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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-26247
VERITAS SOFTWARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0507675
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1600 PLYMOUTH STREET
MOUNTAIN VIEW, CALIFORNIA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 527-8000
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of February 28, 2001, 395,793,187 shares of the Registrant's common
stock were outstanding. The aggregate market value of the common stock held by
non-affiliates of the Registrant as of February 28, 2001 was approximately $25.5
billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement, to be delivered to
stockholders in connection with the Registrant's Annual Meeting of Stockholders,
are incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders
Matters..................................................... 15
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 16
Item 6. Selected Financial Data..................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations....................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 38
Item 8. Financial Statements and Supplementary Data................. 41
Item 9. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure........................................ 43
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 43
Item 11. Executive Compensation...................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 43
Item 13. Certain Relationships and Related Transactions.............. 43
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 44
Signatures............................................................ 49
Financial Statements.................................................. 50
Financial Statement Schedule.......................................... 75
VERITAS, VERITAS Software, the VERITAS logo and other product names are
trademarks or registered trademarks of VERITAS Software Corporation in the
United States and other countries. Other product names mentioned herein may be
trademarks and/or registered trademarks of their respective companies.
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PART I
ITEM 1. BUSINESS
This annual report on Form 10-K contains forward-looking statements, within
the meaning of the Securities Exchange Act of 1934 and of the Securities Act of
1933, that involve risks and uncertainties. These forward-looking statements
include statements regarding our expectations, beliefs, intentions or strategies
regarding the future. All these forward-looking statements are based on
information available to us at this time, and we assume no obligation to update
any of these statements. Actual results could differ from those projected in
these forward-looking statements as a result of many factors, including those
identified in the section titled "Factors That May Affect Future Results" under
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations. We urge you to review and consider the various disclosures made
by us in this report, and those detailed from time to time in our reports and
filings with the SEC, that attempt to advise you of the risks and factors that
may affect our future results.
OVERVIEW
VERITAS is a leading independent supplier of data availability software
products. Data availability software includes storage management and data
protection software as well as clustering, replication and storage area
networking software. Data availability software has grown significantly in
importance during the last few years, and has become a critical component in the
success of a business enterprise. A key competitive factor for businesses today
is whether their critical data and related applications are available without
interruption 24 hours a day, seven days a week. Our products are designed to
enable continuous productivity for computing environments ranging from the
desktop computer to the large enterprise data center, including storage area
networks. VERITAS products assist businesses by helping to make sure that their
data is protected, can be accessed at all times, and can be managed and used in
compliance with business policies.
Demand for data availability products and services is fueled by many
factors. These factors include the rapid increase in the number of internet
users and the number of businesses doing business online, as well as the
continuing automation of traditional business processes. The widespread use of
business computer applications, coupled with the growth of corporate data, has
exceeded the ability of current computing architectures to handle availability,
scalability and manageability issues. A new storage-centric architecture, called
storage area networking, or SAN, has emerged to handle these issues. A SAN is a
high-speed computing network that directly connects storage hardware devices,
such as storage arrays, clustered servers, disk drives and tape drives, to
client and server computers. The typical SAN infrastructure is capable of
handling more data and transactions faster than a traditional network, can grow
along with a business' needs, and is more cost-effective than traditional
network architectures. We are a leading innovator in developing SAN technology
and taking our SAN-capable products to businesses that can benefit from them.
Our products help to improve the levels of centralization, control,
automation and manageability in computing environments, which allows information
technology, or IT, managers to be significantly more effective with constrained
resources and limited budgets. More specifically, our products offer protection
against data loss and file corruption, allow rapid recovery after disk or
computer system failure, enable IT managers to work efficiently with large
numbers of files, and make it possible to manage data distributed on large
networks of computer systems without harming productivity or interrupting users.
In addition, our products provide continuous availability of data in clustered
computer systems that share disk resources to maintain smooth business
operations. Our products are highly scalable in order to allow our customers to
keep up with the growth of data and technologies deployed in their businesses.
In summary, our products help our customers manage their data storage in complex
and diverse computing environments efficiently and cost-effectively.
We develop products for most popular operating systems, including versions
of UNIX, Windows NT and Linux. Our software solutions are used by customers
across a broad spectrum of industries, including many leading global
corporations and e-commerce businesses. We also provide a full range of services
to assist our customers in planning and implementing their data availability
solutions.
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We market our products and services to end users either directly or through
original equipment manufacturers and indirect sales channels such as resellers,
value-added resellers, hardware distributors, application software vendors and
systems integrators. Some of our customers include:
ORIGINAL EQUIPMENT
MANUFACTURERS INDIRECT SALES CHANNELS DIRECT SALES
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Compaq Ingram Micro Amazon.com
Dell Tech Data American Airlines
EMC Corporation AT&T
Fujitsu-Siemens Bank of America
Hewlett-Packard British Telecom
Hitachi eBay
IBM Corporation E*Trade
Microsoft Ford Motor Company
NEC GTE
SGI Lucent
StorageTek Morgan Stanley & Co.
Sun Microsystems Oracle
Yahoo!
PRODUCTS
We offer a wide range of leading data availability software products to
manage the rapid growth of available data and the growing complexity and size of
networked environments that our customers face. Our products allow businesses to
improve the management of their data, to protect their data and to increase the
availability of their data.
File and volume management
We offer products designed to improve the manageability and performance of
business critical data. Our principal management and performance products
include:
PRODUCT DESCRIPTION
------- -----------
VERITAS Volume Manager.................... VERITAS Volume Manager allows for online disk storage
management for business computing environments. It
provides tools to protect against data loss due to
hardware failure, to accelerate system performance by
allowing files to be spread across multiple disks and to
allow IT managers to reconfigure data locations without
interrupting users.
VERITAS File System....................... VERITAS File System is designed to enable fast system
recovery, generally within seconds, from operating
system failure or disruption. It gives mission-critical
servers mainframe-level capabilities by providing
superior performance, data integrity, high availability
and online manageability.
VERITAS Foundation Suite.................. VERITAS Foundation Suite combines VERITAS Volume Manager
and VERITAS File System. These two products together are
intended to improve performance, availability and
manageability.
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Data protection
We offer products designed to back up and restore data. Our leading data
protection products include:
PRODUCT DESCRIPTION
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VERITAS NetBackup......................... VERITAS NetBackup is designed to protect data of medium
to large businesses. It provides centralized backup
scheduling, user-directed backups and restores, and
automated distribution and installation of client
software over a network. It supports all major
platforms, including UNIX, Windows NT, Novell NetWare
and Linux, and includes support for storage area
networks.
VERITAS NetBackup......................... VERITAS NetBackup BusinesServer is a backup and recovery
BusinesServer solution designed for small to mid-size UNIX and
high-end Windows NT installations, and for the many IT
operations that run a combination of the two.
VERITAS Backup Exec....................... VERITAS Backup Exec is designed to provide backup and
restore functions for smaller business, including
scheduled automated data backup operations. It supports
Windows NT, Windows 2000 and Windows 95/98, and has an
array of options designed to protect data contained in
applications such as Microsoft Outlook and Novell
NetWare.
VERITAS Global Data Manager............... VERITAS Global Data Manager centrally manages VERITAS
NetBackup, VERITAS NetBackup BusinesServer and VERITAS
Backup Exec servers at different geographic locations
that are part of a business' intranet or wide area
network. Its intended benefits include increased
flexibility and control, global scalability,
uninterrupted global operations and reduced management
costs.
VERITAS Storage Migrator.................. VERITAS Storage Migrator is designed to increase the
availability of critical business data by ensuring that
only frequently used information is kept online. It
migrates infrequently-used data from online devices to
lower cost secondary storage, and recalls migrated data
to primary online storage when it is accessed by users
or applications.
VERITAS Remote Storage for................ VERITAS Remote Storage for Microsoft Exchange is an
Microsoft Exchange e-mail space management application that moves older
e-mail message attachments from Microsoft Exchange onto
a secondary storage device, such as a tape drive, but
still allows users access to their attachments.
Clustering and replication
We offer products that improve availability of key applications in complex
computing environments. These products include:
PRODUCT DESCRIPTION
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VERITAS Cluster Server.................... VERITAS Cluster Server, or VCS, is an availability
management solution designed to maximize data and
application availability through proactive management of
planned and unplanned downtime. It is also useful in
storage area networks.
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PRODUCT DESCRIPTION
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VERITAS ClusterX for...................... VERITAS ClusterX for Microsoft Cluster Service, or MSCS,
Microsoft Cluster Service addresses the management and deployment of multiple
distributed Windows NT clustered computers. It is
designed to provide failover support for applications
such as databases, messaging systems, and file and print
services.
VERITAS ClusterX for WLBS................. VERITAS ClusterX for WLBS focuses on managing Windows NT
Load Balancing Service servers and is designed to
improve their availability, reliability, scalability and
performance It is designed to enhance both the
availability and scalability of internet server-based
programs such as web servers and streaming media
servers.
VERITAS Global Cluster Manager............ VERITAS Global Cluster Manager is a cluster management
product designed to monitor multiple geographically
distributed VCS clustered computers and to manage
failover of an entire cluster from one site to another.
VERITAS File Replicator................... VERITAS File Replicator is a general purpose data
replication tool designed for use in enterprise
environments. It ensures that data written to one server
is reliably replicated to other participating servers,
so that all updates are available for use in active file
systems across all servers.
VERITAS Storage Replicator................ VERITAS Storage Replicator delivers data replication for
Windows NT environments. It can duplicate files or file
systems at multiple locations for complete data
protection or information distribution. It offers
centralized management, high replication performance,
minimal system requirements, both real-time and
schedule-based replication, and selectable bandwidth
usage.
VERITAS Volume Replicator................. VERITAS Volume Replicator helps businesses ensure that
current data is available at multiple global locations.
It is a robust, flexible, multi-purpose data replication
tool designed for enterprise environments.
Desktop and mobile
VERITAS has product solutions designed for personal data availability for a
wide range of devices in the home, small office and mobile business
environments. These products include:
PRODUCT DESCRIPTION
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VERITAS Simple Backup..................... VERITAS Simple Backup provides basic data protection for
novice computer users and supports a wide range of
compact disc devices.
VERITAS BackupExec Desktop................ VERITAS BackupExec Desktop is designed for the home
office or small business computer user who has knowledge
of data protection and requires a variety of advanced,
versatile features for protection of a single computer.
VERITAS BackupExec Desktop Pro............ VERITAS BackupExec Desktop Pro is designed for the small
business and corporate computer user who has advanced
knowledge of data protection and needs a wide range of
features for protection of one or more computers. It
also includes a disaster recovery function designed to
restore an entire system in the event of disaster.
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PRODUCT DESCRIPTION
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VERITAS NetBackup Pro..................... VERITAS NetBackup Pro is a backup and disaster recovery
tool for portable and desktop computers in remote
offices and telecommuting work locations.
VERITAS MyCD.............................. VERITAS MyCD provides basic music and data storage on
compact disc.
VERITAS MyCD Pro.......................... VERITAS MyCD Pro provides high performance compact disc
recording for music enthusiasts and professionals.
Application solutions
Businesses need integrated solutions to optimize their data availability
strategies. Our principal products offering these integrated solutions include:
PRODUCT DESCRIPTION
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VERITAS Database Edition for.............. VERITAS Database Edition for Oracle is an integrated
Oracle suite of several VERITAS products designed to deliver
improved performance, enhanced manageability and
continuous database access to support the complex and
demanding work of database administrators operating
Oracle servers.
VERITAS Database Replication.............. VERITAS Database Replication Option for Oracle maintains
Option for Oracle a replicated database designed to enable easier ongoing
administrative tasks, such as backups, reporting and
data extraction, on large Oracle databases.
VERITAS Database Edition for.............. VERITAS Edition for Sybase is an integrated suite of
Sybase several VERITAS solutions combined with specialized
software agents designed to increase system performance
and manageability in Sybase database environments.
VERITAS Edition for NFS................... VERITAS Edition for Network File System, or NFS, is
designed to deliver superior performance and higher
availability for SPARC/Solaris servers in computing
environments that run both UNIX and Windows. It also
meets the demand for improved manageability of these
complex networks, and helps to ensure efficient workflow
for users.
VERITAS Edition for Web................... VERITAS Edition for Web is designed to optimize the
availability, performance and manageability of web
servers, particularly for internet service providers, or
ISPs, and corporate web server administrators.
VERITAS File Server Edition............... VERITAS File Server Edition is an integrated suite of
VERITAS storage management products designed to improve
the performance, availability, and manageability of
heterogeneous file system environments.
SAN Products
VERITAS is a leader in developing storage area networking products designed
to reduce the cost and complexity of managing expanding networked storage
environments. These products include:
PRODUCT DESCRIPTION
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VERITAS SANPoint Control.................. VERITAS SANPoint Control is a centralized management
tool to help administer SAN-connected devices.
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PRODUCT DESCRIPTION
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VERITAS SANPoint Direct................... VERITAS SANPoint Direct file access is designed to bring
increased performance and scalability to SAN
environments by allowing computing nodes to access data
directly at faster SAN speeds.
VERITAS SANPoint Foundation............... VERITAS SANPoint Foundation Suite HA is designed to
Suite HA extend VERITAS File System and VERITAS Volume Manager to
support shared data in a SAN environment. With the
software, multiple servers can access shared storage and
files, transparently to the applications and
concurrently with each other.
VERITAS SANPoint Storage.................. VERITAS SANPoint Storage Appliance is designed to enable
Appliance a standard computer server to become a high performance
and high availability storage server.
SERVICES
Our customer service and support organization provides customers with
maintenance, technical support, consulting and training services. We believe
that providing a high level of customer service and technical support is
critical to customer satisfaction and our success. Most of our customers have
support agreements with us that provide for fixed fee, renewable annual
maintenance consisting of technical and emergency support, and minor when-and-if
available product upgrades free of charge. Our service group provides the
following services:
Maintenance and technical support
We offer seven day-a-week, 24-hour telephone support, as well as electronic
mail and fax customer support. Our customers can choose from a variety of
support packages to address their specific needs, ranging from one-time incident
charges to comprehensive support services with a dedicated single point of
contact at VERITAS for some of our applications. Additional customer support is
provided by some of our value-added resellers, system integrators and original
equipment manufacturers.
Consulting
We believe that most customers need assistance before product selection and
not just for the implementation of purchased products. Therefore, we offer
strategy and analysis consulting services for planning the management and
control of enterprise computing in specific customer environments, including SAN
environments. In addition, we offer services to assist customers with product
implementation. As part of our broad range of services, we believe we offer
particular expertise in analyzing network security threats and security policy
integrity.
Training
We have a worldwide customer education and training organization. We offer
training that enables customers to utilize our products, reduces the need for
technical support and provides customers with a means to optimize their
personnel investment by allowing their technical staff access to high quality,
comprehensive instruction. The focus of this organization is aligned with our
strategy to offer end-to-end data availability solutions by providing
instruction from highly-experienced training professionals either at the
customer's location or at one of our multi-platform classrooms.
MARKETING, SALES AND DISTRIBUTION
We market our products and related services through original equipment
manufacturers and a combination of other distribution channels such as direct
sales, resellers, value-added resellers, hardware distributors, application
software vendors and systems integrators. Original equipment manufacturers
incorporate our
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products into their operating systems on a bundled basis or license them to
third parties as an optional product. In most cases, we receive a user license
fee for each copy of our software sublicensed by the original equipment
manufacturer to third parties. We provide our software products to customers
under non-exclusive license agreements, including shrink-wrap licenses for some
products. As is customary in the software industry, in order to protect our
intellectual property rights, we do not sell or transfer title to our software
products to customers. We enter into both object-code only and source-code
licenses of our products.
Our principal original manufacturer relationships are with Hewlett-Packard,
IBM, Microsoft and Sun Microsystems.
- Hewlett-Packard. In November 1997, we entered into an agreement with
Hewlett-Packard under which Hewlett-Packard offers some functional
components of VERITAS NetBackup, VERITAS Volume Manager and VERITAS File
System with the HP-UX operating system. We receive no royalties with
respect to the version of the VERITAS File System embedded in the HP-UX
operating system. Hewlett-Packard has become our reseller with respect to
some of our products, including full feature versions of our products,
and we have offered full feature products and value-added products to the
HP-UX installed customer base. Hewlett-Packard is not obligated to sell
our products under this agreement. In the fourth quarter of 1999, we
dedicated personnel to define and build versions of our products that
meet the needs specific to the Hewlett-Packard marketplace, and to
further focus our sales and marketing efforts on the Hewlett-Packard
sales channel. We cannot assure you that this strategy will be
successful.
- IBM. In April 2000, we entered into an agreement with IBM under which we
will port and optimize our complete set of data availability solutions,
including VERITAS Volume Manager and VERITAS File System, to AIX/Monterey
for IBM POWER and Intel IA-64 processor-based systems. This relationship
is designed to augment solutions already available from VERITAS for the
IBM platform. We have not recognized any significant revenue under this
agreement to date, and IBM is not obligated to sell any of our products
under this agreement.
- Microsoft. In August 1996, we entered into an agreement with Microsoft
under which we agreed to develop a version of VERITAS Volume Manager,
which Microsoft has called Logical Disk Manager, to be ported to and
embedded in version 5.0 of Microsoft's Windows NT operating system, which
now has been released as Windows 2000. We do not receive royalties with
respect to sales of the embedded product by Microsoft. Our products may
not become available for use in, and Microsoft is not required to use our
products in, future versions of Windows NT. We cannot assure you that we
will realize any benefits from the inclusion of this embedded product in
Windows 2000 or future versions of Windows NT. In addition, we authored
several other customized versions of our products that are packaged with
Windows 2000.
- Sun Microsystems. In January 1997, we entered into an agreement with Sun
Microsystems under which we bundle a version of VERITAS Volume Manager
with some of Sun Microsystems' storage technologies. The agreement also
provided for the license of full versions of some of our products and
add-on modules to Sun Microsystems for bundling with some Sun
Microsystems products. In August 1998, we amended the agreement and
granted Sun Microsystems a license to distribute and sub-license VERITAS
NetBackup, VERITAS Storage Migrator and some of the VERITAS Editions.
This license is non-exclusive except with respect to certain named
resellers for which Sun Microsystems retained exclusive distribution
rights. Sun Microsystems is not obligated to sell any of our products
under this agreement. In November 1999, we announced that Sun
Professional Services would be providing our packaged professional
services as well as our custom consulting. This is designed to enable Sun
Microsystems' customers and our customers to maximize their system
availability through optimal configurations and reliable installations.
We cannot assure you that this arrangement will be successful.
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Sales, marketing and support organization
During 2000, we continued to build our sales, marketing and customer
support organization with a focus on delivering our products to resellers,
integrators and end users and integrating the sales force of the Network &
Storage Management Group business, or NSMG. We have sales subsidiaries and
direct sales personnel in North America, South America, Europe and Asia-Pacific.
We also have resellers located in North America, South America, Europe,
Asia-Pacific and the Middle East.
We expect to increase the number of our sales, marketing and customer
support employees in the future to expand our direct sales efforts to resellers
and end users. We may not have the necessary resources to accomplish this. It is
also possible that we will not be able to establish and expand these new
distribution channels successfully or complete the integration of our sales and
marketing efforts successfully. We expect to hire additional sales employees in
all regions during 2001. Competition for qualified sales, technical and other
personnel is intense, and we may not be able to attract, assimilate or retain
additional highly qualified employees in the future. We also may not be able to
manage our growth effectively.
Concentration of customers
In 2000 and 1999, no customer accounted for more than 10% of our net
revenue. Revenue from Sun Microsystems accounted for 12% of our net revenue in
1998.
COMPETITION
The markets in which we compete are intensely competitive and rapidly
changing. Our principal competitors are:
- internal development groups within our original equipment manufacturer
customers that provide data availability functions to support their
systems;
- hardware and software vendors that offer data protection and file and
volume management products;
- hardware and software vendors that offer clustering and replication
products; and
- hardware and software vendors that offer storage area networking
management solutions.
These internal development groups have the resources and capability to
develop their own data availability solutions. Some original equipment
manufacturer customers are also our competitors, including Compaq Computer, EMC,
Hewlett-Packard, IBM, Microsoft and Sun Microsystems. Relationships between us
and these competitors are complex. While we may compete with them for a share of
the market, they also resell our products. We also may be involved with them in
collaborative efforts to address interoperability issues and to set standards
for evolving technology.
The principal markets in which we compete are the markets for data
protection, file and volume management, clustering, replication and storage area
networking management solutions. Our principal competitors in each of these
areas, including the original equipment manufacturer customers listed above,
include:
- Data protection and file and volume management. Computer Associates, EMC,
Hewlett-Packard, IBM, Legato, Microsoft and Sun Microsystems.
- Clustering and replication. Compaq Computer, EMC, Hewlett-Packard,
Hitachi Data Systems, IBM, Legato, Microsoft and Sun Microsystems.
- Storage area networking management. Compaq Computer, Computer Associates,
EMC, IBM and network switch vendors.
The principal competitive factors in our industry include price, product
functionality, product integration, platform coverage, ability to scale,
worldwide sales infrastructure and global technical support. Although many of
our competitors have greater financial, technical, sales, marketing and other
resources than we do, as well as greater name recognition and a larger installed
customer base, we believe we compete favorably on the basis of each of these
competitive factors relative to our competitors.
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Our future anticipated growth and success will depend on our ability to
develop superior products more rapidly and less expensively than our
competitors, and to educate potential customers as to the benefits of licensing
our products rather than developing their own products. Our future and existing
competitors could introduce products with superior features, scalability and
functionality at lower prices than our products, and could also bundle existing
or new products with other more established products in order to compete with
us. Our competitors could also gain market share by acquiring or forming
strategic alliances with our other competitors. Finally, because new
distribution methods offered by the Internet and electronic commerce have
removed many of the barriers to entry historically faced by start-up companies
in the software industry, we expect to face additional competition from these
companies in the future. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
adversely affect our business and operating results.
RESEARCH AND DEVELOPMENT
Our research and development efforts have been directed toward developing
new products for UNIX and Windows NT, developing new features and functionality
for existing products, integrating products in the existing product line and
porting new and existing products to different operating systems.
Our major research and development initiatives include:
- Additional integration of the full family of data availability products,
including further integration of VERITAS Volume Manager, VERITAS File
System and VERITAS NetBackup;
- Development of additional Linux versions of our products;
- Development of additional clustering products; and
- Development of additional storage area network products.
Each of these initiatives involves technical and competitive challenges,
which we may not be able to overcome successfully.
Development work under original equipment manufacturer agreements
We devote a substantial amount of development effort to making sure that
our products work on our original equipment manufacturer customer's platforms.
This is technically challenging, and we may not succeed in our effort.
We have contractual development obligations with some of our original
equipment manufacturer customers. Our agreement with Microsoft requires us to
develop a disk management graphical user interface designed specifically for
Windows NT. Microsoft is providing funding for a significant portion of the
development expenses for this product payable in quarterly increments. In order
to perform under the agreement, we have hired additional personnel with
expertise in the Windows NT operating system environment and are devoting
capital investment and resources to complete this project successfully. In
addition, our agreements with Sun Microsystems and Hewlett-Packard require us to
commit staffing to our projects with them. We may not have the resources
necessary to perform our obligations under these agreements.
Size and location of research and development group
As of December 31, 2000, our research and development staff consisted of
1,330 employees located mainly at our Mountain View, California headquarters and
in Pune, India.
Research and development expenditures
We had research and development expenses of $175.9 million in 2000, $94.5
million in 1999 and $40.2 million in 1998. These amounts exclude $104.2 million
in 1999 and $0.6 million in 1998 for in-process research and development charges
in connection with acquisitions. We believe that technical leadership is
essential to our success and expect to continue to commit substantial resources
to research and development.
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Our future success will depend in large part on our ability to enhance existing
products, respond to changing customer requirements and develop and introduce
new products in a timely manner that keep pace with technological developments
and emerging industry standards. We continue to make substantial investments in
undisclosed new products, which may or may not be successful. We may not
complete these research and development efforts successfully and therefore,
future products may not be available on a timely basis or achieve market
acceptance.
Need to hire research and development personnel
We need to hire additional research and development personnel to complete
new products on a timely basis, including the adaptation of our products to
Windows NT and performance of obligations to key original equipment manufacturer
partners. The market for these personnel is very competitive and we cannot
assure you that we can hire them on a timely basis or at all. We may consider
acquiring and purchasing technology to achieve some of our objectives, but we
may not be able to accomplish this successfully.
Effect of technological advances
From time to time, we or our competitors may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycles of our existing products. Announcements of currently planned or
other new products could cause customers to defer purchasing our existing
products. We have from time to time in the past experienced delays of up to
several months due to the complex nature of software developed by us and other
software developers for whose systems or applications we offer products. We
could experience delays in connection with our current or future product
development activities. Any of these delays could harm our business.
PROPRIETARY RIGHTS
Measures we take to protect our intellectual property
We regard some of the features of our internal operations, software and
documentation as proprietary and rely on copyright, patent, trademark and trade
secret laws, confidentiality procedures, contractual and other measures to
protect our proprietary information.
As part of our confidentiality procedures, we generally enter into
non-disclosure agreements with our employees, distributors and corporate
partners, and license agreements with respect to our software, documentation and
other proprietary information. These licenses are generally non-transferable and
have a perpetual term.
Trademarks
VERITAS is a registered trademark in the United States. VERITAS Software
and the VERITAS logo are trademarks or registered trademarks in the United
States and other countries. Our other trademarks include:
- - VERITAS BackupExec - VERITAS MyCD Pro
- - VERITAS BackupExec Desktop - VERITAS NetBackup
- - VERITAS BackupExec Desktop Pro - VERITAS NetBackup BusinesServer
- - VERITAS Cluster Server - VERITAS NetBackup Pro
- - VERITAS ClusterX - VERITAS Remote Storage
- - VERITAS Database Edition - VERITAS SANPoint Control
- - VERITAS Database Replication Option - VERITAS SANPoint Direct
- - VERITAS Edition - VERITAS SANPoint Foundation Suite HA
- - VERITAS File Replicator - VERITAS SANPoint Storage Appliance
- - VERITAS File Server Edition - VERITAS Simple Backup
- - VERITAS File System - VERITAS Storage Migrator
- - VERITAS Foundation Suite - VERITAS Storage Replicator
- - VERITAS Global Cluster Manager - VERITAS Volume Manager
- - VERITAS Global Data Manager - VERITAS Volume Replicator
- - VERITAS MyCD
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Patents and patent applications
We have 22 United States issued patents and 8 pending patent applications,
including patents and rights to patent applications acquired from the NSMG
business, TeleBackup Systems, Inc. and NuView, Inc. Any patents obtained may not
provide substantial protection or be of commercial benefit to us. It is also
possible that their validity will be challenged.
EMPLOYEES
As of December 31, 2000, we had 4,784 full-time employees, including 1,330
in research and development, 2,840 in sales, marketing, consulting, customer
support and strategic initiatives and 614 in finance and administrative
services. We expect to hire a significant number of new employees in 2001,
particularly in research and development and in sales, marketing, consulting and
customer support. We have not entered into any collective bargaining agreement
with our employees, and believe that our relations with our employees are good.
We believe that our future success will depend in part upon the continued
service of our key employees and on our continued ability to hire and retain
qualified personnel. We may not be able to retain our key employees and may not
be successful in attracting and retaining sufficient numbers of qualified
personnel to conduct our business in the future.
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EXECUTIVE OFFICERS
The names of our executive officers, their ages as of December 31, 2000,
their positions and other information about them are shown below. The dates
given for time of service with VERITAS include time, where applicable, served by
each individual with one of our principal predecessor companies.
NAME AGE POSITIONS
---- --- ---------
Gary L. Bloom........................ 40 President and Chief Executive Officer
Mark Leslie.......................... 55 Chairman of the Board
Geoffrey W. Squire................... 53 Executive Vice President and Vice-Chairman of the
Board
Fred van den Bosch................... 53 Executive Vice President, Engineering
Peter J. Levine...................... 40 Executive Vice President, Strategic Operations
Paul A. Sallaberry................... 44 Executive Vice President, Worldwide Field Operations
Kenneth E. Lonchar................... 42 Senior Vice President, Finance and Chief Financial
Officer
Michael Wentz........................ 48 Senior Vice President, Tech Support
Jay A. Jones......................... 46 Senior Vice President, Chief Administrative Officer
and Secretary
Mr. Bloom has served as our President and Chief Executive Officer since
November 2000. Mr. Bloom joined us after a 14-year career with Oracle
Corporation, where he served as Executive Vice President responsible for server
development, platform technologies, marketing, education, customer support and
corporate development from May 1999 to November 2000, as Executive Vice
President of the systems product division from March 1998 to May 1999, as Senior
Vice President of the system products division from November 1997 to March 1998,
as Senior Vice President of the worldwide alliances and technologies division
from May 1997 to October 1997, as Senior Vice President of the product and
platform technologies division from May 1996 to May 1997, and as Vice President
of the mainframe and integration technology division and Vice President of the
massively parallel computing division from 1992 to May 1996. Before joining
Oracle Corporation in 1986, Mr. Bloom held technical positions in the mainframe
area at both IBM Corporation and Chevron Corporation. Mr. Bloom serves on the
board of directors of Virata Corporation, a supplier of communications software
and semiconductors.
Mr. Leslie has served as our Chairman of the Board since 1990 and served as
our Chief Executive Officer from 1990 to November 2000. Mr. Leslie serves on the
boards of directors of Brocade Communications Systems, Inc., a supplier of
storage area network software, and Keynote Systems, Inc., a supplier of Internet
performance measurement and diagnostic services.
Mr. Squire has served as our Executive Vice President and Vice Chairman of
the Board since April 1997, when we merged with OpenVision Technologies, Inc.
Mr. Squire became a director of OpenVision in 1994 and was appointed Chief
Executive Officer of OpenVision in 1995, after serving as its President and
Chief Operating Officer from 1994 to 1995. Mr. Squire was President of the U.K.
Computing Services and Software Association in 1994 and, in 1995, was elected as
the founding President of the European Information Services Association. Mr.
Squire also serves on the board of directors of Industri-Mathematik
International Corp., a provider of supply chain and customer service software.
Mr. van den Bosch has served as our Executive Vice President, Engineering
since July 1997. Mr. van den Bosch served as our Senior Vice President,
Engineering from 1991 to July 1997 and was appointed as a director in 1996. From
1970 until 1990, he served in various positions with Philips Information
Systems, including Director of Technology.
Mr. Levine has served as our Executive Vice President, Strategic Operations
since December 1999, after serving as our Senior Vice President, Strategic
Operations from January 1999 to December 1999 and Senior Vice President, OEM
Sales from December 1997 to December 1998. Mr. Levine served as a senior
executive of VERITAS from 1995 to December 1997.
Mr. Sallaberry has served as our Executive Vice President, Worldwide Field
Operations since December 1999 after serving as our Senior Vice President,
Worldwide Sales from July 1999 to December 1999, and Vice
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President, Worldwide Sales from April 1997 to July 1999. Mr. Sallaberry was
OpenVision's Senior Vice President of North American Operations from 1995 until
the merger with VERITAS in April 1997.
Mr. Lonchar has served as our Chief Financial Officer since April 1997 and
as our Senior Vice President, Finance since January 1999. Mr. Lonchar served as
our Vice President, Finance from April 1997 until January 1999. Mr. Lonchar was
Chief Financial Officer and Senior Vice President of OpenVision from 1995 until
the merger with VERITAS in April 1997. Mr. Lonchar is a certified public
accountant. Mr. Lonchar also serves on the board of directors of Geoworks
Corporation, a provider of mobile e-commerce and information services and
software.
Mr. Wentz has served as our Senior Vice President, Tech Support since March
2000 and as our Vice President, Technical Services from May 1999 to March 2000.
Mr. Wentz was Vice President, Technical Support of the Network & Storage
Management Group of Seagate Software, Inc. from 1996 to until its acquisition by
VERITAS in May 1999, and was Vice President of Technical Support Services of
Arcada Software, Inc. from 1994 until its acquisition by Seagate Software in
1996.
Mr. Jones has served as our Senior Vice President, Chief Administrative
Officer and Secretary since January 1999. Mr. Jones served as our Vice
President, General Counsel and Secretary from April 1997 to January 1999. Mr.
Jones joined OpenVision as General Counsel in 1993 and was appointed Vice
President, General Counsel and Secretary in 1994 and served in those capacities
until the merger with VERITAS in April 1997. Mr. Jones is a member of the
California Bar Association.
ITEM 2. PROPERTIES
Our executive offices are located in Mountain View, California. Our
principal facilities are located in Mountain View, California and Heathrow,
Florida. All of our facilities are suitable for general office purposes. Large
portions of our facilities are occupied under leases that expire at various
times through 2012. The table below shows the approximate square footage of the
premises that we lease as of December 31, 2000, excluding approximately 34
executive suites in the Americas, 12 in Europe and two in Asia.
APPROXIMATE
SQUARE
LOCATION FOOTAGE
-------- -----------
Americas
California................................................ 482,511
Colorado.................................................. 27,256
Connecticut............................................... 3,585
Florida................................................... 228,694
Georgia................................................... 16,270
Illinois.................................................. 24,710
Maryland.................................................. 4,685
Massachusetts............................................. 37,769
Michigan.................................................. 16,613
Minnesota................................................. 73,274
New Jersey................................................ 17,473
New York.................................................. 16,801
North Carolina............................................ 16,570
Oregon.................................................... 10,425
Pennsylvania.............................................. 6,410
Texas..................................................... 28,557
Virginia.................................................. 20,539
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APPROXIMATE
SQUARE
LOCATION FOOTAGE
-------- -----------
Washington................................................ 35,364
Canada.................................................... 16,337
Argentina................................................. 3,013
Brazil.................................................... 2,152
---------
Total Americas.................................... 1,089,008
---------
Europe
France.................................................... 29,795
Germany................................................... 44,339
Holland................................................... 10,764
Ireland................................................... 10,342
Norway.................................................... 3,003
Scotland.................................................. 700
Spain..................................................... 5,490
Sweden.................................................... 8,310
United Kingdom............................................ 70,682
---------
Total Europe...................................... 183,425
---------
Asia
Australia................................................. 42,375
China..................................................... 11,694
Hong Kong................................................. 2,580
India..................................................... 33,229
Japan..................................................... 3,462
Korea..................................................... 1,800
Malaysia.................................................. 10,281
Singapore................................................. 6,139
---------
Total Asia........................................ 111,560
---------
Total............................................. 1,383,993
=========
Illinois facilities exclude approximately 17,135 square feet and Washington
facilities exclude 2,925 square feet of space that we sublease to third parties.
Facilities in Australia exclude approximately 1,949 square feet of space we
sublease to third parties. Facilities in the United Kingdom exclude
approximately 20,508 square feet of space that we sublease to third parties.
In 1999, we amended and revised our operating lease arrangement for a new
425,000 square foot campus facility in Mountain View, California. We expect to
occupy this facility beginning in the second quarter of 2001. In 1999, we also
entered into an operating lease arrangement for our existing facilities in
Roseville, Minnesota. We expect to improve and expand our existing facilities of
approximately 62,000 square feet and to develop adjacent property adding
approximately 260,000 square feet to the campus. We expect the first phase of
approximately 142,000 square feet to be completed in the second quarter of 2001.
In 2000, we entered into an operating lease arrangement for a new 999,990 square
foot facility in Milpitas, California. We expect to occupy this facility in
phases commencing in the second quarter of 2002 through the second quarter of
2003. Additionally, there is approximately 150,000 square feet of space
currently under construction in Reading, UK. We believe our existing and planned
facilities will be suitable for our needs.
ITEM 3. LEGAL PROCEEDINGS
The following discussion contains forward-looking statements, within the
meaning of the Securities Exchange Act of 1934 and the Securities Act of 1933,
that involve risks and uncertainties. These statements relate to VERITAS' legal
proceedings described below. Litigation is inherently uncertain and may result
in
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adverse rulings or decisions. Additionally, we may enter into settlements or be
subject to judgments that may, individually or in the aggregate, have a material
adverse effect on our operating results. Accordingly, actual results could
differ materially from those projected in the forward-looking statements. The
following discussion relates to the multi-party transaction involving primarily
us, VERITAS Software Technology Corporation, formerly known as Seagate
Technology, Inc. ("Seagate") and Suez Acquisition Company (Cayman) Limited
("SAC"), a company formed by a group of private equity firms led by Silver Lake
Partners, that is described more fully under Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations.
In that transaction, Seagate sold all of its property and assets and the
property and assets of its consolidated subsidiaries, other than certain
designated assets, to Suez Acquisition Company (Cayman) Limited, which we refer
to as the leveraged buyout, and merged a wholly owned subsidiary of VERITAS with
and into Seagate, following which Seagate became VERITAS' wholly owned
subsidiary, which we refer to as the merger.
Following the announcement of the transaction on March 29, 2000, Seagate
stockholders filed 17 lawsuits in Delaware and five lawsuits in California
against Seagate, the individual members of Seagate's board of directors, certain
executive officers of Seagate, Silver Lake Partners, LP, and VERITAS. Between
April 18, 2000 and October 13, 2000, the Delaware Chancery Court consolidated
the 17 lawsuits into a single action captioned In Re Seagate Technology, Inc.
Shareholders Litigation and certified the class action, and the plaintiffs filed
two amended complaints and a motion for a preliminary injunction to enjoin the
closing of the proposed transaction. The plaintiffs' second amended complaint
alleged that Seagate's board of directors breached their fiduciary duties to
their stockholders by entering into the leveraged buyout and merger agreements
and that they did not secure the highest possible price for Seagate's shares,
and alleged that VERITAS aided and abetted that alleged breach. The plaintiffs
sought unspecified damages and an injunction of the closing of the transaction.
On September 28, 2000, the five California complaints were coordinated, with
venue in Santa Clara County. All five of the California complaints have been
voluntarily dismissed.
On October 13, 2000, the parties to the Delaware lawsuit entered into a
Memorandum of Understanding to settle the action. On January 28, 2001, the
parties filed a Stipulation of Settlement in the Court of Chancery of the State
of Delaware in and for New Castle County outlining the terms of the settlement
pursuant to the Memorandum of Understanding. A hearing is scheduled on April 9,
2001 to determine whether the proposed settlement is fair and reasonable and
should be approved by the Court, and whether plaintiffs' counsels' award for
fees and expenses should be paid pursuant to the terms set out in the
Stipulation. The settlement is conditioned on, among other things, the
consummation of the leveraged buyout and the merger and final court approval of
the settlement.
Although VERITAS expects final court approval of the Delaware settlement to
occur during the first half of 2001, it is possible that final approval of the
settlement will be denied or delayed. While the outcome of these matters is
currently not determinable, we believe that the ultimate resolution of these
matters will not have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of stockholders held by VERITAS on November 21, 2000,
our stockholders approved the issuance by VERITAS of new shares of our common
stock to stockholders of Seagate Technology, Inc. in connection with a merger
between Seagate Technology, Inc. and a subsidiary of ours. The issuance was
approved by the following vote:
FOR AGAINST ABSTAIN
- ----------- --------- ---------
324,236,711 1,159,377 1,558,381
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
Our common stock is listed on the Nasdaq National Market under the symbol
"VRTS." The table below shows the range of high and low reported sale prices on
the Nasdaq National Market for our common stock, including our predecessor
corporation, for the periods indicated.
HIGH LOW
------- ------
1999
First Quarter........................................... $ 19.89 $12.89
Second Quarter.......................................... 22.17 13.56
Third Quarter........................................... 36.22 20.64
Fourth Quarter.......................................... 98.58 32.39
2000
First Quarter........................................... $174.00 $72.42
Second Quarter.......................................... 140.50 75.31
Third Quarter........................................... 149.81 87.50
Fourth Quarter.......................................... 166.88 79.25
As of February 28, 2001, there were approximately 3,800 holders of record
of our common stock. Brokers and other institutions hold many of such shares on
behalf of stockholders. We estimate the total number of stockholders represented
by these record holders to be approximately 266,000.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently anticipate that we will retain future earnings, if any, to fund
development and growth of our business and do not anticipate paying any cash
dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data are derived from our
consolidated financial statements. This data should be read in conjunction with
the consolidated financial statements and notes thereto, and Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
----------- ---------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Total net revenue...................... $ 1,207,328 $ 596,112 $210,865 $121,125 $ 72,746
Amortization of developed technology... 62,054 35,659 -- -- --
Amortization of goodwill and other
intangibles.......................... 879,032 510,943 -- -- --
Acquisition and restructuring costs
(reversals).......................... (4,260) 11,000 -- 8,490 --
In-process research and development.... -- 104,200 600 -- 2,200
Income (loss) from operations.......... (553,880) (475,237) 53,668 20,076 11,858
Net income (loss)...................... (619,792) (502,958) 51,648 22,749 12,129
Net income (loss) per share -- basic... $ (1.55) $ (1.59) $ 0.24 $ 0.11 $ 0.06
Net income (loss) per
share -- diluted..................... $ (1.55) $ (1.59) $ 0.22 $ 0.10 $ 0.06
Number of shares used in computing per
share amounts -- basic............... 400,034 316,892 211,558 205,300 193,617
Number of shares used in computing per
share amounts -- diluted............. 400,034 316,892 232,519 222,716 209,228
DECEMBER 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
----------- ---------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................ $ 924,677 $ 630,440 $198,069 $187,667 $ 66,408
Total assets........................... 4,082,834 4,233,277 349,117 241,880 94,524
Long-term obligations.................. 429,176 451,044 100,000 100,000 463
Accumulated deficit.................... (1,152,166) (532,374) (29,416) (81,064) (103,813)
Stockholders' equity................... 2,982,571 3,393,061 169,854 104,193 74,955
In 1999, we acquired the NSMG business, TeleBackup and NuView. Because we
accounted for these acquisitions using the purchase method of accounting, we
recorded developed technology, goodwill and other intangible assets of
approximately $3,754.9 million in total. These assets are being amortized over
their estimated useful life of four years, and result in charges to operations
of approximately $234.8 million per quarter. We recorded one-time non-cash
charges of $104.2 million in our statements of operations in 1999, related to
the write-off of in-process research and development. We also recorded a
one-time restructuring charge in 1999 of $11.0 million related primarily to
costs for our duplicative facilities that we planned to vacate, of which $4.3
million was reversed in 2000 as a result of lower actual exit costs than
originally estimated with respect to our duplicative facilities.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This annual report on Form 10-K contains forward-looking statements that
involve numerous risks and uncertainties. These forward-looking statements
include statements regarding our expectations, beliefs, intentions or strategies
regarding the future. All these forward-looking statements are based on
information available to us at this time, and we assume no obligation to update
any of these statements. The actual results that we achieve may differ
materially from those anticipated by any forward-looking statement due to risks
and uncertainties including those described below under "Factors That May Affect
Future Results."
OVERVIEW
VERITAS is a leading independent supplier of data availability software
products. Data availability software includes storage management and data
protection software as well as clustering, replication and storage area
networking software.
We develop products for most popular operating systems, including versions
of UNIX, Windows NT and Linux. We market our products and services to original
equipment manufacturers and end user customers through a combination of direct
sales and indirect sales channels such as resellers, value-added resellers,
hardware distributors, application software vendors and systems integrators.
We derive user license fee revenue from shipments of our software products
to end-user customers through direct sales channels, indirect sales channels and
original equipment manufacturer customers. Our original equipment manufacturer
customers either bundle our products with the products licensed by the original
equipment manufacturers or offer them as options. Some original equipment
manufacturers also resell our products. We receive a royalty each time the
original equipment manufacturer licenses to a customer a copy of the original
equipment manufacturer's products that incorporates one or more of our products.
Our license agreements with our original equipment manufacturer customers
generally contain no minimum sales requirements. We cannot assure you that any
original equipment manufacturer will either commence or continue shipping
operating systems incorporating our products in the future. When we enter into
new agreements with original equipment manufacturer customers and resellers, a
significant period of time may elapse before we realize any associated revenue,
due to development work that we must generally undertake under these agreements
and the time needed for the sales and marketing organizations within these
customers and distributors to become familiar with and gain confidence in our
products.
Our services revenue consists of fees derived mainly from annual
maintenance agreements, as well as fees from consulting and training services.
Original equipment manufacturer maintenance agreements covering our products
provide for technical and emergency support and minor unspecified product
upgrades for a fixed annual fee. Maintenance agreements covering products that
are licensed through channels other than original equipment manufacturers
provide for technical support and unspecified product upgrades for an annual fee
based on the number of user licenses purchased and the level of service
subscribed.
INTERNATIONAL SALES AND OPERATIONS
Our international sales are generated primarily through our international
sales subsidiaries. International revenue, most of which is collectible in
foreign currencies, accounted for approximately 24% of our total revenue in
2000, 24% of our total revenue in 1999 and 26% of our total revenue in 1998. Our
international revenue increased 103% to $294.4 million in 2000 from $144.9
million in 1999, and 167% in 1999 from $54.2 million in 1998.
We believe that our success depends upon continued expansion of our
international operations. We currently have sales and service offices and
resellers located in North America, Europe, Asia-Pacific, South America and the
Middle East, and a development center in India. International expansion will
require us to establish additional foreign offices, hire more personnel and
recruit new international resellers, resulting in the diversion of significant
management attention and the expenditure of financial resources. To the extent
that we are unable to meet these additional requirements, growth in
international sales will be limited, which would have an adverse effect on our
business, operating results and financial condition. International operations
also
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subject us to a number of risks inherent in developing and selling products
outside the United States, including potential loss of developed technology,
limited protection of intellectual property rights, imposition of government
regulation, imposition of export duties and restrictions, cultural differences
in the conduct of business, and political and economic instability.
SEAGATE TECHNOLOGY TRANSACTION
On November 22, 2000, we completed a multi-party transaction with Seagate
Technology, Inc. ("Seagate") and Suez Acquisition Company (Cayman) Limited
("SAC"), a company formed by a group of private equity firms led by Silver Lake
Partners. The transaction was structured as a leveraged buyout of Seagate
pursuant to which Seagate sold all of its operating assets to SAC, and SAC
assumed and indemnified Seagate and us for substantially all liabilities arising
in connection with those operating assets. At the closing, and after the
operating assets and liabilities of Seagate had been transferred to SAC, a
wholly-owned subsidiary of ours merged with and into Seagate, following which
Seagate became our wholly-owned subsidiary and was renamed VERITAS Software
Technology Corporation. We issued approximately 109.4 million shares of our
common stock to the Seagate stockholders in exchange for approximately 128.1
million shares of our common stock and equity securities in Gadzoox Networks,
Inc. held by Seagate. We recorded the equity securities in Gadzoox and other
assets and liabilities assumed from Seagate at their fair values. In addition,
we accrued $40 million of direct transaction costs, of which $9 million was paid
as of December 31, 2000. We did not acquire Seagate's disc drive business or any
other Seagate operating business.
The transaction had no impact on our consolidated statement of operations.
The impact of the decrease of approximately 18.7 million of shares our common
stock outstanding was a reduction of approximately 2.0 million shares used in
computing net loss per share for the year ended December 31, 2000, resulting in
an incremental net loss per share of $0.01.
The transaction had impacts on our consolidated balance sheet. As of
December 31, 2000, our other assets included $70 million of indemnification
receivable from SAC and $4 million for our ownership in Gadzoox Networks, Inc,
our accrued acquisition and restructuring costs included $31 million of direct
transaction costs, which was net of $9 million paid in 2000, and our deferred
and other income taxes included an additional $132 million, which is net of a
deferred tax asset of $3 million related to our ownership in Gadzoox Networks,
Inc.
BUSINESS COMBINATIONS
On May 28, 1999, we acquired the Network & Storage Management Group
business of Seagate Software, Inc., which we refer to as NSMG. On June 1, 1999
we acquired TeleBackup Systems, Inc., which we refer to as TeleBackup. On August
10, 1999, we acquired certain assets of NuView, Inc., which we refer to as
NuView.
NSMG acquisition
The NSMG business developed and marketed software products and provided
related services enabling information technology professionals to manage
distributed network resources and to secure and protect enterprise data. In
connection with the NSMG acquisition, we issued 155,583,486 shares of our common
stock to Seagate Software and issued options to purchase 15,626,358 shares of
our common stock to our employees who were former NSMG employees. We accounted
for the NSMG acquisition using the purchase method of accounting, and we are
incurring charges of $221.5 million per quarter primarily related to the
amortization of developed technology, goodwill and other intangibles over their
estimated useful life of four years. The total NSMG purchase price was $3,464.5
million and included $3,151.4 million for the issuance of our common stock,
$269.7 million for the exchange of options to purchase our common stock and
$43.4 million of acquisition-related costs. The purchase price was allocated,
based on an independent valuation, to goodwill of $3,015.8 million, distribution
channels of $233.8 million, original equipment manufacturer agreements of $23.4
million, developed technology of $233.7 million, assembled workforce of $12.8
million, trademarks of
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$22.8 million, in-process research and development of $101.2 million, net
deferred tax liabilities of $179.5 million, other intangibles of $1.5 million
and tangible net liabilities assumed of $1.0 million. For 2000, we recorded
$827.6 million for the amortization of goodwill and other intangibles, and $58.4
million for the amortization of developed technology related to this acquisition
and for 1999, we recorded $482.5 million for the amortization of goodwill and
other intangibles, and $34.1 for the amortization of developed technology
related to this acquisition.
Acquisition-related costs consisted of direct transaction costs of $20.0
million, operating lease commitments on duplicative facilities of $8.2 million
and involuntary termination benefits of $15.2 million. Non-cash charges included
in the acquisition-related costs approximated $11.7 million.
Acquisition-related costs are summarized below (in millions):
OPERATING LEASE
DIRECT COMMITMENTS INVOLUNTARY
TRANSACTION ON DUPLICATIVE TERMINATION
COSTS FACILITIES BENEFITS TOTAL
----------- --------------- ----------- ------
Provision accrued at acquisition
date................................ $ 20.0 $ 8.2 $ 15.2 $ 43.4
Cash payments......................... (17.4) (0.3) (1.8) (19.5)
Non-cash charges...................... -- -- (11.7) (11.7)
------ ----- ------ ------
Balance at December 31, 1999.......... 2.6 7.9 1.7 12.2
Cash payments......................... (1.9) (1.9) (0.9) (4.7)
------ ----- ------ ------
Balance at December 31, 2000.......... $ 0.7 $ 6.0 $ 0.8 $ 7.5
====== ===== ====== ======
The remaining acquisition-related costs accrual of $7.5 million is
anticipated to be utilized primarily for servicing operating lease payments or
negotiated buyout of operating lease commitments, the lease terms of which will
expire at various times through the year 2013.
In addition, we recorded a restructuring charge of $11.0 million in 1999 as
a result of the NSMG acquisition. This restructuring charge related to exit
costs with respect to duplicative facilities that we planned to vacate, which
include $0.9 million of write-off of redundant equipment and leasehold
improvements, and involuntary termination benefits. Involuntary termination
benefits relate to the salary and fringe benefit expense for terminated
employees in research and development. The involuntarily terminated employees
represented 2% of the global workforce. In the fourth quarter of 2000, as a
result of lower actual exit costs than originally estimated with respect to
duplicative facilities, we reversed $4.3 million of the restructuring charge.
Restructuring costs are summarized below (in millions):
WRITE OFF OF
REDUNDANT
CANCELLATION INVOLUNTARY EQUIPMENT
OF FACILITIES LEASES TERMINATION AND LEASEHOLD
AND OTHER CONTRACTS BENEFITS IMPROVEMENTS TOTAL
-------------------- ----------- ------------- ------
Provision accrued at acquisition
date............................ $ 8.8 $ 1.3 $ 0.9 $ 11.0
Cash payments..................... -- (0.9) -- (0.9)
Non-cash charges.................. -- -- (0.9) (0.9)
----- ----- ----- ------
Balance at December 31, 1999...... 8.8 0.4 -- 9.2
Cash payments..................... (0.2) -- -- (0.2)
Reversal.......................... (3.9) (0.4) -- (4.3)
----- ----- ----- ------
Balance at December 31, 2000...... $ 4.7 $ -- $ -- $ 4.7
===== ===== ===== ======
The remaining restructuring charge accrual of $4.7 million is anticipated
to be utilized for servicing operating lease payments or negotiated buyout of
operating lease commitments, the lease terms of which will expire at various
times through the year 2012.
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TeleBackup acquisition
TeleBackup designed, developed and marketed software products for local and
remote backup and recovery of electronic information stored on networked, remote
and mobile personal computers. TeleBackup became our wholly-owned subsidiary in
exchange for the issuance of 6,842,795 shares of either our common stock or
exchangeable shares exchangeable into our common stock to the holders of
TeleBackup common shares, and the exchange of options to purchase 154,706 shares
of our common stock to our employees who were former employees of TeleBackup. We
accounted for the TeleBackup acquisition using the purchase method of
accounting, and we are incurring charges of $9.0 million per quarter, primarily
related to the amortization of developed technology, goodwill and other
intangibles over their estimated useful life of four years. The total purchase
price for TeleBackup was $143.1 million and included $134.1 million related to
the issuance of our common stock, $2.8 million for the issuance of options to
purchase our common stock and $6.2 million in acquisition-related costs. The
purchase price was allocated, based on an independent valuation, to goodwill of
$133.1 million, distribution channels of $1.0 million, original equipment
manufacturer agreements of $2.1 million, developed technology of $6.6 million,
assembled workforce of $0.3 million, trademarks of $1.3 million, in-process
research and development of $1.9 million, net deferred tax liabilities of $3.0
million and tangible net liabilities assumed of $0.2 million. For 2000, we
recorded $34.5 million for amortization of goodwill and other intangibles, and
$1.7 million for the amortization of developed technology related to this
acquisition and for 1999, we recorded $20.1 million for amortization of goodwill
and other intangibles, and $1.0 for the amortization of developed technology
related to this acquisition.
The acquisition costs of $6.2 million consist primarily of direct
transaction costs and involuntary termination benefits.
Acquisition-related costs are summarized below (in millions):
DIRECT INVOLUNTARY
TRANSACTION TERMINATION
COSTS BENEFITS TOTAL
----------- ----------- -----
Provision accrued at acquisition date................. $ 5.6 0.6 $ 6.2
Cash payments......................................... (5.1) (0.2) (5.3)
----- ----- -----
Balance at December 31, 1999.......................... 0.5 0.4 0.9
Cash payments......................................... (0.2) (0.4) (0.6)
----- ----- -----
Balance at December 31, 2000.......................... $ 0.3 $ -- $ 0.3
===== ===== =====
The remaining $0.3 million is anticipated to be utilized in 2001.
NuView acquisition
Under an asset purchase agreement, we acquired certain assets of NuView for
a total cost of approximately $67.9 million. We accounted for the acquisition
using the purchase method of accounting, and we are incurring charges of $4.3
million per quarter primarily related to the amortization of developed
technology, goodwill and other intangibles over their estimated useful life of
four years. The purchase price included $47.7 million related to the issuance of
our common stock, $0.8 million for the issuance of options to purchase our
common stock to former NuView employees, $0.2 million in acquisition-related
costs and $19.2 million paid in cash. The purchase price was allocated, based on
an independent valuation, to goodwill of $62.6 million, developed technology of
$2.4 million, assembled workforce of $0.6 million, trademarks of $0.3 million,
covenant-not-to-compete of $0.9 million and in-process research and development
of $1.1 million. For 2000, we recorded $16.5 million for amortization of
goodwill and other intangibles, and $0.6 million for the amortization of
developed technology related to this acquisition and for 1999, we recorded $8.1
million for amortization of goodwill and other intangibles, and $0.3 million for
the amortization of developed technology related to this acquisition.
For the years ended December 31, 1999 and 2000, we incurred net losses due
to the amortization of developed technology, goodwill and other intangibles
related to the acquisitions of the NSMG business,
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TeleBackup and NuView. Because of these acquisitions, we will incur total
charges of $234.8 million per quarter until the second quarter of 2003 related
to the amortization of developed technology, goodwill and other intangibles.
Because of these significant quarterly charges it is likely that we will remain
unprofitable at least through the second quarter of 2003.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items
in our statements of operations expressed as a percentage of total revenue.
YEARS ENDED
DECEMBER 31,
--------------------
2000 1999 1998
---- ---- ----
Net revenue:
User license fees......................................... 82% 84% 80%
Services.................................................. 18 16 20
--- --- ---
Total net revenue................................. 100 100 100
Cost of revenue:
User license fees......................................... 4 4 4
Services.................................................. 7 6 10
Amortization of developed technology...................... 5 6 --
--- --- ---
Total cost of revenue............................. 16 16 14
--- --- ---
Gross profit................................................ 84 84 86
Operating expenses:
Selling and marketing..................................... 37 37 36
Research and development.................................. 15 16 19
General and administrative................................ 6 6 5
Amortization of goodwill and other intangibles............ 73 86 --
Acquisition and restructuring costs....................... (1) 2 --
In-process research and development....................... -- 17 --
--- --- ---
Total operating expenses.......................... 130 164 60
--- --- ---
Income from operations...................................... (46) (80) 26
Interest and other income, net.............................. 5 4 6
Interest expense............................................ (2) (2) (3)
--- --- ---
Income before income taxes.................................. (43) (78) 29
Provision for income taxes.................................. 8 6 4
--- --- ---
Net income.................................................. (51)% (84)% 25%
=== === ===
Net Revenue
Net revenue increased 103% to $1,207.3 million in 2000 from $596.1 million
in 1999, when it increased 183% from $210.9 million in 1998. While we believe
that the percentage increases in net revenue achieved in these periods are not
necessarily indicative of future results, we expect net revenue to continue to
grow in 2001. Our revenue comprises user license fees and service revenue.
User License Fees. User license fees increased 98% to $987.4 million in
2000 from $498.0 million in 1999, when it increased 197% from $167.7 million in
1998. The increases in 2000 and 1999 were primarily the result of the continued
growth in market acceptance of our software products, introduction of new
products, a greater volume of large end-user transactions, and increased revenue
from original equipment manufacturers. In particular, our license fees from our
data protection, file and volume management and application solutions products
increased 91% to $848.4 million in 2000 from $443.6 million in 1999, when it
increased 194% from $150.7 million in 1998. The user license fees from our data
protection, file and volume management and application solutions products
accounted for 86% of user license fees in 2000, 89% in 1999 and 90% in 1998.
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Our user license fees from our newer clustering and replication products
increased 155% to $139.0 million in 2000 from $54.4 million in 1999, when it
increased 220% from $17.0 in million in 1998. In 2000 and 1999, we also recorded
a greater volume of large end-user transactions. For end-user transactions
valued at $250,000 or more, our user license fees increased 284% to $216.3
million in 2000 from $56.4 million in 1999, when it increased 165% from $21.3
million in 1998. Our user license fees from original equipment manufacturers
increased 76% to $169.1 million in 2000 from $95.9 million in 1999, when it
increased 11% from $86.3 million in 1998. The user license fees from original
equipment manufacturers accounted for 17% of user license fees in 2000, 19% in
1999 and 51% in 1998. The increases in user license fees in 2000 and 1999 were
also the result of the acquisition of NSMG in May 1999.
Service Revenue. We derive our service revenue primarily from contracts for
software maintenance and technical support and, to a lesser extent, consulting
and training services. Service revenue increased 124% to $220.0 million in 2000,
from $98.1 million in 1999, when it increased 127% from $43.2 million in 1998.
These increases were 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 demand for consulting and
training services. The increase in 2000 was also attributable to the acquisition
of NSMG. Service revenue represented 18% of total revenue in 2000 and is
expected to continue to grow as a percentage of total revenue.
Cost of Revenue
Cost of revenue increased 100% to $188.8 million in 2000 from $94.6 million
in 1999, when it increased 221% from $29.5 million in 1998. Gross margin on user
license fees is substantially higher than gross margin on service revenue,
reflecting the low materials, packaging and other costs of software products
compared with the relatively high personnel costs associated with providing
maintenance, technical support, consulting, training services and development
efforts. Cost of service revenue varies depending upon the mix of maintenance,
technical support, consulting and training services. We expect gross margin to
fluctuate in the future, reflecting this mix and the timing differences between
increasing our organizational investments and the recognition of revenue that we
expect as a result of these investments.
Cost of User License Fees (including amortization of developed
technology). Cost of user license fees consists primarily of royalties, media,
manuals and distribution costs. Also included in the cost of revenue is the
amortization of developed technology acquired in the NSMG, TeleBackup and NuView
acquisitions in 1999. Cost of user license fees increased 82% to $102.8 million
in 2000 from $56.4 million in 1999, and increased 541% in 1999 from $8.8 million
in 1998. The increases in 2000 and 1999 were primarily the result of the
amortization of developed technology. Gross margin on user license fees was 90%
in 2000, 89% in 1999 and 95% in 1998. The increase in gross margin on user
license fees in 2000 was due to a combination of an increase in user license
fees and the stability of the amortization of developed technology. If we
excluded the amortization of developed technology from the cost of user license
fees, the gross margin on user license fees would have been 96% in both 2000 and
1999. The gross margin on user license fees may vary from period to period based
on the license revenue mix, because some products carry higher royalty rates
than others. We do not expect gross margin on user license fees to increase
significantly in the future.
Cost of Service Revenue. Cost of service revenue consists primarily of
personnel-related costs in providing maintenance, technical support, consulting
and training to customers. Cost of service revenue increased 125% to $86.0
million in 2000 from $38.2 million in 1999, and increased 85% in 1999 from $20.7
million in 1998. Gross margin on service revenue was 61% in 2000, 61% in 1999,
and 52% in 1998. The gross margin improvement in 1999 was the result of
increased productivity and higher service revenue growth due to support fees
from a larger installed customer base and we maintained the same percentage of
gross margin in 2000. We expect the costs of service revenue to continue to
increase in absolute dollars in future periods and we expect the gross margin on
service revenue to increase slightly as a percentage.
Amortization of Developed Technology. Amortization of developed technology
was $62.1 million in 2000 and $35.7 million in 1999. These amounts mainly
represent the amortization of the developed technology recorded upon the
acquisition of NSMG, TeleBackup and NuView in 1999. The useful life of the
developed
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technology acquired is four years and we expect the amortization to be
approximately $15.6 million per quarter.
Operating Expenses
The NSMG and TeleBackup acquisitions that occurred during 1999 have
contributed to increases in all operating expense categories. Although the
increases relating to the acquisitions are most notable from 1998 to 1999, the
impact of acquisitions is still evident in 2000 since this was the first full
year that both NSMG and TeleBackup were reflected in our results. However, due
to the integration that has taken place to date, it is not possible to quantify
the portion of the increase that is related directly to these acquisitions.
Selling and Marketing. Selling and marketing expenses consist primarily of
salaries, related benefits, commissions, consultant fees and other costs
associated with our sales and marketing efforts. Selling and marketing expenses
increased 100% to $443.8 million in 2000 from $222.0 million in 1999, and
increased 191% in 1999 from $76.4 million in 1998. As a percentage of net
revenue, selling and marketing expenses remained consistent at 37% in 2000 and
1999, only up slightly from 36% in 1998. The increase in absolute dollars is
primarily attributable to increased sales and marketing staffing and, to a
lesser extent, increased costs associated with new marketing programs. We intend
to continue to expand our global sales and marketing infrastructure, and
accordingly, we expect our selling and marketing expenses to increase in
absolute dollars but not to change significantly as a percentage of total
revenue in the future.
Research and Development. Research and development expenses consist
primarily of salaries, related benefits, third-party consultant fees and other
engineering related costs. Research and development expenses increased 86% to
$175.9 million in 2000 from $94.5 million in 1999, and increased 135% in 1998
from $40.2 million in 1998. The increases were due primarily to increased
staffing levels associated with new hires and our acquisitions and expansion of
development efforts for new technology. As a percentage of net revenue, research
and development expenses were 15% in 2000, 16% in 1999 and 19% in 1998. We
believe that a significant level of research and development investment is
required to remain competitive, and expect these expenses will continue to
increase in absolute dollars in future periods and may increase slightly as a
percentage of net revenue. We expect research and development expenses to
fluctuate from time to time to the extent that we make periodic incremental
investments in research and development.
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
128% to $77.9 million in 2000 from $34.2 million in 1999, and increased 225% in
1999 from $10.5 million in 1998. As a percentage of net revenue, general and
administrative expenses were 6% in 2000, 6% in 1999 and 5% in 1998. The
increases in absolute dollars in 2000 and 1999 were due to additional personnel
costs, including additional personnel related to the acquisitions in the second
quarter of 1999, and, to a lesser extent, to an increase in other expenses
associated with enhancing our infrastructure to support expansion of our
operations. We expect general and administrative expenses to increase in
absolute dollars, but not to change significantly as a percentage of net
revenue, as we expand our operations.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and other intangibles increased 73% to $879.0 million in 2000 from $510.9
million in 1999. This amount represents amortization of goodwill, distribution
channels, trademarks and other intangibles assets recorded upon the acquisitions
of NSMG, TeleBackup and NuView in 1999. The estimated useful life of the
goodwill and the other intangibles is four years and we expect the amortization
to be approximately $219.7 million per quarter through 2003.
In-Process Research and Development. Upon the acquisition of NSMG,
TeleBackup and NuView in 1999, we recorded one-time charges to in-process
research and development totaling $104.2 million. We obtained outside valuations
for these acquisitions, and values were assigned to developed technology,
in-process research and development and other intangibles. The fair value of the
in-process research and development for each of the acquisitions was determined
using the income approach, which discounts expected future cash flows from
projects under development to their net present value. Each project was analyzed
to determine the characteristics and applications of the technology; the
complexity, cost and time to complete the remaining development efforts; any
alternative future use or current technological feasibility; and
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the stage of completion. The projected future cash flows from the projects under
development were based on management's estimates of revenues and operating
profits related to the projects. Revenues on the projects related to in-process
research and development were estimated to begin in 1999 through 2003, with the
majority of the revenues occurring between 2000 and 2002. The risk-adjusted
discount rate applied to after-tax cash flows was 20%, compared to an estimated
weighted-average cost of capital of 15%. We believe the amounts determined for
in-process research and development are representative of fair value and do not
exceed the amounts an independent third party would pay for the projects
assumed.
The total charge for in-process research and development was estimated to
be $101.2 million for the NSMG acquisition. Seven in-process research and
development projects were identified and valued, with two projects under the
data protection product group that accounted for approximately 71% of the value
assigned to in-process research and development. The data protection software
products provide backup and restore functions, including scheduled automated
unattended data backup operations. The remaining products identified and valued
were under the application solutions and replication product groups. The
application solutions software provides scaleable solution for managing the
behavior of different types of networks worldwide from one central location and
the replication software products deliver flexible and intelligent data
replication for Windows NT environments. Costs to complete all of the NSMG
in-process research and development projects were estimated to be $6.0 million.
At the date of acquisition, the development of all products ranged from 48% to
90% complete and averaged approximately 76% complete, with expected completion
dates through December 1999. At December 31, 2000, all in-process research and
development projects related to the NSMG acquisition were completed or
abandoned.
All in-process research and development projects related to the TeleBackup
and NuView acquisitions were individually insignificant and were completed or
abandoned as of December 31, 1999.
Acquisition and restructuring costs. In connection with the NSMG
acquisition, we recorded a one-time charge to acquisition and restructuring
costs of $11.0 million, which included approximately $9.7 million in exit costs
with respect to duplicative facilities that we planned to vacate and
approximately $1.3 million in severance benefits. In the fourth quarter of 2000,
mainly as a result of lower actual exit costs than originally estimated with
respect to duplicative facilities, we reversed $4.3 million of the restructuring
charge.
Interest and Other Income, Net. Interest and other income, net increased
156% to $59.6 million in 2000 from $23.3 million in 1999, and 97% from $11.8
million in 1998. The increases were due primarily to increased amounts of
interest income attributable to the higher level of funds available for
investment, primarily from the issuance of the convertible subordinated notes in
October 1997 and August 1999 and from the net cash provided by operating
activities. Foreign exchange transaction gains and losses that are included in
other income, net, have not had a significant effect on our results of
operations.
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Interest Expense. Interest expense increased to $31.6 million in 2000 from
$15.7 million in 1999 and $5.7 million in 1998. Interest expense in 2000, 1999
and 1998 consisted primarily of interest recorded under the 1.856% convertible
subordinated notes due 2006 issued in August 1999 and the 5.25% convertible
subordinated notes due 2004 issued in October 1997.
Income Taxes. We had effective tax rates of negative 18% in 2000, negative
8% in 1999 and positive 14% in 1998. Our 2000 and 1999 effective tax rates were
negative and differed from the combined federal and state statutory rates
primarily due to acquisition related charges that were non-deductible for tax
purposes. Our 1998 effective tax rate was lower than the combined federal and
state statutory rates primarily due to the utilization of federal net operating
loss carryforwards, other credit carryforwards and reduction of the valuation
allowance on deferred income taxes, offset by the impact of state and foreign
taxes.
New Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards, or SFAS, No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133,
as amended by SFAS No. 137 and 138, establishes methods of accounting for
derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. We will be required to
implement SFAS No. 133 as of the beginning of our fiscal year 2001. The
implementation of SFAS No. 133 will not have a material impact on our financial
position, results of operations or cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" or SAB 101. SAB 101 provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. The required implementation date for us was the fourth quarter of
2000, retroactive to the beginning of the fiscal year. The implementation of SAB
101 did not have a material impact on our financial position, results of
operations or cash flows for the year ended December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short-term investments totaled $1,119.4
million at December 31, 2000 and represented 62% of our net tangible assets.
Cash and cash equivalents are highly liquid with original maturities of ninety
days or less. Short-term investments consist mainly of investment grade
commercial paper, medium-term notes, corporate notes, government securities and
market auction preferreds. At December 31, 2000, we had $429.2 million of
long-term obligations and stockholders' equity was approximately $2,982.6
million.
Net cash provided from operating activities was $546.8 million in 2000,
$207.4 million in 1999 and $62.8 million in 1998. The increase in 2000 cash
provided by operating activities resulted primarily from income after
adjustments to exclude non-cash charges, including amortization of intangibles
related to acquisition activities, tax benefits from stock plans and an increase
in deferred revenue partially offset by an increase in account receivable and
other assets, as a result of our overall revenue growth. The increase in 1999
cash provided by operating activities resulted primarily from income after
adjustments to exclude non-cash charges, including amortization of intangibles
related to acquisition activities, and tax benefits from stock plans partially
offset by an increase in accounts receivable, as a result of our overall revenue
growth.
Our investing activities provided cash of $81.0 million in 2000 due to the
net decrease in short-term and long-term investments of $240.2 million,
partially offset by purchases of property and equipment of $134.7 million and
strategic investments of $22.0 million. Our investing activities used cash of
$577.0 million in 1999 primarily due to the net increase in short-term and
long-term investments of $505.2 million, purchases of property and equipment of
$59.7 million and purchase of certain assets of NuView. Our investing activities
used cash of $13.4 million in 1998 primarily due to capital expenditures of
$23.4 million.
Financing activities provided cash of $119.5 million in 2000 from the
issuance of common stock under our employee stock plans. Financing activities
provided cash of $379.6 million in 1999 from the net proceeds of $334.1 million
related to the issuance of the 1.856% convertible subordinated notes in August
1999 and $45.5 million from the issuance of common stock under our employee
stock plans. Financing activities
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provided cash of $14.0 million in 1998, arising from the issuance of common
stock under our employee stock plans.
In October 1997, we issued $100.0 million of 5.25% convertible subordinated
notes due 2004 (the "5.25% notes"), for which we received net proceeds of $97.5
million. We and our wholly-owned subsidiary, VERITAS Operating Corporation, are
co-obligors on the 5.25% notes and are unconditionally, jointly and severally
liable for all payments under the notes. During 2000, a total principal amount
at maturity of $35.5 million was converted into approximately 3.7 million shares
of our common stock. Based on the aggregate principal amount at maturity of
$64.5 million outstanding as of December 31, 2000, the 5.25% notes provide for
semi-annual interest payments of $1.7 million each May 1 and November 1. The
5.25% notes are convertible into shares of our common stock at any time prior to
the close of business on the maturity date, unless previously redeemed or
repurchased, at a conversion price of $9.56 per share, subject to adjustment in
certain events, equivalent to a conversion rate of 104.65 shares of common stock
per $1,000 principal amount at maturity. On or after November 5, 2002, the 5.25%
notes will be redeemable over a period of time until maturity at our option at
declining premiums to par. The debt issuance costs are being amortized over the
term of the 5.25% notes using the interest method.
In August 1999, we and our wholly-owned subsidiary, VERITAS Operating
Corporation, issued $465.8 million, aggregate principal amount at maturity, of
1.856% convertible subordinated notes due 2006 (the "1.856% notes") for which we
received net proceeds of approximately $334.1 million. The interest rate of
1.856%, together with the accrual of original issue discount, represent a yield
to maturity of 6.5%. We and VERITAS Operating Corporation are co-obligors on the
1.856% notes and are unconditionally, jointly and severally liable for all
payments under the notes. During 2000, a total principal amount at maturity of
$1.0 million was converted into approximately 28,000 shares of our common stock.
Based on the aggregate principal amount at maturity of $464.7 million
outstanding as of December 31, 2000, the 1.856% notes provide for semi-annual
interest payments of $4.3 million each February 13 and August 13. The 1.856%
notes are convertible into shares of our common stock at any time prior to the
close of business on the maturity date, unless previously redeemed or
repurchased, at a conversion price of $35.80 per share, subject to adjustment in
certain events, equivalent to a conversion rate of 27.934 shares of common stock
per $1,000 principal amount at maturity. On or after August 16, 2002, the 1.856%
notes will be redeemable over a period of time until maturity at our option at
the issuance price plus accrued original issue discount and any accrued
interest. The debt issuance costs are being amortized over the term of the
1.856% notes using the interest method.
At December 31, 2000, we have a ratio of long-term debt to total
capitalization of approximately 13%. The degree to which we will be leveraged
could materially and adversely affect our ability to obtain financing for
working capital, acquisitions or other purposes and could make us more
vulnerable to industry downturns and competitive pressures. We will require
substantial amounts of cash to fund scheduled payments of principal and interest
on our indebtedness, including the 5.25% notes and the 1.856% notes, future
capital expenditures and any increased working capital requirements. If we are
unable to meet our cash requirements out of cash flow from operations, we cannot
assure you that we will be able to obtain alternative financing.
During the third quarter of 2000, we signed a $50.0 million unsecured
credit facility with a syndicate of financial institutions. At December 31,
2000, no amount was outstanding. The credit facility is due to expire in
September 2001. Borrowings under the credit facility bear interest at 1.0% to
1.5% over LIBOR, and are subject to our compliance with financial and other
covenants. The credit agreement requires us to maintain specified financial
covenants such as earnings before interest, taxes, depreciation and amortization
("EBITDA"), debt on EBITDA and quick ratio, all of which we were in compliance
with as of December 31, 2000.
During the first quarter of 2000, we revised our existing lease agreement
for new corporate campus facilities in Mountain View, California. These
facilities will replace certain facilities we currently lease in Mountain View.
The new corporate campus facilities will be developed in one phase for a total
of 425,000 square feet and will provide space for sales, marketing,
administration and research and development functions. The lease term for these
facilities is five years beginning in March 2000, with an option to extend the
lease term for two successive periods of one year each. We have an option to
purchase the property (land
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and facilities) for $139.4 million or, at the end of the lease, to arrange for
the sale of the property to a third party with us retaining an obligation to the
owner for the difference between the sale price and the guaranteed residual
value up to $123.8 million if the sales price is less than this amount, subject
to certain provisions of the lease. We anticipate occupying the new corporate
campus facilities and beginning the lease payments in the second quarter of
2001.
During the first quarter of 2000, we signed a lease agreement for our
existing facilities in Roseville, Minnesota. We will improve and expand our
existing facilities of approximately 62,000 square feet and will develop
adjacent property adding approximately 260,000 square feet to the campus, with
the first phase of approximately 142,000 square feet being completed in the
second quarter of 2001. The facilities will provide space for research and
development functions. The lease term for these facilities is five years
beginning in March 2000, with an option to extend the lease term for two
successive periods of one year each. We have an option to purchase the property
(land and facilities) for $40 million or, at the end of the lease, to arrange
for the sale of the property to a third party with us retaining an obligation to
the owner for the difference between the sale price and the guaranteed residual
value up to $34.3 million if the sales price is less than this amount, subject
to certain provisions of the lease. We anticipate occupying the new campus
facilities and beginning the lease payments in the second quarter of 2001.
During the third quarter of 2000, we signed a lease agreement for the lease
of 65 acres of land and subsequent improvements for new research and development
campus facilities in Milpitas, California. We will develop the site in two
phases, adding a total of 990,990 square feet, with the first phase of 466,000
square feet being completed in the fourth quarter of 2002. We expect to complete
the second phase of 524,990 square feet in the third quarter of 2003. The
facilities will provide space for research and development functions. The lease
term for the first phase is five years beginning in July 2000, with an option to
extend the lease term for two successive periods of one year each. We have an
option to purchase the property (land and first phase facilities) for $243
million or, at the end of the lease, to arrange for the sale of the property to
a third party with us retaining an obligation to the owner for the difference
between the sales price and the guaranteed residual value up to $220 million if
the sales price is less than this amount, subject to certain provisions of the
lease. We anticipate occupying the new campus facilities and beginning the lease
payments in the second quarter of 2002 for the first phase and second quarter of
2003 for the second phase. We expect to start negotiating the financing terms of
the second phase in the third quarter of 2001.
The three lease agreements listed above require us to maintain specified
financial covenants such as EBITDA, debt on EBITDA and quick ratio, all of which
we were in compliance with as of December 31, 2000.
We believe that our current cash, cash equivalents and short-term
investment balances and cash flow from operations will be sufficient to meet our
working capital and capital expenditure requirements for at least the next 12
months. After that time, we may require additional funds to support our working
capital requirements or for other purposes and may seek to raise such additional
funds through public or private equity financing or from other sources. We
cannot assure you that additional financing will be available at all or that if
available, we will be able to obtain it on terms favorable to us.
FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this annual report on Form 10-K, you
should consider carefully the following factors in evaluating VERITAS and our
business.
Our revenue may fluctuate significantly, which could cause the market price
of our securities to decline
We may experience a shortfall in revenue in any given quarter. Any such
shortfall in revenue could cause the market price of securities to fall
substantially. Our revenue in general, and our license revenue in particular,
are difficult to forecast and are likely to fluctuate significantly from quarter
to quarter due to a number of factors, many of which are outside of our control.
These factors include:
- the timing and magnitude of sales through our original equipment
manufacturer customers, including Hewlett-Packard, IBM, Microsoft, Oracle
and Sun Microsystems;
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- the possibility that a slowdown in sales by our original equipment
manufacturer customers could result in reduced demand for our products;
- the unpredictability of the timing and magnitude of sales to the retail
channel by our resellers and by our direct sales force, which tend to
generate sales later in our quarters than original equipment manufacturer
sales;
- the timing and magnitude of direct sales to end-user customers;
- the timing of revenue recognition for sales of software products and
services;
- the introduction, timing and market acceptance of new products;
- changes in data storage and networking technology or introduction of new
operating system upgrades by our original equipment manufacturer
customers, which could require us to modify our products or to develop
new products;
- the relative growth rates of the Windows NT, UNIX and Linux markets;
- the rate of adoption of storage area networks and the timing and
magnitude of sales of our storage area networking products and services;
- the rate of adoption of network attached storage appliance technology and
the timing and magnitude of sales of our network attached storage
appliance products and services;
- the extent to which our customers renew their maintenance contracts with
us;
- the timing and amount of revenue attributable to our end-user customers
whose businesses are substantially dependent on the Internet or the
telecommunications markets, whose ability to purchase our products may be
adversely affected by their inability to raise additional capital or to
meet their business objectives;
- the possibility that our customers may cancel or defer purchases as a
result of reduced information technology budgets;
- the possibility that our customers may defer purchases in anticipation of
new products or product updates by us our by our competitors;
- the overall demand for data availability products and services, which is
likely to be lower in weak or uncertain general economic and industry
conditions;
- the possibility of an economic slowdown generally; and
- changes in our pricing policies and distribution terms.
You should not rely on the results of any prior periods as an indication of
our future performance. If we have a shortfall in revenue in any given quarter,
we probably will not be able to reduce our operating expenses quickly in
response. Therefore, any significant shortfall in revenue could have an
immediate adverse effect on our operating results for that quarter.
Our revenue may fluctuate because we depend on large orders from end-user
customers for a significant portion of our revenue
We depend for a significant portion of our revenue on large orders, which
include lengthy sales cycles from end-user customers. Our revenue for a quarter
could fluctuate significantly based on whether a large sale near the end of a
quarter is closed or delayed. Our end-user customer sales generally range in
value from a few thousand to several million dollars. In recent quarters,
increases in revenue were partially attributable to a greater number of these
large end-user transactions. This trend may not continue. The effort to close
these large sales is typically complex and lengthy. Therefore, our revenue for a
given period is likely to be affected by
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the timing of these large orders, which makes it difficult for us to predict
that revenue. The factors that could delay these large orders include:
- time needed for end-user customers to evaluate our software;
- customer budget restrictions, particularly in weak or uncertain general
economic and industry conditions;
- customer internal review and testing procedures; and
- engineering work needed to integrate our software with customers'
systems.
Our business could be adversely affected if we fail to manage our growth
effectively
If we fail to manage our growth effectively, our business and operating
results could be adversely affected, which could cause the market price of our
securities to fall. We expect to continue to grow our operations domestically
and internationally, and to increase our headcount. The growth in our operations
and headcount has placed, and will continue to place, a significant strain on
our management systems and resources. If we fail to manage this growth and our
future anticipated growth, we may experience higher operating expenses, and we
may be unable to meet the expectations of securities analysts or investors with
respect to future operating results. To manage this growth we must continue to:
- improve our financial and management controls, reporting systems and
procedures;
- continue to add and integrate new senior management personnel;
- improve our licensing models and procedures;
- hire, train and retain qualified employees;
- control expenses;
- integrate geographically dispersed operations; and
- invest in our internal networking infrastructure and facilities.
We have committed a significant amount of money to obtaining additional
systems and facilities to accommodate our current and future anticipated growth.
To the extent that this future growth does not occur or occurs more slowly that
we anticipate, we may not be able to reduce these expenses. If we incur
operating expenses out of proportion to revenue in any given quarter, our
operating results could be adversely impacted.
We may be unable to hire and retain qualified employees
Our future growth and success depends on our ability to hire and retain
qualified employees. If we are unable to hire and retain qualified employees,
our business and operating results could be adversely affected. Our personnel
needs are more acute than those facing most companies. We need to hire
additional sales, technical, and senior management personnel to support the
planned expansion of our business and to meet the anticipated increased customer
demand for our products and services. Competition for people with the skills we
require is intense, particularly in the area around our headquarters in Mountain
View, California, and the high cost of living in this area make recruiting and
compensation costs higher. As a result, we expect to continue to experience
increases in compensation costs. In addition, the exercise of stock options in
the U.S. and certain foreign jurisdictions may result in substantial increases
in employer payroll tax liabilities. We cannot assure you that we will be
successful in hiring or retaining new personnel. Even if we are successful in
hiring and retaining new personnel, the resulting growth is likely to be
disruptive to our business and could have an adverse effect on our ability to
maintain our anticipated growth.
The loss of key personnel could adversely affect our business
Our future anticipated growth and success depends on the continued service
of our key sales, technical and senior management personnel. Many of our senior
personnel have been with the company or its
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predecessors for a number of years, and we cannot assure you that we will be
able to retain them. The loss of senior personnel can result in significant
disruption to our ongoing operations, and new senior personnel must spend a
significant amount of time learning our business and our systems in addition to
performing their regular duties. Even though we have entered into employment
agreements with some key management personnel, these agreements cannot prevent
their departure. We do not have key person life insurance covering any of our
personnel, nor do we currently intend to obtain any of this insurance.
We distribute our products through multiple distribution channels, each of
which is subject to risks
Historically, we sold our products through original equipment manufacturers
and through direct sales. However, as a result of the NSMG and TeleBackup
acquisitions in 1999, we now have an established retail distribution channel as
well. If we fail to manage our distribution channels successfully, they may
conflict with one another or otherwise not function as we anticipate, and our
business and operating results could be adversely affected.
Retail distribution. Some of our software products are sold primarily in
the retail channel, posing different challenges than we face in selling most of
our products. For example:
- the VERITAS brand does not have high recognition in the retail channel;
- retail distribution typically involves shorter product life cycles; and
- the retail channel has higher risks of product returns, higher marketing
expenses and less predictable market demand.
Moreover, our retail distributors have no obligation to continue selling
our products and may terminate their relationships with us at any time.
Direct sales. We also depend on our direct sales force to sell our
products. This involves a number of risks, including:
- longer sales cycles for direct sales efforts;
- our need to hire, train, retain and motivate our sales force; and
- the length of time it takes our new sales representatives to become
productive.
Original equipment manufacturers. A portion of our revenue is expected to
come from our original equipment manufacturer customers that incorporate our
data availability software into systems they sell. Risks associated with our
original equipment manufacturer customers include:
- we have no control over the shipping dates or volumes of systems they
ship;
- they have no obligation to recommend or offer our software products;
- they have no minimum sales requirements and can terminate our
relationship at any time;
- they could choose to develop their own data availability products and
incorporate those products into their systems instead of our products;
- they could develop enhancements to and derivative products from our
products; and
- they could change their own base products, which could make it difficult
for us to adapt our products to theirs.
Finally, our original equipment manufacturer customers compete with one
another. If one of our original equipment manufacturer customers views the
products we have developed for another original equipment manufacturer as
competing with its products, it might decide to stop doing business with us,
which could adversely affect our business and our operating results.
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Some of our original equipment manufacturer agreements may not result in
increased product sales
We have important original equipment manufacturer agreements with
Hewlett-Packard, IBM, Microsoft and Sun Microsystems. Unlike some of our other
original equipment manufacturer agreements under which we sell off-the-shelf
versions of our products, under these agreements we develop unique or "lite"
versions of our products to be included in these original equipment
manufacturers' systems software and products. If we are unable to leverage these
relationships to increase product sales, we will have expended significant
resources without generating corresponding revenue, which could adversely affect
our business and our operating results. We expect to leverage the inclusion of
our products in these systems software and products to generate sales of
additional products to the customers of the original equipment manufacturers.
These relationships require our personnel to develop expertise with respect to
the original equipment manufacturers' products and markets and to cooperate
closely with their personnel. We cannot assure you that we will be able to
attract and retain qualified employees to work with our original equipment
manufacturer customers or to develop and improve the products designed for these
customers.
We face uncertainties porting products to new operating systems and developing
new products
Many of our products operate primarily on the UNIX computer operating
system. We are currently redesigning, or porting, these products to operate on
the Windows NT operating system. We are also developing new products for UNIX
and for Windows NT. In addition, we entered into an agreement with IBM under
which we will port our complete set of data availability products to
AIX/Monterey for IBM POWER and the Intel IA-64 processor-system. We may not be
able to accomplish any of this work quickly or cost-effectively. These
activities require substantial capital investment, the devotion of substantial
employee resources and the cooperation of the owners of the operating systems to
or for which the products are being ported or developed. For example, our
porting and development work for the Windows NT market has required us to hire
additional personnel with expertise on these platforms and to devote engineering
resources to these projects. For certain operating systems, we must obtain from
the operating system owners a source code license to portions of the operating
system software to port some of our products to or develop products for the
operating system. Operating system owners have no obligation to assist in these
porting or development efforts. If they do not grant us a license or if they do
not renew our license, we may not be able to expand our product line into other
areas.
Sales of a small number of product lines make up a substantial portion of our
revenue
We derive and expect to derive a substantial majority of our revenue from a
limited number of software products. If many customers do not purchase these
products as a result of competition, technological change, budget constraints or
other factors, our revenue would decrease and our business and operating results
would be adversely affected. For the year ended December 31, 2000, we derived
approximately $828.7 million, or 84%, of our license revenue from storage
management products, including VERITAS Volume Manager, VERITAS File System,
VERITAS NetBackup and VERITAS Backup Exec.
We derive a significant amount of revenue from only a few customers
Although in 2000 and 1999 no single customer accounted for greater than 10%
of our total net revenue, we still derive significant revenue from a small
number of customers. If any of them were to reduce purchases from us, our
business would be adversely affected unless we were able to increase sales to
other customers substantially. Many of these customers have recently announced
that their own businesses are slowing, which could adversely affect their demand
for our products. We do not have a contract with any of these customers that
requires the customer to purchase any specified number of software licenses from
us. Therefore, we cannot be sure that these customers will continue to purchase
our products at current levels.
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Our success depends on our ability to develop new and enhanced products that
achieve widespread market acceptance
Our future success depends on our ability to address the rapidly changing
needs of our customers by developing and introducing new products, product
updates and services on a timely basis, by extending the operation of our
products on new platforms and by keeping pace with technological developments
and emerging industry standards. In order to grow our business, we are
committing substantial resources to developing software products and services
for the storage area networking market and the network attached storage
appliance market. Each of these markets is new and unproven, and industry
standards for these markets are evolving and changing. If these markets do not
develop as anticipated, or demand for our products in these markets does not
materialize or occurs more slowly that we expect, we will have expended
substantial resources and capital without realizing sufficient revenue, and our
business and operating results could be adversely affected.
We face intense competition on several fronts
We have a number of competitors in the markets for our products. If
existing or new competitors gain market share, our business and operating
results could be adversely affected. Our principal competitors are internal
development groups with original equipment manufacturers that provide data
availability functions to support their systems, as well as and hardware and
software vendors that offer backup and file and volume management, clustering
and replication, and storage area networking products.
Many of our competitors have greater financial, technical sales, marketing
and other resources than we do. Our future and existing competitors could
introduce products with superior features, scalability and functionality at
lower prices than our products, and could also bundle existing or new products
with other more established products in order to compete with us. Our
competitors could also gain market share by acquiring or forming strategic
alliances with our other competitors. Finally, because new distribution methods
offered by the Internet and electronic commerce have removed many of the
barriers to entry historically faced by start-up companies in the software
industry, we expect to face additional competition from these companies in the
future.
Our foreign operations and sales create special problems that could adversely
affect our operating results
An investment in our securities is riskier than an investment in many
businesses because we have significant operations outside of the U.S., including
engineering, sales, customer support and production operations, and we plan to
expand our international operations. As of December 31, 2000, we had
approximately 809 employees in Europe, 468 employees in the Asia-Pacific region,
and 66 employees in Japan. Our foreign operations are subject to risks,
including:
- potential loss of proprietary information due to piracy, misappropriation
or weaker laws regarding intellectual property protection;
- imposition of foreign laws and other governmental controls, including
trade restrictions;
- fluctuations in currency exchange rates and economic instability such as
higher interest rates and inflation, which could reduce our customers'
ability to obtain financing for software products or which could make our
products more expensive in those countries;
- difficulties in hedging foreign currency transaction exposures;
- longer payment cycles for sales in foreign countries and difficulties in
collecting accounts receivable;
- difficulties in staffing and managing our foreign operations, including
difficulties related to administering our stock option plan in foreign
countries and difficulties related to the new organizational structure in
Europe that we implemented in 2001;
- difficulties in coordinating the activities of our geographically
dispersed and culturally diverse operations;
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- seasonal reductions in business activity in the summer months in Europe
and other countries;
- costs and delays associated with developing software in multiple
languages; and
- political unrest, particularly in areas in which we have facilities.
In addition, our foreign sales are denominated in local currency, creating
risk of foreign currency translation gains and losses that could adversely
affect our business and operating results. We receive significant tax benefits
from sales to our non-U.S. customers. These benefits are contingent upon
existing tax regulations in both the U.S. and in the countries in which our
international customers are located. Future changes in domestic or international
tax regulations could affect our anticipated ability to continue to realize
these tax benefits.
Our growth strategy is riskier than others because it is based upon
acquisitions of other businesses
An investment in our securities is riskier than investments in many other
companies because we plan to continue to pursue our strategy of growth through
acquisition. We have grown through acquisitions in the past and expect to pursue
acquisitions in the future.
Acquisitions involve a number of special risks and challenges, including:
- diversion of management attention from our core business;
- integration of acquired company operations and employees with our
existing business, including coordination of geographically dispersed
operations;
- incorporation of acquired company technology into our existing product
lines, including consolidating technology with duplicative functionality
or designed on different technological architecture;
- loss or termination of employees, including costly litigation resulting
from the termination of those employees;
- dilution of our then-current stockholders' percentage ownership;
- assumption of liabilities of the acquired company, including costly
litigation related to alleged liabilities of the acquired company; and
- presentation of a unified corporate image to our customers and our
employees.
In the past, our integration of the operations of acquired companies took
longer and was more difficult than we anticipated.
Our subsidiary following the Seagate Technology leveraged buyout and merger
transaction will remain liable to third parties after the leveraged buyout and
the merger
In November 2000, in the leveraged buyout and merger transaction involving
VERITAS and Seagate Technology, Seagate Technology sold all of its operating
assets to Suez Acquisition (Cayman) Company, and Seagate Technology became our
subsidiary. As part of the transaction, Suez Acquisition Company assumed and
agreed to indemnify our subsidiary and us for substantially all liabilities
arising in connection with Seagate's operations prior to the transaction.
However, governmental organizations or other third parties may seek recourse
against our subsidiary or us for these liabilities. Prior to the transaction,
Seagate was a large, multinational enterprise that owned or leased facilities
and offices in numerous states and foreign countries and employed over 60,000
persons worldwide. As a result, our subsidiary could receive claims related to a
wide range of possible liabilities. Some areas of potential liability include:
- environmental cleanup costs and liabilities for claims made under
federal, state or foreign environmental laws;
- tax liabilities;
- obligations under federal, state and foreign pension and retirement
benefit laws;
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- existing or future litigation relating to the leveraged buyout or the
merger transaction;
- existing and future litigation arising from the restructuring that
Seagate commenced last year, including litigation initiated by terminated
employees; and
- existing and future patent litigation.
Any such claim, with or without merit, could be time consuming to defend,
result in costly litigation and divert management attention from our core
business. Moreover, if Suez Acquisition Company is unable to or is unwilling to
indemnify our subsidiary or us under the indemnification agreement for any of
these liabilities, we could experience a material adverse effect on our business
and operating results.
The Seagate merger consideration may be subject to recovery under fraudulent
conveyance laws
The leveraged buyout and merger transaction involving VERITAS and Seagate
Technology may be subject to review under state or federal fraudulent transfer
laws in the event that a bankruptcy case or lawsuit is commenced by or on behalf
of unpaid creditors of Suez Acquisition Company or any of its affiliates. Under
bankruptcy laws, a court could attempt to proceed against the consideration paid
to Seagate's stockholders in the merger, or direct that amounts deposited with
the trustee administering the distributions of Seagate's tax refunds and credits
be held for the benefit of creditors. A court might take one or more of these
actions if it determined that when the leveraged buyout was completed, Seagate's
operating assets were sold for less then fair value and at that time Seagate,
Suez Acquisitions Company and their affiliates:
- were or became insolvent;
- were engaged in a business or transaction for which their unencumbered
assets constituted unreasonably small capital; or
- intended to incur or reasonably should have believed that they would
incur debts beyond their ability to repay as those debts matured.
A court could also proceed against the consideration paid to Seagate's
stockholders in the merger, or against Seagate's tax refunds and credits
otherwise payable to Seagate's former stockholders following the merger, if the
court found that Seagate effected the leveraged buyout with an actual intent to
hinder, delay or defraud its creditors.
Our effective tax rate may increase
Our effective tax rate could be adversely affected by several factors, many
of which are outside of our control. Our effective tax rate is directly affected
by the relative proportions of domestic and international revenue and income
before taxes. We are also subject to changing tax laws in multiple jurisdictions
in which we operate. We do not have a history of audit activity from various
taxing authorities and while we believe we are in compliance with all federal,
state and international tax laws, there are various interpretations of their
application that could result in additional tax assessments. In addition, in
November 2000, we acquired Seagate Technology, which has significant tax audit
and tax litigation activity. We believe that we have meritorious defense against
asserted deficiencies and that the likely outcome of a re-determination of these
asserted deficiencies by the United States Tax Court and tax settlement
authorities will not result in an additional provision for income taxes. We have
an indemnification agreement with Suez Acquisition (Cayman) Company for these
deficiencies. If Suez Acquisition (Cayman) Company is unable to or is unwilling
to indemnify our subsidiary or us under the indemnification agreement for any of
these deficiencies, we could experience a material adverse effect on our
business and operating results.
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Our strategy of investing in development-stage companies involves a number of
risks and uncertainties
An investment in our securities is riskier than investments in many other
companies because we plan to pursue our strategy of investing in
development-stage companies. Each of these investments involves risks and
uncertainties, including:
- diversion of management attention from our core business;
- failure to leverage our relationship with these companies to access new
technologies and new markets;
- inability to value investments appropriately or to predict changes to the
future value of investments;
- inability to manage investments effectively; and
- loss of cash invested.
We are incurring significant accounting charges in connection with our
acquisitions that are creating net losses immediately and in the future
The significant costs of integration associated with the NSMG, TeleBackup
and NuView acquisitions in 1999 increase the risk that we will not realize the
anticipated benefits of those acquisitions. Because we accounted for these
acquisitions using the purchase method of accounting, we recorded goodwill and
other intangible assets of approximately $3,754.9 million in 1999. This amount
is being amortized over four years, and is resulting in charges to operations of
approximately $234.8 million per quarter. As a result of these charges, we
expect to continue to have net losses for the foreseeable future.
We have a significant amount of debt that we may be unable to service or repay
In October 1997, we issued $100.0 million in aggregate principal amount of
5.25% convertible subordinated notes due 2004, of which $64.5 million was
outstanding as of December 31, 2000. In August 1999, we issued $465.8 million
aggregate principal amount at maturity of 1.856% convertible subordinated notes
due 2006, of which $464.7 million was outstanding as of December 31, 2000. As of
December 31, 2000, the annual interest payments on our outstanding 5.25% notes
were $3.4 million and the annual interest payments on our outstanding 1.856%
notes were $8.6 million, all of which we plan to fund from cash flows from
operations. We will need to generate substantial amounts of cash from our
operations to fund interest payments and to repay the principal amount of debt
when it matures, while at the same time funding capital expenditures and our
other working capital needs. If we do not have sufficient cash to pay our debts
as they come due, we could be in default of those debts. For example, the notes
could be declared immediately due and payable if we do not make timely payments.
Our substantial leverage could also increase our vulnerability to general
adverse economic and industry conditions because it makes it more difficult for
us to raise capital if needed.
We may not be able to protect our proprietary information
We rely on a combination of copyright, patent, trademark and trade secret
laws, confidentiality procedures, contractual provisions and other measures to
protect our proprietary information. All of these measures afford only limited
protection. These measures may be invalidated, circumvented or challenged, and
others may develop technologies or processes that are similar or superior to our
technology. Because we license the source code for some of our products, there
is a higher likelihood of misappropriation or other misuse of our intellectual
property. We also license some of our products under shrink wrap license
agreements that are not signed by licensees and therefore may be unenforceable
under the laws of some jurisdictions. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy our products or to
obtain or use information that we regard a proprietary.
Third parties may claim that we infringe their proprietary rights
We may from time to time receive claims that we have infringed the
intellectual property rights of others. As the number of products in the
software industry increases and the functionality of these products further
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overlap, we believe that we may become increasingly subject to infringement
claims, including patent and copyright infringement claims. We have received
several trademark claims in the past and may receive more claims in the future
based on the name VERITAS, which is a word commonly used in trade names
throughout Europe and the western hemisphere. In addition, former employers of
our former, current or future employees may assert claims that such employees
have improperly disclosed to us the confidential or proprietary information of
these former employers. Any such claim, with or without merit, could:
- be time consuming to defend;
- result in costly litigation;
- divert management's attention from our core business;
- require us to stop selling, to delay shipping or to redesign our product;
and
- require us to pay monetary amounts as damages, for royalty or licensing
arrangements, or to satisfy indemnification obligations that we have with
some of our customers.
In addition, we license and use software from third parties in our
business. These third party software licenses may not continue to be available
to us on acceptable terms. Our inability to use any of this third party software
could result in shipment delays or other disruptions in our business, which
could materially and adversely affect our operating results.
We might experience significant defects in our products
Software products frequently contain errors or failures, especially when
first introduced or when new versions are released. We might experience
significant errors or failures in our products, or they might not work with
other hardware or software as expected, which could delay the development or
release of new products or new versions of products, or which could adversely
affect market acceptance of our products. Our end-user customers use our
products for applications that are critical to their businesses, and they have a
greater sensitivity to product defects than the market for software products
generally. If we were to experience significant delays in the release of new
products or new versions of products, or if customers were dissatisfied with
product functionality or performance, we could lose revenue or be subject to
liability for service or warranty costs, and our business and operating results
could be adversely affected.
Natural disasters or power outages could disrupt our business
We must protect our business and our network infrastructure against damage
from earthquake, flood, hurricane and similar events, as well as from power
outages. A substantial portion of our operations are subject to these risks,
particularly our operations located in California. We have already experienced
temporary power losses in our California facilities due to power shortages that
have disrupted our operations, and we expect in the future to experience
additional power losses that could disrupt our operations. While the impact to
our business and operating results has not been material, we cannot assure you
that power losses will not adversely affect our business in the future, or that
the cost of acquiring sufficient power to run our business will not increase
significantly. Since we do not have sufficient redundancy in our networking
infrastructure, a natural disaster or other unanticipated problem at our primary
data center could have an adverse effect on our business, including both our
internal operations and our ability to communicate with our customers or sell
our products over the Internet.
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Some provisions in our charter documents may prevent or deter certain
corporate actions
Some of the provisions in our charter documents may deter or prevent
certain corporate actions, such as a merger, tender offer or proxy contest,
which could affect the market value of our securities. These provisions include:
- our board of directors is authorized to issue preferred stock with any
rights it may determine;
- our board of directors is classified into three groups, with each group
of directors to hold office for three years;
- our stockholders are not entitled to cumulate votes for directors and may
not take any action by written consent without a meeting; and
- special meetings of our stockholders may be called only by our board of
directors, by the chairman of the board or by our chief executive
officer, and may not be called by our stockholders.
We also have in place a stockholder rights plan that is designed to
discourage coercive takeover offers.
Our stock price may be volatile in the future, and you could lose the value of
your investment
The market price of our common stock has experienced significant
fluctuations and may continue to fluctuate significantly, and you could lose the
value of your investment. The market price of our common stock may be adversely
affected by a number of factors, including:
- announcements of our quarterly operating results or those of our
competitors or our original equipment manufacturer customers;
- changes in earnings estimates by securities analysts;
- announcements of planned acquisitions by us or by our competitors;
- the gain or loss of a significant customer;
- announcements of new products by us, our competitors or our original
equipment manufacturer customers; and
- slowdowns in the economy generally.
The stock market in general, and the market prices of stocks of other
technology companies in particular, have experienced extreme price volatility,
which has adversely affected and may continue to adversely affect the market
price of our common stock for reasons unrelated to our business or operating
results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
We transact business in various foreign currencies and we have established
a foreign currency hedging program, utilizing foreign currency forward exchange
contracts ("forward contracts") to hedge certain foreign currency transaction
exposures. Under this program, increases or decreases in our foreign currency
transactions are offset by gains and losses on the forward contracts, so as to
mitigate the possibility of foreign currency transaction gains and losses. We do
not use forward contracts for speculative trading purposes. All foreign currency
transactions and all outstanding forward contracts are marked-to-market at the
end of the period with unrealized gains and losses included in other income
(expense). The unrealized gain (loss) on the outstanding forward contracts at
December 31, 2000 was immaterial to our consolidated financial statements.
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Our outstanding forward contracts as of December 31, 2000 are presented in
the table below. This table presents the notional amounts using December 31,
2000 exchange rates and the weighted average contractual foreign currency
exchange rates. Notional weighted average exchange rates are quoted using market
conventions where the currency is expressed in currency units per U.S. dollar,
except for the Australian dollar, the Euro and the British pound. All of these
forward contracts mature in 31 days or less as of December 31, 2000 (dollars in
thousands):
NOTIONAL WEIGHTED
AVERAGE EXCHANGE
FUNCTIONAL CURRENCY -- U.S. DOLLAR NOTIONAL AMOUNT RATE
---------------------------------- --------------- -----------------
Australian dollar............................ $ 6,932 0.558
Brazilian real............................... $ 612 1.975
British pound................................ $ 37,280 1.494
Danish krona................................. $ 87 8.003
Dutch guilder................................ $ 971 2.363
Euro......................................... $ 58,894 0.933
French francs................................ $ 3,801 7.027
German mark.................................. $ 12,701 2.098
Japanese yen................................. $ 3,695 113.680
Norwegian kroner............................. $ 338 8.865
Swedish krone................................ $ 1,254 9.529
Swiss franc.................................. $ 487 1.638
----------
Total.............................. $ 127,052
FUNCTIONAL CURRENCY -- EURO
British pound................................ $ 49,508 1.494
Swiss franc.................................. $ 2,373 1.638
----------
Total.............................. $ 51,881
----------
Grand total........................ $ 178,933
==========
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio and long-term debt obligations. Our primary
investment objective is to preserve principal while at the same time maximizing
yields without significantly increasing risk. Our portfolio includes money
markets funds, commercial paper, medium-term notes, corporate notes, government
securities and market auction preferreds. The diversity of our portfolio helps
us to achieve our investment objective. As of December 31, 2000, approximately
65% of our investment portfolio is composed of investments with original
maturities of one year or less and approximately 14% of our investment portfolio
matures less than 90 days from the date of purchase.
Long-term debt of $429.2 million consists of 5.25% convertible subordinated
notes due 2004 of $64.5 million (the "5.25% notes") and 1.856% convertible
subordinated notes due 2006 of $364.6 million (the "1.856% notes"). The interest
rate of 1.856% on the 1.856% notes together with the accrual of original issue
discount represent a yield to maturity of 6.5%. The nominal interest rate on
these notes is fixed and the notes provide for semi-annual interest payments of
approximately $1.7 million each May 1 and November 1 for the 5.25% notes and
approximately $4.3 million each February 13 and August 13 for the 1.856% notes.
The notes are convertible into our common stock at any time prior to the close
of business on the maturity date, unless previously redeemed or repurchased,
subject to adjustment in certain events.
The following table presents the amounts of our cash equivalents,
investments and long-term debt that may be subject to interest rate risk and the
average interest rates as of December 31, 2000 by year of maturity.
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At December 31, 2000, amortized cost approximated fair value for all cash
equivalents and investments (dollars in thousands):
2002 AND FAIR VALUE
2001 THEREAFTER 2000 TOTAL TOTAL 2000 TOTAL 1999
-------- ---------- ---------- ---------- ----------
Cash equivalents and short-term
Investments:
Fixed rate....................... $288,322 -- $288,322 $ 288,322 $625,435
Average fixed rate............... 6.70% -- 6.70% 6.70% 5.82%
Variable rate.................... $ 5,400 -- $ 5,400 $ 5,400 $ 11,713
Average variable rate............ 6.56% -- 6.56% 6.56% 5.87%
Total cash equivalents and
short-term investments:
Investments...................... $293,722 -- $293,722 $ 293,722 $637,148
Average rate..................... 6.69% -- 6.69% 6.69% 5.82%
Long-term investments:
Fixed rate....................... -- $136,111 $136,111 $ 136,111 $ 65,036
Average fixed rate............... -- 6.82% 6.82% 6.82% 5.33%
Long-term debt:
Fixed rate....................... -- $429,176 $429,176 $1,750,132 $451,044
Average fixed rate............... -- 6.31% 6.31% 6.31% 6.22%
In September 2000, we have entered into a three year cross currency
interest rate swap transaction for the purpose of hedging fixed interest rate,
foreign currency denominated cash flows under an inter-company loan receivable.
Under the terms of this derivative financial instrument, EURO denominated fixed
principal and interest payments to be received under the inter-company loan will
be swapped for U.S. dollar fixed principal and interest payments. As a result of
entering into the cross currency interest rate swap, we have mitigated our
exposure to foreign currency exchange rate fluctuations. The gains or losses on
the foreign currency loan receivable will be offset by the gains or losses on
the cross currency interest rate swap. Because we are receiving fixed interest
payments under the cross currency interest rate swap transaction, we are still
subject to fluctuations in U.S. dollar interest rates. As of December 31, 2000
the impact of these fluctuations was not significant.
EQUITY PRICE RISK
We are exposed to equity price risk on the marketable portion of our
portfolio of equity securities investments. We typically do not attempt to
reduce or eliminate our market exposure on these equity securities. These
investments are in companies in the high-technology industry. As of December 31,
2000, we had marketable equity securities in two companies, representing a total
market value of $9.8 million. Assuming a 10% adverse change, our marketable
equity securities investments would decrease in value by approximately $1.0
million. Subsequent to December 31, 2000, many high-technology stocks
experienced a significant decrease in value. If our marketable equity security
investments as of December 31, 2000 had been valued using prices as of March 27,
2001, the value of these securities would have decreased by approximately $3.5
million, or 36%. This estimate is not necessarily indicative of future
performance and actual results may differ materially. We also have begun to make
investments in development-stage companies that we believe provide strategic
opportunities for us. We intend that these investments will complement our own
research and development efforts, provide access to new technologies and
emerging markets, and create opportunities for additional sales of our products
and services. We cannot assure you that this initiative will have the above
mentioned desired results, or even that we will not lose all or any part of
these investments.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Annual Financial Statements
Our financial statements required by this item are submitted as a separate
section of the Form 10-K. See Item 14(a)(1) for a listing of financial
statements provided in the section titled "Financial Statements."
Selected Quarterly Results of Operations
The following selected quarterly data should be read in conjunction with
the Consolidated Financial Statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Form 10-K. This information has been derived from
unaudited consolidated financial statements of VERITAS that, in our opinion,
reflect all recurring adjustments necessary to fairly present this information
when read in conjunction with our Consolidated Financial Statements and Notes
thereto appearing in the section titled "Financial Statements." The results of
operations for any quarter are not necessarily indicative of the results to be
expected for any future period.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER FISCAL YEAR
--------- --------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL 2000
Total net revenue...................... $ 244,640 $ 275,436 $ 317,171 $ 370,081 $1,207,328
Gross profit........................... 199,168 231,519 270,641 317,199 1,018,527
Loss before income taxes............... (154,458) (145,896) (125,464) (100,010) (525,828)
Net loss............................... (174,383) (172,341) (148,106) (124,962) (619,792)
Net loss per share -- basic............ $ (0.44) $ (0.43) $ (0.37) $ (0.31) $ (1.55)
Net loss per share -- diluted.......... $ (0.44) $ (0.43) $ (0.37) $ (0.31) $ (1.55)
Number of shares used in computing per
share amounts basic.................. 394,471 400,787 403,613 401,209 400,034
Number of shares used in computing per
share amounts diluted................ 394,471 400,787 403,613 401,209 400,034
FISCAL 1999
Total net revenue...................... $ 71,904 $ 114,648 $ 183,401 $ 226,159 $ 596,112
Gross profit........................... 63,422 98,561 151,465 188,109 501,557
Income before income taxes............. 21,092 (157,601) (175,135) (155,924) (467,568)
Net income (loss)...................... 13,583 (162,329) (183,576) (170,636) (502,958)
Net income (loss) per share -- basic... $ 0.06 $ (0.59) $ (0.48) $ (0.44) $ (1.59)
Net income (loss) per
share -- diluted..................... $ 0.06 $ (0.59) $ (0.48) $ (0.44) $ (1.59)
Number of shares used in computing per
share amounts -- basic............... 215,199 275,467 384,846 389,410 316,892
Number of shares used in computing per
share amounts -- diluted............. 239,111 275,467 384,846 389,410 316,892
In the second quarter of 1999, we acquired the NSMG business and
TeleBackup. In the third quarter of 1999, we acquired NuView. Because we
accounted for these acquisitions using the purchase method of accounting, we
recorded developed technology, goodwill and other intangible assets of
approximately $3,754.9 million in total. These assets are amortized over their
estimated useful life of four years, and result in charges to operations of
approximately $234.8 million per quarter. As a result of these acquisitions, in
the second quarter of 1999 we recorded approximately $76.6 million of
amortization of developed technology, goodwill and other intangibles, one-time
non-cash charges of $103.1 million related to the write-off of in-process
research and development, and a one-time restructuring charge of $11.0 million
related primarily to costs for our duplicative facilities that we plan to
vacate. In the third quarter of 1999 we recorded a one-time non-cash charges of
$1.1 million related to the write-off of in-process research and development. In
the fourth quarter of 2000, we reversed $4.3 million of one-time restructuring
charge as a result of lower actual exit costs than originally estimated with
respect to duplicative facilities.
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Our operating results have fluctuated in the past, and may fluctuate
significantly in the future, depending on a number of factors, including the
timing and magnitude of sales of our products through original equipment
manufacturers, investment in new products and new distribution channels, the
timing and level of sales to resellers and direct end-users, the introduction,
timing and market acceptance of new products, the timing of license fee payments
and other factors. For further background on fluctuating operating results, see
"Factors That May Affect Future Results -- Our revenue may fluctuate
significantly, which could cause the market price of our securities to decline."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information with respect to directors may be found in the section captioned
"Election of Directors" appearing in the definitive proxy statement to be
delivered to stockholders in connection with the 2001 Annual Meeting of
Stockholders. Such information is incorporated herein by reference.
EXECUTIVE OFFICERS
Information with respect to executive officers may be found in Item 1.
Business.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item may be found in the section captioned
"Executive Compensation" appearing in the definitive proxy statement to be
delivered to stockholders in connection with the 2001 Annual Meeting of
Stockholders. Such information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item may be found in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" appearing in
the definitive proxy statement to be delivered to stockholders in connection
with the 2001 Annual Meeting of Stockholders. Such information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item may be found in the section captioned
"Related Party Transactions" appearing in the definitive proxy statement to be
delivered to stockholders in connection with the 2001 Annual Meeting of
Stockholders. Such information is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
The following are included in item 8 and are filed as part of this
Annual Report on Form 10-K:
- Consolidated Balance Sheets as of December 31, 2000 and 1999
- Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and 1998
- Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998
- Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998
- Notes to Consolidated Financial Statements
- Report of Ernst & Young LLP, Independent Auditors
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule for the years ended
December 31, 2000, 1999 and 1998 should be read in conjunction with the
consolidated financial statements of VERITAS Software Corporation filed as
part of this Annual Report on Form 10-K:
- Schedule II -- Valuation and Qualifying Accounts
Schedules other than that listed above have been omitted since they
are either not required, not applicable, or because the information
required is included in the consolidated financial statements or the notes
thereto.
3. EXHIBITS
INCORPORATED BY REFERENCE
EXHIBIT ------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
- ------- ------------------- ----- -------- ------ --------
2.01 Agreement and Plan of Merger and Reorganization, dated as 8-K 04/05/00 2.01
of March 29, 2000, by and among VERITAS Software
Corporation ("VERITAS"), Victory Merger Sub, Inc. and
Seagate Technology, Inc. ("Seagate")
2.02 Stock Purchase Agreement, dated as of March 29, 2000, by 8-K 04/05/00 2.02
and among Suez Acquisition Company (Cayman) Limited
("Suez"), Seagate and Seagate Software Holdings, Inc.
2.03 Consolidated Amendment to Stock Purchase Agreement, S-4/A 08/30/00 2.05
Agreement and Plan of Merger and Reorganization and
Indemnification Agreement, and Consent, dated as of August
29, 2000, by and among VERITAS, Victory Merger Sub, Inc.,
Seagate, Seagate Software Holdings, Inc. and Suez
2.04 Consolidated Amendment No. 2 to Stock Purchase Agreement, S-4/A 10/19/00 2.04
Agreement and Plan of Merger and Reorganization and
Indemnification Agreement, and Consent, dated October 17,
2000, by and among VERITAS, Victory Merger Sub, Inc.,
Seagate, Seagate Software Holdings, Inc. and Suez
2.05 Amended and Restated Agreement and Plan of Reorganization S-4 04/19/99 2.01
by and among VERITAS, VERITAS Operating Corporation
("VOC"), Seagate, Seagate Software, Inc. ("Seagate
Software") and Seagate Software Network & Storage
Management Group, Inc.
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INCORPORATED BY REFERENCE
EXHIBIT ------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
- ------- ------------------- ----- -------- ------ --------
2.06 Amended and Restated Combination Agreement by and between S-4 4/19/99 2.02
VOC and TeleBackup Systems, Inc.
3.01 Amended and Restated Certificate of Incorporation of 8-A 6/2/99 3.01
VERITAS
3.02 Certificate of Amendment of Amended and Restated 8-A 6/2/99 3.02
Certificate of Incorporation of VERITAS
3.03 Certificate of Amendment of Amended and Restated S-8 6/2/00 3.03
Certificate of Incorporation of VERITAS
3.04 Amended and Restated Bylaws of VERITAS S-4 9/28/00 3.04
4.01 Indenture dated as of October 1, 1997 between VOC and State 10-Q 6/30/99 4.03
Street Bank and Trust Company of California, N.A.
4.02 Amended and Restated First Supplemental Indenture dated S-1 7/27/99 4.04
July 30, 1999 by and among VERITAS, VOC and State Street
Bank and Trust of California, N.A.
4.03 Registration Rights Agreement dated as of October 1, 1997 10-Q 9/30/99 4.07
between VOC and UBS Securities LLC
4.04 Form of Rights Agreement between VERITAS and the Right S-4 4/19/99 4.06
Agent, which includes as Exhibit A the forms of Certificate
of Designations of Series A Junior Participating Preferred
Stock, as Exhibit B the Form of Right Certificate and as
Exhibit C the Summary of Rights to Purchase Preferred
Shares
4.05 Form of Registration Rights Agreement between VERITAS and S-4 4/19/99 4.07
Seagate Software
4.06 Form of Stockholder Agreement between VERITAS, VOC, Seagate S-4 4/19/99 4.08
Software and Seagate
4.07 Form of Specimen Stock Certificate S-1 10/22/93 4.01
4.08 Form of Indenture among VERITAS, VOC State Street Bank and S-1 7/27/99 4.10
Trust Company of California, N.A., as Trustee
10.01 Indemnification Agreement, dated as of March 29, 2000, by 8-K 04/5/00 2.3
and among VERITAS, Seagate, Suez and certain other parties
10.02+ Development and License Agreement between Seagate and S-4 04/19/99 10.01
VERITAS
10.03+ Cross License Agreement and OEM Agreement between Seagate S-4 04/19/99 10.02
Software Information Management Group, Inc. and VERITAS
10.04* VERITAS 1993 Equity Incentive Plan, as amended S-8 03/29/01 4.01
10.05* VERITAS 1993 Employee Stock Purchase Plan, as amended S-8 03/29/01 4.02
10.06* VERITAS 1993 Directors Stock Option Plan, as amended 10-K 12/31/99 10.04
10.07* OpenVision Technologies, Inc. 1996 Employee Stock Purchase S-4 03/24/97 10.19
Plan, as amended
10.08 Office building sublease dated February 27, 1998, by and 10-Q 09/30/98 10.14
between VOC and Space Systems/Loral, Inc.
10.09 Office building lease dated April 30, 1998, by and between 10-Q 09/30/98 10.15
VOC and Ryan Companies US, Inc.
10.10 Form of Key Employee Agreement S-4 04/19/99 10.11
10.11 Office Building Lease, dated September 2, 1994, as amended, 10-K 12/31/94 10.09
by and between VOC and John Arriliaga and Richard T. Peery
regarding property located in Mountain View, California
10.12 Amendment No 1. to Office Building Lease dated May 28, 1997 10-K 12/31/97 10.12
by and between VOC and John Arriliaga and Richard T. Peery
10.13 Agreement dated November 7, 1996 between VERITAS Software S-4 03/24/97 10.12
India Pvt. Ltd. and Talwalkar & Talwalkar and Mr. Rajendra
Dattatraya Pathak, Mrs. Kamal Trimbak Nighojkar, Mrs. Bakul
Prabhakar Pathak, Mrs. Nalini Manohar Saraf, Mr. Narhar
Vaman Pandit, Mr. Madhav Narhar Pandit, Ms. Madhavi Damodar
Thite, and Ms. Medha Narhar Pandit relating to the
development of certain premises in Pune, India
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INCORPORATED BY REFERENCE
EXHIBIT ------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
- ------- ------------------- ----- -------- ------ --------
10.14 Form of Indemnification Agreement entered into between S-4 04/19/99 10.15
VERITAS and each of its directors and executive officers
10.15 Amendment No. 1 to Cross-License and OEM Agreement between S-4 04/19/99 10.16
Seagate Software Information Management Group, Inc. and
VERITAS
10.16 Participation Agreement dated April 23, 1999 by and among S-1 07/27/99 10.17
VOC, First Security Bank, National Association, as "Owner
Trustee," various banks and other lending institutions
which are parties thereto from time to time as "Holders,"
various banks and other lending institutions which are
parties thereto from time to time as "Lenders,"
NationsBank, N.A., as "Agent" for the Lenders and the
Holders, and various parties thereto from time to time as
"Guarantors"
10.17 Grant Deed dated April 23, 1999 recording grant of real S-1 07/27/99 10.20
property to First Security Bank, National Association as
"Owner Trustee" by Fairchild Semiconductor Corporation of
California
10.18 Memorandum of Lease Agreement and Lease Supplement No. 1 S-1 07/27/99 10.21
and Deed of Trust dated April 23, 1999 among VOC, First
Security Bank, National Association and Chicago Title
Company
10.19 Memorandum of Lease Agreement and Lease Supplement No. 2 S-1 07/27/99 10.22
and Deed of Trust dated April 23, 1999 among VOC, First
Security Bank, National Association and Chicago Title
Company
10.20 Collateral Assignment of Sublease dated April 23, 1999 made S-1 07/27/99 10.23
by VOC to First Security Bank, National Association
10.21 Sublease Agreement dated April 23, 1999 by and between VOC S-1 07/27/99 10.24
and Fairchild Semiconductor Corporation of California
10.22 Certificate re: Representations and Warranties dated April S-1 07/27/99 10.25
20, 1999 by Fairchild Semiconductor Corporation of
California and addressed to VOC
10.23 Security Agreement dated April 23, 1999 between First S-1 07/27/99 10.26
Security Bank, National Bank, as "Owner Trustee" and
NationsBank, N.A., as Agent for the "Lenders" and the
"Holders".
10.24 Form of Agreement of Purchase and Sale by and between S-1 07/27/99 10.27
Fairchild Semiconductor Corporation of California and VOC
10.25 First Amendment dated April 14, 1999 and Agreement of S-1 07/27/99 10.28
Purchase and Sale dated March 29, 1999 by and between
Fairchild Semiconductor Corporation of California and VOC
10.26 Agency Agreement between VOC and First Security Bank, S-1 07/27/99 10.29
National Association, as "Owner Trustee"
10.27 Master Lease Agreement dated April 23, 1999 between First S-1 07/27/99 10.30
Security Bank, National Association and VOC
10.28 First Amendment and Restatement of Certain Operative 10-K 12/31/99 10.29
Agreements and Other Agreements dated March 3, 2000 among
VOC, the various parties to the participation agreement and
other operative agreements from time to time, as the
"Guarantors," First Security Bank, National Association, as
"Owner Trustee," the various banks and other lending
institutions which are parties to the participation
agreement and other operative agreements from time to time,
as the "Holders," and Bank of America, N.A., as successor
to NationsBank, N.A.
10.29 Joinder Agreement dated March 3, 2000 by and between 10-K 12/31/99 10.30
VERITAS and Bank of America, N.A.
10.30 Joinder Agreement dated March 3, 2000 by and between 10-K 12/31/99 10.31
OpenVision International, Ltd. and Bank of America, N.A.
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49
INCORPORATED BY REFERENCE
EXHIBIT ------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
- ------- ------------------- ----- -------- ------ --------
10.31 Joinder Agreement dated March 3, 2000 by and between 10-K 12/31/99 10.32
VERITAS Software Global Corporation (formerly known as
Seagate Software Network & Storage Management Group, Inc.)
and Bank of America, N.A.
10.32 Participation Agreement dated March 9, 2000 by and among 10-K 12/31/99 10.33
VOC, various parties thereto from time to time as
"Guarantors," First Security Bank, National Association, as
"Owner Trustee," various banks and other lending
institutions which are parties thereto from time to time as
"Holders," various banks and other lending institutions
which are parties thereto from time to time as "Lenders,"
and Bank of America, N.A. as "Agent" for the Lenders and
the Holders
10.33 Master Lease Agreement dated March 9, 2000 between First 10-K 12/31/99 10.34
Security Bank, National Association, and VOC
10.34 Construction Agency Agreement dated March 9, 2000 between 10-K 12/31/99 10.35
VOC and First Security Bank, National Association
10.35 Trust Agreement dated March 9, 2000 between the several 10-K 12/31/99 10.36
holders from time to time as parties thereto, as "Holders,"
and First Security Bank, National Association, as "Owner
Trustee"
10.36 Credit Agreement dated March 9, 2000 among First Security 10-K 12/31/99 10.37
Bank, National Association, as "Owner Trustee," the several
lenders from time to time as parties thereto, and Bank of
America, N.A.
10.37 Security Agreement dated March 9, 2000 between First 10-K 12/31/99 10.38
Security Bank, National Association, as "Owner Trustee,"
and Bank of America, N.A., accepted and agreed to by VOC
10.38 Second Amendment, Assignment and Assumption and Restatement S-4 09/28/00 10.41
of Certain Operative Agreements and Other Agreements dated
July 28, 2000 among VOC, VSGC, the various parties to the
participation agreement and other operative agreements from
time to time, First Security Bank, National Association, as
"Owner Trustee", the various banks and other lending
institutions which are parties to the participation
agreement and other operative agreements from time to time
as "Holders", the various banks and other lending
institutions which are parties to the participation
agreement and other operative agreements from time to time
as "Lenders", and Bank of America, N.A., as the "Agent" for
the secured parties
10.39 First Amendment, Assignment and Assumption and Restatement S-4 09/28/00 10.42
of Certain Operative Agreements and Other Agreements dated
July 28, 2000 among VOC, VSGC, the various parties to the
participation agreement and other operative agreements from
time to time, First Security Bank, National Association, as
"Owner Trustee", the various banks and other lending
institutions which are parties to the participation
agreement and other operative agreements from time to time
as "Holders", the various banks and other lending
institutions which are parties to the participation
agreement and other operative agreements from time to time
as "Lenders", and Bank of America, N.A., as the "Agent" for
the secured parties
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50
INCORPORATED BY REFERENCE
EXHIBIT ------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
- ------- ------------------- ----- -------- ------ --------
10.40 Participation Agreement dated July 28, 2000 among the S-4 09/28/00 10.43
various parties thereto from time to time, VSGC, First
Security Bank, National Association, as "Owner Trustee",
the various banks and other lending institutions which are
parties thereto from time to time as "Holders", the various
banks and other lending institutions which are parties
thereto from time to time as "Lenders", ABN AMRO Bank N.V.,
Credit Suisse First Boston and Credit Lyonnais Los Angeles
Branch
10.41 Credit Agreement dated July 28, 2000 among First Security S-4 09/28/00 10.44
Bank, National Association as "Owner Trustee", the several
lenders from time to time, ABN AMRO Bank, N.V., Credit
Suisse First Boston, and Credit Lyonnais Los Angeles Branch
10.42 Trust Agreement dated July 28, 2000 between the several S-4 09/28/00 10.45
holders from time to time parties thereto as "Holders" and
First Security Bank, National Association, as "Owner
Trustee"
10.43 Security Agreement dated July 28, 2000 between First S-4 09/28/00 10.46
Security Bank, National Association, as "Owner Trustee" and
ABN AMRO Bank N.V., and accepted and agreed to by VSGC
10.44 Master Lease Agreement dated as of July 28, 2000 between S-4 09/28/00 10.47
First Security Bank, National Association, as "Owner
Trustee" and VSGC
10.45 Construction Agency Agreement dated July 28, 2000 between S-4 09/28/00 10.48
VSGC and First Security Bank, National Association, as
"Owner Trustee'
10.46 Credit Agreement dated September 1, 2000 among VSGC, the 10-Q 09/30/00 10.11
various parties thereto from time to time as "Guarantors",
ABN AMRO Bank N.V., as "Administrative Agent" for
"Lenders", Credit Suisse First Boston, as "Documentation
Agent", and Credit Lyonnais Los Angeles Branch, as
"Syndication Agent".
10.47* Employment Agreement dated November 17, 2000 between X
VERITAS and Gary L. Bloom
10.48* VERITAS 2001 Chief Executive Officer Compensation Plan X
10.49* Form of VERITAS 2001 Executive Officer Compensation Plan X
10.50* VERITAS Non-Qualified Deferred Compensation Plan X
21.01 Subsidiaries of the Registrant X
23.03 Consent of Independent Auditors X
- ---------------
* Management contract, compensatory plan or arrangement.
+ Confidential treatment has been granted with respect to certain portions of
this document.
(b) Reports on Form 8-K
DATE OF REPORT ITEM(S) DESCRIPTION
- -------------- ------- -----------
10/13/00 5, 7 VERITAS announced financial results for its third quarter
ended September 30, 2000 and included the press release.
11/17/00 5, 7 VERITAS announced that it named Gary L. Bloom as president
and chief executive officer and included the press release.
11/30/00 5 VERITAS announced that it chose not to make a cash election
under the transaction involving Seagate Technology, Inc.
12/07/00 5 VERITAS announced the consummation of the transaction
involving Seagate Technology, Inc.
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SIGNATURES
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, in the City of Mountain View, State of
California, on the 29th day of March 2001.
VERITAS Software Corporation
Registrant
/s/ KENNETH E. LONCHAR
--------------------------------------
Kenneth E. Lonchar
Senior Vice President, Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR:
/s/ GARY L. BLOOM President and Chief Executive March 29, 2001
- ----------------------------------------------------- Officer
Gary L. Bloom
PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER:
/s/ KENNETH E. LONCHAR Senior Vice President, March 29, 2001
- ----------------------------------------------------- Finance and Chief Financial
Kenneth E. Lonchar Officer
ADDITIONAL DIRECTORS:
/s/ MARK LESLIE Chairman of the Board March 29, 2001
- -----------------------------------------------------
Mark Leslie
Vice Chairman of the Board
- -----------------------------------------------------
Geoffrey W. Squire
/s/ FRED VAN DEN BOSCH Director March 29, 2001
- -----------------------------------------------------
Fred van den Bosch
/s/ STEVEN BROOKS Director March 29, 2001
- -----------------------------------------------------
Steven Brooks
/s/ WILLIAM H. JANEWAY Director March 29, 2001
- -----------------------------------------------------
William H. Janeway
/s/ JOSEPH D. RIZZI Director March 29, 2001
- -----------------------------------------------------
Joseph D. Rizzi
/s/ STEPHEN J. LUCZO Director March 29, 2001
- -----------------------------------------------------
Stephen J. Luczo
49
52
FINANCIAL STATEMENTS
As required under Item 8. Financial Statements and Supplementary Data, the
consolidated financial statements of the Company are provided in this separate
section. The consolidated financial statements included in this section are as
follows:
FINANCIAL STATEMENT DESCRIPTION PAGE
------------------------------- ----
Consolidated Balance Sheets As of December 31, 2000 and
1999...................................................... 51
Consolidated Statements of Operations -- Years Ended
December 31, 2000, 1999 and 1998.......................... 52
Consolidated Statements of Stockholders' Equity -- Years
Ended December 31, 2000, 1999 and 1998.................... 53
Consolidated Statements of Cash Flows -- Years Ended
December 31, 2000, 1999 and 1998.......................... 54
Notes to Consolidated Financial Statements.................. 55
Report of Ernst & Young LLP, Independent Auditors........... 74
50
53
VERITAS SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
DECEMBER 31,
-------------------------
2000 1999
----------- ----------
Current assets:
Cash and cash equivalents................................. $ 886,558 $ 148,244
Short-term investments.................................... 232,891 544,137
Accounts receivable, net of allowance for doubtful
accounts of $7,810 and $5,693, respectively............ 186,863 132,180
Deferred income taxes..................................... 38,017 23,803
Other current assets...................................... 38,303 13,381
----------- ----------
Total current assets.............................. 1,382,632 861,745
Long-term investments....................................... 136,111 65,036
Property and equipment, net................................. 168,389 76,958
Goodwill and other intangibles, net......................... 2,285,320 3,226,749
Other assets................................................ 110,382 2,789
----------- ----------
$ 4,082,834 $4,233,277
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 45,250 $ 30,229
Accrued compensation and benefits......................... 63,838 35,560
Accrued acquisition and restructuring costs............... 44,123 24,202
Other accrued liabilities................................. 69,289 47,531
Income taxes payable...................................... 34,454 6,804
Deferred revenue.......................................... 201,001 86,979
----------- ----------
Total current liabilities......................... 457,955 231,305
Convertible subordinated notes.............................. 429,176 451,044
Deferred and other income taxes............................. 213,132 157,867
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
10,000 shares authorized: none issued and
outstanding........................................... -- --
Common stock, $.001 par value:
2,000,000 shares authorized; 411,565 and 390,898 shares
issued at December 31, 2000 and 1999; 392,890 and
390,898 outstanding at December 31, 2000 and 1999..... 412 391
Additional paid-in capital................................ 5,847,844 3,926,554
Accumulated deficit....................................... (1,152,166) (532,374)
Accumulated other comprehensive loss...................... (11,455) (1,510)
Treasury stock, at cost; 18,675 shares at December 31,
2000................................................... (1,702,064) --
----------- ----------
Total stockholders' equity........................ 2,982,571 3,393,061
----------- ----------
$ 4,082,834 $4,233,277
=========== ==========
See accompanying notes to consolidated financial statements.
51
54
VERITAS SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
---------- --------- --------
Net revenue:
User license fees...................................... $ 987,363 $ 498,014 $167,703
Services............................................... 219,965 98,098 43,162
---------- --------- --------
Total net revenue.............................. 1,207,328 596,112 210,865
Cost of revenue:
User license fees...................................... 40,779 20,735 8,798
Services............................................... 85,968 38,161 20,663
Amortization of developed technology................... 62,054 35,659 --
---------- --------- --------
Total cost of revenue.......................... 188,801 94,555 29,461
---------- --------- --------
Gross profit............................................. 1,018,527 501,557 181,404
Operating expenses:
Selling and marketing.................................. 443,834 221,989 76,392
Research and development............................... 175,901 94,477 40,239
General and administrative............................. 77,900 34,185 10,505
Amortization of goodwill and other intangibles......... 879,032 510,943 --
Acquisition and restructuring costs (reversals)........ (4,260) 11,000 --
In-process research and development.................... -- 104,200 600
---------- --------- --------
Total operating expenses....................... 1,572,407 976,794 127,736
---------- --------- --------
Income (loss) from operations............................ (553,880) (475,237) 53,668
Interest and other income, net........................... 59,619 23,328 11,821
Interest expense......................................... (31,567) (15,659) (5,700)
---------- --------- --------
Income (loss) before income taxes........................ (525,828) (467,568) 59,789
Provision for income taxes............................... 93,964 35,390 8,141
---------- --------- --------
Net income (loss)........................................ $ (619,792) $(502,958) $ 51,648
========== ========= ========
Net income (loss) per share -- basic..................... $ (1.55) $ (1.59) $ 0.24
========== ========= ========
Net income (loss) per share -- diluted................... $ (1.55) $ (1.59) $ 0.22
========== ========= ========
Number of shares used in computing per share
amounts -- basic....................................... 400,034 316,892 211,558
========== ========= ========
Number of shares used in computing per share amounts --
diluted................................................ 400,034 316,892 232,519
========== ========= ========
See accompanying notes to consolidated financial statements.
52
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VERITAS SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------- PAID-IN ACCUMULATED COMPREHENSIVE DEFERRED
SHARES AMOUNT CAPITAL DEFICIT LOSS COMPENSATION
------- ------ ---------- ----------- ------------- ------------
BALANCE AT DECEMBER 31, 1997.............. 207,573 208 185,679 (81,064) (566) (64)
Components of comprehensive income
(loss):
Net income (loss)...................... -- -- -- 51,648 -- --
Foreign currency translation
adjustment........................... -- -- -- -- 10 --
Total comprehensive income
(loss)............................
Exercise of stock options................ 5,547 5 10,398 -- -- --
Issuance of common stock under employee
stock purchase plan.................... 1,209 1 3,567 -- -- --
Amortization of deferred compensation.... -- -- -- -- -- 32
------- ---- ---------- ----------- -------- ----
BALANCE AT DECEMBER 31, 1998.............. 214,329 214 199,644 (29,416) (556) (32)
Components of comprehensive income
(loss):
Net income (loss)...................... -- -- -- (502,958) -- --
Foreign currency translation
adjustment........................... -- -- -- -- (954) --
Total comprehensive income
(loss)............................
Exercise of stock options................ 11,909 12 38,521 -- -- --
Issuance of common stock under employee
stock purchase plan.................... 799 1 6,973 -- -- --
Tax benefits from stock plans............ -- -- 63,419 -- -- --
Issuance of common stock related to the
NSMG acquisition....................... 155,583 156 3,151,196 -- -- --
Issuance of options to purchase shares of
common stock related to the NSMG
acquisition............................ -- -- 281,418 -- -- --
Issuance of common stock related to the
TeleBackup acquisition................. 6,842 7 134,095 -- -- --
Issuance of options to purchase shares of
common stock related to the TeleBackup
acquisition............................ -- -- 2,762 -- -- --
Issuance of common stock related to the
NuView acquisition..................... 1,436 1 48,526 -- -- --
Amortization of deferred compensation.... -- -- -- -- -- 32
------- ---- ---------- ----------- -------- ----
BALANCE AT DECEMBER 31, 1999.............. 390,898 391 3,926,554 (532,374) (1,510) --
Components of comprehensive income
(loss):
Net income (loss)...................... -- -- -- (619,792) -- --
Foreign currency translation
adjustment........................... -- -- -- -- (9,001) --
Change in unrealized loss on
available-for-sale investments, net
of tax of $629....................... -- -- -- -- (944) --
Total comprehensive income
(loss)............................
Exercise of stock options................ 15,806 16 101,423 -- -- --
Issuance of common stock under employee
stock purchase plan.................... 1,126 1 18,064 -- -- --
Tax benefits from stock plans............ -- -- 160,786 -- -- --
Purchase of treasury stock related to the
Seagate acquisition.................... -- -- -- -- -- --
Reissuance of treasury stock related to
the Seagate acquisition................ -- -- 1,603,380 -- -- --
Conversion of convertible subordinated
notes.................................. 3,735 4 37,637 -- -- --
------- ---- ---------- ----------- -------- ----
BALANCE AT DECEMBER 31, 2000.............. 411,565 $412 $5,847,844 $(1,152,166) $(11,455) $ --
======= ==== ========== =========== ======== ====
TREASURY STOCK TOTAL
----------------------- STOCKHOLDERS'
SHARES AMOUNT EQUITY
-------- ------------ -------------
BALANCE AT DECEMBER 31, 1997.............. -- -- 104,193
Components of comprehensive income
(loss):
Net income (loss)...................... -- -- 51,648
Foreign currency translation
adjustment........................... -- -- 10
------------
Total comprehensive income
(loss)............................ 51,658
Exercise of stock options................ -- -- 10,403
Issuance of common stock under employee
stock purchase plan.................... -- -- 3,568
Amortization of deferred compensation.... -- -- 32
-------- ------------ ------------
BALANCE AT DECEMBER 31, 1998.............. -- -- 169,854
Components of comprehensive income
(loss):
Net income (loss)...................... -- -- (502,958)
Foreign currency translation
adjustment........................... -- -- (954)
------------
Total comprehensive income
(loss)............................ (503,912)
Exercise of stock options................ -- -- 38,533
Issuance of common stock under employee
stock purchase plan.................... -- -- 6,974
Tax benefits from stock plans............ -- -- 63,419
Issuance of common stock related to the
NSMG acquisition....................... -- -- 3,151,352
Issuance of options to purchase shares of
common stock related to the NSMG
acquisition............................ -- -- 281,418
Issuance of common stock related to the
TeleBackup acquisition................. -- -- 134,102
Issuance of options to purchase shares of
common stock related to the TeleBackup
acquisition............................ -- -- 2,762
Issuance of common stock related to the
NuView acquisition..................... -- -- 48,527
Amortization of deferred compensation.... -- -- 32
-------- ------------ ------------
BALANCE AT DECEMBER 31, 1999.............. -- -- 3,393,061
Components of comprehensive income
(loss):
Net income (loss)...................... -- -- (619,792)
Foreign currency translation
adjustment........................... -- -- (9,001)
Change in unrealized loss on
available-for-sale investments, net
of tax of $629....................... -- -- (944)
------------
Total comprehensive income
(loss)............................ (629,737)
Exercise of stock options................ -- -- 101,439
Issuance of common stock under employee
stock purchase plan.................... -- -- 18,065
Tax benefits from stock plans............ -- -- 160,786
Purchase of treasury stock related to the
Seagate acquisition.................... (128,060) (11,671,708) (11,671,708)
Reissuance of treasury stock related to
the Seagate acquisition................ 109,385 9,969,644 11,573,024
Conversion of convertible subordinated
notes.................................. -- -- 37,641
-------- ------------ ------------
BALANCE AT DECEMBER 31, 2000.............. (18,675) $ (1,702,064) $ 2,982,571
======== ============ ============
See accompanying notes to consolidated financial statements.
53
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VERITAS SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
------------ ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (619,792) $ (502,958) $ 51,648
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 46,097 24,126 7,346
Amortization of goodwill and other intangibles.......... 879,032 510,943 --
Amortization of developed technology.................... 62,054 35,659 --
In-process research and development..................... -- 104,200 600
Acquisition and restructuring costs..................... (4,260) 948 --
Amortization of original issue discount on convertible
notes................................................. 15,773 5,402 --
Deferred income taxes................................... (90,827) (36,775) (8,000)
Changes in operating assets and liabilities, net of
effects of business acquisitions:
Accounts receivable................................... (54,683) (77,174) (22,127)
Other receivable...................................... -- 22,935 --
Other assets.......................................... (35,681) (3,367) (8,136)
Accounts payable...................................... 15,021 19,389 3,469
Accrued compensation and benefits..................... 28,278 17,539 4,611
Accrued acquisition and restructuring costs........... (15,819) (15,269) --
Other accrued liabilities............................. 19,174 10,169 2,525
Income taxes payable.................................. 27,650 (8,956) 10,694
Tax benefits from stock plans......................... 160,786 63,419 --
Deferred revenue...................................... 114,022 37,203 20,167
------------ ---------- ---------
Net cash provided by operating activities........... 546,825 207,433 62,797
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of held-to-maturity investments................. (836,897) (764,097) (284,819)
Held-to-maturity investment maturities.................... 846,119 258,891 296,048
Sale of held-to-maturity investments...................... 230,949 -- --
Purchase of property and equipment........................ (134,665) (59,671) (23,424)
Cash acquired from Seagate Technology..................... 2,294,301 -- --
Payments to former Seagate Technology stockholders........ (2,294,301) -- --
Cash acquired from Seagate Software....................... -- 1,044 --
Cash acquired from TeleBackup............................. -- 1,493 --
Strategic investments in businesses....................... (22,000) -- --
Purchase of other businesses and technologies............. (2,520) (14,625) (1,250)
------------ ---------- ---------
Net cash provided by (used for) investing
activities........................................ 80,986 (576,965) (13,445)
FINANCING ACTIVITIES:
Proceeds from short-term borrowings....................... 465,000 -- --
Repayments of short-term borrowings....................... (465,000) -- --
Proceeds from issuance of common stock.................... 119,504 45,507 13,971
Net proceeds from issuance of convertible debt............ -- 334,137 --
------------ ---------- ---------
Net cash provided by financing activities........... 119,504 379,644 13,971
Effect of exchange rate changes............................. (9,001) (954) 134
------------ ---------- ---------
Net increase in cash and cash equivalents................... 738,314 9,158 63,457
Cash and cash equivalents at beginning of year.............. 148,244 139,086 75,629
------------ ---------- ---------
Cash and cash equivalents at end of year.................... $ 886,558 $ 148,244 $ 139,086
============ ========== =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest.................................... $ 14,926 $ 5,300 $ 5,521
============ ========== =========
Cash paid for (refund) income taxes....................... $ (3,403) $ 15,834 $ 6,245
============ ========== =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
TRANSACTIONS:
Issuance of common stock and options for business
acquisitions............................................ $ -- $3,618,161 $ --
============ ========== =========
Issuance of common stock for conversion of notes.......... $ 36,245 $ -- $ --
============ ========== =========
Purchase of treasury stock related to the Seagate
transaction............................................. $(11,671,708) $ -- $ --
============ ========== =========
Reissuance of treasury stock related to the Seagate
transaction............................................. $ 11,573,024 $ -- $ --
============ ========== =========
See accompanying notes to consolidated financial statements.
54
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VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
VERITAS Software Corporation (the "Company"), a Delaware corporation, is a
leading independent supplier of data availability software. Data availability
software includes storage management and data protection software as well as
clustering, replication and storage area networking software. The Company
develops and sells products for most popular operating systems, including
versions of UNIX, Windows NT and Linux. The Company also provides a full range
of services to assist its customers in planning and implementing their data
availability solutions. The Company markets its products and services to
original equipment manufacturers ("OEM") and end user customers through a
combination of direct sales and indirect sales channels such as resellers,
value-added resellers, hardware distributors, application software vendors and
systems integrators.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Stock splits
On June 7, 1999, the Company announced a two-for-one stock split in the
form of a stock dividend paid on July 8, 1999 to stockholders of record on June
18, 1999. On October 14, 1999, the Company announced a three-for-two split in
the form of a stock dividend paid on November 19, 1999 to stockholders of record
on November 2, 1999. On January 27, 2000, the Company announced a three-for-two
split in the form of a stock dividend paid on March 3, 2000 to stockholders of
record on February 18, 2000. All share and per share data have been restated to
give retroactive effect to these stock splits.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents include cash and highly liquid investments with
insignificant interest rate risk and with original maturities of three months or
less. The Company invests its excess cash in diversified instruments maintained
primarily in U.S. financial institutions in an effort to preserve principal and
to maintain safety and liquidity.
Short-term investments include investments with original maturities greater
than three months and remaining maturities of less than one year as of the
balance sheet date. The Company accounts for its short-term investments in
accordance with Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities, ("SFAS No. 115") and
these short-term investments are classified as held to maturity as of the
balance sheet date. At December 31, 2000, amortized cost approximated fair value
for all cash equivalents and short-term investments. To date, there have been no
significant realized or unrealized gains or losses on the short-term
investments.
In the fourth quarter of 2000, the Company conducted a selected liquidation
of approximately $397.0 million of its cash equivalents and short-term
investments to facilitate the Seagate Technology transaction (see Note 2). The
isolated, nonrecurring and unusual nature of the transaction does not change the
Company's intent to hold the other investments to maturity. The realized gain or
loss on the liquidated investments was not significant.
55
58
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-Term Investments
Investments with remaining maturities greater than one year as of the
balance sheet date are classified as long-term. The Company accounts for its
long-term investments in accordance with SFAS No. 115 and these investments are
classified as held to maturity as of the balance sheet date. At December 31,
2000, amortized cost approximated fair value for all long-term investments and,
to date, there have been no significant realized or unrealized gains or losses
on the Company's long-term investments.
Investments in Equity Securities
The Company accounts for its investments in equity securities in accordance
with SFAS No. 115 and these investments are classified as available-for-sale.
Investments in equity securities are included in other assets in the Company's
consolidated balance sheet. These investments are carried at fair value, with
unrealized gains or losses, net of tax, included in accumulated other
comprehensive income or loss as a separate component of stockholders' equity. In
2000, the Company recorded an unrealized loss of $0.9 million, net of tax of
$0.6 million.
Derivative Financial Instruments
The Company transacts business in various foreign currencies and primarily
utilizes foreign currency forward exchange contracts ("forward contracts"), to
hedge certain foreign currency transaction exposures. The Company does not use
forward contracts or any other hedging instruments for speculative trading
purposes.
As of December 31, 2000, the total gross notional amount of the Company's
forward contracts was approximately $178.9 million, all hedging intercompany
accounts of certain of its international subsidiaries. The forward contracts had
a term of thirty one days or less and settled immediately after the end of 2000.
The fair value of the forward contracts is based on quoted market prices. The
carrying amount and fair value of the forward contracts was not significant as
of December 31, 2000. The gains and losses associated with currency rate changes
on forward contracts are recorded in other income (expense), as they generally
offset corresponding gains and losses on the foreign currency denominated assets
or liabilities being hedged.
In September 2000, the Company entered into a three year cross currency
interest rate swap ("swap") transaction for the purpose of hedging fixed
interest rate, foreign currency denominated cash flows under an intercompany
loan receivable. Under the terms of the swap, monthly EURO denominated fixed
principal and interest payments received under the intercompany loan are swapped
for monthly U.S. dollar fixed principal and interest payments. As of December
31, 2000, the notional amount and the fair value of the swap were approximately
$126.9 million and $7.1 million, respectively. The gains and losses on the swap
are recorded in the same period as losses and gains on the underlying
transaction are recorded and generally offset.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are calculated using the straight-line method over the estimated useful lives
or, in the case of leasehold improvements, the term of the related lease, if
shorter. The estimated useful lives of furniture and equipment and computer
equipment is generally three to five years. The Company also depreciates a
building located in India over fifteen years. Depreciation and amortization of
property and equipment charged to costs and expenses was approximately
56
59
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$43.2 million for the year ended December 31, 2000, $23.1 million for the year
ended December 31, 1999 and $6.9 million for the year ended December 31,1998.
Goodwill and other intangibles
Goodwill represents the excess of the purchase price of net tangible and
intangible assets acquired in business combinations over their estimated fair
value. Other intangibles mainly represent distribution channels, original
equipment manufacturer agreements, developed technology, assembled workforce and
trademarks acquired in business combinations. Goodwill and other intangibles are
being amortized on a straight-line basis over their estimated useful life of
four years. The Company periodically reviews goodwill and other intangibles for
recoverability or whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. The carrying amount is compared to the
undiscounted cash flows of future operations. In management's opinion, no
material impairment exists at December 31, 2000. Accumulated amortization of
goodwill and other intangibles was $1,492.6 million as of December 31, 2000,
$548.6 million as of December 31, 1999 and $0.5 million as of December 31, 1998.
Revenue Recognition
In October of 1997 the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 97-2 Software Revenue Recognition, which has been
amended by SOP 98-9. These statements set forth generally accepted accounting
principles for recognizing revenue on software transactions. SOP 97-2, as
amended by SOP 98-4, was effective for revenue recognized under software license
and service arrangements beginning January 1, 1998. SOP 98-9 amended SOP 97-2
and requires recognition of revenue using the "residual method" when certain
criteria are met.
The Company derives revenue from software licenses and customer support and
other services. Service revenue includes contracts for software maintenance and
technical support, consulting and training. In software arrangements that
include rights to multiple software products and/or services, the Company
allocates and defers revenue for the undelivered items, based on vendor-specific
objective evidence of fair value, and recognizes the difference between the
total arrangement fee and the amount deferred for the undelivered items as
revenue.
The Company recognizes revenue from licensing of software products to an
end user upon delivery of the software product to the customer, unless the fee
is not fixed or determinable, or collectibility is not considered probable. For
licensing of the Company's software to OEMs, revenue is not recognized until the
software is sold by the OEM to an end-user customer. For licensing of the
Company's software through its indirect sales channels, revenue is recognized
when the software is sold by the reseller, value-added reseller or distributor
to an end-user customer. The Company considers all arrangements with payment
terms extending beyond twelve months and other arrangements with payment terms
longer than its normal business practice not to be fixed or determinable and
revenue is recognized when the fee becomes due. If collectibility is not
considered probable for reasons other than extended payment terms, revenue is
recognized when the fee is collected.
Customer support revenue is recognized on a straight-line basis over the
period that the support is provided. Other software service arrangements are
evaluated to determine whether those services are essential to the functionality
of the other elements of the arrangement. When software services are considered
essential, revenue under the arrangement is recognized using contract
accounting. When software services are not considered essential, the revenue
allocable to the software services is recognized as the services are performed,
assuming all other criteria for revenue recognition have been met.
Revenue is recognized using contract accounting for arrangements involving
customization or modification of the software or where software services are
considered essential to the functionality of the software.
57
60
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue from these software arrangements is recognized using the
percentage-of-completion method with progress-to-completion measured using labor
cost inputs.
Software Development Costs
Under Statement of Financial Accounting Standards No. 86 Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed, certain
software development costs incurred subsequent to the establishment of
technological feasibility are capitalized and amortized over the estimated lives
of the related products. Technological feasibility is established upon
completion of a working model, which is typically demonstrated by initial beta
shipment. The period between the achievement of technological feasibility and
the general release of the Company's products has been of short duration. As of
December 31, 2000 such capitalizable software development costs were
insignificant and all software development costs have been charged to research
and development expense in the accompanying consolidated statements of
operations.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of investments in debt
securities, trade receivables and financial instruments used on hedging
activities. The Company primarily invests its excess cash in commercial paper
rated A-1/P-1, medium-term notes, corporate notes, government securities, market
auction preferreds with approved financial institutions, and other specific
money market instruments of similar liquidity and credit quality. The Company is
exposed to credit risks in the event of default by the financial institutions or
issuers of investments to the extent recorded on the balance sheet. The Company
generally does not require collateral. The Company maintains allowances for
credit losses, and such losses have been within management's expectations. For
the years ended December 31, 2000 and 1999, no customer accounted for greater
than 10% of revenues. For the year ended December 31, 1998, one customer
accounted for approximately 12% or $25.8 million of the Company's revenue. The
counterparties to the agreements relating to the Company's financial instruments
used on hedging activities consist of four major, multinational, high credit
quality, financial institutions. The amounts potentially subject to credit risk
arising from the possible inability of counterparties to meet the terms of their
contracts are generally limited to the amounts, if any, by which a
counterparty's obligations exceed the obligations of the Company with that
counterparty.
Net Income Per Share
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common shares and dilutive
potential common shares outstanding during the period. Dilutive common shares
consist of employee stock options using the treasury stock method and common
shares issued assuming conversion of the convertible subordinated notes, if
dilutive.
Accounting for Stock-Based Compensation
The Company accounts for employee stock-based compensation in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees and related
interpretations. Pro forma net income and net income per share disclosures
required by Statement of Financial Accounting Standards No. 123, Accounting for
Stock Based Compensation, are included in Note 12.
Translation of Foreign Currencies
Assets and liabilities of certain foreign subsidiaries, whose functional
currency is the local currency, are translated at year-end exchange rates.
Income and expense items are translated at the average rates of
58
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VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
exchange prevailing during the year. The adjustment resulting from translating
the financial statements of such foreign subsidiaries is reflected as a separate
component of stockholder's equity. Foreign currency transaction gains or losses
are reported in results of operations.
Impairment of Long-Lived Assets
The Company reviews the assets for impairment and determines whether an
event or change in facts and circumstances indicates that the carrying amount of
property and equipment or other long-lived assets may not be recoverable. The
Company determines recoverability of the assets by comparing the carrying amount
of the asset to net future undiscounted cash flows that the asset is expected to
generate. The impairment recognized is the amount by which the carrying amount
exceeds the fair market value of the asset. No events or changes in facts and
circumstances occurred during the year that would indicate that any impairment
of assets existed.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $36.4
million, $10.5 million and $1.3 million for the years ended December 31, 2000,
1999 and 1998, respectively.
Reclassifications
Certain amounts reported in previous years have been reclassified to
conform to the 2000 presentation.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS No. 137 and
138, establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. The Company will be required to implement SFAS No. 133 as of the
beginning of its fiscal year 2001. The implementation of SFAS No. 133 will not
have a material impact on the Company's financial position, results of
operations or cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
Revenue Recognition in Financial Statements. SAB No. 101 provides guidance on
the recognition, presentation and disclosure of revenue in financial statements.
The required implementation date for the Company was the fourth quarter of 2000,
retroactive to the beginning of its fiscal year. The implementation of SAB No.
101 did not have a material impact on the Company's financial position, results
of operations or cash flows for the year ended December 31, 2000.
NOTE 2. SEAGATE TECHNOLOGY TRANSACTION
On November 22, 2000, the Company completed a multi-party transaction with
Seagate Technology, Inc. and Suez Acquisition Company (Cayman) Limited ("SAC"),
a company formed by a group of private equity firms led by Silver Lake Partners.
The transaction was structured as a leveraged buyout of Seagate Technology
pursuant to which Seagate Technology sold all of its operating assets to SAC,
and SAC assumed and indemnified Seagate Technology and the Company for
substantially all liabilities arising in connection with those operating assets.
At the closing, and after the operating assets and liabilities of Seagate
Technology had been transferred to SAC, a wholly-owned subsidiary of the Company
merged with and into Seagate Technology, following which Seagate Technology
became a wholly-owned subsidiary of the Company. The merger was accounted for by
the Company at the estimated fair value of the assets and liabilities remaining
in Seagate Technology, immediately prior to the merger. The Company issued
approximately 109.4 million shares of its common stock to the Seagate Technology
stockholders in exchange for approximately
59
62
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
128.1 million shares of its common stock and equity securities in Gadzoox
Networks, Inc. held by Seagate Technology. The Company recorded the equity
securities in Gadzoox and the other assets and liabilities assumed from Seagate
Technology at their fair values. In addition, the Company accrued $40 million of
direct transaction costs, of which $9 million was paid as of December 31, 2000.
The Company did not acquire Seagate Technology's disc drive business or any
other Seagate Technology operating business.
The transaction had no impact on the Company's consolidated statement of
operations. The impact of the decrease of approximately 18.7 million of shares
its common stock outstanding was a reduction of approximately 2.0 million shares
used in computing net loss per share for the year ended December 31, 2000,
resulting in an incremental net loss per share of $0.01.
The transaction had impacts on the Company's consolidated balance sheet. As
of December 31, 2000, the Company's other assets included $70 million of
indemnification receivable from SAC and $4 million for its ownership in Gadzoox
Networks, Inc, its accrued acquisition and restructuring costs included $31
million of direct transaction costs, which was net of $9 million paid in 2000,
and its deferred and other income taxes include an additional $132 million,
which was net of a deferred tax asset of $3 million related to the Company's
ownership in Gadzoox Networks, Inc.
NOTE 3. BUSINESS COMBINATIONS
NSMG acquisition
On May 28, 1999, the Company acquired the Network & Storage Management
Group business of Seagate Software, Inc., which the Company refers to as "NSMG."
The NSMG business developed and marketed software products and provided related
services enabling information technology professionals to manage distributed
network resources and to secure and protect enterprise data. In connection with
the NSMG acquisition, the Company issued 155,583,486 shares of its common stock
to Seagate Software, Inc. and issued options to purchase 15,626,358 shares of
its common stock to its employees who were former NSMG employees. The Company
accounted for the NSMG acquisition using the purchase method of accounting, and
incurs charges of $221.5 million per quarter primarily related to the
amortization of developed technology, goodwill and other intangibles over their
estimated useful life of four years. The total NSMG purchase price was $3,464.5
million and included $3,151.4 million for the issuance of our common stock,
$269.7 million for the exchange of options to purchase our common stock and
$43.4 million of acquisition-related costs. The purchase price was allocated,
based on an independent valuation, to goodwill of $3,015.8 million, distribution
channels of $233.8 million, original equipment manufacturer agreements of $23.4
million, developed technology of $233.7 million, assembled workforce of $12.8
million, trademarks of $22.8 million, in-process research and development of
$101.2 million, net deferred tax liabilities of $179.5 million, other
intangibles of $1.5 million and tangible net liabilities assumed of $1.0
million. For 2000, the Company recorded $827.6 million for the amortization of
goodwill and other intangibles, and $58.4 million for the amortization of
developed technology related to this acquisition.
Acquisition-related costs consisted of direct transaction costs of $20.0
million, operating lease commitments on duplicative facilities of $8.2 million
and involuntary termination benefits of $15.2 million. Non-cash charges included
in the acquisition-related costs approximated $11.7 million.
60
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VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Acquisition-related costs are summarized below (in millions):
OPERATING LEASE
DIRECT COMMITMENTS INVOLUNTARY
TRANSACTION ON DUPLICATIVE TERMINATION
COSTS FACILITIES BENEFITS TOTAL
----------- --------------- ----------- ------
Provision accrued at acquisition
date................................ $ 20.0 $ 8.2 $ 15.2 $ 43.4
Cash payments......................... (17.4) (0.3) (1.8) (19.5)
Non-cash charges...................... -- -- (11.7) (11.7)
------ ----- ------ ------
Balance at December 31, 1999.......... 2.6 7.9 1.7 12.2
Cash payments......................... (1.9) (1.9) (0.9) (4.7)
------ ----- ------ ------
Balance at December 31, 2000.......... $ 0.7 $ 6.0 $ 0.8 $ 7.5
====== ===== ====== ======
The remaining acquisition-related costs accrual of $7.5 million is
anticipated to be utilized primarily for servicing operating lease payments or
negotiated buyout of operating lease commitments, the lease terms of which will
expire at various times through the year 2013.
In addition, the Company recorded a restructuring charge of $11.0 million
in 1999 as a result of the NSMG acquisition. This restructuring charge related
to exit costs with respect to duplicative facilities that the Company plans to
vacate, which include $0.9 million of write-off of redundant equipment and
leasehold improvements, and involuntary termination benefits. Involuntary
termination benefits related to the salary and fringe benefit expense for
terminated employees in research and development. Involuntarily terminated
employees represented approximately 2% of the global workforce. In the fourth
quarter of 2000, as a result of lower exit costs than originally estimated with
respect to duplicative facilities, the Company reversed $4.3 million of
restructuring charge.
Restructuring costs are summarized below (in millions):
WRITE OFF OF
REDUNDANT
CANCELLATION INVOLUNTARY EQUIPMENT
OF FACILITIES LEASES TERMINATION AND LEASEHOLD
AND OTHER CONTRACTS BENEFITS IMPROVEMENTS TOTAL
-------------------- ----------- ------------- ------
Provision accrued at acquisition
date............................ $ 8.8 $ 1.3 $ 0.9 $ 11.0
Cash payments..................... -- (0.9) -- (0.9)
Non-cash charges.................. -- -- (0.9) (0.9)
----- ----- ----- ------
Balance at December 31, 1999...... 8.8 0.4 -- 9.2
Cash payments..................... (0.2) -- -- (0.2)
Reversal.......................... (3.9) (0.4) -- (4.3)
----- ----- ----- ------
Balance at December 31, 2000...... $ 4.7 $ -- $ -- $ 4.7
===== ===== ===== ======
The remaining restructuring charge accrual of $4.7 million is anticipated
to be utilized for servicing operating lease payments or negotiated buyout of
operating lease commitments, the lease terms of which will expire at various
times through the year 2012.
TeleBackup acquisition
On June 1, 1999 the Company acquired TeleBackup Systems, Inc., which the
Company refers to as "TeleBackup." TeleBackup designed, developed and marketed
software solutions for local and remote backup and recovery of electronic
information stored on networked, remote and mobile personal computers.
TeleBackup became a wholly owned subsidiary of the Company in exchange for the
issuance of 6,842,795 shares of either its common stock or exchangeable shares
to the holders of TeleBackup common shares and the exchange of options to
purchase 154,706 shares of its common stock to its employees who were former
61
64
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
employees of TeleBackup. The Company accounted for the TeleBackup acquisition
using the purchase method of accounting, and incurs charges of $9.0 million per
quarter primarily related to the amortization of developed technology, goodwill
and other intangibles over their estimated useful life of four years. The total
purchase price for TeleBackup was $143.1 million and included $134.1 million
related to the issuance of our common stock, $2.8 million for the issuance of
options to purchase our common stock and $6.2 million in acquisition-related
costs. The purchase price was allocated, based on an independent valuation, to
goodwill of $133.1 million, distribution channels of $1.0 million, original
equipment manufacturer agreements of $2.1 million, developed technology of $6.6
million, assembled workforce of $0.3 million, trademarks of $1.3 million,
in-process research and development of $1.9 million, net deferred tax
liabilities of $3.0 million and tangible net liabilities assumed of $0.2
million. For 2000, the Company recorded $34.5 million for amortization of
goodwill and other intangibles, and $1.7 million for the amortization of
developed technology related to this acquisition.
The acquisition costs of $6.2 million consist primarily of direct
transaction costs and involuntary termination benefits.
Acquisition-related costs are summarized below (in millions):
DIRECT INVOLUNTARY
TRANSACTION TERMINATION
COSTS BENEFITS TOTAL
----------- ----------- -----
Provision accrued at acquisition date................. $ 5.6 $ 0.6 $ 6.2
Cash payments......................................... (5.1) (0.2) (5.3)
----- ----- -----
Balance at December 31, 1999.......................... 0.5 0.4 0.9
Cash payments......................................... (0.2) (0.4) (0.6)
----- ----- -----
Balance at December 31, 2000.......................... $ 0.3 $ -- $ 0.3
===== ===== =====
The remaining $0.3 million is anticipated to be utilized in 2001.
NuView acquisition
On August 10, 1999, the Company acquired certain assets of NuView, Inc.,
which the Company refers to as "NuView". Under an asset purchase agreement, the
Company acquired certain assets of NuView, including its Windows NT cluster
management solution, Cluster X, for a total cost of approximately $67.9 million.
The Company accounted for the acquisition using the purchase method of
accounting, and incurs charges of $4.3 million per quarter primarily related to
the amortization of developed technology, goodwill and other intangibles over
their estimated useful life of four years. The purchase price included $47.7
million related to the issuance of the Company's common stock, $0.8 million for
the issuance of options to purchase the Company's common stock to former NuView
employees, $0.2 million in acquisition-related costs and $19.2 million paid in
cash. The purchase price was allocated, based on an independent valuation, to
goodwill of $62.6 million, developed technology of $2.4 million, assembled
workforce of $0.6 million, trademarks of $0.3 million, covenant-not-to-compete
of $0.9 million and in-process research and development of $1.1 million. For
2000, the Company recorded $16.5 million for amortization of goodwill and other
intangibles, and $0.6 million for the amortization of developed technology
related to this acquisition.
Unaudited pro forma summary results of operations
The following unaudited pro forma summary results of operations data have
been prepared assuming that the NSMG, TeleBackup and NuView acquisitions had
occurred at the beginning of the periods presented. The consolidated results are
not necessarily indicative of results of future operations nor of results that
would have occurred had the acquisitions been consummated as of the beginning of
the periods presented. The pro
62
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VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
forma information excludes the impact of the one-time charges related to
in-process research and development costs of $104.2 million and the
restructuring charges of $11.0 million recorded in 1999 (in thousands, except
per share amounts):
1999 1998
--------- ---------
Net revenue.......................................... $ 700,027 $ 409,998
========= =========
Net loss............................................. $(738,049) $(814,993)
========= =========
Basic and diluted net loss per share................. $ (2.03) $ (2.29)
========= =========
NOTE 4. CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash, cash equivalents and short-term investments consist of the following.
At December 31, 2000, amortized cost approximated fair value for all cash
equivalents and short-term investments (in thousands):
DECEMBER 31,
----------------------
2000 1999
---------- --------
Cash and cash equivalents:
Cash............................................... $ 825,727 $ 55,233
Money market funds................................. 38,416 5,234
Commercial paper................................... 22,415 77,771
Corporate notes.................................... -- 10,006
---------- --------
Cash and cash equivalents............................ 886,558 148,244
---------- --------
Short-term investments:
Commercial paper................................... 113 207,465
Market auction preferreds.......................... 5,400 11,713
Government securities.............................. 45,995 91,599
Corporate notes.................................... 181,383 233,360
---------- --------
Short-term investments............................... 232,891 544,137
---------- --------
Cash, cash equivalents and short-term investments.... $1,119,449 $692,381
========== ========
Long-term investments consist of the following. At December 31, 2000,
amortized cost approximated fair value for all long-term investments (in
thousands):
DECEMBER 31,
-------------------
2000 1999
-------- -------
Long-term investments:
Government securities................................. $ 44,006 $18,838
Medium-term corporate notes........................... 92,105 46,198
-------- -------
Long-term investments................................... $136,111 $65,036
======== =======
The following table represents the maturities of investments in debt
securities, which do not include cash and market auction preferreds (in
thousands):
DECEMBER 31,
2000
------------
Due in less than one year............................... $288,322
Due between one and two years........................... 136,111
--------
Total......................................... $424,433
========
63
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VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consisted of the following (in
thousands):
DECEMBER 31,
---------------------
2000 1999
--------- --------
Building.............................................. $ 916 $ 1,445
Computer equipment.................................... 172,269 89,219
Furniture and equipment............................... 31,649 23,058
Leasehold improvements................................ 36,101 17,266
Construction in Process............................... 33,445 8,727
--------- --------
274,380 139,715
Less -- accumulated depreciation and amortization..... (105,991) (62,757)
--------- --------
Property and equipment, net........................... $ 168,389 $ 76,958
========= ========
NOTE 6. CONVERTIBLE SUBORDINATED NOTES
In October 1997, the Company issued $100.0 million of 5.25% convertible
subordinated notes due 2004 (the "5.25% notes"), for which the Company received
net proceeds of $97.5 million. The Company and its wholly-owned subsidiary,
VERITAS Operating Corporation, are co-obligors on the 5.25% notes and are
unconditionally, jointly and severally liable for all payments under the notes.
During 2000, a total principal amount at maturity of $35.5 million was converted
into approximately 3.7 million shares of the Company's common stock. Based on
the aggregate principal amount at maturity of $64.5 million outstanding as of
December 31, 2000, the 5.25% notes provide for semi-annual interest payments of
$1.7 million each May 1 and November 1. The 5.25% notes are convertible into
shares of the Company's common stock at any time prior to the close of business
on the maturity date, unless previously redeemed or repurchased, at a conversion
price of $9.56 per share, subject to adjustment in certain events, equivalent to
a conversion rate of 104.65 shares of common stock per $1,000 principal amount
at maturity. On or after November 5, 2002, the 5.25% notes will be redeemable
over the period of time until maturity at our option at declining premiums to
par. The debt issuance costs are being amortized over the term of the 5.25%
notes using the interest method. The fair value of the 5.25% notes as of
December 31, 2000 and 1999 was $591.5 million and $1,000.9 million based on the
quoted value on the convertible debt market.
In August 1999, the Company and its wholly-owned subsidiary, VERITAS
Operating Corporation, issued $465.8 million, aggregate principal amount at
maturity, of 1.856% convertible subordinated notes due 2006 (the "1.856% notes")
for which the Company received net proceeds of approximately $334.1 million. The
interest rate of 1.856%, together with the accrual of original issue discount,
represent a yield to maturity of 6.5%. VERITAS and VERITAS Operating Corporation
are co-obligors on the 1.856% notes and are unconditionally, jointly and
severally liable for all payments under the notes. During 2000, a total
principal amount at maturity of $1.0 million was converted into approximately
28,000 shares of the Company's common stock. Based on the aggregate principal
amount at maturity of $464.7 million outstanding as of December 31, 2000, the
1.856% notes provide for semi-annual interest payments of $4.3 million each
February 13 and August 13. The 1.856% notes are convertible into shares of the
Company's common stock at any time prior to the close of business on the
maturity date, unless previously redeemed or repurchased, at a conversion price
of $35.80 per share, subject to adjustment in certain events, equivalent to a
conversion rate of 27.934 shares of common stock per $1,000 principal amount at
maturity. On or after August 16, 2002, the 1.856% notes will be redeemable over
the period of time until maturity at the Company's option at issuance price plus
accrued original issue discount and any accrued interest. The debt issuance
costs are being amortized over the term of the 1.856% notes using the interest
method. The fair value of the 1.856% notes as of December 31, 2000 and 1999 was
$1,158.6 million and $1,259.3 million based on the quoted value on the
convertible debt market.
64
67
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. SUMMARY FINANCIAL INFORMATION OF SUBSIDIARY
VERITAS and its wholly-owned subsidiary, VERITAS Operating Corporation, are
co-obligators on VERITAS' 5.25% convertible subordinated notes due 2004 and
1.856% convertible subordinated notes due 2006. VERITAS and VERITAS Operating
Corporation are unconditionally, jointly and severally liable for all payments
under the notes. On June 30, 2000, VERITAS reorganized its corporate structure
that resulted in the elimination of differences in the consolidated financial
position and operating results of the parent company and VERITAS Operating
Corporation. Consequently, separate summarized financial information of VERITAS
and VERITAS Operating Corporation, previously presented pursuant to Staff
Accounting Bulletin No. 53, Financial Statement Requirements in Filings
Involving the Guarantee of Securities by the Parent, are no longer presented
since such information is now the same as the consolidated financial statements
presented elsewhere herein. No other subsidiaries of VERITAS are co-obligators
or guarantors of the convertible subordinated notes.
NOTE 8. CREDIT FACILITY
During 2000, the Company signed a $50.0 million unsecured credit facility
with a syndicate of financial institutions. At December 31, 2000, no amount was
outstanding. The credit facility is due to expire in September 2001. Borrowings
under the credit facility bear interest at 1.0% to 1.5% over LIBOR, and are
subject to VERITAS' compliance with financial and other covenants. The credit
agreement requires the Company to maintain specified financial covenants such as
earnings before interest, taxes, depreciation and amortization ("EBITDA"), debt
on EBITDA and quick ratio, all of which the Company was in compliance with as of
December 31, 2000.
NOTE 9. COMMITMENTS
The Company currently has operating leases for its facilities through 2021.
Rental expense under operating leases was approximately $32.1 million, $15.6
million and $6.1 million for the years ended December 31, 2000, 1999 and 1998,
respectively. In addition to the basic rent, the Company is responsible for all
taxes, insurance and utilities related to the facilities. The approximate
minimum lease payments as of December 31, 2000 are as follows (in thousands):
2001...................................................... $ 51,528
2002...................................................... 62,925
2003...................................................... 68,804
2004...................................................... 68,267
2005...................................................... 46,808
Thereafter................................................ 225,841
--------
Minimum lease payments.................................... $524,173
========
Facilities lease commitments
During the first quarter of 2000, the Company amended its existing lease
agreement, originally signed in the second quarter of 1999, for new corporate
campus facilities in Mountain View, California. These facilities will replace
certain facilities that the Company currently leases in Mountain View. The new
corporate campus facilities will be developed in one phase for a total of
425,000 square feet and will provide space for sales, marketing, administration
and research and development functions. The lease term for these facilities is
five years beginning in March 2000, with an option to extend the lease term for
two successive periods of one year each. The Company has an option to purchase
the property (land and facilities) for $139.4 million or, at the end of the
lease, to arrange for the sale of the property to a third party with the Company
retaining an obligation to the owner for the difference between the sales price
and the guaranteed residual value up to
65
68
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$123.8 million if the sales price is less than this amount, subject to certain
provisions of the lease. The Company anticipates occupying the new corporate
campus facilities and beginning the lease payments in the second quarter of
2001.
During the first quarter of 2000, the Company signed a lease agreement for
its existing facilities in Roseville, Minnesota. The Company will improve and
expand its existing facilities of 62,000 square feet and will develop adjacent
property adding 260,000 square feet to the campus, with the first phase of
142,000 square feet being completed in the second quarter of 2001. The
facilities will provide space for research and development functions. The lease
term for these facilities is five years beginning in March 2000, with an option
to extend the lease term for two successive periods of one year each. The
Company has an option to purchase the property (land and facilities) for $40
million or, at the end of the lease, to arrange for the sale of the property to
a third party with the Company retaining an obligation to the owner for the
difference between the sales price and the guaranteed residual value up to $34.3
million if the sales price is less than this amount, subject to certain
provisions of the lease. The Company anticipates occupying the new campus
facilities and beginning the lease payments in the second quarter of 2001.
During the third quarter of 2000, the Company signed a lease agreement for
the lease of 65 acres of land and subsequent improvements for new research and
development campus facilities in Milpitas, California. The Company will develop
the site in two phases, adding a total of 990,990 square feet, with the first
phase of 466,000 square feet being completed in the fourth quarter of 2002. The
Company expects to complete the second phase of 524,990 square feet in the third
quarter of 2003. The facilities will provide space for research and development
functions. The lease term for the first phase is five years beginning in July
2000, with an option to extend the lease term for two successive periods of one
year each. The Company has an option to purchase the property (land and first
phase facilities) for $243 million or, at the end of the lease, to arrange for
the sale of the property to a third party with the Company retaining an
obligation to the owner for the difference between the sales price and the
guaranteed residual value up to $220 million if the sales price is less than
this amount, subject to certain provisions of the lease. The Company anticipates
occupying the new campus facilities and beginning the lease payments in the
second quarter of 2002 for the first phase and second quarter of 2003 for the
second phase. The Company expects to start negotiating the financing terms of
the second phase in the third quarter of 2001.
The three lease agreements listed above requires the Company to maintain
specified financial covenants such as earnings before interest, taxes,
depreciation and amortization ("EBITDA"), debt on EBITDA and quick ratio, all of
which the Company was in compliance with as of December 31, 2000.
NOTE 10. CONTINGENCIES
The following discussion relates to the multi-party transaction involving
the Company, Seagate Technology, Inc. and Suez Acquisition Company (Cayman)
Limited, a company formed by a group of private equity firms led by Silver Lake
Partners (see Note 2).
Following the announcement of this transaction on March 29, 2000, Seagate
Technology stockholders filed 17 lawsuits in Delaware and five lawsuits in
California against Seagate Technology, the individual members of Seagate
Technology's board of directors, certain executive officers of Seagate
Technology, Silver Lake Partners, LP, and the Company. Between April 18, 2000
and October 13, 2000, the Delaware Chancery Court consolidated the 17 lawsuits
into a single action captioned "In Re Seagate Technology, Inc. Shareholders
Litigation" and certified the class action, and the plaintiffs filed two amended
complaints and a motion for a preliminary injunction to enjoin the closing of
the proposed transaction. The plaintiffs' second amended complaint alleged that
Seagate Technology's board of directors breached their fiduciary duties to their
stockholders by entering into the leveraged buyout and merger agreements and
that they did not secure the highest possible price for Seagate Technology's
shares, and alleged that the Company aided and abetted that alleged breach. The
plaintiffs sought unspecified damages and an injunction of the closing of the
66
69
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
transaction. On September 28, 2000, the five California complaints were
coordinated, with venue in Santa Clara County. All five of the California
complaints have been voluntarily dismissed.
On October 13, 2000, the parties to the Delaware lawsuit entered into a
Memorandum of Understanding to settle the action. On January 28, 2001, the
parties filed a Stipulation of Settlement in the Court of Chancery of the State
of Delaware in and for New Castle County outlining the terms of the settlement
pursuant to the Memorandum of Understanding. A hearing is scheduled on April 9,
2001 to determine whether the proposed settlement is fair and reasonable and
should be approved by the Court, and whether plaintiffs' counsels' award for
fees and expenses should be paid pursuant to the terms set out in the
Stipulation.
The settlement is conditioned on, among other things, the consummation of
the leveraged buyout and the merger and final court approval of the settlement.
Although the Company expects final court approval of the Delaware
settlement to occur during the first half of 2001, it is possible that final
approval of the settlement will be denied or delayed.
Also, in the ordinary course of business, various lawsuits and claims have
been filed against the Company.
While the outcome of these matters is currently not determinable,
management believes that the ultimate resolution of these matters will not have
a material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
NOTE 11. BENEFIT PLANS
The Company has adopted a retirement savings plan qualified under Section
401(k) of the Internal Revenue Code, which is a pretax savings plan covering
substantially all United States employees. Under the plan, employees may
contribute up to 20% of their pretax salary, subject to certain limitations.
Employees are eligible to participate beginning the first day of the month
following their date of hire. The Company matches approximately 50% of the
employee contributions up to $2,500 per year and contributed approximately $5.3
million in 2000, compared to $3.1 million in 1999. For 1998, the Company matched
approximately 25% of the employee contributions up to $1,200 per year and
contributed approximately $0.6 million.
NOTE 12. STOCK COMPENSATION PLANS
At December 31, 2000, the Company had three stock-based compensation plans,
which are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Since the exercise price of options
granted under such plans is generally equal to the market value on the date of
grant, no compensation cost has been recognized for grants under its stock
option plans and stock purchase plans. If compensation cost for the Company's
stock-based compensation plans had been determined consistent with SFAS No. 123,
the Company's net income (loss) and income (loss) per share would have been
reduced to the pro forma amounts indicated below (in thousands, except per share
amounts):
2000 1999 1998
--------- --------- -------
Net income (loss)
As reported..................................... $(619,792) $(502,958) $51,648
Pro forma....................................... $(771,255) $(540,474) $32,102
Basic earnings (loss) per share
As reported..................................... $ (1.55) $ (1.59) $ 0.24
Pro forma....................................... $ (1.93) $ (1.71) $ 0.15
Diluted earnings (loss) per share
As reported..................................... $ (1.55) $ (1.59) $ 0.22
Pro forma....................................... $ (1.93) $ (1.71) $ 0.14
67
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VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SFAS No. 123 is only applicable to options granted subsequent to January 1,
1995. As a result, its pro forma effect was not fully reflected in fiscal years
prior to 1999.
Stock Option Plans
The Company has two stock option plans. The Company's 1993 Equity Incentive
Plan (the "1993 Plan") provides for the issuance of either incentive or
nonstatutory stock options to employees and consultants of the Company. The
options generally are granted at the fair market value of the Company's common
stock at the date of grant, expire ten years from the date of grant, vest over a
four-year period and are exercisable immediately upon vesting. As of December
31, 2000, the Company has reserved 89.6 million shares of common stock for
issuance under the 1993 Plan. The Company has also reserved 2.5 million shares
for issuance under the Company's 1993 Directors Stock Option Plan. Generally
options expire ten years from date of grant, vest over the term of each
director's board membership and are exercisable immediately upon vesting. As of
December 31, 2000, 25.2 million shares were available for future grant under the
plans.
For the pro forma amounts determined under SFAS No. 123, as set forth
above, the fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998: risk-free interest rates
averaging 6.16% in 2000, 5.55% in 1999 and 5.15% in 1998; a dividend yield of
0.0% for all years; a weighted-average expected life of 5 years for all years;
and a volatility factor of the expected market price of the Company's common
stock of 0.70 for 2000, 0.65 for 1999 and 0.65 for 1998.
A summary of the status of the Company's stock option plans as of December
31, 2000, 1999 and 1998 and changes during the years ended on those dates is
presented below (number of shares in thousands):
2000 1999 1998
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- --------- --------- --------- --------- ---------
Outstanding at beginning of year..... 54,422 $ 10.28 36,948 $ 4.88 34,601 $2.86
Granted.............................. 19,024 $100.76 16,717 $23.36 10,469 $9.76
Assumed in business combinations..... -- $ -- 15,896 $ 3.40 -- $ --
Exercised............................ (15,806) $ 6.47 (11,909) $ 3.21 (5,547) $1.88
Forfeited............................ (2,823) $ 31.29 (3,230) $ 9.07 (2,575) $4.03
-------- ------- -------- ------ ------- -----
Outstanding at end of year........... 54,817 $ 41.73 54,422 $10.28 36,948 $4.88
======== ======= ======== ====== ======= =====
Options exercisable at year end...... 22,625 15,201
Weighted-average fair value of
options Granted during the year.... $ 63.42 $ 13.93 $ 5.75
68
71
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 2000 (number of shares in thousands):
OPTIONS OUTSTANDING
---------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- --------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 2000 LIFE PRICE 2000 PRICE
--------------- -------------- ----------- --------- -------------- ---------
$ 0.02 - $ 2.03 5,756 5.32 $ 1.61 5,338 $ 1.59
$ 2.04 - $ 4.79 7,824 6.51 $ 3.80 5,419 $ 3.68
$ 4.84 - $ 8.70 6,078 7.01 $ 7.02 3,753 $ 6.82
$ 8.88 - $ 17.56 7,951 8.04 $ 14.52 3,039 $ 14.13
$ 17.94 - $ 21.81 6,040 8.51 $ 20.75 1,697 $ 20.66
$ 23.33 - $ 88.00 5,675 9.32 $ 64.86 768 $ 45.64
$ 91.69 - $ 97.00 8,536 9.46 $ 94.35 849 $ 93.82
$ 97.61 - $127.44 5,535 9.48 $108.94 524 $106.33
$128.75 - $134.17 1,422 9.31 $132.42 234 $133.16
------ ---- ------- ------ -------
$ 0.02 - $134.17 54,817 8.01 $ 41.73 21,621 $ 15.43
====== ==== ======= ====== =======
EMPLOYEE STOCK PURCHASE PLANS
As of December 31, 2000, under the Company's 1993 Employee Stock Purchase
Plan (the "1993 Purchase Plan"), the Company is authorized to issue up to 21.9
million shares of common stock to its full-time employees, nearly all of whom
are eligible to participate. Under the terms of the 1993 Purchase Plan,
employees can choose to have up to 10% of their wages withheld to purchase the
Company's common stock. The purchase price of the stock is 85% of the lower of
the subscription date fair market value and the purchase date fair market value.
Substantially all of the eligible employees have participated in the 1993
Purchase Plan in 2000, 1999 and 1998. Under the 1993 Purchase Plan, the Company
issued 1.1 million shares to employees in 2000, 0.8 million shares in 1999, and
0.8 million shares in 1998.
In accordance with APB 25, the Company does not recognize compensation cost
related to employee purchase rights under the Plan. To comply with the pro forma
reporting requirements of SFAS No. 123, compensation cost is estimated for the
fair value of the employees' purchase rights using the Black-Scholes
option-pricing model with the following assumptions for these rights granted in
2000, 1999 and 1998: a dividend yield of 0.0% for all years; an expected life
ranging up to 2 years for all years; an expected volatility factor of 0.70 in
2000, 0.65 in 1999 and 0.65 in 1998; and risk-free interest rates ranging from
6.02% to 6.65% in 2000, from 4.57% to 5.77% in 1999 and from 5.14% to 5.39% in
1998. The weighted-average fair value of the purchase rights granted was $16.11
in 2000, $8.70 in 1999 and $3.15 in 1998.
NOTE 13. STOCKHOLDERS' EQUITY
On October 4, 1998, the Board of Directors of the Company adopted a
Stockholder Rights Plan, declaring a dividend of one preferred share purchase
right for each outstanding share of common stock, par value $0.001 per share, of
VERITAS. The rights are initially attached to the Company's common stock and
will not trade separately. If a person or group acquires 20 percent or more of
the Company's common stock, or announces an intention to make a tender offer for
the Company's common stock the consummation of which would result in acquiring
20 percent or more of the Company's common stock, then the rights will be
distributed and will then trade separately from the common stock. Each right
entitles the registered holder to purchase from the Company one one-hundredth of
a share of Series A Junior Participating Preferred Stock,
69
72
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
par value $0.001 per share, of the Company. The rights expire October 5, 2008,
unless the expiration date is extended or unless the rights are earlier redeemed
or exchanged by the Company.
The Company is authorized to issue up to 10,000,000 shares of undesignated
preferred stock. No such preferred shares have been issued to date.
Total common shares reserved for issuance at December 31, 2000 under all
stock compensation plans are 114.0 million shares (see Note 12).
NOTE 14. INCOME TAXES
Income before provision for income taxes consisted of (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- -------
United States..................................... $(310,529) $(455,404) $57,777
International..................................... (215,299) (12,164) 2,012
--------- --------- -------
$(525,828) $(467,568) $59,789
========= ========= =======
The provision for income taxes consists of the following (in thousands):
YEARS ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- -------
Federal
Current........................................... $165,686 $ 64,452 $11,858
Deferred.......................................... (81,317) (35,245) (8,075)
State
Current........................................... 14,862 9,340 2,514
Deferred.......................................... (9,329) (5,077) 75
Foreign............................................. 4,062 1,920 1,769
-------- -------- -------
Total..................................... $ 93,964 $ 35,390 $ 8,141
======== ======== =======
The tax benefits associated with employee stock option activity or employee
stock purchase plan shares reduced taxes currently payable by $160.8 million for
2000 and $63.4 million for 1999.
The provision for income taxes differed from the amount computed by
applying the federal statutory rate as follows:
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Federal tax at statutory rate............................... 35.0% 35.0% 35.0%
Benefit of loss carryforwards............................... -- -- (9.3)
State taxes................................................. (1.1) (0.9) 4.2
Impact of foreign taxes..................................... (1.7) (0.4) 3.0
Change in valuation allowance............................... -- -- (13.4)
In-process research and development charge and
non-deductible goodwill................................... (52.4) (42.2) --
Tax credits................................................. 0.7 0.5 (7.1)
Other....................................................... 1.6 0.4 1.2
----- ----- -----
Total............................................. (17.9)% (7.6)% 13.6%
===== ===== =====
70
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VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
YEARS ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
--------- --------- --------
Deferred tax assets:
Net operating loss carryforwards............... $ 161,966 $ 26,946 $ 23,276
Reserves and accruals not currently
deductible.................................. 43,091 28,315 6,146
Acquired intangibles........................... 17,898 12,521 1,895
Tax credit carryforwards....................... 20,070 2,861 --
Other.......................................... 9,519 2,170 1,655
--------- --------- --------
Total.................................. 252,544 72,813 32,972
Valuation allowance.............................. (162,319) (11,602) (20,772)
--------- --------- --------
Net deferred tax assets.......................... 90,225 61,211 12,200
Deferred tax liabilities:
Acquired intangibles........................... (130,340) (195,275) --
--------- --------- --------
Net deferred tax assets (liabilities)............ $ (40,115) $(134,064) $ 12,200
========= ========= ========
As of December 31, 2000, $135.0 million of deferred and other income taxes
was recorded with the Seagate Technology transaction and relates to certain tax
liabilities that are expected to be paid by the Company after the merger (see
Note 2). Certain of Seagate Technology's federal and state tax returns for
various fiscal years are under examination by taxing authorities. The Company
believes that adequate amounts of tax have been provided for any final
assessments that may result from these examinations.
The valuation allowance increased by $150.7 million in 2000 and decreased
by $9.2 million in 1999 and $5.0 million in 1998. As of December 31, 2000, the
Company has provided a valuation allowance on certain deferred tax assets that
has two main components. Approximately $11.6 million of the valuation allowance
relates to the tax benefits of certain assets acquired with the acquisition of
NSMG and will be credited to goodwill when realized. The Company has also
provided a valuation allowance on certain of its deferred tax assets because of
uncertainty regarding their realizability due to the expectation of future
employee stock option activity. When recognized, the tax benefit of these
deferred tax assets will be accounted for as a credit to stockholders' equity
rather than as a reduction of the income tax provision.
As of December 31, 2000, the Company had federal tax loss carryforwards of
approximately $350 million and federal tax credit carryforwards of approximately
$20 million. The federal tax loss carryforwards will expire in 2008 through
2020, and the federal tax credit carryforwards will expire in 2003 through 2020,
if not utilized. Because of the change in ownership provisions of the Internal
Revenue Code, a portion of the Company's net operating loss and tax credit
carryforwards may be subject to annual limitation. The annual limitation may
result in the expiration of net operating loss and tax credit carryforwards
before utilization. In addition, certain foreign net operating losses have been
recorded as deferred tax assets with a full valuation allowance.
71
74
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net
income (loss) per share (in thousands, except per share amounts):
YEARS ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
--------- --------- --------
Numerator:
Net income (loss).............................. $(619,792) $(502,958) $ 51,648
========= ========= ========
Denominator:
Denominator for basic net income (loss) per
share -- Weighted-average shares............ 400,034 316,892 211,558
Potential common shares........................ -- -- 20,961
--------- --------- --------
Denominator for diluted net income (loss) per
share....................................... 400,034 316,892 232,519
========= ========= ========
Basic net income (loss) per share................ $ (1.55) $ (1.59) $ 0.24
========= ========= ========
Diluted net income (loss) per share.............. $ (1.55) $ (1.59) $ 0.22
========= ========= ========
Common stock equivalents included in the denominator for purposes of
computing diluted net income (loss) per share do not include 6,753,035 shares
issuable upon conversion of the 5.25% convertible subordinated notes and
12,972,191 shares issuable upon conversion of the 1.856% convertible
subordinated notes, as their effect would be anti-dilutive for all periods
presented. In 2000 and 1999, potential common shares included in the denominator
for purposes of computing diluted net income (loss) per share do not include
36,766,246 and 39,406,524 potential common shares respectively, all related to
employee stock options, as their effect would be anti-dilutive.
NOTE 16. SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information (SFAS No.
131), in 1998. SFAS No. 131 supersedes Statement of Financial Accounting
Standards No. 14, Financial Reporting for Segments of a Business Enterprise and
establishes standards for reporting information about operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or group, in deciding how to allocate resources
and in assessing performance.
The Company operates in one segment, data availability solutions. The
Company's products and services are sold throughout the world, through direct,
OEM, reseller and distributor channels. The Company's chief operating decision
maker, the chief executive officer, evaluates the performance of the Company
based upon stand-alone revenue of product channels and the geographic regions of
the segment and does not receive discrete financial information about asset
allocation, expense allocation or profitability from the Company's storage
products or services.
72
75
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Geographic information (in thousands):
YEARS ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
---------- -------- --------
User license fees(1):
United States................................... $ 733,729 $372,485 $121,910
Europe(2)....................................... 175,945 94,986 33,172
Other(3)........................................ 77,689 30,543 12,621
---------- -------- --------
Total................................... $ 987,363 $498,014 $167,703
========== ======== ========
Services(1):
United States................................... $ 179,185 $ 78,756 $ 34,759
Europe(2)....................................... 31,646 15,450 7,869
Other(3)........................................ 9,134 3,892 534
---------- -------- --------
Total................................... $ 219,965 $ 98,098 $ 43,162
========== ======== ========
Total net revenue....................... $1,207,328 $596,112 $210,865
========== ======== ========
AS OF DECEMBER 31,
-----------------------------------
2000 1999 1998
---------- ---------- -------
Long-lived assets(4):
United States.................................. $2,423,292 $3,289,545 $25,202
Europe(2)...................................... 22,212 11,918 3,644
Other(3)....................................... 8,205 2,244 380
---------- ---------- -------
Total.................................. $2,453,709 $3,303,707 $29,226
========== ========== =======
- ---------------
(1) License and Service revenues are attributed to geographic regions based on
location of customers.
(2) Europe includes the Middle East and Africa.
(3) Other consists of Canada, Latin America, Japan and the Asia Pacific region.
(4) Long-lived assets include all long-term assets except those specifically
excluded under SFAS No. 131, such as deferred income taxes and financial
instruments. Reconciliation to total assets reported (in thousands):
AS OF DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- --------
Total long-lived assets............................. $2,453,709 $3,303,707 $ 29,226
Other assets, including current..................... 1,629,125 929,570 319,891
---------- ---------- --------
Total consolidated assets................. $4,082,834 $4,233,277 $349,117
========== ========== ========
No customer represented 10% or more of the Company's net revenue in 2000 or
1999. One customer represented approximately 12% or $25.8 million of the
Company's net revenue in 1998.
NOTE 17. RELATED PARTY TRANSACTIONS
The Company paid $0.8 million in 1998 and $6.7 million in 1999 in service
fees related to the acquisition of NSMG to Donaldson, Lufkin & Jenrette ("DLJ"),
a company affiliated with a director of the Company until February 1999. The
Company had no outstanding receivable or payable balance with DLJ at December
31, 2000.
73
76
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Stockholders and Board of Directors
VERITAS Software Corporation
We have audited the accompanying consolidated balance sheets of VERITAS
Software Corporation as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of VERITAS
Software Corporation at December 31, 2000 and 1999, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
January 23, 2001
74
77
VERITAS SOFTWARE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
PROVISION
FROM CHARGED TO
BALANCE AT BUSINESSES OPERATING BALANCE AT
BEGINNING OF YEAR ACQUIRED EXPENSES DEDUCTIONS(1) END OF YEAR
----------------- ---------- ---------- ------------- -----------
(IN THOUSANDS)
Allowance for doubtful accounts:
Year ended December 31, 2000...... $5,693 $ -- $4,585 $2,468 $7,810
Year ended December 31, 1999...... $2,572 $1,477 $2,425 $ 781 $5,693
Year ended December 31, 1998...... $1,597 $ -- $1,032 $ 57 $2,572
- ---------------
(1) Deductions related to the allowance for doubtful accounts represent amounts
written off against the allowance.
75
78
EXHIBIT INDEX
INCORPORATED BY REFERENCE
EXHIBIT -------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
- ------- ------------------- ----- ------ ------- --------
10.47* Employment Agreement dated November 17, 2000 between X
VERITAS and Gary L. Bloom
10.48* VERITAS 2001 Chief Executive Officer Compensation Plan X
10.49* Form of VERITAS 2001 Executive Officer Compensation Plan X
10.50* VERITAS Non-Qualified Deferred Compensation Plan X
21.01 Subsidiaries of the Registrant X
23.01 Consent of Independent Auditors X
- ---------------
* Management contract, compensatory plan or arrangement.
76