1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
------------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 2, 1999
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 NO. 001-11403
SEAGATE TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
DELAWARE 94-2612933
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
920 DISC DRIVE
SCOTTS VALLEY, CALIFORNIA 95067
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (831) 438-6550
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of Common Stock on July 2, 1999 as
reported by the New York Stock Exchange, was approximately $5.634 billion.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant's Common Stock on July 2,
1999 was 228,717,889.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1999 Annual Meeting of
Stockholders (the "Proxy Statement") are incorporated by
reference to Part III of this form 10-K Report.
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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 a part of this Report:
1. Financial Statements. The following Consolidated Financial
Statements of Seagate Technology, Inc. and Report of Independent
Auditors are included in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets -- July 2, 1999 and July 3, 1998.
Consolidated Statements of Operations -- Years Ended July 2,
1999; July 3, 1998 and June 27, 1997.
Consolidated Statements of Stockholders' Equity -- Years Ended
July 2, 1999; July 3, 1998 and June 27, 1997.
Consolidated Statements of Cash Flows -- Years Ended July 2,
1999; July 3, 1998 and June 27, 1997.
Notes to Consolidated Financial Statements.
2. The following financial statements of VERITAS Software
Corporation are filed as part of this Report:
Page
----
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-2
Consolidated Statements of Operations for the years ended December 31, 1999, F-3
1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended F-4
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999, F-5
1998 and 1997
Notes to Consolidated Financial Statements F-6
Report of Ernst & Young LLP, Independent Auditors F-22
3. Financial Statement Schedules. The following consolidated
financial statement schedule of Seagate Technology, Inc. is
filed as part of this Report and should be read in conjunction
with the Consolidated Financial Statements of Seagate
Technology, Inc.:
SCHEDULE
II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or notes thereto.
1
3
4. Exhibits:
Notes:
------
3.1 Certificate of Incorporation of Registrant, as amended. (A)
3.2 By-Laws of Registrant, as amended. (B)
4.1 Indenture, dated as of March 1, 1997 (the "Indenture"),
between Seagate Technology, Inc. (the "Company") and First
Trust of California, National Association, as Trustee. (C)
4.2 Officers' Certificate pursuant to Section 301 of the
Indenture, without Exhibits, establishing the terms of the
Company's senior notes and senior debentures. (C)
4.3 Form of Senior Note. (C)
4.4 Form of Senior Debenture. (C)
10.1 1983 Incentive Stock Option Plan and form of Stock Option
Agreement. (E)
10.2 Seagate Technology Employee Stock Purchase Plan, as amended. (K)
10.3 Registrant's Executive Stock Plan. (I)
10.4 Conner Peripherals, Inc. 1986 Incentive Stock Plan. (I)
10.5 Building Agreement for Land At Private Lot A14547 in Yio Chu
Kang dated May 30, 1996 between Seagate Technology
International and Jurong Town Corporation. (K)
10.6 Lease Agreement dated July 18, 1994 between Universal
Appliances Limited and Seagate Technology (Thailand) Limited. (K)
10.7 1991 Incentive Stock Option Plan and form of Option Agreement,
as amended. (K)
10.8 Acquisition Agreement dated as of September 29, 1989 by and
among Seagate Technology, Inc. and Control Data Corporation,
Imprimis Technology Incorporated and Magnetic Peripherals,
Inc. (G)
10.9 Amended and Restated Directors' Option Plan and form of Option
Agreement. (H)
10.10 Amended and Restated Archive Corporation Stock Option and
Restricted Stock Purchase Plan - 1981. (I)
10.11 Amended and Restated Archive Corporation Incentive Stock
Option Plan - 1981. (I)
10.12 Conner Peripherals, Inc. - Arcada Holdings, Inc. Stock Option
Plan. (J)
10.13 Arcada Holdings, Inc. 1994 Stock Option Plan. (J)
10.14 Separation Agreement and Release between the Registrant and
Alan F. Shugart dated as of July 29, 1998. (K)
10.15 1998 Nonstatutory Stock Option Plan and form of Stock Option
Agreement. (L)
21.1 Subsidiaries of the Registrant. (L)
23.1 Consent of Independent Auditors.
23.2 Consent of Independent Auditors.
24.1 Power of Attorney. (L)
27 Financial Data Schedule. (L)
- ----------------------
(A) Incorporated by reference to exhibits filed in response to Item 16,
"Exhibits," of the Company's Registration Statement on Form S-3 (File
No. 33-13430) filed with the Securities and Exchange Commission on April
14, 1987.
(B) Incorporated by reference to exhibits filed in response to Item 14 (a),
"Exhibits," of the Company's Form 10-K, as amended, for the year ended
June 30, 1990.
(C) Incorporated by reference to exhibits filed in response to Item 7(b),
"Financial Statements and Exhibits" of the Company's Current Report on
Form 8-K dated March 4, 1997.
(E) Incorporated by reference to exhibits filed in response to Item 14(a),
"Exhibits," of the Company's Form 10-K for the year ended June 30, 1983.
(G) Incorporated by reference to exhibits filed in response to Item 7(c),
"Exhibits," of the Company's Current Report on Form-8K dated October 2,
1989.
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(H) Incorporated by reference to exhibits filed in response to Item 14(a),
"Exhibits," of the Company's Form 10-K for the year ended June 30, 1991.
(I) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-8 (registration number 333-00697) as
filed with the Commission on February 5, 1996.
(J) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-8 (registration number 333-01059) as
filed with the Commission on February 21, 1996.
(K) Incorporated by reference to exhibits filed in response to Item 14(a),
"Exhibits," of the Company's Form 10-K for the year ended July 3, 1998.
(L) Incorporated by reference to exhibits filed in response to Item 14(a),
"Exhibits," of the Company's Form 10-K for the year ended July 2, 1999.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the quarter ended July 2, 1999 except for the
following:
On June 17, 1999, a report on Form 8-K was filed reporting the
completion of the sale of Seagate Software, Inc.'s Network & Storage
Management Group business to VERITAS Software Corporation on May 28,
1999. Seagate Software, Inc. is a majority-owned subsidiary of the
Registrant.
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5
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
SEAGATE TECHNOLOGY, INC.
BY: *
-------------------------------------------
(Stephen J. Luczo, Chief Executive Officer,
President and a Director)
Dated: March 30, 2000
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS AMENDED REPORT ON FORM 10-K HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
Chief Executive Officer, President March 30, 2000
* and a Director (Principal Executive Officer)
- ------------------------------------------------------
(STEPHEN J. LUCZO)
Executive Vice President and Chief Financial
/s/ Charles C. Pope Officer (Principal Financial and Accounting March 30, 2000
- ------------------------------------------------------ Officer)
(CHARLES C. POPE)
* Co-Chairman of the Board March 30, 2000
- ------------------------------------------------------
(GARY B. FILLER)
* Co-Chairman of the Board March 30, 2000
- ------------------------------------------------------
(LAWRENCE PERLMAN)
* Director March 30, 2000
- ------------------------------------------------------
(KENNETH HAUGHTON)
* Director March 30, 2000
- ------------------------------------------------------
(ROBERT A. KLEIST)
* Director March 30, 2000
- ------------------------------------------------------
(THOMAS P. STAFFORD)
* Director March 30, 2000
- ------------------------------------------------------
(LAUREL L. WILKENING)
*By: /s/ Charles C. Pope
-----------------------------------------------
Charles C. Pope
Attorney-in-fact
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6
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, 1999 and
1998...................................................... F-2
Consolidated Statements of Operations-Years Ended December
31, 1999, 1998 and 1997................................... F-3
Consolidated Statements of Stockholders' Equity-Years Ended
December 31, 1999, 1998 and 1997.......................... F-4
Consolidated Statements of Cash Flows-Years Ended December
31, 1999, 1998 and 1997................................... F-5
Notes to Consolidated Financial Statements.................. F-6
Report of Ernst & Young LLP, Independent Auditors........... F-22
F-1
7
VERITAS SOFTWARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
DECEMBER 31,
----------------------
1999 1998
---------- --------
Current assets:
Cash and cash equivalents................................. $ 148,244 $139,086
Short-term investments.................................... 544,137 72,040
Accounts receivable, net of allowance for doubtful
accounts of $5,693 and $2,572, respectively............ 132,180 52,697
Deferred income taxes..................................... 23,803 4,272
Other current assets...................................... 13,381 9,237
---------- --------
Total current assets.............................. 861,745 277,332
Long-term investments....................................... 65,036 31,925
Property and equipment, net................................. 76,958 26,518
Goodwill and other intangibles, net......................... 3,226,749 4,005
Deferred income taxes....................................... -- 7,928
Other assets................................................ 2,789 1,409
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$4,233,277 $349,117
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 30,229 $ 4,958
Accrued compensation and benefits......................... 35,560 11,267
Accrued acquisition and restructuring costs............... 24,202 478
Other accrued liabilities................................. 41,727 10,718
Income taxes payable...................................... 6,804 13,424
Customer advances......................................... 5,208 --
Deferred revenue.......................................... 86,979 37,645
---------- --------
Total current liabilities......................... 230,709 78,490
Convertible subordinated notes.............................. 451,044 100,000
Deferred income taxes....................................... 157,867 --
Other non-current liabilities............................... 596 773
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
10,000 shares authorized: none issued and
outstanding........................................... -- --
Common stock, $.001 par value:
500,000 shares authorized; 390,898 and 214,329 shares
issued and outstanding at December 31, 1999 and
1998.................................................. 391 214
Additional paid-in capital................................ 3,926,554 199,644
Accumulated deficit....................................... (532,374) (29,416)
Deferred compensation..................................... -- (32)
Accumulated other comprehensive loss...................... (1,510) (556)
---------- --------
Total stockholders' equity........................ 3,393,061 169,854
---------- --------
$4,233,277 $349,117
========== ========
See accompanying notes to consolidated financial statements.
F-2
8
VERITAS SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- -------- --------
Net revenue:
User license fees....................................... $ 498,014 $167,703 $ 95,714
Services................................................ 98,098 43,162 25,411
--------- -------- --------
Total net revenue............................... 596,112 210,865 121,125
Cost of revenue:
User license fees....................................... 20,735 8,798 4,731
Services................................................ 38,161 20,663 11,714
Amortization of developed technology.................... 35,659 -- --
--------- -------- --------
Total cost of revenue........................... 94,555 29,461 16,445
--------- -------- --------
Gross profit.............................................. 501,557 181,404 104,680
Operating expenses:
Selling and marketing................................... 221,989 76,392 42,868
Research and development................................ 94,477 40,239 25,219
General and administrative.............................. 34,185 10,505 8,027
Amortization of goodwill and other intangibles.......... 510,943 -- --
Acquisition and restructuring costs..................... 11,000 -- 8,490
In-process research and development..................... 104,200 600 --
--------- -------- --------
Total operating expenses........................ 976,794 127,736 84,604
--------- -------- --------
Income (loss) from operations............................. (475,237) 53,668 20,076
Interest and other income, net............................ 23,328 11,821 4,889
Interest expense.......................................... (15,659) (5,700) (1,206)
--------- -------- --------
Income (loss) before income taxes......................... (467,568) 59,789 23,759
Provision for income taxes................................ 35,390 8,141 1,010
--------- -------- --------
Net income (loss)......................................... $(502,958) $ 51,648 $ 22,749
========= ======== ========
Net income (loss) per share -- basic...................... $ (1.59) $ 0.24 $ 0.11
========= ======== ========
Net income (loss) per share -- diluted.................... $ (1.59) $ 0.22 $ 0.10
========= ======== ========
Number of shares used in computing per share
amounts -- basic........................................ 316,892 211,558 205,300
========= ======== ========
Number of shares used in computing per share
amounts -- diluted...................................... 316,892 232,519 222,716
========= ======== ========
See accompanying notes to consolidated financial statements.
F-3
9
VERITAS SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
NOTES ACCUMULATED
COMMON STOCK ADDITIONAL RECEIVABLE OTHER
---------------- PAID-IN ACCUMULATED FROM DEFERRED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS COMPENSATION INCOME (LOSS)
------- ------ ---------- ----------- ------------ ------------ --------------
BALANCE AT DECEMBER 31, 1996......... 202,676 $203 $ 179,207 $(103,813) $(282) $(97) $ (263)
Components of comprehensive income:
Net income (loss)................ -- -- -- 22,749 -- -- --
Foreign currency translation
adjustment..................... -- -- -- -- -- -- (303)
Total comprehensive income..... -- -- -- -- -- -- --
Exercise of stock options.......... 3,750 4 3,266 -- -- -- --
Issuance of common stock under
employee stock purchase plan..... 1,147 1 2,506 -- -- -- --
Payments on notes receivable from
stockholders..................... -- -- -- -- 282 -- --
Amortization of deferred
compensation..................... -- -- -- -- -- 33 --
Tax benefit related to stock
options.......................... -- -- 700 -- -- -- --
------- ---- ---------- --------- ----- ---- -------
BALANCE AT DECEMBER 31, 1997......... 207,573 208 185,679 (81,064) -- (64) (566)
Components of comprehensive income:
Net income (loss)................ -- -- -- 51,648 -- -- --
Foreign currency translation
adjustment..................... -- -- -- -- -- -- 10
Total comprehensive income..... -- -- -- -- -- -- --
Exercise of stock options.......... 5,547 5 10,398 -- -- -- --
Issuance of common stock under
employee stock purchase plan..... 1,209 1 3,567 -- -- -- --
Amortization of deferred
compensation..................... -- -- -- -- -- 32 --
------- ---- ---------- --------- ----- ---- -------
BALANCE AT DECEMBER 31, 1998......... 214,329 214 199,644 (29,416) -- (32) (556)
Components of comprehensive income:
Net income (loss)................ -- -- -- (502,958) -- -- --
Foreign currency translation
adjustment..................... -- -- -- -- -- -- (954)
Total comprehensive income..... -- -- -- -- -- -- --
Exercise of stock options.......... 11,909 12 101,940 -- -- -- --
Issuance of common stock under
employee stock purchase plan..... 798 1 6,973 -- -- -- --
Issuance of common stock related to
the NSMG acquisition............. 155,583 156 3,151,196 -- -- -- --
Issuance of options to purchase
shares of common stock related to
the NSMG acquisition............. -- -- 281,418 -- -- -- --
Issuance of common stock related to
the TeleBackup acquisition....... 6,842 7 134,095 -- -- -- --
Issuance of options to purchase
shares of common stock related to
the TeleBackup acquisition....... -- -- 2,762 -- -- -- --
Issuance of common stock related to
the NuView acquisition........... 1,436 1 48,526 -- -- -- --
Amortization of deferred
compensation..................... -- -- -- -- -- 32 --
------- ---- ---------- --------- ----- ---- -------
BALANCE AT DECEMBER 31, 1999......... 390,898 $391 $3,926,554 $(532,374) $ -- $ -- $(1,510)
======= ==== ========== ========= ===== ==== =======
TOTAL
STOCKHOLDERS'
EQUITY
-------------
BALANCE AT DECEMBER 31, 1996......... $ 74,955
Components of comprehensive income:
Net income (loss)................ 22,749
Foreign currency translation
adjustment..................... (303)
----------
Total comprehensive income..... 22,446
Exercise of stock options.......... 3,270
Issuance of common stock under
employee stock purchase plan..... 2,507
Payments on notes receivable from
stockholders..................... 282
Amortization of deferred
compensation..................... 33
Tax benefit related to stock
options.......................... 700
----------
BALANCE AT DECEMBER 31, 1997......... 104,193
Components of comprehensive income:
Net income (loss)................ 51,648
Foreign currency translation
adjustment..................... 10
----------
Total comprehensive income..... 51,658
Exercise of stock options.......... 10,403
Issuance of common stock under
employee stock purchase plan..... 3,568
Amortization of deferred
compensation..................... 32
----------
BALANCE AT DECEMBER 31, 1998......... 169,854
Components of comprehensive income:
Net income (loss)................ (502,958)
Foreign currency translation
adjustment..................... (954)
----------
Total comprehensive income..... (503,912)
Exercise of stock options.......... 101,952
Issuance of common stock under
employee stock purchase plan..... 6,974
Issuance of common stock related to
the NSMG acquisition............. 3,151,352
Issuance of options to purchase
shares of common stock related to
the NSMG acquisition............. 281,418
Issuance of common stock related to
the TeleBackup acquisition....... 134,102
Issuance of options to purchase
shares of common stock related to
the TeleBackup acquisition....... 2,762
Issuance of common stock related to
the NuView acquisition........... 48,527
Amortization of deferred
compensation..................... 32
----------
BALANCE AT DECEMBER 31, 1999......... $3,393,061
==========
See accompanying notes to consolidated financial statements.
F-4
10
VERITAS SOFTWARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- --------- ---------
Cash flows from operating activities:
Net income (loss)......................................... $ (502,958) $ 51,648 $ 22,749
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 24,126 7,346 3,113
Amortization of goodwill and other intangibles.......... 510,943 -- --
Amortization of developed technology.................... 35,659 -- --
In-process research and development..................... 104,200 600 --
Restructuring costs..................................... 948 -- 1,218
Amortization of original issue discount on convertible
notes................................................. 5,402 -- --
Deferred income taxes................................... (36,775) (8,000) (4,200)
Changes in operating assets and liabilities, net of
effects of business acquisitions:
Accounts receivable................................... (77,174) (22,127) (14,601)
Other receivable...................................... 22,935 -- --
Other assets.......................................... (3,367) (8,136) (267)
Accounts payable...................................... 19,389 3,469 (208)
Accrued compensation and benefits..................... 17,539 4,611 3,480
Accrued acquisition and restructuring costs........... (15,269) -- --
Other accrued liabilities............................. 10,169 2,525 2,387
Income taxes payable.................................. (8,956) 10,694 3,779
Customer advances and deferred revenue................ 37,203 20,167 9,370
---------- --------- ---------
Net cash provided by operating activities................... 144,014 62,797 26,820
Cash flows from investing activities:
Purchases of investments.................................. (764,097) (284,819) (144,907)
Investment maturities..................................... 258,891 296,048 79,921
Payment received on note.................................. -- -- 108
Purchase of property and equipment........................ (59,671) (23,424) (6,181)
Cash acquired from Seagate Software....................... 1,044 -- --
Cash acquired from TeleBackup............................. 1,493 -- --
Purchase of NuView, Inc. ................................. (11,400) -- --
Purchase of Frontier Software Devel. Pvt. Ltd. ........... (1,325) -- --
Purchase of Windward Technologies, Inc. .................. -- (1,250) --
Purchase of other businesses and technologies............. (1,900) -- --
---------- --------- ---------
Net cash used for investing activities...................... (576,965) (13,445) (71,059)
Financing activities:
Proceeds from issuance of common stock.................... 108,926 13,971 5,777
Net proceeds from issuance of convertible debt............ 334,137 -- 97,500
Payments of notes payable................................. -- -- (612)
Payments on notes receivable from stockholders............ -- -- 282
---------- --------- ---------
Net cash provided by financing activities................... 443,063 13,971 102,947
Effect of exchange rate changes............................. (954) 134 (490)
---------- --------- ---------
Net increase in cash and cash equivalents................... 9,158 63,457 58,218
Cash and cash equivalents at beginning of year.............. 139,086 75,629 17,411
---------- --------- ---------
Cash and cash equivalents at end of year.................... $ 148,244 $ 139,086 $ 75,629
========== ========= =========
Supplemental disclosures:
Cash paid for interest.................................... $ 5,300 $ 5,521 $ --
========== ========= =========
Cash paid for income taxes................................ $ 15,834 $ 6,245 $ 1,703
========== ========= =========
Supplemental schedule of noncash investing and financing
transactions:
Issuance of common stock and options for business
acquisitions............................................ $3,618,161 $ -- $ --
========== ========= =========
See accompanying notes to consolidated financial statements.
F-5
11
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
VERITAS Software Corporation (the Company), a Delaware corporation, is a
leading independent supplier of storage management software. The Company's
products help its customers manage complex and diverse computing environments
efficiently and cost-effectively by making sure that their data is protected,
can be accessed at all times, and can be managed and used in compliance with
business policies. The Company's products help to improve the levels of
centralization, control, automation and manageability in computing environments,
they allow information technology, or IT, managers to be more effective with
constrained resources and limited budgets. Its products offer protection against
data loss and file corruption, allow rapid recovery after disk or computer
system failure, enable IT managers and end users to work efficiently with large
numbers of files, and make it possible to manage data distributed on large
networks of computer systems without harming productivity or interrupting users.
In addition, the Company's products provide continuous availability of data in
clustered computer systems that share disk resources to maintain smooth business
operations. Its products are highly scalable in order to keep up with the rapid
growth of data and technologies deployed in businesses. The Company develops and
sells products for all popular operating systems, including versions of UNIX and
Windows NT. Its software solutions are used in a broad spectrum of industries,
including many leading global corporations and e-commerce businesses. The
Company also provides a full range of services to assist its customers in
planning and implementing their storage management solutions. The Company
markets its products and services to original equipment manufacturers and end
user customers through a combination of direct sales and indirect sales channels
such as resellers, value-added resellers, hardware distributors, application
software vendors and systems integrators.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
Stock splits
On June 7, 1999, the Company announced a two-for-one stock split in the
form of a stock dividend paid on July 8, 1999 to stockholders of record on June
18, 1999. On October 14, 1999, the Company announced a three-for-two split in
the form of a stock dividend paid on November 19, 1999 to stockholders of record
on November 2, 1999. On January 27, 2000, the Company announced a three-for-two
split in the form of a stock dividend paid on March 3, 2000 to stockholders of
record on February 18, 2000. All share and per share data have been restated to
give retroactive effect to the 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 when purchased. The Company invests its excess cash in diversified
instruments maintained primarily in U.S. financial institutions in an effort to
preserve principal and to maintain safety and liquidity.
Short-term investments include investments with original maturities of one
year or less when purchased. The Company has determined its short-term
investments are held to maturity under the provisions of
F-6
12
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", (SFAS No. 115) and accordingly such
amounts are recorded at amortized cost.
At December 31, 1999, amortized cost approximated fair value for all cash
equivalents and short-term investments. To date, there have been no significant
realized or unrealized gains or losses on the short-term investments.
Long-Term Investments
Investments with remaining maturities greater than one year from date of
purchase are classified as long-term. The Company accounts for its long-term
investments in accordance with SFAS No. 115 and these investments are classified
as held to maturity as of the balance sheet date. At December 31, 1999,
amortized cost approximated fair value for all long-term investments and, to
date, there have been no significant realized or unrealized gains or losses on
the Company's long-term investments.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are calculated using the straight-line method over the estimated useful lives
or, in the case of leasehold improvements, the term of the related lease, if
shorter. The estimated useful lives of furniture and equipment and computer
equipment is generally three to five years. The Company also depreciates a
building located in India over fifteen years. Depreciation and amortization of
property and equipment charged to costs and expenses was approximately $23.1
million for the year ended December 31, 1999, $6.9 million for the year ended
December 31,1998 and $3.1 million for the year ended December 31,1997.
Goodwill and other intangibles
Goodwill represents the excess of the purchase price of net tangible and
intangible assets acquired in business combinations over their estimated fair
value. Other intangibles mainly represent distribution channels, original
equipment manufacturer agreements, developed technology, assembled workforce and
trademarks acquired in business combinations. Goodwill and other intangibles are
being amortized on a straight-line basis over their estimated useful life of
four years. The Company reviews goodwill and other intangibles to assess
recoverability from future operations using undiscounted cash flows. In
management's opinion, no material impairment exists at December 31, 1999.
Accumulated amortization of goodwill and other intangibles was $548.6 million as
of December 31, 1999 and $0.5 million as of December 31, 1998.
Revenue Recognition
In October of 1997 the Accounting Standards Executive Committee issued
Statement of Position (SOP) 97-2 "Software Revenue Recognition", which has been
amended by SOP 98-4 and SOP 98-9. These statements set forth generally accepted
accounting principles for recognizing revenue on software transactions. SOP
97-2, as amended by SOP 98-4, was effective for revenue recognized under
software license and service arrangements beginning January 1, 1998. SOP 98-9
amends SOP 97-2 and requires recognition of revenue using the "residual method"
when certain criteria are met. The implementation of these provisions of SOP
98-9 will be effective for the Company's fiscal year ending December 31, 2000.
The Company does not believe the impact of SOP 98-9 will be material to its
financial position, results of operations and cash flows.
The Company derives revenue from software licenses and customer support and
other services. Service revenue includes contracts for software maintenance and
technical support, consulting, training, and porting fees. In software
arrangements that include rights to multiple software products and/or services,
the Company allocates the total arrangement fee among each of the deliverables
based on the relative fair value of each of the deliverables, determined based
on vendor-specific objective evidence of fair value.
F-7
13
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company recognizes revenue from licensing of software products to an
end user upon delivery of the software product to the customer, unless the fee
is not fixed or determinable, or collectibility is not considered probable. For
licensing of the Company's software to OEMs, revenue is not recognized until the
software is sold by the OEM to an end-user customer. For licensing of the
Company's software through our indirect sales channels, revenue is recognized
when the software is sold by the reseller, value-added reseller or distributor
to an end-user customer. The Company considers all arrangements with payment
terms extending beyond twelve months and other arrangements with payment terms
longer than normal not to be fixed or determinable. If collectibility is not
considered probable, revenue is recognized when the fee is collected.
Customer support revenue is recognized on a straight-line basis over the
period that the support is provided. Other software service arrangements are
evaluated to determine whether those services are essential to the functionality
of the other elements of the arrangement. When software services are considered
essential, revenue under the arrangement is recognized using contract
accounting. When software services are not considered essential, the revenue
allocable to the software services is recognized as the services are performed.
The Company generally considers software services essential unless the software
is paid for before the services commence and the services are limited to
training or normal installation.
Revenue is recognized using contract accounting for arrangements involving
customization or modification of the software or where software services are
considered essential to the functionality of the software. Revenue from these
software arrangements is recognized using the percentage-of-completion method
with progress-to-completion measured using labor cost inputs.
Software Development Costs
Under Statement of Financial Accounting Standards No. 86 "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
certain software development costs incurred subsequent to the establishment of
technological feasibility are capitalized and amortized over the estimated lives
of the related products. Technological feasibility is established upon
completion of a working model, which is typically demonstrated by initial beta
shipment. The period between the achievement of technological feasibility and
the general release of the Company's products has been of short duration. As of
December 31, 1999 such capitalizable software development costs were
insignificant and all software development costs have been charged to research
and development expense in the accompanying consolidated statements of
operations.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of investments in debt
securities and trade receivables. The Company primarily invests its excess cash
in commercial paper rated A-1/P-1, medium-term notes, corporate notes,
government securities, market auction preferreds with approved financial
institutions, and other specific money market instruments of similar liquidity
and credit quality. The Company is exposed to credit risks in the event of
default by the financial institutions or issuers of investments to the extent
recorded on the balance sheet. The Company generally does not require
collateral. The Company maintains allowances for credit losses, and such losses
have been within management's expectations. For the years ended December 31,
1999 and 1997 no customer accounted for greater than 10% of revenues. For the
year ended December 31, 1998, one customer accounted for approximately 12% or
$25.8 million of the Company's revenue.
Net Income Per Share
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common shares and dilutive
potential common shares outstanding during the period. Dilutive common shares
consist of
F-8
14
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
employee stock options using the treasury stock method and common shares issued
assuming conversion of the convertible subordinated notes, if dilutive.
Accounting for Stock-Based Compensation
The Company accounts for employee stock based compensation in accordance
with APB Opinion No. 25 "Accounting for Stock Issued to Employees" and related
interpretations. Pro forma net income and net income per share disclosures
required by Statement of Financial Accounting Standards No. 123, Accounting for
Stock Based Compensation", are included in Note 9.
Translation of Foreign Currencies
Assets and liabilities of certain foreign subsidiaries, whose functional
currency is the local currency, are translated at year-end exchange rates.
Income and expense items are translated at the average rates of exchange
prevailing during the year. The adjustment resulting from translating the
financial statements of such foreign subsidiaries is reflected as a separate
component of stockholder's equity. Certain other transaction gains or losses,
which have not been material, are reported in results of operations.
Impairment of Long-Lived Assets
The Company reviews the assets for impairment and determines whether an
event or change in facts and circumstances indicates that the carrying amount of
property and equipment or other long-lived assets may not be recoverable. The
Company determines recoverability of the assets by comparing the carrying amount
of the asset to net future undiscounted cash flows that the asset is expected to
generate. The impairment recognized is the amount by which the carrying amount
exceeds the fair market value of the asset. No events or changes in facts and
circumstances occurred during the year that would indicate that any impairment
of assets existed.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133). SFAS No. 133 establishes methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. The Company will be required to implement SFAS No. 133 as of
the beginning of its fiscal year 2001. The Company's exchange rate hedging
activities have been insignificant to date and the Company does not believe the
impact of SFAS No. 133 will be material to its financial position, results of
operations or cash flows.
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions". SOP 98-9
amends SOP 97-2 "Software Revenue Recognition" to require recognition of revenue
using the "residual method" when certain criteria are met. The Company will be
required to implement these provisions of SOP 98-9 for its fiscal year ending
December 31, 2000. SOP 98-9 also amends SOP 98-4, an earlier amendment to SOP
97-2, which extended the deferral of the application of certain passages of SOP
97-2. The Company does not believe the impact of SOP 98-9 will be material to
the Company's financial position, results of operations or cash flows.
NOTE 2. BUSINESS COMBINATIONS
On May 28, 1999, the Company acquired the Network & Storage Management
Group business of Seagate Software, Inc., which the Company refers to as "NSMG."
The NSMG business develops and markets software products and provides related
services enabling information technology professionals to manage distributed
network resources and to secure and protect enterprise data. Its products offer
features such as system backup, disaster recovery, migration, replication,
automated client protection, storage resource
F-9
15
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
management, scheduling, event correlation and desktop management. In connection
with the NSMG acquisition, in consideration for the contribution of assets and
liabilities related to the NSMG business by Seagate Technology, Inc., Seagate
Software, Inc., and their respective subsidiaries, and based on the average
closing price of our common stock of $20.26 per share for 5 days before and
after June 7, 1999, the measurement date for the transaction, the Company issued
155,583,486 shares of its common stock to Seagate Software, Inc. and issued
options to purchase 15,626,358 shares of its common stock to its employees who
were former NSMG employees. The Company accounted for the NSMG acquisition using
the purchase method of accounting, and incurs charges of $221.5 million per
quarter primarily related to the amortization of developed technology, goodwill
and other intangibles over their estimated useful life of four years. The total
NSMG purchase price was $3,464.5 million and included $3,151.4 million for the
issuance of our common stock, $269.7 million for the exchange of options to
purchase our common stock and $43.4 million of acquisition-related costs. The
purchase price was allocated, based on an independent valuation, to goodwill of
$3,015.8 million, distribution channels of $233.8 million, original equipment
manufacturer agreements of $23.4 million, developed technology of $233.7
million, assembled workforce of $12.8 million, trademarks of $22.8 million,
in-process research and development of $101.2 million, net deferred tax
liabilities of $179.5 million, other intangibles of $1.5 million and tangible
net liabilities assumed of $1.0 million. For 1999, the Company recorded $482.5
million for the amortization of goodwill and other intangibles, and $34.1
million for the amortization of developed technology related to this
acquisition. The Consolidated Statements of Operations include the results of
operations of NSMG subsequent to the acquisition date.
Acquisition-related costs consist of direct transaction costs of $20.0
million, operating lease commitments on duplicative facilities of $8.2 million
and involuntary termination benefits of $15.2 million. Non-cash charges included
in the acquisition-related costs approximate $11.7 million. At December 31,
1999, $17.4 million in direct transaction costs, $0.3 million in operating lease
commitments on duplicative facilities and $1.8 million in involuntary
termination benefits were paid against the acquisition-related costs accrual and
$11.7 million of non-cash involuntary termination benefits were charged against
the acquisition-related costs accrual. The remaining acquisition-related costs
accrual of $12.2 million is anticipated to be utilized primarily for servicing
operating lease payments or negotiated buyout of operating lease commitments,
the lease terms of which will expire at various times through the year 2013. In
addition, the Company recorded a restructuring charge of $11.0 million in 1999
as a result of the NSMG acquisition. This restructuring charge related to exit
costs with respect to duplicative facilities that the Company plans to vacate,
which include $0.9 million of write-off of redundant equipment and leasehold
improvements, and involuntary termination benefits. Involuntary termination
benefits relate to the salary and fringe benefit expense for terminated
employees in research and development. Involuntarily terminated employees
represented approximately 2% of the global workforce. At December 31, 1999, $0.9
million in severance costs were paid against the restructuring charge accrual
and $0.9 million of write-off of redundant equipment and leasehold improvements
had been written off. The remaining restructuring charge accrual of $9.2 million
is anticipated to be utilized primarily for servicing operating lease payments
or negotiated buyout of operating lease commitments, the lease terms of which
will expire at various times through the year 2012.
On June 1, 1999 the Company acquired TeleBackup Systems, Inc., which the
Company refers to as "TeleBackup." TeleBackup designs, develops and markets
software solutions for local and remote backup and recovery of electronic
information stored on networked, remote and mobile personal computers.
TeleBackup became a wholly owned subsidiary of the Company in exchange for the
issuance of 6,842,795 shares of either its common stock or exchangeable shares
to the holders of TeleBackup common shares and the exchange of options to
purchase 154,706 shares of its common stock to its employees who were former
employees of TeleBackup. The Company accounted for the TeleBackup acquisition
using the purchase method of accounting, and incurs charges of $9.0 million per
quarter primarily related to the amortization of developed technology, goodwill
and other intangibles over their estimated useful life of four years. Based on
the average closing price of our common stock of $19.60 per share for 5 days
before and after June 1, 1999, the
F-10
16
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
measurement date for the transaction, the total purchase price for TeleBackup
was $143.1 million. The TeleBackup purchase price included $134.1 million
related to the issuance of our common stock, $2.8 million for the issuance of
options to purchase our common stock and $6.2 million in acquisition-related
costs. The acquisition costs of $6.2 million consist primarily of direct
transaction costs and involuntary termination benefits. At December, 1999, of
the total $6.2 million acquisition costs, the Company paid $5.3 million in
direct transaction costs with the majority of the remaining $0.9 million
anticipated to be utilized by May 2000. The purchase price was allocated, based
on an independent valuation, to goodwill of $133.1 million, distribution
channels of $1.0 million, original equipment manufacturer agreements of $2.1
million, developed technology of $6.6 million, assembled workforce of $0.3
million, trademarks of $1.3 million, in-process research and development of $1.9
million, net deferred tax liabilities of $3.0 million and tangible net
liabilities assumed of $0.2 million. For 1999, the Company recorded $20.1
million for amortization of goodwill and other intangibles, and $1.0 million for
the amortization of developed technology related to this acquisition. The
Consolidated Statements of Operations include the results of operations of
TeleBackup subsequent to the acquisition date.
On August 10, 1999, the Company acquired certain assets of NuView, Inc.,
which the Company refers to as "NuView". Under an asset purchase agreement, the
Company acquired certain assets of NuView, including its Windows NT cluster
management solution, Cluster X, for a total cost of approximately $67.9 million.
The Company accounted for the acquisition using the purchase method of
accounting, and incurs charges of $4.3 million per quarter primarily related to
the amortization of developed technology, goodwill and other intangibles over
their estimated useful life of four years. The purchase price included $47.7
million related to the issuance of the Company's common stock, $0.8 million for
the issuance of options to purchase the Company's common stock to former NuView
employees, $0.2 million in acquisition-related costs and $19.2 million payable
in cash, of which $11.4 million has been paid. The purchase price was allocated,
based on an independent valuation, to goodwill of $62.6 million, developed
technology of $2.4 million, assembled workforce of $0.6 million, trademarks of
$0.3 million, covenant-not-to-compete of $0.9 million and in-process research
and development of $1.1 million. For 1999, the Company recorded $8.1 million for
amortization of goodwill and other intangibles, and $0.3 million for the
amortization of developed technology related to this acquisition. The
Consolidated Statements of Operations include the results of operations of
NuView subsequent to the acquisition date.
The following unaudited pro forma summary results of operations data have
been prepared assuming that the NSMG, TeleBackup and NuView acquisitions had
occurred at the beginning of the periods presented. The consolidated results are
not necessarily indicative of results of future operations nor of results that
would have occurred had the acquisitions been consummated as of the beginning of
the periods presented. The pro forma information excludes the impact of the
one-time charges related to in-process research and development costs of $104.2
million and the restructuring charges of $11.0 million recorded in 1999 (in
thousands, except per share amounts):
1999 1998
--------- ---------
Net revenue.......................................... $ 700,027 $ 409,998
========= =========
Net loss............................................. $(738,049) $(814,993)
========= =========
Basic and diluted net loss per share................. $ (1.93) $ (2.18)
========= =========
Effective April 25, 1997, the Company merged with OpenVision, a
publicly-held company that provided storage management applications and services
for client/server computing environments. This transaction was accounted for as
a pooling of interests. Approximately 65,745,000 shares of the Company's common
stock were issued in the OpenVision merger and the Company reserved
approximately 9,780,000 shares of its common stock for issuance pursuant to the
assumption of outstanding options, warrants and other rights to purchase
OpenVision common stock.
F-11
17
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following information shows revenue and net income of the separate
companies during the periods preceding the merger (in thousands):
1997
--------
Net revenue:
VERITAS................................................... $ 12,454
OpenVision................................................ 13,156
Combined company.......................................... 95,515
--------
$121,125
========
Net income:
VERITAS................................................... $ 3,752
OpenVision................................................ 1,665
Combined company.......................................... 17,332
--------
$ 22,749
========
Note: April 1, 1997 was used as an approximation of the effective date of
the Merger.
As a result of the OpenVision merger, the Company incurred charges to
operations of $8.5 million during the second quarter of 1997, consisting of
approximately $4.2 million for transaction fees and professional services, $1.9
million for contract terminations and asset write-offs and $2.4 million for
other costs incident to the merger. Of the total charge, $1.2 million resulted
from the write-down of redundant assets and facilities, primarily consisting of
intangible assets related to a prior acquisition which became redundant as a
result of OpenVision having a similar product line. The remaining $7.3 million,
involving banking, legal and accounting fees and other direct costs and payments
in connection with the elimination of duplicative facilities, was fully paid as
of December 31, 1999.
NOTE 3. CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash, cash equivalents and short-term investments consist of the following
(in thousands):
DECEMBER 31,
--------------------
1999 1998
-------- --------
Cash and cash equivalents:
Cash................................................. $ 55,233 $ 6,893
Money market funds................................... 5,234 172
Commercial paper..................................... 77,771 132,021
Corporate notes...................................... 10,006 --
-------- --------
Cash and cash equivalents.............................. 148,244 139,086
-------- --------
Short-term investments:
Commercial paper..................................... 207,465 1,357
Market auction preferreds............................ 11,713 20,659
Government securities................................ 91,599 --
Corporate notes...................................... 233,360 50,024
-------- --------
Short-term investments................................. 544,137 72,040
-------- --------
Cash, cash equivalents and short-term investments...... $692,381 $211,126
======== ========
F-12
18
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-term investments consist of the following (in thousands):
DECEMBER 31,
-------------------
1999 1998
------- -------
Long-term investments:
Government securities................................. $18,838 $ 9,497
Medium-term corporate notes........................... 46,198 22,428
------- -------
Long-term investments................................... $65,036 $31,925
======= =======
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consisted of the following (in
thousands):
DECEMBER 31,
--------------------
1999 1998
-------- --------
Furniture and equipment................................ $ 24,176 $ 6,962
Computer equipment..................................... 96,828 34,251
Building............................................... 1,445 1,008
Leasehold improvements................................. 17,266 3,765
-------- --------
139,715 45,986
Less -- accumulated depreciation and amortization...... (62,757) (19,468)
-------- --------
Property and equipment, net............................ $ 76,958 $ 26,518
======== ========
NOTE 5. CONVERTIBLE SUBORDINATED NOTES
In October 1997, the Company issued $100.0 million of 5.25% convertible
subordinated notes due 2004 (the "5.25% notes"), for which the Company received
net proceeds of $97.5 million. The Company and its wholly-owned subsidiary,
VERITAS Operating Corporation, are co-obligors on the 5.25% notes. The 5.25%
notes provide for semi-annual interest payments of $2.6 million each May 1 and
November 1. The 5.25% notes are convertible into shares of the Company's common
stock at any time prior to the close of business on the maturity date, unless
previously redeemed or repurchased, at a conversion price of $9.56 per share,
subject to adjustment in certain events, equivalent to a conversion rate of
104.65 shares of common stock per $1,000 principal amount at maturity. On or
after November 5, 2002, the 5.25% notes will be redeemable over the period of
time until maturity at our option at declining premiums to par. The debt
issuance costs are being amortized over the term of the 5.25% notes using the
interest method. The fair value of the 5.25% notes as of December 31, 1999 was
$1,000.9 million.
In August 1999, the Company and its wholly-owned subsidiary, VERITAS
Operating Corporation, issued $465.8 million, aggregate principal amount at
maturity, of 1.856% convertible subordinated notes due 2006 (the "1.856% notes")
for which the Company received net proceeds of approximately $334.1 million. The
interest rate of 1.856% together with the accrual of original issue discount
represent a yield to maturity of 6.5%. VERITAS and VERITAS Operating Corporation
are co-obligors on the 1.856% notes. The 1.856% notes provide for semi-annual
interest payments of $4.3 million each February 13 and August 13, commencing
February 13, 2000. The 1.856% notes are convertible into shares of the Company's
common stock at any time prior to the close of business on the maturity date,
unless previously redeemed or repurchased, at a conversion price of $35.80 per
share, subject to adjustment in certain events, equivalent to a conversion rate
of 27.934 shares of common stock per $1,000 principal amount at maturity. On or
after August 16, 2002, the 1.856% notes will be redeemable over the period of
time until maturity at the Company's option at issuance price plus accrued
original issue discount and any accrued interest. The debt issuance costs are
being amortized over the
F-13
19
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
term of the 1.856% notes using the interest method. The fair value of the 1.856%
notes as of December 31, 1999 was $1,259.3 million.
NOTE 6. SUMMARY FINANCIAL INFORMATION OF SUBSIDIARY
VERITAS and its wholly-owned subsidiary, VERITAS Operating Corporation, are
co-obligors on VERITAS' 5.25% convertible subordinated notes due 2004 and 1.856%
convertible subordinated notes due 2006. In accordance with Staff Accounting
Bulletin No. 53, Financial Statement Requirements in Filings Involving the
Guarantee of Securities by the Parent, VERITAS provides the following unaudited
summary financial information with respect to VERITAS Operating Corporation. The
following presents the operations of, and the assets held by, the legal entity
VERITAS Operating Corporation and does not necessarily, nor is it intended to,
represent the operations of VERITAS Operating Corporation had it continued as a
separate entity absent the NSMG acquisition (in thousands):
1999 1998
-------- --------
STATEMENT OF OPERATIONS DATA:
Total net revenue........................................... $451,095 $210,865
Amortization of goodwill and other intangibles.............. 28,441 --
In-process research and development......................... 3,000 --
Acquisition and restructuring costs......................... -- --
Income from operations...................................... 96,714 53,668
Net income.................................................. 65,488 51,648
BALANCE SHEET DATA:
Working capital............................................. $530,672 $198,842
Goodwill and other intangibles.............................. 199,590 --
Total assets................................................ 987,359 349,117
Long-term obligations....................................... 451,629 100,773
Retained earnings (accumulated deficit)..................... 36,072 (29,416)
Stockholders' equity........................................ 433,478 169,854
NOTE 7. COMMITMENTS AND CONTINGENCIES
The Company currently has operating leases for its facilities through
October 31, 2012. Rental expense under operating leases was approximately $15.6
million, $6.1 million and $4.3 million for the years ended December 31, 1999,
1998, and 1997, respectively. In addition to the basic rent, the Company is
responsible for all taxes, insurance and utilities related to the facilities.
The approximate minimum lease payments as of December 31, 1999 are as follows
(in thousands):
2000.............................................. $ 23,549
2001.............................................. 21,453
2002.............................................. 18,195
2003.............................................. 17,039
2004.............................................. 15,267
Thereafter........................................ 39,599
--------
Minimum lease payments............................ $135,102
========
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.
F-14
20
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. BENEFIT PLANS
The Company has adopted a retirement savings plan (the VERITAS Software
401(k) Plan), qualified under Section 401(k) of the Internal Revenue Code, which
is a pretax savings plan covering substantially all United States employees.
Under the plan employees may contribute up to 20% of their pretax salary,
subject to certain limitations. Employees are eligible to participate beginning
the first day of the month following their date of hire. The Company matches
approximately 50% of the employee contributions up to $2,500 per year and
contributed approximately $3.1 million in 1999. For 1998 and 1997, the Company
matched approximately 25% of the employee contributions up to $1,200 per year
and contributed approximately $0.6 million in 1998 and $0.3 million in 1997.
NOTE 9. STOCK COMPENSATION PLANS
At December 31, 1999, the Company had three stock-based compensation plans,
which are described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Since the exercise price of options
granted under such plans is generally equal to the market value on the date of
grant, no compensation cost has been recognized for grants under its stock
option plans and stock purchase plans. If compensation cost for the Company's
stock-based compensation plans had been determined consistent with SFAS No. 123,
the Company's net income (loss) and earnings (loss) per share would have been
reduced to the pro forma amounts indicated below (in thousands, except per share
amounts):
1999 1998 1997
--------- ------- -------
Net income (loss)
As reported....................................... $(502,958) $51,648 $22,749
Pro forma......................................... $(540,474) $32,102 $12,358
Basic earnings (loss) per share
As reported....................................... $ (1.59) $ 0.24 $ 0.11
Pro forma......................................... $ (1.71) $ 0.15 $ 0.06
Diluted earnings (loss) per share
As reported....................................... $ (1.59) $ 0.22 $ 0.10
Pro forma......................................... $ (1.71) $ 0.14 $ 0.06
SFAS No. 123 is only applicable to options granted subsequent to January 1,
1995. As a result, the pro forma effect of adopting SFAS No. 123 is not fully
reflected until the year ending December 31, 1999.
Stock Option Plans
The Company has two stock option plans. The Company's 1993 Equity Incentive
Plan (the 1993 Plan) provides for the issuance of either incentive or
nonstatutory stock options to employees and consultants of the Company. The
options generally are granted at the fair market value of the Company's common
stock at the date of grant, expire ten years from the date of grant, vest over a
four-year period and are exercisable immediately upon vesting. The Company has
reserved 89,596,000 shares of common stock for issuance under the 1993 Plan. The
Company has also reserved 2,531,250 shares for issuance under the Company's 1993
Director's Stock Option Plan (the Director's Plan). Generally options expire ten
years from date of grant, vest over the term of each directors board membership
and are exercisable immediately upon vesting. As of December 31, 1999,
39,840,353 shares were available for future grant under the plans.
For the pro forma amounts determined under SFAS No. 123, as set forth
above, the fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997: risk-free interest rates
averaging 5.55% in 1999, 5.15% in 1998 and 6.19% in 1997; a dividend yield of
0.0% for all years; a weighted-average expected
F-15
21
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
life of 5 years for all years; and a volatility factor of the expected market
price of the Company's common stock of 0.65 for 1999, 0.65 for 1998 and 0.60 for
1997.
A summary of the status of the Company's stock option plans (including the
options assumed in the Acquisitions and the Merger) as of December 31, 1999,
1998 and 1997 and changes during the years ended on those dates is presented
below (number of shares in thousands):
1999 1998 1997
--------------------- --------------------- ---------------------
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...... 36,948 $ 4.88 34,601 $2.86 25,817 $1.58
Granted............................... 16,717 $23.36 10,469 $9.76 14,369 $4.68
Assumed in business combinations...... 15,896 $ 3.40 -- $ -- -- $ --
Exercised............................. (11,909) $ 3.21 (5,547) $1.88 (3,474) $0.92
Forfeited............................. (3,230) $ 9.07 (2,575) $4.03 (2,111) $2.94
-------- ------ ------- ----- ------- -----
Outstanding at end of year............ 54,422 $10.28 36,948 $4.88 34,601 $2.86
======== ====== ======= ===== ======= =====
Options exercisable at year end....... 22,625 15,201 11,516
Weighted-average fair value of options
Granted during the year............. $ 13.93 $ 5.75 $ 2.69
The following table summarizes information about stock options outstanding
at December 31, 1999 (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 1999 LIFE PRICE 1998 PRICE
- --------------- -------------- ----------- --------- -------------- ---------
$ 0.01 - $ 1.66 5,637 5.34 $ 0.99 5,326 $ 0.98
$ 1.68 - $ 2.42 6,285 6.91 $ 2.06 4,243 $ 2.08
$ 2.43 - $ 3.68 5,964 6.81 $ 2.73 3,641 $ 2.68
$ 3.70 - $ 4.79 7,265 8.01 $ 4.49 3,058 $ 4.55
$ 4.84 - $ 8.58 6,319 7.88 $ 6.31 2,779 $ 6.08
$ 8.70 - $11.33 5,519 8.48 $10.11 1,795 $10.01
$12.00 - $17.56 6,286 9.24 $16.09 973 $15.69
$17.94 - $21.81 7,891 9.50 $20.67 775 $20.35
$23.33 - $62.83 3,001 9.74 $37.87 35 $30.35
$72.12 - $72.13 255 9.96 $72.13 -- $72.13
------ ---- ------ ------ ------
$ 0.01 - $72.13 54,422 7.97 $10.28 22,625 $ 4.63
====== ==== ====== ====== ======
EMPLOYEE STOCK PURCHASE PLANS
Under the Company's 1993 Employee Stock Purchase Plan (the 1993 Purchase
Plan), the Company is authorized to issue up to 21,910,295 shares of common
stock to its full-time employees, nearly all of whom are eligible to
participate. Under the terms of the 1993 Purchase Plan, employees can choose to
have up to 10% of their wages withheld to purchase the Company's common stock.
The purchase price of the stock is 85% of the lower of the subscription date
fair market value and the purchase date fair market value.
F-16
22
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Substantially all of the eligible employees have participated in the either
the 1993 Purchase Plan or the 1996 Purchase Plan in 1999, 1998 and 1997. Under
the 1993 Purchase Plan, the Company issued 796,495 shares to employees in 1999,
764,573 shares in 1998, and 672,075 shares in 1997.
In accordance with APB 25, the Company does not recognize compensation cost
related to employee purchase rights under the Plan. To comply with the pro forma
reporting requirements of SFAS No. 123, compensation cost is estimated for the
fair value of the employees' purchase rights using the Black-Scholes
option-pricing model with the following assumptions for these rights granted in
1999, 1998 and 1997: a dividend yield of 0.0% for all years; an expected life
ranging up to 2 years for all years; an expected volatility factor of 0.65 in
1999, 0.65 in 1998 and 0.60 in 1997; and risk-free interest rates ranging from
4.57% to 5.77% in 1999, from 5.14% to 5.39% in 1998 and from 5.27% to 5.84% in
1997. The weighted-average fair value of the purchase rights granted was $8.70
in 1999, $3.15 in 1998 and $2.06 in 1997.
NOTE 10. STOCKHOLDERS' EQUITY
On October 4, 1998, the Board of Directors of the Company adopted a
Stockholder Rights Plan, declaring a dividend of one preferred share purchase
right (a Right) for each outstanding share of common stock, par value $0.001 per
share, of VERITAS. The rights are initially attached to the Company's common
stock and will not trade separately. If a person or group acquires 20 percent or
more of the Company's common stock, or announces an intention to make a tender
offer for the Company's common stock the consummation of which would result in
acquiring 20 percent or more of the Company's common stock, then the rights will
be distributed and will then trade separately from the common stock. Each Right
entitles the registered holder to purchase from the Company one one-hundredth of
a share of Series A Junior Participating Preferred Stock, par value $0.001 per
share, of the Company. The rights expire October 5, 2008, unless the expiration
date is extended or unless the rights are earlier redeemed or exchanged by the
Company.
The Company is authorized to issue up to 10,000,000 shares of undesignated
preferred stock. No such preferred shares have been issued to date.
Total common shares reserved for issuance at December 31, 1999 under all
stock compensation plans are 114,037,545 shares (see Note 9).
NOTE 11. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
Federal
Current............................................ $ 64,452 $11,858 $ 539
Deferred........................................... (35,245) (8,075) (3,500)
State
Current............................................ 9,340 2,514 1,939
Deferred........................................... (5,077) 75 (700)
Foreign.............................................. 1,920 1,769 2,732
-------- ------- -------
Total...................................... $ 35,390 $ 8,141 $ 1,010
======== ======= =======
The tax benefits associated with the disqualifying disposition of stock
options or employee stock purchase plan shares reduced the income taxes
currently payable by $63.0 million for 1999. Such benefits are credited to
additional paid-in capital when realized.
F-17
23
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the federal statutory rate as follows:
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
Federal tax at statutory rate............................... 35.0% 35.0% 35.0%
Benefit of loss carryforwards............................... -- (9.3) (35.9)
State taxes................................................. (0.9) 4.2 5.4
Foreign taxes............................................... (0.4) 3.0 9.4
Change in valuation allowance............................... -- (13.4) (17.7)
Acquisition and restructuring costs......................... -- -- 6.5
In-process research and development charge and
non-deductible goodwill................................... (42.2) -- --
Alternative minimum tax, net................................ -- -- 2.3
Tax credits................................................. 0.5 (7.1) --
Other....................................................... 0.4 1.2 (0.7)
----- ----- -----
Total............................................. (7.6)% 13.6% 4.3%
===== ===== =====
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- -------- --------
Deferred tax assets:
Net operating loss carryforwards.................. $ 26,946 $ 23,276 $ 22,499
Reserves and accruals not currently deductible.... 28,315 6,146 2,205
Acquired intangibles.............................. 12,521 1,895 2,114
Tax credit carryforwards.......................... 2,861 -- 2,246
Other............................................. 2,170 1,655 887
--------- -------- --------
Total................................... 72,813 32,972 29,951
Valuation allowance............................... (11,602) (20,772) (25,751)
--------- -------- --------
Net deferred tax assets........................... $ 61,211 $ 12,200 $ 4,200
========= ======== ========
Deferred tax liabilities:
Acquired intangibles.............................. (195,275) -- --
--------- -------- --------
Net deferred tax assets (liabilities)............. $(134,064) $ 12,200 $ 4,200
========= ======== ========
The valuation allowance decreased by approximately $9.2 million in 1999,
$5.0 million in 1998 and $13.6 million in 1997. As of December 31, 1999, the
$11.6 million valuation allowance reflected above relates to the tax benefits of
certain assets acquired with the acquisition of NSMG and will be credited to
goodwill if realized.
As of December 31, 1999, the Company had federal tax loss carryforwards of
approximately $74.0 million and federal tax credit carryforwards of
approximately $2.9 million. The federal tax loss carryforwards will expire in
2008 through 2011, and the federal tax credit carryforwards will expire in 2003
through 2014, if not utilized. Because of the change in ownership provisions of
the Internal Revenue Code, a substantial portion of the Company's net operating
loss and credit carryforwards may be subject to annual limitations. The annual
limitation may result in the expiration of net operating loss and credit
carryforwards before utilization.
Management has determined based on the Company's history of prior earnings,
its expectations for the future and the extended period over which the benefits
of certain deferred tax assets will be realized, as well as
F-18
24
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the limitations on its ability to utilize certain net operating loss
carryforwards, that a valuation allowance continues to be necessary.
The realization of the Company's deferred tax assets, which relate
primarily to net operating loss carryforwards and temporary differences is
dependent on generating sufficient taxable income in future periods. Although
realization is not assured, management believes it is more likely than not that
the net deferred tax assets will be realized.
NOTE 12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share amounts):
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- -------- --------
Numerator:
Net income (loss)............................... $(502,958) $ 51,648 $ 22,749
========= ======== ========
Denominator:
Weighted-average shares......................... 316,892 211,558 205,300
--------- -------- --------
Denominator for basic earnings (loss) per
share........................................ 316,892 211,558 205,300
Common stock equivalents........................ -- 20,961 17,416
--------- -------- --------
Denominator for diluted earnings (loss) per
share........................................ 316,892 232,519 222,716
========= ======== ========
Basic earnings (loss) per share................... $ (1.59) $ 0.24 $ 0.11
========= ======== ========
Diluted earnings (loss) per share................. $ (1.59) $ 0.22 $ 0.10
========= ======== ========
Common stock equivalents included in the denominator for purposes of
computing diluted earnings per share do not include 10,465,067 shares issuable
upon conversion of the 5.25% convertible subordinated notes and 13,010,144
shares issuable upon conversion of the 1.856% convertible subordinated notes, as
their effect would be anti-dilutive for all periods presented (see Note 5). In
1999, common stock equivalents included in the denominator for purposes of
computing diluted earnings per share do not include 39,406,524 potential common
shares, all related to employee stock options, as their effect would be
anti-dilutive.
NOTE 13. SIGNIFICANT DEVELOPMENT AND LICENSE AGREEMENTS
In January 1997 the Company entered into a cross-license and development
arrangement with Sun Microsystems whereby each party granted the other a
royalty-based license to bundle or resell substantially all then-available
products of both companies. Under this arrangement, 5% of each royalty dollar
received by the Company is to be set aside to fund future "best efforts",
non-recurring engineering services to be performed by the Company at the
direction of Sun. Under these NRE projects, the scope of which is mutually
agreed to by both parties, Sun bears the risk of the development effort. In
accordance with SFAS No. 68 the Company has recognized a liability equal to 5%
of each royalty dollar received from Sun under this arrangement. The liability
to Sun as of December 31, 1999 was $1.2 million. As of December 31, 1998 there
was no liability to Sun. The liability to Sun as of December 31, 1997 was $0.2
million.
NOTE 14. SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS No.
131), in fiscal 1998. SFAS No. 131 supersedes Statement of Financial Accounting
Standards No. 14, "Financial Reporting for Segments of a Business Enterprise"
and establishes standards for reporting information about operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available
F-19
25
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
that is evaluated regularly by the chief operating decision maker, or group, in
deciding how to allocate resources and in assessing performance.
The Company operates in one segment, storage management solutions. The
Company's products and services are sold throughout the world, through direct,
OEM, reseller and distributor channels. The Company's chief operating decision
maker, the chief executive officer, evaluates the performance of the Company
based upon stand-alone revenue of product channels and the geographic regions of
the segment and does not receive discrete financial information about asset
allocation, expense allocation or profitability from the Company's storage
products or services.
Geographic information (in thousands):
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
User license fees(1):
United States.................................... $372,485 $121,910 $ 67,888
Europe(2)........................................ 94,986 33,172 12,971
Other(3)......................................... 30,543 12,621 14,855
-------- -------- --------
Total.................................... $498,014 $167,703 $ 95,714
======== ======== ========
Services(1):
United States.................................... $ 78,756 $ 34,759 $ 20,463
Europe(2)........................................ 15,450 7,869 4,865
Other(3)......................................... 3,892 534 83
-------- -------- --------
Total.................................... $ 98,098 $ 43,162 $ 25,411
======== ======== ========
Total net revenue........................ $596,112 $210,865 $121,125
======== ======== ========
AS OF DECEMBER 31,
--------------------------------
1999 1998 1997
---------- ------- -------
Long-lived assets(4):
United States..................................... $3,289,545 $25,202 $ 9,412
Europe(2)......................................... 11,918 3,644 1,114
Other(3).......................................... 2,244 380 67
---------- ------- -------
Total..................................... $3,303,707 $29,226 $10,593
========== ======= =======
- ---------------
(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,
----------------------------------
1999 1998 1997
---------- -------- --------
Total long-lived assets........................... $3,303,707 $ 29,226 $ 10,593
Other assets, including current................... 929,570 319,891 231,287
---------- -------- --------
Total consolidated assets............... $4,233,277 $349,117 $241,880
========== ======== ========
F-20
26
VERITAS SOFTWARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
No customer represented 10% or more of the Company's net revenue in 1999 and
1997. One customer represented approximately 12% or $25.8 million of the
Company's net revenue in 1998.
NOTE 15. RELATED PARTY TRANSACTIONS
The Company paid $0.8 million in 1998 and $6.7 million in 1999 in service
fees related to the acquisition of NSMG to Donaldson, Lufkin & Jenrette (DLJ), a
company affiliated with a director of the Company until February 1999. The
Company had no outstanding receivable or payable balance with DLJ at December
31, 1999.
NOTE 16. SUBSEQUENT EVENTS (UNAUDITED)
During the first quarter of 2000, the Company amended and revised its
existing lease agreement, originally signed in the second quarter of 1999, for
new corporate campus facilities in Mountain View, California. These facilities
will replace certain facilities the Company currently leases in Mountain View.
The new corporate campus facilities will be developed in one phase for a total
of 425,000 square feet and will provide space for sales, marketing,
administration and research and development functions. The lease term for these
facilities is five years beginning in March 2000, with an option to extend the
lease term for two successive periods of one year each. The revised total
approximate minimum lease payments for these facilities for the next five years
will be $0 for 2000, $5.3 million for 2001, $10.6 million for 2002 and $10.3
million for 2003 and 2004. The Company has an option to purchase the property
(land and facilities) for $139.4 million or, at the end of the lease, to arrange
for the sale of the property to a third party with the Company retaining an
obligation to the owner for the difference between the sales price and the
guaranteed residual value up to $123.8 million if the sales price is less than
this amount, subject to certain provisions of the lease. The Company anticipates
occupying the new corporate campus facilities and beginning the lease payments
in the second quarter of 2001. The lease agreement requires the Company to
maintain specified financial covenants such as and earnings before interest,
taxes, depreciation and amortization (EBITDA), debt on EBITDA and quick ratio,
all of which the Company was in compliance with as of December 31, 1999.
During the first quarter of 2000, the Company signed a lease agreement for
its existing facilities in Roseville, Minnesota. The Company will improve and
expand its existing facilities of 62,000 square feet and will develop adjacent
property adding 260,000 square feet to the campus, with the first phase of
142,000 square feet being completed in the second quarter of 2001. The
facilities will provide space for research and development functions. The lease
term for these facilities is five years beginning in March 2000, with an option
to extend the lease term for two successive periods of one year each. The total
approximate minimum lease payments for these facilities for the next five years
will be $0.6 million in 2000, $1.9 million in 2001 and $2.9 million in 2002,
2003 and 2004. The Company has an option to purchase the property (land and
facilities) for $40 million or, at the end of the lease, to arrange for the sale
of the property to a third party with the Company retaining an obligation to the
owner for the difference between the sales price and the guaranteed residual
value up to $34.3 million if the sales price is less than this amount, subject
to certain provisions of the lease. The Company anticipates occupying the new
corporate campus facilities and beginning the lease payments in the second
quarter of 2001.
On March 29, 2000, the Company, Seagate Technology, Inc. and an investor
group including Seagate Technology's management group announced a transaction in
which the Company will acquire all of the shares of its common stock held by
Seagate Technology, certain other securities and cash. The Company is not
acquiring Seagate Technology's disc drive business or any other Seagate
Technology operating business.
In the transaction, the Company will issue to the Seagate Technology
stockholders approximately 109.3 million shares of its common stock for
approximately 128 million shares of the Company's common stock held by Seagate
Technology. In addition, the Company will issue shares of its common stock for
certain other securities held by Seagate Technology at the closing date and, at
the Company's election, the Company may also issue shares of its common stock
for up to $750 million in retained cash at the closing date.
The Company will be indemnified for liabilities, including tax liabilities
and other matters that may arise in connection with the transaction. The
transaction is intended to qualify as a tax-free reorganization.
F-21
27
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Stockholders and Board of Directors
VERITAS Software Corporation
We have audited the accompanying consolidated balance sheets of VERITAS
Software Corporation as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of VERITAS
Software Corporation at December 31, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
San Jose, California
January 25, 2000
F-22
28
EXHIBIT INDEX
Exhibit No. Description Notes:
----------- ----------- ------
3.1 Certificate of Incorporation of Registrant, as amended. (A)
3.2 By-Laws of Registrant, as amended. (B)
4.1 Indenture, dated as of March 1, 1997 (the "Indenture"),
between Seagate Technology, Inc. (the "Company") and First
Trust of California, National Association, as Trustee. (C)
4.2 Officers' Certificate pursuant to Section 301 of the
Indenture, without Exhibits, establishing the terms of the
Company's senior notes and senior debentures. (C)
4.3 Form of Senior Note. (C)
4.4 Form of Senior Debenture. (C)
10.1 1983 Incentive Stock Option Plan and form of Stock Option
Agreement. (E)
10.2 Seagate Technology Employee Stock Purchase Plan, as amended. (K)
10.3 Registrant's Executive Stock Plan. (I)
10.4 Conner Peripherals, Inc. 1986 Incentive Stock Plan. (I)
10.5 Building Agreement for Land At Private Lot A14547 in Yio Chu
Kang dated May 30, 1996 between Seagate Technology
International and Jurong Town Corporation. (K)
10.6 Lease Agreement dated July 18, 1994 between Universal
Appliances Limited and Seagate Technology (Thailand) Limited. (K)
10.7 1991 Incentive Stock Option Plan and form of Option Agreement,
as amended. (K)
10.8 Acquisition Agreement dated as of September 29, 1989 by and
among Seagate Technology, Inc. and Control Data Corporation,
Imprimis Technology Incorporated and Magnetic Peripherals,
Inc. (G)
10.9 Amended and Restated Directors' Option Plan and form of Option
Agreement. (H)
10.10 Amended and Restated Archive Corporation Stock Option and
Restricted Stock Purchase Plan - 1981. (I)
10.11 Amended and Restated Archive Corporation Incentive Stock
Option Plan - 1981. (I)
10.12 Conner Peripherals, Inc. - Arcada Holdings, Inc. Stock Option
Plan. (J)
10.13 Arcada Holdings, Inc. 1994 Stock Option Plan. (J)
10.14 Separation Agreement and Release between the Registrant and
Alan F. Shugart dated as of July 29, 1998. (K)
10.15 1998 Nonstatutory Stock Option Plan and form of Stock Option
Agreement. (L)
21.1 Subsidiaries of the Registrant. (L)
23.1 Consent of Independent Auditors.
23.2 Consent of Independent Auditors.
24.1 Power of Attorney. (L)
27 Financial Data Schedule. (L)
- ----------------------
(A) Incorporated by reference to exhibits filed in response to Item 16,
"Exhibits," of the Company's Registration Statement on Form S-3 (File
No. 33-13430) filed with the Securities and Exchange Commission on April
14, 1987.
(B) Incorporated by reference to exhibits filed in response to Item 14 (a),
"Exhibits," of the Company's Form 10-K, as amended, for the year ended
June 30, 1990.
(C) Incorporated by reference to exhibits filed in response to Item 7(b),
"Financial Statements and Exhibits" of the Company's Current Report on
Form 8-K dated March 4, 1997.
(E) Incorporated by reference to exhibits filed in response to Item 14(a),
"Exhibits," of the Company's Form 10-K for the year ended June 30, 1983.
(G) Incorporated by reference to exhibits filed in response to Item 7(c),
"Exhibits," of the Company's Current Report on Form-8K dated October 2,
1989.
29
(H) Incorporated by reference to exhibits filed in response to Item 14(a),
"Exhibits," of the Company's Form 10-K for the year ended June 30, 1991.
(I) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-8 (registration number 333-00697) as
filed with the Commission on February 5, 1996.
(J) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-8 (registration number 333-01059) as
filed with the Commission on February 21, 1996.
(K) Incorporated by reference to exhibits filed in response to Item 14(a),
"Exhibits," of the Company's Form 10-K for the year ended July 3, 1998.
(L) Incorporated by reference to exhibits filed in response to Item 14(a),
"Exhibits," of the Company's Form 10-K for the year ended July 2, 1999.