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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 March 30, 2001
Commission File Number 000-31859
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CRYSTAL DECISIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0537234
(State or other jurisdiction of (I.R.S. EmployerIdentification Number)
incorporation or organization)
895 Emerson St.,
Palo Alto, California 94301
(Address of principal executive (Zip Code)
offices)
Telephone: (650) 473-3130
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
On March 30, 2001, 75,375,380 shares of the registrant's common stock,
$0.001 par value per share, were issued and outstanding.
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CRYSTAL DECISIONS, INC. (formerly SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Page
----
Consolidated and Condensed Balance Sheets as of March 30, 2001 and June
30, 2000................................................................ 3
Consolidated and Combined Condensed Statements of Operations for the
Quarters Ended March 30, 2001 and March 31, 2000 and for the Nine Months
Ended March 30, 2001 and March 31, 2000................................. 4
Consolidated and Combined Condensed Statements of Cash Flows for the Nine
Months Ended March 30, 2001 and March 31, 2000.......................... 5
Consolidated and Combined Condensed Statements of Stockholders' Equity
for the Nine Months ended March 30, 2001 and for the Year Ended June 30,
2000.................................................................... 6
Notes to Consolidated and Combined Condensed Financial Statements........ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 30
Item 3. Quantitative and Qualitative Disclosures about Market Risk......... 50
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 52
Item 4. Vote of Security Holders........................................... 52
Item 6. Exhibits and Reports on Form 8-K................................... 53
SIGNATURES................................................................. 54
2
Item 1. Financial Statements (Unaudited)
CRYSTAL DECISIONS, INC. (formerly SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
CONSOLIDATED AND CONDENSED BALANCE SHEETS
(In thousands, except share and per share data)
(see note 2)
March 30, June 30,
2001 2000
------------ ---------
(unaudited)
ASSETS (note 11)
----------------
Current assets:
Cash................................................ $ 5,406 $ 3,621
Loan receivable from Seagate Technology LLC (note
3)................................................. 30,101 25,681
Accounts receivable, net............................ 27,380 16,578
Income taxes receivable............................. 161 6,071
Inventories......................................... 814 674
Prepaid and other current assets.................... 3,358 4,021
------- ---------
Total current assets.............................. 67,220 56,646
Capital assets, net................................... 9,346 9,348
Intangibles and goodwill, net......................... 19,828 5,286
------- ---------
Total assets...................................... $96,394 $ 71,280
======= =========
LIABILITIES
-----------
Current liabilities:
Accounts payable.................................... 11,934 10,190
Accrued employee compensation....................... 10,189 6,004
Accrued expenses.................................... 11,161 12,097
Deferred revenue.................................... 25,502 19,495
------- ---------
Total current liabilities......................... 58,786 47,786
Deferred income taxes................................. 2,399 381
------- ---------
Total liabilities................................. 61,185 48,167
Commitments and contingencies (notes 2, 3, 11, 12 and
16)
STOCKHOLDERS' EQUITY
--------------------
Common stock--150,000,000 shares authorized, shares
issued and outstanding--75,375,380 and 75,002,050 at
$0.001 par value per share as of March 30, 2001 and
June 30, 2000........................................ 75 75
Additional paid-in capital............................ 41,991 407,893
Accumulated deficit................................... (7,081) (384,688)
Accumulated other comprehensive income (loss)......... 224 (167)
------- ---------
Total stockholders' equity........................ 35,209 23,113
------- ---------
Total liabilities and stockholders' equity........ $96,394 $ 71,280
======= =========
See notes to consolidated and combined condensed financial statements.
3
CRYSTAL DECISIONS, INC. (formerly SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
CONSOLIDATED AND COMBINED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
For the nine months
For the quarters ended ended
------------------------ ------------------------
March 30, March 31, March 30, March 31,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues:
Licensing (note 7)....... $ 28,026 $ 22,319 $ 76,563 $ 53,710
Maintenance, support and
services (note 7)....... 15,568 12,068 44,080 38,852
----------- ----------- ----------- -----------
Total revenues......... 43,594 34,387 120,643 92,562
Cost of revenues:
Licensing................ 1,619 1,251 3,823 2,854
Maintenance, support and
services................ 9,786 9,216 29,739 30,031
Amortization of developed
technologies............ 1,269 53 1,780 146
----------- ----------- ----------- -----------
Total cost of
revenues.............. 12,674 10,520 35,342 33,031
----------- ----------- ----------- -----------
Gross profit............... 30,920 23,867 85,301 59,531
Operating expenses:
Sales and marketing...... 18,745 14,459 53,621 46,886
Research and
development............. 7,617 6,917 21,403 19,758
General and
administrative (note
7)...................... 4,404 5,469 13,893 15,479
Amortization of goodwill
and other intangibles... 589 519 1,434 2,521
Write-off of in-process
R&D (note 2) ........... -- -- 7,073 --
Unusual items (note 5)... -- -- 1,851 242,569
Restructuring costs (note
6)...................... -- -- 573 1,301
----------- ----------- ----------- -----------
Total operating
expenses.............. 31,355 27,364 99,848 328,514
----------- ----------- ----------- -----------
Loss from operations....... (435) (3,497) (14,547) (268,983)
Interest and other income
(expense), net (note 3)... 375 315 1,494 (966)
----------- ----------- ----------- -----------
Loss before income taxes... (60) (3,182) (13,053) (269,949)
Benefit from (provision
for) income taxes (note
8)........................ (1,486) 2,079 1,020 50,959
----------- ----------- ----------- -----------
Net loss................... $ (1,546) $ (1,103) $ (12,033) $ (218,990)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted (note
9)...................... $ (0.02) $ (0.01) $ (0.16) $ (2.92)
Weighted average number of
shares used in basic and
diluted net loss per
share:.................... 75,314,983 75,001,537 75,208,923 75,001,177
See notes to consolidated and combined condensed financial statements.
4
CRYSTAL DECISIONS, INC. (formerly SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
CONSOLIDATED AND COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
For the Nine months
ended (See Note 2)
--------------------
March 30, March 31,
2001 2000
--------- ---------
Operating activities
Net loss................................................. $ (12,033) $(218,990)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization.......................... 6,325 5,329
Bad debt expense (recovery)............................ 317 2,966
Deferred income taxes.................................. 474 (17)
Stock based compensation expense on Seagate Technology
Exchange of Shares.................................... 1,851 239,574
Write-off of in-process research and development....... 7,073 --
--------- ---------
4,007 28,862
--------- ---------
Changes in operating assets and liabilities:
Accounts receivable.................................... (10,869) 20,934
Income taxes receivable................................ 5,910 (25,550)
Income taxes receivable from Seagate Technology LLC.... (3,978) (37,200)
Inventories............................................ (140) 202
Prepaid and other current assets....................... 733 (3,547)
Accounts payable....................................... 1,870 (1,172)
Accrued employee compensation.......................... 4,185 (4,483)
Accrued expenses....................................... (838) 2,273
Deferred revenue....................................... 7,498 (708)
Other liabilities...................................... -- (225)
--------- ---------
Net cash provided by (used in) operating activities.. 8,378 (20,614)
--------- ---------
Investing activities
Acquisition of capital assets, net....................... (7,188) (1,906)
--------- ---------
Net cash (used in) investing activities.............. (7,188) (1,906)
--------- ---------
Financing activities
Issuance of common stock and common stock subject to
repurchase.............................................. 1,493 5
Borrowings from Seagate Technology LLC................... 109,202 136,839
Payment to Seagate Technology LLC........................ (109,650) (116,889)
--------- ---------
Net cash provided by financing activities............ 1,045 19,955
Effect of exchange rate changes on cash.................. (450) 435
--------- ---------
Increase (decrease) in cash.............................. 1,785 (2,130)
Cash at the beginning of the period...................... 3,621 7,419
--------- ---------
Cash at the end of the period............................ $ 5,406 $ 5,289
========= =========
See notes to consolidated and combined condensed financial statements.
5
CRYSTAL DECISIONS, INC. (formerly SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
CONSOLIDATED AND COMBINED CONDENSED STATEMENTS OF
STOCKHOLDERS' EQUITY
For the nine months ended March 30, 2001 and for the year ended June 30, 2000
(In thousands, except share data)
Accumulated
Common Stock Additional Other
----------------- Paid-In Comprehensive Accumulated
Shares Amount Capital Income (Loss) Deficit Total
---------- ------ ---------- ------------- ----------- ---------
Balance at July 2,
1999................... -- -- 167,038 (629) (163,526) 2,883
Components of
comprehensive loss:
Foreign currency
translation........... 462 462
Net loss............... (221,162) (221,162)
---------
Comprehensive loss...... (220,700)
Incorporation of Crystal
Decisions.............. 1,000 1 1
Contribution of IMG
entities to Crystal
Decisions.............. 75,000,000 75 (75)
Issuance of common stock
upon exercise of
employee stock
options................ 1,050 4 4
Equity contribution by
Seagate Technology
related to the
acquisition of the
minority interest of
Seagate Software
Holdings, Inc. ........ 1,242 1,242
Compensation expense for
Seagate Technology
Exchange of Shares..... 239,574 239,574
Income tax benefit from
Seagate Technology
stock option
exercises.............. 109 109
---------- --- --------- ----- --------- ---------
Balance at June 30,
2000................... 75,002,050 $75 $ 407,893 $(167) $(384,688) $ 23,113
Components of
comprehensive loss:
Foreign currency
translation........... 76 76
Net loss to November
22, 2000.............. (4,952) (4,952)
---------
Comprehensive loss...... (4,876)
Issuance of common stock
eligible for
repurchase............. 225,000 900 900
Issuance of common stock
upon exercise of
employee stock
options................ 12,241 49 49
Income tax benefit from
Seagate Technology
stock option
exercises.............. 33 33
Compensation expense for
Seagate Technology
Stock Options.......... 1,851 1,851
---------- --- --------- ----- --------- ---------
Balance at November 22,
2000................... 75,239,291 $75 $ 410,726 $ (91) $(389,640) $ 21,070
Elimination of
accumulated deficit and
other comprehensive
income................. (389,731) 91 389,640 --
Push down adjustments
reflecting new bases of
net assets............. 20,452 20,452
---------- --- --------- ----- --------- ---------
Adjusted Balance at
November 22, 2000
(unaudited)............ 75,239,291 $75 $ 41,447 -- -- $ 41,522
Components of
comprehensive loss:
Foreign currency
translation........... 224 224
Net loss............... (7,081) (7,081)
---------
Comprehensive loss...... (6,857)
Issuance of common stock
upon exercise of
employee stock
options................ 136,089 544 544
---------- --- --------- ----- --------- ---------
Balance at March 30,
2001 (unaudited)....... 75,375,380 $75 $ 41,991 $ 224 $ (7,081) $ 35,209
========== === ========= ===== ========= =========
See notes to consolidated and combined condensed financial statements.
6
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION MANAGEMENT GROUP
HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(Information as of March 30, 2001 and for the Nine Months ended
March 30, 2001 and March 31, 2000 is unaudited)
Note 1. Description of Business and Basis of Presentation
Description of Business
Crystal Decisions, Inc. ("Crystal Decisions" or the "Company") is an
information infrastructure company that develops and markets software products
and provides related services enabling business users and information
technology professionals to manage enterprise information. Crystal Decisions
operates in a single industry segment and its products, commonly referred to as
business intelligence software, permit the analysis and interpretation of data
in order to make business decisions. Crystal Decisions was incorporated in
Delaware in August 1999. Crystal Decisions' headquarters are located in Palo
Alto, California.
Crystal Decisions is a majority-owned subsidiary of Seagate Software
(Cayman) Holdings, a Cayman Islands limited corporation ("Suez Software"),
which is a wholly owned subsidiary of New SAC, a Cayman Islands limited
corporation ("New SAC"), whose predecessor was Seagate Technology, Inc.
("Seagate Technology"). Prior to November 22, 2000, the Company was a majority
owned subsidiary of Seagate Software Holdings, Inc. ("Seagate Software
Holdings", formerly known as Seagate Software, Inc.), a Delaware corporation
and wholly owned subsidiary of Seagate Technology. Seagate Technology was a
data technology company that provided products for storing, managing and
accessing digital information on computer systems. The outstanding minority
interests in the Company's capital stock amounted to approximately 12.9% and
10.5% on a fully diluted basis as of March 30, 2001 and June 30, 2000,
respectively. The minority interests consisted of the Company's common stock
and options to purchase Crystal Decisions common stock issued pursuant to the
1999 and 2000 Stock Option Plans.
In March 2001, the Company changed its name from Seagate Software
Information Management Group Holdings, Inc. to Crystal Decisions, Inc.
Basis of Presentation
The consolidated and combined condensed financial statements of the Company
have been prepared by the Company, without audit, in accordance with generally
accepted accounting principles for interim financial information and in
accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with U.S. generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations. These unaudited interim financial statements, should be read in
conjunction with the consolidated and combined financial statements and related
notes of the Company in the Registration Statement on Form 10-12G/A as filed
with the Securities and Exchange Commission ("SEC") on January 31, 2001.
The consolidated and combined condensed financial statements reflect, in the
opinion of management, all material adjustments (consisting of normal recurring
items) necessary for the fair presentation of the consolidated financial
position, results of operations and cash flows for such periods. The results of
operations for the nine months ended March 30, 2001 are not necessarily
indicative of the results that may be expected for the entire fiscal year
ending June 29, 2001.
On November 22, 2000, 99% of the outstanding common stock of Crystal
Decisions was purchased by New SAC, through Suez Software and resulted in a
"Change in Control of Crystal Decisions" as described in note 2. Under SEC
rules and regulations, because more than 95% of the Company was acquired and a
change of ownership occurred, Crystal Decisions has restated all its assets and
liabilities as of November 22, 2000 on a push down accounting basis.
Accordingly, results of operations prior to November 22, 2000 and the
comparative information presented do not reflect these adjustments. Refer to
further discussion of the push down accounting basis in note 2.
7
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
Crystal Decisions operates and reports financial results on a fiscal year of
52 or 53 weeks ending on the Friday closest to June 30. Accordingly, fiscal
2000 ended on June 30, 2000 and fiscal 1999 ended on July 2, 1999. Fiscal 2000
and 1999 were comprised of 52 weeks. Fiscal 2001 will be a 52-week year and
will end on June 29, 2001. The quarters ended October 1, 1999, December 31,
1999, March 31, 2000, September 29, 2000, December 29, 2000 and March 30, 2001
each comprised 13 weeks of activity.
Note 2. Change in Control of Crystal Decisions, Inc. (formerly Seagate Software
Information Management Group Holdings, Inc.)
On November 22, 2000, Seagate Software Holdings, Seagate Technology and Suez
Acquisition Company (Cayman) Limited ("Old SAC"), an entity affiliated with,
among others, Silver Lake Partners and Texas Pacific Group, completed a stock
purchase agreement (the "Stock Purchase Agreement"), and Seagate Technology and
VERITAS Software Corporation ("VERITAS") completed an agreement and plan of
merger and reorganization, or the Merger Agreement. Old SAC was a limited
liability company organized under the laws of the Cayman Islands and formed
solely for the purpose of entering into the Stock Purchase Agreement and
related acquisitions. Old SAC assigned all of its rights under the stock
purchase agreement to New SAC.
Under the Stock Purchase Agreement, New SAC agreed to purchase for $1.840
billion cash, including transaction costs of $25 million, all of the operating
assets of Seagate Technology and its consolidated subsidiaries, including
Seagate Technology's rigid disc drive, storage area network, removable tape
storage solutions, enterprise management software businesses and operations,
including shares of Crystal Decisions common stock, and certain cash balances,
but excluding the approximately 128 million shares of VERITAS common stock then
held by Seagate Software Holdings and Seagate Technology's equity investments
in Gadzoox Networks, Inc. and Lernout & Hauspie Speech Products N.V. In
addition, under the Stock Purchase Agreement, wholly owned subsidiaries of New
SAC assumed substantially all of the operating liabilities of Seagate
Technology, Seagate Software Holdings and their consolidated subsidiaries. In
addition, New SAC acquired Seagate Technology Investments, Inc., a subsidiary
of Seagate Technology, which holds certain strategic equity investments in
various companies. This transaction is referred to hereafter as the New SAC
Transaction.
Upon completion of the New SAC Transaction, the 75,001,000 shares of the
common stock of Crystal Decisions' that were held by Seagate Software Holdings
were acquired by New SAC. Crystal Decisions' minority stockholders continue to
hold their interests in the Company's common stock. In addition, the
outstanding unexercised options granted under the 1999 and 2000 Stock Option
Plans continue to remain outstanding.
Immediately following the consummation of the Stock Purchase Agreement under
the terms of a Merger Agreement, VERITAS acquired Seagate Technology and a
wholly owned subsidiary of VERITAS merged with and into Seagate Technology,
with Seagate Technology becoming a wholly owned subsidiary of VERITAS. This
transaction is referred to as the Merger. VERITAS did not acquire Seagate
Technology's disc drive business or any other Seagate Technology operating
business, including Crystal Decisions.
As part of the New SAC Transaction, New SAC, Seagate Technology and Crystal
Decisions agreed to assume and indemnify VERITAS for substantially all
liabilities arising in connection with the Company's operating assets. On March
29, 2000, Seagate Technology, VERITAS and New SAC entered into an
Indemnification Agreement, pursuant to which these entities and certain other
subsidiaries of Seagate Technology, including Crystal Decisions, have agreed to
certain indemnification provisions regarding tax and other matters that may
arise in connection with the New SAC Transaction and the Merger. In addition, a
8
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
majority of Crystal Decisions' assets, along with certain other assets of
Seagate Technology, are now pledged as a guarantee for debt issued to finance
the New SAC Transaction. (Refer to further discussion in note 11).
The federal tax allocation agreement ("Tax Allocation Agreement") Crystal
Decisions had with Seagate Technology was terminated on November 22, 2000, and
Crystal Decisions no longer files federal income tax returns on a consolidated
basis with Seagate Technology. (Refer to further discussion in note 8).
Crystal Decisions has borrowings available up to $60.0 million under a
revolving loan with Seagate Technology LLC, which is a wholly owned subsidiary
of New SAC, to fund a portion of the Company's operating cash needs. The
revolving loan agreement ("Revolving Loan Agreement") continues in effect
subsequent to the closing of the New SAC Transaction on November 22, 2000 and
expires on July 4, 2001. (Refer to further discussion in note 3).
Allocation of Purchase Price to Crystal Decisions Pursuant to the Application
of Push Down Accounting
The New SAC Transaction constituted a purchase business transaction of
Seagate Technology and resulted in a change in control of Crystal Decisions.
Under purchase accounting rules, the net purchase price under this transaction
has been allocated to the assets and liabilities of Seagate Technology and its
subsidiaries, including Crystal Decisions based on their estimated fair values
at the date of the transaction. However, the estimated fair values of
identifiable tangible and intangible assets and liabilities of Seagate
Technology and its subsidiaries at the date of the transaction were greater
than the amount paid, resulting in negative goodwill. The negative goodwill has
been allocated to the long-lived tangible and intangible assets, including
those of Crystal Decisions, on the basis of relative fair values. The estimated
fair values of tangible and intangible assets, including in-process research
and development, have been determined based upon independent appraisals.
The consolidated and combined condensed interim financial statements as of
March 30, 2001 reflect the historical results of operations and financial
position up to the date of the transaction, November 22, 2000, the restatement
of assets and liabilities at that date to reflect the push down purchase
accounting adjustments, followed by the results of operations and financial
position for the period from November 23, 2000 to March 30, 2001 reflecting the
effects of restated balances from the date of the New SAC Transaction. As a
result of the New SAC Transaction and the push down accounting, the Company's
results of operations following the New SAC Transaction, particularly the
depreciation and amortization charges, are not necessarily comparable to the
results of operations prior to the New SAC Transaction.
The purchase price under the Stock Purchase Agreement was fixed and no
contingencies have been identified that will result in a change in the overall
purchase price. However, the allocation of the purchase price is subject to
change in the future as New SAC and its related subsidiaries realize deferred
tax assets in accordance with Statement of Financial Accounting Standards No.
109 ("SFAS 109") "Accounting for Income Taxes" and release related deferred tax
asset allowances.
In connection with the purchase of the operating assets of Seagate
Technology, New SAC established a $350 million valuation allowance against U.S.
federal and state deferred tax assets arising from the transaction. The
realization of New SAC 's federal and state deferred tax assets subject to the
valuation allowance will depend primarily on its ability to generate taxable
income in the United States in future fiscal years, the timing and amount of
which are uncertain. New SAC anticipates that the tax benefits of the deferred
tax assets, when realized, will result in a reduction in values of the
intangible assets recorded in the purchase transaction including those recorded
in the push down adjustments to Crystal Decisions.
9
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
The table below reconciles the total purchase price paid by New SAC for the
operating assets of Seagate Technology and its consolidated subsidiaries,
including the disc drive, tape drive, software and intelligent storage
businesses and operations, to be allocated to Crystal Decisions under push down
and purchase accounting. The fair value of the tangible and intangible long-
lived assets acquired have been reduced by approximately 46% as a result of
negative goodwill allocated to these assets to arrive at the net purchase price
allocation.
Allocated to
Purchase Price for
Purchase price allocation for New SAC (in millions) New SAC
- --------------------------------------------------- ------------------
Net current assets (liabilities):
Crystal Decisions......................................... 9
All other businesses of New SAC........................... 930
Long-term investments held by all other businesses of New
SAC:....................................................... 42
Tangible long-lived assets:
Crystal Decisions......................................... 5
All other businesses of New SAC........................... 773
Intangible Assets:
Crystal Decisions
In process research and development....................... 7
Developed technology...................................... 15
Assembled workforce....................................... 7
All other businesses of New SAC
In process research and development....................... 52
Developed technology...................................... 61
Assembled workforce....................................... 46
Trade name................................................ 47
Other intangible assets................................... 1
-----
Total Identified Intangible Assets......................... 236
-----
Other Long-term assets:
All other businesses of New SAC........................... 42
Other Long-term deferred taxes:
Crystal Decisions......................................... (2)
All other businesses of New SAC........................... (73)
Long-term liabilities owed by all other businesses of New
SAC........................................................ (122)
-----
Net purchase price:......................................... 1,840
-----
Negative Goodwill........................................... 909
-----
Total estimated fair value for New SAC...................... 2,749
=====
10
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
The table below lists the estimated net purchase price allocation of the
tangible and intangible assets acquired (in thousands). The purchase price
allocated to Crystal Decisions as a result of the New SAC Transaction is not
necessarily indicative of a purchase of Crystal Decisions on a stand-alone
basis.
Net Purchase
Purchase Price Allocation Price Allocation
------------------------- ----------------
Net current assets acquired................................. $ 9,138
Tangible long-lived assets acquired(1)...................... 5,130
--------
14,268
--------
Intangible assets acquired:
Developed technology(2)................................... 15,234
Assembled work force(3)................................... 7,073
In-process research and development(4).................... 7,073
Deferred tax liability(5)................................. (2,126)
--------
$ 27,254
--------
Total................................................... $ 41,522
========
(1) Tangible long-lived assets acquired consists of leasehold improvements and
equipment, and are amortized over their remaining useful lives of
approximately 2 years.
(2) The value of the developed technology has been estimated by discounting
the expected future cash flows attributable to all existing technology,
taking into account risks related to the characteristics and applications
of the technology, existing and future markets and assessments of the life
cycle stage of the technology. The analysis resulted in a valuation for
developed technology, which had reached technological feasibility and
therefore was capable of being capitalized. The developed technology is
being amortized on the straight-line basis over its estimated useful life
(3 years) and the amortization is included in cost of revenues.
(3) The estimated value of the assembled work force has been determined by
estimating the costs to replace the existing employees, including the
recruiting, hiring and training costs for each category of employee. The
assembled workforce is being amortized on the straight-line basis over its
estimated useful life (3 years) and the amortization is included in
amortization of goodwill and other intangibles.
(4) As the basis for identifying the in-process research and development
("IPR&D"), Crystal Decisions' developmental projects were evaluated in the
context of Financial Accounting Standards Board Interpretation 4 and
paragraph 11 of Financial Accounting Standards Board ("FAS") Statement No.
2 and FAS Statement No. 86. Crystal Decisions has charged the value
allocated to projects identified as IPR&D to expense in the period the
transactions close. This write-off is necessary because the acquired
technologies have not yet reached technological feasibility and have no
future alternative uses.
At the valuation date, Crystal Decisions was in the process of developing
three next generation versions of existing technologies which were
estimated to be about 85%, 70%, and 75% complete based on total man-hours
and absolute time. Crystal Decisions expects these three projects to be
completed in fiscal 2002, at an estimated cost of $28 million. The nature
of the efforts required to develop the purchased IPR&D into commercially
viable products principally relate to the completion of all planning,
designing, prototyping, verification and testing activities that are
necessary to establish that the product can be produced to meet its design
specifications, including functions, features and technical performance
requirements. Crystal Decisions expects that the acquired IPR&D will be
successfully developed, but it cannot ensure that commercial viability of
these products will be achieved.
11
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
The value of the purchased IPR&D for Crystal Decisions has been calculated
by estimating the projected net cash flows related to such products,
including costs to complete the development of the technology and the future
revenues to be earned on commercialization of the products. These cash flows
were then discounted back to their net present value. The projected net cash
flows from such projects were based on management's estimates of revenues
and operating profits related to these projects.
(5) Deferred taxes arose because of the difference between book and tax basis
of tangible long-lived and intangible assets acquired and located in
jurisdictions other than the United States (U.S.). Deferred taxes do not
arise for those intangible and tangible long-lived assets acquired and
located in the U.S., because the transaction is subject to a special tax
election in the U.S., whereby no difference in the book and tax basis of
the net assets exist.
Pro Forma Information. The following table presents the unaudited pro forma
results of operations for informational purposes, assuming the change of
control of Crystal Decisions occurred at the beginning of fiscal 2000:
Nine Months Ended
------------------
March March
30, 2001 31, 2000
-------- --------
(in thousands,
except for per
share amounts)
Net revenue............................................. $121,541 $ 92,562
Net loss................................................ $(11,518) $(27,416)
-------- --------
Pro forma basic and diluted net loss per share.......... $ (0.15) $ (0.37)
======== ========
The pro forma results of operations give effect to certain adjustments
including amendment of amortization and depreciation of revalued intangible and
tangible assets. The pro forma net loss for the nine months ended March 30,
2001 and March 31, 2000 does not include the following push down and purchase
price adjustments, as they represent one time charges which are not necessarily
reflective of ongoing operating results:
. unusual items of approximately $1.9 million and $242.6 million for the
nine months ended March 30, 2001 and March 31, 2000, respectively as
described in note 5;
. the effects of fair value adjustments to deferred revenue, reducing
revenue by $1.3 million on a declining basis during the twelve months
following the date of the transaction ($898,000 reduction in revenue from
date of transaction to March 30, 2001); and
. the write off of IPR&D charges of approximately $7.1 million during the
nine months ended March 30, 2001, in connection with the New SAC
Transaction.
Note 3. Economic Dependence on Seagate Technology LLC
On July 4, 2000, Crystal Decisions and Seagate Technology LLC, then a wholly
owned subsidiary of Seagate Technology, now an indirect subsidiary of New SAC,
renewed the Revolving Loan Agreement dated June 28, 1996. Under the Revolving
Loan Agreement, Seagate Technology LLC finances certain of Crystal Decisions'
working capital needs and operating activities. The Revolving Loan Agreement
provides for maximum outstanding borrowings of up to $60.0 million and expires
on July 4, 2001. The Revolving Loan Agreement continued in effect subsequent to
the closing of the New SAC Transaction on November 22, 2000. The loan is
payable or receivable upon termination of the agreement. As of March 30, 2001
and June 30, 2000,
12
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
the revolving loan balance was a net receivable from Seagate Technology LLC and
its affiliates of $30.1 million and $25.7 million, respectively. The net
receivable arose largely as a result of offsetting amounts due from Seagate
Technology under a Tax Allocation Agreement for income tax loss benefits
utilized by Seagate Technology relative to Crystal Decisions' tax loss position
(refer to note 8 for further discussion). The loan balance is presented on the
balance sheet as a net receivable or net payable in accordance with the terms
of the loan agreement.
During the quarter and nine months ended March 30, 2001, Crystal Decisions
earned interest income on a monthly basis on the net receivable revolving loan
balance outstanding at a rate calculated to be Seagate Technology LLC's in-
house portfolio yield (average of 5.94% and 7.09% for the quarter and nine
months ended March 30, 2001, respectively). During the quarter and nine months
ended March 31, 2000, interest was charged or earned on the net revolving loan
balance receivable or payable outstanding on a monthly basis at the LIBOR rate
plus 2% per annum, (average of 7.92% and 7.66% for the quarter and nine months
ended March 31, 2000, respectively). Interest income and expense as presented
in the statement of operations primarily relates to interest on the revolving
loan.
Although Crystal Decisions has incurred net losses during the three-year
period ended June 30, 2000 and the quarter and nine months ended March 30,
2001, the Company has generated postive cash flow for the nine months ended
March 30, 2001. Crystal Decisions believes that the amounts due from Seagate
Technology LLC under the Revolving Loan Agreement, in addition to cash
generated from operations are sufficient to fund Crystal Decisions' operating
and planned activities during the next twelve months.
Crystal Decisions may require additional financing through the end of fiscal
2002. Crystal Decisions is in the process of negotiating additional financing
with Seagate Technology LLC through the end of fiscal 2002. Should additional
financing not be available from Seagate Technology LLC at terms that are
satisfactory to Crystal Decisions and Seagate Technology LLC, Crystal Decisions
may seek additional equity and financing from other sources, subject to
concurrence by the lenders which financed the New SAC Transaction, as well as
Crystal Decisions' parent company. As a result of the New SAC Transaction,
Crystal Decisions guaranteed the debt used to finance the New SAC Transaction
and pledged a majority of its assets. As a result of restrictive covenants
under the debt agreement, the ability of Crystal Decisions to raise additional
debt or equity from other sources may be limited. (Refer to note 11 for further
discussion.)
Note 4. Revenue Recognition
Typically, Crystal Decisions can establish vendor specific objective
evidence ("VSOE") for all elements of its multi-element arrangements, and
accordingly, revenues are allocated to the individual elements on the basis of
VSOE. During the second quarter of fiscal year 2001, Crystal Decisions adopted
a new sales model that limits the sale of certain software license products
sold on an individual basis and, as a result, is not able to establish
sufficient VSOE for these license products. As a result of this change in
circumstance, when these products are included in bundled arrangements with
technical support and maintenance services, Crystal Decisions applies the
residual method of accounting as specified in SOP 98-9 such that the total fair
value of the undelivered elements as indicated by VSOE, is deferred and
subsequently recognized in accordance with SOP 97-2 and the difference between
the total arrangement fee and the amount deferred for the undelivered elements
is accounted for as revenue related to the delivered elements. The impact on
revenues of applying the residual method of accounting in the quarter and nine
months ended March 30, 2001 was not material. Although not typical, some
original equipment manufacturer ("OEM") arrangements contain end-user
maintenance elements for which VSOE has not been established, as sufficient
evidence of consistent pricing and renewal rates has not been present. In such
arrangements, Crystal Decisions has recognized the arrangement fee ratably over
the maintenance period in accordance with the provisions set forth in SOP 97-2.
13
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
Note 5. Unusual Transactions
Sale of Seagate Technology
On November 22, 2000, the date of the closing of the New SAC Transaction,
vesting of Seagate Technology options were accelerated and net exercised for
merger consideration of 0.4465 shares of VERITAS and $8.55 cash per share of
Seagate Technology. The accelerated vesting and net exercise of these options
resulted in compensation expense to Seagate Technology. At November 22, 2000,
options to purchase 51,500 shares of Seagate Technology common stock were held
by certain Crystal Decisions employees. As a result, the Company recorded
approximately $1.9 million of compensation expense attributable to its
employees as a capital contribution from Seagate Technology. The compensation
expense is recorded as an unusual item in the income statement for the nine
months ended March 30, 2001.
The October 1999 Seagate Technology Exchange of Shares
On October 20, 1999, the stockholders of Seagate Software Holdings approved
the merger of Seagate Daylight Merger Corp., a wholly owned subsidiary of
Seagate Technology, with and into Seagate Software Holdings. The merger was
effected on October 20, 1999. Seagate Software Holdings assets consisted of the
assets of the business and its investment in the common stock of VERITAS. Upon
the closing of the merger, Seagate Software Holdings became a wholly owned
subsidiary of Seagate Technology. All outstanding options to purchase Seagate
Software Holdings common stock were accelerated immediately prior to the
merger. In connection with the merger, Seagate Software Holdings minority
stockholders and optionees received payment in the form of 3.23 shares of
Seagate Technology's common stock per share of Seagate Software Holdings common
stock less any amounts due for the payment of the exercise price of unexercised
options. Seagate Technology issued 9,124,046 shares of its common stock from
treasury shares to optionees and minority stockholders of Seagate Software
Holdings in connection with the merger.
Seagate Technology accounted for the exchange of shares of its common stock
as the acquisition of a minority interest for Seagate Software Holdings common
stock outstanding and vested more than six months held by employees and all
stock held by former employees and consultants. The fair value of the shares of
Seagate Technology issued was $19.4 million and was recorded as the purchase
price and allocated to all the identifiable tangible and intangible assets and
liabilities of Seagate Software Holdings. Seagate Technology accounted for the
exchange of shares of its common stock for stock options in Seagate Software
Holdings held by employees and stock held and vested by employees less than six
months as the settlement of an earlier stock award. Seagate Technology recorded
compensation expense of $283.6 million, plus $2.1 million of employer portion
of payroll taxes, related to the purchase of minority interest in Seagate
Software Holdings.
The consolidated and combined condensed statement of operations for the nine
months ended March 31, 2000 includes an allocation of compensation expense
arising from the October 1999 Seagate Technology Exchange of Shares.
Compensation expense was allocated to Crystal Decisions on the basis of
employees specifically identified with the business and for those employees
that performed services for the business, on the basis of time estimates.
Accordingly, Crystal Decisions recorded $239.6 million of the $283.6 million
compensation expense related to the October 1999 Seagate Technology Exchange of
Shares and an offsetting $239.6 million was recorded as a capital contribution
from Seagate Technology . In addition, the $2.1 million of employer portion of
payroll taxes paid related to Crystal Decisions employees and therefore the
amount was recorded as an expense for the nine months ended March 31, 2000.
In addition, $877,000 of legal and accounting costs were incurred by Crystal
Decisions in connection with the recapitalization and reorganization of Crystal
Decisions, all of which were recorded in the nine months ended March 31, 2000.
14
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
The following table summarizes the components of the unusual items expense
for the nine months ended March 31, 2000 reported by Seagate Technology that
are attributable to the employees of Crystal Decisions:
As reported by Allocated to Crystal
Seagate Technology Decisions
------------------ --------------------
Compensation expense associated with
the exchange of Seagate Software
Holdings common stock for Seagate
Technology common stock............... $283,619 $239,574
Employer portion of payroll taxes...... 2,118 2,118
Transaction costs...................... 877 877
-------- --------
Total Unusual items.................. $286,614 $242,569
======== ========
Note 6. Restructuring Costs
During the nine months ended March 30, 2001, Crystal Decisions incurred
$573,000 of restructuring charges. The charges relate to the closure of eight
offices in Europe and are part of a restructuring plan announced in September
2000 to consolidate the European sales organization into fewer office
locations. The charges primarily consisted of costs related to the termination
of office leases and other related closure costs, as well as severance and
benefits due to nine sales and marketing employees who were terminated in
September 2000. At March 30, 2001, $300,000 was included in accrued expenses
and is expected to be paid in the year ending June 29, 2001.
During the nine months ended March 31, 2000, Crystal Decisions incurred $1.3
million of restructuring charges for termination of excess personnel as Crystal
Decisions realigned its resources to better manage and control its business.
The charges resulted from a company-wide restructuring plan announced in
October 1999 and were comprised of charges of severance and benefits paid to
approximately 125 employees from various locations and departments, including
direct sales force personnel, who were terminated on October 23, 1999. The
restructuring charges were paid during fiscal 2000.
The restructuring events described above were independent of each other.
Note 7. Related Party Transactions
During the nine months ended March 30, 2001, Crystal Decisions signed a
software license agreement with Seagate Technology in the amount of $1.7
million for the use of the Company's business intelligence software and
maintenance and support services. As of March 30, 2001, there were no
outstanding amounts owed by Seagate Technology included in accounts receivable,
although $272,000 of the $1.7 million is included as deferred revenue with the
remaining portion having been recognized during the nine months ended March 30,
2001.
Historically, Seagate Technology provided substantial services to Crystal
Decisions under a General Services Agreement dated June 28, 1997. During the
year, the General Services Agreement was replaced by a Corporate Services
Agreement, a Payroll Services Agreement, and a Management Services Agreement,
under substantially the same terms as the General Services Agreement. The term
of the new agreements is three years with automatic successive renewal periods
of one year. Upon the closing of the New SAC Transaction, these agreements were
assumed by New SAC. The services provided under these agreements generally
include general management, treasury, tax, benefits administration, insurance,
information technology, legal, accounts payable and receivable and credit
functions, among others. Seagate Technology LLC charges Crystal Decisions for
these services through corporate expense allocations. The amount of corporate
expense allocations depends
15
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
upon the total amount of allocable costs incurred by Seagate Technology LLC on
behalf of Crystal Decisions less amounts charged as a specific cost or expense
rather than by allocation. Such costs have been proportionately allocated to
Crystal Decisions based on detailed inquiries and estimates of time incurred by
Seagate Technology LLC's corporate marketing and general and administrative
departmental managers. Management believes that the allocation method applied
to the costs provided under these agreements is reasonable. Allocations charged
to Crystal Decisions general and administrative expenses were $489,000 and
$164,437 for the quarters ended March 30, 2001 and March 31, 2000,
respectively, and $788,000 and $493,311 for the nine months ended March 30,
2001 and March 31, 2000, respectively.
Note 8. Income Taxes
The federal Tax Allocation Agreement that Crystal Decisions had with Seagate
Technology was terminated on November 22, 2000, and the Company no longer files
federal income tax returns on a consolidated basis with Seagate Technology. The
Company may enter into a state tax allocation agreement with affiliates of New
SAC, as applicable. Therefore, Seagate Technology will not benefit from nor
will it reimburse Crystal Decisions pursuant to the Tax Allocation Agreement
for federal tax losses that Crystal Decisions sustains subsequent to
consummation of the New SAC Transaction. In prior periods, Crystal Decisions
has received substantial cash payments from its tax losses utilized by Seagate
Technology, which it has used to reduce its obligations to Seagate Technology
under the Revolving Loan Agreement. As a result of the termination of the Tax
Allocation Agreement, Crystal Decisions may not be able to convert any future
tax losses into cash.
Crystal Decisions recorded a tax provision of $1.5 million for the quarter
ended March 30, 2001 compared to a tax benefit of $2.1 million for the quarter
ended March 31, 2000. The tax provision for the quarter ended March 30, 2001
reflects increased taxable income in foreign jurisdictions which could not be
offset by the tax benefits of domestic net operating losses. A valuation
allowance has been provided against the deferred tax assets for such operating
losses due to the uncertainty of their realizability. The tax benefit for the
quarter ended March 31, 2000 reflects the benefits recorded during the period
under the Tax Allocation Agreement that Crystal Decisions had with Seagate
Technology.
The income tax benefit recorded by the Company for the nine months ended
March 30, 2001, of $1.0 million includes $4.0 million of tax benefits recorded
pursuant to the Tax Allocation Agreement through November 22, 2000 offset by
other income tax expenses. The effective tax rate used to record the income tax
benefit for the quarter and nine months ended March 30, 2001 differs from the
U.S. federal statutory rate primarily due to an increase in the valuation
allowance for U.S. deferred tax assets arising subsequent to the termination of
the Tax Allocation Agreement on November 22, 2000 and push down accounting
charges that are nondeductible. The effective tax rate used to record the
income tax benefit for the nine months ended March 31, 2000 was less than the
U.S. federal statutory rate primarily due to nondeductible expenses incurred in
foreign jurisdictions in connection with the October 1999 recapitalization and
reorganization of Crystal Decisions, including the October 1999 Seagate
Technology Exchange of Shares.
Note 9. Net Loss Per Share
Prior to August 24, 1999, Crystal Decisions had no outstanding share
capital. Crystal Decisions issued 1,000 shares of common stock to Seagate
Technology for aggregate proceeds of $1,000 on August 24, 1999. On November 16,
1999, Seagate Software Holdings contributed the Information Management Group
business' legal entities to Crystal Decisions in exchange for 75,000,000 shares
of Crystal Decisions common stock. On November 22, 2000, and as part of the New
SAC Transaction, New SAC, through Suez Software, acquired the
16
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
75,001,000 common shares of Crystal Decisions owned by Seagate Technology.
Basic loss per common share has been computed using the weighted average number
of shares of common stock outstanding during each of the periods presented,
with the initial 1,000 and 75,000,000 shares being treated as outstanding for
all reporting periods. Diluted loss per share is computed using the weighted
average number of shares of common stock outstanding during each of the periods
presented assuming exercise of options to purchase common stock, with the
initial 1,000 and 75,000,000 shares being treated as outstanding for all
reporting periods. Options to purchase common stock were 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
net loss per share (in thousands, except share and per share data).
For the nine months
For the quarters ended ended
------------------------ ------------------------
March 30, March 31, March 30, March 31,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Basic net loss per share
computation:
Numerator:
Net loss............... $ (1,546) $ (1,103) $ (12,033) $ (218,990)
Denominator:
Weighted average number
of common shares
outstanding........... 75,314,983 75,001,537 75,208,923 75,000,177
Net loss per share--basic.. $ (0.02) $ (0.01) $ (0.16) $ (2.92)
=========== =========== =========== ===========
Diluted net loss per share
computation:
Numerator:
Net loss............... $ (1,546) $ (1,103) $ (12,033) $ (218,990)
Denominator:
Weighted average number
of common shares
outstanding........... 75,314,983 75,001,537 75,208,923 75,000,177
Net loss per share--
diluted................... $ (0.02) $ (0.01) $ (0.16) $ (2.92)
=========== =========== =========== ===========
The total number of options outstanding were 10,687,004 and 6,452,980 at
March 30, 2001 and March 31, 2000, respectively. During the quarter and nine
months ended March 30, 2001, Crystal Decisions issued 91,560 and 373,330 shares
of common stock respectively, upon the exercise of options granted under the
1999 Stock Option Plan.
Note 10. Comprehensive Income (Loss)
Comprehensive loss includes net loss and other comprehensive income (loss),
the latter being recorded directly as a separate component of stockholders'
equity and excluded from net income (loss). The other comprehensive income
(loss) relates to foreign currency translation adjustments from those
subsidiaries not using the U.S. dollar as their functional currency. A summary
of comprehensive loss follows (in thousands):
For the quarters For the nine
ended months ended
------------------- -------------------
March 30, March 31, March March 31,
2001 2000 30, 2001 2000
--------- --------- -------- ---------
Net loss............................. $(1,546) $(1,103) $(12,033) $(218,990)
Foreign currency translation
adjustment.......................... 226 (242) 300 (530)
------- ------- -------- ---------
Comprehensive Loss................. $(1,320) $(1,345) $(11,733) $(219,520)
======= ======= ======== =========
17
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
Note 11. Debt Guarantees and Pledge of Assets
Senior Secured Credit Facility
On the closing of the New SAC Transaction, New SAC entered into senior
credit facilities with a syndicate of banks and other financial institutions.
The senior credit facilities provide senior secured financing of up to $900
million, consisting of:
. a $200 million revolving credit facility for general corporate purposes,
with a sub-limit of $100 million for letters of credit, which will
terminate in five years;
. a $200 million term loan A facility with a maturity of five years; and
. a $500 million term loan B facility with a maturity of six years.
At the closing of the transaction, New SAC did not borrow under the
revolving credit facility. At March 30, 2001, approximately $147 million of the
revolving credit facility was available because approximately $53 million of
existing letters of credit were outstanding and reduced availability under it.
New SAC drew the full amount of the term loan A facility and the term loan B
facility on the closing of the transaction to finance the acquisition of
Seagate Technology's operating assets, including Crystal Decisions.
The $700 million of outstanding loans under the term loan A and B facilities
are repayable in semi-annual payments due as follows (in thousands).
Fiscal
------
2001............................................................. $ 5,000
2002............................................................. 22,500
2003............................................................. 40,000
2004............................................................. 50,000
2005............................................................. 60,000
thereafter....................................................... 522,500
--------
Total.......................................................... $700,000
========
As of March 30, 2001, the outstanding loan balance under the term loan A and
B facilities was $695 million as a result of a debt repayment of $5 million in
the quarter ended March 30, 2001.
The loans bear interest at variable rates dependent upon market interest
rates and the nature of the borrowings, as well as the consolidated financial
position of New SAC at applicable measurement dates. The average interest rates
being charged under these borrowings from the date of the New SAC Transaction
ranged from 7.75% (LIBOR plus 2.5%) to 9.6875% (LIBOR plus 3%).
New SAC, and certain of its subsidiaries, including Crystal Decisions and
certain of its subsidiaries, are guarantors on a joint and several, whole and
unconditional basis under the senior credit facilities. In addition, the
majority of New SAC's and certain of its subsidiaries' assets, including
certain of Crystal Decisions' assets and its capital stock, have been pledged
against the debt under this credit agreement. New SAC, and certain of its
subsidiaries, including Crystal Decisions and certain of its subsidiaries, have
agreed to certain covenants under the loan agreements including restrictions on
future equity and borrowing transactions, business acquisitions and disposals,
making certain restricted payments and dividends, making certain capital
expenditures, incurring guarantee obligations and engaging in mergers or
consolidations. Further, Crystal Decisions, as part of the consolidated group,
is subject to certain financial covenants which are assessed on the
consolidated operating results and financial position of New SAC and its
subsidiaries.
18
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
The credit agreement provides for the release of Crystal Decisions from its
guarantee obligations, and asset pledge upon an approved transfer or sale of
Crystal Decisions' common stock, or an initial public offering of at least 10%,
on a fully diluted basis, of Crystal Decisions' voting common stock.
Senior Subordinated Notes
In connection with the closing and financing of the New SAC Transaction,
Seagate Technology International, which is a subsidiary of New SAC, issued
unsecured senior subordinated notes under an Indenture Agreement dated November
22, 2000, at a discount to the aggregate principal amount of $210 million, for
gross proceeds of approximately $201 million. The notes mature on November 15,
2007 and bear interest payable semi-annually at a rate of 12.5% per annum. New
SAC and certain of its subsidiaries, including Crystal Decisions and certain of
its subsidiaries, are guarantors on a joint and several, whole and
unconditional basis, of the notes. In addition, New SAC and certain of its
subsidiaries, including Crystal Decisions and certain of its subsidiaries, have
agreed to certain restrictive covenants under the terms of these notes
including restrictions on future equity and borrowing transactions, business
acquisitions and disposals, making certain restricted payments and dividends,
making certain capital expenditures, incurring guarantee obligations and
engaging in mergers or consolidations. Crystal Decisions may be released from
its guarantee obligation if there are certain sales of its capital stock,
including an initial public offering, but would remain subject to the
restrictive covenants of the Indenture until Crystal Decisions and its
subsidiaries are no longer subsidiaries of New SAC or are deemed no longer to
be subject to the restrictive covenants.
New SAC will not require Crystal Decisions' cash flow to be used to service
the obligations pursuant to the senior secured credit facility and the senior
subordinated notes. The Company believes that none of the guarantees or pledges
of assets under the senior credit facilities or the guarantees under the
Indenture are likely to be invoked.
Condensed Consolidating Financial Information
Crystal Decisions is a non-wholly owned subsidiary of New SAC. The senior
subordinated notes are guaranteed by certain of the Crystal Decisions' world-
wide subsidiaries.
The following tables present guarantor and non-guarantor consolidating
condensed financial information for Crystal Decisions' subsidiaries, at March
30, 2001 and June 30, 2000, and the consolidating condensed results of its
operations and its cash flows for the quarter and nine months ended months
ended March 30, 2001 and March 31, 2000. The information is based on the
guarantor and non-guarantor classification of Crystal Decisions' subsidiaries
under the current provisions of the senior subordinating notes.
19
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED BALANCE SHEET
MARCH 30, 2001
(In thousands)
Non- Elimination Total
Guarantor guarantor Entries Consolidated
--------- --------- ----------- ------------
ASSETS
------
Current assets:
Cash............................ $ 2,818 $ 2,588 $ -- $ 5,406
Loan receivable from Seagate
Technology LLC................. 30,101 -- -- 30,101
Accounts receivable, net........ 25,492 1,888 27,380
Intercompany accounts
receivable, net................ 3,476 6,318 (9,794) --
Deferred income taxes........... (17) 17 -- --
Income taxes receivable......... 781 -- (620) 161
Inventories..................... 814 -- -- 814
Other current assets............ 2,643 715 -- 3,358
------- ------- -------- -------
Total current assets.......... 66,108 11,526 (10,414) 67,220
Capital assets, net............... 9,283 63 -- 9,346
Goodwill and other intangibles,
net.............................. 19,828 -- -- 19,828
Investments in non-guarantor
subsidiaries..................... 2,154 -- (2,154) --
------- ------- -------- -------
Total assets.................. $97,373 $11,589 $(12,568) $96,394
======= ======= ======== =======
LIABILITIES
-----------
Current liabilities:
Accounts payable................ $11,550 $ 384 $ -- $11,934
Intercompany accounts payable,
net............................ 6,318 3,476 (9,794) --
Accrued employee compensation... 9,265 924 -- 10,189
Accrued expenses................ 9,096 2,065 -- 11,161
Deferred revenue................ 23,539 1,963 -- 25,502
Accrued income taxes............ -- 620 (620) --
------- ------- -------- -------
Total current liabilities..... 59,768 9,432 (10,414) 58,786
Deferred income taxes............. 2,396 3 -- 2,399
------- ------- -------- -------
Total liabilities............. 62,164 9,435 (10,414) 61,185
STOCKHOLDERS' EQUITY
--------------------
Total Stockholders' Equity.... 35,209 2,154 (2,154) 35,209
------- ------- -------- -------
Total liabilities and
stockholders' equity......... $97,373 $11,589 $(12,568) $96,394
======= ======= ======== =======
20
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED BALANCE SHEET
JUNE 30, 2000
(In thousands)
Non- Elimination Total
Guarantor guarantor Entries Consolidated
--------- --------- ----------- ------------
ASSETS
------
Current assets:
Cash............................ $ 844 $ 2,777 $ -- $ 3,621
Loan receivable from Seagate
Technology LLC................. 25,681 -- -- 25,681
Accounts receivable, net........ 14,703 1,875 -- 16,578
Intercompany accounts
receivable, net................ 9,438 10,763 (20,201) --
Income taxes receivable......... 6,707 -- (636) 6,071
Inventories..................... 674 -- -- 674
Other current assets............ 1,832 2,189 -- 4,021
------- ------- -------- -------
Total current assets.......... 59,879 17,604 (20,837) 56,646
Capital assets, net............. 9,095 253 -- 9,348
Goodwill and other intangibles,
net............................ 5,286 -- -- 5,286
Investments in non-guarantor
subsidiaries................... 1,436 -- (1,436) --
------- ------- -------- -------
Total assets.................. $75,696 $17,857 $(22,273) $71,280
======= ======= ======== =======
LIABILITIES
-----------
Current liabilities:
Accounts payable................ $ 9,914 $ 276 $ -- $10,190
Intercompany accounts payable,
net............................ 10,763 9,438 (20,201) --
Accrued employee compensation... 5,239 765 -- 6,004
Accrued expenses................ 8,279 3,818 -- 12,097
Deferred revenue................ 18,038 1,457 -- 19,495
Deferred income taxes........... -- 63 (63) --
Accrued income taxes............ -- 573 (573) --
------- ------- -------- -------
Total current liabilities..... 52,233 16,390 (20,837) 47,786
Deferred income taxes............. 350 31 -- 381
------- ------- -------- -------
Total liabilities............. 52,583 16,421 (20,837) 48,167
STOCKHOLDERS' EQUITY
--------------------
Total Stockholders' equity.... 23,113 1,436 (1,436) 23,113
------- ------- -------- -------
Total liabilities and
stockholders' equity......... $75,696 $17,857 $(22,273) $71,280
======= ======= ======== =======
21
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 30, 2001
(In thousands)
Non- Elimination Total
Guarantor guarantor Entries Consolidated
--------- --------- ----------- ------------
Revenues:
Licensing....................... $26,491 $1,535 $ -- $28,026
Maintenance, support and
services....................... 13,778 1,790 -- 15,568
------- ------ ----- -------
Total revenues................ 40,269 3,325 -- 43,594
Total cost of revenues........ 11,954 720 -- 12,674
------- ------ ----- -------
Gross profit...................... 28,315 2,605 -- 30,920
Operating expenses:
Sales and marketing............. 16,540 2,205 -- 18,745
Research and development........ 7,511 106 -- 7,617
General and administrative...... 4,341 63 -- 4,404
Amortization of goodwill and
other intangibles.............. 589 -- -- 589
------- ------ ----- -------
Total operating expenses...... 28,981 2,374 -- 31,355
------- ------ ----- -------
Income/(loss) from operations..... (666) 231 -- (435)
Net interest and related........ 657 (282) -- 375
Intercompany charges, net....... (279) 279 -- --
Equity investment income........ 306 -- (306) --
------- ------ ----- -------
Income/(loss) before income
taxes............................ 18 228 (306) (60)
Benefit from (provision for)
income taxes..................... (1,564) 78 -- (1,486)
------- ------ ----- -------
Net income (loss)................. $(1,546) $ 306 $(306) $(1,546)
======= ====== ===== =======
22
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 30, 2001
(In thousands)
Non- Elimination Total
Guarantor guarantor Entries Consolidated
--------- --------- ----------- ------------
Revenues:
Licensing....................... $ 73,070 $3,493 $ -- $ 76,563
Maintenance, support and
services....................... 38,785 5,295 -- 44,080
-------- ------ ----- --------
Total revenues................ 111,855 8,788 -- 120,643
Total cost of revenues........ 33,176 2,166 -- 35,342
-------- ------ ----- --------
Gross profit...................... 78,679 6,622 -- 85,301
Operating expenses:
Sales and marketing............. 46,686 6,935 -- 53,621
Research and development........ 21,167 236 -- 21,403
General and administrative...... 13,100 793 -- 13,893
Amortization of goodwill and
other intangibles.............. 1,434 -- -- 1,434
Write-off of in-process R&D..... 7,073 -- -- 7,073
Unusual items................... 1,851 -- -- 1,851
Restructuring costs............. -- 573 -- 573
-------- ------ ----- --------
Total operating expenses...... 91,311 8,537 -- 99,848
-------- ------ ----- --------
Income/(loss) from operations..... (12,632) (1,915) -- (14,547)
Net interest and related........ 1,430 64 -- 1,494
Intercompany charges, net....... (3,072) 3,072 -- --
Equity investment income........ 986 -- (986) --
-------- ------ ----- --------
Income/(loss) before income
taxes............................ (13,288) 1,221 (986) (13,053)
Benefit from (provision for)
income taxes..................... 1,255 (235) -- 1,020
-------- ------ ----- --------
Net income (loss)................. $(12,033) $ 986 $(986) $(12,033)
======== ====== ===== ========
23
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(In thousands)
Non- Elimination Total
Guarantor guarantor Entries Consolidated
--------- --------- ----------- ------------
Revenues:
Licensing....................... $21,029 $1,290 $-- $22,319
Maintenance, support and
services....................... 10,330 1,738 -- 12,068
------- ------ ---- -------
Total revenues................ 31,359 3,028 -- 34,387
Total cost of revenues........ 9,598 922 -- 10,520
------- ------ ---- -------
Gross profit...................... 21,761 2,106 -- 23,867
Operating expenses:
Sales and marketing............. 11,751 2,708 -- 14,459
Research and development........ 6,917 -- -- 6,917
General and administrative...... 4,873 596 -- 5,469
Amortization of goodwill and
other intangibles.............. 519 -- -- 519
------- ------ ---- -------
Total operating expenses...... 24,060 3,304 -- 27,364
------- ------ ---- -------
Income/(loss) from operations..... (2,299) (1,198) -- (3,497)
Net interest and related........ 236 79 -- 315
Intercompany charges, net....... (560) 560 -- --
Equity investment income
(loss)......................... (726) -- 726 --
------- ------ ---- -------
Income/(loss) before income
taxes............................ (3,349) (559) 726 (3,182)
Benefit from (provision for)
income taxes..................... 2,246 (167) -- 2,079
------- ------ ---- -------
Net loss.......................... $(1,103) $ (726) $726 $(1,103)
======= ====== ==== =======
24
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(In thousands)
Non- Elimination Total
Guarantor guarantor Entries Consolidated
--------- --------- ----------- ------------
Revenues:
Licensing...................... $ 49,890 $ 3,820 $ -- $ 53,710
Maintenance, support and
services...................... 32,010 6,842 -- 38,852
--------- -------- ------- ---------
Total revenues............... 81,900 10,662 -- 92,562
Total cost of revenues....... 30,036 2,995 -- 33,031
--------- -------- ------- ---------
Gross profit..................... 51,864 7,667 -- 59,531
Operating expenses:
Sales and marketing............ 37,407 9,479 -- 46,886
Research and development....... 19,758 -- -- 19,758
General and administrative..... 14,464 1,015 -- 15,479
Amortization of goodwill and
other intangibles............. 2,521 -- -- 2,521
Unusual items.................. 221,601 20,968 -- 242,569
Restructuring costs............ 815 486 -- 1,301
--------- -------- ------- ---------
Total operating expenses..... 296,566 31,948 -- 328,514
--------- -------- ------- ---------
Income/(loss) from operations.... (244,702) (24,281) -- (268,983)
Net interest and related....... (1,071) 105 -- (966)
Intercompany charges, net...... (3,252) 3,252 -- --
Equity investment income
(loss)........................ (21,189) -- 21,189 --
--------- -------- ------- ---------
Income/(loss) before income
taxes........................... (270,214) (20,924) 21,189 (269,949)
Benefit from (provision for)
income taxes.................... 51,224 (265) -- 50,959
--------- -------- ------- ---------
Net loss......................... $(218,990) $(21,189) $21,189 $(218,990)
========= ======== ======= =========
25
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 30, 2001
(In thousands)
Non- Elimination Total
Guarantor guarantor Entries Consolidated
--------- --------- ----------- ------------
Net cash provided by (used in)
operating activities........... $ 8,267 $ 111 $ -- $ 8,378
Investing activities
Acquisition of capital assets,
net............................ (7,188) -- -- (7,188)
--------- ------ ----- ---------
Net cash (used in) investing
activities................... (7,188) -- -- (7,188)
Financing activities
Issuance of common stock and
common stock subject to
repurchase..................... 1,493 -- -- 1,493
Borrowings from Seagate
Technology LLC................. 109,202 -- -- 109,202
Payment to Seagate Technology
LLC............................ (109,650) -- -- (109,650)
--------- ------ ----- ---------
Net cash provided by (used in)
financing activities......... 1,045 -- -- 1,045
Effect of exchange rate changes
on cash........................ (150) (300) -- (450)
--------- ------ ----- ---------
Increase (decrease) in cash..... 1,974 (189) -- 1,785
Cash at the beginning of the
period......................... 844 2,777 -- 3,621
--------- ------ ----- ---------
Cash at the end of the period... $ 2,818 $2,588 $ -- $ 5,406
========= ====== ===== =========
CRYSTAL DECISIONS, INC.
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(In thousands)
Non- Elimination Total
Guarantor guarantor Entries Consolidated
--------- --------- ----------- ------------
Net cash provided by (used in)
operating activities............ $ (21,189) $ 575 $ -- $ (20,614)
Investing activities
Acquisition of capital assets,
net............................. (1,805) (101) -- (1,906)
--------- ------ ----- ---------
Net cash (used in) investing
activities.................... (1,805) (101) -- (1,906)
Financing activities
Issuance of common stock ........ 5 -- -- 5
Borrowings from Seagate
Technology LLC.................. 136,839 -- -- 136,839
Payment to Seagate Technology
LLC............................. (116,889) -- -- (116,889)
--------- ------ ----- ---------
Net cash provided by (used in)
financing activities.......... 19,955 -- -- 19,955
Effect of exchange rate changes
on cash......................... (90) 525 -- 435
--------- ------ ----- ---------
Increase (decrease) in cash...... (3,129) 999 -- (2,130)
Cash at the beginning of the
period.......................... 4,896 2,523 -- 7,419
--------- ------ ----- ---------
Cash at the end of the period.... $ 1,767 $3,522 $ -- $ 5,289
========= ====== ===== =========
26
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
Note 12. Common Stock Eligible for Repurchase
As of March 30, 2001, employees and directors of Crystal Decisions exercised
a combined total of 374,380 options to purchase common stock under the 1999
Stock Option Plan. Under the provisions of the stock option plan, certain
employees and directors have filed an 83(b) election with the Internal Revenue
Service to accelerate the exercise of certain of their options to purchase
common stock. At the option of Crystal Decisions and within 30 days of
termination of these individuals, the unvested shares deemed to be exercised
under this election may be repurchased at the original purchase price. As of
March 30, 2001, there were 144,772 unvested shares which could become subject
to repurchase with a balance and a repurchase price of $579,088.
Note 13. Business Segment and Geographic Information
Crystal Decisions operates in a single industry segment, information
infrastructure software. Crystal Decisions' products and services are sold
worldwide, through direct, OEM and distributor channels. Within the segment,
the chief operating decision maker, Crystal Decisions' chief executive officer,
evaluates the performance of the business based upon revenues from product and
services, revenues by geographic regions and revenues by product channels.
Product and services revenues (in thousands):
For the For the nine
quarters ended months ended
------------------- ------------------
March 30, March 31, March March 31,
2001 2000 30, 2001 2000
--------- --------- -------- ---------
Licensing .............................. $28,026 $22,319 $ 76,563 $53,710
Maintenance, support and services ...... 15,568 12,068 44,080 38,852
------- ------- -------- -------
Total revenues........................ $43,594 $34,387 $120,643 $92,562
======= ======= ======== =======
Geographic revenues (in thousands) (1), (2):
For the For the nine
quarters ended months ended
------------------- ------------------
March 30, March 31, March March 31,
2001 2000 30, 2001 2000
--------- --------- -------- ---------
United States........................... $27,108 $22,861 $ 81,027 $60,123
Europe.................................. 8,911 7,261 23,121 21,326
Other................................... 7,575 4,265 16,495 11,113
------- ------- -------- -------
Total revenues........................ $43,594 $34,387 $120,643 $92,562
======= ======= ======== =======
Channel revenues (in thousands):
For the For the nine
quarters ended months ended
------------------- ------------------
March 30, March 31, March March 31,
2001 2000 30, 2001 2000
--------- --------- -------- ---------
Direct.................................. $27,821 $19,446 $ 75,076 $56,761
Distribution............................ 13,419 11,841 38,115 27,974
OEM..................................... 2,354 3,100 7,452 7,827
------- ------- -------- -------
Total revenues........................ $43,594 $34,387 $120,643 $92,562
======= ======= ======== =======
27
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
Long-lived tangible and intangible assets (in thousands):
June
March 30, 30,
2001 2000
--------- -------
United States................................................ $13,448 $ 6,154
Canada....................................................... 13,379 7,254
Other........................................................ 2,347 1,226
------- -------
Total long-lived tangible and intangible assets............ $29,174 $14,634
======= =======
Reconciliation of total assets (in thousands):
June
March 30, 30,
2001 2000
--------- -------
Total long-lived tangible and intangible assets.............. $29,174 $14,634
Other assets, including current.............................. 67,220 56,646
------- -------
Total assets............................................... $96,394 $71,280
======= =======
(1) Revenues are attributed to geographic regions based on the location of the
customer.
(2) Europe includes South Africa and the Middle East.
Overall, Crystal Decisions' customer base is diverse however, a third-party
customer, Ingram Micro Inc. ("Ingram"), represented 14% of revenues or $5.9
million and 21% of revenues or $7.1 million for the quarters ended March 30,
2001 and March 31, 2000, respectively. Ingram represented 19% of revenues or
$22.4 million and 20% of revenues or $18.1 million for the nine months ended
March 30, 2001 and March 31, 2000, respectively.
Note 14. New Accounting Pronouncements
In March 2001, the Derivative Implementation Group issued Statement 133
Implementation Issue No. C11, "Scope Exceptions: Interpretation of Clearly and
Closely Related in Contracts that Qualify for the Normal Purchases and Normal
Sales Exception" that requires adoption of this pronouncement for quarters
commencing after the issue date. Crystal Decisions is currently still assessing
the impact of the pronouncement on its consolidated results of operations,
financial position and cash flows.
Note 15. Comparative Figures
Certain comparative figures have been reclassified to conform to the basis
of presentation adopted in fiscal 2001.
Note 16. Litigation
On November 10, 1997, Vedatech commenced an action in the High Court of
Justice Chancery Division in the United Kingdom against Crystal Decisions (UK)
Limited, a wholly owned subsidiary of Crystal Decisions, claiming breach of an
oral agreement and infringement of a Vedatech U.K. copyright in the Japanese
translation of one of Crystal Decisions' products and is seeking monetary and
injunctive relief. On August 22, 2000, Vedatech requested and obtained
permission from the court to amend its action to include claims for unjust
enrichment, unlawful interference and quantum meruit. Crystal Decisions has
filed a counterclaim against Vedatech to recover amounts collected by Vedatech
on behalf of Crystal Decisions (UK)
28
CRYSTAL DECISIONS, INC. (FORMERLY SEAGATE SOFTWARE INFORMATION
MANAGEMENT GROUP HOLDINGS, INC.)
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS--(Continued)
Limited but not paid over to Crystal Decisions (UK) Limited. No specific damage
amount has yet been claimed by Vedatech with the exception of $240,000 (26.0
million Yen) for unpaid invoices in connection with the quantum meruit claim.
Vedatech seeks to enjoin Crystal Decisions (UK) Limited from infringing the
U.K. copyright and seeks forfeiture to Vedatech of all infringing software
copies. Crystal Decisions has hired local counsel in the U.K., reviewed
documents, conducted interviews and participated in the discovery process.
Crystal Decisions (UK) Limited has deposited with the court an amount equal to
$200,000 in relation to the quantum meruit claim. Discovery is ongoing, and the
court has granted Vedatech's request to delay commencement of trial until
February of 2002. With the exception of the quantum meruit claim, Crystal
Decisions believes the complaint has no merit, and intends vigorously to 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 affect on Crystal
Decisions' liquidity, financial position or results of operations. The outcome
of this matter and amount of related claims are not determinable at this time.
In addition to the foregoing, Crystal Decisions is subject to other
litigation in the ordinary course of our business. While Crystal Decisions
believes that the ultimate outcome of these matters will not have a material
adverse effect on Crystal Decisions, the outcome of these matters is not
determinable and negative outcomes may adversely affect Crystal Decisions'
financial position, liquidity, or results of operations.
29
Item 2. Management 's Discussion and Analysis of Financial Condition and
Results of Operations
The following information should be read in conjunction with the historical
financial statements and the notes hereto included in Item 1 of this Quarterly
Report on Form 10-Q and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in our Registration Statement on
Form 10-12G/A as filed with the Securities and Exchange Commission ("SEC") on
January 31, 2001.
Except for historical information, the discussion in this Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and the Private
Securities Litigation Reform Act of 1995. These statements refer to our future
plans, objectives, expectations and intentions. These statements may be
identified by the use of words such as "expect", "anticipate", "believe",
"intend", "plan" and similar expressions. Our actual results could differ
materially from those anticipated in such forward-looking statements. Factors
that could contribute to these differences include, but are not limited to, the
risks discussed in the section titled "Factors Affecting Future Operating
Results" in this Form 10-Q. We do not undertake any obligation to publicly
update any forward-looking statement to reflect events or circumstances after
the date on which any such statement is made or to reflect the occurrence of
unanticipated events.
Overview
We develop, market and support an integrated product line of end user
enterprise software products, which enable business users, developers and
information technology professionals to access, analyze, report on and
distribute enterprise information. We believe our products meet an extensive
range of data-centric business needs commonly described as enterprise
reporting, enterprise business intelligence, enterprise portals, developer
reporting tools, analytic application development and packaged analytic
applications. Our primary market is North America where our products are sold
through a direct sales force and certain indirect sales channels, such as
distributors and original equipment manufacturer ("OEM") relationships. Outside
North America, our products are sold through a direct sales force, distributors
and OEMs.
We derive revenues from the sale of licenses for our software products and
from services that support our products such as technical support, training,
consulting and maintenance.
As of November 22, 2000, we became a majority owned subsidiary of Seagate
Software (Cayman) Holdings ("Suez Software"), which is a wholly owned
subsidiary of New SAC, a Cayman Islands limited corporation ("New SAC"), whose
predecessor was Seagate Technology, Inc. ("Seagate Technology"). Prior to
November 22, 2000, we were a majority owned subsidiary of Seagate Software
Holdings, Inc. ("Seagate Software Holdings" and formerly known as Seagate
Software, Inc.), a Delaware corporation and wholly owned subsidiary of Seagate
Technology. Seagate Technology was a data technology company that provided
products for storing, managing and accessing digital information on computer
systems. The outstanding minority interests in our capital stock amounted to
approximately 12.9% and 10.5% on a fully diluted basis as of March 30, 2001 and
June 30, 2000, respectively. The minority interests consisted of our common
stock and options to purchase our common stock issued pursuant to our 1999 and
2000 Stock Option Plans. The options to purchase our common stock are held by
certain employees and directors of our Company, our subsidiaries, and our
affiliated companies.
We were incorporated in Delaware in August 1999. In February 2001, we
relocated our headquarters and our new offices are located at 895 Emerson St.,
Palo Alto, California 94301 and our telephone number is (650) 473-3130.
We changed our name to Crystal Decisions, Inc. from Seagate Software
Information Management Group Holding, Inc. in March 2001.
We operate and report financial results on a fiscal year of 52 or 53 weeks
ending on the Friday closest to June 30.
30
Change in Control of Crystal Decisions, Inc.
On November 22, 2000, Seagate Software Holdings, Seagate Technology and Suez
Acquisition Company (Cayman) Limited ("Old SAC"), an entity affiliated with,
among others, Silver Lake Partners and Texas Pacific Group, completed a stock
purchase agreement (the "Stock Purchase Agreement"), and Seagate Technology and
VERITAS Software Corporation ("VERITAS") completed an agreement and plan of
merger and reorganization, or the Merger Agreement. Old SAC was a limited
liability company organized under the laws of the Cayman Islands and formed
solely for the purpose of entering into the Stock Purchase Agreement and
related acquisitions. Old SAC assigned all of its rights under the stock
purchase agreement to New SAC.
As a result of the transaction, New SAC holds 99.5% and 99.6% of the
outstanding capital stock of our company at March 30, 2001 and December 29,
2000, respectively. This transaction resulted in a change in control of our
company. Suez Software did not purchase shares of Crystal Decisions' common
stock that are outstanding as a result of the exercise of options to purchase
these shares under our Company's 1999 and 2000 Stock Option Plans. Our
company's minority stockholders continue to hold their interests in common
stock. In addition, the outstanding unexercised options granted under the 1999
and 2000 Stock Option Plans continue to remain outstanding.
Under SEC rules and regulations, because more than 95% of our company was
acquired and a change of ownership occurred, Crystal Decisions restated all its
assets and liabilities as of November 22, 2000 on a push down accounting basis
in the accompanying financial statements, presented as of March 30, 2001.
Accordingly, results of operations prior to November 22, 2000 and the
comparative information presented do not reflect these adjustments.
Sale of Seagate Technology
Under the Stock Purchase Agreement, New SAC agreed to purchase for $1.840
billion cash, including transaction costs of $25 million, all of the operating
assets of Seagate Technology and its consolidated subsidiaries, including
Seagate Technology's rigid disc drive, storage area network, removable tape
storage solutions, enterprise management software businesses and operations,
including our common stock, and certain cash balances, but excluding the
approximately 128 million shares of VERITAS common stock then held by Seagate
Software Holdings and Seagate Technology's equity investments in Gadzoox
Networks, Inc. and Lernout & Hauspie Speech Products N.V. In addition, under
the Stock Purchase Agreement, wholly owned subsidiaries of New SAC assumed
substantially all of the operating liabilities of Seagate Technology, Seagate
Software Holdings and their consolidated subsidiaries. In addition, New SAC
acquired Seagate Technology Investments, Inc., a subsidiary of Seagate
Technology, which holds certain strategic equity investments in various
companies. This transaction is referred to hereafter as the New SAC
Transaction.
Immediately following the consummation of the Stock Purchase Agreement under
the terms of the Merger Agreement, VERITAS acquired Seagate Technology and a
wholly owned subsidiary of VERITAS merged with and into Seagate Technology,
with Seagate Technology becoming a wholly owned subsidiary of VERITAS. This
transaction is referred to as the Merger. VERITAS did not acquire Seagate
Technology's disc drive business of any other Seagate Technology operating
business, including us.
As part of the New SAC Transaction, New SAC, Seagate Technology and we
agreed to assume and indemnify VERITAS for substantially all liabilities
arising in connection with the Company's operating assets. On March 29, 2000,
Seagate Technology, VERITAS and New SAC entered into an Indemnification
Agreement, pursuant to which these entities and certain other subsidiaries of
Seagate Technology, including us, have agreed to certain indemnification
provisions regarding tax and other matters that may arise in connection with
the New SAC Transaction and the Merger. In addition, a majority of our assets,
along with certain other assets of Seagate Technology, are now pledged as a
guarantee for debt issued to finance the New SAC Transaction.
31
The federal tax allocation agreement we had with Seagate Technology was
terminated on November 22, 2000, and we no longer file federal income tax
returns on a consolidated basis with Seagate Technology. We may enter into a
state tax allocation agreement with affiliates of New SAC, as applicable.
Therefore, Seagate Technology will not benefit from nor will it reimburse us
pursuant to the tax allocation agreement for federal tax losses that we sustain
subsequent to consummation of the transaction. In prior periods, we have
received substantial cash payments from the Company's tax losses utilized by
Seagate Technology, which we have used to reduce our obligations to Seagate
Technology under an intercompany revolving loan agreement. As a result of the
termination of the federal tax allocation agreement, we may not be able to
convert any future taxes losses into cash.
We have borrowings available up to $60 million under a revolving loan with
Seagate Technology LLC, which is a wholly owned subsidiary of New SAC, to fund
a portion of our operating cash needs. The revolving loan agreement continues
in effect subsequent to the closing of the New SAC Transaction on November 22,
2000 and expires on July 4, 2001, as discussed in the accompanying financial
statements, presented as of March 30, 2001.
Results of Operations
Allocation of Purchase Price to our Company Pursuant to the Application of
Push Down Accounting
The New SAC Transaction constituted a purchase business transaction of
Seagate Technology and resulted in a change in control of our company. Under
purchase accounting rules, the net purchase price under this transaction has
been allocated to the assets and liabilities of Seagate Technology and
subsidiaries, including our company based on their estimated fair values at the
date of the transaction. However, the estimated fair values of identifiable
tangible and intangible assets and liabilities of Seagate Technology and
subsidiaries at the date of the transaction were greater than the amount paid,
resulting in negative goodwill. The negative goodwill has been allocated to the
long-lived tangible and intangible assets, including our assets, on the basis
of relative fair values. The fair values of tangible and intangible assets,
including in-process research and development ("IPR&D"), have been determined
based upon independent appraisals.
The accounting for the purchase transaction has been "pushed down" to our
Company's financial statements. Our March 30, 2001 consolidated and combined
condensed financial statements reflect the historical results of operations and
financial position up to the date of the transaction, November 22, 2000, the
restatement of assets and liabilities at that date to reflect the pushed down
purchase accounting adjustments, followed by the results of operations and
financial position for the period from November 23, 2000 to March 30, 2001
reflecting the effects of restated balances from the date of the New SAC
Transaction.
As a result of the New SAC Transaction and the push down accounting, our
results of operations following the New SAC Transaction, particularly the
depreciation and amortization charges, are not necessarily comparable to the
results of operations prior to the New SAC Transaction.
The following describes the impact of push down accounting on our results:
. Revenue. Deferred revenue was revalued at the transaction date and
reduced by $1.3 million. Consequently, revenues were lower by $0.6
million and $0.9 million, respectively during the quarter and nine months
ended March 30, 2001 than what would have been recorded had the push down
adjustments not been made.
. Amortization and depreciation. As a result of the allocation of negative
goodwill to our long-lived tangible assets, our capital assets were
reduced by $4.3 million. Consequently, we recorded $587,000 and $792,000
less depreciation expense for the quarter and nine months ended March 30,
2001, respectively, than we would have had the push down adjustments not
been made. In addition, we recorded additional amortization expense of
approximately $1.4 million and $1.9 million, respectively during the
quarter and nine months ended March 30, 2001 resulting from the recording
of incremental fair value of intangibles in the push down adjustments.
32
. In-process research and development. We wrote off IPR&D of $7.1 million
as an expense during the nine months ended March 30, 2001.
. Tax effects. The tax provision of $1.5 million for the quarter ended
March 30, 2001 was decreased by approximately $120,000 relating to the
reversal of a portion of the deferred tax liabilities recorded in
connection with the push down adjustments. Similarly, the tax benefit of
$1.0 million for the nine months ended March 30, 2001 was increased by
approximately $160,000.
The following table sets forth certain consolidated statement of operations
data as a percent of total revenues for the period indicated:
For the quarters For the nine months
ended ended
------------------- -------------------
March 30, March 31, March 30, March 31,
2001 2000 2001 2000
--------- --------- --------- ---------
Revenues:
Licensing........................ 64% 65% 63% 58%
Maintenance, support and
service......................... 36% 35% 37% 42%
---- ---- ---- ----
Total revenues ................ 100% 100% 100% 100%
---- ---- ---- ----
Cost of revenues
Licensing........................ 4% 4% 3% 3%
Maintenance, support and
services........................ 22% 27% 25% 33%
Amortization of developed
technologies.................... 3% 0% 1% 0%
---- ---- ---- ----
Total cost of revenues ........ 29% 31% 29% 36%
---- ---- ---- ----
Gross profit margin................ 71% 69% 71% 64%
Operating expenses:
Sales and marketing.............. 43% 42% 44% 51%
Research and development......... 18% 20% 18% 21%
General and administrative....... 10% 16% 12% 17%
Amortization of goodwill and
intangibles..................... 1% 2% 1% 3%
Unusual items.................... 0% 0% 2% 262%
Write-off of in-process research
and development................. 0% 0% 6% 0%
Restructuring costs.............. 0% 0% 0% 1%
---- ---- ---- ----
Total operating expenses ...... 72% 80% 83% 355%
==== ==== ==== ====
Revenues
Total revenues increased 27% from $34.4 million for the quarter ended March
31, 2000 to $43.6 million for the quarter ended March 30, 2001. Total revenues
increased 30% from $92.6 million for the nine months ended March 31, 2000 to
$120.6 million for the nine months ended March 30, 2001. The increase in total
revenues was primarily attributable to the rebuilding of our sales force since
a turnover of the sales force and certain management positions in October 1999
and an increase in productivity of our sales force. While we expect to continue
to maintain and increase our sales productivity in the long-term, a potential
slowdown in the economy may result in a decline in information technology
spending by our existing and prospective customers in the near future. As a
result, we may not be able to maintain the revenue growth rates we have
achieved over the past year.
During the quarter ended March 30, 2001 and the quarter ended March 31,
2000, revenues from a third-party customer, Ingram Micro, Inc. ("Ingram"),
accounted for more than 10% of the consolidated revenues for a total of $5.9
million and $7.1 million, respectively. During the nine months ended March 30,
2001 and March 31, 2000, revenues from Ingram accounted for more than 10% of
the consolidated revenue for a total of $22.4 million and $18.1 million,
respectively.
33
Licensing revenues. Licensing revenues consist of license fees for our
products. Licensing revenues increased 26% from $22.3 million for the quarter
ended March 31, 2000 to $28.0 million for the quarter ended March 30, 2001.
Licensing revenues increased 43% from $53.7 million for the nine months ended
March 31, 2000 to $76.6 million for the nine months ended March 30, 2001. The
increase in licensing revenues was primarily attributable to increased
productivity of our sales force and an overall increase in our direct sales
force, resulting in an increase in our customer base, as well as additional
sales to our existing customers.
Maintenance, support and services revenues. Our maintenance, support and
services revenues were comprised of revenues from technical support, training
activities, consulting services and maintenance related to licenses of our
products. Maintenance, support and services revenues increased 29% from $12.1
million for the quarter ended March 31, 2000 to $15.6 million for the quarter
ended March 30, 2001. Maintenance, support and services revenues increased 13%
from $38.9 million for the nine months ended March 31, 2000 to $44.1 million
for the nine months ended March 30, 2001. The increase in maintenance, support
and services revenues was attributable to the higher cumulative installed
customer base, which resulted in increased sales of maintenance agreements and
training and consulting services.
Revenues by geographic location were as follows (in thousands):
For the quarters For the nine
ended months ended
------------------- ------------------
March 30, March 31, March March 31,
2001 2000 30, 2001 2000
--------- --------- -------- ---------
United States......................... $27,108 $22,861 $ 81,027 $60,123
Europe................................ 8,911 7,261 23,121 21,326
Other................................. 7,575 4,265 16,495 11,113
------- ------- -------- -------
Total revenues...................... $43,594 $34,387 $120,643 $92,562
======= ======= ======== =======
Revenues from sales in Europe and other regions outside of the United States
represented 38% and 34% of total revenues for the quarters ended March 30, 2001
and March 31, 2000, respectively and 33% and 35% of total revenues for the nine
month period ended March 30, 2001 and March 31, 2000, respectively. Combined
revenues from sales in Europe and other regions outside the United States
increased by 43% from $11.5 million for the quarter ended March 31, 2000 to
$16.5 million for the quarter ended March 30, 2001 and by 22% from $32.4
million for the nine months ended March 31, 2000 to $39.6 million for the nine
months ended March 30, 2001. The increase in sales from Europe and other
regions outside the United States was primarily attributable to the expansion
of our customer base and sales channels and an increase in our direct sales
force and their productivity in these regions. Our operating results from
Europe and other regions are impacted by seasonal reductions in business
activity in the summer months, however, to date the impact has not been
material.
A majority of our revenues are denominated in US dollars, the currency in
which we report our operating results. We also collect a portion of our
revenues in currencies other than the US dollar such as Canadian Dollars,
British Pounds Sterling, German Marks, French Francs, Australian Dollars and
Japanese Yen. We expect a portion of our revenues to be denominated and
collected in the Single European Currency ("Euro") in the future. For the
quarter and nine months ended March 30, 2001, approximately 4% of our revenues
were denominated and collected in currencies that will be denominated and
collected in the Euro. To date, the foreign exchange gains and losses on
transactions and revenues reported by those subsidiaries to be denominated in
the Euro have not been significant nor have any costs related to the Euro
conversion. Translation adjustments from consolidation of such foreign
operations are presented within comprehensive income (loss).
Cost of Revenues
Cost of revenues increased 20% to $12.7 million, or 29% of total revenues
for the quarter ended March 30, 2001, from $10.5 million, or 31% of total
revenues for the quarter ended March 31, 2000. Cost of
34
revenues increased 7% to $35.3 million, or 29% of total revenues, for the nine
months ended March 30, 2001 from $33.0 million, or 36% of total revenues, for
the nine months ended March 31, 2000. The dollar increase in cost of revenues
is primarily attributable to a $1.2 million and $1.6 million increase in the
amortization of developed technologies as a result of push down accounting for
the quarter and nine months ended March 30, 2001, respectively. Excluding the
effect of the increase in amortization of developed technologies, the cost of
revenues was relatively unchanged. This is largely attributable to a corporate-
wide initiative to manage costs, while supporting revenue growth.
Cost of licensing revenues. Cost of licensing revenues consists primarily of
materials, packaging and distribution of software, related fulfillment
personnel and third party royalties. Cost of licensing revenues increased 29%
to $1.6 million, or 6% of licensing revenues for the quarter ended March 30,
2001 from $1.3 million, or 6% of licensing revenues for the quarter ended March
31, 2000. Cost of licensing revenues increased by 34% to $3.8 million, or 5% of
licensing revenues for the nine months ended March 30, 2001 from $2.9 million,
or 5% of licensing revenues for the nine months ended March 31, 2000. The
increase in cost of licensing revenues in dollars was due primarily to the
increased volume of shipments during the applicable periods. We expect cost of
licensing revenues to increase in absolute dollars and as a percentage of
revenues in future periods in absolute dollars, and to vary as a percentage of
revenues from licensing revenues because of cost incurred with new product
releases, increased order fulfillment costs, and new packaging of our products
and printing costs associated with revised documentation materials.
Cost of maintenance, support and services revenues. Cost of maintenance,
support and services revenues consists of personnel and related overhead costs
for technical support, training, consulting, maintenance services and the cost
of materials delivered with enhancement releases. Cost of maintenance, support
and services revenues increased by 6% to $9.8 million, or 63% of maintenance,
support and services revenues, for the quarter ended March 30, 2001 from $9.2
million, or 76% of maintenance, support and services revenues, for the quarter
ended March 31, 2000. Cost of maintenance, support and services revenues
decreased by 1% to $29.7 million, or 67% of maintenance, support and services
revenues, for the nine months ended March 30, 2001 from $30.0 million, or 77%
of maintenance, support and services revenues for the nine months ended March
31, 2000. The decline in cost of maintenance, support and services revenues as
a percentage of maintenance, support and services revenues is primarily
attributable to an increased use of company personnel rather than sub-
contracted consultants to perform our services and more efficient delivery of
some of our support services. Cost of maintenance, support and services
revenues may vary between periods because of the mix of services we provide and
the extent to which we use outside consultants to assist us.
Amortization of Developed Technologies. Amortization of developed
technologies increased by $1.2 million to $1.3 million, or 3% of total
revenues, for the quarter ended March 30, 2001 from $53,000 for the quarter
ended March 31, 2000. Amortization of developed technologies increased by $1.6
million to $1.8 million, or 1% of total revenues for the nine months ended
March 30, 2001 from $146,000 for the nine months ended March 31, 2000. The
increase in amortization of developed technologies is attributable to the push
down of the net fair value of our intangibles assets of $29.4 million acquired
by New SAC on November 22, 2000, which included $15.2 million related to
developed technology. Effective November 23, 2000, we began amortizing
developed technology over three years.
Gross Margins
Our gross margins as a percentage of revenue have increased from 69% and 64%
for the quarter and nine months ended March 31, 2000, respectively to 71% for
each of the quarter and nine months ended March 30, 2001, respectively. The
increase in our gross margin is primarily attributable to the low total dollar
cost of licensing revenues relative to total dollar amount of licensing
revenues. Therefore, while cost of licensing revenues generally increase by the
same magnitude as licensing revenues, the absolute dollar increase in cost of
licensing is lower, resulting in improved gross margins. In addition, we have
grown our maintenance, support and services revenues at a greater rate from the
cost of maintenance, support and services, resulting in improved gross margins.
35
Operating Expenses
Sales and Marketing. Sales and marketing expenses include salaries,
commissions and bonuses earned by sales and marketing personnel, advertising
and product promotional activities and related facilities and other costs.
Sales and marketing expenses increased 30% to $18.7 million, or 43% of total
revenues, for the quarter ended March 30, 2001 from $14.5 million, or 42% of
total revenues for the quarter ended March 31, 2000. Sales and marketing
expenses increased 14% to $53.6 million, or 44% of total revenues, for the nine
months ended March 30, 2001 from $46.9 million, or 51% for the quarter ended
March 31, 2000. The dollar increase in sales and marketing expenses was
primarily due to the expansion of our sales force during the respective
periods. In addition, there was an increase in marketing expenses during the
quarter ended March 30, 2001 related to promoting product releases during the
quarter and changing the company name from Seagate Software Information
Management Group Holdings, Inc. to Crystal Decisions, Inc. The decrease as a
percentage of revenues for the nine months ended March 30, 2001 was primarily
attributable to the increase in productivity of our sales force and the
resultant increase in revenues. We expect sales and marketing expenses to
increase in absolute dollars and to vary as a percentage of revenues as we
continue to increase our direct sales force and promote our products and
services.
Research and Development. Research and development expenses consist
primarily of personnel and related costs associated with the development of new
products, the enhancement and localization of existing products, quality
assurance and testing. Research and development expenses increased 10% to $7.6
million, or 18% of total revenues, for the quarter ended March 30, 2001 from
$6.9 million, or 20% of total revenues, for the quarter ended March 31, 2000.
Research and development expenses increased 8% to $21.4 million, or 18% of
total revenues, for the nine months ended March 30, 2001 from $19.8 million, or
21% of total revenues, for the nine months ended March 31, 2000. The increases
in research and development expenses in absolute dollars were primarily due to
increases in personnel and related expenses. We expect research and development
expenses to continue to increase in absolute dollars as we continue to invest
in our products.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for finance, legal, human resources, information
systems and other administrative costs, including bad debt expenses. General
and administrative expenses decreased 19% to $4.4 million, or 10% of total
revenues for the quarter ended March 30, 2001 from $5.5 million, or 16% of
total revenues for the quarter ended March 31, 2000. As a percent of total
revenues, general and administrative expenses decreased 10% from $15.5 million
for the nine months ended March 31, 2000 to $13.9 million for the nine months
ended March 30, 2001. The decrease was primarily attributable to a decline in
bad debt expense during the applicable periods because of a reduced accounts
receivable balance and significantly improved days sales outstanding. This
decline is partially offset by increases in personnel and other costs related
to meeting our public reporting requirements. We expect general and
administration expenses to vary in absolute dollars and as a percentage of
revenues as we continue to develop our company.
Amortization of Intangibles and Goodwill. Amortization of intangibles and
goodwill increased 14% to $589,000 for the quarter ended March 30, 2001 from
$519,000 for the quarter ended March 31, 2000. As a percent of total revenues,
amortization of goodwill and other intangibles decreased to 1% for the quarter
ended March 30, 2001 from 2% for the quarter ended March 31, 2000.
The amortization of other intangibles for the quarter ended March 30, 2001
is attributable to the push down of the net fair value of other intangible
assets of $29.4 million acquired by New SAC on November 22, 2000, which
included $7.1 million related to other intangibles, being assembled workforce.
Effective November 23, 2000, we began amortizing assembled workforce over 36
months. Amortization of goodwill and other intangibles prior to November 22,
2000 and included in the nine months ended March 30, 2001 and March 31, 2000
comprise the amortization of goodwill and other intangibles arising from push
down accounting of goodwill and other intangibles as a result of prior share
transactions between Seagate Software Holdings and Seagate Technology. These
intangible assets were revalued as part of the New SAC Transaction.
36
Restructuring Costs. There were no restructuring charges during the quarters
ended March 30, 2001 and March 31, 2000. Restructuring costs were $573,000,
representing less than 1% of total revenues, for the nine months ended March
30, 2001. The charges relate to the closure of eight offices in Europe and are
part of a restructuring plan announced in September 2000 to consolidate the
European sales organization into fewer office locations. The charges were
primarily comprised of costs related to the termination of office leases and
other related office closure costs, as well as severance and benefits due to
nine sales and marketing employees who were terminated in September 2000. As at
March 30, 2001, $300,000 was included in accrued expenses and is expected to be
paid by the year ending June 29, 2001. Management believes this restructuring
is not significant and it will not have a material impact on our future
revenues, operating costs or operating results.
Restructuring charges were $1.3 million, representing 1% of total revenues
for the nine months ended March 31, 2000. The charges resulted from a company-
wide restructuring plan announced in October 1999 to realign resources to
better manage and control our business. The charges were comprised of severance
and benefits paid to approximately 125 employees from various locations and
departments, including direct sales force personnel, who were terminated on
October 23, 1999. The restructuring charges were paid during fiscal 2000 and no
amounts were outstanding as of June 30, 2000. Management believes there are no
further restructuring liabilities related to this plan. In addition, we believe
that the future benefit of this plan, while not quantifiable, is a more focused
and productive company. Any benefits in the form of cost reductions because of
reduced salaries were realized by the end of fiscal 2000 and are not expected
to continue.
Write-off of In-process Research and Development. As part of the push down
of the purchase price allocation of the New SAC Transaction, the net fair value
of IPR&D, as determined by an independent valuation, was $7.1 million. This
amount, which is 6% of total revenues, was written off in the nine months ended
March 30, 2001.
As the basis for identifying the IPR&D, our developmental projects were
evaluated in the context of Financial Accounting Standards Board Interpretation
4 and paragraph 11 of Financial Accounting Standards Board ("FAS") Statement
No. 2 and FAS Statement No. 86. This write-off of IPR&D during the nine months
ended March 30, 2001 was necessary because the acquired technologies have not
yet reached technological feasibility and have no future alternative uses.
At the valuation date, we were in the process of developing three next
generation versions of existing technologies which were estimated to be about
85%, 70%, and 75% complete based on total man-hours and absolute time. We
expect these three projects to be completed in fiscal 2002, at an estimated
cost of $28 million. The nature of the efforts required to develop the
purchased IPR&D into commercially viable products principally relate to the
completion of all planning, designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements. We expect that the acquired IPR&D will be
successfully developed, but we cannot ensure that commercial viability of these
products will be achieved.
The value of the purchased IPR&D for us was determined by estimating the
projected net cash flows related to such products, including costs to complete
the development of the technology and the future revenues to be earned on
commercialization of the products. These cash flows were then discounted back
to their net present value. The projected net cash flows from such projects
were based on management's estimates of revenues and operating profits related
to these projects.
Unusual Items. There were no unusual items during the quarters ended March
30, 2001 and March 31, 2000. Unusual items for the nine months ended March 30,
2001 of $1.9 million, or 2% of total revenues, comprises the push down of
compensation expense attributable to our employees arising from the
acceleration and net exercise of Seagate Technology options held by our
employees on November 22, 2000, the closing date of the New SAC Transaction.
Unusual items for the nine months ended March 31, 2000 of $242.6 million, or
262% of total revenues, comprises the compensation expense and associated
expenses attributable to our employees related to the October 1999 Seagate
Technology Exchange of Shares.
37
Interest and other income (expense), net. Interest and other income
(expense), net consists of interest income, interest expense and net foreign
currency exchange gains or losses. Interest and other income (expense), net
increased by 19% to income of $375,000 for the quarter ended March 30, 2001
from $315,000 income for the quarter ended March 31, 2000. Interest and other
income (expense), net increased 255% from $1.0 million expense for the nine
months ended March 31, 2000 to $1.5 million income for the nine months ended
March 30, 2001. Interest and other income (expense), net fluctuates on a year-
to-year basis depending on fluctuations in Seagate Technology LLC's in-house
portfolio rate, the LIBOR interest rate, our net outstanding loan balance from
Seagate Technology LLC and for the net foreign currency gains or losses, change
in foreign currency exchange rates. Beginning in fiscal 2001, we earned
interest income on a monthly basis on net receivable balances outstanding at a
rate calculated to be Seagate Technology LLC's in-house portfolio yield
(average of 5.94% and 7.09% for the quarter and nine months ended March 30,
2001, respectively). During fiscal 2000 and fiscal 1999, we paid or earned
interest at the LIBOR rate plus 2% per annum on borrowings or amounts
receivable (average of 7.51% and 8.26% for the quarter and nine months ended
March 31, 2000, respectively). The outstanding loan balance fluctuates
depending on working capital required to fund operations. In addition, our net
loan or receivable balance historically was offset by and therefore fluctuated
as a result of amounts due or receivable from Seagate Technology under a tax
allocation agreement we had with Seagate Technology. The net foreign currency
exchange gain or loss represents the impact of foreign currency fluctuations on
the translation of foreign currency transactions into U.S. dollars and varies
depending upon currency exchange rates. For the quarter and nine months ended
March 30, 2001, a $193,000 loss and a $60,000 gain, respectively, were recorded
related to foreign currency fluctuations.
Income Taxes. We recorded a tax provision of $1.5 million for the quarter
ended March 30, 2001 compared to a tax benefit of $2.1 million for the quarter
ended March 31, 2000. The tax provision for the quarter ended March 30, 2001
reflects increased taxable income in foreign jurisdictions which could not be
offset by the tax benefits of domestic net operating losses. A valuation
allowance has been provided against the deferred tax assets for such operating
losses due to the uncertainty of their realizability. The tax benefit for the
quarter ended March 31, 2000 reflects the benefits recorded during the period
under the Tax Allocation Agreement that we had with Seagate Technology.
We recorded a $1.0 million benefit from income taxes at an effective rate of
8% for the nine months ended March 30, 2001 compared with a $51 million benefit
from income taxes at an effective rate of 19% for the nine months ended March
31, 2000. The effective rate used to record the benefit from income taxes for
the nine months ended March 30, 2001 was less than the U.S. federal statutory
tax rate primarily due to an increase in the valuation allowance for U.S.
deferred tax assets arising subsequent to the termination of the Tax Allocation
Agreement on November 22, 2000 and nondeductible charges arising from push down
accounting. The effective rate used to record the benefit from income taxes for
the nine months ended March 31, 2000 was less than the U.S. federal statutory
tax rate primarily due to nondeductible expenses incurred in foreign
jurisdictions in connection with the October 1999 recapitalization and
reorganization of Crystal Decisions, including the October 1999 Seagate
Technology Exchange of Shares.
From the date of closing of the New SAC Transaction, we will no longer file
federal income tax returns on a consolidated basis with Seagate Technology.
Therefore, Seagate Technology will not benefit from nor will it reimburse us
pursuant to the Tax Allocation Agreement for tax losses sustained by us
subsequent to consummation of the transaction.
Liquidity and Capital Resources
Prior to the New SAC Transaction, Seagate Technology, as part of a general
services agreement, provided cash management services to us. New SAC continues
to provide these services. New SAC uses a centralized cash management function
for its domestic operations, including certain of our domestic operations. We
maintain some other cash balances for our foreign operations. Year-end and
quarter-end cash balances represent both U.S. dollar and foreign currency
deposits, primarily Canadian Dollars, British Pounds Sterling, Japanese
38
Yen and currencies tied to the Euro. Our cash is maintained in highly liquid
operating accounts and primarily consists of bank deposits. At March 30, 2001,
the Company's cash balances totaled $5.4 million, an increase of $1.8 million
from the fiscal year ended June 30, 2000.
Historically, operations have been financed by borrowings from Seagate
Technology LLC. These borrowings were available to us under a revolving loan
agreement with Seagate Technology which was renewed in July 2000 with Seagate
Technology LLC. The revolving loan agreement provides for maximum outstanding
borrowings of up to $60.0 million. Cash in excess of amounts required for
operating activities is applied to the amounts due or payable under the
Revolving Loan agreement. Beginning in fiscal 2001, we earned interest income
on a monthly basis on net receivable balances outstanding at a rate calculated
to be Seagate Technology LLC's in-house portfolio yield (average of 5.94% and
7.09% for the quarter and nine months ended March 30, 2001, respectively) and
were charged interest expense on a monthly basis on net amounts payable (nil
for the quarter and nine months ended March 30, 2001) at LIBOR plus 2% (average
of 7.51% and 8.26% for the quarter and nine months ended March 30, 2001,
respectively). During fiscal 2000 and fiscal 1999, we paid or earned interest
at the LIBOR rate plus 2% per annum on net borrowings or amounts receivable.
The revolving loan agreement continues in effect subsequent to the closing
of the New SAC Transaction on November 22, 2000 and expires on July 4, 2001. We
may require additional financing through the end of fiscal 2002, and are in the
process of negotiating such additional financing with Seagate Technology LLC.
Should additional financing not be available from Seagate Technology LLC at
terms that are satisfactory to us and Seagate Technology LLC, we may seek
additional equity and financing from other sources, subject to concurrence by
the lenders which financed the New SAC Transaction, as well as our parent
company. As a result of the New SAC Transaction, we guaranteed the debt used to
finance the New SAC Transaction and pledged a majority of our assets. As a
result of restrictive covenants under the debt agreement, our ability to raise
additional debt or equity from other sources may be limited.
Net cash provided by operating activities was $8.4 million for the nine
months ended March 30, 2001 and net cash used in operating activities was $20.6
million for the nine months ended March 31, 2000, respectively. The cash
provided by operating activities of $8.4 million for the nine months ended
March 30, 2001 was primarily attributable to a $4.0 million increase in income
taxes receivable from Seagate Technology under a tax allocation agreement,
offset by changes in working capital balances. The cash used by operating
activities for the nine months ended March 31, 2000 was primarily attributable
to a $37.2 million increase in income taxes receivable from Seagate Technology
under a tax allocation agreement and a $25.6 million increase in income taxes
receivable, both relating to the $50 million tax benefit for the nine months
ended March 31, 2000 and prior year losses. This is partially offset by a $20.9
million decline in accounts receivable and net cash operating income of $28.9
million. The decline in the accounts receivable balance was the result of a
concerted effort to reduce days sales outstanding from previous levels.
Net cash used in investing activities was $7.2 million and $1.9 million for
the nine months ended March 30, 2001 and March 31, 2000, respectively. Net cash
used in investing activities for the nine months ended March 30, 2001 was
primarily for new office facilities, leasehold improvements, and the purchase
of computers, furniture and office equipment to support our expansion. In the
next 12 months, we intend to invest approximately $15.0 million in capital
assets. These anticipated capital expenditures include leasehold improvements
at office locations and computer equipment. Additionally, product development
activities may require cash to acquire technology.
Net cash provided by financing activities was $1.0 million and $20.0 million
for the nine months ended March 30, 2001 and March 31, 2000, respectively. The
net cash provided by financing activities for the nine months ended March 30,
2001 was primarily attributable to cash received from option exercises. The net
cash provided by financing activities for the nine months ended March 31, 2000
were attributable to amounts borrowed and repaid under the revolving loan
agreement with Seagate Technology to fund working capital and
39
operating activities. The revolving loan balance was offset by amounts due from
or payable to Seagate Technology under the tax allocation agreement. The net
revolving loan balance as of March 30, 2001 was a receivable balance of $30.1
million, an increase of $4.4 million from the receivable balance of $25.7
million at the end of fiscal 2000. The net revolving loan balance as of March
31, 2000 was a receivable balance of $825,000.
Although we have pledged our assets and guaranteed debt in connection with
the New SAC Transaction, New SAC will not require our cash flow to be used to
service the obligations pursuant to the senior secured credit facility and the
senior subordinated notes. We believe that none of the guarantees or pledges of
assets under the senior credit facilities or the guarantee under the Indenture
are likely to be invoked.
New Accounting Pronouncements
In March 2001, the Derivative Implementation Group issued Statement 133
Implementation Issue No. C11, "Scope Exceptions: Interpretation of Clearly and
Closely Related in Contracts that Qualify for the Normal Purchases and Normal
Sales Exception" that requires adoption of this pronouncement for quarters
commencing after the issue date. We are currently still assessing the impact of
the pronouncement on our consolidated results of operations, financial position
and cash flows.
Factors Affecting Future Operating Results
You should be alerted that the following risks and uncertainties could
affect and in some instances in the past have affected our actual results and
could cause our results for future periods to differ materially. Additional
risks and uncertainties that we are unaware of or that we currently deem
immaterial also may become important factors that may adversely affect our
results of operations, financial condition or business.
Risks Associated with the New SAC Transaction
As a result of the New SAC Transaction closing, our business could be harmed
because:
. we will not receive any future benefits from our recently terminated
intercompany tax allocation agreement, under which we received
substantial cash payments, in the form of an offset to our loan under the
revolving loan agreement from Seagate Technology for our income tax
losses utilized by Seagate Technology relative to our tax loss position;
. we have pledged a majority of our assets to guarantee the debt obligation
used to finance the New SAC Transaction, which could impair our ability
to raise additional capital or debt;
. we may not continue to have access to the same level of administrative
services and support from Seagate Technology LLC after the New SAC
Transaction due to the more limited resources of Seagate Technology LLC,
which may be a result of the burden of servicing the debt used to finance
the New SAC Transaction, and we may incur additional changes or expenses
to provide these services internally or obtain them from a third party;
. we continue to rely on our parent company and its affiliates to finance
our operating and capital needs.
Risks from Restrictions under the Covenants of the Debt Financing of the New
SAC Transaction
New SAC and certain of its subsidiaries including, Crystal Decisions and
certain of its subsidiaries, are guarantors under the senior credit facilities
and senior subordinated notes used to finance the New SAC Transaction. In
addition, the majority of New SAC's and certain of its subsidiaries assets,
including Crystal Decision's assets and its capital stock, have been pledged
against the debt under the senior credit facility.
New SAC, and certain of its subsidiaries, including Crystal Decisions and
certain of its subsidiaries, have agreed to certain covenants under this
agreement including restrictions on future equity and borrowing transactions,
business acquisitions and disposals, making certain restricted payments and
dividends, making certain capital expenditures, incurring guarantee obligations
and engaging in mergers or consolidations. Further, Crystal Decisions, as part
of the consolidated group, is subject to certain financial covenants that are
assessed on the consolidated operating results and financial position of New
SAC and its subsidiaries.
40
New SAC is highly leveraged and has significant debt service obligations. If
New SAC is unable to meet its debt obligations, we may be required to pay
amounts due under these debt agreements and may need to liquidate assets or the
Company as a whole to meet the lenders demands in such cases.
If New SAC is unable to meet the consolidated financial covenants under the
debt agreements, early repayment of debt may force Crystal Decisions to
contribute to the debt payments under its guarantee and pledge obligations or
to forego amounts receivable from Seagate Technology.
The restrictive covenants under the debt agreements may prevent the Company
from growing through acquisitions, consolidations and making certain capital
expenditures if approval from the lenders for such covenants are not obtained.
The Company may be unable to obtain debt or other financing to support its
liquidity requirements and growth if waiver approval of the debt covenants in
this respect cannot be obtained from the lenders or if New SAC is unable to
provide additional financing to Crystal Decisions.
We Remain Liable to Third Parties after the New SAC Transaction and the Merger
In the New SAC Transaction, Seagate Technology sold all of its operating
assets (including us) to New SAC, and New SAC and we have agreed to assume and
indemnify VERITAS for substantially all liabilities arising in connection with
our operating assets. As a result, we continue to face possible liabilities for
actions, events or circumstances arising or occurring both before and after the
New SAC Transaction and the Merger. Some areas of potential liability include:
. tax liabilities;
. obligations under federal, state and foreign pension and retirement
benefit laws; and
. existing and future litigation.
As a result of our obligations to indemnify VERITAS, we could experience a
material adverse effect on our business and financial performance.
Risk from Change in Composition of our Board of Directors
As a result of the New SAC Transaction, the composition of our board of
directors has changed.
Upon the closing of the New SAC Transaction in November 2000, our company
became a majority owned subsidiary of Seagate Software (Cayman) Holdings, a
wholly owned subsidiary of New SAC. As a result of the change in ownership, New
SAC controls more than 85% of our common stock on a fully diluted basis and has
replaced two members of our board of directors and added additional directors.
Through its influence on our board of directors and as majority stockholders,
New SAC has the ability to change the direction of our business, our operating
budget and possible acquisition or sales of our Company.
Risk from Name Change
In March 2001, we changed our name from Seagate Software Information
Management Group Holdings, Inc. to Crystal Decisions, Inc. We made this change
in order to capitalize on the goodwill and brand recognition of our Crystal
line of software products, including our flagship product, Crystal Reports.
There can be no assurance that our customers and potential customers will react
positively to our name change. If the name change is perceived negatively by
customers and market analysts, then our business, operating results and
financial condition could be materially adversely affected.
Revenue Growth and Economic Conditions
The revenue growth and profitability of our business depend on the overall
demand for computer software and services, particularly in the Business
Intelligence and Information Infrastructure segments. Because a large
41
percentage of our revenue is derived from major corporate and government
customers, our business also depends on general economic and business
conditions. A softening of demand for computer software caused by a weakening
of the economy could cause our business, operating results and financial
condition to be materially adversely affected.
Management of Growth
Our future operating results will depend on our ability to manage growth,
continuously hire and retain significant numbers of qualified employees, and
accurately forecast revenues and control expenses. To manage our growth and
expansion, we need continuously to improve and implement our internal systems,
processes and controls. If we are unable successfully to do so then our
business, operating results and financial condition could be materially
adversely affected.
Forecasting of Revenue
Our management and sales force use a "pipeline" system, a common industry
practice, to forecast sales and trends in our business. Our sales personnel
monitor the status of all proposals, such as the date on which they estimate
that a customer will make a purchasing decision and the potential dollar amount
of the sale. We aggregate these estimates periodically in order to generate a
sales pipeline. While this pipeline analysis provides us with some guidance in
business planning and budgeting, our estimates are necessarily speculative and
may not consistently correlate to revenues in a particular quarter or over a
longer period of time. Variations in the rate and timing of conversion of our
pipeline into actual revenue could cause us inaccurately to plan or budget and
thereby adversely affect our business. In particular, a slowdown in the economy
may cause purchasing decisions to be delayed, reduced in amount or cancelled
which will adversely affect the overall rate and timing of conversion of our
pipeline into actual revenue, so that our business, operating results and
financial condition could be materially adversely affected.
Dependence on Key Personnel and Hiring and Retention of Employees
Our future performance depends to a significant degree upon the continued
service of our key members of management including particularly our President
and Chief Executive Officer, Gregory B. Kerfoot, our Chief Operating Officer,
Bill Gibson and our Chief Financial Officer, Eric Patel, as well as other of
our marketing, sales and product development personnel. We do not maintain key
man insurance on any of our officers or key employees. None of our officers or
key employees is bound by an employment agreement for any specific term. 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 growth and success depends upon our ability to
attract, train 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. If we cannot successfully hire and retain
qualified employees, our business, operating results and financial condition
would be materially adversely affected.
Rights to use Software Licensed to us by Third Parties
We occasionally license in certain technologies from third parties to be
used in our products, generally on a non-exclusive basis. The termination of
such licenses, or the failure of the third-party licensors adequately to
maintain or update their products, could delay our ability to ship certain of
our products while we seek to implement alternative technology offered by other
sources. In addition, alternate technology may not be available on commercially
reasonable terms or at all. If we are unable to obtain necessary or desirable
third-party technology licenses our business, operating results and financial
condition could be materially adversely affected.
42
Risks from Potential Fluctuations in Annual and/or Quarterly Operating Results
We often experience a high volume of sales at the end of our 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 actual sales. If this were to happen,
we would not be able to reduce these costs and, consequently, we may experience
a net loss or our net income may be reduced. In addition, our operating results
have been and, in the future, may be subject to significant quarterly
fluctuations as a result of a number of other factors including:
. general weakening of the economy resulting in a decrease in the overall
demand for computer software and services;
. the size and 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;
. market acceptance of and demand for business intelligence and enterprise
reporting software, generally, and our products in particular;
. the length of our sales cycles;
. personnel changes;
. our success in expanding our direct sales force and increasing our
indirect distribution;
. changes in the prices of our products and our competitors' products;
. the mix of products and services of our customer orders, which can affect
the timing of our revenue recognition;
. the amount of customization required for our customer orders, which can
affect the timing of our revenue recognition;
. our ability--accurately to predict the rate and timing of conversion of
our direct sales "pipeline" into actual revenue;
. 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;
. changes in our operating expense;
. competition and consolidation in our industry;
. the timing of new product releases; and
. seasonal factors, such as our typically lower pace of sales in our first
fiscal quarter.
Risks of 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. Sales to
a small number of customers generate a disproportionate amount of our revenues.
For example, we derived 19% of our revenue from sales to Ingram during the nine
months ended March 30, 2001. 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
increase sales to other customers. Because our contracts with Ingram and other
customers 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.
Risks Associated with Long Sales Cycle
To date, our customers have typically invested substantial time, money and
other resources and involved many people in the decision to license our
software products, including proprietary Crystal Reports, Crystal
43
Enterprise, Crystal Info and Seagate Holos. As a result, we may wait six to
nine months after the first contact with a customer for that customer to place
an order while they seek internal approval for the purchase of our products.
During this long sales cycle, events may occur that affect the size, timing or
even completion of the order. For example, the customer's budget and purchasing
priorities may change, or new competing technology may enter the marketplace.
We may lose sales or experience reduced sales as the result of this long sales
cycle, which would reduce our revenues.
Risks Associated with Relying on Sales Staff, Channel Partners and Strategic
Relationships
We sell and support our products through:
. sales staff;
. third party distributors; and
. OEMs.
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 extent 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. 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 are also generally entitled to terminate their
relationship with us 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.
New Product Development and Technological Change
Our products are used in combination with other software. Our future success
depends on our ability to continue to support a number of popular operating
systems and databases. The emergence of new industry standards in related
fields may adversely affect the demand for our existing products. This could
happen, for example, if new web standards and technologies emerged that were
incompatible with customer deployments of our applications. Our applications
run primarily on the Microsoft operating systems. Therefore, our ability to
increase sales currently depends on the continued acceptance of the Microsoft's
operating system products. We cannot currently market all of our current
business intelligence applications to potential customers who use Unix
operating systems as their application server. Although we have invested
substantial resources to develop a complete Unix product line, we cannot be
certain that we will be able to introduce such a product line on a timely or
cost effective basis or at all.
Business intelligence applications are inherently complex, and it can take a
long time to develop and test major new products and product enhancements. In
addition, customers may delay their purchasing decisions
44
because they anticipate that new or enhanced versions of our products will soon
become available. We cannot be sure that we will succeed in developing and
marketing, on a timely and cost-effective basis, product enhancements or new
products that respond to technological change, introductions of new competitive
products or customer requirements, nor can we be sure that our new products and
product enhancements will achieve market acceptance.
The markets for our products are characterized by rapidly changing
technology, changing customer needs, evolving industry standards and frequent
new product introductions and enhancements. Our future success therefore will
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, emerging industry
standards and changing 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.
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.
For example, although we maintain business insurance, our operations may be
subject to some disruption that is not covered under our policies or the dollar
amount of the damages may exceed the applicable coverage limits.
Risks from International Operations
We have significant international operations including development
facilities, sales personnel and customer support operations. We derived 38% and
34% of our total revenue from sales outside of the United States for the
quarters ended March 30, 2001 and March 31, 2000, respectively, and 33% and 35%
for the nine months ended March 30, 2001 and March 31, 2000, respectively. Our
offshore operations are subject to certain inherent risks including:
. fluctuations in currency exchange rates;
. uncertainties and potential disruption due to the pending currency
conversion to the Euro in many European countries;
. import and export restrictions, as well as tariffs;
. lack of acceptance of localized products;
. longer payment cycles for sales in certain 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;
. potentially adverse tax consequences;
. 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.
45
These factors could have a material adverse effect on our business,
operating results and financial condition in the future. In addition, we intend
to continue to invest resources to expand our sales and support operations into
strategic international locations. If the international revenues generated by
these expanded operations are not adequate to offset the expense of
establishing these foreign operations then our business, operating results and
financial condition could be materially harmed.
Our products are generally priced in U.S. dollars even when sold to
customers who are located outside of the United States. Currency instability in
foreign 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.
Risks from Conversion to Euro
On January 1, 1999, certain member states of the European Economic Community
fixed their respective currencies to a new currency, the Euro. On that day, the
Euro became a functional legal currency within these countries. Until December
31, 2001, business in these countries will be conducted both in the existing
national currency, such as the French Franc or the German 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 implementing updates to our internal systems to address conversion to
the Euro. To date, we have not conducted any significant sales or paid any
significant expenses in the Euro. However, we expect to begin to do so by July
2001. Although the introduction and use of the Euro have not had a material
adverse impact on our financial condition to date, there can be no assurance
that it will not have such an impact in the future.
Dependence on Proprietary Technology
Our success is heavily dependent on our proprietary technology. We rely
primarily on the following to protect our proprietary rights:
. patents;
. copyrights;
. trademarks and trade secret rights;
. state and common law trade secret laws;
. 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, we have only limited protection for our
proprietary rights in our software, which makes it difficult to prevent third
parties from infringing upon our rights. 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. In addition, the laws of many countries do not protect our
proprietary rights to as great an extent as the United States.
46
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 our 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 in the following ways:
. require costly litigation to resolve;
. absorb significant management time;
. require us to enter into unfavorable royalty or license agreements;
. require us to cease selling our products;
. require us to indemnify our customers; or
. require us to expend additional development resources to redesign our
products.
Government Regulation may Impact Our Business
Due to increasing use of the internet and the dramatically increased access
to personal information, the U.S. federal and various state and foreign
governments have recently proposed increased limitations on the collection and
use of personal information of users of the internet and other public data
networks.
Although we attempt to obtain permission from users prior to collecting or
processing their personal data, new laws or regulations governing personal
privacy may change the ways in which we and our customers and affiliates may
gather this personal information. In addition, in Europe, the European Union
Directive on Data Protection, a comprehensive administrative and regulatory
program, currently limits the ability of companies to collect, store and
exchange personal data with other entities.
Our growing business, eBusiness and our marketing strategy depend upon our
receiving personal information about subscribers. Privacy concerns may cause
some potential subscribers to forego subscribing to our service. If new laws or
regulations prohibit us from using information in the ways that we currently
do, or if users opt out of making their personal preferences and information
available to us and our affiliates, this could have a material adverse effect
on our business, operating results and financial condition. If personal
information is misused by us, our legal liability may be increased and our
growth may be limited.
Our success depends on increased use of the internet for eCommerce and other
commercial and personal activities. Consumers and businesses may choose not to
use the internet for a number of reasons, including:
. internet access costs;
. inconsistent service quality;
. unavailability of cost-effective, high-speed service;
. perceived security risks, such as a lack of confidence in encryption
technology; and
. privacy concerns.
In addition, governmental agencies and legislators may generate new laws and
regulations covering issues such as obscenity, freedom of expression, pricing,
content and quality of products and services, copyright and other intellectual
property issues and taxation. Such legislation or rule making could dampen the
growth in internet use generally and decrease the acceptance of the internet as
a commercial medium. If use of the
47
internet decreases, some of our customers may purchase fewer licenses for our
software products and our operating results would be harmed.
Software Product Errors or Defects
Software products as complex as those we offer frequently contain undetected
errors, defects, failures or viruses especially when first introduced or when
new versions or enhancements are released or are configured to individual
customer systems. Despite product testing, our products may contain undetected
defects, errors or viruses. If our products have errors, they could:
. cause a negative customer reaction that could reduce future sales;
. generate negative publicity regarding us and our products;
. harm our reputation;
. reduce or limit customers' adoption of our products;
. require us to incur additional service and warranty costs;
. require us to make extensive changes to the product;
. require us to divert additional development resources; 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
judgment. In addition, our insurance against product liability risks may not be
adequate to cover a potential claim. These factors could have a material
adverse effect upon our business, operating results or financial condition.
Facing Risks of Litigation
On November 10, 1997, Vedatech commenced an action in the High Court of
Justice Chancery Division in the United Kingdom against Crystal Decisions (UK)
Limited, a wholly owned subsidiary of Crystal Decisions, claiming breach of an
oral agreement and infringement of a Vedatech U.K. copyright in the Japanese
translation of one of our products and is seeking monetary and injunctive
relief. On August 22, 2000, Vedatech requested and obtained permission from the
court to amend its action to include claims for unjust enrichment, unlawful
interference and quantum meruit. Crystal Decisions (UK) Limited has filed a
counterclaim against Vedatech to recover amounts collected by Vedatech on
behalf of Crystal Decisions (UK) Limited but not paid over to Crystal Decisions
(UK) Limited. No specific damage amount has yet been claimed by Vedatech with
the exception of $240,000 (26.0 million Yen) for unpaid invoices in connection
with the quantum meruit claim. Vedatech seeks to enjoin Crystal Decisions (UK)
Limited from infringing the U.K. copyright and seeks forfeiture to Vedatech of
all infringing software copies. We have hired local counsel in the U.K.,
reviewed documents, conducted interviews and participated in the discovery
process. We have deposited with the court an amount equal to $200,000 in
relation to the quantum meruit claim. Discovery is ongoing, and the court has
granted Vedatech's request to delay commencement of trial until February of
2002. With the exception of the quantum meruit claim, we believe the complaint
has no merit, and intend vigorously to 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 affect on our liquidity, financial position
or results of operations. The outcome of this matter and amount of related
claims are not determinable at this time.
48
In addition to the foregoing, we are subject to other litigation in the
ordinary course of our business. While we believe that the ultimate outcome of
these matters will not have a material adverse effect on us, the outcome of
these matters is not determinable and negative outcomes may adversely affect
our financial position, liquidity, or results of operations.
Revenue Recognition
In accordance with generally accepted accounting principles, several factors
may require us to defer recognition of our revenues for a significant period of
time. Such revenue recognition factors include:
. whether the revenues are associated with the performance of services;
. whether the license agreement relates to currently unavailable software
products;
. whether the license agreement includes customer acceptance based on
future performance obligations; and
. whether license fees are sold in a multiple element contract where
insufficient VSOE exists relating to the fair value of an undelivered
element.
Our deferred revenue as of March 30, 2001 and June 30, 2000 was $25.5
million and $19.5 million, respectively. The timing of our ultimate recognition
of our deferred revenue is dependent upon the fulfillment of various
obligations such as services and also by certain actions performed by our
customers. Deferred revenue at any specific date may not be a true
representation of actual revenues for any succeeding period.
Our ability to recognize revenues is based upon whether delivery has
occurred, evidence of an arrangement exists, the fee is fixed or determinable
and collectability is deemed probable by management. As guidance on revenue
recognition for software companies is evolving and subject to ongoing
interpretation by government and other regulatory bodies, there can be no
assurance that our current revenue recognition policies will always be in full
compliance. If we were forced to change our revenue recognition policy due to
perceived failure to fully adhere to revenue recognition policies, our
financial condition could be materially adversely affected.
There is no established trading market for our common stock, and we do not
expect that any trading market will be established.
Our common stock is not listed on any stock exchange, over-the-counter
market or other quotation system. In connection with this registration
statement, we are not registering shares of our common stock for sale to the
public or registering for resale shares held by our stockholders or that may be
acquired by our optionees. We do not expect to register our common stock for
sale to the public or to apply for quotation of our shares on any exchange,
over-the-counter market or quotation system. As a result, a purchaser of our
common stock will not be able to dispose of the shares the purchaser acquires
from us unless the purchaser can rely on an applicable exemption from
registration, such as Rule 144 under the Securities Act of 1933. We may not
comply with the criteria required for a holder of our common stock to utilize a
given exemption.
In the event that a trading market for our common stock develops, the market
prices of our common stock will likely be subject to substantial price and
volume fluctuations due to a number of factors, many of which will be beyond
our control, which may prevent our shareholders from reselling our common stock
at a profit.
The securities markets have experienced significant price and volume
fluctuations in the past, and the market prices of the securities of technology
companies have been especially volatile. This market volatility, as well as
general economic, market or political conditions, could reduce the market price
of our common stock in spite of our operating performance. In addition, our
operating results could be below the expectations of investment analysts and
investors, and in response the market price of our common stock could decrease
significantly. Investors may be unable to resell their shares of our common
stock at or above the purchase price
49
paid by the investors. In the past, companies that have experienced volatility
in the market price of their stock have been the object of securities class
action litigation. If we were the object of securities class action litigation,
it could result in substantial costs, liabilities and a diversion of
management's attention and resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in the "Factors Affecting Future Operating
Results" section.
As of March 30, 2001 and June 30, 2000, our cash balances were mostly held
by our foreign operations. The remainder of our cash balances is centrally
managed by New SAC. If cash from operations is not sufficient to fund working
capital and operating activities, Seagate Technology LLC provides financing to
us through a revolving loan agreement. The revolving loan agreement provides
for maximum outstanding borrowings of up to $60.0 million and was renewed on
July 4, 2000. As of March 30, 2001 and June 30, 2000, the revolving loan
balance was a net receivable from Seagate Technology LLC and its affiliates of
$30.1 million and $25.7 million, respectively. Beginning fiscal 2001, we earned
interest income on a monthly basis on net receivable balances outstanding at a
rate calculated to be Seagate Technology LLC's in-house portfolio yield
(average of 5.94% and 7.09% for the quarter and nine months ended March 30,
2001, respectively) and were charged interest expense on a monthly basis on net
amounts payable (nil for the quarter and nine months ended March 30, 2001) at
LIBOR plus 2% (average of 7.51% and 8.26% for the quarter and nine months ended
March 30, 2001, respectively). During fiscal 2000, we paid or earned interest
at the LIBOR rate plus 2% per annum on net outstanding balances payable or
receivable (average of 7.92% and 7.66% for the quarter and nine months ended
March 31, 2000, respectively). Our interest income or expense therefore will
fluctuate depending on fluctuations in Seagate Technology LLC's in-house
portfolio yield, the LIBOR rate and fluctuations in the amounts borrowed from
Seagate Technology to fund working capital and operating activities. Net
interest income of $1,237,000 and net interest expense of $1,083,000 were
incurred on the net receivable/loan balance for the nine months ended March 30,
2001 and nine months ended March 31, 2000, respectively.
We do not have any investments in equity or debt securities traded in the
public markets. Therefore, we do not currently have any direct equity price
risk.
A majority of our sales are in the United States and therefore are recorded
in U.S. dollars, the currency in which we report our operating results. We
conduct a portion of our business in currencies other than the U.S. dollar. The
functional currency of most of our foreign operations is the local currency. In
such cases, assets and liabilities recorded in foreign currencies are
translated at the exchange rate on the balance sheet date. Translation
adjustments resulting from this process are charged or credited to other
comprehensive income. Revenues and expenses are translated at average rates of
exchange prevailing during the year. Gains and losses on foreign currency
transactions are included in other expenses. For those foreign operations whose
functional currency is the U.S. dollar, financial results are translated using
a combination of current and historical exchange rates and any translation
adjustments are included in net earnings, along with all transaction gains and
losses for the period. Historically, we have generated revenues and incurred a
significant proportion of our expenses in Canadian Dollars, British Pounds
Sterling, Deutsche Marks, French Francs, Australian Dollars and Japanese Yen
and we expect to generate a portion of our revenues and expenses in the Euro in
the future. Certain European Union member states have fixed the value of their
respective national currencies to the Euro, and our results of operations are
affected by the U.S. dollar to Euro exchange rate. Since the adoption of the
Euro in January 1999, the overall trend for the Euro has been a devaluation
compared to the U.S. dollar. During the nine months ended March 30, 2001,
approximately 4% of our revenues were denominated in currencies for which a
fixed value to the Euro has been established. Currently, none of our foreign
operations have significant transactions in the Euro, however we anticipate
implementing Euro-based transactions effective July 2001. To date, the foreign
exchange gains and losses on transactions and revenues reported by our foreign
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subsidiaries have not been significant. In addition, since most of our foreign
operations conduct business in their local currency, our earnings are not
significantly impacted by fluctuations in exchange rates. Translation
adjustments from consolidation of such foreign operations are presented within
comprehensive income. However, we cannot provide an assurance that foreign
currency denominated transactions will continue to be insignificant as revenues
from the foreign operations increase or there are significant exchange rate
fluctuations. We cannot predict the effect of exchange rate fluctuations upon
our future operating results. For the nine months ended March 30, 2001, we did
not engage in a foreign currency hedging program to cover any exposure we may
have had. For the nine months ended March 30, 2001, a combined variation of 10%
of the exchange rates of the main currencies in which we conduct business--the
Canadian Dollar, the British Pound Sterling, the Australian Dollar, the Euro,
and the Japanese Yen would have generated a combined 1% variation of our
revenues, offset by a 5% combined variation of expenses.
51
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. We are subject to litigation arising in the
ordinary course of our business. While we believe that the ultimate outcome of
these actions will not have a material adverse effect on us, the outcome of
these actions is not determinable and negative outcomes may adversely effect
our financial position, liquidity, or results of operations. Accordingly,
actual results could differ materially from those projected in the forward-
looking statements.
On November 10, 1997, Vedatech commenced an action in the High Court of
Justice Chancery Division in the United Kingdom against Crystal Decisions (UK)
Limited, a wholly owned subsidiary of Crystal Decisions, claiming breach of an
oral agreement and infringement of a Vedatech U.K. copyright in the Japanese
translation of one of Crystal Decisions' products and is seeking monetary and
injunctive relief. On August 22, 2000, Vedatech requested and obtained
permission from the court to amend its action to include claims for unjust
enrichment, unlawful interference and quantum meruit. Crystal Decisions has
filed a counterclaim against Vedatech to recover amounts collected by Vedatech
on behalf of Crystal Decisions (UK) Limited but not paid over to Crystal
Decisions (UK) Limited. No specific damage amount has yet been claimed by
Vedatech with the exception of $240,000 (26.0 million Yen) for unpaid invoices
in connection with the quantum meruit claim. Vedatech seeks to enjoin Crystal
Decisions (UK) Limited from infringing the U.K. copyright and seeks forfeiture
to Vedatech of all infringing software copies. Crystal Decisions has hired
local counsel in the U.K., reviewed documents, conducted interviews and
participated in the discovery process. Crystal Decisions (UK) Limited has
deposited with the court an amount equal to $200,000 in relation to the quantum
meruit claim. Discovery is ongoing, and the court has granted Vedatech's
request to delay commencement of trial until February of 2002. With the
exception of the quantum meruit claim, Crystal Decisions believes the complaint
has no merit, and intends vigorously to 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 affect on Crystal Decisions' liquidity,
financial position or results of operations. The outcome of this matter and
amount of related claims are not determinable at this time.
In addition to the foregoing, Crystal Decisions is subject to other
litigation in the ordinary course of our business. While Crystal Decisions
believes that the ultimate outcome of these matters will not have a material
adverse effect on Crystal Decisions, the outcome of these matters is not
determinable and negative outcomes may adversely affect Crystal Decisions'
financial position, liquidity, or results of operations.
Item 4. Vote of Security Holders
On February 9, 2001, our majority shareholder, New SAC, through its wholly
owned subsidiary, Seagate Software (Cayman) Holdings, voted 75,001,000 shares
of our common stock (99.6% of outstanding shares as of February 9, 2001) by an
action by written consent to amend our certificate of incorporation to change
our corporation's legal name to Crystal Decisions, Inc. This action by written
consent became effective on March 28, 2001.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are included herein:
10.6.1 Management Services Agreement dated November 20, 2000 between
Seagate Software Information Management Group Holdings, Inc. and
Seagate Technology (US) Holdings, Inc.
10.6.2 Corporate Services Agreement dated July 1, 2000 between Seagate
Software Information Management Group Holdings, Inc. and Seagate
Technology LLC.
10.6.3 Payroll Services Agreement dated July 14, 2000 between Seagate
Software Information Management Group Holdings, Inc. and Seagate US
LLC.
(b) Reports on Form 8-K
Crystal Decisions, Inc. filed the following Form 8-K reports during the
quarter ended March 30, 2001 with the Securities and Exchange Commission.
. Form 8-K dated February 5, 2001 presenting financial data as
follows: pro forma consolidated balance sheet at September 29, 2000,
pro forma consolidated statement of operations for the three months
ended September 29, 2000 and the fiscal year ended June 30, 2000.
. Form 8-K Amendment dated February 5, 2001, filed February 28, 2001.
53
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Crystal Decisions, Inc.
Signature Title Date
--------- ----- ----
/s/ Gregory B. Kerfoot President and Chief May 14, 2001
______________________________________ Executive Officer
(Gregory B. Kerfoot) (Principal Executive
Officer)
/s/ Eric Patel Chief Financial Officer May 14, 2001
______________________________________ (Principal Accounting and
(Eric Patel) Financial Officer)
54