<PAGE> 1
================================================================================
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 JUNE 30, 1997
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: 0-22712
------------------------
VERITAS SOFTWARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-2823068
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF 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 on July
31, 1997 was 20,312,414 shares.
================================================================================
<PAGE> 2
VERITAS SOFTWARE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C> <C>
PART I CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements....................................
Condensed Consolidated Balance Sheets as of June 30, 1997 and December 31,
1996........................................................................... 2
Condensed Consolidated Statements of Operations for the Three Months and Six
Months Ended June 30, 1997 and 1996............................................ 3
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June
30, 1997 and 1996.............................................................. 4
Notes to Condensed Consolidated Financial Statements........................... 5
Item 2. Management's Discussion and Analysis of Results of Operations and Financial
Condition...................................................................... 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 18
Item 2. Changes in Securities.......................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders............................ 19
Item 6. Exhibits and Reports on Form 8-K............................................... 19
Signature................................................................................ 21
</TABLE>
1
<PAGE> 3
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $ 23,065 $ 17,411
Short-term investments............................................ 45,383 50,145
Accounts receivable, less allowance for doubtful accounts of
$1,141 at June 30, 1997 and $697 at December 31, 1996.......... 26,938 15,971
Other current assets.............................................. 2,003 1,987
--------- ---------
Total current assets................................................ 97,390 85,514
Property and equipment, net......................................... 8,327 6,997
Notes receivable and other assets................................... 1,228 2,013
--------- ---------
Total assets........................................................ $ 106,944 $ 94,524
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 2,055 $ 1,780
Accrued compensation and related expenses......................... 4,709 3,201
Other accrued liabilities......................................... 7,941 4,875
Deferred revenue.................................................. 10,476 8,096
Current portion of notes payable.................................. -- 149
--------- ---------
Total current liabilities........................................... 25,181 18,101
Notes payable, less current portion................................. -- 463
Deferred rent....................................................... 981 1,005
Stockholders' equity
Common stock...................................................... 181,556 179,410
Accumulated deficit............................................... (100,078) (103,813)
Notes receivable from stockholders................................ (234) (282)
Deferred compensation............................................. (80) (97)
Foreign currency translation adjustment........................... (382) (263)
--------- ---------
Total stockholders' equity.......................................... 80,782 74,955
--------- ---------
Total liabilities and stockholders' equity.......................... $ 106,944 $ 94,524
========= =========
</TABLE>
See accompanying notes.
2
<PAGE> 4
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
1997 1996 1997 1996
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue:
User license fees................................ $ 23,164 $14,476 $43,687 $26,757
Services......................................... 4,364 2,982 8,036 5,649
Porting and source fees.......................... 1,406 432 2,821 782
-------- ------- ------- -------
Total net revenue........................ 28,934 17,890 54,544 33,188
Cost of revenue:
Licenses......................................... 841 775 1,677 1,338
Services......................................... 1,625 799 2,830 1,622
Porting and source fees.......................... 878 39 1,607 164
-------- ------- ------- -------
Total cost of revenue.................... 3,344 1,613 6,114 3,124
-------- ------- ------- -------
Gross profit....................................... 25,590 16,277 48,430 30,064
Operating expenses:
Selling and marketing............................ 10,356 6,323 19,618 11,951
Research and development......................... 6,512 4,610 12,306 8,148
General and administrative....................... 2,080 1,652 4,215 3,210
Merger related costs............................. 8,490 -- 8,490 --
In-process research and development.............. -- 2,200 -- 2,200
-------- ------- ------- -------
Total operating expenses................. 27,438 14,785 44,629 25,509
Income (loss) from operations...................... (1,848) 1,492 3,801 4,555
Other income, net.................................. 835 487 1,670 664
-------- ------- ------- -------
Income (loss) before income taxes.................. (1,013) 1,979 5,471 5,219
Provision for income taxes......................... 669 418 1,736 809
-------- ------- ------- -------
Net income (loss).................................. $ (1,682) $ 1,561 $ 3,735 $ 4,410
-------- ------- ------- -------
Pro forma net income (loss) per share.............. $ (0.08) $ 0.08 $ 0.17 $ 0.22
-------- ------- ------- -------
Pro forma shares used in per share calculations.... 20,219 20,607 21,646 20,156
======== ======= ======= =======
</TABLE>
See accompanying notes.
3
<PAGE> 5
VERITAS SOFTWARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................. $ 3,735 $ 4,410
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................ 1,842 1,720
In-process research and development.................................. -- 2,200
Non-cash merger related costs........................................ 1,218 --
Changes in operating assets and liabilities:
Accounts receivable.................................................. (11,197) (1,447)
Prepaid expenses..................................................... (321) 5
Other assets......................................................... (23) (585)
Deferred revenue..................................................... 2,400 207
Accounts payable..................................................... 285 1,715
Accrued compensation and related expenses............................ 1,539 (6)
Other accrued liabilities............................................ 3,032 (146)
-------- --------
Net cash provided by operating activities.............................. 2,510 8,073
INVESTING ACTIVITIES
Purchase (sale) of short-term investments, net......................... 4,762 (17,450)
Purchase of property and equipment..................................... (3,391) (2,029)
Payments received on note.............................................. 117 188
Purchase of ACSC....................................................... -- (3,000)
-------- --------
Net cash provided by (used in) investing activities.................... 1,488 (22,291)
FINANCING ACTIVITIES
Payments of notes payable.............................................. (612) (8,214)
Payments under capital lease obligations............................... -- (84)
Payments on notes receivable from stockholders......................... 48 1
Proceeds from issuance of common stock................................. 2,146 37,420
-------- --------
Net cash provided by financing activities.............................. 1,582 29,123
Effect of exchange rates on cash and equivalents....................... 74 (139)
-------- --------
Net increase in cash and cash equivalents.............................. 5,654 14,766
Cash and cash equivalents at beginning of period....................... 17,411 3,527
-------- --------
Cash and cash equivalents at end of period............................. $ 23,065 $ 18,293
-------- --------
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest................................................. $ 4 $ 203
Cash paid for taxes.................................................... $ 766 $ 738
Conversion of preferred stock to common stock.......................... -- $ 71,806
</TABLE>
See accompanying notes.
4
<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 accruals) 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
financial statements and notes thereto included in the VERITAS Software
Corporation's ("Veritas California") 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 by the
Registrant as of December 31, 1997. At that time, the Registrant 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.
Adoption of Statement 128 is expected to result in an increase in primary
earnings per share for the six months ended June 30, 1997 and June 30, 1996 to
$0.19 and $0.24 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.
4. MERGER WITH OPENVISION
On January 13, 1997, VERITAS Software Corporation, a Delaware corporation
("the Company") and VERITAS Software Corporation, a California corporation
("Veritas California") entered into an Agreement and Plan of Reorganization (the
"Agreement") with OpenVision Technologies, Inc., a Delaware corporation
("OpenVision"), a publicly-held company that provides storage management
applications and services for client/server computing environments. The
Agreement provided for the merger of a wholly owned subsidiary of the Company
with and into a wholly owned subsidiary of the Company with and into OpenVision
Company (the "Merger"), thereby resulting in Veritas California and OpenVision
both becoming wholly owned subsidiaries of the Company. The Merger was
consummated on April 25, 1997, and was a tax-free reorganization, accounted for
as a pooling of interests whereby each share of the outstanding common stock of
Veritas California was converted into one share of common stock of the 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 Company.
Based on the number of shares of OpenVision Common Stock and Class B Common
Stock outstanding as of April 25, 1997, approximately 6.5 million shares of the
Company's
5
<PAGE> 7
VERITAS SOFTWARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
Common Stock were issued in the transaction and the Company has reserved 965,917
shares of its Common Stock for issuance pursuant to the assumption of
outstanding options, warrants and rights to purchase OpenVision Common Stock.
As a result of the transaction, the Company incurred charges to operations
of $8.5 million during the period that primarily related to approximately $4.2
million for transaction fees and professional services, $1.9 million for
contract terminations and asset write-offs and $2.4 million for other costs
incident to the merger. Of the total charge, $1.2 million resulted from the
write-off of assets related to redundant assets and facilities and $7.3 million
involved cash outflows of which $1.5 are future outflows as of June 30, 1997.
The future outflows will primarily be paid during the next twelve months.
5. SUBSEQUENT EVENT
On July 16, 1997, the Company announced a three for two stock split which
has an effective date of September 15, 1997.
6
<PAGE> 8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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 upon
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, where a subsidiary of the
Company, which performs research and development activities is located, (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 year ended December 31, 1996 and the Registration Statement on
Form S-4 filed by the Company in connection with the merger with OpenVision
Technologies, Inc.
RESULTS OF OPERATIONS
OVERVIEW
The Company designs, develops, markets and supports advanced storage
management and high availability products and services 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. The Company's highly scalable products can be
used independently, and certain products can be combined to provide
interoperable client/server storage management solutions. The Company's products
offer centralized administration with a high degree of automation, enabling
customers to manage complex, distributed environments cost-effectively by
increasing system administrator productivity and system availability. The
Company also provides a comprehensive range of services to assist customers in
planning and implementing storage management solutions. The Company markets its
products and associated services through a combination of direct sales and
indirect channels (resellers, VARs, hardware distributors, application software
vendors and systems integrators). Before its merger with OpenVision, 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.
The Company merged with OpenVision pursuant to the terms of an Agreement
and Plan of Reorganization dated January 13, 1997. The transaction was
consummated on April 25, 1997 and was accounted for as a "pooling of interests"
for financial reporting purposes in accordance with generally accepted
accounting principles. The following discussion reflect the combined results of
the Company and OpenVision for all periods covered.
7
<PAGE> 9
RESULTS OF OPERATIONS
The following tables set forth the percentage of total revenue represented
by certain line items from the Company's condensed consolidated statement of
operations for the three months and six months ended June 30, 1997 and 1996,
respectively, and the percentage change between the comparative periods:
<TABLE>
<CAPTION>
PERCENTAGE OF PERIOD-TO-PERIOD
TOTAL REVENUE PERCENTAGE CHANGE
------------------ ---------------------
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ---------------------
1997 1996 1997 COMPARED TO 1996
---- ---- ---------------------
<S> <C> <C> <C>
Net revenue:
User license fees................................... 80% 81% 60%
Services............................................ 15 17 46%
Porting and source fees............................. 5 2 225%
--- ---
Total net revenue........................... 100 100 62%
Cost of revenue:
User license fees................................... 3 4 9%
Services............................................ 6 5 103%
Porting and source fees............................. 3 -- n/m
--- ---
Total cost of revenue....................... 12 9 107%
--- ---
Gross profit.......................................... 88 91 57%
Operating expenses:
Selling and marketing............................... 36 36 64%
Research and development............................ 23 26 41%
General and administrative.......................... 7 9 26%
Merger related costs................................ 29 -- n/m
In-process research and development................. -- 12 n/m
--- ---
Total operating expenses.................... 95 83 86%
--- ---
Income (loss) from operations......................... (7) 8
Other income, net..................................... 3 3
Provision for income taxes............................ (2) (2)
--- ---
Net income (loss)..................................... (6)% 9 %
=== ===
Gross margin:
User license fees................................... 96% 95%
Services............................................ 63% 73%
Porting and source fees............................. 38% 91%
</TABLE>
- ---------------
n/m = not meaningful
8
<PAGE> 10
<TABLE>
<CAPTION>
PERCENTAGE OF PERIOD-TO-PERIOD
TOTAL REVENUE PERCENTAGE CHANGE
---------------- ---------------------
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ---------------------
1997 1996 1997 COMPARED TO 1996
---- ---- ---------------------
<S> <C> <C> <C>
Net revenue:
User license fees..................................... 80% 81% 63%
Services.............................................. 15 17 42%
Porting and source fees............................... 5 2 n/m
--- ---
Total net revenue............................. 100 100 64%
Cost of revenue:
User license fees..................................... 3 4 25%
Services.............................................. 5 5 75%
Porting and source fees............................... 3 -- n/m
--- ---
Total cost of revenue......................... 11 9 96%
--- ---
Gross profit............................................ 89 91 61%
Operating expenses:
Selling and marketing................................. 36 36 64%
Research and development.............................. 22 24 51%
General and administrative............................ 8 10 31%
Merger related costs.................................. 16 -- n/m
In-process research and development................... -- 7 n/m
--- ---
Total operating expenses...................... 82 77 75%
--- ---
Income from operations.................................. 7 14
Other income, net....................................... 3 2
Provision for income taxes.............................. (3) (3)
--- ---
Net income.............................................. 7% 13%
=== ===
Gross margin:
User license fees..................................... 96% 95%
Services.............................................. 65% 71%
Porting and source fees............................... 43% 79%
</TABLE>
- ---------------
n/m = not meaningful
Net Revenue
Total net revenue increased 62% from $17.9 million for the three months
ended June 30, 1996, to $28.9 million for the three months ended June 30, 1997,
and increased 64% from $33.2 million for the six months ended June 30, 1996, to
$54.5 million for the six months ended June 30, 1997. The Company believes that
the percentage increases in total revenue achieved in these periods are not
indicative of future results. The Company's revenue is comprised of user license
fees, service revenue and porting and source fees. Growth in user license fees
has been driven primarily by increasing market acceptance of the Company's
products and a larger percentage of total license revenue coming through the
direct sales channel. Service revenue is derived primarily from contracts for
software maintenance and technical support and, to a lesser extent, consulting
and training services. The growth in service revenue has been driven primarily
by increased sales of service and support contracts on new license sales and, to
a lesser extent, by increasing renewals of these contracts as the Company's
installed base of licensees has increased. Porting and source fees are derived
from the Company's funded development efforts and one-time fees associated with
the licensing of source code to OEMs. User license fees for the three months
ended June 30, 1997 decreased to 80% of total net revenue from 81% for the three
months ended June 30, 1996. License revenue for the six months ended June 30,
1997 and the six months ended June 30, 1996 were also 80% and 81%, respectively.
9
<PAGE> 11
User license fees. User license fees increased 60% from $14.5 million for
the three months ended June 30, 1996 to $23.2 million for the three months ended
June 30, 1997. User license fees increased 63% from $26.8 million for the six
months ended June 30, 1996 to $43.7 million for the six months ended June 30,
1997. The increase in overall user license fees is primarily due to increased
market acceptance of the Company's products and introduction of new products. In
particular, the Company's user license fees from storage products increased by
approximately 92%, accounting for 76% and 90% of user license fees in the six
months ended June 30, 1996 and 1997, respectively.
Service Revenue. Service revenue increased 46% from $3.0 million for the
three months ended June 30, 1996 to $4.4 million for the three months ended June
30, 1997, and increased 42% from $5.6 million for the six months ended June 30,
1996 to $8.0 million for the six months ended June 30, 1997, primarily due to
increased sales of service and support contracts on new licenses, renewal of
service and support contracts on existing licenses and, to a lesser extent, an
increase in consulting services revenue.
Porting and source fees. Porting and source fees, which include revenues
from porting contracts, increased from $0.4 million for the three months ended
June 30, 1996 to $1.4 million for the three months ended June 30, 1997, and
increased from $0.8 million for the six months ended June 30, 1996 to $2.8
million for the six months ended June 30, 1997. 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 six months ended June 30, 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.
The Company's international sales are generated primarily through its
international sales subsidiaries. International revenue outside the United
States and Canada, most of which is collectible in foreign currencies, accounted
for 22% and 28% of the Company's revenue in the six months ended June 30, 1997
and 1996, respectively. International revenue during this time period grew at a
slower rate than in the United States and Canada. The Company's international
revenue increased 28% from $9.3 million for the six months ended June 30, 1996
to $11.9 million for the six months ended June 30, 1997. Since much of the
Company's international operating expenses are also incurred in local
currencies, the relative impact of exchange rates on net income or loss is less
than on revenues. Although the Company's operating and pricing strategies take
into account changes in exchange rates over time, the Company's operating
results may be significantly affected in the short term by fluctuations in
foreign currency exchange rates. The Company believes that its success depends
upon continued expansion of its international operations. The Company currently
has sales and service offices in the United States, Canada, Japan, England,
Germany and France. The Company has a development center in India. The Company
also has resellers located in North America, Europe, Asia Pacific, South America
and the Middle East. International expansion may require that the Company
establish additional foreign offices, hire additional personnel and recruit
additional international resellers. This may necessitate significant management
attention and financial resources and could adversely affect the Company's
operating margin. To the extent the Company is unable to effect these additions
efficiently and in a timely manner, its growth, if any, in international sales
will be limited, and the Company's business, operating results and financial
condition could be materially and adversely affected. There can be no assurance
that the Company will be able to maintain or increase international market
demand for its products.
Cost of Revenue
Cost of user license fees consists primarily of media, manuals,
distribution costs and royalties. Cost of service revenue consists primarily of
personnel-related costs in providing maintenance, technical support, consulting
and training to customers. Cost of porting fees consists primarily of
personnel-related costs in providing development efforts. Gross margin on user
license fees is substantially higher than gross margin on service revenue and
porting fees, 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.
10
<PAGE> 12
Cost of User License Fees. Cost of user license fees was $0.8 million for
the three months ended June 30, 1996 and 1997, and increased 25% from $1.3
million for the six months ended June 30, 1996 to $1.7 million for the six
months ended June 30, 1997. Gross margin on user license fees increased from 95%
for the three months and six months ended June 30, 1996 to 96% for the three
months and six months ended June 30, 1997, primarily due to a greater percentage
of user license fees generated from products with lower royalty rates. The
Company does not expect significant improvements in gross margin on license
revenue.
Cost of Service Revenue. Cost of service revenue increased 103% from $0.8
million for the three months ended June 30, 1996 to $1.6 million for the three
months ended June 30, 1997, and increased 75% from $1.6 million for the six
months ended June 30, 1996 to $2.8 million for the six months ended June 30,
1997. Gross margin on service revenue decreased from 73% for the three months
ended June 30, 1996 to 63% for the three months ended June 30, 1997 and
decreased from 71% for the six months ended June 30, 1996 to 65% for the six
months ended June 30, 1997, primarily due to the Company's personnel additions
to the support organization to provide maintenance and other service.
Cost of Porting and Source Fees. Cost of porting increased to $0.9 million
for the three months ended June 30, 1997, compared to $39,000 for the same
period of 1996, and increased to $1.6 million for the six months ended June 30,
1997, compared to $0.2 million for the same period in 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
Selling and Marketing. Selling and marketing expenses consist primarily of
salaries, related benefits, commissions, consultant fees and other costs
associated with the Company's sales and marketing efforts. Selling and marketing
expenses increased 64% from $6.3 million for the three months ended June 30,
1996 to $10.4 million for the three months ended June 30, 1997, and increased
64% from $12.0 million for the six months ended June 30, 1996 to $19.6 million
for the six months ended June 30, 1997. Selling and marketing expenses as a
percentage of total net revenue remained at 36% in both the three-month and
six-month comparative periods. The increase in absolute dollars is primarily
attributable to increased sales and marketing staffing. The Company intends to
continue to expand its global sales and marketing infrastructure. Accordingly,
the Company expects its selling and marketing expenses to increase in the
future.
Research and Development. Research and development expenses consist
primarily of salaries, related benefits, third-party consultant fees and other
costs. Research and development expenses increased 41% from $4.6 million for the
three months ended June 30, 1996 to $6.5 million for the three months ended June
30, 1997, and increased 51% from $8.1 million for the six months ended June 30,
1996 to $12.3 million for the six months ended June 30, 1997, primarily
reflecting increased staffing levels. As a percentage of total net revenue,
research and development expenses decreased from 26% for the three months ended
June 30, 1996 to 23% for the three months ended June 30, 1997, and decreased
from 24% for the six months ended June 30, 1996 to 22% for the six month periods
ended June 30, 1997. The Company believes that a significant level of research
and development investment is required to remain competitive and expects such
expenses will increase in future periods, although such expenses may continue to
decline as a percentage of total net revenue to the extent revenue increases.
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
26% from $1.7 million for the three months ended June 30, 1996 to $2.1 million
for the three months ended June 30, 1997, and increased 31% from $3.2 million
for the six months ended June 30, 1996 to $4.2 million for the six months ended
June 30, 1997. The increase in the three and six month comparisons was primarily
due to additional costs associated with the Company enhancing its infrastructure
to allow operations to expand. General and administrative expenses as a
percentage of total net revenue decreased between the three month periods from
9% to 7%, and decreased between the six month periods from 10% to 8%. General
and administrative expenses are expected to increase in future periods to the
extent the
11
<PAGE> 13
Company expands its operations, but may continue to decline as a percentage of
total net revenue to the extent revenue increases.
Merger related costs. As a result of the merger with OpenVision, the
Company incurred charges to operations of $8.5 million during the current period
that primarily related to approximately $4.2 million for transaction fees and
professional services, $1.9 million for contract terminations and asset
write-offs and $2.4 million for other costs incident to the merger. Of the total
charge, $1.2 million resulted from the write-off of assets related to redundant
assets and facilities and $7.3 million involved cash outflows of which $1.5 are
future outflows as of June 30, 1997. The future outflows will primarily be paid
during the next twelve months.
In-Process Research and Development. On April 1, 1996, the Company acquired
all of the outstanding capital stock of Advanced Computing Systems Company
("ACSC"), a company that develops media management software, for a total cost of
$3.5 million. Of the total cost, $2.2 million was allocated to in-process
research and development and was expensed in the second quarter of 1996 and
approximately $1.3 million was allocated to intangibles assets that originally
were amortized and then fully written off in the quarter ended June 30, 1997 as
part of the merger related costs.
Other Income, Net. Other income, net increased from $0.5 million for the
three months ended June 30, 1996 to $0.8 million for the three months ended June
30, 1997, and increased $0.7 million for the six months ended June 30, 1996 to
$1.7 million for six months ended June 30, 1997, due primarily to increased
amounts of interest income attributable to the higher level of funds available
for investment and, to a lesser extent, the repayment of certain interest
bearing debt.
Provision for Income Taxes. The Company had an effective tax rate of 32%
and 16% for the six month periods ended June 30, 1997 and 1996, respectively.
The Company's effective tax rate is lower than the combined federal and state
statutory rates primarily due to the utilization of federal net operating loss
carry forwards. The tax provision recorded for the second quarter of 1997
reflects the impact of certain non-recurring merger related expenses that are
not deductible for tax purposes. The effective tax rate for the remainder of
1997 is expected to be significantly lower than the effective rate recorded year
to date, as the entire impact of these merger related charges were taken into
account in the second quarter.
The Company accounts for its income taxes under Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under
SFAS 109, deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the carrying amount of
assets and liabilities for financial reporting and the amounts used for income
taxes. At June 30, 1997, the Company had approximately $30 million of gross
deferred tax assets comprised primarily of net operating loss carryforward. The
Company believes that, based on a number of factors, the available objective
evidence creates sufficient uncertainty regarding the realizability of the
deferred tax assets such that a full valuation allowance has been recorded. The
Company intends to reevaluate the need for a valuation allowance on a quarterly
basis.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments totaled
$68.4 million at June 30, 1997 and represented 64% of total assets. Cash and
cash equivalents are highly liquid with original maturities of ninety days or
less. Short-term investments consist mainly of investment grade commercial
paper. At June 30, 1997, the Company had $1.0 million of long-term obligations
and stockholders' equity was approximately $80.8 million.
Net cash provided from operating activities was $2.5 million in the six
months ended June 30, 1997 down from $8.1 million in the six months ended June
30, 1996. The reduction in cash provided from operating activities resulted
primarily from an increase of accounts receivable of $11.2 million, partially
offset by increases in deferred revenue and accrued liabilities of $2.4 million
and $3.0 million, respectively, in the six months ended June 30, 1997. The
increase in accounts receivable reflects the overall revenue increase and shift
in revenue distribution to a higher percentage of revenue being generated
through its direct sales channel. The Company typically recognizes a significant
portion of its direct sales license revenue in the last two weeks
12
<PAGE> 14
of a quarter. The Company also used $5.8 million of cash from operations to
provide for non-recurring costs related to the OpenVision merger in the six
months ended June 30, 1997.
The Company's investing activities provided cash of $1.5 million in the six
months ended June 30, 1997 primarily due to the net reduction of short-term
investments of $4.8 million, partially offset by capital expenditures of $3.4
million. The Company's investing activities used cash of $22.3 million in the
six months ended June 30, 1996 and consisted primarily of net purchases of
short-term investments, $17.5 million, $3.0 million used for the purchase of
ACSC and capital expenditures of $2.0 million.
Financing activities provided cash of $1.6 million in the six months ended
June 30, 1997, primarily from the issuance of common stock under the Company's
employee stock plans, partially offset by payments of notes payable. In the six
months ended June 30, 1996, financing activities provided cash of $29.1 million
that reflects the net proceeds of $36.5 million from OpenVision's May 1996
initial public stock offering partially offset by the payments of notes payable.
The Company believes that its current cash, cash equivalents and short-term
investment balances and cash flow from operations, if any, will be sufficient to
meet the Company's working capital and capital expenditure requirements for at
least the next twelve months. Thereafter, the Company may require additional
funds to support its working capital requirements or for other purposes and may
seek to raise such additional funds through public or private equity financing
or from other sources. There can be no assurance that additional financing will
be available at all or that, if available, such financing will be obtainable on
terms favorable to the Company.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this Report on Form 10-Q, the following
factors should be considered carefully in evaluating the Company and its
business.
Merger with OpenVision. The Company merged with OpenVision with the
expectation that the Merger will result in beneficial synergistic effects for
the 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 two companies' sales forces, 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 that will temporarily distract them from
attention to the day-to-day business of the Company. The difficulties of
integration may be increased by a variety of other factors, which include: the
conflicts that may arise with respect to the direct sales distribution model of
OpenVision and the Company's 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 the Company and OpenVision; locating additional facilities
near the Company's current facilities at a reasonable cost to accommodate the
the additional need of the Company as a result of the Merger; 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 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 Company to retain
the key management, technical and sales and marketing personnel who are critical
to the Company's future operations. There can be no assurance that employees of
OpenVision will continue employment with the Company, particularly in light of
the attrition experienced in the consolidation of the 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 because of uncertainty over the integration and continued support
of the products of the Combined Company. Failure to accomplish the integration
of the two companies' operations effectively would have a material adverse
effect on the Company's business, operating results and financial condition.
13
<PAGE> 15
Competition. The markets in which the Company competes are intensely
competitive and rapidly changing. Historically, and prior to the Merger, the
Company's principal competition in the market for storage management products
has come from internal development groups of current and prospective OEM
customers, including operating systems vendors and computer manufacturers, who
have the resources to develop specific operating system level products for their
own needs, including the incorporation of storage management capabilities into
their operating systems. The Company also encounters competition from other
third party software vendors and hardware companies offering products that
incorporate certain of the features provided by the Company's products and from
disk controller and disk subsystem manufacturers who have included or may
include similar features.
Following the Merger and the increased visibility of the Company in certain
markets as a result, the Company will face competition from additional
competitors and experience new competitive factors, particularly as the
companies' respective product offerings are integrated and/or combined. Prior to
the Merger, OpenVision competed primarily with: (i) hardware and software
vendors that offer a management platform or framework to support vendor-created
and third-party systems management applications; (ii) vendors that provide
systems management software for the mainframe environment who are migrating
their products to the client/server environment; (iii) vendors that provide
"point" products that address specific problems and offer specific
functionality; and (iv) vendors that provide integrated and interoperable
solutions. OpenVision has encountered competition from companies such as
Computer Associates International, Inc., IBM Corporation, Legato Systems, Inc.,
EMC and Novadigm, Inc. Such competitors have substantially greater financial,
technical, sales, marketing and other resources, as well as greater name
recognition and a larger customer base, than the Company. The Company further
believes that the market for storage management software, which historically has
been large and fragmented, will become more consolidated with larger companies
being better positioned to compete in such environment in the long term.
The Company's success will depend significantly on its ability to adapt to
these new competing forces, to develop more advanced products more rapidly and
less expensively than its competitors and to educate potential customers as to
the benefits of licensing the Company's products rather than developing their
own products. The Company's future and existing competitors could introduce
products with superior features, scalability and functionality at lower prices
than the Company's products and could also bundle existing or new products with
other more established products in order to compete with the Company. Moreover,
as the open systems management software market develops, a number of companies
with greater resources than the Company could attempt to increase their presence
in this market by acquiring or forming strategic alliances with competitors or
business partners of the Company. For example, IBM Corporation purchased Tivoli
Systems Inc. and Computer Associates International purchase Cheyenne Software,
both competitors of the Company following the Merger. Increased competition is
likely to result in price reductions, reduced gross margins and loss of market
share, any of which could materially and adversely affect the Company's
business, operating results and financial condition. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors, and the failure to do so would result in the Company's business,
operating results and financial condition being materially and adversely
affected.
Fluctuating Operating Results. The Company's 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 the Company's OEM
licensees of computer systems incorporating the Company's 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
14
<PAGE> 16
competition; (vi) technological changes in computer systems and environments;
(vii) the ability of the Company to develop, introduce and market new products
in a timely manner; (viii) quality control of products sold; (ix) market
readiness to deploy storage 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; (xvii) the size and timing of
orders; (xviii) seasonality of revenue; and (xix) general economic conditions.
The Company's operating results are highly sensitive to the timing of
larger orders. Orders typically range from a few thousand dollars to several
hundred thousand dollars. Revenue is difficult to forecast because the
client/server systems management software market is an emerging market that is
highly fragmented and subject to rapid change. The Company's sales cycle varies
substantially from customer to customer. The Company's future revenue will also
be difficult to predict, and the Company has, in the past, failed to achieve its
revenue expectations for certain periods. Because the Company generally ships
software products within a short period after receipt of an order, it typically
does not have a material backlog of unfilled orders, and revenue in any quarter
is substantially dependent on orders booked and shipped in that quarter. In
addition, the Company typically recognizes a significant portion of its direct
sales license revenue in the last two weeks of a quarter. The Company's expense
levels are based, in part, on its expectations as to future revenue and to a
large extent are 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, the Company believes that
period-to-period comparisons of the Company's results of operations are not and
will not necessarily be meaningful and should not be relied upon as any
indication of future performance. Furthermore, it is possible that in future
quarters the Company's operating results may be below the expectations of public
market analysts and investors. In such event, the price of the Company's Common
Stock would be materially and adversely affected.
New Distribution Channels. Before the Merger, a substantial portion of the
Company's net revenues were derived from user license fees received from
computer OEMs that incorporated the Company's storage management software
products into their operating systems. These revenues remain significant to the
Company following the Merger. The Company's 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, the Company's license agreements with its
OEM customers generally do not require the OEMs to recommend or offer the
Company's products exclusively, have no minimum sales requirements, and may be
terminated by the OEMs without cause.
The Company recently has made significant investments in the establishment
of other distribution channels. Efforts by the Company 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; (iii) the acquisition of
Tidalwave Technologies, Inc. in April 1995, as a result of which the Company
began distributing the FirstWatch end user products; and (iv) the merger with
OpenVision whereby a significant direct sales channel is immediately present.
The Company has entered into a Development, License and Distribution
Agreement with Sun Microsystems which will also provide a new distribution
channel for the Company's products. The Company has agreed to develop a
specialized, integrated version of the Company's Volume Manager product that
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 the Company 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 the Company 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.
15
<PAGE> 17
Prior to the consummation of the merger, OpenVision entered into a
Development, License and Distribution Agreement with Sun Microsystems that will
provide a new distribution channel for the Company's storage management
products. While the Company believes that this arrangement with Sun Microsystems
will be beneficial, there can be no assurance that Sun Microsystems and the
Company can both deliver its products to customers without creating certain
sales channel conflicts. Any such conflict could cause significant delays in the
Company's sales cycle and possibly create a loss of revenue, 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 the Company has limited
experience in providing. In addition, as a result of the merger with 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 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.
Management of Growth; Dependence on Key Personnel. The Company continues to
experience periods of significant growth that place 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 manage such
growth effectively. 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 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 and
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 other existing personnel, which could have a material adverse
effect on the Company's business, operating results and financial condition.
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.
Rapid Technological Change and Requirement for Frequent Product
Transitions. The market for the Company's products is intensely competitive,
highly fragmented and characterized by rapid technological developments,
evolving industry standards and rapid changes in customer requirements. The
introduction of products embodying new technologies, the emergence of new
industry standards or changes in customer requirements could render the
Company's existing products obsolete and unmarketable. As a result, the
Company's success depends upon its ability to continue to enhance existing
products, respond to changing customer requirements and develop and introduce in
a timely manner new products that keep pace with
16
<PAGE> 18
technological developments and emerging industry standards. Customer
requirements include, but are not limited to, product operability and support
across distributed and changing heterogeneous hardware platforms, operating
systems, relational databases and networks. For example, as certain of the
Company's customers start to utilize WindowsNT or other emerging operating
platforms, it will be necessary for the Company to enhance its products to
operate on such platforms in order to meet these customers' requirements. There
can be no assurance that the Company's products will achieve market acceptance
or will adequately address the changing needs of the marketplace or that the
Company will be successful in developing and marketing enhancements to its
existing products, or new products incorporating new technology, on a timely
basis. The Company has in the past experienced delays in product development,
and there can be no assurance that the Company will not experience further
delays in connection with its current product development or future development
activities. If the Company is unable to develop and introduce new products, or
enhancements to existing products, in a timely manner in response to changing
market conditions or customer requirements, the Company's business, operating
results and financial condition will be materially and adversely affected.
Because the Company has limited resources, it must restrict its product
development efforts to a relatively small number of products and operating
systems. There can be no assurance that these efforts will be successful or,
even if successful, that any resulting product or operating system will achieve
market acceptance.
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 markets
in which the Company does business, or relating to the Company 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 that often have been unrelated or disproportionate
to the operating performance of these companies. The broad market fluctuations
may adversely affect the market price of the Company's Common Stock.
Dependence on Proprietary Technology; Risks of Infringement. The Company's
success depends upon its proprietary technology. The Company relies on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and licensing arrangements to establish and protect its proprietary
rights. The Company presently has no patents although it has filed several
patent applications. As part of its confidentiality procedures, the Company
generally enters into non-disclosure agreements with its employees, distributors
and corporate partners, and license agreements with respect to its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently. Policing unauthorized use of the Company's products is
difficult and although the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be a
persistent problem. In selling its products, the Company relies in part on
"shrink wrap" licenses that are not signed by licensees and, therefore, may be
unenforceable under the laws of certain jurisdictions. In addition, effective
protection of intellectual property rights is unavailable or limited in certain
foreign countries. There can be no assurance that the Company's protection of
its proprietary rights, including any patent that may be issued, will be
adequate or that the Company's competitors will not independently develop
similar technology, duplicate the Company's products or design around any
patents issued to the Company or its other intellectual property rights.
The Company is not aware that any of its products infringe the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not claim such infringement by the Company with respect to current or
future products. The Company expects that software product developers will
increasingly be subject to such claims as the number of products and competitors
in the Company's industry segment grows
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<PAGE> 19
and the functionality of products in the industry segment overlaps. Any such
claims, with or without merit, could result in costly litigation that could
absorb significant management time, which could have a material adverse effect
on the Company's business, operating results and financial condition. Such
claims might require the Company to enter into royalty or license agreements.
Such royalty or license agreements, if required, may not be available on terms
acceptable to the Company or at all, which could have a material adverse effect
upon the Company's business, operating results and financial condition.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as described below, the Company is not a party to any material legal
proceedings.
Qualix Group, Inc. ("Qualix"), a reseller of the Company's products, filed
a complaint against the Company in the Superior Court of the State of
California, County of Santa Clara (the "Court") on October 25, 1996, alleging
breach by the Company of the terms of a reseller agreement with respect to the
FirstWatch product. The Company filed a crosscomplaint against Qualix alleging
breach by Qualix of such reseller agreement. The Company has reached a
settlement of the action with Qualix pursuant to the terms of a confidential
Mutual Settlement Agreement and Release of Claims dated August 12, 1997, whereby
the parties agreed, among other things, to dismiss their respective actions
against each other by filing a dismissal of their respective complaints with the
court. The Company believes that the terms of the settlement reached with Qualix
will not have a material adverse effect upon the Company's business, operating
results and financial condition.
ITEM 2. CHANGES IN SECURITIES
Simultaneous with the consummation of the Merger, a reincorporation of
VERITAS California in the State of Delaware was effected pursuant to the terms
of the Agreement. The shareholders of VERITAS California became stockholders of
the Company, which is a Delaware corporation, pursuant to the conversion of each
outstanding share of Common Stock of VERITAS California into one share of Common
Stock of the Company and the conversion of each outstanding option or other
right to purchase Common Stock of VERITAS California into an option or other
right to purchase an equivalent number of shares of Common Stock of the Company.
The rights of the Company's stockholders are governed by the Company's
Certificate of Incorporation and Bylaws which differ in certain respects from
the Articles of Incorporation and Bylaws of VERITAS California. In addition, the
rights of the Company's stockholders have been affected in certain respects as a
result of being governed by Delaware law, rather than California law.
In particular, the Bylaws of the Company provide that special meetings of
the stockholders of the Company may be called only by the Board of Directors,
the Chairman of the Board, the Chief Executive Officer or the President. The
Bylaws of VERITAS California governing this matter differed in certain respects,
in particular, providing for the right of shareholders holding in excess of 10%
of the voting shares to call a special meeting. Moreover, shareholders of
VERITAS California were permitted to take action by written consent without a
meeting. The Bylaws of the Company provide that the stockholders may not act by
written consent. Furthermore, the Certificate of Incorporation and Bylaws of the
Company permit the Board of Directors of the Company to amend the Bylaws without
obtaining stockholder approval, including amendment of the number of authorized
directors of the Company. An amendment of the authorized number of directors set
forth in the Bylaws of a California corporation requires stockholder approval.
The Bylaws of the Company further provide for certain notice requirements with
respect to the nomination of persons for election to the Board, and the proposal
of business to be considered, at annual or special meetings of stockholders, by
a stockholder.
A more detailed comparison of the rights of the stockholders of the Company
with the rights of the shareholders of VERITAS California under such companies'
charter documents, and as a result of differences between Delaware law and
California law, is set forth in the Registration Statement on Form S-4 filed by
the Company with the Securities and Exchange Commission on March 24, 1997.
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<PAGE> 20
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on April 24, 1997 (the
"Annual Meeting"), the following individuals were elected to the Board of
Directors:
<TABLE>
<CAPTION>
VOTES VOTES
IN FAVOR WITHHELD
---------- -------
<S> <C> <C>
Mark Leslie................................... 11,413,301 859,139
Roel Pieper................................... 11,414,814 857,626
Joseph D. Rizzi............................... 11,419,276 853,164
Fred van den Bosch............................ 11,414,276 858,164
Steven Brooks................................. 11,407,638 864,802
</TABLE>
The following proposals were also approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
AFFIRMATIVE NEGATIVE BROKER
VOTES VOTES ABSTENTIONS NON-VOTES
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
1. Approval and adoptadoption of the
Agreement and Plan of Reorganization by
and among the Company, Veritas California
and OpenVision providing for (i) the
merger of a wholly owned subsidiary of the
Company with and into OpenVision and (ii)
the merger of a wholly owned subsidiary
with and into Veritas California ......... 9,553,660 939,804 35,581 1,743,395
2. Admendment of the 1993 Equity Incentive
Plan to increase the number of reserved
shares from 2,042,658 to 4,100,000........ 5,585,467 4,933,963 59,006 1,694,004
3. Amendment of the 1993 Director Stock
Option Plan to increase the number of
reserved shares from 150,000 to
250,000................................... 6,716,003 3,825,062 35,571 1,695,804
4. Amendment of the 1993 Employee Stock
Purchase Plan to increase the number of
reserved shares from 675,000 to
250,000................................... 6,718,447 3,829,471 28,718 1,695,804
5. Ratification of the appointment of Ernst &
Young LLP as auditors for the fiscal year
ending December 31, 1997.................. 12,193,722 46,872 31,846
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(A) EXHIBITS
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
---- ------------------------------------------------------------------- ----------------
<C> <S> <C>
2.01 Agreement and Plan of Reorganization by and among the Registrant,
Veritas California and OpenVision dated January 13, 1997
(incorporated by reference to Exhibit 2.01 of the Registrant's
Registration Statement on Form S-4 filed with the Securities and
Exchange Commission on March 24, 1997 (the "Form S-4"))
4.01 Registration Rights Agreement between the Registrant and Warburg,
Pincus Investors, L.P. dated April 25, 1997
4.02 Nomination Agreement between the Registrant and Warburg, Pincus
Investors, L.P. dated April 25, 1997
11.1 Statement Re: Computation of Net Income (Loss) Per Share
27.1 Financial Data Schedule (EDGAR only)
</TABLE>
19
<PAGE> 21
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended June 30, 1997.
20
<PAGE> 22
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 August 13, 1997.
VERITAS SOFTWARE CORPORATION
/s/ KENNETH E. LONCHAR
--------------------------------------
Kenneth E. Lonchar
Vice President, Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
21
<PAGE> 1
EXHIBIT 4.01
VERITAS SOFTWARE CORPORATION
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT is entered into as of April 25, 1997,
by and between VERITAS Software Corporation, a Delaware corporation (the
"COMPANY"), and Warburg, Pincus Investors, L.P. (the "STOCKHOLDER").
RECITALS
WHEREAS, the Stockholder acquired shares of Common Stock of the Company
pursuant to an Agreement and Plan of Reorganization by and among the Company,
VERITAS Software Corporation, a California corporation ("VERITAS"), and
OpenVision Technologies, Inc., a Delaware corporation ("OPENVISION"), dated
January 13, 1997 (the "MERGER AGREEMENT") in connection with the merger of the
Company's two subsidiaries with and into VERITAS and OpenVision, respectively.
Pursuant to Section 5.15 of the Merger Agreement, the Company agreed to provide
the Stockholder certain registration rights as provided herein; and
WHEREAS, as an inducement for OpenVision to enter into the Merger
Agreement, the Company desires to grant the registration rights to the
Stockholder as contained herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the Company and the Stockholder agree as follows:
SECTION 1
REGISTRATION RIGHTS
1.1 DEFINITIONS. As used in this Agreement, the following terms shall
have the following meanings:
(a) "SEC" shall mean the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
(b) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
(c) "EXPIRATION DATE" shall mean the date the Company has published
(in accordance with applicable pooling of interests accounting rules) the
combined financial results of the Company, VERITAS and OpenVision covering a
period of at least thirty (30) days of combined operations of the Company,
VERITAS and OpenVision.
(d) "HOLDER" shall mean any holder of outstanding Registrable
Securities which have not been sold to the public or anyone who holds
outstanding Registrable Securities to
<PAGE> 2
whom the registration rights conferred by this Agreement have been transferred
in compliance with Section 1.11 hereof.
(e) "REGISTER," "REGISTERED" and "REGISTRATION" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement, and compliance with applicable
state securities laws of such states in which Holders notify the Company of
their intention to offer Registrable Securities.
(f) "REGISTRABLE SECURITIES" shall mean all of the following to the
extent the same have not been sold to the public (i) any and all shares of
Common Stock of the Company issued to the Stockholder pursuant to the Merger
Agreement, (ii) stock issued in respect of stock referred to in (i) above in any
reorganization, or (iii) stock issued in respect of the stock referred to in (i)
and (ii) as a result of a stock split, stock dividend, recapitalization or
combination.
(g) "REGISTRATION EXPENSES" shall mean all expenses incurred in
connection with a registration hereunder, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses and the expense of any
special audits incident to or required by any such registration (but excluding
the compensation of regular employees of the Company, which shall be paid in any
event by the Company).
(h) "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
(i) "SELLING EXPENSES" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities and all
fees and disbursements of counsel for the Holders.
1.2 RESTRICTIVE LEGEND.
(a) Each certificate representing Registrable Securities held by any
Holder who is a party to an OpenVision Affiliate Agreement (as defined in
Section 4.5 of the Merger Agreement) shall be stamped or otherwise imprinted
with a legend as provided in the OpenVision Affiliate Agreement.
(b) The Company agrees to remove promptly stop transfer instructions
and the legend provided in Section 1.2(a) above when (i) such proposed sale,
transfer or other distribution is permitted pursuant to Rule 145(d) under the
Securities Act; (ii) counsel representing the Holder, which counsel is
reasonably satisfactory to the Company, shall have advised the Company in a
written opinion letter satisfactory to the Company and Company's legal counsel,
and upon which the Company and its legal counsel may rely, that no registration
under the Securities Act would be required in connection with the proposed sale,
transfer or other disposition; (iii) a registration statement under the
Securities Act covering the Registrable Securities proposed to be sold,
transferred or otherwise disposed of, describing the manner and
2
<PAGE> 3
terms of the proposed sale, transfer or other dispositions, and containing a
current prospectus, shall have been filed with the SEC and declared effective
under the Securities Act; (iv) an authorized representative of the SEC shall
have rendered written advice to Holder (sought by Holder or counsel to Holder,
with a copy thereof and all other related communications delivered to the
Company) to the effect that the SEC would take no action, or that the staff of
the SEC would not recommend that the SEC take any action, with respect to the
proposed disposition if consummated; or (v) when the Holder of Registrable
Securities is no longer subject to the restrictions in Rule 145 pursuant to Rule
145(d)(2) or (3).
(c) Each Holder consents to the Company making a notation on its
records and giving instructions to any transfer agent of the Registrable
Securities in order to implement the restrictions on transfer established in
this Agreement.
1.3 REQUESTED REGISTRATION.
(a) At any time after the Expiration Date, in case the Company shall
receive a written request from a Holder or Holders that the Company effect a
registration with respect to Registrable Securities, the Company shall:
(i) promptly give written notice of the proposed
registration to all other Holders; and
(ii) as soon as practicable use its best efforts to register
(including, without limitation, the execution of an undertaking to file
post-effective amendments, appropriate qualifications under applicable blue sky
or other state securities laws, and appropriate compliance with federal
government requirements) the sale and distribution of the Registrable Securities
as specified in such request, together with all or such portion of the
Registrable Securities of any other Holder or Holders as are specified in a
written request given within ten (10) days after receipt of such written notice
from the Company; provided, however, that the Company shall not be obligated to
file a registration statement pursuant to this Section:
(A) within two hundred seventy (270) days after the
effectiveness of a registration statement relating to a registration effected
pursuant to this Section 1.3(a) or Section 1.4(a);
(B) in any particular state in which the Company
would be required to execute a general consent to service of process in
effecting such registration;
(C) in any registration having an aggregate sales
price (before deduction of underwriting discounts and commissions) of less
than $5,000,000; or
(D) after the Company has effected two such
registrations pursuant to this Section 1.3(a) and such registrations have been
declared or ordered effective; provided, however, that any registration request
which is subsequently withdrawn shall not be deemed to be a registration under
this subsection (D) if the Holders requesting such registration shall have
reimbursed the Company for all Registration Expenses related to such withdrawn
registration. Notwithstanding the foregoing, if at the time of such withdrawal,
the Holders have
3
<PAGE> 4
learned of a material adverse change in the condition, business, or prospects of
the Company from that known to the Holders at the time of their request, then
the Holders shall not be required to pay any of such expenses and such
registration shall not be counted as a registration pursuant to this Section
1.3(a)(ii)(D).
Subject to the foregoing clauses (A) through (D), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as is practicable after receipt of the request or requests of
the Holders; provided, however, that (i) if the Company shall furnish to such
Holders a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors it would be detrimental to the
Company and its stockholders for such registration statement to be filed within
such period, then the Company may defer the filing of such registration
statement for a period of not more than sixty (60) days, provided that the
Company may not exercise such sixty (60) day hold off more than once during any
two hundred seventy (270) day period, or (ii) if at the time of such request the
Company determines it desires to register shares for the account of the Company,
then the Company can so notify the Holders who shall then have rights to
participate in such registration statement as provided in Section 1.4.
(b) If the Holders intend to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to Section 1.3. In such event,
the Company shall include such information in the written notice referred to in
Section 1.3(a)(i), and the Holders shall select an underwriter or underwriters
reasonably acceptable to the Company. The right of any Holder to registration
pursuant to Section 1.3 shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of such Holder's Registrable Securities in
the underwriting to the extent provided herein. The Company shall (together with
all Holders distributing their Registrable Securities through such underwriting)
enter into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting. Notwithstanding any other provision
of this Section 1.3, if the managing underwriter advises the participating
Holders in writing that marketing factors, so as to not materially adversely
impact the market price of the Company's Common Stock, require a limitation of
the number of shares to be underwritten (an "UNDERWRITER'S CUTBACK"), the
Company shall so advise all participating Holders, and the number of shares of
Registrable Securities that may be included in the registration and underwriting
shall be allocated among all participating Holders thereof in proportion, as
nearly as practicable, to the respective amounts of Registrable Securities held
by such Holders. If any Holder disapproves of the terms of the underwriting, he
may elect to withdraw therefrom by written notice to the Company and the
managing underwriter. If, by the withdrawal of such Registrable Securities a
greater number of Registrable Securities held by other Holders may be included
in such registration (up to the limit imposed by the underwriters) the Company
shall offer to all Holders who have included Registrable Securities in the
registration the right to include additional Registrable Securities in the same
proportion used in determining the limitation as set forth above. Any
Registrable Securities which are excluded from the underwriting by reason of the
underwriter' s marketing limitation or withdrawn from such underwriting shall be
withdrawn from such registration and shall remain subject to the lockup
agreement in Section 1.10.
4
<PAGE> 5
1.4 PIGGYBACK REGISTRATION.
(a) If at any time or from time to time, the Company shall determine
to register any of its securities for its own account or the account of any of
its stockholders (other than a registration relating solely to employee benefit
plans, a registration statement related to the offering of debt securities of
the Company, a registration relating solely to a Securities Act Rule 145
transaction, a registration relating to any acquisition by the Company or a
registration on any form (other than Form S-1, S-2 or S-3, or their successor
forms) which does not include substantially the same information as would be
required to be included in a registration statement covering the sale of
Registrable Securities), the Company will:
(i) give to each Holder written notice thereof as soon as
practicable prior to filing the registration statement; and
(ii) include in such registration and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within ten (10) days after receipt of such written notice from
the Company, by any Holder or Holders, except as set forth in Subsection (b)
below.
(b) If the registration is for a registered public offering
involving an underwriting, the Company shall so advise the Holders as a part of
the written notice given pursuant to Subsection 1.4(a)(i). In such event the
right of any Holder to registration pursuant to Section 1.4 shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent provided
herein. All Holders proposing to distribute their securities through such
underwriting shall (together with the Company) enter into an underwriting
agreement in customary form with the underwriter or underwriters selected for
such underwriting by the Company. Notwithstanding any other provision of this
Section 1.4, if the managing underwriter determines that marketing factors, so
as to not materially adversely impact the market price of the Company's Common
Stock, require a limitation of the number of shares to be underwritten, the
managing underwriter may limit the number of Registrable Securities to be
included in the registration and underwriting on behalf of the Holders on a pro
rata basis to not less than thirty-five percent (35%) of total number of shares
to be included in the registration. In such event, the Company shall so advise
all Holders of Registrable Securities which would otherwise be registered and
underwritten pursuant hereto, and the number of shares of Registrable Securities
that may be included in the registration and underwriting shall be allocated
among the Holders in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities held by each of the Holders seeking to
register shares under this Section 1.4. If any Holder disapproves of the terms
of any such underwriting, he may elect to withdraw therefrom by written notice
to the Company and the managing underwriter. If by the withdrawal of such
Registrable Securities a greater number of Registrable Securities held by other
Holders may be included in such registration (up to the limit imposed by the
underwriters), the Company shall offer to all Holders who have included
Registrable Securities in the registration the right to include additional
Registrable Securities in the same proportion used in determining the limitation
as set forth above. Any Registrable Securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration and shall remain subject
to the lockup agreement in Section 1.10.
5
<PAGE> 6
1.5 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to
Section 1.3 or 1.4 shall be borne by the Company, and all Selling Expenses shall
be borne by the Holders of the securities so registered pro rata on the basis of
the number of their shares so registered; provided, however, that the Company
shall not be required to pay any Registration Expenses if, as a result of the
withdrawal of a request for registration by any of the Holders, as applicable,
the registration statement does not become effective, in which case each of the
Holders withdrawing from the requested registration shall bear such Registration
Expenses pro rata; and, provided, further, that such registration shall not be
counted as a registration pursuant to Section 1.3(a)(ii)(D). Notwithstanding the
foregoing, if at the time of such withdrawal, the Holders have learned of a
material adverse change in the condition, business, or prospects of the Company
from that known to the Holders at the time of their request, then the Holders
shall not be required to pay any of such expenses and such registration shall
not be counted as a registration pursuant to Section 1.3(a)(ii)(D).
1.6 OBLIGATIONS OF THE COMPANY. Whenever required to effect the
registration of any Registrable Securities under this Agreement, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its reasonable best efforts to
cause such registration statement to become effective, and keep such
registration statement effective until the distribution is completed, but not
longer than ninety (90) days after the effective date thereof (excluding any
days in which the Company requires the Holders to cease sales of shares as
provided below); provided, however, that (A) the Company may by written notice
require that the Holders immediately cease sales of shares (for a period not to
exceed sixty (60) days) pursuant to such registration statement at any time that
(i) the Company becomes engaged in business activity or negotiation which is not
disclosed in the registration statement (or the prospectus included therein)
which the Company reasonably believes must be disclosed therein under applicable
law and which the Company desires to keep confidential for business purposes,
(ii) the Company determines that a particular disclosure so determined to be
required to be disclosed therein would be premature or would adversely affect
the Company or its business or prospects, or (iii) the registration statement
can no longer be used under the existing rules and regulations promulgated under
the Securities Act, and (B) if such registration statement is not kept effective
for such period, such registration shall not be counted as a registration
pursuant to Section 1.3(a)(ii)(D). The Company shall not be required to disclose
to the Holders which of the reasons specified in clauses (i), (ii) or (iii)
above are the basis for requiring a suspension of sales hereunder.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other
6
<PAGE> 7
documents as they may reasonably request in order to facilitate the disposition
of the Registrable Securities owned by them that are included in such
registration.
(d) Use its reasonable best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided, however, that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions.
(e) Enter into and perform its obligations under an underwriting
agreement, in usual and customary form, with the managing underwriter(s) of such
offering. Each Holder participating in such underwriting shall also enter into
and perform its obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Furnish to the underwriters for sale of Registrable Securities
on the date that such Registrable Securities are delivered to the underwriters
(i) an opinion, dated as of such date, of the counsel representing the Company
for the purposes of such registration, in form and substance as is customarily
given to underwriters in an underwritten public offering addressed to the
underwriters, and (ii) a "comfort" letter dated as of such date, from the
independent certified public accountants of the Company, in form and substance
as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering addressed to the underwriters.
1.7 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Sections 1.3 or 1.4
that the selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them, and the intended method of
disposition of such securities as shall be required to timely effect the
registration of Registrable Securities.
1.8 DELAY OF REGISTRATION. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Agreement.
1.9 INDEMNIFICATION. In the event any Registrable Securities are
included in a registration statement under Sections 1.3 or 1.4:
(a) By the Company. To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, the partners, officers and directors of
each Holder, any underwriter (as defined in the Securities Act) for such Holder
and each person, if any, who
7
<PAGE> 8
controls such Holder or underwriter within the meaning of the Securities Act or
the Exchange Act against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the Securities Act, the Exchange
Act or other federal or state securities law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or violations
(collectively a "VIOLATION"):
(i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto;
(ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein, in light of the circumstances in which made, not misleading, or
(iii) any violation or alleged violation by the Company of the
Securities Act, the Exchange Act, any federal or state securities law or any
rule or regulation promulgated under the Securities Act, the Exchange Act or any
federal or state securities law in connection with the offering covered by such
registration statement;
and the Company will reimburse each such Holder, partner, officer or director,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them, as incurred, in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
indemnity agreement contained in this subsection 1.9(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by such Holder, partner, officer, director, underwriter
or controlling person of such Holder or underwriter.
(b) By Selling Holders. To the extent permitted by law, each selling
Holder will indemnify and hold harmless the Company, each of its directors, each
of its officers who has signed the registration statement, each person, if any,
who controls the Company within the meaning of the Securities Act, any
underwriter (as defined in the Securities Act) and any other Holder selling
securities under such registration statement or any of such other Holder's
partners, directors or officers or any person who controls such underwriter or
other Holder within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages, or liabilities (joint or several) to which
the Company or any such director, officer, controlling person, underwriter or
other such Holder, partner or director, officer or controlling person of such
underwriter or other Holder may become subject under the Securities Act, the
Exchange Act or other federal or state securities law, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereto) arise out of or
are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such
8
<PAGE> 9
registration; and each such Holder will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer, controlling
person, underwriter or other Holder, partner, officer, director or controlling
person of such other Holder or underwriter in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement contained in this subsection 1.9(b) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the written consent of the Holder,
which consent shall not be unreasonably withheld; and, provided, further, that
the total amounts payable in indemnity by a Holder under this subsection 1.9(b)
in respect of any Violation shall not exceed the proceeds (net of underwriting
discounts and commissions) received by such Holder in the registered offering
out of which such Violation arises.
(c) Notice. Promptly after receipt by an indemnified party under
Section 1.9 of notice of the commencement of any action (including, without
limitation, any governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under Section 1.9,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential conflict of interests between such indemnified party and any other
party represented by such counsel in such proceeding; and, provided, further,
that the indemnifying party shall not be required to pay for more than one
separate counsel for all indemnified parties. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action, if materially prejudicial to its ability to defend such action,
shall relieve such indemnifying party of any liability to the indemnified party
under Section 1.9, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under Section 1.9.
(d) Contribution. In order to provide for just and equitable
contribution to joint liability under the Securities Act, the Exchange Act or
any federal or state securities laws in any case in which either (i) any Holder
exercising rights under this Agreement, or any controlling person of any such
Holder, makes a claim for indemnification pursuant to Section 1.9 but it is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that Section 1.9 provides for indemnification in such
case, or (ii) contribution under the Securities Act, the Exchange Act or any
federal or state securities laws may be required on the part of any such selling
Holder or any such controlling person in circumstances for which indemnification
is provided under Section 1.9; then, and in each such case, the Company and such
Holder will contribute to the aggregate losses, claims, damages or liabilities
to which they may be subject (after contribution from others) in such proportion
as is appropriate to reflect the relative fault of the indemnifying party or
parties on the one hand and the indemnified party on the other in connection
with the statements or omissions that resulted in such losses, claims, damages
or
9
<PAGE> 10
liabilities, as well as any other relevant equitable considerations. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
indemnifying party or parties on the one hand or the indemnified party on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission; provided,
however, that, in any such case, (A) no such Holder will be required to
contribute any amount in excess of the proceeds (net of underwriting discounts
and commissions) received by such Holder from all such Registrable Securities
offered and sold by such Holder pursuant to such registration statement; and (B)
no person or entity guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) will be entitled to contribution from
any person or entity who was not guilty of such fraudulent misrepresentation.
(e) Survival. The obligations of the Company and Holders under
Section 1.9 shall survive the completion of any offering of Registrable
Securities in a registration statement.
1.10 "MARKET STAND-OFF' AGREEMENT. Each Holder who gives notice to the
Company of such Holder's desire to participate in any registration under Section
1.3 or 1.4 hereof hereby agrees that it shall not, to the extent requested by
the Company or the managing underwriter, sell or otherwise transfer or dispose
of any Registrable Securities or other shares of stock of the Company then owned
by such Holder (other than to donees, affiliates or partners of the Holder who
agree to be similarly bound) for the period from the filing of the registration
statement until up to sixty (60) days following the date of the final prospectus
in connection with the registration statement. In order to enforce the foregoing
covenant, the Company shall have the right to place restrictive legends on the
certificates representing the shares subject to this Section 1.10 and to impose
stop transfer instructions with respect to the Registrable Securities of such
Holders until the end of such period. The provisions of this Section 1.10 shall
be binding upon any transferee of any Registrable Securities.
1.11 TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company to
register securities granted Holders under Sections 1.3 and 1.4 may be assigned
to any constituent partner of a Holder, where such Holder is a partnership, or
to any parent or subsidiary corporation or any officer, director or principal
stockholder thereof, where such Holder is a corporation, provided that (i) such
transfer may otherwise be effected in accordance with the applicable securities
laws, and (ii) the Company is given written notice of such assignment prior to
such assignment.
1.12 TERMINATION OF RIGHTS. The rights granted pursuant to this Agreement
(a) shall terminate as to any Holder when the aggregate number of Registrable
Securities which such Holder holds (together with other Holders whose sales may
be aggregated) could all be sold in a three (3) month period in a public sale in
compliance with Rule 144 under the Securities Act using the 1% volume limitation
contained in Rule 144(e)(1)(i), and (b) shall not be exercisable by any Holder
if at the time of the request for or notice of registration under Section 1.3
and 1.4 such Holder could sell (together with other Holders whose sales may be
aggregated) in a three (3) month period all Registrable Securities then held by
such Holder in compliance with Rule 144 using the Company's average weekly
trading volume calculation at such time.
10
<PAGE> 11
1.13 RULE 144 REPORTING. With a view to making available the benefits
of Rule 144, the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act;
(b) use its reasonable best efforts to file with the SEC in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act; and
(c) furnish to the Holder forthwith upon request a written statement
by the Company as to its compliance with the reporting requirements of Rule 144,
and provide a copy of the most recent annual or quarterly report of the Company,
and such other reports and documents of the Company as a Holder may reasonably
request in availing itself of Rule 144.
SECTION 2
MISCELLANEOUS
2.1 WAIVERS AND AMENDMENTS. The rights and obligations of the Company and
the rights and obligations of a Holder under this Agreement may be waived
(either generally or in a particular instance, either retroactively or
prospectively, and either for a specified period of time or indefinitely) or
amended, only with the written consent of such Holder.
2.2 GOVERNING LAW. This Agreement shall be governed by and construed under
the laws of the State of California as such laws are applied to contracts made
and to be fully performed entirely within that state between residents of that
state. All disputes arising out of this Agreement shall be subject to the
exclusive jurisdiction and venue of the California State courts Santa Clara
County, California (or, if there is exclusive federal jurisdiction, the United
States District Court for the Northern District of California), and the parties
consent to the personal and exclusive jurisdiction and venue of these courts
2.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
2.4 ENTIRE AGREEMENT. This Agreement constitutes the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
2.5 NOTICES. All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed first class, postage prepaid,
addressed (a) if to a Holder, at such Holder's address set forth in Schedule A
hereto, or at such other address as such Holder shall have furnished to the
Company in writing, or (b) if to the Company, at its principal executive offices
(Attention: Chief Financial Officer) or at such other address as the Company
shall have furnished to the Holders in writing.
Notices shall be effective upon mailing.
11
<PAGE> 12
2.6 SEVERABILITY. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.
2.7 TITLES AND SUBTITLES. The titles of the sections and subsections of
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
2.8 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
constitute one instrument.
2.9 PARTNERSHIP. The Company recognizes that Stockholder is a limited
partnership and agrees that Stockholder's general and limited partners shall in
no event be liable for any obligation or liabilities of Stockholder under this
Agreement.
The foregoing Registration Rights Agreement is hereby executed as of the
date first above written.
"COMPANY"
VERITAS SOFTWARE CORPORATION,
A DELAWARE CORPORATION
/s/ Mark Leslie
----------------------------------------
Signature of Authorized Signatory
Mark Leslie, President & Chief Executive Officer
----------------------------------------
Print Name and Title
"STOCKHOLDER"
WARBURG, PINCUS INVESTORS, L.P.
/s/ Stewart Gross
----------------------------------------
Signature of Authorized Signatory
/s/ Stewart Gross, Partner, Walburg, Pincus, &
Co., General Partner
----------------------------------------
Print Name and Title
12
<PAGE> 1
EXHIBIT 4.02
VERITAS SOFTWARE CORPORATION
NOMINATION AGREEMENT
THIS NOMINATION AGREEMENT is entered into as of April 25, 1997, by
and between VERITAS Software Corporation, a Delaware corporation (the
"Company"), and Warburg, Pincus Investors, L.P. ("WARBURG").
RECITALS
WHEREAS, Warburg acquired shares of Common Stock of the Company pursuant
to an Agreement and Plan of Reorganization by and among the Company, VERITAS
Software Corporation, a California corporation ("VERITAS"), and OpenVision
Technologies, Inc. ("OPENVISION"), dated January 13, 1997 (the "MERGER
AGREEMENT") in connection with the merger of the Company's two subsidiaries with
and into VERITAS and OpenVision, respectively. Pursuant to Section 5.17 of the
Merger Agreement, the Company agreed to provide Warburg certain director
nomination rights as provided herein.
WHEREAS, as an inducement for OpenVision to enter into the Merger
Agreement, the Company desires to grant the director nomination rights to
Warburg as contained herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the Company and Warburg agree as follows:
SECTION 1
DIRECTOR NOMINATION RIGHTS
1.1 TWO DESIGNEES. For so long as Warburg continues to own more than 15%
of the outstanding Common Stock of the Company, the Company shall nominate, in
connection with each stockholder solicitation relating to the election of
directors, two candidates designated by Warburg, at least one of whom shall be a
person who is (i) not a general partner, limited partner or employee of Warburg
and (ii) reasonably acceptable to the Company.
1.2 ONE DESIGNEE. For so long as Warburg continues to own equal to or less
than 15% and more than 5% of the outstanding Common Stock of the Company, the
Company shall nominate, in connection with each stockholder solicitation
relating to the election of directors, one candidate designated by Warburg.
1.3 AFFILIATES. For purposes of this Agreement, all shares held by an
affiliate (as defined in Rule 405 promulgated under the Securities Act of 1933,
as amended) of Warburg, will be deemed to be owned by Warburg.
1.4 VOTING OF MANAGEMENT SHARES. The Company shall use its best efforts
(i) to cause to be voted the shares for which the Company's management or Board
of Directors holds proxies or is otherwise entitled to vote in favor of the
election of such designee(s) nominated
<PAGE> 2
pursuant to this Agreement (the "WARBURG DESIGNEE(S)"); and (ii) to cause the
Board of Directors of the Company to unanimously recommend to its stockholders
to vote in favor of the Warburg Designee(s).
1.5 VACANCIES. In the event that any Warburg Designee shall cease to serve
as a director of the Company for any reason, the vacancy resulting therefrom
shall be filled by another Warburg Designee.
1.6 EQUAL TREATMENT. The Company shall provide the same compensation
and rights and benefits of indemnity to the Warburg Designee(s) as are
provided to other non-employee directors.
SECTION 2.
MISCELLANEOUS
2.1 TERMINATION. This Agreement shall terminate and have no further force
or effect at such time as Warburg ceases to hold more than 5% of the outstanding
Common Stock of the Company.
2.2 WAIVERS AND AMENDMENTS. The rights and obligations of the Company and
the rights of Warburg under this Agreement may be waived (either generally or in
a particular instance, either retroactively or prospectively, and either for a
specified period of time or indefinitely) or amended, only with the written
consent of the parties.
2.3 GOVERNING LAW. This Agreement shall be governed by and construed under
the laws of the State of California as such laws are applied to contracts made
and to be fully performed entirely within that state between residents of that
state. All disputes arising out of this Agreement shall be subject to the
exclusive jurisdiction and venue of the California State courts of Santa Clara
County, California, (or, if there is exclusive federal jurisdiction, the United
States District Court for the Northern District of California) and the parties
consent to the personal and exclusive jurisdiction and venue of these courts.
2.4 SPECIFIC ENFORCEMENT. It is agreed and understood that monetary
damages would not adequately compensate Warburg for the breach of this Agreement
by the Company, that this Agreement shall be specifically enforceable, and that
any breach or threatened breach of this Agreement shall be the proper subject of
a temporary or permanent injunction or restraining order. Further, the Company
waives any claim or defense that there is an adequate remedy at law for such
breach or threatened breach.
2.5 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
2.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
constitute one instrument.
-2-
<PAGE> 3
The foregoing Nomination Agreement is hereby executed as of the date first
above written.
"COMPANY"
VERITAS SOFTWARE CORPORATION,
A DELAWARE CORPORATION
/s/ Mark Leslie
--------------------------------------
Signature of Authorized Signatory
Mark Leslie, President & Chief Executive Officer
--------------------------------------
Print Name and Title
"WARBURG"
WARBURG, PINCUS INVESTORS, L.P.
/s/ Stewart Gross
--------------------------------------
Signature of Authorized Signatory
Stewart Gross, Partner, Warburg, Pincus & Co., General
Partner
--------------------------------------
Print Name and Title
-3-
<PAGE> 1
EXHIBIT 11.1
VERITAS SOFTWARE CORPORATION
STATEMENT REGARDING COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss)................................... $(1,682) $ 1,561 $ 3,735 $ 4,410
Weighted average common shares outstanding.......... 20,219 19,314 20,160 18,155
Common equivalent shares from stock options
(treasury stock method)........................... -- 1,293 1,486 2,001
------- ------- ------- -------
Total shares for primary and fully diluted net
income (loss) per share........................... 20,219 20,607 21,646 20,156
Net income (loss) per share......................... $ (0.08) $ 0.08 $ 0.17 $ 0.22
Calculation of shares outstanding for computing pro
forma net income (loss) per share:
Shares used in computing net income (loss) per
share.......................................... 20,219 20,607 21,646 20,156
Adjustment to reflect the effect of the assumed
conversion of common stock equivalents............ 1,470 -- -- --
------- ------- ------- -------
Shares used in computing pro forma net income
(loss) per share............................... 21,689 20,607 21,646 20,156
Pro forma net income (loss) per share............... $ (0.08) $ 0.08 $ 0.17 $ 0.22
======= ======= ======= =======
</TABLE>
All share and per share amounts for prior periods have been adjusted to reflect
a 3 for 2 stock split effective September 30, 1996.
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE PERIOD ENDED
JUNE 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 23,065
<SECURITIES> 45,383
<RECEIVABLES> 28,079
<ALLOWANCES> 1,141
<INVENTORY> 0
<CURRENT-ASSETS> 97,390
<PP&E> 19,450
<DEPRECIATION> 11,123
<TOTAL-ASSETS> 106,944
<CURRENT-LIABILITIES> 25,181
<BONDS> 0
0
0
<COMMON> 181,556
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 106,944
<SALES> 43,687
<TOTAL-REVENUES> 54,544
<CGS> 1,677
<TOTAL-COSTS> 50,743
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,471
<INCOME-TAX> 1,736
<INCOME-CONTINUING> 3,735
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,735
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
