1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
of
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended October 2, 1998
Commission File No. 000-23169
SEAGATE SOFTWARE, INC.
(Registrant)
-------------------
Incorporated in the State of Delaware
I.R.S. Employer Identification Number 77-0397623
915 Disc Drive, Scotts Valley, California 95066
Telephone: (831) 438-6550
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock as of October
2, 1998 was 1,030,362.
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INDEX
SEAGATE SOFTWARE, INC.
PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of October 2, 1998
(unaudited) and July 3, 1998 2
Condensed Consolidated Statements of Operations for the three
months ended October 2, 1998 and October 3, 1997 (unaudited) 3
Condensed Consolidated Statements of Cash Flows for the three
months ended October 2, 1998 and October 3, 1997 (unaudited) 4
Notes to the Condensed Consolidated Financial Statements 5
(unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risks 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
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SEAGATE SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
OCTOBER 2, JULY 3,
1998 1998
------------- -------------
(UNAUDITED) (1)
ASSETS
Cash $ 10,418 $ 15,130
Accounts receivable, net 44,416 46,564
Inventories 776 1,117
Other current assets 4,386 2,474
------------- -------------
Total current assets 59,996 65,285
Equipment and leasehold improvements, net 15,257 16,876
Goodwill and other intangibles, net 48,019 53,879
------------- -------------
Total assets $ 123,272 $ 136,040
============= =============
LIABILITIES
Loan payable to Seagate Technology $ 3,895 $ 16,054
Accounts payable 11,795 10,994
Accrued employee compensation 14,100 14,365
Accrued expenses 17,080 15,339
Accrued income taxes 652 5,562
Deferred revenue 14,208 13,714
------------- -------------
Total current liabilities 61,730 76,028
Deferred income taxes 1,343 1,691
Other liabilities 284 255
------------- -------------
Total liabilities 63,357 77,974
Common stock subject to repurchase 3,899 3,917
STOCKHOLDERS' EQUITY
Convertible preferred stock 55 55
Common stock -- --
Additional paid-in capital 344,744 343,526
Accumulated deficit (288,323) (289,175)
Foreign currency translation adjustment (460) (257)
------------- -------------
Total stockholders' equity 56,016 54,149
------------- -------------
Total liabilities and stockholders' equity $ 123,272 $ 136,040
============= =============
(1) The information in this column was derived from the Company's audited
consolidated balance sheet as of July 3, 1998.
See notes to condensed consolidated financial statements.
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SEAGATE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
------------------------------------
OCTOBER 2, OCTOBER 3,
1998 1997
------------- -------------
Revenues:
Licensing $ 58,671 $ 51,797
Licensing from Seagate Technology 2,156 1,000
Maintenance, support and other 14,048 10,225
------------- -------------
Total revenues 74,875 63,022
Cost of revenues:
Licensing 2,935 4,969
Licensing from Seagate Technology 129 285
Maintenance, support and other 6,430 4,600
Amortization of developed technologies 2,866 3,942
------------- -------------
Total cost of revenues 12,360 13,796
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Gross profit 62,515 49,226
Operating expenses:
Sales and marketing 36,007 28,697
Research and development 12,787 11,393
General and administrative 8,940 9,079
Amortization of goodwill and other intangibles 3,198 3,456
------------- -------------
Total operating expenses 60,932 52,625
------------- -------------
Income (loss) from operations 1,583 (3,399)
Interest expense (156) (300)
Other, net 468 165
------------- -------------
Interest and other, net 312 (135)
------------- -------------
Income (loss) before income taxes 1,895 (3,534)
Benefit from (provision for) income taxes (1,043) 619
------------- -------------
Net income (loss) $ 852 $ (2,915)
============= =============
Net income (loss) per common share:
Basic $ 3.09 $ (28.12)
Diluted $ 0.01 $ (28.12)
Number of shares used in per share computations:
Basic 275,314 103,659
Diluted 59,984,218 103,659
See notes to condensed consolidated financial statements.
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SEAGATE SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
--------------------------------
OCTOBER 2, OCTOBER
1998 3, 1997
------------- -------------
OPERATING ACTIVITIES
Net income (loss) $ 852 $ (2,915)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 8,247 10,245
Deferred income taxes (348) (1,507)
Write-offs due to restructure -- 553
Changes in operating assets and liabilities:
Accounts receivable 2,148 (2,702)
Inventories 341 831
Other current assets (1,912) 73
Accounts payable 801 (607)
Accrued employee compensation (265) 717
Accrued expenses 1,741 (4,152)
Accrued income taxes (4,810) (512)
Deferred revenue 494 443
Other liabilities 29 (24)
------------- -------------
Net cash provided by operating activities 7,318 443
INVESTING ACTIVITIES
Acquisition of equipment and leasehold improvements, net (572) (1,948)
Acquisition of intangibles (204) --
------------- -------------
Net cash used in investing activities (776) (1,948)
FINANCING ACTIVITIES
Sale of common stock 278 169
Borrowings from Seagate Technology, net (11,337) (1,536)
------------- -------------
Net cash used in financing activities (11,059) (1,367)
Effect of exchange rate changes on cash (195) (38)
------------- -------------
Decrease in cash (4,712) (2,910)
Cash at the beginning of the period 15,130 12,085
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Cash at the end of the period $ 10,418 $ 9,175
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SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $-- $ 14
Cash paid for income taxes 5,201 991
See notes to condensed consolidated financial statements.
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SEAGATE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated condensed financial statements have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The Company believes the
disclosures included in the unaudited condensed consolidated financial
statements, when read in conjunction with the consolidated financial statements
of the Company as of July 3, 1998 and notes thereto, are adequate to make the
information presented not misleading.
The condensed consolidated financial statements reflect, in the opinion of
management, all normal recurring adjustments necessary to summarize fairly the
consolidated financial position, results of operations and cash flows for such
periods.
The results of operations for the three months ended October 2, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending July 2, 1999.
The Company operates and reports financial results on a fiscal year of 52 or
53 weeks ending on the Friday closest to June 30. Accordingly, fiscal 1998 was
53 weeks and ended on July 3, 1998 and fiscal 1999 will be 52 weeks and will end
on July 2, 1999. All references to years in this Form 10-Q represent fiscal
years unless otherwise noted.
REVENUE RECOGNITION. The Company's revenues are primarily derived from the
sale of product licenses, software maintenance, technical support, training and
consulting. During the first quarter of 1999, the Company began recognizing
license revenues in accordance with the American Institute of Certified Public
Accountants Statement of Position 97-2, "Software Revenue Recognition". Revenues
from software license agreements are generally recognized at the time of product
delivery, provided that fees are fixed or determinable, evidence of an
arrangement exists, collectibility is probable and the Company has
vendor-specific objective evidence of fair value. Service revenues from customer
maintenance fees for ongoing customer support and product updates are recognized
ratably over the maintenance term, which is typically 12 months. Service
revenues from training and consulting are recognized when such services are
performed.
NET INCOME (LOSS) PER SHARE. Basic net income (loss) per common share is
computed using the weighted average number of shares of common stock outstanding
during the period. For periods in which the Company had losses, common
equivalent shares from stock options, shares subject to repurchase and
convertible preferred stock are excluded from the computation of diluted net
loss per share, as their effect is antidilutive. Below is a reconciliation of
the numerator and denominator used to calculate basic and diluted earnings per
share (in thousands, except share and per share data):
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SEAGATE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED
----------------------------------
OCTOBER 2, OCTOBER 3,
1998 1997
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Basic net income (loss) per share computation:
Numerator:
Net income (loss) $ 852 $ (2,915)
------------- -------------
Denominator:
Weighted average number of common shares
outstanding during the period 275,314 103,659
------------- -------------
Net income (loss) per share-- basic $ 3.09 $ (28.12)
============= =============
Diluted net income (loss) per share computation:
Numerator:
Net income (loss) $ 852 $ (2,915)
------------- -------------
Denominator:
Weighted average number of common shares
outstanding during the period 275,314 103,659
Convertible preferred stock 54,633,333 --
Incremental common shares attributable to
exercise of outstanding options and shares
subject to repurchase (assuming proceeds
would be used to purchase treasury stock) 5,075,571 --
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59,984,218 103,659
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Net income (loss) per share-- diluted $ 0.01 $ (28.12)
============= =============
For the period ended October 3, 1997, 11,332 shares of common stock subject
to repurchase at an average exercise price of $6.00 per share and options to
purchase 7,789,770 shares of common stock at an average exercise price of $5.24
per share were excluded from the computation of diluted earnings per share
because the effect would have been antidilutive.
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SEAGATE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
ACCOUNTS RECEIVABLE. Accounts receivable are summarized below, in thousands:
OCTOBER 2, JULY 3,
1998 1998
------------- -------------
Accounts receivable $ 46,126 $ 48,200
Less allowance for (1,710) (1,636)
non-collection
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$ 44,416 $ 46,564
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EQUIPMENT AND LEASEHOLD IMPROVEMENTS. Equipment and leasehold improvements
consisted of the following, in thousands:
OCTOBER 2, JULY 3,
1998 1998
------------- -------------
Equipment $ 32,431 $ 30,999
Leasehold improvements 8,495 9,424
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40,926 40,423
Less accumulated depreciation
and amortization (25,669) (23,547)
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$ 15,257 $ 16,876
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GOODWILL AND OTHER INTANGIBLES. Goodwill and other intangibles consisted
of the following, in thousands:
OCTOBER 2, JULY 3,
1998 1998
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Goodwill $ 44,968 $ 44,953
Developed technology 48,239 48,049
Trademarks 9,972 9,972
Assembled workforce 4,596 4,596
Distribution network 2,925 2,925
Other intangibles 13,813 13,813
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124,513 124,308
Accumulated amortization (76,494) (70,429)
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Goodwill and other intangibles $ 48,019 $ 53,879
============= =============
COMMON STOCK SUBJECT TO REPURCHASE. Current employees and directors of the
Company and of Seagate Technology have exercised 732,042 shares of common stock
under the 1996 Stock Option Plan (the "Option Plan"). At October 2, 1998,
279,242 shares were vested and 452,800 shares were unvested. At the option of
the employee or director, within 30 days of termination such vested and unvested
shares may be sold back to the Company at the original issue price. In addition,
upon termination, unvested shares are subject to repurchase at the option of the
Company at original issue price. Because of the obligation to repurchase vested
and unvested shares of common stock, the Company has excluded the amounts
associated with the repurchase obligation from Stockholders' Equity in the
accompanying balance sheet. At October 2, 1998, the repurchase obligation
amounted to $3,899,000.
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SEAGATE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NEW ACCOUNTING PRONOUNCEMENTS
The Company intends to adopt Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131") during fiscal 1999. This standard will require additional
disclosure, but will not have a material effect on the Company's financial
position or results of operations. SFAS 131 changes the way companies report
segment information and requires segments to be determined based on how
management measures performance and makes decisions about allocating resources.
SFAS 131 will first be reflected in the Company's 1999 Annual Report on Form
10-K.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance
on capitalization of the costs incurred for computer software developed or
obtained for internal use. It also provides guidance for determining whether
computer software is internal-use software and on accounting for the proceeds of
computer software originally developed or obtained for internal use and then
subsequently sold to the public. The Company has not yet determined the impact,
if any, of adopting this statement. The disclosures prescribed by SOP 98-1 will
be effective for the Company's consolidated financial statements for the fiscal
year ending June 30, 2000.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that derivatives
be recognized in the balance sheet at fair value and specifies the accounting
for changes in fair value. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999, and will be effective for the
Company's fiscal year 2000. The Company generally does not use derivative
financial instruments.
STOCKHOLDERS' EQUITY
Shares authorized and outstanding are as follows:
SHARES OUTSTANDING
---------------------------------
OCTOBER 2, JULY 3,
1998 1998
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Preferred stock, par value $.001 per share,
73,000,000 shares authorized 54,633,333 54,633,333
Common stock, par value $.001 per share,
95,600,000 shares authorized 298,320 235,502
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SEAGATE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
INCOME TAXES
The Company expects its annual effective tax rate on anticipated
operating income for fiscal 1999 (see "Subsequent Event") to approximate 55%
absent the effects, if any, of the anticipated contribution of the Company's
Network & Storage Management Group to Veritas Holding Corporation. The projected
effective tax rate exceeds the U.S. statutory rate primarily due to the
amortization of goodwill and certain other purchased intangible assets that are
not deductible for tax purposes, expected foreign losses in certain
jurisdictions for which no tax benefit can be recognized currently, and foreign
taxes on certain earnings generated in higher tax rate jurisdictions. This
expected annual effective tax rate of 55% has been used to record the provision
for income taxes for the three month period ended October 2, 1998 compared with
a 17% effective tax rate, used to record the benefit for income taxes for the
three month period ended October 3, 1997. The effective tax rate used to record
the benefit for income taxes for the three month period ended October 3, 1997
was less than the U.S. statutory rate primarily due to increases in the
valuation allowance for deferred tax assets and the amortization of
nondeductible goodwill.
The Company is included in the consolidated federal and certain combined
and consolidated state and foreign income tax returns of Seagate Technology, the
Company's majority stockholder. Seagate Technology and the Company have entered
into a tax sharing agreement ("the Tax Allocation Agreement"). Pursuant to
certain terms of the Tax Allocation Agreement, the Company's ability to
recognize the tax benefits of certain net operating loss carryforwards and
foreign and domestic tax credits can be impacted by Seagate Technology's
anticipated operating income for fiscal 1999. Accordingly, the Company's
expected annual effective tax rate of 55% on anticipated operating income may be
subject to adjustment in future quarters.
COMPREHENSIVE INCOME
As of July 4, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income. SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of SFAS 130 had no impact on the Company's
net income or stockholders' equity. SFAS 130 requires that foreign currency
translation adjustments, which prior to adoption were reported separately in
stockholders' equity, be included in other comprehensive income. Accordingly,
the differences between the Company's comprehensive income and net income for
the periods presented are not material.
LITIGATION
See Part II, Item 1 of this Form 10-Q for a description of legal
proceedings.
SUBSEQUENT EVENT
The Company, its parent company, Seagate Technology, Inc. ("STI") and its
Seagate Software Network & Storage Management Group, Inc. ("NSMG") subsidiary
announced on October 5, 1998 that they had entered into an Agreement and Plan of
Reorganization (the "Plan") as of such date with Veritas Holding Corporation
("Newco") and Veritas Software Corporation ("VERITAS"). VERITAS provides
end-to-end storage management software solutions. The Plan provides for the
contribution by the
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SEAGATE SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Company, STI and certain of their respective subsidiaries to Newco of (a) the
outstanding stock of NSMG and certain other subsidiaries of the Company, and (b)
those assets used primarily in the network storage management business of the
Company (the "NSMG Business"), in consideration for the issuance of shares of
Common Stock of Newco to the Company and the offer by Newco to grant options to
purchase Common Stock of Newco to certain of the Company's employees who become
employees of Newco or its subsidiaries. As part of the Plan, Newco will also
assume certain liabilities of the NSMG Business. The Plan is structured to
qualify as a tax-free exchange. The merger will be accounted for as a
non-monetary transaction using the fair value of the assets exchanged.
Upon consummation of the merger, Newco shall issue shares of Common
Stock to the Company equal to approximately 40% of the fully diluted Common
Stock equivalent equity interests in Newco (assuming conversion of all
convertible securities, including the VERITAS convertible debentures, and
exercise of all assumed options and warrants) less that number of shares of
Newco Common Stock issuable upon exercise of Newco options issued to the Company
employees who surrender their outstanding options to purchase shares of the
Company's Common Stock. Upon consummation of the merger, the former security
holders of VERITAS will be issued Newco securities representing approximately
60% of the fully diluted Common Stock equivalent equity interests in Newco.
The merger is subject to a number of conditions, including but not
limited to the effectiveness of a Registration Statement on Form S-4 to be filed
by Newco with the Securities and Exchange Commission, approval by the
stockholders of VERITAS and the Company, the expiration or termination of the
waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and other customary closing conditions.
The Company anticipates recording a substantial gain and certain
expenses in connection with the merger. The gain will be recorded in fiscal
1999. The expenses will include a substantial one-time write-off of in-process
research and development during fiscal 1999 as well as amortization of goodwill
and intangibles over periods up to five years following the merger. The
magnitude of the gain and expenses will depend on several factors, including the
average stock price of Veritas around the date of the merger, the number of
shares of stock exchanged and an independent valuation of Veritas' business. The
Company will account for its investment in Veritas using the equity method and
currently anticipates the merger will be consummated in the third quarter of
fiscal 1999.
NSMG comprised approximately 53% of consolidated assets, 60% of
consolidated revenues, and (43)% of consolidated net loss at and for the fiscal
year ended 1998 (60% of consolidated assets, 65% of consolidated revenues, and
493% of consolidated net income at and for the first fiscal quarter of 1999). If
the exchange with Veritas is consummated along the lines currently comtemplated,
it will result in a substantial reduction in ongoing consolidated revenues and
will result in net losses in periods subsequent to the exchange resulting from
the amortization of intangible assets and goodwill.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN FORWARD-LOOKING INFORMATION
Certain statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") are forward-looking
statements based on current expectations, and entail various risks and
uncertainties that could cause actual results to differ from those projected in
such forward-looking statements. Certain of these risks and uncertainties are
set forth below in the sections entitled "Results of Operations," "Liquidity and
Capital Resources" and "Factors Affecting Future Operating Results. " Certain
sections in this Quarterly Report on Form 10-Q have been identified as
containing forward-looking statements. The reader is cautioned that other
sections and other sentences not so identified may also contain forward-looking
information.
OVERVIEW
The Company develops and markets software products and provides related
services enabling business users and information technology ("IT") professionals
to manage enterprise information. Headquartered in Scotts Valley, California,
the Company has over 40 offices and operations in 17 countries worldwide. The
Company is a majority-owned and consolidated subsidiary of Seagate Technology,
Inc. (the "Parent Company" or "Seagate Technology"), a data technology company
that provides products for storing, managing and accessing digital information
on computer systems. As of October 2, 1998, the Parent Company and one of its
subsidiaries held 99.6% of the Company's outstanding capital stock. On a fully
converted basis, the outstanding minority interests of the Company amounted to
approximately 18.2%, which consisted of Common Stock, options to purchase its
Common Stock issued pursuant to the 1996 Stock Option Plan (the "Option Plan")
and Common Stock subject to repurchase. Such options and stock are held by
certain current and former employees, directors and consultants of the Company
and the Parent Company.
The Company was incorporated in Delaware in November 1993 and commenced
operations in May 1994 pursuant to the Parent Company's merger with Crystal
Computer Services, Inc., a company engaged in developing and marketing report
writing software. From August 1994 to June 1996, the Parent Company acquired
eight software companies, which were engaged in developing and marketing
business intelligence ("BI") or network and/or storage management software
products. In February 1996, the Parent Company merged with Conner Peripherals,
Inc. ("Conner") in a transaction accounted for as a pooling-of-interests. In
connection with the merger, the Parent Company purchased the outstanding
minority interests in Conner's storage management software operations under
Arcada Holdings, Inc. ("Arcada"). In April 1996, the Parent Company consolidated
its software operations into Seagate Software. In June 1998, the Company
acquired Eastman Software Storage Management Group, Inc. ("Eastman"), a company
engaged in developing, producing and marketing hierarchical storage management
("HSM") products for the Windows NT platform. The purchase price of
approximately $10,000,000 was paid in cash. The Company accounted for the
acquisition using the purchase method, and the results of operations of Eastman
are only included in the Company's operations since the acquisition was
completed.
On October 5, 1998, the Company signed a definitive agreement to
contribute its Network & Storage Management Group subsidiary ("NSMG") to a new
holding company that will also acquire VERITAS Software Corporation ("Veritas").
See "Notes to Condensed Consolidated Financial Statements -- Subsequent Event."
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The Company expects to incur certain expenses in connection with the
contribution of NSMG to Newco. These expenses include a substantial one-time
write-off of in-process research and development during fiscal 1999 as well as
amortization of goodwill and intangibles over the next four to five years and
amortization of the Company's portion of the amortization related to its
acquisition of Newco's stock and the consolidation of Newco's amortization of
its balance sheet items on a pro rata basis in fiscal 1999 and over the next
three to five years. The Company also expects to record a substantial gain on
the sale of NSMG.* The magnitude of the expenses and the gain will depend on
several factors, including the stock price of Veritas on the date of the merger,
the number of options to purchase Seagate Software common stock that are
surrendered by employees of NSMG who receive Newco options, and an independent
valuation of Veritas' business.
NSMG comprised approximately 53% of consolidated assets, 60% of
consolidated revenues, and (43)% of consolidated net loss at and for the fiscal
year ended 1998 (60% of consolidated assets, 65% of consolidated revenues, and
493% of consolidated net income at and for the first fiscal quarter of 1999). If
the exchange with Veritas is consummated along the lines currently contemplated,
it will result in a substantial reduction in ongoing consolidated revenues and
will result in net losses in periods subsequent to the exchange resulting from
the amortization of intangible assets and goodwill.
The Company operates and reports financial results on a fiscal year of
52 or 53 weeks ending on the Friday closest to June 30. Accordingly, fiscal 1998
was 53 weeks and ended on July 3, 1998 and fiscal 1999 will be 52 weeks and will
end on July 2, 1999. All references to years in this Form 10-Q represent fiscal
years unless otherwise noted.
RESULTS OF OPERATIONS
REVENUES. Total revenues increased 19% in the three months ended October
2, 1998, to $74.9 million from $63.0 million for the three months ended October
3, 1997. Licensing revenues increased 15% to $60.8 million for the three months
ended October 2, 1998 from $52.8 million for the three months ended October 3,
1997. The increase in licensing revenues over the comparable year-ago quarter
was primarily due to a net increase in the number of NSMG product licenses sold
for sales of NSMG's Backup Exec for Windows NT and Desktop Management Suite and
IMG's Crystal Reports and Crystal Info products. Maintenance, support, and other
revenues increased 37% to $14.0 million for the three months ended October 2,
1998 from $10.2 million for the three months ended October 3, 1997. The increase
in maintenance, support and other revenues over the comparable year-ago quarter
was primarily due to increases in training and consulting revenues resulting
from a larger installed customer base. Additionally, the Company continued to
expand both its indirect and direct sales channels. Revenues from indirect sales
channels increased 25% to $53.0 million in the three months ended October 2,
1998 from $42.2 million in the three months ended October 3, 1997. Revenues from
direct sales channels increased 5% to $21.9 million in the three months ended
October 2, 1998 from $20.8 million in the three months ended October 3, 1997.
COST OF REVENUES. The cost of revenues consists of amortization of
acquired developed technology, royalties, product packaging, documentation,
duplication, production and the cost of maintenance, consulting support and
other services. Acquired developed technology is amortized based on the greater
of the straight-line method over its estimated useful life (30 to 48 months) or
the ratio of current revenues to total current and anticipated future revenues.
Cost of revenues declined 10% to $12.4 million in the
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are cautioned that other sections
and other sentences not so identified may also contain forward-looking
information.
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three months ended October 2, 1998 from $13.8 million in the three months ended
October 3, 1997. The cost of license revenue as a percent of license revenue
declined to 5% in the three months ended October 2, 1998 from 10% in the
comparable year-ago quarter. This decrease over the comparable year-ago quarter
was primarily due to a nonrecurring charge of $1 million to reserve for obsolete
inventory during the three months ended October 3, 1997. Reductions in product
packaging and documentation costs, resulting from a shift in mix to CD-ROMs from
disks and increased sales of higher margin server products, also contributed to
the decrease. The increase in the cost of maintenance, support and other
revenues over the comparable year-ago quarter was primarily due to expansion of
the Company's professional services work force necessary to support the growth
in training and consulting revenues. The 27% decrease in the amortization of
developed technology over the three months ended October 3, 1997 was primarily
due to certain intangible assets that were fully amortized during or at the
start of the first quarter of fiscal 1999.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
personnel-related expenses, advertising, sales and marketing promotions and
customer technical support costs. Total sales and marketing expenses increased
25% to $36.0 million in the three months ended October 2, 1998 from $28.7
million in the three months ended October 3, 1997. The increase in sales and
marketing expenses over the comparable year-ago quarter was primarily due to
expansion of the Company's sales force and increases in advertising, promotion
and technical support costs necessary to support revenue growth, particularly
outside of North America. As a percentage of total revenues, total sales and
marketing expenses were 48% and 46% in the three months ended October 2, 1998
and October 3, 1997, respectively.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of personnel-related expenses, depreciation of development equipment
and facilities and occupancy costs. In accordance with Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed," software development costs are expensed
as incurred until technological feasibility has been established, at which time
such costs are capitalized until the product is available for general release to
customers. To date, the establishment of technological feasibility of the
Company's products and general release of such software has substantially
coincided. As a result, software development costs qualifying for capitalization
have been insignificant. Total research and development expenses increased 12%
to $12.8 million in the three months ended October 2, 1998 from $11.4 million in
the three months ended October 3, 1997. The increase in research and development
expenses over the comparable year-ago quarter was primarily due to increases in
personnel and related expenses, many specifically related to the Eastman
acquisition, necessary to support new product development and localization
costs. As a percentage of total revenues, research and development expenses were
17% and 18% in the three months ended October 2, 1998 and October 3, 1997,
respectively.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel-related expenses for finance, legal, information
technology, human resources and general management, fixed asset provisions and
outside services. Total general and administrative expenses decreased 2% to $8.9
million in the three months ended October 2, 1998 from $9.1 million in the three
months ended October 3, 1997. The decrease over the comparable year-ago quarter
was primarily due to management's efforts to reduce general management and
administrative costs. As a percentage of total revenues, general and
administrative expenses were 12% and 14% in the three months ended October 2,
1998 and October 3, 1997, respectively.
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AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Goodwill represents the
excess of the purchase price of acquired companies over the estimated fair
values of the tangible and intangible net assets acquired. Goodwill is amortized
on a straight-line basis over six to seven years. Other intangible assets
consist of acquired trademarks, assembled workforces, distribution networks,
developed technology, customer bases, and covenants not to compete. Amortization
of other intangibles, other than acquired developed technology, which is
included in the cost of revenues, is provided based on the straight-line method
over the respective useful lives of the assets ranging from one to five years.
Total amortization of goodwill and other intangibles decreased 7% to $3.2
million in the three months ended October 2, 1998 from $3.5 million in the three
months ended October 3, 1997. The decrease in the amortization of goodwill and
other intangibles over the comparable year-ago quarter was primarily due to
decreases in amortization expense based on certain amounts becoming fully
amortized during or as of the start of the first fiscal quarter of 1999,
partially offset by increases in amortization expense due to goodwill acquired
as part of the Eastman acquisition. As a percentage of total revenues,
amortization of goodwill and other intangibles were 4% and 6% in the three
months ended October 2, 1998 and October 3, 1997, respectively.
INTEREST EXPENSE AND OTHER, NET. Interest expense decreased 48% to
$156,000 in the three months ended October 2, 1998 from $300,000 in the three
months ended October 3, 1997. The decrease in interest expense over the
comparable year-ago quarter was primarily due to a lower level of outstanding
borrowings from Seagate Technology. Other income, net increased 184% to $468,000
in the three months ended October 3, 1998 from $165,000 in the three months
ended October 2, 1997 primarily due to foreign currency translation gains
resulting from the Company's Canadian operations.
INCOME TAXES. The Company expects its annual effective tax rate on
anticipated operating income for fiscal 1999 (see "Subsequent Event") to
approximate 55% absent the effects, if any, of the anticipated contribution of
the Company's Network & Storage Management Group to Veritas Holding Corporation.
The projected effective tax rate exceeds the U.S. statutory rate primarily due
to the amortization of goodwill and certain other purchased intangible assets
that is not deductible for tax purposes, expected foreign losses in certain
jurisdictions for which no tax benefit can be recognized currently, and foreign
taxes on certain earnings generated in higher tax rate jurisdictions. This
expected annual effective tax rate of 55% has been used to record the provision
for income taxes for the three month period ended October 2, 1998 compared with
a 17% effective tax rate, used to record the benefit for income taxes for the
three month period ended October 3, 1997. The effective tax rate used to record
the benefit for income taxes for the three month period ended October 3, 1997
was less than the U.S. statutory rate primarily due to increases in the
valuation allowance for deferred tax assets and the amortization of
nondeductible goodwill.
The Company is included in the consolidated federal and certain combined
and consolidated state and foreign income tax returns of Seagate Technology, the
Company's majority stockholder. Seagate Technology and the Company have entered
into a tax sharing agreement ("the Tax Allocation Agreement"). Pursuant to
certain terms of the Tax Allocation Agreement, the Company's ability to
recognize the tax benefits of certain net operating loss carryforwards and
foreign and domestic tax credits can be impacted by Seagate Technology's
anticipated operating income for fiscal 1999. Accordingly, the Company's
expected annual effective tax rate of 55% on anticipated operating income may be
subject to adjustment in future quarters.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total cash was $10,418,000 and $15,130,000 as of October
2, 1998 and July 3 1998, respectively. The decrease in cash was primarily due to
a reduction in the Company's loan payable
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balance to the Parent Company and purchases of equipment, leasehold improvements
and intangible assets, partially offset by cash provided by operating activities
and the sale of common stock. The Company's cash is maintained in highly liquid
operating accounts and primarily consists of bank deposits.
The Company's operations have been financed by cash flows from operating
activities and borrowings from the Parent Company. Such borrowings are available
to the Company under a Revolving Loan Agreement between the Company and Seagate
Technology. Under the Revolving Loan Agreement, Seagate Technology finances
certain of the Company's working capital requirements. The Revolving Loan
Agreement, which provides for maximum borrowings of up to $60,000,000, is
renewable every two years and expires on July 3, 2000. Interest is paid at the
LIBOR rate plus 2% per annum on such borrowings (7.375% at October 2, 1998). The
loan balance was $3,895,000 as of October 2, 1998.
In addition to the Revolving Loan Agreement with Seagate Technology,
certain foreign subsidiaries have line of credit facilities with third party
financial institutions. These line of credit facilities provide for additional
borrowings of up to an equivalent of approximately $1,139,000 at October 2,
1998. Interest rates payable on borrowings are based on local bank prime
interest rates. At October 2, 1998, there were no outstanding borrowings under
any of these lines of credit.
During the three months ended October 2, 1998, the Company made
investments totaling approximately $1,918,000 for new office facilities,
leasehold improvements, computers, furniture and office equipment. The Company
presently anticipates it will make investments in 1999 of approximately
$15,000,000 in equipment and leasehold improvements.* Additionally, product
development activities may include cash used to acquire technology.* The Company
expects that such investments will be funded from existing cash balances and
cash flows from operations.*
The Company believes its current cash balances, its available borrowings
from the Parent Company and cash flows generated from the Company's operations
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for at least the next 12 months.* Furthermore, the Company
anticipates that future operating and investing activities may be financed by
additional borrowings from the Parent Company, equity financing or other
sources.* The Company believes that additional financing from the Parent Company
will be available at a reasonable cost.*
FACTORS AFFECTING FUTURE OPERATING RESULTS
POTENTIAL FLUCTUATIONS IN ANNUAL AND/OR QUARTERLY OPERATING RESULTS
We often experience a high volume of sales at the end of the quarter.
Therefore, it may be late in the quarter before we are able to determine that
our costs are too high in relation to our sales. If this were to happen, we
would not be able to reduce these costs and, consequently, our net income would
be reduced or our net loss increased.* In addition, our operating results have
been and may, in the future, be subject to significant quarterly fluctuations as
a result of a number of other factors including:
- the timing of orders from and shipment of products to major
customers;
- our ability to develop, introduce, and market new products and
product enhancements in a timely fashion;
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are cautioned that other sections
and other sentences not so identified may also contain forward-looking
information.
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- changes in the prices of our products and our competitors'
products;
- our ability to fill orders received within a given quarter;
- our customers' preference for competing technologies in lieu of
our products;
- our inability to reduce our costs in relation to our revenues
(because we ship our products shortly after we receive orders
and operate with no backlog);
- the impact of changes in foreign currency exchange rates on the
cost of our products and the effective price of such products to
foreign consumers;
- competition and consolidation in our industry; and
- general economic conditions.
REVENUE CONCENTRATION
We currently obtain most of our revenue from a limited number of
software products and anticipate this to be the case in the foreseeable future.*
Our new products must be accepted by customers in order for us to be successful.
If our products are not purchased as a result of competition, technological
change or other factors, then our business, operating results and financial
condition would be materially adversely affected.
Our software products have a fixed life cycle that is difficult to
estimate. If we do not develop and introduce new products before our existing
products have completed their life cycles, then we will be unable to sustain or
increase our level of sales.* We cannot be sure that we will continue to be
successful in marketing our key products or any new products, applications or
product enhancements.
Sales to a small number of customers generate a disproportionate amount
of our revenues. For example, Seagate Software derived 24% of its revenues from
sales to its top customer, Ingram Micro Inc. ("Ingram"), in the three months
ended October 2, 1998. If Ingram, or any other significant customer, reduces its
purchases from us, our business, financial condition, and results of operations
would be materially adversely affected unless we substantially increased sales
to other customers. Because our contracts with Ingram (or any other customer) do
not require them to purchase any specified number of software licenses from us,
we cannot be sure that our significant customers will continue to purchase our
products at their current levels.
RELIANCE ON SALES STAFF, CHANNEL PARTNERS AND STRATEGIC RELATIONSHIPS
Wesell and support our products through:
- sales staff,
- third party distributors, and
- Original Equipment Manufacturers ("OEMs").
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are cautioned that other sections
and other sentences not so identified may also contain forward-looking
information.
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We also have a strategic relationship with Microsoft that enables us to
bundle our products with Microsoft's products, and we have developed and are
developing certain utilities and products to be a part of Microsoft's products.*
If Microsoft reduces the nature and quantity of its relationship with us, our
business, operating results and financial condition would be materially
adversely affected.
We have made significant expenditures in recent years to expand our
sales and marketing force and plan to continue this expansion. Our future
success will depend in part upon the productivity of our sales and marketing
force.* We believe that our ability to continue to attract, integrate, train,
motivate and retain new sales and marketing personnel will also affect our
success.* We face intense competition for sales and marketing personnel in the
software industry, and we cannot be sure that we will be successful in hiring
and retaining such personnel in accordance with our plans. Even if we hire and
train sufficient numbers of sales and marketing personnel, we cannot be sure
that our recent and other planned expenses will generate enough additional
revenue to exceed these costs.
We generate a substantial portion of our revenue by selling our products
to distributors and OEMs. Our distributors and OEMs decide whether or not to
include our products with those they sell and generally can carry and sell
product lines that are competitive with ours. Because OEMs and distributors
carry other product lines and are not required to make a specified level of
purchases from us, we cannot be sure that they will prioritize selling our
products. These distributors and OEMs are also generally entitled to terminate
our relationship without cause. Our business, financial results and operating
condition would be materially adversely affected if some or all of our current
distributors and OEMs discontinued selling our products and we failed to find
comparable replacements.*
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are cautioned that other sections
and other sentences not so identified may also contain forward-looking
information.
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NEW PRODUCT DEVELOPMENT AND TECHNOLOGICAL CHANGE
We had research and development expenses of:
FISCAL YEAR EXPENSE
----------- -------
(in millions)
1996 $36.9
1997 $42.8
1998 $47.1
the three months ended October 2, $12.8
1998
Our products are used in combination with other software. The markets
for our products are characterized by rapidly changing technology, changing
customer needs, evolving industry standards and frequent new product
introductions. Our future success will therefore depend on our ability to
design, develop, test and support new software products and enhancements on a
timely and cost effective basis.*
If we do not respond to changing market conditions and customer
requirements by developing and introducing new products in a timely manner, then
our business, operating results or financial condition could be materially
adversely affected.*
COMPETITION
Our industry is intensely competitive and is characterized by rapidly
changing technology and evolving standards. We expect additional competition
from other established and/or emerging companies and as a result of future
software industry consolidations.* We expect that our competitors will offer new
and existing products at lower prices, if necessary, to gain or retain market
share and customers.* We have experienced and expect to continue to experience
intense competition from a number of domestic and foreign companies. Increased
competition can be expected to cause price reductions, reduced gross margins and
loss of market share, any of which could have a material adverse effect on our
business, operating results or financial condition.* Current and potential
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion, sale and support of their products than we are able to
do.*
It is possible that new competitors or alliances among our competitors
may emerge and rapidly acquire significant market share. In addition, network
operating system vendors could introduce new or upgrade existing operating
systems or environments that could render our products obsolete and
unmarketable.
We also face indirect competition from present and potential customers,
including Microsoft or other strategic partners, that continuously evaluate
whether to develop their own software products and components internally or
obtain them from outside sources. If our strategic partners decide to develop
the utilities and other products we have in the past provided, it could have a
material adverse effect on our business, results of operations and financial
condition.*
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are cautioned that other sections
and other sentences not so identified may also contain forward-looking
information.
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There can be no assurance that we will be able to compete successfully
against current or future competitors. If we fail to compete successfully, our
business, operating results and financial condition may be materially adversely
affected.*
RISKS FROM THE CONTRIBUTION OF THE NETWORK & STORAGE MANAGEMENT GROUP
Seagate Technology consolidated its software businesses into a single
entity called Seagate Software in 1996. Seagate Software's business consists of
two primary divisions, the Network & Storage Management Group and the
Information Management Group. We announced on October 5, 1998 that we will
contribute our Network & Storage Management Group business to a newly formed
company that will also acquire Veritas Software Corporation. Seagate Software
and our optionees who are employees of the Network & Storage Management Group
who go to work for the newly formed company will receive 40% of the fully
diluted equity in the new company.*
We face a number of risks prior to and after the closing of the spin-off
of the Network & Storage Management Group including:
- our management resources may be distracted from day to day
operations by the transaction;
- employees of the Information Management Group may be distracted
by concerns about whether we continue to operate that business
or spin it off;
- the Network & Storage Management Group's customers may delay or
cancel orders due to uncertainty about the transaction;
- the ongoing OEM relationship with the Network & Storage
Management Group and Seagate Technology's tape drive operations
may be disrupted;
- we have agreed not to compete in certain storage management
software businesses for a specified period of time after the
closing and may not be able to benefit from future opportunities
in that market;
- we will not have control over the management of the new company,
although initially we will have two representatives on its board
of directors; and
- we will be limited from liquidating our interest in the new
company for a certain period of time. Thereafter, if we choose
to do so, we will be required to sell our interest in the new
company in increments to comply with certain Securities and
Exchange Commission rules or to bear the expense of filing a
registration statement.
ACQUISITIONS
We intend to continue our expansion into software through internal
growth as well as acquisitions.* Acquisitions involve numerous risks including:
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are cautioned that other sections
and other sentences not so identified may also contain forward-looking
information.
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- the difficulties of integrating the operations and products of
the acquired businesses,
- the potential loss of key employees or customers of the acquired
businesses.
We expect that we will continue to incur substantial expenses as we
acquire other businesses including charges for the write-off of in-process
research and development.* Our operating results have fluctuated in the past and
may fluctuate in the future because of the timing of such write-offs.* For
example, we incurred a charge to operations in the fourth quarter of fiscal 1998
of approximately $7 million for the write-off of in-process research and
development related to our acquisition of Eastman Software Storage Management
Group, Inc.
RISKS OF SYSTEMS FAILURES
Our operations are dependent on our ability to protect our computer
equipment and the information stored in our databases from damage by
catastrophic events such as fire, natural disaster, power loss,
telecommunications failures, and unauthorized intrusion. We believe that we have
taken prudent measures to reduce the risk of interruption in our operations.
However, we cannot be sure that these measures are sufficient. Any damage or
failure that causes interruptions in our operations could have a material
adverse effect on our business, results of operations and financial condition.
YEAR 2000 RISKS
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculation causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in normal business activities.*
We consider a product to be "Year 2000 Ready" if the product's performance and
functionality are unaffected by processing of dates prior to, during and after
the year 2000, but only if all products (for example hardware, firmware, and
software) used with the products properly exchange accurate date data with it.
Seagate's Products.
Our products are used in numerous operating environments. We are
assessing our products to determine whether or not they are Year 2000 Ready.
Although we believe certain of our software products are Year 2000 Ready, we
have determined that certain of our software products are not and will not be
Year 2000 Ready. The inability of one or more of our products to properly manage
and manipulate dates related to the Year 2000 could result in a material adverse
effect on our business, financial condition or results of operations, including
increased warranty costs, customer satisfaction issues and potential lawsuits.
We are taking measures to inform our customers that those products are not and
will not be Year 2000 Ready. To assist our customers in evaluating their Year
2000 issues, we have developed a list of those products that are Year 2000 Ready
as stand-alone products. The list is located on Seagate Software's World Wide
Web page and is periodically updated when we make additional product
assessments.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are cautioned that other sections
and other sentences not so identified may also contain forward-looking
information.
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We anticipate that substantial litigation may be brought against
vendors, including Seagate Software, of all software components of systems that
are unable to properly manage data related to the Year 2000. Our customer
agreements typically contain provisions designed to limit our liability for such
claims. As a result of existing or future federal, state or local laws or
ordinances or unfavorable judicial decisions, it is possible that these measures
will not provide us with protection from liability claims.* If any such claims
are brought against us, regardless of their merit, our business, financial
condition and results of operations could be materially adversely affected from
factors that include increased warranty costs, customer satisfaction issues and
the costs of potential lawsuits.
Seagate's Systems
We have also initiated a comprehensive program to address Year 2000
readiness in our internal systems and with our customers and suppliers. Our
program has been designed to address our most critical internal systems first
and to gather information regarding the Year 2000 compliance of products
supplied to Seagate Software and into which our products are integrated.
Assessment and remediation are proceeding in tandem, and we intend to have our
critical internal systems Year 2000 Ready by July 3, 1999, the first day of
Seagate Software's fiscal year 2000. These activities are intended to encompass
all major categories of systems in use by Seagate Software, including
operations, technical support, engineering, sales, finance and human resources.*
To date, we have not incurred material costs related to assessment and
remediation of Year 2000 readiness. We are still in the process of conducting
our Year 2000 audit and therefore are unable to make a reasonable estimate of
the costs associated with Year 2000 readiness. Accordingly, no assurance can be
given that the costs required to address the Year 2000 issue will not have a
material adverse effect on our business, financial condition or results of
operations. The costs incurred to date related to these programs have not been
and are not expected to be material.
We have also initiated formal communications with our significant
suppliers to determine the extent to which Seagate Software is vulnerable to
those third parties' failure to remedy their own Year 2000 issues. To date we
have contacted our significant suppliers and have received assurances of Year
2000 compliance from a number of those contacted. However, most of our suppliers
are under no contractual obligation to provide such information to us. We could
experience material adverse effects on our business if we fail to fully identify
all Year 2000 dependencies in Seagate Software's systems and in the systems of
our suppliers, customers and financial institutions.* Those material adverse
effects could include delays in the delivery or sale of our products.*
Therefore, we are developing contingency plans for continuing operations in the
event such problems arise.*
Customer Purchasing Patterns
We believe that the purchasing patterns of customer and potential
customers may be affected by Year 2000 issues as companies expend significant
resources to correct or patch their current software systems for Year 2000
readiness.* These expenditures may result in reduced funds available to purchase
products such as those offered by Seagate Software, which could have a material
adverse effect on our business, operating results or financial condition.*
RISKS FROM INTERNATIONAL OPERATIONS.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are cautioned that other sections
and other sentences not so identified may also contain forward-looking
information.
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We have significant offshore operations including development
facilities, sales personnel and customer support operations. Our offshore
operations are subject to certain inherent risks including:
- fluctuations in currency exchange rates;
- lack of acceptance of localized products;
- longer payment cycles for sales in foreign countries;
- difficulties in staffing and managing international operations;
- seasonal reductions in business activity in the summer months in
Europe and certain other countries;
- increases in tariffs, duties, price controls, other restrictions
on foreign currencies or trade barriers imposed by foreign
countries;
- management of an enterprise spread over various countries;
- the burden of complying with a wide variety of foreign laws; and
- political unrest, particularly in areas in which we have
facilities.
These factors could have a material adverse effect on our business,
operating results and financial condition in the future.
Our products are priced in U.S. dollars even when sold to customers who
are located abroad. The currency instability in the Asian and other financial
markets may make our products more expensive than products sold by other
manufacturers that are priced in one of the effected currencies. Therefore,
foreign customers may reduce purchases of our products.* We anticipate that the
recent turmoil in financial markets and the recent deterioration of the
underlying economic conditions in certain countries, including those in Asia and
the Far East, may have an impact on our sales to customers located in or whose
end-user customers are located in those countries due to:*
- the impact of currency fluctuations on the relative price of
Seagate Software's products,
- restrictions on government spending imposed by the International
Monetary Fund (the "IMF") in those countries receiving the IMF's
assistance,
- customers' reduced access to working capital to fund software
purchases, such as our products, due to:
- higher interest rates,
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are cautioned that other sections
and other sentences not so identified may also contain forward-looking
information.
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- reduced bank lending due to contractions in the money
supply or the deterioration in the customer's or its
bank's financial condition, or
- the inability to access other financing
DEPENDENCE ON PROPRIETARY TECHNOLOGY
Our success will be heavily dependent on our proprietary technology. We
rely primarily on the following to protect our proprietary rights:
- patents,
- copyrights,
- trademarks and trade secret rights,
- confidentiality procedures,
- employee and third party nondisclosure agreements, and
- licensing restrictions.
Such efforts provide only limited protection.
We also rely in part on shrink-wrap licenses that are not signed by end
users and, therefore, may be unenforceable under the laws of certain
jurisdictions.
Even though we take these steps, someone may be able to copy or
otherwise obtain and use our products and technology without authorization.
Policing unauthorized use of our products is difficult. Although we cannot
determine the extent of existing piracy of our products, we expect that software
piracy will be a persistent problem.* Third parties may also develop similar
technology independently. We believe that effective protection of intellectual
property rights is unavailable or limited in certain foreign countries.*
Our competitors may successfully challenge the validity or scope of our
patents, copyrights and trademarks.* We cannot be sure that our patents,
copyrights and trademarks will provide us with a competitive advantage or that
our competitors will not design around any patents issued to us. We are not
aware that any of our products infringe upon the proprietary rights of third
parties, but, in the future, third parties may claim that our current or future
products infringe that party's rights.* We believe that software product
developers will be increasingly subject to claims of infringement as the
functionality of products in our industry segment overlaps.* If we were subject
to a claim of infringement, regardless of its merit, such claim would have the
following impacts on us that could have a material adverse effect on our
business, operating results or financial condition:
- require costly litigation to resolve,
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are cautioned that other sections
and other sentences not so identified may also contain forward-looking
information.
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- absorb significant management time, or
- require us to enter into unfavorable royalty or license
agreements.
SOFTWARE PRODUCT ERRORS OR DEFECTS
Software products as complex as those we offer frequently contain errors
or defects, especially when first introduced or when new versions or
enhancements are released. Despite product testing, our products may contain
defects or software errors.* If our products have errors, they could:
- cause a negative customer reaction that could reduce future
sales;
- generate negative publicity regarding Seagate Software and our
products;
- harm our reputation;
- reduce or limit customer's adoption of our products;
- require us to make extensive changes to the product; or
- result in customers' delaying their purchase until the errors or
defects have been remedied, which would cause our revenues to be
reduced or delayed.
Any of these occurrences could have a material adverse effect upon our business,
operating results or financial condition.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. Existing
or future federal, state or local laws or ordinances or unfavorable judicial
decisions may make these provisions ineffective.* Because our products are used
in system management, resource optimization and business intelligence
applications, our liability could be substantial if we receive an unfavorable
judgement, which could have a material adverse effect upon our business,
operating results or financial condition.*
DEPENDENCE ON KEY PERSONNEL.
Our future performance depends to a significant degree upon the
continued service of our key members of management as well as marketing, sales,
and product development personnel.* The loss of one or more of our key personnel
would have a material adverse effect on our business, operating results and
financial condition.* We believe our future success will also depend in large
part upon our ability to attract and retain highly skilled management,
marketing, sales, and product development personnel.* We have experienced
intense competition for such personnel and there can be no assurance that we
will be able to retain our key employees or that we will be successful in
attracting, assimilating and retaining them in the future.
RISKS FROM CONVERSION TO SINGLE EUROPEAN CURRENCY.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are cautioned that other sections
and other sentences not so identified may also contain forward-looking
information.
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On January 1, 1999, certain member states of the European Economic
Community will fix their respective currencies to a new currency, the Single
European Currency ("Euro"). On that day the Euro will become a functional legal
currency within these countries. During the three years beginning on January 1,
1999, business in these countries will be conducted both in the existing
national currency, such as the French Franc or the Deutsche Mark, as well as the
Euro. Companies operating in or conducting business in these countries, will
need to ensure that their financial and other software systems are capable of
processing transactions and properly handling the existing currencies and the
Euro.
We are still assessing the impact that the introduction and use of the
Euro will have on our internal systems. We will take corrective actions based on
such assessment but do not presently expect that introduction and use of the
Euro will materially affect our foreign exchange and hedging activities or use
of derivative instruments or will result in any material increase in our costs.*
While we will continue to evaluate the impact of the Euro introduction over
time, based on currently available information, we do not believe that the
introduction of the Euro will have a material adverse impact on Seagate
Software's financial condition or overall trends in results of operations.*
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK. The U.S. dollar is the functional currency for
most of the Company's foreign operations. Gains and losses on the remeasurement
into U.S. dollars of amounts denominated in foreign currencies are included in
net income for those operations whose functional currency is the U.S. dollar.
Gains and losses on translation into U.S. dollars of foreign operations whose
functional currency is the local currency are recorded as a separate component
of stockholders' equity. Foreign currency fluctuations have not had a
significant effect on the Company's results of operations, and the Company does
not engage in foreign currency hedging programs.
INTEREST RATE RISK. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's borrowings under a Revolving
Loan Agreement between the Company and Seagate Technology. The Company pays
interest to Seagate Technology at the LIBOR rate plus 2% per annum on such
borrowings (7.375% at October 2, 1998). The Company typically uses available
cash in excess of amounts required for operating activities to pay amounts due
under the Revolving Loan Agreement. Accordingly, the Company has not had a
significant level of funds available for investment purposes. Interest rate
fluctuations have not had a significant effect on the Company's results of
operations.
- ---------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations. Readers are cautioned that other sections
and other sentences not so identified may also contain forward-looking
information.
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27
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 10, 1997, Vedatech Corporation commenced an action in the
High Court of Justice Chancery Division in the United Kingdom against Seagate
Software Information Management Group Ltd. claiming breach of an oral agreement
and infringement of a Vedatech U.K. copyright in the Japanese translation of one
of the Company's products (the "Complaint") and seeking monetary and injunctive
relief. No specific damage amount has yet been claimed. The Company has hired
local counsel in the U.K., reviewed documents and conducted interviews. The
Company filed an initial response in the U.K. court on January 13, 1998 and is
now in the discovery process. The Company believes the Complaint has no merit
and intends to vigorously defend the action. However, if an unfavorable outcome
were to arise, there can be no assurance that such outcome would not have a
material adverse effect on the Company's liquidity, financial position or
results of operations.
In addition to the foregoing, the Company is engaged in legal actions
arising in the ordinary course of its business and believes that the ultimate
outcome of these actions will not have a material adverse effect on the
Company's financial position, liquidity, or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are included herein:
10.12 Lease Dated April 15, 1995 between Fiero II Associates and Arcada
Software, Inc. for the premises located at Building 1, Fiero
Commerce Park II, San Luis Obispo, California, as amended to date
10.12.1 Lease dated November 20, 1995 between Fiero II Associates and
Arcada Software, Inc. for the premises located at Building 1,
Fiero Commerce Park II, San Luis Obispo, California
10.12.2 Lease dated December 17, 1993 between Morgan Investments and
Quest Development Corporation for the premises located at 708
Fiero Commerce Park, San Luis Obispo, California
10.12.3 Addendum dated March 26, 1997 to Lease dated May 14, 1995 between
Seagate Software Storage Management Group, Inc. and Jerry Michael
10.13 Lease dated April 18, 1995 between WHC-SIX Real Estate Limited
Partnership and Seagate Technology, Inc. for the premises located
at 19925 Stevens Creek Blvd., Cupertino, California, as amended
by the First Amendment to Lease dated May 1, 1995 and the Second
Amendment to Lease dated January 16, 1996
10.14 Occupational Lease dated June 24, 1998 between the Universities
Superannuation Scheme, Seagate Software Limited and Seagate
Technology, Inc. for the premises located at Acquis House,
Blagrave Street, Reading, England
27.1 Financial Data Schedule
(a) Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the three months ended October 2, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEAGATE SOFTWARE, INC.
(Registrant)
DATE: November 13, 1998 BY: /s/ Terence R. Cunningham
-----------------------
TERENCE R. CUNNINGHAM
President and Chief Operating Officer
DATE: November 13, 1998 BY: /s/Ellen E. Chamberlain
-----------------------
ELLEN E. CHAMBERLAIN
Senior Vice President, Treasurer and
Chief Financial Officer
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SEAGATE SOFTWARE, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER
- -------
10.12 Lease Dated April 15, 1995 between Fiero II Associates and Arcada
Software, Inc. for the premises located at Building 1, Fiero
Commerce Park II, San Luis Obispo, California, as amended to date
10.12.1 Lease dated November 20, 1995 between Fiero II Associates and
Arcada Software, Inc. for the premises located at Building 1,
Fiero Commerce Park II, San Luis Obispo, California
10.12.2 Lease dated December 17, 1993 between Morgan Investments and
Quest Development Corporation for the premises located at 708
Fiero Commerce Park, San Luis Obispo, California
10.12.3 Addendum dated March 26, 1997 to Lease dated May 14, 1995 between
Seagate Software Storage Management Group, Inc. and Jerry Michael
10.13 Lease dated April 18, 1995 between WHC-SIX Real Estate Limited
Partnership and Seagate Technology, Inc. for the premises located
at 19925 Stevens Creek Blvd., Cupertino, California, as amended
by the First Amendment to Lease dated May 1, 1995 and the Second
Amendment to Lease dated January 16, 1996
10.14 Occupational Lease dated June 24, 1998 between the Universities
Superannuation Scheme, Seagate Software Limited and Seagate
Technology, Inc. for the premises located at Acquis House,
Blagrave Street, Reading, England
27.1 Financial Data Schedule
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