<PAGE> 1
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 March 31, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934
For the transistion period from ____________ to ____________
Commission File Number: 0-22712
VERITAS SOFTWARE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-2823068
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1600 Plymouth Street, Mountain View, California 94043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 335-8000
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. X YES NO
--- ---
The number of shares outstanding of the Registrant's Common Stock on
April 30, 1997 was 20,255,026 shares.
Page 1 of 17. The Exhibit Index is located on Page 15.
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VERITAS SOFTWARE CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page no.
--------
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets at March 31, 1997 and December 3
31, 1996
Condensed Consolidated Statements of Operations for the three months 4
ended March 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows for the three months 5
ended March 31, 1997 and 1996
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 8
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VERITAS Software Corporation
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 4,630 $ 5,267
Short-term investments ................................. 34,554 31,662
Accounts receivable, net ............................... 6,584 4,265
Notes receivable, net .................................. 84 131
Prepaid expenses ....................................... 2,162 1,016
-------- --------
Total current assets ................................. 48,014 42,341
Property and equipment, net .............................. 4,747 4,284
Other assets ............................................. 1,096 1,166
-------- --------
$ 53,857 $ 47,791
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 838 $ 831
Accrued compensation ................................... 1,001 1,630
Other accrued liabilities .............................. 2,780 1,787
Deferred revenue ....................................... 1,618 784
-------- --------
Total current liabilities ............................ 6,237 5,032
Accrued rent ............................................. 1,015 1,005
Shareholders' equity:
Common stock ........................................... 69,983 68,884
Accumulated deficit .................................... (23,378) (27,130)
-------- --------
Total shareholders' equity .......................... 46,605 41,754
-------- --------
$ 53,857 $ 47,791
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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VERITAS Software Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1997 1996
------- -------
<S> <C> <C>
Net revenue:
User license fees ................ $10,297 $ 6,908
Services and training ............ 742 421
Porting and contract ............. 1,415 135
------- -------
Total net revenue ......... 12,454 7,464
Cost of revenue:
Cost of license revenue .......... 218 208
Cost of service revenue .......... 517 265
Cost of porting revenue .......... 729 125
------- -------
Total cost of revenue ..... 1,464 598
Gross margin ....................... 10,990 6,866
Operating expenses:
Product development .............. 3,044 2,048
Marketing and sales .............. 3,094 1,521
General and administrative ....... 1,011 672
------- -------
Total operating expenses .. 7,149 4,241
------- -------
Operating income ................... 3,841 2,625
Interest income, net ............. 496 380
------- -------
Income before taxes ................ 4,337 3,005
Provision for income taxes ....... 585 391
------- -------
Net income ......................... $ 3,752 $ 2,614
======= =======
Net income per share ............... $ 0.26 $ 0.19
======= =======
Shares used in per share computation 14,686 14,129
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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VERITAS Software Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ......................................... $ 3,752 $ 2,614
Adjustments to reconcile net income to net
Cash provided by (used in) operating activities:
Depreciation and amortization ...................... 584 374
Changes in operating assets and liabilities:
Accounts receivable .............................. (2,319) (1,031)
Prepaid expenses ................................. (1,146) (186)
Other assets ..................................... 6 (3)
Accounts payable ................................. 7 244
Accrued compensation ............................. (629) (647)
Other accrued liabilities ........................ 993 323
Deferred revenue ................................. 834 65
Accrued rent ..................................... 10 111
-------- --------
Net cash provided by operating activities ...... 2,092 1,864
INVESTING ACTIVITIES
Purchases of available for sale securities ......... (20,691) (13,981)
Sales of available for sale securities ............. 17,799 13,520
Purchase of equipment ............................. (983) (442)
Payment received on note ........................... 47 188
Issuance of note ................................... -- (238)
-------- --------
Net cash used in investing activities .......... (3,828) (953)
FINANCING ACTIVITIES
Principal payments under capital lease obligations . -- (49)
Proceeds from sale of common stock, net ............ 1,099 538
-------- --------
Net cash provided by financing activities ...... 1,099 489
-------- --------
Net increase (decrease) in cash and cash equivalents (637) 1,400
Cash and cash equivalents at beginning of period ... 5,267 2,345
-------- --------
Cash and cash equivalents at end of period ......... $ 4,630 $ 3,745
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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VERITAS Software Corporation
Notes to Condensed Consolidated Financial Statements
March 31, 1997
(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 of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 1997 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 financial statements and notes thereto included in the
VERITAS Software Corporation's ("the Company's") annual report on Form 10-K for
the year ended December 31, 1996.
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 financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Net income per share.
Net income per share has been computed using the weighted average number
of common shares outstanding, after giving effect to dilutive common stock
equivalents. Common stock equivalents consist of the dilutive shares issuable
upon the exercise of stock options and warrants (using the treasury stock
method). All share and per share data for prior periods have been adjusted to
reflect a 3 for 2 stock split effective September 30, 1996.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 ("Statement 128"), Earnings per Share, which requires adoption
as of December 31, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact is expected to
result in an increase in primary earnings per share for the first quarter ended
March 31, 1997 and March 31, 1996 to $0.28 and $0.20 per share, respectively.
The impact of Statement 128 on the calculation of fully diluted earnings per
share for these quarters is not expected to be material.
6
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4. Subsequent Event
On January 13, 1997, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with OpenVision Technologies, Inc., a Delaware
corporation ("OpenVision"), a publicly-held company that provides system
management applications and services for client/server computing environments,
and VERITAS Software Corporation, a Delaware corporation ("the Combined
Company"), pursuant to which the Company and OpenVision will become wholly owned
subsidiaries of the Combined Company (the "Merger"). The Merger was consummated
on April 25, 1997. The Merger is a tax-free reorganization, accounted for as a
pooling of interests whereby each share of the outstanding common stock of the
Company was converted into one share of common stock of the Combined Company and
each outstanding share of OpenVision Common Stock and Class B Common Stock was
exchanged for approximately .346 of a share of Common Stock of the Combined
Company. Based on the number of shares of OpenVision Common Stock and Class B
Common Stock outstanding as of April 25, 1997, approximately 6,506,602 shares of
the Combined Company's Common Stock were issued in the transaction and the
Combined Company has reserved 965,917 shares of its Common Stock for issuance
pursuant to the assumption of outstanding options, warrants and purchase options
to purchase OpenVision Common Stock. Related to the merger, the Combined
Company expects to incur charges to operations, currently estimated to be
between $8.0 million and $10.0 million, in the quarter ended June 30, 1997, to
reflect direct transaction costs, primarily from financial advisory and legal
fees and costs associated with combining the operations of the two companies,
primarily related to redundant assets and facilities. This range is a
preliminary estimate only and is, therefore, subject to change.
The following unaudited information shows revenue, net income and earnings per
share of the Combined Company during the periods presented in this Form 10-Q
that reflect the pro forma adjustments described in the section entitled
"UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS" in the
Company's 1997 Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1997 1996
------- -------
(in thousands, except per share amounts)
<S> <C> <C>
Revenue $25,610 $15,298
Net Income $ 5,417 $ 2,849
Earnings per share $ 0.25 $ 0.14
</TABLE>
7
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains forward-looking statements. There are
certain factors that could cause actual results to differ materially
from those projected in the forward-looking statements contained in the
following discussion. Among such factors are (i) the Company's timely
development and market acceptance of new non-OEM products, (ii) the timely
creation of versions of the Company's products for the Microsoft Windows NT
operating system, (iii) the impact of Windows NT and other operating systems on
the UNIX market which the Company's current products are dependent, (iv) the
reliance on OEMs to continue porting and shipping the Company's products, (v)
the ability of the Company to successfully expand the distribution of its
products through new and unproven channels, including resellers, integrators,
distributors and end-users, (vi) the impact of competitive products and pricing
(vii) the uncertainty of the labor market and local regulations in India, (viii)
the Company's ability to hire and retain research and development and marketing
and sales personnel with appropriate skills in a highly competitive labor
market, (ix) the successful integration of the businesses of the Company and
OpenVision, and (x) such risks and uncertainties as are detailed from time to
time in the Company's SEC reports and filings, including its Annual Report on
Form 10-K for the 1996 fiscal year and the Registration Statement on Form S-4
filed by the Company in connection with the merger with OpenVision Technologies,
Inc.
OVERVIEW
VERITAS Software Corporation (the "Company") develops, markets and
supports advanced storage management and high availability products for open
system environments. The Company's products provide performance improvement and
reliability enhancement features that are critical for many commercial
applications. Some of the key features of storage management products include
protection against data loss and file corruption, rapid recovery after disk or
system failure, the ability to process large files efficiently and the ability
to manage and back-up systems without interrupting users. The high availability
products provide an automated failover between computer systems organized in
clusters sharing disk resources. Prior to 1995, the Company primarily
distributed its products through OEM partners whose operating systems
incorporated one or more of the Company's products. Currently, the Company
supports sales of binary versions of its products predominately through several
OEM partnerships as well as through an increasing effort to market and develop
shrink-wrap versions of its products for distribution through non-OEM channels.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of total revenue represented by certain line items from the Company's
condensed consolidated statement of operations for the three months ended March
31, 1997 and 1996, respectively, and the percentage change from the comparable
period:
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<TABLE>
<CAPTION>
PERCENTAGE OF PERIOD-TO-PERIOD
TOTAL REVENUE PERCENTAGE CHANGE
-------------------- ---------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
1997 1996 1997 COMPARED TO 1996
-------- ------ ---------------------
<S> <C> <C> <C>
Net revenue:
User license fees .............. 83% 92% 49%
Services and training .......... 6% 6% 76%
Porting and contract ........... 11% 2% NM
---- ---- ----
Total net revenue ...... 100% 100% 67%
Cost of revenue:
Cost of license fees ........... 2% 3% 5%
Cost of services and training .. 4% 3% 95%
Cost of porting ................ 6% 2% NM
---- ---- ----
Total cost of revenue .. 12% 8% 145%
---- ---- ----
Gross profit ........................... 88% 92% 60%
Operating expenses:
Product development ............ 24% 27% 49%
Marketing and sales ............ 25% 20% 103%
General and administrative ..... 8% 9% 50%
---- ---- ----
Total operating expenses 57% 57% 69%
---- ---- ----
Operating income ....................... 31% 35% 46%
Interest income, net ........... 4% 5%
---- ----
Income before taxes .................... 35% 40%
Provision for income taxes ..... 5% 5%
---- ----
Net income ............................. 30% 35% 44%
==== ==== ====
</TABLE>
Net Revenue
Total net revenue increased 67% to $12,454,000 in the first quarter of
1997 compared to $7,464,000 for the same period of 1996. The Company believes
that the percentage increase in total revenue achieved during this period is not
indicative of future results. The Company's revenue consists primarily of user
license fees, services and training revenue and porting revenue.
User License fees. User license fees, which include user license fees
and source license fees, increased 49% to $10,297,000 in the first quarter of
1997 compared to $6,908,000 for the same period of 1996. The increase in user
license fees was primarily due to growth in the Company's expanding non-OEM
channel sales distribution of existing and new shrink-wrap versions of the
Company's products, accompanied by a growth in binary sales of the Company's
products through its existing OEM partners.
Services and Training. Services and training revenue, primarily derived
from annual maintenance agreements and, to a lesser extent, training and
consulting services, increased 76% to $742,000 in the first quarter of 1997
compared to $421,000 for the same period of 1996. The increase in services and
training revenue was primarily due to increased sales of service and support
contracts in connection with new licenses and renewal of service and support
contracts relating to existing licenses.
Porting and contract. Porting and contract revenue, which includes
revenues from porting contracts, increased to $1,415,000 in the first quarter of
1997 compared to $135,000 for the same period of 1996. During the third quarter
of 1996, the Company entered into a strategic relationship with Microsoft
Corporation whereby the Company has committed to develop versions of its Volume
Manager products to be included in future releases of Microsoft Windows NT.
During the first quarter of 1997, the increase in porting revenue was directly
related to the efforts incurred in supporting the development needs of the
Microsoft project for which revenue is being recognized under the percentage of
completion method.
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Cost of Revenue
Total cost of revenue increased 145% to $1,464,000 in the first quarter
of 1997, compared to $598,000 for the same period of 1996. Cost of license
revenue consists primarily of media, manuals, distribution costs and royalties.
Cost of services, training and consulting consists primarily of
personnel-related costs of providing maintenance, technical support, training,
and consulting to customers. Cost of porting consists of personnel-related costs
for contract based product development efforts for third parties.
Cost of license revenue. Cost of license revenue increased 5% from
$218,000 in the first quarter of 1997, compared to $208,000 for the same period
of 1996. Gross margin on license revenue increased to 98% in the first quarter
of 1997, compared to 97% for the same quarter of 1996, primarily due to a
decrease in royalty obligations, which were partially offset by an increase in
costs related to media, manuals and product distribution incurred to support the
increase in the Company's non-OEM channel sales business.
Cost of services and training. Cost of services and training increased
95% to $517,000 in the first quarter of 1997, compared to $265,000 for the same
period of 1996. Gross margin related to services and training revenue decreased
to 30% in the first quarter of 1997, compared to 37% for the same quarter of
1996, primarily due to an increased investment in personnel-related and
equipment costs needed to support the planned expansion of the Company's non-OEM
business.
Cost of porting. Cost of porting increased to $729,000 in the first
quarter of 1997, compared to $125,000 for the same period of 1996, primarily due
to the efforts incurred related to the development of versions of the Company's
Volume Manager products intended to be included in future versions of Microsoft
Windows NT.
Operating Expenses
Product Development. Product development expenses consist primarily of
salaries, related benefits, third-party consultant fees and other costs. Product
development expenses increased 49% to $3,044,000 in the first quarter of 1997
compared to $2,048,000 for the same period of 1996, primarily reflecting
increased staffing levels required to support new product development. Total
product development headcount increased to 114 at March 31, 1997 from 61 at
March 31, 1996, which included 25 development engineers located at the Company's
subsidiary in Pune, India at March 31, 1997 and none at March 31, 1996. The
Company believes that a significant level of product development investment is
required to remain competitive and expects such expenses will increase in future
periods, although such expenses may decline as a percentage of total net revenue
to the extent revenue increases.
Marketing and Sales. Marketing and sales expenses consist primarily of
salaries, related benefits, commissions, consultant fees and other costs
associated with the Company's marketing and sales efforts. Marketing and sales
expenses increased 103% to $3,094,000 in the first quarter of 1997 compared to
$1,521,000 for the same period of 1996. The increase was primarily due to
increased staffing levels and marketing programs as the Company continues to
invest in the development of non-OEM sales channels. Marketing and sales
headcount increased to 52 at March 31, 1997 from 22 at March 31, 1996. The
Company intends to continue to invest in the development of its non-OEM channels
business. Accordingly, the Company expects its marketing and sales expenses to
increase in the future, although such expenses may decline as a percentage of
total net revenue to the extent revenue increases.
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General and Administrative. General and administrative expenses consist
primarily of salaries and related benefits, and fees for professional services,
such as legal and accounting services. General and administrative expenses
increased 50% to $1,011,000 in the first quarter of 1997 compared to $672,000
for the same period of 1996. General and administrative expenses as a percentage
of total revenues decreased to 8% in the first quarter of 1997, compared to 9%
for the same period in 1996. General and administrative expenses are expected to
increase as the Company expands its operations and continues to invest in the
non-OEM channels business, although such expenses may decline as a percentage of
total net revenues to the extent revenue increases.
Interest Income,net. Interest income increased 31% to $496,000 in the
first quarter of 1997 compared to $380,000 for the same period of 1996. This
increase reflects interest received on higher average investment balances.
Provision for Income Taxes. The Company had an effective tax rate of 13%
in the quarter ended March 31, 1997 which was consistent with the rate for the
same period of 1996. The Company's effective tax rate is lower than the
statutory rate due to the anticipated utilization of federal net operating
loss carryforwards.
The Company's tax rate reflects the benefits of federal loss and credit
carryforwards. The federal tax loss carryforwards expire in 1997 through 2007.
The federal tax laws impose limitations on loss and credit carryforwards in the
event that changes in a company's stock ownership over a three year period
exceed a specified threshold (a "Change in Ownership"). Based on its analysis of
prior stock ownership changes, the Company believes that it has not incurred a
Change of Ownership. However, changes in stock ownership in amounts that
singularly would not result in a Change of Ownership, may, when aggregated with
prior and subsequent ownership changes, cause a Change in Ownership to occur. In
addition, the Company's analysis of its stock ownership changes, which requires
numerous assumptions, is subject to review by the Internal Revenue Service (the
"IRS"). If the IRS were to maintain that the Company incurred a Change of
Ownership, the Company would be subject to an annual limitation on the
utilization of its net operating loss and certain tax credit carryforwards.
However, given the Company's current fair market value, such limitation, if any,
is not expected to have a significant effect on the Company's utilization of its
net operation loss and tax credit carryforwards.
Liquidity and Capital Resources
The Company's primary source of liquidity during the first three months
of 1997 and 1996, has been cash generated from operating activities. At March
31, 1997, the Company had $39,184,000 in cash, cash equivalents and short-term
investments, compared to $36,929,000 at December 31, 1996, an increase of
$2,255,000, or 6%. At March 31, 1997, the Company had working capital of
$41,777,000 compared to $37,309,000 at December 31, 1996.
Net cash flows provided by operating activities increased to $2,092,000
for the first three months of 1997, compared to $1,864,000 for the same period
of 1996, primarily reflecting larger net income in the first three months of
1997 compared to the same period of 1996.
Net cash used in investing activities increased to $3,828,000 in the
first three months of 1997, including $2,892,000 used for the net purchase of
short-term investments and $983,000 used for the purchase of equipment.
Net cash provided by financing activities increased to $1,099,000 in the
first three months of 1997, primarily related to cash received for the exercise
of stock options and the issuance of common stock under the Company's employee
stock purchase plan.
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The Company anticipates that its current cash, cash equivalents and
short-term investments will be sufficient to fund operating activities at least
through fiscal 1997, including anticipated capital expenditures and future
acquisitions. The Company's long-term liquidity will be affected by numerous
factors, including its ability to generate cash from operations, its capital
requirements, future acquisitions and or dispositions, and the Company's product
development activities. The Company expects to continue to fund these future
activities from cash flows from operations and from future financings as
required. The Company may seek additional equity or debt financing to satisfy
future liquidity and capital resource needs, however, there can be no assurance
that capital will be available when needed or, if available, that the terms for
obtaining such funds will be favorable to the Company.
MERGER WITH OPENVISION; EFFECTS ON OPERATIONS
On January 13, 1997, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with OpenVision Technologies, Inc., a Delaware
corporation ("OpenVision"), a publicly-held company that provides system
management applications and services for client/server computing environments,
and VERITAS Software Corporation, a Delaware corporation ("the Combined
Company"), pursuant to which the Company and OpenVision will become wholly owned
subsidiaries of the Combined Company (the "Merger"). The Merger was consummated
on April 25, 1997. The Merger is a tax-free reorganization, accounted for as a
pooling of interests whereby each share of the outstanding common stock of the
Company was converted into one share of common stock of the Combined Company and
each outstanding share of OpenVision Common Stock and Class B Common Stock was
exchanged for approximately .346 of a share of Common Stock of the Combined
Company. Based on the number of shares of OpenVision Common Stock and Class B
Common Stock outstanding as of April 25, 1997, approximately 6,506,602 shares of
the Combined Company's Common Stock were issued in the transaction and the
Combined Company has reserved 965,917 shares of its Common Stock for issuance
pursuant to the assumption of outstanding options, warrants and purchase options
to purchase OpenVision Common Stock. Related to the merger, the Combined Company
expects to incur charges to operations, currently estimated to be between $8.0
million and $10.0 million, in the quarter ended June 30, 1997, to reflect direct
transaction costs, primarily from financial advisory and legal fees and costs
associated with combining the operations of the two companies, primarily related
to redundant assets and facilities. This range is a preliminary estimate only
and is, therefore, subject to change.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this Report on Form 10-Q, the following
factors should be considered:
Acquisition of OpenVision. The Company has acquired OpenVision with the
expectation that the Merger will result in beneficial synergistic effects for
the Combined Company. Achieving the anticipated benefits of the Merger will
depend in part upon whether the integration of the two companies' businesses is
achieved in a timely, efficient and effective manner, and there can be no
assurance that this will occur. The combination of the two companies will
require, among other things, integration of the companies' respective product
offerings and coordination of their research and development efforts. There can
be no assurance that such integration and coordination will be accomplished
smoothly or successfully. The integration of the two organizations will require
the dedication of management resources which will temporarily distract them from
attention to the day-to-day business of the Combined Company. The difficulties
of integration may be increased by a variety of other factors, which could
include: the conflicts that may arise with respect to the direct sales
distribution model of OpenVision compared to the VERITAS distribution model
which is dependent on the efforts of third parties such as OEMs and resellers;
the necessity of coordinating geographically separated organizations;
differences between the corporate cultures of VERITAS and OpenVision; locating
additional facilities proximate to VERITAS' current facilities at a reasonable
cost to accommodate the Combined Company; and integrating personnel with
disparate business backgrounds. The process of combining the companies may cause
an interruption of, or a loss of momentum in, the activities of either or both
of the companies' businesses and may adversely affect the revenues and results
of operations of the Combined Company, at least in the near term. Furthermore,
the process of combining the companies could have a material adverse effect on
employee morale and on the ability of the Combined Company to retain the key
management, technical and sales and
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<PAGE> 13
marketing personnel who are critical to the Combined Company's future
operations. There can be no assurance that employees of OpenVision will continue
employment with the Combined Company, particularly in light of the planned
consolidation of the Combined Company's Northern California facilities. In
addition, the announcement and consummation of the Merger could cause customers
or potential customers to delay or cancel orders for products as a result of
uncertainty over the integration and continued support of the Combined Company's
products. Failure to effectively accomplish the integration of the two
companies' operations would have a material adverse effect on the Combined
Company's business, operating results and financial condition.
Fluctuating Operating Results. VERITAS' operating results have
fluctuated in the past, and may fluctuate significantly in the future depending
on a number of factors. Factors that have resulted in fluctuations in operating
results include: (i) the timing and level of sales by VERITAS' OEM licensees of
computer systems incorporating VERITAS' storage management products, (ii)
increased dependence upon non-OEM channels, which tend to be more unpredictable
than OEM channels; (iii) timing of lump sum payments for source code license
fees; (iv) achievement of porting milestones; and (v) financial expenses for
investment in new products and distribution channels, including the hiring of
additional sales and marketing personnel and outlay of promotional expenses.
In addition to the factors described above, factors that may contribute
to future fluctuations in quarterly operating results include, but are not
limited to: (i) development and introduction of new operating systems that
require additional development efforts; (ii) introduction or enhancement of
products by the Company or its competitors; (iii) the ability of the Company to
integrate and assimilate the business, operations and technology of OpenVision;
(iv) changes in pricing policies of the Company or its competitors; (v)
increased competition; (vi) technological changes in computer systems and
environments; (vii) the ability of the Company to timely develop, introduce and
market new products; (viii) quality control of products sold; (ix) market
readiness to deploy systems management products for distributed computing
environments; (x) market acceptance of new products and product enhancements;
(xi) customer order deferrals in anticipation of new products and product
enhancements; (xii) the Company's success in expanding its sales and marketing
programs; (xiii) personnel changes; (xiv) foreign currency exchange rates; (xv)
mix of products sold; (xvi) acquisition costs; and (xvii) general economic
conditions.
The Company's future revenue will also be difficult to predict, and
VERITAS has, in the past, failed to achieve its revenue expectations for certain
periods. The Company's expense levels will be based, in part, on its
expectations as to future revenue and to a large extent will be fixed in the
short term. The Company will not be able to adjust expenses in the short term to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall of revenue in relation to the Company's expectations or any material
delay of customer orders would have an immediate adverse effect on its business,
operating results and financial condition. As a result of all of the foregoing
factors, VERITAS believes that period-to-period comparisons of VERITAS' results
of operations are not and will not necessarily be meaningful and should not be
relied upon as any indication of future performance.
Volatility of Stock Price. The market price for the Company's Common
Stock is highly volatile. The trading price of the Company's Common Stock could
be subject to wide fluctuations in response to quarterly variations in operating
and financial results, announcements of technological innovations, new products,
new customer relationships or new strategic relationships by the Company or its
competitors, changes in prices of the Company's or its competitors' products and
services, changes in product mix, changes in revenue and revenue growth rates
for the Company. Statements or changes in opinions, ratings, or earnings
estimates made by brokerage firms or industry analysts relating to the market in
which the Company does business or relating to VERITAS specifically, have
resulted, and could in the future result, in an immediate and adverse effect on
the market price of the Company's Common Stock. In addition, the stock market
has from time to time experienced extreme price and volume fluctuations which
have particularly affected the market price for the securities of many
high-technology companies and which often have been unrelated to the operating
performance of these companies. The broad market fluctuations may adversely
affect the market price of the Company's Common Stock.
13
<PAGE> 14
Management of Growth; Dependence on Key Personnel. VERITAS has recently
experienced a period of significant growth that has placed strain upon its
management control systems and resources. In the future, the Company will be
required to continue to improve its financial and management controls, reporting
systems and procedures on a timely basis and to expand, train and manage its
employee work force. There can be no assurance that the Company will be able to
effectively manage such growth. Its failure to do so would have a material
adverse effect on its business, operating results and financial condition.
Competition for qualified sales, technical and other qualified personnel is
intense, and there can be no assurance that the Company will be able to attract,
assimilate or retain additional highly qualified employees in the future. If the
Company is unable to hire and retain such personnel, particularly those in key
positions, its business, operating results and financial condition would be
materially adversely affected. The Company's future success also depends in
significant part upon the continued service of its key technical, sales and
senior management personnel. The loss of the services of one or more of these
key employees could have a material adverse effect on its business, operating
results and financial condition. Additions of new and departures of existing
personnel, particularly in key positions, can be disruptive and can result in
departures of existing personnel, which could have a material adverse effect on
the Company's business, operating results and financial condition.
New Distribution Channels. A substantial portion of VERITAS' net
revenues has historically been and continues to be derived from user license
fees received from computer OEMs that incorporate VERITAS' storage management
software products into their operating systems. VERITAS has no control over the
shipping dates or volumes of systems shipped by its OEM customers, and there can
be no assurance that any OEMs will ship operating systems incorporating VERITAS'
products in the future. Furthermore, VERITAS' license agreements with its OEM
customers generally do not require the OEMs to recommend or offer VERITAS'
products exclusively, have no minimum sales requirements, and may be terminated
by the OEMs without cause.
VERITAS recently has made significant investments in the establishment
of other distribution channels. Efforts by VERITAS in this area include: (i) the
introduction of shrink-wrap packages of two of its storage management software
products in 1992; (ii) the distribution of end user products for the Sun
Microsystems' Solaris operating system in 1994; and (iii) the acquisition of
Tidalwave in April 1995, as a result of which VERITAS began distributing the
FirstWatch end user products. Additionally, the recent expiration of an
exclusive distributor agreement with respect to its FirstWatch product will
require VERITAS to develop product extensions, to accelerate its direct sales
efforts and to provide support to existing and future customers of the
FirstWatch product.
VERITAS has entered into a Development, License and Distribution
Agreement with Sun Microsystems which will also provide a new distribution
channel for Company's products. VERITAS has agreed to develop a specialized,
integrated version of the VERITAS Volume Manager product which will be bundled
with certain Sun Microsystems' products. While the Company believes that this
arrangement with Sun Microsystems will be beneficial, there can be no assurance
that VERITAS will be able to deliver its products to Sun Microsystems in a
timely manner despite the dedication of significant engineering and other
resources to the development of such products. Any such failure would result in
VERITAS having expended significant resources with little or no return on its
investment, which could have a material adverse effect on the Company's
business, operating results and financial condition.
These additional investments and responsibilities will require the
expenditure by the Company of substantial resources, including the diversion of
employees from other projects to provide the support services and development
efforts required to provide products and services that it has limited experience
in providing. In addition, in relation to its acquisition of OpenVision, it is
anticipated that the Company's direct sales force will also market and sell the
Company's products in competition with indirect sellers of its products, such as
OEMs and resellers, which could adversely affect the Company's relations with
such indirect sellers and result in such sellers being less willing to
aggressively market the Company's products. There can be no assurance that such
sales and marketing efforts by the Company's direct sales force will not result
in a decline in indirect sales as a result of actual or potential competition
between the Company's direct sales force and such indirect sellers, or that such
efforts will not have a material adverse effect on the Company's business,
operating results and financial condition. In addition, any such decline in
indirect
14
<PAGE> 15
sales may require the Company to accelerate investments for expansion into
alternative distribution channels, and no assurance can be given that the
Company will have sufficient resources to devote to such other channels.
Risk of Successfully Integrating Current and Future Products and
Technologies. As a result of the acquisition of OpenVision, the Company's
product strategy will initially be to integrate selected products and
technologies to enhance storage management functionality and to integrate
certain products throughout its entire product line through the availability of
a common set of services. The success of this strategy is dependent in
significant part on the Company's ability to integrate its products as planned
and the resultant products achieving market acceptance by end users, resellers
and OEMs. No assurance can be given that the Company will successfully integrate
its products as planned. If the Company is unable to develop and introduce new
integrated products and technologies, or enhancements to existing products, in a
timely manner, its business, operating results and financial condition would be
materially and adversely affected.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Except as described below, VERITAS is not a party to any material legal
proceedings.
A reseller of VERITAS, Qualix Group, Inc., filed a complaint against
VERITAS in the Superior Court of the State of California, County of Santa Clara
on October 25, 1996, alleging breach by VERITAS of the terms of a reseller
agreement with respect to the FirstWatch product. The complaint seeks
compensatory damages in excess of $25,000 and an unspecified amount of punitive
damages. VERITAS believes these allegations are without merit and intends to
vigorously defend against the same. Nevertheless, the costs of defense,
regardless of outcome, could have an adverse effect on the results of operations
and financial condition of the Company. In addition, VERITAS has filed a
cross-complaint against such reseller alleging breach by the reseller of the
reseller agreement seeking general and punitive damages, as well as injunctive
relief. This matter has been submitted for arbitration.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Description Page number
- ------ ----------- -----------
<S> <C> <C>
2.01 Agreement and Plan of Reorganization dated as of January 13, 1997, by
and among the Registrant, VERITAS Software Corporation, a Delaware
Corporation and OpenVision Technologies, Inc. (incorporated herein by
reference to Exhibit 2.03 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996)
11.01 Statement Re: Computation of Per Share Earnings 17
27.01 Financial Data Schedule (EDGAR only)
</TABLE>
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended March 31, 1997.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
VERITAS Software Corporation
----------------------------------------
(Registrant)
May 15, 1997 /s/ MARK LESLIE
- ------------ ----------------------------------------
(Date) Mark Leslie
President, Chief Executive Officer
and Director (Principal Executive Officer)
May 15, 1997 /s/ KEN LONCHAR
- ------------ -----------------------------------------
(Date) Ken Lonchar
Vice President Finance, Chief Financial
Officer, (Principal Financial and
Accounting Officer)
16
<PAGE> 17
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
11.01 Statement Re: Computation of Per Share Earnings
27.01 Financial Data Schedule
<PAGE> 1
Exhibit 11.01
VERITAS Software Corporation
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1997 1996
------- -------
<S> <C> <C>
Net income .............................................. $ 3,752 $ 2,614
Weighted average common shares outstanding .............. 13,612 13,255
Common stock equivalents resulting from stock options
(treasury stock method) ............................ 1,074 874
------- -------
Total common and common equivalent shares for calculation
of primary net income per share .................... 14,686 14,129
Additional dilutive effect due to stock options ......... -- --
------- -------
Total common and common equivalent shares for calculation
of fully diluted net income per share .............. 14,686 14,129
======= =======
Net income per primary common and common equivalent
share .............................................. $ 0.26 $ 0.19
======= =======
</TABLE>
Since the difference between primary and fully diluted net income per share is
less than 3%, fully diluted net income per share is not presented.
All share and per share data for prior periods have been adjusted to reflect a 3
for 2 stock split effective September 30, 1996.
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,630
<SECURITIES> 34,554
<RECEIVABLES> 6,924
<ALLOWANCES> 340
<INVENTORY> 96
<CURRENT-ASSETS> 48,014
<PP&E> 8,655
<DEPRECIATION> 3,908
<TOTAL-ASSETS> 53,857
<CURRENT-LIABILITIES> 6,237
<BONDS> 0
0
0
<COMMON> 69,983
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 53,857
<SALES> 10,297
<TOTAL-REVENUES> 12,454
<CGS> 218
<TOTAL-COSTS> 1,464
<OTHER-EXPENSES> 7,149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,337
<INCOME-TAX> 585
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,752
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
