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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-26247
VERITAS SOFTWARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0507675
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1600 PLYMOUTH STREET 94043
MOUNTAIN VIEW, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 335-8000
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of February 29, 2000, 393,597,951 shares of the Registrant's common
stock were outstanding. The number of shares of common stock outstanding
reflects the three-for-two stock split announced by the board of directors of
the Registrant on January 27, 2000 and paid as a stock dividend on March 3, 2000
to stockholders of record on February 18, 2000. The aggregate market value of
the common stock held by non-affiliates of the Registrant as of February 29,
2000 was approximately $31,290,581,886.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement, to be delivered to
stockholders in connection with the Registrant's Annual Meeting of Stockholders,
are incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 17
Submission of Matters to a Vote of Security Holders
Item 4. Matters..................................................... 17
PART II
Market for the Registrant's Common Equity and Related
Item 5. Stockholder Matters......................................... 18
Item 6. Selected Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition
Item 7. and Results of Operations................................... 20
Quantitative and Qualitative Disclosures About Market
Item 7A. Risk........................................................ 37
Item 8. Financial Statements and Supplementary Data................. 39
Changes in and Disagreements with Accountants on Accounting
Item 9. and Financial Disclosure.................................... 40
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 40
Item 11. Executive Compensation...................................... 40
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................. 40
Item 13. Certain Relationships and Related Transactions.............. 40
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form
Item 14. 8-K......................................................... 41
Signatures............................................................. 46
Financial Statements................................................... 47
Exhibits...............................................................
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PART I
ITEM 1. BUSINESS
This annual report on Form 10-K contains forward-looking statements, within
the meaning of Section 21E of the Securities Exchange Act of 1934 and Section
27A of the Securities Act of 1933, that involve risks and uncertainties. These
forward-looking statements include statements regarding our expectations,
beliefs, intentions or strategies regarding the future. All these
forward-looking statements are based on information available to us at this
time, and we assume no obligation to update any of these statements. Actual
results could differ from those projected in these forward-looking statements as
a result of factors identified under "Factors That May Affect Future Results."
We urge you to review and consider the various disclosures made by us in this
report, and those detailed from time to time in our reports and filings with the
SEC, that attempt to advise you of the risks and factors that may affect our
future results.
OVERVIEW
VERITAS is a leading independent supplier of storage management software.
Storage management software has grown significantly in importance and market
impact during the last few years. Computing operations have moved from being
part of the infrastructural background of a business enterprise to being a
critical component in the success of a business, particularly given businesses'
requirements that data remain protected and accessible at all times. VERITAS
products assist businesses by making sure that their data is protected, can be
accessed at all times, and can be managed and used in compliance with business
policies. Since our products help to improve the levels of centralization,
control, automation and manageability in computing environments, they allow
information technology, or IT, managers to be significantly more effective with
constrained resources and limited budgets. More specifically, our products offer
protection against data loss and file corruption, allow rapid recovery after
disk or computer system failure, enable IT managers to work efficiently with
large numbers of files, and make it possible to manage data distributed on large
networks of computer systems without harming productivity or interrupting users.
In addition, our products provide continuous availability of data in clustered
computer systems that share disk resources to maintain smooth business
operations. Our products are highly scalable in order to keep up with the rapid
growth of data and technologies deployed in businesses. In summary, our products
help our customers manage their data storage in complex and diverse computing
environments efficiently and cost-effectively.
We develop and sell products for most popular operating systems, including
versions of UNIX and Windows NT. Our software solutions are used by customers
across a broad spectrum of industries, including many leading global
corporations and e-commerce businesses. We also provide a full range of services
to assist our customers in planning and implementing their storage management
solutions.
We market our products and services to end users either directly or through
original equipment manufacturers and indirect sales channels such as resellers,
value-added resellers, hardware distributors, application software vendors and
systems integrators. Some of our customers include:
ORIGINAL EQUIPMENT
MANUFACTURERS INDIRECT SALES CHANNELS DIRECT SALES
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Compaq AVCOM Technologies Amazon.com
Dell Ingram Micro American Airlines
EMC Corporation Merisel AT&T
Hewlett-Packard Tech Data Bank of America
Fujitsu-Siemens British Telecom
Microsoft eBay
NEC e*Trade
SGI Ford Motor Company
StorageTek GTE
Sun Microsystems Lucent
Morgan Stanley & Co.
Oracle
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The demand for storage management solutions is fueled by a number of
factors. These factors include the rapid increase in the number of internet
users and the number of businesses doing business online, as well as the
continuing automation of traditional business processes. The widespread use of
business computer applications, coupled with the explosion of corporate data,
has exceeded the ability of current computing architectures to handle
availability, scalability and manageability issues. A new storage-centric
architecture, called storage area networking, or SAN, has emerged to handle
these issues. A storage area network is a high-speed computing network that
directly connects storage hardware devices, such as storage arrays, clustered
servers, disk drives and tape drives, to client and server computers. The
typical SAN infrastructure is capable of handling more data and transactions
faster than a traditional network, can grow along with a business' needs, and is
more cost-effective than traditional network architectures. We are a leading
innovator in developing SAN technology and taking our SAN-capable products to
businesses that can benefit from them.
A key competitive factor for businesses today is whether their critical
data and related applications are available without interruption 24 hours a day,
seven days a week. Our products are designed to enable continuous productivity
for computing environments ranging from the desktop computer to the large
enterprise data center, including storage area networks.
In 1999, we acquired the Network & Storage Management Group of Seagate
Software, Inc., which we refer to as the NSMG business. Before our acquisition
of the NSMG business, we focused primarily on sales of storage management
software to the UNIX platform. Our purchase of the NSMG business enabled us to
offer products that are targeted primarily at the Windows NT market, which
represented another large market for storage management products. In 1999, we
also acquired TeleBackup Systems, Inc., which we refer to as TeleBackup, and
NuView, Inc., which we refer to as NuView. Our acquisitions of the NSMG
business, TeleBackup and NuView contributed to the increase in the number of our
full-time employees, which grew from 945 to 2,974 during 1999. The acquisition
of these businesses has created new challenges for us, including the general
integration of the businesses and product lines. The products shown below
include products acquired from the NSMG business, TeleBackup and NuView.
RECENT DEVELOPMENTS
On March 29, 2000, VERITAS, Seagate Technology, Inc. and an investor group
including Seagate Technology's management group announced a transaction in which
we will acquire all of the shares of our common stock held by Seagate
Technology, certain other securities and cash. We are not acquiring Seagate
Technology's disc drive business or any other Seagate Technology operating
business.
In the transaction, we will issue to the Seagate Technology stockholders
approximately 109.3 million shares of our common stock for approximately 128
million shares of VERITAS common stock held by Seagate Technology. In addition,
we will issue shares of our common stock for certain other securities held by
Seagate Technology at the closing date and, at our election, we may also issue
shares of our common stock for up to $750 million in retained cash at the
closing date.
We will be indemnified for liabilities, including tax liabilities and other
matters that may arise in connection with the transaction. The transaction is
intended to qualify as a tax-free reorganization.
For a detailed discussion of the transaction and the related risks, please
refer to our Form 8-K that will be filed with the SEC on or about April 3, 2000,
as well as the joint proxy statement/prospectus to be filed by both Seagate
Technology and us in connection with the transaction.
PRODUCTS
We offer a wide range of leading storage management software solutions. We
have developed our products to manage the explosive growth of data and the
growing complexity and size of networked environments that exist today. Our
products allow businesses to back up their data, improve the management of their
data, and increase data availability. We also offer several integrated solutions
that further simplify storage management.
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Data protection
We offer products designed to ensure reliable information backup and
restore. Our leading products that protect information include:
PRODUCT DESCRIPTION
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VERITAS NetBackup VERITAS NetBackup has the flexibility and scalability needed
to protect the mission critical data of businesses with
thousands or even tens of thousands of computer systems. It
provides easily configured centralized backup scheduling,
user-directed backups and restores, automated distribution
and installation of client software over a network, and easy
configuration of users' computers. It supports all major
platforms, including UNIX, Windows NT, Novell NetWare and
Linux, and includes support for storage area networks.
VERITAS NetBackup BusinesServer VERITAS NetBackup BusinesServer is a backup and recovery
solution designed for small to mid-size UNIX and high-end
Windows NT installations, and for the many IT operations
that run a combination of the two. It combines strong
performance with an intuitive interface not normally found
in UNIX solutions.
VERITAS Backup Exec VERITAS Backup Exec provides easy-to-use backup and restore
functions, including scheduled automated unattended data
backup operations. It supports Windows NT, Windows 2000 and
Windows 95/98, and has a large array of options to protect
data contained in popular applications such as Microsoft
Outlook and Novell NetWare.
VERITAS TeleBackup VERITAS TeleBackup is an easy-to-use and secure backup and
disaster recovery tool for portable and desktop computers in
remote offices and telecommuting work locations. It supports
users running Sun Solaris, HP-UX and Windows NT servers, and
Windows 95/98 and Windows NT client workstations.
VERITAS Global Data Manager VERITAS Global Data Manager centrally manages VERITAS
NetBackup, VERITAS NetBackup BusinesServer and VERITAS
Backup Exec servers at different geographic locations that
are part of a business' intranet or wide area network. Its
benefits include increased flexibility and control, global
scalability, uninterrupted global operations and reduced
management costs.
VERITAS Storage Migrator VERITAS Storage Migrator, formerly called VERITAS HSM,
increases the availability of critical business data by
ensuring that only frequently used information is kept
online permanently. It migrates infrequently-used data from
online devices to lower cost secondary storage, and recalls
that migrated data to primary online storage when accessed
by users or applications. Separate UNIX and Windows NT
versions of this product are available.
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File and volume management
We offer products designed to improve the manageability and performance of
business critical data. Our principal management and performance products
include:
PRODUCT DESCRIPTION
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VERITAS Volume Manager VERITAS Volume Manager allows for easy to use online disk
storage management for business computing environments. It
provides the tools needed to protect against data loss due
to hardware failure, to accelerate system performance by
allowing files to be spread across multiple disks and to
allow IT managers to reconfigure data locations without
interrupting users.
VERITAS File System VERITAS File System enables fast system recovery, generally
within seconds, from operating system failure or disruption.
It gives mission-critical servers mainframe-level
capabilities by providing superior performance, data
integrity, high availability and online manageability.
VERITAS Foundation Suite VERITAS Foundation Suite combines VERITAS Volume Manager and
VERITAS File System. These two products provide key benefits
independently, but together they take advantage of each
other's specialized disk and data management capabilities to
improve performance, availability and manageability.
High availability, clustering and replication
We offer products that make businesses' key applications more available in
complex computing environments. These products include:
PRODUCT DESCRIPTION
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VERITAS Cluster Server VERITAS Cluster Server is a comprehensive availability
management solution that maximizes data and application
availability by using proactive management of planned and
unplanned downtime. It reduces the cost of high availability
through a single standby system that protects the
availability of dozens of servers. It is also useful in
storage area networks.
VERITAS ClusterX for Microsoft VERITAS ClusterX for Microsoft Cluster Service, or MSCS,
Cluster Service addresses the management and deployment of multiple
distributed Windows NT clustered computers. It lets users
control the installation, configuration and ongoing
management of multiple MSCS clustered computers from a
single console.
VERITAS ClusterX for WLBS VERITAS ClusterX for WLBS focuses on managing Windows NT
Load Balancing Service servers and improves their
availability, reliability, scalability and performance. It
lets users manage all aspects of enterprise-wide Windows NT
Load Balancing Service clustered computers from a single
console.
VERITAS FirstWatch for Sun VERITAS FirstWatch for Sun provides simple and robust
failover management for the Sun Solaris environment. Fault
detection, isolation and recovery are automated to achieve
rapid restoration of application services in the event of a
failure. An entire application or selected application
services, configured into logical service groups, can be
failed over to a backup system.
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PRODUCT DESCRIPTION
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VERITAS Storage Replicator for Volume VERITAS Storage Replicator for Volume Manager helps
Manager businesses ensure that the most current data is available at
all global locations. It is a robust, flexible,
multi-purpose data replication tool designed for enterprise
environments. It integrates with VERITAS Volume Manager to
provide exceptional recoverability and manageability.
VERITAS Storage Replicator for File VERITAS Storage Replicator for File Systems is a robust,
Systems flexible, general purpose data replication tool designed for
use in enterprise environments. It ensures that data written
to one server is reliably replicated to other participating
servers, so that all updates are available for use in active
file systems across all servers.
VERITAS Replication Exec VERITAS Replication Exec delivers flexible and intelligent
data replication for Windows NT environments. It can
efficiently and automatically duplicate files or file
systems at any number of locations for complete data
protection or information distribution. It offers
centralized management, high replication performance,
minimal system requirements, both real-time and
schedule-based replication, and selectable bandwidth usage.
It can also replicate remote data to a central site for
centralized backup.
Application solutions
Businesses need integrated solutions to optimize their storage management
strategies. Our principal products offering these integrated solutions include:
PRODUCT DESCRIPTION
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VERITAS Desktop Management Suite VERITAS Desktop Management Suite centralizes the management
of distributed network desktop computers by automating tasks
such as operating system and software distribution, hardware
and software inventory, application metering, backup and
remote control. It reduces the total cost of managing
network desktop computers and standardizes the
administration of desktop computers across the enterprise.
VERITAS ManageExec VERITAS ManageExec is a powerful, simple and scaleable
solution for managing the behavior of different types of
networks worldwide from one central location. It
automatically monitors, analyzes and reports on Windows NT
and Novell NetWare systems health, establishes profiles of
normal server and application behavior and sends alerts when
these profiles are not met. As a result, problems that once
may have resulted in computer failure are now resolved
before network users are affected.
VERITAS NerveCenter VERITAS NerveCenter is an event management solution that
helps to ensure high levels of network and application
availability by identifying critical problems and launching
corrective measures automatically. It functions across all
common network devices and applications in UNIX and Windows
NT systems.
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PRODUCT DESCRIPTION
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VERITAS WinINSTALL VERITAS WinINSTALL allows businesses to automate software
distribution and standardize versions of software on all
desktop computers across the business enterprise in Windows
95/98, Windows NT and Windows 2000 networks.
VERITAS WinLAND VERITAS WinLAND collects detailed information about a
computer workstation's hardware, its configuration and its
software. It allows users to automatically identify software
on each computer workstation and to scan for and collect
detailed information from unknown files.
VERITAS Editions
We have also integrated our solutions in a range of product suites
optimized for specific applications including Oracle, Sybase, NFS, SAP and
web-based environments. Our integrated solutions, which we call VERITAS
Editions, include:
PRODUCT DESCRIPTION
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VERITAS Database Edition for Oracle VERITAS Database Edition for Oracle, available in several
configurations, is an integrated suite of several VERITAS
products to deliver improved performance, enhanced
manageability and continuous database access to support the
extremely complex and demanding work of database
administrators operating Oracle servers.
VERITAS Database Edition for Sybase VERITAS Edition for Sybase is an integrated suite of several
VERITAS solutions combined with specialized software agents
to support the increasingly complex Sybase database
environment. Certified by Sybase as the only solution to run
Sybase data servers on file systems, it increases system
performance and manageability.
VERITAS Edition for NFS VERITAS Edition for Network File System, or NFS, is a
comprehensive and cost-effective solution to deliver
superior performance and higher availability for
SPARC/Solaris servers in computing environments that run
both UNIX and Windows. It also meets the demand for improved
manageability of these complex networks, and helps to ensure
efficient workflow for users.
VERITAS Edition for SAP VERITAS Edition for SAP, the enterprise management system
used by many global businesses, is an integrated suite of
VERITAS products optimized to deliver high performance,
easier manageability, and continuous access for SAP
environments using Oracle database servers running on
Solaris. It bundles all the advanced features of the
Database Edition for Oracle with the flexibility and
robustness of VERITAS Cluster Server.
VERITAS Edition for Web VERITAS Edition for Web is designed to optimize the
availability, performance and manageability of web servers,
particularly for internet service providers, or ISPs, and
corporate web server administrators. Based on VERITAS data
and storage management technologies and customized for
SPARC/Solaris systems, it allows web servers to function
effectively as business critical productivity tools.
SERVICES
Our customer service and support organization provides customers with
maintenance, technical support, consulting and training services. We believe
that providing a high level of customer service and technical support is
critical to customer satisfaction and our success. Most of our customers have
support agreements
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with us that provide for fixed fee, renewable annual maintenance consisting of
technical and emergency support, and minor product upgrades free of charge. Our
service group provides the following services:
Maintenance and technical support
We offer seven day-a-week, 24-hour telephone support, as well as electronic
mail and fax customer support. Our customers can choose from a variety of
support packages to address their specific needs, ranging from one-time incident
charges to comprehensive support services with a dedicated single point of
contact at VERITAS for some of our applications. Additional customer support is
provided by some of our value-added resellers, system integrators and original
equipment manufacturers.
Consulting
We believe that most customers need assistance before product selection and
not just for the implementation of purchased products. Therefore, we offer
strategy and analysis consulting services for planning the management and
control of enterprise computing in specific customer environments. In addition,
we offer services to assist customers with product implementation. As part of
our broad range of services, we believe we offer particular expertise in
analyzing network security threats and security policy integrity.
Training
We have a worldwide customer education and training organization, which
offers training that enables customers to utilize our products, reduces the need
for technical support and provides customers with a means to optimize their
personnel investment by allowing their technical staff access to high quality,
comprehensive instruction. The focus of this organization is aligned with our
strategy to offer end-to-end storage management solutions by providing
instruction from highly-experienced training professionals either at the
customer's location or at one of our multi-platform classrooms.
MARKETING, SALES AND DISTRIBUTION
We market our products and related services through original equipment
manufacturers and a combination of other distribution channels such as direct
sales, resellers, value-added resellers, hardware distributors, application
software vendors and systems integrators. Original equipment manufacturers
incorporate our products into their operating systems on a bundled basis or
license them to third parties as an optional product. In most cases, we receive
a user license fee for each copy sublicensed by the original equipment
manufacturer to third parties. We provide our software products to customers
under non-exclusive license agreements, including shrink-wrap licenses for
certain products. As is customary in the software industry, in order to protect
our intellectual property rights, we do not sell or transfer title to our
software products to customers. We enter into both object-code only and
source-code licenses of our products.
Microsoft relationship
In August 1996, we entered into a development and license agreement with
Microsoft under which we agreed to develop a version of our Volume Manager
product, which Microsoft has called Logical Disk Manager, to be ported to and
embedded in version 5.0 of Microsoft's Windows NT operating system, which now
has been released as Windows 2000. We do not receive royalties with respect to
sales by Microsoft of the embedded product. Our products may not become
available for use in, and Microsoft is not required to use our products in,
future versions of Windows NT. We cannot assure you that we will realize any
benefits from the inclusion of this embedded product in Windows 2000 or future
versions of Windows NT. In addition, we authored several other customized
versions of our products to be packaged with Windows 2000, such as the backup
application, NetBackup, the Removable Storage Services, and the software
distribution feature, which was licensed by Microsoft as WinINSTALL LE and is an
abridged version of VERITAS WinINSTALL.
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Sun Microsystems relationship
In January 1997, we entered into a development, license and distribution
agreement with Sun Microsystems that provided a new distribution channel for our
products. We developed a specialized, integrated version of VERITAS Volume
Manager that is bundled with some of Sun Microsystems' storage technologies. The
agreement also provided for the license of full versions of some of our products
and add-on modules to Sun Microsystems for bundling with some Sun Microsystems
products. In August 1998, we amended the agreement and granted Sun Microsystems
a license to distribute and sub-license VERITAS NetBackup, VERITAS Storage
Migrator and some of the VERITAS Editions. This license is non-exclusive except
with respect to certain named resellers for which Sun Microsystems retained
exclusive distribution rights. We may not be able to deliver our products to Sun
Microsystems in a timely manner despite the dedication of resources to the
development of the products. Also, simultaneous sales efforts by Sun
Microsystems and ourselves with respect to our products could create channel
conflicts. Sun Microsystems is not obligated to sell any of our products under
this agreement.
In November 1999, we announced that Sun Professional Services would be
providing our packaged professional services as well as our custom consulting.
This is designed to enable Sun Microsystems' and our customers to maximize their
system availability through optimal configurations and reliable installations.
We cannot assure you that this arrangement will be successful.
Hewlett-Packard relationship
In November 1997, we entered into a marketing, engineering and distribution
agreement with Hewlett-Packard, under which Hewlett-Packard will offer some of
the components of the lite versions, or functional subsets of VERITAS Volume
Manager, VERITAS Cluster Volume Manager, VERITAS NetBackup and VERITAS File
System with the HP-UX operating system. We will not receive royalties with
respect to the lite version of the VERITAS File System embedded in the HP-UX
operating system. Hewlett-Packard has become our reseller with respect to some
of our products, including full feature versions of the above named products,
and we have offered full feature products and value-added products to the HP-UX
installed customer base. We may not be able to deliver our products to
Hewlett-Packard in a timely manner. Also, it is possible that our deliverables
and Hewlett-Packard deliverables under the agreement may not be synchronized in
a timely and successful manner, and that Hewlett-Packard may not be an effective
reseller of our products. The simultaneous sales efforts by Hewlett-Packard and
ourselves with respect to our products could create some channel conflicts.
Hewlett-Packard is not obligated to sell our products under this agreement.
In the fourth quarter of 1999, we dedicated personnel to define and build
versions of our products that meet the needs specific to the Hewlett-Packard
marketplace, and to further focus our sales and marketing efforts on the
Hewlett-Packard sales channel. We cannot assure you that this strategy will be
successful.
Sales, marketing and support organization
During 1999, we continued to build our sales, marketing and customer
support organization with a focus on delivering our products to resellers,
integrators and end users and integrating the sales force of the NSMG business.
We have sales subsidiaries in Australia, Canada, Japan, Germany, France, the
Netherlands, Sweden, Switzerland and the United Kingdom. We have direct sales
personnel in North America, Europe, Asia and the Pacific Rim. We also have
resellers located in North America, Europe, Asia Pacific, South America and the
Middle East.
We expect to increase the number of our sales, marketing and customer
support employees in the future to expand our direct sales efforts to resellers
and end users. We may not have the necessary resources to accomplish this. It is
also possible that we will not be able to establish and expand these new
distribution channels successfully or complete the integration of our sales and
marketing efforts successfully. We expect to hire additional sales employees in
all regions in 2000. Competition for qualified sales, technical and other
personnel is intense, and we may not be able to attract, assimilate or retain
additional highly qualified employees in the future. We also may not be able to
manage our growth effectively.
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Concentration of customers
In 1999 and 1997, no customer accounted for more than 10% of our net
revenue. Revenue from Sun Microsystems accounted for 12% of our net revenue in
1998.
COMPETITION
The markets in which we compete are intensely competitive and rapidly
changing. Our principal competition in the storage management products area
consists of internal development groups of current and prospective original
equipment manufacturer customers, which have the resources and capability to
develop their own storage management solutions. Relationships between us and the
competitors are complex. We have taken a pioneering role with many of our
products and technologies. While we may compete with another company for a share
of the market, we also may be involved with them, for example, in an effort to
set standards for storage area networking technology that benefits the entire
industry. The products of some original equipment manufacturers in the operating
systems arena include packaged data protection and management applications and
features that we compete with. They include:
- Compaq Computer. Compaq sells several hardware clustering solutions. It
also resells ours and other vendors' backup software, and markets UNIX
system software that includes file and volume management products.
- Hewlett-Packard. HP markets a clustering product, MC ServiceGuard, and a
backup product, Omniback.
- IBM. IBM markets backup, file and volume management products. Its disk
management and clustering products are primarily used with the AIX
operating system.
- Microsoft. The file system in Microsoft Windows NT competes with VERITAS
File System, and the Microsoft Cluster Server with our clustering
products.
- Sun Microsystems. Sun has the Solstice Disk Suite, which competes with
VERITAS Volume Manager, but also has an OEM agreement for the VERITAS
product. Sun markets a competing file system, Unix File System to run on
their version of the UNIX operating system, which is called Solaris, but
resells VERITAS File System as well.
We also encounter competition from other third party software vendors and
hardware companies offering products that incorporate some of the features
provided by our products, and from disk controller and disk subsystem
manufacturers that have included or may include similar features.
Our primary competitors in the storage management products area include the
following, grouped by product type:
Backup and data protection
- Computer Associates, Cheyenne division, for its ARCserve product
- EMC for its Enterprise Data Manager product
- Hewlett-Packard for its Omniback product
- IBM for its ADSTAR Distributed Storage Manager product and its Tivoli
division
- Legato Systems for its BudTool, NetWorker and GEMS products
- Sterling Software for its Alexandria Network Librarian product
- StorageTek for its REELbackup product
File and volume management
- Hewlett-Packard for its Logical Volume Manager
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- IBM for its file system and Logical Volume Manager
- Microsoft for the NT File system
- Sun Microsystems for its Solstice Disk Suite and Unix File System
Clustering and replication
- EMC for its Symmetrix Remote Data Facility replication product
- Hewlett-Packard for its MC ServiceGuard product
- Legato Systems for its FullTime HA Plus and FullTime Clusters
- Microsoft for its Microsoft Cluster Server
- Sun Microsystems for its Sun Cluster product
Our competitors in the areas of remote backup technologies and electronic
data vaulting services include Atrieva, Connected Corp., Core Data and STAC Inc.
These competitors are Windows NT-centric and differ in the degree of system
backup and recovery provided to users, with some companies offering data file
set backup and recovery capability only.
The principal competitive factors in our industry include price, product
functionality, product integration, platform coverage and ability to scale,
worldwide sales infrastructure and global technical support. We believe we
compete favorably in each of these areas relative to our competitors.
Many of our competitors have greater financial, technical, sales, marketing
and other resources than we do, as well as greater name recognition and a larger
installed customer base. We expect that the market for storage management
software, which has been large and fragmented historically, will become more
consolidated with larger companies being better positioned to compete in such an
environment in the long term. As the storage management software market
continues to develop, a number of companies with greater resources than ours
could attempt to increase their presence in this market by acquiring or forming
strategic alliances with our competitors or business partners.
Our success will depend on our ability to adapt to these competing forces,
to develop more advanced products more rapidly and less expensively than our
competitors, and to educate potential customers as to the benefits of licensing
our products rather than developing their own products. Our future and existing
competitors could introduce products with superior features, scalability and
functionality at lower prices than our products and could also bundle existing
or new products with other more established products in order to compete with
us. In addition, because there are relatively low barriers to entry for the
software market, we expect additional competition from other established and
emerging companies. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
harm our business.
RESEARCH AND DEVELOPMENT
Our research and development efforts have been directed toward developing
new products for UNIX and Windows NT, developing new features and functionality
for existing products, integrating products in the existing product line and
porting new and existing products to different operating systems.
Our major research and development initiatives include:
- Additional integration of the full family of storage management products,
including further integration of VERITAS Volume Manager, VERITAS File
System and VERITAS NetBackup;
- Development of additional Linux versions of our products;
- Development of additional clustering products; and
- Development of additional storage area network products.
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Each of these initiatives involves technical and competitive challenges,
which we may not be able to overcome successfully.
Development work under Microsoft and Sun Microsystems agreements
Our agreement with Microsoft requires us to develop a version of our Volume
Manager product, which Microsoft has called Logical Disk Manager, to be ported
to and embedded in Windows 2000, which is effectively version 5.0 of Windows NT.
The agreement also requires us to develop a disk management graphical user
interface designed specifically for Windows NT. Microsoft is providing funding
for a significant portion of the development expenses for this product payable
in quarterly increments. In order to perform under the agreement, we have hired
additional personnel with expertise in the Windows NT operating system
environment and are devoting capital investment and resources to complete this
project successfully.
Our agreements with Sun Microsystems and Hewlett-Packard also impose
development obligations on us. We are required to commit staffing to our
projects with these original equipment manufacturers. We may not have the
resources necessary to perform our obligations under these agreements and our
development efforts may not be as successful as planned.
Size and location of research and development group
As of December 31, 1999, our research and development staff consisted of
767 employees located at our Mountain View, California headquarters and at our
other facilities in North America. In addition, our subsidiary in Pune, India
employed 186 engineers.
Research and development expenditures
We had research and development expenses of $94.5 million in 1999, $40.2
million in 1998 and $25.2 million in 1997. These amounts exclude $104.2 million
in 1999 and $0.6 million in 1998 for in-process research and development charges
in connection with acquisitions. We believe that technical leadership is
essential to our success and expect to continue to commit substantial resources
to research and development. Our future success will depend in large part on our
ability to enhance existing products, respond to changing customer requirements
and develop and introduce new products in a timely manner that keep pace with
technological developments and emerging industry standards. We continue to make
substantial investments in undisclosed new products, which may or may not be
successful. We may not complete these research and development efforts
successfully and therefore, future products may not be available on a timely
basis or achieve market acceptance.
Need to hire research and development personnel
We need to hire additional research and development personnel to complete
new products on a timely basis, including the adaptation of our products to
Windows NT and performance of obligations to key original equipment manufacturer
partners. The market for these personnel is very competitive and we cannot
assure you that we can hire them on a timely basis or at all. We may consider
acquiring and purchasing technology to achieve some of our objectives, but we
may not be able to accomplish this successfully.
Effect of technological advances
From time to time, we or our competitors may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycles of our existing products. Announcements of currently planned or
other new products could cause customers to defer purchasing our existing
products. We have from time to time in the past experienced delays of up to
several months due to the complex nature of software developed by us and other
software developers for whose systems or applications we offer products. We
could experience delays in connection with our current or future product
development activities. Any of these delays could harm our business.
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PROPRIETARY RIGHTS
Measures we take to protect our intellectual property
We regard some of the features of our internal operations, software and
documentation as proprietary and rely on contract, copyright, patent, trademark
and trade secret laws, confidentiality procedures and other measures to protect
our proprietary information. Other than the patents acquired in the NSMG and
TeleBackup combinations as described below, we currently hold no patents
applicable to our current business, although we have filed several applications
for patents. Existing copyright and trade secret laws afford only limited
protection.
As part of our confidentiality procedures, we generally enter into
non-disclosure agreements with our employees, distributors and corporate
partners, and license agreements with respect to our software, documentation and
other proprietary information. These licenses are generally non-transferable and
have a perpetual term.
Infringement risks
We make source code available for some of our products. The provision of
source code may increase the likelihood of misappropriation or other misuse of
our intellectual property. We also license some of our products under shrink
wrap license agreements that are not signed by licensees and therefore may be
unenforceable under the laws of some jurisdictions. In addition, the laws of
some foreign countries do not protect our proprietary rights to the same extent
as do the laws of the United States. Thus, protection of our proprietary rights
may not be adequate. Our competitors also could independently develop technology
similar to our technology.
Litigation risks
We are not aware that our products, trademarks or other proprietary rights
infringe the proprietary rights of third parties. However, from time to time, we
receive notices from third parties asserting that we have infringed their
patents or other intellectual property rights. We may find it necessary or
desirable in the future to obtain licenses from third parties relating to one or
more of our products or relating to current or future technologies. Third
parties could assert infringement claims against us in the future with respect
to current or future products. Any assertion could require us to enter into
royalty arrangements or result in costly litigation. As the number of software
products in the industry increases and the functionality of these products
further overlap, we believe that software developers may become increasingly
subject to infringement claims. We expect any claims, with or without merit,
could be time consuming and expensive to defend.
It may be possible for a third party to copy or otherwise obtain and use
our products or technology without authorization, or to develop similar
technology independently. Policing unauthorized use of our products is difficult
and, although we are unable to determine the extent to which piracy of our
software products exists, we expect software piracy could be a persistent
problem.
Trademarks
VERITAS and the VERITAS logo are registered trademarks in the United
States. Our other trademarks include:
- - VERITAS Backup Exec;
- - VERITAS Cluster Server;
- - VERITAS Cluster Volume Manager;
- - VERITAS ClusterX;
- - VERITAS Database Edition for Oracle(R);
- - VERITAS Database Edition for Sybase(R);
- - VERITAS Desktop Management Suite;
- - VERITAS Edition for NFS(R);
- - VERITAS Edition for SAP(R);
- - VERITAS Edition for Web;
- - VERITAS File System;
- - VERITAS First Watch for Sun(R);
- - VERITAS Foundation Suite;
- - VERITAS Global Data Manager;
- - VERITAS ManageExec;
- - VERITAS NerveCenter;
- - VERITAS NetBackup;
- - VERITAS NetBackup BusinesServer;
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- - VERITAS Replication Exec;
- - VERITAS Storage Migrator;
- - VERITAS Storage Replicator for File Systems;
- - VERITAS Storage Replicator for Volume
Manager;
- - VERITAS TeleBackup;
- - VERITAS Volume Manager;
- - VERITAS WinINSTALL; and
- - VERITAS WinLAND.
Patents and patent applications
We have 16 U.S. patents and 8 patent applications, including patents and
rights to patent applications acquired from the NSMG business, TeleBackup and
NuView. Any patents obtained may not provide substantial protection or be of
commercial benefit to us. It is also possible that their validity will be
challenged.
EMPLOYEES
As of December 31, 1999, we had 2,974 full-time employees, including 953 in
research and development, 1,694 in sales, marketing, consulting and customer
support and 327 in finance and administrative services. We expect to hire a
significant number of new employees in 2000, particularly in research and
development and in sales, marketing, consulting and customer support. We have
not entered into any collective bargaining agreement with our employees, and
believe that our relations with our employees are good. We believe that our
future success will depend in part upon the continued service of our key
employees and on our continued ability to hire and retain qualified personnel.
We may not be able to retain our key employees and may not be successful in
attracting and retaining sufficient numbers of qualified personnel to conduct
our business in the future.
EXECUTIVE OFFICERS
The following table sets forth information with respect to persons who
served as our executive officers as of December 31, 1999.
NAME AGE POSITIONS
---- --- ---------
Mark Leslie.................... 54 Chief Executive Officer and Chairman of the Board
Geoffrey W. Squire............. 52 Executive Vice President and Vice-Chairman of the Board
Fred van den Bosch............. 52 Executive Vice President, Engineering and Director
Peter J. Levine................ 39 Executive Vice President, Strategic Operations
Paul A. Sallaberry............. 43 Executive Vice President, Worldwide Sales
Kenneth E. Lonchar............. 42 Senior Vice President, Finance and Chief Financial Officer
Jay A. Jones................... 45 Senior Vice President, Chief Administrative Officer and
Secretary
Mr. Leslie is our Chief Executive Officer and Chairman of the Board. Mr.
Leslie has served as Chief Executive Officer of VERITAS or our predecessors
since 1990 and as a director since 1988. Mr. Leslie is also Chairman of the
Board of Versant Corporation, an object management solutions company, and serves
on the board of directors of Brocade Communications Systems, Inc., a supplier of
storage area network software, and on the board of directors of Keynote Systems,
Inc., a supplier of Internet performance measurement and diagnostic services.
Mr. Squire has served as Executive Vice President and Vice Chairman of the
Board of VERITAS or our predecessors since April 1997, when VERITAS merged with
OpenVision Technologies, Inc. Mr. Squire became a director of OpenVision in 1994
and was appointed Chief Executive Officer of OpenVision in July 1995. From
November 1994 to June 1995, he was President and Chief Operating Officer at
OpenVision. Mr. Squire was President of the U.K. Computing Services and Software
Association in 1994 and, in 1995, was elected as the founding President of the
European Information Services Association. Mr. Squire also serves as a director
of Industri-Mathematik International Corp.
Mr. van den Bosch has served as Executive Vice President, Engineering of
VERITAS or our predecessors since July 1997. Mr. van den Bosch served as our
Senior Vice President, Engineering from 1991
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to July 1997 and was appointed as a director in February 1996. From 1970 until
1990, he served in various positions with Philips Information Systems, including
Director of Technology.
Mr. Levine has served as our Executive Vice President, Strategic Operations
since December 1999, after serving as Senior Vice President, Strategic
Operations of VERITAS or our predecessors from January 1999 to December 2000 and
Senior Vice President, OEM Sales from December 1997 to December 1998. Mr. Levine
served as a senior executive of VERITAS from 1995 to December 1997.
Mr. Sallaberry has served as our Executive Vice President, Worldwide Sales
since December 1999 after serving as Senior Vice President, Worldwide Sales of
VERITAS or our predecessors from July 1997 to December 1999, and Vice President,
North American Sales from April 1997 to July 1997. Mr. Sallaberry was
OpenVision's Senior Vice President of Sales from 1992 until 1994. Mr. Sallaberry
rejoined OpenVision in 1995 as Senior Vice President of North American
Operations.
Mr. Lonchar has served as Chief Financial Officer of VERITAS or our
predecessors since April 1997 and as our Senior Vice President, Finance since
January 1999. Mr. Lonchar served as our Vice President, Finance from April 1997
until January 1999. Mr. Lonchar was Chief Financial Officer and Senior Vice
President of OpenVision from December 1995 until the merger with VERITAS in
April 1997. Prior to joining OpenVision, Mr. Lonchar was Vice President, Finance
and Administration and Chief Financial Officer of Microtec Research, Inc., a
publicly-traded software company, for seven years. Mr. Lonchar is a certified
public accountant. Mr. Lonchar also serves on the board of directors of Geoworks
Corporation, a provider of mobile e-commerce and information services and
software.
Mr. Jones has served as Senior Vice President, Chief Administrative Officer
and Secretary of VERITAS or our predecessors since January 1999. Mr. Jones
served as our Vice President, General Counsel and Secretary from April 1997 to
January 1999. Mr. Jones joined OpenVision as General Counsel in 1993 and was
appointed Vice President, General Counsel and Secretary in 1994 and served in
those capacities until the merger with VERITAS in April 1997. Mr. Jones is a
member of the California Bar Association.
ITEM 2. PROPERTIES
Our executive offices are located in Mountain View, California. Our
principal facilities are located in Mountain View, California and Heathrow,
Florida. Large portions of our facilities are occupied under leases that expire
at various times through 2012. The table below shows the approximate square
footage of the premises that we lease as of December 31, 1999, excluding
approximately 39 executive suites.
APPROXIMATE
SQUARE
LOCATION FOOTAGE
-------- -----------
North America
California............................................. 281,946
Colorado............................................... 26,951
Florida................................................ 139,904
Georgia................................................ 8,863
Illinois............................................... 10,027
Maryland............................................... 4,685
Massachusetts.......................................... 37,760
Minnesota.............................................. 62,420
New Jersey............................................. 11,125
North Carolina......................................... 8,836
Texas.................................................. 12,660
Virginia............................................... 12,441
Washington............................................. 32,848
Canada................................................. 18,526
-------
Total North America................................. 668,992
-------
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APPROXIMATE
SQUARE
LOCATION FOOTAGE
-------- -----------
Europe
France................................................. 8,264
Germany................................................ 31,619
Ireland................................................ 10,000
Sweden................................................. 4,225
United Kingdom......................................... 65,000
-------
Total Europe........................................ 119,108
-------
Asia
Australia.............................................. 5,747
China.................................................. 6,907
Hong Kong.............................................. 2,580
India.................................................. 33,229
Japan.................................................. 3,462
Malaysia............................................... 2,840
Singapore.............................................. 670
-------
Total Asia.......................................... 55,425
-------
Total.......................................... 843,525
=======
California facilities exclude approximately 44,361 square feet of space
that we sublease to others. Illinois facilities exclude approximately 17,135
square feet of unoccupied space, and Florida facilities exclude approximately
5,000 square feet of unoccupied space. Facilities in England exclude
approximately 8,365 square feet of space that we sublease to others.
We recently amended and revised our operating lease arrangement for a new
425,000 square foot campus facility in Mountain View, California. We expect to
occupy this facility beginning in the second quarter of 2001. We also recently
entered into an operating lease arrangement for our existing facilities in
Roseville, Minnesota. We expect to improve and expand our existing facilities of
approximately 62,000 square feet and to develop adjacent property adding
approximately 260,000 square feet to the campus. We expect the first phase of
approximately 142,000 square feet to be completed in the second quarter of 2001.
ITEM 3. LEGAL PROCEEDINGS
We are not subject to any material legal proceedings at this time. We may
in the future become a party to various legal proceedings arising in the
ordinary course of our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
Our common stock is listed on the Nasdaq National Market under the symbol
"VRTS." The table below shows the range of reported last sale prices on the
Nasdaq National Market for our common stock, including our predecessor
corporation, for the periods indicated. We have adjusted all prices to reflect
our stock splits effected as stock dividends through March 6, 2000.
HIGH LOW
------ ------
1998
First Quarter............................................ $ 8.76 $ 6.09
Second Quarter........................................... 9.66 7.61
Third Quarter............................................ 12.92 9.33
Fourth Quarter........................................... 14.22 5.82
1999
First Quarter............................................ $19.65 $13.55
Second Quarter........................................... 21.59 14.25
Third Quarter............................................ 35.67 20.86
Fourth Quarter........................................... 95.42 32.95
As of February 29, 2000, there were approximately 552 holders of record of
our common stock. Brokers and other institutions hold many of such shares on
behalf of stockholders. We estimate the total number of stockholders represented
by these record holders to be approximately 102,000.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently anticipate that we will retain future earnings, if any, to fund
development and growth of our business and do not anticipate paying any cash
dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data are derived from our
consolidated financial statements. Share and per share data applicable to prior
periods has been restated to give retroactive effect to our stock splits
effected as stock dividends through March 6, 2000. This data should be read in
conjunction with the consolidated financial statements and notes thereto, and
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Total net revenue...................... $ 596,112 $210,865 $121,125 $ 72,746 $ 47,826
Amortization of developed technology... 35,659 -- -- -- --
Amortization of goodwill and other
intangibles.......................... 510,943 -- -- -- --
Acquisition and restructuring costs.... 11,000 -- 8,490 -- --
In-process research and development.... 104,200 600 -- 2,200 --
Income (loss) from operations.......... (475,237) 53,668 20,076 11,858 1,193
Net income (loss)...................... (502,958) 51,648 22,749 12,129 2,371
Net income (loss) per share -- basic... $ (1.59) $ 0.24 $ 0.11 $ 0.06 $ 0.01
Net income (loss) per
share -- diluted..................... $ (1.59) $ 0.22 $ 0.10 $ 0.06 $ 0.01
Number of shares used in computing per
share amounts -- basic............... 316,892 211,558 205,300 193,617 181,590
Number of shares used in computing per
share amounts -- diluted............. 316,892 232,519 222,716 209,228 193,780
AS OF DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- --------- ---------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital...................... $ 631,036 $198,842 $188,578 $ 67,413 $ 23,451
Total assets......................... 4,233,277 349,117 241,880 94,524 48,100
Long-term obligations................ 451,640 100,773 100,911 1,468 6,205
Accumulated deficit.................. (532,374) (29,416) (81,064) (103,813) (115,942)
Stockholders' equity................. 3,393,061 169,854 104,193 74,955 23,602
In 1999, we acquired the NSMG business, TeleBackup and NuView. Because we
accounted for the NSMG, TeleBackup and NuView acquisitions using the purchase
method of accounting, we recorded developed technology, goodwill and other
intangible assets of approximately $3,754.9 million in total. These assets are
being amortized over their estimated useful life of four years, and result in
charges to operations of approximately $234.8 million per quarter. We also
recorded one-time non-cash charges of $104.2 million in our statements of
operations in 1999, related to the write-off of in-process research and
development. We also recorded a one-time restructuring charge in 1999 of $11.0
million related primarily to costs for our duplicative facilities that we plan
to vacate.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements that involve numerous
risks and uncertainties which are described throughout this Form 10-K. Such
forward-looking statements consist of statements that are not purely historical,
including, without limitation, statements regarding our expectations, beliefs,
intentions or strategies regarding the future. The actual results that VERITAS
achieves may differ materially from those anticipated by any forward-looking
statements due to risks and uncertainties such as those described below under
"Factors That May Affect Future Results."
OVERVIEW
VERITAS is a leading independent supplier of storage management software.
Storage management software has grown significantly in importance and market
impact during the last few years. Computing operations have moved from being
part of the infrastructural background of a business enterprise to being a
critical component in the success of a business, particularly given businesses'
requirements that data remain protected and accessible at all times. Our
products help our customers manage complex and diverse computing environments
efficiently and cost-effectively, by making sure that their data is protected,
can be accessed at all times, and can be managed and used in compliance with
business policies. Our products help to improve the levels of centralization,
control, automation and manageability in computing environments, they allow
information technology, or IT, managers to be significantly more effective with
constrained resources and limited budgets. Our products offer protection against
data loss and file corruption, allow rapid recovery after disk or computer
system failure, enable IT managers and end users to work efficiently with large
numbers of files, and make it possible to manage data distributed on large
networks of computer systems without harming productivity or interrupting users.
They provide continuous availability of data in clustered computer systems that
share disk resources to maintain smooth business operations and are highly
scalable in order to keep up with the rapid growth of data and technologies
deployed in businesses.
We develop and sell products for most popular operating systems, including
versions of UNIX and Windows NT. Our software solutions are used by customers
across a broad spectrum of industries, including many leading global
corporations and e-commerce businesses. We also provide a full range of services
to assist our customers in planning and implementing their storage management
solutions.
We market our products and services to original equipment manufacturers and
end user customers through a combination of direct sales and indirect sales
channels such as resellers, value-added resellers, hardware distributors,
application software vendors and systems integrators.
We derive user license fee revenue from shipments of our software products
to end-user customers through direct sales channels, indirect sales channels and
original equipment manufacturer customers. Our original equipment manufacturer
customers either bundle our products with the original equipment manufacturer
products licensed by such original equipment manufacturers or offer them as
options. Some original equipment manufacturers also resell our products. We
receive a royalty each time the original equipment manufacturer licenses to a
customer a copy of the original equipment manufacturer's products that
incorporates one or more of our products. Our license agreements with our
original equipment manufacturer customers generally contain no minimum sales
requirements and we cannot assure you that any original equipment manufacturer
will either commence or continue shipping operating systems incorporating our
products in the future. When we enter into new agreements with original
equipment manufacturer customers and resellers, a significant period of time may
elapse before we realize any associated revenue, due to development work that we
must generally undertake under these agreements and the time needed for the
sales and marketing organizations within these customers and distributors to
become familiar with and gain confidence in our products. Approximately 20%, 26%
and 29% of our net revenue was generated from original equipment manufacturer
business during 1999, 1998 and 1997.
Our services revenue consists of fees derived from annual maintenance
agreements, from consulting and training services and from porting fees.
Original equipment manufacturer maintenance agreements covering our products
provide for technical and emergency support and minor unspecified product
upgrades for a fixed annual fee. Maintenance agreements covering products that
are licensed through channels other than original
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equipment manufacturers provide for technical support and unspecified product
upgrades for an annual service fee based on the number of user licenses
purchased and the level of service subscribed. Porting fees consist of fees
derived from porting and other non-recurring engineering efforts when we port,
or adapt, our storage management products to an original equipment
manufacturer's operating system and when we develop new product features or
extensions of existing product features at the request of a customer. In most
cases, we retain the rights to technology derived from porting and non-recurring
engineering work and therefore generally perform this work on a relatively low,
and sometimes negative, margin.
We have made, and intend to continue to make, substantial investments in
porting our products to new operating systems, including Windows NT. The success
of Windows NT product development efforts depends in part on receipt of
development funding from third parties, including Microsoft, and failure to
receive such funding could hamper our efforts to extend our products into the
Windows NT market. The porting and development process requires substantial
capital investment and our allocation of substantial employee resources to this
effort, and our added focus on Windows NT development in recent years has
required, and will continue to require, us to hire additional personnel. Under
an agreement with Microsoft, we have agreed to develop a functional subset of
our Volume Manager product that will be ported to and embedded in Windows NT.
The agreement also requires us to develop a disk management graphical user
interface designed specifically for Windows NT. Microsoft has provided us with
significant funding toward this development effort. We recognize revenue under
our development contract with Microsoft on a percentage-of-completion basis
consistent with our policy for revenue recognition for other similar agreements.
The payment terms in the Microsoft agreement do not directly correlate to the
timing of development efforts and therefore revenue recognition does not
directly correlate to contract billings. The Microsoft agreement requires us to
expand our marketing and sales operations to deal with higher volume markets in
which we have limited experience.
Our international sales are generated primarily through our international
sales subsidiaries. International revenue, most of which is collectible in
foreign currencies, accounted for approximately 24% of our total revenue in
1999, 26% of our total revenue in 1998 and 27% of our total revenue in 1997. Our
international revenue increased 167% to $144.9 million in 1999 from $54.2
million in 1998, and 65% from $32.8 million in 1997. Since much of our
international operating expenses are also incurred in local currencies, which is
the foreign subsidiaries' functional currency, the relative impact of exchange
rates on net income or loss is less than the impact on revenues. Although our
operating and pricing strategies take into account changes in exchange rates
over time, our operating results may be affected in the short term by
fluctuations in foreign currency exchange rates. Our international subsidiaries
purchase licenses for resale from the parent company resulting in intercompany
receivables and payables. These receivables and payables are carried on our
books in the foreign currency that existed at the time of the transaction. These
receivables and payables are eliminated for financial statement reporting
purposes. Prior to elimination, the amounts carried in foreign currencies are
converted to the functional currency at the then current rate, or "marked to
market", which may give rise to currency remeasurement gains and losses. Such
gains or losses are recognized on our statement of operations as a component of
other income, net. To date, such gains or losses have not been material.
We believe that our success depends upon continued expansion of our
international operations. We currently have sales and service offices and
resellers located in North America, Europe, Asia Pacific, South America and the
Middle East and a development center in India. International expansion will
require us to establish additional foreign offices, hire more personnel and
recruit new international resellers, resulting in the diversion of significant
management attention and the expenditure of financial resources. To the extent
that we are unable to meet these additional requirements, growth in
international sales will be limited, which would have an adverse effect on our
business, operating results and financial condition. International operations
also subject us to a number of risks inherent in developing and selling products
outside the United States, including potential loss of developed technology,
limited protection of intellectual property rights, imposition of government
regulation, imposition of export duties and restrictions, cultural differences
in the conduct of business, and political and economic instability. Furthermore,
some global markets, including Asia, Russia and Latin America, are currently
undergoing significant economic turmoil that could result in deferral of
purchase of information technology products and services by potential customers
located in such markets, thereby further limiting our ability to expand
international operations.
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On May 28, 1999, we acquired the Network & Storage Management Group
business of Seagate Software, Inc., which we refer to as NSMG. On June 1, 1999
we acquired TeleBackup Systems, Inc., which we refer to as TeleBackup. On August
10, 1999, we acquired certain assets of NuView, Inc., which we refer to as
NuView. In the following paragraphs, all share and per share data have been
restated to give retroactive effect to our stock splits effected as stock
dividends through March 6, 2000.
The NSMG business develops and markets software products and provides
related services enabling information technology professionals to manage
distributed network resources and to secure and protect enterprise data. Its
products offer features such as system backup, disaster recovery, migration,
replication, automated client protection, storage resource management,
scheduling, event correlation and desktop management. In connection with the
NSMG acquisition, in consideration for the contribution of assets and
liabilities related to the NSMG business by Seagate Technology, Inc., Seagate
Software, Inc., and their respective subsidiaries, and based on the average
closing price of our common stock of $20.26 per share for 5 days before and
after June 7, 1999, the measurement date for the transaction, we issued
155,583,486 shares of our common stock to Seagate Software, Inc. and issued
options to purchase 15,626,358 shares of our common stock to our employees who
were former NSMG employees. We accounted for the NSMG acquisition using the
purchase method of accounting, and we are incurring charges of $221.5 million
per quarter primarily related to the amortization of developed technology,
goodwill and other intangibles over their estimated useful life of four years.
The total NSMG purchase price was $3,464.5 million and included $3,151.4 million
for the issuance of our common stock, $269.7 million for the exchange of options
to purchase our common stock and $43.4 million of acquisition-related costs. The
purchase price was allocated, based on an independent valuation, to goodwill of
$3,015.8 million, distribution channels of $233.8 million, original equipment
manufacturer agreements of $23.4 million, developed technology of $233.7
million, assembled workforce of $12.8 million, trademarks of $22.8 million,
in-process research and development of $101.2 million, net deferred tax
liabilities of $179.5 million, other intangibles of $1.5 million and tangible
net liabilities assumed of $1.0 million. For 1999, we recorded $482.5 million
for the amortization of goodwill and other intangibles, and $34.1 million for
the amortization of developed technology related to this acquisition.
Acquisition-related costs consist of direct transaction costs of $20.0
million, operating lease commitments on duplicative facilities of $8.2 million
and involuntary termination benefits of $15.2 million. Non-cash charges included
in the acquisition-related costs approximate $11.7 million. At December 31,
1999, $17.4 million in direct transaction costs, $0.3 million in operating lease
commitments on duplicative facilities and $1.8 million in involuntary
termination benefits were paid against the acquisition-related costs accrual and
$11.7 million of non-cash involuntary termination benefits were charged against
the acquisition-related costs accrual. The remaining acquisition-related costs
accrual of $12.2 million is anticipated to be utilized primarily for servicing
operating lease payments or negotiated buyout of operating lease commitments,
the lease terms of which will expire at various times through the year 2013. In
addition, we recorded a restructuring charge of $11.0 million in 1999 as a
result of the NSMG acquisition. This restructuring charge related to exit costs
with respect to duplicative facilities that we plan to vacate, which include
$0.9 million of write-off of redundant equipment and leasehold improvements, and
involuntary termination benefits. Involuntary termination benefits relate to the
salary and fringe benefit expense for terminated employees in research and
development. The involuntarily terminated employees represented 2% of the global
workforce. At December 31, 1999, $0.9 million in severance costs were paid
against the restructuring charge accrual and $0.9 million of write-off of
redundant equipment and leasehold improvements had been written off. The
remaining restructuring charge accrual of $9.2 million is anticipated to be
utilized primarily for servicing operating lease payments or negotiated buyout
of operating lease commitments, the lease terms of which will expire at various
times through the year 2012.
TeleBackup designs, develops and markets software solutions for local and
remote backup and recovery of electronic information stored on networked, remote
and mobile personal computers. TeleBackup became our wholly-owned subsidiary in
exchange for the issuance of 6,842,795 shares of either our common stock or
exchangeable shares to the holders of TeleBackup common shares and the exchange
of options to purchase 154,706 shares of our common stock to our employees who
were former employees of TeleBackup. We accounted for the TeleBackup acquisition
using the purchase method of accounting, and we are incurring
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charges of $9.0 million per quarter primarily related to the amortization of
developed technology, goodwill and other intangibles over their estimated useful
life of four years. Based on the average closing price of our common stock of
$19.60 per share for 5 days before and after June 1, 1999, the measurement date
for the transaction, the total purchase price for TeleBackup was $143.1 million.
The TeleBackup purchase price included $134.1 million related to the issuance of
our common stock, $2.8 million for the issuance of options to purchase our
common stock and $6.2 million in acquisition-related costs. The acquisition
costs of $6.2 million consist primarily of direct transaction costs and
involuntary termination benefits. At December, 1999, of the total $6.2 million
acquisition costs, we paid $5.3 million in direct transaction costs with the
majority of the remaining $0.9 million anticipated to be utilized by August
2000. The purchase price was allocated, based on an independent valuation, to
goodwill of $133.1 million, distribution channels of $1.0 million, original
equipment manufacturer agreements of $2.1 million, developed technology of $6.6
million, assembled workforce of $0.3 million, trademarks of $1.3 million,
in-process research and development of $1.9 million, net deferred tax
liabilities of $3.0 million and tangible net liabilities assumed of $0.2
million. For 1999, we recorded $20.1 million for amortization of goodwill and
other intangibles, and $1.0 million for the amortization of developed technology
related to this acquisition.
Under an asset purchase agreement, we acquired certain assets of NuView,
including its Windows NT cluster management solution, Cluster X, for a total
cost of approximately $67.9 million. We accounted for the acquisition using the
purchase method of accounting, and we are incurring charges of $4.3 million per
quarter primarily related to the amortization of developed technology, goodwill
and other intangibles over their estimated useful life of four years. The
purchase price included $47.7 million related to the issuance of our common
stock, $0.8 million for the issuance of options to purchase our common stock to
former NuView employees, $0.2 million in acquisition-related costs and $19.2
million payable in cash, of which $11.4 million has been paid. The purchase
price was allocated, based on an independent valuation, to goodwill of $62.6
million, developed technology of $2.4 million, assembled workforce of $0.6
million, trademarks of $0.3 million, covenant-not-to-compete of $0.9 million and
in-process research and development of $1.1 million. For 1999, we recorded $8.1
million for amortization of goodwill and other intangibles, and $0.3 million for
the amortization of developed technology related to this acquisition.
On April 25, 1997, we merged with OpenVision Technologies, Inc. which we
refer to as OpenVision. The OpenVision merger was accounted for as a "pooling of
interests" for financial reporting purposes. As a result of the OpenVision
merger, we incurred charges to operations of $8.5 million in 1997, consisting of
approximately $4.2 million for transaction fees and professional services, $1.9
million for contract terminations and asset write-offs and $2.4 million for
other costs incident to the OpenVision merger. Of the total charge, $1.2 million
resulted from the write-down of redundant assets and facilities, primarily
consisting of intangible assets related to a prior acquisition that became
redundant as a result of OpenVision having a similar product line. The remaining
$7.3 million, involving banking, legal and accounting fees and other direct
costs and payments in connection with the elimination of duplicative facilities,
was fully paid as of December 31, 1999.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in
our statements of operations expressed as a percentage of total revenue.
YEARS ENDED
DECEMBER 31,
--------------------
1999 1998 1997
---- ---- ----
Net revenue:
User license fees......................................... 84% 80% 79%
Services.................................................. 16 20 21
--- --- ---
Total net revenue................................. 100 100 100
Cost of revenue:
User license fees......................................... 4 4 4
Services.................................................. 6 10 10
Amortization of developed technology...................... 6 -- --
--- --- ---
Total cost of revenue............................. 16 14 14
--- --- ---
Gross profit................................................ 84 86 86
Operating expenses:
Selling and marketing..................................... 37 36 35
Research and development.................................. 16 19 21
General and administrative................................ 6 5 7
Amortization of goodwill and other intangibles............ 86 -- --
Acquisition and restructuring costs....................... 2 -- 7
In-process research and development....................... 17 -- --
--- --- ---
Total operating expenses.......................... 164 60 70
--- --- ---
Income from operations...................................... (80) 26 16
Interest and other income, net.............................. 4 6 4
Interest expense............................................ (2) (3) (1)
--- --- ---
Income before income taxes.................................. (78) 29 19
Provision for income taxes.................................. 6 4 1
--- --- ---
Net income.................................................. (84)% 25% 18%
=== === ===
Net Revenue
Net revenue increased 183% to $596.1 million in 1999 from $210.9 million in
1998, when it increased 74% from $121.1 million in 1997. While we believe that
the percentage increases in net revenue achieved in these periods are not
necessarily indicative of future results, we expect net revenue to continue to
grow in 2000. Our revenue comprises user license fees and service revenue.
User License Fees. User license fees increased 197% to $498.0 million in
1999 from $167.7 million in 1998, when it increased 75% from $95.7 million in
1997. The increase in 1999 was primarily the result of the acquisition of NSMG
in the second quarter of 1999, continued growth in market acceptance of our
software products, a greater volume of large end-user transactions, increased
revenue from original equipment manufacturers, or OEMs, resales of bundled and
unbundled products and the introduction of new products. The increase in 1998
was primarily the result of the continued growth in market acceptance of our
software products, a greater volume of large end-user transactions, increased
revenue from OEM resales of bundled and unbundled products and the introduction
of new products. In particular, our user license fees from storage products
increased by approximately 187% in 1999 from 1998, and accounted for 86% of user
license fees in 1999, 88% of user license fees in 1998 and 89% of user license
fees in 1997.
Service Revenue. We derive our service revenue is derived primarily from
contracts for software maintenance and technical support and, to a lesser
extent, consulting services, training services and porting
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fees. Porting fees are derived from funded development efforts that are
typically associated with our agreements with original equipment manufacturers.
Service revenue increased 127% to $98.1 million in 1999, from $43.2 million in
1998, when it increased 70% from $25.4 million in 1997. The increases in both
1999 and 1998 were primarily due to increased sales of service and support
contracts on new licenses, renewal of service and support contracts on existing
licenses, an increase in demand for consulting and training services and, to a
lesser extent in 1999, the acquisition of NSMG in the second quarter of 1999. We
expect that service revenue will continue to grow as a percentage of our net
revenue.
Cost of Revenue
Cost of revenue increased 221% to $94.6 million in 1999 from $29.5 million
in 1998, when it increased 79% from $16.4 million in 1997. Gross margin on user
license fees is substantially higher than gross margin on service revenue,
reflecting the low materials, packaging and other costs of software products
compared with the relatively high personnel costs associated with providing
maintenance, technical support, consulting, training services and development
efforts. Cost of service revenue also varies based upon the mix of maintenance,
technical support, consulting and training services.
Cost of User License Fees (including amortization of developed
technology). Cost of user license fees consists primarily of royalties, media,
manuals and distribution costs. Also included in the cost of revenue is the
amortization of developed technology acquired in the NSMG, TeleBackup and NuView
acquisitions. The estimated useful life of the developed technology acquired is
four years and we expect the amortization to be approximately $15.1 million per
quarter. Cost of user license fees (including amortization of developed
technology) increased 541% to $56.4 million in 1999 from $8.8 million in 1998,
and increased 86% in 1998 from $4.7 million in 1997. The increase in 1999 was
primarily the result of the amortization of developed technology, and to a
lesser extent, a larger percentage of license fees being generated from the sale
of products with higher royalty rates. We pay royalties for certain technology
licensed from others and incorporated in our products. The increase in 1998 was
primarily the result of a larger percentage of license fees being generated from
the sale of products with higher royalty rates. Gross margin on user license
fees decreased to 89% in 1999 and remained constant at 95% in 1998 and 1997. The
decrease in gross margin on user license fees in 1999 was due to the
amortization of developed technology. If we excluded the amortization of
developed technology from the cost of user license fees, the gross margin would
have been 96% in 1999. The gross margin on user license fees may vary from
period to period based on the license revenue mix and certain products having
higher royalty rates than other products. We do not expect gross margin on user
license fees to increase.
Cost of Service Revenue. Cost of service revenue consists primarily of
personnel-related costs in providing maintenance, technical support, consulting
and training to customers, and development efforts in porting. Cost of service
revenue increased 85% to $38.2 million in 1999 from $20.7 million in 1998, and
increased 76% in 1998 from $11.7 million in 1997. Gross margin on service
revenue was 61% in 1999, 52% in 1998 and 54% in 1997. The increase in absolute
dollars was due primarily to personnel additions in our customer support,
training and consulting organizations, in anticipation of increased demand for
such services. The gross margin improvement in 1999 was the result of increased
productivity and higher service revenue growth due to support fees from a larger
installed customer base.
Operating Expenses
The NSMG and the TeleBackup acquisitions have contributed to increases in
all operating expense categories. However, due to the integration that has taken
place to date, it is not possible to quantify the portion of the increase that
is related directly to these acquisitions.
Selling and Marketing. Selling and marketing expenses consist primarily of
salaries, related benefits, commissions, consultant fees and other costs
associated with our sales and marketing efforts. Selling and marketing expenses
increased 191% to $222.0 million in 1999 from $76.4 million in 1998, and
increased 78% in 1998 from $42.9 million in 1997. Selling and marketing expenses
as a percentage of net revenue remained relatively consistent at 37% in 1999,
36% in 1998 and 35% in 1997. The increase in absolute dollars is primarily
attributable to increased sales and marketing staffing and, to a lesser extent,
increased costs associated with
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new marketing programs. We intend to continue to expand our global sales and
marketing infrastructure, and accordingly, we expect our selling and marketing
expenses to increase in absolute dollars but not necessarily change
significantly as a percentage of net revenue in the future.
Research and Development. Research and development expenses consist
primarily of salaries, related benefits, third-party consultant fees and other
engineering related costs. Research and development expenses increased 135% to
$94.5 million in 1999 from $40.2 million in 1998, and increased 60% in 1998 from
$25.2 million in 1997. The increases were due primarily to increased staffing
levels associated with new hires and our acquisitions and expansion of
development efforts for new technology. As a percentage of net revenue, research
and development expenses decreased to 16% in 1999 from 19% in 1998 and 21% in
1997. We believe that a significant level of research and development investment
is required to remain competitive, and expect these expenses will continue to
increase in absolute dollars in future periods and may increase slightly as a
percentage of net revenue. Research and development expenses can be expected to
fluctuate from time to time to the extent that we make periodic incremental
investments in research and development and our level of revenue fluctuates.
General and Administrative. General and administrative expenses consist
primarily of salaries, related benefits and fees for professional services, such
as legal and accounting services. General and administrative expenses increased
225% to $34.2 million in 1999 from $10.5 million in 1998, and increased 31% in
1998 from $8.0 million in 1997. General and administrative expenses as a
percentage of revenue were 6% in 1999, 5% in 1998 and 7% in 1997. The increases
in absolute dollars in 1999 and 1998 were due to additional personnel costs,
including additional personnel related to the acquisitions in the second quarter
of 1999, and, to a lesser extent, to an increase in the provision for the
allowance for doubtful accounts and other expenses associated with enhancing our
infrastructure to support expansion of our operations. We expect general and
administrative expenses to increase in absolute dollars, but not to change
significantly as a percentage of net revenue, as we expand our operations.
Amortization of goodwill and other intangibles. Amortization of goodwill
and other intangibles was $510.9 million in 1999. This amount for the most part
represents seven months of amortization of goodwill, distribution channels,
trademarks and other intangibles assets recorded upon the acquisitions of NSMG
and TeleBackup and five months of amortization of goodwill and other intangibles
assets recorded upon the acquisition of NuView. The estimated useful life of the
goodwill and the other intangibles is four years and we expect the amortization
to be approximately $219.7 million per quarter.
Acquisition and restructuring costs. In 1999, upon the acquisition of NSMG,
we recorded a one-time charge to acquisition and restructuring costs of $11.0
million, which included approximately $9.7 million in exit costs with respect to
duplicative facilities that we plan to vacate and approximately $1.3 million in
severance benefits.
Acquisition and restructuring costs are summarized below (in thousands):
CASH PAYMENTS OR
PROVISION NON-CASH CHARGES FROM ACCRUED AS OF
RECORDED AT ACQUISITION DATE TO DECEMBER 31,
ACQUISITION DATE DECEMBER 31, 1999 1999
---------------- --------------------- --------------
Cancellation of facility leases and other
contracts................................. $ 8,717 $ -- $8,717
Involuntary termination benefits............ 1,335 (897) 438
Write off of redundant equipment and
leasehold improvements.................... 948 (948) --
------- ------- ------
$11,000 $(1,845) $9,155
======= ======= ======
Of the accrued balance as of December 31, 1999, $8.7 million relates to
servicing operating lease payments or negotiated buyout of operating lease
commitments on duplicative facilities, the lease terms of which will expire at
various times through the year 2012. The remaining $0.4 million is expected to
be utilized by May 2000.
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In 1997, as a result of the OpenVision merger, we incurred charges of $8.5
million, consisting of approximately $4.2 million for transaction fees and
professional services, $1.9 million for contract terminations and asset
write-offs and $2.4 million for other costs incident to the OpenVision merger.
Of the total charge, $1.2 million resulted from the write-down of redundant
assets and facilities, primarily consisting of intangible assets related to a
prior acquisition which were redundant as a result of OpenVision having a
similar product line. The remaining $7.3 million, involving banking, legal and
accounting fees and other direct costs in connection with the elimination of
duplicative facilities, was fully paid as of December 31, 1999.
In-Process Research and Development. In-process research and development
was $104.2 million in 1999. This amount represents one-time charges of $101.2
million recorded upon the acquisition of NSMG in May 1999, $1.9 million recorded
upon the acquisition of TeleBackup in June 1999 and $1.1 million recorded upon
the acquisition of certain assets of NuView in August 1999.
We obtained outside valuations for these acquisitions, and values were
assigned to developed technology, in-process research and development and other
intangibles. The fair value of the in-process research and development for each
of the acquisitions was determined using the income approach, which discounts
expected future cash flows from projects under development to their net present
value. Each project was analyzed to determine the characteristics and
applications of the technology; the complexity, cost and time to complete the
remaining development efforts; any alternative future use or current
technological feasibility; and the stage of completion. The projected future
cash flows from the projects under development were based on management's
estimates of revenues and operating profits related to the projects. Revenues on
the projects related to in-process research and development were estimated to
begin in 1999 through 2003, with the majority of the revenues occurring between
2000 and 2002. The risk-adjusted discount rate applied to after-tax cash flows
was 20%, compared to an estimated weighted-average cost of capital of 15%. We
believe the amounts determined for in-process research and development are
representative of fair value and do not exceed the amounts an independent third
party would pay for the projects assumed.
The total charge for in-process research and technology was estimated to be
$101.2 million, for the NSMG acquisition, completed in May 1999. Seven
in-process research and development projects were identified and valued, with
two projects under the data protection product group that accounted for
approximately 71% of the value assigned to in-process research and development.
The data protection software products provide backup and restore functions,
including scheduled automated unattended data backup operations. The remaining
products identified and valued were under the application solutions and
replication product groups. The application solutions software provides
scaleable solution for managing the behavior of different types of networks
worldwide from one central location and the replication software products
deliver flexible and intelligent data replication for Windows NT environments.
Costs to complete all of the NSMG in-process research and development projects
were estimated to be $6.0 million. At the date of acquisition, the development
of all products ranged from 48% to 90% complete and averaged approximately 76%
complete, with expected completion dates through December 1999. At December 31,
1999, the completion and release of some products have been delayed through May
2000. We do not expect the delays to have any significant impacts on our return
on investments, results of operations or financial position. At December 31,
1999, we estimate approximately $1.5 million to complete the development of the
in-process research and development projects acquired from NSMG.
All in-process research and development projects related to the TeleBackup
and NuView acquisitions were individually insignificant and were completed or
abandoned as of December 31, 1999.
Interest and Other Income, Net. Interest and other income, net increased to
$23.3 million in 1999 from $11.8 million in 1998, and $4.9 million in 1997. The
increases were due primarily to increased amounts of interest income
attributable to the higher level of funds available for investment, primarily
from the issuance of the convertible subordinated notes in October 1997 and
August 1999 and, to a lesser extent, from the net cash provided by operating
activities. Foreign exchange transaction gains and losses that are included in
other income, net, have not had a significant effect on our results of
operations.
Interest Expense. Interest expense increased to $15.7 million in 1999 from
$5.7 million in 1998, and $1.2 million in 1997. Interest expense in 1999, 1998
and 1997 consists primarily of interest accrued under the
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1.856% convertible subordinated notes due 2006 issued in August 1999 and the
5.25% convertible subordinated notes due 2004 issued in October 1997.
Income Taxes. We had effective tax rates of negative 8% in 1999, positive
14% in 1998 and positive 4% in 1997. Our 1999 effective tax rate was negative
and differed from the combined federal and state statutory rates primarily due
to acquisition related charges that were non-deductible for tax purposes. Our
1998 and 1997 effective tax rates were lower than the combined federal and state
statutory rates primarily due to the utilization of federal net operating loss
carryforwards, other credit carryforwards and reduction of the valuation
allowance on deferred income taxes, offset by the impact of state and foreign
taxes.
New Accounting Pronouncements. In December 1998, the AICPA issued SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. SOP 98-9 amends SOP 97-2 Software Revenue Recognition to require
recognition of revenue using the "residual method" when certain criteria are
met. We will be required to implement these provisions of SOP 98-9 for our
fiscal year ending December 31, 2000. SOP 98-9 also amends SOP 98-4, an earlier
amendment to SOP 97-2, which extended the deferral of the application of certain
passages of SOP 97-2. We do not believe the impact of SOP 98-9 will be material
to our financial position, results of operations or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. We will be required to
implement SFAS No. 133 as of the beginning of our fiscal year 2001. Our foreign
currency exchange rate hedging activities have been insignificant to date and we
do not believe that the impact of SFAS No. 133 will be material to our financial
position, results of operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short-term investments totaled $692.4
million at December 31, 1999 and represented 69% of our net tangible assets.
Cash and cash equivalents are highly liquid with original maturities of ninety
days or less. Short-term investments consist mainly of investment grade
commercial paper, medium-term notes, corporate notes, government securities and
market auction preferreds. At December 31, 1999, we had $451.6 million of
long-term obligations and stockholders' equity was approximately $3,393.1
million.
Net cash provided from operating activities was $144.0 million in 1999,
$62.8 million in 1998 and $26.8 million in 1997. The increase in 1999 cash
provided by operating activities resulted primarily from income after
adjustments to exclude non-cash charges, including amortization of intangibles
related to acquisition activities, partially offset by an increase in accounts
receivable, as a result of our overall revenue growth. The increase in 1998 cash
provided by operating activities resulted primarily from net income and
increases in accounts payable, accrued liabilities and deferred revenue
balances, partially offset by an increase in accounts receivable and prepaid
expenses, reflecting our overall growth.
Our investing activities used cash of $577.0 million in 1999 primarily due
to the net increase in short-term and long-term investments of $505.2 million,
purchases of property and equipment of $59.7 million and purchase of certain
assets of NuView. Our investing activities used cash of $13.4 million in 1998
primarily due to capital expenditures of $23.4 million. Our investing activities
used cash of $71.1 million in 1997 primarily due to the net increase of
short-term investments of $65.0 million, and capital expenditures of $6.2
million.
Financing activities provided cash of $443.1 million in 1999 from the net
proceeds of $334.1 million related to the issuance of the 1.856% convertible
subordinated notes in August 1999 and $109.0 million from the issuance of common
stock under our employee stock plans. Financing activities provided cash of
$14.0 million in 1998, arising from the issuance of common stock under our
employee stock plans. Financing activities provided cash of $102.9 million in
1997, primarily from the net proceeds of $97.5 million related to the issuance
of the 5.25% convertible subordinated notes in October 1997 and issuance of
common stock of $5.8 million under our employee stock plans.
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In October 1997, we issued $100.0 million of 5.25% convertible subordinated
notes due 2004 (the "5.25% notes"), for which we received net proceeds of $97.5
million. We and our wholly-owned subsidiary, VERITAS Operating Corporation, are
co-obligors on the 5.25% notes. The 5.25% notes provide for semi-annual interest
payments of $2.6 million each May 1 and November 1. The 5.25% notes are
convertible into shares of our common stock at any time prior to the close of
business on the maturity date, unless previously redeemed or repurchased, at a
conversion price of $9.56 per share, subject to adjustment in certain events,
equivalent to a conversion rate of 104.65 shares of common stock per $1,000
principal amount at maturity. On or after November 5, 2002, the 5.25% notes will
be redeemable over a period of time until maturity at our option at declining
premiums to par. The debt issuance costs are being amortized over the term of
the 5.25% notes using the interest method.
In August 1999, we and our wholly-owned subsidiary, VERITAS Operating
Corporation, issued $465.8 million, aggregate principal amount at maturity, of
1.856% convertible subordinated notes due 2006 (the "1.856% notes") for which we
received net proceeds of approximately $334.1 million. The interest rate of
1.856% together with the accrual of original issue discount represent a yield to
maturity of 6.5%. VERITAS and VERITAS Operating Corporation are co-obligors on
the 1.856% notes. The 1.856% notes provide for semi-annual interest payments of
$4.3 million each February 13 and August 13, commencing February 13, 2000. The
1.856% notes are convertible into shares of our common stock at any time prior
to the close of business on the maturity date, unless previously redeemed or
repurchased, at a conversion price of $35.80 per share, subjec