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FILED PURSUANT TO RULE 424(B)(3)AND RULE 424(C)
REGISTRATION NO. 333-87589
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 30, 1999)
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CUMULATIVE PROSPECTUS SUPPLEMENT
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VERITAS SOFTWARE CORPORATION
785,016 SHARES
COMMON STOCK
-------------------------
This prospectus supplement supplements the prospectus dated September 30,
1999 (the "Prospectus") to which this prospectus supplement is attached. This
prospectus supplement supersedes and replaces the prospectus supplements prior
to the date hereof.
This prospectus supplement should be read in conjunction with the
Prospectus, which is to be delivered with this prospectus supplement. This
prospectus supplement is qualified by reference to the Prospectus except to the
extent that the information in this prospectus supplement supersedes the
information contained in the Prospectus. All capitalized terms used but not
defined in this prospectus supplement have the meanings given to them in the
Prospectus.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SHARES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS OR THIS PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus supplement is April 27, 2000.
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FORWARD-LOOKING STATEMENTS
An investment in our securities involves a high degree of risk. In addition
to the other information contained in this prospectus supplement, you should
carefully consider the factors described under "Risk Factors" below before
investing in our securities. All statements, trend analyses and other
information contained in this prospectus supplement regarding markets for our
products and services and net revenue, gross margin and anticipated expense
levels, and any statements that contain the words "anticipate," "believe,"
"plan," "estimate," "expect," "intend," or other similar expressions, constitute
forward-looking statements. These forward-looking statements are subject to
business and economic risks, and our actual results of operations may differ
materially from those contained in the forward-looking statements. The
cautionary statements made in this prospectus supplement apply to all
forward-looking statements wherever they appear in this prospectus supplement.
RECENT FINANCIAL RESULTS
On April 19, 2000, we announced financial results for our first quarter
ended March 31, 2000. We achieved first quarter revenue of $244.6 million, an
increase of 82% over last year's pro forma first quarter revenue of $134.7
million. Pro forma net income, which excludes purchase accounting adjustments,
increased to $51.6 million from $27.7 million for the same quarter prior year,
an 86% increase. Diluted pro forma net income per share for the first quarter
was $0.12, a 71% increase from $0.07 for the same period last year. Our pro
forma operating margin increased to 31% for the first quarter as compared with
an operating margin of 30% for the same quarter last year.
Our as-reported revenue for the first quarter was $244.6 million, compared
with $71.9 million for the same period last year. For the first quarter, we
reported a net loss of $174.4 million, or $0.44 per share, compared with net
income of $13.6 million, or $0.06 per share on a diluted basis for the prior
year. Included in the current period's net loss is $235.2 million of purchase
accounting amortization.
To better facilitate the financial reporting, we have added an additional
financial table: "Pro forma Statements of Operations." These pro forma
statements are intended to present our operating results excluding purchase
accounting adjustments but including the results of Seagate Software NSMG and
TeleBackup Systems effective at the beginning of 1999.
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VERITAS SOFTWARE CORPORATION
PRO FORMA STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Net revenue:
User license fees......................................... $204,316 $115,566
Services.................................................. 40,324 19,163
-------- --------
Total net revenue...................................... 244,640 134,729
Cost of revenue:
User license fees......................................... 11,778 5,377
Services.................................................. 18,299 7,489
-------- --------
Total cost of revenue.................................. 30,077 12,866
Gross profit................................................ 214,563 121,863
Operating expenses:
Selling and marketing..................................... 87,583 49,801
Research and development.................................. 35,113 22,884
General and administrative................................ 14,911 8,667
-------- --------
Total operating expenses............................... 137,607 81,352
Income from operations...................................... 76,956 40,511
Interest and other income, net.............................. 11,263 4,242
Interest expense............................................ (7,523) (1,438)
-------- --------
Income before income taxes.................................. 80,696 43,315
Provision for income taxes.................................. 29,051 15,594
Pro forma net income........................................ $ 51,645 $ 27,721
======== ========
Pro forma net income per share -- basic..................... $ 0.13 $ 0.07
======== ========
Pro forma net income per share -- diluted................... $ 0.12 $ 0.07
======== ========
Shares used in per share calculation -- basic............... 394,471 377,627
======== ========
Shares used in per share calculation -- diluted............. 437,107 412,875
======== ========
</TABLE>
The pro forma statements of operations are intended to present our operating
results excluding purchase accounting adjustments but including the results of
NSMG and Telebackup assuming the companies had been combined at the beginning of
the three month periods ending March 31, 2000 and 1999, respectively. Such
purchase accounting adjustments would include amortization of developed
technology, amortization of goodwill and intangibles, restructuring and other
merger costs, in-process research and development costs, and related adjustments
for the income tax provision.
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VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
--------- --------
<S> <C> <C>
Net revenue:
User license fees......................................... $ 204,316 $ 55,786
Services.................................................. 40,324 16,118
--------- --------
Total net revenue...................................... 244,640 71,904
Cost of revenue:
User license fees......................................... 11,778 1,955
Services.................................................. 18,299 6,527
Amortization of developed technology...................... 15,395 --
--------- --------
Total cost of revenue.................................. 45,472 8,482
Gross profit................................................ 199,168 63,422
Operating expenses:
Selling and marketing..................................... 87,583 26,823
Research and development.................................. 35,113 13,816
General and administrative................................ 14,911 3,289
Amortization of goodwill and other intangibles............ 219,759 --
--------- --------
Total operating expenses............................... 357,366 43,928
Income (loss) from operations............................... (158,198) 19,494
Interest and other income, net.............................. 11,263 3,031
Interest expense............................................ (7,523) (1,433)
--------- --------
Income (loss) before income taxes........................... (154,458) 21,092
Provision for income taxes.................................. 19,925 7,509
Net income (loss)........................................... $(174,383) $ 13,583
========= ========
Net income (loss) per share -- basic........................ $ (0.44) $ 0.06
========= ========
Net income (loss) per share -- diluted...................... $ (0.44) $ 0.06
========= ========
Shares used in per share calculation -- basic............... 394,471 215,199
========= ========
Shares used in per share calculation -- diluted............. 394,471 239,111
========= ========
</TABLE>
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VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments........................... $ 851,450 $ 692,381
Accounts receivable, net.................................. 126,448 132,180
Deferred income taxes..................................... 23,803 23,803
Other current assets...................................... 18,925 13,381
---------- ----------
Total current assets................................... 1,020,626 861,745
Long-term investments....................................... 49,004 65,036
Property and equipment...................................... 88,233 76,958
Goodwill and other intangibles.............................. 2,991,076 3,226,749
Other non-current assets.................................... 8,429 2,789
---------- ----------
Total assets........................................... $4,157,368 $4,233,277
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 32,774 $ 30,229
Accrued compensation and benefits......................... 41,769 35,560
Accrued acquisition and restructuring costs............... 22,089 24,202
Other accrued liabilities................................. 35,229 41,727
Income taxes payable...................................... 173 6,804
Customer advances......................................... 6,521 5,208
Deferred revenue.......................................... 124,296 86,979
---------- ----------
Total current liabilities.............................. 262,851 230,709
Non-current liabilities:
Convertible subordinated notes............................ 454,557 451,044
Deferred income taxes..................................... 144,384 157,867
Other non-current liabilities............................. 529 596
---------- ----------
Total non-current liabilities.......................... 599,470 609,507
Stockholders' equity........................................ 3,295,047 3,393,061
---------- ----------
Total liabilities and stockholders' equity............. $4,157,368 $4,233,277
========== ==========
</TABLE>
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RISK FACTORS
In addition to other information in the Prospectus and this prospectus
supplement, the following factors should be considered carefully in evaluating
VERITAS and our business. Any of the following factors could harm our business
and could result in a partial or complete loss of your investment.
We face many new difficulties managing a larger company
On May 28, 1999, we acquired the Network & Storage Management Group
business of Seagate Software, Inc., which we refer to as NSMG. On June 1, 1999
we acquired TeleBackup Systems, Inc., which we refer to as TeleBackup. On August
10, 1999, we acquired certain assets of NuView, Inc., which we refer to as
NuView.
The NSMG and TeleBackup acquisitions have created new challenges for us. If
we fail to meet those challenges, our business and quarterly and annual results
of operations could be adversely affected and the value of your investment could
decline. We grew rapidly before these acquisitions. After these acquisitions,
our workforce was approximately twice the size of our workforce prior to the
acquisitions. This growth is likely to continue to strain our management control
systems and resources, including decision support, accounting, management
information systems and facilities. We must continue to improve our financial
and management controls and our reporting systems and procedures to manage our
employees and to obtain additional facilities.
We might fail to integrate the businesses of VERITAS, NSMG and TeleBackup
Product line integration will be difficult. We must integrate the
independent businesses of NSMG and TeleBackup with our own. If we fail to
integrate them, our business and our quarterly and annual results of operations
may be adversely affected. One key issue will be the integration of our products
with those of NSMG and TeleBackup. This product line integration will involve
consolidating products with duplicative functionality, coordinating research and
development activities, and converging the technologies supporting the various
products. For example, the VERITAS NetBackup product and VERITAS Backup Exec
products share many features and functions. Technology convergence will be
particularly difficult because our products lack a common technology
architecture. In particular, products formerly associated with NSMG were not
designed for the degree of scalability that our legacy products were designed
for, nor for use on a variety of operating systems.
Other business integration issues, if not satisfactorily resolved, could
have a material negative impact on our business. Other problems inherent in
integrating our businesses include:
- maintaining brand recognition for key products formerly associated with
NSMG, such as VERITAS Backup Exec, and with TeleBackup, such as VERITAS
TeleBackup, while migrating customer identification of these brands to
VERITAS;
- resolving channel conflicts that may arise between our original equipment
manufacturer and direct sales channels and the retail channels acquired
in the NSMG acquisition;
- coordinating, integrating and streamlining geographically dispersed
operations, such as engineering facilities in California, Minnesota,
Florida, North Carolina, Maryland, Colorado, Massachusetts, Washington,
Canada and India; and
- coping with customers' uncertainty about continued support for
duplicative products.
The integration will be expensive and is likely to interrupt our ordinary
business activities. Any of these risks could harm our business and quarterly
and annual results of operations.
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Management and employee integration issues, if not satisfactorily resolved,
could harm our business. Potential management and employee integration problems
include:
- resolving differences between the corporate cultures of VERITAS, NSMG and
TeleBackup; and
- integrating the management teams of all three companies successfully.
We will incur significant accounting charges in connection with the NSMG,
TeleBackup and NuView acquisitions that will reduce our earnings immediately and
in the future
The significant costs of integration associated with the NSMG, TeleBackup
and NuView acquisitions increase the risk that we will not realize the
anticipated benefits. Because we accounted for these acquisitions using the
purchase method of accounting, we recorded non-cash charges of $104.2 million in
our statements of operations in 1999 related to the write-off of in-process
research and development. We also recorded goodwill and other intangible assets
of approximately $3,754.9 million. This amount will be amortized over four
years, and will result in charges to operations of approximately $234.8 million
per quarter. We also recorded a restructuring charge in 1999 of $11.0 million
related primarily to costs for our duplicative facilities that we plan to
vacate. These costs are in addition to the liability for the estimated costs to
vacate duplicative facilities of the NSMG business.
We have a significant amount of debt that we may be unable to service or repay
In October 1997, we issued $100.0 million in aggregate principal amount of
5.25% convertible subordinated notes due 2004. In August 1999, we issued $465.8
million aggregate principal amount at maturity of 1.856% convertible
subordinated notes due 2006. The annual interest payments on our outstanding
notes as of December 31, 1999 are $5.3 million and $8.6 million respectively,
which we expect to fund from cash flow from operations. We will need to generate
substantial amounts of cash from our operations to fund interest payments and to
repay the principal amount of debt when it matures, while at the same time
funding capital expenditures and our other working capital needs. If we do not
have sufficient cash to repay our debts as they become due, we may be unable to
refinance our debt on reasonable terms or at all. For example, the notes could
be declared immediately due and payable if we do not make timely payments. While
our cash flow has been sufficient to fund interest payments to date, if we
cannot meet our debt obligations from the cash generated by our business, we may
not be able to develop and sell new products, respond to changing business or
economic conditions adequately, make acquisitions or otherwise fund our
business.
Our operating results may fluctuate significantly as a result of factors outside
our control, which could cause the market price of our securities to decline
Fluctuations in our results of operations are likely to affect the market
price of our common stock and subordinated notes in a manner that may be
unrelated to our long-term operating performance. The more likely it is that
market prices of our securities will fluctuate, the riskier is your decision to
buy, sell or hold our securities. In addition, the number of factors that could
affect our results of operation makes an investment in our securities riskier
than many other investments. Our revenues in any quarter will depend
substantially on orders we receive and ship in that quarter. In addition, we
typically receive a significant portion of orders in any quarter during the last
two weeks of the quarter, and we cannot predict whether those orders will be
placed, fulfilled and shipped in that period. If we have lower revenue than we
expect, we probably will not be able to reduce our operating expenses quickly in
response. Therefore, any significant shortfall in revenues or delay of
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customer orders could have an immediate adverse effect on our operating results
in that quarter. The results of operations of VERITAS, and of the NSMG and
TeleBackup businesses we recently acquired, have fluctuated in the past, and our
operating results are likely to fluctuate significantly in the future. Factors
that could affect our results of operations include:
- the timing and magnitude of sales through original equipment
manufacturers;
- the unpredictability of the timing and level of sales to large
distributors in the retail channel and our direct sales force, which tend
to generate sales later in our quarters than original equipment
manufacturer sales;
- the timing and magnitude of large orders;
- the timing and amount of our marketing, sales and product development
expenses;
- the introduction, timing and market acceptance of new products;
- the timing of revenue recognition for sales of software products and
services;
- changes in data storage and networking technology or introduction of new
operating system upgrades by original equipment manufacturers, which
could require us to modify our products or develop new products;
- the relative growth rates of the Windows NT and UNIX markets;
- the rate of adoption of Microsoft's release of Windows 2000 by users;
- pricing policies and distribution terms; and
- the timing and magnitude of acquisitions.
We depend on large orders with lengthy sales cycles for a significant portion of
our revenues
Our revenues for a quarter could fluctuate significantly based on whether a
large order near the end of a quarter is closed or delayed. Customer orders can
range in value from a few thousand to a few million dollars. The length of time
between initial contact with a potential customer and sale of a product, or our
sales cycle, outside the retail channel is typically complex and lengthy, so it
can last from three to nine months. These direct sales also represent our
largest orders. Therefore, our revenues for a period are likely to be affected
by the timing of larger orders, which makes that revenue difficult to predict.
The factors that could delay or defer an order, include:
- time needed for technical evaluations of our software by customers;
- customer budget restrictions;
- customer internal review and testing procedures; and
- engineering work needed to integrate our software with the customers'
systems.
We may be unable to hire and retain needed sales and engineering personnel
Our personnel needs are more acute than those facing most companies. We
need to hire additional sales, engineering, service and administrative
personnel. If we are unable to hire and retain these employees, our business and
quarterly and annual results of operations would be adversely affected.
Competition for people with the skills we require is intense. Additions of new
personnel and departures of existing personnel could disrupt our business and
may result in the departure of other
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employees. We also depend on the continued service of our key personnel. Even
though we have entered into employment agreements with key management personnel,
these agreements cannot prevent their departure. We do not have key person life
insurance covering any of our personnel, nor do we currently intend to obtain
any of this insurance.
We distribute our products through multiple distribution channels, each of which
is subject to risks
Historically, we sold products through original equipment manufacturers and
through direct sales. As a result of the NSMG and TeleBackup acquisitions,
however, we also have a retail distribution channel as well. If we fail to
manage our distribution channels successfully, our business and quarterly and
annual results of operations would be adversely affected.
Retail distribution. Some of the software products of the former NSMG
business are sold primarily in the retail channel. As a result, we face
different challenges than we face in selling most of our other products. For
example:
- the VERITAS brand does not have the same level of recognition in the
retail channel;
- retail distribution typically involves shorter product life cycles; and
- the retail channel has higher risks of product returns, higher marketing
expenses and less predictable market demand.
Moreover, our retail distributors have no obligation to continue selling
the products previously sold by NSMG and TeleBackup and may terminate our
relationship at any time.
Direct sales. We also depend on our direct sales force to sell our
products. This involves a number of risks, including:
- longer sales cycles for direct sales;
- our need to hire, train, retain and motivate our sales force; and
- the length of time it takes our new sales representatives to become
productive.
Original equipment manufacturers. A portion of our revenue is expected to
come from original equipment manufacturers that incorporate our storage
management software into systems they sell. We have no control over the shipping
dates or volumes of systems the original equipment manufacturers ship and they
have no obligation to ship systems incorporating our software. They also have no
obligation to recommend or offer our software products exclusively or at all.
They have no minimum sales requirements and can terminate our relationship at
any time. These original equipment manufacturers also could choose to develop
their own storage management products internally and incorporate those products
into their systems in lieu of our products. Finally, the original equipment
manufacturers that we do business with compete with one another. To the extent
that one of our of original equipment manufacturer customers views the products
we have developed for another original equipment manufacturer as competing with
its products, it may decide to stop doing business with us, which could harm our
business.
Development agreements for original equipment manufacturers. We have
important original equipment manufacturer agreements with Hewlett-Packard, Sun
Microsystems, Microsoft, Dell, Seagate Technology and Compaq Computer. Under
these agreements we develop "lite" versions of our products to be included in
these original equipment manufacturers' systems software and products.
Developing products for these original equipment manufacturers causes us to
divert
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significant resources from other activities that are also important to our
business. If these "lite" versions do not result in substantial revenue, our
business could be harmed.
Our distribution channels could conflict with one another
We have many different distribution channels. If we cannot use these
distribution channels efficiently, our business and quarterly and annual results
of operations could be adversely affected. Our original equipment manufacturers,
resellers and direct sales force might target similar sales opportunities, which
could lead to inefficient allocation of sales resources. We may also try to sell
full versions of the products to customers of the original equipment
manufacturers for whom we have developed "lite" versions of our products. This
would result in us marketing similar products to end-users. These overlapping
sales efforts could also harm our relationships with our original equipment
manufacturers and other sales channels and result in them being less willing to
market our products aggressively. If our indirect sales decline, we would need
to accelerate our investments in alternative distribution channels. We may not
be able to do this in a timely manner, or at all.
Our development agreements with Microsoft could cause us to lose customers
We have important agreements with Microsoft under which we develop software
for its Windows operating system. Microsoft is not obligated under the
agreements to include our software in any of its future releases of Windows
2000. If for any reason our software is not included in the future, we will lose
our expected opportunity to market additional products to the Windows 2000 or
Windows NT installed customer base, as well as suffer negative publicity. In
addition, we would lose a part of the investment we have made in developing
products for inclusion in Windows 2000.
Microsoft could develop competing products
Microsoft can also develop enhancements to and derivative products from our
software products that are embedded in Windows 2000 or Windows NT products. If
Microsoft develops any enhancements or derivative products, or enhances its own
base products with equivalent functionality, Microsoft could choose to compete
with us.
Sales of a small number of product lines make up a substantial portion of our
revenue
For the foreseeable future, we expect to derive a substantial majority of
our revenue from a limited number of software products. If many customers do not
purchase these products as a result of competition, technological change or
other factors, our revenue would decrease and our business and quarterly and
annual results of operations would be adversely affected. For example, in 1999
and 1998 we derived approximately 86% and 88% of our license revenue from
storage management products, including VERITAS Volume Manager, VERITAS File
System, VERITAS NetBackup and VERITAS Backup Exec from May 29, 1999. Also, our
VERITAS NetBackup and VERITAS Backup Exec products perform some overlapping
functions. Customers may select one product over the other, resulting in reduced
revenue for the product not selected. Therefore, we may not receive the same
aggregate level of revenue from these products as we have received in the past.
Our products have relatively short life cycles
Our software products have a limited life cycle and it is difficult to
estimate when they will become obsolete. This makes it difficult for us to
forecast revenue and makes your investment more risky. If we do not develop and
introduce new products before our existing products have completed their
lifecycles, we would not be able to sustain our level of sales. In addition, to
succeed, many
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customers must adopt our new products early in each product's lifecycle.
Therefore, if we do not attract sufficient customers early in a product's life,
we may not realize the amount of revenue we anticipated for the product. We
cannot be sure that we will continue to be successful in marketing our key
products.
We derive significant revenues from only a few customers
For 1999 and 1997 no customer accounted for greater than 10% of our net
revenue. In 1998, we derived 12% of our revenue from sales to Sun Microsystems.
If Sun Microsystems, or any other significant customer, were to reduce its
purchases from us, our revenue and therefore our business would be harmed unless
we were to increase sales to other customers substantially. We do not have a
contract with Sun Microsystems or any other customer that requires the customer
to purchase any specified number of software licenses from us. Therefore, we
cannot be sure that these customers will continue to purchase our products at
current levels.
We face uncertainties porting products to new operating systems and developing
new products
Some of our products operate primarily on the UNIX computer operating
system. We are currently redesigning, or porting, these products to operate on
the Windows NT operating system. We are also developing new products for UNIX
and for Windows NT. TeleBackup's products operate on the Sun Solaris version of
UNIX, the Windows and Windows NT operating systems. We intend to port the
TeleBackup products to other UNIX operating systems and subsequent releases of
Windows NT. We may not be able to accomplish any of this work quickly or
cost-effectively. These activities require substantial capital investment,
substantial employee resources and the cooperation of the owners of the
operating systems to or for which the products are being ported or developed.
Our porting and development work for the Windows NT market has required us to
hire additional personnel with Windows NT expertise and to devote engineering
resources to these projects. We must obtain from operating system owners a
source code license to certain portions of the operating system software to port
some of our products to or develop products for the operating system. Operating
system owners have no obligation to assist in these porting or development
efforts. If they do not grant us a license or if they do not renew our license,
we would not be able to expand our product line easily into other areas. For
example, we rely on a source code license from Microsoft with respect to our
Windows NT development projects. Microsoft is under no obligation to renew the
source code license, which is subject to annual renewal.
The market for VERITAS TeleBackup is unproven
VERITAS TeleBackup, which is designed to back up data for remote personal
computer users, represents new technology that has no proven market. A market
may not develop for this product or similarly unproven products in the future.
This could harm our business because our investment in TeleBackup, and any
additional development and marketing costs, would be lost, and any expected
revenue opportunities would not materialize.
We face intense competition on several fronts
We face a variety of tough competitors, principal among which are:
- internal development groups within original equipment manufacturers that
provide storage management functions to support their systems;
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- other software vendors and hardware companies that offer products with
some of our products' features, such as controller and disk subsystem
manufacturers;
- hardware and software vendors that offer storage application products;
- hardware and software vendors that offer high availability and clustering
products; and
- software vendors focused on remote backup technologies and electronic
data vaulting services.
Many of our competitors have greater financial, technical sales, marketing
and other resources than we do and could attempt to increase their presence in
the storage management market by acquiring or forming strategic alliances with
other competitors or business partners.
Expanding our international sales depends on economic stability in regions that
have been unstable
An investment in our securities is riskier than an investment in many other
companies because we plan to expand in overseas markets such as Asia, Russia and
Latin America that have experienced significant economic turmoil in recent
years. Continued turmoil could adversely affect our plans to increase sales in
these regions. Economic recession could also affect our ability to maintain or
increase sales in these or other regions in the future. Our concern is that
recession in these markets could lead to:
- restrictions on government spending imposed by the International Monetary
Fund;
- customers' reduced access to working capital to fund software purchases;
and
- reduced bank lending or other sources of financing for customers and
potential customers.
Any of these factors could cause foreign customers to reduce their purchase
of our products substantially.
Our foreign-based operations and sales create special problems that could hurt
our results
An investment in our securities is riskier than an investment in most
businesses because we have significant offshore operations, including
development facilities, sales personnel and customer support operations. For
example, as of December 31, 1999, we had approximately 186 engineers located in
Pune, India, performing product development work. These offshore operations are
subject to risks, including:
- potential loss of developed technology through piracy, misappropriation,
or more lax laws regarding intellectual property protection;
- imposition of governmental controls, including trade restrictions;
- fluctuations in currency exchange rates and economic instability;
- longer payment cycles for sales in foreign countries;
- difficulties in staffing and managing the offshore operations;
- seasonal reductions in business activity in the summer months in Europe
and other countries; and
- political unrest, particularly in areas in which we have facilities.
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In addition, our international sales are denominated in local currency,
creating risk of foreign currency translation gains and losses that could harm
our quarterly and annual results of operations. If we generate profits or losses
in foreign countries, our effective income tax rate could also be adversely
affected. Currency instability in Asia and other financial markets may make our
products more expensive than products sold by other vendors that are priced in
one of the affected currencies. Therefore, customers in these markets may choose
not to purchase our products.
Our growth strategy is riskier than others because it is based upon acquisitions
of other businesses
An investment in our securities is riskier than investments in many other
companies because we plan to continue to pursue our strategy of growth through
acquisition. We have grown aggressively through acquisitions in the past and
expect to pursue acquisitions in the future.
Acquisitions involve a number of special risks and challenges, including:
- diversion of management attention, particularly in the case of multiple
concurrent acquisitions;
- integration of the acquired company's operations and employees with an
existing business;
- incorporation of technology into existing product lines;
- loss of key employees; and
- presentation of a unified corporate image.
In the past, we have lost certain employees of acquired companies whom we
desired to retain. In some cases, the integration of the operations of acquired
companies took longer than we anticipated. In addition, if the employees of
target companies remain geographically apart from our existing staff, we may not
realize some or all of the anticipated economies of scale.
Our stock price may be volatile which could negatively affect your investment
The stock market frequently experiences extreme price and volume
fluctuations. In particular, the market for the securities of high technology
companies in general have been especially volatile and these fluctuations have
often been unrelated or disproportionate to operating performance. It is likely
that the price of our common stock will fluctuate widely in the future. Factors
that could affect the trading price of our common stock include:
- actual or anticipated variations in our quarterly operating results;
- changes in financial estimates and recommendations by stock market
analysts regarding us or our competitors;
- our sales of common stock or other securities in the future;
- the hiring or departure of our key personnel; and
- announcements by us or our competitors of significant contracts, new
products or product enhancements, acquisitions, divestitures,
distribution relationships, joint ventures or capital commitments.
If there are adverse fluctuations in the market price of our common stock
and we become involved in class action lawsuits by security holders, we could
incur substantial legal costs and management's attention could be diverted, to
the detriment of our operations and results.
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<PAGE> 14
SELECTED FINANCIAL DATA
The following selected consolidated financial data are derived from our
consolidated financial statements. Share and per share data applicable to prior
periods has been restated to give retroactive effect to our stock splits
effected as stock dividends through March 6, 2000. This data should be read in
conjunction with the consolidated financial statements and notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total net revenue.................. $ 596,112 $210,865 $121,125 $ 72,746 $ 47,826
Amortization of developed
technology....................... 35,659 -- -- -- --
Amortization of goodwill and other
intangibles...................... 510,943 -- -- -- --
Acquisition and restructuring
costs............................ 11,000 -- 8,490 -- --
In-process research and
development...................... 104,200 600 -- 2,200 --
Income (loss) from operations...... (475,237) 53,668 20,076 11,858 1,193
Net income (loss).................. (502,958) 51,648 22,749 12,129 2,371
Net income (loss) per
share -- basic................... $ (1.59) $ 0.24 $ 0.11 $ 0.06 $ 0.01
Net income (loss) per
share -- diluted................. $ (1.59) $ 0.22 $ 0.10 $ 0.06 $ 0.01
Number of shares used in computing
per share amounts -- basic....... 316,892 211,558 205,300 193,617 181,590
Number of shares used in computing
per share amounts -- diluted..... 316,892 232,519 222,716 209,228 193,780
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................. $ 631,036 $198,842 $188,578 $ 67,413 $ 23,451
Total assets.................... 4,233,277 349,117 241,880 94,524 48,100
Long-term obligations........... 451,640 100,773 100,911 1,468 6,205
Accumulated deficit............. (532,374) (29,416) (81,064) (103,813) (115,942)
Stockholders' equity............ 3,393,061 169,854 104,193 74,955 23,602
</TABLE>
In 1999, we acquired the NSMG business, TeleBackup and NuView. Because we
accounted for the NSMG, TeleBackup and NuView acquisitions using the purchase
method of accounting, we 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. We also
recorded one-time non-cash charges of $104.2 million in our statements of
operations in 1999, related to the write-off of in-process research and
development. We also recorded a one-time restructuring charge in 1999 of $11.0
million related primarily to costs for our duplicative facilities that we plan
to vacate.
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<PAGE> 15
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following selected quarterly data should be read in conjunction with
the Consolidated Financial Statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations". This
information has been derived from unaudited consolidated financial statements of
VERITAS that, in our opinion, reflect all recurring adjustments necessary to
fairly present this information when read in conjunction with our Consolidated
Financial Statements and Notes thereto. The results of operations for any
quarter are not necessarily indicative of the results to be expected for any
future period. Share and per share data applicable to prior periods have been
restated to give retroactive effect to our stock splits effected as stock
dividends through March 6, 2000.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER FISCAL YEAR
-------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FISCAL 1999
Total net revenue............... $ 71,904 $ 114,648 $ 183,401 $ 226,159 $ 596,112
Gross profit.................... 63,422 98,561 151,465 188,109 501,557
Income (loss) before income
taxes......................... 21,092 (157,601) (175,135) (155,924) (467,568)
Net income (loss)............... 13,583 (162,329) (183,576) (170,636) (502,958)
Net income (loss) per share --
basic......................... $ 0.06 $ (0.59) $ (0.48) $ (0.44) $ (1.59)
Net income (loss) per share --
diluted....................... $ 0.06 $ (0.59) $ (0.48) $ (0.44) $ (1.59)
Number of shares used in
computing per share amounts
basic......................... 215,199 275,467 384,846 389,410 316,892
Number of shares used in
computing per share amounts
diluted....................... 239,111 275,467 384,846 389,410 316,892
FISCAL 1998
Total net revenue............... $ 39,082 $ 48,113 $ 56,545 $ 67,125 $ 210,865
Gross profit.................... 32,616 40,191 48,702 59,895 181,404
Income before income taxes...... 11,103 11,239 16,355 21,092 59,789
Net income...................... 9,055 8,541 12,593 21,459 51,648
Net income per share -- basic... $ 0.04 $ 0.04 $ 0.06 $ 0.10 $ 0.24
Net income per
share -- diluted.............. $ 0.04 $ 0.04 $ 0.05 $ 0.09 $ 0.22
Number of shares used in
computing per share amounts --
basic......................... 208,951 210,879 212,530 213,827 211,558
Number of shares used in
computing per share amounts --
diluted....................... 229,227 231,095 235,467 234,188 232,519
</TABLE>
In the second quarter of 1999, we acquired the NSMG business and
TeleBackup. In the third quarter of 1999, we acquired NuView. Because we
accounted for the NSMG, TeleBackup and NuView acquisitions using the purchase
method of accounting, we recorded developed technology, goodwill and other
intangible assets of approximately $3,754.9 million in total. These assets are
amortized over their estimated useful life of four years, and result in charges
to operations of approximately $234.8 million per quarter. As a result of these
acquisitions, in the second quarter of 1999 we recorded approximately $76.6
million of amortization of developed technology, goodwill and
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<PAGE> 16
other intangibles, one-time non-cash charges of $103.1 million related to the
write-off of in-process research and development and a one-time restructuring
charge of $11.0 million related primarily to costs for our duplicative
facilities that we plan to vacate. In the third quarter of 1999 we recorded a
one-time non-cash charges of $1.1 million related to the write-off of in-process
research and development and in the third quarter and the fourth quarter of 1999
we recorded approximately $234.8 million of amortization of developed
technology, goodwill and other intangibles related to these acquisitions.
Our operating results have fluctuated in the past, and may fluctuate
significantly in the future, depending on a number of factors, including the
timing and magnitude of sales of our products through original equipment
manufacturers, investment in new products and new distribution channels, the
timing and level of sales to resellers and direct end-users, the introduction,
timing and market acceptance of new products, the timing of license fee payments
and receipt of funding for porting, and other factors. For further background on
fluctuating operating results, see "Risk Factors -- Our operating results may
fluctuate significantly as a result of factors outside our control, which could
cause the market price of our securities to decline."
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<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
VERITAS is a leading independent supplier of storage management software.
Storage management software has grown significantly in importance and market
impact during the last few years. Computing operations have moved from being
part of the infrastructural background of a business enterprise to being a
critical component in the success of a business, particularly given businesses'
requirements that data remain protected and accessible at all times. Our
products help our customers manage complex and diverse computing environments
efficiently and cost-effectively, by making sure that their data is protected,
can be accessed at all times, and can be managed and used in compliance with
business policies. Our products help to improve the levels of centralization,
control, automation and manageability in computing environments, they allow
information technology, or IT, managers to be significantly more effective with
constrained resources and limited budgets. Our products offer protection against
data loss and file corruption, allow rapid recovery after disk or computer
system failure, enable IT managers and end users to work efficiently with large
numbers of files, and make it possible to manage data distributed on large
networks of computer systems without harming productivity or interrupting users.
They provide continuous availability of data in clustered computer systems that
share disk resources to maintain smooth business operations and are highly
scalable in order to keep up with the rapid growth of data and technologies
deployed in businesses.
We develop and sell products for most popular operating systems, including
versions of UNIX and Windows NT. Our software solutions are used by customers
across a broad spectrum of industries, including many leading global
corporations and e-commerce businesses. We also provide a full range of services
to assist our customers in planning and implementing their storage management
solutions.
We market our products and services to original equipment manufacturers and
end user customers through a combination of direct sales and indirect sales
channels such as resellers, value-added resellers, hardware distributors,
application software vendors and systems integrators.
We derive user license fee revenue from shipments of our software products
to end-user customers through direct sales channels, indirect sales channels and
original equipment manufacturer customers. Our original equipment manufacturer
customers either bundle our products with the original equipment manufacturer
products licensed by such original equipment manufacturers or offer them as
options. Some original equipment manufacturers also resell our products. We
receive a royalty each time the original equipment manufacturer licenses to a
customer a copy of the original equipment manufacturer's products that
incorporates one or more of our products. Our license agreements with our
original equipment manufacturer customers generally contain no minimum sales
requirements and we cannot assure you that any original equipment manufacturer
will either commence or continue shipping operating systems incorporating our
products in the future. When we enter into new agreements with original
equipment manufacturer customers and resellers, a significant period of time may
elapse before we realize any associated revenue, due to development work that we
must generally undertake under these agreements and the time needed for the
sales and marketing organizations within these customers and distributors to
become familiar with and gain confidence in our products. Approximately 20%, 26%
and 29% of our net revenue was generated from original equipment manufacturer
business during 1999, 1998 and 1997.
Our services revenue consists of fees derived from annual maintenance
agreements, from consulting and training services and from porting fees.
Original equipment manufacturer maintenance agreements covering our products
provide for technical and emergency support and minor unspecified
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<PAGE> 18
product upgrades for a fixed annual fee. Maintenance agreements covering
products that are licensed through channels other than original equipment
manufacturers provide for technical support and unspecified product upgrades for
an annual service fee based on the number of user licenses purchased and the
level of service subscribed. Porting fees consist of fees derived from porting
and other non-recurring engineering efforts when we port, or adapt, our storage
management products to an original equipment manufacturer's operating system and
when we develop new product features or extensions of existing product features
at the request of a customer. In most cases, we retain the rights to technology
derived from porting and non-recurring engineering work and therefore generally
perform this work on a relatively low, and sometimes negative, margin.
We have made, and intend to continue to make, substantial investments in
porting our products to new operating systems, including Windows NT. The success
of Windows NT product development efforts depends in part on receipt of
development funding from third parties, including Microsoft, and failure to
receive such funding could hamper our efforts to extend our products into the
Windows NT market. The porting and development process requires substantial
capital investment and our allocation of substantial employee resources to this
effort, and our added focus on Windows NT development in recent years has
required, and will continue to require, us to hire additional personnel. Under
an agreement with Microsoft, we have agreed to develop a functional subset of
our Volume Manager product that will be ported to and embedded in Windows NT.
The agreement also requires us to develop a disk management graphical user
interface designed specifically for Windows NT. Microsoft has provided us with
significant funding toward this development effort. We recognize revenue under
our development contract with Microsoft on a percentage-of-completion basis
consistent with our policy for revenue recognition for other similar agreements.
The payment terms in the Microsoft agreement do not directly correlate to the
timing of development efforts and therefore revenue recognition does not
directly correlate to contract billings. The Microsoft agreement requires us to
expand our marketing and sales operations to deal with higher volume markets in
which we have limited experience.
Our international sales are generated primarily through our international
sales subsidiaries. International revenue, most of which is collectible in
foreign currencies, accounted for approximately 24% of our total revenue in
1999, 26% of our total revenue in 1998 and 27% of our total revenue in 1997. Our
international revenue increased 167% to $144.9 million in 1999 from $54.2
million in 1998, and 65% from $32.8 million in 1997. Since much of our
international operating expenses are also incurred in local currencies, which is
the foreign subsidiaries' functional currency, the relative impact of exchange
rates on net income or loss is less than the impact on revenues. Although our
operating and pricing strategies take into account changes in exchange rates
over time, our operating results may be affected in the short term by
fluctuations in foreign currency exchange rates. Our international subsidiaries
purchase licenses for resale from the parent company resulting in intercompany
receivables and payables. These receivables and payables are carried on our
books in the foreign currency that existed at the time of the transaction. These
receivables and payables are eliminated for financial statement reporting
purposes. Prior to elimination, the amounts carried in foreign currencies are
converted to the functional currency at the then current rate, or "marked to
market", which may give rise to currency remeasurement gains and losses. Such
gains or losses are recognized on our statement of operations as a component of
other income, net. To date, such gains or losses have not been material.
We believe that our success depends upon continued expansion of our
international operations. We currently have sales and service offices and
resellers located in North America, Europe, Asia Pacific, South America and the
Middle East and a development center in India. International expansion will
require us to establish additional foreign offices, hire more personnel and
recruit new international resellers, resulting in the diversion of significant
management attention and the
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<PAGE> 19
expenditure of financial resources. To the extent that we are unable to meet
these additional requirements, growth in international sales will be limited,
which would have an adverse effect on our business, operating results and
financial condition. International operations also subject us to a number of
risks inherent in developing and selling products outside the United States,
including potential loss of developed technology, limited protection of
intellectual property rights, imposition of government regulation, imposition of
export duties and restrictions, cultural differences in the conduct of business,
and political and economic instability. Furthermore, some global markets,
including Asia, Russia and Latin America, are currently undergoing significant
economic turmoil that could result in deferral of purchase of information
technology products and services by potential customers located in such markets,
thereby further limiting our ability to expand international operations.
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 $20.26 per share for 5 days before and
after June 7, 1999, the measurement date for the transaction, we issued
155,583,486 shares of our common stock to Seagate Software, Inc. and issued
options to purchase 15,626,358 shares of our common stock to our employees who
were former NSMG employees. We accounted for the NSMG acquisition using the
purchase method of accounting, and we are incurring charges of $221.5 million
per quarter primarily related to the amortization of developed technology,
goodwill and other intangibles over their estimated useful life of four years.
The total NSMG purchase price was $3,464.5 million and included $3,151.4 million
for the issuance of our common stock, $269.7 million for the exchange of options
to purchase our common stock and $43.4 million of acquisition-related costs. The
purchase price was allocated, based on an independent valuation, to goodwill of
$3,015.8 million, distribution channels of $233.8 million, original equipment
manufacturer agreements of $23.4 million, developed technology of $233.7
million, assembled workforce of $12.8 million, trademarks of $22.8 million,
in-process research and development of $101.2 million, net deferred tax
liabilities of $179.5 million, other intangibles of $1.5 million and tangible
net liabilities assumed of $1.0 million. For 1999, we 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.
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, we recorded a restructuring charge of $11.0 million in 1999 as a
result of the NSMG acquisition. This restructuring charge related to exit costs
with respect to duplicative facilities that we plan to vacate, which include
$0.9 million of write-off of redundant equipment and leasehold improvements, and
involuntary termination benefits. Involuntary termination benefits relate to the
salary and fringe benefit expense for terminated employees in research and
development. The involuntarily terminated employees represented 2% of the global
workforce. At December 31, 1999, $0.9 million in severance costs were paid
against the
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<PAGE> 20
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.
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 our wholly-owned subsidiary in
exchange for the issuance of 6,842,795 shares of either our common stock or
exchangeable shares to the holders of TeleBackup common shares and the exchange
of options to purchase 154,706 shares of our common stock to our employees who
were former employees of TeleBackup. We accounted for the TeleBackup acquisition
using the purchase method of accounting, and we are incurring charges of $9.0
million per quarter primarily related to the amortization of developed
technology, goodwill and other intangibles over their estimated useful life of
four years. Based on the average closing price of our common stock of $19.60 per
share for 5 days before and after June 1, 1999, the measurement date for the
transaction, the total purchase price for TeleBackup was $143.1 million. The
TeleBackup purchase price included $134.1 million related to the issuance of our
common stock, $2.8 million for the issuance of options to purchase our common
stock and $6.2 million in acquisition-related costs. The acquisition costs of
$6.2 million consist primarily of direct transaction costs and involuntary
termination benefits. At December, 1999, of the total $6.2 million acquisition
costs, we paid $5.3 million in direct transaction costs with the majority of the
remaining $0.9 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 1999, we 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.
Under an asset purchase agreement, we acquired certain assets of NuView,
including its Windows NT cluster management solution, Cluster X, for a total
cost of approximately $67.9 million. We accounted for the acquisition using the
purchase method of accounting, and we are incurring charges of $4.3 million per
quarter primarily related to the amortization of developed technology, goodwill
and other intangibles over their estimated useful life of four years. The
purchase price included $47.7 million related to the issuance of our common
stock, $0.8 million for the issuance of options to purchase our common stock to
former NuView employees, $0.2 million in acquisition-related costs and $19.2
million payable in cash, of which $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, we 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.
On April 25, 1997, we merged with OpenVision Technologies, Inc. which we
refer to as OpenVision. The OpenVision merger was accounted for as a "pooling of
interests" for financial reporting purposes. As a result of the OpenVision
merger, we incurred charges to operations of $8.5 million in 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 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 that became
redundant as a result of OpenVision having a similar product line. The remaining
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<PAGE> 21
$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.
RECENT DEVELOPMENTS
On March 29, 2000, VERITAS Software Corporation and Seagate Technology,
Inc. entered into an Agreement and Plan of Reorganization, which we refer to as
the Merger Agreement, and Seagate Technology and Seagate Acquisition Company
(Cayman) Limited, which we refer to as SAC, entered into a Stock Purchase
Agreement.
Under the Stock Purchase Agreement, SAC will purchase all of the
subsidiaries of Seagate Technology other than Seagate Software Holdings, Inc.,
formerly known as Seagate Software, Inc., which we refer to as Seagate Software,
and will also acquire all assets and assume all liabilities of Seagate
Technology and Seagate Software, other than the approximately 128 million shares
of VERITAS common stock and the securities of Gadzoox Networks, SanDisk
Corporation, CVC, Inc. and Dragon Systems, Inc., a privately-held company. We
refer to this as the Stock Purchase.
Under the Merger Agreement, immediately following the consummation of the
Stock Purchase, a wholly-owned subsidiary of VERITAS will merge with and into
Seagate Technology, with Seagate Technology to survive the merger and to become
a wholly-owned subsidiary of VERITAS. We refer to this as the Merger. In the
Merger, the Seagate stockholders will receive merger consideration consisting
of:
- Approximately 109.3 million shares of VERITAS common stock issued for the
approximately 128 million shares of VERITAS common stock Seagate
presently owns,
- additional shares of VERITAS common stock issued for the investment
securities, and, at VERITAS' election, for up to $750 million in retained
cash, and
- all cash on the Seagate balance sheet in excess of $800 million of cash
working capital and after giving effect to VERITAS retained cash, debt
repayment, taxes and other liabilities.
Seagate stockholders would receive total consideration of approximately
$77.50 per share for each share of Seagate common stock, consisting of
approximately 0.467 shares of VERITAS common stock, or approximately 115.8
million shares in the aggregate, and approximately $5 in cash, based on the
closing market prices of the investment securities, as of March 28, 2000, and
assuming a $500 million cash retention by VERITAS, and Seagate's anticipated
cash position at closing. With a fixed exchange ratio that locks in the
accretion, this transaction has no collar. The Merger is intended to qualify as
a tax-free reorganization and will be accounted for as a purchase.
Also on March 29, 2000, VERITAS, Seagate Technology and SAC entered into an
Indemnification Agreement, pursuant to which these entities and certain other
subsidiaries of Seagate Technology have agreed to certain indemnification
provisions regarding tax and other matters that may arise in connection with the
Stock Purchase and the Merger.
Each of the Stock Purchase and the Merger is subject to several conditions.
Conditions to the Merger include approval by VERITAS and Seagate Technology
stockholders, the expiration of applicable waiting periods under antitrust laws
and obtaining necessary consents.
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<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in
our 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 we believe that
the percentage increases in net revenue achieved in these periods are not
necessarily indicative of future results, we expect net revenue to continue to
grow in 2000. Our 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, continued growth in market acceptance of our
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 our
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, our user license fees from storage products
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<PAGE> 23
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. We derive our 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 our 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. We expect that service
revenue will continue to grow as a percentage of our 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 we expect 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. We pay royalties for certain technology
licensed from others and incorporated in our 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 we 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 than other products. We do 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 our customer support,
training and consulting organizations, in anticipation of increased demand for
such services. The gross margin improvement in 1999 was the result of
S-22
<PAGE> 24
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 our 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. We intend to continue to
expand our global sales and marketing infrastructure, and accordingly, we expect
our 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 our 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. We believe 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 we make periodic incremental
investments in research and development and our level of revenue fluctuates.
General and Administrative. General and administrative expenses consist
primarily of salaries, related benefits and fees for professional services, such
as legal and accounting services. General and administrative expenses increased
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 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 our operations. We expect general and
administrative expenses to increase in absolute dollars, but not to change
significantly as a percentage of net revenue, as we expand our 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 intangible assets recorded upon the acquisitions of NSMG
and TeleBackup and five months of amortization of goodwill and other intangible
assets recorded upon the acquisition of NuView. The estimated useful life of the
goodwill and the other intangibles is four years and we expect the amortization
to be approximately $219.7 million per quarter.
S-23
<PAGE> 25
Acquisition and restructuring costs. In 1999, upon the acquisition of NSMG,
we 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 we plan 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
RECORDED AT FROM ACCRUED AS OF
ACQUISITION ACQUISITION DATE TO DECEMBER 31,
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, we 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 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.
We 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%. We
believe 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.
S-24
<PAGE> 26
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. We do not expect the delays to have any significant impacts on our return
on investments, results of operations or financial position. At December 31,
1999, we estimate 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 are included in
other income, net, have not had a significant effect on our 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 consists 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. We had effective tax rates of negative 8% in 1999, positive
14% in 1998 and positive 4% in 1997. Our 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. Our
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. We will be required to implement these provisions of SOP 98-9 for our
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. We do not believe the impact of SOP 98-9 will be material
to our financial position, results of operations or cash flows.
S-25
<PAGE> 27
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. We will be required to
implement SFAS No. 133 as of the beginning of our fiscal year 2001. Our foreign
currency exchange rate hedging activities have been insignificant to date and we
do not believe that the impact of SFAS No. 133 will be material to our financial
position, results of operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short-term investments totaled $692.4
million at December 31, 1999 and represented 69% of our net tangible assets.
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, government securities and
market auction preferreds. At December 31, 1999, we had $451.6 million of
long-term obligations and stockholders' equity was approximately $3,393.1
million.
Net cash provided from operating activities was $144.0 million in 1999,
$62.8 million in 1998 and $26.8 million in 1997. The increase in 1999 cash
provided by operating activities resulted primarily from income after
adjustments to exclude non-cash charges, including amortization of intangibles
related to acquisition activities, partially offset by an increase in accounts
receivable, as a result of our overall revenue growth. The increase in 1998 cash
provided by operating activities resulted primarily from net income and
increases in accounts payable, accrued liabilities and deferred revenue
balances, partially offset by an increase in accounts receivable and prepaid
expenses, reflecting our overall growth.
Our investing activities used cash of $577.0 million in 1999 primarily due
to the net increase in short-term and long-term investments of $505.2 million,
purchases of property and equipment of $59.7 million and purchase of certain
assets of NuView. Our investing activities used cash of $13.4 million in 1998
primarily due to capital expenditures of $23.4 million. Our investing activities
used cash of $71.1 million in 1997 primarily due to the net increase of
short-term investments of $65.0 million, and capital expenditures of $6.2
million.
Financing activities provided cash of $443.1 million in 1999 from the net
proceeds of $334.1 million related to the issuance of the 1.856% convertible
subordinated notes in August 1999 and $109.0 million from the issuance of common
stock under our employee stock plans. Financing activities provided cash of
$14.0 million in 1998, arising from the issuance of common stock under our
employee stock plans. Financing activities provided cash of $102.9 million in
1997, primarily from the net proceeds of $97.5 million related to the issuance
of the 5.25% convertible subordinated notes in October 1997 and issuance of
common stock of $5.8 million under our employee stock plans.
In October 1997, we issued $100.0 million of 5.25% convertible subordinated
notes due 2004 (the "5.25% notes"), for which we received net proceeds of $97.5
million. We and our wholly-owned subsidiary, VERITAS Operating Corporation, are
co-obligors on the 5.25% notes. The 5.25% notes provide for semi-annual interest
payments of $2.6 million each May 1 and November 1. The 5.25% notes are
convertible into shares of our common stock at any time prior to the close of
business on the maturity date, unless previously redeemed or repurchased, at a
conversion price of $9.56 per share, subject to adjustment in certain events,
equivalent to a conversion rate of 104.65 shares of common stock per $1,000
principal amount at maturity. On or after November 5, 2002, the 5.25% notes will
be redeemable over a period of time until maturity at our option at declining
premiums to par. The debt issuance costs are being amortized over the term of
the 5.25% notes using the interest method.
S-26
<PAGE> 28
In August 1999, we and our wholly-owned subsidiary, VERITAS Operating
Corporation, issued $465.8 million, aggregate principal amount at maturity, of
1.856% convertible subordinated notes due 2006 (the "1.856% notes") for which we
received net proceeds of approximately $334.1 million. The interest rate of
1.856% together with the accrual of original issue discount represent a yield to
maturity of 6.5%. VERITAS and VERITAS Operating Corporation are co-obligors on
the 1.856% notes. The 1.856% notes provide for semi-annual interest payments of
$4.3 million each February 13 and August 13, commencing February 13, 2000. The
1.856% notes are convertible into shares of our common stock at any time prior
to the close of business on the maturity date, unless previously redeemed or
repurchased, at a conversion price of $35.80 per share, subject to adjustment in
certain events, equivalent to an initial conversion rate of 27.934 shares of
common stock per $1,000 principal amount at maturity. On or after August 16,
2002, the 1.856% notes will be redeemable over a period of time until maturity
at our option at the issuance price plus accrued original issue discount and any
accrued interest. The debt issuance costs are being amortized over the term of
the 1.856% notes using the interest method. We expect to use the net proceeds
from these 1.856% notes issuance for general corporate purposes, including
working capital expenditures and possible acquisitions of companies or
technology, although there are no current agreements or negotiations pending
with respect to any material acquisitions. Pending these uses, we intend to
invest the net proceeds in short-term interest-bearing, investment grade
securities.
Following the issuance of the 1.856% notes, we have a ratio of long-term
debt to total capitalization at December 31, 1999 of approximately 12%. As a
result of this additional indebtedness, our principal and interest payment
obligations increased substantially. The degree to which we will be leveraged
could materially and adversely affect our ability to obtain financing for
working capital, acquisitions or other purposes and could make us more
vulnerable to industry downturns and competitive pressures. We will require
substantial amounts of cash to fund scheduled payments of principal and interest
on our indebtedness, including the 5.25% notes and the 1.856% notes, future
capital expenditures and any increased working capital requirements. If we are
unable to meet our cash requirements out of cash flow from operations, we cannot
assure you that we will be able to obtain alternative financing.
During the first quarter of 2000, we amended and revised our existing lease
agreement for new corporate campus facilities in Mountain View, California.
These facilities will replace certain facilities we currently lease in Mountain
View. The new corporate campus facilities will be developed in one phase for a
total of 425,000 square feet and will provide space for sales, marketing,
administration and research and development functions. The lease term for these
facilities is five years beginning in March 2000, with an option to extend the
lease term for two successive periods of one year each. We have an option to
purchase the property (land and facilities) for $139.4 million or, at the end of
the lease, to arrange for the sale of the property to a third party with us
retaining an obligation to the owner for the difference between the sale price
and the guaranteed residual value up to $123.8 million if the sales price is
less than this amount, subject to certain provisions of the lease. We anticipate
occupying the new corporate campus facilities and beginning the lease payments
in the second quarter of 2001. The lease agreement requires us to maintain
specified financial covenants such as earnings before interest, taxes,
depreciation and amortization (EBITDA), debt on EBITDA and quick ratio, all of
which we were in compliance with as of December 31, 1999.
During the first quarter of 2000, we signed a lease agreement for our
existing facilities in Roseville, Minnesota. We will improve and expand our
existing facilities of approximately 62,000 square feet and will develop
adjacent property adding approximately 260,000 square feet to the campus, with
the first phase of approximately 142,000 square feet being completed in the
second quarter of 2001. The facilities will provide space for research and
development functions. The lease term for these facilities is five years
beginning in March 2000, with an option to extend the lease
S-27
<PAGE> 29
term for two successive periods of one year each. We have an option to purchase
the property (land and facilities) for $40 million or, at the end of the lease,
to arrange for the sale of the property to a third party with us retaining an
obligation to the owner for the difference between the sale price and the
guaranteed residual value up to $34.3 million if the sales price is less than
this amount, subject to certain provisions of the lease. We anticipate occupying
the new corporate campus facilities and beginning the lease payments in the
second quarter of 2001.
We believe that our current cash, cash equivalents and short-term
investment balances and cash flow from operations will be sufficient to meet our
working capital and capital expenditure requirements for at least the next 12
months. After that time, we may require additional funds to support our working
capital requirements or for other purposes and may seek to raise such additional
funds through public or private equity financing or from other sources. We
cannot assure you that additional financing will be available at all or that if
available, we will be able to obtain it on terms favorable to us.
YEAR 2000 COMPLIANCE
Some currently installed computer systems and software products are unable
to distinguish between twentieth century dates and twenty-first century dates
because such systems may have been developed using two digits rather than four
to determine the applicable year. For example, computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. As a result, some companies' software and computer systems
may need to be upgraded or replaced to comply with these Year 2000 requirements.
We believe our software products and services are "Year 2000 ready" -- that
is, they are capable of adequately distinguishing twenty-first century dates
from twentieth century dates. New products are being designed and tested to be
Year 2000 ready. Although our products have undergone, or will undergo, our
normal quality testing procedures, there can, however, be no assurance that our
products will contain all necessary date code changes. Furthermore, use of our
products in connection with other products that are not Year 2000 ready,
including non-compliant hardware, software and firmware, may result in the
inaccurate exchange of dates and result in performance problems or system
failure. In addition, original equipment manufacturer derivative versions of our
older products may not be Year 2000 ready. To date, we have received no
complaints regarding material Year 2000 compliance of our products.
Although we have not been a party to any litigation or arbitration
proceeding to date that involves Year 2000 compliance issues with our products
or services, there can be no assurance that we will not in the future be
required to defend our products or services in such proceedings, or to negotiate
resolutions of claims based on Year 2000 issues. The costs of defending and
resolving Year 2000 related disputes, regardless of the merits of such disputes,
and any liability we have for Year 2000 related damages, including consequential
damages, could harm on our business.
To date, we have not encountered any material problems in this regard with
our computer systems or any other equipment that might be subject to such
problems.
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<PAGE> 30
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE RATE SENSITIVITY
We do not use derivative financial instruments for speculative purposes. We
engage in exchange rate hedging from time to time but this activity has been
insignificant to date and we do not hold or issue foreign exchange contracts for
trading purposes. Our international sales are generated primarily through our
international sales subsidiaries. Most international revenue outside the United
States and Canada is collectible in foreign currencies. Since much of our
international operating expenses are also incurred in local currencies, which is
the foreign subsidiaries functional currency, the impact of exchange rates on
net income or loss is relatively less than the impact on revenue. Although our
operating and pricing strategies take into account changes in exchange rates
over time, our results of operations may be affected significantly in the short
term by fluctuations in foreign currency exchange rates. Our international
subsidiaries purchase licenses for resale from the parent company resulting in
intercompany receivables and payables. These receivables and payables are
carried on these foreign subsidiaries' books at the historical local currency
that existed at the time of the transaction. These receivables and payables are
eliminated for financial statement reporting purposes. Prior to elimination, the
amounts carried in foreign currencies are converted to the functional currency
at the then current rate or "marked to market." The marked to market process may
give rise to currency remeasurement gains and losses. These gains or losses are
recognized on our statement of operations as a component of other income, net.
To date, any such gains or losses have not been material. We do not believe our
total exposure is significant.
INTEREST RATE SENSITIVITY
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio and long-term debt obligations. Our primary
investment objective is to preserve principal while at the same time maximizing
yields without significantly increasing risk. Our portfolio includes money
markets funds, commercial paper, medium-term notes, corporate notes, government
securities and market auction preferreds. The diversity of our portfolio helps
us to achieve our investment objective. As of December 31, 1999, approximately
91% of our investment portfolio is composed of investments with original
maturities of one year or less and approximately 16% of our investment portfolio
matures less than 90 days from the date of purchase.
Long-term debt of $451.0 million consists of 5.25% convertible subordinated
notes due 2004 of $100.0 million (the "5.25% notes") and 1.856% convertible
subordinated notes due 2006 of $351.0 million (the "1.856% notes"). The interest
rate of 1.856% on the 1.856% notes together with the accrual of original issue
discount represent a yield to maturity of 6.5%. The nominal interest rate on
these notes is fixed and the notes provide for semi-annual interest payments of
approximately $2.6 million each May 1 and November 1 for the 5.25% notes and
approximately $4.3 million each February 13 and August 13 for the 1.856% notes.
The notes are convertible into our common stock at any time prior to the close
of business on the maturity date, unless previously redeemed or repurchased,
subject to adjustment in certain events.
S-29
<PAGE> 31
The following table presents the amounts of our cash equivalents,
investments and long-term debt that may be subject to interest rate risk and the
average interest rates as of December 31, 1999 by year of maturity (dollars in
thousands):
<TABLE>
<CAPTION>
2001 AND FAIR VALUE
2000 THEREAFTER 1999 TOTAL TOTAL 1998 TOTAL
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash equivalents and short-term
investments:
Fixed rate..................... $625,435 -- $625,435 $ 625,435 $183,413
Average fixed rate............. 5.82% -- 5.82% 5.82% 5.36%
Variable rate.................. $ 11,713 -- $ 11,713 $ 11,713 $ 20,659
Average variable rate.......... 5.87% -- 5.87% 5.87% 5.55%
Total cash equivalents and
short-term investments:
Investments.................... $637,148 -- $637,148 $ 637,148 $204,072
Average rate................... 5.82% -- 5.82% 5.82% 5.38%
Long-term investments:
Fixed rate..................... $ 65,036 -- $ 65,036 $ 65,036 $ 31,925
Average fixed rate............. 5.33% -- 5.33% 5.33% 5.45%
Long-term debt:
Fixed rate..................... -- $451,044 $451,044 $2,260,147 $100,000
Average fixed rate............. -- 6.22% 6.22% 6.22% 5.25%
</TABLE>
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<PAGE> 32
BUSINESS
OVERVIEW
VERITAS is a leading independent supplier of storage management software.
Storage management software has grown significantly in importance and market
impact during the last few years. Computing operations have moved from being
part of the infrastructural background of a business enterprise to being a
critical component in the success of a business, particularly given businesses'
requirements that data remain protected and accessible at all times. VERITAS
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 our 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, our 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, our products provide continuous availability of data in clustered
computer systems that share disk resources to maintain smooth business
operations. Our products are highly scalable in order to keep up with the rapid
growth of data and technologies deployed in businesses. In summary, our products
help our customers manage their data storage in complex and diverse computing
environments efficiently and cost-effectively.
We develop and sell products for most popular operating systems, including
versions of UNIX and Windows NT. Our software solutions are used by customers
across a broad spectrum of industries, including many leading global
corporations and e-commerce businesses. We also provide a full range of services
to assist our customers in planning and implementing their storage management
solutions.
We market our products and services to end users either directly or through
original equipment manufacturers and indirect sales channels such as resellers,
value-added resellers, hardware distributors, application software vendors and
systems integrators. Some of our customers include:
<TABLE>
<CAPTION>
ORIGINAL EQUIPMENT
MANUFACTURERS INDIRECT SALES CHANNELS DIRECT SALES
------------------ ----------------------- ------------
<S> <C> <C>
Compaq AVCOM Technologies Amazon.com
Dell Ingram Micro American Airlines
EMC Corporation Merisel AT&T
Hewlett-Packard Tech Data Bank of America
Fujitsu-Siemens British Telecom
Microsoft eBay
NEC e*Trade
SGI Ford Motor Company
StorageTek GTE
Sun Microsystems Lucent
Morgan Stanley & Co.
Oracle
</TABLE>
The demand for storage management solutions is fueled by a number of
factors. These factors include the rapid increase in the number of internet
users and the number of businesses doing business online, as well as the
continuing automation of traditional business processes. The
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widespread use of business computer applications, coupled with the explosion of
corporate data, has exceeded the ability of current computing architectures to
handle availability, scalability and manageability issues. A new storage-centric
architecture, called storage area networking, or SAN, has emerged to handle
these issues. A storage area network is a high-speed computing network that
directly connects storage hardware devices, such as storage arrays, clustered
servers, disk drives and tape drives, to client and server computers. The
typical SAN infrastructure is capable of handling more data and transactions
faster than a traditional network, can grow along with a business' needs, and is
more cost-effective than traditional network architectures. We are a leading
innovator in developing SAN technology and taking our SAN-capable products to
businesses that can benefit from them.
A key competitive factor for businesses today is whether their critical
data and related applications are available without interruption 24 hours a day,
seven days a week. Our products are designed to enable continuous productivity
for computing environments ranging from the desktop computer to the large
enterprise data center, including storage area networks.
In 1999, we acquired the Network & Storage Management Group of Seagate
Software, Inc., which we refer to as the NSMG business. Before our acquisition
of the NSMG business, we focused primarily on sales of storage management
software to the UNIX platform. Our purchase of the NSMG business enabled us to
offer products that are targeted primarily at the Windows NT market, which
represented another large market for storage management products. In 1999, we
also acquired TeleBackup Systems, Inc., which we refer to as TeleBackup, and
NuView, Inc., which we refer to as NuView. Our acquisitions of the NSMG
business, TeleBackup and NuView contributed to the increase in the number of our
full-time employees, which grew from 945 to 2,974 during 1999. The acquisition
of these businesses has created new challenges for us, including the general
integration of the businesses and product lines. The products shown below
include products acquired from the NSMG business, TeleBackup and NuView.
RECENT DEVELOPMENTS
On March 29, 2000, VERITAS, Seagate Technology, Inc. and an investor group
including Seagate Technology's management group announced the Merger and the
Stock Purchase in which we will acquire all of the shares of our common stock
held by Seagate Technology, certain other securities and cash. We are not
acquiring Seagate Technology's disc drive business or any other Seagate
Technology operating business. In the transaction, we will issue to the Seagate
Technology stockholders approximately 109.3 million shares of our common stock
for approximately 128 million shares of VERITAS common stock held by Seagate
Technology. In addition, we will issue shares of our common stock for certain
other securities held by Seagate Technology at the closing date and, at our
election, we may also issue shares of our common stock for up to $750 million in
retained cash at the closing date. We will be indemnified for liabilities,
including tax liabilities and other matters that may arise in connection with
the transaction. The transaction is intended to qualify as a tax-free
reorganization.
PRODUCTS
We offer a wide range of leading storage management software solutions. We
have developed our products to manage the explosive growth of data and the
growing complexity and size of networked environments that exist today. Our
products allow businesses to back up their data, improve the management of their
data, and increase data availability. We also offer several integrated solutions
that further simplify storage management.
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Data protection
We offer products designed to ensure reliable information backup and
restore. Our leading products that protect information include:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
VERITAS NetBackup VERITAS NetBackup has the flexibility and scalability
needed to protect the mission critical data of
businesses with thousands or even tens of thousands of
computer systems. It provides easily configured
centralized backup scheduling, user-directed backups and
restores, automated distribution and installation of
client software over a network, and easy configuration
of users' computers. It supports all major platforms,
including UNIX, Windows NT, Novell NetWare and Linux,
and includes support for storage area networks
VERITAS NetBackup BusinesServer VERITAS NetBackup BusinesServer is a backup and
recoverySolution designed for small to mid-size UNIX and
high-end Windows NT installations, and for the many IT
operations that run a combination of the two. It
combines strong performance with an intuitive interface
not normally found in UNIX solutions.
VERITAS Backup Exec VERITAS Backup Exec provides easy-to-use backup and
restore functions, including scheduled automated
unattended data backup operations. It supports Windows
NT, Windows 2000 and Windows 95/98, and has a large
array of options to protect data contained in popular
applications such as Microsoft Outlook and Novell
NetWare.
VERITAS TeleBackup VERITAS TeleBackup is an easy-to-use and secure backup
and disaster recovery tool for portable and desktop
computers in remote offices and telecommuting work
locations. It supports users running Sun Solaris, HP-UX
and Windows NT servers, and Windows 95/98 and Windows NT
client workstations.
VERITAS Global Data Manager VERITAS Global Data Manager centrally manages VERITAS
NetBackup, VERITAS NetBackup BusinesServer and VERITAS
Backup Exec servers at different geographic locations
that are part of a business' intranet or wide area
network. Its benefits include increased flexibility and
control, global scalability, uninterrupted global
operations and reduced management costs.
VERITAS Storage Migrator VERITAS Storage Migrator, formerly called VERITAS HSM,
increases the availability of critical business data by
ensuring that only frequently used information is kept
online permanently. It migrates infrequently-used data
from online devices to lower cost secondary storage, and
recalls that migrated data to primary online storage
when accessed by users or applications. Separate UNIX
and Windows NT versions of this product are available.
</TABLE>
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File and volume management
We offer products designed to improve the manageability and performance of
business critical data. Our principal management and performance products
include:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
VERITAS Volume Manager VERITAS Volume Manager allows for easy to use online
disk storage management for business computing
environments. It provides the tools needed to protect
against data loss due to hardware failure, to accelerate
system performance by allowing files to be spread across
multiple disks and to allow IT managers to reconfigure
data locations without interrupting users.
VERITAS File System VERITAS File System enables fast system recovery,
generally within seconds, from operating system failure
or disruption. It gives mission-critical servers
mainframe-level capabilities by providing superior
performance, data integrity, high availability and
online manageability.
VERITAS Foundation Suite VERITAS Foundation Suite combines VERITAS Volume Manager
and VERITAS File System. These two products provide key
benefits independently, but together they take advantage
of each other's specialized disk and data management
capabilities to improve performance, availability and
manageability.
</TABLE>
High availability, clustering and replication
We offer products that make businesses' key applications more available in
complex computing environments. These products include:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
VERITAS Cluster Server VERITAS Cluster Server is a comprehensive availability
management solution that maximizes data and application
availability by using proactive management of planned
and unplanned downtime. It reduces the cost of high
availability through a single standby system that
protects the availability of dozens of servers. It is
also useful in storage area networks.
VERITAS ClusterX for Microsoft Cluster VERITAS ClusterX for Microsoft Cluster Service, or MSCS,
Service addresses the management and deployment of multiple
distributed Windows NT clustered computers. It lets
users control the installation, configuration and
ongoing management of multiple MSCS clustered computers
from a single console.
VERITAS ClusterX for WLBS VERITAS ClusterX for WLBS focuses on managing Windows NT
Load Balancing Service servers and improves their
availability, reliability, scalability and performance.
It lets users manage all aspects of enterprise-wide
Windows NT Load Balancing Service clustered computers
from a single console.
</TABLE>
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<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
VERITAS FirstWatch for Sun VERITAS FirstWatch for Sun provides simple and robust
failover management for the Sun Solaris environment.
Fault detection, isolation and recovery are automated to
achieve rapid restoration of application services in the
event of a failure. An entire application or selected
application services, configured into logical service
groups, can be failed over to a backup system.
VERITAS Storage Replicator for Volume VERITAS Storage Replicator for Volume Manager helps
Manager businesses ensure that the most current data is
available at all global locations. It is a robust,
flexible, multi-purpose data replication tool designed
for enterprise environments. It integrates with VERITAS
Volume Manager to provide exceptional recoverability and
manageability.
VERITAS Storage Replicator for File VERITAS Storage Replicator for File Systems is a robust,
Systems flexible, general purpose data replication tool designed
for use in enterprise environments. It ensures that data
written to one server is reliably replicated to other
participating servers, so that all updates are available
for use in active file systems across all servers.
VERITAS Replication Exec VERITAS Replication Exec delivers flexible and
intelligent data replication for Windows NT
environments. It can efficiently and automatically
duplicate files or file systems at any number of
locations for complete data protection or information
distribution. It offers centralized management, high
replication performance, minimal system requirements,
both real-time and schedule-based replication, and
selectable bandwidth usage. It can also replicate remote
data to a central site for centralized backup
</TABLE>
Application solutions
Businesses need integrated solutions to optimize their storage management
strategies. Our principal products offering these integrated solutions include:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
VERITAS Desktop Management Suite VERITAS Desktop Management Suite centralizes the
management of distributed network desktop computers by
automating tasks such as operating system and software
distribution, hardware and software inventory,
application metering, backup and remote control. It
reduces the total cost of managing network desktop
computers and standardizes the administration of desktop
computers across the enterprise.
</TABLE>
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<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
VERITAS ManageExec VERITAS ManageExec is a powerful, simple and scaleable
solution for managing the behavior of different types of
networks worldwide from one central location. It
automatically monitors, analyzes and reports on Windows
NT and Novell NetWare systems health, establishes
profiles of normal server and application behavior and
sends alerts when these profiles are not met. As a
result, problems that once may have resulted in computer
failure are now resolved before network users are
affected.
VERITAS NerveCenter VERITAS NerveCenter is an event management solution that
helps to ensure high levels of network and application
availability by identifying critical problems and
launching corrective measures automatically. It
functions across all common network devices and
applications in UNIX and Windows NT systems.
VERITAS WinINSTALL VERITAS WinINSTALL allows businesses to automate
software distribution and standardize versions of
software on all desktop computers across the business
enterprise in Windows 95/98, Windows NT and Windows 2000
networks.
VERITAS WinLAND VERITAS WinLAND collects detailed information about a
computer workstation's hardware, its configuration and
its software. It allows users to automatically identify
software on each computer workstation and to scan for
and collect detailed information from unknown files.
</TABLE>
VERITAS Editions
We have also integrated our solutions in a range of product suites
optimized for specific applications including Oracle, Sybase, NFS, SAP and
web-based environments. Our integrated solutions, which we call VERITAS
Editions, include:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
VERITAS Database Edition for Oracle VERITAS Database Edition for Oracle, available in
several Configurations, is an integrated suite of
several VERITAS products to deliver improved
performance, enhanced manageability and continuous
database access to support the extremely complex and
demanding work of database administrators operating
Oracle servers.
VERITAS Database Edition for Sybase VERITAS Edition for Sybase is an integrated suite of
several VERITAS solutions combined with specialized
software agents to support the increasingly complex
Sybase database environment. Certified by Sybase as the
only solution to run Sybase data servers on file
systems, it increases system Performance and
manageability.
</TABLE>
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<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
------- -----------
<S> <C>
VERITAS Edition for NFS VERITAS Edition for Network File System, or NFS, is a
Comprehensive and cost-effective solution to deliver
superior performance and higher availability for
SPARC/Solaris servers in computing environments that run
both UNIX and Windows. It also meets the demand for
improved manageability of these complex networks, and
helps to ensure efficient workflow for users.
VERITAS Edition for SAP VERITAS Edition for SAP, the enterprise management
system used by many global businesses, is an integrated
suite of VERITAS products optimized to deliver high
performance, Easier manageability, and continuous access
for SAP environments using Oracle database servers
running on Solaris. It bundles all the advanced features
of the Database Edition for Oracle with the flexibility
and Robustness of VERITAS Cluster Server.
VERITAS Edition for Web VERITAS Edition for Web is designed to optimize the
availability, performance and manageability of web
servers, particularly for internet service providers, or
ISPs, and corporate web server administrators. Based on
VERITAS data and storage management technologies and
customized for SPARC/Solaris systems, it allows web
servers to function effectively as business critical
productivity tools.
</TABLE>
SERVICES
Our customer service and support organization provides customers with
maintenance, technical support, consulting and training services. We believe
that providing a high level of customer service and technical support is
critical to customer satisfaction and our success. Most of our customers have
support agreements with us that provide for fixed fee, renewable annual
maintenance consisting of technical and emergency support, and minor product
upgrades free of charge. Our service group provides the following services:
Maintenance and technical support
We offer seven day-a-week, 24-hour telephone support, as well as electronic
mail and fax customer support. Our customers can choose from a variety of
support packages to address their specific needs, ranging from one-time incident
charges to comprehensive support services with a dedicated single point of
contact at VERITAS for some of our applications. Additional customer support is
provided by some of our value-added resellers, system integrators and original
equipment manufacturers.
Consulting
We believe that most customers need assistance before product selection and
not just for the implementation of purchased products. Therefore, we offer
strategy and analysis consulting services for planning the management and
control of enterprise computing in specific customer environments. In addition,
we offer services to assist customers with product implementation. As part of
our broad
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range of services, we believe we offer particular expertise in analyzing network
security threats and security policy integrity.
Training
We have a worldwide customer education and training organization, which
offers training that enables customers to utilize our products, reduces the need
for technical support and provides customers with a means to optimize their
personnel investment by allowing their technical staff access to high quality,
comprehensive instruction. The focus of this organization is aligned with our
strategy to offer end-to-end storage management solutions by providing
instruction from highly-experienced training professionals either at the
customer's location or at one of our multi-platform classrooms.
MARKETING, SALES AND DISTRIBUTION
We market our products and related services through original equipment
manufacturers and a combination of other distribution channels such as direct
sales, resellers, value-added resellers, hardware distributors, application
software vendors and systems integrators. Original equipment manufacturers
incorporate our products into their operating systems on a bundled basis or
license them to third parties as an optional product. In most cases, we receive
a user license fee for each copy sublicensed by the original equipment
manufacturer to third parties. We provide our software products to customers
under non-exclusive license agreements, including shrink-wrap licenses for
certain products. As is customary in the software industry, in order to protect
our intellectual property rights, we do not sell or transfer title to our
software products to customers. We enter into both object-code only and
source-code licenses of our products.
Microsoft relationship
In August 1996, we entered into a development and license agreement with
Microsoft under which we agreed to develop a version of our Volume Manager
product, which Microsoft has called Logical Disk Manager, to be ported to and
embedded in version 5.0 of Microsoft's Windows NT operating system, which now
has been released as Windows 2000. We do not receive royalties with respect to
sales by Microsoft of the embedded product. Our products may not become
available for use in, and Microsoft is not required to use our products in,
future versions of Windows NT. We cannot assure you that we will realize any
benefits from the inclusion of this embedded product in Windows 2000 or future
versions of Windows NT. In addition, we authored several other customized
versions of our products to be packaged with Windows 2000, such as the backup
application, NetBackup, the Removable Storage Services, and the software
distribution feature, which was licensed by Microsoft as WinINSTALL LE and is an
abridged version of VERITAS WinINSTALL.
Sun Microsystems relationship
In January 1997, we entered into a development, license and distribution
agreement with Sun Microsystems that provided a new distribution channel for our
products. We developed a specialized, integrated version of VERITAS Volume
Manager that is bundled with some of Sun Microsystems' storage technologies. The
agreement also provided for the license of full versions of some of our products
and add-on modules to Sun Microsystems for bundling with some Sun Microsystems
products. In August 1998, we amended the agreement and granted Sun Microsystems
a license to distribute and sub-license VERITAS NetBackup, VERITAS Storage
Migrator and some of the VERITAS Editions. This license is non-exclusive except
with respect to certain named resellers for which Sun Microsystems retained
exclusive distribution rights. We may not be able to deliver our
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products to Sun Microsystems in a timely manner despite the dedication of
resources to the development of the products. Also, simultaneous sales efforts
by Sun Microsystems and ourselves with respect to our products could create
channel conflicts. Sun Microsystems is not obligated to sell any of our products
under this agreement.
In November 1999, we announced that Sun Professional Services would be
providing our packaged professional services as well as our custom consulting.
This is designed to enable Sun Microsystems' and our customers to maximize their
system availability through optimal configurations and reliable installations.
We cannot assure you that this arrangement will be successful.
Hewlett-Packard relationship
In November 1997, we entered into a marketing, engineering and distribution
agreement with Hewlett-Packard, under which Hewlett-Packard will offer some of
the components of the lite versions, or functional subsets of VERITAS Volume
Manager, VERITAS Cluster Volume Manager, VERITAS NetBackup and VERITAS File
System with the HP-UX operating system. We will not receive royalties with
respect to the lite version of the VERITAS File System embedded in the HP-UX
operating system. Hewlett-Packard has become our reseller with respect to some
of our products, including full feature versions of the above named products,
and we have offered full feature products and value-added products to the HP-UX
installed customer base. We may not be able to deliver our products to
Hewlett-Packard in a timely manner. Also, it is possible that our deliverables
and Hewlett-Packard deliverables under the agreement may not be synchronized in
a timely and successful manner, and that Hewlett-Packard may not be an effective
reseller of our products. The simultaneous sales efforts by Hewlett-Packard and
ourselves with respect to our products could create some channel conflicts.
Hewlett-Packard is not obligated to sell our products under this agreement.
In the fourth quarter of 1999, we dedicated personnel to define and build
versions of our products that meet the needs specific to the Hewlett-Packard
marketplace, and to further focus our sales and marketing efforts on the
Hewlett-Packard sales channel. We cannot assure you that this strategy will be
successful.
Sales, marketing and support organization
During 1999, we continued to build our sales, marketing and customer
support organization with a focus on delivering our products to resellers,
integrators and end users and integrating the sales force of the NSMG business.
We have sales subsidiaries in Australia, Canada, Japan, Germany, France, the
Netherlands, Sweden, Switzerland and the United Kingdom. We have direct sales
personnel in North America, Europe, Asia and the Pacific Rim. We also have
resellers located in North America, Europe, Asia Pacific, South America and the
Middle East.
We expect to increase the number of our sales, marketing and customer
support employees in the future to expand our direct sales efforts to resellers
and end users. We may not have the necessary resources to accomplish this. It is
also possible that we will not be able to establish and expand these new
distribution channels successfully or complete the integration of our sales and
marketing efforts successfully. We expect to hire additional sales employees in
all regions in 2000. Competition for qualified sales, technical and other
personnel is intense, and we may not be able to attract, assimilate or retain
additional highly qualified employees in the future. We also may not be able to
manage our growth effectively.
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Concentration of customers
In 1999 and 1997, no customer accounted for more than 10% of our net
revenue. Revenue from Sun Microsystems accounted for 12% of our net revenue in
1998.
COMPETITION
The markets in which we compete are intensely competitive and rapidly
changing. Our principal competition in the storage management products area
consists of internal development groups of current and prospective original
equipment manufacturer customers, which have the resources and capability to
develop their own storage management solutions. Relationships between us and the
competitors are complex. We have taken a pioneering role with many of our
products and technologies. While we may compete with another company for a share
of the market, we also may be involved with them, for example, in an effort to
set standards for storage area networking technology that benefits the entire
industry. The products of some original equipment manufacturers in the operating
systems arena include packaged data protection and management applications and
features that we compete with. They include:
- Compaq Computer. Compaq sells several hardware clustering solutions. It
also resells ours and other vendors' backup software, and markets UNIX
system software that includes file and volume management products.
- Hewlett-Packard. HP markets a clustering product, MC ServiceGuard, and a
backup product, Omniback.
- IBM. IBM markets backup, file and volume management products. Its disk
management and clustering products are primarily used with the AIX
operating system.
- Microsoft. The file system in Microsoft Windows NT competes with VERITAS
File System, and the Microsoft Cluster Server with our clustering
products.
- Sun Microsystems. Sun has the Solstice Disk Suite, which competes with
VERITAS Volume Manager, but also has an OEM agreement for the VERITAS
product. Sun markets a competing file system, Unix File System to run on
their version of the UNIX operating system, which is called Solaris, but
resells VERITAS File System as well.
We also encounter competition from other third party software vendors and
hardware companies offering products that incorporate some of the features
provided by our products, and from disk controller and disk subsystem
manufacturers that have included or may include similar features.
Our primary competitors in the storage management products area include the
following, grouped by product type:
Backup and data protection
- Computer Associates, Cheyenne division, for its ARCserve product
- EMC for its Enterprise Data Manager product
- Hewlett-Packard for its Omniback product
- IBM for its ADSTAR Distributed Storage Manager product and its Tivoli
division
- Legato Systems for its BudTool, NetWorker and GEMS products
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- Sterling Software for its Alexandria Network Librarian product
- StorageTek for its REELbackup product
File and volume management
- Hewlett-Packard for its Logical Volume Manager
- IBM for its file system and Logical Volume Manager
- Microsoft for the NT File system
- Sun Microsystems for its Solstice Disk Suite and Unix File System
Clustering and replication
- EMC for its Symmetrix Remote Data Facility replication product
- Hewlett-Packard for its MC ServiceGuard product
- Legato Systems for its FullTime HA Plus and FullTime Clusters
- Microsoft for its Microsoft Cluster Server
- Sun Microsystems for its Sun Cluster product
Our competitors in the areas of remote backup technologies and electronic
data vaulting services include Atrieva, Connected Corp., Core Data and STAC Inc.
These competitors are Windows NT-centric and differ in the degree of system
backup and recovery provided to users, with some companies offering data file
set backup and recovery capability only.
The principal competitive factors in our industry include price, product
functionality, product integration, platform coverage and ability to scale,
worldwide sales infrastructure and global technical support. We believe we
compete favorably in each of these areas relative to our competitors.
Many of our competitors have greater financial, technical, sales, marketing
and other resources than we do, as well as greater name recognition and a larger
installed customer base. We expect that the market for storage management
software, which has been large and fragmented historically, will become more
consolidated with larger companies being better positioned to compete in such an
environment in the long term. As the storage management software market
continues to develop, a number of companies with greater resources than ours
could attempt to increase their presence in this market by acquiring or forming
strategic alliances with our competitors or business partners.
Our success will depend on our ability to adapt to these competing forces,
to develop more advanced products more rapidly and less expensively than our
competitors, and to educate potential customers as to the benefits of licensing
our products rather than developing their own products. Our future and existing
competitors could introduce products with superior features, scalability and
functionality at lower prices than our products and could also bundle existing
or new products with other more established products in order to compete with
us. In addition, because there are relatively low barriers to entry for the
software market, we expect additional competition from other established and
emerging companies. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
harm our business.
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RESEARCH AND DEVELOPMENT
Our research and development efforts have been directed toward developing
new products for UNIX and Windows NT, developing new features and functionality
for existing products, integrating products in the existing product line and
porting new and existing products to different operating systems.
Our major research and development initiatives include:
- Additional integration of the full family of storage management products,
including further integration of VERITAS Volume Manager, VERITAS File
System and VERITAS NetBackup;
- Development of additional Linux versions of our products;
- Development of additional clustering products; and
- Development of additional storage area network products.
Each of these initiatives involves technical and competitive challenges,
which we may not be able to overcome successfully.
Development work under Microsoft and Sun Microsystems agreements
Our agreement with Microsoft requires us to develop a version of our Volume
Manager product, which Microsoft has called Logical Disk Manager, to be ported
to and embedded in Windows 2000, which is effectively version 5.0 of Windows NT.
The agreement also requires us to develop a disk management graphical user
interface designed specifically for Windows NT. Microsoft is providing funding
for a significant portion of the development expenses for this product payable
in quarterly increments. In order to perform under the agreement, we have hired
additional personnel with expertise in the Windows NT operating system
environment and are devoting capital investment and resources to complete this
project successfully.
Our agreements with Sun Microsystems and Hewlett-Packard also impose
development obligations on us. We are required to commit staffing to our
projects with these original equipment manufacturers. We may not have the
resources necessary to perform our obligations under these agreements and our
development efforts may not be as successful as planned.
Size and location of research and development group
As of December 31, 1999, our research and development staff consisted of
767 employees located at our Mountain View, California headquarters and at our
other facilities in North America. In addition, our subsidiary in Pune, India
employed 186 engineers.
Research and development expenditures
We had research and development expenses of $94.5 million in 1999, $40.2
million in 1998 and $25.2 million in 1997. These amounts exclude $104.2 million
in 1999 and $0.6 million in 1998 for in-process research and development charges
in connection with acquisitions. We believe that technical leadership is
essential to our success and expect to continue to commit substantial resources
to research and development. Our future success will depend in large part on our
ability to enhance existing products, respond to changing customer requirements
and develop and introduce new products in a timely manner that keep pace with
technological developments and emerging industry standards. We continue to make
substantial investments in undisclosed new products, which may or
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may not be successful. We may not complete these research and development
efforts successfully and therefore, future products may not be available on a
timely basis or achieve market acceptance.
Need to hire research and development personnel
We need to hire additional research and development personnel to complete
new products on a timely basis, including the adaptation of our products to
Windows NT and performance of obligations to key original equipment manufacturer
partners. The market for these personnel is very competitive and we cannot
assure you that we can hire them on a timely basis or at all. We may consider
acquiring and purchasing technology to achieve some of our objectives, but we
may not be able to accomplish this successfully.
Effect of technological advances
From time to time, we or our competitors may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycles of our existing products. Announcements of currently planned or
other new products could cause customers to defer purchasing our existing
products. We have from time to time in the past experienced delays of up to
several months due to the complex nature of software developed by us and other
software developers for whose systems or applications we offer products. We
could experience delays in connection with our current or future product
development activities. Any of these delays could harm our business.
PROPRIETARY RIGHTS
Measures we take to protect our intellectual property
We regard some of the features of our internal operations, software and
documentation as proprietary and rely on contract, copyright, patent, trademark
and trade secret laws, confidentiality procedures and other measures to protect
our proprietary information. Other than the patents acquired in the NSMG and
TeleBackup combinations as described below, we currently hold no patents
applicable to our current business, although we have filed several applications
for patents. Existing copyright and trade secret laws afford only limited
protection.
As part of our confidentiality procedures, we generally enter into
non-disclosure agreements with our employees, distributors and corporate
partners, and license agreements with respect to our software, documentation and
other proprietary information. These licenses are generally non-transferable and
have a perpetual term.
Infringement risks
We make source code available for some of our products. The provision of
source code may increase the likelihood of misappropriation or other misuse of
our intellectual property. We also license some of our products under shrink
wrap license agreements that are not signed by licensees and therefore may be
unenforceable under the laws of some jurisdictions. In addition, the laws of
some foreign countries do not protect our proprietary rights to the same extent
as do the laws of the United States. Thus, protection of our proprietary rights
may not be adequate. Our competitors also could independently develop technology
similar to our technology.
Litigation risks
We are not aware that our products, trademarks or other proprietary rights
infringe the proprietary rights of third parties. However, from time to time, we
receive notices from third parties asserting that we have infringed their
patents or other intellectual property rights. We may find it
S-43
<PAGE> 45
necessary or desirable in the future to obtain licenses from third parties
relating to one or more of our products or relating to current or future
technologies. Third parties could assert infringement claims against us in the
future with respect to current or future products. Any assertion could require
us to enter into royalty arrangements or result in costly litigation. As the
number of software products in the industry increases and the functionality of
these products further overlap, we believe that software developers may become
increasingly subject to infringement claims. We expect any claims, with or
without merit, could be time consuming and expensive to defend.
It may be possible for a third party to copy or otherwise obtain and use
our products or technology without authorization, or to develop similar
technology independently. Policing unauthorized use of our products is difficult
and, although we are unable to determine the extent to which piracy of our
software products exists, we expect software piracy could be a persistent
problem.
Trademarks
VERITAS and the VERITAS logo are registered trademarks in the United
States. Our other trademarks include:
- - VERITAS Backup Exec;
- - VERITAS Cluster Server;
- - VERITAS Cluster Volume Manager;
- - VERITAS ClusterX;
- - VERITAS Database Edition for Oracle(R);
- - VERITAS Database Edition for Sybase(R);
- - VERITAS Desktop Management Suite;
- - VERITAS Edition for NFS(R);
- - VERITAS Edition for SAP(R);
- - VERITAS Edition for Web;
- - VERITAS File System;
- - VERITAS First Watch for Sun(R);
- - VERITAS Foundation Suite;
- - VERITAS Global Data Manager;
- - VERITAS ManageExec;
- - VERITAS NerveCenter;
- - VERITAS NetBackup;
- - VERITAS NetBackup BusinesServer;
- - VERITAS Replication Exec;
- - VERITAS Storage Migrator;
- - VERITAS Storage Replicator
for File Systems;
- - VERITAS Storage Replicator
for Volume Manager;
- - VERITAS TeleBackup;
- - VERITAS Volume Manager;
- - VERITAS WinINSTALL; and
- - VERITAS WinLAND.
Patents and patent applications
We have 16 U.S. patents and 8 patent applications, including patents and
rights to patent applications acquired from the NSMG business, TeleBackup and
NuView. Any patents obtained may not provide substantial protection or be of
commercial benefit to us. It is also possible that their validity will be
challenged.
EMPLOYEES
As of December 31, 1999, we had 2,974 full-time employees, including 953 in
research and development, 1,694 in sales, marketing, consulting and customer
support and 327 in finance and administrative services. We expect to hire a
significant number of new employees in 2000, particularly in research and
development and in sales, marketing, consulting and customer support. We have
not entered into any collective bargaining agreement with our employees, and
believe that our relations with our employees are good. We believe that our
future success will depend in part upon the continued service of our key
employees and on our continued ability to hire and retain qualified personnel.
We may not be able to retain our key employees and may not be successful in
attracting and retaining sufficient numbers of qualified personnel to conduct
our business in the future.
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<PAGE> 46
FACILITIES
Our executive offices are located in Mountain View, California. Our
principal facilities are located in Mountain View, California and Heathrow,
Florida. Large portions of our facilities are occupied under leases that expire
at various times through 2012. The table below shows the approximate square
footage of the premises that we lease as of December 31, 1999, excluding
approximately 39 executive suites.
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE
LOCATION FOOTAGE
-------- -----------
<S> <C>
North America
California................................................ 281,946
Colorado.................................................. 26,951
Florida................................................... 139,904
Georgia................................................... 8,863
Illinois.................................................. 10,027
Maryland.................................................. 4,685
Massachusetts............................................. 37,760
Minnesota................................................. 62,420
New Jersey................................................ 11,125
North Carolina............................................ 8,836
Texas..................................................... 12,660
Virginia.................................................. 12,441
Washington................................................ 32,848
Canada.................................................... 18,526
-------
Total North America.................................... 668,992
-------
Europe
France.................................................... 8,264
Germany................................................... 31,619
Ireland................................................... 10,000
Sweden.................................................... 4,225
United Kingdom............................................ 65,000
-------
Total Europe........................................... 119,108
-------
Asia
Australia................................................. 5,747
China..................................................... 6,907
Hong Kong................................................. 2,580
India..................................................... 33,229
Japan..................................................... 3,462
Malaysia.................................................. 2,840
Singapore................................................. 670
-------
Total Asia............................................. 55,425
-------
Total................................................ 843,525
=======
</TABLE>
California facilities exclude approximately 44,361 square feet of space
that we sublease to others. Illinois facilities exclude approximately 17,135
square feet of unoccupied space, and Florida facilities exclude approximately
5,000 square feet of unoccupied space. Facilities in England exclude
approximately 8,365 square feet of space that we sublease to others.
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<PAGE> 47
We recently amended and revised our operating lease arrangement for a new
425,000 square foot campus facility in Mountain View, California. We expect to
occupy this facility beginning in the second quarter of 2001. We also recently
entered into an operating lease arrangement for our existing facilities in
Roseville, Minnesota. We expect to improve and expand our existing facilities of
approximately 62,000 square feet and to develop adjacent property adding
approximately 260,000 square feet to the campus. We expect the first phase of
approximately 142,000 square feet to be completed in the second quarter of 2001.
LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings. We may from
time to time become a party to various legal proceedings arising in the ordinary
course of business.
DIRECTORS
We have a classified board. Our board of directors currently consists of 10
directors and is divided into three classes serving staggered three-year terms.
Directors for each class will be elected at the annual meeting of stockholders
held in the year in which the term for that class expires and will serve for
three years. We currently have two vacancies on our board of directors, one of
which is a Class B director, the other of which could be designated to any class
by our board of directors. Each of these vacancies may be filled only by a
majority vote of the directors in office.
The names of the current directors, their ages as of December 31, 1999 and
other information about them are shown below:
<TABLE>
<CAPTION>
DIRECTOR
NAME OF DIRECTOR AGE PRINCIPAL POSITION SINCE
---------------- --- ------------------ --------
<S> <C> <C> <C>
Class A directors -- term
expiring at the 2002 annual
meeting
Mark Leslie................... 54 Chief Executive Officer and Chairman of the Board 1988
Geoffrey Squire............... 52 Executive Vice President and Vice-Chairman of the 1997
Board
Gregory Kerfoot............... 40 Director 1999
Class B directors -- term
expiring at the 2000 annual
meeting
William H. Janeway............ 56 Director 1997
Joseph D. Rizzi............... 57 Director 1987
Class C directors -- term
expiring at the 2001 annual
meeting
Fred van den Bosch............ 52 Executive Vice President of Engineering, Director 1996
Steven Brooks................. 48 Director 1996
Stephen Luczo................. 42 Director 1999
</TABLE>
Each of the directors listed above was appointed to our board of directors
on May 28, 1999. The dates given for the last column include time served by each
individual both as our director and as a director of our predecessor companies.
Mr. Leslie is our Chief Executive Officer and Chairman of the Board. Mr.
Leslie has served as Chief Executive Officer of VERITAS or our predecessors
since 1990 and as a director since 1988.
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<PAGE> 48
Mr. Leslie is also Chairman of the Board of Versant Corporation, an object
management solutions company, and serves on the board of directors of Brocade
Communications Systems, Inc., a supplier of storage area network software, and
on the board of directors of Keynote Systems, Inc., a supplier of Internet
performance measurement and diagnostic services.
Mr. Squire has served as Executive Vice President and Vice Chairman of the
Board of VERITAS or our predecessors since April 1997, when VERITAS merged with
OpenVision Technologies, Inc. Mr. Squire became a director of OpenVision in 1994
and was appointed Chief Executive Officer of OpenVision in July 1995. From
November 1994 to June 1995, he was President and Chief Operating Officer at
OpenVision. Mr. Squire was President of the U.K. Computing Services and Software
Association in 1994 and, in 1995, was elected as the founding President of the
European Information Services Association. Mr. Squire also serves as a director
of Industri-Mathematik International Corp.
Mr. Kerfoot has been a director of VERITAS since May 1999. In May 1999, Mr.
Kerfoot became President and a director of Seagate Software. From May 1996 to
May 1999, Mr. Kerfoot served as Seagate Software's Chief Strategic Officer and
as President of the Information Management Group. In 1994, he joined Seagate
Technology in connection with its acquisition of Crystal Computer Services, and
continued as Crystal's Director of Research and Development until May 1996.
Mr. Janeway has been a director of VERITAS or our predecessors since April
1997. Mr. Janeway has been a Managing Director of E.M. Warburg Pincus & Co.,
LLC, an investment services firm, since 1988. Mr. Janeway is a director of BEA
Systems, Inc., ECsoft Group, PLC, Inacom Corp., Indus International, Inc. and
Industri-Mathematik Intl. Corp.
Mr. Rizzi has been a director of VERITAS or our predecessors since 1987.
Since 1986, he has been a general partner of Matrix Partners, a venture capital
firm.
Mr. van den Bosch has served as Executive Vice President, Engineering of
VERITAS or our predecessors since July 1997. Mr. van den Bosch served as our
Senior Vice President, Engineering from 1991 to July 1997 and was appointed as a
director in February 1996. From 1970 until 1990, he served in various positions
with Philips Information Systems, including Director of Technology.
Mr. Brooks has been a director of VERITAS or our predecessors since 1996.
Since February 1999, Mr. Brooks has been a general partner and a managing
director of Broadview Capital Partners, a private equity firm. From September
1997 to February 1999, Mr. Brooks was a managing director of Donaldson, Lufkin &
Jenrette Securities Corporation, an investment banking firm. From 1994 to 1997,
Mr. Brooks served as Managing Director and Head of Global Technology Investment
Banking at Union Bank of Switzerland Securities, LLC. Mr. Brooks is a director
of Paychex, Inc., a national payroll processing and business services company,
and QRS Corporation, an electronic commerce company.
Mr. Luczo has been a director of VERITAS since May 1999. Since July 1997,
Mr. Luczo has served as Chairman of the Board of Directors of Seagate Software,
Inc. and as Chief Executive Officer, President and Director of Seagate
Technology, Inc. From March 1995 to July 1997, Mr. Luczo served as Seagate
Software's Chief Operating Officer. Mr. Luczo joined Seagate Technology in 1993
as Senior Vice President, Corporate Development, and was promoted to Executive
Vice President, Corporate Development in March 1995, where he served until
September 1997. He was promoted to President and Chief Operating Officer of
Seagate Technology in September 1997, and served in the latter capacity until
August 1998. In July 1998, Mr. Luczo was promoted to Chief Executive Officer and
appointed to the Board of Directors of Seagate Technology. Mr. Luczo also serves
on the boards of directors of Cobalt Networks, Inc., Dragon Systems, Inc. and
Gadzoox Networks Inc.
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<PAGE> 49
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has the following committees:
Audit committee
Mr. Brooks and Mr. Kerfoot are the current members of the audit committee.
Mr. Kerfoot was appointed to the audit committee in October 1999, taking the
place of Mr. Rizzi on the audit committee. Each of them is independent as
defined under the listing standards that apply to us.
The audit committee reviews with our independent public accountants and
with our internal accounting staff the scope and results of the independent
accountants' audit work, our annual financial statements, and the adequacy of
our internal accounting and control systems. The audit committee also recommends
to our board of directors the firm of independent public accountants to be
selected to audit our accounts, and makes further inquiries as it deems
necessary or desirable to inform itself as to the conduct of our affairs.
Compensation committee
Mr. Janeway and Mr. Rizzi are the current members of the compensation
committee. Mr. Janeway was appointed to the compensation committee in October
1999, taking the place of Mr. Brooks on the compensation committee. Each of them
is independent and a non-employee director as defined under the standards that
apply to us.
The compensation committee reviews and makes recommendations to the board
of directors regarding the compensation for officers and compensation guidelines
for our employees. The compensation committee also administers our employee
stock and option plans and makes decisions regarding the grant of all forms of
stock compensation awarded to officers.
Compensation committee interlocks and insider participation
Except as described below, none of the persons who served on our
compensation committee during any part of 1999 had any interlocking
relationships as defined by the SEC.
Mr. Brooks was a managing director of Donaldson, Lufkin & Jenrette
Securities Corporation, or DLJ, at the time our board of directors approved the
NSMG acquisition. DLJ served as the financial advisor to VERITAS Operating
Corporation in the NSMG acquisition, for which VERITAS Operating Corporation
paid them $7.5 million. Mr. Brooks was not a member of the DLJ team responsible
for obtaining the internal approval of, or presenting to the board of directors
of VERITAS Operating Corporation, DLJ's fairness opinion. Mr. Brooks
participated as a member of the board of directors of VERITAS Operating
Corporation in approving all aspects of the NSMG acquisition, other than the
retention of DLJ as financial advisor.
COMPENSATION OF DIRECTORS
How board members are compensated
Our non-employee directors receive a specified number of stock options
under our directors' plan each year. Our board members do not receive any fees
for attending board or board committee meetings, but are reimbursed for actual
expenses they incur to attend meetings.
S-48
<PAGE> 50
Amendments to the directors' plan
In April 1999, our board of directors approved an amendment to the
directors' plan to provide that, if the number of outstanding shares of common
stock is changed as a result of a stock dividend, stock split, reverse stock
split, combination or other similar capital change, the board of directors will
have discretion to determine whether the number of shares available for issuance
under the directors' plan, the maximum number of shares that can be granted to a
director, the number of shares subject to outstanding options or the other terms
of such outstanding options, will be adjusted to reflect the capital change.
In October 1999, our board of directors approved an amendment to the
directors' plan to provide for the decrease in the number of shares subject to
each initial grant made to a director on or after January 1, 1999 from 121,500
to 25,000, the decrease in the number of shares subject to each succeeding grant
made to a director on or after January 1, 1999 from 30,375 to 6,500, and the
change in vesting of those option grants to a vesting rate of 1/48th of the
shares subject to these option grants per month, with no board meeting
attendance requirements. Our board of directors did not adjust the 25,000 and
6,500 grant amounts for our 2-for-1 stock split in the form of a stock dividend
effected in July 1999, our 3-for-2 stock split in the form of a stock dividend
effected in November 1999, or our 3-for-2 stock split in the form of a stock
dividend effected in March 2000. The board of directors may, at its discretion,
increase the number of shares subject to each initial grant to 121,500, and
increase the number of shares subject to each succeeding grant to 30,375,
without stockholder approval.
Grant of options to directors
Following the October 1999 amendment, our directors' plan provides that
each non-employee director will receive an initial option grant to purchase
25,000 shares of our common stock on the later to occur of (1) the date he or
she is first elected to the board, or (2) the date his or her most recent prior
option grant becomes fully vested as to all shares.
In addition, following the October 1999 amendment, each non-employee
director will receive a succeeding option grant to purchase 6,500 shares of our
common stock each year on the anniversary date of the most recent prior option
granted to him or her, provided the individual is still a member of the board. A
non-employee director cannot receive a succeeding grant earlier than the first
anniversary of his or her initial grant.
Exercisability of options
Options granted under the directors' plan are immediately exercisable. Once
exercised, we will have a right to repurchase unvested shares. This repurchase
right lapses as the shares vest. Vesting is as follows:
- Initial grants made prior to January 1, 1999 vest as to 15,187 shares,
and succeeding grants made prior to January 1, 1999 vest as to 3,798
shares, on the last day of each calendar quarter, provided that the
non-employee director attends at least one board meeting during the
quarter.
- Initial grants and succeeding grants made on or after January 1, 1999
vest as to 1/48th of the shares subject to the options on a monthly basis
with no requirement that the non-employee director attend board meetings.
S-49
<PAGE> 51
Terms of options
Director options have a 10-year term and will fully vest as to any shares
that remain unvested on the day immediately preceding the 10th anniversary of
the date the option is granted. Options cease to vest, but remain exercisable as
to vested shares if the non-employee director ceases to be a member of the
board, so long as he or she continues to provide services to us as a consultant.
Effect of mergers, consolidations, dissolutions or liquidations
In the event of a merger, consolidation, dissolution or liquidation of
VERITAS, the sale of substantially all of our assets or any other similar
corporate transaction, the vesting of all options granted under the directors'
plan will accelerate and the options will become exercisable in full.
Number of shares reserved for issuance under the directors' plan
We have reserved 2,531,250 shares of our common stock for issuance under
the directors' plan. In the event that any outstanding option under the
directors' plan expires or terminates for any reason, the shares of common stock
allocable to the unexercised portion of the option will be available again for
future grant under the directors' plan. On March 24, 2000, options to purchase
1,069,687 shares were outstanding, 509,305 options had been exercised and
952,258 shares were eligible for future grant of options.
EXECUTIVE OFFICERS
The following table sets forth information with respect to persons who
served as our executive officers as of December 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Mark Leslie.......................... 54 Chief Executive Officer and Chairman of the Board
Geoffrey W. Squire................... 52 Executive Vice President and Vice-Chairman of the
Board
Fred van den Bosch................... 52 Executive Vice President, Engineering and Director
Peter J. Levine...................... 39 Executive Vice President, Strategic Operations
Paul A. Sallaberry................... 43 Executive Vice President, Worldwide Sales
Kenneth E. Lonchar................... 42 Senior Vice President, Finance and Chief Financial
Officer
Jay A. Jones......................... 45 Senior Vice President, Chief Administrative Officer
and Secretary
Michael Wentz........................ 47 Vice President, Worldwide Technical Services
</TABLE>
For Mr. Leslie, Mr. Squire and Mr. van den Bosch, please see the
information set forth under "Directors" above.
Mr. Levine has served as our Executive Vice President, Strategic Operations
since December 1999, after serving as Senior Vice President, Strategic
Operations of VERITAS or our predecessors from January 1999 to December 2000 and
Senior Vice President, OEM Sales from December 1997 to December 1998. Mr. Levine
served as a senior executive of VERITAS from 1995 to December 1997.
Mr. Sallaberry has served as our Executive Vice President, Worldwide Sales
since December 1999 after serving as Senior Vice President, Worldwide Sales of
VERITAS or our predecessors from July 1997 to December 1999, and Vice President,
North American Sales from April 1997 to July 1997. Mr. Sallaberry was
OpenVision's Senior Vice President of Sales from 1992 until 1994. Mr. Sallaberry
rejoined OpenVision in 1995 as Senior Vice President of North American
Operations.
S-50
<PAGE> 52
Mr. Lonchar has served as Chief Financial Officer of VERITAS or our
predecessors since April 1997 and as our Senior Vice President, Finance since
January 1999. Mr. Lonchar served as our Vice President, Finance from April 1997
until January 1999. Mr. Lonchar was Chief Financial Officer and Senior Vice
President of OpenVision from December 1995 until the merger with VERITAS in
April 1997. Prior to joining OpenVision, Mr. Lonchar was Vice President, Finance
and Administration and Chief Financial Officer of Microtec Research, Inc., a
publicly-traded software company, for seven years. Mr. Lonchar is a certified
public accountant. Mr. Lonchar also serves on the board of directors of Geoworks
Corporation, a provider of mobile e-commerce and information services and
software.
Mr. Jones has served as Senior Vice President, Chief Administrative Officer
and Secretary of VERITAS or our predecessors since January 1999. Mr. Jones
served as our Vice President, General Counsel and Secretary from April 1997 to
January 1999. Mr. Jones joined OpenVision as General Counsel in 1993 and was
appointed Vice President, General Counsel and Secretary in 1994 and served in
those capacities until the merger with VERITAS in April 1997. Mr. Jones is a
member of the California Bar Association.
Mr. Wentz has served as Vice President, Worldwide Technical Services of
VERITAS or our predecessors since May 28, 1999. From February 1996 until May 28,
1999. Mr. Wentz served as Vice President of Technical Services for the NSMG
business of Seagate Software. He joined Seagate Software in February 1996 as
part of its acquisition of Arcada Software, Inc. Mr. Wentz joined Arcada in May
of 1994 where he served in a similar capacity as Vice President of Technical
Support Services. Prior to joining Arcada, Mr. Wentz served as Director of
Technical Support Operations at Samna Corporation and then at Lotus Development
Corporation after its acquisition of Samna.
S-51
<PAGE> 53
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid for services rendered to VERITAS in all capacities during 1999, 1998 and
1997 by our chief executive officer and our four other most highly compensated
executive officers. This information includes the dollar value of base salaries,
commissions and bonus awards, the number of shares subject to stock options
granted and certain other compensation, whether paid or deferred. We do not
grant stock appreciation rights and provide no long-term compensation benefits
other than stock options.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------
ANNUAL COMPENSATION AWARDS
----------------------------------- ------------------
OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION UNDERLYING OPTIONS
--------------------------- ---- -------- -------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Mark Leslie....................... 1999 $400,000 $875,000 $2,500 $719,999
Chief Executive Officer 1998 300,000 398,765 1,200 556,874
1997 250,000 326,400 1,200 860,616
Paul A. Sallaberry................ 1999 225,000 500,000 2,500 337,499
Executive Vice President, 1998 295,603 99,691 1,200 168,749
Worldwide Sales 1997 336,042 58,485 1,200 354,365
Fred van den Bosch................ 1999 250,000 437,500 2,500 449,999
Executive Vice President of 1998 220,000 219,321 1,200 371,249
Engineering 1997 160,000 140,598 1,200 506,241
Peter J. Levine................... 1999 200,000 375,000 2,500 337,499
Executive Vice President, 1998 150,000 179,691 1,200 168,749
Strategic Operations 1997 145,000 149,270 1,200 354,370
Kenneth Lonchar................... 1999 215,000 275,000 0 112,499
Chief Financial Officer 1998 191,200 179,444 0 101,250
1997 114,667 133,680 0 101,241
</TABLE>
Portions of bonuses for services rendered in 1999, 1998 and 1997 were each
paid in the following fiscal year. Messrs. Sallaberry and Lonchar joined us in
April 1997 when we merged with OpenVision Technologies, Inc. The compensation
amounts include sales commissions paid to Mr. Sallaberry in the amount of
$166,090 for 1998 and $170,837 for 1997. We have restated Mr. Sallaberry's
compensation amounts in 1998 and 1997 to reflect sales commissions earned rather
than paid in the years shown. The other annual compensation amounts represent
our matching contributions to our 401(k) plan.
S-52
<PAGE> 54
OPTION GRANTS IN 1999
The following table sets forth further information regarding the individual
grants of stock options pursuant to our stock option plans during 1999 to each
of the above named officers. The table illustrates the hypothetical gains or
"option spreads" that would exist for the options at the end of the 10-year term
of the options based on assumed annualized rates of compound stock price
appreciation of 5% and 10% from the dates the options were granted to the end of
the term. The 5% and 10% assumed rates of annual compound stock price
appreciation are mandated by SEC rules and do not represent our estimate or
projection of future common stock prices. Actual gains, if any, on option
exercises will depend on the future performance of our common stock and overall
market conditions. The potential realizable values shown in this table may never
be achieved.
<TABLE>
<CAPTION>
PERCENT
NUMBER OF OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS ASSUMED RATES OF STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ---------- ------------ --------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Mark Leslie................ 719,999 4.1% $17.55 5/25/09 $7,949,192 $20,144,813
Paul A. Sallaberry......... 337,499 1.9 17.55 5/25/09 3,726,178 9,442,866
Fred van den Bosch......... 449,999 2.5 17.55 5/25/09 4,968,241 12,590,498
Peter J. Levine............ 337,499 1.9 17.55 5/25/09 3,726,178 9,442,866
Kenneth Lonchar............ 112,499 0.6 17.55 5/25/09 1,242,052 3,147,603
</TABLE>
The exercise price of all stock options was equal to the fair market value
of our common stock on the date of grant. Stock options vest over four years at
the rate of 1/48 of the shares subject to the options per month, and the vesting
will accelerate in the event of an acquisition or merger. The options were
granted for a term of 10 years, subject to earlier termination upon termination
of employment.
AGGREGATE OPTION EXERCISES IN 1999 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the exercise of stock
options during 1999 by each of the above named officers, including the aggregate
amount of gains on the date of exercise. In addition, the table includes the
number of shares covered by both vested and unvested stock options held on
December 31, 1999 by each of those officers. Also reported are values for
"in-the-money" stock options that represent the positive spread between the
respective exercise prices of outstanding stock options and the fair market
value of the our common stock as of December 31, 1999. The fair market value is
determined by the closing price of our common stock on December 31, 1999, which
was $95.42 per share.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
UPON VALUE ----------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) VESTED UNVESTED VESTED UNVESTED
---- ----------- ----------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Mark Leslie.......... 324,562 $ 8,321,498 2,127,937 1,490,624 $195,086,560 $126,214,010
Paul A. Sallaberry... 378,727 11,602,969 308,479 650,542 27,289,846 55,022,599
Fred van den Bosch... 269,999 12,419,916 1,431,931 872,575 131,978,577 73,302,499
Peter J. Levine...... 508,779 11,266,014 97,885 578,599 8,193,901 48,370,784
Kenneth Lonchar...... 23,356 411,420 131,560 198,026 11,629,224 16,442,184
</TABLE>
The value realized for option exercises is the aggregate fair market value
of our common stock on the date of exercise less the exercise price. The values
for unexercised in-the-money options are
S-53
<PAGE> 55
based on the difference between the option exercise price and the fair market
value of the stock on December 31, 1999. These values have not been, and may
never be, realized.
EMPLOYMENT AGREEMENTS
All of our executive officers entered into employment agreements with us
effective May 28, 1999.
TERMS OF THE AGREEMENTS
Under the employment agreements, these officers will be paid a base salary
and will be entitled to receive a performance bonus as determined by the board
of directors or the compensation committee. All these employment agreements
provide for a term of one year, except for Mark Leslie, which provides for a
term of two years. In addition, each employment agreement provides that at the
end of its term, the employee will continue on a month-to-month basis on the
terms and conditions in the employment agreement.
SEVERANCE PROVISIONS
Generally, if there is an involuntary termination under one of these
employment agreements as described below, then the employee will be entitled to
six months of base compensation, plus any unpaid quarterly bonuses, and 50% of
the employee's target bonus for the fiscal year. In addition, the employee will
be entitled to continued vesting of all stock options and restricted stock held
by the employee through a nine-month consulting period, and the continued
exercisability of all stock options for three months following the end of the
consulting period. The employee will also be entitled to continue to receive
health, dental and life insurance coverage and will be retained as our
consultant for a period of time as set forth in the applicable agreement.
The employee will not be entitled to receive severance benefits if the
employee's employment terminates by reason of the employee's voluntary
resignation, if we terminate the employee's employment after the last day of the
initial employment term or if the termination is for cause, except those under
our severance and benefits plans.
"Involuntary termination" means:
- the reduction of employee's duties, authority or responsibilities, or the
assignment to employee of reduced duties, authority or responsibilities,
without employee's consent;
- a reduction in the employee's base salary;
- a reduction in the employee's target bonus opportunity with the result
that employee's overall cash compensation package is significantly
reduced;
- the relocation of employee to a facility or a location more than 30 miles
away from the employee's then current location, without employee's
consent;
- any termination of employee without cause; and
- any act or set of acts that would, under California case law or statute,
constitute a constructive termination of employee.
S-54
<PAGE> 56
Noncompetition provisions
The employment agreements provide that, until the end of the consulting
period, the employee will not be an owner, consultant, director or employee of
any business that has products that compete directly with our products, without
our authorization. In addition, until one year after the employee's termination
for any reason, the employee may not solicit any of our employees to leave their
employment or cause an employee to leave.
S-55
<PAGE> 57
RELATED PARTY TRANSACTIONS
From January 1, 1999 to the present, there have not been any and there are
currently no proposed transactions in which the amount involved exceeded $60,000
to which we or any of our subsidiaries were or are to be a party and in which
any executive officer, director, 5% beneficial owner of our common stock or
member of the immediate family of them had or will have a direct or indirect
material interest and there are no business relationships between us and any
entity, of which a director of VERITAS is an executive officer or of which a
director of VERITAS owns equity interest in excess of 10%, involving payments
for property or services in excess of five percent of our consolidated gross
revenues for 1999, except as described above under "Committees of the Board of
Directors," under "Directors" and as described below.
We acquired the Network & Storage Management Group business of Seagate
Software, Inc. on May 28, 1999. As a result of this transaction, Seagate
Software owns approximately 33% of our outstanding common stock. Stephen J.
Luczo, who is Chairman of the board of directors of Seagate Software, and
President, Chief Executive Officer and a member of the board of directors of
Seagate Technology, Inc., and Gregory B. Kerfoot, who is President and a
director of Seagate Software, joined our board of directors. As part of the
transaction, we entered into the agreements described below with Seagate
Software and its parent, Seagate Technology, Inc.
We entered into a stockholder agreement with Seagate Software on May 28,
1999. This agreement gives Seagate Software the right (1) to nominate up to two
members of our board, (2) to sell up to 27,000,000 shares of our common stock
during the first year after May 28, 1999 in a firm commitment underwritten
public offering, (3) in any quarter in which that public offering does not take
place, to sell up to 9,000,000 shares of our common stock in each of the first
three full quarters after May 28, 1999 and up to 13,500,000 shares of our common
stock in the fourth full quarter after May 28, 1999, and (4) for five years to
maintain its ownership percentage if we issue stock to third parties in certain
transactions. Pursuant to the board nomination rights of Seagate Software, Mr.
Kerfoot and Mr. Luczo are members of our board of directors.
VERITAS and Seagate Software entered into a registration rights agreement
on May 28, 1999. This agreement gave Seagate Software the right to require, once
in any nine-month period, that we register for public resale the shares of our
stock owned by Seagate Software.
We entered into a three-year cross-license and OEM agreement on October 5,
1998 with Seagate Software Information Management Group, Inc., a subsidiary of
Seagate Software, and amended the agreement on April 16, 1999. We entered into a
10-year development and license agreement with Seagate Technology on October 5,
1998. These agreements provide for the development and/or licensing of certain
products among the parties and restrictions on the parties' ability to compete
with each other or to enter into relationships with competitors of the other
party. The royalty fees under these agreements, if any, are to be determined at
a later date.
We, Seagate Technology and Seagate Software entered into a transition
services and facilities use agreement on May 28, 1999. This agreement sets forth
the terms by which VERITAS, Seagate Technology and Seagate Software continued to
share certain facilities and services. The term and payment for the services
that we are receiving are as follows: (1) $56,500 per month for the cost of
transitional warehousing, distribution, billing and collection services from
Seagate Technology Netherlands, the Netherlands division of Seagate Technology
International, a Cayman Islands corporation and wholly owned subsidiary of
Seagate Technology, which we stopped using in December 1999; and (2) for various
shared facilities, between $775 to $1,375 per employee per month for shared
facilities in Singapore, Australia and Hong Kong, which we vacated in September
1999, and $15,500 per month for a shared facility in France, which we expect to
vacate no later than
S-56
<PAGE> 58
May 2000. The term and payment for the services that we are providing are as
follows: $32,100 per month for shared facilities in Florida and California,
which facilities we expect to be vacated by Seagate Software no later than June
2000.
Terence Cunningham resigned as President, Chief Operating Officer and as a
director of VERITAS, effective as of August 30, 1999. In connection with his
resignation we agreed, in addition to the terms and conditions of our May 1999
employment agreement with Mr. Cunningham, to transfer to Mr. Cunningham rights
and title to an automobile and specified items of his office equipment. As a
result of his resignation, Mr. Cunningham received an aggregate severance
payment of approximately $250,000 and is entitled to the continued vesting of
his options to purchase our common stock, equal to 592,597 shares, through May
2001.
In August 1999, Seagate Software sold a total of 18,523,500 shares of our
common stock pursuant to a registration statement at a price of $22.14 per
share. In that same offering, Warburg, Pincus Investors, L.P. sold 2,446,500
shares of our common stock at a price of $22.14. The general partner of Warburg,
Pincus Investors, L.P. is Warburg, Pincus & Co. William H. Janeway, one of our
directors, is a general partner of Warburg, Pincus & Co. In November 1999,
Seagate Software sold a total of 9,000,000 shares of our common stock upon
reliance on Rule 145 promulgated under the Securities Exchange Act of 1934 at
then prevailing market prices.
On March 29, 2000, VERITAS, Seagate Technology and an investor group
including Seagate Technology's management group announced the Merger and the
Stock Purchase in which we will acquire all of the shares of our common stock
held by Seagate Technology, certain other securities and cash. We are not
acquiring Seagate Technology's disc drive business or any other Seagate
Technology operating business. In the transaction, we will issue to the Seagate
Technology stockholders approximately 109.3 million shares of our common stock
for approximately 128 million shares of VERITAS common stock held by Seagate
Technology. In addition, we will issue shares of our common stock for certain
other securities held by Seagate Technology at the closing date and, at our
election, we may also issue shares of our common stock for up to $750 million in
retained cash at the closing date. We will be indemnified for liabilities,
including tax liabilities and other matters that may arise in connection with
the transaction.
S-57
<PAGE> 59
PRINCIPAL STOCKHOLDERS
The following table shows how much of our common stock was beneficially
owned as of March 1, 2000 by each director, each executive officer named in the
summary compensation table, all directors and executive officers as a group, and
by each holder of 5% or more of our common stock. To our knowledge, the persons
named in the table have sole voting and investment power with respect to all
shares shown as beneficially owned by them, subject to community property laws
where applicable, unless we indicate otherwise below.
We have included in each person's beneficial ownership that person's
options to purchase common stock that are exercisable within 60 days after March
1, 2000. However, we have not included any other person's options for the
purpose of computing percentage ownership. Percentage ownership is based on
393,706,421 shares outstanding on March 1, 2000.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
<TABLE>
<CAPTION>
PERCENT
BENEFICIAL OWNER SHARES OPTIONS TOTAL OF CLASS
---------------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C>
Gregory Kerfoot........................ 128,059,966 112,500 128,172,466 32.5%
Stephen Luczo.......................... 128,059,966 106,500 128,172,466 32.5
Seagate Software, Inc. ................ 128,059,966 0 128,059,966 32.5
Seagate Technology, Inc. .............. 128,059,966 0 128,059,966 32.5
Putnam Investments, Inc. .............. 24,222,090 0 24,222,090 6.2
Mark Leslie............................ 1,447,609 2,284,969 3,732,578 *
Fred van den Bosch..................... 27,715 1,441,540 1,469,255 *
Joseph Rizzi........................... 168,373 479,437 647,810 *
Peter Levine........................... 325,270 129,621 454,891 *
Paul Sallaberry........................ 120,232 319,042 439,274 *
Steven Brooks.......................... 20,250 258,750 279,000 *
William H. Janeway..................... 151,487 112,500 263,987 *
Kenneth Lonchar........................ 123,347 136,085 259,432 *
All executive officers and directors as
a group (14 persons)................. 130,567,434 6,628,466 137,195,900 34.3%
</TABLE>
- -------------------------
* Less than one percent
Unless we indicate otherwise below, each holder's address is c/o VERITAS
Software Corporation, 1600 Plymouth Street, Mountain View, CA 94043.
Seagate Software, Inc. is a majority-owned subsidiary of Seagate
Technology, Inc. Mr. Luczo, one of our directors, is President, Chief Executive
Officer and a member of the board of directors of Seagate Technology and
Chairman of the board of directors of Seagate Software. Mr. Kerfoot, one of our
directors, is the President and a director of Seagate Software. As such, Mr.
Luczo and Mr. Kerfoot each may be deemed to have an indirect pecuniary interest
in an indeterminate portion of the shares beneficially owned by Seagate
Software. Mr. Luczo and Mr. Kerfoot each disclaim beneficial ownership of these
shares for the purposes of Section 16 of the Securities Exchange Act of 1934 or
otherwise. The business address of Mr. Kerfoot and Seagate Software is 915 Disc
Drive, Scotts Valley, CA 95066. The business address of Mr. Luczo and Seagate
Technology is 920 Disc Drive, Scotts Valley, CA 95067.
S-58
<PAGE> 60
The address of Putnam Investments, Inc. is One Post Office Square, Boston,
MA 02109. The number of shares beneficially owned by Putnam Investments is based
on a Schedule 13G filed by them in February 2000.
STOCK SPLITS
On October 14, 1999, our board of directors declared a three-for-two stock
split of our outstanding common stock, which was effected in the form of a stock
dividend to stockholders of record on November 2, 1999 and was paid on November
19, 1999. On January 27, 2000, our board of directors declared a three-for-two
stock split of our outstanding common stock, which was effected in the form of a
stock dividend to stockholders of record on February 18, 2000 and was paid on
March 3, 2000.
To reflect the stock splits discussed above, the number of shares that may
be offered through the Prospectus has increased to include two and one-quarter
times the number of shares described in the Prospectus that the selling
stockholders held on February 18, 2000. For example, 100 shares in the
Prospectus represents 225 shares.
SELLING STOCKHOLDERS
Rahul Mehta, one of the selling stockholders, has transferred 90,000 shares
of common stock covered by the Prospectus to the Bhupat and Jyoti Mehta Family
Foundation. These shares may be offered by the Bhupat and Jyoti Mehta Family
Foundation under the Prospectus. The address of the Bhupat and Jyoti Mehta
Family Foundation is c/o Rahul Mehta, 738 Hwy. 6 South, Suite 850, Houston,
Texas 77079. The percentage of shares beneficially owned by the Bhupat and Jyoti
Mehta Family Foundation is less than 1%.
The number of shares so transferred to the Bhupat and Jyoti Mehta Family
Foundation is stated to give effect to our stock dividend paid in November 1999.
S-59
<PAGE> 61
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENT DESCRIPTION PAGE
------------------------------- ----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets As of December 31, 1999 and
1998...................................................... F-3
Consolidated Statements of Operations -- Years Ended
December 31, 1999, 1998 and 1997.......................... F-4
Consolidated Statements of Stockholders' Equity -- Years
Ended December 31, 1999, 1998 and 1997.................... F-5
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1999, 1998 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Schedule II -- Valuation and Qualifying Accounts............ F-27
</TABLE>
F-1
<PAGE> 62
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 Item 14(a).
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-2
<PAGE> 63
VERITAS SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---------- --------
<S> <C> <C>
ASSETS
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-3
<PAGE> 64
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-4
<PAGE> 65
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-5
<PAGE> 66
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-6
<PAGE> 67
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 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-7
<PAGE> 68
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-8
<PAGE> 69
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.
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
F-9
<PAGE> 70
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-10
<PAGE> 71
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $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
F-11
<PAGE> 72
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$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 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
F-12
<PAGE> 73
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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
F-13
<PAGE> 74
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-14
<PAGE> 75
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>
F-15
<PAGE> 76
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 proceeds of $97.5 million. The Company and its wholly-owned subsidiary,
VERITAS Operating Corporation, are co-obligors on the 5.25% notes. The 5.25%
notes provide for semi-annual interest payments of $2.6 million each May 1 and
November 1. The 5.25% notes are convertible into shares of 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.
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. 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.
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
F-16
<PAGE> 77
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Operating 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 are eligible to participate beginning
the
F-17
<PAGE> 78
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997: risk-free
F-18
<PAGE> 79
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-19
<PAGE> 80
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-20
<PAGE> 81
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-21
<PAGE> 82
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-22
<PAGE> 83
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 defined as components of an enterprise about which
F-23
<PAGE> 84
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-24
<PAGE> 85
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 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
F-25
<PAGE> 86
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-26
<PAGE> 87
VERITAS SOFTWARE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
PROVISION
BALANCE AT FROM CHARGED TO
BEGINNING BUSINESSES OPERATING BALANCE AT
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-27
