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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER: 000-26247
VERITAS SOFTWARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0507675
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
1600 PLYMOUTH STREET
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 335-8000
(ADDRESS, INCLUDING ZIP CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES
AND REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's common stock outstanding as of
October 31, 2000 was 408,648,245 shares.
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<PAGE> 2
VERITAS SOFTWARE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements................. 1
Condensed Consolidated Balance Sheets as of September 30,
2000 and
December 31, 1999......................................... 1
Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 2000 and
1999...................................................... 2
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999.................. 3
Notes to Condensed Consolidated Financial Statements........ 4
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................. 9
Quantitative and Qualitative Disclosures About Market
Item 3. Risk...................................................... 29
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 31
Item 6. Exhibits and Reports on Form 8-K............................ 32
Signature............................................................ 34
</TABLE>
i
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 556,300 $ 148,244
Short-term investments.................................... 392,278 544,137
Accounts receivable, net of allowance for doubtful
accounts of $6,522 at September 30, 2000 and $5,693 at
December 31, 1999...................................... 169,115 132,180
Deferred income taxes..................................... 23,803 23,803
Other current assets...................................... 32,334 13,381
----------- ----------
Total current assets.............................. 1,173,830 861,745
Long-term investments....................................... 127,466 65,036
Property and equipment, net................................. 130,163 76,958
Goodwill and other intangibles, net......................... 2,521,759 3,226,749
Other non-current assets.................................... 45,513 2,789
----------- ----------
Total assets...................................... $ 3,998,731 $4,233,277
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 33,287 $ 30,229
Accrued compensation and benefits......................... 59,480 35,560
Accrued acquisition and restructuring costs............... 18,087 24,202
Other accrued liabilities................................. 54,796 42,323
Income taxes payable...................................... 8,433 6,804
Customer advances......................................... 2,859 5,208
Deferred revenue.......................................... 138,456 86,979
----------- ----------
Total current liabilities......................... 315,398 231,305
Convertible subordinated notes.............................. 459,812 451,044
Deferred income taxes....................................... 124,405 157,867
Stockholders' equity:
Common stock.............................................. 4,123,608 3,926,945
Accumulated deficit....................................... (1,027,204) (532,374)
Accumulated other comprehensive income (loss)............. 2,712 (1,510)
----------- ----------
Total stockholders' equity........................ 3,099,116 3,393,061
----------- ----------
Total liabilities and stockholders' equity........ $ 3,998,731 $4,233,277
=========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2000 1999 2000 1999
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net revenue:
User license fees........................ $ 256,925 $ 157,643 $ 686,092 $ 306,725
Services................................. 60,246 25,758 151,155 63,228
--------- --------- ---------- ---------
Total net revenue................ 317,171 183,401 837,247 369,953
Cost of revenue:
User license fees........................ 9,270 5,891 29,247 10,673
Services................................. 21,707 10,787 60,171 25,568
Amortization of developed technology..... 15,553 15,258 46,501 20,264
--------- --------- ---------- ---------
Total cost of revenue............ 46,530 31,936 135,919 56,505
--------- --------- ---------- ---------
Gross profit............................... 270,641 151,465 701,328 313,448
Operating expenses:
Selling and marketing.................... 116,936 67,895 310,628 139,290
Research and development................. 46,328 28,924 120,646 63,290
General and administrative............... 20,465 11,020 52,971 21,431
Amortization of goodwill and other
intangibles........................... 219,758 219,626 659,275 291,183
Acquisition and restructuring costs...... -- -- -- 11,000
In-process research and development...... -- 1,100 -- 104,200
--------- --------- ---------- ---------
Total operating expenses......... 403,487 328,565 1,143,520 630,394
--------- --------- ---------- ---------
Loss from operations....................... (132,846) (177,100) (442,192) (316,946)
Interest and other income, net............. 15,648 7,266 39,688 13,445
Interest expense........................... (8,266) (5,301) (23,314) (8,143)
--------- --------- ---------- ---------
Loss before income taxes................... (125,464) (175,135) (425,818) (311,644)
Provision for income taxes................. 22,642 8,441 69,012 20,678
--------- --------- ---------- ---------
Net loss................................... $(148,106) $(183,576) $ (494,830) $(332,322)
========= ========= ========== =========
Net loss per share -- basic................ $ (0.37) $ (0.48) $ (1.24) $ (1.14)
========= ========= ========== =========
Net loss per share -- diluted.............. $ (0.37) $ (0.48) $ (1.24) $ (1.14)
========= ========= ========== =========
Number of shares used in computing per
share amounts -- basic................... 403,613 384,847 399,655 292,115
========= ========= ========== =========
Number of shares used in computing per
share amounts -- diluted................. 403,613 384,847 399,655 292,115
========= ========= ========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(494,830) $ (332,322)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 31,593 16,474
Amortization of goodwill and other intangibles......... 659,275 291,183
Amortization of developed technology................... 46,501 20,264
In-process research and development.................... -- 104,200
Restructuring costs.................................... -- 948
Amortization of original issue discount on convertible
notes................................................. 10,637 1,889
Deferred income taxes.................................. (40,445) (25,899)
Changes in operating assets and liabilities:
Accounts receivable.................................. (36,935) (18,024)
Other receivables.................................... -- 22,935
Other assets......................................... (22,219) 2,584
Accounts payable..................................... 3,058 1,391
Accrued compensation and benefits.................... 23,920 18,759
Accrued acquisition and restructuring costs.......... (6,115) (14,263)
Other liabilities.................................... 12,473 7,672
Income taxes payable................................. 1,629 (11,495)
Customer advances and deferred revenue............... 49,128 22,581
--------- ----------
Net cash provided by operating activities......... 237,670 108,877
Cash flows from investing activities:
Purchases of investments.................................. (718,043) (582,991)
Investment maturities..................................... 807,472 186,622
Purchases of property and equipment....................... (83,064) (36,267)
Cash acquired from Seagate Software....................... -- 1,044
Cash acquired from TeleBackup............................. -- 1,493
Strategic investments in businesses....................... (22,000) --
Purchase of businesses and technologies................... (2,520) (7,725)
--------- ----------
Net cash used in investing activities....................... (18,155) (437,824)
Cash flows from financing activities:
Net proceeds from issuance of convertible subordinated
notes.................................................. -- 334,137
Proceeds from issuance of common stock.................... 194,794 64,484
--------- ----------
Net cash provided by financing activities......... 194,794 398,621
Effect of exchange rate changes............................. (6,253) (669)
--------- ----------
Net increase in cash and cash equivalents................... 408,056 69,005
Cash and cash equivalents at beginning of period............ 148,244 139,086
--------- ----------
Cash and cash equivalents at end of period.................. $ 556,300 $ 208,091
========= ==========
Supplemental disclosures:
Cash paid for interest.................................... $ 11,265 $ 2,625
Cash paid for income taxes................................ $ 376 $ 15,223
Supplemental schedule of noncash investing and financing
transactions:
Issuance of common stock for business acquisitions........ $ -- $3,604,071
Issuance of common stock for conversion of notes.......... $ 1,868 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, considered necessary for a fair
presentation have been included. The results for the interim periods presented
are not necessarily indicative of the results that may be expected for any
future period. The following information should be read in conjunction with the
consolidated financial statements and notes thereto included in the VERITAS
Software Corporation's Annual Report on Form 10-K for the year ended December
31, 1999.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the condensed consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
3. STOCK SPLIT
On January 27, 2000, the Company announced a three-for-two stock split in
the form of a stock dividend paid on March 3, 2000 to stockholders of record on
February 18, 2000. All share and per share data in prior periods have been
restated to give retroactive effect to this stock split.
4. NET LOSS PER SHARE
Basic net loss per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted net loss per share is
computed using the weighted-average number of common shares and dilutive
potential common shares outstanding during the period. However, dilutive
potential common shares outstanding are not included in the denominator for net
loss per share for the three and nine months ended September 30, 2000 as their
effect would be anti-dilutive. Potential common shares consist of employee stock
options using the treasury stock method and common shares issuable upon
conversion of the convertible subordinated notes. The following table sets forth
the computation of basic and diluted net loss per common share (in thousands,
except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Numerator:
Net loss.................................. $(148,106) $(183,576) $(494,830) $(332,322)
========= ========= ========= =========
Denominator:
Denominator for basic net loss per
share -- weighted-average shares
outstanding............................ 403,613 384,847 399,655 292,115
Potential common shares................... -- -- -- --
--------- --------- --------- ---------
Denominator for diluted net loss per
share.................................. 403,613 384,847 399,655 292,115
========= ========= ========= =========
Basic net loss per share.................... $ (0.37) $ (0.48) $ (1.24) $ (1.14)
========= ========= ========= =========
Diluted net loss per share.................. $ (0.37) $ (0.48) $ (1.24) $ (1.14)
========= ========= ========= =========
</TABLE>
4
<PAGE> 7
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Common shares included in the denominator for purposes of computing diluted
net loss per share do not include 10,349,675 shares issuable upon conversion of
the outstanding 5.25% convertible subordinated notes and 12,982,270 shares
issuable upon conversion of the outstanding 1.856% convertible subordinated
notes, as their effect would be anti-dilutive for all periods presented. For the
three and nine months ended September 30, 2000, potential common shares included
in the denominator for purposes of computing diluted net loss per share do not
include 34,928,463 and 38,084,920 potential common shares respectively, all
related to employee stock options, as their effect would be anti-dilutive.
5. COMPREHENSIVE INCOME (LOSS)
The following are the components of comprehensive loss (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss.................................... $(148,106) $(183,576) $(494,830) $(332,322)
Other comprehensive income (loss), net of
tax:
Foreign currency translation
adjustments............................ (4,099) (108) (6,253) (669)
Unrealized gain on marketable
securities............................. 1,574 -- 10,475 --
--------- --------- --------- ---------
Comprehensive loss.......................... $(145,581) $(183,684) $(483,217) $(332,991)
========= ========= ========= =========
</TABLE>
6. SUMMARY FINANCIAL INFORMATION OF SUBSIDIARY
VERITAS and its wholly-owned subsidiary, VERITAS Operating Corporation, are
co-obligors on VERITAS' 5.25% convertible subordinated notes due 2004 and 1.856%
convertible subordinated notes due 2006. VERITAS and VERITAS Operating
Corporation are unconditionally and jointly and severally liable for all
payments under the notes. On June 30, 2000, VERITAS reorganized its corporate
structure that resulted in the elimination of differences in the consolidated
financial position and operating results of the parent company and VERITAS
Operating Corporation. Consequently, separate summarized financial information
of VERITAS and VERITAS Operating Corporation, previously presented pursuant to
Staff Accounting Bulletin No. 53, Financial Statement Requirements in Filings
Involving the Guarantee of Securities by the Parent, are no longer presented
since such information is now the same as the consolidated financial statements
presented elsewhere herein. No other subsidiaries of VERITAS are co-obligors or
guarantors of the convertible subordinated notes.
7. SEGMENT INFORMATION
The Company operates in one segment, storage management solutions. The
Company's products and services are sold throughout the world, through direct,
original equipment manufacturer, reseller and distributor sales channels. The
Company's chief operating decision maker, the chief executive officer, evaluates
the performance of the Company based upon stand-alone software product and
service revenue by product channels and revenues by geographic regions of the
segment and does not receive separate, discrete financial information about
asset allocation, expense allocation or profitability from the Company's storage
products or services.
5
<PAGE> 8
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Geographic information (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
User license fees(1):
United States................................. $188,598 $113,939 $507,008 $228,695
Europe(2)..................................... 49,148 32,669 124,156 57,336
Other(3)...................................... 19,179 11,035 54,928 20,694
-------- -------- -------- --------
Total................................. 256,925 157,643 686,092 306,725
-------- -------- -------- --------
Services(1):
United States................................. 48,633 20,158 125,248 49,462
Europe(2)..................................... 8,484 4,215 20,211 10,421
Other(3)...................................... 3,129 1,385 5,696 3,345
-------- -------- -------- --------
Total................................. 60,246 25,758 151,155 63,228
-------- -------- -------- --------
Total net revenue..................... $317,171 $183,401 $837,247 $369,953
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Long-lived assets(4):
United States............................................. $2,626,856 $3,289,545
Europe(2)................................................. 19,312 11,918
Other(3).................................................. 5,754 2,244
---------- ----------
Total............................................. $2,651,922 $3,303,707
========== ==========
</TABLE>
---------------
(1) License and services revenues are attributed to geographic regions based on
location of customers.
(2) Europe includes the Middle East and Africa.
(3) Other includes Canada, Latin America, Japan and the Asia Pacific region.
(4) Long-lived assets include all long-term assets except those specifically
excluded under SFAS No. 131, such as deferred income taxes and long-term
investments. Reconciliation to total assets reported (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Total long-lived assets............................ $2,651,922 $3,303,707
Other assets, including current.................... 1,346,809 929,570
---------- ----------
Total consolidated assets................ $3,998,731 $4,233,277
========== ==========
</TABLE>
No customer represented 10% or more of the Company's net revenue for the
three or nine months ended September 30, 2000. One customer accounted for
approximately $19.5 million, or 11%, of the Company's net revenue for the three
months ended September 30, 1999 and $48.6 million, or 11%, for the nine months
ended September 30, 1999.
8. CREDIT FACILITY
During the third quarter of 2000, the Company signed a $50.0 million
unsecured credit facility with a syndicate of financial institutions. At
September 30, 2000, no amount was outstanding. The credit facility is due to
expire in September 2001. Borrowings under the credit facility bear interest at
1.0% to 1.5% over LIBOR, and are subject to VERITAS' compliance with financial
and other covenants. The credit agreement
6
<PAGE> 9
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
requires the Company to maintain specified financial covenants such as earnings
before interest, taxes, depreciation and amortization (EBITDA), debt on EBITDA
and quick ratio, all of which the Company was in compliance with as of September
30, 2000.
9. COMMITMENTS AND CONTINGENCIES
Facilities lease commitments
During the first quarter of 2000, the Company amended its existing lease
agreement, originally signed in the second quarter of 1999, for new corporate
campus facilities in Mountain View, California. These facilities will replace
certain facilities that the Company currently leases in Mountain View. The new
corporate campus facilities will be developed in one phase for a total of
425,000 square feet and will provide space for sales, marketing, administration
and research and development functions. The lease term for these facilities is
five years beginning in March 2000, with an option to extend the lease term for
two successive periods of one year each. The total approximate minimum lease
payments for these facilities for the next five years will be $0 for 2000, $6.3
million for 2001, $11.4 million for 2002 and $11.1 million for 2003 and 2004.
The minimum lease payments will fluctuate from time to time depending on short
term interest rates and one of the Company's quarterly financial ratios. The
Company has an option to purchase the property (land and facilities) for $139.4
million or, at the end of the lease, to arrange for the sale of the property to
a third party with the Company retaining an obligation to the owner for the
difference between the sales price and the guaranteed residual value up to
$123.8 million if the sales price is less than this amount, subject to certain
provisions of the lease. The Company anticipates occupying the new corporate
campus facilities and beginning the lease payments in the second quarter of
2001.
During the first quarter of 2000, the Company signed a lease agreement for
its existing facilities in Roseville, Minnesota. The Company will improve and
expand its existing facilities of 62,000 square feet and will develop adjacent
property adding 260,000 square feet to the campus, with the first phase of
142,000 square feet being completed in the second quarter of 2001. The
facilities will provide space for research and development functions. The lease
term for these facilities is five years beginning in March 2000, with an option
to extend the lease term for two successive periods of one year each. The total
approximate minimum lease payments for these facilities for the next five years
will be $0.6 million in 2000, $2.4 million in 2001 and $3.1 million in 2002,
2003 and 2004. The minimum lease payments will fluctuate from time to time
depending on short term interest rates and one of the Company's quarterly
financial ratios. The Company has an option to purchase the property (land and
facilities) for $40 million or, at the end of the lease, to arrange for the sale
of the property to a third party with the Company retaining an obligation to the
owner for the difference between the sales price and the guaranteed residual
value up to $34.3 million if the sales price is less than this amount, subject
to certain provisions of the lease. The Company anticipates occupying the new
campus facilities and beginning the lease payments in the second quarter of
2001.
During the third quarter of 2000, the Company signed a lease agreement for
the lease of 65 acres of land and subsequent improvements for new corporate
campus facilities in Milpitas, California. The Company will develop the site in
two phases, adding a total of 990,990 square feet, with the first phase of
466,000 square feet being completed in the fourth quarter of 2002. The Company
expects to complete the second phase of 524,990 square feet in the second
quarter of 2003. The facilities will provide space for research and development
functions. The lease term for the first phase is five years beginning in July
2000, with an option to extend the lease term for two successive periods of one
year each. The total approximate minimum lease payments for the first phase
facilities for the next five years will be $0 in 2000 and 2001, $14.6 million in
2002 and $19.4 million in 2003 and 2004. The minimum lease payments will
fluctuate from time to time depending on short term interest rates and one of
the Company's quarterly financial ratios. The Company has an option to purchase
the property (land and first phase facilities) for $243 million or, at the end
of the lease, to arrange for the sale of
7
<PAGE> 10
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 $220 million if the sales price is less than this amount, subject to
certain provisions of the lease. The Company anticipates occupying the new
campus facilities and beginning the lease payments in the second quarter of 2002
for the first phase and second quarter of 2003 for the second phase. The Company
expects to start negotiating the financing terms of the second phase in the
second quarter of 2001.
The three lease agreements listed above requires the Company to maintain
specified financial covenants such as earnings before interest, taxes,
depreciation and amortization (EBITDA), debt on EBITDA and quick ratio, all of
which the Company was in compliance with as of September 30, 2000.
10. POTENTIAL TRANSACTION
On March 29, 2000, the Company, Seagate Technology, Inc. and Suez
Acquisition Company (Cayman) Limited, a corporation founded by an investor group
including some of the members of Seagate Technology's management, announced a
transaction in which the Company will effectively acquire all of the shares of
its common stock, certain other securities and cash held by Seagate Technology.
The transaction is structured as a leveraged buyout of Seagate Technology
pursuant to which Seagate Technology will sell all of its operating assets to
Suez Acquisition Company and Suez Acquisition Company will assume and indemnify
Seagate Technology and the Company for substantially all liabilities arising in
connection with those operating assets. At the closing, and after the operating
assets and liabilities of Seagate Technology have been transferred to Suez
Acquisition Company, a wholly-owned subsidiary of the Company will merge with
and into Seagate Technology, following which Seagate Technology will become a
wholly-owned subsidiary of the Company. The Company will issue to the Seagate
Technology stockholders approximately 109.3 million shares of its common stock
to obtain through the merger approximately 128.1 million shares of its common
stock held by Seagate Technology. In addition, the Company will issue shares of
its common stock to the Seagate Technology stockholders to obtain certain other
securities held by Seagate Technology at the closing date and, at its election,
the Company may also issue shares of its common stock to the Seagate Technology
stockholders to obtain up to $500 million in retained cash at the closing date.
The Company is not acquiring Seagate Technology's disc drive business or any
other Seagate Technology operating business. The transaction is intended to
qualify as a tax-free reorganization.
The Company has mailed a joint proxy statement/prospectus concerning the
approval of the transaction to its stockholders of record as of October 20,
2000, and anticipates that the stockholder meeting will be held on November 21,
2000, with the closing of the transaction to occur shortly thereafter assuming
stockholder approval and other closing conditions are met.
8
<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and accompanying notes, which appear elsewhere in this Quarterly
Report on Form 10-Q. The following discussion contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934 and Section 27A of the Securities Act of 1933, that involve risks and
uncertainties. These forward-looking statements include statements that reflect
our plans, estimates and beliefs, based on information available to us at the
time of this report. We assume no obligation to update any such forward-looking
statements. Actual results could differ materially from those anticipated in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those detailed from time to time in
our filings with the Securities and Exchange Commission and those discussed
below and elsewhere in this Form 10-Q, particularly in "Factors That May Affect
Future Results."
Unless expressly stated or the content otherwise requires, the terms "we",
"our", "us", "Company" and "VERITAS" refer to VERITAS Software Corporation and
its subsidiaries.
OVERVIEW
VERITAS is a leading independent supplier of storage management software
for the data availability market. Storage management software has grown
significantly in importance and market impact during the last few years. Over
time the information technology operations of an enterprise have moved from
merely being a piece of an enterprise's computing infrastructure to providing
competitive advantage through the provision of highly available mission critical
data that is accessible at all times. Our products help our customers manage
complex and diverse computing environments efficiently and cost-effectively, by
making sure that their data is protected, can be accessed at all times, and can
be managed and used in compliance with business policies. Our products help to
improve the levels of centralization, control, automation and manageability in
computing environments, and they allow information technology, or IT, managers
to be significantly more effective with constrained resources and limited
budgets. Our products offer protection against data loss and file corruption,
allow rapid recovery after disk or computer system failure, enable IT managers
and end users to work efficiently with large numbers of files, and make it
possible to manage data distributed on large networks of computer systems
without harming productivity or interrupting users. These products provide
continuous availability of data in clustered computer systems that share disk
resources to maintain smooth business operations and are highly scalable in
order to keep up with the rapid growth of data and technologies deployed in
businesses.
We recently announced our strategy for continued expansion of our business,
focusing on data availability, which is a broader market category that includes
storage management software. To support this strategy, we have initiated a
comprehensive worldwide branding campaign to grow awareness of our name and
position ourselves as a data availability company. We are also undertaking a
number of new business initiatives, including dividing our internal product
development and product marketing groups according to the computing platforms on
which our products operate. Each of these new business initiatives is being
driven by a dedicated group of employees focused on that initiative's success,
and will require the devotion of substantial employee resources and management
attention. To the extent these initiatives are not successful, our business and
results of operations would be adversely affected.
We develop and sell products for most popular operating systems, including
versions of UNIX, Windows NT and Linux. 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
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<PAGE> 12
original equipment manufacturer customers either bundle our products with the
products licensed by the 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. 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.
Our services revenue consists of fees derived from annual maintenance
agreements, from consulting and training services and from porting fees.
Original equipment manufacturer maintenance agreements covering our products
provide for technical and emergency support and minor unspecified product
upgrades for a fixed annual fee. Maintenance agreements covering products that
are licensed through channels other than original equipment manufacturers
provide for technical support and unspecified product upgrades for an annual
service fee based on the number of user licenses purchased and the level of
service subscribed. Porting fees consist of fees derived from porting and other
non-recurring engineering efforts when we port, or adapt, our storage management
products to an original equipment manufacturer's operating system and when we
develop new product features or extensions of existing product features at the
request of a customer. In most cases, we retain the rights to technology derived
from porting and non-recurring engineering work and therefore generally perform
this work on a relatively low, and sometimes negative, margin.
Our international sales are generated primarily through our international
sales subsidiaries. International revenue, most of which is collectible in
foreign currencies, accounted for approximately 25% of our total revenue for the
three months ended September 30, 2000 and 27% of our total revenue for the three
months ended September 30, 1999, for 24% of our total revenue for the nine
months ended September 30, 2000 and 25% for the nine months ended September 30,
1999. Our international revenue increased 62% to $79.9 million for the three
months ended September 30, 2000 from $49.3 million for the three months ended
September 30, 1999 and increased 123% to $205.0 million for the nine months
ended September 30, 2000 from $91.8 million for the nine months ended September
30, 1999. Since much of our international operating expenses are also incurred
in local currencies, which is the foreign subsidiaries' functional currency, the
relative impact of exchange rates on net income or loss is less than the impact
on revenues. Although our operating and pricing strategies take into account
changes in exchange rates over time, our operating results may be affected in
the short term by fluctuations in foreign currency exchange rates. Our
international subsidiaries purchase licenses for resale from the parent company
resulting in intercompany receivables and payables. These receivables and
payables are carried on our books in the foreign currency that existed at the
time of the transaction. These receivables and payables are eliminated for
financial statement reporting purposes. Prior to elimination, the amounts
carried in foreign currencies are converted to the functional currency at the
then current rate, or "marked to market", which may give rise to currency
remeasurement gains and losses. Such gains or losses are recognized on our
statement of operations as a component of other income, net. To date, such gains
or losses have not been material.
We believe that our success depends upon continued expansion of our
international operations. We currently have sales and service offices and
resellers located in North America, Europe, Asia Pacific, South America and the
Middle East and a development center in India. International expansion will
require us to establish additional foreign offices, hire more personnel and
recruit new international resellers, resulting in the diversion of significant
management attention and the expenditure of financial resources. To the extent
that we are unable to meet these additional requirements, growth in
international sales will be limited, which would have an adverse effect on our
business, operating results and financial condition. International operations
also subject us to a number of risks inherent in developing and selling products
outside the United States, including potential loss of developed technology,
limited protection of intellectual property rights, imposition of
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<PAGE> 13
government regulation, imposition of export duties and restrictions, cultural
differences in the conduct of business, and political and economic instability.
On May 28, 1999, we acquired the Network & Storage Management Group
business of Seagate Software, Inc., which we refer to as NSMG. On June 1, 1999
we acquired TeleBackup Systems, Inc., which we refer to as TeleBackup. On August
10, 1999, we acquired certain assets of NuView, Inc., which we refer to as
NuView. In the following paragraphs, all share and per share data applicable to
prior periods have been restated to give retroactive effect to our stock splits
effected as stock dividends through September 30, 2000.
The NSMG business developed and marketed software products and provided
related services enabling information technology professionals to manage
distributed network resources and to secure and protect enterprise data. Its
products offered features such as system backup, disaster recovery, migration,
replication, automated client protection, storage resource management,
scheduling, event correlation and desktop management. In connection with the
NSMG acquisition, in consideration for the contribution of assets and
liabilities related to the NSMG business by Seagate Technology, Seagate
Software, 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 and issued options to purchase
15,626,358 shares of our common stock to our employees who were former NSMG
employees. We accounted for the NSMG acquisition using the purchase method of
accounting, and we are incurring charges of $221.5 million per quarter primarily
related to the amortization of developed technology, goodwill and other
intangibles over their estimated useful life of four years. The total NSMG
purchase price was $3,464.5 million and included $3,151.4 million for the
issuance of our common stock, $269.7 million for the exchange of options to
purchase our common stock and $43.4 million of acquisition-related costs. The
purchase price was allocated, based on an independent valuation, to goodwill of
$3,015.8 million, distribution channels of $233.8 million, original equipment
manufacturer agreements of $23.4 million, developed technology of $233.7
million, assembled workforce of $12.8 million, trademarks of $22.8 million,
in-process research and development of $101.2 million, net deferred tax
liabilities of $179.5 million, other intangibles of $1.5 million and tangible
net liabilities assumed of $1.0 million. For the three months ended September
30, 2000, we recorded $206.9 million for the amortization of goodwill and other
intangibles, and $14.6 million for the amortization of developed technology
related to this acquisition and for the nine months ended September 30, 2000, we
recorded $620.7 million for the amortization of goodwill and other intangibles,
and $43.8 for the amortization of developed technology related to this
acquisition.
Acquisition-related costs consisted of direct transaction costs of $20.0
million, operating lease commitments on duplicative facilities of $8.2 million
and involuntary termination benefits of $15.2 million. Non-cash charges included
in the acquisition-related costs approximated $11.7 million. At September 30,
2000, $18.1 million in direct transaction costs, $1.1 million in operating lease
commitments on duplicative facilities and $4.0 million in involuntary
termination benefits were paid against the acquisition-related costs accrual and
$11.7 million of non-cash involuntary termination benefits were charged against
the acquisition-related costs accrual. The remaining acquisition-related costs
accrual of $8.5 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 September 30, 2000, $0.9 million in severance costs and $0.2
million of cancellation of facility leases and other contracts were paid against
the restructuring charge accrual and $0.9 million of write-off of redundant
equipment and leasehold improvements had been written off. The remaining
restructuring charge accrual of $9.0 million is anticipated to be utilized
primarily for servicing operating lease payments or negotiated buyout of
operating lease commitments, the lease terms of which will expire at various
times through the year 2012.
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<PAGE> 14
TeleBackup designed, developed and marketed software solutions for local
and remote backup and recovery of electronic information stored on networked,
remote and mobile personal computers. TeleBackup became our wholly-owned
subsidiary in exchange for the issuance of 6,842,795 shares of either our common
stock, or exchangeable shares exchangeable into our common stock, 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 September 30, 2000, of the total $6.2 million acquisition costs, we
paid $5.9 million in direct transaction costs with the majority of the remaining
$0.3 million anticipated to be utilized by December 2000. The purchase price was
allocated, based on an independent valuation, to goodwill of $133.1 million,
distribution channels of $1.0 million, original equipment manufacturer
agreements of $2.1 million, developed technology of $6.6 million, assembled
workforce of $0.3 million, trademarks of $1.3 million, in-process research and
development of $1.9 million, net deferred tax liabilities of $3.0 million and
tangible net liabilities assumed of $0.2 million. For the three months ended
September 30, 2000, we recorded $8.6 million for amortization of goodwill and
other intangibles, and $0.4 million for the amortization of developed technology
related to this acquisition and for the nine months ended September 30, 2000, we
recorded $25.8 million for amortization of goodwill and other intangibles, and
$1.2 for the amortization of developed technology related to this acquisition.
Under an asset purchase agreement, we acquired certain assets of NuView,
including its Windows NT cluster management solution, Cluster X, for a total
cost of approximately $67.9 million. We accounted for the acquisition using the
purchase method of accounting, and we are incurring charges of $4.3 million per
quarter primarily related to the amortization of developed technology, goodwill
and other intangibles over their estimated useful life of four years. The
purchase price included $47.7 million related to the issuance of our common
stock, $0.8 million for the issuance of options to purchase our common stock to
former NuView employees, $0.2 million in acquisition-related costs and $19.2
million payable in cash, of which $12.8 million has been paid. The purchase
price was allocated, based on an independent valuation, to goodwill of $62.6
million, developed technology of $2.4 million, assembled workforce of $0.6
million, trademarks of $0.3 million, covenant-not-to-compete of $0.9 million and
in-process research and development of $1.1 million. For the three months ended
September 30, 2000, we recorded $4.1 million for amortization of goodwill and
other intangibles, and $0.2 million for the amortization of developed technology
related to this acquisition and for the nine months ended September 30, 2000, we
recorded $12.3 million for amortization of goodwill and other intangibles, and
$0.5 million for the amortization of developed technology related to this
acquisition.
RECENT DEVELOPMENT
On March 29, 2000, VERITAS, Seagate Technology, Inc. and Suez Acquisition
Company (Cayman) Limited, a corporation founded by an investor group including
some of the members of Seagate Technology's management, announced a transaction
in which we will effectively acquire all of the shares of our common stock,
certain other securities and cash held by Seagate Technology. The transaction is
structured as a leveraged buyout of Seagate Technology pursuant to which Seagate
Technology will sell all of its operating assets to Suez Acquisition Company and
Suez Acquisition Company will assume and indemnify Seagate Technology and
VERITAS for substantially all liabilities arising in connection with those
operating assets. At the closing, and after the operating assets and liabilities
of Seagate Technology have been transferred to Suez Acquisition Company, a
wholly-owned subsidiary of VERITAS will merge with and into Seagate Technology,
following which Seagate Technology will become a wholly-owned subsidiary of
VERITAS. We will issue to the Seagate Technology stockholders approximately
109.3 million shares of our common stock to obtain through the merger
approximately 128.1 million shares of our common stock held by Seagate
Technology. In
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<PAGE> 15
addition, we will issue shares of our common stock to the Seagate Technology
stockholders to obtain certain other securities held by Seagate Technology at
the closing date and, at our election, we may also issue shares of our common
stock to the Seagate Technology stockholders to obtain up to $500 million in
retained cash at the closing date. We are not acquiring Seagate Technology's
disc drive business or any other Seagate Technology operating business. The
transaction is intended to qualify as a tax-free reorganization.
We have mailed a joint proxy statements/prospectus concerning the approval
of the transaction to our stockholders of record as of October 20, 2000, and
anticipate that our stockholder meeting will be held on November 21, 2000, with
the closing of the transaction to occur shortly thereafter assuming stockholder
approval and other closing conditions are met.
RESULTS OF OPERATIONS
The following tables set forth the percentage of total revenue represented
by certain line items from our condensed consolidated statement of operations
for the three months and nine months ended September 30, 2000 and 1999,
respectively, and the percentage changes between the comparable periods:
<TABLE>
<CAPTION>
PERCENTAGE OF PERIOD-TO-PERIOD
TOTAL NET REVENUE PERCENTAGE CHANGE
------------------ ------------------
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, 2000
------------------ ------------------
2000 1999 COMPARED TO 1999
----- ----- ------------------
<S> <C> <C> <C>
Net revenue:
User license fees............................. 81% 86% 63%
Services...................................... 19 14 134%
--- ---- ---
Total revenue......................... 100 100 73%
Cost of revenue:
User license fees............................. 3 3 57%
Services...................................... 7 6 101%
Amortization or developed technology.......... 5 8 2%
--- ---- ---
Total cost of revenue................. 15 17 46%
--- ---- ---
Gross profit.................................... 85 83 79%
Operating expenses:
Selling and marketing......................... 37 37 72%
Research and development...................... 15 16 60%
General and administrative.................... 6 6 86%
Amortization of goodwill and other
intangibles................................ 69 119 --%
In-process research and development........... -- 1 n/m
Acquisition and restructuring costs........... -- -- --%
--- ---- ---
Total operating expenses.............. 127 179 23%
--- ---- ---
Loss from operations............................ (42) (96) (25)%
Interest and other income, net.................. 5 4 115%
Interest expense................................ (3) (3) 56%
--- ---- ---
Loss before income taxes........................ (40) (95) (28)%
Provision for income taxes...................... 7 5 168%
--- ---- ---
Net loss........................................ (47)% (100)% (19)%
=== ==== ===
Net revenue:
User license fees............................. 82% 83% 124%
Services...................................... 18 17 139%
--- ---- ---
Total revenue......................... 100 100 126%
</TABLE>
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<PAGE> 16
<TABLE>
<CAPTION>
PERCENTAGE OF PERIOD-TO-PERIOD
TOTAL NET REVENUE PERCENTAGE CHANGE
------------------ ------------------
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, 2000
------------------ ------------------
2000 1999 COMPARED TO 1999
----- ----- ------------------
<S> <C> <C> <C>
Cost of revenue:
User license fees............................. 3 3 174%
Services...................................... 7 7 135%
Amortization or developed technology.......... 6 5 129%
--- ---- ---
Total cost of revenue................. 16 15 141%
--- ---- ---
Gross profit.................................... 84 85 124%
Operating expenses:
Selling and marketing......................... 37 38 123%
Research and development...................... 15 17 91%
General and administrative.................... 6 6 147%
Amortization of goodwill and other
intangibles................................ 79 79 126%
In-process research and development........... -- 28 n/m
Acquisition and restructuring costs........... -- 3 n/m
--- ---- ---
Total operating expenses.............. 137 171 81%
--- ---- ---
Loss from operations............................ (53) (86) 40%
Interest and other income, net.................. 5 4 195%
Interest expense................................ (3) (2) 186%
--- ---- ---
Loss before income taxes........................ (51) (84) 37%
Provision for income taxes...................... 8 6 234%
--- ---- ---
Net loss........................................ (59)% (90)% 49%
=== ==== ===
</TABLE>
---------------
n/m = not meaningful
Net Revenue. Total net revenue increased 73% from $183.4 million for the
three months ended September 30, 1999 to $317.2 million for the three months
ended September 30, 2000, and increased 126% from $370.0 million for the nine
months ended September 30, 1999 to $837.2 million for the nine months ended
September 30, 2000. We believe that the percentage increases in total revenue
achieved in these periods are not necessarily indicative of future results but
we expect net revenue to continue to grow in the near future. Our revenue
comprises user license fees and service revenue. User license fees represented
81% of total net revenue for the three months ended September 30, 2000, and 86%
of total net revenue for the three months ended September 30, 1999. User license
fees represented 82% of total net revenue for the nine months ended September
30, 2000, and 83% of total net revenue for the nine months ended September 30,
1999.
User License Fees. User license fees increased 63% from $157.6 million for
the three months ended September 30, 1999 to $256.9 million for the three months
ended September 30, 2000, and increased 124% from $306.7 million for the nine
months ended September 30, 1999 to $686.1 million for the nine months ended
September 30, 2000. The increases were primarily the result of the continued
growth in market acceptance of our software products, the introduction of new
products, a greater volume of large end-user transactions and increased revenue
from original equipment manufacturers. In particular, our user license fees from
our data protection, file and volume management and application solutions
products increased 53% from $141.9 million for the three months ended September
30, 1999 to $217.7 million for the three months ended September 30, 2000, and
increased 116% from $272.1 million for the nine months ended September 30, 1999
to $587.5 for the nine months ended September 30, 2000. The user license fees
from our data protection, file and volume management and application solutions
accounted for 90% and 85% of user license fees for the three months ended
September 30, 1999 and 2000, respectively, and accounted for 89% and 86% for the
nine months ended September 30, 1999 and 2000, respectively. Our user license
fees from our newer high availability, clustering and replication products
increased 149% from $15.7 million for the three months ended September 30, 1999
to $39.2 million for the three months ended September 30, 2000, and increased
185%
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<PAGE> 17
from $34.6 million for the nine months ended September 30, 1999 to $98.6 million
for the nine months ended September 30, 2000. We also recorded a greater volume
of large end-user transactions. For end-user transactions valued at $250,000 or
more, our user license fees increased 335% from $9.6 million for the three
months ended September 30, 1999 to $41.6 million for the three months ended
September 30, 2000, and increased 341% from $29.7 million for the nine months
ended September 30, 1999 to $131.1 million for the nine months ended September
30, 2000. Our user license fees from original equipment manufacturers increased
71% from $31.7 million for the three months ended September 30, 1999 to $54.2
million for the three months ended September 30, 2000, and increased 84% from
$72.8 million for the nine months ended September 30, 1999 to $133.9 million for
the nine months ended September 30, 2000. The user license fees from original
equipment manufacturers accounted for 17% of user license fees for both the
three months ended September 30, 1999 and 2000, and accounted for 20% and 16%
for the nine months ended September 30, 1999 and 2000. For the nine months ended
September 30, 2000, the increase in user license fees is also greater as a
result of the acquisition of NSMG on May 28, 1999.
Service Revenue. Service revenue is derived primarily from contracts for
software maintenance and technical support and, to a lesser extent, consulting
services and training services. Service revenue increased 134% from $25.8
million for the three months ended September 30, 1999 to $60.2 million for the
three months ended September 30, 2000, and increased 139% from $63.2 million for
the nine months ended September 30, 1999 to $151.2 million for the nine months
ended September 30, 2000. The increases were due primarily to increased sales of
service and support contracts on new licenses, renewal of service and support
contracts on existing licenses and, to a lesser extent, an increase in demand
for consulting and training services. For the nine months ended September 30,
2000, the increase in service revenue is also a result of the acquisition of
NSMG. Service revenue represented 19% of total revenue for the three months
ended September 30, 2000 and is expected to grow slightly as a percentage of
total revenue in the future.
Cost of Revenue. Total cost of revenue increased 46% from $31.9 million for
the three months ended September 30, 1999 to $46.5 million for the three months
ended September 30, 2000 and increased 141% from $56.5 million for the nine
months ended September 30, 1999 to $135.9 million for the nine months ended
September 30, 2000. Gross margin on user license fees is substantially higher
than gross margin on service revenue, reflecting the low materials, packaging
and other costs of software products compared with the relatively high personnel
costs associated with providing maintenance, technical support, consulting,
training services and development efforts. Cost of service revenue also varies
based upon the mix of maintenance, technical support, consulting and training
services. We expect gross margin to fluctuate on a quarterly basis in the
future, reflecting the timing differences between increasing our organizational
investments and the corresponding revenue growth that we expect as a result of
these investments.
Cost of User License Fees (including amortization of developed
technology). Cost of user license fees consists primarily of royalties, media,
manuals and distribution costs. Also included in the cost of user license fees
is the amortization of developed technology acquired in the NSMG, TeleBackup and
NuView acquisitions in 1999. Cost of user license fees increased 18% from $21.1
million for the three months ended September 30, 1999 to $24.8 million for the
three months ended September 30, 2000 and increased 145% from $30.9 million for
the nine months ended September 30, 1999 to $75.7 million for the nine months
ended September 30, 2000. The increase in cost of user license fees for the nine
months ended September 30, 2000 is due primarily to the amortization of
developed technology acquired in the NSMG, TeleBackup and NuView acquisitions in
1999. Gross margin on user license fees increased from 87% for the three months
ended September 30, 1999 to 90% for the three months ended September 30, 2000,
and decreased from 90% for the nine months ended September 30, 1999 to 89% for
the nine months ended September 30, 2000. The increase in gross margin on user
license fees for the three months ended September 30, 2000 was due to a
combination of an increase in user license fees and the stability of the
amortization of developed technology. If we excluded the amortization of
developed technology from the cost of user license fees, the gross margin would
be 96% for the three months ended September 30, 1999 and September 30, 2000. The
decrease in gross margin on user license fees for the nine months ended
September 30, 2000 was mainly due to the inclusion of the amortization of
developed technology for the entire nine-month period in 2000. If we excluded
the amortization of developed technology from the cost of user license fees, the
gross margin would be 97% for the
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<PAGE> 18
nine months ended September 30, 1999 and 96% for the nine months ended September
30, 2000. The gross margin on user license fees may vary from period to period
based on the license revenue mix and certain products having higher royalty
rates than other products. We do not expect gross margin on user license fees to
increase significantly.
Cost of Service Revenue. Cost of service revenue consists primarily of
personnel-related costs in providing maintenance, technical support, consulting
and training to customers. Cost of service revenue increased 101% from $10.8
million for the three months ended September 30, 1999 to $21.7 million for the
three months ended September 30, 2000, and increased 135% from $25.6 million for
the nine months ended September 30, 1999 to $60.2 million for the nine months
ended September 30, 2000. Gross margin on service revenue increased from 58% for
the three months ended September 30, 1999 to 64% for the three months ended
September 30, 2000. Gross margin on service revenue remained constant at 60% for
the nine months ended September 30, 1999 and for the nine months ended September
30, 2000. The improvement in gross margin in the three months ended September
30, 2000 compared to the three months ended September 30, 1999 was a result of
increased productivity and higher revenue growth due to a larger installed
customer base paying fees. We expect the cost of service revenue will continue
to increase in absolute dollars in future periods and the gross margin on
service revenue may increase slightly as a percentage.
Amortization of Developed Technology. Amortization of developed technology
was $15.6 million and $46.5 million for the three and nine months ended
September 30, 2000. These amounts mainly represent the amortization of the
developed technology recorded upon acquisitions of NSMG, TeleBackup and NuView
in 1999. The useful life of the developed technology acquired is four years and
we expect the amortization to be approximately $15.6 million per quarter.
Operating Expenses. The NSMG acquisition on May 28, 1999 and the TeleBackup
acquisition on June 1, 1999 have contributed to increases in all operating
expense categories for the nine months ended September 30, 2000 compared to the
nine months ended September 30, 1999. However, due to the integration that has
taken place to date, it is not possible to quantify the portion of the increase
that is directly related to these acquisitions.
Selling and Marketing. Selling and marketing expenses consist primarily of
salaries, related benefits, commissions, consultant fees and other costs
associated with our sales and marketing efforts. Selling and marketing expenses
increased 72% from $67.9 million for the three months ended September 30, 1999
to $116.9 million for the three months ended September 30, 2000, and increased
123% from $139.3 million for the nine months ended September 30, 1999 to $310.6
million for the nine months ended September 30, 2000. Selling and marketing
expenses as a percentage of total net revenue remained constant at 37% for the
three months ended September 30, 1999 and 2000, and decreased from 38% for the
nine months ended September 30, 1999 to 37% for the nine months ended September
30, 2000. We intend to continue to expand our global sales and marketing
infrastructure, and accordingly, expect our selling and marketing expenses to
increase in absolute dollars but not change significantly as a percentage of
total revenue in the future.
Research and Development. Research and development expenses consist
primarily of salaries, related benefits, third-party consultant fees and other
engineering related costs. Research and development expenses increased 60% from
$28.9 million for the three months ended September 30, 1999 to $46.3 million for
the three months ended September 30, 2000, and increased 91% from $63.3 million
for the nine months ended September 30, 1999 to $120.6 for the nine months ended
September 30, 2000. The increases were due primarily to increased staffing
levels associated with new hires and, for the nine months ended September 30,
1999, the NSMG, TeleBackup and NuView acquisitions. As a percentage of total net
revenue, research and development expenses decreased from 16% for the three
months ended September 30, 1999 to 15% for the three months ended September 30,
2000, and decreased from 17% for the nine months ended September 30, 1999 to 15%
for the nine months ended September 30, 2000. 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 total net revenue.
We expect research and development expenses 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.
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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
86% from $11.0 million for the three months ended September 30, 1999 to $20.5
million for the three months ended September 30, 2000, and increased 147% from
$21.4 million for the nine months ended September 30, 1999 to $53.0 for the nine
months ended September 30, 2000. General and administrative expenses as a
percentage of revenue remained constant at 6% for the three and nine months
ended September 30, 1999 and 6% for the three and nine months ended September
30, 2000. The increases in absolute dollars were due primarily to additional
personnel costs, including additional personnel related to the acquisitions in
the second quarter of 1999 and, to a lesser extent, to an increase in other
expenses associated with enhancing 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 revenue in
the future, as we expand our operations.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and other intangibles was $219.8 million and $659.3 million for the three and
nine months ended September 30, 2000. This amount mainly represents the
amortization of goodwill, distribution channels, trademarks and other intangible
assets recorded upon acquisitions of NSMG, TeleBackup and NuView in 1999. The
estimated useful life of the goodwill and other intangibles is four years and we
expect the amortization to be approximately $219.8 million per quarter.
In-process Research and Development. Upon the acquisition of NSMG and
TeleBackup in 1999, we recorded one-time charges to in-process research and
development $103.1 million in the second quarter of 1999 and upon the
acquisition of NuView in 1999, we recorded one-time charges to in-process
research and development $1.1 million in the third quarter of 1999.
Acquisition and Restructuring Costs. Upon the acquisition of NSMG, we
recorded a one-time charge, in the second quarter of 1999, to acquisitions and
restructuring costs of $11.0 million, which included approximately $9.7 million
in exit costs with respect to duplicate facilities that we plan to vacate and
approximately $1.3 million in severance benefits.
Interest and Other Income, Net. Interest and other income, net increased
115% from $7.3 million for the three months ended September 30, 1999 to $15.6
million for the three months ended September 30, 2000, and increased 195% from
$13.4 million for the nine months ended September 30, 1999 to $39.7 million for
the nine months ended September 30, 2000. The increases were due to increased
amounts of interest income attributable to the higher level of funds available
for investment, primarily from the net proceeds of the issuance of the 1.856%
convertible subordinated notes in August 1999, and, to a lesser extent, from the
net cash provided by operating activities. Foreign exchange transaction gains
and losses, which are included in other income, net, have not had a material
effect on our results of operations.
Interest Expense. Interest expense increased 56% from $5.3 million for the
three months ended September 30, 1999 to $8.3 million for the three months ended
September 30, 2000, and increased 186% from $8.1 million for the nine months
ended September 30, 1999 to $23.3 million for the nine months ended September
30, 2000. Interest expense consists primarily of interest accrued under the
5.25% convertible subordinated notes issued in October 1997 and the 1.856%
convertible subordinated notes issued in August 1999.
Income Taxes. We had effective tax rates of 18% of pre-tax loss for the
three months ended September 30, 2000, and 5% of pre-tax loss for the three
months ended September 30, 1999. We had effective tax rates of 16% of pre-tax
loss for the nine months ended September 30, 2000, and 7% of pre-tax loss for
the nine months ended September 30, 1999. Our effective tax rates were negative
and differed from the combined federal and state statutory rates due primarily
to acquisition related charges that were non-deductible for tax purposes.
New Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards, or SFAS, No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133,
as amended by SFAS No. 137 and 138, establishes methods of accounting
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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 SFAS No. 133 will have a material impact on our financial
position, results of operations or cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" or SAB 101. SAB 101 provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. In recent actions, the SEC has further delayed the required
implementation date which, for us, is the fourth quarter of 2000, retroactive to
the beginning of the fiscal year. The SEC has recently issued implementation
guidance in the form of "Frequently Asked Questions and Answers." Our
preliminary conclusion is that the implementation of SAB 101 will not have a
material impact on our financial position, results of operations or cash flows
for the year ending December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short-term investments totaled $948.6
million at September 30, 2000 and represented 64% of our tangible assets, net.
Cash and cash equivalents are highly liquid with original maturities of 90 days
or less. Short-term investments consist mainly of investment grade commercial
paper, medium-term notes, corporate notes, governments securities and market
auction preferreds. At September 30, 2000, we had $459.8 million of long-term
obligations and stockholders' equity was approximately $3,099.1 million.
Net cash provided by operating activities was $237.7 million in the nine
months ended September 30, 2000, and $108.9 million in the nine months ended
September 30, 1999. For the nine months ended September 30, 2000, cash provided
by operating activities resulted primarily from income, after adjustments to
exclude non-cash charges including amortization of intangibles related to
acquisition activities, increases in deferred revenue and accrued compensation
and benefits, partially offset by a decrease in deferred income taxes and
increases in accounts receivable and other assets. For the nine months ended
September 30, 1999, cash provided by operating activities resulted primarily
from income after adjustments to exclude the non-cash charges including
amortization of intangibles related to acquisition activities, an increase in
deferred revenue and a reduction in other receivables, partially offset by a
decrease in deferred income taxes.
Our investing activities used cash of $18.2 million in the nine months
ended September 30, 2000 due primarily to purchases of property and equipment of
$83.1 million and strategic investments of $22.0 million, partially offset by
the net decrease in short-term and long-term investments of $89.4 million. Our
investing activities used cash of $437.8 million in the nine months ended
September 30, 1999 due primarily to the net increase in short-term and long-term
investments of $396.4 million and purchases of property and equipment of $36.3
million.
We have begun to make investments in development-stage companies that we
believe provide strategic opportunities for us. We intend that these investments
will complement our own research and development efforts, provide access to new
technologies and emerging markets, and create opportunities for additional sales
of our products and services. As of September 30, 2000, we had invested $22.0
million as part of this initiative. We cannot assure you that this initiative
will have the above mentioned desired results, or even that we will not lose all
or any part of these investments.
Financing activities provided cash of $194.8 million in the nine months
ended September 30, 2000, and $64.5 million in the nine months ended September
30, 1999 from the issuance of common stock under our employee stock plans and
the related income tax benefits.
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 and are unconditionally and jointly and severally
liable for all payments under the notes. The 5.25% notes provide for semi-annual
interest payments of $2.6 million each May 1 and November 1. The 5.25% notes are
convertible into shares of our common stock at any time prior to the close of
business on the maturity date, unless previously redeemed or repurchased, at a
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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. As of September 30, 2000 the
aggregate principal amount at maturity, for the 5.25% notes, is $98.9 million.
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%. We and VERITAS Operating Corporation are co-obligors on the
1.856% notes and are unconditionally and jointly and severally liable for all
payments under the notes. The 1.856% notes provide for semi-annual interest
payments of $4.3 million each February 13 and August 13, commencing February 13,
2000. The 1.856% notes are convertible into shares of 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. As of September 30,
2000 the aggregate principal amount at maturity, for the 1.856% notes, is $464.7
million.
Following the issuance of the 5.25% notes and the 1.856% notes, we have a
ratio of long-term debt to total capitalization at September 30, 2000 of
approximately 13%. 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 may be
unable to obtain alternative financing.
During the third quarter of 2000, we signed a $50.0 million unsecured
credit facility with a syndicate of financial institutions. At September 30,
2000, no amount was outstanding. The credit facility is due to expire in
September 2001. Borrowings under the credit facility bear interest at 1.0% to
1.5% over LIBOR, and are subject to our compliance with financial and other
covenants. The credit 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 September 30, 2000.
During the first quarter of 2000, we 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.
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
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space for research and development functions. The lease term for these
facilities is five years beginning in March 2000, with an option to extend the
lease term for two successive periods of one year each. We have an option to
purchase the property (land and facilities) for $40 million or, at the end of
the lease, to arrange for the sale of the property to a third party with us
retaining an obligation to the owner for the difference between the sale price
and the guaranteed residual value up to $34.3 million if the sales price is less
than this amount, subject to certain provisions of the lease. We anticipate
occupying the new campus facilities and beginning the lease payments in the
second quarter of 2001.
During the third quarter of 2000, we signed a lease agreement for the lease
of 65 acres of land and subsequent improvements for new corporate campus
facilities in Milpitas, California. We will develop the site in two phases,
adding a total of 990,990 square feet, with the first phase of 466,000 square
feet being completed in the fourth quarter of 2002. We expect to complete the
second phase of 524,990 square feet in the second quarter of 2003. The
facilities will provide space for research and development functions. The lease
term for the first phase is five years beginning in July 2000, with an option to
extend the lease term for two successive periods of one year each. We have an
option to purchase the property (land and first phase facilities) for $243
million or, at the end of the lease, to arrange for the sale of the property to
a third party with us retaining an obligation to the owner for the difference
between the sales price and the guaranteed residual value up to $220 million if
the sales price is less than this amount, subject to certain provisions of the
lease. We anticipate occupying the new campus facilities and beginning the lease
payments in the second quarter of 2002 for the first phase and second quarter of
2003 for the second phase. We expect to start negotiating the financing terms of
the second phase in the second quarter of 2001.
The three lease agreements listed above 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 September 30, 2000.
We believe that our current cash, cash equivalents and short-term
investment balances and cash flow from operations will be sufficient to meet our
working capital and capital expenditure requirements for at least the next 12
months. After that time, we may require additional funds to support our working
capital 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this Quarterly Report on Form 10-Q, you
should consider carefully the following factors in evaluating VERITAS and our
business.
WE FACE MANY NEW DIFFICULTIES MANAGING A LARGER COMPANY
Our growth has created new challenges for us. As of September 30, 2000, we
had 4,251 full-time employees, as compared to 2,974 as of December 31, 1999 and
945 as of December 31, 1998. If we fail to meet the challenges created by this
growth, our business and quarterly and annual results of operations could be
adversely affected, and the value of your investment could decline. The growth
in the number of our employees is likely to continue to strain our management
control systems and resources, including decision support, accounting, human
resources, 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, as well as continue to obtain additional
facilities to accommodate our growth. We have committed to significant
expenditure on obtaining additional facilities to accommodate the current and
future anticipated growth of our organization. To the extent that this future
growth does not materialize, we may not fully utilize these additional
facilities, resulting in us incurring significant expenditure without any
corresponding increase in the revenue and our business and results of operations
could be adversely affected.
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WE ARE INCURRING SIGNIFICANT ACCOUNTING CHARGES IN CONNECTION WITH THE NSMG,
TELEBACKUP AND NUVIEW ACQUISITIONS THAT ARE CREATING NET LOSSES IMMEDIATELY AND
IN THE FUTURE
The significant costs of integration associated with the NSMG, TeleBackup
and NuView acquisitions increase the risk that we will not realize the
anticipated benefits. Because we accounted for these acquisitions using the
purchase method of accounting, we recorded goodwill and other intangible assets
of approximately $3,754.9 million in 1999. This amount is being amortized over
four years, and is resulting in charges to operations of approximately $234.8
million per quarter. As a result of these charges, we expect to continue to have
net losses for the foreseeable future.
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 September 30, 2000 are $5.2 million and $8.6 million respectively,
which we expect to fund from cash flow from operations. We will need to continue
to generate substantial amounts of cash from our operations to fund interest
payments and to repay the principal amount of debt when it matures, while at the
same time funding capital expenditures and our other working capital needs. If
we do not have sufficient cash to repay our debts as they become due, we may be
unable to refinance our debt on reasonable terms or at all. For example, the
notes could be declared immediately due and payable if we do not make timely
payments. While our cash flow has been sufficient to fund interest payments to
date, if we cannot meet our debt obligations from the cash generated by our
business, we may not be able to develop and sell new products, respond to
changing business or economic conditions adequately, make acquisitions or
otherwise fund our business.
WE MIGHT FAIL TO SUCCESSFULLY COMPLETE THE INTEGRATION OF THE BUSINESSES OF
VERITAS, NSMG AND TELEBACKUP
We continue to experience challenges in integrating the businesses of NSMG
and TeleBackup with our own. If we fail to successfully complete the
integration, our businesses and our quarterly and annual results of operations
may be adversely affected. The difficulties that we face include:
- integrating our products with those of NSMG and TeleBackup, including
consolidating products with duplicative functionality and converging the
technologies supporting the various products despite their lack of a
common technology architecture;
- maintaining brand recognition for key products formerly associated with
NSMG, such as VERITAS Backup Exec, while migrating customer
identification of the brands to VERITAS;
- resolving channel conflicts that may arise between our original equipment
manufacturer and direct sales channels and the retail channels acquired
in the NSMG acquisition; and
- coordinating and streamlining geographically dispersed operations, such
as engineering facilities in California, Florida, Minnesota, North
Carolina, Maryland, Massachusetts, Washington, Canada, India and the
United Kingdom.
OUR STRATEGY OF FOCUSING ON THE BROADER MARKET CATEGORY OF DATA AVAILABILITY
MIGHT NOT SUCCEED, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO EXPAND OUR
BUSINESS
We recently announced our strategy for continued expansion of our business,
focusing on data availability, which is a broader market category that includes
storage management software. To the extent that this strategy does not result in
the anticipated growth of our revenue, our business and results of operations
would be adversely affected. Our branding campaign to grow awareness of our name
and position ourselves as a data availability company might not succeed. Our
initiative of dividing our internal product development and product marketing
groups according to the computing platforms on which our products operate will
require the devotion of substantial employee resources and management attention,
and we might not be successful in
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undertaking this initiative. To the extent these initiatives are not successful,
our business and results of operations would be adversely affected.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AS A RESULT OF FACTORS OUTSIDE
OUR CONTROL, WHICH COULD CAUSE THE MARKET PRICE OF OUR NOTES AND OF OUR
SECURITIES TO DECLINE
Fluctuations in our results of operations are likely to affect the market
price of our common stock and subordinated notes in a manner that may be
unrelated to our long-term operating performance. The more likely it is that
market prices of our securities will fluctuate, the riskier is your decision to
buy, sell or hold our securities. In addition, the number of factors that could
affect our results of operation makes an investment in our securities riskier
than many other investments. Our revenues in any quarter will depend
substantially on orders we receive and ship in that quarter. In addition, we
typically receive a significant portion of orders in any quarter during the last
two weeks of the quarter, and we cannot predict whether those orders will be
placed, fulfilled and shipped in that period. If we have lower revenue than we
expect, we probably will not be able to reduce our operating expenses quickly in
response. Therefore, any significant shortfall in revenues or delay of customer
orders could have an immediate adverse effect on our operating results in that
quarter. The results of operations of VERITAS, and of the NSMG and TeleBackup
businesses we acquired in 1999, have fluctuated in the past, and our operating
results are likely to fluctuate significantly in the future. Factors that could
affect our results of operations include:
- the timing and magnitude of sales through original equipment
manufacturers;
- the unpredictability of the timing and level of sales to large
distributors in the retail channel and by our direct sales force, which
tend to generate sales later in our quarters than original equipment
manufacturer sales;
- the timing and magnitude of large end-user orders;
- the timing and amount of our marketing, sales and product development
expenses;
- the introduction, timing and market acceptance of new products;
- the timing of revenue recognition for sales of software products and
services;
- changes in data storage and networking technology or introduction of new
operating system upgrades by original equipment manufacturers, which
could require us to modify our products or develop new products;
- the relative growth rates of the Windows NT, UNIX and Linux markets;
- the rate of adoption of Microsoft's release of Windows 2000 by users;
- the penetration of the emerging wireless mobile to business market;
- the rate of adoption of storage area networks;
- the timing and amount of revenue attributable to our end-user customers
whose businesses are substantially dependent on the Internet or the
telecommunications markets, whose ability to purchase our products may be
adversely affected by their inability to raise additional capital or to
meet their business objectives;
- pricing policies and distribution terms; and
- the timing and magnitude of acquisitions.
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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 several million dollars. In recent
quarters, increases in revenue were partially attributable to a greater volume
of large end-user transactions. 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
to support the expansion of our business and meet increased customer demand for
our products and services. If we are unable to hire and retain these employees,
our business and quarterly and annual results of operations would be adversely
affected. Competition for people with the skills we require is intense.
Additions of new personnel and departures of existing personnel could disrupt
our business and may result in the departure of other employees. We also depend
on the continued service of our key personnel. Even though we have entered into
employment agreements with key management personnel, these agreements cannot
prevent their departure. We do not have key person life insurance covering any
of our personnel, nor do we currently intend to obtain any of this insurance.
WE DISTRIBUTE OUR PRODUCTS THROUGH MULTIPLE DISTRIBUTION CHANNELS, EACH OF WHICH
IS SUBJECT TO RISKS
Historically, we sold products through original equipment manufacturers and
through direct sales. As a result of the NSMG and TeleBackup acquisitions in
1999, however, we now have an established retail distribution channel as well.
If we fail to manage our distribution channels successfully, our business and
quarterly and annual results of operations would be adversely affected.
Retail distribution. Some of the software products of the former NSMG
business are sold primarily in the retail channel. As a result, we face
different challenges than we face in selling most of our other products. For
example:
- the VERITAS brand does not have the same level of recognition in the
retail channel;
- retail distribution typically involves shorter product life cycles; and
- the retail channel has higher risks of product returns, higher marketing
expenses and less predictable market demand.
Moreover, our retail distributors have no obligation to continue selling
the products previously sold by NSMG and TeleBackup and may terminate their
relationship with us at any time.
Direct sales. We also depend on our direct sales force to sell our
products. This involves a number of risks, including:
- longer sales cycles for direct sales;
- our need to hire, train, retain and motivate our sales force; and
- the length of time it takes our new sales representatives to become
productive.
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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, in part because we seek to
leverage these relationships for the purpose of selling additional VERITAS
products to the original equipment manufacturers' installed customer base, the
original equipment manufacturers that we do business with compete with one
another. To the extent that one of our 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, IBM,
Microsoft and Sun Microsystems. Unlike some of our other original equipment
manufacturer agreements under which we sell off-the-shelf versions of our
products, under these agreements we develop unique or "lite" versions of our
products to be included in these original equipment manufacturers' systems
software and products. We expect to leverage the inclusion of our products in
these systems software and products to generate sales of additional products to
the customers of the original equipment manufacturers. These relationships
require our personnel to develop expertise with respect to the original
equipment manufacturers' products and markets and to cooperate closely with
their personnel. If we are unable to successfully leverage these relationships
to increase product sales, we will have expended significant resources without
generating corresponding revenue, which could harm our business.
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 and we have created a Windows business group to
focus on growing our Windows 2000 business, by working more closely with the
Microsoft field and corporate organization and enhancing our technical and
marketing relationships with Microsoft. 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 and the resources devoted toward
developing a close working relationship with Microsoft will have been wasted.
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.
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SALES OF A SMALL NUMBER OF PRODUCT LINES MAKE UP A SUBSTANTIAL PORTION OF OUR
REVENUE
For the foreseeable future, we expect to derive a substantial majority of
our revenue from a limited number of software products. If many customers do not
purchase these products as a result of competition, technological change or
other factors, our revenue would decrease and our business and quarterly and
annual results of operations would be adversely affected. For example, for the
nine months ended September 30, 2000 and 1999 we derived approximately $575.3
million, or 84%, and $262.6 million, or 86%, of our license revenue from storage
management products, including VERITAS Volume Manager, VERITAS File System,
VERITAS NetBackup and VERITAS Backup Exec. Also, our VERITAS NetBackup and
VERITAS Backup Exec products perform some overlapping functions. Customers may
select one product over the other, resulting in reduced revenue for the product
not selected. Therefore, we may not receive the same aggregate level of revenue
from these products as we have received in the past.
OUR PRODUCTS HAVE RELATIVELY SHORT LIFE CYCLES
Our software products have a limited life cycle and it is difficult to
estimate when they will become obsolete. This makes it difficult for us to
forecast revenue and makes your investment more risky. If we do not develop and
introduce new products before our existing products have completed their
lifecycles, we would not be able to sustain our level of sales. In addition, to
succeed, many customers must adopt our new products early in each product's
lifecycle. Therefore, if we do not attract sufficient customers early in a
product's life, we may not realize the amount of revenue we anticipated for the
product. We cannot be sure that we will continue to be successful in marketing
our key products.
WE DERIVE SIGNIFICANT REVENUES FROM ONLY A FEW CUSTOMERS
Even though for the nine months ended September 30, 2000 and 1999 no single
customer accounted for greater than 10% of our total net revenue, we still
derive significant revenue from a small number of customers. If any of these
customers 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 any of these customers 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. In addition, we recently entered into an agreement with IBM
under which we will port our complete set of storage management solutions to
AIX/Monterey for IBM POWER and the Intel IA-64 processor-system. We may not be
able to accomplish any of this work quickly or cost-effectively. These
activities require substantial capital investment, the devotion of substantial
employee resources and the cooperation of the owners of the operating systems to
or for which the products are being ported or developed. For example, 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.
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<PAGE> 28
WE FACE INTENSE COMPETITION ON SEVERAL FRONTS
We face a variety of tough competitors, principal among which are:
- internal development groups within original equipment manufacturers that
provide storage management functions to support their systems;
- other software vendors and hardware companies that offer products with
some of our products' features, such as controller and disk subsystem
manufacturers;
- hardware and software vendors that offer storage application products;
- hardware and software vendors that offer high availability and clustering
products; and
- software vendors focused on remote backup technologies and electronic
data vaulting services.
Many of our competitors have greater financial, technical sales, marketing
and other resources than we do and could attempt to increase their presence in
the storage management market by acquiring or forming strategic alliances with
other competitors or business partners.
EXPANDING OUR INTERNATIONAL SALES DEPENDS ON ECONOMIC STABILITY IN REGIONS THAT
HAVE BEEN UNSTABLE
An investment in our securities is riskier than an investment in many other
companies because we have begun to expand in overseas markets such as Asia,
Russia, Middle East and Latin America that have experienced significant economic
or political 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 September 30, 2000, we had approximately 284 employees located in
Pune, India, performing product development work. These offshore operations are
subject to risks, including:
- potential loss of developed technology through piracy, misappropriation,
or more lax laws regarding intellectual property protection;
- imposition of governmental controls, including trade restrictions;
- fluctuations in currency exchange rates and economic instability such as
higher interest rates and spiraling inflation;
- longer payment cycles for sales in foreign countries;
- difficulties in staffing and managing the offshore operations;
- seasonal reductions in business activity in the summer months in Europe
and other countries; and
- political unrest, particularly in areas in which we have facilities.
In addition, our international sales are denominated in local currency,
creating risk of foreign currency translation gains and losses that could harm
our quarterly and annual results of operations. If we generate profits or losses
in foreign countries, our effective income tax rate could also be adversely
affected. Currency
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<PAGE> 29
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 some of the 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 STRATEGY OF INVESTING IN DEVELOPMENT-STAGE COMPANIES INVOLVES A NUMBER OF
RISKS AND UNCERTAINTIES
An investment in our securities is riskier than investments in many other
companies because we plan to pursue our strategy of investing in
development-stage companies. Each of these investments involves a number of
risks and uncertainties, including:
- diversion of management attention;
- inability to identify strategic opportunities;
- failure to leverage our relationship with these companies to access new
technologies and new markets;
- inability to value investments appropriately;
- inability to manage investments effectively; and
- loss of cash invested.
RISKS RELATED TO THE SEAGATE TECHNOLOGY TRANSACTION
The following risks relate to the proposed transaction described more fully
in the section titled "Recent Development" in Item 2: Management's Discussion
and Analysis of Financial Condition and Results of Operations. In that
transaction, Seagate Technology, Inc. has agreed to sell all of its property and
assets and the property and assets of its consolidated subsidiaries, other than
certain designated assets, to Suez Acquisition Company (Cayman) Limited, which
we refer to as the leveraged buyout, and to merge a wholly owned subsidiary of
VERITAS with and into Seagate Technology, following which Seagate Technology
will become our wholly owned subsidiary, which we refer to as the merger.
SEAGATE TECHNOLOGY WILL REMAIN LIABLE TO THIRD PARTIES AFTER THE LEVERAGED
BUYOUT AND THE MERGER
In the leveraged buyout, Seagate Technology will sell all of its operating
assets to Suez Acquisition Company, and Suez Acquisition Company will assume and
indemnify Seagate Technology and us for substantially all liabilities arising in
connection with Seagate Technology's operations assets. However, third parties
may nevertheless try to seek recourse against Seagate Technology for these
liabilities. Seagate
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<PAGE> 30
Technology currently is a large, multinational enterprise that owns or leases
facilities and offices in numerous states and foreign countries and employs over
60,000 persons worldwide. As a result, Seagate Technology, which will be our
wholly owned subsidiary, could continue to face a wide range of possible
liabilities after the leveraged buyout and the merger are completed, both for
actions, events or circumstances arising or occurring before the leveraged
buyout and the merger as well as after. Some areas of potential liability
include:
- environmental cleanup costs and liabilities for claims made under
federal, state or foreign environmental laws;
- tax liabilities;
- obligations under federal, state and foreign pension and retirement
benefit laws;
- existing litigation related to the leveraged buyout and the merger
described more fully in Part II, Item 1, of this Form 10-Q;
- existing and future litigation arising from the restructuring that
Seagate Technology commenced last year, including litigation initiated by
terminated employees; and
- existing and future patent litigation.
If Suez Acquisition Company fails to indemnify Seagate Technology or us
under the indemnification agreement for any of these liabilities, we could
experience a material adverse effect on our business and financial performance.
THE MERGER CONSIDERATION MAY BE SUBJECT TO RECOVERY UNDER FRAUDULENT CONVEYANCE
LAWS
The leveraged buyout and the merger may be subject to review under state or
federal fraudulent transfer laws in the event that, following the leveraged
buyout, a bankruptcy case or lawsuit is commenced by or on behalf of unpaid
creditors of Suez Acquisition Company or any of its affiliates. Under those
laws, a court could attempt to proceed against the consideration paid to
Seagate's stockholders in the merger, or direct that amounts deposited with the
trustee administering the distributions of Seagate's tax refunds and credits be
held for the benefit of creditors. A court might take one or more of these
actions if it determined that (1) when the leveraged buyout was completed,
Seagate's operating assets were acquired for less then fair consideration or
reasonably equivalent value; and (2) at the time of the leveraged buyout,
Seagate, Suez Acquisitions Company and their affiliates:
- were or became insolvent;
- were engaged in a business or transaction for which their unencumbered
assets constituted unreasonably small capital; or
- intended to incur or reasonably should have believed that they would
incur debts beyond their ability to pay those debts as they matured.
A court could also proceed against the consideration paid to Seagate's
stockholders in the merger, or against Seagate's tax refunds and credits
otherwise payable to Seagate's former stockholders following the merger, if the
court found that Seagate effected the leveraged buyout with an actual intent to
hinder, delay or defraud its creditors.
FAILURE TO COMPLETE THE LEVERAGED BUYOUT AND THE MERGER BETWEEN SEAGATE
TECHNOLOGY AND VERITAS SUBSIDIARY COULD NEGATIVELY IMPACT OUR STOCK PRICE,
FUTURE BUSINESS AND/OR OPERATIONS
The stock purchase agreement and the merger contain a number of conditions
to the obligations of the parties to complete the leveraged buyout and the
merger. In addition, the stock purchase agreement and the merger agreement may
be terminated under a number of circumstances. If the leveraged buyout and the
merger are not completed for any reason, we may be subject to a number of
material risks. These risks include the following:
- the market price of our common stock may decline to the extent that the
current market price of our common stock reflects a market assumption
that the leveraged buyout and the merger will be completed;
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<PAGE> 31
- we may be required to pay a fee to Suez Acquisition Company if the stock
purchase agreement is terminated under certain circumstances; and
- fees, costs and expenses incurred by us in connection with the merger,
such as legal, accounting and financial advisor fees, costs and expenses,
must be paid even if the leveraged buyout and the merger are not
completed.
THE LEVERAGED BUYOUT AND THE MERGER MAY BE DELAYED IF SEAGATE TECHNOLOGY AND
VERITAS ARE UNABLE TO TIMELY OBTAIN ALL NECESSARY CONSENTS FROM GOVERNMENTAL
AUTHORITIES
Although Seagate Technology, VERITAS and Suez Acquisition Company do not
currently anticipate any challenges to the leveraged buyout or the merger based
upon antitrust grounds, the Department of Justice, the Federal Trade Commission
or any state or foreign governmental authorities could take action under various
antitrust laws against the leveraged buyout or the merger as they deem necessary
in the public interest. Private parties may also seek to take action under
various antitrust laws against the leveraged buyout and/or the merger. If any of
these events occur, the leveraged buyout and the merger may be delayed. Based
upon available information, we believe that the leveraged buyout and the merger
comply with all significant federal, state and foreign antitrust laws. We cannot
assure you, however, that there will not be a challenge to the leveraged buyout
and/or the merger based on antitrust grounds, or that if so challenged, Seagate
Technology, VERITAS and Suez Acquisition Company will prevail.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE RATE SENSITIVITY
We do not use derivative financial instruments for speculative purposes. We
engage in exchange rate hedging from time to time but this activity has been
insignificant to date and we do not hold or issue foreign exchange contracts for
trading purposes. Our international sales are generated primarily through our
international sales subsidiaries. Most international revenue is collectible in
foreign currencies. Since much of our international operating expenses are also
incurred in local currencies, which is the foreign subsidiaries functional
currency, the impact of exchange rates on net income or loss is relatively less
than the impact on revenue. Although our operating and pricing strategies take
into account changes in exchange rates over time, our results of operations may
be affected significantly in the short term by fluctuations in foreign currency
exchange rates. Our international subsidiaries purchase licenses for resale from
the parent company resulting in intercompany receivables and payables. These
receivables and payables are carried on these foreign subsidiaries' books at the
historical local currency that existed at the time of the transaction. These
receivables and payables are eliminated for financial statement reporting
purposes. Prior to elimination, the amounts carried in foreign currencies are
converted to the functional currency at the then current rate or "marked to
market." The marked to market process may give rise to currency remeasurement
gains and losses. These gains or losses are recognized on our statement of
operations as a component of other income, net. To date, any such gains or
losses have not been material. We do not believe our total exposure is
significant.
INTEREST RATE SENSITIVITY
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio and long-term debt obligations. Our primary
investment objective is to preserve principal while at the same time maximizing
yields without significantly increasing risk. Our portfolio includes money
markets funds, commercial paper, medium-term notes, corporate notes, government
securities and market auction preferred instruments. The diversity of our
portfolio helps us to achieve our investment objective. As of September 30,
2000, approximately 87% of our investment portfolio is composed of investments
with original maturities of one year or less and approximately 39% of our
investment portfolio matures less than 90 days from the date of purchase.
Long-term debt of $459.8 million consists of 5.25% convertible subordinated
notes due 2004 of $98.9 million (the "5.25% notes") and 1.856% convertible
subordinated notes due 2006 of $360.9 million (the "1.856% notes"). The interest
rate of 1.856% on the 1.856% notes together with the accrual of original issue
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<PAGE> 32
discount represent a yield to maturity of 6.5%. The nominal interest rate on
these notes is fixed and the notes provide for semi-annual interest payments of
approximately $2.6 million each May 1 and November 1 for the 5.25% notes and
approximately $4.3 million each February 13 and August 13 for the 1.856% notes.
The notes are convertible into our common stock at any time prior to the close
of business on the maturity date, unless previously redeemed or repurchased,
subject to adjustment in certain events.
The following table presents the amounts of our cash equivalents,
investments and long-term debt that may be subject to interest rate risk and the
average interest rates as of September 30, 2000 by year of maturity (dollars in
thousands):
<TABLE>
<CAPTION>
2001 AND FAIR VALUE
2000 THEREAFTER 2000 TOTAL 2000 TOTAL 1999 TOTAL
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash equivalents and short-term
investments:
Fixed rate....................... $559,130 $231,146 $790,276 $ 793,744 $584,595
Average fixed rate............... 6.32% 6.42% 6.46% 6.43% 5.59%
Variable rate.................... $ 24,040 $ 0 $ 24,040 $ 24,040 $ 19,400
Average variable rate............ 6.56% 0.00% 6.56% 6.56% 5.50%
Total cash equivalents and
short-term investments:
Investments...................... $583,170 $231,146 $814,316 $ 817,784 $603,995
Average rate..................... 6.33% 6.42% 6.46% 6.44% 5.58%
Long-term investments:
Fixed rate....................... $ 10,572 $115,394 $125,966 $ 126,562 $ 65,036
Average fixed rate............... 5.83% 6.99% 6.89% 6.86% 5.33%
Variable rate.................... $ 0 $ 1,500 $ 1,500 $ 1,500 $ 0
Average variable rate............ 0.00% 6.63% 6.63% 6.63% 0.00%
Total long-term investments........ $ 10,572 $116,893 $127,466 $ 128,062 $ 65,036
Long-term debt..................... 5.83% 6.99% 6.89% 6.86% 5.33%
Fixed rate....................... $ -- $459,812 $459,812 $3,343,295 $792,290
Average fixed rate............... -- 6.23% 6.23% 6.23% 6.22%
</TABLE>
In September 2000, we have entered into a three year cross currency
interest rate swap transaction for the purpose of hedging fixed interest rate,
foreign currency denominated cash flows under an inter-company loan receivable.
Under the terms of this derivative financial instrument, EURO denominated fixed
principal and interest payments to be received under the inter-company loan will
be swapped for U.S. dollar fixed principal and interest payments. As a result of
entering into the cross currency interest rate swap, we have eliminated our
exposure to foreign currency exchange rate fluctuations. The gains or losses on
the foreign currency loan receivable will be offset by the gains or losses on
the cross currency interest rate swap. Because we are receiving fixed interest
payments under the cross currency interest rate swap transaction, we are still
subject to fluctuations in U.S. dollar interest rates. As of September 30, 2000,
the impact of these fluctuations was not significant.
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<PAGE> 33
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The following discussion contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of
the Securities Act of 1933, that involve risks and uncertainties. These
statements relate to VERITAS' legal proceedings described below. Litigation is
inherently uncertain and may result in adverse rulings or decisions.
Additionally, the Company may enter into settlements or be subject to judgments
that may, individually or in the aggregate, have a material adverse effect on
the Company's results of operations. Accordingly, actual results could differ
materially from those projected in the forward-looking statements.
The following discussion relates the proposed transaction described more
fully in the section titled "Recent Development" in Part I, Item 2: Management's
Discussion and Analysis of Financial Condition and Results of Operations. In
that transaction, Seagate Technology, Inc. has agreed to sell all of its
property and assets and the property and assets of its consolidated
subsidiaries, other than certain designated assets, to Suez Acquisition Company
(Cayman) Limited, which we refer to as the leveraged buyout, and to merge a
wholly owned subsidiary of VERITAS with and into Seagate Technology, following
which Seagate Technology will become VERITAS' wholly owned subsidiary, which we
refer to as the merger.
Following the announcement of the transaction on March 29, 2000, Seagate
Technology stockholders filed 17 lawsuits in Delaware and five lawsuits in
California against Seagate Technology, the individual members of Seagate
Technology's board of directors, certain executive officers of Seagate
Technology, Silver Lake Partners, LP, and VERITAS. Between April 18, 2000 and
October 13, 2000, the Delaware Chancery Court consolidated the 17 lawsuits into
a single action captioned In Re Seagate Technology, Inc. Shareholders Litigation
and certified the class action, and the plaintiffs filed two amended complaints
and a motion for a preliminary injunction to enjoin the closing of the proposed
transaction. The plaintiffs' second amended complaint alleges that Seagate
Technology's board of directors breached their fiduciary duties to their
stockholders by entering into the leveraged buyout and merger agreements and
that they did not secure the highest possible price for Seagate Technology's
shares, and alleges that VERITAS aided and abetted that alleged breach.
The plaintiffs seek unspecified damages and an injunction of the closing of
the transaction. On October 13, 2000, the parties to the Delaware lawsuit
entered into a memorandum of understanding to settle the action. The primary
elements of the memorandum of understanding are the following:
(1) Suez Acquisition Company will increase the cash purchase price in the
leveraged buyout by $50 million in cash, from $2.0 billion to $2.050
billion;
(2) the merger agreement will be amended to (a) replace VERITAS' right to
elect to retain either $500 million or $750 million of cash with a
right to elect to retain either $250 million or $500 million of cash,
(b) reduce the maximum amount that may be held back in escrow to cover
potential Seagate tax liabilities from $300 million to $150 million,
and (c) specify that VERITAS' election to retain cash must be made
during the 15 trading days ending two trading days prior to the Seagate
Technology special meeting;
(3) Suez Acquisition Company will pay any attorney's fees that may be
awarded to the plaintiff's counsel; and
(4) prior to the closing of the transaction, Seagate Technology will obtain
a fairness opinion from Lehman Brothers regarding the combined
consideration to be received by Seagate Technology stockholders in the
merger and the leveraged buyout taken together.
The settlement is conditioned on, among other things, the consummation of
the leveraged buyout and the merger, dismissal of the California lawsuits
described below and final court approval of the settlement.
Between March 30, 2000 and October 27, 2000, one of the California
complaints was voluntarily dismissed and the others were coordinated, with venue
in Santa Clara County. The plaintiffs seek class
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<PAGE> 34
certification and allege that Seagate Technology's board of directors and
certain officers of Seagate Technology breached their fiduciary duties to their
stockholders and that they did not secure the highest possible price for Seagate
Technology's shares, and allege that VERITAS aided and abetted those alleged
breaches. Plaintiffs seek unspecified damages and an injunction of the closing
of the leveraged buyout and the merger. The defendants have not yet answered the
complaints.
Although VERITAS expects final court approval and dismissal of these
lawsuits to occur within the 120 day period following the completion of the
merger, it is possible that settlement and dismissal could take substantially
longer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
EXHIBIT -------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
------- ------------------- ----- --------- ------- --------
<C> <S> <C> <C> <C> <C>
3.01 Amended and Restated Bylaws of VERITAS. S-4 09/28/00 3.04
10.01 VERITAS 1993 Equity Incentive Plan, as amended. S-4 09/28/00 10.05
VERITAS 1993 Employees Stock Purchase Plan, as S-4 09/28/00 10.06
amended
10.03 Second Amendment, Assignment and Assumption and S-4 09/28/00 10.41
Restatement of Certain Operative Agreements and Other
Agreements dated July 28, 2000 among VERITAS
Operating Corporation ("VOC"), VERITAS Software
Global Corporation ("VSGC"), the various parties to
the participation agreement and other operative
agreements from time to time, First Security Bank,
National Association, as "Owner Trustee", the various
banks and other lending institutions which are
parties to the participation agreement and other
operative agreements from time to time as "Holders",
the various banks and other lending institutions
which are parties to the participation agreement and
other operative agreements from time to time as
"Lenders", and Bank of America, N.A., as the "Agent"
for the secured parties.
10.04 First Amendment, Assignment and Assumption and S-4 09/28/00 10.42
Restatement of Certain Operative Agreements and Other
Agreements dated July 28, 2000 among VOC, VSGC, the
various parties to the participation agreement and
other operative agreements from time to time, First
Security Bank, National Association, as "Owner
Trustee", the various banks and other lending
institutions which are parties to the participation
agreement and other operative agreements from time to
time as "Holders", the various banks and other
lending institutions which are parties to the
participation agreement and other operative
agreements from time to time as "Lenders", and Bank
of America, N.A., as the "Agent" for the secured
parties.
</TABLE>
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<PAGE> 35
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
EXHIBIT -------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
------- ------------------- ----- --------- ------- --------
<C> <S> <C> <C> <C> <C>
10.05 Participation Agreement dated July 28, 2000 among the S-4 09/28/00 10.44
various parties thereto from time to time, VSGC,
First Security Bank, National Association, as "Owner
Trustee", the various banks and other lending
institutions which are parties thereto from time to
time as "Holders", the various banks and other
lending institutions which are parties thereto from
time to time as "Lenders", ABN AMRO Bank N.V., Credit
Suisse First Boston and Credit Lyonnais Los Angeles
Branch.
10.06 Credit Agreement dated July 28, 2000 among First S-4 09/28/00 10.45
Security Bank, National Association as "Owner
Trustee", the several lenders from time to time, ABN
AMRO Bank, N.V., Credit Suisse First Boston, and
Credit Lyonnais Los Angeles Branch.
10.07 Trust Agreement dated July 28, 2000 between the S-4 09/28/00 10.46
several holders from time to time thereto as
"Holders" and First Security Bank, National
Association as "Owner Trustee".
10.08 Security Agreement dated July 28, 2000 between First S-4 09/28/00 10.47
Security Bank, National Association as "Owner
Trustee" and AMN AMRO Bank N.V., and accepted and
agreed to by VSGC.
10.09 Master Lease Agreement dated July 28, 2000 between S-4 09/28/00 10.48
First Security Bank, National Association as "Owner
Trustee" and VSGC.
10.10 Construction Agency Agreement dated July 28, 2000 S-4 09/28/00 10.49
between First Security Bank, National Association as
"Owner Trustee" and VSGC.
10.11 Credit Agreement dated September 1, 2000 among VSGC, X
the various parties thereto from time to time as
"Guarantors", ABN AMRO Bank N.V., as "Administrative
Agent" for "Lenders", Credit Suisse First Boston, as
"Documentation Agent", and Credit Lyonnais Los
Angeles Branch, as "Syndication Agent".
27.01 Financial Data Schedule (EDGAR only).
</TABLE>
(b) REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
DATE OF REPORT ITEM(S) DESCRIPTION
-------------- ------- -----------
<C> <C> <S>
7/18/00 5, 7 VERITAS announced financial results for its second quarter
ended June 30, 2000 and included the press release.
</TABLE>
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<PAGE> 36
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 13, 2000.
VERITAS SOFTWARE CORPORATION
/s/ KENNETH E. LONCHAR
--------------------------------------
Kenneth E. Lonchar
Senior Vice President, Finance
(Principal Financial and Accounting
Officer)
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<PAGE> 37
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.11 Credit Agreement dated September 1, 2000 among VSGC, the
various parties thereto from time to time as "Guarantors",
ABN AMRO Bank N.V., as "Administrative Agent" for "Lenders",
Credit Suisse First Boston, as "Documentation Agent", and
Credit Lyonnais Los Angeles Branch, as "Syndication Agent".
27.01 Financial Data Schedule (EDGAR only).
</TABLE>
35
