITAS Merger Agreement. Seller shall not, without
the prior written consent of Purchaser, amend, modify, supplement, mutually
terminate or waive any term or condition set forth in the OD Documents, as in
effect as of the date hereof.
ARTICLE V
CONDUCT PRIOR TO CLOSING
5.1 Conduct of Business. Except (i) as set forth in Section 5.1 of the
Seller Disclosure Schedule, (ii) to the extent that Purchaser shall otherwise
consent in writing, and (iii) to the extent contemplated by the OD Documents as
in effect on the date hereof, or for the sale of all or a portion of the
Designated Assets, at all times during the period commencing with the execution
and delivery hereof and continuing until the earlier of the termination of this
Agreement pursuant to the terms hereof or the Closing, Seller shall, and shall
cause each of its Subsidiaries to, (a) carry on its business diligently and in
the usual, regular and ordinary course, in substantially the same manner as
heretofore conducted and in compliance with all applicable Laws, (b) pay or
perform its material obligations when due, and (c) use its commercially
reasonable efforts, consistent with past practices and policies, to preserve
intact its present business organization, keep available the services of its
present officers and employees and preserve its relationships with customers,
suppliers, distributors, licensors, licensees and others with which it has
business dealings. In furtherance of the foregoing and subject to applicable
Law, Seller shall confer with Purchaser, as promptly as practicable, prior to
taking any material actions or making any material management decisions with
respect to the conduct of its business and the business of its Subsidiaries.
5.2 Restrictions on Conduct of Business. Without limiting the generality
of the terms of Section 5.1 hereof, except (i) as set forth in Section 5.2 of
the Seller Disclosure Schedule or as required by the terms hereof, or (ii) to
the extent that Purchaser shall otherwise consent in writing (which, in the case
of Section 5.2(q) hereof, shall not be unreasonably withheld), or (iii) to the
extent contemplated by the OD Documents as in effect on the date hereof, or for
the sale of all or a portion of the Designated Assets, at all times during the
period commencing with the execution and delivery hereof and continuing until
the earlier of the termination of this Agreement pursuant to the terms hereof or
the
22-A
<PAGE> 437
Closing, Seller shall not do any of the following, or permit its Subsidiaries to
do any of the following:
(a) except as required by applicable Law, waive any stock repurchase
rights, accelerate, amend or change the period of exercisability of options
or restricted stock, or reprice options granted under any employee,
consultant or director stock plans or authorize cash payments in exchange
for any options granted under any of such plans;
(b) enter into any material partnership arrangements, joint
development agreements or strategic alliances, other than in the ordinary
course of business consistent with past practice;
(c) (i) increase the compensation or fringe benefits of any present or
former director, officer or employee of Seller or its Subsidiaries (except
for increases in salary or wages in the ordinary course of business
consistent with past practice), (ii) grant any severance or termination pay
to any present or former director, officer or employee of Seller or its
Subsidiaries (except for the payment of severance or termination pay in the
ordinary course of business consistent with past practice), or (iii)
establish, adopt, enter into, amend or terminate any Seller Plan or any
plan, agreement, program, policy, trust, fund or other arrangement that
would be a Seller Plan if it were in existence as of the date of this
Agreement, except as required by applicable Law;
(d) issue, deliver, sell, authorize, pledge or otherwise encumber, or
propose any of the foregoing with respect to, any shares of capital stock
or any securities convertible into, or exercisable or exchangeable for,
shares of capital stock of any of its Subsidiaries, or subscriptions,
rights, warrants or options to acquire any shares of capital stock or any
securities convertible into, or exercisable or exchangeable for, shares of
capital stock of any of its Subsidiaries, or enter into other agreements or
commitments of any character obligating it to issue any such shares of
capital stock of any of its Subsidiaries, or securities convertible into,
or exercisable or exchangeable for, shares of capital stock of any of its
Subsidiaries;
(e) cause, permit or propose any amendments to any charter document or
bylaws (or similar governing instruments) of Seller or any of its
Subsidiaries;
(f) acquire or agree to acquire by merging or consolidating with, or
by purchasing any equity interest in or a material portion of the assets
of, or by any other manner, any business or any corporation, limited
liability company, general or limited partnership, joint venture,
association, business trust or other business enterprise or entity, or
otherwise acquire or agree to acquire any assets having a value exceeding
$5,000,000 in the aggregate or which are otherwise material, individually
or in the aggregate, to the business of Seller and its Subsidiaries to be
included in the Sold Subsidiaries;
(g) adopt a plan of merger, complete or partial liquidation,
dissolution, consolidation, restructuring, recapitalization or other
reorganization;
(h) except as required by applicable Law, adopt or amend any employee
benefit plan or employee stock purchase or employee stock option plan, or
enter into any employment contract or collective bargaining agreement
(other than offer letters and letter agreements entered into in the
ordinary course of business consistent with past practice with employees
who are terminable "at will"), pay any special bonus or special
remuneration to any director or employee other than in the ordinary course
of
23-A
<PAGE> 438
business consistent with past practice, or increase the salaries or wage
rates or fringe benefits (including rights to severance or indemnification)
of its officers;
(i) except in the ordinary course of business consistent with past
practice, modify, amend or terminate any material contract or agreement to
which Seller or any of its Subsidiaries is a party, or waive, delay the
exercise of, release or assign any material rights or claims thereunder;
(j) sell, lease, license, mortgage or otherwise encumber or subject to
any Lien or otherwise dispose of any of its properties or assets, other
than (i) the sale or transfer of any Designated Assets (but not including
shares of VERITAS capital stock), or (ii) any such properties or assets the
value of which do not exceed $5,000,000 individually and $10,000,000 in the
aggregate, except sales of inventory in the ordinary course of business
consistent with past practice; provided, that Seller may divest any of the
Private Securities without the consent of Purchaser if required to do so on
an involuntary basis pursuant to any merger, securities purchase or other
similar type of agreement;
(k) (i) incur any Indebtedness or guarantee any such Indebtedness of
another person, issue or sell any debt securities or warrants or other
rights to acquire any debt securities of Seller or any of its Subsidiaries,
guarantee any debt securities of another person, enter into any "keep well"
or other agreement to maintain any financial statement condition of another
person or enter into any arrangement having the economic effect of any of
the foregoing, except for endorsements and guarantees for collection,
short-term borrowings and lease obligations, in each case incurred in the
ordinary course of business consistent with past practice, or (ii) make any
loans, advances or capital contributions to, or investment in, any other
person, other than to Seller or any direct or indirect wholly-owed
Subsidiary of Seller;
(l) fail in any material respect to make any capital expenditures in
the amounts budgeted and at the times contemplated therefor in Seller's
annual capital expenditures budget for fiscal year 2000 previously provided
to Purchaser, or expend funds for unbudgeted capital expenditures in an
amount greater than $5,000,000;
(m) pay, discharge or satisfy any claims (including claims of
stockholders), liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), except for the payment, discharge or
satisfaction of liabilities or obligations in the ordinary course of
business consistent with past practices or in accordance with their terms
as in effect on the date hereof, or waive, release, grant, or transfer any
rights of material value or modify or change in any material respect any
existing license, lease, contract or other document, other than in the
ordinary course of business consistent with past practice;
(n) change any financial reporting or material accounting principle
used by it unless otherwise required by applicable Law or GAAP;
(o) settle or compromise any litigation (whether or not commenced
prior to the date of this Agreement) other than settlements or compromises
of litigation where the amount paid (after giving effect to insurance
proceeds actually received) in settlement or compromise does not exceed
$1,000,000, provided that the aggregate amount paid in connection with the
settlement or compromise of all such litigation shall not exceed
$10,000,000;
24-A
<PAGE> 439
(p) declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock, other than dividends
and distributions by a direct or indirect wholly owned subsidiary of Seller
to its parent (i) split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, or (ii)
purchase, redeem or otherwise acquire any shares of capital stock of Seller
or any of its subsidiaries or any other securities thereof or any rights,
warrants or options to acquire any such shares or other securities; or
(q) make, or permit to be made, without the prior written consent of
Purchaser any material Tax election which would affect the Sold
Subsidiaries or any of their respective Subsidiaries.
(r) agree in writing or otherwise to take any of the actions described
in Section 5.2(a) through Section 5.2(q) hereof, inclusive.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Registration Statement; Proxy Statement; Other Filings.
(a) As promptly as practicable after the execution and delivery of this
Agreement, (i) Seller (in cooperation with Purchaser and the other party or
parties to the OD Documents) shall prepare and file with the SEC a proxy
statement/prospectus to be sent to the stockholders of Seller in connection with
the meeting of the stockholders of Seller to consider the approval of this
Agreement, the OD Documents and the transactions contemplated hereby and thereby
(such proxy statement/prospectus being referred to herein as the "Proxy
Statement" and such meeting of the stockholders of Seller being referred to
herein as the "Seller Stockholders' Meeting"), and (ii) Seller shall cooperate
with Purchaser and the other party or parties to the OD Documents in the
preparation and filing a registration statement on Form S-4 (the "Registration
Statement") to be filed with the SEC in connection with the transactions
contemplated by the OD Documents. Seller shall respond to any comments of the
SEC with respect to the Registration Statement or the Proxy Statement, shall use
its commercially reasonable efforts to have the Registration Statement declared
effective under the Securities Act as promptly as practicable after such filing
and shall cause the Proxy Statement to be mailed to its stockholders at the
earliest practicable time. As promptly as practicable after the execution and
delivery of this Agreement, Seller shall prepare and file any other filings
required under the Exchange Act, the Securities Act or any other federal,
foreign or state "blue sky" securities Laws relating to the transactions
contemplated hereby (collectively, the "Other Filings"). Seller shall promptly
notify Purchaser upon the receipt of any comments from the SEC or its staff, and
of any request by the SEC or its staff or any other government officials for
amendments or supplements to the Registration Statement, the Proxy Statement or
any Other Filing, or for additional information, and shall supply the other with
copies of all correspondence between such party or any of its representatives,
on the one hand, and the SEC, or its staff or any other government officials, on
the other hand, with respect to the Registration Statement, the Proxy Statement
or any Other Filing. The Proxy Statement, the Registration Statement and the
Other Filings shall comply in all material respects with all requirements of
applicable Law and the rules and regulations promulgated thereunder. Whenever
any event occurs which is required to be set forth in an amendment or supplement
to the Proxy Statement, the Registration Statement or any Other Filing, Seller
25-A
<PAGE> 440
or Purchaser, as the case may be, shall promptly inform the other party of such
occurrence and cooperate in filing with the SEC or its staff or any other
government officials, and/or mailing to stockholders of Seller, such amendment
or supplement.
(b) Subject to Section 6.2(c) hereof, the Proxy Statement shall also
include the recommendation of the Board of Directors of Seller in favor of the
approval of this Agreement, the OD Documents and the transactions contemplated
hereby and thereby.
6.2 Meeting of Seller Stockholders.
(a) Subject to the terms of Section 6.2(c) hereof, promptly after the date
hereof and in consultation with Purchaser, Seller shall take all action
necessary in accordance with Delaware Law and its Certificate of Incorporation
and Bylaws to convene the Seller Stockholders' Meeting, to be held as promptly
as practicable, for the purpose of voting upon this Agreement, the OD Documents
and the transactions contemplated hereby and thereby. Subject to the terms of
Section 6.2(c) hereof, Seller shall solicit proxies from its stockholders in
favor of the approval of this Agreement, the OD Documents and the transactions
contemplated hereby and thereby, and shall take all other action necessary or
advisable to secure the Required Stockholder Approval.
(b) Subject to the terms of Section 6.2(c) hereof, (i) the Board of
Directors of Seller shall recommend that Seller's stockholders vote in favor of
and approve this Agreement, the OD Documents and the transactions contemplated
hereby and thereby at the Seller Stockholders' Meeting, (ii) the Proxy Statement
shall include a statement to the effect that the Board of Directors of Seller
has recommended that Seller's stockholders vote in favor of and approve this
Agreement, the OD Documents and the transactions contemplated hereby and
thereby, and (iii) neither the Board of Directors of Seller nor any committee
thereof shall withdraw, amend or modify, or propose or resolve to withdraw,
amend or modify in a manner adverse to Purchaser, the recommendation of the
Board of Directors of Seller that Seller's stockholders vote in favor of and
approve this Agreement, the OD Documents and the transactions contemplated
hereby and thereby.
(c) Notwithstanding the foregoing or anything to the contrary set forth in
this Agreement, nothing in this Agreement shall prevent the Board of Directors
of Seller from withdrawing, amending or modifying its recommendation in favor of
this Agreement and the transactions contemplated hereby if (i) Seller receives a
Seller Superior Offer (as defined below) and such Seller Superior Offer is not
withdrawn, (ii) neither Seller nor any of its agents or representatives shall
have violated any of the restrictions set forth in Section 6.5(a) hereof, and
(iii) the Board of Directors of Seller concludes in good faith, after
consultation with its outside counsel, that, in light of such Seller Superior
Offer, the withdrawal, amendment or modification of such recommendation is
necessary in order for the Board of Directors of Seller to comply with its
fiduciary obligations to the stockholders of Seller under applicable Law. For
all purposes of and under this Agreement, the term "Seller Superior Offer" shall
mean a bona fide written offer made by a third party to consummate any of the
following transactions: (a) a merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
Seller, pursuant to which the stockholders of Seller immediately preceding such
transaction would hold less than fifty percent (50%) of the equity interest in
the surviving or resulting entity of such transaction (or the ultimate parent
entity thereof); (b) a sale or other disposition by Seller of assets (excluding
inventory and used equipment sold in the ordinary course of business)
representing all or substantially all of Seller's consolidated assets
immediately prior to such sale, (c) a sale or other disposition by Seller of all
or more than ninety-five percent (95%) of the assets to be held (directly or
indirectly) by the Sold Subsidiaries
26-A
<PAGE> 441
after giving effect to the Split, or (d) the acquisition by any person or group
(including by way of a tender offer or an exchange offer or issuance by Seller),
directly or indirectly, of beneficial ownership or a right to acquire beneficial
ownership of shares representing in excess of fifty percent (50%) of the voting
power of the then outstanding shares of capital stock of Seller, in each case on
terms that the Board of Directors of Seller determines, in its reasonable
judgment (after consultation with its financial advisor and after taking into
account all aspects of the proposal and the person making the proposal and any
proposed changes to this Agreement that may be proposed by Purchaser in response
to such Seller Superior Offer) to be more favorable to the stockholders of
Seller, from a financial point of view, than, (i) in the case of a Seller
Superior Offer of the type referred to in clauses (a), (b) or (d), this
Agreement and the OD Documents and the transactions contemplated hereby and
thereby and (ii) in the case of a Seller Superior Offer of the type referred to
in clause (c), this Agreement and the transactions contemplated hereby;
provided, however, that any such offer shall not be deemed to be a "Seller
Superior Offer" if any financing required to consummate the transaction
contemplated by such offer is not committed and is not likely in the judgment of
Seller's Board of Directors to be obtained by such third party on a timely
basis. Notwithstanding the foregoing or anything to the contrary set forth in
this Agreement, except for a mutual termination as provided for in Section 4.13
hereof, nothing in this Agreement shall prevent the Board of Directors of Seller
from withdrawing, amending or modifying its recommendation in favor of the OD
Documents, or terminating the OD Documents in accordance with its terms.
6.3 Access to Information.
(a) Seller shall afford Purchaser and its accountants, counsel and other
representatives (including potential financing sources), reasonable access,
during normal business hours, to the properties, books, records and personnel of
Seller and its Subsidiaries at any time prior to the Closing in order to enable
Purchaser obtain all information concerning the business, assets and properties,
results of operations and personnel of Seller and its Subsidiaries as Purchaser
may reasonably request. No information or knowledge obtained in the foregoing
investigation by Purchaser pursuant to this Section 6.3 shall affect or be
deemed to modify any representation or warranty contained herein or the
conditions to the obligations of Seller and Purchaser to consummate the
transactions contemplated hereby.
(b) Seller shall provide, and shall cause its Subsidiaries and its and
their respective officers and employees to provide, all necessary cooperation in
connection with the arrangement of the Financing and related matters, including,
without limitation, the execution and delivery of any commitment letters,
underwriting or placement agreements, pledge and security documents, other
definitive financing documents, or other requested certificates or documents,
including a certificate of the chief financial officer of Seller with respect to
solvency matters, as may be requested by Purchaser, provided, however, that such
letters, agreements or documents expressly provide that, from and after
consummation of the transactions contemplated by this Agreement, Seller shall
have no Liability thereunder and the other parties thereto shall look solely to
Purchaser in respect of any obligations of Seller thereunder.
6.4 Confidentiality. Seller and Purchaser acknowledge that they have
previously entered into a Confidentiality Agreement (the "Confidentiality
Agreement"), which shall continue in full force and effect in accordance with
its terms.
27-A
<PAGE> 442
6.5 No Solicitation.
(a) From and after the date of this Agreement until the earlier to occur of
the Closing and termination of this Agreement pursuant to Section 10.1 hereof,
Seller and its Subsidiaries shall not, and shall cause their respective
officers, directors, affiliates or employees or any investment banker, attorney
or other advisor or representative retained by any of them not to, directly or
indirectly (i) solicit, initiate, encourage or induce the making, submission or
announcement of any Seller Acquisition Proposal (as defined in Section 6.5(b)
hereof), (ii) participate in any discussions or negotiations regarding, or
furnish to any person any information with respect to, or take any other action
to facilitate any inquiries or the making of any proposal that constitutes or
may reasonably be expected to lead to, any Seller Acquisition Proposal, (iii)
engage in discussions with any person with respect to any Seller Acquisition
Proposal, except as to the existence of the terms of this Section 6.5, (iv)
subject to the terms of Section 6.2(c) hereof, approve, endorse or recommend any
Seller Acquisition Proposal, or (v) enter into any letter of intent or similar
document or any contract, agreement or commitment contemplating or otherwise
relating to any Seller Acquisition Transaction (as defined in Section 6.5(b)
hereof); provided, however, that until the date on which this Agreement is
approved by the requisite vote of the stockholders of Seller, the terms of this
Section 6.5(a) shall not prohibit Seller from furnishing information regarding
Seller and its Subsidiaries to, entering into a confidentiality or
non-disclosure agreement with, or entering into discussions with, any person or
group in response to a Seller Superior Offer submitted by such person or group
(and not withdrawn) if (a) Seller has not violated any of the restrictions set
forth in this Section 6.5(a), (b) the Board of Directors of Seller concludes in
good faith, after consultation with its outside legal counsel, that such action
is reasonably necessary in order for the Board of Directors of Seller to comply
with its fiduciary obligations to the stockholders of Seller under applicable
Law, (c) Seller receives from such person or group an executed confidentiality
or non-disclosure agreement containing customary limitations on the use and
disclosure of all non-public written and oral information furnished to such
person or group by or on behalf of Seller and containing terms no less favorable
to the disclosing party than the terms of the Confidentiality Agreement
(including with respect to any standstill arrangements, which may not be waived
by Seller unless the standstill arrangements in the Confidentiality Agreement
are waived), and (d) prior to furnishing any such non-public information to such
person or group or entering into negotiations or discussions, Seller notifies
Purchaser promptly of such inquiries, proposals or offers received by, any such
information requested from, or any such discussions or negotiations sought to be
initiated or continued with, any of its representatives indicating, in
connection with such notice, the name of the person and the terms and conditions
of any inquiries, proposals or offers, and furnishes such non-public information
to Purchaser to the extent such information has not been previously furnished to
Purchaser. Seller and its Subsidiaries shall (and shall cause their respective
officers, directors, affiliates, employees, investment bankers, attorneys and
representatives to) immediately cease any and all existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any Seller Acquisition Proposal.
(b) For all purposes of and under this Agreement, the term "Seller
Acquisition Proposal" shall mean any offer or proposal relating to any Seller
Acquisition Transaction. For all purposes of and under this Agreement, "Seller
Acquisition Transaction" shall mean any transaction or series of related
transactions, other than the transactions permitted to be effected under Section
5.2 hereof involving: (i) any acquisition or purchase from Seller by any person
or "group" (as defined under Section 13(d) of the Exchange Act and the rules
28-A
<PAGE> 443
and regulations promulgated thereunder) of more than fifteen percent (15%) in
interest of the total outstanding voting securities of Seller, or any tender
offer or exchange offer that if consummated would result in any person or
"group" (as defined under Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder) beneficially owning more than fifteen
percent (15%) of the total outstanding voting securities of Seller, or any
merger, consolidation, business combination or similar transaction involving
Seller pursuant to which the stockholders of Seller immediately preceding such
transaction would hold less than eighty-five percent (85%) of the equity
interests in the surviving or resulting entity of such transaction (or the
ultimate parent entity thereof); (ii) any sale, lease (other than in the
ordinary course of business), exchange, transfer, license (other than in the
ordinary course of business), acquisition or disposition of more than fifteen
percent (15%) of the fair market value of the consolidated assets and properties
of Seller; (iii) a sale or other disposition by Seller of all or more than
fifteen percent (15%) of the assets to be held by the Sold Subsidiaries after
giving effect to the Split; and (iv) the acquisition by any person or group
(including by way of a tender offer or exchange offer or issuance by Seller),
directly or indirectly, of beneficial ownership or a right to acquire beneficial
ownership of shares representing in excess of fifteen percent (15%) of the
voting power of the then outstanding shares of capital stock of Seller.
6.6 Public Disclosure. Purchaser and Seller shall consult with each other
and agree before issuing any press release or otherwise making any public
statement with respect to this Agreement, and shall not issue any such press
release or make any such public statement prior to such agreement, except as may
be required by applicable Law or Seller's listing agreement with The New York
Stock Exchange, Inc., in which case reasonable efforts to consult with the other
party shall be made prior to such release or public statement.
6.7 Legal Requirements. Purchaser and Seller shall take all reasonable
actions necessary or desirable to comply promptly with all legal requirements
which may be imposed on them with respect to the consummation of the
transactions contemplated by this Agreement (including, without limitation,
furnishing all information required in connection with approvals of or filings
with any Governmental Authority, and prompt resolution of any litigation
prompted hereby), and shall promptly cooperate with, and furnish information to,
the other party hereto to the extent necessary in connection with any such
requirements imposed upon any of them or their respective Subsidiaries in
connection with the consummation of the transactions contemplated by this
Agreement.
6.8 Notification of Certain Matters. Purchaser shall give prompt notice to
Seller, and Seller shall give prompt notice to Purchaser, of the occurrence, or
failure to occur, of any event, which occurrence or failure to occur would be
reasonably likely to cause (i) any representation or warranty contained in this
Agreement to be untrue or inaccurate at the Closing, such that the conditions
set forth in Section 9.2(a) or Section 9.3(a) hereof, as the case may be, would
not be satisfied or fulfilled as a result thereof, or (ii) any material failure
of Purchaser or Seller, as the case may be, or of any officer, director,
employee or agent thereof, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it under this Agreement.
Notwithstanding the foregoing, the delivery of any notice pursuant to this
Section 6.8 shall not limit or otherwise affect the rights and remedies
available hereunder to the party receiving such notice.
6.9 Commercially Reasonable Efforts and Further Assurances. Subject to the
respective rights and obligations of Purchaser and Seller under this Agreement,
each of Purchaser and Seller shall use its respective commercially reasonable
efforts to effectuate
29-A
<PAGE> 444
the transactions contemplated hereby, and to fulfill and cause to be fulfilled
the conditions to Closing under this Agreement. Each of Purchaser and Seller, at
the reasonable request of the other party hereto, shall execute and deliver such
other instruments and do and perform such other acts and things as may be
necessary or desirable for effecting completely the consummation of the
transactions contemplated hereby.
6.10 Indemnification.
(a) From and after the Closing, Purchaser and the Sold Subsidiaries shall
fulfill and honor in all respects the obligations of Seller pursuant to any
indemnification agreements (substantially in the form delivered to Purchaser
prior to the date hereof) between Seller, the Sold Subsidiaries and their
respective directors and officers in effect immediately prior to the Closing and
the Split (the "Indemnified Parties") and any indemnification provisions under
Seller's charter documents as in effect on the date hereof. The organizational
documents of Purchaser shall contain provisions with respect to exculpation and
indemnification that are at least as favorable to the Indemnified Parties as
those contained in Seller's organizational documents as in effect on the date
hereof, which provisions shall not be amended, repealed or otherwise modified
for a period of six (6) years from the Closing Date in any manner that would
adversely affect the rights thereunder of individuals who, immediately prior to
the Closing, were directors, officers, employees or agents of Seller or the Sold
Subsidiaries, unless such modification is required by applicable Law.
(b) In the event that Purchaser or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers all or substantially all of its properties and assets to any
person in a single transaction or a series of transactions, then, and in each
such case, Purchaser shall make or cause to be made proper provision so that the
successors and assigns of Purchaser assume the indemnification obligations of
Purchaser and the Sold Subsidiaries under this Section 6.10 for the benefit of
the Indemnified Parties.
(c) The provisions of this Section 6.10 are (i) intended to be for the
benefit of, and will be enforceable by, each of the Indemnified Parties, and
(ii) in addition to, and not in substitution for, any other rights to
indemnification or contribution that any such person may have by contract or
otherwise.
(d) For a period of six (6) years following the Closing Date, Purchaser
shall use its best efforts to maintain in effect the directors' and officers'
liability insurance policies maintained by Seller; provided, however, that in no
event shall Purchaser be required to expend in any one year in excess of one
hundred and fifty percent (150%) of the annual premium currently paid by Seller
for such coverage.
6.11 Regulatory Filings; Reasonable Efforts. As soon as may be reasonably
practicable following the execution and delivery of this Agreement, Seller and
Purchaser each shall file with the FTC and DOJ Notification and Report Forms
relating to the transactions contemplated hereby as required by the HSR Act, as
well as comparable pre-merger notification forms required by the merger
notification or control laws and regulations of any applicable jurisdiction, as
agreed to by Seller and Purchaser. Seller and Purchaser each shall promptly (i)
supply the other with any information which may be required in order to
effectuate such filings, and (ii) supply any additional information which
reasonably may be required by the FTC, the DOJ or the competition or merger
30-A
<PAGE> 445
control authorities of any other jurisdiction and which Seller and Purchaser may
reasonably deem appropriate.
6.12 Use of Names. Seller acknowledges that from and after the Closing,
the name "Seagate" and all similar or related names, marks and logos (all of
such names, marks and logos being referred to herein as the "Seller Names")
shall be owned by the Sold Subsidiaries, that neither Seller nor any of its
Affiliates shall have any rights in the Seller Names, and that neither Seller
nor any of its Affiliates will be entitled to contest the ownership or validity
or any rights of Purchaser, the Sold Subsidiaries or any of their respective
Subsidiaries in or to the Seller Names.
6.13 Debt Offer. Subject to the terms and conditions of this Agreement,
Seller shall commence an irrevocable tender offer (the "Debt Offer") to purchase
all of the principal amount of the Debentures. The obligations of Seller (i) to
commence the Debt Offer and (ii) to accept for payment, and pay for, any
securities tendered pursuant to the Debt Offer, shall be subject to customary
conditions and be conditioned upon closing of the transactions contemplated
hereby and the OD Documents (any of which may be waived by Seller in its sole
discretion). If fewer than one hundred percent (100%) of the Debentures are
purchased pursuant to the Debt Offer, then at the Closing Purchaser shall (i) in
accordance with the terms and provisions of Section 8.01 and Section 9.01 of the
Indenture, assume the Debentures and enter into a Supplemental Indenture in
accordance with such Section 8.01 and Section 9.01, (ii) give an irrevocable
notice of redemption pursuant to Section 11.01 of the Indenture to the Trustee
thereunder and each holder of a Debenture thereunder, specifying a "Redemption
Date" thirty one (31) days after the Closing and other matters specified in
Section 11.08 of the Indenture, and (iii) deposit the principal amount of the
"Redemption Price" with the Trustee under the Indenture.
6.14 Commitment Letters; Rolled Options. Purchaser shall promptly forward
Seller's counsel a copy of all credit documentation prepared pursuant to the
Commitment Letters. In the event that one or more of the lenders under the
Commitment Letters withdraws its Commitment Letter (or commitment thereunder) or
invokes a condition that would prevent the Closing from occurring, Purchaser
shall promptly notify Seller thereof. In the event that Purchaser invokes the
condition set forth in Section 9.3(c) hereof, or one or more lenders withdraws
its commitment, Purchaser shall use all commercially reasonable efforts to enter
into contracts with one or more substitute lenders designated by Purchaser and
reasonably acceptable to Seller ("Substitute Lenders"), provided, however, that
Purchaser shall be required to enter into such contracts with one or more
Substitute Lenders only if the economic terms and other conditions offered by
such Substitute Lenders are no less favorable than those set forth in the
Commitment Letters. From and after the date hereof until the Closing, Purchaser
shall not amend, modify or supplement, or permit the amendment, modification or
supplementation of, the Roll Agreement without Seller's prior written consent.
6.15 Transaction Expenses. No later than fifteen (15) calendar days prior
to the Closing Seller shall deliver to Purchaser final invoices from Seller's
investment bankers (including their counsel, if any), attorneys, accountants and
other advisors with respect to the transactions contemplated hereby, together
with a statement from each such person to the effect that (i) the amounts shown
due and owing therein constitute a "final" bill, and (ii) after payment in full
of the amounts indicated therein, each such person will not look to Purchaser,
Seller or any of their Affiliates or any party to the OD Documents for the
payment of further amounts with respect to the transactions contemplated hereby
or the OD Documents.
31-A
<PAGE> 446
6.16 Non-Assignable Assets. Nothing in this Agreement shall be construed
as an attempt or agreement to assign any asset, contract, lease, permit, license
or other right which would otherwise be included in the assets transferred
pursuant to the Split, but which is by its terms non-assignable without the
consent of the other party or parties thereto, unless such consent shall have
been given (the "Non-Assignable Assets"). Seller agrees to use commercially
reasonably efforts before the Closing to obtain such consent or consents.
Following the Closing and until such time as the Non-Assignable Assets may be
properly assigned to Purchaser, such Non-Assignable Assets shall be held in
trust for the benefit of Purchaser, the covenants and obligations thereunder
shall be performed by Purchaser, and all benefits and obligations existing
thereunder shall be for the account of Purchaser. Following the Closing, Seller
authorizes Purchaser, to the extent permitted by applicable Law and the terms of
the Non-Assignable Assets, to perform all of the obligations and receive all of
the benefits under the Non-Assignable Assets, and appoints Purchaser as its
attorney-in-fact to act in its name and on its behalf (and on behalf of its
Affiliates) with respect thereto.
ARTICLE VII
EMPLOYEE MATTERS
7.1 Employee Liabilities. Seller and its Subsidiaries shall take all
corporate actions necessary to provide for the transfer of all assets relating
to the Assumed Plans (as defined below) to the Purchaser as of, or as soon as
practicable following, the Closing. From and after the date of the transfer of
such assets, Purchaser shall assume sole sponsorship of all Seller Plans (other
than any stock incentive plan, including, without limitation, the 1983 Incentive
Stock Option Plan, the Employee Stock Purchase Plan, the Executive Stock Plan,
the Conner Peripherals, Inc. 1986 Incentive Stock Plan, the 1991 Incentive Stock
Option Plan, the Amended and Restated Directors' Option Plan, the Amended and
Restated Archive Corporation Stock Option and Restricted Stock Purchase
Plan -- 1981, the Amended and Restated Archive Corporation Incentive Stock
Option Plan -- 1981, the Conner Peripherals, Inc. -- Arcada Holdings, Inc. Stock
Option Plan, 1998 Non-Statutory Stock Option Plan, 1999 Stock Option Plan,
Arcada Holdings Inc. 1994 Stock Option Plan, Xiotech Corporation Amended and
Restated 1996 Stock Option Plan) (such assumed Seller Plans, the "Assumed
Plans") (provided, however, that the Assumed Plans shall include the [Suez]
Software Information Management Group, Inc. 1999 Stock Option Plan and any
outstanding options to acquire Seller Common Stock which are converted into
options to acquire Purchaser shares pursuant to the Roll Agreement), and shall
assume and be responsible for all Liabilities whatsoever to Seller Employees,
including, without limitation, claims incurred under any Assumed Plan
(including, without limitation, any statutory worker's compensation claims),
other than Liabilities under any Seller Plan which is not an Assumed Plan (each,
a "Non-Assumed Plan").
7.2 Employee Benefit Plans.
(a) From and after the Closing, (i) Purchaser shall offer all Seller
Employees employment with a Sold Subsidiary following the Closing ("Transferred
Employees"), initially on the same terms and conditions of employment that such
Transferred Employee had immediately prior to the Closing (including salary,
title and location), and all Transferred Employees shall be entitled to, service
credit under all employee benefit plans of Purchaser, the Sold Subsidiaries or
any of their respective Subsidiaries equal to credited service time for Seller
Employees under all Assumed Plans prior to the Closing, (ii) any service of a
Transferred Employee prior to the Closing Date which was recognized under
32-A
<PAGE> 447
any medical plan of Seller for purposes of medical or dental coverage shall be
recognized by the corresponding employee benefit plans of Purchaser, the Sold
Subsidiaries and their respective Subsidiaries, and (iii) any service of a
Transferred Employee prior to the Closing Date which was recognized under
Seller's vacation policy shall be recognized under the vacation policy of
Purchaser, the Sold Subsidiaries and their respective Subsidiaries.
(b) Purchaser agrees that all Transferred Employees who continue employment
with Purchaser or any affiliate of Purchaser after the Closing ("Continuing
Employees") shall be eligible to continue to participate in all Assumed Plans,
provided that (i) nothing in this Section 7.2 shall limit the right of Purchaser
to amend or terminate any such Assumed Plan, and (ii) if Purchaser terminates
any such Assumed Plan, then the Continuing Employees shall immediately be
eligible to participate in the corresponding Purchaser employee benefit plan or
arrangement on substantially the same terms and conditions as similarly situated
employees of Purchaser and its affiliates. If a Continuing Employee ceases to be
covered by an Assumed Plan providing health or welfare benefits prior to the end
of the plan year, and subsequently becomes covered by any Purchaser employee
health or welfare benefit plan or arrangement, then (A) the Continuing Employee
shall be given full credit under Purchaser's plan or arrangement for any
co-pays, deductibles and out-of-pocket maximums incurred by him or her for such
plan year, and (B) Purchaser's plan or arrangement shall waive any preexisting
condition limitation or restriction otherwise applicable to the Continuing
Employee.
7.3 WARN Act. Purchaser shall assume and be responsible for any
Liabilities arising under the Worker Adjustment and Retraining Notification Act
in connection with the termination of any Seller Employee on or after the
Closing Date.
ARTICLE VIII
TAX MATTERS
8.1 Conveyance Taxes. Purchaser shall pay all real property transfer or
gains, sales, use, transfer, value added, stock transfer, and stamp taxes, any
transfer, recording, registration, and other fees, and any similar Taxes which
become payable in connection with the transactions contemplated by this
Agreement, and shall file such applications and documents as shall permit any
such Tax to be assessed and paid on or prior to the Closing Date in accordance
with any available pre-sale filing procedure. Purchaser shall execute and
deliver all instruments and certificates necessary to enable Seller to comply
with this Section 8.1.
8.2 Section 338(h)(10) Election.
(a) At the request of Purchaser, Seller will join with Purchaser in making
an election under Section 338(h)(10) of the Code and Treasury Regulation Section
1.338(h)(10)-1(d) (and, if permissible, any corresponding elections under any
applicable state and local income tax laws) (collectively, the "Section
338(h)(10) Elections") with respect to the purchase and sale of Shares of any of
the Sold Subsidiaries which is a United States person within the meaning of
Section 7701(a)(30) of the Code (collectively, the "U.S. Sold Subsidiaries")
hereunder.
(b) To the extent possible, Purchaser, Seller and the U.S. Sold
Subsidiaries shall execute on or prior to the Closing any and all forms
necessary to effectuate the Section 338(h)(10) Elections (including, without
limitation, Internal Revenue Service Form 8023 and any similar forms under the
applicable state and local income tax laws
33-A
<PAGE> 448
(the "Section 338 Forms")). In the event, however, any Section 338 Forms are not
executed at the Closing, Purchaser and Seller shall prepare and complete each
such Section 338 Form no later than 15 days prior to the date such Section 338
Form is required to be filed. Purchaser and Seller shall each cause the Section
338 Forms to be duly executed by an authorized person for Purchaser and Seller
in each case, and shall duly and timely file the Section 338 Forms in accordance
with applicable tax Laws and the terms of this Agreement.
(c) As soon as practicable after the Closing Date, Purchaser shall (i)
allocate the Purchase Price among the Sold Subsidiaries (the "Stock
Allocation"), and (ii) determine the allocation of that portion of the Stock
Allocation attributable to any of the U.S. Sold Subsidiaries resulting from the
Section 338(h)(10) Elections (as required pursuant to Section 338(h)(10) of the
Code and the regulations promulgated thereunder) among the assets of such U.S.
Sold Subsidiaries (the "Section 338 Allocation") after considering in good faith
Seller's comments thereto. Purchaser, Seller and the U.S. Sold Subsidiaries
shall be bound by and shall file all Tax Returns (including amended Tax Returns
and amended Section 338 Forms, as necessary) consistently with the Section 338
Allocation.
8.3 Tax Matters Schedule. Prior to the Closing Date, Seller shall promptly
take all actions set forth in Schedule V hereto with respect to the transactions
described herein.
ARTICLE IX
CONDITIONS TO CLOSING
9.1 Conditions to Obligations of Each Party to Effect the Closing. The
respective obligations of each party to this Agreement to effect the Closing
shall be subject to the satisfaction or fulfillment, at or prior to the Closing
Date, of each of the following conditions:
(a) Stockholder Approval. The Required Stockholder Approval shall have
been obtained.
(b) Registration Statement Effective; Proxy Statement. The SEC shall
have declared the Registration Statement effective. No stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose, and no
similar proceeding in respect of the Proxy Statement, shall have been
initiated or threatened in writing by the SEC.
(c) No Order; HSR Act. No Governmental Authority shall have enacted,
issued, promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and which has the effect of
making the transactions contemplated hereby illegal or otherwise
prohibiting consummation of the transactions contemplated hereby. All
requirements, if any, under the HSR Act or equivalent foreign statute,
rule, regulation or order relating to the transactions contemplated hereby
shall have been satisfied.
(d) Other Transaction. All of the conditions set forth in Article VI
of the VERITAS Merger Agreement (other than Section 6.1(f) thereof and the
filing of the Merger Certificate thereunder) shall have been satisfied or
waived. Purchaser shall have received a certificate with respect to the
foregoing, signed on behalf of Seller by the President and the Chief
Financial Officer of Seller.
34-A
<PAGE> 449
9.2 Additional Conditions to Obligations of Seller. The obligation of
Seller to consummate and effect the transactions contemplated by this Agreement
shall be subject to the satisfaction or fulfillment, at or prior to the Closing
Date, of each of the following conditions, any of which may be waived, in
writing, exclusively by Seller:
(a) Representations and Warranties. The representations and warranties
of Purchaser contained in this Agreement shall have been true and correct
in all material respects as of the date of this Agreement, except where the
failure to be so true and correct would not, in the aggregate, reasonably
be expected to have a material adverse effect on Purchaser. In addition,
the representations and warranties of Purchaser contained in this Agreement
shall be true and correct in all material respects on and as of the Closing
Date (except for changes contemplated by this Agreement and except for
those representations and warranties which address matters only as of a
particular date, which shall have been true and correct only as of such
particular date), with the same force and effect as if made on and as of
the Closing Date, except in such cases where the failure to be so true and
correct would not, in the aggregate, reasonably be expected to have a
material adverse effect on Purchaser. Seller shall have received a
certificate with respect to the foregoing, signed on behalf of Purchaser by
the Chief Executive Officer and the Chief Financial Officer of Purchaser.
(b) Agreements and Covenants. Purchaser shall have performed or
complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by it on or
prior to the Closing Date, and Seller shall have received a certificate to
such effect, signed on behalf of Purchaser by the Chief Executive Officer
or the Chief Financial Officer of Purchaser.
(c) OD Documents. The OD Documents shall be in full force and effect,
enforceable in accordance with their terms, and Seller shall not have
received any notice from the other party or parties to such OD Documents of
its or their intention to terminate the OD Documents.
9.3 Additional Conditions to the Obligations of Purchaser. The obligations
of Purchaser to consummate and effect the transactions contemplated hereby shall
be subject to the satisfaction or fulfillment, at or prior to the Closing Date,
of each of the following conditions, any of which may be waived, in writing,
exclusively by Purchaser:
(a) Representations and Warranties. The representations and warranties
of Seller contained in this Agreement shall have been true and correct in
all material respects as of the date of this Agreement, except, in the case
of all such representations and warranties other than those set forth in
Sections 3.3, 3.4, 3.15, 3.22, 3.23, 3.24 and 3.26 hereof, where the
failure to be so true and correct would not, in the aggregate, reasonably
be expected to have a Material Adverse Effect. In addition, the
representations and warranties of Seller contained in this Agreement shall
be true and correct in all material respects on and as of the Closing Date
(except for changes contemplated by this Agreement and except for those
representations and warranties which address matters only as of a
particular date, which shall remain true and correct as of such particular
date), with the same force and effect as if made on and as of the Closing
Date, except, in the case of all such representations and warranties other
than those set forth in Sections 3.3, 3.4, 3.15, 3.22, 3.23, 3.24 and 3.26
hereof, where the failure to be so true and correct would not, in the
aggregate, reasonably be expected to have a Material Adverse Effect.
Purchaser
35-A
<PAGE> 450
shall have received a certificate with respect to the foregoing, signed on
behalf of Seller by the President or the Chief Financial Officer of Seller.
(b) Agreements and Covenants. Seller shall have performed or complied
in all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the Closing
Date, and Purchaser shall have received a certificate to such effect,
signed on behalf of Seller by the President and the Chief Financial Officer
of Seller.
(c) Financing. Purchaser shall have received the proceeds of the
Financing contemplated by the Commitment Letters.
(d) Sold Subsidiaries Cash Amount. The Sold Subsidiaries shall have
available, free and clear of any and all Liens, an amount of Cash at least
equal to the Required Cash.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
10.1 Termination. This Agreement may be terminated at any time prior to
the Closing Date, whether before or after approval of the transactions
contemplated hereby by the stockholders of Seller:
(a) by mutual written consent, duly authorized by the Boards of
Directors of Purchaser and Seller;
(b) by either Seller or Purchaser, if the transactions contemplated
hereby shall not have been consummated by December 31, 2000; provided,
however, that the right to terminate this Agreement pursuant to this
Section 10.1(b) shall not be available to any party hereto whose failure to
fulfill any obligation under this Agreement (including, without limitation,
such party's obligations under in Section 6.5 hereof) has been a principal
cause of, or resulted in, the failure of the transactions contemplated
hereby to occur on or before such date;
(c) by either Seller or Purchaser, if a Governmental Authority shall
have issued an order, decree or ruling or taken any other action, in any
case having the effect of permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated hereby or by the OD Documents,
which order, decree or ruling is final and nonappealable;
(d) by either Seller or Purchaser, if the Required Stockholder
Approval shall not have been obtained by reason of the failure to obtain
the Required Stockholder Approval upon a vote taken at a meeting of
stockholders duly convened therefor or at any adjournment or postponement
thereof; provided, however, that the right to terminate this Agreement
pursuant to this Section 10.1(d) shall not be available to Seller where the
failure to obtain the Required Stockholder Approval shall have been caused
by the action or failure to act in a manner which constitutes a material
breach of this Agreement;
(e) by Seller, upon a breach of any representation, warranty, covenant
or agreement on the part of Purchaser contained in this Agreement, or if
any representation or warranty of Purchaser shall have become untrue, in
either case such that the conditions set forth in Section 9.2(a) or Section
9.2(b) would not be satisfied as of the time of such breach or as of the
time such representation or warranty shall
36-A
<PAGE> 451
have become untrue, provided, however, that if such inaccuracy in
Purchaser's representations and warranties or breach by Purchaser is
curable, then Seller may not terminate this Agreement pursuant to this
Section 10.1(e) for thirty-five (35) calendar days after delivery of
written notice from Seller to Purchaser of such breach, provided that
Purchaser continues to exercise commercially reasonable efforts to cure
such breach (it being understood that Seller may not terminate this
Agreement pursuant to this Section 10.1(e) if such breach by Purchaser is
cured during such thirty-five (35)-day period);
(f) by Purchaser, upon a breach of any representation, warranty,
covenant or agreement on the part of Seller set forth in this Agreement, or
if any representation or warranty of Seller shall have become untrue, in
either case such that the conditions set forth in Section 9.3(a) or Section
9.3(b) would not be satisfied as of the time of such breach or as of the
time such representation or warranty shall have become untrue, provided,
however, that if such inaccuracy in Seller's representations and warranties
or breach by Seller is curable, then Purchaser may not terminate this
Agreement pursuant to this Section 10.1(f) for thirty-five (35) calendar
days after delivery of written notice from Purchaser to Seller of such
breach, provided that Seller continues to exercise commercially reasonable
efforts to cure such breach (it being understood that Purchaser may not
terminate this Agreement pursuant to this Section 10.1(f) if such breach by
Seller is cured during such thirty-five (35)-day period);
(g) by Seller, if (i) prior to obtaining the Required Stockholder
Approval, Seller receives a Seller Superior Offer, the Board of Directors
of Seller concludes in good faith, after consultation with its outside
counsel, that in light of such Seller Superior Offer, the termination of
this Agreement in order to accept such Seller Superior Offer is necessary
in order for the Board of Directors of Seller to comply with its fiduciary
obligations to the stockholders of Seller under applicable Law, and (ii)
Seller has complied with all of its obligations under Section 6.5 hereof,
and (iii) prior to the termination of this Agreement pursuant to this
Section 10.1(g), Seller pays Purchaser the Seller Termination Fee pursuant
to Section 10.3(b)(ii) hereof; provided, however, that such termination may
take place only after two (2) business days following Purchaser's receipt
of written notice advising Purchaser that the Board of Directors of the
Seller has received a Seller Superior Offer specifying the material terms
and conditions of such Seller Superior Offer (and including a copy thereof
with all accompanying documentation, if in writing), identifying the person
making such Seller Superior Offer and stating that it intends to make the
determination set forth in clause (i) of this Section 10.1(g). After
providing such notice, Seller shall provide an opportunity to Purchaser to
make such adjustments in the terms and conditions of this Agreement as
would enable Seller to proceed with its recommendation to its stockholders
without making the determination set forth in clause (i) of this Section
10.1(g); provided, further, however, that any such adjustment shall be at
the discretion of Purchaser at the time; or
(h) by Purchaser, if a Seller Triggering Event (as defined below)
shall have occurred. For the purposes of this Agreement, a "Seller
Triggering Event" shall be deemed to have occurred if (i) the Board of
Directors of Seller or any committee thereof shall for any reason have
withdrawn or shall have amended or modified in a manner adverse to
Purchaser its recommendation in favor of the approval of this Agreement or
the OD Documents and the transactions contemplated hereby or thereby, (ii)
Purchaser shall have failed to include in the Proxy Statement the
37-A
<PAGE> 452
recommendation of the Board of Directors of Seller in favor of the approval
of this Agreement or the OD Documents and the transactions contemplated
hereby or thereby, or shall have taken any action or made any statement
inconsistent with such recommendation, or (iii) a tender or exchange offer
for in excess of the fifteen percent (15%) of the equity securities of
Seller shall have been commenced by a person unaffiliated with Purchaser,
and Seller shall not have sent to its securityholders pursuant to Rule
14e-2 promulgated under the Securities Act, within ten (10) business days
after such tender or exchange offer is first published sent or given, a
statement disclosing that Seller recommends rejection of such tender or
exchange offer.
10.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement pursuant to Section 10.1 hereof shall be effective immediately upon
the delivery of written notice of the terminating party to the other party
hereto. In the event of the termination of this Agreement pursuant to Section
10.1 hereof, this Agreement shall be of no further force or effect, except (i)
as set forth in this Section 10.2, Section 10.3 hereof and Article XII hereof,
each of which shall survive the termination of this Agreement without
limitation, and (ii) nothing herein shall relieve any party from Liability for
any breach of this Agreement.
10.3 Fees and Expenses.
(a) General. Except as set forth in this Section 10.3, all fees and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses, whether
or not the transactions contemplated by this Agreement are consummated.
(b) Seller Payments.
(i) Seller shall pay to Purchaser or its Designees in immediately
available funds, within one (1) business day after demand by Purchaser, an
amount equal to $80,000,000 (the "Seller Termination Fee") if this
Agreement is terminated by Purchaser pursuant to Section 10.1(h) hereof.
(ii) Seller shall pay to Purchaser or its Designees in immediately
available funds, prior to the termination of this Agreement, an amount
equal to the Seller Termination Fee if this Agreement is terminated by
Seller pursuant to Section 10.1(g) hereof.
(iii) Seller shall pay to Purchaser or its Designees in immediately
available funds, within one (1) business day after the date Seller directly
or indirectly enters into an agreement with any third party with respect to
a Seller Acquisition Transaction or a Seller Acquisition Transaction is
consummated, an amount equal to the Seller Termination Fee if (A) this
Agreement is terminated by either party pursuant to Section 10.1(d) hereof,
(B) at any time after the date of this Agreement and at or before the
Seller Stockholders' Meeting a Seller Acquisition Proposal shall have been
publicly announced or otherwise communicated to Seller and not withdrawn,
and (C) within twelve (12) months of the termination of this Agreement,
Seller directly or indirectly enters into an agreement with any third party
with respect to a Business Combination Transaction (as defined in Section
10.3(b)(vi) hereof) or a Business Combination Transaction is consummated.
(iv) Seller shall pay to Purchaser or its Designees in immediately
available funds, within one (1) business day after the first to occur of
the events set forth in clause (D) below, an amount equal to the Seller
Termination Fee if (A) this
38-A
<PAGE> 453
Agreement is terminated by either party pursuant to Section 10.1(b) hereof,
(B) at any time after the date of this Agreement and at or before the
Termination Date a Seller Acquisition Proposal shall have been publicly
announced or otherwise communicated to Seller and not publicly withdrawn,
(C) following the public announcement or communication of such Seller
Acquisition Proposal and prior to any such termination, Seller shall have
intentionally breached (and not cured after notice thereof) any of its
covenants or agreements set forth in this Agreement in any material
respect, which breach shall have contributed to the failure of the Closing
to occur on or before the Termination Date, and (D) within twelve (12)
months of the termination of this Agreement, Seller directly or indirectly
enters into an agreement with any third party with respect to a Business
Combination Transaction or a Business Combination Transaction is
consummated.
(v) Seller acknowledges that the agreements contained in this Section
10.3(b) are an integral part of the transactions contemplated by this
Agreement, and that, without these agreements, Purchaser would not enter
into this Agreement.
(vi) "Business Combination Transaction" shall mean any transaction or
series of related transactions involving: (i) any acquisition or purchase
from Seller by any person or "group" (as defined under Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder) of more
than fifty percent (50%) in interest of the total outstanding voting
securities of Seller, or any tender offer or exchange offer that if
consummated would result in any person or "group" (as defined under Section
13(d) of the Exchange Act and the rules and regulations promulgated
thereunder) beneficially owning more than fifty percent (50%) of the total
outstanding voting securities of Seller, or any merger, consolidation,
business combination or similar transaction involving Seller pursuant to
which the stockholders of Seller immediately preceding such transaction
would hold less than fifty percent (50%) of the equity interests in the
surviving or resulting entity of such transaction (or the ultimate parent
entity thereof); (ii) any sale, lease (other than in the ordinary course of
business), exchange, transfer, license (other than in the ordinary course
of business), acquisition or disposition of more than fifty percent (50%)
of the fair market value of the consolidated assets and properties of
Seller; (iii) a sale or other disposition by Seller of all or more than
fifty percent (50%) of the assets that would have been held by the Sold
Subsidiaries if the Split had taken place; and (iv) the acquisition by any
person or group (including by way of a tender offer or an exchange offer or
issuance by Seller), directly or indirectly, of beneficial ownership or a
right to acquire beneficial ownership of shares representing in excess of
fifty percent (50%) of the voting power of the then outstanding shares of
capital stock of Seller.
10.4 Amendment. Subject to applicable Law, this Agreement may be amended
by the parties hereto at any time by execution of an instrument in writing
signed on behalf of each of the parties hereto.
10.5 Extension; Waiver. At any time prior to the Closing Date any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other party hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto, and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an
39-A
<PAGE> 454
instrument in writing signed on behalf of such party. Delay in exercising any
right under this Agreement shall not constitute a waiver of such right.
ARTICLE XI
INDEMNIFICATION
11.1 Survival. The representations and warranties of Seller contained in
this Agreement, and any representation or warranty, statement or other
information contained in any Exhibit to this Agreement, the Seller Disclosure
Schedule, the TA Statement and any certificate, instrument or other report or
document delivered by Seller pursuant to this Agreement or in connection with
the transactions contemplated hereby (collectively, the "Acquisition
Documents"), shall not survive the Closing. Neither the period of non-survival
nor the Liability of Seller with respect to Seller's representations or
warranties, statements or other information contained in any of the Acquisition
Documents shall be increased by any investigation made at any time by or on
behalf of Purchaser, either before or after the Closing.
11.2 Indemnification. Purchaser shall indemnify and hold harmless Seller
and each other party to the Indemnification Agreement against all losses and
claims to the extent provided in the Indemnification Agreement.
ARTICLE XII
GENERAL PROVISIONS
12.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via facsimile (receipt confirmed) to the parties at
the following addresses or facsimile numbers (or at such other address or
facsimile numbers for a party as shall be specified by like notice):
(a) if to Purchaser (or the Sold Subsidiaries following the Closing),
to:
Suez Acquisition Company (Cayman) Limited
c/o Silver Lake Partners, L.P.
2725 Sand Hill Road
Building C, Suite 950
Menlo Park, California 94025
Attention: Dave Roux
Facsimile: 650-233-8125
Telephone: 650-233-8121
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017-3954
Attention: William E. Curbow, Esq.
Facsimile: 212-455-2502
Telephone: 212-455-2000
40-A
<PAGE> 455
and to:
TPG Partners III, L.P.
201 Main Street, Suite 2420
Fort Worth, Texas 76102
Attention: Richard A. Ekleberry, Esq.
Facsimile: 817-871-4010
Telephone: 817-871-4000
with a copy to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: Paul J. Shim, Esq.
Facsimile: 212-225-3999
Telephone: 212-225-2000
and to:
VERITAS Software Corporation
1600 Plymouth Street
Mountain View, California 94043
Attention: General Counsel
Facsimile: 650-526-2581
Telephone: 650-335-8000
with a copy to:
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
Attention: Michael A. Schwartz
Facsimile: 212-728-8111
Telephone: 212-728-8000
(b) if to Seller, SSHI (or the Sold Subsidiaries prior to the Closing),
to:
Seagate Technology, Inc.
920 Disc Drive
P.O. Box 66360
Scotts Valley, California 95067
Attention: General Counsel
Facsimile: 831-438-6675
Telephone: 831-439-5370
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Larry W. Sonsini, Esq.
Facsimile: 650-493-6811
Telephone: 650-493-9300
41-A
<PAGE> 456
and to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
One Market Street
Spear Tower, Suite 3300
San Francisco, California 94105
Attention: Michael J. Kennedy, Esq.
Facsimile: 415-947-2099
Telephone: 415-947-2000
12.2 Interpretation. When a reference is made in this Agreement to
Schedules or Exhibits, such reference shall be to a Schedule or Exhibit to this
Agreement unless otherwise indicated. The words "include," "includes" and
"including" when used herein shall be deemed in each case to be followed by the
words "without limitation." The table of contents and headings contained in this
Agreement are for convenience of reference only and shall not affect in any way
the meaning or interpretation of this Agreement or any term or provision hereof.
When reference is made herein to "the business of" an entity, such reference
shall be deemed to include the business of all direct and indirect Subsidiaries
of such entity.
12.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when each counterpart has been signed by each of the
parties and delivered to the other party, it being understood that all parties
need not sign the same counterpart.
12.4 Entire Agreement. This Agreement and the documents and instruments
and other agreements among the parties hereto as contemplated by or referred to
herein, including, without limitation, the Seller Disclosure Schedule and the
Purchaser Disclosure Schedule, (i) constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof, it being understood that the
Confidentiality Agreement shall continue in full force and effect until the
Closing and shall survive any termination of this Agreement; and (ii) are not
intended to confer upon any other person any rights or remedies hereunder,
except as set forth herein.
12.5 Severability. In the event that any provision of this Agreement or
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
12.6 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and
42-A
<PAGE> 457
to enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, this being in addition to any
other remedy to which they are entitled at law or in equity.
12.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to conflicts
of law principles.
12.8 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any Law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
12.9 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder, in whole or in part, by operation
of law or otherwise, without the prior written approval of the other party
hereto; provided, however, that Purchaser shall have the right to assign any or
all of its rights to acquire the Shares is one or more designee (each, a
"Designee"); and provided, further, however, that no such assignment shall
release Purchaser from any of its Liabilities or obligations under this
Agreement. Subject to the preceding sentence, this Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
12.10 WAIVER OF JURY TRIAL. EACH OF SELLER AND PURCHASER HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF SELLER OR PURCHASER IN THE
NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
12.11 No Third Party Rights. Except as expressly set forth herein and as
provided in Section 6.10 hereof, this Agreement does not create any rights,
claims or benefits incurring to any person that is not a party hereto nor create
or establish any third party claim.
12.12 Attorneys' Fees. Should suit be brought to enforce or interpret any
party of this Agreement, the prevailing party will be entitled to recover, as an
element of the costs of suit and not as damages, reasonably attorneys' fees to
be fixed by the court, including, without limitation, costs, expenses and fees
on any appeal. The prevailing party will be entitled to recover its costs of
suit, regardless of whether such suit proceeds to final judgment.
[Remainder of Page Intentionally Left Blank]
43-A
<PAGE> 458
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed by their duly authorized respective officers, as of the date first
above written.
SUEZ ACQUISITION COMPANY
(CAYMAN) LIMITED
By:
--------------------------------------
Name:
Title:
SEAGATE TECHNOLOGY, INC.
By:
--------------------------------------
Name:
Title:
SEAGATE SOFTWARE HOLDINGS, INC.
By:
--------------------------------------
Name:
Title:
SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT
44-A
<PAGE> 459
ANNEX B
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
BY AND AMONG
VERITAS SOFTWARE CORPORATION
VICTORY MERGER SUB, INC.
AND
SEAGATE TECHNOLOGY, INC.
DATED AS OF MARCH 29, 2000
<PAGE> 460
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION..................... 1-B
ARTICLE I THE MERGER............................................... 1-B
1.1 The Merger.................................................. 1-B
1.2 Effective Time; Closing..................................... 1-B
1.3 Effect of the Merger........................................ 2-B
1.4 Certificate of Incorporation and Bylaws of Surviving
Corporation................................................. 2-B
1.5 Effect on Capital Stock..................................... 2-B
1.6 Surrender of Certificates................................... 4-B
1.7 No Further Ownership Rights in Seagate Common Stock......... 6-B
1.8 Lost, Stolen or Destroyed Certificates...................... 6-B
1.9 Tax Consequences............................................ 6-B
1.10 Taking of Necessary Action; Further Action.................. 7-B
1.11 Definitions................................................. 7-B
1.12 Dissenting Shares........................................... 10-B
ARTICLE II REPRESENTATIONS AND WARRANTIES OF SEAGATE............... 11-B
2.1 Organization; Good Standing................................. 11-B
2.2 Charter Documents........................................... 11-B
2.3 Capital Structure........................................... 11-B
2.4 Authority................................................... 12-B
2.5 Conflicts................................................... 13-B
2.6 Consents.................................................... 13-B
2.7 SEC Filings; Financial Statements........................... 13-B
2.8 Liabilities................................................. 14-B
2.9 Absence of Material Adverse Effect on Seagate............... 14-B
2.10 Compliance.................................................. 14-B
2.11 Permits..................................................... 15-B
2.12 Litigation.................................................. 15-B
2.13 Brokers' and Finders' Fees.................................. 15-B
2.14 Absence of Liens and Encumbrances........................... 15-B
2.15 Statements; Registration Statement; Proxy
Statement/Prospectus........................................ 15-B
2.16 Board Approval.............................................. 16-B
2.17 State Takeover Statutes..................................... 16-B
2.18 Fairness Opinion............................................ 16-B
2.19 Veritas Common Stock........................................ 16-B
2.20 Intercompany Transactions................................... 16-B
2.21 Taxes....................................................... 16-B
2.22 Code Section 897 Company.................................... 16-B
ARTICLE III REPRESENTATIONS AND WARRANTIES OF VERITAS AND MERGER
SUB............................................................... 17-B
3.1 Organization; Good Standing................................. 17-B
3.2 Charter Documents........................................... 17-B
3.3 Capital Structure........................................... 17-B
3.4 Authority................................................... 17-B
3.5 Conflicts................................................... 18-B
</TABLE>
i
<PAGE> 461
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3.6 Consents.................................................... 18-B
3.7 SEC Filings; Veritas Financial Statements................... 18-B
3.8 Absence of Certain Changes or Events........................ 19-B
3.9 Litigation.................................................. 19-B
3.10 Brokers' and Finders' Fees.................................. 19-B
3.11 Statements; Registration Statement; Proxy
Statement/Prospectus........................................ 19-B
3.12 Board Approval.............................................. 20-B
3.13 Fairness Opinion............................................ 20-B
3.14 Merger Sub Operations....................................... 20-B
ARTICLE IV CONDUCT OF BUSINESS AND OTHER TRANSACTIONS.............. 20-B
4.1 Conduct of Business......................................... 20-B
4.2 No Amendment to OD Documents................................ 20-B
4.3 Waivers and Releases........................................ 20-B
ARTICLE V ADDITIONAL AGREEMENTS.................................... 21-B
5.1 Proxy Statement/Prospectus; Registration Statement; Other
Filings..................................................... 21-B
5.2 Stockholder Meetings........................................ 22-B
5.3 Confidentiality............................................. 23-B
5.4 No Solicitation............................................. 23-B
5.5 Public Disclosure........................................... 25-B
5.6 Legal Requirements.......................................... 25-B
5.7 Notification of Certain Matters............................. 25-B
5.8 Commercially Reasonable Efforts and Further Assurances...... 25-B
5.9 Indemnification............................................. 26-B
5.10 Tax-Free Reorganization..................................... 26-B
5.11 Nasdaq Listing.............................................. 27-B
5.12 Seagate Affiliate Agreement................................. 27-B
5.13 Regulatory Filings; Reasonable Efforts...................... 27-B
5.14 Access to Information....................................... 27-B
5.15 TRA Matters................................................. 27-B
ARTICLE VI CONDITIONS TO THE MERGER................................ 29-B
6.1 Conditions to Obligations of Each Party to Effect the
Merger...................................................... 29-B
6.2 Additional Conditions to Obligations of Seagate............. 30-B
6.3 Additional Conditions to the Obligations of Veritas and
Merger Sub.................................................. 30-B
ARTICLE VII TERMINATION, FEES AND EXPENSES; AMENDMENT AND WAIVER...
31-B
7.1 Termination................................................. 31-B
7.2 Notice of Termination; Effect of Termination................ 33-B
7.3 Fees and Expenses........................................... 34-B
7.4 Amendment................................................... 35-B
7.5 Extension; Waiver........................................... 35-B
ARTICLE VIII GENERAL PROVISIONS.................................... 35-B
8.1 Non-Survival of Representations and Warranties.............. 35-B
8.2 Notices..................................................... 35-B
</TABLE>
ii
<PAGE> 462
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
8.3 Certain Interpretations..................................... 37-B
8.4 Counterparts................................................ 37-B
8.5 Entire Agreement............................................ 38-B
8.6 Severability................................................ 38-B
8.7 Other Remedies; Specific Performance........................ 38-B
8.8 Governing Law............................................... 38-B
8.9 Rules of Construction....................................... 38-B
8.10 Assignment.................................................. 38-B
8.11 Waiver of Jury Trial........................................ 38-B
</TABLE>
iii
<PAGE> 463
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (this "Agreement") is
made and entered into as of March 29, 2000 among VERITAS Software Corporation, a
Delaware corporation ("Veritas"), Victory Merger Sub, Inc., a Delaware
corporation and a wholly owned subsidiary of Veritas ("Merger Sub"), and Seagate
Technology, Inc., a Delaware corporation ("Seagate").
RECITALS
A. Upon the terms and subject to the conditions of this Agreement and in
accordance with the General Corporation Law of the State of Delaware ("Delaware
Law"), Veritas and Seagate have agreed to enter into a business combination
transaction pursuant to which Merger Sub will merge with and into Seagate (the
"Merger").
B. The Boards of Directors of Veritas and Merger Sub (i) have determined
that the Merger is fair to, advisable and in the best interests of, Veritas,
Merger Sub and their stockholders, (ii) have approved this Agreement, the Merger
and the other transactions contemplated by this Agreement, and (iii) have
determined to recommend approval of the Merger. In addition, the Board of
Directors of Veritas has determined to recommend approval of, to the extent not
previously authorized, an amendment to Veritas' Certificate of Incorporation to
increase the authorized number of shares of Veritas common stock from
500,000,000 to an additional amount sufficient to permit the issuance of Veritas
Common Stock contemplated hereby (the "Share Increase").
C. The Board of Directors of Seagate (i) has determined that the Merger is
fair to, advisable and in the best interests of, Seagate and its stockholders,
(ii) has approved this Agreement, the Merger and the other transactions
contemplated by this Agreement, and (iii) has determined to recommend the
approval of this Agreement and the Merger by the stockholders of Seagate.
D. Veritas, Merger Sub and Seagate intend, by entering into this Agreement,
to adopt a plan of "reorganization" within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing premises, and the
covenants, promises and representations set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged and accepted, the parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2 hereof),
and upon the terms and subject to the conditions of this Agreement and in
accordance with the applicable provisions of Delaware Law, Merger Sub shall be
merged with and into Seagate, the separate corporate existence of Merger Sub
shall cease and Seagate shall continue as the surviving corporation. Seagate as
the surviving corporation after the Merger is hereinafter sometimes referred to
as the "Surviving Corporation."
1.2 Effective Time; Closing. As soon as practicable on or after the
Closing Date (as defined in this Section 1.2), and upon the terms and subject to
the conditions of this Agreement, the parties hereto shall cause the Merger to
be consummated by filing a
1-B
<PAGE> 464
Certificate of Merger (the "Certificate of Merger") with the Secretary of State
of the State of Delaware in accordance with the relevant provisions of Delaware
Law (the time of such filing (or such later time as may be agreed upon in
writing by Veritas and Seagate and specified in the Certificate of Merger) being
referred to herein as the "Effective Time"). The closing of the Merger and the
other transactions contemplated hereby (the "Closing") shall take place at the
offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, located
at One Market Plaza, Spear Tower, Suite 1600, San Francisco, California 94105,
at a date and time to be specified by Veritas and Seagate, which shall be no
later than the second (2nd) business day following the satisfaction or, if
permitted pursuant hereto, waiver of the conditions set forth in Article VI
hereof, or at such other location, date and time as Veritas and Seagate shall
mutually agree in writing. The date upon which the Closing actually occurs shall
be referred to herein as the "Closing Date."
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of Delaware
Law. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time all of the property, rights, privileges, powers and
franchises of Seagate and Merger Sub shall vest in the Surviving Corporation,
and all of the debts, Liabilities and duties of Seagate and Merger Sub shall
become the debts, Liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation and Bylaws of Surviving Corporation.
(a) Certificate of Incorporation. As of the Effective Time, the Certificate
of Incorporation of Merger Sub, as in effect immediately prior to the Effective
Time, shall be the Certificate of Incorporation of the Surviving Corporation,
until thereafter amended as provided by Delaware Law and such Certificate of
Incorporation.
(b) Bylaws. As of the Effective Time, the Bylaws of Merger Sub, as in
effect immediately prior to the Effective Time, shall be the Bylaws of the
Surviving Corporation, until thereafter amended as provided by Delaware Law, the
Certificate of Incorporation of the Surviving Corporation and such Bylaws.
(c) Directors and Officers. As of the Effective Time, Mr. Jay Jones shall
be the sole director of the Surviving Corporation, and the officers of the
Surviving Corporation shall be as designated by Veritas.
1.5 Effect on Capital Stock. Upon the terms and subject to the conditions
of this Agreement, at the Effective Time, by virtue of the Merger and without
any action on the part of Merger Sub, Seagate or the holders of any of the
following securities, the following shall occur:
(a) Conversion of Seagate Common Stock. Except as otherwise provided
in this Agreement, each share of Common Stock, par value $0.01 per share,
of Seagate (the "Seagate Common Stock") outstanding immediately prior to
the Effective Time (other than any shares of Seagate Common Stock to be
canceled pursuant to Section 1.5(b) hereof) shall be canceled and
extinguished and automatically converted (subject to the terms of this
Section 1.5) into the right to receive (i) the Stock Portion (as defined in
Section 1.11 hereof), (ii) the Cash Portion (as defined in Section 1.11
hereof) and (iii) the TRA Right (the Stock Portion, the Cash Portion and a
TRA Right being referred to herein, collectively, as the "Merger
Consideration") upon the surrender of the certificate representing such
share of Seagate Common Stock in the manner set forth in Section 1.6 hereof
(or in the case of a lost,
2-B
<PAGE> 465
stolen or destroyed certificate, upon delivery of an affidavit (and bond,
if required) in the manner set forth in Section 1.8 hereof).
(b) Cancellation of Certain Seagate Common Stock. Unless otherwise
determined by Veritas, each share of Seagate Common Stock (i) held in the
treasury of Seagate, or (ii) owned by Merger Sub, Veritas or any direct or
indirect wholly-owned subsidiary of Seagate or of Veritas, in either case
immediately prior to the Effective Time, shall be canceled and extinguished
without any conversion thereof.
(c) Seagate Stock Options; Seagate Employee Stock Purchase Plan. At
the Effective Time, (i) the vesting restrictions applicable to all options
to purchase Seagate Common Stock ("Seagate Options") outstanding
immediately prior to the Effective Time under all Seagate stock option and
stock purchase plans (collectively, the "Seagate Stock Option Plans"),
excluding the Rolled Options (as defined in Section 1.11 hereof), shall be
accelerated such that no vesting restrictions remain thereon, (ii) each
such Seagate Option (excluding the Rolled Options) shall, for all purposes
of and under this Agreement, be converted into a number of shares of
Seagate Common Stock ("Seagate Option Shares") equal to (x) the aggregate
number of shares of Seagate Common Stock issuable upon the exercise in full
of such Seagate Option, minus (y) the NE Amount in respect of such Seagate
Option, (iii) the Seagate Option Shares so converted shall be considered
outstanding shares of Seagate Common Stock for all purposes of and under
this Agreement, including, without limitation, the right to receive the
Merger Consideration pursuant to the Merger in accordance with Section
1.11(a)(xvii) and Section 1.5(a) hereof, (iv) the Rolled Options shall be
canceled and extinguished without any payment of Merger Consideration or
any other consideration therefor, and (v) in accordance with the terms of
Seagate's 1999 Employee Stock Purchase Plan (the "Seagate ESPP"), all
rights to purchase shares of Seagate Common Stock outstanding under the
Seagate ESPP immediately prior to the Effective Time shall be exercised and
each share of Seagate Common Stock purchased pursuant to such exercise
shall by virtue of the Merger, and without any action on the part of the
holder thereof, be converted into the right to receive the Merger
Consideration payable in respect thereof, without the issuance of
certificates representing issued and outstanding shares of Seagate Common
Stock. The Seagate ESPP shall be terminated immediately following such
exercises.
(d) Required Withholding. Each of the Exchange Agent (as defined in
Section 1.6(a) hereof) and Veritas shall be entitled to deduct and withhold
from the Merger Consideration or any other consideration deliverable or
otherwise payable pursuant to the Merger and this Agreement to any holder
or former holder of Seagate Common Stock or Seagate Option Shares such
amounts as may be required to be deducted or withheld therefrom under the
Code or under any applicable provision of state, local or foreign tax law
or under any other applicable legal requirement. To the extent such amounts
are so deducted or withheld, such amounts shall be treated for all purposes
under this Agreement as having been delivered or otherwise paid to the
person to whom such amounts would otherwise have been delivered or
otherwise paid pursuant to the Merger and this Agreement.
(e) Adjustments to Exchange Ratio. The Merger Consideration shall be
adjusted to reflect appropriately the effect of any stock split, reverse
stock split, stock dividend (including any dividend or distribution of
securities convertible into Veritas Common Stock or Seagate Common Stock),
extraordinary cash dividend, reorganization, recapitalization,
reclassification, combination, consolidation or subdivision,
3-B
<PAGE> 466
exchange of shares or other like change with respect to Veritas Common
Stock or Seagate Common Stock occurring on or after the date hereof and
prior to the Effective Time.
(f) Fractional Shares. No fraction of a share of Veritas Common Stock
shall be issued pursuant to the Merger, but in lieu thereof each holder of
shares of Seagate Common Stock and Seagate Option Shares who would
otherwise be entitled to a fraction of a share of Veritas Common Stock
(after aggregating all fractional shares of Veritas Common Stock to be
received by such holder) pursuant to the Merger shall receive from Veritas
an amount in cash (rounded to the nearest whole cent), without interest,
equal to the product obtained by multiplying (x) such fraction by (y) the
Average Veritas Stock Price (as defined in Section 1.11 hereof).
(g) Capital Stock of Merger Sub. Each share of Common Stock, $0.01 par
value per share, of Merger Sub (the "Merger Sub Common Stock") issued and
outstanding immediately prior to the Effective Time shall be converted into
one validly issued, fully paid and nonassessable share of Common Stock,
$0.01 par value per share, of the Surviving Corporation. Each certificate
evidencing ownership of shares of Merger Sub Common Stock shall evidence
ownership of such shares of capital stock of the Surviving Corporation.
1.6 Surrender of Certificates.
(a) Exchange Agent. Veritas shall select an institution reasonably
satisfactory to Seagate to act as the exchange agent (the "Exchange Agent") for
the Merger.
(b) Veritas to Provide Merger Consideration. Promptly following the
Effective Time, Veritas shall make available to the Exchange Agent for exchange
in accordance with this Article I, (i) the shares of Veritas Common Stock
issuable pursuant to Section 1.5(a) or Section 1.5(c) hereof in exchange for
outstanding shares of Seagate Common Stock and Seagate Option Shares, (ii) the
cash payable pursuant to Section 1.5(a) hereof in exchange for outstanding
shares of Seagate Common Stock and Seagate Option Shares, (iii) cash in an
amount sufficient to make the cash payments in lieu of fractional shares
pursuant to Section 1.5(f) hereof, and (iv) cash in an amount sufficient to pay
any dividends or distributions to which holders of shares of Seagate Common
Stock and Seagate Option Shares may be entitled pursuant to Section 1.6(e)
hereof. From and after the date that is 6 months after the Effective Date,
Veritas shall have the right to cause the Exchange Agent to transfer to Veritas
all funds deposited by Veritas with the Exchange Agent pursuant to this Section
1.6(b) that have not been distributed pursuant to Section 1.6(d), and all
holders of Seagate Common Stock and Seagate Options entitled to receive the
Merger Consideration shall thereafter become general creditors of Veritas in
respect of the Merger Consideration.
(c) Exchange Procedures for Seagate Common Stock Certificates. Promptly
following the Effective Time, Veritas shall cause the Exchange Agent to mail to
each holder of record (as of the Effective Time) of a certificate or
certificates (the "Certificates") which immediately prior to the Effective Time
represented outstanding shares of Seagate Common Stock and which were converted
into the right to receive shares of Veritas Common Stock and cash pursuant to
Section 1.5(a) hereof, cash in lieu of any fractional shares pursuant to Section
1.5(f) hereof and any dividends or other distributions pursuant to Section
1.6(e) hereof, (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent, and which shall be
in
4-B
<PAGE> 467
such form and have such other provisions as Veritas may reasonably specify), and
(ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing shares of Veritas Common Stock issuable
and cash payable in respect of such shares of Seagate Common Stock pursuant to
Section 1.5(a) hereof, cash in lieu of any fractional shares payable in respect
of such shares of Seagate Common Stock pursuant to Section 1.5(f) hereof and any
dividends or other distributions payable in respect of such Seagate Common Stock
pursuant to Section 1.6(e) hereof. Upon the surrender and delivery of
Certificates for cancellation to the Exchange Agent (or to such other agent or
agents as may be appointed by Veritas), and such letter of transmittal, duly
completed and validly executed in accordance with the instructions thereto, the
holders of such Certificates shall be entitled to receive in exchange therefor
certificates representing the number of whole shares of Veritas Common Stock
issuable and cash payable in respect of such shares of Seagate Common Stock
pursuant to Section 1.5(a) hereof, cash in lieu of fractional shares payable in
respect of such shares of Seagate Common Stock pursuant to Section 1.5(f) hereof
and any dividends or distributions payable in respect of such shares of Seagate
Common Stock pursuant to Section 1.6(e) hereof, and the Certificates so
surrendered shall forthwith be canceled. Until so surrendered, outstanding
Certificates will be deemed from and after the Effective Time, for all corporate
purposes, subject to Section 1.6(e) hereof as to the payment of dividends and
other distributions, to evidence the ownership of a number of full shares of
Veritas Common Stock and the right to receive an amount in cash into which such
shares of Seagate Common Stock shall have been so converted pursuant to Section
1.5(a) hereof, and the right to receive an amount in cash in lieu of the
issuance of any fractional shares payable in respect of such shares of Seagate
Common Stock pursuant to Section 1.5(f) hereof and any dividends or
distributions payable in respect of such shares of Seagate Common Stock pursuant
to Section 1.6(e) hereof.
(d) Exchange Procedures for Seagate Options. Promptly following the
Effective Time, Veritas shall cause the Exchange Agent to mail to each holder
(as of the Effective Time) of a Seagate Option which was converted into the
right to receive the Merger Consideration pursuant to Section 1.5(a) hereof,
cash in lieu of any fractional shares pursuant to Section 1.5(f) hereof and any
dividends or other distributions pursuant to Section 1.6(e) hereof, (i) a letter
of transmittal (which shall be in such form and have such other provisions as
Veritas may reasonably specify), and (ii) instructions for use in receiving the
certificates representing shares of Veritas Common Stock issuable and cash
payable in respect of such Seagate Options pursuant to Section 1.5(a) and
Section 1.5(c), cash in lieu of any fractional shares payable in respect of such
Seagate Options pursuant to Section 1.5(f) hereof and any dividends or other
distributions payable pursuant to Section 1.6(e) hereof. Upon the delivery of
such letter of transmittal, duly completed and validly executed in accordance
with the instructions thereto, to the Exchange Agent (or to such other agent or
agents as may be appointed by Veritas), the holders of Seagate Options shall be
entitled to receive the Merger Consideration payable to them pursuant to Common
Stock issuable and cash issuable in respect of such Seagate Options pursuant to
Section 1.5(a) and Section 1.5(c), cash in lieu of fractional shares payable in
respect of such Seagate Options pursuant to Section 1.5(f) hereof and any
dividends or distributions payable in respect of such Seagate Options pursuant
to Section 1.6(e) hereof.
(e) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the date of this Agreement in respect of
Veritas Common Stock with a record date after the Effective Time shall be paid
to the holders of any unsurrendered Certificates or Seagate Options with respect
to the shares of Veritas
5-B
<PAGE> 468
Common Stock represented thereby until the holders of record of such
Certificates shall surrender such Certificates or the holders of such Seagate
Options shall return a letter of transmittal, duly completed and validly
executed in accordance with the instructions thereto. Subject to applicable law,
following surrender of any such Certificates and return of such letter of
transmittal, the Exchange Agent shall deliver to the record holders of such
Certificates or the holders of such Seagate Options, as the case may be, without
interest, certificates representing whole shares of Veritas Common Stock issued
in exchange therefor, along with payment in lieu of fractional shares payable in
respect of shares of Seagate Common Stock or Seagate Options pursuant to Section
1.5(g) hereof and the amount of any such dividends or other distributions with a
record date after the Effective Time payable in respect of such whole shares of
Veritas Common Stock.
(f) Transfers of Ownership. If certificates for shares of Veritas Common
Stock are to be issued in a name other than that in which the Certificates
surrendered in exchange therefor are registered, it will be a condition of the
issuance thereof that the Certificates so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the persons requesting such
exchange will have paid to Veritas (or any agent designated by it) any transfer
or other taxes required by reason of the issuance of certificates for shares of
Veritas Common Stock in any name other than that of the registered holders of
the Certificates surrendered, or established to the satisfaction of Veritas or
any agent designated by it that such tax has been paid or is not payable.
(g) No Liability. Notwithstanding anything to the contrary in this Section
1.6, neither the Exchange Agent, Veritas, the Surviving Corporation nor any
party hereto shall be liable to a holder of shares of Veritas Common Stock or
Seagate Common Stock for any amount properly paid to a public official pursuant
to any applicable abandoned property, escheat or similar law.
1.7 No Further Ownership Rights in Seagate Common Stock. All cash and
shares of Veritas Common Stock issued pursuant to and in accordance with the
terms of this Article I (including any cash paid in respect thereof pursuant to
Section 1.5(f) and Section 1.6(e) hereof) shall be deemed to have been issued in
full satisfaction of all rights pertaining to shares of Seagate Common Stock,
and there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Seagate Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article I.
1.8 Lost, Stolen or Destroyed Certificates. In the event that any
Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof, shares of Veritas
Common Stock and cash payable in respect thereof pursuant to Section 1.5(a) or
Section 1.5(b) hereof, cash in lieu of fractional shares, if any, payable in
respect thereof pursuant to Section 1.5(f) hereof and any dividends or
distributions payable in respect thereof pursuant to Section 1.6(e) hereof;
provided, however, that Veritas may, in its discretion and as a condition
precedent to the issuance and payment thereof, require the owner of such lost,
stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
Veritas or the Exchange Agent with respect to the Certificates alleged to have
been so lost, stolen or destroyed.
1.9 Tax Consequences. Veritas and Seagate intend that the Merger shall
constitute a "reorganization" within the meaning of Section 368 of the Code.
Veritas and Seagate
6-B
<PAGE> 469
adopt this Agreement as a "plan of reorganization" within the meaning of
Sections 1.368-2(g) and 1.368-3(a) of the United States Income Tax Regulations.
1.10 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes and intent of this Agreement and to vest in the Surviving Corporation
full right, title and possession in and to all of the assets, properties,
rights, privileges, powers and franchises of Seagate and Merger Sub, the
officers and directors of Merger Sub and Seagate shall be authorized to take,
and shall take, all such lawful and necessary action.
1.11 Definitions.
(a) For all purposes of and under this Agreement, the following terms shall
have the following respective meanings:
(i) "Administrators" has the meaning set forth in Section 5.15.
(ii) "Available Amount" means an amount equal to Cash held by Seagate
immediately prior to the Effective Time including net amounts received
under the OD Documents minus the VP Amount.
(iii) "Average Seagate Stock Price" means the average closing price of
a share of Seagate Common Stock, as reported on the NYSE, for the five (5)
consecutive trading days ending two (2) trading days immediately preceding
the Closing Date.
(iv) "Average Veritas Stock Price" means the average closing price of
a share of Veritas Common Stock, as reported on the Nasdaq, for the five
(5) consecutive trading days ending two (2) trading days immediately
preceding the Closing Date, as with respect to the VP Amount, preceding the
date that Veritas makes its election.
(v) "Cash" means cash, cash equivalents and short-term investments
(including all debt securities available for sale) as determined in
accordance with GAAP and consistent with the determination thereof in the
Recent SEC Reports.
(vi) "Cash Portion" means an amount, in cash, equal to the quotient
obtained by dividing (x) the Available Amount by (y) the Outstanding
Shares.
(vii) "Designated Liabilities" mean all Liabilities (including with
respect to Taxes) relating solely to (i) the Designated Assets and (ii) the
transactions pursuant to this Agreement. Without expanding the definition
of Designated Liabilities, Designated Liabilities shall not include
Liabilities relating to the transactions contemplated by the OD Documents
or any Liabilities included in the Adjustment Amount (as defined in the OD
Documents).
(viii) "Governmental Entity" means any court, administrative agency or
commission or other governmental authority or instrumentality.
(ix) "Indemnification Agreement" means the Indemnification Agreement
dated as of even date herewith by and among Veritas, Seagate and Purchaser
and each of its Subsidiaries.
(x) "ISA Amount" means a number of shares of Veritas Common Stock
equal to the quotient obtained by dividing (x) (A) the Stipulated Amount,
divided by (B) the Average Veritas Stock Price, by (y) the Outstanding
Shares.
(xi) "knowledge" means, with respect to either party hereto, the
actual knowledge of the executive officers of such party.
7-B
<PAGE> 470
(xii) "Liability" or "Liabilities" means any and all debts,
liabilities and obligations of any type or nature whatsoever, whether
accrued or fixed, absolute or contingent, matured or unmatured or
determined or determinable, including, without limitation, those arising
under any Law (including, without limitation, any Environmental Law),
Action or Governmental Order and those arising under any contract,
agreement, arrangement, commitment or undertaking.
(xiii) "Lien" means any lien, security interest, adverse claim,
charge, mortgage or other encumbrance.
(xiv) "Material Adverse Effect on Veritas" means any change, event,
violation, inaccuracy, circumstance or effect that is materially adverse to
the business, assets (including intangible assets), capitalization,
financial condition or results of operations of Veritas and its
Subsidiaries, taken as a whole; provided, however, that in no event shall
(i) a decrease in Veritas' stock price or the failure to meet or exceed
Wall Street research analysts' or Veritas' internal earnings or other
estimates or projections in and of itself constitute a "Material Adverse
Effect on Veritas," or (ii) any change, event, violation, inaccuracy,
circumstance or effect that results from (A) the public announcement or
pendency of the transactions contemplated hereby, (B) changes affecting the
software industry generally or the segments thereof in which Veritas
competes, or (C) changes affecting the United States economy generally,
constitute a "Material Adverse Effect on Veritas."
(xv) "Material Adverse Effect on Seagate" means any change, event,
violation, inaccuracy, circumstance or effect that, after giving effect to
the consummation of the transactions contemplated by the OD Documents,
gives rise to, or is reasonably likely to give rise to, any Liability
(absolute, accrued, contingent or otherwise, but excluding the Designated
Liabilities) of Seagate (or Veritas following the Effective Time) for which
Veritas is not entitled to indemnification under the Indemnification
Agreement following the Effective Time.
(xvi) "Nasdaq" means the Nasdaq National Market System of the National
Association of Securities Dealers, Inc.
(xvii) "NE Amount" means an amount equal to the quotient obtained by
dividing (x) (A) the per share exercise price of a Seagate Option,
multiplied by (B) the aggregate number of shares of Seagate Common Stock
issuable upon the exercise in full of such Seagate Option immediately prior
to the Effective Time, by (y) the Average Seagate Stock Price.
(xviii) "NYSE" means the New York Stock Exchange.
(xix) "OD Documents" means the Stock Purchase Agreement of even date
herewith by and among Seagate, Seagate Software and Suez Acquisition
Company (Cayman) Limited.
(xx) "Outstanding Shares" means the aggregate number of shares of
Seagate Common Stock outstanding immediately prior to the Effective Time,
after giving effect to the treatment of Seagate Options under Section
1.5(c) hereof.
(xxi) "Pro Rata Portion" means with respect to each person receiving a
TRA Right, the number of shares of Seagate Common Stock held by such person
immediately prior to the Effective Time, including shares deemed
outstanding by virtue of Section 1.5(c) divided by the Outstanding Shares.
(xxii) "Purchaser" has the meaning provided in the Stock Purchase
Agreement.
8-B
<PAGE> 471
(xxiii) "Rolled Options" means the Seagate Options and Seagate Common
Stock held by the individuals and in the amounts indicated in the Rollover
Commitment Agreements previously delivered to the parties hereto.
(xxiv) "Seagate Restricted Stock" means shares of Seagate Common Stock
subject to a right of repurchase or other restriction.
(xxv) "Seagate Software" means Seagate Software Holdings, Inc.
(xxvi) "Stipulated Amount" means the sum of:
(1) with respect to all shares of SanDisk Corp. ("SanDisk") held by
Seagate immediately prior to the Effective Time (the "SanDisk Shares"),
(A) the product obtained by multiplying (x) the average closing price of
a share of SanDisk common stock, as reported on the Nasdaq, for the five
(5) consecutive trading days ending two (2) trading days immediately
preceding the Closing Date (the "Reference Average"), by (y) 0.8 (the
product of (x) and (y) being the "Value"), minus (B) 0.4 multiplied by
the difference between the Value and Seagate's tax basis in a SanDisk
Share; multiplied by (C) the number of SanDisk Shares;
(2) with respect to all shares of CVC, Inc. ("CVCI") and Gadzoox
Networks Inc. ("Gadzoox") held by Seagate immediately prior to the
Effective Time (respectively, the "CVCI Shares" and the "Gadzoox
Shares"), (A) the product obtained by multiplying (x) the Reference
Average for shares of CVCI or Gadzoox common stock, respectively, by (y)
0.6 (the product of (x) and (y) being the "Value"), minus (B) 0.4
multiplied by the difference between the Value and Seagate's tax basis
in a CVCI or Gadzoox Share, as the case may be, multiplied by (C) the
number of CVCI Shares and Gadzoox Shares, respectively; and
(3) with respect to shares of Lernout & Hauspie, Inc. ("Dragon")
held by Seagate immediately prior to the Effective Time ( including
shares into which such shares may have been converted, the "Dragon
Shares"), (i) if such Dragon Shares are not listed for trading on a
national securities exchange or over-the-counter market, then an amount
mutually agreed upon by the parties hereto at least ten days prior to
the Seagate Stockholders Meeting, (ii) if shares of Dragon are listed
for trading on a national securities exchange or over-the-counter-
market, then (A) the product obtained by multiplying (x) the Reference
Average for shares of Dragon common stock, by (y) 0.6 (the product of
(x) and (y) being the "Value"), minus (B) 0.4 multiplied by the
difference between the Value and Seagate's tax basis in a Dragon Share
multiplied by (C) the number of Dragon Shares (other than those subject
to any escrow agreement). If the parties are unable to agree upon a
value under clause (i) above or the valuation of any escrowed Dragon
Shares, then the parties agree to include the Dragon Shares and such
escrowed shares in the TRA Amount as provided in Section 5.15 hereof.
(xxvii) "Stock Portion" means a number of shares of Veritas Common
Stock equal to the sum of (i) the quotient obtained by dividing (x) (A) the
number of shares of Veritas Common Stock held by Seagate immediately prior
to the Effective Time, multiplied by (B) 0.853743, by (y) the Outstanding
Shares, (ii) the quotient obtained by dividing (x) (A) the VP Amount,
divided by (B) the Average Veritas Stock Price, by (y) the Outstanding
Shares, and (iii) the ISA Amount.
9-B
<PAGE> 472
(xxviii) "Subsidiary" or "Subsidiaries" means any and all
corporations, limited liability companies, general or limited partnerships,
joint ventures, business trusts, associations and other business
enterprises and entities controlled by a person directly or indirectly
through one or more intermediaries.
(xxix) "Tax" or "Taxes" has the meaning provided in the Stock Purchase
Agreement.
(xxx) "TRA Amount" means the amount of cash received with respect to
all refunds or the utilization of credits for Seagate Taxes for or
attributable to taxable years or periods of Seagate ending on or prior to
the Effective Time, or the pre-closing period, in the case of a taxable
period commencing before the Effective Time and ending after the Effective
Time, less any administrative charges of the Administrators.
(xxxi) "TRA Right" means a non-transferable right to receive, when, as
and if received by Veritas or its Affiliates, a stockholder's Pro Rata
Portion of the TRA Amount.
(xxxii) "Veritas Common Stock" means common stock, par value $.001 per
share, of Veritas.
(xxxiii) "VP Amount" means either $0, $500 million or, if Seagate has
received gross proceeds in excess of $200,000,000 with respect to the
securities listed in Part B of Schedule I hereto on or prior to the
election of the VP Amount, $750 million, at the election of Veritas, which
election shall be made no later than the tenth (10th) day prior to the date
of the Seagate Stockholders' Meeting.
1.12 Dissenting Shares. Shares of Seagate Common Stock which have not been
voted in favor of the Merger and with respect to which the holder thereof has
exercised and demanded appraisal rights under Delaware Law ("Dissenting Shares")
shall not be converted into the Merger Consideration pursuant to the Merger, but
shall instead be converted into the right to receive such consideration as may
be determined to be due with respect to such Dissenting Shares pursuant to
Delaware Law. Seagate agrees that, except with the prior written consent of
Veritas, or as required under Delaware Law, it will not voluntarily make any
payment with respect to, or settle or offer to settle, any appraisal demand.
Each holder of Dissenting Shares ("Dissenting Stockholder") who, pursuant to the
provisions of Delaware Law, becomes entitled to payment of the fair value for
shares of Seagate Common Stock shall receive payment therefor from Veritas (but
only after the value therefor shall have been agreed upon or finally determined
pursuant to Delaware Law). If, after the Effective Time, any Dissenting Shares
shall lose their status as Dissenting Shares, Veritas shall issue and deliver,
upon surrender by such stockholder of a certificate or certificates representing
shares of Seagate Common Stock pursuant to Section 1.6 hereof, the Merger
Consideration to which such stockholder would otherwise be entitled under
Section 1.5.
10-B
<PAGE> 473
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SEAGATE
As of the date hereof and as of the Closing Date, Seagate hereby represents
and warrants to Veritas and Merger Sub, subject to the exceptions and
qualifications specifically set forth or disclosed in writing in the disclosure
letter delivered by Seagate to Veritas, dated as of the date hereof (the
"Seagate Disclosure Schedule"), as follows:
2.1 Organization; Good Standing. Each of Seagate and Seagate Software is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, with the corporate power and authority to own, lease
and operate its assets and property and to carry on its business as presently
being conducted and as proposed to be conducted, and is duly qualified to do
business and in good standing as a foreign corporation in each jurisdiction in
which the failure to be so qualified or in good standing would reasonably be
expected to have a Material Adverse Effect on Seagate.
2.2 Charter Documents. Seagate has delivered or made available to Veritas
a true and correct copy of the Certificate of Incorporation and Bylaws of
Seagate and Seagate Software each as amended and in effect as of the date
hereof. Neither Seagate nor Seagate Software is in violation of any of the
provisions of its Certificate of Incorporation or Bylaws, each as amended and in
effect as of the date hereof.
2.3 Capital Structure.
(a)(i) The authorized capital stock of Seagate consists of 600,000,000
shares of Common Stock, par value $0.01 per share, of which there were
226,977,176 shares issued and outstanding as of February 29, 2000, and 1,000,000
shares of Preferred Stock, par value $0.01 per share, of which no shares are
issued or outstanding. All outstanding shares of Seagate Common Stock are duly
authorized and validly issued, fully paid and nonassessable, are not subject to
preemptive rights created by statute, the Certificate of Incorporation or Bylaws
of Seagate or any contract, agreement or other commitment to which Seagate is a
party or by which it is bound and have been offered, issued, sold and delivered
by Seagate in compliance with all registration or qualification required (or
applicable exemptions therefrom) of applicable federal and State securities
laws. As of February 29, 2000, Seagate had reserved an aggregate of 47,709,220
shares of Seagate Common Stock, net of exercises, for issuance to employees,
consultants and non-employee directors pursuant to the Seagate Stock Option
Plans, under which there were (i) outstanding Seagate Options to purchase an
aggregate of 34,415,211 shares of Seagate Common Stock, and (ii) 13,294,009
shares of Seagate Common Stock available for future grant. All shares of Seagate
Common Stock subject to issuance under the Seagate Stock Option Plans, upon
issuance in accordance with the terms and conditions set forth in the
instruments pursuant to which such shares of Seagate Common Stock are issuable,
would be duly authorized and validly issued, fully paid and nonassessable.
(ii) The authorized capital stock of Seagate Software consists of
300,000,000 shares of Common Stock, par value $0.01 per share, and 73,000,000
shares of Preferred Stock, par value $0.01 per share, all of the issued or
outstanding shares of which capital stock are owned by Seagate. All outstanding
shares of Seagate Software Common Stock are duly authorized and validly issued,
fully paid and nonassessable, are not subject to preemptive rights created by
statute, the Certificate of Incorporation or Bylaws of Seagate Software or any
contract, agreement or other commitment to which Seagate Software is a party or
by which it is bound and have been offered, issued, sold and delivered by
Seagate Software in
11-B
<PAGE> 474
compliance with all registration or qualification required (or applicable
exemptions therefrom) of applicable federal and State securities laws.
(b) Except as set forth in Section 2.3(a) hereof, there are no equity
securities, partnership interests or other similar ownership interests of any
class or series of Seagate or Seagate Software, or any securities exchangeable
or convertible into, or exercisable for, any such equity securities, partnership
interests or other similar ownership interests, issued, reserved for issuance or
outstanding. Except as set forth in Section 2.3(a) hereof, there are no options,
warrants, equity securities, partnership interests or other similar ownership
interests, calls, rights (including preemptive rights), commitments or
agreements of any kind or character to which Seagate or Seagate Software is a
party or by which it is bound obligating Seagate or Seagate Software to issue,
deliver or sell, or cause to be issued, delivered or sold, or repurchase, redeem
or otherwise acquire, or cause the repurchase, redemption or acquisition, of any
shares of capital stock of Seagate or Seagate Software, or obligating Seagate or
Seagate Software to grant, extend, accelerate the vesting of, or enter into, any
such option, warrant, equity security, partnership interest or other similar
ownership interest, call, right, commitment or agreement. Except as set forth in
Section 2.3(b) of the Seagate Disclosure Schedule, there are no registration
rights and, to the knowledge of Seagate, there are no voting trusts, proxies or
other agreements or understandings, with respect to any capital stock of Seagate
or Seagate Software.
(c) Except for the Designated Assets (as defined in Section 4.1 hereof), as
of the Closing Date, Seagate will not own or hold, directly or indirectly
through one or more subsidiaries, any equity securities, partnership interests
or other similar ownership interests of or in any class or series of any other
corporation, limited liability company, general or limited partnership, joint
venture, business trust, association or other business entity or enterprise, or
any security exchangeable or convertible into, or exercisable for, any such
equity securities, partnership interests or other similar ownership interests.
2.4 Authority. Seagate has all requisite corporate power and authority to
enter into this Agreement and the OD Documents, to perform its obligations
hereunder and thereunder, and to consummate the transactions contemplated hereby
and thereby. The execution and delivery by Seagate of this Agreement and the OD
Documents, the performance by Seagate of its obligations hereunder and
thereunder, and the consummation by Seagate of the transactions contemplated
hereby and thereby, have been duly authorized by all necessary corporate action
on the part of Seagate, subject only to the approval and adoption of the
transaction contemplated by the OD Documents and this Agreement and the Merger
by Seagate's stockholders and the filing and recordation of the Certificate of
Merger in accordance with Delaware Law and the transactions contemplated by the
OD Documents. The affirmative approval of the holders of a majority of the
outstanding shares of the Seagate Common Stock is required for Seagate's
stockholders to approve and adopt this Agreement and the Merger under Delaware
Law and the transactions contemplated by the OD Documents. This Agreement and
the OD Documents been duly executed and delivered by Seagate and, assuming the
due authorization, execution and delivery of this Agreement by Veritas and
Merger Sub and the OD Documents by the other parties thereto, this Agreement and
the OD Documents constitute the valid and binding obligations of Seagate,
enforceable in accordance with their respective terms, subject to (i) the effect
of any applicable laws of general application relating to bankruptcy,
reorganization, insolvency, moratorium or other similar laws affecting
creditors' rights and the relief of debtors generally, and (ii) the effect of
rules of law and general principles of equity, including, without limitation,
rules of law and general principal of equity governing specific performance,
injunctive relief and other
12-B
<PAGE> 475
equitable remedies (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
2.5 Conflicts. The execution and delivery of this Agreement and the OD
Documents by Seagate do not, and the performance by Seagate of its obligations
hereunder and thereunder and the consummation by Seagate of the transactions
contemplated hereby and thereby will not, (i) conflict with or violate the
Certificate of Incorporation or Bylaws of Seagate, each as amended and in effect
as of the date hereof, (ii) subject to obtaining the consents, approvals, orders
or authorizations, and making the registrations, declarations or filings, set
forth in Section 2.6 hereof, conflict with or violate any law, rule, regulation,
order, judgment or decree applicable to Seagate or by which Seagate or its
assets and properties are bound or affected, or (iii) result in any breach of,
or constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or impair Seagate's rights or alter the rights or
obligations of any third party under, or give to any third party any rights of
termination, amendment, acceleration or cancellation of, or result in the
creation of a Lien on any of the assets or properties of Seagate pursuant to,
any material note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which Seagate is
a party or by which Seagate or its assets and properties are bound or affected,
except to the extent such conflict, violation, breach, default, impairment or
other effect would not, in the case of clause (ii) or (iii) of this Section 2.5,
individually or in the aggregate, (a) reasonably be expected to have a Material
Adverse Effect, or (b) reasonably be expected to have a material adverse effect
on, or materially delay, the ability of Veritas or Seagate to consummate the
transactions contemplated hereby or on Seagate's ability to consummate the
transactions contemplated by the OD Documents.
2.6 Consents. Except as set forth in the Seagate Disclosure Statement, no
material consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Seagate in connection with the execution and delivery of this
Agreement or the OD Documents by Seagate, or the performance by Seagate of its
obligations hereunder or thereunder or the consummation by Seagate of the
transactions contemplated hereby or thereby, except for (i) the filing and
effectiveness of the Registration Statement (as defined in Section 5.1 hereof)
with the United States Securities and Exchange Commission (the "SEC") in
accordance with the Securities Act of 1933, as amended (the "Securities Act"),
(ii) the filing of the Certificate of Merger with the Secretary of State of the
State of Delaware, (iii) the filing of the Proxy Statement (as defined in
Section 5.1 hereof) with the SEC in accordance with the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), (iv) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
applicable federal and state "blue sky" securities laws and the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and the equivalent laws of any foreign country, and (v) such other
consents, approvals, orders, authorizations, registrations, declarations and
filings which, if not obtained or made, would not have a material adverse effect
on the ability of Veritas and Seagate to consummate the Merger and the other
transactions contemplated hereby or by the OD Documents.
2.7 SEC Filings; Financial Statements. Seagate has filed all forms,
reports and documents required to be filed with the SEC since July 3, 1998, and
has made available (through on-line databases) to Veritas such forms, reports
and documents in the form filed with the SEC. All such required forms, reports
and documents (including all exhibits and schedules thereto and all documents
incorporated by reference therein) are referred to herein as the "Seagate SEC
Reports." As of their respective dates, the Seagate SEC
13-B
<PAGE> 476
Reports (i) complied in all material respects with the applicable requirements
of the Securities Act or the Exchange Act, and the rules and regulations of the
SEC promulgated thereunder, and (ii) did not at the time each such Seagate SEC
Report was filed (or if amended or superseded by a filing prior to the date of
this Agreement, then on the date of such filing) contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. None of the
Subsidiaries of Seagate is required to file any forms, reports or other
documents with the SEC. Except to the extent revised or superseded by a
subsequent filing with the SEC (a copy of which has been made available to
Veritas prior to the date of this Agreement), none of the Seagate SEC Reports
filed by Seagate since July 3, 1999 and prior to the date of this Agreement
(collectively, the "Recent SEC Reports") contains any untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The consolidated
financial statements of Seagate included in all Seagate SEC Reports comply as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP (except, in the case of unaudited consolidated
quarterly statements, as permitted by Form 10-Q of the SEC) applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly present the consolidated financial position of Seagate
and its consolidated Subsidiaries as of the dates thereof and the consolidated
financial position of Seagate and its consolidated Subsidiaries as of the dates
thereof and the consolidated results of their operations and cash flows for the
periods then ended (subject, in the case of unaudited quarterly statements, to
normal year-end audit adjustments). Except as reflected in the most recent
consolidated balance sheet of Seagate included in the Recent SEC Reports most
recently filed by Seagate with the SEC prior to the date hereof (such
consolidated balance sheet being referred to herein as the "Current Seagate
Balance Sheet" and the date thereof being referred to herein as the "Current
Balance Sheet Date"), as of the Current Balance Sheet Date, neither Seagate nor
any of its Subsidiaries had, and since such date neither Seagate nor any of such
Subsidiaries has incurred, any Liabilities or obligations of any nature (whether
accrued, absolute, contingent or otherwise) which, individually or in the
aggregate, would reasonably be expected to have a Material Adverse Effect.
2.8 Liabilities. Except as identified on the Seagate Disclosure Schedule,
as of the Effective Time, Seagate will not have any material Liabilities or
other obligations of any nature whatsoever (absolute, accrued, contingent or
otherwise) other than (i) Designated Liabilities and (ii) Liabilities for which
Veritas is entitled to indemnification under the Indemnification Agreement.
2.9 Absence of Material Adverse Effect on Seagate. Since the date of the
Current Seagate Balance Sheet, there has not been, occurred or arisen any
Material Adverse Effect on Seagate.
2.10 Compliance. Seagate is not in conflict in any material respect with,
or in material default or violation of, (i) any law, rule, regulation, order,
judgment or decree applicable to Seagate or by which Seagate or its assets and
properties are bound or affected, or (ii) any material note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which Seagate is a party or by which Seagate or its
assets and properties are bound or affected. No investigation or review by any
Governmental Entity is pending or, to the knowledge of Seagate, threatened,
14-B
<PAGE> 477
against Seagate, nor has any Governmental Entity indicated an intention to
conduct the same. There is no material agreement, judgment, injunction, order or
decree binding upon Seagate or any of assets and properties which has had, or
would reasonably be expected to have, the effect of prohibiting or materially
impairing the consummation of the Merger, or the other transactions contemplated
hereby or by the OD Documents.
2.11 Permits. Seagate holds all permits, licenses, variances, exemptions,
orders and approvals from Governmental Entities which are material to the
operation of the business of Seagate, and Seagate is in compliance in all
material respects with the terms of such permits, licenses, variances,
exemptions, orders and approvals.
2.12 Litigation. As of the date of this Agreement, there is no action,
suit, proceeding, claim, arbitration or investigation pending, or as to which
Seagate has received any notice of assertion nor, to the knowledge of Seagate,
is there any threatened action, suit, proceeding, claim, arbitration or
investigation against Seagate, which in any case would reasonably be expected to
have a Material Adverse Effect on Seagate.
2.13 Brokers' and Finders' Fees. Except for fees payable to Morgan Stanley
& Co. Incorporated, Seagate has not incurred, nor will it incur, directly or
indirectly, any liability for any brokerage or finders' fees or agents'
commissions or any similar charges in connection with the Merger or the other
transactions contemplated hereby or by the OD Documents.
2.14 Absence of Liens and Encumbrances. Except as disclosed on Section
2.14 of the Seagate Disclosure Schedule, Seagate and Seagate Software Holdings,
Inc. have good and valid title to all of their assets and properties that will
not be sold or otherwise disposed of pursuant to the OD Documents including,
without limitation, their shares of Veritas, Gadzoox, Dragon, CVCI and SanDisk,
and such assets and properties at the Effective Time will be free and clear of
any liens, encumbrances or financial commitments, except for liens for taxes not
yet due and payable and as otherwise reflected in the Seagate SEC Reports.
2.15 Statements; Registration Statement; Proxy Statement/Prospectus. None
of the information supplied or to be supplied by Seagate for inclusion or
incorporation by reference in (i) the Registration Statement (as defined in
Section 5.1 hereof) will, at the time it is declared or ordered effective under
the Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading, or (ii) the Proxy Statement (as defined in Section 5.1
hereof) will, on the date the Proxy Statement is first mailed to the
stockholders of Seagate, at the time of the Seagate Stockholders' Meeting (as
defined in Section 5.1 hereof), at the time of the Veritas Stockholders' Meeting
and at the Effective Time, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading, or omit to state any material fact necessary to
correct any statement in any earlier communication with respect to the
solicitation of proxies for the Seagate Stockholders' Meeting or the Veritas
Stockholders' Meeting which has become false or misleading. The Proxy Statement
will comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations promulgated thereunder.
Notwithstanding the foregoing or anything to contrary set forth in this
Agreement, Seagate makes no representation or warranty with respect to any
information supplied by Veritas or Merger Sub which is contained in any of the
foregoing documents.
15-B
<PAGE> 478
2.16 Board Approval. The Board of Directors of Seagate has (i) determined
that the Merger and the other transactions contemplated hereby and by the OD
Documents are fair to, advisable and in the best interests of Seagate and its
stockholders, (ii) duly approved the Merger, this Agreement, the OD Documents
and the other transactions contemplated hereby and thereby, and (iii) determined
to recommend that the stockholders of Seagate approve the Merger, this
Agreement, the OD Documents and the other transactions contemplated hereby and
thereby.
2.17 State Takeover Statutes. The Board of Directors of Seagate has
approved the Merger, this Agreement, and the other transactions contemplated
hereby and thereby, and such approval is sufficient to render inapplicable to
the Merger, this Agreement, the OD Documents and the other transactions
contemplated hereby and thereby the provisions of Section 203 of Delaware Law to
the extent, if any, such provisions are applicable to the Merger, this
Agreement, the OD Documents and the other transactions contemplated hereby and
thereby. No other state takeover statute or similar statute or regulation
applies to or purports to apply to the Merger, this Agreement, the OD Documents
or the other transactions contemplated hereby and thereby.
2.18 Fairness Opinion. Seagate has received a written opinion from Morgan
Stanley & Co., Incorporated dated as of the date hereof, to the effect that, as
of the date hereof, the Merger Consideration is fair to the stockholders of
Seagate from a financial point of view and will deliver to Veritas a copy of
such opinion.
2.19 Veritas Common Stock. All of the Veritas Common Stock held directly
or indirectly by Seagate is owned, beneficially and of record, by Seagate
Software, and has been held continuously by Seagate Software since May 28, 1999.
2.20 Intercompany Transactions. At no time has Seagate, Seagate Software
or any member of an affiliated group of corporations as defined in Section 1504
of the Code filing returns on a consolidated basis of which Seagate or Seagate
Software is a member engaged in an intercompany transaction with respect to the
Veritas Common Stock giving rise to an intercompany item or corresponding item
within the meaning of Section 1.1502-13 of the United States Income Tax
Regulations with respect to the Veritas Common Stock, including but not limited
to such items that may be subject to gain recognition upon the application of
Section 1.1502-13(f)(4) of the United States Income Tax Regulations.
2.21 Taxes. Each of Seagate and its Subsidiaries has filed all Tax Returns
required to be filed by any of them and has paid (or Seagate has paid on its
behalf), or has set up an adequate reserve for the payment of, all Taxes
required to be paid in respect of the periods covered by such returns (except
where the failure to pay would not have a Material Adverse Effect on Seagate).
The information contained in such Tax Returns is true, complete and accurate in
all material respects except where the failure to be so would not have a
Material Adverse Effect on Seagate. Neither Seagate nor any subsidiary of
Seagate is delinquent in the payment of any tax, assessment or governmental
charge except where the delinquency would not have a Material Adverse Effect on
Seagate. No deficiencies for any taxes have been proposed, asserted or assessed
against Seagate or any of its subsidiaries that have not been finally settled or
paid in full which would have a Material Adverse Effect on Seagate, and no
requests for waivers of the time to assess any such tax are pending.
2.22 Code Section 897 Company. Seagate is not and has not been during the
period referred to in section 897(c)(1)(A)(ii) a United States real property
holding corporation within the meaning of section 897(c)(2) of the Code.
16-B
<PAGE> 479
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF VERITAS AND MERGER SUB
As of the date hereof and as of the Closing Date, Veritas and Merger Sub
hereby jointly and severally represent and warrant to Seagate, subject to the
exceptions and qualifications specifically set forth or disclosed in writing in
the disclosure letter delivered by Veritas to Seagate, dated as of the date
hereof (the "Veritas Disclosure Schedule"), as follows:
3.1 Organization; Good Standing. Veritas and each of its material
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the respective jurisdiction of its incorporation,
with the corporate power and authority to own, lease and operate its respective
assets and property and to carry on its respective business as now being
conducted and as proposed to be conducted, and is duly qualified to do business
and in good standing as a foreign corporation in each jurisdiction in which the
failure to be so qualified would reasonably be expected to have a Material
Adverse Effect on Veritas.
3.2 Charter Documents. Veritas has delivered or made available to Seagate
a true and correct copy of the Certificate of Incorporation and Bylaws of
Veritas, as amended and in effect as of the date hereof. Neither Veritas nor any
of its material subsidiaries is in violation of any of the provisions of its
Certificate of Incorporation or Bylaws or equivalent organizational documents,
in each case as amended and in effect as of the date hereof.
3.3 Capital Structure. The authorized capital stock of Veritas consists of
500,000,000 shares of Common Stock, par value $0.001 per share, of which there
were 396,532,084 shares issued and outstanding as of March 24, 2000, 10,000,000
shares of Preferred Stock, par value $0.001 per share, of which no shares are
issued or outstanding, and one share of the special voting stock, par value
$0.001 per share. The authorized capital stock of Merger Sub consists of 1,000
shares of common stock, par value $0.01 per share, of which, as of the date
hereof, 100 shares are issued and outstanding. All outstanding shares of Veritas
Common Stock and Merger Sub's capital stock are duly authorized and validly
issued, fully paid and non-assessable, and are not subject to preemptive rights
created by statute, the Certificate of Incorporation or Bylaws of Veritas or any
contract, agreement or other commitment to which Veritas is a party or by which
it is bound. All outstanding shares of capital stock of Merger Sub have been
issued and granted in compliance with all applicable securities and other laws.
3.4 Authority. Each of Veritas and Merger Sub has all requisite corporate
power and authority to enter into this Agreement, to perform its obligations
hereunder, and to consummate the transactions contemplated hereby. The execution
and delivery by Veritas and Merger Sub of this Agreement, the performance by
Veritas and Merger Sub of the transactions contemplated hereby, and the
consummation by Veritas and Merger Sub of the transactions contemplated hereby,
have been duly authorized by all necessary corporate action on the part of
Veritas and Merger Sub, subject only to the approval of the Merger and, to the
extent not previously authorized, the Share Increase by Veritas' stockholders
and the filing of an amendment to the Certificate of Incorporation of Venus with
respect to the Share Increase and the Certificate of Merger in accordance with
Delaware Law. The approval of the holders of a majority of the outstanding
shares of Veritas Common Stock is required to approve the Merger and the Share
Increase. This Agreement has been duly executed and delivered by Veritas and
Merger Sub and, assuming the due authorization, execution and delivery of this
Agreement by Seagate, this Agreement constitutes the valid
17-B
<PAGE> 480
and binding obligations of Veritas and Merger Sub, enforceable in accordance
with their respective terms, subject to (i) the effect of any applicable laws of
general application relating to bankruptcy, reorganization, insolvency,
moratorium or other similar laws affecting creditors' rights and the relief of
debtors generally, and (ii) the effect of rules of law and general principles of
equity, including, without limitation, rules of law and general principal of
equity governing specific performance, injunctive relief and other equitable
remedies (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
3.5 Conflicts. The execution and delivery of this Agreement by Veritas and
Merger Sub do not, and the performance by Veritas and Merger Sub of their
obligations hereunder and the consummation by Veritas and Merger Sub of the
transactions contemplated hereby will not, (i) conflict with or violate the
Certificate of Incorporation or Bylaws of Veritas and Merger Sub, (ii) subject
to obtaining the consents, approvals, orders and authorizations, and making the
registrations, recordations and filings, set forth in Section 3.6 hereof,
conflict with or violate any law, rule, regulation, order, judgment or decree
applicable to Veritas and Merger Sub or by which Veritas or Merger Sub or their
assets and properties are bound or affected, or (iii) result in any breach of,
or constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or impair Veritas' or Merger Sub's rights or
alter the rights or obligations of any third party under, or give to any third
parties any rights of termination, amendment, acceleration or cancellation of,
or result in the creation of a Lien on any of the assets or properties of
Veritas or Merger Sub pursuant to, any material note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Veritas or Merger Sub is a party or by which Veritas or
Merger Sub or either of their assets and properties are bound or affected,
except to the extent such conflict, violation, breach, default, impairment or
other effect would not, in the case of clause (ii) or (iii) of this Section 3.5,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on Veritas.
3.6 Consents. Except as set forth in the Veritas Disclosure Schedule, no
material consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity is required by or with
respect to Veritas in connection with the execution and delivery of this
Agreement or the performance by Veritas of its obligations hereunder or the
consummation of the transactions contemplated hereby, except for (i) the filing
of a Registration Statement with the SEC in accordance with the Securities Act,
(ii) the filing of the Certificate of Merger with the Secretary of State of the
State of Delaware, (iii) the filing of the Proxy Statement with the SEC in
accordance with the Exchange Act, (iv) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
applicable federal and state "blue sky" securities laws and the HSR Act and the
antitrust or competition laws of any foreign country, and (v) such other
consents, authorizations, filings, approvals and registrations which, if not
obtained or made, would not be material to Veritas or Merger Sub or have a
material adverse effect on the ability of Veritas, Merger Sub and Seagate to
consummate the Merger and the other transactions contemplated hereby.
3.7 SEC Filings; Veritas Financial Statements.
(a) Veritas has filed all forms, reports and documents required to be filed
with the SEC since December 31, 1998, and has made a copy of all such forms,
reports and documents available to Seagate. All such forms, reports and
documents (including those that Veritas may file subsequent to the date hereof)
are referred to herein as the "Veritas
18-B
<PAGE> 481
SEC Reports." As of their respective dates, the Veritas SEC Reports (i) were or
will be (as the case may be) prepared in accordance with the requirements of the
Securities Act or the Exchange Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder, and (ii) did not or will not (as
the case may be) at the time they were filed (or if amended or superseded, then
on the date of filing of such amendment or superseding form, report or document)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in the Veritas SEC Reports (the "Veritas
Financials"), including any Veritas SEC Reports filed after the date hereof
until the Closing, (i) complied or will comply (as the case may be) as to form
in all material respects with the published rules and regulations of the SEC
with respect thereto, (ii) was prepared or will be prepared (as the case may be)
in accordance with GAAP applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto or, in the case of
unaudited interim financial statements, as may be permitted by the SEC on Form
10-Q under the Exchange Act), and (iii) fairly presented or will fairly present
(as the case may be) in all material respects the consolidated financial
position of Veritas and its subsidiaries at the respective dates thereof and the
consolidated results of its operations and cash flows for the periods indicated,
except that the unaudited interim financial statements were or are subject to
normal and recurring year-end adjustments which were not, or are not expected to
be, material in amount. The balance sheet of Veritas as of December 31, 1998
contained in the Veritas SEC Reports is hereinafter referred to as the "Veritas
Balance Sheet."
(c) Veritas has heretofore furnished to Seagate a complete and correct copy
of any amendments or modifications, which have not yet been filed with the SEC
but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by Veritas with the SEC pursuant to
the Securities Act or the Exchange Act.
3.8 Absence of Certain Changes or Events. Since the date of the Veritas
Balance Sheet, there has not been, occurred or arisen any Material Adverse
Effect on Veritas.
3.9 Litigation. There is no action, suit, proceeding, claim, arbitration
or investigation pending, or as to which Veritas or any of its subsidiaries has
received any written notice of assertion nor, to the knowledge of Veritas, is
there any threatened action, suit, proceeding, claim, arbitration or
investigation against Veritas or any of its subsidiaries, which in any case
would reasonably would be expected to have a Material Adverse Effect on Veritas.
3.10 Brokers' and Finders' Fees. Except for fees payable to Credit Suisse
First Boston Corporation, Veritas has not incurred, nor will it incur, directly
or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with the Merger or the other
transactions contemplated hereby.
3.11 Statements; Registration Statement; Proxy Statement/Prospectus. None
of the information supplied or to be supplied by Veritas for inclusion or
incorporation by reference in (i) the Registration Statement (as defined in
Section 5.1 hereof) will at the time it becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and (ii) the Proxy Statement (as defined in Section 5.1 hereof)
19-B
<PAGE> 482
shall not, on the date the Proxy Statement is first mailed to each of Seagate's
stockholders and Veritas' stockholders, at the times of the Seagate
Stockholder's Meeting (as defined in Section 5.1 hereof) and the Veritas
Stockholders' Meeting and at the Effective Time, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not false or misleading, or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Seagate
Stockholders' Meeting or Veritas Stockholders' Meeting which has become false or
misleading. Notwithstanding the foregoing or anything else to the contrary set
forth in this Agreement, Veritas makes no representation or warranty with
respect to any information supplied by Seagate which is contained in any of the
foregoing documents.
3.12 Board Approval. The Board of Directors of Veritas has (i) determined
that the Merger and the other transactions contemplated hereby are advisable and
in the best interests of Veritas and its stockholders, (ii) duly approved the
Merger, this Agreement and the other transactions contemplated hereby, and (iii)
resolved to recommend that the Stockholders of Veritas approve the Share
Increase.
3.13 Fairness Opinion. Veritas has received a written opinion from Credit
Suisse First Boston Corporation, dated as of the date hereof, to the effect
that, as of the date hereof, the Stock Portion to be paid by Veritas is fair to
Veritas from a financial point of view and will deliver to Seagate a copy of
such opinion.
3.14 Merger Sub Operations. Merger Sub was formed solely for the purpose
of engaging in the transactions contemplated hereby and has not (a) engaged in
any business activities, (b) conducted any operations other than in connection
with the transactions contemplated hereby or (c) incurred any Liabilities other
than in connection with the transactions contemplated hereby.
ARTICLE IV
CONDUCT OF BUSINESS AND OTHER TRANSACTIONS
4.1 Conduct of Business. On or before the Effective Time, Seagate and
Seagate Software shall take all actions necessary to transfer all of their
respective assets and Liabilities to one or more of Seagate's Subsidiaries such
that at the Effective Time the only assets and properties owned or held by
Seagate (the "Designated Assets") and the only Liabilities not assumed by such
other Subsidiaries shall be Designated Liabilities; provided, however, that
prior to the Effective Time, Seagate may sell, transfer or otherwise dispose of
any of the Designated Assets set forth on Part B of Schedule I hereto. From and
after the execution and delivery of this Agreement until the earlier of the
Effective Time or the termination of this Agreement, Seagate shall not sell,
transfer or otherwise dispose of any shares of Veritas Common Stock owned by
Seagate as of the date hereof.
4.2 No Amendment to OD Documents. From the date hereof until the earlier
to occur of the Effective Time or the termination of this Agreement pursuant to
and in accordance with Section 7.1 hereof, neither Seagate nor Seagate Software
shall terminate, amend, modify or otherwise supplement or waive any of the terms
and conditions of the OD Documents (or any of them); provided, however, that
notwithstanding the foregoing, Seagate may terminate the OD Documents pursuant
to their respective terms.
4.3 Waivers and Releases. Seagate shall use its best efforts to obtain and
to deliver to Veritas, as soon as practicable after the date hereof and in any
event at least 15 days
20-B
<PAGE> 483
prior to the Effective Time, (i) with respect to each individual who will be a
holder of Rolled Options, a waiver and release of claims in favor of Veritas and
Seagate in form and in substance reasonably satisfactory to Veritas (a "Proper
Waiver"), with respect to the cancellation of Rolled Options held by such
individual described in Section 1.5(c) hereof, and (ii) with respect to each
individual who is a party to any employment, severance or change in control or
similar agreement, or who participates in any plan providing severance or change
in control benefits, a Proper Waiver with respect to any claims which any such
individual may have against Veritas and/or Seagate with respect to any such
agreements or plans.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings.
(a) As promptly as practicable following the execution and delivery of this
Agreement, Seagate and Veritas shall prepare and file with the SEC a document to
be sent to the stockholders of Seagate and Veritas in connection with the
meeting of Seagate's stockholders to consider the approval and adoption of this
Agreement and the Merger (the "Seagate Stockholders' Meeting") and the meeting
of Veritas Stockholders to consider approval of the Merger and the Share
Increase (the "Veritas Stockholders' Meeting") (such proxy statement/prospectus,
as amended or supplemented, being referred to herein as the "Proxy Statement"),
and Veritas shall prepare and file with the SEC a registration statement on Form
S-4 (the "Registration Statement") in which the Proxy Statement will be included
as a prospectus. Each of Seagate and Veritas shall promptly respond to any
comments of the SEC with respect to the Registration Statement or the Proxy
Statement, shall use its respective commercially reasonable efforts to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after such filing and, in the case of Seagate, shall cause the
Proxy Statement to be mailed to the stockholders of Seagate at the earliest
practicable time. As promptly as practicable after the execution and delivery of
this Agreement, Seagate and Veritas shall prepare and file any other filings
required under the Exchange Act, the Securities Act or any other federal,
foreign or state "blue sky" securities laws relating to the Merger and the other
transactions contemplated hereby (collectively, the "Other Filings"). Each of
Seagate and Veritas shall notify the other promptly upon the receipt of any
comments from the SEC or its staff, and of any request by the SEC or its staff
or any other government officials for amendments or supplements to the
Registration Statement, the Proxy Statement or any Other Filing, or for
additional information, and shall supply the other with copies of all
correspondence between such party or any of its agents or representatives, on
the one hand, and the SEC, or its staff or any other government officials, on
the other hand, with respect to the Registration Statement, the Proxy Statement,
or any Other Filing. The Registration Statement, the Proxy Statement and the
Other Filings shall comply in all material respects with all applicable
requirements of law and the rules and regulations promulgated thereunder.
Whenever any event occurs which is required to be set forth in an amendment or
supplement to the Registration Statement, the Proxy Statement or any Other
Filing, Seagate or Veritas, as the case may be, shall promptly inform the other
of such event, and cooperate in filing with the SEC or its staff or any other
government officials, and/or mailing to stockholders of Seagate, such amendment
or supplement.
21-B
<PAGE> 484
(b) Subject to the terms of Section 5.2(c) hereof, the Proxy Statement
shall include the recommendation of the Board of Directors of Seagate in favor
of adoption and approval of this Agreement and the Merger. The Proxy Statement
shall also include the recommendation of the Board of Directors of Veritas in
favor of approval of the Share Increase and the Merger.
5.2 Stockholder Meetings.
(a) Subject to the terms of Section 5.2(c) hereof, promptly after the date
hereof and in consultation with Veritas, Seagate shall take all action necessary
in accordance with Delaware Law and its Certificate of Incorporation and Bylaws
to convene the Seagate Stockholders' Meeting and Veritas shall call the Veritas
Stockholders' Meeting, to be held as promptly as practicable, for the purpose of
voting upon (i) this Agreement, the Merger and the transactions contemplated
under the OD Documents, (ii) the Merger and (iii) if necessary, the Share
Increase, as the case may be. Seagate and Veritas shall use all reasonable
efforts to hold the Veritas Stockholders' Meeting and the Seagate Stockholders'
Meeting on the same day and as soon as practicable after the date on which the
Registration Statement becomes effective. Nothing herein shall prevent Seagate
or Veritas from adjourning or postponing the Seagate Stockholders' Meeting or
the Veritas Stockholders' Meeting, as the case may be, to the extent necessary
to ensure that any necessary supplement or amendment to the Proxy Statement is
provided to the stockholders of Veritas and Seagate in advance of a vote
relevant to the Merger and this Agreement. Subject to the terms of Section
5.2(c) hereof, Seagate and Veritas shall each use its commercially reasonable
efforts to solicit proxies from its stockholders in favor of the adoption and
approval of the items in clauses (i) and (ii) of the preceding sentence, as
relevant, and shall take all other action necessary or advisable to secure the
vote or consent of its stockholders required by the rules of the National
Association of Securities Dealers, Inc., Delaware Law, The New York Stock
Exchange, Inc. and all other applicable legal requirements to obtain such
approval.
(b) Subject to the terms of Section 5.2(c) hereof: (i) the Board of
Directors of Seagate shall recommend that Seagate's stockholders vote in favor
of and adopt and approve this Agreement and the Merger and the transactions
contemplated under the OD Documents at the Seagate Stockholders' Meeting; (ii)
the Proxy Statement shall include a statement to the effect that the Board of
Directors of Seagate has recommended that Seagate's stockholders vote in favor
of and adopt and approve this Agreement and the Merger and the transactions
contemplated under the OD Documents at the Seagate Stockholders' Meeting, (iii)
neither the Board of Directors of Seagate nor any committee thereof shall
withdraw, amend or modify, or propose or resolve to withdraw, amend or modify in
a manner adverse to Veritas, the recommendation of the Board of Directors of
Seagate that the stockholders of Seagate vote in favor of and adopt and approve
this Agreement and the Merger, and, unless this Agreement shall have been
terminated, Seagate shall cause Seagate Software to vote the shares of Veritas
Common Stock it holds in favor of the Share Increase and the Merger.
(c) Notwithstanding the foregoing or anything to the contrary set forth in
this Agreement, nothing in this Agreement shall prevent the Board of Directors
of Seagate from withdrawing, amending or modifying its recommendation in favor
of this Agreement and the Merger (i) Seagate receives a Seagate Superior Offer
(as defined below) and such Seagate Superior Offer is not withdrawn, (ii)
neither Seagate nor any of its agents or representatives has violated any of the
restrictions set forth in Section 5.4(a) hereof, and (iii) the Board of
Directors of Seagate concludes in good faith, after consultation with its
22-B
<PAGE> 485
outside counsel, that, in light of such Seagate Superior Offer, the withholding,
withdrawal, amendment or modification of such recommendation is necessary in
order for the Board of Directors of Seagate to comply with its fiduciary
obligations to the stockholders of Seagate under applicable law. For all
purposes of and under this Agreement, the term "Seagate Superior Offer" shall
mean a bona fide written offer made by a third party to consummate any of the
following transactions: (a) a merger, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
Seagate, pursuant to which the stockholders of Seagate immediately preceding the
consummation of such transaction would hold less than fifty percent (50%) of the
equity interest in the surviving or resulting entity of such transaction (or the
ultimate parent entity thereof); (b) a sale or other disposition by Seagate of
assets and properties (excluding inventory and used equipment sold in the
ordinary course of business) representing more than fifty percent (50%) of
Seagate's assets immediately prior to such sale or other disposition, or (c) the
acquisition by any person or group (including by way of a tender offer or an
exchange offer or issuance by Seagate), directly or indirectly, of beneficial
ownership or a right to acquire beneficial ownership of shares representing more
than fifty percent (50%) of the voting power of the then outstanding shares of
capital stock of the Seagate, in each case on terms that the Board of Directors
of Seagate determines, in its reasonable judgment, after consultation with its
financial advisor, to be more favorable to the stockholders of Seagate, from a
financial point of view, than the terms of this Agreement and the Merger;
provided, however, that any such offer shall not be deemed to be a "Seagate
Superior Offer" if any financing required to consummate the transaction
contemplated by such offer is not committed and is not likely in the judgment of
the Board of Directors of Seagate to be obtained by such third party on a timely
basis. Notwithstanding the foregoing or anything to the contrary set forth in
this Agreement, nothing in this Agreement shall prevent the Board of Directors
of Seagate from withdrawing, amending or modifying its recommendation in favor
of the transactions contemplated by the OD Documents, or terminating the OD
Documents in accordance with their terms.
5.3 Confidentiality. Veritas and Seagate acknowledge that they have
previously entered into a Confidentiality Agreement (the "Confidentiality
Agreement"), which shall continue in full force and effect in accordance with
its terms.
5.4 No Solicitation.
(a) From the execution and delivery of this Agreement and until the earlier
to occur of the Effective Time and termination of this Agreement pursuant to
Section 7.1 hereof, Seagate and its Subsidiaries shall not, and they shall cause
their respective officers, directors, affiliates or employees or any investment
banker, attorney or other advisor or representative retained by any of them not
to, directly or indirectly (i) solicit, initiate, encourage or induce the
making, submission or announcement of any Seagate Acquisition Proposal (as
defined in Section 5.4(b) hereof), (ii) participate in any discussions or
negotiations regarding, or furnish to any person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes or may reasonably be expected to lead to, any Seagate
Acquisition Proposal, (iii) engage in discussions with any person with respect
to any Seagate Acquisition Proposal, (iv) subject to the terms of Section 5.2(c)
hereof, approve, endorse or recommend any Seagate Acquisition Proposal, or (v)
enter into any letter of intent or similar document or any contract, agreement
or commitment contemplating or otherwise relating to any Seagate Acquisition
Transaction (as defined in Section 5.4(b) hereof); provided, however, that until
the date on which this Agreement is approved by the requisite vote of the
stockholders of Seagate, the terms of this Section 5.4(a) shall not prohibit
Seagate from
23-B
<PAGE> 486
furnishing information regarding Seagate and its Subsidiaries to, entering into
a confidentiality or non-disclosure agreement with, or entering into discussions
with, any person or group in response to a Seagate Superior Offer submitted by
such person or group (and not withdrawn) if (a) neither Seagate nor any agents
or representative of Seagate and its Subsidiaries shall have violated any of the
restrictions set forth in this Section 5.4(a), (b) the Board of Directors of
Seagate concludes in good faith, after consultation with its outside legal
counsel, that such action is necessary in order for the Board of Directors of
Seagate to comply with its fiduciary obligations to the stockholders of Seagate
under applicable Law, (c) Seagate receives from such person or group an executed
confidentiality or non-disclosure agreement containing customary limitations on
the use and disclosure of all non-public written and oral information furnished
to such person or group by or on behalf of Seagate and containing terms no less
favorable to the disclosing party than the terms of the Confidentiality
Agreement (including with respect to any standstill arrangements, unless the
standstill arrangements in the Confidentiality Agreement are waived and (d)
prior to furnishing any such non-public information to such person or group, or
entering into negotiations or discussions, Seller notifies Purchaser promptly of
such inquiries, proposals or offers received by, any such information requested
from, or any such discussions or negotiations sought to be initiated or
continued with, any of its representatives indicating, in connection with such
notice, the name of the person and the terms and conditions of any inquiries,
proposals or offers, and furnishes such non-public information to Veritas to the
extent such information has not been previously furnished to Veritas. Seagate
and its subsidiaries shall immediately cease any and all existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any Seagate Acquisition Proposal.
(b) For all purposes of and under this Agreement, the term "Seagate
Acquisition Proposal" shall mean any offer or proposal (other than an offer or
proposal by Veritas) relating to any Seagate Acquisition Transaction. For all
purposes of and under this Agreement, "Seagate Acquisition Transaction" shall
mean any transaction or series of related transactions, other than the
transactions contemplated by this Agreement or the OD Documents, involving: (i)
any acquisition or purchase from Seagate by any person or "group" (as defined
under Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder) of more than fifteen percent (15%) in interest of the
total outstanding voting securities of Seagate, or any tender offer or exchange
offer that if consummated would result in any person or "group" (as defined
under Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder) beneficially owning more than fifteen percent (15%) of
the total outstanding voting securities of Seagate, or any merger,
consolidation, business combination or similar transaction involving Seagate
pursuant to which the stockholders of Seagate immediately preceding such
transaction would hold less than fifteen percent (15%) of the equity interests
in the surviving or resulting entity of such transaction; (ii) any sale, lease
(other than in the ordinary course of business), exchange, transfer, license
(other than in the ordinary course of business), acquisition or disposition of
more than fifteen percent (15%) of the assets and properties of Seagate; or (iv)
any liquidation or dissolution of Seagate, excluding, in all cases any
disposition of the assets covered by the OD Documents.
(c) In addition to the restrictions and obligations of Seagate set forth in
Section 5.4(a) hereof, Seagate as promptly as practicable, and in any event
within twenty-four (24) hours, shall advise Veritas orally and in writing of any
request received by Seagate for non-public information which Seagate reasonably
believes could lead to a Seagate Acquisition Proposal or of any Seagate
Acquisition Proposal, the material terms
24-B
<PAGE> 487
and conditions of such request or Seagate Acquisition Proposal, and the identity
of the person or group making any such request or Seagate Acquisition Proposal.
Seagate shall keep Veritas informed in all material respects of the status and
details (including material amendments or proposed amendments) of any such
request or Seagate Acquisition Proposal.
5.5 Public Disclosure. Veritas and Seagate shall consult with each other
and agree before issuing any press release or otherwise making any public
statement with respect to the Merger, this Agreement, or a Seagate Acquisition
Proposal and shall not issue any such press release or make any such public
statement prior to such agreement, except as may be required by law or any
listing agreement with a national securities exchange or the Nasdaq, in which
case reasonable efforts to consult with the other party hereto shall be made
prior to such release or public statement; provided, however, that no such
consultation or agreement shall be required if, prior to the date of such
release or public statement, Seagate shall have withheld, withdrawn, amended or
modified its recommendation in favor of this Agreement and the Merger or the OD
Documents and the transactions contemplated thereunder.
5.6 Legal Requirements. Each of Veritas, Merger Sub and Seagate shall take
all reasonable actions necessary or desirable to comply promptly with all legal
requirements which may be imposed on them with respect to the consummation of
the Merger and the other transactions contemplated hereby (including, without
limitation, furnishing all information required in connection with approvals of,
or filings with, any Governmental Entity, and prompt resolution of any
litigation prompted hereby), and shall promptly cooperate with, and furnish
information to, the other party hereto to the extent necessary in connection
with any such requirements imposed upon either of them or their respective
subsidiaries in connection with the consummation of the Merger and the other
transactions contemplated hereby. Veritas shall use its commercially reasonable
efforts to take such steps as may be necessary to comply with the securities and
state "blue sky" securities laws of all jurisdictions which are applicable to
the issuance of Veritas Common Stock pursuant to the Merger in accordance with
this Agreement. Seagate shall use its commercially reasonable efforts to assist
Veritas as may be necessary to comply with the securities and state "blue sky"
securities laws of all jurisdictions which are applicable in connection with the
issuance of Veritas Common Stock pursuant to the Merger in accordance with this
Agreement.
5.7 Notification of Certain Matters. Veritas shall give prompt notice to
Seagate, and Seagate shall give prompt notice to Veritas, of the occurrence, or
failure to occur, of any event, which occurrence or failure to occur would be
reasonably likely to cause (i) any representation or warranty contained in this
Agreement to be untrue or inaccurate at the Effective Time, such that the
conditions set forth in Section 6.2(a) or Section 6.3(a) hereof, as the case may
be, would not be satisfied or fulfilled as a result thereof, or (ii) any
material failure of Veritas, Merger Sub or Seagate, as the case may be, or of
any officer, director, employee or agent thereof, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it under
this Agreement. Notwithstanding the foregoing, the delivery of any notice
pursuant to this Section 5.7 shall not limit or otherwise affect the rights and
remedies available hereunder to the party receiving such notice.
5.8 Commercially Reasonable Efforts and Further Assurances. Subject to the
respective rights and obligations of Veritas and Seagate under this Agreement,
each of Veritas and Seagate shall use its respective commercially reasonable
efforts to effectuate
25-B
<PAGE> 488
the Merger and the other transactions contemplated hereby, and to fulfill and
cause to be fulfilled the conditions to the Closing under this Agreement. Each
of Veritas and Seagate, at the reasonable request of the other party hereto,
shall execute and deliver such other instruments, and do and perform such other
acts and things, as may be necessary or desirable for effecting completely the
consummation of the Merger and the other transactions contemplated hereby.
5.9 Indemnification.
(a) From and after the Effective Time, the Surviving Corporation shall
fulfill and honor in all respects the obligations of Seagate pursuant to any
indemnification agreements between Seagate and any of its directors and officers
existing prior to the date hereof to the extent the obligations thereunder
relate to the approval and adoption of the Merger. The Certificate of
Incorporation and Bylaws of the Surviving Corporation shall contain the
provisions with respect to indemnification, exculpation, expense advancement and
elimination of liability for monetary damages relating to the approval and
adoption of the Merger at least as favorable as is set forth in the Certificate
of Incorporation and Bylaws of Seagate, which provisions shall not be amended,
repealed or otherwise modified for a period of six (6) years from the Effective
Time in any manner that would adversely affect the rights thereunder of
individuals who, at the Effective Time, were directors, officers, employees or
agents of Seagate, unless such modification is required by law.
(b) For a period of six (6) years after the Effective Time, Veritas shall
use its commercially reasonable efforts to maintain in effect, if available,
directors' and officers' liability insurance (or purchase tail coverage)
covering those persons who are currently covered by Seagate's directors' and
officers' liability insurance policy on terms comparable to those applicable to
the then current directors and officers of Veritas.
(c) In the event that the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger, or (ii) transfers a material amount of its assets and properties to any
person in a single transaction or a series of related transactions, then, and in
each such case, the Surviving Corporation shall either guaranty the
indemnification obligations of the Surviving Corporation under this Section
5.10, or shall make, or cause to be made, proper provision so that the
successors and assigns of the Surviving Corporation assume the indemnification
obligations of the Surviving Corporation under this Section 5.11 for the benefit
of the parties entitled to the benefits of this Section 5.10 (the "Indemnified
Parties"). The terms and provisions of this Section 5.10 are (a) intended to be
for the benefit of, and shall be enforceable by, each of the Indemnified
Parties, and (b) in addition to, and not in substitution for, any other rights
to indemnification or contribution that any of the Indemnified Parties may have
by contract or otherwise.
(d) This Section 5.9 shall survive any termination of this Agreement and
the consummation of the Merger at the Effective Time, and shall be binding on
all successors and assigns of the Surviving Corporation.
5.10 Tax-Free Reorganization. Neither Seagate nor Veritas shall, nor shall
either permit any of its Subsidiaries to take or cause to be taken any action
that would disqualify the Merger as a "reorganization" within the meaning of
Section 368(a) of the Code; provided, however, that neither party shall have any
liability under this Section 5.10 as a result of any action contemplated
hereunder or by the OD Documents.
26-B
<PAGE> 489
5.11 Nasdaq Listing. Veritas shall authorize for listing on the Nasdaq the
shares of Veritas Common Stock issuable pursuant to the Merger in accordance
with this Agreement, upon official notice of issuance.
5.12 Seagate Affiliate Agreement. Prior to the Seagate Stockholders
Meeting, Seagate shall provide Veritas a complete and accurate list of those
persons who may be deemed to be, in Seagate's reasonable judgment, affiliates of
Seagate within the meaning of Rule 145 promulgated under the Securities Act (a
"Seagate Affiliate"). Seagate shall provide Veritas with such information and
documents as Veritas reasonably requests for purposes of reviewing and verifying
the foregoing list. Seagate shall deliver or cause to be delivered to Veritas as
promptly as practicable on or following the date hereof, but in no event later
than the date the Proxy Statement is filed with the SEC, from each Seagate
Affiliate an executed Affiliate Agreement, in customary form and substance
reasonably satisfactory to Veritas (the "Seagate Affiliate Agreement"), each of
which will be effective as of the Effective Time. Veritas shall be entitled to
place appropriate legends on the certificates evidencing any Veritas Common
Stock to be received by a Seagate Affiliate pursuant to the Merger in accordance
with this Agreement, and to issue appropriate stop transfer instructions to the
transfer agent for the Veritas Common Stock.
5.13 Regulatory Filings; Reasonable Efforts. As soon as practicable
following the execution and delivery of this Agreement, Seagate and Veritas each
shall file with the United States Federal Trade Commission (the "FTC") and the
Antitrust Division of the United States Department of Justice ("DOJ") a
Notification and Report Form relating to the Merger and the other transactions
contemplated hereby as required by the HSR Act, as well as any comparable
pre-merger notification forms required by the merger notification or control
laws and regulations of any applicable jurisdiction, as agreed to by Seagate and
Veritas. Seagate and Veritas each shall promptly (i) supply the other with any
information which may be required in order to effectuate the foregoing filings,
and (ii) supply any additional information which reasonably may be required by
the FTC, the DOJ or the competition or merger control authorities of any other
jurisdiction and which the parties may reasonably deem appropriate.
5.14 Access to Information. From the date hereof until the Effective Date,
Seagate will, and will cause each of its subsidiaries to (i) allow Veritas and
its officers, employees, counsel, accountants, actuaries, consultants and other
authorized representatives ("Representatives") to have full access to the books,
records, contracts, properties, facilities, accountants, actuaries, consultants,
advisors, management and personnel of Seagate and its subsidiaries at all
reasonable times, (ii) furnish promptly to Veritas and its Representatives all
information and documents concerning Seagate and its subsidiaries as Veritas or
its Representatives may reasonably request and (iii) cause the respective
officers, employees and Representatives of Seagate and its subsidiaries to
cooperate in good faith with Veritas and its Representatives in connection with
all such access.
5.15 TRA Matters.
(a) Form. The TRA Rights shall be evidenced by a non-transferable document
in form and substance reasonably satisfactory to Veritas and Seagate, and shall
contain legends to the effect that they are non-negotiable instruments as well
as such other legends as may be required by law. The TRA Rights shall have an
expiration date of March 31, 2003, after which time they shall expire without
further act. After the expiration date of the TRA Rights, any TRA Amounts
received by Veritas and its Affiliates shall be the property of Veritas without
any obligation whatsoever to account therefor to former holders of the TRA
Rights.
27-B
<PAGE> 490
(b) Administration generally. On or prior to the Effective Time, Seagate
shall designate one or more designees (the "Administrators") who shall be
responsible for overseeing collection of the TRA Amounts and coordinating
activities with representatives of Veritas and Purchaser with respect to Seagate
Taxes. Veritas and Seagate will, prior to the Effective Time, cooperate in good
faith with respect to establishing procedures and structures designed to
maximize the aggregate value of the TRA Amount and minimize the amount of
administrative costs. This may include the establishment of segregated accounts,
pass-through trusts or similar devices (collectively, a "Collection Account") to
receive periodic payments of TRA Amounts. The Administrators shall be entitled
to charge the Collection Account a fee of 1% for all amounts deposited therein
and distributed to holders of the TRA Rights.
(c) Collection Amount. Following the Effective Time, Veritas shall forward
to the Collection Account (and notify the Administrators of) any such refunds or
credits after receipt or realization thereof by Veritas.
(d) Payments. Any payments from Veritas required to be paid shall be made
within 10 business days of the receipt of any refund or realization of credit as
the case may be. Any such payments not made within such time period, shall be
subject to an interest charge of 8% per annum.
(e) Investments/Distributions. Amounts deposited in the Collection Account
shall be invested in short-term money markets instruments, and shall be
distributed to holders of TRA Rights on each calendar quarterly end commencing
September 30, 2000.
(f) Conduct of Audits and Other Procedural Matters. The Administrators
shall have the right to initiate any claim for refund, credit or amended return
that would give rise to a TRA Amount, and to control any audit, examination or
contest with respect thereto, except if such audit, examination or contest may
give rise to an indemnification obligation by Purchaser under the
Indemnification Agreement, in which case the provisions of Section 6(d)(i) of
the Indemnification Agreement shall control. Venus shall promptly forward to the
Administrators all written notifications and other written communications,
including if available the original envelope showing any postmark, from any
taxing authority received by Venus or its affiliates relating to the TRA Amount.
(g) Assistance and Cooperation. After the Effective Time, Veritas shall
(and shall cause their respective Affiliates to):
(i) Assist the Administrators in calculating the potential amount of
the TRA Amount and included any Tax Returns prepaid by Veritas claims for
refunds or credits designed to maximize the TRA Amount;
(ii) Cooperate fully in preparing for any audits of, or disputes with
taxing authorities regarding the TRA Amount;
(iii) Make available to the other and to any taxing authority as
reasonably requested all information, records, and documents relating to
Taxes of Veritas, Seagate or any of their respective subsidiaries;
(iv) Provide timely notice to the other in writing of any pending or
threatened Tax audits or assessments relating to refunds or credits
included or potentially includable by individuals in the TRA Amount; and
(v) Furnish the other with copies of all correspondence received from
any taxing authority in connection with any Tax audit which may affect
refunds or credits included or potentially includable in the TRA Amount.
28-B
<PAGE> 491
(h) Exculpation. In performing any duties under this Agreement, the
Administrator shall not be liable to any party for damages, losses, or expenses,
except for negligence or willful misconduct on the part of the Administrator.
The Administrator shall not incur any such liability for (A) any act or failure
to act made or omitted in good faith, or (B) any action taken or omitted in
reliance upon any instrument, including any written statement or affidavit
provided for in this Agreement that the Administrator shall in good faith
believe to be genuine, nor will the Administrator be liable or responsible for
forgeries, fraud, impersonations, or determining the scope of any representative
authority. In addition, the Administrator may consult with legal counsel in
connection with performing the Administrator's duties under this Agreement and
shall be fully protected in any act taken, suffered, or permitted by him/her in
good faith in accordance with the advice of counsel. The Administrator is not
responsible for determining and verifying the authority of any person acting or
purporting to act on behalf of any party to this Agreement.
(i) Dragon Shares. Any Dragon Shares escrowed at the Effective Time or with
respect to which the parties did not mutually agree to a value, shall be added
to the TRA Amount, mutatis mutandis.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger and
the other transactions contemplated hereby shall be subject to the satisfaction
or fulfillment, at or prior to the Effective Time, of the following conditions:
(a) Stockholder Approvals. This Agreement shall have been approved and
adopted, and the Merger shall have been duly approved, by the requisite
vote under applicable law by the stockholders of Seagate. The Share
Increase and the Merger shall have been approved by the requisite vote of
the Veritas stockholders.
(b) Registration Statement Effective; Proxy Statement. The SEC shall
have declared the Registration Statement effective. No stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose, and no
similar proceeding in respect of the Proxy Statement, shall have been
initiated or threatened in writing by the SEC.
(c) No Order; HSR Act. No Governmental Entity shall have enacted,
issued, promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and which has the effect of
making the Merger illegal or otherwise prohibiting consummation of the
Merger. All requirements, if any, under the HSR Act or equivalent foreign
statute, rule, regulation or order relating to the transactions
contemplated hereby shall have expired or terminated early.
(d) Tax Opinions. Veritas and Seagate shall each have received
substantially identical written opinions from their respective counsels,
Willkie Farr & Gallagher and Wilson Sonsini Goodrich & Rosati, Professional
Corporation, in form and substance reasonably satisfactory to them, to the
effect that the Merger should constitute a "reorganization" within the
meaning of Section 368(a) of the Code, and such opinions shall not have
been withdrawn. The parties to this Agreement agree to make reasonable
representations as requested by such counsel for the purpose of rendering
such opinions.
29-B
<PAGE> 492
(e) Closing of OD Documents. The closing of the transactions
contemplated by the OD Documents shall have occurred without waiver of
Section 9.2(a) and (b) or 9.3(a) and (b) of the OD Documents, and pursuant
thereto, Seagate and Star Software shall not have (i) any assets or
properties other than the Designated Assets, or (ii) any Liabilities (other
than the Designated Liabilities) or other obligations (absolute, accrued
contemplated or otherwise) for which Veritas is not entitled to
indemnification under the Indemnification Agreement, and Seagate and
Purchaser shall have provided Veritas with certificates by their respective
Chief Financial Officers to the foregoing effect.
6.2 Additional Conditions to Obligations of Seagate. The obligation of
Seagate to consummate and effect the Merger and the other transactions
contemplated hereby shall be subject to the satisfaction or fulfillment, at or
prior to the Effective Time, of the following conditions, any of which may be
waived, in writing, exclusively by Seagate:
(a) Representations and Warranties. The representations and warranties
of Veritas and Merger Sub contained in this Agreement shall have been true
and correct in all material respects as of the date hereof, except where
the failure to be so true and correct would not, in the aggregate,
reasonably be expected to have a Material Adverse Effect on Veritas. In
addition, the representations and warranties of Veritas contained in this
Agreement shall be true and correct in all material respects on and as of
the Effective Time (except for changes contemplated by this Agreement and
except for those representations and warranties which address matters only
as of a particular date, which shall have been true and correct only as of
such particular date), with the same force and effect as if made on and as
of the Effective Time, except in such cases where the failure to be so true
and correct would not, in the aggregate, reasonably be expected to have a
Material Adverse Effect on Veritas. Seagate shall have received a
certificate with respect to the foregoing signed on behalf of Veritas by
the Chief Executive Officer and the Chief Financial Officer of Veritas.
(b) Agreements and Covenants. Veritas and Merger Sub shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by it
on or prior to the Effective Time, and Seagate shall have received a
certificate to such effect signed on behalf of Veritas by the Chief
Executive Officer and the Chief Financial Officer of Veritas.
6.3 Additional Conditions to the Obligations of Veritas and Merger
Sub. The obligations of Veritas and Merger Sub to consummate and effect the
Merger shall be subject to the satisfaction or fulfillment, at or prior to the
Effective Time, of the following conditions, any of which may be waived, in
writing, exclusively by Veritas:
(a) Representations and Warranties. The representations and warranties
of Seagate contained in this Agreement shall have been true and correct in
all material respects as of the date hereof, except where the failure to be
so true and correct would not, in the aggregate, reasonably be expected to
have a Material Adverse Effect on Seagate. In addition, the representations
and warranties of Seagate contained in this Agreement shall be true and
correct in all material respects on and as of the Effective Time (except
for changes contemplated by this Agreement and except for those
representations and warranties which address matters only as of a
particular date, which shall have been true and correct as of such
particular date), with the same force and effect as if made on and as of
the Effective Time, except in such cases where the failure to be so true
and correct would not, in the aggregate, reasonably be expected to have a
Material Adverse Effect on Seagate. Veritas shall
30-B
<PAGE> 493
have received a certificate with respect to the foregoing signed on behalf
of Seagate by the President and the Chief Financial Officer of Seagate. The
representations and warranties in Section 2.3(b) hereof shall be true and
correct in all material respects.
(b) Agreements and Covenants. Seagate shall have performed or complied
in all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the
Effective Time, and the Veritas shall have received a certificate to such
effect signed on behalf of Seagate by the President and the Chief Financial
Officer of Seagate.
(c) Indemnification Agreement Representations and Warranties. Each of
the representations and warranties of the parties (other than Veritas) in
the Indemnification Agreement (i) to the extent qualified by materiality
shall be true and correct, and (ii) to the extent not qualified by
materiality, shall be true and correct in all material respects, in each of
cases (i) and (ii), on the date of this Agreement and as of the Closing
Date, as if made at and as of such time (except to the extent expressly
made as of an earlier date, in which case as of such date), except as
otherwise contemplated by this Agreement. The Indemnification Agreement
shall be in full force and effect, and each Subsidiary of Purchaser shall
have executed and delivered a joinder agreement in accordance with the
terms of the Indemnification Agreement.
(d) Financing. The Financing (as defined in the OD Documents) shall
have closed on the terms and conditions specified in the Commitment Letters
(as defined in the OD Documents) and no material change in the terms of
such Financing shall have occurred which, in Veritas' reasonable judgment,
would materially and adversely impact Purchaser's ability to timely satisfy
its obligations under the Indemnification Agreement.
ARTICLE VII
TERMINATION, FEES AND EXPENSES; AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of this Agreement and the
Merger by the stockholders of Seagate:
(a) by mutual written consent, duly authorized by the Boards of
Directors of Veritas and Seagate;
(b) by either Seagate or Veritas, if the Merger shall not have been
consummated by December 31, 2000; provided, however, that the right to
terminate this Agreement pursuant to this Section 7.1(b) shall not be
available to any party hereto whose failure to fulfill any obligation under
this Agreement (including, without limitation, such party's obligation
under Section 5.4 hereof) has been a principal cause of, or resulted in,
the failure of the Merger to be consummated on or before such date
(c) by either Seagate or Veritas, if a Governmental Entity shall have
issued an order, decree or ruling or taken any other action, in any case
having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger, which order, decree or ruling is final and
nonappealable;
(d) by either Seagate or Veritas, if (i) the requisite approval of the
stockholders of Seagate under applicable law to approve this Agreement and
the Merger shall not have been obtained by reason of the failure to obtain
the requisite vote upon a vote
31-B
<PAGE> 494
taken at a meeting of the stockholders of Seagate duly convened therefor or
at any adjournment or postponement thereof; and (ii) the required approval
by the stockholders of Veritas of the Share Increase (if not previously
approved) and the Merger shall not have been obtained by reason of the
failure to obtain the required vote at a meeting of Veritas stockholders
duly convened therefor or at any adjournment thereto; provided, however,
that a party's right to terminate this Agreement pursuant to this Section
7.1(d) shall not be available to Seagate if the failure to obtain the
foregoing approval of the stockholders of that party shall have been caused
by that party's action or failure to act in a manner which constitutes a
material breach of this Agreement;
(e) by Seagate, upon a breach by Veritas of any representation,
warranty, covenant or agreement of Veritas in this Agreement, or if any
representation or warranty of Veritas shall have become untrue, in either
case such that the conditions set forth in Section 6.2(a) or Section 6.2(b)
hereof would not be satisfied as of the time of such breach or as of the
time such representation or warranty shall have become untrue; provided,
however, that if such inaccuracy in Veritas' representations and
warranties, or breach by Veritas, is curable, then Seagate may not
terminate this Agreement pursuant to this Section 7.1(e) for thirty-five
(35) calendar days after delivery of written notice to Veritas of such
breach, provided that Veritas continues to exercise commercially reasonable
efforts to cure such breach (it being understood that Seagate may not
terminate this Agreement pursuant to this Section 7.1(e) if such breach by
Veritas is cured during such thirty-five (35)-day period);
(f) by Veritas, upon a breach by Seagate of any representation,
warranty, covenant or agreement of Seagate contained in this Agreement, or
if any representation or warranty of Seagate shall have become untrue, in
either case such that the conditions set forth in Section 6.3(a) or Section
6.3(b) hereof would not be satisfied as of the time of such breach or as of
the time such representation or warranty shall have become untrue,
provided, however, that if such inaccuracy in Seagate's representations and
warranties, or breach by Seagate, is curable then Veritas may not terminate
this Agreement pursuant to this Section 7.1(f) for thirty-five (35)
calendar days after delivery of written notice to Seagate of such breach,
provided that Seagate continues to exercise commercially reasonable efforts
to cure such breach (it being understood that Veritas may not terminate
this Agreement pursuant to this Section 7.1(f) if such breach by Seagate is
cured during such thirty-five (35)-day period);
(g) by Seagate, if (i) prior to the receipt of the requisite approval
of the stockholders of Seagate to this Agreement and the Merger, Seagate
receives a Seagate Superior Offer and the Board of Directors of Seagate
concludes in good faith, after consultation with its outside counsel, that
in light of such Seagate Superior Offer, the termination of this Agreement
in order to accept such Seagate Superior Offer is necessary in order for
the Board of Directors of Seagate to comply with its fiduciary obligations
to the stockholders of Seller under applicable law, and Seagate enters into
an agreement contemplating, or consummates, a Seagate Acquisition
Transaction, and (ii) Seagate has complied with all of its obligations
under Section 5.4 hereof, and (iii) prior to the termination of this
Agreement pursuant to this Section 7.1(g), pays Veritas the Seagate
Termination Fee pursuant to Section 7.3(b)(ii) hereof; provided, that such
termination may take place only after two (2) business days following
Veritas' receipt of written notice advising Veritas that the Board of
Directors of Seagate has received a Seller Superior Offer specifying the
32-B
<PAGE> 495
material terms and conditions of such Seagate Superior Offer (and including
a copy thereof with all accompanying documentation, if in writing),
identifying the person making such Seagate Superior Offer and stating that
it intends to make the determination set forth in clause (i) of this
Section 7.1(g). After providing such notice, Seagate shall provide an
opportunity to Veritas to make such adjustments in the terms and conditions
of this Agreement as would enable Seagate to proceed with its
recommendation to its stockholders without making the determination set
forth in clause (i) of this Section 7.1(g); provided, further, however,
that any such adjustment shall be at the discretion of Veritas at the time;
or
(h) by Veritas, if a Veritas Triggering Event shall have occurred. For
all purposes of and under this Agreement, a "Veritas Triggering Event"
shall be deemed to have occurred if: (i) the Board of Directors of Seagate
(or any committee thereof) shall for any reason have withdrawn or shall
have amended or modified in a manner adverse to Veritas its recommendation
in favor of the adoption and approval of this Agreement or the Merger; (ii)
Seagate shall have failed to include in the Proxy Statement the
recommendation of the Board of Directors of Seagate in favor of the
adoption and approval of this Agreement and the Merger or shall have taken
any action or made any statement inconsistent with such recommendation; or
(iii) a tender or exchange offer relating to securities of Seagate shall
have been commenced by a person unaffiliated with Veritas, and Seagate
shall not have sent to its securityholders pursuant to Rule 14e-2
promulgated under the Securities Act, within ten (10) business days after
such tender or exchange offer is first published sent or given, a statement
disclosing that Seagate recommends rejection of such tender or exchange
offer; or
(i) by Seagate, if: (i) the Board of Directors of Veritas (or any
committee thereof) shall for any reason have withdrawn or shall have
amended or modified in a manner adverse to Seagate its recommendation in
favor of the Share Increase (if not previously approved) and the Merger; or
(ii) Veritas shall have failed to include in the Proxy Statement the
recommendation of the Board of Directors of Veritas in favor of the Share
Increase (if not previously approved) and the Merger.
7.2 Notice of Termination; Effect of Termination. Except as set forth in
Section 7.3(b), any termination of this Agreement pursuant to Section 7.1 hereof
shall be effective immediately upon the delivery of written notice of the
terminating party to the other party hereto. In the event of the termination of
this Agreement pursuant to Section 7.1 hereof, this Agreement shall be of no
further force or effect, except (i) as set forth in this Section 7.2, Section
7.3 hereof and Article VIII hereof, each of which shall survive the termination
of this Agreement without limitation, and (ii) that nothing herein shall relieve
any party from liability for any intentional breach of this Agreement. A change
by the Veritas board of directors of its recommendation of approval of the
Merger and/or the Share Increase shall be an intentional breach by Veritas of
the terms hereof unless Veritas, at the time of such change, had the right to
terminate this Agreement. In the event of the termination of this Agreement
under circumstances whereby the Seagate Termination Fee shall be payable, either
immediately or based upon the occurrence of a subsequent event, the provisions
of any standstill or similar agreement that would prevent an acquisition by
Veritas or any of its affiliates of capital stock or assets of Seagate or any
affiliate of Seagate (such provisions being "standstill provisions") shall
terminate without any further action on the Part of Veritas or Seagate,
providing that (i) only such standstill provisions of any such agreement shall
terminate and the remaining provisions thereof shall remain in full force and
effect in accordance with their terms and (ii) no severability
33-B
<PAGE> 496
provisions of any such agreement shall be interpreted to require the replacement
of such standstill provisions with any other provision.
7.3 Fees and Expenses.
(a) General. Except as set forth in this Section 7.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses, whether or not the
Merger is consummated.
(b) Seagate Payments.
(i) Seagate shall pay to Veritas in immediately available funds,
within one (1) business day after such notice of termination is delivered,
an amount equal to $440,000,000 (the "Seagate Termination Fee") if this
Agreement is terminated by Veritas pursuant to Section 7.1(h) hereof.
(ii) Seagate shall pay Veritas in immediately available funds, prior
to the termination of this Agreement, an amount equal to the Seagate
Termination Fee if this Agreement is terminated by Seagate pursuant to
Section 7.1(g) hereof.
(iii) Seagate shall pay to Veritas in immediately available funds,
within one (1) business day after the date Seagate directly or indirectly
enters into an agreement with any third party with respect to a Seagate
Acquisition Transaction or a Seagate Acquisition Transaction is
consummated, an amount equal to the Seagate Termination Fee if (A) this
Agreement is terminated by Veritas pursuant to Section 7.1(d)(i) hereof and
at such time was not terminable by Seagate pursuant to Section 7.1(d)(ii),
(B) at any time after the date of this Agreement and at or before the
Seagate Stockholder Meeting a Seagate Acquisition Proposal shall have been
publicly announced or otherwise communicated to the Seagate, and (C) within
twelve (12) months of the termination of this Agreement, Seagate directly
or indirectly enters into an agreement with any third party with respect to
a Seagate Acquisition Transaction or a Seagate Acquisition Transaction is
consummated.
(iv) Seagate shall pay to Veritas in immediately available funds,
within one (1) business day after the first to occur of the events set
forth in clause (d) below, an amount equal to the Seagate Termination Fee
if (A) this Agreement is terminated by either party pursuant to Section
7.1(b) hereof and at such time was not terminable by Seagate pursuant to
Section 7.1(d)(ii), (B) at any time after the date of this Agreement and at
or before the Termination Date a Seagate Acquisition Proposal shall have
been publicly announced or otherwise communicated to the Seagate, (C)
following the public announcement or communication of such Seagate
Acquisition Proposal and prior to any such terminations, Seagate shall have
intentionally breached (and not cured after notice thereof) any of its
covenants or agreements set forth in this Agreement in any material
respect, which breach shall have contributed to the failure of the Closing
to occur on or before the Termination Date, and (D) within twelve (12)
months of the termination of this Agreement, Seagate directly or indirectly
enters into an agreement with any third party with respect to a Seagate
Acquisition Transaction or a Seagate Acquisition Transaction is
consummated.
(v) For all purposes of and under this Section 7.3, the term "Seagate
Acquisition Proposal" shall mean any offer or proposal (other than an offer
or proposal by Veritas relating to any Seagate Acquisition Transaction. For
all purposes of and under this Section 7.3, "Seagate Acquisition
Transaction" shall mean any transaction or series of
34-B
<PAGE> 497
related transactions involving: (i) any acquisition or purchase from
Seagate by any person or "group" (as defined under Section 13(d) of the
Exchange Act and the rules and regulations promulgated thereunder) of more
than fifty percent (50%) in interest of the total outstanding voting
securities of Seagate, or any tender offer or exchange offer that if
consummated would result in any person or "group" (as defined under Section
13(d) of the Exchange Act and the rules and regulations promulgated
thereunder) beneficially owning more than fifty percent (50%) of the total
outstanding voting securities of Seagate, or any merger, consolidation,
business combination or similar transaction involving Seagate pursuant to
which the stockholders of Seagate immediately preceding such transaction
would hold less than fifty percent (50%) of the equity interests in the
surviving or resulting entity of such transaction (or the ultimate parent
entity thereof); (ii) any sale, lease (other than in the ordinary course of
business), exchange, transfer, license (other than in the ordinary course
of business), acquisition or disposition of more than fifty percent (50%)
of the assets and properties of Seagate; or (iii) any liquidation or
dissolution of Seagate, excluding in all cases any disposition of the
assets covered by the OD Documents.
(vi) Seagate acknowledges that the agreements contained in this
Section 7.3(b) are an integral part of the transactions contemplated by
this Agreement, and that, without these agreements, Veritas would not enter
into this Agreement.
7.4 Amendment. Subject to applicable law, this Agreement may be amended by
the parties hereto at any time by execution of an instrument in writing signed
on behalf of each of the parties hereto.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other party hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto, and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. Delay in exercising any right under this
Agreement shall not constitute a waiver of such right.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Non-Survival of Representations and Warranties. The representations
and warranties of Seagate and Veritas contained in this Agreement shall
terminate at the Effective Time, and only the covenants and agreements that by
their terms survive the Effective Time shall survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via facsimile (receipt confirmed) to the parties at
the following addresses or facsimile numbers
35-B
<PAGE> 498
(or at such other address or facsimile numbers for a party as shall be specified
by like notice):
(a) if to Seagate, to:
Seagate Technology, Inc.
920 Disc Drive
Scotts Valley, California 95066
Attention: General Counsel
Facsimile No.: 831-438-6675
Telephone No.: 831-438-6550
with copies to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Larry W. Sonsini, Esq.
Facsimile No.: 650-493-6811
Telephone No.: 650-493-9300
and to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
One Market Plaza
Spear Tower
San Francisco, California 94105
Attention: Michael J. Kennedy, Esq.
Facsimile No.: 415-947-2099
Telephone No.: 415-947-2000
and to:
Suez Acquisition Company (Cayman) Limited
c/o Silver Lake Partners, L.P.
2725 Sand Hill Road
Building C, Suite 950
Menlo Park, California 94025
Attention: Dave Roux
Facsimile: 650-233-8125
Telephone: 650-233-8121
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017-3954
Attention: William E. Curbow, Esq.
Facsimile: 212-455-2502
Telephone: 212-455-2000
36-B
<PAGE> 499
and to:
TPG Partners, III, L.P.
201 Main Street, Suite 2420
Fort Worth, Texas 76102
Attention: Richard A. Ekleberry, Esq.
Facsimile: 817-871-4010
Telephone: 817-871-4000
with a copy to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: Paul J. Shim, Esq.
Facsimile: 212-225-3999
Telephone: 212-225-2000
(b) if to Veritas, Merger Sub or the Surviving Corporation, to:
VERITAS Software Corporation
1600 Plymouth Street
Mountain View, California 94043
Attention: General Counsel
Facsimile: 650-526-2581
Telephone: 650-335-8000
with a copy to:
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
Attention: Michael A. Schwartz
Facsimile: 212-728-8111
Telephone: 212-728-8000
8.3 Certain Interpretations.
(a) When a reference is made in this Agreement to a Section or an Exhibit,
such reference shall be to a Section or an Exhibit to this Agreement unless
otherwise indicated.
(b) The words "include," "includes" and "including" when used herein shall
be deemed in each case to be followed by the words "without limitation."
(c) The table of contents and headings contained in this Agreement are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement, or any term or provision hereof.
(d) Reference to the subsidiaries of an entity shall be deemed to include
all direct and indirect subsidiaries of such entity.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties hereto and delivered to the other party hereto, it being understood
that each party hereto need not sign the same counterpart.
37-B
<PAGE> 500
8.5 Entire Agreement. This Agreement and the documents and instruments and
other agreements among the parties hereto as contemplated by or referred to
herein, including the Seagate Disclosure Schedule and the Veritas Disclosure
Schedule (i) constitute the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, it being understood that the Confidentiality Agreement shall continue in
full force and effect until the Closing and shall survive any termination of
this Agreement, and (ii) except as is provided in Section 5.9 hereof, are not
intended to confer upon any other person any rights or remedies hereunder.
8.6 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of such void or unenforceable provision.
8.7 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and provisions hereof in
any court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which they are entitled at law or in equity.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the of the parties. Subject to the preceding sentence, this Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
8.11 Waiver of Jury Trial. EACH OF VERITAS AND SEAGATE HEREBY IRREVOCABLY
WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
(WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE ACTIONS OF VERITAS AND SEAGATE IN THE NEGOTIATION,
ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
[Remainder of Page Intentionally Left Blank]
38-B
<PAGE> 501
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed by their duly authorized respective officers, as of the date first
above written.
VERITAS SOFTWARE CORPORATION
By:
Name:
Title:
VICTORY MERGER SUB, INC.
By:
Name:
Title:
SEAGATE TECHNOLOGY, INC.
By:
Name:
Title:
39-B
<PAGE> 502
ANNEX C
INDEMNIFICATION AGREEMENT
Indemnification Agreement, dated as of March 29, 2000, by and among VERITAS
Software Corporation, a Delaware corporation ("Veritas"), Seagate Technology,
Inc., a Delaware corporation ("Seagate"), Suez Acquisition Company (Cayman)
Limited, a limited company organized under the laws of the Cayman Islands
("SAC"), and each Person who executes a Joinder Agreement (as defined below)
pursuant to Section 4(f) hereof.
WHEREAS, Seagate has determined to sell to SAC (the "Stock Purchase") all
of the outstanding shares of capital stock of the Sold Subsidiaries (as defined
below) pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement")
between Seagate and SAC, dated as of the date hereof;
WHEREAS, Seagate, Veritas and Victory Merger Sub, Inc., a Delaware
corporation and a wholly owned subsidiary of Veritas ("Victory Sub"), have
previously entered into an Agreement and Plan of Merger and Reorganization (the
"Merger Agreement") dated as of the date hereof, providing for the merger of
Victory Sub with and into Seagate (the "Merger");
WHEREAS, consummation of the Stock Purchase is a condition precedent to the
consummation of the Merger;
WHEREAS, it is a condition precedent to the consummation of the Stock
Purchase and the Merger that this Indemnification Agreement shall be in full
force and effect; and
WHEREAS, the parties to this Agreement have determined that it is necessary
and desirable to set forth certain agreements that will govern various tax
matters, indemnity matters and other matters that may arise in connection with
the Stock Purchase and the Merger.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, provisions and covenants contained in this Agreement, and for other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
SECTION 1. Definitions. Capitalized terms used but not defined herein shall
have the meanings ascribed thereto in the Stock Purchase Agreement. The
following terms shall have the following definitions:
"Financing Agreements" means the documents, instruments and agreements
evidencing the Financing as the same may be amended, refinanced, replaced,
modified or supplemented from time to time.
"Loss" or "Losses" means any losses, claims, damages, deficiencies,
liabilities, costs obligations, fines, penalties and expenses of any nature
whatsoever (including reasonable expenses of investigation and reasonable
attorney's fees and disbursements).
"Material Adverse Effect" means a material adverse change in or effect
with respect to the business, results of operations, properties, financial
condition or prospects of SAC and its Subsidiaries, taken as a whole.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association or other business entity.
1-C
<PAGE> 503
"Pre-Purchase Tax Period" means any Tax Period ending on or before the
end of the date of the Stock Purchase.
"Pre-Purchase Taxes" shall mean (i) all liability for Taxes of Seagate
and the Retained Subsidiaries for Pre-Purchase Tax Periods and (ii) all
liability of Seagate and the Retained Subsidiaries for the Pre-Purchase
portion of Taxes of such companies attributable to any Straddle Period as
determined in accordance with Section 6(b) hereof, provided, however, that
Taxes in respect of any transactions as of the date hereof undertaken at
the written direction of Veritas shall be excluded.
"Retained Subsidiary" means any Subsidiary of Seagate that is not a
Sold Subsidiary.
"SAC Indemnitor" means SAC and each Person who executes a Joinder
Agreement pursuant to Section 4(f) hereof.
"Stock Purchase Date" shall mean the date of the Stock Purchase.
"Straddle Period" shall mean a taxable period of Seagate or a Retained
Subsidiary that begins before the Stock Purchase Date and ends after the
Stock Purchase Date.
"Tax" or "Taxes" means (i) any tax, governmental fee or other like
assessment or charge of any kind whatsoever (including, without limitation,
withholding on amounts paid to or by any Person), together with any
interest, penalty, addition to tax or additional amount imposed by any
governmental authority (a "Taxing Authority") responsible for the
imposition of any such tax (domestic or foreign), (ii) liability for the
payment of any amounts of the type described in clause (i) above as a
result of Seagate or any of its Subsidiaries, including the Sold
Subsidiaries, being a member prior to the Stock Purchase Date of an
affiliated, consolidated, combined or unitary group, or being a party to
any agreement or arrangement entered into prior to the Stock Purchase Date
as a result of which liability of Seagate or any of its Subsidiaries,
including the Sold Subsidiaries, to a Taxing Authority is determined or
taken into account with reference to the liability of any other person,
(iii) liability of Seagate or any of its Subsidiaries, including the Sold
Subsidiaries, for the payment of any amount as a result of being party to
any tax sharing agreement or arrangement entered into prior to the Stock
Purchase Date, or with respect to the payment of any amount of the type
described in clause (i) or (ii) above as a result of any express or implied
obligation arising prior to the Stock Purchase Date to indemnify any other
Person and (iv) liability of Seagate or any of its Subsidiaries, including
the Sold Subsidiaries, as a result of any express or implied obligation
arising prior to the Stock Purchase Date to pay any Taxes of any Person or
to "gross up" any Person for income received or deemed received as a result
of any other Person paying Tax Liabilities of such Person.
SECTION 2. Representations and Warranties of the SAC Indemnitors. The SAC
Indemnitors jointly and severally represent and warrant to Veritas as of the
date hereof, as of the Closing Date and as of the date of each Joinder Agreement
as follows, each of which such representations and warranties shall survive the
Closing Date:
(a) Organization and Authority of the SAC Indemnitors. Each of the SAC
Indemnitors is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has all
necessary corporate power and authority to enter into this Agreement, the
Stock Purchase Agreement and
2-C
<PAGE> 504
each Joinder Agreement to which it is a party, to carry out its obligations
hereunder and thereunder and to consummate the transactions contemplated
hereby and thereby. The execution and delivery of this Agreement and the
Stock Purchase Agreement by SAC and each Joinder Agreement by each Person
who executes such Agreement, the performance by the SAC Indemnitors of
their respective obligations hereunder and thereunder and the consummation
by the SAC Indemnitors of the transactions contemplated hereby and thereby
have been duly authorized by all requisite corporate action on the part of
the SAC Indemnitors. This Agreement and the Stock Purchase Agreement have
been, and each Joinder Agreement will be, duly executed and delivered by
the SAC Indemnitor party thereto, and (assuming due authorization,
execution and delivery by each of the other respective parties thereto)
each of this Agreement, the Stock Purchase Agreement and each Joinder
Agreement constitutes or, when executed and delivered in accordance with
the terms hereof, will constitute a legal, valid and binding obligation of
the SAC Indemnitor Party thereto enforceable against the SAC Indemnitor
party thereto in accordance with its terms.
(b) No Conflict. The execution, delivery and performance of this
Agreement and the Stock Purchase Agreement by SAC and each Joinder
Agreement by each Person who executes such Agreement does not and will not
after giving effect to the transactions contemplated by the Stock Purchase
Agreement and the Financing (i) violate, conflict with or result in the
breach of any provision of the charter or by-laws (or similar
organizational documents) of any SAC Indemnitor, (ii) violate or conflict
with any provision of law, or any order, judgment or decree of any court or
other governmental or other regulatory authority applicable to any SAC
Indemnitor or (iii) violate, conflict with, result in any breach of,
constitute a default (or event which with the giving of notice or lapse of
time, or both, would constitute a default) under any material contract,
lease, loan agreement, mortgage, security agreement, trust indenture or
other agreement or instrument to which any SAC Indemnitor is a party or by
which any SAC Indemnitor is bound or to which any SAC Indemnitor's
properties or assets is subject or (iv) result in the creation of any lien,
charge or encumbrance of any kind whatsoever on any of the properties or
assets of any SAC Indemnitor.
(c) Consents and Approvals. The execution, delivery and performance of
this Agreement and the Stock Purchase Agreement by SAC and each Joinder
Agreement by each Person who executes such Agreement does not and will not
require any material consent, approval, authorization, waiver or other
order of, action by, filing with or notification to any governmental or
regulatory authority, domestic or foreign, except as will be made or
obtained prior to Closing by the SAC Indemnitor party thereto and remains
in full force and effect.
SECTION 3. Representations and Warranties of Veritas. Veritas represents
and warrants to SAC as of the date hereof and as of the Closing Date as follows,
each of which such representations and warranties shall survive the Closing
Date:
(a) Organization and Authority of Veritas. Veritas is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all necessary corporate power and
authority to enter into this Agreement and the Merger Agreement, to carry
out its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Merger Agreement by Veritas, the performance by
Veritas of its obligations hereunder and thereunder and the
3-C
<PAGE> 505
consummation by Veritas of the transactions contemplated hereby and thereby
have been duly authorized by all requisite corporate action on the part of
Veritas. This Agreement and the Merger Agreement have been duly executed
and delivered by Veritas, and (assuming due authorization, execution and
delivery by each of the other respective parties hereto and thereto) this
Agreement and the Merger Agreement constitute legal, valid and binding
obligations of Veritas enforceable against Veritas in accordance with their
terms.
(b) No Conflict. The execution, delivery and performance of this
Agreement and the Merger Agreement by Veritas does not and will not (i)
violate, conflict with or result in the breach of any provision of the
charter or by-laws of Veritas, (ii) violate or conflict with any provision
of law, or any order, judgment or decree of any court or other governmental
or other regulatory authority applicable to Veritas or (iii) violate,
conflict with, result in any breach of, constitute a default (or event
which with the giving of notice or lapse of time, or both, would constitute
a default) under any material contract, lease, loan agreement, mortgage,
security agreement, trust indenture or other agreement or instrument to
which Veritas is a party or by which Veritas is bound or to which any of
Veritas properties or assets is subject or (iv) result in the creation of
any lien, charge or encumbrance of any kind whatsoever on any of the
properties or assets of Veritas.
(c) Consents and Approvals. The execution, delivery and performance of
this Agreement and the Merger Agreement by Veritas does not and will not
require any material consent, approval, authorization, waiver or other
order of, action by, filing with or notification to any governmental or
regulatory authority, domestic or foreign, except as has been made or
obtained prior to Closing by Veritas and remains in full force and effect.
SECTION 4. Certain Covenants.
(a) Access to Books and Records of SAC; Financial Statements and
Reports. Upon the request of Veritas, SAC shall provide to representatives of
Veritas and its Affiliates reasonable access to its books and records and shall
cause its auditors to provide to the auditors of Veritas and its Affiliates
reasonable access to SAC's auditors' work papers. For as long as SAC is required
to do so, SAC shall provide Veritas with copies of any annual or quarterly
financial statements and reports that it is required to deliver to the lenders
providing senior financing in the Financing, and any requests for waivers of any
term or provisions in the Financing Documents, in each case, at the same times
provided for in the Financing Agreements. The provisions contained in this
Section 4(a) shall terminate and be of no further effect from and after the
fifth anniversary of the Stock Purchase Date.
(b) Retention of Documents. Subject to Section 6(f) hereof, each of the SAC
Indemnitors agrees that it will preserve all documentation relating to the
transactions contemplated by the Stock Purchase Agreement or this Agreement and
each of Veritas and Seagate agrees that it will preserve all documentation
relating to (i) Seagate, the Sold Subsidiaries, and the Retained Subsidiaries
for any Pre-Purchase Tax Period and any Straddle Period, and (ii) the Merger
Agreement, Designated Assets and Designated Liabilities (other than
documentation transferred to SAC pursuant to the terms of the Stock Purchase
Agreement), in each case to the extent required by applicable law or by such
party's document retention policies, whichever is longer, as in effect from time
to time. The provisions contained in this Section 4(b) shall terminate and be of
no further effect from and after the eighth anniversary of the Stock Purchase
Date.
4-C
<PAGE> 506
(c) Notice of Certain Events. SAC shall promptly, but in no event more than
five business days after receiving notification or obtaining knowledge thereof,
provide written notice to Veritas of any event which would have a Material
Adverse Effect or materially impair the ability of any SAC Indemnitor to perform
fully its obligations hereunder.
(d) Conduct of Business. Upon and after the Closing Date, SAC will
preserve, renew and keep in full force and effect its corporate existence and
take all reasonable action to maintain all rights, privileges and franchises
necessary or desirable in the normal conduct of its business.
(e) Financing Agreements. Prior to the Closing, SAC shall furnish to
Veritas true and complete copies of the Financing Agreements and, promptly
following any amendments thereto, true and complete copies of such amendments.
The provisions contained in this Section 4(e) shall terminate and be of no
further effect from and after the fifth anniversary of the Stock Purchase Date.
(f) Joinder Agreements. On the Closing Date, SAC shall cause each of the
Sold Subsidiaries to execute and deliver to Veritas a Joinder Agreement in the
form of Annex I hereto (a "Joinder Agreement"). Thereafter, SAC shall cause any
Person that becomes a Subsidiary of SAC to, on the date such Person becomes a
Subsidiary of SAC, execute and deliver to Veritas a Joinder Agreement. Any
Person executing a Joinder Agreement shall, upon executing the same, deliver to
Veritas a certified copy of the charter and by-laws, or similar organizational
documents, of such Person together with resolutions of the Board of Directors
(or comparable governing body) of such Person approving the execution and
delivery of the Joinder Agreement.
SECTION 5. Indemnification. In addition to the obligations of the parties
contained in Section 6 hereof, from and after the Closing Date:
(a) Each of the SAC Indemnitors jointly and severally agrees to
indemnify, defend and hold harmless Veritas and Seagate and their
respective Affiliates including the Retained Subsidiaries (the "Veritas
Indemnitees") from and against any and all Losses as they are incurred or
suffered by any Veritas Indemnitee arising out of or in connection with or
related to (but only to the extent arising out of or in connection with or
related to):
(i) all Liabilities (other than Designated Liabilities and other
than in respect of Taxes, which are the subject of Section 6 hereof)
arising out of or related to (A) the ownership, operations or conduct by
Seagate and its predecessors or Affiliates (other than Veritas and its
Subsidiaries) of their respective businesses, properties, assets or
liabilities on or prior to the Closing Date, or (B) the ownership,
operations or conduct by SAC or any of its Subsidiaries of their
respective businesses, properties, assets or liabilities from and after
the Closing Date;
(ii) the enforcement by the Veritas Indemnitees of their respective
rights under this Agreement;
(iii) any breach by SAC of any agreement, obligation, covenant,
representation or warranty contained in this Agreement, the Stock
Purchase Agreement or any agreement or document entered into in
connection therewith or delivered pursuant thereto to which SAC is a
party.
(b) Veritas and Seagate agree to indemnify, defend and hold harmless
SAC and each of its Subsidiaries from and against any and all Losses, as
they are incurred or
5-C
<PAGE> 507
suffered by SAC or its Subsidiaries, arising out of or in connection with
or related to (but only to the extent arising out of or in connection with
or related to):
(i) all Designated Liabilities;
(ii) all Liabilities of or related to the ownership, operations or
conduct by Seagate or the Retained Subsidiaries of their respective
businesses, properties, assets or liabilities subsequent to the Closing
Date;
(iii) the enforcement by SAC and its Subsidiaries of their
respective rights under this Agreement; and
(iv) any breach by Veritas of any agreement, obligation, covenant,
representation or warranty contained in this Agreement, the Merger
Agreement or any agreement or document entered into in connection
therewith or delivered pursuant thereto to which Veritas is a party.
SECTION 6. Taxes.
From and after the Closing Date:
(a) Each of the SAC Indemnitors jointly and severally agrees to
indemnify and hold the Veritas Indemnitees harmless from all Losses (other
than Designated Liabilities) attributable to (i) Pre-Purchase Taxes of
Seagate and the Retained Subsidiaries, and (ii) Taxes, whenever arising, of
the Sold Subsidiaries or attributable to assets transferred to the Sold
Subsidiaries in connection with the Stock Purchase and the Merger;
provided, however, that the SAC Indemnitors shall not be obligated to
indemnify the Veritas Indemnitees for any Taxes attributable to, or arising
from, the transactions contemplated by the OD Documents (as defined in the
Stock Purchase Agreement), other than the Split and the sale of shares of
the capital stock of the Sold Subsidiaries (including any gain from any
Section 338(h)(10) election made with respect to such sale).
(b) For purposes of determining whether Taxes are Pre-Purchase Taxes
described in clause 6(a)(i) above, in the case of a Straddle Period of
Seagate or a Retained Subsidiary, the SAC Indemnitors shall be solely
responsible for all Taxes attributable to the portion of the period ending
on, and which includes, the Stock Purchase Date, and Veritas shall be
solely responsible for all Taxes attributable to the portion of the period
which begins after the Stock Purchase Date. For purposes hereof, the
portion of any Tax that is attributable to the portion of a Straddle Period
up to and including the Stock Purchase Date shall be (i) in the case of a
Tax that is not based on net income, gross income, sales or gross receipts
(including real property taxes), the total amount of such Tax for the
period in question multiplied by a fraction, the numerator of which is the
number of days in the Straddle Period up to and including the Stock
Purchase Date, and the denominator of which is the total number of days in
such Straddle Period, and (ii) in the case of a Tax that is based on any of
net income, gross income, sales or gross receipts, the Tax that would be
due with respect to the portion of the Straddle Period through and
including the Stock Purchase Date, if such portion of the Straddle Period
were a separate taxable period, except that exemptions, allowances,
deductions or credits that are calculated on an annual basis (such as the
deduction for depreciation or capital allowances) shall be apportioned on a
per diem basis.
The Veritas Indemnitees shall indemnify and hold harmless the SAC
Indemnitors from and against (i) any Taxes of Seagate for which the SAC
Indemnitors are
6-C
<PAGE> 508
not obligated to indemnify the Veritas Indemnitees under Section 6(a), and
(ii) any Taxes arising out of or attributable to the breach of any
representation or covenant contained in this Indemnification Agreement by
the Veritas Indemnitees.
With regard to any Loss for which indemnification is payable
hereunder, such payment shall be treated for federal, state, local and
foreign tax purposes as an adjustment to the Purchase Price in the Stock
Purchase Agreement, unless otherwise required under applicable law. The
amount of any such payment shall be net of any Tax on the Indemnified Party
arising from such payment and shall be adjusted to take into account any
net Tax benefit or net Tax detriment realized by the Indemnified Party that
arises from the occurrence of the Loss for which such payment was made;
provided that no payment shall be made by the SAC Indemnitors in respect of
any Taxes payable by any Veritas Indemnitee in respect of an
indemnification payment hereunder (the "Gross-Up Amount") except if and to
the extent that the aggregate cumulative taxable income of the Veritas
Indemnitees that would otherwise give rise to Gross-Up Amounts exceeds the
Available Loss Amount (as reduced from time to time to the extent used to
reduce Pre-Purchase Taxes). The "Available Loss Amount" shall mean an
amount determined by the Closing Date or as soon as practicable thereafter
by a Big Five accounting firm mutually selected by SAC and Veritas as being
equal to the best available estimate as of the date of determination of the
excess of (x) the aggregate losses of Seagate and its consolidated group
arising on or before the Stock Purchase Date or arising from the
transactions contemplated by the Stock Purchase Agreement or Merger
Agreement (but not taking into account any gain or income recognized in
respect of the Designated Assets in Parts A, B and C of Schedule II of the
Merger Agreement), including the exercise of options in connection with the
Merger or the Stock Purchase Agreement, over (y) the amount of such losses
as are estimated will be taken into account in determining the TRA Amount.
(c)(i) A draft of all Tax Returns relating to Seagate and the Retained
Subsidiaries which are to be filed after the Stock Purchase Date, but which
relate to a Pre-Purchase Tax Period or Straddle Period, including the
federal consolidated income Tax Return of the affiliated group of which
Seagate is the common parent for the period ending with the Merger, shall
be prepared by Ernst & Young or any other Big Five accounting firm (the
"Tax Return Preparer") chosen by SAC. Any such Tax Return shall be prepared
in a manner consistent with past practice and without a change of any
election or any accounting method. A copy of such draft shall be furnished
to Veritas at least 30 days prior to the due date for each such Tax Return
for review and comment. Veritas shall be entitled to suggest such revisions
to each such Tax Return as it, in its good faith belief, considers
appropriate to minimize the risk of an audit adjustment to such Tax Return,
which suggestions shall be considered in good faith by SAC. If Veritas
reasonably objects to any position taken in such draft Tax Return, Seagate
shall amend such draft Tax Return to reflect an alternative position
suggested by Veritas, unless Seagate provides Veritas with an opinion from
the Tax Return Preparer that there is substantial authority (within the
meaning of Section 6662 of the Code and applicable Treasury regulations) to
support the initial position. All other decisions regarding Tax Returns
shall be made by SAC. Veritas shall execute and file such Tax Returns as so
revised on a timely basis and shall pay the Taxes shown due on such Tax
Return. SAC will pay over to Veritas the amount of Taxes shown due at least
five days prior to the date such Tax Return is to be filed. SAC agrees that
it shall be responsible for the preparation and filing of all Tax Returns
of the Sold Subsidiaries and pay the Tax shown due thereon.
7-C
<PAGE> 509
(ii) The parties shall cooperate with each other in the preparation of
any Tax Return and the conduct of any audit or other proceeding, judicial
or administrative (collectively, a "Tax Proceeding"), involving Taxes of
Seagate, the Sold Subsidiaries and the Retained Subsidiaries. Veritas and
SAC, without charge, shall provide the requesting party with such
assistance and documents as may be reasonably requested by such party in
connection with the preparation of any return or the conduct of any audit
or other Tax Proceeding. Veritas and SAC agree to keep each other fully
informed of all matters relating to any Tax Return, or Tax Proceeding,
including without limitation any settlement negotiations in the event that
such Tax Proceeding may involve Taxes for which an indemnity obligation may
arise under this Section 6.
Notwithstanding anything else to the contrary in this Section 6, the
obligations of the SAC Indemnitors pursuant to this Section 6 shall be
calculated by assuming no election has been made pursuant to Section
172(b)(3) of the Code, Treasury Regulation section 1.1502-21(b)(3), or any
similar or successor provision, to waive the carryback of losses arising
from the exercise of options in connection to the Merger or the Stock
Purchase or any losses arising on or before the Stock Purchase Date and by
assuming that all losses, credits and other tax attributes are used in the
order provided under the applicable provisions of the Code and Treasury
Regulations.
(d)(i) If a claim in respect of Taxes (a "Tax Claim") is made or
threatened by any Taxing Authority that, if successful, could result in an
indemnity obligation under Section 6, Veritas shall promptly notify SAC,
stating the nature and basis of such claim and the amount thereof, to the
extent known. Failure to give such notice shall not relieve the SAC
Indemnitors from any liability that they may have on account of this
indemnification or otherwise, except to the extent that the SAC Indemnitors
are materially prejudiced in the defense of such claim thereby. SAC will
have the right, at its option, upon timely notice to Veritas, to assume at
its own expense control of any audit or other defense of such Tax Claim
with its own counsel, and by assuming such control will be deemed to have
acknowledged its indemnification liability for such claim. SAC's right to
control such a Tax Claim will be limited to issues in respect of which
amounts in dispute would be paid by the SAC Indemnitors or for which the
SAC Indemnitors would be liable pursuant to Section 6. Costs of such Tax
Claims are to be borne by the SAC Indemnitors unless the Tax Claim relates
to a Straddle Period.
(ii) In the case of any Tax Proceeding involving liability for Tax of
Seagate, a Retained Subsidiary or any Sold Subsidiary for which Seagate or
a Retained Subsidiary could be liable if such Tax were unpaid (without
regard to any indemnity obligation of SAC), (A) Veritas at its expense and
through counsel of its choosing, shall have the right to observe all
hearings, trials and other proceedings, attend all settlement and other
conferences and receive copies of all material briefs and submissions and
(B) notwithstanding the control rights granted to SAC in clause (i) above,
Veritas shall have the right to control the Tax Proceeding and make all
decisions in respect thereof in the case of any Tax proceeding involving
the liability for Tax of Seagate or the Retained Subsidiaries if Veritas
waives its right to obtain indemnity under this Section 6.
(e) If the parties disagree as to the amount of any payment to be made
under or on any other matter arising under this Section 6, the parties
shall attempt in good faith to resolve such dispute, and any agreed-upon
amount shall be paid to the appropriate party. If such dispute is not
resolved within 15 days following written
8-C
<PAGE> 510
notice from any party hereto to an other party hereto that a dispute
subject to this subsection (f) exists, then the parties shall jointly
retain an independent accounting firm to resolve the dispute. If and to the
extent that a dispute presents legal issues, the independent accounting
firm shall have authority to consult an independent law firm. The fees of
the independent accounting firm and the independent law firm shall be borne
by the party that does not substantially prevail in the dispute; the
independent accounting firm shall make a determination regarding liability
for expenses. The decision of such independent accounting firm and/or the
independent law firm shall be rendered within ten (10) days following final
submissions by the parties to such firm and shall be final and binding on
all parties; provided, however, that if there is a subsequent adjudication
or other determination of a fact or matter assumed, but not decided in the
decision of such accounting firm or law firm, the decision of such
accounting firm or law firm shall be appropriately adjusted and the parties
shall adjust the payments made accordingly. Following the decision of the
independent accounting firm and/or the independent law firm, the parties
shall each take or cause to be taken any action that is necessary or
appropriate to implement such decision of the independent accounting firm
and/or the independent law firm.
(f) Notwithstanding any other provision of this Agreement, Veritas, on
the one hand, and SAC, on the other hand, shall retain all Tax Returns,
schedules and workpapers, and all material records or other documents
relating thereto, until the later of (i) sixty (60) days following the
expiration of the statute of limitations (including extensions, waivers and
mitigations thereof) of the taxable years to which such Tax Returns and
other documents relate or (ii) one hundred twenty (120) days after the
delivery of notice to the other party to the effect that it shall dispose
of such Tax Returns or other documents, unless it is requested by such
party within one hundred twenty (120) days of delivery of such notice (with
which request it shall comply within thirty (30) days of receipt) that it
transfer such Tax Returns or other documents to such other party. Any
information obtained under this Section 6 shall be kept confidential,
except as may be otherwise necessary in connection with the filing of Tax
Returns or claims for refund or in conducting any audit or other
proceeding.
SECTION 7. Termination of Tax Sharing Agreement. All tax sharing or similar
agreements (if any) between Seagate and its Affiliates, on the one hand, and the
Sold Subsidiaries, on the other, are terminated as of the Closing Date without
any further liability to any party thereto and shall be of no further force and
effect. All claims for indemnification for Taxes between the parties shall be
made and resolved in accordance with the terms of this Agreement.
SECTION 8. [Reserved]
SECTION 9. Indemnification Procedure.
(a) Except as may be otherwise provided pursuant to Section 6 hereof, any
party entitled to indemnification hereunder (each, an "Indemnified Party")
shall, with respect to claims asserted against any such Indemnified Party by any
third party (a "Third-Party Claim"), give written notice to the party against
whom indemnification is sought (the "Indemnifying Party") of any liability which
might give rise to a claim for indemnity hereunder within thirty (30) days of
the receipt of any written claim or notice from any such third party, but no
later than twenty (20) days prior to the date any answer, responsive pleading or
other response may be due with respect thereto, and with respect to any other
matter for which any Indemnified Party may seek indemnification hereunder, the
9-C
<PAGE> 511
Indemnified Party shall give prompt written notice to the Indemnifying Party of
any liability which might give rise to a claim for indemnity; provided, however
that any failure to give such notice will not release the Indemnifying Party
from its obligations hereunder except to the extent that the rights of the
Indemnifying Party are materially prejudiced thereby.
(b) Except with respect to claims governed by Section 6 hereof which shall
be governed by the provisions thereof, the Indemnifying Party, upon receipt of
such notice, shall be entitled to participate in or, at the Indemnifying Party's
option, assume at its own expense the defense, appeal or settlement of such
Third-Party Claim with respect to which such indemnity has been invoked with
counsel of its own choosing (who shall be reasonably satisfactory to the
Indemnified Party); provided, however, that if the Indemnifying Party assumes
the defense, appeal or settlement of such Third-Party Claim, (i) the Indemnified
Party shall be entitled to employ one counsel to represent itself if an actual
conflict of interest exists in the opinion of counsel to the Indemnified Party
between the Indemnifying Party and the Indemnified Party in respect of such
Third-Party Claim and in that event and only in that event the reasonable fees
and expenses of such counsel shall be paid by the Indemnifying Party (it being
understood that all Indemnified Parties may employ not more than one counsel to
represent them at the expense of the Indemnifying Party) and (ii) the
Indemnified Party shall nevertheless be entitled to participate in (but not
direct) the defense thereof with counsel of its own choice and, subject to
clause (i) above, at its own expense. Any Indemnified Party is hereby authorized
prior to the date on which it receives written notice from the Indemnifying
Party that it intends to assume the defense, appeal or settlement of such
Third-Party Claim, to file any motion, answer or other pleading and take such
other action which it shall reasonably deem necessary to protect its interest or
that of the Indemnifying Party until the date on which the Indemnified Party
receives such notice from the Indemnifying Party.
(c) No claim or demand may be settled by the Indemnified Party without the
consent of the Indemnifying Party, which consent shall not be unreasonably
delayed or withheld. Unless the claim or demand seeks only dollar damages (all
of which are to be paid by the Indemnifying Party), no such claim or demand may
be settled by the Indemnifying Party without the consent of the Indemnified
Party, which consent shall not be unreasonably delayed or withheld.
(d) The parties agree to cooperate in defending such Third-Party Claims and
the Indemnified Party shall provide such cooperation and such access to its
books, records and properties as the Indemnifying Party may reasonably request
with respect to any matter for which indemnification is sought hereunder, and
the parties hereto agree to cooperate with each other in order to insure the
proper and adequate defense thereof.
(e) With regard to Third-Party Claims for which indemnification is payable
hereunder, indemnification shall be paid by the Indemnifying Party within five
(5) business days following the earlier to occur of:
(i) entry of a final non-appealable judgment by a court of competent
jurisdiction or arbitration panel against an Indemnified Party which has
not been stayed pending appeal; or
(ii) a settlement of the claim, in accordance with the terms of such
settlement.
With regard to any claim for Taxes subject to Section 6 hereof,
indemnification shall be paid by the SAC Indemnitees within five (5) business
days following receipt by SAC
10-C
<PAGE> 512
of written notice from Veritas stating that any amount subject to
indemnification under such Section 6 has been paid by Veritas and the amount
thereof and the indemnity payment requested.
With regard to any other claim for which indemnification is payable
hereunder, indemnification shall be paid promptly by the Indemnifying Party upon
demand by the Indemnified Party but in any event within thirty (30) business
days following any such demand, provided that any such demand shall include a
reasonably detailed description of the claims giving rise to such demand.
(f) The Indemnifying Parties agree to reimburse the Indemnified Parties for
any indemnifiable Losses under the provisions of this Agreement as such Losses
are incurred, provided, however, that if it is finally determined that any
Indemnified Party was not entitled to any amount paid as indemnity with respect
to such Losses, such Indemnified Party shall promptly refund all amounts to
which such Indemnified Party was not entitled to the Indemnifying Parties that
paid such amounts.
SECTION 10. No Contribution. The Indemnifying Parties shall not be entitled
to seek or obtain any contribution, reimbursement or other participation, direct
or indirect, from any Indemnified Party in respect of any payment made or to be
made by any Indemnifying Party hereunder or arising out of this Agreement,
notwithstanding the fact that the Loss for which any Indemnifying Party is
liable results from or is contributed to by any breach by any Indemnified Party
or any misrepresentation by any Indemnified Party contained in the Merger
Agreement, the Stock Purchase Agreement, this Agreement or any agreement,
document, instrument or schedule referred to herein or therein or contemplated
hereby or thereby.
SECTION 11. Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect;
provided, however that if any mutual covenant contained herein is declared
invalid or unenforceable with respect to Veritas and its Affiliates (including
Seagate and any Retained Subsidiary following the Closing), on the one hand, or
SAC and its Affiliates, on the other hand, by any court of competent
jurisdiction or governmental authority, such mutual covenant shall become
invalid or unenforceable with respect to the opposite group to such covenant and
provided further, that this Section 11 shall not be construed to affect any
other rights of any party hereto under applicable principles of contract law,
including without limitation the principles of failure of consideration and
mutual dependency.
SECTION 12. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered in person, by verified telecopy, by expedited delivery
service (such as Federal Express) or by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties as follows:
(i) if to Veritas (and, after Closing, Seagate), to:
VERITAS Software Corporation
1600 Plymouth Street
Mountain View, California 94043
Attention: General Counsel
Facsimile: 650-526-2581
Telephone: 650-335-8000
11-C
<PAGE> 513
with a copy to:
Willkie Farr & Gallagher
787 Seventh Avenue
New York, NY 10019
Attention: Michael A. Schwartz, Esq.
Facsimile: 212-728-8111
Telephone: 212-728-8000
(ii) if to Seagate (prior to Closing), to:
Seagate Technology, Inc.
920 Disc Drive
P.O. Box 66360
Scotts Valley, California 95067
Attention: General Counsel
Facsimile: 831-438-6675
Telephone: 831-439-5370
with a copy to:
Wilson Sonsini Goodrich & Rosatti
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Larry W. Sonsini, Esq.
and to:
Wilson Sonsini Goodrich & Rosatti
Professional Corporation
One Market Street
Spear Tower, Suite 3300
San Francisco, California 94105
Attention: Michael J. Kennedy, Esq.
Facsimile: 415-947-2099
Telephone: 415-947-2000
(iii) if to SAC, to:
Suez Acquisition Company (Cayman) Limited
c/o Silver Lake Partners, L.P.
2725 Sand Hill Road
Building C, Suite 950
Attention: Dave Roux
Facsimile: 650-2338125
Telephone: 650-233-8121
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017-3954
Attention: William Curbow, Esq.
Facsimile: 212-455-2502
Telephone: 212-455-2000
12-C
<PAGE> 514
and to:
TPG Partners III, L.P.
201 Main Street, Suite 2420
Fort Worth, Texas 76102
Attention: Richard A. Ekleberry, Esq.
Facsimile: 817-871-4010
Telephone: 817-871-4000
with a copy to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: Paul J. Shim, Esq.
Facsimile: 212-225-3999
Telephone: 212-225-2000
Such notice shall be effective on the day following receipt of delivery in
person, by verified telecopy or by expedited delivery service and shall be
effective four days after mailing in accordance with the foregoing. The person
to whom notice is to be given, and any address, may be changed from time to time
in the manner set forth above (provided that any such change shall be effective
only upon receipt thereof).
SECTION 13. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof. Venue for any legal action under this Agreement shall be in the
federal or state courts located in the State and County of New York, All parties
hereunder hereto hereby submit themselves to the jurisdiction of such courts for
the purpose of this Agreement and hereby waive trial by jury in any action,
counterclaim or proceeding of any kind arising under or out of or in connection
with this Agreement, the negotiations leading thereto, the inducements to the
parties to enter into this Agreement and to the transactions it contemplates.
SECTION 14. Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
SECTION 15. Parties-in-Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to confer upon any other person any rights,
benefits or remedies of any nature whatsoever under or by reason of this
Agreement.
SECTION 16. Counterparts. This Agreement may be executed in two
counterparts, each of which shall be deemed to be an original, but both of which
shall constitute one and the same agreement, provided that at least one
counterpart is executed by each party herein named.
SECTION 17. Successors. All agreements of the parties in this Agreement
shall bind their respective successors, provided that upon written request by
SAC following the sale of any of its Subsidiaries to an unaffiliated third
party, Veritas shall execute and deliver a release of such Subsidiary of its
obligations hereunder.
SECTION 18. Assignment. This Agreement is not assignable by either party
hereto without the prior written consent of the other party hereto.
13-C
<PAGE> 515
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
day and year first above mentioned.
VERITAS SOFTWARE CORPORATION
By:
Its:
SEAGATE TECHNOLOGY, INC.
By:
Its:
SUEZ ACQUISITION COMPANY (CAYMAN)
LIMITED
By:
Its:
14-C
<PAGE> 516
ANNEX D
CONSOLIDATED AMENDMENT AND CONSENT
CONSOLIDATED AMENDMENT TO
STOCK PURCHASE AGREEMENT, AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION, AND INDEMNIFICATION AGREEMENT, AND CONSENT
THIS AMENDMENT TO STOCK PURCHASE AGREEMENT, AGREEMENT AND PLAN OF MERGER
AND REORGANIZATION, AND INDEMNIFICATION AGREEMENT, AND CONSENT (this
"AGREEMENT") is made and entered into as of August 29, 2000 by and among Suez
Acquisition Company (Cayman) Limited, a limited company organized under the laws
of the Cayman Islands ("SUEZ"), Seagate Technology, Inc., a Delaware corporation
("SEAGATE"), Seagate Software Holdings, Inc., a Delaware corporation ("SSHI"),
VERITAS Software Corporation, a Delaware corporation ("VERITAS"), and Victory
Merger Sub, Inc., a Delaware corporation ("MERGER SUB").
RECITALS
A. On March 29, 2000, Suez, Seagate and SSHI entered into a Stock Purchase
Agreement (the "STOCK PURCHASE AGREEMENT") pursuant to which, among other
things, Seagate and SSHI agreed to sell to Suez (or one of its Designees), and
Suez agreed to purchase (or cause one of its Designees to purchase) from Seagate
and SSHI, all outstanding Shares of the Sold Subsidiaries (as such terms are
defined in the Stock Purchase Agreement) upon the terms and subject to the
conditions set forth therein. Capitalized terms used but not otherwise defined
in Article I hereof shall have the respective meanings ascribed thereto in the
Stock Purchase Agreement. In April 2000, Suez, Seagate and SSHI agreed to reduce
the amount stated in the definition of Required Cash under the Stock Purchase
Agreement from $800,000,000 to $775,000,000.
B. Suez, Seagate and SSHI desire to amend certain terms of the Stock
Purchase Agreement, as more fully set forth herein.
C. On March 29, 2000, Veritas, Merger Sub and Seagate entered into an
Agreement and Plan of Merger and Reorganization (the "MERGER AGREEMENT")
pursuant to which, among other things, upon the terms and subject to the
conditions of the Merger Agreement and in accordance with Delaware Law (as
defined in the Merger Agreement), Veritas and Seagate agreed to consummate the
Merger. Capitalized terms used but not otherwise defined in Article II hereof
shall have the respective meanings ascribed thereto in the Merger Agreement.
D. Veritas, Merger Sub and Seagate desire to amend certain terms of the
Merger Agreement, as more fully set forth herein.
E. On March 29, 2000, Veritas, Seagate and Suez entered into an
Indemnification Agreement (the "Indemnification Agreement") which, among other
things, sets forth certain agreements to govern various tax matters, indemnity
matters and other matters that may arise in connection with the transactions
contemplated by the Stock Purchase Agreement and the Merger Agreement.
F. Veritas, Seagate and Suez desire to amend certain terms of the
Indemnification Agreement, as more fully set forth herein.
1-D
<PAGE> 517
NOW, THEREFORE, in consideration of the foregoing premises, and the
covenants, promises and representations set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged and accepted, the parties hereto hereby agree as follows:
ARTICLE I
AMENDMENTS TO STOCK PURCHASE AGREEMENT
Seagate, Suez and SSHI hereby agree as follows:
1. Purchase and Sale of SSHI Shares. Pursuant to Section 2.1 of the Stock
Purchase Agreement, SSHI agreed to sell to Suez or one of its Designees all of
the outstanding capital stock of SSIMG. Suez hereby acknowledges that SSIMG has
adopted and administers the Seagate Software Information Management Group, Inc.
1999 Stock Option Plan pursuant to which options to purchase shares of common
stock of SSIMG have been heretofore granted to employees of SSIMG. Suez hereby
further acknowledges that a holder(s) of an option(s) granted under the
foregoing stock option plan has/have heretofore exercised such option(s) to
purchase shares of common stock of SSIMG and, as a result, SSHI will be unable
to sell such shares to Suez or one of its Designees in accordance with, and in
the manner contemplated by, the Stock Purchase Agreement. On the basis of the
foregoing, Suez, Seller and SSHI hereby agree as follows:
(a) Recital A of the Stock Purchase Agreement hereby is amended to
insert immediately following the parenthetical language "(as defined
herein)" the following: ", except as otherwise set forth herein."
(b) Section 2.1 of the Stock Purchase Agreement hereby is amended to
insert immediately following the parenthetical in which "SSIMG" is defined
and immediately prior to the parenthetical in which "Sold Subsidiaries" is
defined, the following: ", other than shares of capital stock of SSIMG
issued pursuant to the exercise of options granted under the Seagate
Software Information Management Group Inc. 1999 Stock Option Plan."
(c) Section 3.4(a) of the Stock Purchase Agreement hereby is amended
to (i) insert at the end of the second sentence thereof, the following:
"and shares of common stock of SSIMG held by persons who have exercised
stock options under the Seagate Software Information Management, Inc. 1999
Stock Option Plan" and (ii) insert in the third sentence thereof
immediately following the language that currently reads "or any agreement
or document to which Seller or any of its Subsidiaries is a party or by
which of Seller or any of its Subsidiaries is bound and," the following:
"if and".
2. Redemption of Debt. Pursuant to Section 6.13 of the Stock Purchase
Agreement, Seagate agreed to commence an irrevocable tender offer to purchase
all of the principal amount of the Debentures. Suez, Seagate and SSHI have
agreed to forego the Debt Offer, but proceed with the redemption of the
Debentures contemplated by Section 6.13 of the Stock Purchase Agreement. On the
basis of the foregoing, Suez, Seagate and SSHI hereby agree that Section 6.13 of
the Stock Purchase Agreement hereby is amended to delete therefrom the language
beginning with "Seller shall commence an irrevocable tender offer (the "DEBT
OFFER")..." in the first sentence thereof and ending with "If less than one
hundred percent (100%) of the Debentures are purchased pursuant to the Debt
Offer, then" in the third sentence thereof.
2-D
<PAGE> 518
3. Designated Assets. Pursuant to Section 2.7 of the Stock Purchase
Agreement, Seagate has agreed to effectuate the Split on or before the Closing
Date. Pursuant to Section 1.1 of the Stock Purchase Agreement, (i) the term
"Split" is defined as the "the transfer to the Sold Subsidiaries, prior to the
Closing Date, of all assets...and Liabilities of Seller and Seagate Software
Holdings, Inc., other than the Designated Assets and the Designated
Liabilities..." and (ii) the term "Designated Assets" is defined as "the
securities set forth on Schedule II [to the Stock Purchase Agreement]". Suez,
Seagate and SSHI desire to clarify, among other things, that, in addition to the
securities set forth on Schedule II to the Stock Purchase Agreement, in
connection with the Split, Seagate will also retain (and not transfer to the
Sold Subsidiaries) (i) all of Seagate's cash on hand in excess of the Required
Cash, and (ii) the capital stock of SSHI held by Seagate. On the basis of the
foregoing, Suez, Seagate and SSHI hereby agree as follows:
(a) The definition of "Designated Assets" in Section 1.1(j) of the
Stock Purchase Agreement hereby is amended to replace the word "securities"
with the word "items".
(b) Schedule II to the Stock Purchase Agreement hereby is amended to
add the following immediately following the existing language on Schedule
II:
"D. All outstanding capital stock of SSHI held by Seller.
E. Cash in excess of the Required Cash."
4. Required Cash. Pursuant to Section 1.1 of the Stock Purchase Agreement,
the term "Required Cash" is defined as "$800,000,000, as adjusted pursuant to
Section 2.6 [of the Stock Purchase Agreement]". Suez, Seagate and SSHI desire to
amend the definition of Required Cash in the Stock Purchase Agreement. Suez,
Seagate and SSHI hereby agree that the definition of "Required Cash" in Section
1.1(ee) of the Stock Purchase Agreement hereby is amended in its entirety to
read as follows:
"Required Cash" means (x)(i) $765,000,000, in the event that the $25.25
million settlement amount payable by Seagate to TeraStor Corporation,
MaxOptics Corporation and Kubota Corporation is fully paid by Seagate prior
to the Closing Date, or (ii) $775,000,000, in the event that the $25.25
million settlement amount payable by Seagate to TeraStor Corporation,
MaxOptics Corporation and Kubota Corporation is not fully paid by Seagate
prior to the Closing Date, minus (y) one-third ( 1/3) (up to a maximum of
$2.5 million in the aggregate) of the Printing and Filing Expenses, as
adjusted pursuant to Section 2.6 hereof."
5. Certain Expenses. Suez, Seagate and SSHI desire to clarify that Suez,
Seagate and VERITAS have agreed to split the Transaction Expenses associated
with the printing and filing of all documents with the SEC in connection with
the transactions contemplated by the Stock Purchase Agreement and the Merger
Agreement. Accordingly, Suez, Seagate and SSHI hereby agree as follows:
(a) Section 1.1(nn) of the Stock Purchase Agreement hereby is amended
in its entirety to read as follows: "'TRANSACTION EXPENSES' means the fees
and expenses of Seller's or its Subsidiaries' investment bankers,
attorneys, consultants, accountants and advisors, and the printing and
filing fees and expenses associated with the printing and filing of all
documents required to be filed with the SEC or mailed to the stockholders
of Seller in connection with the transactions contemplated by this
Agreement and the OD Documents ("PRINTING AND FILING EXPENSES"), in each
case incurred in
3-D
<PAGE> 519
connection with this Agreement, the OD Documents and the transactions
contemplated hereby and thereby."
(b) Section 1.1(b) of the Stock Purchase Agreement hereby is amended
to insert at the end of such provision the following: "provided, however,
that notwithstanding the foregoing or anything to the contrary set forth in
this Agreement, for purposes of determining of the Adjustment Amount,
Transaction Expenses shall be deemed to exclude one-third ( 1/3) (up to a
maximum of $2.5 million in the aggregate) of the Printing and Filing
Expenses."
6. Taxes. Suez, Seagate and SSHI desire to clarify certain mechanics
associated with the election specified in Section 8.2 of the Stock Purchase
Agreement. Section 8.2 of the Stock Purchase Agreement is hereby amended in its
entirety to read as follows:
8.2 Section 338(h)(10) Election.
(a) Seller and Purchaser shall make an election under Section
338(h)(10) of the Code and Treasury Regulation Section 1.338(h)(10)-1(d)
(and, if permissible, any corresponding elections under any applicable
state and local income tax laws) (collectively, the "SECTION 338(H)(10)
ELECTIONS") with respect to the purchase and sale of Shares of any of the
Sold Subsidiaries which is a United States person within the meaning of
Section 7701(a)(30) of the Code (collectively, the "U.S. SOLD
SUBSIDIARIES") hereunder listed on Schedule VI hereto, and any other U.S.
Sold Subsidiary designated by the Purchaser (other than Quinta
Corporation).
(b) To the extent possible, Purchaser, Seller and the U.S. Sold
Subsidiaries shall execute on or prior to the Closing any and all forms
necessary to effectuate the Section 338(h)(10) Elections (including,
without limitation, Internal Revenue Service Form 8023 and any similar
forms under the applicable state and local income tax laws (the "SECTION
338 FORMS"). In the event, however, any Section 338 Forms are not executed
by the Closing, Purchaser and Seller shall prepare and complete each such
Section 338 Form no later than 15 days prior to the date such Section 338
Form is required to be filed. Purchaser and Seller shall each cause the
Section 338 Forms to be duly executed by an authorized person for Purchaser
and Seller in each case, and shall duly and timely file the Section 338
Forms in accordance with applicable tax Laws and the terms of this
Agreement.
(c) As soon as practicable after the date hereof, Purchaser shall (i)
allocate the Purchase Price among the Sold Subsidiaries (the "STOCK
ALLOCATION"), and (ii) determine the allocation of that portion of the
Stock Allocation attributable to any of the U.S. Sold Subsidiaries
resulting from the Section 338(h)(10) Elections (as required pursuant to
Section 338(h)(10) of the Code and the regulations promulgated thereunder)
among the assets of such U.S. Sold Subsidiaries (the "SECTION 338
ALLOCATION") after considering in good faith Seller's comments thereto.
Purchaser, Seller and the U.S. Sold Subsidiaries shall be bound by and
shall file all Tax Returns (including amended Tax Returns and amended
Section 338 Forms as necessary) consistently with the Section 338
Allocation, unless in the opinion of a nationally recognized law firm,
there is no reasonable basis therefor.
4-D
<PAGE> 520
7. The Stock Purchase Agreement is hereby amended by adding the following
as Schedule VI thereto:
"SCHEDULE VI
(i) Seagate Software Information Management Group Holdings, Inc.
(ii) XIOtech Corporation"
8. Corrections and Clarifications. Purchaser, Seller and SSHI desire to
make certain corrections and other clarifications to the terms of the Stock
Purchase Agreement. Suez, Seagate and SSHI hereby agree as follows:
(a) The definition of "Affiliate" in Section 1.1(c) of the Stock Purchase
Agreement hereby is amended to replace each instance in which the capitalized
term "Person" appears with the word "person".
(b) The definition of "Liability" in Section 1.1(z) of the Stock Purchase
Agreement hereby is amended to insert immediately following the language
"Environmental Law", the following: "(as defined in Section 3.18(a) hereof)".
(c) The definition of "OD Documents" in Section 1.1(cc) of the Stock
Purchase Agreement hereby is amended to (i) delete the word "and" immediately
following the language "by and among Seller" and immediately preceding the
language "VERITAS Software Corporation" and substituting in its place a comma
and (ii) insert immediately following the parenthetical in which "VERITAS" is
defined, the following: "and Victory Merger Sub, Inc., a Delaware corporation
and wholly owned subsidiary of VERITAS".
(d) The definition of "Overage Amount" in Section 1.1(dd) of the Stock
Purchase Agreement hereby is amended to replace the reference to "Star Options"
with a reference to "Seagate Options".
(e) The definition of "Split" in Section 1.1(jj) of the Stock Purchase
Agreement hereby is amended to delete the reference to "Seagate Software
Holdings, Inc." and replace the foregoing with the defined term "SSHI".
(f) Section 2.1 of the Stock Purchase Agreement hereby is amended to (i)
delete the language "Seagate Technology, Inc." and replace the foregoing with
the word "Seller" and (ii) delete the cross-reference language "Section 12.10"
in the first sentence thereof and replace the foregoing with a cross-reference
to "Section 12.9".
(g) Section 2.6(a) of the Stock Purchase Agreement hereby is amended to (i)
delete the reference to "Seller Stockholder Meeting" in the first sentence
thereof and replace the foregoing with the following: "Seller Stockholders'
Meeting (as defined in Section 6.1(a) hereof)" and (ii) delete the
cross-reference to Section 2.6(c) at the end of the such section.
(h) Section 2.6(b)(i) of the Stock Purchase Agreement hereby is amended to
insert immediately following the word "Seller", the following: ", SSHI".
(i) Section 2.6(b)(ii) of the Stock Purchase Agreement hereby is amended to
delete the language "Seller and Purchaser" at the end of the second and third
sentences thereof, and insert the following: "Seller, SSHI and Purchaser".
(j) Section 2.7 of the Stock Purchase Agreement hereby is amended to
replace each reference to "costs" contained in the proviso to the first sentence
thereof with the defined term "Transaction Expenses".
5-D
<PAGE> 521
(k) Section 3.4(b) of the Stock Purchase Agreement hereby is amended to (i)
delete the parenthetical language "(the "2037 SENIOR DEBENTURES") and, together
with the 2004 Notes, the 2007 Notes and the 2017 Senior Debentures, the
"DEBENTURES")" and replace the foregoing with the following: "(the "2037 SENIOR
DEBENTURES" and, together with the 2004 Senior Notes, the 2007 Senior Notes and
the 2017 Senior Debentures, the "DEBENTURES"), and (ii) delete ", dated as of
March 1, 1997 (the "Indenture")".
(l) Section 3.8 of the Stock Purchase Agreement hereby is amended to (i)
insert at the beginning of the fourth sentence thereof, the following: "Except
for SSIMG," (ii) delete the following redundant language in the sixth sentence
thereof: "and the consolidated financial position of Seller and its consolidated
Subsidiaries as of the dates thereof" and (iii) delete the subheading "(a)"
after "Section 3.8".
(m) Section 3.10 of the Stock Purchase Agreement hereby is amended to
delete the reference to "VERITAS Merger Agreement" in the first sentence thereof
and replace the foregoing with the following: "OD Documents."
(n) Section 3.11(d) of the Stock Purchase Agreement hereby is amended to
delete the language in the first sentence thereof beginning with "is presently
in progress" until the end of the sentence, and replace the foregoing with the
following: "which is presently in progress, and a complete and accurate list of
all notifications received by Seller or any of its Subsidiaries from any Tax
authority regarding any request for such an audit or other examination."
(o) Section 3.11(g) of the Stock Purchase Agreement hereby is amended to
delete the second sentence thereof and replace the foregoing with the following:
"Section 3.11(g) of the Seller Disclosure Schedule contains a complete and
accurate list of all contracts, agreements, plans or arrangements to which
Seller is a party or by which it is bound pursuant to which Seller is required
to compensate any individual for excise taxes pursuant to Section 4999 of the
Code."
(p) Section 3.16(d) of the Stock Purchase Agreement hereby is amended to
delete the following language in the final sentence thereof: "former employee,
director, consultant".
(q) Section 3.19 of the Stock Purchase Agreement hereby is amended to
delete the word "any" appearing immediately following the language "Seller has
no" and immediately preceding the language "knowledge of any strikes".
(r) Section 3.25(a) of the Stock Purchase Agreement hereby is amended to
delete the language "and thereby" appearing immediately following the language
"the consummation of the transactions contemplated hereby" and immediately
preceding the language "will not result in the loss of," in the third sentence
thereof.
(s) Section 3.25(d) of the Stock Purchase Agreement hereby is amended to
(i) insert the word "property" immediately following the language "shall mean
intellectual" and immediately preceding the language "or property of a similar
nature" in the first sentence thereof, and (ii) replace the reference to
"subsidiaries" in the final sentence thereof with the defined term
"Subsidiaries".
(t) The preamble to Article IV of the Stock Purchase Agreement hereby is
amended to delete the following: ", subject to the exceptions and qualifications
set forth or disclosed in the disclosure letter delivered by Purchaser to
Seller, dated as of the date hereof (the "PURCHASER DISCLOSURE LETTER"),".
6-D
<PAGE> 522
(u) Section 4.5 of the Stock Purchase Agreement hereby is amended to
replace each of the first two references to "Seller" in the first sentence
thereof with references to "Purchaser".
(v) Section 5.1 of the Stock Purchase Agreement hereby is amended to (i)
delete the word "and" appearing in the first sentence thereof immediately
preceding the following language: "(iii) to the extent contemplated by the OD
Documents" and (ii) insert in the first sentence thereof immediately following
the language "as in effect on the date hereof, or" and immediately preceding the
language "for the sale of all or a portion of the Designated Assets", the
following: "(iv)".
(w) Section 7.1 of the Stock Purchase Agreement hereby is amended to delete
the word "[Suez]" appearing in the proviso of the second sentence thereof and
replace the foregoing with the following: "Seagate".
(x) Section 7.2(a) of the Stock Purchase Agreement hereby is amended to
insert immediately following the language "(i) Purchaser shall offer all" and
immediately preceding the language "Seller Employees" in the first sentence
thereof, the following: "then current".
(y) Section 9.1(d) of the Stock Purchase Agreement hereby is amended to
delete the cross-reference to Section 6.1(f) of the VERITAS Merger Agreement and
replace the foregoing with a cross-reference to Section 6.1(e) of the VERITAS
Merger Agreement.
(z) Section 9.2 of the Stock Purchase Agreement hereby is amended to insert
immediately following the reference to "Seller" in the caption thereof and the
first sentence thereof, the following: "and SSHI".
(aa) Section 11.2 of the Stock Purchase Agreement hereby is amended to
insert immediately following the first reference to "Indemnification Agreement",
the following: "of even date herewith by and among VERITAS, Seller, Purchaser
and each person who executes a Joinder Agreement contemplated thereby".
(bb) Section 12.12 of the Stock Purchase Agreement hereby is amended to
delete the reference to "reasonably attorneys' fees" in the first sentence
thereof, and replace the foregoing with the following: "reasonable attorneys'
fees".
9. Consent. VERITAS hereby consents to the amendments to the Stock Purchase
Agreement set forth in this Article I for all purposes of and under the Merger
Agreement.
ARTICLE II
AMENDMENT TO MERGER AGREEMENT
Seagate, Merger Sub and VERITAS hereby agree as follows:
1. Tax Withholding and Available Amount
(a) The definition of "Available Amount" in Section 1.11(a)(ii) of the
Merger Agreement is hereby amended by adding, immediately after the word
"minus" a "(i)", and by adding at the end of such definition the phrase ',
(ii) the Estimated Tax Withholding Amount and (iii) the Reserve Amount."
7-D
<PAGE> 523
(b) A new definition is hereby added to the end of Section 1.11(a) of
the Merger Agreement as follows:
"(xxxiv) 'ESTIMATED TAX WITHHOLDING AMOUNT' means the aggregate amount
required to be withheld under the Code or under any applicable provision of
state, local or foreign tax law or under any other applicable legal
requirement, as determined by the mutual agreement of Seagate and Veritas,
in respect of the acceleration of vesting and conversion of the Seagate
Options pursuant to Section 1.5(c) of the Merger Agreement."
(c) Section 1.5(c) is hereby amended by deleting from clause (iii)
thereof the words "and Section 1.5(a) hereof," and substituting therefor
the words "and Section 1.5(a) hereof (except to the extent deducted or
withheld pursuant to Section 1.5(d)),"
(d) Section 1.5(d) is hereby amended:
(i) by deleting the words "Each of the Exchange Agent (as defined
in Section 1.6(a) hereof) and Veritas" and substituting therefor the
words "Each of the Exchange Agent (as defined in Section 1.6(a) hereof),
Veritas and Seagate"; and
(ii) by adding the end thereof a new sentence as follows: "Without
limiting the foregoing, Seagate shall deduct and withhold from each
holder of Seagate Option Shares such number of Seagate Option Shares
(which may include fractional shares) as Veritas and Seagate shall
mutually agree are required to be deducted and withheld from such holder
under the Code or under any applicable provision of state, local or
foreign tax law or under any other applicable legal requirement."
2. Valuation of Dragon Shares. The definition of "Stipulated Amount" in
Section 1.11(a)(xxvi) of the Merger Agreement is hereby amended by deleting
clause (3) thereof in its entirety and substituting therefor the following:
"(3) with respect to shares of Dragon Systems, Inc. ("DRAGON") held
by Seagate immediately prior to the Effective Time (including shares
into which such shares may have been converted, the "DRAGON SHARES"),
(A) the product obtained by multiplying (x) the Reference Average for
Dragon Shares, by (y) 0.6 (the product of (x) and (y) being the
"Value"), minus (B) 0.4 multiplied by the difference between the Value
and Seagate's tax basis in a Dragon Share, multiplied by (C) the number
of Dragon Shares (other than those subject to any escrow agreement). Any
escrowed Dragon Shares shall be treated as provided in Section 5.15
hereof."
3. TRA Amount.
(a) Section 1.11(a) of the Merger Agreement is hereby amended to
insert the following definition as Section 1.11(a)(xxxiv):
"Reserve Amount" shall mean $150 million; provided, however, the
Reserve Amount shall be increased on a dollar for dollar basis to the
extent the "Agreed TRA Amount" (as defined below) is less than $200
million; provided, further, in no event shall the Reserve Amount exceed
$300 million. The "Agreed TRA Amount" shall mean the reasonably
estimated amount of the TRA Amount (determined without taking into
account the Reserve Amount) as mutually agreed upon by Seagate and
Purchaser. Within seven (7) days of the delivery of
8-D
<PAGE> 524
the TA Statement to Purchaser as provided for in Section 2.6(a) of the
Stock Purchase Agreement, Seagate and Purchaser shall determine the
Agreed TRA Amount or a methodology of computing the Agreed TRA Amount
with the only variable in such computation being the Veritas Price (as
defined in the Stock Purchase Agreement) on the trading day immediately
preceding the Effective Time. To the extent the parties cannot so agree,
the dispute resolution mechanism provided for in Section 2.6(b) of the
Stock Purchase Agreement shall be followed.
(b) The definition of "TRA Amount" in Section 1.11(a)(xxx) of the
Merger Agreement is hereby restated in its entirety as follows:
"TRA Amount" means (i) the amount of cash received with respect to
all refunds or the utilization of credits for Seagate Taxes for or
attributable to taxable years or periods of Seagate ending on or prior
to the Effective Time, or the pre-closing period, in the case of a
taxable period commencing before the Effective Time and ending after the
Effective Time, (ii) cash in an amount equal to the Reserve Amount which
shall be deposited with the Administrators by Veritas at the Closing or
within two business days of the Closing and (iii) income earned with
respect to the assets held in the Collection Account (as defined in
Section 5.15(c) hereof), less any administrative charges of the
Administrators and expenses of such Administrators, and less amounts
paid to Veritas in respect of Taxes imposed on income earned in the
Collection Account; provided, however, that the terms "refunds" and
"credits" shall not include any amount that represents a tax benefit
arising from a Correlative Adjustment.
(c) The definition of "TRA Right" in Section 1.11(a)(xxxi) of the
Merger Agreement is hereby restated in its entirety as follows:
"TRA Right" means a non-transferable right to receive, when, as and
if received by Veritas or its Affiliates, a stockholder's Pro Rata
Portion of the TRA Amount as reduced pursuant to Section 5.15(e)(ii)(x)
hereof and subject to Section 5.15(e)(i) hereof.
(d) Section 1.11(a) of the Merger Agreement is hereby amended to
insert the following definition as Section 1.11(a)(xxxv):
"Correlative Adjustment" means a tax benefit such as an increase in
the amount of tax basis of an asset, exclusion from income, tax credit
or other adjustment that results (directly or indirectly) from a tax
detriment arising in any Seagate taxable year ending prior to the
taxable year in which the Closing occurs, such as an increase in taxable
income or gain, reduction in the amount of a tax credit or the tax basis
of an asset, to the extent arising from a settlement with, a taxing
authority, a final determination (as described in Section 1313(a) of the
Code), or the filing of an amended Tax Return, in each case, subsequent
to the Closing.
(e) Section 5.15 of the Merger Agreement hereby is amended and
restated in its entirety to read as follows:
"5.15 TRA Matters
(a) Form. The TRA Rights shall be evidenced by a non-transferable
document in form and substance reasonably satisfactory to Veritas and
Seagate, and shall contain legends to the effect that they are
non-negotiable instruments as well as such
9-D
<PAGE> 525
other legends as may be required by law. The rights of the holders of the
TRA Rights to receive a distribution from the Collection Account (as
defined in Section 5.15(b) hereof) shall terminate with respect to TRA
Amounts on the 30(th) day after the settlement, expiration of the statute
of limitations, or final determination (as defined in Section 1313(a) of
the Code) with respect to the last audit, examination or contest in respect
of a claim for refund, credit or amended return that would give rise to a
TRA Amount. After the expiration date of the TRA Rights, any TRA Amounts
received by Veritas and its Affiliates shall be the property of Veritas or
such Affiliate without any obligation whatsoever to account therefor to
holders of the TRA Rights; provided, however, that any TRA Amounts to be
received after such expiration date in respect of any settlement, or final
determination with respect to the last audit, examination or contest
described in the prior sentence shall be the property of the holders of the
TRA Rights and an amount of cash equal to any such TRA Amount shall be
deposited in the Collection Account pursuant to Section 5.15(c) below.
(b) Administration generally. On or prior to the Effective Time,
Seagate shall designate one or more persons (the "Administrators") who
shall be responsible for overseeing collection of the TRA Amount and
distributions with respect to the TRA Rights and coordinating activities
with representatives of Veritas and Purchaser with respect to Seagate
Taxes. Veritas and Seagate will, prior to the Effective Time, cooperate in
good faith with respect to establishing procedures and structures designed
to realize the aggregate value of the TRA Amount and minimize the amount of
administrative costs. This may include the establishment of segregated
accounts, pass-through trusts or similar devices (collectively, a
"Collection Account") to receive periodic payments of cash amounts equal to
the TRA Amount. The Administrators shall be entitled to charge the
Collection Account a fee of 1% for all amounts deposited therein and
distributed to holders of the TRA Rights, and to charge the Collection
Account third-party expenses associated with administration of the TRA
Rights. The Administrators shall pay to Veritas an amount on account of
Taxes imposed on income earned on the assets held in the Collection
Account, equal to 36% of all income and gain earned by the Collection
Account. Such amount shall be paid no later than January 15 of each year in
respect of income and gain earned in the preceding year or portion thereof
during which the account is in existence.
(c) Collection Account. Following the Effective Time, Veritas shall
forward to the Collection Account (and notify the Administrators of) an
amount in cash equal to any TRA Amount receipt (including the realization
of any credit) by Seagate, within ten (10) business days of such receipt
or, in the case of the Reserve Amount, within 2 business days of the
Closing.
(d) Interest. Any amounts in respect of the TRA Amounts not deposited
in the Collection Account within the time period specified in Section
5.15(c) shall be subject to an interest charge of 8% per annum.
(e) Investment/Distributions. (i) Amounts deposited in the Collection
Account shall be invested by the Administrators in short-term money markets
instruments, and shall be distributed to holders of TRA Rights on each
calendar quarterly end commencing with the first such day that is at least
45 days following the Closing Date (as defined in the Stock Purchase
Agreement); provided however, the amount available for distribution exceeds
$5.0 million. Notwithstanding the immediately preceding sentence, the
Administrators shall not distribute to the holders of the TRA Rights any
amounts held in the Collection Account if such distribution would cause
10-D
<PAGE> 526
the balance in the Collection Account to be less than $300 million
(including interest earned thereon, net of amounts in respect of applicable
income taxes) (the "Retained TRA Amount") until such time as there is a
settlement, expiration of the applicable statute of limitations, or final
determination (as defined in Section 1313(a) of the Code) with respect to
the last audit, examination or contest in respect of Seagate income taxes
relating to the taxable period beginning July 1, 2000 and ending on the
Closing Date (as defined herein) and any carryback arising in such taxable
period, provided, however, upon the earlier to occur of a settlement, or a
final determination (as defined in Section 1313(a) of the Code) with
respect Seagate's federal income taxes for the taxable year in which the
Closing occurs and the taxable years to which any attribute arising in the
taxable year in which the Closing occurs is carried back, the remaining
amount held in the Collection Account, less $50 million, shall be
distributed immediately to the holders of the TRA Rights.
(ii) The Retained TRA Amount shall be paid (x) first to Veritas for
application in respect of Seagate income Taxes (including interest and
penalties, if any) relating to the taxable period beginning July 1, 2000
and ending on the Closing Date (as defined herein) and any carryback
arising in such taxable period, and (y) then second, the remainder (less
fees and expenses, including reimbursement for taxes) thereof, to the
holders of the TRA Rights, pursuant to Section 5.15(e)(i) hereof.
(f) Conduct of Audits and Other Procedural Matters. The Administrators
shall have the right to control any audit, examination or contest with
respect to any claim for refund, credit or amended return that would give
rise to a TRA Amount, except if such audit, examination or contest may give
rise to an indemnification obligation by Purchaser under the
Indemnification Agreement, in which case the provisions of Section 6(d)(i)
of the Indemnification Agreement shall control. Veritas shall promptly
forward to the Administrators all written notifications and other written
communications, including if available the original envelope showing any
postmark from any taxing authority received by Veritas or its Affiliates
relating to the TRA Amount.
(g) Assistance and Cooperation. After the Effective Time, Veritas
shall (and shall cause its respective Affiliates to):
(i) Use reasonable efforts to include in any Tax Returns filed by
Veritas or its Affiliates applicable claims for refunds or credits in
respect of the TRA Amount proposed by the Administrators subject to any
applicable requirements of Section 6(c)(i) of the Indemnification
Agreement;
(ii) Cooperate fully in preparing for any audits of, or disputes
with taxing authorities regarding the TRA Amount;
(iii) Make available to the Administrators and to any taxing
authority as reasonably requested all information, records, and
documents relating to Taxes of Veritas, Seagate or any of their
respective subsidiaries;
(iv) Provide timely notice to the Administrators in writing of any
pending or threatened Tax audits or assessments relating to refunds or
credits included or potentially includable in the TRA Amount; and
(v) Furnish the Administrators with copies of all correspondence
received from any taxing authority in connection with any Tax audit
which may affect refunds or credits included or potentially includable
in the TRA Amount.
11-D
<PAGE> 527
(h) Exculpation. In performing any duties under this Agreement, the
Administrator shall not be liable to any party for damages, losses, or
expenses, except to the extent resulting from the gross negligence or
willful misconduct on the part of the Administrator. The Administrator
shall not incur any such liability for (A) any act or failure to act made
or omitted in good faith, or (B) any action taken or omitted in reliance
upon any instrument, including any written statement or affidavit provided
for in this Agreement that the Administrator shall in good faith believe to
be genuine, nor will the Administrator be liable or responsible for
forgeries, fraud, impersonations, or determining the scope of any
representative authority. In addition, the Administrator may consult with
legal counsel in connection with performing the Administrator's duties
under this Agreement and shall be fully protected in any act taken,
suffered, or permitted by him/her in good faith in accordance with the
advice of counsel. The Administrator is not responsible for determining and
verifying the authority of any person acting or purporting to act on behalf
of any party to this Agreement.
(i) Dragon Shares. Any Dragon Shares being held in escrow at the
Effective Time shall, following release from escrow and delivery to
Veritas, and subject to applicable legal and contractual restrictions, be
transferred to the Administrator. Following receipt thereof, the
Administrator shall use reasonable efforts to distribute these shares to
holders of TRA Rights and/or sell such shares as promptly as practicable,
in each case, in accordance with any applicable legal and contractual
restrictions, and, following any such sale, shall deposit the net proceeds
thereof into the Collection Account and distribute the same in accordance
with paragraph (e) of this Section 5.15."
4. Corrections and Clarifications. The parties desire to make certain
corrections and other clarifications to the terms of the Merger Agreement.
Seagate, Veritas and Merger Sub hereby agree as follows:
(a) Section 1.5(b) of the Merger Agreement is hereby amended by
deleting such Section in its entirety and substituting therefor the
following:
"(b) Unless otherwise determined by Veritas, each share of Seagate
Common Stock (i) held in the treasury of Seagate immediately prior to
the Effective Time, (ii) owned by Merger Sub, Veritas or any direct or
indirect wholly-owned subsidiary of Seagate or of Veritas immediately
prior to the Effective Time or (iii) in respect of which a share of Suez
Acquisition Company (Cayman) Limited or any successor, assignee or
affiliate has been or will be issued to any party to a Rolled Agreement
(as defined in the Stock Purchase Agreement), shall, in each case, be
canceled and extinguished without any conversion thereof."
(b) The definition of "Average Veritas Stock Price" in Section
1.11(a)(iv) of the Merger Agreement is hereby amended by deleting therefrom
the phrase "as with respect to the VP Amount" and substituting therefor the
phrase "or, with respect to the VP Amount".
(c) Section 1.11 of the Merger Agreement is hereby amended to include
the following definition of "Tax Return":
"(xxx) "TAX RETURN" means all federal, state, local and foreign
returns, estimates, information statements and reports relating to Taxes
required to be filed by Seagate and each of its Subsidiaries with any
Tax authority, including any claims for refunds or credits."
12-D
<PAGE> 528
(d) Section 4.1 of the Merger Agreement is hereby amended by adding
the phrase "are those set forth on Schedule I hereto" immediately after the
words "only assets and properties owned or held by Seagate".
(e) Section 5.4(b) of the Merger Agreement is hereby amended as
follows:
(i) By adding the phrase "(other than Section 7.3)" immediately
after the words "For all purposes of and under this Agreement" in the
second sentence thereof.
(ii) By deleting the phrase "pursuant to which the stockholders of
Seagate immediately preceding such transaction would hold less than
fifteen percent (15%) of the equity interests in the surviving or
resulting entity of such transaction" and substituting therefor the
phrase "pursuant to which the stockholders of Seagate immediately
preceding such transaction would hold less than eighty-five percent
(85%) of the equity interests in the surviving or resulting entity of
such transaction".
(iii) By deleting the phrase "or (iv)" and substituting therefor
the phrase "or (iii)".
(f) Section 5.12 of the Merger Agreement is hereby amended as follows:
(i) By deleting therefrom the phrase "Prior to the Seagate
Stockholders Meeting," and substituting therefor the phrase "Prior to
the date that the Proxy Statement is first mailed to Seagate
stockholders and Veritas stockholders,".
(ii) By deleting therefrom the phrase "but in no event later than
the date the Proxy Statement is filed with the SEC," and substituting
therefor the phrase "but in no event later than the date of the Seagate
Stockholders' Meeting,".
(g) Section 7.3(b)(iii) of the Merger Agreement is hereby amended by
adding thereto the words "or Seagate" immediately after the words "if (A)
this Agreement is terminated by Veritas".
(h) Section 7.3(b)(iv) of the Merger Agreement is hereby amended by
deleting therefrom, the phrase "Termination Date" each time such phrase
appears, and substituting therefor each such time the phrase "date of such
termination", and by deleting the word "the" immediately before the phrase
"Seagate, (C) following the public announcement".
(i) Section 7.3(b)(v) of the Merger Agreement is hereby amended by
adding a ")" immediately after the words "other than an offer or proposal
by Veritas".
5. Certain Expenses. Seagate agrees that it shall be responsible for paying
two-thirds ( 2/3), and Veritas agrees that it shall be responsible for paying
one-third ( 1/3), of (a) any additional filing fee owed to the SEC in respect of
the Proxy Statement and the Registration Statement and (b) all printing costs
incurred in preparing, revising and printing the Proxy Statement.
6. Consent. Suez hereby consents to the amendments to the Merger Agreement
set forth in this Article II for all purposes of and under the Stock Purchase
Agreement, and hereby further agrees to be bound by the terms of Section
1.11(a)(xxxiv) of the Merger Agreement, as amended hereby (definition of
"Reserve Amount" and "Agreed TRA Amount").
13-D
<PAGE> 529
ARTICLE III
AMENDMENT TO INDEMNIFICATION AGREEMENT
Capitalized terms used in this Article III and not otherwise defined shall
have the respective meanings assigned thereto in the Indemnification Agreement.
(a) Veritas, Seagate and Suez agree that Section 6(c) of the
Indemnification Agreement shall be amended by redesignating paragraph (ii) as
paragraph (iii) and adding a new paragraph (ii) as follows:
(ii) A copy of a draft of all Tax Returns relating to Seagate and the
Retained Subsidiaries which are to be filed after the Stock Purchase Date, but
which relate to a Pre-Purchase Tax Period or its Straddle Period, including the
federal consolidated income Tax Return of the affiliated group of which Seagate
is the common parent for the period ending with the Merger, shall be furnished
to the Administrators (as defined in the Merger Agreement) at least 30 days
prior to the due date for each such Tax Return for review and comment. SAC will
consider in good faith any comments of the Administrators with respect to each
such Tax Return.
(b) Veritas, Seagate and Suez agree that the Indemnification Agreement
shall be amended to add a new Section 6(h) as follows:
"(h) SAC, on behalf of itself and the SAC Indemnitors, agrees and
confirms that the inclusion in the first sentence of Section 6(a) hereof of
the phrase "(other than Designated Liabilities)" is not intended to limit
the indemnification rights of the Veritas Indemnitees under Section 6(a)
hereof with respect to TRA Amounts distributed to former Seagate
stockholders in respect of the TRA Rights. For the avoidance of doubt, any
amounts paid under Section 5.15(e)(ii)(x) of the Merger Agreement or
described in the proviso to the definition of "TRA Amount" in Section
1.11(a)(xxx) of the Merger Agreement shall reduce any Losses for which the
SAC Indemnitors are required to indemnify the Veritas Indemnitees under
Section 6(a) hereof."
(c) Veritas, Seagate and Suez agree that the Indemnification Agreement
shall be amended to add a new Section 6(i) as follows:
"(i) On the Closing Date, SAC shall deposit an amount equal to $55
million into an escrow account to be held by an escrow agent under the
terms of an escrow agreement, which agent and agreement each shall be
reasonably satisfactory to SAC and Veritas. Such escrowed amount, together
with all income earned thereon, shall be available as provided in the
escrow agreement to Veritas to satisfy Losses attributable to Pre-Purchase
Taxes to the extent that SAC fails to fulfill its obligations hereunder to
indemnify the Veritas Indemnitees for such Losses attributable to
Pre-Purchase Taxes, and any remaining amount shall be released to SAC
pursuant to the terms of such escrow agreement.
ARTICLE IV
GENERAL PROVISIONS
1. This Agreement may be executed in one or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
one or more counterparts have been signed by each of the parties hereto and
delivered to the other party hereto, it being understood that each party hereto
need not sign the same counterpart.
14-D
<PAGE> 530
2. Except as expressly modified by this Agreement, all of the
representations, warranties, terms, covenants, conditions and other provisions
of the Merger Agreement and Stock Purchase Agreement shall remain in full force
and effect in accordance with their respective terms.
3. Nothing in this Agreement shall be deemed to or construed as in any way
making (i) Suez a party to the Merger Agreement or (ii) Veritas a party to the
Stock Purchase Agreement.
[Remainder of Page Intentionally Left Blank]
15-D
<PAGE> 531
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be
executed by their duly authorized respective officers, as of the date first
above written.
VERITAS SOFTWARE CORPORATION
By:
Name:
Title:
VICTORY MERGER SUB, INC.
By:
Name:
Title:
SEAGATE TECHNOLOGY, INC.
By:
Name:
Title:
SUEZ ACQUISITION COMPANY
(CAYMAN) LIMITED
By:
Name:
Title:
SEAGATE SOFTWARE HOLDINGS,
INC.
By:
Name:
Title:
16-D
<PAGE> 532
ANNEX E
CONSOLIDATED AMENDMENT AND CONSENT NO. 2
CONSOLIDATED AMENDMENT NO. 2 TO
STOCK PURCHASE AGREEMENT, AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION, AND INDEMNIFICATION AGREEMENT, AND CONSENT
THIS AMENDMENT NO. 2 TO STOCK PURCHASE AGREEMENT, AGREEMENT AND PLAN OF
MERGER AND REORGANIZATION, AND INDEMNIFICATION AGREEMENT, AND CONSENT (this
"AGREEMENT") is made and entered into as of October 18, 2000 by and among Suez
Acquisition Company (Cayman) Limited, a limited company organized under the laws
of the Cayman Islands ("SUEZ"), Seagate Technology, Inc., a Delaware corporation
("SEAGATE"), Seagate Software Holdings, Inc., a Delaware corporation ("SSHI"),
VERITAS Software Corporation, a Delaware corporation ("VERITAS"), and Victory
Merger Sub, Inc., a Delaware corporation ("MERGER SUB").
RECITALS
A. On March 29, 2000, Suez, Seagate and SSHI entered into a Stock Purchase
Agreement (the "STOCK PURCHASE AGREEMENT") pursuant to which, among other
things, Seagate and SSHI agreed to sell to Suez (or one of its Designees), and
Suez agreed to purchase (or cause one of its Designees to purchase) from Seagate
and SSHI, all outstanding Shares of the Sold Subsidiaries (as such terms are
defined in the Stock Purchase Agreement) upon the terms and subject to the
conditions set forth therein. Capitalized terms used but not otherwise defined
in Article I hereof shall have the respective meanings ascribed thereto in the
Stock Purchase Agreement. In April 2000, Suez, Seagate and SSHI agreed to reduce
the amount stated in the definition of Required Cash under the Stock Purchase
Agreement from $800,000,000 to $775,000,000. On August 29, 2000, Suez, Seagate,
SSHI, Veritas and Merger Sub entered into a Consolidated Amendment to Stock
Purchase Agreement, Agreement and Plan of Merger and Reorganization, and
Indemnification Agreement, and Consent (the "First Consolidated Amendment"),
pursuant to which Suez, Seagate and SSHI agreed to amend certain terms of the
Stock Purchase Agreement.
B. On October 13, 2000, Suez, Seagate, SSHI, Veritas and other defendants
in purported class action lawsuits currently pending in the Chancery Court in
Delaware entered into a memorandum of understanding with the plaintiffs in these
lawsuits regarding the settlement of those lawsuits (the "Settlement"). Suez,
Seagate and SSHI desire to further amend certain terms of the Stock Purchase
Agreement to reflect the Settlement, as more fully set forth herein.
C. On March 29, 2000, Veritas, Merger Sub and Seagate entered into an
Agreement and Plan of Merger and Reorganization (the "MERGER AGREEMENT")
pursuant to which, among other things, upon the terms and subject to the
conditions of the Merger Agreement and in accordance with Delaware Law (as
defined in the Merger Agreement), Veritas and Seagate agreed to consummate the
Merger. Capitalized terms used but not otherwise defined in Article II hereof
shall have the respective meanings ascribed thereto in the Merger Agreement. On
August 29, 2000, Veritas, Merger Sub and Seagate agreed to amend certain terms
of the Merger Agreement as provided in the First Consolidated Amendment.
1-E
<PAGE> 533
D. Veritas, Merger Sub and Seagate desire to further amend certain terms of
the Merger Agreement to reflect the Settlement, as more fully set forth herein.
E. On March 29, 2000, Veritas, Seagate and Suez entered into an
Indemnification Agreement (the "Indemnification Agreement") which, among other
things, sets forth certain agreements to govern various tax matters, indemnity
matters and other matters that may arise in connection with the transactions
contemplated by the Stock Purchase Agreement and the Merger Agreement. On August
29, 2000, Veritas, Seagate and Suez agreed to amend certain terms of the
Indemnification Agreement as provided in the First Consolidated Amendment.
F. Veritas, Seagate and Suez desire to further amend certain terms of the
Indemnification Agreement to reflect the terms of the Settlement, as more fully
set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises, and the
covenants, promises and representations set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged and accepted, the parties hereto hereby agree as follows:
ARTICLE I
AMENDMENTS TO STOCK PURCHASE AGREEMENT
Seagate, Suez and SSHI hereby agree as follows:
1. Purchase and Sale of SSHI Shares. Section 2.2 of the Stock Purchase
Agreement is amended and restated in its entirety as follows:
"2.2 Purchase Price. The aggregate purchase price for the Shares shall
be $2,050,000,000 in cash, minus the Rolled Option Value (the "Purchase
Price"), plus the assumption of all Liabilities (other than Designated
Liabilities) of Seller and SSHI."
2. Corrections and Clarifications. The definition of Adjustment Amount in
Section 1.1(b) of the Stock Purchase Agreement is hereby amended to insert
immediately following the language "excluding Taxes caused by or relating to the
Split," the following: "and, other than as provided below, Taxes relating to the
Canadian Reorganization (as defined below)".
3. Consent. VERITAS hereby consents to the amendments to the Stock Purchase
Agreement set forth in this Article I for all purposes of and under the Merger
Agreement.
ARTICLE II
AMENDMENT TO MERGER AGREEMENT
Seagate, Merger Sub and VERITAS hereby agree as follows:
1. Amendment to Average Veritas Stock Price Definition. The definition of
"Average Veritas Stock Price" in Section 1.11(a)(iv) of the Merger Agreement
hereby is amended by deleting therefrom the phrase: ", or with respect to the VP
Amount, preceding the date that Veritas makes its election".
2-E
<PAGE> 534
2. Amendment to VP Amount Definition. The definition of "VP Amount" in
Section 1.11(a)(xxxiii) of the Merger Agreement hereby is amended by deleting
such definition in its entirety and replacing it with the following:
" 'VP Amount' means either $0, $250 million or $500 million, at the
election of Veritas, which election may be made at any time during the
fifteen (15) consecutive trading days ending two (2) trading days
immediately preceding the date of the Seagate Stockholders' Meeting."
3. Amendment to Available Amount Definition. The definition of "Available
Amount" in Section 1.11(a)(ii) of the Merger Agreement hereby is amended by
deleting such definition in its entirety and replacing it with the following:
" 'Available Amount' means an amount equal to Cash held by Seagate
immediately prior to the Effective Time, including net amounts received
under the OD Documents, minus the sum of (i) the VP Amount, (ii) the
Estimated Tax Withholding Amount, (iii) the Reserve Amount and (iv) the
Litigation Holdback Amount."
4. Amendment to Stock Portion Definition. The definition of "Stock Portion"
in Section 1.11(a)(xxvii) of the Merger Agreement hereby is amended by deleting
from clause (ii)(x)(B) thereof the phrase "Average Veritas Stock Price" and
substituting therefor the phrase "Average VP Veritas Stock Price".
5. Additional Definitions. Section 1.11(a) is hereby amended by adding the
following new definitions at the end thereof:
" 'Average VP Veritas Stock Price' means the average closing price of
a share of Veritas Common Stock, as reported on the Nasdaq, for the five
(5) consecutive trading days ending the trading day immediately preceding
the date that the election referred to in the definition of "VP Amount" is
made.
"Settlement Documents" means the Memorandum of Understanding signed by
litigation counsel to Seagate, Veritas, Suez and the other parties thereto
on October 13, 2000 setting forth the principal terms relating to the
settlement of the class action litigation referred to therein, as amended
by any subsequent settlement documents executed and delivered by the
parties thereto.
"Litigation Holdback Amount" means $50,000,000.
6. TRA Amount.
(a) Section 1.11(a)(xxxiv) of the Merger Agreement is hereby amended
and restated in its entirety as follows:
"Reserve Amount" shall mean $150 million.
(b) The definition of "TRA Right" in Section 1.11(a)(xxi) of the
Merger Agreement is hereby restated in its entirety as follows:
" 'TRA Right' means a non-transferable right to receive from
Veritas, when, as and if received by Veritas or its Affiliates, a
stockholder's Pro Rata Portion of the TRA Amount as reduced pursuant to
Section 5.15(e)(ii)(x) and (y) hereof and subject to Section 5.15(e)(i)
hereof."
(c) Section 5.15 of the Merger Agreement hereby is amended and
restated in its entirety to read as follows:
3-E
<PAGE> 535
"5.15 TRA Matters
(a) Form. The TRA Rights shall be evidenced by a non-transferable
document in form and substance reasonably satisfactory to Veritas and
Seagate, and shall contain legends to the effect that they are
non-negotiable instruments as well as such other legends as may be required
by law. The rights of the holders of the TRA Rights to receive a
distribution from the Collection Account (as defined in Section 5.15(b)
hereof) shall terminate with respect to TRA Amounts on the 30(th) day after
the settlement, expiration of the statute of limitations, or final
determination (as defined in Section 1313(a) of the Code) with respect to
the last audit, examination or contest in respect of a claim for refund,
credit or amended return that would give rise to a TRA Amount. After the
expiration date of the TRA Rights, any TRA Amounts received by Veritas and
its Affiliates shall be the property of Veritas or such Affiliate without
any obligation whatsoever to account therefor to holders of the TRA Rights;
provided, however, that any TRA Amounts to be received after such
expiration date in respect of any settlement, or final determination with
respect to the last audit, examination or contest described in the prior
sentence shall be the property of the holders of the TRA Rights and an
amount of cash equal to any such TRA Amount shall be deposited in the
Collection Account pursuant to Section 5.15(c) below.
(b) Administration generally.
(i) On or prior to the Effective Time, Seagate shall designate one or
more persons (the "Administrators") who shall be responsible for overseeing
collection of the TRA Amount and distributions with respect to the TRA
Rights and coordinating activities with representatives of Veritas and
Purchaser with respect to Seagate Taxes. Veritas and Seagate will, prior to
the Effective Time, cooperate in good faith with respect to establishing
procedures and structures designed to realize the aggregate value of the
TRA Amount and minimize the amount of administrative costs. This may
include the establishment of segregated accounts, pass-through trusts or
similar devices (collectively, a "Collection Account") to receive periodic
payments of cash amounts equal to the TRA Amount.
(ii) The Administrators shall be entitled (x) to charge the Collection
Account a fee of 1% for all amounts deposited therein and distributed to
holders of the TRA Rights, and (y) to charge the Collection Account
third-party expenses associated with administration of the TRA Rights.
(iii) The Administrators shall pay to Veritas an amount on account of
Taxes imposed on income earned on the assets held in the Collection
Account, equal to 36% of all income and gain earned by the Collection
Account. Such amount shall be paid no later than January 15 of each year in
respect of income and gain earned in the preceding year or portion thereof
during which the account is in existence.
(c) Collection Account. Following the Effective Time, Veritas shall
forward to the Collection Account (and notify the Administrators of) an
amount in cash equal to any TRA Amount receipt (including the realization
of any credit) by Seagate, within ten (10) business days of such receipt
or, in the case of the Reserve Amount, within 2 business days of the
Closing.
(d) Interest. Any amounts in respect of the TRA Amounts not deposited
in the Collection Account within the time period specified in Section
5.15(c) shall be subject to an interest charge of 8% per annum.
4-E
<PAGE> 536
(e) Investment/Distributions. (i) Amounts deposited in the Collection
Account shall be invested by the Administrators in short-term money markets
instruments, and shall be distributed to holders of TRA Rights on each
calendar quarterly end commencing with the first such day that is at least
45 days following the Closing Date (as defined in the Stock Purchase
Agreement); provided, however, the amount available for distribution
exceeds $5.0 million. Notwithstanding the immediately preceding sentence,
the Administrators shall not distribute to the holders of the TRA Rights
any amounts held in the Collection Account if such distribution would cause
the balance in the Collection Account to be less than $150 million
(including interest earned thereon, net of amounts in respect of applicable
income taxes) (the "Retained TRA Amount") until such time as there is a
settlement, expiration of the applicable statute of limitations, or final
determination (as defined in Section 1313(a) of the Code) with respect to
the last audit, examination or contest in respect of Seagate income taxes
relating to the taxable period beginning July 1, 2000 and ending on the
Closing Date (as defined herein) and any carryback arising in such taxable
period and the taxable period beginning July 1, 1999 and ending June 30,
2000, provided, however, upon a settlement or a final determination (as
defined in Section 1313(a) of the Code) with respect Seagate's Federal
income taxes for the taxable period in which the Closing occurs and the
taxable years to which any attribute arising in the taxable year in which
the Closing occurs is carried back and the taxable period beginning July 1,
1999 and ending June 30, 2000, the remaining amount held in the Collection
Account, less $25 million, shall be distributed immediately to the holders
of the TRA Rights.
(ii) The Retained TRA Amount shall be paid (x) first to the extent the
Collection Account does not contain amounts in excess of the Retained TRA
Amount, to pay third-party expenses associated with the administration of
the TRA Right and to pay amounts in respect of Taxes imposed on income
earned on the assets held in the Collection Account pursuant to Section
5.15(b)(ii)(y) and (iii) above, (y) second to Veritas for application in
respect of Seagate income taxes (including interest and penalties, if any)
relating to (A) the taxable period (or that portion of a taxable period)
beginning July 1, 2000 and ending on or before the Closing Date (as defined
herein) and any carryback arising in such taxable period or (B) the taxable
period beginning on July 1, 1999 and ending on or before June 30, 2000 but
solely with respect to Seagate income taxes attributable to the Canadian
Reorganization as defined in the Stock Purchase Agreement; and (z) then
third, the remainder (less the Administrators' fee as described in Section
5.15(b)(ii)(x) above) thereof, to the holders of the TRA Rights, pursuant
to Section 5.15(e)(i) hereof.
(f) Conduct of Audits and Other Procedural Matters. The Administrators
shall have the right to control any audit, examination or contest with
respect to any claim for refund, credit or amended return that would give
rise to a TRA Amount, except if such audit, examination or contest may give
rise to an indemnification obligation by Purchaser under the
Indemnification Agreement, in which case the provisions of Section 6(d)(i)
of the Indemnification Agreement shall control. Purchaser will consider in
good faith any comments or recommendations of the Administrators with
respect thereto. Veritas and Purchaser, as the case may be, shall promptly
forward to the Administrators all written notifications and other written
communications, including if available the original envelope showing any
postmark from any taxing authority received by Veritas or its Affiliates
relating to the TRA Amount.
5-E
<PAGE> 537
(g) Assistance and Cooperation. After the Effective Time, Veritas
shall (and shall cause its respective Affiliates to):
(i) Use reasonable efforts to include in any Tax Returns filed by
Veritas or its Affiliates applicable claims for refunds or credits in
respect of the TRA Amount proposed by the Administrators subject to any
applicable requirements of Section 6(c)(i) of the Indemnification
Agreement;
(ii) Cooperate fully in preparing for any audits of, or disputes
with taxing authorities regarding the TRA Amount;
(iii) Make available to the Administrators and to any taxing
authority as reasonably requested all information, records, and
documents relating to Taxes of Veritas, Seagate or any of their
respective subsidiaries;
(iv) Provide timely notice to the Administrators in writing of any
pending or threatened Tax audits or assessments relating to refunds or
credits included or potentially includable in the TRA Amount; and
(v) Furnish the Administrators with copies of all correspondence
received from any taxing authority in connection with any Tax audit
which may affect refunds or credits included or potentially includable
in the TRA Amount.
(h) Exculpation. In performing any duties under this Agreement, the
Administrator shall not be liable to any party for damages, losses, or
expenses, except to the extent resulting from the gross negligence or
willful misconduct on the part of the Administrator. The Administrator
shall not incur any such liability for (A) any act or failure to act made
or omitted in good faith, or (B) any action taken or omitted in reliance
upon any instrument, including any written statement or affidavit provided
for in this Agreement that the Administrator shall in good faith believe to
be genuine, nor will the Administrator be liable or responsible for
forgeries, fraud, impersonations, or determining the scope of any
representative authority. In addition, the Administrator may consult with
legal counsel in connection with performing the Administrator's duties
under this Agreement and shall be fully protected in any act taken,
suffered, or permitted by him/her in good faith in accordance with the
advice of counsel. The Administrator is not responsible for determining and
verifying the authority of any person acting or purporting to act on behalf
of any party to this Agreement.
(i) Dragon Shares. Any Dragon Shares being held in escrow at the
Effective Time shall, following release from escrow and delivery to
Veritas, and subject to applicable legal and contractual restrictions, be
transferred to the Administrator. Following receipt thereof, the
Administrator shall use reasonable efforts to distribute these shares to
holders of TRA Rights and/or sell such shares as promptly as practicable,
in each case, in accordance with any applicable legal and contractual
restrictions, and, following any such sale, shall deposit the net proceeds
thereof into the Collection Account and distribute the same in accordance
with paragraph (e) of this Section 5.15."
7. Litigation Holdback Amount. A new Section 5.16 is hereby added to the
Merger Agreement as follows:
"5.16 Litigation Holdback Amount. Promptly following the satisfaction of
all of the conditions described in paragraph (8) of the Settlement Documents,
Veritas shall make available to the Exchange Agent for payment to each holder of
record of Seagate Common Stock at the Effective Time such holder's pro rata
portion of the Litigation
6-E
<PAGE> 538
Holdback Amount plus interest thereon computed as described in such paragraph
(8) of the Settlement Documents.
8. Consent. Suez hereby consents to the amendments to the Merger Agreement
set forth in this Article II for all purposes of and under the Stock Purchase
Agreement, and hereby further agrees to be bound by the terms of Sections
1.11(a)(xxxiv) (definition of "Reserve Amount") and Sections 5.15(e) and (f) of
the Merger Agreement, each as amended hereby.
ARTICLE III
AMENDMENT TO INDEMNIFICATION AGREEMENT
Capitalized terms used in this Article III and not otherwise defined shall
have the respective meanings assigned thereto in the Indemnification Agreement.
1. Section 6(b) of the Indemnification Agreement is hereby amended to add
at the end of the first sentence in the third paragraph thereof the following:
"provided, however, that to the extent that any payment of a Loss made in
respect of an assumed contingent liability relating to Taxes of Seagate does not
exceed the amount of contingent liability for Taxes that was included in the
amount realized in respect of the Stock Purchase, such payment shall (unless
otherwise determined by the relevant tax authority) instead be treated as a
payment of the amount realized, and not as an adjustment to such Purchase Price.
2. Section 6(c)(ii) of the Indemnification Agreement is hereby amended by
redesignating paragraph (ii) as paragraph (iii) and adding a new paragraph (ii)
as follows:
"(ii) A copy of a draft of all Tax Returns relating to Seagate and the
Retained Subsidiaries which are to be filed after the Stock Purchase Date, but
which relate to a Pre-Purchase Tax Period or its Straddle Period, including the
federal consolidated income Tax Return of the affiliated group of which Seagate
is the common parent for the period ending with the Merger, shall be furnished
to the Administrators (as defined in the Merger Agreement) at least 30 days
prior to the due date for each such Tax Return for review and comment. SAC will
consider in good faith any comments of the Administrators with respect to each
such Tax Return."
ARTICLE IV
GENERAL PROVISIONS
1. This Agreement may be executed in one or more counterparts, all of which
shall be considered one and the same agreement and shall become effective when
one or more counterparts have been signed by each of the parties hereto and
delivered to the other party hereto, it being understood that each party hereto
need not sign the same counterpart.
2. Except as expressly modified by this Agreement, all of the
representations, warranties, terms, covenants, conditions and other provisions
of the Merger Agreement and Stock Purchase Agreement shall remain in full force
and effect in accordance with their respective terms.
3. Nothing in this Agreement shall be deemed to or construed as in any way
making (i) Suez a party to the Merger Agreement or (ii) Veritas a party to the
Stock Purchase Agreement.
7-E
<PAGE> 539
4. Promptly, and in any event within ten (10) calendar days following such
time (if any) as the conditions satisfied in paragraph (8) of the Settlement
Documents have become incapable of being satisfied (as determined by Veritas, in
its reasonable judgement), the Litigation Holdback Amount, together with
interest thereon computed as provided in Section 5.16 of the Merger Agreement,
shall be paid by Veritas to Suez.
[Remainder of Page Intentionally Left Blank]
8-E
<PAGE> 540
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be
executed by their duly authorized respective officers, as of the date first
above written.
VERITAS SOFTWARE CORPORATION
By:
-----------------------------------
Name:
Title:
VICTORY MERGER SUB, INC.
By:
-----------------------------------
Name:
Title:
SEAGATE TECHNOLOGY, INC.
By:
-----------------------------------
Name:
Title:
SUEZ ACQUISITION COMPANY (CAYMAN)
LIMITED
By:
-----------------------------------
Name:
Title:
SEAGATE SOFTWARE HOLDINGS, INC.
By:
-----------------------------------
Name:
Title:
9-E
<PAGE> 541
ANNEX F
EXCLUSIVITY AGREEMENT
SUEZ ACQUISITION COMPANY (CAYMAN) LIMITED
C/O SILVER LAKE PARTNERS, L.P.
March 29, 2000
VERITAS Software Corporation
1600 Plymouth Street
Mountain View, California 94043
Ladies and Gentlemen:
This letter sets forth our agreement with respect to certain matters
related to (i) the Stock Purchase Agreement between Suez Acquisition Company
(Cayman) Limited ("SAC") and Seagate Technology, Inc. (the "Company") dated as
of the date hereof (the "Stock Purchase Agreement") and (ii) the Agreement and
Plan of Merger among VERITAS Software Corporation ("VERITAS"), Victory
Acquisition Sub, Inc. and the Company dated as of the date hereof (the "Merger
Agreement").
1. No-Shop. Prior to termination of the Stock Purchase Agreement in
accordance with its terms, VERITAS shall not (directly or indirectly
through subsidiaries or otherwise), and shall direct its officers,
directors, affiliates or employees or any investment banker, attorney or
other advisor or representative retained by any of them not to, directly or
indirectly, (i) solicit, initiate, encourage or induce the making,
submission or announcement of any Seller Acquisition Proposal (as defined
in the Stock Purchase Agreement), (ii) participate in any discussions,
negotiations or other communications with any person regarding, or furnish
to any person any information with respect to, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes or
may reasonably be expected to lead to, any Seller Acquisition Proposal,
(iii) approve, endorse or recommend any Seller Acquisition Proposal, or
(iv) enter into any letter of intent, contract, agreement, understanding or
commitment contemplating or otherwise relating to any Seller Acquisition
Transaction. VERITAS shall notify SAC promptly after receiving any inquiry
or other communication regarding any Seller Acquisition Proposal.
2. Alternative Transaction Fee. In the event that: (i) the Stock
Purchase Agreement is terminated pursuant to Sections 10.1(g) or (h), (ii)
in the case of a termination by SAC of the Stock Purchase Agreement, SAC
shall not be in breach of any of its representations and warranties,
covenants or agreements under the Stock Purchase Agreement such that the
Company would not then be required to consummate the transactions
contemplated by the Stock Purchase Agreement and (iii) within 90 days of
the date of such termination, VERITAS enters into any agreement or
agreements with respect to a Seller Acquisition Transaction, VERITAS shall,
prior to entering into any such agreement or agreements, pay to SAC (or its
designees), $50 million in immediately available funds.
3. Governing Law. This letter agreement will be governed by and
construed and interpreted in accordance with the laws of the State of New
York.
1-F
<PAGE> 542
4. Counterparts. This letter agreement may be executed in separate
counterparts, each of which shall constitute an original and all of which,
taken together, shall constitute one and the same instrument.
5. Assignment. The rights and obligations of each party hereto may not
be assigned to any other party (by operation of law or otherwise) without
the written consent of the other party hereto.
6. Specific Performance. In view of the uniqueness of the agreements
contained in this letter agreement and the transactions contemplated hereby
and the fact that the parties hereto would not have an adequate remedy at
law for money damages in the event that any obligation under this letter
agreement is not performed in accordance with its terms, each of the
parties hereto therefore agrees that each party hereto shall be entitled to
specific enforcement of the terms of this letter agreement in addition to
any other remedy to which such party may be entitled, at law or in equity.
Very truly yours,
SUEZ ACQUISITION COMPANY (CAYMAN)
LIMITED
By:
-----------------------------------
Name:
Title:
Accepted and Agreed as of
the date first written above:
VERITAS SOFTWARE CORPORATION
By:
----------------------------------
2-F
<PAGE> 543
ANNEX G
OPINION OF MORGAN STANLEY & CO. INCORPORATED
(FINANCIAL ADVISOR TO SEAGATE)
MORGAN STANLEY DEAN WITTER
2725 SAND HILL ROAD
BUILDING C -- SUITE 200
MENLO PARK, CALIFORNIA 94025
(650) 234-5500
August 29, 2000
Board of Directors
Seagate Technology, Inc.
920 Disc Drive
Scotts Valley, CA 95066
Members of the Board:
We understand that Seagate Technology, Inc. ("Seagate" or the "Company"),
VERITAS Software Corporation ("Veritas") and a wholly-owned subsidiary of
Veritas have entered into an Agreement and Plan of Merger and Reorganization,
dated as of March 29, 2000 (the "Merger Agreement"), which provides, among other
things, for the merger (the "Merger") of a wholly owned subsidiary of Veritas
with and into Seagate. We also understand that Seagate, Seagate Software
Holdings, Inc. ("Seagate Software") and Suez Acquisition Company (Cayman)
Limited (the "Buyer"), in connection with the signing of the Merger Agreement
and concurrently therewith, have entered into a Stock Purchase Agreement, dated
as of March 29, 2000, (the "Stock Purchase Agreement"), which provides, among
other things, for the purchase and assumption by the Buyer of all the assets and
liabilities of Seagate other than certain assets and liabilities designated
therein (the "Stock Purchase Transactions"). The closing of the Merger is
expressly conditioned upon, and will occur immediately following, the closing of
the Stock Purchase Transactions. In addition, we understand that the Buyer,
Seagate, Seagate Software and Veritas have entered into a Consolidated Amendment
to the Stock Purchase Agreement, Agreement and Plan of Merger and
Reorganization, Indemnification Agreement, and Consent, dated as of August 29,
2000 (the "Amendment"). For purposes of this opinion, references to the Merger
Agreement and the Stock Purchase Agreement shall include the Amendment. Pursuant
to the Merger, each outstanding share of common stock, par value $0.01 per
share, of Seagate (the "Seagate Common Stock"), other than shares held in
treasury or held by Veritas or any direct or indirect wholly-owned subsidiary of
Veritas or Seagate or as to which appraisal rights have been perfected, will be
converted into the right to receive (i) that number of shares of Veritas common
stock, par value $0.001 per share (the "Veritas Common Stock"), as set forth in
the Merger Agreement (the "Stock Portion"), (ii) an amount in cash based upon,
among other things, the amount of cash held by Seagate immediately prior to the
effective time of the Merger (taking into account the net amounts received in
connection with the Stock Purchase Transactions), subject to adjustment, as set
forth in the Merger Agreement (the "Cash Portion"), and (iii) an
1-G
<PAGE> 544
additional amount in cash based upon certain tax refunds or credits attributable
to Seagate for any taxable periods prior to the effective time of the Merger, if
any, received by Veritas following the closing of the Merger, as set forth in
the Merger Agreement (the "TRA Amount"). The Stock Portion, the Cash Portion and
the TRA Amount are referred to herein, collectively, as the "Merger
Consideration". The terms and conditions of the Merger are more fully set forth
in the Merger Agreement.
You have asked for our opinion as to whether the Merger Consideration to be
received by the holders of the Seagate Common Stock pursuant to the Merger
Agreement is fair from a financial point of view to such holders.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information concerning Seagate;
(ii) reviewed certain publicly available financial statements and other
information concerning Veritas;
(iii) reviewed certain internal financial statements and other financial
and operating data concerning Seagate prepared by the management of
Seagate;
(iv) reviewed certain financial projections prepared by the management of
Seagate;
(v) discussed with senior executives of Seagate the past and current
operations and financial condition and the prospects of Seagate;
(vi) discussed with senior executives of Veritas the past and current
operations and financial condition and the prospects of Veritas,
including a review of publicly available projections from equity
research analyst estimates;
(vii) reviewed the reported prices and trading activity for the Seagate
Common Stock, for the Veritas Common Stock and those for publicly
traded securities of certain other companies whose shares are owned
by Seagate, including Veeco Instruments, Inc., Gadzoox Networks,
Inc., and Lernout & Hauspie Speech Products, N.V.;
(viii) reviewed the pro forma impact of the Merger on the earnings per
share of Veritas;
(ix) analyzed alternative transaction structures involving some or all of
the assets of Seagate;
(x) participated in discussions and negotiations among representatives of
Seagate, Veritas and the Buyer;
(xi) reviewed the Merger Agreement, and certain related documents
including the Stock Purchase Agreement and the Amendment; and
(xii) performed such other analyses and considered such other factors as
we have deemed appropriate.
Other than as set forth in clause (vi) above, in connection with the
preparation of this opinion, we have neither received nor reviewed any
non-public information prepared by or relating to Veritas.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion, including the information prepared by the management of Seagate as
to the computation and timing
2-G
<PAGE> 545
of the TRA Amount and other tax related items. With respect to the financial
projections, we have assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the future
financial performance of Seagate. We have not made any independent valuation or
appraisal of the assets or liabilities of Seagate, nor have we been furnished
with any such appraisals.
We have assumed with your consent that the Merger will be consummated in
accordance with the terms set forth in the Merger Agreement and will be treated
as a tax-free reorganization pursuant to the Internal Revenue Code of 1986. Our
opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof.
It is understood that this letter is for the information of the Board of
Directors of Seagate, except that this opinion may be included in its entirety
in any filing made by Seagate with the Securities and Exchange Commission in
respect of the transaction. In addition, this opinion does not in any manner
address the prices at which the Seagate Common Stock or the Veritas Common Stock
will actually trade at any time.
We have acted as financial advisor to the Board of Directors of Seagate in
connection with the Merger and will receive a fee for our services. In the past,
Morgan Stanley & Co. Incorporated and its affiliates have provided financial
advisory and financing services for Seagate and financing services for Veritas
and have received fees for the rendering of these services.
Based on the foregoing, we are of the opinion as of the date hereof that
the Merger Consideration to be received by the holders of the Seagate Common
Stock pursuant to the Merger Agreement is fair from a financial point of view to
such holders.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ CHARLES R. CORY
----------------------------------------
Charles R. Cory
Managing Director
3-G
<PAGE> 546
ANNEX H
OPINION OF CREDIT SUISSE FIRST BOSTON CORPORATION
(FINANCIAL ADVISOR TO VERITAS)
March 29, 2000
Board of Directors
VERITAS Software Corporation
1600 Plymouth Street
Mountain View, California 94043
Ladies and Gentlemen:
You have asked us to advise you with respect to the fairness to VERITAS
Software Corporation, a Delaware corporation (the "Acquiror"), from a financial
point of view of consideration to be paid by the Acquiror pursuant to the terms
of the Agreement and Plan of Merger and Reorganization, dated as of March 29,
2000 (the "Merger Agreement"), by and among Seagate Technology, Inc., a Delaware
corporation (the "Company"), the Acquiror and Victory Merger Sub, Inc., a
Delaware corporation and wholly owned subsidiary of the Acquiror (the "Sub").
The Merger Agreement provides for the merger (the "Merger") of the Sub with and
into the Company, pursuant to which each outstanding share of common stock, par
value $0.01 per share, of the Company ("Company Common Stock") will be converted
into the right to receive (i) the number of shares of common stock, par value
$0.001 per share ("Acquiror Common Stock"), of the Acquiror determined in
accordance with the Merger Agreement (the "Stock Portion Exchange Ratio") and
(ii) the amount of cash determined in accordance with the Merger Agreement. As
set forth more specifically in the Merger Agreement, the Stock Portion Exchange
Ratio will be calculated by dividing the aggregate number of shares of Acquiror
Common Stock to be issued in the Merger (as determined in accordance with the
Merger Agreement) by the aggregate number of shares of Company Common Stock
outstanding at the effective time of the Merger (after giving effect to the
treatment of options to purchase Company Common Stock set forth in the Merger
Agreement).
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company and the Acquiror, as
well as the Merger Agreement and the Stock Purchase Agreement, dated as of March
29, 2000 (the "Stock Purchase Agreement"), by and among Suez Acquisition Company
(Cayman) Limited, a limited company organized under the laws of the Cayman
Islands ("SAC"), the Company and Seagate Software Holdings, Inc., a Delaware
corporation. We have also reviewed certain other information provided to us or
discussed with us by the Acquiror and have met with the management of the
Acquiror and SAC and advisors to the Acquiror and SAC to discuss the business
and prospects of the Acquiror and the Company. We have also considered certain
financial and stock market data of the Company and the Acquiror, and we have
considered the pro forma effect of the Merger on the Acquiror. We also
considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which we deemed
relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to
financial forecasts for the Company and the Acquiror, we have reviewed and
discussed with the management of the Acquiror publicly available financial
forecasts relating to the Company and the Acquiror
1-H
<PAGE> 547
and have assumed that such forecasts represent reasonable estimates and
judgments as to the future financial performance of the Company and the
Acquiror, respectively. You also have informed us, and we have assumed, that the
Merger will be treated as a tax-free reorganization for federal income tax
purposes. In addition, we have not been requested to make, and have not made, an
independent evaluation or appraisal of the assets or liabilities (absolute,
accrued, contingent or otherwise) of the Company, nor have we been furnished
with any such evaluations or appraisals. Our opinion is necessarily based upon
financial, economic, market and other conditions as they exist and can be
evaluated on the date hereof. We are not expressing any opinion as to the actual
value of the shares of Acquiror Common Stock when issued to the Company's
stockholders pursuant to the Merger or the prices at which shares of Acquiror
Common Stock will trade subsequent to Merger.
We have acted as financial advisor to the Acquiror in connection with the
Merger and will receive a fee for our services, a significant portion of which
is contingent upon the consummation of the Merger. We will also receive a fee
for rendering this opinion.
In the past, we have performed certain investment banking services for the
Acquiror and have received customary fees for such services.
In the ordinary course of our business, we and our affiliates may actively
trade the debt and equity securities of both the Company and the Acquiror for
our and such affiliates' own accounts and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of the Acquiror in connection with its consideration of the Merger and
is not to be quoted or referred to, in whole or in part, in any registration
statement, prospectus or proxy statement, or in any other document used in
connection with the offering or sale of securities, nor shall this letter be
used for any other purposes, without our prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Stock Portion Exchange Ratio is fair to the Acquiror from a
financial point of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
By: /s/ GEORGE F. BOUTROS
-----------------------------------
George F. Boutros
Managing Director
2-H
<PAGE> 548
ANNEX I
DELAWARE GENERAL CORPORATION LAW SECTION 262
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257,
Section 258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
1-I
<PAGE> 549
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
Section 228 or Section 253 of this title, each constituent corporation,
either before the effective date of the merger or consolidation or within
10 days thereafter, shall notify each of the holders of any class or series
of stock of such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that appraisal
rights are available for any or all shares of such class or series of stock
of such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or
2-I
<PAGE> 550
consolidation, shall, also notify such stockholders of the effective date
of the merger or consolidation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of such notice, demand
in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such holder's
shares. If such notice did not notify stockholders of the effective date of
the merger or consolidation, either (i) each such constituent corporation
shall send a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of
the effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders
on or within 10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the sending of the
first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such
holder's shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that such notice has
been given shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the stockholders entitled
to receive either notice, each constituent corporation may fix, in advance,
a record date that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall
3-I
<PAGE> 551
be filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be
4-I
<PAGE> 552
entitled to vote such stock for any purpose or to receive payment of dividends
or other distributions on the stock (except dividends or other distributions
payable to stockholders of record at a date which is prior to the effective date
of the merger or consolidation); provided, however, that if no petition for an
appraisal shall be filed within the time provided in subsection (e) of this
section, or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of such stockholder's demand for an appraisal
and an acceptance of the merger or consolidation, either within 60 days after
the effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation, then
the right of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such approval may
be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
(8 Del. C. 1953, Section 262; 56 Del. Laws, c. 50; 56 Del. Laws, c. 186,
Section 24; 57 Del. Laws, c. 148, Section 27-29; 59 Del. Laws, c. 106,
Section 12; 60 Del. Laws, c. 371, Section 3-12; 63 Del. Laws, c. 25, Section 14;
63 Del. Laws, c. 152, Section 1, 2; 64 Del. Laws, c. 112, Section 46-54; 66 Del.
Laws, c. 136, Section 30-32; 66 Del. Laws, c. 352, Section 9; 67 Del. Laws, c.
376, Section 19, 20; 68 Del. Laws, c. 337, Section 3, 4; 69 Del. Laws, c. 61,
Section 10; 69 Del. Laws, c. 262, Section 1-9; 70 Del. Laws, c. 79, Section 16;
70 Del. Laws, c. 186, Section 1; 70 Del. Laws, c. 299, Section 2, 3; 70 Del.
Laws, c. 349, Section 22; 71 Del. Laws, c. 120, Section 15; 71 Del. Laws, c.
339, Section 49-52.)
5-I
<PAGE> 553
ANNEX J
TAX OPINION OF
WILKIE FARR & GALLAGHER
(COUNSEL TO VERITAS)
[LETTERHEAD OF WILLKIE FARR & GALLAGHER]
October 19, 2000
VERITAS Software Corporation
1600 Plymouth Street
Mountain View, California 94043
Ladies and Gentlemen:
We have acted as special counsel to VERITAS Software Corporation, a
Delaware corporation ("VERITAS"), in connection with the preparation of the
Registration Statement on Form S-4 of VERITAS (file no. 333-41318), initially
filed on July 13, 2000, as amended by Amendment No. 1 thereto, filed on August
30, 2000, as amended by Amendment No. 2 thereto, filed on September 28, 2000,
and as amended by Amendment No. 3 thereto, filed on the date hereof (such
Registration Statement, as so amended, the "Registration Statement"), relating
to the proposed merger of Victory Merger Sub, Inc., a Delaware corporation and
wholly owned subsidiary of VERITAS ("Merger Sub"), with and into Seagate
Technology, Inc., a Delaware corporation ("Seagate"). In that connection, we
have prepared the section entitled "Material United States Federal Income Tax
Consequences of the Merger" contained in the Joint Proxy Statement/Prospectus
forming a part of the Registration Statement (the "Joint Proxy
Statement/Prospectus").
Our opinion is based on the provisions of the Internal Revenue Code of
1986, as amended, Treasury Regulations promulgated thereunder, judicial
authority and current administrative rulings and practice, all as of the date of
this letter, and all of which may change at any time. We have also examined
copies of (i) the Agreement and Plan of Merger and Reorganization dated as of
March 29, 2000 (as amended by the Consolidated Amendments (as defined below),
the "Merger Agreement"), by and among VERITAS, Merger Sub and Seagate, (ii) the
Consolidated Amendment to Stock Purchase Agreement, Agreement and Plan of Merger
and Reorganization, and Indemnification Agreement, and Consent dated as of
August 29, 2000 (the "First Consolidated Amendment"), by and among VERITAS,
Merger Sub, Seagate, Seagate Software Holdings, Inc. and Suez Acquisition
Company (Cayman) Limited, (iii) the Second Consolidated Amendment to Stock
Purchase Agreement, Agreement and Plan of Merger and Reorganization, and
Indemnification Agreement, and Consent dated as of October 17, 2000 (the "Second
Consolidated Amendment" and, together with the First Consolidated Amendment, the
"Consolidated Amendments") by and among VERITAS, Merger Sub, Seagate, Seagate
Software Holdings, Inc. and Suez Acquisition Company (Cayman) Limited and (iv)
the Registration Statement.
It is our opinion that the above-referenced section of the Joint Proxy
Statement/ Prospectus, based upon the assumptions contained therein (including
the accuracy of certain representations to be provided by VERITAS, Merger Sub
and Seagate as of the Effective Time (as that term is defined in the Merger
Agreement)), provides an accurate
1-J
<PAGE> 554
October 19, 2000
Page 2
discussion of the material Federal income tax consequences of the Merger (as
that term is defined in the Merger Agreement).
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement, which is being filed with the Securities and Exchange
Commission and to the reference to us in the Joint Proxy Statement/Prospectus
included as part of the Registration Statement. In giving this consent, we do
not hereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations of the Commission, nor do we thereby admit that we are experts
with respect to any part of such Registration Statement within the meaning of
the term "experts" as used in the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ WILLKIE FARR & GALLAGHER
2-J
<PAGE> 555
ANNEX K
TAX OPINION OF
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
(COUNSEL TO SEAGATE)
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI,
PROFESSIONAL CORPORATION]
October 19, 2000
Seagate Technology, Inc.
920 Disc Drive
Scotts Valley, California 95066
Ladies and Gentlemen:
We have acted as counsel to Seagate Technology, Inc., a Delaware
corporation ("Seagate"), in connection with the preparation of the Registration
Statement on Form S-4 (File No. 333-41318) (the "Registration Statement") (file
No. 333-41318) of VERITAS Software Corporation, a Delaware corporation
("VERITAS"), as amended, relating to the proposed merger of Victory Merger Sub,
Inc., a Delaware corporation and wholly owned subsidiary of VERITAS ("Merger
Sub"), with and into Seagate. In that connection, we, in cooperation with
special counsel to VERITAS, have prepared the section entitled "Material United
States Federal Income Tax Consequences of the Merger" contained in the Joint
Proxy Statement/Prospectus forming a part of the Registration Statement (the
"Joint Proxy Statement/Prospectus"). This opinion is being rendered pursuant to
the requirements of Item 21(a) of Form S-4 under the Securities Act of 1933, as
amended.
In connection with this opinion, we have examined and are familiar with the
Agreement and Plan of Merger and Reorganization dated as of March 29, 2000, as
amended by and among VERITAS, Merger Sub and Seagate, as amended (the "Merger
Agreement"), the Registration Statement, and such other presently existing
documents, records and matters of law as we have deemed necessary or appropriate
for purposes of our opinion. Unless otherwise indicated, any capitalized terms
used herein and not otherwise defined have the meaning ascribed to them in the
Merger Agreement or the Registration Statement. In addition, we have assumed (i)
that the Merger will be consummated in the manner contemplated by the Proxy
Statement/Prospectus and in accordance with the provisions of the Merger
Agreement, (ii) the truth and accuracy of the representations and warranties
made by Parent, Merger Sub and the Company in the Merger Agreement, and (iii)
the truth and accuracy of the certificates of representations to be provided to
us by Seagate, Merger Sub and VERITAS as of the Effective Time.
Based upon and subject to the foregoing, it is our opinion, that the
discussion contained in the Registration Statement under the caption "Material
United States Federal Income Tax Consequences of the Merger" sets forth the
material United States federal income tax consequences applicable to the Merger.
Because this opinion is being delivered prior to the Effective Time of the
Merger, it must be considered prospective and dependent on future events. There
can be no assurance that changes in the law will not
1-K
<PAGE> 556
Seagate Technology, Inc.
October 19, 2000
Page 2
take place which could affect the United States federal income tax consequences
of the Merger or that contrary positions may not be taken by the Internal
Revenue Service.
This opinion is furnished to you solely for use in connection with the
Registration Statement. We hereby consent to the filing of this opinion as
Exhibit 8.02 to the Registration Statement. We also consent to the reference to
our firm name wherever appearing in the Registration Statement with respect to
the discussion of the material federal income tax consequences of the Merger,
including the Proxy Statement/Prospectus constituting a part thereof, and any
amendment thereto. In giving this consent, we do not thereby admit that we are
in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder, nor do we thereby admit that we
are experts with respect to any part of such Registration Statement within the
meaning of the term "experts" as used in the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
2-K
<PAGE> 557
ANNEX L
SECOND AMENDED AND RESTATED COMPLAINT
AND
MEMORANDUM OF UNDERSTANDING
[ROSENTHAL, MONHAIT, GROSS & GODDESS, P.A. LETTERHEAD]
SEPTEMBER 11, 2000
The Honorable Leo E. Strine, Jr.
Court of Chancery
Daniel L. Hermann Courthouse
1020 N. King Street
Wilmington, Delaware 19801
Re: IN RE SEAGATE TECHNOLOGY INC. SHAREHOLDERS LITIGATION DEL. CH.,
CONSOLIDATED CIVIL ACTION NO. 17932-NC
Dear Vice Chancellor Strine:
I write to request that the Court schedule a conference to hear and
determine plaintiffs' motion for preliminary injunction, a copy of which I
enclose for Your Honor's convenience. I also enclose a copy of plaintiffs'
motion to amend. Both these motions have been served today.
Plaintiff's motion seeks to enjoin two transactions, each of which is
conditioned on the other: (a) a sale of Seagate's assets other than its stock in
Veritas Software Corporation ("Veritas") to an investor group which includes (i)
defendant Silver Lake Management Partners LP ("Silver Lake"), (ii) members of
Seagate's management including Seagate's CEO defendant Stephen J. Luczo, (iii) a
number of principals of Morgan Stanley & Co., Seagate's investment advisor on
the transaction, and (iv) partners in Wilson Sonsini Goodrich & Rosati ("WSGR"),
Seagate's lawyers (the "Asset Sale"); and (b) a contemporaneous merger of
Seagate with Veritas in which Seagate's shareholders will receive Veritas stock
(in a collective amount that represents a more than 14% discount from the
Veritas shares Seagate currently holds), and cash.
As set forth in the proposed Amended Complaint, plaintiffs contend that the
Asset Sale is the result of an irremediably conflicted process and has a price
far below the value of the assets to be conveyed. Plaintiffs contend that the
Asset Sale was infected by conflicts of interest on the part of (a) Seagate's
management which would participate in the deal and to whom Seagate's board
delegated a considerable amount of autonomy over the transaction, (b) Morgan
Stanley whose principals have an investment on the buy side and which also
provided investment services to Silver Lake in connection with the transaction,
and (c) WSGR. Plaintiffs further contend that (a) when Seagate's board learned
of these conflicts of interest it nonetheless proceeded with the transaction
without retaining independent investment advisors, (b) no effective canvass of
the market was performed, and (c) Seagate's board approved the Asset Sale
without full and accurate information as to the value of the assets to be
conveyed and market alternatives. In addition, plaintiffs assert that the
preliminary proxy statement proposed to be sent to Seagate's shareholders to
solicit their votes on the transactions contains material misstatements and
lacks material information (see Amended Complaint paragraphs 64 - 88) and that,
in any event, Seagate's shareholders who perceive the Merger as beneficial are
coerced into voting in favor of the Asset Sale without regard to its economic
deficiencies.
1-L
<PAGE> 558
Plaintiffs initiated this action in late March, 2000 and have obtained a
considerable amount of documentary discovery from defendants and other major
participants in the transaction, including Morgan Stanley. The allegations in
the proposed Amended Complaint are based on information contained in document
discovery to date. Plaintiffs are ready to proceed with depositions necessary to
present their preliminary injunction application to the Court.
Plaintiffs assert five separate bases of irreparable injury which
necessitate preliminary injunctive relief (Amended Complaint paragraph 101):
a. without the design and appropriate implementation of a process
reasonably calculated to produce the best available price in the Asset
Sale, it will be exceedingly difficult to determine any subsequent damages,
see Robert M. Bass Group, Inc. v. Evans, Del. Ch., 562 A.2d 1227, 1246
(1988);
b. even if damages could be determined, it is unlikely that the
individual defendants, even with insurance, would have the financial
capacity to respond to a judgment of the magnitude likely to be obtained;
c. the individual defendants other than Luczo will likely contend that
Seagate's corporate charter provision modeled on 8 Del. C. Section
102(b)(7) immunizes them from a damage judgment, see Arnold v. Society for
Savings Bancorp, Del. Supr., 678 A.2d 533, 541 (1996) (holding that
preliminary injunctive relief is appropriate where a Section 102(b)(7)
provision may preclude a subsequent financial remedy);
d. Seagate's shareholders are being denied all information material to
their voting and appraisal decisions with respect to the proposed
transaction, see QVC Network Inc. v. Paramount Communications, Inc., Del.
Ch., 635 A.2d 1245, 1251, aff'd, Del. Supr., 637 A.2d 34 (1993); Gilmartin
v. Adobe Resources Corp., Del. Ch., C.A. No. 12467, Jacobs, V.C. (April 6,
1992), mem. op. at 10; and
e. Seagate's shareholders who favor the Merger are being inequitably
coerced into voting in favor of the Asset Sale, see Eisenberg v.
Chicago-Milwaukee Corp., Del. Ch., 537 A.2d 1057, 1061-62 (1987).
Plaintiff's counsel are informed that Seagate could receive SEC clearance
for its proposed preliminary proxy statement as early as this week which would
mean that the transactions could be scheduled for a shareholder vote and closing
as early as mid-October. Plaintiffs' counsel propose to commence depositions
promptly. Subject to further advice from defendants' counsel regarding the
timing of the transaction, plaintiffs respectfully request that their
preliminary injunction motion be scheduled during the week of October 9, 2000.
2-L
<PAGE> 559
If Ms. Walker will provide me with times convenient to Your Honor's
calendar for a scheduling conference, I will be glad to speak to other counsel
to determine a mutually convenient time.
Respectfully,
/s/ NORMAN M. MONHAIT
------------------------------------
Norman M. Monhait
NMM:mst
Enclosures
cc: Pamela S. Tikellis, Esquire
Gregory V. Varallo, Esquire
David C. McBridge, Esquire
Kenneth J. Nachbar, Esquire
Arthur N. Abbey, Esquire
Neil C. Selinger, Esquire
Vincent Capucci, Esquire
Register in Chancery
3-L
<PAGE> 560
CONFIDENTIAL -- TO BE FILED UNDER SEAL
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
IN RE SEAGATE TECHNOLOGY, INC. CONSOLIDATED
SHAREHOLDERS LITIGATION, CIVIL ACTION NO. 17932-NC
SECOND AMENDED AND
CONSOLIDATED CLASS ACTION COMPLAINT
Plaintiffs allege the following upon information and belief, except as to
paragraph 3 which is alleged upon personal knowledge:
NATURE OF THE ACTION
1. Plaintiffs bring this action on behalf of the public shareholders of
Seagate Technology, Inc. ("Seagate" or the "Company"). Seagate's most valuable
asset is its stake of 128 million shares of Veritas Software Corporation
("Veritas") which constitutes approximately 33% of the outstanding stock of
Veritas. The market price of Veritas' stock appreciated by approximately 200%
between January and October 1999, while the market price of Seagate's stock
languished. In October 1999, Seagate's Board decided to begin an active search
for alternatives to unlock the value of Seagate's stake in Veritas. Seagate's
directors have proposed and are recommending a transaction that they contend
will unlock that value for Seagate's shareholders, which transaction Seagate's
shareholders should have the opportunity to accept or reject. Effecting this
transaction, however, purportedly requires a sale of Seagate's other assets,
including its disk-drive, tape and software businesses and XIOtech (the
"Operating Assets").
Seagate's directors have approved the Operating Assets sale to an investor group
that is led by Silver Lake Management Partners, L.P. ("Silver Lake") and
includes Seagate management, at a price far below the value of those assets. AS
will be shown, this asset sale has been negotiated and structured in a manner
rife with conflicts of interest and in disregard of Seagate's directors'
fiduciary responsibilities of loyalty, care and good faith. Seagate's Board
ceded almost total control of the search for alternatives to Seagate management
including Seagate's CEO, defendant Stephen J. Luczo ("Luczo"), Seagate's Chief
Financial Officer Charles Pope ("Pope"), and other members of Seagate's senior
management. Defendant Luczo immediately focused on a leveraged buyout of
Seagate's operating assets with Silver Lake before even exploring whether
Veritas was interested in any transaction with Seagate.
2. Seagate retained Morgan Stanley & Co. ("Morgan Stanley") to explore
alternatives for maximizing the value of Seagate's Veritas stock but it too
immediately focused on a leveraged buyout of Seagate's Operating Assets. Morgan
Stanley was irreconcilably conflicted by the fact that it was, in effect, part
of the interested purchaser -- it had a significant investment in Silver Lake.
Morgan Stanley's conflict clearly affected its allegiance as it allowed Silver
Lake unfettered access to Seagate's senior management for over three months
before Morgans Stanley began a superficial search for other potential strategic
purchasers of Seagate's Operating Assets. Moreover, Morgan Stanley never even
attempted to seek other potential financial purchasers in order to avoid
interfering with Silver Lake's efforts to recruit financial partners for the
leveraged buyout. More astonishingly, Morgan Stanley and Seagate's Board allowed
Silver Lake an exclusive period up to the end of February 2000 to negotiate with
Veritas concerning a transaction involving the sale of the Operating Assets and
Veritas's acquisition of Seagate's
4-L
<PAGE> 561
stake in Veritas. Even when Seagate's Board learned of Morgan Stanley's conflict
of interest, it maintained Morgan Stanley as Seagate's financial advisor.
Similarly, even after the Board learned that its legal advisors, Wilson Sonsini
Goodrich & Rosati ("WSGR") was also an investor in Silver Lake, the Board agreed
to their continued retention.
3. The two transactions, each of which must be voted on separately by
Seagate's shareholders, as presently structured, contemplate the following:
(a) First, the sale to an entity controlled by Silver Lake of all of
Seagate's operating assets, including $775 million in cash (the "Retained
Cash"), for $2 billion and the assumption of Seagate's liabilities (the
"Asset Sale").
(b) Second, a subsequent merger between Seagate and a subsidiary of
Veritas (the "Merger") in which Seagate's shareholders will collectively
receive (i) 109,330,300 shares of Veritas common stock (a discount of
approximately 14.6% from the 128,059,966 Veritas shares Seagate currently
holds) (the "Discount"); (ii) an additional number of shares of Veritas
common stock with a market value immediately before the completion of the
merger that is intended to be approximately equal to a negotiated discount
to the market value shortly before the completion of the merger of certain
investment securities held by Seagate; (iii) approximately $5.85 in cash
per Seagate share, less an amount of cash Veritas elects to retain in the
Merger per the following, thereby reducing the cash to either $3.75 or
$2.70 per Seagate share; (iv) if Veritas elects to retain some of the cash
otherwise payable, additional shares of Veritas common stock with a market
value determined shortly before the completion of the merger that is
intended to be approximately equal to the amount of cash that Veritas
retains, up to a maximum of $750 million; and (v) an interest in future
cash proceeds attributable to tax refunds and tax credits attributable to
Seagate which may be received or utilized following the completion of the
two transactions.
4. Notwithstanding the fact that Seagate's shareholders are being asked to
vote separately on the sale of the Operating Assets and the Merger, Morgan
Stanley has not provided Seagate's Board with a fairness opinion for each of the
Asset Sale and the Merger. Not withstanding the absence of a fairness opinion
regarding the Asset Sale, Seagate's Board is recommending to the Company's
shareholders that they vote for the Asset Sale. Each of the Merger and Asset
Sale is a condition of the other. Seagate's shareholders should not have to cede
hundreds of millions of dollars of value to Seagate's management in the Asset
Sale in order to be allowed to choose a transaction designed to realize the
value of Veritas. Accordingly, plaintiffs seek injunctive and other appropriate
relief.
THE PARTIES
5. Plaintiffs are Andrea Brown, Michael Chetkof, Burke Trading, Sidney
Mann, Gerard Gardner, Daniel A. Cinicolo, Ruthellen Miller, Palmetto Partners,
Chevra Machzikei Torah Fund, Soloman Pavel, Market Street Securities, Inc.,
Andrew Albstein, Abraham Ringel, Richard Klein, Tillie Greenberg, Zohar Ben-Dov,
and John S. Dobbs (collectively referred to herein as "plaintiffs"). At all
times relevant hereto, each plaintiff has owned shares of the common stock of
Seagate.
6. Seagate is a Delaware corporation with its principal executive offices
located at 920 Disc Drive, Scotts Valley, California 95066. Seagate designs,
manufactures and
5-L
<PAGE> 562
markets products for storage, retrieval and management of data on computer and
data communications systems.
7. Defendant Veritas is a Delaware corporation with its principal executive
offices located at 1600 Plymouth Street, Mountain View, California 94043. It is
named as a defendant as an aider and abettor of the breaches of fiduciary duties
described.
8. Defendant Victory Merger Sub, Inc. ("Merger Sub") is a Delaware
corporation and wholly-owned subsidiary of Veritas, which Veritas formed as a
vehicle for the Merger. It is named as a defendant as an aider and abettor of
the breaches of fiduciary duties described.
9. Defendant Silver Lake is a Delaware limited partnership with its
principal executive offices located at 2725 Sand Hill Road, Building C, Suite
950, Menlo Park, California 94025. It is named as a defendant as an aider and
abettor of the breaches of fiduciary duties described.
10. Defendant Luczo is and was, at all relevant times, a director of
Seagate and its President and Chief Executive Officer. Luczo is also a director
of Veritas and the Chairman of the Board of Seagate Software, Inc. ("Seagate
Software"), a wholly-owned subsidiary of Seagate.
11. Defendant Gary B. Filler ("Filler") is and was, at all relevant times,
Co-Chairman of the Board of Directors of Seagate. Filler is also a director of
Seagate Software.
12. Defendant Lawrence Perlman ("Perlman") is and was, at all relevant
times, Co-Chairman of the Board of Directors of Seagate. Perlman is also a
director of Seagate Software.
13. Defendant Kenneth E. Haughton ("Haughton") is and was, at all relevant
times, a director of Seagate.
14. Defendant Robert A. Kleist ("Kleist") is and was, at all relevant
times, a director of Seagate.
15. Defendant Thomas P. Stafford ("Stafford") is and was, at all relevant
times, a director of Seagate.
16. Defendant Laurel Wilkening ("Wilkening") is and was, at all relevant
times, a director of Seagate.
17. The Individual Defendants are in a fiduciary relationship with
plaintiffs and the other public shareholders of Seagate, and owe plaintiffs and
the other members of the Class the highest obligations of good faith, fair
dealing, due care, loyalty, and full and candid disclosure.
CLASS ACTION ALLEGATIONS
18. Plaintiffs bring this action pursuant to Rule 23 of the Rules of the
Court of Chancery on their own behalf and as a class action on behalf of all
persons who were owners of record of the common stock of Seagate as of March 29,
2000 and their successors in interest who are or will be threatened with injury
arising from defendants' conduct as fully described herein. Excluded from the
Class are defendants herein and any person, firm, trust, corporation or other
entity related to or affiliated with any of the defendants.
6-L
<PAGE> 563
19. This action is properly maintainable as a class action for the
following reasons:
(a) Seagate has approximately 216 million outstanding shares of common
stock, held by approximately 7,000 shareholders of record, and many more
beneficial owners. The Class is so numerous that joinder of all members is
impracticable.
(b) There are questions of law and fact which are common to the Class,
including, inter alia, the following:
(i) whether the Individual Defendants have breached the fiduciary
duties they owe to plaintiffs and the members of the Class and whether
the other defendants have aided and abetted such breaches of duty;
(ii) whether the proxy statement proposed for dissemination to
solicit the vote of Seagate shareholders in favor of the Asset Sale and
the Merger complained of is materially misleading and/or incomplete and
thus violates the Individual Defendants' duty of candor;
(iii) whether Seagate's shareholders are being unfairly and
illegally coerced into voting to approve the sale of Seagate's Operating
Assets to the Investor Group; and
(iv) whether the Class is entitled to injunctive relief and/or
damages as a result of defendants' wrongful conduct.
(c) Plaintiffs are committed to prosecuting this action and have
retained competent counsel experienced in litigation of this nature.
Plaintiffs' claims are typical of the claims of the other members of the
Class, and plaintiffs have the same interests as the other members of the
Class. Accordingly, plaintiffs are adequate representatives of the Class
and will fairly and adequately protect the interests of the Class.
(d) Defendants have acted on grounds generally applicable to the Class
with respect to the matters complained of herein, thereby making injunctive
and corresponding declaratory relief sought with respect to the Class as a
whole.
(e) The prosecution of separate actions by individual members of the
Class would create the risk of inconsistent or varying adjudications with
respect to individual members of the Class which would establish
incompatible standards of conduct for defendants, or adjudications with
respect to individual members of the Class which would as a practical
matter be dispositive of the interests of the other members not parties to
the adjudications or substantially impair or impede their ability to
protect their interests.
SUBSTANTIVE ALLEGATIONS
A. THE COMPANY
20. Seagate is a leading provider of technology and products which enable
people to store, access, and manage information electronically. Seagate is the
world's largest manufacturer of disk drives, magnetic discs and read-write
heads, an innovator in tape drives, and a leading developer of business
intelligence software. Seagate has recently begun to position itself as a
supplier of components essential for high speed enterprise class Internet
access.
21. Notwithstanding the woes of the disk drive business in general, Seagate
has maintained its leadership position in the industry. It has strengthened its
operating and
7-L
<PAGE> 564
financial position and positioned itself to capture enormous gains as the
industry emerges from the low point of its cycle. Seagate is in the midst of an
expense cutting program which includes plant consolidations estimated to save
Seagate over $800 million in the next five years.
22. In addition, Seagate has made substantial investments in cutting edge
technologies through the acquisition of several private companies. In addition
to its valuable disk drive business, Seagate also holds significant equity
stakes in the following public companies: Learnout & Hauspie, Inc. ("Learnout")
and Gadzoox Networks, Inc. ("Gadzoox"). The most notable of such acquisitions
occurred recently. In January 2000, Seagate acquired XIOtech Corporation
("XIOtech") for approximately $360 million in Seagate stock, then valued at $39
per share. XIOtech is a developer of high-performance storage area networking
("SAN") and network attached storage ("NAS") for hardware and software
systems -- an industry that is expected to have explosive growth in the next 5
years.
23. Prior to the announcement of the Asset Sale and the Merger, Seagate's
stock price did not reflect the value of all of the initiatives implemented by
Seagate.
B. SEAGATE ACQUIRES ONE THIRD OF VERITAS AND SEEKS WAYS TO CAPTURE THE INCREASE
IN VALUE OF THE VERITAS STAKE
24. Seagate also owns approximately 33% of Veritas. In or about May 1999,
in exchange for shares of various Seagate subsidiaries, Seagate acquired
approximately 155 million shares of the stock of Veritas' predecessor. By
September 30, 1999, Veritas' stock price had risen to approximately $33.75 per
share, appreciation of approximately 150% over its $13.32 per share price at the
beginning of 1999.
25. Throughout 1999, Seagate's Board discussed the fact that the
appreciation in value of Seagate's Veritas stock was not being reflected in the
market price of Seagate's common stock which remained essentially unchanged
while Veritas' stock price soared.
26. On or about October 8, 1999, Seagate's Executive Committee, consisting
of defendants Perlman, Filler and Luczo, authorized defendant Luczo to explore
possible alternatives to unlock the value of Seagate's underlying assets.
27. Seagate engaged Morgan Stanley to assist in this effort. Morgan Stanley
and approximately 125 of its officers and employees including several of the
officers assigned to the Seagate engagement, had committed to invest up to $42.3
millionn with Silver Lake, an investment company with a long-standing interest
in an acquisition of Seagate's operating businesses. Morgan Stanley was working
with Silver Lake on a leveraged buyout ("LBO") proposal for Seagate's operating
assets. Morgan Stanley, at the time of its initial engagement, did not reveal
these facts.
28. Seagate retained the law firm of Wilson Sonsini Goodrich & Rosati
("WSGR") to act as its legal advisor in connection with these efforts. At the
time, named partner Larry Sonsini and other WSGR partners were investors in
Silver Lake; Mr. Sonsini was also a director of Veritas.
C. DEFENDANT LUCZO AND SEAGATE'S SENIOR MANAGEMENT CONCENTRATE ON SECURING A
DEAL FOR THEIR OWN BENEFIT
29. Defendant Luczo has long harbored a desire to arrange a leveraged
buyout ("LBO") of Seagate's Operating Assets in which he and other members of
Seagate management would participate. As early as 1998, Roger McNamee
("McNamee") of
8-L
<PAGE> 565
Silver Lake and defendant Luczo spoke about the sale of Seagate's operating
assets to an investor group led by McNamee. In the early Fall of 1999, defendant
Luczo discussed his interest in an LBO of Seagate's operating assets with Morgan
Stanley.
30. Instead of concentrating their efforts on unlocking the value of
Seagate's Veritas stockholdings and operating Seagate's businesses, which had
been in a cyclical downtown, for the long term benefit of Seagate's public
shareholders, defendant Luczo and Morgan Stanley pursued their interest in an
LBO of the Operating Assets in which Luczo, Seagate's senior management, and
Morgan Stanley, as an investor in Silver Lake, would participate. Without
express authorization of or knowledge of Seagate's Board of Directors, defendant
Luczo met with representatives of Silver Lake on or about November 8, 1999 to
discuss such an LBO. At subsequent November 1999 meetings between Silver Lake
and Seagate senior management, Morgan Stanley and Silver Lake jointly presented
to Seagate management the proposed structure for a Silver Lake led LBO of
Seagate's Operating Assets with management's participation and outlined the role
that Veritas might play in such a transaction.
31. At a meeting on December 1, 1999, and at several meetings thereafter in
December 1999 and January 2000, Luczo and Seagate senior management met with
Silver Lake and discussed in detail Seagate's business and strategies. The
agenda for these meetings included presentations to Seagate management regarding
their role in the deal and potential returns to Seagate's management from
participating in an LBO. During some or all of these meetings, Seagate's senior
management provided Silver Lake guidance based upon confidential company
information which Seagate's senior management knew would be used for Silver
Lake's valuation models although no confidentiality agreement had been signed.
32. During this time, defendant Luczo met frequently with Silver Lake
representatives. They reviewed Seagate's internal operating projections and
operating information, and Luczo provided Silver Lake with information as to how
low a price Seagate's Board would find tolerable. The information provided by
Seagate management to Silver Lake severaly disadvantaged Seagate shareholders by
allowing Silver Lake to put together a low-ball bid. It was not until February
8, 2000, after Silver Lake had had numerous meetings with Seagate's senior
management and obtained sensitive, proprietary information, that Seagate and
Silver Lake signed a confidentiality undertaking.
33. Seagate's Board failed to take any action to ensure that Seagate
representatives with undivided loyalty to Seagate and its public shareholders
represented Seagate in discussions with Silver Lake about potential
transactions. To the contrary, the Board allowed Luczo, Seagate's senior
management and Morgan Stanley to control the process of exploring alternatives
to unlock the value of Seagate. In fact, during this process, Silver Lake was
granted an exclusive period of time up to the end of February 2000 to come to an
agreement with Veritas on a joint proposal involving Seagate's stake in Veritas.
D. SEAGATE'S PASSIVE BOARD OF DIRECTORS ALLOWS LUCZO AND SENIOR MANAGEMENT TO
GIVE SILVER LAKE AN UNFAIR ADVANTAGE IN STRUCTURING A TRANSACTION
34. Throughout the process, defendant Luczo continued to advance his own
interests and minimize the involvement and oversight of Seagate's Board. For
example, although Luczo's original mandate from the Board was to explore
alternatives to unlock the value of Seagate's Veritas stake, Luczo and Morgan
Stanley focused exclusively on the Silver
9-L
<PAGE> 566
Lake/management LBO until after February 2000 when Silver Lake's exclusive right
to negotiate with Veritas ended.
35. Luczo and Morgan Stanley, with the enthusiastic support of Silver Lake,
refrained from exploring whether there were other parties interested in a
transaction with Seagate until late January/early February 2000. For example,
despite the fact that in mid-November 1999, Business Week reported that both
Futjitsu and IBM had an interest in acquiring Seagate, Morgan Stanley made no
attempt to contact either company at any time. Seagate's Executive Committee and
Morgan Stanley also failed to approach other parties believed to have an
interest in Seagate such as Compaq Computer Corporation, Hewlett Packard Company
and Sony, until Silver Lake first was given an exclusive opportunity to put
together a deal with both Seagate management and Veritas. Silver Lake,
meanwhile, knew from Morgan Stanley that Silver Lake was the only private equity
buyer that Morgan Stanley had introduced to Seagate management and that it would
therefore have an advantage in structuring a deal.
36. None of Luczo, members of the Seagate Executive Committee, or Morgan
Stanley made a serious effort to find a financial or strategic buyer to compete
against Silver Lake. Morgan Stanley and Luczo failed to contact three of the
most logical strategic buyers of Seagate's operating assets, i.e., IBM, Fujitsu
and Hitachi, and made only superficial telephone contact with others such as
Sony, Hewlett-Packard, Compaq, EMC2 Corporation and Sun Microsystems, Inc. When
the latter two companies expressed interest in participating in an acquisition
of Seagate's Operating Assets, Morgan Stanley failed to follow up. At the same
time, however, Luczo and Silver Lake were actively recruiting equity investors
to participate in Silver Lake's proposed purchase of Seagate's Operating Assets.
These efforts proved highly successful as the LBO equity participation was
substantially oversubscribed.
37. Morgan Stanley was rewarded for its efforts in steering the Seagate
transaction towards Silver Lake and Seagate management with a retainer agreement
that promised to pay Morgan Stanley up to $50 million based upon the value of
the transaction. Such a fee structure is materially disproportionate to Morgan
Stanley's efforts and services in the transactions in light of the fact that 90%
of the value of the transaction is attributable to the Merger. Morgan Stanley
did not devise the structure of the Merger and there were no other potential
buyers of Seagate's Veritas stock who could offer Seagate a tax efficient
transaction. Thus, almost all of Morgan Stanley's compensation depended upon the
value of the Merger rather than the price obtained for Seagate's Operating
Assets. In fact, under the terms of the retainer agreement, even if Morgan
Stanley successfully obtained an additional $1 billion for the Operating Assets,
Morgan Stanley would only earn an additional approximately $2.5 million provided
the maximum fee of $50 million had not been reached as a result of an increase
in the market value of Veritas stock. Moreover, the additional fee that Morgan
Stanley could earn if a higher bidder for the Operating Assets was found would
be minuscule compared to the almost six-fold return on its investment in Silver
Lake which Morgan Stanley would earn if Silver Lake got the deal at $2 billion
and was able to exit the investment according to its own projections. For
example, assuming Morgan Stanley's $42 million investment in Silver Lake
constituted approximately 10% of Silver Lake's equity in this transaction,
Morgan Stanley could expect to realize a significant portion of the $6 billion
in proceeds projected in Silver Lake's 2005 exit strategy scenario.
10-L
<PAGE> 567
38. During February and March, 2000, Silver Lake held exclusive discussions
with Veritas regarding a unified bid for Seagate. The discussions included
negotiations of the Discount Veritas would seek from Seagate.
39. On February 4, 2000, Luczo, Pope, Morgan Stanley, WSGR, Silver Lake and
its advisers and counsel, and Veritas and its advisers and counsel met to
discuss a potential transaction although a discussion of valuation and terms was
avoided. This was the first time Seagate and its advisers had met with Veritas
to discuss a merger of Seagate and Veritas. By contrast, Silver Lake
representatives had had numerous discussions with Veritas representatives and
had had negotiations concerning the Discount Veritas would enjoy by the Merger.
Significantly, Silver Lake was permitted to shut out even Seagate management
from its discussions with Veritas regarding the Discount while Silver Lake was
granted the exclusive right to negotiate with Veritas until the end of February
2000. It was not until March 10, 2000, that Seagate's co-chairs met with
representatives of Veritas to negotiate terms of the Discount. All of the people
at the February meeting had a financial interest in Silver Lake's purchase of
the Operating Assets.
40. On March 3, 2000, Morgan Stanley advised Seagate's Board that there was
a lack of interest in the purchase of Seagate's Operating Assets by certain
strategic purchasers selected by Morgan Stanley and, further, there was no
alternative to the Silver Lake deal. Morgan Stanley also informed Seagate's
Board that financial buyers might be interested in purchasing the Operating
Assets. Notwithstanding this information, Seagate's Board did not direct Morgan
Stanley to pursue a possible transaction with financial buyers other than Silver
Lake, and inexplicably allowed Silver Lake's efforts to recruit equity investors
to constitute a "market check" of investors' interest in the Operating Assets.
By contrast, Silver Lake, aided by Luczo and with the benefit of Seagate's
management and an understanding of the potential of Seagate's assets, was able
to recruit other equity investors in the Silver Lake deal, including the Texas
Pacific Group, August Capital, Chase Capital Partners and Goldman Sachs.
41. At the March 3, 2000 Board meeting, in order not to delay or possibly
derail the transaction with Silver Lake, Seagate's Board concluded, inter alia,
that Silver Lake could function as its proxy for the private equity market due
to its ongoing solicitations of equity sources. In short, the Board allowed a
bidder, which had no interest in maximizing the price of the Asset Sale, to
canvass the market of potential financial purchasers.
E. THE MARCH 15, 2000 PROPOSAL AND SUBSEQUENT MODIFICATIONS ON MARCH 17, 2000
AND AUGUST 29, 2000
42. On March 15, 2000, Silver Lake and Veritas made a joint proposal to
Seagate involving Silver Lake's purchase of the Operating Assets and a
subsequent merger of Seagate and Veritas. Silver Lake and Veritas informed
Seagate that the offer would remain open until March 17, 2000 unless rejected
prior thereto. Silver Lake and Veritas also indicated that their joint proposal
was a unified proposal.
43. The March 15 proposal outlined the structure of the transactions as
follows: In the first step, Suez Acquisition Company (Cayman) Limited ("SAC"), a
company formed by Silver Lake's investor group, would purchase for a total price
of $2.0 billion all of the existing assets of Seagate including cash of
approximately $800 million but other than its shares of Veritas and the
securities of SanDisk, CVC (which was subsequently acquired by Veeco), Gadzoox,
and Dragon Systems, Inc. (which was subsequently acquired by Learnout & Hauspie,
Inc.) (collectively, the "Software Companies"). In connection with this purchase
(i.e., the Asset Sale), SAC also would assume all of the
11-L
<PAGE> 568
existing debt of Seagate which would be satisfied in connection with Seagate's
own cash in connection with the closing of the transaction.
44. Following the sale of the Operating Assets to Silver Lake, Seagate
would merge with a newly formed wholly-owned subsidiary of Veritas (i.e., the
Merger). In the Merger, Seagate shareholders would receive approximately 109
million shares of Veritas common stock for their 128 million Veritas shares and
a number of additional shares of Veritas common stock based upon an agreed
schedule of values for Seagate's equity interest in certain public companies.
Seagate shareholders would also receive cash equal to the net amount of cash
held by Seagate after giving effect to the Asset Sale. Silver Lake valued the
March 15 proposal at approximately $80 per Seagate share.
45. Silver Lake and Veritas informed Seagate that the joint proposal would
expire if the proposal or any terms thereof were revealed to anyone other than
Seagate's senior management, directors and financial and legal advisers. In
addition, in the proposal, Silver Lake demanded to be notified immediately if
Seagate engaged in discussions with another potential buyer and further demanded
that once Seagate commenced negotiations with Silver Lake, that Seagate
negotiate exclusively with Silver Lake. Seagate agreed to these demands.
46. On or about March 17, 2000, Silver Lake and Veritas submitted a revised
joint proposal to acquire Seagate. The major revisions to the proposal included:
(1) a reduction of the liquidity discounts on Seagate's stock holdings in
certain of the public companies in which Seagate held stock; (2) SAC's
assumption of the cost to Seagate of golden parachute excise taxes up to $100
million; and (3) an amendment to the calculation period for Veritas shares
issued in the Merger for the public company stakes owed by Seagate. This
proposal was also a unified proposal.
47. The transaction was again revised in late August 2000, in a minor way.
48. On August 29, 2000, Seagate filed with the Securities and Exchange
Commission ("SEC"), a preliminary proxy statement with respect to the Asset Sale
and the Merger (the "Preliminary Proxy Statement"). The Preliminary Proxy
Statement states that, based on an assumed $115.69 price per share of Veritas
stock as of August 24, 2000, the two transactions will provide Seagate's
shareholders total consideration worth approximately $14.046 billion, consisting
of $12.771 billion in Veritas stock and $1.275 billion in cash, or $13.521
billion in Veritas stock and $525 million in cash if Veritas elects to retain
$750 million in cash in exchange for issuing additional Veritas shares. The cash
component of the Merger consideration would come from Seagate's own cash, as
enhanced by the Asset Sale. In the transactions, Seagate shareholder's stake in
Veritas would be reduced from beneficial ownership of approximately 128 million
shares (through Seagate) to approximately 109.3 million shares after the
transactions, a discount with a financial value of approximately $3 billion
based on the market price for Veritas stock in late August. Seagate's
shareholders would also lose the guaranteed opportunity to designate two members
of Veritas' Board of Directors. Seagate's shareholders' beneficial share of
Gadzoox and Learnout would also be reduced materially. In addition, Seagate's
shareholders would lose their interest in Seagate's burgeoning and improving
hard disk drive business, as well as other more valuable businesses being
developed by Seagate, including XIOtech, as management would take these
businesses for its (and its venture capital partners') sole benefit.
49. Silver Lake has offered employment agreements to defendant Luczo, Pope
and other senior executives of Seagate, assuming completion of the Asset Sale.
Luczo would
12-L
<PAGE> 569
also join the Board of Directors of SAC. Moreover, Seagate's management would be
allowed to convert certain of their restructured shares of Seagate and stock
options into common stock and options of SAC. Certain members of Seagate's
senior management team will also be entitled to receive additional stock options
to purchase equity in Seagate's Operating Assets.
50. In the wake of the public announcement of the proposed transaction,
Veritas and Silver Lake publicly gloated over their catch:
(a) Veritas' CEO, Mark Leslie ("Leslie"), publicly stated that
Veritas' repurchase of its shares is a "bargain" for Veritas; and
(b) In an interview shortly after the announcement of the transaction,
Roger McNamee of Silver Lake said this is a "true growth investment" and
that "Seagate . . . has a chance to really break away from the pack." In an
interview on CNBC, Leslie also acknowledged that "the disk-drive business
was at the bottom of its cycle right now."
51. Seagate's Board approved the Asset Sale and the Merger on March 29,
2000 and approved the minor modifications on August 25, 2000.
52. The Asset Sale is the product of a fatally flawed process which has
produced an egregiously unfair price.
53. The approval by Seagate's Board of the transactions was based on
deficient valuation work conducted by a conflicted investment bank whose
financial interests would be best served by a Seagate/Silver Lake LBO at the
lowest possible price.
54. The proposed transactions will be submitted to a vote of Seagate's
shareholders, who will be asked to vote separately on the Asset Sale and the
Merger. Seagate's shareholders, however, must approve both transactions for
either to occur. The implementation of each transaction is a condition of the
other.
FIRST CAUSE OF ACTION
AGAINST THE INDIVIDUAL DEFENDANTS
FOR BREACH OF FIDUCIARY DUTY
55. Plaintiffs repeat and reallege the allegations of 1 through 53 above.
56. In the context of the proposed transactions where the cash proceeds of
the Asset Sale will be distributed directly to Seagate's shareholders as part of
the Merger consideration, the Asset Sale constitutes the sale of a material
portion of Seagate's assets and, in effect, a liquidation of Seagate's operating
business.
57. In the context of the proposed transactions, the Individual Defendants'
fiduciary duties required them to implement a process reasonably designed to
secure the best available transaction in the marketplace for the sale of
Seagate's operating assets. The Individual Defendants failed in this
responsibility. Moreover, the Individual Defendants approved the Asset Sale
without all reasonably available material information necessary to make an
informed decision.
58. Specifically:
(a) At some point in the process, the Individual Defendants learned of
Morgan Stanley's conflicts of interest in that (i) certain of its
principals had committed to invest more than $40 million in Silver Lake,
which investment constituted
13-L
<PAGE> 570
approximately 10% of Silver Lake's equity in the deal, and (ii) that Morgan
Stanley was providing financial advice to Silver Lake in connection with
the Asset Sale. The Individual Defendants nonetheless continued to rely on
Morgan Stanley for advice, information and guidance in connection with the
Asset Sale and allowed Morgan Stanley and Luczo to control the search for
strategic and financial buyers to compete with Silver Lake, rather than
retaining an independent, unconflicted investment banker to provided
impartial advice and conduct the foregoing critical activities.
(b) At some point in the process, the Individual Defendants learned
that Larry Sonsini and other WSGR partners were equity investors in Silver
Lake, and yet the Individual Defendants continued to rely on WSGR for legal
advice and guidance in the process.
(c) The Individual Defendants permitted Luczo and other members of
Seagate's management to have a principal role in dealing with Silver Lake,
notwithstanding their knowledge that these officers intended to be members
of Silver Lake's investor group and therefore had a personal financial
incentive to minimize the transaction price.
(d) The Individual Defendants allowed Silver Lake a multitude of
unfair advantages in putting together the proposed transaction including:
(i) allowing Morgan Stanley and Seagate's senior management to refrain from
approaching any strategic buyers until Silver Lake had an insurmountable
head start in putting together a transaction with the help of Seagate
management; (ii) allowing Morgan Stanley and Seagate's senior management to
refuse to approach any financial buyers to solicit interest in a buyout;
(iii) allowing defendant Luczo to participate in Silver Lake's efforts to
recruit equity investors in Silver Lake's buyout; (iv) allowing Silver Lake
an exclusive period up to the end of February 2000 to put together a
transaction proposal with Veritas; (v) allowing Morgan Stanley to advise
Silver Lake in connection with the proposed transactions; and (vi) allowing
Seagate's senior management to provide guidance to Silver Lake based on
confidential Seagate information before a confidentiality agreement was
signed.
(e) The Individual Defendants approved the Asset Sale without any
reliable information as to the interests of other buyers, strategic or
financial, in acquiring Seagate's operating assets. To the contrary, the
Individual Defendants permitted Silver Lake's efforts to recruit other
potential financial buyers to become investors in Silver Lake's investor
group to serve as a proxy for the public equity markets. They made no
effort to induce financial buyers' direct interest in acquiring Seagate's
operating assets so as to generate a competitor for Silver Lake's bid.
59. The Individual Defendants' purported reliance on Morgan Stanley's
fairness opinion was similarly flawed inasmuch as Morgan Stanley did not provide
a fairness opinion for the Asset Sale or for the Merger. Instead, Morgan Stanley
provided only an opinion on the entire transaction. Moreover, while Morgan
Stanley purported to value the Operating Assets, such valuation analysis was
flawed in ways that was, or should have been patently obvious to the Individual
Defendants. For example, despite the fact that Seagate's XIOtech and software
businesses operate in industries where comparable companies are valued at
relatively high multiples of revenues and net income, Morgan Stanley's valuation
analysis as presented to the Board valued all of Seagate's businesses at the
rock bottom multiples accorded to the low margin slow growth disk-drive
business. Further, despite Seagate's internal projections of healthy cash flow
from the XIOtech and software businesses for years to come, Morgan Stanley's
discounted cash flow analyses applied the
14-L
<PAGE> 571
low multiples and high discount rates applicable to the disk drive business in
general. Morgan Stanley knew that such valuations were inappropriate for the
software business because it had analyzed the value of Seagate Software in
September 1999 and had used revenue and net income multiples considerably higher
than those it used in its analysis of the Operating Assets sale. In addition,
Morgan Stanley had used a 13% discount rate in its discounted cash flow analysis
of Seagate Software in September 1999, but applied a 20% discount in its March
2000 analysis. Perhaps most egregiously, Morgan Stanley valued XIOtech's
projected contribution to Seagate's revenues, net income and cash flow using
multiples comparable to the market multiples for Seagate's low margin slow
growth disk-drive competitors such as Maxtor, Western Digital and Quantum Corp.,
despite the fact that Morgan Stanley knew that Seagate's internal projections
showed high double digit growth rates for XIOtech's revenues and income out to
2006.
60. The Individual Defendants thus approved the Asset Sale in reliance on
financial and legal advisers and representatives whom they knew to suffer from
disabling conflicts of interest, and on valuation work that was patently
deficient. In these circumstances, the Board could not reasonably rely on any
advice or information received from Morgan Stanley, WSGR, Luczo or Silver Lake.
In the absence of a reasonably reliable information base for decision making,
the Individual Defendants' approval of the Asset Sale does not constitute a
reasonable business judgment.
61. In addition, the Individual Defendants approved the Asset Sale
notwithstanding an $80 million break-up fee, constituting 4% of the nominal
transaction value of the Asset Sale, but 6.5% of the real transaction value of
$1.225 billion after giving effect to the $775 million Retained Cash
requirement. Seagate's Board knew or reasonably should have known that such a
break-up fee would operate as a substantial deterrent, if not a complete
barrier, to the interests of other potential buyers in acquiring Seagate's
operating assets.
62. The purported price Silver Lake will pay in the Asset Sale is $2
billion. Under the terms of the transaction, however, the acquired assets are to
include $775 million in Retained Cash. Accordingly, the real cost to Silver Lake
is $1.225 billion (the "Net Cost"). This transaction price is a gross
undervaluation of Seagate's operating assets for at least the following reasons:
(a) The book value of Seagate's operating assets as of June 30, 2000
was $7.96 per Seagate share while the price Silver Lake is paying is
equivalent to only $5.20 per Seagate share for those assets.
(b) Silver Lake's Net Cost values Seagate at only .178 times projected
sales for fiscal year 2000 which is more than 50% lower than the market
value to sales multiples of rivals Western Digital Corp. and Maxtor Corp.
for the 90 days preceding March 29, 2000. Neither Western Digital Corp. or
Maxtor's quality of earnings or balance sheet strength is nearly as high as
Seagate's.
(c) Silver Lake's Net Cost is at the low end of Maxtor's range of
Morgan Stanley's "sum of the parts" valuation for Seagate's operating
business (excluding cash). Morgan Stanley's valuation range is
$1,200,000,000 to $3,600,000,000.
(d) Morgan Stanley valued Seagate's Operating Assets using eleven
valuation methodologies assuming a balance sheet of $800 million in cash
and $50 million of non-operating liabilities. Each method produced a value
range. Only four of the ranges had a low end of less than $2 billion, and
the lowest high end was $2.5 billion. The median low end was $2.0 billion,
and the median high end was $4.2 billion. The mean low end was $2.55
billion, and the mean high end was $4.53 billion.
15-L
<PAGE> 572
(e) Morgan Stanley's private market valuation ranges, using a
discounted cash flow analysis based on the most conservative projections
provided by Seagate's management and adjusted downward by Morgan Stanley,
valued Seagate's operating assets at $2,500,000,000 to $3,000,000,000.
Moreover, using a "base case" set of projections which is the most
conservative of management's projections, Morgan Stanley's discounted cash
flow analysis yielded a range of values for the Operating Assets (including
$800 million of cash) from $3,700,000,000 to $4,700,000,000.
(f) Silver Lake's efforts to find financial investors in the LBO was
highly successful, in fact it was overscribed. Silver Lake refused to allow
a number of interested investors to participate in the deal, and refused to
permit certain others to invest as much as they offered. Silver Lake's
success in recruiting financial investment in the Asset Sale demonstrates
that an effectively conducted market canvas would have produced a more
highly priced transaction.
(g) For the fiscal year ended July 2, 1999, Seagate had income from
operations of $258 million and net income of $1.176 billion. Silver Lake's
offer is, therefore, only 5 times income from operations. The public market
valuation of Seagate's less well positioned competitors such as Western
Digital Corp. and Maxtor is far greater.
(h) Seagate's XIOtech San business is being artificially and unfairly
undervalued or ignored entirely by Morgan Stanley. Seagate's XIOtech SAN
business, considered one of the key drivers of the deal for Silver Lake,
will serve a market that is projected (by Datapoint and Soundview Tech) to
grow at a compound average growth rate of 248% from 1999 to 2002 to a $46+
billion market. XIOtech's revenues and income are projected to grow
significantly in the next few years. Revenues are projected to grow from
$55 million in 2000 to $1.5 billion in 2003; Net income is projected to
grow from $9 million net loss in 2000 to $375 million in 2003. Nonetheless,
Morgan Stanley valued XIOtech at only $180 million to $360 million despite
the fact that Seagate had paid $360 million in stock for XIOtech in January
2000. Seagate, however, has been contemplating an IPO that would value
XIOtech at more than $1 billion.
(i) Silver Lake's and Seagate management's projections for their
internal rate of return ("IRR"), based on Morgan Stanley's "conservative
case" projections, indicated an annual IRR of 63.9% based on a $5 billion
exit value in 2003 and an annual IRR of 50.4% based on an $8.7 billion exit
value in 2005.
63. The Asset Sale therefore cannot constitute a good faith business
judgment that it represents the best available transaction for Seagate's
shareholders. The Individual Defendants either subordinated the interests of
Seagate's shareholders to those of Luczo and Seagate's management and/or
intentionally or recklessly ignored available information demonstrating that the
process employed in the Asset Sale was conflicted and deficient and that the
resulting price was grossly inadequate. Accordingly, in approving the Asset
Sale, the Individual Defendants breached their fiduciary duties of loyalty, care
and good faith.
SECOND CAUSE OF ACTION
AGAINST THE INDIVIDUAL DEFENDANTS
FOR BREACH OF FIDUCIARY DUTY
IN CONNECTION WITH THE PROXY STATEMENT
64. Plaintiffs incorporate by reference the allegations of paragraphs 1
through 62 above.
16-L
<PAGE> 573
65. Under the circumstances present here, including the fact that Morgan
Stanley is part of the buyout group and the fact that Silver Lake, Veritas and
defendant Luczo are all admittedly "affiliates" under SEC regulations with
disclosure obligations governed by Rule 13e-3, there is a heightened duty of
disclosure which requires that all material information concerning negotiations,
alternatives, projections and process be disclosed, including disclosure of all
projections relied upon by any of said affiliates and all future plans for the
conduct of Seagate's businesses.
66. The Individual Defendants have caused to be prepared and have submitted
to the SEC the Preliminary Proxy Statement, the final of which is to be sent to
Seagate's shareholders to solicit their votes to approve the Merger and the
Asset Sale. The Preliminary Proxy Statement is materially false and misleading
and omits material information in a number of respects.
67. The Preliminary Proxy Statement conveys the impression that Morgan
Stanley's investment in Silver Lake is a far smaller portion of Silver Lake's
equity investment in the proposed transaction than is really the case. According
to the Preliminary Proxy Statement:
"Morgan Stanley and some of its officers and employees have committed to
invest up to $42.3 million in Silver Lake Partners' $2.3 billion fund."
In fact, Silver Lake and its investor partners including Morgan Stanley plan to
invest approximately $400 million in equity to effect the Asset Sale. Thus,
Morgan Stanley and its affiliates' investment in Silver Lake's fund is
approximately 10% of Silver Lake's equity investment in Seagate and
approximately 4.2% of the total equity invested in the Asset Sale. The quoted
disclosure misleadingly minimizes the appearance of Morgan Stanley's conflict of
interest.
68. The Preliminary Proxy Statement contains no disclosure regarding the
conflicts of interest on the part of WSGR, i.e. the investment by certain of its
partners in Silver Lake.
69. With regard to efforts to find other potential buyers for Seagate's
Operating Assets, the Preliminary Proxy Statement states that Morgan Stanley
contacted strategic buyers but that none had any interest in a transaction with
Seagate. These disclosures are designed to create the impression that an
adequate canvass of the market for potential buyers of Seagate's Operating
Assets was conducted. The facts, however, are that likely candidates for such a
transaction including IBM and Fujitsu were never contacted that some which
expressed interest in participating in a buyout of Seagate's Operating Assets
(as opposed to an acquisition or merger with Seagate in its entirety) were never
contacted again; that neither the Individual Defendants nor Morgan Stanley
solicited other financial buyers at any time before Silver Lake recruited other
equity partners and buyout firms such as TPG, August Capital and Integral
Partners.
70. Indeed, the Preliminary Proxy Statement conveys the misleading
impression that Silver Lake's inability to raise more than $2 billion in debt
and equity capital was a factor in Silver Lake's determination to pay only $2
billion for Seagate's operating assets. However, the Preliminary Proxy Statement
fails to disclose that Silver Lake was actually refusing offers of investment
capital from investors clamoring to participate in the leveraged buyout. Silver
Lake did not accept several interested investors who offered to contribute
equity to the transaction, and as to other investors who were accepted, it
accepted less than the investor offered to contribute.
17-L
<PAGE> 574
71. According to the Preliminary Proxy Statement, the primary purpose of
the Asset Sale and the Merger "is to enable Seagate's shareholders to realize
the value of a significant portion of the Veritas stock currently held by
Seagate in a manner that should not subject Seagate or them to an immediate tax
liability." This statement is false because the primary objective of the
proposed transaction is to allow Seagate's management and Morgan Stanley and
Silver Lake to participate in a lucrative LBO as reflected by the fact Morgan
Stanley, Seagate senior management and Silver Lake worked on the LBO for
approximately four months before any substantive discussions with Veritas were
held.
72. The Preliminary Proxy Statement fails to disclose that internally at
Seagate defendant Luczo referred to XIOtech as the "crown jewel" and had openly
told employees that a spinoff of a small portion of XIOtech was planned which
would value XIOtech at over $1 billion, three times the highest estimated value
Morgan Stanley accorded to XIOtech in its valuations in connection with its
fairness opinion.
73. The Preliminary Proxy Statement also fails to disclose that it is
Silver Lake's plan to spin off XIOtech in an IPO in the near term and fails to
disclose that Seagate and Luczo had plans to spin off XIOtech.
74. The Preliminary Proxy Statement fails to disclose that as late as
September 1999, Morgan Stanley had analyzed the value of a spinoff of Seagate
Software, Inc. and estimated its valuation range at $275 - $525 million based on
multiples substantially higher than those upon which the valuations contained in
the Preliminary Proxy Statement are based.
75. The Preliminary Proxy Statement fails to disclose that Silver Lake was
allowed an exclusive period to negotiate with Seagate and with Veritas so that
Silver Lake could put together a unified proposal that would condition the
shareholder's ability to receive the benefits of the Veritas Merger on their
approval of the Asset Sale to Silver Lake at a grossly unfair price.
76. The Preliminary Proxy Statement fails to disclose that Silver Lake's
exit strategy projections indicate that the value of the Operating Assets in
2006 will be $6.3 billion.
77. The Preliminary Proxy Statement fails to disclose estimates of the
Operating Assets' "Fair Market Value" of $2.5 billion, done by Deloitte & Touche
for Seagate in early 2000.
78. The Preliminary Proxy Statement fails to disclose that in the past,
Morgan Stanley has (a) provided substantial services to Veritas and has earned
more fees from Veritas than from Seagate and (b) acted as exclusive placement
agent, private broker and custodian for Integral Capital Partners, a major
equity investor in the Seagate buyout.
79. The Preliminary Proxy Statement fails to disclose that the Merger will
be accretive to Veritas earnings in the second half of year 2000 by 16% and in
year 2001 by 13%, assuming a mid-year 2000 close.
80. The Preliminary Proxy Statement fails to disclose that Seagate's
restructuring initiatives which resulted in $300 million in charges to net
income in 1999 are projected to save over $800 million in costs through 2003.
81. The Preliminary Proxy Statement fails to disclose that based upon
management's projection of future results, the market value of Seagate's
Operating Assets is projected to be $10 billion in 2003.
18-L
<PAGE> 575
82. The Preliminary Proxy Statement falsely states that the Merger cannot
be completed without the Asset Sale and fails to disclose that Seagate
relinquished the opportunity to negotiate a deal with Veritas which would
include a spin off of the Operating Assets because Silver Lake was allowed an
exclusive period in which to make a deal with Veritas.
83. The Preliminary Proxy Statement fails to disclose the percentage of
equity which Seagate's senior management will have in SAC. Thus, shareholders
are unable to compare the value Seagate's senior management will receive for
their Seagate stock to the value being given to public shareholders for their
shares in Seagate.
84. The Preliminary Proxy Statement fails to disclose the pro forma
financial statements of Seagate under the various alternatives considered by the
Board. Thus, shareholders have no basis for comparing the alternatives on a
going forward basis.
85. The Preliminary Proxy Statement fails to disclose when Seagate's Board
first learned of Morgan Stanley's participation in Silver Lake's investment
group or the reason why Seagate's Board did not retain a new investment banker
once it learned of Morgan Stanley's participation in the Silver Lake fund.
86. The Preliminary Proxy Statement fails to disclose the negotiations, if
any, between Silver Lake and Seagate over the price of the Asset Sale, and who
conducted them on behalf of Seagate.
87. The Preliminary Proxy Statement fails to disclose material details of
the process employed by Seagate's Board, if any, to ensure the procedural
fairness of the process of selling Seagate's Operating Assets in light of
Seagate Board's reliance on Morgan Stanley to secure the highest possible price,
even though Morgan Stanley was an investor in the only buyer with whom Seagate
dealt. In light of the foregoing, the Preliminary Proxy Statement must disclose:
(a) the reason why Seagate's Board decided not to contact any
financial buyers but instead rely upon Silver Lake as a market check;
(b) whether Seagate's Board requested and received or was aware of
Silver Lake's and its co-investors' plans for an exit of the investment and
the projected return on investment;
(c) the reason why Seagate's Board did not request a fairness opinion
from Morgan Stanley on each of the Merger and Asset Sale; and
(d) whether Seagate's Board sought an independent legal opinion as to
whether the continued reliance on WSGR and Morgan Stanley was consistent
with the Board's fiduciary duties in light of the fact that WSGR and Morgan
Stanley principals are investors in Silver Lake.
88. As a result of the material inaccuracies in and the omissions from the
Preliminary Proxy Statement described above, the Individual Defendants have
breached their fiduciary duties to Seagate's shareholders.
19-L
<PAGE> 576
THIRD CAUSE OF ACTION
AGAINST THE INDIVIDUAL DEFENDANTS
FOR BREACH OF FIDUCIARY DUTIES IN COERCING
A SHAREHOLDER VOTE IN FAVOR OF THE ASSET SALE
89. Plaintiffs incorporate by reference the allegations of paragraphs 1
through 88 above.
90. The Individual Defendants, with the knowing participation of Silver
Lake and Veritas, knowingly manipulated the proposed transaction to structure it
to coerce a favorable vote on the Asset Sale. Assuming that Seagate's Operating
Assets had to be separated from the Company prior to the Merger, the Individual
Defendants rejected means of this disposition that would have produced greater
value for Seagate shareholders, for example, a spin-off of the Operating Assets
or actively seeking competing bidders. Thus, in addition to being misled by the
Preliminary Proxy Statement, Seagate's shareholders who wish to approve the
Merger to obtain the benefit of appreciation in value of Seagate's holdings in
Veritas are forced, by the structure of the transactions, to vote in favor of
the Asset Sale without regard to its economic merits.
91. The Individual Defendants, as directors of Seagate, owed undivided
loyalty to Seagate's shareholders.
92. Forcing Seagate's shareholders to vote in favor of the investor group's
purchase of Seagate's Operating Assets at an unfairly low price in order to
obtain the shareholders' affirmative vote on the Merger inequitably coerces a
shareholder vote in favor of the Merger and effectively disenfranchises
Seagate's shareholders.
93. The actions of Seagate's Board will have the effect of coercing the
vote of Seagate shareholders and disenfranchising them and constitutes a breach
of their fiduciary duties.
FOURTH CAUSE OF ACTION
AGAINST VERITAS, MERGER SUB AND SILVER LAKE
FOR AIDING AND ABETTING BREACHES OF FIDUCIARY DUTY
94. Plaintiffs incorporate by reference the allegations of paragraphs 1
through 93 above.
95. Veritas and Silver Lake participated in the structuring of the proposed
transaction as a unified proposal in order to protect Silver Lake's interest in
acquiring the Operating Assets for less than their value. In return, Silver Lake
and Seagate senior management ensured Veritas a material Discount in the Merger.
They knew of the conflicts of interest on the part of Morgan Stanley and
Veritas, that Seagate's Board had relied on Luczo and Silver Lake, and that no
meaningful canvass of the market had been conducted for alternatives to the
Asset Sale.
96. Since Silver Lake turned away additional investment in the LBO, it knew
that an effective canvass of the market for financial buyers would yield a
higher price for Seagate's Operating Assets.
97. Silver Lake also knows of the deficiencies in the Preliminary Proxy
Statement set forth above.
98. Veritas formed Merger Sub to effect the Merger.
20-L
<PAGE> 577
99. Accordingly, Veritas, Merger Sub and Silver Lake have rendered
substantial assistance to and knowingly participated in the Individual
Defendants' breaches of fiduciary duty described above.
IRREPARABLE INJURY
100. As to each of the foregoing claims, plaintiffs have no adequate remedy
at law and will in fact be subject to irreparable injury unless this Court
enjoins implementation of the proposed transaction.
101. Irreparable injury arises at least from the following:
(a) Absent the design and implementation of a process reasonably
calculated to procure the best available transaction for Seagate's
Operating Assets, a reliable determination of the real value of those
assets is not likely to occur.
(b) Even assuming the real value of Seagate's operating assets can be
established, it is unlikely that the Individual Defendants, even with
insurance, have the financial capacity to respond to a judgment of the
magnitude likely to be obtained.
(c) The Individual Defendants, other than Luczo, are likely to contend
that Seagate's corporate charter provision modeled on 8 Del. C. Section
102(b)(7) immunizes them from a damage judgment. If the Individual
Defendants are successful in that effort, plaintiffs may have no available
financial remedy.
(d) As set forth in paragraphs 64 - 88 above, plaintiffs are being
denied all information material to their decision of whether or not to vote
in favor of the proposed transactions and/or seek appraisal.
(e) Seagate's shareholders who favor the Merger to realize the value
of Seagate's stake in Veritas must vote in favor of the Asset Sale, without
regard to their judgment of its economic merits.
PRAYER FOR RELIEF
WHEREFORE, plaintiffs demand preliminary and permanent relief in their
favor and in favor of the Class against defendants as follows:
A. Declaring that this action is properly maintainable as a class
action;
B. Preliminarily and permanently enjoining defendants from
consummating the proposed transactions until there has been an effective
and sufficient canvass of the market for potential competing purchasers of
Seagate's Operating Assets;
C. Declaring the break-up fee provisions of the Merger agreement void;
D. Preliminary and permanently enjoining the defendants from
consummating the proposed transactions unless and until Seagate's
shareholders have received all facts material to their voting and appraisal
decision on the proposed transactions;
E. If the proposed transactions are consummated, directing that
defendants pay to plaintiffs and the other members of the Class all damages
caused to them and account for all profits and any special benefits
obtained as a result of their unlawful conduct;
F. Awarding plaintiffs the costs and disbursements of this action,
including a reasonable allowance for the fees and expenses of plaintiffs'
attorneys and experts; and
21-L
<PAGE> 578
G. Granting such other and further relief as this Court may deem just
and proper.
Dated: September , 2000
ROSENTHAL, MONHAIT, GROSS & GODDESS,
P.A.
By:
---------------------------------
Suite 1401, Mellon Bank Center
P.O. Box 1070
Wilmington, DE 19801
(302) 656-4433
CHIMICLES & TIKELLIS LLP
One Rodney Square
P.O. Box 1035
Wilmington, DE 19801
(302) 656-2500
Co-Liaison Delaware Counsel
for Plaintiffs
OF COUNSEL:
ABBEY GARDY & SQUITIERI, LLP
212 East 39th Street
New York, NY 10016
ENTWISTLE & CAPPUCCI LLP
400 Park Avenue
New York, NY 10022
LOWEY DANNENBERG BEMPORAD & SELINGER, P.C.
The Gateway, 11th Floor
One North Lexington Avenue
White Plains, NY 10601-1714
WOLF HALDENSTEIN ADLER FREEMAN & HERZ, LLP
270 Madison Avenue
New York, NY 10016
Co-Lead Counsel for Plaintiffs
LAW OFFICES OF JEFFREY S. ABRAHAM
Suite 4700
60 East 42nd Street
New York, NY 10165
BERGER & MONTAGUE, P.C.
1622 Locust Street
Philadelphia, PA 19103
BULL & LIFSHITZ, LLP
246 West 38th Street
New York, NY 10018
22-L
<PAGE> 579
FARUQI & FARUQI, LLP
320 East 39th Street
New York, NY 10016
FINKELSTEIN THOMPSON & LOUGHRAN
2828 Pennsylvania Avenue, N.W.
Washington, D.C. 20007
GOODKIND LABATON RUDOFF & SUCHAROW LLP
100 Park Avenue
New York, NY 10017
GREENFIELD & GOODMAN, LLC
222 W. Lancaster Avenue
Suite 201
P.O. Box 1785
Paoli, PA 19301
KIRBY MCINERNEY & SQUIRE, LLP
830 Third Avenue
10th Floor
New York, NY 10022
LAW OFFICES OF CHARLES J. PIVEN, P.A.
The World Trade Center -- Baltimore
Suite 2525
401 East Pratt Street
Baltimore, MD 21202
POMERANTZ HAUDEK BLOCK GROSSMAN & GROSS LLP
100 Park Avenue
New York, NY 10017
SAVETT FRUTKIN PODELL & RYAN, P.C.
Constitution Place, Suite 700
325 Chestnut Street
Philadelphia, PA 19106
LAW OFFICES OF WALLACE SHOWMAN, P.C.
1350 Avenue of the Americas
29th Floor
New York, NY 10019
WECHSLER HARWOOD HALEBIAN & FEFFER LLP
488 Third Avenue
New York, NY 10022
Attorneys for Plaintiffs
23-L
<PAGE> 580
In the Court of Chancery of the State of Delaware
In and For New Castle County
<TABLE>
<S> <C>
IN RE SEAGATE TECHNOLOGY, INC. Consolidated
SHAREHOLDERS LITIGATION C.A. No. 17932-NC
</TABLE>
MEMORANDUM OF UNDERSTANDING
WHEREAS, the above-captioned action is now pending in the Court of
Chancery, County of New Castle, State of Delaware (the "Action");
WHEREAS, the Action resulted from the consolidation of certain putative
class actions filed in Delaware Chancery Court on behalf of the holders of the
common stock of Seagate Technology, Inc. ("Seagate"), against Seagate, the
members of Seagate's Board of Directors, Silver Lake Partners, LP, Veritas
Software Corporation ("Veritas"), and Victory Merger Sub, Inc. (collectively,
the "Defendants"),
WHEREAS, the Action seeks injunctive relief, monetary damages and/or
rescission on the ground that the conduct of the defendants in connection with a
proposed merger between Seagate and a subsidiary of Veritas (the "Merger") and a
sale of certain assets to an investor group led by Silver Lake Partners, LP (the
"Investor Group") by Seagate (the "Asset Sale") which, together, provide for
Seagate stockholders to receive shares of Veritas plus a cash payment in
exchange for each share of Seagate common stock (the "Transaction"), constitutes
a breach of fiduciary duties by the Seagate defendants in that, among other
things, the Transaction is allegedly unfair to Seagate stockholders;
WHEREAS, as a result of the pendency of the Action, counsel for the parties
conducted negotiations in an effort to reach a settlement of the Action and
reached a settlement in principle on the terms and conditions set forth below;
WHEREAS, counsel for the parties believe that the proposed settlement (the
"Settlement") is in the best interests of the parties and of Seagate and its
shareholders;
IT IS HEREBY AGREED IN PRINCIPLE AS FOLLOWS:
1. Defendants hereby agree to increase the consideration to be
received by Seagate stockholders in connection with the Transaction as
follows:
(a) the Investor Group hereby agrees to increase the purchase price
under the Asset Sale by $50 million in cash;
(b) Defendants further agree to reduce from $300 million to $150
million the amount to be withheld and deposited in a trust pending the
resolution of some Seagate tax audits (as described more fully at page
134 of the SC 13E3/A dated September 28, 2000 (the "13E3/A"));
(c) The amounts referred to in paragraphs 1(a) and (b) above shall
be distributed to the shareholders of Seagate as part of the cash
payment element of the Transaction in accordance herewith, subject to
paragraphs 7 - 9.
2. Defendant Veritas agrees to reduce the amount of cash it may elect
to retain in the Merger from an upper limit of $750 million to an upper
limit of $500 million and has agreed to make the election to retain $250
million or $500 million in cash, if at all, within the 15 consecutive
trading days ending 2 trading days immediately prior to the special meeting
of Seagate stockholders. Veritas further agrees that if it makes
24-L
<PAGE> 581
the aforementioned election to retain an amount of cash and issue Veritas
shares in lieu thereof, Veritas would issue additional shares of Veritas
common stock with an equivalent market value based upon the average closing
price of a share of Veritas common stock, as reported on the Nasdaq, for
the five consecutive trading days ending the trading day immediately
preceding the date the election is made.
3. The defendants further agree to make additional disclosures in the
Proxy to be agreed upon among the parties to this Action.
4. Seagate further agrees to retain Lehman Brothers, Inc. to provide a
fairness opinion for the Transaction.
5. Defendants acknowledge that the pendency and prosecution of the
Action was the sole factor underlying their decision to enter into this
Settlement.
6. The parties will attempt in good faith to agree upon and execute an
appropriate Stipulation of Settlement (the "Stipulation") and such other
documentation as may be required in order to obtain final court approval of
the Settlement and the dismissal of the Action upon the terms set forth in
this Memorandum of Understanding (collectively, the "Settlement
Documents"). The executed no later than 45 days after the date of the
signing of this Memorandum of Understanding. The Stipulation will expressly
provide, inter alia, on behalf of the Class certified pursuant to the Court
Order dated May 22, 2000 or any modification thereof, for entry of a
judgment of dismissal and for a complete release and settlement of all
claims against Defendants and their predecessors, successors, parents,
subsidiaries, affiliates and agents (including, without limitation, any
investment bankers or attorneys and any past, present or future officers,
directors and employees of defendants and their predecessors, successors,
parents, subsidiaries, affiliates and agents) (the "Released Parties"),
which have been or could have been asserted in the Court of Chancery or any
other state or federal court (including any claims under the federal
securities laws) relating to the Transaction, upon usual and customary
terms employed in like actions. The Stipulation will further provide that
defendants have denied and continue to deny that they have committed or
attempted to commit any violations of law or breaches of duty to Seagate or
its stockholders or otherwise, and that defendants are entering into the
Stipulation because the proposed Settlement as described above would
eliminate the burden, risk and expense of further litigation.
7. The parties will present the Settlement Documents to the Court of
Chancery of the State of Delaware for approval as soon as practicable
following appropriate notice of the proposed Settlement to the class of
stockholders of Seagate and will use their best efforts to obtain final
Court approval of the Settlement and the dismissal of the Action with
prejudice as to all claims asserted or which could have been asserted
against defendants in the Action and without costs to any party (other than
counsel fees and expenses as provided in paragraph 9 below). As used
herein, "final Court approval" of the Settlement means that the Court of
Chancery has entered an order approving the Settlement and that such order
is finally affirmed on appeal or is no longer subject to appeal. The
counsel fees and expenses provided in paragraph 9 below and the
consideration set for the in paragraph 1(a) above, shall not be payable
until certain actions pending in California Superior Courts as set forth in
Rider A (the "California Actions") are dismissed with prejudice and no
longer subject to appeal.
8. The consummation of the Settlement is subject to: (a) the
consummation of the Transaction; (b) the drafting and execution of the
Settlement Documents;
25-L
<PAGE> 582
(c) final court approval of the Settlement and dismissal of the Action with
prejudice pursuant to the material terms of the Settlement Documents and
without awarding costs to any party (except as provided in paragraph 9
below); (d) the counsel fees and expenses provided in paragraph 9 below and
the consideration set forth in paragraph 1(a) above not becoming payable
until the California Actions are dismissed with prejudice and no longer
subject to appeal; and (e) reasonable discovery with respect to the tax
audits referred to in paragraph 1(b). The (i) consideration reflected in
paragraph 1(a) above and (ii) the attorneys' fees and expenses awarded by
this Court, shall be held in escrow and earn interest at the 90 day
Treasury rate, respectively, on behalf of the plaintiffs and the class and
attorneys for plaintiff pending fulfillment of all conditions in paragraphs
7 and 8 herein. The additional consideration reflected in paragraph 1(b)
above will be funded from (1) cash of Seagate at closing that would, in the
absence of this Settlement, have been required to be deposited and held in
trust as referred to in paragraph 1(b) and (ii) proceeds of tax refunds
that would, upon receipt by Seagate, also have been required to be so
deposited and held. This Memorandum of Understanding shall be null and void
and of no force and effect should any of these conditions not be met and,
in that event, this Memorandum of Understanding shall neither be deemed to
prejudice in any way the positions of the parties with respect to the
Action nor entitle any party to recover any costs or expenses incurred in
connection with the implementation of this Memorandum of Understanding.
9. Plaintiff's counsel intend to apply to the Court of Chancery for an
award of attorneys' fees (inclusive of disbursements and fees) in an amount
equal to $15,250,000, to be paid by Seagate or on behalf of defendants
jointly to Abbey, Gardy & Squitieri, LLP and Lowey Dannenberg Bemporad &
Salinger, P.C. as receiving agents on behalf of all plaintiffs' counsel in
the Action following final Court approval of the Settlement, and the entry
of an order awarding fees and expenses by the Court. Such fees shall be
paid by Seagate or on behalf of defendants in addition to the consideration
described in paragraphs 1(a) and (b). Defendants agree that they will not
oppose such application. Any attorneys' fees and expenses awarded by the
Court to plaintiffs' counsel shall not be final or payable unless or until
an order dismissing the Action and the California Actions shall be finally
affirmed on appeal or by lapse of time or otherwise shall not be subject to
appeal as set forth in p. 7. Seagate shall pay the costs and expenses
related to providing notice of the Settlement to the class.
Dated: October 13, 2000
ROSENTHAL MONHAIT GROSS & GODDESS P.A.
/s/ NORMAN M. MONHAIT
--------------------------------------
Norman M. Monhait, Esq.
919 North Market Street
Suite 1401
Mellon Bank Center
Wilmington, Delaware 19801
Tel: (302) 656-4433
26-L
<PAGE> 583
CHIMICLES & TIKELLIS, LLP
--------------------------------------
Pamela S. Tikellis
One Rodney Square
P.O. Box 1035
Wilmington, Delaware 19801
Tel: (610) 642-8500
Co-Liaison Counsel for Plaintiffs
ABBEY, GARDY & SQUITIERI, LLP
Lee Squitieri
212 East 39th Street
New York, New York 10016
Tel: (212) 889-3700
LOWEY DANNENBERG BEMPORAD &
SELINGER, P.C.
Neil Selinger
The Gateway, 11th Floor
One North Lexington Avenue
White Plains, New York 10601-1714
Telephone: (914) 997-0500
ENTWISTLE & CAPPUCCI LLP
Vincent Cappucci
400 Park Avenue
New York, New York 10022
Telephone: (212) 894-7200
WOLF HALDENSTEIN ADLER FREEMAN & HERZ,
LLP
Jeffrey Smith
270 Madison Avenue
New York, New York 10016
Telephone: (212) 545-4600
Co-Lead Counsel for Plaintiffs
RICHARDS, LAYTON & FINGER, P.A.
/s/ GREGORY V. VARALLO
--------------------------------------
Gregory V. Varallo
One Rodney Square
P.O. Box 561
Wilmington, Delaware 19899-0952
Tel: (302) 658-6541
27-L
<PAGE> 584
FRIED, FRANK, HARRIS, SHRIVER
& JACOBSEN
Gregory Joseph
Bonnie Steingart
One New York Plaza
New York, New York 10004
Tel: (212) 859-8000
Counsel for Defendants
Seagate Technology, Inc., Gary E.
Filler, Lawrence Perlman, Kenneth E.
Haughton, Robert A. Kleist, Thomas
P. Stafford and Laurel Wilkening
YOUNG, CONAWAY, STARGATT & TAYLOR
/s/ DAVID C. MCBRIDE
--------------------------------------
David C. McBride
Wilmington Trust Center
1100 North Market Street
Wilmington, Delaware 19801
Tel: (302) 571-6600
BROBECK, PHLEGER & HARRISON LLP
David Furbush
2200 Gang Road
Palo Alto, California 94303
Tel: (650) 424-0160
Counsel for Defendant
Veritas Software Corporation and
Victory Merger Sub, Inc.
MORROS, NICHOLS ARSHT & TUNNELL
/s/ KENNETH J. NACHBAR
--------------------------------------
Kenneth J. Nachbar
1201 North Market Street
Wilmington, Delaware 19801
Tel: (302) 658-9200
SIMPSON THACHER & BARTLETT
Henry B. Gutman
425 Lexington Avenue
New York, New York 10017
Tel: (212) 465-2000
Counsel for Defendant
Silver Lake Partners, L.P.
28-L
<PAGE> 585
ASHBY & GEDDES
/s/ STEVEN J. BALICK
--------------------------------------
Steven J. Balick
One Rodney Square
Wilmington, Delaware 19899
Tel: (302) 654-1888
Counsel for Defendants
Stephen Luczo, Charles Pope, Greg
Kerfott and Donald Waite
YOUNG, CONAWAY, STARGATT & TAYLOR
--------------------------------------
David C. McBride
Wilmington Trust Center
1100 North Market Street
Wilmington, Delaware 19801
Tel: (302) 671-6600
BROBECK, PHLEGER & HARRISON LLP
David Furbush
2200 Geng Road
Palo Alto, California 94303
Tel: (650) 424-0160
Counsel for Defendant
Veritas Software Corporation and
Victory Merger Sub, Inc.
MORRIS, NICHOLS, ARSHT & TUNNELL
/s/ KENNETH J. NACHBAR
--------------------------------------
Kenneth J. Nachbar
1201 North Market Street
Wilmington, Delaware 19801
Tel: (302) 658-9200
SIMPSON THACHER & BARTLETT
Henry B. Gutman
425 Lexington Avenue
New York, New York 10017
Tel: (212) 455-2000
Counsel for Defendant
Silver Lake Partners, L.P.
29-L
<PAGE> 586
ASHBY & GEDDES
/s/ STEVEN J. BALICK
--------------------------------------
Steven J. Balick
One Rodney Square
Wilmington, Delaware 19899
Tel: (302) 654-1888
Counsel for Defendants
Stephen Luczo, Charles Pope,
Greg Kerfoot and Donald Waite
30-L
<PAGE> 587
Rider A to the MOU
California Cash Captions and Numbers
<TABLE>
<CAPTION>
CAPTION CASE NO.
------- ---------------------------
<S> <C>
1. Edward Fritche v. Seagate Technologies, Inc., Santa Clara County Superior
Veritas Software Corp., Silver Lake Partners, Court, Case No. CV788830
L.P., Lawrence Perlman, Stephen J. Luczo, Gary B.
Filler, Greg Kerfoot, and Donald Waite
2. Zef Friedman v. Stephen J. Luczo, Gary B. Filler, Santa Clara County Superior
Kenneth E. Haughton, Robert A. Kleist, Lawrence Court, Case No. CV788867
Perlman, Thomas P. Stafford, Laurel L. Wilkening,
Seagate Technology, Inc., and Does 1 through 25,
inclusive
3. Bette Grayson and Robert Grayson, Trustees u/w/o Santa Clara County Superior
Florence Roseman, Individually, and on behalf of Court, Case No. CV788865
all others similarly situated v. Seagate
Technology, Inc., Stephen J. Luczo, Gary Filler,
Lawrence Perlman, Kenneth E. Haughton, Robert A.
Kleist, Thomas Stafford, and Laurel L. Wilkening
4. Jerry Krim and Kevin J. Yourman, on behalf of Santa Cruz County Superior
Themselves and All Others Similarly Situated v. Court, Case No. CV138080
Seagate Technology, Inc., Stephen J. Luczo,
Charles C. Pope, Gary B. Filler, Lawrence
Perlman, Kenneth E. Haughton, Robert A. Kleist,
Thomas P. Stafford, Laurel L. Wilkening, Veritas
Software Corp., Silver Lake Partners, and Does 1
through 100, inclusive
5. Kenneth Schweitzer and Judy C. Klein on Behalf of Santa Cruz County Superior
Themselves and All Others Similarly Situated v. Court, Case No. CV138112
Seagate Technology, Inc., Stephen J. Luczo,
Charles C. Pope, Gary B. Filler, Lawrence
Perlman, Kenneth E. Haughton, Robert A. Kleist,
Thomas P. Stafford, Laurel L. Wilkening, Veritas
Software Corp., Silver Lake Partners, L.P., and
Does 1 through 100, inclusive
</TABLE>
31-L
<PAGE> 588
VERITAS SOFTWARE CORPORATION
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
November 21, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
VERITAS SOFTWARE CORPORATION.
The undersigned hereby appoints Mark Leslie, Kenneth E. Lonchar and Jay A.
Jones, or any of them, each with full power of substitution, to represent the
undersigned at the special meeting of stockholders of VERITAS Software
Corporation and at any adjournments or postponements of the special meeting,
and to vote, as designated below, the number of shares the undersigned would be
entitled to vote if personally present at the meeting. The special meeting
will be held at 9:00 a.m. Pacific time on November 21, 2000 at our offices
located at 900 Alta Avenue, Mountain View, California, 94043.
THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE FOR PROPOSAL NO. 1.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
_____________________________________________________________________________
-FOLD AND DETACH HERE-
Please mark exactly as indicated in this example: [x]
1. TO APPROVE THE ISSUANCE OF NEW
SHARES OF VERITAS SOFTWARE FOR AGAINST ABSTAIN
CORPORATION COMMON STOCK TO [ ] [ ] [ ]
STOCKHOLDERS OF SEAGATE
TECHNOLOGY, INC. IN CONNECTION WITH
THE MERGER OF A WHOLLY OWNED
SUBSIDIARY OF VERITAS WITH AND INTO
SEAGATE TECHNOLOGY, INC.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED. WHEN NO CHOICE IS
INDICATED, THIS PROXY WILL BE VOTED FOR PROPOSAL NO. 1.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, WE URGE YOU TO
COMPLETE, DATE, SIGN AND PROMPTLY MAIL THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE SPECIAL MEETING.
<PAGE> 589
Signature(s): Date: , 2000
--------------------------------------------- -----------
Please sign exactly as your name(s) appears on your stock certificate. If shares
of stock stand of record in the names of two or more persons or in the name of
husband and wife, whether as joint tenants or otherwise, both or all of such
persons should sign the proxy. If shares of stock are held of record by a
corporation, the proxy should be executed by the president or vice president and
the secretary or assistant secretary. Executors, administrators or other
fiduciaries who execute the above proxy for a deceased stockholder should give
their full title. Please date the proxy.
--------------------------------------------- FOLD AND DETACH HERE -------------
-2-
<PAGE> 590
SEAGATE TECHNOLOGY, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
November 21, 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF SEAGATE
TECHNOLOGY, INC.
The undersigned hereby appoints Lawrence Perlman and Gary B. Filler, or either
of them, each with full power of substitution, to represent the undersigned at
the special meeting of stockholders of Seagate Technology, Inc. and at any
adjournments or postponements of the special meeting, and to vote, as designated
below, the number of shares the undersigned would be entitled to vote if
personally present at the special meeting. The special meeting will be held at
9:00 a.m. Pacific Time on November 21, 2000 at _______ located at _____________.
THE BOARD OF DIRECTORS RECOMMENDS THAT
YOU VOTE FOR PROPOSAL NO. 1
AND FOR PROPOSAL NO. 2.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
-------------------------------------------------------------------------------
-FOLD AND DETACH HERE-
Please mark exactly as indicated in this sample: [x]
1. To authorize and approve a Stock FOR AGAINST ABSTAIN
Purchase Agreement, dated March 29, [ ] [ ] [ ]
2000, as amended, by and among Suez
Acquisition Company (Cayman)
Limited, Seagate Technology, Inc.
and Seagate Software Holdings,
Inc., and the sale by Seagate
Technology, Inc. of all its
operating assets.
2. To adopt and approve an Agreement [ ] [ ] [ ]
and Plan of Merger and
Reorganization, dated as of March
29, 2000, as amended, by and among
VERITAS Software Corporation, a
wholly owned subsidiary of VERITAS
Software Corporation, and Seagate
Technology, Inc., and the merger of
Seagate with a wholly owned
subsidiary of VERITAS Software
Corporation pursuant thereto.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED ABOVE. WHEN NO
CHOICE IS INDICATED, THIS PROXY WILL BE VOTED FOR PROPOSAL NO. 1 AND FOR
PROPOSAL NO. 2.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, WE URGE YOU TO
COMPLETE, DATE, SIGN AND PROMPTLY MAIL THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE SPECIAL MEETING.
<PAGE> 591
Signature(s): ______________________________________ Date: ________________ 2000
Please sign exactly as your name(s) appears on your stock certificate. If shares
of stock stand of record in the names of two or more persons or in the name of
husband and wife, whether as joint tenants or otherwise, both or all of such
persons should sign the proxy. If shares of stock are held of record by a
corporation, the proxy should be executed by the president or vice president and
the secretary or assistant secretary. Executors, administrators or other
fiduciaries who execute the above proxy for a deceased stockholder should give
their full title. Please date the proxy.
---------------------------------------------FOLD AND DETACH HERE-
-2-
